Deputy Commissioner of Taxation v Joseph Frangieh - [2017] NSWSC 252 - NSWSC 2016 case summary — Zoe

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Deputy Commissioner of Taxation v Joseph Frangieh

[2017] NSWSC 252

Supreme Court of NSW|2016-03-23

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Source facts

Court

Supreme Court of NSW

Decision date

2016-03-23

Source

Original judgment source is linked above.

Judgment (103 paragraphs)

[1]

8 Commissioner of Taxation v Dalco (1990) 168 CLR 614 Commonwealth v Fernando (2012) 200 FCR 1 Cornwall v Rowan (2004) 90 SASR 269 Dalco v Federal Commissioner of Taxation (1988) 82 ALR 669 Denlay v Federal Commissioner of Taxation [2011] FCAFC 63; (2011) 193 FCR 412 Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) (1949) 79 CLR 296 Deputy Commissioner for Taxation v Joseph Frangieh [2015] NSWSC 727 Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 Deputy Commissioner of Taxation v Niblett (1965) 8 FLR 134 Deputy Commissioner of Taxation v Sakovits [2010] NSWSC 865 Deputy Commissioner of Taxation v TDE Nominees Pty Ltd (No 2) [2011] NSWSC 1528 Edward Moses Obeid Snr v David Andrew Ipp [2016] NSWSC 1376 Fabre v Arenales (1992) 27 NSWLR 437 Favaro v FCT (1996) 34 ATR 1 Featherby v Commissioner of Taxation (No 2) [2016] FCA 465 Hazeldene's Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2) (2005) 13 VR 435 Hua-Aus v FCT (2010) 184 FCR 430 JLW (Vic) Pty Ltd v Tsilogou [1994] 1 VR 237 Jones v Bradley (No 2) [2003] NSWCA 258 Jones v Dunkel (1959) 101 CLR 298 Jones v Trad (No 3) [2013] NSWCA 463 Kordan Pty Ltd v Federal Commissioner of Taxation (2000) 46 ATR 191 Kuddus v Chief Constable of Leicestershire [2002] 2 AC 122 Lahoud v Lahoud [2012] NSWSC 284 Lamb v Cotogno (1987) 164 CLR 1 Leerdam v Noori (2009) 227 FLR 210 Leichhardt Municipal Council v Green [2004] NSWCA 341 Leinenga v Logan City Council [2006] QSC 294 Lock v Australian Securities and Investments Commission [2016] FCA 31 Lockley v National Blood Transfusion Service [1992] 1 WLR 492 Ma v Commissioner of Taxation (1992) 37 FCR 225 Martin v Federal Commissioner of Taxation (1993) 27 ATR 282 Maxwell-Smith v S & E Hall Pty Ltd [2014] NSWCA 146; (2014) 86 NSWLR 481 McCrohon v Harith [2010] NSWCA 67 Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 New South Wales v Ibbett (2006) 229 CLR 638 Pattenden v Commissioner of Taxation (Cth) (2008) 175 FCR 1 Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768 Poletti v Commissioner of Taxation (1994) 52 FCR 154 R v Deputy Commissioner for Taxation (WA) R v Toohey; Ex parte Northern Land Council [1981] HCA 74; (1981) 151 CLR 170 Racz v Home Office [1994] 2 AC 45 Re Waterfront Investments Group Pty Ltd (in liq) [2015] NSWSC 18 Rolls Royce Industrial Power (Pacific) Ltd (Formerly John Thomson (Australia) Pty Ltd) v James Hardie & Coy Pty Ltd (2001) 53 NSWLR 626 Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275 State of New South Wales v Hamod [2011] NSWCA 376 State of South Australia v Lampard-Trevorrow (2010) 106 SASR 331 Sydney City Council v Geftlick [2006] NSWCA 280 Szajntop v Commissioner of Taxation (1993) 42 FCR 318 Three Rivers DC v Bank of England No 3 [2000] 3 All ER 1 Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 Troughton v Deputy Commissioner of Taxation (2008) 166 FCR 9 Troulis v Vamvoukakis [1998] NSWCA 237 United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 Walter v Registrar of Titles [2003] VSCA 122 Wentworth v Wentworth (Supreme Court (NSW), Young J, 12 December 1994, unrep) Whitney v Dream Developments Pty Ltd (2013) 84 NSWLR 311 Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509 Ziliotto v Hakim [2013] NSWCA 359 Texts Cited: M Aronson, "Appendix B - Misfeasance in Public Office", available at UK Law Commission, "Misconduct in Public Office" R P Balkin and J L R Davis, Law of Torts (5th ed, 2013, LexisNexis Butterworths T Cockburn and M Thomas, "Personal liability of public officers in the tort of misfeasance in public office - Part 1" (2001) 9 Torts Law Journal 1 T Cockburn and M Thomas, "Personal liability of public officers in the tort of misfeasance in public office - Part 2" (2001) Delegations and Authorisations Manual A Doecke, "Misfeasance in public office: Foreseen or foreseeable harm" (2014) 22 Torts Law Journal 20 Meagher, Gummow & Lehane's Equity: Doctrines and Remedies, 5th ed (2015) Practice Statement Law Administration 2007/24 (PSLA 2007/24) Category: Principal judgment Parties: Joe Frangieh also known as Joseph Frangieh (Cross Claimant) Deputy Commissioner of Taxation (Cross Defendant) Representation: Counsel: I Young (Cross Claimant) R Weber SC with S Patterson (Cross Defendant)

[3]

Table of Contents A Overview B Short factual chronology C Witnesses at trial D Pleadings in the cross claim E Vicarious liability and the structure of the taxation office E1 Vicarious liability of Deputy Commissioner E1(i) Activities connected with public duties E2(ii) Delegation F The relevant tax legislative provisions G Misfeasance in public office G1 Invalid or unauthorised act of a public officer G2 Actual malice - Conscious maladministration, improper purposes and bad faith G2(i) Invalidity by conscious maladministration G2(ii) Malice, bad faith and improper purpose G2(iii) Aggregating the state of mind G3 Acts of a public officer in purported discharge of his or her duty G4 Application of Briginshaw -the seriousness of allegations G5 Cross claimant's background G5(i) Credibility of the cross claimant G6 The first alleged misfeasance - the audit 2009 to 4 September 2011 G6(i) First aspect - the decision to conduct the audit and notification G6(ii) Audit undertaken for improper purpose as it was on the basis that the cross claimant had assisted another taxpayer G6(iii) Audit undertaken for improper purpose believing that the cross claimant would have limited resources to defend himself G6(iv) Audit undertaken for improper purpose on the belief that be difficult for the cross claimant to discharge his onus of proof in relation to matters raised over three years prior G6(v) Audit undertaken for improper purpose knowing that it was outside the statutory time frame for amending assessments G6(vi) Audit undertaken for improper purpose on the belief that the public and/or adjudicating body would be unsympathetic to the cross claimant given the negative media attention G6(vii) Audit conducted for improper purpose to create and issue assessments that would cause severe disruption, burden, loss and damage G6(viii) Second aspect - conduct of the audit G6(ix) The progression of the audit G6(x) The amended assessment of 1 October 2012 and its validity G6(xi) The Seage complaint and reporting Mr Seage to the Tax Practitioner's Board G6(xii) Advocating for the issue of a Departure Prohibition Order (DPO) G6(xiii) The manner in which the cross claimant's tax position was ascertained G7(i) Factual background of second misfeasance G7(ii) Perpetuation of improper motivations G7(iii) The defendant knew the assessments were incorrect G7(iv) Genuine dispute G7(v) Improper purpose and assessments made in bad faith G7(vi) Assessments issued outside of time period prescribed G7(vii) Failed to follow internal ATO guidelines G7(viii) Judgment could not be obtained G7(ix) Limited resources and assets and substantial time, cost and emotional burden G7(x) Claim could be withdrawn and filed without prejudice G8(i) Compromise proposal requirements G8(ii) AAT proceedings G8(iii) DCT's submissions in relation the third misfeasance G8(iv) Continue undermining the review of a tax decision known to be grossly incorrect G8(v) To bully, harass and cause emotional distress to the cross claimant G8(vi) Perpetuating the original intentions of the audit officers G8(vii) Knowing that withdrawing from proceedings would not prejudice DCT G8(viii) Knowing the statement of claim would need to be amended H Abuse of process I Duty to act in good faith J Conclusion K Damages K1 Economic damages K1(i) Loss of opportunity and inability to obtain finance K1(ii) Sale of properties that otherwise would not have been sold K1(iii) Incurrence of further debts K1(iv) Incurrence of accounting, legal and other expenses K1(v) Humiliation, embarrassment, stress, anxiety, emotional hurt and inconvenience K2 Aggravated and exemplary damages K2(i) Aggravated damages K2(ii) Exemplary damages L Costs of the recovery proceedings L1 Short chronology in relation to costs L2 Costs generally L3 Costs of the cross claim L4 Set-off M Orders

[5]

A Overview

On 15 November 2012, the DCT filed a statement of claim against Mr Frangieh for unpaid tax, penalties and interest.
On 12 June 2015, leave was granted by this Court, for Mr Frangieh to file a cross claim against the DCT.
On 31 July 2015, by consent, the further amended statement of claim in the recovery proceedings was dismissed (JTB 10.473). Mr Frangieh seeks costs on an indemnity basis in relation to the recovery proceedings. The DCT agreed to pay Mr Frangieh's costs of the recovery proceedings but on an ordinary basis.
By cross claim Mr Frangieh, the cross claimant, seeks damages against the DCT for misfeasance in public office, abuse of process, and breach of duty to act in good faith. There are three misfeasance in public office claims, two abuse of process claims and one claim of breach of duty to act in good faith. In summary, the causes of action against defendant's employees arise out of: (a) Their conduct in commencing and continuing with the audit of the cross claimant (the audit of the 2007 tax year); (b) Their involvement in the issuing of the amended notice of assessment; and (c) Their involvement in commencing and continuing the recovery proceedings, in the knowledge that their conduct constituted misfeasance in public office relating to (a) and (b).
The cross claim separates the 11 employees of the ATO into three litigation groups. The first misfeasance in public office claim involves the actions of Jessie Agbola, Michelle Johnston, Cindy Sandford and Marianne Rogers ("the first litigation group").
The second misfeasance in public office claim and the first abuse of process claim involves the actions of Lauren Benjamin, Venus Shakuntala Lakshman, Desiree Armstrong, Grahame Tanna and the Deputy Commissioner of Taxation himself ("the first recovery officers").
The third misfeasance claim and the second abuse of process claim involves the actions of Trudy Hobart, Grahame Tanna and DCT ("the second recovery officers").
The allegation of breach of duty to act in good faith claim involves the actions of all of the above named employees as well as the DCT and the Commissioner of Taxation.
As a result of the DCT's alleged misfeasance in public office, abuse of process and failure to act in good faith Mr Frangieh, the cross claimant, claims that firstly, he could not obtain the finance he needed to engage in property development; secondly, he lost the opportunity to proceed with property development opportunities; thirdly, he sold properties for less than market value; fourthly, incurred further debts including legal and accounting fees; and finally suffered humiliation, embarrassment, stress, anxiety, emotional hurt and inconvenience. He also claims aggravated and exemplary damages. He seeks the amount of $8,750,000 for damages. He also claims equitable damages and compensation.

[6]

B Short factual chronology

On 17 September 2007, the ATO's notice of assessment ("notice of assessment") stated that Mr Frangieh's taxable income was $101,740 for the financial year ended 30 June 2007. (JTB 1.14A).
In September 2009, officers in the Australian Taxation Office ("ATO") started conducting an audit ("the audit") in relation to Mr Frangieh's tax return for the year ended 30 June 2007 ("FY2007"). He was notified of the audit by letter dated 20 October 2009. (JTB 1.19). At that stage, the audit centred upon the receipt by the ATO of the sum of around $700,000 from a company called Western Jetz Pty Ltd ("Western Jetz"). Some five months later, by letter from the ATO dated 30 March 2010, Mr Frangieh was notified that the scope of the audit had been extended to cover all of his income in FY2007. (JTB 1.32).
On 12 May 2011, the ATO issued a position paper to Mr Frangieh in relation to the audit. The ATO's position was that there were unexplained deposits of $3,572,517.16 that would be treated as income and the $700,000 received from Western Jetz, $350,000 would also be treated as income. (JTB 2.70).
On 25 June 2012, Mr Howarth, an ATO officer, formed the evasion opinion. (JTB 4.199).
On 4 September 2012, the ATO wrote to Mr Frangieh advising that the unexplained deposits of $3,234,064 would be treated as income, being deposits that remained unexplained or for which inadequate evidence was provided to support his contentions; and of the $700,000 received from Western Jetz, $350,000 would be treated as income. (JTB 5.227).
The audit decision concluded that Mr Frangieh had understated his income by $3,584,065. The amount of $2,393,725.38 due under the notice of amended assessment was payable by 25 October 2012. (JTB 5.234).
On 12 October 2012, a complaint was made by Mr Christopher Seage to the ATO on behalf of Mr Frangieh, in relation to the conduct of the audit ("the complaint"). (JTB 5.237).
On 15 November 2012, the recovery proceedings were commenced by the DCT. The relief claimed by the DCT included judgment against Mr Frangieh in respect of unpaid income tax (plus penalties and shortfall interest charges) for FY2007, plus two other outstanding tax debts, being a Running Balance Accounts deficit debt ("RBA") relating to BAS and administrative penalties concerning the GJN Discretionary Trust (of which Mr Frangieh was the trustee), and an RBA deficit debt in respect of Mr Frangieh's BAS obligations.
On 4 February 2013, orders for substituted service of the statement of claim were obtained by the DCT in the recovery proceedings. (JTB 5.267).
On 2 April 2013, the amended statement of claim in the recovery proceedings was served on Mr Frangieh pursuant to the orders for substituted service. (JTB 6.282).
On 15 April 2013, Mr Butler, the ATO officer dealing with Mr Frangieh complaint, emailed Mr Seage and Mr Frangieh attaching a letter setting out Mr Butler's reasons for not upholding the complaint. (JTB 6.285).
On 1 May 2013, Mr Frangieh lodged an objection to the audit decision in relation to the amended assessment. (JTB 6.291).
On 13 May 2013, Mr Frangieh filed his defence in the recovery proceedings. On 16 May 2013, his defence was served on the ATO.
On 18 September 2014, the ATO wrote to Mr Frangieh enclosing its reasons for the objection decision. The objection was partially allowed and reduced his taxable income for the FY2007 from $3,685,805 to $827,609. (JBT 7.371).
On 30 September 2014, an amended notice of assessment, reflecting the objection decision, was issued. (JBT 7.373). It relevantly states: Notice of amended assessment - year ended 30 June 2007 Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 We have received some of the information reported in your income tax return for the period ending 30 June 2007 and have amended your assessment for that period.
On 29 October 2014, Mr Frangieh applied to the Administrative Appeals Tribunal ("the AAT") seeking review of the objection decision ("AAT proceedings"). (JTB 7.384). On 4 June 2015, the AAT conducted a conciliation conference.
On 12 June 2015, this Court granted leave to Mr Frangieh to file his cross claim: see Deputy Commissioner for Taxation v Joseph Frangieh [2015] NSWSC 727.
On 16 July 2015, by consent, the AAT made a decision pursuant to s 42C of the Administrative Appeals Tribunal Act 1975 (Cth) that set aside the objection decision; and decided, in substitution, that Mr Frangieh's taxable income was reduced from $827,609 to $101,740. (JTB 8.401).
The notice of amended assessment dated 16 July 2015 (JTB 8.406) relevantly states: Notice of amended assessment - year ended 30 June 2007 Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 We have received some of the information reported in your income tax return for the period ending 30 June 2007 and have amended your assessment for that period. Description Debits $ Credits $ Your previous taxable income was $827,609 Your amended taxable income is $101,740

[10]

D Pleadings in the cross claim

By cross claim, the cross claimant alleges that various officers of the ATO engaged in three instances of misfeasance in public office ("misfeasance"), two of which he characterises as abuses of process. He also alleges that the alleged conduct in all three alleged misfeasances amounted to breaches of a duty of good faith, which gives rise to damages.
The first alleged misfeasance is pleaded at X/C [11]-[14] ("first alleged misfeasance"). Broadly speaking the allegations concerning the first alleged misfeasance relate to two aspects of the audit of the 2007 tax year. The first is an allegation that the decision to conduct an audit of the cross claimant (to "target" the cross claimant) was made for an "improper purpose". (X/C [11]). The second is that the audit was undertaken in a way that no reasonable ATO officer would undertake it and that it was undertaken in bad faith. (X/C [12]).
The second alleged misfeasance is pleaded at X/C [15]-[21] ("second alleged misfeasance"). Broadly speaking the allegations concerning this alleged misfeasance is that a number of ATO officers "commenced and maintained" the recovery proceedings for an improper purpose. This alleged misfeasance occurred during the period from the commencement of the recovery proceedings up to September 2014, when the objection decision was made.
The third alleged misfeasance is pleaded at X/C [22]-[28] ("third alleged misfeasance"). Broadly speaking the cross claimant alleges that several ATO officers maintained the recovery proceedings for an improper purpose.
From this brief summary, it can be observed that all of the allegations of misfeasance are based upon allegations that various named ATO officers engaged in conduct either in bad faith or for improper purposes. The cross claimant submitted that these allegations are allegations of deliberate, advertent behaviour. In light of the principles concerning the tort of misfeasance in public office, it appears that these allegations are ones of targeted malice.

[11]

E Vicarious liability and the structure of the taxation office

Mr Frangieh's cross claim names the Deputy Commissioner as the sole cross defendant on the basis that he, Mr Ravanello, is vicariously liable for the actions of the ATO officers against whom the cross claimant's allegations of misfeasance, abuse of process and breach of duty to act in good faith are directed. The DCT submitted that the DCT is not the correct cross defendant. The question is whether the Deputy Commissioner is capable of being held vicariously liable for the acts of ATO officers. If he is not, then the cross claim must fail prior to attending to considerations of whether those officers did engage in any of the alleged wrongdoing.
It is convenient to set out an overview of the structure and workings of the ATO.
Under s 4 of the Taxation Administration Act the Commissioner of Taxation holds a public office. The Commissioner of Taxation has the general administration of the Tax Administration Act pursuant to s 3A. Neither the Commissioner nor the various Second Commissioners and Deputy Commissioners can administer the entirety of the taxation laws.
Pursuant to subsection 4A(2) of the Tax Administration Act, the Commissioner of Taxation and the public officers assisting the Commissioner of Taxation engaged under the Public Service Act (the ATO public officers) constitute the ATO with the Commissioner of Taxation at its head. ATO officers are appointed by the Commissioner to carry out his or her functions and are employed by the Crown in right of the Commonwealth. They are employees under the Public Service Act. They are not authorised by the Deputy Commissioner.
At all material times Jessie Agbola, Michelle Johnston, Cindy Sandford, Marianne Rogers, John Howarth, Lauren Benjamin, Venus Shakuntala Laksham, Desiree Armstrong, Trudy Hobart and Grahame Tanna were ATO public officers. This much is common ground: see [5], [6], [8] and [9] of the defence to the cross claim (DX/C). While the DCT admits he has been delegated some powers and functions of the Commissioner of Taxation he otherwise denies the allegations.
By s 7 of the Tax Administration Act there shall be such Deputy Commissioners as required. By s 8(1) of the Tax Administration Act, the Commissioner may delegate to a Deputy Commissioner or any other person "all or any of the Commissioner's powers or functions under a taxation law". Generally speaking a power or function so delegated, when exercised or performed by the delegate, for the purposes of the taxation law or the other law, may be deemed to have been exercised or performed by the Commissioner.
At any given time, there are numerous Deputy Commissioners. From the organisational charts, each Deputy Commissioner has a different role in a different business service line within the ATO. (s 8(2)). Assistant Commissioner Damien Browne confirmed that as a delegate of the Commissioner of Taxation, he stands in the shoes of the Commissioner of Taxation, subject to any limitations imposed on his delegation. (T 169.1-14).
The cross claimant referred to a document entitled "General Delegation". This document, dated 2 July 2012, is the instrument by which the Commissioner delegated his powers and functions under a number of Acts that deal with tax and tax related matters to delegates including the Second Commissioner of Taxation, eighteen Deputy Commissioners of Taxation and four First Assistant Commissioners. Not included in this list of Acts is the Public Service Act, which grants the Commissioner of Taxation powers and functions in relation to employment of the staff of the Australian Taxation Office as employer. (s 20).
Since January 2012, Robert Ravanello, has been the Deputy Commissioner of Taxation for Service Delivery and in that role, is responsible for the collection of outstanding debts for the Commissioner of Taxation. (DC/X [7]). The signature of Mr Robert Ravanello, a Deputy Commissioner, has been applied to an Instrument of Authorisation signed by him dated 19 July 2012 (CB 9.468), which demonstrates that he was both a Deputy Commissioner and the Chief Operating Officer. This document grants officers of the ATO in Client Account Services, Customer Services and Solutions, Client Contact, Debt, and Operations Support and Capability the authority to exercise all the powers of the Deputy Commissioner of Taxation expressly granted or otherwise delegated by the Commissioner, as set out in the Schedule to the Instrument of Authorisation, in the name of the holder of the position of Deputy Commissioner of Taxation, insofar as those powers and functions result in notices, determinations, correspondence or other documents.
Mr Damien Browne, an Assistant Commissioner, relied on his affidavit sworn 23 February 2016, which sets out the organisation of the ATO. He gave evidence and was cross examined. No challenge was made to credibility. He was articulate and I have no hesitation accepting his evidence.
Mr Browne explained that, within the ATO there are a number of departments which are commonly called "business service lines" ("BSLs"). From time to time, the names of BSLs change, or one BSL is amalgamated with another. Mr Browne gave the following evidence about the Debt BSL.
Within the Debt BSL, there is a section which is now called "Significant Debt Management", which used to be called "Debt Strategic Recovery". ATO officers in this section undertake various actions in order to recover tax debts, which can include: (a) Liaising with the taxpayer, for example to determine whether a payment arrangement can be agreed upon; (b) Identifying assets held by the taxpayer and issuing garnishee notices in respect of them; (c) Commencing court proceedings to recover outstanding debts.
Mr Browne explained that in relation to court proceedings commenced to recover outstanding debts, if the taxpayer files a defence in such proceedings, the usual practice within the ATO is for that case to be referred to a lawyer in the ATO's Review and Dispute Resolution BSL.
Mr Browne gave evidence about the Review and Dispute Resolution BSL ("RDR"). RDR was established in July 2013, prior to that, its functions were part of the Legal Services Branch ("LSB") within Law & Practice. Some, but not all, ATO officers in RDR are lawyers. ATO officers in RDR are responsible for conducting court proceedings referred to them by officers in the Debt BSL. In addition, ATO officers in RDR conduct other proceedings, such as proceedings in the Tribunal and the Federal Court regarding assessments. (Aff 9(b)).
In relation to Mr Browne's evidence concerning the independent review within the ATO's RDR, Mr Browne was asked the following question in cross examination: "Q. You've mentioned the word independent, an independent branch. I take it - well first of all what do you mean, independent? Independent from whom? Independent from the rest of the tax office, independent from a particular area in the tax office? What do you mean? A. So it is both a sort of structural form of independence, so operating independently and separately from the original decision making areas. Whether that is in relation to an audit or objection, as it was then, or in relation to debt decisions, but it was also to reflect bringing to bear an independent perspective. Still clearly operating as a delegate of the Commissioner but the way we generally describe this is a fresh set of eyes to look at the problem." (T 170.52059; T 171-1).
With regard to the Small and Medium Enterprises BSL ("SME" or "S&ME"), which is now part of the Private Groups and High Wealth Individuals BSL ("PGH"), Mr Browne stated that it was responsible for, inter alia, corporate risks of trust, phoenix, fringe benefits tax, Division 7A and aggressive tax planning. It is also responsible for managing certain categories of individuals and groups with a high turnover. (Aff 9 (c)).
One of the functions of PGH was to ensure compliance by taxpayers with taxation laws, for example, by identifying potential non-compliance by taxpayers, and undertaking audits of such taxpayers. ATO officers who undertake audits are often referred to as "compliance officers" or "auditors".
In 2013 and 2014, there was a separate section in this BSL, called "Interpretive Assistance" ("IA") and later "Technical Excellence Services", which was responsible for considering and determining objections to assessments or amended assessments lodged by a taxpayer. ATO officers who consider objections were referred to as "objections officers". In cross examination, Mr Browne explained that in July 2015, the objections function which had been undertaken within the relevant BSL was moved to within RDR. (T 173.19-22).
Mr Browne gave evidence about "ATO complaints". He explained that this area was established in 2002 and is now within the ATO Corporate BSL. ATO complaints has the overall management of complaints in the ATO. He explained that all BSLs have complaints networks which liaise with ATO complaints to resolve complaints and ensure that this is done in a consistent and effective manner. (Aff 9 (e)). In cross examination, Mr Browne explained that complaints can be handled by individual officers or by managers or if unresolved at one level may be addressed by ATO complaints. (T 179.49-180.5).

[12]

E1 Vicarious liability of Deputy Commissioner

The cross claimant contends that the DCT is a "public officer" for the purposes of the tort of misfeasance in public office and that the relevant conduct was carried out in the course of the exercise of the DCT's public functions The cross claimant submitted that in cases involving the conduct of officers of the ATO, it is appropriate to name the cross defendant as the Commissioner of Taxation, or alternatively, his delegate, the Deputy Commissioner of Taxation, standing in the shoes of the Commissioner.
The Deputy Commissioner has been named the cross defendant as he, according to the cross claimant, may be held vicariously liable for the actions of the ATO officers in performing their duties in public office including, raising assessments, audits, issuing garnishee notices and suing for outstanding taxation in Courts. As I have observed, the parties agree that the ATO officers were public officers at the relevant times.
Vicarious liability can apply to the tort of misfeasance in public office: see Racz v Home Office [1994] 2 AC 45 at 53 ("Racz") and Mengel at 307. In relation to claims of abuse of process which are also asserted by the cross claimant, theoretically there is no obvious impediment to a claim of vicarious liability for the acts of an employee in relation to their employment under the ordinary principles of vicarious liability: see R P Balkin and J L R Davis, Law of Torts (5th ed, 2013, LexisNexis Butterworths) at 735ff. The issues that arise here are whether the respective acts of the ATO officers which are complained of were connected with their duties in public office by way of some de facto authority and whether that authority was delegated by the Deputy Commissioner: Mengel at 347. The focus of the DCT's refutation of vicarious liability is that the DCT was unable to delegate the de facto authority on which the ATO officers purportedly acted by statute or alternatively as he was not their employer.

[14]

E2(ii) Delegation

It is uncontroversial that the administration of taxation laws can be delegated to the staff of the ATO and the Deputy Commissioners.
The powers and functions conferred on the Deputy Commissioner include the standing to act in legal proceedings. Counsel for the DCT referred to s 255-5(2) of Schedule 1 to the Tax Administration Act, which reads: "The Commissioner, a Second Commissioner or a Deputy Commissioner may sue in his or her official name in a court of competent jurisdiction to recover an amount of tax-related liability that remains unpaid after it has become due and payable."
The DCT initially brought proceedings against the cross claimant.
The cross claimant's claim is made against the public office of the Commissioner of Taxation with the Deputy Commissioner standing the shoes of the Commissioner. He placed reliance on the ATO's Delegations and Authorisations Manual (JTB 10. 472) which states (at 2.1.2): "The High Court of Australia has held that delegation enables delegates to act completely in the place of the person who gave the power to them."
As the DCT has standing to act in legal proceedings for the Commissioner, the cross claimant contends that the DCT is positioned to defend the claim as the delegate of the Commissioner of Taxation.
What is problematic with the cross claimant's approach to vicarious liability is firstly, that the evidence does not support a finding that the authority under which the officers were allegedly acting had been delegated to the Deputy Commissioner of Taxation in accordance with either s 8 of the Tax Administration Act (JTB 9.466) or s 78 of the Public Service Act. Section 78 states that an agency head may, in writing, delegate to another person any of the agency head's powers or functions under the Public Service Act. Secondly, notwithstanding the lack of identification of the specific Deputy Commissioner against whom the cross claim was brought, the Deputy Commissioner, Robert Ravanello, who was assumed to be the relevant Deputy Commissioner against whom the proceedings were brought, was not named as a person involved in the alleged acts of the first misfeasance. Nor was the Deputy Commissioner involved in the activities constituting the second and third misfeasance.
The cross claimant referred to Carltona Ltd v Commissioner of Works [1943] 2 All ER 560 ("Carltona"), where the Court of Appeal stated (at 563): "It cannot be supposed that this regulation meant that, in each case, the minister in person should direct his mind to the matter. The duties imposed upon ministers and the powers given to ministers are normally exercised under the authority of the ministers by responsible officials of the department. Public business could not be carried on if that were not the case. Constitutionally, the decision of such an official is, of course, the decision of the minister. The minister is responsible. It is he who must answer before Parliament for anything that his officials have done under his authority, and, if for an important matter he selected an official of such junior standing that he could not be expected competently to perform the work, the minister would have to answer for that in Parliament."
The cross claimant submitted that, applying Carltona, the Commissioner and his delegate, the Deputy Commissioner of Taxation, answers for anything ATO officers have done in the performance of their duties.
Carltona does not assist the cross claimant in establishing the DCT's liability. It was concerned with ministerial responsibility. The powers given to ministers are normally exercised by responsible ministers of the department. The application of Carltona does not result in a conclusion that the Deputy Commissioner answers for anything ATO officers have done in the performance of their duties but it does support the conclusion that the responsible ministers answer for anything ATO officers, including the Commissioner and the Deputy Commissioners, have done in the performance of their duties.
The DCT submitted that if the cross claimant's claim of vicariously liability is based on characterising the ATO officers as employees the claim must fail. This is because neither the Deputy Commissioner nor the Commissioner is the employer of the named ATO officers.
So far as the claim of misfeasance is concerned, the DCT submitted that there could be no vicarious liability in the case as pleaded because the cross claimant alleges conduct actuated by targeted malice, which is to say that he claims the activities of the ATO officers were without authority and of bad faith and improper purpose. The ATO says that to allege vicarious liability for an employee's conduct when such conduct is outside their authority is inconsistent with the principles of agency.
The DCT referred to a prior hearing in these proceedings where Mr Frangieh sought leave to file a cross claim. The pleadings in the cross claim sought relief against 14 named ATO officers, but did not name them as cross defendants. The DCT sought to strike out these paragraphs of the cross claim. When this issue was raised during the hearing on 7 May 2015, the then counsel for the cross claimant said that references to seeking damages against the named ATO officers would be removed (T 21.48-50). Counsel then made the decision not to join them as cross defendants or seek damages against them personally (T 22.41-44), on the basis that the Commissioner would be "vicariously liable" (T 22.23-24). That decision by the cross claimant was reflected in my decision in Deputy Commissioner of Taxation v Frangieh [2015] NSWSC 727 at [44]-[46], and in the terms of the orders the Court made granting leave which required removal of paragraphs seeking damages against the named ATO officers.
The Commissioner of Taxation is the head of the ATO for the purposes of the Public Service Act. (s 4A of the Tax Administration Act). Section 20(1) of the Public Service Act reads that an "Agency Head, on behalf of the Commonwealth, has all the rights, duties and powers of an employer in respect of APS employees in the Agency." It follows that the Commissioner of Taxation, on behalf of the Commonwealth, has the rights, duties and powers of an employer of the ATO public officers. As the agency head, the Commissioner of Taxation may from time to time determine the duties of ATO public officers employed by the ATO. (s 25 of the Public Service Act). The ATO officers' authority and employment is derived from the authority of the Commissioner of Taxation on behalf of the Commonwealth.
Hence, the Deputy Commissioner of Taxation is not vicariously liable for the conduct of the ATO public officers which the cross claimant claims amounts to the torts of misfeasance in public office and abuse of process. While it is not necessary that I decide who the proper defendant is, it should be noted that as it is the Commissioner of Taxation on behalf of the Commonwealth who has the rights, duties and powers of an employer of the ATO officer, it is arguable that it is the Commissioner who is vicariously liable for torts committed by them. I also note the operation of s 59(1) of the Judiciary Act, which states that a claim in tort may be made against the Commonwealth, and s 64 of the Judiciary Act, which states that in any suit to which the Commonwealth is a party, the rights of the parties shall as nearly as possible be the same as in a suit between subject and subject. The Commonwealth is also possibly liable for the tortious conduct of the ATO officers.
My conclusions are firstly, that the Deputy Commissioner of Taxation is the wrong defendant. Secondly, the Deputy Commissioner of Taxation is not vicariously liable for the acts of the public officers. Even if I am wrong and the named tax officers are personally liable (see Mengel at 347), I have made findings (later in this judgment) that their actions are valid and authorised and not done with malice. Hence, the cross claimant claims three claims of misfeasance in public office must fail.
If I am wrong, there are two other matters of general application in relation to the three alleged occasions of misfeasance in public office. They are whether firstly, the Briginshaw test is applicable to that tort and whether the states of mind of public officers can be aggregated and secondly, whether Jones v Dunkel (1959) 101 CLR 298 should be drawn in relation to Ms Johnston and Ms Benjamin. I will return to these issues later in the judgment.

[15]

F The relevant tax legislative provisions

It is now convenient that I set out some of the central provisions of the tax legislation that deals with returns and assessments, the collection and recovery of tax, objections against assessments, reviews and appeals. These provisions relate to the powers that were exercised by officers on behalf of the ATO and are the subject of the cross claimant's claims in these proceedings.
Section 166 of the Income Tax Assessment Act 1936 (Cth) ("ITAA 1936") imposed an obligation on the Commissioner to "make an assessment of the taxable income" of any taxpayer, on the basis of returns, and "from any other information in the Commissioner's possession".
Section 167 of the ITAA 1936 provides for the Commissioner to make "default assessments" in one of three circumstances. They are firstly, if a person defaults in furnishing a return; secondly, if the Commissioner was not satisfied with the return furnished by any person; or thirdly, if the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income.
In each of these circumstances, the Commissioner is empowered to "make an assessment of the amount upon which in his judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166."
The cross claimant had furnished a return for FY2007, and an assessment had been issued on the basis of it. After that, the audit was conducted, and as the result of that audit, the amended assessment was issued pursuant to s 167(b) of the ITAA 1936. In Commissioner of Taxation v Dalco (1990) 168 CLR 614, Brennan J (with whom Mason CJ, Deane J, Dawson J agreed) observed (at 618) that the amended assessments had been made under s 167(b). It follows that, in this case, the amended assessment was issued pursuant to s 167(b) of the ITAA 1936.
In Dalco v Federal Commissioner of Taxation (1988) 82 ALR 669 at 689 (Wilcox J in the Court below) held that the assessments originally issued to the taxpayer had been based on the returns submitted by the taxpayer. The cross claimant submitted that the facts in Dalco are indistinguishable from the DCT's case.
Section 170(1) of the ITAA 1936 prescribes the time limits within which the Commissioner is authorised to amend assessments, calculated from the day on which the Commissioner gave the original assessment. Section 170(1), Item 1 provides that the time limit is two years for individuals, but that provision does not apply if the individual carried on a business (that was not a small business entity), or was the beneficiary of a trust. If s 170(1), Item 1 does not apply, then the time limit is four years: s 170(1), Item 4. In either case, the Commissioner is empowered to amend an assessment "at any time" if he or she is "of the opinion that there has been fraud or evasion": s 170(1), Item 5 of the ITAA 1936.
Section 175 of the ITAA 1936 is a short but important provision. It reads: "The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with."
The operation of the Pt IVC of the Taxation Administration Act 1953 (Cth) is triggered by s 175A(1) of the ITAA 1936 which reads: "A taxpayer who is dissatisfied with an assessment made in relation to the taxpayer may object against it in the manner set out in Part IVC of Taxation Administration Act 1953."
Section 177(1) of the ITAA 1936 (now repealed) reads: "The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct."
Section 175 must be read with ss 175A and 177(1). If that is done, the result is that the validity of an assessment is not affected by failure to comply with any provision of the ITAA 1936, but a dissatisfied taxpayer may object to the assessment in the manner set out in Pt IVC of the Taxation Administration Act. In review or appeal proceedings under Pt IVC the amount and all the particulars of the assessment may be challenged by the taxpayer but in accordance the burden of proof set out in s 14ZZK and 14ZZO of the Taxation Administration Act. Where s 175 of the ITAA 1936 applies, errors in the process of assessment do not go to jurisdiction and so do not attract the remedy of a constitutional writ under s 75(v) of the Constitution or relief under s 39B of the Judiciary Act 1903 (Cth).
Section 255-5(1) of Schedule 1 to the Taxation Administration Act 1953 states that a tax-related liability that is due and payable is a debt due to the Commonwealth that is payable to the Commissioner. Section 255-5(2) provides that the Commissioner, a Second Commissioner or a Deputy Commissioner may sue in his or her official name in a court of competent jurisdiction to recover an amount of a tax-related liability that is due and payable.
As soon as convenient after any assessment is made, the Commissioner is obliged by s 174 of the ITAA 1936 to serve notice in writing by post or otherwise upon the person liable to pay the tax. Any income tax assessed shall be due and payable by the person liable to pay it on the date specified in the notice as the date upon which the tax is due and payable, not being less than 30 days after service of the notice. (s 204). In the event of a deemed assessment pursuant to s 166A(1) of the ITAA, service of a notice of assessment is deemed to have occurred on the day specified by s 166A(1)(c). When it becomes due and payable, income tax shall be a debt due to the Commonwealth and payable to the Commissioner in the manner and at the place prescribed. (s 208). Any tax unpaid may be sued for and recovered in any court of competent jurisdiction by the Commissioner or a Deputy Commissioner. (s 209).
Sections 14ZZM and 14ZZR of the Taxation Administration Act provide that the fact that a review or appeal is pending in relation to a taxation decision does not affect the decision, and any tax and additional amounts may be recovered as if no review or appeal were pending. These provisions demonstrate a legislative intention that proceedings to recover tax debts may be commenced even though reviews of various kinds may be on foot. In Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 ("Broadbeach Properties"), the High Court referred to the statutory provisions in taxation legislation (such as s 177 of the ITAA) and authorities demonstrating this "long-standing policy to protect the revenue" (at [44]). In Broadbeach Properties, the High Court (at [44]), referred to Deputy Commissioner of Taxation v Niblett (1965) 8 FLR 134 ("Niblett") at 140, where Asprey J stated, the fact that an objection is on foot does not affect the assessment in issue or prevent recovery action based upon it. This proposition in Niblett was applied by this Court in Deputy Commissioner of Taxation v Sakovits [2010] NSWSC 865 at [50(7)] ("Sakovits").

[17]

G1 Invalid or unauthorised act of a public officer

Mengel identifies that the first element of the tort of misfeasance in public office is that act complained of must be "an invalid or unauthorised act": Mengel (at 370) per Deane J. At 356 of that judgment Brennan J sought to characterise conduct which may constitute an invalid act within the context of the tort: "A number of elements must combine to make a purported exercise of administrative power wrongful. The first is that the purported exercise of power must be invalid, either because there is no power to be exercised or because a purported exercise of the power has miscarried by reason of some matter which warrants judicial review and a setting aside of the administrative action. There can be no tortious liability for an act or omission which is done or made in valid exercise of a power. A valid exercise of power by a public officer may inflict on another an unintended but foreseeable loss - or even an intended loss - but, if the exercise of the power is valid, the other's loss is authorised by the law creating the power. In that case, the conduct of the public officer does not infringe an interest which the common law protects. However, a purported exercise of power is not necessarily wrongful because it is ultra vires. The history of the tort shows that a public officer whose action has caused loss and who has acted without power is not liable for the loss merely by reason of an error in appreciating the power available. Something further is required to render wrongful an act done in purported exercise of power when the act is ultra vires."
It has been recognised that this element may not need to be established where targeted malice is alleged. In such circumstances where the act was done with the improper or ulterior motive of doing the target harm, then the act can be said to have been in bad faith and exercised unlawfully: Chapel Road Pty Limited v Australian Securities Investments Commission (No 10) [2014] NSWSC 346 at [54]-[55]; Cornwall v Rowan [2004] SASC 384; 90 SASR 269 at [209]-[216]; Three Rivers DC v Bank of England No 3 [2000] 3 All ER 1 at 49.
There is a lack of clarity as to the cross claimant's formulation of the three alleged torts of misfeasance in that while not expressly indicating that the allegations are based on targeted malice, the pleadings and particulars appear to base the allegations of misfeasance on unlawful conduct expressed as being performed improperly or in bad faith. Where pleadings are framed by reference to "invalidity" with regard to the ATO's conduct in conducting an audit of the cross claimant's loan account and issuing of the amended assessments, Commission of Taxation of the Commonwealth v Futuris Corporation Limited (2008) 237 CLR 146; [2008] HCA 32 provides support for the proposition that in order to prove invalidity in the tort of misfeasance, the cross claimant must show that there was conscious maladministration. The DCT contends, and I agree, that the cross claimant's claims in misfeasance are based on targeted or actual malice. However, I accept that there are some allegations which refer to alleged reckless indifference.

