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Tuesday, 8 November 1983
Page: 2418

Mr JACOBI(9.00) —I support the Income Tax Assessment Amendment Bill and the cognate Bills. I say, not so much to the former Treasurer, the honourable member for Bennelong (Mr Howard), but to the Opposition members generally that you failed in two decisive areas. You had seven years in government and there is no excuse for your lack of action on those two decisive areas. One was that you failed to update the laws.

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

Mr JACOBI —I am addressing the Opposition, not the former Treasurer. You failed in two decisive areas-to update company law and to enforce existing law.

Mr DEPUTY SPEAKER —Order! I insist that the honourable member direct his comments through the Chair.

Mr JACOBI —I am doing that. I am directing my comment to the Opposition. Let me be more specific. I want to re-canvass some pertinent observations that I made. I have debated this issue four times and the remarks I made on the initial occasion are just as pertinent today as they were then. They were directed at the bankrupt track record of the previous Government, which has led to the problems that we face today. Opposition policies in areas of tax and corporate law, which we have inherited, can best be summed up in a very simple dictum: Incentives for the rich to get richer are good, especially if they are embedded in the tax system; welfare for the poor to get less poor is bad. It is worse if they actually do. That destroys character. We have witnessed an extraordinary saga of ineptitude and inequity over the last 10 years. The culprits are those who can afford the advice which allows them to evade or avoid perhaps all of their tax. One has witnessed, certainly over the last 10 years, the very sad spectacle of two professional groups, lawyers and accountants, that have been dragged into tax schemes which everybody knows are blatant, artificial and contrived. The Opposition did nothing in its seven years in government until the ultimate two years. At whose expense in fact do the better off sectors of our society score because of the exploitation of appalling gaps in the law? Only now are Australians getting some glimmer of the real depth of the corruption and amorality of some of the wealthier members of society. Wage and salary earners, small businessmen and many women pay their income tax to provide for social benefits which the revenue pays for. For years their income tax load has escalated. They may have had to raise families, build homes, run businesses, run farms, but they still have paid their allotted share of tax. Now they have discovered that in many cases may companies and wealthy members of society do not contribute any tax at all and to these people paying tax has become optional . In 1979 I said:

Who in the community is carrying the greatest share of the income tax burden? It is certainly not the rich or the well-off . . .

The well-off are not carrying the greatest share of the income tax burden, according to the figures provided in the 1983-84 Budget statement on Estimates of receipts to be found in Budget Paper No. 1. If one takes the actual tax collections for 1982-83 from various categories as a percentage as total taxation revenue, one finds that the net group tax instalments by wage and salary earners and company directors totalled 67 per cent. Companies paid 17 per cent. Trusts, professionals, partners, small business and property owners paid around 15 per cent, and withholding tax represented one per cent. In 1979, I said:

It is obvious that wage and salary earners have practically no avenue to evade paying their share of the tax burden, but the same cannot be said of people who are well off.

It is astonishing that in 1976 the level for group tax instalments by wage and salary earners and company directors totalled 60 per cent. It has increased by 7 per cent in the short period from 1976 to 1983-84. Let us get back to the persistent carping which has been heard from members of the now Opposition over the four years of debate on this issue. Some sections of our professional people argue that they should not make moral judgments about what they or their clients do and that they should be able to turn a blind eye. How many groups in history have used the same sort of reasoning to try to escape moral blame? Let me quote what I said last year on the same matter. It is as pertinent this year. I said:

Some honourable members opposite try to excuse the actions of avoiders and their advisers. They claim that, because when vendors sell companies the companies owe no tax at that time, the vendors are blameless. They cannot plead ignorance of corporate accounting practice. Is it that they cannot differentiate between the wet and dry Slutzkins? Let us take the dry Slutzkin. It occurs where companies are stripped of accumulated profit after primary company tax has been paid. In receiving the proceeds of sale in the form of capital what was avoided was the secondary tax that would have been payable by the shareholders if the accumulated profits had been distributed by way of dividends. The disposal of a company in this manner was held to be effective by the High Court of Australia, and such cases are not covered by the legislation. Yet anyone knows that the vendors either knew or ought to have known that the tax was being avoided and that they were profiting by such avoidance. In contrast, cases popularly known as wet Slutzkins involve the stripping of profits before the primary tax liability has been met. After the profits have been stripped the company records are disposed of. In these cases there is a clear and undisputed liability for payment of tax on untaxed profits of the company at the time of the strip. The liability still exists but cannot be collected as the companies have been stripped of their assets and dumped.

