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Datt, Kalmen --- "A Fair Share of Taxes-A Bridge Too Far?" [2010] UNSWLRS 73

University of New South Wales Faculty of Law Research Series

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A Fair Share of Taxes-A Bridge Too Far? [2010] UNSWLRS 73 (21 December 2010)

Last Updated: 23 December 2010

A Fair Share of Taxes-A Bridge too Far?

Kalmen Datt, University of New South Wales


This article was published in Datt, K., Tran-Nam, B. and K. Bain (Eds), International Tax Administration: Building Bridges, CCH, Sydney.


This paper seeks to determine whether there may be a conflict between the obligations imposed on directors by the common law and legislation (primary and delegated) and the demand to pay a fair share of tax. As part of this review the paper considers the role played by legal and accounting advisors to these corporations.

Entrepreneurship, then, is a pattern of behaviour, a style of management which is concerned with obtaining and managing resources to exploit opportunity...Churchill (1997) stresses that entrepreneurs should not attempt to “cross a bridge too far”; instead they should concentrate on perpetual movement and improvement, continually finding and exploiting manageable risks and opportunities. The process is continuous, not periodic major steps with nothing in between.[1]

1. Introduction

The above quote epitomises the task of company directors in seeking to maximise the wealth of the corporation and ultimately its shareholders. In seeking to achieve this goal they must ensure that they find and exploit manageable risks and opportunities This task is made more difficult each year that passes by the growing range of obligations being imposed on directors not only in the context of tax but in relation to all their endeavours. It is suggested that with the plethora of competing obligations imposed by various statutes and regulatory bodies directors may find that compliance with one leads to a breach of another rule. Part of this regulatory environment includes various demands by the Commissioner calling for specific conduct on the part of corporate taxpayers.[2] These demands are part of the strategy adopted by the Commissioner to facilitate compliance with the tax laws by corporate and particularly large corporate taxpayers.

This paper considers only one such demand by the Commissioner, namely that large corporate taxpayers pay a fair share of taxes. The paper seeks to determine whether there may be a conflict between the obligations imposed on directors by the common law and legislation (primary and delegated)[3] and the demand to pay a fair share of tax. As part of this review the paper considers the role played by legal and accounting advisors to these corporations.

The author is of the view that it is arguable that the demand to pay a fair share of taxes is potentially a demand to pay more tax than the law mandates and may be in conflict with directors’ legal obligations. In making this demand the Commissioner may also possibly be exceeding his powers.

Before proceeding it should be noted that the care and management provisions of the various taxing acts[4] do not require the Commissioner to pursue every last cent of revenue where the cost of doing so is prohibitive. [5] By the same token the Commissioner is obliged to collect tax in accordance with a correct assessment, that is to say, to collect the correct amount of tax, no more and no less. If an assessment is excessive it would be improper for the Commissioner to seek to collect tax payable under it.[6]

Having described the nature of the enquiry the article commences with a brief review of certain of the tax obligations imposed on directors.[7]

2. Director’s obligations

2.1 The primary obligation?

The starting point, when considering director obligations, are the numerous cases that have held that directors must act for the benefit of the company.[8] This is reinforced by the Corporations Act 2001 (Cth) (the Corporations Act) that requires directors to act in the best interests of the company.[9] The question that arises is are these interests limited to the company or is there a wider category of interests that should be taken into account? The High Court in Pilmer v The Duke Group Ltd (in liq) [10] considered this and on the facts of that case found that the company was a separate legal entity from its shareholders. The court said:

It is of the first importance to keep at the forefront of consideration that the claim which was made is a claim by the company, not a claim by or on behalf of its shareholders. It may be readily accepted that directors and other officers of a company must act in the interests of the company as a whole and that this will usually require those persons to have close regard to how their actions will affect shareholders. It may also be readily accepted that shareholders, as a group, can be said to own the company. But the company is a separate legal entity and the question raised in this matter is what damage (if any) did it suffer by issuing new shares. The question is not whether the shareholders ... were adversely affected.

In Australian Securities & Investment s Commission v Maxwell & Ors[11] the following was said (at 1329):

106. As to section 181(1), which requires a director or other officer of a corporation to exercise his or her powers and discharge his or her duties in good faith in the best interests of the corporation, and for a proper purpose, in Chew v R (1991) 5 ACSR 473, Malcolm CJ (at 499) summarised the requirements of the duty to act in good faith as including that directors (1) must exercise their powers in the interests of the company, and must not misuse or abuse their power; (2) must avoid conflict between their personal interests and those of the company; (3) must not take advantage of their position to make secret profits; and (4) must not misappropriate the company’s assets for themselves. The words “in the best interests of the corporation” emphasise the significance of the relevant constituencies — in particular, the shareholders as a whole, and the creditors in the case of impending insolvency.
The extracts from the above cases suggest that depending on the circumstances of any particular case the duty owed to the company as a whole may be the company itself or it may include the shareholders or possibly even other stakeholders. Justice Owen in a far ranging and lengthy judgment in Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 9) [12](at paragraphs 4392 to 4395) explained this apparent conflict as follows:

It does no damage to the doctrine of separate corporate personality to recognise that a reflection of the interests of the company may be seen in the interest of shareholders...This does not mean that the general body of shareholders is always and for all purposes the embodiment of 'the company as a whole'. It will depend on the context, including the type of company and the nature of the impugned activity or decision. And it may also depend on whether the company is a thriving ongoing entity or whether its continued existence is problematic. In my view the interests of shareholders and the interests of the company may be seen as correlative not because the shareholders are the company but, rather, because the interests of the company and the interests of the shareholders intersect...Modern theories of corporate governance rest (at least in part) on the proposition that an objective of the corporation is to increase shareholder value. ...This is where the relevant distinction arises. It is, in my view, incorrect to read the phrases 'acting in the best interests of the company' and 'acting in the best interests of the shareholders' as if they meant exactly the same thing. To do so is to misconceive the true nature of the fiduciary relationship between a director and the company. And it ignores the range of other interests that might (again, depending on the circumstances of the company and the nature of the power to be exercised) legitimately be considered. On the other hand, it is almost axiomatic to say that that the content of the duty may (and usually will) include a consideration of the interests of shareholders. But it does not follow that in determining the content of the duty to act in the interests of the company, the concerns of shareholders are the only ones to which attention need be directed or that the legitimate interests of other groups can safely be ignored.
The Supreme Court of Canada in a unanimous judgment in BCE Inc. and Bell Canada v. A Group of 1976 Debentureholders[13] held (at paragraph 37) that:

The fiduciary duty of the directors to the corporation originated in the common law. It is a duty to act in the best interests of the corporation. Often the interests of shareholders and stakeholders are co-extensive with the interests of the corporation. But if they conflict, the directors' duty is clear - it is to the corporation.

As noted by Justice Owen in the Bell Group case there are various theories of corporate governance.[14] For example, there is one school of thought that suggests directors’ duties are to maximise shareholder wealth,[15] whilst another states that directors wealth creation should be subordinated to ensuring the well being of all stakeholders including shareholders, employees, creditors and even the community where the company carries on business.[16] Blair and Stout see directors as one member of a team which includes all stakeholders where the directors act as mediating hierarchs representing all team members.[17] In their opinion, directors owe their duties to the corporation rather than shareholders. This view is evidenced by the business judgment rule[18] which requires directors to act in the honest belief that the action was taken in the best interests of the company.[19]

It seems that irrespective of which theory is adopted, the very essence of good corporate governance is the derivation of profits. Indeed one of the corporate governance principles developed by the OECD in 2004 acknowlwedges that a corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active cooperation between corporations and stakeholders in creating wealth, jobs, and the sustainabilityof financially sound enterprises.
The greater the profit the greater is the ability of the company to achieve its goals and to act for the benefit of its shareholders and other stakeholders. A loss making company on the other hand is unable to pay dividends, [20] is losing value, and such losses may even lead to a winding up.

The paper now turns to certain specific obligations of directors with reference to tax.

2. 2 Obligations of directors and tax: The Corporations Act

2.2.1 Introduction

Irrespective of the legislative and common law requirements one thing is clear directors must ensure that companies comply with their tax obligations. This does not mean that directors have the obligation to pay the tax debts of the companies they manage. The obligation is that of the company although the legislature has seen fit, either directly or indirectly, to impose liability for some of these obligations on directors.

The following sections consider specific aspects of the Corporation laws impacting of the manner in which obligations are imposed on directors in relation to the tax affairs of the companies’ they manage.

