Conduct of review

1.1 This is a report on the Inspector-General of Taxation's (IGT) review into the Australian Taxation Office's (ATO's) administration of class rulings. The report is produced pursuant to section 10 of the Inspector-General of Taxation Act 2003 (the IGT Act 2003).

1.2 The IGT announced terms of reference for this review on 25 March 2010 following a number of concerns raised by industry, tax practitioners and the public. Appendix 1 reproduces a copy of the terms of reference and submission guidelines for this review.

1.3 The IGT received a number of submissions from taxpayers and their representatives. The IGT review team also met with interested taxpayers and their representatives to understand their experiences and obtain perspectives on the class rulings process.

1.4 The IGT review team visited a number of ATO sites to interview staff from different ATO business lines, who were working with class rulings, to examine the end-to-end class rulings process and to obtain an understanding of the ATO's internal management of these matters.

1.5 In particular, the IGT team looked at information, systems and processes relating to the ATO's administration and publication of class rulings over a five year period between 2006–07 and 2010–11. During this period, the ATO had finalised 1143 class rulings.

1.6 The IGT review team summarised the issues that emerged and worked progressively with ATO senior management to distil the scope for improvement and to agree on specific actions to realise these improvements.

1.7 In accordance with section 25 of the IGT Act 2003, the Commissioner of Taxation (the Commissioner) was provided with an opportunity to give submissions on any implied or actual criticisms contained in this report.

What is a class ruling?

1.8 Class rulings are a type of public binding ruling published by the Commissioner under Division 358 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) and are:

issued in response to a request from an entity seeking advice about the application of relevant provisions of tax law to several taxpayers in relation to a defined scheme (other than an investment or financial product for which a product ruling can be issued).1

1.9 For example, such requests for class rulings may be made by:

  • an employer seeking advice about the income tax consequences for its employees under a share acquisition plan;
  • a company seeking advice about the income tax consequences for its shareholders as a result of a demerger or a proposed distribution by the company; or
  • a government agency seeking advice about a proposed industry restructure which has tax consequences for participants in the industry.2

Class rulings history

1.10 Historically, many class rulings have dealt with the tax consequences of transactions and events occurring in the capital markets—for example, the tax consequences of corporate mergers and acquisitions activity, or the tax treatment of company share buy backs in the hands of company shareholders.

1.11 In more recent times, however, the ATO has encouraged certain bodies to apply for class rulings, such as associations with large numbers of their membership facing materially similar tax issues—for example, football umpire associations and the like. This approach avoids the need for the ATO to provide substantially similar private ruling requests and allows the issues to be more efficiently addressed via the issue of a single class ruling. It should be noted that such an approach was advocated by the IGT in the Review into the ATO's administration of private binding rulings.3

1.12 The IGT did not review the class ruling processes for this latter type of application because the number of those applications steadily increased after the completion of IGT's fieldwork. However, it is pleasing to see that the ATO has acted on the IGT's advice to improve its administration in this area.

General benefits and risks

1.13 A class ruling will bind the Commissioner where the ruling applies to the taxpayer and they have acted in accordance with the ruling. That is, broadly speaking, if the ATO's view is such that a class ruling were found to be incorrect, the taxpayer would be protected from having to pay any additional primary tax (the tax shortfall), as well as any interest charges or shortfall penalties. This is essentially the same level of protection that a taxpayer would have if they were the recipient of a private ruling on the matter.

1.14 As a class ruling provides binding advice on the application of the tax laws to several taxpayers in relation to a defined scheme (or arrangement), it typically avoids the need for the individual participants to each seek private rulings. This reduces the compliance costs for the relevant taxpayers overall and reduces the ATO's operational costs in considering multiple private rulings applications.

1.15 An important feature of a rulings regime is that the arrangement outlined in the application is carried out in that manner, such that it is consistent with ATO's view of the law as expressed at that time. A risk inherent in the system is that a given ruling does not meet this requirement.

1.16 There are two general kinds of risks that may arise in this context. The first is factual in that a given taxpayer may mistakenly assume a class ruling accurately reflects the facts of their situation and unwittingly seeks to apply that class ruling incorrectly. The other is that the taxpayer does not agree with the ATO's views expressed in the class ruling in relation to their particular situation.

