Income Tax Amendment Act 1987

This commentary item was published in Public Information Bulletin Volume 167, December 1987

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Procedure for Applying for and Making Determinations Under Section 64E(1) Income Tax Act 1976

The Income Tax Amendment Act 1987, together with the amendments made in the Income Tax Amendment (No.2) Act 1987, inserts into the Income Tax Act 1976 new sections 64B to 64M which provide for the accrual tax treatment of income and expenditure relating to financial arrangements. The scheme of the new sections relies upon the Commissioner making and publishing binding determinations stating how the accruals regime will apply in particular circumstances. The procedure for making determinations is contained in the Income Tax (Determinations) Regulations 1987 which came into force on 16 April 1987.

1. Background

In summary, section 64C of the Income Tax Act 1976 provides -

1.1 The yield to maturity method is to be the basic method of calculating income or expenditure in relation to a financial arrangement so that an amount that is "flair and reasonable" is allocated to each income year:

1.2 Where it is not possible to calculate income or expenditure using the yield to maturity method, a method prescribed by the Commissioner in a determination may be used (section 64C(3)).

1.3 However, the Commissioner must accept an alternative method to the methods referred to 1.1 and 1.2 above if the alternative method:

• Has regard to the principles of accrual accounting;
• Conforms with commercially acceptable practice;
• Is consistently applied by a taxpayer in respect of all such financial arrangements for financial reporting purposes; and
• Results in the allocation to each income year of amounts not materially different from the amounts that would be calculated under the methods referred to in 1.1 and 1.2 above. (Provisos to section 64C(2) and 64C(3)(a)). It is not necessary for a taxpayer to seek a determination from the Commissioner in order to apply such an alternative method.

1.4 Finally, the Commissioner must accept a method that has regard to market valuation in the circumstances outlined in section 64C(4).

2. Determinations

Section 64E of the Income Tax Act and the Income Tax (Determinations) Regulations 1987 made under the Act outline a procedure for the Commissioner at his discretion to make determinations in relation to the matters set out in section 64E(1). Such determinations may be-made:

2.1 In response to an application for a determination by a person who issues or holds or intends to issue or hold a financial arrangement; or

2.2 At the Commissioner's own instigation. The procedure is outlined below.

Application for Determination

3. Commissioner may Make Determination on Matters in Section 64E(1)

The Income Tax (Determinations) Regulations 1987 prescribe the procedure to be followed when a person issuing or holding (or intending to issue or hold) a financial arrangement seeks a determination from the Commissioner on one of the matters referred to in section 64E(1), i.e., -

3.1 How the yield to Maturity method is to be applied to a particular financial arrangement;

3.2 The method for determining income or expenditure where it is not possible to calculate income or expenditure using the yield to Maturity method;

3.3 The method for determining income or expenditure where a person opts for an alternative method to

1. the yield to Maturity method (under the proviso to subsection 64C(2); or
2. the method outlined by the Commissioner in a determination referred to in 3.2 above (under the proviso to section 64C(3)(a));

3.4 The market, the method, and the sources of information to be used to determine market values where a market valuation method of calculating income or expenditure is used;

3.5 The method for determining the part of the income or expenditure, acquisition price, or consideration that is solely attributable to an excepted financial arrangement where that is part of a financial arrangement (both terms are defined in section 64B);

3.6 The method for determining the discounted value of amounts payable for goods or services under trade credits.

4. Fees Payable on Application (Regulations 3 and 11)

A person applying for a determination is required to pay the fees prescribed pursuant to Regulations 3 and 11. A schedule of fees payable in respect of applications will be published (Reg. 10). The fee payable under Regulations 3 (the application fee) must accompany the application form.

The fee payable under Regulation 11 (prior to the Commissioner publishing the determination) is to cover costs which are additional to the fixed costs of the Department in administering the determinations process and which were incurred by the Department in considering the individual application. These would include for instance the fee charged by a consultant making submissions on the application.

A schedule of fees is being prepared.

5. Documents to Accompany Application (Regulation 3(1))

The form for an application for a determination (form IR 430) should be completed and the following documents should be attached to that application form -

5.1 A draft determination - the form of which is outlined in 5.6 below

5.2 Copies of documents relevant to the application

5.3 Written submissions in support of the application

5.4 Any other particulars necessary for understanding the effect of the determination; and

5.5 Where an anonymity notification is given, an anonymous version of the draft determination (refer to paragraph 10 below).

5.6 Form of Draft Determination (Schedule) The draft determination to be attached to the application for a determination is to be in the form set out in the Schedule to the Regulations, i.e., it should contain the following:

1. Explanation: a preamble describing the financial arrangement and outlining the determination applied for;
2. Reference: a section of the Income Tax Act under which the determination is sought and the relationship of the determination to other determinations;
3. Scope of determination: relevant details of the financial arrangement or class of financial arrangements to which the determination is to apply;
4. Principle: a description of the accrual and mathematical concepts that are applied to the financial arrangement;
5. Interpretation: definitions of any specialised term in the draft determination;
6. Method: the application of the Principle in (d) above to the financial arrangement outlined in the Scope of Determination in (c) above;
7. Example: one or more examples of the application of the method.

5.7 Compliance with Requirements on Form of Application (Regulation 3(2)) If the application has the attachments referred to in paragraph 5, in the form required, the Commissioner will record the application in a register and advise the applicant of the date of registration. If an application does not comply with the requirements of Regulation 3(1) the Commissioner may accept and register it or return it to the applicant outlining the respects in which it fails to comply.

6. Withdrawal or Amendment of Application (Regulation 3(6) and (7))

An application may be amended or withdrawn at any time by written notice from the applicant.

