3.1 In a discussion paper issued prior to the enactment of the post RoSA tax rulings laws, the Commonwealth Treasury said:
Providing more legally binding advice would reduce the capacity of the Tax Office to amend assessments where taxpayers have paid too little tax on the basis of incorrect Tax Office advice. This may have significant revenue consequences, or the tax foregone might effectively be borne by taxpayers as a whole. However, these concerns do not apply if the advice is correct.17
3.2 These comments refer to the fact that, in a legally binding ruling regime, the Tax Office does not have the same capacity to collect prior year tax that has not been collected because of incorrect Tax Office advice.
3.3 A concern that incorrect Tax Office advice could have significant revenue consequences appears to be one reason why Australia did not adopt a binding rulings regime until 1992. This may also be why other countries have been reluctant to introduce a binding public rulings regime which is as comprehensive as Australia's. Summaries of the rulings regimes of five other countries with comparable jurisdictions are set out in Appendix 4.
3.4 However, the 1992 rulings laws allowed Tax Office advice to be legally binding. Furthermore, in 2006 these laws were changed to allow more such advice to be legally binding than was the case under the 1992 laws. It seems therefore that, in setting up the post 2006 legal framework for rulings, Australia's policy-makers intended that Australian taxpayers should have, and be able to rely on, more legally binding Tax Office advice, even though this development could have possible adverse revenue consequences.
3.5 It also seems that the policy-makers' decision on this point may have been based on the premise that the Tax Office should be able to minimise the revenue risks associated with its provision of incorrect legally binding advice by introducing internal systems which ensure that any such advice it gives is in fact correct.
3.6 However, given the Commissioner's broad powers of administration, it is theoretically possible for the Tax Office to not give full effect to any apparent intent of the post 2006 rulings laws for more Tax Office advice to be legally binding.
3.7 One way the Tax Office can do so is by stating that certain types of advice it provides are not legally capable of being binding under these laws.
3.8 Under the old rulings laws these matters were limited to those in which the Commissioner gave his opinion on the way in which the law applies to any person (that is, on the interpretation of that law). Under the new rulings laws the Commissioner can now rule on 'any matter involved in the application of' (IGT's italics) the law (see section 358-5(2) of the Taxation Administration Act 1953 (TAA 1953)).
3.9 As a result of this review, the Tax Office has now formally confirmed that under the new rulings regime, in addition to being able to rule on matters of administration, collection and ultimate conclusions of fact, the Tax Office can also make binding public rulings, in the context of the application of a specific tax provision, on:
- risk management material;
- safe harbours;
- matters involving the ABN Act; and
- a matter which is specific to a single entity.
3.10 The Tax Office's acknowledgement of its ability to issue binding rulings on the above topics is subject to conditions, as its comments below on each of these matters illustrate. This acknowledgement has also not been set out in any publicly issued document.
Risk management material
3.11 An example of risk management material is a document which sets out which taxpayers may be the subject of a Tax Office audit on a particular issue.
Tax Office approach
3.12 The Tax Office has advised the Inspector-General that certain types of risk management material could be the subject of a binding public ruling where it is a matter necessary to determine the Commissioner's opinion on how a particular relevant provision applies or would apply to entities and if the Commissioner chose to deal with the risk management material in the public ruling.
3.13 The Tax Office considers that there would be very few, if any, circumstances where it was necessary to deal with risk management material in the course of providing an opinion on the application of a provision of the law. Further, even where discussed, if the risk management material did not relate to the relevant provision being ruled upon, it considers it would not form part of the binding public ruling. It states that this latter point is covered in an example at paragraph 28 of TR 2006/10, where the public ruling in question is dealing with Division 974 and the audit plans are not related to the view expressed about Division 974.
