Deputy Commissioner of Taxation v Leaver [2015] FCA 1454 | Case summary

The cross-claim be struck out.
Judgment be given for the applicant against the second respondent, Russell Associates Limited, in the sum of $15,342.976.79. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 576 of 2015

REASONS FOR JUDGMENT 1 In each of these two proceedings the Deputy Commissioner of Taxation ("the Commissioner") seeks summary judgment and orders striking out cross-claims. In NSD 576 of 2015 the Commissioner also seeks an order striking out the respondent's defence. The Commissioner is the applicant in each proceeding and relies upon assessments against the respective taxpayer. The Commissioner seeks judgment against Mr Vanda Gould in proceeding NSD 576 of 2015 in the sum of $15,213,916.14 upon a certificate produced under s 255-45 of Schedule 1 to the Taxation Administration Act 1953 (Cth) ("the Administration Act"). Mr Gould challenges the validity of the assessments by defence and cross-claim. The Commissioner seeks judgment against Russell Associates Ltd ("Russell Associates") in proceeding NSD 568 of 2015 in the sum of $15,342,976.79 upon a certificate produced under s 255-45 of Schedule 1 to the Administration Act. Russell Associates challenges the validity of the assessments by cross-claim. The Commissioner is entitled to judgment in each proceeding unless the assessments do not have the protection afforded by s 175 of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act") and s 350-10 of Schedule 1 to the Administration Act. 2 Mr Gould filed a defence and a cross-claim in NSD 576 of 2015 ("the Gould proceeding") dated 22 July 2015 challenging the validity of the assessments maintaining that they are not entitled to the protection of s 175 of the 1936 Act or s 350-10 of the Schedule to the Administration Act. A cross-claim to the same effect was filed by Russell Associates in NSD 568 of 2015 ("the Russell Associates proceeding"). The Commissioner applied on 16 November 2015 in the Gould proceeding and on 23 November 2015 in the Russell Associates proceeding to have struck out the respective pleadings of Mr Gould and of Russell Associates and for judgment upon the assessments. The Commissioner's interlocutory applications were heard together on 8 December pursuant to r 30.11 of the Federal Court Rules 2011 (Cth). 3 An oral application was made on behalf of Mr Gould during the afternoon of the hearing to file and rely upon an amended defence in the Gould proceeding. There was no formal application for leave to amend the cross-claim in the Gould proceeding or to amend the cross-claim in the Russell Associates proceeding, but it is clear that each would want to rely upon what is pleaded in the proposed amended defence which adds to and expands upon the existing pleadings rather than reduces their pleaded case. The application by Mr Gould for leave to file an amended defence was heard as part of the case by Mr Gould and Russell Associates against the orders sought by the Commissioner, and it is appropriate to consider the Commissioner's application for summary judgment by reference to the pleading in the proposed amended defence, notwithstanding that the oral application was made late, without adequate explanation, and that there was no application to amend in similar terms Mr Gould's cross-claim or the cross-claim by Russell Associates. For present purposes it may be accepted, therefore, that the case sought to be made by Mr Gould in his defence and cross-claim, and by Russell Associates in its cross-claim, is in the terms of the proposed amended defence given to the Court in the afternoon of 8 December for which leave was sought. The Commissioner's challenge to the pleadings by Mr Gould and Russell Associates at the hearing on 8 December 2015 was narrowed to whether the pleadings should be struck out and judgment given even if the illegality alleged was established. The Commissioner's submission was, in other words, that the illegality alleged, even if established, was insufficient to vitiate the assessments relied upon on the case pleaded. 4 The circumstances relied upon by Mr Gould and Russell Associates to challenge the assessments upon which the Commissioner seeks judgment concern the obtaining and use of information by the Commissioner from the Cayman Islands Tax Information Authority ("the Cayman Islands Authority") pursuant to an agreement between the Australian Commonwealth Government and the Cayman Islands for the exchange of information with respect to taxes ("the information exchange agreement"). Documents were obtained by the Commissioner which the taxpayers allege were unlawfully obtained and unlawfully used in raising the assessments against Mr Gould and Russell Associates. The documents obtained by the Commissioner related to two companies incorporated in the Cayman Islands, namely JA Investments Limited ("JA Investments") and MH Investments Limited ("MH Investments"). On 18 September 2012 those companies commenced proceedings in the Grand Court of the Cayman Islands against the Cayman Islands Authority seeking declarations that the provision by the Cayman Islands Authority of the information was ultra vires. The Commissioner was not a party to those proceedings. On 13 September 2013 Quin J decided in favour of the applicants in the Cayman Islands proceedings before him. Between 16 and 19 September 2013 Perram J heard proceedings in this Court which considered, amongst other matters, whether the Commissioner could rely upon the documents which he had obtained from the Cayman Islands Authority and which the taxpayers, in the proceeding before Perram J, contended, in reliance in part upon the decision of Quin J in the Grand Court of the Cayman Islands, had been illegally obtained. Perram J permitted the Commissioner to rely upon the documents and the information which had been obtained from the Cayman Islands Authority notwithstanding the hypothesis that their tender "might be an offence under the laws of the Cayman Islands": Hua Wang Bank Berhad v Federal Commissioner of Taxation (No 7) (2013) 217 FCR 1 at [92]. His Honour's decision was published on 8 October 2013. 