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If a longstanding approach by the Commissioner is overturned by a fresh interpretation of the law, conscientious taxpayers can be left exposed.
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Taxpayers need protection from a change of course
26 March 2022
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The rule of law is the cornerstone of civilized society. Central to its smooth operation is the premise that the power of the executive government is exercised according to an independent justice system.
The rule of law is fundamental to the development and administration of our tax laws because, without it, taxpayers could be subject to arbitrary exaction by the government. Taxation would be little more than state-sanctioned theft on a grand scale.
Fortunately, we do not find ourselves in that position in Australia. But extreme potential consequences should never be far from our minds as a backdrop for policy development and administering the tax system.
Because the reality is that assessment, collection and administration of the tax system must necessarily be undertaken by an officer of the executive government, that is, the Commissioner of Taxation.
It is the Commissioner’s duty to ensure the correct amount of tax is paid by each taxpayer, “not a penny more, not a penny less”.
The sheer scale of that task means that the Commissioner must have many powers, sometimes frighteningly invasive powers, and many subordinates to facilitate the task of obtaining information and/or bringing compliance action against taxpayers.
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Even before compliance and recovery work can begin, the Commissioner must form a view about how the tax law operates and applies to particular taxpayers, and effectively and consistently inform taxpayers of that view.
Theoretically, as an officer of the executive, this should be a straightforward process: the Commissioner should merely execute the commands of Parliament as they are set down in the relevant legislation. That would be taxation according to law.
However, in practice, as the tax legislation becomes more voluminous and complex, and with taxpayers’ affairs becoming more sophisticated, it increasingly falls on the Commissioner, at least in the first instance, to decide if and how the law applies, sometimes with only minimal guidance from the legislation.
In this environment, it becomes vitally important that taxpayers understand their obligations and have confidence in both the Commissioner and the system more broadly. The only way to instil that confidence is for the Commissioner, by which I really mean tax officers at all levels, to deal with taxpayers fairly and consistently.
This is especially important where the Commissioner has long adopted a particular interpretation of the law or approach to an issue which may be debatable or not clearly required by the law.
And here we have a tension: does the requirement that taxation be in accordance with the law also mean that the taxpayer has no protection from changes by the executive government? Is there protection if a decision of a court either overturns an earlier precedent or interprets the law in a way that differs from the Commissioner’s longstanding interpretation, established without any binding authority?
Strict adherence to the law, newly articulated by the Court or re-interpreted by the Commissioner, with retrospective effect, would lead to taxpayers being punished for following the Commissioner’s established approach at the time. Short of time travel, what can even the most conscientious taxpayers do to protect themselves?
Within the confines of the Commissioner’s duty to collect the right amount of tax under the legislation, there must be room for the Commissioner to act concessionally in these kinds of circumstances. Circumstances where concerns of clarity, confidence, equity and fairness (which in themselves contribute to upholding the rule of law) demand an approach not strictly in accordance with the letter of the law.
In my view, until there is a legislative protection for taxpayers who reasonably rely on the Commissioner’s practice, the proper balance cannot be struck.
And let me make it quite clear that the observations I am making here should not be interpreted as criticism of either the Commissioner or the tax office, who have no choice but to operate within the paradigm delivered to them by legislators and the courts.
The more fundamental issues which arise from a change in position on the part of the Commissioner, and the danger arising from action against taxpayers which is inconsistent with the objectives of clarity, consistency and fairness, can only be dealt with by broader protections grounded in legislation.
In order to protect the rule of law and strike the necessary balance between collecting tax according to the letter of the law and the broader objectives underpinning a coherent tax system, taxpayers who reasonably rely on the practice of the Commissioner, in good faith, should be protected if the Commissioner changes course at a later date.
Without that protection, despite the Commissioner’s power to allocate resources, issue rulings or provide minor relief by legislative instrument, taxpayers would be at the mercy of the tax office which could, perhaps even must, immediately issue assessments according to their current, albeit new, interpretation of the law, no matter the care taken by those taxpayers.
This serves no purpose to our society and is antithetical to the rule of law.
Mark Leibler is senior partner at Arnold Bloch Leibler. This is an edited extract of a lecture he delivered this week at Melbourne Law School. The full lecture can be accessed here: https://www.abl.com.au/insights-and-news/tax-and-the-rule-of-law
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