Document 11

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ATO Minute 572/2011
20111031 ATO Minute bf - U11.par

Treasury ATO Gateway; ATO

Please find attached ATO Minute 572/2001 in relation to the proposed  amendments to the rights to future income and residual cost setting rules- Pre 12 May 2010 period changes.

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Deputy Chief Tax Counsel, TCN North
Law & Practice
Australian Taxation Office
Phone: 02 9374 s22    1   Facsimile: 02 9374 s22

ATO 1 Working for all Australians

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1

ATOMINUTE	572/2011	31 OCTOBER 2011		
FORMAT	MINUTE NO.	
ISSUE DATE	
CLASSIFICATION	

Australian Government
Australian Taxation Office

ATO MINUTE 	FILE REF:  [FILE NO.]

TO:	s22 	Business Tax Division

COPIES TO:		s22 s22
s22 s22
s22

s22

Office

Business Tax Division, Treasury
Chief Tax Counsel, Australian Taxation Office
'• Senior Tax Counsel, Australian Taxation Office
Senior Tax Counsel, Australian Taxation Office
Senior Tax Counsel, Australian Taxation office
, Australian Taxation Office
FAC, Governance and Government Relations, Australian Taxation

s22 	Assistant Commissioner, Australian Taxation Office
s22 	-General Manager, Tax Design Division, Treasury 	I

I

Treasurvatoqateway@treasurv.gov.au 	I

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ATO MINUTE 57212011

CATEGORY:	C Suggested legislati\.13 amendments

j Minor technical amendments to the law- not Tax Issues Entry
System (TIES) issues
IPolicy/Law change suggestion - substanti\19 change in policy or law
C Pre Policy Approval
E Legislati\19 Measures De\lelopment

r General - includes  adiAce in relation to outcome of litigation/courtcases and
1....i1 TIES issues

Purpose

To advise of an emerging issue, not addressed by the draft amendment options, relating to rights to future income and the residual rule particularly for the retrospective period pre 12 May
2010.  In essence, taxpayers have the right under existing law to insist on amended
assessments  based on that law. But the commissioner will not necessarily have the power to reverse those amendments under the existing terms of section 170 even after the law is retrospectively  changed. Therefore  section 170 or another machinery provision requires amendment.

Background

To date the ATO have received approximately  26 private rulings, 46 objections and 80 amendment  requests relating to the consolidation rights to future income and residual rules, which are yet to be resolved.

The majority of claims made in these rulings and objections relate to the assets which would have reset tax cost allocated to goodwill under the current amendment proposals for the retrospective period.

The emerging issue arises because some taxpayers will be able to appeal rulings or objections, requiring the Commissioner to amend assessments in circumstances  where the Commissioner cannot reverse those amendments  concordant with the draft amendment options. Even if the government were to make the announcement regarding retrospective change today no enacted law will exist until some time in 2013, at the earliest.  In the interim what taxpayers are
beginning to do is lodge notices under section 14ZVA  or section 359-50 of the Taxation Administration  Act 1953 (TAA 1953) and so take their objection or ruling to the Administrative Appeals Tribunal (AAT) or Federal Court and force a decision on the existing law.

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ATO MINUTE 57212011

Such a course is open where the right to future income or residual claim relates to an income year prior to 2010.

Presently in the AAT there is a matter which involves a claim under the rights to future income rules for the 2007, 2008 and 2009 income years. The asset in the case is of type which will have its reset tax cost allocated to goodwill under the amendment  proposals. The taxpayer's claim under the existing law is, prima facie, strong.  Subject to disputing the market valuation of the asset there is nothing to prevent the claim from being allowed by the AAT next month. The Commissioner  will be required, pursuant to item 6 of subsection 170(1) ofthe ITAA 1936 to amend the taxpayers 2007, 2008 and 2009 year assessments to reduce the taxable income in each year, resulting in a total tax refund of $3,090,600 at the end of the 2009 income year. If
the retrospective amendments to the law are not enacted until 2013, the Commissioner will be precluded from amending the amended assessments by subsection 170(2}.

Potential claims for the 2003 to 2008 income years, as per objections and private rulings lodged to date, total approximately  $5.1 billion.  There is nothing to stop taxpayers in these cases from lodging section 14ZYA and 359-50 notices in the hope of forcing a favourable AAT or court decision and income tax refunds which the Commissioner will be precluded  from recovering when the retrospective  amendments to the law are enacted.

The cost to the revenue of such claims under the current law will depend largely on the number of cases the tribunal or courts are capable of processing until the amendments to the law are enacted.

There is nothing to stop Australia's banks and insurer's following the example  of the taxpayer presently before the AAT. That will mean significant revenue risk.

Advice/Issue

The current amendment proposals for the retrospective period do not deal with the amendment of a pre 12 May 2010 assessment as a result of a tribunal or court decision after the 31 March
2011 this could have a significant, unintended revenue cost.

Recommendation/Action

The amendment proposals  for the retrospective period should include a provision to amend section 170 to allow a refreshed amended period for amending amended  assessments for the purpose of giving effect to the retrospective period amendments  to the rights to future income and residual rules.

s22

s22
Deputy Chief Tax Counsel

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