Bills Digest no. 69 2005–06
Tax Laws Amendment (Improvements to Self
(No. 2) 2005
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Contact Officer & Copyright Details
The following abbreviations and acronyms are
used throughout this Bills Digest.
ANAO 2001 Report
The Australian Taxation Office s
Administration of Taxation Rulings
ANAO 2004 Report
Administration of Taxation Rulings Follow up
Australian Taxation Office
Commissioner of Taxation
Inspector-General of Taxation
Income Tax Assessment Act 1936
Income Tax Assessment Act 1997
Private binding ruling
Regulation Impact Statement Chapter 4 of the
Explanatory Memorandum to the Bill
Report of an Internal Review of the Systems
and Procedures relating to Private Binding Rulings and Advance
Opinions in the Australian Taxation Office
shorter period of review
Taxation Administration Act 1953
Report on Aspects of Income Tax Self
Review on Aspects of Income Tax Self
Amendment (Improvements to Self Assessment)
(No. 2) 2005
Date Introduced: 10 November 2005
House: House of Representatives
Assent. Some parts of the Bill are expressed to apply to
certain financial periods. These are outlined in Main Provisions
On 24 November 2003 the Treasurer
announced the Review of Aspects of Income Tax Self
Assessment.(1) The review was conducted by the treasury
and reported in August 2004. On 16 December 2004, the Government
announced its intention to adopt all 30 legislative recommendations
made in the report. This was achieved, in part, through the
enactment of the Tax Laws Amendment (Improvements to Self
Assessment) Act (No.1) 2005. The purpose of this Bill
is to complete the process of implementing the recommendations made
in the report.
Since the 1986-87 financial year, Australia has operated a
system of self-assessment of income tax. Under that system
taxpayers self-assessed returns are accepted at face value in the
first instance, but the ATO may subsequently verify the accuracy of
the information in the return.(2) Prior to that period,
the ATO would make the assessment, based on information provided by
the taxpayer. From 1989-90, a similar system of self-assessment was
applied to the returns of companies and superannuation funds.
In 1992, in response to the identification of problems with the
self-assessment system, and the need to create greater taxpayer
certainty, the Government introduced changes including:
- a new system of binding public rulings
- a new system of binding private rulings
- a new system of penalties for understatements of income tax
liability, based on the requirement that taxpayers exercise
- a new interest system for underpayments or late payments of
income tax, based on commercial principles and market interest
In early 2000 there was considerable publicity in the media both
before and after the arrest of a former senior ATO officer who was
alleged to have issued private rulings in inappropriate
circumstances whilst in the employ of the ATO.(5)
In response, the ATO in May 2000, commissioned Mr Tom Sherman,
the former head of the National Crime Authority, to undertake a
review of the private ruling system and to provide the Commissioner
with an early assessment of that system with particular attention
to the quality, consistency and integrity of private rulings.
Sherman Report (2000)
Mr Sherman s report titled
Report of an Internal Review of the Systems and Procedures relating
to Private Binding Rulings and Advance Opinions in the Australian
Taxation Office the (Sherman Report) recommended that a number
of measures be implemented to enhance public confidence in the
private ruling system.(6) The main recommendation was
that all private rulings should be published on a public data base.
The published ruling should be the private ruling with taxpayer
identifiers deleted, otherwise the published ruling will be the
same as the private ruling.
The Sherman Report, also in paragraphs 1.111, cited a number of
previous external reports of inquiries into various aspects of the
private ruling systems and, in paragraph 1.121, listed a number of
external commentaries on the private rulings system.
The Australian National Audit Office (ANAO) undertook a
performance audit of the ATO s administration of the ruling system
in March 2001. Its findings and recommendations are set out in a
The Australian Taxation Office s Administration of Taxation
Rulings (ANAO 2001 Report).(7) As
stated in paragraph 1.29 of the ANAO Report 2001, the timing of the
ANAO s audit received an impetus with the high level of public and
Parliamentary interest following the laying of charges against a
former senior executive of the ATO involved in issuing private
In August 2004, the ANAO released a follow up audit report on
the rulings system.(8) It commented adversely on the
lack of integration of systems and inadequate systems controls in
relation to private rulings which undermined certainty, fairness
and consistency of treatment for taxpayers. A summary of its
findings is set out below.
In summary, we concluded that the processes for
the production of public rulings of high technical quality operated
effectively overall; but the collection, analysis and use of
performance information could have been enhanced in some areas. We
also considered that the mechanisms in place for public rulings
substantially provided for consistent and fair treatment for
taxpayers. This positive assessment for public rulings contrasted
with the situation for private rulings.
With regard to private rulings we found that the
administrative processes had operated poorly in many respects. We
also found that the lack of integration of systems and inadequate
systems controls undermined certainty, fairness and consistency of
treatment for taxpayers. Although the ATO was taking steps to
address these deficiencies as part of the Provision of Advice (PoA)
Project, we considered that the ultimate test would be in the
results achieved. The ANAO made 12 recommendations aimed at
improving the ATO s administration of taxations rulings. The ATO
agreed to all of the recommendations.(9)
In a press release on 24 November 2003 titled
Review of Aspects of Income Tax Self Assessment (the
Review), the Treasurer announced a review of the income tax
self-assessment regime to be undertaken by the Treasury. The
The review will seek to identify whether there are
refinements to the present arrangements that would reduce the level
of uncertainty for taxpayers, reduce compliance costs and enhance
the timeliness of ATO audits and amendments, while preserving the
capacity of the ATO to collect legitimate income tax liabilities.
The review will consider the self-assessment of income tax returns,
- protection for taxpayers from unreasonable delays in enforcing
the tax law;
- the statutory timeframes for amending assessments;
- the length of tax audits;
- aspects of the operation of the general interest charge;
- the level of reliance taxpayers can and should be able to place
on taxation rulings and other forms of ATO advice; and
- the circumstances in which the ATO should undertake
earlier examination of tax returns.(10)
On 29 March 2004, the Treasurer
announced the release of a discussion paper indicating options
for making changes to Australia s income tax self assessment
discussion paper considered the right balance to be struck
between protecting the rights of individual taxpayers and
protecting the revenue in making changes to the self assessment
system.(12) The discussion paper also considered
comparable arrangements in other
On 16 December 2004 the Government released the Report
on Aspects of Income Tax Self Assessment (the Report). The
Treasurer indicated that the Government would implement the
Report's legislative recommendations, and strongly encourage the
Tax Office to implement the administrative recommendations as soon
as practicable.(14) A full list of the legislative and
administrative recommendations in the Report was included in the
Attachment to the Treasurer s Press Release.
The Tax Laws Amendment (Improvements to Self Assessment) Act
(No. 1) 2005 implemented part of the Government s
response to the Report. It amended the then existing law to reduce
the consequences of uncertainty that goes with taxpayers having to
cope with interpreting complex tax law in the self assessment
system by mitigating the interest and penalty provisions applicable
to taxpayer errors.
The reader is referred to
Digest to the relative Bill for further
Currently, the provisions of section 170 of the ITAA 1936 deal
with the time within which the Commissioner may amend various types
of assessments. The amendments proposed by items 1
to 18 of Schedule 1 restructure
and renumber the provisions of section 170 to reduce the periods
during which the Commissioner may amend various types of
assessments generally from 4 years to 2 years subject to various
qualifications and exceptions. However, the Commissioner may amend
an assessment at any time if in the Commissioner s opinion there
has been fraud or evasion.
Apart from section 170 of the ITAA 1936, there are also
provisions in other tax laws that give the Commissioner unlimited
periods of review. The amendments in Schedule 1
bring these tax laws in line with the measures in proposed
The amendments proposed by item 1 of
Part 1 of Schedule 1 of the Bill
repeal subsections 170(1) to 170(7). Proposed subsection
170(1) includes a table covering 6 circumstances when the
Commissioner may amend assessments. Column 2 of the table indicates
the time period within which the Commissioner may amend different
categories of assessments. Column 3 of this table sets out the
qualifications that attach to the application of time periods in
column 2. A helpful table setting out a comparison of the new and
existing law can be found in the Explanatory Memorandum to the
Bill.(16) The reader is referred to paragraphs 2.23 to
2.80 on pages 15 to 30 of the Explanatory Memorandum to the Bill
for detailed explanations of the amendments.
It will be noted that column 3 of the table in proposed
subsection 170(1) also indicates that further qualifications may be
prescribed by regulations. (Schedule 1, item 1 - paragraph (f) in
column 3 of item 1, paragraph (e) in column 3 of item 2 and
paragraph (d) in column 3 of item 3). The reason for this is,
according to the Explanatory Memorandum:
2.33 Because taxpayers financial affairs are
constantly evolving and from time to time new arrangements emerge,
the law includes a mechanism by which sets of circumstances can be
excluded from the standard amendment period by allowing for
exclusion in any other circumstance prescribed by the regulations .
