STAMP DUTIES (PARTNERSHIP INTERESTS) AMENDMENT BILL

Second Reading

Adjourned debate on second reading.

(Continued from 21 July 2010.)

The Hon. R.I. LUCAS (15:52): I rise to speak to the second reading of the stamp duties bill. In the earlier discussions on this bill and the briefings that the Liberal Party had, and as would have been evidenced by its rapid passage through the House of Assembly, we would have expected or anticipated that this might have been a relatively easy passage of legislation through the upper house.

At the outset, I say that this debate we are about to have, I think, is further testimony to the uniqueness and value of having a state upper house, a second chamber, to allow views to be put to the parliament which otherwise might not have been considered by the parliament. I think members ought to be reminded of that on occasions like this, that if it had not been for a second chamber this legislation would have passed without the opportunity for this parliament and chamber to consider some of what I will endeavour to do justice to—and I suspect I will not do it complete justice—namely, a comprehensive submission that we have now received from the Law Society of South Australia and the Law Council, representing a number of other groups, raising some significant questions on the legislation.

With that introduction, I apologise to members. I advise Hansard that the submission from which I read, and read quickly, is nicely typed, so I can provide a copy of it. I refer to this submission, which is dated 18 August 2010. When one looks at the debate in the House of Assembly, I am not sure of the time but it looks as though it might have taken all of four or five minutes. There was a second reading explanation from the minister and a speech from the Liberal shadow, on behalf of the Liberal Party, supporting it. There was no committee stage at all and the bill passed through all stages, as I said, in probably three or four minutes. Subsequent to the bill having passed the House of Assembly, we have received a copy of this submission dated 18 August 2010, signed by John Tucker, Rankine Tucker Lawyers, who is the chair of the Members in South Australia of the Taxation Committee of the Business Law Section of the Law Council of Australia, with a detailed 17-page submission, indicating that two other people, Bernie Walrut and Paul Ingram, have been involved in the preparation of the submission.

For those members who have followed these debates before, as soon as the name Bernie Walrut is mentioned I am sure bureaucrats' eyes glaze over, their ears are pinned back, the hackles rise on the back of the neck, and they know they are in for a discussion of the debate, because Mr Walrut has a formidable reputation over many years in terms of advising on tax law, nationally, but in particular in South Australia, and is respected, I think, by most in terms of his views on tax law. So if he has been involved in this submission, as I suspect he probably has been, then it is a warning sign to the state government and to Revenue SA that they ought to give proper consideration to the issues raised.

This was dated 18 August, sent to Graeme Jackson. It does say Commissioner of State Taxes, but I think Mr Jackson works within that unit. Then a copy of the letter was sent to Iain Evans, as the shadow treasurer. The letter had actually been sent to the Law Society, and Richard Mellows on 24 August, a week later, said, 'Thanks for the letter', and stated:

The bill is being considered by the society's Commerce, Corporate and Tax Committee and the society has endorsed the submission of the Law Council to Revenue SA, a copy of which is attached.

So the Law Society has looked at the Law Council's submission on the bill and has endorsed the Law Council's view on it. I do not propose to read all 17 pages of the submission into Hansard. Obviously the government and its advisers do have copies of it, but I do want to highlight a considerable number of the issues that the Law Council and the Law Society have raised about the legislation, and perhaps I can just read in its entirety the summary to indicate the significance of the views they are putting forward. Page 16 of the submission states:

82. The retrospectivity cannot be justified and the limited grounds put forward for it to be adopted are contradicted by the Commissioner's own Circular.

83. The creation of penal sanctions retrospectively is untenable.

84. Unlimited power to amend past assessments to give effect to untenable retrospective provisions compounds and completes a trilogy that makes a mockery of the rule of law.

85. The substantive provisions of proposed legislation are drawn in the most pervasive possible terms:

85.1 deeming partners to have an interest in assets that they do not have at law;

85.2 deeming dealing with interests to be made by persons who are partners even though they, under the terms upon which they are partners, have no interest in the surplus of partnership assets over liabilities nor possibly beyond a share of the income of the partnership;

85.3 deeming collectively held assets to be the asset of a person and thereby creating a curious concept of a collective member of a partnership and also potentially imposing double duty in any situation where an interest has been assigned in equity but not law, once upon the assignor, once upon the assignee;

85.4 deeming a basis of valuation for duty which is not reflective of market value but which requires the Commissioner to apply a formula to create some other, deemed, value which will potentially have no correlation to market value.

86. This is instead of just legislating to impose the Commissioner's losing argument in Cyril Henschke Pty Ltd v Commissioner of State Taxation or introducing the most onerous regime from among the existing legislation of other states.

