Tax is not simply 30% of profit
Determining tax compliance of large corporate groups is never simple. There are inherent risks due to business complexity and uncertainties around the law.
Recently, there has been more community interest in the behaviour of large corporate groups, particularly multinational enterprises. They have been seen as trying to minimise their tax or avoid paying tax, including through shifting profits away from Australia.
The policy underpinning Australia’s tax laws generally means that Australian companies only pay tax on their Australian profits (active and passive) and their foreign passive profits.
Discussions about corporate tax often focus on the tax rate of 30%, linking it to the company’s announced accounting profit. However, we can’t draw conclusions about tax behaviour solely on a reported tax rate. We talk about this in our annual report of entity tax information.
Corporate groups may have lower taxable incomes than economic profits or pay no tax for a range of reasons. Some of the major reasons include:
The tax law recognises companies can and do incur business losses. It allows these losses to be:
- carried forward and recouped for tax purposes against subsequent profits
- carried back and recouped against prior year profits in specific circumstances.
The similar business and continuity of ownership tests provide integrity to the loss rules. Taxable income can be reduced by losses incurred in previous years, reducing the company's taxable income below its accounting profit.
Over the past 10 years, 20% to 30% of Australian Securities Exchange (ASX) 500 companies have reported a net accounting loss in any given year.
Special tax rules for trusts
Trusts are widely used for investment and business purposes by large corporate groups. Trusts are treated as taxpayer entities for tax administration purposes. The trustee is responsible for managing the trust’s tax affairs, including paying some tax liabilities.
When shares in some companies are sold together with units in an associated trust, they are said to be ‘stapled’ together. Income from the trust is returned by the unit holder in their return rather than by the company. This results in company taxable income returned being much less than total business profits, but is offset by the tax payable at the unit holder level.
Property Group is an Australian real estate investment trust (A-REIT) listed on the ASX. It operates through a stapled structure that consists of units in Property Trust stapled to the shares in Property Company.
Property Trust owns a large portfolio of commercial properties that are leased to unrelated third parties. Property Trust receives rent from those third parties. This is distributed to security holders on a periodic basis. Property Company undertakes activities such as the management and development of Property Trust’s commercial properties.
The remuneration paid to Property Company is an arm’s length amount that allows it to generate a sufficient return for the work it has performed for Property Trust. The pricing is supported by comprehensive documentation including references to appropriate comparable transactions.
Our review of Property Group confirmed the cross-staple dealings presented a low risk and appeared to be priced in a robust manner. These dealings are incidental to the leasing of commercial properties and rent received by Property Trust.
The profit of Property Company is taxed under normal rules at 30%. The profit of Property Trust is not taxed at the trust level but is taxed in the hands of unit holders.
End of example
Some features of tax law are designed to stimulate investment and economic growth. These various exemptions and concessions may also explain, in part, why some corporate groups appear to pay tax at a rate less than 30% of their accounting profit (and less than 30% of their taxable income).
Tax concessions include:
- research and development expenditure to promote innovation and the social and economic benefits innovation brings
- capital allowances to encourage business investment through shorter effective lives of assets for tax purposes than for accounting purposes, with particular policy concessions for
- certain exploration expenditure
- capped effective lives for certain depreciating assets
- economic stimulus measures to support eligible businesses such as temporary full expensing.
By deferring tax to the later years of an asset's useful life, capital allowances give rise to earlier positive cash flows.
Australian companies expanding offshore
Australian corporate groups may benefit by investing offshore to access larger markets, new technologies and business processes. These benefits can flow through to the Australian economy and society more generally.
Active business profits Australian companies or their subsidiaries earn offshore are generally not taxed in Australia, either when they are earned or later as dividends. This allows Australian corporate groups to compete on a level playing field offshore. It also encourages Australian companies to earn foreign income and bring it back to Australia.
Australia also doesn't tax capital gains on sales of offshore active businesses.
Offshore companies investing in Australia
Overlaying our Australian tax rules is a network of tax treaties to assist international trade and fair taxation. As tax treaties assign taxing rights, they also impact on our domestic tax payments. Guidelines agreed by Australia and other countries at the Organisation for Economic Cooperation and Development (OECD) set the correct way to resolve taxing disputes.
If a taxpayer thinks they have been subject to double taxation, our treaties provide a mutual agreement procedure to resolve the dispute between the respective jurisdictions.
Investing in Australian companies
Under the imputation system, a share of corporate tax paid is imputed to shareholders. The shareholder declares both the dividend they receive and an imputed amount of corporate tax. The imputation or franking credit offsets the shareholder’s tax liabilities.
An Australian company that has a stake in another Australian company will not pay tax on a dividend twice. If the other company pays a franked dividend, it will not be taxable again in the hands of the shareholding company. This is even though it may be included in the accounting profits of the shareholding company.
Large corporate groups don't always report a tax rate of 30% of their accounting profits – this page describes the economic and policy reasons for this difference.