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Thursday, 9 December 1971
Page: 4451


Mr SNEDDEN (Bruce) (Treasurer) - I move:

That me Bill be now read a second time.

The purpose of this Bill is to give effect to amendments to the income tax law foreshadowed in 2 separate announcements I made earlier this year. Each announcement followed a decision of the High Court which showed a weakness in the present law of which taxpayers were taking advantage to avoid - quite legally - large amounts of tax which, in accordance with the policy of the legislation as approved by the Parliament, it was intended they should pay.

The Bill is therefore one directed wholly against legal tax avoidance. This is a subject about which the Government is generally concerned at the present time and which it is closely examining in various aspects. The Bill is an important one, dealing in part with the most difficult question of providing effective legislative tests which separate the genuine public company from the ostensible public company for taxation purposes. It will not be practicable to debate the Bill in these sittings but the Government considered it should nevertheless be introduced now. There will thus be provided a full opportunity for the terms of the Bill to be considered within the Parliament and outside it before the debate takes place.

Before the amending legislation of 1964, based on the recommendations of the Commonwealth Committee on Taxation 1959-1961, there had been considerable legal tax avoidance through essentially private companies masquerading as public companies. The 1964 legislation was intended to put an end to this. Unfortunately, as the High Court has pointed out, the 1964 amendments left a real gap. This gap has been used to obtain the same sort of unintended tax advantages for private companies as were available before the 1964 amending legislation. In broad terms, the general aim of the arrangements is to ensure that the trading profits of private companies remain taxed at the lower rate applicable to those companies but that the profits are distributed as dividends to companies that are public in a narrowly technical sense so that there is no incidence of undistributed profits tax or personal tax on shareholders in respect of the dividends. The arrangements strike at the very basis of our company tax system as it was intended by the legislature to apply. Moreover, they are highly artificial and serve no purpose other than tax avoidance.

One type of scheme was dealt with by the High Court in the case of Casuarina Pty Ltd and ruled legally effective. Another type is known as the 'chain-of-ten" scheme and is equally effective. Each type requires co-operation between genuine public companies and private companies so that, with the help of the public companies, the private companies can pay dividends to a company which is technically a subsidiary of a public company - and therefore itself a public company - for tax purposes. Of course the arrangements also ensure that the dividends effectively remain the exlusive property of the private company interests, except, perhaps, to a very small extent which is a recompense or fee to the public company for its assistance.

In the Casuarina arrangement, the whole essence of the matter is that at the end of the year of income the company receiving private company dividends meets all the technical tests of a subsidiary of a public company. That is to say, at that time more than 50 per cent of the capital, voting power and the rights to dividends and other distributions are in the hands of a public company shareholder. There co-exist, however, countervailing devices which ensure that any attempt by the public company shareholder to exercise its ostensible rights can easily be defeated by the private company interests so that the public company rights are, in fact, worthless. These devices include such things as the use of shares redeemable at the instance of the private company interests only, but there are many ways in which the desired effects can be achieved.

The 'chain-of-ten' scheme takes advantage of the fact that under the present law a sub-subsidiary of a public company, no matter how remote from the head or parent company, must be treated as a public company. If a company is owned as to more than 50 per cent by a public company, and its voting power is controlled by the same company, it is treated as a subsidiary of that public company. If it, in turn, has the same measure of ownership and control in another company, that other company is also treated as a subsidiary and so on. Tn a typical chain a public company listed on the stock exchange provides a specially set up company with subsidiary status and this subsidiary sets up a chain of ten other subsubsidiaries below it. The tenth and last sub-subsidiary is the company to which the private company profits are distributed as dividends. The public company interests could force redistribution of these dividends along the chain - against the wishes of the private company interests. This is unlikely, however, because there is a 49 per cent private company ownership of each link in the chain which would result, for example, in only $119 out of $100,000 of private company profits finding its way to the listed public company at the top of the chain. The balance would all go to the private company interests.

The Government has decided that, in the face of these arrangements, in all their complexity and their shades of organisational and factual differences one from the other, the best plan was to define primarily as a subsidiary of a public company one that is, at all times during the year of income, beneficially owned, in the fullest sense of those words, as to 100 per cent by a genuine public company, including a sub sidiary which, on these tests, is itself a public company. This the Bill proposes to do. The Bill also proposes that a company which does nol meet the 100 per cent test will not be treated as a subsidiary of a public company unless, at all times during the year of income, it is owned as to more than 50 per cent and its voting power is controlled, again in the fullest sense, by a public company listed on the stock exchange. Both direct and indirect interests will be taken into account for these purposes.

These are necessarily stringent tests. As a safety valve against their applying inappropriately, the dispensing discretion vested in the Commissioner by the present law to treat a company as public when, for one reason or another, it fails to meet all the technical tests but should reasonably be treated as public, will remain. This is not a new administrative discretion, but one that has operated satisfactorily for some years now.

