4. 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.
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 4.1 – 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 4.2 – 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 4.4 – 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 4.5 – 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
Settlement negotiations can cover further actions for either party.
Example 4.6 – 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 4.7 – 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 4.8 – 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 2011/14External Link – General debt collection powers and principles.
Example 4.9 – 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 4.10 – 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 4.11 – 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 4.12 – 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 4.13 – 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.