The Private Binding Rulings system was introduced as part of the improvement package to the then existing self assessment arrangements in 1992. Formally, the PBR regime is two parts. Sections 170BB to 170BI of the Income Tax Assessment Act (1936) and Part IVAA of the Taxation Administration Act.
Broadly speaking, taxpayers who are uncertain about the tax effect of an arrangement that is proposed, commenced or completed are able to seek a Private Ruling from the Commissioner. The Commissioner will be bound by the ruling in that the tax that would be payable by the taxpayer will be reduced to reflect the ruling. Taxpayers are able to have a Private ruling, even on a proposed arrangement, reviewed by the AAT or the courts. When the review process is finalised, the decision of the AAT or court is legally binding and conclusive as to the application of the ordinary provisions of the law to an actual arrangement not materially different from the proposal or arrangement to which the Private Ruling related.
Taxpayers are able to object against a Private Ruling within the period ending either:
- 60 days after receipt of the ruling; or
- 4 years from the last day allowed for the lodgement of the relevant return.
The reason for the four year period is to allow an objection against a Private Ruling where, despite a return being lodged, an assessment is not issued for some reason, eg., because a loss is incurred in the relevant year. This will enable a disputed matter to be determined earlier than otherwise would happen in some cases, eg., an assessment in which a disputed loss becomes an issue might not be made for some years. I note with some interest that this rationale may no longer be valid pending the outcome in Ryan.
Taxpayers have full rights of review against a Private Ruling where there is no assessment covering the matter which is the subject of the Private Ruling.
A Private Ruling will be binding on the Commissioner if the ruling can be said to be favourable to a person. More specifically, section 170BB of the Assessment Act provides that a ruling about a matter can be said to be favourable if the way in which the tax law would apply to a person in relation to that matter is different to the way the ruling stated that law would apply and the tax payable under an assessment or an amount of withholding tax would, because of the difference, be more than it would have been if the ruling had been correct. The ruling is binding in the sense that the tax payable or the withholding tax is not to be greater than it would be if the ruling applied.
Taxpayers, of course, are able to self-assess in line with the ruling. If the Commissioner was to make an assessment involving that matter, he is compelled by law to act in accordance with the favourable ruling.
Key provisions relevant to our discussion today are in the Administration Act.
Section 14ZAF provides that ‘a person may apply to the Commissioner for a ruling on the way in which, in the Commissioner’s opinion, a tax law or tax laws would apply to the person in respect of a year of income in relation to an arrangement’.
Immediately, one can see that a number of terms and phrases need to be defined or explained. Specifically, these are ‘tax law’, ‘year of income’ and ‘arrangement’.
‘Tax law’ is defined in section 14ZAAA in Part IVAAA of the Administration Act as, amongst other things, an income tax law. ‘An income tax law’ is defined in the same section as ‘a law under which is worked out the extent of liability for: (a) income tax...’.
‘Law’ is also defined. It means:
(a) a section or other provision of an Act; or
(b) a regulation under an Act.
You can see, therefore, that a ruling can only be given if it is in respect of a section or other provision of an Act which is a law under which is worked out the extent of liability for income tax.
I’ll return to that point in a minute.
Section 14ZAH says that a year of income to which an application for a Private Ruling applies ‘may be:
(a) a past year of income; or
(b) a current year of income; or
(c) a future year of income.
This is an important provision to note. So is section 14ZAI which defines what an arrangement is. An arrangement to which an application applies may be an arrangement that has been carried out, is being carried out or is a proposed arrangement. In conjunction, these two sections obviously provide for rulings in relation to arrangements to be undertaken in the future. However, an appeal against a Private Ruling is not available if the relevant year in which the proposed arrangement was to take place has come and gone.
This is because section 14ZAF provides that a ruling has to be about how a tax law ‘would apply to the person in respect of a year of income’. In CTC Resources v. F C of T 94 ATC 4072 Hill J dealt with the question of competence to hear an appeal in respect of a ruling relating to a proposed transaction in a year past. As you know, the right of objection is conferred by section 14ZAZA of the Administration Act upon a ‘rulee’ who is ‘dissatisfied’. In the opinion of Hill J, a person will only be dissatisfied in the relevant sense:
‘if that person is a person to whom the "ruling" is still capable of having legal effect. In the case of a ruling relating to a particular arrangement, that means the arrangement must be one which, if entered into, will fall within the ruling. If the ruling relates to a year of income which has passed before the appeal is instituted (or perhaps before the appeal has been heard) so that the ruling cannot effect the taxation liability of a putative appellant, that person, no matter how discontented, will not be a person "dissatisfied".’
