2.1 One of the key observations of the 'U-turns' review was that in the absence of binding advice the law allowed the ATO to apply any changed views retrospectively without protection against primary tax for taxpayers. The 'U-turns' report further noted that while the Commissioner may exercise his powers of general administration to not take compliance action for prior periods where taxpayers had relied upon a general administrative practice (GAP), there were significant difficulties for taxpayers in establishing the existence of a GAP.

2.2 The U-turns review sought to address the key concerns and findings regarding the impacts of retrospective application of changed ATO views through an integrated set of recommendations. The recommendations that interlink in this manner are 1, 2 and 4.

2.3 Recommendation 1 was made to the then Government for consideration to change the law so that changes to tax administration only operated prospectively particularly where taxpayers had relied on longstanding practices or GAPs, to provide greater transparency and certainty on changed or clarified ATO views.

2.4 However, at the time of the report's release, it was considered that if administrative changes directed to the ATO were appropriately implemented stakeholders' concerns would be significantly alleviated. Accordingly, an initial strategy was for the ATO to address stakeholders' concerns through Recommendation 2 which develops an administrative framework for managing potential 'U-turns' and Recommendation 4 as a corollary which applies to tax audits. Recommendation 1 was, therefore, effectively to be considered after a period of time had been afforded for the ATO's administrative approach to be implemented and assessed.

2.5 The public release of the IGT's report and the development of the ATO's administrative practice for managing potential 'U-turn' issues have yielded significant positive outcomes for both the taxpayer community and for the ATO. It has provided a basis upon which taxpayers and the ATO have been able to engage on potential 'U-turns' where previously this was difficult to initiate. Moreover, a number of positive examples have been brought to the IGT's attention regarding the practical outcomes which have emerged from the ATO applying its new approach when faced with a potential 'U-turn'. In recent years the IGT has also seen a number of examples of the ATO recognising the existence of prior practice in its public rulings and deciding to apply its view on a prospective basis only.2

2.6 Notwithstanding the positive feedback and outcomes of the 'U-turns' review and the resulting ATO administrative improvements, submissions made to the IGT during this follow up review suggested that some of the underlying issues continue to arise.

2.7 Furthermore, during the course of this follow up review, the Federal Court of Australia (Federal Court) handed down its judgment in Macquarie Bank Limited v Commissioner of Taxation (the Macquarie case),3 which has brought into question some of the implemented recommendations of the 'U-turn' review. Some stakeholders have asserted that the Macquarie case may have broader implications particularly in relation to taxpayer reliance on practice statements more generally.

2.8 The remainder of this chapter will examine the ATO's implementation of Recommendations 2 and 4 and its administrative approach to 'U-turn' issues before discussing the persisting and new issues including the implications of the Macquarie case.

Implementation of agreed recommendations

2.9 In assessing the implementation status of particular recommendations the IGT has used the following terms in this report:

  • Implemented — the ATO has demonstrated that the particular agreed recommendation has been satisfactorily addressed.
  • Partly implemented — the ATO has commenced implementation and made substantial progress toward completion.
  • Not implemented — the ATO has not made satisfactory progress or falls well short of implementing the agreed recommendation.

2.10 In some cases the status of a recommendation may be determined to be implemented or partly implemented where certain work remains to be done, but only where there are detailed plans, actions and commitment to complete implementation within an appropriate timeframe.

Recommendation 1 of the IGT's 'U-turns' review

The Government should consider whether the current legislative framework adequately provides effective transparency and certainty for taxpayers where the ATO retrospectively applies new, 'changed' or 'clarified' views.

2.11 Recommendation 1 was made to the then Government for consideration and therefore outside of the scope of the ATO's implementation. As noted above, Recommendation 1 was a longer-term consideration for the former Government which was conditional upon the effectiveness of the ATO's administrative processes for managing 'U-turns'.

Recommendation 2 of the IGT's 'U-turns' review

For the purpose of reducing the adverse impact of delayed or changed ATO views on significant issues, the ATO should within 12 months openly develop in collaboration with the taxpayer community, its administrative practice concerning the circumstances in which it seeks to apply its views retrospectively by incorporating the following process steps and considerations.

  1. Process steps
    1. Before announcing any view, the ATO would conduct its own research to see whether its previous publications or conduct could have conveyed a different view. The Commissioner, based on this research, will then consider a number of criteria (set out below) to decide whether to take compliance action, in accordance with the new view, prospectively or retrospectively.
    2. Where the new view is contained in a public ruling or determination, the Ruling Panel, in addition to their substantive recommendations to the Commissioner would opine on whether to take retrospective or prospective compliance action. In addition, taxpayers, tax practitioners and relevant representative bodies would be invited to express views on this issue as part of the consultation process in developing the ruling or determination.
    3. In the final product the ATO would state whether compliance action would be on a go forward basis or not and would provide reasons for such a position.
    4. Where the actual product does not involve the Ruling Panel, for example, practice statements, audits, etc. the process would be the same except for the non-involvement of the Panel.
  2. The criteria to determine whether to apply new or clarified ATO views retrospectively or not should be based on fair and reasonable treatment and should strike a balance between:
    • protection for taxpayers where the ATO has facilitated or contributed to formation of views, by taxpayers, which are inconsistent with subsequent ATO views; and
    • preventing a laissez-faire situation where any position could be arguably justified on a particular area of uncertainty before the ATO releases its formal view.
  3. On the above basis, the criteria should be as follows:
    1. the extent to which the ATO has facilitated or contributed to the taxpayer perception of the previous industry practice or position, including whether:
      • the ATO became aware of the previous industry practice or position (for example, through audits) but did not challenge it within a reasonable timeframe;
      • the previous industry practice and position can be reasonably understood from ATO statements on how to administer the law;
      • a general administrative practice supporting the previous industry practice or position can be deduced from other ATO conduct; and
      • the time that has elapsed since the ATO's first awareness of the issue, publicly announcing it would challenge the previous practice and the time taken to finalise its new view.
    2. the extent to which affected taxpayers had taken reasonable care in adopting the previous industry position or practice and whether such a position or practice is not devoid of legal merit;
    3. the extent to which the ATO has relied on material not available to taxpayers generally (for example Treasury files and discussions) with respect to its new/clarified view; and
    4. as an overriding qualification, the ATO would reserve its right to apply views retrospectively where there is fraud, evasion or tax avoidance (viz Part IVA of the Income Tax Assessment Act 1936 or section 165 of A New Tax System (Goods and Services Tax) Act 1999).

It should be noted that any of the above criteria, other than tax avoidance, may not be sufficient of themselves. They must be considered as a whole in making a determination.

2.12 The ATO agreed with Recommendation 2 but expressed reservations regarding the criterion in Recommendation 2(c)(iii).

2.13 In line with the recommendation above, the ATO consulted broadly with the taxpayer and tax practitioner community to develop a practice statement outlining its administrative approach to 'U-turns'. On 28 July 2011, the ATO issued Law Administration Practice Statement PSLA 2011/27 Matters the Commissioner considers when determining whether the ATO view of the law should only be applied prospectively (PSLA 2011/27).

2.14 The ATO considers PSLA 2011/27 to be a lawful direction to all staff who must adhere to its direction when performing relevant tasks.4 References to PSLA 2011/27 are also embedded in a number of other relevant staff directions to reinforce awareness of its requirements.5

2.15 The criteria contained in Recommendation 2 were largely adopted in PSLA 2011/27. Set out in Table 1 below are these criteria together with the corresponding paragraphs in PSLA 2011/27 and the IGT's conclusion of the status of their implementation.

Table 1: Adoption of criteria in IGT Recommendation 2 in PSLA 2011/27 and implementation status
Recommendation criteria Corresponding paragraph in PSLA 2011/27 Implementation status
2(a)(i) 24, 25 Implemented
2(a)(ii) 51 Implemented
2(a)(iii) 28, 29, 30 Implemented
2(a)(iv) 52 Implemented
2(b) N/A Implemented – discussed further below
2(c)(i) 36(a) Implemented
2(c)(ii) N/A Not implemented — discussed further below
2(c)(iii) N/A Not implemented — discussed further below
2(c)(iv) 36(b), 36(c) Implemented

2.16 It should be noted that PSLA 2011/27 does not include references to two of the criteria in the recommendation, namely the criteria set out in Recommendations 2(c)(ii) and 2(c)(iii).

Recommendation 2(c)(ii)

2.17 The ATO has advised that Recommendation 2(c)(ii), which was included in the draft version of PSLA 2011/27, was excised from the final version following comments received during the consultation process with external stakeholders, representative tax and accounting professional bodies and the Treasury. Specifically, it was suggested that even where the taxpayer adopted a position which was devoid of legal merit, if the ATO contributed to, or facilitated, the position being adopted then it should nonetheless apply its changed view prospectively.6

2.18 The IGT welcomes the ATO's consultation on this element of the recommendation, and notes that its excision from the final version of PSLA 2011/27 does not otherwise alter the overarching objective of the IGT's recommendation.

