Lazarus Rising

I admired the way in which he had stood up for due process at the time of the Khemlani Affair, in the Whitlam years. He was tough and cunning and a firm believer in the independent sanctity, if I can put it that way, of the federal bureaucracy and most particularly the Treasury. His minutes were succinctly and strongly written. For all that he no doubt had the view that Treasurers came and went but the Treasury went on forever, I always thought he would give me advice that he believed was in the national interest. He was also a heavy smoker, and that suited me at the time because I was still addicted to the habit.

John Stone, who took over from Wheeler in 1979, was the brightest public servant with whom I ever dealt. That did not automatically make him the best, because, on occasions, his judgements did not match the purity of his intellectual arguments. He nevertheless held resolutely to all of the conclusions that he reached, and was quite uncompromising in the advice which he offered to his minister. Some ministers were nervous when I proposed appointing Stone head of Treasury, because they thought he was too doctrinaire in his economic thinking. My attitude was that people should be appointed to senior public service positions on merit. Passing over Stone would have been to deny that fundamental principle.

Early in April 1979, not long after Stone had been appointed secretary, Fraser asked Stone if he would prepare a memorandum of advice for an incoming Conservative Government in Britain, as to what should be done to fix their ailing economy. Fraser wanted to give it to Lord Peter Carrington, who was to see Fraser in Canberra. He was an old friend of Australia, and became Thatcher’s first Foreign Secretary, staying in the post until the Falklands War.

Thirty years on, the Stone memo makes fascinating reading. For example, he wrote, ‘Meanwhile union power has become a threat not merely to economic stability, but to civil liberties and the very concept of the rule of law upon which the British society has been founded and of which it has been for so long such a notable exemplar.’

(#litres_trial_promo) The full memo appears as an appendix to this book.

Thatcher visited Canberra, very briefly, not long after her election in May 1979. She had been at a G7 meeting in Tokyo and came to Australia, ostensibly to discuss the situation in Rhodesia in advance of the Commonwealth Heads of Government (CHOGM) meeting in Lusaka. During her brief visit Mrs Thatcher attended a cabinet meeting, giving an uncompromising outline of what she intended to do in her own country. After she had left, quite a number of my colleagues were rather sceptical about some of her intentions, asserting that she was unrealistic. They had underestimated her.

I had badly needed expert advice on economic issues during the election campaign, as the Treasury had to maintain a certain distance during the caretaker period embracing the campaign.

This is when I met John Hewson. Already a professor of economics although only in his early 30s, John Hewson had had an impressive career at the Reserve Bank and the International Monetary Fund (IMF). He had joined Phillip Lynch’s staff on a part-time basis, and worked closely with another economics professor, John Rose, who worked, also on a part-time basis, in Fraser’s office. They were a real tandem. They provided joint advice to the Prime Minister and the Treasurer, especially on monetary policy issues. I liked John a lot. He gave good advice on most economic issues and was taken by the political atmosphere. In the changeover from Lynch to me, he had glided almost effortlessly from one office to the other.

Tension would develop between the senior people in the department and John early on. The top officials in the Treasury resented the degree to which both Fraser and I listened to private office advisors.

At this time the relationship between the minister, his private office advisors and his department was undergoing significant change. Ten years earlier, somebody like John Hewson would not have existed in the Australian political system. All of the principal policy advisors in a minister’s office came from the relevant department. If non-departmental advice were taken, it was overtly taken from someone who was not on the minister’s staff.

My five years as federal Treasurer were to change profoundly my opinions on many aspects of managing the Australian economy. When I became Treasurer I was unaware of the extent to which the Australian financial system was in need of deregulation, and although generally aware of the negative impact of across-the-board wage rises granted by the Conciliation and Arbitration Commission, I did not see the issue as one requiring freeing of the labour market. Rather I adhered to the conventional view at the time that the commission should be encouraged to deliver different wage judgements. I did not then realise that fundamental change to the system was required.

