House of Representatives

Explanatory Memorandum - PART II

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

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 :

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"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 in ascertaining that primary taxable amount. For example, in a simple case where the shares that were sold were those in the stripped company, the apportionment factor, in relation to a primary taxable amount, will be equal to the vendor-shareholder's proportionate share of the consideration for the sale of the shares in the company.

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

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

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"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.

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

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

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"Late payment tax" means additional tax payable under clause 10 for late payment of the recoupment tax to be assessed under this Bill.

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"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.

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"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.

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

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"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.

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"Primary taxable amount", in relation to a person, means an amount (representing the person's share as a vendor-shareholder of evaded company tax) 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 and recoverable from the person under the legislation.

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"Property" includes a chose in action, any estate, interest, right or power, whether at law or in equi ty, in or over property, and any right to receive income.

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"Recoupment tax" is to mean tax assessed under the proposed Act on an eligible taxable amount and imposed by the proposed Taxation (Unpaid Company Tax) Act 1982.

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"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.

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"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.

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"Secondary taxable amount", represents the share of evaded company tax recoverable from a person otherwise than as a vendor-shareholder 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.

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

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"Undistributed amount" 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.

Sub-clause (2) of clause 3 will ensure that, where particular shares are sold 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 of shares under the scheme are to be read as references to the first sale of the shares under the scheme. This will mean that where shares were sold by persons who had owned the company while it operated and derived income, and were later sold in a further sale or series of sales (and perhaps ultimately to men of straw) the sale by the former owners will be the relevant sale for purposes of the legislation.

Sub-clause (3) 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 interests in the shares, as well as in cases where the joint owners of shares sold their interests in the shares.

Sub-clause (4) 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 relation to the sale of shares or an interest in shares by a particular vendor-shareholder or other former owner. 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 (5) 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, apply in the same manner as it applies where the trustee is an individual.

Sub-clause (6) aims to make it clear 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.

Sub-clause (7) 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), 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. However, 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.

Sub-clause (8) applies where the Commissioner of Taxation has under clause 15 sent to a representative vendor-shareholder 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 the 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 Income Tax 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 to meet any late payment penalty owing by the company will be limited to the penalty that accrued after that date.

Sub-clause (9) is designed to ensure that the legislation will apply in circumstances where a shareholder disposes of his legal and beneficial interest in shares in successive steps. The sub-clause applies where under a scheme:

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a shareholder transfers his legal interest in shares to another person ("the transferee") who is 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 transferee when the beneficial interest in the shares was transferred and for the consideration received in respect of the passing of the beneficial interest.

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 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 Income Tax 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 10 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.

Sub-clauses (3) and (4) effectively incorporate 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. In his report the Commissioner is required to draw attention to any breaches or evasions of the Assessment Act which have come under his notice, and he would in carrying out this function name companies that have not paid their tax in consequence of a scheme of pre-tax profit stripping. Sub-clauses (3) and (4) will mean that, in making his annual report to the Parliament, the Commissioner will also report on the working of this new legislation and, in particular, may draw attention to the failure of an identified person to pay the recoupment tax.

Sub-clause (5) will permit the disclosure, without breach of tax secrecy provisions, of certain information concerning the affairs of a company or other persons to former owners of the company 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 sub-clause 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 sub-clause (6) the Commissioner of Taxation will be formally required to disclose to a person 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 recoupment tax. The existence of such an arrangement is, by virtue of the tests in paragraphs 5(1)(h) and 5(2)(h), a prerequisite to the vendor-shareholders being made liable for recoupment tax.

By sub-clause (7) 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 13 and 14).

Sub-clause (8) will ensure that the obligations of a liquidator with respect to a company's income tax liabilities also apply in relation to its liability to pay recoupment tax under this legislation.

Sub-clause (9) will mean that, where a person in respect of whom an assessment of recoupment tax has been made dies, 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. In this latter case, 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 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.

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 7) 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 the nine tests are all 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. 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.

By sub-clause (5), the primary taxable amount determined under sub-clause (1) or (2) in relation to a vendor-shareholder who is a nominee will, in effect, be trasnferred 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 7 of the Bill will make the person liable to pay tax on that amount and the Taxation (Unpaid Company Tax) Bill 1982 will formally impose recoupment tax at a 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.

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 (j) 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. Paragraph (a) is to be read with paragraph (c).