The vendors ought to have been aware that the tax would not be paid by the company. I went on to say:

They ought to have known that most people sold their companies just before the end of the financial year deliberately to avoid paying company or other taxes. Certainly many of the companies did not actually owe taxes at the time of the sale, but everyone knew, especially the vendor shareholders, that liability for the current year was soon to be assessed and that, morally or in equity, the company did owe taxes when it was sold. Of course the vendors knew that they were avoiding taxes. Did they think they got high prices for their shares simply because they had struck a good bargain or because the purchasers were stupid? Were the vendors so ignorant of tax and commercial matters that they did not know these things? Of course not. It is utter nonsense to claim otherwise.

No professional man in this chamber can do other than agree with that statement. I continued:

The wet Slutzkins are morally worse than the dry Slutzkins but they are both avoidance tactics. Both are shonky and contrived. No one is fooled by the blustering and humbug of interested pressure groups.

Not least of all do I get annoyed by professional people who put across the same story. Let us turn to another culprit in all this. Nobody has touched on this aspect. As I said before, Australian company law as it is structured provides very little protection to small shareholders or trading creditors. Similarly the administrative and judicial machinery for enforcing such laws is complex, cumbersome and unsuitable to the effective combating of corporate malpractice and crime. Regrettably, the existing so-called national company laws provide a breeding ground for the spiv, the charlatan and the corporate crooks.

I say to the former Treasurer in all sincerity that if one were to study, as I did, the O'Reilly report, one would find that it is an appalling indictment of executive administration. That is where the defect has been since 1965. The previous Labor Government stood indicted, I might suggest, between 1972 and 1975 . One cannot blame the Australian Taxation Office, because the defect was that many of the laws were in place but they were not enforced. The previous Government turned to the Crimes (Taxation Offences) Bill, which was quite unnecessary. It has taken 10 years to get Brian Maher at least before the courts . That could have been done under the Crimes Act at least seven years ago. It is no good talking about this and that, about what the Government ought to do and what it ought not to do. Let us at least have a look at what this Government said it would do.

During the debate in Parliament in October 1982 and again during the 1983 election campaign we said that Labor would move to recoup personal income tax avoided by the schemes. We quoted John Howard's own estimate of $500m in lost revenue. We committed ourselves to abolish exemption for companies put through a tax avoidance scheme before being stripped of profits. That is set out in sub- section 3 (12). We also said that we would abolish the 12 months-to-pay provision. Following discussions with Senator Jack Evans and Senator Mason of the Australian Democrats the Government agreed to retain the 12 months to pay provision. In response to criticism of the Bill and in an attempt to secure its passage in the Senate, the Government indicated its preparedness to accept an amendment removing the capital profits component from recoupment of avoided personal tax. As it happened this proposed amendment did not shift the necessary one vote that we required that would have secured a majority for the Government' s Bill. The Government shifted from its mandated legislation which would have raised $350m in 1983-84 and $570m in total to a position where the two amendments-the 12 months to pay and the capital profits amendments-reduced the revenue yield to $185m in 1983-84 and $430m in total.

On Budget night the Government introduced a new Bill which made significant concessions in relation to the personal tax to be recovered. The new Bill was to recover personal tax avoided in respect of the liberated after tax profits of those years where evasion of primary company tax was involved; that is, the personal tax measures were to apply to current year profits. Personal tax was also not to be recouped in respect of any capital profits of the stripped company. Further, there was to be no liability for personal tax where the only company tax evaded for that year was undistributed profits tax. These concessions significantly reduced the revenue yield as originally envisaged. The new Bill was to raise $60m in 1983-84 and $270m in total, compared with the original Bill which was to raise $350m in 1983-84 and $570m in total. The same coalition of senators defeated that legislation.

