Report on Aspects of Income Tax Self Assessment
This Chapter examines the role of Tax Office advice in the self assessment system and recommends changes to the framework for the provision of Tax Office advice to improve its reliability, accessibility, timeliness and accuracy.
Australia’s system of self assessment for income tax relies heavily on the principle of voluntary compliance and on taxpayers (or their advisers) having a good understanding of the tax law in order for them to meet their obligations.
The shift to self assessment in 1986-87 heightened the importance of these principles by placing more responsibility on taxpayers to correctly interpret the law.
Over the last 25 years, there has been a significant increase in the complexity of business and personal affairs and tax laws have had to become longer and more comprehensive. The proportion of individual taxpayers seeking professional assistance to complete their tax returns has risen from approximately 20% in 1980 to around 76% in 2002.
Few taxpayers use the tax law itself as a primary source of information, so Tax Office advice (and advice from tax agents) plays a crucial role in bridging the gap, by providing summarised, understandable advice that taxpayers rely on.
The Tax Office accepts the importance of this advising role and acknowledges that, as the administrator of the tax laws, it must operate ‘as a trusted authority on the law and a professional adviser and educator, ensuring that people have the information and support needed to meet their obligations’.11
Further, the Tax Office’s compliance program is built around the idea that to maximise the number of people who choose to comply, it is necessary to make ‘it as easy as possible for people to understand their obligations’.12 This reinforces the notion that the Tax Office’s role as a regulator is broader than simply enforcing the law. Ideally, the Tax Office’s ‘policing’ role will be minor compared to its support for voluntary compliance.
In the discussion paper, the Review highlighted that a lack of confidence in Tax Office advice could lead to significant adverse impacts on taxpayers, the system of tax administration and the economy as a whole. The discussion paper proposed that taxpayer confidence is enhanced when Tax Office advice is high quality in terms of its reliability, timeliness, accuracy and accessibility.
Consistent with these sentiments, in 2003, the Tax Office’s Making it easier to comply initiative identified that the key improvements that small businesses and individuals wanted were for the Tax Office to ‘better understand their circumstances and to provide quick and accurate advice that we [the Tax Office] stand by’. 13
In the submissions received by the Review, improving advice quality was endorsed as an important way to reduce uncertainty. Most submissions acknowledged that the self assessment system was unfair if the tax administrator (who should arguably have the best knowledge of the tax system) could provide advice that was wrong and taxpayers who have relied on that advice to their detriment bore the consequences.
The Tax Office provides taxpayers and practitioners with a range of advice on applying the income tax law, through formal rulings and other products.
There are currently three main types of formal income tax ruling: public rulings, private binding rulings (PBRs), and oral rulings. The advice in formal rulings is binding by law on the Tax Office and a taxpayer covered by a formal ruling is therefore protected from retrospective amendment, even if the Tax Office subsequently changes its interpretation of the law.
Public rulings provide written guidance to taxpayers generally. They state the Tax Office’s view on how the income tax law applies to a type or class of arrangements. They are provided at the discretion of the Tax Office and are prepared in conjunction with panels containing representatives from the accounting and legal professions.
PBRs provide written advice to a given taxpayer on how the Tax Office considers the law applies to a specified arrangement for particular income years.
Oral binding rulings provide specific advice on a limited range of income tax matters to taxpayers with simple tax affairs.
The Tax Office also provides a wide range of other written advice in the form of manuals, booklets, schedules, fact sheets, press releases, Interpretative Decisions, taxpayer alerts and TaxPack. A considerable amount of this advice is available on the Tax Office website. In addition, the Tax Office provides advice in person and by telephone. Advice provided through these mechanisms is not legally binding, however some advice is treated as administratively binding, meaning the Tax Office will not apply penalties or interest if the advice is wrong, while other advice will only provide protection from penalties.
Currently, different types of advice confer different levels of reliability. This can produce uncertainty when taxpayers are not clear about what advice they can rely on.
