Taxing lies

Geoffrey de Q Walker is a conservative legal academic for whom I usually have a fair amount of respect. However, his opinion piece in today’s Australian, claiming that Australia’s tax system undermines the rule of law, does nothing to enhance my opinion of him.

For a start, Walker makes a fundamental factual error in claiming that “the Hawke Labor government abolished” the income tax indexation system introduced by the Fraser Coalition government. In fact, it was the Fraser government itself, and in particular Treasurer John Howard. Howard presided over the repeal of tax indexation in 1981, reversing the Fraser government’s previous initiative after discovering how inconvenient it was to actually be forced to publicly justify increasing taxes rather than doing so by stealth through letting inflation do the job.

Even more importantly, Walker seriously misrepresents (though mostly by omission) both the history of Australia’s tax anti-avoidance system and its comparison with the UK. Walker’s principal indictment against Australia’s tax system (apart from the standard Tory one that tax rates are too high despite our total tax take being among the lowest in the western world) is the claim that the anti-avoidance provisions of Part IVA of the ITAA (1936) contravene the rule of law:

Further damage to the rule of law has been done by granting the ATO (and, on appeal, the courts) wide discretionary powers to alter the scope of tax law. The most far-reaching is in the “general anti-avoidance rules” of Part IVA, which overrides the rest of the act and which empowers the ATO to strike down an otherwise lawful arrangement on the basis of the commissioner’s opinion as to its purpose.

Former chief justice Harry Gibbs considers that these powers amount to an abandonment of the rule of law. …

Walker carefully ignores the history of Part IVA, and in particular the fact that it was introduced in the early 1980s as a direct response to the utterly unprincipled attack on the integrity of the previous general anti-avoidance provision (section 260) orchestrated by former High Court Chief Justice Sir Garfield Barwick in a series of Court decisions during the 1970s. Those decisions in turn had led to the infamous “Bottom of the Harbour” tax avoidance schemes and consequent massive losses to revenue, leading in turn to an unfair burden on ordinary taxpayers who couldn’t afford to pay shonky acccountants to devise absurdly artificial tax minimisation schemes.

One of numerous examples of the sheer brazen audacity of Barwick’s attack on section 260 can be found in the 1976 decision Mullens v Commissioner of Taxation. Barwick mused about the fact that the wording of section 260 declared void against the Commissioner any arrangement, agreement etc:

so far as it has or purports to have the purpose or effect of in any way, directly or indirectly:

(a) altering the incidence of any income tax

Barwick reasoned that the incidence of tax could only be “altered” if the taxpayer had previously entered into a substantially similar transaction and had then structured the challenged transaction in a different way such that tax liability was changed; otherwise there was nothing to “alter”. As the taxpayer Mullens had not previously undertaken a similar transaction he was not caught by section 260, even though his arrangement clearly had both the purpose and effect of minimising the tax that would otherwise have been payable. Mullens and various other Barwick-orchestrated decisions effectively rendered section 260 completely useless as an anti-avoidance measure, and made payment of tax optional for any businessmen who didn’t feel like paying it and who could afford a skillful tax accountant. The federal government had no practical choice but to enact some provision like Part IVA to prevent massive losses to Consolidated Revenue.

Geoffrey de Q Walker compares Part IVA unfavourably with the anti-avoidance regimes in the US and UK:

Neither Britain nor the US has an equivalent provision and practitioners from those countries aver that the rule of law has survived relatively well in their tax systems.

However, by failing to mention that Part IVA flowed directly from Barwick’s unprincipled judicial assault on the pre-existing anti-avoidance provisions, Walker creates a seriously misleading impression. Neither the US nor UK has experienced an even slightly comparable judicial assault on its income tax regime. It was Barwick who undermined respect for the rule of law, not the Federal Parliament that introduced Part IVA.

