4.1 In the discussion paper which preceded the RoSA report, the Commonwealth Treasury stated that there was a risk that if the tax ruling laws were amended to make more Tax Office advice binding the Tax Office's advice might become 'more limited, cautious and conditional'. This possible development in Tax Office advice was flagged in a Treasury discussion paper which preceded the final RoSA report.20
4.2 This review has gathered evidence which indicates that since the enactment of the 2006 rulings laws, some Tax Office advice has in fact become 'more limited, cautious and conditional'.
4.3 The evidence which supports this assertion consists of:
- the volume of non-binding practice statements issued since 1 January 2006;
- the nature of the declarations which the Tax Office includes in the paper and electronic forms of its annual TaxPack publication as to the extent to which the material in those publications is binding on the Tax Office;
- the extent to which the Tax Office has reissued in a non-binding form material that was issued in a binding form pre 1 January 2006;
- the absence of any systematic Tax Office process for going back over TR, TD or MT series rulings it issued in a non-binding form pre 1 January 2006 and reissuing them in a binding form; and
- the withdrawal by the Tax Office in 2007 of certain assertions it made in a previous 2003 practice statement. The 2003 assertions made it clear that the Tax Office considered that ATO IDs and other material set out its general administrative practice. The Tax Office no longer holds this view. Its revised view on this topic is discussed more fully in the next chapter of this report.
4.4 The review has also found that there are difficulties with the manner in which the Tax Office has communicated to the public certain aspects of both its 'rulings' products and its practice statements products.
Volume of practice statements issued before and after 1 January 2006
4.5 Since the date of effect of the new post RoSA rulings regime, the number of non-binding practice statements issued each year has (with the exception of the year ended 30 June 2008) been on the increase.
4.6 This trend is evident from the following table:
Tax Office declarations involving the binding status of advice in TaxPack
4.7 The RoSA review recommended that the Commissioner be empowered to declare that advice for the general information of non-business individual preparers (for example, TaxPack) is legally binding upon the Tax Office. The RoSA review also specifically contemplated that the Tax Office would progressively make its premier advice products binding, as those products were updated.21
4.8 While the post 1 January 2006 rulings regime now gives the Commissioner power to declare TaxPack and similar material to be a legally binding ruling, the Tax Office has not made significant parts of its paper and electronic versions of TaxPack legally binding.
4.9 Furthermore, the paper and electronic versions of TaxPack are unclear on whether legally binding status extends to business individuals or to individuals who have their return prepared by a tax agent.
4.10 In addition, the paper and electronic versions of the 2008 TaxPack have different methods of excluding material in these publications from public ruling status. This raises the issue that taxpayers who rely on one publication rather than the other may obtain a different level of protection against the payment of tax, penalties and interest if any advice in the relevant publication is wrong.
Binding status of 2007 and 2008 electronic TaxPacks
4.11 The 2008 electronic version of TaxPack specifically excludes a significant number of questions (28 in all) from having binding ruling status. The excluded questions include all questions concerning capital gains tax, all questions concerning rental income and deductions, and all questions concerning entitlement to the net medical expenses offset.
4.12 The 2007 electronic version of TaxPack did not exclude particular questions from having binding ruling status. It listed that the following areas were not subject to public ruling protection:
- amounts of any pre-filled data;
- amounts of any calculations stated to be estimates;
- the publications 2007 module;
- the capital gains tax 2007 module; and
- the E-Tax Medicare tax statement online 2007 program.
4.13 Although the exact meaning of the 2007 exclusions is unclear, it does seem to be clear that these exclusions are not as wide as those listed in the 2008 electronic TaxPack. In other words, between the 2007 and 2008 years of income the Tax Office has actually decreased the amount of material in its electronic TaxPack which it states will give binding ruling protection. This appears to be clear evidence that it has made its advice in this area 'more limited, cautious and conditional'.
Binding status of 2007 and 2008 paper TaxPacks
4.14 The paper versions of the 2007 and 2008 TaxPacks have methods of excluding material in these publications from public ruling status which differ from the electronic versions. In both sets of material the exclusion is made by way of a Tax Office 'commitment to you' statement.
