In this report, we provide statistics for settlements entered into with public and multinational businesses for the 2022-23 financial year. These statistics supplement the aggregated settlement figures included in the ATO annual report each year.
In 2022-23, we secured $3.08 billion of additional tax revenue under settlements reached with 74 public and multinational businesses in respect of 30 different tax disputes. We estimate that, over and above this, an additional $1.5 billion of tax revenue will be collected in future years as a result of these settlements, (assuming no material changes in the respective businesses). This is in addition to additional revenues already locked in via settlements completed in prior years.
All significant settlements with public and multinational businesses are reviewed independently by former Federal Court Judges, to provide the Australian community with confidence that our settlements are fair and reasonable. All 2022-23 settlements reviewed to date have been found to be fair and reasonable, and consistent with legal principles. As settlements are only reviewed after they are finalised some settlements will be reviewed in the following financial year.
In 2022-23, across all client groups we secured $3.16 billion of tax revenue from settlements entered into with 251 entities. Public and multinational businesses accounted for nearly a third of all settlements (74) and $3.08 billion (97.24%) of the tax revenue secured.
Some settlement agreements have multiple parties. The 74 settlements reflect 74 different parties to settlement agreements in respect of approximately 30 separate disputes resolved during 2022-23.
For 2022-23, our total settlement variance for public and multinational businesses was 44% meaning we secured 56% of the disputed amount we considered payable under our starting position. This level of variance is consistent with prior years (42% variance on a 5-year average basis) and also consistent with the average variance seen across all other client markets.
Our settlements will typically lock in go forward outcomes, which means that in addition to resolving past years the ATO can achieve go forward behavioural change through the settlement process creating greater certainty for the tax system.
Approximately two thirds of all public and multinational business settlements in 2022-23 included future year obligations. The additional revenue we expect to see in future years as a result of settlements we entered into in 2022-23 is $1.5 billion. This is in addition to the $3.08 billion of tax revenue directly secured as a result of the settlements entered into for that year.
Our most significant settlements are reviewed by a former Federal Court judge to ensure they are fair and reasonable for the Australian community. All of the settlements concluded in 2022-23 reviewed to date by the former Federal Court judges were evaluated as being fair and reasonable. A small number of settlements are still to be reviewed.
Types of issues settled
In 2022-23 income tax was the predominant tax settled, accounting for nearly 80% of all settlements. Fuel excise and goods and service tax issues represented the balance.
The predominant income tax issues settled with public and multinational businesses related to transfer pricing and tax structuring. In these cases, settlement was considered to present the best resolution option for the dispute. This is reflective of the highly fact-dependent nature of transfer pricing cases in particular and the high level of risk associated with litigating these cases. We will not always settle these matters. We will continue to test transfer pricing or characterisation outcomes by litigation where the circumstances warrant and our prospects of success are good. We will also litigate if we cannot achieve go forward behavioural changes through a settlement.
Stage at which settlement occurred
A settlement can occur at any stage, for example, before or after the issue of a position paper in an audit or during an objection, or litigation where a tribunal or court may direct parties to engage in settlement discussions. We will not enter settlement without knowing the facts and evidence of the underlying arrangement, having considered how the law should apply to those facts and after assessing the system benefit and the prospects of success in litigating matter.
In 2022-23, 60% of all public and multinational business settlements occurred prior to completion of an audit. A further 30% of settlements occurred during the objection stage of the dispute, and 10% occurred after proceedings were filed in Court or the Administrative Appeals Tribunal.
Deciding whether to settle
Corporate taxation is complex, especially when applied to large corporate groups. This can lead to differences in opinion between us and taxpayers on how the law applies.
While we do not settle disputes at any cost, the sensible use of settlements is part of our commitment to earlier and more effective dispute resolution. Settlements are a necessary feature of a well-functioning tax system providing overall fairness and best use of ATO and other community resources. Settlements secure revenue that may otherwise be at risk or otherwise difficult to pursue due to the time and cost.
When considering whether to settle a dispute with Australia's largest taxpayers we weigh up litigation prospects, the cost of the dispute continuing, and overall value for the Australian community. We will also not typically settle a dispute with a public and multinational business unless they agree the tax outcomes for future years.
Litigation is particularly important for law clarification. However, law clarification may mean our view of the law is found not to be correct. Litigating a dispute does not guarantee our position will be the final position or that additional tax would have been secured had a dispute been litigated rather than settled.
In 2022-23, litigation outcomes for disputed objection decisions directly involving public and multinational business were favourable approximately 50% of the time, unfavourable approximately 30% of the time and partially favourable in the balance.
We aim to have the most appropriate matters pursued in court, but it is not possible or practical for us to litigate all matters. Costs in complex matters can often run into the many millions of dollars. Courts and tribunals will also expect parties to endeavour to settle where it is reasonable to do so.
For more information see Managing disputes with large corporate groups.
The nature and extent of concessions made in our settlements will depend on the facts and legal issues in dispute. Some disputes, by their nature, are more heavily fact dependent and likely to generate more divergent opinions on the range of appropriate outcomes.