As mentioned in Part I 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 commences 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(2) 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. This test is to be applied, by virtue of sub-clause 3(4), 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(4), 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 (6) to (8) 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 clause 15 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 15, 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 one of the vendor-shareholders or other former owners, who will 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 former owner.

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 a former owner (see notes on sub-clause 15(4)), the period for objecting against the assessment expires 60 days after service of the notice of assessment on the target company.

The circumstances in which an objection is to be taken as finalised are set out in detail in sub-clauses (9) to (11) 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(7) and (8) and the application of payments measure in clause 9.

For example, in a case where the assessment relates to "ordinary company tax" and no payments on account of that liability have been made to the Commissioner of Taxation, the amount of overdue company tax will, subject to sub-clauses 3(7) and 3(8), 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(7), 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 a vendor-shareholder under clause 15, the amount of overdue company tax will, by reason of sub-clause 3(8), 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 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 property income. In that case, it is 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.

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 (6) to (8).

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 90 per cent or more 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 (12) 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:

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

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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 in Part I 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 in the bare trust.

Sub-clauses (6) to (8) 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(4) 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 (6) 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 (7) applies. Under sub-clause (7), 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 (6)(c) and sub-clause (8). This tax liability will be ascertained by aggregating any tax liability (including late payment penalty) already payable by the company (sub-paragraph (6)(c)(i)) (see also sub-clause 3(6)) with any future tax liability (not including late payment penalty) of the company that might reasonably be expected to occur (sub-paragraphs (6)(c)(ii) and (iii)).

The question whether a future tax liability might reasonably be expected is an objective test which, by virtue of sub-clause (8), 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. 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.

Sub-clauses (9) to (11) define, for the purposes of proposed 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 (9) 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 (10) 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 (11) the possibility that an extension 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 (12) 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 stripped 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 (13) 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 (14) 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 (15) is a measure to ensure that a primary taxable amount will be taken to exist in relation to unpaid company tax notwithstanding that a company or trustee vendor-shareholder who 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 under a bare trust) 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) exists, 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 eligible 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) Bill 1982.

In more detail, under sub-clause (1) secondary taxable amounts will arise where an eligible 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 eligible 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 an eligible 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 eligible taxable amount. The terms "holding company" and "holding trust estate" are defined in sub-clause (13).

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 eligible 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 eligible 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).

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 eligible taxable amount that exists in relation to the company will be taken to be a prescribed taxable amount, which under 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 is assigned to another person.

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 (17)) was a beneficiary 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 as having rights to capital in the vendor-shareholder company is the assignee (paragraph (c)), the trustee (paragraph (d)) or the company in which the shares were acquired or the trust in which the units were acquired (paragraph (e)).

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-sections (6) (stripping of a company) and (10) (stripping of a trust). Each of those sub-sections 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 with those which are specified in relation to the acquisition 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-section (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 an eligible taxable amount. The term is used in sub-clauses (1), (2) and (3) to refer to the amount of an actual or notional capital distribution by a company or trust in relation to which the eligible 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 an eligible 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(4)(c)) of the shares or interest in shares in the target company which, by allocation or tracing, gave rise to the eligible 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 time determined in accordance with these rules is inappropriate then the relevant distribution time will be such later time as the Commissioner determines.

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 that other trust has a beneficial interest in the first 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 matter.

As is the case in relation to 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).

By paragraph (a) the term "associate" is defined. This definition adopts the definition contained in sub-section 82KH(1) of the Assessment Act for the purposes of certain anti-avoidance provisions.

Under paragraph (b) 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 (c) and (d) 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 (e) ensures that a person to whom redeemable shares or units were issued or allotted will be regarded as having acquired them.

Paragraph (f) will ensure that the 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 or as application or allotment moneys 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 establishment 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 traced under sub-clause (1) to the persons who had 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 10 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 accrued in respect of that tax.

Clause 7: Liability to pay tax

Clause 7 formally establishes the liability of a person to pay recoupment tax on a primary taxable amount or a secondary taxable amount.

Under sub-clause (1), if an eligible 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) Bill 1982. The amount of recoupment tax is an amount equal to the eligible taxable amount.

Sub-clauses (2) and (3) mean that, where an assessment has been made of 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-clauses (4) and (5), frozen at its level at the time the assessment of recoupment tax was made.

Sub-clause (3) also provides that in a case where a liability to pay recoupment tax was traced to a person by reason of an opinion by the Commissioner of Taxation that 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 8, be traced to the person(s) to whom the liability was traced.

Sub-clause (4) deals with the situation where, after an assessment of 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 recoupment tax at either the primary level or the secondary level. By virtue of sub-clause 4(7), a recoupment tax assessment may be amended, at any time, to reflect an amendment of the target company's assessment.

Sub-clause (5) 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(7), 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 9, in reduction of that liability as if the late payment penalty had never been imposed.

Clause 8: Reduction of liability where tax paid

This clause provides that where, after an assessment of recoupment tax payable by a person is made, a payment of company tax is made or a payment of recoupment tax is made by another person who has been assessed to the tax at a different level of liability, that payment will be reflected by a reduction in the liability of the first person to pay recoupment tax.

The overall purpose of clause 8 is to ensure that the evaded company tax is only collected at one level and the benefit of any payments of company tax or recoupment tax will flow through to any liability which exists at another level.

Sub-clause (1) to (3) deal with the situation where a payment of company tax is made. The sub-clauses apply where after recoupment tax becomes "payable" (see sub-clause 3(6)) by a person on an eligible taxable amount, a payment is made which is applied in reduction of the corresponding company tax liability of the stripped company.

In that situation, the recoupment tax (which by virtue of sub-clause (7) includes any late payment tax) payable by the person is reduced by a proportion of the company tax paid. 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) deals with the situation 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-share-holder 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 8(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) deals with the situation 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 an eligible 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 eligible 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) means that any reduction of recoupment tax under clause 8 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 9 in relation to payments made directly by a person liable to pay recoupment tax.

Sub-clause (7) is a drafting measure by which the term "recoupment tax" as used in clause 8 is to include late payment tax payable under clause 10.

Clause 9: Application of payments

This clause will provide the basis on which payments made to the Commissioner of Taxation in respect of recoupment tax or company tax are to be applied in discharge or reduction of a particular tax 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 agianst 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) will mean that where a payment of company tax is made, either before or after an amount of recoupment tax is assessed, the payment of the company tax will, unless the Commissioner otherwise determines, be applied firstly against any additional tax for late or no lodgement or incorrect return or late payment of such additional tax and then against "basic company tax" (see sub-clause (4)) and late payment penalty on that basic company tax.

The power being vested in the Commissioner to make a different application of moneys to that set out in sub-clause (2) is being provided to deal with situations where a person liable, or likely to be liable, to pay recoupment tax makes such a payment. It is intended that in such a case - because the additional tax for late or no lodgment or for an incorrect return is not within the scope of evaded company tax that is to be the subject of the recoupment legislation - that the payment will first be allocated against any basic company tax and late payment penalty on that basic company tax.

Sub-clause (3) ensures that payments will be applied in accordance with sub-clause (1) or (2) notwithstanding any direction of the person making the payment.

Sub-clause (4) is a drafting measure by which the term "basic company tax" as used in sub-clause (2) will mean the tax assessed on a company's taxable income and any tax assessed under Division 7 of Part III of the Assessment Act on an undistributed amount, i.e., it will not include any late payment penalty.

Clause 10: Penalty for late payment of tax

By sub-clause (1) of this clause, a person who is assessed as liable to pay 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 by statute 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, remit the penalty tax, in whole or in part.

Clause 11: 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 by a trustee of a trust estate who is subsequently replaced by another trustee. Under the sub-clause, the shares or interest will be taken to have been sold by the current trustee.

Clause 12: 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 12 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 12 will have effect, for the purpose of applying the proposed Act in relation to a sale of shares under a scheme, where a company which was more than 90 per cent controlled by the vendor-shareholders as required by the tests in paragraphs 5(1)(c) and 5(2)(c) ceased to exist after the time when the first shares were sold under the scheme. The remaining provisions of the clause enable the company tax liability of such a company to be established notwithstanding that it no longer exists.

Sub-clauses (2) and (3) deal with the situation where the 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) and 5(2)(g) 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 the 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 (10) will be treated in a comparable manner to an actual amended assessment.

Sub-clauses (4) and (5) deal with the situation where the 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 shares in the target company were sold 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 (10) 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.

Under sub-clause (6) the Commissioner is required to serve notice of the notional assessment on one of the persons who will be liable to pay recoupment tax.

By sub-clause (7) the person on whom the notice of notional assessment is served can exercise 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.

Sub-clause (8) 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) relating to an assessment of company tax are also applicable in the case of a notional assessment of company tax.