4.15 The 2008 version of this commitment statement is reproduced in Appendix 5.
4.16 This commitment statement does not clearly indicate:
- whether the material in the TaxPack supplement forms part of the binding ruling part of TaxPack; or
- whether binding ruling status extends to individuals who have their returns prepared by tax agents.
4.17 There is also some doubt as to whether this commitment statement applies to individuals who operate a business. This is because the recommendation from Treasury's RoSA review, which referred to the Commissioner being empowered to declare that TaxPack is legally binding, only referred to this legally binding ruling status being extended to non-business individual self preparers.22
4.18 The Tax Office has advised the IGT that the commitment statement in its 2008 TaxPack is meant to apply to all individual self-preparers for the material in the TaxPack document alone. This means it is not limited to just non-business individual self preparers. It also means that public ruling status does not extend to individuals who have their returns prepared by a tax agent or to the TaxPack supplement. However, the words used in the commitment statement do not make any of this clear as there is no specific reference in the TaxPack commitment statement to 'self preparers', 'business' individuals nor to the Tax Pack supplement.
4.19 The 2008 commitment statement in the paper version is also different from that used in 2007. The 2007 version (which is also reproduced in Appendix 5) also did not clarify any of the above three issues. However, in addition, the 2007 commitment statement was confusing and apparently contradictory on what parts of TaxPack were and were not a binding public ruling.
4.20 The 2007 statement said that if the Tax Office stated the law incorrectly and taxpayers did not pay enough tax the Tax Office would not ask taxpayers to pay that tax. Immediately after this statement, however, and in apparent contradiction to it, the statement says that if any 'other information' in TaxPack is incorrect and as a result a taxpayer does not pay enough tax the Tax Office may ask them to pay that tax. The meaning of the 'any other information' that, if incorrect, would not protect taxpayers was unclear.
4.21 Early in this review, the Inspector-General brought the contradictory statement issue (as well as the other issues listed above) to the Tax Office's attention. The 2008 commitment statement is now somewhat clearer than the 2007 statement. It specifies that the 'any other information' which will not give binding ruling protection is those parts of TaxPack which amount to guidance to help taxpayers complete their returns. However, it is still not clear how this form of guidance can be distinguished from the rest of the material in TaxPack.
Pre and post RoSA binding material
4.22 Since 1 January 2006, the Tax Office has issued at least 30 public rulings, determinations, practice statements or ATO IDs which involve replacing in whole or in part a pre RoSA ruling or determination. Of these:
- seven involve an increase in the amount of binding material in the post RoSA material. These include the rulings on effective life for depreciation purposes and the annual tax determination for the value of stock deemed to be taken for private purposes (these were both formerly issued as non-binding rulings but are now issued as binding rulings);
- eight involve a decrease in the amount of binding material;
- eleven involve no change in the amount of binding material; and
- in four cases it is unclear whether the amount of binding material has changed.
4.23 One notable example of where the Tax Office has withdrawn a pre RoSA ruling and replaced at least parts of it with less binding material is TR 99/5 (which deals with employee benefit arrangements). This previously binding ruling has been withdrawn in full but has to date only been replaced with two ATO IDs23.
4.24 Other examples where the replacement material is less binding than the former material are in:
- a ruling on sale and lease backs24;
- a practice statement which replaced the formerly administratively binding ruling on PAYG withholding penalties25; and
- material contained in a non-binding guidebook on the research and development concession which replaced material contained in three withdrawn, formerly administratively binding, rulings.26
4.25 The Inspector-General considers that, in line with the apparent intent of the 2006 changes to the rulings law, there should, post RoSA, generally be no cases where the Tax Office issues material post RoSA which is less binding than what existed pre RoSA.
Absence of Tax Office processes to review the binding/non-binding status of pre 2006 rulings
4.26 During the period from 1992 to the beginning of 2006 the Tax Office issued a number of rulings in its TR and TD (as well as its MT series) which despite being labelled 'rulings' actually contained preambles which indicated that they were not in fact public binding rulings and were only 'administratively binding' on the Tax Office (that is, their binding status was similar to those issued in the old IT series of rulings).
