2.1 The introduction of the self assessment system transferred to taxpayers the responsibility of applying the tax laws to their affairs. Under this system, an incorrect application of the law results in taxpayers being exposed to additional primary tax, penalties and interest. As such, the system relies on taxpayers having a good understanding of the tax laws so that they can fulfil this responsibility and avoid the potential adverse consequences.2
2.2 A key feature of the self assessment system is that it empowers the ATO to check taxpayers’ application of the law to their affairs post-assessment and to retroactively amend their returns. As a result, taxpayers are compelled to accurately anticipate ATO views :
[T]axpayers are more reliant upon the Tax Office to provide summarised, understandable statements that taxpayers may rely upon. In a system of self-assessment taxpayers expect that these statements will be timely, accurate and objective acknowledging court and tribunal decisions.3
2.3 Over time, the tax laws have also become increasing complex. This may be for a number of reasons, including as a response to increasingly complex business and personal affairs. As this complexity increases, taxpayers find it more difficult to ascertain how the tax laws apply to their affairs. Therefore, taxpayers may, at their own cost, seek the services of tax professionals to assist them.4 However, there may also be circumstances in which advisers also consider it difficult to ascertain how the tax laws apply.
2.4 It is, therefore not surprising that the advent of the self assessment systems has led to the need for revenue authorities to play a stronger advisory role to support of taxpayers. The ATO can also influence or encourage compliance through its advice and therefore minimise the risk to revenue.
The ATO’s advisory role
2.5 The ATO has no general legal obligation to assist taxpayers in understanding their responsibilities under the tax laws.5 However, as already mentioned, many consider that the ATO should help taxpayers to make it as easy as possible to comply6 as this engenders an environment conducive to high levels of compliance.7 Some also consider that taxpayers have the right to know the manner in which the tax laws will be applied.8
2.6 The ATO itself understands the importance of this role and has committed to it in its Taxpayers’ Charter:
You can expect us to: …
Help you to get things right …
We aim to provide accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations.9
2.7 The ATO has previously expressed the aspiration to be a ‘trusted authority on the law [and a] professional adviser and educator, ensuring that people have the information and support needed to meet their obligations under the law’.10 More recently, however, the ATO has expressed its goal in terms of assisting taxpayers to understand their rights and responsibilities and enable them to fulfil their obligations easily at minimal cost. 11 In this respect:
[ the ATO] foresees a future where:
- People are more engaged and willing to participate if they know what is expected of them and they are able to do this easily at minimum cost.
- People are more likely to participate where they can obtain assistance and guidance on how they should participate. Practical assistance and ease of compliance often go hand in hand.12
2.8 Thus, the link between high levels of compliance with the tax laws and administrative assistance that is user-centric is strongly reflected in ATO material.
2.9 In furtherance of this user-centric objective, the ATO publishes a wide range of material, from highly technical legal analyses through to simple procedural step-by-step guidelines. An inclusive list of the different types of material is set out in appendix 3.
Two different levels of taxpayer protection
2.10 In terms of the extent to which ATO information can be relied upon, the tax laws provide varying levels of protection for ATO information that is incorrect or misleading and leads to an incorrect application of the law.13
2.11 Generally, there are two levels of protection:
- protection from additional primary tax, penalties and interest; and
- protection from penalties and interest.
2.12 The level of protection applicable in any particular case depends upon:
- the type of ATO information issued or provided;
- the tax laws under which it relates; and
- the reason for the taxpayer’s mistake.
Two general types of ATO information
2.13 The ATO categorises all of its information as either ‘advice’ or ‘guidance’.
2.14 ‘ATO advice’ is the ATO’s opinion on the application of the law and is generally provided in the form of public, private and oral rulings.14 Taxpayers are protected from additional primary tax, penalties and interest if they rely on such advice which may ultimately prove to be incorrect. In this way, it binds the ATO to that opinion. Effectively, binding advice allocates the risk of incorrect advice to the Government in return for taxpayer compliance with the ATO’s opinion of the law.
2.15 A distinction needs to be drawn between ATO advice that is legally binding and ATO advice that is administratively binding. In the case of the former, it is the law that precludes the ATO from applying a view inconsistent with the legally binding advice. Whilst, in the case of the latter, it is the ATO who commits to not apply a view that is inconsistent with administratively binding advice. Although the ATO mayconsider itself bound, there have been instances where the ATO has argued publicly against administratively binding advice in litigation.15
2.16 The other category of ATO information is ‘ATO guidance’ which is provided to help taxpayers understand their obligations under the tax laws16 — for example, fact sheets, calculators and brochures. However, taxpayers will not be protected from additional primary tax if the ATO guidance proves to be incorrect. In this sense it is not binding on the ATO. In contrast to ATO binding advice, taxpayers following non-binding ATO guidance effectively accept a greater portion of the risk of the adverse impacts of relying on incorrect ATO guidance.
2.17 Depending of the type of guidance, however, the tax laws may afford protection from penalties and interest, such as the ATO’s law administrative practice statements and ATO interpretative decisions.17
2.18 There are also a number of ATO publications where no protection is offered under the existing advice framework — for example, edited versions of private binding rulings.
2.19 Appendix 3 reproduces part of the ATO’s Practice Statement, PSLA 2008/3, which sets out the types of ATO information and the level of protection afforded.
Binding ATO advice is the ATO’s view of the law, not the law
2.20 Binding ATO advice is the ATO’s interpretation of the law and not the law. They assist the taxpayer to understand how the ATO considers the law applies.
2.21 It should be noted that the risks that taxpayers face are not only those in correctly applying the law. Taxpayers also face the risk of the administrator enforcing a different tax outcome to that expected. If taxpayers are to minimise this risk, they need to know the ATO’s view of interpretational issues. In this sense, binding ATO advice provides taxpayers with a means for minimising this risk.
Main features of the current ATO advice system
2.22 The current ATO advice framework has a number of desirable features.
2.23 First, public, private and oral rulings can protect taxpayers from additional primary tax, penalties and interest, even if the ATO ruling is wrong. This provides taxpayers with certainty of the ATO’s treatment of issues.
2.24 Second, the ATO view in private rulings can be subject to external review. However, this right may not provide a taxpayer with certainty of the ATO’s treatment of their affairs. The ATO may still audit the affairs to examine whether the ruling was implemented as stated. Any variance may provide room for further dispute.
2.25 Third, the ATO is not bound to any particular process in developing and issuing rulings. This has led to some successful innovations, such as class rulings, product rulings and determinations.
Aspects of the ATO advice framework reviewed previously and recommendations made
2.26 The history of the ATO providing advice can be traced back to the 1930s, a substantial period of time prior to the introduction of the self assessment system. A summary of that history and the key events impacting on the advice framework, such as external reviews, are set out in appendix 2.
2.27 One of the most important recent reviews of the advice framework was Treasury’s 2004 ROSA review. In relation to the ATO advice framework, it recommended a number of changes to the ATO advice framework to make more of the ATO’s advice legally binding, amongst other things. The Government and ATO agreed with all recommendations, and legislation and administrative changes were made.
2.28 This included the replacement of the provisions in the tax laws dealing with the rulings system. Overall the changes were aimed at:
- making advice in the form of rulings by the Commissioner available to many taxpayers on a wide range of matters;
- ensuring that the Commissioner provides rulings in a timely manner;
- enabling the Commissioner to obtain, and make rulings based on, relevant information;
- protecting taxpayers from increases in tax and from penalties and interest where they rely on rulings;
- limiting the ways the Commissioner can alter rulings to a taxpayer’s detriment; and
- giving protection from interest charges where a taxpayer relies on other advice from the Commissioner, or on the Commissioner’s general administrative practice.18
2.29 The ATO’s approach to implementing the ROSA review’s administrative recommendations is discussed in chapter 6.
2.30 Since that time other reviews have examined aspects of that framework and made a number of recommendations. These later reviews are also summarised in appendix 2, as referred to above.
2.31 Overall, four main underlying systemic issues recur in these later reviews, being delays, costs, lack of objectivity and uncertainty. Each of these issues is discussed in turn below.
2.32 A number of prior IGT reviews have noted substantial delays in issuing of binding advice. Although significant improvements have been made since those reviews, the most recent figures19 indicate the timeframes for provision of binding advice continues to be outside of commercial expectations.
2.33 One possible reason for these delays is complexity, both in terms of the application of the law to factual arrangements and the law itself (including the policy objectives of that law).20
2.34 In addition to resolving the complexity of issues, the ATO also needs to consider the wider implications of interpretative positions, both for reasons of consistency and coherence of the tax laws.21 The ATO has previously sought to deliver binding advice which minimises the potential for unintended application of that advice. Stakeholders observe that this appears to have driven an ATO desire to strive for perfection in broad scoping documents, motivated by an apparent fear of exposing the revenue to undeterminable risk. However, the ATO now has other means at its disposal to address the small number of cases that may seek to do this, such as the general anti-avoidance provisions, promoter penalty provisions, taxpayer alerts and reportable tax position schedules. The likelihood and consequences of this ‘indeterminable risk’ is much lower than what existed before these means were introduced.
2.35 Irrespective of the causes, delays are a major disincentive for taxpayers to obtain binding advice. Commercial and compliance imperatives force taxpayers to take positions within limited timeframes that are frequently much shorter than the timeframes within which the ATO takes to issue binding advice.
2.36 In the absence of public binding advice, taxpayers have no practical and inexpensive way of obtaining certainty from the ATO regarding the application of the law to their circumstances.22 Both professional advice and private ruling applications impose substantial direct costs on taxpayers.
2.37 Also, a private ruling application will signal to the ATO a taxpayer’s intention to enter a transaction. Although, this may not be of concern in and of itself, it may discourage taxpayers from seeking certainty on unsettled or ‘borderline’ areas of the law. This is because such applications may expose taxpayers to excessive costs as a result of the ATO increasing its scrutiny of these issues.23 Some stakeholders have claimed that requests for private rulings can turn into mini-audits involving extensive and unnecessary information requests because the ATO may be trying to find a reason to give a negative response.
Lack of sufficient objectivity
2.38 Claims of lack of ATO objectivity or revenue bias have existed for a substantial period of time. This issue was considered in the IGT’s Review of the Potential Revenue Bias in Private Binding Rulings Involving Large Complex Matters.24 As summarised by the Joint Committee Of Public Accounts and Audit, this review:
4.35 … confirmed that there were significant perceptions of ATO bias in the tax community. Most stakeholders did not consider this bias to be undue. Rather, they thought it was the sort of approach to be expected of a revenue agency. The few examples given of undue bias occurred when the ATO was applying a legal interpretation that it thought best represented the policy intent of a law.25
2.39 Although that review examined an aspect of the private ruling framework, it should be noted that the review recommended a range of measures to improve objectivity on the ATO’s interpretative framework that dealt with both private and public rulings, amongst others. The ATO agreed with most recommendations, but disagreed with the recommendation to publish Treasury advice to the ATO on interpretative matters. This IGT recommendation was later adopted in the Henry review.26
2.40 From time to time, suggestions have been made that binding advice should be issued or scrutinised by a body independent of the ATO to improve objectivity and accountability.27 This approach, however, has not been recommended in a number of reviews of the tax administration system.28
2.41 The reasons that have been advanced for not doing so include that an independent body may give rise to increased delays,29 reduced flexibility and responsiveness in exercising discretion in applying the laws to allow taxpayers to comply, such that its interpretative views may be detached from practical consequences. The Henry review examined these reasons and, notwithstanding considering that these problems could be overcome, concluded that uncertainty for taxpayers may effectively increase:
While the rulings function could be moved to an independent body, the ATO would still have to interpret the law in order to fulfil its administrative role. In the absence of the ATO’s ‘in-house’ binding rulings regime, taxpayers would have a reduced understanding of the ATO’s view of the law and a reduced capacity to bind the ATO to those of its views that were known. Even if the independent body had issued a ruling that bound the ATO, there could be doubt about the ATO’s view on whether or not it applied in a given case.30
2.42 In addition to the recommendations made in prior IGT reviews,31 the Henry review also considered that objectivity would be improved by more explicitly stating the policy objectives of the law in the text of the law.32
2.43 As discussed above, minimising uncertainty for taxpayers as to how to apply the law to their affairs as well as how the ATO may administer those laws is critical. In examining the degree of uncertainty in the Australian tax administration system, there are a number of indicators that should be explored.
