Bottom of the harbour tax avoidance
   HOME

TheInfoList



OR:

Bottom of the harbour tax avoidance was a form of
tax avoidance Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdict ...
used in
Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...
in the 1970s. Legislation made it a
criminal offence In ordinary language, a crime is an unlawful act punishable by a state or other authority. The term ''crime'' does not, in modern criminal law, have any simple and universally accepted definition,Farmer, Lindsay: "Crime, definitions of", in Can ...
in 1980. The practice came to symbolise the worst of variously contrived tax strategies from those times. In its 1986/87 annual report, the
Australian Taxation Office The Australian Taxation Office (ATO) is an Australian statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system, superannuati ...
(ATO) stated a total 6,688 companies had been involved, involving revenue of between $500 million and $1 billion.


Operation

The operation at the heart of bottom of the harbour schemes involved a
company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members share a common p ...
that would be stripped of
asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value ...
s and accumulated profits before its
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
fell due, leaving it then unable to pay. Once assets were stripped, the company would be sent, metaphorically, to the "bottom of the harbour" by being transferred to someone of limited means and with little interest in its past activities. The company's records were often lost too. The ATO, being in the same position as other unsecured
creditor A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...
s in the case of an
insolvent In accounting, insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet inso ...
company, ended up with nothing. Promoters such as
lawyer A lawyer is a person who practices law. The role of a lawyer varies greatly across different legal jurisdictions. A lawyer can be classified as an advocate, attorney, barrister, canon lawyer, civil law notary, counsel, counselor, solic ...
s or
accountant An accountant is a practitioner of accounting or accountancy. Accountants who have demonstrated competency through their professional associations' certification exams are certified to use titles such as Chartered Accountant, Chartered Certifi ...
s generally facilitated the transactions. The promoter would help the owners of a company first transfer the assets to a new company which was to continue the business, then the owners sold the old company to the promoter for the value of the untaxed accumulated profits, less an amount representing a fee or commission. For the owners this was the sale of a capital asset and hence untaxed (being prior to
capital gains tax A capital gains tax (CGT) is the tax on profits realized on the sale of a non-inventory asset. The most common capital gains are realized from the sale of stocks, Bond (finance), bonds, precious metals, real estate, and property. Not all count ...
). The promoter would have the company pay (to the promoter) a dividend of the money it had left, then the promoter on-sold the now empty shell to someone else. The way the promoter paid the owners for undistributed profits was similar to a dividend strip operation. In any case the amount the promoter paid was a
tax deduction Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and tax credits. T ...
(since the promoter would be in the business of buying and selling shares) and the dividend would be
taxable income Taxable income refers to the base upon which an income tax system imposes tax. In other words, the income over which the government imposed tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. Th ...
, leaving just the promoter's commission taxable, not the whole original company profit. The "harbour" in the expression was usually taken as referring to
Sydney Harbour Port Jackson, consisting of the waters of Sydney Harbour, Middle Harbour, North Harbour and the Lane Cove and Parramatta Rivers, is the ria or natural harbour of Sydney, New South Wales, Australia. The harbour is an inlet of the Tasman Sea (p ...
(which is adjacent to the financial district), though obviously the sense is also quite general. The actual origin of the name and the practice is not clear.


Deputy Crown Solicitor debacle

The first time the
Australian Taxation Office The Australian Taxation Office (ATO) is an Australian statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system, superannuati ...
(ATO) detected a bottom of the harbour scheme was in 1973. Rod Todman, a senior investigations officer in
Perth Perth is the capital and largest city of the Australian state of Western Australia. It is the fourth most populous city in Australia and Oceania, with a population of 2.1 million (80% of the state) living in Greater Perth in 2020. Perth is ...
, found a scheme involving about 50 companies and selected one for investigation. By 1974, he had assembled evidence which was referred to the Deputy Crown Solicitor (DCS) in Perth for possible prosecution as a
test case In software engineering, a test case is a specification of the inputs, execution conditions, testing procedure, and expected results that define a single test to be executed to achieve a particular software testing objective, such as to exercise ...
. The DCS was uncertain of the prospects for the case, but in late 1974 had a
Queen's Counsel In the United Kingdom and in some Commonwealth of Nations, Commonwealth countries, a King's Counsel (Post-nominal letters, post-nominal initials KC) during the reign of a king, or Queen's Counsel (post-nominal initials QC) during the reign of ...
opinion strongly recommending charges of
conspiracy A conspiracy, also known as a plot, is a secret plan or agreement between persons (called conspirers or conspirators) for an unlawful or harmful purpose, such as murder or treason, especially with political motivation, while keeping their agree ...
to
defraud In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. Fraud can violate civil law (e.g., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover monetary compens ...
the Commonwealth be brought against the promoter and two other individuals. There then followed delay upon delay, duplicated investigations, ill-prepared reports by inexperienced officers, and even a DCS officer deliberately avoiding contact with the ATO. After five full years, in April 1979, and based on miscommunication, the Crown Solicitor in
Canberra Canberra ( ) is the capital city of Australia. Founded following the federation of the colonies of Australia as the seat of government for the new nation, it is Australia's largest inland city and the eighth-largest city overall. The ci ...
advised the ATO that the evidence was insufficient and the case was dropped. It might well have been that it was not strong enough, but that decision was not arrived at in a well-considered way. The performance of the various DCS officers was later the subject of scathing criticism, with problems arising primarily from (possibly deliberately) overworked and underskilled staff, and bad management. The abandoned case came to light in only 1982 in the
Costigan Royal Commission The Costigan Commission (officially titled the Royal Commission on the Activities of the Federated Ship Painters and Dockers Union) was an Australian royal commission held in the 1980s. Headed by Frank Costigan QC, the Commission was establ ...
investigating activities of the
Federated Ship Painters and Dockers Union The Federated Ship Painters and Dockers Union (FSPDU) was an Australian trade union which existed between 1900 and 1993. It represented labourers in the shipbuilding industry, covering "mostly work associated with chipping, painting, scrubbing ...
. The Commission came upon bank account transactions for millions of dollars, and the "paper trail" led eventually, and among other things, to the bottom drawers of the DCS Perth. The commission also found that the wife of one of the senior case officers at the DCS Perth was running an
escort service An escort agency is a company that provides escorts for clients, usually for sexual services. The agency typically arranges a meeting between one of its escorts and the client at the customer's house or hotel room (outcall), or at the escort' ...
, and that she was a company secretary at several companies which were involved in bottom of the harbour schemes. There was no suggestion her husband improperly used his position, but the connection was close enough to be extremely embarrassing for all concerned, and the officer was dismissed.


Legislation


''Crimes (Taxation Offences) Act 1980''

In 1980, the ''Crimes (Taxation Offences) Act 1980'' put an end to bottom of the harbour schemes. Under the act it became a
criminal offence In ordinary language, a crime is an unlawful act punishable by a state or other authority. The term ''crime'' does not, in modern criminal law, have any simple and universally accepted definition,Farmer, Lindsay: "Crime, definitions of", in Can ...
for any person to make a
company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members share a common p ...
or
trust Trust often refers to: * Trust (social science), confidence in or dependence on a person or quality It may also refer to: Business and law * Trust law, a body of law under which one person holds property for the benefit of another * Trust (bus ...
unable to pay tax debts (
income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
,
sales tax A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a govern ...
, etc.), or to aid or abet any person or company doing so. The act thus caught both those in the schemes and the promoters of such schemes. It made it unnecessary in the future to address the activity as a crime of
defrauding In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. Fraud can violate civil law (e.g., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover monetary compensa ...
the Commonwealth through the Deputy Crown Solicitor office, which up to this point had been poorly managed. This act was controversial at the time, since
tax avoidance Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdict ...
was regarded as something less than an outright
crime In ordinary language, a crime is an unlawful act punishable by a State (polity), state or other authority. The term ''crime'' does not, in modern criminal law, have any simple and universally accepted definition,Farmer, Lindsay: "Crime, definit ...
. Tax matters might normally be addressed by closing a revenue loophole, the act instead treated bottom of the harbour schemes like
fraud In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. Fraud can violate civil law (e.g., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover monetary compens ...
s. However, once certain behaviour has been criminalised, what was once tax avoidance (which is legal) becomes
tax evasion Tax evasion is an illegal attempt to defeat the imposition of taxes by individuals, corporations, trusts, and others. Tax evasion often entails the deliberate misrepresentation of the taxpayer's affairs to the tax authorities to reduce the taxp ...
(which, by definition, is not).


''Taxation (Unpaid Company Tax) Assessment Act 1982''

The ''Taxation (Unpaid Company Tax) Assessment Act 1982'' went further, allowing for the recovery of tax avoided under bottom of the harbour tax schemes between 1 January 1972 and 4 December 1980. The retrospectivity in this act was controversial at the time although some argued that law was not retrospective as the tax was always payable.
Treasurer A treasurer is the person responsible for running the treasury of an organization. The significant core functions of a corporate treasurer include cash and liquidity management, risk management, and corporate finance. Government The treasury o ...
John Howard John Winston Howard (born 26 July 1939) is an Australian former politician who served as the 25th prime minister of Australia from 1996 to 2007, holding office as leader of the Liberal Party. His eleven-year tenure as prime minister is the s ...
said on 23September 1982 during the second reading of the bill in the
House of Representatives House of Representatives is the name of legislative bodies in many countries and sub-national entitles. In many countries, the House of Representatives is the lower house of a bicameral legislature, with the corresponding upper house often c ...
that the normal reluctance against retrospectivity was "tempered by the competing consideration of overall perceptions as to the equity and fairness of our taxation system and the distribution of the tax burden." whilst
Senator A senate is a deliberative assembly, often the upper house or chamber of a bicameral legislature. The name comes from the ancient Roman Senate (Latin: ''Senatus''), so-called as an assembly of the senior (Latin: ''senex'' meaning "the el ...
Don Chipp Donald Leslie Chipp, AO (21 August 192528 August 2006) was an Australian politician who was the inaugural leader of the Australian Democrats, leading the party from 1977 to 1986. He began his career as a member of the Liberal Party, winning el ...
thought the purpose noble but spoke strongly against the retrospective nature in the Senate on 19November, saying "I do not trust politicians to legislate retrospectively. One of the few protections that the ordinary citizen has is that he knows the law."


See also

*
Taxation in Australia Income taxes are the most significant form of taxation in Australia, and collected by the federal government through the Australian Taxation Office. Australian GST revenue is collected by the Federal government, and then paid to the states un ...


Further reading

* * *
Second Reading Speech
',
John Howard John Winston Howard (born 26 July 1939) is an Australian former politician who served as the 25th prime minister of Australia from 1996 to 2007, holding office as leader of the Liberal Party. His eleven-year tenure as prime minister is the s ...
,
Australian House of Representatives The House of Representatives is the lower house of the bicameral Parliament of Australia, the upper house being the Senate. Its composition and powers are established in Chapter I of the Constitution of Australia. The term of members of the ...
, 23 September 1982 *
Second Reading Speech
',
Don Chipp Donald Leslie Chipp, AO (21 August 192528 August 2006) was an Australian politician who was the inaugural leader of the Australian Democrats, leading the party from 1977 to 1986. He began his career as a member of the Liberal Party, winning el ...
,
Australian Senate The Senate is the upper house of the Bicameralism, bicameral Parliament of Australia, the lower house being the House of Representatives (Australia), House of Representatives. The composition and powers of the Senate are established in Chapter ...
, 19 November 1982 *


References

{{reflist


External links

*
Crimes (Taxation Offences) Act 1980
' on the
Federal Register of Legislation The Office of Parliamentary Counsel (OPC) is an Australian Commonwealth government agency established under the ''Parliamentary Counsel Act 1970'' (Cth) within the Commonwealth Attorney-General's portfolio. OPC drafts all government Bills that ...
*
Taxation (Unpaid Company Tax) Assessment Act 1982
' on the
Federal Register of Legislation The Office of Parliamentary Counsel (OPC) is an Australian Commonwealth government agency established under the ''Parliamentary Counsel Act 1970'' (Cth) within the Commonwealth Attorney-General's portfolio. OPC drafts all government Bills that ...
*
Taxation (Unpaid Company Tax—Vendors) Act 1982
' on the
Federal Register of Legislation The Office of Parliamentary Counsel (OPC) is an Australian Commonwealth government agency established under the ''Parliamentary Counsel Act 1970'' (Cth) within the Commonwealth Attorney-General's portfolio. OPC drafts all government Bills that ...
*
Taxation (Unpaid Company Tax—Promoters) Act 1982
' on the
Federal Register of Legislation The Office of Parliamentary Counsel (OPC) is an Australian Commonwealth government agency established under the ''Parliamentary Counsel Act 1970'' (Cth) within the Commonwealth Attorney-General's portfolio. OPC drafts all government Bills that ...
*

' Corporate taxation History of taxation in Australia Tax avoidance