Practical guide to the ATO Code of settlement

Example: PAYG withholding settlement

A company withheld PAYG withholding amounts at the resident rate for its current and former employees including non-resident employees. Some of the former employees have now returned to their country of origin while others, still in Australia, are not contactable. The company estimates that a percentage of the employees were non-residents. A settlement is negotiated based on an agreed percentage of former employees who should have had PAYG withheld at the non-resident rate.

Example: Settlement following an alleged 'U-turn'

A taxpayer with a significant online presence has taken a position in respect of its online sales that the ATO does not accept. The ATO has issued a draft GST ruling followed by a final GST ruling that sets out its view of the law. Soon after the final GST ruling was issued, the taxpayer accepted the ATO view of the law on a go-forward basis. The taxpayer strongly asserts that the ATO has engaged in a ‘U-turn’. The ATO does not accept that there has been a ‘U-turn’ but recognises that the taxpayer’s argument has some merit. The ATO and the taxpayer have entered into negotiations with the assistance of a facilitator. Discussions suggest the dispute could be settled on the basis that the ATO view of law be applied to all sales that took place from the first day of the month after the draft GST ruling issued. The ATO and taxpayer agree to enter into a settlement where the taxpayer voluntarily amends its GST liability on the suggested basis and the ATO gives an undertaking that it won't raise any GST assessments in respect of earlier sales.

Example: Third party settlement

Following comments in the media that a newly released investment product may not have the taxation benefits it claimed, the financial institution approached the ATO. The ATO indicated that it did have some concerns about the product. There are currently 3,000 investors. Following discussions between the ATO and the financial institution a test case is run and the decision is consistent with the ATO interpretation. To minimise impacts for taxpayers, a settlement is negotiated on the basis that the institution will pay an amount that is equal to an estimate of the tax liability of the investors. The ATO will not raise amended assessments in respect of those investors.

Example: Change of view not a settlement

A taxpayer has appealed to the Federal Court. During the audit and objection, experienced ATO officers were involved in determining the ATO view of law to the facts. The ATO has engaged Senior Counsel for the litigation who has identified a significant weakness in the ATO view. After consideration, the decision is made to amend the taxpayer’s tax return to reverse the previous amendments. This is not a settlement.

Example: ATO initiated

A taxpayer has lodged an objection to the ATO’s use of a valuation methodology for an asset. The ATO has sought further advice from an expert valuer who supports the ATO’s position but has also identified some weaknesses. As a result, the ATO approaches the taxpayer to discuss a possible settlement.

Example: Taxpayer initiated

During an audit, it was established that a taxpayer had for many years provided their artistic talents to family and friends, sometimes without payment. The taxpayer's activities recently expanded into a full-time business. There is now disagreement about when the taxpayer commenced carrying on a business. The taxpayer’s adviser has suggested they would be willing to discuss a settlement based on a compromised commencement date.

Example: Multiple areas within ATO

Following an audit, the ATO has agreed to enter settlement negotiations on a multi-issue, multi-year tax dispute that involves income tax and GST issues. To ensure all issues are covered, a debt officer, an interest product team member, officers with expertise in income tax and GST, and a senior officer who is authorised to settle all aspects of the dispute on behalf of the ATO are involved.

Example: External experts

During an audit, a public company and the ATO have been unable to agree on certain facts. The ATO is relying on the advice of an expert witness. The ATO has asked the company whether it would be willing to present its arguments in respect of the factual position to an independent alternative dispute resolution (ADR) practitioner for a neutral evaluation. While neither party is bound by the evaluation, both parties agree that the evaluation may assist them reach agreement on the facts and then possibly to a settlement. The ATO would ensure that its expert witness is available to discuss the matter with the ADR practitioner.

