How Some Millionaires in Australia Avoid Paying Taxes and Who Might Be Worse

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Avoiding tax can almost seem like a national sport in Australia, but is it ever fair for our richest residents to pay no tax at all?

Last week, the Australian Taxation Office (ATO) released data showing 91 people who reported a total income or loss of more than $1 million in 2022-23 paid no tax.

Experts say there are legitimate reasons why high-income earners may be paying no tax, but it does raise questions around whether the system could be fairer — especially for those who don’t have the same opportunities to benefit from tax deductions.

Why some people don’t pay tax

Independent economist Saul Eslake says there could be several reasons why people earning substantial incomes are not paying tax.

For example, those who earn income generated overseas may have already paid tax in a foreign country. Australia has treaties with most countries, so residents don’t pay double tax.

Of the 91 individuals who paid no tax in 2022-23, at least 28 reported $14.8 million in foreign-source income.

Lottery wins in Australia are also not taxed.

“Personally, I think [lottery wins] should be subject to tax, but they’re not,” Eslake says.

Superannuation earnings in the draw-down or retirement phase are also not taxed, something that has been described by former federal treasury secretary Ken Henry as “stupid”.

‘Unfair’ system that disadvantages wage and salary earners

Ann Kayis-Kumar, associate professor of accounting at UNSW Business School, says while tax planning is allowed in Australia and laws around deductions are relatively generous, they don’t benefit everyone equally.

She says business owners are much more likely to be able to claim deductions and reduce their tax to zero than Australians who are earning a wage or salary.

A study by UNSW found high-income taxpayers were best able to mitigate their tax liability because they were more likely to have access to different business structures.

For someone [earning] salary and wages … there aren’t any sophisticated structures that we can use.

Greg Jericho, chief economist at The Australia Institute, says wage earners often find it difficult to claim tax deductions for expenses such as work clothes.

“As soon as you’re either a sole trader or small business, suddenly things become business expenses and you’re able to claim them,” he says.

“There’s a lot of carrying forward losses from previous years and things like that, which just doesn’t happen for someone who is on an income.”

An ATO spokesperson says employees generally can’t claim a deduction for conventional clothes and this also applies to business owners.

But if a business purchases and provides conventional clothing for its owner or other employees for wear during their employment or provides them with an allowance for this, the business may be entitled to a deduction.

“A business can claim a tax deduction for most expenses they incur in carrying on your business if they are directly related to earning your assessable income.”

A woman types on a calculator while sitting at desk covered in papers.

Business owners are able to claim tax deductions easier than wage and salary earners. Source: Getty / Krisanapong Detraphiphat

Eslake says income from capital gains, dividends, partnerships, trusts and superannuation funds is also taxed at lower rates than wages and salaries.

Around 82 per cent of the income earned by those in lower tax brackets is gained through wages and salaries. This drops to just 58 per cent among those in the top tax bracket.

Among the 91 individuals who did not pay tax, just 18 reported $4.7 million in income earned from salary or wages.

But they reported $430.4 million in capital gains, which are profits from the sale of investments such as property, shares and crypto assets.

Something that’s fundamentally unfair about the tax system is that it does discriminate against wage and salary earners.

Eslake says the system also benefits people aged over 65 because they rely less on wages and salaries, although many receive a pension.

“There’s an awful lot of capital gains, dividends and partnership income that people over 65 earn, and they don’t pay the same rate of tax as you would if you were earning it in wages and salaries, it’s lower,” he says.

“Personally, I think that’s unfair between rich and poor, and it’s also unfair between old and young.”

Table showing selected income sources for 91 individuals who paid no tax in 2022-23

Salary and wages make up a small portion of the $52.4 million in income reported by 91 individuals who paid no tax in 2022-23. Source: SBS News

The worst offenders when it comes to tax avoidance

While attention is often focused on high-income earners, Eslake says small businesses are believed to be the worst offenders when it comes to avoiding tax.

Eslake is part of an expert advisory panel run by the ATO, which has estimated the difference between the amount of tax collected in categories such as personal tax, company tax, and customs and excise duty, and what would be collected if there were full compliance with the law.

He says the ATO estimates small business discrepancies make up around 40 per cent of the tax gap, amounting to $17.7 billion of the $44.5 billion gap in 2021-22.

They don’t put a lot of resources into making sure small businesses comply because there are so many of them.

In contrast, Eslake says the ATO invests significant resources in ensuring that high net worth individuals and companies are compliant.

“The tax office would know who those people are, they will have gone over their affairs with a pretty fine-tooth comb and if they’re not paying tax, it would be for a good reason,” he says.

High-income earners better able to take advantage of tax deductions

Gifts or donations to charity make up a significant portion of the tax deductions claimed by the 91 individuals who paid no tax in 2022-23.

But Jericho says one of the more interesting aspects of their deductions is how much the group is spending on managing their tax affairs.

“It really highlights that the millionaires who avoid paying tax are spending a lot of money on fairly high-priced accountants and tax lawyers to find every loophole to enable them to get their taxable income below the tax-free threshold [of $18,200 a year].”

