CHAPTER 6
Schedule 7 – Distributions to Beneficiaries and Partners that are
Equivalent to Interest
6.1 Mr R Dukes of Blake Dawson Waldron expressed concern over the retrospective
application of the legislation [1]
There are two aspects of retrospectivity which I would like to talk
about. One is just the general aspect that this legislation was introduced
on 2 July 1998 but foreshadowed by press release which predated it by
some 14 months. The previous witness to the committee spoke about the
Senate's previous resolutions in relation to legislation that is introduced
more than six months after a press statement. However, that is not the
main aspect of my submission.
The main aspect of my submission concerns one particular aspect of
the Treasurer's press statement. In the relevant part of the press statement
issued on 13 May, the Treasurer said that the measure would apply only
to interests in trusts created after 7.30 p.m. on 13 May or interest
extended, renewed or rolled over after that date. The words of the Treasurer
were, `This amendment will apply to capital subscribed to trusts and
finance raised on or after 7.30 p.m., 13 May 1997, and to the renewal,
extension or rollover after that time of existing interests in trusts
after the expiry of their present term.' However, draft section 45ZA
contained in schedule 7 to the bill says that the measures will apply
to interests that were, amongst other things, acquired after the commencing
time. In other words, the interest in the trust or the unit in the trust
could have been created before 13 May 1997 and the measure can apply
to those interests.
The Treasurer's press statement clearly says that the measures will
only apply to capital subscribed after that date. Just to restate: when
an interest in a trust was acquired after 13 May 1997, the section will
have application, even where the interest was created before that date.
So the proposed section 45ZA could have an application in respect of
interests in trusts existing prior to 13 May 1997. That extends well
beyond that indicated by the Treasurer in his press statement.
This means that the legislation will have retrospective application
which was not foreshadowed by the Treasurer in his press statement.
For example, it will apply to secondary trading after 13 May 1997 in
respect of units created before that time. It is our view that this
will unfairly affect many hundreds of thousands of ordinary Australians
with investments in a range of trusts. I cannot quantify—I do not
have the wherewithal to work out how many people might be affected by
this. I am aware of a number of people affected, however. On the question
of fairness, I think that the legislation should be amended so that
it applies to interests acquired after the first release of the legislation—that
is, 2 July 1998—instead of 13 May 1997.
6.2 In response, Mr Peter Walmsley Assistant Commissioner Australian
Taxation Office advised the Committee that [2]:
The amendment which is in question there is one which deals with trusts.
In essence—I am simplifying somewhat but I do not think that matters
very much—the amendment is to prevent dividends in lieu of interest
being passed through a trust. There was an existing provision in the
law which prevented dividends being paid directly to shareholders in
a way which enabled the dividend to be substituted for interest. The
reason that one would wish to substitute a dividend for interest, of
course, is that whereas interest would be fully taxable, the dividend
might carry a franking credit or an intercorporate dividend rebate.
However, a problem had emerged where trusts were interposed between
the person receiving the money and the company. In effect, the provision
could be circumvented by the interposition of a trust. The provision
as announced was, of course, intended to stop that practice from budget
day. The actual words which were mentioned in the press release dealt
with the obvious case where a trust is created, renewed or extended.
What it did not do was address the situation of trading in the secondary
market; it just simply did not say `interests acquired'.
So that was an omission, and I would not wish to pretend that it was
anything other than an omission.
6.3 The Committee was concerned to determine when the decision was taken
to include secondary trading in the legislative net as illustrated in
the following exchange between Mr Walmsley and Senator Campbell [3]
Senator George Campbell: When was the decision in respect to the secondary
trading issue made by the tax office or the Treasurer's office?
Mr Walmsley:…. I am advised that when the legislation was drafted
the word `acquired' was already there. In other words, from the time
the legislation was exposed the legislation covered secondary trading.
Mr Dukes raised the issue after the legislation was exposed. The matter
that went to the Assistant Treasurer was whether, in doing that, the
legislation in fact reflected the views of government. The answer was
yes, it did. So I got the order of events slightly out of sequence.
Senator George Campbell: When was the decision taken consciously that
secondary trading would be encompassed by this legislation?
Mr Walmsley: It was assumed right from the inception of drafting that
it was intended to be encompassed, so the decision, in so far as it
was taken at all in a conscious fashion, was made whenever drafting
began. The failure to
Senator George Campbell: Did the drafting begin before the press release
of May?
Mr Walmsley: No, after.
Senator George Campbell: So it is possible it was not contemplated
prior to that press release that secondary trading would be covered
by this legislation?
Mr Walmsley: No, what happened was that the press release was simply
poorly worded. It referred to—
Senator George Campbell: It was obviously poorly worded.
Mr Walmsley: Well, obviously poorly worded.
Senator George Campbell: What I am trying to get at is when did you
make a conscious decision that secondary trading would be encompassed
by this legislation? Presumably you would have briefed the draftsman
in terms of what was to go into the legislation.
Mr Walmsley: Yes, we did. And the answer to that would be when the
cabinet decision was made, because the legislation was drafted on the
basis of the cabinet decision.
Footnotes
[1] Evidence p. E 6.
[2] Evidence p. E 9.
[3] Evidence p. E 12.