Ethics after Petroulias – a suggested approach

In a speech in November 1998, the Tax Commissioner made two admissions or acknowledgements that have largely gone unnoticed. Yet they are of breathtaking significance.

First, the Commissioner acknowledged "that many participants [in the schemes proposed to be attacked] have become involved in the arrangements believing them to be perfectly legitimate. [T]hey were not tax experts [and] had relied on others in making the investments".

I don’t believe that the Tax Office would have even contemplated such an acknowledgement had there been in the market place, at the relevant time, any public expression of the Commissioner’s view that could have served as a warning of potentially adverse tax consequences.

The second acknowledgement is far more significant. It appears to relate to employee benefit arrangements. The Commissioner’s words were that the Tax Office acknowledged "that in giving past advice we have not always adequately identified the issues". In my translation, the Commissioner is conceding that some of the advice given in the past on employee benefit arrangements was wrong. He then went on to state: "As is our practice, positive advice previously given will hold for the past unless there is good reason to do otherwise, for example where the arrangements were not implemented as proposed."

On 19 May 1999, the Commissioner issued a media release threatening to issue assessments at multiple taxing points against entities involved in "aggressively marketed employee benefit arrangements". Taxpayers were offered the opportunity of coming forward voluntarily in return for the imposition of a reduced penalty and a single tax liability.

The Commissioner stated that, while the Tax Office remained bound by its private binding rulings, he had, in his words, "considered whether the balance of the public interest was in not adhering to [our advance] opinions … In the end event I have not felt the need to reach a conclusion on this because we consider that these advance opinions are unlikely to have any practical application. This is because the arrangements we have seen have not been implemented according to the facts presented".

Following the laying of criminal charges against Nick Petroulias the Commissioner issued a media release on 27 March 2000. It said in part that "an unlawful ruling is not binding on the ATO". The Commissioner went on to say that those unwittingly caught up in the illegal activities of others would receive sympathetic treatment from the Tax Office – but apparently only in relation to penalties.

In a subsequent article in The Australian on 31 March 2000, Michael Carmody confirmed that "full consideration will be given to the individual circumstances of any investor who may be unwittingly affected". He did not suggest that this consideration would be limited to remission of penalties. Furthermore, the Commissioner stated that he "will be seeking broad advice before taking a decision".

The Commissioner will eventually consider the cases of taxpayers who have relied on varying forms of advice from the Tax Office when entering into what the Commissioner described as "aggressively marketed employee benefit arrangements." The Taxpayers’ Charter and the broader ethical standards of public administration will have to be applied to the facts. How should the Commissioner proceed?

1. As a matter of law, the Tax Office will be bound by a private binding ruling where its terms are strictly adhered to. Only the person to whom the ruling is addressed will be able to rely on it.
2. In the Commissioner’s view, an unlawful ruling is not binding. However, the Commissioner is obliged to treat taxpayers fairly. The Tax Office should consider itself administratively or ethically bound to treat such a ruling as binding where neither the taxpayer nor an agent of the taxpayer was involved in any illegal or fraudulent activity. If the Commissioner adopted any other view he would be implying that, in dealing with the Tax Office, taxpayers should inquire whether the ruling relevant to them is unlawful because of factors that may even include fraud in the Tax Office. One analogy is with what the law calls a "bona fide purchaser without notice".
3. It is most unfortunate that the Commissioner of Taxation even contemplated resiling from advance opinions. These are considered administratively binding and it would be quite unreasonable, unethical and unconscionable for the Commissioner to repudiate the opinions simply because he subsequently formed the view that they were incorrect.
4. Clearly the Commissioner will not, and ought not, be bound by private binding rulings or advance opinions where the arrangements have not been implemented according to the facts presented.
5. But I do not think the Commissioner can stretch that guiding standard as far as he appeared to do in his statement of 19 May 1999. While in many instances the rulings may not be binding for the reasons stated, I have no doubt that in some instances the arrangements provided genuine retirement income. In such cases there would be little or no scope for the operation of Part IVA.
6. I have seen advance opinions and rulings going back as far as 1991 that confirm a technical view of the operation of the law that is quite at odds with the legal analysis that accompanied the Commissioner’s media release of 19 May, 1999. I believe a full review by the Tax Office will disclose that the technical view reflected in the advance opinions and rulings was the generally accepted Tax Office view, at appropriate levels of seniority, well before Nick Petroulias arrived on the scene. If this is the case then the Tax Office should consider itself bound by this technical view in respect of all arrangements entered into until the date upon which the Commissioner announced that the relevant advance opinions and rulings were being withdrawn.It is appropriate that this approach be applied across the board to all taxpayers – not only those to whom the advance opinions or rulings were addressed.I have considered the technical views reflected in the relevant opinions and rulings and I am in no doubt that they are in sharp conflict with the policy underlying the law. The Tax Office should never have embraced these technical views. One of the general ethical principles of public administration is that administrators’ actions should be rationally related to public policy decisions. If the Tax Office considered that these technical views were correct, the Commissioner should have immediately informed the Government and recommended an appropriate change in the law.The Taxpayers’ Charter commits the Tax Office to achieving an equitable outcome for each taxpayer having regard to his or her individual circumstances. The Commissioner is ethically obligat to ensure that his approach is sufficiently flexible to guarantee that appropriate consideration can be given to those taxpayers whose circumstances are special or otherwise fall outside those contemplated in his media release.

If the Tax Office reneges on previous advice in circumstances where taxpayers have reasonably acted on that advice to their detriment, the Tax Office will fail to meet its ethical obligations. But more than that, it will harm itself by diminishing its reputation and its legitimacy. This is a sensitive time for tax administration. In my view, Australia’s tax system is currently unmanageable and will remain so for the next couple of years. It is most unlikely that the Government, Treasury and the Tax Office will be able to marshall the resources necessary to bring into effect, in an acceptable way, both the GST and the Reform of Business Taxation within the announced time frames. The deadlines will create pressure on politicians and bureaucrats that will lead to badly drafted legislation, with all the cost and delays that flow from that.

This is an environment in which the Tax Office can ill afford to diminish itself.

A retrospective change to the Tax Office’s interpretation of tax legislation is even less acceptable than retrospective tax legislation. At least the latter carries the imprimatur of the Parliament.

In these difficult times, one clause of the Taxpayers’ Charter requires special attention. In the Charter the Tax Office states that "if the application of the law causes unintended consequences, we inform the Government of those consequences". Over the next couple of years, there will be considerable scope for the Tax Office to inform the Government of anomalies and unintended consequences. I trust the Tax Office will do so efficiently and expeditiously, irrespective of whether or not the unintended consequence is to the benefit or detriment of the revenue.