2.2.2 Duty of loyalty, care and diligence

From a tax perspective the duties of care, diligence and good faith are arguably one of the most important duties imposed by the Corporations Act on directors.[21] Directors owe a duty of care and loyalty[22] primarily to members but not to creditors other than when insolvency intervenes[23] or the Corporations Act authorises a creditor to act. When directors breach their duty of care it is generally the company that should sue.[24]

Clarke and Sheller JJA in Daniels &Ors v Anderson & Ors[25] explained this obligation in the following terms:

Because directors are bound to exercise ordinary care, they cannot set up as a defence lack of the knowledge needed to exercise the requisite degree of care. If one ‘feels that he has not had sufficient business experience to qualify him to perform the duties of a director, he should either acquire the knowledge by inquiry, or refuse to act.’... Directors may not shut their eyes to corporate misconduct and then claim that because they did not see the misconduct, they did not have a duty to look. The sentinel asleep at his post contributes nothing to the enterprise he is charged to protect...Upon discovery of an illegal course of action, a director has a duty to object and, if the corporation does not correct the conduct, to resign... A director is not an ornament, but an essential component of corporate governance. Consequently, a director cannot protect himself behind a paper shield bearing the motto ‘dummy director’.
The fact that the person is a shadow or de facto or unpaid or non executive director does not negate or limit this duty in any way.[26]

Tax strategy decisions are subject to this care and diligence rule which in turn is subject to the business judgment rule.[27] The director's belief that the judgment is in the best interests of the corporation must be a rational one. If the belief is one that no reasonable person in their position would hold, the business judgment rule is not available as a defence: Section 180 (2) Corporations Act.

Management must act in terms of the constitution of the company and corporation law to ensure wealth maximisation for investors. Wealth maximisation takes the form of dividends and capital gains. Dividends are paid out of after tax profits and capital gains are calculated inter alia by the increase in value of a company’s net assets.[28] A reduction of the tax burden as with any other expense serves to achieve this outcome. As White J said in a different context:

Unless this country has room for entrepreneurs who are prepared to take risks the community's collective wealth will not increase.[29]

From an operational point of view tax is just one of a number of factors that directors must take into account in determining how a business is conducted. Tax is essentially an unavoidable expense of the company in the company’s search for profits. Tax should be contained to enable companies to achieve a competitive effective tax rate. Directors need to devote time to formulating tax strategies to achieve this goal.[30]

It follows that tax minimisation policies and possibly even an aggressive tax policy[31] should be adopted if it leads to greater profits being available for investment or distribution or other purposes that benefit the company. For purposes of this paper an aggressive tax policy means seeking to limit ones tax obligations as far as the law will allow. Sartori is of the view that any activity that does not have a business purpose should not be permissible for tax purposes. This is essentially how the tax laws are administered in Australia.[32]

It follows that tax minimisation policies and possibly even an aggressive tax policy[33] should be adopted if it leads to greater profits being available for investment or distribution or even charitable purposes.

The benefits from schemes to reduce taxes must be greater than the direct and indirect costs of implementing the arrangement. These costs would include any potential costs of litigation with the ATO, possible reputational damage and the possibility of penalties being imposed whether of a civil or criminal nature. Bersten[34] believes these costs include the possibility of a reduction in the market value of the company due to adverse publicity; the time value of money; and that the nature of the transaction is such that the Commissioner is compelled to challenge the view taken by the taxpayer. He notes that media controversy can arise from a surprise disclosure of a major tax risk but that disclosure prior to the issue of an amended assessment appears in general to pass without criticism.[35]
An additional cost is what Sartori[36] describes as implicit taxes. These taxes emerge when the rate of return of investments is lower after having minimized the tax rate than would have been the case with the higher tax rate.

An example of the risk assessment process, albeit possibly extreme in today’s terms, appears from E.I.Du Pont De Nemours and Company v The United States.[37] The taxpayer sold goods to an overseas subsidiary at a less than arm’s length price with a view to transferring profits to the subsidiary. Part of the documents made available to the court was an internal advice that in part read:

It would seem to be desirable to bill the tax haven subsidiary at less than an arm’s length price because: (1) the pricing might not be challenged by the revenue agent; (2) if the pricing is challenged, we might sustain such transfer prices; (3) if we cannot sustain the prices used, a transfer price will be negotiated which should not be more than an arms length price and might well be less; thus we would be no worse off than we would have been had we billed at the higher price.
The court passed no comment on the validity (or legality) of this approach and determined the case on its merits. The approach followed by Du Pont is an example of the risk assessment process that should be carried out by companies when considering entering into a transaction.

According to Slemrod, shareholders of large publicly held companies hold diversified portfolios with the result that the firm should behave as if it is risk-neutral, even if its shareholders are not. In his view tax avoidance raises no issues of ethics or virtue. Taxes are enforced exactions, not voluntary contributions. According to this view, not taking optimal (from the corporation’s point of view) advantage of legal opportunities for tax avoidance (and at the very least tax planning opportunities) is like giving a gift to government. Giving such gifts may reflect civic virtue, but not giving them is not a sign of ethical failure.[38]

The next obligation of directors considered is the continuous disclosure requirements of the Corporations Act and the Australian Securities Exchange (ASX).

2.2.3 Continuous disclosure

The continuous disclosure requirements of the Corporations Act require directors of listed companies to advise the stock market of the company’s risk inter alia in the area of tax.[39] Directors are required to advise shareholders of any information known to them that could impact on the price or value of the shares held by them.[40]

If the directors of a listed company are aware of any tax implications arising from their dealings with the ATO or otherwise and such information could have the impact described above then disclosure must be made. In the author’s opinion the fact that an aggressive tax risk profile is adopted, of itself, is not grounds for such disclosure. This proposition is based on the assumption the company is satisfied (based on expert legal and/or accounting advice) that the tax position taken by the company is correct. Presumably if a dispute with the ATO subsequently arises which could impact on the company’s price or value of its shares, disclosure is required.

The fact that disclosure is made does not mean that either the transaction will be challenged by the Commissioner or if challenged that the view of the Commissioner will prevail.[41] Most large corporations have significant resources available to them and can afford to litigate. In the author’s opinion, (but subject to a possible change in accounting standards mentioned in section 2.2.4 below) the mere fact that a position has been taken which is at odds with a view of the Commissioner, of itself, is not a basis for such disclosure. Even the fact of litigation probably does not call for disclosure unless the decision, if adverse, could impact on the price or value of the company’s shares.[42]

The Australian Securities Exchange (ASX) listing rules have a similar rule that provides that timely disclosure must be made of information which may affect security values or influence investment decisions, and information in which security holders, investors and the ASX have a legitimate interest.[43]

2.2.4 Financial and tax accounting

As tax plays such an important part in the financial success of a company, it is important that provisions for tax and other liabilities be accurately disclosed in the company’s financial statements.

Several studies cited by Slemrod[44] have documented a large and growing gap in the United States between the book income reported on public corporations’ financial statements and the tax income of corporations, which remains even after eliminating what arises from known differences in the accounting procedures used for book and tax income. The United States Supreme Court described this difference as follows:

The primary goal of financial accounting is to provide useful information to management, shareholders, creditors, and others properly interested; the major responsibility of the accountant is to protect these parties from being misled. The primary goal of the income tax system, in contrast, is the equitable collection of revenue; the major responsibility of the Internal Revenue Service is to protect the public fisc. Consistently with its goals and responsibilities, financial accounting has as its foundation the principle of conservatism, with its corollary that "possible errors in measurement [should] be in the direction of understatement rather than overstatement of net income and net assets." In view of the Treasury's markedly different goals and responsibilities, understatement of income is not destined to be its guiding light. Given this diversity, even contrariety, of objectives, any presumptive equivalency between tax and financial accounting would be unacceptable.[45]

The Commissioner has noted that:

Any substantial move towards convergence of tax and accounting treatments will require a meeting of minds between the accounting and tax professions and government...In Australia there is no systematic connection between the income tax law and accounting concepts or standards. However, the two interrelate in various ways.[46]
Not all accounting and tax outcomes are necessarily different. As was stated in Coles Myer Finance Ltd v Federal Commissioner of Taxation (Cth), a case dealing with deductions under section 51(1) Income Tax Assessment Act 1936:[47]

Under s.51 (1) a loss or outgoing is a deduction only to the extent to which it is incurred in gaining or producing the assessable income. That provision has been described as:

"a statutory recognition and application of the accountancy principle which all the accountants who gave evidence referred to as the matching principle"
The reason for the differences between financial and tax accounting can probably be found in the divergent reasons for adopting the different approaches. The primary purpose of the tax system is to raise revenue for the government of the day and partially to influence certain social or political aims of the government. The primary purpose of financial accounting on the other hand is to provide stakeholders with information to assist in investment and other decisions.

Ultimately the differences between tax and financial accounting may be substantial depending on the jurisprudential enquiry conducted by the court in determining the meaning given to the words used in a statute.
Generally financial and tax accounting reflect different outcomes which give opportunities for tax minimisation. The basic principle in determining an entity’s tax liability is to determine the profits as reflected in the financial statements and then make any adjustments expressly required for tax purposes, such as adding back deductions which the taxing statute forbids.[48]

The Corporations Act imposes obligations on directors in relation to the financial statements of companies. Under Parts 2M.2 and 2M.3 directors must, for example, furnish a declaration stating whether in their opinion the financial statements of the company and notes to such statements are in accordance with the Corporations Act and drawn in compliance with accounting standards.[49] They must also reflect a true and fair view of the company’s affairs.[50] These latter two requirements need to be read in conjunction with each other.

If the company is a listed on a stock exchange a section 295A declaration must be made by the CFO and CEO of a company that in their opinion the prescribed requirements of the Corporations Act in relation to the financial statements have been met. It is this declaration that is intended to be used by the board prior to their declaration.
The Australian Accounting Standards Board have prescribed that all information that is material must be disclosed in the financial statements of a company. Materiality means that an item is material if its omission, misstatement or non-disclosure has the potential, individually or collectively to either influence the economic decisions of users taken on the basis of the financial report or affect the discharge of accountability by the management or governing body of the entity.[51]

Boards of directors seem to take the view that subject to advice being given they are not obliged to disclose potential disputes with the ATO until a review is in progress or more usually after an amended assessment has been issued.[52] For example, National Australia Bank Limited in its 2008 financial statements recorded a claim against a wholly owned New Zealand subsidiary as follows:

The New Zealand Inland Revenue Department (IRD) is carrying out a review of certain structured finance transactions in the banking industry.

As part of this review, subsidiaries of the Group have received amended tax assessments for the 1998 to 2005 years from the IRD with respect to certain structured finance transactions. The amended assessments are for income tax of approximately NZ$416 million. As at 30 September 2008, interest of NZ$217 million (net of tax) would be payable on this amount. The possible application of penalties has yet to be considered by the IRD...The Group is confident that its position in relation to the application of the taxation law is correct and it is disputing the IRD’s position with respect to these transactions. The Group has legal opinions that confirm that the transactions complied with New Zealand tax law. The transactions are similar to transactions undertaken by other New Zealand banks. The Group has commenced legal proceedings to challenge the IRD’s assessments.
The amount of tax inclusive of penalties was in excess of NZ$600 million yet it was only after an amended assessment was issued that the disclosure was made. It was only after the matters came before the court and the decision made in favour of the IRD that the liability was recognised. The sums of money involved were substantial, even by virtue of the size of this bank. Interestingly the large amount of tax seemed to have no impact on the price of the bank’s shares nor did seem to suffer any reputational damage as a result of the actions of the NZ Inland Revenue Department.[53]
In March 2009 in an attempt to refine current accounting standards and to bring greater equivalence to tax and financial accounting, the International Accounting Standards Board (IASB) issued an exposure draft, ED/2009/2 on how to reflect uncertain tax positions in financial statements of a company.[54] This provided that (at paragraph 26):

Uncertainty about whether the tax authorities will accept the amounts reported to them by the entity affects the amount of current tax and deferred tax. An entity shall measure current and deferred tax assets and liabilities using the probability-weighted average amount of all the possible outcomes, assuming that the tax authorities will examine the amounts reported to them and have full knowledge of all relevant information. Changes in the probability-weighted average amount of all possible outcomes shall be based on new information, not a new interpretation by the entity of previously available information (Author’s emphasis).
An accompanying document to the exposure draft describes the basis for the conclusions reached by the IASB. Paragraph BC 57 of this latter document states that an entity should only recognise tax benefits to the extent it is more likely than not that the tax authorities will accept them. Where tax outcomes are less certain the reason for adopting the weighted average test is that this uncertainty is included in the measurement of tax assets and liabilities by measuring current and deferred tax assets and liabilities using the probability-weighted average of all possible outcomes. This explanation is qualified (at paragraph BC 63) as follows:

The Board does not intend entities to seek out additional information for the purposes of applying this aspect of the proposed IFRS. Rather, it proposes only that entities do not ignore any known information that would have a material effect on the amounts recognised.

Possibly even with this qualification the natural consequence of all the forgoing would seem to require financial statements to disclose to the revenue authorities that an aggressive tax policy had been adopted or even that a tax minimisation scheme had been concluded. Presumably the more aggressive the scheme the less likely it would be that the tax authorities would accept the outcome and the greater the potential for liability. If this is the correct interpretation of the recommendation then effectively this would act as a red flag to tax authorities to audit a particular taxpayer or at the very least to audit the transaction in question. If this interpretation was followed it has the potential to reduce if not eliminate avoidance and probably tax minimisation schemes, irrespective of whether they would ultimately be accepted by the courts or not.

Another and potentially more probable view is that taxpayers, in following the requirements of the IASB will take a different and more nuanced approach. This statement is made on the basis that the taxpayer has received unequivocal advice from their professional team that a scheme is valid and effective for tax purposes and the Commissioner has not made any statement in which he deals differently with this interpretation of the law. On this basis and given the nature of the advice received taxpayers that enter into tax minimisation and even avoidance schemes would not be obliged to highlight such schemes as even on a weighted probability basis there would be no prospect of a challenge, let alone a successful one.[55] Even if the advice were not unequivocal it is suggested that by virtue of the rules of professional privilege (assuming the advice is given by the taxpayer’s legal team) the Commissioner would not be able to challenge such a contention by the taxpayer.[56]

Since preparing this paper the Australian Accounting Standards Board have noted that this exposure draft is to be revised and put out for further comment.[57], [58]

The question of continuous disclosure and proper financial statements are impacted by the complexity of the tax laws. The paper turns to a consideration of this issue.

3. The role of legal (and other) advisers and complexity of the tax laws

3.1 Complexity

Just how uncertain and complex the tax laws are is reflected by the following statement by Coleman and Freeman:[59]

The Tax Law Improvement Project (Paper No 1) noted that over 70% of Australian taxpayers use a tax agent. Then there is Tax Pack for the rest of the population. The fact that there is such a thing as Tax Pack demonstrates that taxpayers have trouble understanding the Tax Act and their obligations under it.[60]

John Taylor in research commissioned by the Taxation Institute of Australia was also of the view that the tax laws were complex because excessively detailed operational rules obscure the fundamental principles that the tax law is trying to express.[61]

Krever (in 2003),[62] in a scathing attack on the complexity of the Australian tax laws, said:

Measured against almost any test of simplicity, the Australian income tax law fails abysmally. While the costs of tax administration incurred by government are not high by international standards, study after study shows the tax system imposes higher compliance costs on taxpayers than virtually all other income tax systems and taxpayers almost universally believe the law to be complex. The legislation may well be both the largest in the world in terms of sheer volume and among the most difficult to read and comprehend. Almost certainly, more irrational distinctions based on inappropriate criteria exist in the Australian law than in any other nation’s tax legislation with the result that minute changes in the legal form of a transaction can lead to dramatically different tax consequences.

The Commissioner has accepted the tax laws are complex. In a speech entitled Effective revenue Administration, the Commissioner, Michael Carmody said:[63]

No discussion of the complexity of today's tax environment would be complete without addressing the vexed issue of the complexity of our tax laws... In meeting equity objectives, the impact on complexity is all too apparent.

The increased use of the tax law to deliver social benefits adds a further dimension to the complexity of the law and its administration for individual taxpayers. This is particularly the case where the Tax Office is an alternative provider of benefits. ... Legislative design is another issue.

There will always be conflict between principle-based law and so-called black letter law.

The practice of adopting widely-based solutions to deal with specific identified issues is another source of tension.

Notwithstanding this acknowledgement about the complexity of the tax laws the underlying premise behind the ATO compliance model and numerous statements by the Commissioner is the notion that the law is known and constant. This is not the case. Until the law is capable of being understood by all participants by some objective standard the compliance model suffers from a serious and potentially destructive flaw.[64] Both regulators and those regulated need to be able to identify non-compliance. Currently this is not the case. As Myers stated:

We have seen in the 1980s an explosion of unintelligible taxation legislation. We used to have one volume of Commonwealth income tax legislation. Now we have three volumes. The problem is not merely that the volume of the legislation has increased, but that so much of the legislation has been so drafted that it is practically unintelligible. Very often the consequence of this unsatisfactory legislation is that the Commissioner can decide, in effect, what is the law. It is a basic right of taxpayers to know with reasonable certainty, so they can plan their affairs, what is the law affecting them. They are being denied this.[65]

Since the Myers article was written the number of volumes of tax legislation increased to 4. It was only in 2008/9that it came back to three in number. The legislation is as complex as ever. David Varney (the then Head of Her Majesty’s Revenue and Customs) is reported as noting that no national tax system is a model of clarity.[66]

John Braithwaite believed the complexity of the law was the foundation of the avoidance industry. He said:

A smorgasbord of rules engenders a cat and mouse legal drafting culture - of loophole closing and reopening by creative compliance. Moreover it engenders a structurally inegalitarian form of uncertainty. The law thus engendered becomes so complex that little people who cannot afford sophisticated legal advice cannot understand it. In practice a particular law may be certain in the way lawyers apply it to ordinary people, but perceptually its complexity makes it uncertain to them as a guide to their actions, untutored as they are by legal advice. The rich, in contrast, deploy legal entrepreneurship to make the law uncertain in practice. As citizens go about activities like paying taxes, creative compliance thus creates a law that is perceptually unclear to ordinary people, and therefore uncertain for them, and uncertain in practice for the rich who more clearly perceive and exploit this uncertainty.[67]

Legal entrepreneurship in complex areas of law like tax is largely about steering clients into safe harbours (referred to as shelters in the tax context) that defeat the law’s purposes.[68]

Lavermicocca[69] (at page 16) found that the results of a preliminary survey for her PhD of 7 large Companies (turnover in excess of $250 million) suggest that the uncertainty and complexity of the income tax laws in Australia are a major contributor to tax risk and ultimately contributes to a failure of the organisation to comply with the income tax laws. This was the view of all tax managers even though all seven participants were highly qualified and experienced in the application of the income tax laws in Australia and in most instances had a significant amount of staff in the tax department. All seven of the participants used expert external advisors (Big 4) to get a tax opinion where they were unsure of the correct tax treatment and a majority of participants regularly applied for a private ruling from the ATO in an attempt to obtain some certainty.

