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IMPROVING THE OPERATION OF THE INCOME TAX
RULINGS SYSTEM

DISCUSSION PAPER

Prepared by Professor Graeme S. Cooper*

December 1998

The ASCPA maintains copyright over this paper and its contents and any reproduction in full or in part needs to acknowledge the ASCPA as its source.

* Faculty of Law, The University of Melbourne

Table of Contents

  1. INTRODUCTION
  2. EXECUTIVE SUMMARY
  3. OUTLINE OF THE REPORT
  4. ROLE OF THE RULING SYSTEM IN A SELF ASSESSMENT PROCESS
  1. Administrative Pronouncements in the Tax Administration Framework
  2. Functions Identified by the Australian Government
    1. Introduction of Organised Public Rulings – 1982
    2. Review of the Rulings System – 1987
    3. Formalising the Rulings System - 1991-92
    4. An Assessment of Tax – Rulings
  1. A Critique of the Design of the Ruling System
    1. A Range of Mechanisms and Design Options
    2. The Chosen Options and the Roots of the Current Dissatisfaction
  1. DESIGN DEFICIENCIES AND ADMINISTRATIVE CONCERNS IN THE CURRENT RULINGS SYSTEM
  1. Issues in Relation to Public Rulings
    1. The Problem of Unreliable Public Rulings
    2. The Problem of Inconclusive Public Rulings
    3. Public Rulings as Ambit Claims
    4. The Problem of Administrative Practices Without Statements – Taxpayer Expectations of Dispensation
    5. The Link with the Penalty System
    6. The Quality of Public Rulings
    7. The Incontestability of Public Rulings
    8. Concerns about the Prior Review Process
    9. The Temptation for Slipshod Drafting
  1. Issues in Relation to Private Rulings
    1. Delay in Securing Rulings
    2. Limitations on Available Issues
    3. Writing and Actions Not Amounting to Rulings
    4. Problem of Embargoed Topics
    5. Quality of Private Rulings and Procedures
    6. Incontestable in Reality
    7. The Limits on Rulings
  1. Generally Uncooperative Approach
  1. RECOMMENDATIONS FOR THE REFORM OF THE

RULINGS SYSTEM

  1. Current Reform Plans for the Rulings System
  2. Improving the Quality and Reliability of Public Rulings
  3. Improving Reliability, Quality and Timeliness of Private Rulings
  4. A System for Completed Transactions
  1. REFERENCES
  2. LIST OF ABBREVIATIONS

I. INTRODUCTION

The Australian Society of Certified Practising Accountants has been actively involved in the tax reform process that is now in full swing. As part of the reform, the Review of Business Taxation chaired by Mr John Ralph is now underway. The Chairman of the ASCPA’s Taxation Centre of Excellence, Professor Richard Vann, FCPA has been appointed as an adviser to the Review.

The ASCPA is keen to see the issues of concern to its members put forward in submissions to the Review. This is the first of our submissions and addresses the operation of the income tax rulings system. The first discussion paper from the Review, A Strong Foundation, acknowledges that there are deficiencies in the existing rulings system and invites submissions that address how those deficiencies may be remedied. We put this submission forward as a constructive contribution on this important aspect of the business tax system.

Angela Ryan
Director Taxation - ASCPA

II. EXECUTIVE SUMMARY

This Report examines the functioning of the income tax Rulings System and makes a series of recommendations to reform the System.

A system of Public and Private Rulings was introduced on 1 July 1992 as an important element in the self-assessment system. Rulings are, in principle, intended to provide taxpayers with a definitive statement from the Australian Taxation Office on how the law applies to particular arrangements. Rulings should therefore provide greater certainty to taxpayers in working out their tax liability.

Despite this laudable principle, a series of deficiencies in the design of the current Rulings System have been identified as inhibiting its ability to achieve its intended functions. Practitioners also have concerns in relation to the administration of the Rulings System.

In relation to Public Rulings, there is a perception of unreliability, inconclusiveness, incomplete coverage, an inappropriate link with the penalty system, poor quality, and incontestability.

In relation to Private Rulings, the concerns are excessive delays, jurisdictional limitations, incomplete coverage, the problem of embargoed topics, poor quality, incontestability and limited time coverage.

The principal recommendations for the reform of the Public Rulings System are:

  • making Public Rulings more explicitly applicable to similar transactions where there is no material difference between the arrangement described and the one undertaken by the taxpayer;
  • addressing the jurisdictional limitations on matters on which a binding Public Ruling can issue;
  • extending the System to cover long-standing administrative practices;
  • removing the link with the penalty system;
  • drafting Public Rulings to be a more exact statement;
  • excising from Public Rulings parts that are not intended to be binding;
  • eliminating ambiguous terms and qualifying words and phrases; and
  • improving the existing mechanisms for independent review, including the consideration of a more formalised system for independent review.

The principal recommendations for the reform of the Private Rulings System are:

  • ensuring that Private Rulings remain applicable where the arrangement as implemented differs from the arrangement described in the Ruling, but the differences are not material;
  • addressing similar jurisdictional limitations in relation to the matters on which binding Public Rulings can issue, including the application of Part IVa;
  • addressing the problem of timeliness through a default system;
  • eliminating embargoed topics;
  • addressing the problem of the uncontestability of Private Rulings by allowing the Tribunal greater latitude to assume facts and allowing taxpayers greater flexibility to introduce new evidence;
  • introducing unimplemented recommendations from the JCPA report - the public disclosure of Private Rulings given by the ATO in a suitably anonymous form; and
  • examining an alternative system for dealing with Private Rulings in relation to completed transactions.

III. OUTLINE OF THE REPORT

This Report for the ASCPA. Examines various aspects of the Rulings System in relation to tax matters. The terms of the engagement seek,

[a] paper [that] will set out the current arrangements for developing and issuing rulings. It will also discuss the role that rulings play in the self assessment system. It may be useful to draw on international experience. The paper should identify the strengths and weaknesses in the existing system. If possible, the paper should include comment on how the system impacts on the work load of taxation practitioners and the taxation authorities. The aim of the paper is to come to some firm conclusions on how to improve the processes involved in the development of taxation rulings, particularly in the context of a self assessment system.

I take it from this that the Society is concerned with the topics listed below, which I will address in the following order:

  • the functions that the Rulings System should perform in a self-assessment system of tax administration (Section II);
  • any deficiencies in the design of the current Rulings System which inhibit its ability to achieve the functions identified above, and any deficiencies in the administration of the Rulings System, particularly those perceived by tax practitioners, which inhibit its ability to achieve the functions identified above (Section III);
  • a review and evaluation of existing options for improving the performance of the current Rulings System, and recommendations for improving the operation of the Rulings System (Section IV). The recommendations are presented as a catalogue of measures which could form the basis of more formal submissions by the Society.

The Report is confined to an examination and evaluation of the operation of the formal Rulings System in relation to income tax matters. That is, the Report focuses principally on the two Systems established primarily under Parts IVaaa [Public Rulings] and IVaa [Private Rulings] TAA 1953, and the accompanying provisions of the ITAA 36 and the FBTAA 86 dealing principally with objections, assessments and penalties. The Report will not examine the operation of similar systems of Sales Tax Rulings or non-binding rulings given for the purposes of other Australian taxes.

The principal focus of this Report is on the rights and entitlements of taxpayers, and the responsibilities of the tax administration, that arise from written statements made with the requisite degree of formality. Similar related issues can also arise from the conduct and established practices of the tax administration which are not found in any published statements and so could not amount to "Rulings" as that term is defined in the Australian tax jurisprudence. But these practices can be equally important for taxpayers and their advisors, especially where they are of long standing and have led taxpayers to act to their detriment. The responsibility of the tax administration for actions and practices that do not amount to a "Ruling" will also be examined.

IV. ROLE OF THE RULINGS SYSTEM IN A SELF ASSESSMENT PROCESS

This Section of the Report considers the place of administrative pronouncements in a system of tax administration, and in particular in Australia’s self-assessment system of income tax. It classifies public statements according to various criteria, and examines their proper role, their intended status and desired effects. Within this overall framework, the Report then proceeds to consider how well the Rulings System as designed serves its critical function - the creation of an enforceable estoppel against the tax administration where a taxpayer enjoys the benefit of a definitive statement made by the ATO.

A. Administrative Pronouncements in the

Tax Administration Framework

Several discrete and distinct types of public pronouncements are available to the administrators of a tax system, the differences between them being based upon a collection of variables that are combined and recombined in various ways. Not all the public pronouncements of a tax administration would be described as "Rulings" as we currently understand that term in Australia, but a representative sample of the range of public pronouncements would include:

  1. Technical memoranda. These documents would exist primarily to provide guidance to internal staff on a range of technical issues to ensure that consistent technical positions were adopted across the jurisdiction. They would be a management tool. The intended audience would be assessors and auditors, although taxpayers would undoubtedly be interested in learning the contents of these statements as well. The principal audience, the ATO, would be expected to follow the document in assessing, auditing and penalising, and failure to do so would result in employment sanctions.
  2. Statements of Office Policy. These documents would provide guidance to internal staff on a range of administrative processes to ensure consistent administration on the range of discretions which have to be managed and procedures which ought to be followed. They would be a management tool directed at an intended audience of office and case managers responsible for setting and remitting penalties, structuring settlements, and so on. Taxpayers might be interested to read such statements but they would not be the primary audience. The principal audience would be expected to follow the document in assessing, auditing and penalising, and failure to do so would result in employment sanctions.
  3. Public Technical Proclamations. These statements would be initiated by the administration as a device for managing at one blow a number of potential problems on a single issue. They would function by announcing in advance a considered administrative position for a class of unspecified taxpayers. The intended audience would be both taxpayers and, to a lesser extent, auditing and assessing staff. It might be expected that taxpayers would choose to follow these pronouncements - that is the purpose of issuing the document - but the failure to comply might or might not be a matter of significance in terms of penalties or other sanctions. The tax administration in most OECD countries refer to these documents as "rulings," "decrees," "practice statements" or some similar term. In Australian terminology, they are Taxation Rulings, usually called Public Rulings.
  4. Private Agreements. These documents would be sought by taxpayers and intended to secure a considered position on a technical issue for one or a few identified taxpayers. The intended audience would be those taxpayers and the few staff who deal with these taxpayers. In this case, taxpayers could be expected to follow the ruling and the failure to comply would be a matter of significance in terms of penalties or other sanctions. Most OECD countries also have these systems which generate documents usually called "private rulings" or "letter rulings." In Australian terminology, these are Private Rulings.
  5. Public Advertising. These statements would be intended to function as a tool for managing a large number of taxpayers to prevent non-compliance arising from honest mistake or misunderstanding by the taxpayer of obligations. The purpose of the ruling would be to increase taxpayer awareness through advertising, information brochures and education. The intended audience would be taxpayers as a whole. It might be hoped that taxpayers would choose to read and comply with these pronouncements but the failure to comply might or might not be a matter of significance in terms of penalties or other sanctions.

The variables that have been manipulated to produce the differences between these kinds of statements are:

  • the purpose in issuing the Ruling - possible purposes might include better administration, dispute prevention by clarifying positions, or warning of an area of disagreement;
  • the intended audience - internal staff, identified taxpayers and their advisors, unspecified taxpayers also known as the public-at-large, or any or all of these. The significance of the audience is that this is the party who is subject to the obligations set out by a pronouncement and is able to invoke the benefits it offers.
  • the intended authority of the ruling - to express the preferred view, to set the limits of acceptable views, to elicit responses; and
  • the consequence of issuing the ruling for the intended audience and other audiences - does it impose obligations, does it confer an immunity and if so from penalties only, from interest and penalties, or from any re-assessment?

Different combinations of these variables produce distinct documents. The purpose in drawing these paradigms is that they are each relevant and useful to the tax administration, but they are different documents and should not be viewed in the same manner. The consequences of each should be different because they are issued for different purposes, with differing authority and to different audiences. It will be argued later that one of the fundamental problems with the Rulings System is that it has become almost the exclusive vehicle for all of these different kinds of pronouncements with adverse consequences for reliability and integrity of the Rulings System.

The group that is the focus of this Report are Public Rulings of general application and Private Rulings of individual application. While they are commonly viewed as forming a consolidated package and discussed together in the public imagination, they are issued for different purposes, addressed to different audiences, have different authority and different consequences. So, for most purposes in this Report, it will be necessary to distinguish them.

B. Functions Identified by the Australian Government

1. Introduction of Organised Public Rulings - 1982

A relatively organised and formal system for the public issue of Rulings began operation in Australia in December 1982. The main impetus for the system was probably the adoption of the Freedom of Information Act 1982 (Cth.). Prior to that time, the ATO had sporadically released isolated public documents, sometimes under other names such as C.I.T.C.M. (Canberra Income Tax Circular Memorandum) or P.I.B. (Public Information Bulletins dating from 1965), which served to identify the ATO’s view of various provisions, the tax consequences of identified transactions, and its understanding of the outcome of various Court and Board decisions. In addition, the ATO was in the habit of providing advance opinions in relation to proposed transactions which served the function of Private Rulings.

It was made clear from the outset, that a Ruling was reliable only on the question of the administration’s attitude to a transaction or the exercise of a discretion - Rulings were not authoritative in the sense that they replaced primary sources of law. The ATO stated this in Taxation Ruling IT 1 which provided that:

In using taxation rulings it should be recognised that they cannot supplant the terms of the law. It is now well established that statements or declarations by the Commissioner of Taxation or his officers do not have the effect of an estoppel against the operation of the taxation law. While taxation rulings are compiled with great care and are intended to assist in the interpretation of taxation law in given circumstances, they must be overruled by legislative amendments to the law or by decisions of appellate tribunals. Furthermore, where a ruling is given in respect of a particular fact situation it will be operative in the circumstances of that fact situation. Taxation rulings are issued subject to these necessary reservations.

