FEDERAL COURT OF AUSTRALIA

Deputy Commissioner of Taxation v Advanced Holdings Pty Ltd [2019] FCA 1917

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 31A of the Federal Court Act 1976 (Cth) and r 26.01 of the Federal Court Rules 2011 (Cth), there be judgment for the applicant against the first respondent in the sum of $32,820,588.02 including a $3,286,898.60 general interest charge calculated up to 22 November 2019 comprised as follows:

(a)    in respect of the income tax assessments issued on 17 August 2018 in the amounts of:

$8,009,110.20        Year ended 30 June 2013

$5,842,256.70        Year ended 30 June 2014;

(b)    in respect of the notices of assessment of shortfall penalty issued on 17 August 2018 in the amounts of:

$7,209,552.15        Year ended 30 June 2013

$5,258,031.00        Year ended 30 June 2014;

(c)    in respect of shortfall interest charge relating to amended assessments made on 17 August 2018 in the amounts of:

$2,197,561.31        Year ended 30 June 2013

$1,017,178.06        Year ended 30 June 2014.

2.    The respondents pay the costs of the applicant, such costs to be taxed in default of agreement.

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

ORDERS

THE COURT ORDERS THAT:

1.    The originating application be summarily dismissed pursuant to s 31A of the Federal Court of Australia Act 1976 (Cth) and r 26.01 of the Federal Court Rules 2011 (Cth).

2.    The applicant pay the respondent’s costs of the whole of the proceeding, such costs to be taxed in default of agreement.

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

REASONS FOR JUDGMENT

DAVIES J:

Introduction

1    The Commissioner of Taxation (“Commissioner”) has issued amended assessments and penalty assessments to Advanced Holdings Pty Ltd (“Advanced Holdings”) for the income years ended 30 June 2010, 30 June 2011, 30 June 2013 and 30 June 2014 (collectively, “the assessments”). In raising these assessments, a taxation officer relied on documents which officers of the Australian Federal Police, together with officers of the Australian Taxation Office (“ATO”), seized from premises used by LCI Partners, Advanced Holdings’ accountants, pursuant to a search warrant. The search warrant was issued to the Australian Federal Police under s 3E of the Crimes Act 1914 (Cth) (“Crimes Act”) in connection with a criminal investigation known as “Operation Prince”. Proceeding NSD 1496 of 2018 was instituted by the Deputy Commissioner of Taxation (“DCT”) for recovery of the tax assessed by the amended assessments for the 2013 and 2014 income years. Proceeding NSD 722 of 2019 is an originating application by Advanced Holdings under s 39B of the Judiciary Act 1903 (Cth) (“Judiciary Act”) seeking orders to quash the assessments on the basis that they are invalid due to conscious maladministration of the income tax assessment process, and orders for declaratory and injunctive relief. The allegation of conscious maladministration relates to the use of the documents seized under the search warrant to make the assessments. There are two applications for determination.

2    In proceeding NSD 722 of 2019, the Commissioner has applied for the following orders:

(a)    an order pursuant to r 16.21(1)(d), (e) and/or (f) of the Federal Court Rules 2011 (Cth) (“the Rules”) that the whole of the amended statement of claim be struck out;

(b)    further or alternatively an order pursuant to r 13.01(1)(a) of the Rules that the originating application be set aside;

(c)    an order that a notice to produce issued by Advanced Holdings be set aside; and

(d)    judgment for the Commissioner pursuant to r 26.01(1)(a), (c) and/or (d) of the Rules and/or s 31A(2) of the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”).

3    In proceeding NSD 1496 of 2018, the DCT has applied for summary judgment pursuant to s 31A(2) of the Federal Court Act and r 26.01(1)(a), (c) and/or (d) of the Rules. Senior counsel for Advanced Holdings conceded that if the Commissioner is successful on his application in NSD 722 of 2019 in obtaining an order that the proceeding be dismissed, Advanced Holdings has no defence to the recovery proceedings in NSD 1496 of 2018 and the DCT would be entitled to judgment.

Chronology of Events

4    The underlying chronology of events is not the subject of any dispute.

5    On or about 12 December 2017, a search warrant was issued to the Australian Federal Police pursuant to s 3E of the Crimes Act. The premises to be searched included premises of LCI Partners. The terms of the search warrant authorised the “executing officer” to enter and search the premises for “any evidential material” that satisfied each of the three conditions in the search warrant. The second condition set out the names of a number of individuals and entities, which did not include Advanced Holdings but did include LCI Partners. The third condition specified that the issuing officer of the search warrant was satisfied by information that there were reasonable grounds for suspecting that there were at LCI Partners’ premises materials that would afford evidence as to the commission of certain indictable offences against the law of the Commonwealth by various named persons. The search warrant further authorised the executing officer to:

… seize any other thing found at [LCI Partners’] premises in the course of the search that the executing officer or the constable assisting believes on reasonable grounds to be:

(i)    evidential material in relation to an offence to which the warrant relates;

(ii)     evidential material in relation to another offence that is an indictable offence; or

…

if the executing officer or the constable assisting believes on reasonable grounds that seizure of the thing is necessary to prevent its concealment, loss or destruction or its use in committing an offence;…

(Emphasis added.)

