Taxation- Private Binding Rulings - Assignment Example

1. Explain what a Private Binding Ruling (PBR) is? Section 91EB of the Tax Administration Act 1994 says that: The section 91EB with regard to private binding ruling applies to "a person in relation to an arrangement", it can apply only to a person expressly referred to in the binding ruling (the person who applied for the binding ruling under section 91EC).  This means that, in the case of a private ruling, if other taxpayers become aware of the existence of the ruling, but were not a party to the application or named in it, they cannot rely on the ruling in relation to their own tax affairs, even though they consider their circumstances may be the same as those set out in the ruling.  Taxpayers should be aware that a private binding ruling is not to be taken as a notice of the Commissioner's policy in respect of any particular tax law.  Rather it is the Commissioner's view at a particular time on a particular arrangement and a particular taxpayer.   When making an application for either a non-binding opinion, or their own binding ruling, taxpayers may choose to cite an earlier binding ruling that supports their application.  However, each case will be considered on its own merits, and, however a previous ruling on a similar arrangement will not automatically mean that a similar conclusion will be reached in all future applications.    To make a general statement about a particular arrangement, the Commissioner may issue a public binding ruling or an interpretation statement.  These may be relied upon by all taxpayers, provided their arrangement is the same as set out in the public ruling or is covered by the interpretation statement. Mr. Sherman was asked to review the following points on PBR:1 1. The adequacy of the current systems and procedures to achieve consistency and appropriate levels of quality, 2. The adequacy of current systems and procedures to guard against fraud, as outlined in the current ATO Fraud Control Plan, and conflicts of interest He was also asked to recommend any improvements to systems and procedures so that an assurance can be given to the community confidence in the integrity of the Private Binding Rulings and Advance Opinions System, whilst also ensuring that the ATO is able to continue to operate effectively and efficiently. The Report Mr Sherman’s Report outlines the extensive procedures we have instituted over the years. These include: 1 i. That private binding rulings be signed off by the relevant case officer and countersigned by an authorising officer; ii. Use of IT precedent systems; iii. Use of a national Case Reporting System to record all private binding rulings and assist in quality and consistency through inbuilt mechanisms to identify significant issues and, through templates and prompts, to ensure that rulings are properly structured and relevant issues are considered; iv. An Income Tax Advice Manual to guide officers engaged in technical work; v. Escalation procedures designed to identify significant matters and to bring appropriate technical expertise to bear on these matters; vi. Quality Assurance Processes that involve selection of representative cases on a regular basis for review by an assessment panel, commonly involving an external representative. The Report pointed out areas which required improvements. The report points out that the National Case Reporting System has been superimposed on top of a range of specific purpose case management systems developed over the years, introducing cumbersome work practice requirements that can impact on the effectiveness of these tools. 1 The Report also notes areas of confusion around the meaning and consequences of various forms of advice. It further recommends that for the future all private binding rulings be published on a public database without disclosing the identity of the taxpayer. 1 The Australian Taxation Office (ATO) has recently issued Practice Statement Law Administration PS LA 2005/10, "Priority private binding rulings." This policy statement sets out when the ATO will give a private binding ruling application priority, and how this priority is obtained. Broadly, priority is given where the ruling is for a proposed transaction, the issues are significant and there is some urgency.2 Taxpayers can apply for a private ruling to the way tax law enforces to their facts for an income year or years. The person applying for a private ruling has to provide all relevant facts and disclose fully when applying for the ruling. Such a private ruling is binding on the ATO where it results in less tax. A taxpayer can ignore the private ruling if following the law results in less tax. In the past, when such an unfavourable ruling was not followed then a 25 per cent penalty was imposed particularly where the private ruling correctly expressed the law. But recently the Government has introduced legislation to abolish this penalty with effect from the income year 2004-05. On the other hand penalties, may crop up on tax shortfalls where a taxpayer has not taken reasonable care, or has taken a position which is not reasonably arguable. 2 A private ruling cannot be withdrawn by the ATO without the taxpayer’s consent. The Commissioner can decline, only in limited situations, to react to a ruling request. The ATO aims to issue private rulings within 28 days of the application being made, but in practice this may take 5 to 6 weeks, and sometimes longer. However it is likely this time-frame may be much shorter for a "priority private binding ruling." 