I believed that the Whitlam Government had spent far too much and that a big part of my responsibility as Treasurer was to reduce the rate of growth in government spending. I also thought the Australian taxation system needed to be reformed. However, I underestimated the enormity of the task involved in bringing about change in that area.

I was to have successes and failures. In 1978 the idea I floated of introducing a retail turnover tax collapsed, as a policy initiative, fairly quickly after an onslaught from Australian retailers and some very unhelpful comments from one of my colleagues, Bob Ellicott. He used the platform of a Sunday evening address at the Wayside Chapel in Sydney to say that the Government should abandon the whole idea because it was causing disquiet in sections of the business community. Although I had been right, in a pure policy sense, to raise the issue, I had been extremely naïve in the way in which I had gone about it. As I learned from that, you need time to build the case for change by explaining, in detail, the shortcomings of the existing system.

* * *

Decisions and promises from the first term of the Fraser Government preoccupied my early months as Treasurer. Treasury told me, shortly after the election, that the 1977 budget revenue estimates would not be realised. This was due to the average weekly earnings issue, already mentioned, as well as early predictions of expenditure over-runs. So from the beginning of 1978, it became increasingly apparent that my first budget would be extremely difficult. Australia still had a large budget deficit, although Lynch had made an impact on this in his first two budgets, and inflation, despite having fallen, was still quite high. Very unpopular decisions would be required if a significant reduction in the budget deficit were to be achieved.

Then there were the interest-rate predictions made by both Malcolm Fraser and Doug Anthony during the election campaign. Interest rates in Australia at that time were high, and financial institutions within the traditional banking sector were still tightly regulated. Fraser and Anthony predicted during the campaign that interest rates would fall by 2 per cent during the next term of office. Fraser said in the campaign, ‘Falls in important interest rates could add up to a total of 2 per cent within 12 months.’ Doug Anthony said that if interest rates did not fall by 2 per cent he would eat his hat. The statements were not only wildly optimistic, but also politically unnecessary.

At that time, bank lending and borrowing rates were subject to controls administered by the Reserve Bank. All savings bank housing loans and overdraft or business loans under $100,000 were caught by the controls. But the Government effectively decided those rates because, in administering the controls, the Reserve Bank normally reflected the views of the Monetary Policy Committee of cabinet. That committee met regularly, was chaired by Fraser, and as well as me as Treasurer, included Doug Anthony, Ian Sinclair and Peter Nixon plus Phillip Lynch and Reg Withers. The secretary of the Treasury and the Reserve Bank governor normally attended its meetings.

Thirty years on, this may sound an interventionist system, but it was not until the election of my Government in 1996 that the bank was given full independence to set interest rates. Although there was some early success on the interest-rate front in 1978, with a small reduction, there was never any hope that that 2 per cent prediction could be realised. Increasingly, monetary conditions ran in the opposite direction.

From the beginning, the interest-rate issue caused a lot of tension between the PM, the RBA and me. Fraser felt that the bank was dragging its feet on cutting rates. This was nonsense. He should never have made such a specific prediction in the campaign. I was caught in the middle. The Monetary Policy Committee once talked about invoking section 11 of the Banking Act, which enables the Government to direct a monetary policy move by the bank, provided the reasons for the direction and the RBA’s contrary view are tabled in parliament. I thought that such a move would be extremely damaging for the Government, because on the economic merits there was no justification for a further cut in interest rates. As part of the debate with the bank, I was asked by the Monetary Policy Committee to meet the RBA board and argue the case for a rate reduction. I felt uncomfortable carrying this brief, and simply went through the motions. Quite justifiably, the RBA did not shift. My discomfort was increased by the presence, as an RBA board member, of Bob Hawke. Fortunately, my senior colleagues thought better of invoking section 11.