Moreover, and in contrast to Barwick’s concerted attack on the tax system, the British courts have introduced a judicial doctrine known as the ‘fiscal nullity’ doctrine that actually complements the effectiveness of that country’s tax system instead of undermining it, and goes some way towards achieving a similar effect to Australia’s Part IVA by judicial elaboration. Thus, according to Halsbury’s Laws of Australia:

First, there must be a pre-ordained series of transactions, or one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (that is business) end. Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax¢â¬ânot ‘no business effect’. If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed depends on the terms of the taxing statute sought to be applied.

The British courts, however, refuse to countenance looking at the “substantive effect” of an impugned transaction, preferring to assess the form of a taxpayer’s actions rather than their substantive effect:

“Everyone is entitled if he or she can to order his or her affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he or she succeeds in ordering them so as to secure this result, then however unappreciative the Commissioners of Inland Revenue or any fellow taxpayers may be of this ingenuity, he or she cannot be compelled to pay an increased tax. This so-called doctrine of ‘the substance’ seems to me to be nothing more than an attempt to make a person pay notwithstanding that he or she has so ordered his or her affairs that the amount of tax sought from him is not legally claimable.”

Barwick was equally keen on ringing rhetorical endorsements of the citizen’s inalienable right to avoid tax, and frequently cited the above passage (the so-called Duke of Westminster principle) with approval.

By comparison, the policy of Part IVA is to look to both the form and substance of a transaction. Having properly concluded that there is a scheme which results in a tax benefit to the taxpayer, the Commissioner (and a Court on appeal) is required to assess whether:

having regard to the eight factors listed in section 177D (b) of the Act, a reasonable person would conclude, on an objective analysis, that at least one person entered into or carried out the scheme, or any part of the scheme for the sole or dominant purpose of enabling the relevant taxpayer, or the relevant taxpayer and another person or persons to obtain a tax benefit in connection with the scheme

Part IVA has stood the test of time and smartarse lawyers’ challenges, not least because Barwick retired as Chief Justice in 1981. Incidentally, quite apart from the specific legacy of Part IVA of the ITAA, one of the other consequences of Barwick’s disreputable reign as Chief Justice of Australia was the enactment in the early 1980s of two additional sections of the Acts Interpretation Act (Cth), both designed to prevent courts from engaging in the sort of wholesale defiance of Parliament that Barwick perpetrated by ignoring its manifest intention/purpose and instead adopting an often absurdly narrow, legalistic and literalist interpretation of legislation with which he disagreed. The first of these reforms was section 15AA, which requires:

In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.

That section is supplemented by section 15AB:

SECT 15AB
Use of extrinsic material in the interpretation of an Act

(1)Subject to subsection (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material:

(a) to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or
(b) to determine the meaning of the provision when:
(i) the provision is ambiguous or obscure; or
(ii) the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable. …

These two sections allow (and require) courts to give effect to Parliament’s intentions and purposes where they are readily discoverable (e.g. in the Minister’s Second Reading Speech), instead of cynically thwarting them by adopting artificial interpretations that too often strained credibility and drastically undermined the rule of law in a way that Part IVA of the Tax Act could never approach.

About Ken Parish

Ken Parish is a legal academic, with research areas in public law (constitutional and administrative law), civil procedure and teaching & learning theory and practice. He has been a legal academic for almost 20 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in the early 1990s.
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Norman
Norman
2022 years ago

I’d always thought there was a clear distinction between “mistake” and “lie”; but I’m not a lawyer, of course.

Ron Mead
Ron Mead
2022 years ago

I note that Mullins was a 2-1 majority decision. I assume that other Barwick judgements concerning Section 260 were also decided in conjunction with other judges in either unanimous or majority decisions. I know Barwick had a certain status as Chief Justice, but surely other justices would have been independent thinkers and would not have allowed themselves to be dominated by him.

Section 260 was a poorly drafted section that purported to strike out any contract that had the “purpose or effect of in any way, directly or indirectly of altering the incidence of any income tax” and as such could have been interpreted to disallow the effect of any agreement that gave rise to a tax deduction, whether that was its dominant purpose or not, including any payments made by any taxpayer under 77A.