6    On about 14 December 2017, officers of the Australian Federal Police attended those premises together with officers of the ATO (who attended in their capacities as “constables assisting” within the meaning of s 3C of the Crimes Act). The documents seized as a result of the execution of the search warrant were placed in the custody of Mr Tim Kelly, an ATO officer in the ATO’s Criminal Investigations Team. Other taxation officers within the Private Groups and High Wealth Individuals (“PGH”) business line who were not members of the Criminal Investigations Team within the ATO became aware of that fact around the same time or shortly after Mr Kelly came into possession of the documents.

7    On about 14 March 2018, the ATO issued a notice to Mr Kelly pursuant to s 353-10 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (“Administration Act”) requiring Mr Kelly to provide the documents, barring those that were subject to any claim for legal professional privilege. Following receipt of the notice, Mr Kelly produced the documents.

8    In August 2018, the documents were used by the ATO to make the assessments.

Amended Statement of Claim in the s 39B proceeding

9    The following matters are taken from the amended statement of claim (“ASOC”) and the defence as filed to the original statement of claim. An amended defence to the ASOC has not yet been filed.

10    Advanced Holdings has alleged that ATO officers engaged in illegal conduct in the course of obtaining the documents on which the amended assessments were based.

11    The first alleged act of illegal conduct is that the search warrant “did not authorise the seizure of some or all of the documents as some or all of the documents were not evidential material specified in the search warrant”: ASOC [9]. That allegation is denied: Defence [9.1]. Although the ASOC does not provide particulars of the allegation, Advanced Holdings in its written submissions has claimed that ATO officers did not form the suspicion required by the third condition of the warrant, nor were there reasonable grounds for forming that opinion.

12    The second alleged act of illegal conduct is that a person informed ATO officers in the PGH business line who were not part of the Criminal Investigations Team that Mr Kelly was in possession of the documents which related to Advanced Holdings and its related entities: ASOC [13], [16]. It is alleged that informing the other officers within the PGH business line about the documents was an illegal use of the documents which was not authorised by s 3ZQU of the Crimes Act: ASOC [14]. The term “illegal use” is not defined in the ASOC and no particulars of the allegation are set out in the pleadings. The Commissioner has admitted that a person informed ATO officers in the debt business line that Mr Kelly had the documents in his custody but has denied the allegation of illegal use: Defence [13], [14], [16].

13    The third alleged act of illegal conduct is Mr Kelly’s production of documents under the s 353-10 notice, which, it is alleged, was not authorised by s 3ZQU of the Crimes Act and was an illegal use: ASOC [24]. That allegation is denied: Defence [24]. Although the ASOC does not provide particulars of the allegation, Advanced Holdings in its written submissions claimed that a notice under s 353-10 was not “a law answering the description in s 3ZQU(4) [of the Crimes Act] … because a law referred to in s 3ZQU(4) does not include a power of compulsory production the invocation and scope of which is in the discretion of the executive”. Section 3ZQU(4) provides:

Purposes for which things and documents may be used and shared

...

(4)    To avoid doubt, this section does not limit any other law of the Commonwealth     that:

(a)    requires or authorises the use of document or other thing; or

(b)    requires or authorises the making available (however described) of a     document or other thing.

14    In respect of each act of alleged illegal conduct, Advanced Holdings has alleged that the ATO officers involved in the conduct knew, or were recklessly indifferent to, the illegality of that conduct and such conduct amounted to conscious maladministration: ASOC [14]–[15], [17]–‍[18], [21]–[25], [27], [27B]. The Commissioner has denied those allegations and relevantly pleaded that the s 353-10 notice was issued with a general purpose of the administration of taxation laws, including the making of assessments: Defence [20.1], [20.2].

15    In answer to the whole of the claims made in the ASOC, the Commissioner has pleaded at [30]–‍[31] of the Defence that:

(a)    the Commissioner is obliged by s 166 of the Income Tax Assessment Act 1936 (Cth) (“ITAA 1936”) in making assessments to act upon information which he has in his possession, regardless of how he came to have it;

(b)    conscious maladministration in the process of obtaining documents or other information for the purpose of making assessments is not conscious maladministration in the income tax assessment process;

(c)    Advanced Holdings has not asserted that the ATO officers who made the assessments issued to it deliberately made assessments they knew to be incorrect or arbitrary, which were based on inaccurate information or which intentionally misrepresented the information in the officers’ possession that was used to make the assessments;

(d)    Advanced Holdings has not alleged that the ATO officers who made the assessments exercised their power in bad faith nor alleged that those officers used the information obtained under the s 353-10 notice for any purpose other than, or alien to, the fulfilment of their duty under s 166 of the ITAA 1936; and

(e)    by reason of these matters, the [ASOC] fails to disclose a reasonable cause of action and is liable to be struck out.

Applicable principles on summary judgment application

16    The power to grant summary judgment is contained in s 31A of the Federal Court Act. That section relevantly provides as follows:

(1)    ….

(2)    The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if:

(a)    the first party is defending the proceeding or that part of the proceeding; and

(b)    the Court is satisfied that the other party has no reasonable prospect of successfully prosecuting the proceeding or that part of the proceeding.

(3)    For the purposes of this section… a proceeding or part of a proceeding need not be:

(a)    hopeless; or

(b)    bound to fail;

for it to have no reasonable prospect of success.

(4)    This section does not limit any powers that the Court has apart from this section.

  (5)    This section does not apply to criminal proceedings.

17    The applicable principles to apply in determining the application for summary dismissal are set out in Spencer v Commonwealth (2010) 241 CLR 118; [2010] HCA 28 (“Spencer”). French CJ and Gummow J stated at [24]–‍[25]:

The exercise of powers to summarily terminate proceedings must always be attended with caution. That is so whether such disposition is sought on the basis that the pleadings fail to disclose a reasonable cause of action or on the basis that the action is frivolous or vexatious or an abuse of process. The same applies where such a disposition is sought in a summary judgment application supported by evidence. As to the latter, this Court in Fancourt v Mercantile Credits Ltd said:

“The power to order summary or final judgment is one that should be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried.”

More recently, in Batistatos v Roads and Traffıc Authority (NSW) Gleeson CJ, Gummow, Hayne and Crennan JJ repeated a statement by Gaudron, McHugh, Gummow and Hayne JJ in Agar v Hyde which included the following:

“Ordinarily, a party is not to be denied the opportunity to place his or her case before the court in the ordinary way, and after taking advantage of the usual interlocutory processes. The test to be applied has been expressed in various ways, but all of the verbal formulae which have been used are intended to describe a high degree of certainty about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way.”

There would seem to be little distinction between those approaches and the requirement of a “real” as distinct from “fanciful” prospect of success contemplated by s 31A. That proposition, however, is not inconsistent with the proposition that the criterion in s 31A may be satisfied upon grounds wider than those contained in pre-existing Rules of Court authorising summary dispositions.

Section 31A(2) requires a practical judgment by the Federal Court as to whether the applicant has more than a “fanciful” prospect of success. That may be a judgment of law or of fact, or of mixed law and fact. Where there are factual issues capable of being disputed and in dispute, summary dismissal should not be awarded to the respondent simply because the Court has formed the view that the applicant is unlikely to succeed on the factual issue. Where the success of a proceeding depends upon propositions of law apparently precluded by existing authority, that may not always be the end of the matter. Existing authority may be overruled, qualified or further explained. Summary processes must not be used to stultify the development of the law. But where the success of proceedings is critically dependent upon a proposition of law which would contradict a binding decision of this Court, the court hearing the application under s 31A could justifiably conclude that the proceedings had no reasonable prospect of success.

(Footnotes omitted.)

Spencer is thus authority that s 31A(2) requires a practical judgment by the Court as to whether the applicant has more than a “fanciful” prospect of success. Although the test for summary judgment does not require the respondent to show that the applicant’s claims against it are hopeless or bound to fail, the Court must consider whether there are any real, as opposed to fanciful, issues of fact or law that require proper determination at a trial and should be cautious to dismiss a claim summarily when questions of fact or law arise. The pleadings in the present case raise factual issues for determination but, in deciding the summary judgment application, the Court does not engage in fact finding. The Commissioner submitted that even if it be assumed that the allegations of fact are all true, Advanced Holdings has no reasonable prospect of succeeding on its claims for relief in the s 39B proceeding.

Consideration

18    It is well settled that s 175 of the ITAA 1936 precludes a taxpayer from challenging the validity of an assessment under s 39B of the Judiciary Act on the basis that there has been an error of fact or law by the Commissioner in the exercise of his assessment power: Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146; [2008] HCA 32 (“Futuris”). The legal remedy for the taxpayer in that situation is through the objection and review/appeal procedure provided for under Part IVC of the Administration Act and by which the taxpayer may contest the tax liability to which the taxpayer has been assessed. For s 175 to protect the validity of an assessment from challenge under s 39B of the Judiciary Act, there must, however, be an “assessment”. In Futuris, the High Court held that an assessment may not answer the statutory description of an “assessment” to which s 175 applies where there has been conscious maladministration of the assessment process. Where there has been conscious maladministration of the assessment process, the validity of the assessment is amenable to the constitutional writs under s 39B of the Judiciary Act for jurisdictional error: Futuris at [25], [55]–‍[56].

