4.1 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 taxpayers to whom the relevant ruling had been issued.
4.2 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 in March 2009 the Commissioner announced that it had decided not to proceed with this proposal and that he would maintain the register in its current form.
4.3 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.
4.4 This chapter sets out the IGT's findings on this term of reference.
4.5 The creation of the register of private binding rulings was in response to the recommendations of an internal review conducted in 2000 by Mr Tom Sherman15. The Sherman review was commissioned by the ATO in response to media criticisms of the integrity of the private binding rulings system. Some of these criticisms related to the then pending prosecution of a former senior ATO officer who was alleged to have issued private rulings in inappropriate circumstances.
4.6 From the outset, the ATO has considered that the register is a transparent historical record of advice that has been provided.
4.7 Initially, the ATO provided no search engine for the register. However, a search engine for the register was provided by January 2005 in response to requests by members of the National Tax Liaison Group and other bodies.16
Present nature of register
4.8 The register currently contains over 80,000 edited versions of private binding rulings. These documents are not grouped on the register according to subject matter.
4.9 The ATO has no processes for removing edited versions which are either out of date or which are incorrect. It also has no processes for removing an edited version from the register when the ATO has subsequently withdrawn that ruling, even when that withdrawal occurs immediately after the issue of the ruling.
4.10 The ATO's internal policy for not removing withdrawn or incorrect rulings from the register is explained in the following internal guidelines which it has issued to its staff and which are available on its intranet (emphasis added):
The initial Edited version (EV) is not affected by the creation of a revised ruling. It exists as a transparency and accountability measure to show that advice issued to a client matches advice recorded on Tax Office systems. The fact that advice may be incorrect, or subsequently revised, is immaterial. The EV is retained as an historical record and does not need to be altered or withdrawn.
4.11 The ATO notifies users of the register of its limitations via a disclaimer that users must acknowledge they have read before searching the register. A slightly different disclaimer also appears at the bottom of any copy of an edited ruling on the register.
4.12 The disclaimer which users must acknowledge they have read before using the register's search facility, contains the following words:
The Register of Private Binding Rulings is a historical public record of written binding advice the Tax Office has issued to specific entities. It exists to enhance the integrity and transparency of the Tax Office's decision-making processes. In essence, it enables the recipient of written binding advice to confirm that what they have is official Tax Office advice.
Each record is based on the facts of a specific situation as advised to the Tax Office and reflects our view of the law in force at the time the advice was issued. Before we place a record on the register, we edit it to protect the applicant's privacy.
Records on the Register cannot be relied upon as precedent or used for determining how the Tax Office will apply the law in other cases because:
- the advice is binding on the Commissioner only in relation to the specific entity named in the written binding advice
- some material facts that formed the arrangement on which our advice was given may have been removed or altered for privacy, secrecy or confidentiality reasons
- we do not update records to reflect:
- changes in legislation
- changes in the Tax Office's application of the law resulting from tribunal or court decisions
- changes to the Tax Office view on how the law applies, and
- changes to decisions resulting from review processes after entities have disputed the Tax Office's decision.
Given the above, a record in the Register is not a publication approved in writing by the Commissioner. It is not intended to provide you with advice, nor does it set out the Tax Office's general administrative practice. Therefore a record on this Register is non-binding and provides you with no protection (including from any penalty or interest). In addition, a record on the Register is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances.
The Tax Office provides a legal database that contains the Commissioner's view on how the law would apply in various circumstances. If you need to clarify how the law applies to your circumstances, you should seek expert advice or apply for a private binding ruling from the Tax Office.
4.13 The disclaimer at the bottom of each copy of an edited ruling on the register specifically states that the register is not updated to reflect withdrawal of the relevant advice or any other changes in circumstances.
4.14 The IGT considers that the above disclaimers are appropriate, given the limitations of the register.
Reasons for the ATO's 2008 proposed changes to the register
4.15 Historically, revenue authorities have been reluctant to publish the detailed texts of private rulings for cost reasons and also because publication increases the risk of a possible loss to the revenue from an incorrect ruling.
4.16 In a number of jurisdictions (for example, the United States of America) the reluctance of revenue authorities to publish binding private rulings has been overcome by governments enacting legislation which compels the revenue authority to publish these rulings. In Australia, the freedom of information legislation may have this effect.
4.17 At the end of 2008 the ATO became concerned that the register was being used inappropriately by taxpayers and their advisers as a research tool and 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. The ATO also considered that reducing the extent of the publication process would lead to speedier ATO response times for private rulings.
Views raised in submissions or other public documents
4.18 All the submissions made to this review urged the Commissioner to retain the register of private binding rulings in its current form. Some submissions suggested a number of ways in which the current register could be improved.
4.19 Similar views were expressed in a number of other, publicly available, documents that were prepared by organisations during the consultation process undertaken by the ATO in relation to its original proposal to cease publishing the detailed content of the register.
