Salient features and the alleged duty of care
73 Putting the Commissioner's submissions concerning the proper construction of ss 8AAZLF and 8AAZLH of the Administration Act to one side, the question remains whether it is reasonably arguable that the facts alleged in the proposed proposed pleading are capable of supporting a finding that the Commissioner owed a common law duty of care to Farah in relation to the payment of the relevant refunds into the Viaus account. Are the salient features of the relationship between the Commissioner and taxpayers in Farah's position capable of supporting such a finding? Or do they, as the Commissioner contended, exclude the existence or implication of any duty of care?
74 Many, if not most, of the Commissioner's arguments were directed at the general proposition that the operation of the statutory scheme and the nature of the relationship between the Commissioner and taxpayers as a whole was inconsistent or incompatible with the proposition that the Commissioner owed a duty of care to taxpayers when performing the duties or exercising the powers in question. It was, for example, submitted that it would be impractical, if not impossible, for the Commissioner to verify, monitor and check the bank account details nominated by all tax agents so as to ensure that they met the requirements of s 8AAZLH(2A) of the Administration Act. That submission was supported by evidence concerning the size and scale of the Australian tax system. It was also submitted that there were sound policy reasons for denying the existence of such a broad and general duty and that the existence of such a duty of care was inconsistent with the fact that the taxation legislation, including the Administration Act, constituted a "complete and exhaustive code of the rights and obligations of the [C]ommissioner and other officers of his department to members of the general public who are subject to its provisions and of those members of the general public to his department": Deputy Commissioner of Taxation (NSW) v Brown (1958) 100 CLR 32 at 49.
75 There is perhaps some force in the Commissioner's submission that he does not owe a general duty of care to all taxpayers, or all taxpayers who are represented by tax agents, which would oblige him in all circumstances to verify the details of all accounts nominated by tax agents, or indeed information notified by tax agents generally. The existence of such a broad and general common law duty of care would not be supported by any realistic consideration of the purpose to be served by the relevant provisions of the Administration Act. Nor could it be said that the Commissioner had any significant degree of control in respect of the relevant risk posed by potentially unscrupulous tax agents generally, or that taxpayers represented by tax agents generally were particularly vulnerable to the exercise of the Commissioner's powers in respect of the payment of refunds. It is also difficult to see how the existence or imposition of such a broad and general common law duty of care could be seen to be consistent or compatible with the comprehensive and tightly defined statutory scheme relating to the payment of refunds.
76 That, however, may not be a complete answer to Farah's case. There are no doubt parts of the proposed pleading which would tend to suggest that the duty of care that Farah alleges was owed by the Commissioner would effectively oblige the Commissioner to check or verify that all accounts nominated for the purposes of s 8AAZLH of the Administration Act by all taxpayers or their agents meet the criteria in subs 8AAZLH(2A) of the Administration Act. Other parts of the proposed pleading also indicate that the duty of care said to be owed by the Commissioner would oblige him to contact or warn taxpayers generally if he observed any irregularities or inconsistencies in the conduct by a tax agent of a taxpayer's affairs. There are, however, other parts of the pleading which suggest that Farah's primary case concerning the duty owed by the Commissioner is in fact somewhat more confined.
77 While parts of the proposed pleading are expressed in very broad and, at times, obtuse terms, the essence of Farah's case would appear to be that the Commissioner owed it a duty to exercise reasonable care when paying its refunds into the Viaus account having regard to the particular and fairly unique facts and circumstances of its case. In particular, Farah alleges that the Commissioner owed it a duty of care in relation to the payment of refunds essentially because, by reason of the knowledge possessed by the ATO officers who had conducted an audit or investigation into the activities of Mr Kennedy and Strathfield Tax, the Commissioner was effectively or constructively on notice that there were irregularities in relation to the Viaus account and that Farah was or may have been particularly vulnerable or at risk of fraud by its tax agent. The particular risk was that the refunds might not be passed on to Farah, and yet Farah's RBA would nonetheless be debited by the amount of the refunds. An additional risk was that the refunds themselves might be fraudulent and based on incorrect information, and yet Farah would nonetheless be liable to account for them. Farah's case is that, in those particular circumstances, the Commissioner breached his duty of care because, had he acted with reasonable care and diligence, he would have exercised, or considered exercising, his discretion under s 8AAZLGA of the Administration Act and retained the refunds and conducted reasonable inquiries or investigations concerning the use of the Viaus account and the accuracy or integrity of the relevant information notified by Mr Kennedy generally.
78 The question, then, is whether it is reasonably arguable that the Commissioner might owe a duty to a particular taxpayer to exercise care in paying RBA refunds in accordance with the statutory scheme in particular circumstances where the Commissioner had reason to suspect or believe that there were irregularities in the account nominated to receive those refunds, or inaccuracies in the notified information which generated the refunds.
79 Farah submitted that its case was essentially analogous to cases where it has been held that a bank might be liable to a customer in negligence if the bank implemented an otherwise valid instruction to pay money out of a customer's account in circumstances where it was aware of the risk that the individual responsible for the instruction was perpetrating a fraud on the customer who held the account: cf. Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2017] EWHC 257 (Ch); Lipkin Gorman (a firm) v Karpnale Ltd [1992] 4 All ER 409; [1989] 1 WLR 1340; Barclays Bank Plc v Quincecare Ltd [1992] 4 All ER 363. Those cases establish, in general terms, that even though a bank's obligation to honour cheques and withdrawals is mostly automatic and mechanical, if a bank knows of facts which might suggest fraud or dishonesty, it would breach the duty of care owed to its customer if it acted on the instruction without making further inquiry. It would, for example, be negligent for a bank to continue to honour cheques or pay withdrawals on the instruction of a director or employee of a corporate account holder in circumstances where the bank was aware of facts which might suggest that the director or employee was defrauding the company.
80 Farah submitted that, like a bank in those circumstances, the Commissioner would be negligent in continuing to pay refunds into a taxpayer's nominated account without further inquiry if he was aware of information which suggested that the account did not comply with subs 8AAZLH(2A) of the Administration Act or was otherwise an instrument of fraud or dishonesty. That would be so even though the vast amount of refunds under the statutory scheme are paid automatically or mechanically.
81 The suggested analogy with the bank cases is far from perfect, particularly in a legal sense. That is because the relationship between a bank and its customer in respect of transfers of money based on the customer's instructions is materially different to the relationship between the Commissioner and a taxpayer or taxpayers in respect of the payment of refunds. For a start, the relationship between a bank and its customer is contractual. The contract between a bank and its customer would ordinarily include an implied term that the bank would observe reasonable skill and care in executing the customer's instructions: see Singularis at [168] referring to the judgment of Steyn J in Quincecare. It is not surprising, in those circumstances, that there is no issue that the bank also owes the customer a duty of care. In Singularis, it was noted (at [168]) that the duties in contract and tort are coextensive. The main issue in Lipkin Gorman, Quincecare and Singularis was whether there had been a breach of duty, not whether there was a common law duty of care.
82 In contrast, there is obviously no relevant contractual relationship between the Commissioner and a taxpayer. The relationship arises or exists primarily, if not solely, by operation of statute. In the case of the payment of refunds, the Commissioner's duties and obligations are dealt with comprehensively in the Administration Act. It is, in those circumstances, significantly less obvious why the Commissioner would also owe a common law duty of care to a taxpayer or taxpayers in relation to the making of refunds.
83 It is, however, nevertheless possible to see some factual analogy between the relationship between a bank and its customer in respect of transfers of money and the relationship between the Commissioner and a taxpayer or taxpayers in respect of the payment of refunds. For example, as has already been noted, the Commissioner submitted that one consideration that weighed heavily against imposing a common law duty of care in respect of the making of refunds was that the scale of the Australian tax system was such that it would be practically impossible for the ATO to comply with a duty to verify, monitor and check banking details supplied by taxpayers or their agents so as to ensure compliance with subs 8AAZLH(2A) of the Administration Act. The nature and size of the banking system was also considered to be an important factor in the banking cases.
84 In both Lipkin Gorman and Quincecare the bank was found not to have breached its duty of care to its customer essentially because the bank was not on notice of anything unusual or exceptional about the withdrawals in question. It was accepted that the bank's obligation to honour cheques was largely automatic and unexceptional and that the circumstances in which the bank could be held to be under a duty to exercise any degree of care in deciding whether to honour a cheque would be exceptional. It was, however, also accepted that circumstances may exist where a failure to take care in honouring a cheque may give rise to liability in negligence. In Lipkin Gorman, for example, May LJ said (at 421; 1356):
For my part I would hesitate to try to lay down any detailed rules in this context. In the simple case of a current account in credit the basic obligation on the banker is to pay his customer's cheques in accordance with his mandate. Having in mind the vast numbers of cheques which are presented for payment every day in this country, whether over a bank counter or through the clearing bank, it is in my opinion only when the circumstances are such that any reasonable cashier would hesitate to pay a cheque at once and refer it to his or her superior, and when any reasonable superior would hesitate to authorise payment without inquiry, that a cheque should not be paid immediately upon presentation and such inquiry made. Further, it would I think be only in rare circumstances, and only when any reasonable bank manager would do the same, that a manager should instruct his staff to refer all or some of his customers' cheques to him before they are paid.
85 Similarly, in Quincecare, Steyn J said (at 376):
In my judgment the sensible compromise, which strikes a fair balance between competing considerations, is simply to say that a banker must refrain from executing an order if and for as long as the banker is 'put on inquiry' in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company … And, the external standard of the likely perception of an ordinary prudent banker is the governing one. That in my judgment is not too high a standard.
86 In Singularis, however, the bank was held to be in breach of its duty to its customer because "[a]ny reasonable banker would have realised that there were many obvious, even glaring, signs that [the customer's director] was perpetrating a fraud on the company [the customer] when he instructed that the money be paid to other parts of his business operations" (at [192]).