87. Clearly the provisions are anti-business, will reflect very badly on any legislature that passes them, compromise those who are to administer them and ought not to be pursued or passed in their present form.

Other than that, I think they thought the legislation was all right! It is a fairly damning indictment of the legislation from the Law Society and the Law Council's view. It certainly challenges all that we have been told in relation to retrospectivity and its impact on business.

I propose, as I said, to highlight in detail some of the issues that are raised in the submission, but—and I accept this—I am sure that the government and Revenue SA in particular will disagree with a number of the elements of the submission. However, having read the submission, I would be surprised if Revenue SA can dismiss all elements of the submission that have been put now to members of the Legislative Council and the government.

There is reference in the first three pages of the submission to a number of Commissioner of Taxation circulars. I seek the response from the minister to provide these to members prior to the debate on this issue. I was going to suggest that, given that we are up for a week or so, the minister could provide them prior to the council having to debate this issue, because our party room, I am sure, will want to at least give further consideration to the government's response to some of the serious issues that have been raised by the Law Society and the Law Council.

Could the government provide copies of the Commissioner's Circular 191—Conveyances and Transactions Involving Partnership Interests, issued in August 1999, also, a copy of Commissioner's Circular 165, issued in March 1998 and the Commissioner's Circular 86, which was issued in October 1993? So, could members have copies of those circulars to assist them in consideration of this submission and also any response from the government?

I refer to page 4, point 17 of the submission firstly, under the heading of Retrospective Effect—Fundamental Proposition. There are a number of points there which I do not propose to read into Hansard, but point 17 I do:

The foregoing is further accentuated by the fact that Circular 191—

which is the most recent Commissioner's Circular—

confirms that if a partner retires from a partnership and receives nothing more than the partner's capital account and there is no goodwill, then there is no duty consequence. So simply stated a partner retiring and being paid out the partner's capital entitlement involves no duty consequence as confirmed by the Full Court of the South Australian Supreme Court in Cyril Henschke Pty Ltd v Commissioner of State Taxation. The relevant example from the Circular is as follows:

Some Examples

The following examples, while not exhaustive, illustrate the principles involved. All examples will relate to the following hypothetical partnership. The statement of affairs of a partnership just prior to the change in partnership interest is as follows:

A, B, C & Co

Assets $35

Liabilities $(10)

Net assets $25

Partnership Funds

Capital A $5

Capital B $10

Capital C $10

Total funds $25

The profits (capital and income) of A, B, C & Co are shared by A, B and C in the ratio 1:2:2...

3 Retirement of a Capital Partner

B retires by taking $10 from the partnership interest.

Scenario 1—The partnership has no goodwill.

Since the interests of A and C (the remaining partners in the partnership fund before/after retirement of B) remain the same, the amount on which duty will be levied is zero. However, a statement pursuant to Section 71E(3) is required to be lodged.

18. On the basis of that example the Bill is not retrospectively reinstating the Commissioner's practice but reversing it.

19. The foregoing clearly demonstrates that there has been no fixed view since 1993 let alone 1923 as to the appropriate treatment of dealings in partnership interests such as to justify retrospective legislation that seeks to impose a view that at most, in limited respects, has been the practice of the Commissioner since 1999.

20. Further parts of Circular 191 adopts the same view as adopted by the Full Court of the South Australian Supreme Court in Cyril Henschke Pty Ltd v Commissioner of State Taxation whilst other parts appear to adopt a view that is inconsistent. They appear to be the views now being espoused by the Commissioner as inconsistent and correct. Clearly, the Circular does not cover all aspects of partnership dealings, it does not reflect a shared view notwithstanding the level of consultation that preceded it. It has not always been applied consistently. The foregoing highlights that the views expressed in the Circular are confused and inconsistent.

Then, under the next heading 'Retrospective Effect & Reassessments—How Far', it states:

21. The provisions expressed to be retrospective but without limit. On one view it would therefore appear that they are retrospective to at least 1923, on the consolidation of the then Stamp Duties laws and the Stamp Duties Act 1923. It is possible that they are retrospective to some time prior to that but it is unclear how that will work without a close scrutiny of the various acts consolidated in 1923.

22. Section 1 of the Transitional Provisions permit the Commissioner to reassess duty with respect to any instrument or transaction created or entered into before the commencement of the proposed act.

23. Section 47 of the Taxation Administration Act 1996 provides for no time limitation on the right to recover taxes in this state. Section 16 of the Stamp Duties Act 1923 provides for the duty to be payable by reference to the rates in force at a time the document is to be stamped. The rates have changed very significantly since the introduction of stamp duties in South Australia.

