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Wednesday, 24 May 1972
Page: 3031

Mr MARTIN (Banks) - My colleague, the honourable member for Melbourne Ports (Mr Crean) confined himself to the attitude of the Opposition to the

Income Tax Assessment Bill (No. 2) 1972 which covers the provisions of the amendment to section 26a of the Act. I will confine myself largely to the attitude of the Opposition to the Income Tax Assessment Bill 1972. The Australian Labor Party supports this Bill because it sets out to remedy weaknesses in the present law which have enabled taxpayers to avoid large amounts of income tax which it was intended that they should pay. We on this side of the House oppose what is commonly called 'legal tax avoidance'. Any measure which has the effect of closing up these gaps has our full support. It should not be necessary for me to point out that if the liability for taxation is escaped by one section of the community it has to be borne by another section of the community. Who do we find has to bear that additional load? It is that section which can least afford it. The wealthier section of the community is transferring its share of the burden to the poorer section. In elementary justice this situation should never be allowed to prevail.

As it is, the present taxation legislation is heavily loaded against the average and middle income group section of the community. There is no way out for them. It is a case of pay up and shut up. The tax is taken out of the wage earner's pay packet before he even receives his income. But this is not the case for the man with big income and capital to go with it. He can employ skilled legal advisers and accountants to devise ways and means of minimising his taxation commitment. In fact this practice has almost been given a degree of respectability. The previous Treasurer, the honourable member for Wentworth (Mr Bury), gave it respectability when, in reply to a question from me on 8th May 1970 in regard to taxation avoidance, he said:

It is open under the law for any citizen to operate the laws as be can best to his advantage.

The then Treasurer was sharply in contrast with one of his own top administrators, Mr P. J. Lanigan, Second Commissioner of Taxation, who in a paper he delivered at the Conference of the Taxation Institute of Australia in May 1969 described tax avoidance as what it is - a social evil. Rather than condone tax avoidance, this

Government should be doing everything it can to stamp it out. Why has the Government taken so long to stamp out these and other tax avoidance schemes? Since I first became a member of this Parliament, in October 1969, I have in speech after speech in this House pointed out the manner in which taxation avoidance has been practised. In all of those speeches I have been specific about these taxation avoidance schemes. I have named them and categorised them. This Bill is now attempting to close up the loopholes to which I first drew attention some 2 years ago. If the Government had taken notice of me then, when I first raised this subject, the Commonwealth Treasury would have gained many more millions of dollars from that section of the community which could afford to pay it.

The Income Tax Assessment Bill 1972 which is now before the House deals with 3 methods of tax avoidance: Firstly, dividend stripping; secondly, private companies masquerading as public companies; and thirdly, the practice of share trading companies manipulating the value of their trading stock to obtain the benefit of the rebate under section 46 of the Income Tax Assessment Act and also to make tax free a proportion of their income. By way of illustration it is necessary to explain the devious nature of these tax avoidance devices. The practice of dividend stripping was officially revealed for the first time in August 1971 when the High Court announced its decision in the case of the Federal Commissioner of Taxation and the Adelaide based merchant banking group, Investment and Merchant Finance Corporation Ltd. I can understand the honourable member for Angas (Mr Giles) saying that in South Australia it is a vexed question. Apparently South Australia did not restrict itself to using section 26a to its best advantage, because it obviously used other sections of the Act also, as other States do.

The facts of the case to which I have referred were that in 1963-64 the Corporation, which was a money lender, an underwriter and a share dealer, bought 70 per cent of the shares of another company called MacGrenor Investments Ltd for $86,504. This latter company had $122,000 accumulated profits available for distribution to shareholders as dividends.

MacGrenor Investments Ltd then declared a dividend of $81,900 payable to Investment and Merchant Finance Corporation which was virtually tax free. The reason it was tax free was that it was subject to a rebate under section 46 of the Income Tax Assessment Act. To complete the scheme Investment and Merchant Finance Corporation in the following year sold its shares back to the people from whom it bought them - -MacGrenor Investments Ltd - for $21 and then claimed a loss of $82,931. When the Commissioner of Taxation disallowed that loss the Corporation appealed to the Full High Court which unfortunately - I say 'unfortunately' advisedly - upheld Ms appeal. That completed the cycle of the stripping of the dividends. This is the reason why this legislation is being brought in.

The type of transaction which I have just mentioned has not been an isolated one. It has been availed of by some of the biggest share trading companies in Australia. During the course of the inquiry by the Senate Select Committee on Securities and Exchange h was established that Patrick Corporation, an extremely large share dealing organisation and merchant bank, had paid only $7,400 - a minimal amount of income tax - on its profits of $S.6m. That is a farcical situation. Many other large finance companies were able to achieve a similar result. One can only guess at the total loss of revenue which has eventuated from this type of transaction. This Bill has the effect of closing the gate after the horse has got out. But closed it now is, I hope. However, the question to be asked is: Why has it taken the Government so long to close up this type of loophole? Why have people who can ill afford it been forced to pay a higher rate of tax to make up for revenue losses caused by financial corporations juggling their incomes? Let the lesson be learned now. Whenever a loophole appears the Government should close the gap by legislation immediately and not wait for the court to confirm that a loophole exists. It takes years for a case to come before the High Court and in that time millions of dollars of revenue, which could be put to much better use, is lost. The pensioners of this country could have benefited years ago from a further increase in their pensions if this additional revenue had been collected.

As it is, the lost revenue has found its way into the pockets of those who need it least, and the needy have suffered.

A similar situation applies to private companies masquerading as public companies. The Bill now being discussed seeks to close a gap which was revealed when the High Court disallowed an appeal in the case of the Commissioner of Taxation v. Casuarina Pty Ltd. This decision disclosed a gap in income tax legislation enacted in 1964 following recommendations of the Commonwealth Committee on Taxation in 1959-61, known as the Ligertwood Committee. It relates to the statutory definition of a public company. It was intended by legislation enacted in 1964 that companies which were in a real sense private companies should be taxed as such. However, the loopholes were soon exposed, and skilled taxation consultants set about taking advantage of them. The tax revenue involved was substantial, as was admitted by the Treasurer in a statement to this House on 28th April 1971. But once again, the same tortuous process was followed. Instead of immediately bringing in amending legislation to close the gaps, the normal processes of the law were followed - years of waiting, years of procrastination, with millions of dollars of lost revenue.

My remarks about what could have been done with the revenue lost from dividend stripping techniques apply with equal force to the revenue lost from this type of tax avoidance scheme. There are still many other areas of tax avoidance about which nothing is being done. I name but a few. The purchase of loss companies, with resulting tax saving, is still a flourishing racket. Tax havens are still allowed to operate. Norfolk Island is a case in point. At 30th November 1971 there were 1607 companies registered on Norfolk Island, and the numbers are growing every week. These companies were set up with only one purpose in mind - tax avoidance. The thing that galls the average taxpayer is the inconsistency of the Government's attitude. The little man who overclaims medical expenses or some other deduction is made an example of, is taken to court and fined; but the big man or financial corporation is allowed to get off scot free. It is no wonder that the average Australian has lost faith in this Government.

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