3.2 The specific exclusions as they affect the process for private rulings are contained in section 91E(4) of the Tax Administration Act 1994, and apply if:
- the application for the ruling would require the Commissioner to determine questions of fact;
- the person to whom the ruling is to apply is not seriously contemplating the arrangement for which the ruling is sought;
- the application is frivolous or vexatious;
- the matter on which the ruling is sought concerns a duty or levy that is due and payable or is being/should be dealt with under the competent authority provisions of a double tax agreement;
- a private ruling already exists in relation to the relevant arrangement and person that covers the timeframe in question;
- an assessment has been made for the relevant arrangement, person and timeframe;
- Inland Revenue is auditing or investigating how the taxation law applies to the relevant arrangement, person and timeframe;
- the application relates to an arrangement that is the subject of a notice of proposed adjustment;
- the Commissioner’s opinion is that insufficient information has been provided following a request for further information;
- the Commissioner’s opinion is that it would be unreasonable to make a ruling in view of the resources available;
- the application for the ruling would require the Commissioner to form an opinion on generally accepted accounting practice or commercially acceptable practice.
3.3 Similar exclusions apply to the process for obtaining a product ruling.
Question of fact
3.4 One of the key exclusions, section 91E(4)(a), applies when the application for the ruling would require the Commissioner to determine questions of fact. This exclusion is the predominant focus of this chapter. The discussion document, Binding Rulings on Taxation, explained the rationale for the exclusion in the following terms:
A rulings system is intended to provide certainty on the Commissioner’s view of the law. There are established common law principles as to what constitutes a “question of fact”, although the application of these principles can be difficult in practice. Determining whether an application gives rise to a question of fact will depend on the particular circumstances of each case. Nevertheless, the discretion is important because the Commissioner cannot be expected to give rulings on whether facts supplied by taxpayers are correct. [7]
3.5 Determining what constitutes a “question of fact” as opposed to a question of law is notoriously difficult. This chapter suggests how this boundary could be clarified in the binding rulings context so that certainty over whether a ruling can be provided is improved for both taxpayers and Inland Revenue.
The problem
3.6 An underlying principle of the binding rulings legislation is that the Commissioner should not have to determine whether facts provided by an applicant for a ruling are correct. This is because the Commissioner’s role is to rule on the application of the law to the facts in the arrangement outlined by the applicant. This legislative intent is supported by the fact that the rulings legislation applies to prospective transactions.
3.7 That said, on a more literal interpretation, section 91E(4)(a) could be argued to prohibit a ruling being made when doing so would expressly or implicitly require particular facts to be found to exist. In that case, the Commissioner may be unable to rule on fact-dependent issues such as the application of section BG 1 or other anti-avoidance provisions. This limitation could also apply to a consideration of the capital/revenue boundary or whether the taxpayer was carrying on a business.
3.8 Such an interpretation would be inconsistent with the understanding and application of the binding rulings provisions by taxpayers, tax practitioners and officials. It would also be inconsistent with the policy intent of binding rulings, which was clearly to allow determinations about tax avoidance to be made.
3.9 To remove the scope for such interpretations clarification of the circumstances in which a ruling application would require the Commissioner to determine questions of fact would therefore seem to be warranted.
3.10 We note, incidentally, that, in a similar way to the intended policy in New Zealand, the Australian legislation allows private rulings to be given on the basis of assumptions for which the relevant information has not been provided to the Commissioner provided those assumptions are brought to the attention of the applicant. [8] Rulings can also be made on an ultimate conclusion of fact that relates to a tax law – for example, on whether an activity is a hobby or business. [9]
Generally accepted accounting practice/commercially acceptable practice
3.11 The last exception in section 91E(4) – paragraph (j) – provides that a ruling may not be made if the application for the ruling would require the Commissioner to “form an opinion as to a generally accepted accounting practice or to form an opinion as to a commercially acceptable practice”.
3.12 The reason for the exclusion for generally accepted accounting practice is self-evident in that opinions on accounting practices are likely to fall outside the Commissioner’s specific sphere of expertise in administering the taxation laws.
3.13 The exclusion for commercially acceptable practice was provided for the same reason. However, its scope is unclear. We consider that its application was intended to be, and should be, limited to those provisions in the tax legislation such as the financial arrangements rules in which it is explicitly used. Without this limitation paragraph (j) could possibly be interpreted to mean that any matter concerning commercially acceptable practice, including the application of section BG 1, which we have noted turns on questions of fact, could not be ruled on. This would be inconsistent with the policy noted above that rulings on section BG 1 ought to be able to be made.
