A.2.1 As a result of the IGT calling for submission in this review, the following was provided as purported examples of delayed or changed ATO views. The summaries of the issues below were current as at the time provided by the private sector to the Inspector-General. It is likely that further action has taken place since that time.
A.2.2 Apostrophes in the numbers column below denote an example that was examined in more detail by the IGT.
|1||Miscellaneous issues||A range of issues mentioned by name but without any explanation.|
|2||APRA calculations for thin capitalisation purposes||It is claimed that the thin capitalisation rules for banks were constructed on the basis that you could rely on APRA calculations for ease of compliance purposes, as evidenced by the relevant explanatory memorandum. The ATO says that financial institutions cannot rely on their calculations for APRA purposes and may need to do separate tax calculations to 'notionally' risk weight assets. Industry says that the ATO's view will lead to a double counting of life subsidiary assets in thin capitalisation calculations. Therefore, they will need to hold more capital for tax than for APRA purposes.|
|3*||GST "stop the clock" letters — MT 2008/D4||On 29 October 2008, the ATO released MT 2008/D4, which tax practitioners say imposed a higher standard for refund notification requirements than had been previously accepted by the ATO. Tax practitioners say that the ATO applied this approach retrospectively.|
|4*||Section 25-90 of the ITAA 1997 — Deductions relating to foreign non-assessable non-exempt income||
Industry thought that tracing and quarantining concepts were no longer relevant to deductions in relation to non-assessable, non-exempt income (NANE income), as evidenced by the relevant explanatory memorandum and lack of ATO comments in relevant private binding rulings and audits over the last 8 years. The ATO has recently indicated that it was taking the view that section 25-90 of the ITAA 1997 would operate on a cash basis — that is, quarantining the debt deductions to the year in which relevant NANE income was derived. The basis for this view seems to be the different wording used in sections 8-1 and 25-90.
Industry says that this view would expose taxpayers to reverse deductions claimed, as it is extremely common for debt deductions to exceed dividend deductions from foreign subsidiaries in any year. Industry says that the ATO could have declared that it is reviewing section 25-90.
|5||Offshore banking unit concessions||Previously financial institutions had chosen whether their offshore activities constituted offshore banking activities at the outset of activities and set up accounting systems on that basis and say that they have relied on TD 93/135 for 14 years. The ATO now thinks that the TD is not consistent with OBU law. In December 2007, the ATO released a consultation paper that proposed the withdrawal of the TD. It was unclear if this withdrawal would be applied retrospectively.|
|6*||Section 215-10 of the ITAA 1997 — Certain non-share dividends by authorised deposit taking institution are unfrankable||
Industry says that the reason for section 215-10 of the ITAA 1997 is that the Government acknowledged Australian financial institutions would be at a competitive disadvantage if they couldn't raise money offshore and get a deduction. Therefore, if financial institutions are in an offshore competitive market they should get the same tax treatment, as long as certain conditions were met.
Industry says that the ATO appears to have changed its view on this issue and representatives of financial institutions say that because of this change the hybrid market is now problematic. In a meeting, the ATO indicated that section 215-10 does not apply to Australian sourced capital and that stapled securities will be treated as a single scheme (based on TD 2008/D8). Industry says that this view will mean that it is no longer cost effective to raise Tier 1 capital through the issue of stapled securities. This will severely restrict the scope of raising Tier 1 hybrid capital and impedes the management of capital positions, determining the costs of capital and diversifying exposure.
|7||Service trusts||Tax practitioners say that from 1978 to 2005 in relation to service entities, mark-ups of 50 per cent on the direct costs of staff and 6 to 8 per cent on the cost of plant and equipment were commonly used and accepted by the ATO (for example, the ATO's audit manual). In 2005, the ATO released a draft ruling indicating these mark-ups were not acceptable and the view would be applied retrospectively. This issue was examined as a case study in the IGT's review of the ATO's management of major, complex issues.|
|8*||Guarantee fees and interest deductions and their interaction with Division 820 of the ITAA 1997 and the transfer pricing provisions||This issue concerns an overlap between the transfer pricing and thin capitalisation rules in relation to debt arrangements. Industry and tax practitioners are concerned that the ATO's recent approach of 'reconstructing capital structures' to determine whether debt deductions are at arm's length (including the role that the credit rating of the parent entity plays) is contrary to prior industry practice. They say that prior ATO statements relating to this issue never indicated such an approach and it would be unreasonable to expect taxpayers to have discerned this approach from the previous law, extrinsic materials, ATO guidance and ATO compliance activities.|
|9||Trust cloning||Although the ATO says that its understanding of the underlying policy for CGT event E2 was that the exception was only to apply to cases where a single existing trust merely changed its trustee, the ATO does accept that the text of the law allows transfers between two pre-existing trusts to occur. However, the ATO believes that the exceptions should be read narrowly because of its understanding of the underlying policy.|
|10*||Trusts — sections 95 and 97 of the ITAA 36 — net income of the trust estate||The issue relates to the correct interpretation for section 97 of the ITAA 1936 in relation to the terms "a share of the income of the trust estate" and "that share of the net income of the trust estate". Tax practitioners understand that trusts law rules prevails in determining the terms in question and therefore could allow trustees to determine the character of the receipt and stream it to certain beneficiaries. The ATO considers that the terms should be interpreted according to tax law and that the trust deed or exercise of the trustee's discretion cannot alter the character of the receipt.|
|11||Trusts — income streaming, CGT and capital beneficiary agreements||This is a specific aspect of the issue in example #10.|
|12*||Section 974-80 of the ITAA 1997 — equity interest arising from arrangement funding return through connected entities||
Industry says that section 974-80 of the ITAA 1997 was intended to operate in limited circumstances, as evidenced by the relevant supplementary explanatory memorandum, and, that the ATO Discussion Paper circulated in March 2007, indicates a wider operation.
