Virgin Australia Holdings Limited
Virgin founder Richard Branson actually resides in a tax haven. He even has his own tropical island, Necker Island, in the notorious tax secrecy archipelago, the British Virgin Islands.
You don’t get more tax-haveny than that. Some may quibble that rival airline Qantas has dodged far more tax. Indeed, the national carrier has paid no tax on an humongous $62 billion in total income over the four years of available Tax Office transparency data.
Virgin, with its $18 billion and zero tax payable, is a midget by comparison.
Yet, as explained in the methodology, these Top 40 rankings are not just based on sheer magnitude of total income but also on how much taxable income the company managed to wipe out.
Qantas still produced $334 million of taxable income (on which it still paid no tax). And if you take last year’s numbers – as 2018 is not included in the lagging Tax Office transparency data – Qantas racked up another $18 billion in cash receipts and showed tax paid of a measly $3 million (paid, not here, but to a foreign government to boot).
Qantas therefore is eminently worthy of note. Despite its billions in bona fide tax losses, there is evidence of chipmonkery on the tax front.
That said, because of the way the numbers fall, and the need to stick closely to the Tax Office data in formulating a credible rankings system, this is Virgin’s story. And Virgin’s story is that the board of the airline, its executives and those who pull the strings from overseas think that paying income tax in Australia is optional, not compulsory.
Virgin and its auditors from KPMG don’t even bother to list tax as an item in their cashflow statement. Income tax is apparently not their thing.
There are $6 billion in cash receipts from customers last year, and finance costs and so forth, but no tax. They do deign to include a “tax expense” line in their income statement, but this number is forward-looking, an accounting estimate and, in Virgin’s case, quite possibly a fantasy. We shall see how this fantastical tax expense number is borne out in real life this time next year.
Moving to the notes in the latest Virgin accounts about its subsidiary, Tigerair, you will find this:
“(Tax losses) relating to the Tigerair … have not been recognised as there is insufficient convincing evidence that future taxable profit will be available against which these tax losses can be realised.”
Virgin would have the Tax Office believe that it is running a business which it thinks will never make a profit. What is the point of being in business if you truly thought you would never make a profit?
Last year it was noted that Virgin said Tigerair “cannot foresee using” its tax losses.
It is fair to say that airlines are deeply cyclical, they make huge losses. They are tough businesses to run. It is also fair to say that the Qantas/Virgin duopoly on the Sydney-Melbourne routes is one of the most profitable capers in world aviation.
The profits go somewhere. Etihad came on the register with a touch over 20 per cent last year. Singapore Airlines and two Chinese conglomerates HNA and Nanshan Capital also all hold around 20 per cent. Then there is the mysterious Corvina Holdings Ltd from the British Virgin Islands with its ten per cent.
These investors are not there to lose money so Virgin, despite its years of losses, must be making them money somehow.
Virgin, as is the case with most airlines, has ample scope to avoid tax. The latest accounts show $138 million in operating lease payments to related parties in the 2018 year and $268 million in payments for goods and services to related parties.
How much Virgin founder Richard Branson and associates siphon from Australia in IP payments and so forth is not visible. This is a complex structure with foreign airlines as shareholders and partners in a complex global industry.
There is still plenty of tax shelter left. In 2017 it was $2.3 billion in tax losses. Last year the group had $753.7 million of tax losses carried forward. Virgin enjoyed a strong rise in revenue to $5.4 billion last year though, unsurprisingly, costs kept pace.
Tax expense was $452 million – from a benefit of $104 million last year. So it will be interesting to see if that estimated expense transforms into an actual payment of tax.
Virgin leadership declined to be interviewed about the company’s tax affairs. A spokesperson responded with a statement via email which can be viewed here, at the end of the story.
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We are counting down the Top 40 Tax Dodgers. There are now four years of tax transparency data published by the Tax Office and we have used this data to work out which large companies operating in Australia have paid the least tax, or no tax.
Notable new economy players such as Google, eBay, Booking.com, Expedia are not near the top of the ATO list. That's because they don't (yet) recognise all income earned here; instead, they book Australian revenue directly to their associates offshore. They will be ranked in due course.
For other large corporations, and in particular, multinationals, the main steps in avoiding tax are made by reducing their taxable as much as they can; usually by sending it offshore in interest on loans, "service" fees or other payments to foreign associates. So, we have set a threshold. We have included only those companies which managed to wipe out 99.5 per cent or more of their taxable income over four years.
Qantas, therefore, is not on this list, although it has enormous income and has paid no income tax in Australia for many years. It misses the cut-off due to it not eliminating more than 99.5 per cent of its total income.
The airline had made large losses which were offset against profits. Many large corporations which have paid zero tax in ATO data, have legitimately made losses and have therefore built up "tax-loss shelter".
Further explanation of methodology can be found here.
Many others however, such as ExxonMobil and EnergyAustralia, are on the list as they managed to eliminate all or most of their taxable income by "debt-loading" or other means of aggressive tax avoidance.
In this, the second iteration of michaelwest.com.au corporate tax rankings, we have ranked companies purely on the Tax Office data. We will also publish a list of Australia's better corporate taxpayers, those companies who contribute most to the country in which they operate.
The Tax Office data is not a perfect guide. It does not record refunds, only tax payable and is often at odds with disclosures made for accounting purposes. In some cases, there are multiple entities with the same ultimate offshore parent reporting. One entity may pay zero tax, another may pay at the statutory 30 per cent rate (even if on low taxable income). We endeavour to be fair in our reporting to recognise these issues.
The data also recognises trusts as well as companies. For trusts, it is the members (investors) rather than the trusts who are ordinarily required to pay the tax. In many cases however it is fair to recognise trust structures for what they are, as tax is often the main reason these vehicles have been structured as trusts.
Companies are welcome to debate their rankings or to touch base to clarify or defend their tax practices. We will append or link these submissions.
Hydrox has been taken off the list as it never made a profit.