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Thursday, 22 November 1973
Page: 3742

Mr LYNCH (Flinders) - The Bill before the House seeks to amend the Income Tax Assessment Act to eliminate the use of Norfolk Island and, to a more limited extent, of Papua

New Guinea, for tax haven purposes. The amendments proposed for Norfolk Island will also apply to Cocos (Keeling) Islands and Christmas Island.

Under the terms of this legislation Australian income tax laws will apply to the Territories - Norfolk Island, Cocos (Keeling) Islands and Christmas Island - as if they were part of Australia. The Bill's provisions will continue to exempt from tax the island and other ex-Australian income of people who live on the island and are not resident in Australia for tax purposes.

The legislation provides for three main exemptions: Territory residents and trusts are to be exempt for income derived from sources outside the Territories and outside Australia; Territory residents, Territory companies and Territory trusts are to be exempt for island source income; and persons not qualifying as Territory residents but resident in one of the Territories for periods exceeding 6 months are to be exempt in respect of employment income.

The Bill contains a number of supplemental measures which, in general, seek to prevent the exploitation of the new provisions. In addition, there is a transitional measure to assist island companies that now have a degree of non-island ownership but wish to re-organise their affairs to retain tax exemption. In this respect the Bill provides for a partial exemption for income derived up to the end of the 1973-74 income year for a company that becomes fully island-owned and controlled during the last 6 months of 1973-74.

The provisions relating to Papua New Guinea seek to prevent tax evasion by Australian private companies through the payment of such companies of dividends to special repository' companies set up in Papua New Guinea, where undistributed profits tax is not levied on private companies. The Bill will make dividends paid by an Australian private company to a private 'repository' company resident in Papua New Guinea ineligible to be counted as a dividend for the purpose of calculating whether the Australian company has a liability for undistributed profits tax. This will not affect dividends paid to a Papua New Guinea company in circumstances, as defined in the Bill, which do not involve tax avoidance,

This legislation was foreshadowed by the Leader of the Opposition (Mr Snedden) as Treasurer of the former Government. On 19 July 1972 he stated:

The Government has been concerned for some time that some persons may be able to arrange transactions in such a way as to exploit Norfolk Island's present taxation status. Much has been done administratively to counter these arrangements but there is a complex situation which has led to the conclusion that legislative action is necessary to protect Australia's income tax revenue. The Government has a responsibility to act to prevent inequity arising when some people are able to take advantage of the special tax status of the island in a way which was not intended to be available and which is not open to the great majority of taxpayers.

The Government acknowledges that it would not bc justifiable to make people actually living on the island subject to the same income tax as they would have to pay if they lived in Australia. It sees its task as one of striking a reasonable balance between maintaining the present exemption for genuine residents of the Island and preventing that exemption from being exploited by persons not intended to benefit from it.

Consistent with that statement, the Opposition supports the Bill before the House. We recognise that the present tax law relating to the Territories is open to abuse by persons seeking to minimise or eliminate completely the tax for which they are liable. We are aware also that the cost to Australian revenue each year as a result of such tax evasion is considerable. However, we wish to emphasise that the proposed legislation could have deleterious effects on certain sectors of the Norfolk Island community. This could be exacerbated if the legislation is applied with absolute rigidity.

We believe that in implementing this legislation the Government must adopt a sympathetic and flexible approach. In the case of Norfolk Island, genuine trading concerns owned outside the island but deriving all income from the island will have to adjust from circumstances of no tax liability to a liability for Australian company tax of 471 per cent. At the same time, such enterprises would have to compete with island-owned and controlled companies paying no tax. Obviously such a situation may result in the liquidation of certain enterprises, possibly to the detriment of the island. Alternatively, it may result in considerable price increases thereby creating a source of inflation for the island.

The Government would be aware that the island's major hotels, including the two planned hotels, will be liable for tax. This legislation will inevitably increase hotel tariffs which in turn must have adverse consequences for the future development of Norfolk Island's tourist industry. If the proposed legislation is applied in an uncompromising manner, business concerns, which are to become liable for Australian taxation, may withdraw from the island's economy. This could result in the development of Norfolk Island being restricted to projects for which local finance, local skills, local management and local direction can be arranged.

The former Treasurer foreshadowed provisions to deal with these contingencies when he stated:

The Government has a responsibility to act to prevent inequity arising. . . .

He said also:

It is proposed to replace existing provisions with measures which operate as if the island were part of Australia but to confer exemptions from Australian tax where appropriate.

We recognise that the Government is aware of the implications of this legislation for the island. The Minister for the Capital Territory (Mr Bryant) recently stated:

It is a very delicately balanced economy as I see it and it will not take much to unbalance it.

He emphasised that it was his- interest to see that the Norfolk Island people are not disadvantaged as a result of any steps we take.

Although the Opposition accepts the Minister's statement as one of broad policy, we nevertheless believe that the Government should outline the measures it proposes to take to protect the island's economy from any adverse effects arising from the application of this legislation. The former Government raised the grant for Norfolk Island from $66,000 to $120,000 in 1972-73 in the expectation that this tax legislation would be passed. That assistance has clearly been of benefit. In addition, the marginal increase in the funds allocated for restoration and maintenance of historical structures to $66,700 in the 1973-74 Budget will benefit the island tourist industry. Australian-owned companies in business on the island clearly receive a quid pro quo for the tax payable on income from their island operations. However, I reiterate that it is vital for the island to be assured of the Government's intention to prevent inequity in the case of individual companies and, particularly, to prevent any adverse effects on the island's economy.

The Opposition supports this legislation before the House. I trust that the Treasurer (Mr Crean) will be prepared to provide the assurances sought by the Opposition in respect of the Norfolk Island residents before closing this debate. I see that the Treasurer, who is sitting on the front bench of the Government side, is nodding his head, so I take it that that assurance is so given.

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