What is a settlement?
When a business or taxpayer does not agree with a decision of the Australian Taxation Office (ATO), a settlement may take place. The ATO defines a settlement as “an agreement between parties to resolve matters in dispute where one or all parties make concessions on what they consider is the legally correct position.” Essentially, a settlement occurs when the ATO and the taxpayer meet each other halfway.
The dispute may be about a:
- Tax or superannuation debt.
- Tax or superannuation liability or entitlement, such as tax to be paid, tax refunds owed, and ATO-imposed penalties.
The ATO provides a guide to the stages of settlement and the key considerations.
Stages of settlement
Initiation
Where it appears that settlement could be an option, the ATO or the taxpayer can initiate settlement discussions and/or make a settlement offer.
Determination of involvement
The nature of the dispute will determine who will be involved. In significant cases, officers from more than one area of the ATO may need to be involved, as well as external experts.
Future actions
Settlement negotiations can cover further actions for either party, such as a business being required to make changes to its superannuation payments. While the ATO cannot guarantee freedom from prosecution in a settlement, all statements made during negotiations are made on a “without prejudice” basis to protect negotiation discussions from being put in evidence.
Finalisation
Settlements are finalised by the parties signing a written agreement which sets out the terms of their agreement.
The decision should be documented so that it would satisfy an objective review. The ATO will not disclose the terms of any settlement agreement to third parties, unless authorised by law or by the taxpayer.
The steps required for resolution of the matter will also be outlined. For example, if the taxpayer has liability and obligations to the ATO, the settlement will outline how and when this will be given effect.
Key considerations
In determining the viability of a settlement, the ATO will consider:
- The strength of the other party’s position.
- Costs vs. benefits of continuing the dispute to make an objective assessment. For example, will the collected liability outweigh the ATO’s legal costs? If the costs of continuing the dispute exceed the benefits, then settlement is likely a preferable option.
- Will compliance be achieved?
A settlement may not be considered if it is in the public interest to litigate, and if agreeing to a settlement may send a signal to the community that non-compliance goes unpunished.
Can settlements be varied?
While not a decision to be taken lightly by the ATO, in rare circumstances the terms of a settlement may be varied, such as where the ATO subsequently changes its view of the law on which the settlement was based, in a way that would have achieved a better outcome for the taxpayer.
Conclusion
Businesses and taxpayers do not always agree with decisions by the ATO, and in many cases their concerns are legitimate. Settlements are a way for both parties to reach an agreement to resolve a dispute. While the ATO affords “without prejudice” privilege to statements made as part of the settlement process, this does not guarantee freedom from prosecution.