4.27 Examples of rulings in the TR or TD series which contain a preamble which states that they are not in fact binding rulings are:
- TR 2005/1, which deals with the issue of carrying on a business as a professional artist;
- TD 2004/24, which deals with whether there is a deemed assessment when a company lodges a non-taxable return;
- TR 2003/1, which deals with thin capitalisation;
- TD 2002/26, which deals with the value of goods taken from stock for private use;
- TR 2001/13 which deals with interpreting Australia's double tax treaties; and
- TR 2000/15 which deals with company groups and company subsidiaries.
4.28 The Tax Office has no systematic process for going back over the rulings it issued in its TR, TD or MT series which were not rulings and were only administratively binding and reissuing these as binding rulings. There are estimated to be about 22 of these kinds of rulings which are still current. Such a process could, for example, be introduced whenever the Tax Office is confirming the application of those rulings to a number of taxpayers.
Withdrawal in 2003 of Tax Office statements on whether or not particular documents represented its general administrative practice
4.29 In 2003 the Tax Office issued a practice statement, PS LA 2003/3 which clearly stated that the following Tax Office documents all represented its 'general administrative practice' for the legislative provisions that they covered for penalties protection purposes:
- public rulings;
- publicly issued draft rulings;
- ATO IDs;
- documents listed in the Tax Office's schedule of sources of ATO precedential views.27
4.30 In 2007 the Tax Office withdrew the parts of PS LA 2003/3 which contained the above views. The Tax Office no longer considers that ATO IDs and material contained in its Schedule of ATO precedential views represent its general administrative practice. This change clearly represents a shift in the direction of making its public advice more 'limited, cautious and conditional'. This issue is discussed in more detail in the next chapter of this report.
Tax Office's communication of the binding/non-binding status of public rulings
4.31 Some TR and other rulings on the Tax Office's website dated between 1998 and 1999 do not contain a preamble indicating their binding status in the 'printable' version of the ruling (see for example TR 99/5). Taxpayers must view the 'pdf' version of such a ruling to obtain the relevant preamble. The Tax Office has not advertised to taxpayers they need to do this to obtain the full version of the relevant ruling.
4.32 The Tax Office has also advised that the pdf version of rulings is the only authorised version. This point has not been clearly communicated to the public.
4.33 In addition, the Inspector-General considers that it is not appropriate for the Tax Office to communicate the binding/non-binding status of rulings in a preamble which many taxpayers may overlook. This communication should be set out in the body of the ruling itself, with considerable prominence.
Effect of misleading income tax advice in a public binding ruling
4.34 The Tax Office has a policy that where income tax advice in a public ruling is misleading a taxpayer who follows that advice and makes a mistake will be protected against the payment of penalties and interest, but not against the payment of tax.28
4.35 This policy has been applied to the 2008 TaxPack (see the 'commitment to you' statement which is set out in Appendix 5).
4.36 However, in two recently issued Miscellaneous Tax Rulings dealing with penalties, MT 2008/1 and MT 2008/3, both of which are binding public rulings, the Tax Office appears to have departed from this policy. The preambles to both these rulings state that if the advice in these rulings is misleading and the taxpayer makes a mistake as a result of having relied on this advice, no tax, nor penalties nor interest, will be payable.
4.37 The Inspector-General considers that the Tax Office should adopt a consistent position across all of the rulings that it issues on income tax matters on the extent to which it will be bound by advice that is misleading for the purposes of the payment of prior period tax.
Communication by the Tax Office of changes it makes to its practice statements
4.38 The review also found that although the Tax Office has been issuing an increasing number of non-binding detailed practice statements, sometimes in substitution for what was previously documented in administratively binding public rulings, some of its communication strategies around these statements require improvement.
4.39 For example, it has no formal processes in place to notify the community of when practice statements have been withdrawn. In contrast, when a public ruling is withdrawn, the Tax Office issues a formal notification of the withdrawal.
4.40 Similarly, when a practice statement is amended, the precise nature of any amendments is not detailed by the Tax Office. Again this contrasts with Tax Office practices in relation to binding public rulings.
4.41 Furthermore, in some cases, the Tax Office does not make available on its website the content of previous versions of amended or withdrawn practice statements. These previous versions can only be obtained by contacting the Tax Office directly. Again, this practice stands in contrast to the public binding rulings process.
4.42 An example of these communication issues associated with Tax Office practice statements is as follows. In 2007, just prior to the announcement of this review, the Tax Office made changes to PS LA 2003/3 to make it clear that reliance by a taxpayer on certain Tax Office document (such as ATO IDs) would, as a result of the 2006 changes to the rulings laws, protect a taxpayer from an interest charge if the relevant Tax Office document was wrong.
4.43 These changes were not embodied in a newly issued 2007 practice statement but by way of making changes to a 2003 practice statement. The fact that this 2003 practice statement had been changed in 2007 was not formally made known to taxpayers. As a result, many taxpayers, tax practitioners and, it seems, Tax Office staff were unaware of these changes.
4.44 A copy of the revised version of the 2003 practice statement is available on the Tax Office's website. This version does disclose that the practice statement was changed in mid 2007, but does not detail the nature of those changes. Taxpayers can only ascertain the full nature of these changes by requesting a copy of the original practice statement from the Tax Office.
4.45 As the Tax Office appears to be increasingly relying on practice statements as a vehicle for explaining and documenting its approaches, these documents should be subject to the same disciplines regarding any changes made to them that are currently applied to binding public rulings.
4.46 The comments made in this chapter lead to the following recommendations.
Key recommendation 2
The Inspector-General recommends that the Tax Office take steps to ensure that any rulings in its TR, TD or MT series which are currently called 'rulings', but which are not in fact legally binding rulings, are separately identified or are re-named in a way which ensure that taxpayers are not misled as to the legal status of such 'rulings'.
Tax Office response
4.47 The Tax Office disagrees with this recommendation.
4.48 The Tax Office considers the preamble to each of these rulings is clear and unambiguous in identifying their status and stating the protection afforded to taxpayers. The preamble is considered to be located in a logical and transparent place in the document, being immediately below the header. In addition, post-ROSA, each page of a formal series ruling which contains legally binding material carries a label in the header identifying that page of the document as being legally binding.
4.49 Moreover, the Tax Office considers that these documents have been known and viewed as rulings for considerable time, even though they may not be capable of being legally binding. These include the Income Tax (IT) series and the Superannuation Guarantee (SG) series of rulings and determinations. The Tax Office is not aware of any evidence that there is confusion about the status of such documents. Indeed, the Tax Office considers that the implementation of this recommendation, particularly in relation to pre-ROSA rulings referred to in the report, would cause rather than remove confusion, and would not alter the way in which these rulings might be used or viewed by the community.
4.50 Nevertheless, going forward, the Tax Office will make appropriate further enhancements to the existing page status label in its formal series rulings to address any perceived confusion about the binding nature of the material on any particular page.
Inspector-General's comments on Tax Office response
4.51 This recommendation could have been addressed by the Tax Office agreeing to change the citation name of all rulings which are called 'rulings' but which are not in fact legally binding to something like 'TR (not legally binding)' or 'TR (NLB)'. There were 22 rulings of this type identified in the Inspector-General's report. This would have meant that when such rulings are cited by the Tax Office or by tax practitioners in any advice or in any other document it will be clear to the reader of the relevant advice or document that the ruling which is being referred to is not legally binding. The Inspector-General notes that the Tax Office has adopted this kind of process to differentiate 'general administration' practice statements from other practice statements.
Key recommendation 3
The Tax Office should enhance its systems to promptly inform the community of any material changes it makes to its practice statements, the nature of those changes and their date of effect. It should also consider making available to the community via its website the full text of the new and old versions of the relevant practice statements so that a full history is available.
Tax Office response
4.52 The Tax Office agrees with this recommendation.
4.53 The Tax Office does aim to inform the community when changes to law administration practice statements (LAPS) have occurred and currently does so via 'alerts' to subscribers, in the Tax Agent Newsletter, and other means. The Tax Office agrees that it could be useful and more transparent to highlight material changes to any LAPS via our Tax Office website and will explore how this might be best achieved prospectively.