5 Mr Gould and Russell Associates contended that the assessments raised against them upon the information obtained from the Cayman Islands are invalid and do not attract the protection of s 175 of the 1936 Act and s 350-10 of Schedule 1 to the Administration Act. To succeed Mr Gould and Russell Associates must establish, and for present purposes must have pleaded, bad faith in the sense considered in Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 and Denlay v Federal Commissioner of Taxation (2011) 193 FCR 412. Section 175 of the 1936 Act provides: The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with. Section 350-10 of Schedule 1 to the Administration Act now contains the provision formerly found in s 177(1) of the 1936 Act which provides, in effect, that the production of a copy of a notice of assessment is conclusive evidence that the assessment was properly made and, except in proceedings under Part IVC of the Administration Act on a review or appeal relating to the assessment, that the amounts and particulars of the assessment are correct. 6 The High Court in Futuris considered the limits beyond which s 175 did not reach and at [25] of the joint judgment said that the protection would not extend to an assessment produced in "conscious maladministration of the assessment process". At [25] of the joint judgment their Honours said: But what are the limits beyond which s 175 does not reach? The section operates only where there has been what answers the statutory description of an "assessment". Reference is made later in these reasons to so-called tentative or provisional assessments which for that reason do not answer the statutory description in s 175 and which may attract a remedy for jurisdictional error. Further, conscious maladministration of the assessment process may be said also not to produce an "assessment" to which s 175 applies. Whether this be so is an important issue for the present appeal. Their Honours went on to consider the knowledge to be established for the protection provided by ss 175 and 177 not to be available. At [53]-[66] their Honours said: The knowledge of the Commissioner 53 The Full Court found: "[i]t is our view that the Commissioner knew, during the relevant period, that if he included in Futuris' assessable, and therefore taxable, income an amount of $82,950,090 as a tax benefit obtained in connection with a scheme to which Pt IVA applied on top of the taxable income assessed under the first amended assessment, he would be 'double counting' the amount of $19,950,088. That the Commissioner found comfort for this in his assumption that he could subsequently make a compensating adjustment in reliance on s 177F(3) does not mitigate against that conclusion as to his knowledge; on the contrary, it supports the conclusion that the Commissioner knew that his chosen course involved 'double counting'; and, with respect to, but contrary to, the finding of the primary judge, it also supports a conclusion that the 'double counting' was deliberate, albeit subject to the assumption that all could be made good by a subsequent compensating adjustment determination in reliance on s 177F(3)." (Original emphasis.) 54 If this finding as to mental element in the making of the assessment were to withstand the challenge in this Court by the Commissioner, would that, contrary to what has been concluded thus far in these reasons, enliven principles respecting jurisdictional error? 55 The issue here is whether, upon its proper construction, s 175 of the Act brings within the jurisdiction of the Commissioner when making assessments a deliberate failure to comply with the provisions of the Act. A public officer who knowingly acts in excess of that officer's power may commit the tort of misfeasance in public office in accordance with the principles outlined earlier in these reasons. Members of the Australian Public Service are enjoined by the Public Service Act (s 13) to act with care and diligence and to behave with honesty and integrity. This is indicative of what throughout the whole period of the public administration of the laws of the Commonwealth has been the ethos of an apolitical public service which is skilled and efficient in serving the national interest. These considerations point decisively against a construction of s 175 which would encompass deliberate failures to administer the law according to its terms. 56 Such failures manifest jurisdictional error and attract the jurisdiction to issue the constitutional writs. To the extent that there is any indication to the contrary in what was said by Mason and Wilson JJ in F J Bloemen Pty Ltd v Federal Commissioner of Taxation that should not be followed. 57 It should be added that, with respect to the remedy of injunction, what was said in the joint reasons in Plaintiff S157/2002 v The Commonwealth indicates that injunctive relief clearly is "available for fraud, bribery, dishonesty or other improper purpose". 58 However, there was no such failure of due administration with respect to the second amended assessment. The Court was taken through the internal documents of the ATO and the correspondence which was in evidence. The key to the error in the reasoning of the Full Court may be seen in the concluding words in the passage from its reasons set out above that what was held to be the "deliberate" conduct of the Commissioner was "albeit subject to the assumption that all could be made good by a subsequent compensating adjustment determination in reliance on s 177F(3)". 