2.44 First, the Australian tax system has one of the highest users of tax advisers in the developed world, notwithstanding the endeavours of the ATO.33 A recent Organisation for Economic Co-operation and Development (OECD) comparative survey report indicates that for the 2009 year, 73 per cent of all personal income tax returns were lodged by tax professionals. This exceeds figures reported for New Zealand (50 per cent), the USA (40 per cent), the UK (67 per cent) and Canada (39 per cent).34 The ATO reports that for the 2009–10 year over 95 per cent of business taxpayers and 72 per cent of individual taxpayers lodged their returns through a tax agent.35
2.45 Second, a large number of the ATO’s compliance activities, such as data matching programs that identify omitted interest, dividends and salary, detect accounting, transposition and governance errors. The remainder of the ATO’s compliance activities may involve greater analysis of factual arrangements, the tax laws and the application of those laws to the facts. Only a small number of such ATO compliance activities result in adjustment involving the application of culpability penalties that indicate taxpayers knew their obligations but failed to fulfil them (or were reckless to those obligations). This infers that the ATO advice framework has not been effective in the majority of those cases where no egregious culpability was found but which nonetheless resulted in an adjustment to the taxpayer’s self assessment. The implications, therefore, are that a key objective for the ATO should be to focus on minimising taxpayer uncertainty, both in terms of the interpretation of the tax laws and the administrator’s application of those laws.
2.46 Since 2010–11, the ATO has adopted as a corporate key performance indicator to ‘reduce legal risks and increase certainty through ATO views by issuing advice and practical guidance that assists people to meet their obligations’.36
2.47 This is an encouraging step and further work should be conducted to ensure that the metrics used to evidence this indicator are more than merely the amount of guidance and advice provided, and the number of cases litigated. Such metrics could include the percentage of ATO compliance activities resulting in adjustments that had misstatement penalties of 50 per cent or more applied. Invariably, this aim of increasing taxpayer certainty should be achieved with minimal taxpayer compliance costs.
The ATO should expand the range of indicators it uses to publicly report on the level of certainty that it provides with minimal compliance cost to taxpayers.
The ATO agrees that there is benefit in publishing information about progress towards achieving greater certainty.
The ATO will discuss with the Inspector-General of Taxation and consult with the community, through appropriate consultative forums, to explore options that may be feasible and to identify what additional information might be usefully published.
Submissions to this review
2.48 An underlying theme from submissions to this review was that, under the self assessment system, the risk of adverse consequences arising from uncertainty primarily rested with the taxpayer. In this respect, they supported the aims of the Treasury ROSA’s recommendations — that is, the main role of the advice framework was to minimise the adverse effects, or harm, of uncertainty.
2.49 The overwhelming conclusion drawn in most submissions was that public binding advice is most effective where it is targeted at the areas of greatest taxpayer concern or uncertainty and, critically, that it is published in a timely manner. In these circumstances taxpayers are able to use advice at the time they are self-assessing in order to reduce the costs and impacts of uncertainty. However, notwithstanding the outcome of previous reviews of the ATO’s advice framework, taxpayers and their advisers claimed that they continued to experience examples of unnecessary delays, costs, perceived lack of sufficient objectivity and continuing uncertainty. This gave rise to substantial shortcomings in providing taxpayers with practical certainty of the administrator’s view.
2.50 Overall, these submissions considered that the ATO’s administration of the advice framework had not fulfilled the ROSA review’s aims, but appeared to be directed towards minimising the risk to the consolidated revenue at the expense of increasing administrative costs and taxpayers’ uncertainty.
2.51 Submissions highlighted certain ATO behaviours as substantially contributing to these views, including:
- an ATO emphasis on directing taxpayers to private rulings over providing public rulings; and
- an ATO preference in issuing non-binding guidance rather than public rulings.
2.52 These perceived behaviours are discussed below.
Emphasis on directing taxpayers to private rulings
2.53 Submissions observed an ATO emphasis on directing taxpayers to private rulings notwithstanding the increased costs and delays in such a process in comparison with public rulings. Submissions claimed that, in contrast to public rulings which are principles based, private rulings are primarily used by the ATO as a risk management tool whereby the ATO seeks to quantify the revenue impacts of specific arrangements and therefore provides an unexpressed basis for the ATO to reject or manage out arrangements. These factors contribute to the basis for perceptions of ATO revenue bias in private rulings.
2.54 As an example, submissions argued that the ATO was reluctant to provide public binding advice in resolving certain areas of uncertainty in relation to share capital tainting rules, instead directing taxpayers to private rulings:
In 2007, in response to external calls for guidance on share capital tainting rules, the ATO agreed to release a fact sheet. The fact sheet, however, did not cover the application of the share capital tainting rules to equity based remuneration arrangements. Public binding advice was requested on the topic. The ATO response was that because of the wide range of circumstances that may arise commercially and such diversity of facts, it was more appropriate to deal with questions of this nature through the private rulings process, including the issue of an ATO Interpretative Decision covering a specific set of facts (ATO ID 2009/76).
[Four years later] The topic was accepted by the National Tax Liaison Group [NTLG] Public Rulings Steering Committee as a potential new ruling on 18 March 2011, and forwarded to the main NTLG for consideration. The ATO agreed to issue a ruling if external stakeholders could supply real factual circumstances to be used in that ruling. Share capital tainting: consequences of employee share schemes was added to the Rulings Program on 20 September 2011 with the draft TR [Taxation Ruling] due to issue on 11 January 2012.
… The draft TR was reviewed by the Public Rulings Panel on 25 November 2011, with agreement among members that reasoning for the decision was too liberal and that further work was needed to address this. The draft TR was to go back to the panel with panel comments due 30 January 2012. Consequently, the issue date for the draft TR was deferred until 29 February 2012. Further issues have been raised that require consultation with Treasury, which is likely to further delay the issue of the draft.
2.55 In the IGT’s view, the ATO reaction in this example may be characterised as a cautious attempt to limit the risk to consolidated revenue because of a lack of knowledge of the types of business arrangements to which the advice may potentially apply. Also there may be a variety of complex factual scenarios to which the advice may apply, such that it may be difficult or unwieldy for the ATO to address all of them in one document.
2.56 However, the example also indicates room for improvement in the ATO’s engagement with the private sector in resolving issues of technical complexity. Such an issue was also discussed in the IGT’s Review into the Implications of any Delayed or Changed ATO Advice on Significant Issues, the so-called ‘u-turns’ review.37 Recommendation 3 of that review was aimed at securing improvements by ensuring that all ATO staff adhere to an improved framework for taxpayer engagement in developing technical views. The improved framework included using the most appropriate vehicle to engage the community on community issues (such as technical discussion papers) and provide interim guidance to the extent it can and minimise delays.
2.57 It is clear that the ATO’s recent general response to taxpayer calls for increased certainty is for the taxpayer to seek a private ruling.38 However, as stated above this is not always possible or an attractive option for taxpayers due to delays and costs that may arise in seeking a private ruling.
2.58 Nevertheless, the ATO has had some success in realising these improvements by implementing the recommendations of previous IGT reviews. One such area is in relation to more widely adopting the key principles of the priority ruling process in relation to large business private rulings.39 The ATO redeveloped its work practices to improve the management of private ruling work. The pilots of this work indicate an approximately halving of the timeframes for rulings. A summary of that work is provided in appendix 5.
Private rulings — requesting evidence of facts and resulting costs and delay
2.59 As stated earlier, some submissions to this review also claimed that a private ruling request can turn into a mini-audit resulting in unnecessary costs and delay. In particular, it is claimed that the ATO sometimes requests evidence of facts presented in a ruling request — for example, asking for copies of the accounts to support a taxpayer-presented fact of a particular accounting treatment.
2.60 Reasons for these ATO requests may include the ATO seeking to address issues outside the scope of the application or the taxpayer not providing enough facts. These particular issues have been considered in other IGT reviews. However, the issue of requiring evidence of facts presented in a private ruling application can amount to an inquisitorial type of engagement, more akin to an audit, bringing with it additional delays and compliance costs.
2.61 The ATO agrees that the information gathering process undertaken for a private ruling should not become a de-facto audit. However, the ATO advises that it may be concerned that particular facts presented by the taxpayer may not be an accurate representation of the evidence, or a ‘gloss’. If this is the case, the ATO may engage with the taxpayer to discuss these concerns. If legitimate concerns still remain unaddressed, more investigatory process may be more appropriately dealt with outside of the private ruling process.
2.62 Additionally, it has been suggested that if the taxpayer does not wish to provide more information, the ATO may use assumptions in the private ruling. If these assumptions materially differ to the actual facts, they effectively invalidate the protection of the ruling. In this respect, the Commissioner must give the applicant a reasonable opportunity to respond where he proposes to make assumptions in a private ruling.40
2.63 The ATO, however, holds the view that the use of assumptions in these circumstances may be constrained because it considers that the law requires the Commissioner to ask for more information where further information is required to make the private ruling:
(1) If the Commissioner considers that further information is required to make a *private ruling or an *oral ruling, the Commissioner must request the applicant to give that information to him or her.
(2) The Commissioner may decline to make the ruling if the applicant does not give the information to the Commissioner within a reasonable time.41
2.64 The ATO’s practice statement, PSLA 2008/5, indicates that the ATO will not use assumptions where the applicant should be able to provide the information:
21. Generally, where a ruling cannot be made on the facts available, the Commissioner will decline to rule. He will only make assumptions about unknown facts such as future events, and where an assumption is made it must be one that the Commissioner reasonably expects to eventuate. Assumptions must not be made where the applicant should be able to provide the required information, or the information can be readily obtained from another source. Staff who are unsure about assumptions, and when to use them, should refer to ORCLA [Online Resource Centre for Law Administration — the ATO’s internal staff instructions].42
2.65 The ATO’s internal staff instructions (ORCLA) make it clear that, in these circumstances, the ATO considers that the use of assumptions will be rare:
Making assumptions in Division 359 – private rulings
While section 357-110 of Sch 1 to the TAA gives us the power to make assumptions, we are not obliged to do so.
You must not make assumptions if the applicant can provide the required information, or the information can be readily obtained from another source under section 357-120 of the TAA.
Generally, if you cannot make a ruling on the facts available or readily obtainable, you should decline to rule. Also, if the correctness of the private ruling relies on assumptions about a future event or other matter, you can decline to rule.
The decision to rule based on an assumption should be rare, and you should consider it with great care. Any assumption you do decide to make must be one that we can reasonably expect to eventuate.
If you request further information to clarify the facts of a case and the applicant fails to respond, do not make assumptions about the missing information, but follow the process outlined in ‘Additional Information not provided within the specified time to finalise the advice’.
