Mr HOWARD (Treasurer)(10.22) —I move:

That the Bill be now read a second time.

The matters with which this Bill and its companion measures deal have been the subject of considerable public and political debate in recent times. In bringing the measures before the Parliament the Government demonstrates once again its clear commitment to do what it can to establish and uphold a fair system of taxation in this country. As Treasurer of the Commonwealth, I have brought before the Parliament a wide range of Bills designed so that those who would seek to escape their fair share of taxation do not succeed.

Today the Government complements its earlier proscription of schemes to evade the payment of legally payable company tax by a Bill that will recover evaded company tax from the principal beneficiaries of earlier evasion of that kind. In doing this we have sought to achieve a reasonable balance between all the various, and often conflicting, interests and considerations that seem to attend the more significant of taxation issues. Our normal and general reluctance to introduce legislation having any retrospective element has, on this ocassion, been tempered by the competing consideration of overall perceptions as to the equity and fairness of our taxation system and the distribution of the tax burden. We are also dealing here with recoupment of tax which was clearly the subject of illegal evasion.

The Government believes that the public is clearly of the view that that tax evaded in the course of so-called bottom-of-the-harbour strips of untaxed company profits should be recovered for public purposes. Vendor shareholders and other former owners of stripped companies ought to be made make good the tax that remains unpaid, and from the evasion of which they have clearly enjoyed a benefit. But, in establishing by this Bill the rules under which accounts are to be settled, the Government has been anxious to ensure that the matter proceeds on a properly measured basis. I believe that the Bill I am presenting observes these principles.

The basic measures contained in the Bill were foreshadowed by me in some detail in a full statement made on 25 July 1982 and in a further statement on 17 August last. I made it clear then, and I repeat now, that the measures are designed, and will operate only, to collect evaded company tax. Tax that may have been avoided is not the subject of the legislation. That point needs to be made clear not only so that the ambit of the Bill is properly understood, but also so that some of the wilder claims about the numbers of companies that have been stripped of untaxed profits can be seen as unfounded as they are. Where companies were simply stripped of profits that have borne all the company-including undistributed profits-tax payable on them, there has been no evasion of tax and the legislation will not apply. Nor will it apply to the taxed profits element in the case of a strip of both taxed and untaxed company profits. Only the tax on the untaxed profits is the subject of the Bill.

But let me remind the House, with effect from 27 May 1981 when we brought in the new general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act, Vendor-shareholders are to be taxed on any profits liberated to them in the course of a dividend strip or other similar strip of company profits . The measures to collect evaded tax are to operate on strips of untaxed profits that were carried out between 1 January 1972 and 4 December 1980 when the Crimes (Taxation Offences) Act 1980 dealt a decisive blow to such schemes. Just as that legislation applies to arrangements that have a purpose of rendering a company unable to pay its tax, so the present Bill will declare that it is to operate only where there has been an arrangement that had the effect that a company was rendered unable to pay its company tax.

The other precise tests of the legislation are also of an objective nature, helping to make clear its field of operation, and I now outline them, taking first the simpler forms of company structure. I said in my statement of 25 July that the legislation would apply where all the shares in a company were sold. Scheme promoters needed to have total control of a company before they could effect the strip that was a part of the overall arrangement. However, it was possible for them to do this where less than the entire ownership was acquired and the Bill accordingly, on the basis of company law provisions, makes it a condition for its application that there was a sale of shares carrying more than 90 per cent of the voting power in the target company.

Another important test is framed so that it is clear that the legislation will apply only where the vendor-shareholder and other former owners actually derived a benefit from the evasion of the company's tax. This is achieved by a provision that requires that the total consideration for the sale of the shares in the company exceeded its net assets as reduced by any actual or contingent company tax liability on income derived up to the time of sale of the shares. To put it another way, the test is one that puts into legal terms the concept that the sale price for the company was such that it was evident that company tax on the amount of then apparent profits would not be paid. A person who pays, say, $90, 000 for shares in a company that has traded for part of the income year and earned $100,000, which is what the company has in the bank, cannot be regarded as in a position to pay the $46,000 company tax payable on a taxable income of $ 100,000.

The liability of former owners of a company under the legislation will not arise until the company's liability has been established by assessment, rights of objection and appeal against that assessment have either not been exercised or have been exhausted, and tax remains unpaid. That test is obviously as it should be, but, in the course of our detailed preparation of the legislation, we have decided that, although a delay in collection of the evaded tax will be involved, another element should be added. This is that former owners of a company will not be called on to effect recoupment of the company tax under this legislation until after they have had an opportunity to contest the basic assessment of that tax.

The Commissioner of Taxation has already issued many notices of assessment in respect of the companies concerned, but due to the fact that some have been returned unclaimed, and to other circumstances, these notices are a less than satisfactory foundation for tax claims on the former owners. As soon as practicable after this legislation is passed, therefore, a copy of the already issued notice of assessment will in each case be sent to a representative vendor -shareholder who will be able to exercise the rights of objection and appeal open to the company. The obligation of former owners to meet any late payment penalty owing by the company will be measured only from the date that would be the due date for payment if the company assessment had been served on the day that the copy is sent.

