Stewart v The Deputy Commissioner of Taxation

REASONS FOR JUDGMENT 1 For sometime now there has been on foot a multi-agency federal investigation known as Project Wickenby which has been examining, broadly speaking, tax fraud. A number of well known people have been caught up in it and several criminal convictions resulting in custodial sentences have been secured. 2 Mr Stewart is an accountant. On 9 June 2005, the Australian Crime Commission ("ACC") which is one of the agencies involved in Project Wickenby, executed search warrants at his home and business premises. It would appear that at the time that the warrants were executed the ACC was assisted by officers of the Australian Taxation Office ("the ATO") and federal agents from the Australian Federal Police ("the AFP"). 3 Amongst the materials removed from Mr Stewart's possession would appear to have been documents relating to the taxation affairs of Mr Hogan and Mr Cornell as well as some relating to those of Mr Stewart. At a time which is not clear (although the evidence suggests around September 2005), the ACC also issued a notice to produce pursuant to the Australian Crime Commission Act 2002 (Cth) to Ernst & Young and also to Champion and Partners which are both firms of accountants. These notices resulted in the production by them, so it is said, of further documentation also relating to the taxation affairs of Messrs Stewart, Hogan and Cornell. At least for present purposes it is convenient to proceed on the assumption that the notices to produce were issued at about the same time as the warrants, that is, in about 2005. 4 The origin of this proceeding lies in the fact that, at some stage, the ACC appears to have provided the documents seized from Mr Stewart to the ATO. The proceeding itself arises from Messrs Stewart, Hogan and Cornell's attempts to give effect to their contention that the ATO is not permitted to examine these documents. In a sense, it would appear that the genie may already be out of the bottle because, so these gentlemen allege, officers of the ATO have accessed the seized documents and having done so have subsequently determined to conduct audits into each of their taxation affairs. Further, in Mr Stewart's case he has received a notice pursuant to s 264 of the Income Tax Assessment Act 1936 (Cth) ("the Act") requiring him to attend before the ATO and to answer questions on oath. Accordingly, Messrs Stewart, Hogan and Cornell not only seek to restrain the use of the materials but also to reverse the consequences of the use which they contend has impermissibly already occurred. As will presently become apparent, this includes not only seeking to quarantine those who have seen the seized documents from any further involvement in the audit process but also claims for the destruction of the documents themselves. 5 The materials in question are not legal advice so they are not protected from production in the face of a search warrant or a notice to produce. The path into the alleged entitlement of Messrs Stewart, Hogan and Cornell to keep from the ATO's eyes the materials in question rests upon the fact that the Commissioner, at a time antedating the events giving rise to this litigation, and after extensive consultation with the accounting industry, publicly pronounced a policy whereby, generally speaking, he does not use his compulsory powers to obtain access to certain categories of documents, including advices prepared by external accounting advisors. He does reserve the right, in appropriate cases, however, to release himself from this undertaking. This policy is usually referred to both by the Commissioner and by those in the accounting industry as the accountant's concession. 6 The concession is not, and could not be, a rule of law. It is plain that no other party apart from the Commissioner is affected by it. In particular, it was not, and it could not have been, suggested that the material seized by the ACC under warrant was immune from production under that warrant for the concession in no way bound the ACC. 7 The concession is extensively documented and includes in it written provision for its lifting. Although the documents were seized from Mr Stewart in 2005, no claim under the concession was, in fact, made until after the audit process was commenced in 2008 and 2009. Once reliance was asserted on the concession by Messrs Stewart, Hogan and Cornell, the ATO signalled its intention to lift it. Submissions were sought from each of the applicants as to why the concession should not be lifted and such submissions were received. However, the ATO was not persuaded by those submissions and lifted the concession anyway. The present proceeding then ensued. 8 The amended application seeks orders permanently restraining the Commissioner from ever using the documents seized from Mr Stewart and, in his particular case, seeks to restrain the Commissioner from acting on the s 264 notice issued to him. In fact, Mr Stewart refused to be sworn on the return of the notice so that this aspect of the proceedings might reasonably be thought of as an attempt to head off his prosecution for that failure. 