1.17 There are certain remedies that may, depending on circumstance, be available to address these situations for taxpayers. The situation is slightly different in a class rulings context, as compared to a private ruling, because class rulings are typically obtained by a sponsor applicant on behalf of a group or class of taxpayers.

1.18 In circumstances where the arrangement may differ from that described in the ruling, the costs in remedying such situations, for both taxpayers and the ATO, can be significant.

Important difference between class rulings and product rulings

1.19 Where the subject of the proposed ruling is an investment or financial product, a product ruling can be issued instead of a class ruling. A product ruling is also a type of public binding ruling under Division 358 of Schedule 1 to the TAA 1953, and therefore offers taxpayers the same level of protection as a class ruling.

1.20 The issue that arises is more a case of understanding the difference between a product ruling and a class ruling. There is considerable scope for overlap between the two ruling types. As the processes underlying the ruling applications may be quite different, there is potential for administrative inefficiency. Some stakeholders expressed a view that there should be clearer principled criteria and reasoning for differences in ATO processes. The IGT gives in principle support for such an approach, rather than making specific recommendation, as the product ruling regime was not within the terms of this review.

Important differences between class rulings and private rulings

1.21 One important difference between private rulings and class rulings is that, unlike private rulings, class rulings are typically applied for by sponsor applicants and not the taxpayers to whom the rulings will apply. This may mean that the degree of influence over the content of a class ruling application is limited, in practice, to the degree of influence a taxpayer has over the sponsor applicant.

1.22 It is important to appreciate that a class ruling provides a level of operational efficiency and risk reduction to the parties involved. There is a tension in this process, in that there are various interests to be considered for an effective and appropriate outcome. Sponsor applicants may be seeking to effect a particular transaction for various corporate entities and related shareholders, or in other situations, to obtain a broad interpretative answer for association members. The overarching stakeholder benefit is that the ATO provides administrative certainty for relevant taxpayers. The ATO in doing so needs to ensure that the interests of the particular class of taxpayer are appropriately considered as amongst other interests in this regard.

1.23 The operational benefits and risk reduction is considerable for the ATO which, by extension, may directly benefit taxpayers too. The ruling process seeks to ensure there is clarity up-front in relation to sponsored arrangements. This provides for smoother end-to-end processing for taxpayers or their agents and avoids costly after-the-event corrections and disputes that might otherwise arise with the ATO.

1.24 The specific risks that may arise for taxpayers in relation to class rulings have been noted above. Taxpayers may be subjected to an ATO view which they may have had no direct opportunity to influence. Under the current system there is an indirect means by which affected taxpayers may object to views expressed in class rulings. It has been suggested that this can be cumbersome requiring the taxpayer to either apply the class ruling in self-assessing their taxation liabilities and object to their assessment, or, obtain a private ruling and subsequently object against it.

1.25 In relation to the other situation, where a taxpayer applies a class ruling mistakenly to their own situation, submissions suggested that this risk may ultimately be best addressed by taxpayers ensuring they obtained independent advice. The underlying theme from submissions suggests that the issue may be one of taxpayer awareness and how that might best be achieved through ATO support or independent advice.

1.26 The underlying issues raised in this section are considered further at Chapter 2 in the sections headed Communicating expectations and Improving transparency.

The life cycle of a class ruling

1.27 In making a class ruling application, an applicant must provide details of the scheme and the class of entities on behalf of whom the class ruling is sought, as well as the questions on which the ATO is requested to rule. If the information provided by an applicant requires clarification, the ATO will typically request information from the applicant and/or the taxpayers on one or more occasions.

1.28 Generally, it is the ATO's Interpretative Assistance (IA) areas of the relevant business lines that will manage applications through the class rulings process.

1.29 If the ruling is in relation to an ATO precedential issue (that is, an issue for which no ATO view has previously been published), the class ruling must be referred within the ATO to a Centre of Expertise (COE) for authoring and approval. However, where the class ruling does not canvas a precedential issue, it needs only to be referred to a COE for approval.4

1.30 Before the ATO issues a class ruling, a copy of the draft is sent to the applicant to obtain a signed statement that the description of the scheme as contained in the document is accurate and covers all relevant features, all parties named in the proposed class ruling have expressly consented to being named and the negotiated date for publication is acceptable. The draft is provided in confidence and cannot be relied upon by the applicant at this stage.