59 This was more than an "assumption"; the reasoning in the ANZ Case was fairly open to the construction that it supported the course taken in making the second amended assessment and the assessment was made on that footing. That s 177F(3) might be differently construed in a subsequent Pt IVC proceeding (and the allowing of this appeal leaves open that possibility in the pending Pt IVC litigation in the Federal Court) does not support any conclusion that the Commissioner engaged in "double counting" with any knowledge or belief that there was a failure in compliance with the provisions of the Act. 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. Remarks by Hill, Dowsett and Hely JJ in Kordan Pty Ltd v Federal Commissioner of Taxation are in point. Their Honours said: "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 Co Pty Ltd v Federal Commissioner of Taxation 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." 61 The outcome on the present appeal bears out the quoted observation by Hill J. Conclusions 62 The primary judge was correct to dismiss the s 39B application and the Full Court erred in displacing that outcome. The appeal to this Court should be allowed. It should be noted that the process of reasoning which has led to that conclusion does not depend upon giving determinative effect to s 177(1). Rather, the critical matter for the determination by this Court of the appeal has been the proper construction of s 175 and its application to the facts as correctly found by the primary judge. 63 However, given the attention devoted to s 177(1) in the submissions of both parties something more should be said respecting that provision. The relationship between ss 175 and 177(1) 64 The evident policy reflected in the terms of s 177(1) is the facilitation of proceedings for the recovery of tax which are instituted by the Commissioner under s 209 of the Act in a court of competent jurisdiction. Corresponding provision is made elsewhere in the Act for the recovery of other amounts. The action for recovery is facilitated by the "conclusive evidence" provision in s 177(1). That sub-section, as the Commissioner correctly submitted, is not a privative clause in the ordinary use of that term. It does not purport to oust the (necessarily federal) jurisdiction conferred upon any other court in matters arising under the Act. To the contrary, it recognises that there may be Pt IVC proceedings and in those proceedings the "conclusive evidence" provision does not apply. 65 In recovery proceedings s 177(1) operates to change what otherwise would be the operation of the relevant laws of evidence. But, given the presence of Pt IVC, s 177(1) does not operate to impose an incontestable tax or otherwise fall foul of the principles which were considered in Nicholas v The Queen and which respect usurpation of the federal judicial power by deeming to exist an ultimate fact. 66 What of the operation of s 177(1) as a limitation upon the evidence which may be received in an application for judicial review under s 75(v) of the Constitution or s 39B of the Judiciary Act? What will be in issue there, as explained earlier in these reasons, are allegations of corruption and other deliberate maladministration. The attribution "correct" given by the concluding word of s 177(1) is inapt to describe the situation which would arise were such allegations (properly pleaded) made good in the judicial review proceeding. Considerations applied above in the construction of s 175 apply here also. The result is that, on its proper construction and its application to the present s 39B case, s 177(1) did not conclude against Futuris curial consideration of alleged deliberate maladministration of the Act with respect to the second amended assessment. (Footnotes omitted). The application of these principles was subsequently considered by the Full Court in Denlay where the Full Court said at [21]-[25]: 21 The expression, "conscious maladministration", which looms large in the taxpayers' argument, derives from the statement by Gummow, Hayne, Heydon and Crennan JJ in Futuris that s 175 of the ITAA 1936 "operates only where there has been what answers the statutory description of an 'assessment'" (at [25]). Their Honours said (Reasons at [23]-[25]): The significance of s 175 for the operation of the Act and for the scope of judicial review outside Pt IVC is to be assessed in the manner indicated in Project Blue Sky Inc v Australian Broadcasting Authority. That case decided that the description of provisions as either mandatory or directory provides no test by which the consequences of non-compliance with a statutory criterion can be determined. Rather, consistently with the reasons in Project Blue Sky of McHugh, Gummow, Kirby and Hayne JJ, the question for the present case is whether it is a purpose of the Act that a failure by the Commissioner in the process of assessment to comply with provisions of the Act renders the assessment invalid; in determining that question of legislative purpose regard must be had to the language of the relevant provisions and the scope and purpose of the statute. Section 175 must be read with ss 175A and 177(1). If that be done, the result is that the validity of an assessment is not affected by failure to comply with any provision of the Act, but a dissatisfied taxpayer may object to the assessment in the manner set out in Pt IVC of the 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 with the burden of proof provided in ss 14ZZK and 14ZZO of the Administration Act. Where s 175 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 under s 39B of the Judiciary Act. But what are the limits beyond which s 175 does not reach? The section operates only where there has been what answers the statutory description of an "assessment". Reference is made later in these reasons to so-called tentative or provisional assessments which for that reason do not answer the statutory description in s 175 and which may attract a remedy for jurisdictional error. Further, conscious maladministration of the assessment process may be said also not to produce an "assessment" to which s 175 applies. Whether this be so is an important issue for the present appeal. (Footnotes omitted.) 