Sub-clause (9) 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 (10) 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).

Clause 13: 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 13 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.

By sub-clause (1), such a request 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

•

a 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 13 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(7), 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 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 wich qualifies as a body or institution whose income is exempt under the provisions of the Assessment Act.

Sub-clause (6) applies in situations where the Division 7 tax liability of a company in relation to a year of income is paid after the vendor-shareholders became liable for that tax. In that case, the vendor-shareholders will not be deemed to have been paid dividiends in relation to that liability.

Sub-clause (7) applies 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 (8) is a drafting measure which ensures that a reference in sub-clause (7) to undistributed profits tax will not include a reference to any late payment penalty related to the Division 7 tax.

Clause 14: 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 13 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.

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.

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 15: Notification of company tax liability

The basic purpose of clause 15 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-clauses (1) and (2) 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.

By sub-clause (1) 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.

Under sub-clause (2) the representative former owner on whom a notice of assessment of company tax is served will be entitled to exercise the same rights of objection and appeal against that assessment as are available to the company itself. The company will retain its normal rights of objection and appeal against the assessment, notice of which has been served on it by the method specified in sub-clause (1).

Sub-clauses (3) to (5) 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 company before 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.

By sub-clause (3) the Commissioner will be required to serve a copy of the notice of assessment on one of those persons. Complementing sub-clause (1), the sub-clause also provides that if the notice was not validly served on the company, the service of the copy will be deemed to be service on the company.

However, sub-clause (4) means that sub-clause (3) is not to apply where it is apparent to the Commissioner that the service or purported service brought the contents of the notice to the attention of one of the former owners who is likely to become liable to pay recoupment tax.

Under sub-clause (5) the representative former owner on whom a copy of the notice of assessment of company tax is served 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 former owner to object against the assessment within 60 days of the service of the copy.

Sub-clause (6) is a drafting measure which ensures that the provisions of clause 6 will apply in relation to an assessment of company tax under which additional tax for late or no return or for incorrect return has been imposed.

Clause 16: 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 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, to 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 include also a 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 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) :

•

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

•

"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

•

"recoupment tax" will include penalty tax payable under clause 10 for late payment of recoupment tax.

Clause 17: Evidence

Clause 17 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. This is in line with section 177 of the Assessment Act, and both that section and clause 17 are to be seen against the background that the objection and appeal provisions of the law give persons concerned that avenue of challenging an income tax liability contended for by the Commissioner of Taxation.

Clause 18: 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) Bill 1982

This Bill is a "Rates Bill" which will formally impose the 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) 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 person's "eligible 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) (Consequential Amendments) Bill 1982

As its title implies, this Bill proposes amendments to certain Acts that are consequential upon the principal legislation to impose a recoupment tax 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.

Clauses 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.

Clauses 5 to 14

These clauses, which propose amendments of the payroll 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 available to him, make provision to meet.

Income Tax Assessment Amendment (Additional Tax) Bill 1982

Introductory note

The primary function of this Bill is to amend the Income Tax Assessment Act 1936 to increase the rate of statutory penalties for late payment of tax from 10 per cent per annum to 20 per cent per annum. The additional taxes and the additional amounts concerned are payable to the Commissioner of Taxation as penalty in cases where income tax or other amounts payable to the Commissioner are paid after the due date for payment. Additional (penalty) tax at the rate of 10 per cent per annum is also payable where the expected income tax liability of a company has been underestimated, with the result that instalments of company tax are reduced. An underestimation of this nature effectively means that the company tax was not paid when it should have been paid.

The provisions of the Assessment Act which, by this Bill, will be amended to increase penalty taxes and other penalty amounts from 10 per cent per annum to 20 per cent per annum are :

A related purpose of this Bill is to amend the Assessment Act to restrict the power of the Commissioner of Taxation to remit all or part of an amount payable as penalty tax or other penalty amount to those cases where late payment is due to special circumstances such as adverse business or other factors beyond the control of the taxpayer. The practical effect of these amendments, insofar as they relate to additional tax for late payment of income tax, will be that the Commissioner's existing practice, in disputed assessment cases, of agreeing to remit the additional tax payable in respect of one-half of the disputed tax pending the outcome of the dispute, provided that the other half is paid in the meantime, will not be open in the future.

