Binding rulings have been part of our tax framework for almost 20 years. There were some early questions about how courts would handle appeals from negative private rulings but relatively little on how the binding nature of rulings is given effect.
Bellinz case states that:
“The binding quality which the legislation gives to a public ruling applies to the tax consequences of the arrangement or class of arrangements to which the ruling relates, and not … to the underlying philosophy behind the ruling.”
The recent application of this approach by the AAT in Buggins case illustrates that it is the articulation of the “arrangement” upon which the ruling is given that will that govern its binding scope.
For private rulings also, it is the Commissioner’s view on how a provision applies to a scheme that binds the Commissioner and gives the relevant entity protection.
The Full Federal court in Mt Pritchard & District Community Club concerns an application by the taxpayer for injunctive and declaratory relief that assessments issued were invalid because they contravened section 170BB of the Income Tax Assessment Act 1936 (‘1936 Tax Act’) or section 357-60 of Schedule 1 of the Taxation Administration Act 1953 (‘TAA’).
A detailed background and commentary on the case can be found in Thomson Reuters Weekly Tax Bulletin of 4 November 2011 – 2011 WTB 46 . The article, entitled “Does the Mt Pritchard case undermine the integrity of the Private Rulings system?” by Michael Bannon, Tax Consulting Partner, Duesburys Nexia, Canberra”, is available to subscribers to Weekly Tax Bulletin.
The following are my comments and do not contain the history of the issue that you will glean from the article.
The taxpayer had obtained a private ruling in 2004 that its income was exempt from income tax. The Commissioner issued assessments in 2006 and 2007 income years that treated the relevant income of the taxpayer as assessable income rather than exempt in accordance with the private ruling.
The court concluded that the question of the application of sections 170BB or 357-60 to prevent the Commissioner from treating the income as assessable depends upon whether the arrangement in relation to which the ruling had been given had materially changed over time. In this case, the taxpayer amalgamated with another entity. The Commissioner contended that this was a material change to the “arrangement” upon which the 2004 ruling was given.
The court declined to grant injunctive or declaratory relief, preferring the view that:
“in the absence of jurisdictional error of the type identified by the High Court in Futuris, any failure by the Commissioner to comply with a provision of the tax legislation (including the private ruling regime provisions) when issuing an assessment does not thereby render the assessment invalid.”
The case illustrates three aspects of the difficulty in seeking and relying on rulings:
- If the arrangement upon which the ruling was given has materially changed over time, the Commissioner is not bound to apply his ruling to the changed arrangement.
- The question of whether the change is material such that the Commissioner is not bound is likely to be tested in Part IVC proceedings against an adverse assessment issued by the Commissioner. “It cannot … be concluded that the Commissioner is bound by the Ruling not to make any assessment under s 166 where the Commissioner in good faith contends the Ruling does not apply because of a relevant change of circumstances.”
- No difference arises in relation to the binding nature of income tax rulings whether one applies section 170BB of the 1936 Tax Act (the previous rulings system) or section 357-60 of Schedule 1 to the TAA.
An interesting aspect of the decision is the significance of section 175 of the 1936 Act in the circumstances where assessments had been issued to the taxpayer. Section 175 provides that:
The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with.
So the emphasis of the court was whether the binding rulings regime applied to invalidate assessments that had been issued.
For GST liabilities, an assessment does not establish a liability for tax. As we are reminded in the current discussions about the “self actuating” system of indirect tax liabilities, assessments are not the process by which liabilities become payable and credit entitlements arise.
This self actuating system is at the heart of the Full Federal Court decision to grant mandamus relief in Multiflex (see this recent post).
Accordingly, the decision is not concerned with whether declaratory or injunctive relief might be available to prevent assessments being issued in indirect tax matters.
The court in Mt Pritchard observed, without concluding, that “there are existing Pt IVC proceedings on foot in the AAT in relation to the 2006 Assessment. The pending of those proceedings would normally mean no declaratory relief should be made in relation to the 2006 Assessment”. If injunctive relief were sought in a GST matter, the Commissioner may be able to address it by issuing an assessment.
For indirect tax matters, there are two further questions:
- The previous rulings system did not involve the specification of an arrangement, an entity and how a provision applied. Accordingly, a material change in circumstances may not, of itself, defeat the binding nature of the ruling – that is, the principle ruled upon may still be capable of reliance.
- The “old” indirect tax rulings system was replaced with the “uniform” ruling system in Part 5-5 of Schedule 1 of the TAA from 1 July 2010. A private indirect tax ruling that was in force prior to 1 July 2010 is treated as if it had been made under the “uniform” regime. Does this mean that:
a. post 2010, the “arrangement” in the original ruling now becomes determinative of its binding nature; and
b. does a taxpayer rely on Part 5-5 for GST liabilities that arose for tax periods prior to 1 July 2010?
The certainty for taxpayers that is the policy and object of the rulings system seems to be at issue in these recent developments.
One thing is clear from the move for indirect tax to the uniform rulings regime – nothing is clear.