A3.1 Part A of this appendix sets out the legislative history of the remission of the interest charge and details the ATO's interest remission policy.
A3.2 Part B traces the historical development of the ATO interest remission policy against the backdrop of legislative amendments to the interest provisions. It considers the nature and purpose of the interest charge and the effect of the interest charge given the ATO's interest remission policy.
A3.3 Part C of this appendix outlines the factors that have been considered by the Commissioner in exercising the discretion to remit the interest charge in certain arrangements and how the Commissioner exercised this discretion when dealing with groups of taxpayers. It also examines the concerns raised with the Inspector-General regarding the treatment by the ATO of groups of taxpayers, including the type of relevant 'factors' considered by the Commissioner and the approach adopted by the Commissioner in settling disputes with groups of taxpayers.
A3.4 Part D specifically addresses particular concerns raised with the Inspector-General regarding the ATO's interest remission policy, including instances where there is ATO delay during the pre-amended assessment period and a lack of taxpayer and community awareness of the ATO's interest remission policy.
A3.5 Part E of the appendix briefly examines the ATO policy for the remission of penalties for both income tax and fringe benefit tax purposes. It refers to some of the concerns raised with the Inspector-General regarding the significance of factors considered relevant to remission of penalties when considering the remission of the pre-amended assessment interest.
Part A: Background to the interest remission power
Years of income up to and including 1991/1992
Interest for underpaid tax
A3.6 Prior to 30 June 1992, no separate provision generally operated to impose or remit interest on underpayment of tax. Rather, this interest was imposed administratively as part of the per annum component of the penalty for unpaid tax.32 The Commissioner had a wide discretion to remit in whole or in part the imposed penalty tax.33
Interest for late payment of tax
A3.7 Interest for late payment of tax was imposed as a late payment penalty (LPP).34 This was calculated on a simple interest basis at the rate of 20 per cent per annum.35 The Commissioner was given the discretion to remit this penalty, but on certain conditions. These conditions were similar to those that applied for the 1999/2000 year of income, as discussed below.
Years of income from 1992/1993 up to and including 1998/1999
Interest for underpaid tax
A3.8 For the years of income from 1992/93 to 1998/99, the previous penalty for underpaid tax was split into separate interest and penalty elements. The Commissioner was given wide discretions to remit both these elements.36
Interest on late payment of tax
A3.9 Following amendments to the law, taxpayers became liable for two separate charges on any amount of tax left unpaid after the due date, with each provision having its separate remission power.37
A3.10 A penalty was imposed by way of a per annum charge for tax that remained unpaid after the date of payment.38 The Commissioner's power to remit this charge was subject to similar limitations to those that applied for the year of income 1999/2000, as discussed below.39
A3.11 A per annum interest charge was also levied for late paid tax.40 The Commissioner was provided with a wide discretion to remit the whole or any part of the interest payable by a taxpayer under this section.41
1999/2000 year of income
A3.12 As discussed in Appendix 2, for the 1999/2000 income year separate charges for interest on late paid tax and interest on underpaid tax were levied. Both forms of interest were charged at the new uniform GIC rate.
Interest on underpayment of tax
Interest for late payment of tax
A3.14 Specific provisions allowed the Commissioner to remit interest that arose from the late payment of tax.44
A3.15 These provisions allowed the Commissioner to remit the interest if one of the following conditions applied:
- the delay in payment was not due to, or caused directly or indirectly by an act or omission of the person and the person has taken reasonable steps to mitigate those circumstances;
- the delay in payment was due to, or caused directly or indirectly by an act or omission of the person, the person has taken reasonable action to mitigate those circumstances and having regard to those circumstances it would be fair and reasonable to remit all or part of the charge; or
- there are special circumstances making it fair and reasonable to remit all or part of the charge.
Years of income 2000/01 and beyond
A3.16 For the years of income 2000/01 and beyond, interest for underpayment of tax was merged with interest for the late payment of tax and calculated pursuant to section 8AAC of the Taxation Administration Act 1953 (TAA 1953).45 The Commissioner's power to remit this interest charge was subject to the same limitations that applied to interest for late payment of tax during the 1999/2000 income year (see above) but effective from 1 July 2000, the Commissioner was also granted the power to remit the interest charge if it was 'otherwise appropriate to do so'.46
ATO policy for remission of interest
A3.17 This part of the appendix specifically examines the Commissioner's policy for the remission of interest arising where there is an underpayment of tax.
Years of income up to and including 1991/92
A3.18Taxation Ruling IT 2517 provided some guidance as to the factors to be considered in the imposition and remission of the per annum component of the penalty for underpaid tax. This was the administratively imposed interest for underpaid tax that applied during this period in most circumstances.
A3.19Taxation Ruling IT 2517 also provided that the per annum component was intended to compensate the Revenue for the full amount of tax not having been paid by the due date. The rate of this interest charge was set at 14.026 per cent per annum, which was the same rate at which interest on overpayments of tax was imposed.47
A3.20 The ruling provided that any remission of this component should be made in only exceptional circumstances.48 Generally, reduction of the per annum component would only be warranted where:
- a taxpayer makes a voluntary disclosure (the per annum component should generally be reduced to 10 per cent);
- a taxpayer did not know and could not be expected to know that a statement in his or her return was false or misleading or that income had been omitted (the per annum component should be reduced to nil);
- a taxpayer has been genuinely misled by actions of the ATO (the per annum component should be reduced to nil);
- a taxpayer made an understatement of taxable income which resulted from an interpretation of the law adopted by him or her for which there was judicial or quasi-judicial authority at the time of lodgement of the return — and the statement made in the return is misleading in only a minor particular. In this case the principles contained in another ruling, Taxation Ruling IT 2444, were to be followed when determining whether, and to what extent, the per annum component should be reduced.
A3.21 During this period another provision also operated in certain limited circumstances to impose interest for underpaid tax.49Taxation Ruling IT 2444 provided guidance on the manner in which the Commissioner would exercise any discretion to remit interest for underpaid tax during this period in these limited circumstances.50
Years of income from 1992/93 up to and including 1999/2000
Interest for underpaid tax
A3.22 Chapter 93 of the current ATO Receivables Policy appears, at first glance, to set out how the Commissioner will remit interest for underpayment of tax for these years of income. However, a close reading of the opening paragraphs of Chapter 93 indicates that it applies to the remission of interest 'in particular, general interest charge imposed as a result of late payment.'51 As discussed in Appendix 2, interest for the underpayment of tax was merged with interest for late payment of tax from the years of income 2000/01 and onward. Chapter 93 therefore only provides guidance for the remission of interest on the underpayment of tax for the years of income 2000/01 and onward. Chapter 93 also appears to be focused on the remission of interest in the post-amendment assessment period.
A3.23 The ATO has confirmed with the Inspector-General that the current ATO Receivables Policy contains no specific guidance as to how the Commissioner will remit interest for the underpayment of tax for the years of income from 1992/93 up to and including 1999/2000.52
A3.24 The ATO has informed the Inspector-General that the reason for this omission is that the remission of interest on the underpayment of tax during these years was considered to be an assessing function, and therefore part of the understatement regime for underpayment of tax. The ATO has also recognised that the principles contained within the ATO Receivables Policy have in practice probably been used to consider remission of interest for the underpayment of tax for this period. The ATO has indicated that they intend to make the ATO Receivables Policy clearer on this point in future.53
A3.25 Leaving aside Chapter 93 of the ATO Receivables Policy, the ATO has indicated that Taxation Ruling IT 2444, issued on 27 August 1987, also provides some guidance as to how the Commissioner will exercise the power to remit interest on underpayment of tax for the years of income 1992/93 up to and including 1999/2000.54
A3.26 Paragraph 14 of that ruling provides that having regard to the compensatory nature of the interest charge, it is clear that the legislature did not intend the remission power to be exercised in the general run of cases. In broad terms, the ruling identified three kinds of situations in which remission in whole or in part may be warranted:
- where a taxpayer voluntarily advises of an underpayment;
- where an understatement of taxable income resulted from an interpretation of the law adopted by a taxpayer for which there was a judicial or quasi-judicial authority at the time of lodgement of the taxpayer's return; or
- where, by reason of the particular circumstances, it is considered fair and reasonable to remit the interest.
A3.27 As will be further discussed below, concerns have been raised with the Inspector-General with the manner in which the Commissioner exercises his discretion to remit the interest charge.
A3.28 In the absence of specific guidelines, the manner in which interest for the underpayment of tax has been remitted by the ATO in practice for the years of income from 1992/93 up to and including 1999/2000 can only be ascertained from examining actual situations involving those years of income. The next three appendices of this review examine five such situations.
Interest on late payment of tax
A3.29 Chapter 92 of the ATO Receivables Policy deals with the Commissioner's powers to remit additional charges for late payment and the circumstances when those additional charges will be remitted. Chapter 92 has application before 1 July 1999.
A3.30 The policy provides that taxpayers have a responsibility to meet their payment obligations as and when their taxation debts fall due for payment. The various taxation laws provide for the automatic imposition of additional charges when a debt is paid late. The automatic imposition of additional charges for late payment is a response, by way of legislation, aimed at encouraging payment by the due date and compliance with future liabilities.55
A3.31 The ATO Receivables Policy notes that the legislation that applies for this period acknowledges that situations exist where it would be fair and reasonable for the additional charges to be remitted. The Commissioner has the discretion to remit the additional charges in part or in full depending on the circumstances that lead to the late payment.
A3.32 It also notes that the law identifies three specific circumstances when the Commissioner may exercise the discretion to remit the additional charges. These three circumstances have been listed earlier in this appendix.56
A3.33 Paragraphs 92.4.5 and 92.4.6 of the ATO Receivables Policy deal specifically with the per annum interest charge that was applied during this period. This interest is termed 'penalty interest' and the ATO Receivables Policy provides that:
'Penalty interest is by its nature a compensatory amount and is imposed where the Commonwealth has been denied the use of funds because amounts were not paid by the due date. Penalty interest may be remitted, but will only be remitted in limited and exceptional circumstances (for example, natural disasters such as fire, flood, or drought which directly caused serious financial difficulty).
Each request for remission of the penalty interest will be considered on its merits and a decision made in light of the particular circumstances of the case. The debtor will need to demonstrate that exceptional circumstances apply for remission of this component of the additional charges.'
A3.34 Penalty interest does not necessarily imply culpability, but merely that, technically at law, the interest is imposed as a penalty (rather than imposed, for example, under contract).
A3.35 The ATO Receivables Policy also deals with the remission of the separate penalty for late paid tax that applied during this period. Paragraph 92.4.8 of the policy provides that:
'The Commissioner will consider all of the factors put forward by a debtor in the request for remission, their effect upon late payment and the steps taken to alleviate the delay in payment. Remission will not be considered if the debtor were to rely on general grounds for the request, nor would it be considered if the debtor were to rely on factors that could only be remotely linked to the late payment.'
A3.36 The policy then goes on to list particular circumstances relevant to the remission power for this penalty component and provides some commentary on the Commissioner's view on what each entails. Relevant circumstances are:
- factors beyond the control of the debtor;
- acts or omissions of the debtor;
- relieving the circumstances or effects of circumstances;
- what is considered to be 'fair and reasonable';
- the taxpayer's good history payment;
- the bankruptcy or liquidation of the taxpayer;
- interest arising as a result of a court judgment;
- special circumstances; and
- situations involving disputed debt and amended assessments.
Years of income 2000/01 and onward
A3.37 The major publicly available ATO policies and guidelines associated with remission practices for the interest for the years of income 2000/01 and onward are:
- the ATO Receivables Policy — particularly Chapter 93; and
- the ATO's Code of Settlement Practice.