[19]

G2(i) Invalidity by conscious maladministration

Futuris provides guidance for determining whether the default assessment is invalid. In that case the High Court set out the effect of ss 175, 175A and 177 (extracted above). At [24]-[25] the majority (Gummow, Hayne, Heydon and Crennan JJ) commented that consistent with s 175, the validity of an assessment is not affected by "errors in the process of assessment". Where such errors arise, a dissatisfied taxpayer can object in the manner as set out in Part IVC. However, in circumstances where an assessment is tentative or provisional - i.e. indeterminate in fixing the amount of tax due and payable - or where there has been "conscious maladministration of the assessment process", s 175 does not apply and therefore in either circumstance an assessment may be deemed invalid.
Any unlawful conduct by ATO officers in the course of processes anterior to the making of an assessment is not sufficient to establish conscious maladministration and render an assessment invalid. As recognised by the Full Court in Denlay v Federal Commissioner of Taxation [2011] FCAFC 63; (2011) 193 FCR 412 at [76] there must be some "actual bad faith, not with some form of 'constructive' bad faith established by unwitting involvement in an offence". The threshold to establishing such conduct is high. As observed by the majority later in Futuris at [60], "Allegations that statutory powers have been exercised corruptly or with deliberate disregard to the scope of those powers are not lightly to be made or upheld."
The fact that there may be some guesswork or estimation involved in an assessment will not render it invalid provided that there is some intelligible justification for the figures reached by the commissioner or provided that the Commissioner had not merely plucked a figure from the air or engaged in uninformed guesswork: Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 at 87-88; Briggs v Deputy Commissioner for Taxation (WA); Ex parte Briggs (1987) 14 FCR 249 at 269 ("Briggs"). The issue here is whether the cross claimant can prove that there was conscious maladministration, in the sense of actual bad faith, in the audit and issuance of the amended assessments.

[20]

G2(ii) Malice, bad faith and improper purpose

Central to this dispute is whether the ATO officers acted with the requisite malicious intent. In short the cross claimant alleges that relevant acts of the officers were actuated by malice whereas the DCT argues that the cross claimant has mischaracterised the officers' conduct as malicious when in fact it was not.
Counsel for the cross claimant submitted that an exercise of power must be accompanied by one of the following forms of "bad faith": (1) The DCT must have exercised the power knowing that he or she was acting in excess of power and with the intention to cause harm to the cross claimant (targeted malice); or (2) The DCT must have been recklessly indifferent to whether the act was beyond power and recklessly indifferent to the likelihood of harm being caused to the cross claimant (reckless indifference).
Although it has been accepted that in substance the cross claimant has advanced a case of targeted malice both targeted malice and reckless indifference shall be addressed in the event that I am wrong.
The House of Lords decision in Three Rivers District Council v Bank of England (No 3) [2003] 2 AC 1 ("Three Rivers") is authority for the second form. In Three Rivers, Lord Steyn stated (at 192G): "The policy underlying it is sound: reckless indifference to consequences is as blameworthy as deliberately seeking such consequences. It can now be regarded as settled law that an act performed in reckless indifference as to the outcome is sufficient to ground the tort in its second form."
In Mengel the majority (Mason CJ, Dawson, Toohey, Gaudron and McHugh JJ) stated (at 347): "The cases do not establish that misfeasance in public office is constituted simply by an act of a public officer which he or she knows is beyond power and which results in damage. Nor is that required by policy or by principle. Policy and principle both suggest that liability should be more closely confined. So far as policy is concerned, it is to be borne in mind that, although the tort is the tort of a public officer, he or she is liable personally and, unless there is de facto authority, there will ordinarily only be personal liability […]. And principle suggests that misfeasance in public office is a counterpart to, and should be confined in the same way as, those torts which impose liability on private individuals for the intentional infliction of harm. For present purposes, we include in that concept acts which are calculated in the ordinary course to cause harm, as in Wilkinson v Downton [1897] 2 QB 57], or which are done with reckless indifference to the harm that is likely to ensue, as is the case where a person, having recklessly ignored the means of ascertaining the existence of a contract, acts in a way that procures its breach. It may be that analogy with the torts which impose liability on private individuals for the intentional infliction of harm would dictate the conclusion that, provided there is damage, liability for misfeasance in public office should rest on intentional infliction of harm, in the sense that that is the actuating motive, or on an act which the public officer knows is beyond power and which is calculated in the ordinary course to cause harm. However, it is sufficient for present purposes to proceed on the basis accepted as sufficient in Bourgoin [SA v Ministry of Agriculture, Fisheries & Food [1986] QB 716 at 741], namely, that liability requires an act which the public officer knows is beyond power and which involves a foreseeable risk of harm. If misfeasance in public office is viewed as a counterpart to the torts imposing liability on private individuals for the intentional infliction of harm, there is much to be said for the view that, just as with the tort of inducing a breach of contract, misfeasance in public office is not confined to actual knowledge but extends to the situation in which a public officer recklessly disregards the means of ascertaining the extent of his or her power. However, that is not what was put in this case. The argument was that it is sufficient that the officer concerned ought to have known that he or she lacked power."
In Cornwall v Rowan (2004) 90 SASR 269, the Full Court of the Supreme Court of South Australia (Bleby, Besanko and Sulan JJ), after quoting the above passage in Mengel, explained that there are two possible forms of the element of malice. They stated (at [212]): "Thus it may be seen that the element of malice is satisfied either by proof of an actual intention to cause injury, sometimes referred to in the cases as targeted malice, (the first limb) or alternatively by proof of knowledge of invalidity or lack of power and knowledge that it would be likely to cause injury (the second limb). The second limb may also be satisfied if it can be proved that there was reckless indifference or deliberate blindness to the invalidity or lack of power and the likely injury. As will be seen, in this case we are not concerned with the application of the second limb, but only of the first. However, a question may arise as to whether, if targeted malice is proved but no other invalidity or lack of authorisation is established, this is also sufficient proof of the first element of the tort, namely an invalid or unauthorised act."
In Commonwealth v Fernando (2012) 200 FCR 1 at [110], the Full Court quoted the following passage from the judgment of Lord Steyn in Three Rivers, where his Lordship described the two possible forms of malice in the tort of misfeasance in public office (at 191): "The case law reveals two different forms of liability for misfeasance in public office. First there is the case of targeted malice by a public officer, ie, conduct specifically intended to injure a person or persons. This type of case involves bad faith in the sense of exercise of public power for an improper or ulterior motive. The second form is where a public officer acts knowing that he has no power to do the act complained of and that the act will probably injure the plaintiff. It involves bad faith inasmuch as the public officer does not have an honest belief that his act is lawful."
The DCT submitted that the above authorities demonstrate that for the second form of malice, it may be sufficient to prove that the public officer was recklessly indifferent to the invalidity of his or her act and to the likely injury that would follow. However, the DCT submitted that it is not necessary to decide whether reckless indifference is sufficient to establish the second form of malice. This is because the facts pleaded in the cross claim are allegations of actual or targeted malice (first form of malice) as his claim is based upon allegations of either bad faith or improper purposes.

[22]

G3 Acts of a public officer in purported discharge of his or her duty

The cross claimant contends that the DCT is a "public officer" for the purposes of the tort of misfeasance in public office and that the relevant conduct was carried out in the course of the exercise of the DCT's public functions.
The term "public office" has been given a wide meaning. In Leerdam v Noori (2009) 227 FLR 210 ("Leerdam"), Spigelman CJ said at [3]: "The concept of "public office" or "public officer" appears in various legal contexts, both statutory and at common law ... [citation omitted]. There is no authoritative statement of a test for determining what constitutes a public officer for purposes of the tort of misfeasance. Nor is one needed. In almost all cases the answer will be obvious."
In Leerdam it was held that a solicitor acting on behalf of the Minister for Immigration in the AAT did not occupy a position within the scope of the tort of misfeasance in public office.
In Edward Moses Obeid Snr v David Andrew Ipp [2016] NSWSC 1376, Hammerschlag J observed the following in relation to the requirement of the tort of misfeasance in public office that the defendant be a "public officer" (at [240]): "The tort is principally concerned with the abuse by the holder of a public office of a public power or one which must be exercised for the public good and which is attached to the office: Cannon v Tahche (2002) 5 VR 317 at 328 [28]. In Cannon v Tahche at 337 [49], the Court said: [49]…since the tort is essentially concerned with the misuse of a relevant power which is an incident of a public office, it follows as a matter of practicality that an office cannot be characterised as a public office for the purposes of the tort if no relevant power is attached to it. Put another way, an essential feature of such a public office is that a relevant power is an incident of it."
As I have observed, the parties agree that the ATO officers are public officers. In so far as third claim of the first misfeasance in public office is concerned I too consider that Jessie Agbola, Michael Johnston, Cindy Sandford, Marianne Rogers, Laurence Benjamin, Venus Shakuntala Lakshman, Desiree Armstrong, Grahame Tanna, Trudy Hobart and Robert Ravenello are public officers. However, as I have stated above, I do not find that the acts impugned can be attributed to the Deputy Commissioner in the discharge of his public duties. Notwithstanding these findings and in the event that I am wrong, I will continue to consider whether the cross claimant's claims in misfeasance has been made out.

[23]

G4 Application of Briginshaw -the seriousness of allegations

It is trite to say that the tort of misfeasance in public office involves very serious allegations. In Leinenga v Logan City Council [2006] QSC 294 ("Leinenga"), Mullins J observed at [64] that allegations that persons have committed the tort of misfeasance in public office is a very serious allegation, which is "not easily established". Schmidt J approved this observation at [59] in Chapel Road.
The cross claimant has made allegations of bad faith and improper purpose against a number of ATO officers. Because of the seriousness of the allegations involved in the tort of misfeasance in public office, and the consequences of such allegations, it follows that the principle in Briginshaw v Briginshaw (1938) 60 CLR 336, codified in s 140 of the Evidence Act 1995 (NSW), applies to these proceedings but only so far as malicious intent is concerned. In Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 ("Karajan"), Mason CJ, Brennan, Deane and Gaudron JJ explained at 449-450 that although the standard of proof in all civil litigation is proof on the balance of probabilities, "the strength of evidence necessary to establish a fact or facts on the balance of probabilities may varying according to the nature of what it is sought to be prove". Their Honours in Karajan explained that statements to the effect that "clear", "cogent" or "strict" proof is necessary where matters as serious as fraud are alleged were not directed to the standard of proof, but instead reflected the "conventional proposition" that members of society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a "court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct".
The Briginshaw principle is important. As the Full Court stated in Fernando at [130], the principle in Briginshaw means that if, on the facts found in this case, conflicting inferences are open and one of those inferences is favourable to the ATO officers against whom accusations of serious wrongdoing are made, this Court would not be satisfied that the cross claimant's case has been proved to the necessary standard. In Chapel Road Schmidt J at [55], [65] and [66] adopted a similar view, namely, that before it could be inferred that officers were acting with malicious intent, it was necessary for the cross claimant to establish that there were no other inferences that could be drawn of equal probability as to the officers' intention.
It is my view that the Briginshaw test applies in determining whether the DCT officers were acting with malicious intent.

[25]

G5(i) Credibility of the cross claimant

I closely observed the cross claimant as he gave evidence and was cross examined over a number of days. Senior counsel for the DCT submitted that the cross claimant's evidence ought not to be accepted unless it were corroborated by objective documentary evidence or was against his interests. Reluctantly, I have come to the same conclusion that where the cross claimant's evidence is corroborated or against interest, I should accept it, unless otherwise stated. I have also formed the view that I should treat his evidence on damages with caution as there was often no proper documentary evidence to support his claim. Some reasons for my approach are as follows:

In parts of his cross examination, the cross claimant was argumentative, and he sought to volunteer information, rather than answer the question he was asked. This occurred numerous times and it was necessary for this Court to explain to him the argumentative nature of his evidence. (T 313.31-34).
The cross claimant sought to give his evidence by reference to how he perceived it to be relevant to his case, rather than directly answer the questions asked. An example of this is when he was asked whether he was a qualified architect, and he avoided answering the question and then complained that he did not "understand the relevance". (T 271.30-44). He later admitted that he was not a qualified architect.
It became apparent from his cross examination that the cross claimant has at times been indifferent to the truth when required to disclose information about his financial circumstances. When asked about his application to BankWest for additional finance in relation to XX XXXX Road, Albion ("the Albion property") (BankWest application) (Ex 21), the cross claimant stated he was an "architect" who had been "employed" by iDraft Plans Pty Ltd for "3 years and 6 months". (T 325.1-3). The cross claimant agreed that all of that information was false. (T 326.43-327.20). He then attempted to justify his actions by saying that he "just wanted to get the application passed" (T 324.48-49) and that he "just wanted to get the loan approved, I told him whatever I had to, to get the loan approved." (T 328.11-12). This evidence indicated a willingness on the cross claimant's part to put forward information as to his financial circumstances that he perceived would serve his particular purpose at the particular time, regardless of the truth of that information.
In the same BankWest application, the cross claimant stated his income was $195,000 in personal PAYG income and $46,800 in rental income. His tax return for FY2011 (covering roughly the same time period, given the BankWest application was in June 2011), said that his income was $66,641. (Ex 12). The cross claimant sought to explain the discrepancy by suggesting that there had been a subsequent amendment to his FY2009 tax return. (T 329.28-34; T 330.30-35). An amendment to the cross claimant's FY2009 income tax return does not explain the discrepancy, since there is no reason why his income from two years prior would have been used in the BankWest application. Both his income from FY2011 (shown in the FY2011 tax return to be $66,641) and his FY2010 (shown in his FY2010 tax return (Ex 11, p 8) to be $50,284) would have been the more relevant information. In light of that, it can only be concluded that either BankWest or the ATO was provided with false information as to the cross claimant's income.
There were internal inconsistencies in the cross claimant's own evidence. On the one hand, the cross claimant asserted that he sold a property at XXXX Street, Waterloo ("the Waterloo property") during the course of the audit but before the September 2012 audit decision because he had "grave concerns" about what was going to happen with the ATO and he feared bankruptcy. (T 318.47-319.19). On the other hand the cross claimant had put forward evidence, as part of his claim, that after the September 2012 audit decision (when his fears were in fact realised and a tax debt arose) that he was actively seeking finance in order to purchase properties, such as a property in Surry Hills. This is also demonstrated by the letter from Mr Moses dated 3 November 2013 (JTB 7.319) which shows that around that time, the cross claimant was seeking finance to purchase a property at Parramatta Road, Camperdown. The cross claimant's evidence was that he anticipated borrowing about $2,000,000 to purchase that property.
The cross claimant gave evidence in relation to his psychological condition. When it was suggested to the cross claimant that in completing the checklists, it must have been obvious to him that if he wanted to obtain damages in this case, it was to his advantage to answer the question "almost always", the cross claimant asserted that at the time he saw Ms Duffy "damages weren't even on the radar" and that "My solicitor never even knew Ms Duffy or referred me to Ms Duffy. I went of my own free will." (T 263.12-28). This evidence was obviously incorrect. Ms Duffy's report is addressed to the cross claimant's solicitor, Mr Wojtasik. Her report records, in the first paragraph, that the cross claimant requested her to provide Mr Wojtasik with a: "[P]sychological assessment and report in relation to a claim lodged in the Supreme Court of Sydney against the Deputy Commission of Taxation (case number S355840 of 2015 regarding the impact of ATO actions on Mr Frangieh."

Thus, not only was the purpose of the cross claimant's visit to Ms Duffy to obtain a report to use in his claim for damages, but it was the cross claimant himself who conveyed that purpose to Ms Duffy.

[26]

G6 The first alleged misfeasance - the audit 2009 to 4 September 2011

The cross claimant's allegations concerning the first alleged misfeasance involve two aspects of the audit. The first aspect is that the decision to conduct an audit of the cross claimant (to "target" the cross claimant) was made for an "improper purpose". (X/C [11]) ("the decision to audit"). The second aspect is that the audit was undertaken in a way that no reasonable ATO officer would undertake it and that it was undertaken in bad faith. (XC [12]) ("the audit process"). The DCT denies these allegations. (DX/C [11]).
The cross claimant has pleaded six matters in support of his allegation that the decision to conduct the audit was made for an improper purpose, namely that the audit was undertaken:

F6(ii): on the basis that the cross claimant had assisted another taxpayer with managing a debt and other issues relating to the ATO.
F6(iii): on the belief that the cross claimant would have restricted and/or limited resources to defend himself against, or assert his interest in relation to ATO actions taken against him because his source of funds was largely borrowings.
F6(iv): on the belief that the cross claimant would have difficulty discharging his onus of proof in relation to the matters being raised over three years ago, knowing that he was unlikely to have kept records of the numerous loan account transactions for personal income tax purposes.
F6(v): knowing that the audit period was outside the statutory time frame for amending assessments.
F6(vi): on the belief that the public and/or an adjudicating body would be unsympathetic towards the cross claimant given the negative media attention against him.
F6(vii): to create and issue tax assessments that would cause severe disruption, burden, loss and damage to the cross claimant.

I shall deal with each of these allegations in turn.
The ATO officers alleged to have engaged in this first misfeasance in public office are Jessie Agbola, the submitting officer, Michelle Johnston, Cindy Sandford and Marianne Rogers. They are referred to collectively as the "audit officers". The DCT elected not to read the affidavits of Michelle Johnston, Cindy Sandford and Marianne Rogers. This meant they were not able to be cross examined. It is important to note that Ms Johnston was not involved in the decision to commence the audit. In the middle of 2010, she became involved in the audit. After 30 June 2010, Ms Agbola, who was the team leader, ceased to work on the "Western Jetz" case and Ms Johnston took on her role. (JTB 1.34). This is relevant to my later findings concerning the application of the principle in Jones v Dunkel.

[27]

G6(i) First aspect - the decision to conduct the audit and notification

By 2008, the unit within SME responsible for phoenix activities had been conducting an audit in relation to around 30 entities and individuals associated with George Cheihk and his business "QLD Group". This is recorded in a note dated 22 July 2008 written by Ms Marianne Rogers and the spreadsheet listing those entities. (JTB 1.12, 1.13).
On 23 and 24 September 2009, two officers (Jessie Agbola and Marianne Rogers) within SME exchanged emails and a case plan relating to the audit. (JTB 1.17). At that stage, the case plan referred to Western Jetz. The case plan had a section entitled "Reason for selection". It stated: "This case is a Spin off from QLD group of Companies under audit with Siebel case id 1-XXXXX. Western Jetz according to records obtained from the client is a Bare Trust which carried out one development project and made a profit which was distributed to the beneficiaries of the Trust. 2 beneficiaries declared the income received from the Trust in their income Tax returns, however, 2 other beneficiaries failed to declare their share of the distributions received. This case aims to bring to account the distributions received by [another taxpayer] and Mr Joseph Frangieh, their share of the Trust of the Trust distributions."
The ATO officers had a copy of the profit share agreement concerning Western Jetz in which the four joint venturers (called "participants" in cl A of the Introduction), including the cross claimant, were named. (JTB 1.15). From the case plan, the cross claimant was originally selected for the audit because of the information the ATO officers had received during the course of their audit relating to the QLD Group about Western Jetz, and the possibility that the cross claimant and another taxpayer had not declared income relating to Western Jetz, whereas two other taxpayers had.
On 20 October 2009, the ATO notified the cross claimant by letter sent by Ms Agbola under the name DCT Konza: "… your tax return for the year ended 30 June 2007 has been selected for audit in relation to income you have received from a Trust distribution. What you need to do To help us complete the audit we ask that within 28 days of the date of this letter, you provide information in relation to the following: 2007 Distribution of $721,177 received from Western Jetz Pty Ltd. If you find that you did receive assessable income from the above but did not include that income in your return, please provide a detailed explanation by 20 November 2009." (JTB 1.18). (Author's emphasis).
The cross claimant agrees that around October 2009, the ATO commenced an audit of him because of his involvement in one of Mr Cheihk's projects in 2007, the Western Jetz project. The cross claimant's position at that time was that he loaned Western Jetz over $500,000, which was repaid to his building company, In-Style Developments Pty Ltd, (Instyle Developments) plus interest in 2007. The cross claimant says that his accountant was aware of the loan and that he (the accountant) had reported the interest correctly to the ATO. The cross claimant now believes his accountant treated the interest as income of his building company, whereas it seems it should have been treated as his personal income. He says that his accountant later included the interest in his personal income tax return for a later year. (Aff, 9/12/2015, [10]-[12]).

[28]

G6(ii) Audit undertaken for improper purpose as it was on the basis that the cross claimant had assisted another taxpayer

The cross claimant alleges that "in the 2010 calendar year, if not earlier", ATO public officers had formed the view that:

The cross claimant had assisted Mr Cheihk with annulling his bankruptcy;
The cross claimant was responsible for entities with outstanding tax obligations and also had an outstanding tax obligation himself; and
An entity of which the cross claimant was a director had registered a second mortgage over a property in respect of which the ATO had issued a garnishee notice in relation to proceeds of sale. (X/C [11(1)]).

The cross claimant obtained a copy of the undated office minute (JTB 1.9) because, as he stated in an email to Ms Johnston on 18 May 2011 (CB 2.74), Ms Lewis accidentally sent it to him. The document emanated from the "Strategic Recovery" section of the Debt BSL. The subject of the undated office minute was "Security Deposit". Its purpose is stated as being "To provide background from approval to seek a security deposit for due payment of an existing or future tax related liability for the company Ripley Land Holdings Pty Ltd (RLH)."
So far as the cross claimant is concerned, this minute shows that he was never a director of RLH. The cross claimant had been mentioned because George Cheihk's statement of affairs, shows that he (Mr Cheihk) owes the cross claimant and associated entities the sum of $2,550,000. The undated office minute refers to the cross claimant's involvement after RLH had been issued with a notice of demand. At [25] to [28] it states: "25. On the 21 June 2010 a cheque was received by Brisbane Legal Services Branch (LSB) for the amount of $82,886.03, this being the balance of the November 2006 BAS & General Interest Charges (GIC). $32,886.03 was paid by Joseph Frangieh, $50,000 was paid by Eric Christofi. 26. On the 25 June 2010 the wind up application was withdrawn, 27. Joseph Frangieh has a number of entities with outstanding lodgements and debt to the Tax Office. Joseph Frangieh has an income tax debt of $154,713.21. 28. The Tax Office is currently [involved] in court proceedings with the company Instyle Developments Pty Ltd of which Joseph Frangieh is sole director. The proceedings relate to a Garnishee which attached to a sale of property for a third party on which Instyle Developments Pty Ltd registered a second mortgage at the last minute."
The DCT's recommended action concerned RHL lodging a security deposit had nothing to do with the cross claimant.
The DCT submitted that it is apparent that the purpose of the document was to outline the relevant background to the company RHL. This included identifying the company's compliance with its tax obligations and outlining the individuals and entities that appeared to have some association with the company in order to give consideration as to whether officers in the Debt BSL should exercise the power in s 255-100 of the Taxation Administration Act to request a security deposit from RHL.
The DCT also submitted that there are two particular aspects of the undated office minute which demonstrate that it cannot establish that the audit officers "targeted" the cross claimant for the audit because of assistance he had provided to another taxpayer, or because of any other issues the cross claimant had with the ATO. They are that it is apparent that the undated office minute was prepared no earlier than 12 July and that the office minute was generated within the Debt BSL not the SME BSL which conducted the audit.
The decision to commence the audit was made prior to 20 October 2009. On this date, the cross claimant was notified of the decision to audit the income he received from a trust distribution in the FY2007. At paragraph [16] the undated office minute refers to an amount being correct "as at 12 July 2010". There are other references in the document to events which occurred in the first half of 2010. Of particular relevance, in light of the allegation made, is the reference in [25] to the cross claimant having paid some of the BAS and General Interest Charge (GIC) liabilities of RHL on 21 June 2010. For an amount to be "correct" as at a particular date, that date must have occurred. It is my view that the undated office minute came into existence on or at some point in time after 12 July 2010. Therefore, there is no basis to conclude that the matters addressed in the undated office minute could have been the reason for the decision to conduct the audit.
It has not been argued that the addressees of the undated minute nor its author were involved in the decision to conduct the audit. It was made with the Debt BSL not the SME BSL. There is also no evidence that any of the ATO officers allegedly involved in the decision to conduct the audit saw the minute either before or at the time the decision was made.
In any event, the undated minute does not specifically assert that the cross claimant assisted Mr Cheihk with annulling his bankruptcy, rather it records that the cross claimant paid $32,866.03 towards the payment of the BAS and GIC of RHL.

[30]

G6(iv) Audit undertaken for improper purpose on the belief that be difficult for the cross claimant to discharge his onus of proof in relation to matters raised over three years prior

The third allegation of improper purpose is that the audit was conducted on the belief that the cross claimant would have difficulty discharging his onus of proof in relation to the matter being raised over three years prior, knowing that he was unlikely to have kept records of the numerous loan account transactions for personal income tax proposes.
The DCT submitted that there is no evidence that supports this allegation. In particular, there is no evidence that the audit officers had any knowledge, in September 2009 when the decision to conduct the audit was made, as to the cross claimant's record keeping practices.
According to the DCT, if the audit officers were aware that the cross claimant had failed to keep records in relation to transactions, conducting an audit when the officers were so aware could not amount to conducting an audit for an improper purpose. This is for two reasons.
Firstly, if such awareness could amount to an improper purpose, it would mean that ATO officers could never lawfully conduct audits of any taxpayer who fails to keep records.
Secondly, the cross claimant has described himself as a "builder and property developer". Therefore he is a person carrying on a business. All persons carrying on a business are obliged to keep records "that record and explain all transactions and other acts engaged in by the person that are relevant for any purpose of [the ITAA 1936]". (s 262A(1)). The records which must be kept are those relevant to ascertaining the person's income and expenditure. (s 262A(2)). They must be kept for a period of five years after the records were prepared or obtained, or the completion of the transactions or acts to which the records relate. (s 262A(4)).
The DCT further submitted that, in light of the legal obligation the cross claimant was under to keep records, it could not be concluded that the audit officers had an "improper purpose" by conducting the audit in circumstances where they believed it was likely the cross claimant had failed to keep records.
The ATO's initial request for information, which was made on 20 October 2009, occurred within the five year period, given that the relevant transactions occurred in FY2007. The documentation in relation to loan account transactions in and out of the Westpac account were relevant to ascertaining the cross claimant's income and expenditure.
In my view, the ATO's request for documentation was reasonable, given that the cross claimant had been in business for a number of years prior to the FY2007 and could reasonably be expected to properly comply with his record keeping obligations. The ATO officers may have had a belief that the cross claimant would have difficulty discharging his obligation to provide documentation in response to requests; however this cannot be improper given his obligation to retain them and provide them pursuant to a request in the course of an audit.

[31]

G6(v) Audit undertaken for improper purpose knowing that it was outside the statutory time frame for amending assessments

Section 170(1) of the ITAA 1936 prescribed the time limits within which the Commissioner was authorised to amend assessments, measured from the day on which the Commissioner gave the original assessment. Section 170(1), Item 1 provided that the time limit was two years for individuals, but that provision did not apply if the individual carried on a business (that was not a small business entity), or was the beneficiary of a trust. If s 170(1), Item 1 did not apply, then the time limit was four years. (s 170(1), Item 4). In either case, the Commissioner was empowered to amend an assessment "at any time" if he or she was "of the opinion that there has been fraud or evasion". (s 170(1), Item 5).
The original assessment was issued on 17 September 2007. (JTB 1.14A). The audit officers proceeded upon the basis that the four year time limit in s 170(1), Item 4 was the relevant assessment period.
First, in the audit decision (dated 4 September 2012, (JTB 5.227), there is a statement noting that "In your case, the audit started after the halfway point in your amendment period on 23 September 2009." For 23 September 2009 to be the halfway point in an amendment period that commenced on 17 September 2007, the amendment period must have been four years. (There is a statement to similar effect in the ATO's position paper concerning the audit, issued on 12 May 2011.) (JTB 2.70).
Secondly, in an email dated 30 August 2010 (almost three years after the original assessment), in the context of considering whether the cross claimant's case ought to be referred to serious non-compliance rather than being dealt with by SME Phoenix team, Ms Johnston stated "We still have time on our side for POR [period of review] … The two year exclusion does apply to this client. The client is conducting a business of some sort and is probably not a STS taxpayer." (JTB 1.50).
Thirdly, a file note of Ms Sandford, one of the audit officers, dated 15 August 2011 (JTB 3.100) contains the statement "2007 POR [period of review] about to expire". For the period of review to be about to expire in 2011, the audit officers must have been proceeding on the basis that the period of review was four years.
In light of this material, the factual allegation that the audit officers knew that the "audit period" was outside the statutory time limit fails. The evidence establishes that when the audit officers were conducting the audit, they were proceeding on the basis that the four year time limit in s 170(4) of the ITAA 1936 was the relevant assessment period (in the absence of an opinion being formed as to fraud or evasion).
Even if an audit period was, to the knowledge of audit officers, outside the statutory time limit on amending assessments that is ordinarily applicable, it would not necessarily be improper to decide to conduct an audit. This is because, if the Commissioner is of the opinion that there has been fraud or evasion, there is no time limit to amending assessments. It may only be through the carrying out of an audit that such fraud or evasion is detected, or that information is obtained such that an initial suspicion of fraud or evasion is confirmed.
The parties agree that the relevant period is four years from the date of issuance of the notice of assessment. As the assessment was issued on 17 September 2007, the relevant period expired on 17 September 2011. On 23 September 2009 the decision to conduct the audit was made and on 20 October 2009 the cross claimant was notified of this decision. Therefore the decision to commence the audit was made well before the expiration of the statutory time frame for amending assessments under s 170 of the ITAA.

[32]

G6(vi) Audit undertaken for improper purpose on the belief that the public and/or adjudicating body would be unsympathetic to the cross claimant given the negative media attention

The cross claimant alleges that the audit officers were aware of a media article published in October 2007 entitled "Cocaine dealer director of Queensland property companies" in which reference was made to George Cheihk. (JTB 1.7l; XC1. The cross claimant's submissions do not elaborate on this pleading.
In cross examination, the cross claimant was asked about a similar newspaper article. (JTB 1.6). He confirmed that article about him, such as that he and his brother had pleaded guilty to cocaine supply charges and were paroled in 2003. He confirmed that his father was shot dead in December 2003 and that his father's death was linked to a wild car chase involving his brother Raymond. (T 257.4-17). Thus, the allegations published in the newspaper article about the cross claimant were largely true.
The DCT submitted that there is no evidence to support the allegation that the audit officers held a belief that, because of negative media attention, either the public or an "adjudicating body" would be unsympathetic towards the cross claimant and that such a belief was their motive for deciding to conduct the audit.
The DCT submitted that the evidence demonstrates that the audit officers considered information concerning the cross claimant's criminal background and his links to others with a criminal background to be relevant to their safety, not to whether to conduct the audit, or to the substantive issues in the audit. The DCT relied on the following documents in support of this: 1. In a case plan prepared by Ms Johnston on 22 July 2010 and updated on 11 August 2010 (JTB 1.37), in a section entitled "Operational Risks", Ms Johnston listed information concerning the cross claimant having spent time in custody, and also information as to the criminal background of his relatives and associates. Then, Ms Johnston listed some "mitigation strategies". These included using the ATO's general phone number and extensions rather than direct lines that would identify the office location, conducting all interviews at ATO offices, and arranging for a criminal record check. 2. In an email to Ms Threlfall, the ATO's Property Operations Site Manager at Sydney on 17 May 2011 (JTB 2.73), Ms Johnston noted that she was going to be conducting an interview with a client, and then set out similar information concerning the cross claimant. Under the heading "Concerns", Ms Johnston wrote: "security and safety of myself and my colleague when interviewing this client". Ms Threlfall responded that a security guard would be placed outside the interview room. 3. In a meeting maker email sent on 27 July 2012, regarding a planned meeting with the cross claimant on 9 August 2012, Ms Johnston set out similar information regarding the cross claimant and his family and associates, and then said, "I have considered OHS when dealing with this taxpayer". She then set out various security arrangements that had been made in relation to the interview. (JTB 4.214).
The DCT further submitted that the other way in which the cross claimant's criminal connections were treated as relevant was because those connections raised the possibility that the "Serious Non Compliance" (SNC) BSL may either have information about the cross claimant's connections or background (which could assist in addressing any security concerns), or SNC officers may themselves have been conducting inquiries into the cross claimant. It is clear that this is the context in which Ms Johnston sent an email to SNC on 20 August 2010. (JTB 1.44).
In light of the above, the DCT submitted, there is no basis for the allegation, made by the cross claimant that Ms Johnston (or anyone else) treated the cross claimant's criminal connections as being relevant to the substantive issues in the audit. (T 43.28-44.7).
In my view there is no evidence that demonstrates that the ATO officers undertook the audit on the belief that the public and/or an adjudicating body would be unsympathetic towards the cross claimant given negative media attention. The question is therefore whether such a state of mind can be inferred from the conduct of the ATO officers from the available evidence.
The cross claimant was notified of the ATO's decision to audit on 20 October 2009. When the decision to audit was made there was no evidence to support the allegation that the audit officers had considered the adverse media attention the cross claimant had received at the time they determined to audit his affairs. The DCT first became aware of these allegations made in the newspapers on 11 August 2010, a time well after the audit commenced. In these circumstances, it is my view that the audit was not conducted by the audit officers Ms Agbola, Ms Johnston, Ms Sandford and Ms Rogers with the state of mind or belief that the public and/or an adjudicating body would be unsympathetic towards the cross claimant, given the cross claimant's negative media attention. This argument fails.

[34]

G6(viii) Second aspect - conduct of the audit

The second aspect of the first alleged misfeasance involves the manner in which the audit was undertaken. The cross claimant pleads:

Ms Agbola, Ms Johnston, Ms Sandford and Ms Rogers were not authorised to issue any tax related assessment to him for FY2007 in bad faith or because the FY2007 was outside the legislative time period for issuing amended assessments on 1 October 2012.
Jessie Agbola, Michelle Johnston, Cindy Sandford and Marianne Rogers undertook the audit in such a way that no reasonable person acting in the capacity of an ATO public officer performing that task would have undertaken, was not a bona fide attempt to ascertain his tax position and was undertaken in bad faith.
Ms Johnston, Ms Sandford and Ms Rogers issued to the cross claimant, in bad faith and outside the legislative time period, an amended assessment for FY2007, the notice dated 1 October 2012 ("the amended assessment"), an administrative penalty assessment for FY2007 ("the administrative penalty assessment") and a corresponding assessment of shortfall interest charges ("the SIC assessment") (collectively "the assessments") as a result of their audit activities ("the first misfeasance"). The tax liability created by issuing the assessment amounted to $3,243,732.93. This conduct, together with the state of mind of the audit officers in commencing and carrying out the audit, comprised "the first misfeasance in public office".

Prior to addressing the particular allegations made in the cross claim, it is useful to set out the following account as to how the audit progressed. This involves addressing four matters. First, an account of the information and evidence required by the audit officers, the information and evidence provided by the cross claimant or his tax agents during the audit, and the information the cross claimant provided after the audit, during the objections process and Tribunal proceedings following the audit. Secondly, an explanation of the evidence regarding the views expressed by ATO officers concerning the statutory declarations. It should be noted the ATO officers' views occurred during the period of the second alleged misfeasance. They are discussed at the first heading of point G7(ii). Thirdly, an account as to the formation of an opinion, in June 2012, that there had been fraud or evasion; and fourthly, an outline of the evidence demonstrating the involvement of other ATO officers in these processes.

[36]

Initial request for information

In response to the ATO's letter dated 20 October 2009 (JTB 1.18) notifying the cross claimant of the audit, the cross claimant's tax agent at the time, Mr Rizkallah, sent a letter dated 30 October 2009 (JTB 1.19) stating that:

The cross claimant had loaned $510,000 to the Western Jetz project;
The cross claimant received only $700,000, not $721,177;
The cross claimant received $700,000 on 2 May 2007, of which $510,000 was return of principal and $190,000 was interest which was assessable income;
The interest of $190,000 had been paid to the cross claimant's company, Instyle Developments Pty Ltd ("Instyle"), and treated as Instyle's income in its FY2007 income tax return; and
Some of the interest did end up being treated as the cross claimant's income, but $109,000 of it had not, and so the cross claimant's FY2007 income tax return would be amended to reflect those changes.

On 9 November 2009, the ATO wrote a letter to the cross claimant (sent by Ms Agbola under the name of DCT Konza), explaining that it had a copy of the profit share agreement, and requesting that the cross claimant provide within 14 days: 1. documentary evidence such as bank statements verifying the contribution of $510,000 to Western Jetz; and 2. a copy of the loan agreement between the cross claimant and Western Jetz. (JTB 1.21).
On 20 November 2009, Mr Rizkallah sent a letter to the ATO enclosing a copy of a loan agreement dated 15 September 2006 between the cross claimant as lender and Mr George Cheihk and Mr Con Bassili ("the borrowers"), in which the borrowers promised to pay the cross claimant the amount of $510,000 plus interest. (JTB 1.22). This was requested in (1) above.
So far as request (2) above is concerned, Mr Rizkallah enclosed a statement from a Westpac Bank account related to an "Equity Access Loan" account in the cross claimant and Sharon Frangieh's names (the Westpac account) for the period 11 August 2006 to 13 November 2006, which included a withdrawal of $350,000 on 19 September 2006. That withdrawal entry does not contain further details. There is a handwritten note that reads "Bank cheque to Lloyd Tan." It appears that the ATO accepted the explanation that this sum of $350,000 was part of the $510,000 loan to Western Jetz. (JTB 1.33). Mr Rizkallah stated that that withdrawal represented part of the loan amount, and that the balance of the loan amount was withdrawn from another account which had since been closed. The Westpac statement also recorded a number of deposits in the period covered by the statement.
The Westpac account statement for the account in the name of Qld Pty Ltd shows that on 2 May 2007 a debit entry in the amount of $700,000 specifying "WITHDRAWAL - internet online banking… PAYMENT Loan Western Jetz". Handwritten next to this entry is "Joe Frangieh". This statement of QLD Pty Ltd was provided to the ATO with Mr Rizkallah's letter dated 30 October 2009. (JTB 1.20).
On 24 February 2010, the ATO wrote to the cross claimant acknowledging that the cross claimant had provided a bank statement in relation $350,000 of the $510,000 that he had loaned to Western Jetz. The ATO required bank statements to show payment of the balance of $160,000 of that loan and requested details of the bank account(s) which Mr Rizkallah had said were closed (in relation to that balance of the loan amount). In addition, the ATO also noted that the statement from the Westpac account, which Mr Rizkallah had provided in his letter of 20 November 2009, contained 14 deposits totalling $497,218, and requested "details of the source of the funds and an explanation of why each deposit was made to the account". (JTB 1.24).
Counsel for the cross claimant suggested that this letter from the ATO showed that, having received excerpts from a bank account that "point to the existence of a loan", the "Commissioner changes tack". (T 36.31-37). I do not think so. The ATO letter was still seeking information (bank statements) about the loan the cross claimant said he made in relation to Western Jetz, because the distribution was $700,000 yet only the sum of $510,000 had been explained. That meant that $160,000 in withdrawals was still missing from the cross claimant's account. However, the cross claimant had provided new Westpac bank statements that showed 14 new unexplained deposits. This letter was seeking information in relation to the new unexplained deposits made into the cross claimant's account.
On 10 March 2010, the cross claimant personally sent a letter to Ms Agbola, in response to her letter of 24 February 2010. In that letter, he:

Advised that he was in the process of appointing a new accountant.
Asserted that the signature on the Western Jetz profit share agreement was not his. This of course is a very serious allegation.
Stated that he paid the $350,000 he loaned to Mr Cheihk to a Mr Lloyd Tang, who was a person to whom Mr Cheihk owed money. (This information had already been provided to ATO and this explanation has been accepted).
Stated that he still needed more time to obtain information as from which bank account the remaining $160,000 he said he lent to Western Jetz was debited.
Purported to provide explanations for the deposits to the Westpac account.
Enclosed several bank deposit slips and copies of cheques in relation to some of the deposits identified in the ATO's letter.
Acknowledged that an amendment was required to the FY2007 income tax return. (JTB 1.27).

I accept that the cross claimant was initially selected for the audit because it appeared to ATO officers that he was one of four beneficiaries in the Western Jetz profit share agreement, and that while two other beneficiaries had declared income received, the cross claimant and the other beneficiary had not.
Not all of the cross claimant's explanations of transactions were supported by statements or source documents he disclosed but an explanation as to $350,000 had been accepted by the ATO. The cross claimant had also disclosed 14 new deposits made to his Westpac account that remained unexplained.

[37]

The decision to expand the audit

On 17 March 2010, an ATO file note was created. It recorded a meeting between Ms Agbola and Ms Jones where they decided to expand the audit of the cross claimant to cover the whole of the FY2007. The file note records, "not eligible [for short period of review] b/c recd trust distn." The note records that the cross claimant would now be requested to provide all bank statements for FY2007. (JTB 1.28).
On 22 March 2010, Ms Agbola sent an email to Ms Sandford, Ms Jones and Ms Rogers about the audit. (JTB 1.30). In her email, Ms Agbola referred to a case workshop held on 17 March 2010, and as a result of that workshop further information was requested from the cross claimant concerning the loans he said he made, and expanding the audit to cover the whole of FY2007. Ms Agbola stated: "Your Advise ● Conduct RTA searches on the transaction he indicated were car sales; ● Request for more evidence from Mr Frangieh on the remaining transactions i.e. regarding the loans he made to friends and family members supporting documentation showing when the loans were made, evidence from Sharon Frangieh on the course of $3000 cash deposited in the account on 3 October 2006. ● Extend the scope of the audit to cover the whole year and ask Mr Frangieh for all his bank statements for 2007 income year from all banks and advise Mr Frangieh we are extending the scope of the audit to cover all income for the 2007 income years. ● Request Mr Frangieh to provide evidence on the remaining $160,000 loan made to Western Jetz in relation to the $700,000 distribution he received. My views ● As 10 out of the 14 transactions relate to amounts under $20,000 we should make a determination and accept his explanations for those transactions or advise him of our decision if we intend to assess him on those amounts rather than asking for further information and explanation which will only delay the audit process. Moreover we work in the SME [small to medium enterprise] market and pursuing such issues may fall outside the SME market, I think. We could follow up on the other amounts and ask for further evidence. … In conclusion my point is, we focus on the main audit issues and not get side tracked. However you are my Technical Advisors and I don't have a problem following your advice and suggestions but I thought I should express my views on the case." (Ms Agbola's emphasis).
Here Ms Agbola was suggesting that they not focus on deposits to the Westpac account that were "smaller amounts" (that is, less than $20,000) but rather focus on the main audit issues. Ms Agbola was not suggesting that even those smaller amounts would not be treated as income; instead, she was suggesting that rather than undertaking further investigation, they either accept the cross claimant's existing explanations (and not treat them as income), or go ahead, without providing the cross claimant further time to provide supporting evidence, and assess those amounts as income.
Ms Agbola then had a change of mind about the approach the ATO should take. On 24 March 2010, she emailed Ms Rogers, Ms Jones and Ms Sandford attaching a briefing document. This briefing document was prepared in response to Ms Rogers' request for more information and analysis from Ms Agbola on 23 March 2010 so that Ms Rogers could consider the views Ms Agbola had expressed in her email of 22 March 2010. (JTB 1.31).
In the briefing document, Ms Agbola concluded by stating that she would "like to humbly redraw" her earlier comments and views so that they could go ahead with the plan of investigating all transactions for the period. The briefing document also commented upon the issue of compliance history. Ms Agbola noted that: 1. The cross claimant is up to date with his lodgement of tax returns. He has an outstanding tax debt of $81,056.75 relating to his FY2009 income tax return; 2. The cross claimant's company, Instyle Developments, had an outstanding tax debt, in respect of which the cross claimant was working with Strategic Debt Recovery BSL; and 3. Earlier in the audit, she had been asked by Ms Jones to conduct a profile of the cross claimant to determine if there was evidence of Phoenix activity. She conducted the profile and there was no evidence of Phoenix. (JTB 1.31, 1.32 and 1.33).
On 30 March 2010, the cross claimant was notified by letter that the scope of the audit had been extended to cover all of his income for FY2007. (JTB 1.32). He was also requested to provide bank statements for all bank accounts he held for FY2007. (JTB 1.32).
On 31 March 2010, a notice pursuant to s 264 of the ITAA (s 264 notice) was issued by Ms Rogers under the name of Greg L Williams to the cross claimant. That notice required the cross claimant to provide information concerning the source of $160,000 the cross claimant said he had loaned to Messrs Cheihk and Bassili. (JTB 1.33).
On 24 June 2010, Ms Johnston emailed a case up load for the audit of the cross claimant, which she described as a "spin off from Western Jetz case" to Ms Rogers. (JTB1.35). Previously the audit of the cross claimant was conducted in a case called "Western Jetz", which related to both the cross claimant and the other taxpayer who had not declared income from Western Jetz. This was the first involvement of Ms Johnston in the cross claimant's tax audit.
The scope of the audit was extended to cover all of the cross claimant's income for FY2007 because Ms Agbola, Ms Rizkallah and Ms Sandford were of the collective view that the Westpac account statement Mr Rizkallah provided to the ATO on the cross claimant's behalf showed numerous unexplained deposits.
On 27 July 2010, the cross claimant was advised that Michelle Johnston was the auditor responsible for the FY2007 income tax audit. (JTB 1.38). Ms Agbola's involvement as the audit officer came to an end and Ms Johnston became responsible for this expanded audit. It appears that there is a short overlap of about three weeks when both Ms Agbola and Ms Johnston were involved in the expanded FY2007 tax audit.
On 4 August 2010, Ms Johnston emailed the cross claimant's tax accountant, Mr Mascari of SJ Sissine & Co, setting out details she requested in relation to his client's 2007 income tax assessment. (JTB 40).
On 9 August 2010, Ms Lewis of Strategic Recovery BSL asked Ms Johnston to contact her "before doing any further action on Frangieh - including having a meeting with him." (JTB 1.41). In a further email on the same day, Ms Lewis sent details of an email link to Ms Johnson. (JTB 1.42). So as at 9 August 2010, Ms Johnson was obliged to contact Ms Lewis before taking any further action in relation to the cross claimant.
On 11 August 2010, Ms Johnston, in the SME Phoenix case plan set out the reasons the cross claimant was selected as: "Client has failed to include income distribution from Western Jetz Project. Further explanation and evidence is required for transactions to the personal bank account of the client and money on deposit with Kevin Barnes."
Under the heading "Operational Risks - Security" is set out that "The client was held in custody for ??? possible criminal activities" and set out two business associates and two family members possibly directly or indirectly involved in illegal activities. (JTB 1.37). (Emphasis as in original).
On 12 August 2010, Ms Johnston wrote to Mr Mascari. (JTB 1.43). He set out the material that had already been provided by the cross claimant or his previous tax agent, and then added: "In addition to the above your client will need to provide explanations and evidence of all transactions in all the bank accounts held for the above period. For example, your client has explained deposits to the loan account above where he has indicated that amounts deposited are the sale of motor vehicles. The example of the type of evidence required would be RTA transfer slips, registration numbers, VIN number, full name and address of the person who purchased the vehicle, details of how the motor vehicle was transported to the purchaser, invoices for freight etc. Where a deposit is the repayment of a loan, examples of the details required would be copies of any loan agreement indicating the name/s of the party/s, terms of loan and the relationship to the client."
Ms Johnston also advised Mr Mascari of a tentative interview with him and the cross claimant to be held on 27 August 2010 at 11.00 am. There is no evidence that Ms Johnson contacted Ms Lewis to consult her before going ahead and writing to the cross claimant's accountant and setting up a tentative interview. Ultimately this proposed interview did not go ahead.
On 20 August 2010, Ms Johnston had a telephone conversation with Mark Vale, team leader, Risk Strategy & Intelligence, Serious Non Compliance ATO. She followed up by way of email to Mark Vale giving details of the cross claimant, two business associates and two family members possibly directly or indirectly involved in illegal activities and sought advice as to: "1. if SNC plan to undertake or are undertaking any audit activity on the client. 2. any intelligence on the above named 3. or any other information that I should know about." (JTB 1.44).
Here Ms Johnston does not specifically refer to any media reports concerning the cross claimant in this email.
On 24 August 2010, Mark Vale sent an email to Ms Johnston, Ian Cameron and Sam Simpson regarding an SNC intel database search. He advised Ms Johnston: "I've checked both of our SNC intelligence databases using a combination of searches and there are no records held for Joseph FRANGIEH, his address or enterprises. Based on this I'm assuming that no SNC Audit activity is planned for FRANGIEH. I have however sent a copy of my response to Ian Cameron (SNC Audit manager NSW) and Sam Simpson (SNC Organised Crime Project) - just to make sure that we've covered off on all bases." (JTB 1.44).
On 26 August 2010 at 11.48 am, Ian Cameron, Director Audit (NSW) SNC Audit & Investigations advised Mark Vale and Ms Johnston: "This matter has significant organised crime links and would not be appropriate for any area but SNC. Michelle could you please refer your data collected to date to SNC via a Seibel referral." (JTB 1.47).
On 26 August 2010, Ms Johnston emailed Ms Rogers team leader. She recorded the course of action suggested by Ian that it was appropriate of SNC to deal with the Frangieh matter. Her suggestion as to the way forward was: "My suggestion on the way forward with this case is:- * Initially no interview to be conducted with the client. * proceed with the raising default assessments. The client and his representatives have failed to supply the information in a timely manner. They have continually requested to change interview appointment dates and insisted that the interview be conducted at the TAG's office. Reason being the client would find it daunting to attend an interview at the ATO. It had been explained to the TAG that it is office procedure that interviews conducted for this type of audit are conducted at ATO offices. Perhaps this is a form of hindrance engaged by the client and his TAG. Note the client has had three (3) TAG in the last six months. I don't know if this client is a Phoenix operator. By undertaking my suggested course of action will allow me to finalise the case, hopefully sooner, and move on to doing other Phoenix audits. What are your thoughts?" (JTB 1.48).
On 30 August 2010, Ms Johnston sent an email to Ms Rogers saying that she thought about her (Ms Johnston's) earlier email and considered that her suggested way forward was too harsh. Ms Johnston's new suggestion was to give the cross claimant more time to produce documents, although she observed that this did generally prolong the audit. Her suggestion was: "… We still have time on our side for POR [period of review]. The audit is one the 2007 Year the 2007 issued on 17/09/2007. The two year exclusion does apply to this client. The client is conducting a business of some sort and is probably not a STS tax payer. … … If the client and the TAG fail to cooperate, then I feel that we should proceed with the harsher line, including referral to SNC IHP for failure to comply with the Notice." (JTB 1.50).
On 31 August 2010, Ms Johnston emailed Sam Simpson of SNC and advised him that Ian Cameron suggested that the SNC undertake a risk assessment of the cross claimant and she provided some background. (JTB 1.51). She recorded: "A comprehensive audit commenced on the client under the Western Jetz (Siebel case id 1-1QZ1M6N) on 20 October 2007. Initially the audit was for a specific issue - the distribution from a profit share arrangement. As a result of questions asked in providing evidence of payments to and from the profit share arrangement, the auditor at the time extended the scope of the audit to the entire 2007 year. Information was requested from the client both formally and informally. The client has failed to provide all the information requested."
Lastly, Ms Johnston requested Mr Cameron to undertake checks of the cross claimant with the Australian Crime Commission and NSW State Police.
On 31 August 2010, Ms Johnston sent an email to the cross claimant's tax agent, Sid Sassine, confirming that she agreed to granting an extension of time to 17 September 2010 in order to provide information and documentation (but noting that such extension did not apply to the s 264 notice). (JTB 1.52). Here Ms Johnston is acting favourably to the cross claimant by agreeing to an extension of time to provide information.
On 17 September 2010, Mr Mascari provided a detailed reply (including many attachments) to Ms Johnston. (JTB 1.53). In his email, Mr Mascari:

Stated that the cross claimant says that his signature on the Western Jetz Profit Share Agreement was forged.
Acknowledged that amendments were required to the cross claimant's (and InStyle's) income tax returns in order to properly reflect the $190,000 in interest income the cross claimant conceded he had received from Western Jetz.
Listed a series of withdrawals from the Westpac account which, it was asserted, formed the $510,000 loaned to Mr Cheihk (although Mr Mascari acknowledged the withdrawals nominated totalled more than $510,000).
Referred to each of the deposits to the Westpac account in the period September 2006 to November 2006 in respect of which the ATO had previously requested explanations on 24 February 2010 and some had been given.

The attachments to Mr Mascari's email were as follows:

A number of the attachments were statements for the Westpac account to cover the entirety of FY2007.
Copies of Mr Rizkallah's letters and attachments provided in late 2009.
Copies of the bank deposit slips and cheques that the cross claimant had provided on 10 March 2010.
Documents relating to Western Jetz, including the Profit Share Agreement and documents relating to the sale of a property by Western Jetz that settled on 1 May 2007.
A page from a statement for the Westpac account, showing the withdrawal of $350,000 paid to Mr Lloyd Tang. This document had already been supplied to the ATO on 20 November 2009.
A fax from Westpac dated 14 September 2010 stating that: "However, there is a delay in the process and the investigations are still ongoing. Currently, we are only able to provide information for transactions made for the year 2006."

Much of this information had already been provided to the ATO.
On 17 September 2010, Ms Lewis sent an email to the cross claimant's accountant, Mr Mascari, in which she set out how much the cross claimant owed for his PAYG liability based on his FY2009 tax returns and the amounts outstanding in relation to InStyle Developments Pty Ltd. From this it appears that Ms Lewis was concerned with the cross claimant's FY2009 tax return and the amounts outstanding in relation to Joseph Frangieh AFT GJN Discretionary Trust. She noted that there were three other entities but there was no outstanding tax liability for them. (JTB 1.55).
On 20 September 2010, Ms Johnston emailed Mr Lewis stating: "Just letting you know that I have received a considerable amount of information and documentation from Frangieh's TAG. It will take some time to go through the email and the attachments. If [you] required any information or documentation from the client please check with me, as I may have the information you require. I will notify you with a summary of the details I have received, shortly. Please consult with me before you take any action on this client." (JTB 1.56).
From the previous two emails, it appears that Ms Lewis was involved with the cross claimant's tax assessment FY2009. Ms Johnston was concerned with the cross claimant's tax assessment for FY2007. They shared information so even though Ms Johnston does not appear to have cooperated with Ms Lewis as at 9 August 2010, on 17 September 2010, a date when she received a large amount of financial information from the cross claimant's accountant, she contracted Ms Lewis and updated her on these details. Now Ms Lewis was to contract Ms Johnston before taking any action in relation to the cross claimant.
On 11 November 2010, Ms Johnston sent an email to Ms Rogers in which she stated: "Yesterday I spoke to Jason [of SNC] and explained that there is no Siebel referral. I am only seeking any information on Joseph Frangieh from the NSW State Police or the Australian Crime Commission. Jason felt that given the business associates of Frangieh that it would be more appropriate for the client to be audited by SNC. Ian Cameron has stated 'it would not be appropriate for any area but SNC'. I said to Jason that Joseph Frangieh may not be involved in any criminal activities even though he has links to very colourful crime individuals. I think they have misunderstood me. Perhaps you can have a discussion with SNC if don't mind." (JTB 1. 59).
This email suggests that at this stage Ms Johnston had not formed the view that the cross claimant's case was appropriate for SNC, nor that the cross claimant was involved in criminal activities despite his links to "colourful crime individuals". This was notwithstanding the views of Ian Cameron and Jason (of SNC). Here Ms Johnston interpreted this issue favourably to the cross claimant.
On 2 May 2011, Ms Johnston emailed Ms Sandford in relation to the draft position paper. The purpose of the position paper was to provide the cross claimant with a summary of the ATO's position in relation to his affairs which were subject to the audit so that he could comment before the audit was finalised. It was not reflective the ATO's final position; it was merely a reflection of the ATO's views at a point in the audit. In her email, Ms Johnston stated: "… there are two things that I am not comfortable with: 1. Unexplained deposits to the joint bank account - I have assessed the total credits to the account to only Joseph Frangieh. I have explained that he stated that his consultancy fees are credits to this account. 2. Penalty I have recommended 25% a BPA [base penalty amount] be imposed. However do you think that recklessness is more appropriate in the case given the sizeable amount of the tax shortfall., Bearing this in mind the penalty would then be around the $950,000, - EL 2.1 approval and notify the SES [Senior Executive Service] of the adjustments. Or alternatively, should we increase the BPA by 20%. The taxpayer has obstructed the ATO in its enquiries during the audit. The tpr has failed to comply with S264 notice of information and several requests for that same information. I guess I have sorted written up the report for the increase in the BPA. What are your thoughts?" (JTB 1.63).

[39]

On 18 May 2011, Ms Johnston emailed the cross claimant indicating that if he had further information and documentation to provide, he should: 1. Identify what points of the position paper the information and documentation related to; 2. Identify what evidence or proof he currently had and would provide, such as bank statements, invoices or other third party documentation; 3. Advise what other evidence or proof he anticipated having. (JTB 2.74).
On 18 May 2011, the cross claimant in a flurry of activity sent Ms Johnston seven emails with attachments. At this time he says he is feeling "vindicated" and "targeted". These emails are as follows.
Email 1 - sent 5.27 pm - attached the undated office minute: The cross claimant explained his personal situation, including that his father had been murdered in December 2003 and that he was responsible to care for his mother and sisters. The cross claimant alleged, "I really think that you have treated me unfairly and very harshly based on a picture that has been portrayed of me to you." By reference to the undated office minute, he said he felt he was "being vindicated and bought into a circle were the ATO has targeted me". The cross claimant also implored Ms Johnston to "look into my matter closely and fairly as you have not considered and debits that have gone out of my account… if you add them up they will most likely be even…". He said he had sought out cheque butts written to people who had later returned that money. (JTB 2.74).
Email 2 - sent 10.26 pm - attached budget documents, draft dealership documents, an email about an invoice and documents relating to "Soul Shop": The cross claimant asserted that he entered into a dealer agreement for $500,000, and that was returned to him "in increments and I can recall one on 12/06/07 and another deposit shortly after". There was no explanation, nor is it clear, as to how these attached documents related to deposits in the Westpac account. On the copy of the email in the audit file, there is a yellow sticky note with the handwritten comments, "How does this relate to the trx 2006/7" and "no withdrawal from Equity Access A/C". (JTB 2.75).
Email 3 - sent 10.47 pm - attached a document relating to "CJG Property Group" (an Ipswich property settled on 19 June 2007): The cross claimant stated that he used his line of credit "to cover deposits of my old business partners in this entity and they would repay me once they had a settlement occur". There was no explanation as to how the attached documents related to deposits in the Westpac account. (JTB 2.76).
Email 4 - sent 11.05 pm - attached a document relating to "Quintatter" (property settled on 21 August 2007): There was no explanation as to how the attached documents related to deposits in the Westpac account. On the copy of the email in the hard copy audit file there is a sticky note with the comment, "settlement 28/8/07. How does this relate to trx 07YR". (JTB 2.78).
Email 5 - sent at 11.09 pm - attached documents relating to "drawdown" to Collingwood Park, to make a payment to Lloyd Tang: The cross claimant stated that Mr Tang was a mortgagee over QLD Group and that the cross claimant paid $500,000 toward the debt owed to Mr Tang, and he would be paid back via the sale of a property on XXXX Road, Redbank Plains. There was no explanation as to how these documents related to deposits in the Westpac account. On the copy of the email in the audit file, there is a yellow sticky note with the handwritten comment, "not in the audit period, 21/1/08". (JTB 77).
Email 6 - sent 11.15 pm - attached documents concerning Noble Capital and Mr Prestia as well as bank statements for transactions in December 2007: The cross claimant stated that Mr Prestia had a finance company that provided bridge loans and the cross claimant became involved in assisting Mr Prestia lend money, which Mr Prestia then returned. There was no explanation as to how the attached documents related to deposits in the Westpac account during FY2007. On the copy of the email in the hard copy audit file, there is a yellow sticky note with the handwritten comment, "2008 trxs. How does this relate to the trxs." (JTB 2.79).
Email 7 - sent 11.26 pm - attaching "Asset & Liability Statement": The cross claimant said the attachment related to "AnL which were promised to me by QLD group which led me to the continuing capital lending… Unfortunately none of these came to fruition and have now been placed in receivers hands." There was no explanation as to how this document related to deposits in the Westpac account. (JTB 2.80).
On 19 May 2011, Ms Johnston responded by email to the cross claimant stating that she had received and read the cross claimant's emails of 18 May 2011. She stated: "The evidence that you have provided so far does not support the transactions that occurred in the 2007 year. Please follow my instructions in my email of 18 May". (JTB 2.80).
She advised him that further documentation and evidence could be forwarded to the attention of Peter Smith ATO and must be received by noon Monday, 23 May 2011. (JTB 2.81).
On 19 May 2011, the cross claimant responded by email to Ms Johnston. He stated: "Michelle I am shocked at your response… I am not sure what exactly you would like me to do, other than I have given you as much evidence as I can surrounding the circumstances. My hands are tied as I'm powerless in obtaining bank records. I will fax further information received today in the morning." (JTB 2.81).
On 20 May 2011, the cross claimant sent a fax to Ms Johnston. The covering note referred to enclosed "Banking records/slips". It also stated that the cross claimant was waiting "on some more info of friends that were involved with my projects", such as a Mr Leo Lewin. There was no explanation of what the documents included in the fax were said to show, or to which deposits in the Westpac account they were said to relate. There was a copy of a fax sent to Darryl Carr, voucher retrievals at Westpac dated 20 September 2010 stating that transactions during FY2007 were "are unlocated as no work is barcoded." There were handwritten notes on this fax. A number of the bank records concerned withdrawals with no explanation as to which, if any, deposit the withdrawal was said to relate to, nor what any such relationship was. A number of the bank records related to transactions in FY2008. There were also copies of cheque butts for an account held by Hasna Frangieh (the cross claimant's mother) but no explanation was provided as to how these documents were said to relate to the deposits in the Westpac account. (JTB 2.83).
On 23 May 2011, the cross claimant sent an email to Ms Johnston. (JTB 2.84). The cross claimant stated:
"A lot of sleepless nights have passed in trying to compile all the evidence provided and attached. I hope you see in favour of the evidence provided as I am totally out of options in what more I can give you. The banks have been helpless in helping me obtain vouchers and is making it very difficult for me in trying to remember such an enormous amount of activity."
This email attached a "position paper response" and a list of unexplained debits from the cross claimant's account.
Once again he raised the allegation that his signature on the Western Jetz Profit Share Agreement had been forged and that his previous tax agents had caused problems for him. He described, in a summary way, his business affairs in 2006-2007 (such as that he had used money from his sister Elizabeth and mother, Hasna, to make certain property investments). Finally, against the list of deposits in the Westpac account that were identified in the position paper, he set out explanations for the deposits. (JTB 2.85).
The next day, 24 May 2011, Ms Johnston received another fax from the cross claimant which was an "annexure" referred to in the cross claimant's response to the position paper. That annexure included the following material:

Documents concerning the sale of properties by Elizabeth Frangieh and Hasna Frangieh.
Documents regarding withdrawals (ie, bank slips and cheque butts) from as early as 2005.
Documents relating to a Mr Leo Lewin.
Bank deposit slips and copies of cheques. (JTB 2.86).

DCT submitted that many of the explanations offered in relation to the list of deposits to the Westpac account were no more than assertions that the amounts were repayments of loans from particular people. Even where there was a reference to a document in the annexure, the document referred to was often only the bank deposit slip and/or a copy of the cheque. According to the DCT such documents do not themselves prove the nature of the transaction that gave rise to the deposit and therefore could not provide evidence as to whether the deposit was assessable income or not. However, in relation to some of the deposits, the cross claimant could not obtain any further information in relation to them.
The DCT further submitted that it should be noted that explanations for some deposits provided by the cross claimant at that stage were different to the explanations provided by Mr Mascari in his email on 17 September 2010. For example, in relation to deposits of $4000 on 28 September 2006 and 30 October 2006, the cross claimant said that they were "interest repayments" for funds invested with a Mr R Melhem. But Mr Mascari had said that these deposits were income in the form of payments for consultancy work which the cross claimant had done (and which he conceded should have been included in the FY2007 income tax return).
The cross claimant's responses to the audit position paper are confusing and often irrelevant. Importantly, the cross claimant did not draw links between the documents and explanations he was providing to the particular transactions in the Westpac account which were the subject of the audit. Insofar as those links could be drawn, they did not assist Ms Johnston's understanding of the cross claimant's tax affairs for the purposes of the audit.

[44]

Items 17 and 18 and Annexure Q - the cross claimant's brother repaying car loan

For these deposits, it was asserted that they were payments from Raymond Frangieh, the cross claimant's brother, repaying a loan from the cross claimant that Raymond used to purchase a car for $200,000. The handwritten annotations suggest that Ms Johnston did some Roads and Traffic Authority (RTA) searches in relation to the information (or lack of it) provided. Mr Browne stated that the ATO has access to the database of the RTA (now Roads and Maritime Services) which reflects some of the information held by the RTA. (Aff, [35(b)]).
It is apparent from the handwritten annotations on the copy of the Richards submission that each of the explanations provided were considered and that the explanation or evidence provided was considered to be deficient.
Similarly, in respect of car registration details or engine and chassis numbers provided relating to the deposits said to be for the cars (Items 2, 16, 17 and 18), the audit file contains RTA search requests dated 7 June 2011 (several days after the date of the Richards submission) and the resulting information. (JTB 2.95-98). This demonstrates that the information provided was considered and analysed. The car registration details or engine and chassis numbers provided in the Richards submission match the car registration details or engine and chassis numbers used in the RTA search requests.
Under the heading "Accounting" Mr Richards conceded that the deposit on 2 February 2007 of $35,000 (Item 13) was income, in the form of a "project commission" paid to the cross claimant by Mr Lewin, and that the cross claimant's income tax return for FY2007 would be amended to reflect that. This explanation for the deposit differs from the explanation provided by the cross claimant to the ATO several weeks earlier in his position paper response, namely, that that deposit was the repayment of a loan from Lews Discount Carpets. (JTB 2.84).
The Richards submission also made the following statements:

The cross claimant appreciated that there had been an unsatisfactory attendance to his accounting affairs.
The cross claimant admitted that better records could be maintained for his personal and his company's affairs.

Here the cross claimant is acknowledging that his conduct in attending to his financial affairs and his record keeping was unsatisfactory.
Mr Browne explained that "Siebel" is an electronic case and document management system used by staff within the ATO. (Aff [12]-[13]). Siebel is used to record interactions and file notes of telephone calls with taxpayers, their tax agents, or third parties. It is also used to make notes about tasks undertaken, attach documents, or record other information about cases. Siebel can also generate reports which provide details of the information contained in Siebel for a particular case. In the Siebel case notes report for the audit Ms Johnston recorded a file note of a telephone conversation she had with Mr Richards on 23 June 2011. She recorded as follows: "… I explained that he needed to provide further evidence of these loans to family members and business associates. I said the tpr would not borrow money from a personal loan account to lend to others for no return. Robert thought he did receive a return for borrowings made. Robert said that perhaps the best way forward on this matter would be for the AAT to decide. Where affidavits and cross examination may take place." (JTB 9.429).
On 24 August 2011, another new tax agent, Mr Bardella, sent an email to Ms Johnston attaching a "detailed debtors and creditors report for Mr Joseph Frangieh for the four years to 30 June 2007". (JTB 3.102). Mr Bardella stated that the initial periods provided a "starting point" for the source of funds leading up to the 2006 and 2007 transactions. Mr Bardella said that the Westpac account was the "arterial account to transfers funds between creditors and debtors". On the statement of debtors and creditors, there are a number of handwritten annotations noting that there remained a question as to which account a number of the withdrawals were made.

[45]

The evasion opinion

On 6 September 2010, by way of an office minute from Mr Cranston, a set of "Fraud or Evasion Guidelines" that was circulated. (JTB 8.420).
The Fraud and Evasion Guidelines ("the guidelines") were developed by S&ME and SNC "to ensure that audit staff have a greater understanding of the practical application of the fraud and evasion amendment power." They support PS LA 2008/6, which concerns fraud and evasion. The guidelines directly concern the making of a finding of fraud or evasion in the context of amending assessments at any time pursuant to s 170(2) of the ITAA 1936.
The guidelines relating to the law concerning evasion are set out at [10]-[25]. That section contains relevant extracts from case law considering the topic of evasion. In Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) ("Denver") (1949) 79 CLR 296 at 313, Dixon J said: "… I think it is unwise to attempt to define the word "evasion". … it means more than avoid and also more than a mere withholding of information or the mere furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible, is contemplated. An intention to withhold information lest the Commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which, if the result is to avoid tax, would justify finding evasion."
The guidelines continue (at 13]): "Accordingly, evasion involves some blameworthy act or omission. Typically, evasion in the income tax context will involve omitting income from a return or wrongly claiming a deduction (intentional or otherwise) without any credible or excusable explanation for either action. The intentional withholding of information referred to in the above extract from the decision of Dixon J is but one example of calculated behaviour which would justify a finding of evasion."
Under the heading "Behaviour contemplated by evasion", the guidelines state that the two elements of evasion are: "1. an avoidance of tax in the sense that less tax has been paid than ought to have been paid (i.e. there is an identified tax shortfall); and 2. a blameworthy act or omission which has resulted in the tax shortfall."
In terms of indicators of evasion, the guidelines state: "16. The most common example of evasion is where a taxpayer has omitted income from their tax return and not provided any credible explanation: e.g. a taxpayer who consistently understates his business income. 17. Unbusinesslike behaviour (such as a failure to keep proper records) or indifference to the accuracy of a return before signing and lodging may also support a finding of evasion where it results in a tax shortfall."
The guideline 57 indicates that blameworthy acts or omissions that may be taken into account in forming an evasion opinion, including acts which occur after a taxpayer has prepared and lodged their return. For example, in Denver, the taxpayer withheld profit and loss and balance sheet information from the Commissioner after a request was made for them in the course of an audit.
Guideline 71 states the SME BSL had a dedicated Panel to advise on certain technical decisions and that a finding of fraud or evasion for the purpose of s 170(1), Item 5 of the ITAA "must be referred for assurance to the technical panel" prior to the authorised officer forming the opinion. This occurred here.
On 15 August 2011, a file note by Ms Johnston records, "2007 period about to expire" and "pull out 4 year rule." (JTB 3.100). The cross claimant commented that this note tells of Ms Johnston's state of mind, namely that she was determined to have FY2007 tax assessment amended to a much larger sum.
On 24 August 2011, an email sent by Ms Sandford to Ms Rogers and Ms Johnston relevantly says: "On Wednesday afternoon, Michelle was asking me about what to include in the position paper for Frangieh. I suggested to Michelle that the priority is to write the Fraud/Evasion submission." (JTB 3.101).
On 19 October 2011, Ms Johnston emailed Mr Howarth and copied in Mr Corke. She wrote to Mr Howarth seeking his advice. Ms Johnston confirmed that she had sent out the s 264 notices to the bank on 21 September 2011. She set out the procedure for a fraud and evasion approval and then stated: "However in the Frangieh case I have issued a position paper and received a response from the taxpayer. In the position paper we were amending the taxpayer with a penalty of 25% for "lack of reasonable care". Now we are going Fraud and Evasion the penalty should be a minimum "reckless" - 50%." How do we stand with this? Do realise that the Position Paper is ATO position in a point in time." (JTB 3.108).
As at 19 October 2011, Ms Johnston was of the view that the cross claimant's behaviour fell into the category of recklessness with an appropriate penalty of 50% (double what it was on 12 May 2011 at a time when the four year cut off period was approaching).
On 17 November 2011, Ms Johnston sent material relevant for the draft evasion opinion to Mr Stanmore. (JTB 3.113). On 22 November 2011, Mr Stanmore forwarded to her a partially completed draft for the fraud and evasion opinion, adding his work in red print. (JTB 3.114).
On 21 December 2011, a monthly call over was held and a document prepared that set out the comprehensive audit action plan in relation to the cross claimant. It also records the agreed action from previous call overs. The work was to be carried out by Ms Johnston, Mr Stanmore and Mr Howarth. (JTB 3.115).
Prior to the draft evasion opinion being provided to the technical panel it went through a number of drafts. In addition to Ms Johnston, two other ATO officers, Mr Howarth and Mr Stanmore, had input into the drafting of the evasion opinion. "Joseph Frangieh has operated numerous businesses over a long period of time. There is a reasonable expectation that Joseph Frangieh would have been aware of what is income for taxation purposes. He has not established why the income is not taxable in the year of receipt. Joseph Frangieh should be aware of his reporting obligations and the need to maintain adequate records. It is held that he intentionally omitted the income from his return. The omission of the significant unexplained deposits from his 2007 income tax return again indicates gross carelessness in meeting his taxation obligations." (JTB3.148).
Ms Johnston considered that there was a blameworthy act or omission made by the cross claimant and that the avoidance of tax was due to evasion but not due to fraud.
At various stages, Mr Howarth recommended significant amendments and rewriting of the draft evasion opinion. (Email dated 8 March 2012 (JTB 3.119)).
Also on 8 March 2012, Ms Johnston emailed Ms Benjamin, stating: "I have just finished preparing the Evasion Submission. I will be discussing the report with STL on Wednesday. Hopefully the submission will go to the Panel next week. If the evasion submission is not approved, then there will be no audit amendment. However, I am confident that it will be approved." (JTB 3.122).
On 12 March 2012, Ms Benjamin emailed Ms Johnston stating: "I just wanted to touch base and advise that I am now managing the debt case of Joseph Frangieh. Could you please keep me up to date with audit progress?" (JTB 3.122).
Between 23 March 2012 and 29 March 2012, there were a number of emails passing between Ms Johnston and Mr Stanmore concerning the issue of another position paper to reflect the change from recklessness to "evasion". (JTB 3.129-130, 3.131, 3.134). Mr Stanmore was against issuing another position paper. He stated: "The only change from the previous position paper is the quantum of the adjustment to be made by Michelle. That quantum was determined by the responses given by the taxpayer to the original position paper." (JTB 3.130).
Here, Ms Johnston seems concerned with providing the cross claimant the opportunity to respond to the change of category to "evasion".
On 17 April 2012, Ms Johnston emailed Ms Benjamin advising her of the addresses that were used by the cross claimant from 2007 to date. She then commented: "The Frangieh's have a mortgage with the Commonwealth bank on the Barnstaple Rd property. So, perhaps they may have further accounts with the CBA for possible garnishee opportunities." (JTB 3.140).
On 19 April 2012, Ms Johnston updated Ms Benjamin as to further details concerning the cross claimant. Ms Benjamin replied advising Ms Johnston that: "I will look at Statewide Demountable Installations as a possible garnishee when the IT debt is raised." (JTB 3.142).
There were three draft evasion submissions. As I noted earlier, while Ms Johnston was primarily responsible for compiling the submission, others including Mr Howarth and Mr Stanmore, had some input into the contents of this document.
On 10 May 2012, Ms Johnston commented to Ms Benjamin that "There was certainly a lot [of] money in the CBA account!!!". Ms Benjamin replied: "Yeah I know! At least there was a little more in the Westpac account. Although it doesn't look like we'll have much luck with garnishees at this rate once the debt is raised." (JTB 3.157).
It appears that from mid April 2012 to May 2012 both Ms Johnston and Ms Benjamin were keen to ascertain which entities they could serve a garnishee to obtain the cross claimant's outstanding tax amounts due, even though the evasion opinion had not been considered by the technical panel nor had the recovery proceedings commenced.
On 22 May 2012, Mr Howarth sent an email to Mr Mick Lyons, attaching an "evasion submission" for consideration by the panel. (JTB 4.166). The submission was in the form of a draft evasion opinion.
On 23 May 2012 at 2.23 pm, Mr Howarth sent an email to Ms Johnston and Mr Stanmore stating: "After further consideration the position paper that was released should be withdrawn. The position now has changed subsequent to the issue of the original documents. In particular the level of penalties will be increased to reflect the evasion principle." (JTB 4.169).
The "further consideration" to which Mr Howarth referred reflected the fact that various ATO officers, in March 2012, had already given consideration to whether a new or amended position paper was required, and they had concluded that it was not necessary. (JTB 3.120, 3.130, 3.132, 3.134). It was Mr Howarth's opinion (not Ms Johnston's) that the level of penalties would be increased to reflect the evasion principle.
On 23 May 2012 at 2.58 pm, Ms Johnston sent an email to Mr Stanmore, Ms Jones, Ms Rogers and Ms Sandford setting out a conversation she had had with Mr Howarth. (JTB 4.170). Ms Johnston recorded that she and Mr Howarth had discussed the withdrawal of the position paper issued on 12 May 2011. In relation to evasion/penalties, Ms Johnston recorded: "2. … in the position paper we say that the Tpr [taxpayer] is behaviour at the time was "lack of reasonable" with no new evidence we are now saying the tpr is reckless. In order for evasion to be approved, the tpr's behaviour at the time the blameworthy act, must be gross carelessness or Reckless."
She further recorded: "3. Correct administrative procedures have not been followed in the case. The position paper issued prior to the finding of evasion. Evasion cannot be used just because the POR [period of review] has expired. Yes, Frangieh case is definitely Evasion. If were not to amend on this basis and walk away from an adjustment to Joseph Frangieh it would seem unfair on the other parties of the Profit Share Arrangement. One party has been amended as a result of the audit. The others include income."
In other words, out of the four people involved in the distributions from Western Jetz Trust, the cross claimant was the only one who had not resolved his dispute with the ATO and to Ms Johnston's mind, this would be "unfair".
On 25 May 2012, Mr Stanmore sent an email to Ms Johnston and Ms Sandford referring to a meeting between him, Mr Howarth and Ms Johnston on 24 May 2012. He recounted that they had discussed withdrawing the position paper, because the ATO had changed its position on the level of penalties, from lack of reasonable care to recklessness. Mr Stanmore set out reasons for this change of position as follows: "the level of co-operation and information provided by the taxpayer to the ATO during the course of the audit prior to the issue of the position paper in May 2011. the level of co-operation and further information provided by the taxpayer to the ATO after the issue of the position paper in May 2011. Further 3rd party checks that the ATO undertook in response to further information provided by the taxpayer after the issue of the position paper in May 2011." (JTB 4.172).
Importantly, in this email Mr Stanmore also explained that the issue of fraud or evasion was distinct from the issue of penalties, although they might involve similar concepts. He emphasised that "the level of penalties in this matter have NOT been increased to reflect the Evasion Principle, as referred to in John's email". (JTB 4.172).
On 19 June 2012, Ms Johnston sent an email to Mr Stanmore and Ms Sandford referring to a discussion they had had, in which they reached the conclusion that it was unnecessary to withdraw the position paper. (JTB 4.192).
On 28 May 2012, the draft evasion opinion was considered by the panel (comprising seven ATO officers). The panel provided written feedback and comments on the position paper. The panel "requested that the paper be resubmitted with recommended changes". In particular, the document records that the panel "recommended that the updated paper include much more of the facts and details, that would support the conclusion, which were presented to it verbally". (JTB 4.171).
On 13 June 2012, Mr Howarth sent an email to "SME Technical Panel" attaching an amended evasion submission. (JTB 4.183). The amended submission was in the form of a draft evasion opinion.
On 18 June 2012, the amended draft evasion opinion was again considered by the panel. Although the panel did express some criticism of the drafting of the evasion opinion, the outcome is recorded as: "The Panel supported the finding of evasion with respect to the profit share, unexplained deposits and sale of the cars, with several adjustments and improvements to the evasion submission." (JTB 4.189).
The panel were prepared to accept a finding of evasion given the signed [profit share agreement] document and it agreed that not returning the unexplained amounts was a blameworthy act. The panel questioned the amounts included for the sale of the cars and the details that the cross claimant's claim for the sale of the motor vehicles and said that the subsequent enquiries be included in the report as they may constitute blameworthy acts in themselves (misleading the Commissioner). At this point, panel considered there was ample evidence to support evasion opinion, including signed documentation and "car stuff."
Following the panel's opinion, Ms Johnston sent an email to Mr Howarth, attaching the final evasion opinion. She had also included an explanation concerning the motor vehicles that panel had requested. (JTB 4.191). On 25 June 2012, Mr Howarth signed the evasion opinion. (JTB 4.199).
Hence on 25 June 2012, when the Commissioner formed the opinion that there had been evasion, the time limit for amending assessments did not apply. It should be observed that it was not Ms Johnston who made the decision that there should be a finding of evasion.

[46]

Submissions in relation to the evasion opinion

The cross claimant submitted that the independent review by the LBI BSL highlighted "misgivings and concerns" in relation to the formation of the evasion opinion. Mr Howarth's comments expressed concerns. The cross claimant submitted that the ATO ultimately recanted from any opinion as to evasion.
The cross claimant further submitted that there is a fundamental inconsistency between the initial position paper imposing a penalty at 25% and the subsequent opinion as to fraud or evasion warranting a 50% penalty. By s 170(1), Item 5, for the power of amendment to arise, the Commissioner must be of the opinion there was fraud or evasion at the time of the original assessment. In the initial position paper, a penalty was imposed on account of not taking reasonable care only. A penalty at 25% is not commensurate with fraud or evasion. By definition, finding fraud or evasion, in the absence of what Mr Aftanas described as any "positive evidence" and that foremost the cross claimant was not a Phoenix taxpayer, is an ex post facto rationalisation so as to justify the amendment of the assessment outside of four years.
The cross claimant's main criticism is that in these documents Ms Johnston did not consider withdrawals and deductions. All she turned her mind to was excluding deposits that were reversals of amounts previously withdrawn. The DCT suggested that what Ms Johnston fell within the example of PS LA 2007/24 at [99]. (Ex F). It relevantly reads: "A taxpayer with no disclosed income producing activities and who has not lodged any income tax returns has used funds sourced from a series of significant cash bank deposits over several years to pay for living expenses for himself and his family. …"
The DCT submitted that all of the evidence regarding the drafting of the evasion opinion does not give any indication that Ms Johnston, Mr Howarth, the panel, or any other ATO officer involved in the preparation, consideration, and formation of the evasion opinion were ever of the view that there was an insufficient evidentiary basis for the evasion opinion contrary to the allegation in X/C [12], particulars 5 and 6. Instead, the various draft versions that were prepared, and the changes made to the written evasion opinion, were directed to ensuring that the written evasion opinion sufficiently set out reasons for the formation of the opinion.
The DCT submitted that it is necessary to address several issues raised by the cross claimant in relation to the evasion opinion. They are as follows.
Counsel for the cross claimant suggested that Ms Johnson had let the period for amending the cross claimant's assessment slip, and therefore, she had to prepare the evasion opinion. (T 42.44-46). The only allegation pleaded concerning the evasion opinion is that there was no evidence to support the evasion opinion. (X/C [12] particulars 5 & 6).
Senior counsel for the DCT further submitted that if it was intended by the cross claimant to allege that there was any other kind of wrongful conduct in relation to the evasion opinion, such an allegation is not open on the pleading, and for that reason alone this point raised in the cross claimant's opening must be disregarded. In any event, such an allegation, if proved, could not constitute misfeasance in public office. The scheme of the legislation is such that, if an audit is completed within the usual period for amending assessments, it is not necessary for any person to turn their mind to whether there appears to have been fraud or evasion. It is only if an audit is completed after the usual period has expired, that it is necessary to give consideration as to whether there has been fraud or evasion.
Therefore, the fact that in this case, in light of the way the audit progressed, it became necessary for ATO officers to turn their minds to the question of whether there was fraud or evasion. That in doing so they formed the view that there had been evasion cannot demonstrate any form of misfeasance in public office. Such conduct was consistent with ATO officers following the scheme established under the legislation.
Secondly, at T 42.18-42, the cross claimant suggested that the ATO had a "dilemma" regarding the penalty of 25% (based on lack of reasonable care) proposed in the position paper (JTB 2.70), and the fact that the ATO officers were of the view that there was evasion, because evasion is indicative of at least recklessness. As noted above, the only pleaded allegation concerning the evasion opinion is the allegation at X/C [12] particulars 5 and 6 that there was no evidence to support the evasion opinion. If it was the cross claimant's intention to allege that misfeasance by the audit officers can be established by reference to this penalty issue, such an allegation is not open on the pleading, and for that reason, this issue must be disregarded. The DCT submitted that, in any event, the evidence does not support a conclusion of any wrongdoing in this respect.
The DCT submitted that this evidence does not support any conclusion of wrongdoing, contrary to the cross claimant's opening. Instead, it reveals that ATO officers were aware of the different procedures involved in considering penalty, and in considering fraud or evasion, and they were careful to ensure that they were applying the correct reasoning in respect of each. It is also notable that two of the ATO officers who had significant involvement were Mr Howarth and Mr Stanmore, and there is no allegation in the cross claim that either of them engaged in the first alleged misfeasance. The significance of this evidence is that there is no allegation that any of these other ATO officers engaged in misfeasance. There is no evidence to suggest that any of them had misgivings or concerns about the conduct of the audit officers. This further circumstance suggests that this Court should be slow to draw any inference that the audit officers themselves engaged in the kind of conduct that is alleged against them.
Although Mr Howarth made a number of suggestions as to the drafting of the evasion opinion (for example, in his email of 20 April 2012 with attachment, at JTB 3.143), those suggestions were as to the drafting of the evasion opinion. Likewise, the DCT says that there was no suggestion that he, or any other ATO officer who considered the matter, was of the view that there was insufficient evidence to support the finding of evasion.
It is my view that PS LA 2007/24 [99] does not seem applicable to the cross claimant as he had lodged tax returns in the past. Further, the correct statement of principle occurs at PS LA 2007/24 [56] in the body of the statement and not as an illustrative example. As already discussed, neither of these statements are helpful because PS LA 2007/24 is an out dated document in that it does not refer to Futuris. Also the cross claimant's submissions in relation to the evasion opinion are logically flawed. The fact that the ATO ultimately withdrew its assessments is not evidence that the ATO officers should not have made a finding of evasion. This is supported by s 177(1) of the Tax Administration Act, which states that notices of assessment are to be treated as conclusive evidence of the due making of an assessment. Unless conscious maladministration on the part of the formation of the evasion opinion can be demonstrated (see Futuris), the evasion opinion is to be treated as valid. Here there was no such bad faith on behalf of the ATO officers' nor any deliberate disregard to the scope of their powers. In fact there actions were consistent with the statutory framework within which they were required to work.
The purpose of the position paper was to give the cross claimant an opportunity to provide comments and evidence in relation to the ATO's views of his affairs that were the subject of the audit before its finalisation. The position paper merely reflected the ATO's position at that point in time.
An evasion opinion may be formed by the ATO on the basis of a taxpayer's conduct in response to requests for information by the ATO: see Denver. In the course of the audit, the ATO officers asked the cross claimant for evidence in relation to transactions in the Westpac account. Not only was this information inadequately supplied by the cross claimant himself, his tax agents were not forthcoming in providing it. The cross claimant's lack of proper explanation continued between the formation of the initial position paper and the subsequent evasion decision.
The evidence that the cross claimant relies upon to support his allegation that the ATO officers artificially increased the penalty assessment from 25% to 50% is Mr Aftanas' email dated 18 June 2015 following the settlement of the dispute between the cross claimant and the DCT. Although Mr Aftanas' email is set out in full later in this judgment, it is important to note in particular his observations as follows: "As I understand it, the applicant was not forthcoming with evidence at the audit stage. The evidence was limited to self-serving statements of Mr Frangieh and his accountant. Mr Frangieh's explanations were inherently implausible and, in the absence of corroborating evidence, it was appropriate to rely on the burden of proof to reject these assertions." (JTB 8.403).
Although the ATO officers did not mount a positive case against the cross claimant, Mr Aftanas considered the audit officers' approach to be appropriate in the circumstances. As previously stated, Ms Johnston did not make the decision as to the penalty. In my view, the cross claimant's allegation that Ms Johnston, Ms Sandford and Ms Rogers acted in bad faith when the amended tax assessment together with the administrative penalties were issued, is not supported by the evidence. These claims of bad faith fail.
On 4 July 2012, the ATO sent a letter to the cross claimant advising that a decision had been made in relation to the audit and enclosing reasons for the decision. (JTB 4.205). The decision was that: 1. $350,000 of the $700,000 received in relation to Western Jetz was income; and 2. Unexplained deposits in the Westpac account amounting to $3,234,064 were income.
The total of unexplained deposits to be treated as income was slightly less than the $3,572,517.16 of unexplained deposits identified as potential income in the position paper. The audit reasons for decision also noted that during the FY2007, deposits totalling $4,007,030 were made into the Westpac account.
Ms Johnston sought to schedule a meeting between herself, Mr Stanmore, Mr Barclay, the cross claimant and his tax agent for 9 August 2012, however the cross claimant and his tax agent elected to cancel the meeting. (JTB 4.214) (JTB 4.217). On 8 August 2012, Ms Johnston emailed the cross claimant to advise him of the matters she had proposed to discuss with him at the meeting, including voluntary disclosure for FY2008 to FY2010, lodgement of the FY2011 income tax return, outstanding tax obligations for the cross claimant's associated entities and relationships and payment of the debt resulting from the amendment to the 2007 income tax return.

[48]

September audit decision

On 4 September 2012, a further letter was sent to the cross claimant enclosing reasons for the decision in relation to the audit September 2012 audit decision. (JTB 5.227). The September audit decision explained that, although the usual time limit for amending assessments had passed, the Commissioner had formed the opinion that there had been avoidance of tax due to evasion, so that, pursuant to s 170(1), Item 5 of the ITAA, the usual time limit did not apply.
In these reasons, the following conclusions were reached: 1. In relation to the $700,000 received from Western Jetz, it was accepted that $350,000 had been paid to Mr Lloyd Tang, and the audit officers treated that as an amount invested by the cross claimant in the Western Jetz project. The audit officers therefore treated the remaining $350,000 as assessable income. 2. In relation to unexplained bank deposits in the Westpac account, it was concluded that deposits amounting to $3,234,064 were income. As noted above in relation to the July audit reasons for decision, the total of unexplained deposits to be treated as income ($3,234,064) was less than the $3,572,517.16 of unexplained deposits identified as potential income in the position paper. The September 2012 audit reasons for decision also noted that during the FY2007, there were deposits totalling $4,007,030 in the Westpac account.
The September audit decision stated that the cross claimant would be liable to a penalty of 50% of the shortfall in tax on the basis that he acted recklessly in accordance with s 184-90 of Sch 1 to the Taxation Administration Act. The factors which the ATO considered demonstrated the cross claimant was reckless were as follows: "● You have been operating in the building industry and managing development projects for many years. There is a reasonable expectation that you would know that the net profit from an investment in a development project would be assessable income. ● You have been the director of at least 26 companies since 2006. There is a reasonable expectation that you would implement appropriate record keeping systems and other procedures to ensure compliance with your taxation obligations. ● The size of the shortfall is significant when compared to the tax that would have been payable had the false or misleading statement not been made." (JTB 5.227)."
The ATO then stated: "The above factors indicate that you were reckless because they show that you could have reasonably foreseen that your action may have led to the shortfall in your net amount, yet you did nothing to prevent. This finding is consistent with paragraph(s) 99 and 101 and example 102 contained in MT 2008/1." (JTB 5.227).
As the shortfall amount was determined at $1,700,017, the penalty amounted to the sum of $850,008.
In relation to the opinion that there had been an avoidance of tax due to evasion on the part of the cross claimant, the DCT referred to the relevant ATO practice statement (PS LA 2008/6) and case law on the topic. In concluding that the cross claimant had engaged in an tax evasion, the DCT indicated that "[t]he intentional withholding of information" was an example of calculated behaviour which could justify a finding of evasion. (JTB 5.227).
The DCT submitted that numerous other ATO officers who were involved in the decision-making processes which led to the September audit decision. This evidence demonstrated that Ms Johnston was not the final or sole decision maker in respect of the September audit decision. Therefore consideration of her conduct by the cross claimant as the purported "invalid act" or as capable of "targeting" the cross claimant with the corresponding bad faith intent is misplaced.
The September audit decision set out the same decision, as to amounts of income, as did the July audit decision. The reasons in the September audit decision are, in large part, the same as the July audit reasons for decision, although there are some small differences. It is not clear precisely why the cross claimant was notified again of the decision and that an additional set of slightly different reasons was prepared. From an internal ATO email chain ending on 19 July 2012 (JTB 4.209), it appears that authorisation from a more senior officer was required in respect of the penalties to be applied following the audit decision and that Mr Matthew Pearce, National Director - Phoenix in the SME BSL, was requested to provide that approval.
From that email chain, it also appears that Mr Pearce suggested some small additions to the reasons for the audit decision. In relation to the profit share/loan aspect of the decision, Mr Pearce suggested making it clear whether there was evidence as to where the $525,000 claimed to be a loan went. In the September 2012 audit reasons an additional paragraph was added explaining that of the $525,000, the ATO's audit had determined that $175,505 comprised overseas transfers to recipients not in the name of the alleged borrowers, and were made prior to the loan agreement. Therefore the ATO determined that only $350,000 was accepted as the amount originally invested, rather than the full $525,000. Mr Pearce also suggested that more specificity was required in relation to the issue of the sale of cars.
In the September audit reasons for decision, on page 5 of 13, a statement was added (at the end of the first bullet point on the page) that, since enquiries with the RTA and financial institutions did not confirm sales of motor vehicles, deposits claimed to be proceeds of the sale of motor vehicles remained unexplained and were treated as deposits. Mr Pearce subsequently approved the imposition of the penalty. (JTB 4.212).
As a result of the September audit decision, on 1 October 2012, the amended assessment was issued.

[49]

G6(x) The amended assessment of 1 October 2012 and its validity

On 1 October 2012 an amended assessment was issued. It stated the cross claimant's taxable income for FY2007 was $3,685,805. (JTB 5.234). With administrative penalties and shortfall interest charges, the total amount owing in in relation to the cross claimant's income tax for FY2007 was $3,243,734.28. (JTB 5.236). It should be noted that the cross claimant takes issue with the validity of the amended assessment, the timeframe within which it was issued, and the competence of the DCT using it as a foundation upon which to commence recovery proceedings (considered in the second and third alleged misfeasance).
Counsel for the cross claimant submitted that the amended assessment issued on 1 October 2012 was beyond the power conferred by the provisions of the ITAA 1936 as there was no fraud or evasion per se or alternatively that the cross claimant had discharged his onus of establishing the assessment was excessive. Further, counsel for the cross claimant argued that the invalid exercise of the power is evidenced by the DCT withdrawing the amended assessments and restoring the cross claimant's original assessment on 16 July 2015.
Counsel for the cross claimant added that no matter what benign gloss is attempted to be placed upon the actions of the ATO officers, the cross claimant's case is that viewed as a totality, the actions of the officers are so close to the exercise of "despotic power" in the circumstances where the relevant assessment is beyond the power of s 177 of the ITAA those actions in aggregate constitute misfeasance in public office.
In relation to the first misfeasance in public office, counsel for the cross claimant says that the factual matrix includes:

The ATO had four years to amend absent fraud or evasion;
The ATO officer continued the audit after the matter was referred to the Serious Non Compliance division;
The audit, notwithstanding it had been on foot for over a year, was not completed within that four year period;
The audit was conducted on the basis of alleged phoenix activity;
An independent ATO officer has subsequently concluded there was no basis for elevating the matter to the class of phoenix.
The amended assessment was issued on a gross receipts basis with no regard to the law of assessing net receipts and ATO's phoenix policy; and
The position paper for the amended assessment included a penalty (25%) which was not commensurate with the requisite level of mischief (50%) asserted implicitly in any determination of fraud or evasion to give rise to the out of time amended assessment.

In oral submissions, counsel for the cross claimant argued that s 177 of the ITAA 1936 would protect the original assessment and the final assessment but, because the second amended assessment had been withdrawn, there was nothing there for s 177 to protect, therefore it is not a valid assessment. Section 173 of the ITAA 1936 reads: "173 Amended assessment to be an assessment Except as otherwise provided every amended assessment shall be an assessment for all the purposes of this Act."
The first amended assessment is an assessment for all the purposes of the ITAA 1936. Therefore it was protected by ss 175 and 177 and is not invalid merely by virtue of being superseded by subsequent amended assessments.
Counsel for the cross claimant referred to the ATO's Practice Statement Law Administration 2007/24 (PSLA 2007/24) (Ex F) ("practice statement"). This is an ATO practice guide for staff contemplating making default assessments using the powers provided by s 168 of the ITAA 1936 and other similar provisions. This document contains a section entitled "Review of assessments", at [48] to [65] and sets out when an assessment is capable of review by the Federal Court under s 39B of the Judiciary Act.
This practice statement was issued and took effect on 20 December 2007. It has undergone amendments in 2008, 2010, 2011 and 2012. According to the amendment history, the section entitled "Review of assessments" was not updated after the practice statement was issued. Futuris was decided in 2008 and is commonly cited as authority on the question of the validity of assessments (see Commissioner of Taxation v Bosanac [2016] FCA 448 and Featherby v Commissioner of Taxation (No 2) [2016] FCA 465). Therefore, the cross claimant it is not clear if this document is still applicable given the update in the jurisprudence on this topic since Futuris.
Counsel for the DCT submitted that, as in Futuris, the only way a notice of assessment can be impugned is if it is a tentative assessment or infected by conscious maladministration and that in this case, the amended assessment was neither tentative nor affected by conscious maladministration, therefore at all times the first amended assessment remained the subject of ss 175 and 177. Senior counsel for the DCT argued that if this Court finds that there is not misfeasance then there will be no maladministration, therefore the notice of assessment was at all times evidence of a legal indebtedness which was capable of being sued upon.
The cross claimant submitted that the invalidity of the exercise of power is established because the Deputy Commissioner withdrew the amended assessment and restored the cross claimant's original assessment.
According to the cross claimant, the statement of claim (and further amended statement of claim) in these proceedings, suing as it was on the excessive tax and penalty assessments, was beyond the power of subs 255-5(2) of Schedule 1 to the Taxation Administration Act and was dismissed by this Court. (JTB 10.473) so moneys obtained under garnishee notices, on the basis of the excessive tax and penalty assessments were refunded.

[50]

G6(xi) The Seage complaint and reporting Mr Seage to the Tax Practitioner's Board

The Seage complaint is pleaded to be in the second misfeasance, however it actually took place in the conduct of the audit (the period of the first alleged misfeasance). It is convenient to set out the relevant facts in relation to the complaint here.
On 12 October 2012, shortly after the amended assessment was issued, a complaint concerning the conduct of the audit was made by Mr Christopher Seage, of Rambo Taxation Services on behalf of the cross claimant. (JTB 5.237). In the complaint, addressed to Matthew Pearce, National Director - Phoenix of the SME BSL, Mr Seage did not refrain and remarked: "I don't believe [the cross claimant] has been treated fairly and professionally by staff from the Phoenix audit branch of Newcastle Office and as a result this has led to breaches of the Taxpayers' Charter by Michelle Johnston and her supervisor Marianne Rogers. By not properly explaining their decisions in formulating the notice of amended assessment issued on 1 October 2012 leaves me in a position of trying to formulate an objection where I am totally in the dark as to what level of evidence the ATO requires to satisfy the issue of unexplained deposits into the Westpac Equity Access Account. … It is evident Mesdames Johnston and Rogers have ignored the weight of the evidence. … It seems to me that the case simply got too hard for Johnston and Rogers. So what do they do? Ignore credible evidence from two senior practitioners [Crawford and Richards], issue a big tax bill and let someone else down the ATO food chain, such as objection and appeal officers, deal with the problem. All the while Mr Frangieh's compliance costs continue to skyrocket. Pathetic stuff! …".
Mr Seage requested that Mr Pearce, firstly, investigate Ms Johnston and Ms Rogers to find out why they ignored credible evidence provided by the cross claimant, Mr Richards and Mr Crawford; secondly, withdraw the amended assessment of 1 October 2012; thirdly, place any legal action to recover the assessment of 1 October 2012 on hold until the complaint is finalised; fourthly, provide Mr Seage with any contemporaneous notes from the cross claimant's audit file to determine what verbal instructions, if any, were provided to the him and/or his representatives; and finally, if unable to satisfy the above, provide written guidance as to the level of evidence required to satisfy the ATO in respect of unexplained deposits so that he may lodge an objection to the assessment.
On 18 October 2012, Ms Johnston wrote to Ms Benjamin noting the appointment of, and complaint by, Mr Seage, and pointed out that he is not a registered tax agent. (JTB 5.238). In her email, she stated: "Also Frangieh has appointed a new representative, Chris Seage. He is not a registered TAG [Tax Agent]. A [formal complaint] on the audit has been lodged by Chris Seage. This is being dealt with by the National Phoenix director, Matt Pearce. S&ME complaints also have created a case. I am not aware of an objection being lodged as yet."
The cross claimant argued that Ms Johnston's conduct in relation to Mr Seage's complaint evidences her malicious state of mind. I will now address these allegations.
On 3 December 2012, Ms Johnston provided comments in response to Mr Seage's complaint. (JTB 5.251). I will only refer to the relevant parts of the complaint and the corresponding responses of Ms Johnston.
In his complaint, Mr Seage stated: "It seems to me that the case simply got too hard for Johnston and Rogers. So what do they do? Ignore credible evidence from two senior practitioners, issue a big tax bill and let someone else down the ATO food chain, such as objection and appeal officers, deal with the problem. All the while Mr Frangieh's compliance costs continue to skyrocket. Pathetic stuff!"
In response to this, Ms Johnston commented: "No the case was not hard! All evidence and contention made by Frangieh were taken into consideration. Perhaps the reason why Frangieh's compliance cost skyrocketed is because he changed representatives numerous occasions. Not an ATO problem."
Mr Seage continued: "I have been involved in many audits both in my time in the ATO and subsequently as a consultant and I have seen a number of these cases settled in the taxpayers' favour when similar evidence to which Mr Frangieh has provided has been accepted. The most recent was in 2008 in respect of W, Martyn and associated entities. An audit conducted by the cash economy taskforce into the adult industry participants, prima facie established unexplained deposits. I was able to satisfy the ATO officers, in the same way Mr Richards has presented his case, of the source of the funds."
Ms Johnston's comments in response were as follows: "Interesting, I wonder if he was paid for such services. I would assume so, surely wouldn't do the work free of charge. Tax Practitioner Board maybe interested in this. Any case each case on it own merits."
Later in his complaint, Mr Seage stated: "The ATO has not provided my client or his representatives with sufficient information to satisfy the ATO's evidence requirements."
After the word "client", Ms Johnston has interposed the following remarks: "Macquarie dictionary definition of client "2. one who employs or seeks advice from a professional adviser. 3. a customer", maybe Chris Seage is being paid for Taxation services. Regardless of payment Chris Seage has breached sections 50.5 and 50.10 of the Tax Agent Services Act 2009. Section 90.5 of same act defines tax agents services. This includes Chris Seage acting for Frangieh in his current capacity. This is something that you may wish to raise with Chris Seage. Also a referral is required to the Tax Practitioner Board. The SME gatekeeper is Luke Shelly."
Counsel for the cross claimant submitted that this demonstrates Ms Johnston has recommended and advocated that Mr Seage has breached the Tax Agent Services Act 2009 (Cth) and should be reported for investigation by the Tax Practitioners Board with a view to the imposition of a civil penalty.
Sections 50-5 and 50-10 of the Tax Agent Services Act relevantly read: "50-5 Providing tax agent services if unregistered (1) You contravene this subsection if: (a) you provide a service that you know, or ought reasonably to know, is a*tax agent service; and (b) the tax agent service is not a *BAS service or a *tax (financial) advice service; and (c) you charge or receive a fee or other reward for providing the tax agent service; and (d) you are not a *registered tax agent; and (e) if you provide the tax agent service as a legal service-either: (i) you are prohibited, under a *State law or *Territory law that regulates legal practice and the provision of legal services, from providing that tax agent service; or (ii) subject to subsection (3), the service consists of preparing, or lodging, a return or a statement in the nature of a return. Civil penalty: (a) for an individual-250 penalty units; and (b) for a body corporate-1,250 penalty units. Note: 50-C of this Act and Subdivision 298-B of Schedule 1 to the Taxation Administration Act 1953 determine the procedure for obtaining a civil penalty order against you. … 50-10 Advertising tax agent services if unregistered (1) You contravene this subsection if: (a) you advertise that you will provide a *tax agent service; and (b) the tax agent service is not a *BAS service or a *tax (financial) advice service; and (c) you are not a *registered tax agent; and (d) if the tax agent service would be provided as a legal service - either: (i) you are prohibited, under a *State law or *Territory law that regulates legal practice and the provision of legal services, from providing that tax agent service; or (ii) subject to subsection (3), the service would consist of preparing, or lodging, a return or a statement in the nature of a return; and (e) if the tax agent service would be provided on a voluntary basis - you would not provide the service under a scheme approved by the Commissioner by notice published in the Gazette. Civil penalty: (a) for an individual - 50 penalty units; and (b) for a body corporate - 250 penalty units. Note: Subdivision 50-C of this Act and Subdivision 298-B of Schedule 1 to the Taxation Administration Act 1953 determine the procedure for obtaining a civil penalty order against you."
Section 90.5 of the Tax Agent Services Act defines a tax agent service as follows: "90-5 Meaning of tax agent service (1) A tax agent service is any service: (a) that relates to: … (iii) representing an entity in their dealings with the Commissioner; and (b) that is provided in circumstances where the entity can reasonably be expected to rely on the service for either or both of the following purposes: (i) to satisfy liabilities or obligations that arise, or could arise, under a taxation law; (ii) to claim entitlements that arise, or could arise, under a taxation law."
Counsel for the cross claimant submitted that the quintessential function of a tax agent is the preparation and lodgement of tax returns and that making a complaint after an assessment has issued is not for a purpose specified in s 90.5(1)(b), being for the purpose of satisfying obligations (eg, the lodgement of returns) and claiming entitlements arising under a taxation law. Therefore, according to the cross claimant's counsel, it is open to infer that Ms Johnston was actuated by actual targeted malice towards the cross claimant and Mr Seage in recommending that Mr Seage be investigated for breaches of the Tax Agent Services Act, in relation to and as a consequence of Mr Seage lodging a complaint against Ms Johnston. Alternatively, the cross claimant submitted that it is open to infer that Ms Johnston was recklessly indifferent or wilfully ignorant in relation to the operation of the Tax Agents Services Act because Mr Seage's services were demonstrably not for any prescribed purpose within s 90.5(1)(b).
Senior counsel for the DCT submitted that the above submissions are misconceived as there is no evidence that any investigation was undertaken nor that any action was taken against Mr Seage. In its submissions, the DCT asserted that there is no evidence from which it could be inferred that Ms Johnston's references to Mr Seage not being a registered tax agent that her state of mind was malice towards the cross claimant and Mr Seage in retaliation against them for lodging the complaint.
Counsel for the cross claimant has not referred me to any authority that interprets s 90.5 of the Tax Agent Services Act as only applying to services in relation to the preparation and lodgement of tax returns. Without fully determining the meaning of s 90.5, I consider this section can be interpreted as encompassing the services provided by Mr Seage. Mr Seage was representing the cross claimant to the ATO in relation to his tax affairs. Whether or not Mr Seage was a registered tax agent is perhaps a legitimate concern for Ms Johnston to have in her capacity as an officer of the ATO.
In the end Ms Johnston did not take any action in relation to her concerns. While Ms Johnston's comments may have been intemperate and ill-advised because at that time she was on the receiving end of a complaint, I do not consider that her remarks in response to Mr Seage's complaint indicate that she was actuated by targeted malice, conveyed reckless disregard for ascertaining the extent of her power or reckless indifference towards the likelihood of harm to the cross claimant. Moreover there has failed to be any evidence identifying what harm did or was likely to arise from Ms Johnston's email statements.

[51]

G6(xii) Advocating for the issue of a Departure Prohibition Order (DPO)

The cross claimant submitted that in raising for consideration the issue of the ordering of a DPO against the cross claimant, Ms Johnston did not consider whether reasonable grounds existed and were not to be made in unreasonable circumstances, nor did she undertake any balancing exercise as between the severe intrusion into the cross claimant's liberty weighed against the protection of the revenue. The cross claimant submitted that it is open to the Court to infer and be comfortably satisfied that Ms Johnston's state of mind was to cause the maximum inconvenience to the cross claimant by the issue of the DPO and was recklessly indifferent, deliberately blind and wilfully ignorant as to the existence of any checks and balances concerning the issue of a DPO.
On the other hand, the DCT submitted that there is no evidence from which it could be inferred that Ms Johnston's state of mind was "to cause the maximum inconvenience to the [cross claimant]".
On 25 October 2012 (24 days after the issue of the amended assessment and before the due date for payment), Ms Johnston sent an email to Ms Benjamin as follows: "Have [you] thought about putting a DPO on Frangieh?" (JTB 5.240).
Section 14S of the Taxation Administration Act reads where a person has a tax liability and "the Commissioner believes on reasonable grounds" that it is desirable to do so, he may prohibit the departure of the person from Australia for a foreign country. Such orders are known as a Departure Prohibition Order ("DPO").
The issue of DPOs pursuant to s 14S was considered in Poletti v Commissioner of Taxation (1994) 52 FCR 154 ("Poletti") at 160 per Lockhart, Gummow and Foster JJ in a passage approved subsequently in Pattenden v Commissioner of Taxation (Cth) (2008) 175 FCR 1, and Troughton v Deputy Commissioner of Taxation (2008) 166 FCR 9. In Poletti, their Honours stated: "… The requirement that reasonable grounds must exist to support the Commissioner's belief is a safeguard to the taxpayer that departure prohibition orders will not be made against him or her in unreasonable circumstances. The making of such an order is a severe intrusion into a person's liberty, privacy and freedom of movement. On the other hand, the protection of the revenue is of great importance to Australia. These two interests must be balanced. …"
On 29 October 2012, Ms Benjamin responded to Ms Johnston's email stating: "I am currently going through the DPO policy with Frangieh in mind, and am putting together some notes in order to make a decision about whether a request might be worthwhile." (JTB 5.242).
Attached to this email were Ms Benjamin's working notes for Ms Johnston's perusal. In these notes, Ms Benjamin recorded that the cross claimant: "has travelled overseas twice in 2012, being the only overseas travel in over ten years." (JTB 5.242).
The DPO was never issued against him but then again it would be up to the recoveries section to do so.
There was little information contained in Ms Benjamin's notes that indicated the cross claimant was considered a flight risk, other than the $3,331,770.82 liability owed to the ATO and the existence of the recovery proceedings. While in these circumstances Ms Johnston's approach was lawful, it is not what I would call a well-reasoned one.
On 30 November 2012, Mr Seage sent an email to Mr Mick Lyons (who at that stage was handling the complaint on behalf of the ATO). (JTB 5.250). In that email, Mr Seage asserted that Ms Johnston had lied to Mr Lyons about what information she had found during the audit concerning Ms Cherie Summers, who had signed a statement concerning loans made by the cross claimant to Noble Capital and Mr Prestia, which was included in the Richard submission on 3 June 2011. Attached to this email was a letter, dated 30 November 2012, from Joseph Prestia of Crest Capital, stating that Ms Summers was employed by Noble Capital and that neither Ms Summers nor staff of Crest Capital recalled being contacted by the ATO about the cross claimant. I have already made a finding that Ms Johnston searched the wrong company in her investigations. It is my view that she made a mistake but she was not deliberately lying about Ms Summers' employment with Noble Capital Pty Ltd.
On 6 December 2012, Mr Peter Butler, the ATO officer then handling the complaint, sent an email to ATO officers in the Debt BSL. (By 15 November 2012, the recovery proceedings had commenced.) In his email, Mr Butler requested that the Debt BSL "consider" placing a "dispute indicator" against the debt until Mr Butler's complaint investigation is complete, which he foreshadowed would not conclude "until late January 2013." (JTB 5.252). Placing a dispute indicator against the debt would cause the debt recovery action to be held in abeyance.
On 6 December 2012, Ms Ranita Lal, Assistant Director, Debt Strategic Recovery did not agree and responded by stating that "we will not be applying a dispute indicator to the debt as currently no objection has been lodged however we are prepared not to proceed to Judgement until after January 2013." Ms Lal noted that, as a statement of claim had been filed in the Supreme Court and service must be affected within six months, the Debt BSL would proceed to attempt service on the cross claimant to ensure the time for service does not lapse. (JTB 5.252).
On 6 December 2012, Mr Butler wrote to Mr Seage, advising firstly, that he was the case manager for the complaint; secondly, he would not withdraw the notice of amended assessment; thirdly, no dispute indicator would be placed against the debt; and finally, that he would seek to release contemporaneous notes to Mr Seage. (JTB 5.253).
On 14 December 2012, Mr Hood, an ATO officer in the LBI BSL was appointed to review the "technical aspects" of the audit. (JTB 5.257). On 8 January 2013, Mr Butler sent an email to Mr Hood explaining the issues he wanted Mr Hood to review, in particular, whether there was evidence that the ATO had considered the Richards and Crawford submissions and whether, after reviewing the audit, Mr Hood held the opinion that a review by SME was warranted. (JTB 5.259).
On 24 January 2013, Mr Hood sent an email to Mr Butler, attaching his review report ("the Hood report"). (JTB 5.262). This report upheld some of Mr Seage's complaints. In the Hood report, following a review of the relevant documentation, Mr Hood summarised his findings as follows: "Inconsistent treatment of: ● Evidentiary requirements ● Random sampling ● Analysis primarily focused on deposits, not on withdrawals ● Acknowledging some of the taxpayer's representatives but not others ● Agreed action items not settled Recommendation It is submitted that as there is no evidence that the ATO has considered the Crawford submission, and taking into account the inconsistent treatments listed above, it is my opinion that a proper consideration and escalation of the submissions, would warrant a review of the audit."
Mr Hood also noted that the Richards submission was considered by the ATO in the course of the cross claimant's audit.
The Hood report was somewhat favourable to the cross claimant. It demonstrates that, within the ATO, Mr Hood held the view that there were problems with the manner in which the audit of the cross claimant had been conducted. These problems included firstly, ambiguity in relation to the level and type of evidence required to satisfy the ATO in relation to the transactions that were the subject of the audit; secondly, problems with the employment of random sampling; thirdly, analysis focussed on deposits and not withdrawals; fourthly, acknowledging some of the cross claimant's tax representatives and not others; and finally, agreed action items, such as a meeting, not settled.
On 30 January 2013, Mr Butler emailed Ms Lal advising that there were sufficient grounds to request SME to undertake some further work on the audit outcomes and that he had extended the due date for completion of the complaint to 28 February 2013. Ms Lal responded, confirming that ATO would not seek judgment until the end of February 2013. (JTB 5.266).
On 11 February 2013, Scott Simpson, Team Leader, Parliamentary & Complaints, Small & Medium Enterprises emailed Elizabeth Gamin of SME requesting that an independent member of SME who had not been involved with the audit carry out a review of it. (JTB 5.268). On 13 February 2013, Ms Julie Elms, an ATO officer in the SME BSL, was appointed to review the audit. (JTB 5.269). On 27 February 2013, Ms Elms provided her report to Mr Butler ("the Elms report"). (JTB 5.273). Ms Elms disagreed with Mr Hood.
In the Elms report, Ms Elms set out the findings of the Hood report, summarised the Crawford submission, and then set out a timeline of relevant events from the audit. Ms Elms' conclusions were as follows: 1. Some difficulty was caused by the cross claimant changing representatives, as the taxpayer and the auditor, Ms Johnston, had to brief each new representative each time and that communications between the cross claimant and the auditor would have been more effective and timely had there been a constant taxpayer representative; 2. The Crawford submission was considered, however the case note supporting this finding, which was created by Ms Johnston on 22 August 2012 (JTB 5.223), provided no explanation as to why it did not change her decision; 3. Assuming the Crawford submission had not been considered by Ms Johnston, it did not require a material change to the audit outcome. Ms Elms considered that although the Crawford submission did provide some further explanation of transactions outside the sample transactions that were addressed in the Richards submission, "it did not include any evidence in support of the explanation." (original emphasis); and 4. The amended assessment did not need to be amended because the cross claimant needed to provide more evidence for all of the remaining 16 sample transactions and that the "evidence provided to date does not sufficiently support the explanation. … The bank statements and deposit slips are not sufficient evidence." She also considered that Ms Johnston "could have also verified some of the explanations by making some third party enquiries to for example trace the sale of the motor vehicles."
Ms Elms commented that she believed, should an objection be lodged, that the objection officer would "like the auditor require additional evidence of the transactions in order to be satisfied that the amounts did not constitute assessable income." Similarly, if the objection was disallowed, she believed "the appeal decision would turn on the available evidence." On this point she concluded, "The point being that at some stage the Taxpayer [the cross claimant] will be required to provide this additional evidence in order to prove the assessment was excessive."
Finally, Ms Elms recommended that the audit team "propose alternative dispute resolution as a means to determine this dispute" and that a meeting take place between the audit team, the cross claimant and his representative "to review the evidence supporting the (16) sample transactions with a view to determining the exact nature of the transactions." (JTB 5.273). Ms Elm's report, so far as the cross claimant is concerned, was missed. The Elms report demonstrates that there were some unfavourable elements of the conduct of the audit on the parts of both Ms Johnston and the cross claimant. As Ms Elms pointed out, communication was made difficult by the cross claimant changing representatives a number of times. Ms Elms also considered that Ms Johnston could have verified some of the explanations herself by making third party enquiries.
In relation to the cross claimant's submissions, it is my view that Ms Elms considered that he did not provide adequate evidence in support of the explanations he provided in relation to the transactions. Ms Elms does not refer to any improper conduct on the part of Ms Johnston in the conduct of the audit, (but perhaps that was not the scope of her report) rather she said that Ms Johnston could have verified some of the cross claimant's explanations by making third party enquiries.
On 15 April 2013, Mr Butler forwarded his response to the complaint to Mr Seage and the cross claimant. In his reasons for not upholding the cross claimant's complaint, he addressed each of the seven issues Mr Seage raised in his complaint. (JTB 6.286).
Firstly, in response to the allegation that the ATO auditor ignored credible evidence provided by the cross claimant, Mr Richards and Mr Crawford, Mr Butler stated that "neither the Richards submission nor the Crawford submission contained credible evidence." Hence the ATO officers could not have overlooked credible evidence in either of these submissions. Mr Butler referred to the reports of Mr Hood and Ms Elms, which both supported his view that neither submission contained credible evidence. Mr Butler concluded that "the ATO has not acted unfairly or unreasonably in not accepting the claims in the submissions."
Secondly, Mr Butler concluded that, as the complaint review had not changed the substantive tax issues, the ATO would not issue an amended assessment at that stage.
Thirdly, Mr Butler referred to Mr Seage taking issue with the ATO Debt BSL attempting service of the statement of claim on the cross claimant and then seeking an order for substituted service from the Court. Mr Butler confirmed that he considered that seeking to serve the statement of claim on the cross claimant was not unreasonable and not contrary to the undertaking not to pursue the debt to judgment.
Fourthly, in response to Mr Seage's request, Mr Butler enclosed with his letter copies of the contemporaneous notes relating to verbal instructions alleged to have been given to the cross claimant and/or his representatives.
Fifthly, in relation to Mr Seage's request for advice as to the level of evidence required to substantiate the cross claimant's assertions regarding the unexplained deposits, Mr Butler noted that, prior to seeing and reviewing any evidence that the cross claimant supplied to the ATO, he could not advise what level of evidence will (original emphasis) be accepted, but indicated that "simply making a statement to advise of the nature of a transaction would not be acceptable as 'evidence' - some form of documentary evidence verification of the statements will usually be required." It is the lack of evidence produced by the cross claimant that lies at the heart of this dispute. Mr Butler then set out examples of the kinds of evidence that may be considered as supporting evidence for transactions relating to loans or motor vehicles. In setting out these examples, he referred to previous correspondence from Ms Johnston to the cross claimant's representative to similar effect.
Sixthly, Mr Butler also addressed Mr Seage's allegations in his email of 30 November 2012 that Ms Johnston had lied in relation to her investigations concerning the statement from Cherie Summers contained in the Richards submission. Mr Butler was satisfied that Ms Johnston had not lied. Accordingly, Mr Butler stated that no action against Ms Johnston was warranted.
Finally, Mr Butler dealt with Mr Seage's complaint that the ATO treated different sides of a transaction inequitably, namely the payment of $700,000 by Mr Cheihk to the cross claimant. He explained that, as the cross claimant could only substantiate $350,000 of the loan to Mr Cheihk, the ATO had characterised the balance of $350,000 as income. The cross claimant had "not yet substantiated, to the ATO's satisfaction, that he lent $700,000 to Mr C[heihk]."
Mr Butler concluded that the ATO's actions in the audit of the cross claimant's tax affairs were reasonable, as were the subsequent actions in not withdrawing the assessment and in serving a statement of claim on the cross claimant. (JTB 6.286).
This report, as well as the reports by Mr Hood and Ms Elms to which it refers, support the view to a large extent that the conduct of Ms Johnston, in the course of the audit of the cross claimant was reasonable. No allegations have been made against Mr Hood, Ms Elms or Mr Butler. The process of internal review of the conduct of the audit appears reasonable in light of Mr Seage and the cross claimant's concerns.

[52]

G6(xiii) The manner in which the cross claimant's tax position was ascertained

As stated earlier, the cross claimant pleads that the audit was undertaken by Jessie Agbola, Michelle Johnston, Cindy Sandford and Marianne Rogers in a way that no reasonable person in the capacity of an ATO public officer performing that task would have undertaken and that it was not a bona fide attempt to ascertain the cross claimant's tax position.
The particulars of the cross claimant's allegation that the audit was undertaken in such a manner are as follows: 1. Michelle Johnston added together repayments made into his loan account ignoring withdrawals and corresponding withdrawals and alleged that the total represented his income for the FY2007. 2. Ms Johnston failed to test the estimated income figure arrived at by using bank deposits method with an alternative estimation method, such as the asset betterment method, or comparing income in previous financial years, or applying an industry benchmark (failure to test method). 3. Jessie Agbola, Cindy Sandford, Michelle Johnston and Marianne Rogers relied on a fraudulent document in calculating an income figure (document relied upon to calculate income). 4. Ms Johnston and Ms Rogers ignored relevant evidence and information provided by the cross claimant and his legal representative in accordance with Ms Johnston's own request for that information and evidence and that same information and evidence was recently relied upon by another ATO officer to find that the transaction amounts it pertained to did not represent the cross claimant's income (ignored relevant information). 5. Ms Johnston alleged that he engaged in tax evasion in the FY2007 without any evidence to justify that allegation (no evidence to justify evasion). 6. John Howarth approved Ms Johnston acting on the tax evasion allegation having acknowledged that the original basis for making the allegation was insufficient.
I will now address these allegations concerning the conduct of the audit. There is some overlap with these allegations.