Use of the register as a research tool
4.20 A number of submissions or other public documents pointed to a number of different areas where the register was considered to be useful to tax practitioners. These documents stated that the register was useful as a tool for obtaining information on particular tax issues.
4.21 Submissions and/or other public documents also stated that the register was useful because it assisted tax practitioners and their clients in determining whether or not to apply for a ruling on the topic. On this point, the Taxation Committee of the Business Law Section of the Law Council of Australia (the Law Council) stated that:
If the ATO has ruled negatively, and the reasoning is persuasive, then practitioners may be dissuaded from applying unnecessarily for ruling guidance. In other words, it may be useful in freeing up the overburdened rulings systems.
4.22 The Institute of Chartered Accountants stated:
It is also useful to be able to ascertain the ATO's approach to technical issues and compare it with the approach taken by clients. If the facts are similar and favourable then clients can apply for a similar ruling. If the facts are similar and clients are not following the ruling then clients can review their position which seems eminently sensible.
4.23 Submissions and/or other public documents also stated that the register was useful for giving guidance to practitioners on what points they should include in any applications for a private ruling. On this point the Law Council stated that:
Where a ruling is applied for on a similar fact pattern (this will often occur as applicants will be aware that the edited Private Binding Rulings do not provide binding advice) it is useful to see the format and issues which are discussed since they give guidance to the points which it may be expected the ATO will want to see in any Private Binding Ruling application.
4.24 The register was also considered to be useful in alerting practitioners to arguments they may not be aware of for a specific issue. On this point, the Law Council stated:
Edited private rulings obtained from the register often set out in specific detail arguments which practitioners may not have thought about which could be relevant to the matters they are considering. The arguments are often set out in much greater detail, compared to ATO IDs which may have issued on similar issues. Practitioners are well aware that they cannot rely on these arguments in order to protect their clients' position. However, it is nonetheless helpful to have access to this type of information.
4.25 Submissions and/or other public documents also stated that the register assisted with tax compliance. On this point, CPA Australia gave the following example:
A year before the ATO released a Taxpayer Alert on the use of hybrid trusts, there were several PBRs where the ATO ruled that the full interest was not deductible to the unitholder — this information was crucial to persuading many taxpayers not to enter into these arrangements despite urgings to do so from hybrid promoters.
Whether other ATO advice and guidance products have replaced the need for the register
4.26 Submissions and/or other public documents provided a number of examples of issues of importance where information on the relevant issue was only available on the register and not in any other ATO material such as ATO IDs or other rulings. Examples included edited private rulings on CGT Event D3, trusts resettlements, debt/equity issues and section 128F.
4.27 CPA Australia noted that its members asserted that:
Unlike public binding rulings (including ATO Interpretative Decisions or ATO IDs) which are general in nature, the private binding rulings apply the law to a particular set of circumstances and thus are more useful to tax agents/ taxpayers.
PBRs are also much more useful than ATO IDs as their coverage is wider and many useful PBRs appear not to be translated into ATO IDs.
4.28 The ATO asserts that, since the Sherman report, it has developed ATO Interpretative decisions (ATO IDs). These arise from issues raised in private binding rulings and other technical decision making activities where an ATO precedential view on an interpretative issue needs to be established.
4.29 It has asserted that, unlike the edited private rulings on its register, ATO IDs are correct and kept up to date.17 The ATO also notes that under current ATO work practices, a tax officer cannot generally issue a private binding ruling unless either an ATO ID (or another type of document which the ATO regards as being an ATO precedential view) exists on the relevant topic or the issue under consideration involves a straightforward application of the law.
4.30 The ATO considers that ATO IDs are publications approved in writing by the Commissioner. Taxpayers are therefore provided with legislative protection against penalties and interest if they follow guidance contained in an ATO ID and that advice is wrong. The ATO states that ATO IDs are:
... not published as a form of advice. They are published to meet freedom of information requirements because they may be applied by tax officers in making other decisions. 18
Whether the register is inappropriately used
4.31 A number of submissions and/or other public documents noted that, if the register was being inappropriately used by tax practitioners, then this would involve ignoring the disclaimers on the register itself and would also raise professional negligence issues. The Institute of Chartered Accountants noted:
... it is difficult to accept that the register represents "an unacceptable level of risk" to users. The Register is risky only if the user ignores the warnings posted on the register and displays a complete lack of reasonable care in discharging their obligations as a tax professional.
4.32 The Law Council of Australia noted that:
It is surely for taxpayers and their agents to assess, for themselves whether they find the Register useful, despite its acknowledged limitations.
Extent of use of the register
4.33 Submissions and/or other public documents stated that large numbers of tax professionals used the register.
4.34 The Institute of Chartered Accountants stated:
Our information shows that a large number of tax professionals use the Register.
4.35 CPA Australia stated:
Many agents currently rely on the PBR register (contrary to the ATO's claim) to properly advise their clients on the law.
