Overview of Australia's corporate tax system
This chapter provides an overview of Australia's corporate tax system
and its importance as a source of public revenue. In particular, this chapter:
provides an introduction to Australia's corporate tax system;
considers the international context; and
explores the broad impacts associated with tax avoidance and
Introduction to Australia's corporate income tax system
Australia's taxation system is extremely complex and issues relating to corporate
tax are no different. As such, the information presented in this section
provides a brief overview of how the corporate income tax system operates—noting
there are many highly technical rules and interpretations that affect businesses
and investment decisions, and the amount of corporate income tax paid.
While corporations pay a variety of taxes and levies (including payroll
tax, GST and royalties) to different levels of government, the potential for
tax avoidance and aggressive minimisation appears to be greatest in the area of
corporate income tax. That said, there are also competition concerns when
corporations may have different costs structures because of the taxes levied on
them by virtue of operating from other jurisdictions. These issues are explored
in chapter 5.
Corporate income tax is levied on
Australian corporations that are considered permanent establishments are
required to pay corporate income tax on assessable income. The general rate of
taxation is 30 per cent but there are some variations for a small number of
specific company types. Assessable income is defined as total revenue less
allowable deductions that are associated with the costs of doing business.
Corporations are entitled to deduct various expenses relating to their
business operations. Allowable deductions include:
costs incurred in supplying goods and services, including
interest payments on borrowed money;
depreciation and amortisation of capital goods; and
research and development expenses.
Australia has a broad-based company income tax regime which seeks to tax
assessable income on a territorial basis—that is, in the jurisdiction where it
is sourced. If assessable income is derived from activities within Australia,
then that income is taxed according to the Australian company tax regime.
Where assessable income is derived from activities outside Australia,
that income is generally exempt from corporate income tax provided that the
income was 'actively' earned.
In certain circumstances, however, corporations may be required to pay 'top-up'
tax to Australia on repatriated earnings as required by Controlled Foreign
Company rules. For example, BHP Billiton has paid 'top-up' tax to Australia on
profits repatriated from its Singapore marketing hub.
Certain types of corporations are
exempt from paying income tax
While most corporations undertaking business activities are required to
pay corporate income tax, certain types of corporate entities are not liable.
Partnerships and trusts are not required to pay corporate tax provided
their assessable income is distributed to unit holders. Unit holders are then
required to pay either corporate tax (in the case of a company) or personal
income tax (in the case of individuals) on distributed income on a flow-through
Property trusts, such as Real Estate Investment Trusts (REITs), do not
pay corporate income tax on passive rental income but distribute this to
investors who pay tax at their own individual tax rate.
In Australia, stapled securities are used to split the passive and active
income earning activities of property investments. Active income from trading
activities, such as funds management and property development, are subject to
corporate income tax.
Other types of incorporated entities are also exempt from paying income
tax, such as certain non-profit organisations and charities.
Breakdown of corporate tax in
Large companies pay the majority of
corporate income tax
Over 850,000 companies lodged a tax return in 2012–13 and paid $66.9 billion
in company income tax.
This represented about 19 per cent of total federal tax receipts.
Corporate tax revenue is highly concentrated with the majority of
corporate tax paid by only a relatively small number of companies. For example,
large companies with turnover of greater than $250 million account for
over 60 per cent of net corporate income tax but represent less than 0.2 per
cent of the total number of corporate entities that lodged a tax return.
Table 2.1: Corporate tax
characteristics by entity size, 2012–13
Proportion of corporations
Net tax ($b)
Proportion of net tax
Greater than $250 million
$10 million to $250 million
$2 million to $10 million
$1 to $2 million
Less than $1
The ATO noted that 69 higher consequence (or key) taxpayers, which
typically have a turnover of more than $5 billion annually, represent 42
per cent of the entire corporate tax base.
In terms of industry contributions, the financial services and mining
industries accounted for over half of all corporate tax revenue in 2012–13.
However, given the cyclical nature of the mining industry and recent falls in
commodity prices, it is unlikely that this sector will continue to contribute
income tax revenue to the same level in the short term.
