The new Labor Government fails repeatedly in the Senate to extend its predecessor's bottom of the harbour (T(UCT)) legislation. Gyles persists in contending that section 260 applies and the High Court agrees. A doubling up problem (T(UCT) plus section 260) arises. Almost $700m is collected.
A federal election on 5 March 1983 saw the coming to office of a Labor government, with John Dawkins, as Minister for Finance, given ministerial responsibility for the ATO. He lost no time in seeking to give effect to government policies in the area of tax avoidance and evasion.
During the election campaign, Labor had made proposals about adopting retrospectivity policies in relation to tax matters and, as put forward in earlier debate, to strengthen the unpaid company tax recoupment measures.290 Recoupment of personal income tax escaped in bottom of the harbour schemes was a commitment of particular note.
As to this, Dawkins had been advised at the beginning of his tenure of the debate that had arisen about bringing section 260 back to life and proceeded on the basis of O'Reilly's decision that section 260 remained an ineffective provision.
Senate rejects new government's approaches
A series of recoupment Bills concerning companies stripped of pre-tax profits was presented to parliament by the new government. All of them failed in the Senate.
The first, introduced by Dawkins on 18 May 1983, featured provisions designed to recover personal tax avoided by the former owners of stripped companies. It is to be recalled that the previous government's legislation (which Dawkins reminded members would not have passed without Labor support) was designed to recover evaded, and unpaid, company tax. When a company was stripped of its pre-tax profits, vendor shareholders received profits in a capital form, thus avoiding tax they would have been liable to had the amounts been distributed as dividends. (That is, assuming section 260 did not make them liable.)
The May 1983 legislation sought to overcome this. In cases of companies stripped of pre-tax profits (and covered by the earlier legislation) it specified that former owners were to pay personal tax on the basis that all accumulated profits at the time of sale were distributed as dividends. This included prior-year accumulated profits and profits of a capital nature. The rate of tax could be as high as the maximum personal tax rate.
This feature came under heavy criticism on the basis that prior accumulated profits might never have been distributed as dividends and that, in the case of liberated capital profits, a distribution on liquidation out of capital profits was expressly not taxable. The government in response drew comfort from the dividend stripping provisions of Part IVA and from the fact that accumulated profits were liberated. For situations where the existing recoupment tax covered unpaid Division 7 (undistributed profits) tax, that liability was to be removed if vendors became liable to the new personal recoupment tax in relation to the profits concerned.
The May 1983 Bill also proposed changes to the regime for recoupment of unpaid company tax. A let-out clause (3(12)) that operated where a stripped company was the subject of an unsuccessful post-sale scheme to avoid tax was to be abolished. Further, penalty-free instalment arrangements in the legislation were to be abolished. There were further amendments expressed as designed to improve administration of the legislation or to correct technical deficiencies.
Finally, it was proposed to re-insert in the recoupment tax legislation a provision initially proposed by the previous government but not maintained by it which authorised the Commissioner to report to parliament the names of persons who failed to meet their vendors or promoters recoupment tax liability. Following defeat of this Bill in the Senate, the government on Budget night on 23 August 1983 resubmitted a modified Bill, responding to some of the criticism. The modified Bill removed the levying of personal tax on distributions out of capital profits and on other accumulated profits from past years where there was no pre-company tax stripping. Treasurer Paul Keating, by then responsible for the ATO, noted that the government was persisting with its proposals for recovery of escaped personal tax relating to those years where there was pre-tax profit stripping. Personal tax recouped could be paid over a period of 12 months, free of interest.
At the time, the recoupment tax legislation was under constitutional challenge in the High Court and to cope with one possible outcome an evidentiary provision in the existing law was to be modified. This Bill too was rejected in the Senate. It was estimated to have yielded $270m in total, $60m in 1983-84. The May Bill would have yielded $570m in total and $350m in 1983-84.