9 The Commissioner now seeks to have the proceeding dismissed pursuant to s 31A(2) of the Federal Court of Australia Act 1976 (Cth) or otherwise struck out. I have no doubt that in the present form of the proceeding the Commissioner is entitled to the relief he seeks. The efficacy of the current case depends upon the conclusion that the concession has the effect of a binding rule of law. Whilst it is true the concession has been held to engender a legitimate expectation that it will be applied so that unnotified departure from it will involve a breach of the rules of procedural fairness (One.Tel Ltd v Commissioner of Taxation (2000) 101 FCR 548 at 567-568 [42] per Burchett J) in no universe of discourse does it operate so as to prevent the Commissioner from discharging his public obligations under the Act which may well include using the documents seized from Mr Stewart. In effect, the applicants' argument must rise as high as an assertion that the concession could operate to qualify the operation of the Act itself. Indeed, the applicants do allege that s 8 of the Act, which vests administration of the Act in the Commissioner, "has been qualified by" the concession (see paragraph 3 of the statement of claim). 10 This argument is contrary to axiomatic principles of Australian law. Under that system, Parliament makes the law and the Executive, of which the Commissioner is a part, administers it. The notion that the Commissioner can, absent specific statutory authority, "qualify" the operation of a federal statute is a hopeless contention, bereft of support and having no place in proceedings responsibly drawn. 11 The applicants sought to avoid the inevitable dismissal of the proceeding in its current form by formulating a proposed further amended application and a further amended statement of claim. The proposed further amended application seeks a welter of orders and declarations for each applicant. It is convenient to deal first with the position of Mr Stewart and to defer, for now, those of Messrs Hogan and Cornell. Mr Stewart seeks 12 substantive orders. The first six seek to prevent the Commissioner from ever using the documents seized from Mr Stewart's premises, to require him to destroy those documents and to ensure that no officer or agent who has ever seen them has any further involvement in their taxation affairs. 12 These six claims are contained in the prayers 1(a)-(f) of the proposed further amended application. The basis for the making of such extreme orders is to be discerned from the proposed further amended statement of claim. I have found this document to be nearly impenetrable. Doing the best I can, and reading it more liberally than it probably deserves, paragraphs 16, 17, 18, 19 and 21A might contain bases upon which such relief might be claimed. These bases are: (a) a breach of the concession was said to be an unlawful act; (b) a breach of the concession involved a denial of procedural fairness; and (c) the conduct of the Commissioner gave rise to an estoppel which should prevent him from ever using the documents. 13 I have already rejected the first proposition. The second proposition, even if established, could not justify the final relief sought. The only remedy available for a breach of the rules of procedural fairness would be an order setting aside the Commissioner's decision to depart from the concession with a concomitant order to reconsider his decision to do so: Re Minister for Immigration and Multicultural and Indigenous Affairs; Ex parte Lam (2003) 214 CLR 1 at 21 [66]-[67] per McHugh and Gummow JJ, 48 [148] per Callinan J; Rush v Commissioner of Police (2006) 150 FCR 165 at 186-187 [82] per Finn J. 14 The estoppel claim is also hopeless. Even assuming the Commissioner in some way should be taken to have engaged in conduct which, in the private law sphere, might give rise to an estoppel preventing him from using the documents it is established in this country that such an estoppel cannot stand in the way of an operation of a statute imposing duties of a public nature: Minister for Immigration and Ethnic Affairs v Kurtovic (1990) 21 FCR 193 at 214-215 (FC) per Gummow J. Leave to amend in order to raise such claims should therefore not be granted. 15 I turn then to the balance of Mr Stewart's claims. 