[53]

(a) and (b) Adding together repayments and failing to test the estimated income figure with an alternative estimation method

The cross claimant submitted that the amended assessment raised by Ms Johnston proceeded on the basis of gross receipts deposited into the mortgage account at Westpac and that the only deposits excluded by Ms Johnston was an ATO refund cheque and deposits which Ms Johnston was satisfied were the return of the same specific funds previously debited to the account, such as reversals of prior entries. In FY2007, in aggregate the amount of approximately $4,100,000 was withdrawn from the account and the amount of approximately $3,900,000 was deposited.
Counsel for the cross claimant submitted that this method of assessment offends one of the most basic foundations of the income tax, namely, that taxable income is all assessable income minus allowable deductions. Counsel for the cross claimant referred to the ATO "Phoenix Guide" (JTB 8.421A), which refers to two indirect methods of ascertaining taxable income, namely the "T" account method and the asset betterment method.
Both the "T" account methodology and the asset betterment are net concepts. The theory of a "T" account was explained by the Full Federal Court in Favaro v FCT (1997) 36 ATR 55 at 57 ("Favaro") (Spender, von Doussa, and Sackville JJ) as follows: "… a technique used as an indirect method of ascertaining a taxpayer's taxable income. They compare cash available at the beginning of a period plus cash received during the period with cash expended during the period plus cash on hand at the end of the period. With full and accurate information, the two sides of the exercise should balance."
The "T" account technique measures amounts coming in compared with amounts going out and as adjusted for amounts on hand at the beginning and end of the year. It is necessarily, a "net" calculation. The cross claimant claims that within that formulation, what Ms Johnston did was to focus on "amounts received during the period" without considering expenditure or available funds on hand at the start or end of the period.
The theory of the "asset betterment statement" is set out by the Commissioner in PS LA 2007/24 70. It relevantly states: "... the net worth of an entity at the end of each relevant year is compared with the net worth at the beginning of each of those years, and an estimate of annual asset growth is obtained. Non-deductible expenditure is added to this estimate and liabilities and exemptions are subtracted. A figure is then computed for total taxable income."
The net concept measures the increase in net assets or net worth over the period, with non deductible expenditure added to that amount and liabilities and exempt amounts subtracted.
Firstly, in response to these allegations, the DCT submitted that the evidence does not support them. The DCT referred to the September audit decision (JTB 5.227 at 45), where it states that while the total credit transactions in the Westpac account in FY2007 totalled $4,007,030, $3,234,064 remained unexplained, and that this was determined as the result of the vouching exercise of the credit and debit transactions. A similar statement was made in the evasion opinion at p 11. (JTB 4.199).
Senior counsel for the DCT further submitted that a "Summary of Withdrawals to Vouch" in relation to the withdrawals from the cross claimant's Westpac Equity Access account for the year 2007 was released to the cross claimant pursuant to a Freedom of Information request on 30 April 2013. (JTB 6.310). Senior counsel for the DCT says this document demonstrates that the audit officers did undertake analysis of withdrawals from the Westpac account.
In the Phoenix Guide, the asset betterment method is referred to as "one of the alternative means of ascertaining taxable income". The T account method is referred to as "an indirect method of ascertaining the amount of taxable income earned during a period." While it is true that the Phoenix Guide refers to these two methods of calculating a taxpayer's income for the purposes of a default assessment, it does not state that either is mandatory. Rather, the guide states that "[t]he primary requirement is that the judgement of a taxpayer's taxable income is based on some reasonable or rational grounds."
The evidence demonstrates that the ATO did consider and "vouch" the withdrawals from the Westpac account, however it does not demonstrate that the audit officers compared the withdrawals with corresponding payments into the account. Although Ms Johnston ideally should have taken deductible withdrawals into account in reaching the default assessment amount, the reality is that she did not have that information available to her.
In the Richards and Crawford submissions, the only information that was provided, was information pertaining to withdrawals. In light of the onus being on the taxpayer to demonstrate their true position for the purpose of a default assessment, the ATO could only make a default assessment on the basis of the information that had been made available to it in the course of the audit. When Ms Johnston received the additional Westpac bank deposits, she could have made DCT's position clearer and asked the cross claimant to explain these deposits and provide explanations of the withdrawals. But she did not do so.
Counsel for the cross claimant referred to Martin v Federal Commissioner of Taxation (1993) 27 ATR 282 ("Martin"), where Davies J stated at 291: "I regard it as unsatisfactory that the Taxation Office has not sought to come to a conclusion about Mr Martin's costs of earning his income save to say that expenditure not proven would not be allowed. An unwilling taxpayer, even though he is a tax evader whose evidence is not reliable, should not be assessed to tax on gross income. The Act requires that a judgment be made as to allowable deductions."
However, in Martin Davies J continued at 287: "If a proper basis can be arrived at for the allowance of deductions, that basis should be given effect."
Counsel for the cross claimant also referred to PS LA 2007/24 [56]. It states: "Where relying upon information relating to assessable income receipts, it will generally be appropriate to consider potential allowable deductions in order to make a proper determination of the taxpayer's taxable income (Martin v FCT (1993) 93 ATC 5200, 27 ATR 282). It will not be appropriate, however, to consider allowable deductions in instances where information relating to net income is relied upon, such as the results of an asset betterment or 'T' account calculation…"
The DCT submitted that there is no evidence that demonstrates the audit methodology used by Ms Johnston was inappropriate, or that she was required to have tested her conclusions reached in the audit by another method.
Counsel for the cross claimant submitted that the amended assessment raised by Ms Johnston suffers from both vices identified in PS LA 2007/24 [56], namely that the gross income is assessed without considering deductions and Ms Johnston did not attempt to undertake a net income methodology, as in a T account or an asset betterment statement, so as to disregard allowable deductions. However, this submission is based upon the existence of information pertaining to allowable deductions or net income methodologies. Counsel for the cross claimant submitted that the independent review by Mr Hood of the LBI BSL observed that there was no consideration of withdrawals/expenses or allowable deductions, Ms Elms and Mr Butler in their reports concluded that there was a lack of credible information available to Ms Johnston upon which she could make an assessment.
Counsel for the cross claimant then submitted that the inference that can be comfortably drawn is that this constitutes deliberate blindness or wilful indifference to the Commissioner's own policy to assess gross receipts.
The DCT submitted that in order for the ATO to make an allowance for deductions, it must be satisfied of a basis for the allowance of deductions. The cross claimant has not pointed to reliable evidence that was before Ms Johnston (aside from a tax refund) at the time of the audit that provided her with a basis upon which to allow deductions. Without this evidence, Ms Johnston was unable to carry out the alternative estimation methods, as they would require evidence of both the cross claimant's assessable income and deductible expenditure during FY2007.
I should draw attention to the two main reasons as to why the expanded audit was protracted. The first is that the cross claimant's responses to the ATO such as from "memory", "could have been", "I can suggest", "may be a transfer from my business account" together with his lack of proper bookkeeping record and the like are imprecise.
The second reason is that overall Ms Johnston's approach to seeking information from the cross claimant while not invalid or unlawful, was inadequate. The cross claimant would have been greatly assisted if she had advised him early on in the process to provide evidence of withdrawals so that she could apply the analysis methodologies above.
In Lock v Australian Securities and Investments Commission [2016] FCA 31 ("Lock"), Gleeson J stated that mere error or irrationality or poor decision making are not sufficient to ground a finding of bad faith. While Ms Johnston's insufficient advice to the cross claimant as to what sort of evidence she required may have displayed poor decision making, it does not lead me to conclude that her approach to auditing the cross claimant demonstrates that she was motivated by bad faith.
Neither party provided evidence or submissions in relation to the concept of an "industry benchmark". Therefore I have not considered whether this is a preferred or useful alternative estimation method.

[55]

(d) Ignoring relevant evidence and information provided by the cross claimant

This allegation involves two propositions. They are firstly, the cross claimant alleges that Ms Johnston and Ms Rogers ignored relevant evidence and information provided by the cross claimant and his legal representative in accordance with Ms Johnston's requests; and secondly, the cross claimant alleges that the same information and evidence was, more recently, relied on by another ATO public officer to find that the transaction amounts it pertained to did not represent the cross claimant's income.
So far as the first proposition is concerned, in response to a request for further and better particulars by the cross claimant (JTB 10.477-478), the cross claimant's solicitors identified that the "information and evidence" referred to in X/C [12]4 means the Richards submission, provided to the ATO on 3 June 2011. (JTB 2.93). As previously stated, the high point for the cross claimant was the Hood report. But then the Hood report was subject to an audit review conducted by Ms Elms and did not find favour with her.
The Hood, Elms and Butler reports demonstrate that the Richards submission was taken into account by Ms Johnston. Their views were similar to hers, namely that the information and evidence upon which she could make an assessment was lacking. Similarly, the Elms and Butler reports concluded that the Crawford submission was also taken into account, but suffered from the same defects as the Richards submission, namely that it lacked adequate evidence. This allegation is not made out.
In relation to the second proposition, in response to a request for further and better particulars by the cross claimant (JTB 10.477-478), the cross claimant confirmed he was alleging that it was the objection decision in which information and evidence had been relied upon by another ATO officer. This evidence is set out later in this judgment. Relevantly, the evidence provided at the objection stage was new information that had not been received in the course of the audit. This new information was the basis upon which the ATO officers subsequently amended the cross claimant's income tax assessment. In any event, I have found that the Richards submission was considered by the relevant ATO officers. Therefore this aspect of this allegation must also fail.

[57]

What, if any, Jones v Dunkel inferences should be drawn?

The cross claimant submitted that ordinarily, given that the state of mind of the requisite public officer is a key ingredient of the tort, it would be expected that if the Deputy Commissioner in this case were to dispute the existence of "reckless indifference" or "deliberate blindness" or "wilful ignorance", it would be expected that the officers concerned (primarily Ms Johnston and Ms Benjamin) would come to Court and give direct evidence that they were not recklessly indifferent, or deliberately blind, or wilfully ignorant, concerning their exercise of power and the likelihood of harm.
From the factual findings that I have made throughout this judgment, it is only necessary to consider whether a Jones v Dunkel inference should be made against the audit officers, Ms Johnston and the recovery officer, Ms Benjamin. Neither of them gave evidence at trial.
The sequence of events that concern Ms Johnston and Ms Benjamin not giving evidence is as follows: 1. Ms Johnston swore an affidavit in these proceedings on 2 February 2016; 2. Ms Benjamin swore an affidavit in these proceedings on 3 February 2016; 3. Leave was sought and granted to file both affidavits in Court (T 2.4-45); 4. Both affidavits were incorporated and handed up in the court book at the hearing; 5. This court was informed Ms Benjamin was undergoing surgery in hospital but would be available from Monday 14 March 2016 (T 4.47); 6. On Wednesday, 16 March 2016 at 5.41 pm, in solicitors' correspondence, the Deputy Commissioner advised his order of witnesses as "1. Ms Chow; 2. Ms Vo; 3. Ms Johnston; 4. Ms Benjamin". (Ex E); 7. On 18 March 2016, senior counsel for the DCT informed this Court he would not be reading the affidavits of Ms Benjamin and Ms Johnston (T 354.14); and 8. On 19 March 2016, senior counsel for DCT informed this Court that there was no explanation as to why they would not be called. (T 359.13).
In Fabre v Arenales (1992) 27 NSWLR 437, Mahoney JA (with whom Priestley and Sheller JJA agreed) at 449 stated: "…the significance to be attributed to the fact that a witness did not give evidence will in the end depend upon whether, in the circumstances, it is to be inferred that the reason why the witness was not called was because the party expected to call him feared to do so."
The above proposition arises from Jones v Dunkel at 320, per Windeyer J.
In this case, the DCT submitted that it should not be inferred that Ms Johnston and Ms Benjamin were not called because the Deputy Commissioner feared to do so. Rather, in light of the voluminous contemporaneous documentary evidence available, it was unnecessary to call those witnesses.
In Chapel Road, Schmidt J outlined (at [118]-[129]) the relevant principles concerning Jones v Dunkel inferences. Because that case was also a misfeasance in public office case, her Honour's outline of the principles is particularly apt. They are: 1. A Jones v Dunkel inference may not be available against a public officer, as to why a power was exercised, if documents in evidence, such as reasons for a decision, shed light on the matter. ([120]). 2. The rule in Jones v Dunkel does not permit the failure to call a witness to be used to fill gaps or deficiencies in the evidence. ([126]). 3. The rule in Jones v Dunkel does not permit the conclusion that the witness' evidence would have damaged the case of the party who did not call the witness. ([126]). 4. Before a Jones v Dunkel inference can be drawn, there must first be an inference against that party available to be drawn from the evidence admitted. ([128]).
In Chapel Road, the relevant officers of ASIC were not called. Schmidt J stated that given the contemporaneous documents which were available, no adverse inferences were available to be drawn. ([129]).
It follows from these principles set out in Chapel Road that the evidence should be considered and the inferences available from that evidence should be determined, before it can be concluded that a party did not call a witness because he feared to do so. The evidence, and the inferences (or lack thereof) available from it, may demonstrate that a party did not call a witness because, in light of the other evidence, there was no need to do so.
Counsel for the cross claimant referred to Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345 ("Hellicar") at [166] that recently reaffirmed the principle flowing from Lord Mansfield's dictum in Blatch v Archer (1774) 98 ER 969 at 970 that "[i]t is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted". The decision in Jones v Dunkel was described as "a particular and vivid example" of how such principles may be used. The Court in Jones v Dunkel (1959) 101 CLR 298 at 308 per Kitto J; held that: "... that any inference favourable to the plaintiff for which there was ground in the evidence might be more confidently drawn when a person presumably able to put the true complexion on the facts relied on as the ground for the inference has not been called as a witness by the defendant and the evidence provides no sufficient explanation of his absence."
According to counsel for the cross claimant, from the material discovered by the Deputy Commissioner, incorporated in the joint tender bundles, there is a wealth of material (including email correspondence, post-it notes, file notes, submissions, draft and final documents) from which inferences might be drawn that the ATO officers, including Ms Johnston and Ms Benjamin. These inferences suggest that they were motivated by actual targeted malice, or alternatively, were recklessly indifferent, or were deliberately blind or were wilfully ignorant concerning whether their acts were beyond power and the likelihood of harm.
According to the cross claimant they are persons who presumably were able to put the true complexion on the facts relied upon to found the inference, but were not called and no explanation for their absence given. Therefore, the cross claimant says that this Court may be comfortably and confidently satisfied that from the material before the Court that the inferences of targeted malice, or reckless indifference, or deliberately blind, or wilfully ignorant should be drawn.
Senior counsel for the DCT disagrees and submitted that there is a "wealth of material" available in the evidence in the court book which sheds light on the reasons for the ATO officers' acts.
I accept that senior counsel for the DCT made, at the last moment, a forensic decision not to call Ms Johnston and Ms Benjamin. Although I have not yet referred to Ms Johnston's trenchant view about the evidentiary qualities of statutory declarations, I have also taken evidence of her views into account when considering whether I should make Jones v Dunkel inferences against her. It is my view that Ms Johnston has not held back contemporaneously expressing her views in writing. These documents were in evidence. In these circumstances, I do not think it is appropriate to draw Jones v Dunkel inferences against Ms Johnston.
Ms Benjamin had less of a role in dealing with Mr Frangieh and his tax obligations. She also expressed her views contemporaneously in writing. I do not think that any Jones v Dunkel inferences should be drawn against her either.
After a careful examination and analysis of the evidence, I have reached the conclusion that the cross claimant was not targeted by Ms Agbola, Ms Johnston, Ms Sandford and Ms Rogers when they decided to conduct an audit and carry out the expanded audit. Nor did they have an improper purpose or malice when undertaking the audit and making the decision to expand and conduct an audit. The first claim for misfeasance in public office fails.

[58]

G7 The second alleged misfeasance - commencement and maintenance of recovery proceedings - 15 November 2012 to September 2014

Broadly, the allegations concerning this second alleged misfeasance are that a number of ATO officers "commenced and maintained" the recovery proceedings for an improper purpose. The second alleged misfeasance occurred during the period from the commencement of the recovery proceedings up to September 2014, when the objection decision was made. It is said to have involved tax officers Lauren Benjamin, Venus Shakuntala Lakshman, Desiree Armstrong, Grahame Tanna and the DCT (the first recovery officers).
There are 10 particulars of the alleged second misfeasance in public office. Each of these particulars as well as the heading points at which they are addressed are as follows (there is some overlap):

F7(iii): The DCT knew the assessments were incorrect, and hence knew the legal claim based upon it misrepresented to the Court a liability owed by the cross claimant.
F7(iv): The first recovery officers knew that there was a genuine dispute in relation to the assessments and/or that the assessments could not withstand scrutiny.
F7(v): The first recovery officers knew the improper purpose of Jessie Agbola, Michelle Johnston, Cindy Sandford and Marianne Rogers ("the audit officers") for auditing and assessing the cross claimant.
F7(vi): The first recovery officers knew the assessments to have been issued outside of the time period prescribed for amending assessments.
F7(v): The first recovery officers knew, or were reckless as to whether the assessments were made in bad faith.
F7(vii): The first recovery officers deliberately or recklessly failed to follow internal ATO guidelines directing ATO public officers to not pursue legal proceedings to recover a disputed tax debt unless the risk that the taxpayer may flee the country to escape tax obligations or the risk that the taxpayer's assets justified prematurely taking steps to secure a disputed debt.
F7(viii): The first recovery officers knew that judgment for the claimed amount could not be obtained.
F7(ix): The first recovery officers knew that the cross claimant had limited resources and assets.
F7(ix): The first recovery officers knew that legal proceedings would impose upon the cross claimant a substantial time, cost, and emotional burden.
F7(x): The first recovery officers knew that the claim could be withdrawn and filed, if genuinely necessary, at a later time without any prejudice to the DCT.

The cross claimant also alleges that this conduct amounts to an abuse of process. I will refer to this later in this judgment.

[59]

G7(i) Factual background of second misfeasance

It is now convenient that I set out the relevant factual matters in relation to the second misfeasance in public office. Two different things were happening at this time, the recovery proceedings were on foot and the ATO was dealing with the cross claimant's objection to the amended assessment. Where I discuss the recovery proceedings in this Court, in which the cross claimant was the defendant, I will refer to him by name.
Shortly after the ATO issued the assessments, the cross claimant lodged a complaint regarding the audit and the assessment to the ATO complaints area. (X/C [15]).
The cross claim pleads that an ATO public officer from the ATO complaints area requested ATO officers in the debt collection area not to pursue legal proceedings to judgment due to issues with the audit and the assessment. The ATO officers in the debt area advised the ATO officers in the complaints area that the legal proceedings would not be pursued to judgment, but did not withdraw the claim that had been filed. It also pleads that an ATO public officer from the ATO complaints area acknowledged that the assessments were defective and the audit methodology applied was flawed explaining that there had been a failure to take into account withdrawals from the loan account that was audited. (X/C [17] to [19]).
On 1 May 2013, an objection to the amended assessment was lodged. The cross claimant alleges that the recovery officers commenced and maintained the recovery proceedings for improper purposes, namely to facilitate the improper motivations of the audit officers. This was done firstly, in order to perpetuate the agenda that had been formed and exacerbate the disruption, burden, loss and damage to the cross claimant; secondly, to impose a time, costs and emotional burden on the cross claimant and; finally, to obstruct and undermine substantive review of the assessments. (XC [21]).
On 15 November 2012, the recovery proceedings were commenced. The relief claimed by the DCT included judgment against Mr Frangieh in respect of unpaid income tax (plus penalties and shortfall interest charges) for FY2007 as well as two other outstanding tax debts. Those debts were an "RBA deficit debt" relating to BAS and administrative penalties concerning the GJN Discretionary Trust (of which Mr Frangieh was the trustee), and an RBA deficit debt in respect of Mr Frangieh's BAS obligations. As previously mentioned, the statement of claim was signed by Mr Robert Ravanello, a Deputy Commissioner of Taxation. (JTB 5.247).
On 6 December 2012, Ms Lal in the Debt Strategic Recovery section undertook to Mr Butler (the ATO officer handling Mr Frangieh's complaint) that she would not proceed to judgment until after January 2013, noting she would need to serve it on Mr Frangieh within six months of filing. On 30 January 2013, Ms Lal gave a further undertaking to Mr Butler not to seek judgment until the end of February 2013. The DCT did not seek default judgment until after the end of February 2013.
On 4 February 2013, orders for substituted service of the statement of claim were obtained by the DCT in the recovery proceedings. (JTB 5.267).
On 14 March 2013, the DCT filed an amended statement of claim in the recovery proceedings.
On 2 April 2013, five months after the statement of claim in the recovery proceedings had been filed, Mr Frangieh was served with the amended statement of claim pursuant to the orders for substituted service. (JTB 6.282).
On 15 April 2013, Mr Butler, the ATO officer dealing with Mr Frangieh's complaint, emailed Mr Seage and Mr Frangieh attaching a letter setting out Mr Butler's reasons for not upholding the complaint. (JTB 285).
On 1 May 2013, the cross claimant lodged an objection in relation to the amended assessment. (JTB 6.291). This objection was partially successful. On 18 September 2014, Mr Brett Martin, a Deputy Commissioner of Taxation, made a decision in respect of that objection, partially allowing the objection, and reducing the cross claimant's taxable income for FY2007 from $3,685,805 to $827,609. (JTB 7.371). An amended assessment reflecting the objection decision was issued on 30 September 2014. (JTB 7.373).
On 13 May 2013, Mr Frangieh filed his defence in the recovery proceedings which was served on the Deputy Commissioner of Taxation on 16 May 2013. (JTB 6.297).
Mr Frangieh's evidence is that after discussions with his solicitor, he decided to try to settle with the ATO rather than go through further review in the AAT, which would be more time consuming, costly and stressful. He decided to make an offer of around $100,000. Mr Frangieh and his solicitor were of the opinion that this reflected a compromise, based on a handful of transactions they felt would be more difficult to explain. They were prepared to, in effect, treat these items as income. It was Mr Frangieh's view that this was more than a reasonable offer, given that he knew the amounts were not income. It is also his view that the ATO was way out of time to have even assessed him in the first place. (Aff, [30], 9/12/2015).
The ATO advised Mr Frangieh that for it to consider a settlement offer, Mr Frangieh had to submit a compromise proposal. A form was required to be completed. Mr Frangieh was to provide personal details, details of assets and liabilities. After undertaking that exercise, Mr Frangieh says that in his opinion it seemed even clearer that the offer he was making was very reasonable given that he had no assets the ATO could possibly get at. Mr Frangieh explained in the form that he would borrow money from family to pay the settlement amount. (Aff, [31], 9/12/2015).
On 23 July 2013, Ms Armstrong (a lawyer employed by the ATO) wrote to Mr Frangieh's newly engaged solicitor, Mr Carey of Small, Meyer Hughes ("SMH") noting that the recovery proceedings were listed for directions on 25 July 2013. She said that she would propose short minutes of order seeking leave to file a further amended statement of claim and that the proceedings be listed for directions on 21 August 2013. (JTB 6.301).
On 24 July 2013, Mr Carey of SMH sent a letter to Ms Armstrong, agreeing to the short minutes and also proposing a three month adjournment of the recovery proceedings. (JTB 6.302). At the directions hearing on 25 July 2013, the orders were made by consent. (JTB 10.473).
On 7 August 2013, Ms Armstrong sent a letter by email to Mr Carey, referring to SMH's request for a further three month adjournment. On 21 August 2013, by consent, the matter was stood over for direction to 24 September 2013. (JTB 10.473). On 20 August 2013, Ms Armstrong mentioned the matter by consent and handed up consent orders. (JTB 6.309).
On 20 September 2013, SMH sent a document to Ms Callahan, the ATO officer then dealing with the cross claimant's objection ("the objection submission"). (JTB 6.311). This document provided a summary of explanations concerning the deposits into the Westpac account, along with annexures. Amongst the annexures are documents including statutory declarations, account statements, bank vouchers, copies of cheques, emails and letters from businesses and bank employees, a letter from the cross claimant's brother, documents received pursuant to FOI requests made of the ATO by the cross claimant, a loan agreement and a dealership agreement.
It is important to note that some of the evidence provided had not been provided by the cross claimant or his representatives earlier, during the course of the audit in support of explanations that had been given in relation to the deposits into the Westpac account. The statutory declarations included one from the cross claimant together with statutory declarations from Robert Melham dated 18 September 2013, Joseph Prestia dated 20 September 2013, George Cheihk dated 19 September 2013, Sharon Frangieh dated 18 September 2013, Hasna Frangieh dated 19 September 2013, Leo Lewin dated 19 September 2013 and an unsigned affidavit by Simon Bak. Seven of these statutory declarations say that certain deposits made to the cross claimant were repayments of loans, loan interest or payments for motor vehicles. These declarations had not been provided during the course of the audit.
Also on 20 September 2013, Mr Carey of SMH wrote to Ms Armstrong in relation to the next directions hearing on 24 September 2013. Mr Carey set out proposed orders for the exchange of categories of documents for discovery and the exchange of verified lists of documents. (JTB 6.312).
On 23 September 2013, Ms Armstrong wrote to Mr Carey stating that the Deputy Commissioner did not agree to orders for discovery and would propose instead orders for the parties to exchange evidence. (JTB 6.313). She also said that given the nature of the allegations in the defence, the Deputy Commissioner was considering whether to apply for parts of it to be struck out. In light of that, Ms Armstrong proposed an adjournment of four weeks to 23 October 2013 and enclosed short minutes of order to that effect.
On 23 September 2013, Mr Carey replied, stating that Mr Frangieh was agreeable to the four week adjournment, enclosing signed consent orders to that effect, and requesting Ms Armstrong mention SMH's appearance at the directions hearing. (JTB 6.314). At the directions hearing on 24 September 2013, the recovery proceedings were listed for directions on 23 October 2013. (JTB 10.473).
The following orders were made by consent at the directions hearing on 23 October 2013: "1. The Plaintiff file & service affidavit evidence by 22 November 2013 2. The Plaintiff file & serve any motion seeking to strike out all or part of the Defence and/or for Summary Judgment by 6 Dec 2013 3. [Mr Frangieh] file & serve affidavit evidence by 24 Jan 2014 4. The Plaintiff file & serve affidavit evidence in reply by 14 Feb 2014 5. The proceedings be listed for directions on 14 Feb 2014." (JTB 10.473).
On 22 November 2013, Mr Frangieh filed his affidavit evidence in the recovery proceedings. (JTB 7.327).
On 6 December 2013, the DCT filed a notice of motion seeking orders that Mr Frangieh's defence be struck out and for summary judgment. (JTB 7.328). On 22 November 2013 Ms Benjamin filed an affidavit in support of this motion. (CB 2.17). She deposed at [43] that she believed that " [Mr Frangieh] has no defence to the [DCT's] claim." This motion was never set down for hearing.
On 11 December 2013, Mr Wojtasik, the current solicitor for the cross claimant, sent an email to Ms Callahan attaching bank statements that he said "should assist in substantiating further statements made by various parties in Statutory Declarations annexed to the objection." (JTB 7.329).
On 14 January 2014, Mr Wojtasik sent a further email to Ms Callahan attaching a letter concerning statutory declaration evidence. This letter contained submissions to the effect that the statutory declaration evidence provided to the ATO for the objection to that date should be accepted. (JTB 7.333).
On 24 January 2014, the DCT filed and served affidavit evidence.
On 10 February 2014, Mr Carey of SMH sent a letter to the Australian Government Solicitor ("AGS"), who was then acting for the DCT. (JTB 7.337). In that letter, Mr Carey set out Mr Frangieh's position concerning the objection. He proposed that the recovery proceedings be adjourned for a further six months, with the progress of the objection and any subsequent appeal to be reviewed at the end of that period. Mr Carey also proposed: "Should you[r] client not be agreeable to the above, we would ask that your client undertake to take no recovery action in respect of any judgment until our client's taxation objection and any subsequent appeals of that objection are determined."
Mr Carey continued: "In the event that your client is not agreeable to the abovementioned proposed courses of action, we confirm that our client will consent to your client requesting a hearing date at the next directions hearing. If your client does proceed in this manner and prosecute the notice of motion, our client will have no option to make an application for stay of the judgment."
The DCT submitted that this letter is significant for two reasons, firstly, it demonstrates that the cross claimant, through his lawyers, acknowledged that he contemplated and accepted that the recovery proceedings might proceed to judgment while his objection was still on foot (subject to no recovery action being taken); and secondly, the letter also indicated that the cross claimant would consent to the recovery proceedings being set down for hearing while his objection was on foot.
On 13 February 2014, AGS responded to Mr Carey's letter. (JTB 7.338). AGS referred to ss 14ZZM and 14ZZR of the Taxation Administration Act. (I have already set out these sections earlier in this judgment). Those sections permit the DCT to continue with recovery action while a review took place. AGS stated that the DCT did not agree to a six month adjournment but would agree to an adjournment until 24 April 2014 "for your client's objection to progress". That is, the DCT agreed to an adjournment of over two months. Alternatively, AGS suggested that, in order to save both parties unnecessary time and costs, Mr Frangieh should consent to judgment, and if he did, the Deputy Commissioner would agree not to enforce the judgment for "at least" six months.
At the directions hearing on 14 February 2014, the recovery proceedings were adjourned until 24 April 2014, by consent. (JTB 10.473.)
On 22 April 2014, Mr Wojtasik of SMH sent an email to AGS asserting that there was "really no excuse" for proceeding with the recovery proceedings and that the ATO "should withdraw immediately". AGS responded that the DCT was not prepared to withdraw the recovery proceedings because the liabilities still remained outstanding and the objection had not yet been determined. AGS proposed an adjournment until 5 June 2014. (JTB 7.341). AGS further explained that its instructions were that when the objection was determined, it was likely there would still be outstanding liability, and that if the cross claimant was complaining about delay, AGS was happy to have the matter set down for hearing. Mr Wojtasik responded "No, we want the matter dismissed." (JTB 7.341). On 24 April 2014 at the directions hearing, Mr Frangieh was represented by Ms McLay (a city agent for SMH). She sent an email to Mr Wojtasik reporting on the directions hearing (CTB 7.342): "I explained why it was the defendant's [Mr Frangieh] position that there was no reasonable basis for the proceedings to be maintained (based on the existing assessment) and that the proceedings should be dismissed with costs. The Registrar heard my submissions but noted that the defendant [Mr Frangieh] had consented to the proceedings remaining on foot during the objection process."
Ms McLay also noted that the Registrar adjourned the matter to 23 May 2014 and stated that "[Mr Frangieh] could file any application in the meantime". Ms McLay had also referred Mr Wojtasik to the UCPR 13.4 that relates to having proceedings dismissed on the basis that they disclose no reasonable cause of action or are an abuse of process, and the documents required to make such an application.
On 20 May 2014, Philip Brown, on behalf of Michael Cranston, DCT, sent a letter to Mr Wojtasik in which he conveyed that the potential outcome of the objection was that the cross claimant's undeclared income would be assessed at $1,041,151 and provided comments seeking the cross claimant's response. (JTB 7.344).
On 21 May 2014, Ms Wang a lawyer at AGS sent an email to Mr Wojtasik stating that the likely outcome of the cross claimant's objection was that his assessable income would be reduced from $3,584,062 to $1,041,151, and that it was anticipated the objection would be finalised by 28 May 2014. AGS suggested that the recovery proceedings be adjourned until 6 June 2014, and should Mr Frangieh not agree to an adjournment, then AGS anticipated seeking instructions to have the matter set down for hearing. (JTB 7.347).
Mr Wojtasik responded by email, stating "Are you proposing to have the matter set down for hearing? You know we think this matter should be dismissed with costs." (JTB 7.347).
The parties did not reach agreement as to what should occur at the directions hearing on 23 May 2014. At that hearing, Mr Frangieh was again represented by Ms McLay. She sent an email to Mr Wojtasik (JTB 7.349) reporting on the directions hearing. She advised that she had argued that the recovery proceedings should be dismissed because they were based on an incorrect statement of claim and incorrect assessments; perceived the Registrar had "seemed persuaded" that the proceedings "should not continue", and indicated that he would refer to the matter to a duty judge; after the matter was stood down in the list, the solicitor appearing for the DCT (Ms Wang of AGS) explained that it was not anticipated that all of the assessment would be withdrawn, so it was not necessary to file a new statement of claim; instead, only some particulars would require amendment; and the registrar adjourned the proceedings until 11 July 2014.
On 28 May 2014, Mr Wojtasik wrote to Mr Brown at ATO in response to his letter dated 20 May 2014 (detailed above). Mr Wojtasik stated that it had become clear that "the assessment issued as a result of the audit was issued in bad faith" and that the ATO's decision to proceed with debt recovery action in the Supreme Court "clearly served no rational purpose other than to harass and place pressure" on the defendant. (JTB 7.350).
On 19 June 2014, Mr Frangieh solicitor at [4] of his letter to the ATO (attention Philip Brown) stated: "Regarding the outstanding amounts you have identified, as we have little details regarding these amounts, we propose to accept these amounts as Mr Frangieh's taxable income and propose to pay any resulting tax minus any interest or penalties, in final settlement of this matter." (JTB 7.353).
On 8 July 2014, shortly before the directions hearing on 11 July 2014, Mr Wojtasik sent an email to Ms Wang stating that he had been engaged in some settlement discussions with Mr Brown, the ATO officer handling the objection. He further stated: "We want to avoid incurring further costs in the Supreme Court matter as we do not believe those proceedings should have been commenced in the first place. At the moment my understanding is that the matter is scheduled again for this Friday. Would you be happy to attend and let the Registrar know that the parties are currently engaged in settlement discussions? Our position is still that the matter should be dismissed, but if the ATO insists on keeping the matter on foot, then we would have to accept again that the matter be adjourned. Would you be happy to attend without us and communicate a mutually agreed position? I suggest a letter to the Registrar beforehand. The matter could then be dealt with quickly." (JTB 7.358).
From this correspondence it appears that Mr Wojtasik, while expressing a preference for the recovery proceedings to be dismissed, accepted that the proceedings might be kept on foot and further adjourned.
On 10 July 2014, AGS replied to Mr Wojtasik's email. AGS again pointed out the effect of ss 14ZZM and 14ZZRR of the Tax Administration Act and that the recovery proceedings did not relate just only to the income tax liabilities (the subject of the objection) but they also related to RBA deficit debts which were not the subject of substantive dispute. AGS proposed, on the basis that settlement discussions would include all liabilities the subject of the proceedings, that the recovery proceedings be stood over for six weeks until 22 August 2014. AGS enclosed short minutes of order to that effect and confirmed that they were willing to mention SMH's appearance. (JTB 7.358).
On 10 July 2014 at 5.08 pm, Mr Wojtasik emailed the registrar attaching the consent orders. (JTB 7.358). He also stated: "Although our client is of the view that these proceedings were unnecessarily and prematurely commenced; that costs have unnecessarily been incurred; that the plaintiff's claim would need to be further amended to move forward; and that dismissal of this matter would be beneficial to both parties (and would not prejudice the plaintiff's right to commence proceedings at a later time if needed), we understand that the plaintiff insists on maintaining the proceedings, and, as such, the defendant accepts further adjournment of this matter."
This email indicates that cross claimant accepted that another adjournment should be granted. At this stage the ATO decision in relation to the objection was still pending.
On 14 July 2014, AGS sent a letter to Mr Wojtasik regarding the directions hearing on 11 February 2014. (JTB 7.359). AGS reported that Ms Foda of counsel had appeared and mentioned the matter on SMH's behalf. She had informed the Court that Mr Wojtasik's email to the registrar at 5.08 pm on 10 July 2014 had been sent without the knowledge or consent of the DCT and in those circumstances the parties had agreed that the email should be removed from the Court file. AGS also reported that orders were made standing the recovery proceedings over for six weeks, until 22 August 2014.
On 25 July 2014, following some "without prejudice" exchanges between Mr Wojtasik and Mr Brown, Mr Wojtasik sent an email to Mr Brown attaching further evidence Mr Frangieh was able to locate concerning four of the deposits that were still in issue. (JTB 7.361).
On 13 August 2014, Mr Wojtasik sent an email to Mr Philip Brown in which he provided Mr Brown with two further statutory declarations being those of Mr Bassili and Mr Paul Saliba. The deponents asserted that funds received by Mr Frangieh from them and paid into his Westpac account were repayments of loans.
It is my view that the DCT's attitude to adjournments while the objection was considered was reasonable. It was only on 13 August 2014 that further explanations were provided as to the repayment of their loans to the defendant.

[60]

Views expressed by Ms Johnston regarding statutory declarations and garnishee orders and bankruptcy proceedings considered by Ms Johnston and Ms Benjamin

As the cross claimant regards the views of Ms Johnston's regarding statutory declarations and garnishee orders and bankruptcy proceedings considered by Ms Johnston and Ms Benjamin as revealing their states of mind, I have addressed them separately here. First in time is the Ms Benjamin and Ms Johnston's consideration of the garnishes orders and bankruptcy proceedings followed by Ms Johnston's views on the topic of statutory declarations.
The first discussions about the garnishee orders commenced on 13 and 14 May 2013.
On 13 May 2013, Ms Johnston emailed Ms Benjamin and stated: "Were you aware of this properly held in the name of Joseph Frangieh? Looks like it is on the market. Another potential garnishee opportunity." (JTB 6. 292).
On the same day Ms Benjamin responded: "Yeah it's been on the market for about a year. I will touch base with the agent…"(JTB 6. 293).
On 14 May 2013, Ms Benjamin emailed Ms Johnston with more information. She stated: "I have been told that Frangieh's sister (Elizabeth, I think) owns XX XXXX St Albion and is earning around $5,500 per month if you wanna look into that :)" (JTB 6.295).
The next discussions occurred in October 2013.
The cross claimant submitted that Ms Johnston had also collaborated with Ms Benjamin for default judgment to be entered forthwith, and for Mr Frangieh to be made bankrupt with garnishee orders be issued forthwith, notwithstanding the pendency of the objection and appeal.
Subsequently, the cross claimant submitted that Ms Benjamin and the other ATO officers, pressed for default judgment (including striking out Mr Frangieh's defence) in circumstances where they had been informed by the ATO objections officer ("the fresh set of eyes") that significant credit amendment was likely to arise and that the amended assessment was likely to be reduced by $3,000,000.
The cross claimant says that the primary material to make good that intention commences with Ms Benjamin writing to Ms Johnston on 19 October 2014, some six days before the due date for payment, saying: "Once the debt becomes payable, I will likely file a Statement of Claim with a view to bankruptcy."
Ms Johnston replied "Yes good idea". (JTB 6.239).
According to the cross claimant that means Ms Benjamin is saying that it is a good idea to make Mr Frangieh bankrupt and irrespective of all the errors omissions and shortcomings contained in the amended assessment.
On 17 October 2013, Ms Benjamin received an email from Tim Edwards, team leader PGH. Mr Edwards advised: "I have someone going through all the information, and I am awaiting a response from the auditor. I expect to have an update by CoB Monday 21 October. My initial opinion that they may have provided some material that may result in a credit amendment. I will have a better idea once all the information is considered." (JTB 7.316). On 21 October 2013, Mr Edwards emailed Ms Benjamin stating: "... it is possible that there may be a significant credit amendment as a result of the information provided. The taxpayer has provided bank statements loan agreements and stat decs to explain about $3 million worth of income. … based on the information provided (assuming we accept it) this may cast some doubt on the disputed debt?" (Emphasis added). (JTB 7.317).
However, on 22 November 2013 and 6 December 2013, a month after she was told of the existence of a significant credit amendment amounting to a $3,000,000 reduction in income and doubt over the disputed debt, Ms Benjamin moved (JTB 7.328) that the defence be struck out and default judgment entered. As previously mentioned, she swore an affidavit in support (JTB 7.327) that: "I verily believe that the defendant has no defence to the Plaintiff's claim ... [Mr Frangieh] is indebted to the Plaintiff for the sum of $4,441,770.82."
A significant credit would constitute a defence that Mr Frangieh was not indebted as alleged.
The cross claimant submitted that it is actual malice, or alternatively, reckless indifference, to move for default judgment (with a view to bankruptcy) on the basis that he was indebted and had no defence, in circumstances where the "fresh set of eyes" had told her four weeks before, there was likely to be significant credit amendments and there was "some doubt on the disputed debt". Hence an allegation of reckless indifference is raised here.
According to the cross claimant, each subsequent ATO officer involved with the recovery proceedings possesses the same imputed knowledge that there was some significant and considerable doubt on the level of the disputed debt until the recovery proceedings on 31 July 2015. However, as previously stated, the tort of misfeasance cannot be established simply by the acts of various tax officers or establishing a course of conduct which it is claimed is improper or tainted in some way. (Chapel Road at [77]).
The DCT submitted four reasons why the cross claimant's submissions should be rejected, firstly, the cross claimant did not provide statutory declaration evidence during the course of the audit. Hence, the decisions that Ms Johnston was actually involved in during the course of the audit did not raise the issue of whether, and if so in what circumstances, statutory declaration evidence might be rejected or accepted. Secondly, Ms Johnston's comments in the email dated 11 December 2013, (JTB 7.330) that refers to her attitude towards the cross claimant's statutory declarations, would not have changed the outcome of the audit. Ms Johnston considered the cross claimant's statutory declarations to be unreliable because the information supplied in them was inconsistent with other evidence.
At the outset, it is important to note that the cross claimant's submissions on this topic only concern Ms Johnston's views towards statutory declarations. The issue of statutory declarations only came into play in the objection process. It was only then that the statutory declarations were furnished to the ATO. In the chronology of the statement of cross claim, this event falls within the events that occurred during the second misfeasance. Ms Johnston is not named as a person who was involved out the second misfeasance, except to the extent that the cross claimant alleges the debt/recovery officers commenced and maintained the legal proceedings for the improper purpose of facilitating the improper motivations of the audit officers, including Ms Johnston on the basis that the audit officers knew of such motivations. Hence the issue is what was Ms Johnston's state of mind and whether the debt/recovery officers knew of and adopted her state of mind in maintaining the recovery proceedings against the cross claimant.

