4.1 The review into the ATO's handling of service entity arrangements was prompted by concerns that the ATO had taken too long to identify and resolve the tax issues associated with these arrangements and that this delay had led to considerable uncertainty and (in some cases) unnecessary costs for affected taxpayers. This review was announced in October 2005 as one of three case studies culminating in the IGT's 2008 report on improvements to tax administration arising from case study reviews of the ATO's management of major, complex issues (the fourth report).
4.2 As part of the review, the IGT looked into the key events associated with the development of the ATO's compliance approach to service entities. These events started with the ATO's first significant challenge to the deductibility of fees paid under a service entity arrangement in the 1978 Phillips case1 and ended with the ATO issuing its final guidance on the deductibility of service entity fees in 2006.
4.3 Overall, the review found that the compliance issue associated with service entities could have been resolved much more quickly. Public guidance on this issue could have been provided as early as 2001 instead of 2006. This would have meant far less uncertainty for taxpayers who wanted to apply the ATO's view and would have more quickly brought to account those who did not. The review also determined that the ATO's concerns should have been communicated much earlier and more effectively in order to optimise voluntary compliance.
4.4 The fieldwork undertaken for this review also enabled the IGT to identify a number of areas for improvement by the ATO. For example the ATO had not been appropriately monitoring and therefore reporting on adherence to its performance standards for the provision of public rulings. Also, certain audit practices, such as an apparent failure to appropriately consider taxpayer's individual circumstances during the course of an audit, were identified.
4.5 In January 2007, the IGT's report2 was publicly released and included twelve recommendations. The ATO agreed with seven of the twelve recommendations and partly agreed with three of the remaining five recommendations. The principles behind the two recommendations not agreed, namely key recommendations 1 and 4, have been picked up again in the course of the IGT's Review into delayed or changed Australian Taxation Office views on significant issues.3
4.6 During the course of the Service Entities review, the ATO had also implemented a number of changes to address concerns raised including:
- the provision of final guidance on service entities;
- the issue of some public guidance on the meaning and effect of the term 'general administrative practice';
- the recommencement of a process to monitor the timeliness of public rulings and determinations;
- the introduction of a feedback process for public rulings; and
- changes to its consultation and audit processes.
4.7 The status of the recommendations from the review which the ATO agreed to implement, in whole or in part, is set out below.
Key Recommendation 1
Not Agreed to by the Tax Office (refer to Appendix 3)
Key Recommendation 2
The Tax Office's timeliness standards for public rulings should be made public in the same manner as its other service standards.
The content of these standards should be altered as follows.
Where a compliance issue arises which gives rise to the possible need to issue a ruling, the Tax Office should reach a decision to issue a ruling and then should actually issue the relevant ruling in final form no later than 12 months after the compliance issue is identified. If the ruling is to be accompanied by detailed practical guidance which contains commercial benchmark rates for a number of industries, such as occurred in the case of service entities, both documents should be issued within a maximum period of 24 months of the relevant compliance issue being identified.
If a ruling and any accompanying guidance material are issued more than two years after any relevant compliance issue is identified, the date of effect of both the ruling and any accompanying guidance should be prospective only.
4.8 The Tax Office agreed with the part of the recommendation that related to publishing timeliness standards for public rulings, noting it already did this via the Tax Office website. The Tax Office did not agree with the rest of the recommendation.
4.9 The Tax Office publishes the public rulings program each month on its website ato.gov.au. This program lists details of the public rulings which are in progress, the date they were added to the program as well as projected publication dates for the draft and final versions of the ruling.
4.10 As noted by the Tax Office in Agreed Area A of the Inspector-General's report Improvement to tax administration arising from the Inspector-General's case study reviews of the Tax Office's management of major, complex issues (also known as the 'fourth report'):
For public rulings and LAPS, the Tax Office's programs on www.ato.gov.au reflect the agreed delivery timeframes for those products including the issuing of drafts in the case of public rulings. The Tax Office processes governing the development of both products requires referral to and approval from the relevant Band 2 SES officer for existing timeframes to be varied. The rulings program also indicates the Tax Office's 'target' timeframes for the development of taxation rulings and determinations across the different subject areas. Exceptions to these targets (for example, to allow additional consultation with industry) are advised on the program.
4.11 The program includes a note outlining the standard timeframes that we will seek to achieve in issuing first a draft and then a final ruling. Proposed public rulings which fail to meet their projected publication dates are highlighted by shading in the program. The note provides:
Shaded topics are delayed. As a general rule, we aim to issue a draft taxation ruling within 6 months of being notified on the program and a final ruling within 6 months of its issue in draft form. The relevant period for a draft and final taxation determination is 3 months. We aim to issue a draft Self Managed Superannuation Fund Ruling within 8 months of being notified and a final Self Managed Superannuation Fund Ruling within 8 months of its issue in draft form. The relevant period for a draft and final Self Managed Superannuation Fund Determination is 4 months. Exceptions to these rules (for example, to allow additional consultation with industry) are advised upon notification and the planned issue dates are reflected accordingly. These exception topics will not be shaded as delayed until the issue dates, as originally notified, pass.4
4.12 We believe that this approach allows practitioners and the community to track the progress of specific rulings and to see clearly which rulings are outside their original expected timeframes. Previous versions of the program, dating from January 2007, are maintained in the same location of the Tax Office's website should anyone wish to refer to or view them.
