Some corporations may pay no tax and there can be valid reasons for this, including business and economic factors. Corporations may make an accounting loss when economic or environmental conditions reduce their income or increase their expenses. Capital investment decisions to grow a business can also increase tax deductions.
Australian Securities Exchange (ASX) data shows, on average, losses are reported by 20–30% of ASX 500 companies in any one year (see Figure 1). Importantly, this shows that even large corporates will sometimes incur a loss in a particular year.
Figure 1: Proportion of companies with reported loss, by ASX population, 2010–2019
A corporation's income and tax paid can vary over the different stages of its life cycle. The early stages in a corporation's life cycle are characterised by uncertainty in revenue flows and start-up costs, risk taking and product innovation.
For example, in mining, the early stages of operation involve a long exploration, test and build phase. In this phase, spending on investment and increased borrowing can lead to low or no profits and, as a result, no tax paid and the build-up of tax losses.
Compared to earlier phases, later stages in a corporation's life cycle reflect an increase in efficiency, a reduction in uncertainty and a decline in investment spending. In this stage, profits are maximised as a corporation's earnings per share grow, leading to higher and more sustained income and tax paid. For example, mining companies may be paying down debt, having built their facilities. Manufacturing and services companies may have products that are selling well.
In this stage, corporations expect to use losses accrued in earlier stages of their life cycle, lowering their taxable income.
In mature stages of a corporation's life cycle, they may have declining growth rates and stagnant cash flow. This is because production may decline or products in the market might face increased competition.
Once corporations have used their tax losses, they may seek to maintain or grow income and avoid decline, which may lead to an increase in tax paid. This could be by investing in innovation, or looking to diversify by investing in other businesses.
We carefully monitor the tax performance of the largest entities through our Top 100 and Top 1000 justified trust programs, including understanding the reasons why some entities have sustained losses year on year and the causes for not paying tax.
See also
- What is a tax loss?
- How to claim a loss
- Loss carry back tax offset
- Offsets and rebates for businesses
- Top 100 justified trust program
- Top 1,000 combined assurance program