Donoghue v Commissioner of Taxation

PROCEDURAL HISTORY 9 In July 2012, Mr Donoghue filed an originating application for relief under s 39B of the Judiciary Act 1903 (Cth) seeking, among other things, orders to the effect that: (a) the Commissioner deliver up and/or destroy any documents (or copies thereof) related to Mr Donoghue or any related entity of his that were provided to him by Moore & Associates and/or Mr Moore Junior; and (b) the Commissioner be restrained from using or taking any action on the basis of the Moore documents or any information contained therein for the purpose of assessing any taxpayer's taxable income or for exercising any power under ss 263-264 of the ITAA, or s 353-10 of Sch 1 to the TAA in respect of any person. 10 At the same time, Mr Donoghue filed an interlocutory application seeking an order that was essentially identical to that in [9(b)] above, together with an order that the Commissioner "be restrained … from requiring, pursuant to s 264 of the ITAA, [either] Mrs Sandra Donoghue or any related entity … of any entity in relation to which [Mr Donoghue] is a related entity" from attending and giving evidence before him. 11 Initially, Mr Donoghue applied ex parte and was granted interim orders in the terms of the interlocutory orders he had sought. Shortly thereafter, once the Commissioner had filed an appearance and been given an opportunity to file any materials he wished to rely upon, I heard Mr Donoghue's present application for interlocutory injunctive relief. 12 During the initial stages of the hearing for interlocutory relief, the Commissioner maintained the position he had previously taken (see at [7] above) to neither confirm nor deny whether he had the Moore documents in his possession. However, that changed after Mr Walker SC, for Mr Donoghue, called on the Commissioner to respond to a notice to produce the Moore documents. That notice had earlier been served on the Commissioner under Rule 30.28(3) of the Federal Court Rules 2011. It therefore had the effect of a subpoena for the production of the Moore documents. When this call was made, Mr Derrington SC, for the Commissioner, sought a short adjournment to consider his client's position. Upon resuming the hearing, Mr Walker informed me that Mr Derrington and he had reached an agreement as to the basis on which this application was to proceed. That agreement was as follows. For the purposes of this application for an interlocutory injunction and not for the purposes of the application for final relief, there is factual material supporting a serious question to be tried that: documents relating to Mr Donoghue's affairs were given to Mr Moore Junior and Moore & Associates in circumstances where Mr Moore Junior owed duties of confidentiality to Mr Donoghue in relation to those documents; and among those documents now in the possession of the Commissioner as a result of a breach of confidentiality by Mr Moore Junior, there may be some in respect to which there could be a proper claim for legal professional privilege. 13 Mr Walker further informed me that it was agreed that this agreement was without prejudice to the Commissioner's right to dispute all elements of Mr Donoghue's claim to legal professional privilege at the final hearing and to argue at the hearing of this interlocutory application that, as a matter of law, any legal professional privilege or duty of confidentiality that may have existed in relation to the Moore documents was no longer available to Mr Donoghue. 14 Three further matters of importance to this interlocutory application emerged during the hearing. First, Mr Derrington informed me that I could "assume that if [the ATO] can gain something relevant for the purposes of assessing [the] taxpayers, [the Moore documents] will be used [by it]." Secondly, Mr Walker made it clear that his client did not seek relief that would attempt to undo whatever use the Commissioner had already made of the Moore documents. Accordingly, he expressly confined the scope of the interlocutory injunction to the "use of [the Moore] documents for future assessments". Finally, Mr Walker advised that Mr Donoghue would not pursue the further order set out at [10] above because the order set out at [9(b)] above would achieve the same purpose.