Within a few months of becoming Treasurer, it was clear to me that far from interest-rate controls keeping interest rates low, they were having the opposite effect. Banks could not attract enough money to lend for housing because the controls to which they were subject prevented them from offering sufficiently attractive interest rates to attract funds in the first place. Increasingly, as time went by, the solution seemed to me to be the removal of those controls.

The winter of 1978 was consumed with preparing the budget, and I knew it would be extremely unpopular. The expenditure-cutting process was made even more difficult because Eric Robinson, the Finance Minister, was sidelined because of a Royal Commission. I carried both portfolios. It was a lonely exercise. Any euphoria about being the youngest Treasurer had gone. I was determined to cut the deficit, but at every turn I met solid resistance from colleagues defending their patches. There would be no last-minute revenue surge to relieve the pain. The early forecasts were that, for the first time in 20 years, the Government faced a reduction of revenue receipts in real terms.

The main purpose of the budget, delivered in August 1978, was to cut the deficit, preferably through spending cuts, although some tax increases were needed to achieve the desired result. There was a temporary income-tax surcharge, steep increases in excise duties on spirits and cigarettes, taxation for the first time of certain lump-sum payments, the introduction of an airport departure tax, the elimination of home-loan interest deductibility (which had only been re-introduced by the Fraser Government in 1976), and the tightening of conditions relating to estimating provisional tax.

The big long-term policy announcement in the budget was that Australian crude oil would, in future, be sold domestically at the higher world market price. It was not popular because it pushed up the petrol price by 3.5 cents a litre, but it was good policy. It priced a wasting resource at its market value — surely sound conservation policy. The price increase for crude oil meant that, overnight, oil companies would potentially enjoy a windfall profit gain, so the Government increased the production levy imposed on oil companies to the level necessary to ensure that all of the windfall gain went to the Treasury as revenue, and not to the companies.

The budget was seen as mean and nasty, although some grudging commentary indicated that the Government was at least trying to hold onto its economic fundamentals. The problem was that it was the kind of budget that should have been introduced (with some modifications) in 1976, not two years later. The public thought that the Government was taking back things which should never have been given in the 1977 budget.

Malcolm Fraser was very unhappy about having to take back any of the personal income tax cuts. He had been the real author of them in the 1977 budget. The initial decisions we had taken for the 1978 budget did not include the temporary income tax surcharge. Fraser had wanted a range of increases in indirect taxation, so as to preserve the 1977 tax reductions. At the last moment I persuaded him that we should substitute an income tax surcharge, as the indirect tax increases would have a very negative impact on the consumer price index, thus blunting the impact of our ‘fight inflation first’ strategy.

Thirty years later, reading through the budget speech of 1978, I was struck by how big an emphasis I placed on the wage-fixing decisions of the Conciliation and Arbitration Commission. It was a reminder of the distance Australia had travelled concerning industrial relations — until Julia Gillard’s Fair Work Act reversed much of the progress of the past 25 years — and how all-pervasive, and therefore inimical, a centralised wage-fixation system had been for the Australian economy.

Nasty and unpopular though it was, the 1978 budget did lay the foundation for the next two budgets and was, therefore, important in setting up our economic credentials for the 1980 election. If delivering an unpopular budget is a measure of economic responsibility, then this had been a most responsible budget. Later, whenever I heard Kevin Rudd boast about all the ‘tough’ economic decisions he had taken, I rolled my eyes and thought of my first budget, more than 30 years ago.

In his 1977 budget speech, Phillip Lynch gave a general warning that he would ‘crack down hard’ on artificial tax avoidance schemes. In April 1978 I was informed by the Commissioner of Taxation, Bill O’Reilly, that a particular tax avoidance scheme, called the Curran Scheme, was eroding revenue conservatively to the tune of $400 to $500 million a year, with some estimates putting the revenue loss well over $1 billion; O’Reilly recommended that the Government take immediate action to proscribe it.

