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Wednesday, 10 September 2003
Page: 19627

Ms JANN McFARLANE (9:33 AM) —I am pleased to have the opportunity to speak on Taxation Laws Amendment Bill (No. 8) 2002. In fact, it is a year since I wrote this speech when it was flagged that this bill was going to come into the House. I am doubly pleased to be able now to talk on these most important issues. I am beginning to feel that, every time I rise in this place to debate legislation dealing with our taxation system or the administration of it, I end up criticising the actions of the Australian Taxation Office. I have spoken over the past 18 months on the issues of mass marketed tax effective schemes, defective administration, the operation of the superannuation guarantee scheme and also the conduct of the ATO in relation to its treatment of ordinary Australian taxpayers.

Today we deal with another of the myriad taxation bills that regularly pass through this place. At first glance the bill deals with issues that would not necessarily affect the average taxpayer. This bill deals with deductions for the closing down of petroleum projects, the extension of the imputation system to cooperative companies and the removal of any taxation consequence from the conversion of AGL from a statutory corporation to one registered under the companies act.

It is hardly riveting stuff for my constituents, but there is one provision of the bill that caught my eye and prompted me to speak on this issue and a related issue that has been brought to my attention by a number of my constituents. This provision is the one that deals with the treatment of capital gains tax on employee share schemes. I am interested in this issue, as I will be watching with interest how the ATO administers this law given its track record on a similar type of arrangement used to improve productivity: the employee benefit scheme. I will deal briefly with the details of the provision in this bill and then move on to what I see as mismanagement by the ATO that is ruining small businesses and people's lives.

This bill is essentially providing incentive to employees who participate in an employee share ownership scheme. It provides a discount on the capital gains tax paid by participants in these schemes if they sell their shares after a 12-month period. This measure was born out of the findings of the House of Representatives Standing Committee on Employment, Education and Workplace Relations report entitled Shared endeavours, dated September 2000. The report aimed to foster the use of employee share ownership schemes and to curtail their use for aggressive tax planning. I have no problems with this aim and the application of this aim in this bill; in fact, I do not support the practice of aggressive tax planning. In my time in this House I have come across many constituents and people in Western Australia who got involved in what was seen as a legal tax minimisation scheme and were severely burnt in the process.

I would like to mention the efforts of an organisation called Australians for Tax Justice, who have been fighting for the rights of investors in so-called mass marketed tax effective investments. I had the privilege of attending a rally of theirs outside a Liberal Party businesswomen's function in West Perth earlier this year. Protesting was a novel experience for many of the people who attended the rally. They were protesting at the gross injustice perpetrated by the ATO and this government over this issue.

I spoke at the rally and had conversations with many of the people present, who were mainly Liberal supporters and who felt betrayed by the actions of the Treasurer, the Assistant Treasurer and the ATO. The Assistant Treasurer was the guest at the Liberal Party function and the group asked that she come out and address them. I felt that it was disgusting that the minister did not have the guts to come out and at least receive a copy of the submission that they wished to present to her. This was not a group of rabblerousers or professional protesters but a group of predominately middle-class, white-collar professionals and small business owners—people you would have thought were the natural constituency of the Liberal Party.

At this rally I met a number of small business owners who had also been affected by the ATO changing its stance in relation to the operation of employee benefit arrangements. I must admit that I am pretty sceptical of tax minimisation schemes. I have a strong belief that we should all pay the tax we are supposed to pay. However, the law allows certain mechanisms that enable people on higher incomes to reduce the amount of tax they have to pay. I will put it on the record that I do not agree with these types of schemes from an ideological point of view, so what interested me in the plight of these small business owners? It was the fact that, through ATO mismanagement, some of them had been forced to pay huge tax bills and, in some cases, were forced into liquidation.

I was originally approached by a small business operator from Balcatta in my electorate who had received an amended assessment from the ATO in relation to the employee benefit arrangement he had in place at his company. For those of us who do not know what an employee benefit arrangement is I will give the House a brief outline. An employee benefit arrangement is similar to the employee share ownership schemes outlined in this bill, the major difference being that the employees are given units in a trust instead of shares. This is because small businesses do not have shares like companies listed on the Australian Stock Exchange. Employee benefit arrangements were widely used in the late eighties and early nineties by small businesses. The ATO identified what it saw was a revenue hole in the late nineties and then decided that it would issue amended assessments retrospectively.