The Legislative Instruments Act 2003 restricts
the retrospective application of regulations and provides for
consultation on regulations affecting
Under items 1, 2 and
3 of the table in proposed subsection
170(1) the standard assessment time is 2 years and if the
conditions in items 1, 2 and 3
are not satisfied the standard assessment time is 4 years as
provided under item 4. Under item 5 in the table
in proposed subsection 170(1) the Commissioner may
amend an assessment at any time if he or she is of the opinion
there has been fraud or evasion. The question arises whether the
regulations can prescribe a time different from 2 or 4 years for
taxpayer involvement in evolving financial arrangements and
products. If this is the case it brings in an element of
uncertainty as to whether a higher standard than 2 or 4 years will
be prescribed by regulation for involvement with certain new and
evolving financial arrangements and products.
Item 15 of Schedule 1 provides
that the amendments made by Part 1 apply in
relation to assessments for the 2004-05 year of income and later
The measures proposed in Part 2 of
Schedule 1 will amend the meaning of assessment in
the ITAA 1936 to include nil liability assessments. The present
definition of assessment in subsection 6(1) of the ITAA 1936 only
covers the ascertainment of the amount of taxable income and of the
tax payable on that taxable income or net income. Item
16 of Part 2 repeals this definition and
substitutes a new definition into subsection 6(1) of the ITAA 1936.
Proposed paragraph (a) of the new definition
covers the ascertainment of the:
amount of taxable income (or that there is no
taxable income), and
the tax payable on that taxable income (or that
no tax is payable).
A taxpayer has no taxable income because total deductions equal
or exceed total assessable income. A taxpayer may have no tax
payable because the taxable income is below the tax-free threshold
or because tax offsets (or rebates) reduce the tax payable to
Section 175A of the ITAA 1936 provides that a taxpayer who is
dissatisfied with an assessment may object to it.
The proposed amendments to the definition of assessment by
item 16 of Part 2 of
Schedule 2 would have enabled a taxpayer to appeal
against a nil assessment in all circumstances under the existing
section 175. However, the amendments proposed by items
17 and 18 of Part
2 restrict the ability of a taxpayer to object to a nil
assessment to a situation where the taxpayer is seeking an increase
in the taxpayer s liability. In other situations, where the
taxpayer wishes to dispute the amount of a tax loss, that can only
be done in the income year in which the loss is deducted.
Item 19 of Part 2 provides that the amendments
made by this Part apply in relation to the 2004-05 year of income
and later years.
It was noted above that the amendments proposed in Parts
1 and 2 of Schedule 1
relating to amending assessments and nil assessments applied from
the year of income 2004-05. Part 3 of
Schedule 1 deals with the making of assessments
for year of income 2003-04 and earlier years.
Item 20 of Schedule 1 inserts
new section 171A to the ITAA 1936 to ensure that
nil liability (non-loss) returns become final after 4 years and
loss returns become final after 6 years. Proposed
subsection 171A(2) provides that where the Commissioner is
of opinion that there has been fraud or evasion, there will be no
time limits on the Commissioner making or amending an
The reader is referred to paragraphs 2.63 to 2.70 on pages 26 to
28 of the Explanatory Memorandum for a detailed explanation of the
proposed amendments and examples in illustration.
Part 4 of Schedule 1 includes
consequential amendments to other provisions in tax law in
consequence of the changes proposed in Parts 1,
2 and 3. The consequential
provisions cover certain provisions of the:
Income Tax Assessment Act 1936 (ITAA 1936) ,
Income Tax Assessment Act 1997 (ITAA 1997),
Taxation Administration Act 1953,
Taxation (Interest on Overpayments and Early Payments) Act
Child Support Assessment Act 1989, and
Income Tax (Transitional Provisions) Act 1997.
The reader is referred to paragraphs 2.71 to 2.80 on pages 28 to
30 of the Explanatory Memorandum to the Bill for a detailed
explanation of the proposed consequential amendments.
The Taxation Administration Act 1953 (the TAA 1953) has
the following provisions currently relating to rulings:
Part IVAAA deals with public rulings,
Part IVAA deals with private rulings, and
Division 360 of Part 5-5 of Schedule 1 deals with oral rulings
The amendments proposed in Part 1 of
Schedule 2 to the Bill provide for a complete
overhaul of the provisions relating to rulings.
Item 1 of Part 1 of
Schedule 2 repeals Division 360 and inserts the
following Divisions to Part 5-5 of Schedule 1 to the TAA 1953 in
relation to rulings:
Division 357 to deal with the object and common
rules in respect of rulings,
Division 358 to deal with public
Division 359 to deal with private rulings,
Division 360 to deal with oral rulings.
The consequential amendments in Part 2 of
Schedule 2 to the Bill include the repeal of Parts
IVAAA and IVAA by item 16.
