PwC has announced its partners pay an average tax rate of 37 per cent, with CEO Luke Sayers saying the firm was "a significant contributor to Australia’s economy and tax system".

The rate is just below the 39 per cent average tax rate for Australians earning more than $180,000 a year but above the 30 per cent corporate tax rate.

“We take our tax affairs extremely seriously and we have robust tax compliance policies and procedures in place governing the tax affairs of our partners,” Mr Sayers said.

The revelation of the partners' tax rate, made in response to a Tax Office summary about how partners at the big four consulting firms minimise their tax, is in line with or higher than the average paid by PwC's big four consulting rivals at Deloitte, EY and KPMG.

KPMG said its partners pay an average tax rate of between 35 per cent and 37 per cent, while EY said its average rate was 35 per cent or higher. Partners at Deloitte have previously said their average tax rate is higher than 30 per cent.

A partnership does not pay income tax on profits earned. Instead profits are distributed to partners who then pay tax as individuals, according to the ATO.

The Tax Office told a Senate estimates committee at the end of March that the agency was unable to calculate the collective level of tax paid by big four partners due to the widespread use of legal income-splitting methods.

Profits split up to three ways

PwC said the firm distributed profits to its 700 or so partners in up to three ways – directly to partners, via a tax vehicle called an "Everett assignment", and to "a range of beneficiaries" via the firm's service trust – with the average tax rate paid by partners across these distributions coming in at 37 per cent.

Deloitte has previously criticised the use of the legal "Everett assignment" – a tax-reduction strategy in which partners assign a portion of their stake in the partnership and its future income stream to others, usually a spouse, to cut their overall tax bill – and said it discourages its partners from using the structure.

The ATO has tightened rules around the "Everett assignment" because it felt the small business capital gains discount was being misused by partners entering into the arrangement. It has also withdrawn its guidance around how professional practices use service trusts because of concern about "high risk" tax avoidance arrangements, which did not have "any meaningful commercial purpose".

Despite these moves, the ATO has also noted that the large professional firms tended to ensure partners were paying an "appropriate amount" of tax.

PwC partners start on $350,000

PwC believes that because the partners are owners of the business and not employees, the most valid comparison figure for the average 37 per cent partner tax rate is the 30 per cent corporate tax rate.

At the individual level, a tax rate of 37 per cent is the average tax that an individual earning around $275,000 would pay.

Industry sources have told The Australian Financial Review that the starting income for a PwC partner is $350,000, with that usually rising to more than $700,000 after several years. PwC declined to comment on how much partners earn.

The PwC partner average tax rate of 37 per cent was "pretty reasonable", said Deakin University associate professor and tax expert Adrian Raftery.

"[B]eing taxed at 37 per cent is pretty reasonable given the company tax rate is 30 per cent and small and medium-sized enterprises with less than $50 million in turnover only pay 27.5 per cent tax," he said. "Yes, the highest marginal tax rate is 47 per cent but high-income owners do get benefits of the lower tax thresholds so someone earning $400,000 pays an average tax rate of 40 per cent."

Mr Sayers said said PwC "contributed more than $620 million in taxes" in the 2018 financial year.

"This total tax contribution includes taxes paid on partner income, fringe benefits tax, payroll tax, stamp duty as well as taxes collected on behalf of the government such as GST and staff PAYG [pay as you go instalments]," he said.

$620m figure 'irrelevant'

The $620 million figure, which the firm declined to break down, is "irrelevant" said Associate Professor Raftery.

"Essentially that $620 million figure incorporates all the tax on the wages of all the employers and the GST and these are separate taxes to the income tax on the profit that they have derived. It's important to realise the contribution that these big organisations make in terms of employing people, but for the purpose of income tax transparency its an irrelevant figure."

PwC said the average tax paid does not account for the tax rates paid by retired partners who receive ongoing payments out of the firm's net profit.

Original article published here on 1 May 2019 in The Australian Financial Review.