4.13 The public rulings program is a standard agenda item at the National Tax Liaison Group Public Rulings Steering Committee and members are given the opportunity to question and raise concerns about the progress of any public rulings on that program.
4.14 We are seeking to make further improvements to the presentation of the public rulings program by separating those rulings currently in progress into two work sheets; one for drafts and one for rulings which have issued in draft from and are being finalised. This will make it clearer what stage a ruling is at in its development. The note will be maintained.
4.15 We have sought the views of the National Tax Liaison Group members through the Public Rulings Steering Committee and they support the change.
IGT Conclusion — Implemented
4.16 As indicated in the above response, the ATO agreed to continue its current practices for the publishing of timeliness standards for public rulings. Therefore for the purposes of this follow up review, the ATO has implemented the recommendation to the extent that it agreed to do.
4.17 The IGT however maintains that the ATO's current practice for publishing the timeliness standards for public rulings should be made public in the same manner as its other service standards.
Key Recommendation 3
The Tax Office should monitor and assess the degree to which public rulings are meeting its internal service standards on timeliness for these rulings on at least an annual basis. The results of this monitoring and assessment process should be publicly reported in the same way as its performance against other service standards is reported.
4.18 The Tax Office agreed that it should assess and monitor the degree to which public rulings were meeting its internal service standards on timeliness, noting that this information was available on the Tax Office's website.
4.19 The Tax Office considers that the recommendation continues to be met via the public rulings program which is published monthly on its website and which highlights those rulings which have not issued according to their originally notified timeframes.
4.20 This approach allows practitioners, the community and Tax Office senior officers to track and monitor the progress of specific rulings and to see clearly which are outside their original expected timeframes. Previous versions of the program dating back to January 2007 are maintained in the same location on the Tax Office's website should anyone wish to refer to or view them.
4.21 Discussion of items on the public rulings program is a standard agenda item at the National Tax Liaison Group Public Rulings Steering Committee. During discussion, members are given the opportunity to question and raise concerns about the progress of any public rulings on that program.
4.22 Once the need for a public ruling has been identified and resources allocated, the relevant stakeholders are required to complete a resolution schedule setting out the expected key milestones for the ruling. As noted in Agreed Area A in the fourth report, Tax Office processes for public rulings require referral to and approval from the relevant Band 2 SES officer for existing timeframes to be varied. Delays in meeting expected publication dates are monitored and managed by the Chief Tax Counsel and Deputy Chief Tax Counsel, including through the Priority Technical Issues Committee which meets each six to eight weeks.
4.23 In the case of PTIC, prior to each PTIC meeting, the convener and the Chair (the Chief Tax Counsel) meet to discuss which issues, including any proposed public rulings, require call-over by PTIC. Follow up action is undertaken prior to the meeting by the Convener or the CTC as required. At the meeting, issues identified requiring call-over are discussed, including by contacting the relevant officer by phone. The action taken, or to be taken, is reflected in the action items and minutes of the PTIC.
4.24 In addition, reports provided to the Law and Practice Executive, the Priority Technical Issues Committee (PTIC) and the Plenary Governance Forum give senior Tax Office leaders an overview of how public rulings overall are tracking against their expected timeframes.
IGT Conclusion — Implemented
4.25 As indicated in the above response, the ATO has agreed to continue its current practices for the monitoring, assessing and publishing of the timeliness of public rulings. The ATO has also introduced some new practices for the internal monitoring and management of Priority Technical Issue (PTI) cases5 — which include public rulings. These changes are discussed in chapter 9 of this report.6 For the purposes of this follow up review, the ATO has implemented the recommendation to the extent that it agreed to do.
4.26 Although the ATO continues to record the time that public rulings are notified to the public rulings program and the date when finalised, the IGT maintains that a statistic regarding overall performance against its timeliness standard for public rulings should be provided as occurs for other products on the ATO webpage 'Our service standards'.
Key Recommendation 4
Not Agreed to by the Tax Office (refer to Appendix 3)
Key Recommendation 5
When conducting audits of any taxpayer (including any audits of prior year service entity arrangements), the Tax Office should ensure that it fully considers all the relevant taxpayer's individual circumstances. It should also, as part of the audit process, clearly demonstrate to the taxpayer that it has done so, for example, by addressing these circumstances specifically if the taxpayer has raised these circumstances in a written submission.
4.27 The Tax Office agreed with this recommendation and noted that it had consistently adopted this approach in relation to its active compliance activities on service entity arrangements.
4.28 Consideration of taxpayer's individual circumstances is 'hard wired' into Tax Office commitments in the Taxpayers' Charter and enterprise-wide work procedures for audits and other active compliance activities.
4.29 The Taxpayer's Charter booklet 'If you're subject to enquiry or audit' describes what taxpayers can expect if selected for a face to face review or audit. The publication is available on ato.gov.au.
4.30 Enterprise-wide work procedures are in place to support Tax Office staff using our case management system (Siebel). The procedures include detailed instructions for staff undertaking active compliance activities. The instructions direct staff to consider the Taxpayers' Charter, client relationship management procedures and taxpayer's circumstances. These procedures are available to Tax Office staff on the intranet.
4.31 The case management system (Siebel) also includes a number of quality control points and manager approval points during the course of a case which extend to consideration of taxpayer's circumstances.
4.32 As a result of this IGT review, the Tax Office published in May 2010 on our Work Processes intranet site an instruction to Tax Office staff which re-states the general Taxpayer Charter commitments with the specific language of the IGT's recommendation. It states:
Re-Statement of Our Policy
Subject: Requirement to fully consider all the relevant taxpayer individual circumstances throughout our audits
When conducting audits of any taxpayer, tax officers including team leaders, must ensure they fully consider all the relevant taxpayer's individual circumstances, throughout our audits.
As part of the audit process, officers must clearly demonstrate to the taxpayer that we have done so, for example, by addressing these circumstances specifically if the taxpayer has raised these circumstances in a written submission.
Simplistic, "one size fits all" solutions to managing similar compliance risks across taxpayers without adequately considering the individual circumstances of each taxpayer or arrangement are unacceptable given our Taxpayer Charter commitments.
4.33 For every Tax Office audit case product, this instruction is important because it has been published as a task for auditors at the start of every audit. Furthermore, the key requirements have also been re-stated in Tax Office work procedures at the approval point prior to closing every audit
4.34 In addition, there are also more specific procedures that have been developed for certain types of cases where the nature of the compliance approach requires more detail or instruction.
4.35 The outline of the general S&ME procedures and work practices direct staff to consider people's circumstances during the compliance action. For example, client responses are considered when presenting the initial findings in a position paper to the client. Prior to case completion the client's contentions are considered and the team manager signs off that the compliance decision takes into account the client's view.
4.36 A further example comes from the Superannuation business line (SPR) where client's views and supporting documentation are addressed where the Tax Office is considering making a fund non -complying. In these cases, a show cause process is used where a position paper is sent to the client stating relevant facts, our views, the client's position (if one is provided) and our position. This process enables the client to further address our concerns and the finalisation letter containing our reasons for decision will address the issues raised by the client.
4.37 The Tax Office has implemented an integrated quality framework (IQF). The framework includes processes for continuously improving and assuring the management of quality, capability, assessment of quality, reporting, continuous improvement and culture.
4.38 The processes included within IQF give detailed consideration to the quality of ATO decisions which includes identifying, understanding and addressing all the relevant taxpayer issues and circumstances in audits.ATO IQF processes are identifying instances where a more complete addressing of individual taxpayer circumstances is required and as a result IQF is bringing about a review of case decisions before cases are closed.
4.39 IQF is designed to ensure, amongst other things, that practices, procedures and policies, introduced or re-stated to implement this recommendation are followed, by tax officers. If they are not followed, this will be identified and acted on.
4.40 These processes assist in ensuring officers consider individual circumstances as required by the procedures. (Practice Statement Law Administration PS LA 2009/6 'Quality improvement and assurance: application of and conformance with the Integrated Quality Framework').
IGT Conclusion — Implemented
4.41 In response to this review, the ATO recently7 introduced a new directive to tax officers which re-states the requirements contained in the IGT's recommendation8. To support this development, changes have been made to the ATO's case management system including a step requiring sign-off by case reviewers that the audit has been conducted in accordance with the IGT's recommendation.
4.42 The ATO also refers to the introduction of its new IQF quality assurance system9 which it states is designed to ensure that the above mentioned policies and procedures are followed by tax officers.
4.43 Given the recent introduction of these measures, IGT has not had the opportunity to test their application and effect. This may form part of a future review by the IGT. Subject to future satisfactory testing of the application of these changes, the IGT considers that for the purposes of this review this recommendation is implemented.
Key Recommendation 6
The Tax Office should issue comprehensive guidance to its staff, in the form of a practice statement which is made publicly available, on the meaning of the term 'general administrative practice' and on the implications with regard to penalties, interest and primary tax which arise if the Tax Office has changed such a practice. This guidance should also provide practical examples and should be subject to public consultation prior to being issued.
4.44 The Tax Office agreed to this recommendation and as noted in its original response considered it had been addressed in issuing Taxation Ruling TR 2006/10.