19    Conscious maladministration in the sense explained in Futuris requires the mental element of knowingly acting in excess of power: at [11]. The use of the assessment power for corrupt or for ulterior purposes or a deliberate disregard of tax laws in making an assessment would be exercises of administrative power that may be attacked for conscious maladministration: at [12], [60]–[61]. But, critically, for an assessment to lose the protection of s 175, it is not enough merely to show that the assessment power was exercised unlawfully. In Futuris the taxpayer unsuccessfully challenged the validity of an assessment on the basis that the Commissioner knowingly made an assessment which exceeded the amount which the Commissioner knew was the taxpayer’s tax liability because it involved double counting. The High Court held that whilst the Commissioner had consciously and deliberately raised the assessment on that basis, he had not done so with deliberate disregard to the scope of his powers or in deliberate non-compliance with the tax laws but had done so on the assumption that the double counting could be corrected by a subsequent compensating adjustment: at [58]–‍[59]. In Commissioner of State Revenue (Vic) v ACN 005 057 349 Pty Ltd (2017) 261 CLR 509; [2017] HCA 6 (“ACN 005 057 349”), the High Court allowed an appeal from the Victorian Court of Appeal which had found conscious maladministration by the State Revenue Office in refusing to amend an assessment. It was held there was no basis to justify the conclusion of conscious maladministration. Aside from finding that there was no duty to amend, Bell and Gordon JJ (with whom Gageler J agreed) stated that even if there was a failure to exercise a duty on the Commissioner to amend the assessments, such failure would not have established conscious maladministration as it would not have provided a basis to conclude that the Commissioner refused to amend the assessments “knowing that he was legally obliged to make the amendment”: at [85] (emphasis in original). Both Futuris and ACN 005 057 349 make clear that conscious maladministration requires more than showing an error in the process. Conscious maladministration as explained in both cases is the corrupt exercise of power or conscious intention to misuse the statutory power for purposes outside the scope of the power conferred.

20    In Denlay v Federal Commissioner of Taxation (2011) 193 FCR 412; [2011] FCAFC 63 (“Denlay”), the Full Court held that the exercise of the assessment power was not affected by conscious maladministration on the basis that it was reasonable for the Commissioner’s taxation officers to suspect that information they used to raise assessments had been unlawfully obtained. After referring to Futuris, the Court stated at [76]–‍[82] as follows:

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.

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.

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 paragraphs [49] and [50] of these reasons negative bad faith on the part of the Commissioner’s officers.

Section 166 of the ITAA 1936

Conscious maladministration as explained in Futuris relates to the integrity of the assessment. Even if the circumstances in which the information in question became available to the Commissioner’s officers involved unlawful conduct on their part, that would not necessarily deny the integrity of the assessment. What matters for that purpose is the accuracy of the information and the competence and honesty of those officers involved in making the assessment.

The views of the majority in Futuris do not bear upon the proper interpretation of s 166 of the ITAA 1936. Their views are concerned with making the point that an assessment which is the result of bad faith towards a taxpayer is not an assessment worthy of that description in the ITAA 1936. It may be accepted that such a purported assessment would be contrary to s 13(4) of the Public Service Act. But the reasons of the majority of the High Court in Futuris do not support the notion that an assessment, made in good faith on the basis of information believed to be accurate, may be vitiated by reason of a breach of s 13(4) of the Public Service Act in the course of obtaining that information.

We are unable to interpret s 166 of the ITAA 1936 in the way urged by the taxpayers. Section 166 imposes a duty upon the Commissioner. The interpretation of s 166 urged by the taxpayers would limit the performance of that duty to cases where the Commissioner is able to satisfy himself that his officers had not infringed any law in the gathering of the available information. It would be a remarkable state of affairs if the Commissioner were entitled, and indeed obliged, to refrain from doing what is expressed to be his duty by the terms of s 166 of the ITAA 1936 by reason of a suspicion on his part, even a reasonable suspicion, that some illegality on the part of his officers may have occurred in the course of gathering the information. A clear expression of legislative intention so to qualify the duty imposed on the Commissioner would be required to relieve him of his duty under s 166. We are unable to see that such a limitation is consistent with the unqualified language in which the duty is cast upon the Commissioner and the high importance of making an assessment based on the information available to the Commissioner. The expense and inconvenience of casting such a burden on the Commissioner, and the difficulty of defining precisely the kinds of unlawful conduct which might preclude the Commissioner from doing the duty cast on him by the unqualified language of s 166, are further reasons why the interpretation propounded by the taxpayers should be rejected.