The total variance amount includes the variance from the starting position for primary tax, interest and penalties. As interest and penalty amounts are applied to the settled amount the starting position will vary even before any concession is applied.
A variance during settlement may reflect a principled recognition of the:
- uncertainty or evidentiary issues in relation to the legal issues
- prospects of success in litigation
- costs to the community of continuing the dispute
- benefits to the tax system in settling the dispute (for example an industry first)
- taxpayer's agreement to change their behaviour in the future and willingness to 'lock in' tax outcomes going forward.
The variance from our starting position does not necessarily represent an amount that would have been collected had the dispute continued. We do not win all matters we litigate. The taxpayer may also provide further and better evidence to support their position over time.
Settlements occurring in later stages of a dispute tend to have lower settlement variance than those which occur earlier. That is, as disputes become advanced there is generally a reduction in the factors that support concessions to our position which results in a higher amount of tax likely to be payable than if earlier resolution occurred. However, there are other costs and impacts on the health of the tax system by allowing disputes to become entrenched. A lower settlement variance later in a dispute may not outweigh the benefit a settlement can deliver by securing compliance potentially years sooner, and on an ongoing basis.
We apply a rigorous process to our decision to move from our starting position, to ensure our positions are defensible and principled. We also have independent review processes in place which consider the decisions in respect of concessions made in our settlements (more information on this is outlined below (Independent review of settlement outcomes)).
Locking in tax outcomes for the future
Typically, our settlements will lock in future tax outcomes by setting the basis on which a taxpayer will lodge in future years. We will generally not settle a matter with a public and multinational business unless we can agree the go forward tax outcomes for the arrangement. In circumstances, where a practical compliance guideline is relevant, future settlement may involve the taxpayer being required to agree to restructure their affairs such that they come within the green (or low risk) zones.
The future benefits we secure by reaching forward agreement from the taxpayer are in addition to the headline value of the settlement itself. We refer to these future benefits as sustained compliance and are part of the total revenue effects figure we publish annually in our Annual Report. For more information on total revenue effects, see ato.gov.au/totalrevenueeffects
Compliance with settlement terms
Where a settlement provided for the ongoing, or future, treatment of an arrangement we closely monitor subsequent tax return lodgements to ensure compliance with the terms of the settlement.
Taxpayers are required to disclose annually via the reportable tax position (RTP) schedule whether they have complied with the terms of a settlement agreement in place for the year or whether there have been changes in the relevant and material facts on which the settlement was based. We provide information on the aggregated disclosures made by large public and multinational businesses through Category C of the RTP in our RTP Findings Report.
We may also verify compliance with settlement terms as part of our yearly engagement with our Top 100 taxpayers, our periodic review of Top 1000 taxpayers or as part of a specific engagement. Many taxpayers will willingly engage with us when the settlement agreement concludes to agree tax outcomes going forward in order to avoid future disputes.
Transparency and settlements
We are committed to being transparent about our approach to collecting revenue and delivering results for the Australian community. However, details of a particular settlement are covered by confidentiality provisions and the tax secrecy requirements of the taxation law.
Recognising the public interest in significant matters, we encourage large businesses to publicly disclose when they enter into settlements with the ATO (noting taxpayers are not constrained in discussing their own affairs in the way the ATO is). There are a number of high-profile examples in the public domain, including Chevron, BHP, Rio, Google, Microsoft and Apple. In some cases, we will also issue a media statement following a public disclosure of a settlement.
Sharing settlements with other jurisdictions
International Exchange of Information (EOI) is the key mechanism used to share taxpayer-related information between Australia and other jurisdictions in order to administer and enforce Australia's tax laws. Settlements may be exchanged with our treaty partners where they are relevant to the administration and enforcement of each other's domestic tax laws.
We have the highest levels of controls in place in relation to settlements with public and multinational business. These safeguards ensure that there is clarity about which cases should be settled and any concessions in these settlements are consistent with legal advice. Decisions are made at the Assistant Commissioner level or above, with two senior officers approving settlement decisions in all significant matters. We also have independent review processes in place for significant settlements as outlined below (Independent review of settlement outcomes).
Our settlement practices are subject to significant external scrutiny, with the Australian National Audit Office (ANAO) finding that our practices are effectiveExternal Link. Settlements have been entered into, negotiated and followed up largely in line with the ATO's settlement policies and procedures, including the principles outlined in the ATO's Code of Settlement. The ANAO also indicated we have more transparency over large market settlements than any other jurisdiction.
Independent review of settlement outcomes
Under our Independent Assurance of Settlements Program we engage a former Federal Court judge to provide independent assurance on all of our largest and most significant settlements. Settlements where a taxpayer is represented by a former ATO senior executive officer (that is, a former Assistant or Deputy Commissioner) are also referred for review under the Independent Assurance of Settlements Program, even if the settlement does not meet the standard materiality criteria. We report the outcomes from the IAS program in the Annual Report.
The independent review of settlements provides the community with an independent perspective as to whether the outcomes from our most significant settlements are fair and reasonable and in the best interests of the Australian community. All of the settlements concluded in 2022-23 reviewed to date by the former Federal Court judges were evaluated as being fair and reasonable. A small number of settlements are still to be reviewed.