Tax Tip 413: When Should a Private Binding Ruling be Applied for?

There are really 2 occasions when a private binding ruling (or PBR) should be applied for from the ATO, and they are:


a) When the law is unclear, or

b) When you want to ask how the law will apply to your particular situation.


An example would be on something like deductibility of interest. The relevant legislation is section 8-1 ITAA97, but this section does not even mention interest. It relates to general deductions, of which interest is one. It is very certain that it applies to interest so in most cases it is very straight forward in claiming interest. But there are hundreds of different situations relating to interest deductions. The ATO has produced a large number of documents outlining their interpretations of the law for many of these situations, but not all.

As far as I know there is no ATO tax ruling or other document that says borrowing and parking borrowed money in a segregated offset account and then using that money to invest will result in the interest being deductible. There are perhaps 3 or 4 PBRs relating to this sort of situation, but they only cover the taxpayer who applied for the ruling and their situation will be different to your situation.


Therefore, if you want to borrow and park in an offset and later claim the interest you would then have 2 choices

a) Ask the Commissioner whether he would allow the deduction, or

b) Claim the deduction and hope you are no audited, and if you are audited make your argument as to why the interest should be deductible and hope the ATO accepts this argument.


In some situations, the first approach might be best, and in other situations the second approach.

Where the difference in tax between the 2 situations is large it might be best to ask so as to avoid the transaction if it will result in tax.

An example of this would be arguing a property is held by a person as trustee under a circumstantial trust. If the ATO accepts that person A holds it on trust for Person B the title to the property can be transferred without CGT being triggered. If there is no trust relationship then CGT event A1 would be triggered if title is transferred and this could result in hundreds of thousands of dollars in tax. If you know there would be tax payable you might just refrain from doing the transfer so it could be a good idea to apply for the ruling in advance.


Rulings take at least 28 days to obtain and often 2 or 3 months. So they are no always possible to get in time – someone might be buying a property and want to know if they structure the transaction in a certain way will the ATO accept that it is a trust and allow a transfer later without triggering CGT. You won’t have time do apply for a ruling along these lines if buying a property, unless the vendor was prepared to wait.

 

There's no ruling regarding the deductibility of interest in those example for a reason. Probably because there hasn't been any thorough audit on the matter or if there has the taxpayer has not challenged the decision.

Maybe there hasn't been many audits and taxpayers have been lucky and dodged the bullet. It's a matter of how lucky one feels lol.

 

However a binding private ruling request could be avoided or is best not obtained in some situations. Starting with personal tax advice may be wise.

1. A BPR that is badly prepared is useless. If anything is not totally disclosed the ruling will be invalid. Most taxpayers will often provide that type of request and ignore the chain of events
2. A BPR on a matter of fact is a waste of ATO resources and they may disregard the request. After 28 days it akin to a refusal to issue the advice.
3. Some requests may not fit within the scope of a ruling and may be general information or guidance etc. Can I deduct ? questions.The offset one is a good example. There isnt a use of borrowed funds...instead its a use of borrowed funds that have been held in a offset. There is a public interest reason there is no general ruling. It would be misinterpreted.
4. Some issues are not in the public interest. Eg requesting a ruling on a arrangement which appears scheme like but also legit. The ATO may not want to encourage such acts and may refuse a advance ruling if the transaction didnt actually occur. When it does occur they would expect complete information.
5. There are several forms of guidance and advice and rulings the ATO can give. Ask for the wrong one and they often correct it but dont have to. eg A product / class ruling may be needed for the issues of the arrangement.
6. The ATO will never a ruling in respect of the law. They can provide their opinion of the understanding of the law but they wont issue legal advice.
7. The ATO are often asked to allow things that the law doesnt allow. eg Commissioners discretion. Only specific elements of law give that and its very rare. Time and other limits usually apply

Seeking tax advice avoids declaring your position and receiving a adverse view. The taxpayer may later receive the protection from penalties for recklessness in such cases if tax advice was sought compared to just charging ahead. I often find this with self education. Aftre meeting with and advising the client I dispute that something is/isnt deductible. In some cases I do recommend that a ruling be sought to give clarity and address any areas of uncertainty regarding, for example, the taxpayers existing role and job.

 

I have never done PBR but is it true/urban myth that by applying for such, one would place himself on ATO radar net this its like putting crosshair target on self?

my friend has been getting tax advise about his expat non-resident status and the accountant said instead of any pre-emptive private ruling, he said its much more effective if/when ATO sends RFI (pre audit stage) to respond forcefully to shut it down. Apparently PBR attracts attention, but a forceful justification upon ATO enquiry shows one is prepared/ready to defend and "lawyered up" so ATO tends to back off (why spend resource on someone willing to fight on hard to proove case, instead you can pursue weak targets)

just wondered which has better outcome

 

Imagine there is a chocolate cake in the fridge and you ask your mum for a piece and she says no!. If you are going to sneak a piece you are more likely to get caught because she is aware you want it. And the punishment is going to be higher than had you just eaten a bit without asking.

 

I’ve dealt with hundreds and hundreds of expats and my experience is that the likelihood of an audit is less than 1%.

If there is significant money at stake I would apply for a ruling but I can guarantee the ATO officers don’t always follow the case law and can come to conflicting decisions on the tax residency which is frustrating. At times it is best to withdraw the ruling.

 

Another common approach is to go via the objection route for a historical position where there is a chance of a tax refund. I’ve gone back up to 10 years and been able to claim an individual tax refund worth hundreds of thousands of dollars. Same amount of rigour goes into assessing an objection by the ATO.

 

i tend to agree. most of the people are law abiding rule tollowing citizens. its the 1pct bad egg that ruins reputation but ATO enforcement team should be smart enough to go after the bad big fish.

with Big Data AI surveilance, interconnected Agency, Austrac, CRS, Dimia, Medicare links, one must assume ATO has enough tools to fight and i supposse they focus on smoking guns

 

Completely untrue