VIII. Aspects of Present Company Taxation

Minimum Distribution Requirements

16.102. Reference has already been made to the distinction drawn in the Act between public and private companies and to the undistributed profits tax intended to compel minimum distributions by private companies.

16.103. At the inception of Commonwealth income taxation in 1915, it was provided that if a company did not make a reasonable distribution a deemed distribution could be made and the distribution assessed as income in the hands of the shareholders; however, the concept of ‘reasonable distribution’ was left undefined. The amending Act of 1922 fixed two-thirds of the taxable income as a reasonable distribution and provided that tax on deemed distributions would be imposed on the company, the tax so imposed being the tax that would have been paid by the shareholders on the amount unreasonably retained had it been distributed to them. The practice of the Commissioner at this time was to limit the application of the provisions to closely controlled companies, i.e. companies controlled by a few individuals.

16.104. The Ferguson Commission recommended in its first report, in 1932, that the deemed distribution provisions be limited in a way that would give legislative approval to the Commissioner's practice. It was said that:

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‘The dividend policy of a public company in which the public are substantially interested, and whose shares are dealt in on the Stock Exchange, is not likely to be affected by consideration of the amount of tax which will be paid by individual shareholders. The influence of shareholders will be exerted to induce the directors to distribute as much and not as little as possible, and its published accounts will show what profit has been earned, and how it has been appropriated.’

The 1934 Amending Bill gave effect to the recommendation. The amended law defined a private company and confined the deemed distribution provisions to such companies.

16.105. The definition of a private company was complex; but it did not cover all closely-controlled companies, and company structures were adopted to escape the definition. In the early 1950s the Spooner Committee recommended a new definition of a private company, intended to prevent such escape; and it also recommended that in place of the tax calculated by reference to deemed distributions, there should be a tax on company profits designed to force distributions. The tax proposed was to be a penalty levy applicable to so much of the profits of the company after payment of company tax and after deduction of a retention allowance as had not been distributed within a defined period. The recommendation of the Committee was adopted by amendment to the Act in 1952.

16.106. The new definition did not succeed in preventing the practice of employing company structures that fell outside the definition though in fact the companies were closely-controlled. Moreover, companies coming within the definition were able formally to satisfy the requirement to make a sufficient distribution by distributing to a series of related companies (known as chains) or around circles of related companies (known as snakes). The profits thus remained in a pipeline of companies forever moving between companies but never being taxed to individual shareholders.

16.107. In 1964, following recommendations of the Ligertwood Committee in 1961, yet another attempt was made to define a private company, this time by defining a public company and providing that all other companies would be private. The provisions allowing a tax rebate on dividends passing between companies were amended at the same time. The practice of storing profits in a pipeline of companies is now prevented by a partial denial of the rebate when dividends are received by a private company from another private company. However, the Commissioner is given a discretion to allow a full rebate. That discretion will ordinarily be exercised if the Commissioner is satisfied that the dividends will reach the hands of persons, who are not private companies, within 22 months of the end of the year of income in which the dividends were received by the company claiming the full rebate.

16.108. But the new definition of private company, like its predecessors, failed to embrace all closely-controlled companies. Again company structures were adopted by which closely-controlled companies escaped the definition, this time exploiting the provisions making a subsidiary of a public company a public company. Amendments to the definition were made in 1973 with the object of preventing this avenue of escape.

16.109 The history surveyed in the previous paragraphs reflects two assumptions. The first, recognised by the Ferguson Commission, is that because of pressure exerted by their shareholders listed companies in which the public are substantially interested may be expected to distribute sufficient profits, ultimately to individuals, to prevent

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the company affording a tax shelter. The second is that it is possible to draw a distinction between such companies and others that need to be put under a legal discipline to make adequate distributions.

16.110 Experience over the years tends to belie the latter assumption. But whether or not an effective distinction can be drawn, the question remains whether the first assumption—that listed companies in which the public are substantially interested do not afford tax shelters—is correct.

16.111. Empirical evidence casts some doubt on the correctness of the assumption. Distribution policies of listed companies in which the public are substantially interested may reflect a variety of purposes that management is seeking to further. But if in fact the distribution policy of a company involves substantial retention of profits, it will give tax advantages to high-income shareholders whether or not management has this in mind, though it is true that the retained profits in terms of their value to the shareholders in the market place may be less than the amount retained.

