Nicola Roxon (Gellibrand, Australian Labor Party, Shadow Attorney-General) Share this | Link to this | Hansard source

The problem of high-flying professionals who use bankruptcy to avoid tax and other liabilities first came to national attention in 2001. That was when Paul Barry, a journalist for the Sydney Morning Herald, published an investigation into New South Wales barristers, some of whom had been bankrupt more than once but who continued to enjoy the high life because they had put all their assets in the names of their spouses or in trusts unreachable by the tax office or other creditors. Playing catch-up, the government set up its own task force to look into the matter that same year. But now we are here in 2006, five years later, finally debating a piece of legislation that might actually deal with this issue.

However, before I discuss the detail of the Bankruptcy Legislation Amendment (Anti-avoidance) Bill 2005, I think the House deserves to hear some of the bill’s history, because it is an extraordinary tale of incompetence on behalf of the government. For five years, until now, the government has zigzagged bizarrely between nonchalance and overzealousness, never managing to steer a clear, straight and sensible path. At first the government dragged its feet for three years before producing any response. Then, in 2004, it produced an exposure draft bill that went way overboard with a disproportionate response to the problem. It proposed retrospective laws and a reversed onus of proof. That draft would also have undermined legitimate asset protection arrangements, where families divide their property so that not all family members are exposed to the business and credit risk taken by one. Bankruptcy law of course has to get the balance right between cracking down on rorters and protecting legitimate family arrangements. The exposure draft, though, got it completely wrong and a furore erupted.

Coming up to the 2004 election, the government took the antiavoidance parts of the plan completely off the table. This was a return to another period of inaction. Rather than have another try at more sensible legislation, the coalition gave up on getting antiavoidance measures right at all. The Attorney-General came back with the Bankruptcy and Family Law Legislation Amendment Bill—basically the exposure draft minus the antiavoidance schedule. Although we supported that bill, Labor were very disappointed that the government would let slip an opportunity to fix the high-flyers’ problem once and for all. We moved some amendments which would have gone part of the way, but the government in its arrogance refused to consider them. That was one year ago.

One year later—in all, five years too late—Labor are pleased to see that the government has accepted the approach that we advocated at that time. Finally, we have before us a bill sensibly targeting the use of bankruptcy to avoid tax and other debts. It takes the approach of strengthening existing clawback provisions, as Labor proposed through amendments last year. Clawback provisions allow the trustee to undo transactions, transfers and arrangements designed to defeat or frustrate creditors. They make it harder to hide assets.

This bill proposes four mechanisms to toughen clawback provisions. Firstly, it will introduce a rebuttable presumption of insolvency where the bankrupt has kept books, records and accounts below an acceptable standard or has not retained them at all. This is precisely what Labor proposed and the government rejected last year. That is a real shame, because these laws could have been active a whole year earlier if not for the government’s pure arrogance. Sadly, the Attorney-General would rather delay reform of the law than be seen to pick up an amendment proposed by the Labor Party. A rebuttable presumption is useful because in many instances it is hard to prove that the bankrupt was insolvent at the relevant time. This introduces a new fair concept, preventing people from frustrating trustees and creditors by relying on their own incompetent record keeping.

Secondly, the bill will increase the time period for clawback for related entities, including family members, to four years rather than two. Avoidance techniques are obviously more common amongst related entities than strangers, so it is reasonable to have a longer period to inquire into the purpose and nature of transactions. Thirdly, the bill will introduce a requirement of reasonableness into the test for the clawback of transfers intended to defeat creditors. Currently, transferees are immune from clawback if they had no actual knowledge of the transferor’s true intention. Under this bill, transferees will be protected only if they could not reasonably have known. This will target those cases where a person has turned a blind eye to an obvious attempt to avoid liabilities.

Fourthly, the bill will allow property to be vested in the trustee in bankruptcy in those cases where the bankrupt has paid for property on behalf of someone else but still enjoys the benefits of the property. For example, it will cover the situation where a person has put their income into a house that is technically owned by their spouse but where the person still enjoys rent-free living. This is exactly the sort of scam that allows some high-flying bankrupts to maintain a high-income lifestyle while avoiding creditors.

