A taxpayer can apply to the Australian Taxation Office (ATO) for a private ruling, which is written advice on how the ATO considers that a tax law applies to specific circumstances. Seeking a private ruling is a common way in which entities manage their tax risk. The advantage in applying for a private ruling is that the ruling legally binds the ATO even if the ruling is later proved to be incorrect. If the ruling is incorrect, the ATO can only apply the law correctly if it would be more favourable for the applicant. Accordingly, a private ruling provides certainty for a taxpayer in respect of a particular transaction.
Scope of a private ruling
A private ruling only applies to the particular scheme or circumstances that it describes. The ATO is not legally bound by a ruling where the scheme is not implemented in the way set out in the private ruling or material facts were omitted or misleadingly or inaccurately stated. Accordingly, it is important that the full and accurate facts of the transaction are outlined to the ATO when seeking a private ruling.
In order to obtain a private binding ruling, the transaction or arrangement must be in serious contemplation. It is not possible to obtain a ruling in respect of a hypothetical arrangement.
While the ATO aims to provide private rulings within 28 days of receiving all the necessary information, it is usually the case that rulings (particularly for transactions or arrangements that raise more complex matters) take longer than 28 days to be provided (approximately 2 to 3 months). [During the COVID-19 period in particular, rulings have generally taken longer to obtain (around 3 to 4 months) as the ATO has applied its resources to dealing with COVID-19 measures.]
In some circumstances, this timing can create problems for transactions that need to be completed quickly. If the tax risk is a material consideration in the transaction, a potential solution is to obtain the ruling after signing (but prior to completion) and make obtaining a favourable ruling as a condition precedent to completion or agree a value adjustment.
Where a particularly complex tax risk is identified and the proposed parties to a transaction are still in the negotiation phase, it can be prudent to request for an "early engagement" discussion with the ATO. During the early engagement process, the parties may discuss their timeframes with the ATO and have a more flexible discussion about the specific tax issues that arise. The early engagement process can also assist in streamlining the ruling process, as the ruling application can incorporate any comments or issues raised by the ATO prior to being formally submitted.