A3.38 As was previously discussed for the years of income 2000/01 and onwards, interest for the underpayment of tax and interest for the late payment of tax were merged into one interest charge, the GIC.57
A3.39 The current remission policy for GIC is contained in Chapter 93 of the ATO Receivables Policy.
A3.40 Although the comments made here concerning Chapter 93 and its approach to the remission of interest for the underpayment of tax are not directly relevant to the majority of the disputes examined for the purpose of this review, the comments are pertinent to the future application of the interest remission power in the pre-amended assessment period. The comments are also directly relevant to the application of the remission power for late payment interest in the disputes examined during this review.
Commissioner's current view as to the application of the interest remission power
A3.41 The Commissioner has stated that taxpayers have a responsibility to meet their payment obligations as and when their taxation debts fall due for payment. The various taxation laws provide for the automatic imposition of the GIC when a debt is paid late. The GIC automatically imposed by legislation is intended to encourage compliance with future liabilities. It denies late payers an advantage over those who do pay on time and the knowledge that the GIC is accruing should encourage debtors to organise their affairs in such a way as to enable them to pay on time.58
A3.42 The Commissioner acknowledges that situations may exist where it would be fair and reasonable for the GIC to be remitted. In such circumstances, a debtor has a right to request a remission of GIC and the onus is placed by the Commissioner on the debtor to demonstrate that remission is warranted. However, it is important to note that there is no legislative prohibition upon the Commissioner exercising the discretion to remit GIC on his own accord where the Commissioner decides that the circumstances warrant remission.
A3.43 Where a request is made by a taxpayer for the remission of GIC, the ATO Receivables Policy requires that a request be considered having regard to the following:59
- the facts of each individual case;
- the chapter titled 'Principles Underlying the Receivables Policy of the ATO'; and
- the policy guidelines contained in Chapter 93 of the ATO Receivables Policy.
A3.44 Paragraph 93.4.4 of the ATO Receivables Policy provides that it would be inappropriate for the Commissioner to exercise the discretion to remit GIC for the following reasons:
- as an inducement to encourage payment of debts;
- as an inducement to finalise a disputed assessment; or
- to finalise a case where the ATO has not attempted to collect the GIC.
A3.45 The ATO Receivables Policy also specifies that the Commissioner will consider all of the factors put forward by a debtor in the request for remission, their effect upon late payment and the steps taken to alleviate the delay in payment.60
A3.46 In considering the circumstances under which remission of GIC is appropriate, both the relevant legislation and the ATO Receivables Policy distinguish different classes of taxpayers dependent upon the circumstances causing the delay and whether there was reasonable action to mitigate those circumstances.
'Fair and reasonable' circumstances
A3.47 Apart from instances of hardship occasioned by natural disasters such as fire, flood and drought, the ATO Receivables Policy provides that the Commissioner may remit the GIC in circumstances where it is fair and reasonable to do so.
A3.48 Paragraphs 93.5.13 and 93.5.14 of the ATO Receivables Policy outline the Commissioner's views on what is meant by the term 'fair and reasonable'. They provide that:
'A decision by the Commissioner to remit GIC because it is fair and reasonable must be considered in view of the legislative policy that debtors should be liable to additional charges if they pay late. Not only must the exercise of the power to remit be fair to the debtor concerned, it must be fair to the whole community. In other words a debtor who pays late should not be given any advantage over those taxpayers who organise their affairs to ensure they can pay on time. Debtors will need to demonstrate that it is fair and reasonable to remit the GIC, having regard to the nature of the specific event or decision.
Partial remission should be considered where the debtor has experienced the types of factors outlined in this chapter, and would otherwise qualify for full remission; however, their recent payment record has been unsatisfactory. It may be unfair to taxpayers who consistently do the right thing if those who choose not to comply are given the same level of remission. Partial remission may also be the appropriate in cases where the circumstances that led to the non payment were caused directly or indirectly by an act or omission of the debtor, and the debtor meets the other criteria for remission.'
A3.49 The ATO Receivables Policy provides no further information on how the discretion to partially remit the interest charge will be exercised. For instance, no specific guidelines are provided to indicate what proportion of the interest should be remitted, what specific circumstances will be considered and how partial remission will be calculated. This position may be contrasted to that taken by the Commissioner for the remission of penalties. For example, in relation to the Failure to Lodge on Time penalties the policy lists specific factors to be considered by the Commissioner in exercising the power to partially remit the penalty.61
A3.50 Paragraphs 93.5.22 and 93.5.23 of the ATO Receivables Policy outline particular examples of special circumstances where remission may be granted and deal with instances of hardship and release from payment of tax.
'Otherwise appropriate' circumstances for remission
A3.51 The discretion to remit the GIC was broadened, effective from 1 July 2000, with the inclusion of the words 'or it is otherwise appropriate to do so'.62 The Explanatory Memorandum for the Bill that proposed the amendment stated that:
'3.62 This amendment to the TAA 1953 allows the Commissioner to remit the GIC in a wide range of circumstances.
3.63 The effect of the amendment is to give the Commissioner a broader discretion to remit the GIC than under the current provision.'
A3.52 The current ATO Receivables Policy states, at paragraph 93.5.24, that:
'… this provision gives the Commissioner a degree of flexibility. It means that the Commissioner can adapt to changing circumstances, and consider unusual circumstances, or future issues, on their merits and make decisions accordingly. Such decisions will not usually be concerned with the circumstances of a particular taxpayer, but may extend to a particular group of tax debtors, or to the general body of tax debtors, and may involve consideration of issues of administrative efficiency and fairness. Decisions to grant remission under this provision will be restricted to senior Tax Office officers. An example of this type of decision is the announcement by the Commissioner of a settlement offer made to some taxpayers who have invested in mass marketed schemes, subject to those taxpayers being eligible for, and agreeing to enter into, specified settlement arrangements.'
A3.53 The ATO has expressed the view that paragraph 8AAG(5)(b) of the TAA 1953 does not grant the Commissioner an unfettered discretion to remit. However, the ATO has acknowledged that the ATO's policy guidelines may need to more fully discuss the scope and practical application of this limb of the remission power.63
A3.54 It is important to acknowledge that in performing his duties, the Commissioner only has limited resources to allocate to particular functions. This means that in carrying out his statutory functions considerations of administrative efficiency will be relevant. However, it is important that such limitations and considerations are balanced with the Commissioner's obligations under the Taxpayers' Charter. In particular, relevant to this discussion are the Commissioner's obligations under the Taxpayers' Charter to:
- act impartially and use his powers in a fair and professional manner; and
- make fair and equitable decisions in accordance with the law. This includes acting consistently, treating the taxpayer as an individual, listening to the taxpayer and taking all relevant circumstances into account.
A3.55 The Senate Economics Reference Committee in their Interim Report on MMTEIs raised the concern that the ATO had failed to take full account of relevant circumstances when dealing with interest remission and other decisions for MMTEI investors. Submissions to the Committee complained that taxpayers' efforts to have individual circumstances addressed were met with standardised pro-forma ATO correspondence that glossed over or simply ignored personal factors. The Committee noted that this style indicated a process-driven 'broad brush' approach to dealing with MMTEI investors and stated that:
'… it was hard to reconcile, on the face of it, the claim that the ATO 'always' considers individual circumstances with the evidence presented to the inquiry. It seems to the Committee that the ATO's overall handling of many scheme participants is more influenced by the view that variations are 'relatively minor' across schemes and participants than the requirement to treat taxpayers on an individual basis. This view tends towards prejudging scheme participants and appears to have introduced a bias in the ATO's approach that marginalises individual circumstances.'64
A3.56 To address these concerns, the Committee considered that:
'… it is incumbent upon the ATO to adapt its operating procedures to address individual circumstances in a manner consistent with the Taxpayers' Charter. This is necessary for the ATO to meet its obligations under the Charter and Income Tax Assessment Act.'65
A3.57 Submissions to the Inspector-General also expressed a concern with how the Commissioner has applied the remission policy in a global manner regardless of individual circumstances.
A3.58 Such concerns seem well founded given the Commissioner's interpretation of paragraph 8AAG(5)(b) of the TAA 1953, particularly his view that the remission power would not usually be concerned with the circumstances of individual taxpayers. In the Inspector-General's view, the adoption of such a position marks a narrowing of the broad discretion afforded by Parliament to the Commissioner.
A3.59 It is important that the remission power be applied in a manner consistent with the broad effect intended by Parliament. There is no limitation placed by Parliament on this remission provision applying to the circumstances of a particular taxpayer or that it should only extend to a particular group of taxpayers. To do so, in the Inspector-General's view, unnecessarily restricts the operation of the discretionary power afforded by Parliament to the Commissioner to remit the interest charge.
A3.60 The ATO has expressed the view that an inference a reader may draw from the above discussion is that the ATO view of paragraph 8AAG(5)(b) of the TAA 1953 is that it applies only to groups of taxpayers. Rather, the ATO has indicated that the paragraph 93.5.24 of the ATO Receivables Policy does not preclude the application of the provision to an individual case, but reflects its administrative experience that the sort of situations where it would expect to use this wider power would generally be those relating to a group or groups of taxpayers. The ATO is of the view that, in practice, most individual cases would be dealt with under the other limbs of section 8AAG of the TAA 1953.66
Part B: History of the interest remission power and its application
Submissions to the Inspector-General
A3.61 Evidence and submissions to the Inspector-General have raised concerns with the impact of the interest charge and the Commissioner's approach to interest remission. In particular, submissions to the Inspector-General noted that the need for an appropriate and equitable remission policy was amplified by the current interest charge rate.
A3.62 Regarding the effect of the interest charge, a submission to the Inspector-General commented that GIC rate was, at least in part, penal in nature and made the following comments:
'It is difficult to see how the current method of application of the GIC and the current rate at which it prevails is a commercially realistic one, given the addition of the 7 percentage points. Nor is it possible to see how it could be labelled compensatory in nature. So much was acknowledged by the Commissioner when he stated that eligible investors in mass marketed schemes 'will be entitled to an interest reduction from the full general interest charge, currently 11.89 per cent, to a rate reflecting the time value of money.'
A3.63 In a similar vein, another submission to the Inspector-General expressed the view that:
'It is difficult to see how the GIC can reflect 'market interest rates' in regard to many taxpayers, as the 7 per cent premium on the 90-day Bank Bill rate will often result in a greater GIC rate than the equivalent market rate of debt funding available to a taxpayer and the Government (particularly in the current, low interest environment). Whilst the GIC may be deductible, it nonetheless requires significant cash outlay from a taxpayer to pay the amount to the ATO. As a result, the GIC effectively serves as an additional penalty on a taxpayer.'
A3.64 The submission goes on to conclude that:
'On the basis that the GIC rate does not 'reflect market interest rates' it is submitted that the current rate of GIC and its full application in addition to the other administrative penalties is not serving the original policy intent of the provisions.'
A3.65 Some submissions concede that the GIC is apparently intended to serve as a disincentive to taxpayer's to 'use the Treasury as a bank' and delay payment of tax. However, they point out when this is coupled with the ATO's reluctance to remit the GIC in all but exceptional circumstances the policy intent seems:
'… inappropriate in situations where the taxpayer has genuinely intended to pay the correct amount of tax and the tax shortfall arose, for example, due to uncertainty and lack of ATO guidance as to how the law properly applied.'
