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Tuesday, 6 March 1984
Page: 500


Senator COOK(9.51) —The Income Tax Assessment Amendment Bill (No. 5) 1983 introduces a number of amendments to Australian tax law which are categorised under seven headings-withdrawral of investment allowance where property is used in tax exempt activities; leverage leasing and similar arrangements; special concessions for Australian trading ships; bonuses and other amounts received in respect of certain short term life assurance policies; deductions for investment in qualifying Australian films; exemption of payments of special benefit to victims of major disasters; and-this is the part which has incited the most comment in this chamber this evening-tax avoidance practices in relation to employee superannuation funds. All of these amendments, of course, are supported. Some are controversial and some are not. Some were mentioned by the former Government. Naturally, I support all of the amendments.

I think that in tonight's debate the Opposition has been deliberately obtuse. It has not been prepared to come to grips with exactly what is before the Senate in that part of the legislation referred to as covering the cherry picker scheme . I want to concentrate on that last group of amendments. I think it is quite reasonable that the Government should proceed in this area. The cherry picker scheme is a most outrageous and reprehensible tax avoidance mechanism. It is referred to in a letter received today from the Acting Commissioner of Taxation as 'blatant and contrived'. Later in the letter the Acting Commissioner stated:

The practices seem to me to be brazen and bare faced and involve abuses of the tax law which, in the superannuation area, contains generous concessions intended for the benefit of the employees . . .

I do not think anyone in this chamber would in any sense wish to defend the type of scheme known as the cherry picker scheme. It perverts the real purpose of superannuation by the creation of sham funds and it manipulates and victimises workers at the point of termination of their employment and in terms of their benefit entitlement. It avoids taxes properly due and, in doing so, deprives the revenue of a considerable amount of money to which it would otherwise be entitled. The Acting Commissioner of Taxation in his letter of 6 March has indicated the amount to be of the order of $15m.


Senator Walsh —At a bare minimum.


Senator COOK —At a bare minimum. Of course, that means that ordinary taxpayers are treated as suckers by the perpetrators of these schemes. Ordinary taxpayers pay more because people in this country are prepared to resort to such schemes in order to avoid their proper tax liability.

As I have said, I do not think anyone in this chamber would argue that such schemes are reprehensible, but it has been argued tonight that such schemes are not widespread. It has been taken on the bases of that assertion, which I hope to demonstrate later by resort to some documentation, that therefore we ought not to move in this area as we have proposed to move. I suggest that, even if the schemes were not widespread, that would be no argument for not moving to stamp out reprehensible practices of this nature. But, of course, it is not true to say that they are not widespread; they are. They are anecdotally well known by anyone associated with the broad range of business activities, in particular proprietary companies in the small business area and people who have been employed by those companies. It is my regret that the scheme is known by the somewhat flamboyant and colourful title of the cherry picker scheme, because something as distasteful and tawdry as this type of manipulation ought not to have such an attractive title.

I think it is essential to put on the record briefly and, I hope, succinctly the nature of these schemes. Essentially, the features of a classic cherry picker operation is that a bogus or not genuine superannuation scheme is established. Usually it is established in a proprietary company, but that is not necessarily the case. However, the companies are usually small businesses. From my experience and from reports that I have from reliable sources, the people who establish such schemes are those who flirt with or are constantly involved in all other forms of tax avoidance and evasion. It seems that once the mind sets upon methods of tax avoidance and tax evasion the cherry picker scheme comes into the imagination and, unfortunately for these types of companies, is later put into practice. The principals who establish these schemes cite themselves as employers and usually pay the maximum superannuation payment into the fund on their own behalf and on behalf of the genuine employees of the company.

The workers in a classic cherry picker scheme have at best only a vague idea of its existence. Often the scheme is concealed from them so that they are not aware of it and thus cannot front up later and claim what they regard as their entitlement. To my knowledge, where the scheme is only vaguely known there is obfuscation and deliberately misleading information is given in order to put workers off the scent, to confuse them or to intimidate them about inquiring further as to the existence of the scheme. That, of course, brings forth the whole set of reprehensible employer-employee relationships. The key aspect of the cherry picker scheme is that if the employees knew of such a scheme and were able to claim their entitlements the scheme as it was designed would not operate . It cannot operate effectively where workers become beneficiaries of the scheme . I wish to return to that point later because some play has been made about that aspect in earlier debate in this chamber.