This bill contains three other changes relating to the admissibility of transcripts of interviews by the official receiver and corrects two possible unintended interpretations of sections 120 and 121. These are uncontroversial. Indeed, the whole bill is uncontroversial. It is a welcome set of reforms to target the high-flying bankruptcy problem. Labor will closely watch to see whether these changes actually achieve that result. The only controversy here is why this bill has taken so long. It is five years since the problem emerged. It is all the more embarrassing, given that Labor offered a large part of this solution 12 months ago, only to have it arrogantly dismissed by the Attorney-General. I might note, while the Attorney-General is here at the table, that earlier today we started debating the Family Law Amendment (Shared Parental Responsibility) Bill. This was another case where the opposition has made some very constructive proposed amendments to the Attorney-General’s bill. I hope that he has learnt from the embarrassing experience of this antiavoidance bill that good policy sometimes means being prepared to swallow his pride and accept Labor’s good ideas the first time around. I trust that he might take that advice to heart when we are debating other changes in the House later in this week. I commend the bill to the House.

Craig Emerson (Rankin, Australian Labor Party) Share this | Link to this | Hansard source

The Bankruptcy Legislation Amendment (Anti-avoidance) Bill 2005 is welcomed by Labor but it has been a long and sorry period of time coming forward. Thank goodness it finally has. As the member for Gellibrand has pointed out, Labor continued throughout a period of five years to provide concrete and very constructive suggestions of how the government might deal with this problem of high-flying bankrupts—very often barristers—who had been able to avoid tax and other liabilities while maintaining lavish lifestyles by continuing to enjoy property that they had put in the name of a third party, whether it be a family member or a related company. For a very considerable time the government rejected Labor’s suggestions but, in this piece of legislation, belatedly the government has picked up a large number of our suggestions. Of course we welcome that.

The legislation is indeed an attempt to cut off the use of bankruptcy by high-flyers to avoid their fair share of tax and to avoid other debts that they may have accumulated with creditors. The problem was identified back in 2001; here we are, in 2006, five long years later. Indeed, five years after a task force report, the government still had not come up with workable legislation until the introduction of this bill.

I will not go through all of the provisions of the legislation in detail, but certainly Labor welcomes the increase in the period from two to four years of clawback from related entities. By that, I mean that at present the transfer of property to an entity cannot be voided if it occurred more than two years before the bankruptcy, and the transferee can prove that the transferrer was solvent at the time. The bill before us proposes to amend this to provide for a four-year period. That means that it is more likely that the authorities can prove that these were sham arrangements with the purpose of avoiding tax and other obligations. Of course we welcome that. There is also a provision to allow clawback of property hidden in the name of a natural person. Labor certainly welcomes that along with the other provisions.

As I said a moment ago, the scandal underlying this legislation was identified as early as 2001 when barristers in particular were shifting assets into the names of their spouses or related corporate entities in order to avoid paying tax, or certainly avoid their fair share of tax, while continuing to enjoy lavish lifestyles. I have no problem if people want to enjoy a lavish lifestyle, but they should not enjoy it at taxpayers’ expense. They should pay their fair share of tax. I remember the Sydney Morning Herald, amongst other media outlets, did a very good job in exposing this rort.

I fear, though, that this is but the tip of the iceberg. I am not asserting that these very same barristers are involved in a range of other activities—I am not sure. But we do know from the most recent annual report of the Australian tax office that it has been compelled to establish what it calls a ‘serious non-compliance unit’. It says in that annual report that unfortunately there has been no shortage of work for this newly established unit. The purpose of the serious non-compliance unit is to target in particular high-wealth individuals. I have a great sense of foreboding that the tax avoidance and tax evasion that is going on here in Australia in 2006 is no less rampant than it was during the notorious bottom-of-the-harbour schemes of the late 1970s and early 1980s.

I have been on a number of parliamentary committees where you get a window into the sorts of unscrupulous, unethical and immoral activities that many high-wealth individuals have been engaging in. For example, we conducted a parliamentary inquiry into employee share ownership plans. A report was commissioned at the invitation of the minister of the day. The idea was to examine whether the interests of employees might be aligned more closely with the interests of their employers through enhanced share ownership arrangements. But a little bit like the painters and dockers royal commission back in the early 1980s, while we were looking at what seemed to be one issue we discovered another. The issue back in the 1980s with the painters and dockers union was in fact rampant tax avoidance in the form of the bottom-of-the-harbour schemes. When we were innocently looking at employee share ownership plans, we discovered that what was rampant was the use of executive share plans—that is, company executives being able to take a very substantial, even an overwhelming, part of their remuneration in the form of share options and then being able to minimise their tax through that device.