4.45 Taxation Ruling TR 2006/10, which issued on 4 October 2006 outlines the public rulings system under Division 358 of Schedule 1 of the Taxation Administration Act 1977. Paragraphs 70 to 74 of that public ruling deal with the Commissioner's view of the term 'general administrative practice'.
4.46 Since the review, on 28 February 2008 the Tax Office also issued Law Administration Practice Statement PS LA 2008/3 which provides comprehensive guidance on the Tax Office's advice and guidance framework. The practice statement also deals with how the Commissioner will communicate and manage a change in general administrative practice. See in particular paragraphs 31 to 33 and 66 of PS LA 2008/3.10
4.47 In the Inspector-General's recent Review of the Tax Office's administration of public binding advice it was agreed (Recommendation 4) that the Tax Office would seek independent legal advice on the meaning of the term 'general administrative practice' and following receipt of that advice would issue further guidance to staff on that term. This advice has now been obtained. To complete work on this, the Tax Office is to prepare and issue additional guidance on the term for staff.
4.48 In relation to penalty, interest and primary tax, PSLA 2008/3 provides guidance to staff on the different levels of protection afforded by the Commissioner's different advice and guidance products. See in particular paragraphs 30 to 74, 222 to 257, paragraph 271 and Attachment A of that Practice Statement.11 In addition, Law Administration Practice Statement PS LA 2008/12 sets out the manner in which the protection afforded by a particular document should be communicated, such as via the protection statement for that particular document.
IGT Conclusion — Partly Implemented
4.49 Taxation Ruling TR 2006/1012 provides general guidance on a general administrative practice (GAP). However, this guidance does not assist tax officers to determine whether a GAP exists or not. Therefore the advice is not comprehensive.
4.50 The issue underlying this recommendation, regarding the degree of certainty on the circumstances that will give rise to a GAP and the protection afforded in those circumstances, was examined as part of the IGT's review into delayed or changed ATO views on significant issues and recommendations were made in respect of this issue.13
4.51 The IGT will maintain a watching brief over the development of the ATO's administrative practice.
Key Recommendation 7
The Tax Office should ensure that when it is dealing with a compliance issue that affects a significant segment of the taxpayer population it employs appropriate communication processes to ensure that its concerns on this compliance issue are made known to that population directly and as soon as possible. The Tax Office should not seek to rely on communicating these concerns only in publications or speeches to limited audiences.
4.52 This recommendation has been implemented to the extent agreed with.
4.53 Communication is fundamental to effectively managing the tax and superannuation systems, helping ensure taxpayers and their representatives understand their rights and obligations.
4.54 We routinely employ direct, targeted communication strategies on particular compliance issues to maximise the effective use of our resources and support taxpayers. A continual challenge is communicating with a large, diverse audience that only engage with the system when they need to.
4.55 Depending on the compliance issue we are dealing with, the demographic characteristics of the audience and our budget, we may use a mix of different communication channels.
4.56 These include routine business communication channels that form part of business strategy — such as in-person visits, phone calls, letters to affected audiences, seminars, and paper and online information products, tools and calculators. Our emphasis is often based on the mantra — prevention is always better than cure.
4.57 We explain the choices we make with our resources and the risks the revenue system faces by publishing our Compliance Program every year. By publishing what we see and what we are doing about it, we seek to influence the decisions people make in their approach to meeting their obligations. The program is targeted directly to media and tax professionals who eagerly await the program's release each year. As such, our compliance messages reach a wide and varied portion of the community.
4.58 Each year we assess the compliance risks we see in the individuals market. This work before people lodge individual tax returns is a good example of direct, business as usual communication to a large, demographically diverse audience.
4.59 For example in 2008-09 we identified undeclared rental income as a significant compliance risk. We wrote to over 130,000 people with new investment properties with information on how they should correctly report their investment income on their tax return. In addition we wrote to people we identified at risk of not meeting their obligations, reminding them to check the accuracy of their claims before lodging their returns. We also sent letters to over 420,000 people we considered at risk of not claiming work related expenses correctly with information on how to do so.
4.60 Our taxpayer alerts are another example of our approach to warning taxpayers early about specific risks. We publish all alerts to our website and, given the often technical and sophisticated arrangements covered in the alert, we send them directly to tax agents and other tax professionals who represent many taxpayers. Taxpayer alerts are generally supported by media releases and, where appropriate, targeted articles for industry media.
4.61 Of course, our direct business as usual communication is often supported by concerted marketing communication efforts. Our marketing communication tools include electronic, online and paper based tools, paid advertising and media activities across all broadcast and specialist media.
4.62 Our business as usual approach is also supported with direct communication to tax agents. They are a large and important audience as around 75 per cent of the community use tax agents to assist with their tax obligations. We use a mix of e-newsletters, broadcasts, seminars, web information and booklets and calculators to target information we also provide to the larger community.
