The claim

With the Turnbull Government's proposed corporate tax cut stalled in the Upper House, the business lobby has been ramping up efforts to convince a handful of crossbench senators to pass the legislation.

In March, the Business Council of Australia released a letter signed by 10 senior executives saying the tax plan was "urgent and vital" for keeping Australia competitive.

Included in it was a promise to invest more in Australia should the legislation be passed, with an assertion that this would, in turn, result in the creation of more jobs and higher wages.

"If the Senate passes this important legislation we, as some of the nation's largest employers, commit to invest more in Australia, which will lead to employing more Australians and therefore stronger wage growth as the tax cut takes effect," the letter says.

But the promise of higher wages has been ridiculed by opponents, among them Labor senator Murray Watt.

In a March 22 tweet, Senator Watt claimed: "Half the companies that signed this letter didn't pay ANY company tax in 2015-16. How will a company tax cut help them pay higher wages?"

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The same day, Senator Watt told Sky News that the promise was "just laughable".

"Of the 10 companies that signed that letter, half of them didn't pay any company tax whatsoever in 2015-16," Senator Watt said.

"So I don't know why they are so focussed on getting a company tax reduction; they are not paying company tax as it is. If the crossbenchers, and One Nation in particular, fall for that letter from the Business Council, then look, I think they might as well believe in Santa Claus."

Senator Watt was contacted by Fact Check to clarify his comments, but he did not respond.

Fact Check interprets Senator Watt's claim to mean that these companies would not be in a position to pass on the benefits of a tax cut through higher wages, because they did not pay company tax in 2015-16.

Is this correct?

RMIT ABC Fact Check investigates.

The verdict

Senator Watt is on shaky ground.

Although he accurately points out that half of the signatories to the BCA letter represent companies that did not pay any corporate tax in 2015-16, it is a stretch to suggest this means these companies would not be in a position to pass on potential future benefits — however small — in the form of higher wages.

As experts noted, using a single year (in this case, 2015-16) to make a broad assertion about the future is problematic.

Should the legislation be passed, the tax cut would not apply until the next decade for some larger companies.

In their letter, the executives left open the timing of future wage increases resulting from the tax cut, promising stronger wages growth "as the tax cut takes effect".

As experts pointed out, whether a company pays corporate tax in a given year depends on a range of factors, including market conditions, past capital investments and tax offsets.

Not paying company tax in a particular year does not mean a business will not pay company tax in the future.

Indeed, some of the signatory companies that did not pay corporate tax in 2015-16 have indicated they are on track to pay corporate tax in the near future.

Economic modelling by Treasury and other analysts has concluded the corporate tax cuts would also broadly boost the economy, although the impact is likely to be modest.

Whether other policies would be more effective in boosting wages is a different issue, and not the subject of this fact check; nor is whether the corporate tax plan — which is expected to cost about $65 billion over a decade — is in the nation's best interests, or should be prioritised over other budget measures.

The letter

In addition to Business Council President Grant King and Chief Executive Jennifer Westacott, the 10 signatories were:



Andrew Mackenzie, Chief Executive Officer, BHP;

Andrew Mackenzie, Chief Executive Officer, BHP; Catherine Tanna, Managing Director, EnergyAustralia;

Catherine Tanna, Managing Director, EnergyAustralia; Andrew Forrest, Chairman, Fortescue Metals Group;

Andrew Forrest, Chairman, Fortescue Metals Group; Brent Eastwood, Chief Executive Officer, JBS Australia;

Brent Eastwood, Chief Executive Officer, JBS Australia; Tim Reed, Chief Executive Officer, MYOB;

Tim Reed, Chief Executive Officer, MYOB; Frank Calabria, Managing Director and Chief Executive Officer, Origin Energy;

Frank Calabria, Managing Director and Chief Executive Officer, Origin Energy; Alan Joyce, Chief Executive Officer, Qantas Airways;

Alan Joyce, Chief Executive Officer, Qantas Airways; Rob Scott, Managing Director and Chief Executive Officer, Wesfarmers;

Rob Scott, Managing Director and Chief Executive Officer, Wesfarmers; Peter Coleman, Managing Director and Chief Executive Officer, Woodside Energy; and

Peter Coleman, Managing Director and Chief Executive Officer, Woodside Energy; and Brad Banducci, Chief Executive Officer and Managing Director, Woolworths

The letter did not include a direct commitment by those companies to boost employment or pay higher wages should the legislation be passed.