Cost of the register
4.36 Submissions and/or other public documents queried whether the register involved enormous additional cost to the ATO given that the ATO would still need to maintain an internal register for use by its own staff.
4.37 Submissions and/or other public documents also pointed to other alternative savings the ATO could make instead of removing the content from the register.
4.38 The Law Institute of Victoria submitted:
If the issue is one of funding for the retention of the register in its current form then we urge that funding be made available to enable this valuable service to continue.
4.39 Some submissions or other public documents urged that more funding be applied to the register to enhance its usefulness.
4.40 The Institute of Chartered Accountants suggested that:
Improvement involving possible edits to the register, such as indicating if rulings are still representing the current application of the law would be helpful.
4.41 Other submissions or public documents urged that the ATO introduce a better search engine for the register19 and that the edited versions of private rulings on the PBR register should also include an edited version of the original application for ruling.
Need for a detailed register for integrity, transparency and other purposes
4.42 A number of submissions or public documents stated that the register provided significant enhancements to the integrity and/or transparency of the general administration of taxation law by the ATO.
4.43 The Law Institute of Victoria noted that it considered that any removal of the detailed content of edited private rulings on the register was:
... a reduction in the transparency of the rulings process (and, accordingly, a reduction in the transparency of the Commissioner's processes). Without the publication of these rulings there is no ability to check consistency of rulings and quality of advice being given. Moreover, good tax administration depends on taxpayers in like circumstances being treated equally and fairly. The Register provides a useful check on whether the ATO is adopting similar positions on legal issues.
4.44 The Law Council stated:
The retention of the register would result in a greater level of confidence (as a result of a greater level of transparency) that the major issues which are being ruled on are being extracted and reflected in ATO IDs or other Public Rulings. In other words, the retention of the Register would give rise to a greater level of confidence in practitioners that the system is in fact working and the transparency the register provides is a good test in this regard. In essence, the transparency serves a different purpose of that originally envisaged but it is a purpose which is probably more useful for the vast majority of practitioners.
4.45 In their submission, the Institute of Chartered Accountants noted:
Occasionally, the edited private rulings have highlighted inconsistencies of approach, for example, between the private rulings and the position taken by an ATO auditor.
4.46 CPA Australia noted that an issue raised by its members was that:
As our current tax administration system is based on self assessment it is inappropriate for the ATO to withhold information relating to its view of the law from taxpayers, let alone 80,000 PBRs.
4.47 Other submissions or public documents noted that the original reason for the creation of the register was to enhance transparency and authenticity in light of the (named tax officer) affair and that nothing had occurred in the eight years to date mean that those reasons do not still stand.
4.48 The IGT notes any cessation of publishing the edited texts of private binding rulings would be contrary to the recommendations of a number of previous reviews of the ATO's private binding rulings system. The review conducted by Tom Sherman in 2000 was one of these.20 The main recommendation of his review was as follows:
The ATO should publish all private rulings on a public database. The published ruling is to be the private ruling with taxpayer identifiers deleted. The text of the published ruling will otherwise be the same as the private ruling.21
4.49 Other reports which have made a similar recommendation include the 1993 report of the Australian Parliament's Joint Committee of Public Accounts and Audit22 and the 1999 report from the Review of Business Taxation chaired by Mr John Ralph AO (called the Ralph review).
Arguments in favour of maintaining the existing PBR register
4.50 The arguments in favour of continuing the publication of edited private rulings, and the IGT's findings in relation to these arguments are outlined in the following sections. Arguments against are discussed in later sections.
4.51 The principal argument in favour of continuing the publication of edited private rulings is transparency. Publication of such rulings gives taxpayers an indication of whether they are being treated equally or fairly when compared to other taxpayers in similar circumstances.
4.52 Transparency is a fundamental principle which underlies Australia's current freedom of information legislation. There is therefore a serious issue as to whether any ATO proposal to remove the detailed content from the register addresses this legislation.
4.53 In his 2001 report Tom Sherman noted that the publication of private rulings (at least in an edited form) may not simply be an option for the ATO, but may be a legal obligation under FOI laws23. He noted that section 9 of the Freedom of Information Act 1982 (Cwth) places obligations on Commonwealth agencies to make certain documents available for inspection and purchase. Amongst those documents are:
(a) manuals or other documents containing interpretations, rules, guidelines, practices or precedents including, but without limiting the generality of the foregoing, precedents in the nature of letters of advice providing information to bodies or persons outside of Commonwealth administration.
4.54 He goes on to state that:
There is I believe a sound argument that any private ruling on the internal ATO databases which is used as a precedent ( for example, on the CRS system) is a precedent within the terms of paragraph 9(1) (a) of the Freedom of Information Act 1982 and is therefore required to be available for public inspection.
The fact that a document may contain exempt material (eg the identity of a taxpayer) does not protect it from disclosure. Section 9(4) of the Freedom of Information Act 1982 requires agencies to excise the exempt material and make the edited document available to the public.
