Royal commission into matters relating to norfolk island


The position after the 1973 amendments

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7.The position after the 1973 amendments

          1. As mentioned earlier, the heart of the problem, so far as avoidance of Australian tax by Australians was concerned, was that the exemption for Island source income of Island residents could be exploited by:


            1. Arranging for income to have the technical character of Island source income; and

            2. Arranging that companies in substance owned and controlled from Australia were technically resident in Norfolk Island.

          2. To be successful, remedial legislation had to be directed towards overcoming these devices. This could have been achieved most simply by amending the income tax law to treat Norfolk Island as part of Australia and leaving it at that, However, such legislation would have meant imposing tax on the Island or other ex-Australian income of genuine residents of the Island who had long been free from tax on such income and who did not fully share in Australian social welfare benefits and other tax-financed facilities. In these circumstances the Government of the day decided in June 1972 on more complex measures adopted in toto by its successor, by which Australian income tax law was extended to Norfolk Island, but on the basis that people living in the Island (and companies which were wholly and beneficially owned by them) were to remain exempted from tax on income that genuinely and in substance arose from sources outside Australia.
          3. The announcement of the decision to amend the Australian income tax law was made by the then Treasurer (the Rt Hon. B.M. Snedden) in a comprehensive press statement released on 19 July 1972. The announcement said that the proposed law would have effect in relation to income derived after the date of the announcement. The change of government later in 1972 led to a delay in the submission to Parliament of the detailed legislation but, when it was introduced late in 1973 and passed in the same form, it was exactly the legislation that would have been put to the previous Government for submission to Parliament. It gave exact effect to what was said in Mr Snedden’s statement


          4. The fundamental basis of the new legislation was repeal of existing provisions relating to Norfolk Island commission with new provisions by which the income tax law was expressed apply as if Norfolk Island were a part of Australia, The broad basic result was that the derivation of any income that had a technical source in Norfolk Island gave rise to the same tax consequences as if the income had its source in Australia. Equally, the derivation of income from any source by a person whose technical residence was in Norfolk Island gave rise to the same tax consequences as if the person were a resident of Australia,

          5. The balance of the new law — contained in Division lA of Part III of the Income Tax Assessment Act 1936-1973 - was concerned with providing an exemption for Island and other ex Australian income of people living in the Island and of companies wholly owned by such people. Against the background of the kinds of devices that had been employed to exploit the previous law, it was necessary to surround the exempting provisions with safe guarding measures to ensure that only income that has a genuine source in the Island or elsewhere outside Australia is exempted, and then only where the real entitlement to that income rests with Island people.

          6. This legislation appears to have closed off the avenues for income tax avoidance resort to Norfolk Island There is no evidence to the contrary There are some indications that a few companies are being set up in Norfolk Island as part of particular income tax avoidance schemes also involving companies in Australia. It is thought that the motive of having companies in the Island may be to make it more difficult to investigate the scheme if not to contribute to outright evasion plans

8.Avoidance of estate and gift duty

          1. Under the Estate Duty Assessment Act 1914—1973, duty is imposed on estates of deceased persons, and under the Gift Duty Assessment Act 1941-1973 duty is imposed on gifts.


          2. In the case of a person dying domiciled in Australia duty is levied (subject to certain exemptions) on the net estate listing of real property situated within Australia and personal property wherever situated. A person dying domiciled outside ‘Australia is subject to duty only in respect of property situated Australia.

          3. To a very limited extent, it might be open to a person contemplating death to establish a domicile in Norfolk Island and transfer his property either to the Island or to other places outside Australia to avoid the incidence of Australian estate duty. However, there are many other countries in which this could be done and presumably it must be accepted as having been within the contemplation of the legislation.

          4. A person who remains domiciled in Australia up to the of death could, theoretically, purchase real property in Norfolk Island so as to place that part of his estate outside the scope of the Act. However, there is very little property of that kind available in the Island and the possibility does not appear to have been exploited to any great extent or to amount to a serious threat to the Australian revenue.
          5. Where Norfolk Island has been used for the purpose of estate duty minimisation, this has been done by using the Island as a place in which there is no gift duty and which may be used by a person wishing to diminish his potential estate by making gifts of property to the persons who will ultimately be his beneficiaries. The device which has been used for this purpose known as the ‘Gorton scheme’ after the name of the case in which its validity was tested before the High Court can also be used to make gifts free of duty when death is not in contemplation.


There is evidence that the Island has been used extensively for that purpose

          1. Australian gift duty is payable on gifts made

            1. By a person (not being a body corporate) who i~ domiciled in Australia or by a body corporate which is incorporated under the law of any State or Territory which is part of the Commonwealth of any property wherever situated or;

            2. By any other person — of any property which is situated in Australia at the time when the gift is made.

This is subject to an exemption for gifts not exceeding $10,000 in the aggregate made within a period of three years (i e eighteen months before and eighteen months after the particular gift).