7. Authority of Commissioner to Make Determinations is Discretionary (Regulation 4(1)(b))

The Commissioner is not required to make a determination under section 64E(1) : he exercises a discretion in doing so. He may therefore decline to make a determination.

8. Consultant(s) may be Invited to Consider Application (Regulation 9)

In considering an application, the Commissioner may invite submissions from any person. It is proposed that the Department will select a number of highly qualified and experienced consultants to form a panel, any member of which the Commissioner may consult on a particular application. At the Commissioner's request, the consultant may advise on the application, and may attend a conference with the applicant (see paragraph 9.1 below).

There is provision on the application form for the consent of the applicant to the disclosure to a consultant of information in, and attached to, the application.

9. Commissioner to Prepare Draft Determination (Regulation 5)

Prior to making a determination, the Commissioner will prepare a draft determination in relation to the application and send to the applicant a copy of the draft determination and his reasons for the determination.

9.1 Conference on Draft Determination May be Held Provision is made at this stage for the Commissioner to hold a conference to discuss the draft determination should he or an applicant wish to do so. The applicant must notify the Commissioner within 10 working days after a date set by the Commissioner that he wishes the Commissioner to hold a conference. If a conference is to be held the Commissioner will appoint a date (not later than 20 days after the expiration of that 10 day period), time, and place for the conference and will notify the application. At the conference, the Commissioner, applicant and anyone nominated by them are entitled to be present. It is intended that the conference be informal and provide the taxpayer and Commissioner with a reasonable opportunity to express their views on the draft determination. The Commissioner may make a determination at any time following the conference. If the applicant does not notify the Commissioner that they wish the Commissioner to hold a conference, or if advise the Commissioner that they do not wish the Commissioner to hold a conference, the Commissioner may then make the determination.

9.2 The Commissioner may make a determination without following the procedure outlined in paragraph 9 and 9.1 above, where his determination complies with the draft determination submitted by the applicant, or where the applicant waives the requirements to follow that procedure or where the Commissioner issues independently a determination incorporating the matter for which the application is made.

10. Anonymity Notification (Regulation 8)

There is provision on the application form for an applicant to notify the Commissioner that they do not wish their identity to become publicly known.

In this case, in addition to the draft determination accompanying the application, the applicant submits an anonymous version of the draft determination edited to remove identifying references. The Commissioner then prepares for publication an anonymous version of the determination removing any identifying particulars which can be omitted from the published version of the determination without affecting its value.

Commissioner may make a Determination Independently

In addition to his discretion to make a determination in response to an application under section 64E(3), the Commissioner may independently make a determination in relation to the matters outlined in paragraph 3 above.

The following paragraphs are applicable to determinations made under section 64E(1) whether independently by the Commissioner or in response to an application from a taxpayer.

11. Publication of Determinations (Section 64E(7) and Regulation 10)

Determinations are to be published in the Gazette within 30 days after they are made.

12. Determinations to be Binding Section 64E(2) and (9))

Where the Commissioner has made a determination which is applied by a person, the Commissioner must assess that person in accordance with the determination.

Determinations made in relation to the matters referred to in paragraphs 3.1, 3.2, 3.4, 3.5, and 3.6 above are binding upon taxpayers for the purposes of the new sections 64B to 64M of the Act. Determinations made in relation to the matters referred to in paragraph 3.3 above are binding upon the Commissioner only.

13. Right of Appeal (Section 64E(4) and (5))

A person issuing or holding a financial arrangement in respect of which the Commissioner has made a determination and who is dissatisfied with the determination may object to it. A notice of objection must -

• be in writing,
• identify the determination objected to,
• state shortly the grounds of objection,
• be given to the Commissioner within one month after the date on which notice of the determination was published.

An objection is treated in the same way as an objection to an assessment under Part III of the Income Tax Act 1976. However, sections 3 and 4 of the Amendment Act amend sections 32 and 33 of the Income Tax Act to restrict the powers of the Taxation Review Authority and High Court in relation to determinations. The TRA and High Court have no power to make a determination or alter the determination but are limited to directing the Commissioner to issue a fresh determination under section 64E(6) which conforms to the decision of the TRA or High Court.

Section 30(2) of the Income Tax Act 1976 also applies to an objection to a determination. The Commissioner may in his discretion accept a late objection and notify the objector accordingly.

14. Variation of Determinations (Section 64E(6))

The Commissioner has power to make a fresh determination which varies an existing determination, rescinds it, or restricts or extends it in scope. The Commissioner shall not require a person to apply that fresh determination in relation to financial arrangements acquired or issued by him before publication of the fresh determination until four years after publication of the fresh determination.

For example, a taxpayer may apply for a determination on the treatment of a swap arrangement and the Commissioner in response may make a determination on that arrangement. The taxpayer has the right then to apply that determination. If, after two years, the Commissioner makes a fresh determination which varies the original determination, the taxpayer may continue to apply the original determination in relation to his existing swap arrangements for a further four years.

Determinations Made Under Sections 64C(6) and 104A(5)

The procedures outlined above only apply to determinations made under section 64E(1) of the Income Tax Act 1976. There are quite separate powers in sections 64C(6) and 104A(5) for the Commissioner to determine the matters referred to there.

Such determinations may be cancelled at any time (sections 64C(7) and 104A(6)) and the objection procedures under Part III of the Income Tax Act do not apply in respect of them.

Any persons seeking a determination under either section should apply in writing to the Commissioner outlining the reasons for exemption from the requirements to comply with that section and providing a draft of the determination that is sought.