House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)

General Outline

Introductory note

This memorandum contains explanations designed to provide a guide to the legislation prepared to give effect to company tax recoupment measures first foreshadowed in Ministerial statements of 25 July 1982 and 17 August 1982.

A package of Bills to achieve this broad purpose, but limited to former owners of the companies concerned, was introduced into the House of Representatives on 23 September 1982, at which time it was indicated that there would be further provisions to make promoters of pre-tax profit stripping schemes also liable to recoupment tax.

The Bills that are the subject of this memorandum represent the legislation introduced on 23 September 1982, extended to include promoters, and varied in some respects to effect technical and certain other changes in the originally-introduced measures. An associated measure, the Income Tax Assessment Amendment (Additional Tax) Bill 1982 deals with penalties for late payment of income tax and is explained in the explanatory memorandum prepared to cover the Bills introduced on 23 September 1982.

There are four Bills for the purpose of recouping evaded company tax:

•

The Taxation (Unpaid Company Tax) Assessment Bill 1982 which sets out the basic conditions of liability and contains necessary machinery measures.

•

The Taxation (Unpaid Company Tax - Vendors) Bill 1982 is a "Rates" Bill which formally imposes on vendor shareholders and other former owners of stripped companies a tax of the amount established by the first Bill.

•

The Taxation (Unpaid Company Tax - Promoters) Bill 1982 is also a "Rates" Bill formally imposing recoupment tax on promoters of pre-tax profit stripping schemes and their associates.

•

The Taxation (Unpaid Company Tax) (Consequential Amendments) Bill 1982 makes changes to several other Acts consequent upon the first Bill.

TAXATION (UNPAID COMPANY TAX) ASSESSMENT BILL 1982

General outline

This Bill will:

•

define the parameters of liability to recoupment tax of vendor-shareholders and other former owners of shares in companies that were stripped of pre-tax profits and thus evaded company tax (including undistributed profits tax) on those profits;

•

provide the mechanism for determining which former-owners are to be liable for this vendors recoupment tax and the measure of that liability;

•

provide a right of election so that shareholders in a company that has been stripped of its pre-tax profits will be (if the election is made) able to be assessed on sufficient dividend income to eliminate the liability of the company to undistributed profits tax and thus to recoupment tax on that undistributed profits tax;

•

similarly define the basis of liability to promoters recoupment tax of persons instrumental in stripping companies of pre-tax profits, and their associates;

•

require payment of additional tax for late payment of recoupment tax at the rate of 20% per annum where the recoupment tax is not paid within 30 days of service of a notice of assessment of that recoupment tax, or such extended time as the Commissioner of Taxation allows;

•

enable former owners of the companies to make arrangements with the Commissioner of Taxation for early payment of the amount of the evaded company tax;

•

require the Commissioner to re-issue notices of assessment on a stripped company to representative former owners and allow those former owners, through a nominated person, to exercise those rights of objection and appeal against the assessment that the company could have exercised;

•

render void arrangements entered into after 25 July 1982 which have the dominant purpose and the effect of directly or indirectly defeating, evading or avoiding a person's liability to pay recoupment tax.

Broad outline

As indicated above, the Taxation (Unpaid Company Tax) Assessment Bill is the main Bill in a package of 4 Bills, designed to recover from vendor-shareholders and other former owners of companies stripped of pre-tax profits, and from scheme promoters and their associates, the tax evaded by those companies.

This Bill contains provisions delineating the liability to a recoupment tax of persons who, directly or indirectly, owned shares in companies that were subject to stripping procedures that rendered them unable to meet a company tax liability that was actual or contingent at the date these persons ceased to so own their shares.

Similarly, the basis of liability to recoupment tax of the "promoter" group is spelt out in the legislation.

Included in the company tax that will be the subject of the recoupment will be tax on taxable income of the company, undistributed profits tax payable by the company and unpaid penalty tax imposed on the company for late payment of these taxes, measured only from 30 days after the date on which former owners are notified of the company's tax liability.

The Bill will also impose additional penalty tax at the rate of 20 per cent per annum on any recoupment tax assessed under the proposed law that is not paid by the due date for payment of the tax. That penalty tax will be capable of remission by the Commissioner of Taxation only in restricted circumstances. Special arrangements for time to pay, without penalty, are also provided for.

In addition, the Bill contains provisions to render void any arrangement, or transfer of property, occurring after the date of the Ministerial announcement foreshadowing this legislation - 25 July 1982 - that has the dominant purpose and the effect of enabling a person, who will be liable to recoupment tax under the Bill, to escape payment of that tax.

In order to recover from former owners of shares in stripped companies and from promoters and their associates the tax evaded by those companies it is necessary for constitutional reasons for the Bills to impose a tax on the persons concerned. The tax on former owners is to be imposed by one Rates Bill as a "vendors recoupment tax" and by a further Rates Bill the tax on promoters and their associates is to be imposed as "promoters recoupment tax".

The legislation will apply to schemes entered into before 4 December 1980, that being the date that is the commencement date of the Crimes (Taxation Offences) Act 1980. In order to make the legislation apply only from a time shortly before these schemes came to be practised on a wide scale, the Bill is expressed to apply to schemes entered into on or after 1 January 1972.

A typical scheme of pre-tax company profit stripping would ordinarily involve a sale of all (in isolated cases practically all) of the shares in a company (the "target company") which had successfully traded for a substantial part of the income year and which had, up until the implementation of the scheme, current year profits on which a contingent company tax liability existed. In addition, if the target company concerned was a private company for income tax purposes it would in due course become liable to pay undistributed profits tax in the event that it failed to pay a dividend of a specified proportion of its profits within 10 months after the end of the income year.

The trading activities of the target company would first have been transferred to another entity (company or trust) controlled by the former owners of the company and the target company's assets reduced to cash or other liquid form. It would be a condition of the scheme promoter that all liabilities of the company except its actual or contingent tax liabilities be paid or indemnified by the vendor-shareholder.

The former owners of the company would be paid a price for their shares that was fixed on the basis of the value of the company's assets, not taking into account the contingent tax liability on company profits. This capital sum would however have been reduced to reflect the fee charged by the promoter or other stripper.

By further processes the target company would be stripped of its liquid assets (e.g., by the making of a loan that could not be repaid) and thus rendered incapable of meeting the company tax liability in due course assessed to it. It is this unpaid company tax that is the subject of the Bill.

There were yet other situations in which the ownership of companies was sold and the companies rendered incapable of paying their income tax.

In some of these the sale of shares in a holding company would carry the ownership of one or more subsidiary companies, one or more of which was stripped of funds and rendered incapable of paying legally payable company tax. In situations involving more complex company structures, the entire ownership of a company that was later stripped was transferred by selling shares either in it and in other companies through which the company to be stripped was owned or in other companies which through various inter-company shareholdings owned the target company.

Some companies that were stripped of untaxed current year profits were also stripped of profits of a prior year that had not borne the company tax legally payable on those profits.

Yet again, some companies that had current year profits were, after the sale of their shares, put into a scheme which is found to be unsuccessful in its purpose of creating deductions that would eliminate the company tax liability that had accrued to the date of sale. Once the scheme is found not to be effective, so that company tax is payable, and the scheme is one that could not reasonably be expected to have achieved its purpose, is connected with a stripping of the company that has rendered it unable to pay tax or has a purpose of so stripping it, the case is also one of pre-tax profit stripping.

For all these situations, the legislation proposes the creation of liabilities to recoupment tax on "vendors" and "promoters". The liability on each group is independent of the other, except that the legislation is so structured that a payment of promoters recoupment tax will have the effect of reducing the amount of unpaid company tax that is the basis for the recoupment tax liability of vendors.

In relation to "vendors", the Bill proposes the creation of a series of levels of liability to vendors recoupment tax - a liability at primary level on each person (other than a bare trustee) who was a vendor-shareholder of shares in a stripped company or, where the vendor was a bare trustee, the owner of them under the trust, and to the extent necessary a series of further levels for persons who were at the time of sale of the stripped company beneficially entitled directly or indirectly to capital rights in a primary level company or trust. A liability at a level below the primary level will not arise unless for some reason (e.g., the primary level liability falls on a company that has been wound up) a primary level liability to the vendors recoupment tax will not be met or it would be inappropriate in the particular circumstances to expect it to be paid.

By clause 5 a liability for recoupment tax at the first level - primary level - will arise where (to take the simple case):

•

shares in a company carrying more than 90 per cent of the voting power in the company were sold, whether in Australia or outside Australia, on or after 1 January 1972 and before 4 December 1980 (i.e., before the commencement of the Crimes (Taxation Offences) Act 1980);

•

the total consideration for the sale of the shares in the company exceeded the net assets of the company after taking into consideration any actual or contingent company tax liability (but not penalty taxes) covering periods up to the time of sale of the shares;

•

an assessment has been made of the company tax payable by the target company, any objection against that assessment has been finalised and there is no outstanding dispute in relation to the company tax;

•

the company tax (including late payment penalty) remains unpaid as a result of an arrangement or transaction; and

•

the company did not after the sale carry on the same business it had carried on before the sale.

A liability to recoupment tax would not however arise if the case is one where after the sale of the shares the company unsuccessfully entered into a scheme to eliminate its tax liability, the scheme is one that (objectively viewed) could reasonably have been expected to be efficacious, it was not part of the arrangement that rendered the company unable to pay its tax and there was no purpose of stripping in the arrangement.

Where the various conditions are all met each direct shareholder in the target company, or a shareowner holding shares via a nominee who sold his or her shares, will, by clause 8, become liable to pay a recoupment tax equal to a proportion of the unpaid company tax ascertained by reference to the proportion of his or her consideration for the sale of the shares to the total consideration for all the shares.

The measures, suitably adapted, will also apply where shares in a holding company or holding companies were sold so that not only the holding company(ies) but also its subsidiaries were stripped of pre-tax profits, and in this case the tests outlined above will apply after aggregating the net assets and tax liabilities of the holding company(ies) and the subsidiary companies. Similarly, they will apply where a target company had been owned through a more complex series of shareholdings and the sale of the company was accomplished by selling shares in a number of companies, including the target company.

If a company had traded for a period and a provision for the company tax for the period had been raised in the company's accounts it sometimes happened that the vendor-shareholders received a price for their shares that was diminished by the amount of the provision and by an additional fee for the promoter. In that simple case, the legislation will not apply - the consideration for the shares did not exceed the company's net assets after taking into consideration the company tax liability (paragraph 5(1)(d)).

If, however, the case was one where the promoter took from the vendors the amount of the tax provision for a completed year, but left the vendors to enjoy the bulk of the benefits of the unpaid company tax for the next year, the test in paragraph 5(1)(d) could be satisfied in relation to the entire scheme, and in relation to the unpaid tax of both years. In line with the outcome in the given simple case, sub-clause 5(4) will permit the Commissioner to free the vendors from the recoupment liability in relation to the first of these two years.

Sub-clause 5(4) and its counterpart sub-clause 6(18) will also authorise the Commissioner to free a person from a liability for vendors recoupment tax where that person's liability would be less than $100 and it would not be appropriate to seek to recover the tax.

A person who holds shares as a bare trustee (i.e., as a nominee) will not be liable for vendors recoupment tax, but a person on whose behalf those shares are held will become liable as if that person were the holder of the shares that were sold.

Where a person has died before an assessment of recoupment tax is made in respect of that person there will be no liability for recoupment tax passed on to that person's dependants or beneficiaries under a will. However, if a person dies after a recoupment tax assessment has been made on him or her, the Commissioner will be authorised to recover that tax out of that person's estate.

Where the allocation of the unpaid company tax at the primary level is to individuals no further tracing of liability for the recoupment tax will be necessary. Liability will rest with the vendors who benefited as vendor-shareholders (or beneficiaries under a bare trust) from the evasion of company tax.

That will also be the case where the person who is allocated a recoupment tax liability at the primary level is a company or trust that is still owned by the people who were owners at the time control of the relevant target company was sold to the promoter or other stripper - so long, of course, as the company or trust still exists and has funds to pay its share of the recoupment tax.

Where that is not so, a further process of tracing may be necessary. As soon as such further tracing reaches an individual, it will stop, but would as necessary correspondingly continue to and through successive companies and trusts.

There are three triggers for tracing from the primary to the next level and, as required, successively to further levels. These are, very broadly, that the company or trustee to which recoupment liability has been allocated or traced -

(a)

no longer exists (sub-clause 6(1));

(b)

now has different shareholders or beneficiaries as a consequence of sales of shares or beneficial interests (sub-clause 6(2));

(c)

is unlikely to pay all of its share of the evaded tax (sub-clause 6(3)).

Once the need to trace liability from a company or trust has thus been established, the fundamental rule for tracing to shareholders and beneficiaries is on the basis of respective firm rights to a capital distribution from the company, or to a distribution of trust corpus, normally as viewed at the time of sale of the target company concerned.

In some cases, e.g., in the case of a discretionary trust, persons will have received capital distributions in situations where it could not be said that at the time of sale they had a firm right to that distribution. For such cases the legislation treats the actual receipt of capital or of corpus as having been received pursuant to right.

There are yet further situations where persons have received moneys as a consequence of a sale of shares in a target company (stripped of its pre-tax profits), but have not done so either in pursuance of rights to capital or corpus or in the form of a formal distribution of capital. For example, a recipient trust may have been stripped of funds by the making of loans so structured that they are not intended to be, and in a practical sense are not capable of being, repaid. The Bill treats persons who have thus effectively received moneys originating in a target company as having received, pursuant to right, a distribution of capital or corpus.

Should the application of these tracing rules result in the allocation to a person of a recoupment tax liability that is so far removed from practical realities that it would not be appropriate to pursue the person for the recoupment tax amount the Commissioner will be empowered (sub-clause 6(18)) to refrain from action accordingly.

If, after an assessment for vendors recoupment tax is made, the whole or a part of the underlying basic company tax (tax on taxable income and undistributed profits tax) is paid, the payment of that company tax will reduce any recoupment tax that is payable (clause 9). Similarly, if an amount of recoupment tax is paid at the primary level that payment will be reflected through reduction of the recoupment tax payable at a later level and vice-versa.

By sub-clause 9(7) a payment of promoters recoupment tax will be taken as a payment of basic company tax, and this will have the consequence of reducing the amount of vendors recoupment tax that is payable.

Turning to the basis for ascertainment of promoters recoupment tax, the persons who will be liable to recoupment tax as promoters are those who purchased shares from vendor shareholders or, for the more usual situation where the purchaser was a company or trustee, were shareholders or directors of the purchasing company, beneficiaries or trustees of the purchasing trust, directors of a purchasing corporate trustee, or were legal or beneficial owners through one or more further companies or trusts in a chain of ownership extending behind the purchasing company or trust.

Also to be treated as promoters for purposes of the promoters recoupment tax are those persons, companies and trustees (and similarly persons connected with or behind them) that acted as agent for the purchaser of the shares or as broker. On the same basis, the legislation will include persons in the "promoter" class where they are associates of a purchaser and gave financial assistance in the purchase of the shares (or, in the sense indicated, are connected with or behind them).

These tests aim to include as "promoters" those who, in the popular sense, were promoters of schemes to strip companies of pre-tax profits, and those closely connected with them in terms of ownership rights. For the same general purpose, a person who stripped moneys from a company or trust that is in the promoters class by way of loans that had the real character of distributions of income or capital will be treated as a "promoter" by being treated as a shareholder or beneficiary of the company or trust.

Persons liable as "promoters" will have a joint and several liability to pay promoters recoupment tax in respect of certain amounts of unpaid company tax, both primary tax on taxable income and undistributed profits tax. The basic tests for determining whether promoters are to be so liable are the same as those for determining whether vendor shareholders are to be liable for recoupment tax (tests based on purchase being substituted for tests based on sale), except that there is not to be in relation to promoters the "excess consideration" test (sale proceeds exceeding company net assets after taking into account any actual or contingent company tax liability).

The omission in relation to promoters of this test, along with further specific tests contained in the legislation will mean that the "promoters" group is to be liable to pay, as promoters recoupment tax -

(a)

20 per cent of the amount that "vendors" are liable to pay as vendors recoupment tax in any given case.

(b)

an amount equal to the whole of the evaded company tax in any case where vendors are not liable for recoupment tax because the whole amount of a company provision for tax was paid to the promoter; and

(c)

an amount equal to the whole of the evaded company tax in any case where the ratio of accumulated (taxed) profits to pre-tax profits in the stripped company is so high that the "excess consideration" test operates to exclude vendors from liability to recoupment tax.

In category (a) just outlined, the liability to promoters recoupment tax will be co-extensive (as to 20 per cent) with, and independent of, the liability to vendors recoupment tax in relation to the particular amount of unpaid company tax. However, there are provisions in the Bill (sub-clause 9(7)) under which any amount paid as promoters recoupment tax in relation to a particular company will, in relation to vendors recoupment tax, be taken as having been applied in reduction of the underlying unpaid company tax, with the consequence that the payment will operate to reduce the vendors recoupment tax liability accordingly.

The liability for promoters recoupment tax being a joint and several one of the members of the eligible promoters class it could occur that one or more of the members of the class is obliged to pay the recoupment tax that is the responsibility also of other members of the class. To enable the weight of the promoters recoupment tax to be appropriately shared amongst member of the class, clause 10 gives a member of an eligible promoters class a right of contribution against other members of the class in respect of promoters recoupment tax that he or she has paid. The right is to be exercised by suit in a court of competent jurisdication, which may order such sharing of the tax as appears to the court just and equitable.

A further provision in the Bill (clause 11) enables a person who would otherwise be treated as being in an eligible promoters class to seek from the Federal Court a declaration that it is not just and equitable that the person be so included. This relief could be sought either where the Commissioner of Taxation is seeking recovery of promoters recoupment tax from the person, or the person is the subject of an action for contribution brought by another member of the eligible promoters class.

If an amount of either vendors or promoters recoupment tax remains unpaid after the due date for payment (i.e., 30 days after issue of a notice of assessment), additional penalty tax at the rate of 20 per cent per annum will become payable. This additional tax will be capable of remission only in restricted circumstances such as where late payment of the recoupment tax is due to factors beyond the control of the taxpayer. If any payments of recoupment tax are made these will be applied in the first instance against this penalty tax (sub-clause 9(1)).