Noting the role of Tax Office advice in the self assessment system outlined above, the Review has concluded that, as a general principle, taxpayers who have acted in good faith should not suffer adverse consequences as a result of having relied on incorrect Tax Office advice. Such consequences should properly be borne by the community as a whole. Although this will not be a great cost (as Tax Office advice will be correct in the great majority of cases), it will relieve a major source of uncertainty for taxpayers.
For these reasons, the Review recommends that all Tax Office advice should provide a level of protection for taxpayers who have acted in good faith and reasonably relied on Tax Office advice that subsequently turns out to be incorrect.
The level of protection conferred will depend on the type of Tax Office advice. In the case of advice that is legally binding, including the expanded categories of legally binding advice recommended below (see subsections 2.3.1 and 2.4.1), taxpayers should be protected from amended assessments raising further primary tax, penalties or interest charges. In the case of any other written advice, oral advice about an individual’s circumstances or longstanding administrative practice,14 taxpayers should be protected from both penalty and interest charges.
Of course, there will be circumstances where the Tax Office may need to express views without binding the Commissioner, for example, in relation to consultation drafts, discussion papers canvassing alternative options, or in providing general oral advice. Recognising this, advice that is clearly labelled as non-binding will not automatically provide protection to taxpayers. For oral advice, it may prove unmanageable to have the Tax Office bound by all the oral advice it provides, largely because such an approach would introduce complicated evidentiary requirements about the advice a taxpayer received. To avoid this problem, only responses from formal enquiry centres will provide taxpayers protection from penalties and interest.
This new framework for protection from the consequences of incorrect advice could apply from 1 July 2005, provided enabling legislation has received Royal Assent.
Taxpayers who reasonably rely on Tax Office advice should receive a level of protection as follows:
Recommendation 2.1 seeks to make reliance on Tax Office advice more certain and less risky for taxpayers. Expanding the types of advice that fall into the legally binding category will further decrease that risk.
The Review received a number of submissions suggesting that a wider range of written advice should legally bind the Tax Office. Indeed, some suggested that all Tax Office advice should be binding, as with the GST system. They also expressed dissatisfaction with the fact that the Tax Office is not bound on procedural, administrative or collection aspects of the law, or all statements forming part of the ruling.
The benefits of a broader scope for legally binding rulings were recognised in Tax Reform: not a new tax, a new tax system (ANTS),15 however legislation to broaden this category has not been introduced. While these changes will allow more topics to become the subject of rulings, the decision to address particular issues in public rulings is a matter for the Tax Office.
The category of legally binding public rulings should be expanded to cover matters of administration, procedure, collection, and ultimate conclusions of fact involved in the application of a tax law.
The Tax Office produces a number of non-ruling products in which the public, especially those preparing their own returns, should be entitled to have a high level of confidence, such as TaxPack. The Review has concluded that, even if these products are not suitable for inclusion in the formal public rulings series, some of them should have the same protection as public rulings for self-preparer taxpayers. However, it would be extremely expensive and difficult for the Tax Office to attempt, in the short term, to review all its publications to determine whether they should be binding. The Review therefore concludes that this power should be confined to non-business individual self-preparers and used as existing premier products are updated.
The Commissioner should be empowered to declare that advice provided for the general information of non-business individual self-preparers (for example, TaxPack) is legally binding upon the Tax Office.
A number of submissions to the Review criticised the fact that important parts of public rulings were not included in the ‘ruling’ section of the publication. Taxpayers and their advisers currently have the opportunity to provide feedback on draft rulings, where they believe that certain content of the ruling should be included in the ruling section. Submissions were split between the competing ideas that the Tax Office should consider all alternative arguments in detail, and the notion that rulings should provide the Tax Office’s view.
The Review concludes that the primary purpose of rulings should be to state the Tax Office’s view. In doing this, other views should be discussed, if it is useful to do so. However, the Tax Office should not be obliged to address all possible other arguments, especially when to do so would be likely to confuse the reader. As a result, where competing views are raised during consultation and not addressed in the ruling, the Tax Office should provide feedback directly to people contributing those views. Finally, all aspects of a ruling that are capable of being binding should be drawn together in one section within the ruling.