Example: Future superannuation guarantee compliance

An employment agency that provides workers in a service industry has always considered the workers to be independent contractors and never made required superannuation guarantee (SG) contributions. After the receipt of additional information, it was recognised that the taxpayer acted on a genuine belief that the workers were independent contractors. The workers had been receiving a higher level of remuneration to compensate for not getting super support. An agreement between the agency and the ATO is reached where the agency will correctly treat the workers as employees for SG purposes and will commence making super contributions on a prospective basis commencing on an agreed date.

Example: Future superannuation regulatory compliance

An ATO auditor reported that a self-managed super fund had a number of serious regulatory contraventions by its trustees over a 9 year period. The contraventions related to loans made by the fund to related parties. After the audit, the ATO issued a notice of non-compliance, and a significant proportion of the loans were repaid to the fund. The parties agreed to settle their dispute on the fund’s complying status. Under the terms of the settlement, the ATO issued a notice of compliance to the fund and reinstated its original income tax assessments and agreed not to take any further action on the issues covered by its audit of the fund. The fund’s trustees undertook to secure full repayment of the loans plus interest by the related parties, agreed to be disqualified, roll over all benefits to an APRA regulated fund and wind up the fund.

Example: Future income treatment

A taxpayer operates in an industry where the ATO has identified certain industry averages. The taxpayer is within those industry averages. In one year, the taxpayer lodged a tax return where the ratio of certain expenditure substantially differed from the average. During the audit the taxpayer advised that having reviewed their accounting records they had incorrectly categorised certain expenditure. The taxpayer asked whether the ATO would agree to finalise the audit based on an amendment to the assessment that took into account the correct categorisation of expenditure and a full remission of administrative penalty. The ATO agreed to this position if the taxpayer gave an undertaking that, if there were no material changes to how they operate their business, they would lodge future tax returns for the next 2 years within the industry average. The taxpayer and the ATO entered into a settlement agreement on this basis.

Example: Not commencing future dispute action

As part of negotiating a settlement for an objection both parties agreed that the taxpayer would withdraw their objection and not commence any future dispute action – including Administrative Decision Judicial Review action or Freedom of Information requests on the matter in dispute.

Example: Issuing amended assessments within agreed time frame and payment arrangement

During settlement negotiations on an objection, the taxpayer has asked the ATO to commit to issuing amended assessments within an agreed timeframe to give effect to the settlement position. The ATO officer also discusses payment arrangements for the agreed debt. Both matters are incorporated into the settlement deed.

Example: Widely based settlement position

The ATO has identified a tax arrangement involving a significant number of unrelated taxpayers. To optimise the benefits of a settlement, a small number of participants to the arrangement are reviewed and a widely based settlement position is developed. This settlement position will then be offered to the remaining participants to the arrangement who may or may not be in dispute.

Example: Third party settlement

The ATO has identified an issue with the net income of a managed fund which could ultimately impact 20,000 beneficiaries. Although the trustee may not directly be in dispute, the beneficiaries would be likely to be in dispute once their assessments were adjusted. The ATO negotiates a settlement with the trustee as a practical resolution and to avoid unnecessary and costly disputes.

Example: Third party settlement

The ATO has identified a number of taxpayers who had incorrectly calculated their assessable income from a particular investment. In all cases, they lodged using a tax agent who was using the same commercial software. The software supplier investigated their product and identified that it had led to a calculation error. Concerned about the commercial damage they'd suffer if the ATO amended the tax returns, the supplier asked the ATO to accept a payment from them rather than raise amended assessments on the taxpayers. As there could substantial administrative savings for all parties, the ATO negotiates a settlement with the supplier.

Example: All factors considered

A taxpayer rejected a settlement offer made by the ATO at objection. The dispute is now before the Federal Court and the taxpayer now concedes that their position is unsustainable. The taxpayer has approached the ATO to settle based on a previous ATO offer with immediate payment of the tax and both parties to bear their own costs. In considering whether to settle, the ATO decision maker must consider the likely outcome of the litigation, the costs of continuing the dispute and the immediate payment of the full amount of the tax liability, and the additional costs already incurred because of the taxpayer’s actions.