Principles on the grant of an interlocutory injunction 15 Before turning to consider the arguments of the parties on this application, it is convenient to briefly outline the principles relevant to the grant of an interlocutory injunction of the kind sought by Mr Donoghue. Those principles were recently discussed at some length in Samsung Electronics Co Ltd v Apple Inc (2011) 286 ALR 257; [2011] FCAFC 156 at [52]-[74] per Dowsett, Foster and Yates JJ (Samsung). While Samsung concerned an interlocutory injunction sought pursuant to s 122 of the Patents Act 1990 (Cth), the basic principles outlined therein apply in this matter. 16 The first and most fundamental principle relevant to interlocutory injunctive relief is that, to obtain such relief, an applicant has to demonstrate that: (1) a sufficient prima facie case has been made out for the final relief claimed; and (2) the balance of convenience favours the granting of the injunction: see, for example, Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 at 622-3 per Kitto, Taylor, Menzies and Owen JJ. However, these two criteria do not involve distinct inquiries, and should therefore not be considered in isolation: Samsung at [67]. 17 To establish that there is a prima facie case; or as it as sometimes expressed, that there is a serious question to be tried, the applicant is not necessarily required to demonstrate that their case is, on balance, likely to succeed: Samsung at [57], citing Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57 (O'Neill) at 68 per Gleeson CJ and Crennan J. Instead, the Court is required to make an assessment of "the strength of the probability of ultimate success" which will vary from case to case, depending "upon the nature of the rights asserted and the practical consequences likely to flow from the grant of the injunction which is sought": Samsung at [59]. Accordingly, where the grant or refusal of an interlocutory injunction will finally dispose of the proceedings in favour of a party, closer attention will be required to the strength of the successful party's case: Samsung at [58] referring to O'Neill at [68]-[72] per Gummow and Hayne JJ. On the other hand, where there is little dispute about the legal basis for the applicant's claimed private right, the Court may be more likely to find a prima facie case: Samsung at [64]. 18 In assessing the balance of convenience criterion, the harm that is likely to be suffered by the applicant if the injunction is not granted is to be weighed against the prejudice or harm that is likely to be suffered by the respondent if the injunction is granted: Samsung at [62]. In considering the harm potentially suffered by the applicant, it will usually be necessary to consider the adequacy (or otherwise) of damages: Samsung at [62]-[63].

Does Mr Donoghue have a prima facie case for final relief? 19 As is already recorded above (at [1]), Mr Donoghue's application for final relief relies upon two grounds: that the Moore documents are subject to a duty of confidentiality; or alternatively, that the Moore documents are subject to legal professional privilege. Without conducting distinct inquiries, it is convenient first to consider whether Mr Donoghue has made out the requisite prima facie case for final relief on one or both of these grounds before turning to consider the balance of convenience criterion.

Prima facie case - duty of confidentiality 20 Accepting that, for the purpose of this interlocutory application, there is a prima facie factual basis for the existence of a duty of confidentiality in relation to the Moore documents and the breach thereof (see [12] above), Mr Derrington submitted that Mr Donoghue could not establish a prima facie case for final relief that this duty of confidentiality continued to exist in relation to the Moore documents. He submitted that was so because any such duty of confidentiality had been extinguished by the operation of s 166 of the ITAA, or by the operation of s 263(1) of that Act.

Does s 166 of the ITAA extinguish the duty of confidentiality and thereby deny a prima facie case for final relief? 21 I will deal with these two sections of the ITAA in the order they are identified above. First, s 166 provides: From the returns, and from any other information in the Commissioner's possession, or from any one or more of these sources, the Commissioner shall make an assessment of the amount of the taxable income (or that there is no taxable income) of any taxpayer, and of the tax payable thereon (or that no tax is payable).

The contentions on the operation of s 166 22 To attempt to make good the proposition that this section extinguished any duty of confidentiality that may have existed in relation to the Moore documents, Mr Derrington relied on the decision of the Full Court of this Court in Denlay v Federal Commissioner of Taxation (2011) 193 FCR 412; [2011] FCAFC 63 (Denlay) at [79]-[82]. He submitted that these paragraphs of Denlay supported the proposition that s 166 of the ITAA both authorises and compels the Commissioner to make assessments of taxable income and the tax payable thereon using all the information in his possession, free of any obligation to inquire whether or not that information has been obtained legally. He submitted that this proposition extended to information that may have been obtained in breach of a duty of confidentiality. 23 In response, Mr Walker submitted that s 166 of the ITAA was not engaged until an assessment was made. Accordingly, he submitted, since this interlocutory application is now confined to any future use of the Moore documents (see [14] above), s 166 has not been enlivened and any duty of confidentiality that existed in the Moore documents has not been extinguished. That being so, he submitted that an injunction should be granted to restrain any future use of the information in the Moore documents in breach of that extant duty of confidentiality. 24 Mr Walker also submitted that Denlay could be distinguished from the present case because that decision concerned the validity of an antecedent, completed assessment whereas Mr Donoghue's application is now confined to any future assessments that may be made using information in the Moore documents. In this respect, he relied upon a similar distinction that was made by the High Court in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355; [1998] HCA 28 (Project Blue Sky) at [100] per McHugh, Gummow, Kirby and Hayne JJ as follows: In a case like the present, however, the difference between holding an act done in breach of s 160 is invalid and holding it is valid is likely to be of significance only in respect of actions already carried out by, or done in reliance on the conduct of, the ABA… That being so, a person with sufficient interest is entitled to sue for a declaration that the ABA has acted in breach of the Act and, in an appropriate case, obtain an injunction restraining that body from taking any further action based on its unlawful action.

There is a sufficiently strong prima facie case that s 166 does not extinguish the duty 25 Denlay clearly establishes (at [81]) that s 166 imposes a duty on the Commissioner to make an assessment of the tax payable by a taxpayer based on the information available to him and, most importantly, that that duty is not subject to any obligation on the Commissioner's part to satisfy himself that the available information has been obtained legally. However, I consider Mr Walker is correct in highlighting the factual distinction between Denlay, where the assessment of taxation had already been made by the Commissioner, and the present case, which is now confined to any future use of the information in the Moore documents to make any such assessments. The importance of this distinction is that this application raises the question whether the duty that is clearly imposed on the Commissioner under s 166 requires him to rely upon the information in the Moore documents notwithstanding that, on the facts now available to him, there is a prima facie case that that information has been obtained in breach of a duty of confidentiality and, therefore, illegally. Stated as such, I consider this question raises a sufficiently strong prima facie case for final relief to justify Mr Donoghue being granted the interlocutory relief he has sought. This conclusion is further supported by the fact that any determination on this question (and the other two questions below) in this interlocutory injunction will not have the effect of finally determining these proceedings.

Does s 263(1) of the ITAA extinguish the duty of confidentiality and deny a prima facie case? 26 In the alternative, Mr Derrington submitted that any duty of confidentiality that may have existed in relation to the Moore documents was extinguished by the operation of s 263(1) of the ITAA, which provides: The Commissioner, or any officer authorized by the Commissioner in that behalf, shall at all times have full and free access to all buildings, places, books, documents and other papers for any of the purposes of this Act, and for that purpose may make extracts from or copies of any such books, documents or papers.

The contentions on the operation of s 263 27 Mr Derrington claimed that this section had the effect of making that lawful which would otherwise be unlawful. In making this submission, he relied on what Mason J said in Federal Commissioner of Taxation v Australian and New Zealand Banking Group Ltd (1979) 143 CLR 499 (ANZ) at 535. Mr Derrington further observed that ANZ (at 521, 540 and 546) affirmed that s 264 overrides obligations of confidentiality. He submitted that, as there was no rational basis to distinguish between ss 263 and 264 of the ITAA, s 263 must similarly override obligations of confidentiality. Mr Derrington also submitted that the application of s 263 of the ITAA was not limited to circumstances where the Commissioner had taken positive steps to obtain documents. Rather, he submitted, s 263 was necessarily engaged whenever the Commissioner accessed any books, documents or papers, including any books, documents or papers that were already in his possession. That being so, he submitted, s 263 operated to override any obligation of confidentiality attaching to the Moore documents. 28 In response, Mr Walker submitted that s 263 of the ITAA did not extend to documents that were already in the Commissioner's possession, or at the very least, there was sufficient ambiguity as to whether s 263 extended to such documents for a prima facie case to exist. While he accepted that s 263 of the ITAA had the effect described by Mr Derrington, Mr Walker submitted that it had never been unlawful for the Commissioner to access and consider documents in his own files and it would therefore be absurd to suggest that s 263 was engaged on every occasion that he did so. He submitted that the Commissioner's power to use information in documents already in his possession was not founded on s 263 of the ITAA, but rather on the Commissioner's general powers of administration in s 8 of the ITAA. Furthermore, he submitted s 8 did not abrogate obligations of confidentiality. Accordingly, as s 263 of the ITAA was not engaged, he submitted any duty of confidentiality that applied to the Moore documents was not extinguished.

