ATO’s approach to settlements with Australia’s largest taxpayers

The ATO has published its findings report on public and multinational business settlements 2022-2023 (findings report). The findings report publishes data in relation to the number of settlements achieved for the financial year 2022-2023. Historically, the ATO has said that in evaluating whether to settle a tax dispute it will weigh up litigation prospects, costs of the dispute continuing, and the overall value for the Australian community. Interestingly, the ATO now also expressly notes that it will:

• not typically settle a dispute with a public and multinational business unless they agree the tax outcomes for future years; and
• encourage large businesses to publicly disclose when they enter into settlements with the ATO.

In our experience, for matters of public interest, it is difficult to achieve a settlement with the ATO if the taxpayer is not prepared to agree to these features.

In this article, we unpack the ATO’s findings, and outline the considerations that the ATO will take into account in evaluating whether to settle a dispute. Understanding the ATO’s approach to settlements will equip large businesses with a framework to assess whether a settlement will suit their organisational needs.

Key settlement outcomes for 2022-2023

In tax disputes, a settlement refers to a legally binding agreement between the taxpayer(s) and the Commissioner of Taxation where one or all of the parties make concessions about what they consider is the correct position in order to resolve the dispute.

The ATO acknowledges that the Australian corporate tax system is complex and states that the use of settlements is part of its commitment to earlier and more effective dispute resolution.

The key settlement statistics for public and multinational businesses in 2022-2023 are outlined below.

• The ATO entered into 251 settlements, securing $3.16 billion of tax revenue.
• Public and multinational businesses accounted for nearly a third of all settlements and $3.08 billion of the tax revenue secured across 30 separate disputes. Of these disputes that have been settled, approximately two thirds included future year obligations. The ATO expects the future year obligations secured through these settlements to produce additional revenue of $1.5 billion.
• 80 per cent of the disputes settled related to income tax matters, with fuel excise and GST issues making up the balance. Key issues for public and multinational businesses related to transfer pricing and structuring.
• 60 per cent of all public and multinational business settlements occurred prior to the completion of an audit. A further 30 per cent of settlements occurred during the objection stage of the dispute, and 10 per cent occurred after litigation had commenced.
• Total settlement variance for public and multinational business settlements was 44 per cent, meaning that the ATO secured 56 per cent of the disputed amount the ATO considered to be payable from the starting position for primary tax, interest and penalties. This level of variance is consistent with prior years.

The ATO’s considerations in evaluating whether to settle

An understanding of the considerations the ATO takes into account when deciding whether a case is suitable for settlement is relevant for taxpayers considering a settlement with the ATO.

While settlement can occur at any stage – for example, before or after the issue of a position paper in an audit or during an objection – the ATO will not enter into a settlement without:

• knowing all the facts and evidence of the underlying arrangement;
• having considered how the law should apply to those facts;
• having assessed the system benefit, such as whether there are other costs and impacts on the health of the tax system by settling the dispute (if it is an industry first) or by allowing the dispute to become entrenched; and
• evaluating the prospects of success in litigating the matter.

With this in mind, an important initial step for taxpayers who would like to resolve their dispute with the ATO is to work through how their case aligns against this criteria.

Cases that are highly fact intensive in nature, such as transfer pricing cases may be conducive to settlement. The ATO states that it will not always settle these matters. It will continue to test transfer pricing or characterisation outcomes by litigation where the circumstances warrant and the ATO views its prospects of success as good.

The other factor influencing the decision to settle or litigate is the degree to which the ATO can achieve go forward behavioural changes through settlement (with settlement more likely if the ATO’s desired changes can be achieved).

In 2022–23, litigation outcomes for disputed objection decisions directly involving public and multinational business were favourable approximately 50 per cent of the time, unfavourable approximately 30 per cent of the time and partially favourable in the balance.

The ATO’s process in agreeing to enter into a settlement is to have the decision made at the Assistant Commissioner level or above, with two senior officers approving settlement decisions in significant matters. In addition, as a further level of control, the ATO has an independent review process in place for significant settlements. This involves the ATO appointing a former Federal Court judge to provide independent assurance on all of its largest and most significant settlements. The ATO reports that all the settlements reviewed by the former Federal Court judges for 2022-2023 were evaluated as being fair and reasonable.

In our experience, similar to the ATO’s process of obtaining independent assurance regarding settlement outcomes, there has been an increasing trend towards taxpayers also seeking to obtain independent assurance in relation to the governance and conduct of their tax dispute. This is often considered to be a useful tool for organisations to obtain additional comfort that they are achieving the best outcomes in the circumstances of their dispute with the ATO.