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Wednesday, 11 November 1964

Senator WRIGHT (Tasmania) .- I hope the Minister for Civil Aviation (Senator Henty), who is in charge of the Bill, will get such comfort as is appropriate from the lukewarm approval that has been accorded to the measure by the Leader of the Opposition (Senator McKenna). Having noted that the Bill strikes at fundamental principles for which I should have thought the Government stood, 1 should think that in the long run the remarks of the Leader of the Opposition will be cold comfort to the Government.

The Bill stems from the fact that in 1959 it was recognised that the income tax laws of this country were becoming too complex. In that year the then Treasurer announced the appointment of a Committee which was presided over by a no less distinguished person, from the point of view not only of having a sense of justice but also of having an insight into this complex legislation, than Mr. Justice Ligertwood of South Australia. Mr. Justice Ligertwood was joined in his labours by others, each one of whom had had special experience with this type of legislation. One of the oddities of this measure is that the Treasurer (Mr. Harold Holt) has felt obliged to apologise for its excessive complexity. His effort at simplification has resulted in a broad stream of inextricably confused complexities. He has found the task of rewriting the law to be one to which he is unequal, and in desperation he has committed the taxpayers of Australia for the most part to the decision, perhaps permeated by goodwill, of no less than the Commissioner of Taxation.

The Government strikes at the very root of my political purposes when it directs the Commissioner of Taxation to say whether or not a partnership is reasonable, whether or not, with no criterion available, it is reasonable for a rebate to be paid to a private company, and whether or not a family trust is reasonable. Mr. Deputy President, I ask you which parent in this country is prepared to put the Commissioner of Taxation in the position of saying what is the appropriate provision to make by way of trust arrangements for members of his family. As an exponent of taxation law, the Commissioner of Taxation is especially experienced. From the viewpoint of saying whether taxation law has been evaded, his opinion is valuable. But he is an inappropriate person to presume to decide whether in the terms of the Bill, a certain arrangement is reasonable.

Let it be said without equivocation that the loopholes for evasion of taxation which the Ligertwood Committee revealed should have been stopped up immediately. J shall refer to some of them. At that time I used all my influence with the Minister of the day immediately to bring in corrective legislation. I stand not to utter one syllable in defence of tax evasion; but by the same token, for so long as I am here I shall defend the proposition that a bona fide taxpayer enjoys the right, according to law, to settle his affairs, make a partnership or engage in any other transaction so as to arrange for his family to derive the benefit of his exertions and earnings with a minimum of taxation incidence. I say that as one who has no interest other than one of proper principle.

As I have said, the Treasurer was certainly conscious of the degree to which he has resorted as the last haven of escape to the discretion of the Commissioner of Taxation because in this Bill - I adopt someone else's figure - there are 97 such instances. In effect, the Treasurer has said: "The thing has got so complex that we must hand over to the Commissioner of Taxation the right of deciding whether it is reasonable in these circumstances to tax A and exempt B, or whether it is reasonable to apply in a particular case a section that Parliament has written into an Act - in other words, whether it is reasonable in the opinion of the Commissioner to dispense with the application of that section to a particular taxpayer." In addition to the futility of that position, delay has taken place in closing the wide loopholes that the Ligertwood Committee revealed. Mr. Justice Ligertwood was so conscious that public damage could be done by a disclosure of the evasion arising from the loopholes that in paragraph 336 of his report he said -

The Committee recommends that the recommendations made in this report should operate from the date on which the report is first made public, in respect of improvements made on leasehold property and completed after that date, not being certain improvements -

Mr. Deputy President,3i years have gone by and to an observer it is obvious that metropolitan building construction in the two big cities has been continuing apace. Despite the fact that Mr. Justice Ligertwood made that recommendation and the Treasurer in tabling his report in August 1961 said that the provisions would operate from that date, the Bill purports to operate as to improvements effected under arrangements for leaseholds only after October 1964. All those persons who exploited the loopholes before the disclosure in Mr. Justice Ligertwood's report and all those persons who have gained the benefit of the report from then until October 1964 are to continue to enjoy the benefit of huge deductions. I hope that before I have finished, the Labour Party in the Senate will take such an interest in this matter that it will consider the proposal I shall make before we reach the committee stage - that the Senate appoint a select committee on the matters covered by this Bill. As Senator McKenna in the course of his speech last evening said most appropriately, this Bill is ideally suited for such consideration.