Industry says that this view will affect genuine commercially based financial transactions and is proposing to adopt an interpretation which is contrary to the explanatory memorandum. The ATO claimed it had no flexibility to adopt an administrative solution and confirmed that the explanatory memorandum to the legislation was not consistent with how the ATO was applying the law.
Industry is concerned that the ATO has taken more than 6 years to say that it does not agree with the explanatory memorandum and chosen to adopt a contrary interpretation rather than seek to amend the law. The matter is now with Treasury, which is expected to respond to industry concerns.
|13||Farm-out arrangements||The ATO has released a discussion paper reviewing the longstanding farm-out ruling IT 2378 and is canvassing a change in interpretation whereby the farm-out of wildcat exploration interest (that is, a prospecting interest at the grass roots stage) could trigger CGT or assessable balancing charges.|
|14*||Managed investment trusts — the distinction between capital and revenue||The ATO has expressed concerns whether industry is appropriately treating an investment portfolio on revenue or capital account. The issue is now part of a review by the Board of Tax.|
|15||Capitalisation of labour costs||In July 2008, the ATO issued a discussion paper that indicated to tax practitioners that it intended to adopt a view that was aligned with accounting principles when determining whether certain labour costs were to be held on revenue or capital account. Tax practitioners considered that this was a change in established practice.|
|16||Royalty withholding tax on copyright payments||Industry says that draft ruling TR 2007/D5 does not correctly reflect the law and would impose overly prohibitive burdens on Australian businesses. This draft ruling proposes to treat a sale of rights under a copyright as royalties.|
|17||Supply chain management in business structures||Tax practitioners say that supply chain management in business structures (that is, the process of planning, implementing and controlling certain operations of the supply chain, from suppliers to end users, as efficiently as possible) has been used for a long time and the ATO has been aware of it for a long time. These structures can give rise to a range of complex tax issues and risks, including capital gains tax, transfer pricing and the research and development concessions. Tax practitioners say that the ATO is now reviewing this area and are concerned that the ATO will retrospectively apply changed approaches.|
|18||The standard for valid notifications under MT2008/D4||Refer to example #3.|
|19||Petroleum resource rent tax — scope of exploration costs||
In February 2009, the ATO released TR 2009/1. The ATO took a view that stopped taxpayers from transferring deductible exploration expenditure inherited via the purchase of equity in other projects, and offsetting these against profits from other projects with the effect of reducing their liability to the petroleum resource rent tax.
The previous industry understanding was that where a company bought an additional interest in a project, the inherited exploration expenditure would be transferable to other projects. Industry points to long-term decisions that had been made under the previous treatment, which were subsequently negatively affected through the release of the ruling.
|20||Salary sacrifice and charitable donations||The Government announced that workplace giving arrangements (from after-tax earnings) for Victorian bushfire victims represent an appropriate mechanism for avoiding the fringe benefit tax (FBT) problems associated with salary sacrifice when making donations. However, industry says that it is not presently the Government's intention to extend the exception to other deductible gift recipients. Industry says that a number of organisations have had salary sacrifice arrangements in place for some time for other deductible gift recipients, but were unaware of the ATO's view of the FBT provisions. Industry disagrees with the ATO's view. They have asked the ATO to publish an interpretive product that sets out its reasoning in more detail than simply asserting that the arranger rules result in an FBT liability for the employer.|
|21*||Division 7A of the ITAA 1936, section 100A and unpaid present entitlements||
This example involves 2 aspects:
i. A senior ATO official commented publicly that unpaid present entitlements could be treated as loans under Division 7A of the ITAA 1936. This is of concern to tax practitioners as this was contrary to information published on the ATO's website over the years in relation to unpaid present entitlements. They are unsure in what situations unpaid present entitlements will be treated as loans under Division 7A. In particular they would like to know if the ATO is seeking to apply its views generally and retrospectively.
