Decline in Tax-Free Corporations Signals Improved Compliance in Australia
The latest report from the Australian Taxation Office (ATO) reveals a significant shift in the tax landscape for large corporations in Australia. The proportion of major companies that paid no tax in the 2023-24 income year has decreased from 36% to 28% over the past 11 years. This decline is seen as a positive indicator of improved tax compliance and better business conditions, according to the ATO.
Overview of the Corporate Tax Transparency Report
The ATO’s 11th annual Corporate Tax Transparency Report (CTT), released recently, provides insights into the tax behavior of large corporate entities, defined as those with total income of $100 million or more. In the 2023-24 income year, 4,110 corporate entities submitted tax returns, with 1,136 of them reporting no tax liability, marking a notable decrease in the percentage of tax-free corporations.
ATO Assistant Commissioner Michelle Sams highlighted that this is the first time the proportion of entities paying no tax has dipped below 30% since the CTT reporting began. “This is the lowest proportion of nil tax entities in 11 years of CTT reporting and reflects the continued efforts of the Tax Avoidance Taskforce in holding large corporates accountable,” she stated.
Factors Contributing to Zero Tax Payments
The report outlines several reasons why some corporations may not pay taxes in a given year. These include:
- Accounting Losses: Companies may incur losses that exceed their income, resulting in no tax liability.
- Tax Offsets: Many corporations utilize tax offsets that can reduce their tax obligations to zero.
- Carried Forward Losses: Firms can carry forward losses from previous years to offset future profits.
The ATO noted that all industry segments reported a decrease in the number of entities paying no tax, although the “Mining, Energy, and Water” sector exhibited a higher proportion of tax-free entities. This is attributed to the volatility of commodity prices and the lengthy timelines required for projects to become profitable.
Global Context: The Impact of International Tax Reforms
The ATO’s report comes at a time when global tax reforms are under scrutiny. The recent rollback of the OECD’s Global Minimum Tax deal by former U.S. President Donald Trump has raised concerns about the future of corporate tax compliance worldwide. In 2021, around 140 countries, including Australia, had agreed to a framework for a 15% global minimum tax aimed at ensuring that multinational corporations pay their fair share of taxes.
This agreement was particularly significant for countries like Australia, which sought to collect more tax from digital giants such as Google and Amazon. The ATO had anticipated that implementing this law could yield an additional $370 million in tax revenue over five years. However, the effects of Trump’s decision to exempt the U.S. from this agreement are expected to take time to manifest, with ATO officials projecting that the impact may not be evident until 2026.
The Role of Compliance and Enforcement
The ATO has emphasized its commitment to maintaining high levels of tax compliance among large businesses. According to the report, 94.1% of taxes owed are paid voluntarily, and this figure rises to 96.3% following compliance actions by the ATO. The agency continues to focus on identifying and addressing profit-shifting practices that exploit low-tax jurisdictions, particularly through transfer pricing and the migration of intellectual property.
Insights into Tax Revenue Concentration
The report also highlights the concentration of tax revenue among a small number of large firms. Of the total income reported by the 4,110 entities, which amounted to $3.3 trillion, taxable income was $365.5 billion, leading to a total tax payable of $95.7 billion. Notably, entities with incomes exceeding $5 billion, representing just 2.3% of the total, accounted for 59.3% of the tax payable, amounting to $56.8 billion. In contrast, entities earning less than $250 million, which made up 54.4% of the total, contributed only 7.2% of the tax payable.
Challenges in the Mining Sector
The report also noted a decline in revenue from the Petroleum Resource Rent Tax (PRRT), which fell by 20.6% from $1.86 billion to $1.48 billion in the 2023-24 income year. Despite an increase in the number of entities paying PRRT, the overall revenue declined due to various factors, including lower oil prices and increased operational costs. The ATO indicated that PRRT collections are closely tied to global oil prices, which can fluctuate significantly based on geopolitical events and market dynamics.
Conclusion
The decline in the percentage of large corporations paying no tax in Australia is a promising development that reflects improved compliance and the effectiveness of the ATO’s enforcement efforts. However, the challenges posed by international tax reforms and the concentration of tax revenue among a small number of firms highlight the complexities of the corporate tax landscape. As Australia navigates these challenges, the ATO remains committed to ensuring that all corporations contribute their fair share to the national revenue.