I said in my statement of 25 July that we do not want the legislation to apply where the reason for non-payment of company tax is that a company has suffered commercial misadventure in the hands of its new owners, following its sale at a commercially realistic price. To make that clear, the legislation specifies that it will apply only where the company did not, after the sale, carry on the same business as it had carried on beforehand. Where the various threshold tests are all met each vendor-shareholder will, at base, be liable to effect recoupment of his or her share of the evaded tax. That amount will be fixed according to the vendor's share of the total consideration for the sale of shares in the company.

In noting that the recovery from vendor-shareholders will be of the total amount of the evaded company tax, undiminished by the part of that tax taken as a fee by those who promoted the scheme and stripped the company, I also observe that the special legislation will not make vendors liable for penalty taxes incurred by the company in respect of lodgment of an incorrect return or of late lodgment or of non-lodgment. On review, the Government has accepted the argument that vendors should not have to bear these penalties, which can be accepted as being due more to acts or omissions on the part of those to whom the companies were transferred. The penalty taxes excluded from the scope of the recoupment measures will, however, remain as tax that is legally owing by the companies concerned.

That brings me to a discussion of the liability of promoters and other strippers to assist in making good the evasion of tax that has occurred. Our appointment of a Special Prosecutor, and the work that he will carry out, can be expected to make some contribution, but the Government is not content to let it rest there. It is the Government's wish to have legislation that will place a liability on those who were on the post-sale side of these schemes. Provisions to effect some recoupment of unpaid company taxes from these people will either be added to the Bill by an amendment on the floor of the House or made the subject of a further Bill to be considered alongside the present Bill. To return to that Bill, its recoupment obligations will extend to vendor-shareholders in a company who sold shares and thereby, in association with other shareholders concerned, transferred control in yet another company which was stripped of untaxed company profits. A sale of shares in a holding company that carried ownership of a series of subsidiary companies with untaxed profits is an example . Whether a sale of shares took place in one of these more complex situations, or in the simple case I dealt with earlier, some of the vendor-shareholders will have been companies or trusts through which people held ownership of the stripped companies, and there could also have been more lengthy chains of ownership.

The broad aim of the legislation is to effect a recoupment at the earliest practicable and appropriate stage along a chain of ownership but where, in defined circumstances, that cannot be achieved the Bill has provisions for tracing through, broadly on the basis of rights to capital, the liability from one level to another, so that ultimately it rests on the people who indirectly owned the stripped companies. Persons who at a primary or secondary level are liable to the recoupment tax that is being formally imposed as a technique for recovering the evaded tax will be issued with a notice of assessment setting out the amounts they are each liable to pay. A recipient of such a notice will of course have the usual rights of objection and appeal against a recoupment tax assessment and, if the tax remains unpaid 30 days after the notice is issued, the unpaid amount will there after attract late payment penalty at the rate of 20 per cent per annum. On review, we have concluded that that rate, rather than the earlier-announced rate of 30 per cent would be appropriate.

Associated with that, a separate Bill that I will shortly introduce will implement the earlier-announced decision to propose a doubling-from 10 per cent to 20 per cent-in the rate of penalty for late payment of income tax. This further Bill will have the effect that late payment penalty begins to accrue as soon as is practicable at the higher rate of 20 per cent in the basic assessments of company tax issued or to be re-issued in respect of the stripped companies concerned. In noting that unpaid undistributed profits tax is within the scope of the recoupment legislation, I observe that in harmony with existing provisions in the income tax law the former owners of a company may arrange instead to pay tax themselves on the same basis as if the company had distributed enough in dividends to escape a liability to undistributed profits tax. Earlier-foreshadowed provisions to guard against divestment of assets in an attempt to frustrate the operation of the recoupment legislation are another feature of the Bill.

Among further provisions of note are measures to adopt the machinery and collection provisions of the income tax law; to enable the fullest reporting to Parliament of failures to comply with the recoupment legislation; to ensure that , secrecy provisions of the tax law notwithstanding, persons liable to recoupment tax are able to get details of the basis on which their liability was calculated and, to assist them in any personal pursuit of promoters for compensation, of the ways in which their company was stripped; to make appropriate adjustments in a person's liability where other amounts of, or representing, the unpaid company tax are paid; to deal with situations where a stripped company has ceased to exist; and finally, to give the Commissioner of Taxation authority not to pursue liability in particular circumstances, including where a person's liability under the legislation is under $100. These are the broad principles of the Bill which, while it gives effect to a simple enough recoupment concept has, reflecting the difficulty and variety of situations with which it deals, emerged as a somewhat complex piece of legislation.

As is usual with taxation legislation a comprehensive explanatory memorandum giving further and fuller explanations of the Bill and three associated Bills that I will introduce shortly is being made available to honourable members. Part 1 of the memorandum is being circulated today and Part 2, which will be a clause by clause explanation of the Bills, will be made available to honourable members next week. The Government believes that the Parliament will give this package of legislation the speedy approval that it deserves. While we are committed to implementation of the policies that the Bills express, we are of course ready to review particular provisions of them at a more technical level, having regard to any constructive comments that are put to us. With those introductory remarks I commend this Bill to the House.

Debate (on motion by Mr Dawkins) adjourned.