ii. The senior ATO official also commented publicly that unpaid present entitlements could potentially trigger the application of section 100A. This is of concern to tax practitioners as no guidance has been provided so far. They are unsure in what situations the ATO would be looking to use s.100A in the context of unpaid present entitlements. In particular they would like confirmation that its use will be limited to defined and blatant avoidance arrangements (and an explanation of what those arrangements are).
|22||Bonus share plans||
Tax practitioners say that the ATO has held the view to date that a bonus share plan, properly constituted, does not provide the shareholder with the choice, and thus subsection 6BA(5) of the ITAA 1936 does not apply, therefore, the shareholder can treat the bonus share plan as giving rise to a 'delusional spreading of cost base', without an amount being assessable as a dividend.
In TD2008/D17, the draft view expressed in paragraphs 24 to 25 is that the legal analysis and differentiation between bonus shares and dividend reinvestment plans is not relevant for purposes of section 6BA. Tax practitioners are concerned that there is no detailed analysis in the determination.
|23*||CGT consequences of earnout arrangements — TR 2007/D10||An earnout arrangement is used in a sale of business as a mechanism to quantify the goodwill of the business. The arrangement is used as an alternative to a fixed amount supplemented by representations and warranties to deal with any failure to achieve anticipated outcomes after the sale. The ATO released a discussion paper which highlighted changes from the earlier TR 93/15 to the draft TR 2007/D10. The ATO informed the tax profession in March 2009 that it was deferring the finalisation of the ruling pending discussions with Treasury.|
|24*||Not at risk research and development — sections 73B and 73CA of the ITAA 1936||The ATO considers that section 73CA of the ITAA 1936 can apply to fixed price contracts for result. The ATO released a discussion paper on section 73CA not at risk research and development. The ATO indicated in March that a draft ruling on the scope and application of section 73CA is due to be released fairly soon. Industry is concerned that the paper suggests that fairly straightforward commercial arrangements could be caught by the provisions.|
|25||Reasonably arguable position and reasonable care||
Tax practitioners say that ATO audit teams are applying a 25% no reasonably arguable penalty (RAP) in cases where there is a RAP objectively, but no evidence that the taxpayer took external advice at the time of entering the arrangement. They say that this approach is contrary to prior ATO practice and contrary to the policy basis for culpability penalties.
The ATO recently issued MT 2008/1 on the issue. Tax practitioners say that there is so much wiggle room that any position on RAP penalties can be developed by the ATO. They say that ATO auditors are reading MT 2008/1 as "you can't have a RAP without taking reasonable care". Tax practitioners say that the prior ATO practice was that a RAP was an objective assessment — it either existed or not — and did not depend on the steps that the taxpayer took at the time of entering the arrangement.
|26||Simpler super legislation and deferred annuities||Taxpayers are concerned that the 2007 Simpler Superannuation legislation (operative from March 2007) is deficient in that it does not cover deferred annuities — entities which were covered by all previous legislation. They say that they were assured by Government that these annuities were covered by the legislation. However, the ATO does not believe that they are covered by the new legislation.|
|27||Eligible termination payments and pre-July 1983 components||
The Tax Laws Amendment (Simplified Super) Act 2007, enacted in March 2007, provided concessional treatment on voluntary contributions to superannuation if made before July 2007. The ATO issued a facts sheet and ATOID 2007/131 saying that the non-taxable pre-July 1983 component of an eligible termination payment would count towards this limit.
Tax practitioners say that this view is inconsistent with treatment of other non-taxable components and contrary to Government policy.
|28||Revenue apportionment in credit card businesses for input tax credit claims||
Credit card businesses have mixed revenue streams for GST purposes — some supplies are taxable and some input taxed. Therefore, there is a need to apportion costs according to the extent of creditable purpose. In June 2000, the ATO released GSTR 2000/22 which said that the net revenue approach is the most appropriate for financial supplies and the gross approach for taxable supplies.
In April 2006, the ATO replaced GSTR 2000/22 with GSTR 2006/3 requiring that apportionment be 'fair and reasonable'. In the absence of any express comment in GSTR 2006/3 expressing concern with the use of 'net' revenue, industry proceeded on the basis that the ATO accepted that 'net' revenue was appropriate.