4.54 The report contrasts a number of the Tax Office processes for public rulings with those for practice statements. In this respect, it should be noted that the Tax Office makes its LAPS available to the community in the interests of openness and transparency, whereas publication of public rulings is required under the law. The Tax Office agrees that this transparency would be improved if old versions of LAPS were to be more readily available and will explore how this might be achieved where material changes to LAPS occur in the future.
Subsidiary recommendation 1
The Inspector-General recommends that the Tax Office should:
- take steps to advise taxpayers that the pdf versions of rulings on its website are the only authorised versions of rulings;
- ensure that any other versions of rulings made available to the public always contain the full text of the pdf versions, including any material which indicates the binding status of the relevant rulings; and
- ensure that the binding status of rulings is set out in the body of any ruling rather than in a preamble that may be overlooked by taxpayers.
Tax Office response
4.55 The Tax Office agrees with the first two dot points and disagrees with the last dot point of this recommendation.
4.56 The ROSA law clearly requires that a public ruling be labelled as a public ruling so that its status is clear and unambiguous. The preamble indicates the extent to which a Tax Office formal series ruling is a public ruling under the law. The Tax Office considers the present location of the preamble immediately below the header to the document on the first page is the most logical and transparent place in the document for this information. As the preamble also contains a protection statement, this is consistent with the approach across all Tax Office publications. In addition, each page which contains legally binding material carries a label in the header indicating that it has that status.
4.57 There is a danger that if this message was located elsewhere, such as within the body of the document, it would be overlooked.
Inspector-General's comments on Tax Office response
4.58 The Inspector-General notes that the Tax Office could have addressed the last dot point of this recommendation by including the words of the preamble (or a summarised version thereof) in the body of the ruling as well as in the preamble itself.
Subsidiary recommendation 2
The Inspector-General recommends that any 'commitment to you' (or similar statements in any of it publications) which set out the extent to which the Tax Office will be bound by the material set out in that publication:
- be identical for different versions of the same publication (for example, for the electronic and paper versions of TaxPack);
- clearly state the categories of taxpayers to which any such commitment applies (for example, that the Taxpack commitment statement only applies to self-preparers, not individuals who use tax agents); and
- clearly state what material is covered by the commitment (for example, that the Taxpack commitment does not extend to material in the TaxPack supplement).
Tax Office response
4.59 The Tax Office disagrees with dot point 1 of the recommendation but agrees with the principles in dot points 2 and 3.
4.60 On the first dot point, the Tax Office agrees that commitment statements in our publications should be consistent in their application to different versions of the same publication or to the same material contained in different publications. However this consistency in application will not necessarily be achieved by having 'identical' commitment statements in all cases.
4.61 A number of Tax Office publications are the same in substance and merely made available in different formats, such as paper or downloadable PDF documents. In such cases, the protection and commitment statements should be the same.
4.62 However, the Tax Office considers that its E-Tax product and the paper and downloadable versions of TaxPack and the TaxPack Supplement are quite distinct products. The Tax Office considers that E-Tax is not just an electronic version of TaxPack. Instead, E-Tax is a more integrated publication, which by its nature is quite different to the paper version. For instance, it allows users to roll-over information from previous years and enables the pre-filling of certain types of information.
4.63 For these reasons, it is necessary to use a different type of commitment statement to separately identify those parts of E-Tax that are equivalent to TaxPack and the TaxPack Supplement respectively to ensure consistent treatment. In developing the commitment given to E-Tax users, the Tax Office has endeavoured as far as possible, to ensure that E-Tax users have the same level of protection as they would if they had used TaxPack and, if necessary, the TaxPack Supplement and the publications referred to in them. The respective commitment statements are therefore intended to bring about a consistent outcome, but are not 'identical'.
4.64 As to dot points 2 and 3, the Tax Office also agrees that a commitment statement should be clear as to its application, both in terms of categories of taxpayers and the material which is covered by the statement. In the report, the Inspector-General suggests that this objective has not been achieved with the commitment statement applicable to TaxPack contending that it is not clear that TaxPack is a public ruling only for individual self-preparers. The Tax Office disagrees with this for the following reasons:
- Where a taxpayer uses both TaxPack and the TaxPack Supplement to prepare their personal income tax return, the commitment statements in each apply separately to each publication. Therefore, the Tax Office considers it is clear that the commitment statement in TaxPack applies to the material in TaxPack and not to the TaxPack Supplement.
