5.1 This chapter discusses the basis for the Inspector-General's findings, observations and recommendations set out in Chapter 2.

No evidence of undue revenue bias

Inherent revenue bias

5.2 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 revenue collector. On this basis it is expected 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.

5.3 Tax officers are perceived to be biased in their interpretation of the law by the mere fact of being imbued with the revenue authority's administrative and revenue collection culture. Most people who made representations, however, did not consider this inherent bias as 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.

Undue revenue bias

5.4 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.

5.5 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.20

5.6 The Inspector-General examined a random sample of Tax Office files comprising 15 of the around 570 large business PBR applications made or considered during the 2003-04 and 2004-05 income years. These included a number of cases in which applicants withdrew or the Tax Office refused to rule. In examining the random sample of cases, the Inspector-General did not attempt to review the Tax Office's interpretation of the law.21 Rather, the Inspector-General considered whether Tax Office processes and records of internal thinking that led to the PBR exhibited 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.

5.7 The records indicated that tax officials thought the views taken were the better views of the law, according to their understanding. There was no record that views were taken, ruling requests were refused or delays were made for the purpose to impose more tax than otherwise payable on a better view of the law, in tax officials' opinions. Also, very few records relating to PBR applications contained details on the revenue involved in the arrangements.

5.8 During 2003-05, the proportion of favourable PBRs requiring a Tax Office precedential view (48 per cent) compared against the proportion of favourable PBRs requiring non-precedential views (43 per cent) did not indicate a revenue bias. This five percentage point difference amounts to a six case difference.

5.9 Also, the pattern of decisions relating to external review of the 13 Tax Office PBR objection decisions for the relevant period does not indicate a systemic revenue bias. More Tax Office PBR objection decisions were affirmed on external review than set aside, but, there were more Full Federal Court decisions that set aside PBR objection decisions than affirmed them (see Table 1 in Chapter 3). However, the numbers are too small to draw any firm conclusions as to whether or not this latter point evidenced an undue revenue bias.

5.10 While submissions to the review and the survey undertaken as part of this review did not bring to the surface any direct evidence of undue revenue bias, they did provide evidence of circumstances that gave rise to perceptions of revenue bias.

5.11 These perceptions are important because a perception of an undue revenue bias adversely affects taxpayers' confidence in the Tax Office's administration. This, therefore, adversely affects compliance.

Fairness and professionalism are important because the literature of the social psychology of procedural justice shows that when people believe they are treated fairly, they are more likely to comply with the law.22

Widespread perceptions of revenue bias

5.12 Based on a survey of representative large corporate PBR applicants' views, the perceptions of revenue bias are widespread among large corporate internal and external tax advisers. These perceptions are not limited to any particular industry group (see Chapter 4 and Appendix 2 — survey report). Perceptions of revenue bias are not due to unfavourable rulings.

5.13 The survey report identified why large business PBR applicants' perceive a revenue bias. Their perceptions were based on their interpretation of observed Tax Office behaviours and taxpayer expectations. The Inspector-General provided a copy this survey to the Tax Office in January 2006.

5.14 Submissions indicated that PBR applicants interpreted certain Tax Office behaviours as motivated by a revenue bias:

  • the Tax Office sometimes takes a strained reading of the law;
  • the Tax Office is reluctant to tell applicants that it is discussing with Treasury its concerns for wider implications of its view; and
  • the Tax Office sometimes asks applicants to withdraw rulings, refuses to rule and delays issuing a ruling.

Underlying cause of perceptions of revenue bias

5.15 In the absence of cogent explanation, taxpayers generally interpreted these Tax Office behaviours as:

  • the Tax Office is 'clinging to a theoretical right to support a revenue friendly view';
  • issues are resolved behind closed doors without the opportunity to implement change quickly; and
  • the Tax Office is reluctant to be bound by its view and is seeking to wear down the applicant by avoiding resolution of the issue.

5.16 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 were the reasons for perceptions of revenue bias, they were not the underlying cause.

5.17 The major underlying causes for PBR applicant perceptions of revenue bias were insufficient Tax Office transparency and communication about its behaviours, leaving taxpayers grounds to reasonably conclude that the behaviours were motivated by a pro-revenue bias.

5.18 Had the Tax Office not exhibited these behaviours or been sufficiently transparent in its dealings with affected taxpayers, it is unlikely that perceptions of revenue bias would be as strongly held or as widespread.

5.19 These Tax Office behaviours, taxpayers' perceptions of them, the motivations of these behaviours and action to address continuing perceptions are discussed below.

The Tax Office sometimes takes a strained reading of the law which is not seen to be supportable either on the text of the law or the publicly available extrinsic materials

5.20 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.23

5.21 An understanding of the requirement for the Tax Office to take a purposive approach to statutory interpretation (see Chapter 3 for background) is important to appreciating why, in some circumstances, the Tax Office interpretation may be more strained than the interpretation favoured by the taxpayer. This is because the scope to strain the words gives rise to a spectrum of interpretive tensions between the underlying purpose of legislative measures and statutory constructions that are open on a reading of the law. The less congruent these two factors appear in particular circumstances, the more difficult it becomes for the Tax Office to persuade the applicant of its views and the more likely perceptions of revenue bias will arise.

