As a result of the 1973 amendments to the Income Tax Assessment Act a situation has arisen in which a company the shareholders of which are resident in the Island may be competing in the Island with another company whose shareholders are not Island residents. In the case of the former company, income tax is not levied whereas the latter company is liable to taxation. Naturally enough this impost of income tax affects not only financial profits but of course costs and hence competitiveness between companies in the same industry.
Such discrimination is undesirable and Particularly so in a small and confined community. Now that the Berwick Case has established that the Island is a part of the Commonwealth, its taxation treatment should conform with that accorded other isolated parts of Australia. At the same time one must consider certain wider issues and these are referred to in the conclusion to this section.
Evidence from the Department of the Treasury disclosed that prior to the extension of the Life Insurance Act 1945-1973 to Norfolk Island by proclamation on 26 November 1974, certain companies which may have lacked the required degree of financial soundness were contemplating incorporation in the Island for the purpose of undertaking life insurance business. This was understood to be for tax avoidance purposes.
Assertions were made to the Commission that Australia would benefit economically by retaining the Island’s tax haven status; the argument contended that investment within Australia (via Norfolk Island) would be stimulated as a result of income earned from such investment being non-taxable through being channelled through the Island.
Little time need be wasted on this assertion. Its basic premise is extremely doubtful and no account is taken of the obvious harmful effects of a tax haven which would certainly counter any such alleged benefits.
12.State duties – death and stamp
The effect of the Norfolk Island tax avoidance activities upon these duties levied by Australian States is difficult to assess.No State government or department gave any evidence to the Commission and it would be logical to infer from this that the States feel either that there is no problem here or that it is so small in size that it is of no concern to them. On the other hand, it is undeniable that the known activities in Norfolk Island involved the allotment and transfer of many shares on which transactions stamp duty would certainly have been paid had they been conducted in a State. Against this, however, is the point that some of the transactions would never have been conducted in a State anyhow but in some other tax avoidance place, so no State has in fact lost any stamp duty. State death duties must, however, be affected adversely to whatever extent property is transferred from a State to Norfolk Island. Again, no real loss to a State accrues until the party concerned dies and certainly no evidence was given the Commission on the effect upon any State’s revenue of past deaths of persons who had shifted assets to Norfolk Island. It is possible that the Australian States take the view that such transfers of assets away from a State would be possible even if Norfolk Island did not exist and that there is nothing they can do about it which would not to some extent be could be productive.
13.Criticism against the retrospective character of the amending legislation of 1973
The Income Tax Assessment Act 1973 received Royal Assent on 11 December 1973 but it was given retrospective application to income derived on or after 20 July 1972 In principle retroactive legislation is Prima-Facie bad legislation as citizens should be able to conduct their affairs in the light of the law as it stands. However, although the law itself was not operative until December 1973 it cannot be said that ample notice of the proposed change was not given well in advance. On 19 July 1972 the decision to amend the law was announced by the then Treasurer including the fact that the change would have effect in relation to income derived after the date of the announcement. That this point received wide publicity and was acted upon cannot be doubted for the effects were immediately noticeable in the fall—off in tax avoidance activities. The criticism, therefore, against retrospectivity is hollow and it is impossible to accept that the vast majority of persons engaged in the activities under question were not well aware on or about 19 July 1972 of the looming change. Little weight, in consequence need be given the charge of unfairness usually associated with retroactive legislation
It has been necessary to set out in some detail the many facets of Norfolk Island tax avoidance in order for the re to understand fully the complexities of the subject and the human characteristics involved and thus be able to place in some perspective the measures which have been taken to date in counter them and the further recommendations in this Report.
In so far as income tax avoidance is concerned the Overwhelming body of abuses has now been stopped. Those that remain, namely abuses in the areas of Federal estate duty and state death and stamp duties, are on a relatively smaller scale, but to an unascertainable extent, are detrimental to the Federal and State revenues concerned. It is significant that for the year ended 30 June 1975 over fifteen and a half million dollars passed through the books of the Norfolk Island branch of the commonwealth Trading Bank and for the year ended 30 September 1975 over sixty-five and a half million dollars passed through the books of the Island’s branch of the Bank of New South Wales by way of ‘paper’ transactions. Following the Berwick Case, Taxation Office investigators will be able to demand from Island entities full and complete disclosure of all details of their financial dealings, and to take any necessary steps to curb or eliminate whatever tax avoidance activities remain.
In looking at this entire picture of tax avoidance one cannot dissociate it from the unique nature of Norfolk Island’s earlier constitutional positions and its history. If taxation abuses based in the Island are to be totally eliminated in so far as Australia is concerned (and while Australia is expected to assist the Island in diverse ways, this is a wholly reasonable aim), then there must be a conscious and quite deliberate adoption of measures to bring the Island wholly within the Australian taxation system. The Commission recommends accordingly.
To this end, and as part of such measures, legislation should be passed providing for death and stamp duties to be levied in the Island of the same kind as those now obtaining in the Australian Capital Territory.
With regard to income tax of both companies and individuals resident in the Island, one must recognise the essential log fairness of the doctrine that benefits must be paid for and inequities in treatment of residents in the same country must be abolished. Norfolk Island is part of the Commonwealth and its residents should be subjected to the same system of taxation is applied to other Australian citizens. The Island is already in Zone A within the meaning of s 79A of the Income Tax Asses Act so that its residents who come within the scope of the section are entitled to the benefits allowed to residents of the Commonwealth who live in isolated areas. The benefit is available to a person who spends more than one—half of the year of income in the Island. At present it is a tax rebate equal $216 plus one-fourth of the total rebates available to the taxpayer for maintenance of dependants. It is to be noted that although rebates for maintenance of children have generally been abolished they remain notionally in existence for the purpose of calculating zone rebates.