It has been widely accepted that claims founded on the Commissioner of Taxation owing a duty of care to taxpayers have limited or no prospects of success, with previous negligence claims failing. Taxpayer remedies for alleged misconduct or wrongdoing by the Commissioner and ATO officers have been understood as limited to avenues such as lodging a complaint with the Inspector-General of Taxation, or applying for discretionary compensation under the Compensation for Detriment caused by Defective Administration scheme, with such awards being notably modest in scale.
That's why the Federal Court's recent decision to allow a plaintiff taxpayer to proceed with a negligence claim against the Commissioner is so significant: even if limited to the facts in the case, the Commissioner could be looking at more claims by unhappy taxpayers (Farah Custodians Pty Limited v Commissioner of Taxation (No 2) [2019] FCA 1076).
The factual matrix in Farah Custodians
The Commissioner applied to strike out Farah's pleadings but failed to satisfy the Court that a claim in negligence was not reasonably arguable, with the Federal Court finding that it could not be safely concluded that the proposed duty of care was "inconsistent or incompatible with the statutory scheme" or unsupported by "salient features of the relevant relationship" between the Commissioner and the plaintiff taxpayer. A key reason for the Commissioner's loss in this case appears to be the particular circumstances as pleaded. In brief, as alleged:
- the plaintiff's tax agent provided the ATO with certain bank account details into which refunds payable to Farah in respect of Running Balance Account (RBA) surpluses were to be paid;
- the plaintiff did not instruct or authorise payments to that bank account – the tax agent allegedly intended to misappropriate the refunds;
- the ATO conducted separate audits of the plaintiff and the tax agent. During the audit of the tax agent, the ATO officers discovered the tax agent's scheme, but did not inform Farah either of the audit ( which was conducted almost exclusively through the tax agent) or of their discovery of the scheme; and
- despite ATO officers' knowledge of the tax agent's scheme, the ATO continued to pay the refunds to the unauthorised bank account.
On this basis, Farah sought to claim that given the circumstances, the Commissioner's failure to stop paying the plaintiff's tax refunds into the bank account was a breach of the Commissioner's duty of care owed to the plaintiff taxpayer. The Commissioner sought to have the plaintiff's claim struck out on the basis that the Commissioner had no duty of care to the plaintiff.
The novel duty of care
In his submissions in support of his strikeout application, the Commissioner relied heavily on the lack of any prior finding by a superior Australian court that he has a duty of care to anyone in the performance of his functions, and that the courts in New Zealand and Canada have declined to recognise a general duty towards taxpayers.
Yet, the Court was prepared to explore a possible expansion of the negligence categories, consistent with the accepted incremental and analogical approach and with reference to principles capable of general application set out by the High Court.
Farah contended that such a duty to exercise reasonable care was reasonably arguable, by way of analogy to cases where banks were found to be negligent in honouring cheques and withdrawals (even if automated) if the bank knew of facts which might suggest fraud or dishonesty.
The Court accepted this analogy and considered that it was arguable – given the unique circumstances (ie. the Commissioner became aware of the Scheme when undertaking the audits) the "Commissioner might owe a duty of care to [the plaintiff] in respect of the payment of refunds if he is on notice of such matters."
The Court considered that the Commissioner's submissions on the proper construction of the RBA surplus refund provisions were not sufficient to defeat Farah's claim in the strike out application, as the submissions did not address whether the Commissioner had a duty to exercise reasonable care in paying the refunds.
The parameters of the arguable duty of care
While concluding that the negligence claim was "at least arguable", the Court was careful to frame its decision within the particular and novel circumstances of the plaintiff's case and agreed with the Commissioner that no general duty of care was owed to all taxpayers:
"The existence of such a broad and general common law duty of care would not be supported by any realistic consideration of the purpose to be served by the relevant provisions of the Administration Act."
Various public policy considerations are often cited against the imposition of a general duty of care upon public authorities, and we would expect these to form part of a Court's consideration the issues. However, while such considerations may assist the Commissioner to properly administer Australia's tax system, we should once again be reminded of the late former Justice Hill's extrajudicial comments:
"The Income Tax legislation may impose trust in the Commissioner to perform his tasks properly and impartially as he generally does, but his actions must not be immune from review. The inescapable fact that taxation is the cornerstone of our society must not be allowed to stand as a justification for arbitrary acts, bullying or the erosion of civil rights in the name of exaction of taxes." (Justice Donald Graham Hill, ‘What Do We Expect From Judges In Tax Cases?’ (1995) 69 Australian Law Journal 992, 1005)
Implications for taxpayers, tax agents and the Commissioner
The Court's finding may have implications for taxpayers, tax agents and the Commissioner.
For taxpayers, the decision may open up the possibility of seeking damages from the Commissioner in some cases where taxpayers have suffered loss caused by the wrongdoing of tax agents, where that wrongdoing was known to or suspected by the Commissioner.
For tax agents, the Commissioner may act to avoid or mitigate potential liability by taking steps such as:
- shortening the internal processes around notifications to the Tax Practitioners Board about tax agents; and
- developing new processes to help protect taxpayers whose tax agents are under investigation or are the subject of a credible complaint (eg. automatically communicating directly with these taxpayers).
Until a final decision in this litigation (and the exhaustion of all appeals), taxpayers and the Commissioner face considerable uncertainty. The Commissioner may expect the commencement of additional proceedings against him, particularly in matters relating to losses suffered by taxpayers due to tax agent wrongdoing, where there is a suggestion that the Commissioner was aware or ought to have been aware of the tax agent conduct.