Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. Frank Crean, M.P.)Introductory note
The purpose of this memorandum is to explain the provisions of Bills designed to provide a firmer and more comprehensive basis for existing procedures under which exchange control approval of certain transactions with persons in tax havens may be refused if the transactions are related to tax avoidance or evasion arrangements.
Under tax screening procedures outlined in a statement made by the Treasurer on 25 October 1973, proposed transactions with persons in the New Hebrides were not to be given exchange control approval by the Reserve Bank unless it sighted evidence that the Commissioner of Taxation did not object to the proposed transaction on grounds that it would involve, assist in or be associated with avoidance or evasion of Australian tax. A similar rule applied to proposed portfolio investments in tax havens generally.
Towards the end of 1973 an amendment of the Banking Act was made with the object of giving firmer legal backing to these tax screening procedures. The Banking Act (No. 2) 1973 inserted new sub-sections - sub-sections (3) to (5) - into section 39 of the Banking Act.
Sub-section (3) of section 39 provides that, where the exchange control regulations require Reserve Bank approval of proposed transactions, the Bank may withhold its approval on the ground that the transaction involves, assists or is associated with avoidance or evasion of Australian tax. Sub-section (4) specifies that the Bank may not refuse approval on tax grounds if there is produced to it a statement by the Commissioner of Taxation that in his opinion approval should not be withheld on a ground referred to in sub-section (3).
It now appears that further legislation is required to enable the tax screening of proposed transactions with persons in tax havens to work as intended. The 1973 amendments to the Banking Act dealt in a short form with the tax screening procedures and a more comprehensive legislative statement of the position is now appropriate.
The proposed measures will clearly and directly place on the Commissioner of Taxation the task of deciding, according to rules set out in the Taxation Administration Bill, whether there are tax avoidance or evasion implications in proposed transactions with persons in tax havens. In cases where proposed transactions are subject to tax screening, in accordance with new section 39B being inserted in the Banking Act by the Banking Bill, the Reserve Bank may not approve the relevant exchange control application unless a tax clearance certificate from the Commissioner is produced to it.
More detailed notes on relevant clauses of the Bills are set out below.
Notes on Clauses
BANKING BILL 1974
One of the new sections being inserted in the Banking Act by clause 3 of the Banking Bill 1974 is section 39B. This will provide the basic authority for the tax screening of exchange control applications involving transactions with tax havens.
The proposed section 39 of the Banking Act, like the existing section 39, empowers the making of regulations governing the authorisation of, broadly, foreign exchange transactions. Section 39B will be applicable where such regulations provide, as do the existing Banking (Foreign Exchange) Regulations, that an act or thing may not be done without the authority of the Reserve Bank.
Sub-section (1) of section 39B provides that where an application is made to the Bank for its authority to carry out a particular transaction, the Bank is not to grant the authority - in a case where the transaction is of a kind specified by the Treasurer in a notice under sub-section (2) - unless there is produced to the Bank a tax clearance certificate. Section 14C of the Taxation Administration Act (being inserted by clause 10 of the Taxation Administration Bill 1974) provides for the Commissioner of Taxation to issue such certificates.
Sub-section (1) of section 39B also empowers the Reserve Bank to itself require that a tax clearance certificate be obtained before it grants its authority for the carrying out of a transaction. This power could be exercised in a particular case where, although the transaction is not covered by a notice under sub-section (2), the Bank has reason to believe that the transaction may have tax avoidance or evasion implications.
Sub-section (2) of section 39B enables the Treasurer, by a notice to be published in the Gazette to direct that transactions of a kind specified in the notice are, in effect, to require a tax clearance certificate before they may be carried out. As indicated earlier, proposed transactions with persons in the New Hebrides and proposed portfolio investment in tax havens generally, are currently exposed, by direction of the Treasurer, to tax screening procedures. Sub-section (2) would, of course, empower the Treasurer to bring transactions other than these within the screening procedures.
