Applications are regularly made to the ATO, often at a significant cost to taxpayers. The associated professional fees alone can run into the thousands of dollars. Therefore, even if an application is successful, the associated costs can significantly reduce the net proceeds the taxpayer receives. This can lead to unfairness.
In certain circumstances, however, there may be the ability for taxpayers (including SMSFs) to seek compensation from the ATO. This can provide taxpayers with the ability to recover a proportion, if not all, of the professional fees and other costs associated with a successful application. Note that although an application for compensation can be a real ‘value add’ for clients and might be worth considering, it will only be available in limited circumstances.
This article outlines some of the key factors of seeking compensation from the ATO. In particular, it focuses on applications made under the Scheme for Compensation for Detriment caused by Defective Administration (‘CDDA Scheme’).
Available avenues
For completeness, we note that the CDDA Scheme is not the only avenue available to taxpayers who wish to seek compensation. Other avenues include:
- compensation for legal liability (eg, negligence); and
- act of grace payments (administered by the Department of Finance, not the ATO).
CDDA Scheme
General
The CDDA Scheme provides the ATO with the ability to compensate taxpayers for loss suffered as a direct result of the ATO’s defective administration. Some key aspects of the CDDA Scheme are summarised below:
- Discretionary — The ATO is not obliged to make payments under the CDDA Scheme. Rather a decision under the scheme is entirely discretionary. That being said, the ATO must make decisions in accordance with Finance Circular No. 2009/09, which provides decision makers with guidance on the scheme.
- Case-by-case basis — The CDDA Scheme is underpinned by general principles, as opposed to prescriptive rules. This means that each decision will be determined based on the taxpayer’s specific circumstances. It follows that there is no guarantee of success.
- Moral obligation — Payments under the CDDA Scheme are approved on the basis that there is a moral obligation to compensate the claimant (as opposed to a legal obligation).
- Direct link — In order for a claim under the CDDA Scheme to be successful, the ATO’s action or omissions must have directly caused the claimant’s loss and the type of loss suffered must have been reasonably foreseeable by the ATO.
- No time limit — There is not time limit on when a claim under the CDDA Scheme can be made. However, the longer the period between the relevant event and the claim, the more difficult it may be to gather facts or sufficient evidence. Further, the ATO will typically not consider a claim for compensation until after the initial issue has been resolved.
- Last resort — The CDDA Scheme is a ‘mechanism of last resort’ and compensation will only be available under the scheme if no other reasonable avenues for compensation exist. Therefore, if the claimant has other legal or administrative avenues available to them (eg, litigation or administrative appeal) and there is a reasonable chance that they will be successful under these other avenues, compensation under the CDDA Scheme will generally be unavailable.
What can and cannot be claimed
A claim under the CDDA Scheme will only be successful if the taxpayer has suffered a quantifiable financial loss as a direct result of the defective administration. The following table summarises the losses that generally can and cannot be claimed under the scheme (Australian Taxation Office, Applying for compensation, (27 July 2012) <http://www.ato.gov.au/corporate/content.aspx?doc=/content/48904.htm>):
Losses that cannot be claimed
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Losses that may be claimed
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· claims for costs associated with complying with the tax system including costs associated with audits, objections and appeals even where you ultimately are found to have complied with your obligations; · costs of putting in a claim or conducting a claim for compensation including claims for delay in receiving funds from the ATO where statutory interest has been paid; or · claims for personal time expended, stress, anxiety, pain and suffering or other emotional distress. |
· professional fees, where evidence of payment of these fees is provided and the fees are considered by the decision maker to be reasonable (the ATO assessment of what is reasonable may differ from yours); · interest for delays in providing funds in cases where no statutory interest has been paid; and · bank or other administrative fees you have incurred because of the actions of the ATO. |
Review process
In the case that an application for compensation under the CDDA Scheme is rejected, the claimant can request that the ATO conduct an internal review of the decision. The ATO will typically only agree to do so if the claimant can provide new and relevant information. Alternatively, the claimant can refer the matter to the Commonwealth Ombudsmen.
Practical implications
As alluded to above, the CDDA Scheme will not be applicable in every circumstance. A successful application requires a direct link between the detriment suffered by the claimant and the ATO’s defective administration. This can be a difficult test to meet and in the past there has been a low chance of success. For instance, in 2011, 389 claims for compensation were made to the ATO, of which less than 50% were successful. Of the successful applications less than 50% were paid in full.
This low success-rate coupled with the costs associated with actually making the claim (eg, professional fees, etc), may not make an application under the CDDA Scheme worthwhile. This is especially considering that each application is decided on a case-by-case basis and therefore there is no guarantee of success. That being said, in the right circumstances, a claim for compensation under the CDDA Scheme may be worthwhile.
For instance, consider the case where a successful application has been made to have super contributions disregarded or reallocated for excess contributions tax purposes. In this case, a claim under the CDDA Scheme may provide the taxpayer with the ability to recover some of the (often substantial) professional fees associated with making the application.
To make an application for compensation to the ATO under the CDDA Scheme, NAT 11669 should be completed and lodged.
Conclusion
Where a successful application has been made to the ATO, the taxpayer may have the ability to recover some of the associated costs by making an application under the CDDA Scheme. Compensation under the CDDA Scheme will only be available in limited circumstances, however, the scheme can provide clients with the ability to recover a significant proportion of their costs and is generally worthy of consideration.
For more information please contact our SMSF accountants
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
Article by Daniel Butler, Director and Tina Conitsiotis, Lawyer, DBA Lawyers
4 April 2013
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