Decision impact statement

Commissioner of Taxation v Donoghue

Court Citation(s):
[2015] FCAFC 183
2015 ATC 20-551
(2015) 237 FCR 316
(2015) 329 ALR 400

Venue: Federal Court of Australia
Venue Reference No: QUD110 of 2015; QUD128 & 129 of 2015
Judge Name: Kenny, Perram & Davies JJ
Judgment date: 17 December 2015
Appeals on foot: No
Decision Outcome: Favourable to the Commissioner

Impacted Advice

Relevant Rulings/Determinations:

• None

Précis

Outlines the ATO's response to this case which concerns whether in circumstances where the ATO has obtained privileged documents from a third party without the use of compulsory powers whether the use of those documents constitutes conscious maladministration such as to invalidate assessments to which section 175 of the Income Tax Assessment Act 1936 otherwise applies.

Brief summary of facts

The Commissioner issued default assessments to Mr Donoghue for the income tax years ended 30 June 2005, 30 June 2006 and 30 June 2007 on the view that Mr Donoghue was an Australian resident for tax purposes.

Mr Donoghue objected to the default assessments.

Subsequently Mr Donoghue commenced proceedings in the Federal Court seeking orders quashing by certiorari each of the notices of assessment and also seeking declaratory relief on the basis that the use of allegedly privileged material in the audit process (which were used to reach an audit decision and led to the issue of the notices of assessment) constituted conscious maladministration by the Commissioner.

The allegedly privileged material had been provided to the auditor by a third party employee of a law firm engaged by Mr Donoghue to represent him in proceedings relating to the enforcement of loans and claims for possession of property.

The Trial Judge found the documents provided to the auditor were privileged but that the auditor whilst cognizant of what he regarded as a small risk that the documents might be privileged did not know that they were and had not acted in bad faith. The Trial Judge concluded that the auditor had acted with reckless disregard in respect of Mr Donoghue's claim for privilege and this constituted maladministration and rendered the assessments invalid.

The Commissioner appealed to the Full Federal Court from the Trial Judge's finding that the notices of assessment were invalid.

Issues decided by the court/Tribunal

On 17 December 2015 the Full Court (Kenny, Perram & Davies JJ) allowed the Commissioner's appeal.

The Commissioner argued that the common law principles concerning legal professional privilege were irrelevant to the formulation of a view that maladministration or conscious maladministration had occurred. Legal professional privilege constituted no more than a common law immunity against a requirement to produce documents or information under compulsion. In circumstances where the Commissioner obtained documents from a third party without the use of compulsory powers the common law principles were irrelevant. The only right that Mr Donoghue could have had to prevent the use of documents lay in an action for breach of confidence which claims was not in issue before the Trial Judge who consequently made no findings.

The Full Court found that there was no doubt that Mr Donoghue had abandoned his claim for breach of confidence before the Trial Judge. The only issue was the allegation of conscious maladministration on the basis that it was unlawful for the Commissioner to use privileged documents which had come into his possession in the course of the audit process.

The Full Court found that the Trial Judge's view that the principle of legal professional privilege was a bar to the use of the documents in the audit process was not correct stating that 'The common law of legal professional privilege operates as an immunity from the exercise of powers requiring compulsory production of documents or disclosure of information. It is not a rule of law conferring individual rights, the breach of which may be actionable.' It followed that as the Commissioner did not use any compulsory power to obtain the documents, whether they were privileged or not was irrelevant.

It further followed that breach of the common law of legal professional privilege could not constitute an act of maladministration or conscious maladministration.

ATO view of decision

The Tax office accepts the judgment of the Full Court as an application of non-contentious principles as to the operation of the common law principle of legal professional privilege in relation to claims of maladministration or conscious maladministration.

Legislative References:
Income Tax Assessment Act 1936 (Cth)
s 175
s 177(1)

Judiciary Act 1903 (Cth)
s 39B

Evidence Act 1995 (Cth)
s 118
s 119

Case References:
Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analysts Group Pty Ltd
[2012] NSWCA 430
(2012) 295 ALR 348

Australian Securities and Investments Commission v Lindberg
[2009] VSCA 234
(2009) 25 VR 398

Coco v AN Clarke (Engineers) Ltd
[1969] RPC 41

Commissioner of Australian Federal Police v Propend Finance Pty Ltd
(1997) 188 CLR 501

Cowell v British American Tobacco Australia Services Ltd
[2007] VSCA 301

Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission
[2002] HCA 49
(2002) 213 CLR 543

Denlay v Federal Commissioner of Taxation
[2011] FCAFC 63
(2011) 193 FCR 412
2011 ATC 20-260
(2011) 83 ATR 625

Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Ltd
[2013] HCA 46
(2013) 250 CLR 303

Federal Commissioner of Taxation v Futuris Corporation Ltd
(2008) 237 CLR 146
2008 ATC 20-039
(2008) 69 ATR 41

Lord Ashburton v Pape
[1913] 2 Ch 469

Macquarie Bank Limited v Commissioner of Taxation
[2013] FCAFC 119

Trevorrow v South Australia (No 4)
[2006] SASC 42
(2006) 94 SASR 64