We are also unable to see that such a qualification is necessary in order to ensure that the Commissioner’s officers are discouraged from disobeying the law in carrying out their functions under the ITAA 1936. One may confidently say that, in carrying out their investigations, the Commissioner’s officers are subject to the law of the land; if they transgress the law of the land, then they will suffer the consequences. It is an entirely different thing to say that the interest of the Australian community in the making of taxation assessments based on the most accurate information available, an interest embodied in s 166 of the ITAA 1936, should be defeated by a default on the part of the Commissioner’s officers which has no bearing on the accuracy of the assessment. Thus, the desirability of encouraging officers of the executive government to abide by the law of the land affords no reason to confine the operation of s 166 of the ITAA 1936 by subjecting it to the limitations urged by the taxpayers.

(Footnotes omitted.)

Critically, as the Full Court stated, what mattered for the purpose of raising assessments was the accuracy of the information, and the competence and honesty of those officers involved in making the assessment and the fact that the information may have been obtained illegally did not mean that the assessment was not made in good faith or on the basis of information believed to be accurate. Similarly, in Federal Commissioner of Taxation v Donoghue (2015) 237 FCR 316; [2015] FCAFC 183 (“Donoghue”), the Full Court held that an assessment was not invalidated for conscious maladministration because the taxation officers relied upon information in making an assessment which they had reason to suspect might be the subject of a claim for legal professional privilege.

21    Advanced Holdings argued that there are three reasons why its claims are not “fanciful”, despite Denlay and Donoghue.

22    First it was argued that the observations in those two cases were obiter. In Denlay the relevant illegality was said to be a contravention by ATO officers of s 400.9 of the Schedule to the Criminal Code Act 1995 (Cth) (“Criminal Code”), but the Court held that there was no such contravention: Denlay at [63]–‍[74]. In Donoghue, the relevant conduct by ATO officers was said to be a breach of confidentiality, a case which was not run at trial and which the Full Court considered on the basis of two assumptions that had not been established: Donoghue at [70]. It was submitted that such dicta do not rise to the level of a binding decision that would justify a finding that Advanced Holdings’ case has no reasonable prospects of success. It was submitted there has not been a case in which the Commissioner has been found to have obtained or used information in breach of Australian law where the resulting assessment has nonetheless been held to be valid for want of conscious maladministration. It was submitted that it is far from “fanciful” that the principles might be further developed in a case in which there is evidence that establishes the basis for the allegations of conscious maladministration.

23    Secondly, Advanced Holdings submitted that the correctness of the dicta in Denlay and Donoghue was doubted by Logan J in Gould v Deputy Commissioner of Taxation (2017) 104 ATR 608; [2017] FCAFC 1 (“Gould”) at [31] and [34] where his Honour said, after referring to those dicta:

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.

….

The powers conferred on the Commissioner by the [ITAA 1936] and the [Administration Act] 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…. An aspect of [the principle of legality] 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’” … 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.

(Footnotes omitted.)

It was submitted that it cannot be said that it is “fanciful” that his Honour might be correct. Relying on the observations of Logan J, it was submitted that illegal conduct can itself be sufficient for the assessments to be invalidated by conscious maladministration and, even if it was not, the ATO officers making the assessments relied on documents that they knew were obtained by illegal conduct, or were recklessly indifferent as to the documents being obtained by illegal conduct, which would be conscious maladministration and invalidate the assessments.

24    Thirdly it was submitted the Commissioner’s construction of s 166 did “substantial violence to the search warrant regime” and was “contrary to his past practice and his practice in this case”. These considerations were said not to be before the Court in Denlay or Donoghue. In support it was argued that:

(a)    the use of documents seized for a purpose other than the purposes contemplated by the warrant would be improper use: Williams v Keelty (2001) 111 FCR 175; [2001] FCA 1301 at [233], [244]; Australian Securities & Investments Commission v Marshall Bell Hawkins Ltd [2003] FCA 833 at [6];

(b)    section 3ZQU(4)(a) does not authorise a “thing” seized pursuant to a search warrant to be used by an ATO officer for the purposes of making an assessment;

(c)    the Commissioner’s contention that s 166 of the ITAA 1936 is a law that satisfies s 3ZQU(4)(a) of the Crimes Act and, by s 166, the Commissioner has a mandatory “statutory duty” to use the information to make an assessment regardless of how the information came into the Commissioner’s possession, is a misconstruction of s 166 of the ITAA 1936 and s 3ZQU(4)(a) of the Crimes Act;

(d)    the Commissioner’s contention is contrary to the position he has previously taken. Reference was made to Bai v Commissioner of Taxation [2015] FCA 973 where at [63] and [69] Rares J observed:

…some of the documents sought had been seized by the AFP under search warrants and the AFP had subsequently provided them to the Commissioner. The Commissioner had contended that s 3ZQU of the Crimes Act 1914 (Cth) did not permit him to use those documents for the purpose of making an assessment…

…

The Commissioner contended that he had not used, and by force of s 3ZQU of the Crimes Act could not use, the documents seized under the search warrants in performing the functions of making an assessment of the taxpayer’s income or assisting the Tribunal under s 33(1AA) of the AAT Act. He argued that although officers of the ATO had assisted the AFP in executing the search warrants, there was a “Chinese wall” within the ATO between those performing assessment functions and those assisting the AFP in its criminal investigations…

On appeal in Binetter v Commissioner of Taxation (2016) 249 FCR 534; [2016] FCAFC 163, Perram and Davies JJ at [183] similarly observed that:

…The material seized by the Australian Federal Police was provided to the ATO pursuant to s 3ZQU(1)(a) of the Crimes Act 1914 (Cth) for the purpose of the ATO investigating offences under the Criminal Code. There is no need to set out that section. It suffices to observe that it did not authorise the sharing of documents with the ATO for the purposes of assessing income.

(e)    if the Commissioner’s construction of s 166 is correct, it would have been a complete answer to the plaintiff’s case in Glencore International AG v Commissioner of Taxation [2019] HCA 26, yet the High Court decided that case of a different basis: see at [4], [7], [14].

25    Thus, it was submitted, the Commissioner “must acknowledge that Denlay and Donoghue are not a complete exposition of the scope of s 166”.

26    I accept that there is a triable issue on the question as to whether s 166 of the ITAA 1936 is a law that satisfies s 3ZQU(4)(a). There is no authoritative jurisprudence on this issue and for the purposes of this application I accept that this legal question has more than a fanciful prospect of success. There are also triable factual questions concerning the knowledge, and extent of the knowledge, of the relevant taxation officers concerned. However, in light of the authorities, there is not a triable issue that the assessments are invalid for conscious maladministration, even taking Advanced Holding’s case at its highest and assuming that the information relating to Advanced Holdings which was used to make the assessments came into the possession of the ATO unlawfully and, in making the assessments, the relevant taxation officers knew of, or were recklessly indifferent to, that fact.

27    First, it is arguable that the reasoning of the Full Court in Denlay on s 166 should properly be characterised as part of the ratio of the decision. The taxpayers in Denlay sought to rely on the finding made by the primary judge that the Commissioner’s officers had a reasonable suspicion that the documents had been obtained in breach of Lichtenstein criminal law and s 400.9 of the Criminal Code had been contravened. That formed the basis of the contention recorded at [55] of the Full Court’s judgment as follows:

Invoking the observations of the majority in Futuris, the taxpayers argue that the primary judge erred in confining “conscious maladministration of the assessment process” to a case where the Commissioner’s agents had knowingly contravened s 400.9 at the time of receiving the LGT documents. The taxpayers argue that the contents of the LGT documents were not “other information” to which the Commissioner could have recourse pursuant to s 166 of the ITAA 1936 in making the amended assessments. They submit that the reference in s 166 to “other information” cannot be construed as a reference to information known to have been obtained by the Commissioner’s officers by criminal conduct on their part. They argue that s 166 should be interpreted in this way to encourage officers of the Commissioner to observe the law of the land in the discharge of their statutory functions.

The observations of the Full Court at [78]–‍[82] were central to its reasoning in rejecting that argument.

28    Secondly, even if those observations do not form part of the ratio, it is undoubted that the reasoning in both Denlay and Donoghue is seriously considered dicta of appellate courts and persuasive authority from which it is not appropriate to depart unless I consider that dicta on the operation of s 166 to be clearly wrong, which I do not: cf Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22, [134]–‍[135]. In Donoghue, the Full Court referred to the reasoning of the Full Court in Denlay on s 166 with approval in rejecting the contention 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. At [74], the Full Court, after reference to the passage at [81]–[82] of the Full Court’s reasons in Denlay, agreed that the duty on a taxation officer under s 166 to act upon the information which he has in his possession in making an assessment was not qualified or subject to some limitation that the relevant information has been lawfully obtained. At [74], Kenny and Perram JJ (with whom Davies J agreed) stated:

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 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.

In Gould, Robertson J (with whom Gilmour J agreed) similarly stated as follows at [75]:

…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.

Gould was another case where the Commissioner applied for summary judgment against the applicant in proceedings under s 39B of the Judiciary Act challenging the validity of assessments for alleged conscious maladministration. There was in that case no pleading that the person who raised the assessments or amended assessments knew of any illegality. But, significantly, Robertson J, after referring to the passages from Denlay at [76]–‍[78], considered that “these dicta provide[d] 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”. In each of Denlay, Donoghue and Gould, those parts of the reasoning of the Full Court were critical to its conclusion and as a single judge I consider that those Full Court authorities are fatal to Advanced Holdings’ case.

