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Australian Taxation Office is criticised for re-examining the tax position of corporate raiders who financed takeovers by borrowing

PAUL MURPHY: The share price of John Elliott's Elders IXL plunged another 11 cents today, amid wild unsubstantiated rumours that the syndicate of banks funding Mr Elliott's private company had pulled the plug. The Elders' share price fell from $1.89 to $1.78 in what one analyst called a boiling cauldron of rumours about John Elliott's private company, Harlin Holdings. Meanwhile, the Australian Tax Office has been criticised for its apparent interest in re-examining the tax position of scores of corporate raiders who borrowed to fund big takeovers during the 1980s. At the time, legal precedent said there was nothing wrong with borrowing big sums of money to fund takeovers and then writing off the expense of paying interest, as a tax deduction. The Tax Office has come under fire for a draft ruling aimed at clawing back what could be billions of dollars of interest payments, apparently legitimately used to reduce taxable income. Here's our economics correspondent, Peter Martin.

PETER MARTIN: Back in the mid-1980s, it was taken for granted that a takeover for which you borrowed, was one of the best tax minimisation schemes in town, all the better if the takeover target didn't actually pay you much money by way of dividends. You could claim the whole exercise had lost you money, unintentionally, of course, and then use the tax loss to offset a big and continuing profit in another area. You could cut your tax, while becoming an even bigger corporate mogul. The tax system itself was said to encourage company takeovers and foreign debt. High profile economists, including Kenneth Davidson of The Age and Max Walsh of the ABC and Sydney Morning Herald, wanted the deduction limited. The Treasurer didn't, and on the floor of the ALP National Conference, he said the view of Walsh and Davidson should be consigned to the spike on the back toilet.

PAUL KEATING: Honestly, I don't want to be abusive about this, but this is just tripe. I mean, this is just absolute, unadulterated tripe. I tell you what, the things you've got to do in this job. This is .. look, I've stood this. This has been on for months, this has been on for months. There's been more column inches in The Age and the Sydney Morning Herald on this than you could ever imagine. At 9.30, almost every second night on the ABC, there's glazed eyes across the dining rooms of the this country, on the same issue, and everyone's revved it up, they've all revved it up that there's a new demon out there - it's interest deductions. You see, and it's bringing all these corporate takeovers and it's bringing us all unstuck. I tell you this, that is basically fraudulent. The Treasury paper has been out two months, no-one's been able to answer it ...

PETER MARTIN: And from that moment on, accountants, advisers and commentators thought the question had been settled, but not it seems, the new look Tax Office and its Commissioner, Trevor Boucher.

TREVOR BOUCHER: The law was never finally settled in the way that some people are arguing it was.

PETER MARTIN: What about the need for this?

TREVOR BOUCHER: It's arisen as we have been carrying out our audit program, and particularly our audits into the top 100, and in re-reviewing a number of the transactions that they carried out in past years, this issue has come to the fore.

PETER MARTIN: But it's come to the fore twenty five years too late, according to the accountants who advised the corporate moguls. In the words of Richard Buchanan of Peat Marwick, and president of the Taxation Institute, the horse has bolted. He says the moguls were acting within the law, as the courts had shown it to be, as long ago as 1965.

RICHARD BUCHANAN: The case was lost at the High Court single justice and the Commissioner decided not to appeal.

PETER MARTIN: That decision then has stood for twenty five years?

RICHARD BUCHANAN: That decision has stood for twenty five years, unchallenged by the Tax Office.

PETER MARTIN: According to Richard Buchanan, that would make any re-interpretation now, retrospective.

RICHARD BUCHANAN: The position has been very settled for a long period of time, that is for the twenty five-odd years.

PETER MARTIN: Did they believe they had the imprimatur of the Treasurer?

RICHARD BUCHANAN: I believe they believed they had the imprimatur of the Tax Office and of the Treasurer.

PAUL MURPHY: Richard Buchanan who's president of the Taxation Institute of Australia.