2.1 This chapter begins by summarising the Inspector-General's key findings and observations, which are discussed in more detail in Chapter 5. This chapter concludes by setting out the Inspector-General's recommendations.

No evidence of undue revenue bias

2.2 Almost all representations to the Inspector-General acknowledged that there is an inherent revenue bias in the PBR system. The Tax Office has a dual role as impartial rulings administrator and a revenue collector. On this basis it appears that the large business community expects that a tax administrator will have some revenue bias in its rulings system where matters are finely balanced. This is especially so in relation to complex matters. Most, however, did not consider this inherent bias undue. The Tax Office did not agree that there is an inherent bias in the PBR system but did accept that its dual role as collector and administrator can lead to perceptions of revenue bias.

2.3 No submissions to the review brought forward examples of undue revenue bias. Examples that stakeholders reasonably considered to show undue bias were, on examination, the product of interpretations that best promoted the 'policy intent' of the law, as the Tax Office understands it.1

2.4 In examining the random sample of cases, the Inspector-General did not attempt to review the Tax Office's interpretation of the law. Rather, the Inspector-General considered whether Tax Office processes and records of internal thinking that led to the PBR surfaced any evidence of an intention to impose more revenue than was open on a purposive interpretation of the law, as the Tax Office understands it. The sample did not exhibit evidence of such intentions.

2.5 Based on a survey of representative large corporate PBR applicants' views, submissions to the review, the proportion of favourable PBRs given, the pattern of external review of the Tax Office's PBR objection decisions, and review of a random sample of Tax Office files undertaken by the staff of the Inspector-General, this review has found no evidence of undue revenue bias.

Insufficient Tax Office transparency and communication leads taxpayers to conclude that certain Tax Office behaviours are motivated by a pro-revenue bias

2.6 Based on a survey of representative large corporate PBR applicants' views, the perceptions of undue revenue bias were widespread among large corporate internal and external tax advisers — almost 72 per cent of survey participants having these perceptions. These perceptions were based on their interpretation of observed Tax Office behaviours and taxpayer expectations.

2.7 Observed Tax Office behaviours include sometimes taking a strained interpretation of the law, a reluctance to tell applicants that it is discussing with Treasury its concerns over the implications of its view, delays, refusals to rule, requests for applicants to withdraw and conduct generally construed by taxpayers as hindering their rights to obtain and/or challenge Tax Office views.

2.8 However, an examination of Tax Office files (unseen by taxpayers) showed that these Tax Office behaviours were not motivated by a revenue bias. Also, while Tax Office behaviours generated the perceptions of revenue bias, they were not the underlying cause.

2.9 The major underlying causes for PBR applicant perceptions of revenue bias were insufficient transparency and communication by the Tax Office, leaving taxpayers reasonable grounds to conclude that the behaviours were motivated by a pro-revenue bias. A lack of transparency in disclosing the full circumstances and the reasons for Tax Office behaviours leave taxpayers nothing to go on but their own interpretation of what may be happening and what Tax Office behaviours mean.

2.10 The Inspector-General considers that it is generally inappropriate for the Tax Office to engage in certain behaviours — such as asking applicants to withdraw their PBR application — regardless of its motivations and especially in the absence of a full explanation of the circumstances. It is also inappropriate to unduly delay issuing a PBR because the Tax Office is awaiting the resolution of informal or formal dialogue with Treasury. Tax Office implementation of the Inspector-General's recommendations for improving transparency and timeliness should result in a discontinuation of these practices and the other inappropriate behaviours referred to in Chapter 5.

The Tax Office has made substantial improvements since 2005, however, strong perceptions of an undue revenue bias remain

2.11 The Tax Office has made changes to increase transparency and reduce timeframes in its management of the large business PBR process — for example, the Tax Office says:

  • it developed the Large business and tax compliance booklet, with significant input from the Corporate Tax Association, incorporating key themes of client engagement and timeliness, such as ensuring the early engagement of technical specialists where necessary to resolve complex technical issues, completing case work in the shortest time practicable with minimum inconvenience and disruption to taxpayers and acting in a professional and courteous manner, demonstrating integrity, fairness and impartiality at all times;
  • in relation to its performance on PBRs, it has received positive feedback on its improvements to the PBR system from the top 100 company groups (as part of its client visits programme in which all aspects of its relationship are discussed with senior tax officials), a range of consultative forums and PBR recipients participating in feedback questionnaires;
  • it has dedicated advice teams working on PBRs, has cross-fertilised learnings from the positively received Priority PBR process to other PBR work, and has increased senior management focus on monitoring aged case management with one of its senior executives having a specific focus on advice products (including PBRs); and
  • it has reduced elapsed timeframes for large business PBRs to an average of 92 days in 2005-06 (just under 65 per cent being completed within 90 days) and 74 days in 2006-07 (just under 70 per cent being completed in 90 days).