Recommendation 2(c)(iii)

2.19 The ATO undertook consultation on the possible inclusion of the criterion in Recommendation 2(c)(iii) in PSLA 2011/27. The feedback received from this consultation was that while the criterion may be relevant in determining whether the taxpayer took reasonable care or adopted a reasonably arguable position, it did not go to the heart of whether an ATO view should be applied prospectively.7 This feedback resulted in Recommendation 2(c)(iii) not being included in the final version of PSLA 2011/27.

2.20 The IGT considers that, in line with the outcome of the ATO's consultation, the exclusion of criterion 2(c)(iii) from PSLA 2011/27 does not detract from its overriding objective of providing certainty for taxpayers.

Recommendation 2(b)

2.21 The ATO has advised that the principles contained in PSLA 2011/27, which largely align with the two points contained in Recommendation 2(b), are also integrated into various documents which guide officers in the development of an ATO view including taxation rulings, taxation determinations and other practice statements.8 These documents seek to highlight the need to protect taxpayers who have acted in accordance with practices or views facilitated or contributed to by the ATO, and to prevent a situation in which any position may be arguably justified in areas of uncertainty prior to the ATO finalising its view. The ATO's guidance strikes this balance by referring to PSLA 2011/27 as well as directions for staff to escalate potentially affected matters to the Deputy Chief Tax Counsel for determination.

2.22 Accordingly, the IGT considers that while the text of Recommendation 2(b) was not included in PSLA 2011/27, these criteria and processes are outlined elsewhere in the ATO's guidance to its staff which, if followed, would go some way to addressing the systemic tax administration issue identified in the review.9

IGT conclusion — Implemented

2.23 Having regard to the preceding discussion on the ATO's publication of PSLA 2011/27, the IGT considers that this recommendation has been implemented.

Recommendation 4 of the IGT's 'U-turns' review


  • the ATO comes across a taxpayer practice or view in a compliance activity, such as an audit or risk review;
  • the ATO does not agree with that practice or view; and
  • the taxpayer had acted in accordance with that practice or view because the taxpayer perceived that the practice or view was accepted by the ATO,

the ATO should follow the process and criteria set out in recommendation 2 and deal with the compliance activity accordingly.

2.24 The ATO agreed with this recommendation. Following publication of PSLA 2011/27, the ATO published articles in its internal news publication urging staff to familiarise themselves with the practice statement's requirements. Moreover, the ATO's then Special Tax Adviser and Chief Tax Counsel released a video interview in which they discussed the purpose of the PSLA 2011/27 by 'more clearly articulating what [the ATO's] practices are and how [it goes] about determining when [it] should only apply the view on a prospective basis.'10

2.25 The ATO has also advised that further guidance will be provided to staff on an issue by issue basis at appropriate business line technical conferences or technical leadership forums. Furthermore, if changes are made to existing case procedures as a result of these technical discussions then these changes would be publicised and so provide further opportunity to reiterate the requirements of PSLA 2011/27.

2.26 Moreover, the ATO has previously issued a minute to all its National Program Managers which outlines the purpose of PSLA 2011/27 and requested that it be disseminated to staff for their review. In addition, the IGT notes that material provided by the ATO suggests that the PSLA 2011/27 was also discussed at a number of ATO technical forums, and references to it were added to existing ATO compliance guidebooks and presentations.

2.27 Externally, the ATO has publicised the release of PSLA 2011/27 through general emails to members of the Large Business Advisory Group11 and the National Tax Liaison Group (NTLG). Furthermore, articles and reference to the practice statement were published in the TAXAGENT magazine12 and the Large Business Bulletin.13 In addition, the ATO conducted information sessions with a number of tax practitioner stakeholders in which PSLA 2011/27 was discussed. The ATO has advised the IGT that while no further specific external guidance is planned, similar discussions with tax practitioners may be held in the future or as requested.

2.28 The ATO has also advised that a number of governance mechanisms are also in place to ensure that PSLA 2011/27 is being appropriately considered and applied by its staff. These mechanisms include:

  • instructions to specifically consider PSLA 2011/27 in the creation of ATO interpretative decisions and public rulings;14
  • guidance and procedures available on the ATO's Online Resource Centre for Law Administration (ORCLA), an internal repository of guidance for staff engaged in various advice work, which directly references PSLA 2011/27;
  • review and approval phases built into Siebel, the ATO's enterprise case management system, which requires such approval only be given by an accredited officer15 who has reviewed the advice or decision before they are issued to ensure compliance with ATO views including, where relevant, the requirements of PSLA 2011/27; and
  • the use of draft rulings and audit position papers which are provided to taxpayers to promote an opportunity for taxpayers to raise issues of potential inconsistency with PSLA 2011/27 prior to the final advice or decision being issued.

2.29 The ATO further notes that post-finalisation, a random sample of audit and ruling cases are subjected to assessment as part of its Integrated Quality Framework (IQF). Two relevant criteria under IQF are 'correctness' and 'transparency'. The former refers to compliance with the ATO view while the latter seeks to assess honest and open communication with taxpayers of reasons for decisions or actions taken. The ATO has advised that the IQF process has not unearthed any concerns with the application of PSLA 2011/27 in audits of large business taxpayers. The ATO has advised the IGT that from 1 July 2014, it will be making changes to the IQF process to better focus on case quality from the taxpayer perspective.

2.30 In addition to the IQF assessment information above, the ATO has also indicated to the IGT that it will review existing audit and private ruling processes with a view to augmenting the processes governing PSLA 2011/27. Specifically, the ATO notes that consultation with staff in the large business compliance area has commenced for the purpose of identifying what procedural, instructional or governance changes would be beneficial to interpretative assistance and compliance work in this area.16

2.31 One option being considered is the inclusion of a focussing question on industry practices in appropriate audit and ruling products. The ATO notes this option 'will not only enhance governance, but also raise awareness of PSLA 2011/27 by linking the procedures into mandated practices, bringing it to the fore at an early stage of compliance activities and enhancing the awareness of staff, taxpayers and advisers.'17

2.32 To further illustrate its implementation of Recommendation 4, the ATO has provided some examples of cases in which PSLA 2011/27 was considered and applied where the ATO had identified, or the taxpayer had brought to the ATO's attention, a possible 'U-turn'. The examples provided by the ATO included the following:18

  • After the completion of an audit, the taxpayer lodged an objection on a number of grounds, including the question of whether ATO officers had properly considered the application of PSLA 2011/27. While the ATO advised the taxpayer that the application of PSLA 2011/27 was not a valid objection ground, it would nonetheless be considered in a process separate to the objection proper. The objection was disallowed and the taxpayer was advised that PSLA 2011/27 did not apply to their case. The taxpayer appealed the objection to the Federal Court but did not challenge the decision in relation to PSLA 2011/27.
  • In a refundable tax offset audit case, the taxpayer made submission to the ATO that a 'U-turn' may have occurred in this case owing to the taxpayer's reliance upon the ATO's view in the then draft Practice Statement PSLA 3434. Following a series of consultations with senior ATO technical officers, as well as practitioners and representatives of the taxpayer, the ATO determined it would exercise the Commissioner's discretion to apply its view prospectively owing to the fact that the ATO had been aware of the significance of the risk in the practice adopted by the taxpayer but had not taken timely action in response.
  • A taxpayer relied upon an existing Taxation Ruling as well as correspondence in relation to a particular issue from the ATO Chief Tax Counsel, and continued to do so consistently up until 2008 when the ATO commenced compliance action. The ATO's audit report demonstrated consideration of the application of the PSLA 2011/27. In this case the ATO acknowledged that it had contributed to or facilitated the practice and would take no action in relation to the taxpayer's 2008 income tax return.
  • A stakeholder had raised concerns with the ATO that its view concerning revenue expenditure to acquire or construct buildings was excluded and not considered 'research and development' under section 73B of the Income Tax Assessment Act 1936 (ITAA 1936) represented a potential 'U-turn'. Information provided by the ATO indicates that it engaged with the stakeholders to discuss their concerns as early as 2010 and again in 2012 following the release of ATO Interpretative Decision 2012/519 on the issue. However, the ATO notes that no formal submissions or evidence were made to it to consider the application of PSLA 2011/27 and as such, the ATO has not specifically considered the issue as a 'U-turn'.
  • In consultation undertaken at the NTLG Goods and Services Tax (GST) sub-committee in relation to the different views expressed on GST tax invoice issues that involved the application of GST Ruling (GSTR) 2000/17 (alternative documents to be treated as tax invoices) and draft GSTR 2011/D1, the ATO acknowledged that GSTR 2000/17 facilitated a practice and, in applying PSLA 2011/27, agreed that documents created in line with GSTR 2000/17 would not be challenged or disputed by the ATO.20
  • Other examples provided include the ATO applying its view on a prospective basis only that income should be treated as being derived within the electricity and gas industry once supply has commenced; deferring any compliance action on Harm Prevention Charities until March 2014 pending legislative change by the Government; and applying its changed view in Taxation Ruling TR 2013/2 on a prospective basis only.21

2.33 The ATO also consults on the intended date of effect of any new public ruling once it is released.22 This assists taxpayers to determine whether it is necessary to raise any industry practice or other issues affecting compliance in relevant years. The ATO also notes that settlements which are agreed to or effected prior to the release of a public ruling are not otherwise disturbed by any potentially changed views.23

IGT conclusion — Partly implemented

2.34 The IGT recognises that the ATO has made substantial progress in implementing this recommendation as described above. However, submissions made to the IGT during this review have raised ongoing concerns regarding the application of PSLA 2011/27, particularly in the course of active compliance activities. The examples raised in submissions, some of which are set out below, indicate that the ATO may not be applying PSLA 2011/27 during all audits and reviews.

