FEDERAL COURT OF AUSTRALIA

Gould v Deputy Commissioner of Taxation [2017] FCAFC 1

ORDERS

THE COURT ORDERS THAT:

1.    The applicant’s application for an extension of time to seek leave to appeal be granted.

2.    The applicant’s application for leave to appeal from the judgment given on 17 December 2015 be granted.

3.    The appeal be dismissed.

4.    The applicant pay the respondent’s costs, as agreed or taxed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ORDERS

THE COURT ORDERS THAT:

1.    The applicant’s application for an extension of time to seek leave to appeal be granted.

2.    The applicant’s application for leave to appeal from the judgment given on 17 December 2015 be granted.

3.    The appeal be dismissed.

4.    The applicant pay the respondent’s costs, as agreed or taxed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

GILMOUR J:

1    I agree with the reasons of Robertson J and the orders which his Honour proposes.

Associate:

Dated:    9 January 2017

REASONS FOR JUDGMENT

LOGAN J:

2    In Federal Commissioner of Taxation v Clarke (1927) 40 CLR 246 at 276 (Clarke) Isaacs ACJ stated:

The Act so far trusts the Commissioner and does not contemplate, in my opinion, a curial diving into the many official and confidential channels of information to which the Commissioner may have recourse to protect the Treasury.

3    By a cross-claim in the proceedings respectively instituted against them by the respondent, the Commissioner of Taxation (Commissioner), each of the applicants invited the Court to engage in a form of “curial diving”.

4    I have had the advantage of reading in draft the reasons for judgment of Robertson J. I agree that, in each case leave to appeal (and a related extension of time) should be granted but that the appeal should be dismissed, with costs.

5    My reasons for expressing that agreement are not completely congruent with those of Robertson J. His Honour has comprehensively summarised pertinent background facts, relevant extracts from the proposed defences and cross-claims, the reasons of the learned primary judge and the submissions of the parties. Save to the extent necessary to explain my reasons for judgment, I do not repeat references to these.

6    The statement of Isaacs ACJ in Clarke, quoted above, was made by reference to s 39 of the Income Tax Assessment Act 1922 (Cth) (ITAA 1922) and to its analogue in its predecessor Federal income tax statute, s 35 of the Income Tax Assessment Act 1915 (Cth). There was also for many years an analogue in its successor income tax statute, s 177 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). A parliamentary value judgment that it was better to co-locate provisions relating to the collection and recovery of a number of Federal taxes has, so far as income tax is concerned, latterly seen s 177 replaced by an equivalent provision of more pervasive application, item 2 in the table to s 350-10(1) in Sch 1 to the Taxation Administration Act 1953 (Cth) (TAA). The effect of each of these provisions is that, except in a taxation appeal or, where alternatively available, on an external merits review relating to the assessment, a notice of assessment is, on production, conclusive evidence that the amounts and particulars of the assessment are correct.

7    Subject to the qualification that it is now additionally necessary to look to the TAA, Sir Isaac Isaacs’ observation in Clarke as to an evident absence of parliamentary contemplation in taxation legislation of “curial diving” into the Commissioner’s channels of information remains true. So far as income taxation legislation is concerned, the force of that observation is reinforced by the continued presence of ss 166, 167, 169 and 175 in the ITAA 1936:

Assessment

166    From the returns, and from any other information in the Commissioner's possession, or from any one or more of these sources, the Commissioner must make an assessment of:

(a)    the amount of the taxable income (or that there is no taxable income) of any taxpayer; and

(b)    the amount of the tax payable thereon (or that no tax is payable); and

(c)    the total of the taxpayer's tax offset refunds (or that the taxpayer can get no such refunds).

Default assessment

167    If:

(a)    any person makes default in furnishing a return; or

(b)    the Commissioner is not satisfied with the return furnished by any person; or

(c)    the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income;

the Commissioner may make an assessment of the amount upon which in his or her judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166.

Assessments on all persons liable to tax

169    Where under this Act any person is liable to pay tax (including a nil liability), the Commissioner may make an assessment of the amount of such tax (or an assessment that no tax is payable).

Validity of assessment

175    The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with.

8    In Clarke, at 277, Isaacs ACJ also observed that there was a distinction between an action to recover tax, which he termed the “legal enforcement of an ascertained right”, in which the assessment ascertaining the amount of tax is, on its production and by virtue of the provision mentioned, conclusive, and a so-called “appeal” in relation to the assessment, in reality an exercise of original jurisdiction. The purpose of that exercise of original jurisdiction, so his Honour stated, was “to correct the assessment and bring it, as an essential factum of liability, into conformity with the requirements of the law, so that whatever liability exists may be adjusted properly by a true factum”. The essentiality to which Isaacs ACJ referred, then as now, was derived from the basal, constitutional proposition that a law with respect to taxation is invalid unless it makes provision for the option of recourse to the judicial branch so as to contest on the merits whether or not the criteria for a liability to tax are met: Deputy Federal Commissioner of Taxation (NSW) v Brown (1958) 100 CLR 32 at 40; Giris Pty Ltd v Federal Commissioner of Taxation (1969) 119 CLR 365 at 378-379; MacCormick v Federal Commissioner of Taxation (1984) 158 CLR 622; Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 at [9] (Futuris).

9    Though it is, in this respect also, now necessary additionally to look to the TAA (s 255-5(1) of Sch 1, which makes the amount of, materially, an income tax liability which is due and payable a debt due to the Commonwealth and payable to the Commissioner) to discern the statutory scheme for the collection and recovery of income tax, it remains a feature of that scheme that a distinction is drawn between a taxation appeal (or tribunal review) and other proceedings in relation to an assessment, with an evident legislative intention that an assessment, on production of the notice of assessment, will be conclusive in the way described in all but the former. This distinction has, repeatedly, been recognised in the High Court in cases decided since Clarke, most recently in Futuris at [64].

10    In relation to liability to taxation, the Constitution intrudes not just to qualify legislative competence in the manner described but also executive competence. That is because the Commissioner is an officer of the Commonwealth and his actions or inactions are subject to review by constitutional writ or to restraint or compulsion by injunction by the High Court in the exercise of the original jurisdiction conferred on that court by s 75(v) of the Constitution. As Nettle J recently observed in Construction Forestry Mining and Energy Union v Director of the Fair Work Building Industry Inspectorate [2016] HCA 41 at [22], by reference to a statement made by Sir Owen Dixon in Bank of New South Wales v The Commonwealth (1948) 76 CLR 1 at 363, the “high constitutional purpose of s 75(v) of the Constitution is to make it constitutionally certain that there is a jurisdiction capable of restraining officers of the Commonwealth from exceeding Commonwealth power”. It is this same original jurisdiction which, subject to exceptions not presently material, has been conferred on this Court by s 39B(1) of the Judiciary Act 1903 (Cth) (Judiciary Act). Each of the applicants sought to invoke that jurisdiction by their respective cross-claims.

11    Before the learned primary judge, the Commissioner sought summary judgment and orders striking out those cross-claims. In NSD 576 of 2015, the Commissioner also sought an order striking out the respondent’s defence. It is these orders which the applicants seek to challenge.

12    The applicants take issue with the deficiencies in their pleadings identified by the primary judge. Their fall-back position is that, even if there were any deficiency, that was not incurable and the allegations and evidence before the primary judge disclosed a case to be answered. In other words, they contend that the case was never one for summary judgment.

13    If, on the material before the primary judge, the case were, truly, one for summary judgment the deficiencies, real or perceived, in those pleadings would be academic. The case would be one for summary judgment if, on that material, the defences and cross-claims had no reasonable prospect of success: s 31A(2)(b) of the Federal Court of Australia Act 1976 (Cth); White Industries Australia Ltd v Federal Commissioner of Taxation (2007) 160 FCR 298 at 309, [47] per Lindgren J, cited with approval by French CJ and Gummow J in Spencer v The Commonwealth [2010] HCA 28; 241 CLR 118 at 131, [23] (Spencer v The Commonwealth). And the exercise of that power of summary determination would necessarily entail caution: Spencer v The Commonwealth at 131, [24].

14    Though I do not, with respect, deny the force of the critique offered by the primary judge or by Robertson J, in my view the adequacy of the applicants’ pleadings is a subject upon which reasonable minds might reasonably differ. If proof of that were necessary, it is to be found in Deputy Commissioner of Taxation v Anglo American Investments Pty Ltd [2016] NSWSC 975 at [47]. In that case, Button J regarded a pleading materially indistinguishable from the present as adequate. So do I.

