Usually, when you disagree with a decision made by the ATO, you lodge an objection. You can object to most decisions made by the ATO, including a private ruling. Even though you can object to a private ruling, you should consider whether you should.

What is a private ruling?

The tax law says that the Commissioner of Taxation can make a private ruling on how he considers the tax law to apply to a taxpayer in relation to a ‘specified scheme’.

The private ruling must specify the scheme to which it relates. This means that the Commissioner sets out the background and the steps involved in a particular situation – this is the ‘scheme’. He then makes his ruling about how the law applies to the ‘scheme’ that he described. This is very important. The way the Commissioner describes the scheme can be fundamental to what happens next.

Objecting to a private ruling

When you object to a private ruling, you are objecting to the way the Commissioner made his decision in relation to the scheme as he describes it. It is entirely possible that he has described the scheme in a way that does not include everything that you think is relevant. You may have sent copies of contracts when you applied for the ruling – but, unless these are specifically referred to in the ‘scheme’ described by the Commissioner, they essentially become irrelevant when you lodge an objection.

Put another way, an objection to a private ruling is not an objection to the way the law applies to a whole set of circumstances. It is only an objection to how the law applies to the specific scheme, as described by the Commissioner.

The same goes for any appeal against the ATO’s decision on an objection to the private ruling. The Administrative Appeals Tribunal or the Federal Court can only look at the ‘facts’ described in the scheme by the Commissioner in the private ruling. Neither the Tribunal nor the court has the power to redefine the scheme once the private ruling has been issued.

How an objection to a private ruling can go wrong

There are many examples of where a taxpayer has gone wrong by objecting to a private ruling.

In Public Servant v Federal Commissioner of Taxation [2014] ITAA 247, the taxpayer had objected to a private ruling. The ATO disallowed the objection, so the taxpayer appealed to the Administrative Appeals Tribunal (the AAT).

The AAT member reviewed the way the scheme was described in the ruling. She was also presented with some additional evidence about the circumstances by the taxpayer. However, she said that she could not consider this new evidence. She could only consider the scheme as it had been described in the private ruling by the Commissioner.

In this particular case, the ATO’s scheme description was very self-serving.

The issue was whether a particular payment by an employer to a former employee was an ‘employment termination payment’. This involved an assessment of whether the payment was made ‘in consequence of termination of employment’. If the payment was in consequence of termination of employment, then income tax was payable. If it was not in consequence of termination of employment, then no tax was payable.

The private ruling described the scheme, including the following statement:

The Employer agreed to a gross sum of $15,000 less any tax withheld upon cessation of your Employment and subject to the terms and conditions under the Deed

Because the Commissioner described the payment in this way, the AAT had no alternative but to find in the Commissioner’s favour. The AAT found that the payment described in the scheme was paid in consequence of termination of employment – and so it was subject to tax.

The AAT member said that, had she been able to look at the real facts, she would have decided that the amount was not subject to tax.

The taxpayer in this case spent significant time and resources, only to find out that she could never have won her case by objecting to the private ruling. If she’d adopted a different approach (see the third option below), the outcome is likely to have been very different.

Click here to read about a couple of other examples of objections to private rulings that have gone wrong.

What to do instead

If it’s not a good idea to object to a private ruling, then what can you do instead?

Option One

One option is to be very careful in the way you draft your application for a private ruling, to make sure you cover all of the facts. However, this does not prevent the Commissioner from putting the scheme into his own words, or missing out things that are key to your position. Where this happens, your chances of successfully objecting are reduced.

Option Two

Another option is to apply for a private ruling using the new ATO Streamlined private ruling system. This allows you to provide your own draft of a private ruling that you want endorsed by the ATO. This means that you should have much more control over how the ‘scheme’ is described.

However, unless you’re very thorough and draft the Streamlined private ruling with the possibility of an objection in mind, then it is likely that some of the relevant facts will be missing. You won’t be able to introduce these facts down the track, if you wish to object or appeal.

Option Three

The third option, which I think is often the best approach, is to:

• lodge your tax return on a conservative basis – i.e. in alignment with the outcome of the private ruling; and
• object against the assessment that results from this return.

This allows you to raise new matters in the objection and to introduce new evidence in an appeal. You cannot do this in an objection against a private ruling.

Of course, this third approach will likely leave you with a tax debt, until the issue is resolved. You should only proceed in this way with the help of a tax lawyer who can advise you on the likelihood of success and how to deal with a disputed tax debt.

This article is not legal advice; it is a brief summary of a complicated area of law.