Losses can also have a significant effect on income tax revenue as prior
year losses can be offset against current year income. In 2012–13, 148,738
companies used $18.1 billion in prior year tax losses to offset income tax
liabilities and the balance of carried forward losses for all companies was
Private companies are also
Private companies contributed $22 billion, or about a third, of the
total corporate tax paid in 2012–13. Almost 70 per cent of the tax paid by this
group was from private companies with turnover greater than $2 million.
There are 147,000 private companies associated with 220,000 private
groups linked to 119,000 wealthy individuals, defined as resident individuals
who, together with their business associates, control more than $5 million
in net wealth.
Wealthy individuals and their private groups often have complex
arrangements and utilise flow-through entities, such as trusts and partnerships
in addition to companies.
Corporate income tax is an
important contributor to Commonwealth revenue
Corporate income tax is an important part of Australia's tax base and is
the second largest contributor to tax revenue after personal income tax.
Australia's company tax revenue as a proportion of GDP at 5.2 per cent
is higher than the OECD average of 2.9 per cent.
This relatively high proportion reflects a number of factors including:
Levels of incorporation differ across countries, and the
classification of income companies may differ.
Levels of corporate sector profitability differ across countries.
Incentives for domestically-owned companies to pay tax in
Australia in order to pay fully franked dividends under the imputation system.
Australia's company income tax regime is relatively broad-based,
with limited concessional write-off arrangements compared to many OECD
In addition, Australia does not levy social security taxes, which are a
large source of direct taxation revenue for a significant number of OECD
Corporate income tax and personal
income tax are inter-related
Australia's system of dividend imputation effectively links the
corporate and personal income tax systems, whereby taxes paid by companies are
distributed to shareholders via franked dividends. Franked dividends have tax
credits attached that allow Australian shareholders to offset their income tax.
By comparison, trust income distributed on a flow-through basis is not franked
and does not have tax credits attached.
Dividend imputation systems are rare internationally with most countries
undertaking some form of 'double taxation', whereby corporate income taxes are
paid on profits and personal income taxes are paid on dividends (with some
countries levying lower personal tax rates on dividends compared to earned
income). Australia, New Zealand, Chile and Mexico are the only OECD countries
to operate a dividend imputation system.
The majority of Commonwealth revenue in Australia is sourced from
personal and corporate income taxes, collectively representing over 70 per cent
of total revenue in 2012–13.
As a result, Commonwealth revenue is highly susceptible to base erosion if the
integrity of the income tax regime is compromised.
International comparisons of
corporate income tax
Australia's statutory corporate tax rate of 30 per cent is roughly equal
to the average corporate tax rate of the nations with the 10 largest economies.
However, it is higher than both the OECD average (25.3 per cent) and
other small to medium OECD countries (23.9 per cent).
Based on corporate tax rates alone, Australia is at a comparative disadvantage
in attracting foreign investment.
This disadvantage is exacerbated where countries choose competitive
corporate income tax policies to attract economic activity. For example, some
large multinational companies have established entities in Singapore, Hong Kong
or Ireland where statutory corporate income tax rates are 17, 16.5 and 12.5
per cent respectively.
Some countries have preferential agreements with certain corporate
entities to reduce the effective rate of tax paid. The committee heard that
Singapore has had programs in place since 1967 to encourage multinational
corporations to set up and operate activity hubs.
As such, many large corporations have negotiated effective tax rates much lower
than the statutory rate. For example, BHP Billiton effectively pays no income
tax on profits from its Singapore marketing operations.
Submissions and previous reviews have highlighted that proposed changes
to reduce the rate of corporate income tax may not substantially alter the tax
competitiveness of Australia relative to other countries where multinational
corporations may choose to base their operations.
International aspects of corporate taxation
Developments in technology and the increasing importance of trade in the
operations of multinational companies have resulted in an international
taxation system that is outdated and provides opportunities for multinational
corporations to exploit loopholes and discrepancies between jurisdictions.