See 94 ATC at page 4,100.
This is a particularly significant development because many transactions that potentially attract the operation of Part IVA will be generally understood by competent taxation advisors as being within that class. Whilst there may be disagreement as to whether a particular arrangement would fall within the Part, I would be surprised if many of us would disagree about the potential of an arrangement to be within that class. Prudence, particularly in relation to large dollar transactions, ought to dictate a sign-off by the Commissioner. Indeed, many such transactions are predicated on attaining a favourable Private Ruling from the Commissioner in respect of the transaction. If the ruling turned out to be unfavourable then the time to have that decision reviewed may become crucial. This is particularly so as we are disinclined these days to give rulings for multiple years in relation to arrangements going forward over a number of years of income.
On a different but related point is the question of assumptions. Whilst section 14ZAM requires the Commissioner to request the applicant to give whatever further information is necessary in order for the ruling to be made, sometimes, not every piece of relevant information necessary to forming a view will be "available" at the time of making the application. For example, in relation to transactions involving other parties, a rulee may not know certain things peculiarly within the knowledge of the other party. Particularly in Part IVA cases, where the answer always turns on the relevant facts, this can be a problem.
Accordingly, section 14ZAQ enables the Commissioner to make an assumption about a future event or other matter if he considers the correctness of the ruling would depend on the assumption. Whilst the Commissioner cannot make assumptions about information which the applicant could provide, he can make assumptions about future events that are uncertain.
However, Hill J pointed out in CTC Resources (at page 4,100) that:
‘It may be that s. 14ZAQ is beyond power in purporting to permit the Commissioner to make assumptions of future facts or "other matters" which then must be taken into account by the Court in an appeal. If there be facts relevant to the making of the ruling, these will, in the first instance, be supplied by the taxpayer, and if deficient the Commissioner may require additional facts to be supplied to supplement those already given: s. 14ZAM. The Court is not empowered in exercising is jurisdiction to find facts and if the facts were inadequate would be obliged to refer the matter back to the Commissioner to exercise the power given to him under s. 14ZAM. As presently advised I doubt the ability of the Court to draw inferences from the given facts, but if the Court had that power there is a big difference between the drawing of inferences and the making of assumptions. The Court is given the statutory task of deciding whether the objection decision ought to have been made differently: s.14ZZO, or in other words, whether the ruling is wrong. In so doing the Court must rely upon the facts stated in the ruling in coming to its conclusion. But to empower the Commissioner to make assumptions (it must be presumed that the only assumptions contemplated are assumptions of fact, the Commissioner could hardly make assumptions of law which would render the ruling useless) and then to require the Court to rule upon assumed facts would, in my view, involve the Court in being forced to decide a question of law on facts not put forward by the taxpayer as relevant to the proposed arrangement. Facts assumed by the Commissioner, albeit that the assumption made is that which the Commissioner under s. 14ZAQ considers the most appropriate, may bear no real relationship to the actual facts upon which the ruling is sought. However, that question does not arise for decision here.’
On the face of it, Hill J seems to be saying that there is a problem with a legislative scheme that allows the Commissioner to make assumptions of future facts which then must be taken into account by a court in an appeal on the correctness of the private ruling. I think this is connected to the question whether the appeal would be competent because those assumptions may not give rise to a "matter" for the purposes of section 77 of the Australian Constitution.
He has not however, decided that to be the case. And in any event that may not mean that the ruling is flawed if it was based on information provided by the taxpayer as well as assumptions made by the Commissioner. Presumably the court would be limited to deciding the correctness of the ruling having regard only to the facts not assumed by the Commissioner. Hill J has, of course, also recognised that if there are insufficient facts on which to make the ruling the matter should be remitted to the Commissioner to ascertain from the rulee those extra necessary facts. See CTC Resources at ATC 4102.
In any event, I suggest, with respect, that other members of the Federal Court have expressed views on the matter that are not necessarily the same as Hill J. I refer you to the reasons for decision of at Lockhart and Emmett JJ in FC of T v. McMahon & Anor 97 ATC 4986.
McMahon’s case concerned the question whether, upon a review of a private ruling by the Administrative Review Tribunal, additional factual material to that taken into account by the Commissioner in making the ruling could be entertained by the Tribunal in determining the correctness of the Commissioner’s ruling.
The unanimous decision of the Full Federal Court was that it could not. Notably the Court also indicated that the facts relied upon by the Commissioner were the only ones on the table for the purposes of the whole of the review process including hearings within the Court system.