Part IVA was much stronger precisely because it did introduce the concept of “dominent” purpose, something notably missing from Section 260.

If the High Court were to refuse the appeal in Mullins case, the Commissioner could consistently have disallowed any tax deduction he wanted to, which would have made all sections in the Act relating to tax deductions inoperative or redundant – law by bureaucratic fiat. Barwick et al obviously considered this to be against the principles of sound tax law.

The wonder is that it took the Parliament so long to introduce Part IVA. Let’s sheet home the responsibility to where it really belongs in this case.

Mark Platt
Mark Platt
2022 years ago

Ken,

I’m interested in your last paragraph, where you suggest the provisions of the Acts Interpretation Act ss15AA and 15AB not only allow but require courts to give effect to the intention of Parliament. My understanding heretofore was that these sections merely give the courts the discretion to look to extrinsic material. Per Mason CJ, Wilson, Deane and Dawson JJ: “The second reading speech, while deserving serious consideration, cannot be determinative. The words of a Minister must not be substituted for the text of the law” in R v Bolton; ex parte Beane at http://www.austlii.edu.au/au/cases/cth/HCA/1987/12.html. Can you help clarify this?

Robert
2022 years ago

Hmm. Don’t remember you making a similar response to Windschuttle, Norman…

Ken Parish
Ken Parish
2022 years ago

Ron,

I take your point on the potentially sweeping effect of section 260 (if interpreted naively without regard to its intended purpose). One of the multiple ironies about the history of section 260 is that Barwick was himself a professed adherent of Dixonian legalism, and professed to apply a purely textual approach to interpreting legislation. As Mullens and numerous other decisions illustrate, however, words more often than not don’t have a single potential meaning. You suggest (correctly, I think) that one could easily interpret section 260 (purely from its text) as allowing the Commissioner to disallow any arrangement whose effect (irrespective of legitimate purposes, dominant or otherwise) was to reduce tax liability. Barwick, on the other hand, managed to achieve a result, by the combined effect of various decisions all professedly adopting a legalistic/literal/textual approach, an almost diametrically opposite result – where section 260 had almost no effective operation at all. It illustrates, as I said, that complex language almost always has several potential meanings (or at least shades of meaning), and that purportedly literal/textual approaches to interpreting such language are by their nature intellectually bankrupt and frequently dishonest (in this case, hiding a judicial purpose of subverting legislative intent). The more appropriate approach to interpretation is to have regard not only to the text of the statute itself, but also its context, history and legislative intent, partly as revealed by extrinsic sources.