16.112 The Committee has given some consideration to the technical aspects of an extension of minimum distribution requirements to all companies. Apart from the aspect about to be mentioned, the general structure of the present undistributed profits tax presents no problems. In this it contrasts with the earliest provisions requiring minimum distribution: those provisions, though formally applicable to all companies, could only be effectively administered in relation to closely-controlled companies. However, as a measure to prevent the storing of profits in a pipeline of companies, the present undistributed profits tax could not be applied to all companies, since a company whose shares are widely held cannot know the ultimate destination of distributions it makes to other companies. An alternative to undistributed profits tax would have to be considered.

16.113 Two methods of ensuring that no tax advantage attends the holding of profits in a pipeline of companies deserve some consideration. The first is the method used in the United States and involves denying exemption to a fraction of a dividend received by a company from another company at each point of movement of profits in the pipeline. This method was in fact proposed by the Ligertwood Committee which suggested that the fraction of a dividend denied exemption should be set at 15 per cent—the fraction actually employed in the United States. However, unless dividends moving within a group of companies are accorded special treatment, as in fact they are in the United States, the method involves an arbitrary and wide-ranging cascade tax on company profits. Even if such special treatment is given, there remains an element of cascade taxation where dividends move through companies that are not members of a group.

16.114 The second method involves an adaptation of a Canadian scheme which at present applies in that country only to dividend income received by closely-controlled investment companies. A company receiving a dividend would hold that dividend in a separate account. The dividend would be subject, in the hands of the company, to a refundable tax at a rate reflecting the tax that an individual shareholder on the maximum marginal rate would pay, after making allowance for any tax credit available to him under the prevailing imputation system. When a dividend is paid by the company from the amount in this account, the tax would be refunded to the company. If such distributions are made in a year of income so as to absorb all dividends received by the company in that year of income, there will of course be no net refundable tax payable. The method involves some complications where the company receiving the dividend has suffered a loss in an earlier year or in the year of income; the company might

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not, in these circumstances, have any immediate prospect of paying a dividend which would generate the refund of tax. In such circumstances the company might be allowed to apply the loss against the dividend received and so avoid payment of the refundable tax; in the result, however, it will have applied the loss to relieve tax at the refundable tax rate, which will be less than the company tax rate.

16.115 These observations suggest that it might be technically feasible to extend minimum distribution requirements to all companies. The possible gain in equity must, however, be weighed against the costs involved. These costs include not only those of administration and compliance but also the loss of neutrality between retention and distribution of profits. In the Committee's view, the costs are likely to outweigh the gain in equity, and therefore the extension of minimum distribution requirements to all companies is not recommended.

Income of Private Investment Companies

16.116 The present undistributed profits tax applied to private companies in effect imposes a penalty on the company if it does not distribute what remains of profits after company tax and after a retention allowance. Originally the retention allowance was seen as enabling the company to hold back funds for the maintenance and expansion of its business operations. Even when the retention allowance had ceased to depend on any exercise of discretion by the Commissioner as to the amount of a reasonable retention, this purpose of the allowance continued to be reflected in the diminishing fractions applied to successive slices of profits in computing the amount of the allowance. The present law applies one fraction—50 per cent—to all after-tax profits whatever their amount. There is in the result very little suggestion of the original purpose: the present retention allowance is basically no more than a method of fixing how much of the company's profits should be taxed at shareholders’ individual rates. In one respect, however, the original purpose does find a continuing expression. The retention allowance on income from property—income not accompanied by the same degree of commitment to hold back funds for the continuance of business operations—is fixed at the much lower figure of 10 per cent, or, in the case of private company dividends, at zero.

16.117 As long as the separate system of company taxation remains, and even under a limited imputation system, there is a general bias against the use of the corporate form. The result of the less generous retention allowance on income from property is that such bias is correspondingly greater where the corporate form is used as a vehicle of investment in property other than shares. In the Committee's view this additional bias is unjustified, and it therefore recommends that the retention allowance in respect of income from property other than shares be brought into line with that applying to other income.