Of course, in practice these limitations on the authority of Rulings were more apparent than real. Few taxpayers had either the inclination or the resources to challenge the ATO’s stated attitude even if advised that it was more likely than not wrong. The stated position was in most circumstances treated both by ATO staff and tax advisors as amounting to law, even if incorrect.

2. Review of the Rulings System - 1987

The system of Taxation Rulings was reviewed by the Senate Standing Committee on Legal and Constitutional Affairs in 1987. Its report, Income Taxation Rulings issued in November 1987, noted a series of criticisms of the System as it then operated:

  • because rulings would usually not be challenged, they were virtual law on any issue, so that the ATO was enacting virtual tax legislation;
  • even if there were the desire, no system existed by which a ruling could formally be challenged apart from litigating an assessment;
  • the existence of the Ruling System allowed the drafting of legislation which was vague and imprecise, relying upon Rulings to make the rules workable;
  • the ATO did not regard itself as formally bound by an issued Ruling so that taxpayers might bona fide organise their affairs in accordance with a Ruling only to find that the ATO had decided not to adhere to it;
  • some Rulings were argued to be inaccurate, poorly drafted and unsatisfactory;
  • Rulings tended to be treated by taxation officers as if they were law and no real thought was given to exercising any judgment or discretion.

Nevertheless, the Committee did not think it desirable that all these criticisms be addressed. It rejected a suggestion that Rulings be made regulations (so that they would be binding on the ATO) on the basis of procedural difficulties and the inappropriateness of the subject matter to treatment as a regulation. It also rejected a submission that Rulings should create an estoppel against the ATO or otherwise be binding on him because (i) the ATO would be discouraged from making Rulings and (ii) those that were made would probably be just as technical as the legislation they were intended to interpret.

3. Formalising the Rulings System - 1991-92

Subsequent events rendered inconsequential the Committee’s reluctance to recommend radical changes to the Rulings System.

In February 1990, the government announced a project to reduce complexity and uncertainty in the administration of the income tax. One outcome of this project was released for discussion in December 1990 in a discussion paper - A Full Self Assessment System of Taxation - A Consultative Document. This document outlined proposals to extend the self assessment system of income tax to all taxpayers. It also recognised that a series of concomitant changes was required to other aspects of the income tax system, "particularly penalties, interest and taxpayer certainty issues." Most importantly for the purpose of this Report, the document proposed formalising a system of twin Private Rulings (to replace the then current s. 169a requests) and Taxation Rulings. The system in the Consultative Document as described had three fundamental features:

Binding Characteristics

The Consultative Document proposed that the ATO would be given legislative authority to issue these two types of Ruling and would be bound at law by both types:

4.10 The Commissioner would be bound by both types of rulings and the law would reflect this. In the case of a private ruling the Commissioner would be bound by the ruling where the act, transaction or event was carried out in accordance with the facts and information supplied to the Commissioner and where all relevant information was made known to the Commissioner. The Commissioner would be bound in respect of the particular taxpayer only…

4.11 Where a Taxation Ruling applies to a taxpayer’s circumstances, the Commissioner would be bound by the opinion expressed in the Ruling so far as it applies to the taxpayer’s circumstances and provided there has been no change in the law… Subject to any legislative constraint, a departure from the Commissioner’s Ruling would be on a prospective basis only.

Contestability

Unfavourable Private Rulings would be reviewable at the taxpayer’s instigation either by the AAT or Court, and Taxation Rulings could be challenged indirectly through the mechanism for challenging Private Rulings. Both types of challenge would occur using the existing mechanism for dealing with objections to assessments:

4.12 Although the Commissioner would be bound by private rulings, they would be subject to review by the Administrative Appeals Tribunal (AAT) and the Courts…

4.14 A taxpayer who is dissatisfied with a private ruling could object. Where a taxpayer wished to contest the Commissioner’s opinion in a Taxation Ruling it would be necessary to first seek a private ruling on the application of the Taxation Ruling to the taxpayer’s circumstances.

Impact Upon Penalties

The imposition of penalties, which was substantially revised at the same time, would be tied in to the Rulings System. The penalty system would not in future be based around concepts of full and true disclosure. Instead, it would be based around whether a taxpayer had exercised "due diligence in the conduct of its income tax affairs." Due diligence was to be expressed in the notions of "a reasonably arguable position" and "acting in good faith." It was made clear that a taxpayer could not be duly diligent where (i) the text of the law was clear, (ii) there were existing precedents on the issue or (iii) there was a Taxation Ruling on the matter. The Consultative Document stated,

1.6 … Where a taxpayer does not assess on the basis of a private ruling and does not object to the decision he or she would be liable to a penalty if, following an audit or other checking activity, the Commissioner raised an assessment on that issue.

1.7 … A taxpayer who does not take a Taxation Ruling into account in calculating taxable income could be liable to penalty following an audit where it would be reasonable for that Ruling to have been taken into account."

The position was repeated later in the document:

6.23 Where the Commissioner has issued a private ruling the taxpayer would not be able to claim to have a reasonably arguable position if a position was taken other than that provided for in the ruling. Similarly, failure to take into account in calculating taxable income a general Taxation Ruling applicable to the taxpayer’s circumstances, would militate against there being a reasonably arguable position.

These three basic elements were not varied during the steps that followed after the consultations invited in the document.

In the 1991-92 Budget, the government released another paper, Improvements to Self-Assessment – Priority Tasks - An Information Paper, in which it announced that it would act on the proposals outlined in the Consultative Document, with a few amendments. The main elements of the system were introduced into the income tax system from 1 July 1992 by measures in the Taxation Laws Amendment (Self-Assessment) Act 1992 (Cth.), which made amendments to the ITAA 36, the FBTAA 86 and the TAA 53.

According to the Second Reading Speech of the Minister Assisting the Treasurer, Mr Peter Baldwin, the principal objects of the system were to increase the fairness of the system and to provide greater certainty to taxpayers. He said,

This Bill will provide real benefits for taxpayers by making the system fairer and more certain…

The new system of binding and reviewable rulings will promote certainty for taxpayers, and thereby reduce their risks and opportunity costs. The new system will also be fairer because taxpayers will be able to object to private rulings and have the matter reviewed by an independent tribunal or court.

In relation to Public Rulings, the principal elements of the new system as implemented were:

  • The Commissioner was specifically authorised to issue Public Rulings [ss 14zaae, 14zaaf, 14zaag TAA 53].
  • Rulings could be made on the way in which a "tax law" applies to a class of persons, class of arrangements or both [ss 14zaae, 14zaaf, 14zaag TAA 53]
  • Unless otherwise stated, a Public Ruling issued under the new procedures applied to all arrangements, past present or future [s. 14zaah TAA 53].
  • A Public Ruling could be withdrawn by the Commissioner either expressly, or by implication arising from the issue of an inconsistent Public Ruling [s. 14zaak TAA 53]. Where a Public Ruling was withdrawn, it would continue to operate for all arrangements begun to be carried out before the withdrawal [s. 14zaal TAA 53].
  • A Public Ruling was made "binding" on the Commissioner because he was precluded from issuing an assessment inconsistent with a Public Ruling "where there is a public ruling on the way in which an income tax law applies to a person in relation to an arrangement" [s. 170ba ITAA 36; s. 74a FBTAA 86]. A taxpayer was not equally detrimentally affected by a Public Ruling because the Commissioner was only obliged to issue an assessment consistent with the Ruling where the amount of tax properly assessable exceeded the amount of tax according to the Ruling.
  • A taxpayer could challenge a Public Ruling by applying for a Private Ruling to the same effect as the Public Taxation Ruling and then challenging the Private Ruling. A taxpayer could object to an unfavourable Private Ruling [ss 14zaza, 14zy TAA 53] and if the objection was refused, appeal either to the AAT or the Federal Court [s. 14zz TAA 53].
  • The new system would only apply to Public Rulings issued on and after 1 July 1992 [s. 12 Taxation Laws Amendment (Self Assessment) Act 1992 (Cth.)].

In relation to Private Rulings, the principal elements of the new system as implemented were:

  • The Commissioner was generally obliged to comply within 3 months with a request for a Private Ruling lodged by an applicant under the powers provided in the Act [ss 14zaf, 14zag, 14zal, 14zao TAA 53].
  • A Private Ruling could be (sought and) made in relation to any year of income, a past, current or proposed transaction, and for the applicant or another on whose behalf the applicant was authorised to apply [ss 14zag, 14zah, 14zai ITAA 53].
  • The applicant was required in its application to provide such information and documents as were required by the Commissioner [s. 14zaj TAA 53]. This information could be supplemented by the taxpayer and the Commissioner was permitted to make assumptions about future events in order to make a correct Private Ruling [ss 14zam, 14zaq TAA 53].
  • A Private Ruling had to set out the particulars of the transaction, taxpayer, tax law and years of income to which it applied [s. 14zas TAA 53].
  • The Commissioner was, however, permitted to decline issuing a Private Ruling for various reasons such as redundancy, duplication of proceedings, delay, insufficient information, the application being frivolous or where the transaction was not "seriously contemplated" [s. 14zan TAA 53].
  • A Private Ruling could be withdrawn by the Commissioner expressly in certain circumstances, or by implication arising from the issue of a subsequent inconsistent Public Ruling [ss 14zau, 14zaw TAA 53]. A Private Ruling could also be withdrawn if the arrangement to which it applied had not commenced. If the arrangement had commenced, the Commissioner could still withdraw the Ruling where another person would be disadvantaged by the continuation of the Ruling.
  • A Private Ruling was made "binding" on the Commissioner because he was precluded from issuing an assessment inconsistent with a Private Ruling "where there is a private ruling on the way in which an income tax law applies to a person in respect of a year of income in relation to an arrangement" [s. 170bb ITAA 36; s. 74b FBTAA 86].
  • A taxpayer could object to an unfavourable Private Ruling [ss 14zaza, 14zy TAA 53] and if the objection was refused, appeal either to the AAT or the Federal Court [s. 14zz TAA 53].
  • The new system would only apply to Private Rulings issued on and after 1 July 1992 and only in relation to arrangements that commenced after that date [s. 13 Taxation Laws Amendment (Self Assessment) Act 1992 (Cth.)].

4. An Assessment of Tax - Rulings

The Rulings System was again reviewed by the Parliament as part of the inquiry into "the administrative procedures adopted by the Australian Taxation Office (ATO) in the collection of taxation revenues pursuant to the Income Tax Assessment Act 1936" conducted by the Joint Committee of Public Accounts from 1991-93. That review examined in particular, the "efficiency and effectiveness of self assessment" and "the authority and application of taxation Rulings."

The Committee’s majority report was supportive of the procedures and recommended a series of measures designed to enhance the operation of Rulings. The observations and recommendations included:

  • support for a high degree of external participation in the preparation of Public Rulings;
  • where differing views of the law emerged during the preparation of Rulings, this should be viewed as indicative of an area where the law was unclear and required formal amendment, and a recommendation that the Commissioner not rely upon Public Rulings (and perhaps not even issue the Ruling) in preference to clarification of the law;
  • all Public Rulings should be subject to formal independent review prior to their release;
  • formalising the procedural requirements necessary to constitute a valid Public Ruling as the means of eliminating doubts about the extent to which less authoritative statements might be treated as Rulings;
  • severing the automatic link between the penalty system and both the Public and Private Rulings system; and
  • making Rulings more accessible through various publishing options and a program of review, consolidation and cross-referencing.

The government acted on several of the recommendations of the Committee, though few in the Rulings area.

C. A Critique of the Design of the Rulings System

It seems clear that from the outset, the Rulings System was introduced in order to deliver greater certainty to taxpayers, particularly those taxpayers most affected by self assessment. Certainty in this context means reducing the likelihood of an unforseen dispute between the taxpayer and ATO arising in relation to a proposed transaction, after the transaction has been undertaken or after a return has been filed - that taxpayers can have confidence they know where the contentious areas are and are not to be found in the mind of the ATO, and can organise their actions accordingly.

1. A Range of Mechanisms and Design Options

Given that increasing the level of taxpayer certainty was the government’s principal goal, the government faced a series of options about designing the appropriate mechanism to achieve that goal:

  • How might this greater level of certainty have been achieved? For example, it would have been possible to secure varying, but increased, levels of certainty (in the sense mentioned above) for taxpayers by employing any one or more of a wide range of administrative and legal devices:
  • instituting an express administrative system of prior clearances for proposed transactions - facilitating the negotiation of an agreed outcome with the ATO;
  • increasing the scope for privately negotiated assessments between taxpayers and the ATO - negotiating the assessment with the ATO while the return is being prepared;
  • adjusting the tax statute of limitations - taxpayers would be protected from changes to ATO positions sooner after an assessment, even an erroneous assessment, was made;
  • flagging contentious areas and changes of ATO opinion by issuing more and more copious Press Releases - taxpayers would be aware of the areas where disputes were now likely;
  • giving taxpayers better assistance and information in preparing their returns;
  • changing the administrative law that governs tax administration - making doctrines such as "legitimate expectation" expressly and obviously applicable in tax administration and removing some of the current exclusions of tax from the Administrative Decisions (Judicial Review) Act 1977 (Cth.);
  • changing the law of negligent misrepresentation - creating a parallel set of provisions that afford the taxpayer a remedy for acting on advice where it is reasonable to assume that the advice is intended to be relied upon but has been given without a reasonable level of care; and
  • instituting a system of formal measures designed to create an estoppel against the ATO for its announced positions.

There are undoubtedly other mechanisms. Obviously not all of these measures offer the same degree or formality in coaxing a little more certainty out of the system. In some cases, the certainty arises simply from greater awareness of the likelihood of a dispute; in others from the expectation that the ATO will honour an individual agreement struck with a taxpayer, even if, after reflection or subsequent events, the agreement appears to the ATO to be unwise or inconsistent with the law. But they all go some way toward reducing the likelihood that an unexpected dispute would arise between the ATO and the taxpayer.

  • If the system were to be estoppel-based, what would the estoppel mean in practice? In other words, would the mechanism be an estoppel simpliciter or should the system go beyond this?