If you propose to make assumptions, tell the applicant about the assumptions before making the ruling, and give them a reasonable opportunity to respond (see Law Administration Practice Statement PS LA 2008/5 for further information). Notifying the applicant of our assumptions extends the usual 60-day period for making a ruling under section 359-50 of Sch1 to the TAA. The extension starts on the day we tell the applicant about the assumptions, and ends on the day the applicant responds.
State your assumptions clearly in the notice of private ruling, as they help define the scheme being ruled upon.43
2.66 Section 357-110 was inserted by the Taxation Laws Amendment (Improvements to Self Assessment) No. 2 Act 2005. The explanatory memorandum to the relevant amendments states:
3.38 To make a private or oral ruling, the Commissioner may require further information. The Commissioner must first ask for that information from the taxpayer. The Commissioner may also obtain information necessary for a ruling in other ways, but is not obliged to do so. While the Commissioner cannot refuse to rule simply because insufficient information was provided with the initial application, where the Commissioner asks the applicant for additional information, but it is not provided within a reasonable time, the Commissioner may decline to rule. …
3.40 Issuing a ruling may depend on an assumption about an unknown fact, such as a future event. If the Commissioner considers that correctly making a private or oral ruling would depend on an assumption, the Commissioner may make the assumption and tell the applicant about it, giving a reasonable time for their response, or may decline to make the ruling.
2.67 On one hand, it could be argued that the law requires the Commissioner to ask for information before using assumptions. On the other hand, it could be argued that in light of the context of the relevant provisions use of assumptions was intended to enhance the provision of timely private rulings and the requirement to ask for additional information was aimed at preventing the Commissioner from declining to rule without first attempting to remedy deficiencies in the facts presented in the application.
2.68 In the IGT’s view, the Commissioner should be empowered to broadly align his approach with the approach taken by private sector advisers: i.e. a recital of material facts on which the advice is based and, where there are concerns with the facts presented, make critical assumptions that are prominently marked and clearly brought to the taxpayer’s attention. Using such assumptions will also help minimise delays caused by additional ATO information requests. In this respect, the IGT notes that the Commissioner’s instruction to staff may be too restrictive.
- The Commissioner should amend PSLA 2008/5 to allow ATO staff to make assumptions of fact in private rulings, in a broader range of circumstances, without being required to request additional information. In these circumstances, the taxpayer should be given a reasonable opportunity to review the assumptions and be required to confirm that the assumptions are correct.
- If the Commissioner considers that he is not empowered to implement (a) above, the Government should consider amending the law to provide the Commissioner with such power.
Matter for Government.
The current law does not support an amendment of PSLA 2008/5 along the lines recommended – it would require a change in legislation. Section 357-105 of Schedule 1 to the Taxation Administration Act 1953 provides that where further information is required to make a private ruling, the Commissioner must request the applicant to provide that information. This approach has been confirmed by the Courts (see for example CTC Resources NL v FC of T 94 ATC 4072).
Comparative costs — private rulings and public rulings
2.69 Notwithstanding improvements in delivery, private rulings will always come at a cost to taxpayers. Individuals and smaller businesses do not have the same level of resources of large businesses. Some of the technical issues arising for small businesses are as complex (if not more so) as for large businesses. Inaccessibility of private rulings will tend to have a greater impact for them, than for large business taxpayers. Due to the costs of seeking professional advice, individuals and small businesses are much more reliant on public binding advice in order to mitigate the impacts of uncertainty.
2.70 In comparison to private rulings, public binding advice is relatively inexpensive for taxpayers to find and apply (where it exists). The unavailability of simple public binding advice puts these taxpayers at a greater disadvantage as they are less able to bear the underlying costs of uncertainty and the direct costs of administrative compliance, including advice costs.
2.71 The IGT also considers that there may be a more effective approach in dealing with the public versus private ruling dichotomy. If the ATO is able to better address the cost and practical access to private rulings and enhance some of their benefits, as well as improving stakeholder perceptions of cost and benefit, private rulings are likely to become more widely used by taxpayers. The end result will be reduced taxpayer uncertainty, as well as an improvement to ATO information gathering regarding those specific areas.
Reconsidering ATO technical resource allocation
2.72 The ATO currently seeks to allocate the most complex technical tax law issues to the most highly skilled and experienced ATO technical officers in the Tax Counsel Network and Centres of Expertise. Up until recently,44 the ATO determined which issues were of greater importance through its Priority Technical Issues process. This process sought to achieve, among other things:
[the] correct identification and prioritisation of technical issues with systemic implications that cross taxpayer markets, industry segments or revenue line boundaries.45
2.73 Issues concerning the ATO’s technical decision making processes and procedures have been raised in many IGT reports historically. The IGT raised such concerns from as early as 2005 in both review and annual reports.46 Others have suggested expanding the extent of resources through a user-pays system. However, this suggestion has been rejected on propriety grounds.47 This raises the question of how the ATO can more effectively deploy its technical resources and whether there is scope for improved technical decision making processes and procedures.
2.74 In line with these concerns, the ATO has embarked on a number of initiatives to deliver more effective and efficient use of tax technical resources through earlier engagement of tax technical expertise.
2.75 The ATO is currently seeking to do this mainly through its Transforming Tax Technical Decision Making project (the T-project) which aims to improve outcomes for the community. The T-project flows directly from five key recommendations of the ATO’s Law Improvement Project to:
- Bolster technical networks within the business/service lines - Work with Compliance and Operations to provide early engagement for Active Compliance, Interpretative Advice and Operations staff dealing with technical matters.
- Investigate and establish early engagement mechanisms - including Tax Counsel Network/Centres of Expertise Consultants, tax clinics etc, to help deliver timely, quality decisions for the community and build technical capability in the business/service lines, and ensure less difficult or risky cases are not escalated to Law.
- Change the basis of escalation to Centres of Expertise and Tax Counsel Network to one based on a formal risk assessment, with 'precedential' one of several criteria to be considered.
- Design and implement a practice management function in Law, to manage the activities of our highest level experts and best meet the expectations of the community and ATO business/service lines.
- Design and implement a review process at sub-plan level to align law interpretative advice priorities with corporate and sub-plan priorities. This should be a two way process, with Law advising on emerging issues and risks the sub-plans should consider and where further risk assessment is required.48
2.76 The IGT considers that enhancements in technical decision making and the effective employment of ATO technical expertise should go some way to ensuring that matters at risk of ongoing dispute and litigation are identified and addressed by the most appropriate ATO personnel.
2.77 The improvements should also align the ATO’s efforts with the Joint Committee of Public Accounts’ (JCPA) recommendation made in 1993 that the ATO ‘commit itself to providing decisions to taxpayers which are final and supportable in the first instance’.49
2.78 The ATO has conducted a number of pilots as part of the T-project. The recommendations resulting from the pilots have now been adopted by ATO management and are in the process of being implemented. Accordingly, it would be more appropriate for the IGT to consider reviewing this area once these changes are implemented and bedded down.
2.79 Given the reallocation of its technical resources, it is therefore also important that the ATO concentrate its efforts on providing sufficient public binding advice, in a timely manner, for those areas where uncertainty has its most significant impacts.
2.80 Providing public binding advice would also help to address perceptions of revenue bias because ATO interpretative decisions would be made on a principle basis without full knowledge of the revenue implications (as is the case with private rulings).
ATO preference for issuing non-binding guidance
2.81 As discussed above, submissions considered the ATO’s administration of the advice framework had not fulfilled the ROSA review’s aims and highlighted certain ATO behaviours as contributing to this view. One of these ATO behaviours was said to be an ATO preference for issuing non-binding guidance.
2.82 In providing information to taxpayers, the ATO advises that it aims to allocate resources in a manner that delivers the most effective response to specific issues.50 In this respect, the ATO takes a graduated approach that ‘steps up’ the level of taxpayer protection. The first step may be for the ATO to provide a form of non-binding guidance. If taxpayers want more certainty they can apply for a private ruling.51 Also where the ATO identifies a pattern of facts from audits and private rulings it will consider whether it should issue public binding advice to apply its view more broadly.52 Where matters of this nature are not issued in public binding advice form, increased uncertainty remains for those affected in the greater community.
2.83 Submissions to this review observed an ATO preference for issuing non-binding guidance and a reluctance to issue public binding rulings. In the absence of public binding advice, many taxpayers may seek to rely on relevant non-binding ATO guidance, thereby exposing them to the risk of retrospective change of treatment by the ATO.
2.84 As such, taxpayers prefer binding advice over non-binding advice because it gives taxpayers greater protection against uncertainty of the administrator’s application of the law, and therefore more effective in minimising the potential harm caused by this uncertainty.
2.85 In addition to the stakeholder concerns above the ATO raised the following propositions:
- there has been an increase in the proportion of public rulings and determinations issued; 53
- ATO guidance is effectively binding;54 and
- legally binding advice cannot be simple and practical.55
2.86 These propositions are further outlined below.
Increase in proportion of public rulings and determinations issued
2.87 In any one year, the ATO may produce far less ATO advice than ATO guidance. In the 2010–11 financial year, the ATO provided 9285 pieces of ATO advice and 27,292 pieces of ATO guidance.56 The ATO reports that it released 9075 private binding rulings in this year, compared with 10,946 in the 2009–10 financial year.57
2.88 An examination of the numbers of particular types of ATO advice products (public rulings and determinations) and ATO guidance products (ATO Interpretative Decisions (ATOIDs) and Law Administration Practice Statements (LAPS)) reveals that over an eleven year period far more public non-binding guidance has been published and maintained than public binding advice (see table 2.1 below). However, this of itself does not necessarily confirm that the ATO has a ‘preference’ for providing non-binding guidance over binding advice.
|Published Public ATO Advice and ATO Guidance Products||2001||2002||2003||2004||2005||2006||2007||2008||2009||2010||2011||Cumulative|
|Public Rulings and Determinations|
Source: Australian Taxation Office
1. Source for this set of statistics is ATOLAW which is provided by calendar year.
2. The numbers for withdrawns indicate the numbers which were released in the given year, which have subsequently been withdrawn. They may have been withdrawn in that year or later.
3. In addition to public rulings and interpretative decisions, the precedential ATO view is expressed in documents listed on the Schedule of documents containing the precedential ATO view. The precedential ATO view is the Tax Office's documented interpretation of any of the laws administered by the Commissioner in relation to a particular interpretative issue. As at 15 December 2011, there were 84 documents listed on the schedule, 23 of which are current and 61 relate to prior income years.
2.89 The ATO analysis of these figures note that the information indicates the following trends:
1. 1.74 per cent decrease in total products released from the 2001 to 2011 calendar years (1123 - 292).
2. 88 per cent decrease in ATOIDs released from 2001 to 2011 calendar years (805 - 99) cf. 46 per cent decrease in Public Rulings and Determinations released over same period (303 - 163).
3. 46 per cent of all products released in the 11 year period have been subsequently withdrawn (4016/8739).
4. Public Rulings and Determinations as a per cent of total products released has increased from 27 per cent in 2001 to 56 per cent in 2011.58
2.90 These figures clearly show an increase in the proportion of public ATO advice, compared to certain types of public ATO guidance. The ATO also produces other forms of binding advice and non-binding public guidance, such as private rulings and fact sheets, which have not been captured.
2.91 Additionally, the figures are indicative of the relationship between binding advice and non-binding guidance, showing that a greater proportion of ATO material is non-binding in nature.
