When involved in a dispute with the Australian Taxation Office (ATO), the possibility of resolving that dispute by way of settlement should always be carefully considered including what approach should be taken in negotiating with the ATO to get the best outcome for taxpayers.
This is the third in a six-part series of articles on different aspects of, and strategies that can be employed in, a tax dispute with the ATO.
When should you settle a tax dispute?
Tax disputes always attract risk and the prospect if unsuccessful, of a worse outcome in relation tax, penalties, interest, and the professional fees relating to the dispute. Sometimes it may be in the best interests of the taxpayer to settle so that they can move on and concentrate on their personal and business affairs.
Tax advisers should be able to help in both aspects. That is, tax advisers should recommend whether settlement is the best choice and at the same time help alleviate the stress of the taxpayer.
In advising taxpayers in relation to potential settlement of a tax dispute, tax advisors should consider a wide number of circumstances, such as whether a taxpayer can establish a reasonably arguable position in respect of their interpretation of a tax law, or where there are several contentious factual circumstances, or evidentiary difficulties. In tax matters, the onus of proof is on the taxpayer to prove their contentions.
The ATO Code of Settlement to settle tax disputes is set out in Law Administration Practice Statement PS LA 2015/1 (the Code) and its accompanying Practical Guidelines (the Practical Guidelines).
The question whether to settle a matter with the ATO can be a daunting decision for taxpayers.
The Code and the Practical Guidelines
To give a taxpayer’s settlement offer the greatest chance of acceptance by the ATO, it is essential for advisers to structure any such offer reflecting the Code and Practical Guidelines. It is therefore necessary to be aware of the approach the ATO takes towards a settlement.
Under the Code, when considering a potential settlement, the ATO must consider several factors, including:
the relative strength of the parties’ positions;
the cost versus the benefits of continuing the dispute; and
the impact on future compliance for the taxpayer and the broader community.
For instance, in considering the cost versus benefits of continuing a dispute, the ATO must make an objective assessment of both the internal and external ATO legal costs, the costs and risk in collecting the tax liability including a taxpayer’s ability to pay, the financial position of the taxpayer and related entities, and whether it is an efficient use of ATO resources.
The ATO is less likely to agree to a settlement where:
there is a contentious point of law which needs clarification;
it is in the public interest to litigate; or
the behaviour is such that the ATO needs to send a strong message to the community.
The ATO has power to settle a tax dispute where it relates to tax (including superannuation) liabilities and debts, penalties, payments, notional tax on losses, franking credits and debits, foreign tax credits, credits and refunds of indirect taxes and general interest charges or shortfall interest charges.
Settlements will always involve, to a degree, a compromise by all parties. However, unlike a commercial settlement, the ATO cannot settle a dispute on a purely commercial basis without reference to the Code and the factors set out in the Code (see above).
The ATO will often consider advice from external counsel when considering the appropriateness of a proposed settlement. However, the responsible ATO officer at the proper delegation level is the ultimate decision maker.
Consequences of settlement
We often recommend taxpayers enter into a written deed of settlement when settling a matter with the ATO. The settlement deed governs the terms of the settlement. A settlement deed may also provide for the taxpayer to adopt a certain approach in future years (unless specifically stated that it cannot) unless the taxpayer’s circumstances change materially or there has been a change either to the law or application of the law.
The provisions of a settlement deed typically waive the right of the parties to bring further proceedings in relation to the settled matter.
Tips and good practice
Tax advisers should be aware of the ATO’s approach to settlements of tax disputes. When negotiating a settlement, parties should act fairly, honestly and in good faith and taxpayers should disclose to the ATO, to the best of their knowledge and belief, the relevant and material facts which are relevant to the dispute.
Other tips for successfully negotiating a settlement include:
the settlement submission should clearly specify the quantum of tax or interpretation of the law in dispute;
‘administrative reasons’ should be emphasised to the ATO when negotiating a settlement;
the settlement submission should be without prejudice and deny liability or admission of fact to preserve the taxpayer’s position should litigation ensue; and
the terms of the settlement deed negotiated should include protection for both individual taxpayer and the officers of a corporate taxpayer from unnecessary risks and public discovery or scrutiny.
Negotiating the terms and condition of the settlement deed can be contentious and difficult. The best advice we can give taxpayers is to engage a well-credentialed tax lawyer to deal with the ATO on their behalf in relation to their dispute to bring about the best outcome possible.
In the fourth part of this series, we will look at dealing with interest and penalties that may be imposed by the ATO by seeking remission of those amounts, objecting, getting a reasonably arguable position advice and/or applying for a private binding ruling.
At Sladen Legal, one of the areas our tax team specialises is the settlement of tax disputes with the ATO on behalf of our clients. Please contact us if you have any further questions or need our assistance: