4.1 The protections against the adverse effects of ATO delayed or changed views give a measure of certainty to the future treatment of taxpayers' affairs — a measure of taxpayer prospective certainty. However, the examples highlight concerns with the scope of protection afforded to taxpayers in light of the difficulties faced with their practical application. These are discussed below in relation to binding advice, the operation of the general administrative practice (GAP) provisions, and the Commissioner's power of general administration not to undertake compliance action for prior periods on particular issues.
Binding ATO advice
4.2 As a mechanism for prospective certainty, the law provides that the Commissioner is bound to assess a taxpayer's arrangements consistent with binding advice, such as public and private rulings where the advice applies to the taxpayer. Effectively, this provides protection from primary tax that might otherwise be imposed in the event that the ruling did not correctly reflect the law.
4.3 Generally, public rulings will provide protection to all taxpayers until they are withdrawn. Private rulings, however, need not be withdrawn as the general ATO practice is to limit their protection for the relevant taxpayer for a fixed period of time.
4.4 Notwithstanding the existence of binding ATO advice, there are disputes about whether subsequent ATO action changes previously issued binding advice or whether it is consistent with that advice. Reasonable people can differ in their opinions on the application and scope of binding advice. ATO rulings may also be narrow in scope or generally worded.
4.5 Non-binding advice refers to all forms of ATO advice that do not amount to 'binding ATO advice'. Non-binding advice will not stop the ATO from applying an inconsistent view when it assesses tax obligations. Non-binding advice may provide protection from interest and penalties, but not primary tax. The vast majority of ATO advice and practice falls within this category. The ATO provides an explanation of their advice and guidance framework in Practice Statement Law Administration (PSLA) 2008/3.
General administrative practice (GAP)
4.6 The term 'general administrative practice' (GAP) was first enacted into tax law in 1992 to give penalty and interest protection to taxpayers lodging returns consistent with a GAP (now sections 284-215 and 361-5 of the Taxation Administration Act 1953 (TAA 1953)). The term 'GAP' was not defined.
4.7 The explanatory memorandum to the Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 2) 2005 provides as follows:
3.130 General administrative practice will usually be established by the ATO having communicated consistently to a wide range of taxpayers on a particular issue. A general administrative practice is usually adopted for the efficient administration of the taxation system and will often be documented in a Law Administration Practice Statement, General Administration Law Administration Practice Statement, an ATO policy document (eg, the ATO Receivables Policy), or other precedential material (such as an ATO Interpretive Decision). An example is Law Administration Practice Statement PS LA 2003/8 which sets out the rules developed to lessen the cost of accounting for low cost assets for taxpayers carrying on a business. Where a draft public ruling represents the Commissioner's only public statement on an issue, the draft ruling will usually represent the Commissioner's general administrative practice.
3.131 A general administrative practice is not established merely because there are several similar private rulings on a matter, although evidence of a significant number of uncontradicted private rulings on a matter over time will tend to support such a conclusion. Similarly, a bare failure by the Commissioner to take some action within his power does not establish a general administrative practice, but a repeated failure to exercise that power after the issue is drawn to the Commissioner's attention will tend to do so. Again, mere silence or failure to issue a public ruling on a matter does not constitute general administrative practice, but it will be established where, following identification of an issue, ATO officers have accepted it as the basis on which taxpayers should treat the issue in a range of situations.
4.8 In 2005, section 358-10 of the TAA 1953 was enacted to provide that a public ruling cannot apply detrimentally from a time before it is issued where that ruling changes a GAP. The ATO's position (which is confirmed by recent legal advice that the ATO obtained from the Australian Government Solicitor — the AGS legal advice) is that this does not mean that the ATO must assess the taxpayer's liabilities in accordance with the GAP. It only means that the ATO is not bound to apply the ruling and that the GAP will continue to operate only for the purpose of providing interest and penalty protection.
4.9 As set out below, it should also be noted that establishing whether a GAP exists can be extremely difficult for taxpayers.
4.10 Section 358-10 was introduced as part of a range of measures flowing from Treasury's Review of Aspects of Income Tax Self Assessment. That review considered the problem of retrospective application of changed ATO views, amongst other things. The review report2 recommended:
Where the ATO changes a public interpretation or long standing practice to the detriment of taxpayers, that change should become effective prospectively and, where necessary, from a future date that allows affected taxpayers reasonable time to become aware of, and act upon, that new interpretation.
4.11 The Government acted on this recommendation by enacting section 358-10 and documenting its expectation in the explanatory memorandum that the Commissioner exercise his powers of general administration not to undertake compliance action for prior periods on a particular issue where he changed a GAP and the new practice was less favourable for taxpayers.