Proposed Division 357-A of Schedule 1 of the
TAA 1953 deals with the objects of Part 5-5 and proposed
section 357-1 gives an outline of the framework of
proposed Division 357. It states that:
Proposed Division 357 sets out
the common rules that apply to public, private and oral
A ruling is an expression of the Commissioner s opinion of the
way in which a relevant provision applies, or would apply to any
A ruling binds the Commissioner if it applies to a taxpayer and
the taxpayer acts in accordance with it
If a taxpayer acts in accordance with the ruling and the law
turns out to be less favourable to a particular taxpayer than the
ruling provides, the taxpayer is protected by the ruling from any
Proposed subsection 357-5 states that the
object of Part 5-5 is to provide a way for a taxpayer to find out
the Commissioner s view about how certain laws administered by the
Commissioner apply to that particular taxpayer so that the risks of
uncertainty when self assessing or working out tax obligations or
entitlements are reduced.
The means to achieve this object are outlined in
proposed subsection 357-5(2) as follows.
(a) making advice in the form of rulings by the Commissioner
available on a wide range of matters and to many taxpayers; and
(b) ensuring that the Commissioner provides rulings in a timely
(c) enabling the Commissioner to obtain, and make rulings based
on, relevant information; and
(d) protecting the taxpayer from increases in tax and from
penalties and interest where a taxpayer relies on rulings; and
(e) protecting a taxpayer from decreases in entitlements where
the taxpayer relies on rulings; and
(f) limiting the ways the Commissioner can alter rulings to the
taxpayer s detriment; and
(g) giving the taxpayer protection from interest charges where
the taxpayer relies on other advice from the Commissioner, or on
the Commissioner s general administrative practice.
Section 358-5 of proposed Division
358 to Schedule 1 of the TAA 1953 gives the
attributes of a public ruling.
(a) A public ruling is a written ruling that expresses the
Commissioner s opinion of the way in which a relevant provision
applies or would apply:
to entities or a class of entities, or
to entities generally, or a class of entities in relation
to a class of schemes, or
to entities generally, or a class of entities, in relation to a
(b) The public ruling may cover any matter
involved in the application of the provision.
(c)The ruling must be published and state that it is a public
(d) The Commissioner must publish notice of the making of a
public ruling. in the Gazette.
A public ruling applies from the time it is published or from
such earlier or later time as specified in the ruling as provided
by proposed subsection 358-10.
A public ruling that relates to a scheme does not apply to a
taxpayer, if the scheme had begun to be carried out when the ruling
is published and:
(a) the ruling changes the Commissioner s general practice;
(b) the ruling is less favourable to the taxpayer than the
This provision precludes retrospective changes to ATO practices
on the application of the provisions of taxation law to
A private ruling, as provided in section 359-5
of proposed Division 359, is an expression of the
Commissioner s opinion in writing of the way in which a relevant
provision applies or would apply to a taxpayer in relation to a
specified scheme. A private ruling may cover any matter involved in
the application of the provision.
The Commissioner makes a private ruling by recording the ruling
in writing and giving a copy to the applicant (proposed
section 359-15). A private ruling must:
state that it is a private ruling,
identify the entity to whom it applies, and
specify the scheme and the relevant provision to which it
relates (proposed section 359-20).
An application for a private ruling must be made in the approved
form (proposed subsection 359-10(2)).
Proposed section 359-60 provides for a person
dissatisfied with a private ruling to object against it under Part
IVC of the TAA 1953. However, proposed subsection
359-60(3) provides that a person cannot object against a
private ruling if:
(a) there is an assessment for that person for
the income year or other accounting period to which the ruling
(b) the ruling relates to withholding tax or mining
withholding tax that has become due and payable.
Proposed subsection 359-50(1) also provides for
the applicant for a private ruling who has not received the ruling
within 60 days of making the application to give a written notice
to the Commissioner requiring him or her to make the ruling. The 60
day period is extended in the circumstances mentioned in the table
in proposed subsection 359-50(2).The applicant may
thereafter under proposed subsection 359-50(3)
object against the Commissioner s failure to make the ruling within
30 days of the notice given under proposed subsection
359-50(1) . The objection will be dealt with under Part
IVC of the TAA 1953. The applicant must lodge with the objection a
An oral ruling, as provided in section 360-5 of
proposed Division 360, is the Commissioner s
advice given orally, of the way in which a relevant provision
applies or would apply to the taxpayer who makes an oral
application for such advice. Proposed subsection
360-5(1) provides that the oral application can also be
made by the legal representative of the taxpayer. Proposed
subsection 360-5(3) states that the oral advice given by
the Commissioner is an oral ruling.
The Commissioner may decline to give an oral ruling if the
Commissioner considers that the advice sought refers to:
a business matter or a complex matter, or
the matter sought to be ruled on is already being, or has been
considered by the Commissioner for the taxpayer making the oral
application (proposed subsection 360-5(3)).
