House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

Technical Overview: Scheme and Structure

Overview of the Chapter

This chapter deals with the title and commencement of the proposed Act and summarises the changes the Act will make to other Acts, and the scheme and structure of those changes.

Title and Commencement of the Act

When this Bill is enacted it will be called the Taxation Laws Amendment (Self Assessment) Act 1992. [Clause 1]

The Act is to commence on the day it receives Royal Assent [Clause 2]. However, most provisions will not apply before the later of Royal Assent or 1 July 1992 [Clause 34]. For example, the amendments made to the Income Tax Assessment Act do not apply to elections made before the later of the commencement of this Act or 1 July 1992 [Clause 34]. Similarly, taxpayers will not be able to obtain binding and reviewable Private Rulings before 1 July 1992 or for arrangements entered into before the commencement of this Act or 1 July 1992 [Clause 13].

Details of the commencement of the changes are outlined in the following chapters.

Scheme and Structure of the Legislation

The Act will amend the following Acts:

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Taxation Administration Act 1953 (Administration Act) [Clauses 3 to 14];

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Income Tax Assessment Act 1936 (ITAA) [Clauses 15 to 34];

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Fringe Benefits Tax Assessment Act 1986 (FBT Act) [Clauses 35 and 36]; and

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Taxation (Interest on Underpayments) Act 1986 (Interest on Underpayments Act). [Clauses 37 and 38]

Binding Public Rulings

Taxation Administration Act

The Bill inserts a new Part IVAAA into the Administration Act dealing with binding Public Rulings. [Clause 4]

Part IVAAA covers matters such as:

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interpretation and scope, including Part IVAAA's application to income tax (including withholding taxes and Medicare levy), franking deficit tax and fringe benefits tax; [sections 14ZAAA - 14ZAAC]

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the Commissioner's ability to make Public Rulings; [sections 14ZAAD - 14ZAAG]

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arrangements to which Public Rulings apply; [section 14ZAAH]

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the making of Public Rulings; [sections 14ZAAI - 14ZAAJ]

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the withdrawal of Public Rulings. [sections 14ZAAK - 14ZAAL]

The commencement of this Act is specified in Clause 2 of the Bill to be the date of Royal Assent to the Bill. Public Rulings will be able to be made on or after the later of the commencement of the Act and 1 July 1992 and will only apply to arrangements entered into on or after that date. [Clause 12]

Income Tax Assessment Act

The Bill inserts new sections into the ITAA to provide for the binding effect on the Commissioner of Public Rulings dealing with income tax, withholding taxes, Medicare levy and franking deficit tax, and to resolve which binding effect applies where there are conflicting rulings. As the Commissioner will be bound by the ruling, the tax that would be payable by a taxpayer will be reduced to reflect the ruling or rulings. Questions of conflict are resolved by providing the taxpayer with the greatest benefit consistent with all the relevant rulings. [sections 170BA, 170BC, 170BD and 170BF - Clause 22]

The relevance of Public Rulings to the new penalty provisions inserted by the Bill in Part VII and Division 11 of Part IIIAA of the ITAA is specifically dealt with by new sections 222C (for income tax) [Clause 26] and 160ARZD (for franking deficit tax) [Clause 18].

Fringe Benefits Tax Assessment Act

Similar changes are made to the FBT Act to prescribe the binding effect of Public Rulings on fringe benefits tax and to resolve questions of conflict. [sections 74A and 74C - Clause 36]

Binding and reviewable Private Rulings

Taxation Administration Act

The Bill inserts a new Part IVAA into the Administration Act dealing with binding and reviewable Private Rulings. [Clause 4]

Part IVAA covers matters such as:

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interpretation and scope, including the application of Part IVAA to income tax (including withholding taxes and Medicare Levy), franking deficit tax and fringe benefits tax [sections 14ZAA - 14ZAD];

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what a Private Ruling is - the Commissioner's opinion on the way in which a tax law or tax laws would apply to a person in respect of a year of income in relation to an arrangement [sections 14ZAA, 14ZAE, 14ZAF, 14ZAG and 14ZAP];

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application for a Private Ruling [sections 14ZAF to 14ZAJ];

