5. 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.
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 5.1 – 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 5.2 – 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 5.3 – 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 5.4 – Future compliance & 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 5.5 – Strength of position & 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 5.6 – Strength of position & 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 5.7 – 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 5.8 – 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 5.9 – 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 5.10 – 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