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The Federal Court has confirmed that neither s 166 nor s 263 of the Income Tax Assessment Act 1936 (Cth) give the Commissioner a right to use, in the assessment process, material which is subject to legal professional privilege. In a case where the ATO was aware of, but disregarded, the possibility of the existence of legal professional privilege in documents supplied to it by a third party and used by it to make and issue assessments, that amounted to conscious maladministration on the part of the ATO sufficient to render the assessments invalid.

The ATO carried out what it described as a covert audit of the taxpayer’s taxation affairs. During the course of that audit, the ATO came into possession of documents supplied by a third party who apparently had a grievance with the taxpayer. The taxpayer had not given permission for that information to be given to the ATO. The officer working on the audit was aware that some at least of the documents might be subject to legal professional privilege, on the basis that the third party who supplied the information was working with or for a law firm which was acting for the payer, but chose to ignore that apprehension. The information supplied by the third party, along with other information gathered by the ATO, informed the audit, and influenced the assessments which were ultimately issued to the taxpayer.

The taxpayer applied for orders under s 39B of the Judiciary Act 1903 (Cth), seeking orders declaring the assessments to be invalid and quashing them, and seeking consequential orders enjoining the Commissioner from taking any further action directed to the recovery of the tax liability purportedly created by the assessments.

The court found, on the evidence, that:

  • the third party worked to or for a law firm with which the taxpayer had a retainer; alternatively, the third party acted as the taxpayer’s agent for the purposes of the taxpayer’s dealing with the law firm
  • communications and documents which were ultimately given to the ATO by the third party were made for the dominant purpose of obtaining legal advice or for use in litigation and were therefore subject to legal professional privilege
  • the ATO held an apprehension that this was the case, but did not act on that apprehension; the officers involved acted in wilful disregard of the taxpayer’s right to claim legal professional privilege in respect of the material supplied to the ATO by the third party and which the relevant officer always believed might be privileged
  • the material assisted the ATO’s train of inquiry and the process of making the assessments.

The court referred to previous authority which establishes that recklessness is sufficient to establish the element of consciousness in conscious maladministration, and to establish the tort of misfeasance in public office.

In this case, the evidence showed that the ATO officer was reckless, and the Commissioner’s process of assessment was, therefore, affected by conscious maladministration.

Conscious maladministration in the process of assessment does not produce an assessment to which s 175 of the ITAA 36 applies. In this case, therefore, the assessments concerned were to be quashed. It necessarily followed that separate penalty assessment dependent upon the primary tax assessments must also be quashed. In the absence of any income or penalty tax liability, no general interest charge would, as a matter of law, be payable.

Further, there was nothing to support either the recovery proceedings or a departure prohibition order based on the taxation liability grounded in the assessments now found to be invalid.

It would be a matter for the Commissioner to decide whether, having regard to information not subject to privilege and in the circumstances now prevailing, the issuing of fresh assessments would be possible in fact and in law.

Donoghue v FCT [2015] FCA 235 (Logan J, 17 March 2015).


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