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Thursday, 28 February 1985
Page: 365

Senator GARETH EVANS (Minister for Resources and Energy)(6.15) —I move:

That the Bills be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard.

Leave granted.

The speeches read as follows-


This Bill is the first of three Bills the purpose of which is to recoup income tax sought to be avoided under new generation trust stripping schemes. This legislation was foreshadowed in a statement on 28 April 1983 by the Minister for Trade, Mr Dawkins the then Minister for Finance. As indicated in that statement, the policy of the Government is to employ retrospective legislation, whenever necessary, to ensure that tax sought to be avoided under any blatant tax avoidance scheme that comes to light during our term of office will be collected, irrespective of when the scheme was entered into.

That policy means that there will not be the slightest possibility that a blatant tax avoidance scheme will be effective and is the only sure way of totally eradicating the tax avoidance industry. Indeed, there is every reason to believe that the announcement of that policy combined with the Government's demonstrated commitment to act in pursuance of it, has in fact finally brought the tax avoidance industry to an end.

Mr President, trust stripping involves arrangements under which trust income is formally allocated for tax purposes to a beneficiary that does not pay tax on it-such as a tax exempt charitable institution. The income concerned, however, is effectively retained-undiminished by the payment of tax-by those family members really intended to benefit from it. Legislation against trust stripping was enacted in 1979 and amendments of a strengthening kind were made in 1981. Despite that specific legislation and the enactment of new general anti-avoidance provisions with effect from 27 May 1981, variants of trust stripping schemes continued to be developed and used because the promoters and participants were confident that the previous Government would only enact remedial legislation on a prospective basis.

The variants of trust stripping arrangements with which this Bill deals seek to exploit a provision of the income tax law not used in earlier trust strips. Under that provision a beneficiary having a vested and indefeasible interest in the income of a trust estate is treated as being presently entitled to that income. Briefly, in a typical new generation trust stripping scheme, the income of a family trust is formally allocated for tax purposes, directly or through a chain of trusts, to a charity that is exempt from the payment of tax on the income. Although the charity is given a vested and indefeasible interest in the income, it is generally not entitled to payment of the income until 80 years hence. In the meantime, the charity receives only a token payment with the balance of the funds being retained for the benefit of family members.

The claimed result of such an arrangement is that the trust income nominally allocated to the tax exempt charity is not subject to tax. In reality, the charity derives virtually no benefit from the income allocated to it. Even if the income is ultimately paid to the charity in 80 years time, the present value of that amount is negligible. For example, $100,000 payable in 80 years time is equivalent to less than $50 payable today. That is, by conferring on the charity a benefit worth less than $50 the family concerned seeks to avoid tax of up to $60,000.

The essence of the scheme is that trust income is made to appear for tax purposes as income of an exempt body, but effective enjoyment of the income rests with the family that seeks to avoid tax. This is clearly a blatant tax avoidance scheme that warrants retrospective legislation. Accordingly, the Bill is designed to ensure that the tax sought to be avoided through these schemes will be recovered irrespective of when the scheme was entered into.

I turn now to the details of the Bill. The legislation will operate where under a tax avoidance scheme entered into on or after 1 July 1980 a beneficiary is given a vested and indefeasible interest in the income of a trust estate and the present value of the benefit that will be derived by the beneficiary from that interest is less than 50 per cent of the amount of the income formally allocated to the beneficiary. Where income is sought to be stripped under arrangements of this type, the trustee of the stripped trust will, in the first instance, be liable to pay trust recoupment tax on the income at the rate of 60 per cent, that being the rate applicable to trustees under section 99A of the Income Tax Assessment Act.

There is, however, to be a right for beneficiaries of the stripped trust to elect to be taxed on amounts equal in total to the amount of the stripped income. If this election is made and the Commissioner of Taxation is satisfied that the allocation of the stripped income among the beneficiaries is reasonable and that personal tax, if any, payable by the beneficiaries will be paid by them, the trustee of the stripped trust will be freed from its liability for trust recoupment tax.

As foreshadowed in the statement by Mr Dawkins, collection of the tax will not be allowed to be hindered by techniques such as participating trusts being left devoid of funds or being made to disappear. If the beneficiaries of the stripped trust fail to excercise their right of election and the stripped trust has ceased to exist, its beneficial ownership has changed or it is unlikely to be able to meet its liability for trust recoupment tax on the stripped income, the Bill will, in those very limited circumstances, place on all the persons who are in the eligible beneficiaries class in relation to the stripped trust, a joint and several liability for the trust recoupment tax payable on that income.

The Bill provides that the eligible beneficiaries class is to comprise those persons who directly or indirectly derived a benefit attributable to the stripped trust income. The class will not, however, include third parties who derived a benefit as a result of an arm's length transaction. Nor will it include a charity that is a nominal beneficiary under a particular scheme and which usually derives a token benefit.

The imposition of joint and several liability on members of an eligible beneficiaries class means that each person in the class is fundamentally, but subject to rights of contribution and apportionment of liability that I will mention shortly, liable for the whole of the trust recoupment tax attaching to that group of persons.

