Executors and Trustees are personally liable for the tax assessable on a trust estate, so it is critical that they be absolutely sure the extent of that tax liability. But how can you be sure? What action can you take? What forms of application can you make, to ensure you are protected as far as possible from future claims or a re-assessment?
The requirement of self-assessment puts much greater responsibility on taxpayers to ensure their income tax returns were correct before lodgement with the ATO. Much greater certainty about the ATO’s views on the technical enforcement of the tax law is necessary to protect yourself from strict liability.
Consider firstly, what is “advice” in terms of a communication from the ATO? Advice consists of “public” and “private rulings, which are very different and have a weight that applies at public or private levels. public and private rulings are now ‘binding’ on the ATO and it is recommended that trustees obtain clarity using these.
Public rulings explain the application of the tax law to taxpayers generally (for example Taxation Rulings and Determinations), a class of taxpayers (Class Rulings) or a particular arrangement (Product Rulings). These apply particular sections of the legislation in detailed factual circumstances, to confirm a binding position taken by the ATO regarding assessments.
A public ruling provides protection until it is withdrawn, or when it specifies that it ceases to apply.
You don’t need to know of the existence of a public ruling to rely on it.
What are not Public Rulings?
The Income Tax (IT) and Capital Gains Tax (CGT) Determination series which were published prior to 1 July 1992 when the legislative framework for public rulings was established, are not legally binding on the Commissioner. Income Tax Ruling IT2622 (about present entitlement during the stages of administration of deceased estates) is of particular importance in this regard. The Commissioner will treat these determinations as “administratively binding”.
A draft public ruling is a document that sets out the Commissioner’s preliminary view about the way in which a relevant provision applies. This means that reliance on a statement in a draft ruling provides the same level of protection as ‘guidance’ (penalty and interest protection).
In the context of deceased estates and trusts , rulings within this category include TR 2004/D25 (about absolute entitlement) and TR 2010/D1 about the meaning of income of a trust estate.
In the absence of a binding ATO position, a trustee or executor might apply for a private ruling from the ATO. This gives the person certainty about how the facts will be applied to the law and assessment made, rather than assuming a position which could be open to interpretation. No one wants a nasty surprise by way of a re-assessment long after the estate assets have been distributed.
The ATO is bound to follow a private ruling on which the rule relies. This is unless a section of the Act, is repealed or amended to have a different effect, or a Court makes a judgment that takes a view about the section that is more favourable to the rule.
A ruling assists in deciding whether the taxpayer has taken reasonable care when determining penalties. Be careful not to rely on views in edited versions of private rulings published on the ATO Legal Database. The devil is always in the detail.
A private ruling provides protection to the taxpayer it is issued to and only for the tax years covered. (There is an exception where a trustee obtains a private ruling in relation to a trust. In that case, the private ruling will apply to the beneficiaries of the trust (other than an indirect tax or excise ruling) and to any trustee that replaces the applicant trustee, for as long as the ruling remains current.
An edited version reflects the law (and the Commissioner’s view of the law) at the time it was issued – so it is very important to check if either have changed since the ruling was published.
For example, there are issues about the application of the complex partial main residence exemption provisions. For executors who are risk averse, we would suggest that they obtain a private ruling.
What can a ruling be about?
A private ruling can cover anything involved in the application of a relevant tax law, including issues relating to:
- Liability for tax;
- procedure and collection;
- ultimate conclusions of fact (such as residency status);
- Status to apply for a private ruling:
You can apply for a private ruling about:
- your own affairs
- the affairs of another entity (including a person) if you’re their agent or legal personal representative (LPR).
Various private ruling application forms together with instructions are available on the ATO website. The person applying for the ruling must indicate whether or not they will include detailed reasoning to support their application and should do so to support their case. An application must contain a full description of all relevant facts and circumstances.
The website also lists supporting information that should accompany private ruling applications on particular topics (including for example, those about death benefits, child maintenance trusts and capital gains for deceased estates).
A word of warning trustees must note carefully. The ATO will not be bound by a private ruling if you do not provide all material facts or the scheme which the ATO has ruled upon is not implemented in the way set out in the ruling.
Refusal to rule
The ATO may decline to give a private ruling in some circumstances, including if:
the making of the ruling would prejudice or unduly restrict the administration of the law – for example:
- the application is frivolous or vexatious;
- the arrangement is not seriously contemplated;
- making the ruling would not have any practical consequences – (e.g. the transaction in question occurred in the past and the amendment period has expired).
- the issue has been, or is being considered – (e.g. in an audit relating to the particular question);
- the taxpayer has made an objection on the same matter;
- information requested by the ATO was not provided in a reasonable time;
- the ATO exercises a particular power available under the law, rather than provide advice on how that power would be exercised, (e.g. you should normally ask the Commissioner for an extension of time to lodge a form rather than seeking a ruling on the issue).
- the ATO considers that the correctness of a private ruling will depend on certain assumptions and it chooses not to make a ruling subject to those assumptions; (go figure!)
- you decline to pay the cost of obtaining an accurate valuation required for the ruling.
So consider these possible opportunities to clarify and obtain certainty as a trustee or executor in any potential tax liabilities. In some cases taxpayers have looked back over many years and raised concerns about historical tax returns and to ensure they will not be assessed at any future time, they lodge a voluntary submission for assessment. If the ATO decides there is nothing to assess then the trustee will be relatively insulated from any further re-assessments.
If we can assist with the estate administration and work with your accountant to ensure certainty for you as the “at risk” trustee or executor, please give us a call on (07) 3839 7555.