29    Moreover, with respect, Logan J’s observations in Gould do not cast doubt on the correctness of the reasoning in Denlay and Donoghue. I repeat the view I expressed in Donoghue at [114] that:

…[I]t cannot be an improper purpose or maladministration of the assessment power, let alone conscious maladministration, for the Commissioner to use information in his possession for the purpose of raising an assessment against a taxpayer where the Commissioner has formed the view that the statute imposes a liability on the taxpayer upon the facts as they are known to the Commissioner. Where the information in the Commissioner’s possession discloses that a taxpayer has a taxable income, the Commissioner’s duty in the exercise of his assessment power is to determine and fix the amount of liability that the law operates to impose on the taxpayer: s 166 of the [ITAA 1936]: Macquarie Bank Limited v Commissioner of Taxation [2013] FCAFC 119.

For an assessment to be deprived of the protection of s 175, there must be jurisdictional error rendering the assessment invalid. Information obtained by the ATO in unlawful circumstances is still information for the purposes of s 166, and an assessment based on that information can nonetheless be a bona fide exercise of power under s 166, notwithstanding the circumstances under which that information came to be obtained and the knowledge of those circumstances. Conscious maladministration vitiating an assessment, as explained in Futuris, is the deliberate use of the s 166 process to make an assessment known by the taxation officers at the time to impose a taxation liability on the taxpayer which the taxation laws did not operate to impose. Such a claim is not alleged against the Commissioner in the ASOC.

30    On the strength of the authorities, the information relating to Advanced Holdings having come into the possession of the taxation officers, the taxation officers had the duty to use that information in making an assessment, regardless of whether the information was illegally obtained or used. Further and contrary to the submissions of Advanced Holdings, Futuris is binding authority against the proposition that illegal conduct can itself be sufficient for the assessments to be invalidated by conscious maladministration. A mental element of deliberate intention and/or knowledge is required to establish conscious maladministration.

31    Advanced Holdings has thus failed to demonstrate that the present case raises any point of principle that would entail the “further development” of the principles established by Denlay, Donoghue and Gould. Accordingly I find that Advanced Holdings has no reasonable prospects of successfully prosecuting its case. This is not a case where the failure to plead a reasonable cause of action may be cured by an opportunity to plead a reasonable cause of action but rather the case that is sought to be advanced is one that is not capable of support in law.

32    Advanced Holdings contended that even if it fails to establish that the assessments are invalidated by conscious maladministration, it is nonetheless entitled to declaratory and injunctive relief because the assessments were made relying on documents obtained by the s 353-10 notice, and that s 353-10 notice was issued for an improper purpose, being the purpose of circumventing the operation of s 3ZQU(1) of the Crimes Act. The declaration sought is that the conduct was illegal and the injunction sought is that the Commissioner and the officers of the ATO “take no steps to enforce any debts arising or purportedly arising from the purported assessments”.

33    There is authority that neither form of relief requires jurisdictional error to be shown: Plaintiff S157/2002 v Commonwealth (2003) 211 CLR 476; [2003] HCA 2 (“Plaintiff S157”) at [82]; Corporation of the City of Enfield v Development Assessment Commission (2000) 199 CLR 135; [2000] HCA 5 at [58]. It was submitted that injunctive relief “would clearly be available for fraud, bribery, dishonesty or other improper purpose” (Plaintiff S157 at [82]; Futuris at [57]) arising from the jurisdiction exercised in equity to vindicate the public interest in the due administration of government by restraining abuses of power by administrators: see Bateman’s Bay Local Aboriginal Land Council v The Aboriginal Community Benefit Fund Pty Ltd (1998) 194 CLR 247; [1998] HCA 49 at [24]–‍[27].

34    In seeking the declaratory and injunctive relief, Advanced Holdings relies on the Commissioner’s admission that ATO officers outside the Criminal Investigations Team were aware of the proposed searches before they were conducted and that ATO officers outside the Criminal Investigations Team became aware that Mr Kelly had the documents in his custody when they were placed in his custody or shortly thereafter. Advanced Holdings contended that it may reasonably be inferred that the ATO officer who issued the s 353-10 notice to another ATO officer in his capacity as such did so deliberately to circumvent s 3ZQU and that doing so was the use of the power under s 353-10 for an improper purpose, which caused Advanced Holdings “damage” in the sense that it brought about the issue to it of the assessments. It was argued that the “damage” would be crystallised if the Commissioner were to obtain judgment for the debt owing as a result of the assessments and the enforcement of that judgment and submitted in reliance on the authority of Patrick Stevedores Operations No. 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1 at [33] that the Court has the power to grant an injunction to prevent further damage to Advanced Holdings by an injunction restraining the Commissioner from taking any further steps to enforce the debt arising under the assessments.