The Commissioner when giving the oral ruling must also give the
taxpayer concerned or his or her legal personal representative a
registration identifier for the ruling (proposed subsection
Proposed sections 357-50 to
357-90 of proposed Subdivision
357-B to Schedule 1 of the TAA 1953 deal with certain
common rules that apply to rulings whether public, private or
Proposed section 357-55 states that provisions
of Acts and regulations of which the Commissioner has general
administration are relevant for rulings if the provisions are about
tax, Medicare levy, fringe benefits tax, franking tax, withholding
tax, mining withholding tax, the administration or collection of
those taxes and a grant or benefit mentioned in section 8 of the
Product Grants and Benefits Administration Act 2000 or the
administration or payment of such a grant or benefit.
357-60(1) to Schedule 1 of the TAA 1953 states that a
ruling binds the Commissioner in relation to a taxpayer if:
ruling applies to that taxpayer, and
taxpayer relies on the ruling by acting or omitting to act in
accordance with that ruling.
A taxpayer may rely on a ruling at any time unless prevented
from doing so by a time limit imposed by a taxation law as provided
in proposed subsection 357-60(2).
Proposed section 357-65 to Schedule 1 of the
TAA 1953 gives a taxpayer the flexibility to stop relying on a
ruling and subsequently to rely on that ruling, unless prevented
from doing so by a time limit imposed by a taxation law.
A note to proposed subsection 357-65(1) states
that there is no penalty for a shortfall resulting from failing to
follow a ruling. However, it adds that there are penalties from
from failing to take reasonable care, and
from taking a position about a large income tax item that is not
reasonably arguable under Division 284 of the TAA 1953.
Proposed paragraph 357-70(1)(a) provides that
the Commissioner may apply a relevant provision to a taxpayer if it
would produce a result more favourable than would be the case by
the application of a ruling on which the taxpayer had relied.
However, proposed paragraph 357-70(1)(b) states
that the Commissioner may be prevented from amending an assessment
by a time limit imposed by a taxation law.
Proposed subsection 357-70(2) adds that the
Commissioner does not have a duty to apply proposed
subsection 357-70(1) to any taxpayer. It may therefore be
concluded that it is for any taxpayer adversely affected by the
application of a ruling to request the Commissioner to apply the
law which gives a result more favourable than would be the case by
applying the ruling. The provisions of proposed subsection
357-70(2) are intended to relieve the Commissioner from a
duty to amend the assessments of all taxpayers affected by the
application of a ruling in the event that a particular taxpayer
succeeds in an objection or appeal in securing an interpretation of
a taxation law that is more favourable that that in the
Commissioner s ruling. It would be an administrative nightmare to
require the ATO to take the initiative to amend assessments, which
are not open by objections, whenever a ruling is overturned on
objection or appeal of a taxpayer to give a more favoured
interpretation of a provision.
Proposed subsection 357-75 to Schedule 1 of the
TAA 1953 sets out in a table the rules to ascertain which ruling
applies where 2 rulings given at different times both relate to the
circumstances of a taxpayer and the 2 rulings are inconsistent. The
Explanatory Memorandum in paragraph 3.31 at page 41 sets out
succinctly the outcome proposed in the table.
3.31 The rules governing cases where two
inconsistent rulings apply to the same taxpayer are listed in the
table at subsection 357-75(1). The structure of the table is such
that a taxpayer may always choose to rely on a public ruling that
applies to them and they may choose to rely on a private ruling
that specifically addresses their circumstances, notwithstanding an
apparent inconsistency with a prior public ruling. It allows the
Commissioner to correct erroneous private and oral rulings by a
public ruling, but only where the taxpayer has not already entered
into the relevant scheme and the relevant income year or other
period has not commenced. Finally, it allows a taxpayer to check or
clarify a private or oral ruling (although the Commissioner may
decline to rule if there is already a ruling on the matter, see
paragraph 3.78), but only if they do so honestly, by disclosing the
existence of the prior ruling when they apply for the later ruling.
A special rule for revising private rulings allows the Commissioner
to correct a private ruling with another private ruling in limited
circumstances (see paragraphs 3.97 to 3.99). [Schedule
2, item 1, subsection 357-75(1) of
Schedule 1 to the TAA 1953]
Proposed subsection 357-75(1) states that if 3
or more rulings apply to a taxpayer and the rulings are
inconsistent, the rules in the table in proposed subsection
357-75(1) should be applied to each combination of 2
rulings in the order in which they were made to ascertain the
ruling the taxpayer can rely on.
The Explanatory Memorandum gives a very helpful comparison of
the proposed law and the current law at pages 35 to 38.
