Settlements of tax disputes in the early stages provides benefits for both the taxpayer and the Australian Taxation Office (“ATO”). Early engagement and ongoing communications with the ATO is critical for the purpose of negotiating mutually beneficial settlement terms.
The Zafra Legal team has the experience to assist all taxpayers to achieve a sensible and achievable resolution of their tax debts.
Early engagement and full disclosure
The ATO has become less combative with, and more receptive to, those taxpayers who actively engage with the ATO and manage their taxation liabilities.
Like it is with any creditor management, early engagement and ongoing communications are likely to facilitate mutually beneficial settlements and at the earliest opportunity.
Full disclosure of the taxpayer’s current financial and commercial circumstances will only assist the taxpayer to narrow the scope of information that is required by the ATO when engaging in settlement discussions.
Once an in-principle agreement has been reached with the ATO, the taxpayers and their advisers should consider the terms of a settlement deed to ensure that the taxpayer (and any guarantors) are fully aware of the bargain they have struck and the important obligations they have agreed to comply with.
When settlement is appropriate
As a general principle, a settlement of an outstanding tax liability is appropriate in almost every case. Whether the settlement is:
- an agreed extension to the otherwise due date for the payment of the entire taxation liabilities, without the imposition of interest;
- an agreed payment arrangement to pay the taxation liabilities in instalments or upon the occurrence of an event, such as the sale of an asset to fund the payment, with or without the imposition of interest;
- an agreement by the ATO to remit the interest and penalties which have been assessed against the taxpayer; or
- an agreement by the ATO to amend the tax assessments on the basis that they are excessive,
a settlement is a useful tool to provide certainty to a taxpayer’s tax position which can avoid the expensive and time-consuming dispute processes (such as garnishees and insolvency proceedings), bearing in mind the power that the ATO has to recover taxation liabilities, even if they are disputed.
Negotiation of payment arrangements
Payment arrangements can be advantageous for both the taxpayer and the ATO as they provide certainty to both parties as to the payment of the taxation liabilities. They can assist a taxpayer in the immediate term by alleviating the taxpayer’s immediate tax burden during what is most often difficult times for a taxpayer.
There are three different types of payment arrangements which the ATO and a taxpayer may agree to enter into. They are:
- a 50/50 payment arrangement wherein the taxpayer pays any undisputed tax liability in full and 50% of the disputed tax liability in return for the ATO not recovering the balance of the disputed tax liability until finalization of a relevant tax dispute. Whilst a 50/50 arrangement is generally available to most taxpayers, the ATO reserves the right to not enter into such an arrangement if it is perceived to be a risk to revenue (such as evidence of assets being dissipated, or the taxpayer is considered to be a serious non-complier);
- an instalment payment arrangement wherein the taxpayer pays the tax liabilities in instalments, usually over a period not exceeding two (2) years – or less in some instances. It is important to note that the instalments need to be sufficient enough to ensure that the liabilities are paid off in the earliest possible time and are sufficient enough to cover any continuing interest which may accrue; and
- a deed of agreement guarantee and indemnity wherein security and guarantees are provided whilst the tax dispute is being resolved or where the taxpayer is in the process of liquidating other assets to meet the tax liabilities.
The ATO is likely to be more receptive to and accept payment proposals where taxpayers offer ‘sweeteners’ such as lump sum payments toward the tax liabilities or by providing security and guarantees. For instance, for a $20,000 tax debt, the taxpayer may offer to pay $10,000 up front with the balance payable in weekly instalments of $192 per week over a period of one (1) year.
For debts under $25,000 the ATO has an online payment arrangement calculator which can test various scenarios to assist a taxpayer to work out a sustainable payment arrangement to ensure the tax liabilities are paid off over the shortest possible time.
If you have a debt with the ATO then early engagement with the ATO officers and full disclosure of the circumstances relating to the debt are key factors in an early and mutually beneficial resolution. If the quantum of the debt is considerable, then a payment arrangement could assist to alleviate the immediacy of the burden of the tax debt.