The ATO notes that the rapid pace of globalisation has seen the
Australian economy become increasingly interconnected with the global economy
across all markets. This has arisen from improvements in technology and reduced
barriers to international trade, and the adoption of global value chain
approaches to operations, particularly within multinational corporations.
Tax treaties and other international tax agreements were intended to
facilitate international investment and avoid double taxation. While they have
been effective in achieving their intended purpose, they also provide
organisations with mechanisms to exploit 'double non-taxation' opportunities.
Domestic treatment of foreign
As noted earlier, the tax treatment of foreign source income depends on
the jurisdiction in which it is sourced and whether it is captured by
Controlled Foreign Company (CFC) rules.
These arrangements are generally covered by treaties (bi- and multi-
lateral) and avoid 'double taxation' of income in both jurisdictions. This is
consistent with the notion of taxing income on a territorial basis. Such
arrangements generally only apply to income that is 'actively' earned, not
passive income (such as interest or rent).
Income from subsidiaries resident in jurisdictions that have similar tax
systems to Australia, known as 'listed' jurisdictions, is generally exempt in
corporate income tax considerations.
Income from subsidiaries resident in other jurisdictions, known as
'unlisted' jurisdictions, is generally liable for corporate income tax in
Australia but may be given a tax credit for any tax already paid in a foreign
Under Australia's Controlled Foreign Company (CFC) rules, domestic
companies that have a controlling interest in a foreign company are liable to
pay the Australian corporate tax rate on income from that company.
For example, even though BHP Billiton Marketing (Singapore Branch) pays
almost no corporate tax in Singapore, its Australian parent company, BHP
Billiton Australia, owns 58 per cent of the company and has been required to
pay A$945 million in 'top-up tax' to the ATO on the profits of BHP
Billiton Marketing (Singapore Branch) for the period 2006 to 2014.
Treatment of income sourced in
Australia by foreign-based organisations
Where tax treaties exist between jurisdictions, companies can
effectively choose the jurisdiction where they pay corporate income tax by
creating permanent establishments in these jurisdictions. As Australia has a
relatively high corporate income tax rate compared to other jurisdictions in
the Asian region, it is not surprising that corporations will structure their
operations so that they are based, and pay corporate tax, in jurisdictions
where after tax profits are maximised.
Withholding tax is applied to unfranked dividends, interest payments and
royalties for payments made to non-residents or foreign branches of Australian
residents. The rate of withholding tax depends on the type of payment and the
terms of any tax treaty that may be in place.
In the context of the digital economy, tax integrity issues arise from
the way in which income is recorded for corporate tax purposes where a foreign
company provides 'digital services' (payment and provision) from a foreign
jurisdiction. For example, the provision of advertising services over the
internet where the service is purchased and consumed in Australia from a
company based in a lower tax jurisdiction, such as Singapore, as in the case of
Google and Microsoft. These structures often avoid permanent establishment
status and enable multinational corporations to attribute revenue from
Australian sources to foreign jurisdictions. As a result, this Australian
sourced income may not currently be liable for Australian company income tax.
International related party
International related party dealings (IRPDs) represent the flow of cross
border transactions between related entities (in the same corporate group).
They are a necessary and legitimate part of a multinational entity's global
IRPDs arise from the transfer of goods and services between
jurisdictions, particularly where one jurisdiction serves as a regional base or
is a centralised location for specific activities.
According to the ATO, the total value of IRPDs between Australia and all
countries in 2012–13 was $326.7 billion (excluding derivatives, debt
factoring and securitisation) which accounts for over half of the
$599.6 billion in total trade.
Singapore had by far the largest IRPD flows with over $100 billion
exchanged in 2012–13, reflecting the importance of this jurisdiction as a hub
for regional activities.
While many foreign based multinational corporates, such as Google and
Apple, have chosen to use Singapore as a regional base for operations in the
Asia-Pacific, some large Australian mining multinationals, such as BHP Billiton
and Rio Tinto, have strategically established operations in Singapore to act as
a base for marketing their products.
Other Australian companies source their raw materials or final products
from Singapore. For example, Australia imports the majority of its transport
fuels from Singapore as it is the regional hub for the refining, trading and
distribution of these products.