The tests - stringent as they are on the face of it - could still be met and provide no more than a facade behind which the company is managed or conducted so as to render the public shareholding worthless or virtually so. Directors representing private interests, for example, could have the power to do this. This is a substantial difficulty which it has not been found possible to overcome both positively and comprehensively. The legislation therefore permits the Commissioner to deny public status lo a company when, having regard to specified matters relevant to the determination and set out in some detail, he is satisfied that the company's affairs are being conducted to this end.

It is proposed by the Bill that the amendments I have so far described should basically apply so that, if the company structure had been fully established by the necessary issue of shares, etc., before 29th April 1971, the relevant company will remain a public company for the 1970-71 income year by satisfying the existing tests of a public company subsidiary. For subsequent years, however, the company will need to comply with the tests that are proposed in this Bill. Where the structure had not been established until after 28th April 1971, it is proposed that the company be treated as a private company for 1970-71 and later income years unless, of course, it meets the new tests in relation to the later years. These commencement provisions are consistent with what I said In my announcement on the matter on 28th April 1971.

The income year 1971-72 is, therefore, the year for which, in the generality of cases, the new tests, required to be met at all times during the year, will apply. A good deal of that year has already elapsed and more will have passed before, if Parliament approves the Bill, royal assent is given to it. In recognition of this, a special transitional provision is proposed whereby a company will, with an exception I shall shortly mention, be taken to have met the tests at all times during 1971-72 if it meets them at all times during the part of that year commencing no later than one month after the date of royal assent. The exception is the case of the company which has performed the public company part in a tax avoidance arrangement of the kind against which the legislation is directed and which received private company dividends in the period of 1971-72 prior to its compilance with the new tests.

Where a company remains a public company for the income year 1970-71, distributions made to it by a private company up to the end of that year will be treated as dividends paid to a public company. However, it is proposed by the Bill that any such distributions made after 28th April 1971, and before the end of the recipient company's 1970-71 income year, will not be capable of giving rise to an excess distribution to be carried forward by the private company into future years. In other words, a company will not be permitted to generate an excess distribution through excessive dividends declared under the tax avoiding arrangement in the closing stages of 1970-71, and after my announcement of the proposed amendments.

The Bill also proposes an amendment to deal with another and different arrangement which involves avoidance of undistributed profits tax without actual distribution of profits. Under this scheme a private company issues shares to a genuine public company in return for a premium equal to the dividends the private company is able to declare. It is proposed that a dividend paid in these circumstances is not to be taken into account in determining whether the paying company has made a sufficient distribution of its profits. This amendment will apply in relation to dividends paid after today.

As foreshadowed by my announcement of 31st August 1971, the Bill also proposes amendments to deal with dividendstripping arrangements which take advantage of the way in which the law at present requires the tax rebate on inter-company dividends to be calculated, lt is proposed that the amendments will operate in relation to dividends arising out of an arrangement which the Commissioner of Taxation is satisfied is by way of dividend-stripping. The term 'dividend-strippng' has been employed in the courts here and in the United Kingdom and has come to have a widely understood connotation in professional and financial circles. This amendment will apply to dividends paid after 31st August 1971 and, in broad terms, will permit the amount of dividends subject to rebate to be ascertained by reference to all losses and outgoings incurred in relation to the dividend-stripping arrangement as a whole. in my announcement of 31st August 1971 1 pointed out that, because of the dividend rebate provisions, a company can effectively receive other kinds of income tax-free. In addition to the dividendstripping arrangement, a recognised way of doing this is for a share trading company to take advantage of the trading stock and dividend rebate provisions of the income tax law, operating in combination, so as to reduce tax on share trading profits. The Bill proposes that where the purpose of a valuation of trading stock is to obtain this tax advantage the rebate allowable to the company is to be calculated as though, instead of the valuation of stock adopted by it, the lowest valuation that it could lawfully have chosen had been adopted. This amendment will apply in relation to assessments for the income year 1971-72 and subsequent years.

In my announcement of 31st August 1971 1 also mentioned that the rebate is required to be calculated on a basis that can be unduly advantageous to companies not involved in any arrangement for legal lax avoidance. On this aspect of the matter the Government has received a large volume of representations and it has become quite clear that there is no simple way of altering the basis of the rebate without giving rise lo serious anomalies between different company structures. For this reason the Government has considered that it should confine the proposals of this Bill to measures directed against legal tax avoidance. An examination of the other matter will continue, paying particular regard to the exigencies of company organisation. If it is found appropriate, amending legislation to deal with the matter will be brought forward at a later time.

A number of the provisions - unavoidably and, I think, quite appropriately - turn primarily upon the Commissioner of Taxation being satisfied as to certain matters. If the taxpayer disputes the opinion formed by the Commissioner on the facts of a particular case, the usual rights of objection and appeal against the Commissioner's decision will, of course, be open to him. A memorandum explaining technical features of the Bill is being made available for the use of honourable members. I commend the Bill to the House.


Mr Crean - Before 1 move for the adjournment of the debate I seek leave to make a brief statement of some two or three minutes about one or two matters that have been raised in this debate.







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