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Thursday, 20 May 1965


Senator WRIGHT (Tasmania) . - Mr. President, Senator Cant has exercised his undoubted liberty to deal with any subject of public importance whether relevant or irrelevant to the Bill now before the Senate. Whilst there is much in his speech that one would instinctively and firmly repudiate, nevertheless he has concentrated the attention of the Senate on a subject which is of the utmost immediate importance - that is to say, a broad assessment of our policy in relation to mineral resources. Having regard to the very great change in that policy that was entered upon some three or four years ago, it is most appropriate in my view that the Senate has given attention to the matter for the purpose of assessing just what the trend in this policy means to the country. I for my part express my appreciation of the fact that many of Senator Cant's references to the economic considerations of the mineral industry and the condition of its exports are matters of real national importance.

I wish to speak to the Senate upon another matter which is, I believe, of importance, and to which we should give continuing attention. This is the subject of income tax. I am one of those people who feel that we have a very great job to do here and that, in fact, keeping up with the affairs that come before the Senate is an impossible task unless one limits oneself to a special set of subjects. Any LiberalCountry Party member of the Senate - any member of the Senate at all - realises the impact that income taxation makes upon the lives of every individual and upon the nation. It has within it, great political strengths that we should consider and reassess from time to time in order to gauge the political drift. This afternoon I mean to confine my remarks to a very restricted field because one of the manoeuvres of those who seek to divorce this Parliament from responsibility in this field has been to encumber it with matters that give rise to great confusion and complexity in a multitude of issues.

I believe that one can extract from the income tax law one or two items that stand' out as demanding attention, and to which we can devote our attention from time to time when Parliament is sitting. Honorable senators will recall that the Government on 3rd December 1959 constituted a Committee under the chairmanship of no less an authority than Mr. Justice Ligertwood to review the income taxation legislation of the Commonwealth with a view to simplification. That Committee sat until June 1961. Its report was then tabled in Parliament. So startling were some of the disclosures made by that Committee as to current practices of evasion of taxation with consequent loss of legitimate revenue that the Committee itself urged that many of its recommendations should be enacted into law with effect from the date of the publication of the report. The Treasurer (Mr. Harold Holt), when tabling the report in another place, announced that that recommendation would be given effect.

Notwithstanding that announcement, no legislation was submitted to Parliament until more than three years after that date, namely in October or November 1964. The Bill that was then introduced was of such a startling character that, on the admission of the Minister who introduced it the consideration that could be given to it was completely inadequate. It was introduced in the failing days of the session, with an election imminent, and the finishing day for Parliament imperative. " Hansard " shows that insufficient time could be given to the terms of the Bill. When we discussed in this place the appointment of a select committee to deal with this report, pointed reference was made to this question by my colleague, Senator Laught, who said that the Treasurer had given an undertaking to re-examine this legislation and to bring in any corrective legislation needed in the current sessional period of the Parliament. It is quite obvious that we are not to get any such legislation.

In two respects the legislation that we did get in November last was certainly not in accordance with Mr. Justice Ligertwood's report. It is to these two respects that I wish to direct attention this afternoon and say that, so far from restricting or curtailing evasion in one respect, the legislation of last November gave a basis for its continuance. I refer to the question that was discussed by Mr. Justice Ligertwood on the subject of improvements made in leases. Mr. Justice Ligertwood pointed out that, by the device of interlocked companies, a parent company, after going to the Registrar and creating a subsidiary company, could obtain a lease of land from its own subsidiary company. If the parent company erected a building worth £250,000 on the property without the written consent of the subsidiary, and then the parent company assigned- the lease to another subsidiary company the taxation position was this: The parent company received a deduction of the whole cost of the building, which was £250,000, and neither of the subsidiary companies was assessed on the value of improvements, because of the particular provisions in the legislation at that time. That Mr. President, is an entirely artificial situation which is created by these provisions in the income tax act and which give an altogether false advantage as between a parent company and its two subsidiary companies. By a manipulation of the legislation in that respect the complex of the three companies gets a deduction from income tax of the whole cost of that new building. I should think that, compared with the incidence of taxation on ordinary people an advantage of that kind would have demanded attention by the Minister responsible for the administration of the income tax laws long before Mr. Justice Ligertwood pointed it out.