Sadly but not surprisingly, the government members of that particular committee saw this as fairly legitimate activity and in fact proposed ways of making that activity even more attractive. But the Australian people can always be assured that the Australian Labor Party will not join the coalition in condoning and providing greater rewards for tax avoidance activity. On that occasion we produced a dissenting report, and to the credit of the Treasury officials of this country they obviously advised the Treasurer not to go down that path, not to open up new loopholes through which company executives could dive, avoiding their fair share of tax. As a result, the recommendations of the government members of that particular committee have not been picked up by this government. I said a moment ago that I am deeply concerned that we are seeing the same tax morality in 2006 as was prevalent during the notorious bottom-of-the-harbour schemes back in the early 1980s. The reason I say that is that everywhere we look we see evidence of large-scale avoidance and evasion by high-wealth individuals.

I think, as the Australian newspaper points out, that it is probably not the high-wealth individuals who are on the top marginal rate of income tax. In fact, some work that has been done by the Australian newspaper, using the HILDA survey analysis, suggests that high-wealth individuals are probably paying an average income tax of around $28,000 a year. There is no doubt that John Garnaut of the Sydney Morning Herald has unearthed, through good investigative reporting, cases of not only rampant tax avoidance but downright evasion. The government has been dragged kicking and screaming to the mark, as it was during the notorious bottom-of-the-harbour schemes, in order to do something about that.

A welcome development was reported in the Australian Financial Review today. It seems that the government might be finally getting around to closing off some of the arrangements with Bermuda—that great Bermuda Triangle into which the dollars of lots and lots of Australian taxpayers are disappearing every year. The tax havens around the world are being used by high-wealth individuals in this country. They are being used ruthlessly and relentlessly by high-wealth individuals.

The member for Hunter exposed just in the last couple of weeks, in relation to the Australian Wheat Board, the most extraordinary development—that Australian taxpayers have unwittingly subsidised $90 million of kickbacks to Saddam Hussein. The Howard government is the best friend that Saddam Hussein has ever had—certainly to the tune of $300 million. But $90 million of that came out of the pockets of Australian taxpayers because the AWB successfully claimed those kickbacks as a tax deduction. The government seems blissfully unconcerned about that. It sees it as a legitimate sort of activity. The member for Hunter has said time and again that these sorts of facilitation payments should not be tax deductible. Every decent, fair-minded Australian would be outraged at the suggestion that they had unwittingly contributed $90 million of the $300 million that went into Saddam Hussein’s pocket from the Australian Wheat Board.

It is everywhere you look, whether it is the Bermuda Triangle or the other tax havens around the world that are being accessed by high-wealth individuals, or whether it is the barristers who live high on the hog and then, when the tax bill comes in, declare themselves bankrupt, put their assets in the names of their spouses or some other entity and get away with it. At last, shamed by the Labor Party, after six years the government has finally gotten around to doing something about barristers evading and avoiding their fair share of tax.

No wonder Australians pay so much income tax—because high-wealth individuals do not pay their fair share of tax. A key reason for that is that this government has made the income tax system so complex. It has created in just 10 years 100 more tax concessions. In the first 60-year history of the Income Tax Act, 170 special tax concessions were created. But in just 10 years of the Howard government another 100 were created. Why? Very often it was to support tax minimisation and tax avoidance by favoured constituencies so that their accountants could dive them through the loopholes deliberately created in the income tax system by this government.

That is why we have high income tax rates in this country: honest taxpayers are paying the burden that has been shifted onto their shoulders by wealthy, dishonest Australians, most often with the full concurrence and support of this government in creating so many tax loopholes and such complexity in the Income Tax Act. The Treasurer has announced a special inquiry so that he can work out what is going on with the Australian tax system. He has had 10 long years to work out what is going on with the Australian tax system. I can tell him that this is the highest taxing government in Australia’s history. In the year 2000 it brought in a special new monster tax—the orphan tax—which is collecting more than $36 billion a year. The day it was born in this parliament, the government said, ‘It’s not ours; it’s someone else’s. It’s a state tax.’

The Commonwealth Statistician says that the GST is a Commonwealth tax. The Auditor-General says that it is a Commonwealth tax. According to the Treasurer, the whole purpose of the GST in this great tax adventure, this streamlined A New Tax System for a new century, was to fund reductions in income tax rates, yet it has done nothing of the sort. Every year this government is whacking ordinary Australians with bracket creep and using the proceeds to become the highest taxing government in Australia’s history, to provide welfare for the wealthiest people in this country. Last night, a Channel 7 story showed that millionaire couples in Vaucluse, Double Bay, Edgecliff, Rose Bay and Kirribilli are receiving family tax benefits. That is why ordinary people are paying so much tax.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

Mr Deputy Speaker, I seek to intervene to ask a question.

Harry Quick (Franklin, Independent) Share this | Link to this | Hansard source

Will the member for Rankin accept a question?

