Corporate Taxation in Australia

INTRODUCTION

Corporate Taxation in Australia is a perennial target for the promoters of lower taxation, but too often is the debate [and that term is very loosely used] based on inaccurate or incorrect information.

Taxation in Australia is certainly an emotive subject and it is one in which logic and common sense seem to have no part. Within Australia the corporate taxation system is deemed to be quite tough and restrictive, prompting many calls from within the community, particularly the business community, to relax the system, and particularly to reduce the nominal taxation rate.

In this analysis we outline & review what is actually occurring from a practical and operational perspective, certainly not from a legalistic nor regulatory position. We hasten to add that we are not authorised to provide advice or direction, nor are we suggesting that there are any untoward actions or activities being conducted by corporates, we are just recording the events as seen.

THE INTERNATIONAL CORPORATE TAX RATES.

The corporate tax rates for the various countries are widely published and hence publicly available. We have assembled a range of tax rates to include some OECD countries as well as those Asian countries which are attractive to trade and investment by western companies. The list is included as Appendix 1. Australia is in the top bracket of Corporate tax bracket but certainly is not the highest taxing OECD Member country. That belongs to USA at 38.92%, Belgium at 33.99%, and Italy at 31.29%.

We are aware that a comparison of the taxation rates is a very crude measure as the actual rates and the base, which in Australia is termed the taxable income, varies and can be quite complex, however for the purposes of this example, the crude measure is deemed to be adequate for the purpose.

A summary of selected tax rates are as follows

Australia
Corporate tax rate -- 30%
Consumption taxes [VAT, GST Etc] -- 10% to 0

USA
Corporate tax rate -- 38.92%
Consumption taxes [VAT, GST Etc] -- 11.7% to 0

UK
Corporate tax rate -- 20%
Consumption taxes [VAT, GST Etc] -- 20% to 0

New Zealand
Corporate tax rate -- 28%
Consumption taxes [VAT, GST Etc] -- 15%

It is notable that the 3 countries which are the top investment destinations for Australian corporates, are USA, UK & NZ. Interestingly USA has both national and state income taxes which make the total taxation on profits significantly higher than Australia, and both UK and New Zealand have higher consumption tax rates than Australia. This may indicate that Australian Corporates are prepared to invest in a higher taxed regime than that in Australia.

CHANGES IN THE INTERNATIONAL TAX RATES.

It is relevant to note there is an international trend to lower taxes. The Grattan Institute have reported the fact that many of the developed economies which are part of the OECD have reduced the corporate tax rates, and the average rate has reduced from 32% in 2001 to 25% in 2016. It is notable, that Australia and the USA are the only 2 countries which have not changed their rates [yet?]. Interestingly, Chile and Hungary actually increased the rates.

ACTUAL TAX PAID.

The Australian Tax Office under the legislation which requires transparency, publishes the annual report on certain taxpayers. The most recent publication is for the 2014/2015 year, and it includes public and foreign owned entities (including foreign owned private companies) with total revenue of $100 million or more, as well as Australian-owned resident private entities with total revenue of $200 million or more,

There are 1904 entities which fall into this category with a total revenue of $1,781,032,033,343 [$1781.03 billion], and had a taxable income as deemed by the ATO of 168,948,598,889 [$168.95 billion] and on which the tax payable is $41,855,966,529 [$41.86 billion]. There are some very interesting statistics: -

Of those 1904 entities,

554 [29.1%] had no taxable income

126 [6.6%] had taxable income and no tax payable

43 [2.3%] had taxable income had a tax payable of less than 10%

115 [6%] had taxable income had a tax payable of 10% but less than 20%

108 [5.7%] had taxable income had a tax payable of 20% but less than 25%

367 [19.3%] had taxable income had a tax payable of 25% but less than 30%

591 [31%] had taxable income had a tax payable of 30%


That means that 69% of those total entities had a tax payable of less than 30% of the taxable income. It is notable that of the 554 entities which had no taxable income, there are 72 which had a revenue in excess of $1 billion, and one of those, had a revenue in excess of $12billion.

Other interesting facts include: -

· The average tax payable on those entities which had a taxable income was 24.77%. If that were paid at 30% the tax payable would be $50.68 billion, an increase of $8.83 billion.

· If tax were payable on those entities which had a taxable income, but no tax was payable, the tax would be equivalent to $1.32 billion

It is difficult to make any definitive comment about corporate tax as the basis is so complex and convoluted, but it is difficult not to draw the inference that the structure would benefit from a thorough review and probable remodelling.

DOUBLE TAX TREATIES.

Australia has entered into tax treaties with over 40 other countries primarily to avoid or mitigate double taxation, and to counter fraudulent activities. These treaties may cover a range of taxes including income taxes, inheritance taxes, value added taxes, or other taxes.

The basic objective of a double taxation treaty is to eliminate the double taxation of profits arising in one jurisdiction and paid to residents of another. At a corporate level this arises when a taxable entity, [say] home business, has a subsidiary or branch in another jurisdiction, and that subsidiary makes a profit and is subject to tax in the resident country, then repatriates the tax-paid profit to the home company, and that is consolidated into the main company accounts. If there were not a double tax treaty in place, that repatriated profit would be subject to taxing in the home country, but a double tax agreement prevents the tax being paid in the home country, and there are various mechanisms to make that adjustment. It is usual that a nominal withholding tax is factored into the equation in the country in which the off-shore profit is made

The actual mechanism within a double tax treaty can be reasonably complex, far too complex for this discussion and an individual or organisation which may in this situation should seek expert advice.

FRANKING CREDITS

Franking Credits are almost unique to Australia and are another form of “double tax treaty” to assist the investor avoid double taxation if he and the company are in the same jurisdiction. As a company declares a dividend it also declares the “franking credits” which are applicable, which is the tax the company has already paid, and the recipient can nett that off against his/her personal tax. Once again the actual application may be complex and the individual in this situation should seek expert advice.

SUMMARY

Corporate Taxation is a very emotive subject and no matter in which direction the regulators decide to move, it will be resisted or criticised by some sections of the community.

We embarked on this essay as there has been some suggestion that tax may be an impediment to off-shore investment particularly at the corporate level and we wished to see the factors which may be involved. It is difficult to see that tax is an impediment to an off-shore investment, unless an investment is made into a jurisdiction which does not have a Double Tax Treaty with Australia.

It is possible that because Franking Credits cannot be claimed in Australia in relation to an off-shore investment, this may be seen as a disincentive in some circumstances.

Similarly, it is difficult to see that the current tax rates are a disincentive to inward investment, but that will be the subject of another essay.

Acknowledgements

Glen Robinson, AFG Venture Group, This email address is being protected from spambots. You need JavaScript enabled to view it., Mob +61 (0)412 229 664

Glen has spent the last 25+ years focussing on the establishment and development of cross border alliances, joint ventures, mergers and acquisitions, particularly in the manufacturing, processing and distribution areas, and particularly targeted to Asia. These corporate advisory activities are based on many years' experience in management consultancy, and he has worked with a wide range of industries from agriculture, government through to manufacturing, distribution and service industries. He initially gained his Asian experience as chief executive officer for the Asian subsidiaries and joint ventures of a major international manufacturing and marketing organisation. Glen sits on the board of many Asian related business organisations and has for many years advised a number of Foreign Investment Boards in the Asian region.