There is a sufficiently strong prima facie case that s 263 does not extinguish the duty 29 It is apparent from these submissions that neither party has sought to challenge the observations of Mason J in ANZ about the effect of s 263 of the ITAA: that "[i]t makes lawful that which would otherwise be unlawful". Further, Mr Walker did not challenge Mr Derrington's submission that s 263 could operate to extinguish a duty of confidentiality and, conversely, Mr Derrington did not submit that s 8 had that effect. The point of difference, therefore, is whether s 263 of the ITAA was engaged at all. 30 Mr Derrington was not able to refer me to any authority in support of his submission that whenever the Commissioner uses information in his possession, s 263 is necessarily engaged. That is not surprising, because I do not consider that construction appears from a plain reading of that provision. Self-evidently, in a federal government agency as large as the ATO, the Commissioner, through his officers, will be constantly accessing and using enormous quantities of information that is in his possession. It therefore seems to me that this commonplace and frequent use of information by the Commissioner is more likely to be founded on his general powers of administration in s 8 of the ITAA, rather than the more radical powers contained in s 263. But it is unnecessary for me to come to a concluded view on this question because, at the very least, I consider Mr Donoghue has established a sufficiently strong prime facie case for final relief on this question to justify interlocutory relief being granted. 31 Since I have concluded there is a sufficiently strong prima facie case for final relief that any duty of confidentiality in the Moore documents has not been extinguished by either of these two provisions of the ITAA, Mr Donoghue has met the first criterion for the grant of interlocutory injunctive relief and it is not strictly necessary for me to consider the alternative ground, viz whether the Moore documents are subject to legal professional privilege. However, in deference to the detailed submissions of counsel on that question, I will briefly turn to consider it.

Prima facie case - contentions on whether the legal professional privilege was wholly extinguished 32 As I have already noted above (at [1]), in the alternative, Mr Walker submitted that Mr Donoghue has established a prima facie case that the Moore documents or, at least some of them, may be subject to a valid claim of legal professional privilege. 33 On this issue, Mr Walker submitted that, even if s 263 of the ITAA was engaged, that provision did not override legal professional privilege and accordingly the Commissioner was obliged to give Mr Donoghue an adequate opportunity to make any claim of privilege in the documents he wished to. On this aspect, he relied on Commissioner of Taxation v Citibank Ltd (1989) 20 FCR 403 (Citibank) at 417 per Bowen CJ and Fisher J. 34 In response, Mr Derrington submitted that legal professional privilege is a right to resist the compulsory production of documents. He submitted it is not a right of an individual which can sustain the granting of an injunction to restrain the use of documents by a third person such as the Commissioner. In support of that submission, Mr Derrington relied on The Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission (2002) 213 CLR 543; [2002] HCA 49 at [9] and [10] per Gleeson CJ, Gaudron, Gummow and Hayne JJ; Commissioner of Australian Federal Police v Propend Finance (1997) 188 CLR 501 (Propend) at 565-6 per Gummow J; and Australian Securities and Investments Commission v Lindberg (2009) 25 VR 398; [2009] VSCA 234 (Lindberg) at [43]-[49] per Mandie JA (Warren CJ and Neave JA agreeing). It followed, so Mr Derrington submitted, that once privileged documents were provided to a third person, such as the Commissioner, the documents lost any protection associated with their privileged status. 35 As to the Commissioner's obligation to afford an opportunity to claim legal professional privilege, Mr Derrington submitted that the principle enunciated in Citibank was limited in its application to circumstances in which the Commissioner had exercised a power of compulsory acquisition under ss 263-264 of the ITAA. On this, he relied upon Lindberg at [51] where Mandie JA stated: The principle is not one which applies or is capable of applying to a situation in which the authority has already obtained possession of the documents from third persons and it does not extend to creating a right to such a practical and realistic opportunity to claim privilege by some other person. Since the Moore documents were supplied voluntarily to the Commissioner, Mr Derrington submitted that the Commissioner was not required to afford an opportunity to Mr Donoghue to make a claim for legal professional privilege in them. 36 In reply, Mr Walker submitted that Mr Derrington's submissions involved a misreading of the authorities upon which he relied. He pointed to Propend at 565, where Gummow J referred to Lord Ashburton v Pape [1913] 2 Ch 469 and said: [I]t was decided that the client whose privileged documents, being letters written to his solicitor, had fallen into the hand of the third party by a trick, might obtain injunctive relief requiring the return of the documents and restraining the third part from making use of them. 37 Further, Mr Walker submitted that nothing that was said in Lindberg affected the correctness of the ruling in Citibank. He submitted that this was borne out in the sentence that followed the passage in Lindberg at [51] (set out at [35] above) and, in particular, by the footnote (30) that appeared in the middle of that sentence, as follows: The principle cannot extend that far, in my view, because the legal position is, as I have said, that once such documents come into the possession of another party,30 the privilege is lost or cannot be asserted except in the context of a claim in equity to protect confidentiality. … __________________ 30. The position is likely to be different if that party has obtained the privileged documents or information from the person entitled to the privilege on a confidential basis as exemplified in the cases of Mann v Carnell (1999) 201 CLR 1 and Spotless Group Ltd v Premier Building & Consulting Pty Ltd (2006) 16 VR 1.)

