ASIA
28 May 2020
Australian Corporate Tax To 2018
Glen Robinson rejects the claim that Australia needs to reduce the headline tax rate to remain “competitive”.
This is a rejection of the claim that we need to reduce the headline tax rate to remain “competitive”, and simultaneously we take a look at the future of taxation policy. As we recover from the ravages of the corona virus the taxation system will be the subject of much debate. Unfortunately, much will be emotive and devoid of a factual base, so this article is intended to provide a factual base from which to work.
The present taxation system is overly complex, is well overdue for a revamping, and interestingly, even the Australian Tax Office makes comments about the complexity of the system. With the disruption created by the virus, a thorough evaluation and remake of our tax system would be an absolute necessity and the end result must be one which does not replicate the present shortcomings, but presents a vibrant and focused taxation system which can confidently and expertly support the redevelopment of the Australian economy.
The Australian Tax Office annual report lists public and foreign owned entities [including foreign-owned private companies] with a total income of $100 million or more as well as Australian owned resident private entities of the total income of $200 million or more. The three tax related statistics included are
-- Income, the revenue the entity receives, less expenses, and tax adjustments for non-assessable items, which then equals
-- Taxable Income, and the tax on that income at 30%, less tax offsets, equals
-- Tax Payable, is the tax which the entity should pay
It is apparent there is an international move to reduce the tax rates, as examples, since 2005, Canada has reduced from 36% to 26.5%, Germany from 38% to 30%, USA from 40% to 27%, UK from 30% to 19%, and NZ from 33%to 28 %.
What is not defined is the base upon which those tax rates apply. In Australia, it is based on the “taxable income” a contrived figure, but it ignores the other variables which can distort or dilute the real tax payable. What is just as relevant is the imposts which may occur when dividends are transferred across borders, as some jurisdictions may impose withholding or transfer taxes, and there are the tax holidays which some countries apply on foreign investments. These tax holidays can be as high as no tax payable for 10 years.
Unfortunately, it is not a simple as reducing the tax rate to make us more competitive, as it is theoretically possible to have a headline tax rate which is quite high, but when it is applied to a real situation the actual tax payable is quite modest. Add to the complexity of the system in Australia, and the complexity of the systems in the countries into which we invest and it is not possible to make superficial statements like “we must reduce our tax rate to be competitive”.
Looking at the historical tax paid by the largest entities in recent years, for the year ended June 2018, there were 2246 entities which met the ATO criteria of a larger entity, and in earlier years the number of entities which met the criteria were 2212 for 2017, 2041 for 2016, 1904 for 2015 and 1859 for 2014 The summary of the taxation position of those entities for the average over those past 5 years was as follows: 28 % had no taxable income, and no tax was payable; 7% had a taxable income and no tax was payable; 8% paid less than 20% tax; 25% paid less than 30% and 32% paid the headline tax rate of 30%.Some of the interesting points are: -
-- The trends for each category over the 5 years are remarkably consistent
-- There is a relatively high number of entities which had a taxable income, but no tax was payable. This may indicate the frequency of tax offsets [R&D, foreign taxes paid, franking credits], have more deductions than one may expect
-- On average only 32% of entities pay the headline tax rate of 30 %
-- On average, approx. 35% of entities pay no tax
-- If the headline tax rate were reduced and all those companies which had taxable income actually paid at the new headline rate, the actual tax take by the ATO would be increased. INTERESTING
-- and several matters are of real interest: -Average Tax Payable is 23.9% of Taxable incomeAverage Tax Payable is 2.6% of Total revenue.
Is Tax A Significant Factor In Investment Decisions? This is a perplexing question, and one which has probably not really been evaluated. As an indication of the effect of tax considerations on investment decisions, the investment into and out of Australia is evaluated to see if there were any indicators. Those investing in Australia for the 3 years to 2018 were USA 27%, UK 16%, Belgium 9%, and Japan 7% while for the same period Australia invested in the following countries USA 28%, UK 16%, Japan 5% and New Zealand 4%. There does not appear to be any bias towards economies which have an apparent tax advantage, and it may be the reverse as the higher taxed countries appear to be investment targets.
Many analyses of cross border investment, particularly of FDI clearly indicate that the tax rate of the target country is not of high concern. To undertake an in depth comparative analysis of tax rates requires an in depth evaluation of each individual country’s taxation rules, the determination of the taxable income, the headline tax rate and how it is applied, and what subsequent deductions are allowed.
A simple comparison of headline tax rates is not of any relevance in comparing taxation rates.
