Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)
Chapter 1 Rulings
This chapter deals with how rulings made by the Commissioner are to be binding and what review rights there are to be in respect of rulings. The key features are:
- the Commissioner will be able to make binding Public Rulings about how the tax laws apply to classes of arrangements or persons;
- taxpayers will be able to seek binding Private Rulings about their own particular tax affairs;
- the Commissioner will be compelled to adhere to a binding Public or Private Ruling if the ruling is favourable to a taxpayer;
- binding Public and Private Rulings may be withdrawn, but in general, not so as to disadvantage taxpayers who have acted in reliance on a ruling;
- taxpayers will be able to object to Private Rulings in the same way as they can object against assessments;
- taxpayers will also be able to seek review by the AAT or a court of adverse objection decisions.
The Bill gives effect to changes announced in sections 8 and 9 of the August 1991 information paper entitled 'Improvements to Self Assessment - Priority Tasks'.
Among other things, amendments proposed by the Bill will provide for a system of binding and, in some cases, reviewable tax rulings. These amendments will affect:
- Public Rulings - rulings issued by the Commissioner for the information of the public generally; or
- Private Rulings - rulings given to individual taxpayers about their own particular tax affairs.
Only Private Rulings will be reviewable by the AAT or courts.
The amendments affecting rulings are in two parts:
- amendments to the Administration Act deal with administrative issues, for example, how binding Public and Private Rulings are to be made and withdrawn, and review rights in respect of Private Rulings [Clause 4]; and
- amendments to the ITAA and the FBT Act deal with substantive issues, like the effect Public and Private Rulings will have on assessments and the effect on an assessment of an AAT or court decision made following a review of an objection decision in relation to a Private Ruling. [Clauses 22 and 36]
The objective of the amendments affecting rulings is to ensure that rulings made by the Commissioner about the application of tax laws to arrangements are to be binding and that Private Rulings are to be reviewable in the same way as assessments are reviewable under Part IVC of the Administration Act.
Tax laws to which rulings may apply
The tax laws covered by binding rulings can relate to income tax, withholding taxes, franking deficit tax, Medicare levy and FBT [sections 14ZAAA and 14ZAA of the Administration Act -Clause 4]. Rulings on these tax laws will be binding where they would affect the amount of tax payable by a taxpayer. The new rules do not cover rulings by the Commissioner on procedural, administrative or collection aspects of the law [eg., rulings on Pay-As-You-Earn (PAYE) or Prescribed Payments System (PPS) matters] which do not affect a taxpayer's final liability to tax.
Meaning of 'binding'
A ruling will be binding on the Commissioner if the ruling can be said to be favourable to a person. 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 will be 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. A taxpayer will be able to self assess in line with the ruling. If the Commissioner was to make an assessment involving that matter, he will be compelled by the law to act in accordance with the favourable ruling. [sections 170BA, 170BB, 170BC, 170BD and 170BE of the ITAA - Clause 22 and sections 74A, 74B and 74C of the FBT Act - Clause 36]
Penalty if Private Ruling not followed
While the Commissioner will be bound to apply favourable rulings, a taxpayer who gets an unfavourable Private Ruling prior to self assessing will be penalised for not self assessing in accordance with the Private Ruling. See Chapter 4. A ruling is unfavourable if a taxpayer's opinion of how the tax law applies in relation to a matter is different to the Commissioner's view expressed in the ruling, and the tax payable under an assessment or an amount of withholding tax would be greater if the Commissioner's view is applied.
There will only be review rights in respect of Private Rulings. This is because Public Rulings will not be specific to any particular person or arrangement. The rights of review for a Private Ruling will be the same as those available in respect of assessments. Taxpayers will be able to object against unfavourable Private Rulings and seek review by the AAT or a court of an adverse objection decision. [section 14ZAZA of the Administration Act - Clause 4]
While a taxpayer could not object against an unfavourable Public Ruling that deals with an arrangement proposed or commenced by the taxpayer, the person could seek a Private Ruling about the particular matter and pursue whatever review rights are available in respect of that Private Ruling.
Binding Public Rulings
A new Part is being inserted in the Administration Act to deal with the issue and withdrawal of Public Rulings that are binding at law [Part IVAAA - Clause 4]. For the purpose of the new Part, a Public Ruling is a determination by the Commissioner of the way in which a tax law or tax laws would apply to any person in relation to a class of arrangements, a class of persons in relation to an arrangement, or a class of persons in relation to a class of arrangements. [sections 14ZAAE, 14ZAAF and 14ZAAG]
The Commissioner makes known his views about the application of the tax laws in a number of ways. For some years now, the Commissioner has issued formal Taxation Rulings on the application of the tax laws generally (in the sense that they do not cover any particular taxpayer's affairs). These rulings are available through the Freedom of Information units in the ATO. More recently, the ATO Capital Gains Tax (CGT) Specialist Cell, a working group in the ATO that focuses on CGT issues, has issued formal CGT Determinations that give rulings about the application of CGT. The Commissioner's views about tax laws may also be found in other ATO publications, for example, return form guides, information booklets, Commissioner press statements and speeches.
