Company tax is one of the Federal Government’s biggest sources of revenue, and one of its most debated. Here’s how it works, who pays what, and why it’s tied to the dividends shareholders receive.
Companies pay tax on their taxable income, broadly their revenue minus allowable expenses and deductions.
The rates
Australia has two company tax rates.
The standard rate is 30%.
A lower rate of 25% applies to base rate entities, which are companies with aggregated turnover of less than $50 million, and where no more than 80% of income is passive income, such as interest, rent or dividends.
Company tax raises around a fifth of the Federal Government’s tax revenue, making it the second-biggest source after personal income tax. Much of it comes from a relatively small number of very large companies, especially miners and banks.
Franking credits
Australia is one of the few countries with a full dividend imputation system.
When a company pays tax in Australia and then pays dividends to shareholders, it can attach franking credits, representing the tax already paid.
Australian shareholders include the dividend plus the franking credit in their taxable income, and then use the credit to reduce the tax they owe. If their tax rate is lower than the company’s, they can get a refund.
The aim is to avoid profits being taxed twice, once in the company and again in the hands of shareholders. In effect, for Australian shareholders, company tax works like a prepayment of their own income tax.
Multinationals
Large multinational companies can shift profits to countries with lower tax rates, for example by paying fees for intellectual property or interest on loans to related companies overseas.
Australia has introduced laws to combat that, including the Multinational Anti-Avoidance Law in 2016, the Diverted Profits Tax in 2017, tighter rules on interest deductions, and requirements for large companies to publish more tax information.
The Australian Taxation Office publishes a yearly report on the tax paid by large companies, which often shows many large businesses paid no tax in a given year. That can be due to losses, deductions or offsets, not necessarily avoidance.
Australia has also signed up to a global agreement for a 15% minimum tax rate on large multinationals.
The debate
Business groups argue Australia’s 30% rate is high compared with many other advanced countries, discouraging investment, and that it should be cut.
Others argue that because of franking credits, the rate matters less for Australian shareholders, and that cutting it would mainly benefit foreign investors while reducing government revenue.
Plans to cut the rate for big business to 25% were blocked by the Senate in 2018.