- For example, would a statement made by the ATO only be available as a shield for use by a taxpayer against possible ATO actions, or would it be a sword as well that the taxpayer might use to found an action?

  • Or going even further, if such a statement could found an action against the ATO, could it also justify actions by the ATO. In other words, would statements give the ATO a sword to use against taxpayers, as well as imposing a constraint? One means of doing this would be to create a relationship between the estoppel and penalties.
  • If the system extended beyond an estoppel, ought the additional consequences be contestable by taxpayers? Presumably they should if the estoppel is more than an estoppel.
  • If the mechanism were to be an estoppel, the next issue would be to decide which statements would trigger the estoppel - that is, would the ATO be estopped in relation to both public and private statements, and if both, then which public and private statements? Obviously there have to be metes and bounds - public speeches probably ought not create an estoppel, but privately negotiated agreements should, for example. Informal understandings and long-honoured practices could be more difficult, especially where they are tacit, and still more so where they conceivably represent a concessionary departure from the text of the legislation.
  • In respect of which tax-related liabilities would an estoppel operate? Would a taxpayer be able to rely upon a statement to rebut an assessment of additional tax, the imposition of interest, the imposition of a penalty, the level of penalty, either alone or some combination of these? Alternatively, should there be some collateral remedy created for the taxpayer?
  • Would there be identical consequences for all kinds of statements or would the consequences vary? In other words, might there be a range of effects, with varying consequences attaching to statements in different circumstances? For example, would the answers be the same for both private and public statements?

2. The Chosen Options and the Roots of the Current Dissatisfaction

The mechanism that was utilised to achieve this greater certainty was the Rulings System just described, which represents one combination of answers to the design questions posed.

Essentially the Rulings System as designed began with an estoppel-based notion - denying the ATO the ability to resile from (i) positions that are published formally, and (ii) positions that are agreed, at least so far as the imposition of tax and penalties is concerned.

But the estoppel-based beginning was amplified by requiring the ATO to make a statement about a matter, whether it wished to or not. It is one thing to say that the ATO should be held to the positions it declares publicly or agrees privately; it is another to insist that the ATO express such a position on (almost) all matters at the behest of a taxpayer. This is an important extension to the estoppel mechanism, since it mandates statements that cannot later be denied, assuming they were within the scope of the matters on which Rulings are permitted.

The resemblance of an estoppel-based system was further clouded when the system was modified to give the ATO a sword. This occurred because the principal estoppel-based measures were supplemented by related adjustments to the penalty provisions. This sword can be said to be the "price" paid by taxpayers for the Ruling System - the price to be paid for allowing certain statements to be enforceable was the increased penalties triggered for ignoring them, although in the case of Public Rulings, the system insisted that the price be paid only where the ATO’s published position was correct as a matter of law.

Because the system gives the ATO a weapon, it was thought necessary to make the system contestable - the ability to challenge a Private Ruling by a court procedure to insist that a "better" statement be made. This amplifies the estoppel-based beginning beyond all recognition.

There is now some evidence of the problems that this combination of design elements poses - the next Section examines the complaints about the System in detail. Clearly it can lead to strategic behaviour on the part of taxpayers arising from the range of options available to them for challenging the ATO, and the conditions that were attached to the System in the text of the legislation introducing it - at least as the legislation has come to be interpreted - mean that many fewer published and agreed positions will fall within the System than was previously hoped.

But much of the current dissatisfaction with the Rulings System stems from the problems that arise from trying to turn what should have been a simple estoppel-based system into a system of duelling contestable weapons. The focus of the System should have been throughout on denying the ATO the ability to resile from a published position or an agreed position, but the addition of the two extraneous elements of contestability and penalties has undermined the ability of the system to achieve this goal. The System has been tortured beyond a surer foundation and in the process has achieved less rather than more. And the evidence of the experience with the System to date and the current level of dissatisfaction with it catalogued in the next Section, is a strong indication of these problems.

V. DESIGN DEFICIENCIES AND ADMINISTRATIVE CONCERNS

IN THE CURRENT RULINGS SYSTEM

Section II has outlined many of the design features of the current system of Public Rulings in Australia that make it unique. The purpose of this Section is to examine how the system which was constructed has fared in the six years of its operation. In other words, this Section catalogues areas where the system is failing to achieve its goals.

A. Issues in Relation to Public Rulings

The concerns arising from Public Rulings are in many respects distinct from those arising for Private Rulings and will be discussed separately. The range of concerns is long although there is clearly a degree of overlap between the two Systems.

1. The Problem of Unreliable Public Rulings

The principal concern that has emerged in the operation of the Rulings System is that Rulings are perceived not to be reliable - they do not provide an adequate level of certainty to taxpayers who rely upon them against an assessment of tax by the ATO. They do not provide a robust estoppel in circumstances where taxpayers believe they are entitled to rely upon them.

This unreliability of Public Rulings has many causes and manifests itself in many ways, but the concern can be broken down into 4 principal aspects:

  • There are clearly jurisdictional problems apparent in the legislation giving effect to the Rulings System so that there are many areas of tax law which cannot be the subject of a binding Public Ruling as a matter of law.
  • Public Rulings are authoritative in respect of much narrower propositions than was previously understood.
  • The ATO, aware of these two problems, continues to release documents labelled as Public Rulings which cannot be binding Public Rulings.
  • The ATO appears to be becoming less reluctant to depart from its own Public Rulings .

What can a Ruling bind? The Application of "Tax Laws" in Relation to "Arrangements"

According to the terms of the TAA 53, a Public Ruling under Part IVaaa can only be made, in three situations:

Section 14ZAAE. The Commissioner may make a public ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to any person in relation to a class of arrangements.

Section 14ZAAF. The Commissioner may make a public ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to a class of persons in relation to an arrangement.

Section 14ZAAG. The Commissioner may make a public ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to a class of persons in relation to a class of arrangements.

Indeed, s. 14zaaa defines a "public ruling" to mean a ruling under one of these 3 sections. The two important elements of these provisions are the terms "tax law" and "arrangement."

A "tax law" for these purposes is defined in s. 14zaa TAA 53 to mean "(a) an income tax law; or (b) a fringe benefits tax law." These two terms are themselves defined in s. 14zaa to mean:

"income tax law" means a law under which is worked out the extent of liability for:

(a) income tax, withholding tax, mining withholding tax, or Medicare levy, within the meaning of the Income Tax Assessment Act 1936 or of the Income Tax Assessment Act 1997; or

(b) franking deficit tax within the meaning of Part IIIAA of the Income Tax Assessment Act 1936;

"fringe benefits tax law" means a law under which the extent of liability for tax imposed by the Fringe Benefits Tax Assessment Act 1986 is worked out.

The concern that this definition presents arises from the words which require a "law under which is worked out the extent of liability for" income tax or fringe benefits tax.

Based upon this test, there will be many documents labelled Public Rulings which cannot be Public Rulings for the purposes of Part IVaaa. For example, a document which describes the ATO’s views of a taxpayer’s administrative responsibilities will not be a Public Ruling. A document such as TR 92/1 which describes the Commissioner’s understanding of the operation of the Ruling system would not be a Public Ruling. Indeed, in TR 92/1 the ATO takes the view that,

5. … If a provision of an Act or a regulation is not relevant to working out the extent of liability to one or more of those taxes (e.g. it deals exclusively with the lodging of returns or the Commissioner's access powers), it is not a tax law for the purpose of the public ruling provisions. A statement setting out the Commissioner's view on procedural, administrative, or collection aspects of the law (e.g. tax instalment deductions or the prescribed payments system) is not a 'public ruling' for the purposes of the public ruling provisions.

There are many documents labelled Taxation Rulings or Taxation Determinations which meet this description. For the purposes of this Report, it does not matter whether the ATO’s views of what is binding in a Public Ruling is correct - that is, the view will be upheld by a Court. Because the ATO does not believe itself to be formally bound by these statements, one must assume its officers will adopt and act on that same view. In other words, they will not believe themselves to be formally bound by many of the documents labelled Public Rulings either in whole or in part, because the ATO’s own instruction is that they cannot validly be made the subject of a binding Ruling.

The second important term in these sections is an "arrangement" or "class of arrangement." It is defined in s. 14zaa to include:

"(a) [a] scheme, plan, action, proposal, course of action, course of conduct, transaction, agreement, understanding, promise or undertaking; or

(b) part of an arrangement"

A document which does not set out how a tax law will apply to an arrangement will not be a Public Ruling for the purposes of Part IVaaa. There is clear authority that a document labelled "Private Ruling" but which does not describe an arrangement will not be a Private Ruling and the issue is equally relevant here because the same definition is used for both part IVaaa and Part IVaa. In National Speakers Association of Australia v. F.C.T. the Court held that a document issued by the ATO and labelled a Ruling was not a valid Private Ruling because it did not identify an "arrangement." Rather, according to the document, it ruled on the ATO’s view of the tax status of the taxpayer. Emmett J said,

… the notice of private ruling does not purport to identify and does not in fact identify any "arrangement" as defined in s 14zaaa. It is not possible to glean with any certainty from that material just what scheme, plan, action, etc., is the subject of the ruling. That is not a matter of pure form. It is an essential part of the scheme of Part IVaa that the arrangement to which the ruling relates must be identified. It is of no use to a tax payer to know that the Commissioner has made a ruling about some arrangement in relation to a particular year of income unless that arrangement and the year of income are identified with precision. It is, of course, clearly in the interests of a prospective tax payer or applicant to set out with sufficient particularity the arrangement in respect of which a ruling is sought and the year of income in respect of which the ruling is sought. By the same token, it must then be incumbent upon the Commissioner to identify that which is the subject of the ruling.

Public statements made by the ATO which do meet the requirements of Part IVaaa can only have effect as administratively binding statements - that is, as if they were made under the regime that existed prior to 1992.

What is the Ruling Authority for? Transactions v. Principles

Another limitation on the operation of the Rulings System has been exposed by recent decisions which qualify the extent to which taxpayers can rely upon Public Rulings. The recent jurisprudence in relation to the Rulings System has drawn a distinction between statements about transactions and statements about principles - a distinction that is easy to describe but more difficult to define. This dichotomy between rulings on transactions and rulings on matters of principle has an important consequence - if a Public Ruling describes a transaction, that is well and good, but if it doesn’t then the Ruling cannot be relied upon for s. 170ba ITAA 36, even if it expresses a view of the law that might reasonably be thought applicable in the circumstance. Court decisions can express principles that can be applied by analogy, but Rulings do not - they simply describe transactions.

At first instance in the Bellinz, Merkel J observed,

… a public ruling will only be binding in the sense that the Commissioner cannot depart from it in making an assessment where the ruling relates to "an arrangement" and the tax law relates to "that arrangement" in a different way. The ruling is binding as to the way in which a tax law applies to a person or class of persons in relation to an arrangement or class of arrangements. It is not binding in relation to the principles or reasoning stated in it. This distinction is significant in the present case. Accordingly, unless the particular arrangement is the same as the arrangement in respect of which the ruling was made, the Commissioner is not bound to assess the taxpayer in the same way.

Moreover, it appears that a high degree of similarity between the transaction described in the Public Ruling and the arrangement undertaken by the taxpayer is necessary before the Public Ruling will be binding on the ATO.

A good place to observe the application of this dichotomy is in Bellinz itself. Merkel J. spent a great deal of time going over the prior Rulings on leasing and then distinguishing them from the transaction he had to consider - many were issued pre-1992; IT 28 dealt with a situation where property in the goods is to be able to pass "at any point of time" to the lessee; IT 2051 dealt with the circumstances in which a lease would not be treated as a lease but did not deal with the question whether a lease will be regarded as a purchase; IT 2419 only dealt with "eligible trading ships" being hired under a hire purchase agreement; none of the rulings dealt with a tri-partite lease; and so on. For each Ruling, some element did not describe the Bellinz transaction with sufficient accuracy for that Ruling to be binding. The Full Federal Court similarly distinguished both the pre- and post-1992 Rulings as unreliable because none dealt with a situation where the lessee (with an option to purchase) did not retain possession. Hill J noted,

It is unnecessary to set out in detail the various binding rulings upon which the appellants rely. It suffices to say that, while underlying the rulings a philosophy to permit depreciation in respect of hire purchase agreements may be gleaned, none of the rulings relates to an arrangement or class of arrangement precisely similar to the present arrangements (emphasis added).

And moving on from the problem of the high degree of precision, there are two further aspects to the conundrum that this position exposes. Based on this dichotomy, there are many documents labelled Public Rulings which are not reliable as Public Rulings because they fail to describe any identifiable arrangement, or they describe a class of transaction but their principal purpose is to extrapolate from the class to express a more general principle.

Many current Public Rulings deal with issues rather than transactions. Consider the various Public Rulings which try to elaborate when a taxpayer is carrying on business. These Rulings include:

  • IT 2655 – Whether taxpayer is carrying on on a business of betting or gambling
  • TR 93/26 - Issues relating to the horse industry
  • TR 94/8 - Whether business is carried on in partnership
  • TR 95/6 - Primary production and forestry
  • TR 97/11 - Am I carrying on a business of primary production.

In many instances these documents describe something so nebulous that they will not amount to a Public Ruling at least while the legislative requirement of an "arrangement" remains in its current form. At best, they repeat the tests in the relevant cases, but do little more. In any event, they are insufficiently precise to be capable of meaningful application by either a taxpayer or the ATO, though no doubt many tax advisors and ATO staff regard them as reliable.

Other documents labelled Public Rulings describe an issue and then answer that issue by expressing a general principle rather than an outcome. An example of this kind of Public Ruling is Draft Taxation Ruling TR 98/D8. It purports to rule on the demarcation between interest and royalty withholding tax on cross-border leases. It provides,

7. Where it is clear from the outset that the sale element in a transaction in the context of cross border equipment leases (where the incidents of ownership and economic risk are passed to the lessee) is paramount, payments made under that transaction are not subject to equipment royalty withholding tax under subsection 128B(5A) of the Act. Where an instalment payment under a hire-purchase agreement in respect of the type of arrangements covered by this Ruling contains an implicit interest component, that interest component is subject to interest withholding tax in accordance with section 128AC.

