Operation
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.
The "harbour" in the expression was usually taken as referring to Sydney Harbour (which is adjacent to the financial district), though obviously the sense is also quite general. The actual origin of the name and the practice is not clear.
Read more about this topic: Bottom Of The Harbour Tax Avoidance
Famous quotes containing the word operation:
“It requires a surgical operation to get a joke well into a Scotch understanding. The only idea of wit, or rather that inferior variety of the electric talent which prevails occasionally in the North, and which, under the name of “Wut,” is so infinitely distressing to people of good taste, is laughing immoderately at stated intervals.”
—Sydney Smith (1771–1845)
“You may read any quantity of books, and you may almost as ignorant as you were at starting, if you don’t have, at the back of your minds, the change for words in definite images which can only be acquired through the operation of your observing faculties on the phenomena of nature.”
—Thomas Henry Huxley (1825–95)
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—Henri Bergson (1859–1941)