Although the provisions referred to in paragraphs 3.128 and 3.129 [of the Explanatory memorandum to the Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 2) 2005] refer to penalty and interest being foregone, the Commissioner's acceptance that there has been a general administrative practice can also result in no further primary tax being payable. Where the Commissioner changes a general administrative practice in a way that is less favourable for taxpayers, he is not obliged to amend assessments that were raised consistently with a practice in place at a particular time. The Bill needs no special provision to bring this about because it is an inherent part of the Commissioner's general power to administer the tax laws to make judgments about what returns to review and amend. Accordingly, the Commissioner would commonly decide to make a change in general practice prospective where the new practice is less favourable for taxpayers. Furthermore, in some cases it would be appropriate for the new practice to start at a future date (eg, because taxpayers need time to adjust their accounting systems). However, consistent with [Treasury's Report on Aspects of Income Tax Self Assessment, August 2004] at page 13, the Commissioner would generally not take this approach where tax avoidance is involved or the previous practice has been exploited in an unintended way.3
4.12 The IGT considers that if the Government had intended that taxpayers would receive certainty by requiring changes to the ATO's administrative practice to only operate prospectively (unless an arrangement involved tax avoidance, fraud or evasion), then it has been extremely difficult to achieve for the following reasons:
- Significant practical difficulties exist in establishing a GAP under the law itself (as highlighted in the AGS legal advice).
- The IGT is only aware of one case where the Commissioner has decided not to undertake compliance action for prior periods on a particular issue because taxpayers acted in accordance with a GAP, as the law relies on the Commissioner exercising his powers of general administration not to undertake compliance action for prior periods on particular issues where taxpayers acted in accordance with a GAP. During the finalisation of this review, the ATO provided the IGT with 14 cases where the ATO had applied its views only prospectively. However, it is not clear whether this was done because of the existence of a GAP.
4.13 These reasons are discussed in more detail below.
Significant practical difficulties with establishing a GAP
4.14 The ATO's position is that a GAP generally requires a habitual or customary adoption of a view in multiple cases of which the Commissioner is aware and accepts by administering the law consistently with that practice. This means that:
- establishing ATO acceptance of a GAP requires consideration of all relevant circumstances. At the very least, existence of the practice needs to be made clear to the ATO (and made with a purpose of eliciting a response from the ATO with respect to the asserted practice) and the ATO continued to administer the relevant law consistently with the relevant practice.
- public statements of how the Commissioner intends to administer the law may help to evidence a GAP, but are not enough in themselves to establish a GAP (notwithstanding potential indications to the contrary in paragraph 3.130 of the explanatory memorandum to the Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 2) 2005 — as set out above). What is needed is evidence that the view has been serially applied — that is, a repeated application of the view to taxpayers' affairs needs to be established.
4.15 This view is confirmed by the AGS legal advice.
4.16 This view raises significant practical difficulties in establishing whether a GAP exists or not.
4.17 Firstly, on the above view, it is extremely difficult for taxpayers to definitively determine whether a GAP exists or not. They may not know if that practice has been applied by the ATO widely or not. Even if their adviser may be aware, their adviser is prevented by the secrecy provisions from adducing the requisite evidence. Also, the ATO itself may not know if a GAP exists because the IGT has observed in other reviews that the ATO does not consistently record which precedential decision it applies in making interpretative decisions in advice products, audits and disputes (see for example, agreed action item in Chapter 4 of the IGT's report on the Review into Aspects of the Tax Office's Settlement of Active Compliance Activities: Report to the Assistant Treasurer).
4.18 Secondly, the above view requires a relatively high hurdle to be cleared in establishing whether the ATO is aware of, and accepted, a practice adopted by taxpayers. For example, the AGS legal advice indicates that a GAP could be established where senior ATO officers are made aware of the industry practice on successive occasions with the purpose of eliciting a response as to whether the ATO accepts the industry practice. However, a GAP will not be established where the ATO is aware of the practice, but does not agree with the practice. On the face of it, this view may appear to give clear guidance on whether a GAP exists or not. This ATO view raises significant practical difficulties in determining whether a GAP exists, and if so, at what point in time it does.
