Redress for ATO mistakes

Therefore, even if an application is successful, the associated costs can significantly – and unfairly – reduce the net proceeds the taxpayer receives.

In certain circumstances, however, there may be the ability for taxpayers (including self-managed super funds) 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.

Here, we outline some of the key factors of seeking compensation from the ATO, focusing particularly on applications made under the Scheme for Compensation for Detriment caused by Defective Administration (CDDA Scheme).

Other avenues available to taxpayers seeking compensation include compensation for legal liability (eg negligence) and act of grace payments, which are administered by the Department of Finance and Administration, not the Tax Office.

CDDA Scheme

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:

• 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 no 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 exist. If the claimant has other legal or administrative avenues available to them (eg litigation or administrative appeal) and there is a reasonable chance of success under these other avenues, compensation under the CDDA Scheme will generally be unavailable.

What can and can’t 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.

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 Ombudsman.

Practical implications

As mentioned, 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. In 2011, for instance, 389 claims for compensation were made to the ATO, with fewer than 50 per cent successful – and of those successful applications, fewer than 50 per cent were paid in full.

This low success rate, coupled with the costs associated with actually making the claim (eg professional fees), may not make an application under the CDDA Scheme worthwhile. This is especially true considering that each application is decided on a case-by-case basis. That being said, in the right circumstances, a claim for compensation under the CDDA Scheme may be worth pursuing.

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 apply for compensation under the CDDA Scheme, a form (NAT 11669) on the ATO website should be completed and lodged.

Conclusion

Where a successful application has been made to the ATO, the taxpayer may be able to recover some of the associated costs 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.