I know that it will be said in relation to my advocacy of reform in income tax legislation that a legal nigger is in the woodpile

Anyone who is interested in the genuineness of my advocacy in this matter should know that if such a proposition had been submitted to me before the Ligertwood Committee's report was published I would have said, " Complete nonsense. A device of that sort will immediately be struck down under section 260 of the Act ". 1 point out that section 260 of the Income Tax and Social Services Contribution Assessment Act provides that -

Every contract, agreement, or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, shall so far as it has or purports to have the purpose or effect of in any way, directly or indirectly - "(a) Altering the incidence of any income tax;

(b)   relieving any person from liability to pay any income tax or make any return;

(c)   defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or

(d)   preventing the operation of this Act in any respect, be absolutely void, as against the Commissioner. . .


Senator Webster - That means that you cannot take any step at all under that Act to reduce the incidence of taxation, does it?


Senator WRIGHT - I am obliged to Senator Webster for his interjection, but J dispute the suggestion in it. However, it would occupy a disproportionate part of the time at my disposal to argue the question. I am merely pointing out that section 260 of the Act would enable any purposeful Commissioner of Taxation and the responsible Minister of the day immediately to challenge that practice and, if the court ruled against the challenge, to bring in specific legislation to prevent companies by means of a device, from getting for themselves and their subsidiaries an advantage under the income tax legislation.

I wish to mention a second instance which Mr. Justice Ligertwood gave of what [ consider to be a monstrous evasion of the income tax legislation. He put forward the example of the owner of an undeveloped city block consenting to an investor erecting a building to cost £1 million on the block. The owner grants the investor a 98-year lease of the building at an appropriate ground rent. The investor proceeds to sublet the building to tenants and the building reverts to the owner at the expiration of the lease. The report states -

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 the 98 year lease . . . However, the value at the end of 98 years may be expected to be negligible. Had a similar building been erected on freehold property, the investor would not have been allowed any part of the cost of the erection as an allowable deduction from his assessable income.

I should have thought that those were two of the most startling disclosures made in the Ligertwood Committee's report. Mr. Justice Ligertwood realised that when he gave publicity to these matters it would give to anybody who was venturesome enough to take a risk on such schemes for income tax evasion the opportunity to do so.

Notwithstanding that it was announced that loopholes for evasion would be created as from the date of the publication of the report, the legislation of last November did not stop arrangements that were made under those two heads for the continued deduction throughout the terms of the leases so long as the leases were granted or arrangements were made for them to be granted before October 1964. So, we have the situation that if those arrangements had been made before October 1964 - not even before June 1961 - all those people who were in the know during suspension of the consideration of this matter and took the risk that the Treasurer's declaration of June 1961 would not be given legislative effect were enabled to continue to have that glaring advantage so long as they had arranged their leases or had entered into agreements before October 1964. That was achieved by a subtle method of draftsmanship in the November legislation. Instead of amending the provisions that enabled these loopholes to be created, the legislation simply provided that the provisions should not apply to leases that were arranged after a certain date or which were agreed to be arranged after that date.

In June 1961 , when the Ligertwood Committee made its report. It stated -

.   . we are informed that the adverse effect on the revenue is already very substantial, and as the practices are increasing the revenue aspects are becoming increasingly serious.

I have information that the revenue involved in the continued deductibility of these sums from the proportionate part of the yearly capital cost of buildings runs into millions of pounds. I believe that it is completely inequitable that some people should be able to have exemption for their transactions after October 1964 if those transactions were arranged before that date. In my view, that makes it all the more imperative that the legislation of last October be subjected to early review.