2.12 However, recent representations to the Inspector-General from a number of sources demonstrate that perceptions of a pro-revenue bias continue to be strongly held — see for example the Minutes of the National Tax Liaison Group's 28 June 2007 meeting.

A strained Tax Office interpretation of the law is perceived to be motivated by a pro-revenue bias, but the Tax Office genuinely strives to interpret the law to support the 'policy intent', as it understands it

2.13 In some matters, taxpayers have said that the Tax Office adopted an 'overly legalistic' or a strained interpretation of the law when an alternative construction was more congruent with the text of the legislative provisions and its publicly available extrinsic materials. In these circumstances, taxpayers perceive that the motivating factor for these strained interpretations is a pro-revenue bias.

2.14 On the basis of the Inspector-General's review of case files and communications with Treasury, the Tax Office genuinely strives to provide an interpretation which supports the 'policy intent' of the law, as it understands it. This approach is consistent with the purposive approach to statutory interpretation and is not, of itself, a revenue bias. However, the Tax Office should clearly distinguish interpretations derived from the accepted rules of statutory interpretation and interpretations settled with reference to those extrinsic materials not permissible according to the accepted rules of statutory interpretation. Otherwise the Tax Office's assessment of legal risk of its views being upheld by the courts, and the taxpayer's ability to appraise their chance of success in a legal challenge will be significantly impaired. The latter approach is pragmatic (where transparent) and the Tax Office's view must be reasonably open on the law; but a purposive interpretation need not be the most apparent one on a reading of the text of the law. Also, this Tax Office approach has not always resulted in a favourable outcome for the revenue.

2.15 The Inspector-General considers that increasing tangible signs of objectivity should reduce perceptions of bias arising from concerns that the Tax Office adopts pro-revenue positions in areas of uncertainty by straining the interpretation of legislative provisions. The Tax Office should also clearly state to its officers how they should undertake the process of statutory interpretation, in light of senior public statements that the Tax Office interprets the law to give effect to the 'policy intent'.

Need for greater understanding and transparency in Tax Office-Treasury interactions on technical matters

2.16 In some matters involving the formulation of precedential Tax Office views, Inspector-General staff observed certain Tax Office behaviours that gave reasonable grounds for perceptions of undue revenue bias. These behaviours included: the Tax Office seeking and to some extent relying on Treasury officials' views of the 'policy intent' as a means to resolve interpretive matters; the Tax Office delaying the issuing of PBRs until discussions with Treasury were finalised (delays sometimes amounting to more than 18 months); and, the Tax Office not telling applicants that Tax Office-Treasury dialogue was active on the technical issues in question. Some stakeholders have argued that these behaviours push the Tax Office to administer the system on an untenable interpretation of the law — legislation by administrative fiat or propping up deficient law.

2.17 A significant proportion of large business PBR applicants supported the Tax Office's discussion of policy and statutory interpretation with Treasury. However, most were unaware whether it had occurred. This is because the Tax Office is reluctant to be open with applicants about the fact that it is in dialogue with Treasury officials. There will occasionally be circumstances when it would not be appropriate to disclose to a PBR applicant that a matter relating to their PBR application is being discussed with Treasury or may be considered by Government, but on objective assessment this will not normally pose a risk.

2.18 Treasury strongly discourages any notion that it has any role in providing advice on the 'policy intent' of already enacted legislative provisions and strongly discourages the use of this term. Once legislation is enacted, the law, together with permissible extrinsic materials (Explanatory Memoranda for example), evidences the only relevant intention for interpreting the law — Parliament's. Parliament's intention is to be determined according to the accepted principles of statutory interpretation. Treasury officials' views on the 'background' to the legislative provisions or what was intended when the law was drafted are, in Treasury's view, unhelpful and should not be relied upon to settle interpretive matters as the Tax Office must come to its own view of the law. This will not preclude Treasury from discussing with the Tax Office whether the better view has been reached by reference to publicly available extrinsic materials and whether the position is consistent with other views the Tax Office has adopted. Treasury input in these discussions is only one of many; any member of the community is open to engage the Tax Office in these types of discussions.

2.19 The Inspector-General considers that in its role as an impartial rulings administrator the Tax Office must come to its own view of the law according to the accepted principles of statutory interpretation. To minimise adverse perceptions of Treasury's influence on interpretive matters, the Tax Office should come to a view, or possible views, on a case before it approaches Treasury for dialogue on the technical issues in question or the implications arising from the Tax Office's view. The Tax Office should also tell applicants when it is seeking external input on interpretive matters that relate to their PBR requests and the reasons why.

2.20 The potential for continuing misunderstandings should also be addressed by clarifying in the interagency protocol the Tax Office's and Treasury's expectations of each other in relation to interpretive matters and also re-enforcing with Tax Office technical decision makers that discussions on the 'policy intent' for enacted law have no relevance in interpretive matters.

2.21 The Inspector-General also considers that effective operation of the tax system requires a mechanism for significant implications of Tax Office views to be drawn to the attention of the Treasury and where necessary the Government.

2.22 However, the Tax Office should not delay settling its view or issuing PBRs when it is in dialogue with Treasury. By its design, the PBR system gives applicants certainty on a timely basis while minimising any risk to the revenue that an incorrect Tax Office view might have by limiting the application of that view to the applicant.

2.23 There is potential for commercial damage in situations where the Government might respond to Tax Office views by changing the law after the Tax Office has ruled. This may result in an uneven playing field or a need to undo administrative actions — especially where the Government considers the Tax Office's view is not aligned with its policy. However, this risk could be reduced by increasing transparency surrounding the possibility of law change in each particular case, and enacting legislation with transitional provisions providing PBR recipients a reasonable opportunity to reorganise their affairs where the prospective effect of the law change would otherwise be detrimental.

Need to increase tangible signs of Tax Office objectivity

2.24 A significant proportion of large corporates considered that increasing the tangible signs of Tax Office objectivity would reduce perceptions of revenue bias.

2.25 One measure would be to improve Tax Office approaches that can impede mutual understanding of technical views. By not indicating how the Tax Office has considered taxpayers' views or attributed the weight of evidence, taxpayers are left with impressions that Tax Office views are taken to achieve revenue objectives without regard to the cogency of taxpayers' reasoning.

2.26 Providing, as a matter of course, easy, direct communication with the technical decision maker and early opportunities to be heard before adverse decisions are made would also improve taxpayer perceptions of Tax Office objectivity.

2.27 Large businesses expressed concern that they perceived inadequate internal checks against the cultural influences of the compliance function influencing the Tax Office's advice function. This is mainly because the same area that is responsible for auditing a large business taxpayer is also the area responsible for providing that taxpayer with a PBR. Since these comments were made the Tax Office has sought to confine PBR advice work to specialist staff. However, resourcing demands may necessitate these staff becoming involved in audit work from time to time.

2.28 Perceptions of objectivity could be further increased by providing applicants, before an adverse decision is made, the basis for the likely Tax Office view (including external opinions where relevant), an explanation of why the Tax Office's view is to be preferred over the applicant's, including the weight given to information provided by applicants, and an adequate opportunity to comment. In unfavourable PBRs, the Tax Office should also include a statement of the underlying purpose of the legislative provisions on which the interpretation is based and the source for that view — for example, which materials are relied upon to ascertain that purpose.

Need to further reduce Tax Office delays for large business PBRs

2.29 In combination with certain other Tax Office behaviours, delays in providing PBRs provide reasonable grounds for perceptions of revenue bias.

2.30 Over the last few years, the Tax Office has implemented case management systems which have progressively reduced elapsed timeframes for issuing large business PBRs. However, there are further opportunities to improve the timeliness in providing large, complex PBRs.

2.31 The Tax Office will delay a PBR while the issue is the subject of a contemplated public ruling or other interpretive advice. In these circumstances, the Tax Office may also ask applicants to withdraw their application or may refuse to rule and may direct the applicant to more general non-binding advice. However, if an application falls within the Priority PBR process, the Tax Office says it will issue a PBR notwithstanding the issue being considered in a contemplated public ruling or other interpretive advice.

2.32 The Inspector-General considers that any large, complex PBR should not be delayed because the technical issue being considered is the subject of a developing public ruling.

2.33 Delays are also experienced in escalating precedential matters to Tax Office technical decision makers. Submissions expressed frustration with the negligible influence case officers had over the process or time periods where issues are referred outside of their area. Also, applicants say that 'agreed' or 'negotiated' timeframes between applicants and case officers are generally illusory and that timeframes are changed, in some cases many times, at the sole discretion of the Tax Office backed by the perceived threat of an adverse ruling if the applicant refuses to agree. Tax Office aged case management has improved over time. However, further improvement could be made in those matters where precedential issues are considered.

2.34 These types of delays could be minimised by making Tax Office technical decision makers accountable for communicating directly with the client over the issue (while keeping the case manager informed of that communication), including the indicated timeframes and reasons for any delays.

