Why some corporations pay no tax

Some corporations may pay no tax and there can be valid reasons for this, including business and economic factors. Corporations may make an accounting loss when economic or environmental conditions reduce their income or increase their expenses. Capital investment decisions to grow a business can also increase tax deductions.

Australian Securities Exchange (ASX) data shows, on average, losses are reported by 20–30% of ASX 500 companies in any one year (see Figure 1). Importantly, this shows that even large corporates will sometimes incur a loss in a particular year.

Figure 1: Proportion of companies with reported loss, by ASX population, 2010–2019

ATTRIBUTIONThis chart was compiled using Morningstar DatAnalysis Premium and contains listed companies only (including trading and suspended companies). The sectors are classified according to the Global Industry Classification Standard and the search query was PreTax Profit from Annual Profit & Loss. The search results were refined to exclude blank or zero results. As such, the population of companies included in the analysis varies on a yearly basis depending on the number of results returned in the search, which may not match the number of companies listed on the ASX. The companies included in the analysis were allocated to ASX indices based on current data, and this allocation remains constant for the entire 2010 to 2019 period.DISCLAIMER© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782

A corporation's income and tax paid can vary over the different stages of its life cycle. The early stages in a corporation's life cycle are characterised by uncertainty in revenue flows and start-up costs, risk taking and product innovation.

For example, in mining, the early stages of operation involve a long exploration, test and build phase. In this phase, spending on investment and increased borrowing can lead to low or no profits and, as a result, no tax paid and the build-up of tax losses.

Compared to earlier phases, later stages in a corporation's life cycle reflect an increase in efficiency, a reduction in uncertainty and a decline in investment spending. In this stage, profits are maximised as a corporation's earnings per share grow, leading to higher and more sustained income and tax paid. For example, mining companies may be paying down debt, having built their facilities. Manufacturing and services companies may have products that are selling well.

In this stage, corporations expect to use losses accrued in earlier stages of their life cycle, lowering their taxable income.

In mature stages of a corporation's life cycle, they may have declining growth rates and stagnant cash flow. This is because production may decline or products in the market might face increased competition.

Once corporations have used their tax losses, they may seek to maintain or grow income and avoid decline, which may lead to an increase in tax paid. This could be by investing in innovation, or looking to diversify by investing in other businesses.

We carefully monitor the tax performance of the largest entities through our Top 100 and Top 1000 justified trust programs, including understanding the reasons why some entities have sustained losses year on year and the causes for not paying tax.

See also

• What is a tax loss?
• How to claim a loss
• Loss carry back tax offset
• Offsets and rebates for businesses
• Top 100 justified trust program
• Top 1,000 combined assurance program

Some corporations pay no tax. There can be many reasons for this, including business and economic factors.