4.63 Where funding is provided, we can conduct advertising campaigns, turning relatively complex issues into simple, early warnings. For example, our 'Don't take the bait campaign' dealt with mass marketed schemes directly targeted in areas where we knew promoters to be active. Using press advertising supported by intensive media work in the targeted region, we got a warning message to a large audience at a time when they needed it — that is, before they invested in the new financial year.
4.64 We have around 50 community consultative forums which help us better understand the needs of particular segments of the taxpaying community and the compliance issues they face. We also use these forums to communicate our compliance concerns.
4.65 We also provide high quality advice directly to taxpayers through the public and private rulings program. In 2009, we issued 360 private rulings and 18 public rulings. We also responded to a further 5,285 requests for guidance, providing practical assistance rather than technical advice.
IGT Conclusion — Implemented
4.66 As highlighted in the Service Entities report, this recommendation was made to ensure that the ATO employed appropriate communication processes to let taxpayers know its view of the application of the law on matters that directly affected them. In the case of service entity arrangements the ATO had relied on media releases, speeches given to private audiences or minutes of liaison meetings, all of which are principally directed at tax advisers (who were then relied upon to communicate the ATO view to taxpayers with these arrangements). Although the IGT recommended communicating directly to affected taxpayers, it is noted that the ATO only agreed in part with reference to the approach it took with service entity arrangements by approaching members of the legal and accounting professions.
4.67 The importance of alerting taxpayers directly has been re-raised in the IGT's Review into delayed or changed Australian Taxation Office views on significant issues14. As indicated in that review, the IGT observed that the ATO had made efforts to issue taxpayer alerts on specific arrangements with which it is concerned.
4.68 The ATO's response for this recommendation refers to continuing efforts to communicate its concerns to taxpayers and notes the challenge it faces in identifying those that only engage with the tax system when they need to do so. During the course of this follow up review, the ATO provided the IGT with examples of its efforts to alert affected taxpayers to changes in real time and to make them aware of the need to review their tax position.
4.69 The ATO has now refined its approach by introducing guidelines in August 2009 for staff regarding the need to communicate directly to affected taxpayers, and or their advisers, where a risk relating to a major compliance issue arises. The ATO is also now in the final stages of publishing its newly approved Risk Management Instruction to ensure that the agreed requirements set out in the above guidelines are met. Assurance is to be achieved by assigning senior tax officers at the Senior Executive Service (SES) Band 2 level with accountability and sign-off that the minimum requirements relating to the effective management of risk categories is complete.
4.70 The ATO's Risk and Issues Management corporate practice statement has been updated to incorporate the introduction of the above mentioned Risk Management instruction. In particular, reference is made to the new responsibilities held by SES Band 2 officers and to the requirement that they provide evidence to the ATO's Chief Knowledge Office (CKO) regarding their adherence to the corporate instruction. The practice statement notes that the CKO is responsible for providing assurance of conformance and also for actioning non-conformance. The CKO is also required to provide an annual Risk Management Certificate of Assurance. The practice statement says that ongoing monitoring and analysis to ensure that issues are being effectively identified, recorded, managed and escalated in the ATO will also be undertaken by a First Assistant Commissioner.
4.71 At a higher level, the ATO Audit Committee oversees internal governance and assurance policy to monitor and evaluate internal controls (such as risk management) to support the ATO's Integrity Framework.
4.72 Given that these changes are yet to be finalised, IGT is currently unable to test their application and effect in terms of the recommendation. However, the IGT recognises the changes being made by the ATO and the work it has undertaken in response to the recommendation. For example, the introduction of guidelines for staff in August 2009 which has now been reinforced through the Risk Management certificate of assurance processes. Subject to future satisfactory testing of the application of these changes, the IGT considers that this recommendation is implemented.
Key Recommendation 8
The Tax Office should, in the interest of providing maximum certainty to taxpayers in a self assessment environment, ensure that all guidance which is of a significant nature and which applies to a substantial segment of the taxpayer population is, to the maximum extent possible, embodied in the form of guidance which is legally binding on the Tax Office.
4.73 As noted in the original response to the Service Entity Review, the Tax Office agreed in principle with the recommendation. While the Tax Office continues to agree with the broad principle underlying the recommendation, it is satisfied that the current advice and guidance framework strikes the right balance between appropriate levels of guidance and appropriate levels of protection for taxpayers.
4.74 As advised during the Inspector-General's recent Review of the Tax Office's administration of public binding advice the Commissioner considers that providing advice and guidance on the application of the laws administered by the Commissioner is central to the role of the Tax Office. It enables taxpayers to understand and meet their obligations and to be aware of their rights and entitlements in a self-assessment system. However, the assistance provided must be relevant to the intended audience.
4.75 The community is quite diverse when it comes to its need for assistance on taxation matters. Our experience is that most taxpayers, especially individuals and small businesses, are looking for guidance that is simply expressed and provides practical step by step assistance. This guidance does not readily lend itself to being legally binding.
