The Tax Institute’s Senior Tax Counsel: Professor Bob Deutsch, wrote the following feature article in their weekly email: TaxVine 27, 20 July 2018.

It never ceases to amaze me how many people appear to be ready, willing, and able to litigate complex commercial matters before a court or tribunal. For example, at the AAT alone, there were over 50,000 applications lodged in the 2016-17 year. Clearly, not all those proceed to final litigation, but well over half do. Of relevance to us, somewhere in the order of 1,000 applications are made in the taxation and commercial division each year.

To me this raises the question as to what are the advantages and disadvantages of litigating a case, particularly in the context of taxation.


Important in all this is the Commissioner of Taxation’s detailed policy on settlements as outlined in PSLA 2015/1, which is loosely referred to as the Code of Settlement. Importantly, section 5 of the Code of Settlement sets out the three key factors that must be considered by the ATO in deciding whether to settle a dispute with a taxpayer:

  • The relative strength of the ATO’s and the taxpayer’s position;
  • The costs versus the benefits of continuing the dispute; and
  • The impact on future compliance for the taxpayer in the broader community.

Each of these three points is worthy of further consideration.

Relative strength of the parties’ position

An evaluation of the evidence which is available on both sides, is a key part of understanding the relative strength of each parties’ position. The ATO is usually well advised but, notwithstanding tight timelines set through directions from the “bench”, often the evidence gathering and evaluation occurs very late in the piece. This should happen earlier, particularly if the ATO are seeking to persuade the taxpayer as to the strength of its position.  

Costs vs benefits

The ATO is bound by its Code of Settlement to make an assessment as to the costs and benefits of continuing the dispute. This assessment should include:

  • an understanding of the internal and external ATO legal costs;
  • the risks and costs associated with collecting the liability;
  • an understanding of the taxpayer’s ability to pay;
  • the financial position of the taxpayer and its related entities; and
  • the effective and efficient use of resources available to the ATO.

Prima facie, if the costs of continuing a dispute exceed the benefits that can be derived from a litigated resolution, then from the ATO perspective a negotiated settlement is likely to be a preferable option.

Current and future compliance

This may be countervailing factor to any costs associated with continuing the dispute. In particular, if the ATO take the view that a litigated outcome in a particular case will serve to achieve better compliance by a broad group of taxpayers (both for the current and future years), the ATO may well push for a litigated outcome. This could be particularly relevant in the current context in dealing with certain deductions where the ATO feels that poor compliance is prevalent. 


In evaluating whether to litigate or to settle, taxpayers need to think very carefully about:

  1. the relative strength of their case – in my experience, taxpayers are poor at assessing the evidence available to them to sustain an argument that they are likely to put to a tribunal or court. Mere assertions are not evidence. Evidence will often require hard documents to sustain an argument. The onus will ordinarily sit with the taxpayer to establish that an assessment is incorrect. That is the very clear position at which the taxpayer starts, and consequently, cogent evidence will be needed, if the taxpayer’s position is to be sustained. Taxpayer advisers will be very useful in explaining this difficulty and ensuring that all available evidence is found and properly evaluated on an objective basis.
  2. the primary tax involved – even relatively small amounts can be worth chasing to protect a principal taxpayer’s need to understand the risks involved in doing so. Suing for false imprisonment to recover a penny spent on catching a ferry which had gone sounds glamorous but after a few days in a hearing room being quizzed by lawyers, the glamour starts to wear off;
  3. any interest and penalties that may have been applied;
  4. the legal costs involved in pursuing the case;
  5. whether an adverse cost order can be made against the taxpayer in the event of losing, or even partially losing the case. (Ordinarily cost orders cannot be made in the AAT but they can be in the Supreme, Federal and High Courts);
  6. the fact that even if the taxpayer wins at the tribunal or lower court level, an appeal is always a possibility that needs to be considered, and further appeals beyond that next level.

There is nothing wrong with litigating where one has a reasonable chance of success. However, this should be done on the basis of a full and complete understanding of the risks associated with running the litigation, and I have identified as many of those as I can in the above analysis. Sometimes, a negotiated settlement through conciliation is a preferable course. Apart from the problems with litigation that I have identified above, the sheer stress and strain that it imposes should not be overlooked.

Kind regards,

Bob Deutsch, CTA

[TaxVine 27, 20/7/18]

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