The new ATO Code of Settlement
practice
The Tax Office has recently released a
revised version of its Code
of Settlement Practice, which provides guidance to ATO staff
on tax dispute settlements: see 2007 WTB 8 [284].
The Revised Code may indicate a greater
willingness on the part of the Tax Office to settle tax disputes.
Taxpayers in dispute with the Tax Office should therefore consider
at an early stage:
-
whether
they wish to settle the dispute;
-
the
most appropriate time to suggest settlement discussions;
-
how
the suggestion should be made without showing a lack of confidence
in their case; and
-
whether
they would be prepared to settle in accordance with the 'Model
Deed of Settlement'.
What is the Code of Settlement practice?
The
Revised Code is a document providing guidance to Tax Office staff
on the settlement of tax disputes. ATO staff must follow the
Revised Code in deciding whether and how to settle a dispute.
Why is settling with the ATO different from a normal
settlement?
Litigation
with the ATO differs from other commercial litigation in a number
of respects. Some of these differences can be to the advantage of
the taxpayer. For example, the role of the ATO is to apply tax
legislation, rather than always to maximise tax recoveries. In the
context of tax litigation, this should mean that the ATO will not
pursue an argument which, on balance, it considers to be
incorrect. This can be contrasted with commercial litigation,
where a party will often pursue an argument which may have less
than a 50% chance of success.
Some
of these differences can, however, make litigation with the ATO
more difficult than other commercial litigation. A particular
difficultly concerns settlements. While the great majority of
commercial disputes are eventually settled, this is not the case
with disputes with the ATO.
The
current Tax Office settlement practice guideline expressly states
that 'settlement is not a normal means of resolving issues for
disputed tax liabilities or entitlements'.
When will the ATO settle?
The
Revised Code recognises that 'good management' and the proper
administration of tax legislation may make it appropriate for the
Tax Office to settle certain disputes with taxpayers. The Revised
Code does not, however, provide any procedure for the Tax Office
to initiate settlement discussions. It is implicit in the Revised
Code that any initiation of settlement discussions must come from
the taxpayer.
The
Revised Code also emphasises that there will be very limited
prospects of settling a case which falls within a 'clearly
established and articulated ATO view' of the issue in dispute.
This can lead to a common practical difficulty in dealing with the
ATO. Even if a taxpayer can put forward a reasonable argument
that, for example, a public ruling is inconsistent with tax
legislation, the ATO will nevertheless insist on applying the
public ruling. This limitation, and other limitations listed in
para 25 of the Revised Code, significantly curtail the
circumstances in which a settlement with the ATO can be achieved.
The
situations in which the ATO might settle are listed in para 26 of
the Revised Code. In summary, the best prospect for achieving a
settlement for most corporations will be to prove genuine
uncertainty in the application of tax legislation and the absence
of any applicable 'ATO view' on the dispute. The introduction
of 'genuine uncertainty as to the proper application of the
law' as a ground for settling a matter has been introduced for
the first time within the Revised Code and may signal a greater
willingness by the ATO to settle tax disputes.
When can a taxpayer initiate settlement discussions?
The
Revised Code expressly acknowledges that settlement discussions
can occur at any stage, including prior to a formal assessment
being raised. It notes that settlement discussions will often
occur during an audit, after the taxpayer has considered a
position paper from the ATO. As mentioned above, however, the
Revised Code assumes that it will be the taxpayer who first raises
the possibility of settlement. Taxpayers may therefore be
concerned that suggesting settlement discussions might be seen as
a sign of weakness. This concern can normally be met, however, by
an appropriately worded letter proposing settlement discussions.
It is also possible for appropriately worded settlement offers,
even if not accepted, to have costs benefits for taxpayers.
How will a settlement be recorded?
The
Revised Code contains a 'Model Deed of Settlement' to record
settlement agreements. One concern for taxpayers is the insertion
of a new clause 4 into this model deed. This clause, which
reflects the new para 75 of the Revised Code:
(a)
requires a warranty from the taxpayer that 'to the best of its
knowledge and belief it has made full and true disclosure of all
relevant facts to the Commissioner'; and
(b)
gives the Commissioner a discretion to rescind the settlement
agreement 'if there has not been full and true disclosure of all
relevant facts to the Commissioner as required by clause [a]'.
This
clause will apply whether or not there is any dishonesty on the
part of the taxpayer and whether or not the Commissioner has
requested the relevant information or documents. The clause is not
one that would normally be found in a settlement deed for
commercial litigation.
Conclusion
The
Revised Code may show an increased willingness on the part of the
ATO to settle disputes with taxpayers. Whether this will in fact
lead to an increase in the
number
of tax disputes which are settled is, of course, yet to be seen.
This article written by Michael Quinlan and
Ross Stitt, Partners and Malcolm Stephens, Senior Associate,
Allens Arthur Robinson, appeared in Thomson's Weekly
Tax Bulletin (2 March). With tax fast-moving and
ever changing, practitioners rely on Australia's most
comprehensive and informative tax news service - Weekly
Tax Bulletin. It covers, in clear terms, all tax and
related developments from cases, new legislation, tax rulings and
major announcements to detailed practitioner articles. To find out
more, click
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