In so deciding, Lockhart J said that the private ruling regime is quite different from the process of assessment to tax under the Assessment Act. He then said that a private ruling is founded on the way in which, in the Commissioner’s opinion, a tax law applies to the applicant in respect of a year of income. If a taxpayer seeks a review of the private ruling before the Tribunal, the subject matter of the review is the arrangement as identified by the Commissioner in his private ruling.
He then said (at 97 ATC 4990):
‘But that review is not a review in the usual sense that applies to the processes of administrative review when it is dealing with actual facts. These are hypothetical facts. They may turn out to be the real facts; but the whole notion of a private ruling is that the facts are not necessarily the facts that will underlie the making of any ultimate assessment.’
In addition to this, a few paragraphs earlier Lockhart J had said that the ‘relevant arrangement is but a complex of assumed or identified facts. It may also involve assumptions which, if made by the Commissioner, must be stated in his identification of the relevant arrangement’.
Such a set of propositions are clearly consistent with the notion that a review of a private ruling is limited to the correctness of the Commissioner’s view of the way in which the tax law applies to the relevant arrangement howsoever identified in the ruling. This includes the facts as supplied by the rulee and any assumptions made by the Commissioner as to future events or other matters. I think this must be taken to mean that the assumed matters as to what the arrangement is must be able to be ruled upon and hence be subject to review.
Emmett J expressed essentially the same view but he also added the telling point that under section 14ZAS(2), if the correctness of a private ruling depends on an assumption, the assumption is, for the purposes of section 14ZAS(1), an aspect of the arrangement to which the ruling relates. There was no suggestion whatever that this aspect of the arrangement was not capable of being ruled upon and, of course, therefore reviewable.
Broadly speaking, for Part IVA to apply to an arrangement it must be posited that there is a scheme, that there is a tax benefit in relation to that scheme and that a person who carried out the scheme did so for the purpose of enabling the taxpayer to obtain that tax benefit. The purpose must be the sole or dominant purpose of the relevant person. Finally, it must be remembered that none of that is of any great moment unless the Commissioner makes a determination in respect of the tax benefit.
I think there is a degree of uncertainty and confusion as to how Part IVAA of the Administration Act applies in respect of Part IVA of the Assessment Act.
We are often asked to make a ruling on each of the elements of the Part but, in my view, it is not possible to rule that way. Sometimes the question of whether a matter is a question of law or a question of fact has been introduced into the debate. It has been said that the Commissioner cannot make a ruling on a question of fact. That, of course, is true but that is not to the point. The point is that individually the question of whether there is a scheme and whether there is a tax benefit are not income tax laws in the relevant sense. I doubt whether the definition of ‘scheme’ in subsection 177A(1) is a law under which is worked out the extent of liability for income tax. Nor is the question of whether it can be posited that there is a tax benefit in relation to that scheme.
In particular, it is peculiarly within the knowledge of the rulee in relation to a proposed transaction as to whether, absent the scheme, an amount would have been included in the assessable income or allowed as a deduction. As such, these matters may be information that the rulee might furnish, whether as a result of a section 14ZAM request or otherwise and also may be said to be matters of fact.
In Jackson’s case Gummow J said that the conclusion of purpose under section 177D is a mixed question of law and fact. Again I wonder whether strictly speaking, the conclusion as to purpose is in itself a law under which is worked out the extent of liability for income tax. However, I favour the view that section 177D, being the section within Part IVA that tells you which schemes the Part applies to, is such a law.
Whether that is right or not, it is perfectly clear that section 177F is such a law. That section enables or authorises the Commissioner to determine that some or all of a tax benefit is to be cancelled and then provides that the Commissioner shall take such action as he considers necessary to give effect to that determination.
Even though section 177F is a discretionary provision, section 14ZAE of the Administration Act provides that a private ruling on the way in which a tax law applies may be a ruling on the way in which a discretion of the Commissioner under that law would be exercised.
Accordingly, as a minimum, the Commissioner is required to rule if all other matters in Part IVAA of the Administration Act have been satisfied, if the question is asked whether he will make a determination under section 177F in relation to a particular scheme. In order to do that, however, the Commissioner must first determine whether the scheme is one to which the Part applies. Remember that the opening words of section 177F are:
‘where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may - ...’
As I say, I favour the view that determining under section 177D whether a particular scheme is one to which the part applies is also a tax law in the relevant sense.
So much seems to have been taken for granted in Bellinz where, at least in the Full Federal Court, in a joint judgment, Hill, Sundberg and Goldberg JJ said that there is nothing to suggest that in an appropriate case a ruling could not issue on Part IVA of the Act.
However, they also said that in respect of a proposed arrangement ‘it is difficult to see how there could be adequate facts on which to base a private ruling’ and that even in relation to executed arrangements, there may in many cases be difficulty in obtaining all relevant facts.
