How Does a Largest Australia Company Avoid Paying Tax?

SYDNEY - ATO figures show, almost 600 of the largest companies operating in Australia did not pay income tax in the 2013 to 2014 financial year. As released by ABC News, these are wealthy companies with high annual incomes and it has led to speculation that Australia is missing out on billions of dollars of tax.

How much? According to a 2014 report, about $8.4 billion dollars a year. The corporate tax rate is set at 30 per cent, but almost a third of companies are paying an effective tax rate of about 10 per cent, according to the report.

And this is while there is talk of increasing the GST to 15 per cent to make up for a shortfall in taxation revenue. The GST hike would raise about $27 billion per year.

You may ask, how does a company avoid paying tax?

Here we get to an important distinction; between tax deductions (legal) and tax evasion (illegal). Not paying tax does not necessarily mean tax evasion.
Give us an example

One of the more controversial examples is a company like Apple. The technology giant has a total income of about $6.1 billion, but only $247 million (about four per cent) of that was taxable income. It paid $74 million tax - 30 per cent of its taxable income, or one per cent of its total income. So what is taxable income? It's a company's total income minus expenses. If a company doesn't turn a profit in a financial year, it doesn't pay any tax. This happens quite often.

In the last decade, each year between one fifth and one third of the top 500 companies have not made a profit. The number of companies not paying tax in 2013-14 was nothing unusual.

For example, Qantas and Ten Network are two of the companies that paid no tax. They also recorded losses of $2.84bn (Qantas) and $80mn (Ten). If a company does make a profit, it can also make deductions to reduce its taxable income. These deductions are perfectly legal. They include:
- Prior year losses (a company can deduct losses from a previous financial year from its taxable income in the current financial year)
- Research and development (money spent on R&D earns tax credits)
- Franking credits (a company can offset its tax liability against the dividends it pays to shareholders)

This is why it can be misleading to look at taxation as a percentage of total income, rather than taxable income. The more interesting figure is the difference between total income and taxable income.