Cabinet authorised me to outlaw the scheme with effect from budget night 1977. Thus began my long and often very bitter campaign against the tax-avoidance industry, which lasted whilst ever I was Treasurer. At times it poisoned my relations with a large section of the WA Liberal Party; some of its major donors had been involved in tax-avoidance schemes. Some of my anti-tax avoidance activities helped fuel the Joh for PM campaign.

Banning the Curran Scheme caused some anguish amongst Coalition MPs because, strictly speaking, it did have retrospective effect. Many in the Liberal Party held to the purist line that, irrespective of the revenue at stake, the principle of non-retrospectivity should never be violated. Others argued that there was a clear difference between reaching backwards to prevent people from avoiding an obligation parliament had always intended to impose on them as compared with imposing, with retroactive effect, a completely new obligation, previously not intended.

Price, Waterhouse & Co., one of Australia’s leading firms of accountants, wrote to me, strongly supporting the stand I had taken. This reflected the fact that many reputable legal and accounting firms did not wish to advise their clients to go into artificial schemes, but as time went by, with no action being taken against those schemes, that position became increasingly difficult to sustain. There were always others in the two professions willing and eager to gain new clientele by advising how taxation obligations could be artificially avoided.

I enjoyed working with the commissioner and his senior people, who had their own distinctive style. On tax avoidance, I found them quite demoralised, and I understood why. Much as I admired the late Sir Garfield Barwick, there was little doubt that the Barwick High Court, in applying a very literal interpretation to the taxation laws, had rendered the general anti-avoidance section of the Taxation Act, namely section 260, largely inoperative.

That section had been in the Tax Act for decades, and stated that if an arrangement were entered into by a taxpayer with the purpose of avoiding taxation, then to the extent of that avoidance, the arrangement was void against the commissioner. For a long time the section had been applied effectively to protect the revenue against blatant and artificial schemes, but from the late 1960s and into the ‘70s, however, the High Court began applying the section differently. By the time of Cridland’s case, decided on 30 November 1977, it was the view of Bill O’Reilly and his colleagues that section 260 was useless.

My response was to instruct the Tax Office to draft a new anti-avoidance section to replace (or update) section 260. The commissioner and his colleagues thought this a waste of time, telling me that no matter what parliament said, the courts would find a way of watering it down in favour of the taxpayer. I persevered and ultimately a new anti-avoidance section, known as part IVA of the Income Tax Assessment Act, was introduced, coming into operation in May 1981. Part IVA has worked very effectively. According to the commissioner, it put a stop to new tax-avoidance schemes of a totally contrived nature.

The controversy following my axing of the Curran Scheme was as nothing to the conflagration which occurred almost five years later when the Government enacted tax recoupment legislation to collect the proceeds of tax evaded through the use of bottom-of-the-harbour schemes. The bottom-of-the-harbour scheme involved a practice which effectively denuded a company of any assets, meaning it was unable to meet its tax obligations. It was different from an artificial tax-avoidance scheme, where the arrangement was such that there was no legal obligation to pay the tax. With bottom-of-the-harbour schemes the legal obligation remained, but the company had no assets with which to meet the obligation. The disposal of the company’s assets was a fraud on the revenue because its only purpose was the evasion of the tax. Why ‘bottom of the harbour'? In some cases disposal of the assets was accompanied, literally, by the records being thrown into Sydney Harbour.

The legal advice then was that, because fraud was involved, the scheme could not be banished under existing law or a specific prohibition, as with Curran. The only remedy was to make the fraudulent disposal of assets a crime. This caused me to swallow hard. It was one thing to adopt a no-holds-barred approach to outlawing artificial tax schemes; it was entirely another to threaten people, for the first time, with the criminal law if they engaged in certain behaviour. A lot of citizens deplored tax minimisation, but even they may have baulked at making the minimisers criminals.