Tax practitioners say that in a position paper issued to industry in January 2009, the ATO expressed a change in its position regarding the use of 'net' or 'gross' interest by not accepting the use of 'net' revenue for measuring financial supply income in the apportionment methodology of a credit card business. Industry says that the ATO has stated that this 'new' approach will apply retrospectively from April 2006 rather than from January 2009, which when tax practitioners say that the ATO made the change. Industry considers that the ATO should withdraw the position paper and undertake an industry consultation process that leads to a broad based ruling that sets out the principles of apportionment.
|29||Treating deferred income as ordinary income||Tax practitioners say that ATO officers consider that, in the context of infrastructure trusts, tax deferred income is ordinary income and therefore assessable under section 6-5 of the ITAA 1997. They argue that this view is inconsistent with the policy objectives of promoting investment in the infrastructure industry.|
|30||Non-forestry managed investment schemes||This issue was the subject of the Parliamentary Joint Committee on Corporations and Financial Services' inquiry into agribusiness managed investment schemes (MIS).|
|31||Charter boats||The issue relates to the ATO's approach to income tax deductions and GST claims in relation to charter boats. The issue was examined in the IGT's review into aspects of the ATO's settlement of active compliance activities.|
|32||Employee share plans||
The issue relates to the Government's policy to improve employee equity participation in Australian businesses and the ATO's actions in relation to delays in providing rulings, views taken in rulings and views taken in the Administrative Appeals Tribunal.
|33||Interest deductibility and tracing of funds — TR 2000/2||Involves a case of denying interest expenses incurred on commingled funds relying on paragraph 50(a) of the ITAA 1936, TR 2000/2 and case law that purportedly does not require a direct trace of funds when determining deductibility of outgoings under subsection 51(1) of the ITAA 1936.|
|34||Range of issues dealing with sale of pre-CGT shares and application of penalties||
|35||Employee benefit arrangements||The issues relates to the ATO's compliance action against employee benefit arrangements in the late 1990s and 2000s.|
|36*||[Confidential issue — relates to taxpayer specific facts]||The taxpayer says that the ATO has told it that a previous advance opinion (given before the private binding ruling regime was put in place) that the ATO gave on the taxpayer's business structure was wrong and has now changed its view.|
|37*||TR 2009/D2 — Trading stock — trade incentives offered by sellers to buyers||
Industry is concerned with the retrospective application of proposed views in TR 2009/D2, which they say is contrary to prior ATO views and industry practice. Industry says that TR 2009/D2:
Industry says that in 2003 the ATO said it would issue a public ruling on the issues, however, 6 years is too long a time to allow uncertainty to continue. They say that if the ATO confirms the views in the final ruling, it must provide justification for the reversal of longstanding positions.
|38||Taxpayer Alert TA 2009/11 — retail premiums received by shareholders||
In May 2009, the ATO released a facts sheet and Taxpayer Alert 2009/11 that said that retail premiums are unfranked dividends or ordinary income where they are received by shareholders who do not take up shares under a rights issue or entitlement offer. This means that those shareholders will not be able to access the CGT discounts or offset CGT losses against any gain on cessation of rights.
Industry says that this position is contrary to the reasoning in the McNeil case and also the explanatory memorandum to the legislation that was introduced to overcome the McNeil decision (Tax Laws Amendment (2008 Measures No.3) Act 2008). Taxpayers for the 2008 year would have lodged tax returns on the basis of the explanatory memorandum, and are now exposed to penalties and interest. Industry says that either the ATO should issue a binding ruling to confirm the explanatory memorandum or run a test case quickly if they believe the explanatory memorandum is incorrect. In any event, industry asks why the explanatory memorandum was issued if the ATO had a contrary view.
|39||TR 2006/8: The cost basis of valuing trading stock for taxpayers in the retail and wholesale industries||
Industry is concerned with the broadening of cost basis in valuing trading stock to include more than the cost price of goods. Industry says that TR 98/2 says that only costs incurred up to the point that a saleable product exists are required to be absorbed into the cost of trading stock (e.g. paragraph 9 says transport costs in transporting the finished product are not included). Paragraph 33 of the ruling says that the production process ends when the saleable product is first stockpiled. Transport costs incurred after this point do not have to be absorbed (paragraph 115).