2.35 The examples provided by stakeholders, which highlighted the breadth and complexity of potential 'U-turns' matters and the range affected taxpayers, include the following:

  • Stakeholders were concerned that the ATO had disregarded a series of private rulings which had been issued that confirmed the ATO would not seek to apply Part IVA to securities and financial products issued under Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997). The IGT observed that the matter had been resolved following escalation to a senior executive within the ATO.
  • An ATO 'U-turn' was perceived to have occurred by the ATO seeking to apply Part IVA during an audit to transactions involving two successive capital gains tax rollovers pursuant to sub-division 124-H of the ITAA 1997 which resulted in the taxpayers receiving a deferral of tax payable. It was contended that in applying Part IVA, the ATO had disregarded a range of prior private rulings with materially similar facts. Moreover, the IGT's investigation of the matter revealed that the audit officers did not appear to have regard to existing research undertaken by the ATO's risk assessment section which demonstrated the ATO's awareness of such transactions24 and, in some cases, its 'tacit approval' which had been given to such arrangements.25
  • The ATO was perceived to have retrospectively changed its view on general expense allocations in the Offshore Banking Unit (OBU) context. This issue is explored further below.

2.36 Having regard to the above examples, the IGT's observations in the OBU case study and feedback received from the Working Group (set out below), the IGT considers that the ATO has partly implemented Recommendation 4.

Persisting 'U-turn' issues

2.37 PSLA 2011/27 provides a structured process through which taxpayers may raise concerns regarding ATO views that potentially conflict with prior practice and to have those concerns investigated and resolved. However, the submissions which have been made by a range of stakeholders, including small and large taxpayers, tax practitioners and their representative bodies, indicate that certain issues which were sought to be addressed by the 'U-turns' review continue to arise.

2.38 In addition to the examples set out in the previous section which served to highlight some issues regarding the ATO's implementation of Recommendation 4, stakeholders have also raised some 'U-turn' examples outside of the active compliance context. Some of these examples included:

  • The ATO holding a prior view that payments made, or property transferred, pursuant to an order of the Family Court of Australia under section 79 of the Family Law Act 1975 are 'arms-length' transactions and therefore excluded from the operation of Division 7A of the ITAA 1936.26 However, in a draft ruling issued in 2013, the ATO changed its view to regard such payments and transfers to not be 'arms-length' and therefore assessable as income in the hands of the receiver pursuant to section 44 of the ITAA 1936. While the IGT observed that the facts indicated that the ATO had performed a 'U-turn', the ATO's draft ruling accounts for this prior practice by confirming that it would only apply its changed view on a prospective basis which accords with the intent and purpose of PSLA 2011/27.
  • An initial draft ruling relating to mobile home parks was perceived to constitute a 'U-turn' by stakeholders. The draft ruling deemed mobile home parks to not be 'commercial residential' premises and, therefore, operators of those parks would not be able to avail themselves of certain GST concessions.27 The previous ATO view was to apply until the final ruling was issued after which time the new ATO view would apply 'both before and after the date of issue' except to 'the extent that it [conflicted] with the terms of settlement of a dispute agreed to before the date of issue' of the final ruling.28 The ATO later updated the draft ruling to state that the final ruling would not apply retrospectively in relation to the supply of sites which had already been treated as long-term accommodation in commercial residential premises.29

2.39 A complete list of the examples raised with the IGT during the course of this review, together with relevant commentary, is set out in Appendix 1 for reference.

2.40 The two examples cited above serve to illustrate both positive and negative outcomes arising out of the ATO's administration of 'U-turns'. In the first case, the ATO's recognition of its prior practice aligns with the principles and processes contained in PSLA 2011/27. However, in the second example, the ATO did not appear to consider the implications of its prior position before issuing its original draft ruling in October 2013. However, the ATO did subsequently update the draft ruling to address these implications before withdrawing it altogether. These examples illustrate that the ongoing 'U-turn' issues may be due to a number of factors that need to be addressed. These factors include:

  • the lack of ATO officer awareness of the purpose and requirements of PSLA 2011/27;
  • issues in establishing industry practice and the quality of ATO officer research;
  • issues affecting communication of ATO officer research to taxpayers;
  • ATO officer objectivity and the need for independent dispute resolution mechanisms to address any disagreements which may arise; and
  • the lack of public information regarding 'U-turns' which have been identified.

2.41 Having regard to the concerns raised, the numbers of submissions received and feedback from the Working Group, the IGT determined that it would be appropriate to examine the ATO's application of PSLA 2011/27 in an active compliance case to better understand the approach taken and the resulting taxpayer's experience in dealing with these issues.

2.42 Having considered the examples which were brought to the IGT's attention, the IGT identified the ATO's approach to OBU expense allocation as a suitable case study given the long history of the issue, as well as the nature of the material available within the ATO and the concerns raised. Moreover, impending litigation was progressing in the Federal Court at the time which brought the issues into the public domain and assisted to remove certain limitations on the IGT discussion of those issues having regard to privacy and secrecy considerations contained in the IGT Act 2003.30

2.43 As part of the case study, the IGT examined ATO documents on the administration of OBUs and engaged with senior ATO officers as well as OBU industry participants to better understand the relevant facts and underlying issues.

Case Study — Offshore Banking Unit expense allocation

2.44 Offshore banking broadly refers to the 'intermediation of a resident financial institution of financial transactions, between non-resident borrowers and non-resident lenders.'31 An OBU is the unit within a bank, or appropriate financial institutions, which manages these transactions. Division 9A of the ITAA 1936, currently offers specific tax concessions to OBUs, including an exemption from Income Withholding Tax32 and a tax rate of 10 per cent for 'taxable income derived from pure offshore banking (OB) transactions by an authorised OBU.'33

2.45 In addition to the concessional treatment afforded to OBUs, the regime requires specific allocation and classification of allowable deductions which are set out in section 121EF of the ITAA 1936. Where expenses can be characterised as exclusively OB or exclusively non-OB, the application of the provision is relatively straightforward.34 The residual of deductions which cannot be classified as either exclusively OB or exclusively non-OB are considered 'general deductions' and required to be apportioned in accordance with sub-section 121EF(4) which states:

(4) A general OB deduction is so much of any deduction (other than a loss deduction, an apportionable deduction, an exclusive OB deduction or an exclusive non-OB deduction) allowable from the OBU's assessable income of the year of income as is calculated using the formula:
Equation: deduction muliplied by the adjusted assessable OB income over adjusted total assessable income

2.46 The OBU expense allocation issue which concerns the subject of the purported 'U-turn' involves taxpayers adopting particular methodologies to apportion general deductions which do not strictly apply the above statutory formula.

2.47 The OBU expense allocation issue had been raised by a representative industry body, the then International Banking and Securities Association (IBSA). The minutes of the ATO's meetings with IBSA members (the IBSA minutes) indicated that, as early as 1998, IBSA had raised some concerns with the ATO regarding the uncertainty and difficulties associated with the application of the above statutory formula.35 Specifically, the ATO representatives were advised:

… that OBUs did not always operate as separate profit centres, which made it difficult to allocate expenses on an in/out of OBU basis … 36

2.48 In response, the IBSA members were advised:

… that the ATO would accept an accounting allocation that gave a reasonable outcome. In particular, [the Deputy Commissioner for Large Business & International] said that the ATO would be satisfied that the expense allocation was in line with commercial practice, conducted at arm's length, sufficiently documented and applied consistently from year to year.37

2.49 After this meeting, the ATO identified that its examination of OBU compliance issues had been ad hoc and that the concessional treatment afforded to OBUs provided some incentive for taxpayers 'to contrive to have domestic banking (DB) income treated as OB income.' The ATO noted that 'the findings from several recent audits had reinforced the view that the regime posed some significant revenue risks.'38 Therefore, during the 2002–2004 period, the ATO undertook a project to systemically review the compliance risks in the OBU industry (the 2002 OBU project).