8. Conversely, where the main object of the transaction in the context of cross border leases is hire, even where the hirer has an option to purchase the equipment, royalty withholding tax under subsection 128B(5A) applies.

The document does not purport to rule on "where the inciden of ownership and economic risk are passed to the lessee" or when an agreement "contains an implicit interest component." It is exactly this difficulty that is responsible for the taxpayer’s problem. The Ruling does not rule an answer to the problem; rather it sets up a principle or framework and leaves it to the taxpayer to decide how its arrangement fits within that framework.

The second aspect of the problem will emerge for almost every Public Ruling that describes a transaction with sufficient precision for it to be capable of creating an estoppel, or forcing the issue of a contestable Private Ruling, but where the ATO wants the Ruling to be more encompassing. Consider for example - TR 93/15, CGT Consequences of Consideration Comprising a Lump Sum Plus a Right To a Contingent And Unascertainable Amount. In this Ruling, the ATO states a view that, for the seller, the sale is one made for money and property, but for the buyer the purchase is made for money only. Assuming for this purpose that it is correct, how far does its binding effect run - does it apply to a sale where the price consists of the variable component only; does it apply where the variable component is contingent but is ascertainable; does it apply where the variable component is not contingent but is unascertainable?

It is not easy to see how this matter can be rectified short of legislative amendment, and the two aspects of the problem would require different legislative solutions. One would require the elimination of the implication that a valid Ruling must describe a transaction, and the second would allow documents labelled Public Rulings to describe a class of transaction, and extend to similar transactions where no material differences exist.

The Mingling of Binding and Non-binding Rulings, and the Mingling of Binding and Non-Binding Text

The limitations on the reliability of documents labelled Public Rulings have been recognised by the ATO and tax advisors for some time, and the ATO has cautioned taxpayers and their advisors about these limitations in various ways. Nevertheless, the ATO continues to issue undifferentiated documents labelled as Public Rulings many of which cannot be Public Rulings under Part IVaaa. Further, there is much text in a Public Ruling that is not Ruling - it is explanation or justification of the ATO’s position, or didactic prose. Tax practitioners have expressed concerns that the ATO does not appear willing to take responsibility for issuing only binding Rulings or to differentiate carefully which Rulings (and parts of Rulings) are binding and which are not.

The caution to taxpayers to make this differentiation occurs in several places and is done in a variety of forms. The most obvious caution is contained in Taxation Ruling TR 92/1.

5. … If a provision of an Act or a regulation is not relevant to working out the extent of liability to one or more of those taxes (e.g. it deals exclusively with the lodging of returns or the Commissioner’s access powers), it is not a tax law for the purpose of the public ruling provisions. A statement setting out the Commissioner’s view on procedural, administrative, or collection aspects of the law (e.g. tax instalment deductions or the prescribed payments system) is not a ‘public ruling’ for the purposes of the public ruling provisions.

15. If no part of a Taxation Ruling or Determination concerns the way in which ‘a tax law’ applies, no part of the Taxation Ruling or Taxation Determination is a public ruling.

According to its terms, TR 92/1 is presumably not a binding Public Ruling for the purposes of Part IVaaa.

Another caution, in the form of a disclaimer, was expressed in the Preamble to Public Rulings. Public Rulings in the Taxation Ruling (TR) series initially carried the notation:

Note: This Ruling, to the extent that it is capable of being a ‘public ruling’ in terms of Part IVaaa of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part . Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner.

This text was the subject of adverse comment by Merkel J in Bellinz who noted,

The present case suggests that the public rulings to which I have referred may not have served the purpose Parliament envisaged that they would serve. When the binding rulings system was introduced into the Administration Act by the Taxation Laws Amendment (Self Assessment) Act 1992 (Cth) the Minister Assisting the Treasurer stated in the Second Reading Speech for the Bill:

This Bill will provide real benefits for taxpayers by making the system fairer and more certain…

The new system of binding and reviewable rulings will promote certainty for taxpayers, and thereby reduce their risks and opportunity costs. The new system will also be fairer because taxpayers will be able to object to private rulings and have the matter reviewed by an independent tribunal or court. (Vol H of R 184 at 2774-5).

By making a ruling that states that it is binding "to the extent it is capable of being a public ruling" … the Commissioner is not providing the certainty that binding public rulings are intended to provide. Further, rulings in such terms obviously have a tendency to mislead, which is antithetical to the system of certainty and fairness intended to be provided to taxpayers by the public ruling system.

In response to these comments, the Preamble to a Public Ruling was amended to be more specific. It states,

The number, subject heading, and the Ruling and Date of effect parts of this document are a ‘public ruling’ in terms of Part IVaaa of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner.

This practice of including the new form of Preamble is not, however, universally followed. For example, Taxation Ruling 98/11 which sets out the ATO’s views on documentation and other compliance issues connected with transfer pricing does not contain the new form of words, but continues with the former phrase.

The Preamble to Public Rulings in the TD series was also amended. It now reads,

Preamble

The number, subject heading, date of effect and paragraphs 1 and 2 of this Taxation Determination are a ‘public ruling’ for the purposes of Part IVaaa of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the Determination is administratively binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain how a Determination is legally or administratively binding.

Date of effect

This Determination applies for the … year commencing on ... However, it does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

In so far as His Honour’s comments were directed to a lack of precision in the drafting of Rulings, this amendment to the Preamble goes some way to addressing the point. But these comments can also be understood as making a much broader point, that the ATO should not be in the habit of issuing under the label of binding Public Rulings documents which clearly are not binding (because they cannot be), but placing responsibility for making this differentiation on taxpayers and their advisors.

On one view, the purpose of the caution in either form appears to be to function as a disclaimer of responsibility by the ATO. It is intended to remind taxpayers and their advisors that not every document labelled as a Pubic Ruling and released by the ATO can be a binding Public Ruling. Tax practitioners’ concerns that the ATO does not appear willing to take responsibility for issuing only binding Rulings or to differentiate carefully which Rulings are binding and which are not, are not addressed by a change to the form of the Preamble. Released in this form, Public Rulings clearly have the capacity to mislead even sophisticated users.

The view of the ATO is that by couching the Preamble in this form, it is allowing the possibility that parts of Rulings can be binding for the benefit of taxpayers and, in so far as it is incapable of being a valid Ruling, the ATO will still treat it as administratively binding. But advisors have not accepted this position based on their prior experience with "administratively binding" statements, and because they believe that the ATO will, when a matter is tested in Court, withdraw from its own documents and argue for immunity from constraint.

ATO Does Not Follow its Own Rulings

The matter which has generated the most heated dissatisfaction among practitioners is the developing perception that the ATO has in several instances deliberately chosen not to follow its own Rulings. This perception exacerbates the problem of unreliability that has emerged from the text of the law as interpreted by the Court decisions referred to above.

Three recent cases are commonly cited as examples of this:

  • In Bellinz, the ATO successfully argued that its prior Public Rulings on the treatment of depreciation in relation to leased equipment did not apply to the particular form of lease arrangement then before the Court. The taxpayer argued that the differences between its proposal and that described in the various Public Rulings were immaterial so that it was reasonable for it to assume that the Rulings applied to its transaction as well. As noted above, Hill J was able to find "underlying the rulings a philosophy to permit depreciation in respect of hire purchase agreements" which was not applied by the ATO in this case although the ATO has argued that this was never its position.
  • In Crommelin v D.F.C.T, "senior counsel for the [Commissioner] submitted that Ruling IT 2551 did not correctly state the legal principles to be derived from the authorities" and was successful in sustaining the assessment. The taxpayer had sought to bring itself within a Public Ruling which appeared to apply to the taxpayer’s position to render it immune from tax.
  • Again, in Mercantile Mutual Insurance v F.C.T, counsel for the ATO put a submission based upon "an approach expressly disavowed in IT 2663 it being said that it relied on [an] unrealistic premise." The submission was rejected by the Court.

In the latter two decisions, the Rulings in question were not binding Public Rulings under Part IVaaa. Nevertheless, the ATO has stated on many occasions that Rulings made under the former system, and non-binding Public Rulings made under Part IVaaa, remain "administratively binding."

Another example can be seen in Crestani v. F.C.T. which concerned the deductibility of expenses associated with transporting tools by an employee in the airline industry. In that case, Senior Member Block cited paragraph 138 of Taxation Ruling TR 95/19 and expressed the view that,

… the Ruling in its terms is clear and unambiguous, and that the circumstances in which the Applicant’s travel expenses were incurred are in accordance with the arrangement outlined in paragraph 138. The clarity of the Ruling and its clear application to the Applicant’s travel arrangements preclude me from having to ascertain the essential character of the expenses …

Counsel for the ATO took a different view of its application. The disagreement was hardly surprising given that the single paragraph deals with 3 aspects of a single tax issue.

2. The Problem of Inconclusive Public Rulings

A second group of concerns surrounds the style of drafting of Rulings - that they are inconclusive according to their terms. Again, the Public Ruling might be said to be "unreliable," but in this instance the unreliability arises because it is not clear that any definitive statement has been made.

Qualified Rulings

The most obvious aspect of this problem arises from the use of qualifying phrases and terms in the text of Public Rulings. Practitioners routinely complain of Rulings that qualify their effects by using terms such as "may," "in most cases," "will generally," "in most circumstances," and so on.

This passage from Taxation Ruling TR 94/20 on whether deductions are allowable to police officers for the cost of conventional clothing is typical,

80. The cost of conventional clothing worn at work is generally a private expense. It is our view, that in most cases plain clothes police officers will be unable to show a sufficient connection between expenditure on plain clothes and income earning activities. Therefore, expenses incurred against a clothing allowance are generally not allowable deductions under subsection 51(1). Paragraphs 238 to 243 of this Ruling confirm that expenses incurred on conventional clothing are generally not deductible (emphasis added).

One can clearly grasp the intended meaning of the passage, but it does not identify the characteristics of the unusual circumstances when the expense will be allowable. A similar passage from TR 96/16 on the deductibility of compulsory uniforms is just as qualified,

4. The decision in Mansfield’s case follows the long standing view that, as a general rule, expenditure on items of clothing is private in nature and not deductible, whether or not the taxpayer uses them for work. In most cases, expenditure on shoes, socks, stockings and other conventional clothing will not be deductible.

5. This general rule is not, however, of universal application and it is possible in special circumstances for there to be a sufficient connection between the expenditure on clothing and the income earning activities of a taxpayer. For this to occur it is not sufficient that the expenditure is a prerequisite to the derivation of assessable income. It must be relevant and incidental to the actual activities which gain the assessable income.

Again, the clear intention of the paragraph is to discourage taxpayers from claiming deductions for conventional clothing, but it does not identify the characteristics of the special circumstances when the expense will be allowable.

Indeed, the problem posed by such qualifications may be more fundamental than simply being indecisive - it may mean that the document is not a Public Ruling. In order to be a Ruling, the document must set out "the way in which, in the Commissioner’s opinion, a tax law or tax laws would apply to …" A statement that is too qualified may fail to set out any opinion at all.

Essays, not Rulings

Another aspect of the same problem of inconclusive Rulings arises from Rulings that do not rule - they rather describe a general area of law. As was noted above, where a document does not describe how the law will apply to an arrangement, it is probably not a Public Ruling for the purposes of Part IVaaa. Whether or not this is ultimately held to be the law, it is nevertheless the case that the ATO routinely issues documents which describe the law on a general area, but which do not obviously "rule" on any matter.

One example is the recently released TR 98/9 on the deductibility of self-education expenses. It provides,

Circumstances in which self-education expenses are allowable

Section 8-1 of the ITAA 1997

12. Self-education expenses are deductible under section 8-1 where they have a relevant connection to the taxpayer's current income-earning activities.

13. If a taxpayer's income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction.

14. If the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in a taxpayer's income from his or her current income-earning activities in the future, the self-education expenses are allowable as a deduction.

15. No deduction is allowable for self-education expenses if the study is to enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity (whether in business or in the taxpayer's current employment). This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

16. In practice, the above principles do not always operate on a mutually exclusive basis. It is always necessary to have regard to the words of section 8-1 and apply them to the facts.

17. An expense is deductible under section 8-1 when it has the essential character of an income-producing expense. The essential character is to be determined by an objective analysis of all the surrounding circumstances. There are circumstances where apportionment under section 8-1 is required. For example, if a study tour or attendance at a work-related conference or seminar is undertaken for income-earning purposes and for private purposes, it is appropriate to apportion the expenses between the purposes. If the income-earning purpose is merely incidental to the main private purpose, only the expenses which relate directly to the former purpose are allowable. However, if the private purpose is merely incidental to the main income-earning purpose, apportionment is not appropriate.

The document is principally a summary of principles that emerge from the relevant case law. But does it actually "rule" something? Once paragraphs 16 and 17 are examined, is doubtful that the document says more than, the question must always be answered by examining the facts, understanding the applicable law, and applying the facts to the law.

Another example is the Public Ruling on the relationship between restrictive covenants and goodwill - TR 95/3, Application of subsections 160M(6) and 160M(7) to restrictive covenants and trade ties. The document is dealing with a difficult legal question about when a covenant ceases to be the mechanism by which a vendor conveys goodwill to the buyer of his business, and whether it becomes an asset separate from the seller’s goodwill. The consequences arising from this question are important to taxpayers - if the covenant is simply a mechanism, the taxpayer is selling its goodwill, which may be a pre-CGT asset, or, if not, might entitle the taxpayer to the concession provided for sales of goodwill in s. 118-250 ITAA 97. If the covenant is an asset separate from the goodwill, the asset will generate a capital gain taxable in full on its disposal under s. 104-35 ITAA 97. The Ruling approaches, but does not answer this question,

Restrictive covenant may be a separate asset from goodwill

7. A restrictive covenant may be treated as a separate asset distinct from goodwill, in the context of a sale of a business.