16.118 In contrast with the special bias against the use of the corporate form as a vehicle for deriving income from other kinds of property, the present law gives rise to a significant incentive to use the corporate form as a vehicle for deriving income from shares. An individual with a portfolio of share investments can secure significant tax saving by vesting the portfolio in a private investment company which will derive the dividends on those shares. Because of the tax rebate on dividends allowed to a company, the dividends will not be taxed in the hands of the investment company. The effect of the retention allowance of 10 per cent of the amount of the dividends (available unless the dividends are from private companies) is that tax on this fraction of the dividends can be indefinitely deferred. The prospect of undistributed profits tax

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will force a distribution of the remainder; but tax on the individual who vests his portfolio in a company can be delayed for at least one year, and as long as three years, after the derivation of the dividends by the company. (The longer delay is achieved by the interposition of other private companies between the individual and the company holding the portfolio of shares.)

16.119 Where a business is carried on through a private company, a deferral of tax on dividends paid by the company can be obtained by vesting the shares in that company in an interposed private holding company. There will be no retention allowance in this case, but again tax can be deferred for at least a year, and longer if further companies are interposed.

16.120 The Committee recommends that measures be introduced to prevent this deferral of tax. The measures should be applied to a private investment company as defined for this purpose: the definition would be based on income from property being the predominant element in the company's income. The measure would employ the technique of a refundable tax to which reference was made in paragraph 16.114. The company holding the portfolio of shares would be subject to tax at a rate equivalent to the tax an individual on the maximum marginal rate would pay, after making allowance for any tax credit available to him under the prevailing imputation system. There would be corresponding refunds on distribution. The same regime would apply to any interposed company.

16.121. If the Committee's recommendation is adopted, there will need to be either a phasing-in period or adequate notice of its introduction, in order to accommodate liquidity problems that will inevitably arise in some instances.

Assessment of Company Groups

16.122. A number of submissions have drawn attention to the absence of any provisions whereby a loss suffered by one company of a group of companies may be offset against the net income of another company in the same group.

16.123. It is argued in these submissions that the fact that two companies are legally distinct entities should not prevent their being treated as one entity for income tax purposes when the same persons are beneficially interested in the equity of both companies. Parent and subsidiary companies it is said should be regarded as one taxable entity, and the subsidiary companies as branches or divisions of the parent. This would be in line with the requirements of the Australian Companies Act in relation to the preparation of consolidated accounts for groups of companies in which the results of the operations of the group, as a whole, are reported.

16.124. The point has also been raised that where the companies involved are private companies there are special difficulties. A profitable parent company, engaged in trading, may be required to pay a dividend to avoid undistributed profits tax even though its profits are offset by a loss incurred by its subsidiary company.

16.125. The treatment of company groups in other countries. Overseas the practices adopted are varied. In the United States a group of companies having a certain common ownership is permitted to make a consolidated return of income. The principle thus expressed is that the true income of a single enterprise should be taxed even though the enterprise is carried on through more than one company. The regulations provide extensive and detailed rules covering the preparation of consolidated returns, the basis for computing taxable income of the group and the liability for the tax assessed. The privilege of lodging consolidated returns is denied foreign companies,

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life insurance companies, exempt companies and a number of others specifically defined. Some conception of the complexity of the rules thought necesary to prevent the provisions being abused may be gained from the fact that the rules and associated comments in one of the standard tax services relating to consolidated returns in the United States cover nearly 400 pages.

16.126. In New Zealand there are provisions requiring the income of related companies to be aggregated, but here the requirement is largely a consequence of the fact that the income of a company is taxed at graduated rates ranging from 20 per cent up to the general rate of company tax of 45 per cent. Requiring aggregation precludes any tax advantages which might otherwise be gained by multiple incorporation. There is provision for the transfer of losses without restriction between companies in a group where they are wholly owned by the same interests. Where minority interests are involved there is provision whereby one company in the group may make up the current loss of another through a payment to it, referred to as a subvention payment. The payment is deductible by the company making it and is income of the receiving company.

16.127. There is no provision in the Canadian law for the lodging of consolidated income tax returns by company groups. However, there are some provisions in regard to multiple incorporation, which are mainly aimed at ensuring that undue advantage is not taken of the lower rates of tax available on some company income.

16.128. The United Kingdom has no provisions for consolidated returns but the law contains what are termed ‘group relief’ provisions which, like the New Zealand loss transfer provisions, have the effect, in certain respects, of treating a company group as a single taxpayer. Under the United Kingdom provisions a company may, under certain conditions, surrender to any company in the same group which is profitable its own entitlement to relief for trade losses and for certain other amounts eligible for relief from corporation tax—for example, capital allowances and management expenses. The effect is to cancel one company's losses and reduce the profits of others in the group. It is not necessary that there be an actual payment for the surrender but if a payment is made it will not give rise to tax consequences for either party.

