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Tuesday, 23 August 1983
Page: 57

Mr HURFORD (Minister for Housing and Construction and Minister Assisting the Treasurer)(9.26) —I move:

That the Bill be now read a second time.

Some three months ago the Minister for Finance (Mr Dawkins) introduced into this House a Bill by this title. The major purpose of that Bill was to give effect to this Government's election undertaking to recover personal tax avoided by former owners of companies that were the subject of bottom of the harbour schemes. In addition, the Bill was designed to strengthen and improve in several identified areas the legislation passed by the Parliament last year to recoup the company tax that was evaded by the use of these schemes. Honourable members will recall that the Bill, after amendment, was passed by the House but defeated in another place. As foreshadowed by the Treasurer (Mr Keating) in his Budget Speech earlier tonight the Government is now submitting to the Parliament, as an important part of the Budget, a Bill that covers esentially the same ground as the earlier one but which has been changed in significant respects. The principal change concerns the measure of personal tax to be recovered.

Under the earlier Bill, former owners of a stripped company were to be made liable for personal tax on the total after tax accumulated profits effectively received by them as part of the price received for the sale of their shares. The Government has now decided that the recovery of personal tax should be confined to such tax avoided in respect of the liberated after tax profits of those years of income where evasion of primary company tax was involved. In short, the personal tax measures will apply to current year profits. This limitation will mean that personal tax avoided in respect of profits of earlier years that had borne primary company tax will not be within the scope of the legislation as now proposed. Similarly personal tax is not to be recouped in respect of any capital profits of the stripped company, regardless of the year of income in which such profits were derived. Another significant aspect of the proposed limitation is that a liability for avoided personal tax will not arise in respect of any year of income where the only company tax evaded for that year was undistributed profits tax under Division 7 of the Income Tax Assessment Act. I mention also that the time to pay, free of interest, facility inserted in the earlier Bill by amendment in this House has been retained in the present Bill. The Government believes that, with these changes, the legislation is now in a form which responds adequately to the points made in the debate on the earlier Bill.

Mr Deputy Speaker, subject to one exception, the present Bill proposes to strengthen and improve the company tax recoupment measures in the same areas as were proposed in the earlier Bill passed by this House. The exception concerns the proposal under the earlier Bill to simplify the procedures that require copies of notices of company assessments be served on a range of former owners. The passage of time has reduced the administrative advantages which that proposal was designed to provide and has obviated the need for the amendments. The Government has therefore decided not to proceed with these.

For reasons connected with the grounds of a recent constitutional challenge in the High Court of Australia to the validity of the recoupment tax legislation, and about which I will have something to say later, this Bill now proposes a variation to earlier amendments to an evidentiary provision of the recoupment tax legislation. I turn now to the details of the Bill.

Measures to Recover Personal Tax

By far the greater part of this Bill is related to amendments to give effect to our decision that the restitution expected of those persons who benefited form the sale of shares in companies that were stripped of pre-tax profits should not be limited to the tax that ought to have been paid by the companies concerned. Rather, those persons should also pay the tax that, as shareholders or other former owners, they escaped through receipt in a non-taxable capital form of after-tax profits that, if the companies had continued to operate as going concerns, would have been taxable as dividends in their hands.

As I mentioned earlier, the recovery of personal tax will, however, be confined to the tax related to after-tax revenue profits of the stripped company for those years of income in respect of which primary company was evaded. In our view it is quite beyond argument that the revenue is just as entitled to have these tax losses made good as it is to have the lost company tax made good.

This Bill will accordingly insert in the recoupment tax law rules to be applied to fix the liability of former owners of a stripped company for personal income tax on those profits on which primary company tax was evaded. Broadly, these rules will require a former owner of a stripped company to pay income tax on the basis that the company had paid a dividend to the former owner at the time of sale of the shares. The amount of this imputed dividend will be the same proportion of the company's after-tax taxable income for the year of income in respect of which primary company tax was evaded as the proportion of the sale consideration received by that owner. The amount of after-tax taxable income will be determined after allowance has been made for the unpaid ordinary company tax that is to be recouped under the existing legislation, as proposed to be amended.