15    In these circumstances, it seems to me that it is better to focus on whether, on the material before the primary judge, the applicants had no reasonable prospect of success such that the Commissioner was entitled to summary judgment. It was to the answering of just this question that the parties devoted the greatest attention in oral submissions.

16    The asserted triable issue arose out of the Commissioner’s request for and subsequent obtaining and use of information from the Cayman Islands Tax Information Authority. The agreement between the governments of Australia and the Cayman Islands did not allow for information to be sought except in relation to tax periods commencing on or after 1 July 2010. The applicants asserted that the Commissioner had knowingly sought information under this agreement for the purpose of using it in respect of tax periods prior to 1 July 2010, including in the determining of objections for the 2001 to 2007 tax periods, using it in proceedings challenging objection decisions in respect of tax periods prior to 1 July 2010 and in the making of assessments of their respective liabilities to income tax in respect of tax periods prior to 1 July 2010.

17    It was in respect of those liabilities to tax that the Commissioner sought summary judgment. For that purpose, he produced the assessments concerned, relying upon the conclusive effect of s 350-10(1) in Sch 1 to the TAA and the operation of s 175 of the ITAA 1936. Prima facie, that entitled him to judgment in respect of the assessed taxation liability. The applicants sought to meet this by the allegation that there were no lawful assessments and hence no conclusiveness of proof of liability or operation of s 175 in respect of them, because they were affected by “conscious maladministration” in the way described in Futuris at [66] by Gummow, Hayne, Heydon and Crennan JJ:

What of the operation of s 177(1) as a limitation upon the evidence which may be received in an application for judicial review under s 75(v) of the Constitution or s 39B of the Judiciary Act? What will be in issue there, as explained earlier in these reasons, are allegations of corruption and other deliberate maladministration. The attribution “correct” given by the concluding word of s 177(1) is inapt to describe the situation which would arise were such allegations (properly pleaded) made good in the judicial review proceeding. Considerations applied above in the construction of s 175 apply here also. The result is that, on its proper construction and its application to the present s 39B case, s 177(1) did not conclude against Futuris curial consideration of alleged deliberate maladministration of the Act with respect to the second amended assessment.

18    Before the primary judge and as it emerged in submissions on the appeal, the evidentiary essence of the applicants’ allegations of conscious maladministration and the basis upon which it was put that there was a triable issue such that there should be no summary judgment concerned two requests for information made to the Cayman Islands Tax Information Authority by the Commissioner, one on 23 February 2011, the other on 27 May 2011. The emphasis in the case asserted for the applicants was that the procurement of the information from the Cayman Islands Tax Information Authority was attended with conscious maladministration by the Commissioner. They invited a conclusion that these requests were deliberately made not to seek information in respect of tax periods after 1 July 2010 but rather for the purpose of gaining information for use in respect of the making of assessments for tax periods prior to that date.

19    On their face, the requests disclosed no such intention, only conformity with the terms of the agreement with the Cayman Islands government. The basis for the applicants’ allegations rose no higher than an exchange with counsel in the evidence in chief given by one of the Commissioner’s officers, Ms Lenore Richards, in other proceedings in this Court (Hua Wang Bank Berhad v Federal Commissioner of Taxation (No 7) [2013] FCA 1020; 217 FCR 1 (Hua Wang Bank v FCT)). Within the Australian Taxation Office, Ms Richards was involved in the investigation of the tax affairs of Mr Gould and related entities (or those believed to be related), as was a Mr Matthew Evans. Neither Ms Richards nor Mr Evans authored the information request on behalf of the Commissioner. That person was a Mr Neil Cossins. However, the request was made on Ms Richards’ initiative and it was she who prepared it. Ms Richards’ evidence concerned the making of the request of 23 February 2011. That part of Ms Richards’ evidence relied upon by the applicants is set out by Robertson J in his reasons for judgment. As to the request of 27 May 2011, the inference which the applicants invited to be drawn was that the underlying intention was no different.

20    In my view, taking that evidence at its highest and recalling that it was an application for summary judgment, not a trial on the merits, with which the primary judge was seized, no foundation for the judicial review, on any of the grounds under the rubric of conscious maladministration as described in Futuris, of the making of the assessments in question is made out. That is so even taking into account the caution which must attend the reaching of that conclusion.

21    As stated in Futuris, at [60] by Gummow, Hayne, Heydon and Crennan JJ, citing with approval remarks in this same regard made by Hill, Dowsett and Hely JJ in Kordan Pty Ltd v Federal Commissioner of Taxation [2000] FCA 1807 at [4]; (2000) 46 ATR 191 at 193; [2000] ATC 4812 at 4815, “Allegations that statutory powers have been exercised corruptly or with deliberate disregard to the scope of those powers are not lightly to be made or upheld.” The proof of such allegations at trial would attract s 140(2)(c) of the Evidence Act 1995 (Cth) and require heed to the reminder offered by Sir Owen Dixon in Briginshaw v Briginshaw (1938) 60 CLR 336 at 362 that in respect of grave allegations “‘reasonable satisfaction’ should not be produced by inexact proofs, indefinite testimony, or indirect inferences”. Ms Richards’ evidence does not suggest to me that the applicants have any reasonable prospect of successfully prosecuting at a trial their conscious maladministration allegations.

22    In reaching this view, I have expressly eschewed any reliance upon observations made by Perram J in Hua Wang Bank v FCT with respect to his acceptance of Ms Richards’ evidence. That is not an indication of disrespect, only recognition that, so far as this proceeding is concerned, that before Perram J is res inter alios acta. Even so, Ms Richards’ evidence rose no higher than an acknowledgement that, within the Australian Taxation Office, the possibility that prior tax period assessments might be raised in respect of Mr Gould was recognised but that this was not under active contemplation at the time when the information request was made. To acknowledge such a possibility is neither probative of some unarticulated occasion for the making of the request for information nor, more materially, even suggestive that such a case could ever be made out. That apart, her evidence entailed an affirmation that the request related to an examination of Mr Gould’s then current tax period taxation affairs under s 168 of the ITAA 1936, with the term “real time review” apparently being used within the Australian Taxation Office to describe such an examination. As at the time of the making of the request for information, such a review would necessarily have related to a period after 1 July 2010 and thus fallen within the terms of the agreement.

23    Ms Richards’ evidence does not reveal any endeavour or, reasonably, any prospect of the proof of an endeavour on the part of the Commissioner to depart from the terms of the agreement with the Cayman Islands government by a deliberate deception as to the intended use of the information requested. It offers no foundation for concluding that there is any prospect of ever proving such a grave allegation.

24    Also in reaching my view, I have assumed in favour of the applicants and as they contended that the scope of the process of assessment extends to the procurement of information for the purpose of the making of an assessment. As to what constitutes “assessment” for the purposes of the ITAA 1936, that is a very considerable and generous assumption, for reasons given below. It does not reflect the narrower conception of “assessment” for which the Commissioner contended. In turn though, in relation to judicial review of an assessing decision on the basis of conscious maladministration in public administration within the Australian Taxation Office, that narrower conception may pay insufficient regard to the overall and inter-related statutory responsibilities of the Commissioner with respect to the receipt and procuring of information and related assessment of any income tax liability and the impact of the principle of legality in respect of the content and lawful discharge of those responsibilities. The applicants’ difficulty is at the factual level in that, even if the position is as assumed in their favour or as just hypothesized, it offers no evidentiary foundation necessitating the determination of the correctness in law of either position. That means that answering the very large questions of principle which were raised in the applicants’ submissions is for another case on different facts. In deference to the submissions of the parties, I merely offer the following observations on those subjects.

25    The applicants’ contention takes assessment as the subject of judicial review beyond the definition of “assessment” found in s 6 of the ITAA 1936, which materially provides:

“assessment” means:

(a)    the ascertainment:

(i)    of the amount of taxable income (or that there is no taxable income); and

(ii)    of the tax payable on that taxable income (or that no tax is payable); and

(iii)    of the total of a taxpayer’s tax offset refunds for a year of income (or that the taxpayer can get no such refunds for the year of income); or …

26    This statutory definition takes up an understanding as to what constitutes “assessment” evident in an earlier judgment of Sir Isaac Isaacs concerning the ITAA 1922, which did not contain a definition of “assessment”. In R v Deputy Federal Commissioner of Taxation; ex parte Hooper (1926) 37 CLR 368 Isaacs J said at 372-373:

Before indicating in detail the successive provisions of the Act, one general deduction from those provisions may be stated, a deduction possibly obvious, but very necessary to remember. It is as to the nature of an assessment. An “assessment” is not a piece of paper: it is an official act or operation; it is the Commissioner’s ascertainment, on consideration of all relevant circumstances, including sometimes his own opinion, of the amount of tax chargeable to a given taxpayer. When he has completed his ascertainment of the amount, he sends by post a notification thereof called “a notice of assessment.”