4.76 'Binding' means that if the Commissioner provides favourable advice that is wrong, taxpayers who rely on that guidance are advantaged relative to those that comply with the law. That is, errors made by the Commissioner in binding material exact a high price on the community, which must forgo the related revenue. Because of this risk, the process in preparing binding advice needs to be rigorous and it needs to be expressed in precise, often legalistic terms. While Tax Office public and private rulings provide this type of advice, they often do not meet the needs of those taxpayers seeking simply expressed guidance. Of course, any taxpayer who wants a private ruling can seek one.
4.77 PS LA 2008/3, PS LA 2009/5 and PS LA 2008/12 together provide guidance to staff on the Tax Office's advice and guidance framework and on the processes to be followed in selecting, developing, clearing, approving, publishing and reviewing public advice and guidance products. Similarly, the class, product and public rulings regimes are used to ensure that guidance which is of a significant nature and which applies to a substantial segment of the taxpayer population is embodied in the form of guidance which is legally binding on the Tax Office. Individual taxpayers can also continue to seek a private binding ruling if they feel it is warranted.
IGT Conclusion — Not Implemented
4.78 Following the IGT's 2007 report, the ATO has released three practice statements that provide guidance to its staff on the processes to be followed for preparing public advice and guidance. However, a review of these practice statements does not indicate any change in the ATO's approach in response to the IGT's recommendation.
4.79 The IGT also notes that the ATO changed the extent to which its most prominent guidance product, TaxPack, is considered legally binding. Specifically, the 2008 version is considered to be a binding public ruling, whereas only the 'Special circumstances and glossary' section of the 2009 version is considered to be a binding public ruling.15
4.80 The issue regarding the level of binding advice has also been raised in IGT's 2009 review16 into the ATO's administration of public binding advice.
Key Recommendation 9
The Tax Office should ensure that when any form of draft guidance is issued to taxpayers, that draft always contains a very clear statement of the intended date of effect of that guidance. This requirement should be set out in a Tax Office practice statement or other internal document which provides guidance to its staff.
4.81 The Tax Office agreed with this recommendation.
4.82 It has been our consistent practice to include a paragraph in our draft rulings and determinations setting out the intended date of effect. See for example, draft Taxation Rulings TR 2006/D4 (paragraph 53; issued 29 March 2006); TR 2007/D2 (paragraph 25; issued 11 April 2007); TR 2008/D6 (paragraph 187; issued 27 August 2008) and TR 2009/D8 (paragraphs 54 to 57; issued 16 December 2009).
4.83 Paragraphs 37 to 39 and 69 of Law Administration Practice Statement PS LA 2008/12 (issued 26 June 2008) provide guidance to staff on including a date / period of effect for all public advice and guidance products, including drafts of those products. In particular, paragraph 37 states:
All public advice and guidance products (including drafts of those products), must specify one … of the following:
- date of effect — either:
- from a specified date (for example, the date that the product is published, or, if the law has been amended, the date from which that amendment applies)
- the product applies both before and after the date of issue
- period of effect — where the advice or guidance is effective for a specified period (for example, a product that deals with a fixed period of time, such as a tax-time product, a consultative document that will cease to be effective from the release of the final product, or a product that relates to an amnesty or review for compliance purposes).
4.84 TR 2006/10, at paragraphs 59 to 77, provides guidance on the date of effect to be adopted in a public ruling noting that rulings will generally have both a past and future application because they represent the Commissioner's opinion as to what the correct interpretation of the law has always been.
4.85 The Public Rulings Manual (at paragraph 18.104.22.168.4) — which sets out the corporate processes for authors and approvers of public rulings — also provides guidance for authoring teams in determining an appropriate date of effect for a public ruling. In relation to income tax draft rulings and determinations it states:
All draft and final rulings and determinations issued publicly must have a date of effect section.
There are two standard 'Date of effect' paragraphs for a ruling or determination, depending on whether the ruling is to have retrospective application or not. In devising a date of effect, the Ruling team is to conform with the ROSA recommendation that where the Tax Office is changing a public interpretation or long standing practice to the detriment of taxpayers, that change should become effective prospectively and, where necessary, from a future date that allows affected taxpayers reasonable time to become aware of, and act upon, that new interpretation. See TR 2006/10 for more guidance.
In the vast majority of cases, a ruling will have a past and a future application, as it will ordinarily represent the Tax Office's view of the law as it has always been.
Draft rulings and determinations set out what the date of effect will be when the ruling or determination finalises. There are two standard 'Date of effect' paragraphs depending on the circumstances.
The standard 'Date of effect' paragraph in a draft ruling or determination that will have past and future application is:
Date of effect
It is proposed that when the final Ruling/Determination is issued, it will apply both before and after its date of issue. However, the Ruling/Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling/Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).