2.35 Tax Office information requests were sometimes considered a Tax Office tactic to deliberately delay making a ruling or to improve Tax Office performance statistics (an information request will 'stop the clock' for the Tax Office's reporting purposes). Applicants perceive a need for Tax Office discipline in limiting information requests to those directly relevant to resolving the technical issues in question in the PBR request. Extending the priority PBR procedure of providing cogent reasons for requesting further information would also improve taxpayer perceptions. Performance on elapsed timeframes from receiving the application should also be reported as a key performance indicator. This would help to eliminate perceptions that additional information requests are made to improve Tax Office statistics.


The Inspector-General recommends that the Tax Office should act to reduce the widespread perceptions of revenue bias among large business PBR applicants by implementing the following:

Increasing transparency, improving communication and more clearly demonstrating objectivity:

  1. Informing taxpayers when it sees a need for external input, including from the Treasury, on interpretive matters that relate to their PBR applications and the reasons why. [Tax Office response: Agree in part]
  2. Informing taxpayers of the outcomes of external input, including from the Treasury, and internal deliberations on matters that affect them, especially where an unfavourable ruling is likely. [Tax Office response: Agree in part]
  3. Where an understanding of purpose is a factor in the decision in large business unfavourable PBRs, including a statement of the underlying purpose of the legislative provisions on which the interpretation is based and the source for that purpose (for example, how the legally permissible extrinsic materials have been relied upon to ascertain that purpose and in concluding its view). [Tax Office response: Agree]
  4. More widely adopting the key principles of the Priority PBR process in relation to large business PBRs:
    • Centralised point of reference (process owner) responsible for marshalling resources and taking remedial action to ensure cases are not delayed;
    • Alignment of taxpayer and Tax Office priorities;
    • Front end engagement of all expertise to avoid sequential processing; and
    • Taxpayers and Tax Office working together to clarify the ruling.

    [Tax Office response: Agree]

  5. Increasing transparency, improving communication and more clearly demonstrating objectivity in relation to PBR technical decision making by:
    • before an adverse decision is made, communicating to the applicant the basis for the likely Tax Office view (including external opinions where relevant), an explanation of why the Tax Office's view is to be preferred over the applicant's, indicating the relevance of information provided by the applicant, and providing the applicant an adequate opportunity to comment;
    • vetting requests for additional information and (if requested) providing reasons why the information is relevant and identifying the specific aspect of the technical issue that turns on the requested information;
    • if requested by the applicant, providing applicants with written reasons for delay if the PBR has not issued after 3 months, including contact details for the relevant LB&I segment leader, CoE Manager and Deputy Chief Tax Counsel;
    • where necessary, engaging recognised independent external subject specialists to supplement Tax Office capability to respond to large, complex PBRs; and
    • where requested by the PBR applicant, ensuring that the Case Manager provides the applicant with a free and quick flow of direct contact with those technical decision makers (whether in TCN, CoE or LB&I) that determined, or are determining, the technical issues relating to the application.
  6. [Tax Office response: Agree]

  7. Ensuring that tax officials involved in interpretive matters are aware of the accepted principles of the purposive approach to statutory interpretation (including the accepted materials to ascertain that purpose) and that they should not rely on advice of what policy developers or legislative drafters intended.[Tax Office response: Agree]

Clarifying interagency interactions

  1. Clarifying, preferably in its interagency protocol, the Tax Office's and Treasury's expectations of the purpose and nature of their interactions on technical matters that relate to already enacted law. This clarification should include:
    • that PBRs should not be delayed because the technical issues relating to those PBRs are the subject of discussions with Treasury; and
    • that in relation to interpretive matters, the Tax Office may invite comments on the purpose or object of the legislative provisions in question, while recognising that any Treasury comments are not determinative.

[Tax Office response: Agree in part]

Adhering to formal interagency processes

  1. Ensuring that the Tax Office follows the formal protocol processes in every case where it sees a need for dialogue with Treasury on potential implications of its view of the law. This would include providing a comprehensive administrative impact statement (including details on how it will administer the law if there is no law change). [Tax Office response: Agree]

Further reducing delays in large business PBR processes

  1. Issuing PBRs irrespective of whether the matter involves consideration of a technical issue that is the subject of a developing or contemplated public ruling. [Tax Office response: Agree]
  2. Reporting achievements against performance standards and elapsed timeframes of PBRs in Tax Office annual reports. [Tax Office response: Agree in part]

2.36 The Tax Office has welcomed the finding that there was no evidence of undue revenue bias; it has accepted that perceptions of bias exist and that it will need to improve transparency to remove them. The Tax Office has agreed fully with 6 of the 10 recommendations in the report and has partly agreed with the rest.

2.37 The Tax Office's full response to these recommendations is contained in Appendix 6 to reduce duplication and the length of the report.

1 This review distinguishes between the terms 'policy intent' and 'purposive approach to statutory interpretation' — see paras 3. 31 to 3.44 in Chapter 3.