(Emphasis added.)

27    Later in time is George v Federal Commissioner of Taxation (1952) 86 CLR 183 (George), a case upon which the applicants placed particular reliance. In that case, Dixon CJ, McTiernan, Williams, Webb and Fullagar JJ stated in their joint judgment, at 206-207:

As already has been said, ss. 166 and 167 are together concerned with the process of ascertaining the taxpayer's taxable income and the consequent tax. The clear policy of s. 177 is to distinguish between the procedure or mechanism by which the taxable income and tax is ascertained or assessed on the one hand and on the other hand the substantive liability of the taxpayer. The former involves the due making of the assessment. The production of the notice of assessment is conclusive evidence of the due making of the assessment. It would, for example, be absurd to suppose that in an action brought by the commissioner under s. 209 to recover unpaid tax due upon such an assessment as those now under appeal, evidence must be given for the plaintiff that the right officer was not satisfied under s. 167 (b) and formed a judgment as to the amount of the income to be taxed. Yet that is the consequence of the argument. To avoid this consequence, amounting as it does to a reductio ad absurdum of the argument, it was suggested that under s. 177 (1) the amount of the assessment was conclusive, although fulfilment of what the argument treated as conditions precedent to the power given by s. 167 to make the assessment were not covered by the words "due making". But this would mean that ex hypothesi the power to assess the tax was not well exercised. Accordingly the assessment would be bad and there would be nothing to be treated as good. Since tax is only due after it is "assessed" (see, for example, s. 204) a bad assessment would not do, however conclusive as to the amount of the tax a notice of assessment might be. Obviously the "due making of the assessment" was intended to cover all procedural steps, other than those if any going to substantive liability and so contributing to the excessiveness of the assessment, the thing which is put in contest by an appeal.

Contrary to the applicants’ contention, I do not consider that this passage offers any support for the proposition that the process of assessment extends back to the procurement or receipt of information. If anything, in the references to ss 166 and 167, it suggests that the process of assessment commences after the procurement or other receipt of information by the Commissioner has occurred. George and Clarke before it are but two of many cases which establish that the process of assessment includes decisions which are conditions precedent to the making of the assessment with the consequence that the right of appeal (or review) presently found in Part IVC of the TAA is correspondingly comprehensive. This settled approach enables conditions precedent to the making of an assessment to be examined on the merits by an exercise of judicial power (or administrative review) as part of determining whether an assessment has been proved by a taxpayer to be excessive. The comprehensive quality of the right of appeal (or review) explains why, even where the alternative of a proceeding under s 75(v) of the Constitution or s 39B of the Judiciary Act exists, the pendency or availability of a proceeding under Part IVC of the TAA will usually dictate that any constitutional writ or injunctive proceeding ought peremptorily to be dismissed as a matter of discretion: Futuris at [48].

28    It is only in that narrow class of case where the purported “assessment” is, to use the description in George, “bad”, such that it is not in law an assessment at all, that there will be occasion to grant relief under s 75(v) of the Constitution or s 39B of the Judiciary Act.

29     There are a number of ways in which this can occur. One is where the Commissioner has, for some reason, refrained from making a definitive ascertainment of a person’s taxable income and related taxation liability, instead, as in Federal Commissioner of Taxation v Hoffnung & Co Ltd (1928) 42 CLR 39, issuing what is patently a tentative assessment; for a collation of later examples of this kind see Australia and New Zealand Banking Group Ltd v Federal Commissioner of Taxation [2003] FCA 1410; 137 FCR 1. Another is where, in one or the other of the ways described in Futuris, the making of the assessment is attended with conscious maladministration.

30    I accept, as Robertson J demonstrates, that there are passages in the judgments delivered in each of Denlay v Federal Commissioner of Taxation (2011) 193 FCR 412 and Federal Commissioner of Taxation v Donoghue (2015) 237 FCR 316 that would support the upholding of the order for summary judgment. However, because of the evidentiary insufficiency mentioned, I do not consider that this is an occasion to revisit the correctness of everything that was said in those judgments.

31    It may be that, even though what is entailed in the process of assessment is not as extensive as the applicants contend, there is no bright line to be drawn between bad faith, official corruption or some other form of conscious maladministration on the part of the Commissioner in the receipt or procurement of information and the use of that information for the purpose of the making of an assessment, so far as the availability and aptness of a remedy under either s 75(v) of the Constitution or s 39B of the Judiciary Act.

32    The facts in Clarke offer a pointer as to why that may be so. The report of that case discloses (at 305), that it was the Commissioner personally who made the decision to make the amended assessment, including forming the belief that there had been an avoidance of tax owing to fraud or attempted evasion, which was the condition precedent to amendment. Even in 1926 when that assessing decision was made, it must have been an unusual circumstance for the Commissioner personally to make that decision. The better part of a century later, with the increase over time in population and business activity in Australia, it must now be rare indeed that the Commissioner personally makes an equivalent assessing decision. In Clarke, the formation of the belief was a condition precedent to amendment and fell within the scope of a taxation appeal. But what if the Commissioner personally had engaged in conscious maladministration in the receipt or procurement of the information upon which he based his belief and then assessed?

33    To look at the ITAA 1936 and the TAA is to see that it is the Commissioner who has the general administration of taxation laws, who is empowered to procure or receive information, to make or amend assessments and to determine objections. The practical impossibility of either the Commissioner or even his delegates personally making the myriad of decisions required in the administration of taxation legislation was recognised, in O’Reilly v Commissioners of the State Bank of Victoria (1983) 153 CLR 1, in the upholding of the lawfulness of delegated authority being exercised on behalf of the Commissioner’s delegates by authorised officers. But as Fullagar J observed in his supplementary reasons for judgment in George at 207, the Commissioner is only nominally, not personally, a party in taxation proceedings. Taxation appeals, as his Honour noted, “are really proceedings between Crown and subject”. An assessed taxation liability is payable to the Commissioner but due to the Commonwealth. It necessarily follows that taxation recovery proceedings are also really proceedings between Crown and subject.

34    The powers conferred on the Commissioner by the ITAA 1936 and the TAA are not for his personal benefit but for the lawful raising of revenue for the Commonwealth. That being so, it is not at all obvious to me why when, for practical reasons of public administration, the tasks of receiving and procuring information and then assessing cannot all personally be undertaken by the Commissioner, bad faith or official corruption or some other form of conscious maladministration in the receipt or gathering of information by one of the Commissioner’s officers should nonetheless result in a lawful accretion to the revenues of the Commonwealth, because the assessment reliant upon that information happens to have been made by another of the Commissioner’s officers who, in turn, happens to be ignorant of this maladministration. Notably in Electrolux Home Products Pty Ltd v Australian Workers’ Union [2004] HCA 40; 221 CLR 309 at 329, [21], Gleeson CJ drew attention to the principle of legality which governs relations between Parliament, the executive and the courts. An aspect of that principle is an assumption in the construction of a statute that “it is highly improbable that Parliament would ‘overthrow fundamental principles, infringe rights, or depart from the general system of law’ without expressing its intention with ‘irresistible clearness’” (referring to Potter v Minahan (1908) 7 CLR 277 at 304, where O’Connor J cited a passage from Maxwell on Statutes, 4th ed (1905), p 122). I prefer to leave as an open question, unnecessary to decide in the circumstances of this case, whether s 166 or, as the case may be, s 167 of the ITAA 1936 has about it the requisite clarity to overthrow, for the benefit of the Commonwealth revenue, such principles, rights and general system of Australian law.

Associate:

Dated:    9 January 2017

REASONS FOR JUDGMENT

ROBERTSON J:

Introduction

35    These applications for an extension of time and for leave to appeal are in respect of orders made by the primary judge on 17 December 2015. In each matter the cross-claim was struck out. In the Russell Associates Ltd (Russell Associates) matter, judgment was given for the Deputy Commissioner of Taxation in the sum of $15,342,976.79. In the Gould matter judgment was given for the Deputy Commissioner of Taxation against Mr Vanda Russell Gould in the sum of $15,213,916.14.

