Deputy Commissioner of Taxation v Frangieh (No 3)

[2017] NSWSC 252

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:

Deputy Commissioner of Taxation v Joseph Frangieh (No 3) [2017] NSWSC 252

Hearing dates:

9, 10, 11, 14, 15, 16, 17, 18, & 23 March 2016

Date of orders:

20 March 2017

Decision date:

20 March 2017

Jurisdiction:

Common Law

Before:

Harrison AsJ

Decision:

The Court orders that:

 

(1) The plaintiff is to pay the defendant’s costs of the recovery proceedings on an ordinary basis.

 

(2) The cross claim filed 19 June 2015 is dismissed.

 

(3) The cross claimant is to pay the cross defendant’s costs of the cross claim.

 (4) There is to be set off between the parties in relation to the costs orders set out in orders in paragraphs (1) and (3) above.

Catchwords:

TORT – misfeasance in public office – audit of account of taxpayer – issuance of amended assessment – recovery proceedings – whether cross defendant did an invalid or unauthorised act – conscious maladministration – malice – whether the cross defendant acted improperly or in bad faith with motive of doing target harm – targeted malice or reckless indifference

 

PROCEDURE – abuse of process – whether commencement of recovery proceedings were for an improper purpose

 

EQUITY – good faith – fiduciary relationship – public officer – whether the cross defendant owed the cross claimant duty to act in good faith

 

CONTRACT – implied duty to act in good faith – relationship between public officer and tax payer

 

COSTS – economic damages – aggravated damages – humiliation and embarrassment and stressed caused my actions of cross defendant

  COSTS – on usual basis or indemnity – whether Calderbank offer

Legislation Cited:

Administrative Appeals Tribunal Act 1975 (Cth)
Bankruptcy Act 1966 (Cth)
Constitution
Evidence Act 1995 (NSW)
Income Tax Assessment Act 1936 (Cth)
Judiciary Act 1903 (Cth)
Oaths Act 1900 (NSW)
Public Governance, Performance and Accountability Act 2013 (Cth)
Public Service Act 1999 (Cth)
Supreme Court Rules 1970 (NSW)
Tax Agent Services Act 2009 (Cth)
Taxation Administration Act 1953 (Cth)
Uniform Civil Procedure Rules 2005 (NSW)

Cases Cited:

ACN 074 971 109 Pty Ltd (As Trustee for the Argot Unit Trust and Pegela Pty Ltd (ACN 002 256 751) v The National Mutual Life Association of Australasia Limited (ACN 004 020 437) (No 2) [2012] VSC 177
Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345
Ballina Shire Council v Ringland [1999] NSWSC 11
Biggin & Co Ltd v Permanite Ltd [1951] 1 KB 422
Blatch v Archer (1774) 98 ER 969
Briggs v Deputy Commissioner of Taxation (WA); Ex parte Briggs (1987) 14 FCR 249
Briginshaw v Briginshaw (1938) 60 CLR 336
Butler v Simmonds Crowley & Galvin [1999] QCA 475; [2000] 2 Qd R 252
Calderbank v Calderbank [1975] 3 All ER 333
Carltona Ltd v Commissioner of Works [1943] 2 All ER 560
Chapel Road Pty Limited v Australian Securities Investments Commission (No 10) [2014] NSWSC 346
Commission of Taxation of the Commonwealth v Futuris Corporation Limited (2008) 237 CLR 146; [2008] HCA 32
Commissioner of Taxation v Bosanac [2016] FCA 448
Commissioner of Taxation v Dalco (1990) 168 CLR 614
Commonwealth v Fernando (2012) 200 FCR 1
Cornwall v Rowan (2004) 90 SASR 269
Dalco v Federal Commissioner of Taxation (1988) 82 ALR 669
Denlay v Federal Commissioner of Taxation [2011] FCAFC 63; (2011) 193 FCR 412
Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) (1949) 79 CLR 296
Deputy Commissioner for Taxation v Joseph Frangieh [2015] NSWSC 727
Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473
Deputy Commissioner of Taxation v Niblett (1965) 8 FLR 134
Deputy Commissioner of Taxation v Sakovits [2010] NSWSC 865
Deputy Commissioner of Taxation v TDE Nominees Pty Ltd (No 2) [2011] NSWSC 1528
Edward Moses Obeid Snr v David Andrew Ipp [2016] NSWSC 1376
Fabre v Arenales (1992) 27 NSWLR 437
Favaro v FCT (1996) 34 ATR 1
Featherby v Commissioner of Taxation (No 2) [2016] FCA 465
Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2) (2005) 13 VR 435
Hua-Aus v FCT (2010) 184 FCR 430
JLW (Vic) Pty Ltd v Tsilogou [1994] 1 VR 237
Jones v Bradley (No 2) [2003] NSWCA 258
Jones v Dunkel (1959) 101 CLR 298
Jones v Trad (No 3) [2013] NSWCA 463
Kordan Pty Ltd v Federal Commissioner of Taxation (2000) 46 ATR 191
Kuddus v Chief Constable of Leicestershire [2002] 2 AC 122
Lahoud v Lahoud [2012] NSWSC 284
Lamb v Cotogno (1987) 164 CLR 1
Leerdam v Noori (2009) 227 FLR 210
Leichhardt Municipal Council v Green [2004] NSWCA 341
Leinenga v Logan City Council [2006] QSC 294
Lock v Australian Securities and Investments Commission [2016] FCA 31
Lockley v National Blood Transfusion Service [1992] 1 WLR 492
Ma v Commissioner of Taxation (1992) 37 FCR 225
Martin v Federal Commissioner of Taxation (1993) 27 ATR 282
Maxwell-Smith v S & E Hall Pty Ltd [2014] NSWCA 146; (2014) 86 NSWLR 481
McCrohon v Harith [2010] NSWCA 67
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449
New South Wales v Ibbett (2006) 229 CLR 638
Pattenden v Commissioner of Taxation (Cth) (2008) 175 FCR 1
Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768
Poletti v Commissioner of Taxation (1994) 52 FCR 154
R v Deputy Commissioner for Taxation (WA)
R v Toohey; Ex parte Northern Land Council [1981] HCA 74; (1981) 151 CLR 170
Racz v Home Office [1994] 2 AC 45
Re Waterfront Investments Group Pty Ltd (in liq) [2015] NSWSC 18
Rolls Royce Industrial Power (Pacific) Ltd (Formerly John Thomson (Australia) Pty Ltd) v James Hardie & Coy Pty Ltd (2001) 53 NSWLR 626
Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275
State of New South Wales v Hamod [2011] NSWCA 376
State of South Australia v Lampard-Trevorrow (2010) 106 SASR 331
Sydney City Council v Geftlick [2006] NSWCA 280
Szajntop v Commissioner of Taxation (1993) 42 FCR 318
Three Rivers DC v Bank of England No 3 [2000] 3 All ER 1
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63
Troughton v Deputy Commissioner of Taxation (2008) 166 FCR 9
Troulis v Vamvoukakis [1998] NSWCA 237
United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766
Walter v Registrar of Titles [2003] VSCA 122
Wentworth v Wentworth (Supreme Court (NSW), Young J, 12 December 1994, unrep)
Whitney v Dream Developments Pty Ltd (2013) 84 NSWLR 311
Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509
Ziliotto v Hakim [2013] NSWCA 359