In fact, that’s precisely how the High Court DID begin interpreting section 260 once section 15AA and 15AB were in place and Barwick had retired. In Federal Commissioner of Taxation v Gulland (1985) 160 CLR 55, the Court held that the test for infringement of section 260 necessarily involved an objective assessment of the purpose or intent of an impugned arrangement. That is, the Court managed to interpret the section in a way which DIDN’T involve accepting that the Commissioner could disallow arrangements whose effect (irrespective of purpose) was to reduce tax. It’s quite a good example of giving effect to legislative intent, in contrast to deliberately subverting it (which is what Barwick did). Here’s an extract from the judgment of Gibbs CJ in Gulland that explains the Court’s approach to section 260:
Section 260 creates many difficulties of interpretation, but some matters may now be taken as settled. The section does not refer to the motives of the taxpayer or other person who entered into the arrangement which it is sought
to impugn; the purpose or effect of the arrangement must be ascertained from the terms of the arrangement itself and from the overt acts by which it was carried into effect. Not every arrangement which results in a saving of tax will be struck down by the section. …
Lord Denning suggested a practical test for deciding whether an arrangement is one to which the section applies. He said:
“In order to bring the arrangement within the section you must be able to predicate – by looking at the overt acts by which it was implemented – that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section.”
The question, according to this test, is whether the arrangement, on its face, must necessarily be labelled as a means to avoid tax. That test is a useful one, and it has often been applied, but it does not provide a guide to the decision of every case. An arrangement which is not capable of explanation by reference to ordinary dealing and which on its face is obviously designed to bring about the result that less tax will be paid may nevertheless do no more than take advantage of an opportunity to reduce tax which the Act itself provides. A line of decisions illustrates that if the Act offers to the taxpayer a choice of alternative tax consequences, either of which he is free to choose, or offers certain tax benefits to taxpayers who adopt a particular course of conduct, the choice of the advantageous alternative or the adoption of the beneficial course does not mean that s.260 is attracted.”
Of course, this formulation still potentially leaves a hole in section 260 large enough to drive a truck through. That is, as long as there is some plausible legitimate (non-tax-avoidance) purpose, an arrangement would be safe from attack by the Commissioner. However, in the post-Barwick era, the Court also had little difficulty in disposing of that problem and adopting a constructive approach to giving effect to legislative purpose. Here’s Gibbs CJ again in Gulland:
Secondly, the avoidance of tax (by which I mean to include any of the purposes mentioned in s.260) need not be the sole purpose of the arrangement. In Hollyock v. Federal Commissioner of Taxation (1971) 125 CLR 647, at p 657, I respectfully dissented from the view, apparently accepted as correct in Mangin v. Inland Revenue Commissioner (1971) AC 739, at p 751, that the avoidance of tax must be the sole or at least the principal purpose of the arrangement, although I considered that it would not be enough to justify the application of the section that tax avoidance was an inessential or incidental feature of
the arrangement. … If tax avoidance is one of the main purposes of the arrangement in the sense that it is not inessential or merely incidental, that is enough.
Thus, in Gulland the Court arrived at an interpretation of section 260 that is not all that dissimilar to the express provisions of Part IVA. It may be that Part IVA wouldn’t have been necessary had the High Court not been intent on subverting section 260 throughout Barwick’s reign as CJ.

What Part IVA adds to the post-Barwick interpretation of section 260 is broad discretions in the Tax Commissioner and a reversal of the onus of proof. I agree with Geoffrey de Q Walker that these innovations are less than desirable. However, prattling on about how they undermine the rule of law without putting the matter in context and acknowledging that Part IVA was a legislative response to the initial wholesale defiance of the rule of law orchestrated by Barwick is positively misleading.

Mark,

Turning to Mark Platt’s point, R v Bolton; ex parte Beane simply adds a necessary cautionary note to purposive interpretation. While the search is ALWAYS for legislative intent, extrinsic indications of that intent can’t displace the plain and unavoidable words of a statute if they clearly (on their face and in context) bear a contrary meaning to what the Minister said was intended. However, that is an extreme situation. More commonly, ambiguity or uncertainty will be evident on the face of the provision, or once one looks at extrinsic sources to ascertain actual intent.

Gulland is an excellent example of this. Even though section 260 is not self-evidently ambiguous on its face (and, as Ron Mead observed, may be interpreted on a naive literal basis as permitting the Commissioner to disallow arrangements whose effect, irrespective of purpose, is to avoid/reduce tax), judicial examination of purpose allowed the Court to imply a test of dominant (or rather not insignificant) purpose in order to give effect to Parliament’s intention. It’s an example of section 15AB(1)(ii): where “the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable”. The ordinary textual meaning of section 260 was not directly contrary to the meaning Parliament intended (i.e. there wenren’t express words precluding judicial interpretation in accordance with Parliament’s actual intention), so it wasn’t a R v Bolton; ex parte Beane situation, but it was necessary to imply words which weren’t present (namely a test of dominant purpose) to adequately achieve that intent and avoid an absurd situation where any tax-reducing effect would be enough to invalidate any arrangement.