The ATO released TR 2006/8 which requires taxpayers to include in the cost of stock, transport costs beyond those incurred in bringing the stock to a point where it is on hand; and storage costs where the storage is at a site which is remote to the place from which the stock is sold. Industry argues that this view is contrary to the requirements of the law and TR 98/2, and also contrary to Accounting Standard AASB 102.
|40||[Confidential issue — relates to taxpayer specific facts]||Relates to certain purported concessions that the ATO gave in determining the effect of certain legislative provisions.|
|41*||ATO interpretation of certain exempt income tax provisions||Tax practitioners say that up until 2007, the ATO took a broad view of the scope of an exemption in many class rulings. From that time the ATO took a narrower view, but did not make this view known publicly. Class rulings applied for after this time were generally withdrawn when the applicant was told the ATO had decided to make a negative ruling. A ruling on the issue was applied for in mid 2008. The ATO spent several months issuing information requests and only disclosed the change of view when the need for the ruling became urgent. Ultimately, the ATO issued the ruling requested.|
|42||Superannuation entities claiming foreign investment fund exemptions||
In late 2004, tax practitioners raised with the ATO that the interaction between the foreign investment fund (FIF) exemption (section 519B of the ITAA 1936 — enacted in 2004) for complying superannuation funds and foreign hybrid rules meant that the net income from foreign hybrids would still be included in any FIF income because the foreign hybrid would not qualify for the FIF exemption. This would impose significant administrative burdens on the super funds because the underlying investment was required to be identified in undertaking FIF calculations. Tax practitioners proposed that the law be changed or the ATO issue a ruling so that in circumstances where a complying super fund had an interest in net income from a foreign hybrid it would be allowed to disregard any FIF income and not have to be calculated by the super fund at all.
In February 2006, the ATO released ATOID 2006/40 which contradicted this. Tax practitioners pointed out that this was contrary to what the ATO had previously verbally agreed. In late 2007 the ATO said that the ATOID was wrong and reissued another rectifying the view. The ATO said that it would release a public ruling on the issue.
|43||Section 23AJ precedence over s23AH if dividend derived through a foreign permanent establishment||In October 2007, the ATO released ATOID 2007/184 that said that where an Australian company derives non-portfolio dividend (within the meaning of section 317 of the ITAA 1936) through its permanent establishment overseas, the dividend will not be non-assessable non-exempt income (NANE income) under section 23AH but NANE income under section 23AJ. If under section 23AH then the expenses incurred in deriving the NANE income are not deductible, whereas if under section 23AJ then certain deductions are available under section 25-90 of the ITAA 1997. The ATO withdrew the ATOID in April 2009 saying that "it is reconsidering the position stated in the ATOID". At the date of the submission no replacement has been released or listed on the Rulings Program.|
|44*||Meaning of "exploration" under the petroleum resource rent tax||
Industry had previously largely relied on the income tax view of "exploration" for petroleum resource rent tax (PRRT) purposes. The income tax view was that until a decision to mine was made, the expenditure was generally exploration expenditure in nature. This would include expenditure to determine the commerciality of the project. This view was based on the text of paragraph 40-730(4) of the ITAA 1997 and TR 98/23 and PBR 77089. However, the ATO has taken recent compliance action on the basis that expenditure that relates to determining the commerciality of a project (as opposed to the commerciality of resources) may not necessarily be exploration expenditure in nature for PRRT purposes.
Industry says that if a new view contradicts an old view, then the new view should be clearly stated to all taxpayers. Until such time, the old view should continue to apply.
|45||Consolidations and trusts||
Wholly owned trusts (that is, trusts where the group owns all of the interests, excluding debt interests) within a consolidated group are treated as part of the head company in calculating that company's tax liability. Industry considers that the head company or its subsidiary need be the trustee. Accordingly the net income for the trust itself is 'nil'. Industry treats payments made on debt interests by a trust as a deduction under section 25-85 of the ITAA 1997 based on the single entity rule. This view is based on a reference in the ATO's Consolidations manual that implies that a fixed trust in a consolidated group is treated as a company in that group.
Industry says that the ATO recently said that if the trustee of the trust is not a subsidiary of the head company, then there is no relevant person who owes the relevant obligations under the trust deed to the beneficiaries, as these obligations will fall outside the group. Therefore, only that part of net income of the trust to which the group is presently entitled is included in the head company's tax liability.
Industry says that the policy in this area needs to be clarified.
|46*||Section 320-40 of the ITAA 1997||
In consultation on the introduction of Division 320 of the ITAA 1997, the ATO told life companies that one-third of fee income from new members would be excluded over the period 1/7/00 to 30/6/05 if the master policy was in place before the start of that period and new members were incorporated under it after the start of that period.
In late 2005, the ATO told the industry that when a new member joins the relationship would be governed by a 'new contract' for tax purposes. Industry said that this view would cause hundreds of millions of dollars through reversing tax returns. In April 2007, the ATO discontinued this view.
|47||Section 128D of the ITAA 1936 and its application to trust income||
Industry says that trustees are not liable for tax on income to which a non-resident beneficiary is presently entitled where section 128B of the ITAA 1936 applies to that income (section 128D give effects to this). It is treated as non-assessable, non-exempt income. This is because the final tax for non-residents is relation to certain income is Division 11A. Industry says that the ATO issued IT 2049 and TR 92/13 saying that trustees' distributions of unfranked dividend income (post withholding tax) is excluded from the trustees' income. Industry practice follows 5 steps in determining trustees' tax liability; determine net income; determine whether beneficiaries are presently entitled; for non-resident beneficiaries determine whether s.128 applies.