- The commitment statement in TaxPack makes it clear that it is 'a public ruling for individuals who use it reasonably and in good faith to complete their 2008 personal tax return' (that is, self-preparers). This commitment statement for TaxPack applies to all individual self-preparers for the material in TaxPack, not just non-business individual self-preparers. The Tax Office considers it is also clear that this commitment statement does not apply to those who have their return prepared by someone else, such as a tax agent.
4.65 Nevertheless, as part of continuous improvement, we will seek feedback on the issues raised by the Inspector-General in dot points 2 and 3 through our normal user acceptance testing processes to determine whether any changes to TaxPack, etc. are warranted.
Inspector-General's comments on Tax Office response
4.66 The Inspector-General is pleased to note that in its response the Tax Office, although disagreeing with dot point 1 of the Inspector-General's recommendation, has confirmed that it intends that the commitment statements in the paper and electronic versions of TaxPack should have a consistent outcome in the future.
Subsidiary recommendation 3
The Inspector-General recommends that the Tax Office should ensure that its policy on the effect of misleading advice in a binding income tax ruling is applied consistently to all binding income tax rulings.
Tax Office response
4.67 The Tax Office agrees that its policy on the effect of misleading advice should apply consistently to all binding income tax rulings, and considers this has been done.
4.68 In the report, the Inspector-General suggests that the Tax Office appears to have departed from this policy in two recently issued Miscellaneous Tax Rulings dealing with administrative penalties (MT 2008/1 and MT 2008/3). This suggestion is based on the wording of the protection statement in the preamble to each ruling. The Tax Office disagrees with this suggestion for the following reasons:
- These rulings deal solely with administrative penalties dealt with in provisions of the law about the collection and administration of tax generally. As these penalty provisions apply across all taxes administered by the Tax Office, the ruling is declared in the preamble to be a public ruling under the GST law as well as being a public ruling relating to administration of the taxes listed in section 357-55 (income tax, excise, etc). They are not rulings about income tax as such.
- The protection statement in the preamble has been specifically tailored to deal appropriately with the subject matter (penalties) and the context (across all taxes) of these rulings. Protection in respect of these administrative penalties rulings is provided where any statement therein is incorrect or misleading and a taxpayer makes a mistake as a result of relying on that statement. This is consistent with Tax Office policy.
- While the protection statement does mention, in addition to penalties and interest, 'any resulting underpaid tax', this is of no practical consequence as the rulings do not deal with tax liability issues as such (whether for GST, income tax, excise, etc). Therefore any statement in the ruling will not directly affect a taxpayer's primary tax liability.
4.69 The Tax Office seeks to ensure that any protection statement gives the intended level of protection, is relevant to the material to which it relates, and that no-one will suffer any detriment as a consequence.
Inspector-General's comments on Tax Office response
4.70 The Inspector-General is pleased to note that the Tax Office in its response has confirmed that it agrees that its policy on the effect of misleading advice should apply consistently to all binding income tax rulings. However, he considers that the Tax Office could have done more to ensure that this consistency was achieved with respect to MT 2008/01 and MT 2008/03.
20 Commonwealth Treasury, Review of Aspects of Income Tax Self Assessment Discussion Paper, March 2004 at page 26.
21 The Commonwealth Treasury, Report on Aspects of Income Tax Self Assessment, August 2004 at paragraph 2.3.1.
22 See Recommendation 2.3 in: Commonwealth Treasury, Report on Aspects of Income Tax Self Assessment, August 2004, at page 11.
23 ATO ID 2007/194 and ATO ID 2007/204.
24 TR 2006/13.
25 PS LA 2007/22.
26 The relevant rulings are IT 2442, 2451 and 2552, all of which were withdrawn on 6 August 2008. Any material in these former rulings which was current is now included in Part C of the ATO's Guide to the R&D Tax Concession, accessible at law.ato.gov.au.
27 PS LA 2003/3 Precedential ATO view, dated 12 May 2003 at footnotes 11, 13, 15 and 17.
28 See PS LA 2008/3 at paragraph 21.