Example: Cost versus benefit and Strength of position

A self-managed super fund sold a commercial premise. The premise had been held for many years and substantial improvements had been made which had to be taken into account to correctly calculate the cost base. The documentary evidence of the improvements had been lost due to a fire. The taxpayer has made an estimate of the cost of the improvements, but the ATO auditor considers this estimate to be too high. While a valuer could be engaged to provide a professional estimate of the cost of the improvements, the fees that would be charged could exceed half of the tax in dispute. In this situation, it would be appropriate for the ATO and the taxpayer to negotiate a settlement rather than incur the professional fees of a valuer.

Example: Strength of position

A company did not remit PAYG withholding or pay super for its employees, and director penalty liability has been imposed on the sole director of the company. The director has raised a valid defence which the ATO considers has a real prospect of success. The director has offered to make a partial payment that reflects the likelihood of success. The ATO may be willing to consider a settlement in this situation but will not accept a lesser payment towards the employees' super entitlements. However, a settlement offer where payment received is applied disproportionately towards the employee super entitlements and a lesser proportion is applied towards the PAYG withholding debt, may be accepted.

Example: Future compliance and Cost v benefit

A company, when under the control of its founder, had a poor approach to maintaining accounting records and understated assessable income for many years. The founder has been ill for the last 18 months and unable to manage the company which is now controlled by his son. Prior to being contacted by the ATO, the son took action to improve the quality of business records and meet the company's tax obligations. The ATO proposes to raise amended assessments which, according to the son, would require the company to appoint a liquidator. He indicated he will object to any amended assessments raised and argue that the amended assessment is based on unsound estimates, and ignore the limited records that his father prepared. The founder’s health is such that he can no longer give intelligible responses to questions. The ATO negotiates a settlement where some amended assessments will be raised but not all that could be. The company agrees to continue to improve its accounting and record keeping system.

Example: Strength of position and Cost versus benefit

The taxpayer was engaged in business as a sole trader and the business has failed. The only asset of value is the family home which is mortgaged to a relative. The taxpayer has offered to borrow a further amount from the relative if the ATO will accept a single payment that is substantially less than the tax debt as the final payment. The ATO has sought advice from counsel with bankruptcy expertise who advised that the security over the home held by the relative is probably effective against other creditors. The ATO could seek to have the taxpayer bankrupted and indemnify the trustee in bankruptcy for the costs in seeking to have the mortgage treated as a preference debt. However, counsel advises that this is unlikely to succeed. Accepting that there would be selling costs and professional fees paid to the trustee in bankruptcy and that most of the proceeds are likely to be paid to the relative as mortgagor; the ATO may consider that it's in the interest of good administration to negotiate a settlement.

Example: Strength of position and Cost versus benefit

The taxpayer has an income tax dispute and has permanently left Australia with a taxation debt. The taxpayer holds assets in the foreign country that could potentially pay the whole debt. The taxpayer wants to settle their dispute by making a single and final payment for a significant proportion of the debt. The ATO has sought the advice of an international law firm that has advised the debt may not be recognised or collectable under the laws of that country. Given this advice, the ATO commences settlement negotiations with the taxpayer.

Example: Strength of position

A property development company sold properties to an adult child of one of its directors for a consideration that the ATO views to be substantially below market value. The company’s position is that it was a forced sale, and the consideration was market value. The ATO views its argument is the strong one. The company’s solicitor has approached the ATO and advised the company believes that if the dispute is litigated, there is a 60% probability the court will decide in favour of the ATO. The ATO takes this into account, along with internal views as to the prospects of success and the relative strength of the legal arguments of both parties before proceeding to settlement negotiations.

Example: Test case

A taxpayer is the beneficiary of a trust, and the trustee has taken a tax position that provides the taxpayer with a substantial tax benefit. While the ATO doesn't accept the position, the ATO is aware that this position has been taken by many trustees and has the strong support of some members of the tax profession. It is identified that clarification of the law is in the community interest and test case funding will be considered. It would not be appropriate for the ATO to negotiate a settlement in this situation.