24. The penalty regime has also changed significantly in the period from 1923 to now. Section 2 of the Transitional Provisions provides that there is to be no penalty. The Taxation Administration Act 1996 distinguishes between penalty and interest. Division 1 of Part 5 provides for interest where there is a tax default in Division 1 of Part 6 for penalty tax. The reference to a penalty in the Transitional Provisions appears to be limited to the penalty tax under Division 2 of Part 5.

25. There appears to be a number of situations that require consideration. There are those situations where there has been no assessment and there are those situations where there has been an assessment.

There is a comprehensive summary of two areas, 'Retrospective Effect & Reassessments', where there is no assessment, and 'Retrospective Effect', where there is assessment. I do not propose to read those three pages of the submission into Hansard, other than referring to them, and then summarising the last point, which is point 35, as follows:

35. It is completely inappropriate for legislation to be proposed which the community could not, if properly informed, reasonably be expected to support and which will compromise the Executive through it failing or deciding not to administer according to its terms.

The next section of the submission, on page 8, is section 71AB. It states:

36 The section uses the concept of an 'asset'. The Stamp Duties Act 1923 has generally used the concept of property. The concept of an asset has been introduced into a number of parts of the act, but its use creates further issues rather than resolving them.

37. The possibility that an asset is a concept that is wider than property is highlighted in the definition of section 91(1) where an asset is defined to include property. The Accounting Standards define assets in a manner that raises many issues, if that is what is intended in this situation. The relevant heads of charge are concerned with property; this is mixing and confusing concepts. The provision should be limited to property. This is also consistent with conveyancing provisions and agreement for sale provisions, both of which refer to property.

The next section refers to a detailed analysis of section 71AB(1) of the bill. I do not propose to read all four pages of that, other than for two or three sections of that that give you a flavour of the concerns in this aspect of the submission. It states:

45. The provisions would apply where partners draw down pro rata to their contribution of it or entitlement to it capital contributed by them. This is contrary to the position with the unit trust, where pro rata distributions of capital are expressly exempt.

46. It also appears possible that, if the departments collectively sell an asset of the partnership, the provisions are triggered. In this situation, there is a transfer of the interests of the persons and the asset of a partnership is held collectively. While such a transfer within the scope of the Stamp Duties Act 1923 will be liable to normal conveyance duty under section 60 and the head of charge conveyance on sale, section 78AB(5) will prescribe a different method for determining the liability for duty or impose an additional liability. This raises the question whether this is a situation to which Speyer Bros v IRC applies or one to which section 14 and Commissioner of Stamp Duties (NSW) v Pendal Nominees Pty Ltd apply? Where the asset that is sold is not one that attracts ad valorem duty, say, the sale of goods in the ordinary course of business, then duty will be imposed in accordance with these provisions. This is patently inappropriate. Many other like situations can arise under these provisions as currently drafted. They require considerable clarification, both of the interests within their scope and in their drafting.

47. Section 71AB(1)(b) provides that the section is triggered if there is a conversion of the relevant interest in an asset into money. There are potentially two different situations where this works considerable injustice. The first is where the partnership buys an asset. In every such situation section 39 of the Partnership Act 1891 converts the rights of the partners in the purchased asset into a right to receive the payment of the surplus after payment of debts of the partnership, namely the right to receive money or some other benefit. So section 71AB(1)(b) appears to be triggered.

48. The second is where the partnership sells an asset or collects a debt. In each situation the interests of the partners in the assets of the partnership are converted into money or other consideration or benefit. In the case of a partnership conducting a supermarket every sale of its stock in trade involves the conversion of the interests of the partners in the assets that are stock in trade into money or a right to receive money from a credit card provider. The right to receive payment from the credit card provider will be consideration or a benefit. On the conversion of that right to receive payment from the credit card provider to actual money section 71AB(1)(b) will again apply because the chose in action will be converted into money or another benefit, this time it is likely to be the right to recover from the partnership's bankers the amount credited.

49. Indeed if taken to its literal legal conclusion each drawing on a partnership bank account that dilutes the partnership's asset of a legal chose in action against the bank has the potential to attract duty. That the dilution of this asset discharges a liability, is not accommodated by the draughtsman, there is no concept of net benefit. Duty is levied on the value of the deemed interest in the asset to which it applies. Again it is not an acceptable response to argue that the Executive or the Courts will not apply the literal interpretation of the provisions. Given the extent of the provisions their constitutional base is also a potential issue.

