A common theme in ATO messages this year has been that big businesses are generally doing the right thing. They’re lodging income tax returns accurately and paying the correct amount of tax. Interestingly, corporate tax avoidance is absent from their narrative.
Instead, concerns focus on individual taxpayers who over claim deductions.
However, the recently published “Paradise Papers” have brought the issue of corporate tax avoidance back into the media spotlight once again.
In this article we’ll break things down into two parts. First we discuss inflated deduction claims by individual and businesses. Then, we’ll look at corporate tax avoidance where businesses use loopholes to avoid paying tax on their revenue.
Tax Gaps: What are they?
A tax gap is the amount of tax an individual or business should pay and the amount they actually pay. The gap is caused by over claimed deductions or under-reported income.
The individual tax gap
Recently, senior ATO figures like Taxation Commissioner Chris Jordan have spoken about what they call the individual tax gap. The ATO reported a “tax gap” of $2.5 billion of over-claimed work related deductions on individual tax returns last year.
In other words, the ATO says that taxpayers claimed $2.5 billion more deductions than they were entitled to.
While $2.5 billion is a lot of money, let’s compare that to big businesses to put that number into context.
The corporate tax gap
Nassim Khadem from the Sydney Morning Herald recently reported on the “big business tax gap”. She found that out of just 1400 big businesses, the tax gap was worth $3.5 billion. (The ATO hopes to reduce this amount by $1 billion through auditing activities).
That’s right, the “tax gap” for just 1400 big businesses is more money than the tax gap for 12,000,000 normal Australians. And, this doesn’t even take into account corporate tax dodging – which the ATO continues to steer clear of discussing and could involve Billions of hidden and un-taxed corporate dollars that the ATO hasn’t even figured out.
Revenue lost via Corporate Tax Avoidance?
Last year we wrote an in-depth piece about how big businesses are using tax loopholes to reduce the tax they pay.
To summarise that article in the context of this post: Large companies legally avoid tax in Australia by shifting their income offshore to subsidiary offices with lower tax rates (Singapore, Bermuda, British Virgin Island, Luxemburg).
This means that nearly 1/3 of ASX 200 companies have effective company tax rates in Australia of less than 10%. (The official company tax rate is 30% unless a business has a turnover of less than $2 million where the rate is 28.5%).
How does that convert to dollar figures? The Tax Justice Network and the union United Voice found that in the past two years,
as much as $80 billion worth of tax was diverted away from the ATO via corporate tax avoidance practices.
What’s the way forward?
Most of us agree that all Australians, both individuals and business should pay their fair share of taxes. So it really is a numbers game. Perhaps, corporate tax avoidance should be put back on the agenda for both the ATO and Federal Government.
Cracking down on individual working Australians over little tax deductions is an easy target and collects a bit more taxes. But cracking down on the richest companies that could be making off with Billions via corporate tax avoidance means a lot more potential tax gained by the ATO, plus, it means businesses pay their fair share of tax on revenue they generate in Australia. And, the Government ends up with more revenue in their budget to fund projects the benefit all Australians.
Ms Khadem sums it up nicely: “Saying multinationals are good corporate citizens and the rest of us are the problem isn’t being honest.”