Too often, it seems the Commissioner loses sight of the fact that tax is entirely a creature of statute and even though amplified by decisions of the courts it is full of anomalies and oddities. Its object is simply to raise tax.[70] There is no obligation on any taxpayer to pay tax of any sort unless parliament has legislated for such liability.

The courts in interpreting tax legislation as with any other legislation now look to the purpose of the legislation. Thus the Honorable Murray Gleeson (a former Chief Justice of Australia) said this about the current approach of courts in interpreting tax statutes:

The idea that, unless Parliament has specified, with unambiguous clarity, that a certain set of circumstances will give rise to a liability to tax, then no liability exists, does not reflect the modern approach to interpretation. Not long after Barwick CJ‘s statements two other members of the High Court said that, in revenue statutes as in other cases, the courts must “ascertain the legislative intention from the terms of the instrument viewed as a whole. It should be added that s 15AA of the Acts Interpretation Act 1901 (Cth) applies to taxing Acts as well as others. It provides: “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”...Furthermore, judicial references to what Lord Tomlin described in the Duke of Westminster’s Case in 1935 as the entitlement of every man to order his affairs so as to attract the least tax are now harder to find. To state the obvious, any such entitlement is subject to Pt IVA. At the same time, it should be said that Lord Tomlin made his remarks in the course of rejecting an attempt to treat judicial disapproval of a taxpayer’s conduct as a substitute for applying the language of the Act. It is to be hoped that such an attempt would be as unsuccessful today as it would have been in the past. Liability to tax is not determined by judicial discretion. The rule of law applies both to revenue authorities and to taxpayers, regardless of whether in a particular case it comes down on one side or the other.
Notwithstanding this approach to the interpretation of tax laws, they must not be arbitrary. For example Lord Wilberforce in Vestey v IRC (Nos 1 and 2) said:[71]

I must regard this case therefore as one in which Parliament has attempted to impose a tax, but in which it has failed, in the case of discretionary beneficiaries, to lay down any basis on which it can be assessed or levied. In the absence of any such basis the tax must fail. That this must be the result was correctly perceived by Macnaghten J in Lord Herbert v Inland Revenue Comrs a decision based on the Finance Act 1938, s 38. The learned judge there used these words:
'It seems to me fantastic to suppose that Parliament has conferred upon inspectors of taxes, or even upon the Special Commissioners, the right to decide at their own will and pleasure which of several persons should be liable to income tax or surtax as the case might be.'

The accuracy of financial statements and the complexity of the law are inseparably tied in with the advice of legal and other advisors.

3.2 Legal and accounting advice

By virtue of the complexity of the law it is imperative that legal and accounting and other tax advice is such that they meet with the objects of the legislation.

Directors must ensure that in entering into tax effective transactions that board approval is not given to any illegal action, or to any attempt to misrepresent the arrangements to the authorities or to withhold information from them. There should be evidence of the professional advice taken and that this contains no suggestion of illegality or impropriety in what is envisaged.[72] Significantly John Braithwaite[73] noted that:

All the government should or can do about the High Wealth Individual (HWI) who goes to the extraordinarily competent, yet conservative, adviser is to close off the biggest legal opportunities they exploit. For these conservative HWIs who pay little tax, deterrence is utterly irrelevant as a strategy for protecting the revenue... It would be improper to deter them from exploiting the services of an unusually competent but law-respecting practitioner.[74]
Braithwaite makes the unassailable point, in the author’s view, that it would be improper to deter taxpayers from exploiting the services of an unusually competent but law-respecting practitioner. The Commissioner however, although accepting the views of Braithwaite in creating the compliance model prima facie does not accept the view expressed in the previous extract particularly having regard to the Commissioner’s repeated criticism of aggressive tax planning and the constant calls for companies to pay a fair share of tax.[75]

Irrespective of the risk profile of a company or whether it enters into an arrangement that has tax avoidance as its object:

It is not against the law to give aggressive tax advice and nor should it be. Advice to break the law is sufficient reason to withdraw a licence to offer tax advice. But we have seen that this is not the real problem. Deterrence is largely beside the point at the moment because taxpayers who breach the law on the basis of a reasonably argued position supplied by a licensed adviser will not be subjected to any penalty tax; they simply pay the back taxes plus interest. This means that it can be rational to go to advisers who push their advice to the limits of what could conceivably be accepted as a reasonably argued position.[76]

Having regard to the complexity of the tax laws, the grey areas present coupled with the fact that there is no obligation to pay any tax unless the law so provides it is no wonder that advisors attempt to ensure that transactions are effective for tax purposes. The services of tax professionals are not cheap. Effective schemes are more likely to be the one-off schemes rather than the mass marketed schemes as were popular in the late 1990s. Avoidance does not, in its pure form, rely on deception but on confrontation. By its very nature a party that enters into a tax avoidance scheme contends the arrangement complies in all respects with the law. Thus a taxpayer who participates in such a scheme should not feel at risk if all the facts are disclosed to the revenue authorities. McBarnet states that with its emphasis on the manipulability of the law, and on the scope for bending it to specific interests regardless of the intention behind it, the economic elites with the resources to buy legal creativity can also buy immunity from the law. [77] The reference to immunity from the law may be too broad a view of this phenomenon. The views of Braithwaite may be be a better reflection of what in fact occurs.[78]

Lawyers have a responsibility to act in the interests of their client’s subject always to their advice not being in conflict with the law. David Russell QC, a former president of the Taxation Institute of Australia is reported to have said:

Any notion of conflict between the interests of clients and the tax system that might require a professional to suppress a client’s interests is totally a wrong one.[79]

Myers in an insightful article said:

The ethical responsibility of a lawyer who tenders tax advice is no different from that of a lawyer who tenders any other kind of legal advice. In the end, his ethical responsibility is to uphold the law and to discharge his duty to his client according to the best of his knowledge and ability. It is not dictated by changes in public opinion about perceived evils of tax avoidance or the morality of organising one’s affairs to minimise tax... A person who seeks to reduce his liability for taxation to the minimum level permitted by law is seeking to do no more than obey the law. Should he not be entitled to be advised as to how he might obey the law?[80]

The obligation of lawyers has always been to give advice to the best of their ability on any issues raised by their client’s subject always to that advice being in conformity with the law.
Notwithstanding the above the comments of the Commissioner as to the nature of questions to be put by directors to their advisors should be noted. He said:

Questions to tax advisors that go beyond the simple statement of tax outcome to include advice on probability, level of aggressiveness and likely Tax Office response and the reasons for that may be pertinent depending on the nature and size of the particular arrangement.[81]
This suggestion of the Commissioner becomes even more important if one bears in mind the recommendations of the IASB referred to in section 2.2.4 above when referring to uncertain tax positions.

Accountants may possibly have a different obligation to their clients when their advice is sought. The Code of Ethics for Professional Accountants[82] provides that accountants must act not only for the benefit of their clients (as is the case with lawyers) but also in the public interest which is defined as the collective well-being of the community of people and institutions that the Members serve.[83]

The need to take the wider community into account by accountants may well be due to the fact that information furnished by accountants are often used by investors and other interested stakeholders to assist them in determining whether to invest or do business with a company whereas lawyers primary duty is to their client with an overriding obligation not to mislead the court in matters that are litigated. In view of this it may often possibly be more practical to take advice from a legal rather than an accounting advisor.
Related to the topic of complexity and legal advisors is the need to ensure that all transactions are properly documented.

3.3 Documentation

Where directors decide that it is appropriate in any particular case to engage in tax minimisation schemes or to adopt an aggressive tax policy should consider the importance of carefully documenting the decision and the reasons underlying them. As Bersten notes the most effective preventative action a taxpayer can take is to ensure that the evidence supports the taxpayer’s position and that when required the documentation is readily available and can be produced.[84] The need for proper records and documents is highlighted by the fact that should the Commissioner issue an amended assessment which is challenged; the onus is on the taxpayer to show that the assessment is either wrong or excessive.[85]

Finally the paper turns to what is euphemistically referred to as “payment of a fair share of tax.” There are regular calls by the Commissioner for companies to pay such a fair share of taxes.

4. Paying a fair share of taxes

The Commissioner has acknowledged that:[86]

Tax planning is a key feature of any tax landscape. Maintaining the line between legitimate tax planning - no one has an obligation to pay more tax than is payable under the law - and planning ultimately designed to avoid taxes payable under the law, remains a challenge for us all.[87]
This statement has its genesis in what has been said by the highest courts in many countries. For example in the United States, Judge Learned Hand in Gregory v. Helvering, Commissioner of Internal Revenue[88] said:

We agree with the Board and the taxpayer that a transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.