[61]

Recovery officers' knowledge of Ms Johnston's state of mind and alleged perpetuation of an improper agenda through legal proceedings

On 11 October 2013, Ms Callahan, the ATO officer then handling the objection, sent an email to Ms Johnston. (JTB 6.315). In that email, Ms Callahan informed Ms Johnston that the cross claimant had provided some additional information, including statutory declarations. Ms Callahan then said: "No decision had been made and if you have the capacity, on an informal basis, we would be interested in your thoughts on the information. For example, they have provided some stat decs with the information - is this the type of information you were looking for?"
On 1 November 2013, Tim Edwards (Ms Callahan's team leader) followed up on Ms Callahan's email by emailing Ms Johnston asking her to contact him if she had any comments or views in relation to Ms Callahan's email dated 11 October 2013. Mr Edwards noted that he had had someone look at the new evidence provided by the cross claimant in support of his objection and that "they have considered that it is possible that a majority of the undeclared income can be explained". (JTB 7.318).
Ms Johnston forwarded this email to other ATO officers in SME, which prompted a number of other emails. Some emails involved Ms Sandford liaising with Mr Edwards for the purpose of holding a discussion between her, Mr Edwards and Ms Johnston. (JTB 7.323 and 7.325). An email from Ms Sandford was also sent to Mr Pearce, a National Director - Phoenix, in the SME BSL, to keep him in the loop. (JTB 7.322). In other emails, ATO officers offered comments, apparently in response to Mr Edwards' statement that the person who had reviewed the new information provided by the cross claimant in support of his objection considered that a majority of the undeclared income might be explained. Ms Sandford posed the question whether the undeclared income was explained through statutory declarations. (JTB 7.321). Mr Stanmore observed that it was necessary to do more than just "explain" the deposits; and that "documentary proof" was required. (JTB 7.324). Ms Jones said "Lets just pack up shop now … We're obviously getting paid for nothing." (JTB 7.321).
The DCT submitted that, as a whole, these emails demonstrate only two things. Firstly, that on receipt of Mr Edwards' email, ATO officers endeavoured to arrange a meeting in order to address his request. Secondly, that on receipt of Mr Edwards' email, some ATO officers wished to know what kind of "information" had been received that would now explain the previously unexplained deposits. My view is that Ms Jones' email (JTB 7.321) expressed exasperation with the procedure being adopted. The DCT submitted that in any event, Ms Jones' email could not further the cross claimant's case because he does not allege in the cross claim that she was one of the ATO officers who engaged in any misfeasance. According to the defendant, whatever else these emails show, they do not show malice. In my view the authors of the emails express a difference of opinion and one author expresses exasperation but this does not amount to malice.
On 11 December 2013, Ms Johnston sent an email to Ms Callahan, responding to Ms Callahan's request for her to provide her thoughts on the new information the cross claimant had provided at the objection stage, and whether that was the kind of information she had been looking for during the audit. (JTB 7.330). In her email, Ms Johnston explained that she had gone through around half the transactions and expressed her conclusion as follows: "Looking at the evidence and explanations provided by Joseph Frangieh on those transactions, the result of the audit would not have changed." Ms Johnston then set out, in dot point form, her reasons for that view. They are: ● "Providing statutory declarations is not accepted as evidence to a support loan between two parties or any other contentions made by Frangieh. Other primary source documents would be available e.g. Bank statements showing the flow of funds at a very minimum. ● The Statutory declarations made contain false statements. The statements made by Joseph Frangieh that he was director of In Style Developments Pty Ltd is incorrect. He was not a director of the company when the statement was. He was not a director of the company when the listed payments were made to him and he was not a director of the company during the ATO comprehensive audit. Refer to MASCOT for more details. No address is stated on the Statutory Declaration. ● Joseph Frangieh claims that some of the deposits are rebankings are more than likely not rebankings. Statements made now in the past may not be correct. The amounts don't match. Some withdrawals are cheques or transfers to other accounts. E.G. 3/10/2006 a DEFT payment by authority is debited to the account. A deposit of cash paid into the account by Sharon Frangieh on 3/10/2006. How could this be rebankings?? Statements made but no evidence to support statements ● A letter from Crest Capital Pty Ltd (Previously Noble Capital Pty Ltd). No loan agreements, no details of the amount of interest/fees paid. Only listing of returned capital. Statutory Declarations made by Joseph Prestia states certain payments were made to Joseph Frangieh from Noble Capital. However, the vouching undertaken by the ATO indicate that the payments received were not from Noble Capital. ● Not all deposits to the account have been included as income. Where it is clear the amount is not income, the amount is excluded. Refer to attached spreadsheet. The vast majority of the "evidence" presented for the objection has been presented during the audit. None of the information presented at the objection would change the decision made at the audit." (JTB 7.330).
Ms Johnston attached to her email a spreadsheet setting out her comments in relation to the additional information provided, in respect of specific transactions.
In this email Ms Johnston analyses the details of the information provided in the statutory declarations and compared them with the information she was provided during the audit.
In July 2014, Ms Johnston became aware that the objection was close to finalisation, and the likely outcome was that the amount the ATO now proposed to treat as undeclared income was $843,243. That prompted her to prepare a submission to Mr Seddon, a draft of which she emailed to Ms Jones on 1 July 2014. (JTB 7.356). Mr Seddon was a National Director of Phoenix (see JTB 8.404).
The DCT submitted that the sections of legislation in the Bankruptcy Act 1966 (Cth) and Taxation Administration Act dealing with statutory declarations to which the cross claimant referred cannot be relied upon as authority demonstrating that Ms Johnston would have been bound to accept statutory declarations. As well, the passage from Ma (at 230) suggests that a combination of evidence on oath, together with "acceptable evidence" of how a taxpayer spends his time and a "reasonable explanation" for the appearance of assets should be considered.
The DCT also submitted that the cross claimant's reliance on Mr Aftanas' email dated 18 June 2015 is misplaced since, rather than undermining the formation of the evasion opinion, he explains the reason for the different outcome at audit when compared to the objection decision and the outcome of the AAT proceedings, namely that the cross claimant provided "better evidence" and "more plausible and coherent arguments".
According to the DCT, no inference of malice could be drawn from the manner in which Ms Johnston, after the audit had occurred and objection commenced, considered statutory declarations.
The DCT submitted that Ms Johnston's correspondence does not show she was of the view that statutory declarations were "of no worth whatsoever" unless there was a supporting "contemporaneous third party document". Rather, her email to Ms Callahan dated 11 December 2013 shows that, if presented with evidence in the form statutory declarations, she would consider that evidence against other evidence (such as vouching information in relation to bank transactions, showing the source of deposited funds or the destination of withdrawn funds) to assess its consistency with other evidence. According to the DCT, it was not until the objection stage that the cross claimant provided evidence in the form of statutory declarations. The best evidence as to how Ms Johnston would have approached statutory declaration evidence is the evidence as to how she in fact approached the unsworn Summers statement during the audit. Ms Johnston's approach was not to reject it out of hand, but to consider the statement in the context of other available information, such as company and other searches. This is consistent with Ms Johnston's subsequent analysis in her email of 11 December 2013 of the statutory declarations that were provided during the objection.
Additionally, none of the material establishes that Ms Johnston sought to "dictate" the outcome of the objection. It is clear that, after having provided her views to the ATO officers handling the objection, Ms Johnston did not then direct her submissions to those officers. Instead she articulated her concerns to her more senior officers (Ms Jones and Mr Seddon) so that they could consider the issues she raised and take whatever actions they considered appropriate.
So far and Ms Johnston's attitude to statutory declarations are concerned, counsel for the cross claimant submitted that, in maintaining her view that no new information of any description was supplied on objection, Ms Johnston failed to consider the arbitrariness her view introduced for the cross claimant's liability to tax. Reference was also made to the email of Mr Aftanas dated 18 June 2015 in relation to the workshop to discuss earnings arising from the audit and recovery measures taken against the cross claimant. (JTB 8.403). The cross claimant argued that Mr Aftanas' email demonstrates that the Commissioner never had any evidence, much less positive evidence, to form the opinion that there was "fraud or evasion" and accordingly the assessment is beyond power. Hence, the cross claimant submitted, the available inference from Ms Johnston's conduct in advocating for the view that there was fraud or evasion is that she was recklessly indifferent, deliberately blind or wilfully ignorant as to whether the amended assessment she was raising was within power.
On 25 September 2014, after the objection decision was made, Ms Johnston sent her submission to Mr Seddon, with copies forwarded to Ms Kay Johnston, Ms Sandford, Mr Dinola and Ms Jones. (JTB 7.372).
It is also important to set out these documents in full, as they are relied on by the cross claimant as particular examples of Ms Johnston's state of mind.
The contents of the email to Mr Seddon are: "Hi Michael The above case is now closed. The IA officer has not contacted me to advise the outcome of the objection. (Original emphasis). Just as a refresher, this case had several unexplained deposits to a bank account. During the audit I vouched all transactions to the account, as the explanations and evidence provided by Frangieh was not acceptable. On objection Frangieh provided Statutory Declarations as evidence to support his contentions that certain transactions to the bank account were in connection with loans. I raised a submission to you through Angela Jones, of my concerns on the potential decisions of the IA officer. I believe that discussions were had at a higher level. I am concerned that the IA has not considered any of my concerns. For reference I have attached the submission. The objection was allowed in part. ● Distribution from the Western Jetz was reduced from $350,000 to $200,000 ● The unexplained deposits to the Westpac Equity Access account reduced from $3,234, 064 to $490,769. ● Commissioner's finding of Evasion was upheld. The business associates of Joseph Frangieh are in the Phoenix population. This decision will likely get out to the wider community. The message being that the ATO will accept statutory declarations as the only evidence to support transactions. It is likely that this behaviour will be replicated by other taxpayers engaged in Phoenix activities. Clarification on the evidentiary requirements is required. This clarification then needs to be conveyed to auditors and officers dealing with disputes. The legal representative for Frangieh has suggested that we, the ATO, "take a refresher in evidentiary requirements". This taxpayer is likely to take the matter to the AAT - probably get resolved (settled) during the ADR process. In discussions with the IA officer I advised that a false statement was made in a Statutory Declaration that was provided as evidence. I cannot see any work item created for a referral to SNC. The Frangieh case has been through SNC case refinement and is on the "Wait List". This may sufficient to push the case further up the priority list for audit or investigation. Michael, would you like to discuss the outcomes of the Frangieh case with Scott Parkinson?" (JTB 7.32). (Author's emphasis).
The contents of Ms Johnston's submission to Mr Seddon, (which she had also sent to Ms Callahan previously) state: "RE: Joseph Frangieh Background: Comprehensive audit conducted on the 2007 Year. Taxpayer is involved in the following industries: Building Construction, Land development Communication and Gambling. The taxpayer's business associates include persons with criminal backgrounds and high profile business persons in the Australian community The audit commenced in Oct 2009. The personal bank statements of the taxpayer were examined. The taxpayer was requested to provide details of 84 deposits to his personal bank account. The taxpayer claimed that the majority of the transactions were a return of money lent. There was finding of evasion. The taxpayer was unable to provide adequate evidence to support his explanations. The taxpayer was amended in October 2012 for $3,234,064 being unexplained deposits and $350,000 being profit distributed from a joint venture banked elsewhere. The amounts were treated as ordinary income. During the course of the audit the taxpayer changed representatives, approximately eight times. On each occasion the taxpayer was given further time to provide information and evidence of the unexplained income. The taxpayer lodged a complaint. ATO complaints determined that I had followed correct procedure during the conduct of the audit. An objection was lodged by the taxpayer. ATO audit documents were provided to the taxpayer under FOI. I have provided clarification and explanations on certain transactions to the IA officer dealing with the objection. PGH IA had received statutory declarations as supporting evidence for the unexplained deposits to the account. I further examined the details provided on objection. PGH IA asked whether the documentation and further explanations provided on objection, would change to the outcome of the audit. My answer was no, for the following reasons:- ● statutory declarations are not accepted as evidence, (they are just statements) ● statutory declarations made by the taxpayer and the third parties contain false statements. Today I checked the progress of the objection in Siebel as I had not been notified of any outcome. The objection is almost finalised. I contacted the IA Officer, Philip Brown and was advised the following The amount now in dispute is $843,243. The IA officers reason for partially allowing the objection was that the taxpayer provided statutory declarations, bank statements further explanations from the taxpayer and some third parties. The IA officer has accepted the documents on face value after I had explained the inconsistencies in the "evidence" provide. No steps have been taken by the IA officer to further verify the validity of the documents. The IA officer is aware that the Taxpayer has been involved in Phoenix activities and his business associates are also involved in business activities. Concerns: The ATO Partially allowing the objection by a substantial amounts are sending a message to this taxpayer (and most likely to all his associates) that providing Statutory Declarations are evidence to support any type of transactions are not supported by real evidence. There is significant revenue at risk in this case as in the majority of Phoenix cases. The integrity of the Tax office is in jeopardy if we fail to match the behaviour of the taxpayer with a suitable compliance response, supported by the IA and Debt areas actions. Solution: Taxpayers involved in Phoenix activities are egregious taxpayers. Objection officers dealing with objections of amended assessments raised by Phoenix Active Compliance Audit Officer should be determined by appropriate IA areas that understand the techniques used by taxpayers involved in Phoenix activities." (JTB 7.32) (Author's emphasis).
Initially, the ATO officers handling the objection requested input on an informal basis from those involved in the audit. According to the DCT, this undermines any suggestion that Ms Johnston (or any other ATO officer involved in the audit) sought to "dictate" the outcome of the objection. Rather, Ms Johnston was asked to consider the new evidence that the cross claimant had provided and to inform the ATO officers handling the objection whether that was the type of information that she had been looking for during the audit. Ms Johnston's response to Ms Callahan was that, having looked at the evidence and explanations now provided, she considered that the result of the audit would not have changed. In other words, she disagreed with the eventual outcome of the objection. As requested by the ATO officers handling the objection, she provided her views on the new evidence by reference to her knowledge of the matter.
On 15 June 2015, after Ms Johnston learned of the outcome of the AAT proceedings, she sent a further email to Mr Seddon, Mr Robert Di Nola, Director - Phoenix Active Compliance, and others. (JTB 8.399). In this email, Ms Johnston expressed concerns similar to those in her previous email to Mr Seddon as to how the ATO's approach could be perceived by other taxpayers. This email may have prompted Mr Dinola to organise the workshop to discuss the outcomes of the cross claimant's case. (JTB 8.404). It was this meeting which Mr Aftanas (the ATO officer who had handled the AAT proceedings) could not attend, leading Mr Aftanas to send his email outlining the reasons for the different outcomes at different stages. (JTB 8.403).
The cross claimant submitted that Ms Johnston's reference in her email to Mr Seddon to the cross claimant's case being on a "Wait List" with SNC was an attempt to "denigrate, if not actively seek, the overturn of the proposed objection decision" and that this response was "vicious and vitriolic". It is not clear from the evidence what being on a "Wait List" with SNC means. In any event, that did not occur. I do not think the comments concerning wait list and SNC demonstrate that her response here was "vicious and vitriolic".
Counsel for the cross claimant referred to the fact that some Commonwealth Acts recognise and require statutory declarations to be given. These include s 84(3) of the Bankruptcy Act and Sch 1, s 268-40(1) of the Taxation Administration Act and the Oaths Act 1900 (NSW), under which statutory declarations are made, and the criminal sanctions that can follow making false declarations.
In relation to her email to Mr Seddon, Ms Johnston's expressed her views as to the quality of the evidence contained in the statutory declarations and that this unsatisfactory evidence was accepted by the ATO officers carrying out the objection. Ms Johnston's email reflects her frustration at the differing approaches to evidence within the ATO, and that her concerns had not been considered by IA, as well as the humiliation reflected in her reference to the cross claimant's representatives telling her to "take a refresher in evidentiary requirements". Overall, I think that the crux of her concern is that statutory declarations should not necessarily be accepted as evidence (they are just statements) and statutory declarations made by the cross claimant and the third parties contained false statements.
After the conciliation conference when the cross claimant was advised that ATO would concede the amended assessment was wrong and it would be withdrawn Ms Johnston was unhappy with the result.
On 15 June 2015, Ms Johnston sent an email to other ATO officers, including Mr Dinola, Mr Seddon, Ms Sanford and Ms Jones. (JTB 8.399). It states: "Hi all The ATO has conceded to the above case I am not satisfied the correct decision has been made in this case. The Western Jetz was a property development in QLD. It involved a few investors who are in the property building and construction industry. Frangieh had numerous construction and developments in Western Sydney. Unknown if he has any current developments. Western Jetz Project - other participants in the project included the gain in their taxable income or the gain was included as assessable income as a result of Phoenix audit activity. So there appears to [be] no equity here. Joe Frangieh nor his entities has not and will not pay any tax on the gain from The Western Jetz Project. Will the other Participants in the project request an amendment to exclude the gain from their taxable income? [REDACTED] Other unexplained deposits to bank account -The ATO has accepted third party information and statutory declarations (some of which appeared to contained false statements). Finding of Evasion There was a finding of evasion no all the adjustments for the 2007 year. How can the finding of evasion change when the facts are the same? Only the adjustments have changed. It also appears that Frangieh has taken further action by taking the matter to the Supreme Court of NSW. Perhaps a claim under the CDDA Scheme. I and other named officers in the case have not been formally been advised of misfeasance in public office. See link below. Has the audit change the behaviour of the taxpayer?? How do our actions in this case reduce any motivation for avoid paying tax liabilities? What message has the ATO sent to this client? I am concerned that the decisions made here may circulate amongst the associates of Frangieh, some of which are involved in the property building and construction industry. http://www.austlii.edu.au/au/cases/nsw/NSWSC/2015/727.html Michael or Kay you wish to pass this on to Scott Parkinson. Also for your information http://www.billionairesnewswire.com/joseph-frangieh-the-rags-to-riches-story/"
In Ma v Commissioner of Taxation (1992) 37 FCR 225 ("Ma"), Burchett J, in considering the position of a taxpayer giving evidence on oath at the AAT and discharging his onus of proving that an assessment was excessive, stated (at 230): "Whether, ultimately, Mr Ma should be believed [on his oath] is not, of course, a matter for me. Nor, if it were, could it be decided upon the written record alone. The decision must take account of the onus under s 190(b). But if a taxpayer denies any undisclosed source of income, provides acceptable evidence of how he spends his time, and demonstrates a reasonable explanation for any appearance of the possession of assets, he will generally discharge his burden of proof unless some positive reason is shown why he is to be disbelieved. Any other view would introduce a degree of arbitrariness into liability for tax. In the present case, the very lack of a clear refutation of the applicant's case at present… reinforces my impression that the Tribunal saw the matter entirely or substantially through the spectacles of its view of the law."
This passage from the decision in Ma was set out with approval by the Full Court of the Federal Court in Szajntop v Commissioner of Taxation (1993) 42 FCR 318 at 322 to 323 per Black CJ and Burchett J; Favaro v FCT (1996) 34 ATR 1 at 2; per Branson J; and Hua-Aus v FCT (2010) 184 FCR 430 at 445 per Edmonds J.
The cross claimant submitted that this passage from Ma was also set out and embraced by the Commissioner in PS LA 2007/24 - Making default assessments: section 167 of the Income Tax Assessment Act 1936 and other similar provisions. The expressed purpose of PS LA 2007/24 was to guide staff contemplating making default assessments using the powers provided by s 167 of the ITAA 1936 and other similar provisions. Under the heading "Excessive Assessments" at [65] the above passage from Ma is cited, including the words "Any other view would introduce a degree of arbitrariness into liability for tax."
The cross claimant submitted that the treatment of statutory declarations by ATO officers supports the inference that they were actuated by targeted malice or was recklessly indifferent to the existence of their powers in relation to assessing the cross claimant. The only tax officer who criticised the use of statutory declaration by other tax officers was Ms Johnston and despite her continued protests about their use, her view was not accepted by the other officers of the DCT. Therefore, it is my view that the DCT officers did not adopt the state of Ms Johnson's mind when they maintained the recovery proceedings. I have closely examined the evidence as to the DCT officers and their activities and they did nothing wrong.

[63]

G7(iv) Genuine dispute

The cross claimant claims that the recovery officers knew there was a genuine dispute in relation to the assessment and/or that the objection could not withstand scrutiny. The recovery proceedings were commenced on 15 November 2012. The cross claimant's objection was lodged at the ATO on 1 May 2013, which was after the DCT filed the statement of claim in this Court. It was only on 29 September 2014, when the cross claimant submitted the bulk of the material in support of the objection. Hence, at the time the debt officers commenced the recovery proceedings in November 2012, it was not possible that a genuine dispute existed.
On this topic, the cross claimant referred to Ms Benjamin's internal correspondence with other ATO officers where she both recognised and was advised that, based on the further information provided by the cross claimant pursuant to the objection, there could be credit amendment (JTB 7.316) and that "some doubt" may be cast on the disputed debt (JTB 7.317). This evidence does not demonstrate that Ms Benjamin knew with any certainty that there was a genuine dispute, nor that the assessments were incapable of withstanding scrutiny. Rather, this evidence demonstrates that ATO officers, including Ms Benjamin, considered that there was a possibility that the cross claimant's objection decision had some potential to change the outcome of the assessment.
As it turns out, the outcome of the objection decision was favourable to the cross claimant as the objection was allowed in part. Until the objection decision was made, the debt officers (who had no involvement in deciding the objection decision) did not and could not have known the genuineness of the dispute or the amount of the amendment. By deposing in her affidavit dated 22 November 2013 at [43] (JTB 327) to her belief that "the [Mr Frangieh] has no defence to the [DCT's] claim in the recovery proceedings, Ms Benjamin was not being untruthful at the time that she made her statement. It was made 10 months before the cross claimant submitted the bulk of his material in relation to the objection. This new additional information was the game changer. The evidence demonstrates that there was no basis upon which Ms Benjamin could genuinely hold the converse belief that the cross claimant had a bona fide defence to the DCT's claim when she swore the affidavit. This claim also fails.

[66]

G7(vii) Failed to follow internal ATO guidelines

In response to a request for further and better particulars, the cross claimant identified the relevant internal guideline as PS LA 2011/4, "Recovering disputed debts". That practice statement defines a "disputed debt" as a tax related liability "which is subject to an objection, a tribunal review or an appeal." At [59] this practice statement states: "… where the due date for payment of tax has passed and an objection has not been lodged, the ATO may commence debt collection action in accordance with the principles and practices set out in this policy document."
On 15 November 2012, when the recovery proceedings were commenced, the cross claimant had not yet filed his objection in the ATO. It was filed on 1 May 2013 nearly six months later. Hence, the recovery proceedings were not commenced contrary to internal ATO guidelines.
In relation to maintaining the proceedings after the lodgement of an objection, the operation of ss 14ZZM and 14ZZR of the Taxation Administration Act provide that where a review (ie, an objection) or appeal in relation to an objection decision is pending in relation to a taxation decision, it does not affect the decision, and any tax and additional amounts may be recovered as if no review or appeal were pending. These provisions allow the ATO to proceed with proceedings to recover unpaid tax, including to hearing and judgment, notwithstanding that the taxpayer is pursuing review and appeal rights. The DCT submitted that the mere fact that the recovery proceedings were not withdrawn once the cross claimant lodged his objection could not give rise to a conclusion, or even an inference, that there was anything improper in the ATO officers' conduct.
In my view, the cross claimant has misunderstood the ATO internal guidelines and ss 14ZZM and 14ZZR of the Taxation Administration Act. The ATO internal guidelines contemplate that proceedings may be maintained in circumstances where they have been commenced prior to a taxpayer raising an objection. This approach reflects the ATO's underlying policy, as set out in [1] of PS LA 2011/4 as follows: "The legislative framework which underpins the Commissioner's policy in the collection and recovery of disputed debt is designed to ensure that tax debtors do not improperly delay payment of tax by lodging objections, requests for tribunal appeals or appeals."
The ATO's general principle underlying its approach to the recovery of disputed debts is stated at [9] of PS LA 2011/4, as follows: "As a general principle, the Commissioner expects that all debts, including those subject to dispute, will be paid on time. Where tax is paid and the dispute is resolved in favour of the tax debtor (in whole or in part), the Commissioner will pay interest on overpayments under the Taxation (Interest on Overpayments and Early Payments) Act 1983, in respect of certain types of tax which have been overpaid. (See Law Administration Practice Statement PS LA 2011/23 Credit Interest)."
In the ex tempore decision in Deputy Commissioner of Taxation v TDE Nominees Pty Ltd (No 2) [2011] NSWSC 1528 ("TDE Nominees"), Gzell J observed (at [18] to [20]): "18 The legislative scheme established in relation to tax recovery, as manifested in provisions like s 14ZZR [and s 14ZZM] of the Taxation Administration Act reflects a clear policy in favour of the Revenue and against the taxpayer. The Commissioner is placed in a position of special advantage and is, in general, free to pursue recovery of proceedings, despite outstanding appeals and reviews against disallowance of an objection: Trade World Enterprise Pty Ltd v Deputy Commissioner of Taxation [2006] VSCA 191; (2006) 64 ATR 316 at [19]; 322, referring to Clyne v Deputy Commissioner of Taxation (NSW) (No 3) (1983) 48 ALR 545 at 547. 19 The policy of the Income Tax Assessment Act 1936 as reflected in its provisions gives priority to recovery for the Revenue against the determination of the taxpayer's appeal against the assessment. 20 The effect of s 177 of the Income Tax Assessment Act 1936 and s 14ZZR of the Taxation Administration Act is to give primacy to the general right of the Deputy Commissioner to have tax paid irrespective of the pendency of an appeal and its merits: Deputy Commissioner of Taxation (NSW) v Mackey (1982) 13 ATR 547 at 550; Deputy Commissioner of Taxation v Ho (1996) 131 FLR 188 at 191; Deputy Commissioner of Taxation v Feldman [2006] NSWSC 378; (2006) 62 ATR 253 at [15]; 256."
The effect of and policy of ss 14ZZM and 14ZZR is clear. They allow the Commissioner, by its officers, to maintain proceedings against a taxpayer who has an outstanding debt owed to the ATO despite any pending objection. This allegation also fails.

[70]

G8 The third alleged misfeasance - commencement and maintenance of the recovery proceedings - 5 September 2014 to 31 July 2015

The cross claimant pleads that Ms Hobart, Mr Tanna and the DCT maintained the legal proceedings for an improper purpose:

F8(iv): To continue undermining the review of a tax decision known to be grossly incorrect by causing disruption and forcing the cross claimant to expend further time and money in relation to the legal proceedings.
F8(v): To bully and harass him and cause emotional distress to the cross claimant.
F8(vi): In the hope of eventually bankrupting the cross claimant thereby causing further damage to him and his ability to generate income in perpetuation of the original intentions of the audit officers.
F8(vii): Knowing that withdrawing from the proceedings would not prejudice the DCT.
F8(viii): Knowing that the DCT's claim would need to be amended to stand any chance of obtaining judgment.

The particulars of the alleged improper purposes with which Ms Hobart, Mr Tanna and the DCT are claimed to have acted with are that firstly, they knew that there was no possibility of collecting the claimed amount; secondly, they rejected a reasonable offer from the cross claimant knowing that the amount offered was more than the DCT could ever expected to collect; thirdly, they knew pursuing legal action could result in the cross claimant's bankruptcy; fourthly, they knew that as a bankrupt the cross claimant would not be able to generate income as a builder; and finally they knew the cross claimant had six dependants and as a bankrupt would struggle or fail to support them.
The relevant facts in relation to the third misfeasance in public office are as follows.
On 21 August 2014, Ms Hobart (a lawyer employed by the ATO, who had carriage of the recovery proceedings at this date) sent a letter to the cross claimant's solicitor, Mr Wojtasik via email (JTB 7.365). In that letter, Ms Hobart enclosed the ATO's "Compromise Proposal" document and form. Ms Hobart also proposed that, in order to allow the cross claimant to put forward a compromise proposal, the recovery proceedings be listed for directions on 26 September 2014, and she enclosed short minutes of order to that effect. Later on 21 August 2014, Mr Wojtasik sent Ms Hobart a signed copy of those short minutes (JTB 7.366).
On 22 August 2014, at the directions hearing, orders were made by consent listing the recovery proceedings for directions on 26 September 2014 (JTB 10.473).
The DCT submitted that it is important to note a number of aspects of the compromise proposal document Ms Hobart sent to Mr Wojtasik on 21 August 2014. (JTB 7.365).

[71]

G8(i) Compromise proposal requirements

Part A of the compromise proposal document sets out background information concerning the compromising of taxation debts, the Commissioner had also published PSLA 2011/3, "Compromise of undisputed tax related liabilities and other amounts payable to the Commissioner", which detailed the factors and considerations for ATO officers in deciding whether to accept an offer to compromise an undisputed taxation debt. (JTB 9.424). In those documents, the following matters were noted in relation to the compromise proposals:

The compromise proposal must offer all of the taxpayer's net assets in full satisfaction of the debt. (PSLA 2011/3 at [51]-[52]).
The Commissioner expects to be treated the same as other creditors, and so a proposal which either prejudices or preference the Commissioner will not be accepted. (PSLA 2011/3 at [60]-[62]). If a payment to the Commissioner under a compromise proposal prejudiced other creditors, there is a risk that that payment may need to be repaid as a voidable preference. (PSLA 2011/3 at [33]).
Assessments or liabilities on which the taxation debts are based must not be subject to dispute through the objection and appeals process. (PSLA 2011/3).
A taxpayer's payment record was relevant to the Commissioner's decision, in that the Commissioner is more inclined to accept a compromise proposal with a taxpayer with a good payment history than one whose payment history is poor. A high risk taxpayer would be excluded from compromise proposals. A high risk taxpayer is described as a person who continually participates in aggressive tax planning, regularly lodges returns late and/or pays his/her taxation debts late or not all. (PSLA 2011/3 at [69]-[70]).
The Commissioner would not accept a compromise proposal if the only reason in support of the proposal is the taxpayer's claim of hardship, because there was a separate procedure for dealing with cases of serious hardship. (PSLA 2011/3 at [67]).

On 5 September 2014, Mr Wojtasik sent an email to Ms Hobart attaching a completed compromise proposal ("first compromise proposal") (JTB 7.370). The cross claimant argued that this proposal provided extensive financial details and an offer to pay an amount to settle disputed between him and the ATO which represented more than the DCT could expect to collect otherwise.
On 18 September 2014, the ATO provided the cross claimant with a notice of objection decision, partially allowing the cross claimants' objection. (JTB 7.371). The conclusions reached in the objection decision were that in relation to: 1. Western Jetz, of the $350,000 treated as income at audit, $150,000 was repayment of loan capital, so the amount to be treated as income was $200,000; and 2. the unexplained deposits, $525,869 remained unexplained and would be treated as income.
On 26 September 2014, at the directions hearing, the recovery proceedings were stood over by consent to 17 October 2014 (JTB 7.375).
On 30 September 2014, an amended notice of assessment reflecting the objection decision was issued (JTB 7.373). It relevantly stated: Notice of amended assessment - year ended 30 June 2007 Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 We have received some of the information reported in your income tax return for the period ending 30 June 2007 and have amended your assessment for that period. Description Debits $ Credits $ Your previous taxable income was $3,685,805 Your amended taxable income is $827,609 …

[73]

On 10 October 2014, Ms Hobart sent Mr Wojtasik an email in relation to the first offer of compromise. (JTB 7.376). After advising Mr Wojtasik that it was necessary for the cross claimant to get his lodgements up to date in order for the Commissioner to consider his compromise proposal, Ms Hobart provided guidance as to a number of aspects of the first compromise proposal. This included: 1. All questions needed to be completed (such as Q43 concerning trusts); 2. The cross claimant needed to ensure all details were correct, such as correctly identifying the number of dependents he had and the fact that the form did not disclose rental income the cross claimant said (during a conference) he was earning; and 3. Any supporting documentation requested in the form (such as payslips), as well as other documentation (such as documents to show how substantial mortgage payments on a property listed in the form were being met) should be provided. (JTB 7.376).
During this time the cross claimant was of the view that the tax office was just wasting his time and money. (Aff [33], 9/12/2015).
On 13 October 2014, Mr Wojtasik sent an email to Ms Hobart attaching a further compromise proposal form ("second compromise proposal"). (JTB 7.377.) As with the first compromise proposal, the cross claimant submitted that this proposal provided further financial details and an offer that represented more than the DCT could expect to otherwise collect.
I accept that both of these offers of settlement were made prior to the cross claimant's favourable outcome in the AAT.
On 16 and 17 October 2014, there was an email exchange between Ms Hobart and Mr Wojtasik regarding the directions hearing on 17 October 2014 and the parties did not agree on the directions that should be made (JTB 7.380).
On 17 October 2014, at the directions hearing, the DCT was represented by Ms Foda of counsel, and the cross claimant by Ms McLay. Ms McLay sent an email to Mr Wojtasik reporting on the directions hearing (JTB 7.379). The following orders were made by the Registrar. Mr Frangieh was to provide ATO with proposed amended defence by 28 November 2014; the ATO was to advise Mr Frangieh in writing whether he consents to leave being granted to file and serve the amended defence by 5 December 2014; the motion was listed for direction on 11 December 2014; and liberty to restore on two days' notice. (JTB 7.379).
On 27 October 2014, Debbie Hastings, First Assistant Commissioner, Review and Dispute Resolution, sent an email on behalf of Ms Hobart to Mr Wojtasik, attaching a letter explaining that the second offer of compromise had been refused for the following reasons: "● inconsistencies in information provided by the taxpayer; ● extremely poor compliance history exhibited by the taxpayer and his associated entities; ● significant debts to other creditors; ● the appearance of uncommercial transactions and asset structuring for the purpose of defeating creditors." (JTB 7.382).
The DCT also advised the cross claimant that his request for remission of the general interest charge (GIC) had been fully considered by the relevant decision maker in accordance with the ATO's policy guidelines and the circumstances detailed did not warrant remission of the GIC for the following reasons: "i. The GIC remission request dated 28 August 2014 made reference to the GIC being incorrect (paragraph 19) and there being no shortfall and therefore no applicable shortfall interest charge ("SIC") (paragraph 29). However, upon the objection being finalised partially in favour of the taxpayer, the GIC and SIC were recalculated on the primary tax the taxpayer is liable for. This is reflected in the objection decision. ii. The taxpayer has, during communications with ATO staff, made an admission of primary tax payable yet clearly stated that these amounts will not be paid inclusive of applicable interest. iii. The reasons for non-payment provided by the taxpayer are not considered to be unforeseen or uncontrollable as per Practice Statement Law Administration 2011/12 ("PSLA 2011/12')." (JTB 7.382).
Senior counsel for the DCT drew this Court's attention to what he says were a number of inconsistencies between the information provided by Mr Frangieh in the first compromise proposal and the second compromise proposal, as well as other issues with the proposal, that include: 1. In Q26, concerning secured creditors, the size of the mortgage on a property had increased from the first compromise proposal to the second compromise proposal. 2. In Q30, concerning employment income, Mr Frangieh had indicated gross monthly pay of $5,000 (from InStyle Homes Queensland) and no deductions in the first compromise proposal, then indicated no income and a number of deductions totalling over $84,0000, in the second compromise proposal. 3. In Q34, the amount of drawings from InStyle Homes Queensland was reduced from $80,000 in the first compromise proposal to $55,000 in the second compromise proposal. In addition, while Mr Frangieh did not disclose any rental income in the first compromise proposal, he claimed to have received $59,106 in rental income in the second compromise proposal. 4. In Q51, which asked the taxpayer to list what he believed to be the causes of his inability to pay his taxation debts, the reasons given in the first compromise proposal and the second compromise proposal were different. (It should be noted that the reasons given asserted that the taxation was disputed, notwithstanding that the policy concerning compromise proposals was that the debts the subject of compromise must not be disputed). 5. In Q55, which asked for the compromise the taxpayer wished to put to the Commissioner in both offers of compromise, stated that he proposed to pay $94,961.85, and that family and friends would assist with paying this. The DCT submitted that this proposal did not pay any regard to Mr Frangieh's net asset position, contrary to the policy underlying compromise proposals which was that compromise proposals must offer all of the taxpayer's net assets in full satisfaction of the debt.
The DCT further submitted that there is evidence which demonstrates that Mr Frangieh had a poor compliance history in respect of his tax obligations. The debts that the DCT sought to recover in the recovery proceedings included not just the debt relating to Mr Frangieh's income from FY2007, but also included two other outstanding tax debts, being an "RBA deficit debt" relating to BAS and administrative penalties concerning the GJN discretionary trust (of which Mr Frangieh was the trustee), and an RBA deficit debt in respect of Mr Frangieh's BAS obligations, about which there does not appear to have been any real dispute. In addition, the DCT submitted, the evidence demonstrates that from at least as early as 2010, Mr Frangieh and his company InStyle both had outstanding tax debts and outstanding lodgement obligations. This is demonstrated in an email from Ms Jan Lewis (an ATO officer in the strategic recovery section of the Debt BSL) to Mr Mascari, Mr Frangieh's then tax agent, on 17 September 2010 (JTB 1.55).
Finally, the DCT noted that in both the first and second compromise proposals, Mr Frangieh disclosed that he had significant debts owing to unsecured creditors. In Q27 of both, proposals he claimed to owe $451,000 to a number of unsecured creditors.
On 28 October 2014, Mr Wojtasik wrote a very unhappy email to Ms Hobart. (JTB 7.383). It reads: "Hi Trudy, You have on numerous occasions advised us of your intention to resolve this matter, including your belief that this matter could and would be resolved. It is not clear whether these were misrepresentations, or you have failed to advise the purported decision maker you referred this matter to of the reasons why it is in both the ATO's and the taxpayer's best interests to resolve this matter. We do not accept that an ATO lawyer with carriage of a Court matter cannot advise a ATO business line of the appropriate course of action to take. You can seek support from a more senior officer than yourself if you are liaising with a more senior officer in the business line. At the end of the day, the ATO legal area is responsible for any legal action. ATO legal officers are not answerable to the ATO business line. Quite likely a lack of initiative on your part has allowed for such a poorly considered response to our proposal, if not a lack of sincerity In your correspondence with us. We consider the baseless allegations regarding attempting to defeat creditors made in the letter as highly defamatory. Please substantiate the basis for these allegations or formally withdraw them. We do not consider compliance history as a relevant consideration in making the decision expressed in this letter. Firstly, by its very nature, a compromise proposal seeks to treat the result of what can be described as a poor compliance history. Secondly, the only reason there is any purported record of poor compliance history is because of the actions taken by the ATO with respect to Mr Frangieh, including the posting of excessive liabilities onto his account, and leaving his tax position uncertain. You are well aware that Mr Frangieh's purported liability has been in dispute and amendments have been made, This purported poor compliance history must be considered in context, not in isolation. As such, we do not believe the decision maker has based his/her decision on a relevant consideration in this regard and has ignored relevant information. Although it is not clear what inconsistencies in information provided is being referred to, we do not accept that Mr Frangieh providing further details to the ATO as part of making the compromise proposal can of itself undermine the proposal. To take this view would be to treat the compromise proposal process as a farce, and perhaps facilitating an ulterior purpose, such as to gather information. In any settlement scenario, parties may agree to take a position for the purposes of achieving settlement. Although Mr Frangieh has endeavoured to take the opportunity to settle seriously, it does not seem that has been reciprocated by the ATO. What other creditors Mr Frangieh may have is not a relevant consideration. Mr Frangieh's other creditors are individuals who have supported Mr Frangieh, and who would continue to support him in achieving settlement as outlined in the proposal. It is only audacity for the ATO to pretend to be some sort of caretaker for these individuals. A competent ATO officer considering a compromise proposal would consider whether entering into the proposal is beneficial in comparison to the taxpayer entering into a debt agreement or bankruptcy. This has not been referred to in this decision. You advised us to provide you with an interest remission request, seemingly also to facilitate settlement. We did as you asked. It seems our remission request only cost Mr Frangieh money, our time, and some ATO officer's time to read and think of reasons to refuse it. Again, there is no indication that you have taken any responsibility for this. It is questionable whether your role in this matter has really been of any value, other than perhaps as a middle man between the ATO debt area and the Court, or not even that, but between the ATO debt area and the barrister you have engaged. We also find it difficult to interpret what was meant by looking forward to an amended defence. Perhaps it was just a bad choice of words, or a Freudian slip, but it does come across that the ATO is intent on maintaining an adversarial relationship with Mr Frangieh as long as possible, it is our view that the ATO prematurely commenced legal action against Mr Frangieh as part of what the ATO euphemistically refers to as being a strategic approach, designed to place pressure on Mr Frangieh, drain his resources, and ultimately take Mr Frangieh out of the system. This, of course, is an abuse of the legal process. It is also in contrast to the ATO's own practice statement which directs ATO officers to only pursue legal action where there is a genuine dispute in situations where the taxpayer is a high risk taxpayer (meaning a taxpayer that could flee the country or whose assets are quickly dissipating)."
Mr Frangieh said that he now had to go to the AAT. He also decided to amend his defence and file a cross claim. His view, at this time, was that the ATO refused to drop its claim knowing that it was excessive, and knowing that they stood to gain nothing from pursuing him. He says that there was no other explanation other than the ATO was intent on causing him as much damage as possible.