All aspects of a public ruling that are capable of binding the Tax Office (including for example, worked examples) should be collected together and clearly labelled as binding.
In public rulings, alternative views need not be addressed if these are likely to confuse the reader. Where competing views are raised in consultation and not addressed in the ruling, the Tax Office should provide feedback directly to people contributing those views.
Another circumstance with the potential to cause uncertainty is where public rulings are withdrawn by the Tax Office and not replaced. This can leave taxpayers confused about how they should apply the law from that date on.
The Review has concluded that the Tax Office should ensure that some appropriate instruction replaces a public ruling as soon as practicable after it is withdrawn.
The Tax Office should take all steps necessary to ensure that an appropriate instruction or product replaces any public ruling as soon as practicable after it is withdrawn.
Many submissions expressed dissatisfaction about situations in which the Tax Office appeared to apply their interpretation of the law retrospectively. The issue was addressed in Joint Committee of Public Accounts Report 326:
‘As interpretations of the law, Rulings of themselves neither create nor extinguish rights. Rather, as administrative instruments they indicate the intention of the ATO to assess obligations in a particular manner. The Committee considered that, in general, as statements of intent, Rulings should only be issued with prospective force and where one Ruling overturned another, the ATO should be obliged to give Rulings prospective application only.’16
The Tax Office has advised the Review that Taxation Ruling 92/2017 publicly states its position that outcomes are only applied prospectively from the date of final issue, where a new ruling replaces another and is less advantageous for taxpayers.
In some cases, it may be in the interests of good administration to announce a date of effect some time after the date of the issue of the ruling, to allow affected taxpayers reasonable time to become aware of, and act upon, that new interpretation. This would not generally apply where rulings address tax avoidance arrangements, or in situations where the former ruling is being exploited.
Where the Tax Office changes a public interpretation or long standing practice to the detriment of taxpayers, that change should become effective prospectively and, where necessary, from a future date that allows affected taxpayers reasonable time to become aware of, and act upon, that new interpretation.
In order to be useful, advice needs to be provided in time to meet the needs of taxpayers. This is especially important where a decision to enter into a prospective transaction is dependent on the Tax Office’s view of its taxation consequences. However, draft public rulings can take many months, sometimes years, to become final binding rulings. Taxpayers do not have certainty if they rely on draft rulings and, in practice, they cannot usually get a private ruling while a public ruling on the same topic remains unfinalised.
A number of submissions advocated a statutory time limit within which draft public rulings become final. The Review has examined this idea, but concluded that it is not entirely practicable, and could prove counterproductive in some cases. At present, some delay is desirable between draft and final ruling to allow full consultation and time for responses to drafts. Moreover, public rulings panel processes necessarily take some time. The alternative may simply force the finalisation of a premature Tax Office position. Nevertheless, if a position cannot be formally finalised, the Tax Office draft position may be the best available in the interim.
The Review has therefore concluded that relying on draft public rulings should be grounds for a taxpayer to receive a full general interest charge remission and protection from shortfall penalties. This largely reflects current Tax Office practice.
Where taxpayers rely on public rulings while they are in draft form they should be protected from penalties and receive full remission of any interest charges in the event that the final ruling is issued in different terms, to their detriment.
Some submissions noted that advice provided by the Tax Office is not always easy to understand. These submissions proposed that advice should be written in a plainer and simpler style. However, submissions also recognised the balance that needs to be struck between providing advice that is clear and succinct, and ensuring that advice is accurate. They acknowledged that, depending on the taxpayer and the advice sought, varying degrees of technical language may be required or appreciated. Moreover, some taxpayers and practitioners have said that they would prefer a longer explanation in order to gain a better understanding of how the Tax Office might approach similar cases.
Nevertheless, the Tax Office is not in the business of being a paid tax adviser to individuals18 and it should not feel obligated to provide its general advice in a way that only suits a minority. The main purpose of Tax Office advice is to inform the public about how it will interpret the law and act in a given situation. If that advice is written like some legal opinions, in complex language with caveats or qualifying statements, what is stated to be public advice, may not in fact be accessible by the general public.