Industry says that the ATO said that section 128D should also apply to the calculation of 'net income' (a previous step in determining distributions of trusts). This would have the effect of causing anomalies in determining trust distributions but also denying resident beneficiaries their imputation credits.
|48||Petroleum resource rent tax and the treatment of indirect costs||Industry says that the ATO's treatment of indirect costs was set out in MT 93/2, but then the ATO took a different approach in audits and delivered a speech in 2005 which was inconsistent with the MT. Industry says that the Treasurer noted in the 2005-06 Budget via a press statement that his preference was that an administrative solution should be explored before any legislative amendment is considered. Industry says that four years on, the issue remains largely unresolved. Industry says that the narrow base of precedents means that individual taxpayers need to engage the ATO on a case by case basis in lengthy periods of negotiation and this creates extended periods of uncertainty, impacting on investment decisions.|
|49||Division 7A of the ITAA 1936 — honest mistake||
The ATO recently released a draft practice statement, PSLA 2843 which provides guidance on the meaning of an honest mistake or inadvertent omission for the purposes of the Commissioner's discretion under section 109RB of the ITAA 1936 to disregard a deemed dividend under Division 7A where it was a result of an honest mistake or inadvertent omission.
Tax practitioners understood the Commissioner's media release in relation to PSLA 2007/20 would mean that the term 'an honest mistake or inadvertent omission' was intended to cover a "wide range" of mistakes and omissions made by taxpayers. Taxpayers were strongly encouraged to correct prior mistakes in relation to Division 7A, and were provided with a great deal of comfort that the matter would not be subject to further audit scrutiny. Despite the public ATO messages regarding taxpayers and tax agents being encouraged to take advantage of PSLA 2007/20, the ATO's views in the draft PSLA 2843 would effectively result in very few taxpayers being able to comply with PSLA 2007/20.
Tax practitioners are concerned that the subsequent views of the ATO in the draft PSLA will result in the ATO being construed as misleading in relation to its advice on correcting past errors. Furthermore, if the ATO did hold the view that taxpayers would not fall within the ambit of an 'honest mistake or inadvertent omission' where their affairs were managed by a tax agent, tax practitioners find it particularly disconcerting that the ATO is writing to tax agents to make them aware of the Commissioner's discretion and offering them the opportunity to correct past mistakes.
|50||Interpretation of liabilities||
Tax practitioners say that the interpretation by the Commissioner of the meaning of 'liabilities' for the purposes of different divisions of the ITAA 1997 are inconsistent. They compare TD 2007/14 (which relates to Division 152 of the ITAA 1997) in which the Commissioner has effectively adopted a reference to legal debts and excluded accounting liabilities (that is, recognised accounting provisions, from this definition) with TR 2002/20 (which is the basis for some views on Division 820 of the ITAA 1997) in which the Commissioner adopts the accounting meaning of 'liabilities'.
Tax practitioners appreciate that the statutory interpretation of a term needs to be considered in the context of the provisions in which the term is used and this may result in a term having different interpretations depending on the legislative context. However, they say that Division 152 and Division 820 are both provisions which are applied in a business context and to apply different interpretations of 'liabilities' without sufficient justification provides taxpayers with little comfort that the ATO is applying the income tax law fairly and consistently.
Tax practitioners also note that the ATO has acknowledged that adopting an accounting meaning of 'liabilities' is likely to reduce compliance costs for taxpayers. They say that given that it is the ATO's objective to reduce compliance costs for taxpayers, in particular small business taxpayers who would lack the requisite resources and knowledge to be tax compliant, it seem the ATO's interpretation of 'liabilities' under Division 152 is contradictory to this objective.
|51||CGT and leasehold interests||
Tax practitioners understood that the established prior practice was that the ATO did not consider leasehold property to come within the meaning of real property and felt the need to bring this to Treasury's attention, as evidenced by the NTLG Losses and CGT Sub-committee 14 November 2007 meeting minutes. The ATO has now issued TD 2009/D1 which concludes that a leasehold interest in land is 'real property' within the meaning of paragraph 855-20(a) of the ITAA 1997 and will be applied with retrospective effect.
