Introduction
The ATO is a large bureaucracy with a large workforce handling complex legislation. Mistakes sometimes can occur. ATO mistakes or ‘maladministration’ can give to considerable costs to taxpayers.
In certain circumstances taxpayers (including SMSF trustees) may seek compensation from the ATO where, for example, the ATO has directly caused a taxpayer to suffer detriment, or, conversely, prevented them from avoiding detriment due to among other things:
- a failure or unreasonable delay to comply with normal administrative procedures; or
- giving incorrect or ambiguous advice.
This scheme gives an opportunity to recover some costs associated with defective administration.
This article outlines some of the key factors of seeking compensation from the ATO under the Scheme for Compensation for Detriment caused by Defective Administration (Scheme).
General points about the Scheme
The 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 Scheme are summarised below:
- Discretionary — The ATO is not obliged to make payments under the Scheme. Rather a decision under the Scheme is entirely discretionary. That being said, the ATO must make decisions in accordance with Department of Finance’s Resource Management Guide 409 (RMG 409), which provides decision makers with guidance on the Scheme.
- Case-by-case basis — The 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 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 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 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 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 Scheme will generally be unavailable.
Available avenues
For completeness, we note that the 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).
What can and cannot be claimed
A claim under the 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 ATO’s position on losses that generally can and cannot be claimed under the Scheme (https://www.ato.gov.au/printfriendly.aspx?url=/forms/applying-for-compensation/):
| Losses that cannot be claimed | Losses that may be claimed |
| • 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; | • 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); |
| • 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 | • interest for unreasonable delays in providing funds in cases where no statutory interest has been paid; and |
| • taxation or other Commonwealth liabilities where you have substantive review rights that you have not pursued; or | • bank or other administrative fees you have incurred because of the actions of the ATO. |
| • claims for personal time expended, stress, anxiety, pain and suffering or other emotional distress. |
Review process
In the case that an application for compensation under the 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 or contentions to support their claim.
Alternatively, the claimant can request their decision be reviewed by the ATO’s external review panel which consists of independent reviewers. If the decision is reviewed externally, then the panel will provide a recommendation on the outcome of the original decision to the ATO. Cases that are often suitable for external review involve complex factual issues, long-standing or historical disputes, or disputes about claims of significant amounts.
The ATO’s approach to handling applications under the Scheme is supported by the Taxpayers’ Charter. This Charter outlines the ATO’s commitment to a relationship with taxpayers based on mutual trust and respect, and sets out taxpayers’ rights and obligations when dealing with the ATO, as well as what taxpayers can do if they are not satisfied with ATO decisions or actions. Further, a taxpayer can refer a matter to the Inspector-General of Taxation who investigates complaints related to tax administration.
Practical implications
As alluded to above, the 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 FY2020-21, 174 claims for compensation were made to the ATO, with 61 being offered compensation (around a 35% success rate for claimants). The total amount of compensation payments made in 2020–21 was $213,223. The average payment made was $3,439 and the median payment was $958.
This low success-rate coupled with the costs associated with actually making a claim (eg, professional fees, etc), may not make an application under the Scheme seems attractive. 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 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 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 Scheme, NAT 11669 should be completed and lodged with supporting documentation.
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 Scheme. Compensation under the Scheme will only be available in limited circumstances, however, the Scheme may provide clients with the ability to recover some of their costs if the ATO caused them due to poor administration.
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By Bryce Figot ([email protected]), Special Counsel and Daniel Butler ([email protected]), Director, DBA Lawyers.
Note: DBA Lawyers presents regular SMSF Online Updates. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
17 February 2022
