Surveys find profits booming
By Peter Boyle
Corporate profits have shot up dramatically — almost returning to their peak before the recession. The Australian Financial Review's survey of 500 large companies, released on September 21, showed a 98% increase in their total net profits in the last financial year.
Total sales rose only by 4.5%, so the profit rise did not come from an increase in business activity. Rather, it came from a combination of savage cost cutting, generous tax benefits, interest rate falls, a reduction in abnormal write-offs and a turn-around in loss-making operations, according to the AFR.
Companies increased their net profits mainly by operating on "tighter margins" and were reaping the benefits of redundancies and lay-offs carried out in previous years.
Profits were boosted by lower tax bills because of the federal Labor government's reduction of the corporate tax rate from 49% to 39% to 33% and because of tax deductible losses carried over from the recession. Ongoing effects of the reduction in corporate tax rates are expected to boost corporate profits by a further 7% this year at a cost to federal government revenue of $2.8 billion.
While total earnings before tax and interest of the surveyed companies increased by 10.3%, tax payments on the higher earnings remained nearly the same as in 1991-92. Their "effective tax rate" fell from 35% in 1992 to 24% in 1993, according to the AFR.
Some of the biggest companies gained the most from Keating's corporate tax cuts. BHP enjoyed a $679.6 million profit rise with the help of a $204 million deferred tax gain. $50 million of Woolworths' $87 million rise in net profit came from tax reductions. Coles-Myer had a $41 million rise in net profit and a $30 million drop in its tax. CRA gained $92 million from the cut in tax rates.
There was a great unevenness in the distribution of these profit rises. Only 248 of the 500 companies surveyed by had profit rises, and two-thirds of the net rise went to three big corporations: Fosters Brewing Group, BHP and Rupert Murdoch's News Corporation. These companies accounted for $2.3 billion out of the $3.7 billion net increase in profits.
These trends were confirmed in a broader survey in the September 22 Australian. Business editor Mark Westfield reported that 630 listed companies enjoyed a 145% increase in total earnings, the best result in a decade. There was a 25% increase in profits before tax although revenues as a whole only increased by 9.5%. Profit rises came from "lower debt, reduced interest payments and cost cutting".
The Australian reported that mining companies and banks featured prominently in the 20 best companies based on earnings per share.
According to the National Australia Bank's August quarterly survey of business expectations, most of Australia's larger companies intend to shed more jobs in the current financial year.