After all the trauma of the Curran saga, the remedial provisions were said to have a major drafting defect.
On 7 April 1978, when legislation to curtail Curran schemes was brought in, it was the commencement of a very busy period of anti-avoidance activity. By the middle of the year it became necessary to return to the Curran scheme issue.
At the time the Curran remedial provision, section 6BA, was being drafted it was realised that one of the capital sources from which bonus shares might be distributed was a company's share premium account. (At the time, bonus shares were normally issued out of realised capital profits or capital profits revealed by revaluation.) Accordingly, section 6BA on its introduction on 7 April 1978 also referred expressly to bonus shares originating from a share premium account.
Despite this, by mid-year word came in that use of bonus shares fuelled from share premium accounts might beat the legislative drafters.
This information came from a practitioner who had made an offer through a member of the Treasurer's private office staff to give information about the latest tax avoidance schemes. In a minute to the Treasurer on 11 July 1978 about the information, O'Reilly observed that 'the Government's recent initiatives in this area do not seem to have diminished the ingenuity of tax planners or their dedication to their cause'. He ended on a low note:
Although I am reluctant to say it, we seem to be fighting a war that is hard to win. No sooner does the Government clamp down on a series of schemes than the massive energies of the avoidance industry are directed - successfully it seems - to devising new ones to overcome the intention of the legislation.
As to the suggested defect in the new section 6BA he wrote:
I also report that an eminent Queen's Counsel is alleged to have given an opinion suggesting that the drafting of the new section 6BA - the "Curran amendments" - is deficient. We have not seen the opinion, but I am endeavouring to obtain a copy of it from "friendly sources". It is understood that the alleged deficiency is in the use of the phrase "a dividend (including an amount debited against an amount standing to the credit of a share premium account)". It is said that the word "dividend" takes its meaning from the general interpretation section of the Act. In that section, the word, which is expressed to have the defined meaning throughout the Act "unless the contrary intention appears", generally excludes amounts debited against a share premium account.
The eminent Q.C. apparently takes the view that the parenthetical words in the reference to "dividend" in section 6BA are merely explanatory of the general definition of "dividend" in the interpretation section and thus only cover dividends paid from share premium accounts in very exceptional circumstances. The officer who attended the discussions yesterday was told that many millions of dollars were being committed to "Curran"-type schemes using the share premium account variation in apparent reliance on this deficiency. My own officers have come across one scheme, involving $100 million, which appears to have been completed in the last weeks of the last financial year and which, with the benefit of the Sydney information, may be seen as relying on the alleged deficiency.
It is depressing that planners claim to have beaten section 6BA in this way, especially as we and Parliamentary Counsel were conscious of the point and, indeed, drafted the reference in section 6BA to amounts debited against share premium accounts for the very purpose of making sure that the section does apply to all bonus shares paid up out of share premium account. Despite Counsel's opinion, I intend to proceed with assessments on the basis that the intention has been achieved, but these assessments will, it seems clear, have to be fought through the courts.
It has also been reported to me that the person who provided this information indicated, in the context of referring to the increased deficit for 1977-78, that the estimate of "Curran" losses to the revenue of $500 million was "conservative" and that other schemes presently being promoted are "at least as big as Curran".
Further information about the extent of reliance on the claimed defect in section 6BA came to hand early in September 1978. This was that schemes entered into in Sydney on 29 and 30 June 1978 accounted for $1.4 billion in banking transactions and were implemented in reliance on the defect.
The information was passed to the Treasurer by O'Reilly in a minute of 13 September:
It is of considerable concern that at least one promoter is confident enough that the High Court would confirm the supposed weakness in section 6BA to embark upon an extensive programme of these schemes. (His clients would lose nothing if the Court found against them but he and the clients would profit greatly if the scheme is upheld). In view of my record with the High Court I would not like to back myself in a contest on the matter.
'All things considered', he recommended that the government should resolve on amendment to put the original intention of section 6BA beyond any shadow of doubt.
The 13 September 1978 minute went before an Ad Hoc Cabinet Committee the next day109 with the committee endorsing action which Cabinet approved on 19 September in Decision 6737 along with other anti-avoidance measures.110
A problem in framing the section 6BA amendment was that, against the background that both the Taxation Commissioner and Parliamentary Counsel did not accept that a defect existed, any clarifying change could be taken to concede, by implication, that a defect did exist. Issues of possible retrospectivity lurked around. This was dealt with by including in the amending Bill a declaration that the relevant amendments 'are enacted for the avoidance of doubt'.
The clarifying amendments to section 6BA had been announced by the Treasurer in a statement on 3 October 1978 and were made applicable in respect of bonus shares allotted after that day. But the statement (and ensuing legislation) indicated that if the 'ex share premium account' defect was found to exist and the relevant scheme had been entered into after 7 April 1978 (when section 6BA was introduced), the resulting 'artificial' loss would not be eligible for carry-forward as a deduction against income of 1979-80 or subsequent years.111
Courts decide there was no drafting weakness
Both official fears and promoter confidence proved to be unfounded. In a judgment handed down on 1 July 1986,112 the Federal Court (Chief Justice Bowen and Justices Fisher and Beaumont) agreed with Justice Yeldham of the NSW Supreme Court that section 6BA as originally enacted did strike down a scheme where the bonus shares were issued out of a share premium account. The case was one where a Curran loss of $660,065 had been sought.
Sections within Chapters 21-30
Last Modified: Wednesday, 16 June 2010