It appears that merely applying for a private ruling provides a form of penalty protection for a transaction, whether that is a complete or partial removal of any administrative penalty.

Taxpayers have a bit more clarity about the effect of seeking a private ruling, even if the ATO refuses to make the ruling.

On its face, Hacon v Commissioner of Taxation [2017] FCA 659 was about whether the Commissioner could be compelled to give a ruling where he refused to rule on the basis of insufficient information.

Intriguingly though, Justice Logan hinted, albeit in a somewhat Delphic manner, that the mere fact that the applicants had sought a private ruling (even though it had been refused on grounds open to the Commissioner) would provide the taxpayer with a degree of protection from any administrative penalty if a tax assessment eventually arose in respect of the facts disclosed in the ruling.

This is the first time a court has made this suggestion.

Justice Logan's comment that failing to receive a private ruling would "not be irrelevant in the context of any later penalty decision", however, appears to be consistent with the intention of the legislation.

Administrative penalties for tax breaches

The Tax Administration Act 1953 (Cth) applies administrative penalties for a range of breaches. The penalties range from between 25%-75% of the shortfall depending on:

  • whether the statement is false or misleading;
  • the level of culpability of the taxpayer;
  • whether the taxpayer took a position that is not reasonably arguable; and
  • whether or not a "scheme penalty" issue arises.

Where the taxpayer can show that they took reasonable care, there will be no penalty.

There's value in seeking a private ruling

Justice Logan was, we think, deliberately cautious in his choice of words, but he appeared to confirm that by making an application for a private ruling, the taxpayer had taken reasonable care, even if the Commissioner refuses to rule on the arrangement. As a result, the taxpayer should be protected from a penalty for a false or misleading statement, or at the very least, face a reduced penalty on the basis of voluntary disclosure if the taxpayer adopts a position that is not reasonably arguable, and has not in the circumstances taken reasonable care.

While Justice Logan did not elaborate further, his broad comment appears to be correct if the taxpayer is assessed on the same facts they used for the private ruling. It supports the contention that seeking a private ruling, as long as the facts do not change, can only be beneficial to the taxpayer, either providing complete protection (in the case of a favourable ruling), penalty protection where the Commissioner refuses to rule, or at worst provide a setting for litigation on a limited and agreed set of facts.

This stance is consistent with the Explanatory Memorandum to the A New Tax System (Tax Administration) Act (No. 2) 2000 (Cth), which stated that to avoid penalty the Commissioner needs to be satisfied that the taxpayer made a genuine attempt to flag the transaction by seeking a ruling prior to lodging the return.

At the least, seeking a private ruling on the relevant facts may only be considered voluntary disclosure, with the result that the penalty is significantly reduced but not altogether removed.

Even in the case of a scheme penalty, a taxpayer will be treated as not having a shortfall amount relating to a statement that was false or misleading where the taxpayer (and the agent if the agent made the statement) took reasonable care in making the statement. Once again once a ruling has been sought, this could well constitute reasonable care.

Care will need to be taken that the facts as disclosed in the ruling are ultimately implemented as disclosed ‒ otherwise the any protection gained is largely illusory, as the Commissioner will argue that reasonable care was not taken, and that any disclosure was inaccurate.