Over 800 large companies paid no corporate tax in Australia in the 2021-22 financial year, according to new data from the Australian Tax Office (ATO).
Total corporate tax paid was 22.2% higher than the previous year, reflecting higher business profits. Despite this, about a third of all companies paid no tax.
There are many legal reasons why this might be the case, and the ATO routinely checks companies are paying appropriately. There is no suggestion that any company acted illegally. But how is it legal that companies can pay
no tax?
About company tax
Companies are taxed on their profits (total earnings minus expenses).
If a company operates at a loss in a financial year, they don’t have to pay any tax. This is quite common, and not just for failing companies: for example, companies spending money to expand will often record losses.
Australia also lets companies “carry forward” losses into future years. That means a big loss in one year could be spread out to reduce tax to zero over several years.
Just like people, companies can also claim a range of ‘deductions’ which reduce their tax bill. For example, tax breaks are available for companies investing in research and development.
In the last few years, as a support measure during COVID, the Government also allowed businesses to “carry back” losses. That meant businesses with large losses during COVID could effectively get a refund on the tax paid in previous years.
Without any additional information, we don’t know the specific circumstances of the companies paying no tax in 2021-22. The ATO monitors for illegal underpaying, but these figures don’t include the results of that monitoring.
The mining industry accounted for more than half the tax paid by all companies in 2021-22 — the first time this has been the case. ATO Deputy Commissioner Rebecca Saint attributed this to higher prices for mining commodities, like iron ore.
There is significant international debate about whether corporate tax laws make it too easy for companies to (legally) structure their businesses to pay very little tax.
There is some evidence in Australia. ATO data is available back to 2013-14, and it shows a large number of companies who have paid no tax up to 2021-22 despite consistently large earnings.
A particular focus of this debate centres around multinational corporations.
Leading economic institutions like the World Bank and the International Monetary Fund have highlighted that many large companies take advantage of different countries’ rules to avoid paying taxes. For example, structuring their accounts so that sales made in a high-tax country are recorded as profits in a low-tax country.
There are international efforts to crack down on this issue.
How do other countries tax companies?
Like Australia, countries tax profits rather than earnings. Most comparable countries to Australia also allow losses to be carried forward into future years, although some have time limits in place.
The International Monetary Fund recommends a ‘minimum tax’ on earnings, where companies must pay a small amount of tax on total earnings even if they make no
profit.
What about tax rates?
Australia’s corporate tax rate is 30% (30c for every dollar). This rate is one of the highest in the world.
A handful of areas including the Cayman Islands, the Bahamas, and the United Arab Emirates, have 0% corporate tax rates.
Some other examples: Brazil 34%, Japan 30.6%, New Zealand 28%, China 25%, U.S. 21%, UK 19%, Singapore 17% and Ireland 12.5%.