Craig Emerson (Rankin, Australian Labor Party) Share this | Link to this | Hansard source

I would love to hear a question from the member for Moncrieff.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

I ask the member for Rankin: does he or does he not support the GST?

Craig Emerson (Rankin, Australian Labor Party) Share this | Link to this | Hansard source

Labor’s position on the GST has been set out time and time again. Everyone in this chamber knows our position on the GST. The GST is here. It is a monster tax and a compliance nightmare for small business. I would have thought that the member for Moncrieff would be more concerned about the compliance nightmare of the GST for small business, instead of standing up here defending the GST. With all those small businesses and microbusinesses in the Gold Coast hinterland, what is he going to do when he goes back to his electorate? He is standing in this chamber and saying, ‘We’ve got this GST; isn’t it terrific.’ What about the small businesses that have to bear the burden? What about ordinary Australians who have to bear the burden of an incentive-crushing income tax system with income tax rates that are much higher than they need to be for everyday, honest Australians? The tax rates are much higher for one reason and one reason only: this government does not have the guts to crack down on its rich mates, on high-wealth individuals.

In its annual report just this year, the Australian Taxation Office warned and lamented that, unfortunately, there is no shortage of work for the serious non-compliance unit. That is a bureaucratic way of saying that tax evasion in this country is out of control. At last we have one piece of legislation to deal with one category of unscrupulous high-wealth individuals—that is, barristers who hide their assets, deliberately go bankrupt and think they are home clear. At last, as a result of this government picking up Labor’s suggestions, we have legislation here in the parliament. That is great. Now I say to the member for Moncrieff, ‘Get the bit between your teeth.’ It feels good, surely, after 10 long years, and, in this case, after five years of task force analysis and recommendation, to move a piece of legislation in this parliament that ensures that at least one category of high-income earners will not be able to rort the system. But the other high-income earners are able to rort the system because this government has made it easier for them.

The government came into office with a promise to reduce red tape by 50 per cent. The barometer of red tape in this country is the size of the Income Tax Act. When this government came to office the Income Tax Act ran to 3,500 pages. It now runs to more than 9,000 pages. It has become ever more complex. It is an incredible compliance burden on honest businesses and honest taxpayers. But at the same time it is a rich harvest for those who are determined to avoid and evade tax, because it is riddled with loopholes. There is an elephant in the coalition party room and it has been encouraged to ram hole after hole in the Income Tax Act, cheered on by the member for Moncrieff, by National Party members and by those who support the aggressive marketing of tax avoidance schemes—ramming holes in the income tax system and making honest lower and middle-income Australians foot the bill.

The game is up. This government has to crack down on tax cheats. In the next couple of years it will be evident that tax evasion and avoidance is as rampant as it was in the notorious bottom-of-the-harbour scheme arrangements condoned by the then Treasurer of the country, John Howard. Three telephone books worth of advice and finally he was shamed into acting, shamed by the Australian Labor Party. And we will shame you again into dealing with the unscrupulous behaviour of the high-wealth tax cheats in this country.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

I am indeed pleased to follow the member for Rankin in this debate on the Bankruptcy Legislation Amendment (Anti-avoidance) Bill 2005. I am pleased because I think it is about time there was an injection of some facts into this debate. I am pleased because I think it is about time there was an injection of some reality into this debate. And I am pleased because, once again, this is a bill that goes to the core of the Howard government delivering by ensuring we are providing revenue protection for government by cracking down on those who would do the wrong thing.

Before I focus my attention on the actual provisions of the bill, however, I would like to turn my mind to some of the comments the member for Rankin has made. I could not, of course, let slide many of the erroneous statements that he made, ranging from those that were completely absurd to those that were a little disingenuous. In particular, I have to comment on the Australian Labor Party saying, through the member for Rankin, that this government is the best friend that Saddam has ever had. Not only is that an outrageous assertion, but the reality is that if it were not for the Howard government and the coalition of the willing, if the Australian Labor Party had been in power, then Saddam Hussein would still be in power in Iraq today. People may ask: what does this have to do with the nature of the bill? I am interested in that question as well. The reality is that I am touching on that because the member for Rankin made a whole range of comments about it.

With respect to the Australian Wheat Board and the comment that taxpayers subsidised payments made by the AWB, we have already established that the Australian Labor Party is completely unable to draw any connection whatsoever between the knowledge of the government and the activities of the Australian Wheat Board. In fact, to the contrary, the government has clearly demonstrated on occasion after occasion that there was no knowledge of the activities of the Australian Wheat Board. Furthermore, the Australian Wheat Board’s claims of deductions under the Income Tax Assessment Act or related legislation clearly have shown that there is simply no provision under existing legislation for such bribes or payments to be allowable deductions at law. The simple reality is that if, with the passage of time, those payments are demonstrated to be kickbacks and bribes, then of course there is no safe harbour for AWB in claiming those deductions, and I am certain that they will feel the full force of the law.