A3.66 The ATO confirms that it will only remit the GIC in 'exceptional circumstances'. It states:
'The introduction of the GIC from 1 July 1999 also did not change the circumstances in which remission of interest (GIC) for the pre-amended assessment period would be warranted. It is true that the rate of interest increased by adding 8 percentage points to the base interest rate (section 170AA was previously determined by adding 4 percentage points to the same base rate). In the EM accompanying the amendment it was recognised that there would be an increase in the interest rate in cases where an amended assessment increased the amount of tax payable (refer to paragraphs 1.45 and 1.46 of the EM to the Taxation Laws Amendment Act (No.3) 1999). However, there is nothing in the legislation or the EM suggesting that the Parliament intended the remission power should be exercised any differently. The general remission power in subsection 8AAG(1) of the TAA which applied in the 1999-2000 year was essentially the same as subsection 170AA(11) which applied in earlier years.'67
A3.67 In support of that view the ATO refers to the Explanatory Memorandum to the Taxation Laws Amendment (Self-Assessment) Act 1992, which stated the following in respect of the penalty interest for late payment:
'However, as distinct from the remission of late payment penalty, interest is only to be remitted in very exceptional cases, given that it represents compensation to the Revenue for the time value of money for the period that the Revenue has been denied use of the funds. Thus in contrast to the remission provision for late payment penalty, which has regard to exceptional circumstances that contributed to the delay in payment of the tax, the remission provision in respect of interest will be more limited. The Bill provides a provision identical to the existing remission provision in respect of section 170AA interest, which allows the Commissioner to remit interest in those cases where there are special circumstances which make it fair and reasonable for the interest to be remitted.'68 (emphasis added by the ATO)
A3.68 In critically evaluating the views expressed in the submissions as to the nature of the interest charge and the position taken by the Commissioner in his current interest remission policy, it is important to have regard to the amendments made to the interest provisions discussed in Appendix 2. It is also necessary to examine the underlying policy behind the legislative changes and the development of the remission policy in that context.
Nature and purpose of the interest charge and consistency of the ATO interest remission policy with that purpose
Position for the years of income up to and including 1991/92
A3.69 During the years of income up to and including 1991/92, there were no separate general provisions operating to impose or remit interest on the underpayment of tax. Instead a penalty of up to 200 per cent of the underpaid tax could be applied. However, the ATO stated in Taxation Ruling IT 2517 that this penalty would actually be levied on the basis that it consisted of a per annum interest-like charge and a separate flat penalty.
A3.70 Taxation Ruling IT 2517 set out the remission guidelines to be followed in exercising the remission power in respect of both the penalty and per annum interest components of this penalty. This ruling made clear the purpose of each separate charge in paragraphs 33 and 34 of Taxation Ruling IT 2517. These provided that:
'The 'per annum' component is intended to compensate the Revenue for the full amount of tax not having been paid by the due date. In certain circumstances, the 'per annum' component may warrant further remission.
The 'culpability' component is separate from the 'per annum' component and reflects the gravity of the offence or the wrong doing of the taxpayer. It operates primarily in terms of the principle that the culpability of the taxpayer's actions is a function of the reason for or motivation of his or her actions. It will also account for the extent to which a taxpayer has assisted or facilitated ATO enquiries.'
A3.71 The rate imposed for this per annum component was equivalent to the rate that applied to overpayments of tax. Unlike the former policy that imposed a rate of 20 per cent per annum, it did not contain a penal or culpability component. The culpability of the taxpayer for the underpayment of tax was treated separately through the culpability penalty component.
A3.72 The ATO outlines its views on the policy objectives of the penalty regime in Taxation Ruling IT 2517. Paragraph 11 provided that:
'Although subsection 223(1) [of the ITAA 1936] is clearly intended to penalize heavily taxpayers who seek to evade their correct liability to tax, it is equally obvious that this legislation is not to be administered so as to be seen as oppressive by those taxpayers who, although caught by subsection 223(1), have made an honest attempt to fulfil their obligations under the income tax law. Subsection 227(3) recognizes that, in the context of subsection 223(1), there are degrees of culpability. Some situations will require substantial additional tax, others less substantial. Some, although these will be exceptional, may not warrant any additional tax at all.
Penalties are an integral part of our taxation system. Taxpayers are expected to fully and accurately disclose relevant matters in their returns and this carries with it a significant duty of care. While the penalty provisions are accordingly attracted by a failure to meet that duty, those provisions also help to encourage voluntary compliance, on which our taxation system heavily depends. The administration of those provisions for which this ruling provides guidance should bear those principles in mind.'
A3.73 The guidelines clearly set out relevant factors that would be considered in determining the remission of the per annum component. These factors have already been mentioned in this appendix.
A3.74 Importantly, the ruling acknowledged the inherent difference between an interest charge and a penalty charge and the underlying purpose of each component.
A3.75 In the Inspector-General's view, such an approach promoted transparency and ensured that taxpayers were better able to understand what each element represented. This ruling was important in ensuring that the administration of each element was not seen as oppressive by those taxpayers who made an honest attempt to fulfil their obligations under the income tax law.
A3.76 It is also important to note that the guidelines set out in Taxation Ruling TR 95/4 for the remission of penalty taxes arising from fringe benefit tax audit action are similar in application to the approach set out in Taxation Ruling IT 2517.
Section 170AA of the ITAA 1936
A3.77 During the period up to year of income 1991/92, section 170AA of the ITAA 1936 was a separate provision that imposed interest for underpaid tax in certain limited circumstances.69 This provision had been inserted into the ITAA 1936 in 1986. The interest rate that applied under this section was also linked to the interest rate paid by the Commissioner on overpayments of tax.70 On 27 August 1987, the Commissioner released Taxation Ruling IT 2444 to provide guidelines concerning the Commissioner's discretion to remit interest imposed under section 170AA in the limited circumstances where it applied.
A3.78 Paragraphs 13 and 14 of the ruling provided that:
'In considering whether, or to what extent, interest should be remitted, it is necessary to bear in mind the purpose for which the interest charge was introduced. Broadly, the interest charge on underpayments of tax is designed to compensate the revenue for the full amount of tax not having been paid by the due date.
Having regard to the compensatory nature of the interest charge, it is clear that the legislation did not intend the remission power to be exercised in the general run of cases. This is specifically noted at page 70 of explanatory memorandum, which accompanied the Taxation Laws Amendment Bill 1986. Against this background, factors such as ignorance or misinterpretation of the law and tax agent error will not normally be considered as circumstances warranting remission.'
A3.79 The ruling then went on to describe three kinds of situations in which remission of interest in whole or in part may be warranted where an amendment results in an underpayment of tax. These factors have previously been mentioned in this appendix.71
Amendments in 1992 to the interest regime
A3.80 In 1992, the Government decided to formally divide the previous penalty for underpayment of tax into its interest and penalty elements. This division was achieved by expanding the coverage of section 170AA of the ITAA 1936, so that it applied in all circumstances where there was an underpayment in tax.72 In addition, the relevant rate of interest was set at the last weekly tender for the 13 week Treasury Note before the end of that month plus four percentage points. This rate of interest no longer matched the rate of interest paid in instances of overpayment of tax.
A3.81 Following these amendments to section 170AA, Taxation Ruling IT 2444 was not revised to reflect the changes to the nature of the interest charge under section 170AA with the introduction of the uplift factor. The Commissioner continued to apply the principles contained in the ruling, in particular the principle that remission of interest was not to be exercised in the general run of cases.
A3.82 The ATO accepts that it may have been appropriate to reconsider Taxation Ruling IT 2444 after the passage of the 1992 legislation. The ATO has also indicated that it does not necessarily follow that they would have come to a different conclusion regarding the scope for remission of the interest charge.
Amendments in 1999 to the interest regime
A3.83 The regime for interest on underpaid tax was again significantly amended on 1 July 1999 with the introduction of the GIC regime.
A3.84 The GIC was originally set in accordance with the weighted average yield of the 13 week Treasury Note rate plus eight percentage points. The basis of calculating the rate was later changed with the 90 day Bank Accepted Bill rate replacing the 13 week Treasury Note yield rate and the uplift factor being reduced from eight to seven percentage points. The Explanatory Memorandum to the Taxation Laws Amendment Act (No. 3) 2001, which effected the change, noted that:
'The Government considers that a 7 percentage point margin is sufficient to support the policy objectives that taxpayers should pay their tax liabilities on time and not use the Commonwealth as a lending authority.'
A3.85 In Appendix 2, there is reference to an article published in the ATP Weekly Tax Bulletin No 18 quoting a letter from the Assistant Treasurer to the author of the article. This letter also indicates that the uplift factor reflects an average borrowing rate which should discourage taxpayers from using the tax system as an unsecured mechanism for borrowing. It further states specifically that the uplift factor does not represent a culpability component.
A3.86 A submission to the Inspector-General expressed the view that in light of the introduction of an 8 per cent uplift factor as part of the interest charge, the approach taken by the ATO in relation to the remission of the GIC should ensure that it is only used in situations where it will encourage timely payment of liabilities and discourage the use of the Commonwealth as a lending authority.
A3.87 Firstly, the current ATO Receivables Policy does not cover disputes for the years of income from 1992/93 up to and including 1999/2000. Only Taxation Ruling IT 2444 applied during this period.
A3.88 At the time Taxation Ruling IT 2444 was issued, the interest rate imposed for the underpayment of tax following an amendment to an assessment was linked to the interest rate imposed for overpayments in tax.
A3.89 With the amendments in 1992 and the introduction of an uplift factor to the interest charge, there was a change in the possible effect of the interest charge for the pre-amended assessment period.
A3.90 Notwithstanding these amendments, Taxation Ruling IT 2444 continued to express the Commissioner's view on the circumstances when the remission power would be exercised after 1 July 1992. This is despite the fact that Taxation Ruling IT 2444 was issued prior to the introduction of the uplift factor as part of the interest charge. Also, the position adopted by the Commissioner in Taxation Ruling IT 2444 appears to have been carried forward into the Chapter 93 of the ATO Receivables Policy.
A3.91 In doing so, the administrative policy documents dealing with the remission of the interest charge for the post-1992 period have neglected to consider the context in which the Commissioner's views in Taxation Ruling IT 2444 were originally expressed and the nature of the interest rate imposed at that time. In particular, the influence of Taxation Ruling IT 2444 on the Commissioner's interest remission policy has created a limited view of how the discretion to remit such an interest charge should be exercised, especially in the pre-amended assessment period.
A3.92 As a consequence, the narrow view adopted by the Commissioner regarding the circumstances that warrant the remission of the pre-amended assessment interest for the years of income 1992/93 and onward has meant that, in certain cases, the interest charge without remission has had a far broader and punitive-like effect. This is particularly so where the interest has accrued over a period of up to four or six years and the taxpayer was unaware of the liability.
A3.93 Where the circumstances of the taxpayer mean that the interest charge in the pre-amended assessment period has a punitive-like effect, and given that the primary purpose of the interest charge is to represent the time value of money, then the interest remission policy must be flexible so as to accommodate these circumstances and remove any punitive-like effect. Definitions of what constitutes 'special circumstances making it fair and reasonable' or 'otherwise appropriate to do so' cannot be treated as static concepts, but rather need to change as the nature and effect of the interest charge changes.
A3.94 This approach seems to have been adopted by the Commissioner when announcing the concessions to be made to investors in Mass Marketed Tax Effective Investments (MMTEIs) where he stated that:
'… eligible investors will be entitled to an interest reduction from the full general interest charge, currently 11.89 per cent, to a rate reflecting the time value of money. This rate will be 4.72 per cent which is the rate applicable to tax before 1 July 1999 but for administrative simplicity it will be used for all years.'73
A3.95 It is generally accepted that the intention of Parliament in introducing this uplift factor was to serve as a disincentive to taxpayers and effect compliance by discouraging taxpayers from using the tax system as an unsecured mechanism for borrowing.
A3.96 However, in the pre-amended assessment period a taxpayer may not be aware that there is an underpayment of tax. In fact, a taxpayer may genuinely believe that they have complied with all their taxation obligations under the self-assessment regime. In such a situation it is unclear how the imposition of the interest charge in full without remission can serve to discourage the taxpayer from using the tax system as an unsecured mechanism for borrowing. Rather, it would be assumed that such a compliance effect would be more relevant in circumstances where a taxpayer has intentionally not complied with their taxation obligations or has delayed the payment of tax.