On 3 November 1983 Keating introduced a third bill on the subject. This dropped entirely the proposals to recover avoided personal tax, thus confining its ambit to recovery of evaded company tax. The bill resubmitted the proposals in the Budget night Bill and provided new anomalies relief in cases of certain public company involvement. Again, the Senate rejected the Bill which the government said would have raised $40m from strengthening provisions, reduced by $5m for anomalies relief.
In May 1984, the government tried yet again, with the acting Treasurer Chris Hurford introducing a fourth Bill which he said was identical with the Budget-night Bill, that is, it restored an attempt to collect personal tax, but not to the same extent as in the original May 1983 Bill.
After an election, Keating, on 27 March 1985, introduced, in pursuance of an election policy commitment, yet another recoupment Bill, this one also identical with the Budget night 1983 Bill, apart from what he described as 'some relatively minor corrections of a more or less technical nature'. Keating put $270m as the yield from this Bill.
Keating began his second reading speech in these terms:
Mr Speaker, the 1984 Australian Labor Party policy speech by the Prime Minister re-affirmed the Labor Party's policy of smashing the tax avoidance industry - a policy that was pursued throughout our previous term of government and a policy upon which this Government was re-elected. In his policy speech last year, the Prime Minister promised the Australian public that, once re-elected, the Government would re-introduce the twice-rejected "bottom-of-the-harbour" legislation - legislation that will recoup hundreds of millions of dollars from those who have sought to escape their taxation responsibilities through participation in avoidance schemes produced by the tax avoidance industry.
The Senate rejected this Bill on 19 April 1985, and the government did not try again.
Section 260 back on the table
While all this was happening the question of bringing section 260 out of retirement had not gone away. This avenue for recovery of personal tax had, as noted above, been discussed with Dawkins. After receiving O'Reilly's briefing, he had written to the Attorney-General, Gareth Evans, on the matter. Following Senate rejection of the government's May 1983 Bill, Evans offered his views to Keating. The Attorney-General noted the differing legal views, to which he had given consideration, and saw the prospects of sustaining assessments under section 260 as 'rather less than 50-50'. In that situation 'the legal considerations are probably not decisive' and he saw the practical considerations identified by the Commissioner as 'clearly relevant'. Keating's view accordingly was that section 260 was not a practical option.
On 9 November 1983, O'Reilly briefed Keating about differences with Gyles concerning the extent of the latter's civil remedies power and the overlapping question of use of section 260, which Gyles continued to push. O'Reilly again dealt with the legal opinions that had been received. The ongoing battle with the Senate was touched on, including that an attempt to use section 260 could be seen as 'an attempt to achieve indirectly, in a very messy way and retrospectively, what the Government has not been able to achieve directly'. O'Reilly concluded that his 'personal view is that in all the circumstances it would be wrong both legally and administratively, to apply section 260 now', adding 'All of my senior officers wholly support my reluctance on the administrative side, including the one or two who, as a matter of law, consider the resurrection of section 260 not to be right out of the question'.
Gyles continued to press and on 7 March 1984 in a minute to the Treasurer, I, as Acting Commissioner, maintained the Tax Office stance.
Shortly afterwards, on 11 April 1984, Attorney-General Evans sent to the Prime Minister and the Treasurer a paper 'prepared in close consultation with Mr Gyles Q.C.'. This paper detailed the argument Gyles had been putting and included rebuttals of competing views expressed by O'Reilly. It ended up recommending that the Tax Commissioner be asked to reconsider urgently his section 260 decision, as to both wet and dry Slutzkins, and in consultation with the Special Prosecutor to select appropriate test cases for action.
O'Reilly, by minute of 18 April 1984 offered comments on the paper. He maintained the Tax Office position (which included reliance on Solicitor-General advice) and summarised:
If the Attorney-General were now to advise that, on consideration of all legal aspects involved, there was such a chance of success in general or in particular kinds of case, that the application of section 260 should be tested, I would view it as my duty to initiate action to test the section along the lines suggested.