With regard to the claim by the member for Rankin that the Howard government is seeking to ensure protection for tax avoiders and tax evaders, once again this is nothing but hot air from the member for Rankin. Like so much that he put forward, it is palpably wrong. What is very clear is that there are currently under legislation provisions that make it illegal for anyone to avoid or evade tax.

Despite all the rhetoric by the member for Rankin, it is simply not the case that people are able to avoid or evade their tax liabilities. That is not to say that they do not try. Of course there are many that attempt to evade and avoid tax, but those who do are generally caught. We have seen through Operation Wickenby the operations of the ATO and other agencies to crack down on those that may have avoided or evaded their tax liabilities. In the fullness of time, those that have avoided or evaded tax will feel the full force of the law and those that have claimed legitimate deductions will continue to enjoy using those legitimate deductions.

The greatest area of concern for me was when the member for Rankin said there was this monstrous tax called the GST which led to a monstrous compliance headache for small businesses around the country. There is one simple question to ask: if the member for Rankin was truly concerned about the GST and compliance, why did he, along with other members of his political party, not support the introduction of the GST as the coalition sought to have it from the outset?

The reality is that the compliance headache that is forced upon small businesses in this country is a direct consequence of Labor’s obstinacy when it came to the GST. If it were not for the fact that the Australian government was forced to negotiate with the Australian Democrats to get this much-needed reform through—a reform which, I might add, the Australian Labor Party supported in the late 1980s, and a tax which, for a while, the Australian Labor Party said they would roll back—there would not be three-quarters of the compliance headaches that Australian small businesses now face. Despite all the hot air and the rhetoric from the member for Rankin, compliance burdens are a consequence of the Australian Labor Party being unwilling or unable to face up to reality with respect to the compliance requirements of the GST.

I am also fascinated that the Australian Labor Party—the beneficiaries of the GST, through their various state and territory governments, to the tune of some $37 billion per annum—say that they are opposed to the GST. Queensland’s Premier Peter Beattie was one of the first people to sign up to the GST agreement. With his trademark cheesy grin on his face, he said, ‘Oh, woe is me to have to sign the GST agreement.’ Yet the Australian Labor Party, through the likes of premiers Peter Beattie, Steve Bracks and a host of other failed Labor premiers around this country, have ensured that the GST continues to flow like rivers of gold—similar to what the Australian Labor Party had with Centenary House—from the federal government directly into state government coffers.

The fascinating thing is that, despite the rhetoric from the member for Rankin and other members with respect to the GST, the Australian Labor Party still find a way to impose new taxes on people in their respective states. In Queensland, for example, despite some $10½ billion of GST and financial assistance grants flowing to the Queensland state government, the Beattie government introduced a new ambulance tax, despite over $10 billion of financial assistance from the Australian government. It is little wonder then that I and the people of Rankin, and the people of Australia more broadly, looked straight through the comments by the member for Rankin and other Labor Party members because they know that, despite the bluff and bluster, there is simply no substance to the arguments that the Australian Labor Party put forward.

I would like to touch on another point raised by the member for Rankin. He alleges that this government is the highest taxing government in Australia’s history and that the full weight of taxation is felt by Australian families. The reality is that Australian families are better off today than they have been at any point in our nation’s history. In particular, with the operation of family tax benefit, Australian families today have no net tax liability until they earn approximately $42,000 per annum. A family in Australia today can earn up to $42,000 and not incur any tax liability, thanks to the Howard government.

This is coupled with the fact that we have the lowest levels of unemployment this country has seen for decades, the lowest level of interest rates this country has seen for decades and super low levels of inflation—again in stark contrast to the history of the Australian Labor Party. Despite the rhetoric and despite the bluff and bluster by the member for Rankin and other Labor Party members, under the Australian Labor Party interest rates were at 18 per cent, not around six per cent; unemployment was at 11 per cent, with one million people unemployed, and not down at record lows; and the inflation rate was galloping away and not under control as it is now. The stark contrast is there for all to see. That is the reason why this government will continue delivering and the reason why I am hopeful that the Australian people will continue to support the Australian government and see straight through the sophistry of the Australian Labor Party and the arguments that the member for Rankin puts forward, which simply lack substance.