36    It is important to identify the jurisdiction of the Court sought to be invoked. The claims sought to be made are not in proceedings under Part IVC of the Taxation Administration Act 1953 (Cth) (the TAA) in which the Court hears appeals against objection decisions. Rather, the claims are made in proceedings under s 39B of the Judiciary Act 1903 (Cth). Each applicant seeks to show that the assessments or amended assessments are invalid. In this way, the applicants claim that any tax appeals would fall away as there would be no assessments and thus no objection decisions from which to appeal.

37    In each matter the following findings by the primary judge were not challenged by the applicant:

(a)    there are no material facts in the pleadings to support the allegation that the Australian Taxation Office (ATO) officers deliberately made assessments that they knew to be incorrect or arbitrary or which were based upon inaccurate information or which intentionally misrepresented the information in the officer’s possession that was used to make the assessments; and

(b)    there are no material facts in the pleadings to support an allegation that the ATO officers used the information provided by the Cayman Islands Authority for any purpose other than, or alien to, the fulfilment of their duty under s 166 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) to make an assessment from the returns and from other information in their possession.

38    Each applicant accepted that for present purposes he or it did not rely on the pleas of illegality, either under foreign law or Australian law, or on the plea of contempt of this Court. Each applicant also accepted that although there were two requests under the Agreement Between the Government of Australia and the Government of the Cayman Islands on the Exchange of Information with Respect to Taxes (the Agreement), it was not necessary to look at the second request as it gave rise to exactly the same series of allegations and the same principle each applicant sought to invoke.

39    There was no pleading that the person who raised the assessments or amended assessments knew of any illegality. Each applicant submitted that this did not matter as it was not necessary to prove that the person who raised the assessment knew that the material had been illegally obtained. Each applicant did not say that there was any conscious impropriety at the moment of raising the assessment. Equally each applicant did not plead that the Commissioner, in forming his opinion under s 170(1) item 5 of the ITAA 1936 that there had been fraud or evasion, was relying upon information which had been obtained with conscious impropriety. Rather, the applicants submitted that McAndrew v Federal Commissioner of Taxation [1956] HCA 62; 98 CLR 263 (McAndrew) showed that a determination under s 170 was part of the assessment process because it was a predicate requirement to raising an assessment.

40    In submissions on behalf of each applicant, the point sought to be made was that, nevertheless, the pleadings in question alleged that the assessments or amended assessments were liable to be set aside on the basis that there was conscious maladministration in the assessment process. Each applicant submitted first that, as a matter of law, the assessment process included the collection of information for the purposes of the assessments. Secondly, each applicant submitted the use of that material, whether in the s 166 process or the s 170 process of determining fraud and evasion meant that each assessment or amended assessment was liable to be set aside in accordance with Federal Commissioner of Taxation v Futuris Corporation Ltd [2008] HCA 32; 237 CLR 146 (Futuris). Each applicant submitted that since the process of collection of information was part of the assessment process, if there was conscious maladministration in the collection of information the assessment was liable to be set aside. Alternatively, to the extent that there was a determination of an opinion of fraud or evasion which was based upon material produced or obtained through conscious maladministration, that assessment was liable to be set aside.

41    The applicants submitted that on the pleaded facts the arguable case of conscious maladministration was, as pleaded, the deliberate decision of officers of the ATO to purport to exercise the administrative powers under s 8 of the ITAA 1936 (to make a request for information under the Agreement) knowing that it was outside the proper use of that Agreement. If that produced information which was relied upon by the Commissioner in determining to raise the assessment and also in determining whether there was fraud or evasion then the assessments or amended assessments were invalid.

42    For the reasons which follow, I would grant each of the applications for an extension of time and for leave to appeal but dismiss the appeals. In each case the applicant should pay the Commissioner’s costs, as agreed or taxed.

The primary judge

43    The judgment of the primary judge noted first, at [1], that the Commissioner was entitled to judgment in each proceeding unless the assessments did not have the protection afforded by s 175 of the ITAA 1936 and s 350-10 of Sch 1 to the TAA.

44    The primary judge said, at [3], that it was appropriate to consider the Commissioner’s application for summary judgment by reference to the pleading in the proposed amended defence in Mr Gould’s case, notwithstanding that the oral application was made late, without adequate explanation, and that there was no application to amend in similar terms in Mr Gould’s cross-claim or the cross-claim by Russell Associates. The primary judge said it may be accepted, therefore, that the case sought to be made by Mr Gould in his defence and cross-claim, and by Russell Associates in its cross-claim, was in the terms of the proposed amended defence given to the Court on 8 December 2015 for which leave was sought.

45    The primary judge observed that the Commissioner’s challenge to the pleadings by Mr Gould and Russell Associates at the hearing on 8 December 2015 was narrowed to whether the pleadings should be struck out and judgment given even if the illegality alleged was established. The primary judge said that the Commissioner’s submission was, in other words, that the illegality alleged, even if established, was insufficient to vitiate the assessments relied upon on the case pleaded.

46    The primary judge explained, at [4], that the circumstances relied upon by Mr Gould and Russell Associates to challenge the assessments upon which the Commissioner sought judgment concerned the obtaining and use of information by the Commissioner from the Cayman Islands Tax Information Authority (the Cayman Islands Authority) pursuant to an agreement between the Australian Commonwealth Government and the Cayman Islands for the exchange of information with respect to taxes (the information exchange agreement). Documents were obtained by the Commissioner which the taxpayers alleged were unlawfully obtained and unlawfully used in raising the assessments against Mr Gould and Russell Associates. The documents obtained by the Commissioner related to two companies incorporated in the Cayman Islands, namely JA Investments Ltd (JA Investments) and MH Investments Ltd (MH Investments). On 18 September 2012, those companies commenced proceedings in the Grand Court of the Cayman Islands against the Cayman Islands Authority seeking declarations that the provision by the Cayman Islands Authority of the information was ultra vires. The Commissioner was not a party to those proceedings. On 13 September 2013, Quin J decided in favour of the applicants in the Cayman Islands proceedings before him. Between 16 and 19 September 2013, Perram J heard proceedings in this Court which considered, amongst other matters, whether the Commissioner could rely upon the documents which he had obtained from the Cayman Islands Authority and which the taxpayers, in the proceeding before Perram J, contended, in reliance in part upon the decision of Quin J in the Grand Court of the Cayman Islands, had been illegally obtained. Perram J permitted the Commissioner to rely upon the documents and the information which had been obtained from the Cayman Islands Authority notwithstanding the hypothesis that their tender “might be an offence under the laws of the Cayman Islands”: Hua Wang Bank Berhad v Federal Commissioner of Taxation (No 7) [2013] FCA 1020; 217 FCR 1 at [92] (Hua Wang Bank Berhad). His Honour’s decision was published on 8 October 2013.

47    The primary judge said that to succeed, Mr Gould and Russell Associates must establish, and for present purposes must have pleaded, bad faith in the sense considered in Futuris and Denlay v Federal Commissioner of Taxation [2011] FCAFC 63; 193 FCR 412 (Denlay).

48    Section 350-10 of Sch 1 to the TAA now contains the provision formerly found in s 177(1) of the ITAA 1936 which provides, in effect, that the production of a copy of a notice of assessment is conclusive evidence that the assessment was properly made and, except in proceedings under Pt IVC of the TAA on a review or appeal relating to the assessment, that the amounts and particulars of the assessment are correct. Section 175 provided:

175    Validity of assessment

The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with.

49    The primary judge said, at [6], that the High Court in Futuris considered the limits beyond which s 175 did not reach and, at [25], in the joint judgment of Gummow, Hayne, Heydon and Crennan JJ, said that the protection would not extend to an assessment produced in “conscious maladministration of the assessment process”.

50    The primary judge said that their Honours went on to consider the knowledge to be established for the protection provided by ss 175 and 177 not to be available. The primary judge set out [53]–[66] of Futuris.

51    The primary judge said that the application of these principles was subsequently considered by the Full Court in Denlay. The primary judge set out Denlay at [21]–[25] and at [76]–[82].

52    The primary judge said, at [6], that it was clear from these paragraphs that what must be shown in a pleading of conscious maladministration was actual bad faith by reference to a state of mind consciously to act contrary to law held by those said to have acted in bad faith in the discharge of their statutory duty. That was because the protection of s 175, and of the provisions previously found in s 177, did not extend to the wilful disregard of what the official concerned knew to be required. The sections were designed to protect assessments from collateral challenges of error, including consciously adopted positions which may be erroneous, but they did not extend to actual bad faith. The essence of bad faith, in this context, was that the person purporting to exercise a statutory power did so knowing that the power was being exercised improperly; that is, that the person was conscious of the unlawfulness. It was the knowledge and awareness of the illegality which was central to establish bad faith to defeat the protection of the provisions.

53    The primary judge said, at [7], a pleading did not adequately plead a case of bad faith or conscious maladministration, or other jurisdictional error, by a generalised plea of “bad faith”, “maladministration”, “conscious maladministration”, “illegality”, “contempt of court” or the like. His Honour said, what must specifically be established, and for present purposes what must specifically be pleaded, were the material facts of the state of mind said to constitute the knowledge or awareness of raising an assessment unlawfully. Rule 16.43(1) of the Federal Court Rules 2011 (Cth) provided that a party “who pleads a condition of mind must state in the pleading particulars of the facts on which the party relies”. The primary judge referred to Young Investments Group Pty Ltd v Mann [2012] FCAFC 107; 293 ALR 537 at [7]–[11] (Mann), Fox v H Wood (Harrow) Ltd [1963] 2 QB 601 at 604, Smith v Littlemore (1996) 15 WAR 289 at 300 and Ritter v North Side Enterprises Pty Ltd [1975] HCA 18; 132 CLR 301 at 304. The primary judge said that allegations of fraud, or the involvement of persons in statutory breaches sufficiently analogous to allegations of fraud, required the provision of quite specific particulars.

54    The primary judge set out the relevant principles from the Court in Mann at [11]:

There are sound reasons for requiring knowledge to be particularised, at least in relation to the kind of allegations made in the statement of claim. Proving a director’s actual knowledge of the essential ingredients of a contractual or tortious breach or statutory contravention is a prerequisite to the director’s personal liability. For statutory breaches, it is well-established that, in order to be an accessory or to be knowingly involved in a contravention, a person must have intentionally participated, having knowledge of the essential matters constituting the contravention: see Yorke v Lucas (1985) 158 CLR 661; 61 ALR 307. That is not imputed or constructive knowledge but, rather, actual knowledge. It would not usually be sufficient to establish a statutory breach to show that a person said to be an accessory to such a breach wilfully shut his or her eyes to the obvious: see Giorgianni v R (1985) 156 CLR 473; 58 ALR 641; 2 MVR 97. Actual knowledge of suspicious circumstances and failure to make inquiry may be different: see Pereira v DPP (1988) 82 ALR 217 at 219; 63 ALJR 1 at 3. However, actual knowledge of suspicious circumstances is not pleaded in the statement of claim in the sense required for accessorial liability.

55    At [7], the primary judge said the pleadings in these proceedings, at their highest, did not state the particulars, or any material facts, of awareness or knowledge, beyond conclusionary pleadings, of a relevant state of mind of any person sufficient to establish that the assessments in question were beyond the protection of s 175 of the ITAA 1936 and s 350–10 of Sch 1 to the TAA.

56    The primary judge said, at [8], the proposed amended defence made a number of allegations of illegality in connection with the assessments raised by the Commissioner. It alleged that the information request transmitted by the ATO to the Cayman Islands Authority on 23 February 2011 was expressed to be for the purpose of conducting a “real time review” of the tax liability of Mr Gould for the 2011 income year when, as alleged, in fact the ATO officer who issued the request “knew” that no such review was taking place. It alleged that the 23 February 2011 request was transmitted by the ATO to the Cayman Islands Authority for an invalid purpose under the information exchange agreement and particularised the allegation of an invalid purpose to include the use of the information as evidence in anticipated Pt IVC proceedings commenced by taxpayers in respect of tax liabilities for years prior to 1 July 2010. The proposed amended defence pleaded at paragraphs 51 and 52 that officers of the ATO had “committed a criminal offence under the law of the Cayman Islands by wilfully attempting to obtain confidential information belonging to another” (emphasis added) and that they “knew”, or were “recklessly indifferent”, to whether they were committing an offence under the law of the Cayman Islands. The proposed amended defence at paragraph 50 pleaded that the transmission of the information request by officers of the Commissioner was a breach of s 13(1), (8) and (11) of the Public Service Act 1999 (Cth) “where it was known [that] the request did not relate to tax periods covered by” (emphasis added) the information exchange agreement. The proposed amended defence at paragraphs 53 and 54 pleaded that the power to transmit information requests at the relevant time did not extend to the request sent. Similar allegations were made with respect to a subsequent request transmitted by the ATO to the Cayman Islands Authority on 27 May 2011 in respect of which the amended pleading also contended the Commissioner was in contempt of court. The proposed amended defence used words such as “knew”, “wilfully”, “recklessly indifferent” and “known” to plead awareness but gave no particulars, and pleaded no material facts, of the knowledge, wilfulness, reckless indifference or the like which was relied upon. The primary judge said it may be accepted, of course, that it may be difficult to plead, or particularise, the knowledge or awareness of raising an assessment unlawfully where, for example, it was concealed. But the difficulty in pleading, or in particularising, knowledge or awareness of raising an assessment illegally was consistent with the absence of any such knowledge or awareness.

57    The primary judge said, at [9], in all respects what the pleading lacked was the fundamental element required to establish a pleading of bad faith, namely, the material facts said to constitute the consciousness or awareness or knowledge of wrongdoing. Neither bad faith nor conscious wrongdoing was established by knowledge, awareness or consciousness of acts, facts or circumstances which the person concerned did not believe to be wrongful. Facts, acts or circumstances might be wrongful and that wrongfulness might result in such other remedies as may be available in respect of that wrongdoing, but wrongdoing did not establish bad faith of the kind contemplated in Futuris or Denlay. It might be accepted that Mr Gould and Russell Associates wished to plead facts sufficient to establish bad faith or conscious maladministration in the sense contemplated by Futuris and Denlay, but the pleadings did not do so. It was true, the primary judge said, that the pleadings for Mr Gould and Russell Associates were replete with generalised assertions of “conscious maladministration”, “deliberate failure”, “knowledge”, “reckless indifference”, “awareness” and an absence of “good faith”, but there were no material facts pleaded, or any particulars, of any of those generalised claims. That was unsurprising if, and may be expected where, a person undertakes conduct (which may for present purposes be assumed to be unlawful) in the belief that what was done was lawful and proper. The primary judge said there was no foundation in the pleading, or in any other material filed in the proceeding, of any ATO officer acting in the conscious knowledge that what was done was not permitted. There was, for example, nothing to show that any of the ATO officers concerned knew that they could not obtain or rely upon the information in raising the assessments.

58    The primary judge said, at [10], that a few examples might suffice to demonstrate the deficiency in the amended pleading. Paragraph 86 in the proposed amended defence, for example, pleaded:

The officers and employees of the Applicant were aware that the 27 May 2011 request was not supported by the relevant statutory power, or they showed reckless indifference to the absence of statutory power. [Emphasis added.]

59    Three particulars were provided to this amended pleading:

(i)    The officers and employees of the Applicant were aware of the Australian Court Proceedings, and aware of the doctrine of contempt of court.

(ii)    The officers and employees of the Applicant knew that information held in the Cayman Islands, of the sort specified in the request, was likely to be confidential and also private property of JA Investments; and

(iii)    The officers and employees of the Applicant were aware the Applicant was not conducting a real time review of the personal tax liability of the respondent for the year ended 30 June 2011. [Emphasis added.]

The primary judge said that, putting aside any formal criticism about whether what appeared in the “particulars” ought to have been pleaded as “material facts”, there was an absence of any pleading of material facts of, or particularisation of, an awareness of wrongdoing. The “awareness”, pleaded in paragraph 86, was purportedly “particularised” only by the subsequent generalised assertion of an “awareness” in the particulars. The subject matter of the awareness may have been specified in the particulars, but there was neither particularisation nor allegation of material facts of the wrongful state of mind. There was, in other words, a failure to plead the awareness of wrongdoing. Accordingly, the primary judge said he accepted the Commissioner’s submission that the amended pleading, and its predecessors, lacked the material facts capable of establishing conscious maladministration within the principles set down by the relevant authorities. Neither the amended defence nor the earlier defence, nor either of the cross-claims, pleaded material facts which, if proven, would demonstrate bad faith or conscious maladministration on the part of any relevant ATO officer because:

(a)    there were no material facts in the pleadings to support the allegation that the ATO officers deliberately made assessments that they knew to be incorrect or arbitrary or which were based upon inaccurate information or which intentionally misrepresented the information in the officer’s possession that was used to make the assessments; and

(b)    there were no material facts in the pleadings to support an allegation that the ATO officers used the information provided by the Cayman Islands Authority for any purpose other than, or alien to, the fulfilment of their duty under s 166 of the ITAA 1936 to make an assessment from the returns and from other information in their possession.

60    At [11], the primary judge said the same was true of the new claims, sought to be introduced by the proposed amended defence, that the Commissioner sought and relied upon information in contempt of court. Given the way the oral submissions were made before this Full Court it is not necessary to go into more detail about the allegation of contempt of court.

61    The primary judge said, at [12], that he was not satisfied, therefore, that leave should be granted for the amended defence to be filed or that there was any foundation to warrant granting leave to Mr Gould or Russell Associates to re-plead. None of the evidence filed on their behalf, or in any of the extant pleadings, satisfied the primary judge that there was any foundation upon which they could make the case they wanted to make of conscious maladministration sufficient to find bad faith to take the assessments beyond the protection of s 175 of the ITAA 1936 and s 350-10 of Sch 1 to the TAA.

62    The primary judge said, at [13], that r 16.21 of the Federal Court Rules 2011 (Cth) relevantly provided that the Court may order that all or part of a pleading be struck out on the ground that the pleading failed to disclose a reasonable cause of action or defence or other case appropriate in the nature of the pleading. The primary judge referred to Mulhern v Bank of Queensland [2015] FCA 44 at [53]–[57] and said that he was satisfied that the whole of the pleading should be struck out as failing to disclose a reasonable cause of action or defence to the Commissioner’s action upon the assessment. His Honour said he was not satisfied on the material available that there was any foundation that would justify granting leave to re-plead, but he was satisfied that the Commissioner was entitled to summary judgment on his application in reliance upon the assessments and the certificates. The case was not one where the defect was merely one of form which could be expected to be cured, or which a party should be given leave to cure: cf J & A Vaughan Super Pty Ltd (Trustee) v Becton Property Group Limited [2014] FCA 581.

The present application

63    The application in the Russell Associates matter to the Full Court was in the following terms:

Grounds of application

1.    The primary judge erred by granting summary judgment against the Applicant, rather than giving the Applicant leave to re-plead, because:

a.    The defects identified by the primary judge related to something (being the state of mind of the Respondent’s officers) that was peculiarly within the Respondent’s knowledge, so any gaps in the pleadings could have been filled following the necessary evidence being obtained through discovery.

b.    The Applicant was seeking to set aside the assessments on three separate legal bases. One of these bases (the acquisition of the Cayman Islands documents in contempt of court) was supported by appellate authority. The Applicant’s two other legal bases for setting aside the assessments were not precluded by authority;

c.    On the summary judgment application the Respondent bore the onus of proof, and the Respondent adduced no evidence (or insufficient evidence) to negative key factual matters alleged by the Applicant;

d.    Paragraph [12] of the primary judge’s reasons erroneously places the onus of proof on the Applicant rather than the Respondent in respect of the underlying factual matters;

e.    The Respondent admitted many of the factual matters on which the Applicant's causes of action were based;

f.    The underlying facts alleged by the Applicant in the cross-claim supported an inference that the Respondent's officers had knowledge of the unlawfulness of their acts, or were reckless as to this unlawfulness;

g.    The Applicant had not received a meaningful opportunity to re-plead in light of the deficiencies in the pleadings identified by the primary judge;

h.    The appropriate relief for any failure to comply with rule 16.43(1) of the Federal Court Rules 2011 (Cth) was not striking out the Applicant's cross-claim.

2.    On the basis of the following facts and allegations, the primary judge ought to have found that the Applicant had a sufficiently arguable case in relation to the state of mind of the Respondent's officers and employees.

a.    In respect of the first information request sent by the ATO to CITIA on 23 February 2011:

i.    The information request was prepared by Lenore Richards and Matthew Evans: Proposed Amended Defence (AD) [49](ii);

ii.    The information request asserted that the ATO was presently engaged in a 'real time review' of the taxable income of the Applicant for the year ending 30 June 2011 (AD[40]);

iii.    Lenore Richards admitted in earlier proceedings that there was no 'real time review' being conducted at the time of the information request (AD[41] Particular (i) and AD[42]);

iv.    Lenore Richards admitted in earlier proceedings that she knew that under the Tax Information Agreement that CITIA would not comply with a request except in relation to tax periods commencing on or after 1 July 2010 (AD[43](ii));

v.    Lenore Richards admitted in earlier proceedings that she knew the Tax Information Agreement did not allow for documents to be sought except in relation to tax periods commencing on or after 1 July 2010 (AD[56] Particular (ii));

vi.    On 12 August 2010, officers of the ATO including Matthew Evans raised a number of assessments against various companies (Hua Wang Bank Berhad, Chemical Trustee Ltd and Derrin Brothers Properties Ltd) in relation to the tax years 2001 to 2007 (AD[39]);

vii.    In September 2010, those companies lodged objections to the assessments issued to them in August 2010 (AD[59]);

viii.    30 March 2011 the ATO disallowed the objections lodged by those companies in respect of the 2001 to 2007 period (AD[60]);

ix.    On the basis of these allegations and admissions, it is reasonable to infer that officers of the ATO, including Lenore Richards and Matthew Evans, knew that the information request was not sent for the lawful purpose of investigating taxation years after 1 July 2010 (AD[56]). Without a 'real time review' of the Applicants' 2011 tax return, there were no relevant taxation periods that were properly the subject of the Tax Information Agreement;

x.    On the basis of these allegations and admissions, it is reasonable to infer that the documents were instead sought for the purpose (sic) using the information in respect of pre 1 July 2010 tax periods (AD[56] Particular (i)), including determining the objections lodged by Hua Wang Bank Berhad, Chemical Trustee Ltd, Derrin Brothers Properties Ltd and Bywater for the 2001 to 2007 periods.

b.    In respect of the second information request sent by the ATO to CITIA:

i.    On or about 18 May 2011, Hua Wang Bank Berhad, Chemical Trustee Ltd and Derrin Brothers Properties Ltd commenced proceedings in the Federal Court of Australia in which they challenged the objection decisions referred to in (a)(vii) above (AD[61]);

ii.    From 18 May 2011 to 16 June 2011 officers of the ATO prepared appeal statements in those Australian proceedings, which contended that various entities were owned or controlled by Mr Gould (AD[62] to [64]);

iii.    On 27 May 2011, the ATO transmitted a second information request to CITIA, asserting that the purpose of the request was to engage in a 'real time review' of the taxable income of the Applicant for the year ending 30 June 2011 and making no reference to the Australian proceedings (AD[65]);

iv.    The documents sought in the second information request were relevant to the Australian proceedings and the allegation that certain entities were owned or controlled by Mr Gould (AD [74]);

v.    The ATO was not conducting a 'real time review' of the taxable income of the Applicant for the year ending 30 June 2011 (AD[67]);

vi.    The admissions referred to in (a)(iii) to (v) above;

vii.    On the basis of these allegations and admissions, it is reasonable to infer that officers of the ATO knew that the information request was not sent for the lawful purpose of investigating taxation years after 1 July 2010 (AD[80]).Without a 'real time review' of the Applicants' 2011 tax return, there were no relevant taxation periods that were properly the subject of the Tax Information Agreement.

viii.    On the basis of these allegations and admissions, it is reasonable to infer that officers of the ATO knew that the information request was sent for the dominant purpose of obtaining documents for the Australian proceedings (AD[74]). The connection between the documents sought and the Australian proceedings, and the false assertion in the request of a permissible purpose, provide a basis for inferring that the ATO officers knowingly sought the documents for the purpose of the Australian proceedings.

c.    In respect of the use of the documents obtained through the information requests:

i.    On 12 February 2012 the ATO sent a request to CITIA which admitted that the terms of the Tax Information Agreement would not allow the disputed documents to be used in respect of tax periods prior to 1 July 2010 but requested CITIA's permission to use the obtained documents for those earlier tax years and in the Australian court proceedings (Exhibit 3, affidavit of Mark Ord dated 24 November 2015);

ii.    CITIA did not grant that permission to the ATO;

iii.    The admissions referred to in (a)(iii) to (v) above; and

iv.    On the basis of these allegations and admissions, it is reasonable to infer that officers of the ATO knew that the information request was not sent for the lawful purpose of investigating taxation years after 1 July 2010. The terms of the 12 February 2012 correspondence provide a basis for inferring that the ATO officers knew that the use of the documents for assessing taxation years prior to 1 July 2010 was not permissible under the Tax Information Agreement.