Restrictive covenant has value

8. In the case of an employee, a restrictive covenant that protects goodwill still has value in its own right. In the case of a sale of business contract, although a restrictive covenant protects the value of goodwill it will often have value in its own right.

Apportionment of consideration

9. If the parties to an agreement for the sale of a business are acting at arm's length and reasonably attribute or allocate an amount to the restrictive covenant, that allocation will be accepted. Failing this, if the basis of apportionment has to be decided, we rely on subsection 160ZD(4) attributing a reasonable value to the restrictive covenant. It then essentially becomes a question of valuation to determine to what extent the consideration for the sale of the business relates to the restrictive covenant over and above the goodwill.

Restrictive covenant may form part of goodwill

10. In the circumstance of a person selling his or her business by contract which provides for a restrictive covenant, the covenant may form part of the collection of intangible elements that comprise goodwill. Accordingly, if the other requirements of section 160ZZR are met, the entire consideration received qualifies for concessional taxation treatment under that section. However, the concessional treatment afforded by section 160ZZR to the disposal of goodwill under an agreement to sell a business is not available in respect of the disposal of the notional asset that arises by operation of subsection 160M(7).

It is not possible to decipher from this Ruling when a covenant is a separate asset and when it is not. Paragraph 7 simply says that it may be. Paragraph 8 implies, though does not rule, that the determinant is whether the covenant has value to the buyer beyond the price being paid for the other assets. It may be that the Ruling does not purport to rule on that question, but that is not the impression one is left with. Instead, one is left wondering what it is that one is meant to have learned from this Ruling. What has been "ruled"?

3. Public Rulings as Ambit Claims

Another matter which has concerned practitioners is the way that the Rulings System has come to be used by the ATO. According to common understanding, the main purpose of the Rulings System was to provide certainty for taxpayers against the ATO - it was intended to be a safe harbour protecting them against administrative inconsistency. But under its current direction, the Rulings System is viewed a means for generating more tax. It may be that this is the reason for the recommendation of the Joint Committee of Public Accounts that the ATO not issue Public Rulings on areas "where the Commissioner is presented with arguments that there is serious doubt as to the validity of an interpretation" until the law had been clarified.

Many examples can be given of this use of Public Rulings:

  • In Draft Ruling TR 95/D28 and in TR 98/15 the ATO takes the view that any amount credited to a taxpayer on the trade-in of leased equipment will be assessable as income notwithstanding an inconsistent High Court decision on the treatment of trade-ins.
  • The saga of airline frequent flyer schemes is similarly viewed as an example of the use of the Rulings System as a weapon. The ATO released Rulings and Determinations - TR 93/2, TR 94/15, TD 95/61 and TD 96/15 - which took the view that benefits under frequent flyer schemes were assessable income. Only when the matter was challenged in the Payne litigation could the claim be refuted.
  • The Ruling on lease incentives, IT 2631, stated unequivocally, "where a business taxpayer is given a cash incentive to enter into a lease of business premises, the incentive is income of the taxpayer." When this position was challenged, the subsequent litigation in Selleck, Montgomery and Lees & Leech has shown serious qualifications to the ATO’s view. Interestingly, no change has yet been made to the Ruling. Indeed, it is referred to extensively as if an authority in subsequent Rulings such as TR 96/6.

There is clearly a role for the ATO to warn taxpayers of the ATO’s attitude to various matters. For example, if the ATO holds the view that a case was wrongly decided or that a practice is inconsistent with the Act, this is clearly important information for taxpayers and they should be made aware of it. But the Rulings System is not the vehicle that should be used for this purpose. It is inappropriate because the link with the penalty system clothes Public Rulings with a punitive force.

A response to this concern is that the system, as designed, allows taxpayers the opportunity to challenge incorrect Public Rulings through the Private Rulings system. But at a practical level, this ability of taxpayers to challenge incorrect Rulings is unlikely to be an effective protection against the abuse of the Rulings System. It will be argued below that the mechanism for challenging Private Rulings is proving unworkable, but more fundamentally, the cost and difficulty of engaging in a debate with the ATO is too high. Many taxpayers will, therefore, quite rationally, choose to abandon their rights rather than spend their time and money in a challenge that is weighted against them.

4. The Problem of Administrative Practices Without Statements -

Taxpayer Expectations of Dispensation

Another problem with the effectiveness of the Rulings System in creating an estoppel arises often in the case of administrative practices. Taxpayers have faced the problem that the ATO will refuse to dispense with a tax obligation that exists at law, but has not been enforced in the past as a matter of administrative practice - David Jones Finance is the best known example.

At present, it is difficult for these administrative matters to be the subject of a binding Public Ruling given the jurisdictional limitations on the System discussed above. Second, even if it becomes possible under the government’s proposed changes to the System, not all administrative practices are, or are likely to be, reduced to writing in the form of a Public Ruling. Consequently a taxpayer such as David Jones Finance may still have no recourse to a remedy under the principal System set up to ensure certainty for taxpayers in a self assessment system. There seems no prospect of a simple and effective mechanism for contesting this outcome.

This lacuna is a consequence of the way the system was designed. If the system were consciously focussed on the estoppel notion, the debate might have been directed to this central question - how should the ATO have acted based on its prior representations, rather than the current question - how should the ATO have acted based on the law as it stands?

5. The Link With the Penalty System

It was noted above that the Rulings System also provides the ATO with a sword through the effect of the Rulings System on the imposition of penalties. If the link with penalties was the price for the certainty afforded by a Ruling, it might be wondered why the price is necessary. A taxpayer should be penalised for failing to comply with obligations that arise under the law. Simply as a matter of democratic practice, it is not desirable that taxpayers should be penalised for failing to comply with obligations the source of which is a statement made by the administration. This places too much pressure on the Rulings System.

Indeed it places too much pressure on everyone in the process. There is now a serious danger that the benefit-to-price ratio of the System, if one can call it that, will get out of alignment. It was argued above that the tie between the Rulings System and the penalty system can be viewed as the price to be paid for an increased level of certainty. But if a Ruling is unreliable, or one can’t be sure whether it is reliable, and if one can’t realistically expect to be able to challenge the accuracy of Rulings (as will be argued below), there is the possibility that there will be penalty without reliability or contestability. It is easy to imagine situations where ATO officers feel that every published Ruling is accurate and binding - indeed it is hard to imagine how ATO officers could conscientiously do their job and act otherwise. Consequently, ATO officials will feel obliged to assess and recommend a penalty based upon the view that the taxpayer did not have a reasonably arguable position. The taxpayer now has to convince the ATO officials that it is only valid Rulings that have this effect - valid in the sense that the Ruling is one that could be made under the Rulings system, and that it applies to the situation, and that it is correct at law. ATO officials should not be put in a position where they are asked to agree that a Ruling is invalidly made (regardless of whether it is incorrect at law).

6. The Quality of Public Rulings

A continuing source of dissatisfaction is the alleged poor "quality" of Public Rulings. This complaint takes many forms. Some argue that Rulings display a systematic bias toward the ATO’s view of the law - the problem of ambit claims mentioned above. On other occasions, the allegation is that a Ruling simply overlooks major authorities, especially when inconvenient, or misconceives the law. This problem is said to be more evident with Taxation Determinations and has, as one of its causes, the problem that Rulings emanate from so many sources within the ATO.

One example cited of this problem was the Draft Ruling TR 95/D28 on the trade-in of leased equipment. When released, the Draft Ruling stated the bald proposition that,

5. Where a previously leased asset is traded-in on a replacement asset, all or part of the trade-in credit is assessable under the following provisions of the Act…

6. This will be the case even if the trade-in credit was not paid to the lessee but was used either to reduce the cost of a replacement asset or to reduce the lease payments which would otherwise be payable on a replacement asset.

The leading High Court decision on the treatment of trade-ins, AL Hamblin Equipment Pty Ltd and AL Hamblin Constructions Pty Ltd v. FC of T, which at the least is a serious obstacle to this assertion, was not even mentioned in the Draft Ruling. This omission was corrected when the final version of the Ruling was released three years later as Taxation Ruling TR 98/15. The final version maintained the ATO view but went to great lengths to explain why the ATO does not agree with an interpretation of this decision that would contradict the ATO view.

The Ruling on lease incentives, IT 2631, is also seen as an example of the problem of over-simplification of the law. Paragraph 8 states unequivocally,

Cash Payments

8. In view of the decisions in Myer and Cooling, where a business taxpayer is given a cash incentive to enter into a lease of business premises, the incentive is income of the taxpayer. This position will also apply to amounts paid in consideration of the variation of a lease to take up extra space or to relocate within the same building. An incentive paid to encourage a tenant to remain in the same leased premises would also be income.

Nothing in the rest of the document retracts or qualifies this statement. Considered just as a statement of a principle of the law emanating from Cooling and Myer as understood at that time, it is inadequate. It purports to state as a principle of tax law, that a cash payment made to a taxpayer carrying on a business "to enter into a lease of business premises" is income simpliciter. Subsequent decisions in Selleck, Montgomery and Lees & Leech have shown the error.

The ATO has attempted to address this matter in a recent Quality Assurance review of the Rulings System. According to a recent presentation, the ATO views its performance as adequate.

7. The Incontestability of Public Rulings

The following Section will consider problems that have been identified with respect to the system for contesting Private Rulings. These problems also arise for Public Rulings because the same system is involved - a taxpayer who wishes to challenge a Public Ruling does so by securing a Private Ruling and it is the Private Ruling which is challenged. Because the system for challenging Private Rulings is proving deficient, the prospect of mounting a meaningful challenge to a Public Ruling is similarly deficient.

This outcome places more pressure on the need to ensure that Public Rulings are correctly drafted prior to their release.

8. Concerns About the Prior Review Process

Various professional bodies representing taxpayers are involved in a system for reviewing drafts of Public Rulings prior to their release. In addition, there are separate Panels constituted within the ATO to assist in the preparation of draft Rulings, and these Panels include individuals drawn from outside the ATO. Because the system for challenging a Ruling after its release is proving less than fully satisfactory, these are the principal means for ensuring that Public Rulings are a correct interpretation of the law.

Practitioners continue to express concerns about the prior review process. Many doubt that their views are seriously considered in the preparation of the final version because in most cases there is no contact with commentators on their comments during the review process, and it is obvious in the final version that individual comments were not addressed.

9. The Temptation for Slipshod Drafting

Another concern that practitioners have raised arises out of a fear that the Rulings System is being seen as an alternative to clear and careful drafting. Indeed, it may account for a perceived decline in the quality of legislative drafting.

Two versions of this argument have emerged. In one version, the Parliament is being less rigorous in ensuring that new legislation is carefully and precisely drafted because of its knowledge that if needed, a Ruling can issue that will clarify the law to ensure that it accords more fully with the stated policy. A more sinister version of this same concern sees the Parliament being encouraged to allow faulty legislation to pass, relying upon assurances that any unforeseen consequences (and perhaps even some foreseen ones) will be solved by issuing a Public Ruling at some convenient time. The legislation is passed, but no Ruling is issued, or else the Ruling issued differs from what was expected. These comments echo the concerns expressed by the Senate Standing Committee on Legal and Constitutional Affairs in its 1987 report.

B. Issues in Relation to Private Rulings

A different collection of issues emerges from examining the current experience with Private Rulings. Indeed, even within this group of Private Rulings, different types of problems have been identified with respect to requests for Private Rulings arising from completed transactions and those in respect of proposed transactions.

1. Delay in Securing Rulings

By far the greatest concern expressed by practitioners was the frustration expressed at the delay involved in securing a Private Ruling. Many practitioners spoke about delays of over a year in processing Ruling requests for proposed transactions. For transactions that are commercially sensitive or depend upon meeting a limited market opportunity, this delay was unsatisfactory.

Further, it appears that the machinery inserted into the Act in order to force the ATO to deal promptly with requests is largely ineffective. Section 14zao(3) TAA 53 requires the Commissioner to "give the applicant written reasons for continued delay in the consideration of the application" every 3 months until the application is determined. This process generally ensures that the ATO periodically generates a non-committal document which is sent to the tax advisor. Section 14zao(1) TAA 53 permits the taxpayer to request from the Commissioner "a written statement of the reasons why the consideration of the application has been delayed." This too is a fruitless procedure in practice. Instead, one commentator has suggested that the best method for ensuring a response from the ATO on a protracted matter is to institute proceedings for mandamus.

Less concern was expressed about delays in processing requests for Private Rulings in respect of completed transactions as the taxpayer’s commercial position is already fixed. There is still, however, a concern in that the rate of interest charged on late payments of tax exceeds a market rate of interest in order to discourage taxpayers from "borrowing from the government." This implicit penalty grows as the delay continues.

Delay in issuing Private Rulings on a prospective transaction can have a flow-on effect - it can mean that it is not possible to have a meaningful contest where the Ruling request is not answered favourably. For example in CTC Resources NL v F.C.T. the taxpayer lodged its request for a Private Ruling in January 1993 and sought a Ruling for the year of income 1992-93. Presumably this year was identified because the Ruling sought related to a proposed transaction which could have been undertaken at any time. The unfavourable Rulings issued in April but by the time the taxpayer’s objection had been considered the income year referred to had elapsed. At the appeal concerning the refusal, the ATO argued that the appeal was incompetent because the taxpayer was no longer a person "dissatisfied" with a Ruling as required by s. 14zz TAA 53. As the period to which it related had expired, even if the Ruling had been overturned, it could have no effect because the taxpayer would not be able to implement the transaction described. The Full Federal Court upheld this submission and dismissed the appeal as incompetent.

2. Limitations on Available Issues

Another significant concern of practitioners is the large number of important issues or proposals on which the ATO will not issue a Private Ruling. It was noted above that there are many areas where a Public Ruling will be issued even though no exact arrangement is defined, but on these same areas no Private Ruling will be issued.