Further on the submission states:

52. According to partnership law, partners do not become entitled to their share of the net income until the partnership accounts are struck and approved by the partners. In this situation a resolution of the partners approving the accounts and consequently the distribution of profit to the partners will necessarily convert the interest of partners in the surplus existing at the time of approval into an entitlement to payment of money for each of the partners entitled to a share of the net income. The payment will stand to be made out of the assets of the partnership be they funds in the partnership bank account or by way of set off against the right of the partnership to recover from the partners' drawings made in anticipation of their respective shares of net profit and repayable if their share does not materialise to the extent of the drawings. Section 71AB(4) will treat these resolutions for the distribution of net profit as a conveyance of property operating as a voluntary disposition inter vivos. The valuation of the property deemed so conveyed would appear to be the consideration given for it, in the above example the value of the obligation to repay drawings set off against it, or the full amount of the net profit.

53. It cannot be intended that duty be chargeable in the above circumstances. This will retrospectively impose duty on partners who could not reasonably ever have been expected to anticipate such duty. In the future well advised partners will avoid ever creating an instrument to distribute profits whilst others may inadvertently become exposed to such duty. The concept of such a potentially wide reaching provision is critically flawed.

54. The foregoing demonstrates, using the words of others, 'this is a great big new tax', not simply the clarification of a situation.

There are then further submissions on sections 71AB(2), 71AB(3), 71AB(4), 71AB(7) and 71AB (9) which I do not propose to outline in detail. I now turn to page 15 of the submission, which refers to 71AB(10) of the bill, as follows:

68. Section 71AB(10) continues the Commissioner's denial of reality. It requires that the goodwill of a partnership be included as an asset of the partnership. In many larger professional practices goodwill is not brought to account nor charged on either the admission or retirement of a partner.

69. These partnerships are rarely capable of converting the goodwill into anything. In some smaller partnerships goodwill may still be paid for and it is appropriate in those situations that it be brought to account. It reflects reality. Accountants' theories of valuation, which have found some support in particular circumstances, ought not to be legislated to have effect to deem values where clearly none exist in genuine market circumstances.

70. Notwithstanding the current factual situation the Commissioner continues to insist on an amount being included for goodwill. This unreality should not become reality by law.

Then there is a submission on section 71AB, other provisions and exemptions, a submission on valuation methodology, which I do not propose to read into Hansard. Finally, there are sections 91 and 95, general amendments. Point 76 states:

The possibility of these amendments to Part 4 having retrospective effect was never foreshadowed. They seek to overturn the operation of section 22 of the Partnership Act 1891, which was not an issue in Cyril Henschke Pty Ltd v Commissioner of State Taxation. There is simply no justification for these provisions to apply retrospectively. It was never foreshadowed.

Point 77 states:

The provisions either do not integrate or integrate unfairly with the land rich provisions. A corporate or private unit trust partner will now be deemed retrospectively to hold an interest in land which is an asset of a partnership of which it is a partner. If there have been changes in significant interest in an entity which was a partner in a partnership but not land rich it will now be retrospectively deemed to have held an interest in land and this will raise an issue as to the application of the land rich provisions, after the date on which those provisions came into force.

It goes on at point 78 to state:

The land rich provisions require the lodgement of a statement within 2 months after a dutiable transaction occurs. If the statement is not lodged within that time an offence is committed. In effect a person will be made liable for a prosecution retrospectively.

Then point 79 states:

Non-dutiable transactions that have occurred will be retrospectively made dutiable though the partners to them are unlikely to be appropriately informed of this occurring. Consequently the law will be applied in a discriminatory way and be incapable of fair administration.

I have read significant sections of that submission of 18 August onto the Hansard record. My request to the minister is that a comprehensive reply from Revenue SA is provided to the opposition well prior to any time that the minister intends to further consider this legislation.

Having read that submission only on the weekend, as I was given it late last week, late yesterday I received a further submission. It was a copy of a letter from Mr Tucker for the Adelaide members of the committee to which I referred earlier, to the Hon. Iain Evans, shadow treasurer, and dated 13 September—only Monday of this week—and I am assuming Mr Evans received it either Tuesday or Wednesday. It was only late yesterday afternoon that I received a copy of it.

That submission is now a 25-page submission. The one that I read earlier was a 17-page submission and it was quite complex. As I said, I only had the opportunity to work my way through it on the weekend. The covering letter to this 25-page submission from Mr Tucker states that his understanding is that not only does the Law Society support the Law Council's submission now but the Australian Institute of Conveyancers South Australian Division Inc. has also supported the submission.

