Can the Australian Taxation Office (ATO) gain access to financial records disclosed in a Family Court proceedings and for what purpose?

20/10/2014

Traditionally, the ATO has had a right to access financial information disclosed in Family Court proceedings, if the ATO provided a substantial basis for the right to access those documents. In a recent matter of the Commissioner of Taxation in 2014, the Family Court of Australia considered whether or not the ATO was allowed to use the information discovered in Family Court proceedings to audit for potential tax evasion.

Factual Background

The husband and his wife were parties to proceedings in the Family Court of Australia, which were dismissed by consent in 2010. In 2009 the Australian Tax Office (ATO) commenced investigating the husband’s affairs. The ATO sought financial documents for a number of years as part of their audit.

Grounds of the Appeal

The appeal to the Full Court of the Family, was made after Macmillian J, at the first instance held that there was insufficient evidence in regards to the “proper interest” required by the Family Law Rules 24.13, to allow the Commissioner of Taxation to be released from the implied obligation.  The “implied obligation” is that documents produced in the proceedings were not to be used for purposes other than those of the proceedings.  Macmillian J, held that the purpose of the obligation was “to preserve the parties’ privacy and to encourage full and frank disclosure”,

The Commissioner appealed on six grounds, including primarily: 

• Ground 3- the statutory provisions of the Income Tax Assessment Act, were sufficient so that the Commissioner of Taxation was not bound to the “implied obligation” not to use documents produced in one set of proceedings for other purposes.
• Grounds 4 and 5- were based on the fact the Commissioner required leave of the Court to make use of the documents, but sought to dispute the primary judge’s exercise of discretion in disallowing the ATO right to use those documents produced in the Family Court proceedings.

Decision

• Ground 3- the Court found no merit in ground 3. Accordingly the Court held that there was no statutory right for the Commissioner of Taxation to use the documents produced in the Family Court proceedings as a matter of right. 
• Grounds 4 and 5- the Court held that there was merit in the appeal grounds and decided that the Primary Judge had miscarried her discretion.  The Court said “Her Honour correctly identified that it was the competing public policy considerations (between the Family Court procedures and the Australian Taxation Office procedures), which [went] to the heart of the application”.  There was a discussion as to what evidence was required to be produced by the ATO so as to establish the position that the Court would exercise their discretion in allowing the ATO to utilise the documents for the audit and releasing the Commissioner from the “implied obligation” not to use the documents discovered in the Family Court proceedings for any other purpose.

The Full Court of the Family Court held it could only set aside the decision of the primary judge if the discretion had miscarried.  This depends upon numerous elements including the evidence submitted by the ATO for the Court to exercise the discretion.  The Full Court accordingly allowed the Commissioner to utilise the documents that had been disclosed in the Family Court proceedings for the purpose of the audit. 

The Full Court held that the Commissioner be released from the implied obligation and that the Commissioner should be given a copy of the two pages omitted from the bundle previously copied.

In determining whether the appeal should stand, the Court accepted “there was no specific evidence of any “injustice” that would flow if the (original) decision was permitted to stand; namely, that the documents would not be made available to the Commissioner.  However, the Court found there is injustice to the extent that the Commissioner would have to conduct an audit without the benefit of access to documents on the Court file.  One of the matters that was considered was that the case was a targeted substantial audit by the ATO. 

Consequences of Decision

The Court’s decision allowed the Commissioner access to documents which had been provided to the Family Court by the parties and to utilise those documents to assist the Commissioner in his tax audit of the tax payer (who was a party to the Family Court proceedings). 

The discretion to be exercised by the Court whether to allow the Commissioner to use documents will depend on the facts and circumstances.

As the Court acknowledged, there is an obligation for disclosure of the financial position of the parties as part of the proceedings.

If there are any concerns or you wish to consider the disclosure obligations and other related issues please discuss those matters with Richard Watson or Dennis Grant.