2 The move to publish PBRs has been taken so that anyone can see the advice the Tax Office is giving to taxpayers who look for certainty on tax matters. People can check the genuineness of any private binding ruling they receive from the Tax Office. PBRs will be binding only for the applicant and other important conditions continue to apply to ensure the integrity of the system. Applicants for PBRs will be furnished with a copy of the version planned for publication and they will also be given a chance to bring up privacy and privacy issues prior to publication. Rulings will be in print on the Tax Office's internet site at www.ato.gov.au/rba. 3 2: Do you think that PBRs should be edited before being published? Provide reasons to support your arguments. Edited versions of private rulings and other written binding advice are published in the Register of private binding rulings to improve the integrity of Tax Office advice. They constitute a historical record of the written binding advice issued. Consequently they remain on the register even where, for example, later changes to the law may make them inaccurate, until they are archived. To perk up the integrity of its advice processes, the Tax Office publishes edited versions of all written binding advice (referred to as edited versions) provided to taxpayers. Edited versions are published in the Register of Private Binding Rulings (the register) on the Tax Office website.4 Taxation laws, including section 16 of the Income Tax Assessment Act 1936, impose a number of secrecy obligations on Tax Office staff. Further obligations to protect the privacy of individual taxpayers are imposed by the Privacy Act 1988. A publicly accessible register containing edited versions requires Tax Office staff to take particular care to ensure that a taxpayer's information and identity are protected. 4 The editing process involves 4 steps in the removal or replacement of information that: (1) Specifically identifies a taxpayer (2) May enable the identity of the taxpayer to be ascertained (3) Might enable a reader to identify third parties where such information would breach privacy or secrecy guidelines or information that specifically identifies third parties except where: - The information pertaining to the third party is in the public domain and - The taxpayer's identity can not be ascertained by identifying the third party, and (4) Is confidential to the taxpayer or third parties. 4 PBRs are specific written advice to a peculiar taxpayer on how the Tax Office conceives the law applies to that taxpayer. They only apply to a specified arrangement for a specified income year. They are not binding on the Tax Office in relation to other taxpayers. PBRs are provided in response to requests for advice from taxpayers and practitioners.3 Most taxpayers may apply for a PBR at any time until four years after the last date for lodging a return for the income year to which the ruling relates.4 The Tax Office must provide a PBR unless the request falls into one of the exclusions listed in the relevant legislation. In these circumstances, the Tax Office can issue a PBR, but is not obliged to do so.5 Taxpayers are not charged a fee by the Tax Office for PBRs. There is no statutory time limit for the Tax Office to make a PBR.6 The Taxpayers’ Charter indicates that the Tax Office aims to provide PBRs within 28 days of receiving all necessary information from the applicant (or a longer period negotiated with the relevant taxpayer). PBRs are published by the Tax Office on its website, in an edited form to protect the confidentiality of recipients. In practice, some taxpayers and practitioners use these to gain insights into how the Tax Office interprets particular provisions of the law, although the Tax Office would prefer them to use Australian Taxation Office Interpretative Decisions (ATOIDs, see 2.1.2) for this purpose. Enhanced Transparency1 The Sherman Report recommends that all private binding rulings be published, excluding any material that would identify the taxpayer. 1 This would enhance the transparency of the private binding rulings system. It would also provide a vehicle to check the authenticity of rulings. 1 On the other hand it runs the risk of giving private binding rulings a status they do not have. As explained, a quite specific legislative design feature is that private binding rulings can apply only to the applicant. Publishing them on a public database could lead to them being seen as generally binding forms of advice. 1 We have decided that greater weight is to be given at this time to transparency. Accordingly we will be moving to publishing private binding rulings, suitably edited as required to remove any material that would identify the taxpayer. This will apply on a prospective basis to ensure applications are made in the knowledge that the response will be published. 1 In further pursuit of transparency, we are exploring whether the registration number issued on the receipt of an application could be used to access through our web site, details of the progress of the applicant's ruling request. 