ATO settlements, penalty risks and s177EA: insights from Ziegler v Commissioner of Taxation

The Full Federal Court recently handed down its decision in Ziegler v Commissioner of Taxation [2025] FCAFC 168 (Ziegler). In this case, in the ATO’s view, the taxpayer sought to negate the consequences of a settlement of the group’s tax audit by restructuring and obtaining a refund of franking credits derived on paying the settlement amount. 

Broadly, the case provides that: 

• An assessable recoupment may arise where a taxpayer did ‘in fact’ deduct a prior amount which has been recouped.
   
• The Commissioner of Taxation (Commissioner) can unilaterally increase an administrative penalty after a taxpayer objects to a primary tax liability (in this case, from 25% to more than 90%), even if the taxpayer did not object to penalties.
   
• The Commissioner is not limited by the period of review limitation rules when amending a taxpayer’s assessment of administrative penalties.
   
• The Commissioner can issue a valid section 177EA determination where a taxpayer attempts to substantially negate the impact of a tax settlement by obtaining a refund of the tax paid for that settlement.
   
• Arguing a breach of a settlement deed by the ATO is not sufficient to establish that a tax assessment is excessive. Other remedies must instead be sought, such as for breach of contract.

Background to Ziegler v Commissioner of Taxation

Ziegler is an appeal to the Full Federal Court from the earlier Administrative Appeals Tribunal (as it then was) decision in BSKF and Commissioner of Taxation [2024] AATA 3377 (BSKF). 

The case concerns a private group consisting of 22 people and entities headed by Mr Ziegler. In April 2009, the group entered into a settlement deed with the Commissioner over amounts received between 1998 and 2004. The settlement provided for a single payment by one group entity, Orrong Strategies Pty Ltd (Orrong), for the 2008 income year. The settlement amount was $3,900,000 plus the general interest charge (GIC). 

At a very high level, after entering into the settlement, Mr Ziegler then: 

• personally acquired all shares in Orrong, becoming its sole shareholder;
   
• personally acquired related entity debts, and deducted over $13 million in GIC (which was later refunded by the ATO), which placed him in a tax loss position;
   
• transferred group funds to enable Orrong to be in a position to pay a dividend;
   
• caused Orrong to fully pay the outstanding settlement liability to the ATO early, thereby bringing forward the franking credits obtained on the payment; and
   
• caused Orrong to pay a fully franked dividend to himself, which included $2,993,610 in franking credits.

As a result of the carried forward losses, Mr Ziegler was then personally entitled to a refundable tax offset of $2,993,610. 

The judgment said that this refund ‘was not well received by the Commissioner’s officers’ and that ‘[i]n the Commissioner’s view, the outcome of the Settlement Deed was largely defeated because a substantial proportion of the $3,458,160.53 that Orrong paid to the Commissioner… under the Settlement Deed was paid to Mr Ziegler as a refundable tax offset of $2,993,610’.

The Commissioner then issued a determination to Mr Ziegler pursuant to section 177EA(5)(b) of the Income Tax Assessment Act 1936 (Cth) (section 177EA) for the 2010 income year. This determination cancelled Mr Ziegler’s imputation benefit of $2,993,610. 

Mr Ziegler objected to the Commissioner’s 177EA determination and assessments. 

At objection, the Commissioner then increased penalties from 25% to 75% plus a 20% uplift for some years. 

Full Federal Court decision

The Full Federal Court of Bromwich, Thawley and Jackman JJ, handed down a unanimous decision in November 2025. In handing down its decision, the Court did not agree with Mr Ziegler on any of his primary grounds of appeal. 

At a high level, these grounds of appeal were: 

1. The $13,698,643 in GIC refunded to Mr Ziegler’s Income Tax Account was not an assessable recoupment within the meaning of section 20-20(3) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
    
2. The Commissioner had no power at the objection stage to increase the penalty assessments because this power was spent on its initial exercise on assessing the penalties and no amendments to penalty assessments were contemplated by the relevant legislative  provisions.
    
3. The Commissioner had no power to issue a section 177EA determination because section 177EA(3)(e) (the objective purpose conclusion) was not satisfied. 
    
4. When considering the settlement reached with the Commissioner, the assessments were excessive and the section 177EA determination should not have been made. 

Ground 1: assessable recoupment

Under the first ground of appeal, Mr Ziegler argued that the $13,698,643 in GIC credited (that is, refunded) to his Income Tax Account on the ATO’s Tax Agent Portal should not be included in his assessable income as an assessable recoupment under section 20-35 of the ITAA 1997. This is despite the fact that he had previously deducted this amount. Amongst other reasons, Mr Ziegler argued an assessable recoupment must include an amount ‘lawfully deducted’ rather than an amount ‘in fact deducted’ and that, by virtue of section 172(1) of the ITAA 1936, the GIC previously accrued was taken to never have been payable. 

