How close are taxable income and accounting profit?: An empirical study of large Australian companies

• Published in: Australian tax forum Vol. 28; no. 3; pp. 641 - 677
• Main Authors: Shirley Carlon, Binh Tran-Nam, Alfred Tran
• Format: Journal Article
• Published: 01.01.2013
• Subjects: Accounting; Corporate profits; Corporations; Government policy; Income tax; Rates and tables; Taxation; AUSTRALIA
• ISSN: 0812-695X

There has been a perception by the Australian public that 'big' Australian businesses do not pay their 'fair' share of income tax. This perception is primarily based on the belief that there exists a vast array of tax concessions available to companies in Australia. The present article examines the gap between taxable income and accounting profit of large Australian companies. This is achieved by estimating the effective tax rates (ETRs), defined as the ratio of income tax expense over accounting profit before tax, of 20 large (and highly visible) corporations in Australia for the six-year period from 2005 to 2010. Three measures of ETR, namely ETR, current and cash ETR are considered in this article. It is shown that while annual ETRs tend to fluctuate from year to year around the statutory tax rate, the aggregate ETRs of most companies are very close to the statutory tax rate. Thus, taxable income and accounting profit are very close for large Australian companies. These empirical findings are consistent with the Australian Government's income tax base broadening policy which has, over the past 25 years, removed most tax concessions to companies.