As recently as 2008 in Michael H Boulware v United States [89] Judge Souter in delivering the unanimous judgment of the United States Supreme Court said:

We have also recognised that “[t]he legal right of a taxpayer to decrease the amount of what would otherwise be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted”.
However if one is to accept at face value the various statements made by the Commissioner as to a company’s tax obligations it would appear that the ATO believes that corporate entities should act as good citizens and pay their fair share of tax rather than that amount mandated by the law.[90] For example in 1999 the then Commissioner raised the issue of taxpayers paying their fair share of tax. He said:

Compliance is a rather strong sounding word. Perhaps it is better to think in terms of fairness, for that is what compliance with our tax laws is all about. It is about people paying their fair share as set by our laws. [91]

The above statement seems to contain an inherent conflict. Either a taxpayer must pay their fair share of taxes or they must pay the amount mandated by the law. If the Commissioner, in making the above statement suggests there is no conflict then there should be no controversy about tax minimisation or even aggressive tax polices provided always that they comply with both the spirit and letter of the law. The conduct of the Commissioner suggests the contrary is the case. For example in 2006 the Commissioner said:

We are generally seen by the community to be active in the area of enforcement of compliance although there is a level of perceived inequity in relation to the ability of large companies or high-income earners to avoid paying their fair share of tax.[92]

The Commissioner reverts to this theme on numerous occasions.[93]

There are two problems with the Commissioner’s approach to the payment of a fair share of taxes. The first is that the Commissioner never explains what is meant by ‘a fair share of tax’. No one has to date defined what this term means. The second is that the call for payment of a fair share of taxes ignores all taxes paid by companies other than income tax. In a survey conducted by Pricewaterhouse Coopers in the United Kingdom it was found that if one took account of all taxes paid by companies this could amount up to 50 percent of profits.[94]

The Commissioner contends that the compliance model is designed to clearly explain taxation compliance activities involving large business. Large business and the ATO have mutual obligations to ensure that the compliance process is working efficiently and effectively, and to demonstrate to the wider community how it works. According to the Commissioner, the challenge for the ATO and the business sector is to facilitate and support good corporate citizenship that will strengthen the Australian economy and promote the well-being of Australian society.

In this vein and in 2001 the Commissioner said: [95]

The research also revealed an emerging posture to tax – that of game playing. Game players see the ATO as someone to be beaten through smart moves and reliance on grey areas of the law. It is all in the game. A sense of responsibility to the community is not the issue in their minds.

As recently as September 2009 the Commissioner said:

Taxes are the price we pay as part of enjoying a certain lifestyle and the services that go with it. We are fortunate in Australia that most people including international companies that operate here share Mr Hirst’s views and do the right thing. It helps too when you live in such a nice place... The ATO is seeking to leverage that natural advantage and find new ways to encourage behaviours that engender community ownership of the tax and superannuation systems, including the powerful idea that a willingness to pay tax (in accordance with the law) is a mark of good citizenship...Senior executives are seeking better insight into tax because of its potential material impact on financial statements and because the tax function can no longer focus simply on tax compliance and managing the effective tax rate.[96]

This view raises a moral issue in relation to the payment of taxes. The call is not for the payment of taxes as mandated by the law but rather for taxpayers to consider the community in determining how to conduct their tax affairs. This seems to be the view of the United Kingdom (UK) tax authorities as well. In 2005 Henderson Global Investors noted that in the UK:

The Inland Revenue itself has argued that tax is a matter not just of law but of morality, and that companies should refrain from utilising certain tax planning opportunities on the grounds that they are unethical. The Deputy Chairman of the Inland Revenue, Dave Hartnett, has asked, ‘with increasing numbers of investors taking an interest in the ethical and social policies of companies [...], are we now at a time when corporate responsibility demands a new attitude to tax avoidance?’[97]

Avi-Yonah appears to agree with this approach.[98] He said:

Thus, strategic tax behavior seems to be inconsistent with any view of the corporation. Under the artificial entity view, it undermines the constitutive relationship between the corporation and the state. Under the real view, it runs contrary to the normal obligation of citizens to comply with the law even in the absence of effective enforcement. And under the aggregate view, it is different from other forms of shareholder profit maximisation in that it weakens the ability of the state to carry out those functions that the corporation is barred from pursuing. It would thus seem that whatever view management takes of its relationship to the shareholders, to society and to the state, it is never justified in pursuing tax strategies that have as their only goal minimising the corporation’s tax payments to the government.

The good corporate citizen argument is the equivalent of the consistent demand by the Commissioner that corporations pay their fair share of tax. It is submitted there here are a number of difficulties with the Avi-Yonah approach. First even if the company is creation of the legislature (state) this does not mean that the duties it owes to the state or the obligation to pay tax is any greater than any other taxpayer. All taxpayers must pay such taxes as the law mandates-nothing more and nothing less. No taxpayer, whether it be an individual or otherwise has an obligation to pay more tax than the law mandates. There may be a real difference between tax as mandated by law and what is euphemistically described as a fair share of tax. Finally the mere fact that the corporation cannot perform certain functions which are the exclusive preserve of the state is not a basis for usurping the rule of law.

Tax laws may be unjust or cause harm but provided they meet the constraints prescribed in the Constitution there is no limit to the power of Parliament to enact taxation laws. Thus Isaacs J was of the view that the power to tax includes the power "to embarrass or to destroy," and neither the purpose nor the effect is an objection to the exercise of the power.[99] If the state is of the opinion it requires additional revenue to meet its social and other agendas it has the power to legislate for additional taxes. The fact that the state may have a need for revenue does not and, it is submitted, should not, translate into some form of social contract whereby companies pay more tax than the law requires. If companies wish to do good deeds they can do so openly and gain the benefits of being good citizens by increasing the value of their goodwill. There is no advantage in paying more tax than is required by the law. In any event acting in such a way would prima facie be a breach of the duty owed to act in the best interests of the company and of good faith to its shareholders.

It seems the argument for an approach such as Avi-Yonah suggests is that unless a company acts as a good corporate citizen it will have more regulation which is expensive and not conducive to good profits. Acting as a good corporate citizen becomes a strategic rather than a moral issue.[100] The problem with this approach is that it only works if all companies are not equally disadvantaged. If additional regulations are imposed they would impact on all companies equally and as such each individual company would not be in a worse position to any of its competitors.
There is some evidence, despite the legal obligations of directors to endeavour to minimise costs and maximise shareholder value, of a creeping conservatism in relation to tax at many large companies.[101] Certain companies have accepted the view that their obligations include paying their so called fair share of tax. For example Johnson & Johnson, a multinational consumer health and pharmaceutical company state:

We must be good citizens-support good works and charities and bear our fair share of taxes.[102]

Vodafone, a multinational telecommunications company, in contradistinction to the former view, believes they should only pay such tax as the law requires. It states:

We believe it is important to state clearly and precisely our views on tax in the context of corporate responsibility. We believe our obligation is to pay the amount of tax legally due and to observe all applicable rules and regulations in all of the territories in which we operate. Within this agreed obligation, we have a responsibility to our shareholders to legally minimise and control our tax costs. We accept that some may not share this view and believe that transparency regarding our position on this point is the best policy.[103]

There is a difference in principle between paying a fair share of taxes as suggested by Johnson and Johnson and paying only those taxes legally due. The concept of a fair share in this context suggests that corporates must act as good citizens for the benefit of the state and other citizens including their competitors and contribute revenue, in excess of that mandated by the law, to enable the Government of the day to carry out its various programs. There is no moral or legal basis for such an approach. Any tax paid in excess of that mandated by law is a reduction in the monies available for investment or distribution by the company. Directors unless mandated to do so have no power to dissipate corporate funds for no discernable gain for the company.[104]
The payment of tax has nothing to do with being a good citizen nor is it reflective of good morals. Unless legislation specifically provides for the payment of a tax on income or any other tax there is no obligation to pay such monies to the state. Even with the enactment of a GAAR in Australia there is not even a patriotic duty to increase one's taxes unless there is a specific provision in the law that requires such payment. There is no rational reason why high wealth individuals and corporations should be better citizens than the rest of the population. The greater ability to pay is reflected in the higher marginal tax rates of individuals and in the case of companies any increase in profits is generally met by an increase in more taxes being paid. Where profits are distributed by way of dividend the revenue taxes the individual at that entities’ marginal tax rate with effectively no loss of income even if the company has a low effective tax rate.

Victoria Heard noted another criticism of this concept of paying a fair share of taxes. She noted that:

Milton Friedman voiced a number of objections to the idea of a corporation as an entity with responsibilities (Friedman 1970). The first objection is an economic criticism that states that the engagement of companies in philanthropic activities distorts allocative efficiency. He opined that a corporation’s only responsibility was to use shareholder’s funds in a profitable way. He only accepted that spending on socially responsible activities could be a company’s goal if it improved the company’s profits more than other ways of spending that money. His second point was: “How can it be ethical that a corporation should act first as an unpaid tax collector and then as an unaccountable benefactor?” In his opinion, it was up to publicly elected representatives to provide finance for public services and up to individuals to donate to charity. Finally he stated that companies cannot possess responsibilities – only individuals can do so. Companies are social constructs set up by the law and as such are unable to have responsibilities.[105]

The author suggests it follows the demands of the Commissioner to pay a fair share of taxes may well be in direct conflict with the obligations that directors have under the Corporations Act.