Under varying circumstances and conditions, there is provision under which former owners may, in a way that results in them not being liable to late payment penalties pay to the Commissioner amounts equal to some or all of the unpaid company tax, and in a way that does not reduce "promoters" liability to recoupment tax. In particular, if former owners choose not to contest liability, they may make arrangements with the Commissioner to pay over a period, normally of up to 12 months, the whole of a company's unpaid company tax, without attracting late payment penalty.

The legislation (clause 15) will enable the Commissioner to make an assessment of company tax against a company that has ceased to exist, e.g., where a company has been dissolved or deregistered, in which case the assessment notice is to be served on a representative group of pre-strip owners of the company.

By clause 18 of the Bill a company's assessment notice if not already issued or a copy of a notice of assessment previously served on a stripped company under the Income Tax Assessment Act will similarly be served on a representative group of pre-strip owners.

The representative group of former owners will be those people now living and whose whereabouts are known, and those companies that are still operative, who were shareholders (or owners under a bare trust of which the vendor shareholder was a trustee) being persons who are likely to have a recoupment tax liability. The representative group will also include up to 5 further former indirect owners of the company.

The representative group will be entitled to nominate a person who, on the basis of a majority decision of the group, will be able to exercise all the company's rights of objection and appeal against the company's assessment to primary company tax or undistributed profits tax.

As announced on 17 August 1982, a right of election will be available to shareholders in a company who would be liable to be assessed to recoupment tax based on unpaid undistributed profits (Division 7) tax of the company. The election would, if practicable, be made by the former directors of the company or, failing that, the vendor-shareholders. They will be able to elect that the former owners be assessed on an amount of income equal to the dividend that the company would have needed to pay to eliminate the liability to undistributed profits tax (clause 16).

Where such an election is made and the Commissioner is satisfied that the persons concerned will pay tax on the amount to be included in their assessable incomes, the company's liability to Division 7 tax, and thus the shareholders' liability to recoupment tax in connection with that Division 7 liability, will be eliminated. Where a shareholder is a trustee of a trust estate, a further election will be available to treat the imputed dividend income of the trust estate under the earlier election as a distribution to the beneficiaries in the trust, which will be assessed to tax at the marginal rate applicable to those benficiaries (clause 17). A similar effect in relation to shareholders in a company will be able to be achieved by the application of existing provisions of the income tax law (sections 46(3) and 105AA).

In a practical sense persons who make elections under these provisions will do so only where a lower rate of tax is applicable to any imputed dividend and thus where elections would operate to the financial benefit of the former owners or beneficiaries in a trust that formerly owned shares in a company.

The proposed legislation also contains (clause 22) provisions - foreshadowed on 25 July 1982 - to render void arrangements entered into after that date which have the dominant purpose and the effect of directly or indirectly defeating, evading or avoiding a former owner's liability to pay recoupment tax. Where a scheme involves a transfer of, or diminution in the value of, any property of a person liable to pay vendors recoupment tax, that scheme will be void in any proceedings commenced by the Commissioner or by a liquidator or trustee in bankruptcy which are designed to recover the recoupment tax. A scheme of this nature entered into for the purpose of rendering a person unable to meet a potential liability to vendors recoupment tax will also be void if, at a later time, that person is assessed to pay recoupment tax and fails to pay that tax.

Corresponding provisions are to apply in relation to arrangements to avoid promoters recoupment tax.

Finally, the legislation will mean that a person who receives a notice of assessment to recoupment tax will not be entitled to go behind the company tax liability unless there have been exercised, in the circumstances allowed, rights of objection and appeal against the company assessment (clause 23). Once a company's liability to company tax is finalised, either by a failure to exercise rights of objection or by a determination of any objection and subsequent appeal against the company, that liability will be conclusive insofar as an assessment to recoupment tax is concerned.

TAXATION (UNPAID COMPANY TAX - VENDORS) BILL 1982

General outline

This Bill will formally impose on vendor shareholders and other former owners of stripped companies a tax on the vendors taxable amount (broadly the person's share of the unpaid company tax) ascertained under the Taxation (Unpaid Company Tax) Assessment Bill 1982. The tax will be an amount equal to that vendors taxable amount.

TAXATION (UNPAID COMPANY TAX - PROMOTERS) BILL 1982

General outline

This Bill will formally impose recoupment tax on persons who were promoters, or associates of promoters, of schemes to strip companies of pre-tax profits. The amount will be determined under the Taxation (Unpaid Company Tax) Assessment Bill 1982 and is there described as a promoters taxable amount (in general it will be 20 per cent of the unpaid company tax). The tax will be an amount equal to the promoters taxable amount.

TAXATION (UNPAID COMPANY TAX) (CONSEQUENTIAL AMENDMENTS) BILL 1982

General outline

This Bill will:

•

amend the Administrative Decisions (Judicial Review) Act 1977 to exclude from review under that Act decisions relating to the assessment of recoupment tax (which will be reviewable instead under the objection and appeal provisions of the income tax law).

•

amend several other taxation Acts to provide that a liquidator or receiver of a company that has a liability to recoupment tax is required in setting aside assets of the company to pay tax to take into account the liability to recoupment tax.

Against the above general background, the provisions of each Bill are, in the notes that follow, explained clause by clause.

Notes on Clauses

Taxation (Unpaid Company Tax) Assessment Bill 1982

Clause 1: Short title

This clause provides for the new Act to be cited as the Taxation (Unpaid Company Tax) Assessment Act 1982.

Clause 2: Commencement

Under this clause the Act is to come into operation on the day on which it receives the Royal Assent. But for this clause the Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.

Clause 3: Interpretation

This clause contains a number of measures to assist in interpretation.

Sub-clause (1) defines various terms used in the Bill. Each term is to have the given meaning, unless the contrary intention appears:

•

"Agent" is to include a person holding a power of attorney.

•

"Apportionment factor", in relation to a primary taxable amount, will mean the proportion of an amount of overdue company tax that under clause 5 is allocated to a particular vendor-shareholder or beneficiary under a bare trust in ascertaining that primary taxable amount. For example, in a simple case where the shares that where sold were those in the stripped company, the apportionment factor, in relation to a primary taxable amount applicable to a vendor-shareholder, will be equal to his or her proportionate share of the consideration for the sale of the shares in the company.

•

"Assessment Act" means the Income Tax Assessment Act 1936.

•

"Associate", in relation to a person, is defined to have the same meaning as that term has under the definition contained in sub-section 26AAB(14) of the Assessment Act. That definition specifies who is an associate in relation to a natural person, a company, a trustee of a trust estate and a partnership and, in broad terms, refers to those persons who by reason of family or business connections might appropriately be regarded as one with a particular person.

•

"Company tax" will mean "ordinary company tax" or "undistributed profits tax", those terms being the subject of further definitions.

•

"Director", in relation to a company, will include any person who, formally or in practice, occupies or acts in that position and any person in accordance with whose directions the directors are accustomed to act (see also sub-clause 3(2)).

•

"Distribution of capital", in relation to a company, will mean a distribution of the surplus funds available for return to the company's shareholders in the event of the company's liquidation.

•

"Distribution of corpus", in relation to a trust estate, is being defined to mean a distribution of the corpus of the trust among those beneficiaries having a vested interest in the corpus.

•

"Eligible promoters class", in relation to a promoters taxable amount (the amount of evaded company tax that persons in the class of "promoter" will be liable to recoup), will mean the purchasers of shares in a target company together with other specified persons who, by virtue of sub-clause 7(4), are included in the eligible promoters class and who have not been excluded from that class as a result of an application under clause 11 to the Federal Court of Australia. These persons will be jointly and severally liable to pay promoters recoupment tax on the promoters taxable amount.

•

"Eligible taxable amount" will mean a "vendors taxable amount" or a "promoters taxable amount", both those terms being defined later in this sub-clause.

•

"Late payment tax" means additional tax payable under clause 13 for late payment of the vendors or promoters recoupment tax to be assessed under this Bill.

•

"Object" and "objection", in relation to an assessment, are terms used in the Bill to refer to the right of a taxpayer who is dissatisfied with an income tax assessment to post to or lodge with the Commissioner of Taxation, within 60 days after service of the notice of assessment, an objection in writing against the assessment.

•

"Ordinary company tax", in relation to a company, will mean income tax assessed upon the taxable income of the company together with any additional tax payable by the company for late payment of that tax.

•

"Person" is to include a company and a trustee.

•

"Prescribed distribution period", in relation to a company in relation to a year of income, is defined as the period that, for the purposes of the undistributed profits tax provisions of Division 7 of Part III of the Assessment Act, is the prescribed period during which the company must pay by way of dividend a specified proportion of its profits if it is to avoid a liability to undistributed profits tax.

•

"Primary taxable amount", in relation to a person, represents the share of evaded company tax recoverable from a person as a vendor-shareholder, or beneficiary under a bare trust the trustee of which was a vendor-shareholder, and means an amount that, by virtue of sub-clause 5(1), (2) or (5), is to be treated as a primary taxable amount in relation to that person.

•

"Promoters recoupment tax" means tax assessed under the proposed Act on a promoters taxable amount and imposed by the proposed Taxation (Unpaid Company Tax - Promoters) Act 1982.

•

"Promoters taxable amount", in relation to a person or persons, represents the share of evaded company tax recoverable from the promoter's group and means an amount that, by virtue of sub-clause 7(1) or (2), is to be treated as a promoters taxable amount in relation to an eligible promoters class in which those persons are included.

•

"Property" includes a chose in action, any estate, interest, right or power, whether at law or in equity, in or over property, and any right to receive income - the latter expression itself being further defined.

•

"Recoupment tax" is to mean "promoters recoupment tax" or "vendors recoupment tax", those terms being the subject of further definitions.

•

"Right to receive income" means not only a right of a person to have income that will or may be derived (from property or otherwise) paid to the person, but also a right to have the income applied or accumulated for the benefit of that person. Such rights are included in the definition of "property" for the purposes of the Bill.

•

"Scheme" is being defined broadly to ensure that all arrangements, regardless of the form employed, will be encompassed within the term. Accordingly, "scheme" will mean any agreement, arrangement, transaction, understanding or scheme, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings.

•

"Secondary taxable amount", in relation to a person, represents the share of evaded company tax recoverable from a former owner of shares in a company otherwise than as a vendor-shareholder or beneficiary under a bare trust and means an amount that, by virtue of sub-clause 6(1), (2) or (3), is to be treated as a secondary taxable amount in relation to the person.

•

"Shares" means shares in the capital of a company and includes stock.

•

"Undistributed amount", in relation to a company, is to mean an amount that is an undistributed amount in relation to the company for the purposes of Division 7 of Part III of the Assessment Act. A private company is liable to pay Division 7 tax on its "undistributed amount" and that term is defined in sub-section 103(1) of the Assessment Act as, broadly, the amount remaining after deducting from its distributable income (broadly, its after-tax income) the appropriate retention allowance and dividends paid during the prescribed period.

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"Undistributed profits tax", in relation to a company, will mean Division 7 tax assessed upon the undistributed amount of the company together with any additional tax payable by the company for late payment of that tax.

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"Vendors recoupment tax" is to mean tax assessed under the proposed Act on a vendors taxable amount and imposed by the Taxation (Unpaid Company Tax - Vendors) Act 1982.

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"Vendors taxable amount" will mean a "primary taxable amount" or a "secondary taxable amount", both those terms being defined earlier in this sub-clause.

Sub-clause (2) will make it clear that a person will not be taken to be a director of a company merely because the directors act on advice given by that person in a professional or business capacity.

Sub-clause (3) will ensure that, where particular shares are sold or purchased under a scheme on more than one occasion, as typically occurred in the schemes to which this legislation applies, references in the Bill to the sale or purchase of shares under the scheme are to be read as references to the first sale or purchase, as the case may be, of the shares under the scheme.

This will mean that where the shares which were sold by the persons who had owned the company while it operated and derived income were later sold in a further sale or series of sales (and perhaps ultimately to men of straw) the sale by the former owners and the corresponding purchase by the new owners will be the relevant sale or purchase for purposes of the legislation.

Sub-clause (4) is a drafting measure which ensures that a reference in the Bill to the joint holder of shares includes a reference to a person who holds the shares in common with someone else.

This will mean that the legislation will apply in cases where persons who owned shares in a target company as owners-in-common sold their respective interests in the shares, as well as in cases where the joint owners of shares sold their interests in the shares.

Sub-clause (5) is a further drafting measure which gives meaning to references in the Bill to the time of sale of shares in a company under a scheme.

Paragraphs (a) and (b) define the first sale time and the last sale time in relation to the sale of all the shares that were sold under a scheme.

By paragraph (a) the first sale time will be taken to be:

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if all the shares were sold at the same time - that time; and

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in any other case - the time when the first of the shares were sold.

Similarly, paragraph (b) provides that the last sale time will be taken to be, in the case of a simultaneous sale, the time when all the shares were sold and otherwise the time when the last of the shares were sold.

Paragraph (c) defines the time of sale in the context of the sale of shares or an interest in shares by a particular vendor-shareholder. Under this paragraph, the time of sale of shares or an interest in shares will be taken to be:

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if all those shares were sold at the same time - that time; and

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in any other case - the time when the last of those shares were sold.

Sub-clause (6) applies in relation to a purchase of shares and mirrors the application of sub-clause (5) in relation to a sale of shares.

Under paragraphs (a) and (b) of sub-clause (6) the first purchase time and the last purchase time will be taken to be, in the case of a simultaneous purchase of shares under a scheme, the time when all the shares were purchased and otherwise the time when the first or the last of the shares, as the case may be, were purchased.

Paragraph (c) applies in the context of a purchase of shares by a particular purchaser. By this paragraph the time of purchase will be taken to be, in the case of simultaneous purchase, the time when all the shares were purchased and otherwise the time when the last of the shares were purchased.

Sub-clause (7) will make it clear that a reference in the Bill to a company will not be taken as including a reference to a company that is acting in a trustee capacity. An effect of the sub-clause is that the legislation will, where there is a corporate trustee, generally apply in the same manner as it applies where the trustee is an individual.

Sub-clause (8) will ensure that a reference in the Bill to the purchase of shares by a person includes a reference to the purchase of shares by the person jointly or in common with someone else.

This will mean that in determining the persons who constitute the eligible promoters class under sub-clause 7(4) a person who purchased an interest in shares under a scheme will be taken to be a person who purchased shares and will therefore be included in that class.

Sub-clause (9) is a drafting device to ensure that company or recoupment tax that has been assessed will, for the purposes of the Bill, be included in the expression "payable" where used throughout the Bill notwithstanding that the due date for actual payment has not arrived. The sub-clause will not substantively affect the due date for payment of company tax or recoupment tax which will continue to be due for payment 30 days after service of a notice of assessment.

Sub-clause (10) applies where the company tax payable by the target company in relation to the year of income in which shares were sold under the scheme includes an amount of tax attributable to income derived after the sale. In that case, the amount of company tax payable will, for the purposes of the Bill (other than the "excess consideration" tests in clause 5 and the determination of a promoters taxable amount under clause 7), be taken to be the amount of the company tax payable that is attributable to the period preceding the sale of the shares.

This provision will ensure that the evaded company tax in respect of which vendor-shareholders will be liable to pay recoupment tax will only include company tax payable in respect of profits derived by the company up to the time when those vendor-shareholders sold their shares in the company, and will not include tax on any profits made by the company during a later period of the year.

If, following the sale of shares in the company by the vendor-shareholders, the company entered into transactions that reduced the amount of pre-sale profits (e.g., a successful avoidance scheme was entered into by the company) the vendor-shareholders will, in the ascertainment of the recoupment tax they are liable to pay, receive the benefit of any reduction in company tax generated by those transactions. That is because the company tax that is payable in relation to the year is the reduced amount payable as a consequence of the transactions, or for the same reason there is no company tax at all.

Sub-clause (11) applies where the Commissioner of Taxation has under sub-clause 18(5) sent to representative former owners a copy of a notice of assessment that has already issued to a stripped company. In that case the amount of the company tax liability of the company will be ascertained, for the purposes of the Bill, on the basis that the assessment was served on the company on the day on which the copy was served on a vendor-shareholder.

This will mean that, for the purposes of the Bill, the company tax liability so notified will be treated, by reason of section 204 of the Assessment Act, as though it became due and payable on the thirtieth day after service of the copy and hence additional tax for late payment will not commence to accrue until that date. Accordingly, the obligation of former owners and promoters to meet any late payment penalty owing by the company will be limited to the penalty that accrued after that date.

Sub-clause (12) is designed to ensure that the legislation will not operate to recoup unpaid company tax where the funds of a target company were removed - rendering it unable to pay tax - on the basis of an objective view as to the efficacy of a post-sale tax scheme designed to reduce or eliminate tax liability.

The sub-clause applies where, after a target company was sold to the promoter, it entered into a scheme which is ultimately found to be unsuccessful of its purpose to reduce or eliminate the company's liabilities for the income year during which the sale occurred (paragraph (a)) and that could reasonably have been expected to eliminate or reduce the company tax payable for that year (paragraph (b)). In that case, provided the scheme was not part of, or connected with, the arrangement which rendered the company unable to pay its company tax liabilities (paragraph (c)) and the arrangement which had that effect had not been entered into for that purpose (paragraph (d)), the amount of company tax payable will, for the purpose of ascertaining the liability of former owners and promoters to pay recoupment tax, be taken to be the amount of the company tax that would have been payable if the scheme had turned out to be successful.

Sub-clause (13) is designed to ensure that the legislation will apply in circumstances where a shareholder disposes of his or her legal and beneficial interest in shares in successive steps. The sub-clause applies where under a scheme:

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a shareholder transferred his or her legal interest in shares to another person ("the transferee") to hold the shares upon trust for that shareholder; and

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the shareholder's beneficial interest in the shares later passed, for a consideration, to the transferee or another person.

In those circumstances the shareholder will be deemed to have sold the shares to the new beneficial owner for the consideration received in respect of the passing of the beneficial interest. Conversely, the new beneficial owner will be treated as having purchased the shares for that consideration.