An alternate taxation system, or at least a substantially modified one, could be of significant advantage, and now is the time to design and implement it immediately following the massive disruption and dislocation caused by the Corona 19 virus. However what form of tax system would be acceptable to the government, the financial industry, the business community, and the general public, is quite a question. Never-the less several general concepts could or should be considered, and these are not explored in this paper as it requires a much greater depth of understanding of alternate tax options than can be canvassed here. However, several general concepts are submitted.
Fixed Rate Based on Revenue. There have been attempts at promoting this concept, and it certainly has interesting benefits. Many experienced mid-manager level executives would be released from their current activities to become more productive members of the community. However, it is unpopular as it is seen as discriminating against the company which is not profitable. This concept is highly unlikely to be accepted by large sections of the business community
Fixed Rate Based on Free Cash Flow. Very similar to the Fixed Rate Based on Revenue, except as it is based on free cash flow, it does not discriminate against the loss making company, but it has all the benefits of freeing up talented people from calculating tax obligations. It should be seriously considered but is unlikely to be so.
Changed Structure. There is a need to design a new system which is much simpler to operate and explain, but more relevant to the operation of a business. There are many experts available to undertake this activity, and the results could be incredibly significant. Unfortunately, this is outside the scope of this analysis.
It is sufficient to say that the timing is absolutely perfect for the introduction of a new taxation system, one which meets the needs of a growing economy, is not complex, is easily applied by the majority of the population, and is not written for the benefit of a selected part of the economy.
Double Tax Treaties Australia has entered into Double Tax Treaties with some 56 countries, primarily to avoid or mitigate double taxation. 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.
Franking Credits are almost unique to Australia and are another form of “double tax treaty” to assist the investor to 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.
The concluding comments from this analysis include: -
Recognise that the present taxation system is corrupted, with over 30% of the largest commercial organisations paying no tax. This not to suggest that they are undertaking illegal or even inappropriate activities in order to reduce their liabilities, but the present system allows, and some might say encourages, avoidance of tax.
The disruption and dislocation created by the virus is an ideal opportunity to develop a taxation system which does not replicate the present shortcomings but presents a vibrant and focused taxation system which can confidently and expertly support the redevelopment of the Australian economy. The time to do that is now.
There is no evidence that lowering the headline tax rate will increase our “competitiveness” or that leaving the rate as is will decrease our “competitiveness”, as we, as well as other countries invest in higher taxing economies. The rate should be the level which is sufficient to comfortably sustain our economy, and have the ability to weather the occasional calamity.
Shut down the jingoistic and incorrect “reduce the tax rates” cry.
The present taxation system is overly complex, is well overdue for a revamping, and interestingly, even the Australian Tax Office makes comments about the complexity of the system. With the disruption created by the virus, a thorough evaluation and remake of our tax system would be an absolute necessity and the end result must be one which does not replicate the present shortcomings, but presents a vibrant and focused taxation system which can confidently and expertly support the redevelopment of the Australian economy.
The Australian Tax Office annual report lists public and foreign owned entities [including foreign-owned private companies] with a total income of $100 million or more as well as Australian owned resident private entities of the total income of $200 million or more. The three tax related statistics included are
-- Income, the revenue the entity receives, less expenses, and tax adjustments for non-assessable items, which then equals
-- Taxable Income, and the tax on that income at 30%, less tax offsets, equals
-- Tax Payable, is the tax which the entity should pay
It is apparent there is an international move to reduce the tax rates, as examples, since 2005, Canada has reduced from 36% to 26.5%, Germany from 38% to 30%, USA from 40% to 27%, UK from 30% to 19%, and NZ from 33%to 28 %.
What is not defined is the base upon which those tax rates apply. In Australia, it is based on the “taxable income” a contrived figure, but it ignores the other variables which can distort or dilute the real tax payable. What is just as relevant is the imposts which may occur when dividends are transferred across borders, as some jurisdictions may impose withholding or transfer taxes, and there are the tax holidays which some countries apply on foreign investments. These tax holidays can be as high as no tax payable for 10 years.
Unfortunately, it is not a simple as reducing the tax rate to make us more competitive, as it is theoretically possible to have a headline tax rate which is quite high, but when it is applied to a real situation the actual tax payable is quite modest. Add to the complexity of the system in Australia, and the complexity of the systems in the countries into which we invest and it is not possible to make superficial statements like “we must reduce our tax rate to be competitive”.