Tax practitioners are concerned that the alternate view is given such cursory acknowledgement and that in deciding to apply the view retrospectively it has given insufficient consideration of the ATO's contribution to the prior industry practice.
|52||Deductibility of disability insurance premiums||
On 1 July 1988, sections 267 and 279 of the ITAA 1936 were enacted (part of Part IX of the ITAA 1936) and provided deductions to superannuation funds for insurance premiums in relation to policies that provided benefits in the event of "permanent disability". The industry accepts that this term extended to "disability benefits" within the normally usage by the life insurance industry. On 1 July 2007, Part IX was replaced by sections 295-460 and 295-465 of the ITAA 1997, which provide deductions for insurance premiums in relation to "disability superannuation benefits" (as defined in s.995-1).
In December 2008, the ATO told the industry that the new law had not changed the position under the old law. It said that the premiums were deductible only to the extent that the premium reflected the fund's current or contingent liabilities to provide specific benefits, the scope of those benefits being set by reference to amounts capable of being paid under a "Condition of Release" that applies to preserved benefits under the Superannuation Industry (Supervision) Act 1993.
Industry says that at no time over the last 20 years did the ATO give any such view during audits or advice products. They say that the retrospective effect of this view will result in tax liabilities that will create asset shortfalls and may need to be funded by insurers' capital injections. It will create a need for actuarial certification requiring significant funds and in some cases may exceed the deductions claimed. The ability of funds to change arrangements may be limited as many involve many years of coverage and there may also be limited ability to claw back costs from members due to cost recoupment structures.
The ATO has advised Treasury and may issue a ruling and will consider it a priority if the law does not change.
|53||GST vouchers and Division 100 of the A New Tax System (Goods and Services Tax) Act 1999||
Industry was of the view that both fixed and mobile network prepaid phone cards would qualify as Division 100 vouchers, based on consultation between the Industry, the ATO and Treasury and confirmed in the Telecommunications Industry Partnership — Issues Register — Issues 15, 16 &17. On 23 March and 23 May 2003, the ATO issued GSTR 2000/37 (Agency) and GSTR 2003/5 (Vouchers).
On 10 September 2008, the ATO issued addendums to GSTR 2003/5, with effect from that date. These changes would have required the Industry to make system changes to reflect the fact that the ATO considered some prepaid phone products were no longer Division 100 vouchers and some were now to be treated as stored value cards. Further the change to GSTR 2000/37 resulted in the fact that Subdivision 153-B did not apply to simplify the accounting for GST in relation to non-taxable supplies (e.g. vouchers) made through an agent (e.g. dealer). This would have required costly and time-consuming changes to contractual arrangements between the industry, its distributors, dealers and retailers.
Industry says that the ATO should have consulted earlier and if the ATO considered that its longstanding view/interpretation could no longer be supported it should have supported the industry in obtaining an expeditious law change to ensure that the status quo remained.
|54||[Confidential issue — relates to taxpayer specific facts]||Involves difficulties in trying to obtain rulings on specific issues.|
|55||Delays in class rulings||Tax practitioners are concerned with extended delays in obtaining class rulings on certain issues.|
|56||Pooling of Funds — TR 2005/11||Tax practitioners say that a prior practice was followed of not needing to trace funds in banks as inherently untraceable, as evidenced by TR 2005/11. They say that the ATO now says that the ruling may no longer be followed and have not indicated why this issue is being re-opened. They are concerned that the effect of any subsequent ATO view will by retroactive.|
|57||Section 46G profits||Tax practitioners say that a prior practice was followed that non-rebatable dividends would be determined on a net profits last basis, as evidenced by an ATO paper issued in 1996. They say that the ATO has now disowned the paper.|
|58||Closed end funds and Division 6C of the ITAA 1936||Tax practitioners say that a prior practice was followed that closed end funds were not unit trusts for Division 6C of the ITAA 1936, as evidenced by ATOID 2003/43. They say that the ATO has refused to rule on the issue.|
|59||Tax law partnerships and registration for GST purposes||Tax practitioners say that a prior practice was followed that tax law partnerships were entitled to register as an entity for GST purposes, as evidenced by PR 2005/92. They say that the ATO now says that tax law partnerships are now not entitled to register as an entity for GST purposes, as per PR 2006/47 and 2006/84.|
|60||Own occupation insurance||Tax practitioners say that a prior practice was followed of allowing a deduction for own occupation insurance, as evidenced by the ATO's tacit acceptance of the industry practice over 20 years. They say that since 2009 the ATO asserts that the claims were never deductible. They are concerned that the effect of the ATO's view is retroactive.|
|61||Research and development — feedstock||
The research and development (R&D) feedstock provisions were introduced in 1996 and restricted deductions at the concessional rate for expenditure on manufactured or acquired materials or goods that were transformed or processed into saleable output by an activity that was also R&D. In addition it excluded the energy costs to do that processing or transformation. Industry says that no concession was allowed on these costs unless the sale resulted in a loss compared to these feedstock inputs. This is despite the fact that concessional claims would be allowed on all the other eligible non-feedstock expenditure on R&D. Industry says that to date the guidance has been little more than rehashing the related explanatory memorandum.
