House of Representatives

Second Reading Speech

Mr HOWARD (Bennelong - Treasurer) (3.7) - I move:

That the Bill be now read a second time.

This Bill contains further measures designed to counter income tax avoidance practices. It covers four main areas of avoidance that were referred to in my announcements of 24 September 1978, 3 October 1978 and 1 March 1979. With the introduction of this Bill, all proposals for action against specific schemes of tax avoidance foreshadowed in announcements by me will have received legislative form. However, it is not to be inferred that this is the end of the matter. The Government will continue its fight against tax avoidance schemes along lines that have now become well established. In addition, as I have said already, examination of possible changes to the general anti-avoidance provision contained in section 260 is proceeding.

Taking the present amendments in the order in which they appear in the Bill, the first gives effect to the proposal announced on 3 October 1978 relating to tax avoidance through modifications of the so-called 'Curran' schemes. The second is concerned with commodity trading schemes and the third with share trading schemes that are variations of the schemes in respect of which legislation was enacted last year. The fourth amendment is concerned with 'expenditure recoupment' schemes that seek to exploit the availability of deductions for expenditure incurred in borrowing money, in discharging a mortgage, in the acquisition of trading stock, or in respect of a liability to pay interest or rent. The last three amendments were foreshadowed in my announcements of 24 September 1978 and 1 March 1979. (Quorum formed)

Modified Curran Schemes

In my statement of 3 October 1978, I said that tax scheme promoters were marketing modifications of the so-called Curran Schemes which they claimed were not caught by the amendments made last year. The Government advice is that the scheme is caught, but it cannot afford to take the risk. As was the case with the original scheme, the modified version depends for its success on a non-taxable issue of bonus shares. However, the bonus issue is paid out of a share premium account created solely for the purpose of the scheme, instead of out of capital profits reserves. The amendments made last year were clearly intended to cover such schemes, but promoters of the modified schemes argue that, for very technical reasons, they are not within the scope of the earlier amendments. The Commissioner of Taxation will be contesting this interpretation of the effect of the earlier amendments, but the Government has decided that it is necessary to guard against the eventuality of an adverse court decision and is, for this purpose, introducing a declaratory amendment.

The amendment will apply in respect of bonus shares allotted after 3 October 1978. At the same time, should it be held by the courts that the earlier amendments are defective, any artificial tax deductible losses arising from schemes based on the Curran decision, where bonus shares were allotted after 7 April 1978, will not be available for carry-forward beyond the 1978-79 income year. The date 7 April 1978 is of course that on which legislation to counter the Curran Schemes was introduced in the parliament.

Commodity Trading Schemes

The second group of amendments contained in the Bill will give effect to my announcement of 24 September 1978 to expand the scope of anti-avoidance measures enacted last year to counter schemes that rely on the special provisions of the income tax law that apply to transfers of trading stock. Those provisions, which are contained in section 36 of the Income Tax Assessment Act, require a taxpayer who disposes of trading stock otherwise than in the ordinary course of business - including a transfer of trading stock to a partnership in which the transferor is a partner - to bring the market value of the stock to account in assessable income and for this value to be taken as the purchase price paid by the transferee.

Honourable members will recall that last year amendments were made to section 36 to deal with tax avoidance schemes that used these special provisions to generate artificial losses on the transfer of trading stock consisting of shares, debentures or other choses in action. In effect, those amendments authorised the Commissioner of Taxation to fix the transfer value for taxation purposes on a commercially-realistic basis, having regard to guidelines set out in the law. The amendments proposed in this Bill will extend the scope of the earlier measures so as to counter schemes of the same general character, involving other forms of trading stock such as precious metals, antiques and fine art. The scope of the earlier amendments will be widened so as to include all trading stock and related property that is covered by section 36 of the Income Tax Assessment Act.(Quorum formed).

Mr Donald Cameron - Mr Deputy Speaker, is there a Standing Order which requires that quorums be called no more frequently than, say, at 15-minute intervals? This irresponsible behaviour on the part of the Opposition is interfering with committee meetings which are going on.

Mr DEPUTY SPEAKER (Mr Drummond) - Order! There is no substance to the point of order. It is the duty of the Government to see that a quorum is present in the House.

Mr HOWARD - The Bill also proposes amendments to section 36A of the Income Tax Assessment Act that are consequential upon those being made to section 36. This is being done to close off avenues that may otherwise be available to scheme promoters to exploit the election provisions of section 36A so as to frustrate the intention to widen the scope of the anti-avoidance provision of section 36. This amendment to section 36A, along with another more technical change concerning items that in legal terms are described as choses in action, will apply in relation to a notice of an election under the section given after today, unless it can be established that the change in ownership or interests occurred on or before today.

