Private rulings: are they worth it?

This article seeks to describe a structured approach, with reference to the law and relevant decisions, which may be used when trying to decide whether it is worthwhile to apply for a private ruling. The framework suggested is that which is generally used in choosing consumer products. The article suggests that the decision must be made by reference to the taxpayer’s corporate attitude to tax risk, and the other approaches available for achieving the desired level of certainty on the tax risk associated with a particular issue. Depending on the circumstances, other approaches may be preferred. Rulings, however, offer an opportunity to understand the Commissioner’s reaction to a situation and, through engagement, achieve a positive response. They require particular care in drafting, and care in the evaluation of the response.

Introduction

Two recent Federal Court decisions present a useful opportunity to think again about the role that private rulings might play in managing a taxpayer’s tax risk.

In Aurizon Holdings Ltd v FCT¹, the court commented on why a ruling would not have been suitable there. And in Landcomv FCT², the court considered the role of rulings in relation to state/territory government entities paying “GST equivalents”.

Aurizon, in particular, invites us to think again about how and when we use rulings. This article will try to give taxpayers the information they will need to determine the value to them of seeking a “private ruling”.

The article will discuss what actually constitutes a private ruling. It will examine the attributes of such a ruling, and then compare and contrast it with other strategies which might give similar outcomes. In doing so, it will consider the relevant statutory rules and court decisions. Finally, the article will try to offer some thoughts on how to answer the question posed by the title.

In the annual report for 2020–21, the Commissioner advised that he had issued 3,977 rulings during the year (compared to5,285 in 2019, and 4,126 in 2020). Of these, 81% were finalised within 28 calendar days of receiving all of the necessary information, and 90% of taxpayers were contacted with14 calendar days where the matter was expected to take more than 28 days to finalise. Approximately 60% of taxpayers thought the process and outcome were fair. So there are clearly a significant number of taxpayers who choose to seek a ruling, and most seem to think it worthwhile³.

The author has not set out the origin or history that led to the current rules (which came into effect in 2005).

The question of whether private rulings are worth it is a subjective one for each taxpayer, and the answer will depend on the benefits that emerge from the analysis described in this article. But these must be weighed against the cost(both in preparation and risk) in asking for a ruling. Or notasking for a ruling.

While many taxpayers will hope for a simple “yes or no” answer to the question, it is only possible for this article to give some of the information which will be needed by a taxpayer as they answer the question for themselves.

The classic factors in “is it worth it?” decisions arise around consumer products and typically involve considerationof the following:

• utility (whether the outcome from the process was more useful than from competing processes);
• enjoyment (whether the experience was no more painful perhaps than other options, in the context of a taxquestion); and
• cost (whether the utility and enjoyment was such that you thought the cost worthwhile).

These are deeply individual and subjective factors in most cases.

The legislation and case law are primary tools in decision-making, but taxpayers should also consider the database of redacted private rulings published by the Commissioner⁴. Although not binding on the Commissioner for other taxpayers, they can often guide the approach taken.

The author’s final introductory observation is that the level of certainty on a tax issue that is required is usually set by the taxpayer’s “tax risk policy”. This will vary depending on factors such as the amount of the tax at stake, the level of opinion given by advisers, and public statements by the ATO on the issue. It also depends on whether the taxpayer has been advised by the Commissioner that a failure to seek confirmation of positions will lead to a deterioration in the taxpayer’s relationship with the Commissioner. Not all taxpayers or all issues require certainty. The topic of this article only arises when a taxpayer makes a decision that greater comfort is required on a tax risk.