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In the absence of any draft Practice Statement as to how the ATO intends to exercise the discretion complete and final comments cannot be provided.

Without having reviewed the final practice statement on the administration of Taxation Ruling TR 2010/3: Income tax: Division 7A trust entitlements complete and final comments on the Draft Ruling cannot be provided.

A fundamental revision of the current ATO approach to the discretion it has been provided with (in section 109RB) is justified by the extensive changes to not only Division 7A itself (that is, in Tax Laws Amendment (2010 Measures No.2) Act 2010 but also in the ATO views on unpaid present entitlements in TR 2010/3. Taxpayers will now not only be playing on a new playing field but also with totally different goal posts. Taxpayers will not longer 'feel more confident they are acting within the law' (ATO's 2010/11 Compliance Program, page 37)

Applying an open approach to interpreting subsection 109RB(1) rather than a restrictive approach is consistent with the ATO's strategic direction to 'champion the promotion of voluntary compliance' and reduce taxpayer anxiety at having to comply with the division (see page 36 of the ATO Compliance Program 2010-11).

Taxpayers will not make voluntary disclosures and as a result the ATO will not be able to receive the correct amount of tax for preceding years without the need for expensive audits if taxpayers know that there is no scope for leniency and they will pay the maximum amount of tax possible even if they make a voluntary disclosure. Taxpayers will simply not make voluntary disclosures.

To reduce taxpayer anxiety at having to comply with Division 7A and avoid the need for the ATO to undertake expensive audit action the ATO should go back to administering section 109RB in a way that allows taxpayers to self-assess and apply the discretion themselves, as in the first year of operation of the section.

Section 109RB has an important interaction with TR 2010/3. The Ruling Compendium TR 2010/3EC provides linkages to the use of section 109RB for unpaid present entitlements (UPEs). The first is contained in Part B - item 4, where the ATO encourages taxpayers to apply for the Commissioner's discretion in relation to a Section two loan. The second is contained in Part I - item 5, where the ATO indicates that it will also provide administrative guidance on the application of section 109RB to UPEs. It is critical that the ATO deliver on what was contained in the ruling compendium. It is imperative that this is done by: