2.1 Private rulings are legally binding written advices that taxpayers may obtain from the ATO under Australian tax law. The key taxpayer benefit is that the private ruling binds the ATO, such that no additional income tax, penalties and interest can be levied on the taxpayer even if that advice is wrong.

2.2 Private rulings are issued directly to taxpayers by the ATO. They are also published in an edited form on a register of private binding rulings that is publicly accessible via the ATO's website.

2.3 The Inspector-General's review looks at the ATO's administration of private rulings and the purpose, use and ongoing relevance of the edited private binding rulings register. It also examines the extent to which the ATO has implemented recommendations from the Inspector-General's 2008 review on the potential revenue bias in private rulings.

2.4 The review has been conducted both on the IGT's own initiative and in response to a specific request to review the private rulings system from the Commissioner of Taxation.

2.5 The Commissioner's request was made shortly after community concerns were voiced about a proposal of the Commissioner (which has since not been proceeded with) to remove the detailed content of private rulings from the register of private binding rulings. The ATO had planned to streamline this register so that it showed only the subject matter of any private ruling and its authorisation number. The request was also made against the background of a major change that the ATO was about to implement to its computer system for the management of private rulings. Implementation of this major system change occurred after the major fieldwork for this review had been completed.

2.6 The review did not examine certain types of rulings that are, or are similar to, private rulings on income tax for various reasons. Goods and services tax (GST), luxury car tax and wine equalisation tax rulings currently have a different legislative regime to income tax and were so excluded, (although the Government has indicated that this will change). Superannuation regulatory issue rulings are not legally binding on the ATO, unlike income tax, and were also therefore excluded. The ATO's Aggressive Tax Planning area rulings were not included due to their unique circumstances. Finally, the review did not examine class or product rulings as the ATO issues these rulings as public rulings rather than as private rulings.

2.7 In submissions made to this review, taxpayers and tax practitioners primarily focussed on the ATO's original proposal to alter the current content of the publicly accessible register of private binding rulings. These submissions all urged the Commissioner to retain the register in its current form.

2.8 Concerns that were raised in submissions about other aspects of the ATO's administration of private rulings were that:

  • private rulings take too long to issue;
  • private rulings on the same topic can be inconsistent; and
  • private rulings cannot be obtained on certain topics.

2.9 Overall, the review found that, up to the time when the ATO introduced a new computer system for the management of its private rulings it had a strong performance in relation to the production of quality, timely and consistent private rulings. However there is an issue as to whether the new Siebel system which the ATO has introduced for the management of these rulings has already led or will lead to a deterioration in this previously strong performance.

2.10 The small sample of Siebel-generated cases to date that the IGT has reviewed in the final stages of this review is too small to come to a definitive conclusion on these issues.

2.11 The review's detailed findings and recommendations are summarised in this chapter.

Administrative processes for private rulings

2.12 In 2008/09 the ATO finalised 8,917 private rulings. A significant number — about 33 per cent — of these private rulings were on the topic of the assessability of South Australian workers compensation receipts. Private rulings on the topic of the undeducted purchase price of an annuity were the next largest segment (6 per cent) of all finalised private rulings, although legislative changes made in 2007 mean that in future years of income the volume of these rulings will decrease significantly.

2.13 Both these types of private rulings are straightforward in nature and have standardised arrangements for their preparation which are adopted by both applicants (when requesting these rulings) and by the ATO (when generating these rulings).

2.14 Despite the significant volume of rulings dealing with both these types of rulings in 2008/09, and their standardised preparation arrangements, neither category of rulings is specifically identified in any ATO-wide internal reports prepared by the ATO for this year, although the individual business lines dealing with these rulings are themselves aware of the volume of rulings on these topics.

2.15 This has meant that the ATO has missed opportunities for enhancing its management of these types of rulings, other private rulings, public rulings or other forms of interpretative assistance.

2.16 For example, a lack of separate ATO-wide reporting on these and other types of standard rulings, which have a very quick turnaround time, has meant that the ATO has been reporting that it has met its overall service standards for the timely issue of rulings, when in fact it has not been meeting this standard for certain categories of more complex rulings (for example in the superannuation area).

2.17 It has also meant that the ATO has missed an opportunity to significantly improve the ATO's published register of private binding rulings.

2.18 This register currently consists of over 80,000 separate edited rulings. The ATO has had concerns that taxpayers may be labouring under a misapprehension that they carry a burden to review the register prior to making tax decisions or providing taxation advice. However, based on the above ATO statistics, over a third of the rulings on this register are likely to be standardised responses on two topics. This suggests that the current number of edited rulings on this register could be significantly reduced by separately identifying private rulings on South Australian workers compensation and undeducted purchase price issues, or other similar high volume rulings, publishing a standard form ruling on these topics and then associating each individual advice on these topics with the relevant standard form without publishing the actual edited private ruling in its entirety.

2.19 The IGT considers that the ATO should introduce a process to identify, track and report on high volume rulings to better manage its resources and to support better decision making.

2.20 Rulings grouped into high volume or broader category topics would, for example, provide useful information to the ATO about high demand private ruling topics that may benefit from alternative ATO approaches. It would also provide tax policy makers with useful information about the areas of the tax law that may require amendment to assist taxpayer needs. Publication of the top five or ten private rulings topics would facilitate this process.

2.21 The IGT has therefore made the following recommendation:

Key Recommendation 1

The Inspector-General recommends that the ATO should:

  • to better manage its resources for the production of private rulings, improve its existing management systems to identify, track and report, on a Tax Office wide basis, the most frequently requested private ruling topics; and
  • to facilitate the process of providing useful information to the ATO about high demand private ruling topics that may benefit from alternative ATO approaches and also to tax policy makers about areas of the tax law that may require amendment, publish the top five or ten (or whatever number is the most appropriate) of the most frequently requested private rulings topics.

2.22 Submissions to this review stated that there are, or have been in the recent past, examples of 'no go' topics upon which the ATO has refused to issue private rulings. The existence of 'no go' topics would run counter to the design of Australia's private rulings system which, unlike many other countries, allows private rulings on income tax issues to be issued on a very broad range of topics.

2.23 During the review, the IGT found that the ATO does not have a list of certain specific topics upon which it refuses to rule. However, from time to time, it does put in place special arrangements for the processing of rulings on particular topics which have the effect that private rulings on these topics are delayed for very significant periods.

2.24 An example of such a topic was the application of section 40-880 of the Income Tax Assessment Act 1997. This section allows certain expenditure known as 'blackhole' expenditure to be deducted over a period of five years. During the 2008/09 year the ATO had a directive in place which meant that all private rulings on this topic had to be reviewed by a particular member of the Tax Counsel Network prior to being issued. This had the effect that a number of private rulings on this topic were delayed for significant periods — in some cases for over a year and a half. Delays of this kind fuel perceptions that the ATO will not rule on certain topics.

2.25 To address these perceptions, the IGT has made the following recommendation:

Key recommendation 2

The ATO should address perceptions that it may have topics on which it will refuse to make private rulings by adopting measures such as:

  • notifying applicants for private rulings on particular topics of any key issue escalation arrangements put in place for private rulings on those topics and what impact those arrangements may have on the timeliness of rulings on those particular topics; and
  • also notifying (where appropriate) the public of the nature of any such arrangements and what impact these arrangements may have on the timeliness of rulings on those particular topics.

2.26 Submissions to the review also strongly asserted that private rulings in general take too long to issue.

2.27 Delays in issuing private rulings are clearly inappropriate, given the purpose and design of the private rulings system. The aim of this system is to provide taxpayers with certainty, on a timely basis, of the ATO's view of an arrangement. Generally any revenue risk is limited because, if any private ruling is incorrect, it is confined in its application to only that taxpayer.