Matters of Fact

The ATO takes the view that it is precluded from issuing a Private Ruling on many matters which largely revolve around questions of fact. One example is the reluctance to grant a private ruling on whether a taxpayer is carrying on a business. Taxation Determination TD 96/16 says,

1. No. The question of whether a person is carrying on a business does not identify any particular "tax law". Under section 14zaf of the TAA a person can only apply for a ruling on how, in the Commissioner's opinion, a tax law applies in relation to an "arrangement" in respect of a "year of income".

2. However, the application of a number of tax laws depends on whether a business is being carried on. For example, a deduction for a loss or outgoing will not be allowable under the second limb of subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA) unless it has been necessarily incurred by a taxpayer in carrying on a business for the purpose of producing assessable income.

3. The carrying on of a business is a pre-requisite for the application of this part of this particular tax law. In a private ruling about the application of this tax law the Commissioner would give his opinion on how the second limb of subsection 51(1) of the ITAA applies, or might apply, to a person in respect of a year of income, in relation to an arrangement.

In other words, the ATO will not answer the question directly, but will provide answers to other questions where those answers depend for their validity on an answer to the question, is the taxpayer carrying on a business.

Yet there are many Public Rulings which purport to "rule" for whole classes of taxpayers on matters which largely revolve around matters of fact. It was noted above that many current Public Rulings deal with issues rather than transactions such as the various public Rulings which try to elaborate when a taxpayer is carrying on business. It is extremely odd that we have a situation where a Public Ruling can be issued on a matter where facts are so significant, such as whether a taxpayer is carrying on a business, or what is the source of some income, but it is not possible to secure a Private Ruling on the matter. This is exactly the wrong outcome. Only in a Private Ruling request can the ATO pay any serious attention to the facts and circumstances relevant to the particular taxpayer seeking certainty.

Application of Part IVa

One matter that has recently arisen as a cause for concern is the possibility that the ATO cannot issue a binding Private Ruling on whether Part IVa will apply to a proposed transaction. In Bellinz, Hill J cast doubt on this, and observed obiter,

While there is nothing to suggest that in an appropriate case a ruling could not issue on Pt IVa of the ITAA 1936, both the Commissioner and the taxpayer must be aware of the difficulty which a private ruling on a Pt IVa issue will create. Section 177D(b) sets out the various matters to which the Commissioner shall have regard in reaching the conclusion that a person or more than one person entered into or carried out the scheme or any part of the scheme for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with it. One of those matters is "the manner in which the scheme was entered into or carried out." Where the arrangement in respect of which a private ruling is sought has not yet been carried out, it is difficult to see how there could be adequate facts upon which to base a private ruling. Even where the scheme has been carried out, there may in many cases be difficulty in obtaining all relevant facts, particularly those relating to the manner in which the scheme was entered into or carried out. In the present circumstances there is no need to consider these difficulties.

It is understood that the ATO considers it is able, and will continue, to issue binding Private Rulings on the application of Part IVa. Taxpayers are, however, concerned that such a Ruling may later be challenged by the ATO in a Court and found defective. A judicial caution such as this cannot be simply overlooked.

Issues of Collection, Tax Administration and Procedure

Because of the jurisdictional limitation referred to above that a Ruling must address the application of a tax law to an arrangement, there are many instances where a binding Private Ruling cannot be given. These matters can be just as significant to a taxpayer as substantive issues.

3. Writing and Actions Not Amounting to Rulings

One continuing problem in achieving greater reliability in dealings with the ATO is the status of correspondence between taxpayers and the ATO. Because of the requirement in s. 14zar(4) TAA 53 that "a private ruling must state that it is a private ruling for this Part" there is clearly a great deal of correspondence and other actions which will not amount to a Private Ruling but which taxpayers and their advisors will quite reasonably rely upon. When tested by a taxpayer who wishes to insist upon the practice, or when the ATO wants to deny the treatment to a particular taxpayer, the ATO is able to rely upon the traditional protection against an estoppel.

One example of this problem can be seen in a case such as AAT Case 8824. In this case there was detailed correspondence between the ATO and the taxpayer’s employer over a period of years concerning the tax consequences of an employee share scheme. In mid-1991, the Commissioner’s officers incorrectly advised that no assessable income would be derived by employees under the terms of the scheme, a position they maintained in a subsequent correspondence, until in 1997 the ATO assessed the employee to tax on the value of shares issued under the scheme. This correspondence was treated by the AAT as so hedged by qualifications that it could not be relied upon to found an estoppel against the ATO (were it possible to do so apart from the Rulings system). In addition, whatever representations had been made, were made only in relation to the first allotment of shares under the scheme and not subsequent issues, notwithstanding that the terms of subsequent share issues were materially the same as the one referred to in the correspondence.

Another example arose in Bellinz, although in this case the taxpayers did not rely upon the preliminary advice they received. In this case, the partners applied to the ATO for a Private Ruling in respect of their arrangement on 13 May 1997 and, according to the facts found by Merkel J., "they initially received a draft ruling favourable to them. However, it became clear that a favourable ruling would not issue within the time in which, commercially, the lessor partners needed to obtain that ruling. Proceedings by way of mandamus issued by the lessor partners against the Commissioner were brought to a conclusion by an agreement on the part of the Commissioner to issue a binding ruling by a fixed date. The lessor partners finally received notice of a private ruling dated 27 February 1998. That ruling … was unfavourable."

There is a danger that this problem may actually be exacerbated by the system of Private Rulings. There is a possibility that the Public Rulings System may now operate as the exclusive source of administrative law remedies available to taxpayers who have grievances in relation to Rulings. In Bellinz, Hill J in the Full Federal Court took the view that it, "leaves no room for the operation of any doctrine of estoppel or the reintroduction of that doctrine through administrative law remedy." If this is ultimately held to be correct, and the deficiencies of the Rulings System are left unremedied, this is an unwelcome outcome - a defective and inflexible system operates to the exclusion of more adaptable and evolving processes.

A second problem arises from the immunity conferred upon the ATO’s conduct more generally. Where there is a course of action that is consistent but is not backed up by a document, there can be no recourse to the Rulings System to challenge the failure to continue such practices. An example of this problem is David Jones Finance. The Commissioner had allowed a practice to develop for about 30 years of not insisting upon the registration of the beneficial ownership of shares by corporate taxpayers in order to gain entitlement to the inter-corporate dividend rebate under s. 46 ITAA 36, notwithstanding the High Court decision in F.C.T. v. Patcorp Investments Ltd. The Federal Court allowed the ATO to depart from its prior practice and insist upon a strict application of Patcorp. Parliament found it necessary to remedy this change of practice by inserting s. 45z ITAA 36 entitling a taxpayer to the benefit of the inter-corporate dividend rebate denied by the ATO to the taxpayers.

At present, there is no adequate and simple procedure for seeking a remedy for this kind of administrative action because it does not amount to a Ruling, yet it raises precisely the same kind of issues that the Rulings System was designed to remedy. Taxpayers can legitimately have expectations that the ATO will act consistently at least until a change in policy is announced, and that the changed policy will not be applied selectively and retrospectively.

4. Problem of Embargoed Topics

There is ongoing concern that the ATO is resisting the mandatory aspect of the Ruling process by delineating a group of "embargoed" topics, now euphemistically referred to as "areas of special focus," where no Private Ruling will be given.

It was the clear intention of the Ruling System as designed that the ATO would be required to provide Private Rulings to any taxpayer who requested them, subject only to the enumerated exclusions in s. 14zan TAA 53. This feature of the system has been remarked upon by the judges who have considered the system.

Nevertheless, the ATO has advised that it will not issue Private Rulings or give oral advice on a range of matters. These issues are the resettlement of trusts, various kinds of loans, investments in capital-protected equity loan products, the treatment of rent payable by stapled companies to stapled unit trusts, and tax deductible capital raisings. While tax advisors recognised that it is clearly appropriate for the ATO to have sufficient time to allow it to prepare a considered and consistent response to requests for Rulings in any area, there is no justification for this state of affairs continuing beyond the short term.

5. Quality of Private Rulings and Procedures

Concerns about the content of Private Rulings also emerge from an examination of published material and discussions with practitioners and taxpayers. Underlying various matters is a common concern about the quality of the Rulings in terms of their technical accuracy. This concern is seen in a variety of complaints:

  • There is a perception that answers are always prepared with a bias toward the ATO’s view of the law.
  • If any disagreement is expressed by the advisor, or the advisor tries to bring pressure to bear in an attempt to try to expedite a protracted process, the person preparing the response will invariably reply with a negative response.
  • It is difficult to locate the individual who is handling the request or who can answer questions about its progress. It is even more difficult to locate a person who will discuss the technical issues in relation to the request and response.
  • There is a tendency by ATO staff to try to "rewrite the arrangement" put forward by the taxpayer for the Ruling. The ATO officer provides a Ruling about a transaction that was not proposed, but which has a clearer (and invariably larger) tax liability attaching to it. Some evidence of this tendency can be seen in CTC Resources NL where the ATO tried to place a construction upon the facts presented by the taxpayer notwithstanding "that a consequence of [this construction] is that the arrangement miscarries in a fundamental respect… Would one readily infer such an intention that CTC receive the moneys on trust if the result would be to defeat the expressed object of the arrangement?"
  • The reasons, if any, given by the person in the Private Ruling can be incomprehensible or display a lack of understanding of the transaction, and can fail to take into account or even address the position and the reasons advanced by the taxpayer. Indeed, even the text of the Private Ruling can be incomprehensible.

The ATO Quality Assurance review into the Rulings System referred to above also examined responses to Private Ruling requests. Again it seems the ATO assessed its performance as good.

6. Incontestable in Reality

A major failing in the current system is that one cannot have confidence it is possible to have a meaningful contest concerning an unfavourable response to a Private Ruling request. Despite the system set up in Part IVaa and IVc TAA 53 for contesting Public and Private Rulings, the experience with challenges to unfavourable responses to Ruling requests displays the almost total failure of this process in the Courts.

This outcome is the result of the series of steps and procedures involved in challenging a Ruling, and in the way that the Courts have framed the matter for resolution before them and the AAT:

  • The taxpayer must provide the information describing the transaction in respect of which the Ruling is sought - s. 14zaj TAA 53. Where that information is considered inadequate, the ATO can ask for further information in order to answer the request, and can, if necessary, assume certain facts in providing its response - ss 14zam, 14zaq TAA 53. The power to make such assumptions is, however, limited to matters which the Commissioner could not discover by asking further questions of the taxpayer.
  • When the AAT or a Court considers an appeal against the refusal of a taxpayer’s objection, it frames the issue as, what should the Commissioner have ruled, based on the material that was before him at the time.
  • Where the facts originally adduced and supplemented by the taxpayers remains insufficient for the AAT or Court to resolve the matter, it is not possible for the taxpayer to supplement the material before the AAT or Court to get to the crux of the matter in dispute. Rather, the Court will usually remit the matter to the Commissioner to obtain further facts and reconsider the request.

The failure of the review process in the Courts comes about because of the second and third points - that only limited materials will, as a practical matter, be tendered with a request for ruling, and those materials will often be considered insufficient by a Court for it to determine whether the unfavourable Private Ruling was correctly or incorrectly issued.

Which Facts and Information can be Considered?

As many taxpayers have found to their expense, these principles have the important consequence that, rather than analyse the substance of the taxpayer’s argument, the Court looks primarily at the procedures followed by the ATO, and based only on the information before it. As the decided cases show, the Courts often require far more information than the ATO will typically insist upon before they are satisfied that the matter can be decided. This renders the review by the Court or AAT of little value to a taxpayer.

While the AAT has proved more willing to assume and infer from available material, it too has recognised that there will often be a deficiency of facts before it. And the Federal Court has subsequently held that the AAT may not elicit further information on its hearing. Nor may it find a different arrangement from the one that the ATO considered in deciding the ruling request. In F.C.T. v. McMahon, Lockhart J. observed,

In making his decision about the private ruling the Commissioner is bound by the facts said by him to constitute the arrangement as identified in the ruling. Nor can the Tribunal travel beyond those facts as identified in the ruling. What the tribunal does is to "go over again" the objection decision to consider what it thinks should be the proper answer to the question about the way in which the relevant tax law operated on the identified facts constituting the arrangement… In my opinion, the tribunal … erred in deciding that the evidence to be tendered on the hearing before it was not limited to matters considered by the Commissioner.

What do Those Facts Prove?

Courts have found on several occasions that they could not decide whether a favourable Private Ruling ought to have been issued because the facts they were allowed to consider formed an insufficient basis upon which to found a decision.

In CTC Resources, the Court remitted the second Private Ruling requested by the taxpayer to the ATO for further review. The problem for both Hill and Gummow JJ was the omission of certain facts in the evidence before the Court. Hill J examined the transaction before the Court as described in several documents and stated,

A question immediately arises whether the subscription moneys ever became part of the funds of the company or whether the moneys were at all times held by the company for the financial institution. If the latter, then there could, for reasons other than those taken into account by the Commissioner in giving the ruling, be no dividend. This question depends upon knowing the precise terms of the proposed arrangement between the financial institution and the applicant, the intentions of the parties and the terms of issue of the shares and relevant provisions of the articles of association. None of these matters are known to us…

In these circumstances the Court can do no more than refer the matter back to the Commissioner to exercise his powers under s 14zam of the Act to obtain further facts concerning the proposed arrangement which will bear upon the issue whether the subscription moneys, and particularly the share premium proposed to be paid by the financial institution to the applicant, are ever proposed to become the property of the applicant available to it for its own purposes. Without that information the ruling should not have been made…

In Payne v F.C.T. the taxpayer sought to challenge the ATO’s views on frequent flyer program benefits through the Private Ruling process. The ATO had taken the position in EDR 93 and TR 93/2 that the value of free personal travel arising from points accumulated on employer-paid business flights would be assessable income of the employee-passenger. The taxpayer received a Private Ruling from the ATO consistent with the Public Ruling that the value of the ticket should be included in her assessable income under s. 26(e) ITAA 36 and appealed to the Federal Court. Hill J found that he lacked sufficient facts to be able to find whether there was a benefit which had a value to the taxpayer, whether the benefit had yet been conferred and whether such a benefit was conferred in relation to her employment. The taxpayer succeeded in the appeal but the matter was simply remitted to the ATO to ascertain the missing facts. Hill J commented:

… this case demonstrates now for the second time the difficulty inherent in what at first blush appears a relatively simple procedure… When the matter comes before the Court, the Court itself can not inquire into potential facts. The power so to do is conferred upon the Commissioner and not upon the Court. The result is that the parties are caused further expense and time is lost which may well be significant in many cases. The problem is one which I would commend to the legislature for further consideration.