What should be made of this? It seems to me that it is a re-statement of the kind of sentiment expressed in CTC Resources and which I have suggested is not necessarily shared by other judges on the court.
However it must be acknowledged that another, differently constituted court, has adopted what on its face seems to be a different view. Naturally this puts the Commissioner and taxpayers in a difficult position because it must be accepted that there exists more than a theoretical possibility that the Bellinz view may in fact turn out to be correct.
At this stage we do not think that will be the case and we are not intending to decline to rule where we think there is sufficient information provided by the rulee. To the extent that assumptions have to be made we will adopt the approach to the private rulings system articulated in McMahon.
Section 14ZAN sets out when applications do not have to be dealt with. Paragraph (h) of that section provides that the Commissioner is not required to comply with an application if the arrangement to which the application relates has neither been, nor is being, carried out and is not seriously contemplated by the rulee.
I sometimes wonder when it is said to us that a transaction will not proceed unless a favourable ruling is given whether such a transaction can be in serious contemplation by the rulee. This is particularly so when, at the same time, it is also said that the arrangement is not tax driven and that any tax benefit is incidental to the commercial imperatives that are really driving the arrangement. Whilst we do not, and will not refuse to rule in such circumstances, I find the situation a little odd.
I suppose this is a related matter to the inherent structural difficulty in some scenarios of trying to determine whether a tax benefit would exist but for the scheme. For example, think of a situation involving the dismantling of a structure passed its use-by date. Assume a vanilla dismantling would result in an income or a capital gain upon the disposal of property. If tax efficiency is a priority and absent that, the alternative to the transaction is to ‘do nothing’ then, on one construction of section 177C(1) it is arguable that the ‘do nothing’ alternative does not give rise to a tax benefit.
How can you make a Private Ruling on such a proposed transaction? It may be said to follow logically that it is just not reasonable to expect that an amount would have been included in the assessable income if the scheme had not been entered into or carried out.
As such you could never find that the scheme was one to which the Part could apply and there could only ever be one answer to the ruling.
Bearing that in mind, we operate on the basis that one way or another the commercial objective will be achieved and that sitting on your hands is not an option. Accordingly, we presume that to ‘do nothing’ is not an alternative scenario thus preventing the creation of a tax benefit.
In a similar vein, sometimes it is put to us that absent a particular proposed transaction, the same tax outcome would be achieved by a different means so that again, there can be no tax benefit. I think it is open to the Commissioner to turn his mind to the question of whether the alternative itself would be a scheme to which the Part would have application. If so, it seems to me that a logical conundrum is being presented, again, making it difficult to rule. We have operated in the past on the basis that an alternative arrangement that itself is a scheme cannot be used as a shield in relation to determining whether the primary question of whether there is a tax benefit would be satisfied.
Finally, an interesting situation arose recently in relation to a private ruling issued some years ago in respect of a transaction to run until the year 2010. The question was whether an amount payable was on revenue or capital account. We ruled favourably that the expense was deductible but the ruling was specifically limited to the period ending 30 June 1999.
Because of changed circumstances, the rulee came back to us with a request in relation to an organisational restructure. When we revisited the matter we realised the initial ruling was probably wrong. Given that it expired next year, future amounts payable were likely to be not deductible. Naturally the rulee wanted a different result and suggested that it revisit the arrangements under which the amount was payable in order to ensure that they remained deductible.
Catch 22. On the face of it what is being proposed is that an arrangement that is presently in place be changed in order to make a non-deductible amount henceforth a deductible amount. Question. Isn’t this creating a tax benefit in relation to a scheme thus requiring an analysis under 177D as to purpose?
One might suggest that to condemn a rulee to an unfavourable outcome in this kind of situation would be iniquitous. If ever there was an example of the importance of the discretionary provision in section 177F it would be this.
Now that the Federal Election is over it is perhaps timely to point out the proposal in the Government’s Tax Reform program to examine a system of user charges for private rulings and other binding advice given to large business taxpayers in complex cases.
The rationale behind the initiative is that providing binding advice to taxpayers in complex cases requires the ATO to commit high level technical resources for extended periods. This represents a significant cost to the community. If introduced, the user charge will be used to maintain suitably skilled professional resources, able to provide timely, quality advice.
We are currently in the process of setting up a team of people experienced in dealing with these kinds of cases that will form a kind of integrated finance team to better manage our work in the structured finance area. Perhaps this group may form the nucleus of the people involved in the user charging system that may be instituted in the future. More will be known in due course.
Thanks for your attention.
Last Modified: Friday, 25 January 2002
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