Gavin Marshall (Victoria, Australian Labor Party) Share this | Link to this | Hansard source

I seek leave to incorporate Senator Ludwig’s speech on the Bankruptcy Legislation Amendment (Anti-avoidance) Bill 2006.

Leave granted.

Joe Ludwig (Queensland, Australian Labor Party, Manager of Opposition Business in the Senate) Share this | Link to this | Hansard source

The incorporated speech read as follows—

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, for the Sydney Morning Herald, published an investigation into NSW 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 into the names of spouses or trusts – unreachable by the tax office or other creditors.

Playing catch-up, the Government set up its own taskforce to look into the matter that same year.

Now here we are in 2006 – 5 years later – finally debating a piece of legislation that might deal with this issue. Before I discuss the detail of this bill, this House deserves to hear its history. It is an extraordinary tale of incompetence. For five years the Government has zig-zagged bizarrely between nonchalance and over-zealousness, until now never managing to steer a straight, sensible path.

At first, the Government dragged its boots for three years before producing any response.

Then in 2004 it produced an exposure draft that went overboard with a disproportionate response to the problem. It proposed retrospective laws and a reversed onus of proof. That draft also would have undermined legitimate asset protection arrangements, where families divide their property so that all family members are not exposed to the business and

credit risks taken by one. Bankruptcy law has to get the balance right between cracking down on rorters and protecting legitimate family arrangements. The exposure draft got it completely wrong – and a furore erupted. Coming up to the 2004 election the Government took the anti-avoidance parts of that plan completely off the table. This was the return to another period of inaction.

Rather than have another try at more sensible legislation, the Coalition gave up on getting anti-avoidance right. The Attorney-General came back with the Bankruptcy and Family Law Amendment Bill – basically the exposure draft minus the anti-avoidance schedule.

Although we supported that Bill, Labor was 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. The Government, in its arrogance, refused to consider them.

That was once year ago.

One year later – in all, five years too late – Labor is pleased to see that the Government has accepted the approach we had advocated.

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 `claw back’ provisions, as Labor proposed through amendments last year. `Claw back’ 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 claw back provisions.

First, it will introduce a rebuttable presumption of insolvency where the bankrupt has keep books, records and accounts below an acceptable standard, or 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 Governments’ 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 a relevant time. This introduces a new fair concept, preventing people from frustrating trustees and creditors by relying on their own incompetent record keeping.

Second, the bill will increase the time period for claw back 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.

Third, the bill will introduce a requirement of `reasonableness’ into the test for the claw back of transfers intended to defeat creditors. Currently, transferees are immune from claw back if they had no actual knowledge of the transferors’ true intention. Under this bill, transferees will only be protected 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.

Fourth, 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 would 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 still avoiding creditors.

The bill contains three other changes relating to the admissibility of transcripts from interviews by the Official Receiver and correcting two possible unintended interpretations of the sections 120 and 121. These are uncontroversial.

Indeed this 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 they achieve this.

The only controversy here is why this bill has taken so long—6 years since the problem emerged. It is all the more embarrassing given that Labor offered a large part of the solution 12 months ago, only to have it arrogantly dismissed by the Attorney-General.

Earlier today we started debating the Family Law Amendment (Shared Parental Responsibility) Bill 2005. That is another case in which the Opposition has made some constructive amendments to one of the Attorney’s bills. I hope he has learnt from the embarrassing experience of this anti-avoidance bill that good policy sometimes means being prepared to swallow his pride and accept Labor’s good ideas the first time around.

Andrew Murray (WA, Australian Democrats) Share this | Link to this | Hansard source

The Bankruptcy Legislation Amendment (Anti-avoidance) Bill 2006 is legislation that has been a long time coming. Looking back over the history of these recommendations, we see that it is partly based on a media furore which occurred from 2001 when Paul Barry wrote a series of articles pointing out that bankruptcy was a way in which barristers were avoiding paying tax. The bill also addresses what has been the extremely common practice where high-income earners who experience financial difficulty declare bankruptcy to avoid paying their debts, to the detriment of others.

The often arrogant pursuit of law and the assumption of high morality in our courts of those particular legal people are not reflected in the way that they conduct their private affairs and the dissonance between the oaths they take and the laws that they are sworn to uphold. Their personal behaviour reflects badly on the ethics that they are taught to follow. Such people impugn the reputation, credibility and good faith of the vast bulk of barristers, lawyers and judges who do conduct their tax affairs and their personal affairs appropriately and properly. However, my disappointment in some members of the legal profession was again generated by a story in the West Australian newspaper on Saturday, 18 March 2006 which identified a particular accounting firm which was giving tax advice to members of the legal profession about schemes which were designed to avoid tax.

More generally, in my opinion, the culture of tax avoidance is encouraged by the government’s overly generous provision of tax concessions which encourage people to enter into negative gearing and pursue capital gains and other things to minimise tax paid. The thought that you can run losses on one side of your family balance sheet and cover those by your tax concession on another side is amongst the causes that get people into moral and ethical trouble—and I might say in passing: Lord help them if the property market ever falls! We had a visitor a while back—the head of the United Kingdom tax office—who indicated that his greatest motivation and campaign was in fact to change the culture by which people address their tax affairs and tax compliance matters. It is important that the government leads both in a moral and ethical sense in this field as well as in a legislative sense.