A3.97 In this context, the imposition of the interest charge in full without remission during the pre-amended assessment period can have a punitive-like effect even though the taxpayer's circumstances do not warrant such an outcome.
A3.98 In order to ensure that the policy objectives of the interest charge are satisfied, it is important that the Commissioner's interest remission policy should look at the intention of Parliament in introducing the interest charge and the wording of the Act, the nature of the interest charge and its possible effects.
A3.99 The approach needs to be one that is consistent with the broad discretion that Parliament has afforded the Commissioner to remit the interest charge and also consistent with other ATO policies such as the penalty remission policy, the Compliance Model and the Taxpayers' Charter. It is also important that the approach adopted by the Commissioner in the remission of the interest charge ensures that the principles of equity and fairness in the administration of the tax system are maintained.
A3.100 As is discussed later in this appendix and in Appendices 4 to 6 in more detail, the Commissioner appears to have acknowledged the need for a flexible approach to how the interest remission power is exercised so as to deal with situations on their merits. This is confirmed by the instances where the Commissioner has in fact remitted the interest charge in a number of disputes involving groups of taxpayers. These disputes included MMTEI disputes, Controlling Interest Superannuation (CIS) disputes and disputes involving securities lending arrangements. In these disputes the Commissioner has remitted the rate of pre-amended assessment interest to either nil or to a rate which approximately equals the equivalent rate of interest for the overpayment of tax payable in respect of the particular period.
A3.101 The above comments lead to the following key finding:
Key Finding 1
The legislative provisions authorising interest remission for the pre-amended assessment period provide the Commissioner with a broad power to remit the interest charge.
However, the Commissioner has adopted a narrow approach regarding the circumstances in which the interest remission power will be exercised.
This has meant that, particularly where interest has accrued over a period of up to four or six years, the pre amended assessment interest charge without remission may have a far broader and punitive like effect. The interest remission guidelines must be flexible and responsive to remove inappropriate punitive-like consequences where out of the ordinary circumstances exist.
Tax Office response
A3.102 The broad design of the current remission powers is to provide for defined circumstances relevant to the individual, with a further power of remission where there are special circumstances or where it is otherwise appropriate.
A3.103 While broad, the further remission power is not unfettered. There must be reasonable grounds for exercising it.
A3.104 This can be illustrated by referring to the extrinsic material in the Explanatory Memorandum (EM) to the Taxation Laws Amendment (Self Assessment) Act 1992 which is applicable to the former interest charge provisions.
A3.105 The interest remission power embodied in that Act – "The Commissioner may, in his or her discretion, remit the whole or any part of the interest payable by a taxpayer under this section." - was applicable for a large part of the pre amended assessment period for Employee Benefit Arrangements.
A3.106 In relation to this broad remission power EM states at page 109:
"However, as distinct from the remission of late payment penalty, interest is only to be remitted in very exceptional cases, given that it represents compensation to the Revenue for the time value of money for the period that the Revenue has been denied use of the funds. Thus in contrast to the remission provision for late payment penalty, which has regard to exceptional circumstances that contributed to the delay in payment of the tax, the remission provision in respect of interest will be more limited. The Bill provides a provision identical to the existing remission provision in respect of section 170AA interest, which allows the Commissioner to remit interest in those cases where there are special circumstances which make it fair and reasonable for the interest to be remitted. [subsection 207A(4) – Clause 24]".
A3.107 In practice the remission powers under that Act and the current law have been exercised in a wide range of cases where the necessary circumstances have been found to exist.
A3.108 Thus we have used that power in the context of some widely marketed schemes where there are particular circumstances warranting it. Other examples include situations where there are acknowledged gaps in the law, periods between announced changes to the law and enactment of the relevant legislation, reliance on publications (e.g. Tax Pack) in the event they prove to be misleading, so called GST "wash transactions" and where the ATO has delayed in issuing an amended assessment after gathering all relevant information necessary for the assessment.
A3.109 The mere fact that interest is accumulating at the legislated rate prior to an amended assessment issuing is not, of itself, grounds for remission. As recognised in your findings "out of the ordinary" circumstances need to exist to warrant remission.
A3.110 The question of the appropriateness of the rate of GIC applying during the pre-amended assessment period is subject to examination in the Review of Income Tax Self Assessment.
A3.111 The quoted Explanatory Memorandum (EM) provides some level of historical guidance. However, it is noted that there have been legislative changes since that EM and it is the view of the Inspector-General that the matter is not as clear cut as suggested by the response.
A3.112 In noting the reference to out of the ordinary circumstances, the Inspector-General observes that this issue is not necessarily directly relevant to the majority of situations under focus in this review.
Key Finding 2
Prior to 1992, the Commissioner had an established policy that the remission power for interest, or its equivalent, for the pre-amended assessment period would only be exercised in exceptional circumstances.
With the 1992 legislative amendments to the penalty and interest provisions, including the introduction of the interest 'uplift' factor, the Commissioner did not revise his previous policy regarding the circumstances in which the interest remission power would be exercised.
As such, there was no detailed policy framework for the remission of the pre-amended assessment interest for the years of income from 1992/93 up to and including 1999/2000.
For the years of income 2000/01 and onwards, the ATO's Receivables Policy does not provide sufficient guidance to the public on how the interest remission power is to be exercised for the pre-amended assessment period.
For this reason, tax administration would benefit if the Commissioner published a separate policy document which provides clear guidelines on his policy, covering the current and prior years, for remission of the interest charge.
The policy should include the different considerations relevant to determining whether remission of the interest charge is warranted for either or both the pre-amended and post-amended assessment periods.
Tax Office response
A3.113 The ATO's policy on pre-amended assessment interest articulated in Taxation Rulings IT 2444 and IT 2593 for the period prior to 1992 is relevant also for the period 1992/93 to 1999/2000. As noted in the response to Key Finding 1, the general remission power introduced in 1992 was the same as that for the immediately prior years.
A3.114 The ATO's receivables policy does contain an extensive chapter on remission, including specific examples embracing the pre-amended assessment period, eg misleading publications and delays in issuing amended assessments.
A3.115 However it is acknowledged that there would be benefit in publishing more practical and accessible guidelines for the community.
A3.116 Community representatives, including your office and that of the Ombudsman will be consulted in finalising these guidelines.
A3.117 The impact of the timing and outcomes of the Review of Income Tax Self Assessment will need to be considered in that context.
A3.118 The Tax Office states that Taxation Rulings issued prior to 1992 were current because the general remission powers were the same in later years. However, the Inspector-General notes that there were legislative changes to the actual remission powers and there were changes occurring over time in the broader commercial environment. The situation was not static over the decade.
A3.119 The Inspector-General endorses the Commissioner of Taxation's acknowledgement that more practical and accessible guidelines need to be published.
Part C: Other factors considered by the ATO
Recent concessions and settlement arrangements
Mass Marketed Tax Effective Investments
A3.120 As discussed further in Appendix 4, in deciding to remit the interest charge for taxpayers who had participated in the MMTEIs, the Commissioner determined that there were special circumstances by reason of which it would be fair and reasonable to remit the interest charge for both underpaid and late paid tax.
A3.121 The special circumstances the Commissioner identified for such taxpayers were as follows:
- typically, investors in these eligible schemes lacked full knowledge of the scheme arrangements and the operation of the tax system;
- investors were often subject to aggressive and sophisticated marketing techniques;
- investors had a generally good tax record and typically they took advice from people expected to have the necessary knowledge to foresee the pitfalls;
- investors contributed real money to the schemes and most suffered a real financial loss.74
A3.122 Promoters, tax agents and other tax advisers were not eligible for a full remission of GIC unless an investor could demonstrate special circumstances to justify a remission.
Controlling interest superannuation arrangements
A3.123 As discussed in further detail in Appendix 5, on 14 March 2003, the Commissioner announced that for Controlling Interest Superannuation (CIS) arrangements the interest charge would be reduced to the commercial rate of 4.72 per cent where a contribution was made to a superannuation fund before 19 May 1999.
A3.124 The special circumstances that applied in the CIS arrangements involved the uncertainty of the law prior to May 1999, and the existence of a reasonably arguable position by the taxpayer.
A3.125 It is evident that in deciding whether to exercise the discretion to remit the interest charge in the above cases in whole or in part, the Commissioner took into consideration a range of 'factors' so as to establish whether special circumstances existed and what was fair and reasonable. From an examination of material provided by the ATO such factors included:
- the existence of a reasonably arguable position (this was a key factor in the decision to remit part of the interest charge in CIS arrangements);
- the taxpayer's background, experience, occupation and prior compliance history (these were factors in the decision to remit GIC in eligible MMTEI arrangements);
- whether the taxpayer made a voluntary disclosure and the level of the taxpayer's co-operation;
- the existence of prior correspondence, rulings or advance opinions; and
- the payment of fees to promoters and tax advisers.
A3.126 Although there is evidence of these factors being taken into consideration in these cases and for other arrangements, there is an absence of any detail in Chapter 93 of the ATO Receivables Policy, or any other supplementary interest remission guidelines, clearly articulating these factors and what the Commissioner requires when taxpayers make requests for remission of GIC.
A3.127 Excluding remission requests based upon delay in issuing amended assessments, there is little guidance in Chapter 93 of the ATO Receivables Policy as to the factors the Commissioner will consider in determining whether special circumstances exist that warrant the remission of GIC. In particular, there is little guidance as to the factors the Commissioner will look at in determining whether it is fair and reasonable to remit the GIC having regard to the nature of the specific event or decision.
A3.128 It is the Inspector-General's view that it is not expected that a policy will cover in advance all circumstances and factors to be taken into account in determining whether special circumstances exist and what is to be considered fair and reasonable.
A3.129 However, it is appropriate that any policy dealing with the remission of the GIC clearly articulate factors the Commissioner considers in practice. This is to ensure that taxpayers are properly informed of the factors the Commissioner considers relevant to the remission of the interest charge and to enable taxpayers to apply for remission of the interest charge on the basis of that knowledge. It is important that taxpayers are provided with all the relevant information to allow them to properly manage their tax affairs and be able to exercise their legal rights.
Groups of taxpayers
A3.130 In the English case IRC v National Federation of Self Employed & Small Businesses Ltd  AC 617, Lord Scarman said:
'I am persuaded that the modern case law recognises the legal duty owed by the revenue to the general body of the taxpayers to treat taxpayers fairly; to use their discretionary powers so that, subject to the requirements of good management, discrimination between one group of taxpayers and another does not arise; to ensure that there are no favourites and no sacrificial victims.'
A3.131 This decision has been cited with approval in Australia in a number of Federal Court decisions including Bellinz Pty Ltd v Federal Commissioner of Taxation (1998) 615 FCA, and Pickering & Ors v Deputy Commissioner of Taxation (1997) 37 ATR 41. In the latter case, Cooper J expressed the view that:
'… there is a growing body of academic and judicial opinion that persons in like situations are entitled at law to receive like treatment.' (article references and citations omitted)
A3.132 A number of submissions have expressed concern with the ATO's consistency in its application of the law relating to the remission of the interest charge as it applies to groups of taxpayers. In particular, concerns have been raised as to the approach adopted by the Commissioner for the remission of the interest charge amongst groups of taxpayers that had effectively entered into similar tax arrangements.
A3.133 From 1 July 2000, the Commissioner could exercise his discretionary power to remit the GIC for late payment in circumstances 'where it is otherwise appropriate to do so'.
A3.134 In paragraph 93.5.24 of the ATO Receivables Policy the Commissioner has indicated that the power to remit under this provision:
'… will not usually be concerned with the circumstances of a particular taxpayer, but may extend to a particular group of tax debtors, or to the general body of tax debtors, and may involve consideration of issues of administrative efficiency and fairness.'
