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Wednesday, 11 November 1964

Senator WRIGHT (Tasmania) .- This clause deals with what have come to be known in the trade as loss companies. We should realise that under the tax law a taxpayer is entitled to take a seven-year bracket for the purpose of considering his net profit or loss. If, in the past five years, he has been unfortunate enough to incur heavy losses, and in the sixth and seventh years he makes considerable profits, as I understand the position he is allowed to set off the losses against the profits. Under the tax law a company is regarded as a person. So if the entity of the company is maintained, it is entitled to take a seven-year bracket for the purpose of taxability.

In the early years of the last war, just before uniform taxation was introduced, it was found that some companies were mere shells, with huge losses that they could not pay. If there was a profitable company which could buy all the shares in the loss company and so bring under the cover of the loss company part of the profitable operations of the profit making company, it could establish a branch of its own business under the aegis of the loss company and set off its profits. Therefore, the Government of the day said, in effect, that where shares were transferred in a private company, the right to take advantage of losses which had been made in the earlier part of the seven-year bracket should apply only if there was an identity of shareholding to the extent of 25 per cent, of the voting power of the company. If the shareholding existed in the years of loss, the right was carried through without break into the years of profit. The retention of the shareholding was made a qualification for the use of previous losses. The provision of the 25 per cent, shareholding did not apply to public companies. Therefore, public companies could be bought and sold, although the shareholding in the years of loss might be completely different from that in the years of profit.

I am bringing these matters to the attention of the Committee to show the vagaries with which this Bill has been brought before the Parliament. The Ligertwood Committee considered this matter. It said that there is no sense in the distinction between public companies and private companies for the purposes of this part of the taxation law.

Senator Sir William Spooner - There is a distinction in the Act, is there not?

Senator WRIGHT - I think not. The Ligertwood Committee looked at the debates in " Hansard " when the 25 per cent, shareholding stipulation was introduced. I suppose that a lot of people would give a good measure of credit to the Committee for considering the arguments advanced by the then Leader of the Opposition, who is the present Prime Minister (Sir Robert Menzies). He advanced the view that if a company is to be considered as a person and is made to pay tax as an entity, it is immaterial who the shareholders are. I had better be precise in this regard. The report states that the then Leader of the Opposition said -

It is extraordinary to notice how the taxation laws flit about, sometimes treating a company as a legal entity quite distinct from its shareholders and then again, as in the present instance, suddenly saying " We shall cease to look at the company, but shall look at the shareholding ".

Having considered that argument, the Ligertwood Committee recommended the repeal of the retention shareholding of 25 per cent.

After the report was tabled by the Government there was not a breath of suggestion that it was going to disagree with the proposition. In the interval between 1961, when the report was tabled, ami 1964, when this Bill was introduced, all of the States engaged in the moulding of uniform company legislation under the general guidance of the then Federal Attorney-General, Sir Garfield Barwick, who is now Chief Justice of the High Court. For the first time they introduced special provisions, outside the liquidation provisions, into the company legislation to provide for official management as a means - of overcoming chronic debt chaos. They took advantage of the recommendations of the Ligertwood Committee that the provisions should not be repealed but allowed to continue. No indication was given to the commercial community before the Bill was introduced that it was going to run counter to or would modify substantially the recommendations of the Ligertwood Committee. I do not want any honorable senator to think that I am advocating the continuance of trading in loss companies. I am not. But the Bill itself enables the practice to continue under certain conditions.

Sitting suspended from 5.45 to 8 p.m.

Senator WRIGHT - Before the suspension of the sitting I was pointing out that under the existing law a company, taking over another company could obtain the benefit of its losses for the purpose of taxation so long as there had been a continuity of at least 25 per cent, of its shareholding from the year of the loss until the year in which the tax return was lodged. The Ligertwood Committee recommended the deletion of even that shareholding requirement. It accepted the view that a company was to be recognised on its own basis as an entity, and if it had suffered losses in any of the previous seven years, it should be entitled to offset those losses against any profits that it had made in the subsequent years, irrespective of the identity of its shareholding.

Between the time of Mr. Justice Ligertwood's report in August 1961 and the date of the introduction of this Bill in October 1964, the States had, as I said just before the suspension, gone to the trouble of moulding uniform company laws and they introduced provisions specially to take advantage of this situation. They did that through a committee of State AttorneysGeneral, irrespective of political party. The Attorneys reached an agreement whereby Chey provided for some official management to bc an alternative to a liquidation in a winding up. The very purpose of preventing the company from going into liquidation and adopting this status of official management was to preserve the company with its loss structure so that if the creditors could obtain a takeover company, the losses would have some income tax benefit. The creditors could sell that so-called asset and make some recovery. This is a very artificial approach, which is a development of the last few years, but it received the official recognition of the State Attorneys-General, and as honorable senators know, our own Attorney-General of the day lent a guiding hand in this uniform company legislation.

Now we have this Bill introduced and so far from accepting Mr. Justice Ligertwood's recommendations it proceeds in the opposite direction without giving any notice to the commercial public, and without taking any regard of transactions that have been made right up to October 1964 on the faith that if anything were to be done on the subject it would be done in accordance with Mr. Justice Ligertwood's recommendations. This situation has to do with a 7-year programme, and it is very interesting to notice the difference in the incidence of the provisions of this Bill in relation to loss companies and in relation to leases. In relation to leases that may go on for another 5; 7, 15, 30 or 40 years and the position is preserved, but in relation to company losses extending over seven years, people who have bargained on the faith that any alteration that would be made would be a sequence of the Ligertwood report, can be very badly treated. I should like to know the reason for the difference in treatment. The only reason I can think of is that in the case of leases the Treasury would have to forgo its tax if the landlord failed to receive his money from the tenant, but in the case of loss companies, if the procedure is permitted to go on to the natural conclusion of seven years, then the Treasury gets no makeweight against that at all. The proposal fails to have regard to the incidence of altered legislation on bona fide commercial transactions that have been made on faith in existing legislation

As I have said, it is an artificial position and I do not contend for the continuance of that position and I have no protest to offer against the provisions that are proposed in the Bill. However, we should see that justice is done to those in the community who have entered into transactions.

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