Turning my attention specifically to the bill before the chamber today, the amendments as they are proposed are intended to strengthen the Bankruptcy Act 1966. The amendments effectively allow trustees to recover property disposed of prior to bankruptcy or owned by a third person but acquired by that person using the bankrupt’s resources. Currently, bankrupts may deliberately avoid the provisions in a number of ways, including transferring assets to related entities in anticipation of insolvency, concealing records relating to the transfer of assets, transferring assets to a person who should reasonably be aware of the bankrupt’s intention to defeat creditors, or accumulating wealth in the lead-up to bankruptcy in the name of a person who will allow the bankrupt to continue to enjoy the asset despite the transfer and after the bankruptcy commences.

This bill embraces changes so that the amendments are based on the premise that gifts designed to dissipate assets, rendering them unavailable to creditors, are likely to be made to relatives and associates rather than to strangers. On this basis, the particular focus of the bill is to ensure that adequate scrutiny is placed upon those who would be beneficiaries, those who would assist those who would like to escape the clutches of creditors and those who would like to escape trustees trying to recover funds.

The amendments increase the time period from two to four years where property was transferred to a related entity during the period for less than market value consideration. Related entities would include, as I touched upon, business partners, parents, children, relatives and beneficiaries of trusts. It is also common for people to know that, because they are likely to be deemed bankrupt more than two years before the fact, you would see the structure and the execution of these kinds of arrangements. On this basis, the government has taken the view that people will readily and often know more than two years before they are actually declared bankrupt—hence the rationale for extending the time period from two years to four years.

In addition, the amendments in this bill will empower the court to make orders in relation to property or money of natural persons where, during a period of up to five years prior to bankruptcy, the person’s interest in particular property increases as a direct or indirect result of financial contributions and, additionally, the bankrupt used or derived a benefit from the property during that time. As a result of these amendments, a presumption will now exist. That presumption will operate and arise where the transferor was insolvent at the time of the transfer if a transferor had not kept books, accounts and records or they had failed to preserve them. This in effect removes the incentive to avoid making, hiding or destroying records that would demonstrate insolvency. We have often heard allegations that someone who has been declared bankrupt has carried out exactly these acts—that is, attempted to destroy books, accounts and records or ignored the accurate keeping of books, accounts and records, in the hope that they could escape the clutches of creditors.

The purpose of this bill is to overcome some of the difficulties faced by trustees when endeavouring to establish an intention on the bankrupt’s behalf to defeat the interests of creditors—which is, of course, the bar set by the current legislation. The amendments will also introduce standards of reasonableness in relation to the transferee’s knowledge of the transferor’s intention in conveying property. Currently, a transferee can be wilfully blind as to whether a transferor’s purpose is to defeat creditors. Now the test will be that notion of reasonableness so that the government is able to capture those who can argue that they were not wilfully blind or who in the past argued successfully that they were wilfully blind.

By introducing the standard of reasonableness, the government will be more able to capture this kind of activity and thereby ensure people’s tax liabilities are met. A transfer will only be protected from this provision if market value consideration is given by the transferee to the bankrupt. Again, this is often a common element of demonstrating those that would be considered—for lack of a better term—legitimate transactions versus those that would be considered illegitimate transactions and done for the purposes of avoiding the operation of bankruptcy legislation.

We have seen a number of professions—and, in particular, a number of barristers—who have sought to inappropriately use their knowledge of the law and the operation of bankruptcy legislation to exploit the operation of the legislation such that they could declare themselves bankrupt on occasion after occasion and thereby be in a situation where, in effect, they are able to comply with the strict letter of the law but certainly not the spirit of the law. I am pleased that these changes are going to be introduced, because they will ensure that those who may comply with the strict letter of the law but be in contravention of the spirit of the law will now be captured by the operation of these provisions.

In essence, it means that those who have exploited the system in the past will no longer be able to do so—or, at the very least, it would be the intention of the government to make it as hard as possible to exploit the legislation. Of course there may always be some entrepreneurial people seeking to utilise loopholes, but this legislation goes a long way to ensuring that we capture those who would misuse the legislation and thereby seek to avoid their requirements under bankruptcy legislation.

In summary, this is a welcome amendment. It is an amendment that sees the introduction of commonsense and makes it easier to trace or secure creditors’ assets, particularly with the introduction of the reasonableness threshold. I must say that I was disappointed that it appeared that the member for Rankin was so poorly briefed with respect to the operation of this act that he had to make such a wide-ranging argument, touching on the operation of the GST through to the Australian Wheat Board. But I know that the people of Rankin continue to see through those arguments that are put forward. I believe that my rebuttal at the beginning of my speech more than adequately canvassed the falsity contained in the arguments that the member for Rankin put forward. I commend the bill to the chamber.