22 Their Honours went on to say (Reasons at [55]-[57]): The issue here is whether, upon its proper construction, s 175 of the Act brings within the jurisdiction of the Commissioner when making assessments a deliberate failure to comply with the provisions of the Act. A public officer who knowingly acts in excess of that officer's power may commit the tort of misfeasance in public office in accordance with the principles outlined earlier in these reasons. Members of the Australian Public Service are enjoined by the Public Service Act (s 13) to act with care and diligence and to behave with honesty and integrity. This is indicative of what throughout the whole period of the public administration of the laws of the Commonwealth has been the ethos of an apolitical public service which is skilled and efficient in serving the national interest. These considerations point decisively against a construction of s 175 which would encompass deliberate failures to administer the law according to its terms. Such failures manifest jurisdictional error and attract the jurisdiction to issue the constitutional writs. To the extent that there is any indication to the contrary in what was said by Mason and Wilson JJ in F J Bloemen Pty Ltd v Federal Commissioner of Taxation that should not be followed. It should be added that, with respect to the remedy of injunction, what was said in the joint reasons in Plaintiff S157/2002 v The Commonwealth indicates that injunctive relief clearly is "available for fraud, bribery, dishonesty or other improper purpose". (Footnotes omitted.) 23 The reference in the passage cited in the preceding paragraph to "the tort of misfeasance in public office in accordance with the principles outlined earlier in these reasons" is a reference to the statement by their Honours (at [11]): What is conveyed by the holding by the Full Court that the Second Amended Assessment did not represent an exercise by the Commissioner of the power to assess which was bona fide? That phrase is used in several senses in public law. With cognate expressions, it also appears in formulations of the tort of misfeasance in public office. This Court has accepted that in that context it is sufficient that the public officer concerned acted knowingly in excess of his or her power. The House of Lords has since indicated that in English law recklessness may be a sufficient state of mind to found the tort. The affinity between tort law and public law has been remarked upon in this Court; that affinity reflects the precept that in a legal system such as that maintained by the Constitution executive or administrative power is not to be exercised for ulterior or improper purposes. 24 Before the primary judge in the current case, the Commissioner argued the evidence in support of the taxpayers' allegation of a contravention of s 400.9 of the Criminal Code did not meet the standard of proof required by s 140(2) of the Evidence Act 1995 (Cth) in relation to the proof of conduct of such alleged gravity. Next, the Commissioner argued that the allegation of a breach of s 400.9 of the Criminal Code ignored the operation of s 10.5 of the Criminal Code in respect of actions authorised by law; their conduct was authorised by ss 166, 263 and 264 of the ITAA 1936. These provisions should, it was said, be given effect according to their terms. 25 In any event, it was argued, the Commissioner's officers acted in good faith throughout; to the extent that Mr Kieber engaged in illegal conduct in taking information from LGT four years or more before handing the disks over to the Commissioner's officers, that did not affect them in the conscientious performance of their duties. The Commissioner argued that there was no evidence that his officers knew or believed they were committing an offence at any time. All of the officers of the ATO who interviewed Mr Kieber, who were involved in Project Jade, or who amended the assessments were engaged only in seeking, in good faith, to give effect to the ITAA 1936. At [75]-[82] the Court said: Conscious maladministration 75 In Futuris, Gummow, Hayne, Heydon and Crennan JJ said (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. Remarks by Hill, Dowsett and Hely JJ in Kordan Pty Ltd v Federal Commissioner of Taxation are in point. Their Honours said: 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 Co Pty Ltd v Federal Commissioner of Taxation 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. (Footnotes omitted.) 76 Those observations highlight that their Honours were concerned, in their reference to conscious maladministration, with bad faith in the exercise of the decision-making power under challenge and the need for proof of an allegation of bad faith against the Commissioner or his officers. Their Honours were concerned with actual bad faith, not with some form of "constructive" bad faith established by unwitting involvement in an offence. 77 The passages from the decision of the majority in Futuris set out above are concerned with the state of mind of the officers of the Commissioner involved in the making of the assessment. They emphasise the importance of fidelity on the part of those officers to the purposes of the legislation. If Mr Kieber had merely told the Commissioner's officers of the contents of the documents he had taken from LGT, or had brought the documents into Australia himself and handed them over to the Commissioner's officers here, the taxpayers would have no argument. It is difficult to discern a rational basis for distinguishing these hypothetical examples from the present case in terms of the vice of "conscious maladministration" which is apt to vitiate an assessment. 78 The observations of the majority in Futuris do not support the proposition that any breach of the law by officers of the Commissioner in the course of processes anterior to, or even in the course of, making an assessment, suffices to establish conscious maladministration which is apt to vitiate the assessment. Conscious maladministration, as explained in Futuris, involves actual bad faith on the part of the Commissioner or his officers. The findings of the primary judge to which we have referred at [49] and [50] of these reasons negative bad faith on the part of the Commissioner's officers. Section 166 of the ITAA 1936 79 Conscious maladministration as explained in Futuris relates to the integrity of the assessment. Even if the circumstances in which the information in question became available to the Commissioner's officers involved unlawful conduct on their part, that would not necessarily deny the integrity of the assessment. What matters for that purpose is the accuracy of the information and the competence and honesty of those officers involved in making the assessment. 80 The views of the majority in Futuris do not bear upon the proper interpretation of s 166 of the ITAA 1936. Their views are concerned with making the point that an assessment which is the result of bad faith towards a taxpayer is not an assessment worthy of that description in the ITAA 1936. It may be accepted that such a purported assessment would be contrary to s 13(4) of the Public Service Act. But the reasons of the majority of the High Court in Futuris do not support the notion that an assessment, made in good faith on the basis of information believed to be accurate, may be vitiated by reason of a breach of s 13(4) of the Public Service Act in the course of obtaining that information. 81 We are unable to interpret s 166 of the ITAA 1936 in the way urged by the taxpayers. Section 166 imposes a duty upon the Commissioner. The interpretation of s 166 urged by the taxpayers would limit the performance of that duty to cases where the Commissioner is able to satisfy himself that his officers had not infringed any law in the gathering of the available information. It would be a remarkable state of affairs if the Commissioner were entitled, and indeed obliged, to refrain from doing what is expressed to be his duty by the terms of s 166 of the ITAA 1936 by reason of a suspicion on his part, even a reasonable suspicion, that some illegality on the part of his officers may have occurred in the course of gathering the information. A clear expression of legislative intention so to qualify the duty imposed on the Commissioner would be required to relieve him of his duty under s 166. We are unable to see that such a limitation is consistent with the unqualified language in which the duty is cast upon the Commissioner and the high importance of making an assessment based on the information available to the Commissioner. The expense and inconvenience of casting such a burden on the Commissioner, and the difficulty of defining precisely the kinds of unlawful conduct which might preclude the Commissioner from doing the duty cast on him by the unqualified language of s 166, are further reasons why the interpretation propounded by the taxpayers should be rejected. 82 We are also unable to see that such a qualification is necessary in order to ensure that the Commissioner's officers are discouraged from disobeying the law in carrying out their functions under the ITAA 1936. One may confidently say that, in carrying out their investigations, the Commissioner's officers are subject to the law of the land; if they transgress the law of the land, then they will suffer the consequences. It is an entirely different thing to say that the interest of the Australian community in the making of taxation assessments based on the most accurate information available, an interest embodied in s 166 of the ITAA 1936, should be defeated by a default on the part of the Commissioner's officers which has no bearing on the accuracy of the assessment. Thus, the desirability of encouraging officers of the executive government to abide by the law of the land affords no reason to confine the operation of s 166 of the ITAA 1936 by subjecting it to the limitations urged by the taxpayers. It is clear from these paragraphs that what must be shown in a pleading of conscious maladministration is actual bad faith by reference to a state of mind consciously to act contrary to law of those said to have acted in bad faith in the discharge of their statutory duty. That is because the protection of s 175, and of the provisions previously found in s 177, does not extend to the wilful disregard of what the official concerned knows to be required. The sections are designed to protect assessments from collateral challenges of error, including consciously adopted positions which may be erroneous, but they do not extend to actual bad faith. The essence of bad faith in this context is that the person purporting to exercise a statutory power does so knowing that the power is being exercised improperly; that is, that the person is conscious of the unlawfulness. It is the knowledge and awareness of the illegality which is central to establish bad faith to defeat the protection of the provisions. 