87 Farah submitted that its case was factually analogous to Singularis. Farah's case, in essence, is that the Commissioner, acting reasonably, would similarly have realised that there were many obvious, even glaring, signs that Mr Kennedy was perpetrating a fraud on Farah. Those signs included the use of the Viaus account. Farah's case is that, in those circumstances, the Commissioner breached his duty to take reasonable care in making the refunds. That is because, despite being on notice of the potential fraud being perpetrated by Mr Kennedy, the Commissioner failed to verify that the Viaus account complied with subs 8AAZLH(2A) of the Administration Act, failed to exercise, or consider exercising, his power under s 8AAZLGA of the Administration Act to delay making the refunds pending further inquiries and failed to contact or warn Farah about Mr Kennedy's use of the Viaus account for the receipt of refunds payable to Farah.
88 It is obviously unnecessary and undesirable at this point of the litigation to finally determine the merits or otherwise of Farah's proposed case that the Commissioner owed it a duty to take reasonable care in making the relevant refunds. It is sufficient to say that its case, while novel, is at least arguable. Like a bank acting on an otherwise valid instruction to pay out funds, the Commissioner could not be expected to be under any duty to withhold a refund, or make further inquiries, unless he was in some way on notice that there was some irregularity in relation to the nominated account, or some other facts which might suggest fraud or dishonesty. It is, however, at least arguable that the Commissioner might owe a duty of care to a taxpayer in respect of the payment of refunds if he is on notice of such matters.
89 The considerations relied on or emphasised by the Commissioner do not necessarily compel a contrary conclusion, or at least do not compel the conclusion that Farah's case is unarguable. It cannot safely be concluded, at this interlocutory stage, that the existence of a duty of care in those specific circumstances is necessarily inconsistent or incompatible with the statutory scheme, or would impose impossible or prohibitive burdens on the Commissioner in the context of the statutory scheme. The duty alleged by Farah is unlikely to have the far-reaching implications contended by the Commissioner if, as in the bank cases like Singularis, there is no question of breach other than in particular circumstances where the Commissioner is somehow on notice of irregularities or the potential of fraud. Nor can it be safely concluded, at least at this early stage of the proceedings, that the salient features of the relevant relationship between the Commissioner and Farah that are eventually established by the evidence adduced at the trial, will not support the existence of a duty of care in the particular circumstances of this case.
90 The Commissioner also submitted that he did not owe a duty of care to taxpayers arising from the fact that he conducted audits and investigations into the tax affairs of certain taxpayers. He supported that submission by reference to numerous authorities which consider whether the police or similar investigative bodies owe a duty of care to the public at large, or to particular groups of people who might become victims, or to third parties whose interests might be affected by the investigation, or to the suspect or person being investigated: cf. Hill v Chief Constable of West Yorkshire [1989] AC 53; State of New South Wales v Tyszyk [2008] NSWCA 107; Cran v State of New South Wales (2004) 62 NSWLR 95; Rush v Commissioner of Police (2006) 150 FCR 165; Sullivan. In general terms, those authorities establish that investigative bodies do not owe a duty of care to the public, or sections of it, or third parties, or the subject of the investigation where the imposition of such a duty would give rise to conflicting obligations, or would be contrary to public policy because it would cause the body to adopt an overly defensive approach or would otherwise impede the carrying out of the body's primary functions.
91 The Commissioner also submitted that there is nothing in the statutory provisions relating to the Commissioner's investigatory powers which expressly or impliedly imposes on the Commissioner a duty of care to a taxpayer being investigated, or taxpayers generally, in relation to the conduct of audits. In the Commission's submission, the imposition of such a broad duty of care would be incompatible with the Commissioner's statutory duties and would be an impossible task given the scale of the Commissioner's functions.
92 The Commissioner's submissions concerning the existence of a broad duty of care owed by the Commissioner in relation to the conduct of audits and other investigations have some force. It may perhaps be accepted, as a general proposition, that it is unlikely to be the case that, when tax officers are undertaking investigations into the tax liabilities of a particular taxpayer, they owe a general duty to all other taxpayers, or other third parties in respect of the conduct of the investigation. That, however, is not necessarily a complete answer to Farah's proposed negligence case. Farah's proposed negligence case is far removed from the types of cases considered in the authorities that were relied on by the Commissioner.
93 Farah does not allege that the Commissioner breached a duty of care he owed to Farah in relation to the conduct of the audit or investigation into Strathfield Tax and Mr Kennedy, or the investigation into the tax affairs of Farah and other companies associated with Mr Elias. Rather, it alleges that, having obtained information concerning the potentially fraudulent activities of Mr Kennedy and his use of the Viaus account in the course of those audits or investigations, the Commissioner breached his duty of care owed to Farah in relation to the payment of refunds. As has already been noted, the essence of Farah's case is that the Commissioner, having obtained information in the course of the investigations, failed to take reasonable care because he continued to pay refunds supposedly payable to Farah into the Viaus account without making further inquiries. Farah's case is that, had the Commissioner exercised reasonable care, he would have retained the refunds pending further investigations or inquiries. The facts and circumstances of Farah's proposed negligence case are therefore distinguishable from the authorities concerning duties of care said to have been owed by the police and other investigatory agencies.