16 Reference has already been made to the decision of the ATO to lift the concession. This is alleged to have occurred on 20 April 2009. Mr Stewart now seeks an order setting aside that decision and remitting the matter to the Commissioner for reconsideration. So much appears from prayer 1(k) of the proposed further amended application which seeks two orders in the following terms: i. an order quashing or setting aside the decision of the Second Respondent identified in paragraph 15 of the Second Further Amended Statement of Claim; ii. an order remitting the matter to the Second Respondent for further consideration (or to a delegate of the Second Respondent other than Peter Sdjelar [sic]) in accordance with law. 17 The mechanism by which this challenge works is set out in the proposed further amended statement of claim at paragraphs 13-21A. Four distinct challenges are made to the decision of 20 April 2009. First, it is said that the decision was contrary to the concession. For reasons already given, this is an untenable argument. Secondly, it is said that the decision made was unreasonable. I take this to be an allegation that the decision was so unreasonable that no reasonable decision maker could have arrived at it and, therefore, to be an invocation of the principle in Associated Provisional Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223 or the corresponding ground disclosed in s 5(2)(g) of the Administrative Decisions (Judicial Review) Act 1977 (Cth). 18 The unreasonableness is said to arise from the approach taken to the lifting of the concession by the Commissioner's delegate. In that regard, Mr Stewart contends that there are two different approaches permitted under the concession which provide for its lifting. One is referred to in the pleadings as the procedure in "guideline 5", the other as the procedure in "guideline 6". Mr Stewart argues that when the delegate called for submissions as to why the concession should not be lifted he proceeded on the basis that the matter was governed by guideline 5. However, says Mr Stewart, this was wrong and the matter was, in truth, governed by guideline 6. 19 Guidelines 5 and 6 are part of a document issued by the Commissioner entitled "Guidelines to Accessing Professional Accounting Advisors Papers". That document has a number of paragraph headings and what the applicants refer to as guidelines 5 and 6 are, in fact, headings from that document. They are in the following terms: 5. APPROVAL REQUIRED Access to restricted source and non-source documents may only be sought in exceptional circumstances with the (personal) written approval of a Deputy Commissioner or another appropriate ATO SES officer. In these circumstances, ATO officers will specify, to the extent practicable, the relevant documents applicable to the issue under review. In a litigated case before the courts and the AAT, the ATO recognises the rights of the courts or the AAT to inform themselves about the issues in dispute. However, the ATO will not seek to inspect or obtain documents listed in litigation procedures except with the (personal) written approval of a Deputy Commissioner or another appropriate ATO SES officer. If written approval was given to access restricted source and non-source documents during an audit then further approval at the litigation stage is not required. There could be instances where the rules of evidence will mean that alternative avenues of demonstrating to the court known facts relating to a contested assessment are unavailable to the ATO in arguing its case. In such an event, the ATO will not preclude itself from seeking the use of restricted source and non-source documents that would otherwise not be obtained. 6. INSUFFICIENT INFORMATION In the first instance and subject to these guidelines, all reasonable effort will be made to obtain sufficient information from the taxpayer. Where source documents do not provide sufficient factual information the ATO officer may request a statement by the taxpayer of both the facts and the taxpayer's understanding of the tax consequences of any transaction or arrangement. The taxpayer may ask for this request to be made in writing. If such a statement is not provided by the taxpayer within 30 days of the receipt of the request or within such period as is agreed between the taxpayer and the ATO officer (each using their best endeavours to agree to such a period) or if the statement does not contain such information as to enable the ATO officer to ascertain the facts, circumstances and purpose, then the ATO officer may seek access in accordance with these guidelines. In relation to non-souorce documents access in those circumstances to relevant papers in the current audit file will only be sought where access to restricted source documents does not provide the necessary information. ATO officers shall seek the approval of a Duty Commissioner or another appropriate ATO SES officer (in person) for access to restricted source and non-source documents without following the procedures outlines above in the following circumstances. (i) Where there are reasonable grounds to believe that fraud or evasion, or an offence under the Taxation Administration Act, or any other illegal activity has taken place. (ii) Where the taxpayer's source documents have been lost or destroyed and the ATO officers are not able to obtain from the taxpayer or the taxpayer's professional accounting advisors sufficient information to describe, verify or determine the tax consequences of a transaction or arrangement, then access will be sought to the restricted source documents and non-source documents relevant to that transaction or arrangement. Where such information is sought the professional accounting advisor may ask for the request to be in writing. Likewise, where the source documents appear on reasonable ground to have omissions or other material deficiencies, and an explanation or a statement of the facts and tax consequences provided by the taxpayer does not adequately explain the transaction or arrangement, then access will be sought to relevant restricted source documents and non-source documents. (iii) Where, subject to part 3.1, the taxpayer or the taxpayer's professional accounting advisors refuse to provide, or have not within 30 days provided (from the receipt of the request), source documents, and other parties' available source documents are insufficient for the ATO officer to ascertain the facts and purpose of, and such of the surrounding circumstances as are necessary to determine the tax consequences of, the transaction or arrangement, then access to restricted source documents and non-source documents may be sought. (iv) Where neither the taxpayer's records nor the taxpayer can be located, then access may be sought to restricted source documents and non-source documents; and/or (v) Where some or all of the records of a taxpayer are maintained overseas, and the taxpayer denies access to, or claims an inability to obtain those records or documents, ATO officers will first seek a statement from the taxpayer of both the facts and of the taxpayer's understanding of the tax consequences of any transaction or arrangement. If such a statement is not provided or does not enable ATO officers to ascertain the facts and purpose of, and such of the surrounding circumstances as are necessary to determine the tax consequences of, the transaction or arrangement, then the ATO officers will seek access to restricted source documents and non-source documents appropriate to the transaction or arrangement. 20 These guidelines are, in some ways, obscure. However, for the purposes of this application I am content to proceed on the basis that they do represent distinct procedures available in different circumstances. 21 An allegation that the wrong guideline was followed is capable, as a matter of pleading, of being unreasonable in the Wednesbury sense. Of course, merely making a decision in error is not enough to engage the Wednesbury doctrine. However, at the level of an application summarily to dispose of the proceeding it is not one which should be denied its day in Court. 22 The third challenge is that there was a breach of the rules of procedural fairness because it was procedurally unfair to give the impression that the matter was governed by guideline 5 when, in truth, it was governed by guideline 6. If, as Mr Stewart contends, guideline 6 truly applied then it is arguable that procedural fairness required Mr Stewart to be given an opportunity to argue against the application of guideline 5 before a decision to apply it was taken. This argument is potentially viable although only if it includes a contention that the departure from the guideline caused unfairness separate from that departure: Re Minister for Immigration and Multicultural and Indigenous Affairs; Ex parte Lam (2003) 214 CLR 1 at 12-13 [34] per Gleeson CJ, 16-17 [48] per McHugh and Gummow JJ. 23 The fourth challenge is an allegation that the process of lifting the concession was a "sham" because the documents had already been accessed by the ATO at the time that they were provided to it by the ACC which was before the time at which the Commissioner's officers determined to investigate the taxation affairs of the applicants. If such an allegation were made good it would provide a basis for setting aside the decision to lift the concession. This is because it would necessarily imply a lack of honest or genuine attempt to undertake the statutory task and would, therefore, be an allegation of bad faith: SCAS v Minister for Immigration and Multicultural Affairs [2002] FCAFC 397 at [19] per Heerey, Moore and Kiefel JJ (who cited NAAV v Minister for Immigration and Multicultural and Indigenous Affairs (2002) 123 FCR 298 at 340-341 [107]-[108] per Beaumont J with whom at 305 [4] Black CJ agreed). As the Court explained in that case such an allegation "involves a personal attack on the honesty of the decision-maker". That being so, the allegation involves the proposition that the Commissioner's delegate engaged in a series of acts which were never intended by the delegate to have any legal effect and were, in substance, merely window dressing. This serious allegation of misconduct is contained in paragraph 19A of the proposed further amended statement of claim and is in these terms: In circumstances where the Second Respondent (through Peter Zdjelar) had represented to the First Applicant that the Access Guidelines were applicable, notwithstanding that access to the documents and use of the documents referred to in paragraphs 6(e) and (f) had already occurred, the acts of the Second Respondent (through Peter Zdjelar) in purporting to act in accordance with the Access Guidelines were a sham and unlawful. 24 This argument can only be successful if it can be inferred (or better still, proven) that Mr Zdjelar knew that the documents in question had already been accessed and utilised the promulgated process concerning the lifting of the concession in order to give the appearance of regularity and to legitimise the otherwise illegitimate method of obtaining such documents. 25 No particulars are provided for this allegation. It is not explained how the sham will be proved so that, at least at the moment, the argument rests only on the proposition that there had been prior access. I do not see how it follows that because there had been prior access it can be deduced, in effect, that the delegate decided to try to conceal that fact. Without some particularity as to what the delegate's mental states were in carrying out the steps which he did, and from what it is that those mental states are to be deduced, it would be inappropriate to permit such a serious allegation to go forward in its present form. Out of fairness to the officials concerned I should record my view that none of the material I have been shown provides a basis for the allegation. 26 From paragraphs 22-24 Mr Stewart challenges the decision to issue to him a s 264 notice. The decision to issue that notice and the subsequent examination of him - limited though it was - is said to be unlawful because: (a) it originated from the use of documents seized from Mr Stewart by the ACC in circumstances where he was not given the opportunity to claim the concession in relation to them; (b) Mr Stewart had already been examined by the ACC for some eight days; and (c) the schedule to the notice did not name Mr Stewart. 27 The allegation in (a) is, so it seems to me, viable. If it be established that the documents which were provided by the ACC were the subject of the concession then it may be possible to establish that it was a denial of procedural fairness to access those documents without first hearing from Mr Stewart. If it further be established that the documents were utilised in the process of making the decision to issue the s 264 notice then there is a reasonable argument that the decision to issue the notice and the notice itself should be set aside. More difficult questions may attend the status of any evidence garnered during a hearing which was the subject of an issued s 264 notice. Those difficulties relate to the fact that even if the notice were to be set aside it might well still be possible for the same evidence to be obtained by the issue of a valid notice. However, those difficulties do not arise because Mr Stewart's position at the examination was that he would not answer any questions. 28 I do not really understand the proposition being advanced in (c) and it was not, during the course of argument, in any way developed. The argument in subparagraph (b) is, as a matter of administrative law, absurd. 29 In relation to the Mr Stewart's allegations I conclude, therefore, that: (a) the proposed claims permanently to prevent the use of the documents provided by the ACC to the ATO cannot be permitted to go forward as they are hopeless; (b) a case that the decision to lift the concession should be set aside because the wrong guideline was applied and thus denied Mr Stewart an opportunity to argue that the correct guideline should have been applied is not so hopeless that leave to amend should not be granted; (c) a case that the decision to lift the concession was unreasonable in the Wednesbury sense because the wrong guideline was applied should be permitted; (d) a case that the guidelines may be directly enforced is hopeless and should not be permitted; (e) the contention that the administrative process of lifting the concession was a sham is insufficiently particularised, especially having regard to its gravity, presently to be permitted; and (f) a case that the decision to issue the s 264 notice and the notice itself should be set aside because it derives from documents obtained through a breach of the rules of procedural fairness should be permitted. However, the balance of the attacks on the decision to issue the s 264 notice, the notice itself and the results of the ensuing examination, such as it was, should not. 30 In Mr Stewart's case, the appropriate course is, therefore, to strike out the current application and statement of claim, but to grant leave to file a further amended application and an amended statement of claim consistent with these reasons. 31 I turn then to the position of Mr Hogan and Mr Cornell albeit briefly. Nothing is alleged by either of them which is not also, in substance, alleged by Mr Stewart. The same conclusions apply mutatis mutandis in their cases. 