He added that this would have to be on the basis of government understanding of a number of points, briefly:
• a very considerable administrative burden
• any doubling up with T(UCT) would be removed by legislation (even the taxes and penalties could be well in excess of 100 cents in the dollar)
• unlike the government legislation's limitation to current year revenue profits,291 section 260 assessments would extend to both accumulated and current year profits and to distributions out of capital profits
One of the issues that next came to prominence concerned the time that might elapse before a test case vindicated the application of section 260. In a minute of 4 May 1984, O'Reilly suggested that by then the Taxation Office could be statute-barred from applying any test case success in the remainder of the pre-tax profit strip cases. This was because reopening of vendor shareholder assessments further than six years back required a formal finding that there had been fraud or evasion. While the strips were fraudulent and evading, the test was whether the vendors had acted in that way. O'Reilly doubted whether it could be so concluded. Counsel for the Commissioner were later not to be as pessimistic on this point.
The Attorney-General on 15 May 1984 in a letter to the Treasurer responded to O'Reilly's invitation of 18 April to offer formal advice. He said:
The Commissioner has said that if I - as Attorney-General - were now to advise that, on consideration of all legal aspects involved, there was such a chance of success, in general or in particular kinds of case, that the application of section 260 should be tested, he would view it as his duty to initiate action to test the section accordingly.
I do advise that, in cases having the features referred to below, the chances of success are such as to warrant testing the application of section 260 to such cases.292
Having set out these features, Evans proposed that appropriate test cases be selected by consultation between Special Prosecutor Gyles, the Crown Solicitor and the Commissioner. Selection should be on the basis of the principles enunciated in the Gleeson/Hill opinion of 25 August. The matter was to be progressed urgently. At the time, government proposals for strengthening the former government's recoupment legislation were before the Senate, and the proposals for section 260 assessments would need to be reconsidered if the proposed legislation was passed.
There was further ministerial-level consideration of issues and in June 1984 the Attorney-General again confirmed his view that there were sufficient chances of success to warrant the matter being tested in the courts.
Sir Maurice Byers QC (by then no longer Solicitor-General) was quoted by Evans as also favouring testing section 260, on the basis that where counsel disagree on difficult questions of interpretation, 'the protection of the revenue requires that the matter be resolved by the Courts'.
Selection of test cases proceeded with expedition, such that on 4 September 1984, I (having on 14 June succeeded O'Reilly as Commissioner) was able to advise Keating that 27 representative cases had been selected and assessments were ready for issue. After a short delay sought by Gyles, the assessments were issued. Five of them concerned strips to which the Crimes (Taxation Offences) Act could have application, 22 were covered by the Taxation (Unpaid Company Tax) recoupment legislation.
In announcing the decision on 13 September 1984, Acting Commissioner Des Black referred to the changes in legal opinion. All of the cases selected for test were ones where the business of the target company continued on through a new entity owned by much the same people.
An exchange of correspondence
The exchange of views regarding section 260 between the Special Prosecutor and the Commissioner was featured in their respective annual reports for 1983-84. Gyles supplemented his comments by attaching to his report copies of correspondence between the two, with the Commissioner in turn adding further observations and correspondence.
Doubling up
Legal advice was that the section 260 assessments should call on vendor shareholders to pay tax on company profits effectively distributed to them in the course of the arrangement, without adjustment for payments of company tax under the recoupment legislation. This doubling up aspect had been drawn to the government's attention.
Finally, it was said that the question of whether further assessments in stripped profits cases would be issued would be reviewed in the light of decisions reached in the representative cases.
The government shortly afterwards dealt with the doubling up issue. On 30 October 1984, following Cabinet consideration, Keating released a statement indicating that the government would, as necessary, act to eliminate the doubling up elements. This would be done by an appropriate reduction in the amounts that the vendor-shareholders are called on to pay under the section 260 assessments.