The standard 'Date of effect' paragraph for a draft ruling or determination that will have prospective application only is:
Date of effect
When the final Ruling/Determination is issued, it is proposed to apply to arrangements begun to be carried out from [date of issue/alternate date].
IGT Conclusion — Implemented
4.86 As noted in the ATO response, the requirement referred to in the IGT's recommendation has been appropriately incorporated into ATO practice statement PS LA 2008/1217.
4.87 In response to IGT's queries regarding how the ATO ensures that its officers comply, the ATO referred to a process undertaken in the PTI and Public Rulings Branch (PTIPRB) whereby a final review of rulings and determinations is undertaken to ensure adherence to the ATO's publication requirements, including PS LA 2008/12.
Subsidiary Recommendation 1
The Tax Office's consultation processes with the community for public rulings should be conducted openly at all times and should commence as soon as possible during the drafting process. These processes should not involve, to any significant degree, consultation with only a select group of taxpayers that may be affected by the ruling.
4.88 In its original response to the Service Entity Review, the Tax Office agreed in part with the recommendation and noted that it had announced that future consultation would not generally involve confidential processes.
4.89 As noted in that original response, there may be instances where confidential consultation will still be necessary or where preliminary consultation with select groups may be required before the Tax Office is in a confident position to publish material suitable for broader public consultation. Accordingly, in some limited circumstances, the Tax Office may undertake more targeted and limited consultation. This may occur where the topic in question is very specific to a particular industry or group or where assistance on shaping the Tax Office view is needed before consulting more widely.
4.90 Depending on the issue, consultation may occur with affected industry groups or practitioners early in the development of a public ruling. Ruling topics are often raised through the NTLG sub-committees and issues covered by a proposed draft ruling may be discussed at sub-committee meetings. Minutes of these meetings are available on the Tax Office website.
4.91 Where the need for a public ruling has been identified and agreed, it is added to the public rulings program and includes details of the ruling authoring team and the proposed issue date. Members of the public are able to contact a member of the authoring team should they have any questions or comments about the proposed ruling.
4.92 Public rulings listed on the public rulings program first issue in draft form for comment by any interested parties. A compendium of all comments received, including how they have been addressed in the final ruling, is prepared and published when the final ruling is issued.
IGT Conclusion — Implemented
4.93 The IGT's subsidiary recommendation was made to ensure that consultation on public rulings was open and did not involve confidential processes to any significant degree. As noted in the above response, the ATO has announced that future consultation will not generally involve confidential processes.
4.94 The change in the ATO's approach since the Service Entities review has been evidenced through the Division 7A consultation process. However, at the same time the IGT is aware that there remain other concerns regarding this particular consultation process not relating to the strict terms of the subsidiary recommendation.
Subsidiary Recommendation 2
The Tax Office's key decision makers on any proposed public ruling (or any proposed ruling which is to be accompanied by detailed practical guidance) should be engaged in the process of developing the ruling no later than the time when that ruling and any accompanying guidance is subject to public consultation processes.
4.95 As noted in the Tax Office's original response to the review, the recommendation was consistent with the Tax Office's management processes for priority technical issues which may lead to the preparation of a public ruling.
4.96 Since the time of the review, process improvements have been made which address this recommendation and ensure key decision makers are engaged in developing a ruling before public consultation commences. Resources, the key decision makers and other stakeholders to be involved in the development of a public ruling are generally identified at the outset, such as when it is identified as the resolution strategy for a priority technical issue.
4.97 In particular, any potential public ruling topic is first considered by one of three Deputy Chief Tax Counsel (all Band 2 SES officers) as well as the Chief Tax Counsel before it is added to the public rulings program.
4.98 In addition, prior to issuing in either draft or final form most rulings (TRs) are considered by a Public Rulings Panel which is chaired by a Deputy Chief Tax Counsel. Determinations (TDs) are either considered by a Public Rulings Panel or must be reviewed and approved for issue by a Deputy Chief Tax Counsel. Furthermore, Tax Office, membership of the Public Rulings Panel now includes Senior Tax Counsel officers who are assigned to work with the respective authoring team to progress the ruling or determination following the panel meeting.
4.99 Where appropriate, the relevant Second Commissioner, and even the Commissioner, may become involved in considering the draft ruling or determination prior to issue for public consultation.
IGT Conclusion — Implemented
4.100 During the course of fieldwork for this review, the ATO referred to the above mentioned involvement of the Chief Tax Counsel and a Deputy Chief Tax Counsel as the change in process that addresses the subsidiary recommendation. Furthermore, the ATO referred to the above response as indicating that where the Commissioner or relevant Second Commissioner is considered the relevant decision-maker or stakeholder, then they will be identified as such at the outset of the process. In saying this however, the ATO noted that it may not be evident that a decision at those levels is warranted until further into the process, and potentially only after public consultation (as a result of issues coming out of that consultation).
4.101 The ATO assured the IGT that its position is to identify the appropriate decision-makers and/or stakeholders as quickly as possible, and involve them as appropriate once they have been identified. On the basis of these assurances, the IGT considers that the subsidiary recommendation is implemented.
Subsidiary Recommendation 3
The Tax Office should state in a practice statement or other guidance document that is issued to its staff that prior year advices given to taxpayers will not be considered to have been withdrawn unless the withdrawal is specifically brought to the attention of affected taxpayers.
4.102 While the Tax Office agreed to consider providing guidance to staff on the circumstances in which taxpayers are entitled to rely on prior year advice, it has since decided that existing guidance, as outlined below, is adequate. Further, the recommendation seemed to envisage specific communication to each affected taxpayer and this part of the recommendation was not agreed to.
4.103 All Tax Office advice and guidance contains a date or period of effect of that advice. The requirement for this is set out at paragraphs 37 to 39 and 69 of PS LA 2008/12.
4.104 In relation to private rulings, TR 2006/11 explains the operation of the law covering private rulings and states that the ruling will usually specify the time it begins to apply and the time it ceases to apply. The specified start or end time of a private ruling may be before, when or after the private ruling is made. This time may be specified by reference to the occurrence of a particular event (for example, commencement of the relevant scheme). Where no date or event is specified, the private ruling applies from when it is made. If no end time is specified, it ceases to apply at the end of the income year or accounting period in which it started to apply. (See paragraph 54 of TR 2006/11). In addition, paragraphs 41 to 48 of TR 2006/11 explain what happens in circumstances where there are inconsistent rulings applying to a particular taxpayer.
4.105 In relation to public rulings, as set out in TR 2006/10, all rulings contain a date of effect. If the ruling does not specify the time at which it ceases to apply, the ruling will apply until it is withdrawn, either in part or whole by a notice in the Gazette. (See paragraphs 43 to 48 of TR 2006/10).
4.106 In relation to Tax Office guidance material, these publications will state their period of effect and include a commitment statement on the protection that taxpayers have when following advice in the publications.
4.107 Paragraph 76 of PS LA 2008/12 sets out that Tax Office advice and guidance products should be regularly reviewed to ensure that they remain current and accurate, with consideration given to withdrawing those products which are no longer relevant. Paragraphs 86 to 92 of PS LA 2008/12 set out the process for withdrawing a publication. For public rulings, this is dealt with in the Public Rulings Manual (Chapter 14.3 in particular).
IGT Conclusion — Implemented
4.108 This subsidiary recommendation was aimed at preventing situations arising whereby the ATO rescinds prior advice without specifically bringing this to the attention of affected taxpayers. In response to IGT's subsidiary recommendation, the ATO agreed to give consideration to providing guidance to staff on the circumstances in which taxpayers are entitled to rely on prior year advice.
4.109 The ATO has since given consideration to this and decided that the existing guidance referred to in the above response is adequate. For the purposes of this follow up review, the ATO has completed what it agreed to do.
1 F C of T v Phillips (1978) 8 ATR 783.
2 Review of Tax Office's management of complex issues - Case study on service entity arrangements
3 Released in March 2010.
4 A longer period is given for Self Managed Superannuation Fund Rulings and Determinations to allow consultation to be undertaken with the Australian Prudential Regulation Authority prior to issue.
5 PTIs are usually the most complex or significant technical issues based on risk to revenue or impact on confidence in the tax or superannuation system. They usually require resolution by way of formation and/or application of the ATO view of the law and most commonly are referred to the ATO's more senior technical staff. Public rulings are treated as PTIs.
6 Chapter 9 covers the implementation of recommendations arising from the IGT's 2008 report Improvement to tax administration arising from the Inspector-General's case study reviews of the Tax Office's management of major, complex issues.
7 Introduced in May 2010.
8 This has also been included as a specific instruction that appears when auditors open a new case.
9 The IQF is the ATO's principal corporate means of testing and assuring the quality of work.
10 See also Law Administration Practice Statement PS LA 2009/5 in relation to the provision of advice and guidance by the ATO in relation to the application of the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994 to self managed superannuation funds (SMSFs).
11 See also paragraphs 4 to 11 of Law Administration Practice Statement PS LA 2009/5 regarding the level of protection afforded by SMSF advice or SMSF guidance and paragraphs 111 to 126 regarding the weight to be given to the fact that an SMSF trustee has relied on the SMSF advice or SMSF guidance.
12 TR 2006/10 Income tax, fringe benefits tax and product grants and benefits: Public Rulings
13 Released March 2010.
14 Released in March 2010.
15 TaxPack Supplement for both 2008 and 2009 were not legally binding.
16 Review of the Tax Office's administration of public binding advice (publicly released April 2009)
17 Specifically, paragraphs 37 to 39 and 69 of PS LA 2008/12 Public advice and guidance products: selection, development, publication and review processes. It is mandatory for staff to search for and follow LAPS relevant to the tasks they are performing (PS LA 1998/1 Law Administration Practice Statements).