The Australian Taxation Office (ATO) has recently released further guidance on the Commissioner of Taxation’s remedial power (CRP). The statutory power, which is contained in Division 370 of the Taxation Administration Act 1953 (Cth), enables the Commissioner to modify the operation of the taxation laws to ensure that their purpose or object is met. Taxation laws include income tax, superannuation, goods and services tax, and fringe benefits tax.
The power is one of last resort where the Commissioner has been unable to interpret the law, or exercise his general powers of administration, to achieve intended outcomes (or to avoid unintended outcomes), or where changes to the law itself are not practical due to time constraints or uncertainty as to whether the legislative process will deliver the desired amendments.
Not surprisingly, there are some parameters around the exercise of the CRP. Firstly, the Commissioner can only modify the operation of the taxation laws. The Commissioner is not empowered to directly amend the text of the legislation nor its underlying purpose or object. Furthermore, the modification must:
- not be inconsistent with the intended purpose or object of the provision;
- be considered by the Commissioner to be reasonable, having regard to both the intended purpose or object of the provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object; and
- have a negligible impact on the Commonwealth Budget as advised by specified government advisers.
Taxpayers cannot compel the Commissioner to exercise the remedial power; it is discretionary. A further limitation is that it can only be used to resolve issues that arise for all entities or for a specified class of entities. It cannot be used to modify the application of a taxation law for a particular entity. Having said that, to ensure that no entities are adversely affected by a modification to how a taxation law operates as a result of the exercise of the CRP, an entity must disregard the modification if it would produce a less favourable outcome as compared to the law’s unmodified operation. A modification also does not affect a right or liability of an entity under a court order.
The ATO previously provided a list of the limited circumstances in which the CRP had been applied. So far, it has been exercised three times:
- To allow a vendor of ‘taxable Australian property’ such as Australian real property to claim a credit in the appropriate year of income for any foreign resident capital gains tax withholding that the purchaser may have withheld from the consideration for the disposal in a manner that reduces compliance costs where the transaction straddles two income years;
- To ensure that relief is provided for all direct income tax consequences where there is a small business roll-over. For example, in the absence of the exercise of the CRP, if a company which is a ‘small business entity’ restructures by transferring its assets to its sole shareholder, the income tax law only provides relief from some, but not all, adverse income tax consequences; and
- To allow ATO officers to provide information about a deceased taxpayer’s tax affairs to representatives of executors and administrators to enable them to attend to obligations such as lodging a final individual tax return for the deceased and preparing the tax return of the estate.
In its latest guidance, to provide additional transparency on when a submission for exercise of the CRP might be suitable, the ATO has provided an index of circumstances where the CRP has not been applied. There have been far more instances of the Commissioner not exercising the power to modify the operation of a taxation law – 23 are listed in the index as compared to the 3 where the power has been exercised. These include the Commissioner not exercising the CRP to:
- Create an entitlement to interest on overpayments where the Commissioner amends the rate of withholding tax applicable to foreign residents;
- Exempt certain individuals from the five-year record-keeping requirement;
- Allow the foreign exchange election in the taxation of financial arrangement rules to apply retrospectively to fix errors made in classifying realised and unrealised foreign exchange gains;
- Allow a broader discretion to disregard minor technical breaches by not-for-profit entities to provide certainty on their entitlement to the income tax exemption;
- Allow chains of foreign trusts with companies as the ultimate beneficiaries to lodge a single tax return with tax payable at the corporate rate of tax. The position remains that each entity in the chain must lodge separate tax returns with any foreign trust individually paying tax at 45% but with a credit for that tax being available to the upstream entity;
- To modify the formula to calculate the entitlement of a partner in an early stage venture capital limited partnership (ESVCLP) to the tax offset in Subdivision 61-P of the Income Tax Assessment Act 1997. The amount of the tax offset is broadly equal to 10% of the lessor of (a) the partner’s contributions to the ESVCLP for the income year; and (b) the ‘investment related amount’ being a ‘partner’s share’ of the amount of eligible investments made by the ESVCLP. This formula means that partners who join an ESVCLP in a later income year may be entitled to a reduced tax offset because the partner’s share is based on the entire capital of the ESVCLP.
With many of the cases where the CRP has not been applied, this was because it would have been inconsistent with the intended purpose or object of the relevant provision, or would have contravened the requirement that it cannot be used to modify the operation of a taxation law for a single entity. In some of the cases, the issue was addressed through amendment to the law making the exercise of the CRP unnecessary.
While the CRP has so far only been used to modify the operation of a taxation law in a handful of instances since it took effect on 1 March 2017, it is nevertheless another potential avenue which taxpayers can explore in seeking a sensible interpretation of the taxation law. Furthermore, even though the Commissioner may not exercise the CRP to resolve a particular issue, simply submitting the issue as a possible candidate for resolution using the power may expedite a required change to the law. This was recognised in the explanatory memorandum to the bill which introduced the CRP where it was anticipated that the power would reduce the time it takes to give effect to some minor legislative corrections and may, where appropriate, allow for some minor technical corrections to be addressed where this may not otherwise occur.
Where the Commissioner becomes aware of an issue that is a potential candidate for an exercise of the CRP, which may be from taxpayers but could be from internally within the ATO, the issue will be referred to a technical advisory group (consisting of private sector specialists, and ATO and Treasury representatives) whose purpose is to advise the Commissioner on the operation of the power. The Commissioner would also, prior to exercising the power, conduct public consultation typically for a period of 4 weeks by publishing the draft legislative instrument on its website and issuing subscriber alerts. The Board of Taxation would also be consulted on matters such as the appropriateness of the CRP to resolve the issue.
In summary, where a taxpayer is concerned that the taxation laws are operating in an unintended way or resulting in unforeseen outcomes, an initial step might be to approach the Commissioner to see if he can give effect to the purpose or object of the law through applying conventional principles of statutory interpretation or by exercising his general powers of administration. Failing that, the CRP is potentially another arrow in the taxpayer’s quiver that may allow the laws to be administered consistently with their purpose or object, or at least facilitate a more timely change to those laws.
In light of this additional guidance from the ATO on the CRP, taxpayers should review positions that they have taken where they considered the application of a taxation law might have been unclear or not in line with its intended purpose or object. Please contact one of our tax experts if you would like to understand the scope of the CRP and its potential application to your circumstances.