The significance of these statutory provisions is that the publication of private rulings (at least in an edited form) may not simply be an option for the ATO, it may be a legal obligation. And the situation may not be very different from Canada.
4.55 This opinion was published prior to the introduction of ATO changes to its processes concerning the use of private rulings as precedents. These processes include the introduction of the system of published ATO IDs. The ATO has since obtained internal legal advice that Mr Sherman's advice no longer applies. However, given the importance of this issue, the IGT considers that it would have been more prudent to have sought external legal advice on this matter.
4.56 Any removal may also be contrary to proposed changes to FOI laws that are currently contained in bills that are before the Australian Parliament.24
Improving the quality and consistency of ATO advice
4.57 Another argument in favour of publication is that this helps to improve the quality of ATO private rulings as public exposure of the content of ATO rulings allows any errors in these rulings to be detected either by parties external to the ATO or by ATO officers. A further argument is publication ensures consistency. If the ATO were to issue inconsistent rulings on the same subject matter, external scrutiny allows this to be detected.
4.58 The IGT has been provided with numerous examples during the course of this review where material contained in an edited private ruling on the register has either not been consistent with other private rulings on the register, or has identified incorrect technical views being adopted inside certain areas of the ATO.
4.59 A submission from the Institute of Chartered Accountants stated that the issue of detecting inconsistent private rulings was particularly important for practitioners in indirect taxes. It stated:
Many practitioners in indirect taxes have expressed their experience that competitive neutrality can be extremely important as far as transactions taxes such as GST, WET and LCT are concerned. One way in which competitive neutrality is achieved is when one cell within the ATO advises one taxpayer that its product (goods or services) is input taxed or GST free while another ATO cell is advising competitors that its product is taxable. To help guard against this, or to detect conflicting rulings early, it is useful to allow industry participants and their external advisers to monitor developments in an informal manner by researching issues via the Register.
Assisting the operation of the private binding rulings system
4.60 Publication of edited private rulings also assists the efficient operation of the private binding rulings system. The register helps tax practitioners and their clients to determine whether or not to apply for a ruling on a topic. If these parties do decide to apply for a private ruling, it also helps them by giving guidance on what points they should include in their applications for a private ruling.
Assisting tax compliance
4.61 Publication also assists tax compliance. Some submissions gave examples of where publication of a particular edited private ruling had deterred taxpayers from entering into particular tax arrangements. Other submissions noted that the publication of an edited private ruling could also alert tax practitioners to aspects of a tax issue that they had not yet considered.
Assisting the self assessment process
4.62 During its consultation processes on its original proposal to remove the detailed contents of private rulings from the register the ATO asserted that there may be no need for such a register because its full suite of advice and guidance products, which includes published ATO Interpretative Decisions (ATO IDs) now meets the needs of taxpayers and tax practitioners for information on the ATO's view on particular interpretation issues in a self assessment system.
4.63 However, as submissions noted, publication of edited version of private rulings provides some types of assistance to taxpayers and tax practitioners which is not currently available from other ATO sources. The PBR register in its current form therefore actively assists the self assessment process.
4.64 The IGT's fieldwork for this review has confirmed that there are topics dealt with in edited private rulings that are not dealt with in any other publicly available ATO material, including ATO IDs and public rulings. These topics generally involve matters where the ruling involves an application of the law to the particular facts that arise in the ruling request, rather than an issue which involves the interpretation of the law. These types of matters arise in all the business lines that prepare private rulings, including the LBI line, where the IGT's fieldwork indicated that they were particularly prevalent.25 For these types of cases no ATO ID (or similar ATO material such as a public ruling or determination) will exist to guide taxpayers and tax practitioners on what the ATO's view of the relevant matter will be, because ATO IDs only deal with interpretative issues.
4.65 Only a very small number of ATO IDs are generated each year as a result of a private ruling request. For example, in the 2008 calendar year, only 166 ATO IDs were issued of which only 74 were generated in response to a private ruling request. The remaining ATO IDs were generated as pre-emptive ATO IDs, hypothetical ATO IDs, to replace outdated earlier ATO IDs or for internal ATO advice purposes. This data tends to support the Inspector General's finding that the many private rulings, particularly for large business taxpayers, concern matters for which there is no relevant ATO ID or other publicly available ATO material such as a public ruling or determination.
4.66 Where a matter does involve the interpretation of the law, and there is a relevant ATO ID on the matter, edited private rulings on the same topic are also considered by tax practitioners to be more useful than the associated ATO ID. This is because the ATO ID will be general in nature, while the edited private binding rulings apply the law to one or more particular sets of circumstances.
4.67 Furthermore, since 2001, the number of ATO IDs that have been issued each year has been in dramatic decline.
4.68 Part of this decline is due to the ATO actively withdrawing a number of previous ATO IDs. While many of these withdrawals have been to ensure that only up to date ATO IDs are published by the ATO, at least 469 ATO IDs have been withdrawn for the reason that they are considered to be a simple statement of the law rather than an interpretative decision.
4.69 During this review, staff of the IGT examined a number of the ATO IDs that had been withdrawn on this basis. They found that a number of these withdrawn ATO IDs did in fact assist taxpayer and tax practitioners to better understand the relevant law that was the subject of the ATO ID by applying that law to particular fact scenarios. The withdrawal of the relevant ATO ID now means that ATO guidance on these specific fact scenarios is no longer available. In this environment, the only publicly available documents on the relevant matter that will provide anything on the ATO's possible view (even though this may be flawed material because of the editing process) will be in any edited private ruling that is on the ATO's private rulings register.
Other arguments in favour of publication of edited private rulings
4.70 Other arguments in favour of continuing to publish edited private rulings are as follows
- The register is in fact being used by a significant number of taxpayers and tax practitioners and not just a few. Internal research carried out by the ATO on the use of the register prior to 26 November 2008 indicated that professionals were making use of the register for research purposes. This research included a Tax Office provision of advice survey which was conducted in 2006. The report from this survey is available on the ATO's website.26 This survey indicated that 26 per cent of the 528 tax professionals who responded to the survey were using the register.
- Publication may ensure that large tax and accounting firms do not obtain an unfair advantage over smaller firms. Both before and during the time edited private rulings have been published, large tax and legal firms have accumulated substantial libraries of private rulings issued to their own clients. Small firms have not had this capacity. The introduction of the PBR register has allowed smaller firms to have access to private rulings material similar to that accumulated by larger firms. Any removal of the register would recreate the disadvantages previously suffered by smaller firms. This disadvantage was cited specifically by the US Congress as one of the reasons why it introduced legislation to compel the US revenue authority to publish edited versions of private rulings.27
- Publication is supported by all of the tax practitioner bodies which made submissions to this review.
- Publication may also be supported by the majority of the ATO's staff. Although the ATO, prior to flagging its recent proposals to dismantle the register, did not conduct a detailed consultation process with its own staff on this issue, the ANAO did conduct such a survey as part of their 2001 report on the ATO's administration of taxation rulings.28 This survey found that most (59 per cent) ATO staff considered that, subject to adequate protection of taxpayer confidentiality and privacy, private binding rulings should be published by the ATO. This survey also found that 79 per cent of private tax professionals felt the same way.29
Arguments against maintaining the existing PBR register
4.71 The arguments against publication of edited versions of private binding rulings, and the IGT's findings on these arguments, are as follows.
cost of the register
4.72 Prior to announcing its proposal to remove the content of the register to NTLG members the ATO did not perform a cost/benefit analysis for this proposal.
4.73 In January 2009 the ATO advised the IGT that the potential budget savings estimated to arise from the proposal amounts to a total of $1,095,321, comprising $530,346 of saving from its Law and Practice area and $564,975 from its business lines. However, these cost savings do not include any estimates of additional ATO costs that may arise from the proposal. These additional costs would arise from:
- a likely increase in the number of private binding ruling applications on matters previously covered only in the register;
- a possible increase in the level of work ATO officers would be required to undertake to ensure that applications for private binding rulings address all appropriate issues, in view of the absence of sample rulings on the same topic in the register that may in the past have assisted taxpayers as to what to include in their applications; and
- a possible increase in non-compliance in areas no longer the subject of edited private rulings.
4.74 The IGT also notes that the ATO's costings do not quantify any overall benefits to tax administration (in terms of detecting wrong or inconsistent advice within certain areas of the ATO) that would arise from making its private rulings transparent.
4.75 The costings also do not appear to take into account any cost efficiencies that may arise from the ATO adopting alternative internal processes for publishing edited private rulings. Currently, the ATO has a small team of officers, separate to those that actually prepare the private rulings and their edited versions, who check edited versions of PBRs to ensure that they meet privacy and other requirements. Submissions have asserted that there could be potential cost efficiencies if this work was transferred to the officers that actually prepare the private rulings.
Publication of rulings gives them a binding status that they do not have
4.76 As noted above, historically, revenue authorities have been reluctant to publish the detailed texts of private rulings because publication increases the risk of a possible loss to the revenue from an incorrect ruling.
4.77 Private rulings were developed to provide single taxpayers with the ATO's view of the tax consequences of a particular transaction or course of action and, being limited in this way, could be delegated to non-executive level officers to issue.
4.78 Private rulings also allow revenue authorities to issue, within a short period of time, a private ruling on a matter that may be about an area of the law that is not clear. If further private rulings on the same issue are sought and/or granted, the revenue authority is able to develop a more mature response to the relevant issue, based on the scale of the problem. This may culminate in a public ruling for the benefit of all taxpayers. 30
4.79 Revenue risk concerns appear to be one basis for ATO concerns about tax practitioners inappropriately using the register for research purposes. The ATO has also advised the IGT that it is concerned that the register poses a reputation risk for the ATO as community confidence in tax administration may be eroded if taxpayers improperly rely on material that is on the register. Furthermore, the ATO has advised the IGT that it is concerned 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.