The comments of Lord Atkin albeit in a different context are apposite for the purposes of this discussion. He said in Proprietary Articles Trade Association v. A.G. for Canada that: [106]

Criminal law connotes only the quality of such acts or omissions as are prohibited under appropriate penal sanctions by authority of the State. The criminal quality of an act cannot be discovered by intuition; nor can it be discovered by reference to any standard but one: Is the act prohibited with penal consequences? Morality and criminality are far from coextensive; nor is the sphere of criminality necessarily part of a more extensive field covered by morality: unless the moral code necessarily disapproves all acts prohibited by the State, in which case the argument moves in a circle. It appears to their Lordships to be of little value to seek to confine crimes to a category of acts which by their very nature belong to the domain of `criminal jurisprudence'; for the domain of criminal jurisprudence can only be ascertained by examining what acts at any particular period are declared by the State to be crimes, and the only common nature they will be found to possess that they are prohibited by the State and that those who commit them are punished.

The liability and the method of calculation of taxes can only be determined by reference to the various taxing statutes. This view is reinforced by the judgment of Turner P (with whom Richmond and Macarthur JJ. gave a separate concurring judgment) in The Commissioner of Inland Revenue v. International Importing Ltd[107] where the following was said:

The approach enjoined upon Courts of construction by sec.5(j) of the Acts Interpretation Act 1924 is normally of little material assistance in the construction of revenue statutes. The ``object of the Act'' which the section designates as a key to questions of statutory construction is often only too clearly simply the collection of funds to swell the general revenues of the State; and Courts of construction have consistently declined to read implications into such statutes to catch a taxpayer, who in his business dealings has relied upon the text of the statute, by some extension of the wording accepting the notion of a moral duty to pay a ``proper'' amount of tax. The taxing provision is read as prescribing the tax for which its text plainly provides, no more and no less.

Other judgments, some of which are of the highest authority are to the same or similar effect.
In Re Fortex Pty. Limited[108]the following was said:
With some regret, I have had to reject Mr Burns' attractively put and tempting submission that I should not order inspection by taking into account the fact that the applicant is seeking only to exploit a totally artificially created unsavoury scheme to avoid paying ` “unnecessary” tax. Despite the lack of social morality involved, I find I cannot do so.

Justice Mason in delivering the judgment of the High Court in Cridland v FCT[109] said:

The decision in the Mullens Case and the passages from the judgments to which I have referred show that the principle which underlies the Keighery Case is not as narrow as the primary judge supposed it to be. It is not confined to cases in which the Act offers two alternative bases of taxation; it proceeds on the footing that the taxpayer is entitled to create a situation by entry into a transaction which will attract tax consequences for which the Act makes specific provision and that the validity of the transaction is not affected by s. 260 merely because the tax consequences which it attracts are advantageous to the taxpayer and he enters into the transaction deliberately with a view to gaining that advantage.

s. 260 is not a charging provision, as Lord Diplock has had occasion to note more recently in speaking for the Judicial Committee in Europa Oil (N.Z.) Ltd. v. Inland Revenue Commissioner (1976) 1 WLR 464, at p 475; (1976) 1 All ER 503, at p 511 .

From the decisions mentioned above (and there are many others) it is submitted that there is no basis for the proposition that a person, whether it be a company or any other entity, is obliged to pay a fair share of tax. This is the case irrespective of whether one states the concept means to act as a good corporate citizen or if the meaning is to preclude corporations adopting tax policies that have as their goal the limitation of a company’s tax obligations. Either the law provides for an obligation to pay a tax or it does not.

Perhaps the final word on this topic should be left to the Permanent Secretary for Tax and the Commissioner of Her Majesty’s Revenue and Customs, David Hartnett in a speech to the International Network for Tax Research where he said:

Government ministers in the UK have asserted that taxpayers should pay their fair share of taxes. Some people argue in reply that the only fair share can be what is required by law and that exploitation of schemes, loopholes and cross-border tax arrangements, for example, that work in law are all permissible in quantifying that fair share. But there is another approach – one that involves ultimate responsibility for a corporation’s taxes lying with its Board and being actively managed by that Board through a policy that is well understood throughout the business, and published so that it is also understood by stakeholders and customers.

In broad terms, corporates recognise tax as a cost to business and that paying more tax than is strictly due may breach legal duties and obligations to shareholders. But an increasing number of corporates see real worth in a positive working relationship with tax administrations and they value a good reputation with governments, their customers, employees and the public at large.[110]
This statement is at the very least an implied concession that the call for payment of a fair share of taxes is in fact a call for corporates to potentially pay more tax than the law provides.

There is no legal, moral or other obligation on any taxpayer to pay more tax than the law mandates. Either there is an obligation to pay or not. There is, in the author’s opinion, no such concept as a fair share of tax.

5. Conclusions

Even though there has not been a comprehensive review of directors obligations this article has shown, notwithstanding the limits of the review, that there are numerous and onerous obligations imposed on directors under the corporations’ law. Coupled to that the Commissioner from time to time calls upon corporate taxpayers to pay what is described as a “fair share of taxes.” This demand suggests the Commissioner requires corporate taxpayers to pay more tax than that mandated by law.

The author has shown that there cannot be payment of a fair share of taxes. Either the law provides for an obligation to pay tax in a particular amount or it does not. There is no basis for calling upon any taxpayer to pay more tax than the law provides. It is arguable the Commissioner may be exceeding the power granted to him under the various taxing acts when making such a demand.

[1] Extract from John L Thompson, A strategic perspective of entrepreneurship, International Journal of Entrepreneurial Behaviour & Research, 1999, Vol 5 No 6 pages 279-296 accessed 24 January 2010.

[2] The OECD in its Seoul declalration of 2006 agreed that a method of enforcing tax laws are to use corporate governance tools. This is probably one of the reasons why the Commissioner places great reliance on corporate governance in his demands on large corporate taxpayers.

[3] This review is limited to specific provsions of the Corprations Act 2001 (Cth).

[4] See for example section 8 Income Tax Assessment Act 1936 that provides that the Commissioner shall have the general administration of that act.

[5] See for example Practice Statement Law Administration PS LA 2009/4 Escalating a proposal requiring the exercise of the Commissioner's powers of general administration and Inland Revenue Commissioners v. National Federation of Self-employed & Small Businesses Ltd [1981] UKHL 2; [1982] AC 617.

[6] Brown v Commissioner of Taxation [1999] FCA 563 per Hill J at paragraph 51.

[7] The length of the paper precludes a comprehensive review of the obligations of directors.

[8] Examples of such cases include:

Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL [1968] HCA 37; (1968) 121 CLR 483;

Smith Kline & French Laboratories Ltd v Inter-Continental Pharmaceuticals (Australia) Pty Ltd [1969] HCA 34; (1969) 123 CLR 514; and
Kalls Enterprises Pty Ltd (In Liquidation) & Ors v Baloglow & Anor [2007] NSWCA 191.

[9] See for example section 181 (1) of the Corporations Act.

[10] Pilmer v The Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165, 178 – 179 per McHugh, Gummow, Hayne and Callinan JJ.

[11] Australian Securities & Investment s Commission v Maxwell & Ors (2006) 24 ACLC 1,308 per Brereton J.

[12] Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 9) [2008] WASC 239. The extract cited is lengthy but seems to encapsulate what is meant by ‘the interests of the company.’

[13] BCE Inc. and Bell Canada v. A Group of 1976 Debentureholders [2008] 3 S.C.R. 560; [2008] 3 R.C.S. 560.

[14] There are also various theories about the conflicting interests within the company which are beyond the scope of this research. See for example McCahery J, Picciotto S and Scott C (Editors) Corporate Control and Accountability: Changing Structures and the Dynamics of Regulation1993, Claredon press, Oxford.
[15] RP Austin, HAJ Ford and IM Ramsay, Company Directors: Principles of Law and Corporate Governance (LexisNexis Butterworths, 2005) at page 57.

[16] Bratton W Jr., Public Values, Private Business and US Corporate Fiduciary Law in McCahery J, Picciotto S and Scott C (Editors) Corporate Control and Accountability: Changing Structures and the Dynamics of Regulation1993, Claredon press, Oxford.

[17] Cited in RP Austin, HAJ Ford and IM Ramsay, Company Directors: Principles of Law and Corporate Governance (LexisNexis Butterworths, 2005) at page 50,51.

[18] See for example section 180 (2) of the Corporations Act.

[19] See Austin RP, Ford H A J and Ramsay I M, Company Directors: Principles of law and Corporate Governance LexisNexis Butterworths, Australia 2005 at paragraph 1.4 and 1.42 and the authorities cited at page 50..

[20] Section 254T Corporations Act.