This is similar to the experience of investors in the mass marketed tax effective investments. However, there is a fundamental difference. Instead of issuing one assessment, the ATO issued three new assessments. These were issued even though the courts had found in favour of the taxpayer in the Essenbourne case. To give the House a simplified version of the argument that my constituents have with the ATO and to point out the injustice in the ATO's behaviour, I will quote extensively from an article by Peter McDonald, National Director of Taxpayers Australia. His editorial, published in the Taxpayeron 28 April 2003, states:

Has the Tax Office become a law unto itself? If the ATO's recent actions following from the Essenbourne case are anything to go by, then the answer is yes. In the Essenbourne case the Federal Court held that payments by an employer to an Employee Incentive Trust were not deductible to the employer. The court also held that the anti avoidance rules in Part IVA did not apply and it also held that FBT was not payable by the employer on those payments. It is history now that the ATO did not appeal the decision. Consequently the Essenbourne case stands as the definitive judgment, at this time, on the application of Part IVA and FBT to payments made to employee incentive schemes. The ATO, however, has chosen to accept that part of the Essenbourne case that it likes and has rejected those parts that it does not like. In a speech to the ICAA NAB Gala Luncheon on 14 March 2003 the Tax Commissioner, Michael Carmody, stated `... we do not accept the Court's comments in Essenbourne on both Part IVA and Fringe Benefits Tax were correct...I see no reason to change our current position on these schemes. The appropriate venue for people wishing to contest our decision is in the Courts.' True to the Tax Commissioner's word the ATO has commenced issuing notices of amended assessment to taxpayers who have been involved in such schemes—

Assessing the employer with FBT in respect of the contributions,

Disallowing deductions to the employer for the contribution and on any funds borrowed to finance the arrangement,

Assessing the individuals for income tax on the contributions received, and

Charging the employer and the individuals with substantial penalties and interest charges.

The ATO has made the `gracious' offer to look to test its view on fringe benefits tax and the application of the anti avoidance provisions to these types of arrangements in future court cases. In the meantime it has commenced to issue amended assessments disallowing claims while at the same time imposing FBT and penalties.

The ATO ignored the decision of the Federal Court. The ATO has chosen to set itself above the law and has chosen to make itself the final arbiter of the law and how it should be applied. In effect its position is to reject what it does not like and look for other cases that might give it the answer it wants. No doubt if the ATO does obtain a favorable decision in a future case it will claim universal application of the law to the decision that it likes. Have we just witnessed the demise of equity and fairness and a proper application of the law? If any taxpayer sought to apply the position that the ATO has adopted to their own affairs then the full force of the law would be brought to bear. The umpire's decision should be final. The court is that umpire. It seems to apply in all cases except when the ATO doesn't like the decision. There is no justification for the ATO position. As most employee benefit arrangements were structured on similar lines to the facts in Essenbourne, the Federal Court's decision should be final. The ATO did not appeal the case. Therefore all taxpayers in similar circumstances should be treated in the manner of the Court's decision.

The position adopted by the ATO has identified a fatal flaw in tax law and a fatal flaw in administration of the law. There are two courses of action available to eliminate that flaw. The first is a Parliamentary enquiry into this untenable and inequitable position. The alternative is that this issue should be the first task allocated to the Inspector General of Taxation.

What Mr McDonald rightly pointed out is that the ATO has hedged its bets and issued multiple assessments. In effect, the taxpayer has to pay tax more than once. The Law Council of Australia who, in its response to the ATO's media release No. 2003/30 dated 14 March 2003, supported this view. It stated:

There is no point, in the view of the Committee, for the Commissioner to `test his views' in the courts, if, when he has done that, he simply disregards decisions which go against him. To so act is inconsistent with his undertaking to taxpayers in his own `Taxpayers Charter' and, more fundamentally, his responsibility as a public official whose duty is to apply the law to collect the correct amount of tax payable - `not a penny more, not a penny less.'

Not a penny more, not a penny less—I agree totally with that comment.

To continue this line of argument I will share with the House some of the contents of a memo from the Institute of Chartered Accountants in Australia. The memo deals with the statements made by the Commissioner of Taxation in relation to the Essenbourne case. I will quote from some of the passages:

In both these cases (Essenbourne & Eastern Nitrogen) the Commissioner has stated that he believes that a judicial decision was either `wrong' or `not correct' in interpreting the law.

The `Law' in Australia is made up of legislative pronouncement and judicial decisions. Regarding a judicial decision, it remains `law' until it is either overridden by a decision of a superior court (as inferior courts are bound by a decision of a superior court) or is changed by legislative pronouncement, it remains the `law'.

Therefore is it possible for a statutory body (such as the Commissioner and the ATO) to act in a way that is not in accordance with a judicial decision that has not been overturned by a superior court or changed by legislative pronouncement? Can a statutory authority act in a way that is contrary to the `law'?

I can understand the ATO testing cases in court, yet what astounds me is that, in circumstances where a case has already been decided in favour of the taxpayer, it ignores the decision of the court. As I have already pointed out, if any of my constituents behaved like this, they would feel the full force of the law.