Example: Behaviour

During an audit, the ATO identified that an individual who was the director of a company had prepared false invoices that were used to claim input tax credits. The ATO is taking action to recover the input tax credits. The Commonwealth Director of Public Prosecution is also prosecuting the individual for several related fraud offences. An associate of the taxpayer approached the ATO and offered to make a single payment towards the tax debts if the ATO will make the necessary amendments, such that there is no further tax liability. While a settlement would probably lead to a greater recovery of the tax debt than any other option, the settlement may weaken the criminal prosecution. Accordingly, a settlement in this situation should not be considered.

Example: Behaviour but still appropriate to settle

The taxpayer has a history of ‘phoenix’ companies, and a taxation liability has recently been raised. The Commonwealth Director of Public Prosecution has advised the ATO that although there are grounds to prosecute the taxpayer, they've formed the opinion that it isn't in the public interest to do so. This is because the taxpayer was severely injured in a motor vehicle accident. The taxpayer is seeking to settle the tax dispute by making a small payment which will leave some capacity to pay for their ongoing medical care. While ordinarily the ATO would be reluctant to consider a settlement with a serial ‘phoenix’ operator, due to the taxpayer’s severe injuries the phoenix behaviour will not recur and it would be appropriate for the ATO to enter into settlement discussions.

Example: Advice of external counsel

The ATO had not been able to resolve a tax dispute that the taxpayer appealed to the Federal Court. Evidence filed by the taxpayer in some aspects strengthens the ATO’s case, and in other aspects casts doubt as to whether the ATO’s position is tenable. Following discussions between the ATO’s external counsel and that of the taxpayer, the ATO’s counsel has advised there is scope to settle the matter. The final decision to accept or reject a settlement offer is that of the responsible ATO SES officer who will give due consideration to the advice of the ATO’s counsel.

Example: Settlement panel

A taxpayer has made a settlement offer to the ATO audit officer. The proposal has been taken to an ATO settlement panel for consideration. The panel doesn't agree that the settlement amount is appropriate and gives the audit officer parameters for which a settlement could be agreed to. The officer is authorised to make a settlement decision within those parameters to achieve the settlement.

Example: Authorised officer

During conciliation, the Administrative Review Tribunal member has recommended that the parties consider a settlement. The ATO officer in charge of the case (Executive Level 1) is authorised to negotiate a settlement to a certain amount (see note). The ATO officer has commenced negotiation with the taxpayer representative, but to achieve a settlement, the amount agreed to would exceed their authorisation. The ATO officer has contacted the authorised Executive Level 2 officer by phone to seek their approval to settle at a higher amount. The EL2 officer will be the decision maker in this case.

Note: maximum amount of tax (including interest and penalties) that can be remitted.

Example: Settlement negotiation has stalled

A settlement negotiation has stalled with some distance still between the position of the ATO and the taxpayer. The ATO negotiators need to explain they need to amend relevant assessments and issue penalty notices. To avoid the perception they are threatening the taxpayers, the ATO officers ensure from the outset that the taxpayer is aware of the timeframes they must meet.

Example: Potential prosecution

Prior to entering into settlement negotiations, the ATO had referred the matter for consideration of potential prosecution. The ATO officer makes the taxpayer aware of this during the negotiations. The ATO negotiators become aware that prosecution won't proceed. The taxpayer is informed of this decision.

Example: Funding a test case

The ATO is funding a test case on a particular issue. A company with the same issue wants to settle their dispute so they can proceed to sell the business. It becomes obvious during settlement negotiations that the company is unaware there is a test case which may have application to their matter. The company is likely to be sold prior to the resolution of the test case. The ATO officer includes a mechanism in the settlement deed to amend the taxpayer’s assessment if the court finds against the ATO’s position.