Bottom of the harbour tax avoidance
Encyclopedia
Bottom of the harbour tax avoidance was a form of tax avoidance
used in Australia
in the 1970s. Legislation (below) made it a criminal offence
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
(ATO) stated a total 6,688 companies had been involved, involving revenue of between $500 million and $1 billion.
s and accumulated profits
before its tax
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
s in the case of an insolvent company, ended up with nothing.
Promoters such as lawyer
s or accountant
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
).
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
(since the promoter would be in the business of buying and selling shares) and the dividend would be taxable income
, 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 (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.
(ATO) detected a bottom of the harbour scheme was in 1973. Rod Todman, a senior investigations officer in Perth
, 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.
The DCS was uncertain of the prospects for the case, but in late 1974 had a Queen's Counsel
opinion strongly recommending charges of conspiracy
to defraud
the Commonwealth be brought against the promoter and two other individuals. But 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
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 wasn't 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 overworked and underskilled staff, and bad management.
The abandoned case only came to light in 1982 in the Costigan Royal Commission investigating activities of the Federated Ship Painters and Dockers Union
. The Commission came upon bank account transactions for millions of dollars, and the "paper trail", as it was called, led eventually, and among other things, to the bottom drawers of the DCS Perth.
One of those other things the commission found was that the wife of one of the senior case officers at the DCS Perth was running an escort service, 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.
for any person to make a company
or trust unable to pay tax debts (income tax
, sales tax
, 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 to go through the crime of defrauding
the Commonwealth that had been so poorly handled at the Deputy Crown Solicitor above.
This act was controversial at the time, since tax avoidance
was (and perhaps still is) regarded as something less than an outright crime
. Tax matters might normally be addressed by closing a revenue loophole, the act instead treated bottom of the harbour schemes like fraud
s.
Treasurer
John Howard
said 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." (House
, 23 September 1982). Senator
Don Chipp
thought the purpose noble but was strongly against retrospectivity, 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." (Senate
, 19 November 1982).
Tax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...
used in Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
in the 1970s. Legislation (below) made it a criminal offence
Crime
Crime is the breach of rules or laws for which some governing authority can ultimately prescribe a conviction...
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
Australian Taxation Office
The Australian Taxation Office is an Australian Government statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system and superannuation legislation...
(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 was simple. A company would be stripped of assetAsset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
s and accumulated profits
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
before its tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
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
Creditor
A creditor is a party that has a claim to 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 or service to the second party under the assumption that the second party will return an equivalent property or...
s in the case of an insolvent company, ended up with nothing.
Promoters such as lawyer
Lawyer
A lawyer, according to Black's Law Dictionary, is "a person learned in the law; as an attorney, counsel or solicitor; a person who is practicing law." Law is the system of rules of conduct established by the sovereign government of a society to correct wrongs, maintain the stability of political...
s or accountant
Accountant
An accountant is a practitioner of accountancy or accounting , which is the measurement, disclosure or provision of assurance about financial information that helps managers, investors, tax authorities and others make decisions about allocating resources.The Big Four auditors are the largest...
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
Capital gains tax in Australia
Capital gains tax in the context of the Australian taxation system applies to the capital gain made on disposal of any asset, except for specific exemptions. The most significant exemption is the family home...
).
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
Income tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions...
(since the promoter would be in the business of buying and selling shares) and the dividend would be taxable income
Taxable income
Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that...
, 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 (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 OfficeAustralian Taxation Office
The Australian Taxation Office is an Australian Government statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system and superannuation legislation...
(ATO) detected a bottom of the harbour scheme was in 1973. Rod Todman, a senior investigations officer in Perth
Perth, Western Australia
Perth is the capital and largest city of the Australian state of Western Australia and the fourth most populous city in Australia. The Perth metropolitan area has an estimated population of almost 1,700,000....
, 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.
The DCS was uncertain of the prospects for the case, but in late 1974 had a Queen's Counsel
Queen's Counsel
Queen's Counsel , known as King's Counsel during the reign of a male sovereign, are lawyers appointed by letters patent to be one of Her [or His] Majesty's Counsel learned in the law...
opinion strongly recommending charges of conspiracy
Conspiracy (crime)
In the criminal law, a conspiracy is an agreement between two or more persons to break the law at some time in the future, and, in some cases, with at least one overt act in furtherance of that agreement...
to defraud
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
the Commonwealth be brought against the promoter and two other individuals. But 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
Canberra is the capital city of Australia. With a population of over 345,000, it is Australia's largest inland city and the eighth-largest city overall. The city is located at the northern end of the Australian Capital Territory , south-west of Sydney, and north-east of Melbourne...
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 wasn't 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 overworked and underskilled staff, and bad management.
The abandoned case only came to light in 1982 in the Costigan Royal Commission investigating activities of the Federated Ship Painters and Dockers Union
Federated Ship Painters and Dockers Union
The Federated Ship Painters and Dockers Union was an Australian trade union that covered "mostly work associated with chipping, painting, scrubbing, cleaning, working in every size of tanks, cleaning boilers, docking and undocking vessels, and rigging work"...
. The Commission came upon bank account transactions for millions of dollars, and the "paper trail", as it was called, led eventually, and among other things, to the bottom drawers of the DCS Perth.
One of those other things the commission found was that the wife of one of the senior case officers at the DCS Perth was running an escort service, and that she was a company secretary
Company secretary
A company secretary is a senior position in a private company or public organisation, normally in the form of a managerial position or above. In the United States it is known as a corporate 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.
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 offenceCrime
Crime is the breach of rules or laws for which some governing authority can ultimately prescribe a conviction...
for any person to make a company
Company
A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...
or trust unable to pay tax debts (income tax
Income tax in Australia
Income tax in Australia is the most important revenue stream within the Australian taxation system.Income tax is levied upon three sources of income for individual taxpayers: personal earnings , business income and capital gains...
, sales tax
Sales tax
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....
, 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 to go through the crime of defrauding
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
the Commonwealth that had been so poorly handled at the Deputy Crown Solicitor above.
This act was controversial at the time, since tax avoidance
Tax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...
was (and perhaps still is) regarded as something less than an outright crime
Crime
Crime is the breach of rules or laws for which some governing authority can ultimately prescribe a conviction...
. Tax matters might normally be addressed by closing a revenue loophole, the act instead treated bottom of the harbour schemes like fraud
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
s.
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 even more controversial than making the avoidance a crime.Treasurer
Treasurer of Australia
The Treasurer of Australia is the minister in the Government of Australia responsible for government expenditure and revenue raising. He is the head of the Department of the Treasury. The Treasurer plays a key role in the economic policy of the government...
John Howard
John Howard
John Winston Howard AC, SSI, was the 25th Prime Minister of Australia, from 11 March 1996 to 3 December 2007. He was the second-longest serving Australian Prime Minister after Sir Robert Menzies....
said 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." (House
Australian House of Representatives
The House of Representatives is one of the two houses of the Parliament of Australia; it is the lower house; the upper house is the Senate. Members of Parliament serve for terms of approximately three years....
, 23 September 1982). Senator
Australian Senate
The Senate is the upper house of the bicameral Parliament of Australia, the lower house being the House of Representatives. Senators are popularly elected under a system of proportional representation. Senators are elected for a term that is usually six years; after a double dissolution, however,...
Don Chipp
Don Chipp
Donald Leslie Chipp, AO was an Australian politician, and the inaugural leader of the Australian Democrats.-Early life:...
thought the purpose noble but was strongly against retrospectivity, 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." (Senate
Australian Senate
The Senate is the upper house of the bicameral Parliament of Australia, the lower house being the House of Representatives. Senators are popularly elected under a system of proportional representation. Senators are elected for a term that is usually six years; after a double dissolution, however,...
, 19 November 1982).
External links
- Crimes (Taxation Offences) Act 1980 at ComLawComLawComLaw is an Australian government web site run by the Attorney-General's Department providing online copies of Commonwealth legislation and related documents. The website was redesigned and re-released early in 2011....
- Taxation (Unpaid Company Tax) Assessment Act 1982 at ComLawComLawComLaw is an Australian government web site run by the Attorney-General's Department providing online copies of Commonwealth legislation and related documents. The website was redesigned and re-released early in 2011....
- Taxation (Unpaid Company Tax - Vendors) Act 1982 at ComLawComLawComLaw is an Australian government web site run by the Attorney-General's Department providing online copies of Commonwealth legislation and related documents. The website was redesigned and re-released early in 2011....
- Taxation (Unpaid Company Tax - Promoters) Act 1982 at ComLawComLawComLaw is an Australian government web site run by the Attorney-General's Department providing online copies of Commonwealth legislation and related documents. The website was redesigned and re-released early in 2011....