Mr Tucker notes that, since the submission was delivered (that is the earlier one), further issues have been identified, and that is why it has been updated. He goes on to say that it has been so widely drafted that it will have many unintended consequences. He says the retrospective operation is particularly onerous, and he points out that the Commissioner's appeal against the Full Court decision in the High Court has now been heard by the High Court, and its decision is now pending. He makes the suggestion that perhaps the government ought to wait for the decision of the High Court before it proceeds with this legislation, given the defects that he claims exist.

He indicates that the Commissioner for Taxation has not yet responded to their submission of August. However, they have spoken with the Deputy Commissioner about the legislation. Whilst I had the chance to work through the 17-page submission on the weekend, given the budget arrival today and having received a further 25-page submission late yesterday afternoon, and the fact that we are not sitting next week, I have not had the chance to read it, other than to skim through the 25-page submission.

It is fair to say that I think that the 25-page submission picks up most of the elements of the earlier 17-page submission to which I have referred. I do note that it does have some easier to read and understand examples highlighted in the 25-page submission, which does make exploration of some of the issues a bit easier because it does highlight some of the problems that will possibly ensue. I might just read three of those examples onto the record from the 25 pages. They are practical examples of some of the problems that the Law Council and the Law Society are highlighting. The first example is:

Many small businesses are conducted in partnerships involving a husband and wife. Sometimes other family members are partners, particularly rural partnerships. So a farming partnership selling 100 lambs for $90 each will trigger a stamp duty liability of $90. This in effect a new impost. If there is no document then they are required by section 71E to file a statement and pay duty on it. The failure to lodge that statement constitutes an offence.

The second example:

An example of the foregoing is where a husband and wife conduct a small supermarket in partnership. Each time they sell a can of soft drink and a sandwich they convert the assets of the partners into cash and the proposed provision is triggered. If there is no document then they are required by section 71E to file a statement and pay duty on it. The failure to lodge that statement constitutes an offence.

The third example:

In the example of the husband and wife conducting a small supermarket they decide to buy a new display refrigerator for $4,000 with funds from the partnership bank account. The partners have converted their interest in the bank funds into a new piece of property in which they now have new interests. The provisions once again are triggered with a stamp duty consequence of $40. Once again if there is no document then they are required by section 71E to file a statement and pay duty on it. The failure to lodge that statement constitutes an offence.

I am sure it was never the intention of the government to pick up the sorts of examples that Mr Tucker, the Law Society and the Law Council have highlighted and require them to pay stamp duty on those every day circumstances in business, and if they do not lodge documents, that there would be an offence. Nevertheless, the Law Society and the Law Council are saying that a literal interpretation of this drafting would leave these sorts of normal business transactions such as buying a fridge in a partnership or selling goods in a deli or supermarket liable to penalties and the payment of duty in a whole range of circumstances, which I am sure (whilst I am always happy to impute improper motives to the government of the day, particularly this government) not even this government would stoop so low as to want to pick up these sorts of normal transactions and impose duties and penalties in the event that documents are not completed by partners in various partnerships.

However, the Law Society and the Law Council are highlighting that that is the literal reading of the drafting of the legislation. In highlighting some of the elements of those submissions from the Law Society and the Law Council, I conclude by again saying to the minister in charge of the bill—I know he is the not responsible, this is the Treasurer's—that the opposition is now seeking a detailed response from Revenue SA to the quite serious—

The Hon. P. Holloway: The government is seeking crown law advice.

The Hon. R.I. LUCAS: Yes, I am sure it is, but what I am saying is that, in terms of our expediting this, the opposition is now seeking a quite detailed response from the government to the serious claims being made by the Law Society and the Law Council. We have thus far accepted in good faith the briefings that we have taken from the government's advisers on the impact of the legislation, and that is why the bill went through the House of Assembly very quickly. However, it is certainly our very strong position as members of the Liberal Party that we will urge the Independent members and minor party members to support us in not proceeding—

The Hon. P. Holloway interjecting:

The Hon. R.I. LUCAS: Yes—with consideration of this legislation until we can reach the stage of receiving the government's response, having the opportunity to discuss it with the Law Society and the Law Council and then, if we do need to contemplate amendments, we would need to go back to our party room. As I said, we are not sitting next week. I thought it was useful for me to place on the record our position on this last sitting day before the break, which gives the government and its officers fair warning of the Liberal Party's position.

Hopefully, prior to the government wishing to continue the debate, if we could receive a copy of the government's detailed response from the Treasurer or the minister to the claims that have been made by the Law Society, and with sufficient time so that we are able to meet with them to further consider their position in light of the government's consideration of their submission. With that, I thank the minister for his assistance.

Debate adjourned on motion of Hon. R.P. Wortley.