Rulings about the application of the tax laws may still be made in any one of the forms just mentioned. But a ruling will only be a Public Ruling for the purpose of the new binding rulings provisions if it:
- is made available to the public; [subsection 14ZAAI(1)] and
- contains a statement that it is a Public Ruling for the purposes of the new provisions. [subsection 14ZAAI(2)]
Date of effect for Public Rulings
Public Rulings about arrangements will generally apply to past as well as new arrangements. This is because a Public Ruling states the Commissioner's interpretation of the law and, subject to legislative change, that law is taken to have always applied. The exception to the general rule is where a ruling states that it only applies to arrangements commenced after a particular date. This might happen if the ruling applies to new tax law or if the Commissioner considers it would be unfair to apply a ruling to arrangements commenced before the ruling is made, even though there has not been an earlier ruling on the matter. [section 14ZAAH]
Where a Public Ruling is issued about a matter and there is an earlier Public Ruling on the same matter, the earlier ruling continues to apply to arrangements commenced before the issue of the new ruling [section 14ZAAI]. Any conflict between the new and old rulings in respect of the period before the issue of the new ruling will be resolved by special rules [subsections 170BC(3) and 170BF(3) of the ITAA and subsection 74C(3) of the FBT Act]. In general the ruling that gives the greater benefit to a taxpayer will apply (see later notes on conflicting rulings).
One consequence of Public Rulings having past as well as future effect is that where a ruling is favourable to a taxpayer, the taxpayer may self amend to give effect to the ruling in an assessment at any time before the amendment period for the assessment has expired. See Chapter 3. In practical terms this means that people will be able to gain the benefit of favourable Public Rulings for a period up to4 years after an assessment is made. The Commissioner would not be able to make any change to the self amended assessment in respect of the matter covered by the ruling, even if the Commissioner's interpretation of the law was to subsequently change. In such a case, the law will compel the Commissioner to assess in accordance with his earlier favourable ruling (see notes on effect of Public and Private Rulings).
Withdrawal of Public Rulings
It will be possible for the Commissioner to withdraw either the whole or part of a Public Ruling by:
- giving written notice of the withdrawal for the benefit of the general public; [subsection 14ZAAK(1)] or
- issuing a new Public Ruling about a class of arrangements or persons that is inconsistent with an earlier Public Ruling. [subsection 14ZAAK(2)]
Where a new Public Ruling is only partly inconsistent with an earlier ruling, the earlier ruling is to be taken to be withdrawn only to the extent of the inconsistency. [subsection 14ZAAL(2)]
Effect of withdrawal of Public Ruling
To the extent that a Public Ruling is withdrawn, it will not apply to arrangements entered into after the withdrawal [section 14ZAAL]. The time of withdrawal is the time when the relevant written notice is published or the relevant inconsistent Public Ruling is published or, if the notice or inconsistent Public Ruling specifies a later time, that time. A withdrawn ruling will continue to apply, in respect of arrangements commenced before the ruling was withdrawn. As already noted, a consequence of this is that there could be conflicting Public Rulings applying to an arrangement that has commenced, in a case where a Public Ruling is withdrawn by the issue of an inconsistent Public Ruling. Any conflict will be resolved under the conflicting rulings provisions. [subsections 170BC(3) and 170BF(3) of the ITAA and subsection 74C(3) of the FBT Act]
There are two crucial issues in dealing with Public Rulings that are withdrawn. They are:
- where a ruling is only partly withdrawn - determining the extent to which the ruling is withdrawn; and
- in every case - deciding when it is that an arrangement can be said to have begun to be carried out.
Ruling partly withdrawn
The first issue is important because, to the extent it is not withdrawn, a Public Ruling continues to have effect.
A ruling deals with expenditure connected with an employer sponsored superannuation fund. The ruling states that the relevant expenditure is deductible to:
Deciding when arrangements have begun
The second issue involves a question of fact that must be determined on the basis of the actual facts in each particular case. It is important because a withdrawn Public Ruling only has application for arrangements commenced on or before the withdrawal. Where an arrangement will be carried out under a contract, the arrangement will be taken to have begun to be carried out at the time when the contract was entered into [section 14ZAAB]. This could be before the time when the arrangement has actually commenced to be carried out. For instance, a builder might enter into a contract to build a home but construction of the home will not commence for a further 3 months. The arrangement of building the home will have begun to be carried out when the contract was made.
The definition of arrangement [section 14ZAAA] is very broad. There will be cases where an arrangement does not involve a contract, eg., a Public Ruling might deal with the deductibility of expenditure incurred in travelling to and from work. In this case each day's travel to and from work is a separate arrangement that is begun when a person embarks on the journey. If the Public Ruling was withdrawn it would only apply to journeys undertaken up until the withdrawal.
Binding Private Rulings
The Administration Act will also be amended by this Bill to insert a new Part that deals with Private Rulings [Part IVAA - Clause 4]. The essential difference between Private and Public Rulings is that Private Rulings deal with specific arrangements that are proposed, or have been entered into or completed by a particular person or persons. This allows Private Rulings made by the Commissioner to be reviewable in the same way as assessments are reviewable.
The provisions dealing with Private Rulings are more comprehensive than those dealing with Public Rulings. This is because they have to deal with applications by persons for Private Rulings (the Commissioner may issue Public Rulings at his own discretion) and because Private Rulings are reviewable.
What is a Private Ruling
A Private Ruling is a written response from the Commissioner to a request for a ruling about the application of a tax law, or tax laws, to a person (the rulee) in respect of a year of income in relation to a particular arrangement [sections 14ZAF, 14ZAG and 14ZAR]. In making a Private Ruling, the Commissioner may also make an additional Private Ruling on the way in which another tax law would apply, or how a tax law would apply to the person for another year in respect of the arrangement, or how a tax law would apply to the person in relation to a related arrangement. [section 14ZAP]
The matter covered by a Private Ruling is specific to a particular person, tax law or laws, year of income and arrangement. This is important because it limits the extent to which a ruling is binding to that matter and, as already noted, allows for review of Private Rulings. Where the actual facts of an arrangement are materially different to those covered by a ruling, the ruling has no effect.
Applications for Private Rulings
People can apply for a ruling about a matter that affects them or, with the written consent of another person, about a matter that affects the other person [sections 14ZAF and 14ZAG]. If two or more people want a ruling about an arrangement, or a class of arrangements, a person may, with the written consent of the others, make an application on behalf of all of those persons.
Form of application for a Private Ruling
An application for a Private Ruling must be made in a form approved by the Commissioner [section 14ZAJ]. The Commissioner will be publishing standard forms that can be used to apply for a Private Ruling. These will be available from the ATO. A person need not apply on a standard form, provided an application contains all of the information that the Commissioner requires in an application to be able to make the ruling. It could be expected that a ruling application about a routine matter would not require the same degree of information as an application about a complex matter.
Insufficient information provided
There may be cases where the standard information required to be provided with applications will still be insufficient to allow the Commissioner to give a ruling about a matter. In this case the Commissioner must ask the applicant for the additional information needed to allow a ruling to be given [section 14ZAM]. This ensures that the Commissioner cannot refuse a ruling request merely on the grounds that insufficient information has been provided by the applicant.
Commissioner may give additional Private Rulings
Where a Private Ruling request is very specific in its application to an arrangement and a particular tax law, the Commissioner may give such ruling as he thinks is appropriate. For instance a person might ask for a ruling as to whether an amount derived from the sale of an asset is assessable under section 25 of the ITAA. If the Commissioner considers that the amount is not assessable under section 25, he could give a Private Ruling simply stating that opinion. This would be so even though the Commissioner formed the opinion that, although no amount was assessable under section 25, an amount was assessable under Part IIIA as a capital gain. In this case, the law allows the Commissioner to give the applicant a Private Ruling stating both opinions or to give the applicant a second Private Ruling about the way Part IIIA would apply to the sale of the asset. [paragraphs 14ZAP(a) and (b)]
Similarly, if an applicant asked for a ruling in respect of a particular year in relation to an arrangement that will be carried out over more than one year, the Commissioner may give an additional ruling or rulings covering the other year or years [paragraph 14ZAP(b)(ii)]. Where relevant, the Commissioner may also give an additional Private Ruling about an arrangement that is related to the arrangement for which a ruling has been sought [paragraph 14ZAP(b)(iii)]. In broad terms, two arrangements are related [section 14ZAB] if they are part of the same arrangement or both affect a person's tax.
In cases where the Commissioner considers it would be appropriate to deal with additional matters, such as a year or a related arrangement not covered by an application, he cannot give one Private Ruling covering both the matters covered by the application and the additional matters. This is because they relate to either a different year, or years, or to different arrangements. To enable review of Private Rulings they are to cover only one year of income and only one arrangement.
Assumptions made by the Commissioner
If the correctness of a Private Ruling would rely on assumptions made by the Commissioner, the Commissioner may either decline to make the ruling or make the appropriate assumptions [section 14ZAQ]. The Commissioner may not make assumptions about information which the applicant could provide. As already noted, the Commissioner must ask for any further information needed to deal with a ruling request. But assumptions could be made about future events that are uncertain.
Example A person asks for a Private Ruling concerning a venture which is seriously contemplated but not all details are known. The arrangement involves a trust and it is not known whether the beneficiaries are residents. The Commissioner may make the assumption for the purpose of giving a ruling that even though the beneficiaries are not yet known, they will be Australian residents.
Dealing with applications for Private Rulings
The Commissioner will be obliged to comply with a ruling request [subsection 14ZAL(1)], except in a limited group of cases [section 14ZAN and paragraph 14ZAQ(a)]. Even if the Commissioner is not compelled to give a ruling, he may still choose to give one. [subsection 14ZAL(1) and paragraph 14ZAQ(b)]
Applications that do not have to be dealt with
There is a range of circumstances where the Commissioner does not have to respond to an application for a Private Ruling [section 14ZAN]. As a general rule, the Commissioner will not have to give a Private Ruling about a matter if the matter has already been determined, or will be determined through a different process. To require rulings to be given in those circumstances would cause a duplication of work. In addition, the Commissioner will not have to deal with applications that are frivolous or purely hypothetical.