Instead, if a taxpayer who has disputed an assessment pays only, say, 50 per cent of the tax in dispute additional tax at the increased rate of 20 per cent per annum will be payable in respect of the tax that is found to be payable and remains unpaid, and the Commissioner will not be authorised to remit any part of that additional tax. There has been a ministerial announcement of further legislation to provide for the payment of interest on amounts refunded to taxpayers as a result of a successful objection or appeal against an assessment.

Arrangements entered into by the Commissioner, prior to the date on which the amendments proposed by this Bill become law, to remit additional tax in disputed liability cases will not be overturned and will be allowed to continue according to their terms.

The increased rate of penalty tax proposed by this Bill will not take effect until a date two months after the date on which the amendments become law.

Notes on each clause of the Bill follow.

Clause 1: Short title, etc.

By sub-clause (1) of this clause the amending Act is to be cited as the Income Tax Assessment Amendment (Additional Tax) Act 1982.

Sub-clause (2) facilitates references to the Income Tax Assessment Act 1936 which, in the Bill, is referred to as "the Principal Act".

Clause 2: Commencement

Under this clause the amending Act is to come into operation on the day on which it receives the Royal Assent. But for this clause the amending 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.

By clause 9 the increase from 10 per cent to 20 per cent in the rate of additional tax for late payment will not apply for a further two months.

Clause 3: Payment of withholding tax

This clause proposes amendments to sub-sections 128C (3) and (4) of the Principal Act. By section 128C, withholding tax on dividend and interest income derived by a non-resident of Australia is due and payable twenty-one days after the end of the month in which the income to which it relates was derived. If any withholding tax remains unpaid at the expiration of sixty days after the time when it became due and payable, additional tax is due and payable on the amount unpaid, computed from the expiration of that period. The existing rate used in the calculation of the additional tax is 10 per cent per annum.

Paragraph (a) of clause 3 proposes an amendment to sub-section 128C(3) to increase the rate of additional tax to 20 per cent per annum.

By paragraph (b), sub-section 128C(4) will be omitted and a new sub-section substituted. Existing sub-section 128C(4) provides general authority for the Commissioner of Taxation to remit the statutory additional tax or any part of the additional tax simply, for such reasons that he thinks sufficient. New sub-section (4) will operate to permit the Commissioner to remit the statutory additional tax only in restricted circumstances.

The circumstances in which remission of additional tax will be permitted by sub-section (4) are comparable with those in which remission of additional tax for late payment of assessed income tax is to be permitted.

Clause 4: Penalty for unpaid tax

Clause 4 of the Bill proposes an amendment to section 207 of the Principal Act by which sub-section 207(1) will be omitted and two new sub-sections - sub-sections (1) and (1A) - will be substituted.

Under section 207 of the Principal Act, additional (penalty) tax becomes payable when income tax determined by assessment remains unpaid after the time when it becomes due and payable. By virtue of sub-section 221YA(2) this additional tax applies also to late payment of provisional tax.

The rate of the additional tax is 10 per cent per annum and is calculated on the amount of assessed income tax (or provisional tax) unpaid from the date on which it became payable to the date on which it was paid.

Revised sub-section (1) of section 207 specifies that the rate of late payment penalty is to rise to 20 per cent per annum. In addition, its re-expression will make clear the position about this penalty where, under section 206 of the Principal Act, the Commissioner has granted a taxpayer an extension of time for payment.

The additional tax may be payable where tax remains unpaid after the due date for payment notified in a notice of assessment, whether or not an extended due date has been granted under section 206. Where, however, in granting an extension of time to pay the Commissioner has determined a later date as the date from which the late payment penalty is to run, additional tax will be payable if tax remains unpaid after that later date.

This will mean that under the amended law the way will be open for the Commissioner, if the circumstances make it appropriate, to grant to a taxpayer who pays, say, 50 per cent of an amount notified by the Commissioner, an extension of time for the balance of the tax, subject to late payment penalty on the balance, measured from the original due date.

A power to remit late payment penalty, now contained on a general basis in the proviso to sub-section 207(1) is being reinstated in more restricted terms in proposed sub-section 207(1A).

By paragraph (a) of sub-section (1A) the Commissioner will be permitted to remit the additional tax payable by a tax-payer if he is satisfied that the circumstances that led to the delay in payment of the income tax were not caused by an act or omission of the taxpayer and the taxpayer has taken reasonable action to mitigate the effects of the circumstances that led to the delay. For example, paragraph (a) would permit the Commissioner to remit additional tax in a case where the late payment of income tax was caused by adverse factors beyond the taxpayer's control, such as, loss of property or trading stock through an accident or a natural disaster. The power to remit the additional tax will, however, only be available if the taxpayer has taken any action reasonably available to mitigate the effects of the adverse factors. Action that a taxpayer could be expected to take in mitigation would include payment of as much as practicable of the outstanding tax.