Rather, it represented a promise to boost investment, with the assertion being that this would ultimately result in higher employment and wages across the economy.

Company tax cuts

Smaller companies have already been given a tax cut.

Under legislation passed in May 2017, the company tax rate for businesses with annual turnovers of less than $10 million was lowered from 30 per cent to 27.5 per cent from the 2016-17 financial year.



This rate is due to be lowered further (to 25 per cent) by 2026-27, with coverage progressively extended to include businesses with turnovers up to $50 million.



Sorry, this video has expired Watch Del Irani present the facts

The political controversy — and the Senate roadblock — relates to tax cuts for larger businesses with annual turnovers of more than $50 million.



In October 2017, the Government introduced a separate bill to Parliament that would, if passed, extend the program of tax cuts to larger businesses, also by 2026-27.



Opponents claim the tax cuts are unaffordable and inequitable, and question the extent to which the benefits of the tax cuts would "trickle down" to boost jobs and wages.

They also warn that a proportion of the benefits would flow overseas.

On the other hand, supporters argue the tax cuts are needed to keep Australia internationally competitive and to attract investment, arguing that Australia now has one of the highest corporate tax rates in the world.

How much tax?

The Australian Taxation Office's annual Report of Entity Tax Information provides a range of data — on income, taxable income and company tax paid — for more than 2000 large corporations.



The ATO says the amount of "tax payable" is determined by multiplying taxable income by the 30 per cent corporate tax rate and then deducting tax offsets, such as the research and development incentive and franking credits.



"Some corporate tax entities will have an amount of taxable income but no income tax payable due to these offsets," it says.

"This is a function of our system and the way tax payable is calculated."



Senator Watt refers to the 2015-16 financial year, the latest year for which data is available.



As can be seen from the table below, five of the 10 signatory companies — BHP, Fortescue, Wesfarmers, Woodside and Woolworths — paid corporate tax in 2015-16.



The others — EnergyAustralia, JBS, MYOB, Origin Energy and Qantas — paid no corporate tax that year.

Five of the companies didn't pay tax in 2015-16





This supports the first part of Senator Watt's claim that half of the companies that signed the letter did not pay any company tax in 2015-16.



The ATO also provides data for the preceding two financial years. Although Senator Watt referred specifically to the 2015-16 financial year, Fact Check has included the preceding two years for context.

Total income, taxable income and tax payable for the same 10 companies for 2013-14 and 2014-15



Of the five companies that paid no corporate tax in 2015-16, four — EnergyAustralia, MYOB, Origin Energy and Qantas — also paid no tax in 2014-15.

EnergyAustralia, MYOB and Qantas also paid no tax in 2013-14.



The companies' view

Fact Check approached the five companies who paid no tax in 2015-16 for comment.

Broadly, two issues were raised. First, drawing on a single year (2015-16) to suggest wage increases could not be delivered in the future was contested.

For example, a spokesperson for financial software company MYOB said Senator Watt's claim implied the company would not be required to pay tax in 2020-21 or 2021-22, when the proposed reduction in the company tax rate would apply to it.

The spokesperson said MYOB did not pay any income tax in 2015-16 due to losses carried forward from previous years.



"MYOB expects to pay tax for the year ending 31 December 2018 (once all carried forward tax losses have been fully utilised this year), and every year thereafter," the spokesperson said.



"Therefore, tax paid in 2015-16 is not a fair representation of anticipated tax that will be paid in the future years, specifically 2021-22 when the proposed reduction in corporate tax rates is anticipated to be relevant to MYOB."



Qantas, which has not paid corporate tax for a number of years, referred Fact Check to its 2017 Voluntary Tax Transparency Code Report.

