Yahoo Finance Tax secrets of the most profitable private companies
Private companies are doing fascinating and curious things public companies aren’t. We ignore them at our peril.
In Australia, we obsess over the big public companies, like BHP and Woolworths.
Why? We talk about them because we can. Their details are public. Listed companies have to report all their profits and losses, they have to front the press to shout their triumphs and confess their sins.
But big public companies are less than a quarter of the big companies in Australia. The economy is bursting with private companies you almost never hear about. Billions of dollars flows through them unremarked.
Unlisted companies owned by private individuals or foreign firms have huge incomes and pay more tax than public companies. These are an enormous part of the Australian economy.
The exception is when the government puts out its annual corporate tax transparency report. Then these secretive companies spill the beans.
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You may have come across the tax transparency reports when they are used to point the finger at big oil and gas companies for paying no tax. That’s important but it’s not what we’re looking at today.
Today, we’re just going to peep at a few companies with crazy numbers. Big brands with massive profit margins, weird corporate structures with wild amounts of revenue, subsidiaries of global mega corps, etc.
Let us start with Hermès, the local entity behind the French luxury brand. They sell things like a colourful scarf for $1,695.
Hermès isn’t exactly a mega brand in Australia, it only has six stores. But it easily meets the $100 million threshold for reporting its corporate tax via the transparency report. Hermès pays a lot of tax, and that’s because it makes a lot of money. It reported income of $297 million in 2021-22. Not bad for six shops. Hermès makes the highly coveted Birkin bag, which can retail for well over $20,000.
Of Hermès’ $297 million in income, $95 million was taxable. In other words, we can more or less see it as profit. That’s about one-third – an astonishing net margin. The business lesson here is not to go back in time and start a bespoke atelier in Paris in 1837, but the power of not selling out your brand with cheap brand extensions.
Hermès paid $29 million in tax, which is about 10 per cent of its revenue. Suggesting if you buy the scarf above, $340 or so will end up at the ATO (10 per cent as GST and another 10 per cent in company tax).
What is ‘taxable’ income?
We just need to point out here that companies pay tax on their profits, not their revenues. The tax report includes a proxy for revenue, (called, in the database, “total income”) and a proxy for profits (called “taxable income”).
If a company makes $100 million in total income a year and has $20 million of taxable income, it suggests their profit after expenses is about 20 per cent.
The calculation is not exact because weird accounting things can happen (asset sales, asset write-offs, tax offsets and other loopholes, etc). But over several years, the amount of taxable income a company has relative to its total revenue gives you a good hint of its profit margin.
It’s the best we can do for most private enterprises. They certainly don’t want to give this information away and they weren’t doing it before the tax transparency regime got strict (it’s not compulsory but the Board of Taxation makes it clear they consider it important).
Lindt and LinkedIn
We can also see the tax results of your favourite chocolate brand and your least-favourite social network.
LinkedIn (a subsidiary of Microsoft) and Lindt and Sprungli (listed in Switzerland) both make money in Australia and both pay about $15 million in tax.
Neither of these companies have margins anything like Hermes. Lindt is running at a ratio of taxable to total income of between 4 per cent and 10 per cent, while the local LinkedIn subsidiary is around 15 to 16 per cent for the two years it has paid tax.
We can also check out some other fun companies. The next chart shows Nintendo making far more money in Australia than Ferrari. But Lego made more than both of them in the most recent year. Toy companies however, don’t have much margin. These companies all report margins between 3 per cent and 7 per cent.
I want to also shout out to the most intriguing company I’ve found on the list. It reports having had $230 million in taxable income in 2021-22 (more than Ampol or HSBC). It’s called Popeye Treasures Pty Ltd and it is registered to a location on the Gold Coast. Despite having so many millions in taxable income, it appears to have paid just $312,000 in tax. It is a corporate mystery. What is it and what does it do?
I went digging at the Australian Securities and Investments Commission.
Turns out there are other Gold Coast companies with the name Popeye that are linked to multi-millionaire Tony Quinn. He made over $400 million selling a pet food business at one point. He also bought and flipped Darrell Lea (buying it out of administration and selling it to private equity for hundreds of millions). I’m guessing Popeye Treasures is an investment vehicle for him with a very clever corporate structure.
There is a clue the company is involved in investing. I can find one other reference on the internet to Popeye Treasures Pty Ltd (and only one). It pops up in a list of entities that own a lot of bonds issued by NAB, alongside JP Morgan, and the Roman Catholic church.
Quinn has been contacted for comment but was yet to respond at the time of publication.
This is why the private companies are so interesting. They’re doing fascinating and curious things public companies aren’t. We ignore them at our peril.
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