Their Honours rejected these arguments. They held that the statutory definition of ‘recoupment’ is defined ‘in a broad and inclusive way’ with the ‘obvious purpose’ of seeking to unwind prior deductions. Mr Ziegler had ‘in fact’ deducted the GIC when he was liable to pay it. While section 172(1)(a)(i) of the ITAA 1936 provides that, where a tax liability is reduced by an amendment, that amount is ‘taken never to have been payable for the purposes of… the general interest charge’, this only creates a statutory fiction for a confined purpose, being the recalculation of GIC payable. The fiction operates only so far as is necessary to achieve that purpose. It does not go further to deem the underlying liability to be retrospectively extinguished. 

More broadly, their Honours also held an assessable recoupment may arise ‘whether or not the taxpayer was lawfully entitled to deduct the amount’, provided a deduction was ‘in fact’ claimed. This is because the definition of an assessable recoupment includes amounts which ‘you have deducted’ as well as amounts which you ‘can deduct’. In so finding, their Honours rejected Mr Ziegler’s arguments that the provisions should be limited by reference to prior, more limited concepts which were previously included in the ITAA 1936. 

Going forward, it’s important to call out that legislative changes have taken effect for income years starting on or after 1 July 2025 which mean that GIC is no longer deductible. As a result, the question of whether future GIC is assessable when remitted should not arise. 

Ground 2: increased penalty assessments

Under ground two, Mr Ziegler argued that, once the Commissioner has issued an administrative penalty assessment, his power to assess penalties in that matter is spent. 

In considering this ground, their Honours held that the decision in Aurora Developments Pty Ltd v Commissioner of Taxation (No 2) [2011] FCA 1090 was incorrect. In that case, it was decided that section 14ZY of the Taxation Administration Act 1953  (Cth) (TAA) (which requires the Commissioner to decide an objection) confers an implied power to amend a penalty assessment and section 33(3) of the Acts Interpretation Act 1901 (Cth) confers a power to amend a notice of penalty assessment. 

Their Honours determined that these matters are incorrect because there is no separate power to issue an administrative penalty assessment under the provisions of the TAA, whether express or implied (including an amended administrative penalty assessment). They also said that section 14ZY does not contain an express or implied limitation on the Commissioner’s power to increase an administrative penalty assessment at, or after, objection. 

Rather, the relevant TAA provisions oblige the Commissioner to make an administrative penalty assessment and notify the entity of that assessment. The Commissioner’s obligation to assess penalties does not stop at objection and is not confined by the taxpayer’s grounds of objection. As a result, the Commissioner is required to make an assessment of an increased or decreased penalty where he considers a prior penalty assessment is incorrect. Their Honours then considered it was open to the Commissioner to increase the administrative penalties, in this case from 25% to, for some matters, 90% or more. 

Their Honours also determined an administrative penalty assessment is not an ‘assessment’ within the statutory definition in section 6(1) of the ITAA 1936. This is because such assessments relevantly require the ‘ascertainment’ of ‘taxable income and the tax payable on that taxable income’. Rather, the assessment of an administrative penalty flows from a ‘shortfall amount’ calculated by reference to a ‘tax-related liability’. 

This has the consequence that an administrative penalty assessment is not a relevant ‘assessment’ that is subject to the period of review time limits in section 170 of the ITAA 1936. Rather, to limit the time period where the Commissioner can amend an assessment (generally, to two or four years), section 170 only applies in respect of an ‘assessment’. Because an administrative penalty assessment is not a relevant ‘assessment’ within the meaning of section 170, the time limits do not apply.

A natural concern may then arise that the Commissioner has an unlimited period of review to amend penalty assessments. Their Honours addressed this by: 

• noting the Commissioner generally issues administrative penalty assessments when assessing primary tax liabilities, which are subject to the period of review rules; and
   
• cautioning the Commissioner’s power to issue administrative penalty assessments 'might be controlled by an implicit condition that it be exercised reasonably or within a reasonable time'. 

Taxpayers should be aware of the ATO’s ability to increase liabilities through an objection process and carefully consider the merits of their case before taking any next steps. 

Ground 3: section 177EA determination 

Under ground three, Mr Ziegler argued that the Commissioner had no power to issue a determination pursuant to section 177EA(5)(b) because, amongst other matters, the requisite purpose did not exist. 

Section 177EA differs from the general provisions in Part IVA in several important respects, including because: 

• It requires there to be a ‘scheme for a disposition of membership interests’. Broadly, this requires a dealing in membership interest (e.g. shares) such as by issuing, transferring, or substantially altering of the economic risks and benefits (such as through a hedge) in membership interests.
   
• The franking credits obtained are the tax benefit. There is strictly no need to undertake a counterfactual analysis to identify a tax benefit (although one may be undertaken if relevant).
   
• It does not require the purpose of obtaining the franking credits to be the sole or dominant purpose. It instead requires ‘a purpose’ of obtaining the franking credits to exist, provided that the purpose is more than an ‘incidental purpose’.
   
• A broader range of matters are explicitly listed for consideration when undertaking the objective purpose analysis. This includes the eight general Part IVA matters in section 177D as well as an additional 10 matters listed in section 177EA(17).