Paragraph (b) of sub-section (1A) will authorize the Commissioner of Taxation to remit the additional tax in appropriate cases, notwithstanding that the circumstances which led to the delay in payment of tax were caused by the taxpayer. Remission of the penalty tax will be possible if the Commissioner is satisfied that the taxpayer has taken reasonable action to mitigate the effects of those circumstances and that it is fair and reasonable to remit the penalty tax in view of the nature of those circumstances.

A situation to which paragraph (b) would apply could arise out of financial difficulties caused by a business decision taken by the taxpayer which, although it might have been a reasonable decision to take at the time, resulted in a loss or other adverse consequences for the taxpayer.

By paragraph (c) of sub-section (1A) the Commissioner of Taxation will be able to remit additional tax imposed for late payment of income tax where he considers that there are other special circumstances to justify that course.

The automatic imposition of additional tax by sub-section 207(1) will, in some cases, result in very small amounts of additional tax being payable. Paragraph (1A)(c) will permit the Commissioner to remit in full those small amounts if he considers that course to be justified.

Clause 5: Estimated income tax

This clause proposes amendments to section 221AG of the Principal Act by which sub-sections 221AG(6) and (7) will be omitted and two new sub-sections substituted. Section 221AG forms a part of the provisions in the Principal Act by which companies are called upon to pay advance instalments of tax. The section operates, in cases where a notice has been served by the Commissioner of Taxation on a company requiring it to pay an instalment of company tax, to permit the company to make an estimate of its expected income tax liability for the purpose of varying the amount payable by way of instalments.

Sub-sections 221AG(6) and (7) impose additional tax where instalments of company tax have been reduced as a result of an underestimation of the company's income tax liability. An underestimation of this nature effectively means that the company tax was not paid when it should have been paid.

The existing sub-section (6) imposes penalty tax where a company, upon receiving a notice calling for payment of an instalment of tax, provides the Commissioner of Taxation with an estimate, which subsequently proves to be an underestimate, of its income tax liability for the purpose of having the amount of the tax instalment reduced. By the scheme of the company tax instalment provisions, subsequent notices to be served on a company which makes an estimate of its income tax liability are also based on the estimate made by the company. Sub-section (7) imposes penalty tax in cases where as a result of the income tax liability of a company having been underestimated, subsequent instalments of tax are notified at the reduced level. Existing sub-sections 221AG(6) and (7) provide general authority for the Commissioner of Taxation to remit the statutory additional tax or any part of the additional tax simply, for such reasons that he thinks sufficient.

The new sub-sections 221AG(6) and (7) will substantially re-enact the existing sub-sections, with the difference in each sub-section being that the rate of the additional tax is increased from 10 per cent per annum to 20 per cent per annum and the power of the Commissioner of Taxation to remit all or part of the additional tax is limited to cases where the Commissioner is satisfied that there are special circumstances by reason of which it would be fair and reasonable to do so.

Clause 6: Group employers

By clause 6 of the Bill section 221F of the Principal Act will be amended by omitting sub-section (10) of that section and substituting two new sections - sub-sections (10) and (10A). Section 221F forms part of the PAYE (pay-as-you-earn) provisions applicable to employees. The broad requirement of the PAYE provisions is for employers to make deductions from salaries and wages paid to employees and to either remit the amounts so deducted to the Commissioner of Taxation or to purchase tax stamps on behalf of the employee.

Section 221F requires an employer who ordinarily has 10 or more employees to register as a group employer and to remit to the Commissioner deductions made from salaries and wages paid to employees. A group employer is required to remit the deductions to the Commissioner within 7 days of the end of the month in which the deductions were made.

Existing sub-section 221F(10) imposes statutory additional tax at the rate of 10 per cent per annum if PAYE deductions are not remitted to the Commissioner in the time allowed. The Commissioner can remit all or part of the additional tax for such reasons that he thinks sufficient.

In the new sub-section 221F(10) proposed by this clause the rate of the additional tax is increased from 10 per cent per annum to 20 per cent per annum of the amount unpaid.