Time was running out
When in 1984 Attorney-General Evans set out the basis for the test case approach he expressed a wish that the situation be kept under review, so that a wider issue of assessments could be conducted if warranted by court decisions. On 21 February 1986, the Secretary of the Attorney General's Department wrote to the Commissioner suggesting such a review. In his opinion, the decisions of the High Court in the Watson, Gulland and Pincus cases293 involving application of section 260 to income splitting arrangements suggested that the prospects of success in the company strip cases had improved greatly. That view was supported by the Commonwealth Director of Public Prosecutions who had taken over substantially the role of Special Prosecutor Gyles. The point was also made that because of the six-year time limit on amendment of assessments, more and more amendments of assessments would become statute-barred.
Responding to this, the ATO calculated that if no assessments were statute-barred some 19,000 vendor shareholders could face revenue claims totalling $350m, $110m of it in penalty. As of May 1986, it was estimated that only 10,000 assessments would not be statute-barred (unless of course, fraud or evasion could be found). The ATO calculated that 450 staff-years could be involved in pursuit of the 10,000 cases. In cost-benefit terms, the deployment to conventional Tax Office work of 450 staff-years could bring in a more certain $140m.
On 1 May 1986, the joint view of the three agencies was conveyed, for noting, to the Treasurer. This was that action should proceed to raise the 10,000 assessments and that once they were raised, the High Court decision in pending test cases should be awaited. Awkward potential implications of the wholesale issue of the assessments were drawn to Keating's attention. It was by then clear that the timeframe of from nine to 20 months estimated by Evans for securing a High Court decision had been proved to be very wide of the mark.
I announced the decision to raise further section 260 assessments in a statement on 29 May 1986. After allowing for removal of the T(UCT) doubling up effect, potential revenue was estimated as $230m.
Issue of assessments began soon after, the T(UCT) teams within the Tax Office being given responsibility for the work, alongside their continuing T(UCT) activities. The notices being accompanied by advice about the decision to avoid doubling up effects, the assessments that were issued were confined to cases where there had been a strip of pre-tax company profits, that is, cases covered by the T(UCT) recoupment legislation. Recipients of the assessments were advised that legal recovery action under them would not be taken pending the outcome of the 27 representative cases, but that additional (penalty) tax for late payment would accrue from the due date of each assessment.
The section 260 turnaround
The first of the 27 test cases came on for hearing before Justice Lee of the NSW Supreme Court on 14 October 1986. On 19 December 1986, in Gregrhon Investments Pty Ltd and Others v. FC of T,294 Justice Lee held that section 260 did not operate to void the transactions involved in a strip of the relevant company's pre-tax profits. At that time, some 2,500 section 260 assessments had been issued pursuant to the statement of 29 May 1986. The case before Justice Lee involved a company strip put into operation in March 1980, that is, before the Crimes (Taxation Offences) Act 1980 and the introduction of Part IVA. As the judge observed, the vendor shareholders had by then already paid recoupment tax of $337,291 under the T(UCT) legislation.
The family concerned had transferred a business to a new company owned by them, leaving the target company with funds of $744,346, representing $108 in paid-up capital, capital profits of $12,662, operating profits of previous years of $127,131 and operating profits of the current period of $604,445. As shown in evidence the family was aware from widespread advertising that companies could be sold and had comforting professional advice. They were concerned to not pay tax on the target company's profits and sold their shares for a price of $711,346. (The difference of $33,000 from $744,346 represented fees, as it turned out.) Company tax on profits of the period was not provided for in these figures.
The section 260 assessments on the vendor shareholders assessed them to tax on a total of $744,238 ($744,346 less return of capital of $108). Justice Lee took the view that if the vendor shareholders were parties to the stripping arrangements, section 260 would operate. But he was not satisfied that the taxpayers could be treated as parties to a scheme (the stripping arrangements) of which they were not aware. On this basis, the section 260 assessments could not stand.
Justice Lee observed that 'one usually would not see such blatant tax avoidance or evasion: as the promoters interests plainly devised'. However, he was satisfied that the vendors had no knowledge at all as to what the purchasers would do with the target company. 'They had no conception at all' that the purchasers would do as they did, and there was nothing to indicate any belief by them 'that the transaction they were entering into was dishonest or in any way fraudulent on the Taxation Commissioner'.
