Inspector General of Taxation, Australian Government

Review of the Potential Revenue Bias in Private Binding Rulings Involving Large Complex Matters

Terms of Reference and Consultation Plan

This document contains the terms of reference for the review which the Inspector-General of Taxation will undertake into the potential revenue bias in relation to large complex private binding rulings (PBRs). It also outlines how the Inspector-General proposes to consult the community on this review.

Background

The Treasury’s Review of Aspects of Income Tax Self Assessment (ROSA) conducted during 2004 indicated a strong private sector belief that the Tax Office was adopting a pro-revenue position in those PBRs involving large complex matters. These types of PBRs may involve issues of genuine uncertainty in the application of the law or the policy intent.

The PBR system provides binding Tax Office advice on how it will administer the income tax laws in a taxpayer’s specific arrangements. This advice stops the Tax Office from later assessing a taxpayer’s affairs inconsistently with that advice, provided the taxpayer implements the arrangement in accordance with that advice. The ROSA report stated that in the 2002-03 financial year the Tax Office finalised about 11,300 PBR applications. The Tax Office says the majority of PBR applications involve simple issues or non-controversial views of the law. However, about 3 per cent of all PBR applications involve large complex matters.

Submissions to the ROSA review argued that the Tax Office should provide advice on the application of the law “without fear or favour”. They argued that a pro-revenue bias in dealing with large complex PBRs was evident where the Tax Office provided unfavourable rulings, delayed or refused to rule. They asserted that taxpayers withdrew their PBR applications or did not apply because they had no confidence in the Tax Office’s ability to objectively determine PBRs. Also, they asserted that there were no mechanisms to counter any natural revenue bias.

The Tax Office argues that it has improved its governance processes and review mechanisms and points to the figures that generally indicate that a majority of all issued PBRs are favourable. It has also recently announced a “Priority Binding Ruling” process aimed at speeding up the issuing of large complex PBRs. It says that requests for more information and refusals are generally due to applicants not making full and true disclosures. Further, the penalty under the tax laws for not following a PBR was recently removed. Also, the Tax Office and the Government have adopted and are in the process of implementing the ROSA report recommendations aimed at improving the Tax Office’s timeliness in providing PBRs.

The Minister for Revenue and Assistant Treasurer has asked the Inspector-General to review and report on whether there is a pro-revenue bias in PBRs issued by the Commissioner. Based on consultations with private sector stakeholders, the Inspector-General has decided to broaden the scope of the review to include PBR applications which taxpayers withdrew and PBR applications on which the Tax Office refused to rule. This will enable the Inspector-General to review the potential for pro-revenue bias in the Tax Office’s dealings with PBRs and to review the basis for perceptions of revenue bias in the PBR system.

Private sector stakeholders support the Inspector-General treating this topic as one which should be reviewed.

The Inspector-General will review those PBRs considered during the period 1 July 2003 to 30 June 2005.

Terms of Reference

In accordance with paragraph 8(3)(a) of the Inspector-General of Taxation Act 2003, the Inspector-General of Taxation conducts the following review at the request of the Minister.

The Inspector-General will review whether there is a Tax Office “pro-revenue” bias in dealing with large complex private binding rulings (PBRs). It will focus on:

(a) the evidence and extent of any revenue bias in dealing with PBRs;
(b) the basis for any perception of revenue bias in dealing with PBRs; and
(c) the relevant governance measures.

Consultation Processes

The Inspector-General will:

  • publish a copy of the terms of reference for this review on his website at www.igt.gov.au;
  • take submissions on this review from members of the public generally;
  • invite applicants of large complex PBRs to provide submissions on this review; and
  • request the Commissioner of Taxation to provide information and documents relevant to this review.

Contacting the Inspector-General of Taxation

To ensure consideration, submissions should address the terms of reference and should be lodged by 30 September 2005. The Inspector-General recognises that the timeframe for detailed submissions may coincide with taxpayers’ and tax practitioners’ business peaks. Therefore, the Inspector-General is happy to receive abridged oral submissions by telephone.

Submissions may be given:

By telephone: (02) 8239 2111
By email: rulings@igt.gov.au
By post: Revenue bias in PBRs
Inspector-General of Taxation
GPO Box 551
SYDNEY NSW 2001
By facsimile: (02) 8239 2100