          1. The term ‘Australia’ is not defined in the gift duty legislation but Norfolk Island is now clearly (in the light of the Berwick Case) part of Australia However prior to the doubt being resolved by the High Court in that case Norfolk Island was not regarded as part of Australia A gift by a person domiciled in Norfolk Island or by a company which was incorporated in Norfolk Island would not therefore be subject to Australian gift duty unless it was a gift of property which was situated in Australia when the gift was made. Under the gift duty avoidance schemes that have come under notice the arrangements provided for the gift to be made by a company incorporated in Norfolk Island and for the property that was the subject of the gift to be situated in Norfolk Island at the time the gift was made.
          2. The schemes usually involve arrangements of the type considered by the High Court in Gorton v. Federal Commissioner of Taxation (1965) 113 C.L.R. 604 and in Ord Forrest v, Federal Commissioner of Taxation (1973—1974) 130 C.L.R. 124. They involve the incorporation of a private company with the shares beneficially owned by one person A who makes a loan to the company or sells investments to the company for full value, A takes up ordinary shares in the company at a substantial premium (e.g. $1 shares at a premium of $9 or $99 each, the total Amount payable for the shares being equal to the amount owing by company to A for the loan or purchase of the investments. debt due to A is set off against the amount due by A for the shares As the next step the ordinary shares are by special resolution converted to cumulative preference shares carrying a right to a low rate of dividend and the return of paid up capital only upon winding up. A small number ofordinary shares is then allotted to B, the person (or persons) that A seeks to benefit. In consequence of the limited rights of the preference shareholders, the ordinary shares held by B then carry all but a minute part of the worth of the company. It is conceded, of course, that this arrangement does reduce the net assets of A. But the contention was made that there was no point in the arrange­ment at which anything was done which amounted to a gift within the meaning of the Gift Duty Assessment Act.


          3. In the Gorton Case, gift duty had been assessed on the footing that the arrangement, although not involving any gift in the normal sense of the expression, fell within paragraph (f) of the definition of ‘disposition of property’, which relates to:

Any transaction entered into by any person with intent thereby to diminish, directly or indirectly, the value of his own property and to increase the value of the property of any other person.

If this contention had been accepted, it would have followed that there was a disposition of property for inadequate consideration which could be treated as a gift.



          1. When the assessment was challenged before the High Court, it was upheld at first instance by McTiernan J. but this decision was reversed by the Full High Court (Barwick C.J. and Taylor J., with Windeyer J. dissenting). The majority view was based on the technical point that paragraph (f) did not apply because, although the issue of shares to the intended beneficiaries for a fraction of their true worth obviously conferred a benefit upon them there was no point of time at which any unit of Property held by the beneficiaries increased in value. The shares had their high value at the moment of issue The fact that the deal gave the beneficiaries new property of substantial value was in the majority view sufficient to create a situation in which within the meaning of paragraph (f) the value of the Property of the beneficiaries was increased.
          2. The Gorton arrangement became a model that was copied in many other cases until the Commissioner sought to levy gift duty on a different basis – i.e. on the assumption that the company used in the transaction had made a gift to the beneficiaries when it issued to them at par shares worth far more than their face value and the company would therefore be liable to bear gift duty. A gift duty assessment claiming a gift by a company Ord Forrest Pty Ltd, which had been the vehicle for such an arrangement eventually came before the High Court. Duty was assessed on the basis that there had been a disposition of property by the company for inadequate consideration. Reliance was placed on paragraph (a) of the definition of ‘disposition of property’ which declares that that expression includes the allotment of shares in a company. The High Court upheld the assessment in the Ord Forrest Case referred to above.


          3. When it became known that the Commissioner was seeking to challenge the Gorton-type arrangements by raising assessments on the assumption that there was a gift by the company involved estate planners saw a means of avoiding the Commissioner’s action by setting up the company outside Australia. This put the gift by the company outside the scope of the Gift Duty Assessment Act because it was not a gift by a company incorporated in Australia or a gift of property situated in Australia. As the arrangements took the transactions outside the ambit of Australian gift duty law, specific action has not as yet been taken to identify all of the schemes of this type carried out by means of Norfolk Island companies. Nevertheless, forty-one schemes which appear to be designed to take advantage of the Gorton precedent have come under notice mainly as a result of information obtained or furnished in connection with other tax matters. These cases have not been fully investigated but the indications are that gift duty of about $5 million would have been payable on the authority of the decision in the Ord Forrest Case if the transactions had been carried out wholly in Australia
          4. While it could be said in one sense that a very large amount of Australian revenue has been avoided by this means, it is necessary to keep in mind that the transactions would never have been entered into if the persons responsible had not been advised by their professional representatives that the transactions would be free from duty. Strictly speaking, therefore, the loss of duty is purely notional. Australia does not suffer any real loss from the implementation of a Gorton scheme in Norfolk Island unless and until the person who carried out the scheme dies and the value of his net estate proves to be less as a result of the divesting of assets in Norfolk Island than it would otherwise have been had there not been an opportunity to carry out a Gorton scheme in Norfolk Island or in some other overseas area.