35    Injunctive relief has been granted to restrain the use of material improperly seized pursuant to a search warrant: Donnelly v Amalgamated Television Services Pt Ltd (1998) 45 NSWLR 570; see also Puglisi v Australian Fisheries Management Authority (1997) 148 ALR 393. However I do not accept the contention that there is a reasonable prospect of such relief being granted in this case. First, Advanced Holdings cannot be said to have suffered any “damage” arising out of the issue or enforcement of assessments which have been validly made and, secondly, an injunction is not appropriate where the effect of granting an injunction restraining the Commissioner from taking any further steps to enforce the debt arising under the assessments would be to circumvent the operation of s 175 of the ITAA 1936 and s 255-45 of Schedule 1 of the Administration Act.

36    Likewise, I reject Advanced Holdings’ contention that it is entitled to declaratory relief even if it is unable to establish conscious maladministration. Advanced Holdings submitted that a declaration of illegality goes some way towards ensuring the accountability on which the Full Court’s dicta in Denlay was premised. Reference was made to [83] where the Full Court justified the broad interpretation given to s 166 by stating that:

…One may confidently say that, in carrying out their investigations, the Commissioner’s officers are subject to the law of the land; if they transgress the law of the land, then they will suffer the consequences.

37    Reliance was also placed on Ainsworth v Criminal Justice Commission (1992) 175 CLR 564; [1992] HCA 10 (“Ainsworth”). In that case the respondent had delivered a report to Parliament making adverse comments about the appellants. The respondent had failed to afford the appellants procedural fairness by giving them an opportunity to respond to the allegations. As the report had no legal consequences, mandamus and certiorari were unavailable. However the High Court declared that the respondent had failed to afford the appellant procedural fairness. Mason CJ, Dawson, Toohey and Gaudron JJ observed at [37]–‍[39]:

It does not follow that, because mandamus and certiorari are inapplicable, the appellants must leave this Court without remedy. The law with respect to procedural fairness has developed in spite of the technical aspects of the prerogative writs. Moreover, had the appellants had advance notice of the Commission's intention to report adversely, its failure to observe the requirements of procedural fairness would have entitled them to relief by way of prohibition preventing it from reporting adversely without first giving them an opportunity to answer the matters put against them and to put submissions as to findings or recommendations that might be made. Instead, the report has been made and delivered in accordance with s.2.18 of the Act. And, although it had no legal effect or consequence, it had the practical effect of blackening the appellants' reputations. Prima facie, at least, these matters suggest that the appellants are entitled to declaratory relief… 

It is now accepted that superior courts have inherent power to grant declaratory relief. It is a discretionary power which ‘[it] is neither possible nor desirable to fetter ... by laying down rules as to the manner of its exercise.’ However, it is confined by the considerations which mark out the boundaries of judicial power. Hence, declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions. The person seeking relief must have ‘a real interest’ and relief will not be granted if the question ‘is purely hypothetical’, if relief is ‘claimed in relation to circumstances that (have) not occurred and might never happen’ or if ‘the Court's declaration will produce no foreseeable consequences for the parties’.  

The present case involves no mere hypothetical question. At all stages there has been a controversy as to the Commission's duty of fairness. A report has been made and delivered under s.2.18 of the Act. That report has already had practical consequences for the appellants' reputations. For all that is known, those consequences may extend well into the future. It is appropriate that a declaration be made in terms indicating that the appellants were denied natural justice. That may redress some of the harm done. 

(Footnotes omitted.)

It was submitted that Advanced Holdings was in a similar position in that had Advanced Holdings had notice of the conduct of the ATO officers of which it now complains before the conduct was engaged in, it could have sought relief by way of prohibition to prevent that conduct.

38    I accept the submission for the Commissioner that Advanced Holdings’ reliance upon Ainsworth in relation to its alleged entitlement to declaratory relief is misguided. For the reasons already given, Advanced Holdings has not suffered any “damage” as a result of the assessments. Further, in the absence of a claim for substantive relief the declarations will produce no foreseeable consequences for the parties: cf Ainsworth at [38]–‍[39].

39    Finally, as I am satisfied that the Commissioner is entitled to summary judgment in the s 39B proceedings, there is no utility in Advanced Holdings’ notice to produce and whether or not it should be set aside need not be addressed.

40    In proceeding NSD 1496 of 2018 the DCT has produced copies of the assessments and evidentiary certificates pursuant to s 255-45 of Schedule 1 to the Administration Act. Advanced Holdings cannot in the debt recovery proceedings contest its liability to pay the tax as assessed and the Commissioner is entitled to summary judgment on his application in that proceeding also.

Associate:    

Dated:    22 November 2019