7 A pleading does not adequately plead a case of bad faith or conscious maladministration, or other jurisdictional error by a generalised plea of "bad faith", "maladministration", "conscious maladministration", "illegality", "contempt of court" or the like. What must specifically be established, and for present purposes what must specifically be pleaded, are the material facts of the state of mind said to constitute the knowledge or awareness of raising an assessment unlawfully. Rule 16.43(1) of the Federal Court Rules 2011 (Cth) provides that a party "who pleads a condition of mind must state in the pleading particulars of the facts on which the party relies". In Young Investments Group Pty Ltd v Mann (2012) 293 ALR 537 the Court said at [7]-[11]: [7] A statement of claim must allege a cause of action with sufficient particularity and not simply make allegations in general terms. The adequacy of a statement of claim is to be assessed by reference to whether the cause of action is pleaded at a level of particularity that is sufficient to define the issues and inform the other party of the case that it has to meet, in the context of the particular allegations. A respondent or defendant is entitled to know the factual foundation for the case that is being alleged, so that the respondent or defendant can prepare to meet that case at trial. In order to disclose a reasonable cause of action, a statement of claim must contain an allegation of all of the relevant facts necessary to support any allegation made in it. A pleading that simply pleads a conclusion is embarrassing and should not be permitted to stand. [8] More specifically, r 16.43(1) of the Federal Court Rules 2011 (Cth) provides that a party who pleads a condition of mind must state in the pleading particulars of the facts on which the party relies. Under r 16.43(3), condition of mind for a party includes knowledge. In addition, under r 16.43(2), if a party pleads that another party ought to have known something, the first party must give particulars of the facts and circumstances from which the other party ought to have acquired the knowledge. The question of knowledge on the part of the directors is critical to the causes of action sought to be pleaded against them by the appellants. [Emphasis in original] [9] It has long been the case, in various jurisdictions, that particulars are to be provided of facts and circumstances relied upon to support a plea that something ought to have been known: see Fox v H Wood (Harrow) Ltd [1963] 2 QB 601 at 604 and Smith v Littlemore (1996) 15 WAR 289 at 300. Knowledge itself has usually been treated differently. Knowledge of, or recklessness towards falsity, by way of example, may usually be pleaded as the material fact without particularisation: see Ritter v North Side Enterprises Pty Ltd (1975) 132 CLR 301 at 304; 6 ALR 125. Allegations of fraud, or the involvement of persons in statutory breaches sufficiently analogous to allegations of fraud, on the other hand, have required the provision of quite specific particulars. [10] The reason for not being required to particularise knowledge is not fully explained in the cases. It may be assumed that, on the one hand, there is the obvious difficulty of knowing what is inside another's mind. On the other hand, there may be instances where the evidence to be relied upon to establish knowledge could be identified by particulars. That evidence might be an admission or a communication, written or oral, that could only give rise to the relevant state of mind. In appropriate cases, the provision of particulars has been ordered when sought. [11] There are sound reasons for requiring knowledge to be particularised, at least in relation to the kind of allegations made in the statement of claim. Proving a director's actual knowledge of the essential ingredients of a contractual or tortious breach or statutory contravention is a prerequisite to the director's personal liability. For statutory breaches, it is well-established that, in order to be an accessory or to be knowingly involved in a contravention, a person must have intentionally participated, having knowledge of the essential matters constituting the contravention: see Yorke v Lucas (1985) 158 CLR 661; 61 ALR 307. That is not imputed or constructive knowledge but, rather, actual knowledge. It would not usually be sufficient to establish a statutory breach to show that a person said to be an accessory to such a breach wilfully shut his or her eyes to the obvious: see Giorgianni v R (1985) 156 CLR 473; 58 ALR 641; 2 MVR 97. Actual knowledge of suspicious circumstances and failure to make inquiry may be different: see Pereira v Director of Public Prosecutions (1988) 82 ALR 217 at 219; 63 ALJR 1 at 3. However, actual knowledge of suspicious circumstances is not pleaded in the statement of claim in the sense required for accessorial liability. The pleadings in these proceedings, at their highest, do not state the particulars, or any material facts, of awareness or knowledge, beyond conclusionary pleadings, of a relevant state of mind of any person sufficient to establish that the assessments in question are beyond the protection of s 175 of the 1936 Act and s 350-10 of Schedule 1 to the Administration Act. 8 The proposed amended defence makes a number of allegations of illegality in connection with the assessments raised by the Commissioner. It alleges that the information request transmitted by the ATO to the Cayman Islands Authority on 23 February 2011 was expressed to be for the purpose of conducting a "real time review" of the tax liability of Mr Gould for the 2011 income year when, as alleged, in fact the ATO officer who issued the request "knew" that no such review was taking place. It alleges that the 23 February 2011 request was transmitted by the ATO to the Cayman Islands Authority for an invalid purpose under the information exchange agreement and particularises the allegation of an invalid purpose to