In the first instalment of this two-part series, we made some broad comments on when to settle and when to litigate a tax matter. In this article, we follow-up on those themes and provide some further broad observations on how best to resolve a tax matter with the Australian Taxation Office (ATO).
Options for settling
There are many different ways to potentially settle a tax matter. These include, for example, independent review, in-house facilitation, mediation, early neutral evaluation, arbitration, etc. Each have their own nuances and advantages. It would be wise to understand these options before reaching out to the ATO.
Time to settle
If a taxpayer decides to attempt to settle a matter, when is the best time to do so? In the life cycle of a tax dispute, there are in fact many moments where a matter can potentially settle. Key points in that life cycle include initial review, audit, draft position paper, final position paper, assessments, objections and independent review. I have heard an eminent senior barrister say the best way to settle a matter is to "always have the war paint on" and to settle only on the courtroom steps. I have also seen that scenario play out to good effect. Others have said that if you get as far as the courtroom steps, you may as well go into the courtroom! For the best timing of when to settle, there is no golden rule - it really comes down to the facts.
The ATO's approach
Thankfully, the ATO, as a regulator, has generally been amenable to resolving tax disputes. It recognises that tax law is complex. The ATO's code of settlement says that settlements are part of good administration. The overwhelming majority of tax matters settle without the need to go to court. But there are some matters that won't settle.
For example, if the ATO wants to make an example of the taxpayer or test an unclear position in the law, they may be more likely to litigate. If there is an issue for the taxpayer or the broader community around future compliance, this can make settling a matter more challenging. However, if this is the case, then it is the ATO who should pay for this - and the taxpayer should consider applying for test case funding. Taxpayers and their advisers should be aware that there is a test case tax litigation panel within the ATO that considers taxpayer applications for funding costs of the taxpayer in litigating a matter.
Unlike a commercial settlement, the ATO cannot settle a dispute on a purely commercial basis without reference to its settlement code and the factors set out in the code. The ATO will often consider advice from external counsel when considering the appropriateness of a proposed settlement. However, the responsible ATO officer at the proper delegation level should be the ultimate decision maker. It is wise to know who that person is from the outset.
Raising settlement with the ATO
Often the ATO is as keen to settle a matter as the taxpayer is. The ATO also has litigation risk and it is acutely aware of that. It may be that the best first step a taxpayer or their adviser can take is to ask the ATO their thoughts on how they believe the matter could be 'resolved'. From an ATO perspective, 'resolved' can be a better word than 'settled' as settlement has overtones of compromise and trade-offs that may or may not be needed.
Dispute resolution theory
The four key principles of negotiation from the seminal work 'Getting to Yes' by Roger Fisher apply equally to resolving tax disputes. They are:
- separate the people from the problem
- focus on interests, not positions
- invent options for mutual gain
- insist on objective criteria.
One important lesson I have learnt over the years is that psychology plays an important part in resolving tax disputes. There are some people (whether advisers, regulators or counterparties) who by nature are hard to deal with. One pioneer of work in this field is Bill Eddy, who is also the founder of the High Conflict Institute in the United States and has published extensively on this topic. One of his earliest books, 'High Conflict People in Legal Disputes', is a fascinating account of why some disputes that should resolve simply do not. These high conflict people do not play by the normal rules and alternative carefully considered approaches are required when dealing with them. These people are prone to litigate rather than settle and Mr Eddy explains why that is the case.
Role of the tax lawyer
The role of the tax lawyer is to provide guidance on all the points above. The role also requires one to stay independent and objective. This can be challenging. I have seen counsel criticise tax advisers for "falling in love with their own arguments". Understanding the other sides' perspective and then systematically dismantling it is one of the hallmarks of great advocacy. To do that, you have to understand first before seeking to be understood.
Types of taxes that can be settled
The ATO has power to settle a tax dispute where it relates to tax (including superannuation) liabilities and debts, penalties, payments, franking credits and debits, foreign tax credits, credits and refunds of indirect taxes and general interest charges or shortfall interest charges.
Will settlement discussions impact on future litigation?
Settlement discussions should be held on a 'without prejudice' basis. As the ATO settlement code notes:
"Statements made during settlement negotiations are not to be construed as an admission of liability and cannot be given in evidence. This is to ensure that, in the event that negotiations break down, parties are not prejudiced as a result of a position taken in the course of trying to resolve the matter".
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.