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

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 in turn based on the belief that there exists a vast array of tax concessions available to companies in Australia. The present study sets out to examine whether or not such a perception is well founded. This is achieved by estimating the effective tax rates (ETRs), defined as the ratio of income tax liability over accounting profit, of 21 large (and highly visible) corporations in Australia for the six-year period from 2005 to 2010. 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, the good news is that big companies in Australia do pay their fair share of income tax. These empirical findings are consistent with the Australia Government's income tax base broadening policy which has, over the past 25 years, removed most tax concessions to companies.