The power to remit late payment penalty, at present contained on a general basis in the proviso to sub-section 221F(10), is being reinstated in a restricted form in proposed sub-section 221F(10A). The circumstances in which remission of the late payment penalty will be permitted by sub-section (10A) are comparable with those in which remission of additional tax imposed by section 207 of the Principal Act for late payment of assessed income tax is to be permitted.

Clause 7: Deductions to be forwarded to Commissioner, etc.

This clause proposes amendments to section 221YN of the Principal Act. Section 221YN forms a part of the provisions of the Principal Act which deal with the collection of withholding tax payable by a non-resident of Australia in respect of dividends and interest received from Australia. To facilitate the collection of withholding tax, the company or other person in Australia that pays the dividend or interest to the non-resident is required to deduct from the dividend or interest an amount on account of the withholding tax liability of the non-resident and to pay the amount of the deduction to the Commissioner of Taxation.

An amount deducted from a dividend or interest paid to a person not resident in Australia is required to be paid to the Commissioner within 21 days after the end of the month in which the deduction was made. If the amount is not paid within that period sub-section 221YN(4) specifies that an additional (penalty) amount becomes payable at the rate of 10 per cent per annum computed from the date on which the amount should have been paid.

Paragraph (a) of clause 7 proposes to amend sub-section 221YN(4) to increase the rate of the late payment penalty from 10 per cent per annum to 20 per cent per annum.

Paragraph (b) will omit sub-section (5), which provides on a general basis a power for the Commissioner to remit the late payment penalty, and substitute a new sub-section (5) to restate the power to remit late payment penalty in a restricted form. The form of the restricted power of remission is the same as that proposed for the remission of additional tax for late payment of assessed income tax.

Clause 8: Deductions to be forwarded to Commissioner, etc.

This clause proposes amendments to section 221ZC of the Principal Act. Section 221ZC imposes upon persons who make specified payments for the use of Aboriginal land for mining or mineral prospecting purposes an obligation to deduct from the payments an amount on account of mining withholding tax payable in respect of those payments.

An amount deducted from a payment of this kind is required to be forwarded to the Commissioner of Taxation within 21 days after the end of the month in which the deduction was made. If the amount is not remitted to the Commissioner within that period an additional amount becomes payable at the rate of 10 per cent per annum computed from the date on which the amount should have been paid.

Paragraph (a) of clause 8 proposes to amend sub-section 221ZC(4) to increase the rate of the late payment penalty from 10 per cent per annum to 20 per cent per annum.

Paragraph (b) will omit sub-section (5), which provides on a general basis a power for the Commissioner to remit the late payment penalty, and substitute a new sub-section (5) to restate in a more restricted form the power to remit late payment penalty. The form of the restricted power of remission is the same as that proposed for the remission of additional tax for late payment of assessed income tax.

Clause 9: Deferment for 2 months of increased rate of additional tax

Clause 9 of the Bill is a transitional measure designed to ensure that the proposed 20 per cent per annum rate for late payment penalty will only commence to apply from a date 2 months after the Bill becomes law.

In practical effect, clause 9 will require that, in any computation of late payment penalty under a provision of the Principal Act which is proposed to be amended by this Bill, the computation will proceed on the basis that, where tax or another amount has remained unpaid during a period prior to the date 2 months after enactment, the former rate of 10 per cent per annum continues to apply.

Clause 10: Agreement to remit additional tax

Clause 10 is a further transitional measure designed to modify the effect of the amendments made by this Bill to the power of the Commissioner of Taxation to remit an amount of late payment penalty imposed under section 207 of the Principal Act. By the amendment to section 207 the power of the Commissioner to remit all or a part of an amount payable as penalty for late payment of assessed income tax is to be restricted to those cases where late payment is due to special circumstances, such as adverse business or other factors beyond the control of the taxpayer. The practical effect of those amendments will be that the Commissioner's existing practice, in disputed assessment cases, of agreeing to remit the additional tax payable in respect of one-half of the disputed tax pending the outcome of the dispute, provided the other half is paid in the meantime, will not be open in the future.

Clause 10 will, however, retain for the Commissioner a general authority to remit an amount of late payment penalty in any case where, prior to the date on which the Bill becomes law, he has entered into an arrangement with a taxpayer to remit additional tax in respect of an amount of assessed income tax that has remained unpaid pending the resolution of a disputed assessment. In other words, these existing arrangements will not be overturned and will be allowed to continue according to their terms.