[21] Section 180 (1) of the Corporations Act provides that directors must exercise their powers and discharge their duties with care and diligence.
[22] The author suggests it is arguable that directors may in fact be legally obliged to ensure that company’s’ they manage do not pay more tax than the law provides as part of their duty of care and good faith.
[23] See for example Andrew Keay The Director’s Duty To Take Into Account The Interests Of Company Creditors: When Is It Triggered? [2001] MelbULawRw 11; (2001) 25 Melbourne University Law Review 315 for a discussion on this issue.
[24] The rule in Foss v Harbottle [1843] EngR 478; (1843) 2 Hare 461 states that only the company can take legal action to enforce the directors' duties. Pt 2F.1A of the Corporations Act has given shareholders and others the right to sue in a derivative action. The Corporations Act in some cases does give creditors a limited right of recourse.

[25] Daniels Ors( formerly practicing as Deloitte Haskin &Sells) v Anderson & Ors; Hooke v Daniels & Ors(Formerly(formerly practicing as Deloitte Haskin &Sells); Daniel & Ors ((formerly practicing as Deloitte Haskin &Sells v AWA Ltd (1995) 13 ACLC 614 at 664, 665.

[26]Tadgell J in Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at page 197 said:

The Code does not in terms distinguish between executive and non-executive directors, or between paid and honorary directors. Again, the obligations cast by the Code on companies having the benefit of limited liability are in general applicable alike to companies not for profit and profit-making companies. There is nothing in the Code to suggest that the standard to be expected of a part-time non-executive director of a company not for profit is different from the standard expected of any other director of a profit-making company.

[27] The business judgment rule provides that directors will not breach the care and diligence rule if they make the judgment in good faith for a proper purpose; do not have a material personal interest in the subject matter of the judgment; and inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and rationally believe that the judgment is in the best interests of the corporation.
[28] Review of Sanctions for Breaches of Corporate Law, (2007) The Treasury, Canberra Australia stated at paragraph 1.22, 1.23:

The Corporations Act imposes a range of general and specific obligations on directors and other company officers. The main aim of these provisions is to ensure that directors and other company officers are loyal to, and act in the interest of, the company.
[29] Cullen v. Corporate Affairs Commission (1989) 7 ACLC 121;pf=;cs=default;ts=default;pt=594647?DwebQuery=cullen&DwebInside=ALL accessed 26 January 2009.
[30] Jeffrey Owens in a speech to the Tax Executives Institute Conference held in Washington D.C., on 19 March 2007. The views of Owens described here suggest an amoral approach to the collection and payment of taxes.
How tax-aggressive shareholders want the corporation to be has to be conveyed to the managers who make such decisions. One is often faced with an assumption that the firm owner makes the tax reporting decision without delegating decision-making responsibility. Although this assumption makes sense for small, closely-held businesses, in a large, publicly-held corporation decisions about taxes (and accounting) are not made by the shareholders directly but rather by their agents, the directors. In order to align the incentives of the decision-makers with the interests of the shareholders, the shareholders should give directions as to the tax policy to be followed and tie the decision-makers’ compensation, explicitly or implicitly, to observable outcomes such as the average effective tax rate or after-tax profitability that affect the share price.

[31] It is beyond the scope of this paper to consider the distinction, if any, between tax minimisation, tax avoidance and tax evasion.

[32] N Sartori, Effect of strategic tax behaviours on corproate governance, accessed 11 January 2009.

[33] An aggressive tax policy means seeking to limit ones tax obligations as far as the law will allow.

[34] Bersten M, Managing risks in a tax audit-the tax man cometh paper delivered to the 45th Victorian State Convention of the Taxation Institute of Australia, 6 October 2006, Cumberland Lorne Resort, Victoria, Australia.

[35] Ibid. As will appear from section 2.2.4 below this view is not of universal application.

[36] See n 32 above.
[37] E.I.Du Pont De Nemours and Company v. The United States 221 Ct. Cl. 333; 608 F.2d 445; 1979 U.S. Ct. Cl. LEXIS 277; 79-2 U.S. Tax Cas. (CCH) P9633; 44 A.F.T.R.2d (RIA) 5906.

[38] Joel Slemrod The economics of corporate selfishness 2004 Working Paper 10858 National Bureau of Economic Research accessed 12 January 2009.
[39] Sections 674 and 675 Corporations Act. The Australian Securities Exchange (ASX) must be immediately advised of this information: ASX listing ruling 3.1.

[40] Although it was not necessary for the court to make a finding on this point, in Australian Securities & Investments Commission v Citrofresh International Ltd (ACN 064 551 426) [2007] FCA 1873 it was submitted by counsel for ASIC that a breach of the continuous disclosure requirements constituted a breach of the duty of care and diligence referred to above.

[41] The fact of the disclosure is akin to an invitation to the ATO to audit or review the transaction or company.

[42] See section 2.2.4 below.

[43] ASX listing rule 3.1.
[44] Joel Slemrod The economics of corporate selfishness 2004 Working Paper 10858 National Bureau of Economic Research accessed 12 January 2009. The studies include:
Department of the Treasury. The Problem of Corporate Tax Shelters: Discussion, Analysis, and Legislative Proposals, July, 1999;
Desai, Mihir. The Divergence between Book Income and Tax Income. In Tax Policy and the Economy, Volume 17, edited by James M. Poterba: 169-206. Cambridge: NBER and MIT Press, 2003; and
Manzon, G., Jr. and George Plesko. The Relation between Financial and Tax Reporting Measures of Income. Tax Law Review 55 No. 2 (2001): 175-214.

[45]Thor Power Tool Company v Commissioner of Internal Revenue [1979] USSC 16; 439 U.S. 522 at 24 June 2009.

[46] Paper delivered to 15th Australasian Tax Teachers Association Conference by Michael D’Ascenzo, Second Commissioner, Australian Taxation Office and Andrew England, Assistant Commissioner, Australian Taxation Office, University of Wollongong 31 January 2003 The Tax and Accounting Interface.

[47] Coles Myer Finance Ltd v Federal Commissioner of Taxation (Cth) [1993] HCA 29; (1993) 176 CLR 640 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ at paragraph 36.
[48] See for example Commissioners for HM Revenue and Customs v William Grant & Sons Distillers Ltd [2007] UKHL 15, [2007] SC (HL) 105.

[49] Section 296 of the Corporations Act.

[50] Section 297 of the Corporations Act. Section 295(3) (c) of the Corporations Act requires information not contained in the financial statements to be recorded in notes to them where necessary to give a true and fair view of the company’s affairs.

[51] Accounting Standard AASB 1031 paragraph 9.

[52] The issue of materiality is inextricably linked to the topic of continuus disclosure considered in section 2.2.3 above.
[53] In relation to the same series of suspect NZ financial structures the Commonwealth Bank of Australia Ltd in its 2007 annual report said:

Certain subsidiaries of the Bank in New Zealand are being audited by the Inland Revenue Department (IRD) as part of an industry-wide review of structured finance transactions. Assessments have been received from the IRD in respect of two structured finance investments in relation to the 2001 and 2002 financial years. Notices of Proposed Adjustment have been received for other similar investments for later years. The Group is confident that the tax treatment it has adopted for these investments is correct, and any assessments received will be disputed.
Again the amount in dispute was in the hundreds of millions of NZ dollars.

[54] Australia follows the recommendations of the Board if implemented as policy.

[55] See extracts from the National Australia Bank Ltd financial statements above as an example of where this latter approach would presumably apply. It is certainly not the function of a taxpayer to second guess the Commissioner and assume a challenge when on the information available to it no challenge would be forthcoming.

[56] Issues such as an implied waiver of legal professional privilge are beyond the scope of this paper.

[57] GAAP Alert No.18/2009 issued by Colin Parker.

[58] It is interesting to note that an article by Lynnley Browning in the Australian Financial Review of 28 January 2010, No shelter from tax now, page 15 noted that in the USA the IRS said it would require large companies to reveal basic information about their tax transactions. In addition companies with a turnover of $10 million or more that were required to to file broader disclosures with the Securities and Exchange Commissionen would be required each year to provide the IRS with information about tax transactions that might be challenged by the agency. The article continued that the IRS ruling piggybacks on a Financial Accounting and Standards Board regulation known as Fin 48 that requires such companies to disclose what their total tax bill might be if the IRS were to challenge any of their transactions. They wer also to provide short summaries of these transactions even if the transactions were not now deemed to be illegal by the IRS. This appears to be the reason for the exposure draft by the IASB and mentioned in section 2.2.4 of this article which appears to be in similar terms to the American requirements.
[59] Cynthia Coleman and Lynne Freeman, Cultural foundations of taxpayer attitudes to voluntary compliance, (1997) 13 Australian Tax Forum at 311 at 312.
[60] This was confirmed by the Commissioner in 2003 when he said:

Around 75% of individuals use tax agents to prepare their tax returns. More than 95% of businesses similarly use a tax agent to lodge their returns. Tax agents also play an important role in providing advice to businesses.
Managing compliance Address to The Sydney Institute 18 August 2003
[61] C John Taylor, Beyond 4000 - A Report on Measures to Combat rising Compliance Costs Through Reducing Tax Law Complexity, Taxation Institute of Australia, Sydney, 2006.
[62] Richard Krever Taming Complexity in Australian Income Tax [2003] SydLawRw 22; (2003) 25 Sydney Law Review 467.
[63] Effective Revenue Administration Address to the Australia-Israel Chamber of Commerce 13 November 2002 – Sydney.
[64] See for example Mark Burton Responsive Regulation and the Uncertainty of Tax Law – Time to Reconsider the Commissioner’s Model of Cooperative Compliance? eJournal of Tax Research (2007) vol. 5, no. 1, pp. 71-104.
[65] A J Myers QC Tax Advice: The Lawyer’s Ethical Responsibility (1990) 6 Australian Tax Review June 1990, page 83-84.