Sub-clauses (14) and (15) are designed to ensure that the legislation will apply to a form of pre-tax profit stripping scheme under which the pre-strip owners of a company disposed of their shares to a promoter, not by means of a formal sale, but by means of an arrangement under which they obtained a loan from the promoter and, on pre-arranged default in repayment, their interest in the shares was transferred to the promoter in satisfaction of the loan. The amount of the loan that the pre-strip owners were left to enjoy was equivalent to what the shares would have been sold for.

Sub-clause (14) applies where under a scheme -

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a shareholder mortgaged his or her shares to secure repayment of a loan; and

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as a result of the mortgagee exercising rights under the mortgage, e.g., a power of sale or a forfeiture, the mortgagee or another person became the beneficial owner of the shares.

In those circumstances the shareholder will be deemed to have sold the shares to the new beneficial owner for consideration equal to the amount of the loan. This provision also has the effect that the new beneficial owner will be regarded as having purchased the shares for that consideration.

Sub-clause (15) applies where under a scheme -

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a shareholder mortgaged his or her shares to secure repayment of a loan made to the shareholder by transferring his or her legal interest in the shares to the mortgagee to hold upon trust for that shareholder; and

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the shareholder transferred his or her equity of redemption in the shares (i.e., the right to a re-transfer of the mortgaged shares) in consideration of the discharge of the loan.

In those circumstances the shareholder will be deemed to have sold the shares to the mortgagee for consideration equal to the amount of the loan. Similarly, this will also mean that the mortgagee will be deemed to have purchased the shares for that consideration.

Clause 4: Application of Assessment Act

Clause 4 will operate to adapt and apply for purposes of the recoupment tax, the machinery provisions of the income tax law.

Sub-clause (1) applies, with appropriate variations, specified provisions of the Assessment Act and the regulations made under that Act for the purposes of the assessment and collection of recoupment tax and the collection of late payment tax on recoupment tax under the Bill.

The specified provisions relate to definitions (section 6), extension of the legislation to Norfolk Island and other external Territories (section 7A), administration (Part II), non-monetary consideration (section 21), returns and assessments (Part IV), objections and appeals (Part V), collection and recovery of tax (Division 1 of Part VI), penal provisions and prosecutions (Part VII) and miscellaneous provisions (Part VIII).

The application of those provisions to recoupment tax will mean, for example, that a person will have the same rights of objection and, subject to sub-clause (7), the same rights of appeal against an assessment of recoupment tax as are available to a taxpayer who is dissatisfied with an income tax assessment. Likewise, the date on which recoupment tax will become due and payable will, by virtue of the application of section 204 of the Assessment Act, be the date specified in the notice of recoupment tax assessment as the date upon which tax is due and payable, not being less than 30 days after service of the notice, or, if no date is so specified, on the thirtieth day after service.

By sub-clause (2) a reference in the Bill to a particular provision of the Assessment Act is, unless the contrary intention appears, to be read as a reference to that provision in its application for the purposes of the collection of recoupment tax. For example, a reference in clause 13 to section 206 of the Assessment Act - a provision which permits the Commissioner of Taxation to extend the time for payment of income tax - is to be taken as a reference to that provision as it applies, by virtue of sub-clause (1), to recoupment tax and will mean that the reference is to be read as a reference to the extension of time to pay recoupment tax.

Sub-clause (3) specifically incorporates into this Bill the provisions of section 14 of the Assessment Act under which the Commissioner of Taxation is to make an annual report to the Parliament on the working of the Act.

Sub-clause (4) will permit the disclosure, without breach of tax secrecy provisions, of certain information.

Under paragraph (a) information concerning the affairs of a company or other persons may be disclosed to former owners of the company or persons included in the eligible promoters class who are liable to, or likely to be liable to, pay recoupment tax based on that company's unpaid company tax liability. The information which the Commissioner of Taxation is authorised to disclose to a person under this paragraph is information that is relevant to an assessment of that person's liability to pay recoupment tax.

In practice, this provision will mean that a person liable to pay recoupment tax will be enabled to have full knowledge of the basis on which that liability has been calculated. It will also ensure that the Commissioner will be able to disclose to persons seeking to pay a company tax liability of a company they formerly owned, details of the company's tax liability.

Under paragraph (b) the identity of, and details of the liability of, persons liable to pay promoters recoupment tax may be disclosed to a person who is, or is likely to become, jointly and severally liable with those persons to pay that tax.

This information may be required, for example, to enable a person who has paid any promoters recoupment tax to institute proceedings pursuant to clause 10 to recover part of the amount paid from the other persons who are jointly and severally liable to pay the tax.

Under sub-clause (5) the Commissioner of Taxation will be formally required to disclose to a former owner who makes a request in writing, all the information in his possession which relates to an arrangement which has the effect of rendering a company unable to pay its tax and is relevant to that person's liability to pay vendors recoupment tax. The existence of such an arrangement is, by virtue of the tests in paragraphs 5(1)(h) and 5(2)(h), an element in the vendor-shareholders being made liable for recoupment tax.

By sub-clause (6) the Commissioner of Taxation is to be authorised to amend an assessment made under either the Assessment Act or the new legislation for the purpose of giving effect to specified provisions of the Bill. In broad terms, the provisions which are specified are those provisions under which a person's liability to recoupment tax may alter upon a change occurring in the liability of the target company to pay company tax resulting from an amendment to the company's assessment. Also included in the specified provisions are those clauses of the new legislation which enable a person to lodge an election to eliminate a company's liability to undistributed profits tax (clauses 16 and 17).

Sub-clause (7) concerns appeals against assessments in respect of promotors recoupment tax and is set against the background of other provisions in the Bill (particularly clause 11) that concern court actions involving members of the promotors eligible class. The broad object of all the provisions is to minimise related matters concerning the one case being considered in a number of jurisidications, by vesting all jursidiction in the Federal Court of Australia.

As part of this package, sub-clause (7) substitutes for a Supreme Court of a State or Territory, the Federal Court as the court before which appeals against promotors recoupment tax assessments may be taken.

The income tax law confers on a taxpayer dissatisfied with an income tax assessment rights of objection, review by an independent Taxation Board of Review, appeal to a Supreme Court constituted by a single judge and, subject to the appropriate leave being granted, further appeals to the Federal Court of Australia and to the High Court. This system of court appeals also applies in relation to appeals by the Commissioner of Taxation.

Under sub-clause (7) the abovementioned hierachy of court appeals will, in relation to a promotors recoupment tax assessment, be replaced by one under which a right of appeal will lie in the first instance to the Federal Court constituted by a single judge and, subject to leave being granted, further appeals will lie to the Full Federal Court and to the High Court. Rights of objection and review by a Taxation Board of Review are not affected by sub-clause (7).

Sub-clause (8) prevents the Commissioner of Taxation from suing a person for recovery of promoters recoupment tax unless that person is the person on whom the notice of assessment was served (see sub-clause (11)) or that person has been given 30 days notice in writing by the Commissioner of his intention to commence proceedings for recovery of the tax.

Sub-clause (9) will ensure that the obligations of a liquidator to set aside a proportion of a company's assets after payment of secured creditors to meet the company's income tax liabilities also apply in relation to the company's liability to pay recoupment tax and late payment tax on that recoupment tax under this legislation.

Sub-clause (10) will mean that, where a former owner dies after an assessment of vendors recoupment tax is made on him or her (paragraph (a)) or where a person included in the eligible promoters class dies after an assessment of promoters recoupment tax has been made in relation to that class (paragraph (b)), the Commissioner of Taxation will be authorised to collect that recoupment tax and any late payment tax on that recoupment tax from the executor or administrator of the deceased person's estate.

This is to be contrasted with the situation where a person dies before an assessment of recoupment tax is made. Because a primary taxable amount or secondary taxable amount can only exist in relation to a natural person who is still alive, the estate of a person who is a former owner of shares in a stripped company and who died before an assessment of vendors recoupment tax is made will not be liable for payment of the recoupment tax applicable to his or her share of the evaded company tax.

Similarly, the estate of a person who was in a "promoter" group and who dies before an assessment of promoters recoupment tax is made in relation to the particular eligible promoters class will not be jointly and severally liable for payment of that tax because only a natural person who is still alive can be included in an eligible promoters class.

Under sub-clause (11) a notice of assessment or any other notice in respect of a liability to pay promoters recoupment tax will be deemed to be served on each person in the particular promoters class who is jointly and severally liable to pay that tax, provided it is served on one of them.

Sub-clause (12) is a measure to ensure that notice of an assessment of promoters recoupment tax will be validly issued if it identifies only one or some of the persons who are jointly and severally liable to pay that tax.

Clause 5: Primary taxable amounts

Clause 5 is a key provision in the legislation and applies to those persons who were the vendor-shareholders in a target company (or in more complex structures were vendor-shareholders in a company or companies through which the target company had been owned) or were the beneficial owners of shares in such a company which were sold by a nominee (bare trust).

By this clause (read with clause 8) these persons will be liable to recoup the unpaid company tax liability of the stripped company, in direct proportion (in the simple case) to their share of the total consideration for the sale of shares in the company. In the more complex case, a vendor-shareholder's proportion of a company's unpaid tax liability will be fixed on the basis of the person's share of consideration attributable to the effective disposal of the company.

The mechanism which clause 5 will employ to create this liability will be by establishing that a "primary taxable amount" is to exist in relation to each vendor-shareholder.

Nine tests for determining whether a "primary taxable amount" will be taken to exist in relation to a vendor-shareholder are set out in paragraphs (a) to (j) of sub-clauses (1) and (2). Sub-clause (1) deals with the simple case where the shares were sold in a single target company while sub-clause (2) deals with schemes involving the disposal of more than one company under the scheme, including those cases where the shares were sold in one or more holding companies of a target company.

Where all of the applicable nine tests are satisfied, paragraphs (1)(k) and (m) and (2)(k), (m) and (n) will specify how the primary taxable amount applicable to a particular vendor-shareholder is to be calculated. Each primary taxable amount will be a proportion of the unpaid company tax and, for this purpose, the unpaid company tax will, by reason of sub-clause 9(7), be reduced by any payments of promoters recoupment tax based on that company tax, the reduction being effected if necessary by amendment of an assessment of vendors recoupment tax made before the promoters recoupment tax was paid.

Under paragraphs (1)(k) and (n) the primary taxable amount in relation to a particular vendor-shareholder will be the same proportion of the company tax unpaid by the stripped company as the proportion of the shareholder's share of the total consideration for the sale of the shares in the company. Primary taxable amounts will, in broad terms, be calculated under paragraphs (2)(k), (m) and (n) by allocating the overdue company tax of a stripped company to vendor-shareholders by reference to their share of the total consideration received from the relevant sale of shares and by relating this to what had been their interest in the stripped company.

The primary taxable amount determined under sub-clause (1) or (2) in relation to a vendor-shareholder who is a nominee will, under sub-clause (5), in effect be transferred to the person on whose behalf the nominee held the shares.

Where a primary taxable amount exists in relation to a vendor-shareholder (or beneficial owner of shares under a bare trust), clause 8 of the Bill will make the person liable to pay tax on that amount and the Taxation (Unpaid Company Tax - Vendors) Bill 1982 will formally impose recoupment tax at the rate of 100 per cent on that primary taxable amount. It is by the use of this tax mechanism that the unpaid company tax will be recouped from vendor-shareholders.

In more detail, under sub-clause (1) a primary taxable amount will exist in relation to a vendor-shareholder where all the tests set out in paragraphs (a) to (h) and paragraph (j) where applicable of the sub-clause are satisfied.

Paragraph (a) sets out the initial test that some or all of the shares in a company were sold under a scheme entered into, whether in Australia or abroad, on or after 1 January 1972 and before 4 December 1980. By sub-clauses 3(13) to (15) shares disposed of under a scheme otherwise than by former sale will, in defined circumstances, be deemed to have been sold under the scheme. Paragraph (a) is to be read with paragraph (c).

As mentioned earlier in the "broad outline" part of this explanatory memorandum, these application dates will mean that the legislation will apply to pre-tax company profit stripping schemes entered into during a period which commenced shortly before such schemes came to be widely practised and which ends at the time at which such schemes were made a specific criminal offence by the Crimes (Taxation Offences) Act 1980.

Under paragraph (b) it is a requirement that the shares sold under the scheme were sold before the commencement date of the proposed Act, i.e., the date on which the Act receives the Royal Assent.

By virtue of sub-clause 3(3) the reference in paragraph (b) and other paragraphs of sub-clause 5(1) to the sale of shares under the scheme will, in a case where particular shares were sold under the scheme on more than one occasion, be read as a reference to the first sale of the shares under the scheme.

By paragraph (c) it is a condition that the rights attaching to the shares sold under the scheme were such that the vendor-shareholders were capable of controlling more than 90 per cent of the voting power in the company. In this context, sub-clause (6) provides that voting rights enjoyed by a person by reason of an office he or she held in the company will, if that person sold all of his or her shares in the company under the scheme, be treated as though they were attached to those shares.

The test under paragraph (c) is to be applied, by virtue of sub-clause 3(5), immediately before the time when all the shares were sold under the scheme or, in a case where the shares were not sold simultaneously, immediately before the time when the first of those shares were sold.

Typically, all the issued shares in a company were sold under the scheme and in that case the test in paragraph (c) would be satisfied. The test would also be satisfied in a case where issued shares carrying less than 10 per cent of the voting rights were not sold under the scheme.

If the case is one where not all the shares were sold, the persons whose shares were not sold will not, in relation to those shares, have any liability under the recoupment legislation.

Paragraph (d) makes it a condition that the total consideration received for the shares sold under the scheme was greater than the value of the net assets of the company after making allowance for any actual or contingent company tax liability in respect of income derived by the company up to the time of sale of the shares.

Under the formula specified in the paragraph, the value of the company's net assets is equal to the amount by which the total value of its assets (A) exceeds the aggregate of its liabilities (L) and any company tax liability (T) not included in L.

The value of each component in the formula is, by virtue of sub-clause 3(5), to be ascertained immediately before the time when the shares were sold under the scheme or, in a case where the shares were not sold simultaneously, immediately before the time when the last of those shares were sold.

The method of ascertaining the value of the company's assets, liabilities and company tax liability for the purpose of applying the formula is set out in sub-clauses (7) to (9) of clause 5.

Under paragraph (e) it is necessary that the Commissioner of Taxation has, either in the past or the future, made an assessment of the "ordinary company tax" or the "undistributed profits tax" payable by the target company in relation to either the year of income during which the shares were sold or a preceding year of income. Such an assessment having been made, paragraphs (f) and (g) set out further tests in relation to that assessment.

Paragraph (f) requires that the assessment is no longer open to dispute by providing that the period for objecting against the assessment must have expired and that any objection lodged must have been finalised.

The date on which the period for objecting against the assessment expires will be determined in accordance with section 185 of the Assessment Act and clauses 15 and 18 of the Bill.

Under section 185 of the Assessment Act the period for objecting against an assessment expires 60 days after service of the notice of assessment.

By reason of clause 18, a notice of the target company's assessment or a copy thereof will, except where they already have notice of it, be required to be served on a representative group of former owners, one of whom will, on the nomination of a majority of the group, be entitled to exercise the company's rights of objection against that assessment. In that case, the period for objecting against the assessment will expire 60 days after service of the notice of assessment (or a copy thereof) on that particular group of former owners.

Where, because former owners had notice of it, it is not necessary to serve a copy of the target company's notice of assessment on them (see notes on sub-clause 18(6)), the period for objecting against the assessment expires 60 days after service of the notice of assessment on the target company.

In a case where a target company ceased to exist before an assessment was made, the objection period would, by reason of clause 15, expire 60 days after the service of a notice of notional assessment on the former owners.

The circumstances in which an objection is to be taken as finalised are set out in detail in sub-clauses (10) to (12) of clause 5.

By paragraph (g) it is a condition that an amount of "ordinary company tax" or "undistributed profits tax" is owing at any time after the commencement of the proposed Act in respect of the assessment referred to in paragraphs (e) and (f). The amount unpaid is referred to in sub-clause 5(1) as the "overdue company tax" and represents the amount of tax evaded by the company in respect of that assessment that will be recouped from the former owners of the company.

The amount of the overdue company tax will be determined in accordance with the definitions in sub-clause 3(1) of "ordinary company tax" and "undistributed profits tax", the interpretative measures in sub-clauses 3(10) and (11) and the provision in sub-clause 9(7) treating a payment of promoters recoupment tax as a reduction of company tax.

For example, in a case where the assessment relates to "ordinary company tax" and no payments on account of that liability or related promoters recoupment tax have at the time been made to the Commissioner of Taxation, the amount of overdue company tax will, subject to sub-clauses 3(10) and 3(11), be equal to the tax assessed on the company's taxable income together with any additional tax for late payment of that tax. By virtue of sub-clause 3(10), any ordinary company tax payable in relation to the year of income in which the shares were sold that is attributable to any income derived by the company after the shares were sold will not be included in the amount of overdue company tax. If a copy of the company's notice of assessment has been served on vendor-shareholders under clause 18, the amount of overdue company tax will, by reason of sub-clause 3(11), include additional tax for late payment of the company tax only to the extent that it accrued from the date that is the thirtieth day after the service of the copy.

Paragraph (h) looks to the reason for the company's inability to meet its company tax liability. Under this test there must have been an arrangement (whether or not part of the scheme under which the shares were sold) that had the effect that the company was unable (or, if it had not ceased to exist, would have been unable) to pay all its company tax (including additional tax for late payment). This test reflects the basic test of the Crimes (Taxation Offences) Act 1980, that a person has entered into an arrangement for a purpose of securing that a company will be unable to pay its income tax.

The test in paragraph (j) applies in situations where immediately before the shares were sold the target company was carrying on a business which was not confined to deriving income from property. "Income from property" is an expression defined in sub-section 6(1) of the Assessment Act and, broadly, means income from dividends, interest and rent. In a case where paragraph (j) applies, it is a condition that the company did not continue to carry on the same business after the shares were sold.

This test would not be satisfied, for example, where the company concerned was the subject of a normal commercial takeover and under the new ownership continued to carry on the same business as before the change in ownership.

