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Wednesday, 7 September 1983
Page: 506

Mr HURFORD (Minister for Housing and Construction and Minister Assisting the Treasurer)(5.19) —in reply-In closing the second reading debate and thanking those who took part, I want to start with a quotation:

We have decided on this course of action because of the essentially fraudulent nature of much of the conduct involved. The legislation will be directed against people who have in effect taken off with moneys which should have been paid as tax to the Treasury.

Bottom of the harbour schemes have gone beyond legal avoidance of taxation and represent illegal evasion of tax.

Mr Humphries-Who said that?

Mr HURFORD —That is a good question. That was said by the former Treasurer, the honourable member for Bennelong (Mr Howard), who opened for the Opposition in this debate, on 25 July 1982 in a statement that he made regarding the recovery of tax evaded in schemes to strip companies of untaxed profits. They are the very companies which are the subject of the legislation before the House. He went on:

It is quite clear that the community regards as totally abhorrent and unacceptable, a situation in which a relatively few people had been able to make personal profit from connections with procedures that left the companies concerned without funds to meet a company tax liability existing under the law applicable at the time.

Whatever the technicalities maybe, these strips of untaxed company profits were fraudulent in nature on the part of at least one person concerned in each transaction. So far as the tax law is concerned they did not involve legal avoidance of tax but represented illegal evasion.

May I point out to the House that the companies which were subject to the legislation brought in by the previous Treasurer, the ones to which the statements I have just read referred, are the very same companies to which this legislation applies. Only part of the tax avoided-indeed, evaded-was collected under the previous Government's legislation. Two forms of tax were evaded or avoided when these companies were sold to crooks, or shysters, as they were described by the honourable member for Hunter (Mr Robert Brown). Primary tax was evaded when the companies were sold and went to the bottom of the harbour, but there were also undistributed profits in those companies on which tax was applicable when those profits were distributed to the owners of those companies, the shareholders. I need to repeat all this, even though it is in the second reading speech, at the end of this debate because it would seem that the very essence of this Bill has not been understood by those on the Opposition benches who have taken part in the debate. The fact is that there was a quasi- liquidation of those companies when they were sold. The revenue due to the people of this country, the tax on those undistributed profits, was avoided- indeed quasi-evaded. The revenue is light of a lot of money which should be collected. This Bill provides for the collection of those extra funds that were avoided, those extra taxes that were quasi-evaded.

I am obliged to return to this matter of undistributed profits. I repeat that if a company was properly liquidated, tax was due to be paid on those dividends which would have been paid out of its undistributed profits. We are collecting those funds that should have been paid from those who have received the benefit of them; namely, those who received an amount for the shares in those companies which were sold. It is interesting to quote again a former Liberal Minister in this Parliament who, admittedly a few years ago, when he was Minister Assisting the Treasurer, said in a debate on tax avoidance:

I mention that for more than a quarter of a century our taxation law has, in broad terms, treated as dividends, and therefore as income subject to tax in shareholders' hands, any distribution made by a company as a going concern other than a return of paid-up capital . . . The Government considers that this situation constitutes a real threat to revenue and to the general principles on which the taxation law is based. It also considers it gives an unwarranted advantage to shareholders in companies in a position to execute this type of plan as against companies not so fortunately placed.

To the credit of the Liberal-National Country Party Coalition Government of that time, it was closing another loophole which was very like the loophole which has now been closed and which is very much the subject of the legislation before this House. The point is that that which under the law seemed to be capital but was in reality revenue-dividends paid out of undistributed profits-should be taxed in the hands of those who received those dividends. That is what this law does.

I turn now to some of the points made by the honourable member for Bennelong and the honourable member for North Sydney (Mr Spender). First of all the former Treasurer claimed that the legislation goes against pre-election undertakings. He alleged that the legislation is penal in character. That is just not true. The exact opposite is the case. The Government made a specific and well publicised commitment prior to the election not just to clean up those loopholes that were inherent in the previous legislation relating to primary tax but to recover the personal tax avoided through bottom of the harbour schemes. This is an election promise that we are carrying through in this legislation; we have a mandate to implement the legislation.

The legislation is not of a penal character. No penalties or additional taxes are imposed, as might have been the case. The Bill simply seeks to recover tax that ought to have been paid years ago when profits were stripped from companies . It is quite clear that those who sold those shares knew that they were selling them to crooks. No primary tax had been paid. We are not going to those other companies where primary tax was paid when they were stripped; we are going only to the companies where no primary tax was paid and where, quite clearly, the shares were being sold to crooks. We are not even collecting tax on deemed dividends paid out of undistributed profits of earlier years. In this Bill we are only collecting the tax on deemed dividends from profits in those years when no primary tax was paid. It is a very fair way of attacking this problem. I repeat that the legislation does not impose any additional amount to compensate for the fact that repayment of escaped tax will be made in today's money values and not the money values of the years when the tax should have been paid.

Both the former Treasurer and the honourable member for North Sydney spoke about the proposal to remove the test which requires that the particular arrangement which rendered a company unable to pay its tax must be identified before a recoupment tax liability can be established. They claimed that the removal of that test would mean that people who made no attempt to escape tax may be caught by the legislation. Once again those claims are totally wrong.

