Show download pdf controls
  • Practical guide to the ATO Code of settlement

    This material provides further details and practical examples to assist tax officers and taxpayers in considering settlement. The examples seek to illustrate through practical example the application of the principles outlined in the Code of settlement.

    Find out about:

    1. What is a settlement?
    2. Settlement is part of good administration
    3. Settlement negotiations
    4. Settlement considerations
    5. Settlement decision
    6. Responsibilities
    7. Settlement deed
    8. Background

    1 What is a settlement?

    A settlement is an agreement between parties to resolve matters in dispute where one or all parties make concessions on what they consider is the legally correct position.

    In this context, a dispute can be about – a:

    • tax or superannuation liability or entitlement
    • tax or superannuation debt
    • decision under a tax or superannuation law.

    A reference to a disputed ‘liability or entitlement’ in this context includes:

    • tax (including any tax, levy, charge, duty or excise imposed under a law administered by the Commissioner of Taxation)
    • penalties (but not penalties imposed by a Court)
    • payments (including any offset, grant or benefit under a law administered by the Commissioner of Taxation)
    • notional tax on losses
    • franking credits and debits
    • foreign tax credits
    • credits and refunds of indirect taxes
    • general interest charge
    • shortfall interest charge and interest.

    A dispute considered for settlement is one where the taxpayer has (or will have) a right to challenge the Commissioner’s decision, although settlement should be potentially considered as a way to resolve a wide range of disputes and disagreements.

    If the ATO or the taxpayer decides that the other party has the preferred position and agrees to adopt that position, this is not a settlement.

    Example 1.1 – 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 on the basis of an agreed percentage of former employees who should have had PAYG withheld at the non-resident rate.

    Example 1.2 – Settlement following an alleged 'U-turn'

    A taxpayer with a significant on-line presence has taken a position in respect of its on-line 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 that 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 will not raise any GST assessments in respect of earlier sales.

    Example 1.3 – 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 and the ATO will not raise amended assessments in respect of those investors.

    Example 1.4 – 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 so as to reverse the previous amendments. This is not a settlement.

    End of example

    2 Settlement is part of good administration

    Settling disputed matters is consistent with good management of the tax system, overall fairness and best use of ATO and other community resources. This has become known as ‘the good management rule’, which has been endorsed by the courts.

    3 Settlement negotiations

    A settlement can occur at any stage, for example, before or after the issue of a position paper in an audit or during the course of an objection or litigation.

    Where settlement is sensible and appropriate in relation to a matter, it is unnecessary to go through a formal process of assessment, amendment and objection.

    A settlement can occur for one issue, multiple issues or the entire dispute.

    It may be that settlement is discussed several times throughout a dispute before a final agreement is reached.

    Initiate discussions

    Where it appears that settlement could be an option, the ATO or the taxpayer can initiate settlement discussions and/or make a settlement offer.

    Example 3.1 – 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 3.2 – 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 that they would be willing to discuss a settlement based on a compromised commencement date.

    End of example

    Nature of the dispute will dictate who will be involved

    In significant cases, generally more than one ATO officer should be present during settlement negotiations. Some disputes will require the involvement of officers from more than one area of the ATO.

    Both parties should have the relevant decision maker present or readily available during negotiations.

    In disputes that involve (or potentially involve) significant debts, the ATO officer leading the negotiations should ensure that the relevant debt decision maker is aware of any settlement negotiations and involved in discussions and decision-making as necessary.

    As a guide, in disputes that:

    • potentially could reduce the amount of income tax already paid by a taxpayer, or raise a remission, refund or credit, the leading ATO officer need to ensure that the relevant Interest Product team member from Client Account Services in Service Delivery is included. This is important as the ATO has no discretionary powers to pay or not pay a credit interest entitlement, although a taxpayer may waive their statutory entitlement to Interest on Overpayment or Delayed Refund Interest
    • involve (or potentially involve) significant debts, the ATO officer leading the negotiations needs to ensure that the relevant debt decision maker is aware of any settlement negotiations and involved in discussions and decision-making as necessary.

    Equally for debt disputes where an objection or appeal exists or is likely to be received the ATO officer with carriage of the debt negotiations needs to ensure that a relevant tax technical decision maker is appropriately involved.

    Example 3.4 – 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 3.5 – 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.

    End of example

    Future actions

    Settlement negotiations can cover further actions for either party.

    Example 3.6 – 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 superannuation 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 superannuation contributions on a prospective basis commencing on an agreed date.

    Example 3.7 – Future superannuation regulatory compliance

    An ATO auditor reported that a self-managed superannuation fund had a number of serious regulatory contraventions by its trustees over a nine 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, rollover all benefits to an APRA regulated fund and wind up the fund.

    Example 3.8 – 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 on the basis of 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, provided that there were no material changes to how they operate their business, they would lodge future tax returns for the next two years within the industry average. The taxpayer and the ATO entered into a settlement agreement on this basis.

    End of example

    The ATO cannot guarantee in a settlement freedom from prosecution, however, the ATO can agree not to allocate resources to investigate a taxpayer’s disclosure for the purposes of prosecuting a taxpayer for a criminal offence or to refer the taxpayer for criminal investigation by another law enforcement agency.

    Resolution of matter

    Negotiations should encompass how the resolution of the matter will be given effect. The Settlement deed should specify the method or timing by the taxpayer to pay the settled liability and obligations of the ATO.

    Settlement negotiations that result in an unpaid liability should include a payment arrangement in accordance with the requirements in Law Administration Practice Statement PS LA 2011/14: General debt collection powers and principles.

    Example 3.9 – 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 3.10 – 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.

    End of example

    Multiple taxpayers likely to be in dispute

    In some situations a taxpayer may not yet be in dispute with the ATO. This usually occurs where there is an arrangement or scheme where a number of taxpayers were participants. These cases can still be subject to settlement.

    Example 3.11 – 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 3.12 – 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 3.13 – 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. Being concerned about the commercial damage they would 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.

    End of example

    Statements made during negotiations

    All settlement and ADR processes are conducted in a confidential and on a ‘without prejudice’ basis (also known as ‘settlement negotiation privilege’).

    ‘Without prejudice’ privilege can apply to protect negotiation discussions from being put in evidence. The general rule is that communications between the parties which are genuinely aimed at settlement or early resolution, whether oral or in writing, cannot be put in evidence without the consent of both parties in the event of those negotiations for settlement being unsuccessful.

    The rationale for the rule is to protect statements which have been made for the purpose of furthering negotiations and resolving the dispute out of court from being brought before the courts as admission on questions of liability.

    ‘Without prejudice’ privilege has a number of exceptions and exclusions but the main rule to remember is that the privilege is limited to negotiations for the settlement or dispute resolution.

    To ensure there is no confusion during settlement negotiations, parties must understand that all discussions are ‘without prejudice’ and that no binding agreement exists until a settlement deed is executed, that is, signed and dated by all parties.

    Although statements made during negotiations are on a ‘without prejudice’ basis this does not extend to objective facts that may be established during the course of negotiations that can be proved by direct evidence.

    4 Settlement considerations

    The considerations for settlement should be assessed as a whole before making a decision on whether or not to settle a dispute.

    Each case must be considered on its merits having regard to the facts and issues in dispute, any advice from relevant experts and the individual circumstances of the case.

    The ATO decision to settle, or not, must reflect a fair, effective and efficient use of resources in resolving dispute matters, balancing competing considerations and applying discretion in achieving a sensible settlement decision.

    Relative strength of the parties position

    The relative strength of the party’s position involves an evaluation of the evidence, the application of the law to the facts and the quantum of the tax in dispute and the possible litigation outcome.

    Costs v benefits

    The ATO must consider the costs and benefits of continuing the dispute and make an objective assessment. Considerations include:

    • the internal and external ATO legal costs
    • the cost and risk in collecting the liability (including a taxpayer’s ability to pay)
    • the financial position of the taxpayer and related entities
    • the effective and efficient use of resources.

    If the costs of continuing the dispute exceed the benefits then settlement is likely a preferable option.

    Future compliance

    When considering a settlement involving concessions on past liabilities, the ATO will apply the 'good management rule' where it will achieve compliance by the taxpayer, group of taxpayers, or a section of the public, for current and future years, in a cost effective way.