ATO guidance is ‘effectively’ binding
2.92 Another proposition raised by the ATO was that notwithstanding ATO guidance may not legally bind the ATO it may be difficult for the ATO to ‘walk away’ from such material.59
2.93 The ATO has also suggested that ATO guidance is derived from ATO views set out in ATO advice documents, such as rulings or determinations.60 Furthermore, where ATO guidance is prepared on an issue where there is no precedential ATO view, ATO advice will also be prepared for publication in conjunction with it. In this way, the ATO considers that ATO guidance guides taxpayers towards ATO advice.
2.94 The IGT, however, has reported in other reviews certain circumstances in which the ATO has not stood by ATO guidance. For example, in the IGT’s Review into delayed or changed Australian Taxation Office views on significant issues (the so-called ‘u-turns’ review) an ATO webpage, ‘most frequently asked questions and answers to Division 7A’, from 1999 to 2007 stated that Division 7A would not apply where the trustee retains an unpaid present entitlement on trust. However, in 2009 as set out in the IGT’s report:
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.61
2.95 In the example, further consultation with the tax profession indicated that the ATO may have been unaware of its prior views. The ATO agreed with recommendation 2 in the IGT’s report, which was designed to reduce the adverse impact of delayed or changed ATO views on significant issues by including the following process step:
24. Before applying any product, position, opinion or view of the law, tax officers are required to determine whether there are circumstances which would make it appropriate to take action to apply the ATO view of the law only on a prospective basis.
25. To do this tax officers must:
(a) undertake research to form an opinion whether any ATO publication, product or evidence of ATO conduct could have reasonably conveyed a different view of the law on a particular issue, to taxpayers generally, or to a particular class or industry group.62
2.96 Although the ATO may endeavour to base non-binding products on binding advice and give taxpayers the option of relying on simple guidance or more complex binding advice, stakeholders provided a number of examples where the ATO was prepared to publish non-binding guidance (such as a fact sheet or practice statement), however, was not prepared to provide public binding advice at that point in time.
2.97 Furthermore, if the ATO considers it will stand by non-binding guidance which is based on binding advice, it can be perplexing why the ATO does not declare that information binding and increase the level of certainty for taxpayers.
2.98 In the IGT’s view where a non-binding product expresses or applies an interpretative view, it is appropriate for the ATO to publish that view in a binding form whereby taxpayers could rely on it. In the absence of any clear reasons as to why the interpretative view should not be binding, it should work towards providing that view publicly in a binding form. This would enhance taxpayer understanding of the ATO’s position and provide protection from the adverse consequences, thereby minimising the harm caused by uncertainty.
ATO advice cannot be simple and practical
2.99 One particular area strongly voiced by submissions was that the ATO has not given full effect to the ROSA recommendations in relation to making ATO advice more accessible, timely and binding in a wider range of cases. They considered the ATO’s approach to advice as being ‘limited, cautious and conditional’.63
2.100 In its ROSA review, the Treasury explained that one way to reduce uncertainty would be for taxpayers to be confident that they are assessing their liabilities in accordance with the ATO’s interpretation of the law.64
2.101 It articulated the general principle that all ATO advice should provide a level of protection (depending on the type of advice) to those who reasonably rely on it in good faith and that if such advice turns out to be wrong:
Such consequences should properly be borne by the community as a whole. Although this will not be a great cost (as Tax Office advice will be correct in the great majority of cases), it will relieve a major source of uncertainty for taxpayers.65
2.102 The ROSA review concluded that taxpayer certainty would be improved by providing a better framework for ATO advice and making ATO advice more accessible, timely and binding in a wider range of cases.66
2.103 In making ATO advice more accessible to the general public, the ROSA report recommended that all ATO written advice, including public rulings, should use plain language with a minimum of qualifying statements. This implies that rulings should be clear and succinct:
Some submissions noted that advice provided by the Tax Office is not always easy to understand. These submissions proposed that advice should be written in a plainer and simpler style. However, submissions also recognised the balance that needs to be struck between providing advice that is clear and succinct, and ensuring that advice is accurate. They acknowledged that, depending on the taxpayer and the advice sought, varying degrees of technical language may be required or appreciated. Moreover, some taxpayers and practitioners have said that they would prefer a longer explanation in order to gain a better understanding of how the Tax Office might approach similar cases.
Nevertheless, the Tax Office is not in the business of being a paid tax adviser to individuals and it should not feel obligated to provide its general advice in a way that only suits a minority. The main purpose of Tax Office advice is to inform the public about how it will interpret the law and act in a given situation. If that advice is written like some legal opinions, in complex language with caveats or qualifying statements, what is stated to be public advice, may not in fact be accessible by the general public.
The Review therefore encourages the Tax Office to provide general advice in a style that is as simple and easy to understand as possible. Some rulings with a potentially limited readership may need to be tailored to the special needs of the target audience.
Wherever possible, Tax Office general written advice, including public rulings, should be written in plain language, with a minimum of qualifying statements so that it is accessible to the general public.67
2.104 The IGT has previously reviewed concerns with the implementation of the 2006 ROSA legislative changes on the ATO’s advice framework in his Review of the Tax Office’s administration of public binding advice.68 In summary, that IGT review concluded that although the ATO had taken positive steps to implement the ROSA changes, the ATO had also not given full effect to those changes. Amongst other things,69 this was because the ATO’s advice ‘has become … more limited, cautious and conditional’.70 The review formed this conclusion on the basis that:
- the number of (non-binding) practice statements issued had generally increased each year;
- the ATO had not made significant parts of TaxPack or e-tax legally binding (further developments in this regard are discussed later in this chapter)
- the ATO had replaced binding material with non-binding material;
- the ATO had not instituted a systematic process for reviewing the level of protection for pre-2006 rulings stating that they are not binding; and
- in 2007, the ATO withdrew statements made in a 2003 practice statement which clearly indicated that it considered ATO precedential views (such as ATOIDs) as representing its general administrative practice.71
2.105 In its response, the ATO strongly disagreed with these findings, explaining:
Providing advice and guidance on the application of the laws administered by the Commissioner is central to the role of the Tax Office. It enables taxpayers to understand and meet their obligations and to be aware of their rights and entitlements in a self-assessment system. However, the assistance provided must be relevant to the intended audience. Plainly, the community is quite diverse when it comes to its need for assistance on taxation matters. Our experience is that most taxpayers, especially individuals and small businesses, are looking for guidance that is simply expressed and provides practical step by step assistance. This guidance does not readily lend itself to be legally binding. ‘Binding’ means that if the Commissioner provides favourable advice that is wrong, taxpayers who rely on that guidance are advantaged relatively to those that comply with the law. That is, errors made by the Commissioner in binding material exact a high price on the community, which must forgo the relevant revenue.
Because of this risk, binding advice needs to be prepared rigorously and needs to be expressed in precise, often legalistic terms. While the Tax Office public and private rulings provide this type of advice, they often do not meet the needs of those taxpayers seeking simply expressed guidance referred to above. Of course, as you know, any taxpayer who wants a private ruling can seek one.72
2.106 Clearly, under the ATO’s approach to administering the advice framework to date, the ATO finds it a continual challenge to provide technically accurate advice in a manner that is simple and practical to a wide range of taxpayers. This indicates a need to reconsider the approach in administering the advice framework.
2.107 Having considered the main stakeholder and ATO views on the relevant factors, potential solutions to concerns need to be considered.
Legislative imperative to minimise uncertainty
2.108 Given the role that the advice framework plays in harm minimisation for the productivity of the economy and confidence in the tax system, it has been strongly argued that there should be a legislative imperative to provide binding advice. Such advice would minimise the extent of uncertainty, especially in relation to those self assessing taxpayers who do not have practical access to private rulings.
2.109 In considering the issue of a legislative imperative a number of threshold questions need to be considered. First, should all ATO guidance be binding on the ATO?
Should all ATO information be binding on the ATO?
2.110 The issue of whether all ATO information should be made binding was considered during Treasury’s ROSA review. However, no such recommendation was made. In the discussion paper to that review, Treasury stated that there was a risk that if such an obligation was placed on the ATO, then the ATO’s advice may become ‘more limited, cautious and conditional’.73 Additionally, it may also result in the ATO producing less information.
2.111 Relevantly, the Government has also recently acted on the Board of Taxation’s recommendations to enact a legal framework for GST rulings.74 In effect, these changes adopt the income tax rulings regime for GST (and other indirect taxes). It will enable the ATO to reduce the number of GST public binding rulings and allow it to issue other types of information, such as non-binding ATO guidance.
Should the ATO be legally required to produce binding information?
2.112 To overcome the challenges that may emerge if all ATO information were required to be binding, it has been suggested that the ATO should also be legally required to provide advice.
2.113 A corollary to such legal obligation would be that the ATO should delay taking compliance action until such advice is produced. This has taken place in the past, such as after the goods and services tax was introduced to give people enough time to understand what needed to be done to comply with the new regime.
2.114 However, a general rule that delayed compliance action (until ATO advice is provided) may effectively delay the date of effect of the relevant legislation. This delay may be significant given the lengthy periods of time that has been needed in the past for the ATO to produce binding advice. Consequently, the application of Parliament’s intent and Government policy may be subject to administrative compliance verification much later than otherwise anticipated.
2.115 Nevertheless, imposing a legal obligation on the ATO may still need to be considered in the future. However, in the interim, there are more cautious improvements that can be sought with respect to the timeliness and scope of public ATO advice.
2.116 One approach is to encourage and assist the ATO to provide public binding advice in areas of uncertainty more quickly. Such advice should be preferred over private rulings because it minimises taxpayers’ compliance costs, albeit that private rulings would still have a valuable purpose and place in the advice framework.
2.117 As a general aim, public binding advice should be simple, practical and reliable, and that one document need not cover the field — for example, it could be limited by type of factual arrangements, limited in time, limited in amount of potential tax liabilities. Importantly public binding advice should be produced on a timely basis. Taxpayers should have the choice to follow public binding advice or not (where they consider the ATO view is incorrect), but also be prepared to accept the consequences if they are ultimately incorrect.
2.118 To achieve the above, the IGT considers that uncertainty would be significantly reduced if the ATO was required to synchronise its advice at the enactment of substantial new laws.
Synchronising ATO advice with the enactment of new law
2.119 In addition to the timeliness with which ATO advice is issued, and to a substantial extent, the utility of ATO advice depends upon awareness of the factual arrangements to which it applies. Typically, the ATO develops this awareness from compliance verification activities and taxpayer initiated advice requests. However, where law is proposed there may be little existing ATO awareness of the specific taxpayer factual arrangements to which the law may apply.
2.120 Therefore to enable useful ATO advice to be delivered, improved private sector engagement in policy design would be required to raise awareness of the practical application of proposed measures. Consistent with this, and to enable this type of private sector engagement to take place, the type of ATO involvement is important, such as providing its view on how policy detail would be administered in practice. Ultimately, this would be an intense and iterative process, but a more effective one.
2.121 The following example illustrates how effective private sector consultation depends upon the ATO’s articulation of how it would administer the policy and law in practice:
[In setting out the alienation of personal income as a case study of the Integrated Tax Design process (which is described in chapter 5), the Chief Tax Counsel referred to a case study in which extensive public consultation with industry and professional groups, including that involved in the Ralph review, was carried out before the legislation was drafted. The bill was reviewed by the Senate Economics Legislation Committee. Following its enactment on 30 June 2000, the ATO carried out an extensive education program targeted at tax agents. The ATO subsequently released a draft Public ruling that it considered was consistent with the policy intent in the Explanatory Memorandum and the Ralph review recommendations.]
[Notwithstanding the extensive public consultations and education campaign], it was not until the release of the draft Public Rulings on the matter in April 2001 that the measure came under intensive scrutiny by the tax profession and some industry bodies.
However, the further consultation which the draft Public Rulings engendered resulted in clarification of the policy intent and in the Government agreeing to legislative changes (Treasurer, Press Release (No 47, 29 June 2001); and Treasurer, Press Release (No 51, 9 July 2001) …
Public Rulings are generally issued as drafts as a means of promoting consultation and input on the ATO’s interpretation of the law. The alienation draft Public Rulings were successful in this regard and provided the spur to the clarification of policy and legislative change.75
2.122 The ATO also recognises the importance of its role in providing views during policy and legislation development on how proposed law would be administered:
11. … the ATO's role in tripartite tax law design [discussed further in chapter 5] is to provide high quality input into the development of tax policy and legislation, by contributing its views and experience, particularly in relation to the administrative impacts of the proposed changes to the law. This recognises the principle that tax policy and legislation should take administrative issues fully into account. Included within these administrative impacts and issues is that part of tax administration which relates to the interpretation of the laws which the ATO administers.
23. It is clearly preferable for tripartite discussions on any issues associated with legislation that has been introduced to Parliament to take place while it is still before the Parliament, rather than not addressing such issues until after the law is passed or takes effect.76
2.123 The IGT considers that this draft staff instruction (cited immediately above) should allow those ATO officers involved in policy and legislation design to provide:
- views as to whether the provisions achieve the policy outcome in relation to particular matters;
- advice as to whether draft legislation can be administered and interpreted in accordance with the underlying policy intent; and
- preliminary views (settled by Tax Counsel Network or Centre of Expertise officers) as to how the Commissioner would interpret the draft legislation.77
2.124 Notwithstanding this type of ATO officer involvement in policy and legislation design, the IGT considers that there is room for further ATO improvement. Requiring the ATO to articulate, during the policy and legislation design stages how it would administer the law would avoid many problems with the uncertainty arising from the ATO’s administration of new law. From the ATO’s own experience, it has shown that this approach surfaces many unintended anomalies, impracticalities and consequences before law is enacted.
2.125 The ATO has commented that this approach would be possible if it is a party that is ‘integrated consistently throughout the policy law design process, including consultation with externals’. For example:
during the development of the Minerals Resource Rent Tax legislation where we worked very closely with the Policy Transition Group, we provided guidance on how we would interpret legislation still in development. This required the ATO to resolve technical issues quickly, and anticipate issues that would likely arise once the law was in operation. It is not normal practice for early guidance to be provided before law has been passed by Parliament and it was only possible in this case as the ATO had been integrated consistently throughout the policy law design process, including consultation with external stakeholders. As the new resource rent tax arrangements have significant process and practical issues such as valuations, early guidance fits well with the arrangements. In other cases, the ATO may be limited to providing advice on law as enacted.78
2.126 In this respect, the IGT considers that some of the uncertainty caused by the ATO’s administration of new law would be minimised if the ATO was required to synchronise its advice with the enactment of substantial new laws. This together with the tripartite law design approach, which is described in detail in chapter 5 of this report, should significantly improve certainty for taxpayers.
2.127 In short, this improved consultation processes for developing new law would not only consider substantive issues but will also consider what should appear in the explanatory memorandum, the synchronised ATO advice as well as the legislation itself. In addition, the tripartite tax law design team consisting of paid external tax experts as well as senior ATO and Treasury officials will provide advice on these issues to the Government before the passage of such legislation through the Parliament.
2.128 Where the ATO provides such synchronised advice on enactment, it should also be recognised that the advice may be later varied as new issues and arrangements come to light after enactment. However, any such changes should operate prospectively.
2.129 On a related issue, it has been suggested that synchronising binding ATO advice with the enactment of legislation ignores the role of tax advisers and the law. Such suggestions are viewed from a perspective that the law should set out all the obligations without the need for further explanatory materials.79 However, the complexities of a modern tax administration system require certainty, not only of the tax laws but also, of the administrator’s application of those laws. The current system is founded on confidence in the administrator as a fair and impartial one. If perceptions where to grow that application of uncertain areas of new was arbitrarily directed towards revenue outcomes, this confidence would diminish. Further, the response would lead to an ever-increasing volume and complexity of tax laws to clearly set out in law all the potential applications to potential factual scenarios.
Where the tripartite tax law design teams consider that certain details are more effectively addressed in ATO public binding advice (see recommendation 5.1), the Government should consider requiring the ATO to synchronise its public binding advice with the enactment of substantial new tax law. Whether any particular new tax law requires synchronised ATO public binding advice, and what matters such advice must cover, should be subject of consultation on the development of that law. After enactment of the new laws, the advice should be monitored and where necessary updated with those changes having prospective effect.
Matter for Government.
Tailoring the scope of ATO public rulings to improve timeliness
2.130 Another measure to improve the utility of the public rulings system is to consider the scope of these rulings and the capacity to provide timely interim certainty.
2.131 According to the ATO, public rulings are prepared as part of the risk management process. Until recently, decisions to issue a public ruling were made by the ATO, through its Priority Technical Issues framework,80 and in consultation with stakeholders.81
2.132 However, such an approach may involve significant periods of elapsed time between issues being raised for resolution and the ultimate issue of public binding advice.
2.133 Comprehensive legally binding ATO advice is most desirable. However, where developing such advice would significantly impact on elapsed timeframes, alternatives may be considered separately and in a parallel, so that periods of uncertainty are minimised.
2.134 The IGT considers taxation determinations (which are also a form of public binding advice) offer an opportunity to quickly provide taxpayer certainty on key issues while minimising the imposition on ATO technical resources. Taxation determinations tend to be more sharply focused and so do not require the same investment of ATO resources in their development. Although they do not provide comprehensive binding advice on all issues of concern, they can provide interim binding advice on the issues of most urgency and concern.
2.135 The ATO has also stated that, in practice, taxation determinations were a convenient and useful form in which to provide the ATO’s view on many matters. This was also observed by other scrutineers:
6.78 The Committee noted general support given by taxpayers to the issuance of Determinations as a means of rapidly ascertaining the view of the Commissioner on a particular point. However, the Commissioner was concerned at the possible use of Determinations as substitutes for fully reasoned Rulings. Given the importance of the ATO issuing advice as soon as practicable and balanced with the time taken to properly determine the issues at any given taxation circumstance, the Committee considered the greater dissemination of Determinations was preferable to the provision of no information at all.82
2.136 More recently, a senior ATO officer publicly commented that determinations may be a means to improve timeliness of public rulings on significant issues:
Another issue which I think should be considered is the way in which the ATO publishes its views on important or significant technical issues. For example, is the current public ruling system as effective as it could be? In other words, is it meeting community expectations?
There is room for improvement. Timeliness has long been a problem. Work practice changes are currently being implemented to try to improve timeliness. But I believe other questions also need to be considered.
To what extent should public rulings be more issue-based and shorter in a taxation determination format, rather than the more comprehensive taxation rulings format?83
2.137 Sometimes the approach of first developing broader principles to apply to a range of factual arrangements leads to inordinate delays. This could be due to a number of reasons, such as lack of awareness of the range of applicable factual arrangements. In these circumstances incremental development of principles through analysing the application of the law to particular factual arrangements and publishing those views on a case by case basis would provide a quicker development of the principles in a transparent manner while improving taxpayer certainty at the same time.
The ATO should make more use of determinations by, for example, considering:
- the conversion of significant ATO Interpretative Decisions into determinations periodically; and
- issuing a number of determinations on key factual scenarios as a prelude to developing a public ruling on the broader topic.
Identification and prioritisation of potential topics for rulings and determinations is largely a demand-driven consultative and collaborative process involving representatives from the tax profession, such as the technical sub-committees of the National Tax Liaison Group (NTLG) and the NTLG Public Rulings Steering Committee. Discussion with these groups already includes consideration of the appropriate vehicle for ATO advice or guidance on any given topic. The ATO’s public rulings manual and other instructional guidance also covers conversion of ATO IDs into determinations or rulings, and the use of determinations to cover specific factual scenarios.
The ATO will, however, work with the consultative forums identified above to implement a process to ensure that the forums periodically identify and consider opportunities for the conversion of significant ATO IDs into determinations and identify and prioritise potential determinations on key factual scenarios as a prelude to developing a public ruling on a broader topic.
Improving timely issue identification for the public rulings program
2.138 A further measure to improve the utility of the public rulings system is to expedite the identification of issues for public rulings.
2.139 In identifying issues for public binding advice, not all technical issues currently result in such advice. Any public ruling is subject to the ATO’s internal process, such as the Public Rulings Panel.
2.140 The ATO advises that in informing itself on the issues for the public ruling program it collects data from internal risk assessment processes and compliance activities, and representations received through community and professional forums.84
[P]ublic rulings arise out of our risk mitigation strategies. Risk processes are governed at an ATO level by the Enterprise Risk Management Framework (ERMF). All BSLs [Business and Service Lines] have risk management processes in place consistent with the ERMF (see for example LB&I [the Large Business and International BSL], Indirect Tax, and S&ME [the Small and Medium Enterprises BSL] risk intranet pages). It is generally through these processes that public rulings are internally sourced, including risks escalating out of private rulings work.85
2.141 Where the ATO collaborates with tax professionals through external forums, such as the National Tax Liaison Group (NTLG), this had led to a better assessment of what the priority areas of uncertainty were, as well improving the ATO’s understanding and its capacity to address them effectively. Transforming the way the ATO engages with the tax profession is also seen as important with some senior ATO officers:
Identifying the more significant issues of uncertainty or contention and providing timely views on them continues to be a significant challenge. So what things should the ATO do to continue to get better at this? …
[T]he ATO’s law experts and leaders need to have ongoing engagement with the tax profession about contentious and uncertain issues. During the last year or so, this has started to happen more and more, but I think a wider range of law experts (and not just the senior officers) need to be engaging this way. This type of ongoing open and frank discussions with the accounting and law firms should help to provide a better understanding of contentious issues and areas of uncertainty in the laws, as well as developing a more constructive relationship between the ATO and the profession. It would also enable a greater understanding of each other’s views and perspectives…
[T]he ATO’s involvement at tax conferences and seminars could be enhanced … Open and constructive dialogue on technical issues and the ATO’s strategies and work practices can only be of long term benefit for the tax and superannuation systems.86
2.142 These opinions confirm the IGT’s previous observations that the ATO needs to develop innovative ways to fulfil community expectations of the ATO as a responsive rulings administrator, rather than relying largely on taxpayers and advisers to approach the ATO for advice.
2.143 Such an issue was also discussed in the IGT’s Review into the Implications of any Delayed or Changed ATO Advice on Significant Issues, the so-called ‘u-turns’ review.87 Recommendation 5 of that review required the ATO to be more proactive in identifying areas of compliance concerns by supplementing existing consultative forums with technical issues forums and making better use of ATO and industry knowledge gleaned from the development of relevant legislative provisions.
2.144 The ATO has also used private rulings as a source for public rulings. The ATO has advised that it reviews annually the top five topics on which rulings are requested and published and that:
[the ATO] has identified 65 instances [since 2003] where private rulings have been expressly referenced as a source or driver for, or have otherwise informed, the proposed public ruling. We have included some examples below (the text in italics is drawn from the notification form):
- Leased commercial properties – lead to GSTR 2004/6 …
- Ruling ID 3526 - home loan TD – lead to TD 2012/1 …
- Ruling ID 3568 – mining tax improvements lead to TR 2012/D3 …
- PTI 492 cancellation fees – lead to GSTR 2009/3.88
2.145 Notwithstanding this work, the IGT has also observed in a previous review that opportunities for identifying topics for public binding advice were missed in certain circumstances. In this respect the IGT recommended that the ATO improve its awareness of the topics for private rulings.89
2.146 Another area in which potential public rulings could be sourced are ATO Interpretative Decisions (ATOIDs). ATOIDs do not bind the ATO, however, ATO officers are required to apply the views set out in an ATOID, where applicable. In this sense, they provide an interpretative precedent for ATO officers.