1.31 Following provision of a draft ruling to the applicant for comment and final approval by the overseeing COE officer(s) being given, the class ruling is allocated a designated number, with a 'CR' prefix, issued to the applicant in its final form and published on the ATO website.

1.32 As a class ruling is a type of public ruling under the TAA 1953, the ruling must be published and notice of it included in the Commonwealth Gazette. Often class rulings will only apply for a set period. As such, the Gazette notice may also give notice of the future date on which the ruling will be withdrawn. It is only once the class ruling is published by the ATO and the notice appears in the Gazette that the class ruling may be relied upon.5

ATO management of class rulings

1.33 The ATO's Chief Tax Counsel is accountable for the overall operation of the public rulings system which includes class rulings.

1.34 The day-to-day management of a class ruling application rests with the relevant ATO business line, determined either by reference to the subject matter of the application or the market segment to which the taxpayer applicant belongs. Each business line has in place its own case management processes.

1.35 Similar to processes in the public rulings system, input and oversight is also provided on each class ruling by at least one officer from the relevant COE.

1.36 Class rulings have historically been managed through the ATO's Technical Decision-Making System (TDMS) which was purpose-built and tailored to the needs of ATO interpretative assistance work. The TDMS maintained a 'case report' which identified such matters as the questions and issues raised in the class ruling application as well as the ATO view(s) supporting the ruling.

1.37 As part of the ATO's Change Program, the TDMS was replaced with an ATO-wide case and work management system, Siebel, in August 2009. The Siebel system is intended to manage the broad spectrum of the ATO's work. It is not specifically tailored for interpretative assistance work.

Priority class rulings

1.38 A small proportion of class rulings are produced under the priority rulings process. This process is detailed in the ATO's Law Administration Practice Statement, PSLA 2009/2. Its stated intention is to assist corporate boards to manage the taxation risks associated with significant transactions.

1.39 The priority rulings process is characterised by:

  • a centralised point of reference in the ATO who is responsible for marshalling resources and taking remedial action to ensure that rulings are not delayed,
  • an alignment of priorities between the ATO and the applicant, 
  • early engagement of all required ATO expertise to avoid sequential processing, and
  • the applicant and the ATO working together to clarify the arrangement to be ruled on and the issues to be addressed in the ruling.6

1.40 Generally, the priority rulings process requires that:

  • the application relates to a transaction that is time sensitive, prospective, of major commercial significance and requiring consideration at corporate board level;
  • the tax outcome is a critical element of the transaction and complex law and/or facts need to be analysed;
  • the applicant notify the ATO as soon as practicable after the transaction is first seriously contemplated and provide a full brief containing all relevant information, issues, legal arguments and timeframes;
  • the applicant nominate a representative who will be responsible for all interactions with the ATO and timely responses to information requests; and
  • the applicant arrange and conduct a pre-lodgement meeting with the ATO, including the provision of an overview of the proposed transaction and any high level tax analysis.7

1.41 A class ruling produced under this priority process is characterised by the early engagement of many different areas in the ATO such as the Tax Counsel Network (TCN) and the COEs, which would ordinarily only be engaged after a process of escalation had been followed.

1.42 The priority process is run by a unit in the Large Business and International (LBI) business line, which is the central point of contact for the applicant's representative and ATO officers. This LBI unit also determines what matters are accepted into the priority ruling process, has authority to marshal all necessary resources across the ATO's business lines, and has authority to take remedial action if delays occur or are expected to occur.

