Concerns raised with ATO’s ‘black letter approach’ to legislation

“Feedback from our members, and the Tax Institute’s experiences of engaging with the ATO on pertinent issues, indicates that there is a growing trend for ATO officers across all business lines to adopt a strict, black letter approach to the law,” the submission explained.

“In practice, this has led to instances where important issues that could have been resolved through the adoption of a purposive approach have instead required alternate action such as ardent advocacy to senior ATO officers, the Treasury, or government.”

The submission gave an example of the ATO’s recent law companion ruling on non-arm’s length income expenditure, LCR 2021/2 and Practical Compliance Guideline 2020/5, which strictly interpret the text of the legislation.

“This [has] resulted in an outcome that goes beyond the underlying policy intent of the legislation and has the potential to inequitably and adversely impact the superannuation balance of every Australian,” the submission warned.

“Despite several professional bodies, including the Tax Institute, advocating against the ATO’s approach, the ATO has maintained a strict interpretation of the legislation and its compliance approach.”

While the submission noted that there has now been an announcement of proposed legislative changes to the NALI provisions, this could have been addressed through a more purposive interpretation of the law.

In order to minimise these kinds of issues, the Tax Institute said it is important that the ATO’s processes include procedures that ensure that a purposive approach to the legislation is, in fact, adopted across all matters, ranging from individual tax disputes to the development of new guidance material.

The submission also said that the IGTO should look at the ATO’s current approach and culture in this regard and that the ATO implement procedural changes that achieve these goals.

“For example, it may be beneficial to require the ATO to implement checks and sign-off that the relevant action is consistent with the underlying intent of the legislation. Alternatively, a panel comprising ATO and industry stakeholders may be utilised to determine the underlying policy intent and design solutions to keep the intent at the forefront of ATO decision-making,” the submission suggested.

The Tax Institute also called for the public rulings panel to be utilised for all public guidance material, including practice statements of law administration and practical compliance guidelines.

It also said that the ATO’s current processes would benefit from greater involvement by external stakeholders.

“The increased use of external parties in decision making processes will enable an exchange of knowledge and assist ATO officers to better understand the realities of business practices and challenges taxpayers face when applying the legislation. It will also instill greater public confidence in the ATO’s decision making processes and introduce an extra, measured form of public scrutiny,” the submission explained.