The Federal Court has held that ATO audit teams investigating three taxpayers should have access to confidential accounting advice prepared for the taxpayers: Stewart & Ors v DCT [2011] FCA 336 (Federal Court, Perram J, 8 April 2011).

Background

The Court said each of the three taxpayers in question (Mr Stewart, an accountant, and two of his clients, Mr Hogan and Mr Cornell) was the subject of an ATO audit. As part of Project Wickenby, search warrants were executed at the accountant's home and office, and documents were taken which related to the accountant's own affairs and those of some of his clients, including Messrs Hogan and Cornell. Later, the Australian Crime Commission (ACC) also obtained documents relating to the three taxpayers from two accounting firms. The ACC provided those documents to the ATO, pursuant to notices under s 264 of the ITAA 1936 issued by the ATO to the ACC and also pursuant to an express statutory power of the ACC to provide documents to other agencies.

Within the ATO, three administrative decisions were made in relation to the documents (one for each of the taxpayers) the effect of which was to allow those documents to be accessed by the officials within the ATO who were conducting the audits. The Court said the ATO audit teams had not seen the documents in the case of Messrs Stewart and Cornell and a decision was made to give them access (the audit teams already had access to the documents regarding Mr Hogan). The three taxpayers sought to have the ATO access to the documents set aside.

Decision

The Federal Court dismissed the three taxpayers' claims that granting access to the documents to the audit teams should be set aside. In reaching its decision, the Court extensively reviewed the ATO's "Guidelines to Accessing Professional Accounting Advisors' Papers" and the Accountants' Concession contained therein. It also discussed the "exceptional circumstances" that may warrant the lifting of that concession ie that there was a scheme or arrangement for the purposes of Pt IVA, and there were reasonable grounds to believe that fraud or evasion had taken place.

Messrs Cornell and Stewart

Regarding Mr Cornell, the Court said the documents provided by the ACC to the ATO included documents obtained from several accounting firms and included advice to Mr Cornell. The documents included what the Commissioner referred to as "restricted source documents" and "non-source documents". Access by the ATO to these types of documents under the ATO's Access Guidelines is generally not sought (this is known as the Accountants' Concession) except in exceptional circumstances. Mr Cornell claimed the Concession. In response, an ATO officer wrote to Mr Cornell's solicitors seeking their views as to whether the Concession should be lifted in this case. The letter said the ATO officer's approval had been sought to grant ATO access to the documents on the grounds there were exceptional circumstances ie there was a scheme or arrangement for the purposes of Pt IVA and that there were reasonable grounds to believe that fraud or evasion had taken place.

The Court said Mr Cornell claimed the Commissioner denied him procedural fairness by not applying the guidelines or by not applying them correctly. The Court rejected this. It said "the plain fact is that Mr Cornell was explicitly told [of the exceptional circumstances the ATO officer] was going to consider".

The Court said Mr Cornell also argued that the ATO officer's decision to allow access to the documents was so unreasonable that no decision maker could have arrived at it. There were claimed to be two aspects of the decision which defied rationality in the requisite sense. The Court said the first was the proposition that the ATO officer could not have reached the view that there were exceptional circumstances without first having viewed the documents for himself. The Court did not accept this.

Perram J said the ATO officer had before him a submission by the auditors that suggested Mr Cornell "was the anonymous 'Client Number 1' identified in records seized under warrant by the ACC from Mr Philip Egglishaw, one of the principals of a European firm of tax advisors, Strachans. The submission suggested that Strachans provided services which included setting up structures to avoid paying Australian tax. More particularly, the submission claimed that Mr Cornell participated in various arrangements with Mr Hogan which were devised and implemented by Mr Stewart and Strachans. Four particular arrangements were identified in relation to Mr Cornell. .... The first was said to involve the non-disclosure of royalties from the Crocodile Dundee films." Another arrangement involved the use of debit and credit cards.

The second aspect of the argument put by Mr Cornell was that it was unreasonable in the same sense for the ATO officer to have proceeded to make a decision to grant access to the documents under Guideline 6. This was said to be because he proceeded by reference to "exceptional circumstances" which was a criterion found only in Guideline 5. The Court rejected this argument too on the basis that it did not accept that the "exceptional circumstance" was confined in the way Mr Cornell submitted.

The Court said the arguments mounted by Mr Stewart "were in substance the same as those mounted by Mr Cornell" and it rejected them for the same reasons.

Mr Hogan

The Court said Mr Hogan's solicitors claimed the protection of the guidelines by claiming generally the Accountants' Concession. However, instead of determining that exceptional circumstances existed under the guidelines, the Court said an officer of the ATO determined that the guidelines did not apply to the documents at all. According to the Court, his reason for this was that "Mr Hogan's solicitors had asked the ATO to obtain all documentation relating to Mr Hogan from the ACC and had, therefore, waived the guidelines".

The Court said Mr Hogan claimed he was denied the opportunity "to make submissions as to why access ought not to be granted to the documents in relation to the Hogan audit". Perram J said he did not accept that confidentiality was lost "when documents are produced to a third party, as they were here, under compulsory process and without any choice". He went on: "Despite that, I accept the Commissioner's argument that the guidelines, as a matter of their text, cannot apply to documents which have come into possession of persons other than the taxpayer or the taxpayer's external accountant". "The machinery specified in the guidelines simply makes no sense where third parties possess the documents", the Court said.

The Court came to the conclusion that the guidelines did not apply to the documents provided by the ACC to the ATO. There could be, in that circumstance, nothing procedurally unfair in accessing the documents, it said. "Fairly construed, the guidelines and the ATO's correspondence with Mr Hogan could not reasonably have engendered any view on his part that access would not be had to the documents without first giving him an opportunity to argue to the contrary", Perram J said. The Court's view was that Mr Hogan was not denied procedural fairness. "The guidelines did not apply and he was not told they did".