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For at least two decades Australia has had a self-assessment tax system. In this system, the binding rulings regime introduced in 1992 and revised in 2006 is essential for ensuring “[t]axpayers should gain confidence that they are assessing their tax liabilities in line with the ATO’s interpretation.”

Taxpayers may obtain a binding private ruling under Part 5-5 of the Taxation Administration Act 1953 (TAA). These rules were “intended to effect a profound reform in revenue law and practice, both within the Commissioner’s office and amongst taxpayers.

The Commissioner is bound by the view of the law expressed in a private ruling that applies to the taxpayer and on which the taxpayer relies (s 357-60). The existence of a ruling “will govern the assessment that issues in due course” to the taxpayer.

When can the Commissioner alter a private ruling?

The Commissioner can alter a private ruling if he is satisfied the taxpayer’s circumstances have “materially changed” from those that existed at the time the ruling was issued.

This can be done either by issuing the taxpayer with a revised ruling, or a tax assessment contrary to the original ruling. This was confirmed by the Full Federal Court in the 2011 case of Mount Pritchard. After being ruled a tax-exempt body, the taxpayer was subsequently assessed to tax in the amount of $437,000 because it was determined that the taxpayer’s amalgamation with sporting bodies (that it was previously affiliated with) amounted to a material change in circumstances.

Formation of opinion about the taxpayer’s circumstances is thus an essential step informing the Commissioner’s decision to revise a private ruling under s 359-55(1). It follows a presumption of procedural fairness limits the power to revise because alteration of a ruling is apt to adversely affect the right of a person to rely on the earlier favourable ruling,

Failure to accord the adversely affected taxpayer with procedural fairness constitutes jurisdictional error for which the taxpayer may seek judicial review relief under s 39B(1) of the Judiciary Act. This would allow the court to prevent detriment for the taxpayer from the inability to make representations to the Commissioner. In an oft-cited passage from a 2003 High Court decision, Gleeson CJ said:

A common form of detriment suffered where a decision-maker fails to take a procedural step is loss of opportunity to make representations… it is the existence of a subjective expectation, and reliance, that results in unfairness … [which] is essentially practical.

Since the High Court decision in Futuris in 2008, jurisdictional error relief has significantly narrowed, essentially, to instances where bad faith of the Commissioner in the administration of the Tax Act is alleged. Bad faith is extremely hard to prove and, not surprisingly, is overwhelmingly rejected by the courts.

Can the Commissioner be estopped from altering a private ruling?

In most cases, there is a lack of effective recourse for the taxpayer who has a private ruling in alleging jurisdictional error. And there is no opportunity to object to the making of a revised ruling under Part IVC TAA. (s 359-60 TAA)

However, the “animating principle” from City of Enfield (2000) directs that “courts should provide whatever remedies are available and appropriate”.

Therefore, it is suggested that declaratory relief in the form of estoppel under s 39B(1A)(c) of the Judiciary Act could serve as proxy for judicial review relief. This could effectively prevent the Commissioner resiling from a private ruling without first giving the adversely affected taxpayer an “opportunity to object”. The purpose of administrative estoppel is to compel the Commissioner to adhere to the presumption of procedural fairness conditioning the power to revise.

This draws on the private law notion of equitable estoppel, whose “basal purpose … is to prevent a detriment to the party asserting the estoppel by compelling the opposite party to adhere to the assumption upon which the former acted or abstained from acting”.

Administrative estoppel yet to be established in Australia

The notion of administrative estoppel is not new. In England, it has evolved sufficiently “to stand upon its own two feet”. In Australia, however, “[n]o doctrine of administrative estoppel has [to date] emerged.”

Nevertheless, it is well recognised that estoppel “may conceivably have a role in administrative law.” In Winters, Moynihan J gave company directors leave to allege a “limited estoppel” as a defence to directors penalty notices issued by the Deputy Commissioner of Taxation.

One of the biggest obstacles in raising estoppel against a public authority in Australia has been the absence of suitable facts. A further obstacle in the taxation field is the well-known principle from Wade that “[n]o conduct on the part of the Commissioner can operate as an estoppel against the operation of the Act.” This was subsequently applied by the Full Court in Bellinz to exclude estoppel in relation to public rulings.

However, the element of reliance by a particular taxpayer is much stronger in the context of a private ruling issued to that taxpayer, where the taxpayer reasonably relies on the Commissioner’s interpretation of the law in relation to an agreed set of facts and circumstances.

When raising estoppel against a public authority, English courts invoke the abuse of power doctrine. This doctrine was disavowed for Australia in Ex parte Lam.

However, the statutory objective to limit “the ways the Commissioner can alter rulings to a taxpayer’s detriment” mandates that courts should be able to provide ‘available and appropriate’ relief for the practical injustice suffered where the Commissioner fails to take the required procedural step. In Australia, the “concern of the law is to avoid practical injustice”.

To successfully argue estoppel in equity, the aggrieved party must be able to establish six elements. These were expounded by Brennan J in Waltons Stores but may be distilled into two essential elements – detrimental reliance and unconscionability.

The detriment that befalls a taxpayer when the Commissioner alters a private ruling relates both to the failure to be afforded procedural fairness and the inability to rely on the ruling. To establish administrative estoppel, the taxpayer must also be able to demonstrate that its decision to obtain a private ruling was “so influenced” by the assurance or assumption of procedural fairness that it would be unconscionable to permit the Commissioner to resile from the assumed state of affairs.

In Mount Pritchard, it is conceivable the taxpayer was induced to alter its position to its detriment by proceeding with the amalgamation with other sporting bodies and informing the Commissioner of these steps, while assuming (as is common and reasonable) that it could still rely on the original ruling. At least, the taxpayer should have had the opportunity to make representations about why the amalgamation did not constitute a material change sufficient to warrant withdrawal of the private ruling.

A pleading in administrative estoppel would sidestep the Futuris limitation in respect to bad faith. It would invoke the Court’s extended original jurisdiction under s 39B(1A) to grant declaratory relief in respect to “any matter” arising under any laws that apply to circumstances that happened or are about to happen.

On this basis, Courts will be in a stronger position to ensure the Commissioner always acts within the limits of his authority before altering a ruling on which the taxpayer relies.

 

This post is based on my papers published in (2016) 39 UNSWLJ 1096-1126 and (2017) 46 AT Rev 242-270.

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