5.22 Applicants are more likely to perceive that an undue revenue bias has influenced technical decision making where the Tax Office ruling is inconsistent with an applicant's understanding of the underlying purpose of the legislative provisions in question. The Tax Office's view must be reasonably open on the law; but a purposive interpretation need not be the most apparent on a reading of the text of the legislative provisions.

5.23 On the basis of the Inspector-General's review of case files and Tax Office-Treasury communications, 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 will consider material that is irrelevant according to the rules of statutory interpretation — for example, referring to material arising during the policy development or drafting of the law such as Treasury's institutional view of the 'policy intent' as at the time the law was enacted. Although this material is irrelevant according to the rules of statutory interpretation, it allows the Tax Office to make more informed and pragmatic judgements in particular cases — especially where it is in the taxpayer's favour. But, it can lead the Tax Office into errors of law where the 'policy intent' and the text of the law (including its extrinsic materials, where permissible under the rules of statutory interpretation) are at odds. The Tax Office's assessment of legal risk of its views not being upheld by the courts will be significantly impaired if it does not 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. This pragmatic approach, however, is not evidence of a revenue bias because this Tax Office approach has not always resulted in a favourable outcome for the revenue.

5.24 The Tax Office has publicly stated that it interprets the law according to the 'policy intent'.24 Although this phrase may be a short hand term for the purposive approach it may lead lower level officers into error. This is because interpretive tasks may be carried out by relying on 'policy intent' which is evidenced in impermissible extrinsic materials (according to the accepted rules of statutory interpretation) before looking to the underlying purpose of the provisions as evidenced by the text of the law. The Tax Office should 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'.

5.25 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.

Tax Office requests for taxpayers to withdraw rulings, refusals to rule and delays

5.26 In circumstances where the purpose of the legislative provisions is not readily identifiable or misaligned with a reasonable reading of the law, the Tax Office will discuss the issues with Treasury. In these circumstances, the Tax Office will generally await resolution of these discussions with Treasury before ruling — for example, Inspector-General staff observed one matter where the Tax Office was reluctant to rule notwithstanding it had arrived at a view that an interpretation supporting Treasury's advised 'policy intent' of the provisions were 'clearly arguable [even if they are not without some difficulty]'. In this matter, the Tax Office noted that there was a 'real risk that the Courts might not prefer our view' and that a plain reading of the law did not support that view. However, the Tax Office said it 'could not prefer [the taxpayer representative's] proposed interpretations over reasonably available ones that delivered the policy intent as advised'.

5.27 This behaviour generally resulted in delaying the ruling, refusing to rule and/or asking the applicant to withdraw their application unless they wanted to receive an unfavourable ruling — for example, in a case related to the matter above the applicant withdrew their application after eight months of delay. In another case, the Tax Office delayed the resolution for five months while the technical matter was being resolved with Treasury. During this period the Tax Office asked the applicant to withdraw its PBR application three times.

5.28 Inspector-General staff also observed circumstances where the Tax Office did not tell taxpayers that the reasons for its reluctance to rule or the delays was that it did not want to rule while it was discussing with Treasury the implications of its view. The ATAX survey report also indicates that taxpayers are generally unaware of whether the Tax Office has discussed the technical matters with Treasury (see Table 34 of the survey report).

5.29 The potential consequences of this lack of transparency include significantly increased compliance costs for those taxpayers disputing the interpretation and the costs of litigation. It also results in an erosion of public confidence in the Tax Office's ability to administer the PBR system impartially.

5.30 Although these Tax Office behaviours can sometimes be to avoid giving an unfavourable ruling to PBR applicants, applicants were generally unaware of this.

5.31 Delays may also be experienced in cases involving technical uncertainty but where no referral of the issue is made to Treasury — for example, in one case the Tax Office spent almost 11 months in considering the issues, including 4 months as a PTI and almost 5 months in the LB&I and CoE areas considering the issues.

5.32 The Inspector-General has précised the following case study from publicly available material to illustrate Tax Office behaviour where it is reluctant to make a ruling if a prevailing interpretation of the law does not give effect to the 'policy intent' of the law, as the Tax Office sees it. The example shows how the Tax Office may ask taxpayers to withdraw applications and might adjust ruling dates to negate objection rights. These behaviours colour private sector perceptions of its intentions.

Case study — Indooroopilly children services (ABC)25

On 13 February 2003, ABC and the franchisee employees applied to the Commissioner … for a private ruling that its issue of shares would not give rise to FBT to it or the franchisee employees, and that the employees would be liable to tax if and when the trustee distributed ABC shares to them.

The ruling application on the FBT issue was expressed to relate to the following six FBT years ending 31 March 2008.

[A ruling along these lines would have been consistent with the Federal Court's judgment in the Essenbourne case (decided in 2002) with which the Commissioner expressed disagreement on 14 March 2003 (a month after ABC applied for the PBR). The Commissioner did not appeal the Essenbourne outcome but said he wanted to test it in future cases.]

