The issues in this case are matters of Question of Law rather than Question of Facts. The in depth examination of case laws and statutes is essential to identify the issues and remedies for this case.
The main issues in this case are
1. Whether the income from amateur sports, reimbursement of travel and other expenses paid by TV stations, collections from spectators, government grants, free equipments from golf clubs and sporting firms are taxable ?
2. Consequence of the advice given by Karrie's Cousin, who is an ATO Staff.
3. Could Karrie apply the same ruling after two years the ruling was issued and after she becoming a professional?
4. Can Sporting Elite's other clients prepare their returns based on the ruling issued to Karrie?
The first issue is regarding the taxability of income of an amateur sportsman from different sources.
Generally the taxability of the income generated from a amateur sport depends mainly on the factor that if the activity of the sportsperson constitutes a business or not. The intention or motive of the person is irrelevant, the main issue is if he/she is engaged in a business or not.
The assessable income of a tax payer as per Income Tax Assessment Act should include: “the value to the taxpayer of all of all allowances, gratuities, compensations, benefits granted to him in respect of, or for or relation directly or indirectly to, any employment of allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or services rendered by in him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise ”
The question as of the tax status of income from the grants and other money that athletes were receiving was clarified by a unanimous High Court decision in Commissioner of Taxation v Stone . The High Court held that sponsorship and appearance money as well as prize money and training grants, earned by Olympic javelin thrower, Joanna Stone, are subjected to tax for the relevant tax year. The court also if a person has profit, he could be considered as engaging in a business even if his aims are idealistic and are not monetary based.
The court further note that the taxpayer's athletic success is the reason for her receving prize money and the deals of sponsorship. Those financial rewards are rewards for her athletic success, which is the conduct of her business. Hence the Court stated that the Commissioner's decision to disallow the tax payer's objection in including the grants in her taxable income was correct. The transformation of athletic talent to money is construed as business by the Court and held that the income from grants and prize money are all taxable.
Here if we consider Karrie Wood's case, the income earned from government grants, the reimbursement of travel expenses, collection from the spectators are all taxable since the activities of Karrie Wood constitute a business irrespective her intention to be an amateur golfer.
The second issue is regarding the consequences of the advice given by Karrie's Cousin, an ATO staff.
Karrie sent an email to the ATO staff in her official email address regarding the taxability of the reimbursement receipts and the collections from the spectators. Her cousin replied through her same official email address stating that the receipts are not taxable since she is an amateur.
The ATO staff relied on public ruling that amateurs' income is not taxable. She did not consider the individual circumstances of Karrie.
It is mandatory for staff to search for and follow Law Administration Practice Statements (LAPS) relevant to the tasks they are performing. Failure to follow a relevant LAPS can result in disciplinary action .
Although LAPS provide direction and assistance to tax office staff, they are published and approved for taxpayers to rely on them in the same way as other publications rulings can be relied upon. A taxpayer who relies on a LAPS will remain liable for any tax shortfall if the LAPS is incorrect, or is misleading and the taxpayer makes a mistake as a result. However, they will be protected against any shortfall penalty that would otherwise arise. In addition, they will be protected against interest charges on the shortfall if the LAPS was reasonably relied on in good faith.
The ‘Goods and Services Tax' (GST) advice and the entity can rely on it to the extent provided in section 105 60 of Schedule 1 to the Tax Administration Act. Essentially, Commissioner will be bound by that advice, to the extent that the general view of the law applies to the entity's circumstances. The Entity may provide further details and request a further GST private ruling if requires more specific advice in relation to its particular circumstances.
Where a person seeks advice on a matter that is not of a general, straightforward or simple nature, the person is to be advised to request the advice in writing. This ensures that the person receives a properly considered opinion on the application of the law to their circumstances. It also means that the person obtains advice that is binding on the Commissioner . In this case even Karrie has made the request in writing as email, Karrie's cousin, ATO staff gave her advice based on public ruling. She did not apply the law relating to Karrie's circumstances.
However Karrie opted to apply for private ruling afterwards, hence the advice of the ATO staff was irrelevant.
The third issue is about the applicability of the Private Ruling obtained by Karrie.
When Karrie applied for the Private Ruling, she did not disclose the material facts relating her income that the reimbursements exceed her expenses. The Commissioner had the duty to examine her proof of income and to assess her individually. The commissioner should have asked for more information, but he/she failed to carry out the duty and power conferred by the Taxation Administration Act 1953.
In CTC Resources v FCT the Court noted that the Application for a ruling is required to be in a form approved by the Commissioner and to be accompanied by relevant information and documents as required by the Commissioner. The court also referred to Section.14ZAS that if the Commissioner is of the view that there is a need for further information before the ruling can be given, he must request the applicant to supply that information. The ruling must set out the matters ruled upon, identifying the relevant person affected, the tax law, the year of income and the arrangement to which the ruling relates. It must also identify the assumptions made as per Section.14ZAS.
The Commissioner in Karrie's matter failed to execute the power and duty conferred by the Statures, relied on Public Ruling to issue a Private Ruling for her.
Based on the Private Ruling, Karrie believed that the receipts are not taxable and continued the arrangement in the ruling. Two years later she turned professional, at that time also she did not submit an application for reassessment of taxable income, instead she relied on the private ruling issued 2 years ago. The private ruling she obtained was only for that particular financial year, but she continued to rely on that. Thereby by she failed to inform the tax office of the change of her circumstances and thereby evading tax. In addition to that the Tax Office later discovered that the reimbursements made by the TV stations are as per contract and exceeded Karrie's expenses. At this point the Commissioner has the power to reassess her income and can make her accountable for her previous years' income.
