Royal commission into matters relating to norfolk island


Efforts to counter the tax avoidance schemes



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6.Efforts to counter the tax avoidance schemes

      1. Although there is no doubt that had remedial action la taken earlier than it was much of the tax loss over the years would have been avoided this is not to say that Australian authorities involved were up to that point inactive in trying t counter the tax avoidance schemes In spite of truly effective legislation being absent the Australian Taxation Office did resist these schemes


      2. Sometimes a flaw in the arrangements — a failure on ti part of the sponsors to go through all the steps necessary to create the requisite legal effects — enabled the Commissioner of Taxation to treat the arrangements as an ineffective sham In other cases a deduction was denied for interest payments either under general provisions of the Australian income tax law or s of the Income Tax Assessment Act without the taxpayer challenging the Commissioner’s view But after the decision of the Full Hic Court in the Esquire Nominees Case (referred to earlier) by which time remedial legislation had been announced, and before which avoidance techniques had been honed and refined, it was decided by the Commissioner that he did not have sufficient legal support to upset carefully planned and executed interest schemes under the law as it existed before the 1973 amendments.

When the apparent use of Norfolk Island as a tax haven fir& came to notice the Taxation Office took action on a case—by—case basis Taxation officers first visited the Island for this purpose in 1967. Further visits were made by investigation officers in February 1968 July 1969 October 1969 October 1973 and November 1973 The July 1969 visit led to the raising of the assessments that were the subject of the Esquire Nominees Case. Many of the efforts by the Taxation Office were hindered and frustrated by the difficulties in securing information of genuine value. People declined to co—operate and on some occasions deliberately used delaying tactics Constitutional and other legal objections were raised in the path of the investigating officers. This state of affairs persisted through the late 1960s and early l970s and it was not until the decision of Barwick C.J. of the High Court 7f Australia in Southwestern Indemnities Ltd v. Bank of N.S.W and the Commissioner of Taxation (1973) 129 C.L.R. 512 that those in possession in Norfolk Island of information sought by the Taxation office were confronted with a judicial ruling that the Commissioner Taxation had power to obtain it. It should not be thought, however, that this decision brought an end to the difficulties.


      1. Soon after the decision the Income Tax Assessment Act ~ 1973 became law and had retrospective effect in relation to income derived on or after 20 July 1972 in accordance with a Ministerial announcement made on that date The tax liabilities created by this measure did not extend to income with a ‘genuine’ source in the Island derived by people living there or by companies wholly owned by such people This and the legal implications of the decision on appeal in the Esquire Nominees case in relation to pre-20 July 1972 income, had an important bearing on the administrative courses thereafter pursued by the Taxation Office.

      2. The routine lodgment of annual income tax returns required pursuant to s,l61 of the Income Tax Assessment Act did not apply for the year ended 30 June 1973 and prior income years to Norfolk Island residents deriving only Island source income. For the 1973—74 and subsequent years a return was not required as a routine matter from a Norfolk Island person whose income is, under the new law, free of Australian tax. That was thought to be a proper way of ensuring that genuine residents of the Island were not subjected to unnecessary compliance with Australian tax requirements.
      3. For other cases several different approaches were adopted, consistent with the general need to deploy scarce staff resources to best advantage over a wide field. One approach was to look at required 1973—74 returns as they came in and, on a basis of an examination of them, to call (under s.162) for lodgment of returns for earlier years, as found appropriate. It is a sufficient commentary on the success of this approach to observe that relatively few returns for 1973—74 were, as a result of it, received from companies incorporated in Norfolk Island.


      4. Another approach was to make a formal request for information or returns from particular companies That met with only limited success When infrequently the information or returns came in it was after protracted delays and they were commonly incomplete, thus necessitating further requests It still asserted by some that the Taxation Commissioner’s legal power to get information and collect tax was not established that was used as an argument to refuse or delay compliance 0 some occasions it was even put that administrative processes should be held in abeyance pending the Report of this Royal Commission.

      5. Following the widespread failure to comply with forma demands for lodgment of returns in August 1974 forty—nine prosecutions were instituted in Sydney against various companies incorporated in Norfolk Island for failure to lodge returns a. and when required. On 10 October 1974, following several adjournments, sixteen of the cases were heard and each company was fined $40 plus costs Other cases were further adjourned ~ the request of the companies’ representatives. On 28 February 1975, following a hearing on 23 January 1975, Mr G. Smythe, SM, delivered his judgment in one of these cases, that of Berwick I. The magistrate dismissed arguments centered on the proposition t the 1973 amendments were beyond Australia’s constitutional power and convicted the company of the offence of failing to furnish a return of income in respect of the year ended 30 June 1973, a and when required. His Worship imposed a fine of $20 plus $6 court costs and $75 professional costs,
      6. The company then appealed to the High Court of Australia from the decision The appeal was dismissed for the reasons already given in Chapter 6 Shortly thereafter the companies in the adjourned cases were each fined a small amount and the required returns were lodged.


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