The Commissioner had sought to make up for the deficiency of evidence of relevant knowledge in the vendor shareholders by a line of reasoning that imputed knowledge to them. As to this, Justice Lee referred to some features of the evidence which 'demonstrate that the appellants expressly refrained from making enquiries' and which explained their attitude. An adviser to the taxpayers was seen by the judge to have acted on the basis 'that he thought Slutzkin's case did give some protection if enquiries were not made'. He was not prepared to impute knowledge, noting also that knowledge of a transaction and entering into a transaction are wholly different.
The Commissioner appealed the decision of Justice Lee to the Federal Court, but while waiting for its decision, the program of raising section 260 assessments in company strip cases was going ahead. The loss at first instance meant that, at the least, the ATO could not in relation to those assessments be accruing late payment penalty against those taxpayers (the vast majority) who were not paying the tax called for by the assessments. So in a press statement of 3 April 1987 the Commissioner announced that the late payment penalty would not further accrue 'until further notice'.
On 26 November 1987, after three days hearing in July, the Federal Court (Justices Fisher, Lockhart and Spender) handed down its decision, allowing the Commissioner's appeal.295 Gleeson and Hill had again appeared for the Commissioner. Justice Fisher described the 'crucial end result' that had been achieved by the arrangements:
Mr and Mrs Clough (vendor shareholders) retained control of the furniture manufacturing and sales businesses and had received as proceeds of sale of their shares in Detail (the target company) the entire net operating profit and reserves of that company less Mr Goldspink's (promoter) fee. Detail for its part was left without reserves from which to pay its current year primary tax and any Division 7 undistributed profits tax.
The court concluded that in determining (as required by the terms of section 260) the purpose or effect of an arrangement an objective assessment is required. The motives and intentions of the taxpayers did not determine the issue. 'If it were otherwise', Justice Fisher said, 'the law would place a premium on naivety, ignorance and calculated abstention from knowledge and understanding'. In any event, he added, the surrounding circumstances were such that the taxpayers 'should have been alerted to a scheme of tax avoidance'. Such 'calculated abstention' was an attitude 'mistakenly understood' to have assisted the taxpayers in Slutzkin's case.
Justice Lockhart saw that viewed objectively it was 'plain that there was but one transaction involving a series of integrated and mutually dependent steps including the sale and transfer of shares' by the vendor shareholders to the promoter interests and 'an interlocking flow of funds'. There was no warrant for severing the transaction into the events of which the vendors had actual knowledge and the events of which Justice Lee found they were ignorant. 'Plainly', he said, 'this is a case where the arrangements served no business, professional or family purpose'.
The High Court's decision in Slutzkin was long the peg on which taxpayers and their advisers had hung their quest for escape from the 'tax problem' of what to do about companies fat with pre-tax profits. Justice Lockhart said:
Slutzkin is plainly distinguishable from the present case. In Slutzkin Francis Richard Holdings Pty. Limited, the target company, was not carrying on any business at any relevant time and had become redundant. No tax problem confronted it. It had no problem with respect to impending primary tax liability, nor with respect to any undistributed profits tax. All that the taxpayers sought to do was to realise their shares and the assets of the target company in a manner designed to ensure that the tax liability which would be payable if accumulated profits were distributed by way of dividend or on a liquidation would not be attracted. The relevant activities were capable of explanation as ordinary business dealing. It was simply a realisation by taxpayers of their shares in a dormant company intended to ensure that the realisation itself did not attract a tax liability.
Justice Spender agreed with his colleagues. He said:
It is not necessary, even in the criminal law, before a person can be party to an arrangement or scheme, that that person have full knowledge of all the details and steps of that arrangement or scheme; a fortiori, when that person is wilfully blind....In my opinion, in the context of section 260, calculated ignorance is not bliss.