A3.135 This approach was adopted by the Commissioner in determining how the remission power should be exercised in a number of arrangements. Apart from those taxpayers that had participated in the MMTEIs, other taxpayers were broadly grouped into categories based upon the type of arrangement. For some arrangements, a general offer of partial GIC remission was then made as part of the settlement offer.
Submissions to the Inspector-General
A3.136 The Inspector-General received a number of submissions outlining their circumstances and detailing the experience of taxpayers and advisers with the ATO's approach to remitting the interest charge for various arrangements including EBAs and retirement village investments.
A3.137 One submission noted that it had been their experience that:
'… taxpayers who entered into EBAs were subject to tax shortfall penalties of 10 per cent and GIC calculated from the due date of the original assessment until the date the taxpayer entered into a settlement. Any requests that were made to the ATO for the remission of the GIC were denied.
However, taxpayers who had invested in a mass-marketed scheme and settled with the ATO were offered full remission of GIC and penalties. We believe that this represents an inconsistent approach in the application of the law and the use of the Commissioner's discretion.
The ATO has justified the inconsistent approach by drawing a distinction between the type of taxpayer who invested in the EBAs and those taxpayers who invested in the mass-marketed schemes. We do not agree that such a distinction can be drawn, or applied to all taxpayers involved in the employee benefit arrangements.'
A3.138 The submission went on to state that in their experience:
'… a broad array of individuals entered into the EBAs ranging from 'sophisticated' investment bankers and corporate executives to the average salary and wage earner, small business operator, 'mum and dad' companies, etc. The investors in the EBAs were not exclusively 'sophisticated investors' and many were like those who invested in the mass-marketed schemes.'
A3.139 In a similar vein, another submission expressed the following concerns with the ATO's procedures and approach for groups of taxpayers:
- There was a divergence in the ATO's approach as to how groups of taxpayers were treated in the lead up to the settlement of a dispute;
- The ATO is reluctant to recognise a taxpayer's reasonably arguable position when remitting or reducing penalties. Taxpayers who have sought an advance opinion from a tax practitioner or who have been sophisticated enough to take advice are being poorly treated. This has been particularly prevalent in the ATO's handling of employee benefit trust arrangements.
A3.140 The submission raised the above concerns in the context that the Commissioner had failed to consider the individual taxpayer's circumstances in determining how the remission power was to be exercised.
A3.141 Another submission to the Inspector-General expressed concerns that there was a perception amongst the taxpayer community that the ATO is offering generous GIC remission in certain high profile situations but not in others. In doing so, the submission made the following comments:
- Various arrangements that are very similar to (and in some cases modelled on) the mass marketed schemes, but are not strictly 'mass-marketed', have not been able to access the same generous GIC remission;75
- It is not clear why the ATO has adopted three different approaches in relation to the remission of the GIC in these situations (Mass-Marketed Schemes, Controlling Interest Superannuation Arrangements and the other Employee Benefit Arrangements). The lack of explanation for the different approaches may be interpreted as a lack of consistency;
- The features identified by the ATO, which were said to distinguish the mass-marketed investment scheme participants, are true of many taxpayers who are subject to the GIC;
- The unfair treatment of tax agents who themselves have entered into mass-marketed schemes, but were in no way involved in their promotion;76
- It appears that GIC remission is handed out to participants in mass-marketed arrangements due to public outcry and political exposure, while others whose circumstances are much the same (or indeed more worthy of remission), but who have not had the same success in using the media and lobbying politicians, have had their applications for GIC remission refused. This leads to the perception of inequity and discrimination.
A3.142 The submission concluded that the actions of the ATO have resulted in participants feeling that:
'… there is discrimination between taxpayers who have entered into fundamentally similar transactions with the same knowledge. In essence, the only difference is that enough people entered into one of these arrangements that the ATO labels the arrangement a mass-marketed arrangement and/or an artificial distinction between 'the innocent public' and people who 'should have known better'.
A3.143 In an attempt to finalise disputes involving certain groups of taxpayers and achieve payment of the outstanding tax, the ATO has progressively offered standardised settlement arrangements, involving particular terms as regards the remission of pre-amended and post-amended assessment interest to taxpayers involved in these disputes.
A3.144 Aside from a very small number of cases, these standardised settlements were offered to affected taxpayers either on the basis that they were members of a group of people who had invested in one of the relevant types of arrangement or on the basis that they were members of a further subgroup of investors in the particular arrangement who shared certain characteristics. The relevant taxpayers were not offered settlement terms that were tailored to their own particular set of circumstances.
A3.145 Although the grouping of taxpayers may allow for administrative efficiency, it is crucial that the overarching principles of equity and fairness within tax administration are promoted. This is ensured by integrating flexibility within the grouped categories of arrangements so as to allow the circumstances of individual taxpayers to be considered where requested and maintaining a consistent approach to remitting the interest charge for different classes of taxpayers.
A3.146 It is recognised that the Commissioner has finite resources to allocate to the various functions carried out by the ATO. This means that how the Commissioner approaches certain issues, such as the application of interest remission for groups of taxpayers, may involve consideration of issues of administrative efficiency. However, as was made clear by the Senate Economics Reference Committee, it is incumbent upon the ATO to adapt its operating procedures to address the individual circumstances in a manner consistent with the Taxpayers' Charter.77 Ensuring that this obligation is adhered to is crucial in not only promoting equity and fairness but also maintaining public confidence in the administration of the tax system.
A3.147 Confidence in the administration of the tax system is not promoted if taxpayers within an arrangement are treated as a homogenous group and broad distinguishing labels are attached to the entirety that do not reflect the true nature of the members of that group.
A3.148 Therefore, the particular type of arrangement and how it operated would be merely one consideration in determining whether remission of interest is warranted. That is, whether a taxpayer entered into a MMTEI or another arrangement should not be the key determinant of whether a taxpayer is granted remission of the interest charge. Nor should the sophistication of an arrangement be attributed to a taxpayer for the purposes of classing them as a 'sophisticated' participant.
A3.149 Likewise, the extent to which a taxpayer shares certain characteristics of others who have also invested in the particular arrangements (such as their level of involvement in and knowledge of the relevant arrangement and of the tax system generally) should not be the only factors considered in determining whether a particular settlement offer involving particular interest terms is appropriate.
A3.150 As outlined in further detail in Appendices 4 to 6, the disputes that have been examined for the purposes of this review all involve marketing techniques by promoters that especially target unsophisticated investors, mixed ATO advice and opinions on the nature of those arrangements and delays in arriving at a considered view of the efficacy of the arrangements.
A3.151 Against this background, an examination of all the circumstances of the taxpayers involved in these arrangements may indicate that it is more appropriate for a similar interest remission outcome to arise for taxpayers who share similar individual circumstances regardless of which particular arrangement is involved.
A3.152 In the Inspector-General's view, the above comments lead to the following key findings.
Key Finding 3
Although disputes involving groups of taxpayers may have distinguishing features including the nature, complexity and sophistication of the arrangements, at the taxpayer level there are more common features between the individuals forming part of each group than points of differentiation. These include a broad array of investors, targeted marketing techniques, prior ATO advice/advance opinions/rulings and time delays.
Against this background, an examination of all the circumstances of the taxpayers involved in these arrangements may indicate that it is more appropriate for a similar interest remission outcome to arise for taxpayers who share similar individual circumstances regardless of the particular arrangement involved.
Key Finding 4
Administrative procedures regarding the remission of the interest charge for groups of taxpayers require that an appropriate balance is achieved between considerations of administrative efficiency in dealing with groups of taxpayers and examining the conduct and circumstances of a taxpayer in accordance with the Taxpayers' Charter.
To date, the approach of the Commissioner suggests more focus has been on considerations of administrative efficiency as opposed to an examination of a taxpayer's individual conduct and circumstances. In particular, considerations of the type and nature of the arrangement and the extent to which members of a group share certain further characteristics have overshadowed consideration of the conduct and circumstances for each individual.
Tax Office response
A3.153 The factors listed in Key Finding 3 are amongst the factors taken into account when determining whether a settlement offer is appropriate and the terms of that settlement offer.
A3.154 Of course the fact that an arrangement involves a group or groups of people does not of itself mean a settlement is appropriate. Each case needs to be considered on its merits, taking account of the circumstances surrounding the arrangements and the participants in them and the impact on the health and integrity of the tax system.
A3.155 The fact that the terms of particular settlements, including interest charge remissions, generally apply equally to all investors reflect that the reasons for the settlement generally go to the nature of the arrangements and of the investor's involvement in them.
A3.156 Efficient administration is one of the matters taken into account in determining the terms of any settlement offer. For example the ability to resolve large numbers of disputes and allow resources to be more effectively employed in managing the tax system is a relevant factor in determining the final terms of a settlement.
A3.157 This means that where it is appropriate to settle, the terms have generally been set at a level that is more beneficial than having regard solely to the circumstances of the various participants.
A3.158 Where there are significant groups within a particular arrangement that have significant distinguishing features this may result in differentiated settlement terms. This was the case for mass marketed investment schemes where promoters and accountants were offered different terms.
A3.159 Applications for further remissions outside of the general settlement terms are considered on a case-by-case basis. Given the general structure of settlements outlined above, grounds for further remission of the interest charge would generally be expected to relate to an individual participant's financial and other circumstances not directly related to the nature of the arrangement and the circumstances of the person's participation in it.
A3.160 The Inspector-General noted that the approach of the Tax Office suggests more focus has been placed on considerations of administrative efficiency rather than consideration of individual circumstances.
A3.161 The Commissioner acknowledges that administrative efficiency is one factor in determining mass dispute settlements and that therefore a key element of any such settlement requires that the terms be set at a more beneficial level than having regard solely to the circumstances of participants. The Inspector-General notes that opinions differ on whether the terms offered by the Commissioner are more beneficial. If the terms are more beneficial for most participants, cases may still exist where the relevant taxpayers should be granted more concessional treatment. For these exception cases, processes must exist to ensure that the individual circumstances of the taxpayers are considered. On the other hand, if the terms of settlement are not more beneficial to most participants, the individual circumstances of each participant need to be fully considered.
A3.162 Whether full consideration of all individual circumstances has occurred is a question of fact. The Inspector-General notes the strong community perception that individual circumstances have not been fully taken into account by the Tax Office.
Part D: Pre-amended assessment period, ATO delay and taxpayer and community awareness of the ATO interest remission policy
ATO delay in the pre-amended assessment period
A3.163 Evidence and submissions to the Inspector-General raised concerns with the inconsistency of the ATO in remitting interest for periods of delay caused by the ATO during the audit process. In particular, specific mention was made of the ATO's inconsistent remission of the interest charge in circumstances where both the taxpayer community and the ATO are uncertain of the application of the law.
A3.164 One submission noted that:
'… in many cases, the period of time between a taxpayer responding in full to a Notice of Intention to Audit of an EBA and the ATO issuing assessments-amended assessments has been up to 18 months. The period of time between a taxpayer's contribution to an EBA and the date of issue of the assessments-amended assessments is considerably longer — in some cases up to six years.'
A3.165 In a similar vein, another submission raised concerns with the retrospective application of the interest charge, noting:
'Due to the nature of the tax law, there are frequently instances where taxpayers may interpret the law, and its application to their particular factual circumstances, differently to that of the ATO. The taxpayer should be able to request a stay in the imposition of the GIC so that it is not effectively retrospective in instances where there is a review process being undertaken, the necessity for which has arisen due to the complexity of the tax law.'