The Bill provides that a dividend will be deemed to have been paid in circumstances where the former owner of a company is liable to make good unpaid company tax on the company's taxable income, that is, where there is a liability for vendors recoupment tax in relation to ordinary company tax or there would have been such a liability if any payments of such tax made after 25 July 1982 were disregarded. That date is, of course, the date on which the former Government announced its intention to legislate to recover unpaid company tax escaped through bottom of the harbour schemes. This qualification is necessary to ensure that the liability for escaped personal income tax will not be avoided simply by making a payment of the company tax in pursuance of the former Government's announcement or of the legislation enacted last year.

The requirement that there exists or, but for payments of company tax, would exist a liability for vendors recoupment tax means that, where the liability for that tax is or would be less than $100 and the Commissioner of Taxation exercises his power under the existing law not to pursue the liability, there will be no liability for the relatively small amounts of personal income tax that would otherwise be liable to be recouped. Where the former owner concerned is a natural person the imputed dividend is to be included in his or her assessable income. In the case of an entity not itself subject to income tax on the dividend by reason of its tax exempt status or, in certain cases, the intercompany dividend rebate, the imputed amount will of course be treated as tax free income in the hands of that entity.

Where a company, or a person as trustee of a trust, is allocated a dividend that is deemed to have been paid by a stripped company and the owners of that company, or the beneficiaries of that trust, are the same persons as the former owners of the stripped company at the date of its sale, the company or trustee will, in the first instance, be liable to pay dividend recoupment tax on the dividend at the maximum personal rate applicable to the year of income in which the sale of shares occurred. However, there is to be a right for former owners in this situation to elect to be taxed on amounts equal in total to the amount of the dividend deemed to have been received by the company or trust concerned. If this election is made, and the Commissioner is satisfied that the allocation of the deemed dividend among former owners is reasonable and that personal tax, if any, payable by the former owners will, subject to the hardship relief provisions of the income tax law, be paid by them, the interposed company or trust will be freed from its liability for dividend recoupment tax. In a similar fashion a stripped company will, where a liability for personal tax or dividend recoupment tax exists, be freed from its liability for the income year concerned for undistributed profits tax payable under Division 7, and the former owners will accordingly no longer be liable for vendors recoupment tax on an unpaid Division 7 liability for that year. As already mentioned, a liability for personal tax or dividend recoupment tax will not exist in relation to the profits of a particular year of income where the only unpaid company tax for that year giving rise to a liability for vendors recoupment tax is a liability for undistributed profits tax under Divison 7 of the Income Tax Assessment Act.

As with the existing recoupment tax law, it will be possible under the provisions being inserted by this Bill to trace from the primary level to the next level and, as necessary successively to further levels where a company or trust has ceased to exist, has different shareholders or beneficiaries as a result of shares or beneficial interests having been sold, or is unlikely to be able to meet a liability for dividend recoupment tax on the dividend which is deemed to have been paid to it. The automatic tracing process applicable in this case will continue until a dividend is deemed to have been paid to a natural person, or tax free entity referred to earlier, or to a company or trust that still exists if, in the latter situations, the company or trust is one the ownership of which has not changed since the stripped company was sold and has the capacity to meet the dividend recoupment tax payable.

A significant feature of the Bill is the provision of a time to pay facility in relation to the personal income tax and dividend recoupment tax liabilities which are to be imposed by this and an associated Bill. This provision is modelled on an existing facility-which is to be retained in a modified form- which permits former owners of companies who are liable to pay a share of unpaid company tax to meet that liability by instalments, typically over 12 months without late payment penalty being charged.

In the earlier Bill as first introduced, the Government proposed that the existing facility be abolished from a date to be proclaimed. On review, we accepted and still accept that the particular facility for time to pay should be retained. Additionally, the present Bill also provides for dividend recoupment tax and related personal tax to be paid over 12 months without attracting additional tax for late payment. The modification of the existing facility I referred to a moment ago is to impost a strict limitation to 12 months as the period for which an arrangement to pay unpaid company tax may be made. Similarly , the proposed facility in relation to personal tax and dividend recoupment tax will require full payment to be made within a period of 12 months if the penalty free concession is to be attracted. An application for time to pay personal income tax or dividend recoupment tax in respect of a share of a stripped company's profits will need to be made within 30 days after service of the notice of assessment relating to that liability.