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withdrawal of the application by the taxpayer [section 14ZAK];

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dealing with a ruling application [sections 14ZAL and 14ZAM];

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applications that do not have to be dealt with in certain specified circumstances [sections 14ZAN and 14ZAQ];

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the giving of reasons for delays in making the ruling [section 14ZAO];

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the making of a Private Ruling [sections 14ZAP to 14ZAT];

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the withdrawal of a Private Ruling and its effect [sections 14ZAU to 14ZAX and 14ZAZ];

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the circumstances where a Private Ruling is taken to have no effect [section 14ZAY];

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objections, reviews and appeals relating to Private Rulings, thus providing for the review of Private Rulings [section 14ZAZA]. This provision enables a rulee (defined in section 14ZAA to mean the person the application to whom of a tax law is the subject of the ruling) to object against a Private Ruling in the same way as a taxpayer can object against an assessment. There is a consequential amendment to section 14ZQ of the Administration Act to include the term 'Private Ruling' within the definitions applicable to taxation objections, reviews and appeals [Clause 5];

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the effect of the Commissioner's decision on a ruling where the taxpayer does not appeal against the decision or make an application for review by the AAT - the ruling is so altered [section 14ZAZB];

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the effect of ruling application and objections against rulings on lodgement requirements and the Commissioner's assessment power - no effect [section 14ZAZC].

A new section 14ZVA is included in the Administration Act to avoid duplication of disputes where a rulee has objected against a Private Ruling, by limiting the rulee's rights to object to a subsequent assessment in respect of the same matter [Clause 7]. This complements paragraph 14ZAZA(2)(a) which specifies that a rulee may not object against a ruling where an assessment has been made in respect of the year of income relating to the arrangement dealt with by the ruling. A new provision, subsection 14ZW(1A) prescribes the time period within which a taxpayer can object against a Private Ruling. [Clause 8]

The commencement of this Act is specified in Clause 2 of the Bill to be the date of Royal Assent to the Bill. Applications for Private Rulings will be able to be made on or after or 1 July 1992 in respect of arrangements entered into on or after the later of that date or the commencement of the Act. [Clause 13]

The Bill also inserts new provisions in Part V of the Administration Act to ensure that the validity of a Private Ruling is not affected by non compliance with Part IVAA of that Act, and that the production of a notice of, or a notice of the withdrawal of, a Private Ruling or a signed copy of such a notice is conclusive evidence of the proper making of the ruling. [sections 15AA and 15AB - Clause 11]

Income Tax Assessment Act

The Bill inserts new sections into the ITAA which provide for the binding effect on the Commissioner of Private Rulings dealing with income tax (including withholding taxes and Medicare levy) and franking deficit tax, and to resolve which binding effect applies where there are conflicting rulings. As the Commissioner will be bound by the ruling, the tax that would be payable by the taxpayer will be reduced to reflect the ruling or rulings. Questions of conflict are resolved by providing the taxpayer with the greatest benefit consistent with all relevant rulings. [sections 170BB, 170BC, 170BE and 170BF - Clause 22]

New sections 170BG and 170BH provide that a decision of the AAT or a court order which is final is legally binding and conclusive as to the application of the ordinary provisions of the law to an actual transaction not materially different from the proposal or arrangement to which the Private Ruling related. Section 170BI deals with discretions. [Clause 22]

The relevance of Private Rulings to the new penalty provisions is specifically dealt with by new section 226M in respect of income tax [Clause 31] and new section 160ARZE in respect of franking deficit tax [Clause 18].

This new system of binding and reviewable Private Rulings supersedes the current system whereby taxpayers can, by raising in their return a question that is relevant to their liability to tax, require the Commissioner to give attention to that question. Accordingly, the Bill amends subsection 169A(2) of the ITAA so that it does not apply where the taxpayer is entitled to apply for a Private Ruling under Part IVAA of the Administration Act. [Clause 19]

Fringe Benefits Tax Assessment Act

Similar provisions dealing with the binding nature of Private Rulings, conflicting rulings and the conclusive effect of a final AAT decision or court order are to be found in new sections 74B to 74F of the FBT Act. [Clause 36]

