Commissioner's power to issue a replacement ruling that operates retrospectively

Tax Administration Act 1994, sections 91E(4)(e) and 91F(4)(e)

1. All legislative references are to the Tax Administration Act 1994 unless otherwise stated.

Background

2. A private or product ruling may be issued that is incorrect because it contains an error not previously detected. This may be a factual error contained in the description of the arrangement, an error in the reference to the taxation laws applied, or an error affecting another aspect of the ruling.

3. Where the error is a minor or typographical error and its correction will not change the meaning of the ruling, section 91GI applies so the ruling may be corrected without being withdrawn and reissued. Where the error results in a materially different arrangement, the ruling will not apply as a result of sections 91EB(2)(a) and 91FB(2)(a), and a new ruling may be reissued for the same period.

Question

4. A question has been asked whether the Commissioner may withdraw a ruling and issue a replacement ruling that operates retrospectively for all or some of the same period as the withdrawn ruling if the withdrawn ruling contains an error that cannot be dealt with under section 91GI, the error is not material, and the Commissioner and the taxpayer consider that the error does not affect the technical conclusion reached, but agree that the error should still be corrected.

Answer

5. In these circumstances, sections 91E(4)(e) and 91F(4)(e) do not prevent the Commissioner from withdrawing a private or product ruling issued under the Income Tax Act 2004 or the Income Tax Act 2007, and issuing an amended replacement ruling with application for some or all of the same period as the previous ruling (apart from the period that the Commissioner is not able to issue a replacement ruling under the Income Tax Act 2007 for a ruling issued under the Income Tax Act 2004).

Analysis

6. The issue is whether the Commissioner may withdraw a ruling that contains an error (as outlined above) and then issue a replacement ruling, or whether this is in breach of sections 91E(4)(e) and 91F(4)(e) when an arrangement has been entered into and the replacement ruling is expressed to apply before the withdrawal of the original ruling. As noted above, this issue does not arise in the case of:
   • Errors that can be dealt with under section 91GI; or
   • Material errors subject to section 91EB(2)(a) or section 91FB(2)(a).

7. An example would be where a ruling is issued on 1 November 2005 with application from 1 November 2005 to 31 October 2007. On 1 December 2005, an error is discovered, and it is established that section 91GI cannot be applied, it does not result in a materially different arrangement, and the correction of the error will not affect the technical conclusions reached. The Commissioner and the taxpayer agree that the error should still be corrected; so on 6 December 2005, the Commissioner withdraws the original ruling, and then reissues the ruling on the following day with retrospective application from 1 November 2005 to 31 October 2007. The question is whether the Commissioner is precluded from issuing the replacement ruling, because in the period 1 November 2005 to 6 December 2005 the original ruling existed.

8. Section 91E(4)(e) states that the Commissioner may not make a private ruling if:

   A private ruling already exists on how the relevant taxation law applies to the person and the arrangement, and the proposed ruling would apply to a period or an income year to which the existing ruling applies.

9. Section 91F(4)(e) states that the Commissioner may not make a product ruling if:

   A product ruling already exists on how the taxation law applies to the arrangement, and the proposed ruling would apply to a period or income year to which the existing ruling applies.

10. This issue arises because sections 91E(4)(e) and 91F(4)(e) prevent the Commissioner from issuing a ruling when a ruling "already exists" that "applies" in that particular instance. It is unclear, in cases where the original ruling is withdrawn, whether the replacement ruling (when operating retrospectively) would breach this restriction. This is because it could be argued that when the replacement ruling is retrospective, the original ruling is still in "existence" in respect of that period. This may prevent the replacement ruling from operating retrospectively.

Sections 91E(4)(e) and 91F(4)(e)

11. Sections 91E(4)(e) and 91F(4)(e) act as a restriction on the powers of the Commissioner to issue a private or product ruling. Summarising these provisions, the Commissioner cannot rule if a private or product ruling "already exists" and the proposed ruling would "apply" to a period to which the "existing ruling" "applies". This difference in terminology suggests that Parliament intended to make a distinction between these terms. It is important to consider how these sections operate in light of this distinction. This terminology also indicates that it is important to note the point in time at which the Commissioner must have regard to the restriction. Under these provisions, the restriction on the Commissioner operates at the time of issuing the replacement ruling. This means that at that point in time, the Commissioner must consider whether a private or product ruling already exists, and whether the replacement ruling will apply to the same period as applies to the existing ruling.

12. This is supported by the term "already exists" being coloured by "existing ruling". The term "existing ruling" is in the present tense and suggests that the ruling needs to be in existence at the point in time at which the replacement ruling is to be issued. As both the phrases "existing ruling" and "already exists" are in the present tense, this would indicate that it is only necessary to consider whether a ruling exists at the point in time the Commissioner is about to issue the replacement ruling, not whether it has existed previously.