The Review therefore encourages the Tax Office to provide general advice in a style that is as simple and easy to understand as possible. Some rulings with a potentially limited readership may need to be tailored to the special needs of the target audience.
Wherever possible, Tax Office general written advice, including public rulings, should be written in plain language, with a minimum of qualifying statements so that it is accessible to the general public.
The Tax Office’s website contains a large amount of information and is increasingly relied on by tax agents. However, in consultations, agents reported that the website was not easily searchable or accessible, and did not contain a comprehensive index. A number of submissions to the Review also reported that Tax Office Interpretative Decisions did not have an effective search facility, making it difficult to find information.
The Tax Office has recently updated its search facilities, website server and support for its legal database (<law.ato.gov.au>). People using the legal database search facilities will now find that Tax Office Interpretative Decisions, for example, can be comprehensively and easily searched. The Review encourages the Tax Office to continue to improve its website accessibility as the need arises.
Furthermore, agents complain that they have been sent large amounts of information by the Tax Office about changes to the tax laws, or relating to their clients. Keeping up to date with large volumes of information can be difficult. Indeed, many agents report that, in the past, so much material has been mailed out to them that it is virtually impossible to read it all. Tax agents also noted that electronic interaction with the Tax Office is more convenient for them, and that the new tax agent ‘portal’ (an electronic window to clients’ accounts) is particularly valuable.
The Tax Office should continue to replace large ‘mail-outs’ to tax agents with more targeted electronic contacts, and a ‘whole-of-agency’ view should be applied to volumes of information distributed.
A number of submissions suggested that confidence in the integrity of Tax Office advice could be enhanced if the Tax Office’s views about the general anti-avoidance provision (Part IVA) were more transparent. The fact that statements on how the Tax Office considers Part IVA applies are spread across a number of products means that the Tax Office’s approach is not easy to ascertain. This has created an impression that the provisions may be invoked arbitrarily, notwithstanding the Tax Office’s processes to control the application of Part IVA, such as the Part IVA Panel.
The Tax Office has advised the Review of its intention to update its Part IVA Practice Statement in the next few months.
The Tax Office should update and consolidate its guidance on the way it interprets and administers Part IVA of the Income Tax Assessment Act 1936 into a single comprehensive Ruling or Practice Statement.
Public rulings are not delegated legislation, so they are not tabled in Parliament.
Some commentators have argued that, as public rulings outline how the Tax Office considers the law applies and most taxpayers do not have the resources to challenge that interpretation, public rulings are effectively equivalent to the law. Therefore, to protect taxpayers’ rights, it is argued that these rulings should be subject to the scrutiny of (and possible disallowance by) Parliament.
However, tabling public rulings in Parliament could delay the process of making rulings, introduce further uncertainty for taxpayers and would be likely to politicise the administration of the tax laws. If Parliament thought a public ruling incorrectly reflected the law, it could amend the law to re-state its meaning.
Furthermore, while it is true that public rulings are hard to challenge directly, a taxpayer dissatisfied with a public ruling can request a private binding ruling on the same terms and ultimately appeal it to a court.
The Review therefore does not recommend that public rulings be tabled in Parliament.
To make reliance on Tax Office advice more certain and less risky for taxpayers, Recommendation 2.2 proposes that the category of legally binding public rulings should be expanded to cover matters of administration, procedure, collection and ultimate conclusions of fact.
Private binding advice could also be made more certain and less risky if the range of matters that can legally bind the Tax Office is broadened in the same way. However, as noted in the Review of Business Taxation (commonly called the Ralph Review),19 such an expansion should not unduly limit the Tax Office’s normal compliance activities.
The category of PBRs should be expanded to cover matters of administration, procedure, collection, and ultimate conclusions of fact involved in the application of a tax law. However, the Commissioner should not be obliged to rule where to do so would prejudice or unduly restrict the administration of the tax law.
Private binding advice underpins self assessment by allowing taxpayers to seek reliable guidance on the interpretation of tax law in their particular circumstances. However, some submissions asserted that the Tax Office has refused to stand by private rulings that are silent on the question of whether Part IVA had been considered. Other submissions and consultations highlight that there is often doubt about whether Part IVA has been considered in private binding advice.