32 The course I propose to take, therefore, is to strike out the current application and statement of claim on the basis that they present a case which cannot possibly succeed but to grant leave to file a further amended application and an amended statement of claim based only on propositions (b), (c) and (f) above. 33 I should say that I regard the current and proposed forms of pleading as being well below the Plimsoll line of competence which this Court is entitled to expect of parties with representation. The pleading, in particular, is filled with irrelevancies and allegations which reveal the absence either of comprehension or application or both. The task of identifying what, if any, case the applicants have has been very much hampered by the pleadings put forward on their behalf, which is, of course, precisely the opposite effect which pleadings are intended to achieve (see: Gould and Birbeck and Bacon v Mount Oxide Mines Ltd (In liq.) (1916) 22 CLR 490 at 517 per Isaacs and Rich JJ; Banque Commerciale S.A., En Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 at 286 per Mason CJ and Gaudron J; Cordelia Holdings Pty Ltd v Newkey Investments Pty Ltd [2004] FCAFC 48 at [148] per Black CJ, French and Tamberlin JJ). Anyone who seeks to wrestle with the mysteries of the proposed further amended statement of claim will see that it is more akin to a Chinese puzzle box than a succinct statement of the applicants' cases. 34 Professional responsibilities attend those who draft such documents and they are owed, not only to the party on whose behalf they are drafted, but also to the Court and, in certain circumstances, to opposing parties. It is for those reasons that this Court may, in certain circumstance, order practitioners to bear the costs of their own handiwork: s 43(3)(f) Federal Court of Australia Act 1976. For myself, I regard the making of such orders as generally undesirable. Often, all too little will be known of the circumstances which have lead to the formulation of such pleadings and matters, not obviously known to the Court, such as the availability of time and funding or the quality or nature of instructions too often can give quite a different hue to matters which, at least at first blush may, otherwise, appear unsatisfactory. There are cases, however - the present may be one - where what is done constitutes such a forensic escapade that the interests of justice require a more severe approach to be taken. 35 Pleadings in judicial review proceedings are not to be drawn by the ritual incantation of words such as "unlawful" and "procedural fairness" without a concomitant grappling with the doctrines upon which such allegations rest. Pleadings are succinct statements of a case designed to inform Court and foe alike of what is said and how it will be put. Properly done, they promote the identification of the issues in dispute and, by so doing, their more prompt and efficient resolution. So much has always been so. The enactment of provisions such as s 37M of the Federal Court of Australia Act 1976 with its injunction to the expeditious and inexpensive resolution of proceedings gives added impetus to these considerations. It follows that a pleading which departs from its principle purpose of affording procedural fairness to the opposing party is a pleading which confounds the ends of justice. It engenders expense, delay and the wastage of public resources; it is not to be countenanced. 36 The orders I will make will grant leave, not to file amended pleadings, but instead to file a motion seeking leave to file such pleadings. It should be clear that that leave is unlikely to be granted in respect of a pleading which does not address and achieve the fundamental purposes of pleading. The applicants are well represented and there is no reason why the time of this Court or of the respondent should be further taken up seeking to fathom the obscure. 37 The orders I make are, therefore, as follows: 1. Strike out the amended application and statement of claim; 2. Grant leave to the applicants to file within 21 days a notice of motion, supported by an affidavit, seeking leave to file a further amended application and amended statement of claim raising claims that: i. The decisions to lift the concession in each of their cases be set aside on the basis that a breach of the rules of procedural fairness occurred by the incorrect application of the guidelines or that such decisions were unreasonable in the Wednesbury sense; and ii. In Mr Stewart's case, a claim to set aside both the decision to issue to him the s 264 notice and the notice itself on the basis that they each originated from documents which were themselves obtained by reason of a breach of the rules of procedural fairness. 3. Unless the Commissioner applies by a motion for some other order within 21 days, the applicants are to pay the respondent's costs of the Commissioner's motion to dismiss the proceeding and the applicants' motion to amend. 4. The notices of motion in orders 2 and 3 be returnable before me for directions on 20 May 2010. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.