Section 284-215 of the TAA 1953 at present provides protection
from administrative penalties if a taxpayer acts in relation to a
taxation law in reliance on advice given by or on behalf of the
Commissioner in relation to that law, or general administrative
practice in relation to that law or a statement in a publication
approved in writing by the Commissioner in relation to that
Proposed section 361-5 extends this protection
to taxpayers from both the shortfall interest charge and the
general interest charge if:
they reasonable rely in good faith on advice (other than a
ruling) given by or on behalf of the Commissioner, or
a statement in a publication approved in writing by the
unless the advice or statement or publication is labelled
non-binding (proposed paragraph 361-5(1)(a)).
In addition a taxpayer relying in good faith has this extended
protection if the taxpayer relied in good faith on the Commissioner
s general administrative practice (proposed paragraph
The reader is referred to paragraphs 3.128 to 3.134 on pages 62
to 64 of the Explanatory Memorandum for details of the proposed
The most significant consequential amendment, as mentioned
above, is the repeal of Parts IVAAA and IVAA of the TAA 1953
dealing with public and private rulings, by item
16 of Part 2 of Schedule
2. The other consequential amendments flow from the
introduction of a new regime for advice and rulings.
As there is no special provision for the commencement of the
amendments in Part 2, the amendments in this Part
commence on the day on which the Act receives the Royal Assent
under clause 2 of the Bill.
Item 29 of Part 3 of
Schedule 2 provides for the continuation of the
public, private and oral rulings in force on the commencement day,
and made under the existing regime which is to be repealed, as
though they were made under the proposed new advice and rulings
Item 30 of Part 3 of
Schedule 2 ensures that the inconsistency rules
that existed immediately before the commencement day continue to
apply to inconsistent rulings made before the commencement day.
Item 31 of Part 3 of
Schedule 2 provides for applications for private
or oral rulings lodged before commencement day and not decided
before that day to be treated as though:
in the case of applications for private rulings, the
applications were made under proposed Division 359
of the TAA 1953, and
in the case of applications for oral rulings, the applications
were made under proposed Division 360 of the TAA
Item 28 of Part 3 of Schedule
2 states that the commencement day means the later of:
(a) the day on which this Act receives the
Royal Assent; and
(b) 1 January 2006.
The transitional provisions in Part 3 will take
effect from the commencement day as defined.
Item 32 of Part 4 of
Schedule 2 provides that the amendments made by
this Schedule apply to things done on or after the later of:
(a) the day on which this Act receives the
Royal Assent; and
(b) 1 January 2006.
The measures in the Bill are intended to set up a new framework
within which the self assessment and the Commissioner s advice and
rulings systems will operate. The regulation impact statement (RIS)
in paragraphs 4.37 and 4.38 at page 74 of the Explanatory
Memorandum expects the following overall benefits to taxpayers.
4.37 Overall, these amendments to the existing provisions
the flexibility in communication methods between
taxpayers and the ATO;
timeliness of the provisions of rulings; and
certainty by making it clear that any written
interpretative documents the Commissioner publishes may be declared
to be a public ruling.
4.38 This measure will have a positive effect on the
responsiveness and reliability of ATO advice. Taxpayers should gain
confidence that they are assessing their liabilities in line with
ATO s interpretation.
However, the RIS is also cautious in its concluding comments and
recommended option for continuous monitoring of the implementation
of these measures by the Treasury and the ATO. In paragraph 4.52 at
page 76 it states:
4.52 The Treasury and the ATO will monitor the
implementation of these measures, as part of the whole taxation
system, on an ongoing basis.
This is probably an acceptance that the new framework alone may
not be the only answer to the problems of the self assessment and
ATO advice and rulings systems.
The RIS, in paragraphs 4.39 and 4.40 at page 74, also states
that the administrative costs of implementing the measures in the
Bill, comprising additional funds for the ATO to improve quality
and timeliness, are estimated to be $23 million over 4 years. The
RIS also adds that $8 million will be allocated to improve the
timeliness of private rulings and $11 million has been allocated to
improve the oral ruling system, including introducing a voice
It was indicated above that the
ANAO 2004 Report on the rulings system concluded that there was
a lack of integration of systems and inadequate systems controls
which undermined certainty, fairness and consistency of treatment
In relation to public rulings the ANAO 2004 Report in
Recommendation 5 stated as follows:
To support the ATO s continuous improvement in the process of
producing public rulings, the ANAO recommends that the ATO assess
periodically, the timeliness, relevance, logic and clarity of
expression of Income Tax, Fringe Benefits Tax, and Goods and
Services Tax public rulings, after they have been
However, recent articles by tax practitioners appear to suggest
that there are many problems with private and public rulings which
will require continuous ATO attention as recommended in the ANAO
2004 Report. Some of these problems are briefly highlighted below,
as they may require solutions beyond the measures provided in this
In a recent article on rulings, Chris Wallis canvasses, from a
practitioner s perspective, the readability and accessability of
ATO publications.(21) The problems highlighted include
lengthy and obscure rulings, inconsistent expressions within
publications, pointless discussions, poorly chosen examples,
repetitious content, less than complete explanation and addenda
without consolidation. The article does not canvass the correctness
of ATO publications. Some of these issues are probably tied up with
the complexity of tax law itself and the difficulty of interpreting
the general anti- avoidance provisions in Part IVA of the ITAA 1936
briefly discussed below.