John Humphreys
2022 years ago

All this legal talk… I just can’t handle it! My brief note is to point out that, while Australia’s tax rate is low relative to some OECD countries – it needs to be remembered that tax rates accross the OECD are high by historical standards.

Mostly, the tax rates in the OECD are higher than the tax rates in the remaining communist countries. For instance, China’s top marginal tax rate is lower than Australia’s.

Ron Mead
Ron Mead
2022 years ago

Thanks for making such a detailed response, Ken. I do think your characterisation of the Barwick as deliberating subverting the law is unduly provocative and imputes motives that can’t be proven. As I said above the High Court is not a one man band. Decisions are made by independent judges either unanimously or by majority.

The point about the rule of law is that ideally we should all know what the law is in advance of our actions, and in relation to tax matters we are further away from this ideal than we’ve ever been. It is really not good enough to arm the Tax Commissioner with power to strike down any arrangement he sees fit and to allow others to pass which have essentially the same effect. One example is that many married couples switch income-earning assets to the partner with the lower marginal rate for no other reason than to avoid tax. This is allowed, but is certainly no different than the transaction Mullins was involved in. It is motivated solely by tax-avoidance. As I said before this is legislation by bureaucratic fiat.

For some reason it appears beyond the capability of Parliamentary draftspersons to put English words together in such a way as to convey a clear meaning. The forcing of judges to resort to Parliamentary debates to garner a meaning to a piece of legislation is pathetic and is an indictment on a profession (all legal draftsmen are lawyers one assumes) whose main tool of trade is the English language. One trembles to think of the state of our wiring if their calling had been that of electrician.

Norman
Norman
2022 years ago

Robert, I accept that you “can’t remember” a lot. Perhaps that’s why there was little point in you trying to analyse the extent of Ryan’s fabricated sources by READING the books? [[apologies, ken, for our discussion on your site]]

Mark Platt
Mark Platt
2022 years ago

Thanks for the clarification.

John
John
2022 years ago

A great post, Ken. I’d push it a bit further and observe that, in the period when Barwick was rampaging around, even practices that are normally considered highly objectionable, like retrospective laws, became desirable.

The general objection to retrospectivity is that people can’t know what law will apply to the transactions they undertake. But with Barwick in operation, that was already the case – noone could say what bizarre interpretation he might come up with. The only way to have any certainty was for the government to say, in effect,

“We will pass a law with effect X from date A , and if the High Court reads its meaning perversely, we will pass another, retrospective law, which have effect X at date A. If that is misread, we will pass another until the High Court gives in”

The changes to the Acts Interpretation Act were also crucial in killing off Barwick’s approach and discrediting it with his fellow judges. Like you, I’m surprised that Walker would now try to refight this battle.

Ron Mead
Ron Mead
2022 years ago

I’m just amazed that you intellectuals would countenance retrospective legislation in a democracy, whatever the perceived crime or misdemeanor. It is just straight out despotism. You don’t have to have any sympathy for bottom-of-the Harbour practitioners (I certainly don’t) to take this position. It’s the one thing in my view that discredits John Howard’s record.

There are times when you just have to wear the consequences of deficiencies in the law, and try to fix it up with prospective legislation. I do agree with JQ’s subtext of the lawmaking supremacy of Parliament over the judiciary, although I suspect his consistency may well be tested if an issue arose concerning Kirby’s stance on judicial activism.

John
John
2022 years ago

Ron, the deficiencies weren’t in the law but in the judiciary or, more precisely, in the Chief Justice (though his colleagues, with the glorious exception of Lionel Murphy) all too oftenw ent along with him).

I haven’t paid enough attention to Kirby’s judicial decisions (as opposed to controversial public statements) to form a strong opinion on whether he’s really an activist, but I think Murphy had the right idea: a fairly broad reading of constitutional rights and freedoms, combined with deference to the intent of Parliament in relation to statute law. The Acts Interpretation Act could have been taken directly from Murphy’s dissenting judgements under the Barwick court.