by John Howard
In his 1977 budget speech, Phillip Lynch gave a general warning that he would ‘crack down hard’ on artificial tax avoidance schemes. In April 1978 I was informed by the Commissioner of Taxation, Bill O’Reilly, that a particular tax avoidance scheme, called the Curran Scheme, was eroding revenue conservatively to the tune of $400 to $500 million a year, with some estimates putting the revenue loss well over $1 billion; O’Reilly recommended that the Government take immediate action to proscribe it.
Cabinet authorised me to outlaw the scheme with effect from budget night 1977. Thus began my long and often very bitter campaign against the tax-avoidance industry, which lasted whilst ever I was Treasurer. At times it poisoned my relations with a large section of the WA Liberal Party; some of its major donors had been involved in tax-avoidance schemes. Some of my anti-tax avoidance activities helped fuel the Joh for PM campaign.
Banning the Curran Scheme caused some anguish amongst Coalition MPs because, strictly speaking, it did have retrospective effect. Many in the Liberal Party held to the purist line that, irrespective of the revenue at stake, the principle of non-retrospectivity should never be violated. Others argued that there was a clear difference between reaching backwards to prevent people from avoiding an obligation parliament had always intended to impose on them as compared with imposing, with retroactive effect, a completely new obligation, previously not intended.
Price, Waterhouse & Co., one of Australia’s leading firms of accountants, wrote to me, strongly supporting the stand I had taken. This reflected the fact that many reputable legal and accounting firms did not wish to advise their clients to go into artificial schemes, but as time went by, with no action being taken against those schemes, that position became increasingly difficult to sustain. There were always others in the two professions willing and eager to gain new clientele by advising how taxation obligations could be artificially avoided.
I enjoyed working with the commissioner and his senior people, who had their own distinctive style. On tax avoidance, I found them quite demoralised, and I understood why. Much as I admired the late Sir Garfield Barwick, there was little doubt that the Barwick High Court, in applying a very literal interpretation to the taxation laws, had rendered the general anti-avoidance section of the Taxation Act, namely section 260, largely inoperative.
That section had been in the Tax Act for decades, and stated that if an arrangement were entered into by a taxpayer with the purpose of avoiding taxation, then to the extent of that avoidance, the arrangement was void against the commissioner. For a long time the section had been applied effectively to protect the revenue against blatant and artificial schemes, but from the late 1960s and into the ’70s, however, the High Court began applying the section differently. By the time of Cridland’s case, decided on 30 November 1977, it was the view of Bill O’Reilly and his colleagues that section 260 was useless.
My response was to instruct the Tax Office to draft a new anti-avoidance section to replace (or update) section 260. The commissioner and his colleagues thought this a waste of time, telling me that no matter what parliament said, the courts would find a way of watering it down in favour of the taxpayer. I persevered and ultimately a new anti-avoidance section, known as part IVA of the Income Tax Assessment Act, was introduced, coming into operation in May 1981. Part IVA has worked very effectively. According to the commissioner, it put a stop to new tax-avoidance schemes of a totally contrived nature.
The controversy following my axing of the Curran Scheme was as nothing to the conflagration which occurred almost five years later when the Government enacted tax recoupment legislation to collect the proceeds of tax evaded through the use of bottom-of-the-harbour schemes. The bottom-of-the-harbour scheme involved a practice which effectively denuded a company of any assets, meaning it was unable to meet its tax obligations. It was different from an artificial tax-avoidance scheme, where the arrangement was such that there was no legal obligation to pay the tax. With bottom-of-the-harbour schemes the legal obligation remained, but the company had no assets with which to meet the obligation. The disposal of the company’s assets was a fraud on the revenue because its only purpose was the evasion of the tax. Why ‘bottom of the harbour’? In some cases disposal of the assets was accompanied, literally, by the records being thrown into Sydney Harbour.
The legal advice then was that, because fraud was involved, the scheme could not be banished under existing law or a specific prohibition, as with Curran. The only remedy was to make the fraudulent disposal of assets a crime. This caused me to swallow hard. It was one thing to adopt a no-holds-barred approach to outlawing artificial tax schemes; it was entirely another to threaten people, for the first time, with the criminal law if they engaged in certain behaviour. A lot of citizens deplored tax minimisation, but even they may have baulked at making the minimisers criminals.
After a lot of agonising, I recommended to the Government that it use the criminal law to stamp out bottom-of-the-harbour schemes. The Crimes (Taxation Offences) Act came into operation early in December 1980 and ended the practice. I thought that I would hear little more of bottom-of-the-harbour schemes. I was, however, wrong, although it would be two years before this became apparent.
In September 1980, Malcolm Fraser and the Victorian Liberal Government had appointed Frank Costigan QC, a Melbourne lawyer, to conduct a Royal Commission into the activities of the Federated Ship Painters and Dockers Union. This group was notoriously linked to alleged criminal activity on the wharves and elsewhere. The aim was to expose any corrupt or illegal behaviour. But it also could embarrass, politically, the Labor Party, because of its associations with the union, especially in Victoria.
