The ATO case
Contrary to public opinion, the Australian Taxation Office (ATO) is not increasing the number of tax rulings, which provide taxpayer certainty, in favour of time-expedient alerts.
The tax collection agency produced 64 such rulings in 14/15, 69 in 15/16 and 73 in 16/17. While the ATO is increasingly issuing alerts, it is doing so along with other forms of taxpayer guidance, in order to provide a layered way to communicate with all taxpayers, be they individuals, businesses or tax practitioners.
Andrew Mills, second commissioner, law design and practice at the ATO, calls public rulings, “the centrepiece of what we do”. According to Mills, tax alerts have certainly increased in number over the past few years, with 11 alerts issued last year and nine the year before.
“Prior to that it was three,” says Mills, “but that’s not a lot in the scheme of things.”
Over the same period the ATO issued 301 class rulings and 64 product rulings.
ATO alerts have ‘ticked up’
Mills says the use of alerts “has ticked up” but the context in which the ATO uses them has changed.
“They started with the mass-marketed schemes [but now] we are actually starting to see issues that run across industries or particular market segments, often at the high end, which are starting to proliferate.
“It’s no longer something that is bespoke because three or four large corporates are doing it. All of a sudden it may be potentially 20 that are doing it, and before it gets out of hand, we want people to know we are concerned.”
Mills further notes that, “alerts simply raise a flag and say, ‘Just be aware we are looking into this, we have some concerns about it, we are going to look into and we are going to give you some guidance down the track’.”
In the last few years, with the aim of increased taxpayer communication, the ATO has been issuing practical compliance guides. Mills calls these guides “the safe-to-swim-between-the flags sort of stuff”.
“Once upon a time the tax office did a lot by way of rulings but didn’t do a lot of guidance,” says Mills.
“The practical compliance guide is very much trying to say to people ‘there’s the law [and] here’s a safe way of getting to the final result.’”
View on ATO alerts from the big end of town
According to Martin Caplice, Oceania leader, tax controversy at EY, “Tax rulings still have a very important role to play in the tax administration system and I don’t think the ATO is walking away from these. But at the moment, it is using taxpayer alerts as a tool to give taxpayers its real-time views on structures, transactions and issues from a compliance perspective.”
He says taxpayer alerts are less formal than tax rulings. Unlike tax rulings, they are based on the ATO’s general impressions and don’t contain the carefully considered analysis of the law found in tax rulings because they are issued fairly quickly. They are also not legally binding.
Caplice says while alerts are designed to give guidance as to the ATO’s thinking, they don’t go beyond that.
“They [alerts] may be helpful in some cases, but they are general in nature. Taxpayers have to consider whether what’s covered in the alert is an issue for them. Then the guidance from the ATO is that if they do think it’s an issue for them, they must get independent advice. So it doesn’t provide taxpayers with clarity.”
In contrast, he says rulings, both public or private, do give taxpayers greater certainty because there is a lot more analysis of facts and how the law, as the ATO sees it, is applied to those facts.
“If you operate within that ruling, you have the protection of it.”
While Caplice believes alerts create additional compliance costs and obstacles for taxpayers, he also appreciates the ATO’s need to get its views out to the market quickly.
“In fairness to the ATO, it gets criticised for taking 18 months to issue a ruling on something that’s an issue.”
He believes practitioners need to bear tax alerts in mind and certainly consider them, but their real focus should be on whether their view, taken with the assistance of their advisers, is the correct position in terms of the law.
“While the ATO may be expressing concerns about certain things to be taken into account, ultimately it is the application of the law to the taxpayer’s facts, based on their own views and those of their advisers, which is critical. This is what a court will ultimately be concerned with.
“Make sure you have documented the basis for your decision, because you will be required to show all the reasons why you’ve come to that conclusion when the ATO comes knocking on your door. “
Caplice adds that from 2019, the reportable tax position (RTP) schedule will require corporate taxpayers to work through all ATO tax alerts and determine if they apply to them.
“If taxpayers form a view that they don’t apply, they will need to document why that is the case. The ATO may ask them questions about how they have gone about completing these,” he says.
“For the big end of town, there is a larger element of compliance around this, more than there is necessarily guidance from the ATO as to what is the correct position to take. It’s not streamlining the tax system. It is making it more cumbersome,” he adds.
The tax lawyer’s view on ATO rulings
Andrew O'Bryan, a partner at Hall & Wilcox Lawyers, says the ATO’s attitude to private rulings has evolved in recent years.
“I am generalising, but it used to be the case that if you applied for a ruling, the ATO’s attitude was ‘How do we say no?’. Now it’s a case that if you present a well-reasoned case as to why a ruling should be given, it will say ‘okay’.”
O’Bryan notes that the revenue collection agency has also introduced law companion guidelines which set out its views on how it will administer new legislation and has for some time made public internal practice statements which direct ATO staff on how the law in a particular area should be applied.
O'Bryan says this is all part of the ATO’s “swim between the flags” approach, which together with alerts and its practical compliance guidelines, should give taxpayers and their advisers some comfort.
“The tip is to ensure you are aware that the guidelines exist. They should give you a degree of comfort and if you swim between the flags, you will be pretty safe,” he says.
“Don’t get too het up about whether the ATO’s opinion is absolutely right or not. When it comes to the pointy end of an audit and if there’s a dispute, it’s not the case these days that the ATO will litigate everything to the full extent. It’s very much into [using] alternative dispute resolution and will usually litigate on issues where it is very confident on its position and that it will win.
“It will also litigate on cases that are not a single taxpayer issue but have broader implications and on matters involving that troublesome 3 per cent [who don’t comply].
“Practitioners should understand that the ATO is giving guidance and encouraging engagement. You can always approach it with your concerns,” adds O’Bryan.