… six months after ABC's ruling application was lodged [the ATO] advised ABC of a 'very recent high level policy change' that required the ruling application to be reassigned to a Centre of Expertise. [The ATO] asked for ABC to send in its application again, which it did.

In September 2003 the ATO informed ABC's advisors that any ruling would be negative and they preferred not to issue a ruling at all. They asked ABC to withdraw their ruling application. … In October 2003 ABC rejected the Commissioner's request to withdraw its application.

… A week or two later [a negative private ruling was issued to ABC]: FBT was payable and the employees had to pay tax when they received their shares. … the private ruling … was made in respect of the year of income ended 30 June 2004, not the FBT years ended 31 March 2008 that were requested.

In December 2003 the taxpayer objected to the ruling under Part IVC of the TAA. Throughout 2004 the Commissioner continued in his attempts to have Essenbourne (and Walstern) overturned.

… Over one year after [ABC's] objection was lodged, in January 2005, the Commissioner disallowed the objection. He highlighted that it was a ruling for the year ended 30 June 2004. … a deliberate ruling on a proposed arrangement for a year that has already passed is non-justiciable, a fortiori where it is a year of income not an FBT year … So ABC was left without any recourse to the courts.

ABC raised this matter with the Commissioner.

In May 2005 the Commissioner requested that ABC lodge a new ruling application, whereupon the Commissioner would issue a new ruling for the correct future FBT years. ABC would then object against the ruling and the objection would be decided quickly.

In May 2005 ABC lodged the new application for the FBT years 31 March 2006 through to 31 March 2011.

The ATO then rang ABC's advisors to inform it that the ATO policy was only to issue rulings for no more than two future years. This apparent policy would have made any ruling, by the time it went through the courts, unable to protect ABC in any way. ABC referred the ATO to the decision of Hill J in the CBCI case [Corporate Business Centres International Pty Ltd v C of T [2004] FCA 458 (20 April 2004)], where mandamus was ordered against the Commissioner for not making a valid ruling as requested.

Finally, on 30 June 2005 the Commissioner issued ABC a valid private ruling for all years requested. The [negative] ruling confirmed that the Commissioner's position was as set out in TR 1999/5 until a Full Court decided otherwise.

… In July 2005 ABC and the franchisees objected to the ruling. The Commissioner disallowed the objection. [ABC] appealed to the Federal Court under Part IVC of the TAA [and won in both the Federal Court and, on appeal in April 2007, the Full Federal Court].

5.33 Submissions to this review recounted similar Tax Office behaviours to that in the above case study. Inspector-General staff also observed similar behaviours in Tax Office files. They underlie PBR applicants' perceptions that such Tax Office behaviours evidence an undue revenue bias: the Tax Office is reluctant to be bound by its view and is seeking to wear down the applicant by avoiding resolution of the issue.

5.34 The Inspector-General considers that it is generally inappropriate for the Tax Office to ask a taxpayer to withdraw a PBR application regardless of its motivations, 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 illustrated in the case study above.

A lack of clarity surrounding Tax Office-Treasury interactions on technical matters

5.35 The Tax Office is reluctant to be open with applicants about the fact that it is in dialogue with Treasury officials on the implications of technical issues relating to PBR applications. The implications of these technical issues may include such things as impacts on taxpayers, revenue, compliance, Tax Office administration, and questions of interpretation.

5.36 The processes agreed between the Tax Office and Treasury are public knowledge. The Tax Office-Treasury protocol, the Technical Issues Management Sub-committee of the NTLG, the pilot of the new Tax Issues Entry System26 and the desirability of dialogue between the two agencies are all well known and supported in the large business taxpayer segment. Large business PBR applicants, members of the tax profession and representatives of large business strongly supported Treasury having a role in ensuring that Tax Office views are consistent with policy intent when the Tax Office resolves ambiguities in the tax laws.27 This is because they consider it would minimise compliance costs and provide greater ongoing certainty. However, they express some concerns about the potential for this dialogue to increase PBR timeframes.

5.37 Treasury considers that it has no role in providing advice on the 'policy intent' of already enacted legislative provisions and strongly discourages the use of the 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. However, Treasury says that the Tax Office should not attempt to prop up the law because it feels frustrated that the law is not getting changed, nor should it delay giving interpretive advice in these circumstances.

5.38 It is interesting to note that in 1996, before the tax law design role was transferred to the Treasury, the Tax Office appeared to have a simpler view of the world:

Where the policy intent is unclear or gives rise to anomalous or unintended outcomes, these matters are communicated, as matter of practice, to Treasury in order to either obtain clarification of the policy intent or to allow Treasury to advise government. Traditionally, anomalies have arisen in the law where a rule was provided, but the reason for the rule was not expressed in the law or fully articulated by the drafter. In these circumstances the rule may require a result that drafters would have avoided if they had considered it.28

5.39 This statement could be characterised as the Tax Office searching for an administrative interpretation and not a search for Government's policy intent before the law was presented to Parliament. However, the Tax Office's loose use of the term 'policy intent' to mean Parliament's underlying purpose for legislative provisions, observed Tax Office-Treasury communications and the views expressed in the Tax Office's final submission in Appendix 6 imply that the Tax Office continues to have these expectations of Treasury.

