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Financial advisers need to understand just what a product ruling from the tax office means - or trouble awaits. By Rod North and Kay Wood.
In June 1998, the Australian Tax Office introduced a new system for assessing the tax status of small business investments raised under a prospectus - in particular, investment proposals where tax effectiveness is an important issue. The new framework has been referred to as a 'product ruling'.
There has been considerable debate and confusion in the financial services market place about the effect of product rulings in determining outcomes for raising capital in 1998/1999. But in essence the meaning of a product ruling is clear: it is simply and no more than - the tax office approving the deduction for the investment offered under the prospectus. There is a mistaken view by some investors and financial planners that once an investment proposal has been the subject of a product ruling, the usual 'due diligence' is not required.
Product rulings have prospective effect only and apply to arrangements entered into after the date the ruling is made. A person who invests in a product before the ruling is made is not able to rely on it as a public ruling. An investment proposal which refers to a product ruling must cite it in fill, and not select only particular parts.
A product ruling also specifies the date on which it will be withdrawn and cease to have effect. It applies to all persons within the specified class who entered into the specified arrangement (identified by a product name) during the term of the ruling, and continues to apply to those persons, even following its withdrawal, for arrangements entered into prior to withdrawal of the ruling. This, however, is subject to there being no change in the arrangement or in the person's involvement in the arrangement.
The Commissioner of Taxation has indicated that a product ruling will not be given for a period exceeding three years from the end of the income year in which it is made, unless exceptional circumstances exist.
The product ruling applies to investments made on the strength of a 'particular' prospectus offering, and does...