In Perth in 1973 the ATO came across a company that had been stripped of its capacity to pay tax owing. Repeated attempts to have perpetrators prosecuted came to nothing. Along with other failed ATO efforts towards prosecution, this case was later to lead to this kind of activity being made a specific criminal offence.
In 1973, the first bottom of the harbour schemes came to ATO attention. The following account of their handling (and particularly of one that became a landmark case) is taken primarily from the fourth interim report of Royal Commissioner Costigan. In his report, Costigan set out events in great detail. He also endorsed the ATO description of a bottom of the harbour scheme.165
In 1973, a senior ATO investigation officer in Perth, Rod Todman, was called on by his Deputy Commissioner to investigate a novel case in which a company had lodged a return but failed to pay the assessed tax. On enquiry, it was found that the company had been sold and there was no money left to pay that tax. Not only that, there were profits from a later year, but no taxpaying capacity left. As investigations unfolded, Todman uncovered schemes for some 50 companies, giving most of his attention to the first case as an example of them all. Initial pursuit of one case was influenced by a situation of limited investigative resources.
The investigation reached fruition in mid-1974 by which time most of the participants had been interviewed, relevant documentary material procured and copies taken of books of account. This allowed assessments to be raised, although at the time of the strip a writ for unpaid taxes had been raised against the stripped company. Shortly after the shares had been transferred, judgment was entered for a sum in excess of $70,000. After assessments for a later period, unpaid tax amounted to $300,000.
By arrangement within the Tax Office, reports of the operation of this kind of scheme throughout Australia were sent to Todman so that he could be kept informed about its spread. In 1974 it was decided to seek legal advice. A letter of 4 September from the Deputy Commissioner to the Deputy Crown Solicitor in Perth said:
The recovery of company tax in this case and other cases acquired by (naming the promoter) raises issues which could have far reaching implications on the collection of company tax generally.
The officer handling the matter in the Deputy Crown Solicitor's office initially considered that the facts 'appear to be insufficient to support a fraud claim against any of the persons involved'. Ultimately a brief was delivered to senior counsel, Brinsden QC. In an opinion delivered between Christmas and New Year, Brinsden's firm advice was that the promoter and two others should be charged with a breach of section 86(e) of the Commonwealth Crimes Act and be subjected to certain civil proceedings.
Section 86(1)(e) provided that a person who conspires with another person to defraud the Commonwealth or a public authority under the Commonwealth was guilty of an indictable offence, punishable by imprisonment for three years. It will be noted that the offence was one of conspiracy. There was then no direct statutory offence of defrauding the Commonwealth - this was to come later.166
The Brinsden advice was sent to the Deputy Commissioner in Perth and on to the Commissioner in Canberra, where it was accepted. Some doubt arose in Canberra as to whether the secrecy provisions of the tax law would inhibit the evidence being called. This led to further advice being sought from counsel and on 25 June 1975 he advised that section 16 constituted no hindrance.
After referring this advice to the ATO in Canberra the Deputy Crown Solicitor was instructed in August 1975 that action under section 86 of the Crimes Act should be commenced against the three men concerned.
Prosecution action stalls
Costigan's comment in relation to events at this time was:
It was August 1975. The case had been identified as a test case. It was, both then and thereafter, seen as the case upon which the whole operation of the scheme, whether by that promoter or others, depended. Action in other matters was, in the main, delayed pending its outcome.
The action to institute prosecution had not yet been taken, and in November and December 1975 the Tax Office in Perth was pressing the officer handling the matter in the Deputy Crown Solicitor's office, but to no avail. In early 1976 an opinion in another case obtained from Sydney counsel that was supportive of a criminal prosecution was provided to the Perth solicitor.