A3.166 Paragraphs 93.5.32 and 93.5.33 of the ATO Receivables Policy discuss the remission of the interest charge where there has been a delay in issuing amended assessments. They provide that:
'The Commissioner may partly remit GIC for late payment based on significant delay. This may occur where the Commissioner has by a particular date gathered all the information and evidence that is necessary for the issue of the amended assessment, but the issuing of the amendments is delayed for a significant period of time beyond that date. However, a decision about any such remission will be affected by many factors. These may include:
- the complexity of the issues involved in making a determination of the amended amount;
- whether the taxpayer requested that the issuing of the amended assessment be delayed; or
- whether the taxpayer did, or was in a position to, self-amend, that is, determine and pay the amended amount themselves.Remission in such circumstances would normally consist of a reduction to the prevailing base interest rate (which is the prevailing monthly yield of 90 day Bank Accepted Bills) from whatever date the Commissioner deems appropriate in the circumstances.'
A3.167 The Inspector-General notes that paragraphs 93.5.32 and 93.5.33 of the ATO Receivables Policy only seem to deal with the remission of the interest charge due to ATO delay in the issuing of an amended assessment once all the relevant information and evidence has been gathered and the ATO has formed a view. In some instances there may be a lengthy period of time taken by the ATO in gathering the relevant information and evidence and arriving at a position on a particular arrangement, especially where there is some uncertainty as to the operation of the law.
Subsidiary Finding 1
The current ATO Receivables Policy only deals with the remission of the interest charge due to ATO delay in the issuing of an amended assessment once all information and evidence has been gathered and the ATO has formed a view.
Tax administration could be improved if the interest remission policy also specifically set out how the remission power would be exercised where the ATO has contributed to the delay during the pre-amended assessment period due to operational reasons or some uncertainty as to the operation of the law.
This could be similar to the approach in previous ATO guidelines, such as Taxation Ruling IT 2517.
Tax Office response
A3.168 As stated in response to Key Finding 2, the ATO will publish clearer guidelines on the remission of the pre-amended assessment interest charge.
A3.169 The Inspector-General endorses the Tax Office proposal to publish clearer guidelines addressing the issues identified.
Taxpayer and community awareness of the ATO interest remission policy
A3.170 Evidence and submissions to the Inspector-General raised concerns with the adequacy and availability of publicly available information detailing how the Commissioner will exercise his discretion to remit interest for underpayment of tax or late payment of tax.
A3.171 A submission to the Inspector-General expressed the view that:
'Chapter 93 does not include any comments on specific circumstances where the Commissioner may choose to remit the GIC. Instead, the Commissioner has issued a series of Interpretative Decisions (IDs) and Rulings in relation to specific issues that may affect taxpayers. This approach has resulted in no specific public guidance being issued by the Commissioner for many contemporary issues about which taxpayers may be in dispute with the ATO.'
A3.172 The submission proceeds to suggest that:
'…a more transparent and holistic approach should be adopted by the Commissioner in respect of the publication of guidance on the remission of GIC. This should involve the issue of public guidance about the remission of GIC for a broader range of taxation issues than is currently available. To ensure the integrity of the tax system and protect against inconsistent GIC outcomes between taxpayers, it would also be desirable, where possible, for guidance issued by the Commissioner to be in a form that is binding (for example, public rulings).'
A3.173 Another submission expressed concern over the adequacy of publicly available ATO interest guidelines in three key areas. Each of these is set out below with a summary of the main concerns.
ATO Receivables Policy
- Chapter 93 of the Receivables Policy is flawed because it is not clear from this information exactly when and how the Commissioner will exercise his discretion to remit or reduce the GIC.
- The information in Chapter 93 is complex and difficult to follow, with some reasons having a general application, and others are specific to a transaction.
ATO supplementary information on its GIC remission policy
- Limited supplementary ATO information is available to the public about the GIC in general.
- There is specific supplementary information about the ATO's GIC remission policy but in its current form this information is not helpful as a guide to the ATO's GIC remission policy.78
- Settlement guidelines are not always clear about how remission should apply and other supplementary information focuses more on the calculation and levying of GIC, rather than its remission.
Accessibility and public awareness
- The [ATO] Receivables Policy is not readily accessible to the public. Access to this policy document is principally via the ATO's website. It is a large and complex document which is difficult to search unless you know exactly what you are looking for.
- It is not clear when and how the remission policy will be applied in practice.
- It is questionable whether the public at large are as aware of the existence of the ATO Receivables Policy as they should be, let alone the ATO's specific policy on GIC remission. Cross-referencing to Chapter 93 in supplementary information is at best poor and in most instances non-existent. This only serves to reinforce public ignorance about the existence and application of the ATO's GIC remission policy.
A3.174 In a similar vein, another submission to the Inspector-General expressed the following concerns:
- Many practitioners are unaware that the interest remission policy exists and the fact that the interest remission policy for pre-amendment periods is embedded in the [ATO] Receivables Policy makes it difficult to locate.
- Many practitioners do not know where it is located on the ATO website and when searching on the ATO website encounter great difficulties in locating the ATO policy.
- The content of the policy is unwieldy and difficult to assimilate. It lacks examples of situations in which interest has been remitted or would be remitted and an explanation of the factors which were relevant in the decision to remit interest.
- The policy should include comments in relation to common factors that often arise in the context of penalty remission and would be relevant considerations for interest remission. For example, concepts such as honest mistake, voluntary disclosure and reasonably arguable position.
A3.175 The Inspector-General notes that the Rulings issued at the introduction of the self-assessment regime, namely Taxation Ruling IT 2444 and Taxation Ruling IT 2517, provided far greater guidance to taxpayers and their advisers than the current ATO policies. In particular, these rulings clearly set out the circumstances of remission of the interest charge, the factors to be considered by the ATO and what the actual rate of remission would be in particular circumstances. Much of that material was not incorporated by the Commissioner in later guidelines and no mention is made of the factors set out in Taxation Ruling IT 2517 and Taxation Ruling IT 2444 as relevant to the remission of interest.
A3.176 The Inspector-General further notes that no guidance is provided to the public by the Commissioner on how the remission power is to be exercised during the pre-amended assessment period, how partial remission of the interest charge is to determined and what factors are to be taken into account in determining remission in this assessing stage.
A3.177 This contrasts to the guidance provided to taxpayers in the imposition and remission of penalties. The ATO has issued a number of rulings, such as Taxation Ruling TR 94/7 and practice statements, including Practice Statement PS LA 2004/5, on how the Commissioner will remit penalties. The Administrative Appeals Tribunal (AAT) is also able to review the exercise of the Commissioner's power to remit any penalty for the underpayment of tax. As such, a body of law has also developed regarding the circumstances when this discretion should be exercised.
A3.178 Taken together, the Commissioner's views expressed in Taxation Ruling TR 94/7, Practice Statement PS LA 2004/5 and the relevant AAT decisions provide greater guidance to the taxpayer community as to how and when the Commissioner will exercise his discretion to remit tax shortfall penalties than does the interest remission policy.
A3.179 The Inspector-General agrees with the views expressed by a number of the submissions and the various suggestions made in those submissions. Good tax administration requires that taxpayers are made aware of the factors that will be taken into consideration by the Commissioner in determining whether to remit the interest charge. These views also reiterate Key Finding 2 which states that tax administration would benefit if the Commissioner published a separate policy document that provides clear guidelines on the current policy for the remission of the interest charge.
A3.180 The Inspector-General makes the following additional findings with the view that they would lead to an improvement in the adequacy and availability of publicly available information dealing with the remission of the interest charge for all taxpayers.
A3.181 These additional findings are consistent with the Commissioner's obligations under the Taxpayers' Charter to explain to taxpayers his decisions regarding their tax affairs and provide further assistance to taxpayers in understanding why the interest charge has been imposed at a particular rate and why remission is not warranted. This concern was raised in a number of submissions to the Inspector-General. They called for the Commissioner to provide greater information to taxpayers as to why remission of the interest charge in the pre-amended assessment period is not warranted.
A3.182 Importantly, such an approach will also provide taxpayers with more information to allow them to make informed decisions concerning remission applications and as to their legal rights under the Administrative Decisions (Judicial Review) Act 1977.
A3.183 This is particularly important where taxpayers do not have recourse to a merit review in respect of remission decisions.
Subsidiary Finding 2
Taxpayers would benefit if the Commissioner produced a simple guide to the remission of the interest charge, similar to an ATO Fact Sheet, outlining the process for requesting remission of the interest charge and the supporting information that the ATO requires.
Tax Office response
A3.184 As stated in response to Key Finding 2, the ATO will publish clearer guidelines on the remission of the pre-amended assessment interest charge.
A3.185 The Inspector-General endorses the Tax Office proposal to publish clearer guidelines addressing the issues identified.
Subsidiary Finding 3
Taxpayers would benefit from the Commissioner publishing more supplementary information dealing with the remission of the interest charge. For example, greater guidance could be provided in the form of more ATO Interpretative Decisions being released and referred to in the ATO interest charge remission guidelines.
Tax Office response
A3.186 As stated in response to Key Finding 2, the ATO will publish clearer guidelines on the remission of the pre-amended assessment interest charge.
A3.187 The Inspector-General endorses the Tax Office proposal to publish clearer guidelines addressing the issues identified.
Subsidiary Finding 4
Taxpayers would benefit if, in relation to pre-amended assessment interest, the Commissioner provided upon request the factors considered relevant to the decision to maintain, remit or reduce the statutory interest charge.
Tax Office response
A3.188 As stated in response to Key Finding 2, the ATO will publish clearer guidelines on the remission of the pre-amended assessment interest charge.
A3.189 The Inspector-General endorses the Tax Office proposal to publish clearer guidelines addressing the issues identified.
Other ATO comments
A3.190 In response to the above findings, the ATO has expressed the view that many of the above findings are based around the remission of pre-amended assessment interest, and the perception that it is not clear how Chapter 93 applies to such cases.79
A3.191 The ATO agrees that Chapter 93 of the ATO Receivables Policy was written primarily to focus on 'late payment' GIC. As such, the ATO has stated that it will give further consideration to the question of whether different guidelines should apply to 'pre-amended' and 'late payment' GIC and what form these guidelines should take.
A3.192 The ATO has also indicated that the ATO Receivables Policy was intended as a centralised and cohesive policy document addressing a taxpayer's lodgement and payment obligations. It may be possible to improve the policy guidelines without preparing a separate document relating to interest remission.
A3.193 The ATO has also expressed the view that it is essential for the Commissioner to retain the flexibility to deal with situations on their merits. Therefore, careful consideration needs to be given to what might be termed the 'precedent value' of examples of past situations where GIC has been remitted.
A3.194 The ATO has noted that it has in the past set out in detail, as a separate document, the factors taken into account in deciding that special circumstances existed for many taxpayers who participated in MMTEIs.80
A3.195 However the ATO is of the view that it now takes a more proactive approach to advising taxpayers of its view of many 'tax effective investments'. This includes issuing ATO Taxpayer Alerts. Along with other factors, the ATO has indicated that this may change the landscape such that it may not make the same decisions on remission if similar circumstances occurred in the future.81
Part E: Consideration of factors relevant to the remission of penalties
A3.196 A number of submissions to the Inspector-General have raised the concern that there is a lack of consistency between the factors relevant to the remission of penalties and the remission of the interest charge.
A3.197 This part of the appendix will firstly examine the legislative and policy background to the Commissioner's power to remit penalties.
A3.198 The policy underlying the application of a penalty will be briefly analysed and any disparity between factors considered relevant for the remission of penalties and the remission of the interest charge, that could give rise to a punitive-like effect in certain circumstances, will be examined.
