Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. Frank Crean, M.P.)
The purpose of this memorandum is to explain the provisions of Bills designed to provide a firmer and more comprehensive basis for existing procedures under which exchange control approval of certain transactions with persons in tax havens may be refused if the transactions are related to tax avoidance or evasion arrangements.
Under tax screening procedures outlined in a statement made by the Treasurer on 25 October 1973, proposed transactions with persons in the New Hebrides were not to be given exchange control approval by the Reserve Bank unless it sighted evidence that the Commissioner of Taxation did not object to the proposed transaction on grounds that it would involve, assist in or be associated with avoidance or evasion of Australian tax. A similar rule applied to proposed portfolio investments in tax havens generally.
Towards the end of 1973 an amendment of the Banking Act was made with the object of giving firmer legal backing to these tax screening procedures. The Banking Act (No. 2) 1973 inserted new sub-sections - sub-sections (3) to (5) - into section 39 of the Banking Act.
Sub-section (3) of section 39 provides that, where the exchange control regulations require Reserve Bank approval of proposed transactions, the Bank may withhold its approval on the ground that the transaction involves, assists or is associated with avoidance or evasion of Australian tax. Sub-section (4) specifies that the Bank may not refuse approval on tax grounds if there is produced to it a statement by the Commissioner of Taxation that in his opinion approval should not be withheld on a ground referred to in sub-section (3).
It now appears that further legislation is required to enable the tax screening of proposed transactions with persons in tax havens to work as intended. The 1973 amendments to the Banking Act dealt in a short form with the tax screening procedures and a more comprehensive legislative statement of the position is now appropriate.
The proposed measures will clearly and directly place on the Commissioner of Taxation the task of deciding, according to rules set out in the Taxation Administration Bill, whether there are tax avoidance or evasion implications in proposed transactions with persons in tax havens. In cases where proposed transactions are subject to tax screening, in accordance with new section 39B being inserted in the Banking Act by the Banking Bill, the Reserve Bank may not approve the relevant exchange control application unless a tax clearance certificate from the Commissioner is produced to it.
More detailed notes on relevant clauses of the Bills are set out below.