3.    In the alternative to Ground 1, the primary judge erred by striking out the Applicant's cross-claim for failing to adequately particularise the state of mind of the Respondent's officers, because those pleadings as a whole adequately particularised knowledge, or recklessness, as to the unlawfulness of the relevant acts.

64    The application in each matter was relevantly in the same terms.

65    The draft notice of appeal in each matter was in the following terms:

Grounds of Appeal

1.    The primary judge erred by granting summary judgment against the Appellant, rather than giving the Appellant leave to re-plead, because:

a.    The defects identified by the primary judge related to something (being the state of mind of the Respondent’s officers) that was peculiarly within the Respondent’s knowledge, so any gaps in the pleadings could have been filled following the necessary evidence being obtained through discovery;

b.    The Appellant did not receive a meaningful opportunity to re-plead in order to correct the deficiencies in the pleadings identified by the primary judge;

c.    The Appellant raised triable issues in the first-instance proceedings that had sufficient prospects of success and were not foreclosed by the authorities;

d.    The Respondent did not discharge its burden of proof in relation to the issues ventilated by the Appellant.

2.    The primary judge ought to have found that the Appellant had a sufficiently arguable case in relation to the state of mind of the Respondent’s officers and employees.

3.    In the alternative to Ground 1, the primary judge erred by striking out the Appellant’s defence and cross-claim for failing to adequately particularise the state of mind of the Respondent’s officers, because those pleadings as a whole adequately particularised knowledge, or recklessness, as to the unlawfulness of the relevant acts.

Consideration

66    The starting point must be s 175 of the ITAA 1936 set out at [48] above.

67    Section 6(1) of the ITAA 1936 relevantly provided, unless the contrary intention appeared, that in the ITAA 1936 “assessment” meant the ascertainment of the amount of taxable income; and of the tax payable on that taxable income.

68    In that statutory context, it is next necessary to identify the specific foundation for the general pleading of “conscious maladministration”. This is said to be found in some answers given in chief in proceedings before Perram J on 17 September 2013. Those proceedings, part of which are the subject of a reported judgment, Hua Wang Bank Berhad, concerned the identical evidence.

69    The evidence in chief given by Ms Richards was in relation to the following paragraphs in the request made on 23 February 2011 under Art 5 of the Agreement, Ms Richards having first ascertained that the Agreement had come into force and could be utilised for the year ending 30 June 2011:

(c)    The tax purpose for which the information is sought

The active investigation of Mr Gould and Mr Leaver is over a number of years to the present, including a real time review of the current Australian financial year ending 30 June 2011 for both taxpayers.

In relation to the real time review, under our legislation, the Commissioner of Taxation may at any time during any Australian financial year, or after its expiration, make an assessment of the taxable income derived in that year or any part of it by any taxpayer and of the tax payable thereon.

70    Ms Richard’s oral evidence in chief, which provided the foundation for the present proceedings, was as follows:

I will just draw your attention to the second last paragraph, which states amongst other things:

The Commissioner may, at any time during any Australian financial year or after its expiration, make an assessment of the taxable income derived in that year –

etcetera. Now, can you tell the court whether, at the time of this request – this document being prepared – can you tell the court what was the stage of consideration of that possibility, with respect to any of the taxpayers who are mentioned in this document, if you recall?---It was always recognised as a possibility that the Commissioner could do so, although, at the time of making the request it wasn’t actively contemplated. That was always subject to change.

What are the circumstances in which an assessment may issue before the conclusion of the financial year, not comprehensively, but in general terms, in accordance with the practice of the ATO?

…

THE WITNESS: Generally speaking, the Commissioner would look to exercise this as a 168 assessment, in the circumstances where there’s a risk to revenue. And that could be through the fact that assets may be dissipating, or that there’s a remarkable transaction.

71    For completeness, I note there is nothing in the judgment in Hua Wang Bank Berhad, the proceedings in which the impugned evidence was given by Ms Richards, which provides any support for the present pleaded contention. Indeed, Perram J said there, in relation to the notice, the purpose of which is the foundation of the present proceedings:

56    Returning then to the question of whether the evidence in Exhibits 8 and 9 was improperly obtained for the purposes of s 138(1) of the Evidence Act the question to be considered is whether the Commissioner’s two requests for information were made in breach of Art 12(b) of the Treaty which means whether it was issued for the purposes relating to periods prior to 1 July 2010.

57    On this, Ms Richards’ evidence was clear: the purpose for which the two requests were issued related to matters after 1 July 2010. Ms Richards was cross-examined by counsel for the taxpayers but it was not put to her at any stage that this evidence was not correct and, indeed, she was not asked about it at all. Instead, the taxpayers submitted that her evidence on the issue of the purposes for which the notices were issued was of no value.

…

60    Since 2009 Ms Richards has been involved, in that capacity, in Operation Rubix and, therefore, with the tax affairs of Mr Gould. Ms Richards’ role includes work as an information gathering advisor in which capacity she assists auditors with the drafting of requests by the Commissioner for information including under the Treaty. It is her job to ensure that requests made for information by the Commissioner at the instigation of his auditors are carried out in a lawful manner and for a proper purpose.

61    It is important to observe the significance of this evidence because it shows that Ms Richard’s [sic] understanding of the purposes for which such notices are issued is not peripheral or derivative but instead is an aspect of the central focus of her work.

…

65    The request issued to CITIA on 23 February 2011 was 12 pages long and in view of that length I will abstain from setting it out. It was signed by a Mr Neil Cossins on behalf of the Commissioner but I accept — it was not suggested that I should not — that the request was prepared by Ms Richards and Mr Evans. There are two features of it what [sic] are worth emphasising. First, it indicated the transactions in respect of which the information was sought and, as I have indicated above, all that information post-dated 1 July 2010.

66    Secondly, it explicitly informed CITIA of the purpose for which the information was sought. This part of the notice was as follows:

The active investigation of Mr Gould and Mr Leaver is over a number of years to the present, including a real time review of the current Australian financial year ending 30 June 2011 for both taxpayers.

In relation to the real time review, under our legislation, the Commissioner of Taxation may at any time during any Australian financial year, or after its expiration, make an assessment of the taxable income derived in that year or any part of it by any taxpayer and of the tax payable thereon.

Further, where a foreign corporation is controlled by a resident of Australia, the income of that corporation may be attributed to the resident of Australia, and the Australian resident is assessed on the attributed income.

The Cayman Islands information requested:

•    in respect of the ultimate beneficial owners of J.A. Investments Limited and M.H. Investments Limited is required to assist the ATO to determine the Australian income tax payable by Mr Gould, Mr Leaver and/or their associated entities for the taxable period commencing 1 July 2010; and

•    will be relevant to the consideration of the behaviour of the taxpayers, and the determination of the appropriate shortfall penalty.

67    The reference to a “real time review” is in reference to the Commissioner’s power under s 168 of the ITAA 1936 which is as follows:

168 Special assessment

(1) The Commissioner may at any time during any year, or after its expiration, make an assessment of:

(a) the taxable income derived (or that there is no taxable income) in that year or any part of it by any taxpayer; and

(b) the tax payable thereon (or that no tax is payable); and

(c) the total of the taxpayer’s tax offset refunds for that year or that part of it (or that the taxpayer can get no such refunds).

(2) Where the income, in respect of which such an assessment is made, is derived in a period less than a year, the assessment shall be made as if the beginning and end of that period were the beginning and end respectively of the year of income.

68    The notice, then, was explicit that the purpose for which the information was sought related to assessment after 1 July 2010.

69    On its face the notice did not have as any of its purposes the assistance of the Commissioner in his pursuit of these proceedings.