Legislative and policy background to the penalty remission power
Overview — Pre-1 July 2000
A3.199 The general powers of the Commissioner to impose and remit penalties were previously contained in Part VII of the ITAA 1936. The Commissioner was given a general discretion to remit additional tax imposed by way of penalty.82
A3.200 Prior to 1 July 1992, Taxation Ruling IT 2517 outlined the remission guidelines applicable to cases involving the imposition of additional tax by way of a penalty. It specifically outlined the factors likely to influence the level of the culpability component and provided a schedule of typical base criteria and 'culpability' component ranges.83 It also provided a series of examples of how the remission power was to be exercised in a variety of cases involving different levels of culpability.
A3.201 For the years of income 1992/93 up to and including 1999/2000, Taxation Ruling TR 94/7 set out guidelines on the manner in which the Commissioner would exercise the discretion to remit a penalty otherwise payable under the shortfall sections.
A3.202 Paragraph 2 of Taxation Ruling TR 94/7 provides that:
'The discretion to remit penalty otherwise attracted under a shortfall section should be exercised in only those exceptional cases where, having regard to all of the circumstances, the application of a particular shortfall section and/or rate of penalty prescribed under that section would provide a clearly unreasonable or unjust result. However, the guidelines provided by this Ruling do not fetter authorised officers when exercising the discretion to remit. Each case should be decided on the basis of its facts and circumstances.'
A3.203 In providing an explanation of the ruling and the context in which the Commissioner intends that the discretion be exercised, paragraphs 15 to 17 of Taxation Ruling TR 94/7 provide:
'The new tax system specifies the penalties attracted for specific kinds of behaviour, and does not contemplate for most cases a further reduction from the rates set in the legislation. A major objective of the new penalties is to promote certainty in respect of the rates of penalty attracted and that objective would be compromised if the specified rates were regularly remitted.
However, the new system does recognise, through the remission power, that there will be certain exceptional cases where the penalty standards or the rates of penalty prescribed, if applied rigidly, may provide an unintended or unjust result. The discretion to remit penalties otherwise attracted should accordingly be administered in a fashion that ensures that the objectives of the new penalty system are achieved, but without oppressive results. For example, penalty otherwise attracted under a shortfall section in respect of a year of income will generally be remitted in full if the law is changed retrospectively after the taxpayer has lodged a return for the year(s) affected by the retrospective changes.
While this Ruling provides guidelines as to when the discretion to remit penalties should be exercised, officers should treat each case individually and make a decision based on the merits of the particular case.'
A3.204 It is made quite clear by Taxation Ruling TR 94/7 that it will only be in exceptional cases that remission of the prescribed penalties will be warranted. However, the ruling does list a number of factors to be considered, namely whether:
- the underpaid tax represents a tax deferral rather than permanent avoidance;
- the income has been incorrectly included in another taxpayer's return and no tax has been avoided because the taxpayers' rates of tax are the same;
- the authority supporting the ATO's view of the law is published just before the taxpayer lodges their return and the taxpayer could not reasonably be expected to have been aware of it; or
- the taxpayer only just exceeds the $10,000 — 1 per cent threshold requiring that they have a reasonable arguable position as well as having taken reasonable care because of an extraordinary transaction and it would be unjust to penalise the taxpayer.
Overview — Post-1 July 2000
A3.205 A new administrative penalty regime was introduced with effect from 1 July 2000. The uniform administrative penalty regime imposes penalties on taxpayers for failing to satisfy obligations under the taxation laws. The uniform regime applies in relation to statements, schemes or failure to lodge penalties and the imposition of such penalties are in addition to GIC.84
A3.206 Previously, Chapter 94 of the ATO Receivables Policy set out the factors to be taken into account when deciding whether to remit a shortfall penalty. However, Chapter 94 of the ATO Receivables Policy was withdrawn and replaced with a series of Practice Statements including PS LA 2000/9, PS LA 2002/8 and recently PS LA 2004/5. Each of these Law Administration Practice Statements outlines the Commissioner's position on the remission of penalties following the introduction of the new tax system.
A3.207 The ATO has indicated that, despite the introduction of the new uniform administrative penalty regime, the broad principles for penalty remission set out in the previous Taxation Ruling TR 94/7 will continue to apply.85 This is made explicitly clear in paragraph 55 of Practice Statement PS LA 2004/5.
Fringe benefits tax
A3.208 Taxation Ruling TR 95/4 sets out the guidelines for the remission of penalty taxes arising from a fringe benefit tax (FBT) audit. Similar to the approach set out in Taxation Ruling IT 2517, it provides that in determining remission of an additional tax by way of penalty, there are two components to be considered:
- a 'per annum component' that acts to compensate the revenue for the full amount of tax not having been paid by the due date; and
- a 'culpability component' based on the person's blameworthiness.
A3.209 The ruling also provides a list of circumstances where each of the components will be remitted. In respect of the per annum component, the ruling provides that:
'a partial or full remission may be appropriate where:
- the statement or omission has been made as a result of being genuinely misled by the actions of the ATO (full remission); or
- the particular circumstances make it fair and reasonable to remit all or part of the interest. The degree of the remission, if any, is dependent on the facts of the case.'86
A3.210Taxation Ruling TR 95/4 also sets out the factors to be considered in determining the culpability component and outlines the range of the penalty to be applied for each culpability type.87
Relevant factors for the purposes of penalty and interest remission
Analysis of penalty remission policy
A3.211 According to the ATO, culpability penalty reflects the level of accountability to be assigned to the taxpayer for non-compliance with their tax obligations. The culpability penalty represents the sum of the typical culpability rate component, the mitigating or aggravating factors component and the repeat offence component.88
A3.212 The typical culpability rate is dependent upon the cause of the shortfall amount. A number of the culpability rates deal with particular taxpayer behaviours including intentional disregard of a taxation law, recklessness as to the operation of a taxation law and failing to take reasonable care to comply with a taxation law. Alternatively, a penalty is imposed in circumstances where a taxpayer takes a position that is not reasonably arguable and the shortfall amount is above a reasonably arguable position threshold.
A3.213 In certain circumstances, the legislature has provided for an automatic remission in the level of the culpability penalty. One such instance is where a taxpayer has made a voluntary disclosure.89 Another is where the taxpayer's approach was consistent with a general administrative practice of the ATO.
A3.214 Paragraph 6 of Taxation Ruling TR 94/7 provides that it will be in only exceptional cases that remission of the prescribed penalties will be warranted.
A3.215 Paragraph 91.3.4 of the ATO Receivables Policy provides that:
'… the imposition of penalties will be cognisant of the taxpayer's compliance history and a consequential evaluation of compliance risk, as well as being focused on the longer-term goal of ensuring both current and future compliance. Some penalties, particularly the GIC, are designed to include compensation to the Government for the delay in paying the correct liability. In circumstances where a taxpayer has an impeccable compliance history, an error may not attract any penalty other than the GIC, while taxpayers with poor compliance history may be prosecuted rather than have administrative penalties imposed.'
A3.216 The Inspector-General notes the reference to the GIC as 'a penalty' by the ATO Receivables Policy. Such a reference is contrary to the intention of the interest charge as a means to compensate the Revenue for the time value of money.
A3.217 It would be inappropriate for the ATO to be treating the interest charge as a penalty, especially given that the uniform administrative penalties regime is intended to govern the punitive consequences for taxpayers that fail to meet their obligations. More importantly, to treat the GIC as a penalty where there is an absence of review rights similar to those under the uniform administrative penalty regime means that taxpayers are denied appropriate legal redress. Such an outcome is unlikely to be one intended by Parliament when introducing the current GIC regime and therefore it is important that the interest charge is imposed, and remitted, consistent with its purpose.
A3.218 In the Inspector-General's view, paragraph 91.3.4 of the ATO Receivables Policy should be revised so that it clearly articulates the purpose of the interest charge, namely to compensate the Revenue for the time value of money, rather than expressing the interest charge as a penalty.
A3.219 In response, the ATO has indicated that whilst Chapter 91 does fall under the section of the ATO Receivables Policy dealing with penalties, the term is perhaps being used in a wider sense that GIC is the impost or 'penalty' one faces when tax is not paid on time. However, as part of the wider review of the remission policy, the ATO has stated that they will consider revision to the passages in Chapter 91 as well as the placement of the remission policy.90
Consideration of relevant factors
A3.220 As has been previously discussed, it is important that the Commissioner's policy regarding the remission of interest achieves an appropriate balance between considerations of administrative efficiency in dealing with groups of taxpayers and examining the conduct and circumstances of a taxpayer.
A3.221 An examination of all the circumstances of the taxpayers involved in group disputes would include factors that were considered relevant by the Commissioner for the remission of penalties. Where such factors are not considered for the purposes of determining the remission of the interest charge, then this may give rise to an inequitable and punitive-like outcome for a taxpayer. This could arise where the taxpayer has a good tax compliance record, the taxpayer has made a voluntary disclosure to the Commissioner regarding their tax affairs, where there has been reasonable and positive co-operation by the taxpayer or where the taxpayer's approach is consistent with a general administrative practice of the ATO. Such scenarios will be discussed in further detail below.
Taxpayer has a good tax compliance record
A3.222 The first situation considers the circumstances identified in paragraph 91.3.4 of the ATO Receivables Policy, which is extracted above, of a taxpayer that has an impeccable compliance history. The policy provides that an error by the taxpayer would not attract any penalty other than the GIC. This means that under the ATO Compliance Model there are relevant factors that warrant the remission of penalties.
A3.223 In the Inspector-General's view, in the above scenario, the factors considered relevant for the remission of penalties may also provide strong grounds for the remission of the interest charge. However, if the Commissioner takes a narrow view in terms of what factors will be relevant for the remission of the interest charge, then the imposition of the interest charge in full without remission for the pre-amended assessment period could have a punitive-like effect.
Voluntary disclosure by a taxpayer
A3.224 Where a taxpayer voluntarily discloses a shortfall amount to the Commissioner before notification of a tax audit there is an automatic remission of penalty.
A3.225 Previously, Taxation Ruling IT 2517 made specific provision for the remission of the interest charge where a taxpayer made a voluntary disclosure of an underpayment of tax.91
A3.226 In contrast to the position taken by the Commissioner in Taxation Ruling IT 2517, voluntary disclosure is not specified as a situation where remission of the interest charge is warranted in the current remission interest policy. However, voluntary disclosure is a factor that the ATO has applied in practice to remit the interest charge, as is evident in the disputes examined later in Appendices 4 to 6.
A3.227 If voluntary disclosure is not specified as a factor warranting the remission of the interest charge under the current policy, then it raises the possibility of inequity and unfairness being introduced into the administration of the tax system.
A3.228 The Commissioner should specifically set out how the remission power will be exercised in circumstances involving voluntary disclosure for pre-amended assessment interest. Such an approach would be similar to that adopted in Taxation Ruling IT 2517 and would serve to promote and encourage voluntary compliance by taxpayers.
Reasonable and positive co-operation by the taxpayer
A3.229 Under the penalty remission policy which applied pre 1 July 1992, a relevant factor in the remission of penalties was whether a taxpayer's conduct has actually assisted the task of the auditor. According to the ATO, reasonable co-operation required the timely provision of information. This could either be by answering all relevant and reasonable questions truthfully and to the best of his or her ability and the timely provision of books and records.92
A3.230 Under Taxation Ruling IT 2517 positive co-operation was considered to be present where, after commencement of an audit, a taxpayer voluntarily admitted to an omission of income or an incorrect claim for a deduction. This disclosure needed to bring to light additional information to enable the ATO to make a judgment that the admission was reasonably complete.93
A3.231 The current interest remission policy makes no specific allowance for the co-operation of a taxpayer in determining the remission of the interest charge. In such circumstances, although the conduct of the taxpayer has resulted in a relatively significant saving in time and resources, the imposition of the interest rate in full without remission could have a punitive-like effect upon the taxpayer.