By March 1976 the Deputy Crown Solicitor officer advised the ATO that he was 'not confident' but had referred the matter to Commonwealth police for further action. (Costigan saw no need for this.) The police investigation was not concluded until November 1976. Their report, described by Costigan as being of a 'high standard', recommended that charges be brought. The police said:
It is submitted that sufficient documentary evidence is available to prove the three conspirators came to an agreement to affect their financial purposes by unlawful means.
Nothing further was done until April 1977, when the solicitor handed to Todman draft instructions to counsel to settle the criminal charge and advice on evidence. Todman made many alterations. A process of revision went on between the two officers, leading to preparation of a fresh set of instructions, with the solicitor indicating on 9 June that he would have the matter ready for counsel in a few days. Before leaving the office on 22 June 1977, the solicitor handed the instructions to his successor for their immediate delivery to counsel. They were never delivered, being found in 1982, as a result of Costigan's enquiries, in a bottom drawer in the Office of the Crown Solicitor in Perth.
Costigan described the treatment of the file by the successor as 'even worse' than the one who had retired sick (and gives details in his fourth Interim Report). With other attempts by Todman unsuccessful, the Deputy Commissioner of Taxation in Perth decided to make direct contact with the Deputy Crown Solicitor, leading to a meeting between them on 20 February 1978.
An outcome of that meeting was for the solicitor in Perth to 'marshall the documentary evidence with a view to presenting the case to the Crown Solicitor so that the course of action can be decided'. That work too was not done, although a letter concerning the matter was sent by the Deputy Crown Solicitor to the Crown Solicitor. With information accumulating in the ATO in Canberra about resort to the scheme, the Tax Office had accordingly alerted the Crown Solicitor personally. He telephoned his Deputy, asking for a report. He was told (falsely as Costigan found) that they were awaiting a further report from the Perth Tax Office. The report requested by the Crown Solicitor was never delivered to him.
The Treasurer was given information in a passing way in a minute of 24 May 1978 from the Commissioner dealing with a range of tax avoidance matters - this minute began the process leading to the Crimes (Taxation Offences) Act 1980. O'Reilly wrote:
In making this suggestion I mention that my officers have been pressing the Crown Solicitor to investigate whether prosecution action could be taken under the Crimes Act or the Companies Act against people involved in two cases of "straw company" evasion.
It became known in the middle of 1978 that the Corporate Affairs Commissioner in Melbourne was proposing to investigate companies that had ended up in the hands of impecunious directors and shareholders. This was the McCabe-Lafranchi investigation.167 This led to a letter of 1 June 1978 from the Deputy Crown Solicitor to the Crown Solicitor for his instructions. The letter highlighted difficulties, 'most of which did not exist' according to Costigan. Nothing more than that was done on the matter in Perth.
The latter half of 1978 saw the Canberra and Perth offices of the Crown Solicitor telling the ATO that the other was handling the matter. At the end of the year, the file was handed to a senior officer in the Crown Solicitor's office in Canberra, and the matter came in the New Year to the attention of his superior, who became alarmed. The senior officer then looked further into the matter and was also alarmed, with the upshot that a letter was prepared countering 'many if not all' the matters in the Perth letter of 1 June of the previous year. The letter ended up not being sent. Instead, the superior officer telephoned the Deputy Crown Solicitor in Perth. Concerned that no action had been taken, the Canberra senior officer rang the Deputy in Perth at the end of March 1979 to be told that the evidence was not sufficient to allow prosecution. This conclusion was advised formally to the ATO by the Crown Solicitor on 3 April 1979.
As a result of these events, the proposed prosecution lapsed. Todman had one last try but as Costigan noted, the Tax Office in Canberra had 'become discouraged'. In May a file note was written:
The Crown Solicitor's memo was disappointing, but is hardly surprising as it seems to me that taking account of the long history of the matter and the period of time it has been with the DCS, the (Canberra memorandum) … to the Crown Solicitor almost invites the opinion we ultimately got. It may well be a lost cause.
At the time, the ATO in Canberra had begun action to secure what became the Crimes (Taxation Offences) Act 1980 and in terms of responsive action was starting to put its eggs in that basket.