The exceptions to the general rule that the Commissioner must respond to a ruling request are where:
- there is already a Private Ruling about the same matter; [paragraph 14ZAN(a)]
- the matter has already been decided by the Commissioner in making a Commissioner assessment; [paragraph 14ZAN(b)]
- the ruling would cover withholding tax that has already become due and payable; [paragraph 14ZAN(c)]
- the Commissioner considers the matter will be decided in the course of a tax audit that commenced before the ruling request; [paragraph 14ZAN(d)]
- the matter is covered by an objection against a self assessment and will be decided when the objection is decided; [paragraph 14ZAN(e)]
- the ruling request is made more than 4 years after the due date for lodging the tax return for the relevant year; [paragraph 14ZAN(f)]
- the application is frivolous or vexatious; [paragraph 14ZAN(g)]
- the arrangement covered by the application is not seriously contemplated; [paragraph 14ZAN(h)]
- the applicant has not satisfactorily complied with a request for more information; [paragraph 14ZAJ(i)]
- the Commissioner considers it would be unreasonable to have to comply, having regard to
- the amount of resources he would have to apply to dealing with the ruling request; or
- any other relevant matters. [paragraph 14ZAN(j)]
Some of these exceptions warrant further explanation.
Existing Private Rulings
The Commissioner will not have to comply with an application for a Private Ruling if there is already a Private Ruling about the matter sought to be determined. In this context, the 'matter' is the application of a tax law or tax laws to a person in respect of a year of income in relation to an arrangement. Because a matter is specific to a particular person this exception will not prevent another person from getting a Private Ruling about the same arrangement. In particular, where a person makes applications for rulings on behalf of a number of persons in relation to the same arrangement, the fact that one or more of those persons has already obtained a Private Ruling about the same matter will not prevent the remaining persons from obtaining rulings.
If a matter has been decided and has affected an assessment made by the Commissioner in respect of a taxpayer, the Commissioner will not have to deal with an application for a ruling about the same matter. Although in this case, the right to a review of a Private Ruling will not be available, the taxpayer will, of course, have review rights in respect of the assessment.
A decision about a matter may not affect an assessment until a later year of income. Where a matter is determined by the Commissioner but no assessment is made, eg., where there is a loss in that particular year of income and the Commissioner's decision would cause a smaller loss to be carried forward, a taxpayer will be able to seek a Private Ruling about the matter up until the time, if there is one, when the determination has an effect in a Commissioner assessment. A Commissioner assessment is one that is not a self assessment, ie., one where the Commissioner applies the law to the taxpayer's facts. The determination could affect a Commissioner assessment, for instance, in which the taxpayer seeks a deduction for the loss carried forward. The deduction for a loss carried forward sought by the taxpayer would be greater than that allowed by the Commissioner. At that stage the taxpayer will not be able to get a Private Ruling about the matter decided in the earlier year. But the taxpayer could object against the assessment in which the loss deduction is sought.
Example A taxpayer calculates a loss of $1 000 for the 1992-93 income year on the basis that a $500 deduction is available for repairs.The Commissioner decides that the expenditure of $500 is of a capital nature and, therefore, is not deductible. The Commissioner's view is that the loss to be carried forward is only $500.At this stage the taxpayer could ask for a Private Ruling about the matter, since the Commissioner's decision has not had an effect in an assessment. The taxpayer would then have all the rights of review that attach to a Private Ruling.Later, there is an assessment made by the Commissioner in respect of the taxpayer for the 1993-94 year of income. The Commissioner allows as a deduction against assessable income a loss of $500, giving a taxable income of $8 000.The taxpayer thinks the taxable income should be $7 500, on the basis that the loss carried forward should be $1 000.At this stage the taxpayer cannot ask for a ruling about the matter because it has had an effect in a Commissioner assessment. But, of course, the taxpayer could object against the assessment on the ground that the loss allowed as a deduction is incorrect.
Matter decided in the course of an audit
The Commissioner will not have to comply with a ruling request if the matter involved in the request will be determined in the course of a tax audit that commenced before the ruling request was made. Because a 'matter' is specific to the application of the law to an arrangement in a particular year of income, this does not prevent a taxpayer from seeking a ruling about how the tax law will apply to the same arrangement in a later year of income. Also, rulings could be sought about matters not within the scope of the audit.
Even if not obliged to give a ruling because an audit has commenced, the Commissioner may still give a ruling if he considers it appropriate [subsection 14ZAL(2)]. For example, the Commissioner might give a ruling, despite paragraph 14ZAN(d), to deal with a question of law even though the actual facts of a matter had not been established through the audit. This might happen where the Commissioner did not intend to look at all the actual facts of that matter during the audit or where the Commissioner agreed to resolve the particular question early in the audit process.
Frivolous or vexatious application
Where the application for a ruling is frivolous or vexatious or is not seriously contemplated, the Commissioner does not have to comply with the application. Examples are:
- where it is obvious that the arrangements sought to be ruled on involve purely hypothetical situations; or
- where the request asks the Commissioner to confirm in respect of a tax return that all the income returned is assessable and all deductions claimed are deductible and the correct amount of tax has been assessed.
Information not provided with application
The standard application forms for Private Rulings will ask for certain basic information to be provided. If the standard information that the Commissioner requires in an application to make the ruling is not provided, the application will not be properly made. Where the standard information is given, the Commissioner will have to respond to a ruling request even if he considers that he needs more information before he can give the ruling asked for. [section 14ZAM]
The Commissioner does not have to comply with a request where it would be unreasonable to comply in view of the resources of the Commissioner that would be required to comply. This provision would not normally apply. However, there may be situations where the resources required to deal with a ruling request would seriously impact on the Commissioner's ability to deal with other applications for rulings or other work. This might occur for example, where the Commissioner is asked to give an opinion as to an 'arm's length price' under Division 13 of the ITAA that would involve a study of the particular industry over a considerable period of time.