5.40 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 what may appear to be 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 Tax Office-Treasury processes are active and the reasons why.

5.41 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.

5.42 Regardless of these nuances, what remains unchanged at the broader level is that to operate effectively the tax system needs a mechanism for significant implications of Tax Office interpretations to be drawn to the attention of the Treasury and where necessary the Government.

5.43 Without this opportunity in the system, there would be a greater number of situations where Government might respond to implications by changing the law after the Tax Office has ruled — resulting in an uneven playing field or a need to undo administrative actions — especially where it considers the Tax Office's view is not aligned with its policy:

I have a concern about trying to retain a balance between the independence of the ATO, which is sacrosanct, and the government preserving its prerogative to drive policy … I want to make sure that when we have rulings … that their outcome is not to drive policy away from where the government had it.29

5.44 Changing the law after issuing a PBR has the potential to cause significant commercial damage to those rulees. 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 rulees a reasonable opportunity to reorganise their affairs where the prospective effect of the law change would otherwise be detrimental.

5.45 Notwithstanding these views of the broader system, there are four specific areas for improvement which would better facilitate these processes and reduce perceptions of revenue bias:

  • adhering to formal inter-agency processes in dealings with Treasury;
  • improving the internal recording of the source of technical decisions;
  • improving Tax Office transparency and communication to taxpayers when it is in dialogue with Treasury on implications of its view; and
  • improving transparency of the Tax Office's understanding of the purpose underlying legislative provisions.

Adhering to formal inter-agency processes in dealings with Treasury

5.46 In circumstances where the Tax Office foresees implications arising from its interpretations, under the formal inter-agency arrangements, it is required to clearly advise Treasury of its inability to administer the law in a manner that gives effect to the purpose of the legislation, allowing Treasury to consult with the Government on the need for any law change. The Tax Office must also clearly state how it will administer the law if there is no law change and the impacts that this approach will have including revenue and interest groups. The Tax Office is required to give Treasury detailed advice on the impacts of its view.

5.47 Inspector-General staff observed some cases in which the Tax Office fully complied with the spirit of this practice statement — for example, in one case the Tax Office advised Treasury of unintended outcomes of a certain legislative provision. The Tax Office outlined its technical position and the impacts that non-tax policy factors had on the resulting outcomes of applying the legislation to the circumstances in question. It outlined the administrative impacts and the potential industry criticism of such a position if the Government chose not to amend the law to remove the uncertainty. It also estimated the cost to revenue of any potential amendment and recommended certain action to Treasury. The Tax Office clearly set out how it would administer the provisions if the Government chose not to change the law.

5.48 However, Inspector-General staff also observed some cases in which the Tax Office did not fully embrace the spirit of this practice statement. In relation to some of the PBR applications, the Tax Office discussed the relevant technical issues with Treasury officers and merely alerted Treasury to the relevant compliance risks or deficiencies in the legislation in delivering its intended purpose, as understood by the Tax Office. It did not state how it would administer the law if there was no law change, or the impacts on revenue and interest groups. The Inspector-General made similar observations in his living away from home allowance case study report.30

5.49 In the context of the framework in which the two agencies operate, it is inevitable that informal dialogue will exist and often will be desirable, if only as a precursor to formal engagement. However, if the Tax Office is reluctant to act without a Treasury response and those matters are not formally and quickly raised with Treasury in line with the interagency protocol, delays and uncertainty for taxpayers will be compounded. Without anything formally in the system it is likely that nothing will come out, and matters will not progress.

5.50 The Inspector-General considers that the Tax Office should not delay settling its view or issuing PBRs because it is in dialogue with Treasury. Treasury also agrees that delay should not occur because of such dialogue. 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.

Improving the internal recording of the source of technical decisions

5.51 Inspector-General staff saw a number of cases where inadequate records were kept on its Technical Decision Making System. This is the Tax Office's internal system for keeping records relating to the provision of written binding advice. In some cases, there were missing records of internal discussions on technical issues (by way of email or record of meetings) and letters from taxpayers on significant technical matters. In almost all cases where the Tax Office consulted with Treasury on a technical issue in relation to the PBR, those communications were not sufficiently identified, if at all. This is surprising as these communications went to the core of the policy objective sought to be achieved in the Tax Office's interpretation of law.

Improving Tax Office transparency and communication to taxpayers when it is in dialogue with Treasury on implications of its view

5.52 Taxpayers awaiting a PBR involving matters of technical uncertainty remain variously unaware of whether the Tax Office has a view of the law; if the Tax Office has formally advised Treasury of any implications of its interpretation and is waiting response; or if its interpretation is based on delivering the purpose of the law as it sees it.

5.53 A lack of transparency in disclosing when these processes are active on a particular matter is one of the main underlying causes for taxpayers' perceptions of revenue bias. In these circumstances, taxpayers have nothing to go on but their own interpretation of what may be happening and what Tax Office behaviours mean. The ATAX researchers also commented that from PBR applicants' perspectives, improved communication and visible changes to processes and outcomes are critical to the reduction of perceptions of revenue bias (see page 36 of the survey report).

Improving transparency of the Tax Office's understanding of the underlying purpose of provisions

5.54 In some cases, the Tax Office has also not clearly explained to taxpayers the reasons for its understanding of the underlying purpose of legislative provisions where it was the settled following input from external bodies.

5.55 In one case, the Tax Office merely advised applicants that it adopted a purposive interpretation which delivered the 'policy intent'. However, no explanation was given for the reasons or source for its view of the 'policy intent'. The Tax Office's view was at odds with the applicant's understanding of the underlying purpose of the provisions, but unknown to the applicant the Tax Office's views relied on what the Tax Office considered was Treasury's advised 'policy intent'. The applicant's understanding of the provisions' legislative purpose was derived from the publicly available extrinsic materials and their consultations with Treasury during the design of that law. Taxpayers were effectively asked to trust the Tax Office that its view of the 'policy intent' was cogent and should be preferred to the purpose indicated by the publicly available extrinsic materials. Taxpayers, however, disputed the Tax Office's view.

5.56 Also disconcerting is that the lack of transparency under present arrangements allows perceptions to flourish that the Tax Office is pushed towards administering the system on an untenable interpretation of the law. Applicants consider that the Tax Office is seeking to resolve deficiencies in the law by achieving policy outcomes through administrative means where the resolution is detrimental to PBR applicants — legislation by administrative fiat.

Need to increase tangible signs of objectivity

5.57 Perceptions of revenue bias could be reduced if there were improvements to:

  • current Tax Office approaches that can impede mutual understanding of technical views; and
  • the limited routine review mechanisms.

5.58 The reasons why improvements are considered desirable and what they might be are discussed below.

Improvements to Tax Office approaches that can impede mutual understanding of technical views

Demonstrated consideration of taxpayer information

5.59 Almost two-thirds of surveyed PBR applicants felt the Tax Office had not fully considered the material they provided with their application.

5.60 Survey participants commented that although the Tax Office acknowledged their technical arguments, they appeared as a 'cut and paste' in the PBR but with nothing to show that their view had been balanced against the Tax Office's and nothing to show why the Tax Office preferred its view over the applicant's — a lack of comparative reasoning.

5.61 By not indicating how the Tax Office has considered taxpayers' views or 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.

Adequate opportunities to be heard

5.62 Inspector-General staff observed that Tax Office approaches were mixed. In some cases, tax officials clearly provided adequate opportunities for PBR applicants to be heard before potential adverse PBRs were issued. However, in other cases, the Tax Office did not communicate with applicants before adverse rulings were given. In an isolated case, this caused a disjunction between what was asked to be ruled upon and what was actually ruled upon.

5.63 Providing, as a matter of course, early opportunities to be heard before adverse decisions were made would improve taxpayer perceptions of Tax Office objectivity.

5.64 In non-favourable PBRs, transparency, procedural fairness and a greater degree of interim certainty are more likely to be perceived where, at the earliest time possible in determining the PBR, the technical decision maker:

  • meets face to face with the applicant;
  • provides the basis for the likely Tax Office view;
  • explains why the Tax Office's view should be preferred, weighing the applicant's view against the Tax Office's; and
  • in finely balanced matters, explains what alternative facts would likely lead to an alternative view and the reasons why.

5.65 Face-to-face consultation also minimises the risk of inadvertent disjunction between what is asked and what ruled upon.

5.66 On a related issue, a common complaint in submissions to this review was that the Tax Office would sometimes rule on the general anti-avoidance provisions when not requested to do so by the applicant. This had prolonged delays and potentially exposed the Tax Office to repeated litigation.31 However, the ROSA report has since recommended that the Tax Office refrain from ruling on issues not directly raised in PBR applications without the applicant's consent.32 It has also recommended measures to improve the transparency in the application of Part IVA.33

Quality of communication

5.67 Inspector-General staff also observed that the higher level of the technical decision maker, the better the quality of communication between the Tax Office and the applicant. In one case one year after the PBR application was lodged, the issue was escalated to a Tax Office senior tax counsel. That official immediately provided the applicant with a copy of an external counsel's opinion on the technical issues. The senior tax counsel then met twice with the applicant and discussed the applicant's options and also gave the applicant an opportunity to comment on the draft PBR before it was issued. The applicant commended the official for their involvement in the matter.

5.68 Perceptions of bias would also be reduced if the Tax Office were to facilitate easy, direct communication with the technical decision maker.

Limited routine review of PBRs

5.69 Large businesses express concern that they perceived inadequate internal checks against the cultural influences of the compliance function influencing its 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.

5.70 An internal Tax Office report also recognised this implicitly by recommending that tax officials providing advice in the PBR process be separate from the compliance staff.34 Since these comments were made the Tax Office has sought to keep confine PBR advice work to specialist staff. However, resourcing demands may necessitate these staff becoming involved in audit work from time to time.

5.71 Many submissions argued for increased tangible mechanisms of objectivity in the PBR process. The survey supported stronger assurance mechanisms to address the potential for perceptions of revenue bias arising.

