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