2.1 On 10 March 2009, the Assistant Treasurer directed the IGT to review and report on concerns in relation to any perceived ATO delayed or changed approaches — so called 'U-turns' — on significant interpretative matters or on past administrative practices. At the direction of the Assistant Treasurer and in response to submissions from concerned taxpayers, the IGT started this review pursuant to subsections 8(2) and 8(1) of the IGT Act 2003 respectively.
2.2 Perceived delayed or changed ATO approaches on significant interpretative matters are one of the main reasons for private sector dissatisfaction with ATO governance arrangements. Where the ATO is perceived to be changing or clarifying its existing views with retrospective effect, taxpayers can incur significants costs. The action can also reduce the level of prospective certainty in the administration of the tax laws. In some quarters, this has resulted in substantial erosion of confidence in the ATO as a fair administrator and driven a reluctance to work with the ATO on technical issues.
2.3 The IGT announced submission guidelines and terms of reference for this review on 21 April 2009. The terms of reference are reproduced in appendix 1. The IGT received 57 submissions from taxpayers and their representatives, raising more than 60 potential examples of delayed or changed ATO views on significant issues. A list of these examples is provided in appendix 2. The IGT also met with interested taxpayers, their representatives and selected industry and tax practitioner bodies to understand their experiences.
2.4 Fifteen of these examples were reviewed in more detail by looking at the related ATO files and discussing the issues with key ATO staff. They involved differing industry groups, tax issues and types of internal ATO processes. These 15 examples are shown on the list in appendix 2.
2.5 Generally, the examples involved the ATO releasing new advice or guidance which allegedly differed from one of the following previous categories of views or practices:
- an ATO binding view — for example, a public ruling;
- an ATO non-binding view or practice — for example, a view set out in a number of published edited versions of private rulings (which are binding only in relation to the rulees);
- an industry practice developed in the absence of ATO guidance and/or unchallenged by the ATO for a significant period of time despite the ATO being well aware of the practice; or
- a view adopted by taxpayers on new law and in relation to which there was no ATO view for a significant period of time.
2.6 The IGT found that the perceptions of 'U-turns' were generally based on a chain of events that mainly involved previous non-binding ATO views or industry practices of which the ATO was understood to be aware. The following chain of events are illustrative of what took place in many of the examples that were cited in submissions to us:
- Taxpayers and their representatives perceived that the ATO accepted a practice or view and relied on that perception when entering into arrangements. In some cases, taxpayers and their representatives may have considered that there was no ATO practice or view, however, they self-assessed within the limited timeframes allowed and in the absence of ATO views.
- The ATO later became aware of compliance concerns (concerns with practices or views that the ATO perceived to be of sufficient risk to revenue) in relation to particular arrangements. Commonly, the ATO became aware through audits, and to a lesser degree through advice requests.
- The ATO rejected that it accepted the view which taxpayers believed the ATO held and/or considered that existing binding advice did not cover the arrangements which were the subject of the concern. It then commenced a process (which may have included issuing a technical discussion paper and engaging in consultation with taxpayers and their representatives) to develop, finalise and apply a view to those arrangements.
- Because the ATO considers that it cannot estop the operation of the law, it considers that it must therefore apply its view retrospectively to applicable arrangements where it becomes aware of them.
- Taxpayers and their representatives thought it unfair to be adversely affected at a later point in time when it could do nothing to predict changed or new ATO views or to minimise their adverse effects. They considered that the ATO's retrospective application of views in these circumstances did not sufficiently consider:
- reasonable taxpayer reliance on what taxpayers believed to be ATO practice, views or conduct, in light of the taxpayer community's expectation that the ATO will administer the law as it sets out in its public statements; and
- ATO delays in light of the onus that the self-assessment system places on taxpayers to apply the tax law in real time.
2.7 The IGT established a working group comprising key tax practitioners and representatives. The participants were: Michael Barbour, Westpac; Michael Bersten, PricewaterhouseCoopers; Alf Capito, Ernst & Young; Frank Drenth and David Kuhne, Corporate Tax Association; Matt Hayes, KPMG; Andrew Mills, Greenwoods & Freehills; and senior ATO officials, such as Kevin Fitzpatrick, Acting Second Commissioner—Law; Andrew England, Acting Chief Tax Counsel; and Peter Walmsley, Deputy Chief Tax Counsel.
2.8 We greatly appreciate the generosity of the members of this working group in freely giving their time and expertise. Their involvement has greatly enhanced the outcomes of this review.
2.9 The working group met several times to discuss the potential solutions to the systemic issues identified in this review. It should be noted, however, that the views and recommendations expressed in this report are not necessarily those of individual members of the working group. The views and recommendations were finalised by the IGT after much deliberation, and based on input received and discussions with private sector representatives and the ATO.
2.10 The IGT also worked progressively with ATO senior management to distil the scope for improvement and to agree on specific actions. The IGT also discussed these matters with interested external stakeholders and working group members.
2.11 Overall, the IGT considers that, whilst the ATO may have acted within the law, there are circumstances where taxpayer perceptions of ATO changes in views or practices and their related delays may be justified. This is discussed in more detail in Chapter 3.
2.12 In this context, the IGT found that the examples highlighted scope for further improvement in the following areas:
- Improving certainty of legislative protection for taxpayers where the ATO retrospectively applies a newly developed ATO view (this issue is discussed in Chapter 4);
- refining the ATO's process and criteria for deciding whether to apply new, changed or clarified ATO views retrospectively, to better ensure that an appropriate balance is struck between:
- protection for taxpayers where the ATO has facilitated or contributed to the formation of taxpayer views which are inconsistent with subsequent ATO views; and
- preventing a laissez-faire situation where any position could be arguably justified on a particular area of uncertainty before the ATO releases its formal view (this issue is discussed in Chapter 5); and
- improving the ATO's engagement with the community while it develops its technical views (this issue is discussed in Chapter 6); and
- minimising the time periods occurring before the ATO identifies its compliance concerns and the time taken in finalising ATO views without compromising its reliability (this issue is discussed in Chapter 5).