ATO second commissioner highlights tax avoidance red flags for investors

In a speech at the Australian Shareholders' Association Investor Conference, ATO second commissioner Jeremy Hirschhorn called tax compliance the silent ‘T’ in ESG, flagging it as an important component of corporate-social responsibility.

“Tax is inextricably linked to social licence,” he said.

“An individual or company which aggressively avoids (or worse evades) their obligations is effectively repudiating the rules of engagement of that community and puts its social licence at risk.”

For investors reviewing a company’s financial statements, a low accounting effective tax rate should be seen as a red flag for tax avoidance, Hirschhorn said.

An abnormally low tax rate could be driven by significant operations in low-tax jurisdictions, artificial allocation of profits to low-tax jurisdictions, or significant concessions under tax incentive schemes such as the R&D tax incentive.

Second, where companies had a normal effective tax rate but a low cash tax rate, he urged investors to consider the drivers, including deferred tax liabilities, which could indicate asset depreciation and dodgy international structuring.

Hirschhorn also flagged tax disputes as a reason to tread cautiously, which were often opaque to investors. He encouraged investors to question where the company had flagged a tax dispute.

“Sometimes tax disputes are a one-off, but more often they are on an ongoing issue (e.g. ongoing pricing or mis-pricing of intra-group transfers).”

Companies with ongoing tax issues could end up with a higher effective tax rate in the future following ATO compliance activities, and thus see poorer-than-expected future profits and returns, Hirschhorn warned.

The ATO’s corporate tax transparency report showed that a third of large companies didn’t pay tax in Australia in 2022–23, drawing questions from experts regarding how so many companies had avoided their tax responsibilities.

With a residual tax gap of approximately $45 billion across Australia’s tax system, cracking down on tax avoidance would save considerable money to pay for public services, Hirschhorn said.

Despite this, Australia’s tax system was fundamentally healthy, with a 90 per cent compliance rate.

“In relation to large business, despite some commentary that suggests otherwise, overall performance actually exceeds the overall system, but this is after significant dedication of compliance resources,” Hirschhorn said.

“Our estimate of compliance at lodgment [for large companies] is circa 92 per cent to 93 per cent, increasing to 96 per cent after compliance activity.”

The ATO’s medium-term aspiration was to increase the compliance rate for large companies to 96 per cent at lodgment, and 98 per cent following compliance activity, he added.

Large companies‘ “income tax gap” – the gap between the amount of tax that should be paid and the amount that is paid – was primarily caused by international issues, particularly where intra-group transfers were mispriced, Hirschhorn said.

Transfer mispricing allowed companies to artificially shift profits accrued in Australia to lower-tax jurisdictions, reducing their effective tax rate in Australia, he said.

Hirschhorn also encouraged investors to ask large companies about their ATO tax assurance ratings.

“Under our 'justified trust' program, we provide tax assurance ratings to the largest Australian companies, with both detailed findings and overall ratings. Under taxpayer secrecy rules, the ATO cannot separately publish these ratings, but the companies can.”

Some large companies, including BHP, Woolworths, Origin and BUPA, chose to voluntarily disclose their high assurance ratings, providing confidence to stakeholders regarding their tax practices, Hirschhorn said.

He also reminded investors that they would have greater access to companies’ tax data after public country-by-country reporting laws took effect from mid-2026. The new requirements are poised to allow investors to make better-informed decisions based on companies’ tax practices.

“Whether a company is meeting its tax obligations goes to its social licence – I would argue that if a company is not contributing fairly to the community in which it operates, its social licence is at risk, perhaps in unpredictable ways.”