    Example 4.1 – 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 on the basis of 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 4.2 – Cost v benefit & Strength of position

    A self-managed superannuation 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 4.3 – Strength of position

    A company did not remit PAYG withholding or pay superannuation 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 superannuation entitlements of the employees. However, a settlement offer where payment received is applied disproportionately towards the employee superannuation entitlements and a lesser proportion is applied towards the PAYG withholding debt may be accepted.

    Example 4.4 – 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 the founder’s 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 are 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 and the company agrees to continue to improve its accounting and record keeping system.

    Example 4.5 – Strength of position and Cost v 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 which 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 is in the interest of good administration to negotiate a settlement.

    Example 4.6 – Strength of position and Cost v 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 4.7 – 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 that the company believes that if the dispute is litigated, there is a 60% probability that 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.

    End of example

    Settlement should generally not be considered where:

    • there is a contentious point of the law which requires clarification – in such cases it may be appropriate to fund the litigation under the test case litigation program
    • it is in the public interest to litigate
    • the behaviour is such that there is a need to send a strong message to the community – behaviour such as persistent, ongoing and/or expanding non-compliance; or blatant non-compliance about which the community would expect the ATO to take action.

    Example 4.8 – 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 does not 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 4.9 – Behaviour

    During the course of an audit, the ATO identified that an individual who was the director of a company had prepared false invoices which 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 4.10 – 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 have formed the opinion that it is not 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.

    End of example

    5 Settlement decision

    The settlement decision should be seen to be an appropriate application of the Code of settlement principles on the facts and circumstances of the matters in dispute. The decision should be documented and evidenced so that it would satisfy an objective review.

    Settlements can only be approved by an ATO officer who has the delegation or authorisation to conclude settlements. All Senior Executive Service officers (SES) have the delegation to settle taxation and superannuation disputes. In some areas other ATO officers are authorised to make a settlement decision.

    In some ATO business areas, settlement panels provide advice to ATO officers on reasonable parameters for settlement negotiations and decisions.

    For cases where external counsel has been engaged it is expected that the advice of counsel would be obtained on the merits of the Commissioner’s position and the reasonableness of the proposed settlement.

    Example 5.1 – Advice of external counsel

    The ATO had not been able to resolve a tax dispute which 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 that 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 5.2 – 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 does not 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 5.3 – Authorised officer

    In the course of conciliation the AAT 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*. 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.

    * maximum amount of tax (including interest and penalties) that can be remitted

    End of example

    6 Responsibilities

    Acting in good faith means parties must cooperate in a reasonable way to achieve settlement. In some instances this would require a party to disclose material information to another which, in the absence of a good faith obligation, it would not be required to do.

    In addition the strict secrecy requirements of taxation and superannuation laws mean the ATO will not disclose the terms of any settlement agreement to third parties, unless authorised by law or by the taxpayer.

    Actions by ATO officers will be consistent with the APS Code of ConductExternal Link and will ensure the application of the guidance and mutual obligations in the Taxpayers’ Charter.

    Example 6.1 – Acting in good faith

    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 that they are threatening the taxpayers the ATO officers ensure from the outset that the taxpayer is aware of the timeframes they must meet.

    Example 6.2 – Acting in good faith

    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 will not proceed. The taxpayer is informed of this decision.

    Example 6.3 – Acting in good faith

    The ATO is funding a test case on a particular issue. A company with the same issue wishes to settle their dispute so that they can proceed to sell the business. It becomes obvious during settlement negotiations that the company is unaware that 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.

    End of example

    7 Settlement deed

    Settlements must be finalised by the parties signing a written agreement which sets out the terms of their agreement. The agreement must represent the final agreed position between the parties (including any payment or future obligations including methods and timing).

    The form of the agreement that will be appropriate to evidence a particular settlement may vary. For example, in simpler matters, an exchange of correspondence or a simple agreement may be appropriate to evidence a settlement. A simple agreement may include an agreement made between the parties under sections 34D or 42C of the Administrative Appeals Tribunal Act 1975 (AAT Act).