The right of contribution which the Bill provides will mean that a person in an eligible beneficiaries class who has in consequence paid some or all of the trust recoupment tax attaching to that class may seek through the courts an appropriate contribution from other members of the class. The right of apportionment contained in the Bill will mean that a person in the eligible beneficiaries class who is sued by the Commissioner for unpaid trust recoupment tax may act to have other members of the class joined as co-defendants in the recovery suit. Where that option is exercised the court will, having regard to the value of the benefit enjoyed or to be enjoyed, have power to determine how much of the unpaid amount it is just and equitable that the person sued, and each of the persons joined, should be liable to pay as trust recoupment tax.

Another feature of the Bill is the imposition of penalty tax in cases where new generation trust stripping schemes are entered into after 28 April 1983. In line with our announced policy on retrospective legislation, the level of penalty that will apply to such schemes entered into prior to the commencement of this legislation will ensure that the amount recovered is the tax sought to be avoided adjusted for inflation. In relation to any future schemes, the penalty tax will be equal to double the tax sought to be avoided.

Finally, the Bill contains provisions to guard against divestment of assets in an attempt to frustrate the operation of the trust recoupment tax legislation.

Mr President, in bringing the measures before the Parliament the Government demonstrates once again its commitment to smashing the tax avoidance industry and ensuring that this deplorable anti-social industry will never be resurrected. The tax at risk from new generation schemes already entered into is currently estimated at about $10m. Of greater significance, however, is the fact this legislation along with other measures introduced by the Government will make it plain to everyone that the days of blatant tax avoidance schemes are well and truly over. An explanatory memorandum providing a detailed explanation of the various measures contained in the Bill is being made available to honourable senators. I commend the Bill to the Senate.


This Bill will formally impose a tax-to be called trust recoupment tax-on the taxable amount determined in accordance with the rules being inserted in the trust recoupment tax legislation by the Bill I have just introduced. As I explained in my second reading speech on that Bill, liability for the trust recoupment tax will, subject to election arrangements, fall initially on the trustee of the stripped trust, but where it is impracticable or inappropriate to levy the tax at that primary level it will be possible to levy the tax at the secondary level on the class of persons who are referred to in the legislation as the eligible beneficiaries class.

This Bill imposes on the taxable amount at either the primary or secondary level a trust recoupment tax equal to 60 per cent of the taxable amount. In addition, the Bill imposes tax on taxable amounts described in the legislation as elected taxable amounts and company taxable amounts. These taxable amounts may arise where the beneficiaries of a stripped trust elect to be assessed to income tax on the stripped income and one of those beneficiaries is a company. The rate of tax will be 75 per cent on elected taxable amounts and 46 per cent on company taxable amounts, the former rate applying where the shareholders of the company do not elect to be taxed on deemed dividends. I commend the Bill to the Senate.


The third Bill in the legislative package to recoup the tax sought to be avoided under new generation trust stripping schemes proposes amendments to several acts, consequential upon the two Bills I have already introduced. The first amendment is that of the Administrative Decisions (Judicial Review) Act 1977. Decisions under certain acts are precluded from review through the system of review provided for by that Act.

Decisions under the new trust recoupment tax legislation are also to be excluded from the purview of the Administrative Decisions (Judicial Review) Act, consistent with the position that prevails in relation to decisions under various other Commonwealth laws.

However, a trustee or other person liable for trust recoupment tax who is dissatisfied with an assessment by the Commissioner of Taxation, will have available full rights of objection and appeal to a taxation board of review or a supreme court and ultimately, if the matter warrants it, to the Federal and High Courts of Australia. Other taxation laws administered by the Commissioner of Taxation that provide similar rights to contest liability are also excluded from review under the Administrative Decisions (Judicial Review) Act.

Two other Acts to be amended as a consequence of the Trust recoupment tax legislation deal with the Commonwealth-State tax sharing arrangements. The first of the tax sharing acts dealt with by this Bill is the Local Government (Personal Income Tax Sharing) Act 1976. Under Section 4A of that Act, the Commissioner of Taxation is required by the end of July each year, to make a determination as to the amount of net personal income tax collections for the year. That determination is then used as the basis for the allocation of funds to the states by way of financial assistance for local government purposes.

As the trust recoupment tax legislation basically seeks to recover personal income tax sought to be avoided, the Local Government (Personal Income Tax Sharing) Act is to be amended to include net collections of trust recoupment tax as part of the tax sharing base. The amendment proposed to the States (Tax Sharing and Health Grants) Act 1981 will also include collections of trust recoupment tax in the tax base. This proposal is consistent with the intention of that legislation.

In 1981, an understanding was reached with the States that they would receive tax sharing grants calculated by reference to a 'total' tax base rather than the personal income tax base used in previous arrangements. That understanding requires that newly introduced Commonwealth taxes be included in the tax base. While the existing legislation allows for such new inclusions through the promulgation of regulations, the necessity for other consequential amendments provides an opportunity to include this amendment within a total legislation package.

The Bill further proposes two minor technical amendments of the Taxation Administration Act 1953 following the substantial changes made to that Act last year. The proposed amendments give effect to the intention to adapt and apply the machinery provisions of the income tax law for the purposes of the proposed trust recoupment tax law.

Finally, the Bill proposes to amend the Taxation (Interest on Overpayments) Act 1983. Those amendments will mean that the Commissioner of Taxation will pay interest on refunds of trust recoupment tax following a successful objection or appeal against a trust recoupment tax assessment. I also commend this Bill to the Senate.

Debate (on motion by Senator Reid) adjourned.