5.72 Some academics argued that a body external to the Tax Office should be tasked with considering and issuing PBRs, such as in the system used in Sweden. As a result of criticisms that the revenue collector was not objective and independent, from 1991 private binding rulings in the Swedish tax system have been issued by a tax law commission (the Council for Advance Tax Rulings) independent of the revenue collection agency (the National Tax Board). The Council acts as a national tax court and is part of the Swedish court system. An application process is adversarial in nature. The Council has an outstanding reputation for the quality of its decisions but has been criticised for the time taken.35

5.73 However, no surveyed PBR applicant, tax practitioner or representative organisation commented during this review that such a change was necessary or desirable for Australia. This option was also considered and rejected in the Ralph report as to likely result in unacceptable delays and increase uncertainty.36

5.74 Other submissions argued for internal independent review of PBRs on significant precedential matters. Comparisons were also made to the New Zealand system where the representative tax professional organisation considers that the Inland Revenue rules impartially 'without fear or favour'. This is largely due to the New Zealand system of structural separation of functions within the Inland Revenue and its Rulings and Adjudication area's strong culture of impartiality.

5.75 The Adjudication and Rulings area of the New Zealand Inland Revenue provides private binding rulings. The Inland Revenue maintains a strict structural separation between this area and its Policy Advice Division37 (New Zealand's equivalent to Australia's Treasury in relation to policy matters) and compliance functions. There is, however, open communication between the three areas. The rulings area will obtain input from the compliance and policy areas. Rulings are also not delayed because of delays in obtaining input from its policy area. When the timeframes for these rulings are compared with the Tax Office's large complex rulings, the timeframes are similar (see Appendix 4).

5.76 Implementing such a system into the Australian system would require a Tax Office restructure to separate technical decision makers and reviewers from the influences of the compliance culture of the organisation. The Tax Office could be expected to regard such proposals as a step backwards to the 1980s and 1990s when it was suffering from major backlogs of requests for review and from internal tensions between compliance and review areas. The Inspector-General considers that in the context of large business PBRs, increased transparency would better address perceptions of bias and Tax Office culture.

5.77 The Tax Office has a technical quality review process which assesses the Tax Office's decision making in individual cases, including in large business PBRs. However, the Inspector-General notes that in relation to PBRs expressing a precedential Tax Office view on a significant matter, the reasoning is not reviewed by subject specialists. The technical views adopted in large, complex PBRs are ultimately settled by senior tax officials as precedential Tax Office views settled under the Tax Office's precedential decision making system.

5.78 The Inspector-General considers that perceptions of objectivity could be 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.

5.79 The Tax Office says that effective external review of its views in PBRs is provided by the Part IVC process. Applicants may object to a PBR. If unsatisfied with the Tax Office's determination of the objection, applicants may apply to the Administrative Appeals Tribunal or Federal Court for review of the Tax Office's PBR objection decision.

5.80 However, submissions indicated that large business taxpayers are, in part, deterred from seeking PBRs because of the hurdles they face in the event that they need to challenge the Tax Office's position. These hurdles are:

  • the prohibitive costs involved which, for significant issues, ultimately may require a Full Federal Court decision to resolve the matter;
  • the lengthy timeframes between the implementation of the arrangement and external review in light of the time limits the Tax Office places on the life of the PBR which may effectively preclude an appeal being heard on the objection to the PBR38;
  • that objecting to a PBR will also restrict a taxpayer's right to object an assessment (by virtue of section 14ZVA of the TAA 1953), leaving the better strategic approach to challenging Tax Office views through an objection to an amended assessment;
  • the perception that the Tax Office is free to distinguish the decision on the grounds that the PBR was not implemented as stated in the application because all the facts are unable to be set out in the application; and
  • the context of many complex rulings being that without Tax Office approval the arrangements are unlikely to go ahead in the forms proposed.

5.81 Until recently, PBR applicants did not have a statutory means to force the Tax Office to issue a PBR where the application was being delayed. Under the new laws (for PBR applications received or rulings made after 1 January 2006), a PBR applicant may, subject to certain timeframes and procedural steps, object to the Tax Office's failure to make a ruling. This process provides a right to avoid Tax Office delay and bring the matter to an external forum for review of the substantive matter.

5.82 However, large businesses say that because of the hurdles above, most are unlikely to challenge the Tax Office's PBRs with the result that these PBRs become 'de facto law'. They argue that the Tax Office is able to interpret the law to its advantage through rulings and is free to ignore case law without consequence to its view,39 but, the taxpayer is not free to do so. Taxpayers who are unwilling or unable to match the Tax Office resources do not challenge these rulings and those that do, do so to their detriment.

5.83 These perceptions have a behavioural effect. Large businesses who perceive a revenue bias do not to apply for PBRs unless the transactions are ongoing or critical to the taxpayer's business. This is supported by the main finding of the survey — those with a reduced level of perception of bias will be more likely to seek a PBR.

5.84 Generally, large businesses consider external counsel advice as a better risk management strategy than a PBR. Ultimately this depends on the nature of the transaction, the strength of external opinion and the business' tolerance for risk. If the issues are disputed by the Tax Office during a later audit the taxpayer will seek to rely on a reasonably arguable position and any tax indemnities.