Let us examine two case laws in this regard
In the case of Daihatsu Aust Pty Ltd v FCT the Commissioner reassessed the income of the appellant for the past 6 financial years and send the notice of reassessment to the appellant after finding out the massive consideration received by the appellant for the past 6 years. The Court held that the Commissioner was within the powers conferred by section 166 of Income Tax Assessment Act.
In the case of Pierce , the ATO staff decided to investigate a tax payer who sought a Private Ruling in relation to his car expenses and after denying the Ruling, issued an amended assessment based on these investigations. These were viewed as two impermissible actions by the Administrative Appeals Tribunal(AAT) considering the individual circumstances of this case.
Karrie's case will come under the first one since she obtained the private ruling using misrepresentation of facts. Hence Karrie's previous years' income from the reimbursements could be a subject of reassessment by the Commissioner.
The fourth issue is whether Sporting Elite's other clients can prepare their returns based on the ruling issued to Karrie?
The Private Ruling Karrie obtained was an assessment of her individual circumstance and the taxability of her income. It was a Private Ruling and was not Public Ruling. Therefore this Private Ruling cannot be relied upon by any of the other clients of Sporting Elite. It was specifically issued for Karrie wood.
If it was Public Ruling or Class Ruling then the depending on the circumstances the clients of Sporting Elite could follow that.
Whenever an entity requests advice about the application of the tax law to a specific class of persons in relation to a particular arrangement, it will be treated as a request for a Class Ruling (or Product Ruling if more appropriate). ATO staff are to also give consideration to preparing a Class Ruling in those situations where a member of a class of persons affected by a particular arrangement requests a private ruling on the arrangement. Similarly, ATO staff are to give consideration to preparing a Class Ruling where they otherwise identify an arrangement that has tax consequences for a class of person
In the case of Bellinz Pty Ltd v FCT While there is nothing to suggest that in an appropriate case a ruling could not issue on Part IVA of the Act, both the Commissioner and the taxpayer must be aware of the difficulty which a private ruling on a Part IVA issue will create. Section 177D(b) sets out the various matters to which the Commissioner shall have regard in reaching the conclusion that a person or more than one person entered into or carried out the scheme or any part of the scheme for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with it. One of those matters is "the manner in which the scheme was entered into or carried out".
The Private Ruling is based on the Individual circumstances of the tax payer who is making the application. It cannot be used as a guidance for another tax payer even if they are of the same set or class.
In Remuneration Planning Corporation Pty Ltd v FCT the Court made a note of SECTION 14ZAAG of the Taxation Administration Act 1953 that the Commissioner may make a public ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to a class of persons in relation to a class of arrangements. “The Court also referred to the system of private rulings pursuant to the Administration Act, provision for which was introduced in 1992 at the same time as that for public rulings. They are covered by Part IVAA of the Administration Act, which provides for applications for and the giving of private rulings and the way in which, in the Commissioner's opinion, a tax law would apply to the person in respect of a year of income in relation to an arrangement or, with the written consent of another person, as to how the law would apply to that other person” .
To make it clear the Private Ruling is for a particular year of income and issued to a particular person, the applicant. The Private Ruling should not be mixed up or confused with Public Ruling which would be published in the gazette.
The statutes and laws should be made more transparent when it comes to taxation. The income tax is the main source of revenue for all countries and by simplifying the Laws of Taxation, people would feel comfortable to pay tax. The Private binding and Public binding principles should be more clear in the legislations in order to avoid confusion among common people. Making the taxation law simpler should be the key principle to be born in mind for the legislators when they eanct a new law or amend the existing ones.
Taxation Administration Act 1953
Income Tax Assessment Act 1936
PS LA 1998/1 (Law Administration Practice Statements).
PS LA 2001/4 (Provision of Written Advice by the Australian Taxation Office).
PS LA 2001/15 (Taxpayer alerts).
PS LA 2001/8 (Interpretive Decisions).
PS LA 2001/14 (ATO Advice Manual).
PS LA 2003/9 (The Online Resource Centre for Law Administration (ORCLA)).
PS LA 2002/17 (Provision of non binding oral technical advice by the Australian Taxation Office).
PS LA 2005/10.
GSTR 1999/1 & Addenda 1999/1A & 1999/1A2: The GST rulings system.
Media Release Nat 2000/26 (Taxpayer concerns about possible illegal rulings).
TR 92/1 Income tax and fringe benefits tax: public rulings.
TR 92/20 Income and other taxes: guidelines on the use of date of effect paragraphs in Taxation Rulings and Taxation Determinations.
PR 1999/95 Income tax and fringe benefits tax: Product Rulings system.
CR 2001/1 & 2001/1A: Class Rulings System.
Other Reference Sources
Meredith, The Rulings System which one, if any, do you apply for now (2002)
Sawyer, "What are the Lessons for Australia from New Zealand's First Comprehensive Remedial Review of its Binding Rulings Regime
Sles, The Interaction of Administrative Law and the Public Rulings System: Lessons from. Bellinz (1998)
Bentley, "A Proposal for Reform of the Australian Rulings System" (1997)
Warner H, "Private binding rulings are they worthwhile", Taxation in Australia, Volume 43/4 October 2008, pp 242 247. 11.