A.3f.1 This appendix sets out the Tax Office's detailed responses to Chapter 7 of the review and contains the Inspector-General's comments on the Tax Office responses.

Tax Office detailed reply to Chapter 7

Subsidiary recommendation 7.1

The Tax Office should include, in its comprehensive published policy or guidelines on tax litigation, its philosophy and approach in applying and communicating to taxpayers and the community the outcome of finalised decisions.

Tax Office Response

A.3f.2 Agreed

Subsidiary recommendation 7.2

The Tax Office's philosophy and approach in applying and communicating to taxpayers and the community the outcome of finalised decisions should be consistent with its role of administering the tax laws in a fair, timely and cost effective manner, consistent with the rule of law.

Tax Office Response

A.3f.3 Agreed

Subsidiary recommendation 7.3

The Tax Office should communicate, in a summarised form, its view of the application of all finalised court and tribunal decisions that involve a question of law within eight weeks of the date of the decision. By implication, this will include all finalised decisions considered by the Full Federal Court, the High Court and by the Federal Court on appeal from the Administrative Appeals Tribunal.

Tax Office Response

A.3f.4 Agreed in principle. However it may not be logistically possible to do so within eight weeks in all cases. For example, some may require longer consideration (and consultation) where the possible application to other cases is unclear.

Subsidiary recommendation 7.4

The Tax Office should also communicate, in a summarised form, its views of the application of all other decisions within similar timeframes, where it involves a priority technical issue or there is significant community interest in the outcome of the court or tribunal decision.

Tax Office Response

A.3f.5 See response to subsidiary recommendation 7.3.

Key Finding 7.4

There are community perceptions that the Tax Office's communication of the implications of finalised decisions indicates an absence of objectivity in the Tax Office's approach in applying finalised court and tribunal decisions.

Stakeholders suggest that the Tax Office has applied the outcomes of finalised court or tribunal decisions differently depending on if the Tax Office agrees or disagrees with the decision. The Inspector-General believes that these perceptions are valid.

Tax Office Response

A.3f.6 The Tax Office recognises we can always improve in the area of communication and agrees in principle with key recommendation 6. However, the Tax Office disagrees with the perception that it applies the outcomes of finalised cases differently.

A.3f.7 In all cases decided by the courts and tribunals, successful litigants are given the full benefit of decisions finally decided in their favour. Decisions of the courts are also applied broadly where they establish principles of general application. However, even here taxpayers can exercise their rights to appeal. On rare occasions there have been decisions where we disagree with the outcome and we have advised the community that we will either seek to challenge earlier decisions, or test other factual scenarios more broadly. This is in accordance with the advice of the Solicitor-General and the Attorney-General's Chief General Counsel.

A.3f.8 The cases said to justify the finding are mass marketed scheme cases and an employee benefits trust case. In most cases, the underlying relevant facts are common between participants in the same scheme. Therefore, with the exception of individual circumstances, a lead case would tend to be illustrative of the outcome of other similar cases.

A.3f.9 The following comments can be made about three of the four cases referred to159:

Howland-Rose & Ors

A.3f.10 These cases were run not only as the lead cases, but as test cases to seek guidance on the application of the general anti-avoidance provision to round-robin non-recourse financing involved in the Budplan and similar schemes.

A.3f.11 Apart from some exceptional circumstances, the cases illustrated the likely outcome for other Budplan participants. It gave an indication of how the courts might treat other schemes with similar financing arrangements. The taxpayers in Howland-Rose and Ors did not pursue appeals from the decision at first instance. No other participant subsequently ran another case on the same scheme to overturn the decision. No other case since has suggested the Part IVA reasoning in Howland-Rose was wrongly decided.

Vincent

A.3f.12 In this case the Commissioner was successful in showing that deductions were not available to the participants under the general deduction provision. The decision also found that the six-year period for amending assessments under Part IVA cannot be relied upon where the claimed tax benefit is cancelled under the general provisions of the income tax law.160 Both the Commissioner and the taxpayer accepted the outcome. The Commissioner accepted the part of the decision in Vincent that was adverse to him, and has at no stage sought to confine that aspect to its facts. Where the claimed tax benefit is ultimately found to be 'cancelled' under the general provisions of the income tax law, it is accepted that Part IVA has no application because there was no tax benefit within the meaning of section 177C.161

Cooke and Jamieson

A.3f.13 In this case the Full Federal Court upheld the original decision that expenses claimed by the taxpayers in relation to their investment in the Australian Horticultural Project (No 1) were deductible under the general deduction provisions of the income tax law. Further, the court held that the anti-avoidance provisions did not apply to disallow the deductions.

