ATO practice statements following the decision in the Macquarie Bank case
Banking on Tax, Issue 11
The recent decision in Macquarie Bank Limited v Commissioner of Taxation  FCA 887 (Macquarie Bank) may have implications for ATO administration and audit practices. In the case, the Federal Court dismissed Macquarie Bank's application for an injunction to prevent the ATO from issuing amended assessments in an ATO audit of the bank’s offshore banking unit (OBU).
Macquarie sought a review under section 5 of the Administrative Decisions (Judicial Review) Act 1977 (the “ADJR Act”) and section 39B of the Judiciary Act 1903, as well as other administrative arguments. The primary administrative argument was the extent to which ATO officers were bound by ATO practice statements. Macquarie considered that the ATO had changed its interpretation of how expenses could be allocated to its OBU (i.e. that it had performed a U-turn). This was important to Macquarie because OBUs are effectively taxed at a concessionary 10 per cent rate compared to the normal 30 per cent rate for non-OBU business.
Macquarie submitted that the Commissioner had historically accepted an "industry practice" accounting allocation of OBU expenses where that allocation produced a "reasonable outcome". Macquarie sought to rely on the application of ATO Practice Statement PS LA 2011/27 (Matters the Commissioner considers when determining whether the ATO view of the law should only be applied prospectively). The Practice Statement states that ATO officers should not apply a changed view of the law retrospectively except in extreme cases.
The court found that:
- The ATO’s decision to issue amended assessments to Macquarie for prior year tax returns was not a decision to which the ADJR Act applies
- The Commissioner’s powers under Australian taxation law (in this case to issue assessments under the Income Tax Assessment Act 1936) cannot be estopped by administrative decisions or conduct of ATO officers.
Importantly, the court did not make a finding on whether or not the ATO had performed a U-turn. Instead, Justice Edmonds held that the taxation law does not, expressly or impliedly, require or authorise the making of ATO Practice Statements, nor does it require or authorise the Commissioner to make a decision about whether or not to apply the law on a retrospective basis. Specifically, PS LA 2011/27 is “not an exercise of any delegated law-making power and does not have statutory force"..."it cannot be described as an ‘enactment’”. Accordingly, the decision of the Commissioner to apply the law retrospectively was not a decision under an “enactment” and therefore was not a decision subject to which the ADJR Act was applicable.
The Full Federal Court refused Macquarie Bank leave to appeal the Federal Court’s decision. The Full Federal Court was of the view that the case would fail, or alternatively, had “no utility", as there was no basis upon which Macquarie could seek to enforce any adherence to the Practice Statement.
ATO Practice Statements are issued by the Commissioner to give direction to ATO officers, and they are binding on ATO officers. They cover a range of issues relevant to audits (and tax controversy), including: exercise of information gathering powers; accountants’ concession and ATO access to Board Papers on tax risk; imposition and remission of penalties; freedom of information; Part IVA; settlements; debt recovery; ATO escalation of technical issues; and the priority rulings process.
Practice Statements are made available publicly so that taxpayers and advisers know the framework within which ATO officers operate. They create a reasonable expectation of the way in which ATO officers will judge and decide certain issues. However, the decision of the Federal Court makes it clear that Practice Statements do not provide legal rights that taxpayers can use against the ATO. Rather, it is only the Commissioner that has the power to enforce Practice Statements on his own officers.
The controversy here is that there may be cases where ATO officers have not followed ATO Practice Statements and, following the Macquarie Bank case, there is no legal recourse available to taxpayers under the ATO Practice Statement. The only remedy would be to communicate the concern with the ATO officers involved, perhaps combined with escalating any concerns to more senior officers.
Developments affecting allocation of expenses to an OBU
The audit issue that led to the Macquarie Bank case was the interpretation applied by the ATO of how expenses could be allocated to an OBU. As outlined in the previous issue of Banking on Tax (Uncertainty in proposed changes to the OBU regime), the former Government proposed a number of changes to the OBU regime to apply from 1 July 2013. One of the proposals was to consult with industry to address concerns with the allocation of expenses between OBU and non-OBU activities. As part of its statement on announced but unenacted tax changes released on 6 November 2013, the current Government said it would continue to work closely with stakeholders to develop targeted rules to address integrity issues with the current OBU rules and would commence consultation with industry. This consultation is likely to include the allocation of expenses to OBUs.
The Government also said that it would not proceed with the previously announced measure to exclude all related-party transactions with an OBU. Instead, it will develop a targeted integrity measure to provide certainty and help Australian banks to compete internationally.
Banks with OBUs should contribute to the consultation process and monitor developments, to ensure appropriate outcomes, particularly given the implications of the Macquarie Bank case. Deloitte will be closely involved with the OBU consultation process.