The Commissioner of Taxation’s duty of administration of the tax laws under the microscope

Articles Written by Kathryn Bertram (Partner), Stewart Grieve (Partner)

Key takeaways

The matter of Donoghue v Commissioner of Taxation [2015] FCA 235 (17 March 2015) raises questions about the nature and extent of the Commissioner’s duties in the proper administration of Australia’s tax laws, to afford taxpayers adequate opportunity to make legal professional privilege claims over documents that have come into the ATO’s possession. 


This decision concerns the knowing use of privileged materials by the Commissioner of Taxation (Commissioner). The taxpayer, Mr Donoghue, sought an order declaring that assessments issued by the Commissioner in December 2011 were invalid because, in making the assessments, the Commissioner had relied upon materials supplied by a third party over which the taxpayer could properly have asserted a claim for legal professional privilege. The case was heard by Logan J in the Federal Court of Australia and highlights the Commissioner’s obligations to afford taxpayers adequate opportunity to make legal professional privilege claims over documents obtained from third parties.


Donoghue was introduced to Simeon Moore by Donoghue’s daughter Alexandria with whom Moore was studying law at Bond University. Simeon Moore’s father, Peter, was a principal of Moore & Associates, a firm of solicitors. In early February 2010, Donoghue retained Moore & Associates in relation to several proceedings in which his then partner was involved in the New South Wales Supreme Court. At that time, Donoghue knew that Simeon Moore was not yet a qualified lawyer but believed that Moore was either an agent, or employee, of Moore & Associates. Between February and August 2010, Donoghue provided various documents to Moore & Associates and Simeon Moore for the purposes of existing or anticipated litigation.

In August 2010, Simeon Moore sent Donoghue a $753,174.62 bill for work performed by him in the period from 30 January 2010 to 5 August 2010. Subsequently a dispute arose between Simeon Moore and Donoghue over the fees charged. Donoghue alleged that Simeon Moore threatened Donoghue that if he did not pay the fees, then Moore would disclose Donoghue’s confidential documents to the Australian Taxation Office (ATO).

The Commissioner had separately commenced a covert audit of Donoghue’s tax affairs in October 2010. By 25 October 2011, Shannon Main, an auditor with the ATO’s Serious Non-Compliance Project Wickenby team, had analysed information obtained by the ATO in the course of that audit and prepared a draft Reasons for Decision (RFD). Notably, the only assessment contemplated in the draft RFD related to the 2005 income year.

On or about 1 or 2 November 2011, Simeon Moore followed through with his threat and provided the ATO with various documents relating to Donoghue. These documents eventually made their way to Main, who noted in an internal email that some of the documents may be subject to privilege. As a result of reviewing the documents provided, Main abandoned the draft RFD. Eventually, a different ATO officer issued assessments to Donoghue for the 2005, 2006 and 2007 income years, rather than just the 2005 income year that had been contemplated in the RFD.

After the assessments were issued, and Donoghue became aware the ATO had been provided with privileged materials, Donoghue instructed new lawyers to assert a claim for legal professional privilege over the documents. Main asked Donoghue to detail the individual documents the subject of a privilege claim in circumstances where he knew it was impossible for Donoghue to know the nature and extent of the disclosures made by Simeon Moore.

The Commissioner argued that in the event that the material was found to be privileged, it had been validly used, relying on s166 of the Income Tax Assessment Act 1936 (Cth) (ITAA36) which imposes a duty on the Commissioner to make an assessment. The Commissioner also argued that the access power in s263 of the ITAA36, which makes lawful what would otherwise be unlawful (eg entry upon premises), authorised the Commissioner’s use of the privileged material.


The Court concluded that, apart from an initial informal and temporary arrangement with Simeon Moore in January 2010, the communications between Donoghue, Simeon Moore and his father Peter Moore, on and from late January/early February 2010 up to and including early August 2010 were made for the dominant purpose of retaining Moore & Associates to provide legal advice or act in existing or anticipated litigation. Accordingly, the documents were privileged.

Logan J found that, in making the assessments, the Commissioner relied upon documents that Simeon Moore had provided to the ATO. That material was privileged and the privilege had not been waived by Donoghue. The Court found that Main deliberately refrained from making or initiating any privilege enquiry which may have removed or confirmed his apprehension that some of the documents were subject to legal professional privilege. In this respect, Logan J concluded that “Mr Main acted in reckless disregard of a right which Mr Donoghue had at least to claim an important common law privilege”. Accordingly, His Honour concluded that the Commissioner’s process of assessment was affected by conscious maladministration. For this reason, the Court quashed the assessments and made an order for the privileged material to be returned to the taxpayer or destroyed.

In response to the Commissioner’s submission on s166 of the ITAA36, Logan J found that this provision did not authorise the Commissioner to use information in his possession which is the subject of legal professional privilege. As for the Commissioner’s argument in respect of s263 of the ITAA36, the Court cited the well-worn ratio that s263 does not abrogate the common law doctrine of legal professional privilege.

For the Commissioner, a Court finding of conscious maladministration is a serious matter. Unsurprisingly, the Commissioner has appealed Logan J’s decision to the Full Federal Court.


Donoghue’s case raises questions about the nature and extent of the Commissioner’s duties in the proper administration of Australia’s tax laws, to afford taxpayers adequate opportunity to make legal professional privilege claims over documents that have come into the ATO’s possession. 

In Donoghue’s case it appears to have been apparent from the face of the documents in question that they were documents over which the taxpayer could have made a legal professional privilege claim. In addition, the documents were provided to the ATO by a third party not entitled to make such a claim in relation to the documents. The Court found that the ATO officer was aware of this and ought to have taken steps to ensure that the taxpayer was given proper opportunity to make a legal professional privilege claim. However, it is not hard to imagine different sets of circumstances in which the Commissioner’s obligations in relation to privileged material are not so clear cut including, for example, where  on the face of the documents provided by a third party, it is not apparent, that the documents could be subject to a legal professional privilege claim.

For the Commissioner, the critical consideration is how to avert or minimise the risk of a claim of conscious maladministration in handling documents obtained from third parties that may be privileged. Based on the outcome to date in Donoghue’s case, the Commissioner can substantially reduce this risk by:

  1. adopting policies and procedures for reviewing and relying on documents provided by third parties which give adequate opportunity for taxpayers to make legal professional privilege claims;
  2. ATO officers adhering to those policies and procedures in the conduct of their enquiries; and
  3. experienced ATO officers providing adequate supervision and guidance to more junior auditors in the conduct of their activities.

For example, such policies may mandate that an ATO officer independent of the audit team undertake a compulsory review of any documents obtained from third parties, to determine whether such documents may be privileged. The ATO officer could then decide whether (and what) further actions are required to investigate the status of the documents and/or allow the taxpayer proper opportunity to make any appropriate legal professional privilege claims.

The policy could also require that in all but exceptional circumstances, as a matter of course, the ATO provide the taxpayer with copies of any documents obtained from third parties. This would enable the taxpayer to know what materials the Commissioner is relying upon and give the taxpayer the opportunity to make any appropriate legal professional privilege claims in relation to the documents.  

By having due regard to taxpayers’ rights in relation to the conduct of ATO audit enquiries, the Commissioner can minimise the risk of future conscious maladministration findings like the one in Donoghue’s case.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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