A3.232 Under the ATO Compliance Model, it is not appropriate for a taxpayer making a genuine effort to achieve the correct tax position by advising the ATO of an honest mistake to be penalised. For this reason, it is important that where factors are relevant in the remission of penalties that these same factors are part of the decision-making process in determining whether remission of the interest charge is warranted.
General administrative practice under taxation laws
A3.233 It is also important that the ATO's administrative policy dealing with the remission of the interest charge specifically provide for instances where there is evidence of a general administrative practice of the Commissioner to give favourable advice on a particular issue or arrangement.
A3.234 Previously, the Commissioner in Taxation Ruling IT 2517 broadly adopted such an approach. The Ruling provided that any remission of the 'per annum' component should be made in only exceptional circumstances. One instance where the remission of this per annum component was warranted was where a taxpayer had been genuinely misled by the actions of the ATO and the ruling provided for the remission of the per annum component to nil.
A3.235 More recently, the Federal Court in Prebble v FCT (2002) raised the possibility that the conduct of the Commissioner in issuing favourable advices for particular arrangements may amount to a general administrative practice.94 Although making it clear that a taxpayer is not entitled in any way to rely upon a private ruling or advance opinion to which he or she was not a party to, the Court did state that:
'Rather, the rulings and advance opinions were referred to merely to demonstrate that other reasonable minds construing the sections in question came to the same conclusion as to their proper construction and operation with respect to controlling shareholder contributions as that contended for by the Doctor [the taxpayer].
Although there is some evidence of a general administrative practice of the Commissioner to assess all claims for deductions to a superannuation fund by persons in the circumstances of the Doctor [the taxpayer] on the basis of the reasoning in those private rulings and advance opinions, that practice ended prior to September 1999.95
A3.236 Taxpayers who were involved in EBAs in the form of Employee Benefit Trusts, Employee Share Plans and Controlling Interest Superannuation arrangements have submitted that they believed, from the existence of prior favourable ATO advices on similar arrangements, that the arrangements they were entering into had received the endorsement of the ATO.
A3.237 In such circumstances, it is reasonable to assume that these taxpayers were not aware of the fine legal technical distinctions between advices that bind the Commissioner and those that do not. It is also reasonable to assume that, in any event, these taxpayers would have relied on the promoters of these schemes and their advisers to warn them of these distinctions, if those promoters and advisers had considered them to be relevant at the time.
A3.238 Therefore, the administration of the tax system could be improved by specifically providing, as one of the factors to be considered in determining remission of the interest charge, whether there was any evidence of a general administrative practice of the Commissioner to give favourable advice on a particular issue or arrangements.
A3.239 In the Inspector-General's view, the above comments lead to the following findings.
Key Finding 5
There are a variety of factors that the ATO has considered relevant in the statutory reduction and remission of penalties. These factors may also be relevant in considering the remission of the interest charge for groups of taxpayers in dispute with the ATO.
Tax Office response
A3.240 The fact that there are circumstances leading to a reduction or remission of penalties is not, of itself, conclusive of grounds for remission of the interest charge. It this was intended the legislative schema could be expected to reflect this.
A3.241 On the other hand they may, in combination with other factors contribute to a decision to remit the interest charge in whole or in part, particularly in a settlement context.
A3.242 The Inspector-General notes the acknowledgement of the Commissioner that factors relevant to a reduction or remission of penalties may be relevant to interest remission consideration.
Subsidiary Finding 5
Tax administration could be improved if the interest remission policy specifically set out how the remission power would be exercised for pre-amended assessment interest in instances where:
- no penalty is imposed due to the taxpayer's previous good compliance record in accordance with the Compliance Model;
- the taxpayer has made a voluntary disclosure to the Commissioner regarding their taxation position and there is no evidence of any prior intention to avoid the payment of tax;
- there is reasonable and positive co-operation by the taxpayer; and
- there is evidence of a general administrative practice by the Commissioner supporting the approach taken by the taxpayer.
Such an approach would be similar to that adopted in previous ATO rulings and would serve to promote and encourage voluntary compliance by taxpayers.96
Tax Office response
A3.243 The proposed remission guidelines will outline factors to be taken into account in deciding whether the interest charge should be remitted. As noted in the response to Key Finding 5, the fact that there are circumstances leading to a reduction in penalties is not, of itself, conclusive of grounds for remission of GIC under the current law.
A3.244 The Inspector-General endorses the Tax Office's proposal to publish clearer guidelines addressing the issues identified and notes that the Commission of Taxation acknowledges that circumstances leading to a reduction in penalties may also be relevant considerations for the remission of GIC.
32 Penalty for unpaid tax was imposed pursuant to section 223 of the Income Tax Assessment Act 1936 (ITAA 1936). Section 170AA of the ITAA 1936 had limited application.
33 Section 227 of the ITAA 1936.
34 Late Payment Penalty rates are detailed in Appendix 7 of this report.
35 Section 207 of the ITAA 1936.
36 The remission power for the interest element was contained in subsection 170AA(11) of the ITAA 1936, while the remission power for the new separate penalty was contained in subsection 227(3) of the ITAA 1936.
37 Amendments introduced by the Taxation Laws Amendment (Self-Assessment) Act 1992.
38 Section 207 of the ITAA 1936.
39 Subsection 201(1A) of the ITAA 1936.
40 Section 207A of the ITAA 1936.
41 Subsection 207A(4) of the ITAA 1936.
42 Section 170AA of the ITAA 1936.
43 Subsection 8AAG(1) of the Taxation Administration Act 1953 (TAA 1953).
44 Subsections 8AAG(1)-(5) of the TAA 1953.
45 The interest charge was imposed pursuant to section 204 of the ITAA 1936.
46 Paragraph 8AAG(5)(b) of the TAA 1953.
47 Taxation Ruling IT 2517, paragraph 33.
48 Taxation Ruling IT 2517, paragraph 81.
49 Section 170AA of the ITAA 1936.
50 These circumstances largely involved cases involving requests made by taxpayers under section 169A of the ITAA 1936 for the ATO's view of the law to be applied to a particular item shown in a lodged income tax return or other cases where the relevant item in dispute has been disclosed in the taxpayer's return.
51 Commissioner of Taxation, ATO Receivables Policy, April 2003, accessed from http://www.ato.gov.au on 13 April 2004, Chapter 93. The preamble to the Chapter 93 provides that 'this Chapter takes effect from 1 July 1999 and relates to remission of the General Interest Charge (in particular, general interest charge imposed as a result of late payment)'.
52 Attachment to ATO Minute No: IGT02-2003, dated 8 January 2004.
54 54 ATO Minute No: IGT015-2004, dated 23 February 2004, and email to the Inspector-General from ATO dated 16 April 2004.
56 The specific set of circumstances have been listed at paragraph A3.15 of this appendix.
57 Section 204 of the ITAA 1936 imposes the liability to pay the GIC in income tax matters. The provisions in Division 1 of Part IIA of the TAA 1953 deal with the calculation of the GIC, imposition of GIC on Running Balance Accounts (RBA) and remission of the GIC.
61 Paragraph 98.5.21 of the ATO Receivables Policy.
62 Amendment to subsection 8AAG(5) of the TAA 1953 by the A New Tax System (Tax administration) Act (No. 2) 2000.
63 Attachment to ATO Minute IGT30-2004, dated 27 May 2004, at page 8.
64 Senate Economics Reference Committee, Inquiry into Mass Marketed Tax Effective Schemes and Investor Protection, Interim Report, June 2001, at page 40.
65 Senate Economics Reference Committee, Inquiry into Mass Marketed Tax Effective Schemes and Investor Protection, Interim Report, June 2001, at page 41.
66 Attachment to ATO Minute IGT30-2004, dated 27 May 2004 at page 8.
67 ATO Minute No. IGT015-2004, dated 23 February 2004.
69 Section 170AA did not operate where the underpayment of tax was subject to a penalty under section 223 of the ITAA 1936.
70 Paragraph 170AA(4)(b) of the ITAA 1936 provided that interest was to be imposed:
'… at such rate of interest as is, or such rates of interest as are, applicable under regulations made for the purposes of paragraph 10(1)(b) of the Taxation (Interest on Overpayments) Act 1983'.
71 The specific set of circumstances have been listed at paragraph A3.26 of this Appendix.
72 The previous penalty provision under which the Commissioner imposed an interest charge, namely section 223 of the ITAA 1936, was also repealed at this time.
73 Australian Taxation Office, 'Most Mass Marketed Scheme Investors Set to Benefit from Interest Reduction', Media Release-Nat 01-58, 23 July 2001.
74 Information provided by the ATO to the Inspector-General in email dated 21 January 2004.
75 For example, the submission refers to the refusal by the Commissioner to grant GIC remission on similar terms in arrangements involving retirement villages and research and development (R&D) syndicates. These arrangements had either a private ruling (R&D syndicates) or were based on a public ruling (retirement villages) whereas almost all of the mass-marketed arrangements did not have such confirmation from the ATO. In the case of retirement villages, the investments were sold to the same types of investors and often had the same benefits as the mass-marketed arrangements.
76 Such tax agents have been denied access to the settlement offers made available to other participants in the same schemes — they are denied 'eligible taxpayer' status.
77 Senate Economics Reference Committee, Inquiry into Mass Marketed Tax Effective Schemes and Investor Protection, Interim Report, June 2001, at page 41.
78 For example, the GIC remission guidelines issued as part of a settlement are not always clear or equitable in their application and some general GIC information focuses primarily on the calculation of the GIC, with only passing reference to the remission of GIC. Also, some GIC information makes no reference to the remission of GIC (for example, the ATO's General Interest Charge (GIC) rates fact sheet that sets out what GIC is, how it is calculated and the rates used).
79 Attachment to ATO Minute 30/2004, dated 27 May 2004, at page 9.
82 Pursuant to section 227 of the ITAA 1936. This applies to penalties otherwise payable under sections 226G, 226H, 226J, 226K, 226L and 226M of the ITAA 1936.
83 Taxation Ruling IT 2517, at paragraphs 36 to 38.
84 Pursuant to section 298-20 of Schedule 1 of the TAA 1953 the Commissioner has the discretion to remit all or part of an administrative penalty.
85 Taxation Ruling TR 2000/3, which deals with the remission of penalty and GIC for failure to make deductions from RPS, PAYE and PPS payments, also indicates that the factors to be taken into account in deciding whether to remit the GIC will be similar to those taken into account under the pre-1 July 1999 regime.
86 Taxation Ruling TR 95/4, at paragraph 18.
87 Taxation Ruling TR 95/4, at paragraph 20.
88 Taxation Ruling TR 2000/3, at paragraph 6.
89 Where a taxpayer voluntary discloses a shortfall amount to the Commissioner before notification that a tax audit will be conducted, the base penalty amount is reduced by 80 per cent where the shortfall amount is $1,000 or more or to nil where the shortfall amount is less than $1,000. Where a taxpayer voluntarily discloses a shortfall amount to the Commissioner after the taxpayer has been notified that a tax audit will be conducted, the base penalty amount will be reduced by 20 per cent.
90 Attachment to ATO Minute 30/2004, dated 27 May 2004, at page 10.
91 Paragraph 16 of Taxation Ruling IT 2444 also provided that interest payable under section 170AA of the ITAA 1936 was remitted to an amount equal to the lesser of interest calculated at the rate of 10 per cent per annum, or 75 per cent of interest otherwise payable.
92 Taxation Ruling IT 2517, at paragraph 48.
93 Taxation Ruling IT 2517, at paragraph 51.
94 Prebble v FCT  FCAFC 165 (Full Federal Court) and Prebble v FCT  FCA 1424 (single judge).
95 Prebble v FCT  FCA 1424 at paragraph 51.
96 For example, Taxation Ruling IT 2517 and Taxation Ruling 95/4.