4.19 Take the following scenario for example (which is based on conduct seen in the examples raised with the IGT). New law may have been enacted and a small number of taxpayers applied for private rulings on particular arrangements that involved this new law. ATO officers follow the technical decision-making requirements of escalating the applications to the ATO's Centres of Expertise because there is no ATO precedential view. A precedential ATO view is formed and documented in a published ATOID and favourable rulings are issued. Other taxpayers entered arrangements on the basis of this view also; however, they did not apply for rulings given the time and costs involved. They relied on the view in the ATOID. They thought that until the ATO withdrew the ATOID, ATO officers would continue to be directed by the Commissioner to apply that view in materially similar circumstances. Several years later one of the taxpayers sought to enter a materially similar arrangement and sought another private ruling. This time the ATO escalated the ruling application to the tax counsel network (TCN) realising that a different conclusion may likely be reached this time, largely because of a new ATO view in another area of the law which impacted its thinking on how the relevant provision should apply. The ATO alerted the relevant industry to its potentially adverse view during a consultative forum meeting and sought community input. Months later the ATO advised that it was involved in discussions with Treasury seeking policy clarification. A year after alerting the industry to a potential new view, the ATO advised the industry that a draft public ruling was to issue shortly.
4.20 In examining the certainty that taxpayers have in relation to subsequent ATO active compliance action, on one view one could argue that a GAP existed up until the time the ATO advised the industry of its potentially adverse view. The ATO has arguably accepted the taxpayer practice because the ATO was made repeatedly aware of the practice in private rulings and was expected to respond as to whether the ATO accepted that practice. The ATO gave favourable private rulings and did not alert taxpayers to its potential adverse view until several years later.
4.21 On an alternative view, one could also argue that the ATO never accepted the practice. Firstly, according to the ATO's legal advice, public statements about how the ATO intends to administer the tax laws (such as ATOIDs) do not establish a GAP unless there is other evidence that indicates customary or habitual ATO administration consistent with the view expressed in the public statement. Secondly, 'senior officers' were not made repeatedly aware of the practice, only the relatively lower level officers (the Centres of Expertise) received and considered the ruling applications — once the relatively more senior TCN officers were made aware of the practice they were involved in an internal dialog on the technical issue and once they concluded that their view was likely to be adverse (albeit taking some time) it was communicated to the community. Thirdly, the explanatory memorandum to the Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 2) 2005 indicates that a small number of single private rulings will not evidence a GAP (this is likely due to the risk framework that the legislation provides for the private ruling system — a trade-off between providing timely certainty on the application of the tax laws to a private ruling applicant while at the same time limiting the ATO's risk of giving incorrect advice to a single case). However, evidence of a significant number of uncontradicted private rulings on an issue over time may evidence a GAP.
4.22 On this alternative view, therefore, there was no GAP. This means that those who obtained private rulings would be protected under the binding advice framework. However, those that relied on the ATOID would be exposed to subsequent adverse compliance action.
Commissioner's power of general administration not to undertake compliance action for prior periods on particular issues
4.23 Even if a GAP exists, the Commissioner will still need to exercise his power of general administration to apply views prospectively only. There are a number of ATO publications which set out the ATO's interpretation of how the Commissioner exercises this power.
4.24 Paragraph 32 of PSLA 2008/3 indicates that additional primary tax protection may effectively be available in certain circumstances:
If there is a change to a general administrative practice the ATO would usually communicate the change by way of a public ruling. However, where there is a change to a general administrative practice that is less favourable for taxpayers and that change is not communicated by way of a public ruling, the ATO will not necessarily amend assessments that were raised consistently with a practice in place at the time of the assessments. As a general rule the ATO will amend assessments only where tax avoidance is involved or the practice has been exploited in an unintended way.
4.25 This statement reflects the Government's expectation set out in paragraph 3.132 of the explanatory memorandum to the Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 2) 2005.
4.26 Since 1992, the ATO has expressed an intention to not take compliance action with retrospective effect where it has contributed to taxpayers generally adopting a certain practice in lodging their tax returns (see for example, paragraph 16 of taxation ruling TR 92/20).
4.27 In addition, the ATO's TR 2006/10 outlines the ATO's public ruling system. Paragraphs 60 to 69 set out the ATO's position that public rulings will generally have retrospective and prospective effect. Paragraphs 61 to 62 of that ruling note, however, that there may be circumstances where it will depart from this general approach:
60. The 'date of effect' guidelines provided in paragraphs 61 to 69 of this Ruling are not intended to be rigid rules that must be adhered to without due regard to the effect on the revenue or the extent to which entities might be disadvantaged. Rather, the guidelines provide a guide as to the appropriate date of effect provision that might generally be adopted to ensure consistency in the use of date of effect provisions in public rulings.
61. At all times these guidelines need to be administered in a commonsense manner in light of the particular issues dealt with in a public ruling.
62. It is recognised that there may be situations where, for the proper administration of the relevant provisions, it will be necessary to depart from the guidelines. For example, where giving a public ruling both a past and future application would, on an objective consideration of all the factors, produce an unfair, absurd, unjustifiable or impractical result.