A.3f.14 This was the only investment scheme case where the Commissioner was wholly unsuccessful. The Commissioner accepted this decision and applied it to all other affected participants in the scheme who had outstanding disputes before the Administrative Appeals Tribunal (AAT).

A.3f.15 Cooke and Jamieson is referred to as a case 'the Tax Office has confined to the particular circumstances of the case.' As stated by Hill J in considering the application of the decision in Cooke to the facts in Sleight: '… decisions on Part IVA will, inevitably, turn upon the particular facts of the case'.162

Inspector-General's comments on Tax Office response

A.3f.16 Although the Tax Office may disagree with the perception that it applies the outcomes of finalised cases differently, the Inspector-General is of the view that there have been valid grounds for such perceptions arising. These grounds have been set out in Chapter 7 of the report. It is agreed that many of these perceptions arise from the Tax Office's approach and handling of mass marketed tax arrangement cases and an employee benefits trust case. Nevertheless, these adverse perceptions have the potential to undermine the Tax Office's overall management of litigation, especially without clear statements by the Tax Office regarding its philosophy and approach in applying and communicating to taxpayers and the community the outcome of finalised decisions.

A.3f.17 As acknowledged by the Commissioner of Taxation in his letter of reply what is important is that these adverse perceptions held by some should be addressed. The Inspector-General welcomes the Tax Office's support of the recommendations intended to improve the Tax Office's communication of finalised court and tribunal decisions as a means of addressing such perceptions.

Key Finding 7.6

The Tax Office does not provide taxpayers with objective guidance on the application of all finalised court and tribunal decisions to assist taxpayers operating in a self-assessment environment and, in some cases, continues to administer the law as if the decision did not apply.

Tax Office Response

A.3f.18 Of the case studies referred to in the report (Metal Manufactures, Eastern Nitrogen, and Essenbourne) the Commissioner has provided his views in press statements and speeches.163

A.3f.19 In relation to Marana Holdings, the Commissioner won the case. The Public Rulings Program showed that the re-write of one aspect of GSTR 2000/20 (the availability of input tax credits for units in serviced apartments) was delayed 'pending further consultation with Treasury'.

Inspector-General's comments on Tax Office response

A.3f.20 The Inspector-General does not believe that press statements and speeches represent adequate and objective guidance on the application of all finalised court and tribunal decisions to assist taxpayers operating in a self-assessment environment. Such statements tend to be both very brief (especially in the case of speeches) and difficult to locate by taxpayers and their advisers. Also, such statements, in particular press statements, do not serve to properly inform taxpayers and their advisers of the implications of the finalised decision and, at times, are more concerned with minimising perceived compliance risks. The Inspector-General welcomes the Tax Office's support of Key Recommendation 6 where it has agreed to communicate to taxpayers the implications of adverse and significant court decisions.

Key Finding 7.7

The Tax Office does not have appropriate processes and procedures in place to ensure that taxpayers are made aware that the Tax Office's view expressed in a public ruling, determination and interpretative decision may be impacted by a court or tribunal decision and that it is under review.

Tax Office Response

A.3f.21 See Key Recommendation 6 where we have agreed to communicate to taxpayers the implications of adverse and significant court decisions and the Tax Office's view wherever practicable.

Subsidiary recommendation 7.5

Following a court or tribunal decision, the Tax Office should promptly make taxpayers aware that the Tax Office's view expressed in a public ruling, determination or interpretative decision may be impacted and that it is under review. It should include identifying the paragraphs that are potentially affected and provide guidance to taxpayers on how they should apply the law until the public ruling, determination or interpretative decision is formally amended or withdrawn.

Tax Office Response

A.3f.22 Agreed in principle.

A.3f.23 However this could potentially mislead taxpayers in cases where the Government is considering legislative amendments. In these special cases, administrative common sense should prevail.

Inspector-General's comments on Tax Office response

A.3f.24 The Inspector-General notes that where Government is considering legislative amendments the Tax Office should nevertheless communicate to the community that it is seeking legislative change or that the matter is with Government. This is important in promoting transparency in tax administration by providing guidance to taxpayers operating in a self-assessing environment of the implications of a finalised court or tribunal decision.

Subsidiary recommendation 7.6

Where the Tax Office can readily identify how a finalised court or tribunal decision will impact a particular class of taxpayers then taxpayers should not be expected to hold their objections or disputes in abeyance indefinitely pending lengthy Tax Office internal processes for amending or withdrawing public rulings, determinations or interpretative decisions.