1 3: Critically analyse whether you think PBRs should be published. Your analysis should include reasons why PBRs should be published as well as why they should not be published before you reach any conclusions. Also, your analysis should be undertaken in the context of tax policy principles including simplicity, certainty, equity, neutrality and efficiency. A private ruling binds the Commissioner (not the taxpayer) if the ruling applies to the entity and that entity relies on the ruling (by acting, or omitting to act, in accordance with it). In other words, taxpayers who follow a ruling that applies to them can ensure that the Commissioner is bound to assess them as set out in the ruling in relation to a particular matter.7 However, even if a taxpayer does follow a private ruling, the Commissioner may apply a relevant provision of the law in a way that is more favourable for them than is set out in the ruling if the Commissioner subsequently comes to the view that the ruling is incorrect and that it disadvantages the taxpayer (provided the Commissioner is not prevented from doing so by a time limit imposed by the law). 8 Private Rulings are published by the Commissioner of Taxation under the Taxation Administration Act (Cth.) 1953. A Private Ruling is the Commissioner’s view on the way that the tax law will apply to a taxpayer’s agreement for the exacting years that are reported in the application for the Private Ruling, according to LAC Lawyers.11 These Private Rulings are an efficient way of deciding whether a taxpayer’s placements will be triumphant in legally minimising liability to income taxation, capital gains taxation, or goods and services taxation. The publication of the private rulings will help the taxpayer to assess in advance what the potential taxation liability may be if the arrangement were to proceed. But when a taxpayer finds that the Ruling is not in his favour then the taxpayer has a chance to adopt substitute taxation systems without essentially attracting taxation liabilities. 9 A Private Ruling should be separated from an appraisal made by the Commissioner of Taxation consistent to an income tax return. An assessment is made by the Commissioner of Taxation after he/she reviews the information provided by the taxpayer in the taxation return for the particular financial year together with any extra information received by the Australian Taxation Office consistent to an audit or probe of the taxpayer’s matters pursuant to the Income Tax Assessment Act (Cth.) 1936. In layman’s terms, a Private Ruling enables a “dry-run” without necessarily attracting a taxation liability in the form of an assessment. 10 A taxpayer can apply for a Private Ruling either before or after the taxpayer lodges the return for the year in which the taxpayer’s arrangement took place. It is preferred to apply for the Private Ruling before the lodgement of the return for the year in which the arrangement is to take place in order to obtain the full benefit of the process. 10 There are 5 modern standards for evaluating taxes. They are as follows: 1. Simplicity: A tax should be as simple as possible so that the taxpayer clearly understands his/her obligations. This will give them the chance to make arrangements and to provide for his/her tax liability. The tax has to be simple so that the administration also gets a clear understanding of the extent of its power. The costs for the administration will also be lowered and there will be less number of litigations and normally advanced conformity levels. The less the number of individuals or organisations from whom the tax is composed, the barer is the taxation system. The tax system should also be convenient with regard to the time of collection, the place and the mode of payment. Under the income tax system, a withholding system is followed and this is suitable for salaried people and wage earners also. This criterion is based on Adam Smith’s maxims - convenience. The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. 11 Simplicity & Certainty Private binding rulings generally have the provisions of greater certainty to taxpayers and businesses as one of their major purposes rather than acting as some form of legislative power to the tax authorities that issue them. A growing number of countries have introduced or formalised their rulings systems rather than relying on administrative processes operated at the discretion of the tax authority. Essentially a binding ruling is a statement of the revenue authority’s interpretation and application of tax laws to an arrangement, which is binding on the revenue authority in terms of the future application of the tax laws but not normally on the applicant. 12 As can be seen a company's debt/equity or capital management strategies can give rise to different tax consequences. Often companies seek certainty in the tax consequences of the strategies they want to pursue. The ATO assists the market by the provision of binding advice. This can be under the public rulings system or by way of binding and reviewable private rulings. 12 Private Rulings13 Major improvements have been made by the tax office in the way we provide private binding and reviewable rulings. The improvements include: 13 1. new guidelines on the types of written binding advice which may be issued by the ATO and the officers who may approve such advice, 2. a process to publish edited versions of the written binding advice given with identifying features removed, 3. an integrated case management system, 4. the introduction of a registration number which can be used to track the progress of all requests for private binding rulings, and 5. An improved process for assuring the capability of staff preparing or approving written binding advice. 