Secrets and Lies: how franking credits stole the tax bonanza

by | Dec 26, 2019 | Finance & Tax

Thanks to franking credits, the $52 billion in tax paid by Australia’s largest corporations is not actually received by the Tax Office. Michael West reports on one number everybody seems to have missed.

For five years now, the Tax Office has issued its Corporate Tax Transparency Report which shows how much tax Australia’s largest companies pay, or don’t pay. The latest report was released earlier this month. The data showed the biggest companies operating in this country paid collectively $52.3 billion in 2017-2018.

Surely this was good news. Then why was nobody crowing about it? Well, almost nobody.

Upon releasing its report, the ATO’s Deputy Commissioner Rebecca Saint did note the “significant increase of $6.6 billion in tax payable” by large corporations.

But where were the eulogies from government ministers and peak business groups? Why the deafening silence? No press release from the office of Treasurer Josh Frydenberg, or from Finance Minister Mathias Cormann for that matter.

Nothing from powerful peak body the Business Council of Australia either. Even though the Tax Office press release said the rise in tax revenue was “primarily due to strong commodity prices”, there were no proud words from the mining lobby, the Minerals Council of Australia.

Perhaps it was because a slew of the world’s largest corporations were still paying zero income tax in Australia. There was nothing from US oil giant Exxon, despite its $9 billion in revenue, nothing from Chevron either, or Rupert Murdoch’s News Australia Holdings again this year; nothing from a bunch of coal giants, still relentlessly chewing through tax losses from Australia’s overly generous tax regime.

Fleecing Australia: Tax Office data dump shows the usual large culprits paying no tax

Why the silence? Was it also because nobody wanted to draw attention to the fact that this rise in tax receipts was also roughly equivalent to the amount paid out in franking credits … that the real amount received by the Tax Office was probably $6 billion or so shy of the touted $52.3 billion which headlined the transparency figures?

This is tax money which does not go to pay for submarines, education, health or pensions.

Perhaps few realised. It surely went missing in the media. If Treasury estimates from the pre-election franking credits debate were any guide – that is, that the value of franking credits had risen from $1.9 billion in 2005-06 to almost $6 billion in 2014-15 – then the present figure was probably higher.

To its credit, the Tax Office subsequently confirmed to this publication the headline figures did not include franking credits. Further, over a third of the tax had, in a previous year, been handed back to shareholders via franking credits.

“Based on the 2015-16 income year data published in Tax Stats 2016, just over one third of the company net tax was handed back to shareholders (shareholders can include institutional investors) through franking credits,” said the ATO in response to questions. “However, it is important to note that this is an economy wide figure and may not reflect the proportion attributable to the CTT population (the 2200 companies on the transparency list)”.

Tax gap gaps down

This was more a secret than a lie. If there was a lie in the transparency report it was the “Tax Gap”. The tax gap is a suspiciously political-looking metric which has bobbed up in recent years purporting to be the tax which large companies have not paid but should pay.

In this year’s data dump, they reckon there’s only $2 billion still missing, that is $2 billion still owed by big companies. That’s a big call, given almost a third of the top 2200 companies pay no tax and another third pay very little given the enormity of their businesses.

Again, to give the Tax Office its due, the tax gap is probably inserted in the transparency report at the insistence of the Government, to make it look like its big business donors are pulling their weight, paying their fair share.

Further, there is enough grey area in the byzantine tax laws to allow large companies, particularly foreign multinationals, to dodge huge licks of income tax via debt loading, service fees to offshore companies, aggressive transfer pricing, IP payments and so forth.

There has been much progress. Ten years ago, tax fairness was hardly on the public radar. Now, the fact that the average “quiet Australian” pays more income tax than Exxon, is a critically sensitive political issue.

Senate: less debt-loading, much more disclosure and tighten that PRRT!

Thanks to the 2015 Senate Inquiry into Corporate Tax Avoidance, this quickly become a national issue. Community awareness drove the political reforms of 2016 and 2017. Some $7 billion of revenue from internet companies has since been “onshored”, made taxable.

Tax Office insiders say the community awareness and media coverage has also led to a change in behaviour from large corporations. It is no longer acceptable to be seen to be paying zero income tax. It is a bad look, a PR issue.

Credit is also due the Government. Although, under former PM Tony Abbott, it originally claimed there was no need for a Senate inquiry; multinational tax avoidance was not a problem, it soon changed tack and reformed. But there is a long way to go to achieve tax fairness.

The to-do list

Elsewhere in its transparency narrative, the Tax Office alluded to the weakness of the Petroleum Resource Rent Tax (PRRT), a tax specifically designed to capture the gigantic cashflows of the oil and gas majors, a failed tax which barely raised more than a billion dollars in 2018.

The report also pointed to evidence that large companies were still actively gaming the transparency system, restructuring into smaller entities in order to escape reporting under the transparency regime.

Further, there was some gentle prodding for further transparency reform, for further investigation into companies deliberately wiping out their taxable income and consistently reporting losses. Then, in the wake of the transparency data, there was a media release from the Treasurer’s office exulting a $482 million settlement with Google and the success of the Tax Avoidance Taskforce.

“Since its establishment, the Taskforce has increased its scrutiny of the tax affairs of multinationals and large corporations raising more than $15.5 billion in liabilities”. Mind you, the Australian National Audit Office has been critical of the Taskforce, saying it was difficult to evaluate its efficacy.

Although progress has been made in tackling multinational tax dodgers, this remains the biggest racket in the world. In Australia, as the corporate tax rate stands at 30 per cent, large companies save billions of dollars a year by eradicating their liabilities in this country, jacking up their costs and siphoning money to their associates overseas.

Also in the wake of the transparency report came news that the ATO was in dispute with 15 corporate taxpayers. They were unnamed however, their identities secret. The power of corporations is on the rise, aided and abetted by secrecy and the failure of governments to hold companies publicly to account. Further transparency is required.

And further still, tax losses should be capped as they are in the US, the PRRT needs to be radically tightened, large companies should be forced to report proper financial statements (General Purpose) and deductions should be capped too.

As for franking credits; in the long term the current regime is untenable. It entrenches a subsidy from all taxpayers to share owners. Many of these depend on this income for retirement and those less wealthy retirees should be protected by a cap but clearly the likes of $250,000 hand-outs to the likes of Dick Smith are impossible to justify.

This publication will shortly roll out its annual Top 40 Tax Dodgers report. Stay tuned.

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Michael West established to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences.

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