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Friday, 19 March 1926


Senator NEEDHAM (Western Australia) . - 'I understand that this bill validates certain refunds of income tax. Clause 3, which is the principal provision, states -

When the paid-up value of any shares distributed out of taxed profits has been included in any assessment under the Income Tax Assessment Act, as being income within the meaning of paragraph (6) of section 14 of that act, and income tax has been paid on that value, any refund of the income tax so paid made by -the Commissioner prior to the commencement of this act shall be deemed to be, and at all times to have been, as lawfully made as if that value had been exempt from income tax under that act.

The Minister (Senator Crawford), in moving the second reading, did not give the Senate a great deal of information. I find that the measure provides for the validation of the refund of certain tax paid in respect of bonus shares that had been distributed from accumulated profits, and it validates the non-collection of certain other amounts of tax. A perusal of the bill reveals many technicalities that, in some instances, may be puzzling; but it is clear that the Government, as the result of its interpreta tion of the decision of the High Court in the Webb case, refunded moneys collected on bonus shares. I noticed that the Commissioner of Taxation, in his ninth report, refers in these terms to the High Court's decision: -

The High Court ruled that the tax was not payable on shares in a new company issued in substitution for shares in an old company reconstructed. The Government, after consideration of the views of the SolicitorGeneral, the Crown Solicitor, and the Crown Counsel in the Webb appeal, decided to announce in Parliament that this money would be refunded.

It will be observed that the Commissioner stressed the point that the decision applied to new companies upon reconstruction. There appears to be no doubt that the Government decided, upon a wrong course of action. I hold that the money was legally collected, and illegally refunded, and that this bill has been introduced to validate the illegality. Three years have elapsed since the refund was made, and Parliament is now asked to validate a wrong action.


Senator Payne - Is the position not rather that the bill will put right what was wrong ?


Senator NEEDHAM - That may be so; but Parliament should be very careful in validating wrong acts. When a citizen breaks the law, he, ordinarily, has to pay the penalty. When the Government acts illegally, however, it simply asks Parliament to validate its action. The Minister did not inform us as to the amount of money involved in this repayment, and I hope that he will supply that information. The flat rate tax on companies is now ls. in the £1. The persons to whom the tax was refunded were, in the main, in receipt of incomes of £4,000 a year.


Senator Crawford - Not all of them.


Senator NEEDHAM - Many of them had such incomes. They were certainly not on the bread line.


Senator Crawford - The majority of the holdings in most companies are comparatively small.


Senator NEEDHAM - This bill suggests that there is one law for the wealthy and another for the poor. We know that a number of wealthy men have evaded the payment of land tax in this country, and they have not been punished. This bill is inequitable and unjust. It is evidently intended to benefit the rich man, or, as a Nationalist member of the other branch of the legislature termed him, the " fat " man. The royal commission that inquired into taxation made certain valuable recommendations. The gist of its suggestions was that dividends or bonus shares should be added to the income of the shareholder, and assessed at the individual rate, less the flat rate already paid by the company. By that system there would be no double taxation. Companies are formed in many cases for the purpose of evading taxation. A company may put certain profits into its reserve account in one year,' and pay them, out to its shareholders in the form of bonus shares the next year. Thus 'the Commonwealth is deprived of tax. If the money, instead of being put into reserves is paid out in dividends, the persons receiving it have to pay tax on the dividends as well as the company tax. When the bonus shares are distributed in respect of the current years' profits the tax must be paid on them; but, by paying the money out of reserves in the following year, taxation, with the exception of the company rate, is evaded. Although the measure could be commented upon at considerable length, I think that I have said sufficient regarding it. I presume that it will receive similar support in. this chamber to that given it in the other blanch of the legislature, ;and will become law. It is really a piece of class legislation, protecting a certain section of the community that is well able to pay this tax. Parliament is again asked to validate a wrong action on the part of the Government. It should hesitate before doing so. The Government has access to the best legal brains in Australia, and there is- no excuse for the blunder. I, therefore, oppose the measure

Senator SirHENRY BARWELL (South Australia) [11.16]. - I am sorry that I was unavoidably absent yesterday when the Minister, in his second-reading speech, explained the provisions of this bill. This appears to be an extraordinary measure. Apparently, the Commissioner of Taxes has not only refrained from taxing the shareholders of companies in respect of bonuses which were credited or paid to them, but he has also gone further, and repaid to other taxpayers the amounts paid by them by way of income tax in respect of bonuses. In my opinion, those who were taxed in respect of those- bonuses, or bonus shares, were rightly taxed. I, therefore, consider that no repayments should have been made. It seems extraordinary that such, a state of affairs should have arisen. I assume that the Government acted on legal advice.