4.28 Neither PSLA 2008/3 or TR 2006/10 set out any procedural steps or relevant criteria for considering whether to only apply a view prospectively. The current ATO process for considering the exercise of the Commissioner's power of general administration is currently set out in PSLA 2009/4. This process relies on ATO officers to initiate a process and prepare a submission, for the Commissioner's consideration, that the ATO not undertake compliance action for prior periods on a particular issue.
4.29 Under PSLA 2009/4, in considering whether to exercise the Commissioner's power of general administration not to undertake compliance action for prior periods on a particular issue, a number of criteria are to be considered by ATO officers. These are set out in paragraphs 22 and 23 of the appendix B to the PSLA 2009/4:
22. The Commissioner cannot use his powers of general administration to accept non-compliance with the law. However, as part of his duty of good management, the Commissioner can decide not to undertake compliance action on a particular issue for prior years or periods.
23. In determining whether or not to undertake compliance action for prior years or periods on a particular issue that affects a class of taxpayers or industry group, the Commissioner will consider all of the circumstances, including:
- the estimated amount of revenue at risk;
- the potential number of taxpayers affected;
- the cost of identifying and pursuing non-compliance;
- the extent to which some taxpayers have complied with the ATO view in respect of the issue, where known;
- whether the ATO has contributed to non-compliance;
- the likely impact on future voluntary compliance by taxpayers if compliance action is not taken;
- the relative priority of the compliance risk compared to other identified risks;
- the strength of the ATO view on the issue; and
- any proposed change of law affecting the issue including the proposed date of effect of any such change.
4.30 Industry was concerned that these criteria did not sufficiently consider the ATO's facilitation or contribution to the formation of industry practices. It was also considered that they were unduly directed towards revenue protection. The criteria are discussed in more detail in Chapter 5.
4.31 However, the interaction between PSLA 2008/3 and PSLA 2009/4 is unclear. PSLA 2009/4 is a lawful direction to staff that no-one but the Commissioner can exercise the power of general administration to not take compliance action on an issue for prior periods. Paragraph 32 of PSLA 2008/3 indicates the subject matter for the exercise of the power of general administration in relation to GAPs. PSLA 2008/3 does not set out any procedural matters inconsistent with PSLA 2009/4. However, the ATO advises that paragraph 32 of PSLA 2008/3 is not subject to the process set out at paragraphs 22 and 23 in Appendix B to PSLA 2009/4 and a submission to the Commissioner is not required in order to apply the practice set out in paragraph 32. This means that there is an absence of available material that gives guidance on the process and relevant considerations in exercising this discretion not to take compliance action for prior periods on a particular issue where taxpayers have acted in accordance with a GAP. The ATO has agreed to clarify the interaction of these two practice statements.
Application of GAP in exercising the Commissioner's power of general administration
4.32 Notwithstanding this process, the IGT is only aware of one case in which the Commissioner exercised his powers of general administration not to undertake compliance action for prior periods on a particular issue because taxpayers had self-assessed in accordance with a GAP. It is important to note, however, that during the finalisation of this report, the ATO referred the IGT to 14 public rulings which, in whole or part, only had a prospective effect and were said to demonstrate:
[the ATO's] application of the administrative policy in paragraphs 31-32 of PS LA 2008/3, consistent with our previous practice described in TR 92/20. They also demonstrate that we apply some rulings on a prospective basis even where there is no GAP, consistent with the principle set out at paras 61 and 62 of TR 2006/10.
... The prospective application of the view in each case will not necessarily reflect an acceptance that a prior ATO general administrative practice existed, nor acceptance of a specific industry practice (indeed, in some instances, there may have been several differing industry practices).
4.33 It should be noted that it is unclear as to whether the prospective date of effect of these rulings is due to the existence of a GAP. Prospective effects can be decided for a range of reasons, as set out in TR 2006/10, PSLA 2008/3 and PSLA 2009/4. It is also unclear whether the views in these rulings had not already been sought to be applied in compliance activities before these rulings were finalised.