Time limit for applications
While the Commissioner may generally comply with an application for a ruling even though not required to [subsection 14ZAL(2)], he cannot respond to an application that is made more than 4 years after the due date for lodging a tax return for the particular year covered by the application. This deadline for lodging an application for a ruling is consistent with the similar restrictions in seeking an amendment to an assessment.
Applications and objections not to affect obligations and powers
The fact that a taxpayer has applied for, or objected against, a Private Ruling does not affect the taxpayer's obligation to lodge a tax return for the relevant year, or any other obligations of the taxpayer under the tax laws. Nor will it affect the Commissioner's power to make or amend an assessment in respect of the year covered by the application or ruling. [section 14ZAZC]
Delays in dealing with applications
If the Commissioner has not dealt with an application for a Private Ruling within 3 months of the application being made, the applicant may ask for a written statement of the reasons for the delay. The applicant's request must be in writing. For this purpose an application is dealt with if the Commissioner gives the Private Ruling or advises the applicant that he does not propose to give a ruling. Where the Commissioner has asked the applicant to provide more information, the 3 month period commences when that information is provided to the Commissioner.
Once a written statement of the reasons for delay has been given to the applicant, the Commissioner must give further statements every 3 months until the application is dealt with. If during one of those 3 monthly intervals the Commissioner asks for more information from the applicant, the next statement of reasons will be required 3 months after the date when that information is provided to the Commissioner.
Form and content of a Private Ruling
Notice of a Private Ruling must be served on the applicant in writing and the notice must state that it is a Private Ruling for the purposes of the new provisions. Two or more rulings about an arrangement or related arrangements may be given in the same notice. [section 14ZAR]
A Private Ruling must identify the person, year of income and arrangement to which it applies and any assumptions made in the ruling. This is important for the purposes of determining the extent to which a ruling is binding and for allowing for the review of Private Rulings by the AAT and courts. Since the description of an arrangement might otherwise become quite lengthy, the law allows an arrangement to be identified in a Private Ruling by reference to a document which contains details of the arrangement, but only if the person to whom the ruling will apply has access to that document. [section 14ZAS]
Withdrawal of Private Rulings
Private Rulings may be withdrawn by the Commissioner, either wholly or in part, but generally not to the detriment of a rulee who has acted in reliance on a Private Ruling. [section 14ZAU]
The Commissioner may withdraw a Private Ruling with the consent of the rulee [subsection 14ZAU(1)]. The Commissioner can also withdraw a Private Ruling without the rulee's consent in certain circumstances but not if the ruling is still under review or has been reviewed by the AAT or a court.
A ruling is still under review if the Commissioner has made a decision about an objection against the ruling and:
- the period within which the decision may be appealed against has not ended [paragraph 14ZAU(2)(c)]; or
- the period within which an application for review of the decision may be made has not ended [paragraph 14ZAU(2)(d)]; or
- there has been an appeal or application for review which has not been withdrawn (whether finalised or not). [paragraph 14ZAU(2)(e)]
The circumstances where a Private Ruling may otherwise be withdrawn without consent are if:
- the arrangement dealt with in the ruling has not begun to be carried out [paragraph 14ZAU(2)(a)]; or
- the arrangement has commenced and the Commissioner considers that a person other than the rulee would suffer a disadvantage if the ruling is not withdrawn, and that disadvantage would be much greater than any disadvantage the Commissioner considers the rulee would suffer if the ruling is withdrawn [paragraph 14ZAU(2)(b)].
In determining whether the rulee would suffer a disadvantage if a ruling is withdrawn in relation to an arrangement that has already begun to be carried out, the Commissioner is required to take into account whether the arrangement covered by the ruling was entered into or commenced before the ruling was given. [subsection 14ZAU(3)] It is more likely that the rulee would be considered to be disadvantaged if the rulee only entered into an arrangement after getting a favourable Private Ruling.
Where a ruling is to be withdrawn even though the arrangement covered by the ruling has been commenced, the Bill ensures that the withdrawal does not retrospectively affect the rulee's income tax position. The Bill does this by providing that a Private Ruling cannot be withdrawn if the ruling relates to a year of income that has already commenced or ended. [subsection 14ZAU(4)]
The diagram opposite illustrates the circumstances in which a Private Ruling can be withdrawn.
Where it is authorised, a Private Ruling may be withdrawn by:
- the Commissioner giving written notice to the applicant; [section 14ZAV] or
- the Commissioner issuing a Public Ruling that is inconsistent with the Private Ruling. [section 14ZAW]
Certain Private Rulings of no effect
A Private Ruling will not have any effect if it was given to the applicant about someone else's tax position and it is found that the other person's consent to the application being made was not genuine, or had been withdrawn before the application was made. [paragraph 14ZAY(1)(a)]
Also, a Private Ruling will generally be of no effect if it is subsequently found that the Commissioner need not have complied with the application for the ruling [paragraph 14ZAY(1)(b)] because either:
- the Commissioner had already given a ruling about the matter;
- the matter covered by the ruling had already been decided and affected a Commissioner assessment;
- the ruling related to withholding tax that was due and payable;
- a tax audit had commenced and the matter sought to be ruled on was to be decided as part of the audit;
- the matter covered by the ruling request was already the subject of an objection against a self assessment.