Classically, in the cherry picker scheme the principal lends his funds back to the company involved, usually at a very low interest rate, for the benefit of the founders of the scheme. Of course, it does not return a rate on investment to the scheme that would maintain its benefits if it were a genuine scheme. The provision is always that the superannuation payment is payable to fund members upon retirement. That provision is usually so constructed as to provide that in other circumstances the trustees of the scheme, who are of course the perpetrators, are in a situation of exercising discretion as to whether payment should be made other than when workers retire. Classically, they always exercise that discretion so as to avoid making payment. The other classic aspect of such a scheme is that a company frequently keeps a list such as that described in the case of Kelly v. Raymor (Illawarra) Pty Ltd by Kelly's counsel as a death list of workers who are approaching retirement and who are duped into retiring earlier so that they do not qualify under the provisions or who are sacked or retrenched before retirement. Alternatively in a cherry picker scheme the company, but not the superannuation scheme, may be transmitted to another company. Therefore the shell company folds and pays out the remaining benefit to the directors who are cited as employees. The end purpose of the whole operation is that the company owners who list themselves as employees become sole beneficiaries to the fund of the scheme and deprive the taxation authorities of revenue. Taxes are avoided by profits being diverted into the scheme. Once excess benefits are paid out and the fund is wound up no money is left to pay any other tax liability and the proprietors, as beneficiaries of the scheme, are often classically in a situation where they pay only the 5 per cent tax on termination.

As I have said, I think the bones and structure of the type of scheme we are talking about-this practice that I believe can be demonstrated as being much wider spread in the community than the Opposition will allow in the debate in this chamber tonight-should be placed before the Senate. As has been referred to by other senators, the Minister for Resources and Energy (Senator Walsh), representing the Treasurer, has been kind enough to have circulated to us a decision by Mr Justice Wootten of the New South Wales Supreme Court in the case of Kelly v. Raymor (Illawarra) Pty Ltd. I refer those who wish to pursue the argument that these schemes are not widespread, that this is somehow an oddity of a case, to page 598 of the findings of His Honour Mr Justice Wootten. His Honour Mr Justice Wootten is referring to the fact that the litigant in this case, Mr Paul Kelly, called a superannuation consultant in order to adduce evidence from an expert witness as to the type of superannuation schemes that operate. Because of the context in which His Honour Mr Justice Wootten has quoted the matter-as an approving quotation-one must agree that His Honour accepts this as a reasonable statement of fact from an expert. He states:

A superannuation consultant called by the plaintiff, in the course of his evidence, said that from his experience he would classify superannuation funds into two categories, genuine superannuation funds and tax avoidance superannuation funds. He said that the most extreme category of tax avoidance funds would have the following characteristics.

He goes on to cite the typical characteristics of a cherry picker scheme and concludes:

In the ultimate example the benefits on resignation are never paid and few retirement benefits are paid, and the fund simply rolls on as a fund of money.

There can be no doubt that the Raymor superannuation fund was of this extreme tax avoidance category.

I conclude the quotation at that point and simply state for those who want to labour the argument that this is an oddity of a case, a rare example not typical of the type of thing that in fact happens, that we have in the Kelly and Raymor case expert evidence that establishes that there are other schemes and that this is a well known fact in terms of superannuation.


Senator Messner —Who won the case, Senator?


Senator COOK —If the honourable senator asks that question he should also know that the case was withdrawn by agreement. But the judge goes on to describe what can only be the moral turpitude of the type of people who operated the scheme and he took certain actions to bring it to the attention of the authorities. The honourable senator asks the question: 'Who won the case?' Essentially, no one won. Therefore, this legislation is necessary in order to make sure that the type of fraudulent activities that were engaged in here are not continued. As I have said, I believe that anyone who moves in the normal commercial world with his or her eyes open will be aware of the existence of these schemes.

From the point of view of putting another piece of information on the record, I am indebted to my colleague in the House of Representatives the honourable member for Newcastle, Mr Allan Morris. Mr Morris has brought to my attention a scheme which has all the classic definitions of a cherry picker scheme. It is operated by a company that a constituent of Mr Morris, a Mr Hadley, has complained about. Mr Morris and Mr Hadley have given me permission to quote from their description of the scheme to establish that, in this debate, we are not merely talking about a one-off case, Kelly v. Raymor. I wish to quote from a letter-Mr Morris has authorised me to do so-from him to the Treasurer (Mr Keating). It describes the scheme to establish the bona fides of my statement. Mr Morris states:

I write concerning the operation by a company known as Carnaby Sales Pty Ltd . . . a superannuation/ Pension Fund.