2.28 The IGT found that one of the causes of ATO delay in issuing certain private rulings is the ATO's management arrangements for these rulings. In certain cases, such as those which involve the creation of an ATO view to support the private ruling, these management arrangements involve large numbers of ATO staff (that is, a minimum of 6 people)1. In these and other cases delays can arise because the ultimate decision-maker in the case is organisationally separate from the ATO staff who have the primary carriage of the private ruling and this decision-maker is not engaged in the process of developing the private ruling until a very late stage.

2.29 To address the delays and productivity issues that can arise from these management arrangements, the IGT has made the following recommendation:

Key recommendation 3

To address delays and productivity issues that may arise from having large teams from different areas of the Tax Office working on private rulings, the Tax Office should:

  • implement measures to ensure that only the minimum number of Tax Office personnel necessary to produce a timely and high quality product are employed on any private ruling;
  • introduce and develop productivity benchmarking, exploring both internal and external criteria for Tax Office personnel engaged in the private ruling decision-making process; and
  • ensure that the minimum necessary number of personnel on a private ruling case includes the ultimate case decision-maker from the time when this ultimate decision-maker has been identified.

2.30 Submissions to, and other work performed by the IGT during the course of this review, raised other issues relating to the productivity, timeliness, quality and integrity of private rulings issued by the ATO. The IGT's findings in relation to each of these other issues are set out below and are followed by a single recommendation which covers all these issues.

Productivity issues

2.31 The review found that, although the number of private rulings finalised by the ATO has been steadily declining in recent years, ATO resources devoted to generating these rulings has increased by 25 per cent.

2.32 An ATO internal review which looked at this issue concluded that this trend was justifiable but that there was room for improvement and for further work. This ATO review found that this trend was explained by factors such as the increased complexity of the subject matter of rulings and deliberate ATO strategies to switch private ruling requests where appropriate to faster, lower cost, less resource intensive products such as oral rulings or guidance or written interpretative advice. This ATO review found that when total non-private ruling guidance work was combined with private rulings work, historic trends showed that there was a slight decrease in both the total volume of this work and the resources devoted to it over time.

2.33 The IGT found that this internal ATO review did not seek the views of taxpayers or their representatives on why they were seeking fewer private rulings. It did not take into account that, at least for large taxpayers, a perception of revenue bias tends to deter these taxpayers from seeking a private ruling unless it is necessary. It also did not acknowledge that many taxpayers, and in particular large businesses, generally consider that external professional advice is a better risk management strategy than a private ruling. These types of views may also be a reason for the decline in private rulings over recent years.

Timeliness issues

2.34 The ATO's service standard for private rulings is that 80 per cent of private rulings should be finalised within 28 days of receipt of all information or by a negotiated due date. The ATO's Annual Report for 2008/09 indicates that service standard was met in the year ended 30 June 2009. However the ATO has advised the IGT that this standard has not been met for the 6 months to 31 December 2009. In these six months only 69 per cent of private rulings have been finalised within 28 days of receipt of all information or by a negotiated due date. During these six months the ATO progressively switched to a new computer system, known as the Siebel system, for the management of its private rulings work.

2.35 The 2008/09 Annual Report also includes data showing the median and mean number of elapsed days from the date of receipt of a ruling request in the ATO to the date of issuing a ruling.

2.36 The period of lapsed days is not the time used by the ATO to measure its performance in the delivery of rulings as it does not take into account periods of delay which are due to the ATO requesting information from the taxpayer. Nevertheless, this lapsed day measure period does provide a supplementary means of assessing the ATO's performance in the timely delivery of private rulings.

