2. What is a settlement
A settlement involves an agreement between parties to resolve matters in dispute where one or both 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 that would be considered for settlement would ordinarily be one where the taxpayer has (or will have) a right to challenge the Commissioner’s decision, although settlement should be considered as potentially a way to resolve a wide range of disputes and disagreements.
Where 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 2.1 – 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 2.2 – 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 2.3 – 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 2.4 – 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