Getting back to the legislation before us, this bill will tackle some of the avoidance practices that have been used to manipulate Australia’s bankruptcy laws. Unfortunately this just reflects human nature. The government’s legislation cannot and will not put an end to some of the more outrageous abuses of the bankruptcy system by a few high-income earners, but it certainly will improve the authority’s ability to lessen and minimise those practices.

Australians, in general, are rightly angry to see some corporate or former corporate high-flyers and other high earners in our society claiming bankruptcy and avoiding creditors despite having obvious wealth at their disposal through some third-party entity or family members. Any West Australians in the chamber might recognise those characters who feign mental illness and have a terrible problem recalling their details, and have these amazing friends living in Switzerland and England who look after them. And then suddenly—hey presto—they have a lovely house in Cottesloe and their family are doing awfully well, thank you very much, and they are back in business. I do not know what these laws will do to address characters like that, but hopefully they will have some impact.

The report from the Joint Committee on Corporations and Financial Services noted that there is a practice in, for instance, the building industry whereby people set themselves up as phoenix companies, go bust and then repeat the process again and again. It is an attitude that has to be stamped out and I must commend ASIC for responding very well to that committee’s report on the matter and starting to be far more active in this area than they were before. I must say in that regard that the committee was greatly assisted by an in-depth submission put to the committee by the CFMEU, many of whose members had been hurt by the phoenix company types.

People should not be able to avoid creditors through artificial arrangements that secure their own financial wellbeing but result in great hardship to others who have entered into business arrangements with them in good faith. While it is true that the bankruptcy system must guard against abuse, care in addressing the abuses must not result in preventing access to bankruptcy by those with a genuine need to do so. We should always understand that bankruptcy laws were designed right from the very beginning as a safety net for those experiencing unfortunate circumstances in life, and the fact that some miscreants abuse those laws should not blind us to their overall intention.

Most bankrupts today—probably as always—are low- or middle-income earners who owe relatively small amounts of money and have got out of their depth. Those who genuinely require recourse to bankruptcy should not face unnecessarily artificial barriers or be subject to unduly punitive measures. They should be given the chance of rehabilitation and I think the government and this legislation are, indeed, conscious of that. The Democrats support the extension of time to allow the trustee in bankruptcy to examine transactions up to four years prior to the bankruptcy and to recover funds to pay creditors. We also support the extension to five years where property is transferred to related entities or family members and no consideration is paid for the transfer.

Since the High Court’s decision in the matter of John Cummins QC was handed down on 7 March 2006 several lawyers have pointed out that this legislation is now not necessary and could impact negatively on the spouse of, say, a problem gambler. There is a possibility of this and we must recognise that one of the consequences of shifting the law like this is that people may be hurt at the margins. I am sure the Attorney-General’s Department will keep an eye on that one and see if adjustments need to be made to the law. However, given the premeditation of action which this bill is addressing, it seems more likely to impact on those in receipt of expensive financial advice, or with a skill or knowledge of their own about how the system works and how to use it to their own advantage and with a premeditated motive.

I do not agree with the lawyers who claim that the High Court decision in Cummins ‘reaffirms that the Bankruptcy Act already has enough teeth’. The reason I do not agree with this assessment is that the High Court overturned a decision of the Federal Court which held in favour of Cummins, if I understand the matter correctly. The minority judge in the Federal Court, with whom the High Court agreed, said:

... it beggars belief to suggest that by August 1987, after spending over twenty two years in practice at the New South Wales Bar ... without paying any tax ... that he was not fully conscious of his exposure to the (tax) Commissioner ...

What the High Court decision means is not that the Bankruptcy Act as it now stands has enough teeth but that the trustee in bankruptcy had to battle all the way to the High Court and await the decision handed down on 7 March 2006 before being in a position to pay the creditors of Mr Cummins. Mr Cummins was guilty at the outset but he had to be dragged through an expensive process to make sure that the facts on the face of the case were as they were stated, because he defended himself all the way through. We know he is entitled to do that, but when somebody’s fingerprints are on the knife and you find them with their hands on the knife and the knife is in the body, they might be able to defend themselves all the way to an appeal to the Governor-General but nevertheless their hand was on the knife, and that is essentially what the High Court found with respect to Mr Cummins and his tax affairs.

We are all fully aware of the delays in the court systems in all states and, as the saying goes, ‘justice delayed is justice denied’. There is no doubt that some of Mr Cummins creditors would be so disadvantaged by the length of this delay that their lives would have been irreversibly changed by it. I use that case because it has been a high-profile case but of course there have been many other cases which this legislation addresses. It has been controversial legislation. There was concern about retrospectivity which I understand has now been addressed. The Australian Democrats think that, despite some worries at the margins—as I say, there is a fear that in some cases spouses who do not deserve to be caught in the web might end up being caught in decisions—this is a necessary change to the law and we support it. I am sure the Attorney-General’s Department will continue to watch this area of law to make sure that the law has its proper and intended effect.

Chris Ellison (WA, Liberal Party, Minister for Justice and Customs) Share this | Link to this | Hansard source

The government welcomes the support of other parties in relation to the Bankruptcy Legislation Amendment (Fees and Charges) Bill 2006 and of course it will strengthen existing anti-avoidance provisions in the Bankruptcy Act 1966. Senator Murray has touched on many aspects of that and of course this is something which there is a great deal of concern about in the community. I commend the bill to the Senate.

Question agreed to.

Bill read a second time.