Clause 5(2) of the Banking Bill deals with applications made to the Reserve Bank for exchange control approval prior to the commencement, on a date to be proclaimed, of that measure. It specifies that if the Bank had not disposed of the application it is to be dealt with under the existing tax screening rules contained in sections 39(3) and (4) of the Banking Act. Accordingly, the new tax screening rules and procedures will apply only to exchange control applications made to the Reserve Bank after the commencement of the proposed legislation.
TAXATION ADMINISTRATION BILL 1974
Clause 1: Short title and citation
This clause formally provides for the short title and citation of the Amending Act and of the Principal Act (the Taxation Administration Act 1953-1973) as amended.
Section 5(1A) of the Acts Interpretation Act 1901-1973 provides that, unless the contrary intention appears, every Act shall come into operation on the twenty-eighth day after the day on which it receives the Royal Assent.
This clause provides that clauses 1 and 2 will come into operation on the day on which the Bill receives the Royal Assent, while other provisions of the Bill are to come into operation on a date or dates to be fixed by Proclamation. The Banking Bill 1974 is to come into operation by Proclamation and the provisions of the Taxation Administration Bill dealing with tax screening procedures could be expected to be proclaimed to commence on the same day.
Clauses 3 and 4 : Headings of Parts I and II
These clauses are formal drafting provisions and are consequential on the division of the Principal Act into Parts.
Clause 5: Tenure of Commissioner and Second Commissioners
This clause repeals sub-section (6) of section 5 of the Principal Act. Sub-section (6) provides the rate of salary payable to the Commissioner of Taxation and the Second Commissioners of Taxation. With the enactment of the Remuneration Tribunals Act 1973-74 and the insertion into the Principal Act of new section 5A by clause 6 of this Bill, this sub-section is no longer necessary.
Clause 6: Remuneration and allowances of Commissioner Second Commissioners
This clause inserts a new section - section 5A - into the Principal Act to provide for the payment of remuneration and allowances to the Commissioner of Taxation and the two Second Commissioners.
Sub-section (1) of new section 5A provides that the Commissioner and Second Commissioners shall be paid such remuneration as is determined by the Remuneration Tribunal. It also provides that, until such a determination is in operation, they are to be paid remuneration at the respective rates that were applicable immediately before the commencement of this section.
Sub-section (2) of section 5A provides for the payment of such allowances to the Commissioner and the Second Commissioners as are prescribed.
Sub-section (3) of section 5A provides that the section is to have effect subject to the provisions of the Remuneration Tribunals Act 1973-74.
This clause amends sub-section (1) of section 8 of the Principal Act to allow the Commissioner to delegate all or any of his functions under the Principal Act. At present, section 8 permits delegation by the Commissioner of his powers under other taxation Acts that he administers and the amendment will allow the Commissioner to delegate powers and functions he is being given under new Part IV of the Principal Act in relation to the issue of tax clearance certificates.
This clause effects a formal drafting amendment that is similar to those being effected by clauses 3 and 4.
Clause 9: Remuneration and allowances of the Chairman and other members of Valuation Boards
This clause makes, in relation to the Chairman and members of a Valuation Board appointed under the Principal Act, an amendment corresponding with that proposed by clause 6 - see the notes on that clause. Sub-clause (1) repeals section 11 of the Principal Act and inserts a new section 11 that is, in all material respects, identical with new section 5A to be inserted into the Principal Act by clause 6.
Sub-clause (2) of clause 9 is a saving provision which provides that until regulations prescribing allowances to be paid to the Chairman and other members of a Valuation Board are made under the power granted by sub-section (2) of section 11 of the Principal Act, allowances are to be paid at the rates that applied immediately before the commencement of the section.
Clause 10: Exchange Control - Taxation Certificates
This clause will insert in the Principal Act a new Part, Part IV - comprising sections 14A and 14O - which establishes the machinery by which, and the rules under which, the Commissioner may issue a tax clearance certificate. It also provides for review by a Taxation Board of Review of a refusal by the Commissioner to issue such a certificate.
