How come I have to pay tax every year but some companies pay none?

I make what I believe is a little above the median salary in Australia. I pay $12,000 in income tax, give or take. I have no problem with this, as I like that my money goes to hospitals, roads and schools. But I do not understand why I pay amounts like this year after year while companies making billions of dollars often pay nothing in tax.

I know there is some kind of accounting trick involved, so I half understand a single year of paying no tax, but how does it happen over five or ten years? Isn’t this unfair? Why do we let this happen?

The list of ways companies can avoid paying tax is as long as your arm, but there are a few simple explanations for this harrowing quandary.Credit: John Shakespeare

I asked Dale Boccabella, who’s an associate professor of taxation law in the school of accounting at the University of NSW about your concern. He said your question gets asked by many people, especially around the time the Australian Taxation Office (ATO) releases its annual report of entity tax information.

He went on to provide a detailed response, reflecting the complexity of the subject.

Associate Professor Boccabella said “fact situations” were the circumstances that went some way to determining how a company might be taxed. They include things such as whether an organisation is Australian or foreign, is part of a consolidated group, is a holding company, has significant tax losses from previous years and so on.

[Companies have] taxable profits – taxable income – shifted to low company tax countries, and away from high company tax countries.

Dale Boccabella, associate professor of taxation law

“The [reader’s] question is clearly focused on income tax – sometimes called company tax. It is worth noting that some companies that may not have any income tax liability for a year [or more] may be paying some of Australia’s other taxes over the same period. For example, GST, fringe benefits tax, state payroll or land taxes, local government rates and royalty taxes on mining.”

Associate Professor Boccabella said that it may be obvious, but it bears repeating that income tax is paid on taxable income, not on turnover or accounting profit.

“The rules for measurement of accounting profit are different to the rules for measurement of taxable income. Hence, when finance journalists state that a company made profits of, say, $50 million for a year and paid no income tax, the statement is misleading. It is misleading because it implies tax is paid on accounting profit.”

“One might suggest that we change the tax rules so that tax is paid on accounting profit - because this is often higher. This is not a good idea because accounting profit under the accounting standards can involve considerable judgment, and company directors are very likely to use that judgment to reduce accounting profits when it suits.”

The above goes for all companies, but another problem that Associate Professor Boccabella identified relates mostly to multinational companies, particularly their attempts to minimise their worldwide tax bill.

“This usually means having taxable profits – taxable income – shifted to low company tax countries, and away from high company tax countries. Australia’s 30 per cent company tax rate is higher than the company tax rate in many other countries.”

They can do this in numerous different ways, and will often be “very aggressive and strategic in their tax planning”, Associate Professor Boccabella said.

He also said that allowing tax losses of a previous year to be deductible against taxable income in a future year is a “principled tax position”. However, there is no doubt “the ATO is wary where any taxpayer claims they have substantial tax losses from an earlier year. At times, these claims can turn out to be baseless”.

But there is what Associate Professor Boccabella describes as an interesting twist or counter-phenomenon that is worth knowing about. It relates to Australia’s imputation system.

“Franking credits are highly valued by potential investors and because of this, there may be an incentive for Australian companies to pay tax in Australia so that they have franking credits to pass on to their shareholders. This provides a contradictory pull factor.”

As to your question about why we’re letting this happen, Associate Professor Boccabella said that, in fact, “there have been many recent reforms to tax rules in Australia to build more integrity” into the system.

However, it’s “likely it could take some time before these rules have full effect in helping to ensure that Australia obtains its fair share of tax revenue from foreign multinationals”.

Send your work questions to Work Therapy by emailing [e-mail]

Get workplace news, advice and perspectives to help make your job work for you. Sign up for our weekly Thank God it’s Monday newsletter.