There may be situations where individuals do not want Part IVA considered in their PBR application, for example, where a taxpayer wants a response quickly, is sure that Part IVA is not applicable, or if they are willing to take the risk. While the Tax Office’s role is not that of paid adviser and they may properly decline to give an assurance that Part IVA will not apply in certain cases, there should be no room for doubt about whether the issue has been considered.
The Review has concluded that, in cases where Part IVA could potentially apply to a PBR application, the Tax Office should indicate its view about Part IVA or that, while it may be relevant, it has not been addressed.
In PBRs where Part IVA could apply having regard to the facts provided in the PBR application, the Tax Office should indicate whether Part IVA has been considered. This indication may be by way of substantive comment on Part IVA’s application, or by disclaimer. Where Part IVA had been substantively addressed and there has been a full and true disclosure of all material facts, the Tax Office should be prevented from reopening an assessment.
Taxpayers can advise in their PBR application that Part IVA need not be considered.
Taxpayers and practitioners have a legitimate expectation that the advice they receive from the Tax Office will be accurate and unbiased. However, a number of submissions asserted that the Tax Office adopts a pro-revenue position in large complex cases, even though statistics suggest that such a perception may be unfounded. 20
The discussion paper canvassed the option of having a suitable independent body undertake a systematic evaluation of PBRs to determine the objectivity of Tax Office advice. This approach was supported by submissions. Furthermore, from discussions with focus groups of tax agents, the Review has concluded that the perception of pro-revenue bias in PBRs is so strong that it needs to be independently examined.
The Government should request the Inspector-General of Taxation to evaluate whether the pattern of PBRs indicates a pro-revenue bias.
The current standard for replying to requests for PBRs is 28 days, or such further time as negotiated. If all the information needed to make a decision is not provided, the Tax Office will endeavour to contact the taxpayer within 14 days to request further information. If the PBR request raises particularly complex matters that will take more than 28 days to resolve after receiving all the required information, the Tax Office aims to contact the taxpayer within 14 days to negotiate an extended reply date.
Feedback through the consultation process shows significant concern about the turnaround time for PBRs. While major difficulties are not obvious from the available aggregated data on PBRs, that data is not published in a way that eliminates the possibility that tax agent cases are generally taking several months longer to complete.
The Tax Office should enhance its published performance reporting on PBRs to distinguish response times to individuals and very small business from those for larger businesses, and separately report agent and non-agent case statistics.
Tax agents have reported that delays in PBR responses, especially in relation to more complex requests, are so prevalent that they seriously threaten the usefulness of the PBR system. Apart from the lack of certainty, the lengthy period means that PBR applications can become a costly exercise for tax agents to pursue on behalf of their clients. Many tax agents now rarely use PBRs.
To address problems of long delay, the Review has concluded that taxpayers should be able to crystallise an answer to their PBR request. (Other ways to address this identified service gap are discussed at section 2.6.)
For PBR applications that are older than 60 days, taxpayers who have supplied all information required by the Tax Office should be able to request that the Tax Office determine their application within 30 days. If the Tax Office does not make a determination within 30 days, the taxpayer will be taken to have received a negative response to their application, thus triggering their objection and appeal rights.
The Review received submissions arguing that the PBR process allows the Tax Office too much latitude to request arguably unnecessary additional information to ensure that largely unlikely hypothetical circumstances are dealt with. Where this occurs, the taxpayer or agent is put to further cost, the Tax Office’s response time target restarts, and the process can be further delayed.
The Review has concluded that, to enhance the provision of PBRs in a timely manner, issues not directly raised in a PBR application should not generally be ruled on. Information about how to request a ruling should advise taxpayers to raise all issues on which a ruling is required.
The Tax Office should refrain from ruling on issues not directly raised in PBR applications without the taxpayer’s agreement. In cases where other aspects of the tax law could impact on the accuracy of the Tax Office’s response, the response should contain appropriate caveats or statements that the advice is issued subject to certain assumptions or limitations.