Section 14A sets out definitions necessary for the application of Part IV. The definitions calling for particular comment are :
- "Australian tax"
- means tax imposed by a law of Australia or of a Territory. It will, as well as income tax, include estate, gift and ACT stamp duties, sales tax and other taxes imposed by the Parliament.
- "taxation law"
- is defined to mean a law of Australia or of a Territory imposing a tax or otherwise dealing with Australian tax. This will make it clear that, in considering whether there are tax avoidance or evasion implications in proposed transactions, the whole of the relevant tax law is taken into account.
Section 14B : Applications for issue of certificates
Section 14B sets out the circumstances in which a person may apply to the Commissioner for the issue of a tax clearance certificate. Broadly, an application in respect of a proposed transaction that, by reason of the exchange control regulations can only be made with the authority of the Reserve Bank, may be made where -
- (a)
- the act or thing for which approval is sought is of a kind specified in a declaration by the Treasurer made under proposed section 39B(2) of the Banking Act (see page 3 above); or
- (b)
- in any other case, the Bank has declined, under proposed section 39B(1)(b) of the Banking Act, to grant exchange control approval without a tax clearance certificate being given by the Commissioner.
Section 14C : Issue of certificates
This section, when read with section 14D, provides that the Commissioner is to issue a tax clearance certificate if he is satisfied that the transaction in respect of which the certificate is sought does not involve the avoidance or evasion of Australian tax.
Sub-section (1) of section 14C sets out the basic rule that where an application is made, the Commissioner is, subject to sub-section (2), to issue the clearance certificate if he is not authorised by section 14D to refuse to issue it. (Section 14D authorises the Commissioner to refuse a certificate if he is not satisfied that the proposed transaction does not involve avoidance or evasion of Australian tax.)
Sub-section (1) also will require the Commissioner to issue a clearance certificate if, although he would be authorised by section 14D to refuse it, he considers that the tax implications of the particular case are of such relatively minor importance that the need to protect the revenue of Australia does not warrant the withholding of a certificate.
Sub-section (2) of section 14C recognises that there may be a situation where it cannot be predicated, by looking at the particular act or thing for which a tax clearance is sought, that its carrying out will not lead to tax avoidance or evasion. The fact that further events are to, or could, happen outside Australia, and may not be subject to Australian exchange control, is something that could lead to that situation. For example, it may be desired to incorporate a subsidiary company in a tax haven. The establishment of the subsidiary company would make it possible for it to be used in the course of time as a means of tax avoidance.
To meet such situations, sub-section (2) allows the Commissioner, as a condition precedent to the issue of a tax clearance certificate, to obtain undertakings that will, if carried out, mean that the transaction for which clearance is sought will not lead to loss of Australian tax revenue through avoidance or evasion.
Sub-section (3) of section 14C provides for sanctions against breach of an undertaking given under sub-section (2). It does this by empowering the Commissioner to require that an undertaking contain an agreement to pay, in the event of a breach, an ascertained or ascertainable amount.
Where a breach of an undertaking does occur the sub-section will allow a court to order the person or persons who gave the undertaking to pay to Australia an amount not exceeding the amount indicated by the undertaking.
In determining the amount that is to be paid in respect of such a breach, the court is required to have regard to all relevant matters including, in particular, the nature of the undertaking, the nature and extent of the breach, the circumstances in which the breach took place and the nature and extent of any tax benefit or advantage that flows, or could be expected to flow, from the breach.
Sub-section (4) of section 14C (which parallels proposed section 14D(2)) is to the general effect that a court may regard a tax benefit or advantage relating to income tax to exist if income tax otherwise payable by a person is reduced or eliminated by reason that a breach of an undertaking under section 14C(2) has led to income not being derived or a loss or outgoing being incurred.
Sub-section (5) of section 14C allows the Commissioner to institute proceedings, for recovery of an amount considered to be payable as a result of a breach of an undertaking, in a court of competent jurisdiction.
Section 14D : Grounds on which issue of certificates may be refused
The broad purpose of section 14D is to authorise the Commissioner to refuse to issue a tax clearance certificate in respect of a proposed foreign exchange transaction if the applicant for the certificate does not establish that the transaction has no tax avoidance or evasion connotations. The section in effect spells out what is meant by avoidance or evasion.
