Understanding tax loss
Where a corporate entity has tax deductions that exceed its income, it can incur a tax loss and pay no tax for that year. Companies with losses in one year can carry these losses forward and deduct them from their profits in future years.
Corporate entities may also be able to use features in the Australian tax law such as tax offsets to reduce the amount of tax they pay, sometimes to zero. Eligibility criteria for each offset can be different and are used to stimulate investment in areas given special concessions in the tax law. For example, the Research and development tax incentive.
We examine companies making a tax loss very carefully to understand why they are making a loss and whether this represents a compliance risk. We apply considerable resources to ensure these taxpayers are paying the right amount of tax. For information on the specific risks we deal with, see the Tax Avoidance Taskforce and refer to Compliance programs for links to our corporate population compliance findings.
The corporate tax transparency data this year has 31% of entities reporting nil tax paid. This proportion is similar to ASX data, which shows around 20–30% of ASX 500 companies reporting a net loss to their shareholders in any given year. The ASX data shows that even extremely large companies will sometimes not make a profit in a year when they expand or face challenging market conditions.
For more information, see Why some corporations pay no tax.
Reasons for tax losses
There are numerous commercial reasons why corporations can make a loss. The main reasons include, but are not limited to:
- sensitivity to economic and environmental conditions which may impact income and expenses
- capital investment decisions, including reinvesting capital assets or business expansion that can lead to increased tax deductions.
Although taxable income or loss is calculated differently to accounting profit or loss, it is useful to compare levels. We can gain confidence when we examine a corporate entity and find loss-making levels are broadly comparable between accounting and tax.
We often look at the alignment between the reporting of an accounting or economic loss in a company tax return with a consequential tax loss, given the close relationship between the accounting and tax systems. The company tax return asks for information to reconcile the calculation of taxable income from accounting profit or loss.
An entity may not pay tax in an income year where it reports:
- an accounting loss
- an accounting profit but reconciliation items resulted in a tax loss – for example, tax deductions allowed at higher rates than accounting permits
- a taxable income but was also entitled to offsets, such as the research and development incentive at least equal to the tax otherwise payable
- a taxable income but prior-year losses were available to deduct against that profit, so no tax was payable.
Of the 3,985 entities in the Corporate tax transparency report 2022–23, 2,732 (69%) paid tax. However, due to some of the reasons outlined above, 1,253 (31%) did not pay tax (see Figure 10).
Figure 10: Reasons for nil tax at the entity level
Economic group level analysis
Many single entities that did not pay tax are members of a tax paying corporate group. An economic group includes all entities, such as companies, trusts and partnerships, that lodge an Australian tax return under a direct or indirect Australian or foreign ultimate holding company or other majority controlling interest. This includes all entities under a single ultimate holding company or under the ownership of a single individual, trust or partnership.
Multinationals typically comprise many corporate entities operating across multiple jurisdictions. At the economic group level, a total of 3,389 economic groups or standalone entities were to some degree in scope for the Corporate tax transparency report. When we analyse this population at the group level, the percentage with nil tax payable drops from 31% to 21% because at least one entity in the group did pay tax (see Figure 11).
Figure 11: Reasons for nil tax at the economic group level
The main reason for nil taxes can vary from year to year. In 2022−23 there were higher rates of entities incurring accounting losses as opposed to utilising carry forward losses (see Figure 12).
Figure 12: Proportion of economic groups with nil tax payable, by tax outcome over 3 years
Nil tax payable – by ownership segment
The proportion of entities with nil tax payable has decreased in the 10 years since this report was first published, from 36% in 2013–14 to 31% in 2022–23. This drop is largely a reflection of better business conditions.
The proportion of Foreign-owned entities which paid nil tax increased slightly in 2022−23. There was also an increase in the proportion of Australian private entities with nil tax this year and also over the 3-year period (see Figure 13). The additional private entities with total income less than $200 million have had a minimal impact on the proportion of entities with nil tax payable in this ownership segment.
There was an increase in the proportion of Australian public entities with nil tax over the 3-year period, however a slight decrease in 2022−23 compared to the prior year.
Note: The ownership cohorts are not directly comparable for the 2020–21 and 2021–22 years, as smaller Australian private entities with total income less than $200 million weren't represented in the data. See Interpreting the results.
Figure 13: Proportion of entities with nil tax payable, by ownership segment, over 3 years
Nil tax payable – by industry segment
The proportion of entities with nil tax payable remained steady in 2022–23 but the effect was different across the industry segments (see Figure 14). Nil tax payable can also depend on macroeconomic factors such as economic downturns or conditions that affect industry segments in different ways.
Factors, such as volatile commodity prices and extended lead times before projects become revenue generating, mean there is a higher percentage of nil tax payable entities in the Mining, Energy and Water segment compared to other segments.
The effect of challenging economic conditions resulted in higher expenses (input costs) and deductions in 2022–23 for corporate entities in sectors such as Manufacturing, led to a slight increase in the proportion of entities reporting an accounting loss and therefore nil tax.
Figure 14: Proportion of entities with nil tax payable, by industry segment, over 3 years