To illustrate the points made by both Taxpayers Australia and the author of the Institute of Chartered Accountants in Australia's internal memo, I will relate to the House some examples of how the ATO has blown this principle out of the water. The first deals with an employee benefit trust arrangement. In this case, a taxpayer and his wife are beneficiaries of a trust. The trust claimed a deduction for the contribution to the arrangement. The ATO disallowed the deduction. The disallowance of the deduction results in the trust having an assessable income. In a normal situation, the assessment process allows the assessable income to be offset against carried forward losses. Any excess is assessable to the beneficiaries under the normal provisions of the legislation. In this case, the trust has carried forward losses dating back to 1994. The ATO failed to take the carried forward losses into account in raising assessments against the beneficiaries.

The ATO have the carried forward losses recorded in their internal records but have not explained why the losses were not taken into account. The assessments raised against the beneficiaries have been raised outside the four-year time limit and have been raised using part IVA. The taxpayer has raised with the ATO the issue that the assessments are invalid because, even if the ATO disallowance of the deduction is correct and there are no carried forward losses, the income is properly assessable to the beneficiaries. However, as the time limit has expired, the ATO cannot now assess the beneficiaries under part IVA. The assessment was not avoided by virtue of a scheme; it has not occurred and it has not been assessed because of ATO delays in determining the issue.

Regardless of what I have just described, the carried forward losses wipe out the income in any event and there is nothing to assess. Because the ATO do not like losing, they have now requested information to substantiate the carry forward losses—that is, the ATO are commencing an audit going back nine years. Under Corporations Law, the maximum time requirement for retention of records is seven years and the time requirement for retention of tax records is generally between three and five years. The ATO themselves generally destroy records every three years. Why are the ATO doing this? A person involved with this case described it to me as a `bloody-minded attempt to intimidate the taxpayer and force him to incur unnecessary expenses'.

In relation to employee benefit arrangements, there are possibly hundreds in a similar position in relation to the ATO's sudden use of part IVA assessments. Another example of this was the taxpayer who was an employee of a company that implemented an employee benefit arrangement. You need to bear in mind that this was an employee of a company and not someone who could be accused of setting up a scheme to avoid tax. The company has since been liquidated. The taxpayer did not claim deductions in respect of the employee benefit arrangement. The ATO advised that it was going to disallow deductions to the taxpayer and raise an amended assessment against him personally. The taxpayer then informed the ATO in writing that he had never claimed a deduction and consequently no assessment could be raised. What did the ATO do? It disregarded the fact that deductions were not claimed and raised amended assessments on the basis of disallowing deductions that were never claimed. This is quite mind-boggling. It is unfair. It is unjust.

But the stories get better. This actual event emphasises that in some cases a consequence of the ATO's retrospective actions is actually retrospective insolvency. This result has been achieved by the ATO in relation to a business that, on receipt of a fringe benefits tax assessment for the employee benefit arrangement, declared itself insolvent. A liquidator was appointed and at the creditors meeting the ATO as the major creditor were asked to vote for administration rather than liquidation. In exchange, the owners would pay the ATO $300,000 in full settlement of the tax liability. The ATO refused the offer and voted for liquidation. Four days later, the ATO called the liquidator. They advised that they had just read the file, realised they had made a mistake and wanted to change their vote. The liquidator advised that the assets had already been sold to meet the claims of debenture holders on the company and the ATO would receive nothing. The ATO have now come back to the liquidator and advised that, as the company had a nil fringe benefits tax assessment in 1997, this new bill was not an amendment but an original. Therefore, the ATO assert that the FBT liability that it raised in 2000 actually arose in 1997 and pre-dated the issuing of the debentures. Consequently, the ATO say the tax debt takes precedence to secure debenture charges, because they contend the company was insolvent at the time the debenture charges arose.

This contention by the ATO has widespread implications. It means that, prior to issuing loans or extending credit to business, lenders and creditors must be certain a tax liability that the ATO claim was an original liability will not be raised at any time in the future for past years that could retrospectively render the entity insolvent prior to loans or credit being provided. This is a serious result arising from retrospective action. If the ATO rationale is followed, then companies may find that, due to a backdated ATO interpretation, they have been trading while insolvent since some point in their past history and have been in breach of Corporations Law since that time.

What about people or entities who have lent money to corporations? Should they now check to make sure that there is no unexpected tax liability that could arise from previous activity? How can they check, when the ATO will refuse information under secrecy provisions? The upshot of this is that this issue goes beyond the employee benefit arrangement and affects all business. What is happening in the administration of the ATO? I avidly watched the Four Corners report recently. I will be speaking in this place in the future on some more issues that have been raised with me by constituents about the administration of our tax system.

I support this bill, but I have reservations. Will the ATO be able to administer the law we pass in the parliament as it was intended to be administered by the legislators who drafted it? This is a question that still needs to be answered. I ask the Treasurer to note my concerns and those of Stirling constituents in small business. I ask him to work for a fair and just tax system and tax administration system. I remind him that the taxpayers charter is the thing that is supposed to give us, the people of Australia, confidence in the tax system and in this parliament. I ask him to go back to that charter and operate it in a way that is fair, reasonable and just.