On 29 July 2016, the ATO issued Decision Impact Statement on the decision in FCT v Donoghue [2015] FCAFC 183, which reversed the decisions of Logan J in Donoghue v FCT [2015] FCA 235 and Donoghue v FCT [2015] FCA 291.

This statement outlines the ATO’s response to this case, which involved the ATO using privileged documents, from a third party, without the use of compulsory powers, in raising default assessments. The issue was whether the Court had the power to find the assessments invalid, as outside the provisions of s175 of the Income Tax Assessment Act 1936, that otherwise would operate to deem an ‘assessment’ valid, even if “any of the provisions of this Act have not been complied with” (one of two conclusivity’ provisions: the other being s177 of the same Act).

[ATO Statement] [LTN 145, 29/7/16]

Extract from Decision Impact Statement

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, based on his view that Mr Donoghue was an Australian resident for tax purposes.

Mr Donoghue objected to the default assessments.

Subsequently Mr Donoghue commenced certiorari proceedings in the Federal Court quash 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 (such that s175 could not operate to deem the assessments to be valid as they were not relevantly “assessments”).

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 aware that there was a small risk that the documents might be privileged, did not know that they were privileged 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 [in truth, is relieved that] the judgment of the Full Court, [regarded as] 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. [parenthetical comments by FJM]