Senator Crawford - Yes. It was assumed that the provisions of the Income Tax Assessment let of 1922 had retrospective application, so far as bonus shares were concerned; but a subsequent decision was given .that that was not the case.


Senator Sir HENRY BARWELL - Was the legal opinion based on the decision of the High Court in the Webb case ?


Senator Crawford - Yes.


Senator Sir HENRY BARWELL - In view of section 4 of the 1922 act, which appears .to me to be very clear, that seems an extraordinary opinion.


Senator Crawford - A subsequent decision was given in what is known as the James .case.


Senator Sir HENRY BARWELL - In the Income Tax Assessment Act the definition of income from personal exertion is clearly worded ; it includes income derived from various sources in. Australia, such as earnings, salary, wages, fees, bonuses, and so on. In the Webb case, which dealt with the reconstruction of a company, the position was entirely different. It was held in that case that no part of the shares of the new company which were allotted to a member of the old company could be regarded as profits or bonuses credited or paid by the old company to the member of the new company within the meaning of section 14 of the 1915 act, and that the member was not liable to assessment in respect of those shares. That was an entirely different case from that of the assessmentsmade by the Commissioner in respect of which this validation is now sought. The assessments covered by the Webb case were in respect of the reconstruction of a company and the issue of shares to its. members.


Senator Crawford - It was really an exchange of new shares for old shares.


Senator SirHENRY BARWELL - It was held in that case that they were not profits or bonuses credited or paid by the old company to the member of the new company. But Webb's case in no way authorized an exemption of bonuses paid by a continuing company to its members. The mistake occurred because of a wrong opinion which was given to the Government regarding the effect of the Webb case. I do not know whether the amount which the Government has lost has been disclosed.


Senator Crawford - That information is not available. There is no doubt regarding the provision of the 1922 act, so far as bonus shares issued since the passing of that act are concerned. That provision, however, is not retrospective. This bill is to make it retrospective.

Senator Sir HENRYBARWELL.Then I take it that these assessments were made under the 1915 act, prior to the passing of the 1922 act ?


Senator Crawford - Yes.


Senator Sir HENRY BARWELL - The Webb case was decided in 1922 - it was a decision based on the provisions of the 1915 act - and I understand that, as the result of an opinion given, the present Prime Minister (Mr. Bruce), when Treasurer, promised that no further assessments would be made in respect of bonus shares in the hands of the shareholders, and that where assessments had been made, and money paid, repayments would he made. I take it that this legislation has been introduced in fulfilment of that promise.


Senator Crawford - Yes.

Senator Sir HENRYBARWELL.T appreciate the difficulty which confronts the Government; but it is unfortunate that this situation should have arisen. The Government is treating it as a matter of honour, although the decision in the James case was that the action of the Commissioner of Taxes, in assessing those shareholders on their bonus shares, was legal. Because of the promise given, moneys which were rightly collected have been repaid.


Senator Crawford - That is the position.


Senator Sir HENRY BARWELL - It is unfortunate, 'but the Government is bound by the promise of the then Trea surer. Were payment again demanded from them, hardship would be inflicted on those taxpayers to whom repayments have been made. Although to a certain extent the honour of the Government is involved, no blame can be attached to it for having taken action on the legal advice tendered. In the circumstances, I cannot see that the Senate can do other than support the second reading of this bill, and thus validate the action of the Government.

Question resolved in the affirmative.

Bill read a second time.

In committee:

Clauses 1 and 2 agreed to.

Clause 3 (Validation of refunds).







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