2.50 Under the 2002 OBU project, the ATO initially sent questionnaires to the 17 taxpayer groups with the largest OBUs (OBU taxpayers) which together accounted for 95 per cent of all OBU activity.39 The questionnaires consisted of twenty questions which sought details in relation to a range of OBU issues including:

  • the number of full-time equivalent staff engaged in OB activities;
  • the gross and net income from all OB activities for the relevant years;
  • any areas in which the OBU believed that the 'provisions in the [ITAA 1936] do not operate as intended or create unnecessary practical problems, or on any other aspects of the operation and/or administration of the OBU regime';40
  • policies and procedures in relation to identifying and recording OB activities;
  • accounting procedures and internal controls to ensure that OB and DB activities are recorded in the relevant profit/cost centre's files and accounts; and
  • internal review mechanisms to ensure that senior management are kept informed of OB activities and adherence to management policies, procedures and guidelines.

2.51 ATO officers also visited those OBU taxpayers to sight documents and gain a greater understanding of their businesses.41 The ATO noted at the time that the 'expense allocation' issue was a 'big ticket item' for the 2002 OBU project.42

2.52 An internal ATO report on the 2002 OBU project was produced in November 2003. This report attached a summary of the methodologies adopted by 16 of the 17 OBU taxpayers surveyed to determine the level of general expenses.43 The ATO's summary of these cases indicates that it had a reasonable understanding of the methodology adopted by the majority of OBU taxpayers and included commentary on whether the OBU taxpayer's methodology was consistent with sub-section 121EF(4) or 'accords with the spirit of the IBSA minutes.'44

2.53 Based on its findings, the report went on to identify five discrete issues with the operation of sub-section 121EF(4). In summary, these were:45

  • the inequity of an arbitrary formula has led to a problematic 'search for a better way';
  • the difficulty in deciding whether an expense is tainted by OBU operations;
  • some accounting systems do not produce information needed for the general deduction formula;
  • flaw in apportionment formula;46 and
  • misunderstanding as to the true economic cost of running the OB operations.

2.54 On the 'expense allocation' issue, the November 2003 report ultimately concluded that:

The concern within industry is that the arbitrary allocation formula [the statutory formula] can lead to an unfair result. The ATO has signalled in the past a willingness in principle to accept a more economically realistic allocation. Our current concerns relate to how to achieve a fair outcome without confusing taxpayers and compromising the revenue. We have identified 5 discreet areas of concern within the expense allocation issue which we think need to be addressed. A series of ATO IDs would be a possible vehicle, although there is an argument that a "one stop shop TR" would be more useful, if supportable within the [Priority Technical Issues] framework.47

2.55 In March 2004, the ATO's Tax Counsel Network (TCN) issued internal advice on the operation of sub-section 121EF(4) and observed that:

The threshold issue is whether section 121EF allows a loss or outgoing that relates to both OB and non-OB activities (eg. overhead expenses) to be apportioned, with each resulting component taken to be an 'exclusive OB deduction' and an 'exclusive non-OB deduction' respectively.48

2.56 On this issue, the TCN's view was that the statutory formula must be applied:

Section 121EF does not allow a deduction that relates to both OB and non-OB activities to be apportioned on an economic/accounting basis and each component treated as an exclusive OB or exclusive non-OB deduction. Such a deduction is a 'general OB deduction' by definition and must be apportioned according to the formula contained in section 121EF(4).49

2.57 In July 2004, the ATO approached the Treasury to seek its support on its view of the operation of sub-section 121EF(4). In its minute to the Treasury, the ATO noted:

The ATO view is that we are unable to read down the term "exclusively" as it is used within the definition of "exclusive OB deduction" (and "exclusive non OB deduction" for that matter). We believe that any such approach would render the statutory formula in sub-section 121EF(4) redundant, in addition to being contrary principles of statutory construction. High level advice from our Tax Counsel Network … has confirmed this overall view. That advice has stressed the clarity and strong sense of purpose which 121EF(4) provides. The ATO therefore considers that we are unable to consider alternative (contrary) methodology for calculating 'general expenses' within the OBU regime.50

2.58 The Treasury's response to the ATO noted that:

… there are a range of possible methodologies (including the 'general expenses formula') that could provide outcomes consistent with the policy intention.

It appears that the 'general expenses formula' was included in legislation because it provides a transparent, simple and reliable method for determining OBU deductions. This provides certainty for both taxpayers and administrators.

As to whether the legislation itself allows taxpayers to use a method other than the 'general expenses formula', this is a matter of legal interpretation.51

2.59 After considering the TCN's view and the Treasury's response, it was decided that no ATO view would be published because 'the view was a straight forward application of the law'52 and that the new view would only be communicated in a meeting with IBSA.53

2.60 In October 2004, the ATO met with members of IBSA and conveyed its position. The minutes of that meeting state:

… the Commissioner has no discretion with respect to allowing an alternative or broadening the formula for OBU expense allocation. TCN has interpreted the legislation and Treasury consulted. IBSA may wish to seek policy relief with Treasury.54

2.61 According to the IGT's discussions with stakeholders and ATO officers, during the period starting from just after this meeting until 2010, no relevant ATO public statements were published on the 'expense allocation' issue.

2.62 In 2010, the ATO undertook a further project in relation to lower and medium risk OBU taxpayers within the large business market (the 2010 OBU project). In terms of the taxpayer population which comprised the new project, only five of the original seventeen OBU taxpayers who were subject of the 2002 OBU project were revisited.55

2.63 The report of the 2010 OBU project observed, amongst other things, that there were further ongoing concerns in relation to the formula to calculate general OB deductions:

The statutory formula used to calculate the general OB deduction has caused angst among many taxpayers for a variety of reasons including the dilemma of a negative general OB amount and the methodology they use to determine what a general deduction is. In this regard, it is considered some blame may be attributable to the ATO for not providing guidance on the application of the OBU provisions that is detailed, clear and visible to taxpayers.

Some taxpayers have found it difficult to comply with the statutory formula to calculate the general OB deduction. Some consider that the formula provides inappropriate allocations of expenses and have therefore substituted their own methodology to calculate their general OB deductions. Our policy has been to accept reasonable and supportable approaches to this allocation. This tacit approval has been given on an ad hoc basis where it is justifiable on the facts.56

2.64 Stakeholders and ATO staff indicate that the ATO has not made any further relevant public statements on its view concerning the OBU 'expense allocation' issue, with the exception of a position paper issued in May 2012 to a taxpayer subject to an audit. Stakeholders also claim that the ATO has not indicated in any other forums its intention to apply the statutory formula retrospectively. This is so, even in circumstances where the ATO had previously made itself aware of the different practices and methodologies adopted by OBU taxpayers in relation to their OBU general expenses, and had taken no adverse action.

2.65 During an ATO audit of Macquarie Bank Limited, a point of disagreement arose as to what indeed was the ATO's practice in relation to OBU expense allocation. This disagreement led to litigation in the Federal Court.

2.66 Specifically, the case concerned Macquarie Bank's application pursuant to the Administrative Decisions (Judicial Review) Act 1977 and section 39B of the Judiciary Act 1903 for review of a decision by the Commissioner (and his authorised officers) not to apply a changed view of the law in relation to OBU expense allocation prospectively. In summarily dismissing Macquarie Bank's application, the Court noted:

Just as no conduct on the part of the Commissioner could operate as an estoppel against the operation of the Acts,… it is trite that no practice statement could derogate from the Commissioner's duty to assess in accordance with the Acts.57

…Read with the references to the legal framework within which the Commissioner must operate, and obligations arising under the FMA Act [Financial Management and Accountability Act 1997], the references in PS LA 2011/27 at [21] and [23] to taking "action" (or "compliance action") are to be read as referring to circumstances where there are resource allocation decisions to be made — e.g. whether to initiate an audit or some other form of investigation. PS LA 2011/27 does not purport to require that, in assessing the tax due for past years or periods (e.g., at the completion of an audit), officers are to make a decision about whether to make that assessment on the basis of the ATO's current understanding of the law or on the basis of some other understanding.