4.80 However, these concerns about revenue risk and other matters need to be balanced against the following aspects of the private rulings system.
4.81 The first aspect is the legislative structure of the private binding rulings system. As a former Commissioner noted, the private binding rulings system is a legislative exercise in risk management.31 The legislation is designed on the basis that the ATO may get some rulings wrong but ensures that any risk associated with an incorrect ruling is limited to:
- the taxpayer who receives the ruling;
- the relevant years of income; and
- the relevant arrangement.
4.82 A number of internal reports prepared by or for the ATO have referred to the ATO's risk averse approach to private binding rulings generally. One of these reports32 notes that this risk approach may be due to various factors, including:
- an ATO culture that places a high importance on 'getting it right';
- a concern that a ruling may be used to widely market a particular tax strategy;
- a concern that others with different factual circumstances will rely on the ruling or the associated ATO ID;
- a recognition that an ATO ID creates a precedent that must be followed by ATO officers;
- a suspicion that the full facts have not been disclosed; and
- a perceived need to obtain and verify all the facts about the arrangement.
4.83 This same internal ATO report however noted that the above risk averse approach appears to be misplaced, given that it is the applicant for a ruling that has the most to lose if all material facts are not provided because, in this event, they will not have a binding ruling.
4.84 Secondly, any potential losses that could arise from an incorrect ruling being on the PBR register should be reduced if the ATO has appropriate internal processes in place to minimise the situations where incorrect private rulings are issued, or are relied on. As noted above, these current processes include the existence of disclaimers on the register which make it clear to those who may look at the texts of binding private rulings that they are not to be relied on as evidence of the Commissioner's view on any topic.
4.85 Thirdly, the marketing of private tax rulings or aggressive tax arrangements is now heavily constrained by the statutory tax promoter penalty regime.
4.86 Finally, the ATO could, assuming that adequate resources were available for it to do so, take steps to either actively remove, or make a suitable notation to identify, those edited rulings on the register which it knows, or which other parties let it know, are clearly wrong or out of date. As indicated above, the ATO currently has no processes in place to do this.
4.87 In the light of the above comments, the IGT has concluded that the PBR register in its current form has some residual risk to the tax system. A few examples were found during the course of the review where taxpayers or their representatives were, on various publicly accessible websites, citing edited private rulings as being the ATO's view on a particular topic. However, in the IGT's view, this residual risk is not sufficient justification for the revival of any proposal to remove the detailed content of private rulings from this register. The IGT also considers that the ATO should continue to take any steps that are within its power to mitigate this risk. One such step would be to introduce a process to ensure that any rulings on the register that the ATO withdraws are noted as having been withdrawn. A one-line annotation next to the relevant rulings would assist in addressing this issue.
Publication has led to a mass of material that taxpayers and their advisers have to decipher
4.88 As noted above, there are currently 80,000 edited private rulings on the register, some of which are clearly wrong and out of date. There is therefore a legitimate concern that the current register has created a mass of material for taxpayers and their advisers to decipher.
4.89 However, as noted in a previous chapter, this problem could be addressed through the ATO adopting a process of segregating out the large volume of rulings that involve standardised responses (such as the private rulings concerning South Australian workers compensation issues and undeducted purchase price issues) and publishing only the full text of the standard private rulings responses that are issued on these matters, rather than setting out the full text of the standard response in every individual ruling.
Other arguments against publishing binding private rulings
4.90 In the 2001 Sherman report two other arguments were canvassed as possible reasons against publishing binding private rulings.
4.91 The first of these was that publication may deter people from applying for private rulings. It is certainly true that over the time the register has been in existence the number of private rulings has been declining progressively. However, as discussed in the previous chapter, it seems more likely that other factors have had a bigger role in bringing about this result.
4.92 The second argument was that the publication process may delay the timely issue of private rulings. Again, as discussed elsewhere in this report, factors other than the actual publication process probably play a greater role in causing these delays.
4.93 Australia is somewhat unique in having a system where public and private rulings are legally binding on the revenue authority. In many countries only private rulings are legally binding. Public rulings, where they exist, are only generally administratively binding on the relevant revenue authority.
4.94 In some countries where there is no legally binding public rulings system, (such as the United States of America and Canada), the process of publishing the edited contents of private binding rulings is in effect a substitute for the lack of an extensive public rulings system. In both the United States and Canada, the revenue agencies themselves do not broadly publish these edited private rulings — this task is performed by commercial publishers. The revenue agencies receive income from these commercial publishers which assists in covering the revenue agencies' costs of the publishing regimes. The external publishers provide certain 'value adding' services to the publishing process, such as eliminating minor and duplicated advice.
4.95 As in Australia, these edited published rulings are not binding on the revenue authority in respect of taxpayers generally. They are however generally binding on the relevant authority in respect of the taxpayers to whom they were originally issued. Nevertheless, they are widely relied on by taxpayers and tax advisers in those countries as an indication of how the revenue authority will apply the tax law to particular fact situations.