16.129. The choice of method of relief. There is little doubt that consolidated return procedures involve some major compliance and administrative difficulties. Moreover, procedures which would have the effect of permitting the extensive offsetting of losses within all company groups could have significant revenue implications.

16.130. Some of the major difficulties which arise in regard to returns concern defining companies which are part of a group, the question of the time at which any relevant ownership tests decided upon should be applied, the treatment of companies with common ownership but differing balance dates, the extent to which overseas income of foreign members should be aggregated with Australian income, assessing difficulties resulting from the necessity for all member companies to lodge their income tax returns at the same tax office, inordinate delays in assessing because one company's return is late in lodgment and the possible need to amend assessments of all group member companies where an adjustment or error arises in respect of one of them. In addition, there would be special problems arising in relation to sufficient distributions and undistributed profits tax in the case of private companies.

16.131. While the Committee accepts in principle that a company and, at least, its wholly-owned subsidiaries should be treated as one entity for income tax assessment

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purposes, it does not favour the adoption of group assessment procedures. It recommends that group relief procedures modelled on those currently in force in the United Kingdom should be available in Australia, though subject to conditions which would be more restrictive than under the United Kingdom law.

16.132. Holding and subsidiary companies. Relief should only be available when:

  • (a) the companies concerned are resident in Australia;
  • (b) one company is a wholly-owned subsidiary of the other or both are wholly-owned subsidiaries of a third company for the whole of the year of income;
  • (c) both companies have the same year of income;
  • (d) the loss surrendered by one company was incurred in the same year of income as that in which it is claimed by the other company;
  • (e) the surrender of the loss is evidenced by a written agreement, nominating the amount surrendered, made and notified to the Commissioner within three months of the end of the year of income in which it was incurred.

The adoption of this restriction basis would avoid a number of difficulties and possible abuses and should minimise the effect on revenue.

16.133. The Committee does not think it necessary for the tax law to require that the surrendering company should be paid any amount by the claimant company for the loss transferred. It is apparent, however, that there will be circumstances where commercial reasons, and perhaps company law reasons, require that a payment be made. Under the Committee's proposals there will not be any minority interests in a company which could be prejudiced by the surrender of the loss, but a creditor of the surrendering company might be prejudiced if no payment is received by that company for the loss surrendered. There should be provisions whereby a payment which is in fact made will not be treated as income of the surrendering company or as a deductible outgoing by the claimant company.

16.134. Trading and consortium companies. The United Kingdom extends its group relief provisions so that they are available where the surrendering company carries on business and is owned by a consortium of companies and is not a 75 per cent subsidiary of any company, and the claimant company is a member of that consortium; or where the surrendering company is a 90 per cent subsidiary of a holding company which is in turn owned by a consortium of companies and the claimant company is a member of that consortium; or where the surrendering company is the holding company owned by the consortium of companies and the claimant company is a member of that consortium. A company is owned by a consortium of companies if it is owned by five or fewer companies. These latter companies are the members of the consortium. Relief is only available in favour of the member of the consortium in respect of the loss of the company carrying on the business, or of the holding company. A member of the consortium cannot surrender a loss to another member of the consortium nor can a member surrender a loss to the holding company or to the company carrying on the business.

16.135. A company owned by a consortium, in the language of the United Kingdom provisions, is sometimes described in Australia as a ‘joint venture company’. In the Committee's view there should be provisions allowing the surrender of losses by a joint venture company to its owners modelled on the United Kingdom provisions. Where there is a surrender of part of a loss in favour of one member of the consortium

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but no surrendering in favour of another—the latter may have no net income to absorb it—a payment by the member of the consortium receiving the surrender will be commercially appropriate. A payment in these circumstances, like the payments referred to in paragraph 16.133 should not attract any tax consequences.

Restrictions on Carry-forward of Company Losses

16.136. The general provisions of the law in regard to the carry-forward of losses has been explained in Chapter 8.

16.137. Until 1944 no restrictions were imposed on the carry-forward of losses by companies. In that year provisions were inserted in the Act denying the carry-forward of losses by a private company unless shares having not less than 25 per cent of the voting power in the company were beneficially held by the same persons in both the year of loss and the year in which it was sought to apply the loss.

