The evolution of reliable tax guidance

The way in which our tax laws operate with regard to tax revenue collection interactions between the ATO and Australian taxpaying citizens changed dramatically just over 30 years ago when the then Treasurer Paul Keating introduced the Taxation Laws Amendment Act 1986, which introduced a system of tax collection that to this day is referred to as “self-assessment”.

As the name suggests, with self-assessment the onus is on the taxpayer to arrive at an estimate of their own tax liability before their tax return is examined in detail by the ATO. Before the 1986 changes, taxpayers were required to lodge a return containing relevant information from which ATO assessors would prepare a statement of either tax liability or refund (a “notice of assessment”).

By the early 1980s, this review procedure was placing considerable strain on the ATO’s resources, especially with the growth in the number of objections. With about 10 million returns to review, and with quotas applying to ATO assessors (plus an increasing incidence of taxpayer objections), it was estimated by the Australian National Audit Office that an average individual return would have received optimum scrutiny of a mere handful of minutes.

Change was necessary, and that change came in the form of the system of self-assessment. With this approach, taxpayers’ returns are accepted at face value in the first instance, with the ATO subsequently verifying the accuracy of the information in the return within a prescribed period after that initial assessment. From 1989-90, the returns of companies and superannuation funds became subject to the system of full self-assessment, under which entities calculate their liability and pay that tax liability when lodging a return.

Growing demand for guidance
Naturally, the system of self-assessment led to increased demand for more guidance from the government’s tax revenue agency. While a significant part of the ATO’s role in administering Australia’s tax system has always been to provide interpretative advice on issues of taxation law, the system of self-assessment — which heavily relies on taxpayers having some understanding of tax matters in order to fulfil their obligations — significantly increased demands (from all parties involved) to have a much more robust body of tax guidance that the accounting and tax professional sector, and taxpaying public in general, could more confidently rely upon.

In response to this demand, and in a relatively short time after the 1986 change to the tax system, the Taxation Laws Amendment (Self Assessment) Act 1992 was introduced to establish a more robust public tax rulings system. This was launched with an intention for rulings to be legally binding on the Commissioner of Taxation, and on which taxpayers could confidently base their tax affair decisions.

It should be noted that a formal taxation rulings system had already been in place before this, but the 1992 reforms changed the status of such rulings. They went from being documents that represent the Commissioner’s view on the application of tax law (described in previous rulings as documents that “do not and cannot supplant the terms of the law”) to become legally binding statements of tax law advice — and therefore reviewable by the Administrative Appeals Tribunal or the courts.

The legislation introduced several changes, the most notable being:

  • a new system of binding public rulings
  • a new system of binding private rulings
  • an extension (to four years) of the period within which a taxpayer could object to an assessment
  • a new system of penalties for understatements of income tax liability, based on the requirement that taxpayers exercise reasonable care, and
  • a new interest system for underpayments or late payments of income tax, based on commercial principles and market interest rates.

In the years since, the government has shortened the period of review for taxpayers with straightforward tax affairs, introduced binding oral advice, reduced the rate of interest on shortfalls and late payments, and introduced the office of the Inspector-General of Taxation to make sure the system runs smoothly and to offer advice on fixing anomalies when they occur.

The rulings menu
The modern taxation rulings system allows the ATO to make binding rulings that the Commissioner must honour, meaning that a taxpayer who relies on a ruling cannot later be penalised by the ATO, even if the view expressed in the ruling is later found by a court or tribunal to be incorrect.

The binding rulings include:

  • Public rulings — advice issued by the ATO to explain an application of tax law to taxpayers generally, a class of taxpayers or a particular arrangement, and include:
    • Taxation rulings (TR)
    • Taxation determinations (TD)
    • Goods and services tax rulings and determinations (GSTR, GSTD)
    • Class rulings (CR)
    • Product rulings (PR)
  • Private rulings — advice on the application of tax law to a particular taxpayer in relation to a specified arrangement.
  • Oral rulings — advice on a simple matter related to the tax affairs of a taxpayer who is an individual.

Note that the ATO itself divides its public rulings into three main categories, or series. These are income tax and FBT public rulings (TR, TD and CR series), GST public rulings (GSTR and GSTD series) and product rulings (PR series).

Taxation rulings issued before 1 July 1992
These set out the Commissioner’s opinion regarding income taxation matters and are administratively binding on the Commissioner, in contrast to public rulings and private rulings which legally bind the Commissioner. Pre-July 1992 rulings differ in effect from present taxation rulings only in that they cannot contain legally binding material (that is, be a public ruling).

In general terms, regarding other “administratively binding” advice, while this is not legally binding on the Commissioner, the ATO says it will stand by such advice and will not depart from it unless:

  • there have been legislative changes since the advice was given
  • a tribunal or court decision has affected its interpretation of the law since the advice was given
  • the advice is no longer appropriate for other reasons.

If a taxpayer follows the advice, but the ATO later finds out that it doesn’t apply the law correctly (and none of the points above apply), a taxpayer will be protected from having to repay amounts of tax that would otherwise be payable, and any penalties and interest on those amounts.

It is worth noting also that the ATO is not the sole source of taxation rulings or advice. Some taxpayers prefer to take private advice, and some (for example, taxpayers with larger tax liabilities) may seek to rely on a judicial outcome regarding a “reasonably arguable position” rather than to seek definitive advice of the ATO. Australia’s current tax system establishes this as a right for taxpayers.

The evolution of reliable tax guidance. The evolution of reliable tax guidance. The evolution of reliable tax guidance. The evolution of reliable tax guidance. The evolution of reliable tax guidance. The evolution of reliable tax guidance. The evolution of reliable tax guidance. The evolution of reliable tax guidance.