In the Press Release of 16 December 2004, the Treasurer included
Attachment A, a list of the legislative and administrative
recommendations from the Report on Aspects of Income Tax Self
Assessment.(22) Attachment A also indicated whether
the implementation would be carried out by legislative or
administrative changes. Among the items listed for administrative
changes are recommendations 10 and 12 relating to the operation of
the general anti-avoidance provisions of Part IVA of the ITAA 1936.
Recommendation 10 required the ATO to update and consolidate its
guidance on the way it interprets and administers Part IVA of the
ITAA 1936 into a single comprehensive Ruling or Practice
The Commissioner indicated in a
speech on 17 November 2005, in the Leadership Matters event
series that the ATO will shortly be issuing a detailed statement on
the operation of Part IVA and it will be accompanied by a guide
that will give practical tips on understanding the risk of Part IVA
applying to particular arrangements. The Commissioner added
The more people are supported into low risk
approaches, the more we can concentrate our compliance activities
on the more egregious cases of avoidance or evasion.
At the time of writing this guide has not been issued.
Whilst Part IVA has been difficult to interpret, it has been an
instrument available to the ATO to deal with taxpayers who take a
high risk approach in organising their affairs with the dominant
purpose of reducing their tax liabilities. Fairness to all
taxpayers and maintaining the integrity of the tax system requires
that those who take a high risk approach in organising their
affairs should have the opportunity before embarking on such a
course to have the promised ATO guide, so that they cannot be heard
to complain that the reach of Part IVA is too wide and severe when
it is applied to their detriment.
The usefulness of private rulings in cases where Part IVA has to
be considered has been called into question in a recent article.
(23)The author there cites the decision of Justice Hill
Lamont v Commissioner of Taxation (Lamont):
49 The ruling contains, as noted, a question as to
the application of Part IVA of the 1936 Act to deny any deductions
50 In Bellinz v Commissioner of
Taxation (1998) 84 FCR 154 at 170, I pointed out the practical
difficulty which would be faced by the Commissioner in giving a
private ruling as to whether Part IVA applied to a particular
arrangement. The difficulty arises because of the need to consider
the whole factual matrix in determining, for the purposes of s
177D(b), whether the eight factors there set out would lead to a
conclusion that a person or persons who entered into or carried out
the relevant scheme did so for the dominant purpose of obtaining a
tax benefit in the defined sense of that expression (see s
53 There is much to be said for both of the
arguments advanced by Queen s counsel for the applicant. In the
circumstances, I am of the view that there should be excised from
the ruling, both the questions and answers to the application of
Part IVA. However, because it is possible that the Commissioner
might in any year of income make a determination under s 177F(1)
and because in light of the facts, that determination may be
correctly made, the answers to the question of deductibility and
the question of whether income is assessable should be qualified by
words to the effect that the answers could be altered if a
determination were made under the provisions of Part IVA which
operated to disallow the deductions otherwise allowable.
The general guide to the application of Part IVA promised by the
Commissioner will in the circumstances be helpful to taxpayers and
tax practitioners before entering into arrangements, if rulings
have to be qualified in the manner suggested by Hill J in
One of the major problems, if not the most significant problem,
with the self assessment system is that taxpayers are expected to
self assess their tax liabilities by finding their way through a
maze of complex tax law. This complexity of tax law also follows
the ATO in formulating advice and rulings for the benefit of
In a Press Release on 24 November 2004 titled
Income Tax Act reduced by 30 percent the Treasurer
indicated that the Board of Taxation has provided a report to the
Government on provisions of the tax law that are inoperative and
can be repealed. The Treasurer added that the Board estimates that
up to 28 per cent, or 2,100 pages, of the Attorney-General's
Department's Scaleplus (now ComLaw www.comlaw.gov.au) version of
the combined Income Tax Assessment Acts can be repealed. Whilst
this repeal should result in a significant easing up of the
problems of finding one s way through income tax law there is also
a need for simplification of the balance 72 percent or some 5400
The report of the Board to the Treasurer titled
Identification and Possible Repeal of the Inoperative Provisions of
the 1936 and 1997 Income Tax Assessment Acts A Report to the
Treasurer lists in Appendix 2 the provisions in the ITAA
1936 and ITAA 1997 that are to be repealed.(25) In the
Executive Summary, the Board notes that the suggested repeal of
inoperative provisions represents around 44 per cent of the
Scaleplus version of the ITAA 1936 and 28 per cent of the same
version of the two Acts combined. It may be appropriate for the Tax
Law Improvement Project (now abandoned), whose work resulted in
income tax law being settled in two Acts ie the ITAA 1936 and the
ITAA 1997 to recommence its tax simplification work so that the
balance 56 percent of the ITAA 1936 could be transferred to a
consolidated ITAA 1997 Act. Such a move will be of further
assistance to taxpayers and tax practitioners in finding their way
through income tax law.