Sub-section (1) specifies, as its main proposition, that the Commissioner may refuse to issue a tax clearance certificate if the applicant for the certificate does not satisfy him that the proposed transaction will not, or may not reasonably be expected to, involve or assist in or be associated with avoidance or evasion of Australian tax. The relevant avoidance or evasion may occur in Australia or overseas and could be avoidance or evasion by a person other than the applicant.
Paragraph (a) of sub-section (1) elaborates on this main proposition by providing that the Commissioner may refuse to issue a clearance certificate if the applicant does not satisfy him that the proposed transaction or an associated transaction will not, or may not reasonably be expected to, lead or has not, or could not reasonably be expected to have, led to the receipt or obtaining of a tax benefit or advantage. However, a tax benefit or advantage flowing from a transaction will not under paragraph (a) provide grounds for refusal of a certificate if the relevant transaction would be or could reasonably be expected to be, done, and done in the same form or way, if the tax benefit or advantage were not a factor.
Paragraph (b) of sub-section (1) of section 14D also extends the main proposition of the sub-section for cases where the transaction or an associated transaction would have, or may reasonably be expected to have, the result that funds or assets are placed in a tax haven beyond the reach of the Australian taxation authorities. If the applicant does not satisfy the Commissioner that the relevant transaction does not or could not reasonably be expected to have such a result he is entitled to refuse to issue a clearance certificate.
Sub-section (2) of proposed section 14D, like section 14C(4), is designed to provide, in relation to possible income tax implications, a stated criterion for determining whether a transaction gives rise, or could reasonably be expected to give rise, to a tax benefit or advantage. Sub-section (2) must therefore be read with paragraph (a) of section 14D(1).
Very broadly, sub-section (2) means that a person may be viewed as in receipt of a tax benefit or advantage if the person's liability to income tax is reduced or eliminated by reason that the relevant transaction has led to the person not deriving income, or has led to the person incurring expenditure, that would not have been derived or incurred but for the transaction. Sub-section (2) does not, however, affect the general meaning to be given to sub-section (1).
Sub-section (3) contains provisions of a type that it has been found necessary to include in taxation legislation that operates as a counter to tax avoidance practices. By paragraph (a) regard may be had to informal arrangements, understandings and practices which, while they may not have legal force, will be acted on by the persons concerned.
Paragraph (b) contains a necessary provision to the effect that a transaction is not to be excluded from being viewed as a tax avoidance or evasion arrangement on the ground that it represents ordinary commercial or family dealing.
Sub-section (4) of section 14D requires the Commissioner, if he refuses an application for a tax clearance certificate, to provide the applicant with formal notice of refusal. Such a notice provides a basis for the applicant to object against the refusal (section 14G) and, if necessary, to take the matter to a Taxation Board of Review and the High Court (section 14H).
Section 14E : Powers and functions of a Second Commissioner of Taxation
Section 14E provides that the powers of the Commissioner under this Part of the Taxation Administration Act may be exercised by either of the two Second Commissioners of Taxation and contains measures supplementary to that authority. This follows the normal practice of taxation legislation.
Section 14F contains the normal secrecy provisions found in taxation legislation. Broadly, an "officer" (defined in sub-section (1)) is prohibited by sub-sections (2) and (3) from divulging or communicating, except in the performance of his duty as an officer, any information acquired by him for tax clearance certificate purposes in relation to the affairs of a person.
Information may, however, by sub-section (4) be communicated to a Taxation Board of Review or to an officer performing a function or duty under an Act administered by the Commissioner. A person to whom information is communicated under sub-section (4) is subject to the obligations of, and entitled to the privileges of, an officer under earlier provisions of the section.
The Commissioner may require an officer to make an oath or declaration of secrecy and provision is made to ensure that information available to the Commissioner under other Acts may, without breach of secrecy, be taken into account in the consideration of an application for a tax clearance certificate.