Plain ordinary meaning of "exists" and "applies"

13. The ordinary meanings of the terms "exist", "apply" and "withdraw" are consistent with this view.

14. The definitions in the Concise Oxford Dictionary (11th ed.) and Shorter Oxford Dictionary (5th ed.) indicate that for something to "exist" it must have an objective reality or being. These dictionaries define "withdraw" as meaning to take something back or away. The relevant definitions also refer to discontinuing or rescinding something so it no longer has effect (e.g. retracting a statement or expression, or rescinding a judgment). On this basis it can be argued that the relevant meaning of a "withdrawn" ruling is one that has been "cancelled" so that it no longer exists. The term "apply" in a legal sense can have a very specific meaning. However, in the context of sections 91EI(3)(b) and 91FJ(4)(b), it means to be relevant or operative in relation to that thing.

15. Applying the meanings of these terms when considering sections 91E(4)(e) and 91F(4)(e), the Commissioner cannot rule if a private or product ruling "has an objective reality or being" and the proposed replacement ruling would "be relevant or operative" in relation to a period to which the existing ruling applies. If the previous ruling has been withdrawn, then it will no longer "exist", meaning that it will not have "an objective reality" at the point that the Commissioner intends to issue a replacement ruling.

16. The Commissioner acknowledges that under sections 91EI(3)(b) and 91FJ(4)(b) a withdrawn private or product ruling (respectively) continues to "apply" for the remainder of the period or income year specified in the ruling, if the arrangement was entered into before the date of withdrawal. However, in the Commissioner's view, the continuing application of the withdrawn ruling does not prohibit the Commissioner from issuing a replacement ruling because of the distinction between the terms "exist" and "apply" as discussed above.

Wider statutory context

17. It is also notable that the original Rulings legislation included provisions dealing with the situation in which two or more private or product rulings applied to a person in relation to an arrangement (sections 91EA(2) and 91FA(2), now repealed). Under these sections, the taxpayer could choose which ruling the Commissioner would be required to apply. These subsections were repealed with application from 20 May 1999.

18. The repeal of these sections was explained both in the Commentary on the Bill and in a statement in Tax Information Bulletin Vol 11, No 6 (July 1999), which stated that these provisions were unnecessary and were repealed on that basis, and that where conflicting rulings exist, the taxpayer has the choice of which ruling to apply. These comments indicate that it was still envisaged that it would be possible to have a situation in which two conflicting rulings apply. That it was envisaged that two rulings could apply further supports the view that it is possible for a replacement ruling to operate retrospectively so that there are two rulings applying at the same time.

Purpose of the Rulings regime

19. The approach taken in this item is consistent with the purpose of the Binding Rulings regime, which is to provide certainty to taxpayers about the way the Commissioner will apply taxation laws and to help taxpayers meet their obligations under those laws. A ruling with an error in it may create uncertainty on the part of a taxpayer as to whether or not the ruling applies to their situation. In cases where section 91GI does not apply, the ability to withdraw the original ruling and then issue a replacement ruling that operates retrospectively provides a taxpayer with certainty about the correctness of the ruling.

Income Tax Act 2007

20. A particular issue arises for rulings issued under the Income Tax Act 2004 that are saved under the Income Tax Act 2007. The Income Tax Act 2007 came into force on 1 April 2008 and first applies to income derived in the 2008-09 income year.

21. Section ZA 4 of the Income Tax Act 2007 saves private or product rulings issued under the Income Tax Act 2004, if the application for the ruling was made before the beginning of the 2008-09 income year on an arrangement that is entered into, or that an applicant seriously contemplates will be entered into, before the commencement of the Income Tax Act 2007. Any ruling saved under section ZA 4 of the Income Tax Act 2007 may be withdrawn and replaced if the saved ruling contains an error that cannot be dealt with under section 91GI of the Tax Administration Act 1994, the error is not material, and the Commissioner and the taxpayer consider that the error does not affect the technical conclusion reached, but agree that the error should still be corrected.

22. However, after a taxpayer's 2008-09 income year begins, the Commissioner will not be able to issue a retrospective replacement ruling under the Income Tax Act 2007 for the same period as the ruling saved under section ZA 4. This is because the Commissioner will require a "fresh" application for the replacement ruling and this will be made after the beginning of the taxpayer's 2008-09 income year. Therefore, the Commissioner will be able to issue a replacement ruling under the Income Tax Act 2007 for a ruling issued under the Income Tax Act 2004 only with effect from, at earliest, the beginning of the taxpayer's 2008-09 income year.

Conclusion

23. Therefore, the Commissioner considers that sections 91E(4)(e) and 91F(4)(e) do not prevent the Commissioner from withdrawing a private or product ruling which contains an error of the type outlined above, and then issuing an amended replacement ruling that applies for some or all of the same period as the previous ruling (apart from the period that the Commissioner is not able to issue a replacement ruling under the Income Tax Act 2007 for a ruling issued under the Income Tax Act 2004 as outlined above). This is based on a consideration of the distinction between the terms "exist" and "apply", the timing requirement inherent in sections 91E(4)(e) and 91F(4)(e), and the wider context and purpose of the Rulings regime.