In Ziegler, the Commissioner identified a single step as the relevant scheme. This was: 

‘On or around 19 June 2009, Mr Ziegler authorised the transfer of M[i]rnlight’s shares in Orrong to himself, thereby becoming the sole shareholder of Orrong.’

The identified scheme consisted of this single step. However, the broader associated arrangements involved shuffling group funds and liabilities around to ensure that Mr Ziegler could personally obtain a refund of tax paid on the ATO settlement payment, when the previous corporate shareholder would not have received such a refund. 

Their Honours held it was permissible for the scheme to consist of this single step. However, this doesn’t mean that the section 177EA purpose analysis is constrained to that single step. Rather, in undertaking the purpose analysis, section 177EA(3)(e) requires consideration of the ‘relevant circumstances of the scheme’. Their Honours explicitly stated that it is not necessary to identify those relevant circumstances as part of the scheme itself. The relevant circumstances can be explained in other communications between the Commissioner and taxpayer.

Based on this simple scheme, Mr Ziegler contended there could be no requisite section 177EA purpose due to the operation of section 177EA(4). Subsection 177EA(4) provides: 

'Bare acquisition of membership interests or interest in membership interests 

It is not to be concluded for the purposes of paragraph (3)(e) that a person entered into or carried out a scheme for a purpose mentioned in that paragraph merely because the person acquired membership interests, or an interest in membership interests, in the entity.’

Mr Ziegler contended the effect of section 177EA(4) was to wholly exclude Mr Ziegler’s own purpose from the analysis. Their Honours rejected this argument, noting that it could not be correct for ‘at least’ two reasons:

• firstly, section 177EA(4) does not directly exclude a person’s purpose; and
   
• secondly, section 177EA(4) requires there to be the 'mere' acquisition of membership interests. 

Rather, section 177EA(4) excludes the possibility of finding the existence of the relevant purpose on the ‘mere’ existence of one fact, being the acquisition of membership interests. Their Honours reinforced that the inclusion of the word ‘merely’ in section 177EA(4) is significant and, on ‘no sensible view’, did Mr Ziegler merely do no more than acquire shares in Orrong.

Their Honours also rejected Mr Ziegler’s argument the Tribunal had impermissibly considered the purpose of the scheme rather than the purpose of a person who entered into or carried out the scheme. In rejecting this argument, their Honours noted that Mr Ziegler had made submissions in respect of the ‘purpose of the scheme’, with the Tribunal merely engaging with those submissions. 

Finally, their Honours also: 

• endorsed the position found by the Tribunal that the requisite purpose for section 177EA can exist even if what is done is consistent with a settlement agreement entered into with the ATO; and
   
• stated that relevant purpose matters should not be construed in a narrow way given the list of relevant purpose matters in section 177EA is non-exhaustively expressed and section 177EA’s purpose is to prevent abuse of the imputation system. 

Interestingly, at first instance in BSKF, the Tribunal considered section 177EA may not be subject to the period of review limitation rules in section 170 of the ITAA 1936. This is because, by virtue of sections 177EA(5) and (11), a section 177EA determination does not itself form part of an assessment and the determination ‘has effect according to its terms’. In Ziegler, the Full Federal Court did not comment on the applicability of the period of review rules in respect of a section 177EA determination. 

While there are only two other cases which have considered section 177EA, the facts and circumstances in Ziegler are fairly unique. While the case provides general principles on how to apply section 177EA, the unique facts and circumstances limit the general applicability of the judgment.

Ground 4: the effect of the settlement agreement

In order to successfully appeal a tax assessment at the Administrative Review Tribunal or Federal Court, a taxpayer has the burden of establishing that the assessment is 'excessive or otherwise incorrect and what the assessment should have been'. Under the last ground, Mr Ziegler contended that, when the terms of the settlement agreement with the ATO are considered, the assessments are excessive and the section 177EA determination should not have been made. 

Their Honours rejected these contentions. Importantly, 'excessiveness' is not demonstrated by establishing a defect in procedures or mechanisms undertaken by the ATO. Rather, the term 'excessive' relates to a taxpayer’s substantive tax liability as determined under the tax laws, and a long line of established authority makes clear that the Commissioner cannot bind himself by administrative practice or by contract to give the tax laws an operation which they do not have.

A settlement deed, unlike for example a private binding ruling, has no consequence for the taxpayer’s substantive tax liability. Outside of its relevance to the section 177EA analysis, Mr Ziegler’s attempts to show what he perceived as inconsistencies with the terms of the settlement were simply not relevant to whether the assessment was excessive. 

Next steps in Ziegler v Commissioner of Taxation

Mr Ziegler has also initiated proceedings in the Federal Court against the Commissioner for breach of contract, alleging that the Commissioner’s actions are inconsistent with the terms of the settlement deed. These proceedings remain on foot. The Full Federal Court refused to make additional factual findings in relation to the correct operation of the settlement deed.

Those other proceedings therefore did not impact the Full Federal Court’s judgment above. In any event, their Honours also stated a tax assessment will not be shown to be excessive simply by being ‘inutile’. That is, even if the effect of the above judgment were somehow to be reversed by the other proceedings, that is not enough to win a Pt IVC proceeding.