House of Representatives

Income Tax Assessment Bill (no. 4) 1973

Income Tax Assessment Act (no. 4) 1973

Second Reading Speech

Mr CREAN (Melbourne Ports - Treasurer) (12.45) - I move:

That the Bill be now read a second time.

Complicated and lengthy as this Bill is, it has a simple purpose. It is designed to put an end to the use of Norfolk Island and, to a more limited extent, of Papua New Guinea for tax haven purposes. I informed the House earlier in the year that this legislation would be brought in. I said then that it would be the same as legislation announced by my predecessor on 19 July 1972. The Bill I now present fully accords with my predecessor's announcement. With the unanimity of purpose that is thus implied, and because fuller explanations are given in an explanatory memorandum that is being made availabe to honourable members, I think I can be fairly brief in what I say about the Bill.

It may be useful if I begin by saying something about what the term 'tax haven' means. In some business and professional circles it may be replaced by more euphemistic terms, such as 'investment centre', 'finance centre', 'capital entrepot' or the like. But whatever the polite desciption the meaning is the same. A tax haven is a place that levies little or no income tax of its own, whether generally or in particular circumstances, and which has banking, commercial and communication facilities, and a legal system, conducive to resort to it by people and companies wishing to minimise or eliminate tax they would otherwise have to pay.

In the Norfolk Island context the absence of income tax is due to the fact that the Island is not treated as part of Australia for general tax purposes, although it is for some special purposes, such as the rebate that frees inter-company dividends from tax. Income that has, or is given, a technical legal source on Norfolk Island is not subject to Australian tax if it is derived by an individual or company qualifying as a resident of the Island. A company can be a resident of the Island by E being incorporated and managed and controlled there, even though its ownership is wholly vested elsewhere.

Before my predecessor's announcement last July there had been highly complex tax avoidance arrangements designed chiefly to convert Australian income of Australian residents into income with a technical 'source' on the Island derived by an entity that was technically an Island resident. In a fairly typical situation money would be made available from Australia on interest-free terms-a most unlikely business deal in normal circumstances - to a company resident in Norfolk Island. The money would be on-lent through a series of companies resident in the Island and ultimately find its way back to Australia as an interest-bearing loan to the company that provided it in the first place. How anybody can give respectability to that sort of transaction is beyond my comprehension, ethically at least.

The object of the scheme was to give the interest received by the Island companies the flavour of income with a source on the Island so that it was free of Australian tax, while the interest paid by the Australian company was a tax deduction in its own assessments. In other cases the Island's tax haven status was used by non-residents to avoid Australian tax and, possibly, also foreign taxes. It has by no means been established that all of the schemes based on Norfolk Island effectively avoid tax. The application of the present law in the immense variety of factual situations that can be contrived is, however, uncertain and difficult. It is necessary therefore both to tighten up and to clarify the law.

The amendments in the Bill aim at a fair balance between the interests of Islanders and the Australian tax-paying community. The key provision will make the income tax law apply as if Norfolk Island were part of Australia. This would in itself stop the tax avoidance. This shows how the unscrupulous can wreak damage upon the innocent. However, if no more than that were done all residents of Norfolk Island, including the Pitcairners who have lived there on tax-free terms for so long, would be subject to tax on their Island income. The Bill does not have this extreme effect. It proposes new provisions which will continue to exempt from tax the Island and other ex-Australian income of people who live on the Island and are not resident in Australia for tax purposes. These kinds of income will also be exempt when derived by companies wholly owned and controlled by such Island residents. Another exemption will be provided for certain trust income, principally income accumulating under the terms of an Island trust in which the beneficiaries are Island people. For people who are not entitled to the full exemption that will be available for permanent residents of the Island, there will be an exemption for employment income earned on the Island where the period of time to be spent there is over 6 months.

These are the main provisions, but the Bill contains a variety of supplementary measures, mostly in the form of safeguards against exploitation of the new provisions. For example, there are detailed rules to protect the condition that, for a company to be exempt, it must be wholly owned and controlled on the Island. Conversely, the Bill provides authority for the Commissioner of Taxation to disregard a temporary failure to comply with this condition where it would be appropriate in special circumstances to do so. Against the background of arrangements that have been made in the past to give income an artificial Island source, the Bill provides rules specifying when income such as dividends, interest and royalties are to be treated as having an Island source.

As the former Treasurer announced, the new provisions will have effect in relation to income derived after 19 July 1972. However, as a transitional measure to assist Island companies that now have some degree of non-Island ownership, but wish to re-arrange their affairs so as to retain tax exemption, the Bill provides for an appropriate partial exemption P for income derived up to the end of the 1973-74 income year for a company that becomes fully Island-owned and controlled during the last 6 months of 1973-74. There has been little, if any, use of the Territories of Cocos (Keeling) Islands or Christmas Island for tax haven purposes. The tax law relating to them is, however, the same as that applying to Norfolk Island. If the law were left unchanged, there could be resort to these territories for a tax haven. The operators are cosmopolitan people; they are not interested in where they go. It is the benefits they gain that concern them. The Bill accordingly makes the same amendments for the 2 Territories as it does for Norfolk Island.

I turn now to the part of the Bill that is concerned with tax haven resort to Papua New Guinea. These measures were also foreshadowed in my predecessor's statement in July 1972. Broadly speaking, private company groups are given a choice by the income tax law of paying dividend to individual shareholders, which are then taxed at the shareholders' personal rates, or of paying an undistributed profits tax. Recent tightening of the law to uphold that principle has led to a situation where some private company groups pay dividends to so-called 'repository' companies in Papua New Guinea. Papua New Guinea does not tax the dividends and the arrangements have been made with the objective that no Australian tax would be paid on them either. The dividends received by the repository company in Papua New Guinea would in due course be used in ways that would benefit the Australian shareholders without exposing them to liability to tax. To correct this situation, the Bill proposes basically that where dividends were, or are, paid after 19 July 1972 by a private company in Australia to another private company in Papua New Guinea, the dividends will not be taken into account in determining whether the paying company has made a distribution of profits sufficient to avoid payment of undistributed profits tax. This is the basic provision, but there are measures to the effect that it is to apply only to dividends that are held in Papua New Guinea on behalf of Australian individual shareholders.

This Bill does not deal with the problem of tax havens outside Australian jurisdiction. This is a most difficult matter to which I and my advisers have been devoting some attention. It is necessary that action be taken to prevent or minimise as far as possible successful use of such haven by Australian taxpayers, because the result of the tax avoiders' efforts is a heavier tax burden on their fellow citizens and companies. I assure the House that the Government will as soon as and wherever practicalbe, be taking whatever steps are open to it to prevent loss of revenue through the use of tax havens. I am sure that I will have the support of all parts of this House in such endeavours. I commend the Bill to the House.

Debate (on motion by Mr Nixon) adjourned.