Mr Spender —Give us an argument on it rather than simply an assertion.

Mr HURFORD —The stripping arrangement test is entirely unnecessary because the other tests in the legislation ensure that only bottom-of-the-harbour schemes are within the scope of the legislation. In this regard, three tests are particularly important. The honourable member for North Sydney has asked me for arguments and of course I will outline them. I am not in the habit of just making assertions: I am in the habit of substantiating my assertions.

I will go through the three tests. Firstly, there must be an amount of unpaid company tax. I have already said that that applies in all cases under this Bill. This test would not be satisfied where tax had been legally avoided or where the company had retained assets with which to pay any tax due. Secondly, there is the excess consideration test. It means that the vendor-shareholders must have received a price for their shares which made no allowance for the company tax payable on pre-sale profits; in other words, it was always intended that the company tax would not be paid. In the words of the present Treasurer (Mr Keating ), there must have been an expectation that tax would not be paid. That is clear . I said that in relation to the previous point. These people knew they were selling their shares to crooks. I come to the third test. The 'same business' test means that the legislation does not apply where a company carries on the same business after the sale as it did before the sale. That test by itself is enough to ensure that the legislation could not possibly apply to any normal commercial take-over of a company which is subsequently unable to pay its tax debts because of commercial misadventure.

Next there was the argument from the former Treasurer that the legislation is highly discriminatory because it applies only to a small fraction of companies. In other words, he was complaining that the legislation does not apply to dry Slutzkins. Let me respond to that. The proposed legislation is not discriminatory because, like the existing legislation, it applies only to schemes that involve an element of fraud. I have explained that everybody who sold those shares knew they were selling them to crooks. The existing legislation requires persons who benefited from the sale of shares and companies that were stripped of pre-tax profits to make good the unpaid company tax provided the person's share of the unpaid tax was more than $100.

So the Government believes it is equally fair and equitable that such persons should also make good the associated personal tax they escaped through these schemes which involved an element of fraud on the part of one or more persons associated with them. In the Government's view there is no valid distinction to be made between unpaid company tax and unpaid personal tax. On the question of whether the proposed retrospective legislation should also extend to the dry Slutzkin schemes, the Government believes that these schemes are distinguishable from bottom of the harbour schemes on the basis that they do not involve any element of fraud. In other words, honourable members opposite are defending those who were involved in fraud. We are confining ourselves only to those cases in which that situation applies.

There was a further argument that the Bill seeks to impose a tax on retained profits which would not have borne tax had the company concerned continued to operate. I have already indicated what nonsense that is. We are dealing with a quasi-liquidation situation. The people who sold the shares knew it was a quasi- liquidation situation. The fact of the matter is that profits were not retained in the companies concerned but were liberated to the vendor-shareholders in the form of the sale price of their shares reduced by the promoter's fee. The income tax law as it now stands and as it stood for the whole of the period from 1 January 1972 to 3 December 1980-the period in relation to which the recoupment tax law operates-requires that distributions of profits to shareholders by a company that is a going concern be taxed as dividends.

I made this point earlier and I should have mentioned who was involved. The Hon . Peter Howson as Minister Assisting the Treasurer drew attention to this position. Obviously Liberal governments had more morality in those days than the Liberal Opposition has today when they recognised that any deemed distributions out of profits which had been untaxed-undistributed profits-should be taxed when in the hands of those who received those deemed distributions. If the companies concerned were liquidated, such distributions of revenue profits would be fully taxable. I could go on to talk about the previous Government's record in relation to these sorts of affairs, but the time available is short because of the heavy legislative program. But I say this--

Mr Spender —And you are running out a supply of notes.

Mr HURFORD —I have much more that I could talk about. Indeed, I have not only these notes but also other notes; so I do not require any rudeness from the honourable member on this matter. I say to the honourable member that he is prostituting the morality to which he referred when speaking in the House on a previous occasion. That is a part of his nature when making the sorts of arguments he has used in this case. He is defending those who clearly sold their shares knowing that they were selling those shares to crooks. Those people were avoiding tax. They were going further: They were quasi-evading tax. You and the Government which you--

Mr DEPUTY SPEAKER (Mr Mildren) —Order! The Minister will direct his comments through the Chair.

Mr HURFORD —supported prior to the last election collected most of the unpaid primary tax. This Bill seeks to collect some more of it because you provided some loopholes.

Mr DEPUTY SPEAKER —Order! I suggest that the Minister direct his comments through the Chair.

Mr HURFORD —Those on the other side who took part in this debate sought to defend a situation in which they were prepared to collect the unpaid primary tax but now they are seeking to defend the indefensible. They are cavilling at what is a legitimate Bill which will collect the unpaid taxes on the deemed distributions from undistributed profits. I believe that it ill becomes them to do so. I have much pleasure in supporting this legislation. I hope the House will do so.

Question resolved in the affirmative.

Bill read a second time.

In Committee

The Bill.