Taxation Law - Taxation Settlements

Taxation law and practice is a highly complex area of the law.  For any number of reasons individual or corporate taxpayers may find themselves in dispute with the ATO.  In order to provide some certainty as to how a taxation dispute may be dealt with the ATO follows a Code of Settlement Practice.  Despite this the ATO has been at pains to point out that settlement is not a normal means of resolving the issues for disputed tax liabilities or entitlements.  Despite this the code is directed at circumstances where it would be in the best interests of the Commonwealth to settle.  Settlements normally occur in circumstances where there is a dispute involving either factual issues or quantum. 

The ATO is under a duty to administer the tax laws and to protect the revenue.  Normally the Commissioner will not forego tax that is properly payable and will seek to collect that which is owed.  Despite this there may be circumstances where it makes good sense to settle.  Basically the alternatives are these - either settle or litigate.  Obviously the vicissitudes of litigation can be uncertain and although in a commercial context it sometimes makes sense to pursue a matter to the end this approach should be thoughtfully considered in a revenue context before it is pursued.  An important reason is this - that although the Commissioner is under a duty to administer the tax law he is not there to maximise tax recoveries and is therefore unlikely to pursue an argument which may be incorrect.  This may be due to uncertainty in the law and/or facts and whether there are reasonable prospects of success.  After all the commissioner is concerned with the good management of the tax system. 

Settlement discussions may occur at any time where it is both sensible and appropriate to do so.  Despite this there are circumstances which the ATO would consider generally inappropriate to settle.  Obviously where there is a clearly established and articulated ATO view of an issue in dispute it is highly unlikely that the ATO will compromise a matter in these circumstances.  Despite this genuine uncertainty in the application of the law may now be advanced as a ground for settling a tax matter.  This has only recently been introduced by the ATO as being viable in the last revision of the Code.

Some of the matters which the ATO takes into consideration when considering whether settlement may be an appropriate way to resolve a matter include: the cost of litigation; does it involve complex issues of fact/evidence/law or quantum, has "a participant or group of participants in a tax avoidance or other arrangement come to accept the Commissioner's position [and] settlement is around the steps necessary to unwind existing structures and arrangements", settlement will achieve taxpayer compliance in a cost-effective way and "unique or special features exist which make it unsuitable for resolution through litigation e.g. a dispute about the valuation of a unique asset".  Although the ATO will not enter into a settlement without an established view of the law it is sometimes prepared to reconsider its view in limited circumstances.

Where an individual or corporate taxpayer is confronted by a set of circumstances where there is significant potential for dispute with the ATO or where a dispute has arisen then they need to give thorough consideration to whether or not they should consider settling.  Interestingly the Code of Settlement Practice does not provide a procedure whereby these types of issues may be ventilated with the ATO.  Irrespective a taxpayer must initiate settlement discussions.  This will not be seen as weakness by the ATO but good sense and a display of good faith which will assist it with the good management of the tax system.  After all the ATO is concerned with the preservation of its financial resources and is looking to achieve fairness in dealing with taxpayers who are trying to do the right thing.  Irrespective, where there is genuine uncertainty in the application of tax legislation and there is no clear articulated ATO view of the matter in dispute then it is in everybody's best interests to try and achieve an outcome which makes sense in the circumstances.  For all taxation disputes whether involving individual or corporate taxpayers it is essential to obtain the services of a specialist tax lawyer - call Frank Egan at LAC Lawyers for assistance.