Where conditions (a) to (h) and, if applicable, (j) are met, paragraphs (k) and (m) specify how the primary taxable amount applicable to each vendor-shareholder is to be calculated. If conditions (a) to (j) are satisfied in relation to more than one unpaid assessment on a company, then a primary taxable amount will exist in relation to each unpaid assessment. This would occur where the conditions are satisfied in relation to assessments of both "ordinary company tax" and "undistributed profits tax" or in relation to assessments of either kind of tax in relation to more than one year of income.

Paragraphs (k) and (m) establish primary taxable amounts in relation to persons who exist at the time of making a recoupment tax assessment. Accordingly, a primary taxable amount will not exist in relation to a natural person who died before an assessment of recoupment tax assessment is made. However, by virtue of sub-clause (16), a primary taxable amount will be taken to exist in relation to a vendor-shareholder company or trust notwithstanding that it ceased to exist before an assessment of recoupment tax is made. This is to ensure that the liability to recoupment tax can be traced under clause 6 to former-owners or beneficiaries of such a company or trust.

Paragraph (k) applies where all the shares were sold under the scheme by one person. In that case, a primary taxable amount equal to the overdue company tax will be taken to exist in relation to that person.

Paragraph (m) applies where the shares were sold under the scheme by more than one person. In that situation, a primary taxable amount will exist in relation to each person who sold shares or an interest in shares under the scheme.

The primary taxable amount applicable to each vendor-shareholder will be a proportion of the overdue company tax, that proportion being the person's share of the total consideration for the shares sold under the scheme.

Sub-clause 5(2) applies broadly the same tests as sub-clause (1) in a case where the vendor-shareholders effectively disposed of more than one company, each of which satisfies a 90 per cent control test, and one or more of those companies had actual or contingent company tax liabilities at the date of the sale of the shares.

Some examples of situations which would come within the ambit of sub-clause (2) are :

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schemes under which the vendor-shareholders sold shares in a wholly owned holding company which in turn had one or more wholly owned subsidiary companies or sub-subsidiary companies; and

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schemes under which the vendor-shareholders sold shares in more than one company and in relation to which the company structure had been such that the result was a sale of the ownership of one of those or another company.

By this sub-clause primary taxable amounts will exist in relation to the vendor-shareholders where the applicable conditions listed in paragraphs (a) to (j) are fulfilled. Each paragraph is a suitably adapted counterpart to the corresponding paragraph in sub-clause (1) and the notes on the tests in sub-clause (1) are also relevant to this sub-clause.

Under paragraphs (a) and (b) it is necessary that a scheme was entered into, whether in Australia or abroad, between 1 January 1972 and 3 December 1980 (inclusive), under which some or all of the shares in one or more companies were sold and those shares were sold prior to the date on which the proposed Act receives the Royal Assent.

By paragraph (c) it is a condition that the rights attaching to the shares that were sold enabled the vendor-shareholders to control, either directly or through interposed entities, more than 90 per cent of the voting power in two or more companies. The companies in respect of which this test would be satisfied could include the companies in which the shares were sold and their subsidiary companies.

Under the "excess consideration" test set out in paragraph (d) the total consideration received for the shares sold under the scheme must have exceeded the value of the combined net assets of the companies concerned, after making allowance for their actual and contingent company tax liabilities in respect of income derived up to the time of sale. The value of each company's assets, liabilities and company tax liability is to be determined in accordance with sub-clauses (7) to (9).

By paragraph (e) it is required that an assessment of "ordinary company tax" or "undistributed profits tax" has been made in relation to one of those more than 90 per cent controlled companies in relation to the year of income in which the shares were sold or a preceding year of income.

Paragraph (f) requires that the period for objecting against the assessment has expired and that any objection against the assessment has been finalised.

Under paragraph (g) there must be an amount of "overdue company tax" in respect of that assessment, i.e., an unpaid amount of "ordinary company tax" or "undistributed profits tax" due and payable by the company in respect of income derived prior to the date of sale.

Paragraphs (h) and (j) require that the company with the overdue company tax liability was rendered unable to meet its company tax liability by an arrangement and did not carry on the same business after the shares were sold as it carried on before the shares were sold.

Where the above tests are satisfied, paragraphs (k) to (n) specify how the primary taxable amount applicable to each vendor-shareholder is to be calculated.

Paragraph (k) applies where all the shares were sold under the scheme by one person. In that case, a primary taxable amount equal to the overdue company tax will exist in relation to that person.

Paragraph (m) applies where the shares that were sold under the scheme were all in the one company and were sold by more than one person. In that case, the primary taxable amount applicable to each vendor-shareholder will be a proportion of the particular company's overdue company tax, that proportion being the same as the proportion of the total consideration for all the shares that was payable in respect of his or her shares (or an interest in shares).

Paragraph (n) applies where the shares were sold in more than one company by more than one person. In that situation, a primary taxable amount will exist in relation to each person who under the scheme sold shares or an interest in shares in the taxable company (i.e., the stripped company) or another company that was related to the taxable company immediately before any shares were sold under the scheme. In this context, sub-clause (13) provides that a company will be related to the taxable company if the value of that company's shares would have been diminished as a result of a reduction in the value of the taxable company's shares. This would occur where the company directly or indirectly held shares in the taxable company.

The primary taxable amount applicable to each vendor-shareholder will be a proportion of the particular company's overdue company tax, that proportion being the product of two factors, namely:

•

the person's proportionate share of the total consideration received for the shares sold in the taxable or related company (C/S); and

•

in a case where the shares sold were in a related company, the value of that company's proportionate beneficial interest in the net worth of the taxable company (N/W).

Sub-clause (3) will ensure that, if sub-clause (2) applies to a particular situation, sub-clause (1) will not apply.

Sub-clause (4) will authorise the Commissioner of Taxation to determine that a primary taxable amount does not exist in relation to a particular vendor-shareholder. Where more than one primary taxable amount exists in relation to a person in relation to a sale of shares the power being conferred on the Commissioner is to be available in relation to each amount and may, if appropriate, be exercised in relation to one amount and not exercised in relation to another amount.

By paragraph (a) a primary taxable amount may be taken not to exist where, having regard to the particular circumstances concerning the sale of the shares, the reasons why the company was unable to discharge its income tax liability and any other relevant circumstances, the Commissioner considers it unreasonable for that primary taxable amount to exist. An example of a situation where this power might appropriately be exercised is given earlier in the "broad outline" part of this explanatory memorandum.

Under paragraph (b) a primary taxable amount may be taken not to exist if it is less than $100. The existence in relation to a person of a number of primary taxable amounts each less than $100 would be a factor relevant to whether relief should be given in reliance on paragraph (b).

A person who is called on to pay recoupment tax and is dissatisfied with the Commissioner's decision not to apply sub-clause (4) in his favour will, by reason of sub-clause 4(1), have usual rights of objection and reference to an independent Taxation Board of Review.

Sub-clause (5) has the effect that a vendor-shareholder who holds shares merely as a nominee of another person (that is under a bare trust) will not be liable for recoupment tax. Instead, a primary taxable amount will be taken to exist in relation to the person or persons on whose behalf the nominee held the shares.

The primary taxable amount applicable to each such person will be a proportion of the primary taxable amount that would otherwise exist in relation to the nominee, that proportion being equal to the person's proportionate interest under the bare trust.

Sub-clause (6) is designed to ensure that the legislation will apply in circumstances where one or more of the vendor-shareholders controlled the voting power in a company not by virtue of voting rights attaching to their shares but by virtue of voting rights which attached to an office held in the company. For example, under a company's constituent document voting rights may have been conferred on the shareholder who held the position of governing director of the company.

By sub-clause (6) a vendor-shareholder who was capable of controlling any of the voting power in the target company by reason of being an office-holder in the company will, if all of his or her shares were sold under the scheme, be treated for the purposes of the control tests in paragraphs (1)(c) and (2)(c) as having controlled that voting power by virtue of rights attaching to those shares.

Sub-clauses (7) to (9) set out how the value of a company's assets, liabilities and company tax liability, immediately before the last sale time, are to be ascertained for the purpose of applying the formulae in paragraphs (1)(d) and (2)(d). By virtue of sub-clause 3(5) where shares were sold at different times under the scheme, the last sale time will be taken to be the time when the last of the shares that were sold under the scheme were sold.

By paragraphs (a) and (b) of sub-clause (7) the value of a company's assets and the amount of a company's liabilities will, where applicable, be taken to be the amounts agreed upon by the parties to the sale of shares under the scheme for the purposes of that sale. In the absence of such agreement, the amounts will, subject to rights of objection, be taken to be such amounts as the Commissioner of Taxation determines.

The value of a company's assets thus ascertained is to be reduced where sub-clause (8) applies. Under sub-clause (8), where the assets of a group of companies are being aggregated for the purpose of applying the formula in paragraph 5(2)(d) and the assets of one company in the group include a beneficial interest in the shares of another company in the group, the value of the former company's assets is to be reduced by that part of the value attributable to the beneficial interest. This reduction will ensure that there is no "double-counting" of assets in arriving at the aggregate value of the group's assets.

A company's actual and contingent income tax liability at the time of sale of shares is dealt with by paragraph (7)(c) and sub-clause (9). This tax liability will be ascertained by aggregating any tax liability (including late payment penalty) that is already payable by the company because tax has been assessed (sub-paragraph (7)(c)(i)) (see also sub-clause 3(9)) with any future (unassessed) tax liability (not including late payment penalty) of the company that might reasonably be expected to arise (sub-paragraphs (7)(c)(ii) and (iii)).

The question whether a future tax liability might reasonably be expected to arise is an objective test which, by virtue of sub-clause (9), is to be applied on the basis of full knowledge of the affairs of the company, the assumed continued existence of the company, and in the case of the year of income in which the shares were sold, the income derived by the company up to the time of sale. The principles embodied in sub-clause 3(12) may also be relevant. In addition, in the case of a future tax liability to undistributed profits tax, it will be necessary to assume that the only dividends which might be paid by the company after the time of sale are those dividends which were in fact paid by the company during the appropriate prescribed distribution period ending 10 months after the end of the year of income.

Sub-clauses (10) to (12) define, for the purposes of paragraphs 5(1)(f) and 5(2)(f), when an objection by a company (or a vendor-shareholder acting in place of the company) against a company assessment is to be treated as finalised. Broadly speaking, an objection will be treated as finalised for the purpose of those paragraphs when the rights of review and appeal under the provisions of the Assessment Act have been exhausted or have lapsed through the effluxion of time.

Under sub-clause (10) an objection will be treated as finalised for the purposes of paragraphs 5(1)(f) and 5(2)(f) where any proceedings which have been instituted in relation to the objection under the provisions of the Assessment Act relating to reviews and appeals (Division 2 of Part V) have been determined and the time for instituting proceedings under those provisions has expired.

By sub-clause (11) where an objection or a request for a reference to a Board of Review or an appeal to a court has lapsed or otherwise been terminated (e.g., where a company that has lodged an appeal has ceased to exist before that appeal has been heard) that proceeding is to be regarded as having been determined.

By virtue of sub-clause (12) the possibility that an extention of time for the lodgment of an appeal might be granted by a court is to be disregarded in ascertaining whether the time for instituting proceedings has expired.

Sub-clause (13) is a drafting measure to assist in the interpretation of paragraph (2)(n).

By paragraph (a) a company will be taken to be related to a target company immediately before any shares were sold under the scheme if the value of that company's shares could be expected to decrease consequent upon a reduction in the value of the target company's shares.

Under paragraph (b) the net worth of a company will be equal to the amount by which the value of a company's assets exceeds the amount of its liabilities. For this purpose, sub-clause (14) provides that the value of a company's assets and the amount of a company's liabilities will, where applicable, be taken to be the amounts agreed upon by the parties to the sale of shares under the scheme for the purposes of that sale. In the absence of such agreement, the amounts will be taken to be such amounts as the Commissioner of Taxation determines.

Sub-clause (15) clarifies the meaning of the term "arrangement or transaction" as used in paragraphs (5)(1)(h) and (5)(2)(h).

Paragraph (a) ensures that the term "arrangement or transaction" carries a meaning that includes both an arrangement and a transaction and any series or combinations of arrangements and/or transactions.

The term "arrangement" is itself further defined in paragraph (b) so as to include an arrangement, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings.

Sub-clause (16) is a measure to ensure that a primary taxable amount will be taken to exist in relation to unpaid company tax notwithstanding that a vendor-shareholder company or trust which would be liable to recoupment tax on that primary taxable amount has ceased to exist. By virtue of sub-clause 6(1) the persons who were behind such a vendor-shareholder will become liable for recoupment tax on a "secondary taxable amount".

Clause 6: Secondary taxable amounts

Clause 6 sets out the circumstances under which those persons who, in a chain of ownership, are behind the primary-level vendor-shareholders may become liable for recoupment tax. The clause will also identify the persons who will be liable at such a secondary level and will provide the means by which their liability is to be calculated.

Broadly, the liability of a vendor-shareholder (or the beneficial owner of shares held by a nominee vendor) to pay recoupment tax will be traced to the persons behind that shareholder where it is a company or trust that is unable to pay the recoupment tax or it would be inappropriate to expect the primary owner to pay the recoupment tax. Where the liability is traced to other companies or trusts which in turn cannot or ought not be expected to pay the recoupment tax the tracing process will continue a stage further, and so on. The tracing process will stop when the liability to pay recoupment tax falls upon individuals or upon companies or trusts which are able to and can appropriately be expected to pay the tax.

The mechanism by which clause 6 will make persons liable at a secondary level will be by providing that, in specified circumstances, "secondary taxable amounts" will be applicable to those persons.

The circumstances in which secondary taxable amounts will be taken to exist in relation to those persons behind a particular vendor-shareholder are set out in sub-clauses (1) to (3). These are, very broadly, that the company or trust to which liability to pay recoupment tax has been allocated under clause 5 or traced by virtue of a previous application or previous applications of clause 6 :

(a)

no longer exists (sub-clause 6(1));

(b)

now has different shareholders or beneficiaries as a consequence of sales of shares or beneficial interests (sub-clause 6(2)); or

(c)

is unlikely to pay all or part of that tax (sub-clause 6(3)).

Where the circumstances specified in sub-clause (1), (2) or (3) exist, the relevant sub-clause provides that secondary taxable amounts will be taken to exist in relation to those shareholders or beneficiaries who had firm rights to a capital distribution from the company or a distribution of trust corpus, those rights normally being viewed as at the time when the shares in the target company were sold.

The secondary taxable amount applicable to each such shareholder or beneficiary will be a proportion of the vendors taxable amount (a share of the unpaid company tax) or of the unpaid recoupment tax (where sub-clause 6(3) applies) applicable to the company or trust. Broadly, that proportion will be equal to what would have been the person's share if a distribution of capital or corpus had been made by the company or trust immediately before the relevant time (normally the time of sale of shares in the target company), unless sub-clause (4), (5), (6), (8), (9) or (10) applies.

Those sub-clauses specify situations where a person who has received property from a company or trust whose liability to pay recoupment tax is being traced under sub-clause (1), (2) or (3) is to be treated as having had a right to a distribution of capital or corpus at the relevant time. In such a case, the secondary taxable amount applicable to each person who had actual or deemed rights to capital at the relevant time will be determined by the Commissioner of Taxation on the basis of guidelines listed in sub-clause (16).

Where a secondary taxable amount exists in relation to a person, that person will, by virtue of sub-clause 7(1), be liable to pay the tax which will be imposed on that amount (at a rate of 100 per cent) by the Taxation (Unpaid Company Tax - Vendors) Bill 1982.

In more detail, under sub-clause (1) secondary taxable amounts will arise where a vendors taxable amount is applicable to a company or trust which has been wound up before an assessment of recoupment tax is made.

In that case, secondary taxable amounts will be taken to exist in relation to those former shareholders of the defunct company or former beneficiaries of the defunct trust who would have been entitled to participate in a distribution of capital or corpus by the defunct company or trust, if such a distribution had been of an amount equal to the "distribution amount" and had been made immediately before the "relevant distribution time".

The terms "distribution of capital" and "distribution of corpus" are defined in sub-clause 3(1) and refer respectively to a distribution of surplus funds to shareholders on a winding up of the company and to a distribution of the trust's corpus amongst those beneficiaries having a vested interest in the corpus.

By virtue of sub-clause 6(12), the "distribution amount" means, in broad terms, the consideration received by a vendor-shareholder company or trust for the sale of shares in the target company (where that vendor-shareholder's liability is being traced) or an appropriate part of that consideration (where the secondary liability of a company or trust behind the vendor-shareholder is being traced). The "relevant distribution time" is defined in sub-clause (13) and is generally the time when the shares in the target company were sold.

The application of those definitions may be illustrated by taking the example of a vendor-shareholder company that is now defunct. In that case, secondary taxable amounts will be taken to exist in relation to those former shareholders of the defunct company who would have benefited if, immediately before the time when the company sold its shares in the target company, it had been liquidated and returned to shareholders surplus funds equal in amount to the consideration it received for the sale of those shares.

The secondary taxable amount applicable to each person who would have been entitled to participate in the notional capital distribution by the defunct company or trust will be a proportion of the vendors taxable amount applicable to that company or trust, that proportion being that person's share of the notional capital distribution, unless sub-clause (4), (5), (6), (8), (9) or (10) applies.

Those sub-clauses operate in defined circumstances to deem a person to have had a right to participate in the notional capital distribution. In a case where one of the specified sub-clauses applies, the secondary taxable amount applicable to each person who had an actual or deemed right to a capital distribution will be such part of the eligible taxable amount applicable to the company or trust as the Commissioner of Taxation determines, having regard to the matters specified in sub-clause (16).

Under sub-clause (2) secondary taxable amounts may arise where a vendors taxable amount exists in relation to a company or a trust (referred to in the sub-clause as the relevant company or relevant trust estate) and shares in that company (or its holding company) or a beneficial interest in that trust (or its holding trust) were sold after the time of sale of the shares (or interest in shares) in the target company which gave rise to that vendors taxable amount. The terms "holding company" and "holding trust estate" are defined in sub-clause (14).

In those circumstances, secondary taxable amounts will be taken to exist if the Commissioner of Taxation considers that, by reason of the change in beneficial ownership, it would be unreasonable for the relevant company or trust to be liable to pay the recoupment tax. The Commissioner could be expected to form such a view where the price received by the former owners of the relevant company or former beneficiaries of the relevant trust for their shares or beneficial interests reflected the benefit received by that entity upon the sale of shares in the target company and, therefore, the benefit of the evaded company tax will have flowed to these former owners.