Laurie Ferguson (Reid, Australian Labor Party, Shadow Minister for Consumer Affairs) Share this | Link to this | Hansard source

The member for Moncrieff has given a very long and highly emotional response to the question of the complicity of the current government with regard to the funding of the Iraqi insurgency. But I am afraid that he could equally be accused of plagiarism because, quite frankly, his tiresome response was the kind of contribution that we have heard from the Minister for Foreign Affairs and the Prime Minister over the last month or so—that of blissful ignorance; that they did not really know what was going on in the world and were totally ignorant and uninformed and basically out of the game.

As to the question of the OECD’s response to facilitation fees, he tells us today that, who knows when in the future, these will not be tax deductible because they will be exposed as bribes. That is all very well, but a government that quotes the OECD every second day of the week with regard to the labour market, social welfare and health systems cannot then turn around and basically dismiss so easily the OECD’s criticism of this country’s tax deductibility for these facilitation fees. As I say, it is all very well to give us these assurances—though I do not know what his assurances are worth, quite frankly—but, clearly, international experts in this area feel that the current practice with regard to facilitation fees is an option for bribery.

The other point made by a number of speakers was the culture of tax evasion in this country. We were regaled in parliament today with the list of donations from trade unions. The point I would make about those is that they are very public, much acknowledged and very well known. However, the current government, of course, is the architect, the innovator, with regard to the Greenfields Foundation and other related entities—and we will see attempts in the near future to further erode public scrutiny of political donations in this country.

Is it any wonder that it has taken so long to do anything about this area of bankruptcy evasion and people not paying taxes in a culture which looks at further increasing secrecy with regard to political donations? We all know about the intention of the government to increase the nonreportability of donations from the current level of $1,500 to $10,000. It is very convenient for the corporate sector that large numbers of donations will no longer have to be revealed to the general public and the public will not have the ability to examine government policy in the context of those donations. It is no wonder that we have had this growth in the culture of tax evasion, the question most recently in the public domain with the appointment of Mr Gerard to the Reserve Bank board and the controversy about that. I concede that for factional reasons elements in the Liberal Party in South Australia were very active in revealing Mr Gerard’s practices. But it is a matter of concern.

The purpose of the Bankruptcy Legislation Amendment (Anti-avoidance) Bill 2005 is to extend the clawback provisions in the Bankruptcy Act. The provisions contained in the bill are essentially designed to diminish the possibility of bankrupts transferring assets to third parties in anticipation of insolvency or bankruptcy. Quite clearly, the focus would be on the immediate family and close relatives et cetera, because that would be the direction to which they would turn. According to the explanatory memorandum, the legislation would:

(c)

void a transfer made to defeat creditors if it was reasonable for the transferee to infer that the bankrupt’s main purpose in transferring the property was to defeat creditors;

It would:

(d)

empower the court to make orders in relation to property or money of natural persons where during the period of up to 5 years prior to bankruptcy:

• the person acquired an estate in property as a direct or indirect result of financial contributions made by the bankrupt during that period; or the value of the person’s interest in particular property increased as a direct or indirect result of financial contributions made by the bankrupt during the period; and
• the bankrupt used or derived (whether directly or indirectly) a benefit from the property during the relevant period.

The bill also seeks to:

(d)

allow transcripts and notes from examinations under sections 77C and 81 of the Act to be used in proceedings under the Act, regardless of whether the person examined is a party to the proceedings ...

It would:

(e)

clarify section 120 to make it clear that a transfer will only be protected from this provision if market value consideration is given by the transferee to the bankrupt; and

(f)

amend sections 120 and 121 to make it clear that:

(vii)

the amount to be refunded to the transferee by the trustee is the amount that the transferee gave to the bankrupt; and

(ii)

‘consideration’ for the purposes of these provisions is not to include any right that the transferee has given to their bankrupt spouse to reside at the transferred property ...

The key objectives underpinning the bill are:

A proposed amendment will increase the time period in section 120 from 2 to 4 years where property was transferred to a related entity during that period for less than market value consideration. Examples of related entities are business partners, parents, children, relatives ...

This approach is based on the premise that gifts designed to dissipate assets rendering them unavailable to creditors are in practice more likely to be made to relatives and associates rather than to strangers. Further, it is common for people to be aware they are likely to become bankrupt more than 2 years before they become bankrupt ...

That makes it all the worse for those people whose financial circumstances are undermined by this kind of activity. It continues:

If transfers in this ... period can’t be declared void, it is open to a person to dispose of their assets in a way that will leave little for creditors (eg gifts to relatives). It is appropriate to extend the bar to doing this to 4 years, not 2, because in the period between 2 and 4 years there is too much scope for a person to deliberately divest themselves of assets.