16.138. The reason for adopting these provisions was explained by the Ligertwood Committee in the terms of the Treasurer's speech when introducing the Bill. The Treasurer referred to a practice by persons who had been refused Capital Issues Board permission to form companies ‘of buying up shares in practically defunct companies and then operating those companies for purposes other than those for which they were originally registered’.

16.139. After the war-time capital issues controls had ceased to function, the provisions continued to be part of the law as a means of limiting the carry-forward by private companies of losses of previous years. In this they were designed to control the practice of buying the shares in a company that has suffered losses in order to be able to take advantage of those losses by applying them against future profits of the company. But they proved quite ineffective. Schemes were devised by which they were easily avoided and they became no more than traps for the unwary.

16.140. The Ligertwood Committee considered the policy of limiting the allowance of company losses of previous years by reference to the need for continuity of shareholding in the company and questioned whether the principle of limiting, for taxation purposes, ‘the allowance of losses of previous years incurred by companies which have substantially changed their shareholders, is soundly based’. In recommending the repeal of the provisions inserted in 1944, the Ligertwood Committee referred to its view that a company, in fact as well as in law, is a legal entity separate from its shareholders and concluded that a company's losses should be treated for fiscal purposes without regard to the identity of its shareholders.

16.141. The Ligertwood Committee's conclusion was not adopted. In 1964 new provisions were inserted in the Act limiting the carry-forward of losses by companies, whether private or public. A continuity of ownership of shares carrying 40 per cent of voting and dividend rights and rights to capital was now required. In 1965 these provisions were qualified to some extent by further provisions under which a failure of the required continuity could be disregarded if the company continued the same business. The qualification was so strictly drafted that it did not significantly modify such effect as there was in the continuity of ownership provisions.

16.142. However, the continuity of ownership provisions enacted in 1964, like the 1944 provisions, proved ineffective in preventing the practice of acquiring the shares in companies that had suffered losses in order to exploit the potential tax savings to be gained by the application of the losses when carried forward. Arrangements were adopted whereby the continuity of ownership required by the law was satisfied even

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though, in substance, there was no continuity. Further provisions were inserted in the Act in 1973 to defeat such arrangements, as a result of which a more than 50 per cent continuity of ownership is now required.

16.143. The Committee agrees with the policy of these provisions limiting the carry-forward of company losses and is not persuaded by the reasoning of the Ligertwood Committee. In the taxation of companies it is necessary to go behind the veil of separate legal personality. An individual carrying on business as a sole proprietor or partner who suffers losses has no means open to him of obtaining their equivalent in tax relief except by subsequently making profits against which those losses will be deductible. Moreover, he is limited in thus taking advantage of the losses by the span of his life: losses suffered by an individual cannot be applied against profits made by his personal representative after his death. If there were no restrictions, by reference to continuity of ownership, on the carry-forward of losses by companies, an individual who conducts business through a company would have an unfair advantage: by selling his shares he would obtain immediately the tax equivalent of the losses suffered by the company; and the value of the losses could be turned to advantage after his death.

16.144. The objective that the seller of shares in a loss company seeks to further is to obtain the tax equivalent of those losses immediately. Other ways of doing this which do not involve any unfair advantage will be available if recommendations of the Committee in regard to carry-back of losses and transfer of losses are adopted. The Committee has recommended in Chapter 8 that carry-back of losses be allowed. It has also recommended in this chapter that the law allow a loss to be moved from one company in a group to another in the same group. In addition, it has suggested that losses of companies electing to be taxed as partnerships be allocated to shareholders.

Loan Capital and Share Capital

16.145. In the discussion of the present separate system of taxing company profits, attention was drawn to the fact that the system is not neutral as between equity finance and debt finance. This want of neutrality will be less if the partial imputation system proposed by the Committee is adopted; it will virtually disappear under full imputation.

16.146. However, even under partial imputation it would be possible to achieve neutrality if the treatment of loan capital were brought into line with the treatment of share capital. Interest on loan capital would be denied deduction, and imputation would be allowed of part of the resulting increase in company tax. The debenture-holder would be given a credit for the tax imputed against the tax on the interest he receives, in the same manner as credit is given to a shareholder against tax on dividends he receives. It would obviously not be appropriate to extend the treatment to all interest. A company engaged in, for example, banking could hardly be denied a deduction for interest paid on deposits, nor could a company which was a customer of the bank be denied a deduction for interest paid to the bank on its overdraft. There would be a question of how one should treat payments under hire-purchase agreements or under leasing arrangements, which at least in part have the same character as interest. It might be possible to draw a distinction between short-term and long-term loan capital and to deny a deduction of interest on the latter, but the line of ratio would necessarily be arbitrary. The Committee considers that in general the present method of taxing loan capital should be retained. However, there are two situations—one relating to convertible notes, the other to the high gearing of loan to share capital—where it may not be inappropriate, for tax purposes, to treat loan capital like share capital.