Looking at the historical tax paid by the largest entities in recent years, for the year ended June 2018, there were 2246 entities which met the ATO criteria of a larger entity, and in earlier years the number of entities which met the criteria were 2212 for 2017, 2041 for 2016, 1904 for 2015 and 1859 for 2014 The summary of the taxation position of those entities for the average over those past 5 years was as follows: 28 % had no taxable income, and no tax was payable; 7% had a taxable income and no tax was payable; 8% paid less than 20% tax; 25% paid less than 30% and 32% paid the headline tax rate of 30%.Some of the interesting points are: -
-- The trends for each category over the 5 years are remarkably consistent
-- There is a relatively high number of entities which had a taxable income, but no tax was payable. This may indicate the frequency of tax offsets [R&D, foreign taxes paid, franking credits], have more deductions than one may expect
-- On average only 32% of entities pay the headline tax rate of 30 %
-- On average, approx. 35% of entities pay no tax
-- If the headline tax rate were reduced and all those companies which had taxable income actually paid at the new headline rate, the actual tax take by the ATO would be increased. INTERESTING
-- and several matters are of real interest: -Average Tax Payable is 23.9% of Taxable incomeAverage Tax Payable is 2.6% of Total revenue.
Is Tax A Significant Factor In Investment Decisions? This is a perplexing question, and one which has probably not really been evaluated. As an indication of the effect of tax considerations on investment decisions, the investment into and out of Australia is evaluated to see if there were any indicators. Those investing in Australia for the 3 years to 2018 were USA 27%, UK 16%, Belgium 9%, and Japan 7% while for the same period Australia invested in the following countries USA 28%, UK 16%, Japan 5% and New Zealand 4%. There does not appear to be any bias towards economies which have an apparent tax advantage, and it may be the reverse as the higher taxed countries appear to be investment targets.
Many analyses of cross border investment, particularly of FDI clearly indicate that the tax rate of the target country is not of high concern. To undertake an in depth comparative analysis of tax rates requires an in depth evaluation of each individual country’s taxation rules, the determination of the taxable income, the headline tax rate and how it is applied, and what subsequent deductions are allowed.
A simple comparison of headline tax rates is not of any relevance in comparing taxation rates.
An alternate taxation system, or at least a substantially modified one, could be of significant advantage, and now is the time to design and implement it immediately following the massive disruption and dislocation caused by the Corona 19 virus. However what form of tax system would be acceptable to the government, the financial industry, the business community, and the general public, is quite a question. Never-the less several general concepts could or should be considered, and these are not explored in this paper as it requires a much greater depth of understanding of alternate tax options than can be canvassed here. However, several general concepts are submitted.
Fixed Rate Based on Revenue. There have been attempts at promoting this concept, and it certainly has interesting benefits. Many experienced mid-manager level executives would be released from their current activities to become more productive members of the community. However, it is unpopular as it is seen as discriminating against the company which is not profitable. This concept is highly unlikely to be accepted by large sections of the business community
Fixed Rate Based on Free Cash Flow. Very similar to the Fixed Rate Based on Revenue, except as it is based on free cash flow, it does not discriminate against the loss making company, but it has all the benefits of freeing up talented people from calculating tax obligations. It should be seriously considered but is unlikely to be so.
Changed Structure. There is a need to design a new system which is much simpler to operate and explain, but more relevant to the operation of a business. There are many experts available to undertake this activity, and the results could be incredibly significant. Unfortunately, this is outside the scope of this analysis.
It is sufficient to say that the timing is absolutely perfect for the introduction of a new taxation system, one which meets the needs of a growing economy, is not complex, is easily applied by the majority of the population, and is not written for the benefit of a selected part of the economy.
Double Tax Treaties Australia has entered into Double Tax Treaties with some 56 countries, primarily to avoid or mitigate double taxation. 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.
Franking Credits are almost unique to Australia and are another form of “double tax treaty” to assist the investor to 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.
Conclusions
Australia’s taxation system is complex and convoluted, this is admitted and enumerated by the Taxation Office. Whether or not those economies with which we trade also have complex systems is not within the parameters of this commentary, but anecdotes indicate that complexity exists in many of Australia’s trading partners tax systems.The concluding comments from this analysis include: -
Recognise that the present taxation system is corrupted, with over 30% of the largest commercial organisations paying no tax. This not to suggest that they are undertaking illegal or even inappropriate activities in order to reduce their liabilities, but the present system allows, and some might say encourages, avoidance of tax.
The disruption and dislocation created by the virus is an ideal opportunity to develop a taxation system which does not replicate the present shortcomings but presents a vibrant and focused taxation system which can confidently and expertly support the redevelopment of the Australian economy. The time to do that is now.
There is no evidence that lowering the headline tax rate will increase our “competitiveness” or that leaving the rate as is will decrease our “competitiveness”, as we, as well as other countries invest in higher taxing economies. The rate should be the level which is sufficient to comfortably sustain our economy, and have the ability to weather the occasional calamity.
Shut down the jingoistic and incorrect “reduce the tax rates” cry.