On 25 August 2022, the Commissioner of Taxation (Commissioner) issued his decision impact statement in relation to Aurizon Holdings Limited v Commissioner of Taxation [2022] FCA 368 (Aurizon).

Albeit the facts in this case are bespoke, both the approach of Thawley J and the Commissioner’s response in the decision impact statement are useful reminders about the importance of contemporaneous documentation to support the asserted facts upon review of tax positions adopted by the ATO.

In Aurizon, the main issue was whether an amount paid by the Queensland State Government was to be classified as “share capital” for the purposes of section 975-300 of the Income Tax Assessment Act 1997 (ITAA 1997).

The Commissioner argued that the amount paid could not be share capital as it was not made in exchange for an issue of shares. The Commissioner’s contention was that the character of the payment was to be determined primarily from the language of the legal documents. Relevantly one of the documents expressly stated that the consideration was to be ‘nil’.

Justice Thawley disagreed with the Commissioner’s position, saying that on an objective assessment, which included the known background events and earlier transaction, it was clear that the payment was intended to be an equity contribution by the sole shareholders of the fully paid ordinary shares on issue.

The secondary issue in Aurizon concerned whether declaratory relief should be declined because there was an alternative and more appropriate remedy available to the applicant via seeking a private ruling from the Commissioner. In the event that the taxpayer did not agree with the ruling, to bring appeal proceedings under Part IVC of the Taxation Administration Act 1953 (Cth).

The object of the private ruling regime is to provide a way for taxpayers to find out the Commissioner’s view about how the taxation laws apply to the taxpayer. This may be a way for a taxpayer to manage the risks of uncertainty in a self-assessment regime.

A private ruling may not be particularly well suited for all matters. In Aurizon, Thawley J noted that the limitations of the private ruling regime include:

  • It may be difficult to agree on a number of relevant and material facts with the Commissioner in the absence of presenting evidence in an admissible manner that complies with the rules of evidence;
  • The ruling would be binding on the Commissioner in relation to the particular taxpayer (here, Aurizon Holdings Limited). Other interested parties or stakeholders (in this case, shareholders) would not have the benefit of a ruling issued to Aurizon Holdings Limited;
  • If there had been an appeal from the ruling, it is likely that the facts in the private binding ruling application would have been shown to be wrong in some respect with the result that the whole process would likely miscarry and need to start again.

The Commissioner’s view as set out in the decision impact statement is that the decision has very limited application and turned on its own particular facts. Further, the approach in the case as to what constitutes share capital will only be relevant where there is clear contemporaneous evidence that the objective intention was that the relevant amount was always meant to be a contribution to share capital. As to Justice Thawley’s observation that the private ruling regime was not an appropriate regime to resolve the matter, the Commissioner considers that the private ruling process is capable of dealing with complicated factual circumstances.