I have been approached by a previous employee of the Company, who advises me that he discovered that monies from the Company were being paid into this fund, purportedly on his account. He was never formally advised of this, nor, he claims, were other employees.

I have been led to believe that significant sums of money were placed in this Fund, tax free, employees were dismissed, etc. without ever being advised of the Fund's existence, and the Principals of the Company have closed the Fund and received all monies accrued.

I understand the device is called 'cherry picking'--

I think we can labour the point that these things do not occur because we do not want to recognise that they do occur. My point is: I do not believe that argument can be put in all seriousness if we look at the case of Kelly and Raymor, if we read that decision of the judge, if we move in the commercial world with our eyes open and if we take account of the type of example that Mr Allan Morris, the honourable member for Newcastle, has presented.

I think the issue to which we should pay some attention is that millions of dollars are lost to the Taxation Office each year. Honest taxpayers are taxed more heavily as a result. We cannot be in a position of defending the tax avoidance industry. We find in the Kelly and Raymor case several very pithy quotations. But since the question was asked earlier in the debate in this chamber: 'What about the workers involved; what about their fate?', I draw the attention of honourable senators to page 597 of the document which has been circulated by the Minister. From lines 15 to 45 four cases are set out in which workers lost amounts of $50,000, $48,000, $53,639 and $40,000 to which they were entitled. All the circumstances are set out there. Had they known of their entitlement and had they been in the position to pursue a claim-a matter that His Honour Mr Justice Wootten makes it clear they were confused about or at the very least misled about and, in some cases, deliberately not informed of-they would have had an entitlement. But the point is this: This scheme operates so as to deny that information because it is not a scheme for the benefit of the workers at all; it is a scheme to avoid taxation. The whole purpose of the scheme is not to confer a benefit but to accrue an advantage to the perpetrators of the scheme.

I do not argue that any honourable senator in the debate in this House would support such a scheme. But I believe it is essential that, if we are clear on the question of not supporting it, we should be clear on what steps are to be taken to prevent it. In order to do that, in terms of tax law, the fundamental principle that has to be looked at-a principle that I have mentioned in previous debates on all the tax Bills of a controversial nature that have come before this chamber-is that there is no incentive for tax avoidance or tax evasion if there is a clear understanding in the mind of all would-be perpetrators of such avoidance and evasion that the Government, upon discovering deliberate avoidance and evasion, is prepared to legislate retrospectively to stamp out that avoidance and evasion. If they know that a government can do that, tax avoidance becomes a back number. The unfortunate aspect of the previous debates on tax avoidance measures has been that the Opposition, some Australian Democrats and Senator Harradine have not been prepared to confront that principle squarely and , as a consequence, tax avoiders have escaped their obligations. I think it is about time we confronted that principle and moved to put the tax avoidance- evasion industry to flight by enacting at least this legislation and, since the Government has foreshadowed further bottom of the harbour Bills those when they come before the chamber.

A matter that has been raised in earlier discussions is I think worthy of a particular comment from me. It has been asked: 'What about the workers who lose their benefits'? Essentially and fundamentally, although it is trite in this context to argue it, it also ought to be mentioned that the only way of protecting workers in the long run is the enactment of a national superannuation scheme. Workers who are the victims of cherry-picking schemes are typically in small enterprises that are not unionised and, therefore, have no industrial protection and are exploited by employers in those circumstances. That is cause for genuine outrage, but a tax Bill is not a way in which that outrage can be remedied because a cherry-picking scheme becomes illegal only when it has been wound up and the benefits have been taken. Prior to that point it is, from all outward appearance, a genuinely operating superannuation scheme. It may be that aspects of superannuation are not previously reported, deliberately delayed or avoided, but nonetheless it appears as a genuine scheme. The problem is that we cannot prove in advance that it is intended to be illegal. If we could, we could do something about it, but we cannot.

The surest way of preventing these sorts of schemes is the preparedness to tax them as this Bill contemplates, because if they are then taxed properly there is no advantage in establishing a false scheme. If there is no advantage in so doing, those schemes will not be established and workers will be able to obtain genuine superannuation. The whole purpose of this type of practice is not to confer a benefit but to reap an advantage. I commend the Bill to the Senate.