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Tuesday, 27 November 1973
Page: 2117

Mr ACTING DEPUTY PRESIDENT (Senator Wood) - Is leave granted? There being no objection, leave is granted. (The speech read as follows)-

The main purpose of this Bill is to put an end to the use of Norfolk Island as a tax haven. The Treasurer (Mr Crean) announced earlier in the year that this legislation would be brought in and that it would be the same as legislation announced by his predecessor on 19 July 1972. The Bill I now present fully accords with the former Treasurer's plans. With the unanimity of purpose that is thus implied, and because fuller explanations are given in an explanatory memorandum that is being made available to honourable senators, I think I can be fairly brief in what I say about the Bill.

It may be useful if I begin by saying something about what a tax haven is. It is a place that levies little or no income tax of its own, whether generally or in particular circumstances, and which has banking, commercial and communication facilities, and a legal system, conducive to resort to it by people and companies wishing to minimize or eliminate tax they would otherwise have to pay.

In the Norfolk Island context the absence of income tax is due to the fact that the Island is not treated as part of Australia for general tax purposes, although it is for some special purposes, such as the rebate that frees inter-company dividends from tax. Income that has, or is given, a technical legal source on Norfolk Island is not subject to Australian tax if it is derived by an individual or company qualifying as a resident of the Island. A company can be resident of the Island by being incorporated and managed and controlled there, even though its ownership is wholly vested elsewhere.

Before the former Treasurer's announcement in July of last year there had been highly complex tax avoidance arrangements designed chiefly to convert Australian income of Australian residents into income with a technical source on the Island derived by an entity that was technically an Island resident. In a fairly typical situation money would be made available from Australia on interest-free terms to a company resident in Norfolk Island. The money would be on-lent through a series of companies resident in the Island and ultimately find its way back to Australia as an interest-bearing loan to the company that provided it in the first place. The object of the scheme was to give the interest received by the Island companies the flavour of income with a source on the Island so that it was free of Australian tax, while the interest paid by the Australian company was a tax deduction in its own assessments.

As honourable senators will know, the Full High Court recently decided in the Esquire Nominees case that particular arrangements involving dividends that had their origin in Australia were effective to give the dividends the legal character of income with a source on the Island. Additionally, it is known that the Island 's tax haven status has been used by non-residents to avoid Australian tax and, it is believed, foreign taxes as well. It has not been established that all of the schemes based on Norfolk Island effectively avoid tax. The application on the present law in the immense variety of factual situations that can be contrived is, nevertheless, uncertain and difficult. It is necessary therefore both to tighten up and clarify the law.

The amendments in the Bill aim at a fair balance between the interests of islanders and the

Australian tax-paying community. The key provision will make the income tax law apply as if Norfolk Island were part of Australia. This would in itself stop the tax avoidance. However, if no more than that were done all residents of Norfolk Island, including the Pitcairners who have lived there on tax-free terms for so long, would be subject to tax on their Island income. The Bill does not have this extreme effect. It proposes new provisions which will continue to exempt from tax the Island and other exAustralian income of people who live on the Island and are not resident in Australia for tax purposes. These kinds of income will also be exempt when derived by companies wholly owned and controlled by such Island residents

This limited exemption of company income was clearly foreshadowed in the July 1972 statement on the matter. Since the legislation was introduced, there have been some representations for a change in this part of it, and these have been carefully considered. The Government has concluded, however, that the Bill should not be changed in this respect. An exemption confined to Island-owned companies is still regarded as sufficient to meet justifiable claims to tax exemption. Another exemption is provided in the Bill for certain trust income, accumulating under the terms of an Island trust in which the beneficiaries are Island people. For people who are not entitled to the full exemption that will be available for permanent residents of the Island, there will be an exemption for employment income earned on the Island where the period of time to be spent there is over 6 months.

These are the main provisions but the Bill contains a variety of supplementary measures, mostly in the form of safe-guards against exploitation of the new provisions. For example, there are detailed rules to protect the condition that companies wholly or partly owned outside the Island are not to be exempt. Conversely, the Bill provides authority for the Commissioner of Taxation to disregard a temporary failure to meet the Island-ownership test where it would be appropriate in special circumstances to do so. Against the background of arrangements that have been made in the past to give income an artificial Island source, the Bill provides rules specifying when income such as dividends, interest and royalties are to be treated as having an Island source.

As the former Treasurer announced, the new provisions will have effect in relation to income derived after 19 July 1972. However, as a transitional measure to assist Island companies that now have some degree of non-Island ownership but wish to re-arrange their affairs so as to retain tax exemption, the Bill provides for an appropriate 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. There has been little, if any, use of the Territories of Cocos (Keeling) Islands or Christmas Island for tax haven purposes. The tax law relating to them is, however, the same as that applying to Norfolk Island. If the law were left unchanged, there could be resort to these Territories for a tax haven. The Bill accordingly makes the same amendments for the two territories as it does for Norfolk Island.

I turn now to a part of the Bill that is concerned with tax haven resort to Papua New Guinea. These measures were also foreshadowed in the former Treasurer's statement in July 1972. Broadly speaking, private company groups are given a choice by the income tax law of paying dividends to individual shareholders, which are then taxed at the shareholders' personal rates, or of paying an undistributed profits tax. Recent tightening of the law to uphold that principle has led to a situation where some private company groups have been paying dividends to so-called 'repository' companies in Papua New Guinea. Papua New Guinea does not tax the dividends and arrangements have been made in the past with the objective that no Australian tax would be paid on them either. The dividends received by the repository company in Papua New Guinea would in due course be used in ways that would benefit the Australian shareholders without exposing them to liability to tax at the later time.

I interpolate here that the proposal in a subsequent Bill to levy a withholding tax of 15 per cent on dividends paid from Australia to Papua New Guinea will result in there being some Australian tax on dividends paid in furture to respository companies in Papua New Guinea. It would not however be enough to deter the practice. To correct the situation, the Bill proposes basically that where dividends were, or are, paid after 19 July 1972 by a private company in Australia to another private company in Papua New Guinea, they will not be taken into account in determining whether the paying company has made a distribution of profits sufficient to avoid payment of undistributed profits tax. This is the basic provision but there are measures to the effect that it is to apply to dividends that are held in Papua New Guinea on behalf of Australian individual shareholders.

This Bill does not deal with the problem of tax havens outside Australian jurisdiction. This is a most difficult matter to which the Treasurer and his advisers have been devoting some attention. As the Treasurer has pointed out, it is necessary that action be taken to prevent or mininize as far as possible successful use of such havens by Australian taxpayers, because the result of the tax avoiders' efforts is a heavier tax burden on their fellow citizens and companies. I assure the Senate that the Government will, as soon as, and wherever practicable, be taking whatever steps are open to it to prevent loss of revenue through the use of tax havens. I commend the Bill to the Senate.

Debate (on motion by Senator Cotton) adjourned.

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