The Federal Court has held that income tax assessments issued to a taxpayer were invalid because the Commissioner had drawn upon information that was subject to legal professional privilege and received by the ATO from a third party without the authorisation of the taxpayer.
The Commissioner’s process, which included a tax officer’s wilful disregard of the taxpayer’s right to claim legal professional privilege, was affected by conscious maladministration, the court found. The assessments concerned, and separate penalty assessments, were therefore to be quashed.
The court also held that the privileged material was either be returned to the taxpayer or destroyed, and pending that, injunctions granted in by Reeves J should be continued preventing the Commissioner from making any future use of the information.
Court ref:  FCA 235, Logan J, 17 March 2015, Brisbane.
The Federal Court has granted a taxpayer’s application under s 39B of the Judiciary Act 1903 for orders declaring that assessments issued to him were invalid and quashing them. The assessments were issued following an audit that gave rise to a multimillion dollar liability.
The audits were performed, and the assessments issued, with the help of legal and other material provided by a third party who was connected with a law firm with which the taxpayer had a retainer.
The third party was the son of the principal of that law firm who was a law student and who had given legal advice to the taxpayer. However, they had a falling out after the taxpayer refused to pay a bill of over $700,000 for various work done by the third party.
In granting the taxpayer’s application, the Court found that material provided by the third party was subject to legal professional privilege as it was made for the dominant purpose of obtaining legal advice or for use in litigation and that the tax officers conducting the audit held a reasonable apprehension that this was the case.
Furthermore, the Court found that while the taxpayer was already the subject of an audit by the ATO before the receipt of the information from the third party, the material provided by the third party assisted the ATO’s “train of inquiry” in the audit and the process of making assessments, including in relation to an alleged previously unknown discretionary trust of the taxpayer.
Accordingly, the Court held that the assessments should be declared invalid as there was no right under either s 166 or s 263 of the ITAA 1936 for the Commissioner to use material that was subject to legal professional privilege in the course of making assessments. The Court also issued an order to prevent the material being used in any further assessment-making process. In making its decision, the Court also noted there was an element of recklessness in the process of making the assessments sufficient to amount to “conscious maladministration”. Finally, the Court also set aside a related departure prohibition order issued against the taxpayer.
(Donoghue v FCT  FCA 235, Federal Court, Logan J, 17 March 2015.)
[LTN 53, 19/3/15]
Commissioner appeals decision to quash assessments raised with the conscious use of the taxpayer’s privileged information
The Commissioner has appealed to the Full Federal Court against the decision in Donoghue v FCT  FCA 235. The Federal Court had granted the taxpayer’s application for orders declaring that assessments issued to him were invalid and that they be quashed on the grounds they were partly based on information that was subject to legal professional privilege.
[LTN 58, 26/3/15] [IT 26/3/15]