Despite these provisions, the Commissioner may allow a Private Ruling, that would otherwise be of no effect, to remain in force if he considers it appropriate.
Obligation to give replacement for withdrawn Private Ruling
If the Commissioner withdraws a Private Ruling, he is generally obliged to give the applicant a new Private Ruling about the particular matter [subsection 14ZAZ(1)]. The exception is where the ruling was withdrawn by the issue of a Public Ruling [subsection 14ZAZ(2)]. In this case the Commissioner would not necessarily know that a Private Ruling had been withdrawn.
Objections, reviews and appeals relating to Private Rulings
A rulee may object against an unfavourable Private Ruling in the same way as an objection can be lodged against an assessment [section 14ZAZA]. There are two instances where an objection cannot be made. They are if:
- an assessment has been made in respect of the arrangement and year of income covered by the ruling. In this instance the matter dealt with in the ruling may be reviewed if the person objects against the assessment [paragraph 14ZAZA(2)(a)]; or
- the ruling relates to withholding tax that has become due and payable [paragraph 14ZAZA(2)(b)]. This reflects the existing law which does not allow for objections to be made against withholding tax that has become due and payable.
Where an objection against a Private Ruling has been allowed in full, or the objection has been partially allowed and no further review has been applied for, the Private Ruling is taken to have been altered in accordance with the objection decision [section 14ZAZB]. Where an objection decision is disallowed the rulee may seek review of the objection decision by the AAT or a court.
A consequence of allowing matters covered by a Private Ruling to be reviewed is that objection rights in respect of an assessment that includes the matter covered by the ruling, are to be limited. It will not be possible to object against the assessment in relation to that same matter [section 14ZVA - Clause 7]. See Chapter 2. The reason for this limitation is to ensure that there are not two reviews of the same matter.
Time limit for objection
An objection against a Private Ruling must be made before the end of the later of:
- 60 days from the date the ruling is given [paragraph 14ZW(1A)(a) - Subclause 8(g)]; or
- 4 years after the last day allowed for lodging a tax return for the year of income covered by the ruling [paragraph 14ZW(1A)(b) - Subclause 8(g)]. See Chapter 2.
The second time limit will 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. Where a return is lodged and an assessment is issued, a dispute may be resolved by objecting against the assessment.
The last day allowed for lodging a tax return is the date published by the Commissioner in the Gazette notices, unless the Commissioner has given an extension of the time to lodge a return.
When the new provisions apply from
Public Rulings cannot be made, and Private Rulings cannot be applied for, before the date of Royal Assent to the Bill, which is the general date of commencement of the Bill [Clause 2]. If Royal Assent is before 1 July 1992, then Public Rulings cannot be made, or Private Rulings applied for, before 1 July 1992. [Clauses 12 and 13] Applications for Private Rulings can only be made about arrangements that commence on or after the date of Royal Assent or 1 July 1992, whichever is later. Public Rulings will only apply to arrangements commenced on or after the date of Royal Assent or 1 July 1992, whichever is the later. [Clauses 12 and 13]
Rulings about arrangements begun before new provisions apply
People can get rulings about the application of the tax laws to an arrangement under existing legislation (subsection 169A(2)), by asking the Commissioner to make a decision about a matter when lodging a tax return. Since people will now be able to ask for Private Rulings about arrangements, subsection 169A(2) is being amended to allow people to get rulings about arrangements under subsection 169A(2) only in cases where a Private Ruling about the arrangement cannot be obtained under the new provisions [Subclause 19(b)]. This means people will still be able to get subsection 169A(2) decisions about arrangements begun before the later of the date of commencement of the Bill or 1 July 1992.
Evidence and validity of a Private Ruling or withdrawal
There may be occasions when either the Commissioner or a taxpayer wants to rely on the existence and validity of a notice of a Private Ruling or a notice of the withdrawal of a Private Ruling in an action under Part IVC of the Administration Act involving the review of, or an appeal against, an income tax or FBT assessment. This could happen, for instance, if the Commissioner failed to apply the binding rulings provisions to a matter in an assessment, even though he had given a favourable Private Ruling to a rulee about the particular matter, and for some reason argued that the ruling was either not made or was invalid because a provision of the law had not been complied with. In this case the rulee could present the ruling or a copy of it as conclusive evidence of the proper making of the ruling. In another case, the Commissioner might argue that a Private Ruling is of no effect because it was withdrawn. In this case he will be able to produce the notice of the withdrawal, or a copy of it, as evidence of the withdrawal and its validity. [sections 15AA and 15AB of the Administration Act - Clause 11]
Public and Private Rulings
Public and Private Rulings will affect income tax assessments where:
- a ruling states that the law applies to a person in a particular way;
- the law applies to the person in a different way to what was stated in the ruling (ie., the ruling was incorrect, at least to some extent); and
- the tax assessed under an assessment less any foreign tax credits or offsets (the final tax), would be more than it would have been if the law applied in the way the ruling stated it would.
In these cases, the assessment and the final tax must be what they would have been if the assessment was made in accordance with the ruling. [subsections 170BA(3), 170BB(3) and 170BC(3) of the ITAA]
A person will not be able to use the new provisions to obtain a double deduction (existing section 82(1) of the ITAA).