When the futility of the provisions of the Bill is coupled with the delay in the implementation of the specific recommendations in the Ligertwood report, it indicates that the Treasurer must be marked with conspicuous incapacity in the administration of the taxation law of this country. Loopholes of substantial significance have been brought to attention but have not been closed; instead, they have remained available for public abuse for three years and are to remain available for exploitation in respect of leases arranged in that interval. I take the Treasurer's obligation to be the administration of taxation statutes. If their provisions are shown from year to year, by cases which I hope the Commissioner reports to the Treasurer, definitely and concretely to allow for evasion, then the proper thing to do is to bring each instance forward for the Parliament's decision; and not commit future instances to the discretion of the Commissioner of Taxation without considering whether thelaw should be altered in order to make taxation equitable among the various taxpayers.

Let me take several instances from the Ligertwood report. Paragraph 40 draws attention to what Mr. Justice Ligertwood called " chain " companies in respect of the undistributed profits tax that is imposed on private companies. His Honour pointed out that undistributed profits tax could be evaded by what he called " other devices ". Paragraph 40 of the report states -

One method has been to form a new company each year. Company A, for example, in relation to the income year ended 30th June 1960, must make a sufficient distribution of, say, £10,000 by 30th April 1961, or incur a liability of £5,000 undistributed income tax. In April 1961, the shareholders in Company A make over their shares to a newly formed Company B, accepting in their place shares of equivalent value in Company B. Company A then pays a dividend of £10,000 which is received by Company B as income of the year ending 30th June 1961. Company B does not incur a liability for primary company tax because of the rebate provisions of section 46 of the Act, under which section a rebate of tax at company rate is allowed on dividends included in a resident company's taxable income. Neither does any question of undistributed income tax arise until the end of Company B's prescribed period for distributions, that is 30th April 1962. In April 1962 Company C is formed, and Company B makes a sufficient distribution to it. This process of forming new holding companies in the April of each year can be continued indefinitely, and in the result, profits are being continually accumulated in respect of which the real proprietors of the enterprise pay no individual rate of tax, and no undistributed income tax is payable by any company. Such companies are referred to as " Chain " companies.

This racket was revealed to the Commissioner of Taxation as long ago as 1957, at the very latest. It was revealed to the public in August 1961 by Mr. Justice Ligertwood and the opportunity for evasion of taxation has remained open for three years.

I turn now to consider leaseholds, Mr. Deputy President. The report of the Ligertwood Committee referred to the taxability of premiums and improvements in relation to leaseholds. For the purpose of simplicity and brevity I shall refer to page 53 of the report, dealing with what are called, in the language of the taxation game, uncovenanted improvements. The report states -

(1)   A parent company obtains a lease ofland from its own subsidiary company;

(2)   The parent company erects a building for £250,000 without the written consent of the subsidiary;

(3)   The parent company assigns the lease to another of its subsidiary companies for a nominal consideration.

The taxation position is that -

(a)   The parent company gets a deduction of the cost of the building - £250,000. . . .

(b)   Neither subsidiary is assessed on the value of improvements because they are " uncovenanted ". . . .

I hope that the members of the Labour Party will consider this matter.

I turn now to the example which the Committee thought fit to express in respect of covenanted improvements -

(1)   The owner of an undeveloped city block consents to an investor erecting a £1,000,000 building on the block.

(2)   The owner grants the investor a 98-year lease of the building at an appropriate ground rent.