3.14 The Tax Office also states that, more significantly, with audit plan and other enforcement scenarios, the Commissioner would not choose to issue any binding public ruling on such general administration issues where this would amount to a direct fetter on his ability to fulfil his responsibilities to properly administer the law. Any possible discussion of risk management material in a proposed public ruling would be considered on a case by case basis in the course of developing the public ruling.
'Safe harbour' issues
3.15 The term 'safe harbours' in this context means practices (which may include maximum or minimum amounts) which the Tax Office says it will accept as meeting the requirements of the tax law in specific circumstances.
Tax Office approach
3.16 The Tax Office states that it is a matter for the Commissioner to consider, on a case-by-case basis, when and the extent to which any 'safe harbour' of the nature mentioned (for example, permitted deductible amounts) might be necessary to provide an opinion on the application of a provision of the law in the form of a binding public ruling. In considering this, he must have regard to the extent the provision of any such safe harbour might prejudice or unduly restrict his ability to fulfil his responsibility to properly administer the tax laws and his responsibilities under the Financial Management and Accountability Act 1997. Therefore, as with risk management material above, it would be extremely rare for this to be dealt with in a public ruling.
Matters involving the ABN Act
3.17 After the enactment of the new ruling regime the Tax Office reissued its ruling on the meaning of the term 'entity carrying on an enterprise' for the purposes of the ABN Act. The new ruling is MT 2006/1. However this new ruling, like its predecessor, is expressly not a binding ruling (although both it and its predecessor are parts of what is known as the miscellaneous tax 'ruling' series).
3.18 Although the ABN Act is not an Act covered by the new rulings regime, the operation of the ABN Act is an integral part of the administration of the income tax laws. This is because a failure to quote an ABN will result in income tax being withheld on business to business payments. The new rulings laws now expressly allow the Tax Office to make binding rulings about the administration or collection of income tax. This means that the Tax Office could have issued this ruling on the basis that it was, at least partly if not wholly, a binding ruling. However, it did not do so.
Tax Office approach
3.19 The Tax Office states that section 357-55 of the TAA 1953 lists the various topics that are relevant for binding public rulings (these are set out at paragraph 11 of TR 2006/10). The ABN Act is not included, and therefore the Commissioner is not authorised to make binding public rulings about provisions in the ABN Act. The Tax Office considers the law to be clear on this point.
3.20 It also states that, in dealing in a binding public ruling with the PAYG provisions in the Taxation Administration Act 1953 (which are about the collection and administration of income tax), it may be useful to consider some applicable concepts or terms from the ABN Act. This falls under the scope of 'any matter', but is for the purpose of ruling on the PAYG provision and is only binding in respect of that provision (as discussed above).
3.21 The Tax Office has also advised the Inspector-General that it did not take an approach of issuing MT 2006/1 in a form which linked to a relevant provision, as listed in section 357-55, so as to render the contents legally binding because:
MT 2006/1 deals even more comprehensively (87 pages) with the meaning of 'entity' and 'enterprise' for the purposes of the ABN Act (than its predecessor). The ruling (at paragraphs 8 to 9) discusses the policy intent underlying the introduction of the ABN system, being principally as a unique business identifier to be used by entitled entities for all dealings with commonwealth, state and local government. While a significant part of the policy intent is to allow businesses to identify themselves reliably for the purposes of a range of taxation laws (that is, not just income tax), it also serves a variety of other purposes.
Due to the multi-purpose nature of the ABN system, the views in MT 2006/1 on the meaning of terms in the ABN Act apply much more generally than for any specific income tax provision (such as no-ABN withholding). This is why these issues were dealt with in the MT series, both in 2000 and again in 2006.
As the primary reason for having MT 2006/1 is for more general application, to issue a ruling with more restricted application would not have fulfilled the original purpose and a further ruling in the same terms as MT 2006/1 would still have been necessary.
3.22 The Inspector-General notes that the Tax Office's register of binding private rulings appears to indicate that taxpayers have sought and obtained from the Tax Office private binding rulings solely in relation to ABN Act matters.18 The Inspector-General will further explore the subject of Tax Office practices in this area in the context of a proposed review on binding private rulings which he has recently announced will form part of his forward work program.