The High Court agrees
The taxpayers sought special leave of the High Court to have it review the matter. On 18 March 1988, a full bench comprising Chief Justice Mason and Justices Wilson and Gaudron refused the special leave.296 Following brief argument, the Chief Justice said:
The critical question sought to be raised by the proposed appeals relates to the ascertainment or identification of the arrangement to which the taxpayers were parties. The answer to that question depends on the particular facts of this case. One of the material facts found by the Full Court of the Federal Court was that there was calculated abstention on the part of the taxpayers from making an inquiry as to the way in which the transaction they were entering was to be carried through to completion.
Counsel for the applicants rightly concedes that in order to succeed in the proposed appeals the applicants would need to persuade this Court to overrule that finding of fact. An answer to the question we have identified would not, in our view, result in any elucidation of general principle, the present case being distinguishable from Slutzkin's case,297 as the Full Court of the Federal Court demonstrated on the facts which it found.
In this respect, we should mention one specific matter, namely, that the taxpayers did participate in the disposition of Detail's assets to the Lockwing company which was a vehicle of the purchasers. The case is, therefore, not a suitable vehicle for the grant of special leave and we would refuse the application.
Legal ebbs and flows
Thus, some years after the Cridland and Slutzkin decisions had pointed to the demise of section 260, a process of distinguishing Slutzkin breathed some life back into the section. The Gregrhon decision resolved other matters of debate.
When in 1982 Solicitor-General Byers gave his opinion unfavourable to the invocation of section 260, he pointed out that the section had only a destructive effect. To bring a scheme to tax after an arrangement was voided by section 260 you have to find a situation where the rest of the tax law exposes a taxable situation. Section 260 did not have a constructive application. So, Byers thought, application of section 260 could fail in company strip cases because there was not, in terms of section 44, a distribution by a company out of its profits; profits were liberated more informally than that.
Justice Lee had concluded, for the different reasons noted earlier, that section 260 did not apply but was of the view that had the section otherwise been applicable, there was not left exposed a situation in which section 44 would apply. In that event, section 47(2A) which brought to tax profit elements in an informal distribution other than capital profits could apply. The Federal Court disagreed with this, holding that the voiding effect of section 260 left intact a situation where section 44 required assessment as dividends of all profit elements - income and capital - in the stripping distribution. The High Court did not gainsay that view.
What to do now?
With success in the Gregrhon case under its belt the ATO then faced the issue of how to follow up on this precedent.
The particular case had had, as O'Reilly commented to Keating on another occasion, massive resources lavished on it. It had been fully investigated, and the case worked up, by Special Prosecutor Gyles (and later by the Commonwealth Director of Public Prosecutions and by the ATO). The balance of the 27 test cases being held (mostly in the NSW Supreme Court) pending the outcome of the Gregrhon case had similarly been the subject of extensive official examination. All of them had been selected as cases where the ATO was most likely to be successful; in the remainder of the estimated 10,000 assessments the prospects of success in the variety of fact situations were of a more questionable nature. More than that, the self-evidence of the presence of a tax scheme was enough to justify raising assessments with only a minimum of examination. But if the assessments were resisted by the taxpayers concerned, very substantial investigation work would be entailed in defending the assessments before the courts.
On the other hand, it was by then apparent that there was willingness by taxpayers who had participated in schemes to settle their tax liabilities. Some early overtures to settle had come from professional representatives soon after the section 260 assessment project got under way.
Taxation staff deployed to the project were largely those engaged in the still-to-be-completed work of recovering unpaid company tax under the T(UCT) legislation. And all such work, despite its own contribution to revenue collection, carried an opportunity cost. There is always, as O'Reilly was fond of saying, a 'bottomless pool' of untouched revenue-productive audit and investigation work.