The ATO is currently preparing a draft ruling on feedstock. Through interactions with the ATO, industry has been getting indications of two possible significant changes in the application of these provisions:
1. The exclusion of consumables from being considered feedstock inputs is actively being questioned by the ATO in the preparation for the forthcoming ATO ruling. Industry says that this would seriously expand the costs excluded from the concession in a way that undermines the legislative intent to encourage more R&D by businesses in Australia.
2. The ATO looks like it will seek to apply a holistic calculation where there are R&D activities early in a manufacturing stream and different R&D activities later in the stream, contrary to the relevant explanatory memoranda.
|62||Research and development — TR 2002/1||
Industry says that after 14 years of ATO acceptance of industry standard practice on the application of the law on research and development (R&D) plant expenditure, the ATO redefined the accepted interpretation of definitions and treatment of expenditure on plant by releasing draft taxation ruling TR 1999/D14 (which became TR 2002/1). Industry says that this redefinition had two main changes:
Industry says that this was so dramatic a change that so undermined the integrity of the concession that it resulted in direct intervention by the Prime Minister and new amending legislation being put in place to block the ruling's ongoing application before the ruling was finalised. Industry says that these changes by the Government were introduced because the Government recognised that, in the absence of any guidance from the Commissioner, that a broad interpretation of the 'exclusive use' test had come to be used in commercial practice and that this had apparently been accepted by the Commissioner right up to the release of the draft ruling.
|63||Research and development — withdrawal of rulings||
Income Tax rulings IT 2552 (1989), IT 2442 (1987), and IT 2451 (1987)("the Rulings") variously contained detailed information regarding the principles and methods that should be adopted by a taxpayer in preparing a calculation of research and development (R&D) expenditure. The Rulings were administratively binding advice and while not legally binding on the Commissioner offered some level of protection to the many taxpayers who have relied upon them annually since their release.
Industry is concerned that the withdrawal of the Rulings removes any tax shortfall protection, evidences a lack of industry consultation and will reduce the reliability of ATO guidance without any clearly expressed concerns, despite no concerns expressed for the last 20 years.
|64||[Confidential issue — relates to taxpayer specific facts]||Relates to a difference in administrative views between another Government department and the ATO.|
|65||[Confidential issue — relates to taxpayer specific facts]||Relates to a purported departure from ATO views expressed in a private ruling as being "no longer appropriate or applicable" for the same arrangement in later years.|
|66||Division 320 of the ITAA 1997 — cash versus accruals||The tax profession cites this as an example of a view adopted by taxpayers on new law enacted in 2000 and in relation to which there was no ATO view until 2007. Initially participants adopted either a cash or accruals approach to Division 320 of the ITAA 1997. The ATO refused to rule in 2002 that cash basis was correct (as non-contentious), but subsequently ruled (refer to ATOID 2007/41) on an accruals basis.|
|67||GST apportionment methodology applicable to asset finance businesses||
For GST purposes, the GST Act treats disclosed hire purchase arrangements as a mixed supply, having two components: the taxable supply of goods; and the input taxed credit charges. The ATO's ruling, GSTR 2000/22, stated that the appropriate measure for financial supplies is 'net revenue' while the appropriate measure for taxable supplies is 'gross revenue'. In relation to disclosed hire purchase agreements in the asset finance area, industry applied this ruling to calculate the extent an acquisition was made for a creditable purpose. Industry considered that the ATO's answers to questions placed on its website (constituting a binding public ruling) until September 2006 confirmed this approach.
In April 2006, the ATO replaced GSTR 2000/22 with GSTR 2006/3, which made no specific comment regarding the measurement of financial supplies, but re-stated the requirement that the apportionment methodology to be 'fair and reasonable'. Industry says that the ATO considers that the latter ruling clarified its position on the use of revenue methodology. In September 2006, the ATO also changed the answers to questions on its website to say that the use of net income from financial supplies was distortive. In December 2006, the ATO released a consultation paper (later finalised as a Practice Statement in 2008). It asserted that it was the ATO's 'longstanding view' that the net revenue approach was not an appropriate measure of financial supplies, and that taxpayers may be subject to audits.
Industry is concerned that the ATO will now audit and issue amended assessments on a basis which is inconsistent with its earlier public rulings. Industry is also is concerned that taxpayers will be hampered in proving that they relied on a public ruling before September 2006 because by changing the answers on the website the ATO have in effect retrospectively altered the public ruling and removed its previous contents from view.