Mr Ali Noroozi
Inspector-General of Taxation
Level 19, 50 Bridge Street
Sydney NSW 2001
Thank you for your report on the review into delayed or changed Australian Taxation Office (ATO) views on significant issues. The ATO responses to your specific recommendations are at Attachment 1. I understand that you will include our responses under the relevant recommendation in your final report.
At the outset I acknowledge and thank you for the collaborative manner in which you have conducted this review. This has helped in developing recommendations which we believe will further improve the administration of the tax system. Our involvement with the working group of key practitioners and taxpayer representatives which you established has helped to inform our understanding of taxpayer perceptions and ways to address these perceptions.
As you can see from our responses to the recommendations, we are in general agreement with recommendations 2 to 5. Whilst recommendation 1 is a matter for Government, we are of the view that the issues raised in the report are best addressed by implementing recommendations 2 to 5. In particular, we are of the view that providing more guidance on the circumstances and factors which are relevant in determining when the ATO will only apply its view of law prospectively should help to address taxpayer and practitioner perceptions about changes in ATO views and practices.
In the ATO's view, the examples provided in submissions to your review indicate the real issues arising from this review are twofold. First, there are sometimes disagreements over whether either a previous ATO practice existed or the ATO consciously accepted or contributed to a practice or view adopted by taxpayers. Secondly, some examples show a difference of view about the meaning and scope of an existing ATO view expressed in a ruling or other product.
In our view, the examples do not provide evidence of so called u-tums where the ATO has applied a change of view retrospectively. Some of the examples in the submissions in fact refer to opinions expressed in discussion papers. These papers are clearly not final views but are issued to facilitate consultation before the ATO forms its view.
As pointed out in your report, we have identified 14 public rulings issued over the last four years where the ATO view, either wholly or partly, was prospective only. These examples are set out in Attachment 2 to this letter. In each of these examples the ATO concluded that a prospective application of the view was fair and reasonable in the circumstances. The table in the attachment outlines the circumstances for each example.
We are currently tightening our processes and practices around the use of discussion papers. We are also initiating technical discussions with some professional firms in order to try to improve the timely identification of issues where there might be uncertainty or differences of view. We plan to immediately start the process of developing a new or revised draft practice statement to implement recommendation 2. We will consult with representative bodies on this draft.
Thank you for the opportunity to provide this response to your report.
Chief Tax Counsel
[Pages 3 to 10, attachment 1 of the ATO's response, contain the ATO's responses to the IGT's recommendations.
As indicated in the ATO's cover letter above, these responses have been moved into the body of the report to remove duplication.]
|Ruling number and title||Date of effect - Compliance implications|
|TR 2009/D8 - Income tax Division 7A loans: trust entitlements||
Previous Fact Sheets
Whilst this issue has not previously been dealt with in a public ruling, ATO fact sheets issued in the past indicated that a UPE would not be treated as a loan for Division 7A purposes. In recognition of this, in relation to those UPEs which are themselves treated as loans tor the purposes of Division 7A it is proposed that the view in the draft Ruling only apply prospectively.
Where, however, a UPE no longer exists and has instead been converted to an actual loan, it is the Tax Office view that there was no prior administrative practice of indicative view. In these situations there is no relevant outstanding UPE (instead, there is only an actual loan outstanding), and it is proposed that when finalised the Ruling would apply both before and after its date of issue to this category of arrangements.
|TR 2006/8 - Income tax: the cost basis of valuing trading stock for taxpayers in the retail and wholesale industries||
Previous Practice Statement
This Ruling applies to years of income both before and after its date of issue, subject to 2 exceptions, both relating to former PS LA 2003/13:
|TR 2005/21 - Income tax and fringe benefits tax: charities||
Change in Tax Office approach
The Ruling generally applies both before and after its date of issue. However, one aspect of the Ruling is to distinguish between 'charitable funds' and 'charitable institutions'. A consequence of this distinction is that charitable funds will no longer be taken to be rebatable employers for the purposes of section 65J of the FBTAA, as that provision only applies to charitable institutions. It is acknowledged in the Date of Effect section that this involves a change in the previous Tax Office administrative approach so this aspect of the Ruling only applies from 1 July 2005 (draft Ruling issued in May 2005).
|TR2005/22 - Income tax: companies controlled by exempt entities||
Previous inconsistent taxpayer practices and confusion about Tax Office approach
Comments on the draft of the Ruling indicated there were different approaches adopted by taxpayers and there was some confusion about the previous Tax Office practice. Comments indicated a need for a transitional period in which taxpayers could, where necessary, restructure their affairs.