2.37 The Annual Report data on the lapsed days measure indicates that in 2008/09 for all types of taxpayers other than individuals the median number of elapsed days for private rulings exceeded 28 days from receipt of the original ruling request. This data appears to confirm statements made in submissions to this review that private rulings are not issued within 28 lapsed days. This means that, if non-individual taxpayers have a 28 day period or less for entering into the transaction that is the subject of a private ruling request, they cannot generally expect to receive a ruling within this time frame.

2.38 Submissions stated that one possible cause of these delays was a perceived practice of ATO staff making requests for further information from taxpayers in all private ruling matters, even where this did not seem to be justified. The IGT's previous review on potential revenue bias in private rulings also examined this concern and recommended that the ATO should take steps to vet requests for further information, should (if requested) provide reasons why the information is relevant and should identify the specific aspect of the technical issue that turns on the requested information. The ATO agreed with this recommendation.

Quality issues

2.39 Submissions to this review raised some concerns about possible inconsistencies in some private rulings, but otherwise submissions raised no concerns about the quality of private rulings issued by the ATO. A number of submissions, all of which were prepared prior to the ATO's switch to a new computer system for managing private rulings, praised the quality of written rulings issued by the ATO.

2.40 The IGT's fieldwork for this review, which was based on rulings finalised or on-hand during the 2008/09 year did not reveal any examples of inconsistent rulings.

2.41 The IGT's fieldwork for this review has however raised concerns that the quality of private rulings being generated in the 2009/10 year under the new Siebel system may have deteriorated from previous years, which could be serious.

Integrity issues

2.42 The review also found that the ATO's new Siebel computer system for managing private rulings work which was introduced in August 2009 does not yet replicate all the important integrity controls that were in place in the previous Technical Decision Making System (TDMS) used for private rulings. The ATO is working to address this issue, but does not expect to fully complete this work until 18 months time.

2.43 The new Siebel system, unlike the TDMS, also does not allow case officers who prepare rulings to conduct an effective free text search to specifically locate any other interpretative advice, including private rulings, the ATO may have provided on a particular topic. When the TDMS system was in place, such searches were regularly carried out by ATO officers as part of the process of preparing a private ruling. The inability to carry out such effective free text searches under the new Siebel system raises significant concerns about the integrity and consistency of private rulings being generated under this new system.

2.44 The ATO has advised the IGT that it is satisfied that Siebel's advanced search provides enhanced functionality over that of the TDMS search. However it acknowledges that there are issues with the accuracy of the search functionality within Siebel, which the ATO considers are being addressed through appropriate mechanisms within the ATO.

Need for a further review

2.45 The IGT's current findings in relation to the timeliness, quality and integrity of private rulings being generated under the new Siebel system raise concerns about whether the new system has already led or will lead to a deterioration in the ATO's previously strong performance in relation to the production of quality and/or timely and/or consistent rulings. The small sample of Siebel-generated cases to date that the IGT has reviewed in the final stages of this review is too small to come to a definitive conclusion on these issues.

2.46 The IGT notes that, as with the introduction of any new system, especially those of the magnitude being implemented by the ATO under its overall Change Program, it would be expected that it will take some time for its staff to get accustomed to the new functionality and proper ways to use the new system to produce high calibre rulings.

2.47 The IGT therefore makes the following key recommendation:

Key recommendation 4

To address possible concerns that the new Siebel computer system for handling private rulings may have led to a deterioration in the Tax Office's previous strong performance in the delivery of timely, high quality and consistent private rulings, the Inspector-General recommends:

  • that a review which addresses the timeliness, quality, consistency and integrity of private rulings being produced by the Tax Office under the Siebel computer system be conducted after the Tax Office has fully completed its phasing-in work for this new system; and
  • that the ATO takes steps, as soon as possible, to ensure that ATO staff can conduct effective searches across the ATO's internal databases for any private rulings on a particular topic.

Oral rulings

2.48 During the review the IGT, with the agreement of the ATO also examined the extent to which taxpayers and the ATO were making use of the system of oral rulings which is provided for in Division 360 in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). The current oral rulings system has been in place since 1 January 2006.