The Government decided not to proceed with a further attempt to recoup personal tax. The Bill introduced on 3 November deals only with measures to strengthen and improve the company tax recoupment measures as originally proposed. Principally, this Bill removes the so-called innocence clause, that is, the exemption from liability where the stripped company was the subject of an unsuccessful post-sale scheme to avoid tax. The Bill also expands the anomalies relief provisions of the previous Government's legislation. Under that legislation the Commissioner of Taxation has the power to give complete relief, firstly, where the amount otherwise payable is less than $100 and, secondly, where persons have not in any way benefited from the evasion of company tax giving rise to the recoupment liability. I am pleased to note that the former Treasurer made reference to the company Coomel Pty Ltd. I will not go over the same ground. He is correct in that. I do not disagree with that.

The new provisions in this Bill will assist people in cases where a public company shareholder is well removed from the actions giving rise to the recoupment tax liability. These will mean that a public company shareholder, unconnected with the scheme, who received only a relatively small benefit from the evaded company tax could have his or her recoupment tax liability reduced so as to reflect appropriately the benefit received. If the Commissioner does not consider that a person is entitled to such relief the person concerned can have his or her case reviewed independently by a taxation board of review sitting as a recoupment tax anomalies tribunal. The strengthening of the company tax recoupment measures will yield at least $40m while the anomalies relief could cost $5m. In 1983-84 the Government expects to collect $20m representing a loss of $40m on that budgeted for in August and a negligible amount next to the $350m to be raised for this year by the original amending legislation.

In the few minutes I have left to me I come back to where I commenced my speech . I think it is an appalling scandal that the law makers of this country have persistently perpetuated ineffective law. I do not think that there is any doubt that the so-called wet Slutzkin schemes were helped largely by the easy creation , manipulation and destruction of straw companies. We have done nothing about that. In the 14 years that I have been a member of parliament I have persistently tried to get that provision updated in the Companies Act in line with New Zealand, the European Economic Community and, in particular, all western European countries. If one compares our legislation with that applicable in New Zealand one finds that it is a joke. If one compares our legislation with the laws in Europe one finds that it is laughable. Until such time as we, as legislators, close up that appalling gap and as long as we enforce taxation laws to a certain level, the same capacity and propensity for tax avoidance and evasion will continue. I got a reply from the Attorney-General (Senator Gareth Evans) the other day with which I must confess I am not particularly impressed. As long as the co-operative system remains in place efficient and effective laws certainly will not meet the market place. If ever there was an area to which we would have to apply our minds it would be to give the Taxation Commissioner the support that he needs to make the laws enforceable and effective. We will not be able to do so unless we update the other three corresponding sectors of the law; that is, the area of company law, securities law and, to some extent, bankruptcy and liquidation. We have to correspondingly go along with that. We have to, in some way or other, retool the judiciary.

I just want to make one further observation. I think the legislators, to some extent, have to face up to the fact that my Government in 1972 and 1973 faced a hostile High Court of Australia. We may even face a hostile High Court in the future. So there is even more obligation on us to put laws in place. I remember the former Treasurer and I getting into holts when I said that we ought to put in a provision to alter the canons and constructions of law in relation to the High Court. The former Treasurer will remember that he said we could not do it. We ultimately did do it. I think that is one weapon at least with which we can strengthen the armoury against tax avoidance.

Finally, I think the biggest problem, as I said earlier, is the deficiencies in the law. They are the cornerstone for people, whether they be corporate crooks, spivs or charlatans. If the McCabe-Lafranchi report and the report of the Costigan Royal Commission on the Activities of the Federated Ship Painters and Dockers Union have done nothing else, they have certainly highlighted the long litany of corruption, collusion and malpractices in a whole range of areas. I say to governments: To some extent we have to clean up the laws. We have to retool the judiciary. There needs to be a constant surveillance of tax laws if we are not to go through the sorts of problems we have over the last three to four years.

I think the Government has done an excellent job. I think the Opposition stands indicted for the fact that it has not been consistent at all. The Opposition ought to have supported this legislation if only on grounds of justice and equity. This tax avoidance and evasion situation has escalated to such an extent that tax collections have increased from 60 per cent to 67 per cent and that burden is being carried by people who cannot avoid or evade their tax. The number of people who can avoid their tax is escalating. There is something wrong with the system. Why ought we not recoup that avoided tax? We have an obligation to do so. The former Government failed on those two counts. It is with pleasure that I support the legislation.