Accordingly, immediately after the High Court's refusal to grant special leave, the Tax Office began to consider settlement possibilities and, in particular, the basis on which it might bring the whole bottom of the harbour chapter (T(UCT) liabilities included) to a close. In a minute to Keating on 8 April 1988 I wrote:
I approach the whole matter of cleaning up, from the 'schemes era' - of which 'bottom-of-the-harbour' is a highly visible part - from a standpoint of seeking to put it behind us as fast as we can. The more important thing now is to get on with dealing with today's corporate and other villains and in so doing ensure that further bottom-of-the-harbours do not arise. To the extent resources were diverted from that to s. 260 our efforts would be compromised. Added to that, there are a number of awkward matters in the bottom-of-the-harbour area itself.
(This latter comment was a reference to some problems under the T(UCT) legislation that were emerging from matters before the courts.)
Settlement terms
At that time the vendor shareholders were in varying stages of paying as recoupment tax (many of them were contesting liability) the company tax that had been evaded in pre-tax profit strips. On 16 April 1987 the Treasurer had confirmed in a statement that there would be relief from the doubling-up of recoupment tax and section 260 liabilities. (As confirmed in the Gregrhon decision the section 260 assessments taxed vendors on the whole of the profits liberated by the strip, regardless of them paying some of the profits to the government by way of recoupment tax.) What emerged was the notion that settlement of assessed T(UCT) and assessed section 260 liabilities might be offered on the basis of:
a. the already agreed removal of doubling-up
b. the elimination of penalties
c. deletion of the capital profits component, in return for
d. prompt payment, without dispute, of the resulting section 260 liability and any outstanding T(UCT) liability.
As to element b., the section 260 assessments had included penalty tax of from 40 per cent to 60 per cent for incorrect reporting of income, but there was broad concern in the professional community (and emerging judicial unease) at taxpayers being penalised for lodgment of returns on a basis that reflected the prevailing legal view at the time that section 260 was effectively a dead letter.
The issue of capital profits component was a difficult one. In the Gregrhon case, a small part of the stripped profits was made up of capital profits, so that their liability to tax had been established. On the other hand, a distribution out of capital profits in the liquidation of a company was not taxable. The trigger for the issue of section 260 assessments had been the presence of some amount of current year revenue profits. Absent them, a section 260 assessment was not raised. In some of the assessments a relatively small presence of current year revenue profits had led to the inclusion in section 260 assessments of large amounts of liberated capital profits. Moreover, although in its first recoupment tax legislation the government tried to statutorily make distributions out of capital profits taxable, when that legislation failed it gave up in subsequent attempts.
On balance, and in the particular circumstances, I concluded that exclusion of capital profits elements should be offered as part of settlements.
Initial Tax Office thinking was to ask the government to bring in legislation to sanction settlements on the above basis. After discussion with Keating, confirmation was sought on 21 April 1988 from the Attorney-General's Department whether the Commissioner had, without further legislation, authority to settle in the way contemplated. In a lengthy advice on 1 May 1988 the Secretary of the Attorney-General's Department gave that confirmation. It was common practice for the Commissioner to be a party to settlements with taxpayers. Removal of the T(UCT)/section 260 doubling up element lay in the Minister for Finance exercising, as he did, powers under section 70C of the Audit Act.
Consideration of this advice led to a further question: whether contemplated settlements might extend to generally exclude from tax distributions out of accumulated revenue profits. A basis for this query was that in the government's final attempt to secure passage by the Senate, such profits had been excluded. A further advice from Attorney-General's was that such an extension was beyond power. Keating gave his broad endorsement to settlements on the basis of the 1 May 1988 advice, albeit that ultimately this was a matter for the Commissioner.
The figures attaching to the various elements were given to Keating in August 1988. As at 30 June 1988, with the process of issuing assessments within the six year limitation period all but complete, total tax and penalties charged had come to $703m. Removal of doubling up, no penalties and exclusion of capital profits would bring this down to $261m. Removal of doubling up was put at $173m, penalties $161m and capital profits $108m. The bottom line figure would come down to $105m, after further adjustments (dividends becoming non-taxable in public companies) $59m, uncollectable amounts $30m, tax already paid $29m, and ATO direct and opportunity costs $38m. Without settlements, and by ploughing ahead, $224m was put as the bottom line collections.