include the use of the information as evidence in anticipated Part IVC proceedings commenced by taxpayers in respect of tax liabilities for years prior to 1 July 2010. The proposed amended defence pleads at paragraphs 51 and 52 that specified officers of the ATO "committed a criminal offence under the law of the Cayman Islands by wilfully attempting to obtain confidential information belonging to another" (emphasis added) and that they "knew" or were "recklessly indifferent" to whether they were committing an offence under the law of the Cayman Islands. The proposed amended defence at paragraph 50 pleads that the transmission of the information request by officers of the Commissioner was a breach of sections 13(1), (8) and (11) of the Public Service Act 1999 (Cth) "where it was known [that] the request did not relate to tax periods covered by" (emphasis added) the information exchange agreement. The proposed defence at paragraphs 53 and 54 pleads that the power to transmit information requests at the relevant time did not extend to the request sent. Similar allegations are made with respect to a subsequent request transmitted by the ATO to the Cayman Islands Authority on 27 May 2011 in respect of which the amended pleading also contends the Commissioner was in contempt of court. The proposed amended defence uses words such as "knew", "wilfully", "recklessly indifferent" and "known" to plead awareness but gives no particulars, and pleads no material facts, of the knowledge, wilfulness, reckless indifference or the like relied upon. It may be accepted, of course, that it may be difficult to plead, or particularise, the knowledge or awareness of raising an assessment unlawfully where, for example, it is concealed. But the difficulty in pleading, or in particularising, knowledge or awareness of raising an assessment illegally is consistent with the absence of any such knowledge or awareness. 9 In all respects what the pleading lacks is the fundamental element required to establish a pleading of bad faith, namely, the material facts said to constitute the consciousness or awareness or knowledge of wrongdoing. Neither bad faith nor conscious wrongdoing is established by knowledge, awareness or consciousness of acts, facts or circumstances which the person concerned does not believe to be wrongful. Facts, acts or circumstances may be wrongful and that wrongfulness may result in such other remedies as may be available in respect of that wrongdoing, but wrongdoing does not establish bad faith of the kind contemplated in Futuris or Denlay. It may be accepted that Mr Gould and Russell Associates wish to plead facts sufficient to establish bad faith or conscious maladministration in the sense contemplated by Futuris and Denlay, but the pleadings do not do so. It is true that the pleadings for Mr Gould and Russell Associates are replete with generalised assertions of "conscious maladministration", "deliberate failure", "knowledge", "reckless indifference", "awareness" and absence of "good faith", but there are no material facts pleaded, or any particulars, of any of those generalised claims. That is unsurprising if, and may be expected where, a person undertakes conduct (which may for present purposes be assumed to be unlawful) in the belief that what was done was lawful and proper. There is no foundation in the pleading, or in any other material filed in the proceeding, of any ATO officer acting in the conscious knowledge that what was done was not permitted. There is, for example, nothing to show that any of the ATO officers concerned knew that they could not obtain or rely upon the information in raising the assessments. 10 A few examples may suffice to demonstrate the deficiency in the pleading. Paragraph 86 in the proposed amended defence, for example, pleads: The officers and employees of the Applicant were aware that the 27 May 2011 request was not supported by the relevant statutory power, or they showed reckless indifference to the absence of statutory power. [Emphasis added] Three particulars are provided to this pleading: (i) The officers and employees of the Applicant were aware of the Australian Court Proceedings, and aware of the doctrine of contempt of court [Emphasis added]. (ii) The officers and employees of the Applicant knew that information held in the Cayman Islands, of the sort specified in the request, was likely to be confidential and also private property of JA Investments [Emphasis added]; and (iii) The officers and employees of the Applicant were aware the Applicant was not conducting a real time review of the personal tax liability of the respondent for the year ended 30 June 2011 [Emphasis added]. Putting aside any formal criticism about whether what appears in the "particulars" ought to have been pleaded as "material facts", there is an absence of any pleading of material facts of, or particularisation of, an awareness of wrongdoing. The "awareness" pleaded in paragraph 86 is purportedly "particularised" only by the subsequent generalised assertion of an "awareness" in the particulars. The subject matter of the awareness may have been specified in the particulars, but there is neither particularisation nor allegation of material facts of the wrongful state of mind. There is, in other words, a failure to plead the awareness of wrongdoing. Accordingly, I accept the Commissioner's submission that the amended pleading, and its predecessors, lack the material facts capable of establishing conscious maladministration within the principles set down by the relevant authorities. Neither the amended defence nor the earlier defence, nor either of the cross-claims plead material facts which, if proven, would demonstrate bad faith or conscious maladministration on the part of any relevant ATO officer because: (a) there are no material facts in the pleadings to support the allegation that the ATO officers deliberately made assessments that they knew to be incorrect or arbitrary or which were based upon inaccurate information or which intentionally misrepresented the information in the officer's possession that was used to make the assessments; and (b) there are no material facts in the pleadings to support an allegation that the ATO officers used the information provided by the Cayman Islands Authority for any purpose other than, or alien to, the fulfilment of their duty under s 166 of the 1936 Act to make an assessment from the returns and from other information in their possession. 