The Full Federal Court recently upheld an appeal against the Federal Court decision by Justice Logan in Donoghue v Commissioner of Taxation  FCA 235 which was handed down on 17 March 2015.
The Full Court's decision makes clear that while legal professional privilege may protect taxpayers from producing privileged material to the Commissioner of Taxation ("Commissioner"), it will not prevent the Commissioner from using that material if it finds its way into the Commissioner's possession.
Background to the original decision
- In 2010 the applicant, Mr Donoghue ("Taxpayer"), engaged an adviser ("Simeon") to provide various consulting services ("Services"), and as part of that arrangement, engaged a law firm owned by an associate of Simeon to provide litigation services to the Taxpayer.
- As a result of undertaking the work in connection with the litigation matters, Simeon accumulated a significant amount of information and documents pertaining to the Taxpayer.
- Following a fee dispute with the Taxpayer, Simeon provided information relating to the Taxpayer gathered in providing the Services to the Commissioner.
- The Commissioner commenced an audit of the Taxpayer, and in December 2011 raised amended assessments for the 2005, 2006 and 2007 income years (the "Assessments").
The decision at first instance
The key legal issue for the Court to determine was whether the Assessments should be set aside as invalid on the basis that they were raised using privileged material and involved 'conscious maladministration.'
In considering the issue, the Court had regard to the following matters:
- whether there was a solicitor/client relationship between the Taxpayer and Simeon; and
- whether the conduct of the Commissioner and the Commissioner's officers constituted 'conscious maladministration'.
The Court determined that the Assessments should be set aside as invalid on the basis that they were obtained by way of 'conscious maladministration.' In making this decision, Logan J found the following:
- There was a solicitor/client relationship between Simeon and the Taxpayer as the Taxpayer perceived that Simeon was either acting as agent for the Taxpayer or for the associated law firm in the work that was being undertaken. On this basis, the information provided to Simeon by the Taxpayer was subject to legal professional privilege.
- Section 263 of the Income Tax Assessment Act 1936 (now repealed) allowed the Commissioner a right to access the Taxpayer's information. However, it did not allow the Commissioner to access material which was the subject of legal professional privilege.
- The Commissioner is also required to act reasonably in exercising the right to access the Taxpayer's information. In JMA Accounting Pty Ltd v Federal Commissioner of Taxation (2004) 139 FCR 537, the Federal Court held that "acting reasonably" involves putting in place a regime which will protect any claimed legal professional privilege. In this case, Justice Logan found that the Commissioner and the Commissioner's officers had not implemented such a regime when dealing with the Taxpayer's audit.
- As was found in the case of Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146, where there is an element of recklessness exercised in the process of assessment, this recklessness can amount to 'conscious maladministration.'
- Justice Logan found that the Commissioner's officers willfully disregarded the Taxpayer's right to claim legal professional privilege in respect of the material supplied to the Commissioner by Simeon. The Commissioner's officers involved in making the Assessments had consciously misused the documents and information which they knew to be privileged in making those Assessments.
Full Court's Decision – Kenny, Perram and Davies JJ
(17 December 2015)
The Full Court allowed the appeal by the Commissioner and determined that the Assessments should not have been set aside as invalid on the basis of 'conscious maladministration.'
In making this decision, Kenny, Perram and Davies JJ found the following:
- Legal professional privilege should not be seen as a bar to inspection. In other words, where there is information subject to legal professional privilege, the mere fact that the information is subject to legal professional privilege should not itself mean that the Commissioner cannot exercise his powers under section 166 of the Income Tax Assessment Act 1936 to make assessments based on that information.
- The effect of legal professional privilege is to grant immunity from the exercise of the Commissioner's powers requiring the compulsory production of documents or disclosure of information. However, action cannot be taken against the Commissioner and his officers for merely receiving documents or information which are or is privileged.
- The Court found that the Commissioner was able, and in fact required, to exercise his duty under section 166 of the Income Tax Assessment Act 1936 to make the Assessments. That duty required the Commissioner to use any information in its possession to raise the Assessments. As a result, the use of the privileged information by the Commissioner and the Commissioner's officers did not amount to 'maladministration' and therefore could not be 'conscious maladministration'.
- Where the Commissioner is provided with a taxpayer’s privileged documents and uses them in the process of assessing that taxpayer’s assessable income in a given income year, this will not amount to conscious maladministration and the notices of assessments will be valid.
While the facts in this case were somewhat extraordinary, it is nevertheless a reminder for all taxpayers that, while legal professional privilege can prevent the Commissioner from accessing privileged information, it will not prevent the Commissioner from using that information where it has already come into the Commissioner's possession. The Commissioner is obliged to use whatever information is in his possession to raise assessments.
It is expected that the Taxpayer will seek special leave of the High Court of Australia to appeal the decision of the Full Federal Court.