Where the Commissioner exercises this authority, secondary taxable amounts will be taken to exist in relation to those former shareholders of the relevant company or former beneficiaries of the relevant trust who would have been entitled to participate in a notional capital distribution by the company or trust of the same kind as commented on in the notes on sub-clause (1).

The secondary taxable amount applicable to each such person will be a proportion of the vendors taxable amount applicable to the relevant company or trust, that proportion being calculated on the basis of their respective firm rights to the notional capital distribution, except where sub-clause (4), (5), (6), (8), (9) or (10) applies. The effect of these sub-clauses is explained in the notes on sub-clause (1).

In addition, sub-clause (2) provides that the relevant company or the trustee of the relevant trust estate will be treated as not being liable to pay recoupment tax on the vendors taxable amount.

Sub-clause (3) establishes a secondary taxable amount where recoupment tax is payable by a company or a trustee, but the Commissioner of Taxation considers that a part or all of the recoupment tax is unlikely to be paid. This could occur, for example, where a vendor-shareholder company has itself been stripped of all assets, so that it has been rendered unable to pay either company tax or recoupment tax.

As is the case under sub-clauses (1) and (2), secondary taxable amounts will apply to those persons who had rights to a capital distribution from the company or trust at the relevant distribution time.

The secondary taxable amount applicable to each such person will be a proportion of the recoupment tax payable by the company or trust, that proportion being calculated in the same manner as applies under sub-clause (1) or (2). If any part of the recoupment tax has been paid this will be taken into account under clause 9.

Under sub-clause (4) a shareholder who in fact received a distribution of capital from a company after the time of sale of shares in the target company will be deemed to have had a right to a distribution of capital from that company at the relevant distribution time, for the purpose of tracing to others that company's liability to pay recoupment tax under sub-clause (1), (2) or (3).

In addition, the vendors taxable amount that exists in relation to the company will be taken to be a prescribed taxable amount, which under the paragraphs of those sub-clauses (e.g., paragraph (f) of sub-clause (1)) has the effect that the apportionment of the company's liability to pay recoupment tax between the persons who had actual or deemed capital distribution rights will be determined by the Commissioner of Taxation having regard to the matters listed in sub-clause (16).

Sub-clause (5) deals with yet other ways in which persons might effectively have received amounts from a company to which a recoupment tax liability attaches. Under the sub-clause, a person who acquired certain property from a vendor-shareholder company will be treated as having had a right to a distribution of capital from that company at the relevant distribution time for the purpose of tracing the company's liability to pay recoupment tax under sub-clause (1), (2) or (3).

The person must have acquired the property from the vendor-shareholder company in the circumstances set out in paragraph (c), (d) or (e) of the sub-clause.

Paragraph (c) applies where under a scheme the company transferred property by way of loan, being a transfer that in the Commissioner's view would not have happened if the company had not sold shares in the target company, and after the transfer the company's right to recover the whole or a part of the loan was assigned to another person or the company either had released or abandoned or may be expected to release, abandon or not to demand repayment of, the loan (or part thereof).

Paragraph (d) applies where the company transferred property by way of a settlement or a gift to a trust of which the company or an "associate" (defined in sub-clause 3(1) was a beneficiary or was capable of being made a beneficiary by exercise of a power of appointment under the trust instrument and the Commissioner considers that the transfer would not have occurred if the company had not sold shares in the target company.

Paragraph (e) applies where the company acquired redeemable shares or redeemable units in a unit trust for a consideration greater than their redemption value and in the Commissioner's opinion the acquisition would not have been made if the company had not sold shares in the target company. Drafting measures applicable to this paragraph are set out in sub-clause (17).

Where paragraph (c), (d) or (e) applies, the person who is treated under paragraphs (f), (g), (h) and (j) as having rights to capital in the vendor-shareholder company is the assignee (where the loan is assigned) or the borrower (where the loan is released, etc.) - (paragraph (c) cases), the trustee (paragraph (d) cases) or the company in which the shares were acquired or the trust in which the units were acquired (paragraph (e) cases).

Under sub-clause (6) persons who acquire property from a company (referred to in the sub-clause as the relevant company) under certain schemes will, for the purpose of tracing that company's liability to pay recoupment tax under sub-clause (1), (2) or (3), be treated as having had a right to a distribution of capital from that company.

The sub-clause applies where under a scheme the relevant company received a capital distribution from another company or a trust, being a company or trust whose liability to pay recoupment tax has been traced to the relevant company, and a person acquired property of the relevant company (otherwise than by way of a distribution of capital) which the Commissioner considers would not have been acquired if the capital distribution to the relevant company had not been made.

In other words, the sub-clause treats amounts stripped from a company as being amounts distributed by way of capital distribution from the company.

Sub-clause (7) is designed to allow the further application of sub-clauses (6) (stripping of a company) and (10) (stripping of a trust) where the person who acquired the property was in turn a company or trust. Each of those sub-clauses is, in part, expressed to operate where there has been a distribution of capital of a company. These provisions will by virtue of sub-clause (7) also operate on the basis of circumstances in which sub-clause (6) deems a distribution of capital of a company to have been made.

Sub-clause (8) applies in relation to a trust estate and mirrors the application of sub-clause (4) in relation to a company. Under sub-clause (8) a beneficiary of a trust estate to whom corpus of the trust is in fact paid or applied for his or her benefit after the time of sale of shares in a target company will, for the purpose of tracing the trust's liability to pay recoupment tax under sub-clause (1), (2) or (3), be treated as having had a right to a distribution of corpus from that trust.

Similarly sub-clause (9) which applies to trusts is a companion measure to sub-clause (5), which applies to companies. Under sub-clause (9), a person who acquired property from a vendor-shareholder trust will be treated as having had a right to a distribution of corpus from that trust for the purpose of tracing the trust's liability to pay recoupment tax under sub-clause (1), (2) or (3).

The person must have acquired the property from the vendor-shareholder trust in the circumstances set out in paragraphs (c), (d) or (e) of the sub-clause. These circumstances are comparable to those which are specified in relation to the acquisiton of property from a vendor-shareholder company under the corresponding paragraphs of sub-clause (5).

Sub-clause (10) is the "trust" version of the "company" provisions of sub-clause (6). Under sub-clause (10), persons who have acquired property from a trust (referred to in the sub-clause as the relevant trust estate) under certain schemes will be deemed to have had a right to a distribution of corpus from that trust for the purpose of tracing that trust's liability to pay recoupment tax under sub-clause (1), (2) or (3).

The sub-clause applies to schemes under which the relevant trust received a capital distribution from another trust or a company, being a trust or company whose liability to pay recoupment tax has been traced to the relevant trust, and a person acquired property of the relevant trust (in any way except by way of a distribution of corpus) which the Commissioner considers would not have been acquired if the capital distribution to the relevant trust had not been made.

An example of a scheme against which this clause is directed is one under which a vendor-shareholder company distributed its capital to a trust (the relevant trust) whose only beneficiaries were children and the funds of that trust were stripped by way of an irrecoverable loan being made to the children's parents. In that situation, the parents would be deemed to have had a right to a distribution of the trust's corpus, they being the persons who effectively received the consideration for the sale of shares in the target company.

Sub-clause (11) is a companion measure to sub-clause (7) and, like it, is designed to allow the further application (and possibly successive applications) of sub-clauses (6) and (10). Where sub-clause (10) has operated to treat an acquisition of property as being a distribution of trust corpus, it will be so treated for purposes of any application of sub-clause (6) or (10) that depends on a distribution of trust corpus having been made.

Sub-clause (12) defines the term "distribution amount" in relation to a vendors taxable amount. The term is used in sub-clauses (1), (2) and (3) to refer to the amount of a notional capital distribution by a company or trust in relation to which the vendors taxable amount exists.

In a case where a primary taxable amount exists in relation to a company or trust, the distribution amount will be the consideration received by that entity for the sale of its shares or interest in shares in the target company.

In a case where a secondary taxable amount exists in relation to a company or trust, the distribution amount will be a proportion of the distribution amount applicable to the entity whose liability to pay recoupment tax was traced to the company or trust, that proportion being the share of that liability that was traced to the company or trust.

Sub-clause (13) defines the "relevant distribution time" in relation to a vendors taxable amount that exists in relation to a company or trust. The term is used in sub-clauses (1), (2) and (3) to specify the time when a notional capital distribution by that company or trust is to be taken as having occurred.

Where the company or trust existed at the "time of sale" (see notes on paragraph 3(5)(c)) of the shares or interest in shares in the target company which, by allocation or tracing, gave rise to the vendors taxable amount, the relevant distribution time will be taken to be that time.

However, if the company or trust did not exist at the time of sale, the relevant distribution time will be the time when the company or trust was created. This would occur, for example, where the company or trust was created and became a beneficiary in a vendor-shareholder trust after the time of sale and, by reason of having received an actual distribution of corpus, the liability of the vendor-shareholder trust is traced to it.

If the Commissioner of Taxation considers that the relevant distribution time determined in accordance with these rules is inappropriate then the relevant distribution time will be such later time as the Commissioner determines. An example of where a later time might be appropriate would be where an existing "shelf-company" became a beneficiary in a trust after the time of sale. In that case the appropriate time would be the time when the company became a beneficiary in the trust.

Sub-clauses (14) and (15) define when a company will be taken to be a "holding company" of another company or a "holding trust estate" in relation to another trust estate. Under sub-clause (2) the liability of a company or a trust may be traced where there has been a sale of shares in a holding company of that company or of a beneficial interest in a holding trust estate in relation to that trust.

A company is a holding company of another company if it has a controlling interest in that company either directly or through other companies in which it has a controlling interest.

A trust is a holding trust estate in relation to another trust if it has a beneficial interest in that trust either directly or through other trusts in which it has a beneficial interest.

Sub-clause (15) permits the successive application of the principles of sub-clause (14).

Sub-clause (16) specifies the matters which the Commissioner of Taxation is to have regard to in determining how the liability of a company or trust to pay recoupment tax is to be traced in a case where a person is deemed by virtue of sub-clause (4), (5), (6), (8), (9) or (10) to have had a right to a capital distribution by the company or trust.

In determining the secondary taxable amounts that are to apply to the persons having firm or deemed rights to the capital distribution referred to in sub-clause (1), (2) or (3) the Commissioner will have regard to:

•

the firm rights of any of those persons to the notional capital distribution;

•

the amount of any actual distributions to any of those persons of the capital of the company or the corpus of the trust estate to which sub-clauses (4) or (8) apply;

•

the amount or value of any property acquired by any of those persons from the company or trust where they are deemed to have capital distribution rights by virtue of that acquisition;

•

the consideration received by any of those persons for redeemable shares or redeemable units acquired by the company or trust and the redemption value of those shares or units where they are deemed to have capital distribution rights by reason of the receipt of that consideration; and

•

any other relevant matters.

As is the case with other matters which the Bill leaves to determination by the Commissioner, a person who is dissatisfied with the Commissioner's decision will have usual rights of objection and reference to an independent Taxation Board of Review.

Sub-clause (17) defines a number of terms used in sub-clauses (5) and (9).

Under paragraph (a) the "redemption value" of redeemable shares or units will be taken to be, where applicable, the amount for which they were actually redeemed or otherwise the amount for which they could be expected to be redeemed if redemption were to occur at the time when sub-clause (5) or (9) is being applied.

By paragraphs (b) and (c) a company share or trust unit will be regarded as redeemable if it is liable to be redeemed at the option of the company or of the trustee of the unit trust or if it was issued pursuant to an arrangement entered into for a purpose of enabling the company or trustee to distribute, in one way or another, any money or property to or on behalf of the person to whom the shares or units were issued.

Paragraph (d) ensures that a person to whom redeemable shares or units were issued or allotted will be regarded as having acquired them.

Paragraph (e) will ensure that consideration paid or given by a person for the acquisition of redeemable shares or units will be taken to include any payment or other consideration given by the person to the company or trustee in respect of the shares or units, whether by way of a premium, as application or allotment moneys, calls of unpaid share capital or otherwise.

Sub-clause (18) will authorise the Commissioner of Taxation to determine that a secondary taxable amount does not exist in relation to a person.

By paragraph (a) a secondary taxable amount may be taken not to exist where, having regard to the particular circumstances which gave rise to its existence and any other relevant circumstances, the Commissioner considers it unreasonable for that secondary taxable amount to exist.

Under paragraph (b) a secondary taxable amount may be taken not to exist if it is less than $100. The existence in relation to a person of a number of secondary taxable amounts each less than $100 would be a factor relevant to whether relief should be given in reliance on paragraph (b).

Sub-clause (19) is a safeguarding measure to ensure that a secondary taxable amount can be taken to exist in relation to a company or a trust notwithstanding that the company or trust has ceased to exist. This is necessary to enable the liability of the defunct company or trust in relation to that secondary taxable amount to be further traced under sub-clause (1) to the persons who had actual or deemed capital rights in respect of that company or trust.

By sub-clause (20) a distribution of capital of a company will be taken, for the purposes of clause 6, to have been received by a person not only when it is actually paid over to the person but also when it is re-invested, accumulated, capitalised, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on behalf of the person or as the person directs.

Sub-clause (21) is a measure which provides that where the term "recoupment tax" is used in clause 6 it will include the tax payable under clause 13 for late payment of recoupment tax, unless the contrary intention appears. This will mean, for example, that where a company or trust is unlikely to pay an amount of recoupment tax and, by virtue of sub-clause (3), its liability is traced to persons behind the company or trust those persons will become liable for both the unpaid recoupment tax payable by the company or trust and any late payment tax that has already accrued in respect of that tax.

Clause 7: Promoters taxable amounts

Clause 7 applies to those persons who were the promoters of, or similarly instrumental in, schemes to strip companies of pre-tax profits and, where such a promoter was a company or trust, to the persons who directly or indirectly owned, controlled or stripped funds from it.

By this clause (read with clause 8) these persons will be jointly and severally liable to recoup 20 per cent of the unpaid company tax liability of the stripped company (where the former owners are also liable to pay recoupment tax) or 100 per cent of that liability (where no former owner is liable to effect recoupment).

The mechanism which clause 7 will employ to create this liability will be by establishing that a "promoters taxable amount" is to exist in relation to the "eligible promoters class".

Eight tests for determining whether a "promoters taxable amount" will be taken to exist in relation to the eligible promotors class are set out in paragraphs (a) to (h) of sub-clauses (1) and (2). Sub-clause (1) deals with the simple case where the shares were purchased in a single target company while sub-clause (2) deals with schemes involving the acquisition of more than one company under the scheme.

The eight tests are expressed to apply in relation to a purchase of shares under a scheme and mirror the tests which apply under sub-clauses 5(1) and 5(2) in relation to the corresponding sale of shares under the scheme, except that there is no "excess consideration" test.

The absence of such a test means that the legislation can apply to promoters even if the promoter's fee (which may have been determined by reference to both accumulated profits and pre-tax profits or may have involved the promoter taking over the amount of a tax provision in the company's accounts) exceeded the evaded company tax and thus the "excess consideration" test applicable to vendor-shareholders is not satisfied.

Where the applicable eight tests are satisfied, paragraphs (j) and (k) of sub-clauses (1) and (2) specify how the promoters taxable amount in relation to the eligible promoters class is to be calculated. For each unpaid company assessment the promoters taxable amount will be 20 per cent of the company tax unpaid by the stripped company, except where no former owner is liable to pay recoupment tax in respect of that assessment in which case it will be 100 per cent of the unpaid company tax.

The persons who will fall into the eligible promoters class in relation to a purchase of shares under a scheme are described in sub-clauses (4) to (6). Broadly, these persons will be the promoters of the scheme (principally, the persons who purchased shares under the scheme, their brokers or agents in the purchase transaction and their associates who provided financial assistance in relation to the purchase) and, in the more usual cases where such a promoter operated through a company or a trust, the shareholders, directors, trustees and beneficiaries who directly or indirectly owned or controlled that company or trust. In addition, a person who stripped funds from a company or trust included in the promoters class will also be included in that class and, if it in turn is a company or trust, the persons who directly or indirectly owned, controlled or stripped it will also be included. By reason of clause 11 a person will not be included in the eligible promoters class where, on application by the person, the Federal Court of Australia declares that it would not be just and equitable for the person to be included.

Where a promoters taxable amount exists in relation to an eligible promoters class, clause 8 of the Bill will make the persons in that class jointly and severally liable to pay tax on that amount and the Taxation (Unpaid Company Tax - Promoters) Bill 1982 will formally impose recoupment tax at a rate of 100 per cent on that promoters taxable amount.

The provisions of the clause are explained in more detail in the notes that follow.

Under sub-clause (1) a promoters taxable amount will exist in relation to the promoters eligible class where all of the applicable tests set out in paragraphs (a) to (h) of the sub-clause are satisfied. These tests mirror the tests (other than the "excess consideration" test) which apply under sub-clause 5(1) and require that:

•

shares in a company carrying more than 90 per cent of the voting power in the company were purchased under a scheme entered into, whether in Australia or abroad, on or after 1 January 1972 and before 4 December 1980 and those shares were purchased before the commencement of the proposed Act (paragraphs (a) to (c));

•

an assessment has been made of ordinary company tax or undistributed profits tax payable by the target company in relation to either the year of income during which the shares were purchased or a preceding year of income and the period for objecting against that assessment has expired and any objection lodged has been finalised (paragraphs (d) and (e));

•

an amount of company tax remains unpaid in respect of that assessment (paragraph (f)). (The amount unpaid is referred to as the "overdue company tax" and will be determined in accordance with the definitions in sub-clause 3(1) of "ordinary company tax" and "undistributed profits tax", the limitation on late payment penalty arising from sub-clause 3(11) and the provisions requiring that certain payments of company tax made by the former owners are to be disregarded for the purpose of ascertaining the liability of promoters (clauses 20 and 21));

•

an arrangement was entered into that had the effect that the company was unable to pay all its company tax liability (paragraph (g)); and

•

the company did not after the purchase carry on the same business as it carried on before the purchase (paragraph (h)).

