Bottom of the Harbour Tax Avoidance
Bottom of the harbour tax avoidance refers to a notorious tax avoidance scheme that was employed in Australia during the 1970s. This practice involved the deliberate stripping of assets from a company to evade taxation liabilities, rendering the company essentially valueless, akin to sinking it to the "bottom of the harbour."
Mechanism of the Scheme
The scheme was typically executed by liquidating a company's assets and distributing them to shareholders or related entities, while the company itself was left with significant tax liabilities. The remaining shell of the company, devoid of assets, would be wound up, often by insolvency, with no funds to meet its tax obligations. This was facilitated through complex arrangements involving multiple parties, including company directors, accountants, and legal professionals.
Legislative Response
The Australian Government, under the leadership of Prime Minister Malcolm Fraser, responded to this widespread tax avoidance strategy by passing legislation in 1980, which criminalized such practices. The legislation involved retrospective penalties, which were met with some controversy. Notably, certain politicians, such as Andrew Thomas, opposed these retrospective measures.
Involvement of the Costigan Commission
The uncovering and investigation of bottom of the harbour schemes were significantly advanced by the Costigan Royal Commission, which was initially tasked with investigating activities of the Federated Ship Painters and Dockers Union. The Commission, led by Frank Costigan, expanded its scope to address broader issues of tax avoidance and criminal activities within the industry.
Implications and Legacy
The bottom of the harbour schemes highlighted significant flaws in the Australian taxation system and led to major reforms in tax law enforcement. These schemes are often cited in discussions on tax noncompliance and have influenced modern strategies to curb tax avoidance.
The exposure of these schemes also led to public scrutiny of accounting and law practices involved in such arrangements, resulting in a more stringent regulatory environment for corporate governance and financial reporting.