Federal Court confirms ATO's broad powers (and duty) to use documents in its possession, even Court documents

The Federal Court has confirmed that however the ATO gets a document, once a document is in its possession, it is entitled to rely on it for the purposes of assessing a person's income tax. That is even where the document would otherwise be subject to the Harman undertaking not to use documents obtained in Court proceedings for an extraneous purpose to those proceedings (La Mancha Africa S.a.r.l. v Commissioner of Taxation [2021] FCA 1564).

What documents can the ATO use?

Section 166 of the Income Tax Assessment Act not only allows, but requires, the ATO to use "any other information in the Commissioner's possession" when administering the tax laws including:

• Where the ATO obtained the documents illegally;
• Where malicious actors (eg. hackers) obtained the documents illegally and published them, for example, the "Paradise Papers" leak;
• Where the documents were obtained by a liquidator through an earlier court process; and
• As in this latest case, where the documents were obtained from a third party subpoena in proceedings involving the ATO.

Documents are produced to the ATO subject to confidentiality

La Mancha Africa S.a.r.l. (LMA) is involved in proceedings with the Commissioner. As part of those proceedings, LMA issued a subpoena to Ernest Henry Mining Pty Ltd (EHM), seeking documents relating to the Ernest Henry mine project. EHM and LMA agreed confidentiality orders, restricting how LMA could access and publish the documents. The Commissioner refused to agree confidentiality orders with EHM, and said he was entitled to use the documents to assess EHM's taxable income (among other purposes).

EHM objected to the production of the documents to the Commissioner and sought orders restricting the Commissioner's use of the documents.

The documents, the Harman undertaking, and the ATO's position

EHM argued that the Commissioner's proposed use of the documents was contrary to the Harman undertaking and it was unfair to EHM (as a third party to the proceedings) for its documents to be obtained by LMA under subpoena and used by the Commissioner to assess EHM's taxable income.

The Harman undertaking is a well-known legal principle that prevents parties to litigation using documents they've received as part of the litigation for an extraneous purpose. For example, a person cannot provide documents they have obtained through court proceedings to the media in order to expose an alleged wrongdoing.

The rationale for the undertaking is that the compulsion to produce material (such as in response to a subpoena) violates a party's right to confidentiality, and it would be inequitable for that material to be used for purposes other than that which compelled its production.

The Commissioner argued that it is well accepted by Australian appellate courts that the Harman undertaking yields to inconsistent statutory obligations. One example of this is that if a person obtains documents in one proceeding, they must disclose those documents (to the extent they are relevant) in a separate proceeding, even if the parties to the two proceedings are not the same.

In response EHM said that the authorities distinguish between use of a document, such as that proposed by the Commissioner, and mere production of a document, such as in the example of a person disclosing a document in one proceeding that it had received in a separate proceeding.

The Commissioner's statutory duty vs the Harman undertaking

The Court agreed with the Commissioner and said that the Harman undertaking does not preclude the Commissioner from using the documents for the purpose of assessing EHM's taxable income. The Court held that the Commissioner's statutory duty to act upon information in his possession for determining tax liability imposed on a taxpayer was an inconsistent statutory duty that could not be dispensed with by the Harman undertaking.

The decision was reminiscent of the dispute the Commissioner had in relation to the Panama Papers, where the High Court held that even though the documents were obtained illegally, the Commissioner was still allowed to rely on them to assess taxpayers' taxable income.

How this affects ordinary taxpayers (and their documents)

The judgment is another reminder that it does not matter how the Commissioner comes into possession of documents. Whether by illegality, or under a subpoena that was not issued by the Commissioner, once the documents are in the Commissioner's possession, he is entitled to rely on them to assess your taxable income.

Parties required to disclose documents to the ATO should assume that the ATO is able to rely upon documents obtained in litigation as evidence of tax obligations.

Related Insights 

• Documents you give to other parties in litigation can end up with the ATO
• Hacked? Don't expect legal professional privilege to stop others using your documents, says High Court