Tax Office Response

A.3f.25 Agreed in principle but subject to the qualification referred to in the response to 7.5 above.

Subsidiary recommendation 7.7

The Tax Office should implement processes to ensure that objections and disputes on hand involving a public ruling, determination or interpretative decision under review as a result of a court or tribunal decision are handled and resolved in a timely manner. This could require the resolution process being led by senior tax officers who are able to make a decision based on the current law (the law as interpreted by the Courts) rather than the existing Tax Office view.

Tax Office Response

A.3f.26 Agreed in principle, subject to the qualification referred to in response to 7.5.

A.3f.27 We will review our processes to ensure a timely response to decisions, as appropriate.

Subsidiary recommendation 7.8

A.3f.28 The Tax Office should develop uniform corporate governance processes to deal with the identification, consideration and feeding back to all appropriate areas of the Tax Office of any non-technical issues arising from the conduct of litigation with the aim of improving the quality and efficiency of litigation through better upstream processes.

Tax Office Response

A.3f.29 Agreed

Other Tax Office comments

Rule of law

A.3f.30 The joint advice of the Solicitor-General and the Attorney-General's Chief General Counsel confirms that there is no legal impediment to the Commissioner challenging a previous judicial decision in future litigation provided the Commissioner is open about his intentions. If advice has been obtained that suggests an earlier tribunal or single judge decision is wrong, that provides a basis on which to challenge that decision.

A.3f.31 We have reconsidered the cases where the Inspector-General has stated the Commissioner has acted inconsistently with the rule of law.

A.3f.32 Further comment on those cases appears below.

Essenbourne

A.3f.33 Following the decision of the Federal Court in Essenbourne, the Tax Office set out its position in an information sheet issued on 14 March 2003. The case related to employee benefit trust (EBT) arrangements.

A.3f.34 The decision of the Federal Court in Essenbourne held that the deductions claimed by participants were not allowable. The court also held that fringe benefits tax (FBT) was not payable in respect of the contribution to the trust.

A.3f.35 The court found that the contribution to the trust was simply a means for three principals of the company to share business profits. Therefore, deductions were not allowable, thereby rendering the scheme ineffective.

A.3f.36 We made it clear in our information sheet that we would look to clarify the application of the FBT law through litigation of representative cases. Through this information sheet, we advised those affected of our view.

A.3f.37 The Inspector-General has concluded that 'there have been a number of short-comings in the Tax Office meeting the standards set out in the Solicitor-General's opinion following Essenbourne.' He places heavy emphasis on the fact the Tax Office commented that it believed '… that there is an alternative view that is more consistent with our understanding of the policy intent of the law'.

A.3f.38 Although the Tax Office is of the opinion that the decision relating to FBT is not consistent with its understanding of the policy intent of the law, the decision to challenge the finding in later cases was not made on that basis alone. Shortly after the decision we sought and received advice from senior counsel that the decision was questionable and that a Full Federal Court, would, more likely than not, come to a different view. This advice was provided to the Inspector-General.

A.3f.39 In March 2004, Senior Counsel provided oral advice in relation to the application of fringe benefits tax to employee benefit arrangements, to the effect that both Keifel J and Hill J were wrong in their rejection in the Essenbourne and Walstern cases of the Tax Office's construction of the FBT law as stated in TR 1999/5. The Inspector-General has been advised of this advice.

A.3f.40 We accept that we have not offered test case funding in any case argued on similar issues since Essenbourne, however this is because there has not been a case where we have not succeeded in relation to the non-deductibility of the claimed deductions for income tax purposes.

Inspector-General's comments on Tax Office response

A.3f.41 The Inspector-General is of the view that, notwithstanding the Tax Office publicly stating the it did not accept that the Court's comments in Essenbourne on fringe benefits tax as correct, there have been a number of short-comings in the Tax Office meeting the standards set out in the Solicitor-General's opinion following Essenbourne. These have been set out in greater detail in Chapter 4 of the report.

Eastern Nitrogen and Metal Manufactures

A.3f.42 In Metal Manufactures and Eastern Nitrogen, the High Court refused the Tax Office special leave to appeal the decisions of the Full Federal Court because the decisions were essentially ones of fact. After careful consideration, the Commissioner issued a press release stating that we would not alter our stance in relation to abusive sale and leaseback transactions. This is not a case of not following precedent.