The value of IRPDs is highly concentrated within the largest 30
corporate entities which account for approximately 50 per cent of total IRPDs.
Related party flows broadly reflect actual trade flows but there are
some differences. In 2012–13, Australia's top five trading partners were China,
Japan, the United States, Republic of Korea and Singapore, while the top five
related party flows by country were Singapore, United States, Japan, Great Britain
and Switzerland. The ATO considers the differences are due to the way in which
trade flows are captured and may reflect the use of offshore hubs by
multinational enterprises. For example, Singapore and Switzerland are commonly
used as financing hubs for Asia and Europe respectively.
Information about trade flows and IRPDs is useful to understand the
operations of multinational corporations and to identify aggressive tax
planning activities. However, as IRPDs are generally subject to internationally
agreed 'arm's length' transfer pricing rules, the dollar value of related party
transactions does not represent the amount of profits that are being
artificially shifted from one jurisdiction to another.
Tax avoidance and aggressive minimisation have broad impacts
Aggressive tax minimisation and avoidance can have a number of direct
and indirect consequences for the broader economy and social fabric. Some
submissions reflected growing concerns that tax avoidance causes serious harm,
often to the most vulnerable groups in society, as unrealised corporate tax
revenue denies governments revenue for essential public services, such as
healthcare, education, effective law enforcement, aged care and roads.
In essence, failure to address base erosion and tax leakage means that the tax
burden eventually falls more heavily on other taxpayers and/or government does
not provide the same level of services it would otherwise be able to provide.
Also, if left unaddressed, tax avoidance reduces the efficiency,
fairness and sustainability of the tax system. This leads to unfair competitive
disadvantages for businesses that do the right thing and, ultimately, distorts
Further, tax avoidance can undermine the integrity of the tax system and
skew social and economic interactions by favouring those who can best afford to
develop and implement the most effective tax strategy, usually large
corporations and wealthy individuals. This has the potential to create
widespread distrust and a reluctance to comply when others are not.
The Uniting Church of Australia, Synod of Victoria and Tasmania, noted the
importance of trust and legitimacy in supporting the tax system:
...it needs to be acknowledged that where a corporation is able
to engage in tax avoidance without any counter-action being taken, it will
encourage others to also engage in the same behaviour resulting in further loss
of tax revenue.
Maintaining public confidence in Australia's tax system is vital to
ensure voluntary compliance and this confidence can best be fostered by
preserving the integrity of the system.
But so do legitimate tax planning
As discussed in chapter 1, the distinction between tax minimisation and
tax avoidance is usually subtle, technical and largely open to opinion. Disputes
between companies and the tax officials may arise when certain tax planning
arrangements are considered to be 'aggressive' or not in the 'spirit of the
law'. Tax minimisation only becomes avoidance when it is done for the sole or
dominant purpose—not just an incidental purpose—of paying less tax.
Indeed, the Australian tax system actively encourages minimisation by
providing for deductions across a range of activities, and for various social
and economic goals. For example, research and development tax concessions are
intended to boost competitiveness and improve productivity across the
Australian economy. This sentiment was conveyed by the Institute of Public
There is nothing wrong with an individual or company,
structuring their affairs to pay the minimum legal amount of tax. In many cases
the system has been deliberately designed to encourage that, for various social
and economic goals. The complexity of the existing tax system reflects policy
decisions. It is not accidental.
Further, company executives and board members have a duty under
corporations law to act in the best interests of a company's owners and
maximise returns. As such, the concern over corporate and multinational tax
avoidance, base erosion and profit shifting should perhaps better be viewed in
light of the continuing exploitation of tax-effective minimisation
opportunities that the law allows.
The important question for parliament and the broader community which
they represent is not which instances of tax minimisation are unlawful but
rather which ones are unacceptable. Unacceptable tax minimisation opportunities
will require legislative amendment to remove their attraction as appeals to a
collective corporate conscience are unlikely to change behaviour when companies
insist that what they are doing is legal and in the interests of their
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