Objections

As indicated above, where a rulee has objected against a Private Ruling in respect of a matter, the rulee is precluded from objecting against an assessment in respect of the same matter. [section 14ZVA of the Administration Act - Clause 7]

A taxpayer can object against a Private Ruling in the manner set out in Part IVC of the Administration Act but must do so within the later of 4 years after the last day allowed for lodging the relevant return or 60 days after receipt of the Private Ruling. [section 14ZAZA and subsection 14ZW(1A) - Clauses 4 and 8]

The Bill also amends the Administration Act to extend the period for lodging an objection against fringe benefits tax, franking deficit tax and income tax assessments and related determinations to 4 years from the notice of the taxation decision [subsection 14ZW(1)], or, where a taxation objection relates to an amendment of these assessments or determinations, the taxpayer has the later of 4 years from the original notice of assessment or determination or 60 days from the notice of the amended assessment or determination, within which to lodge an objection [subsection 14ZW(1B)]. If an assessment or determination has been amended more than once, the relevant notice of the assessment or determination is the first notice [subsection 14ZW(1C)]. Other taxation objections retain the 60 day objection period (existing subsections 14ZW(1)(a), (b) and (c)). Consequential changes are made to subsections 14ZW(2) and (3) to include a reference to the 4 year objection period. [Clause 8]

Similarly, consequential changes are made to section 14ZX (applications for extension of time to object), and section 14ZY (decisions on taxation objections) to include a reference to the 4 year objection period. [Clauses 9 and 10]

These amendments of the Administration Act are to apply to taxation objections against assessments etc. for the income year, franking year, or year of tax in which the later of 1 July 1992 or the date of commencement occurs and later years. [Subclause 14(2)]

Self Amendment

The Bill amends subsection 169A(1) of the ITAA so that the Commissioner will be able to accept a statement made by or on behalf of the taxpayer in a request for an amendment for the purposes of amending the taxpayer's assessment. [Clause 19]

Where the Commissioner has relied, in making a credit amendment, on a statement made by the taxpayer, the Commissioner will have 4 years from the service of the notice of amended assessment to increase the liability of the taxpayer in respect of the particular which was the subject of the amendment [subsection 170(1A) - Clause 20]. However, where the Commissioner increases the tax liability of the taxpayer in these circumstances, the taxpayer is not entitled to a further credit amendment in respect of the particular, other than by disputing the Commissioner's assessment. [subsection 170(5A) - Clause 20]

Understatement Penalties

Income Tax

The Bill repeals section 223 of the ITAA, which imposes penalties on taxpayers who make false or misleading statements [Clause 27]. However, the operation of section 223 is preserved for the 1991-92 and prior income years and substituted accounting periods for the 1992-93 income year that commenced before 1 July 1992. [Subclause 34(7)] Consequential changes are made to section 170AA. [Subclauses 21(c) and (d)]

The new penalty provisions will mainly apply where a tax shortfall is caused by the taxpayer's failure to exercise reasonable care in carrying out his or her tax obligations, or, for large items, by the taxpayer adopting a position which is not reasonably arguable.

The Bill introduces new tax shortfall provisions into Part VII of the ITAA which give rise to a liability to penalty:

Special rules will apply to the application of penalties in partnership and trust cases. The rules basically mirror the approach of the present subsections 223(2), 223(4) and 223(5) of the ITAA. [sections 226N to 226T - Clause 31]

The Bill also amends sections 224, 225 and 226 of the ITAA (the scheme sections), which deal with penalties applicable where anti-avoidance provisions apply, to modify the rates of penalty attracted and to include circumstances in which those rates will be reduced. Thus, sections 224 and 226 are amended to specify a rate of penalty of 50% of the difference between the tax properly payable by the taxpayer and the tax that would have been payable if the anti-avoidance provision had not been applied. However, where it is reasonably arguable that any pre-condition to the application of the anti-avoidance provision has not been met, or where it would be concluded that the opinion formed by the Commissioner was not according to law, the penalty is reduced to 25%. [Clauses 28 and 30]

A similar approach is taken to profit shifting cases covered by section 225, subject to the distinction already recognised in section 225 that profit shifting arrangements may or may not be entered into for the sole or dominant purpose of paying less tax. Under the amended section 225, where there is a dominant purpose of paying less tax, the rate of penalty is 50%, which is reduced to 25% where it is reasonably arguable that Division 13 of the ITAA does not apply. Where there is no dominant purpose of paying less tax the rate is 25% reduced in similar circumstances to 10%. [Clause 29]

The Bill introduces into Part VII a number of interpretational provisions. Section 222A defines such terms as 'tax shortfall', 'statement tax', 'proper tax' and 'taxation statement'. For example, tax shortfall generally means the difference between the tax that would be payable if it were assessed on the basis of the taxpayer's statements (after allowing for credits), and the taxpayer's proper tax for that year. Section 222B complements the definition of 'taxation statement' by picking up the definitions in existing subsections 223(9A) to (9F). Section 222D deals with the case where a taxpayer treats an income tax law as not applying. Section 222E provides that a taxation statement can apply to different years. [sections 222A to 222E - Clause 26]

Section 222C explains that a taxpayer's treatment of the application of a law will be 'reasonably arguably correct' for the purposes of provisions like section 226K and section 226L if, having regard to the relevant authorities and the facts of the case, it would be concluded that the treatment was about as likely as not correct. The section also provides guidance as to the operation of the reasonably arguable test in cases where the way in which an income tax law operates is dependent on the Commissioner exercising a discretion. This new section will also provide guidance on what is included within the scope of the word 'authority'. [Clause 26]

The Bill will ensure that taxpayers will not be subject to penalties where they had previously sought a Private Ruling from the Commissioner but had not received that ruling at the time the relevant statement giving rise to the tax shortfall was made. Similarly, taxpayers will not be penalised where they act on advice provided by taxation officers or on general administrative practice [sections 226U and 226V - Clause 31]. Taxpayers will also be protected from scheme penalties in the same circumstances. [sections 226A and 226B - Clause 31]

Where 2 or more shortfall sections apply to a particular shortfall, the taxpayer is only liable for whichever is the highest penalty applicable under those sections. [section 226W - Clause 31]

The penalty applicable to part or all of a tax shortfall is increased by 20% of the relevant penalty where there are aggravating factors [section 226X - Clause 31]. The penalty payable where a scheme section applies in similar circumstances will also be increased in the same way. [section 226C - Clause 31]

Where a taxpayer notifies the Commissioner about all or part of a shortfall after being informed of a tax audit, the amount of penalty applicable to all or part of the shortfall, as appropriate, is reduced by 20% where this could reasonably be expected to save the Commissioner a significant amount of time or resources [section 226Y]. Where there is a voluntary disclosure by the taxpayer before being notified of an audit, the relevant penalty is reduced by 80% or, where the penalty would be less than $1 000 - to nil [section 226Z]. The Commissioner may treat a disclosure under section 226Y to be a disclosure under section 226Z where appropriate [section 226ZA - Clause 31]. Similar provisions deal with disclosure where a scheme section applies, but there is no reduction to nil. [sections 226D, 226E and 226F - Clause 31]

Section 226ZB will provide that the minimum amount of penalty under Part VII is $20. [Clause 31]

A similar approach to that which presently exists will apply to taxpayers who use tax agents. That is, taxpayers will be vicariously liable for penalty in respect of the culpable errors of their tax agents [sections 226G, 226H and 226J - Clause 31]. Taxpayers will continue to have available the remedy under section 251M of the ITAA, which will be amended to refer to interest payable by the taxpayer under section 170AA or section 207A. [Clause 32]

The Commissioner will retain the remission power provided by section 227 of the ITAA.

Franking Deficit Tax

The Bill will introduce into Division 11 of Part IIIAA provisions, similar to those to be included in Part VII, to deal with tax shortfalls in relation to franking deficit tax:

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sections 160ARXA, 160ARXB and 160ARXC deal with interpretational matters; [Clause 17]

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sections 160ARZA, 160ARZB, 160ARZC, 160ARZD and 160ARZE are the franking tax shortfall sections; [Clause 18]

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sections 160ARZF and 160ARZG apply where the taxpayer had previously sought a ruling or relied on ATO advice or practice; [Clause 18]

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sections 160ARZH deals with the case where 2 or more shortfall sections apply; [Clause 18]

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section 160ARZI deals with aggravating factors; [Clause 18]

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sections 160ARZJ, 160ARZK and 160ARZL deal with voluntary disclosures. [Clause 18]

Rights of objection and review

The Bill will amend the Administration Act to ensure that taxpayers have full rights of objection, review and appeal whatever amount of penalty is involved. [section 14ZS - Clause 6]

Commencement date

The new penalty provisions will apply to tax shortfalls and franking tax shortfalls in relation to a year of income or franking year that commences on or after 1 July 1992, excluding substituted accounting periods that commenced before 1 July 1992, where those shortfalls are caused by acts or omissions after the date on which the Bill receives Royal Assent. [Subclause 34(2)]

Interest

Payment of interest by taxpayer where assessment amended

The Bill amends section 170AA of the ITAA to require taxpayers to pay interest, at such rate as is specified in new section 214A, where there is an amendment to an assessment or determination, irrespective of whether the taxpayer is liable to penalty under

Part VII [subsections 170AA(1AA) and 170AA(2) - Clause 21]. The Bill also ensures that for relevant entities, section 170AA interest will be payable from the prescribed due date for payment of tax for the relevant year of income. [subparagraphs 170AA(4)(a)(i), (ia) and subsection 170AA(7) - Clause 21]

The Commissioner retains the power to remit interest under subsection 170AA(11) of the ITAA.

The changes apply to assessments for the 1992-93 year of income and all subsequent years of income. [Subclause 34(4)]

The Interest on Underpayments Act is amended to make it clear that it only imposes any interest which is a tax that is payable under the ITAA. [Clause 38]

Penalty and interest for unpaid tax

The Bill amends section 207 of the ITAA by reducing the rate of penalty applicable where tax remains unpaid after the time it becomes due and payable from 20% to 8% per annum [amended section 207 - Clause 23]. The Bill also ensures that in respect of relevant entities, penalty will apply from the prescribed due date for payment of tax for the relevant year of income. [subsection 207(1AA) - Clause 23]

Interest on a judgment debt is not to be offset against the section 207 penalty. [subsection 207(1B) - Clause 23]

The Bill ensures that section 207 will apply to interest under section 170AA. [subsection 207(3) - Clause 23]

The Commissioner retains the power to remit the penalty under subsection 207(1A).

The Bill introduces a new section 207A into the ITAA which requires a person to pay interest at the rate prescribed in the new section 214A on unpaid tax. For the purposes of this section, 'tax' includes interest under section 170AA and penalty under Part VII. The Commissioner will be entitled to remit the interest having regard to criteria specified in subsection 207A(2). Notwithstanding section 207A, the Commissioner can sue for recovery of tax that is due and payable. Where a judgment debt carries interest, that interest can be offset against the interest payable under section 207(A). [section 207A - Clause 24]

Consequential amendments are made to the ITAA as specified in Schedule 3. [Clause 33]

The amendments to section 207 and section 207A apply to late payments of tax in respect of the 1992-93 year of income and all subsequent years of income. [Subclauses 34(5) and (6)]

Interest Rates

The Bill inserts a new section 214A into the ITAA which specifies that the interest rate for the purposes of section 170AA and section 207A is to be the weighted average yield for the 13 Week Treasury Note plus 4%. Section 214A also deals with the notification of the rate, its determination and the Treasurer's ability to determine the rate that should be applicable. [section 214A - Clause 25]

Deductibility of interest

The Bill will make expenditure that consists of interest under section 170AA or section 207A an allowable deduction for all taxpayers. [subsection 51(5) - Clause 16]

Elections

The Bill amends the ITAA in relation to the election and notification provisions specified in Schedules 1, 2 and 4 of the Bill in the manner set out in those schedules. [Clause 33]

The amendments to the election and notification provisions specified in Schedules 1 and 2 do not apply to elections made before the later of the date of Royal Assent or 1 July 1992. [Subclauses 34(9) and (10)]

Other Amendments

Consequential amendments to the ITAA are made by Clause 33 of the Bill. These amendments are set out in Schedule 4 and their commencement date is specified in clause 34.