The next matter to which I want to refer concerns the extraordinary proposition that the legislation of last November, without any previous public announcement, wrote into the income tax legislation exemption from income tax on premiums paid on the arrangement of a lease. Half a century ago there was authority for the viewpoint that if you arranged a capital sum as the price of granting a lease, that was capital. But that viewpoint was rejected by Australian income tax legislation in 1936. As many sections of the community which have criticised the legislation of last November have pointed out, the acceptance of a premium is indistinguishable from the acceptance of rent. The viewpoint that a premium should be regarded as a revenue item has been accepted throughout the country in many cases where it has been necessary to ascertain the annual value of a property for the purpose of assessing rates. It would be quite absurd, would it not, to say, in relation to a big city building that is subject to a tenancy of ten years and which is let to the XY Company for £50,000 a year and in respect of which £100,000 is paid for the leasehold, that that sum of £100.000 should be exempt from taxation and that tax should be levied only on the rent?

But as many sections of the community have pointed out, that is the position. It is making a very great impact on the commercial community, particularly on sections such as the brewery trade. We know that breweries collect licensed houses and then, as part of their outlet for their product, let those licensed houses to licensees. Until 20 years ago it was a common practice, when giving a lease, to say to the lessee: " You may have a five year lease upon payment of a premium of £10,000 and rent of £5,000 a year ".


Senator Henty - That would be a good hotel.


Senator WRIGHT - Those figures are insignificant when we think of what has happened in relation to some hotels. They certainly are not inflated as applied to some Tasmanian hotels. They would be of quite small magnitude when we think of some metropolitan hotels on the mainland. It is not my practice to exaggerate an argument intentionally. Really I prefer to understate the case. In relation to this matter, I am appealing to reason and equity.


Senator O'Byrne - A local hotel keeper in my own town was offered £100,000 a few weeks ago for a suburban hotel.


Senator WRIGHT - Was that for the freehold or leasehold?


Senator O'Byrne - That was for the freehold.


Senator WRIGHT - I am speaking of the premium that is paid upon the granting of a lease. The principle is the same whether the premium be £1,000 or £100,000. The accepted view in relation to municipal rating and in relation to the levying of income tax since 1936 has been to treat the premium paid as equivalent to rent. Exemption of the premium can give the brewery interests a tremendous advantage. The notion that the tenant is in a commercial position to take that advantage into account and to meet the brewery on equal terms is just illusory.

Another aspect of the matter arises in the application of this principle to New South Wales, where I believe premiums are paid lawfully in relation to some controlled premises even though the increasing of rent is forbidden. 1 am relying here not upon any legal knowledge but simply upon submissions that I have received from sections of the commercial community or which I have read. It is of the utmost absurdity that premiums paid in Sydney and elsewhere in New South Wales should be distinguishable from rent for the purposes of the income tax legislation. I submit that it is not satisfactory to the Parliament for it to be said that premiums are exempt and that the tenant knows when he agrees to pay a premium that the payment is not deductible for taxation purposes. It is for that reason that I call attention to specific anomalies introduced by the November legislation and which, in the one case, continued to allow the advantage of evasion and, in the other, opened up for the first time a new loophole for the evasion of taxation.

I now proceed to another aspect of the matter which concerns me very greatly. I refer to the degree to which the Treasurer (Mr. Harold Holt) was conscious of having introduced into the income tax legislation last November provision for the exercise of discretion by the Commissioner of Taxation as a means of resolving doubts about tax liability. The Treasurer sought to excuse his action by repeatedly reminding us that any decision that the Commissioner made in the exercise of his discretion was subject to review by a Taxation Board of Review, lt is quite alarming to think that liability to income tax should be dependent upon the discretion of the Commissioner. I submit that it is a cardinal rule of our society that, as between the Treasury and the taxpayer, the liability of the taxpayer should be governed by a rule of law which is capable of determination by an independent tribunal - a court of justice. It is because of the security and independence of the courts of justice that our system of British justice has attracted so much credit.