The binding rulings provisions are similar for FBT assessments, since the provisions that give effect to Private and Public Rulings about FBT are almost identical to those for rulings about income tax. [sections 74A, 74B and 74C of the FBT Act]
What arrangements are covered by a binding ruling
A Public Ruling applies to a person, in relation to a year of income, where an arrangement the person has entered into is covered by the Public Ruling. Private Rulings are more specific than Public Rulings in that they specify the person, year of income and arrangement, covered by the ruling. A Private Ruling will apply to a person in relation to an arrangement, provided the arrangement is materially the same as the arrangement described in the ruling. There may be some minor differences between an arrangement dealt with in a ruling and the arrangement actually carried out, but provided the differences are not so material that the Commissioner might have given a different ruling, the ruling will still apply to the actual arrangement.
Example A taxpayer might obtain a Private Ruling about the deductibility of interest payments under a proposed loan contract with a particular financial institution. If the loan falls down but the taxpayer is able to obtain a loan on the same terms from another lender, the ruling will still be effective.
Assessments affected by ruling
Ordinarily, there will only be an application of the binding rulings provisions [sections 170BA, 170BB and 170BC of the ITAA, and sections 74A, 74B and 74C of the FBT Act] in an assessment for a year of income if there is a binding ruling that deals with an arrangement wholly or partly carried out in the same year of income. For instance, there may be an application of the binding rulings provisions in a 1992-93 assessment in respect of a ruling that certain expenditure incurred in the 1992-93 year of income in relation to an arrangement being carried out in that year is deductible under section 51. The binding rulings provisions would apply if, in fact, a deduction for some part, or all, of that expenditure was not allowable in 1992-93 and, therefore, the tax payable under the assessment would otherwise be more than it would have if the ruling applied. The binding rulings provisions will effectively ensure that a deduction is allowed for the otherwise non-deductible expenditure.
Example The Commissioner gives a taxpayer a Private Ruling that expenditure of $5 000 on repairs incurred in the 1992-93 year of income is deductible under section 53.The repairs are actually of a capital nature and the $5 000 expenditure is not deductible under section 53.The taxpayer's taxable income for 1992-93 under the law is $15 000.If the assessment was made in accordance with the Private Ruling, the taxable income would be $10 000.In this case the final tax payable under an assessment made in accordance with the law would be more than the final tax if an assessment was made in accordance with the ruling. The binding rulings provisions would apply so that the taxable income was $10 000 and the final tax payable will be the tax on $10 000.
There will be some instances, though, where a ruling dealing with an arrangement carried out in a year of income can affect an income tax assessment for a later year of income. This could happen, for example, where the size of a loss to be carried forward and allowed as a deduction in a particular year of income would be bigger if a ruling dealing with the earlier loss year was applied instead of the law. In such a case the binding rulings provisions may apply in an assessment for a year of income that is later than the year of income covered by the ruling. A special provision in the law allows for this to happen in respect of Private Rulings, which deal with a specific year of income [subsection 170BB(4)]. A similar provision is not needed for the binding rulings provisions for Public Rulings [section 170BA], since Public Rulings do not deal with any particular year of income. The binding rulings provisions will have effect if the final tax in an assessment under the law for a year would be more than the final tax if the law applied in accordance with the ruling, regardless of the year of income affected by the ruling.
Example The Commissioner gives a taxpayer a Private Ruling stating that interest incurred in 1992-93 on a loan used to buy a home is fully deductible under section 51, despite the fact that the taxpayer intends to live in half of the house, while renting the other half. The amount of interest is $2 000.Only 50% of the interest, ie., $1 000 is properly deductible under the law.If the ruling applied, the taxpayer would have a loss for 1992-93 of $5 000.Under the law, the taxpayer's loss is $4 000.In 1993-94 the taxpayer's taxable income before allowing for any loss carried forward is $20 000.If the actual loss of $4 000 was allowed as a deduction the taxable income would be $16 000.If the loss calculated in accordance with the ruling was allowed as a deduction the taxable income would be $15 000.In this case the final tax payable (tax on $16 000) in 1993-94 in accordance with the law is more than it would have been (tax on $15 000) if it was determined in accordance with the ruling. In such a case, the binding rulings provisions will apply to ensure that the final tax and assessment for the 1993-94 year of income are what they would have been if the law applied in the way stated in the 1992-93 ruling, ie., the taxpayer's taxable income will be $15 000 and the tax payable will be the tax on $15 000.
Dealing with conflicting rulings
There will be occasions where conflicting rulings apply to the same person in respect of a year of income, so that there could be different or multiple applications of new sections 170BA and 170BB of the ITAA and section 74A and 74B of the FBT Act in an assessment that is affected by the rulings. This could happen if a Public Ruling that is favourable to a person is withdrawn by the issue of another Public Ruling dealing with the same matter, that is different but also favourable to the person. Assume that the person has already begun an arrangement that is in a class of arrangements dealt with in both rulings. The new ruling has a past, present and future effect [subsection 14ZAAH(1) of the Administration Act].
The old Public Ruling, even though withdrawn, continues to apply to arrangements that have commenced to be carried out before its withdrawal. [section 14ZAAL of the Administration Act]
In these cases there is the potential for a dual application of section 170BA of the ITAA or section 74A of the FBT Act. There could be a similar conflict between Public and Private Rulings, for instance, where a Public Ruling is issued that conflicts with an existing Private Ruling and the Private Ruling cannot be withdrawn because it applied to an arrangement that has already been commenced. The same potential for conflict should not arise with Private Rulings, because they are required to be specific to a year of income and since a withdrawn Private Ruling is taken to have never been of effect.