Section 14G and 14H : Objections, reviews and appeals
These sections provide for objections against, and independent review of, any refusal by the Commissioner to issue a tax clearance certificate. The sections are modelled on provisions in other taxation legislation administered by the Commissioner.
Under section 14G, a person who is dissatisfied with a refusal of the Commissioner to issue a tax clearance certificate under section 14C may object against the refusal within sixty days of service of notice of the refusal. A person dissatisfied with the Commissioner's decision on the objection may within sixty days of service of notice of that decision request the Commissioner to refer the matter to a Taxation Board of Review for review.
Under section 14H the Commissioner is required to refer any request under section 14G which is accompanied by a fee of $2 to a Board of Review as soon as practicable after receipt of the request. On such a review, the burden of showing, on the basis of grounds stated in the objection, that the issue of a tax clearance certificate should not have been refused will, like the burden of showing that an income tax assessment is excessive, lie on the person who requested the review. The Board of Review may on its own view of things confirm the decision of the Commissioner or direct that a certificate be issued.
Both the Commissioner and the person making the request will have a right of appeal to the High Court from a decision of a Board of Review that involves a question of law, and a right to have the Board refer to the High Court questions of law arising in the course of a review by the Board.
Sections 14I and 14J : Information, evidence and access to books, etc.
In substance, these sections confer on the Commissioner, for purposes of his consideration of applications for the issue of tax clearance certificates, the same powers to obtain documents and other information, and of access to records, that he has under other taxation Acts he administers.
Section 14I allows the Commissioner, by notice in writing, to require a person to furnish information, attend and answer questions or produce any books, documents and other papers in his custody or control.
Section 14J empowers an officer authorised by the Commissioner for the purposes of Part IV of the Taxation Administration Act to enter at reasonable times upon land, to have access at reasonable times to books, documents and papers and to take extracts from or make copies of such books, documents or papers.
This section governs the matter of offences against Part IV.
Sub-section (1) creates an offence, and provides a penalty, if a person, in broad terms, fails to comply with a requirement under section 14I or if a person fails to answer questions truly and fully or provides a false or misleading statement or answer in connection with an application for a tax clearance certificate.
Other provisions of section 14K allow a court to order a person convicted of certain offences under sub-section (1) of this section to do the act he failed, refused or neglected to do and creates an offence, and provides a penalty for, a failure to comply with such an order.
Section 14L : Application of Part IV outside Australia
Part IV of the Taxation Administration Act addresses itself to transactions with persons in tax havens outside Australia. Accordingly section 14L specifies, in line with proposed section 39A of the Banking Act, that the Part is to apply both within and without Australia.
Section 14M : Jurisdiction of courts
Section 14M arises from the extra-territorial scope to be given by section 14L to Part IV. Section 14M confers on State and Territorial Courts jurisdiction with respect to offences against the Part that are committed outside Australia.
This is a conventional provision authorising the Commissioner to serve notices under Part IV either personally, or by post to the person's last known place of residence or business or to an address for service fixed by regulation.
Section 14O : Report by Commissioner
In keeping with a similar practice under other taxation legislation the Commissioner is to report annually to the Parliament on the operation of Part IV of the Taxation Administration Act.
Clause 11 repeals section 15 of the Principal Act and inserts both a heading for Part V of the Principal Act and a new section 15.
Section 15 : Rights of public servant preserved
Section 15 re-states the existing section 15 to the effect that a person appointed as the Commissioner of Taxation, a Second Commissioner of Taxation or a member of a Valuation Board who was, immediately before his appointment an officer of the Australian Public Service or a person to whom the officers' Rights Declaration Act 1928-1973 applied shall retain his existing and accruing rights. For the purpose of determining those rights his service in that appointment is to be regarded as if it were service in the Australian Public Service.
Clause 12 inserts a new section - section 18 - into the Principal Act. Section 18 will allow the making of regulations for the purposes of the Principal Act, e.g., for purposes of regulating references to a Board of Review of the Commissioner's refusal to issue a tax clearance certificate or to prescribe allowances under new sections 5A and 11.