Possible solutions
3.14 Possible legislative solutions for dealing with the uncertainties around questions of fact and commercially acceptable practice are:
- to list specifically the questions of fact on which the Commissioner cannot rule; or
- to give the Commissioner a discretion not to rule in relation to questions of fact (accompanied with a limitation to the scope of commercially acceptable practice).
Legislated criteria for when not to rule
3.15 The first option would involve an amendment listing the specific questions of fact on which the Commissioner may not rule. These specific questions of fact would include:
- A person’s intention or purpose – for example, in relation to the acquisition of land. (This would not include the purpose of an arrangement under anti-avoidance legislation.)
- A determination of the value of anything – other than under the transfer pricing provisions, which are specifically excluded from the ambit of section 91E(4)(a).
- What commercially acceptable practice is for the purpose of any provision of subpart EW (the financial arrangements rules) that refers to commercially acceptable practice. This exception would in effect clarify the application of section 91E(4)(j), which could consequentially be removed.
3.16 The intention or purpose of the taxpayer (as opposed to the intention or purpose of the arrangement) may be difficult to determine based on the facts provided by the applicant without incurring significant further administration costs and, for the applicant, compliance costs, including fees. Exclusion therefore seems warranted. The value of anything or what is commercially acceptable practice would be excluded because the Commissioner has limited expertise in these matters.
3.17 Specifically listing the matters on which the Commissioner may not rule will ensure that rulings can be issued for significant matters, such as whether an arrangement involves tax avoidance and the determination of the capital/revenue boundary. As is currently the case, the Commissioner, in making a binding ruling, would accept the facts as provided by the applicant. If the arrangement is entered into based on the binding ruling, the arrangement may be audited at a later stage. If there are any material differences between the facts in the ruling and the actual arrangement, the ruling would not apply.
3.18 This approach is also consistent with taxpayers self-assessing their tax liability, as broad legislative provisions in a tax system based on self-assessment may not provide taxpayers with adequate certainty.
3.19 On balance, this is the option officials prefer. We would welcome submissions on any other matters that should be included in the suggested list.
3.20 If the preferred option were adopted, a further amendment would be made to clarify that rulings will be based entirely on the facts advised to the Commissioner by the applicant and that, where any such facts are stated in the ruling, the Commissioner will not be treated as accepting those facts. This would further assist in addressing the seeming underlying difficulty with a ruling determining questions of fact.
3.21 A regulation-making power could also be introduced to allow for expansion of the matters to be excluded from being able to be ruled on. This flexibility would deal with any matters that may arise resulting from the changing business environment.
Commissioner discretion
3.22 An alternative option would allow the Commissioner not to rule if the application for the ruling would, in the Commissioner’s opinion, require the determination of questions of fact. Paragraph (j) would simply be amended by limiting the formation of an opinion on commercially acceptable practice to the provisions in the tax legislation that used that term.
3.23 This approach assumes the Commissioner is best placed to determine what can and cannot be ruled on as the Commissioner is able to take into account all relevant factors. The approach is also consistent with the observation of the 1994 discussion document on binding rulings that “if the operation of the rulings regime indicated that taxpayers were requesting rulings for the purposes of tax avoidance, the regime would have to be amended to guard against such abuse, perhaps by introduction of an additional discretion to decline to rule”. [10]
3.24 On the other hand, a discretion in relation to questions of fact could lead to uncertainty and may require guidelines on when the discretion would be likely to be exercised. A concern is that views on the application of the guidelines might differ and further “grey areas” would develop.
Summary of suggested options
Replace the current general prohibition on ruling on questions of fact (contained in section 91E(4)(a)) with a more limited list of factual matters on which the Commissioner cannot rule. They would include:
- A person’s intention or purpose – for example, in relation to the acquisition of land. (This would not include the purpose of an arrangement under anti-avoidance legislation.)
- A determination of the value of anything – other than under the transfer pricing provisions, which are specifically excluded from the ambit of section 91E(4)(a).
- What commercially acceptable practice is for the purpose of any provision of subpart EW (the financial arrangements rules) that refers to commercially acceptable practice. This exception would clarify the application of section 91E(4)(j), which could consequentially be removed.
An alternative option is to give the Commissioner a discretion not to rule in relation to questions of fact (accompanied by a limitation to the scope of commercially acceptable practice).
8 Schedule 1, section 357-110 of the Taxation Administration Act 1953.