Summary of issues raised and responses
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:
Compendium
The ATO published responses to 12 submissions on this ruling in TR 2010/8EC. Outcome labels are heuristic — read the ATO response for the detail.
1Qualification of comments 1. 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. 2. 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.response provided
ATO response
Draft Taxation Ruling TR 2010/D3 only deals with the interpretative issues. The Practice Statement will deal with evidentiary issues which are beyond the scope of the TR. The Commissioner does not consider it necessary to provide a direct link to TR 2010/3 in the final ruling as the issue is covered by the paragraphs relating to common errors.
2General comments 1. It was intended that the requirements under subsection 109RB(1) would cover a wide range of mistakes or omissions. Accordingly, it is imperative that the ATO should not take an unduly restrictive approach to applying subsection 109RB(1). 2. Division 7A is a complex area of law and constantly changing. In view of the most recent developments (that is, TR 2010/3 and Tax Laws Amendment (2010 Measures No. 2) Act 2010 it is all the more essential that the ATO does not take an unduly restrictive approach as to whether an honest mistake or inadvertent omission caused the result produced by Division 7A. 3. 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) 4. 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). 5. 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. 6. 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. 7. 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: • Providing a direct link to TR 2010/3 in the final subsection 109RB(1) ruling. The ATO should make it clear that the incorrect treatment of a UPE (including a Section 2 loan) is an example of a technical issue that should be within the scope of subsection 109RB(1). • Providing taxpayers with a draft practice statement on the application of section 109RB for UPEs, as promised by the ruling compendium. The practice statement should (very broadly) outline instances where the ATO would expect the discretion to be applied in relation to UPEs (especially around Section two loans).