Under the current law, the Tax Office can only rule on the information provided in the taxpayer’s PBR application. This means that, where the Tax Office has access to additional information that might be relevant, they cannot use it, but must instead request the applicant to provide it.
Removing the need for the Tax Office to request information that is readily available will reduce PBR response times, thereby improving certainty.
When making a PBR, the Commissioner should be empowered to consider information other than that supplied by the applicant, provided that such information is made known to the applicant before being used.
Some submissions pointed out that the design of the PBR application form contributes to delays in providing PBRs. It was suggested that the Tax Office should modify PBR application forms and related processes, to reduce the need for taxpayers to conform to complex procedures or for the Tax Office to seek additional information.
The Review has concluded that the Tax Office’s PBR application forms should only require taxpayers to include the information reasonably required to determine their requests.
The Tax Office should continue to modify its PBR application forms and processes to reduce the need for taxpayers to conform to complex procedures, or for the Tax Office to seek additional information from taxpayers.
At present, where a taxpayer has a PBR and the transaction that is the subject of the PBR has commenced or the income year has begun, the ruling cannot be withdrawn, even if the Tax Office decides it has issued the PBR incorrectly.21 However, where the transaction has not been entered into and the income year has not yet commenced, a subsequent public ruling will override the PBR.
Revoking a PBR by a public ruling in these circumstances is rare. Nevertheless, the potential for a public ruling to revoke a PBR theoretically requires holders of PBRs to monitor public rulings constantly. The Review concludes that this is an unnecessary and inappropriate feature of the system, especially in the light of the ‘reasonable period of adjustment’ rule for new interpretations in Recommendation 2.6. The requirement to monitor rulings should be made more manageable for taxpayers. In recommending this, the Review does not envisage major changes are required to Tax Office practice to cater for these rare situations.
While the Review recognises that, occasionally, a PBR might continue in force when it otherwise would be withdrawn by a public ruling, this rare occurrence is preferable to the alternative of requiring taxpayers to monitor all changes to public rulings. Requiring a taxpayer or their adviser only to examine public rulings at the start of a new income year to determine whether any of them override the taxpayer’s PBR is much less onerous. Moreover, the Tax Office should be able to manage any revenue risk by noting large PBRs issued with significant lead times.
If neither the transaction nor the income year to which a PBR relates has begun, the PBR may be withdrawn by either:
Some submissions noted that PBR requests were often answered at quite a technical level. These submissions point out that qualifying statements in PBRs, combined with their length and technical references, can make them hard to understand, especially where the audience does not have a high level of tax expertise.
The Tax Office has advised the Review that its current objective is to issue rulings in language that reflects the needs of the applicant, while ensuring that the PBR is technically accurate and not misleading.
The Review concludes that the Tax Office’s use of technical terminology may be inevitable in some cases, as the person requesting a PBR will be undertaking a complex transaction and have a good understanding of technical tax terms. However, as a general rule, explanations in plain language would be appreciated by the applicants.
PBRs should contain an answer written in plain language, with a minimum of qualifying statements.
In addition to the plain explanation, the Tax Office may provide a more detailed or technical statement of its position, where it is necessary to do so.
Submissions to the Review suggested that taxpayers and their representatives appear to be insufficiently aware of the review processes available to them for PBRs.
The Tax Office has advised the Review that PBR responses now incorporate an explanation of taxpayers’ review rights.
Under the existing arrangements, where taxpayers object to a private ruling, review is limited to the arrangement set out in the ruling application. Submissions to the Review have argued that the timeliness of this process would be improved if the Tax Office or reviewing authorities were able to take into account additional facts provided by taxpayers after they have lodged their PBR applications. Taxpayers would be able to clarify their position so that all the necessary information is presented to support the case for review of the decision. As is currently the case, where the arrangement identified by the taxpayer is materially different from that identified in the taxpayer’s original PBR application, the applicant should make a fresh application.
In responding to a request for a private ruling, or determining an objection to a PBR request, the Commissioner, Tribunal or Court (as the case may be) should be able to take into account additional facts and particulars provided by taxpayers after they have lodged their PBR application.
Where the additional facts mean that the arrangement is materially different from that in the original PBR request, a taxpayer must make a fresh PBR application.
PBRs bind the Tax Office to determine a taxpayer’s obligations in a specified way for designated income years. A PBR cannot be relied on by other taxpayers.
Some submissions argued that PBRs should be able to be relied on by taxpayers other than the applicant. It was suggested that such a practice would reduce compliance costs and improve equity. However, if PBRs could be relied on by taxpayers other than the applicant, it would be virtually impossible for the Tax Office to determine which or how many taxpayers had relied on a given ruling. The possibility of a taxpayer believing that a PBR should apply to them, where the Tax Office did not, would only add to uncertainty.
In any case, the Tax Office already has a process whereby a single ruling can apply to more than one taxpayer, by issuing class rulings. With this process, the Tax Office knows precisely who will be relying on the ruling and can update or amend it as necessary.
The Review has concluded that a PBR should not be able to be relied on by taxpayers other than the applicant.
Tax agents have reported that trustees of a trust estate are currently uncertain whether they can rely on PBRs that were originally issued to previous trustees, as the advice does not clearly state whether future trustees are covered by the ruling.
The Review has concluded that a PBR given to a trustee of a trust estate in respect of that trust should also be able to be relied on by subsequent trustees, provided the circumstances in relation to which the PBR was given still apply.
Where the Tax Office has provided a PBR to a trustee of a trust estate, the PBR should be able to be relied upon by future trustees of the trust estate for the same income years on the same terms as the original PBR.
In the discussion paper, the Review questioned whether the Tax Office should continue to provide advice free of charge, or whether alternative funding arrangements should be introduced (as a means of funding wider improvements to Tax Office advice).
Of the submissions received, almost all advocated no change to the current funding arrangements. The primary argument was that, within a self assessment environment, taxpayers have the right to know the manner in which the tax laws apply to their circumstances (rather than being a privilege that would justify charging a fee). Some submissions also noted that a ‘user pays’ system may raise concerns about the propriety of positive rulings.
The Review has concluded that private rulings should not be charged for.
Oral rulings provide specific advice on a limited range of income tax matters to taxpayers with simple tax affairs. As with PBRs, the Tax Office is required to provide an oral ruling unless the request falls into one of the specific exclusions contained in the legislation. Practitioners cannot apply for oral rulings on behalf of their clients.
ANTS proposed oral rulings to provide certainty in low revenue risk cases:
‘The Government will ensure that taxpayers with simple affairs can rely on oral advice received from the Tax Office. Such advice will be binding on the Commissioner in much the same way as written private rulings.’22
While a number of submissions advocated extending the oral binding ruling system to tax agents, the Review has received advice from the Tax Office that it is advancing initiatives (outlined in the following section) that make it unnecessary to extend the oral rulings system to agents. Although there is no basis in principle to exclude tax agents from the oral binding ruling system, the Review has concluded that the alternative system for agents proposed by the Tax Office should be explored first.
Submissions also noted that the system’s effectiveness was severely constrained because there was only a very limited range of circumstances in which the ruling could bind.
The Review has concluded that eligibility for oral rulings should be expanded to give effect to the goal in ANTS that the system be open to the majority of salary and wage earners who prepare their own returns.
The eligibility for oral rulings should be expanded to cover all non-business individual taxpayers who are self-preparers unless, in the opinion of the Commissioner of Taxation, the question being asked is complex and would require the question to be set out and answered in writing.
The Tax Office does not currently record the majority of its non-binding oral advice. Submissions received by the Review noted that a system to track Tax Office oral advice effectively would be welcomed.
Further support for improving the management of oral advice is highlighted in the Ombudsman’s report Issue relating to oral advice: Clients Beware.23 The Ombudsman’s report recognises that not all government agencies are in a position to record the details of oral advice given, but suggests that recording advice, where a risk to the client and agency is high, is a sensible management strategy. With today’s technology, the possibility of implementing a system to record oral advice is workable. The Ombudsman has raised this issue in Annual Reports since 1997.