During his investigations, Costigan uncovered the involvement of some officials and affiliates of the union with people who had promoted bottom-of-the-harbour tax schemes. He included this material in his findings, which became a blockbuster report, and along with the separate McCabe/Lafranchi report, tabled in the Victorian Parliament, it ended up damaging the Fraser Government. Names, amounts and shady practices were detailed. This heightened public outrage. The Victorian report cited ‘very serious errors and omissions and resigned attitudes on the part of the Australian Taxation Office’.2 Both reports gave colourful and dramatic descriptions of what had gone on in some bottom-of-the-harbour activities.
Regrettably for the Government, the perception was that a vast amount of tax had been evaded before the criminal law had been invoked, and nothing had been done to recover it. The fact that the Government had taken steps to ensure that even more tax would not be evaded in the future made no impact on the public.
The issue was on our minds as we prepared the 1982 budget. With the country rapidly falling into recession, that budget was proving very difficult to put together. The Taxation Office and the Treasury urged the passage of special legislation to recover tax evaded under bottom-of-the-harbour schemes prior to the passage of the special criminal legislation in November 1980; so did Peter Durack, the Attorney General.
The attraction of collecting the tax to help with the budget, combined with the apparent value of quietening public concern regarding the evasion of so much taxation, proved an irresistible combination. On 25 July 1982 I announced that we would legislate.
This caused uproar in many sections of the Liberal Party and the business community, particularly in Western Australia and Queensland. Elsewhere, there was a lot of support for what the Government had decided to do. The gathering recession had slashed revenue forecasts and, as a consequence, collecting this unpaid tax would avoid some less palatable imposts on honest taxpayers.
The legislation, however, wreaked havoc on Coalition unity. No fewer than 14 members of the Liberal and National parties crossed the floor to vote against it.
The decision to enact the recoupment legislation did not kill the issue. Critics alleged that if the Government and the Taxation Office had not been negligent in the first place, this special legislation would not have been needed.
This issue put me under great pressure from the Labor Party and the press. To defuse the situation I tabled in parliament all of the advice I had received from the Tax Office on the subject. It became known as the ‘telephone book’ because of the large number of documents involved.
There were rough patches for me, particularly some of the delays between Tax Office advice and action in response. The quite radical transparency I had adopted — the bureaucracy was horrified, so were a few of my ministerial colleagues — took a lot of steam out of Labor’s attack. In addition, the opposition then scored a spectacular own goal, which effectively took the heat off the Government.
At the time Hayden was under pressure, having just beaten off a challenge from Hawke. He overreached, in the hope of landing a leadership-boosting blow on the Government, with his allegations of tax avoidance against the respected businessman John Reid. Reid had been a director of a company subsequently sold in a bottom-of-the-harbour scheme. Foolishly, Hayden named him in the house on the strength only of a company search showing Reid as a director. At Reid’s request, the commissioner quickly looked at his affairs and was able to certify that he had not been involved in any improper conduct. This blew Hayden out of the water. He had gone too far.
Although it was no longer on the back foot, the Fraser Government had been hurt by the whole episode, because there was a lot of disunity and bad blood in our own ranks.
After all the drama I have described, Murray Gleeson QC, the clear leader of the bar, later Chief Justice of New South Wales and then Australia, delivered an opinion that section 260 could, after all, be used to recover tax evaded through bottom-of-the-harbour schemes, and that special recoupment legislation had not been needed. Several years later, the Federal Court agreed with Gleeson. It was a frustrating finale to a distracting revenue and political saga.
Fraser had committed the Coalition to an inquiry into the financial system at the 1977 election, and early in 1979 I established the Committee of Inquiry into Australia’s Financial System, to be chaired by Keith Campbell, the boss of LJ Hooker Limited, the leading real-estate developer; other committee members also had impeccable credentials for the task.
It produced a landmark report which reshaped, fundamentally, Australia’s financial system. I doubt that any major inquiry in past decades saw as many of its key recommendations adopted by governments as did the Campbell Inquiry. All of the members I appointed to the committee shared my view that the financial system should be deregulated. Therein lay its great strength — philosophical consistency. I ignored the urgings of some to appoint a token regulator. Sadly, Keith Campbell would not live to see the full implementation of his blueprint for modernisation. He died in 1983, shortly after the change of government.
The financial press may have welcomed the Campbell Inquiry, but such things meant little to the average citizen, who was still hoping for some reduction in interest rates. The general economic news, however, was slowly getting better. Unemployment finally began to fall, and something of a mining boom was gathering pace, especially in Western Australia and Queensland.
12
‘YOUR INDIRECT TAX IS DEAD, COBBER’
As Treasurer I worked in close collaboration with the Prime Minister. Malcolm Fraser was a highly intelligent person with prodigious energy and a total preoccupation with the responsibilities of his high office. He was always the best informed on the widest range of subjects within cabinet. Having previously been a minister in both a major domestic portfolio (Education) and one with national security emphasis (Defence), he could bring perspectives to cabinet discussions lacking in others.