4.96 Some of these countries (for example, the United States) have periodically reassessed whether they should discontinue their practice of publishing edited private rulings. However the result of such a process has always been to continue with this practice. This is because it has been considered that the benefits of this practice outweigh the costs. The ATO did not consider this international material during its recent reassessment of the PBR register.
ATO internal processes for creating the register
4.97 During the period of this review, the Inspector-General examined the ATO's internal processes for creating edited versions of private rulings.
4.98 Currently the ATO has a small team of officers, located in a Practice Management Unit (PMU) in Newcastle who check edited versions of PBRs to ensure that they meet privacy and other ATO requirements. These officers work in the ATO's Law and Practice area, which is separate from the business lines that prepare private rulings.
4.99 The process for creating edited versions under the ATO's previous TDMS computer system for preparing private rulings was as follows. The TDMS system would automatically generate a version of the ruling for editing purposes at the same time as the actual private ruling was created. Case officers in the relevant business line would check this edited version to ensure that all specific references to the taxpayer or their business were removed. Any information that was confidential to the taxpayer or third parties, or that enabled the identity of the taxpayer or of third parties to be ascertained, was also removed.
4.100 Once an edited version was approved within the relevant business line, it was forwarded to the taxpayer who was asked to provide comments on the proposed edited version prior to its publication. The taxpayer received this edited version at the same time as they received their actual ruling. The edited version was also at this time automatically forwarded by the TDMS system to the Practice Management Unit.
4.101 The process for creating edited versions under the current Siebel system is similar. However, under this system, an edited version is not automatically created for a case officer. Instead, case officers must copy and paste from the original ruling to create the edited version. Furthermore, under the new system, a copy of the edited version is not automatically sent to the PMU. Instead, case officers must send a copy to the PMU manually.
4.102 The process of manually preparing edited versions under the Siebel system, and manually sending them to the PMU means that there is a risk that under the Siebel system private rulings may be generated within a business line but their edited versions are not sent to the PMU area for publication. This is an example of an integrity issue that did not arise under the TDMS system.
4.103 The ATO has advised that it is addressing this problem in the following way. The PMU unit is sending each business line a summary of the number of edited versions received from that business line with a request that the numbers received equals the number of pieces of written advice finalised by them. Any gaps identified are to be investigated in a joint effort between the business line concerned and the PMU.
4.104 During the first phase of the IGT's fieldwork for this review his staff found that a significant percentage (over 50 per cent) of the TDMS-managed cases selected for review, and which had led to the issue of a private ruling, did not yet have their associated edited version published. Further examination revealed that one third of these cases that were missing a published edited version had been finalised more than nine months previously.
4.105 This backlog issue was immediately raised with the ATO who advised that this backlog had arisen as a result of a redirection of resources that had occurred in the ATO early in 2009. This redirection was based on the ATO's original proposal to cease publication of the content of private rulings from early 2009.
4.106 To address this backlog the ATO has taken the following steps.
4.107 Firstly, the Practice Management Unit is using an internal working measure that edited versions must be published on the register 49 days after the provision of written advice. This 49 days measure is based on the 28 days that is allowed to the taxpayer to comment on the document, 7 days to allow for mail to be delivered and a further 14 days for the PMU to process any changes.
4.108 Secondly, in October 2009 the ATO conducted a review of the Register to identify any missing versions.
4.109 This review found that 324 edited versions generated under the TDMS system were stored in a 'processed folder' that had not in fact been published. This accounted for 100 per cent of all missing edited versions, including those identified by the IGT. The ATO has advised that all these edited versions have now been published and staff of the IGT have confirmed that all the missing versions from the IGT's sample that were more than nine months old have now been published on the register.
4.110 The ATO has also conducted further investigations to ensure that its systems are operating correctly so that all versions sent for publication are in fact appearing on the public register.
4.111 To clear the current backlog, the ATO has taken steps to publish as many edited versions that are within the 49 day performance standard as possible and to then work on the older edited versions. This approach gives priority to keeping currency as useful as possible.
4.112 The ATO has advised that the current approach is reducing stock on hand and is producing an understanding of the aged nature of the edited versions not yet published.
4.113 The ATO has also provided statistics to the IGT which show that, as at 30 November 2009, the oldest edited versions that have not been published date from 20 July 2009 (for private rulings processed under the TDMS system) and from 29 August 2009 (for rulings processed under the Siebel system). This means that the backlog has now been reduced from over nine months to around four months.
4.114 The IGT has considered in detail the arguments raised for and against removing the detailed content of private binding rulings. He has concluded that on balance the ATO should continue its practice of publishing edited and searchable versions of binding private rulings.
4.115 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.
4.116 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.
4.117 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.