2.49 Oral rulings are expressions of the Commissioner's opinion of the way in which the tax law applies to a particular arrangement which are given orally rather than in writing. They are given only to individuals (or their legal personal representative) and are only available on straightforward income tax matters. They cannot be given on business or complex matters, nor can they be given to tax agents. The Commissioner is legally bound by an oral ruling in the same manner as he is legally bound by written private rulings.

2.50 The IGT found that during the 2008/09 year there were only 13 oral rulings issued by the Tax Office.

2.51 During fieldwork for the review, ATO staff advised the IGT that they perceived that the amount of work required to prepare an oral ruling was similar to that required for a private ruling. Because of this, ATO staff preferred to issue a private ruling, rather than an oral ruling, as this type of ruling provided a tangible response to the taxpayer.

2.52 The administrative costs associated with the oral rulings system are disproportionate to the low level of useage of the system. The Tax Office maintains detailed administrative processes for these types of rulings. These processes include a number of publicly available ATO practice statements and fact sheets dealing with oral rulings2 as well as a number of internal ATO documents and training packages on this subject.

2.53 In the light of these comments, the Inspector-General is of the view that the Government should consider abolishing the oral rulings system and removing the relevant provisions dealing with oral rulings from the TAA 1953.

2.54 The IGT notes that the Board of Taxation made a similar recommendation in its 2008 Review of the Legal Framework for the Administration of the GST.3

2.55 The IGT therefore makes the following recommendation:

Key Recommendation 5

In view of the continuing low level of usage of the oral rulings system, the Inspector-General recommends that the Government should consider abolishing the oral rulings system and removing the relevant provisions dealing with oral rulings from the Taxation Administration Act 1953.

ATO's published register of private binding rulings

2.56 The ATO publishes on its website the content of private binding rulings in the form of a register of private binding rulings. The published content of these rulings is edited to remove any material (such as names) which could identify the taxpayer to whom the relevant ruling has been issued.

2.57 In November 2008 the ATO flagged a proposal to convert this register into one which displayed the number and subject title of the relevant rulings, without any content. This proposal was to be implemented in January 2009. However, following representations from the IGT and from other bodies the Commissioner announced in March 2009 that he had decided not to proceed with this proposal and that he would maintain the register in its current form.

2.58 When he made his announcement to keep the register, the Commissioner also asked the IGT to conduct this present review of the private rulings system. The first agreed term of reference for this review was that the IGT would examine the purpose, use and ongoing relevance of the edited private rulings register and the relationship of this register to the ATO's more authoritative forms of guidance, such as ATO Interpretative Decisions.

2.59 In this review, the IGT has considered in detail the arguments raised for and against maintaining a detailed public register of edited private rulings.

2.60 The arguments for maintaining such a register are that:

  • a detailed register promotes transparency. Publication of detailed edited private rulings gives taxpayers an indication of whether they are being treated equally or fairly when compared to other taxpayers in similar circumstances;
  • a detailed register helps to improve the quality of ATO private rulings. It allows any errors in these rulings to be detected either by parties external to the ATO or by ATO officers. Publication therefore helps to ensure consistency in the private rulings being issued by the ATO;
  • a detailed register helps tax practitioners and their clients to determine whether or not to apply for a private ruling on a topic, and if they do decide to apply for a private ruling it gives them guidance on what points they should include in their application;
  • a detailed register assists tax compliance. Sometimes publication of a particular edited private ruling has deterred taxpayers from entering into particular arrangements. On other occasions a detailed edited private ruling has alerted tax practitioners to aspects of a tax issue that they had not yet considered;
  • a detailed register assists the self assessment process because it provides some types of assistance to taxpayers and tax practitioners which is not available from other ATO sources. For example, private rulings are often about matters which involve an application of the law to particular facts rather than about an interpretation of the law. In these circumstances no ATO product (such as an ATO Interpretative decision (ATOID)) will exist to help guide taxpayers as ATOIDs and similar products only deal with interpretative issues;
  • the existing detailed register is actually being used by a significant number of taxpayers and tax practitioners;
  • a detailed register ensures that large legal and accounting firms (who are able to maintain their own library of previous ATO private rulings issued to their clients) do not obtain an unfair advantage over smaller firms who do not have access to the type of private rulings material accumulated by larger firms;
  • the existing detailed register may be supported by the majority of the ATO's staff; and
  • other overseas jurisdictions have considered that the benefits of maintaining a detailed register outweigh any costs associated with such as register.