The law will deal with cases involving conflicting rulings by ensuring there is only one application of the binding rulings provisions and that it is the one which provides the taxpayer with the greatest benefit. [subsection 170BC(3) of the ITAA and subsection 74C(3) of the FBT Act]
Conflict between income tax ruling and FBT ruling
The law does not deal with any conflict between rulings on income tax and FBT because, although the rulings might deal with the same subject, they would affect different taxpayers. For instance, an employee might obtain a ruling that a particular benefit is not taxable because it is a fringe benefit. The person's employer might get a ruling that the benefit is not taxable because it is not a fringe benefit. Although the rulings give conflicting views of how the tax laws apply to the benefit, there is no conflict in the assessment of either the employee or the employer. Both persons would be able to rely on their favourable rulings.
Effect of rulings on withholding tax
The effect of Public and Private Rulings on a person's liability to withholding tax is the same as the effect on a liability under an income tax or FBT assessment. That is, the actual withholding tax liability is not to be more than it would have been if the law applied in the way a Public or Private Ruling stated it would.
Where an amount of tax under an income tax or FBT assessment would exceed the amount of tax payable if the assessment was made in accordance with a ruling, the assessment is to be made in accordance with the ruling. This means that the excess tax will never be raised. But it is not possible to stop a withholding tax liability, which arises simply through operation of the law rather than because of an assessment, from being raised under Division 11A of Part III of the ITAA.
For that reason the provisions making rulings binding are different for withholding tax. They apply where an amount of withholding tax payable exceeds the amount of withholding tax payable in accordance with a Public or Private Ruling. Rather than requiring an assessment to be made in accordance with a ruling, the Bill prevents the Commissioner from seeking to recover the excess withholding tax and provides for the remission of the excess. [sections 170BD and 170BE]
In a case involving a Private Ruling, the excess withholding tax is not automatically remitted. In this case the excess will only be remitted if there was no objection against the ruling before the withholding tax became payable or, if an objection was lodged, when the objection decision has been made and:
- if an appeal against, or application for review of, the decision has not been made, the appeal or review period expires; or
- if an appeal against, or application of, the decision has been made, the appeal or application is withdrawn.
In a case where an appeal or application for review is decided by the AAT or court, there is no need to remit the excess withholding tax. This is because the AAT or court decision determines the actual withholding tax liability. The Commissioner will have to adjust ATO records to reflect the decision.
Conflicting rulings on withholding tax
A special rule, similar to the rules for cases involving income tax and FBT assessments, will resolve any conflict between different rulings about the same withholding tax matter [subsection 170BF(3)]. This rule will ensure that a taxpayer is given the benefit of the most favourable of the conflicting rulings.
Tribunal decision about Private Ruling
Where the AAT reviews an objection decision about a Private Ruling and determines the way the tax law applies to a person in respect of a year of income in relation to an arrangement, that will override any decision of the Commissioner as to the application of the law and also overrules the Private Ruling. In a case like this, the AAT will have decided what the law is in respect of the particular matter. [section 170BG of the ITAA and section 74D of the FBT Act]
The AAT's decision has effect when the decision is final, ie., when the period for lodging an appeal against the decision has expired and an appeal has not been lodged, and the arrangement covered by the ruling has commenced.
The AAT's decision about how the law applies will be effective regardless of any conflicting decision by the AAT or court about the application of that particular law to someone else [subsection 170BG(3) of the ITAA and subsection 74D(3) of the FBT Act]. This means that people affected by an AAT decision are not entitled to self amend to give effect to a subsequent AAT or court decision in respect of someone else that would be more favourable to them.
Court order about Private Ruling
Where a court makes an order that the income tax law applies in a particular way to a person in respect of a year of income in relation to an arrangement, that decides what the law is for that person [section 170BH of the ITAA and section 74E of the FBT Act].
Nothing can change that, not even a conflicting decision by a higher court about the application of that law to another person. [subsection 170BH(3) of the ITAA and subsection 74E(3) of the FBT Act]
As with decisions of the AAT, a court's order becomes effective in deciding the law when the order is final and the particular arrangement has commenced to be carried out. [subsection 170BH(4)]
There will be cases where a court order about a Private Ruling does not decide the law that is to apply. This will happen where a court is asked to decide whether the Commissioner can lawfully exercise a discretion in the way specified in a Private Ruling (a court cannot exercise the Commissioner's discretions but the AAT can). If the court orders that the Commissioner can lawfully exercise the discretion in that way, and the Commissioner does so, the Commissioner will have acted lawfully [subsection 170BI(3) of the ITAA and paragraph 74F(3) of the FBT Act]. There could not be any further review of the matter.
An order of the court to the effect that, if the Commissioner exercised a discretion in a particular way, the Commissioner will have acted lawfully, does not prevent the Commissioner from exercising the discretion in a different way. If the Commissioner does exercise the discretion in a different way and in a way that would cause the tax under an assessment to be more than if the ruling applied, the binding rulings provisions [sections 170BB and 170BE of the ITAA and section 74B of the FBT Act] ensure that any assessment that would be affected by the Commissioner's contrary decision is made on the basis of the Private Ruling.