Where the above tests are satisfied, paragraphs (j) and (k) specify how the promoters taxable amount applicable to the promoters eligible class is to be calculated. If applicable conditions (a) to (h) are satisfied in relation to more than one unpaid assessment on a company, then a promoters taxable amount will exist in relation to each unpaid assessment.

Paragraph (j) applies in cases where at least one former owner will also be liable to pay recoupment tax in relation to the unpaid assessment or would be so liable but for the fact that the Commissioner of Taxation has exercised or may exercise his power under paragraph 5(4)(b) or 6(18)(b) to free a person from a vendors recoupment tax liablility of less than $100. Under paragraph (j), a promoters taxable amount equal to 20 per cent of the overdue company tax will be taken to exist in relation to the promoters eligible class.

Paragraph (k) applies where no former owner will be liable to pay recoupment tax in relation to the unpaid assessment and this lack of liability will not arise merely because a person will be freed from a liability of less than $100 under paragraph 5(4)(b) or 6(18)(b).

Situations which would come within the ambit of paragraph (k) are:

•

schemes under which the vendor-shareholders were all individuals and all those persons died before any assessment to vendors recoupment tax was made;

•

schemes in respect of which the "excess consideration" test in paragraph 5(1)(d) or 5(2)(d) is not satisfied, for example, because the proportion of accumulated profits to pre-tax profits of the target company was high or the amount of a prior year tax provision was paid by the vendors to the promoter; and

•

schemes under which vendor-shareholders received a price for their shares that was diminished by a provision for company tax on the preceding year's profits but not on the current year's profits and the vendor-shareholders are freed from liability in respect of that prior year pursuant to paragraph 5(4)(a).

Under paragraph (k) the promoters taxable amount applicable to the promoters eligible class will be equal to the overdue company tax.

Sub-clause 7(2) applies broadly the same tests as sub-clause (1) in a case where the promoters effectively acquired more than one company under a scheme.

By this sub-clause a promoters taxable amount will exist in relation to the eligible promoters class where the applicable tests listed in paragraphs (a) to (h) are fulfilled. These tests mirror the tests (other than the "excess consideration" test) in sub-clause 5(2) and require that:

•

shares in one or more companies were purchased and the rights attaching to those shares enabled the purchasers to control, either directly or through interposed entities more than 90 per cent of the voting power in two or more companies;

•

an assessment of company tax has been made in relation to one of those more than 90 per cent controlled companies in relation to the year of income during which the shares were purchased or a preceding year of income and the period for objecting against that assessment has expired and any objection lodged has been finalised;

•

an amount of company tax remains unpaid in respect of that assessment;

•

that tax was unpaid as a result of an arrangement; and

•

the company did not after the purchase carry on the same business as it carried on before the purchase.

Where these conditions are met, paragraphs (j) and (k) specify how the promoters taxable amount applicable to the promoters eligible class is to be calculated.

As already explained in relation to paragraphs (1)(j) and (k) - which are virtually identical to paragraphs (2)(j) and (k) - the promoters taxable amount will be equal to 20 per cent of the overdue company tax or, if none of the former owners is liable to pay vendors recoupment tax, the overdue company tax.

Sub-clause (3) will ensure that, if sub-clause (2) applies to a particular situation, sub-clause (1) will not apply.

Sub-clauses (4) to (6) describe the persons who will fall into the eligible promoters class for the purposes of applying sub-clause (1) or (2) in relation to a purchase of shares under a scheme.

The eligible promoters class is determined at the time an assessment of promoters recoupment tax is made and will include only persons who still exist at that time. Accordingly, the estate of an individual promoter who died before an assessment is made would not be liable for promoters recoupment tax.

Under sub-clause (4), the eligible promoters class will comprise -

•

each person who purchased shares under the scheme;

•

each person who acted either as a purchaser's agent (including, by virtue of sub-clause 3(1), a person holding a power of attorney) or as broker;

•

each "associate" (see sub-clause 3(1)) of a purchaser who, under the scheme, directly or indirectly provided "financial assistance" (see sub-clause (11)) to that purchaser in relation to the purchase of the shares;

•

in a case where the purchaser was a company - each shareholder (see sub-clause (14)) or director (see sub-clause 3(1)) of that company either at the time of purchase of shares in the target company or at the time when the stripping arrangement was entered into;

•

in a case where the purchaser was a trust - each beneficiary of that trust and, if the trustee is a company, each director of that company either at the time of purchase or at the time when the stripping arrangement was entered into; and

•

in a case where an abovementioned broker or agent, associate, director, shareholder or beneficiary of a purchaser is a company or trust - each director or shareholder of the company and, in the case of a trust, each beneficiary of the trust or director of a corporate trustee either at the time of purchase of shares in the target company or at the time when the stripping arrangement was entered into. This principle applies successively so that in a case where a director, shareholder or beneficiary included under this category is itself a company or trust, that entity's directors, shareholders and beneficiaries will also be included in the eligible promoters class, and so on.

Sub-clause (5) has the effect that a person may be included in the eligible promoters class where that person benefited from amounts stripped from a company that is included in the eligible promoters class.

The sub-clause applies where -

•

a company is included in the eligible promoters class;

•

the company, after the time of purchase of shares in the target company, made an advance or loan to a person or a payment for the benefit of a person; and

•

having regard to specified circumstances, it would be reasonable to conclude that the advance, loan or payment represented a distribution of income or capital of the company to the person.

In those circumstances, the person will be deemed to have been a shareholder in the company at the time the shares in the target company were purchased under the scheme. As a result, the person will, by virtue of paragraph (d) or (g) of sub-clause (4), be included in the eligible promoters class, and that broad outcome will flow through to other persons in a chain of ownership.

Sub-clause (6) is the "trust" version of the "company" provisions of sub-clause (5). An effect of sub-clause (6) is that a person who benefited or stood to benefit from amounts stripped from a trust that is included in the eligible promoters class will be deemed to be a beneficiary of that trust and thus included in the eligible promoters class under paragraph (e) or (g).

Sub-clause (7) is the counterpart of sub-clause 5(6) and is designed to ensure that the voting control tests in paragraphs 7(1)(c) and (2)(c) will be satisfied where the purchasers acquired more than 90 per cent voting control of the target company by virtue of one of them becoming an office holder in the company (e.g. governing director) rather than simply by virtue of the rights attaching to their shares in the company.

Sub-clauses (8) to (10) define, for the purposes of paragraphs 7(1)(e) and (2)(e), when an objection against a company assessment is to be treated as finalised. The circumstances in which an objection will be treated as finalised are the same as those that apply for the purposes of the corresponding tests in clause 5 and are explained in the notes on sub-clauses (10) to (12) of clause 5.

Sub-clause (11) will ensure that a reference to the giving of financial assistance to a purchaser of shares by an associate will extend to the various forms in which such assistance may have been given, namely by making a loan, giving a guarantee, providing security, releasing an obligation, forgiving a debt or otherwise.

Sub-clause (12) applies where a company or trust would be included in the eligible promoters class but for the fact that it no longer exists. For the purpose of determining whether other persons are included in the eligible promoters class, by virtue of provisions (e.g. paragraph (4)(g)) which treat persons as being in that class if they have a specified connection with a company or trust included in the class, the defunct company or trust will be taken to be so included. This will mean that the former directors, shareholders or beneficiaries of a company or trust will not escape inclusion in the eligible promoters class merely because the company or trust is now defunct.

Sub-clause (13) clarifies the meaning of the term "arrangement or transaction" as used in paragraphs 7(1)(g) and 7(2)(g). The term will have the same meaning as under sub-clause 5(15) and is explained in the notes on that sub-clause.

By sub-clause (14) the term "shareholder", in relation to a company, will include a person who has a right to have his name entered presently or in the future in the company's register of members. This will mean that a person who owns shares in a company through a nominee (bare trust) will be treated as a shareholder in the company for the purposes of determining an eligible promoters class as will a person who has purchased shares in a company but whose name has not for some reason or another been entered in the company's register of members.

Clause 8: Liability to pay tax

Clause 8 formally establishes the liability of a former owner to pay recoupment tax on a primary taxable amount or a secondary taxable amount and the liability of the promoters and their associates to pay recoupment tax on a promoters taxable amount.

Under sub-clause (1), if a vendors taxable amount (i.e., a primary taxable amount or a secondary taxable amount) exists in relation to a person, the person is liable upon assessment to pay the recoupment tax to be imposed on that amount by the Taxation (Unpaid Company Tax - Vendors) Bill 1982. The amount of recoupment tax is an amount equal to the vendors taxable amount.

Under sub-clause (2), if a promoters taxable amount exists in relation to an eligible promoters class, the persons included in that class are jointly and severally liable upon assessment to pay the recoupment tax to be imposed on that amount by the Taxation (Unpaid Company Tax - Promoters) Bill 1982. The amount of recoupment tax is an amount equal to the promoters taxable amount.

Sub-clauses (3) and (4) mean that, where an assessment has been made of vendors or promoters recoupment tax, that liability shall not be increased on account of any late payment penalty payable by the target company that accrues after the time when the recoupment tax assessment was made. In other words, once an assessment of recoupment tax has been made, the unpaid company tax liability of the target company for the purposes of the recoupment tax assessment is, subject to sub-clause (5) (amendment of the company's assessment) and (7) (remission of company's late payment penalty), frozen at its level at the time the particular assessment of recoupment tax was made.

Sub-clause (4) also provides that in a case where a liability to pay vendors recoupment tax was traced to a person by reason of an opinion by the Commissioner of Taxation that vendors recoupment tax is unlikely to be paid by a company or a trust, that liability is not to be reduced on account of a change in the opinion of the Commissioner as to the likelihood that that recoupment tax will be paid. However, if payments are in fact made in reduction of the recoupment tax payable by the company or trust, that reduction will, by virtue of clause 9, be traced to the person(s) to whom the liability was traced.

Sub-clause (5) deals with the situation where, after an assessment of vendors or promoters recoupment tax has been made on a person, the corresponding assessment of the target company is amended by either increasing the target company's liability or decreasing it. In this situation, the amount of recoupment tax that the person will be liable to pay will be ascertained as if the tax payable under the target company's amended assessment had been the tax payable under the original assessment.

The sub-clause will thus ensure that any adjustments to the target company's tax liability will flow through as a changed liability for vendors recoupment tax at either the primary level or the secondary level and for promoters recoupment tax. By virtue of sub-clause 4(6), a recoupment tax assessment may be amended, at any time, to reflect an amendment of the target company's assessment.

Sub-clause (6) deals with the situation where an assessment of promoters recoupment tax is made on the basis that no vendors recoupment tax is payable and after that assessment is made vendors recoupment tax does become payable. In this situation, the amount of promoters recoupment tax payable will be the amount that would have been payable if it had been ascertained on the basis that vendors recoupment tax was payable. As a result, the promoters recoupment tax payable will be reduced from 100 per cent to 20 per cent of the overdue company tax to which it relates.

Sub-clause (7) has the effect that where late payment penalty payable by a target company is remitted by the Commissioner of Taxation under powers of remission conferred on him by the Assessment Act, the liability of persons to pay recoupment tax will be correspondingly reduced. By reason of sub-clause 4(6), a recoupment tax assessment may be amended, at any time, to reflect a remission of late payment penalty payable by the target company.

The sub-clause also has the effect that where additional tax for late payment of recoupment tax is remitted by the Commissioner any payments made in respect of that liability to pay recoupment tax and late payment penalty will be applied, under clause 12, in reduction of that liability as if the late payment penalty had never been imposed.

Clause 9: Reduction of liability where tax paid

This clause has the effect that an amount of vendors recoupment tax payable by a person will be reduced where -

•

a payment of the corresponding company tax is made;

•

a payment of vendors recoupment tax is made by another person who has been assessed to the tax at a different level of liability; or

•

a payment of promoters recoupment tax based on the same unpaid company tax is made.

In addition, the clause provides that an amount of promoters recoupment tax payable will be reduced where a payment of the corresponding company tax is made.

The overall purpose of clause 9 is to ensure that the evaded company tax is only collected once and the benefit of any payments of company tax or recoupment tax will flow through to a related liability where this is appropriate for this purpose.

Sub-clauses (1) to (3) provide for a reduction in vendors recoupment tax payable where a later payment of company tax is made or deemed to have been made. The sub-clauses apply where, after vendors recoupment tax becomes "payable" (see sub-clause 3(9)) by a person on a vendors taxable amount, a payment is made which is applied or deemed to have been applied in reduction of the corresponding company tax liability of the stripped company. A payment of promoters recoupment tax will, by virtue of sub-clause 9(7), be deemed to be so applied.

In that situation the vendors recoupment tax (which by virtue of sub-clause (8) includes any late payment tax) payable by the person is reduced by a proportion of the payment. That proportion will be :

•

in a case where the recoupment tax is payable by a vendor-shareholder (or a beneficiary under a bare trust) on a primary taxable amount - the proportion of the overdue company tax liability that was allocated to that person under clause 5; and

•

in a case where the recoupment tax is payable by a person on a secondary taxable amount - the product of two factors, namely:

(i)

the proportion of a particular vendor-shareholder's liability that, through one or more successive applications of clause 6, was traced to that person; and

(ii)

the proportion of the overdue company tax liability that was allocated to that vendor-shareholder.

Sub-clause (4) provides for a reduction in vendors recoupment tax where a payment of recoupment tax is made at an earlier level of liability. The sub-clause applies where recoupment tax is payable by a person on a secondary taxable amount and a payment is made in reduction of the liability to pay recoupment tax that was traced to that person.

Where this occurs, the recoupment tax payable by that person will be reduced by a proportion of the payment, that proportion being the proportion of the liability that was traced to that person.

The sub-clause will also operate where that person's liability has in turn been traced to other persons. In that case, the reduction under sub-clause (4) in the first person's liability will be traced to those other persons in the same proportions as the liability is traced.

The operation of sub-clause (4) may be illustrated by the following example. Suppose that a particular vendor-shareholder company or trust has a liability to pay recoupment tax of $100,000 and, by virtue of sub-clause 6(3), this is traced to A ($60,000) and B ($40,000). If the vendor-shareholder happens to make a payment of $50,000 then, by virtue of sub-clause 9(4), the liability of A and B will be reduced by $30,000

(((6)/(10)) * $50,000)


and $20,000

(((4)/(10)) * $50,000)


respectively. Likewise, if the liability of A has in turn been traced to C ($50,000) and D ($10,000) then their liability will be reduced by $25,000

(((5)/(6)) * $30,000)


and $5,000

(((1)/(6)) * $30,000)


respectively.

Sub-clause (5) provides for a reduction in vendors recoupment tax where a payment of recoupment tax is made at a later level of liability. The sub-clause applies where recoupment tax is payable by a person on a vendors taxable amount, that liability is traced to another person and a payment is made in reduction of that other person's liability.

In that case, the recoupment tax payable on that vendors taxable amount will be reduced by the amount of that payment. If such recoupment tax payable itself arose as a result of tracing, the reduction will also be applied against the liability from which that tax payable was traced. This backward tracing will continue until the reduction is eventually applied against the recoupment tax payable on the originating primary taxable amount.

Sub-clause (6) provides for a reduction in promoters recoupment tax payable where a subsequent payment of company tax is made. The sub-clause applies where after promoters recoupment tax becomes payable a payment is made which is applied in reduction of the corresponding company tax liability of the stripped company.

In that situation the promoters recoupment tax payable is reduced by 20 per cent of the company tax payment (where 20 per cent of the company tax liability was allocated to the promoters) or by 100 per cent of the payment (where 100 per cent of the liability was so allocated).

Sub-clause (7) provides that a payment of promoters recoupment tax will be deemed to have been applied in reduction of the corresponding company tax liability of the stripped company for the purposes of the proposed Act and the Assessment Act (but not so as to reduce the amount of any Division 7 tax assessed or the amount of promoters recoupment tax payable). The deemed reduction of company tax for the purposes of the proposed Act will mean that in a case where the payment of promoters recoupment tax is made after vendors recoupment tax became payable the liability of former owners to pay vendors recoupment tax will, by virtue of sub-clause 9(1), be appropriately reduced. Similarly, a vendors recoupment tax assessment raised after such a payment will take into account the reduced company tax liability.

Sub-clause (8) means that any reduction of recoupment tax under clause 9 will be applied firstly against any late payment tax included in the recoupment tax and then against the remaining recoupment tax. Any outstanding liability will therefore represent (or include) "basic" recoupment tax on which late payment tax will continue to accrue.

This application rule is the same as that which applies under clause 12 in relation to payments made directly by a person liable to pay recoupment tax.

Sub-clause (9) is a drafting measure by which the term "recoupment tax" as used in clause 9 is to include late payment tax payable under clause 13.

Clause 10: Right of contribution

Under this clause, which is set against the background that persons included in a promoters eligible class are jointly and severally liable to pay promoters recoupment tax on a promoters taxable amount, any person included in that class who has paid any of that tax will be entitled to seek a contribution from other members of the class.

The person may institute a proceeding for recovery of a contribution from a co-member of the class in any court of competent jurisdiction and it will be for the court to determine the part of the recoupment tax paid by the person that it would be just and equitable for the co-member to contribute. Under certain circumstances (see clause (11) these court proceedings may be transferred to the Federal Court of Australia.

Clause 11: Declaration excluding persons from eligible promoters class

In the context of a joint and several liability on the persons concerned, this clause will give a person who would otherwise be included in an eligible promoters class, and who is being sued either by the Commissioner of Taxation for recovery of promoters recoupment tax or by another member of the class for a contribution towards the promoters recoupment tax paid by that member, the right to apply to the Federal Court of Australia to be formally excluded from the class.

By sub-clause (1) a person is entitled to apply to the Federal Court for a declaration that it is not just and equitable that the person be included in a particular eligible promoters class. Such an application can be made only where "prescribed proceedings" (i.e. proceedings for recovery of promoters recoupment tax or a contribution) against the person are pending. Where such an application is made all pending prescribed proceedings relating to that person's liability to recoupment tax as a member of the class will be transferred to the Federal Court to be heard, if the Court so decides, concurrently.

Sub-clause (2) provides for the relevant documents filed of record and moneys lodged in the transferor court to be transmitted to the Federal Court and for that Court to proceed as though the proceedings to date had been instituted in that Court.