After a lot of agonising, I recommended to the Government that it use the criminal law to stamp out bottom-of-the-harbour schemes. The Crimes (Taxation Offences) Act came into operation early in December 1980 and ended the practice. I thought that I would hear little more of bottom-of-the-harbour schemes. I was, however, wrong, although it would be two years before this became apparent.

In September 1980, Malcolm Fraser and the Victorian Liberal Government had appointed Frank Costigan QC, a Melbourne lawyer, to conduct a Royal Commission into the activities of the Federated Ship Painters and Dockers Union. This group was notoriously linked to alleged criminal activity on the wharves and elsewhere. The aim was to expose any corrupt or illegal behaviour. But it also could embarrass, politically, the Labor Party, because of its associations with the union, especially in Victoria.

During his investigations, Costigan uncovered the involvement of some officials and affiliates of the union with people who had promoted bottom-of-the-harbour tax schemes. He included this material in his findings, which became a blockbuster report, and along with the separate McCabe/Lafranchi report, tabled in the Victorian Parliament, it ended up damaging the Fraser Government. Names, amounts and shady practices were detailed. This heightened public outrage. The Victorian report cited ‘very serious errors and omissions and resigned attitudes on the part of the Australian Taxation Office'.

(#litres_trial_promo) Both reports gave colourful and dramatic descriptions of what had gone on in some bottom-of-the-harbour activities.

Regrettably for the Government, the perception was that a vast amount of tax had been evaded before the criminal law had been invoked, and nothing had been done to recover it. The fact that the Government had taken steps to ensure that even more tax would not be evaded in the future made no impact on the public.

The issue was on our minds as we prepared the 1982 budget. With the country rapidly falling into recession, that budget was proving very difficult to put together. The Taxation Office and the Treasury urged the passage of special legislation to recover tax evaded under bottom-of-the-harbour schemes prior to the passage of the special criminal legislation in November 1980; so did Peter Durack, the Attorney General.

The attraction of collecting the tax to help with the budget, combined with the apparent value of quietening public concern regarding the evasion of so much taxation, proved an irresistible combination. On 25 July 1982 I announced that we would legislate.

This caused uproar in many sections of the Liberal Party and the business community, particularly in Western Australia and Queensland. Elsewhere, there was a lot of support for what the Government had decided to do. The gathering recession had slashed revenue forecasts and, as a consequence, collecting this unpaid tax would avoid some less palatable imposts on honest taxpayers.

The legislation, however, wreaked havoc on Coalition unity. No fewer than 14 members of the Liberal and National parties crossed the floor to vote against it.

The decision to enact the recoupment legislation did not kill the issue. Critics alleged that if the Government and the Taxation Office had not been negligent in the first place, this special legislation would not have been needed. This issue put me under great pressure from the Labor Party and the press. To defuse the situation I tabled in parliament all of the advice I had received from the Tax Office on the subject. It became known as the ‘telephone book’ because of the large number of documents involved.

There were rough patches for me, particularly some of the delays between Tax Office advice and action in response. The quite radical transparency I had adopted — the bureaucracy was horrified, so were a few of my ministerial colleagues — took a lot of steam out of Labor’s attack. In addition, the opposition then scored a spectacular own goal, which effectively took the heat off the Government.

At the time Hayden was under pressure, having just beaten off a challenge from Hawke. He overreached, in the hope of landing a leadership-boosting blow on the Government, with his allegations of tax avoidance against the respected businessman John Reid. Reid had been a director of a company subsequently sold in a bottom-of-the-harbour scheme. Foolishly, Hayden named him in the house on the strength only of a company search showing Reid as a director. At Reid’s request, the commissioner quickly looked at his affairs and was able to certify that he had not been involved in any improper conduct. This blew Hayden out of the water. He had gone too far.

Although it was no longer on the back foot, the Fraser Government had been hurt by the whole episode, because there was a lot of disunity and bad blood in our own ranks.

After all the drama I have described, Murray Gleeson QC, the clear leader of the bar, later Chief Justice of New South Wales and then Australia,