Class ruling statistics

Finalised class rulings

1.43 Over a period of five years from 2006–07 to 2010–11, the ATO finalised 1143 class rulings, including priority class rulings, as outlined below.8

Table 1.1: Numbers of class rulings finalised from 2006–07 to 2010–11
ATO business line 2006-07 2007-08 2008-09 2009-10 2010-11
Aggressive Tax Planning 0 0 1 0 2
Indirect Taxes 0 0 0 0 1
Law & Practice 0 0 0 2 2
Large Business & International 90 80 52 41 71
Personal Tax/Micro Enterprises and Individuals 59 77 96 36 44
Small Business/Small & Medium Enterprises 69 83 63 34 50
Superannuation 54 39 41 25 31
Total 272 279 253 138 201

Source: Australian Taxation Office

1.44 The number of class rulings finalised declined in the 2009–10 year with approximately half of what was issued in each of the preceding three years. In the 2010–11 year, this number increased but not to the same amount as in each of the three years preceding the 2009–10 year.

Class Ruling service standard

1.45 The timely delivery of ATO services is critical to maintaining public confidence in the administration of the tax system. In the context of complex commercial transactions, taxpayers rely on ATO rulings to provide certainty of the ATO's administrative treatment of the tax issues that arise in these transactions. Delay on the part of the ATO may result in parties having to hold a transaction in abeyance pending the ATO advice. This will likely add to the compliance costs borne by the taxpayer and missed commercial opportunities.

1.46 Whilst there is currently no publicly reported service standard for the completion of class rulings, the ATO has imposed its own nominal internal performance standards. These nominal standards are discussed further below.

1.47 The IGT review team examined 40 class rulings completed for the period from September 2007 to December 2010 and found that, with the exception of the LBI and Superannuation business lines, this service standard was generally not being met.

Relevant ATO internal projects

1.48 During the review, the ATO advised the IGT that a number of ATO projects are set to have some impact on the ATO's class ruling administration.

1.49 First, the ATO advised the IGT that it is conducting a service standards review in order to develop and deliver a service standards strategy that is aimed at both being responsive to organisational and Government strategic directions and which also will take into account contemporary community expectations. This review will impact on the issue of externally reported service standards for class rulings.

1.50 Second, the ATO advised that it was well advanced on a project aiming to build a more sustainable interpretative assistance capability, with a focus on streamlining the Siebel system's processes and procedures. This project has also overseen the provision of the IA areas' needs with respect to an improved search engine function within this system.

1.51 Finally, the ATO advises that a project to improve the tax technical decision making function (the Transforming Tax Technical Decision Making Project or TTTDM project) is aiming to establish and extend early engagement mechanisms (such as those used in the priority rulings process). The current function involves the requirement to escalate class rulings to a COE or TCN officer whether or not there are precedential issues involved, unless it is a priority ruling (in which case these officers are engaged from the beginning of the process). The TTTDM project was undertaken as a result of the recommendations from an ATO internal review called the Law Improvement Project (LIP) review. The LIP focussed on identifying the practical steps that should be implemented to improve the corporate business processes for delivering interpretive advice involving COE and TCN. Since 2005, the IGT has raised concerns with the ATO's technical decision-making function in a number of IGT reviews, most recently in the IGT's review into the ATO's large business risk review and audit policies, procedures and practices.9 The IGT is pleased to see that the ATO has heeded those concerns.

Information gathering process

1.52 In submissions, stakeholders took issue with the information gathering process for class rulings and the related delays that were experienced. The nature of the concern was directed at both the lack of clarity around the process itself and the volume of information that was requested.

1.53 The IGT observes that such stakeholder concerns are a recurrent theme in various IGT reviews. In this regard, please refer to Chapter 7 of the IGT's report into the ATO's large business risk review and audit policies, procedures and practices for a more immediate discussion on information gathering. While the issues are broader and relate to audit, review, potential or actual dispute situations, a number of these issues also arise out of requests for ATO rulings or advice.

1 Australian Taxation Office, Law Administration Practice Statement, PSLA 2008/3, paragraph 50, available at>.

2 ibid., paragraph 51.

3 May 2010, available at>.

4 id., Law Administration Practice Statement, PS LA 2004/4, paragraph 3.

5 id., “What is a class ruling?”, available at>.

6 id., Law Administration Practice Statement, PS LA 2009/2, paragraph 4, available at>.

7 ibid., paragraph 5.

8 The ATO uses the term 'finalised class rulings' to incorporate 'withdrawn', 'declined' and 'published' rulings.

9 Report into the Australian Taxation Office's large business risk review and audit policies, procedures and practices, September 2011, available at>.