Sub-clauses (3) and (4) enable persons other than the applicant seeking a declaration to become a party to proceedings on the application.

Under sub-clause (3) the Commissioner of Taxation has the right to intervene in the proceedings and, if he does intervene, he will be deemed to be a party to the proceedings.

Sub-clause (4) empowers the Federal Court to order that any other person be made a party to the proceedings where that person's interests may be affected by its decision on the application. This power would enable the Court to order that one or more of the members of the eligible promoters class who may wish to contest the application be made a party to the proceedings.

Sub-clause (5) identifies the factors to be taken into account by the Court in determining whether or not it is just and equitable for the applicant to be included in the eligible promoters class. Those factors are the nature and extent of the person's participation in either the scheme under which the shares in the target company were purchased or in the arrangement which rendered it unable to meet its company tax liability, the benefit the person has or may reasonably be expected to obtain as a result of the scheme under which the shares were purchased and any other relevant matters.

Sub-clauses (6) and (7) apply where the Federal Court makes a declaration that it is not just and equitable for the applicant to be included in the eligible promoters class.

By sub-clause (6) the applicant will, for the purposes of the Bill, be deemed never to have been included in that class. This means that, subject to sub-clause 7, the person will not be jointly and severally liable to pay income tax recoupment tax in relation to the liability of members of that class.

However, sub-clause (7) provides that the declaration will not disturb any court orders made, prior to the date of the application for the declaration, in proceedings under clause 10 for recovery of an amount by way of a contribution or under section 209 of the Assessment Act (in its application to the Bill) for recovery of promoters recoupment tax. The applicant would have had the opportunity to apply for a declaration when those proceedings were instituted.

Sub-clause (8) provides that where proceedings are pending on an application under the section, prescribed proceedings relating to the applicant by reason of his membership of the eligible promoters class from which he is seeking exclusion can only be instituted in the Federal Court. This ensures that all proceedings relevant to a particular person's liability will be determined in the same court.

Sub-clause (9) formally gives the Federal Court jurisdiction on matters arising under clause 11 for the purposes of section 19 of the Federal Court of Australia Act 1976.

Sub-clause (10) defines a number of terms used in the clause:

•

"Federal Court" means the Federal Court of Australia;

•

"prescribed proceedings", in relation to a person, will mean proceedings to recover from that person promoters recoupment tax or an amount by way of a contribution towards such tax paid by another person; and

•

"proceedings" includes cross-proceedings and appeals.

Clause 12: Application of payments

This clause will provide the basis on which payments made to the Commissioner of Taxation in respect of recoupment tax are to be applied in discharge or reduction of that liability.

Under sub-clause (1) payments made by a person in respect of a liability to pay recoupment tax and late payment tax on that recoupment tax will be applied firstly against the late payment tax and then against the remaining recoupment tax. This will mean that any outstanding liability represents (or includes) recoupment tax on which additional tax for late payment will continue to accrue until the balance of the account is fully paid.

Sub-clause (2) ensures that payments will be applied in accordance with sub-clause (1) notwithstanding any direction of the person making the payment.

Clause 13: Penalty for late payment of tax

By sub-clause (1) of this clause, a person who is assessed as liable to pay vendors or promoters recoupment tax will, if that tax is not fully paid within 30 days after the date of service of the notice of assessment, be made liable to pay additional tax for late payment at the rate of 20 per cent per annum on the amount unpaid.

However, should the Commissioner of Taxation give an extension of time for payment under section 206 of the Assessment Act, the penalty tax could run from a later date.

Under sub-clause (2) the Commissioner may, in restricted circumstances that parallel those being specified in section 207 of the Principal Act (see Income Tax Assessment Amendment (Additional Tax) Bill 1982), remit the penalty tax, in whole or in part.

Clause 14: Change of trustee

This clause is a formal measure to ensure that the provisions of the new legislation will apply in cases where shares (or an interest in shares) in a target company were sold or purchased by a trustee of a trust estate who is subsequently replaced by another trustee.

In the case of a sale, sub-clause (1) provides that the shares or interest will be taken to have been sold by the current trustee. Similarly, sub-clause (2) provides that, in the case of a purchase, the current trustee will be taken to have purchased the shares (except for the purpose of determining members of the promoters eligible class by reference to the trustee).

Clause 15: Companies ceasing to exist

This clause will ensure that the proposed Act will apply in circumstances where a stripped company ceased to exist after the sale of shares under a scheme. It could happen that a scheme promoter would wind-up or seek to de-register a company as soon as possible after it had been stripped of its assets and its shares transferred to "men of straw".

Clause 15 has the effect that the overdue company tax liability of the stripped company can be established notwithstanding that the company no longer exists.

By sub-clause (1), clause 15 will have effect, for the purpose of applying the proposed Act in relation to a sale (or purchase) of shares under a scheme, where a company which was more than 90 per cent controlled by the vendor-shareholders (or purchasers), as required by the control tests in clauses 5 and 7, ceased to exist after the time when the shares were sold (or purchased) under the scheme. The remaining provisions of the clause enable the company tax liability of such a target company to be established notwithstanding that it no longer exists.

Sub-clauses (2) and (3) deal with the situation where the target company ceased to exist after an assessment of company tax was made.

By sub-clause (2) the tax assessed will be taken to have become due and payable, if this did not occur before the company ceased to exist, and the liability of the company will be taken to be unaffected by the fact that it ceased to exist.

This will mean that the tests set out in paragraphs 5(1)(g), 5(2)(g), 7(1)(f) and 7(2)(f) requiring the existence of an unpaid company tax liability due and payable by the company can be satisfied.

Under sub-clause (3) the Commissioner of Taxation will have the power to amend an assessment, provided this power would have existed but for the company ceasing to exist. It is also a pre-requisite that the amendment is relevant to a person's liability to pay recoupment tax in that, apart from the amendment, the person is liable or likely to become liable to pay recoupment tax or would, as a result of the amendment, be likely to become so liable.

The amended assessment is referred to in the clause as the "notional assessment" and by virtue of sub-clauses (6) to (13) will be treated in a comparable manner to an actual amended assessment.

Sub-clauses (4) and (5) deal with the situation where the target company ceased to exist before an assessment was made of the tax payable by the company in relation to the year of income in which the company was disposed of to the promoters or an earlier year of income.

By sub-clause (4) the Commissioner is authorised to make a "notional assessment" of the company tax that would be payable by the company, if it had not ceased to exist before an assessment was made, provided that if the company had continued to exist and such tax had been assessed and remained unpaid, recoupment tax would have become payable by a person or persons.

For the purpose of making a notional assessment of undistributed profits tax, any dividends that the company might have paid if it had not ceased to exist will, by virtue of sub-clause (5), be disregarded.

Sub-clauses (6) to (13) provide for a notional assessment under sub-clause (3) or (4) to be treated in a comparable manner to an actual assessment of company tax.

Sub-clause (6) applies where the only recoupment tax payable will be promoters recoupment tax. In that case the Commissioner of Taxation will be required to serve the notice of notional assessment on one of the persons who will be liable to pay that promoters recoupment tax.

Sub-clause (7) applies where vendors recoupment tax will also be payable. In that case the Commissioner will be required to serve the notice of notional assessment on one of the persons who will be liable to pay that vendors recoupment tax and to serve a copy of the notice on each other person included in the "representative class". This term is defined in sub-clause (10) and, in broad terms, refers to the vendor-shareholders and up to 5 other former owners.

Under sub-clause (8) it is necessary for the Commissioner to notify each former owner on whom he served the notice or a copy of it, of the identities of the other recipients of copies. This is to facilitate these persons choosing one of their number to represent them for objection and appeal purposes.

Sub-clause (9) confers on a particular person the same rights of objection and appeal against the notional assessment that the company itself could have exercised against an assessment if it had still been in existence. In a case where the notice was served on a former owner, the person appointed by a majority of the representative class will exercise those rights. If the notice was served on a member of the eligible promoters class, that person will exercise the rights.

Sub-clause (10) provides that the following persons will comprise the representative class:

•

each vendor-shareholder (or owner of shares held by a vendor-nominee) who is a natural person (including a trustee) and whose address is known to the Commissioner;

•

each vendor-shareholder (or owner of shares held by a vendor-nominee) which is a company (including a trustee) still carrying on business; and

•

other representative former owners who will be liable to pay recoupment tax based on the company's notional assessment, up to a maximum of 5.

Sub-clause (11) provides that, for the purposes of the Bill, the notional assessment will be treated as if it were an assessment and that the tax payable by virtue of the notional assessment (referred to as the "notional company tax") is to be treated as if it were an amount of company tax that has become due and payable by the company and remains unpaid. This provision will ensure that the tests in paragraphs (e), (f) and (g) of sub-clauses 5(1) and 5(2) and the corresponding paragraphs of sub-clauses 7(1) and 7(2) relating to an assessment of company tax are also applicable in the case of a notional assessment of company tax. It will also mean that the notional company tax can be paid (clause 20) or otherwise made the subject of payment arrangements under clause 21.

Sub-clause (12) provides that the "notional company tax" is to be ascertained on the basis that the provisions of the Assessment Act apply as if the notional assessment were a company assessment and the tax payable under the notional assessment were company tax.

Sub-clause (13) makes it clear that among the provisions of the Assessment Act to be applied are those provisions relating to amendments of assessments (section 170) and late payment tax (section 207).

Sub-clause (14) will ensure that a defunct target company that was controlled by the vendor-shareholders (or the purchasers) by virtue of voting rights attaching to an office held in the company rather than to shares will also be subject to the provisions of clause 15.

Clause 16: Request to eliminate undistributed amount

Under Division 7 of Part III of the Assessment Act, a private company is treated as having made a sufficient distribution in relation to a year of income if it has, within a prescribed period of twelve months ending ten months after the end of that income year, paid in dividends at least the amount by which the distributable income of the year (broadly, its taxable income as reduced by primary tax payable) exceeds the specified retention allowance. A private company which fails to make a sufficient distribution is liable to pay undistributed profits tax on the undistributed amount at the rate of 50 per cent.

Where a strip of untaxed company profits occurred, the company was typically stripped of funds by means other than by having it pay a dividend. Accordingly, the company would not have made a sufficient distribution of its income with the result that a liability on the company for undistributed profits tax (Division 7 tax) arose. This tax also remained unpaid, and it may also remain unpaid where, at the time of sale of the company, the tax on the company's taxable income of the relevant income year had been paid.

The Bill includes this evaded tax within its scope and the former owners will, in the same way as in relation to other evaded company tax, be called on to pay their shares of it.

Clause 16 will give vendor-shareholders who would otherwise be liable to pay recoupment tax based on the unpaid Division 7 tax of a stripped company the right to request that they instead be assessed to pay income tax as though the stripped company had paid enough in dividends to eliminate the liability to Division 7 tax.

The clause will not operate to relieve "promoters" of their liability to recoup 20 per cent of the evaded Division 7 tax and any payments of promoters recoupment tax based on that tax will be passed on to the former owners who are assessed on deemed dividends by virtue of this clause.

By sub-clause (1), a request under the section may be made where:

•

a primary taxable amount exists in relation to Division 7 tax payable by a company in relation to one or more years of income; and

•

no Division 7 tax assessment is outstanding in relation to that company in relation to the year of income in which the shares were sold or a preceding year of income.

In those circumstances, a request that clause 16 should apply in relation to the stripped company may be made by a majority of the pre-sale board of directors or, where this is not practicable, by all the vendor-shareholders together.

By sub-clause (2) the request must be in writing signed by each person making the election and be sent to or lodged with the Commissioner of Taxation. There is no time limit on when the election may be lodged and, by reason of sub-clause 4(6), an assessment of income tax or recoupment tax may be amended, at any time, to give effect to this clause.

The Commissioner may accept or reject the request under sub-clause (3) having regard to the matters listed in sub-clause (4), broadly, the likelihood that the appropriate amount of income tax will be paid by vendor-shareholders on the dividends which would be deemed to be paid to them by the operation of this clause.

Sub-clause (5) is the operative provision which specifies the consequence which will follow where a request is granted by the Commissioner.

Under paragraph (a) the stripped company will, subject to sub-clauses (7) and (8), be deemed to have made a sufficient distribution in relation to each year of income to which the request applies, thereby eliminating its Division 7 tax liability.

By paragraph (b) the stripped company will, for the purpose of the Assessment Act (other than the withholding tax provisions) be deemed to have paid to each vendor-shareholder (or beneficial owner of shares under a bare trust) a dividend of an amount equal to a proportion of the company's undistributed amount. That proportion is referred to as the "apportionment factor" and for each person is defined in sub-clause 3(1) as the proportion of the company's undistributed profits tax liability that he or she would, apart from the election, have borne by virtue of clause 5.

The effect of paragraph (b) is that the deemed dividends will generally be included in the assessable income of the vendor-shareholders under sub-section 44(1) of the Assessment Act in the year of income which included the last day on which the company could have paid a dividend in order to avoid the undistributed profits tax liability. However, the deemed dividends would not be assessable in the case of a vendor-shareholder which qualifies as a body or institution whose income is exempt under the provisions of the Assessment Act.

Paragraph (c) applies where the former owners are liable to be assessed on deemed dividends and a payment of promoters recoupment tax is subsequently made which, by reason of sub-clause 9(7), is deemed to have been applied in reduction of the Division 7 tax. In that case each former owner will be paid an amount equal to a proportion of the deemed reduction, that proportion being the person's share of the total deemed dividend. The amount applicable to a trustee of a trust will be shared between the trustee and the beneficiaries according to the proportion of the dividend deemed to have been paid to the trustee on which the trustee and each beneficiary was respectively assessed.

Sub-clause (6) provides that payments under paragraph (5)(c) will be made out of the Consolidated Revenue Fund.

Sub-clause (7) will mean that the liability of promoters to recoup 20 per cent of an unpaid Division 7 tax assessment will not be increased to 100 per cent under paragraph 7(1)(k) or 7(2)(k) by reason of the fact that vendors recoupment tax will not be payable as a result of a request made under this clause.

Under sub-clause (8) the extinguishment of the company's liability to Division 7 tax under paragraph 5(a) will be disregarded for the purpose of ascertaining the liability of the promoters to pay recoupment tax under clause 7.

Sub-clause (9) is a drafting mechanism that means that, where the Division 7 tax liability of a company in relation to a year of income has been paid in full, the company is to be taken as not having any undistributed amount for that year. Accordingly, the clause will not apply to that year to require a dividend to be deemed to have been paid.

Sub-clause (10) applies in circumstances similar to sub-clause (9) but where the Division 7 tax liability of a company in relation to a year of income has been partly paid. In that case, the undistributed amount of the company is to be proportionately reduced for the purpose of calculating the amount of the deemed dividends under paragraph 5(b). For that purpose, the undistributed amount will be reduced by the same proportion as the Division 7 tax paid bears to the Division 7 tax payable.

Sub-clause (11) is a drafting measure which ensures that a reference in sub-clause (10) to undistributed profits tax will not include a reference to any late payment penalty related to the Division 7 tax and thus distort the calculation to be made under that sub-clause.

Clause 17: Request where dividend deemed to be paid to trustee

This clause will apply where a trustee of a discretionary trust estate is deemed to have been paid a dividend by virtue of clause 16 and would otherwise be liable to be taxed on that dividend under section 99 or 99A of the Assessment Act (these provisions apply to tax in the hands of the trustee income in respect of which no beneficiary has a present entitlement).

In these circumstances, the trustee and the beneficiaries of the trust may request that tax be payable as though the trustee had paid or applied the deemed dividend for the benefit of the beneficiaries specified in the request, in proportions specified in the request.

Where a particular beneficiary(ies) of a trust have an entitlement - either under the trust instrument or by reason of an earlier exercise of a discretion by the trustee to apply income of the trust estate - to income which includes the deemed dividend income, that beneficiary(ies) will have included in his or her (or their) assessable income an appropriate proportion of the deemed dividend by reason of the operation of section 97 or 98 of the Assessment Act.

Sub-clause (1) provides that a request may be made where:

•

a deemed dividend is included in the assessable income of a trust estate;

•

the amount on which the trustee would otherwise be liable to pay tax under section 99 or 99A of the Assessment Act is increased on account of the deemed dividend (the amount of the increase is referred to as the relevant amount); and

•

the trustee had a discretion at the time the dividend was deemed to have been paid to pay or apply actual dividend income to or for the benefit of specified beneficiaries.

In those circumstances, the trustee and some or all of the beneficiaries may request that the trustee be deemed to have paid or applied so much of the deemed dividend as is equal to the relevant amount to or for the benefit of the beneficiaries making the request, in the proportions specified in the request.

Sub-clause (2) enables a request to be made, on behalf of a beneficiary who is under a legal disability, by another person who has full legal capacity. This person would usually be a parent or guardian of a minor beneficiary or other representative of a beneficiary under some other form of legal disability.

By sub-clause (3) the request must be in writing signed by each person making the request and be sent to or lodged with the Commissioner of Taxation. There is no time limit on when the request may be made.

The Commissioner may accept or reject the request under sub-clause (4) having regard to the matters listed in sub-clause (5), broadly, the likelihood that the appropriate amount of income tax will be paid by the nominated beneficiaries.

Sub-clause (6) provides that where a request is accepted the trustee will be taken to have paid or applied that part of the deemed dividend that equals the relevant amount, in accordance with the request, on the day on which the dividend is deemed to have been paid by the stripped company.

As a result, the trustee will not be liable to be assessed under section 99 or 99A on that amount and that amount will be assessed to the beneficiaries (not being beneficiaries whose income is exempt) making the request, in the proportions specified in the request, under the appropriate provisions of the Assessment Act (sections 97 and 98).

Clause 18: Notification of company tax liability

The basic purpose of clause 18 is to ensure that the former owners of a stripped company will have an opportunity, if they have not already had it, to contest an assessment of company tax in cases where the tax remains unpaid and they may become liable to effect recoupment of it.

Sub-clause (1) to (4) apply in cases where a notice of assessment of company tax payable by a company has not been served on the company prior to the commencement of the proposed Act and recoupment tax is likely to become payable by a person or persons in respect of that company tax. The sub-clauses also apply where a notice of amended assessment is required to be served on a company and recoupment tax is already payable, or likely to become payable as a result of the amendment.