          5. Even then, the amount of the loss of duty is a matter for conjecture because the deceased would in all probability have used other means — perhaps means within the contemplation of the estate duty law — to pass assets to the intended beneficiaries if the device associated with Norfolk Island had not been there. For example, there might have been a planned series of gifts over a period of years; only gifts made within three years of the date of death would have been brought into the estate for estate duty purposes and, depending on the size of the installments, there may have been little or no liability to gift duty. Or the taxpayer might have carried on business in the name of his intended beneficiaries, allowing them to earn in their own right the fruits of his income-producing activities during his lifetime. If the donor lives long enough, it may well emerge, with the benefit of hindsight, that the same result could have been achieved without resorting to any artificial device contrary to the presumed intentions of the legislature.
          6. The situation needs to be viewed therefore against the background that it is within the contemplation of the Australian gift duty and estate duty law that any citizen will have limited ability to dispose of his assets during his lifetime without incurring either liability to estate duty or liability to gift duty. The harm which is done to the intentions of the legislature by the implementation of off-shore Gorton schemes was that the taxpayer was able to make his own terms, and perhaps give very large amounts away at a time when death appeared to be imminent and there was not time left for an orderly reduction of assets in the kind of estate planning that the law clearly permits. Depending on subsequent events this may or may not reduce revenue collections in a particular case. Overall of course the reasonable assumption is that the implementation of Gorton schemes would tend to have this effect although the true cost to the revenue cannot be quantified. The arrangements may also have advantages for estate planners seeking to avoid or reduce the incidence of State death duties.


          7. On 21 August 1974, the then Treasurer, the Hon. Frank Crean, made a public announcement that Parliament would be asked to amend the law to reverse the effect of the Gorton decision, and that the proposed amendment would be expressed to apply to arrangements put into effect after that date. Because a gift duty assessment raised under paragraph (f) on the basis that was rejected by the High Court in the Gorton Case operates against the donor in Australia and not against the company used for the carrying out of the scheme, the fact that the company was incorporated in Norfolk Island and carried out its part of the arrangement outside Australia would not, under the law as proposed prevent a liability to gift duty from arising. The Commissioner of Taxation is not aware of any arrangement of this kind that has been put into operation since 21 August 1974 although there may be such cases which have not come to notice. If Parliament in due course approves legislation of the kind envisaged in the Treasurer’s announcement, schemes put into operation since that date would no doubt be dealt with by raising assessments relying on paragraph (f) of the definition of ‘disposition of property’ — or the new equivalent of that provision - to levy duty against the person in Australia who is the effective donor of property.
          8. In the period of six months ending 30 June 1976 the registration of companies in Norfolk Island has risen by twenty-seven from 998 to 1025. Such companies as are now being registered may of course, be designed to modify property—holding arrangements already established in Norfolk Island in consequence of an earlier Gorton scheme, to minimise State duties even if a liability to Federal duty is introduced or perhaps to gamble on the possibility that a change in the law, when announced, will not cover a particular kind of scheme.


          9. In one important respect the use of Norfolk Island for estate planning differs from the use made of the Island for income tax avoidance. There are no Australian laws relating to estate duty or gift duty which directly facilitate the use of Norfolk Island in schemes to avoid the incidence of duty. The schemes which make use of Norfolk Island would be equally effective if the arrangements were implemented in any other overseas country or territory provided, of course, that the overseas country or territory does not levy substantial charges by way of gift duty, stamp duty etc. The special advantages of Norfolk Island for Australian estate planners were largely involved with convenience. Norfolk Island was reasonably close to Australia, it is within the Australian currency region, it is served by Australian banks and its courts are integrated into the Australian judicial system.

          10. With the introduction of the legislation designed to deny exchange control approval for international transactions entered into for tax and duty avoidance, it is no longer a simple matter for a person based in Australia to implement an off—shore Gorton scheme in an overseas country: cf. Part III of the Banking Act 1959-1974 and section 14C of the Taxation Administration Act 1953-­1974. However the Minister’s announcement envisages an approach to remedial legislation which would be aimed at Gorton type schemes wherever implemented if the consequence is to divest a person of Australian property in circumstances which would defeat the intended operation of the gift duty laws.



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