Post-sale avoidance schemes

The recoupment tax legislation contains a let-out provision that operates where the stripped company was the subject of an unsuccessful post-sale scheme to avoid tax. Under this escape clause there is no liability to recoupment tax liability on the people who benefited by non-payment of the company tax. This provision was inserted by the former Government for reasons which are best known to it. In our view it defies logic and it is our announced policy to abolish it. This is to be done by the Bill.

Pre-sale avoidance scheme

Consistentily with the removal of the post-sale avoidance scheme provision, this Bill will also ensure that, in ascertaining the potential tax liability of a company for the purpose of determining whether the recoupment tax legislation applies in relation to it, any pre-sale scheme which is ulitmately established to be ineffective of its tax avoidance purpose is to be disregarded. There are several further amendments contained in the Bill designed to improve the administration of the legislation or to correct technical deficiencies. The Bill proposes to remove one of the pre-conditions to liability for recoupment tax-the requirement that the company was by a stripping scheme rendered unable to pay its tax-which was inserted by the previous Government, it seems for presentational purposes. The element that the requirement expresses is, in substance, present in all cases of pre-tax profit stripping to which the legislation applies and a specific reference to it is quite unnecessary. The ' stripping scheme test', and an associated provision requiring full disclosure by the Commissioner of known details of it, is being exploited by some taxpayers as a means of delaying issue of recoupment tax assessments. Because of their availability as a pure delaying tactic, the provisions are having and will continue to have, unless removed, an adverse effect on revenue.

It is also proposed by this Bill to re-insert in the recoupment tax legislation a provision removed by the previous Government which authorised the Commissioner of Taxation to report to this Parliament the names of persons who fail to meet their liability for vendors or promoters recoupment tax. The Commissioner is already required to provide in his annual report to Parliament details of breaches or evasions of the taxation laws and it is consistent with that duty that he be authorised, where he considers it appropriate, to report details of failure to pay recoupment tax.

Finally, I explain an amendment I touched on earlier. An existing provision of the recoupment tax legislation that reflects the settled policy of the tax law in these matters seeks to ensure that persons liable for recoupment tax can contest the correctness of the underlying company assessment only through the established objection and appeal procedures against the company assessment itself. For this purpose it provides that a certificate specifying the amount of a company's liability to company tax is to be conclusive evidence except in an appeal concerning the assessment of the company. Some technical deficiencies in the provision were to be corrected by the Bill that was defeated earlier in the year and the Government has, with an eye to a particular constitutional question , now decided to make some other amendments as well. Honourable members will know that the recoupment tax legislation has been under constitutional challenge on a number of grounds. One of them concerns the evidentiary provision and reflects a legal argument that the Commonwealth cannot validly levy a tax that is uncontestable. It is said that there are circumstances where a certificate that is conclusive evidence would render the tax uncontestable. Obviously it cannot be predicted what decision the High Court will reach on the particular point but the Government has concluded that it should solve the difficulty by legislating so that the certificate represents only prima facie evidence, with the result that the matters that are the subject of it will therefore clearly not be uncontestable. In providing to that effect, the Bill also proposes that such a certificate would, in appropriate circumstances, represent conclusive evidence if a provision in the Bill that re-instates its conclusive nature were to be proclaimed. A decision on whether to make the proclamation, and thus have the provision revert to the conclusive evidence form that is reflective of settled policy, will be made in the light of any High Court decision on the underlying constitutional point.

The revenue implications of these amendments in the context of the Budget are significant. The measures contained in the Bill are estimated to yield $270m in total and $60m in 1983-84. They should be given the approval of the Parliament. As usual with amendments of the taxation laws, an explanatory memorandum giving details of the amendments contained in the Bill is being circulated to honourable members. It will be clear that while the Government stands by the principles of the Bill as originally introduced, it has nevertheless been prepared to modify its stance to meet all reasonable criticisms of the original measures. In that light, I commend the Bill to the House.

Debate (on motion by Mr Sinclair) adjourned.