Sub-clause (1) applies where the former owners are to be liable to pay vendors recoupment tax. In that case the Commissioner of Taxation will be required to serve the notice of assessment on the company by serving it on one of those persons. This method of service will apply notwithstanding the requirement under section 174 of the Assessment Act that the notice be served upon the company. In addition, the Commissioner will be required to serve a copy of the notice on each other person included in the "representative class". This term is defined in sub-clause (10) and, in broad terms, means the vendor-shareholders and up to 5 other former owners.

Under sub-clause (2) the Commissioner is required to notify each person on whom he served the notice or a copy of the identities of the others.

By sub-clause (3) a former owner appointed by a majority of the representative class will be entitled to exercise the same rights of objection and appeal against the company's assessment as are available to the company itself.

Sub-clause (4) applies where it is likely that only the promoters will be liable to pay recoupment tax based on the company tax. In that case the Commissioner will be required to serve the notice on the company by serving it on one of the persons who is likely to be liable to pay that promoters recoupment tax.

Sub-clauses (5) to (9) deal with the situation where a notice of assessment of company tax payable by a company has been served, or purported to have been served, on the target company in a case where the notice was not required by sub-clause (1) to be served on one of the persons who will be liable to pay recoupment tax. This would typically occur where the notice has been served before the commencement of the proposed Act.

Sub-clause (5) applies where the former owners will be liable to pay vendors recoupment tax and requires the Commissioner to serve a copy of the notice of assessment on one of those persons. If for some reason the original notice was not validly served on the company, the service of the copy will nevertheless still be effective and will be deemed to be service of the assessment on the company. In addition, the Commissioner will be required to serve a copy of the copy notice served on the selected former owner on each other person included in the "representative class".

Sub-clause (6) is designed to apply in cases where a company has been served with a notice of assessment while the company was in the hands of its former owners and who have, as evidenced, say by the lodgment of an objection, had the contents of the notice drawn to their attention. Here sub-clause (5) is not to apply.

Under sub-clause (7) the Commissioner is required to notify each person on whom he served a copy of the notice, or a copy of the copy, of the identities of the others to enable those persons to select a representative to exercise rights of objection or appeal on their behalf.

Under sub-clause (8) a former owner appointed by a majority of the representative class will be entitled to exercise the same rights of objection and appeal against that assessment as the company would have had if it had been served with the notice of assessment on the date on which the copy was served. This will enable the nominated former owner to object against the assessment within 60 days of the service of the copy.

Sub-clause (9) applies where it is likely that only the promoters will be liable to pay recoupment tax based on the company tax payable under the assessment. In that case the Commissioner will be required to serve a copy of the notice on one of the persons who will be liable to pay that promoters recoupment tax. If the original notice was not validly served on the company, the service of the copy will nevertheless still be effective for purposes of clause 18.

Sub-clause (10) provides that the following persons will comprise the representative class:

•

each vendor-shareholder (or beneficiary under a bare trust) who is a natural person (including a trustee) and whose address is known to the Commissioner;

•

each vendor-shareholder (or beneficiary under a bare trust) which is a company (including a trustee) still carrying on business; and

•

each other former owner who will be liable to pay recoupment based on the company's assessment, up to a maximum of 5.

Sub-clause (11) is a drafting measure which ensures that the provisions of clause 18 will apply in relation to an assessment of company tax under which additional tax for late or no return or for an incorrect return has been imposed. Such additional taxes will not, however, be within the scope of the recoupment measures.

Clause 19: Remission of recoupment tax

This clause is the first of three clauses - clauses 19, 20 and 21 - the broad effect of which will be to enable one or more former owners to pay either his or her share of the evaded company tax or all of the evaded company tax without incurring additional tax for late payment beyond the date the payment or the first of the payments is made.

Clause 19 will have effect where one or some only of the former owners wish to pay his or her or their share of the evaded company tax, but the remaining former owners wish to contest the company's liability to tax by lodgment of an objection and subsequent appeals against the assessment or copy assessment (see notes on clauses 15 and 18).

Where this occurs, those former owners who wish to pay their share of the evaded company tax may under paragraph (a) make a payment to the Commissioner equal to the amount that they would be liable to pay by way of vendors recoupment tax if an assessment in respect of that recoupment tax were made on the date of the payment. That will mean that the amount of the payment will be ascertained on the basis of additional tax for late payment accrued in respect of the unpaid company tax only up to the date of the payment.

If such a payment is made to the Commissioner by a former owner, paragraph (b), (c) and (d) will have the effect that, when vendors recoupment tax later becomes payable (once the dispute concerning the company's assessment is resolved) by the former owner or those former owners who paid their expected share of the company tax, the recoupment tax finally payable on the company tax then outstanding (i.e. an amount which will include further additional tax for late payment of the company's tax) will be reduced by the additional tax under section 207 of the Income Tax Assessment Act attributable to the period after the payment was made by the former owner(s). This reduction is to be achieved by statutorily remitting that part of the recoupment tax attributable to the latter additional tax.

If the objection against the company's assessment is successful, amounts paid under this clause will, to the appropriate extent, be refunded to those former owners who paid in expectation that the objection would fail.

Clause 20: Arrangements for payment of company tax

This clause will enable former owners to arrange to pay to the Commissioner, at any time before vendors recoupment tax assessments are made, all of the company tax remaining unpaid and thus eliminate the further accrual in respect of that company tax of additional tax for late payment.

Unlike clause 21 arrangements it will not be necessary for former owners to forgo their rights of objection against the company's assessments as a condition of making an arrangement under clause 20. If, as a result of any objections lodged against the company's assessments, the tax liability of the company is reduced, any refund of tax paid under an arrangement under this clause would carry interest in accordance with the proposals announced in a Ministerial statement on 10 August 1982. One advantage of making a payment of company tax under clause 20 will be that, for the purposes of determining whether a liability for promoters recoupment tax exists, the payment will be disregarded. This will mean that any payments of promoters recoupment tax in relation to the particular company will enure for the benefit of the former owners of the company.

Sub-clause 20(1) identifies the company tax which can be subject to arrangements under the clause and sets out the criteria that must be present before such arrangements can be entered into with the Commissioner.

Paragraph (a) of sub-clause (1) will specify the company tax to which the clause will apply. It is that company tax in respect of which a primary taxable amount or amounts (and therefore a liability for vendors recoupment tax) would exist under clause 5 but for the fact that the period for objecting against the company's assessment(s) has not expired and excluding the possibility that a primary taxable amount may not exist by reason of the exercise of the Commissioner's discretion under either sub-clause 5(4) or sub-clause 6(2) (refer to notes on those sub-clauses for a more detailed explanation of those discretions).

By reason of paragraph (b) it will be necessary for an assessment of the company's tax liabilities to have been made in respect of both ordinary company tax and undistributed profits tax for each year of income including and prior to the year in which the company's shares were sold under the scheme. This will ensure that the arrangement to pay the company tax will encompass all the company tax evaded under the scheme that is subject to recoupment under the legislation.

Finally, paragraph (c) will have the effect of requiring the arrangement to be entered into before any recoupment tax assessments issue to the former owners. Once a vendors recoupment tax assessment issues to a former owner the company's tax liability is frozen at that point of time (see notes on sub-clause 8(3)) and that former owner will have 30 days in which to pay his or her share of the evaded company tax.

Where these criteria are met and the Commissioner enters into an arrangement it will be necessary by reason of sub-clause (2) that the former owners pay to the Commissioner all the company tax (including additional tax for late payment accrued between the date 30 days after the service of the company's assessments or copy assessments under clauses 15 or 18 and the date of payment) then payable by the company.

Once payment of all the company tax payable is made under an arrangement of the kind to which this clause relates certain specified effects result -

•

the payment of the tax is disregarded for the purposes of ascertaining whether there is a liability for promoters recoupment tax and the extent of such liability (paragraphs (2)(a) and (b)). This will mean that, notwithstanding the payment of all the company tax by the former owners, a liability for promoters recoupment tax will still exist; and

•

if any promoters recoupment tax is paid by a person in the eligible promoters class, the amount of the payment will generate a refund of the company tax paid of a like amount to the former owners who paid that company tax, thus effectively reducing their liability to make good the evaded company tax (paragraph (2)(c)).

Clause 21: Instalment arrangements in relation to late payment of company tax

Clause 21 is the third of the clauses referred to in the notes on clause 19, the broad effect of which is to enable the evaded company tax to be paid without incurring additional tax for late payment subsequent to the date payment is made.

This clause will, however, enable former owners who do not seek to exercise rights of objection against the company's assessments as a result of which company tax is payable, to enter into an arrangement with the Commissioner to pay, free of additional tax for late payment, all the company tax payable and to do so by instalments over a period of 12 months or such longer period as the Commissioner allows.

Paragraphs (a), (b) and (d) of sub-clause 21(1) are in identical terms to paragraphs (a), (b) and (c) respectively of sub-clause 20(1) and identify the company tax which may be made subject to the arrangements to pay by instalments, and set out the further criteria that must exist before such arrangements can be made with the Commissioner. Paragraph (a) specifies the company tax to which the clause will apply, paragraph (b) will mean that it is necessary for assessments of the company's tax liabilities in respect of both ordinary company tax and undistributed profits tax to have been made for all years of income up to and including the year in which the company's shares were sold under the scheme, while paragraph (d) will require any arrangements under the clause to be made before vendors recoupment tax assessments have issued in relation to the evaded company tax.

Paragraph (c), which has no counterpart in sub-clause 20(1), will mean that an arrangement under clause 21 can only be made where no objection has been lodged against any of the company's assessments which relate to the evaded company tax. This paragraph, together with sub-clause (2), will ensure that arrangements to pay by instalments will only be available if former owners do not exercise rights of objection and appeal against the company's assessments. In return for this, the former owners will be able to pay the company's outstanding tax liabilities by instalments free of any additional tax for late payment which would otherwise accrue on the balance unpaid from time to time.

Where an instalment arrangement is entered into with the Commissioner it is envisaged as being necessary that the former owners make a part payment of the company's outstanding tax liability at the time the arrangement is entered into (say 25 percent) and agree to pay the balance remaining by equal instalments over the ensuing period of 12 months, or such longer period as is agreed.

The effect of entering into such an arrangement with the Commissioner and making payments in accordance with the arrangement will be as follows:

•

all payments made in accordance with the arrangement will be treated as having been made at the time when the first payment was made under the arrangement (paragraph (e)). This will mean that, for the purposes of calculating additional tax for late payment, those payments made in a timely fashion in accordance with the arrangement will not attract late payment tax;

•

the payment of each instalment will be disregarded for the purposes of ascertaining whether there is a liability for promoters recoupment tax and the extent of such liability (paragraphs (f) and (g)). This will mean that, notwithstanding the payment of the company tax by the former owners, the liability of promoters for recoupment tax will remain;

•

to ensure that, upon payment of the promoters recoupment tax, that amount will flow to the former owners as a refund of the company tax paid by them rather than being applied in reduction of the company tax under the provisions of sub-clause 9(7) (paragraph (h));

•

provided all payments required to be made under the arrangement are made in accordance with the arrangement, any promoters recoupment tax recovered by the Commissioner will result in a refund being made to the persons who paid the company tax under the instalment arrangement (paragraph (j)).

As explained earlier in the notes on this clause, sub-clause (2) will mean that, if an objection is lodged against any of the company's assessments that relate to the evaded company tax, the arrangement to pay by instalments will be at an end and the person(s) who entered into the arrangement will become liable for additional tax for late payment on the balance then outstanding and, once the objection(s) has been finalised, liable to pay vendors recoupment tax in realation to the outstanding amount including the additional tax for late payment.

Clause 22: Arrangements etc. to avoid operation of Act

This clause will render void as against the Commissioner of Taxation arrangements which have the dominant purpose and the effect of directly or indirectly defeating, evading or avoiding a person's liability to pay vendors or promoters recoupment tax.

By sub-clause (1) a scheme entered into by a person after 25 July 1982 will be void as against the Commissioner in so far as it has the direct or indirect effect of defeating, evading or avoiding any liability of the person to pay recoupment tax, where it would be reasonable to conclude that the person entered into the scheme for the dominant purpose of defeating, evading or avoiding his or her liability to pay recoupment tax or "future recoupment tax". This term is defined in sub-clause (6) and refers to recoupment tax that the person could reasonably have expected, when entering into the scheme, would become payable in the future.

Where a scheme or part of a scheme is rendered void by sub-clause (1), it will be treated as being of no effect in any "prescribed recovery proceedings". By virtue of sub-clause (6), this term will refer to proceedings commenced by the Commissioner, a liquidator or a trustee in bankruptcy which are designed to recover the recoupment tax.

Sub-clause (2) deals specifically with schemes involving the divestment of assets, but does not limit the generality of sub-clause (1).

Under this sub-clause, a transfer of property (see sub-clause (4)) after 25 July 1982 which has the effect of rendering a person unable to pay recoupment tax which that person is liable to pay will, to that extent, be void as against the Commissioner in prescribed recovery proceedings where:

•

having regard to the circumstances surrounding the transfer, the nature of any connection between the transferor and transferee and any other relevant circumstances, it would be reasonable to conclude that the person transferred the property for the dominant purpose of becoming unable to pay recoupment tax or future recoupment tax; and

•

the transfer was made by way of gift or, having regard to the abovementioned circumstances, it would be reasonable to conclude that the transferee believed or suspected that the transfer was made for the abovementioned purpose.

Sub-clauses (3) to (6) are drafting measures to assist in the interpretation of sub-clauses (1) and (2).

By sub-clause (3) a reference to a person's purpose in entering into a scheme or transferring property will, in the case of a scheme or transfer with more than one purpose, be taken as a reference to the dominant purpose, i.e., a purpose that outweighs all other purposes put together.

Under sub-clauses (4) and (5) a reference to a transfer of property by a person will carry an extended meaning so as to include an execution of a charge, the incurring of an obligation and a scheme which diminishes the value of that person's property while increasing the value of another person's property which, by virtue of sub-clause (5), includes that other person becoming the owner of property under the scheme.

In those cases, the person to whom the property was transferred will be taken to be the person in whose favour the charge was executed or the obligation incurred or whose property increased in value, respectively.

Sub-clause (6) defines the meaning of a number of terms used in sub-clauses (1) and (2):

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"future recoupment tax", in relation to a person, will mean recoupment tax that the person, when entering into a scheme, could reasonably have expected would become payable in the future;

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"prescribed recovery proceedings" will mean proceedings designed to recover recoupment tax, whether instituted by the Commissioner, a Deputy Commissioner, a trustee in bankruptcy or a liquidator; and

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"recoupment tax" will include penalty tax payable under clause 13 for late payment of recoupment tax.

Clause 23: Evidence

Clause 23 is designed to facilitate recoupment tax procedures that depend, among other things, on company tax being due and payable and remaining unpaid. An official certificate to that effect is to be taken as conclusive evidence except in proceedings which have been instituted in relation to an objection against the company's assessment under the provisions of the Assessment Act relating to reviews and appeals (Division 2 of Part V). This is in line with section 177 of the Assessment Act, and both that section and clause 23 are to be seen against the background that the objection and appeal provisions of the law give persons concerned an appropriate avenue of challenging an income tax liability contended for by the Commissioner of Taxation.

Clause 24: Regulations

By this clause, formal authority is given for the making of any regulations necessary for carrying out or giving effect to the proposed Act. A corresponding regulation - making power for purposes of the income tax law is contained in section 266 of the Assessment Act.

TAXATION (UNPAID COMPANY TAX - VENDORS) BILL 1982

This Bill is a "Rates Bill" which will formally impose the vendors recoupment tax, liability for which is to be established by the Taxation (Unpaid Company Tax) Assessment Bill 1982.

Clause 1: Short title

By this clause the proposed Act is to be cited as the Taxation (Unpaid Company Tax - Vendors) Act 1982.

Clause 2: Commencement

This Bill will come into operation at the same time as the Assessment Bill.

Clause 3: Incorporation

As usual in tax matters, the "Rates" legislation is to be read as one with the "Assessment" legislation.

Clause 4: Imposition of tax

By this clause recoupment tax will formally be levied on a "vendors taxable amount" as determined by the Taxation (Unpaid Company Tax) Assessment Bill 1982. This amount is, broadly, the person's share as a vendor shareholder or other former owner, of the relevant company's evaded company tax.

Clause 5: Amount of tax

By this clause the rate of recoupment tax will be 100 per cent of the eligible taxable amount.

TAXATION (UNPAID COMPANY TAX - PROMOTERS) BILL 1982

This Bill is also a "Rates Bill", and will formally impose the promoters recoupment tax on the basis provided for in the Taxation (Unpaid Company Tax) Assessment Bill 1982.

The clauses are in line with those in the vendors Rates Bill, with the operative clause - clause 4 - operating to levy promoters recoupment tax on the amount of evaded company tax that, under the Assessment Bill, is to be recouped from members of the eligible promoters class.

TAXATION (UNPAID COMPANY TAX) (CONSEQUENTIAL AMENDMENTS) BILL 1982

As its title implies, this Bill proposes amendments to certain Acts that are consequential upon the principal legislation to impose recoupment tax on vendors and promoters to recover unpaid company tax.

Clause 1: Short title

The Bill is to be cited as the Taxation (Unpaid Company Tax) (Consequential Amendments) Act 1982.

Clause 2: Commencement

By this clause the Bill will come into operation at the same time as the principal legislation.

Clause 3 and 4 : Amendment of the Administrative Decisions (Judicial Review) Act 1977

By these clauses decisions by the Commissioner of Taxation under the recoupment tax legislation are, like other comparable tax decisions to be excluded from review under the A.D.J.R. legislation. That exclusion reflects the fact that persons who dispute an assessment on them under the recoupment tax legislation will have rights of objection and appeal modelled on those that apply for income tax purposes.

Clause 5 to 14

These clauses, which propose amendments of the pay-roll tax (Territories), sales tax, stevedoring industry charge, tobacco charges and wool tax legislation have a common purpose.

In each case the amendments are designed to include recoupment tax within the categories of taxes which a liquidator or receiver of a company must, out of funds avialble to him, make provision to meet.