As announced in the 2015 Budget, there is a bill before parliament to introduce a general statutory discretion for the Commissioner of Taxation to be known as the Remedial Power. The Remedial Power is proposed to be introduced in a new Division 370 of the Income Tax Assessment Act (ITAA) 1997.
It gives the Commissioner a power to make substance over form decisions to address technical shortcomings in tax legislation inconsistent with the policy behind the legislation. This power is not unlike the scope the High Court afforded to courts in Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation  HCA 26; 147 CLR 297. However, as with that scope, it can be expected that the power will only be exercised exceptionally and with particular caution.
That said there are many circumstances, including those impacted by Division 35 of the ITAA 1997 concerning non-commercial losses, which could potentially attract remedy by the Remedial Power. That should not be overlooked in the preparation of advice, applications for rulings and in objections.
Exercise of discretion not available for some reason rather than not there at all
The Commissioner will no longer be able to justify decisions that give rise to unjust tax outcomes on grounds that he has no relevant discretionary power under the ITAA beyond the limits of the general power of administration of the tax laws under the Taxation Administration Act 1953. Once the Remedial Power is in place it is expected the Commissioner will rather explain why an unjust decision counter to policy is not worthy of the Remedial Power if the power is not to be used to remedy that outcome.
When is the Remedial Power going to be used?
Broadly the Commissioner may exercise the Remedial Power:
- where the outcome under the tax law is inconsistent with the purpose or object of the law by re-aligning the regime in the law applied by him with its purpose or object; and
- where the outcome under the law is consistent with the purpose or object of the law, but in achieving that outcome the application of the law imposes compliance costs that are disproportionate to achieving the purpose or object of the law by aligning the regime to reduce those compliance costs in a manner consistent with the purpose or object of the law.
Perhaps the unlegislated regime in Practice Statement Law Administration 2010/4, concerning unpaid present entitlements under Division 7A of Part III of the ITAA 1936, is an example of the kind of modification by the Commissioner which could have legal force under Division 370 in future.
Progressing minor corrections
It is anticipated that this power will reduce the time it takes to give effect to minor legislative corrections.
It may also allow for some minor technical corrections to occur where this may otherwise not occur.
Limits on the Remedial Power
The Commissioner will not be able to use the power to:
- alter or extend the purpose or object of the law;
- directly amend the text of the law; or
- make modifications to the operation of the law which will result in more than a negligible impact on the revenue.
In addition, a taxpayer can ignore a modification made under the Remedial Power if it would produce a less favourable result for the taxpayer i.e. modifications under the power will only apply in the taxpayer’s favour.
As the power is discretionary, the Commissioner cannot be compelled to exercise the power. A bureacracy will be established with the Australian Taxation Office to assist the Commissioner to manage the exercise of the power including a tax expert panel (similar to the General Anti-Avoidance Rules Panel) to advise the Commissioner particularly about costs and impracticalities to the revenue if a modification is to be made under the Remedial Power.