The Federal Court has held that a taxpayer’s argument that the commissioner owes a duty of care is “reasonably arguable”, which could possibly open the “floodgates” to other negligent claims.
Federal Court paves way for taxpayer to argue ATO owes duty of care
Last week, in Farah Custodians Pty Limited v Commissioner of Taxation (No 2) FCA 1076, the Federal Court granted leave for a taxpayer to file an amended statement of claim that the commissioner was negligent and owes a duty of care to the taxpayer.
Facts of the case
The taxpayer, Farah Custodians Pty Ltd, had appointed Ian Kennedy of Strathfield Tax as its tax agent.
Mr Kennedy had provided the details of a bank account held in the name of Viaus to the ATO as the bank account into which refunds payable to Farah in respect of running balance account (RBA) surpluses should be paid for the purposes of section 8AAZLH of the Administration Act, despite Farah not authorising the Viaus account.
An ATO audit into the tax agent had revealed fraudulent activities of Mr Kennedy and his use of the unauthorised Viaus account, including how he did not pay out the refunds to clients which were entitled to them.
Despite the audit, the ATO did not inform Farah of the investigations and continued to pay refunds relating to RBA surplus amounts on Farah’s RBA to Viaus.
Farah claims 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.
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.
One of the commissioner’s arguments was that because of the size and scale of the tax system, “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 section 8AAZLH(2A) of the Administration Act”.
The court held that while it was a “novel” claim and by no means easy to resolve, it was “reasonably arguable”.
The case has significance, with the commissioner noting that “no superior Australian court has ever held that the commissioner owes a duty of care to anyone in the performance of his function” and that the “commissioner’s duty is to the Crown and to the Crown alone”.
While a final decision has yet to be reached, Brown Wright Stein Lawyers partner Geoff Stein said that, if the taxpayer is ultimately successful, he expects the commissioner to take the case to the High Court or for swift legislative intervention to follow.
“The commissioner has to fight it because I can’t see the commissioner being able to sit there with a precedent like that,” Mr Stein told Accountants Daily.
“This is really limited to its facts but anywhere where the Tax Office is doing an investigation where they suspect there is criminal activity, the problem is going to be for the Tax Office to complete its investigation and also not breach any duty of care if there is one.
“It is going to have to compromise the secrecy of the investigation, and the way I see that ultimately playing out is that the Parliament will probably change the law to give some type of immunity for the Tax Office in those circumstances.
“It would be interesting to see where that plays out, whether the Tax Office exercises the discretion to withhold refunds or institutes mechanisms internally to become more cautious about how it deals with refunds.”