Accordingly the Ruling applies from 1 July 2006 (Ruling issued on 21 December 2005). This provided companies time to adjust their affairs in light of the Commissioner's interpretation of the law in this Ruling. So, if the Commissioner were to determine that a company is not exempt under Division 50 in accordance with the Ruling, the consequences of that will apply to all of its ordinary income and statutory income from 1 July 2006.
|TD 2010/1 - Income tax: consolidation: capital gains: does paragraph 40-880(5)(f) of the Income Tax Assessment Act 1997 prevent the deduction, under section 40-880 of that Act, of incidental costs described in subsection 110-35(2) of that Act that the head company of a consolidated group or MEC group incurs, in disposing of shares in a subsidiary member to a non-group entity, before the member leaves the group?||
This Determination applies in cases where the incidental costs are incurred on or after 6 June 2008, the date on which a previous ATO ID on the issue that contained a contrary view, ATO ID 2004/500, was withdrawn and replaced with ATO ID 2008/96 (which formed the basis of the view expressed in this Determination).
|TD 2008/16 - Income tax: is an exceptional circumstances relief payment paid to a farmer under the Farm Household Support Act 1992 'assessable primary production income' under subsection 392-80(2) of the Income Tax Assessment Act 1997?||
Previous ATOID, then no ATO view
The Determination applies before and after its date of issue and is consistent with previous ATO ID 2004/9 that had been withdrawn in 2005 while the issue was being reconsidered.
However, the Tax Office recognised that some taxpayers may have included an Exceptional Circumstances Relief Payment as assessable primary production income in the period when there was no published view on its treatment, ie after the withdrawal of ATO ID and while the issue was being reconsidered. This inclusion may or may not have been to their advantage, depending on their particular circumstances. Therefore, taxpayers who had done so prior to the issue of this Determination were not required to seek amendments to their prior year assessments (though they could do so if they wish). This concession was communicated to taxpayers through the Tax Office website and also via an e-link broadcast to tax agents, and was published at the same time as the Determination
|TD 2008/28 - Income tax: when is income tax of a private company a 'present legal obligation' for the purposes of the distributable surplus calculation under subsection 109Y(2) of Division 7A of Part III of the Income Tax Assessment Act 1936?||
Change to view in draft ruling
The Tax Office originally issued draft TD 2007/D9. Subsequent to this it changed its view and issued a revised draft (TD 2008/D8) which was then finalised as TD 2008/28. The date of effect paragraph provides that where taxpayers had relied upon TD 2007/D9 and it provided a more favourable outcome, they were entitled to rely on TD 2007/D9 up until 18 June 2008 which was the date of issue of the revised draft
This is consistent with the statement in the explanatory memorandum accompanying the ROSA law changes which states that, where a draft ruling is the Commissioner's only statement on an issue, the draft ruling will usually represent the Commissioner's general administrative practice.
|TD 2007/4 - Income tax: capital gains tax: is a 'policy of insurance on the life of an individual' in section 118-300 of the Income Tax Assessment Act 1997 limited to a life insurance policy within the common law meaning of that expression?||
Change to view in draft ruling
This Determination applied to years commencing both before and after its date of issue subject to the exception that the Determination only has a prospective date of effect to the extent that the position in it differed from its draft, TD 2006/D36.
Again, consistent with statement in explanatory memorandum about draft rulings usually representing a general administrative practice.
|TD 2007/18 - Income tax: consolidation: in applying the statutory cap in section 705-40 (tax cost setting amount for reset cost base assets held on revenue account) of the Income Tax Assessment Act 1997, does the definition of revenue asset in section 977-50 of that Act include any CGT asset, a hypothetical realisation of which would have an amount reflected in the joining entity's taxable income (disregarding the single entity rule), otherwise than solely as a capital gain or capital loss?||
Change from published view in Consolidation Reference Manual (CRM)
The Determination applies from the date of issue for assets that are consumables. The Consolidation Reference Manual (an ATO precedential document) contained a Note to a worked example dealing with consumables brought into a group. That Note said that a consumable is not a revenue asset 'since its cost rather than a net loss, is allowed as a deduction.' That Note was at odds with the view in this TD and was withdrawn from the CRM before the issue of the TD. The prospective date of effect therefore protects taxpayers who relied on the Note in relation to consumables
There were (and are) no other references to revenue assets in the CRM. Taxpayers with CGT assets other than consumables would not have been entitled to rely on the Note as representing the Commissioner's view of the law in relation to revenue assets generally and therefore the Determination applies to all CGT assets other than consumables, both before and after its date of issue.
|TD 2005/13 - Income tax: capital gains: if there is a change in the majority underlying interests in an asset owned by an entity, does the entity's ownership of the asset start from the change in majority underlying interests for the purpose of applying the tests in paragraphs 152-110(1 )(b) and (c) of the Income Tax Assessment Act 1997?||
Change to oral view
The Tax Office previously expressed the view at the June 2001 NTLG CGT Subcommittee meeting that if a change in the majority underlying interests in an asset happens, the relevant ownership period for paragraph 152-110(1)© purposes restarts. The Tax Office revised its view as set out in this Determination. The change was foreshadowed by the Tax Office at the June 2004 NTLG CGT Subcommittee meeting.