[74]

G8(ii) AAT proceedings

On 29 October 2014, Mr Frangieh applied to the AAT seeking review of the objection decision. (JTB 7.384).
During the AAT proceedings, Mr Frangieh provided additional evidence in the form of sworn affidavits. On 25 March 2015, Mr Frangieh swore an affidavit in the AAT proceedings in which he deposed to his business activities in FY2007. (JTB 7.388). Also on that day, Mr Raymond Frangieh (Mr Frangieh's brother) swore an affidavit as to loans he paid into the Westpac account, and Mr Robert Melhem swore an affidavit deposing to his financial arrangements with Mr Frangieh. (JT 8.389 and JTB 8.390). This was the second and most significant turning point in Mr Frangieh's dispute with the tax office as it was the first time third parties had provided affidavits as to their financial arrangements with Mr Frangieh.
On 27 November 2014, Mr Wojtasik sent an email to Ms Hobart attaching an amended defence and cross claim. (JTB 7.385). From that date until the recovery proceedings were dismissed by consent on 31 July 2015, the steps taken in the recovery proceedings related to the issue of whether Mr Frangieh should be granted leave to file the cross claim and an amended defence. (JTB 10.473).
On 18 December 2014, a decision to partially allow the objection was made and reasons were provided. (JTB 7.371). The conclusions reached in the objection decision were: 1. In relation to Western Jetz, of the $350,000 treated as income in the audit, $150,000 was repayment of loan capital and the balance of $200,000 was to be treated as assessable income; and 2. In relation to the unexplained deposits, $525,869 remained unexplained and would be treated as income.
The DCT submitted that it is apparent from the objection decision that these conclusions were based upon additional information Mr Frangieh provided at the objection stage. This, he says, is apparent from the objection decision, where in answer to Q3, namely, whether the Commissioner was correct to treat $350,000 from Western Jetz and $3,234,065 of unexplained deposits as income, the answer was "No, these amounts will be reduced as a result of further information provided in your objection." Similarly, in the reasons concerning the Western Jetz payment, the objection decision stated that "based on the additional information you provided on objection", it was accepted that of the $350,000 received from Western Jetz, $150,000 of it represented repayment of loan capital.
In relation to the unexplained deposits in the Westpac account, the objection decision noted that Mr Frangieh's submissions (dated 20 September 2013) annexed supporting documents namely bank statements, statutory declarations and other records were provided. The objection decision then stated, "Based on a review of the information provided…" it was accepted that all but $525,869 of the unexplained deposits were not income.
According to the DCT, it is clear that the reason for the different outcome in the objection decision to the outcome at the audit was that Mr Frangieh had provided additional evidence to support contentions which he had not provided during the audit. I agree with this explanation. A great deal more information was provided by Mr Frangieh at the objection stage for the first time. This information had not been provided during the earlier audit proceedings. This new information with supporting documentation was considered by the ATO and led to the partial allowance to the objection.
On 4 June 2015, the AAT conducted a conciliation conference with ATO officers and Mr Frangieh. After the conciliation conference, Mr Frangieh was advised that the ATO would concede that its assessment was wrong and withdraw it. (Aff, [35], 9/12/2015).
On 12 June 2015, Mr Frangieh was granted leave to file the cross claim: Deputy Commissioner for Taxation v Joseph Frangieh [2015] NSWSC 727. (JTB 8.397B).
Mr Aftanas' email sets out succinctly the reasons why the outcome of the AAT proceedings (and the objection) was different to the outcome at audit. His explanation is that it was not until the objection stage, and then the AAT stage, that Mr Frangieh provided sufficient evidence to corroborate his explanations.
On 16 June 2015, Mr Aftanas sent an email to Mr Wojtasik enclosing a notice under s 42C of the Administrative Appeals Tribunal Act (JTB 400). Section 42C relevantly states: "42C Power of Tribunal if parties reach agreement (1) If, at any stage of a proceeding for a review of a decision: (a) agreement is reached between the parties or their representatives as to the terms of a decision of the Tribunal in the proceeding or in relation to a part of the proceeding or a matter arising out of the proceeding that would be acceptable to the parties (other than an agreement reached in the course of an alternative dispute resolution process under Division 3); and (b) the terms of the agreement are reduced to writing, signed by or on behalf of the parties and lodged with the Tribunal; and (c) the Tribunal is satisfied that a decision in those terms or consistent with those terms would be within the powers of the Tribunal; the Tribunal may, if it appears to it to be appropriate to do so, act in accordance with whichever of subsection (2) or (3) is relevant in the particular case. (2) If the agreement reached is an agreement as to the terms of a decision of the Tribunal in the proceeding, the Tribunal may make a decision in accordance with those terms without holding a hearing of the proceeding or, if a hearing has commenced, without completing the hearing. …"
On 16 June 2015, Mr Aftanas sent an email to the AAT enclosing a notice under s 42C of the Administrative Appeals Tribunal Act signed by representatives of Mr Frangieh and the DCT. Also on 16 June 2015, Senior Member McCabe noted that an agreement had been reached pursuant to s 42C(1) of the Administrative Appeal Tribunal Act and that the parties had reached an agreement as to the terms of a decision of the AAT that was acceptable to the parties. The terms of the agreement had been reduced to writing, signed by or on behalf of the parties and lodged with the AAT. The AAT was satisfied that a decision in those terms was within the powers of the AAT and was appropriate to make. Pursuant to s 42C(2) the Tribunal set aside the objection of the DCT dated 18 September 2014 in respect of the income tax year ended 30 June 2007 and decided in substitution that Mr Frangieh's taxable income was reduced from $827,609 to $101,740. The tribunal determined that the proceedings had been terminated in a manner favourable to Mr Frangieh. (JTB 8.402).
In other words, nearly eight years later Mr Frangieh found himself back in the same position he was when he was issued with his initial notice of assessment for the FY2007.
Mr Frangieh was issued a refund because the ATO had garnisheed money during the Court proceedings that needed to be returned. Mr Frangieh did not believe he was paid any interest by the ATO. Mr Frangieh deposed that the ATO only withdrew its claim after asking an amount of questions regarding his defence, and then refused to pay his costs even though it was clear that the ATO should not have pursued him for all that tax. (Aff, [36] and [37], 9/12/2015).
On 18 June 2015, Mr Aftanas emailed a response to an invitation from Mr Dinola to attend a workshop "to discuss the outcome of the Joe Frangieh case as a result of the decisions made by RDR". (JTB 8.403). Mr Aftanas stated: "…First and foremost, the Frangieh matter was not a phoenix case. The audit raised an amended assessment based on undeclared gain on a real estate development and on unexplained deposits to Frangieh's mortgage overdraft account. If Frangieh was involved in phoenix activity it was not mentioned in the audit or objection reasons and was not an issue in this case. I suspect an issue for workshop discussion is why there was a discrepancy in the outcomes of the audit and the litigation, and whether we got it wrong at audit or litigation. In an environment of limited resources such discrepancies are inevitable. As I understand it, the applicant was not forthcoming with evidence at the audit stage. The evidence was limited to self-serving statements of Mr Frangieh and his accountant. Mr Frangieh's explanations were inherently implausible and, in the absence of corroborating evidence, it was appropriate to rely on the burden of proof to reject these assertions. Our case at audit was entirely negative and based solely on deposits into Frangieh's bank account and a payment directed to his trading company. That is, no effort was made to contradict Mr Frangieh's assertions: we relied solely on the taxpayer's burden of proof. The problems arose at objection and litigation. As is commonly the case, as taxpayers move through the objection and litigation stages, taxpayers put more effort into refuting the basis of the amended assessments. They obtain legal representation, provide better evidence and more plausible and coherent arguments. Such was the case with Frangieh. At the litigation stage the majority of the unexplained deposits were explained with the explanations corroborated by sworn statements or third party documents. To the extent the deposits were not corroborated, Mr Frangieh had unassailable explanations supporting his inability to obtain corroborating evidence. Given we had no evidence contradicting the explanations we had no option but to concede. The litigation outcome may have been different if we had been able to mount a positive case. However, there was no evidence with which to do so. Significantly, we did not have the applicant's other bank accounts, we did not have his company's books of account and bank statements and there was no evidence from which would could paint a picture of Mr Frangieh's business and income earning activities. It is arguable that such evidence should have been obtained at audit. However, this argument is only valid in hindsight. While it is clear that such evidence would be essential to a defence of the assessment at litigation, it was not needed to make an audit decision in circumstances where a taxpayer had implausible explanations and a complete lack of corroborating evidence."
On 16 July 2015, DCT issued a notice of amended assessment assessing Mr Frangieh's amended taxable income in the sum of $101,740. (JTB 8.406).
Some six years after the AAT proceedings had been finalised, on 31 July 2015, the DCT's recovery proceedings were dismissed by consent. Costs were reserved.

[75]

G8(iii) DCT's submissions in relation the third misfeasance

In relation to the cross claimant's pleadings, the DCT submitted that, of the officers named as being involved in the third misfeasance (Mr Hobart, Mr Tanna and the DCT), the evidence indicates that only Ms Hobart had any significant involvement in the conduct of the recovery proceedings as the lawyer who had carriage of the proceedings from around mid-2014. I agree.
The DCT says that it is apparent that those conducting proceedings did so in a conventional and unremarkable manner, and, in particular, did not press for the proceedings to be progressed to hearing or judgment with any haste. I accept: 1. The recovery proceedings were not served until almost five months after the statement of claim was filed (and two months after orders for substituted service were obtained); 2. While the cross claimant's complaint was on foot, ATO officers in the Debt BSL gave undertakings to the ATO handling the complaint that they would not seek judgment on the statement of claim before the end of January, and they later extended that undertaking to the end of February, to allow for resolution of the complaint; 3. On a number of occasions, those acting for the Deputy Commissioner agreed to adjournments, including for the purpose of allowing the objection to progress; 4. Mr Frangieh, through his representative, on various occasions accepted that the recovery proceedings might proceed to hearing, or judgment, while the objection was on foot or that the recovery proceedings would be kept on foot.
The DCT submitted that in light of these matters there is no basis for concluding that the recovery proceedings were maintained for any improper purpose.
The DCT submitted that although some of the correspondence sent by ATO lawyers in relation to the recovery proceeding was signed by them under Mr Tanna's name that is not the case in relation to correspondence sent after the objection decision. For example, Ms Hobart's letters of 21 August 2014 (JTB 7.365) and 27 October 2014 (JTB 7.382) were signed under the name of Ms Debbie Hastings, a First Assistant Commissioner in the Review and Dispute Resolution BSL.
As to the allegation that Ms Hobart conducted the recovery proceedings for the purpose of undermining the review of the amended assessment, the DCT submitted that there is no evidence that Ms Hobart had this purpose in her conduct of the recovery proceeding. In addition, ss 14ZZM and 14ZZM of the Taxation Administration Act contemplate that recovery action can continue while a taxpayer is pursuing review rights. The DCT submits that the recovery proceeding were conducted in an unremarkable way, and a consideration of how the proceeding was conducted reveals no suggestion of an intention to undermine the objection process. The DCT further submitted that there is no evidence that Ms Hobart had the purpose of 'bullying" or "harassing" Mr Frangieh in her conduct of the recovery proceedings.
In relation to the allegation that Ms Hobart conducted the recovery proceeding for the purpose of perpetuating the "original intentions" of the audit officers, the DCT asserts that there is no evidentiary basis for this allegation. Moreover the DCT submits that, for the reasons set out above in relation to the first alleged misfeasance, this Court should reject the cross claimant's claim that the audit officers had any improper motivations. In any event, and consistent with the fact that s 177(1) of the Taxation Administration Act provided that notices of assessment were conclusive proof of the due making of the assessment, there is no evidence that Ms Hobart examined the circumstances in which the amended assessment came to be made, in order to form a view herself as to whether there were any issues (such as improperly motivated audit officers) with its making.
The last two alleged improper purposes are that Ms Hobart maintained the recovery proceedings "knowing" that withdrawing the proceedings would not prejudice the DCT and that the claim would need to be amended. The cross claim also alleges that Ms Hobart knew that pursuing the recovery proceedings could result in the cross claimant's bankruptcy, that if bankrupt he would not be able to generate income as a builder, and that he had six dependents whom as a bankrupt he would struggle to support. If the amount claimed in the statement of claim had to be amended to a lesser amount, the DCT could have filed an amended statement of claim. (X/C [28], Particulars 3, 4 and 5). The DCT submitted that even if the evidence did prove all of these matters of knowledge on the part of Ms Hobart, proof that a person knew something cannot amount to proof that that person had any particular purpose.
The cross claimant alleges that Ms Hobart rejected "a reasonable offer" from him, "knowing the amount offered was more than the [Deputy Commissioner] could ever expect to collect."
The defendant submitted that the reasons given for the refusal of the second compromise proposal were logical and reasonable, and the evidence in this case objectively supports those reasons. In light of this, the DCT submitted that there is no basis to conclude that there was any unreasonableness in Ms Hobart's conduct nor that her conduct amounted to the rejection of a "reasonable offer".
I will now address each of the pleaded improper purposes pleaded at X/C [28].

[78]

G8(vi) Perpetuating the original intentions of the audit officers

By this allegation, the cross claimant claims that Ms Hobart, Mr Tanna and the DCT hoped to bankrupt the cross claimant and cause further disruption to his livelihood in furtherance of the audit officers' original intentions. Presumably, this is a reference to the email exchange between Ms Johnston and Ms Benjamin in which Ms Johnston confirmed Ms Benjamin's plan to commence proceedings against Mr Frangieh with a view to bankruptcy as being a "good idea".
It is not unlawful to commence proceedings, if cross claimant unsuccessfully defends the claims the ultimate outcome will be the finalisation of bankruptcy proceedings. Ms Benjamin's responsibility was to apply the ATO's policies and the law in seeking recovery of the taxation liability owed by the cross claimant. The responsibility of the defendant's officers was to recover the debt owed by the cross claimant and preserve the revenue.
By not paying the debt when it fell due and in circumstances where the amended assessment was valid, the cross claimant left himself exposed to debt recovery proceedings. If the cross claimant was unable to pay the judgment debt, the ATO was entitled to commence bankruptcy proceedings to recover the debt outstanding as a creditor of the cross claimant.
As a result, the allegations in X/C [28] particulars 3, 4 and 5 are not made out. In relation to particular 3, although I consider that there is no proof that the second recovery officers knew that the cross claimant would become insolvent, that knowledge could not amount to an improper purpose as the officers were entitled to seek to recover the debt owed by the cross claimant to the ATO from the time the recovery proceedings were on foot, until the date the ATO settled with the cross claimant in the AAT and raised the second amended assessment. Since the allegation in particular 3 falls away, the allegations in particulars 4 and 5 also cannot support a finding that the recovery officers here maintained the recovery proceedings for an improper purpose as knowledge of the effects of the bankruptcy is immaterial.
The other fundamental difficulty with this claim is the allegation that Ms Hobart, Mr Tanna and the DCT were perpetuating the original intentions of the audit officers. As I have stated that the audit officers have not acted pursuant to the states of mind as alleged by the cross claimant in the events constituting the first misfeasance. It follows that these officers could not have acted in a manner that perpetuated the audit officers' original intentions to bankrupt the cross claimant for the purpose of causing damage to him and his ability to generate income. Hence, this aspect of the third alleged misfeasance must also fail.

[81]

H Abuse of process

In Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509 at 526-527 ("Spautz"), the High Court held that proceedings may be stayed as an abuse of process: "…when the purpose of bringing the proceedings is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed or some collateral advantage beyond what the law offers."
It is well established that a party alleging that proceedings are an abuse of process bears a heavy onus: Ballina Shire Council v Ringland [1999] NSWSC 11 ("Ringland"), Hidden J at [47]; Deputy Commissioner of Taxation v Frangieh [2015] NSWSC 727 (this Court's decision granting leave to file the cross claim) at [36].
In Maxwell-Smith v S & E Hall Pty Ltd [2014] NSWCA 146; (2014) 86 NSWLR 481 ("Maxwell-Smith") Barrett JA (Beazley P and McColl JA agreeing) held that the position in New South Wales is that a plaintiff must prove that a defendant acted overtly in furtherance of an improper purpose. Barrett JA at [54] stated: "… a plaintiff in a tort action for collateral abuse of process is required to prove, in addition to improper purpose of the defendant, deployment of the relevant process, in furtherance of that purpose, by way of an overt act or threat distinct from pursuit of the proceeding itself according to its ordinary course".
In Butler v Simmonds Crowley & Galvin [1999] QCA 475; [2000] 2 Qd R 252 ("Butler"), the Queensland Court of Appeal stated (at [38]) that such an act will usually be found "in the form of an overt act such as a demand which identifies the true collateral purpose."
The cross claim alleges that the conduct constituting the alleged second and third misfeasance also amounted to abuses of process. By this, the DCT understands the cross claimant to invoke the tort of collateral abuse of process.
As previously stated, this tort was considered by the High Court in Spautz in the context of comparing this tort to the Court's inherent jurisdiction to stay proceedings which are an abuse of process.
In Spautz, the majority observed (at 523) that the central element for this tort is: "the requirement that the party who has instituted proceedings has done so for a purpose or to effect an object beyond that which the legal process offers."
Their Honours explained in Williams (at 526) that it is not an improper purpose if the litigant's purpose is to "bring proceedings to a successful conclusion so as to take advantage of an entitlement or benefit which the law gives the litigant in that event". Their Honours gave, as an example of such a proper purpose, a situation where one local councillor brings a prosecution against his or her political opponent for failing to disclose a pecuniary interest, with the intention of securing the opponent's conviction so that the opponent will, by reason of the conviction, be disqualified from holding office. Even though the ultimate purpose of securing disqualification would not be within the scope of the criminal proceeding instituted, the immediate purpose - seeking conviction - would be, and the existence of the ultimate purpose could not constitute an abuse of process.
In Williams it was observed that there is a further requirement to establish the tort of collateral abuse of process beyond the existence of an improper purpose. This is a requirement that there be an overt act or threat, separate from the institution of the proceeding itself. This was identified by the majority (Mason CJ, Dawson, Toohey and McHugh JJ) at 528, and Brennan J expressed agreement with the majority's reasoning concerning the tort, at 539. Each of Deane J (at 551-2) and Gaudron J (at 552), who dissented in the result, expressed the view that, for the tort of collateral abuse of process, an overt act distinct from the institution of the proceeding is required.
From the cross claim, it is not apparent to the DCT what overt act, distinct from the commencement and maintenance of the recovery proceedings, that any of the named ATO officers are alleged to have committed. In the absence of such an overt act being alleged and proved, it is clear from the authorities outlined above that the cross claimant's allegations of collateral abuse of process must fail. In any event, for the reasons set out in the submissions below concerning the factual allegations, the claim would also fail because the evidence in this case does not support the allegations of fact made by the cross claimant in respect of the second alleged misfeasance and the third alleged misfeasance.
The DCT submitted that there is an additional aspects of the authorities concerning the tort of collateral abuse of process which should be mentioned, namely that there is authority indicating that it is only the party to the proceeding in question, and not the party's legal representative, who can be liable for the tort of collateral abuse of process: see Leerdam v Noori (2009) 255 ALR 553 (Leerdam) at [29]-[40] per Spigelman CJ (with whom Allsop P agreed at [65]). Of the ATO officers named as wrongdoers in respect of the recovery proceedings, Ms Armstrong and Ms Hobart were lawyers acting for the DCT in the recovery proceedings. Mr Tanna was an assistant commissioner, under whose name some of Ms Armstrong's correspondence was sent. In light of Leerdam, the DCT submitted that those ATO officers could not be liable for the tort of collateral abuse of process.
In Leerdam, Spigelman CJ dealt with the issue of abuse of process. At [29] to [32], [35], [36], [38] to [40] and [44] Spigelman CJ stated: "[29] The principal submission advanced on the part of appellants on the collateral abuse of process issue was the proposition that the tort can only be committed by a party to proceedings. The tort cannot, the appellants submitted, be committed by a legal representative of the party. It was common ground that there was no case which extended liability for this tort beyond a party in Australia, or in other common law nations in which the tort has developed such as New Zealand, Canada or England. There were, however, cases in the United States of America which did so. [30] On one view it could be said that, because there was no authority of the relevant character, it would not be appropriate to decide the matter on a strike out basis. However, alternatively, it may well be that the reason there is no relevant case law is precisely because the conclusion is obvious. [31] It is necessary to distinguish the tort from the broader based concept of 'abuse of process' which arises in the context of stay applications or assertions of miscarriage of justice. (See most recently PNJ v The Queen [2009] HCA 6; (2009) 83 ALJR 384 at [3].) Although cases on the tort may inform the broader concept (see Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509 at 522-523), the reverse does not necessarily work. [32] Significantly for present purposes, the issue has been considered and determined by the Full Federal Court in Emanuele v Hedley (Federal Court of Australia, 19 June 1998, unreported). In a joint judgment Wilcox, Myles and Nicholson JJ said: '… It seems clear that … an action for abuse of process is available only against the party who actually instituted the proceedings: See Williams v Spautz … This is logical because the essence of the tort is that the proceeding was instituted for an improper purpose. If the person who actually instituted the proceeding had a proper purpose, the claim of an abuse of process must fail irrespective of the motives and conduct of people who enforce the decision to institute the proceedings. No doubt a person may act through a servant or agent in instituting a proceeding, in which case the purpose of the principal will be the relevant purpose.' … [35] The passages in Williams v Spautz… to which their Honours referred in Emanuele v Hedley supra were: •'Central to the tort of abuse of process is the requirement that the party who has instituted proceedings has done so for a purpose or to effect an object beyond that which the legal process offers' (at 523). •' … This Court has regarded the purpose of the party instituting the proceedings as of crucial importance' (at 524). •See also the references to 'the purpose in bringing proceedings' (at 526). [36] This and other relevant authorities all focus on the conduct of a party, generally the plaintiff. This Court has accepted that a defendant can commit the tort. (See Hamer-Mathew v Gulabrai (No 2) (1994) 35 NSWLR 92 and on appeal Gulabrai v Hamer-Mathew (New South Wales Court of Appeal, 26 June 1997, unreported). See, however, R P Balkin and J L Davis Law of Torts (3rd ed) (2004), Butterworths Australia at [25.24].) … [38] It is sufficient for present purposes to state that the matter has been determined by an intermediate court of appeal in Emanuele v Hedley, although the United States authorities, upon which the first respondent relied in this Court, were not considered by the Full Federal Court. [39] The proposition for which the first respondent contends involves a significant expansion of the tort into spheres of conduct that are otherwise regulated, particularly by professional ethical standards. Issues of coherence of the law arise, which have not been fully agitated in this Court. [40] I am not prepared, in the absence of any authority from jurisdictions that are directly appropriate in the Australian context, to determine that the decision of the Full Federal Court is clearly wrong. (See Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [135].) In my opinion, it is not clearly wrong. … [44] As I am of the opinion that Emanuele v Hedley is not clearly wrong, both the trial judge and this Court would follow it. The contingency of a special leave application is not sufficient to refuse to apply the strike out test."
In Leerdam, Sparke Helmore Lawyers acted for the Minister for Immigration and Cultural Affairs in the AAT, whereas Ms Armstrong and Ms Hobart were solicitors employed by the DCT (sometimes referred to as in house lawyers). In Leerdam, it was said that a person may act through a servant or agent in instituting a proceeding in which case the purpose of the principal will be the relevant purpose. Therefore, the tort of collateral abuse of process cannot be committed by Ms Hobart and Ms Armstrong when they are acting for their principal, the DCT.
The cross claimant has not proved that there was any improper purpose by those involved in the third alleged misfeasance, namely, Ms Hobart, Mr Tanna and the DCT. Therefore, the recovery proceedings could not have been in furtherance of an improper purpose by way of overt act or threat from the pursuit of the recovery proceedings itself according to its ordinary course. There was nothing untoward in the manner in which the the recovery proceedings were conducted. The claim for abuse of process fails.
On 2 November 2009, the High Court dismissed Leerdam's special leave application.
Here I should add that the assessment notices issued pursuant to s 177 are valid as I have made no finding of conscious maladministration.

[82]

I Duty to act in good faith

In addition to the damages claimed by the cross claimant (discussed below) in relation to the alleged occasions of misfeasance in public office and abuse of process, the cross claimant claims an award of equitable damages and compensation due an alleged breach by the DCT of its duty to act in good faith.
Counsel for the DCT submitted that an absence of good faith has been recognised as a basis for setting aside an administrative decision, however a legal duty to act in good faith has not expressly been recognised.
Counsel for the DCT referred to Futuris where the High Court stated (at 154): "However, Aickin J observed in R v Toohey; Ex parte Northern Land Council that sometimes it was impossible to be certain of the meaning intended to be conveyed by the expressions "good faith" and "bad faith". His Honour went on to discern three distinct grounds upon which as exercise of an administrative power might be attacked. One was the existence of a corrupt purpose, with which Aickin J identified the doing of an act for a personal gain including a gain for associates of the person doing the act. Absence of good faith also was used to indicate the presence of an improper purpose outside the scope of the power but without any endeavour to obtain personal gain. Finally, Aickin J indicated that in a narrow and technical sense a power might be said to have been exercised improperly where the act done was beyond the power conferred irrespective of the motive or intention of the party exercising the power. In this third sense "good faith" means merely exercising an administrative power "for legitimate reasons" and its absence suggests no degree of moral obliquity. However, it is apparent from the terms in which the Full Court expressed its reasons that the failure attributed to the Commissioner to exercise bona fide the power of assessment was not designed to identify "good faith" in any such softer sense." (Footnotes omitted).
In Futuris, the majority, in discussing that a purported assessment would be liable to be set aside in cases of "conscious maladministration" (at [25]), observed (at [60]) that "allegations that statutory powers have been exercised corruptly or with deliberate disregard to the scope of those powers are not lightly to be made or upheld." In Futuris, the High Court quoted with approval the following observations of Hill, Dowsett and Hely JJ in Kordan Pty Ltd v Federal Commissioner of Taxation (2000) 46 ATR 191 at [4]: "The allegation that the Commissioner, or those exercising his powers by delegation, acted other than in good faith in assessing a taxpayer to income tax is a serious allegation and not one lightly to be made. It is, thus, not particularly surprising that applications directed at setting aside assessments on the basis of absence of good faith have generally been unsuccessful. Indeed one would hope that this was and would continue to be the case. As Hill J said in San Remo Macaroni Company Pty Ltd v Commissioner of Taxation 99 ATC 5138 at 5154 it would be a rare case where a taxpayer will succeed in showing that an assessment has in the relevant sense been made in bad faith and should for that reason be set aside."
Similarly, in Lock v Australian Securities and Investments Commission [2016] FCA 31 ("Lock") at [127(6)], Gleeson J noted that the circumstances in which a court will find that an administrative decision maker had not acted in good faith "are rare and extreme".
The cross claimant submitted that the equitable doctrine of good faith is undefined and arises impliedly (for example, in contract law). The cross claimant argued that there is an implied duty on ATO officers to act in good faith in performing the ATO's functions.
The cross claimant referred to The Taxpayers' Charter, which relevantly reads: "We will: ● treat you with courtesy, consideration and respect ● behave with integrity and honesty ● … ● make fair and equitable decisions in accordance with law …"
Counsel for the cross claimant submitted that these self-imposed virtues are consistent with the existence of a duty to act in good faith. Further, he referred to s 10 of the Public Service Act 1999 (Cth), which applies to ATO officers. It states: "10 APS Values Committed to service (1) The APS is professional, objective, innovative and efficient, and works collaboratively to achieve the best results for the Australian community and the Government. Ethical (2) The APS demonstrates leadership, is trustworthy, and acts with integrity, in all that it does. Respectful (3) The APS respects all people, including their rights and their heritage. Accountable (4) The APS is open and accountable to the Australian community under the law and within the framework of Ministerial responsibility. Impartial (5) The APS is apolitical and provides the Government with advice that is frank, honest, timely and based on the best available evidence."
Section 26 of the Public Governance, Performance and Accountability Act 2013 (Cth), that applies to the Commissioner of Taxation, his delegates and ATO officers, reads: "26 Duty to act honestly, in good faith and for a proper purpose An official of a Commonwealth entity must exercise his or her powers, perform his or her functions and discharge his or her duties honestly, in good faith and for a proper purpose."
Counsel for the DCT submitted that it is unclear what consequences follow a breach of s 26 of the Public Governance, Performance and Accountability Act but says that in equity, a breach of a duty to act in good faith may be remedied via equitable compensation or damages. Counsel for the DCT referred to United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 at 816 ("Hospital Products"), where McClelland J noted: "… the court has an inherent power to grant relief by way of monetary compensation for breach of a fiduciary or other equitable obligation…"
The cross claimant submitted that the ATO has breached its duty to act in good faith in its dealings with him and seeks monetary compensation for that breach.
In response to this claim, the DCT submitted that the authorities do not support a pleading of an equitable cause of action. An equitable duty of good faith would be a fiduciary type duty. However, there is no allegation in the cross claim that the ATO officers or the DCT owed fiduciary obligations to the cross claimant. Nor are there any particular facts specified in the cross claimant's case to suggest any basis for finding the existence of a fiduciary relationship between the cross claimant and the ATO officers. In response the cross claimant says that the alleged duty is not a fiduciary duty, but rather one that arises "by implication". The cross claimant does not articulate why it should arise by implication nor why or how the duty is owed by the DCT to the cross claimant.
Finally, the DCT argues that, as a matter of legal principle, it could not be concluded that ATO officers owed the cross claimant obligations of a fiduciary nature. The DCT referred to Meagher, Gummow & Lehane's Equity: Doctrines and Remedies, 5th ed (2015) at [5-005] (143) where it states that the essence of a fiduciary relationship is to "serve exclusively the interests of a person or a group of persons". The DCT submitted that it could not be said that ATO officers had an obligation to serve the cross claimant's interests exclusively, that is, to the exclusion of the interests of others, such as other taxpayers, the interests of the public as a whole, or the interests of the Commonwealth. The DCT referred to Parker v Commonwealth (2011) 197 FCR 1 at [23]-[30], where a claim based on the existence of a fiduciary duty said to be owed by the Commonwealth to a non-citizen in immigration detention was struck out for these reasons.
The parties referred to R v Toohey; Ex parte Northern Land Council [1981] HCA 74; (1981) 151 CLR 170 at 232 ("Toohey"), where Aickin J outlined three bases upon which that duty of good faith could be breached. They are: "…first the existence of a corrupt purpose, second the existence of an improper purpose and third ultra vires in the narrow sense of the act being done beyond the power of the body concerned, irrespective of the motive or intention of the person or body exercising the power. … I use the term 'improper purpose' to mean one for which the relevant power or authority was not conferred."
However, Toohey is concerned with judicial review and has nothing to do with breach of duty to act in good faith as set out in the Public Governance, Performance and Accountability Act and the Public Service Act. It also has nothing to do with equitable duties or the entitlement to equitable damages/compensation.
It is my view that the cross claimant's claim of breach of duty of good faith is misconceived. The cross claimant's assertion that the ATO officers' duty is an "implied duty" is poorly articulated and lacks a legal basis. It is not clear what the scope of this duty is, how it is "implied" and as the cross claimant has observed, what the consequences of its breach are. The legislation to which the cross claimant has referred, including the Public Governance, Performance and Accountability Act and the Public Service Act, do not offer remedies for breaches of their provisions that result in damage. It is not clear how this legislation gives rise to an "equitable duty" that is owed by the ATO officers to the cross claimant for which the Court may award equitable damages and compensation: see Hospital Products at 816. It is also my view that such a duty could not be fiduciary in nature because the ATO officers are not under an obligation to serve the cross claimant's interests exclusively. The cross claimant's claim for failure to act in good faith fails.
It should be noted that where the cross claimant has pleaded that the ATO officers have acted in "bad faith" in relation to claims of misfeasance in public office addressed above, I have understood those pleadings to relate to the mental element of malice which must be established for the purposes of the tort.

[84]

K Damages

At X/C [29] to [34] the cross claimant seeks damages for a range of losses he were the result of the three alleged of misfeasance in public office and the abuse of process. These can be summarised as follows: 1. Inability to obtain finance. 2. Loss of opportunity. 3. Sale of properties that otherwise would not have been sold. 4. Incurrence of further debts. 5. Incurrence of accounting, legal and other expenses. 6. Humiliation, embarrassment, stress, anxiety, emotional hurt and inconvenience. 7. Aggravated damages. 8. Exemplary damages
The cross claimant claims $8,750,000 in damages.
The DCT's submissions on loss are as follows. The cross claimant's claim for loss of opportunity is characterised by a lack of evidence as to key matters which would have to be proved in order to, first, establish that any tortious conduct found caused the loss complained of; and secondly, quantify the size of that loss. Further, according to the defendant the cross claimant's loss of opportunity case depends upon the proposition that he would have been in a financial position to hold the Tempe property and Waterloo property, and purchase the Surry Hills property. However, the cross claimant has made no attempt to adduce evidence to demonstrate his financial position at the relevant times, such as the time period prior to the audit, the time period during the audit, and the time period after the audit. Such evidence would be necessary to establish that the cross claimant's financial position was such that he would have been able to service borrowings in order to hold the properties, or that he would have been in a position to borrow money in order to purchase properties.
The DCT also submits that the cross claimant has then not adduced any evidence as to the terms of the loans that would have financed the holding or purchasing of the properties. Without such evidence, the Court cannot determine the costs that would have been expended in realising the claimed profits on the properties.
The DCT advances its argument by noting that this is not a case where the principle that the Court will do the best it can to estimate damages notwithstanding the dearth of evidence. In McCrohon v Harith [2010] NSWCA 67 ("McCrohon"), McColl JA (with whom Campbell JA and Handley AJA agreed) analysed the authorities on this issue, at [118]-[126]. Her Honour observed (at [118]-[119]) that this principle arises from Biggin & Co Ltd v Permanite Ltd [1951] 1 KB 422 at 438, where Devlin J said, "[W]here precise evidence is obtainable, the court naturally expects to have it. Where it is not, the court must do the best it can." (Emphasis added by McColl JA.) Her Honour also referred (at [120]-[121]) to JLW (Vic) Pty Ltd v Tsilogou [1994] 1 VR 237, and noted that in that case, Brooking J had agreed (at 245-6) with the proposition stated by Pincus J in Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275 (at 319) that "if the evidence called by the plaintiff fails to provide any rational foundation for a proper estimate of damages the court should simply decline to make one".
In McCrohon McColl JA also referred (at [122]-[123]) to Troulis v Vamvoukakis [1998] NSWCA 237 ("Troulis"), where the damages to which the plaintiffs were entitled was the difference between the amount they paid for the goodwill of a business they had purchased and the true value of that goodwill. However, the plaintiffs had adduced no evidence as to the value of the goodwill. Her Honour noted that Gleeson CJ in Troulis said that in such a case, justice did not dictate that a figure be "plucked out of the air".
In McCrohan McColl JA also referred at [124] to the High Court decision of Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768, where Hayne J (with whom Gleeson CJ, McHugh and Kirby JJ agreed) said, at [38], that there may be a distinction between cases where a plaintiff cannot adduce evidence of what has been lost (in which case estimates, if not guesswork, may be necessary to assess damages), and cases where "although apparently able to do so, the plaintiff has not adduced such evidence". McColl JA observed that Hayne J suggested that references to difficulties in estimating damages not relieving a court from the responsibility of estimating them "might be more apt in the former rather than the latter class of case."
In Re Waterfront Investments Group Pty Ltd (in liq) [2015] NSWSC 18, Black J at [44] referred to the similar authorities and principles, and identified that in McCrohon McColl JA (with whom Campbell JA and Handley AJA agreed) held that "an estimate of damages, in the nature of a 'guess', should not be made where precise evidence of the damages suffered could have been adduced, but was not".
The DCT submitted the authorities demonstrate that where a party claiming damages could have adduced evidence to enable the Court to make a rational assessment of damages fails to adduce that evidence, the Court is not required to make a guess as to damages, but should instead decline to make an award. In addition to the particular evidence concerning the properties in respect of which the cross claimant has not adduced evidence, there is other evidence which he failed to adduce which would be necessary to determining his claim for damages for loss of profits.
First, the cross claimant has not adduced evidence of his financial position at relevant points in time, nor evidence as to the costs of borrowing that would be involved in holding the three properties. Secondly, when he was asked about his Portfolio (Ex 8), the cross claimant referred to a property he owned at Collingwood Park. He said that after completion of the development application for subdivision into seven lots in 2010, "the market crashed in Queensland". (T 273.16-36). Similarly, in relation to a property at Collingwood Drive, Redbank, he had a contract to purchase, but could not settle it in 2009 due to a crash in the property market. (T 274.19-30). This evidence suggests that in 2009-2010, the cross claimant's financial position was affected by a "crash" in the property market in Queensland. This evidence suggests a possible different cause for any financial difficulties the cross claimant suffered (and why he sold properties), and highlights why an assessment of any lost profits cannot be made in the absence of evidence from the cross claimant providing his financial position at relevant times. Thirdly, the cross claimant's evidence as to the reasons for the amendment to his FY2009 income tax (T 329.31-32 and T 336.16-21) indicated that his financial affairs were intertwined with the financial affairs of his company. Any determination of the cross claimant's financial position would need to take account of the financial position of his company, and the cross claimant has not adduced any such evidence that would allow that to occur.
The DCT submitted that this is a case where the cross claimant could have adduced evidence which would have enabled this Court to properly assess damages concerning loss of profit, but he has not. Therefore, the Court should decline to award damages.

