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¬ânot ‘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:
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.