Accordingly, paragraph 1 of this Determination applies only to CGT events that happen on or after the date of issue of this final Determination. For CGT events happening before the date of issue, taxpayers may choose whichever view is more favourable to them but must adopt the same view for both paragraphs 152-110 (1)(b) and 152-110(1)(c) of the ITAA 1997 purposes.
|Goods and Services Tax Rulings|
|GSTR 2008/2 - Goods Land services tax: development lease arrangements with government agencies||
No prior view or practice
The final Ruling applies before and after its date of issue. The Tax Office had not expressed a view on this issue before the draft of this Ruling.
However, given the long term nature of the commitments involved and the variation in industry practices, transitional administrative arrangements were considered to be necessary. Basically, developers who were committed to a development lease arrangement prior to the release of the draft Ruling on 3 October 2007 were given the option of continuing with the previous approach that was:
This administrative approach was communicated to key stakeholders, including GSTAS, the NTLG GST Subcommittee, the Property Council of Australia, and the Property and Development Industry Partnership. On issue of the Ruling,
|Goods and Services Tax Determinations|
|GSTD 2008/2 - Goods and services tax: are supplies of food known as. breakfast bars GST-free?||
Inconsistent: practice and small number of private rulings
The final Ruling applies before and after its date of issue.
However, the Tax Office noted that there were a small number of taxpayers with favourable private rulings in relation to their particular breakfast bar products who could treat their products as GST free until the date of issue of the Determination. There had also been inconsistency of treatment through the supply chain with some manufacturers treating the supply as GST-free and retailers then treating the same product as taxable, and vice versa without the benefit of obtaining a ruling.
The Tax Office, in consultation with industry, noted this inconsistency in industry practice, and the need for a transitional period to allow some suppliers to make systems or process changes. An administrative decision was made to give taxpayers 60 days from the date of issue of the Determination to make these changes. In addition, if suppliers were unable to make systems or process changes to comply with the Determination within 60 days or required assistance to implement changes, the Tax Office indicated it would consider whether additional time should be granted on a case by case basis.
The Tax Office utilised the GST Food Classification Working Party to inform industry of the publication of the Determination. Tax professionals were informed through existing Tax Office tax agent specific channels, including the Tax Office website.
|Miscellaneous Taxation Rulings|
|MT 2009/1 - Miscellaneous taxes: notification requirements for an entity under section 105-55 of Schedule 1 to the Taxation Administration Act 1953||
Previous Fact Sheet and Practice
This Ruling explains the Commissioner's view of the law both before and after the date of issue.
There was no previous formal Tax. Office ruling on the section 105-55 notification requirements. However, there was a fact sheet Time Limits on GST Refunds (NAT 11645) published on the Tax Office website which links to a form Notification of entitlement to GST refund (NAT 11719). While the fact sheet and form gave less detail on the notification requirements than this Ruling, they were broadly consistent with it. Unlike this Ruling, the fact sheet and form did not require a taxpayer to positively assert an entitlement to a credit or refund. Furthermore, the fact sheet contained an example that may be interpreted as accepting a lesser standard for notifications. Also, in practice the Commissioner had on some occasions accepted notifications that contained only a very brief description of an entitlement.
Accordingly, this Ruling provides that the Tax Office will not treat a notification lodged before the release of the draft Ruling as invalid where the notification does not assert an entitlement to the credit or refund (for example, it uses language like 'may be entitled'), or where it contains only a brief description of the nature of the entitlement.
|SGR 2009/2 - Superannuation guarantee: meaning of the terms 'ordinary time earnings' and "salary or wages'||
Change to draft Ruling and additional items to old SGRs included
While this Ruling replaced former Rulings SGR 94/4 and SGR 94/5, the final Ruling did vary materially from the draft (SGR 2008/D2) and also covered some items of income that were not previously covered by the old SGRs.
Accordingly, the date of effect of the Ruling was prospective from 1 July 2009. This allowed time for any system changes required by employers and it was the first day of a quarter for superannuation guarantee purposes.