Macro-level analysis is giving us confidence

Corporate tax collections are tracking with corporate profits

Publicly listed businesses have greater reporting requirements, giving us data to undertake additional analysis on these corporate groups. They are also significant contributors to the tax system, accounting for almost half of total corporate income tax.

We found an observable long-term correlation between:

• the pre-tax profits of publicly listed businesses, sourced from their financial reports
• their tax payable, sourced from their tax returns.

This correlation gives us confidence the growth in tax payable is appropriate given the net profitability reported by these publicly listed large corporate groups.

Indexed income tax payable and pre-tax profits of ASX-listed companies

Chart notes:
1. Indexing allows for a comparison in the growth of 2 variables. The base year is set to 100 and each subsequent year’s variable is divided by the base year’s variable and multiplied by 100.
2. Population: ASX-listed public groups excluding loss makers, on a matched basis.
3. Pre-tax profits sourced via Morningstar, matched to company income tax returns.

Company financial report data sourced via Morningstar

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You can also view data for Indexed income tax payable and pre-tax profits of ASX-listed companies in table format.

We've seen how significant the very largest taxpayers are to tax contributions by the large corporate groups population. This is further evidenced by comparing the tax-to-income ratios of various subsets of the population.

Similar data is not available for majority foreign-owned companies. This is because their group accounts include their total global income so it's not possible to isolate the Australian part of their businesses.

However, we can use the macro data above to gain confidence that Australian public groups are paying about the right amount of tax. Then we can extrapolate, based on another measure, the tax-to-income ratio. If this ratio is comparable between Australian public companies and majority foreign-owned companies, it suggests the majority foreign-owned companies have a similar level of compliance.

We compare tax-to-income ratios for Australian public companies and majority foreign-owned companies in the chart below. On aggregate, it is clear Australian public companies pay more tax as a proportion of income relative to their majority foreign-owned counterparts. However, excluding the 3 largest (Australian public) mining companies, which distorts the overall result due to their very large size and higher margins, the results are more equitable across the 3 ownership categories of Australian public, foreign-owned and Australian private.

After removing the 3 largest public companies from the population, we see that the ratio of tax payable to total income for Australian public, private and majority foreign-owned companies becomes much closer. The trend in the ratio for all Australian public companies and majority foreign-owned companies is also similar. The following chart demonstrates this.

Tax-to-income ratios of Australian public, Australian private and majority foreign-owned large corporate groups

 

You can also view data for Tax-to-income ratios of Australian public and majority foreign-owned large corporate groups in table format.

Estimating the tax gap

The tax gap is the difference between the amount of tax payable according to law, and the amount of tax actually paid. It's sometimes split into 2 components:

• Gross gap is the difference before our compliance activities.
• Net gap is the difference after our compliance activities.

Our key goal is to sustainably reduce the net tax gap to a minimum achievable level, noting that a zero tax gap is not practically achievable.

Tax gaps are estimates only, and they are informative, not definitive. We use the best available information and methodologies for our tax gap estimates but recognise all estimates are subject to limitations and have a margin of error. We estimated the large corporate groups income tax gap using a bottom-up illustrative methodology. This methodology relies on:

• expert views to inform assumptions
• learnings from the results of our compliance activities.

A features of tax disputes involving large corporate groups is that they often take several years to resolve. Therefore, our estimates are based on the effectiveness of historic activities rather than current activities. Implications of this include that:

• improvements in practices will take several years to appear in gap estimates
• our estimates can be subject to revision over time.

For 2022–23, we estimate the net income tax gap for large corporate groups is approximately 3.7% or $3.7 billion. We estimate large corporates have voluntarily paid more than 94% of what they should, or around $95.3 billion. We expect this to rise over 96%, or $97.5 billion, after ATO engagement.

The large corporate groups income tax gap estimates use our compliance and tax assured data. Tax assured data allows us to more accurately calculate the expected amendments and determine a non-detection rate. Both are used in our methodology to estimate the net gap.

We intend to sustainably reduce the large corporate groups gross and net income tax gaps with support from new laws, funding and approaches. We recognise this work is likely to take several years to flow through to our formal estimates.

Importantly, we're not attempting to audit our way to success. To reduce the gap, we aim to head off non-compliance before it occurs. We also focus on the most important compliance issues.

Initiatives to sustainably reduce the tax gap

We have a number of initiatives underway to improve voluntary tax payments that will sustainably reduce the large corporate groups income tax gap even further.

Some of the key initiatives are outlined below:

• We are increasing our internal capability and accessing specialist talent from outside our organisation.
• We apply appropriate legislative measures, like the multinational anti-avoidance law (MAAL) and diverted profits tax, and encourage potentially affected taxpayers to engage early on all of their tax issues.
• We make full use of additional information available under measures like Country-by-Country reporting and automatic exchange of rulings.
• We are increasing our emphasis on large corporate groups having a robust experience with corporate governance on tax issues, so they don’t inadvertently take risky tax positions.
• We publish practical compliance guidelines which clearly provide our view on critical issues. This enables large corporate groups to consciously choose to take low or no risk tax positions.
• We quickly issue a taxpayer alert when we see an arrangement we have concerns with, so other large corporate groups don’t unwittingly enter the arrangement.
• We require large corporate groups to lodge a reportable tax position schedule disclosing their approaches on key tax issues and any arrangements covered by a taxpayer alert they have entered into.
• We perform detailed one-to-one reviews of the large corporate groups population. These occur annually for the top 100 population, and on a 4-year cycle for the remaining entities. Our coverage aims to allows us to confidently and positively assert there's either full tax compliance or that we're taking action on any non-compliance detected.
• When providing certainty to taxpayers on a specific area of their business (for example, via a ruling or advance pricing arrangement) we review their tax outcomes holistically to understand their entire global supply chain rather than looking at issues individually.
• We focus on addressing important, systemic issues, or issues with the potential to proliferate, including (where appropriate) through litigation.
• We offer taxpayers the opportunity to engage with us before a transaction, through a range of private advice and guidance products, in order to obtain certainty in real time.
• We generally only settle prior-year disputes where there's also agreement to lock in the appropriate treatment for future years. For example, we'll only settle a dispute over the appropriate rate of interest on a related party loan in prior years if there's also agreement on any appropriate interest rate in future years. This not only locks in forward compliance, but it also frees up capability and resources.
• We address inappropriate conduct by advisers who
  • promote and implement tax avoidance schemes
  • are uncooperative, misleading and obstructive during our investigations.

It will take several years for these strategies to be fully reflected in the published tax gap estimated, given the nature of the population and the approach we use to estimate the large corporate groups income tax gap. But we're confident these strategies are already having a significant impact on sustainably reducing the large corporate groups income tax gap from its already low level.

For more information, see Australian tax gaps – overview.