[66] Strategic Tax – managing tax in the boardroom, published by KPMG UK, a member firm of KPMG LLP, 2005
[67] John Braithwaite Rules and Principles: A Theory of Legal Certainty accessed 18 February 2009
[68] A tax effective transaction does not mean that the safe harbours created by the scheme defeats the law’s purpose. If effective for tax purposes it complies with the law.

[69] Catriona Lavermicocca in a paper presented to the 2010 Australasian Tax Teachers Association held at UNSW, Sydney entitled Understanding the demand for information concerning tax risks – The views of tax executives from large Australian companie. These are the results of a small survey of 7 companies pending a larger survey to be conducted for purposes of her PhD.
[70] See David Williams in a discussion paper prepared by him in 2007 for the KPMG Business School.

[71] Vestey v Inland Revenue Commissioners (Nos 1 and 2) [1980] AC 1148, [1979] 3 WLR 915, 54 TC 503 at 26 May 2009.
[72] See David Williams in a discussion paper prepared by him in 2007 for the KPMG Business School. By giving evidence of advice obtained care must be taken to ensure that legal professional privilege is not waived either expressly or by implication.
[73] John Braithwaite, Through the Eyes of the Advisers: A Fresh Look at High Wealth Individuals in Taxing Democracy (2002) Edited by Valerie Braithwaite, Ashgate Publishing Ltd Aldershot England at page 272.
[74] This comment is of equal application to corporations whether large or small.

[75] See section 4 below.
[76] John Braithwaite Through the Eyes of the Advisers: A Fresh Look at High Wealth Individuals in Taxing Democracy (2002) Edited by Valerie Braithwaite, Ashgate Publishing Ltd Aldershot England at page 274.
[77] Doreen McBarnet Legitimate Rackets: Tax Evasion, Tax Avoidance, and the Boundaries of Legality, The Journal of Human Justice, Vol 3, and (page 57-74) No. 2 Spring 1992.

[78] See n 73 and 74 above.

[79] Taxation in Australia, Volume 28 No 8 March 1994 at page 431.
[80] A J Myers QC Tax Advice: The Lawyer’s Ethical Responsibility (1990) 6 Australian Tax Review June 1990, page 81.
[81] Managing compliance Michael Carmody Commissioner of Taxation, Address to The Tasmanian Chamber of Commerce and Industry 3 September 2003.

[82] The Code of Ethics for Professional Accountants is based on Code of Ethics for Professional Accountants (as published in the Handbook of International Auditing, Assurance, and Ethics pronouncements) of the International Ethics Standards Board for Accountants, published by the International Federation of Accountants (IFAC) and is used with permission of IFAC (Code of Ethics for Professional Accountants).

[83] Section 100.4 of Code of Ethics for Professional Accountants.

[84] Bersten M, Managing risks in a tax audit-the tax man cometh paper delivered to the 45th Victorian State Convention of the Taxation Institute of Australia, 6 October 2006, Cumberland Lorne Resort, Victoria, Australia, page 46.

[85] Sections 14 ZZK and 14 ZZO Taxation Administration Act 1953 (Cth). An example of how important proper documentation is appears from the decison of Edmonds J in Epov v Commissioner of Taxation [2007] FCA 34. He said:

However, no documentary evidence in support of these assertions – orders, title documents, invoices, statements of account, bank statements or otherwise – was forthcoming, other than for the period 19 March to 14 May 1996. And there was no evidence to relate the payment in question to any of the purchases during this period... However, the failure of the applicant to adduce any evidence – apart from bold assertions by the applicant in the witness box – as to what the ACBB payments to New Asia were for, make it impossible to be satisfied that they were not for the individual benefit of the applicant, with New Asia being nothing more than the applicant’s collection vehicle. If the applicant had adduced evidence which enabled one to be satisfied that the ACBB payments were for stock-in-trade as asserted by the applicant, this lack of satisfaction may not have arisen.

[86] Michael Carmody Commissioner of Taxation Managing Compliance Address to The Tasmanian Chamber of Commerce and Industry 3 September 2003
[87] There are numerous other statements, where the Commissioner requires taxpayers to pay their fair share of tax. This is not the same as paying no more tax than the law provides. The Commissioner pays lip service to this principle but the reality is different.
[88] Gregory v. Helvering, Commissioner of Internal Revenue [1935] USSC 5; 69 F.2d 809, 1934 U.S. Tax Cas. (CCH) P9180.
[89] Michael H Boulware v United States 128 S. Ct. 1168; 170 L. Ed. 2d 34; 2008 U.S. LEXIS 2356; 76 U.S.L.W. 4119; 2008-1 U.S. Tax Cas. (CCH) P50, 206; 101 A.F.T.R.2d (RIA) 1065; 21 Fla. L. Weekly Fed. S 102.
[90] KPMG LLP in Tax in the Boardroom point out that:

The emergence of pressure groups such as the Tax Justice Network in the U.K. is further evidence of the higher profile of tax on the wider business stage. Tax management has been the target of some emotional and, arguably, inaccurate comment in an increasingly heated debate about whether corporations are paying their ‘fair share’ of taxes. The main point is not that the accusations are often unjustified, but the fact they are made at all. Tax has news value now and, although often unfounded, ‘naming and shaming’ attacks on alleged tax avoiders can damage their reputations in the eyes of important stakeholders, which can lead to sharp short-term share price falls and the unwelcome attention of more than one taxing authority.
[91] The State of Play Five Years On Address to Taxation Institute of Australia Victorian Division 3 February 1998 Michael Carmody Commissioner of Taxation.
[92] Why we need to govern well Speech by Michael D’Ascenzo, Commissioner of Taxation, to the International CFO Forum – Sydney Australia, 19 October 2006.
[93] Examples are:
Consultation, collaboration and co-design: The way forward for the tax office Commissioner’s address to Australian Public Service Commission SES Breakfast - Boathouse by the Lake, Canberra 21 September 2006;
Opening statement Commissioner of Taxation JCPAA Biannual hearing Friday 20 April 2007 Melbourne; and
The tax office-consulting with business centering on excellence speech presented by Michael D'Ascenzo, Chief Tax Counsel, to Australian Society of CPAs at the Hilton Hotel, Sydney, on the 24 March 1995.
The last example was given simply to show that the demand for a fair share of tax is not a new concept to the ATO.

[94] This survey was cited by Victoria Heard in a paper presented tho the KPMG Business School entitled The Philosophy of Tax. In Australia , in addition to income tax companies pay such taxes as GST, payroll tax, stamp duty and land tax.
[95] Address by Michael Carmody Commissioner of Taxation Australian Institute of Company Directors Perth, 1 May 2001 Taxation, current issues and future directions.

[96] Speech by the Commissioner of Taxation to the International CFO Forum, the Mint, Sydney, 20 November 2009 International CFO Forum Eyes on nthe Commercial ball.

[97] Henderson Global Investors, Tax risk and corporate governance, reporting on a survey made of 350 companies quoted on the London Stock Exchange
[98] Avi-Yonah R, Corporate Social Responsibility and Strategic Tax Behavior, John M Olin Center for Law and Economics, Working Paper No. 06-08 at 31 July 2009

[99]R v Barger [1908] HCA 43; (1908) 6 CLR 41 accessed 25 February 2009.

[100] Robert B Reich, Corporate accountability and regulatory reform, 8 Hofstra L. Rev. 34 (1979-1980) 5.
[101] The tax function, facing up to the changing world, KPMG LLP (UK) November 2006.
[102] accessed 12 February 2009.

[103] accessed 10 March 2009.
[104] Some may argue that maintaining good relations with the ATO is such a gain.

[105] This paragraph is an extract from the paper by Victoria Heard and cited in n 94 above.

[106] Proprietary Articles Trade Association v. A.G. for Canada (1931) A.C at 323 -324.

[107] The Commissioner of Inland Revenue v. International Importing Ltd 72 ATC 6033 at 6034

[108] Re Fortex Pty. Limited 86 ATC 4351 at 4358 per Enderby J.

[109] Cridland v FCT [1977] HCA 61; (1977) 140 CLR 330 at paragraphs 14, 17 and 20. Section 260 is the predecessor to the current GAAR provisions in the ITAA 36.

[110] Speech entitled Tax and Corporate Governance by the Permanent Secretary for Tax and the Commissioner of Her Majesty’s Revenue and Customs, David Hartnett to International network for tax research 8/9 December 2006-.

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