The Tax Office should explore ways to record oral advice as suggested by the Ombudsman.
A common theme that the Review encountered in consultation meetings with groups of tax agents was that the current PBR system did not meet their needs.
Tax agents stated that:
- the system was not responsive enough (in that the Tax Office’s benchmark of 28 days was not timely enough to make the system commercially acceptable)
- the effort needed to prepare a PBR application made relatively simple requests a fairly costly exercise
- the Tax Office often required additional particulars about the ruling circumstances, expanding and complicating even simple requests
- they often simply sought informed discussion with the Tax Office on the law in order to confirm their own views.
The Tax Office has advised the Review that it is already proceeding with some initiatives which may meet some of the needs that tax agents have expressed. For example:
- PBRs should be able to be lodged through the Agent Portal from July 2005.
- Short form PBRs are being progressively offered to taxpayers who do not require full written details (in the case of a favourable PBR ruling).
Progressively over the next three years, the Tax Office is also planning to:
- streamline the requirements for lodgment of PBRs
- consider using Express Telephone Advice for some PBRs
- explore ways to confirm telephone discussions to tax agents relating to straightforward issues.
Despite these advances, it appears that there is a potentially significant gap between the suite of services provided to tax agents and the services tax agents believe are needed.
The Review concludes that there is a need for a low cost, responsive advice system (or modification to the existing PBR or oral binding ruling systems) for agents seeking advice where the amount of tax in question is too small to justify the cost of seeking a PBR.
Features of such a system might include:
- It could be designed primarily for tax agents, to be used in a range of simple, low revenue risk circumstances.
- Requests could be submitted and discussed by phone, with responses being provided by phone or possibly e-mail, after being registered or recorded.
- In appropriate circumstances, the Tax Office could use the power given in Recommendation 2.3 to grant premium protection.
In developing any new system, regard will need to be had to the administrative cost.
The Tax Office should work with tax agents to identify improved ways or new systems to assist tax agents with responsive and timely advice on low risk enquiries.
11 . Australian Taxation Office 2003, Strategic Statement 2003-05, Australian Taxation Office, Canberra.
12 . Australian Taxation Office 2003, Compliance Program 2003-04, Australian Taxation Office, Canberra, inside front cover.
13 . Australian Taxation Office 2003, Making it easier to comply, Australian Taxation Office, Canberra, p. 5.
14 . Longstanding administrative practice refers to issues that the Tax Office has specifically considered and applied consistently over time. Mere inaction or the failure to rule would not be taken as longstanding administrative practice.
15 . Commonwealth of Australia 1998, Tax Reform: not a new tax, a new tax system, August 1998, Commonwealth of Australia, Canberra, p. 147.
16 . Commonwealth of Australia Joint Committee of Public Accounts 1993, An Assessment of Tax, Report 326, 1993, Commonwealth of Australia, Canberra, p. 120.
17 . Australian Taxation Office 1992, Taxation Ruling TR 92/20, Australian Taxation Office, Canberra.
18 . On the question of the Tax Office potentially charging for advice, see subsection 2.4.9.
19 . Commonwealth of Australia 1999, Review of Business Taxation: A tax system redesigned, July 1999, Commonwealth of Australia, Canberra, p. 138.
20 . In 2002-03, the Tax Office issued 7,631 PBRs. 4,150 were wholly favourable to the applicant, 1,246 were partially favourable and 2,235 were unfavourable. It also finalised 3,674 applications without issuing rulings (usually because the application was withdrawn, deemed invalid or because the Tax Office refused to rule).
21 . Paragraph 14ZAU(2)(a) and subsection 14ZAU(4) of the Taxation Administration Act 1953, outline the circumstances in which a private ruling can be withdrawn.
22 . Commonwealth of Australia 1998, Tax Reform: not a new tax, a new tax system, August 1998, Commonwealth of Australia, Canberra, p. 147.
23 . Commonwealth of Australia Ombudsman 1997, Issue relating to oral advice: Clients Beware, Commonwealth of Australia, Canberra.