As it is not possible to cure any deficiency in the Private Ruling request by submitting further material to the Court, there is a real risk that almost every Court challenge to an adverse Private Ruling will founder on the absence of facts for transactions yet to be commenced. One "solution" is for every Private Ruling request on a proposed transaction to be prepared as if for Court - an outcome I imagine neither the ATO nor taxpayers would want to see. Indeed, it is so impractical that it is unlikely that taxpayers will ever adopt it. Instead, faced with an unfavourable Ruling, the taxpayer has the choice of abandoning the transaction, or else recommencing the entire process with a modified version of the original transaction, and one likely to be sub-optimal from a commercial point of view. Unfortunately, the option of simply ignoring the unfavourable Private Ruling is not open to the taxpayer because of s. 226m ITAA 36 which imposes a 25% penalty for ignoring an adverse Private Ruling. The taxpayer therefore is in the difficult position of having to undertake a futile contest simply to be rid of the Private Ruling. This problem is so serious it may mean that Private Rulings will simply be abandoned by taxpayers in respect of proposed transactions.

The Impact of Delays on Contestability

Delay is a different circumstance that leads to the same outcome - the impracticability of a meaningful dispute over a refused Private Ruling request. It was noted above that delay in issuing Private Rulings can have a flow-on effect - it can mean that it is not possible to have a meaningful contest if the Ruling request is not answered favourably and CTC Resources NL v F.C.T. is the most obvious example. The reason is that the court only has jurisdiction to consider a Ruling on the instigation of a person who is "dissatisfied" and that term cannot apply unless the applicant’s tax liability could be affected by the outcome of the Ruling for the year identified.

One commentator has noted that the import of the Federal Court’s judgment in the CTC Resources decision is to place a serious practical obstacle in the path of any judicial review of a rejected request:

The time taken in having matters progress to ruling, objections and then appeal or review means that there are real risks that, by the time the arrangement is being considered by the court or tribunal, there is nothing left on which to adjudicate and the ruling cannot be considered by the court or tribunal. Hill J’s words … suggest that the same position will result even when the proceeding is instituted in time if it is not heard in time…

The reason behind the result is not one that can readily be overcome by legislative change. It can be partly overcome by strenuous effort on the part of rulees and their advisers, putting pressure on the relevant tax officer to decide the initial request quickly and then on the objections officer to decide the objection quickly and, finally, on the court or tribunal to hear and determine the matter expeditiously.

All that might happen occasionally, but it is not likely to occur more than the exception.

In any event, it is an undesirable system if, in an expected class of cases where urgency is likely, the system will only work if all concerned work beyond normal expectations.

7. Time Limits on Rulings

One matter that is currently becoming a matter of concern is the reluctance of the ATO to give Private Rulings for extended periods of time. For example, in the new Product Ruling System, the ATO has announced that it will generally not issue a Product Ruling for a period longer than three years. This practice is an unwelcome development. The powers for the Parliament to amend any law and the mechanisms in the TAA 53 for withdrawing Private Rulings provide sufficient flexibility for Private Rulings to be given for longer terms. This is especially so where a transaction or project has a fixed life.

C. A Generally Uncooperative Approach

Finally, one comment has been made that spans both Public and Private Rulings - that is, that the ATO appears to be trying to thwart the Rulings System at every turn by various devices and subterfuges aimed at reducing its value to taxpayers, and minimising the constraints that it imposes on the ATO. It is part of the general confrontational approach that exists in tax matters.

This perception is attributed to actions such as,

  • In CTC Resources NL, the ATO took the jurisdictional position that the taxpayer could not be aggrieved because the transaction was purely hypothetical. Rather than debate the merits of the Ruling request, the ATO wanted to test the argument that proposed transactions could be eliminated from the Rulings System altogether.
  • In National Speakers Association of Australia, the ATO agued that its own document was so defective that, even though it called itself a Private Ruling, it could not be.
  • The ATO decisions in Bellinz, Crommelin v D.F.C.T, Mercantile Mutual Insurance v F.C.T, and Crestani v. F.C.T. to both argue positions contrary to issued Public Rulings and to try to distinguish them.
  • The decision to reverse its own document released by the ATO as a draft Private Ruling in Bellinz.
  • An ongoing policy of issuing documents that cannot be relied upon as Rulings, and an unwillingness to take the responsibility to identify which ones are.
  • Using the Rulings System as an opportunity to locate potential sources of revenue. The view is expressed by practitioners that if a taxpayer seeks a Ruling on a completed matter, the ATO takes this as flagging a contentious matter, and therefore an ideal opportunity to investigate and review a taxpayer’s affairs with a view to raising revenue. Some evidence to support this view can be seen in Pierce v. F.C.T. where ATO staff decided to investigate a taxpayer who had sought a Private Ruling in relation to his car expenses and, after denying the Ruling, issued an amended assessment based on these investigations. These were viewed by the AAT as "two impermissible actions."

This is clearly a matter of perception. In the minds of some these actions demonstrate, at the least, a win-at-all-costs attitude that does the ATO little credit. A more forthright view perceives these matters as indicative of a clear general strategy of undermining the Rulings System so as to remove the ATO from its strictures and revert to the much less confining regulatory regime that it previously enjoyed.

VI. RECOMMENDATIONS FOR THE REFORM OF

THE RULINGS SYSTEM

The previous Section has catalogued a series of concerns that have been voiced by practitioners and the judiciary since the introduction of the Rulings System. This Section examines current plans to reform the Rulings System and then proposes a series of further options for its enhancement. Despite the impression that may have emerged from the litany of criticisms in the previous Section, it is generally not the case that tax advisors want the Rulings System abolished - the degree of support for the Rulings System that was apparent to the Joint Committee of Public Accounts, remains. No firm opinion has yet emerged that the current System is simply too dangerous to be supported. Instead, practitioners seem to wish to see the current System enhanced so that it matches their initial expectations and better achieves its intended outcomes. This Section considers how this might be done. It presents a catalogue of measures which could form the basis of more formal submissions by the ASCPA to address the problems identified above.

Notwithstanding these views, the general support for the Rulings System may warrant further analysis. It is undoubtedly the case that advisors and taxpayers support the goals that the Rulings System represents, and so are still kindly disposed to the mechanism that expresses the ideas, if disappointed in its operation. It may not be the case, however, that they would express the same support for the current mechanism if another form of Rulings System were presented. In other words, a completely different mechanism for achieving the same goals might be preferred if one was on offer. No such alternative is currently being promoted and is not likely to be while the current System is supported by tax advisors and delivers to the ATO the outcomes that it seeks. Consequently, this Report too will focus on recommendations that modify the current System.

A. Current Reform Plans For The Rulings System

In its tax reform program prepared for the 1998 election, the government announced a series of measures including one that will have an impact upon the Rulings System. In Chapter 4 of Tax Reform – Not a New Tax, A New Tax System the Treasurer identified as problems that "taxpayers cannot get a private ruling about some tax issues and the Tax Office oral advice is never binding." To deal with these problems, he announced:

  • the tax statute of limitations would be reduced for individuals "with simple tax affairs" from four years to two years;
  • "taxpayers with simple tax affairs" would be able to rely on oral advice "in the same way as written private rulings;"
  • the scope of the Rulings System would be expanded so that the Commissioner could give "a ruling on procedural, administrative or collection matters and … a question of fact;"
  • the possibility of introducing a system of user-charges to recover the ATO’s cost of providing binding Private Rulings.

These measures will address two of the concerns identified above - the problem of the limited jurisdictional matters on which binding Rulings can be given, and one part of the limited ability of the Rulings System to deal with administrative practices and other actions not amounting to Rulings as defined.

B. Improving the Quality and Reliability of Public Rulings

This Section considers possible additional strategies for dealing with the concerns noted above in relation to the operation of the Public Rulings System. It draws in part on proposals already advanced by taxpayer representatives and professional bodies.

The critical concern with the Public Rulings System is the problem of unreliability, and the desire of practitioners to find ways to make the estoppel against the ATO more robust. Several steps might be undertaken together or in isolation in order to accomplish this outcome. Some steps would involve legislative changes to the text of Part IVaaa to correct deficiencies that have become evident in the drafting of the provisions which establish the Public Rulings System. Others would involve changes to the current administrative practices of the ATO.

  1. One option would be to make it clear in the legislation that Public Rulings are applicable to the arrangement described in the Ruling, and to similar transactions where there is no material difference between the arrangement described and the one undertaken by the taxpayer. In other words, advisors have suggested that a way should be found to allow Public Rulings to express principles, not just arrangements. An alternative solution of drafting ever more Rulings to deal with each variation of an arrangement is no more feasible than drafting the legislation on this basis.
  2. Another important matter would be to remove the jurisdictional limitation in relation to the matters on which a binding Public Ruling can issue. The government has announced its intention of expanding the scope of the Rulings System so that the ATO can issue binding Public Rulings on procedural, administrative and collection issues. This will likely be an important step in making Rulings more valuable to taxpayers. A more robust position would be to argue that until the law is amended, the ATO should cease issuing under the label "Taxation Ruling" documents which cannot operate as a binding Ruling under the current legislative requirements.
  3. The departure by the ATO from long-standing administrative practices might be addressed by new legislative measures. It seems an unobjectionable proposition that taxpayers can have a legitimate expectation of enjoying a dispensation from the strict application of a tax law based on prior administrative practices that have been applied over an extended period. At present, such administrative practices protect a taxpayer only against the imposition of a penalty. These practices too could be made binding on the ATO whether or not they are reduced to written form, where their existence and substantive content is not seriously in question.
  4. The link with the penalty system is an ongoing source of dissatisfaction, especially in an environment where Public Rulings are less than fully reliable. This connection could be easily severed. The connection does seem incongruous. It is odd to think that an important purpose of the Rulings System is to give the ATO a weapon to use against taxpayers; rather its obvious purpose should be to give taxpayers certainty in their tax affairs against unexpected actions by the ATO. And on the more general issue of democratic practice in a Westminster-style democracy, taxpayers should be penalised for infractions of legislation, not the ATO’s view of it, and to require the AAT to consider ATO Rulings in reviewing penalties is not consistent with this position. The Joint Committee of Public Accounts recommended severing this link for both Public Rulings and Private Rulings in its 1993 Report before many of the current problems with the Rulings System had surfaced - that recommendation could now be acted upon.
  5. In so far as implementing reforms to the Public Rulings System involves legislative change, the question of the time of commencement for the changes arises. Given that the difficulties of jurisdiction are not part of government policy, that the Rulings have already been prepared by the ATO and responded to by the profession on the basis that they are binding, and that the jurisdictional difficulties significantly diminish the value of a large number of Rulings, the legislative changes might be made retrospective to 1 July 1992. In other words, existing Public Rulings issued after 1 July 1992 on matters of administration, collection and procedure could be made formally binding as well as administratively binding. This act would be a significant symbol to the taxpaying community. It could also be done without doing damage to any existing policy or practice and would confer a valuable benefit on taxpayers.
  6. The ATO could also be encouraged to draft Public Rulings to be more exact statements of what the ATO will and will not accept. Rather than preparing an essay on the law in relation to an issue, the ATO might be encouraged to reconsider the nature and functions of Public Rulings. In this respect, it is important to ensure that Public Rulings are less an attempt by the ATO to make an ambit claim by means of restating the law and possibly enlarge the tax net, and instead more akin to a statement of ATO practice.
  7. The problem of inconclusive Public Rulings can be addressed by greater care and attention in the drafting of Rulings - Rulings should actually rule. This might mean confining Public Rulings simply to statements that rule and excising from the text of Rulings parts that the ATO does not wish to advance as ruling on a matter. Explanations and Examples may be useful to some, but not if they mislead readers that they are reliable and are misunderstood as being binding. In other words, the ATO might again be asked not to issue a document unless it is wholly reliable and ATO should take the responsibility for ensuring that it is. This is not a matter that can be solved by the text of a Preamble and a general disclaimer.
  8. The more general matter of inconclusive Public Rulings because of the use of ambiguous terms and qualifying words and phrases in Rulings is being addressed but encouragement to further improvement would support current views about the quality of drafting.
  9. The quality of Public Rulings will be enhanced by the improvement of mechanisms for independent review. This will also help dispel the perception of bias. More attention could be given to ensuring the accuracy of Public Rulings prior to their release, given the evident difficulties of challenging Public Rulings once they are released. The review of draft Rulings by the professional bodies and the involvement of external consultants in the preparation of Rulings are both steps to this end, but practitioners remain less than convinced that the views expressed in these venues are taken seriously. The ATO might be encouraged to address contrary views taken by practitioners more directly and thoroughly where it proposes to disagree with them. And whether or not the current review systems are adjusted, a more formalised system such as the Swedish system could be considered as it has the potential to bring even greater benefits for taxpayers and for the perceived integrity of the Rulings System. Such a system would involve the preparation of Rulings by an independent body comprised of experienced experts and supported by a secretariat.
  10. C. Improving the Reliability, Quality and Timeliness of Private Rulings

    This section considers possible additional strategies for improving the reliability, quality and timeliness of the Private Rulings System. Again, the principal concern expressed is the problem of unreliability, although other difficulties of quality and timeliness are also seen as important. And again, the steps that might be undertaken would require legislative changes to the text of Part IVaa, and changes to the current administrative practices of the ATO.

