If you find yourself in a position where you need to come to a settlement with the ATO, it is critical you understand the legalities behind the said settlement.
Firstly, understand what a settlement is; an agreement between two parties, for instance, yourself or your business and the ATO. The purpose of the agreement is to resolve a dispute where one or more parties make concessions on what they consider is the legally correct position. There are a number of scenarios in which settlement between an employer or employee and the ATO may occur, such as:
– tax liability, entitlement or debt;
– superannuation liability, entitlement or debt;
– decision under a tax or superannuation law.
Examples of a disputed liability or entitlement specific to the ATO may include:
– Tax – tax, levy, charge, duty or excise imposed under a law
– Penalties (exclusive of penalties issued by a court)
– Payments – offset, grant or benefit under a law
– Franking credits and debits and foreign tax credits
– General interest charge and shortfall interest charge and interest
– Notional tax on losses
– Credits and refunds of indirect taxes
When negotiating a course of action, settlement can occur at any stage, i.e., before or after the position paper in an audit, or throughout the process of an objection or litigation. If the circumstances are appropriate, and a settlement can be reached in a sensible and amicable manner, going through a formal process of assessment, amendment and objection can be avoided.
Both the ATO and the employer/employee can initiate discussions for settlement. In some cases the employer/employee will not realise they have done something wrong until the ATO approaches them. In other cases, an employer/employee will fear being caught out for evading certain responsibilities and will come forward and declare their wrong-doing, with the hopes of a settlement occurring.
It is common for more than one ATO representative to be present during the settlement process, and the outcome of the settlement will be based on a number of considerations, including:
Relative strength of the parties position
This involves evaluation of the employer/employee’s position in relation to the evidence, application of the law to the facts and the amount of tax in dispute, as well as a possible litigation outcome.
Costs vs benefits
Considerations relating to continuing the dispute will be determined based on internal and external legal costs to the ATO, cost and risk in collecting liability, financial position of the taxpayer, and effective and efficient use of resources.
The ‘good management rule’ will be applied, in which repayment due through litigation is set out so that compliance can be achieved. A plan for repayment will be developed that is realistic and cost-effective.
If you find yourself in a settlement position, seek appropriate professional advice to ensure you fully understand the stipulations set out in the agreement, and that the litigation corresponds correctly with the agreement terms.