70    Ms Richard’s [sic] evidence confirms the correctness of those statements in the notice. She explained that the pursuit of the Pt IVC proceedings is handled by a different business line of the ATO known as “Micro Enterprises and Individuals” whereas she and the auditor, Mr Evans, worked in the SNC section. Notwithstanding that, Ms Richards accepted that she was aware as at 23 February 2011, when this first request was issued, of the proceedings in this Court.

71    By then the Commissioner had obtained freezing orders over the taxpayers’ assets and summary judgment against them. He had also sought, but had not yet obtained, enforcement of the judgments. Pending also, but as yet undetermined, were the taxpayers’ objections. The Pt IVC appeals had not been commenced.

72    Ms Richards’ evidence was that, notwithstanding her knowledge that those matters were being pursued in other parts of the ATO, the notice she and Mr Evans procured to be issued was not issued for the purpose of those proceedings but for the purpose of investigating matters after 1 July 2010.

73    Ms Richards was not challenged about this and I can see no reason not to accept her evidence. I therefore reject the proposition that the notice was issued for the purpose of assisting with these proceedings. To the contrary, I find that it was issued for the purpose of ascertaining matters arising after 1 July 2010. Consequently, the Commissioner’s act in issuing the request to CITIA was authorised by Art 5 of the Treaty and no breach of the Treaty was involved in its issue.

(Emphasis in original.)

72    Such are the facts underpinning the presently proposed pleading.

73    In Futuris, at [55], the plurality posed the question whether s 175 of the ITAA 1936 brings within the jurisdiction of the Commissioner when making assessments a deliberate failure to comply with the provisions of that Act. Their Honours concluded that s 175 would not encompass deliberate failures to administer the law according to its terms. At [60], their Honours referred to “deliberate disregard to the scope of those [statutory] powers” and said that such allegations were not to be lightly made or upheld.

74    In my opinion, the primary judge was correct to conclude that the applicants’ pleading did not properly plead jurisdictional error outside the scope of s 175.

75    The applicants sought to emphasise the “process of assessment” and to reason therefrom that any improper purpose, in administrative law terms, would vitiate the assessment. In my opinion, Futuris is not authority for the proposition that conscious maladministration is established where, as here, each applicant accepts that the ATO officers did not deliberately make assessments that they knew to be incorrect or arbitrary, or which were based upon inaccurate information, or which intentionally misrepresented the information in the officer’s possession that was used to make the assessments; and where the ATO officers did not use the information provided by the Cayman Islands Authority for any purpose other than, or alien to, the fulfilment of their duty under s 166 of the ITAA 1936 to make an assessment from the returns and from other information in their possession.

76    It is unnecessary to go further.

77    If it were necessary, I note that in Denlay, the Full Court referred to Futuris, at [60], and said:

76    Those observations highlight that their Honours were concerned, in their reference to conscious maladministration, with bad faith in the exercise of the decision-making power under challenge and the need for proof of an allegation of bad faith against the Commissioner or his officers. Their Honours were concerned with actual bad faith, not with some form of “constructive” bad faith established by unwitting involvement in an offence.

77    The passages from the decision of the majority in Futuris set out above are concerned with the state of mind of the officers of the Commissioner involved in the making of the assessment. They emphasise the importance of fidelity on the part of those officers to the purposes of the legislation. If Mr Kieber had merely told the Commissioner's officers of the contents of the documents he had taken from LGT, or had brought the documents into Australia himself and handed them over to the Commissioner's officers here, the taxpayers would have no argument. It is difficult to discern a rational basis for distinguishing these hypothetical examples from the present case in terms of the vice of “conscious maladministration” which is apt to vitiate an assessment.

78    The observations of the majority in Futuris do not support the proposition that any breach of the law by officers of the Commissioner in the course of processes anterior to, or even in the course of, making an assessment, suffices to establish conscious maladministration which is apt to vitiate the assessment. Conscious maladministration, as explained in Futuris, involves actual bad faith on the part of the Commissioner or his officers. The findings of the primary judge to which we have referred at [49] and [50] of these reasons negative bad faith on the part of the Commissioner's officers.

78    In my opinion, these dicta provide further support for the conclusion that, in the circumstances presently pleaded, conscious maladministration may not be made out by recourse to the “process of assessment” invoked by the applicants.

79    Judgment in Commissioner of Taxation v Donoghue [2015] FCAFC 183; 237 FCR 316 (Donoghue) was given on the same day as the judgment of the primary judge in the present applications and was therefore not available to the primary judge. Donoghue concerned the use by the Commissioner of privileged documents. That Court applied Denlay at [81]-[82]. Kenny and Perram JJ said:

73    However, we do not accept that s 166 is confined in its operation merely to permitting the Commissioner to have access to confidential information which he has received without notice of its confidential nature …

74    This requires the conclusion that s 166 not only permits but requires the Commissioner to act upon the information which he has in his possession regardless of how he came to have it. Section 166 exhibits a policy which explicitly privileges the need to have accurate assessments made on the information available over other private law rights. It did not matter in Denlay that the information might have been unlawfully obtained by the Commissioner's officers (although that was not the finding); all that mattered was that it had come into the Commissioner’s possession. The combined effect of Denlay and Awad [Awad v Commissioner of Taxation [2000] FCA 1288; 104 FCR 106] is that the Commissioner is not only entitled, but obliged, to use information which is in his possession even if he knows it is subject to a claim for breach of confidence and even if he knows it is privileged.

Davies J said:

115    In the present case, the Commissioner (through his officers) applied the law to the taxable facts known to him concerning the taxpayer's affairs and raised assessments of the amount of tax payable based upon those taxable facts. The evidence did not show that the Commissioner's officers acted with an absence of bona fides in the exercise of their statutory duty to make the assessments or that the use of the material was not for a legitimate purpose under the tax laws. His Honour refused to make the finding that the Commissioner had deliberately acted in bad faith, as urged by the taxpayer, and his Honour was, with respect, correct to hold that such a finding could not properly be made on the evidence. The primary judge found at [112] that the taxation officer concerned, Mr Main, did not pursue inquiries as to whether legal professional privilege attached to any part of the documents and information because Mr Main “believed that Mr Donoghue was subject to the tax liability which came to be created by the notices of assessment in respect of the 2005, 2006 and 2007 income years”, which belief was “influenced by his review of the material provided by Simeon Moore”, and that:

To have initiated inquiries which would have addressed, one way or the other, his apprehension, would in his view have compromised the confidentiality of an audit desirably kept confidential. At the same time as the assessments issued to Mr Donoghue, departure prohibition orders in respect of Mr Donoghue, based on the assessed indebtedness, were also issued. This was not a coincidence. A reason why the audit was considered desirably to be kept confidential was an apprehension that, with knowledge of it, Mr Donoghue either might not return to Australia or, if present, depart for abroad before assessment notification.

On those findings, the application under s 39B of the Judiciary Act should have been dismissed. The circumstances under which the information on which the assessments were based came into the possession of the Commissioner could not, and did not, alter the liability to tax which the law imposed on the taxpayer on the facts known to the Commissioner and the Commissioner's reliance on that information to raise the assessments could not, and did not, constitute the exercise of power in bad faith nor a deliberate disregard of his duty to assess in accordance with the law.

80    This reasoning supports the conclusion of the primary judge, although stated in terms wider than is necessary for that conclusion.

81    McAndrew, concerned s 170(2) of the ITAA 1936 which conferred authority on the Commissioner to amend an assessment where the taxpayer had not made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment and there had been an avoidance of tax. Dixon CJ, McTiernan and Webb JJ said, at 271:

But bearing in mind that the word “excessive” relates to the amount of the substantive liability it is not difficult to see that it will extend over the area in which the conditions mentioned in s. 170(2) find a place. For the fulfilment of those conditions goes to the power of the commissioner to impose the liability by amendment. If he cannot amend consistently with s. 170(2) and so increase the amount of the assessment then it must be excessive.

82    It was common ground that the formation of an opinion by the Commissioner for the purposes of s 170(1) item 5 was subject to the appeal provisions in Part IVC of the TAA. In my opinion, it would follow that, as a matter of discretion, relief under s 39B of the Judiciary Act should be withheld: see Futuris at [10] and [48] per Gummow, Hayne, Heydon and Crennan JJ.

Conclusion and orders

83    As I have indicated, in my opinion the application for an extension of time and for leave to appeal in each case should be allowed but the appeal dismissed, with costs.

Associate:

Dated:    9 January 2017