Australia: More Certainty Following Tax Rulings System Overhaul

Last Updated: 28 February 2006
Article by Allan Blaikie and Stephen Gates

Key Points

  • Standardised rules will now apply to ATO public rulings, private rulings and oral rulings.

After years of criticism, the regimes for obtaining ATO tax rulings are being significantly expanded and clarified. Standardised rules will apply to ATO public rulings, private rulings and oral rulings, dealing with:

  • exactly when such rulings are binding on the Commissioner, and on taxpayers
  • a decision by a taxpayer to stop relying on ruling by not acting in accordance with the ruling
  • application by the Commissioner of the law if it turns out to be more favourable than a ruling relied on by the taxpayer
  • resolution of inconsistencies between different kinds of rulings
  • common rules to deal with practical issues about the commencement of arrangements, re-enactment of legislation and communication by e-mail.

The changes will bring more areas into the rulings process, and provide more certainty for those seeking rulings. Business should benefit from a more streamlined process, without some of the bottlenecks previously encountered.

Information used by the Commissioner in making a ruling

The new rules clarify requests by the Commissioner for further information, any assumptions that the Commissioner may make when issuing a ruling, and reliance by the Commissioner on additional information provided by the taxpayer.

The Commissioner will no longer be able to decline to rule solely on the ground that the information provided is inadequate. A request for further information must be made first and then the issue of a ruling may be declined only if that is not provided, within stipulated time periods. Taxpayers must be given a similar opportunity to respond to proposed assumptions.

As for the sensitive question of third party information, the rules now expressly entitle the Commissioner to rely on information obtained from sources other than the taxpayer, provided the Commissioner informs the taxpayer what the information is and the taxpayer has a reasonable opportunity to respond before the ruling is made.

Information that the Commissioner considers cannot be disclosed because of possible breaches of the tax secrecy provisions, privacy legislation or confidentiality cannot be relied upon by the Commissioner. The Commissioner may decline to rule where this type of information is considered to be material to the ruling, but those cases will be rare.

Public rulings

New rules clarify the exact nature and status of public rulings, as distinct from the other forms of ATO rulings. There have been problems in the past about the status of booklets and informative material issued by the ATO. In the future the Commissioner will be able to issue electronic and other material containing general statements on a range of matters, and clarify by declaration exactly what elements constitute public rulings.

Withdrawal of public rulings is another area of uncertainty that will be cleaned up. New rules deal with the procedures for the withdrawal of public rulings, and how the withdrawal affects arrangements in place.

Private rulings

The new measures address some - but not all - of the major problems with private rulings.

More types of tax laws will be within the scope of applications for private rulings, for example, provisions relating to withholding tax, franking tax, FBT, and the administration and collection procedures of those taxes as well as income tax (but Goods and Services Tax and related indirect taxes will continue to be subject to their separate rulings regime).

Clearer rules for the application process will remedy the procedural traps in the making of applications. This applies particularly to questions concerning trusts and beneficiaries, and partnerships. One oddity concerning changes in the trustee of a trust and the ability of later trustees to rely on a private ruling has been fixed.

It will be easier to know when private rulings effectively commence, how long they will apply, and when they cease to apply.

Significant aspects of the application procedure have also been overhauled, including the grounds on which the Commissioner may decline to rule. These are now more limited and have been expressed in a manner having greater procedural fairness. Unfortunately, the legislation uses the general ground of "prejudicial or undue restriction of the administration of a tax law" and it is necessary to refer to the Treasury Explanatory Memorandum for a more informative indication of what is intended

Importantly, the vexed question of valuations relevant to a ruling is now expressly dealt with. Applicants may provide a valuation or ask the Commissioner to obtain a valuation. Where a request is made for the Commissioner to obtain a valuation, a specific provision sets out the procedure for obtaining of the valuations, together with a requirement to inform the applicant when the valuation process is complete (but not to provide a copy to the applicant). In this case the Commissioner can pass the cost of the valuation to the taxpayer, and regulations are contemplated concerning the charges. Failure to pay will mean no private ruling. It would be expected that copies would be provided to the applicant but it is unsatisfactory that this has not been expressly stated.

Another difficult issue has been the entitlement of the Commissioner to go beyond the private ruling application and make private rulings on related matters not actually covered in the application. An express authority will entitle the Commissioner to make such additional private rulings. However, it is intended that the Commissioner should not prolong the process by embarking on analysis of matters not covered in an application. Instead, the explanatory material indicates that, if considered appropriate, the Commissioner should add a caution to the ruling issued, noting that related questions exist.

Another attempt has been made to deal with the problem of delays in the private ruling process. An opportunity will now exist for applicants to initiate action if no private ruling has been issued within 60 days from the date of application. However, grounds for extending the 60 day period are set out. If, after the 60 day period (or any extension), the Commissioner does not respond to a request by the applicant for a ruling within a further 30 days, applicants will be entitled to lodge an objection and commence proceedings for review. This is an important addition to the review procedures. In addition, the general rules concerning objections against private rulings and avenues for review are further areas where the rules have been revamped.

Finally, a specific provision now deals with the ways in which a private ruling may be revised, how revisions are communicated and when the revisions take effect.

Oral rulings

In the same way, the exact nature, status and operation of the regime for oral rulings for individuals has also been overhauled. New rules deal with applications for an oral ruling, the matters that may not be the subject of an oral ruling and registration identification of oral rulings. Their consistency with other rulings is governed by the new rules referred to above.

General advice and administrative practice

A new provision expressly protects taxpayers from both the shortfall interest charge and the general interest charge (GIC) where they reasonably rely in good faith on ATO advice and practice information that does not have the status of a ruling. However, an exception applies where the non-ruling advice, information or statement in a publication is labelled as "non-binding". A further exception applies to GIC protection 21 days after notice to the taxpayer of the "correct" position.

The explanatory material deals in some detail with what does, and does not, amount to "general administrative practice", particularly in the context of the mere issue of similar private rulings on a particular matter. Comment is also provided concerning changes in general administrative practice. Regrettably, no comment is provided concerning the exact status of material "labelled as non-binding". All that can be said is that such material will offer no protection against GIC or the shortfall interest charge, though it may be possible to rely on the existing general protections against shortfall penalties based on advice received, general administrative practice or approved publications.

The new laws

The overhaul of the rulings system is in the Tax Laws Amendment (Improvements to Self Assessment) Bill (No 2) 2005, introduced in response to the August 2004 Report on Aspects of Income Tax Self Assessment. The new rules will apply from whichever is the later of Royal Assent and 1 January 2006.

The changes to the rulings procedures are part of a wider set of amendments that seek to ameliorate some of the harsh edges of the self assessment system. Although the changes are an attempt to strike a better balance between the competing interests involved, not all recommendations of the 2004 Review Report have been implemented. The new protections for taxpayers, although welcome, are unlikely to be considered to be excessive.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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