There is a sufficiently strong prima facie case on this question 38 It is not appropriate for me, at this interlocutory stage, to conduct a close analysis of the various authorities referred to by counsel in support of their submissions, nor to come to a final conclusion on this question. It will suffice for me to say that, from my reading of those authorities, I have sufficient doubt about the validity of the submissions made on behalf of the Commissioner to conclude that Mr Donoghue has established a sufficiently strong prima facie case for final relief to justify an interlocutory injunction being granted. I consider that is so at least in relation to the basal question whether, whatever legal professional privilege existed in some, or all, of the Moore documents, was wholly extinguished when they passed into the possession of the Commissioner such that Mr Donoghue cannot now obtain relief to protect the confidentiality he claims exists in the information in the privileged parts of those documents. For these reasons, I consider Mr Donoghue has also demonstrated a prima facie case justifying the relief on this alternative ground. 39 I will now turn to consider the balance of convenience criterion.

Balance of convenience - the contentions 40 The Commissioner's submissions on the balance of convenience criterion were brief. In his written submissions, Mr Derrington submitted that any interlocutory injunction would interfere with the Commissioner's ability to perform his statutory duties. He further submitted that Mr Donoghue had objected to the assessments already made by the Commissioner and, in order to support those objections, Mr Donoghue would in any event most probably have to produce and rely upon the confidential information in the Moore documents. Because of this, Mr Derrington submitted Mr Donoghue could not claim he would suffer detriment from any future use of that confidential information by the Commissioner. Finally, Mr Derrington pointed to the delay that had occurred between August 2010, when Mr Moore Junior provided the Moore documents to the ATO and March 2012, when Mr Donoghue's solicitors first made contact with the Commissioner. 41 On the balance of convenience criterion, Mr Walker submitted that there was an important distinction between Mr Donoghue choosing whether to disclose the confidential information in the Moore documents in support of his objection to the tax assessments and the Commissioner using that confidential information without his consent. With respect to the question of delay, Mr Walker submitted that, as the injunctive relief sought only concerned any prospective assessments and there was no evidence that the Commissioner had suffered any specific prejudice as a result of any delay, delay was not a relevant consideration.

The balance of convenience favours Mr Donoghue 42 I can say at once that, for the reason given by Mr Walker, I consider the last submission (above) is sound. Nonetheless, that does not address the other submissions on this balance of convenience criterion to which I will now turn. 43 For the purpose of this interlocutory application, it is accepted that there is a prima facie basis for concluding (see at [12] above) that the Moore documents were provided to the Commissioner by Mr Simeon Moore in breach of a duty of confidentiality and/or without regard to the existence of legal professional privilege in some, or all, of them. In those circumstances, it is clear that Mr Donoghue may suffer irreparable harm if the Commissioner is allowed to use any confidential information in those documents before Mr Donoghue's rights on these issues are finally determined in these proceedings. It is equally clear that, in those circumstances, damages would not provide an adequate remedy to Mr Donoghue for the destruction of his legal rights in this way were he ultimately to be successful in these proceedings. 44 On the other hand, I am not satisfied that the Commissioner would suffer any substantial inconvenience were I to grant this interlocutory injunction. The Commissioner has not identified any immediate use he wishes to make of the information in the Moore documents, nor was he able to point to any specific inconvenience he might suffer if this interlocutory injunction were to be granted. Furthermore, while there may be some interference with the Commissioner's statutory functions if this injunction is granted, I consider that will be limited to the relatively short period that is likely to elapse between now and the final determination of Mr Donoghue's application. For these reasons, I consider the balance of convenience on this application favours Mr Donoghue.

Conclusion 45 Since Mr Donoghue has established the requisite criteria for interlocutory injunctive relief (see at [16]-[18] above), I consider he is entitled to the interlocutory relief he has sought. I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Reeves.