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Wednesday, 27 March 1985
Page: 1011

Mr KEATING (Treasurer)(4.04) —I move:

That the Bill be now read a second time.

The 1984 Australian Labor Party policy speech by the Prime Minister (Mr Hawke) reaffirmed the Labor Party's policy of smashing the tax avoidance industry-a policy that was pursued throughout our previous term of government and a policy upon which this Government was re-elected. In his policy speech last year, the Prime Minister promised the Australian public that, once re-elected, the Government would reintroduce the twice-rejected bottom of the harbour legislation-legislation that will recoup hundreds of millions of dollars from those who have sought to escape their taxation responsibilities through participation in avoidance schemes produced by the tax avoidance industry.

On 27 February 1985, when announcing the Government's legislation program for the current period of sittings, the Special Minister of State (Mr Young) foreshadowed the reintroduction of Bills designed to give effect to this Government's successive election undertakings to recover personal tax avoided by former owners of companies that were the subject of bottom of the harbour schemes.

This Bill is the first of the two bills to which my colleague was referring. Apart from some relatively minor corrections of a more or less technical nature, this Bill is identical with a Bill introduced into this House on Budget night 1983 and again on 2 May 1984. Honourable members may recall that on both occasions the Bill was passed by this House and rejected in another place. Although many honourable members will already be familiar with the important measures contained in this Bill, it is appropriate, as this is a new Parliament, that I should outline its contents once more.

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 from 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.

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 tax 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 existing 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 recoupment tax legislation enacted in 1982.

The requirement that there exist or, but for payments of company tax, would exist a liability for vendor's 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 inter-company 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 tax 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. 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 Division 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 interest 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 the 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. 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 impose 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.

Pre and 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 will be done by this Bill. Consistent 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 ultimately established to be ineffective of its tax avoidance purpose is to be disregarded.

Other Changes

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, a requirement 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.

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. A further change to the existing recoupment tax law proposed by this Bill will enable a former owner to whom a refund of company tax is made as a result of a successful objection or appeal against the company assessment to receive interest under the Taxation (Interest on Overpayments) Act on the amount refunded.

Finally, this Bill proposes amendments of an evidentiary provision in the existing legislation to overcome some technical deficiencies. The drafting of those amendments also has regard to the views expressed last year by the High Court in a case dealing with the constitutional validity of the recoupment tax legislation. The High Court held unanimously that the substantive provisions of the recoupment tax legislation are constitutionally valid, but in so doing expressed some views that the existing conclusive evidence provision might, at least in part, be invalid by rendering the tax uncontestable.

The proposed amendment provides that a certificate by the Commissioner of Taxation specifying the amount of company tax remaining unpaid would be prima facie, rather than conclusive, evidence of this fact. This will ensure that recoupment tax is not an uncontestable levy and that the evidentiary provision is constitutionally valid in all respects. As is usual with amendments of the taxation laws, an explanatory memorandum giving technical details of the amendments contained in the Bill is being circulated to honourable members. By this Bill the Government proposes to strengthen and improve the legislation introduced by the Opposition parties when in government in 1982. Significantly, the measures contained in this Bill are estimated to yield $270m in revenue. I commend the Bill to the House.

Debate (on motion by Mr Hodgman) adjourned.