But he held too many cabinet meetings, and they went on for too long. Moreover, too many of them were called at very short notice, thus causing chaos with arrangements made to address gatherings in different parts of the country. On several occasions, I had to pull out of speeches or events to which several hundred people had committed themselves, in order to attend a Fraser meeting.
Malcolm Fraser made great demands of the public service. He was entitled to. Any prime minister is. They must, however, be prioritised demands. It is the worst possible administrative style to treat every request made of the public service as urgent. It is not the case. Nothing saps the willingness of public servants more than having to work over a weekend preparing a paper for ministers, only to have ministerial consideration delayed or, at the best, consisting of a cursory glance and a scrawled ‘noted’ on the paper.
There were regular clashes between Treasury and the Department of Prime Minister and Cabinet over economic policy. Fraser’s department mistrusted the Treasury, and Treasury elite were resentful that their advice should in any way be questioned or qualified. Tension could reach absurd dimensions. For one premiers’ conference, two completely separate working documents were produced for the discussion between the Prime Minister, me, and our respective advisors. Clearly there should have been agreement on one set of figures.
Having wanted the financial system inquiry, Fraser seemed to go cold on the idea of financial deregulation as Campbell’s work proceeded. His own utterances increasingly ran counter to what I expected the inquiry would recommend. At monetary policy meetings he would frequently criticise banks, and talk of the desirability of greater, not less, control of financial institutions. On several occasions he asked that consideration be given to proclaiming part IV of the Financial Corporations Act. That would have further extended financial regulation.
I arranged for Keith Campbell to brief Fraser on the work of his committee to date. As I sat through the briefing, it became clear that Fraser was uncomfortable, even irritated, by the direction the briefing was taking. Campbell made no attempt to disguise his view that significant deregulation of the financial system was essential.
John Hewson and the financial community, especially in Sydney, were enthusiastic about Campbell’s work and eagerly anticipated wide-ranging plans to shake up the system. Treasury was unenthusiastic, with the Reserve Bank being more supportive of deregulation. I did not think that the Monetary Policy Committee would be champing at the bit to adopt Campbell’s recommendations.
None of this affected Malcolm Fraser and me working together closely on the immediate economic goals: to keep the budget under control; reduce the deficit; and hopefully make room for further taxation relief. The deficit had fallen significantly over a two-year period, and by the time the 1980 election arrived we had a good story to tell on the expenditure-restraint front.
Malcolm Fraser rightly saw me as a close political ally within the Liberal Party. I was conscious of an underlying tension between him and ‘the young man’, as he called Andrew Peacock. In part it was a product of their former rivalry regarding John Gorton, and the understandable ambitions which Peacock himself entertained about the leadership of the Liberal Party. To some degree I probably filled a gap left by the fracturing of Fraser’s relationship with Phillip Lynch, and the complete termination of it with Reg Withers. These two had been very close to Fraser through the Constitutional crisis of 1975, and in the early months of the new Government. Whilst Lynch and he continued to work together, I do not believe that trust was ever fully restored to the relationship following the events on the eve of the 1977 election.
I remained ambitious about my future, but it would have been a grand delusion to have imagined that, by 1978, I had developed any hard core of people who saw me as having a future beyond continuing as Treasurer. The economic dries remained supportive of Lynch. Those unhappy with Fraser, or still, for one reason or another, carrying lingering resentments about earlier disputes, tended to coalesce around Reg Withers and Andrew Peacock. Overwhelmingly, however, Fraser commanded the loyalty and support of the parliamentary party. He had won two massive victories, and had a demeanour which transmitted commitment and toughness.
On the other side of politics Hayden had replaced Whitlam after the 1977 election. He was respected within the political class for having done a good job as Treasurer in quite impossible c
ircumstances. Deciding to stay out of the leadership for the first two years had been a sensible move. He had a Herculean task to restore his party’s credibility on financial matters.
Bob Hawke was by this point strutting across the national political stage as president of the ACTU, openly ambitious about winning a seat in federal parliament. It now seems incredible that it should have taken the Labor Party so long to find an electorate for him. Once he did win the prime ministership, he would demonstrate a connection with the Australian electorate stronger than any Labor leader, before or since. That, of course, was still several years into the future.
The other Labor figure outside the federal parliament who continued to make an impact was Neville Wran, the Premier of New South Wales. In my view, Wran joins Bob Hawke as one of the two most significant Labor figures of that generation. Wran gave Labor victory, and also competence in government, at a time when national morale for the party had hit rock bottom. Remember that Whitlam was routed in December 1975, and having waited 23 years in opposition to see their dream of a viable Labor alternative in government destroyed so quickly, Labor people despaired of the future. Winning government in New South Wales in May 1976 gave Labor new heart. Wran was a polished media performer — as good as any I have seen on TV news bulletins — got on well with what he called ‘the big end of town’, and provided something of a role model for future state Labor governments around the country.
The 1980 budget will chiefly be remembered as the one which was almost fully leaked by Laurie Oakes, then with Channel 10. Oakes got hold of one of the close-to-final drafts of my budget speech, and its leaking a few nights before the budget was a huge embarrassment for the Government. I later thought that the leak had come from a public service source.