The Full Court of the Federal Court of Australia has held that the Commissioner of Taxation’s (Commissioner) formal information gathering powers override the obligation imposed on a party to litigation not to use information or documents disclosed by another party for any other purpose outside the proceedings in which they were disclosed (commonly known as the ‘Harman obligation’1).
The decision, Deputy Commissioner of Taxation v Rennie Produce (Aust) Pty Ltd (in liq) [2018] FCAFC 38, demonstrates the extremely broad scope of the Commissioner’s information gathering powers. However, whilst broad, these powers do not abrogate client legal privilege (CLP).2
It is therefore incumbent upon taxpayers (including liquidators), to carefully consider whether valid CLP claims could and should be made over any documents proposed to be disclosed to another party or other parties.
The liquidators of Rennie Produce (Aust) Pty Ltd (in liq) (Rennie Produce) obtained documents in 2014 after they applied under ss 596A and 596B of the Corporations Act 2001 (Cth) to summon various persons for examination about the affairs of Rennie Produce, and subsequently to produce documents.
In August 2016, the Commissioner issued a notice to Rennie Produce pursuant to s 353-10 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA) requiring the production of documents in accordance with the notice (Notice). Mr Rennie, a shareholder in, and from 1997 to 2005 the sole director of, Rennie Produce, had lodged an income tax return for the year ended 30 June 2013, which included a net capital gain resulting from the sale of the Rennie Produce business. The ATO considered the documents requested in the Notice to be relevant to assessing and verifying Mr Rennie’s self-assessment of his net capital gain.
The liquidators contended that Rennie Produce was constrained by the Harman obligation from producing documents obtained pursuant to the summonses in response to the Notice.
The Court held that the Harman obligation does not prevent or excuse a person owing that obligation from complying with a valid notice issued under s 353-10 of the TAA, nor does it prevent taxation officers receiving documents the subject of a Harman obligation from using those documents in the lawful exercise of the powers and functions vested in the Commissioner.3
Rennie Produce was therefore required to produce the documents in accordance with the Notice.
The Court rejected Rennie Produce’s contention that the Harman obligation is a ‘fundamental common law right’ and that s 353-10 ‘does not expressly, or by necessary implication, abrogate the Harman obligation’. Justices Kenny, Robertson and Thawley stated that to characterise the Harman obligation in this way ‘does nothing to elucidate the nature of the obligation, but rather assumes some importance or significance which the obligation may or may not have’.4 Their Honours stated:
‘In our opinion, providing documents to the Commissioner in answer to the Notice is not use of documents by the person the subject of the Notice. Rather, the true character of providing such documents is compliance with a requirement to give any document to the Commissioner in circumstances where a refusal or failure to give the document, where the person is capable of so doing, is an offence of absolute liability: s 8C of the TAA. An offence under s 8C is punishable on conviction under s 8E.' 5
This case demonstrates the extremely broad scope of the Commissioner’s formal information gathering powers. In addition to overriding the Harman obligation, it was noted by the Full Federal Court that a contractual duty or equitable obligation of confidentiality also cannot be relied upon to defeat the operation of s 353-10 of the TAA6, and that a person examined under s 353-10 cannot refuse to answer a question on the grounds that the answer might tend to self-incriminate.7
However, whilst broad, the Court noted that the Commissioner’s powers do not abrogate CLP.8 In that regard, a confidential communication will be privileged where made for the dominant purpose of giving or receiving legal advice, or in the context of actual or contemplated litigation.
Liquidators, and taxpayers more generally, should carefully consider any documents that are to be disclosed in litigation (in response to a subpoena, through discovery, or otherwise). Consideration should be given to whether valid claims for CLP could and should be made over any documents.
This should be done bearing in mind that any disclosure of an otherwise legally privileged document may constitute a waiver of the privilege over that document and, potentially, waiver of privilege over a broader range of communications. Where privilege has been waived over a document, it will need to be produced to the ATO if responsive to a document request in a s 353-10 notice issued by the Commissioner.
For completeness, if served with a s 353-10 notice, taxpayers should also consider whether any documents responsive to requests in the notice fall within one of the Commissioner’s administrative concessions for certain tax advice of accountants (under the Accountants’ Concession)9 and certain advice to corporate boards on tax compliance risk (under the Corporate Board Advice Concession).10
For advice on the above issues, please contact our experts.
1 As laid out by the High Court of Australia in Hearne v Street (2008) 235 CLR 125, adopted from the 1983 English case of Harman v Secretary of State for Home Department [1983] 1 AC 280. 2 See [2018] FCAFC 38, at [25], citing Fieldhouse v Commissioner of Taxation (1989) 25 FCR 187 at 199, per Lockhart J, 202, per Burchett J, 208, per Hill J; Federal Commissioner of Taxation v Coombes (No 2) (1998) 160 ALR 456. 3 Ibid, at [56]. 4 Ibid, at [40]. 5 Ibid, at [37]. 6 Ibid, at [25], citing Smorgon v Australian and New Zealand Banking Group Ltd (1976) 134 CLR 475 at 487, 490, per Stephen J; Fieldhouse v Commissioner of Taxation (1989) 25 FCR 187 at 208, per Hill J. See also Taxation v Warner [2015] 244 FCR 479 at [27], per Perry J. 7 Ibid, citing Deputy Commissioner of Taxation v De Vonk (1995) 61 FCR 564 at 566 per Spender J, 583-584 per Hill and Lindgren JJ; Binnetter v Deputy Commissioner of Taxation (2012) 206 FCR 37 at [30], per Edmonds, Perram and Jagot JJ. 8 See footnote 2 above. 9 Under the Accountants’ Concession, the Commissioner will not seek access to certain tax advice prepared by independent external professional accounting advisors other than in exceptional circumstances. 10 Under the Corporate Board Advice Concession, the Commissioner will not seek access to certain communications relating to advising a corporate board on tax compliance risks other than in exceptional circumstances.