A.3f.43 We took this approach for a number of reasons. Firstly, because the High Court stated that other courts will not be bound by these decisions because they are decisions of fact. Secondly, and importantly, we believed that the Full Federal Court gave undue weight to the commercial reasons for the transaction and insufficient weight to the 'elements of artificiality' inherent in the transactions. If the Full Federal Court's approach had been allowed to stand uncorrected, continuing the approach taken in other Part IVA cases would have undermined the principle established by the High Court in F C of T v Spotless Services Ltd (1996) 186 CLR 404 at p 415. That is, that the pursuit of a commercial advantage is not necessarily inconsistent with the existence of a dominant purpose of obtaining a tax benefit. The position was later clarified by the High Court decision in Hart v FC of T [2004] HCA 26. The decision in Hart, we believe, put into question the approach taken by the Court in Metal Manufactures and Eastern Nitrogen, and re-affirmed the position taken by the High Court in Spotless.

A.3f.44 After the High Court refused leave in the sale and leaseback cases, senior counsel for the Commissioner advised in a note to our solicitor that with the issues now substantially refined, it might be possible to run another case as '… in the view of the High Court, each of these matters depended on its particular facts.'

A.3f.45 Although we believe that the sale and leaseback cases were cases which turned on their facts, in line with the Solicitor-General's advice, we 'as soon as possible put those affected on notice of [our] view'. This was done by reference to the media release issued shortly after the refusal of the High Court to grant special leave.

A.3f.46 We note that in paragraphs 7.138 and 7.139, the Inspector-General has quoted from comments made by Tax Office staff in the process of formative views expressed before a final decision had been taken about the cases. The Tax Office encourages staff to express their honest views about cases so that decision makers are fully informed. However, the final Tax Office view was expressed by those authorised to make such decisions. The earlier formative views of junior staff did not have the benefit of subsequent counsel advice.

A.3f.47 The Public Ruling on sale and leasebacks, TR 95/30, is presently under review.

Inspector-General's comments on Tax Office response

A.3f.48 The Inspector-General acknowledges that ultimately the application of precedent will be dependent on the particular facts of the taxpayer. It should also be stressed that this chapter is not examining the technical basis for the Tax Office view but rather the objectiveness and timeliness in its response to how a finalised decision impacts the Tax Office view.

A.3f.49 In its public response to Eastern Nitrogen and Metal Manufactures the Tax Office stated its position on sale and leasebacks continued to be set out in Taxation Ruling TR 95/30. However, the Full Federal Court in Eastern Nitrogen and Metal Manufactures did consider important aspects of the law that, following these decisions, were in apparent conflict with Taxation Ruling TR 95/30. This includes the Tax Office view that a fixture is not an asset that could be the subject of a lease and that it would not accept a going concern basis for valuation.

A.3f.50 In the Inspector-General's view it has been public statements that Taxation Ruling TR 95/30 continued to set out the Tax Office's view on sale and leasebacks when clearly that view was impacted by the Full Federal Court decisions that have fuelled perceptions that the Tax Office is not following precedent. In the Inspector-General's view, the public statements by the Tax Office did not provide sufficient guidance to taxpayers on how the Tax Office view was impacted. This, together with the delay in revising Taxation Ruling TR 95/30, has contributed to those perceptions arising from the Tax Office's handling of the application of the Eastern Nitrogen and Metal Manufactures decisions. There is clearly a need for a more articulated response, especially given the market segment impacted by these decisions.

A.3f.51 The Inspector-General notes that the Tax Office has released Draft Taxation Ruling TR2006/D5, approximately 5 years after the Full Federal Court decisions in Eastern Nitrogen and Metal Manufactures, which is intended to revise and update Taxation Ruling TR 95/30. The Tax Office advises that Taxation Ruling TR 95/30 will be withdrawn from the date of issue of the Final Ruling related to Draft Taxation Ruling TR2006/D5.

Other cases

A.3f.52 The report identifies other cases where the Commissioner has either indicated that he does not accept prior decisions of the Tribunal or has clarified how the case has been understood in the context of higher authority. In all of these cases, the Commissioner has made his position clear. The perceptions that may be held by some seem to be assertions of differing legal interpretations in particular cases.


159 Essenbourne is discussed later.

160 [2002] FCAFC 291; 2002 ATC 4742; 51 ATR 18 at [88] to [94].

161 PSLA 2005/24.

162 [2004] FCAFC 94 at paragraph 111.

163 See for example Media Release — Nat 02/16 'Acting Commissioner reaffirms stand on abusive sale and leaseback transactions'; 'Part IVA and the Common Sense of a Reasonable Person' 2002 Queensland Taxation Institute Convention, Michael D'Ascenzo. 17 May 2002; Media Release — Nat 03/30 'Employee benefit arrangements'; http://www.ato.gov.au/atp/pathway.asp?pc=001/008/003.