All parties in litigation and other Court processes are on notice that the ATO can use its statutory powers to demand documents from other parties following clarification from the Full Federal Court (Deputy Commissioner of Taxation v Rennie Produce (Aust) Pty Ltd (in liq) [2018] FCAFC 38.). This is despite the usual rule that parties cannot use documents obtained in the course of litigation for purposes other than for use in those proceedings. The case represents an erosion of the "the Harman undertaking" (from Harman v Secretary of State for the Home Department [1983] 1 AC 280) which is an implied undertaking not to use documents obtained in litigation for collateral or ulterior purposes unrelated to the proceedings in which the information was obtained.
ATO demands tax documents from liquidator
A liquidator applied to the Court to require documents from a number of people about the affairs of the company being liquidated. One of those people (Mr Rennie) had sold the company a number of years earlier and disclosed a capital gain on his tax return. The Court granted the liquidator's request and Mr Rennie provided the liquidator with access to, amongst other things, documents relevant to his capital gain.
Meanwhile, the ATO was auditing Mr Rennie to determine whether or not he had understated his capital gain. The ATO issued the liquidator with a statutory notice to produce. The liquidator resisted the ATO notice saying that it was subject to a legal obligation (known as "the Harman undertaking") not to use documents it received in Court processes for any purpose other than for which it was given without Court permission. The ATO commenced proceedings against the liquidator to allow for production of the documents.
The liquidator argued that it was not required to hand over the documents as the Harman undertaking was a "fundamental common law right" that could not easily be abrogated.
Court allows ATO demand
The Court held that the ATO's powers to demand documents applied notwithstanding the liquidator's Harman undertaking not to use documents for ulterior purposes. This essentially paved the way for the ATO to gain access to the documents relevant to Mr Rennie's capital gain.
What you should do next
In handing over any documents in litigation or Court process, you must assess whether or not the documents have tax relevance. Most Court proceedings are not confidential and the ATO may choose to demand documents from other parties to the proceeding where it suspects those documents are relevant to your tax position. You should not assume that the other party is entitled to resist demands from revenue authorities.
If you are required to disclose a document with tax relevance in a Court proceeding, your strategy could include considering a voluntary disclosure to the ATO which, in some circumstances, can reduce potential tax penalties, and reduce your ATO risk rating and future tax compliance costs.