11 The same is true of the new claims sought to be introduced by the proposed amended defence that the Commissioner sought and relied upon information in contempt of court. Paragraphs 74 to 77 in the proposed amended defence appear under the heading "27 May 2011 Information Request: Contempt of Court" and conclude in paragraph 77 with the plea that "in the premises" the transmission of the 27 May 2011 information request was a contempt of court. Paragraphs 83 to 88 return to the topic and conclude in paragraph 88 with an unparticularised pleading that the 27 May 2011 request "was a deliberate failure" by the Commissioner to comply with various statutory provisions. The preceding paragraph asserted that the transmission was not in good faith and the earlier paragraphs similarly plead generalised statements of illegality. Paragraph 86, to which I have previously referred, is amongst that group of paragraphs. However, there is no pleading of material facts, or particularising, of conscious maladministration as explained by the High Court in Futuris involving actual bad faith on the part of the Commissioner or his officers, or which relates to the integrity of the assessment as explained in Denlay at [70]. 12 I am not satisfied, therefore, that leave should be granted for the amended defence to be filed or that there is any foundation to warrant granting leave to Mr Gould or Russell Associates to re-plead. None of the evidence filed on their behalf, or in any of the extant pleadings, satisfy me that there is any foundation upon which they can make the case they want to make of conscious maladministration sufficient to find bad faith to take the assessments beyond the protection of s 175 of the 1936 Act and s 350-10 of Schedule 1 to the Administration Act. 13 Rule 16.21 of the Federal Court Rules 2011 (Cth) relevantly provides that the Court may order that all or part of a pleading be struck out on the ground that the pleading fails to disclose a reasonable cause of action or defence or other case appropriate in the nature of the pleading. In Mulhern v Bank of Queensland [2015] FCA 44 Gleeson J said at [53]-[57]: [53] The power to strike out a pleading (in this case, the statement of claim) requires a consideration of the terms of that document. A pleading may be struck out if it is unintelligible, ambiguous or so vague that it fails to identify the material factual allegations to the extent that the other party is not given notice of the real substance of the claim: Priest v State of New South Wales [2006] NSWSC 12 at [34]. [54] It must be apparent on the face of the statement of claim that the facts pleaded, if proved, would establish the cause of action relied upon by the relevant plaintiff or plaintiffs. In Wride v Schulze [2004] FCAFC 216 at [25], a Full Court said: … the pleadings must disclose a reasonable cause of action against the party against whom the cause of action is brought and must state all material facts necessary to establish that cause of action and the relief sought. A "reasonable cause of action" for this purpose means one which has some chance of success if regard is had only to the allegations and the pleadings relied on by the applicant. [55] The power to strike out a pleading because it discloses no reasonable cause of action will be exercised only in a plain and obvious case, where it is clear that no reasonable amendment can cure the alleged defect and there is no reasonable question to be tried: Polar Aviation Pty Ltd v Civil Aviation Safety Authority [2012] FCAFC 97; (2012) 203 FCR 325 at [43]. [56] In contrast, an application for summary judgment requires consideration of matters outside the pleading: Takemoto v Moodys Investors Service Pty Ltd [2014] FCA 1081 at [4] and the cases there cited. [57] Both powers are to be exercised with caution. I am satisfied that the whole of the pleading should be struck out as failing to disclose a reasonable cause of action or defence to the Commissioner's action upon the assessment. I am not satisfied on the material available that there is any foundation that would justify granting leave to re-plead but I am satisfied that the Commissioner is entitled to summary judgment on his application in reliance upon the assessments and the certificates. The case is not one where the defect is merely one of form which can be expected to be cured, or which a party should be given leave to cure: c.f. J&A Vaughan Super Pty Ltd (Trustee) v Becton Property Group Ltd [2014] FCA 581. 14 Accordingly, there will be orders: (a) refusing Mr Gould leave to file and serve the proposed amended defence; (b) striking out the defence and cross-claim in NSD 576 of 2015; (c) striking out the cross-claim in NSD 568 of 2015; (d) giving judgment for the Commissioner in NSD 576 of 2015 in the sum of $15,213,916.14; (e) giving judgment for the Commissioner in NSD 568 of 2015 in the sum of $15,342,976.79. I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Pagone.

Deputy Commissioner of Taxation v Leaver

At a glance

Court

Decision date

Before

Source

Judgment (19 paragraphs)

Parties

Legislation Cited (5)

Cases Cited (16)

Cited By (6)