By Nassim Khadem
The Tax Office is taking a less-aggressive approach to the nation's largest companies than it used to, with its submission to the inquiry into corporate tax avoidance confirming there is only one company in the nation that is deemed "higher risk".
The inquiry, which is examining tax avoidance and tax minimisation strategies by multinationals following a controversial Tax Justice Network report that said of Australia's largest 200 publicly listed companies, 29 per cent had an effective tax rate of 10 per cent or less, and 14 per cent had an effective tax rate of 0 per cent, has also heard from a host of the nation's top companies and lobby groups, who have defended the amount of taxes companies pay, and are putting pressure on the Abbott government to amend existing laws that would make company tax information revealed publicly.
Source: ATO.
For some time the ATO has used what is known as a "risk differentiation framework" to assess how risky a taxpayer is and determine where it focuses its energy each year. There are four risk categories, with higher risk, as the name suggests, resulting in the highest level of scrutiny by the ATO.
Higher-risk taxpayers are the focus of "real time" continuous reviews, which has been a nightmare for company chief executives and chief financial officers. They have spent much time, and invested heavily in the services of big-four accounting firm tax partners to try to get them off the top rating and into a lower-risk category.
Their efforts appear to have worked. At the end of 2011, 13 chief executives and directors of the nation's biggest companies got a surprise letter from the Australian Taxation Office telling them that the company had the new status of "higher-risk". Today, there is only one worthy of that risk rating, Tax Commissioner Chris Jordan and his deputies have said.
Apart from there being only one taxpayer in the highest risk category now, a number of taxpayers have dropped from the second tier of risk (key taxpayer) into the third tier of "medium risk". Again, the drop in riskiness means they face fewer reviews and monitoring by the Tax Office.
The Tax Office said in its submission "higher risk does not mean that we think that the taxpayer is non-compliant, but rather that there is a higher propensity for non-compliance based on known characteristics, including historical tax performance".
"Higher-consequence taxpayers are likely to be subject to increased scrutiny and more comprehensive and resource-intensive assurance activities," the submission said.
More than 850,000 companies lodged a tax return in 2012-13 and paid nearly $67 billion in income tax, it said. The majority were small, with annual turnover of less than $2 million. It also noted that over the past few years there had been an increasing share of corporate income tax from financial services and mining sectors, but that "current economic conditions are impacting revenue from the mining sector".
The Tax Institute said in its submission that recent media reports suggesting large Australian companies were not paying their fair share of tax was undermining the tax system, and it also criticised existing federal laws, introduced under Labor before it lost government, that require the Tax Commissioner to publish from July the total income, taxable income and tax paid by public and private companies with total annual income of $100 million or more. It said the information would lead to misinformation and might not necessarily result in companies paying more tax.
Assistant Treasurer Josh Frydenberg has said the government was looking into those concerns that such data might be misleading, but has not said whether the government would scrap the laws.
A host of companies have also lashed out at the Tax Justice Network (TJN) reports saying Australian companies operated in secrecy havens and paid less than the 30 per cent corporate tax rate.
Australia's biggest logistics provider Toll, in its submission, attacked the TJN report and also confirmed that the Tax Office had written to it confirming "continuous reviews of Toll's income tax returns will not be a focus in the future".
It criticised TJN for saying that Toll operated in "secrecy jurisdictions". Toll said Singapore and Hong Kong were "regional hubs for doing business" and were not associated with tax secrecy.
But it did admit that it "does have a legal presence in a small number of so-called secrecy jurisdictions in which it does not have substantive business operations" and that these include Bermuda, the British Virgin Islands and Luxembourg. It said "Toll's ownership of these entities came as a result of its acquisitions and were not established by Toll to avoid paying tax".
It said it had paid $890 million in corporate income tax over the past 10 years, representing an average annual rate of $89 million in income tax on average accounting profit of $318 million.
James Hardie Group, whose parent company is based in Ireland, said it would pay zero tax because "James Hardie's Australian subsidiaries are at a tax loss". It claims tax losses of about $US5.8 million ($6.3 million). These it said, were "Australian tax losses primarily resulting in income tax deductions for contributions to the Asbestos Injuries Compensation Fund" and that there would be "further tax losses for the foreseeable future".
News Corp Australia, which has been in dispute with the Tax Office in previous years, said in its submission that from 2010 to 2014 it had an accounting profit before tax of $815.9 million and it paid $417.3 million in Australian taxes. Its submission noted that "our capital structure has been reviewed by the Australian Taxation Office" and that "we ensure the level of debt funding provided to News Corp Australia complies with applicable tax law, specifically the thin capitalisation and transfer pricing rules".
Australia's largest freight operator, Aurizon, said in its submission that the TJN report was misleading the public by saying the company had an effective tax rate of 2 per cent, because this number has been "heavily influenced by the fact that Aurizon only recently entered the federal tax regime", on November 22, 2010 and "had no PAYG instalment obligations until 18 months after the start of the income year in which the company first became tax payable". It said the company paid the balance of its 2013 income tax liability in the 2014 income year, but did not state what those were.
Mining giant Rio Tinto, one of few companies in Australia that already voluntarily publish their tax information, said it had signed an Annual Compliance Agreement (ACA) with the Tax Office that ascertained how much tax it paid ahead of time, and had requested an extension of that agreement for another two years.
Glencore said the TJN report was not "reliable or credible" and that it paid its fair share of tax, in terms of income tax and royalties.
Oil and gas company Woodside said in 2013 it had an effective tax rate of 29.77 per cent and that the Tax Office had dropped it from the highest-risk category into the second tier of "key taxpayer". It also said it had an ACA with the ATO, which it entered in late 2013.
Logistics giant Asciano said more than 95 per cent of its income was generated and taxed in Australia, and that it had a "respectful and professional relationship with the ATO". It also rejected the TJN assertion the company paid an effective tax rate of 16 per cent, saying this was the result of timing errors and not taking into account tax concessions like R&D. It said that for 2014 the company paid tax of $115.7 million.
AMP's submission said it had a 23.3 per cent tax rate, which was lower than the corporate rate of 30 per cent, because of a range of factors, including R&D concessions and dividends and legal strategies to drive foreign investment.
Casino group Echo said the ATO had advised that "continuous reviews of Echo's income tax returns would not be required". It said the company's total accounting profit before tax for 2012, 2013 and 2014 was $312.3 million and its total tax expense was $80.3 million, which was an effective income tax rate of 25.7 per cent.
Mirvac Group said in its submission it had made "significant economic losses as a result of the GFC" and as a result has claimed tax and accounting losses over the past few years.