Aiming for a mass release of settlement offers, but needing to deal with subsidiary issues and make calculations, it took some time for us to make settlement offers to the taxpayers concerned. This was done on 17 May 1989, 5,709 settlement offers were sent out. Over 90 per cent of the recipients accepted the settlement offer.
The attractiveness of the settlement terms did a lot to bring to finality those pre-tax profit strip cases where a section 260 assessment was raised. Those who were minded not to settle faced potentially higher taxation liabilities. Where the section 260 pressure was not present, the task of finishing off the collection of T(UCT) recoupment tax was that much harder.
In 1989, a target was set of finishing all T(UCT)/section 260 work by 30 June 1990. A small clean-up team was formed to give guidance in the finalisation of remaining cases. Its report in October 1989, endorsed by the Commissioner, accepted that some revenue potentially collectable would not be pursued and pointed to monetary gains flowing from the deployment of staff back to ordinary activity. The report's conclusion also identified the factor of staff having had enough of this exceptional work. 'In short', the report advised, 'there is likely to be very little, if any, real loss to the revenue but very real gains in terms of overall morale as a result of putting the remnants of T(UCT) behind us'.
While a few difficult cases were still afoot at the target date, it was found practicable at that time to conclude that National Office involvement could cease, with branch offices left to achieve finality, which they did.
The outcome - how much was dredged up?
Chapter 47 has given the T(UCT) part of the bottom of the harbour schemes story up to the time of the change of government in March 1983. This present chapter has recounted that a revived section 260 came to be another source of tax recovery in relation to such schemes, and the two tax recovery avenues, T(UCT) and section 260, in effect became merged. What was collected?
The annual report for 1987-88 was the last to cover the matter in any detail, noting that processing had continued at a reduced rate 'as the project nears finality'.298
As at 30 June 1988 some 6,678 companies had been identified as having been stripped of pre-tax profits, resulting in the issue or reissue of 17,386 company assessments. Ordinary company tax and Division 7 tax raised (that is, debited in assessments) had totalled $760.8m. Not all of this was pursuable under the T(UCT) legislation - $191.3m in section 226 penalty tax, section 207 late payment penalty and in uncollectable company tax had been written off.
Of the many objections against company and recoupment tax assessments, many were still in the system. The estimate was that a total of $590m would be recovered under the legislation. Most of this was company tax, vendors having the option to pay the company tax instead of their own liability for recoupment tax. Also, some vendors had paid personal tax (notionally on dividends) rather than Division 7 tax.
The 1987-88 annual report gave the following table of collections to that point:
Table 13: Total recoupment tax collections 1982-83 to 1987-88299
When the figures as at 30 June 1990 were put together, the collections under the T(UCT) legislation came to $550m, with another $124m brought in by the section 260 assessments.
As to promoters, the 1987-88 annual report indicated that promoter recoupment tax assessments had by then been issued in respect of 3,674 companies. It noted that 98 per cent of 4,481 objections had been determined, leading to 2,154 appeals, most of which were in course (and were to vanish!).300
Promoters had a 100 per cent recoupment liability and a 20 per cent (to be shared with vendors) liability.301 They would also have had their 'ordinary' income tax liabilities. Records indicate that these combined liabilities were seldom satisfied in full. Such descriptions as deceased, overseas, settled (en globo or on specific matters), untraceable, bankrupt, and in jail, sat alongside the names of people in the promoters class whom we were pursuing.
The end result was that little was collected from promoters and little of that became available for refund to vendors. In 1989, $4.16m had been collected from recoupment tax assessments to 229 promoters. This was for both 100 per cent and 20 per cent assessments and the estimate was that less than $1m would be available for vendor refunds.
Trust-stripping was the next schemes area to be finalised.
Sections within Chapters 51-60
Last Modified: Wednesday, 16 June 2010