Fiona Boyce, KPMG Law, discusses a recent Supreme Court ruling on 'conscious maladministration' in the making of a tax assessment.
A recent Supreme Court decision, Deputy Commissioner of Taxation v Anglo American Investments Pty Ltd & Ors  NSWSC 975 (Anglo American), has confirmed that ‘conscious maladministration’, one of the few exceptions to the general rule that the production of a notice of assessment is conclusive evidence that the assessment was validly made, requires actual bad faith by the Commissioner of Taxation in the making of an assessment, and not in the investigation of material leading up to making that assessment.
The Anglo American case revolves around an investigation of a group of taxpayers, in respect of whom the officers of the ATO sought and obtained information from authorities in the Cayman Islands. Subsequent assessments were issued, which formed the basis of debt recovery proceedings. The taxpayers filed defences to the debt recovery proceedings alleging, amongst other things, that the conduct of the Commissioner’s officers involved conscious maladministration and that their conduct also amounted to a contempt of court.
The Commissioner contended that the court should strike out the defences because, even as stated at their highest, the defences were doomed to fail.
Whilst the Commissioner sought to rely upon sections 175 and the successor of section 177(1) of the Income Tax Assessment Act 1936 (ITAA 36) to assert that the production of a notice of assessment is conclusive evidence that the assessment was validly made, the taxpayers argued that the assessments at issue did not fall within the above sections of the ITAA 36 because of conscious maladministration on the part of the officers of the ATO as well as, the officers’ conduct, which they claimed amounted to a contempt of court.
In considering the merits of the taxpayers’ defence, Button J confirmed the analysis of the Federal Commissioner of Taxation v Futuris Corporation Ltd  HCA 32; (2008) 237 CLR 146 (Futuris) decision, as set out in the Full Federal Court decision in Denlay v Federal Commissioner of Taxation  FCAFC 63; (2011) 193 FCR 412 (Denlay), where it was held that ‘any unlawfulness in the process of information gathering by officers of the plaintiff that precedes the formal making of an assessment will not, of itself, constitute conscious maladministration….the relevant consideration is whether there was actual bad faith…in the making of the assessment, not in the investigation of material leading up to it”.
Also of note was the finding that, even where the Commissioner’s investigations are found to constitute a contempt of court, this would not provide a defence to the statement of claim, rather it would result in a sanction against those persons guilty of the contempt.