Taxpayer perceptions of ATO acceptance
3.1 At the outset, it is important to acknowledge the onus that the self assessment system places on taxpayers to apply the tax law in real time. Taxpayers must decide how the tax laws apply to their affairs as best they can in the available time. This time is often limited due to, for example, a transaction needing to take place immediately. Also, taxpayers are not able to delay in deciding how the tax laws apply because of deadlines for lodgement or reporting. Taxpayers also have limited resources in undertaking these activities.
3.2 It is also important to acknowledge that ATO views do not create or extinguish legal rights. They are only statements of administrative intent. Whilst there is no legal obligation on the ATO to provide guidance, views or advice, the ATO has committed itself to giving advice and information on which taxpayers can rely. This reflects the community's expectation of a tax administrator in a self assessment environment.
3.3 Taxpayers may seek to obtain the protection of binding ATO advice (advice that protects taxpayers against additional primary tax, interest and penalties in the event that the advice is wrong — for example, a public ruling). However, the delays and costs in obtaining this level of certainty can be commercially prohibitive. Delays in finalising or clarifying views or changing views may limit taxpayers' commercial opportunities and significantly increase their costs. Also, there is widespread perception amongst large corporates and external tax advisers that there is a revenue bias in the ATO's private rulings.1
3.4 Taxpayers may also seek specialist tax advice from advisers. However, taxpayers' costs would be prohibitive if they were expected to obtain specialised technical advice on every issue. Therefore, they generally assess the need to obtain more specialised (and costly) advice on the basis of perceived risk, as does the ATO. In this respect, taxpayers generally seek to use the ATO's guidance and non-binding advice as a means to test whether there is such a need.
3.5 To a large extent, taxpayers also seek to reduce uncertainty by assessing their liabilities in line with the ATO's interpretation of the law. For example, many taxpayers, particularly small businesses and individuals, may prefer to follow ATO views to avoid costly litigation where they feel they cannot match the resources of the ATO. Taxpayers can resort to the courts if they wish to press their case for ultimate resolution, but this is a costly affair. Also, large companies may have become more reliant on ATO advice in recent years due to encouragement by the ATO to address tax risks as a part of their corporate governance.
3.6 Where new law is introduced, there may be no ATO guidance or advice. Generally, the ATO interacts with Treasury and taxpayers to facilitate a smooth introduction, often with great success. However, a difficulty arises where that interaction is incomplete and sufficient ATO advice or guidance is not provided. Some taxpayers expressed considerable frustration where years after new law had been introduced, the ATO had sought to adopt an interpretation (either in a compliance activity or in response to a request for advice) which was not consistent with prior taxpayer understanding of the application of the law. Taxpayers perceived that the ATO may apply the law with the benefit of hindsight without sufficient regard to the circumstances in which taxpayers felt they were doing their best to grapple with the application of the new law.
3.7 The examples that were raised in submissions to the IGT show that in light of the above, taxpayers and their representatives perceived that the ATO had accepted a practice or view and relied on that perception when entering into arrangements. ATO acceptance was seen as either positive action, such as the existence of a private binding ruling or other non-binding advice or statement, or, an absence of action in circumstances where the ATO was considered to have been aware of the practice, such as reviewing the practice in an audit or review but not challenging the practice or view.
ATO awareness of compliance concerns
3.8 It is also important to acknowledge that the ATO's compliance resources are limited. It allocates its resources on the basis of perceived risk to the revenue (its compliance concerns). Once the ATO becomes aware of a compliance concern, it may act to stop these practices. The examples show that commonly, the ATO became aware of compliance concerns through audits, and to a lesser degree through advice requests. Until the ATO is aware of the compliance concern it will not know whether to act or not.
3.9 The examples show that there is a spectrum of ATO awareness levels. For example, views expressed in public rulings generally receive the attention of high level technical officers and are commented on by private sector representatives before release. In some cases the ATO may not be aware that a particular approach to the application of the tax laws is being taken. In other cases, the ATO may become aware in an audit or private ruling application that a particular approach has been taken by a taxpayer, but the ATO has not diverted compliance resources to determine whether that approach is more widespread. There may also be cases where the ATO is aware that such a practice is widespread but considers that the approach is not of a comparatively high risk and takes no further action to divert compliance resources to alter that practice.
3.10 The examples also show that a significant period of time may have elapsed between the practice developing (for example, on the basis of perceived ATO acceptance in a non-binding view) and the ATO becoming aware of its compliance concern and communicating this to taxpayers. Delays in identifying compliance concerns can significantly increase the adverse impacts of retrospective application of new or changed ATO views. This issue is discussed further in Chapter 6.