(3)   The investor subleases the building to tenants.

(4)   The building reverts to the owner at the expiration of the lease.

The taxation position is that -

(a)   The investor gets a deduction of the cost of the building spread over the term of the lease. . . .

(b)   The owner is assessable on instalments of the value of the building at the end of 98 years. . . . However, the value at the end of 98 years may be expected to be negligible.

They are the words of the Committee, not my words. Although the Committee advised that those matters should be corrected as from the date of the publication of the report, and although the Treasurer said in August 1961 that that would be done, we have the situation in October 1964 where matters, which relate to leases arranged or agreed to be given before October 1964, are not being corrected. The conditions will continue to be enjoyed throughout the whole term of the lease. The leasehold abuses which relate to leases agreed to on or after October 1964 will be stopped. I should think that anybody who had energy to spare for the cause of stopping tax evasion would join with me in ferreting out a few of these instances. One has not to use confidential information which the Commissioner of Taxation is obliged by law not to disclose. One has only to go to Sydney or Melbourne and then go to the Titles Office. In one instance I went to the Titles Office in Tasmania. It is easy to nose out these things.

The amount of revenue involved in the continuance of the deductibility of the premiums over the terms of the leases is considerable. When I say " considerable ", I am thinking in terms of millions of pounds. Do not let us stop there in the interest that we display in this Bill. It should be remembered that some trades habitually divide their revenue from land into premiums or bonuses paid for leases. I refer particularly to the brewery trade where a licensed house lease is sold for a premium and rent is received throughout the period of the lease. In 1936 this country made such premiums liable to taxation.

I heard nothing from the Leader of the Opposition regarding this matter. I am prompted to ask: Is it appreciated in the Senate that this Bill will exempt those premiums from income taxation of any sort in the future? Is it appreciated that premiums paid in the future, not only for brewery leases, but for all commercial leases, will be non-taxable? Is it appreciated that income taxation is to be applied in the future only to leases of premises that are being leased other than for the making of taxable income; that is to say, as private residences?

Surely I have said sufficient to indicate that this Bill, far from catching up in a proper way with tax evaders, is continuing to allow them to enjoy the fruits of tax evasion. It is creating an exemption for lease premiums of commercial premises in the future, and it is establishing a principle that I think every honorable senator, once he individually applies his mind to it, will want to consider further before accepting the Bill.

Senator Sir William Spooner - Would not the lessee lose his right of deduction?

Senator WRIGHT - Of course he would. That is the commercial consideration which, as a matter of policy, I am told the Treasurer relies upon for the prevention of undue loss of revenue. I wonder whether the people who are responsible for this Bill have read the economic history of landlord ownership in the last century and have seen the increasing force of landlord ownership in the large metropolitan centres where huge economic power is built up in ownership of land for letting purposes. I hope 1 speak impartially. I speak forcibly to bring the matter to the attention of the Senate because at the conclusion of the second reading debate I am going to ask the Senate to refer this Bill to a select committee. When I say that, I refer to the application of this Bill to leases. I have given instances of abuses, not in the language of Senator Wright, but in the language of the Ligertwood Committee.

I come now to the way in which the Bill deals with trusts and partnerships. The word " partnership " has been referred to almost as if it was a naughty word in taxation law. I was mortified when it was revealed to me some 10 or 12 years ago that the Commissioner of Taxation thought that he had to recognise an agreement of partnership where one of the parties was a mere three year old child. To me it is simply nonsense for anybody to put forward a piece of paper that has been signed by a three year old child or an infant whose mind is not capable of understanding the true nature of a transaction. In my opinion, the transaction would be void in law. But when Mr. Justice Ligertwood came to consider partnerships he made a recommendation which I am pleased to see the Government has modified. Mr. Justice Ligertwood said that partnerships entered into by anybody under the age of 21 years should not be effective for the purposes of taxation law. I for my part was just as vehement in the defence of those partnerships as I was enthusiastic that there should be an immediate destruction of the lease loophole evasions and the circle company evasions.