13 We have introduced these changes to improve the integrity and transparency of our written binding advice. 13 We have started to publish private rulings as an integrity measure. For advice to be published, taxpayers will receive their binding advice together with an edited version of the advice. They will be invited to comment on the adequacy of the editing within 28 days. If no reply is received within that time, the edited version will be published. If the taxpayer comments on aspects of the edited version and the ATO does not agree with their suggestions, the taxpayer will be able to seek a review of the matter by a non-statutory Publication Advisory Committee with members from outside the ATO or may seek judicial review. 13 Efficiency: The tax law covering private binding rulings is a key example of prime tax law that is not well planned and can create uncertainty. In particular, the fact that the ATO is not currently compelled to reach a decision on a private ruling request within a defined period can, and based on submissions to the Review of Business Taxation (p.141 of 'A Tax System Redesigned') does, lead to taxpayer frustration with the private ruling system. Thus the law has to be amended and the following to be considered giving importance to efficiency and time. That the tax law be amended to establish a default system for the issuing of private rulings so that the Commissioner would be deemed to have given a ruling adverse to the taxpayer if the Commissioner has failed to make a ruling within a specified period. Equity & Neturality Equity is a modern concept and it has evolved from Adam Smith's ability to pay principle. A taxpayer should pay his/her taxes based on their taxable capacity as calculated by the criteria, of their income or their wealth or both. Most people observe that income tax is the best example of the “ability to pay” principle at work. The wider the definition of income which is used to calculate the base, the better it will ensure that the amount of tax paid accords with the taxpayer’s ability or capacity to pay. Private binding rulings have to be published so that taxpayers who under go similar conditions or situations can be prepared for the best or the worst. Publication of PBRs helps the tax payers to be vigilant. Conclusion: Thus the publication of a private binding ruling is very important from the view of a tax payer. It acts as guidance to the tax payer as well as the commissioners who might be dealing with the taxpayer. Publication of the private binding ruling also helps the taxpayer to calculate in advance his amount of tax which he has to pay. This will help him to make arrangements of the amount to be paid as tax in case he does not have the money on hand. Foot notes: 1. http://www.ato.gov.au/corporate/content.asp?doc=/content/00106828.htm. 2. PricewaterhouseCoopers, 2008 http://www.pwclegal.com.au /legal/pwclegal.nsf /pages/09E5837727023ECECA257042001AB765. 3 http://www.ato.gov.au/corporate/content.asp?doc=/content/00141369.htm 4 PS LA 2008/4, http://law.ato.gov.au/atolaw/view.htm? 5 Section 14ZAG of the TAA allows practitioners to apply for a PBR on behalf of a taxpayer. 6 Shorter Period of Review (SPOR) taxpayers have only two years to apply for a PBR. 7Section 357-60. of Practice Statement Law Administration PS LA 2008/3 8Section 357-70. of Practice Statement Law Administration PS LA 2008/3 9 http://www.franchisebusiness.com.au/articles/Franchising-and-Private-Rulings 10 Merlin Harold Hunter, 1921, Outlines of Public Finance, Harper & Brothers 11 in Economics Of The Public Sector, Second Edition, W.W Norton & Company, New York 1988, p390. 12See OECD, HARMFUL TAX COMPETITION: AN EMERGING GLOBAL ISSUE (1998). See also Jeffrey Owens, Emerging Issues in Taxing Business in a Global Economy, in TAXING INTERNATIONAL BUSINESS; EMERGING TRENDS IN APEC AND OECD ECONOMIES 25, 42-44, (Richard Vann ed., 1997). 13Current taxation issues arising out of capital management strategies, Paper presented by Michael D’Ascenzo, Second Commisioner, Australian Taxation Office to the CFO 2001 Summit Financial Review Conference, Hilton Hotel. Sydney on Thursday 7 June 2001 References: 1. http://www.ato.gov.au/corporate/content.asp?doc=/content/00106828.htm. 2. PricewaterhouseCoopers, 2008 http://www.pwclegal.com.au /legal/pwclegal.nsf /pages/09E5837727023ECECA257042001AB765. 3. http://www.ato.gov.au/corporate/content.asp?doc=/content/00141369.htm 4. PS LA 2008/4, http://law.ato.gov.au/atolaw/view.htm? 5. http://selfassessment.treasury.gov.au/content/discussion/06Chapter2.asp#P34_5759 6. http://www.franchisebusiness.com.au/articles/Franchising-and-Private-Rulings 7. http://www.cpaautralia.com.au 8. http://www.taxboard.gov.au/context 9. http://www.ato.gov.au 10. http://www.austlii.edu.au/au/special/tax/ 11. http://www.treasury.gov.au/content/international_taxation.asp? 12. http://www.oecd.org/topic. 13. http://www.austlii.edu.au/au/journals/eJTR/2004/3.html#fn212 14. http://www.ato.gov.au/corporate/content.asp?doc=/content/74868.htm&page= Read More