To the extent that any guideline or practice statement did purport to instruct an officer to act in that way, compliance with that instruction would be inconsistent with fundamental requirements of the Acts. The relevant guideline or practice statement would necessarily be read down accordingly.58

2.67 The judgment in the Macquarie case was subsequently approved by the Full Federal Court in refusing the taxpayer leave to appeal. The Full Court noted:

Whatever the consequence of an alleged failure by the Commissioner to follow an earlier statement or position, it is not to bind him in law to act contrary to the provisions of the statute. To the extent that a reading of the practice statement suggests otherwise it should be withdrawn and rewritten. A declaration in favour of Macquarie that the Commissioner had acted contrary to the practice statement would be futile and would not alter the Commissioner's ability to re-assess Macquarie in accordance with his duty to apply the law.59

IGT observations

2.68 At a broad level, the IGT's examination of the OBU expense allocation example illustrates the complex and multifaceted nature of 'U-turn' issues and the longevity that can be associated with such matters. Moreover, it highlights the risks of inadequate communication where the ATO becomes aware of particular technical concerns within the community but does not take adequate action to provide administrative support and clarification on the issue. In these circumstances, the ATO was perceived to have tacitly accepted technically non-compliant positions on the basis that it provided a practical outcome to achieve the policy objective. As noted earlier, such technical application of the law could also lead to manifestly absurd outcomes such as negative deductions.

2.69 The judgments in the Macquarie case have raised questions regarding the status of ATO practice statements, generally, and the extent to which they may be relied upon by taxpayers and their advisers. Specifically relevant to this follow up review, are the Court's views that practice statements only empower the Commissioner to make 'resource allocation' decisions and do not operate to empower him to make decisions regarding whether to apply the law retrospectively.

The status of practice statements and 'resource allocation'

2.70 As is evident in the earlier discussion, the IGT's 'U-turns' report and the resulting PSLA 2011/27 are integral parts of the ATO's approach to managing 'U-turns'. In particular, the ATO considers that its practice statements are lawful directions by the Commissioner to his staff and that an officer's failure to comply with such statements can be grounds for disciplinary action. Such action may result in sanctions imposed under section 15 of the Public Service Act 1999, including termination of employment. As such, taxpayers have relied on practice statements as an authoritative statement by the Commissioner on the practices that ATO officers are required to follow in the course of their duties. However, the ATO states that practice statements do not empower the Commissioner to act contrary to the law.60

2.71 Following the Full Federal Court's judgment in the Macquarie case, the ATO issued a draft Decision Impact Statement (draft DIS), outlining its view of the administrative implications of the decision.61 Specifically, the draft DIS states that PSLA 2011/27 only applies to the ATO's resource allocation decisions:

The Full Court's decision confirms our understanding that when the Commissioner has formed the view that the tax law imposes a liability on a particular taxpayer, the Commissioner has a duty to assess the taxpayer in accordance with that view. This typically occurs, for example, when an audit is completed.

As the Full Court's decision notes, we were conscious when drafting the Practice Statement of this obligation. We confirm that the Practice Statement applies only to resource allocation decisions, including resource allocation decisions made during the conduct of an audit.

However, in light of the Full Court's comments that a reading of the Practice Statement could suggest otherwise, we will review the wording of the Practice Statement with a view to identifying any changes that should be made to clarify its intended operation. Any such changes are not expected to alter the practical operation of the Practice Statement.

In the meantime, the Practice Statement continues to apply as an instruction to ATO staff about resource allocation decisions, with the intended practical effect of not disturbing assessments for years where the factors outlined in the Practice Statement are present. The ATO will seek to ensure that ATO officers carry out the research required by the Practice Statement at the earliest practical time.62

2.72 In discussions following its publication of the draft DIS on the Macquarie case, the ATO has advised the IGT that the term 'resource allocation' encompasses more than a narrow assessment of the economic efficiency in taking compliance-related actions. The ATO considers that 'resource allocation' decisions may also encompass broader considerations including particular benefits to the tax system of administering the law in a way which promotes certainty and fairness in practice. The ATO intends to reflect its understanding of 'resource allocation' in a revised version of PSLA 2011/27. This revised draft was the subject of specific comment by the IGT and the Working Group. It will also be the subject of community consultation before it is finally settled.

2.73 It ultimately remains to be seen whether the ATO's interpretation of 'resource allocation' is judicially challenged and, if so, whether a Court would agree with the scope of the ATO's interpretation. Notwithstanding this, the IGT recognises that the ATO is seeking to adopt an interpretation which may enable it to exercise its discretion more flexibly for the benefit of taxpayers.

2.74 In further discussions with the IGT, the ATO has also indicated that it considers 'resource allocation' decisions may only be made at the audit stage and before amended assessments are issued. However, the IGT considers that this limitation may result in taxpayers being prevented from escalating disagreements over the existence of potential 'U-turns' where an audit has finalised notwithstanding any deficiency in the ATO's consideration of the issue.

2.75 The ATO has advised the IGT that it would seek to ameliorate the impact of this limitation by allowing ATO officers to consider potential 'U-turn' issues as a factor in settlements with taxpayers. While the IGT notes the ATO's efforts to balance its approach under PSLA 2011/27 with what may be achieved in a broader settlement context, some concerns remain if ATO officers do not properly discharge their obligations during the audit phase. The inability to escalate the issues thereafter, save for settlement discussions, may lead to protracted disputes or additional costs, particularly where the working relationships are strained.

2.76 The IGT therefore considers that the ATO should not unduly limit the operation of PSLA 2011/27 and relevant ATO officers should be empowered to consider the application of PSLA 2011/27 throughout the compliance process and in settlement negotiations. In this respect, the IGT also considers that relevant ATO instructions to staff and settlement guidance materials, such as PSLA 2007/5 Settlements and the Code of Settlement Practice, are revised and reconciled to facilitate this outcome.

Recommendation 2.1

The IGT recommends that the ATO update PSLA 2011/27 and relevant staff instructions and guidance materials, such as PSLA 2007/5 and the Code of Settlement, to ensure that 'U-turn' issues are considered by staff throughout the compliance process and as a relevant factor in settlement negotiations.

ATO Response


Legislative change to empower the Commissioner

2.77 Notwithstanding the potential for a broader ATO interpretation of 'resource allocation', the Federal Court's judgments have resulted in a number of stakeholders raising concerns that ATO statements63 regarding the circumstances in which it would not apply its changed view retrospectively may be untenable.

2.78 Moreover, concerns have been raised that whilst the ATO may specifically instruct its officers not to select certain issues for audit,64 these issues may have to be considered, if a broader audit is underway and adjustments need to be made, to avoid arbitrary and inconsistent outcomes.

2.79 Accordingly, some stakeholders have asserted that, even if the ATO implements the above IGT recommendation appropriately, taxpayers are not sufficiently protected where ATO 'U-turns' arise with retrospective effect. These stakeholders have suggested that only legislative change to empower the Commissioner to apply delayed or changed views prospectively would provide the necessary protection. In addition, and in light of the Macquarie case, stakeholders have also noted that any such legislative power afforded to the Commissioner must include a right to seek external review by taxpayers.

2.80 While the IGT is generally supportive of a right of review for taxpayers, such a right must be balanced against the need to avoid frivolous or vexatious applications which may seek to delay or obstruct the efficient administration of the tax laws. Furthermore, the recommended administrative approach may be more expeditious and flexible than a legislative solution.

2.81 Therefore, while there are legitimate stakeholder concerns with the sustainability of the ATO's approach to 'resource allocation', the IGT believes that the recommended administrative improvements should be implemented in the first instance. If, after a reasonable period of time has elapsed, there is evidence that the administrative approach has not achieved the desired outcome, a legislative solution can then be pursued.

Further opportunities to improve ATO management of 'U-turns'

2.82 In response to this follow up review, stakeholders have raised a number of further opportunities to improve the ATO's management of 'U-turns'. These are discussed further below.

Awareness and understanding of the purpose and intent of PSLA 2011/27

2.83 Stakeholders had expressed concern regarding a perceived 'education' gap, both for the ATO and for some taxpayers. In particular, they noted a lack of awareness and understanding of the purpose and intent of PSLA 2011/27, particularly during the conduct of audits. For example, stakeholders recounted circumstances in which the ATO's audit teams were either unaware of PSLA 2011/27 and their associated responsibilities under it or otherwise expressing a reluctance to concede that it applied to audit activities. While it was observed that escalation channels to senior executives generally worked well, it was suggested that stronger governance mechanisms were needed to ensure ATO officers are both aware of, and adhered to, the requirements under PSLA 2011/27 at first instance. Moreover, stakeholders raised concerns that where ATO officers did consider 'U-turn' issues, they adopted an unnecessarily legalistic approach to the words of PSLA 2011/27 without regard to the intent and purpose of the practice statement.

2.84 The ATO has acknowledged that improvements can be made in relation to staff knowledge and education, particularly when issues of uncertainty emerge in the course of compliance activities. The ATO has agreed that ongoing education and reinforcement of the requirement to adhere to all PSLAs were appropriate. To this end, the ATO has advised the IGT that:65

Work is already underway across compliance to improve our implementation of PSLA 2011/27. This includes a plan to increase awareness of the practice statement at the initiate phase of audit products:

  • internally through incorporating trigger points where an ATO officer would consider the practice statement; and
  • externally through informing taxpayers that the ATO has guidelines for circumstances where they perceive, and have evidence that the ATO view has changed or been delayed.

