ATO permitted to use Family Court documents for tax audit

Usually, documents filed in the Family Court cannot be viewed or used for purposes other than the proceedings before the Court, without express permission by the Court. There exists an ‘implied obligation’ not to make use of these documents for any other purpose. This rule was articulated by the High Court decision of Hearne v Street in 2008.

Just last month, the case of Commissioner of Taxation & Darling and Anor [2014], in the Full Court of the Family Court on appeal, resulted in the Commissioner of Taxation successfully appealing a decision of the lower Court to use documents filed in the Family Court proceedings between Mr and Mrs Darling to conduct an audit of Mr Darling’s taxation affairs. The Court allowed the Australian Taxation Office to use documents attached to the affidavit of Mr Darling in the proceedings for determining tax, penalties and interest referrable to Mr Darling and his related entities in various taxation years for which his evidence was relevant.

In the case, Mr and Mrs Darling’s Family Court proceedings were dismissed by consent in December 2010 following the commencement of an audit by the ATO. There had been no referral of the case to the ATO by either party or the Court. The ATO was granted leave to inspect the Darling’s Family Court file in the Melbourne Registry and relevant documents were ‘tagged’ by the ATO but not copied. The ATO later requested to copy the documents but were prevented due to the terms of Rule 24.13, which requires persons not parties to the proceedings to demonstrate ‘proper interest’. The Court rejected the request by the ATO. The ATO then claimed ‘access powers’ under s263 of the Income Tax Assessment Act 1936 and was subsequently permitted by the Court to copy certain documents within the Court file.

In 2012 the Commissioner of Taxation sought leave to intervene in the Family Law Court proceedings (to be joined as a party) by filing an application seeking orders to make use of the documents copied from the Darlings’ Court file.

Upon hearing of the ATO’s application, the lower Court judge held that the Commissioner remained under an implied obligation from the principle in Hearne v Street not to make use of the documents for a purpose not related to litigation, as the purpose of the obligation was to protect the parties’ privacy and encourage full and frank financial disclosure before the Court. The judge was not satisfied that the public policy considerations outweighed the need for financial privacy in this instance and held that the Commissioner failed to make a sufficient case to demonstrate ‘special circumstances’.

“People should not jump to the conclusion that providing full and frank financial disclosure to the Family Court will result in a tax audit later on. But this case does tell us that the risk exists.”

There were six of grounds to the ATO’s appeal to the Full Court. The Full Court allowed the appeal in part and re-exercised its discretion. The Full Court stated: “We are not persuaded that relieving the Commissioner of the implied obligation in some cases is likely to result in any greater disincentive to the parties being frank with the Court.”

Streeterlaw’s Family Law Specialist Simone Green said the decision in the Darling Case may make it easier for the ATO to now access the financial information filed in the Court by parties to Family Law proceedings.

“People should not jump to the conclusion that providing full and frank financial disclosure to the Family Court will result in a tax audit later on. But this case does tell us that the risk exists,” she said.

“My advice to clients remains that they be as truthful as possible in the evidence provided to the Court in respect to financial disclosure as failing to do so can lead to serious penalties being awarded by the Court.

“In this particular case, the ATO were already investigating the financial affairs of the husband prior to the original proceedings being settled and it is unusual for the ATO to go to such lengths without a direct referral by a party to the matter.”

For further information or advice, please contact Ms Simone Green at Streeterlaw on (02) 8197 0105 or email advice@streeterlaw.com.au.