In light of recent high-profile bankruptcies linked to corporate collapses, such as One.Tel, and the difficulties faced by creditors in getting access to the assets that the directors have seemingly stashed away in a complex maze of family trusts and gifts to associates, it seems that this bill is quite important in enabling creditors legitimate access to assets that would pay for shortfalls to innocent third parties.

With the above in mind, I feel compelled to point out an issue that has been raised with my office by numerous financial counsellors working at the coalface of bankruptcies—that is, the impact bankruptcy has on the families. Indeed, it is important to keep in mind that not all bankrupts are corporate high-flyers. Financial counsellors are concerned that the reality of many gambling related bankrupts being chased for money under this amendment may have enormous impact on their families. People would understand, crucially in New South Wales, that due to the heavy dependence for taxation on the club industry and the proliferation of gambling in hotels this is an increasingly serious problem. Whilst I support this bill, I caution that great care and attention be given so that it does not adversely affect and impact upon families struggling as a result of the gambling habits of one spouse.

Philip Ruddock (Berowra, Liberal Party, Attorney-General) Share this | Link to this | Hansard source

I thank those members who have spoken in this debate: the member for Gellibrand, the member for Moncrieff, the member for Rankin and, latterly, the member for Reid. For the record, may I say that the substantial issue raised by the member for Gellibrand was the progress of the Bankruptcy Legislation Amendment (Anti-avoidance) Bill 2005. In the 2½ years that I have been Attorney-General, I have been always anxious to see these issues progressed as expeditiously as possible. I have no wish to see people being able to engineer their affairs in a way which enables them to avoid proper obligations and still to benefit from their assets by using insolvency. To the extent that some members of the legal profession, who ought to set a higher standard, were known to be doing that, I have always been anxious to see those issues addressed. I find it extraordinary that such activity can go on among people who are officers of the court and who have a particular obligation to uphold the rule of law and that they would manipulate these issues in the way in which they did.

So I have been anxious to have these issues dealt with as expeditiously as possible, as has the government. However, we have also wanted to ensure that there are not unintended consequences. I would have thought the member for Gellibrand would have thanked me for ensuring that the House of Representatives Standing Committee on Legal and Constitutional Affairs had an opportunity to contribute to that discussion. It was as a result of committee deliberations that the bill was amended further and a high level of consultation has taken place in relation to that process.

It is in that context that, in closing this debate, I emphasise that this bill is about strengthening the existing anti-avoidance provisions in the Bankruptcy Act 1966. By increasing the time limits for the clawback provisions where the transfer was to, or the property was held in the name of, a related entity, these changes will make it harder for bankrupts to deliberately avoid these provisions in the lead-up to bankruptcy by off-loading assets to family members. It is in this context again that I note that further changes will mean that bankrupts who fail to keep proper books, accounts and records will be presumed to be insolvent for the purposes of the clawback provisions. That change acknowledges that, if a bankrupt is unable to produce books and records explaining their financial position at a particular time, it would be reasonable to allow the trustee to presume they were insolvent at that time.

Similarly, the application of division 4A of part VI of the act to natural persons will further protect the bankruptcy system from abuse by allowing creditors to access the bankrupt’s wealth that has been deliberately diverted in the lead-up to bankruptcy. Pursuant to these changes, the court may make orders in relation to the property or money of a natural person where, during the period of up to five years prior to the bankruptcy: the person acquired an estate in property as a direct or indirect result of financial contributions made by the bankrupt during that period, or the value of the person’s interest in particular property increased as a direct or indirect result of financial contributions made by the bankrupt during the period; and the bankrupt used or derived, whether directly or indirectly, a benefit from the property during the relevant period.

The amendments relating to transcripts and notes from examinations under sections 77C and 81 will mean that these will be able to be used in proceedings under the act, regardless of whether the person examined is a party to the proceedings. The amendment will assist trustees, particularly in relation to proceedings to recover property for the benefit of creditors.

As I indicated earlier, the amendments to be made by this bill were the subject of very extensive public consultation. The package of reforms is based upon suggestions from stakeholders. The changes strike the right balance between the rights of individuals to organise their affairs as they see fit and the rights of creditors to be paid. More importantly, the amendments contained in this bill will ensure that our bankruptcy system is safeguarded from deliberate abuse by bankrupts. I do not apologise for the efforts to get it right and I am grateful that this chamber is now going to give it expeditious consideration and that the opposition has indicated its support for the measure. I commend the bill to the chamber.

Question agreed to.

Bill read a second time.