  11. In the case of Rulings on proposed transactions, the legislation could be modified to ensure that a Private Ruling remains applicable where the arrangement as implemented differs from the arrangement described in the Ruling, but the differences are not material. Some way could be found to allow Private Rulings to be sufficiently flexible that they can accommodate adjustments to arrangements when they are implemented, without the need to go back to the ATO for a new Ruling for a seemingly inconsequential modification.
  12. The jurisdictional limitations in relation to the matters on which binding Public Rulings can issue should be removed for Private Rulings as well. Tax advisors have generally welcomed the announcement of the intention to expand the scope of the Rulings System to procedural, administrative and collection issues, and on questions of fact. The proposal when developed could also unambiguously allow the ATO to give binding Rulings on the application of Part IVa.
  13. The problem of timeliness is a difficult matter to resolve partly because delays are caused by several factors. One important cause is said to be the time taken by advisors to marshall the material needed to answer supplementary ATO questions in relation to lodged requests, a procedure which the ATO claims is important to ensure they have all relevant facts prior to issuing the Ruling, so that the Ruling will be more reliable for the taxpayer. This argument would seek to shift some of the responsibility for delays to advisors, although advisors have countered that the supplementary questions are often irrelevant to the matter at hand. The problem of delay is an ongoing difficulty that needs somehow to be addressed.

    One solution that has been suggested is a default system which triggers a deemed Ruling where an answer is not forthcoming within (say) 3 months after the response to (say) one set of further questions from the ATO after perusing the request. One problem with default systems is that they can tend to induce aberrant behaviour. If the deemed Ruling is a favourable response, the ATO will be encouraged simply to issue a negative response within the prescribed time limit and taxpayers will be thrown into the objection process. If the deemed Ruling is a deemed rejection, taxpayers will have achieved an answer but again one that throws them into the objection process. In either case, taxpayers are in an unsatisfactory position while ever the contestability of Private Rulings remains unworkable.

    Moreover, a default system of this kind needs to considered in conjunction with the prior recommendation that Private Rulings on proposed transactions remain applicable where the arrangement as implemented differs from the arrangement described in the Ruling, provided the differences are not material. Taxpayers run the "fact risk" in a Ruling request - the risk that the arrangement as implemented will not be the same as the one for which the Ruling was provided - although the prior recommendation seeks to reduce that risk to a lower level. But if the ATO does not have sufficient time to review a proposal and seek supplementary information, while it can rely on assumptions, Private Rulings will likely be a less accurate evaluation of the proposed transaction. So, although the ATO may have fewer facts and less time prior to issuing the Ruling, the Ruling will be more reliable for a taxpayer by virtue of the broader compass of arrangements covered.
    On balance, a default system of this kind is probably workable and will likely be an improvement. But it is not a perfect solution while ever the system for contesting Private Rulings remains in its current state. Government may view these two proposals in tandem as shifting the process too much in the taxpayer’s favour.
  14. The area of embargoed topics or matters of special focus is also one that could be addressed. No-one denies that the ATO needs sufficient time to develop a coherent and consistent national approach to important issues. The question is how long that process should be allowed to take. At the very least, the refusal to rule is contrary to the spirit of the Rulings System, if not the letter of the TAA 53, once sufficient time has elapsed to allow a considered view to emerge. It is also worth mentioning that taxpayers have no such luxury of time to contemplate if they are obliged to report a completed transaction - the full risk of the self assessment system lies upon them.
  15. The problem of the uncontestability of Private Rulings is also not easily solved. One option will be to amend the TAA 53 to allow the Tribunal greater latitude to assume facts and to allow taxpayers greater flexibility to introduce new evidence. While it would be desirable for Courts to have similar powers, there may be constitutional problems in allowing Courts similar powers to make assumptions of the kind noted by the Full Federal Court in CTC Resources. [In the short term, it may also be desirable to remove contests in relation to completed matters from the Private Ruling mechanism and decide these matters instead under a simplified regime, based around the former s. 169a ITAA 36 procedure. This is discussed further below.]
  16. Finally there remain a series of unimplemented recommendations that came out of the Joint Committee of Public Accounts report. One is the public disclosure of Private Rulings given by the ATO in a suitably anonymous form. Another is removing the automatic link between the penalty system and Private Rulings, provided a taxpayer discloses the decision not to follow a Private Ruling.

Finally, another perspective on the deficiencies of the Rulings System and ways in which it might be improved would approach the matter by reference to the desires and expectations of users, rather than the different instruments involved. While the same concerns might emerge, a user-oriented perspective would likely show that their significance will be different for different groups of taxpayers. Many of the concerns addressed above are clearly important to business and corporate taxpayers. They are most concerned with the unreliability of Public Rulings, the difficulties inherent in securing Private Rulings in relation to proposed transactions in a timely manner, and the difficulties inherent in challenging an unfavourable Private Ruling in relation to a proposed transaction. Many corporate taxpayers have expressed the view that seeking a Private Ruling is already a very costly process in terms of the amount of time and effort involved. Consequently, in response to the government’s proposal to examine imposing a user charge, there is some hesitation in paying for a product that is already viewed as expensive and not very reliable. Corporate taxpayers might, however, be prepared to pay for a Private Ruling where they felt payment would bring a greater assurance of the quality of the product, and might also be prepared to pay for expediting the process. Most corporate taxpayers are uninterested in the proposal to make oral advice binding - few matters on which they would consider approaching the ATO would admit of an easy answer.

Individual taxpayers are likely to have different concerns. They too are probably concerned with the unreliability of Public Rulings, but much less so with the difficulties inherent in securing Private Rulings in relation to proposed transactions. They may even be less concerned with issues of the technical quality of Rulings. Instead, they are likely to be more interested in securing a quick answer to the tax implications of a completed matter that they now need to report. For them the prospect of a binding oral answer might be appealing.

D. A System for Completed Transactions

Another matter which might improve the performance of the Rulings System is an alternative system for dealing with questions that arise about how to report completed transactions. Special considerations arise in relation to completed transactions, suggesting that the mechanism appropriate for proposed transactions may not be ideal for completed transactions.

At present, a taxpayer who wants some measure of certainty in relation to a recently completed transaction, at a time when all of the facts are still fresh and the parties are still available, must file a request for a Private Ruling. If the Private Ruling is not delivered before the taxpayer has to file its next return, the taxpayer must decide whether to (say) omit the income and pay less tax pending the resolution of the Ruling and run the risk of the elevated interest rate charged by the ATO, or include and pay tax on the income in the expectation of a favourable outcome and a refund with interest. If an unfavourable Private Ruling is provided after the taxpayer’s assessment has occurred, the taxpayer must object to the assessment, rather than the Ruling. In other words, all the limitations observed in relation to contesting Private Rulings are irrelevant because the taxpayer must now proceed along normal lines and challenge the assessment. If the unfavourable Ruling is delivered before the assessment is made, the taxpayer is put to an election - it can challenge the Ruling (subject always to the practical difficulties of doing so discussed above), or it can ignore the Ruling and object to the assessment, but it cannot object to both. Given the current difficulties with challenging Private Rulings, for practical purposes, most taxpayers are likely to challenge the assessment rather than the Ruling.

In these circumstances, it may be wondered why the Private Ruling System is an appropriate mechanism for dealing with questions in relation to completed transactions. Until 1992, taxpayers could apply under s. 169a ITAA 36 for a decision in relation to a matter flagged in their return. Many taxpayers made the decision to bring a matter to the Commissioner’s attention in this fashion. The process did not require the taxpayer to initiate a formal process such as a Ruling request or an objection. It simply served to direct the Commissioner’s attention to a contentious matter to which the Commissioner could respond if he wished. This kind of system may allow a taxpayer a cheap and simple means of triggering some certainty in relation to a transaction. A similar proposal was advanced by the JCPA as a means of allowing taxpayers who propose to depart from a Private Ruling to notify the Commissioner of their decision.

VII. REFERENCES

Legislation

Explanatory Memorandum and Second Reading Speech to Taxation Laws Amendment (Self Assessment) Act 1992

Cases

Courts

Atkinson v. F.C.T. (1995) 95 ATC 4770
Bellinz Pty Limited v. F.C.T. (1998) 98 ATC 4399 (Federal Court)
Bellinz Pty Limited v. F.C.T. (1998) 98 ATC 4634 (Full Federal Court)
CTC Resources NL v. F.C.T. (1994) 94 ATC 4072 (Full Federal Court) (leave refused (1994) 94 ATC 4234 (High Court)
F.C.T. v David Jones Finance & Investments Pty Ltd; Adsteam Finance & Investments Pty Ltd (1991) 22 ATR 397
F.C.T. v. McMahon (1997) 97 ATC 4986
National Speakers Association of Australia v. FCT (1997) 97 ATC 5131
Payne v. FCT (1994) 94 ATC 4191
FCT v. Wade (1951) 84 CLR 105
Administrative Appeals Tribunal

Case 29/93 (1993) 93 ATC 334
AAT Case 11,710 (1997) 35 ATR 1083
Crestani v. FCT (1998) 98 ATC 2219
Edmonds-Wilson v FCT (1998) 98 ATC 2276
Pierce v. FCT (1998) 98 ATC 2240

Rulings and Determinations

Income Tax Ruling IT 1
Income Tax Ruling IT 2500
Taxation Ruling TR 92/1
Taxation Ruling TR 92/20 [and Addenda]
Taxation Ruling TR 93/1
Miscellaneous Taxation Ruling MT 93/1
Taxation Ruling TR 93/34

Tax Determination TD 95/45
Tax Determination TD 96/5
Tax Determination TD 96/6
Tax Determination TD 96/16
Tax Determination TD 97/22

Sales Tax Ruling SST 92/1

Product Ruling PR 98/1 - Product Rulings System

Product Ruling PR 98/2 - Consequences for Investors in the Proposed Film, ‘The Magic Pudding’

Press Releases and Other ATO Documents

ATO Press Release 91/58 - Taxation Rulings Improved
ATO Press Releases 93/40 - Three Steps Toward Greater Tax Certainty and Understanding
The Taxation Rulings System (15 May 1996), published as, Other Guideline OG 83, Australian Tax Practice, Rulings and Guidelines (looseleaf).
National Tax Liaison Group Minutes (various)

Government and Other Reports

Commonwealth Committee on Taxation, Report on Self Assessment [Spooner Committee] (Canberra, Commonwealth Government Publication Service, 1952)
Joint Committee of Public Accounts, An Assessment of Tax - A Report on an Inquiry into the Australian Taxation Office (Canberra, AGPS, 1993).
Organisation for Economic Cooperation and Development, Taxpayers’ Rights and Obligations (Paris, OECD, 1990)
Senate Standing Committee on Legal and Constitutional Affairs, Income Taxation Rulings (1987)
Taxation Review Committee, Full Report [Asprey Committee] (Canberra, AGPS, 1975)
Treasurer, A Full System of Self Assessment of Taxation - A Consultative Document (1990)
Treasurer, Improvement to Self Assessment - Priority Tasks (1991)
Treasurer, Tax Reform: Not a New Tax, A New Tax System (Canberra, AGPS, 1998)

Books, Articles, Speeches and Secondary Sources

D Bentley, A Proposal for the Reform of the Australian Rulings System (1997) 26 Australian Tax Review 57
S Bernhardt, The Bellinz Case and the Ruling System (1998) 27 Australian Tax Review 117
K Burges, Advance Rulings, in GS Cooper & RJ Vann eds, Decision-Making in the Australian Tax System (Sydney, ATRF, 1986)
Business Council of Australia, Submission to, Inquiry Into Administrative Procedures of the Australian Taxation Office, Business Council Bulletin (July 1992) 27
M Carmody, Future Directions in Tax Administration, or Community Confidence: The Essential Building Block, speech to ATAX 3rd International Conference on Tax Administration, Sydney, 17 April 1998 [http://www.gov.au]
M Carmody, Where To With Self-Assessment? speech to CEDA Public Education Meeting, Brisbane, 3 July 1997 [http://www.ato.gov.au]
M Carmody, Administering Australia’s Tax System, Monash University Law Foundation Lecture, Melbourne, 30 July 1998 [http://www.ato.gov.au]
GS Cooper, Incentives and Strategic Choices Facing Taxpayers Under a Self-Assessment System (1995) 12 Australian Tax Forum 99
M D’Ascenzo, The Bellinz Saga (1998) 2 The Tax Specialist (No 2) 2
P Haggstrom, An Ombudsman's Perspective - The Tax Ombudsman's Opinion on the Private Tax Ruling System (1997) 1 (No 3) inTAX 12
P Harris, Private Tax Rulings: An Advanced System (1994) 23 Australian Tax Review 22
The Hon. Justice DG Hill, Judicial Attitudes to the Rulings System, unpublished paper presented at Taxation Rulings Symposium, Red Hill, 18-20 September 1998
S James & I Wallschutzky, The Design of an Appropriate System of Tax Rulings (1995) 5 Revenue Law Journal 175
GT Pagone, Live Issues – Dead Certainties (1994) 29 Taxation in Australia 68
J Prebble, Advance Rulings on Taxation Liability (Wellington, Victoria University Press, 1986)
R Richards, The Most Important Change in 20 Years, Australian Accountant (July 1992) 52
D Sandler, A Request for Rulings (London, Institute of Taxation & IFS, 1994)
A Sawyer, Binding Tax Rulings: The New Zealand Experience (1997) 26 Australian Tax Review 11
V Webb, The Taxation Rulings System - A Helpful Child or a Potential Bully? (1990) 7 Australian Tax Forum 217

VI. LIST OF ABBREVIATIONS

ATO Australian Taxation Office

AAT Administrative Appeals Tribunal

FBTAA Fringe Benefits Tax Assessment Act 1986 (Cth.)

ITAA 36 Income Tax Assessment Act 1936 (Cth)

ITAA 97 Income Tax Assessment Act 1997 (Cth)

TAA 53 Taxation Administration Act 1953 (Cth)