On average, the 91 individuals spent around $51,000 each on expenses such as accountancy fees and litigation costs.

The group reported a total income of $461.8 million, but their deductions came to $390.3 million. One person claimed $8 million in dividend deductions alone.

Table showing selected deductions claimed by 91 individuals who paid no tax in 2022-23.

Some of the tax deductions claimed by 91 individuals in Australia who paid no tax in 2022-23. Source: SBS News

But the results for this group are likely to differ this financial year, as they are set to lose a significant source of deductions.

In 2022-23, they claimed $63 million for the cost of managing their tax affairs, but the overwhelming majority of this money ($58 million) was for interest charged by the ATO for late payment of taxes and penalties.

Changes announced by the Albanese government in 2023 mean the general interest charge (GIC) and shortfall interest charge (SIC) will no longer be tax-deductible from 1 July this year.

“The change is designed to ensure that taxpayers who do the right thing and pay their tax in full and on time are not disadvantaged relative to those who do delay payment,” an ATO spokesperson says.

Eslake supports the change and says there’s no reason these interest charges should be tax-deductible.

“It’s not an expense necessarily incurred in producing accessible income — like interest on a loan taken out to purchase an investment property or the cost of cleaning work clothes such as a uniform — and it is not a policy purpose, such as donations to registered charities … so it shouldn’t be a tax deduction,” he says.

‘National hobby’ in Australia to avoid paying tax

Jericho says most millionaires do pay tax and most of them (24,164 individuals) even remained in the top tax bracket in 2022-23.

Overall, 860,021 individuals in the highest tax bracket paid $106.4 billion in tax. This equates to 38 per cent of the total income tax collected, even though this group only makes up 5.3 per cent of taxpayers.

Jericho says many tax concessions, such as the capital gains tax discount and negative gearing, are viewed as legitimate and this encourages people to change their behaviour to avoid paying tax.

It almost seems sometimes that one of the national hobbies is trying to find ways to avoid tax.

Jericho says if some of these incentives were removed, there would be less pressure to increase taxes.

Seeing wealthy individuals avoid taxes can also erode people’s faith in the system.

“[It] almost implicitly encourages people to try and think that avoiding tax is legitimate and a worthwhile thing to pursue, and we really should not be encouraging that kind of activity,” Jericho says.

“We should have people feeling that paying taxes is a good thing because it delivers all our services.”

Two cars drive past one another on a road.

Taxes fund our roads, schools and other services Australians rely on. Source: AAP / Luke Costin

Kayis-Kumar says Australia has an over-reliance on personal income tax and former treasury secretary Ken Henry has warned about the intergenerational unfairness of the system.

“This is a really important conversation to be having about income inequality and wealth inequality, and how can we use tax policy and design to mitigate the effects rather than [tinker] on the sidelines,” Kayis-Kumar says.

What changes could be made?

While some wealthy individuals may have legitimate reasons for paying no tax, Jericho says this raises the question of whether a minimum rate of taxation on total income — instead of taxable income — should be considered.

Limiting the amount of money someone can claim as a deduction for managing tax affairs to around $3,000 might also help.

“It would put a bit of a crimp on these people who are spending huge amounts of money on tax lawyers and tax accountants to avoid paying tax,” he says.

A study led by Kayis-Kumar looked at capping deductions for managing tax affairs to $3,000 — something Labor proposed in 2019 — and found it could be effective in reducing the exploitation of tax professional services as a means of reducing tax for high-income earners.

But a second study found the ability for individuals to direct deductions between personal and corporate income may dampen the effectiveness of such a change.

Kayis-Kumar says Australia’s system makes it relatively easy to apply deductions across different income categories.

“The top rate of personal income tax [47 per cent] is higher than the corporate income tax [30 per cent], so you’ve immediately got that incentive,” she says.

“It’s more attractive to put income into pots where the tax rate’s lower, and to put deductions into pots where the tax rate is higher.”

Support needed for changes

Changing the system is also difficult due to unintended consequences and knock-on effects, Kayis-Kumar says.

For example, if Australia reduced the number of deductions available and lowered tax rates simultaneously, most people wouldn’t get much of a refund at the end of the financial year.

In Australia, especially, we love our tax refund culture, so it’s really hard to unpick all of that in a way that will get everyone on board.

These types of changes may also not solve the bigger problem, as high-income earners may still find ways to plan around the rules, particularly because there may still be differences in how business or overseas income is taxed.

Kayis-Kumar says it may be necessary to look more broadly at the taxation of other assets, rather than changes to income tax.

“A broad-based land tax has been described as a really effective way to solve that puzzle around why we have this over-reliance on personal income tax.”

The taxing of super profits — for example, the above-normal profits of mining companies — could also be reviewed.

Eslake says reducing capital gains tax discounts, negative gearing and changing how trusts are taxed could be other ways to make the system fairer.

Australia could also tax capital, investments and business at a flat rate of around 25 to 30 per cent with no tax-free threshold.

“It would be simple and I think it would be fair,” Eslake says.