4.34 In the case that the IGT examined, the ATO identified in 2001 a potential compliance concern in relation to a temporary five-year exemption from income tax for specified management fee income earned by life companies in respect of certain life insurance policies. This exemption was a transitional arrangement, part of the legislative reform of the tax treatment of the insurance industry. During client reviews in 2001, the ATO concluded that the existence of certain types of policies established the eligibility for the exemption. Following industry prompting to provide more certainty, the ATO issued an ATOID in late 2002 and gave a favourable private ruling which confirmed the earlier client review approach. However, following a more detailed compliance project in 2004, the ATO reconsidered its view in light of the additional facts it obtained and engagement of higher level technical officers. In late 2005, the ATO withdrew the ATOID saying that it was reconsidering its position. The ATO finalised its view in late 2006 after a review by external counsel and input from industry representatives. External counsel concluded that the evidence that would establish eligibility for the exemption was different to that previously thought — the effect of which would expose the industry to an estimated $490 million in amended assessments. However, until the ATO announced in April 2007 that the Commissioner would not seek to apply his view retrospectively, the industry was left with the impression that he would. The ATO decided to take no compliance action because it accepted that due to its prior conduct there was a GAP. Also relevant to the ATO's decision was that because the legislative provision was a transitional measure it had no further prospective effect. Additionally, the ATO also considered that the external counsel's view was not free from doubt. This is the only case in which IGT has observed the Commissioner exercising his power of general administration not to undertake compliance action for prior periods on a particular issue where taxpayers acted in accordance with a GAP.
4.35 In the absence of binding advice, the law as currently applied, allows the ATO to apply its views retrospectively without protection against primary tax for taxpayers. The examples that were raised in submissions to the IGT show that the main problem is not that one binding advice clearly changes another binding advice, but that there are disagreements over whether a previous ATO view or practice existed or the ATO rejects having accepted an industry view of which taxpayers and their representatives believe the ATO to have been aware and which they believe the ATO had accepted. The situation is further compounded by ATO delays in firstly identifying its compliance concerns and, secondly, finalising its position in relation to those concerns.
4.36 The Commissioner may exercise his power of general administration not to undertake compliance action for prior periods on particular issues where taxpayers act in accordance with a GAP. However, on the ATO's view, taxpayers face significant practical difficulties in establishing whether a GAP exists or not.
4.37 If the Government's intention was to provide certainty to taxpayers by changes to tax administration only operating prospectively where they rely on longstanding practices or GAPs (unless involving tax avoidance, fraud or evasion), then it should consider whether the current arrangements clearly achieve this aim and, if not, what changes should be made.
4.38 Community consultation on this matter could prove useful in clearly understanding the practical difficulties faced by taxpayers in establishing eligibility to any proposed arrangements as well as an understanding of the potential reduction in the amount of ATO guidance if all ATO guidance was made binding. This may include a consideration of whether the many different types of advice products that the ATO issues, and the varying degrees of certainty that these products provide, should be rationalised. It should be noted that the more certainty that attaches to a particular advice product may mean that the ATO would issue less of that particular advice product and, therefore, safeguards may be needed in this regard.
The Government should consider whether the current legislative framework adequately provides effective transparency and certainty for taxpayers where the ATO retrospectively applies new, 'changed' or 'clarified' views.
This recommendation is a policy matter for Government.
The ATO is of the view that the current legislative framework provides certainty and protection to taxpayers through the public and private rulings regimes. The law also provides protection for taxpayers from penalties and interest charges where a taxpayer self assesses in accordance with ATO advice (other than a ruling) or a general administrative practice.
As pointed out by the Inspector-General, the ATO's administrative policy is generally not to apply its view of the law retrospectively where that view is less favourable to taxpayers than a previous ATO general administrative practice. The issue or concern raised by the Inspector-General is about determining when a general administrative practice exists. The existence of such a practice is a question of fact to be determined having regard to all the facts and circumstances. This involves a consideration and weighing of relevant factors.
It is difficult to see how the concern raised by the Inspector-General would be practically addressed by a law change which either seeks to define an ATO general administrative practice or provides protection from primary tax where a taxpayer acts or self assesses in accordance with such a practice.
In the ATO's view, the examples provided to the Inspector-General indicate that 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.
The ATO notes the Inspector-General's conclusion that on the basis of disagreements about previous ATO practices and delays in finalising ATO positions on some compliance concerns "taxpayers' perceptions of changes in views or practices are justified in some circumstances". In the ATO's view, however, there is no evidence of so called u-turns where the ATO has applied a change of view retrospectively. In fact, as pointed out at paragraph 4.32 of the report, we have identified 14 public rulings issued over the last 4 years where the ATO view, either wholly or partly, had only a prospective effect. In each of these cases it was considered appropriate in the circumstances to apply the view only on a prospective basis.
The better approach to addressing the concern raised by the Inspector-General is for the ATO to provide more guidance on the circumstances and factors which are relevant in determining when the ATO will only apply its view of the law prospectively. This is discussed at Recommendation 2.
2 Treasury, Report on Aspects of Income Tax Self Assessment, Canberra, August 2004.
3 Paragraph 3.132 of the Explanatory Memorandum to the Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 2) 2005.