Bottom of the harbour tax avoidance

Bottom of the harbour tax avoidance was a form of tax avoidance used in Australia in the 1970s. Legislation (below) made it a criminal offence in 1980. The practice came to symbolise the worst of variously contrived tax strategies from those times.

In its 1986/87 annual report, the Australian Taxation Office (ATO) stated a total 6,688 companies had been involved, involving revenue of between $500 million and $1 billion.

The operation at the heart of bottom of the harbour schemes was simple. A company would be stripped of assets and accumulated profits before its tax fell due, leaving it then unable to pay.

Once assets were stripped, the company would be sent, metaphorically, to the "bottom of the harbour" by being transferred to someone of limited means and with little interest in its past activities. The company's records were often lost too. The ATO, being in the same position as other unsecured creditors in the case of an insolvent company, ended up with nothing.

Promoters such as lawyers or accountants generally facilitated the transactions. The promoter would help the owners of a company first transfer the assets to a new company which was to continue the business, then the owners sold the old company to the promoter for the value of the untaxed accumulated profits, less an amount representing a fee or commission. For the owners this was the sale of a capital asset and hence untaxed (being prior to Capital Gains Tax).

The promoter would have the company pay (to the promoter) a dividend of the money it had left, then the promoter on-sold the now empty shell to someone else. The way the promoter paid the owners for undistributed profits was similar to a dividend strip operation. In any case the amount the promoter paid was a tax deduction (since the promoter would be in the business of buying and selling shares) and the dividend would be taxable income, leaving just the promoter's commission taxable, not the whole original company profit.

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