It said due to losses carried forward in its accounts, it had not been required to pay corporate tax through that period, but the company expected this to change once these losses had been exhausted.



"This stems from almost $3 billion in accumulated tax losses from prior years, which now sit at $951 million due to the company's strong financial performance more recently," the statement said.

"Once these losses are exhausted, Qantas will return to paying company tax among the other taxes we pay and collect."

Second, proponents say tax cuts would have a stimulatory effect on the economy, leading to improved business conditions that would support jobs and grow wages.



A spokesperson for EnergyAustralia said "policies which stimulate investment and growth will help companies like EnergyAustralia continue to create good, well-paid jobs".



"The reality is the more competitive the company tax rate, the more competitive our economy and the more likely it is big capital investments will be made in Australia."



What do the experts say?

A study commissioned by the Treasury, and undertaken by leading economic modeller Chris Murphy, concluded that business investment would rise by a one-off 2.53 per cent as a result of cutting the corporate tax rate from 30 per cent to 25 per cent.



This assumes the tax cut is funded by "bracket creep", where workers are pushed into higher tax brackets as nominal wages rise.



Under this scenario, according to Mr Murphy's predictions, real wages would be 0.29 per cent higher than in the absence of the tax cut, although employment levels would be unchanged.

While the "bracket creep" scenario was seen as a likely funding mechanism, Mr Murphy also modelled a range of other funding possibilities for the tax cut, including a rise in the GST, a new lump sum tax, and a cut to government spending.



These scenarios all had a positive impact on business investment and wages and (apart from an increase in the GST) on employment generally.



Such modelling suggests that the company tax cut would lead to an increase in investment and a modest increase in wages.



Treasury Secretary John Fraser told a Senate committee on February 28 that Treasury had found the tax cut would result in a one-off $750 jump in wages.



"In the modelling we did . . . I think we saw a $750 increase in wages, coming from the corporate tax cuts," Mr Fraser said.



Asked by Greens senator Peter Whish-Wilson whether making companies more profitable via tax cuts would necessarily flow through to workers in higher wages, Mr Fraser said: "The evidence over the decades suggests they [corporate tax cuts] will. My view is . . . the real driver of wage growth is productivity."



Michael Kouparitsas, of Treasury's macro-modelling policy division, said the Treasury estimated the corporate tax cut would lift wages "in the range of over 1 per cent", mostly through an increase in investment and productivity.



"The orthodox view is that, by the primary mechanism of deepening capital stock, we'll raise productivity, which will drive a real wage increase," Dr Kouparitsas said.



Mr Murphy agreed that of the 10 signatory companies, only five paid tax in the 2015-16 financial year.



However, he told Fact Check that whether a company would be in a better position to pay higher wages once the tax rate was cut to 25 per cent would depend on its future profitability and not its performance in a particular historical year.



"The financial position of companies fluctuates from year to year with market conditions, so it is not unusual for a company to move in and out of being a payer of company tax," Mr Murphy said.

"This is true for the five signatory companies which happened not to pay tax in 2015-16 . . .



"However, on the publicly available information, it is likely most, and perhaps all, of the 10 companies will be future payers of company tax and will, therefore, be in a better position to pay higher wages if the company tax rate is reduced to 25 per cent."



Professor John Freebairn, of the University of Melbourne, also noted that whether a company paid corporate tax depended upon a range of factors that could fluctuate year-to-year.



"For a given year, a company may report a negative taxable sum because of, for example, expenses running ahead of revenue, as with the mining investment boom years, [or because of] unfavourable market conditions such as a recession."



Professor Freebairn said various studies, including that conducted by Mr Murphy, had found that corporate tax cuts would boost investment, GDP, incomes and other macroeconomic outcomes.



But he pointed out that such cuts would also come at a net cost to revenue that would need to be funded by other tax increases or expenditure cuts, or carried by a larger government debt.



He said this, in turn, would create "second round" economic effects which tended to offset some of the benefits.



Principal researcher Josh Gordon

Sources