Tax did try again with the Perth case, although not until 30 May 1980, when the Crown Solicitor was again asked to advise whether other statutory provisions could be used to attack the schemes. The Crown Solicitor's response, on 29 September 1980, was that information given in the latest ATO request was substantially the same as when dealing with an earlier ATO request and repeated the Crown Law conclusion about insufficiency of evidence.
Despite this, and the introduction of the Crimes (Taxation Offences) Act 1980, that was not to be the end of the saga of the Perth case.168
Eggs in other baskets
While key ATO focus was on achieving prosecution action in the Perth case, it was not the only response that was considered, nor was attention limited to that case.
For example, in August 1978 the ATO received advice through the Sydney office of the Crown Solicitor based on examination by prominent counsel of a strip carried out in 1973. Sydney counsel were apprised of the Perth case and, in relation to the case before them, concluded that any assessment based on section 260 would be unlikely to be upheld and a proposed prosecution would also be unsuccessful. The Deputy Crown Solicitor concluded 'I am accordingly closing my file'.
In the Perth case itself, an early administrative decision was to attack the scheme under section 260 by including the vendors' proceeds of sales of shares in their assessable income. This avenue was not pursued once the Slutzkin decision in 1977 made that course apparently untenable.
Howard's long statement of 27 June 1982, responding to the McCabe-Lafranchi report,169 outlined what we had been doing in other cases selected as representative. One case he mentioned was that of Deputy Federal Commissioner of Taxation v. Corwest Management Pty Ltd170 in which the ATO unsuccessfully sought to register an equitable charge over land as a means towards recovering tax owing by a stripped company. Other action involving liquidation proceedings concerning the same company was taken as a prelude to possible prosecution of persons responsible for stripping the company, but this had been unsuccessful because the whereabouts of relevant persons could not be ascertained, despite assistance from the Australian Federal Police.
Speaking of action initiated in December 1980 Howard referred to steps to intervene in winding-up proceedings and to replace liquidators. He said:
Where companies have attempted to wind up before assessment or payment of taxes the Taxation Office has, wherever possible, intervened to keep the companies on the books and their records intact to enable the examination of possible actions available through the liquidator.
In extreme cases, court actions have been taken to remove liquidators who have been appointed and to replace them with persons nominated by the Taxation Office.
One of these interventions is represented by a decision of Justice Lush in the Victorian Supreme Court.171 The liquidator there was told that he could not reject a proof of debt lodged by the Commissioner, even though an assessment creating the debt relied on by the Commissioner had not been determined.
Justice Crockett of the same court in 1982 acted strongly in a case where the liquidator had not taken into account the assessed taxation debt.172 The case records:
Here, the respondent liquidator lodged accounts which were plainly incorrect as they showed nil liabilities when in fact there were liabilities to the Commissioner. He failed to admit the Commissioner as a creditor. He failed to call a creditors' meeting at the due time. The declaration of solvency was false. He failed to exercise due skill and care. The respondent should therefore be removed as liquidator. The final meetings already held should be set aside, and the liquidation should continue.
A report by the ATO to Royal Commissioner Costigan in July 1982 indicated that at that stage there had been some 448 cases of the kind referred to in the Treasurer's statement. Some involved action to bring back to life companies that had already been wound up. In his fourth interim report Costigan touched on potential use of misfeasance proceedings in connection with a particular liquidation involving a stripped company that the Tax Office had been pursuing. He was somewhat critical of the ATO, reserving his main criticism for the Crown Solicitor's office, a matter taken up in detail in Chapter 46.
The ATO felt unable to have prosecutions launched against what appeared to be criminal evasion of company tax (the relevant available offence being conspiracy to defraud the Commonwealth) and embarked on having pre-tax profit-stripping made a specific federal offence.
Sections within Chapters 41-50
Last Modified: Wednesday, 16 June 2010