    Model deeds

    Model deeds are available for use in preparing a settlement agreement. Input from the ATO legal officers should be sought if any significant changes to the standard clauses are anticipated.

    Varying a settlement agreement

    Settlements represent an agreement by both parties to a dispute to a mutually negotiated position, following a considered assessment by each party of the risks and potential benefits of continuing the dispute. For this reason, the ATO does not believe that settlements should be undone lightly or without good reason. However, the ATO agrees that, in the interests of fair and reasonable administration, some settlements can and should be varied (reopened) in the limited and exceptional circumstances outlined below.

    Taxpayers may seek to reopen a settled case where the ATO subsequently changes its view of the law on which the settlement was based, in a way that would have achieved a better outcome for the taxpayer, subject to the following conditions:

    • a settlement resolves only one matter in dispute (and not multiple issues such as 'global’ settlements)
    • the taxpayer requests that the settlement be varied
    • the timeframe for the relevant amendment period has not ended
    • the settlement was concluded after 1 December 2009 (the public release of the Inspector General of Taxation Review into aspects of the ATO's settlement of active compliance activities).

    Prior to reopening a settlement, ATO officers must seek advice from the ATO settlement policy team in Review and Dispute Resolution.

    8 Background

    The basic duty of the Commissioner is to administer tax law, but in exercising that duty the Commissioner must also provide for reasonable and sensible administration and good management of the tax system. For example, the Full Federal Court held in Grofam Pty Ltd v Federal Commissioner of Taxation 97 ATC 4656 at 4665; (1997) 36 ATR 493 at 503:

     

    The Commissioner's power to settle or compromise proceedings to which he is a party derives from section 8 of the Act [ITAA 1936] which provides that the Commissioner shall have the general administration of the Act.

    The court cited with approval an earlier observation by Spender J in Precision Pools Pty Ltd v Commissioner of Taxation (1992) 37 FCR 554 at 567; 92 ATC 4549 at 4558; (1992) 24 ATR 43 at 54:

     

    That administration has to be bona fide and for the purposes of the Act, but it is a grant of a wide power and would encompass, for instance, the power to compromise proceedings in which he was a party or to make agreements or arrangements concerning the efficient management of a dispute in which he was involved.

    It is clear that, once there is a dispute between the parties, it is open to the parties, and at times highly desirable, to resolve the dispute by means of settlement. For instance in Grofam Pty Ltd v Federal Commissioner of Taxation 97 ATC 4656 at 4665; (1997) 36 ATR 493 at 503 the Full Federal Court urged the parties to consider a commercial settlement:

     

    Perhaps further discussion between the parties and their legal advisers will result in a sensible adjustment of the matters... The alternative is probably further protracted litigation with its consequent delay and expense. We realise that the Commissioner is mindful of the important public duty which he has in administering the Act. Nevertheless, if this were a commercial dispute, there would be much to be said for the view that a further attempt at settlement should be made, perhaps with the aid of an appropriate mediator. We see no reason associated with the Commissioner's powers and duties which should dissuade him from that course if he thought it otherwise an appropriate one for him to follow.

    In formulating what has been called the ‘good management rule’, the courts have recognised that it is open to the Commissioner to make sensible decisions having regard to the best use of the limited resources available. The Commissioner is not obliged to relentlessly pursue every last tax dollar where that would clearly be uneconomic or where the outcome is at best problematic. This is reinforced by Public Governance, Performance and Accountability Act 2013, which imposes an obligation on the Commissioner to manage the affairs of the ATO in a way that promotes the efficient, effective and ethical use of Commonwealth resources.

    The good management rule has broad application, extending beyond individual cases. For example, there may be occasions where the Commissioner might consider it to be in the overall interests of the administration of the tax laws not to pursue retrospective audit and/or assessing action in return for acceptance by a section of the public or group of taxpayers of the Commissioner's position for current and future years. An example of that type of action by a revenue authority can be found in Inland Revenue Commissioners v National Federation of Self-Employed and Small Businesses Ltd [1982] AC 617 (the Fleet Street Casuals Case). That case involved a special arrangement to improve tax compliance amongst a group of 6,000 employees, and included a concession not to undertake retrospective investigations.

      Last modified: 13 Feb 2017QC 42816