Commissioner's discretion to decline making a ruling on application of section GA 1

2012 amendment to the Tax Administration Act allows the CIR to decline to provide a ruling on how the reconstruction provision applies.

Section 91E(3B) of the Tax Administration Act 1994

New section 91E(3B) will allow the Commissioner to decline to provide a ruling on how the reconstruction provision in section GA 1 of the Income Tax Act 2007 applies or would apply.


The purpose of the binding rulings regime is to allow taxpayers who apply for a ruling to obtain certainty on how taxation laws apply to an arrangement disclosed to the Commissioner. It is intended that in most cases rulings will be sought and obtained before entering into the arrangement.

If the Commissioner rules that an arrangement is a tax avoidance arrangement, under the existing law the Commissioner may also be asked by the applicant to rule on how section GA 1 will apply. Section GA 1 is the reconstruction provision which allows the Commissioner to adjust the taxable income of a person affected by an arrangement in order to counteract a tax avoidance arrangement.

New section 91E(3B) gives the Commissioner a discretion to decide not to rule on the application of section GA 1. The discretion is unlikely to arise as an issue very often because it would require the Commissioner to take a position that an arrangement is avoidance and for a taxpayer (who still enters into such an arrangement) to seek a ruling on how the reconstruction power will apply.

In order to rule on section GA 1, the Commissioner will need to undertake a thorough investigation of the arrangement, including the persons who may be affected by the arrangement, and other likely situations which might have arisen had the tax avoidance arrangement not been entered into. This can be a lengthy process and rulings are not intended to be investigations or audits, nor is it appropriate or feasible for the Commissioner to handle rulings in that way. Often, because of timing issues, the tax advantage will not have fully crystallised or be able to be properly quantified until a full audit or investigation occurs. In addition, a ruling on section GA 1 could be used to constrain the Commissioner's ability to argue on the appropriate reconstruction in the context of the tax disputes process. Given the difficulty of arguments regarding counterfactuals and reconstruction, this may be undesirable.

A tax avoidance arrangement may affect more than one person. Accordingly, the Commissioner may need to adjust the taxable income of a number of people in order to appropriately counteract the tax advantages obtained. A taxpayer who is not a party to a tax avoidance arrangement can still be subject to the Commissioner's reconstruction power if they have obtained a tax advantage from the arrangement, even though they may not be aware that they have benefited from the arrangement. These matters can be difficult to determine using the binding rulings regime for complex arrangements involving multiple parties (who may not be applicants). This difficulty will be even more pronounced if this involves prospective arrangements.  

If an applicant for a ruling were able to require the Commissioner to rule on section GA 1, the Commissioner would have to rely on information (if obtainable) provided by the applicant about these other persons. The binding rulings regime is not the most appropriate way to determine what corrective adjustments may be required to be made to all taxpayers who have benefited, or would benefit, from a tax avoidance arrangement.

Given these difficulties, it will not always be feasible or appropriate for the Commissioner to rule in a definitive and binding manner on the application of the reconstruction power.

Key features

This section provides the Commissioner with a discretion to decide not to provide a ruling on how the reconstruction provision applies or would apply.

Application date

The new section will apply from the date of Royal assent, being 2 November 2012.