If research by the ATO officer reveals evidence that may reasonably be perceived by the taxpayer as a u-turn, there may be an opportunity at the initiate stage for the ATO to share their research and findings with taxpayers (as much as they can under secrecy and privacy law) and for taxpayers to raise any concerns they may have. This will allow any potential u-turn issue to be resolved early and will guard against this process being used for frivolous claims at the later stages of a review or audit.

2.85 The IGT considers that increased awareness and education on the purpose and requirements of PSLA 2011/27 would be beneficial for both ATO officers engaged in compliance activities as well as taxpayers and advisers seeking to raise potential 'U-turn' issues and that as part of the revision of PSLA 2011/27, the ATO should consider communication strategies to instil greater understanding of the ATO's administrative approach to 'U-turns'.

Establishing industry practice and the quality of ATO officer research

2.86 The IGT's examination of purported 'U-turn' issues has revealed practical difficulties in identifying and evidencing industry practices and the ATO's facilitation or contribution to those practices.

2.87 It was generally assumed by stakeholders that the ATO has access to all taxpayer information within an industry, as well as an understanding of common practices through its stakeholder consultation and compliance activities. However, in practice, this may not always be the case as the ATO may not review all taxpayers' arrangements or all aspects of taxpayer practices. Even in those cases where the ATO does so, the extent of the ATO's knowledge is dependent on the retention and dissemination of corporate knowledge of such practices, which generally relies on ATO officers' memories, ATO record-keeping systems and its appropriate use by ATO officers.

2.88 Similarly, some ATO officers appeared to assume that taxpayers are alive to the taxation practices within their industry. However, this may not always be the case. Competition between taxpayers and commercial in-confidence practices means approaches adopted by others within the same industry are often guarded and not generally known. Furthermore, for tax advisers, the requirement to maintain client confidentiality and legal professional privilege may operate to prevent advisers from disclosing evidence of potential industry practices with their clients. Furthermore, taxpayers and advisers may be reluctant to raise evidence of industry practice with the ATO out of concern that doing so may result in increased compliance costs in dealing with ATO inquiries and active compliance activities.

2.89 There is also a lack of clarity on what constitutes an 'industry practice'. For example, does an 'industry practice' necessarily require industry participants to adopt practices which are materially similar to each other, or is it enough that industry participants adopt different practices but not the one which the ATO considered to be correct? The ATO encountered these questions in its industry-wide reviews of OBUs referred to above.66 As noted earlier, those industry reviews identified instances where the ATO had previously given tacit approval to taxpayer practices which were not consistent across the industry and which did not align with the ATO's view of the law.67

2.90 In addition to establishing the industry practice itself, stakeholders have also advised the IGT that evidencing the role played by the ATO in contributing to or facilitating said practice can also be difficult. This is especially true in cases where there are few or no ATO public pronouncements on certain issues. In these instances, taxpayers may seek to rely on discussions or public comments made by ATO officers, such as at conferences, other public forums or during the course of previous audits. For example, in relation to the OBU expense allocation issue, the IGT observed that taxpayers sought to use discussions and comments made by senior ATO officers at an industry forum to evidence the ATO's awareness and acceptance of a particular practice. Similarly, the IGT also observed that the ATO sought to use other statements made at the same forum to outline its view of the law.

2.91 The use of external forums to convey ATO approaches or views of the law may be problematic for two reasons. First, not all industry participants are members of such forums. Although, it may be argued that while not all participants are members, discussions at such forums may reach other industry participants through common members, business discussions or through advisers familiar with these forums. However, it cannot be asserted that all stakeholders would be accurately informed of all relevant matters.

2.92 Secondly, where forum minutes and discussions are sought to be relied upon as evidence of the ATO communicating acceptance of a particular practice, difficulties may be encountered where seemingly contradictory statements are subsequently made. Such difficulties are compounded where subsequent ATO activities may be interpreted as 'tacit acceptance' of the original positions.

2.93 The above practical difficulties are similar to those identified by the IGT in the 'U-turns' review in relation to establishing GAP.68 Recommendation 2 of the 'U-turns' review sought to address these practical difficulties by placing the onus on ATO officers to conduct research on these issues before applying any potentially changed views. Stakeholders also commented that they are heavily reliant on ATO officers to undertake sufficient research to determine whether any action by the ATO, or its officers, contributed to or facilitated an industry practice.

2.94 Notwithstanding this obligation on ATO officers, stakeholders expressed concern that the level of research undertaken in accordance with PSLA 2011/27 was, in some instances, insufficient. Such concerns may be justified as the IGT found certain instances in which ATO officers did not identify either the relevant ATO record indicating awareness of certain taxpayer arrangements or the ATO's response or view of those arrangements. For example in the examination of the OBU expense allocation issue, the IGT found that the research required by PSLA 2011/27 did not uncover ATO records which set out the ATO's understanding of different taxpayer methodologies, the previously expressed ATO view on the taxpayers' compliance with the law or previous ATO public statements.

2.95 Moreover, stakeholders were concerned that when ATO officers undertook appropriate research, they may have given undue weight to matters that favour the ATO position while ignoring others supporting taxpayers' positions. For example, a taxpayer in one case noted that in respect of certain transactions, it had identified more than ten private rulings issued by the ATO over a number of years on the matter. However, the taxpayer noted that the ATO officers' research appeared to rely on general comments made in speeches by ATO senior officers and failed to give due weight to the private rulings cited by the taxpayer.

2.96 The IGT recognises that some difficulties may arise for individual ATO auditors, or audit teams, in identifying evidence relevant to an industry practice. At present, these ATO officers may discharge their research obligations under PSLA 2011/27 by reviewing internal ATO databases, such as views expressed on ATOlaw and external public guidance. However, there are limitations on the extent to which ATO officers are able to identify the actual action taken by the ATO, whether in specific private rulings, audits of materially similar cases or industry-wide risk assessments.

2.97 In discussions with the ATO, the IGT has observed that the ATO's risk assessment sections, which are not part of audit teams, appear to undertake more comprehensive research of particular risk areas when developing the ATO's risk treatment strategies. This process involves research undertaken to assess the breadth and severity of perceived risks to the tax system and revenue. To this end, the ATO's risk assessment sections not only draw on broad data and database searches, but also have authority to obtain qualitative case-specific information and outcomes in a range of ATO activities to examine the risks in detail and what action the ATO took in audit and review cases. The findings and recommendations of this process assist the ATO to determine whether compliance activities should be conducted on the issue or whether other treatment, such as issuing advice and guidance, may be more appropriate.

2.98 Some ATO officers and audit teams may be able to access risk assessment information. However, most ATO officers do not have access to such information. In addition to the databases mentioned earlier, they are limited in their reach to personal and professional networks within the ATO. Ideally they should all have access to a consolidated searchable database of the ATO actions taken in case work. However, establishing such as database represents a high standard of ATO data and information management which is unlikely to be realised in the short term.

2.99 As a result of discussions with the IGT during this follow up review, the ATO has proposed to implement internal design improvements to ensure that, in appropriate cases, ATO audit officers have access to a wider network of corporate knowledge on risk issues, treatments and outcomes which may inform their audit conduct. In doing so, the ATO is mindful of the need to guard against possible vexatious or frivolous attacks on the ATO's processes. Specifically, it has advised the IGT that the research of the risk assessment area on relevant risks will be made available to auditors when they commence compliance activities in relation to those risks:69

The ATO considers that there are two avenues through which the application of PSLA 2011/27 might arise in compliance: one is issue-specific and arises during an audit; the other is risk assessment specific and can be dealt with by documenting in summary form the research we already carry out in testing the risk hypothesis…

The ATO considers that the outcome of applying PSLA 2011/27 can appropriately be reflected in the risk treatment strategy that follows from a risk assessment. If a risk assessment indicates that treatment to reduce the incidence of risky behaviour is necessary, and the weight of evidence on balance, supports giving serious consideration to applying the practice statement, it follows that it is likely the decision will only be applied prospectively. In these circumstances treatment will tend towards publication of the ATO view and an education campaign to ensure taxpayers are aware of this changed view. If applying the practice statement the weight of evidence does not support there has been a change to the ATO view, or no ATO facilitation or contribution to the development of particular views by taxpayers generally or an industry practice, then it follows that the treatment strategy can be applied retrospectively, including audits of prior years to ensure compliance with the law. As the risk assessment and management process is mandated corporately, a template could be developed such as a checklist of sources, a brief summary of contents and references where necessary.

If the treatment strategy includes compliance action, the risk assessment's application of PSLA 2011/27 to the risk hypothesis will provide a starting point for the auditor's own case-specific research. Applying the practice statement at the risk assessment stage will increase the quality of the risk assessment and any resulting recommendation for treatment. It will also more clearly define the risk to be examined, providing more certainty for case officers and laying the foundations for their communications with taxpayers about PSLA 2011/27.

2.100 Furthermore, where ATO staff seek to rely on draft rulings in the conduct of active compliance activities, the ATO provides the contact details of the ATO officers who drafted the rulings so they can be used as reference points in relation to determining the research undertaken on any existing industry practice. ATO compliance officers may also directly contact rulings officers to discuss any risk concerns which may emerge during audit activities. The ATO considers that would assist to reduce duplication of research under PSLA 2011/27 while increasing confidence for officers seeking to rely on draft rulings.

2.101 The IGT considers that broadening ATO officer access to information and research relevant to PSLA 2011/27 would assist to enhance the quality of research pursuant to PSLA 2011/27. The ATO could also seek to reduce the perceptions of inadequate or potentially biased research by ensuring that ATO officers document their research including steps they have taken and evidence on which they have relied. Such documentation demonstrates that they have discharged their obligations under PSLA 2011/27 and could be shared with taxpayers and their advisers where necessary.

The communication of ATO research to taxpayers and their advisers

2.102 An issue related to ATO officer research is the adequacy of the ATO's communication to the taxpayer of the research undertaken. Where the ATO does not provide sufficient information to assure taxpayers of the research taken under PSLA 2011/27, taxpayers and their advisers may perceive that the ATO's research is inadequate or not in accordance with the requirements of PSLA 2011/27.

2.103 It could be argued that communication of ATO research would be tantamount to issuing a formal statement of reasons and PSLA 2011/27 does not presently require such a statement to be prepared.

2.104 The IGT does not consider that formal statements of reasons need to be issued. Indeed, where the ATO has consulted with taxpayers throughout the audit or in the development of a ruling, it is unlikely that any written communication be necessary beyond reflecting the substance of the parties' discussions. However, absent such engagement and where taxpayers have continued to allege the existence of a 'U-turn', the lack of sufficient communication may leave taxpayers to question whether the ATO has undertaken the requisite research. Moreover, it creates difficulties for taxpayers seeking to assess the adequacy of the ATO's research and to determine whether there is any other pertinent information which they could provide to assist the ATO.

2.105 The IGT recognises that communication in this regard may pose some difficulties for the ATO where statutory confidentiality and privacy obligations prohibit the ATO from disclosing details of contrary practices adopted by other taxpayers. However, providing taxpayers with details of the steps taken by ATO officers and sharing the evidence, to the extent possible, would instil some trust and confidence in ATO processes and minimise any perception of bias.

Objectivity, independence and escalation processes

2.106 Stakeholders were concerned that ATO audit officers who were responsible for applying PSLA 2011/27 would not be able to isolate the consideration of potential 'U-turns' from the substantive considerations of the audit and that there was a risk that their considerations would be affected by an unconscious bias. This may be exacerbated where audits are long-running or concerned potentially contentious issues.

2.107 Stakeholders further noted that where they had concerns in this regard, there were limited avenues of redress beyond escalating matters to audit team leaders. However, it was clear from stakeholder submissions that they had little confidence in this process as it was perceived that audit team leaders only received briefings on relevant issues from their officers rather than considering afresh the concerns raised by taxpayers. Where this occurs, taxpayers may need to turn to other escalation points within the ATO, such as senior officers with whom they or their advisers have had prior contact.

2.108 In the past, the IGT has noted that such an informal approach to escalating concerns was problematic as it favoured taxpayers or advisers with personal contacts rather than progressing matters through formal channels.70 This may constrain opportunities to progress matters of concern toward resolution or otherwise require advisers with these contacts to be engaged in seeking to resolve their issue.

2.109 The IGT considers that such issues of independence and objectivity can be addressed by having a senior officer outside of the Compliance Group review any disputes or disagreements over potential 'U-turn' issues. The ATO has informed the IGT that it proposes to include additional text in an updated version of PSLA 2011/27 to provide review of 'U-turn' decisions by senior officers within the Law Design and Practice Group. The exact wording of such a change will be the subject of broad community consultation before a final updated version of the PSLA is released.

2.110 The IGT welcomes the ATO's approach in this regard, noting that it is likely to enhance the actual and perceived independence and objectivity of the ATO's 'U-turn' decision making process and further instil community confidence in the ATO's administration.

2.111 It has been suggested that where 'U-turn' decisions are to be made, they ought to be made by the relevant Second Commissioner. The IGT acknowledges that decisions in respect of 'U-turns' are significant and have the potential to affect a broad class of taxpayers. However, the IGT also recognises that escalation of all matters in which 'U-turn' allegations are made to the Second Commissioner may not be desirable as it may result in lengthy delays and protraction of matters needing to be addressed. In the IGT's view, effective and efficient resolution of 'U-turn' issues should be favoured and the Second Commissioner should be notified of cases in which disputes remain unresolved by the Law Design and Practice Group.

Publicising identified 'U-turns'

2.112 An ancillary issue concerning the transparency of the ATO's processes, is the extent to which instances in which PSLA 2011/27 was considered and/or applied are made publicly available. At present the ATO does not publish such data.

2.113 The IGT considers that it would be beneficial for the ATO to publish information and statistics relating to instances of the application of PSLA 2011/27. This would enhance both the transparency and effectiveness of the ATO's administration of 'U-turns' in accordance with PSLA 2011/27 as well as instilling greater community confidence.

Recommendation 2.2

The IGT recommends that the ATO:

  1. enhance the effectiveness of its officers' research pursuant to PSLA 2011/27 by, for example, providing compliance officers with access to the research of the ATO's risk assessment section at the commencement of compliance activities;
  2. instruct ATO officers to document research undertaken pursuant to PSLA 2011/27;
  3. where there is a dispute in relation to a 'U-turn':
    1. to the extent permissible by law, provide details of the research undertaken pursuant to PSLA 2011/27 to the taxpayer or their adviser and engage in further discussion with a view to resolving the dispute;
    2. if the dispute persists after the sharing of research and further engagement envisaged at (c)(i), refer the matter for review to an independent senior officer from the Law Design and Practice Group;
    3. notify the Second Commissioner if the dispute persists after the independent senior officer review mentioned at (c)(ii);
  4. publish information regarding the ATO's administration of PSLA 2011/27, including:
    1. the number of cases in which taxpayers have alleged an ATO 'U-turn';
    2. the number of cases in which PSLA 2011/27 was applied and ATO acceptance of a 'U-turn'; and
    3. descriptions of accepted 'U-turns'.

ATO Response


Where the ATO contributes to or facilitates a practice adopted by a single taxpayer

2.114 While it was not the subject of the 'U-turns' review, stakeholders have raised instances where the ATO contributed to or facilitated a practice adopted by a single taxpayer. For example, where a taxpayer had been the subject of audits in prior years, the action or inaction of the ATO auditors may have led that taxpayer to adopt, or continue to apply, existing practices. In such cases, stakeholders contend that the ATO auditors' actions or inaction indicates to the taxpayer that there is no compliance risk concern and that approval had been given, at least tacitly, for the taxpayer to continue to adopt these practices.

2.115 It should also be noted that it is not always possible to identify an industry practice in the above instances. For example, the taxpayer's activities may be unique or the taxpayer may constitute the entire industry.

2.116 Having regard to the above matters, stakeholders have suggested that the ATO should consider whether there is scope to apply its views prospectively in respect of a single taxpayer where, by action or inaction, the ATO has contributed to or facilitated a particular practice being adopted by that taxpayer. These stakeholders suggest that such an approach would align with the ATO's intent to administer the law in a manner which promotes certainty and fairness.

2.117 The IGT considers that, as a matter of equity and fairness, the prospective application of changed ATO views to a single taxpayer also raises a need to revisit the tax affairs of other taxpayers with materially similar circumstances. However, difficulties may arise where those taxpayers have previously been the subject of finalised audits, settlements and amended assessments may have been issued.

2.118 The IGT is of the view that issues of equity and fairness may be addressed in two ways. First, the prospective application of changed views to a single taxpayer requires consideration of the tax issues, facts and circumstances of a particular taxpayer. Accordingly, any decisions rendered would be specific to the circumstances of the taxpayer and considerations as to whether it is possible to revisit past audits or assessments may be accommodated within the broader 'U-turns' process, taking into account relevant matters such as statutory limitations on amendments. Secondly, the ATO's implementation of escalation processes for the resolution of disputes as well as the publication of accepted 'U-turns' would assist to ensure that the number of 'U-turns' cases raised after audits have been finalised should be reduced.

2.119 Accordingly, the IGT is of the view that a single taxpayer should have the benefit of a changed ATO view applied prospectively, if the ATO contributed to or facilitated that taxpayer adopting a prior inconsistent practice. When approaching such considerations, the IGT considers that the criteria and processes contained within PSLA 2011/27 are germane. Where such considerations cannot be accommodated within the scope of PSLA 2011/27, then the ATO should identify an appropriate channel through which it can instruct its staff to consider these issues at the earliest possible point in time during the compliance verification process.

