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Monday, 25 June 2001
Page: 24990


Senator MURPHY (4:18 PM) —I present an interim report of the Economics References Committee on mass marketed tax effective schemes and investor protection.

Ordered that the report be printed.


Senator MURPHY —I seek leave to move a motion in relation to the report.

Leave granted.


Senator MURPHY —I move:

That the Senate take note of the report.

I would like to make a few remarks about the report. This report would be considered by several tens of thousands of investors and taxpayers in this country to be very important. When this inquiry started, we knew that a significant number of people were affected by decisions of the Australian Taxation Office in respect of investments that they had made in mass marketed investment schemes. In doing that, it meant that we had to look at how these things came about—the growth of mass marketed investment schemes and what caused their explosion, particularly at various periods throughout the late 1980s and towards the mid- and later 1990s. The committee looked at this in great detail. I refer the Senate to the introduction of the report. The issues that we really took into account were the time delay between the growth of the mass marketed scheme market and the ATO's decision to disallow deductions associated with mass marketed arrangements, the circumstances in which participants made their investments and the tax claim decisions and the ATO's handling of individual circumstances of scheme participants since making the decision to disallow deductions.

There are some very important issues that have to be dealt with here. Mass marketing investment schemes have been around for a long period of time, and the Taxation Office has a very significant task in dealing with people who seek to take the tax law up to the line. In many instances, some of them seek to take it over the line and to defraud the Australian taxation system and indeed the general public of this country. I have to say I was disappointed in the criticism that was made in the minority report by government senators—this, of course, is a majority committee report of the Australian Labor Party members of the committee and the Democrats—that we spent a significant amount of time looking at how this came about. I have to say that that was a fundamental point—to actually understand the problem, we had to determine how it was created. In doing that, we looked at some of the issues. The growth of these schemes provides some enlightening information in respect of how these things ebbed and flowed during the period from 1987 through to 1998, which was when the tax office took its conclusive position. In 1987, deductions claimed for that year in the mass marketed scheme area was something like $13 million. In 1988, it was $113 million, in 1993 it was $54 million and in 1994 it was $176 million. If we move through to 1995, it was $288 million, and in 1996 it was $666 million, growing to $1,095 million in 1997.

As I have said, over a period of time the Taxation Office has had to deal with these particular types of investment schemes. During the period 1987 to 1994, the Australian Taxation Office investigated and audited some 14 schemes. Of those 14, nine had their deductions disallowed—and they were disallowed on the basis of financing arrangements. The decision at that time was no different—certainly on the basis of information provided to the committee—from the decision that has been taken currently in respect of the whole range of schemes going back to 1992. I want to make this very clear from the outset, both from a personal point of view and from the committee's point of view, as is written in the majority report: the committee is not in any position to, nor does it, endorse any of the schemes that have been put into the marketplace. We are of the view that most of the schemes are very questionable and that a number of them were specifically designed to defraud the tax system. It is against that background that we have proceeded to ascertain whether or not the investors who have invested in these have been caught up unwittingly or have been involved in a deliberate attempt to gain a tax benefit, in breach of the tax laws of this country.

As I have said, the situation in 1987 to 1994—and, indeed, the fact that the Taxation Office issued only a small number of private binding rulings—does raise very serious questions. The tax office now, for its part, has taken a very clear position: in June 1998 it issued taxation ruling TR2000/8. But serious questions remain over the course of action taken by the Australian Taxation Office. The fact of the matter is that, in a self-assessment tax system, the general public relies very heavily on clarity of the law. Indeed, I will quote briefly what the tax commissioner said about ensuring that taxpayers can fulfil their obligations under the tax law. He said:

We cannot expect taxpayers to pay their taxes in a self-assessment system if we do not provide them with the information to understand their obligations. We can maximise the opportunity for voluntary compliance by narrowing uncertainty. For taxpayers seeking advice from the tax office is often about certainty, confidence or comfort—removing the fear of getting it wrong.

That is very important because, if we go back in history a little way, following a series of investigations and audits by the Australian Taxation Office, the then commissioner made a statement—and I have to emphasise that this statement was made against a backdrop where the tax office decided that, with some of the audits, deductions would be disallowable for financial arrangements; that is, in terms of limited and non-recourse round robin financing. The commissioner at that time said:

I would strongly recommend that in order to be assured of their tax position investors obtain detailed and comprehensive advice on the full tax implications from promoters or their own advisers prior to committing funds.

The defence of taxpayers in this position has been exactly that: they sought professional advice—advice that they felt they should have been able to rely upon. I guess, for all taxpayers in a self-assessment tax system, that is something that ought to be able to be relied upon.

One of the things that this investigation or inquiry has certainly identified at this point in time is that there are significant weaknesses in the regulatory system as it exists today. Most of these investment offerings have been through some form of regulatory process—either through the old Australian Securities Commission or, under the current government, the Australian Securities and Investments Commission. A prospectus offering to go out to the public was registered; it is now just lodged with the Australian Securities and Investments Commission, and little or nothing is really taken into account. But it is relied upon by the taxpayers of the country who make these investments. They proceed on the basis that, because it has been through some form of regulatory process, it has some authority—it is somehow legitimate. That is a problem that we must ultimately address—and likewise in terms of the actions that the tax office must take.

It has been identified, through the investigations of this committee, that there are clear problems with the processes as they currently exist. A whole range of people are seeking to exploit the tax system, and yet we seem to have significant weaknesses within the regulatory regimes as they exist. This is something that we will continue to address as a committee. Unfortunately, because of the time limits we have been given, I will run out of time before I conclude my remarks about this particular report, and so I seek leave to continue my remarks.


The ACTING DEPUTY PRESIDENT (Senator Watson)—No; there are other speakers.