Tax Dispute Update: Settling disputes with the ATO
The Commissioner of Taxation can take legal action to recover a taxpayer’s outstanding taxation debt, regardless of whether the taxpayer intends to dispute or object to the debt. This presents practical problems, as taxation debts are usually due and payable within 21 days.
To circumvent this issue, taxpayers often negotiate with the Australian Tax Office to defer recovery of a tax debt until objections and disputed substantive tax and penalty issues are resolved. The settlement deeds facilitating these arrangements must be carefully drafted to ensure that the intention of the parties is properly documented. The case of Bazzo v Commissioner of Taxation  FCAFC 139 highlights how problems can arise if a settlement deed is loosely drafted, and a tax dispute is on foot.
Bazzo v Commissioner of Taxation  FCAFC 139
In this decision, the Federal Court of Appeal considered the appeal of two cases: Bazzo v Commissioner of Taxation  FCA 71 and Caratti v Commissioner of Taxation  FCA 70. In each case, the taxpayers disputed their assessments and lodged objections.
The Commissioner agreed to defer proceedings to recover the taxation debts, and the taxpayers agreed to provide securities in exchange. These arrangements were formally recorded in separate settlement deeds. In the deeds, ‘Taxation Debt’ was defined as:
Tax Related Liability and applicable GIC due and payable by the Taxpayer as at 7 August 2015, subject to any adjustment to those amounts by virtue of the Determination of the Objection Process.
Another clause stated:
The Commissioner agrees, subject to clause 11.2, to refrain from commencing any proceedings or employing his statutory “garnishee” power … to recover any part of the Taxation Debt. For the sake of clarity, however, the Commissioner may employ any and all recovery options and powers to pursue any tax-related liabilities of the Taxpayer which are not part of the Taxation Debt which is the subject of this Deed … .
After the parties entered into the deeds, the Commissioner took steps to recover the general interest charge (GIC) that had accrued on the debt since 7 August 2017. In both cases, the Commissioner argued that the Deed did not prevent recovery of the GIC that had accrued after 7 August 2015. The taxpayers argued that the deed prevented the Commissioner from recovering any GIC that had accrued on or after 7 August 2015. They viewed the purpose of the deeds as the deferral of the recovery of all amounts that could be adjusted through the objection process.
The court held that the definition of ‘Taxation Debt’ in the deed did not include the GIC that continued to accrue to each taxpayer after 7 August 2017. Further, the court held that:
It was not contemplated by the definition in clause 1.1, therefore, that the amount identified in each deed as the Taxation Debt might be adjusted by reference to the future liability which otherwise continued to arise.
The taxpayers were obligated to pay the accruing GIC, and the Commissioner was entitled to take steps to recover the GIC accruing after 7 August 2017 by seeking recourse to the security provided.
This highlights the basic contractual principle that the obligations of the parties to a formal agreement will be determined objectively, rather than according to the subjective beliefs or understandings of the parties about their rights and liabilities. The meaning of the terms of a contractual document are determined by what a reasonable person would have understood them to mean, not what the parties intended them to mean.
Taxpayers involved in a dispute with the ATO must understand the terms of any settlement arrangement. Settlement deeds must be drafted in a way that fully reflects the intentions of the parties, as discussed in settlement negotiations. Taxpayers should also consider whether there are any aspects of the assessment that they agree with, and make payments for these parts of the assessments.
It is important that taxpayers properly understand their obligations under a settlement deed, and act at the earliest opportunity to negotiate with the Commissioner. Taxpayers disputing or objecting to a taxation debt should seek the advice of a specialist legal practitioner. The risks of sloppy legal drafting can cost a lot of money, especially when dealing with revenue authorities.