The Inspector-General of Taxation (IGT), at the request of the
Minister for Revenue and Assistant Treasurer, is at present
undertaking a review of whether there is a pro-revenue bias in
private binding rulings (PBRs) issued by the Commissioner. The IGT
states that based on consultations with private sector
stakeholders, the IGT has decided to broaden the scope of the
review to include PBR applications which taxpayers withdrew and PBR
applications on which the Tax Office refused to rule. This will
enable the IGT to review the potential for pro-revenue bias in the
Tax Office s dealings with PBRs and to review the basis for
perceptions of revenue bias in the PBR system. A recent press
article highlights some of the problems which lead to this
Costello P (Treasurer) 2003, Review of Aspects of Income Tax
Self Assessment, Parliament House, Canberra, 24 November 2003.
The Treasury, Review of Aspects on Income Tax Self
Assessment, Report, Canberra, August 2004, p. 2.
ibid., pp. 2 3.
Fiona Buffini, Rich targeted in tax swoop , Financial
Review, 27 March 2000.
Australian Taxation Office, Report of an Internal Review of
the Systems and Procedures relating to Private Binding Rulings and
Advance Opinions in the Australian Taxation Office, ATO,
Canberra, 7 August 2000.
Australian National Audit Office (ANAO),
The Australian Taxation Office s Administration of Taxation
Rulings, Canberra, 17 July 2001.
Administration of Taxation Rulings Follow-up Audit,
Canberra, 9 August 2004.
ibid., paragraphs 5 and 6.
The Hon Peter Costello MP, the Treasurer Review of Aspects of
Income Tax Self -Assessment , Press Release No. 098, 23 November
The Hon Peter Costello MP, the Treasurer Release of Discussion
Paper on Income Tax Self Assessment , Press Release No. 017, 29
The Treasury, Discussion Paper Review of Aspects of Income
Tax Self Assessment, Canberra, March 2004.
Appendix 4: International Comparisons.
The Hon Peter Costello MP, the Treasurer Outcome of the Review
of Aspects of Income Tax Self -Assessment , Press Release No. 106,
16 December 2004.
Susan Dudley and Thomas John Tax Laws Amendment (Improvements to
Self Assessment) Bill (No. 1) 2005 , Bills
Digest, no. 150, Parliamentary Library, Canberra,
Explanatory Memorandum to the Tax Laws Amendment (Improvements
to Self Assessment) Bill (No. 2) 2005, page 15.
ibid., paragraph 2.33, p. 18.
ibid., paragraphs 4.39 and 4.40, p. 74.
Administration of Taxation Rulings Follow-up Audit,
Canberra, 9 August 2004, paragraph 6.
ibid., Recommendation No. 5, paragraph 2.25.
C. Wallis, Why are rulings so difficult and time consuming to
read?, Taxation in Australia , Issue 39 No. 10, May
The Hon Peter Costello MP, the Treasurer Outcome of the Review
of Aspects of Income Tax Self -Assessment , Press Release No. 106,
16 December 2004.
R. Richards, Are tax rulings useful? , CPA Australia,
June 2005, volume 75:5, pp. 60 63.
 FCA 513 (29 April 2005), pars. 49, 50, 53.
Board of Taxation, Identification and possible repeal of the
inoperative provisions of the 1936 and 1997 Income Tax Assessment
Acts, A Report to the Treasurer, October 2005.
Allesandra Fabro, Tax bias claims reviewed , Financial
Review, 26 August 2005.
7 December 2005
Bills Digest Service
Information and Research Services
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Australian Parliament using information available at the time of
production. The views expressed do not reflect an official position
of the Information and Research Service, nor do they constitute
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© Commonwealth of Australia 2006
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