2.61 The arguments against maintaining such a register are that:

  • a detailed register involves costs (estimated by the ATO to be in the order of $1,095,321);
  • a detailed register increases the risk of a possible loss to the revenue because an edited private ruling on the register may be wrong and may in fact be relied on by other taxpayers even though the register itself makes clear that edited private rulings may not be relied on by taxpayers;
  • a detailed register can lead to a mass of material that is difficult to effectively manage or use;
  • a detailed register may deter people from applying for private rulings; and
  • a detailed register may delay the timely issue of private rulings.

2.62 The IGT has weighed the above arguments for and against keeping a detailed register and has concluded that on balance the ATO should continue its practice of publishing edited and searchable versions of binding private rulings.

2.63 The IGT also considers that the ATO should work towards making further enhancements to these published rulings such as by introducing a process of grouping rulings which have the same subject matter, introducing a better search engine and noting which rulings on the register have been withdrawn or are known to be incorrect.

2.64 The IGT considers that the ATO should also continue with its current processes to fully overcome its current backlog of edited versions that have not yet been published on the register. This backlog arose because, when the ATO made the decision in late 2008 to cease publishing the content of private rulings on the register, it also at that time significantly reduced the level of resources that were devoted to maintaining the register.

2.65 The IGT therefore makes the following key recommendation:

Key recommendation 6

The Inspector-General recommends that the Tax Office should:

  • retain its practice of publishing on its website edited and searchable versions of binding private rulings;
  • further enhance this register by introducing a process of noting which rulings on the register have been withdrawn;
  • work towards introducing a process of grouping rulings which are of a standardised nature and publishing only the details of the relevant ruling which differ from the standard version;
  • work towards introducing a better search engine for the register and the removal or notation of rulings known to be incorrect or out of date; and
  • work towards ensuring that all private rulings are published on the register within 49 days after the provision of the ruling to a taxpayer.

ATO's Implementation of recommendations of IGT's 2008 review on revenue bias in private rulings

2.66 As part of this review, the Inspector-General examined the extent to which the ATO has implemented recommendations from the IGT's 2008 Review of the potential revenue bias in private binding rulings involving large complex matters. The ten recommendations arising from the 2008 review suggested improvements in the following areas:

  • Tax Office transparency, communication and objectivity;
  • the interactions between the Tax Office and Treasury; and
  • the time frames for private rulings.

2.67 Chapter 5 of this report includes the Inspector-General's findings on the implementation status of these recommendations. Provided for each recommendation is the:

  • the ATO position on the implementation of that recommendation; and
  • the IGT's conclusion on the ATO's implementation of that recommendation.

2.68 Appendix 4 of this report also lists the recommendations and the Tax Office's original responses that were included in IGT's 2008 report.

2.69 The IGT has concluded that the ATO has implemented all of the recommendations (or parts thereof) that the ATO agreed to implement as a result of this earlier 2008 review.


1 The ATO has advised that, in 2008/09, 300 issues pertaining to private rulings were escalated to the Centres of Expertise or to the Tax Counsel Network.

2 See for example the material contained in PS LA 2008/3 at paragraphs 161 to 191.

3 Board of Taxation, Review of the Legal Framework for the Administration of the GST, December 2008 at p. 77.