In this generation we have developed a social community, especially in the primary industries. Instead of the former situation prevailing whereby a father would retain control of his agricultural enterprise and keep his sons on a mere misery wage, in this day and age he enters into partnership with them when they reach the age of, say, 16 years. The sons gradually develop an independence, buy the farm next door, marry, and continue their pursuits after the pattern of this sturdy Australian community.

Thank goodness an element of prudence has been introduced into the Bill whereby partners are not to be deemed as recognisable under taxation law unless they have reached the age of 16 years. I have no quarrel with that part of the law because for the most part a partner who is under 16 years of age has not a real and effective control of his share of the income. However, the Bill provides that where it is shown that a partner in a partnership, whether under 16 years of age or otherwise, has not a real and effective control of his share, instead of that share being attributed to the other partners for the purposes of income tax assessment, it is to be, as it were, considered apart, and subjected to taxation at the rate of 10s. in the £1. Of course, under this legislation the blessed Commissioner of Taxation is given the right, if he thinks it is reasonable, to exempt the share from this punitive confiscatory rate of tax. He will use his discretion.

I pass now to the question of trusts, and in the main the Bill deals with little trusts, although there may be some larger ones that are established in the interests of charities or of families - usually handicapped or junior members of families. If, under the terms of a trust, no person is entitled to a year's income, then irrespective of whether that income is £100, £500 or £5,000, the Commissioner of Taxation can impose a tax of 10s. in the £1. However, if in his opinion it is reasonable that the relevant provision should not apply, he has the discretion to decide that it should not apply. It may interest the Leader of the Opposition and his supporters to look at the clause which specifically provides that where trust income derived by a municipal corporation, a religious, scientific, charitable or public educational instrumentality, a trade union, a friendly society or a public hospital, is conditional in any respect, that is, if the trust has other than a vested interest, being an indefeasible interest, the Commissioner of Taxation can say in effect: " Please pay 10s. in the £1 to the Treasury." Thus the public charitable organisation, the scientific organisation, or the trade union organisation, is deprived of this money.

If a person has an invalid daughter, he may decide that while the daughter's mother is alive half of the income from a trust is to accumulate for his daughter. No matter how meritorious his purpose may be this income will be subject to a tax of 10s. in the £1 unless the Commissioner of Taxation decides that the trust is a reasonable one. The wishes of the settlor - the father of this daughter - are not to prevail unless the Commissioner of Taxation, governed not by the criterion whether the trust is entered into with the intention of evading tax, but by his consideration of what is reasonable, says that they can prevail. That horrifies me, particularly where little trusts are involved. 1 admit that some people were abusing this provision. It was revealed in the Ligertwood report that some 30 odd settlors resorted to settlements in which they ensured that each person would receive an income of not more than £204 and so be exempt from taxation under the old law. But surely it would have been appropriate to meet such cases by providing that where a settlor has made multiple trusts within a certain period the Commissioner of Taxation should aggregate them and tax them as an aggregation.

We are on the air today and we have a long standing custom that on such days second reading speeches shall be limited to 30 minutes. We have a terrific pressure upon us because of the business of the Senate. I content myself at this stage, therefore, with having exposed the provisions of the legislation which I think are obnoxious to every political outlook in this chamber. I shall have more to say in Committee. I think that the principle of giving this huge discretion to the Commissioner is not in any degree parallel to the provision in the existing section quoted by Senator McKen'na under which a default assessment can be made if a taxpayer's return is unsatisfactory or if no return is made. The giving of unlimited discretion, as this Bill does, which may cause injustice to the bona fide taxpayer, is obnoxious to me. I hope that at the appropriate stage the Senate will agree that before the Bill goes beyond the second reading, it should undergo the scrutiny of a select committee of this chamber.

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