Share Trading Losses

In my statement of 24 September 1978 I mentioned that there were further schemes designed to fall beyond the reach of other amendments to the income tax law enacted early in 1978. Those 1978 amendments were intended to ensure that deductions under the general deduction provisions for purchases of trading stock in the form of shares and other choses in action do not exceed the trader's real commercial outlays. One such scheme involves a company issuing shares at a premium to a trustee of a trust in which a beneficiary is a trader in shares. The trustee borrows the funds to pay for these shares from a finance company controlled by the promoter of the scheme. Arrangements are then made for most of the shares to be vested in the beneficiary who treats them as an accretion to trading stock and claims to be entitled to an 'imputed deduction' for the value of the shares. The company then makes a bonus issue of shares from the share premium account on the few remaining shares held in trust and these shares are transferred to the finance company in repayment of the original loan.

The issue of the bonus shares by the company causes the shares owned by the beneficiary share trader to fall substantially in value and the beneficiary would then claim, despite not having suffered any commercial loss at all, to be entitled to a tax deduction for the difference between the sale price and the 'imputed' cost. The amendments proposed in this Bill will make it clear that the law dealing with share trading losses under the general deduction provisions, as enacted early in 1978, is to apply where a deduction is sought for losses or outgoings not involving actual expenditure.

The Bill also proposes to put beyond doubt that all losses or outgoings in relation to the acquisition of shares, whether incurred on application, allotment or by way of call or premium, come within the scope of those provisions. This further amendment is to counter schemes promoted on the basis that if shares, when issued, are paid up to only a nominal extent, say one cent per share, and the balance of the capital and a substantial premium, say $99.99, is payable by way of call, the call moneys are not within the scope of the present law. These amendments will apply in relation to relevant property purchased or acquired after 24 September 1978, but a more technical amendment of the provisions, not previously foreshadowed, will apply only after today. This concerns the meaning to be given to the reference in the existing law to choses in action.

Expenditure Recoupment Schemes

The remaining provisions of the Bill will implement proposals I announced on 24 September 1978 to deal with 'expenditure recoupment schemes'. These are schemes in which expenditure is incurred as part of a tax avoidance arrangement that results in the receipt by the tax-payer or an associate of a compensatory benefit, the value of which, when added to the tax saving arising from the deduction, more than effectively recoups the taxpayer for the expenditure so that no real loss or outgoing is suffered.

As I said in my statement of 24 September 1978 the amendments proposed by this Bill will deny a deduction for expenditure incurred in discharging a mortgage, in the acquisition of trading stock, or by way of interest or rent, where the expenditure is incurred after 24 September 1978 under a tax avoidance agreement of this type that is entered into after that date. As I said in my statement of 1 March 1979, the provisions will also apply in respect of expenditure incurred in borrowing money under a tax avoidance agreement of this type.

Let me here emphasise a point. I warned in my statement of 24 September that if further expenditure recoupment schemes were to emerge, the Government would, with effect from that date, act against them as outlined in that statement. My statement of 1 March 1979 is in earnest of that intent and I say again that the Government is determined to stamp out tax avoidance schemes in which taxpayers seek deductions for expenditure which, in a practical sense, they do not bear. I hope, for the sake of those taxpayers who may be contemplating paying fees to promoters to 'buy' deductions under such schemes, that this message is getting through. I do not think that I need spell out further the various types of expenditure recoupment schemes at which the Bill is directed, or the complex arrangements that are made under these schemes. Honourable members may obtain that sort of detail from the explanatory memorandum accompanying the Bill. It is probably sufficient for me to say that the Bill is directed at expenditure recoupment schemes that have been devised to exploit deductions ordinarily available under section 67, section 67A or section 51 in respect of the purchase of trading stock or a liability for interest or rent. But as I say, the Government intends to act on my 24 September warning.

The major part of the Bill is concerned with countering tax avoidance under expenditure recoupment schemes and, unfortunately, it is both lengthy and complex. It would be idle to expect that this length and complexity will not be criticised. However, as I have said before it is extremely difficult to avoid complexity and length where the aim is to counter arrangements that are in themselves highly artificial and complex unless there is resort to very broad provisions incorporating wide discretionary powers to deal with particular situations. I might also note that much of the complexity arises from the necessity to cover the various situations that in practice occur. For example, the legislation must cater for cases in which a taxpayer participates in more than one expenditure recoupment scheme and where the taxpayer's participation is in his or her own right or through a partnership or trust. It has also been necessary to provide for those schemes that take more than one year to implement, and for situations in which a taxpayer's activities for a year have resulted in a loss. There may be a number of combinations of these different eventualities and they have had to be catered for. Mr Speaker, the Government does not seek the passage of this Bill until the Budget sittings. As I have indicated in respect of earlier Bills directed at tax avoidance schemes, I see an advantage in introducing a Bill and delaying its passage so that provisions giving effect to earlier announcements are available for study by interested members of the public and the Parliament before being debated by the Parliament. The Government is ready to examine any constructive comments that might be made about technical features of the legislation after it has been examined by interested parties. It is because the Government is not seeking passage in these sittings that the Bill is titled (No. 4). A (No. 3) Bill to amend the Income Tax Assessment Act, and relating to valuation boards, will be introduced shortly with a view to passage in the current sittings. Details of the various provisions of the Bill are contained in an explanatory memorandum that is being circulated to honourable members. I commend the Bill to the House.