Taxpayers often negotiate with the ATO to defer recovering a tax debt while they object to the substantive tax and penalty issues in dispute. But as can be seen from the taxpayers’ experiences in Caratti v Commissioner of Taxation  FCA 70 and Bazzo v Commissioner of Taxation  FCA 71, you need to be careful to defer all of the debts from being collected.
What happened in Caratti and Bazzo?
After an audit, Mr Caratti and Ms Bazzo received amended assessments for tax and penalties. Mr Caratti and Ms Bazzo disputed the assessments and lodged objections.
The taxpayers entered into separate settlement deeds with the Commissioner. Under the deeds, the Commissioner agreed to refrain from taking action to recover the ‘Taxation Debt’ while the tax and penalty issues were resolved. The taxpayers agreed to provide security.
In each deed, the ‘Taxation Debt’ was a specific amount comprising the tax and penalty liability and any general interest charge (GIC) on those amounts that was due and payable as at 7 August 2015, as adjusted by the ‘Determination of the Objection Process’.
The ‘Determination of the Objection Process’ then listed the different processes available to Mr Caratti and Ms Bazzo to challenge the amount of the assessments. This included the objection decision and any applications to the Administrative Appeals Tribunal or appeals to a court.
The question for the Federal Court was whether the Commissioner could take action to recover GIC that had accrued on the primary tax and penalty liabilities after 7 August 2015 – over $1 million for each taxpayer – given the terms of the settlement deeds.
Intuitively, it was odd for the Commissioner to defer recovering the tax, penalties and related GIC up to 7 August 2015, but try to collect the GIC accruing from 8 August 2015.
Mr Caratti and Ms Bazzo each argued that the purpose of the deeds was to defer the recovery of all of the amounts that could be adjusted during the objection process. This included the amounts of GIC from 8 August 2015 that the Commissioner wanted to recover.
The Federal Court found that on the proper construction of the deed:
- the Commissioner could not recover the ‘Taxation Debt’ while Mr Caratti and Ms Bazzo exercised their rights under the objection process;
- the ‘Taxation Debt’ was the specific amount of the tax and penalty liabilities and GIC on those amounts as at 7 August 2015; and
- the GIC that accrued on the tax and penalty liabilities from 8 August 2015 was not the ‘Taxation Debt’ and the Commissioner was entitled to take action to recover those amounts.
What do you need to watch out for?
Exercising your rights to object to an assessment or amended assessment can be difficult where the Commissioner also seeks to recover the debt.
When you negotiate with the Commissioner to defer recovery action, you should:
- understand your own risk areas;
- consider whether you have a strong case disputing the assessments;
- determine whether there are there any parts of the assessment that you agree with and, if so, whether you can make any payments while you object to other parts of the assessments;
- act promptly in responding and engaging with the Commissioner – sometimes it is possible to resolve a dispute with the Commissioner at an early stage before amended assessments are issued; and
- make sure the terms of any settlement deed adequately address the risk areas that are relevant to you.
It is important to understand exactly what action the Commissioner can take under the terms of the settlement deed and develop strategies to manage your risk and deal with any action the Commissioner takes.