2.120 The ATO has acknowledged that there may be instances in which the principles of PSLA 2011/27 may be applicable to a single taxpayer. In this regard, the ATO is of the view that an objective test should be applied to determine whether a reasonable person in the taxpayer's position would have formed the impression that the ATO had agreed with the taxpayer's view based on a pattern of ATO action or inaction.

2.121 Where the ATO observes multiple taxpayers raising materially similar issues, it would be appropriate for the ATO to consider the possible existence of an industry practice and apply PSLA 2011/27 accordingly.

2 ATO, Income tax: when a superannuation income stream commences and ceases, TR 2013/5, 31 July 2013, paras [45]-[49]; ATO, Income tax: capital allowances: treatment of open pit mine site improvements, TR 2012/7, 21 November 2012, paras [63]-[65]; ATO, Income tax: business related capital expenditure — section 40-880 of the Income Tax Assessment Act 1997 core issues, TR 2011/6, 30 November 2011, paras [57]-[58].

3 [2013] FCA 887; See also Macquarie Bank Limited v Commissioner of Taxation [2013] FCAFC 119.

4 ATO, Law Administration Practice Statements, PSLA 1998/1, 19 December 2013, para [6]; See also Public Service Act 1999 sub-s 13(5).

5 See for example: ATO, Income tax: consolidation: capital gains: does paragraph 40-880(5)(f) of the Income Tax Assessment Act 1997 prevent the deduction, under section 40-880 of that Act, of incidental costs described in subsection 110-35(2) of that Act that the head company of a consolidated group or MEC group incurs, in acquiring shares in an entity that becomes a subsidiary member of the group, after the entity joins the group?, TD 2011/9, 4 May 2011, paras [20], [29]; ATO, Self managed superannuation funds — notice of non-compliance, PSLA 2006/19, 15 November 2012, para [36]; ATO, Escalating a proposal requiring the exercise of the Commissioner's powers of general administration, PSLA 2009/4, 28 July 2011, para [22].

6 ATO communication to the IGT on 14 May 2013.

7 ATO communication to the IGT on 14 May 2013.

8 See: ATO, Public Rulings, TR 2006/10, 4 October 2006, paras [60]-[70]; ATO, Provision of advice and guidance by the ATO, PSLA 2008/3, 28 February 2008, para [200]; ATO, Precedential ATO view, PSLA 2003/3, 8 June 2007, paras [9] and [13]; ATO, Tax administration: what is a general administrative practice for the purposes of protection from administrative penalties and interest charges?, TD 2011/19, 27 July 2011, paras [20], [29]; ATO, Self managed superannuation funds — notice of non-compliance, PSLA 2006/19, 15 November 2012, para [36]; and ATO, Escalating a proposal requiring the exercise of the Commissioner's powers of general administration, PSLA 2009/4, 21 May 2009, para [22].

9 Ibid.

10 ATO, Transcript for an interview with ATO Special Tax Adviser Kevin Fitzpatrick, internal ATO document, 1 August 2011.

11 The Large Business Advisory Group was renamed the Large Business Liaison Group during the course of this review.

12 ATO, TAXAGENT, October 2011, Issue 53.

13 ATO, Large Business Bulletin, September 2011, p 8.

14 See: ATO, ATO Interpretative Decisions, PSLA 2001/8, 2 May 2013; ATO, Precedential ATO view, PSLA 2003/3, 8 June 2007; ATO, 'Interpretative Decision Guidelines', internal ATO document; ATO, Public Rulings, TR 2006/10, 4 October 2006; ATO, 'Public Rulings Manual', 14 May 2014, internal ATO document.

15 ATO, Authorisation of written binding advice, PSLA 2002/13, 2 May 2014 [Withdrawn].

16 ATO communication to the IGT, 25 January 2013.

17 ATO communication to the IGT, 25 January 2013.

18 ATO communication to the IGT, 15 February 2013.

19 ATO, Income Tax Research and Development: building expenditure, ATO ID 2012/5, 2 January 2012.

20 ATO, National Tax Liaison Group GST Sub-Committee Minutes (June 2012) item 6.

21 ATO communication with the IGT, 20 December 2013.

22 See for example, ATO, Income tax: when a superannuation income stream commences and ceases, TR 2011/D3, 13 July 2011, para [40].

23 ATO, Product Stewardship (Oil) Benefit: the meaning of the expression 'goods produced from used oil' and the terms 'filtered', 'de-watered', and 'de-mineralised' for the purposes of the Product stewardship for oil benefit scheme, PGBR 2012/1, 12 September 2012.

24 ATO communication to the IGT, 8 August 2013.

25 ATO communication to the IGT, 5 July 2013.

26 ATO, Income tax: matrimonial property proceedings and payments of money or transfers of property by a private company to a shareholder (or their associate), TR 2013/D6, 13 November 2013.

27 ATO, Goods and services tax: supplies made by an operator of a 'moveable home estate', GSTR 2013/D2, 30 October 2013.

28 Ibid, paras [32[ and [33].

29 ATO, Goods and services tax: supplies made by an operator of a 'moveable home estate', GSTR 2013/D2, 19 November 2013, para [33].

30 Inspector-General of Taxation Act 2003 s 23.

31 Explanatory Memorandum, House of Representatives, Taxation Laws Amendment Bill (No. 4) 1992.

32 This exemption was introduced in 1986.

33 Above n 31, p 19.

34 Income Tax Assessment Act 1936 sub-ss 121EF(3) and 121EF(6).

35 International Banking and Securities Association (IBSA), IBSA/ATO Liaison Group Meeting, Minutes, 20 March 1998, p 7 [Unpublished].

36 Ibid.

37 Ibid.

38 ATO, 'Offshore Banking Unit (OBU) Project: Report for FSIG Executive', internal ATO document, November 2003, pp 3, 5-6.

39 Above n 38, p 3.

40 Ibid, appendix A, p 5.

41 Ibid, p 3.

42 IBSA, IBSA-ATO Liaison Group Meeting, Minutes, 17 December 2003, p 15 [Unpublished].

43 Above 38, appendix, general expenses.

44 Ibid.

45 Above n 38, pp 15-18.

46 The ATO has identified that where assessable OB income less interest results in a loss, the application of the formula results in a negative deduction which is irreconcilable with a common sense reading of the provision. See: Above n 38, p 17.

47 Above n 38, p 3.

48 ATO communication to the IGT, 6 February 2013.

49 Ibid.

50 ATO communication to Treasury, 14 July 2004.

51 Treasury communication to the ATO, 18 August 2004.

52 ATO communication to the IGT, 14 February 2013.

53 ATO communication to the IGT, 14 February 2013.

54 IBSA, IBSA-ATO Liaison Group Meeting, Minutes, 12 October 2004, p 5 [Unpublished].

55 ATO, Offshore Banking Units Project 2010 Tier 3 Project Closure Report, internal ATO document, 30 June 2011, p 8.

56 Above n 55, pp 8-9.

57 Macquarie Bank Limited v Commissioner of Taxation [2013] FCA 887 at [69].

58 Macquarie Bank Limited v Commissioner of Taxation [2013] FCA 887 at [71] and [72].

59 Macquarie Bank Limited v Commissioner of Taxation [2013] FCAFC 119 at [12].

60 See for example, ATO, Matters the Commissioner considers when determining whether the ATO view of the law should only be applied prospectively, PSLA 2011/27, 13 January 2014, para [20].

61 ATO, Macquarie Bank Limited v Commissioner of Taxation, Draft Decision Impact Statement, 13 January 2014.

62 Above n 61.

63 See for example: ATO, Public Rulings, TR 2006/10, 4 October 2006, paras [61] and [62].

64 See for example PSLA 2010/1 at [10] which states 'Because there had been considerable uncertainty before the decision in Bamford about the principles applicable to the operation of Division 6, it may be expected that some taxpayers will have lodged tax returns and / or administered their trusts on the basis of views that, with the benefit of the decision in Bamford , may be seen to be wrong. Accordingly, staff undertaking active compliance activities in respect of the 2009-10 and earlier income years should not select cases for active compliance just to correct such errors. However, if there is a deliberate attempt to exploit Division 6 (see paragraph 11 of the practice statement) or cases are selected for other reasons (for example, because there is a dispute about the quantum of the [tax] net income), and adjustments are to be made, the adjustments must be made on the basis of the law as explained in Bamford.'

65 ATO communication to the IGT, 28 August 2013.

66 Above n 38; Above n 55.

67 Above n 55, p 9.

68 IGT, Review into delayed or changed Australian Taxation Office views on significant issues (17 March 2010) p 15.

69 ATO communication to the IGT, 28 August 2013.

70 IGT, Review into the Australian Taxation Office's use of early and Alternative Dispute Resolution (2012) p 72.