4.118 The ATO agrees with recommendations 6.1 and 6.5, and disagrees with recommendations 6.2 to 6.4.
4.119 The ATO established the Register of Private Binding Rulings to ensure integrity by enabling recipients of a private ruling to test the authenticity of the ruling received and to provide greater transparency of the private rulings system. This followed the recommendation of an internal review of the private rulings system by an eminent independent person (the Sherman review). We believe that the register is performing this role adequately in its current form.
4.120 It was acknowledged at that time that publishing edited versions of private rulings ran the risk of giving private rulings a status they do not have. A specific legislative design feature is that private rulings apply only to the taxpayer to whom the ruling relates. Publishing private rulings on a public database could lead to them being seen as binding forms of advice. However, at that time, the then Commissioner acknowledged that benefits of transparency outweighed the risk.
4.121 When the Commissioner agreed in early 2009 to retain the register in its current form, it was on the basis that the register in its current form continued to satisfactorily balance the benefit of integrity and transparency against the risk of misunderstanding and improper use. The Commissioner's decision was also informed by acknowledgement from representatives of the tax profession that more needed to be done to ensure that taxpayers and professionals understood the proper purpose of the register and were aware of the risks of improper use of the register, and that the tax professional bodies had a key role to play in that educative function.
4.122 The ATO confirms the public commitment made to the National Tax Liaison Group in March 2009 to retain the register in its current form.
4.123 The ATO disagrees with the proposed 'enhancements' in these recommendations and is concerned that they significantly increase the risk of users misunderstanding the intent and purpose of the register (integrity and transparency of the private ruling system). The ATO provides access to its precedential database (the ATO legal database) for users to research as the authoritative source for information about the ATO's interpretation of the law.
4.124 As the Inspector-General has noted, the current backlog of unpublished edited versions arose in part as a result of the ATO's earlier investigation of an alternative format for edited versions contained in the register. More recently, the team that publishes the register has had to balance the register-related work with the migration of private rulings to Siebel (as noted at paragraph 4.101 of the report) and a recent spike in publishing activity for ATO Interpretative Decisions. Given the precedential status of ATO Interpretative Decisions the team has given priority to that work over work relating to the register.
4.125 The ATO will continue to work towards ensuring that edited versions of private rulings are published on the register within our current internal management measure of 49 days. The 49 day internal measure recognises the balance between integrity and transparency and our statutory obligations under the secrecy and privacy provisions of the relevant laws, but we also acknowledge that we can not always meet this measure in every case. We will also consider opportunities for process and systems improvements that could help drive improved efficiency and timeliness in the longer term.
16 The absence of a search engine for the register and other difficulties with accessing the register (such as the fact that it was located under the Individuals homepage on the ATO's website when not all PBRs were applied for on behalf of individuals) were referred to by members of the ATO's National Tax Liaison Group at the meeting of this group held on 14 November 2003. On 24 January 2005, the Institute of Chartered Accountants advised its members, via their electronic Tax Bulletin, that the ATO had enhanced the register to enable online search by subject matter.
17 See item 10: Issues Log of the Minutes of the National Tax Liaison Group meeting held on 14 November 2003.
18 PS LA 2001/8 at paragraph 5. Page 46
19 A request to be able to search the register more readily for material on the application of section 45B to demergers was made at a meeting of the ATO's Small to Medium Business Enterprises Sub-committee held on 27 October 2006, the minutes of which are available on the ATO's website. The request was denied because the ATO considered that there were inherent risks with using the register as a research tool.
21 Ibid at paragraph 5.12.
22 Joint Committee of Public Accounts, Report No. 326 - An assessment of tax, November 1993. See Recommendation 36.
23 Sherman, Tom, Report of an Internal Review of the Systems and Procedures relating to Private Binding Rulings and Advance Opinions in the Australian Taxation Office, 7 August 2000, at paragraph 4.78.
24 These bills are the Information Commissioner Bill and the Freedom of Information Amendment (Reform) Bill.
25 For this review, the ATO prepared an internal analysis which showed that, for the LBI line, during the years 2006 to 2008, 47 of the 146 most frequently cited references for rulings were that no interpretation was required as the law was clear.
27 Holden, J. P. and Novey, M.S., Legitimate Uses of Letter Rulings Issued to other Taxpayers - a reply to Gerald Portney, Tax Lawyer Vol 7, No 2 at p. 343.
28 Australian National Audit Office, The Australian Taxation Office's Administration of Taxation Rulings, Audit Report No. 3, 2001-2002, 17 July 2001.
29 Ibid at pp 253-254.
30 These issues are discussed in: Rogovin, M and Korb, D.L. The Four R's Revisited: regulations, rulings, reliance and retroactivity in the 21st century: A view from Within, Duquesne Law Review, Volume 46 Spring 2008 at page 346.
31 Carmody, Michael, The Integrity of the Private Binding Rulings System, Speech, Melbourne, 15 November 2000.
32 Australian Taxation Office, Complex Binding Rulings Review Blueprint, a report prepared by Amity Consulting Group, Version 4.3, October 2004.