Need to further reduce delays for large business PBRs

5.85 The average elapsed time for large business PBR applications to be finalised during the 2003-04 and 2004-05 years was around 174 days, almost six months. For PBRs requiring the Tax Office to create a precedential view, this average was around 227 days, over seven months (see Appendix 3).

5.86 Submissions argued that many of these delays evidenced a revenue bias.

5.87 Two-thirds of survey participants said that the Tax Office kept them adequately advised of the progress of their application. However, some qualified their responses in that they felt they had to be 'proactive' in this regard (see Table 14 of the survey).

5.88 Over the last few years, the Tax Office has implemented case management systems which have progressively reduced elapsed timeframes for issuing large business PBRs. It says that 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).

5.89 The Tax Office has also introduced the priority PBR process to speed up the resolution of some of the most urgent large business PBR cases.

5.90 Notwithstanding these significant measures to reduce timeframes, there are three main areas for further improvement in reducing PBR timeframes:

  • delays where public rulings are contemplated;
  • delayed resolution of escalated precedential matters; and
  • Tax Office requests for additional information.

5.91 These areas are discussed below.

Delays where public rulings are contemplated

5.92 The Tax Office will delay a PBR while the issue is the subject of a contemplated public ruling or other interpretive advice. Public Rulings may take 18 months or more to issue and PBRs are then delayed pending the outcome of those rulings. For example, in one PBR application case a year and two weeks elapsed waiting for a public ruling to issue.

5.93 In these circumstances, the Tax Office may also ask applicants to withdraw their application or refuse to rule and may direct the applicant to more general non-binding advice.

5.94 Although the outcome sought by the Tax Office in awaiting the outcome of public rulings is to ensure a consistent view applies to all in the industry and therefore maintain a level playing field, the private sector perception is that a delay in providing PBRs evidences an undue revenue bias: the Tax Office is reluctant to be bound by its view and is seeking to wear down the applicant by avoiding resolution of the issue.

5.95 Large, complex PBRs should not be delayed because the technical issue being considered is the subject of a developing public ruling. Where the technical issue being considered is the subject of a developing public ruling, the Tax Office should consider whether the private binding ruling can be issued before those processes are finalised — as is done in the priority PBR process.

5.96 In these circumstances, the Tax Office could better provide tax certainty to commercial transactions by considering whether those interests outweigh the desire to provide a level playing field for business.

5.97 This would provide an alternative to the Tax Office's global approach to providing certainty on issues. Any views subsequently found to be misaligned with the Tax Office's global view would then be quarantined to individual cases and not extend further — consistent with the rationale for the PBR system in limiting the adverse effects to the revenue of any erroneous views. Any such risk could be highlighted to the public by a disclaimer on the sanitised publication of the view, noting that view is the subject of a contemplated public ruling, that the expediting of the ruling required it to be issued before the resolution of the public ruling, and therefore, the view should not be relied upon by other taxpayers to indicate the Tax Office's public position on the matter.

5.98 The Tax Office could also consider receiving the Public Ruling Panel's advice and, where appropriate, seek timely industry consultation.

Delayed resolution of escalated precedential cases

5.99 In cases observed by Inspector-General staff there was an average time lag of over five months in escalating precedential matters to the Tax Counsel Network (TCN). There was also occasionally a delay in approving TCN involvement or allocating TCN officers to matters. Delays were also experienced in some cases due to the Tax Office considering what further information it needed and having its TCN area consider the technical issues relating to tax avoidance (taking between one-quarter and three-quarters of elapsed time, 2.5 to 9.5 months).

5.100 Submissions expressed frustration with the negligible influence case officers had over the process or time periods where issues are referred outside of their area. Inspector-General staff also observed that some CoE and TCN officers were reluctant to communicate with the applicants and, in some cases, reluctant to provide indications of expected timeframes to the case officers either.

5.101 Also, applicants say that 'agreed' or 'negotiated' timeframes between applicants and case officers are generally illusory. Applicants say that these 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 — for example, in one case the case officer 'agreed' with the applicant 15 times to extend the deadline over a nine-month period, notwithstanding the applicant's obvious frustration towards the end of the period in only 'agreeing' to 'one more shift in date' but ending up 'agreeing' to a further four more until eventually having the matter escalated.

5.102 Tax Office aged case management has improved over time. However, further improvement could be made in those matters where precedential issues are considered. In these cases there is a greater risk of delay where technical issues are considered outside the BSL segment area.

5.103 In line with the Tax Office's processes, where a matter is referred to CoE or TCN for resolution of a technical issue, CoE or TCN officers' accountability should include 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.

5.104 The Tax Office's priority PBR process creates an environment in which tax officials occupying lower level positions and PBR applicants can enter dialogue on the technical issues under consideration with the understanding that such dialogue is conducted with the purpose of quickly narrowing the issues and facts to be considered.

