Australia’s Tax System Is Sound

The Henry Tax Review identified 125 taxes within Australia levied by all levels of government. Of those 125 taxes, just 10 taxes raised 90 per cent of all tax revenue. The company tax is the second largest source of revenue to the Commonwealth. This consideration immediately suggests two points:

• The Australian company tax is a successful tax in that it generates substantial revenue.

• The integrity of the company tax is particularly important for public finance purposes.

Yet the public debate seems to suggest that the integrity of the Australian company tax system is compromised. Late last year the Tax Justice Network Australia released a report that suggested widespread tax avoidance, if not outright tax evasion. In particular, it claimed:

• The average effective tax rate of the ASX 200 was 23 per cent, and

• If the ASX 200 were paying tax at the statutory rate an additional $8.4 billion could be raised in company tax revenue.

While these claims were well received in parts of the Fairfax press and the Australian Broadcasting Corporation, Australian Treasury officials testifying at Senate Estimates were nonplussed. Referring to the 23 per cent average effective tax rate, Rob Heferen, executive director of the Treasury Revenue Group, told the Senate, “I must confess I was surprised it was so high”.

That comment in turn suggests two things. First, deviations between average effective tax rates and the statutory rate are not unusual and, more importantly, it is very unlikely that $8.4bn could be raised by increased compliance activity.

In short, there is no fiscal free lunch. If government wants to raise more revenue in taxation, it is going to have raise taxes.

When thinking about Australian company tax, the first thing to understand is that financial accounting is very different from tax accounting. The former communicates information to shareholders while the latter communicates information to taxation authorities. There is far more leeway in how firms communicate to shareholders than there is to the tax authorities.

As such, we expect to see differences between effective tax rates calculated from information contained in annual financial statements and the statutory company tax rate. That difference can be calculated from the ATO Tax Statistics.

This news story is reprinted from www.businessspectator.com.au

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