[86]

K1(i) Loss of opportunity and inability to obtain finance

The cross claimant claims that, as a result of the misfeasances in public office and the abuses of process, he could not obtain finance needed to engage in property development activities which, as a builder, he engaged in to generate his income. (X/C 29). The cross claimant received advice from his finance broker that no reliable lender would provide finance while such a substantial liability existed.
The cross claimant claims that a direct consequence of the FY2007 amended assessment (and a $3,800,000 tax liability recorded on the cross claimant's ATO account), he could not obtain finance needed to fund property development projects and therefore could not generate income from property development activities.
The cross claimant referred to the following evidence he gave on 16 March 2016 (day 6 of the hearing) (T 277.14-31): "HER HONOUR Q. Sorry, I want to ask a question. Now, you've got the DA approval [for a property in Ipswich QLD], are you going to build on there? A. The plan was to do that, but again I couldn't finance to do any of this. This is one of the ‑ this is something I wanted to keep for my superannuation in the future, and just rent, it's office space, it's in Ipswich, which is a very entry level property, but that was the plan, your Honour. Q. Well, now you don't know? A. No, it was stalled for five years while I dealt with my issues. Q. I understand you were going to say that, but‑ A. It could potentially still be the plan; it is on the market, it has been on the market-- Q. So you put it on the market for sale? A. As a DA approved site, yes, because all through this process, to get finance for something like this, you have to have some substantially backing as well."
The cross claimant's evidence is that the ATO's audit, the FY2007 amended assessment and the recovery proceedings inhibited his opportunity to proceed with property development projects and earn income. He also gave the following evidence (T 246.19-25): "Q. Yes, I don't - so when you at what period of time are you talking about in paragraph 26? A. Shortly after around 2010, 2011, when it started getting, I had to sort of escalate the level of attendance and attention because it was just falling on deaf ears, so I just had to give all my attention to this - to this matter. Q. Yes, I understand that but I'm only - you've said that in other places and I'm probably A. Yes."
Mr Cheihk gave the following evidence (T 122-124): "Q. Has he [Mr Frangieh] kept you appraised of what he's doing in his business from that point in time, from 2010 onwards? A. No, not a great deal of work. I've been trying to get him sort of up there, motivate him, but he's been focusing on getting this matter sorted. Q. When you say you're trying to get him motivated again, can you recall the conversation and the form of words as in I said, he said? … HER HONOUR: Yes, it's paragraph 22 and it's in relation to whether he's been working and what Mr Cheihk knows about it. It might not be conversations but we'd have to have the source of why he knows these things. WITNESS: His standard answer has been until I get this matter sorted, my hands are tied, like, financially, really, but things along the line where I've said to him, "We've a couple of opportunities again if you want to look at getting the building arm going", et cetera, et cetera. Like I said, I now have seven other builders who build for QPG. Sometimes I enticed him with emails and text messages and photos of home shows we're doing, get him psyched up, get him going again with it, but his answer has been pretty clear most times, you know. I can't use some of the words he's used but been straight out like he hasn't been himself. YOUNG Q. You mentioned, I think just then, that there's a couple of projects that he's actually up; is that correct? A. He's getting back on track, yeah. Q. Could you tell the Court what those projects are? … A. One is a land subdivision, looking at getting back into. Q. Where's the subdivision? A. In Brisbane. Still not taken off or anything; there's still a lot of talk, so. Q. It's only at the talk stage? A. Yeah. YOUNG Q. To your knowledge, what's Mr Frangieh's involvement in this land subdivision in Brisbane that you were just referring to? A. He's trying to organise it and, you know, arrange the sewer contractors, the building groups that will be required. It's not a small job. It is a lengthy process. It's still obviously, it's in the early stages. I think he's kind of just starting to get back into the swing of it now. Q. When you say just starting to get back, are you able to be more precise with terms? A. The guy used to work 18 hour days, you know. I'd be on the phone with him; we'd have meetings from Monday to Sunday. He'd have a tool bag on, you know, five days a week if it needed to be. A big difference to what he's doing these days. Half the time, he's moping around the house. … WITNESS: I'm happy to supply phone records. There would be 100 phone calls a week between us, still to this day, just if need be, and ten or 15 emails a day as well. HER HONOUR: So he's obviously very concerned about his friend. YOUNG Q. Can you be precise: what time period are you talking about with this small land subdivision in Brisbane that he's getting back into? A. Probably something that would need probably - get the attention from here on. Like, it's at that DA - DA stands for development approval. It's a site that has an approval now. So we've got the project management rights over it. We can start earthworks in the next probably six weeks. We just need to secure funding, a little bit of attention; probably a good, you know, good solid two months' worth of work by him and he'll get it up and going. Q. This is the first project that he's become involved with you; is that correct? A. That's correct, yes."
The cross claimant's wife Sharon Frangieh gave the following evidence that from about 2009: A. He was consumed by having to ‑ afterwards find out information ‑ from that point forward, he became a different person because he spent night after night trying to find information, he changed as a person, he became very busy, consumed. Everything else that was going on in his life got pushed to the side, because it became the forefront of everything that was important to him; trying to fix what had happened, what was going on. (T 342).
The cross claimant also pleaded that as a result of the misfeasances in public office and the abuse of process, he lost the opportunity to proceed with property development activities from which he, or an entity associated with him, modestly expected to generate profits of around $3,000,000 up to the date of the cross claim. (X/C 29).
On this topic, the cross claimant gave the following evidence (T 242.36-50; T 243.1-27): "Q. Can you explain the basis of why you say you were not able to borrow any money? A. In my past experience when you go for a loan application, it's standard practice for your financier, or your bank, or whoever your broker may be to request a copy of your financials, your notice of assessment being one of them, and being primarily important item into the approval of decline of any loan application. In my situation, my unfortunate situation, I had a notice of assessment to my surprise half way in the middle of certain application of circa $3.8 million as a liability to the tax office, and there's not a financier on the planet that would lend you money with a bill like that; especially when your assets don't exceed your liabilities, and that was the stale mate in my ability to obtain finance for anything, not even a car loan. Q. You say to finance building projects? A. Yes. Q. Can you explain what building projects, or the basis of why you've put in there, finance building projects? A. I do boutique small projects in and around the fringe of the CBD. At this point in time, I'd looked for a knock down, a renovation, my speciality was into boarding houses, and if I find a property that was on the market which was dilapidated or was a block of land, I'd improve that by getting a DA approval or a consent and obviously with my building experience, and my skills, and my network of subcontractors and suppliers, I'd either renovate the property, if it was a renovated property, I'd build the house if it was to be built. I'd turn properties into get approvals for boarding houses where the income was positively geared, and that was a little niche that I saw myself heading towards. Q. The last phrase in that sentence, "So my income earning activities stopped". Could you explain to the Court the basis of why you say your income earning activities stopped? A. I clearly had - my hands were tied in obtaining finance to be able to undertake the tasks that I've just mentioned in relation to acquiring properties, adding values for improving them, and also turning - when I buy a property, turn - for example, one specific property I converted into a boarding house and turned that into an income producing property, because you've got multiple tenants there on one property. That would - was a positively geared scenario where you'd have more income than what you're, sort of, loan amount would be to a bank. So you'd have surplus funds after the rent each month. And to me, in my line of work as a builder, you don't get paid every week, if you do a project, if it's a six month project, 12 month project, its at the end of the project. So any type of income earning activities such as a boarding house, where I'd continually get income every month, I just couldn't do anymore."

[87]

The Surry Hills property

A particular of this claim is that the cross claimant was unable to proceed with a planned investment in South Dowling Street, Surry Hills ("the Surry Hills property"). The cross claimant says that since the time of the ATO audit the Surry Hills property has experienced capital growth of around $1,000,000.
The cross claimant's evidence was that, at the time he was interested in purchasing the Surry Hills property, it was a "rundown boarding house". (T 333.18-19). The DCT tendered seven photographs of the Surry Hills property taken in January 2010, July 2013, November 2013, May 2014, August 2014, September 2014 and July 2015. (Ex 22). The cross claimant accepted that the pictures show that the Surry Hills property has been renovated. (T 333.25-27).
In relation to the lost opportunity to proceed with the planned investment in the Surry Hills property, the cross claimant submitted that on 13 November 2012, the completion of the purchase of the Surry Hills property was to take place and he referred to an undated cover page of the contract of a sale of land for the Surry Hills property. The price is $1,100,000, including a deposit of $110,000 (10% of the price), and the completion date was 13 November 2012. (JTB 5.246). The purchaser is stated as "Instyle Property Innovations Pty Limited (ACN 160 539 462) of XXX Road, Mount Vernon NSW 2178". The document is signed by the vendor and purchaser.
The cross claimant says he was unable to obtain finance for investment in the Surry Hills property as a result of the FY2007 amended assessment and referred to a letter from Mr Moshe Moses of Niche Financial Group dated 4 February 2014. (CB 12). It states: "Dear Joe, RE: APPLICATION FOR FINANCE We refer to your requests for finance and wish to reiterate that as long as you state that you have a Tax Liability to the Australian Taxation Office for the amount of $3.6M and associated Supreme Court Proceedings we will not be in a position to assist you in anyway. Unfortunately until this item has been cleared or removed our ongoing relationship which extends for the past ten years where we had completed a number of transactions for yourself cannot move any further."
This letter does not support the cross claimant's contention because the above letter does not refer to the Surry Hills property and it is more importantly dated well after the date of completion of the contract of sale. It is unlikely this relates to the purchase of the Surry Hills property.
The cross claimant's evidence is that he paid the deposit for the purchase of the Surry Hills property but he did not purchase it in his own name. (T 333.34-41).
Counsel for the cross claimant submitted that the purchase of the Surry Hills property could not go ahead and the deposit amount was forfeited. In support, he relied on trust account statements from the purchaser's solicitor, Joseph Antoun, of Uther Webster & Evans solicitors. (Frangieh Aff, 9/12/2015, JF- 46). In the statement labelled "Surry Hills", the statement of account records two deposit transactions from the cross claimant. The first, dated 30 November 2012, is in the amount of $50,000 and the second, dated 6 December 2012, is in the amount of $500,000. The statement records a withdrawal on 10 December 2012 in the amount of $500,000. A handwritten note records "To Sydney Property Sales". The statement also records a withdrawal dated 18 December 2012 in the amount of $100,000 to Instyle Property Innovations Trust. According to the DCT, the amounts transferred in and out of the trust account do not reflect the amount of the deposit, according to the contract for the sale of the Surry Hills property, and the dates of the transfers occurred after the completion date.
In March 2013, the Surry Hills property was purchased for consideration of $1,156,000. (Ex 25, Tab 5). In cross examination the cross claimant was shown a picture of the property as at May 2014. He agreed that the property appeared to be renovated. Advertisements relating to the Surry Hills property from January 2014 to March 2016 (Ex 25, Tabs 6-12) indicate that the property is now a block of 10 "newly renovated" studio apartments.
The cross claimant tendered a valuation report of the Surry Hills property ("the Surry Hills valuation report") by Australian Valuation Group Pty Ltd trading as Valuations NSW ("Valuations NSW"), dated 11 March 2016. (Ex B). As at 11 March 2016, the Surry Hills valuation report assessed the current market value of the Surry Hills property at $2,000,000. Valuations NSW commented that it was unable to internally inspect the Surry Hills property.
The DCT submitted that the Surry Hills valuation report cannot provide any evidence as to the value of the interest the cross claimant would have in the Surry Hills property if he had purchased it in late 2012 and held onto it to the present date.
In particular, firstly the DCT submitted that, as the property would not have been purchased in his name, the nature and extent of any interest the cross claimant would have had in the Surry Hills property could not be equated to the interest of the legal owner of the property. The DCT pointed to the fact that the purchase was to be in the name of Instyle Property Innovations Pty Limited. According to a company search, the cross claimant has never been a director, secretary or shareholder of Instyle. (JTB 8.418B). The search shows that, from the date of registration on 27 September 2012 to the date of deregistration on 27 December 2015, the company's sole director was Jack Issa, who was also the company's sole shareholder. The DCT pointed to the lack of evidence of any shareholding arrangement or trust structure which might entitle the cross claimant to an interest in the property.
The DCT also submitted that there is no evidence that the Surry Hills property is now in the same state or condition as it was when sold. Rather it appears that the Surry Hills property has been significantly renovated after the date of its most recent sale (March 2013) and before the date of the Surry Hills valuation report. The DCT argued that the burden of proof lies on the cross claimant to prove that the property has not changed, and in light of his failure to discharge that burden, the Surry Hills valuation report cannot provide a valid measure of the change in the market value of the property attributable solely to general property market growth.
In my view, the purchase of the Surry Hills property was Instyle Innovations Trust of which the cross claimant has never been a director, secretary or shareholder. There is no documentation to demonstrate that the cross claimant had a legal interest in the Surry Hills property so I am not in a position to assess that the cross claimant suffered any loss.

[89]

Sale of the Waterloo property

The cross claimant claims that he sold a property at XXXX Street, Waterloo ("the Waterloo property") for around $890,000 in June 2011, where now the market value of similar and comparable properties is over $1,400,000.
On 9 September 2010, the cross claimant purchased the Waterloo property for $360,000. (Ex 15). Westpac granted a mortgage over the Waterloo property to finance the purchase. (Ex 16 and T 315.21-29). The cross claimant, in cross examination, said that on the property was an "old derelict house" (T 315.42) which he demolished. He then constructed a four bedroom, two storey house on the property. (T 315.34-37). The cross claimant tendered a valuation report of the Waterloo property ("Waterloo valuation report") prepared by Valuations NSW dated 11 March 2016. (Ex B). As at 11 March 2016, the valuation report assessed the current market value of the Waterloo property at $2,200,000. Valuations NSW commented that it was unable to internally inspect the Waterloo property.
The cross claimant's evidence is that Mr Richards told the cross claimant that he (Mr Richards) could compile the evidence in a way "the ATO would like it", he had the "utmost confidence" in Mr Richards (T 313.12) and he was content that the information in the Richards submission was correct, he was confident that when the ATO read the Richards submission, the problems with the ATO would be over. (T 314.20-21). This is consistent with the cross claimant's evidence in chief (T 242.42-44) that it was a "surprise" to him when he received the amended assessment and associated tax bill for $3,800,000.
Notwithstanding this evidence, the cross claimant asserted that he sold the Waterloo property on 4 June 2011, the day after the Richards' submissions, because he feared an adverse outcome from the audit which could lead to his bankruptcy.
The DCT submitted that the cross claimant's evidence on this topic should not be accepted, for the following reasons. Firstly, it is inconsistent with the cross claimant's evidence as to the confidence he had that, following the Richards submission to the ATO, the trouble with the ATO would be over and that the amended assessment came as a surprise to him.
Secondly, that evidence is fundamentally inconsistent with other evidence the cross claimant has put forward in support of his damages claim which show that, even after the adverse outcome of the September 2012 audit decision, the cross claimant continued to seek to borrow significant sums of money in order to purchase properties.
Thirdly, the proposition that, even before the September 2012 audit decision, the cross claimant was sufficiently fearful of the outcome of the audit that he would not purchase properties and instead was selling them is contradicted by the fact that he purchased the Waterloo property in September 2010, when the audit had been ongoing for 12 months. It is also contradicted by his purchase of the Albion property in August 2010, when the audit had been ongoing for 11 months. (Ex 19).
Fourthly, the cross claimant said it was "exactly right" that if he was in fear of his financial position due to his dealings with the ATO, he would not be taking on substantial debts in his own name. (T 321.36-48).
However, on 9 June 2011 (five days after he had contracted to sell the Waterloo property), the cross claimant applied to borrow an additional $764,400 in relation to the Albion property (BankWest application).
The cross claimant had purchased the Albion property for $600,000 in August 2010. (Ex 19). The BankWest application was an application to borrow $1,114,000. (Ex 21). $350,000 of those funds was used to pay out the existing mortgagee and $764,400 to finance construction on the Albion property.
Faced with this evidence, the cross claimant said that what he "meant" to say was that he was not acquiring new properties. (T 326.22-27). However, his earlier evidence specifically confirmed that he was fearful of purchasing new properties because of his dealings with the ATO and also that he did not want to take on substantial new debts. (T 321.36-48). According to DCT it is apparent that the cross claimant attempted to resile from his earlier evidence when he realised how it contradicted his case and for that reason his attempt to suggest that he would not acquire new properties, but would take on new debt, should be rejected. It would also be rejected because of its inherent illogicality, given that this would make no real difference to the cross claimant's financial position.
The DCT further submitted that the cross claimant's evidence that he sold the Waterloo property when he did because he feared an adverse outcome from the audit should not be accepted. Instead, the evidence indicates that the most probable reason for that sale occurred in the course of the cross claimant's ordinary business activities, and occurred when it did because the cross claimant had completed the construction of the house on the property. That being the case, the cross claimant has failed to prove that the DCT caused any loss in relation to the Waterloo property, and therefore, the valuation report is irrelevant.
It is my view that it is more likely that the Waterloo property was sold so that these funds could be used to pay out the existing mortgagee and finance the development of the Albion property. These funds were used as part of usual commercial activities.

[90]

The Tempe property

The cross claimant claims that he sold a property at XXXX Street, Tempe ("the Tempe property") for around $1,350,000 on or around November 2012 that was sold again 18 months later for $2,100,000.
On 19 September 2007, the Tempe property was purchased by a company, Colonial State Realty East Pty Ltd ("Colonial State Realty") for consideration of $900,000 (JTB 1.5). On 28 March 2008, it was transferred to Colonial State Realty. At the time, the Tempe property was a nine room boarding house.
Colonial State Realty was the trustee of the "Elkhawli Discretionary Trust". (JTB 1.3). On 1 August 2007, the cross claimant became a beneficiary of this trust pursuant to a Deed of Amendment, alongside the existing beneficiary, Sami Elkhawli. (JTB 1.4). Under the deed, the trustee had "absolute discretion… [t]o determine whether any part of the trust was capital or income"… and "[t]o distribute, accumulate or otherwise deal with any such capital or income". (cll 6(a) and 6(c)).
Counsel for the cross claimant submitted that the relevance of the Elkhawli Discretionary Trust documents showed was that Colonial State Realty was "acting as trustee of the family trust" in respect of the Tempe property. (T 111.18-21).
On 30 July 2013, Colonial State Realty sold the Tempe property for $2,175,000. (JTB 6.306). However, on 22 February 2012, the cross claimant had ceased being a director of Colonial State Realty that took place almost 18 months prior to the sale of the Tempe property.
DCT tendered an extract from Marrickville Council's "eproperty" online register which reveals that in December 2015, a development application was approved. (Ex 25, Tab 13). The application description included plans to increase the number of rooms in the boarding house, from 9 to 10, and to carry out other renovations at an estimated cost of $600,000.
The cross claimant tendered a valuation report of the Tempe property ("Tempe valuation report") by Valuations NSW dated 11 March 2016. (Ex B). As at 11 March 2016, the Tempe valuation report assessed the current market value of the Tempe property at $2,550,000. Valuations NSW commented that it was unable to internally inspect the Tempe property.
The DCT submitted that there are two reasons why the Tempe valuation report cannot provide any evidence as to the value of the interest the cross claimant would have in the Tempe property had it not been sold. Firstly, the nature and extent of the cross claimant's interest cannot be equated to the interest of the owner of the property which is the unstated assumption underlying reliance on a real property valuation report. The DCT submitted that, as one of several beneficiaries under a discretionary trust, the cross claimant's interest is not sufficient to found a caveat. (see Walter v Registrar of Titles [2003] VSCA 122 at [15] per Chernov JA (Ormiston JA and Ashley AJA agreeing). The DCT submitted that, because of the discretionary nature of the Elkhawli Trust, it cannot be assumed that an interest of that nature has the same value as a direct, legal interest in the Tempe property, particularly given that there was another beneficiary to the trust and that there is no basis to assume the cross claimant's potential interest in the trust assets was 50%.
On this topic, the DCT further submitted that if it is assumed that the nature of the cross claimant's interest in the Tempe property was as a shareholder of Colonial State Realty, that interest also cannot be equated with ownership of the Tempe property because the evidence does not disclose when the cross claimant owned those shares. The company search of Colonial State Realty (JTB 8.414) reveals that the company had two ordinary shares issued and that the cross claimant, along with two other companies, at some time had held both shares. However the extract does not indicate when each company held the shares, nor for how long. Further, the DCT submitted that if it were assumed that the cross claimant held those shares at the relevant time, it does not follow that the shares had the same value as the Tempe property. That would depend on any other assets or liabilities of Colonial State Realty.
Secondly, the DCT submitted that the Tempe valuation report cannot provide reliable evidence as to the value of the interest the cross claimant would have in the Tempe property if it had not been sold because there is no evidence that the property is now in the same state or condition as when it was sold. The DCT submitted that the burden of proof lies on the cross claimant to prove that the property has not changed and that he has not discharged this burden, therefore the Tempe valuation report cannot provide a valid measure of the change in the market value of the property.
So far as the Tempe property is concerned, the cross claimant had some financial interest in it from when that property was purchased in 2007 until 22 February 2012. The Tempe property was purchased for $900,000 and sold on 30 July 2013 for $2,175,000, 18 months after the cross claimant's financial interest ceased. It is difficult to ascertain the value of the cross claimant's share in the property from 2007 until 22 February 2012. Doing the best I can, I would assess it at $2,175,000 less the purchase price of $900,000. If it was a 50/50 shareholding, that means that the cross claimant's share of the profits would have been $637,500.

[92]

K1(iii) Incurrence of further debts

The cross claimant pleads that as a result of the misfeasances in public office and the abuse of process, he incurred further debts in the amount of at least $400,000 from borrowing money from family and friends to (a) pay for professional fees associated with dealing with the ATO; and (b) cover the cost of his living and the cost of living of six dependants.
The particulars of this claim are that the cross claimant firstly, financially supports his wife, her adult daughter and his four underage children; secondly, borrowed around $200,000 from his mother who sourced that money from a bank loan secured against her home; thirdly, borrowed around $50,000 from his sister; and fourthly, borrowed around $190,000 from friends.
The cross claimant, in oral evidence, referred to borrowing $200,000 from his mother (T 247.16, 16/3/2016); $90,000 from his friend, Terry (T 247.32, 16/3/2016); and "[t]o date probably about 220, 230 [thousand]" from his sister, Sonja (T 247.29, 16/3/2016).
The cross claimant did not refer to either the HSBC Bank credit card amount or the amount lent by Gary Sharman. He referred to a "ledger" in which he said he stored documents relating to every loan he received from friends. (T 249.44-46, 16/3/2016). A call was made by counsel for the DCT for documentation relating to these loans.
In cross examination the cross claimant gave the following evidence (T 302.26-35): "Q. And your ledger. A. I've got the agreements. Q. You've brought some agreements along, in terms of loans? A. Yes. It wasn't a ledger, it was a package that I have at home that I keep. Q. It's not a running - do you have a - I thought it was more in the line of - I thought it was more in the nature of a running balance, but it's not? A. No, your Honour, it's just all the information that I've kept over the - he's obviously narrowed it down to few of the loan agreements that I've got."
The cross claimant submitted that as a result of the ATO's actions, he has been obliged to borrow the sum of $451,000 from friends and family to provide for his family. The sources of these borrowings are set out in the compromise proposals (JTB 7.370 and 7.377) as follows: 1. HSBC Bank credit card: $11,000; 2. Sonia Hanness (the cross claimant's sister): $50,000; 3. Hasna Frangieh (the cross claimant's mother): $200,000; 4. Gary Sharman: $100,000; and 5. Terry Sierlas: $90,000.
In the end, the cross claimant had some paper on which he had some handwritten notes. This in my view is insufficient evidence to support the cross claimant's assertion that he had borrowed these funds.

[93]

K1(iv) Incurrence of accounting, legal and other expenses

The cross claimant pleads that as a result of the alleged misfeasances in public office and the abuse of process, he incurred accounting, legal and other expenses that he would not have otherwise incurred (not directly related to these proceedings and relevant to any question of costs) in the amount of at least $100,000.
The cross claimant submitted that the following expenses, totalling the sum of $112,132.11, were incurred as a result of dealing with his objections to the ATO's audit, assessment and the commencement of proceedings: 1. 22 September 2010: invoice from SJ Sassine & Co to the cross claimant in relation to In-Style Developments Pty Limited for $7,590 (including GST) (JTB 1.57); 2. 30 September 2010: invoice from SJ Sassine & Co to the cross claimant in relation to GJN Discretionary Trust for $3,200 for $3,520 (including GST) (JTB 1.58); 3. 31 May 2011: invoice from SJ Sassine & Co to the cross claimant personally for $4,961 (including GST) (JTB 2.90); 4. An undated invoice from Robert Richards & Associates for "professional services rendered during May 2011 inclusive of meeting of 20 May 2011, attendance at Taxation Office on 25 May 2011, meeting of 31 May 2011" for 5 hours of work at $650 per hour, plus GST, which equals the sum of $3,575 (JTB 3.107); 5. 31 August 2012: invoice from Altus Financial to the cross claimant in relation to "Frangieh Group" for "[p]reparation of a submission to the Australian Taxation Office with respect to the reassessment of the 2007 Income Tax Return for Joseph Frangieh" in the amount of $7,150 (including GST) (JTB 5.226); 6. An undated invoice dated 3 February 2015 from Duffy Robilliard, psychologists for "the psychological interview and assessment at our rooms in Chatswood on Monday 19 January 2015 and report to follow) in the amount of $1,485 (including GST) (JTB 7.386); and 7. Legal fees to Small Myers Hughes relating to objections to the amended assessment and penalties in the sum of $83,851.11 (JTB 8.405).
The cross claimant gave evidence that his agents, including SJ Sassine & Co, Altus Financial, Robert Richards & Associates and Small Myers Hughes, would not attend or complete tasks until he paid them. (T 246.11-12).
The DCT submitted that as early as 2010 (and well before the audit decision), there is evidence that the cross claimant already had existing debts that officers in the Strategic Recovery section of the Debt BSL were aware of. In respect of those debts, ATO officers were dealing with Mr Mascari of SJ Sassine & Co. (email17 September 2010, JTB 1.55). The invoices from SJ Sassine & Co relied upon by the cross claimant do not demonstrate that the services provided related only to the audit, and it is unlikely they did, given that SJ Sassine & Co was also acting for the cross claimant in respect of existing tax debts.
The DCT submitted that spreadsheet from SMH (JTB 8.405) is not sufficient to prove that each invoice related to the objection process, given that the spreadsheet records transfers to the cross claimant. In addition, there is a reference to a payment to Harris Friedman Lawyers on 29 April 2014. Harris Friedman were the solicitors who acted as SMH's city agents in relation to the recovery proceedings in respect of an appearance at a directions hearing for the recovery proceeding on 24 April 2014. (JTB 7.342). In light of this, there is a real possibility that the SMH spreadsheet includes costs associated with the recovery proceedings. Those costs could not be recovered as damages in the cross claim, given that the cross claimant also seeks recovery of them through the recovery proceedings.
It is my view that the earlier work of the accountants did not properly evidence the cross claimant's outstanding financial matter with the ATO. It was only from September 2012 onwards that satisfactory new evidence was provided so I allow the amounts incurred in items (5) and (7). This equates to $7,150 and $83,851.11 that equates to $91,001.11.
With the exception of item 6, which is a disbursement, namely a medicolegal report that the cross claimant used in these proceedings (in the event that the cross claimant is successful in his cross claim) it is a recoverable item in a bill of costs, I would allow these amounts as they were incurred in the course of the cross claimant's dispute with the ATO.

[94]

K1(v) Humiliation, embarrassment, stress, anxiety, emotional hurt and inconvenience

The cross claimant pleads that as a result of each of the alleged misfeasance in public office and the abuse of process, he suffered humiliation, embarrassment, stress, anxiety, emotional hurt and inconvenience.
The cross claimant claims that firstly, he separated from his wife; secondly, he has struggled to financially support his dependants; and thirdly, individuals and entities the cross claimant engaged in property development activities, who formed the view that he was being targeted by the ATO and would be unable to participate, which affected and restricted further his ability to generate income in his industry.
While the cross claimant is not suing for damages on the basis that he suffers from a diagnosable personality disorder (T 379.39; T 381.15), he relies on medical evidence to demonstrate that ATO's actions caused him to suffer stress.
The cross claimant gave evidence that financial difficulties prevented him from being able to work. Mrs Frangieh, in her evidence, did not say that she observed that the cross claimant's mental state led him to stop working. Mr Cheihk gave evidence that the cross claimant was "moping" around the house (T 123.27).
Ms Duffy a psychologist of Duffy Robilliard provided a report on behalf of the cross claimant dated 3 February 2015. Dr Roberts psychiatrist, provided two reports dated 1 and 9 February 2016 for the ATO. Both practitioners gave evidence and were cross examined.
Ms Duffy agreed (at T 218.11-15) with Dr Roberts' diagnosis. Dr Roberts' evidence is that the cross claimant suffers from Adjustment Disorder with Anxiety and Depression. Dr Roberts opined that: 1. such a disorder is the mildest form of psychiatric disorder; 2. in the cross claimant's case, this disorder would not have rendered him incapable of working; and 3. the substantial causes of the disorder were the killing of the cross claimant's father, and his experience of being incarcerated for 21 months and the stress of interacting with the ATO would be substantially less than these stressors.
Nevertheless, the cross claimant, his wife and Mr Cheik all gave evidence that between 2012 and the resolution in the AAT, the cross claimant was not focussed on his building work. The cross claimant's wife gave evidence that the cross claimant was consumed, was busy and he became a different person because he spent endless nights trying to find information. Everything else that was going on in the cross claimant's life got pushed to the side, because his priority was attempting to fix what had happened and what was going on. I would allow him the sum of $20,000 for his stress over this period. This amount reflects the fact that he did not supply sufficient financial information to the DCT until March 2015 at the earliest.

[96]

K2(ii) Exemplary damages

The cross claimant contends for an award of exemplary damages on account of the maliciousness, oppressiveness recklessness and/or contumelious embarrassment, stress, anxiety, emotional hurt, insult and humiliation: see Lamb v Cotogno (1987) 164 CLR 1 at 8.
The cross claimant also seeks an award of exemplary punitive damages on account of the misfeasance in public office. Exemplary damages for misfeasance were recognised in Kuddus v Chief Constable of Leicestershire [2002] 2 AC 122 at 147-149 ("Kuddus") which was in turn approved by the High Court in New South Wales v Ibbett (2006) 229 CLR 638 ("Ibbett") at [40] as follows: In Kuddus v Chief Constable of Leicestershire, Lord Hutton considered these remarks of Lord Devlin with the added authority of his own judicial experience in Northern Ireland, including his award of exemplary damages in Pettigrew v Northern Ireland Office. Lord Hutton concluded in Kuddus: "I think that a number of cases decided by the courts in Northern Ireland during the past thirty years of terrorist violence give support to the opinion of Lord Devlin in Rookes v Barnard that in certain cases the awarding of exemplary damages serves a valuable purpose in restraining the arbitrary and outrageous use of executive power and in vindicating the strength of the law. Members of the security forces seeking to combat terrorism face constant danger and have to carry out their duties in very stressful conditions. In such circumstances an individual soldier or police officer or prison officer may, on occasion, act in gross breach of discipline and commit an unlawful act which is oppressive or arbitrary and in such cases exemplary damages have been awarded." His Lordship in Kuddus added: "In my opinion the power to award exemplary damages in such cases serves to uphold and vindicate the rule of law because it makes clear that the courts will not tolerate such conduct. It serves to deter such actions in future as such awards will bring home to officers in command of individual units that discipline must be maintained at all times."
Once again, I cannot assess this item as it would depend on the factual findings made against the DCT. For this, the cross claimant claims $2,500,000.

[98]

L1 Short chronology in relation to costs

On 19 June 2014, the cross claimant's solicitor at [4] of his letter to the ATO (attention to Philip Brown) stated (JTB 7.353): "Regarding the outstanding amounts you have identified, as we have little details regarding these amounts, we propose to accept these amounts as Mr Frangieh's taxable income and propose to pay any resulting tax minus any interest or penalties, in final settlement of this matter.
On 8 July 2014, the cross claimant's solicitor emailed Philip Brown stating (JTB 7.357): "… Talking numbers, I'll give you an idea of what I'm thinking, on a without prejudice basis, and open for discussion. If we take a $210,000 increase in taxable income for the 2007 financial year, we're talking tax in the amount of $74,850. If we apply a 25% penalty (reduced from 50%) we get $93,562.50. Add 1 year of GIC at the 208 financial year rates (average approx. 13,.99%) we get $106,651.89. That's around the figure that our client would be prepared to pay in settlement of this matter. As mentioned in my letter of 19 June 2014 the ATO should seriously bear in mind the following in deciding whether to reach a settlement agreement. …"
On 4 September 2014, the cross claimant completed a summary and compromise proposal wherein he proposed to pay $94,961.86 to the ATO. (JTB 7.370). Again on 13 October 2014, the cross claimant repeated the offer above but forwarded copies of his tax return with this offer. (JTB 7.377). As indicated earlier, I accept that both of these offers of settlement were made prior to the cross claimant's favourable outcome in the AAT.
On 16 June 2015, as a result of the ATO conceding in the AAT, the ATO became indebted to the cross claimant in the amount of at least $54,480.12.
On 17 June 2015, the cross claimant's solicitor wrote advising that costs should be borne by the parties.
On 30 June 2015, ATO advised that costs should be reserved.
On 16 July 2015, the DCT issued a notice of amended assessment in the sum of $101,740, for the same amount set out in the notice of assessment issued on 17 September 2007, nearly eight years earlier. ATO paid the cross claimant the sum of $54,480.12.
On 16 July 2015, the cross claimant wrote to the ATO seeking costs on a party/party basis. (the third settlement offer).
On 31 July 2015, the ATO's claim was dismissed.
On 26 August 2015, the cross claimant filed a notice of motion seeking indemnity costs for defending against the ATO's claim including the motion.

[99]

L2 Costs generally

The power to award costs is conferred by s 98 of the Civil Procedure Act 2005 (NSW). The power is subject to the UCPR 42.1 which indicates that costs should "follow the event" unless the court otherwise orders. The usual rule is, further, that costs are to be assessed on an ordinary basis unless the court awards indemnity costs. (UCPR 42.2) A court should only depart from the general rule and award indemnity costs where the conduct of the party against whom the order is sought is plainly unreasonable: see Sydney City Council v Geftlick [2006] NSWCA 280 at [90] ("Geftlick') per Tobias JA, (Mason P and Hodgson JA agreeing). Indemnity costs orders should be reserved for the most unreasonable action by an unsuccessful plaintiff: see Leichhardt Municipal Council v Green [2004] NSWCA 341 ("Leichhardt Municipal Council") per Santow JA (at [57]). Both Geflick and Leichhardt Municipal Council involve Calderbank letters.
The "essence" of a Calderbank v Calderbank [1975] 3 All ER 333 offer is that, in the correspondence accompanying the offer, or in the surrounding circumstances, the offer or has indicated that the offer will be relied upon in relation to the question of costs, should the outcome of the proceeding be more favourable than the offer: Whitney v Dream Developments Pty Ltd (2013) 84 NSWLR 311 ("Whitney") at [42] per Bathurst CJ, (with whom Beazley, McColl and Emmett JJA agreed). In Whitney at [57], Barrett JA said that an offer is only of the Calderbank type if the maker is shown to intend that its non-acceptance will be deployed as a basis for seeking a special costs order. Although the cross claimant asserts these offers are Calderbank offers, they are not. The cross claimant's offers do not specify that their non-acceptance will be deployed as a basis for seeking a special costs order. Nor are they offers of compromise made in accordance with UCPR 20.26.
The cross claimant also relied upon ACN 074 971 109 Pty Ltd (As Trustee for the Argot Unit Trust & Pegela Pty Ltd (ACN 002 256 751) v The National Mutual Life Association of Australasia Limited (ACN 004 020 437) (No 2) [2012] VSC 177 (at [37]) ("Pegela"); Ziliotto v Hakim [2013] NSWCA 359 ("Ziliotto") and Hazeldene's Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2) (2005) 13 VR 435.
In Pegela indemnity costs were awarded taking into account the unreasonable failure to accept a general offer, as distinguished from a "Calderbank" offer or an offer of compromise. The cross claimant asserts that the Court is not precluded from awarding indemnity costs on the basis of the ATO's unreasonable failure to accept the cross claimant's offer.
In Pegela, the Victorian Court of Appeal upheld the decision of Pegela. In Pegela [2014] HCASL 172, the High Court refused special leave.
Also in support of this proposition the cross claimant relied upon Zilitto. Zilitto involves a Calderbank offer that had not been accepted. In Zilitto Basten JA at [20] stated: "In the present case, the plaintiff received a reasonable, indeed generous, offer, as demonstrated by the outcome in this Court. No doubt calculation of damages is an uncertain exercise, but that is not a reason to require a defendant who has made a reasonable offer to be forced to litigate at his or her own cost in circumstances where the offer is refused and not bettered."
Hazeldene also involves a Calderbank offer that had not been accepted. The factors set out there were accepted in Pegela. For the purposes of this costs argument, I will accept that an order for indemnity costs can be made on the basis of an open offer and the factors as set out in Hazeldene. The Victorian Court of Appeal stated at [20]: "[20] The correct approach, in our view, is to treat the rejection of a Calderbank offer as a matter to which the court should have regard when considering whether to order indemnity costs. As Gyles JA stated in SMEC Testung Services Pty Ltd v Campbelltown City Council: …In the end the question is whether the offeree's failure to accept the offer, in all the circumstances, warrants departure from the ordinary rule as to costs …"
The factors to consider are: 1. The stage of the proceeding at which the offer was received; 2. The time allowed to the offeree to consider the offer; 3. The extent of the compromise offered; 4. The offeree's prospects of success, assessed as at the date of the offer; 5. The clarity with which the terms of the offer were expressed; 6. Whether the offer foreshadowed an application for an indemnity costs in the event of the offeree's rejecting it.
While the DCT disputes this, the cross claimant says that by applying the six measures to the circumstances of this case: 1. The offer was made prior to a potential related and relevant application for review in the AAT (a no costs jurisdiction), that is, a review of the amended assessment upon which the ATO's claim was based. The offer was made prior to the ATO's claim, or any motion with respect to it, proceeding to timetabling or a hearing. 2. The time allowed for the ATO to consider the offer was at the discretion of the ATO, that is, the offer was made prior to the ATO issuing the related objection decision affecting the ATO's claim. The timing of issuing the objection decision was at the discretion of the ATO. Further litigation would only be prompted after the issuing of an objection decision made refusing the cross claimant's offer. 3. The amount offered was over $100,000 in excess of the ATO's position at the conclusion of the ATO's claim. 4. The cross claimant's prospects of success were good at the time of making the offer given that the ATO had advised that a significant credit would be applied to the assessment that formed the basis of the ATO's claim. 5. The offer made in the compromise proposals submitted by the cross claimant were clear in terms of amount and in terms of seeking full and final resolution of the dispute between the parties. 6. An application for indemnity costs was not foreshadowed by the cross claimant at the time of making the offers.
The cross claimant submitted that by applying the six considerations in Hazeldene in deciding whether the ATO's refusal of the cross claimant's offer was unreasonable, five of those would tend to suggest that the ATO's refusal to settle was unreasonable, and that an award for indemnity costs for the period prior to the dismissal of the ATO's amended statement of claim is appropriate.
Whether the cross claimant should be awarded indemnity depends on all the circumstances of the case. This approach was confirmed by the Court of Appeal in Jones v Bradley (No 2) [2003] NSWCA 258 at [7]-[9] (per Meagher, Beazley and Santow JJA). A key consideration is whether the offeror (in this case the cross claimant) has established that the offer was one that was "unreasonable" to reject: Jones v Trad (No 3) [2013] NSWCA 463 at [45] per Ward JA (with whom Emmett JA and Gleeson JA agreed).
Where the circumstances, which exist at the time when one party makes an offer of compromise to another party, change significantly so as to produce a different complexion to the litigation so far as that other party is concerned, then the success of the party making the offer will not readily warrant indemnity costs: see Rolls Royce Industrial Power (Pacific) Ltd (Formerly John Thomson (Australia) Pty Ltd) v James Hardie & Coy Pty Ltd (2001) 53 NSWLR 626.
In Rolls Royce the significant change was the filing of a cross claim for contribution or indemnity from another third unrelated party after the expiry of a Calderbank offer.
At the time the second compromise proposal was submitted on 13 October 2014, the objection decision to DCT had been made on 18 September 2014, (JTB 7.371). Although that reduced the amount of the cross claimant's taxable income to $827,609 (from $3,685,805), there still remained a significant amount of tax outstanding ($367,614) plus penalties and shortfall interest charges. (JTB 7.374).
The cross claimant commenced proceedings in the AAT, appealing from the objection decision, on 29 October 2014, after the rejection of the second compromise proposal. It was in the course of those proceedings, in March 2015, that the cross claimant put forward additional sworn evidence from himself, his brother, and Mr Robert Melhem. As an email from the ATO officer who managed the AAT proceedings recounted, it was the provision of that material at that point in the litigation process which led to the decision in the cross claimant's favour (by consent) in the AAT, which in turn led to the dismissal (by consent) of the recovery proceeding.
I have previously stated that when the cross claimant put on additional evidence in the AAT in March 2015, it was the turning point in the DCT's attitude towards the cross claimant's taxation payable in FY2007. To my mind, this is the most decisive factor. It was only in March 2015 when the cross claimant put on all his evidence including new statutory declarations that ATO was, for the first time, in a proper position to fully assess his FY2007 tax liability. The first offers of compromise were made well before ATO could properly assess the cross claimant's claim.
It is my view that at the time the second compromise proposal was submitted, it was not unreasonable.
On 16 June 2015, the consent order was made in the AAT and the notice of amended assessment in the sum of $101,740 was issued (the same amount set out in the notice of assessment issued on 17 September 2007, nearly eight years earlier). The cross claimant wrote to the ATO seeking costs on a party/party (ordinary) basis. Fifteen days later the ATO's claim was dismissed. On 16 July 2015, Mr Frangieh made an offer to pay costs on a party/party basis and this was ultimately agreed to by DCT. In these circumstances, it is my view that costs should not be payable on an indemnity basis. The plaintiff is to pay the defendant's costs on an ordinary basis.

Deputy Commissioner of Taxation v Joseph Frangieh

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