5.105 The principles could be easily applied to applications not falling within the current priority PBR process criteria to assist applicants and Tax Office technical decision makers to quickly narrow the issues in consideration and the facts needed to conclude a view. The Tax Office has previously indicated an intention to consider widening the category of rulings to which priority PBR process approaches apply.

5.106 Prior discussion between applicants and the Tax Office aims to minimise time delays by laying out the whole proposal, providing key information, providing an opportunity for the Tax Office to ask general questions so that decision makers have sound understanding of the proposal and providing an opportunity for the Tax Office to describe information that is likely to be relevant. This process would also address the Tax Office's concerns that delays are sometimes caused by applicants not providing enough information in their application.

Public reporting on elapsed timeframes

5.107 Some submissions strongly argued that information requests were 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). This perception is supported by the average time lag of about three and a half months in determining the need for and waiting on further rulee information. Extended delays were also caused by taxpayers responding to Tax Office information requests. In one case an applicant took six months to respond to Tax Office information requests.

5.108 More than a third of survey participants felt that the Tax Office requested immaterial information (see Tables 15 and 17 of the survey). Inspector-General staff also observed instances where numerous different information requests were made — for example, in one case the Tax Office asked five times for further information.

5.109 Applicants perceive a need for Tax Office discipline in limiting information requests to those relevant to 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.

5.110 Implementing ROSA recommendation 2.16 (a recommendation directed to addressing concerns that the Tax Office requests arguably unnecessary additional information to ensure that largely unlikely hypothetical circumstances are dealt with) is aimed at eliminating requests in relation to issues not directly raised in PBR applications. However, for those information requests in relation to issues directly raised in PBR applications, cogent explanations for the reasons such information are needed, including the specific aspect of the technical issue that turns on the facts requested. Once again, this could be achieved by extending the scope of key priority PBR process approaches.

5.111 The Tax Office calculates its PBR timeliness performance standards from the date the Tax Office considers it has received all the relevant information on which to rule. In addition to these timeframes, performance on elapsed timeframes from receiving the application should also be reported as a key performance indicator. This would eliminate perceptions that additional information requests are made to improve Tax Office statistics.


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

21 It is doubtful that any Inspector-General view that a better view of the law was available to the Tax Office but not adopted would be accepted as evidence of a revenue bias. Also, the Inspector-General considers that submissions to the review would have surfaced any clear examples of biased Tax Office interpretations.

22 Professor John Braithwaite 1 'Through the eyes of the advisers: A fresh look at tax compliance of High Wealth Individuals', Contract Paper prepared for the Interim Review of the HWI Taskforce, p 14; as quoted in the Senate Economics Committee, Inquiry into the Operation of the Australian Taxation Office, Canberra, 2000, p 9.

23 See for example, the tax professional bodies' views in Agenda item 2, 'Design Topics — Tax Office approach to the Interpretation and Application of the tax laws', NTLG Agenda for meeting on 28 June 2007.

24 See for example, Australian Taxation Office, Large Business Tax Compliance 2006, Canberra, 2006, p 10.

25 Quoted from Robertson M, A disregard of the law — Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd, Taxation in Australia Vol. 41 No. 11, June 2007, pp 635-643.

26 Board of Taxation, Improving Australia's tax consultation system: A report to the Treasurer, Canberra, February 2007.

27 See Tables 32 and 33 in the Survey Report in Appendix 2; See also, Drenth F, Executive Director of the Corporate Tax Association, as quoted in the Australian Financial Review, p 1, 6 July 2006.

28 Australian Taxation Office, NTLG Minutes of 15 March 1996 National Tax Liaison Group meeting, Item 9.3 'Linkage between objects and letter of law', available from www.ato.gov.au.

29 Dutton P, the then Minister for Revenue and Assistant Treasurer, as quoted in the Australian Financial Review, 6 July 2006, p 1.

30 Inspector-General of Taxation, Case study — living away from home allowance, Sydney 2007, paras 3.87 and 3.105.

31 For example, Lamont v Commissioner of Taxation (2005) 144 FCR 312.

32 Treasury, Report on Aspects of Income Tax Self Assessment, Canberra, August 2004, recommendation 2.16.

33 Id, recommendations 2.10 and 2.12; see also p 75.

34 Australian Taxation Office, 'Complex Binding Rulings Review Blueprint', a report prepared by Amity Management Consulting Group, Version 4.3, October 2004, Amity.

35 Fransberg, E, The Swedish advance ruling regime, Wintercourse 2002, Stockholm School of Economics, p 23.

36 Commonwealth of Australia 1999, Review of Business Taxation: A tax system redesigned, Canberra, July 1999, p 145.

37 Inland Revenue's Policy Advice Division, works together with The Treasury to advise the New Zealand government on all aspects of tax policy and social policy measures that interact with the tax system, including drafting tax legislation and forecasting tax revenues: Annual Report, 2004, p 20.

38 See for example, CTC Resources NL v. Commissioner of Taxation (1994) 120 ALR 197; also raised in Commonwealth of Australia 1999, Review of Business Taxation: A tax system redesigned, Canberra, July 1999, p 139.

39 For example, the Tax Office's approach to the definition of fringe benefits in five Federal Court cases, resulting in Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16 (22 February 2007).