2.147 The IGT also observes that common issues arising from information provided to the ATO through additional disclosures occurring before an assessment is lodged (pre-assessment disclosures) as well as at the time of lodgement (expanded lodgement disclosures) would be a source for informing the ATO’s public rulings program on areas of uncertainty that may require public binding advice.
The ATO should expand the sources, that it uses to identify topics for public binding advice, to include common issues arising in pre-assessment and expanded lodgement disclosures, such as reportable tax position schedules and annual compliance arrangements.
The ATO continues to look for new sources for potential public rulings as they arise — such as those recommended here — and will ensure that these new products and processes are expressly included in relevant ATO staff instructional material.
Rebalancing taxpayer protections
2.148 The above discussion also raises the question whether there should be fundamental changes to aspects of the current advice framework to rebalance the protections for taxpayers.
Protection where there is no ATO advice or ATO guidance
2.149 There will inevitably be situations where ATO advice will not be available. Given the nature and volume of the information that the ATO, as an administrator provides, certain elements will be more relevant in the considering whether protections should be afforded against additional primary tax, penalties and interest.
2.150 Under the existing advice framework, most non-binding guidance will protect taxpayers against penalties and interest where it is incorrect or misleading.90
2.151 Those ATO communications that are not intended to be relied upon will not protect taxpayers from penalties and interest. They are specifically labelled by the ATO as ‘non-binding’:
242. No penalty or interest protection is provided where an ATO publication, or a statement in an ATO publication states that it is not intended to be relied on. Such communications should state that they are not a publication approved in writing by the Commissioner so that readers are not misled.91
2.152 Edited versions of private rulings, technical discussion papers, audit position papers and taxpayer alerts are also considered non-binding and will not protect against penalties and interest.92
2.153 However, in circumstances in which there is no pre-existing ATO advice or ATO guidance, taxpayers may be required to accept a risk of incorrectly self assessing tax liabilities. This may be the case where commercial imperatives prevent an extended period of time for taxpayer to allocate that risk to the Government via a private ruling.
2.154 Where ATO advice or ATO guidance is delayed or otherwise unavailable in relation to areas of significant uncertainty, this fact should be taken into account when administering penalties and interest charges to self assessing taxpayers. In this way, some of the impacts of uncertainty would be mitigated. In this respect the ATO’s MT 2008/1 states that the complexity of the law and whether the relevant law is a new measure are matters to consider in determining the standard of care that is reasonable and appropriate in the circumstances.93
2.155 Where concession on interest and penalties is offered, there is need for some assurance that a genuine attempt is made to apply the law to the taxpayer’s situation to ensure that taxpayers have an incentive to self assess accurately. In the IGT’s view, where no ATO advice or ATO guidance exists in these circumstances, penalties and interest should not apply where taxpayers have taken reasonable care in applying the law. Such a position would also provide an incentive for the ATO to quickly provide guidance to taxpayers. Consequently, the IGT also considers that the ATO will need to rationalise its advice and guidance products.
- The Government should consider introducing legislation to ensure that penalties and interest do not apply where:
- there is no public ATO advice (binding or non-binding) available on a substantial issue; and
- the taxpayer took reasonable care (as defined in recommendation 4.2) in assessing their liability in relation to that issue.
- If the Government were to introduce such legislation, the ATO should rationalise its advice and guidance products into three categories:
Category 1- protection from additional primary tax, interest and penalties;
Category 2- protection from interest and penalties; or
Category 3- protection from penalties.
Matter for Government.
Other improvements to the existing advice framework
2.156 Submissions also raised a number of specific issues in relation to recommendations that had been made in previous IGT reviews, such as those aimed at minimising the costs and delays in private rulings. These matters, amongst others, will be considered in the course of the relevant IGT’s follow up reviews in future.94
2.157 However, the following issues fall outside of the scope of these follow up reviews and are addressed below:
- the extent of the binding nature of TaxPack and the electronic return form preparation and lodgement package, e-tax;
- timeliness and transparency of decision impact statements;
- communicating changes to certain ATO guidance.
TaxPack and e-tax
2.158 The extent of the binding nature of TaxPack and e-tax is an important concern.95
2.159 Previously, the ROSA review considered a number of non-ruling products, such as TaxPack, were entitled to receive the same protection as public rulings:
The Tax Office produces a number of non-ruling products in which the public, especially those preparing their own returns, should be entitled to have a high level of confidence, such as TaxPack. The Review has concluded that, even if these products are not suitable for inclusion in the formal public rulings series, some of them should have the same protection as public rulings for self-preparer taxpayers. However, it would be extremely expensive and difficult for the Tax Office to attempt, in the short term, to review all its publications to determine whether they should be binding. The Review therefore concludes that this power should be confined to non-business individual self-preparers and used as existing premier products are updated.
The Commissioner should be empowered to declare that advice provided for the general information of non-business individual self-preparers (for example, TaxPack) is legally binding upon the Tax Office.96
2.160 However, the IGT’s 2009 Review of the Tax Office’s administration of public binding advice97 found that the ATO had not made significant parts of TaxPack or e-tax legally binding. The IGT notes that this position remains today.
2.161 In 2009, the ATO rewrote TaxPack to remove what it considered to be unnecessary guidance. Research conducted in that year indicated that TaxPack 2009 was operating at a high level of efficacy, with 88 per cent of users saying it was easy to use and 65 per cent (71 per cent of non-retirees) said the language was easy to understand.98 Only 15 per cent said that there was room to improve the wording. Importantly, the research identified retirees (60+ years old) as the group with most difficulties in understanding language and ease of use.
2.162 However, the demand for TaxPack has decreased recently, mainly due to a preference for e-tax. In 2010, 770,000 of the 3.1 million (approximately one-quarter) taxpayers that prepared their own tax returns (self preparers) used TaxPack. The remaining individual taxpayers used e-tax.99 The ATO has also observed that self-preparers are making greater use of e-tax each year, from approximately 1.5 million e-tax lodgements in 2006 to 2.5 million in 2010.100 There are also indications that significant numbers of individual taxpayers have stopped using tax agents for tax return lodgement and are using e-tax instead.101
2.163 Research conducted in 2011 into the motivations of remaining TaxPack users revealed 41 per cent were unable to lodge tax returns online (46 per cent of this group are 60+ years old) because they had no internet access or lacked computer literacy.102 A further 30 per cent were able to lodge online but were unwilling to do so because of security concerns and lack of familiarity with the electronic lodgement methods.
2.164 The ATO advised that from 2011–12 it will produce TaxPack as a very short and simple set of instructions with only that information essential to completing the return form:
to provide taxpayers with only information essential to completing the tax return, focussing on the circumstances of the majority, while making further detailed information available on the website.103
2.165 The ATO advises that in addition to changing TaxPack, it will develop strategies to encourage unwilling online tax return lodgers to use online lodgement and ensure those who cannot are adequately supported.104 During the finalisation of the report, the ATO advised that the support mechanisms include additional call centre resources (to print and mail the more detailed web based content if required), support in ATO shopfronts and the Tax Help program.105 The ATO will also focus its efforts on increasing the usage of e-tax and developing a web-based tax return guide that can deliver more complex instructional content.106
2.166 In relation to individuals’ income tax return preparation, the ATO is positioning itself for a generational shift in engagement and communication. However, the IGT notes that for those taxpayers unable to lodge electronically, the ATO should support them in a manner that ensures they are able to obtain certainty with minimal additional compliance costs. In any event and regardless of the form of tax return preparation, taxpayer certainty should be preserved through robust protections.
2.167 In relation to TaxPack, the Commissioner has sought to reduce the scope of the document to a set of instructions to fill in the return form. Although, there is an intention to develop strategies to support those taxpayers unable to use electronic based systems, in the IGT’s view, the ATO should not reduce the scope of TaxPack and such reduction should not be even considered until after these strategies are successfully implemented.
2.168 As set out above, the ROSA report recommended that the ATO should be able to declare general information for non-business individual self preparers as legally binding on the ATO.107 The intention of the laws introducing the current advice framework, amongst others, were to make:
advice in the form of rulings by the Commissioner available to many taxpayers on a wide range of matters.108
2.169 However, the ATO has not stated that it will increase the scope and level of protection of TaxPack or e-tax, notwithstanding the law’s ability to cover such publications. In fact, since 2009, the ATO has indicated that it would reduce the scope and level of protection of TaxPack. The reasons for this are said to be that the ATO has received feedback from individuals that TaxPack was written in complicated legal terms and, if the ATO considered itself bound by TaxPack, that it needed to do so to prevent exploitation.109 However, the IGT is not aware of any evidence that such exploitation has happened in relation to TaxPack. It is also doubtful that individuals would agree that the TaxPack should be simpler if they knew they were not protected from the adverse consequences of relying on the document. Such feedback on TaxPack’s terminology should be considered in light of the limited understanding that the general public are likely to have of the self assessment system.110
2.170 There is no legal impediment for the ATO to declare these publications as public rulings and provide certainty to taxpayers. The ROSA recommendations allow some errors to stand and the community bear that cost.111 TaxPack and e-tax has high levels of ATO clearance and the risk of any discovered error is confined to non-business self-preparers. Therefore, any ATO errors would likely be minimal.
2.171 Notwithstanding the reasons for the reluctance to issue more legally binding advice, the ATO has not acted to do so. A major impediment appears to be the ATO’s perception that legally binding advice cannot be given in a simple and practical manner.112
2.172 In the IGT’s view, it is difficult to accept that taxpayers would prefer simpler guidance even if they knew that the ATO’s guidance could not be relied upon to protect them against primary tax and, in some cases, penalties and interest. It is not the fact that advice is non-binding that makes it useful, rather the fact that it is clear and simply expressed. Further, were binding public advice clearly and simply expressed, taxpayers would likely consider that binding advice of most use.
2.173 In this respect, the ATO has not acted to achieve the objectives of Treasury’s ROSA review.
The ATO should re-instate TaxPack to its former scope and declare as public rulings the entire contents of TaxPack, e-tax and web-based individual income tax return lodgement systems.
We believe that within the context of the self-assessment system the current advice and guidance framework strikes the right balance between appropriate levels of guidance for all taxpayers and appropriately graduated levels of protection.
We are concerned that shifting tools and calculators to higher categories of protection would require introducing more detailed and legalistic content. Our feedback is that taxpayers that use these products prefer more straightforward guidance on what they need to do in their circumstances rather than more detailed legal explanations required for higher protection levels such as in rulings.
We disagree that TaxPack should be reinstated and given public ruling status. Since e-tax was launched in 1999 lodgment of paper individual tax returns has declined steadily and now represents only 6.5 per cent of all individual tax returns lodged. Due to falling demand, TaxPack was replaced this year with Individual Tax Return Instructions 2012, following extensive consultation with the community. Feedback to date indicates that this change has been well received.
We will review these arrangements at the end of the lodgment season, however, we believe it is unlikely to reveal community demand for the reinstatement of TaxPack.
Decision Impact Statements
2.174 Stakeholders also raised aspects of Decision Impact Statements (DIS) as a matter of concern in submissions.
2.175 The ATO’s DIS’s communicate the ATO’s view on the implications of particular court or tribunal decisions for the ATO.113
2.176 The ATO adopted the DIS as the result of a number of recommendations in the IGT’s Review of Tax Office Management of Part IVC litigation. In particular, the IGT recommended that:
Following a court or tribunal decision, the Tax Office should promptly make taxpayers aware that the Tax Office’s view expressed in a public ruling, determination or interpretative decision may be impacted and that it is under review. It should include identifying the paragraphs that are potentially affected and provide guidance to taxpayers on how they should apply the law until the public ruling, determination or interpretative decision is formally amended or withdrawn.114
2.177 Submissions to this review indicated three aspects for improvement in relation to DIS’s. These aspects are discussed below.
Prompt publication of the DIS
2.178 Where DIS’s are produced promptly, they are more effective in giving taxpayers advance indication of where existing ATO views will be subject to change in the future. This signals to them that the area is uncertain and allows them to make decisions to allocate their risk accordingly, for example, those decisions involved in preparing tax notices and BAS in circumstances involving pressing deadlines.
2.179 In the abovementioned IGT review, the IGT observed that immediately following a decision being handed down in a litigated matter, the ATO’s procedures required a consideration of the implications of the decision and whether the matter should be appealed. The ATO’s finalised Adverse Decision Reports are the corporate record of that process and are maintained on the ATO’s intranet. These reports record the significance and consequences of technical issues, including any impact on any published ATO view. They are made available to other staff involved in litigation. As a result, the IGT recommended that DIS’s be produced within eight weeks of the date of the final decision.115
2.180 However, notwithstanding internal ATO requirements for DIS’s to be published within eight weeks,116 there have been significant delays. Over 90 per cent of DIS’s produced from 1 July 2008 to 13 January 2012 were published after 8 weeks of the decision being handed down.
|Period in which DIS is published (from date of decision)||Numbers of Decision Impact Statements||Percentage of Decision Impact Statement|
|Within 8 weeks||11||8|
|Between 8 weeks and 6 months||25||19|
|Between 6 and 12 months||82||63|
|More than 1 year||13||10|
2.181 The ATO advises that a considerable number of DIS’s were delayed due to consultation. This may be so, however, of the 120 DIS’s being issued after 8 weeks of the decision, in only four cases was an interim DIS issued.
2.182 Notwithstanding these numbers, the ATO has reduced the timeframes for issuing DIS’s over the last three years. The ATO advises that:
[e]xcluding the 12 DIS which were published later than 52 weeks after the matter was finalised (and significantly skew averages), the ATO has reduced the average number of days beyond the 8 week timeframe to publish a DIS as follows:
- 2009/10 = 80.9 [days beyond the 8 week timeframe]
- 2010/11 = 67.10 [days beyond the 8 week timeframe]
- 2011/12 = 40.15 [days beyond the 8 week timeframe].117
2.183 In the IGT’s view, where a DIS is released and the resulting changes to the ATO view are made promptly, the impacts of continuing uncertainty are greatly reduced. Prompt action appropriately recognises the commercial imperatives and timeframes for business and taxpayer decisions that have tax implications (for example, matters regarding trust distributions). Delays can also give rise to difficulties with the ATO’s conduct of litigation.118
2.184 Given that considerable technical analysis is conducted immediately after a decision is handed down, eight weeks is an appropriate balance between providing taxpayers with a degree of certainty and ATO consideration on which ATO views may be affected by adverse court and tribunal decisions. The ATO should improve its governance processes to publish all DIS’s within this time period.
Communicating changes to the ATO’s view clearly
2.185 DIS’s are most beneficial where they focus on explaining which areas of the ATO’s view would change as a result of an adverse court or tribunal decision. This gives taxpayers an indication of where current ATO views would not be applied in future. Where DIS’s elaborate on issues beyond these ATO views affected by the decision, they were considered to be less useful.
2.186 Some submissions suggested that understanding the ATO’s position would be improved if the ATO were to publish its submissions made to the Administrative Appeals Tribunal or Federal Court upon the decision being handed down. It was felt that these documents would give taxpayers a valuable insight into the ATO’s arguments as they were put to Court. They would also be relatively easy to reproduce on their own, as opposed to incorporating the arguments into an enhanced DIS. However, the ATO advises that were it to publish submissions, there is a danger that confidential information might be disclosed.
2.187 It should be noted that the Federal Court can allow parties who were not part of the litigation proceedings access to certain documents. If there is no order that a transcript be made confidential, a person may obtain a copy of the transcript in a proceeding from the Court’s transcript provider.119 However, it does not provide access to submissions made to the Court itself.
2.188 In the IGT’s view, the ATO should ensure that DIS’s clearly communicate those parts of the ATO’s view (for example, the paragraphs in the relevant public rulings, etc.) that are being reconsidered as a result of the adverse decision.
Perception of unduly limiting the impact of adverse decisions
2.189 It is important that the ATO strive to objectively communicate the implications of adverse decisions. Where taxpayers perceive an absence of objectivity, their confidence in the administrator is eroded. Such perceptions appear to be validated where adverse decisions are considered to be confined to the particular facts of that taxpayer’s case, whereas the decisions in successful cases are considered to apply to taxpayers more broadly.
2.190 The IGT previously examined this issue in the Review of Tax Office Management of Part IVC litigation and found the underlying reasons were perceptions of selective use of precedent, secrecy as to the implications of adverse decisions and the ATO not fully explaining the impact of these decisions on ATO policy.120 The IGT recommended that the ATO take action to address these perceptions by introducing a standard communication product (the DIS) as a means to address these perceptions.121 In the IGT’s follow up review, the IGT agreed that the recommendation had been implemented as he found the DIS was well received by the community and taxpayers were given an opportunity to provide feedback within eight weeks of publishing the DIS.122
2.191 However, during the current review, some submissions reiterated the original concerns above. They stated that recent DIS’s show that adverse decisions were slightly more likely to be represented as confined to their facts than favourable decisions. Additionally, they argued that if:
- the ATO applied its view in a particular case,
- that case was litigated and the outcome was adverse to the ATO (an adverse decision), and
- the relevant DIS stated that the judicial decision was open on its facts, however, there was no change to the ATO view to accommodate the adverse decision,
the ATO should either explain what facts distinguish that case from the application of the ATO view or amend the ATO view to indicate the type of facts that will lead to a contrary outcome. They argue that to not do so would mean that the ATO’s view ignores the applicability of the Court decision.
2.192 The IGT considers that further transparency would assist to minimise adverse perceptions in this respect. For example, the ATO could more clearly explain the material facts that distinguish the application of its view. Transparency would also be improved by the ATO publishing its views of issues raised in feedback on the DIS (in a similar way that it publishes a compendium to feedback received on draft public rulings). However, there are a number of difficulties in implementing such an approach without ensuring the detail of such changes are the subject of detailed consultation with DIS users.
The ATO should consult with taxpayers, tax practitioners and their representative bodies on ways to improve its Decision Impact Statements (DIS’s). Such consultation should consider:
- communicating those parts of the ATO’s view (for example, the paragraphs in the relevant public rulings, etc.) that are being reviewed as a result of the adverse decision;
- improving the timeliness of DIS’s, including issuing a draft DIS particularly where a final DIS is likely to be delayed beyond the 8 week timeframe; and
- improving transparency of the ATO’s DIS’s by:
- explaining the material facts that distinguish the application of the ATO view for those unfavourable decisions that do not lead to a change in ATO view; and
- publishing a compendium of feedback in the DIS’s, and its consideration of the issues raised in that feedback.
Decision Impact Statements were established by the ATO following an earlier IGT recommendation in April 2006 (Key Recommendation 6 of the Review of Tax Office Management of Part IVC Litigation), and so it is timely for us to review these products with the community to ensure they continue to be fit for purpose, including identification of opportunities for improvement as suggested by this recommendation. The ATO has a number of existing consultative forums – particularly the Dispute Resolution Sub-committee of the National Tax Liaison Group (NTLG) – which we will use to consult on potential improvements to our Decision Impact Statements.
Better communication on changes to non-binding information
2.193 As discussed above, taxpayers may consult relevant ATO guidance in seeking to minimise their risks when self assessing in an areas of uncertainty.
2.194 Where this non-binding information was withdrawn or changed, stakeholders noted that it would be useful to know the ATO’s reasoning behind this, particularly whether the ATO’s view was changing, or whether it was being reconsidered. The ATO advises that it provides reasoning for changes or withdrawal in relation to certain types of ATO precedential documents, such as rulings and practice statements. The IGT considers that such an approach should be adopted for all precedential ATO documents to improve certainty for taxpayers.
The ATO should communicate the reason for withdrawing or changing any precedential documents which convey its approach to the law.
The ATO agrees that it is important to provide an explanation for withdrawal or changes to precedential documents which convey the ATO's approach to the law, and, as the Inspector-General has noted, we already do this for most types of precedential documents. The ATO will revise instructions (PS LA 2008/12 Public advice and guidance products: selection, development, publication and review processes) to ensure staff provide an explanation for withdrawal or changes for all precedential documents, including precedential fact sheets and guides.
2 Peter White and Michael Walpole, ‘Tax Forum: Manoeuvring the Maze — Self Assessment Post ROSA’ (Paper presented at the Taxation Institute of Australia NSW Division, Sydney, 25 May 2007) p 4.
3 David R Vos and Tasos Mihail, ‘The Importance of Certainty and Fairness in a Self-Assessing Environment’ (Speech delivered at the 7th International Tax Administration Conference, Coogee, 20–21 April 2006).
4 Ern Chen Loo, Margaret McKerchar and Ann Hansford, ‘An International Comparative Analysis of Self Assessment: What Lessons are there for Tax Administrators?’ (2005) 20(4) Australian Tax Forum 669, p 696.
5 Provisions do exist in the Taxation Administration Act 1953 to require the Commissioner to provide certain specific kinds of ATO advice in certain circumstances, such as those provisions relating to private rulings and oral rulings.
6 See for example, Australia’s Future Tax System (Ken Henry, chairperson), The Treasury (Cth), Final Report , (2009) Part 2 vol 2 p 649; Michael D’Ascenzo, ‘Self Assessment: Priority Tasks (Speech delivered at the Joint Seminar of ATO/Institute of Chartered Accountants and Society of CPAs (ACT Division), 17 September 1991); see also, Joint Committee of Public Accounts and Audit, Report 410 — Tax Administration (2008) pp 98–99.
7 Australia’s Future Tax System, above n 6, part 2 vol 2 p 652.
8 The Treasury, above n 1, p 23.
9 Australian Taxation Office, Taxpayers’ Charter — What You Need to Know (2010) pp 1, 9.
12 Australian Taxation Office, Making a Difference - The Intent Behind our Strategic statement 2010-15 (2010) p 6.
13 Australian Taxation Office, Taxpayers’ Charter - Helping You to Get Things Righ t (30 June 2010).
14 Australian Taxation Office, Taxation Treatment of Expenditure on Low Cost Items for Taxpayers Carrying On a Business, PS LA 2008/3, 22 December 2011, para .
15 See Michael Dirkis and Brett Bondfield, ‘ROSA’s Last Gasp: The Final Steps in Self Assessment’s 21 Year Journey?’ (2008) 3(2) Journal of the Australasian Tax Teachers' Association 202, p 204; Bellinz Pty Ltd v FCT (1998) 39 ATR 198.
16 Australian Taxation Office, above n 14.
17 Ibid paras –.
18 Explanatory Memorandum, House of Representatives, Tax Law Amendments (Improvements to Self Assessment) Bill (No. 2) 2005, p 38.
19 Australian Taxation Office, Commissioner of Taxation: Annual Report 2010–11 (2011) p 78.
21 See for example, Kevin Fitzpatrick, ‘A Long Innings — Valedictory Address by Kevin Fitzpatrick’ (2012) 46(9) Taxation in Australia 394.
22 Vos and Mihail, above n 3.
23 Jennifer Batrouney, ‘The Commissioner’s Role in Interpreting Tax Law and Emerging Issues for Advisers’ (Paper presented at the 46th Victorian State Convention: Feast of Delicacies, Lorne, 11–13 October 2007) p 14.
24 Inspector-General of Taxation, Review into the Implications of Any Delayed or Changed ATO Advice on Significant Issues (2010); Inspector-General of Taxation, Review of the Potential Revenue Bias in Private Binding Rulings Involving Large Complex Matters (2008).
25 Joint Committee of Public Accounts and Audit, above n 6, p 97.
26 Australia’s Future Tax System, above n 6, Part 2, vol 2, recommendation 114.
27 See for example, See for example, Joint Committee of Public Accounts, Report No 326 — An Assessment of Tax — A Report on an Inquiry into the Australian Taxation Office, Canberra, 1993, p 104; Australia’s Future Tax System, above n 6, Part 2 vol 2 p 659.
28 Review of Business Taxation (J T Ralph, Chairperson), The Treasury (Cth), A Tax System Redesigned: More Certain, Equitable and Certain (AGPS, 1999) p 95 Recommendation 3.6; Australia’s Future Tax System, above n 6, Part 2 vol 2 p 659; Note also, no mention was made of this proposal in The Treasury, above n 1.
29 Review of Business Taxation, above n 28, p 145.
30 Australia’s Future Tax System, above n 6, Part 2 vol 2 Recommendation 112.
31 Inspector-General of Taxation, Implications of Delayed or Changed ATO Advice, above n 24; Inspector-General of Taxation, Potential Revenue Bias in Private Binding Rulings, above n 24.
32 Joint Committee of Public Accounts and Audit, above n 6, p 97.
33 Loo, McKerchar and Hansford, above n 4, p 696; P Niemirowski, S Baldwin and A Wearing, ‘Thirty Years of Tax Compliance Research: Of What Value is it to the ATO’ in Michael Walpole and Chris Evans (eds), Tax Administration in the 21st Century (Prospect Media, 2001) pp 199-213.
34 Centre for Tax Policy and Administration, Organisation for Economic Co-operation and Development (OECD), Tax Administration in OECD and Selected Non-OECD Countries: Comparative Information Series (2010) (2011) p 188. A complete table of available data is contained in the report at pp 188–189.
36 Australian Taxation Office, above n 19, p 79.
37 Inspector-General of Taxation, Implications of Delayed or Changed ATO Advice, above n 24.
38 For example Australian Taxation Office, above n 14, para ; see also Bruce Quigley, ‘We Can See Clearly Now: Growing Transparency with Large Businesses’ (Speech delivered at the Corporate Tax Association Convention, Melbourne, 7 June 2011.
39 Inspector-General of Taxation, Potential Revenue Bias in Private Binding Rulings, above n 24, Recommendation 4; Inspector-General of Taxation, Review of Aspects of the Australian Taxation Office’s Administration of Private Binding Rulings (2010) Recommendation 3.
40 Taxation Administration Act 1953 sch 1 s 357-110(2).
41 Taxation Administration Act 1953 sch 1 s 357-105.
42 Australian Taxation Office, Written Binding Advice (Private) - Requests for Further Information, Notification of Assumptions and Intended use of Information from Sources Other than the Applicant, PS LA 2008/5, 2010.
43 Australian Taxation Office, ‘Online Resource Centre for Law Administration: Making Assumptions in Division 359 – Private Rulings’, 25 June 2012.
44 See the ATO’s replacement of Australian Taxation Office, Taxation Treatment of Expenditure on Low Cost Items for Taxpayers Carrying on a Business, PS LA 2003/8, 2007 with Australian Taxation Office, Management of High Risk Technical Issues and Engagement of Tax Technical Officers in Law and Practice, PS LA 2012/1, 2012 on 10 April 2012.
46 See for example: Inspector-General of Taxation, New IGT Work Program 2011-12 (4 April 2011); Inspector-General of Taxation, Annual Report 2009-10, 2010, pp 11-12; Inspector-General of Taxation, Delayed or Changed Australian Taxation Office Views, above n 24, pp 42-43.
47 The Treasury, above n 1, p 23.
49 Joint Committee of Public Accounts, Report 326: An Assessment of Tax (1993) p 270.
50 Australian Taxation Office, Communication to the Inspector-General of Taxation, 12 December 2011.
51 For example, Australian Taxation Office, above n 14, para .
52 See for example, the ATO's response to tax practitioner calls for a public ruling in relation to guarantee fees and transfer pricing: Transfer Pricing Sub-Committee, Meeting Minutes 1 December 2005, NTLG (1 December 2005) Item 5.
53 Australian Taxation Office, Communication to the Inspector-General of Taxation, 22 December 2011.
54 Australian Taxation Office, Communication to the Inspector-General of Taxation, 15 December 2011.
55 Australian Taxation Office, Communication to the Inspector-General of Taxation, 27 March 2009 in Inspector-General of Taxation, Review of the Tax Office’s Administration of Public Binding Advice, 2009, p 55.
56 Australian Taxation Office, above n 19, pp 76–77.
57 Ibid 77.
58 Australian Taxation Office, Communication to the Inspector-General of Taxation, 22 December 2011.
59 Australian Taxation Office, Communication to the Inspector-General of Taxation, 15 December 2011.
61 Inspector-General of Taxation, Review into Delayed or Changed Australian Taxation Office Views on Significant Issues, Sydney, 2010, p 62 Issue number 21, referring to Deputy Commissioner, Australian Taxation Office, ‘Is the Tax Office Widening its Crackdown on Lawyers and Accountants?’ (Speech delivered at the presentation to the Tax Institute of Australia, Canberra, 31 March 2009).
64 The Treasury, above n 1, p. 3–4.
65 Ibid p 9.
66 Ibid Foreword p i.
67 The Treasury, above n 1, p 14.
68 Inspector-General of Taxation, above n 55.
69 Other issues were also raised in that review, such as the ATO’s approach to ‘general administrative practice’. These have been considered in other IGT reviews, such as the so-called ‘u-turns’ review.
70 Inspector-General of Taxation, above n 55, p 9.
71 Ibid pp 9–11.
72 Australian Taxation Office, Communication to the Inspector-General of Taxation, 27 March 2009 in Inspector-General of Taxation, above n 55, p 55.
73 The Treasury, above n 63, p 26.
74 Board of Taxation, Review of the Legal Framework for the Administration of the Goods and Services Tax (2008) Recommendation 17.
75 Michael D’Ascenzo, ‘Taxation Law Design’ (2002) 5(1) Journal of Australian Taxation 34, pp 40–41.
76 Australian Taxation Office, Practice Statement Law Administration PS LA 3473 (Draft) (13 May 2011).
77 Ibid paras [13–18].
78 Jennie Granger, ‘ATO Law Expertise: Evolution or Revolution?’ (Speech delivered at the 24th Australasian Tax Teachers Association Conference, University of Sydney, 17 January 2012).
79 D’Ascenzo, above n 75, pp 41–43.
80 See Australian Taxation Office, PS LA 2003/8, above n 45, now withdrawn and replaced by Australian Taxation Office, PS LA 2012/1, above n 45.
82 Joint Committee of Public Accounts, above n 27, p 116.
83 Fitzpatrick, above n 21.
84 Australian Taxation Office, above n 81.
85 Australian Taxation Office, Communication to the Inspector-General of Taxation, 28 June 2012.
86 Fitzpatrick, above n 21.
87 Inspector-General of Taxation, Implications of Delayed or Changed ATO Advice, above n 24.
88 Australian Taxation Office, Communication to the Inspector-General of Taxation, 28 June 2012.
89 Inspector-General of Taxation, Administration of Public Binding Rulings, above n 39, p 5.
90 Australian Taxation Office, above n 14, paras –.
92 Australian Taxation Office, above n 14, paras , , .
93 Australian Taxation Office, Penalty Relating to Statements: Meaning of Reasonable Care, Recklessness and Intentional Disregard, MT 2008/1, 11 July 2012, para .
94 See Inspector-General of Taxation, Work Program, above n 46.
95 See, for example, Ann O’Connell, ‘The ATO and the Giving of Advice’ (Paper presented at the Centre for Tax Law Workshop, 12 July 2011).
96 The Treasury, above n 1, p 11.
97 Inspector-General of Taxation, above n 55.
98 Roy Morgan Research, Australian Taxation Office, Review of TaxPack 2009 Research (2009) pp 2–5.
99 Australian Taxation Office, Tax Return Guide Project: Concept Brief, 20 November 2011, p 5.
100 Australian Taxation Office, Tax Return Guide Project: Presentation, 16 December 2011, p 1.
101 Australian Taxation Office, above n 19, p 5.
102 Inside Story, Australian Taxation Office, Understanding Paper Lodgers 2011: Final Marketing Research Report, (2011) p 3.
103 Australian Taxation Office, above n 100, p 1.
104 Australian Taxation Office, above n 99.
105 Australian Taxation Office, Communication to the Inspector-General of Taxation, 7 August 2012.
106 Australian Taxation Office, Communication to the Inspector-General of Taxation, 14 March 2012.
107 The Treasury, above n 1, Recommendation 2.3.
108 Explanatory Memorandum, House of Representatives, Tax Laws Amendment (Improvements to Self Assessment) Bill (No 2) 2005, Ch 4.
109 See for example, Commonwealth, Parliamentary Debates, Joint Committee of Public Accounts and Audit, 23 October 2009, pp 14–17.
110 See for example, Commonwealth Ombudsman, The ATO and Main Camp: Report of the Investigation into the Australian Taxation Office’s Handling of Claims for Tax Deductions by Investors in a Mass Marketed Tax Effective Scheme Called Main Camp (2001) pp 12–13.
111 See The Treasury, above n 1, p 9.
112 Australian Taxation Office, Communication to the Inspector-General of Taxation, 27 March 2009 in Inspector-General of Taxation, above n 55, p 55.
114 Inspector-General of Taxation, Review of Tax Office Management of Part IVC Litigation (2006), also subsidiary recommendations 7.5–7.7.
115 Ibid pp 143–144, subsidiary recommendation 7.3.
116 Australian Taxation Office, ‘Online Resource Centre for Law Administration: Review of, or Appeal Against an Objection Decision — Decision Impact Statements’.
117 Australian Taxation Office, Communication to the Inspector-General of Taxation, 15 February 2012.
118 See for example, in Howard v Commissioner of Taxation (No 3)  FCA 352 Jessup J rejected suggestions that delays in issuing a DIS with respect to the judgment in Colonial First State Investments Ltd v Commissioner of Taxation  FCA 16 justified the ATO’s omission to develop the relevant points in the submissions made at trial.
120 Inspector-General of Taxation, above n 114, p 152.
121 Ibid p 153, key recommendation 6.
122 Inspector-General of Taxation, Follow Up Review into the Tax Office’s Implementation of Agreed Recommendations Included in the Six Reports Prepared by the Inspector-General of Taxation between August 2003 and June 2006, Sydney, 2007, pp 20–22.