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16.147. Convertible notes. The present tax treats certain loan capital, generally referred to as convertible notes, in the same manner as share capital. In 1960 interest on notes carrying an option of conversion into shares was made non-deductible in determining the taxable income of the company. In 1970 deductibility of interest on some convertible notes was restored. Deduction is allowed only if the convertible notes meet strictly defined statutory tests intended to ensure that they serve the commercial purposes for which they are ostensibly issued. Thus the option to convert must rest with the note-holder so that, pending conversion, he has the income yield and security of investment that the note provides.

16.148. If deduction were allowed of interest paid on all convertible notes, the operation of the system of taxing company profits would be undermined. That system, where no undistributed profits tax applies, depends for its operation on pressure by those who have an interest in accumulated profits for some measure of current distribution. In the case of a high-income shareholder, the under-taxation of undistributed profits is compensated for by the over-taxation, at company and shareholder levels, of distributed profits. In the case of a holder of convertible notes, whose security gives him a potential claim on a portion of undistributed profits, the pressure for current distribution is satisfied by the interest he receives. This interest will not, however, have borne tax at the company level if the convertible notes are treated as loan capital. The Committee therefore considers that the general denial of deduction of interest on convertible notes should remain.

16.149. Where, however, there are safeguards against defeat of the general operation of the system of taxing company profits, the deduction may be appropriate. The Committee thus does not question the statutory code under which interest on convertible notes is deductible in defined circumstances. Those circumstances are defined so as to ensure that the commercial purposes of the convertible note issue predominate over any tax advantages which may flow.

16.150. High gearing. Where interest is paid by a resident company to a resident, the Committee does not consider that a high gearing of loan to share capital should affect deductibility. The fact that the gearing of loan to share capital may be too high, as a matter of commercial judgment, is a concern of the tax law only so far as it points to the need to overcome the want of neutrality in the treatment of share and loan capital which may have encouraged the high gearing. It does not justify, in the case of a particular company, the denial of deduction of interest on some part of the loan capital.

16.151. However, the Committee would take a rather different view in regard to some loan capital held by a non-resident in an Australian resident company. The taxation of non-residents is considered in Chapter 17. For present purposes it is enough to refer to the fact that Australian tax on profits distributed as dividends to non-residents amounts to company tax, currently 45 per cent, plus a 30 per cent dividend withholding tax (15 per cent if a double taxation agreement limits the rate of tax); on the other hand, Australian tax on profits going in payment of interest to a non-resident is confined to a withholding tax of 10 per cent of the amount of interest so paid. Thus the tax on $100 of profits distributed as dividends (assuming a 30 per cent withholding tax rate) is $63.33; the tax on $100 of profits distributed as interest is only $10. While the Committee does not wish to pronounce generally on the appropriateness of the rate of withholding tax on interest, it is apparent that the low rate may lead a foreign resident investor who controls an Australian resident company to provide an undue proportion of the capital of the company in the form of loan finance. The

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inducement to do so will depend on the level of tax in the country of the investor's residence and the credit for foreign tax that country may allow. The inducement will be at its greatest when the foreign investor is resident in a low-tax, sometimes called a tax-haven, country. Canada has recently adopted provisions which may deny a deduction of a portion of interest payable to a non-resident by a resident company where, either alone or in combination with others, the non-resident owns more than 25 per cent of the shares of the company. The denial depends on the ratio of the loan capital held by the non-resident to the share capital of the company. In the Committee's view, provisions along the lines of the Canadian model should be adopted in Australia. It is realised, of course, that such provisions will operate subject to any double taxation agreement to which Australia is, or may become, a party.

16.152. Alternatively to contributing an undue proportion of capital by way of loan finance, subject to the provisions of the exchange control law a non-resident may lend a smaller amount at a high rate of interest, calculated to have the same effect. Provisions intended to enable what would amount to treating the loan capital on which the interest is paid as share capital are proposed in the next chapter.