3.11 Once the ATO becomes aware of a compliance concern, it may trigger its internal processes to consider the technical issues (such as the interpretation of the law, the application of the law to certain facts, etc.).
ATO technical view development
3.12 The ATO's technical view development operates on a precedential technical decision-making basis. Generally, this means that views are formulated by senior ATO technical officers which other officers are then required to apply when faced with materially similar circumstances, unless those other officers escalate the matter to the senior technical officer for reconsideration or reformulation). These precedential views are required to be published and kept up to date — for example, ATO Interpretative Decisions (ATOIDs) and practice statements.
3.13 Although these precedential views may be directions to ATO staff to apply that view when encountered in advice or compliance activities, under the law, these views will not provide taxpayers with protection from additional primary tax in the event that the ATO later changes its view and then retrospectively applies that changed view. Since 2005, the ATO has sought to provide a statement in relation to the level of protection afforded (usually against penalty and interest) by these guidance products in the product themselves. It should be noted that the law will only provide additional primary tax protection where the advice binds the ATO — that is, where the advice is contained within the binding part of a public ruling or a private ruling which is only binding with respect to the relevant taxpayer.
3.14 However, in light of the factors outlined above, taxpayers may consider that they have a certain degree of comfort in relying on precedential ATO views even though these ATO views are not binding on the ATO.
3.15 Where the ATO considers that existing binding advice does not cover the arrangements which were the subject of the compliance concern, it may commence a process to develop, finalise and apply a new technical view to those arrangements. These processes may take many months or years to finalise. These delays are discussed further in Chapter 6.
3.16 The ATO may also seek to engage with the taxpayer community to assist it to understand the arrangements and develop its view. This may be through a technical discussion paper. However, taxpayers are concerned with the tone of some technical discussion papers and that some ATO compliance officers may seek to use the views in these papers before the technical discussion process is finalised. The IGT identified opportunities to improve the framework for engagement — specifically in relation to the use of technical discussion papers. These opportunities are discussed in Chapter 6.
Legislative taxpayer protection against retrospective ATO action
3.17 Once the ATO formulates its view, it applies that view. The ATO considers that it must apply its view retrospectively to applicable arrangements where it becomes aware of them because it considers that it cannot estop the operation of the law.
3.18 As previously stated, there are legislative provisions which effectively provide protection from additional primary tax liabilities, penalties and interest arising from delayed or changed ATO views in certain circumstances.
3.19 Taxpayers can seek certainty about their primary tax liabilities by either relying on a public ruling (where one covers the arrangement) and/or by obtaining a private binding ruling which is binding on the ATO with respect to their arrangements. This will prevent the ATO retrospectively applying a more adverse view to the arrangements. However, for the reasons set out above, taxpayers generally seek to minimise their costs and uncertainty by following existing ATO guidance that may not be binding on the ATO with respect to them.
3.20 There are also circumstances in which the Commissioner may exercise his power of general administration not to undertake compliance action for prior periods on particular issues where taxpayers assess themselves in accordance with a general administrative practice (GAP). This may also effectively provide protection against the ATO retrospectively applying a more adverse view to the arrangements.
3.21 However, there are concerns with the practical application of these protections. These are discussed in Chapter 4.
3.22 As a result of the issues raised above, the examples show that taxpayers and their representatives thought it unfair to be adversely affected at a later point in time when they could do nothing to predict new, changed or clarified ATO views or 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, view 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.
3.23 On the basis of this chain of events, described above, the IGT generally concludes that the ATO may act within law because it does not apply a view which is a strict clear 'change' from binding ATO advice that applies to the taxpayer in question. However, the IGT does consider that taxpayers perceptions of changes in views or practices are justified in light of the above chain of events in certain circumstances, particularly where there are extended delays. This is explored further in the next chapter.
1 See the IGT's report on the potential revenue bias in private binding rulings. In that review, the IGT found that, within the scope of the IGT's powers, there was no evidence of undue revenue bias and no submissions to the review brought forward examples of undue revenue bias. Almost all representations to the IGT acknowledged and accepted that there was an inherent revenue bias in the private binding ruling system arising from the ATO's dual role as impartial rulings administrator and revenue collector. However, the ATO disputed such an inherent bias existed. The IGT also found that perceptions of undue revenue bias were not limited to any particular industry group and not due to unfavourable rulings. The IGT recommended the ATO take action to increase transparency, more clearly demonstrate objectivity and reduce delays.