A general interest charge (GIC), which accrues and compounds daily, applies to compensate the revenue for the time value of unpaid tax debts. That is where a taxpayer has the use and enjoyment of money which should have been paid in tax for a period of time.

Opportunity to dispute GIC

The GIC is imposed on and follows a tax debt and, for a taxpayer, it is difficult to establish a basis in the objection and appeal process upon which the GIC applicable to a tax debt should be dealt with separately and reduced and remitted.

Resolution of a tax dispute by agreement with the Australian Taxation Office is one opportunity where the GIC can be revisited and reduced so long as the Australian Taxation Office is agreeable. By the time this point is reached significant GIC can have accrued if the taxpayer has not opted to provisionally pay a tax debt that is contention.

Dealing with GIC in an agreement with the ATO

So it was, in the Federal Court in Caratti v Commissioner of Taxation [2017] FCA 70, where $1,145,639.03 had accrued since 7 August 2015 on a tax debt of $10,948,507.45 which included GIC up to 10 February 2017.

On 23 September 2015 the taxpayer had entered into a deed of agreement with the Commissioner of Taxation under which the Commissioner refrained to recover the “Taxation Debt” defined in the deed as:

the amount of $10,948,507.45, which is comprised of Tax-Related Liability and applicable GIC due and payable by the Taxpayer as at 7 August 2015, subject to any adjustment to those amounts by virtue of the Determination of the Objection Process

However the deed also stated that:

The Taxation Debt will continue to accrue GIC daily from the due date for payment in accordance with and at the rate as may be applied from time to time under the TAA 1953.

So the taxpayer could assert that the “Taxation Debt” was a variable and, further, that that interpretation is sensible as the GIC that accrued after 7 August 2015 related to the same underlying debt or “Tax-Related Liability” which the deed made irrecoverable. Although the deed stated that the “Taxation Debt” will continue to accrue GIC the taxpayer asserted that, as the GIC was a part of the “Taxation Debt”, the deed also made that accrual irrecoverable. The Commissioner contended that the Taxation Debt was $10,948,507.45, as the Taxation Debt was expressly stated to be, and that this figure was the irrecoverable total or ceiling and not just a snapshot in time of the figure.

There were other provisions and context in the deed which supported the position of the Commissioner hence Robertson J. found for the Commissioner in the Federal Court.

Equivocal term in the deed gave the ATO a GIC recovery problem

Moving liabilities like the GIC cause difficulties. $1,145,639.03 was put at stake due to the inadvertent and equivocal use of Taxation Debt (capitalised as a defined term) in the formulation of the term in the deed dealing with the further accrual of GIC. A Federal Court challenge to the ATO might have been avoided by the Commissioner if it had been clear in the deed that the amount of the Taxation Debt (as at 7 August 2015) would continue to accrue GIC as a taxation debt which, in turn, was not part of the Taxation Debt made unrecoverable by the deed.