Avenues for compensation include:

• applications made under the Scheme for Compensation for Detriment caused by Defective Administration (CDDA Scheme);

• compensation for legal liability (eg, negligence); and

• act of grace payments (administered by the Department of Finance, not the ATO).

This article focuses on the CDDA Scheme. For more information on act of grace payments, please see: http://www.finance.gov.au/financial-framework/discretionary-compensation/act-of-grace.html.

CDDA Scheme

Key aspects of the CDDA Scheme are:

• Discretionary — The ATO is not obliged to make payments under the CDDA Scheme and decisions are 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 — Each decision will be determined based on the taxpayer’s specific circumstances and there is no guarantee of success.

• 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.

• 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.

• Review process — If a CDDA Scheme application is rejected, the applicant may be eligible for an internal review of the decision. If this is not available or the review does not give rise to the required result, the claimant can refer the matter to the Commonwealth Ombudsman.

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 summarises the losses that generally can and cannot be claimed under the scheme (Australian Taxation Office, Applying for compensation, 27 July 2012):

Losses that cannot 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;

• 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; and

• claims for personal time expended, stress, anxiety, pain and suffering or other emotional distress. 

Losses that may be claimed

• 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.

When and how to apply

Broadly, anyone can submit a CDDA Scheme application and this can occur either directly or through an appropriate third party (eg, a tax agent). To apply, ATO from NAT 11669 should be completed and lodged with the ATO.

Unlike objections or other ATO applications, there is no deadline on when the CDDA Scheme application needs to be lodged. However, any significant lapses in time between the lodgment date and the relevant event may hinder the ability to locate appropriate, supporting evidence.

The ATO will typically not consider a claim for compensation until after the initial issue has been resolved.

Practical implications

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.

This low success rate coupled with the costs associated with actually making the claim (professional fees, etc), may detract from the attractiveness of a CDDA Scheme application. This is especially so given that there is no guarantee of success. That being said, in the right circumstances, a claim for compensation under the CDDA Scheme may be worthwhile and is definitely worth keeping in mind.

Conclusion

Avenues exist for taxpayers (including SMSFs) to seek compensation from the ATO in certain circumstances. Although these circumstances may be limited, the scheme can provide clients with the ability to recover a significant proportion of their costs and is generally worthy of consideration.

Being aware of the compensation avenues available and knowing your options will hold you (and your clients) in good stead.

By Daniel Butler, director and Tina Conitsiotis, lawyer, DBA Lawyers