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Wednesday, 27 May 1998
Page: 4035


Mr KELVIN THOMSON (12:27 PM) —The two bills that we are now debating, the Taxation Laws Amendment (Company Law Review) Bill 1998 and the Income Tax (Untainting Tax) Bill 1998 , involve related anti-avoidance measures which are necessary because of the proposed reforms to company law. Those relevant reform measures are contained within the Company Law Review Bill 1997 which is presently before the Senate.

Labor supports the Company Law Review Bill 1997 as it represents an evolution of our own initiative in government. However we do intend to move some amendments to improve that particular bill and to attempt to address the deficiency which has allowed the Patrick corporation to unjustly dismiss members of the Maritime Union of Australia.

Indeed, the need for those sorts of amendments to that particular bill was pointed out as recently as yesterday by Henry Bosch, who is, of course, a former chairman of the National Companies and Securities Commission. Mr Bosch said that he was concerned about the long tradition in Australia of parent companies being allowed to walk away from the debts of their subsidiaries. That was a reference, of course, to the collapse of the four Patrick subsidiaries which employed some 2,000 waterside workers after the subsidiaries were stripped of their assets. Mr Bosch said that the winding up of subsidiaries was a serious problem in Australia, which had a long tradition of allowing companies to walk away from subsidiary debts because of the basic legal notion that every company was a separate legal personality.

I am most concerned about that and I know a lot of Labor MPs are most concerned about what Patrick has been able to do. Therefore we intend to endeavour to do something about it when the Company Law Review Bill 1997 is being debated in the Senate.

This particular piece of legislation, however, is necessitated by the fact that some of the company law reforms that are part of the Company Law Review Bill 1997 give rise to what might perhaps be described as `tax planning opportunities'. In particular, the Company Law Review Bill 1997 contains a proposal for the abolition of the concept of a par value for shares. This reform, in the absence of the bills now before us, would have allowed companies to make distributions to shareholders which were classified as capital distributions and which are not taxable, instead of the current situation where the distribution would have been a taxable dividend.

In addition, the bills are designed to stop dividend streaming. That occurs where some shareholders are paid a non-taxable capital amount where that is advantageous, and other shareholders are paid normal dividends. This is achieved through a general anti-avoidance provision in the bill. Also, the bills ensure that the existing provisions in the tax law that are dependent on the concept of a par value operate consistently with the new company law structure.

The legislation also ensures that bonus issues of shares and the issue of shares at a premium, that is to say at a higher price than the par value, are treated in the same manner that the law currently treats such transactions. A share premium account, or SPA, is a reserve where a company has raised capital in excess of the par value of a share. Currently, funds from a share premium account can be distributed back to shareholders as a non-taxable capital distribution. This is not a rort. However, the rule could be rorted if other amounts, for example, profits which would be taxable when distributed, could be included in the share premium account.

To deal with such a situation the law currently provides that if incorrect funds are included in the share premium account then that share premium account is described as tainted. The result of such tainting is that the share premium account ceases to be a share premium account and therefore any distributions from it will not be tax free.

This same concept of tainting is adopted in the bills before us now to ensure that the new share capital account, or SCA, will be tainted if profits are transferred into it. Any distributions made from a tainted SCA will be fully taxable to the recipient. If a company with a tainted SCA wishes to untaint it, it may do so. However, the untainting, which is complex, involves paying tax on the tainted amount within the share capital account.

This legislation is necessary to ensure that the proposed reforms to company law which abolish the concept of par value for shares cannot be abused to convert what would be taxable dividends paid by companies into tax-free distributions. I stated when this issue was previously being debated before the Main Committee that Labor would not be passing the Taxation Laws Amendment (Company Law Review) Bill 1998 unless and until appropriate anti-avoidance legislation was introduced to ensure that tax loopholes were not introduced through reform of company law. Accordingly, we will be supporting these bills

However, on the subject of tax avoidance I should say that we are concerned that the government has failed to pick up some of the real issues concerning tax avoidance. On 27 April this year the Sydney Morning Herald produced a report which made it clear that the Treasurer (Mr Costello) has sat on his hands and watched hundreds of millions of dollars leached from the tax system by so-called independent contractors. The Treasurer has ignored Taxation Office warnings, delivered into a detailed confidential paper in 1996, that the existing tax law is unfair and has to be changed in order to stem the flow of sham contractors avoiding PAYE tax. As a result, ordinary employees are required to pay more than their fair share of the tax bill. Soon after the 1996 election, Treasurer Costello promised:

I make it clear on behalf of this government that where anomalies and exemptions are being unfairly exploited, they will be addressed.

That was said on 20 June 1996. But the Treasurer has failed to correct a major tax anomaly where a section of the work force uses artificial schemes to avoid paying its fair share of income tax.

Firstly, he refused to proceed with Labor's legislation introduced before the 1996 election which, by broadening the definition of salary and wages under the PAYE system, would have ensured that individuals doing the same jobs face a similar tax regime. Secondly, the Treasurer has refused to follow up on the Labor initiative to cut down on tax avoidance by artificial schemes involving interposed entities, that is to say, companies, trusts or partnerships.

Instead of paying PAYE income tax like other workers, some independent contractors set themselves up as companies, partnerships or trusts. As a result, they are able to take advantage of the tax law to claim deductions which are not available to PAYE workers, to defer income tax, or to split income with other members of their families. Hundreds of thousands of ordinary workers, doing the same job, at their side, often at the same site, pay higher income tax as a result of this scam. And millions of ordinary taxpayers pay higher taxes because of the subsequent erosion of the income tax base.

A former Labor Treasurer, the member for Gellibrand (Mr Willis) began a more detailed analysis of legislative remedies to cut down on tax avoidance through the use of artificial schemes of this kind. He announced the release of a public discussion paper, with legislation to apply from 1 July 1996. But in the 1996 budget, Treasurer Costello announced that `in a boost to small business' he would not be proceeding either with Labor's PAYE amendments or with any legislation to deal with the interposed entity problem. How can we take seriously the government's claim that the tax system is broke, when they fail to take action on a tax scam which is costing hundreds of millions of dollars each year?

Their deliberate refusal to do anything about bogus independent contractors makes a mockery of their claim that they want a fairer tax system. We have seen this, similarly, with the issue of high-wealth individuals. Nothing has been happening on that front, despite the identification by the tax office of that as a major problem for revenue in this country. It is not good enough to say, `The tax system is broke. The only way to fix it is with a GST.'—which results in extra costs on just about everything: nappies, prams, school fees, schoolbooks, food, electricity, water, council rates, visits to the footy, the theatre, hairdresser, you name it, the necessities of life which are presently untaxed—when the government has not been the slightest bit interested or fair dinkum about addressing real tax avoidance problems and maintaining this nation's revenue base.

We have had circulated today a number of amendments to be moved to the government's own bill. The opposition has had the benefit of a briefing concerning those amendments and I indicate at this point that we will not be opposing those amendments during the committee stage of the debate.