Matters likely to be specific to a particular entity
Tax Office approach
3.23 The Tax Office asserts that subsection 358-5(1) of the TAA 1953 clearly states that a public ruling is about how the Commissioner considers a relevant provision applies to entities generally or to a class of entities (also see paragraph 4 of TR 2006/10). It is possible that a public ruling applying to entities generally could deal with matters specific to a single entity (for example, in the context of a class ruling for employees on a specific company's employee share arrangements). However, it is the private rulings system which has been established to deal with how the law applies to a single entity. The Tax Office considers that the law is clear on this point.
3.24 The Inspector-General notes that the Tax Office's views on all the above matters are yet to be fully communicated to either its staff or to the public at large.
3.25 The Inspector-General further notes that during the course of this review senior staff from various business lines within the Tax Office were found to be of the view that under the 2006 rulings regime they were legally unable to issue public binding rulings on risk management material, safe harbours, matters involving the ABN Act and matters specific to a particular entity. These views do not accord with the position the Tax Office has now expressed to the Inspector-General.
Matters involving the application of the Commissioner's discretion
3.26 During the review the Inspector-General also found that a number of senior Tax Office staff involved in the drafting of public rulings held the view that the rulings laws which came into effect on 1 January 2006 meant that rulings could no longer be made on matters involving the exercise of the Commissioner's discretion. This view was based on the absence in the new rulings law of a specific provision, similar to that which existed in the old rulings law which allowed such rulings to be made.19
3.27 The Tax Office has confirmed in a statement in paragraph 13 of the public ruling TR 2006/10 that the new rulings laws are to be interpreted as enabling the Commissioner to issue rulings on the way in which a discretion is exercised. However, there is clearly a lack of knowledge of this guideline within the Tax Office. The Inspector-General has therefore recommended that the Tax Office take steps to issue further guidance on this matter to Tax Office staff.
3.28 The above comments have led the Inspector-General to making the following recommendation.
Key recommendation 1
The Inspector-General recommends that the Tax Office should:
- issue further guidance to its staff, which is made publicly available, on its ability to issue public rulings on the following issues:
- risk management material;
- safe harbours;
- matters involving the A New Tax System (Australian Business Number) Act 1999 (the ABN Act); and
- matters which are specific to a single entity; and
- issue further guidance to its staff to explain that the rulings laws which came into effect on 1 January 2006 enable the Commissioner to make a ruling on the way in which a discretion will be exercised.
Tax Office response2>
3.29 The Tax Office agrees with this recommendation.
3.30 The Tax Office has provided publicly available guidance for Tax Office staff and the community on these matters in Taxation Ruling TR 2006/10 and in various law administration practice statements. Nevertheless, from the Inspector-General's comments, it is apparent that our position may not be sufficiently clear.
3.31 Therefore, the Tax Office agrees to add additional material to TR 2006/10 (public rulings), TR 2006/11 (private rulings) and internal guidance material, as appropriate, to provide further clarification of the Tax Office's view on:
- the broad scope of 'any matter involved in the application' of the provision of the law being ruled on (so as to potentially cover matters such as risk management material, 'safe harbours' or ABN issues, where it is necessary to do so for the application of the relevant provision),
- the ability to provide public rulings on discretion provisions,
- the inability to provide public rulings on provisions of the law not covered by the list in section 357-55 of Schedule 1 of the TAA, and
- the extent to which a public ruling can deal with matters specific to a single entity.
17 Commonwealth Treasury, Review of Aspects of Income Tax Self Assessment Discussion Paper, March 2004 at page 26.
18 See for example the edited private ruling with the authorisation number 71486 on the Tax Office's register of private binding rulings.
19 The relevant former provision was section 14ZAAD of the TAA 1953.