Early in this century we developed the notion that courts of law were old fashioned and that people could get more speedy and less expensive determination by resorting to administrative tribunals. Those tribunals operated under various procedures. Some of the tribunals were secret, some did not give the parties an opportunity to be heard, and some had trappings similar to those of the traditional courts of justice. But there came a time when the British mind was alerted to the danger of this system by the writings of Lord Hewitt, who drew attention to what he described as a new despotism. Since then the English Parliament has had a committee that has worked on the subject and which has come forward with certain safeguards relating to administrative tribunal decisions.

This is a very vexed question. 1 do not deny the utility of administrative tribunals in some respects, but when they thoroughly undermine and displace the courts of law you have a bureaucratic community that is intolerable to anybody who rejoices in freedom and independence. The Commissioner of Taxation works in his own office and there is no requirement for him to give notice to any party, even to make submissions. There is no requirement for him actually to hear any party. Although that is not true of a Board of Review, I submit that you cannot justly place upon the shoulders of all taxpayers in Australia the responsibility of taking the time and going to the expense of bringing their accountants, advisers and members of their family to Canberra, together with their books of account, to prove to the Commissioner the reasonableness of this or that. I mention the reasonableness of items in superannuation schemes, the reasonableness of provisions that apply the 10s. in th £1 rule to family trusts; the questions that affect the decision of the Commissioner as to whether or not a partner, by virtue not of a document but of the way in which the partnership is operated, has real control over his income. In all those cases, if the Commissioner does not exercise his discretion favourably to the taxpayer there is a penalty rate of tax amounting to 10s. in the £1. That, of itself, should be sufficient to remind the Senate that there is no validity whatever in the argument that this discretion should go to the Commissioner in favour of exemption. To impose a penalty rate and then give an officer discretion to exempt is the worst form of arbitrary taxation. It is reminiscent of the Star Chamber.

I raise this matter, not in the hope that I will get any solution to it during today's debate but in order to keep it alive, because it is my purpose to invite the Senate, at an early date, to constitute a committee of its own members - and there are in the chamber those who will be quite competent to maintain a continuing interest in this legislation - to see that there are proper provisions to maintain equity in the income tax legislation, because there is nothing so distasteful, in regard to revenue and taxation as to find that A can be exempted by the discretion of an official while B can have the full blast of 10s. in the £1 levied on his family trust, partnership or superannuation fund. I speak with fortification, because not only have various sections of the community spoken in this vein but also I saw, with great pleasure, a reference in this morning's " Sydney Morning Herald " to a gathering of the Associated Chambers of Commerce or some other commercial organisation having its annual convention in Brisbane, where Mr. Orr, I think, very cogently put forward a proper principle as the basis of taxation. I wish the Senate to consider what the Editor of the "Australian Law Journal" said in the issue of 31st March 1965, in reference to the November taxation law amendment. He said -

The result is the most flagrant possible rejection of the proper principles for framing taxation measures.

Then, after referring to the availability of an appeal to a Board of Review, he said -

This provides little satisfaction for anyone. Not for the Boards because their course, also, is uncharted and their lists are already overfull;-

I am informed that the average waiting time to appear before these Boards of Review today is two years. He continued - not to the Commissioner because he will not be able to follow a consistent policy, and certainly not to the taxpayer because it will still be all a lottery so far as he is concerned. The amendments in question are bad in principle and unsatisfactory as an expedient and should be reviewed immediately.

It is in that sense that I rise in my place today, almost at the end of this session when it is apparent that no amendment of the legislation is to be put before us at this time by the Government. I do so with a view to having a continuing interest maintained in this, which I believe is a glaring challenge to everybody who, believing in equitable principles of taxation, wishes to eradicate from the taxation system fraud, corruption and any injustice to taxpayers.







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