Texts Cited:

M Aronson, “Appendix B – Misfeasance in Public Office”, available at UK Law Commission, “Misconduct in Public Office”
R P Balkin and J L R Davis, Law of Torts (5th ed, 2013, LexisNexis Butterworths
T Cockburn and M Thomas, “Personal liability of public officers in the tort of misfeasance in public office – Part 1” (2001) 9 Torts Law Journal 1
T Cockburn and M Thomas, “Personal liability of public officers in the tort of misfeasance in public office – Part 2” (2001)
Delegations and Authorisations Manual
A Doecke, “Misfeasance in public office: Foreseen or foreseeable harm” (2014) 22 Torts Law Journal 20
Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies, 5th ed (2015)
Practice Statement Law Administration 2007/24 (PSLA 2007/24)

Category:

Principal judgment

Parties:

Joe Frangieh also known as Joseph Frangieh (Cross Claimant)
Deputy Commissioner of Taxation (Cross Defendant)

Representation:

Counsel:
I Young (Cross Claimant)
R Weber SC with S Patterson (Cross Defendant)

  Solicitors:
Small Myers Hughes (Cross Claimant)
Ashurst (Cross Defendant)

File Number(s):

2012/355840

Publication restriction:

Nil

Table of Contents

A Overview

B Short factual chronology

C Witnesses at trial

D Pleadings in the cross claim

E Vicarious liability and the structure of the taxation office

E1 Vicarious liability of Deputy Commissioner

E1(i) Activities connected with public duties

E2(ii) Delegation

F The relevant tax legislative provisions

G Misfeasance in public office

G1 Invalid or unauthorised act of a public officer

G2 Actual malice – Conscious maladministration, improper purposes and bad faith

G2(i) Invalidity by conscious maladministration

G2(ii) Malice, bad faith and improper purpose

G2(iii) Aggregating the state of mind

G3 Acts of a public officer in purported discharge of his or her duty

G4 Application of Briginshaw –the seriousness of allegations

G5 Cross claimant’s background

G5(i) Credibility of the cross claimant

G6 The first alleged misfeasance – the audit 2009 to 4 September 2011

G6(i) First aspect – the decision to conduct the audit and notification

G6(ii) Audit undertaken for improper purpose as it was on the basis that the cross claimant had assisted another taxpayer

G6(iii) Audit undertaken for improper purpose believing that the cross claimant would have limited resources to defend himself

G6(iv) Audit undertaken for improper purpose on the belief that be difficult for the cross claimant to discharge his onus of proof in relation to matters raised over three years prior

G6(v) Audit undertaken for improper purpose knowing that it was outside the statutory time frame for amending assessments

G6(vi) Audit undertaken for improper purpose on the belief that the public and/or adjudicating body would be unsympathetic to the cross claimant given the negative media attention

G6(vii) Audit conducted for improper purpose to create and issue assessments that would cause severe disruption, burden, loss and damage

G6(viii) Second aspect – conduct of the audit

G6(ix) The progression of the audit

G6(x) The amended assessment of 1 October 2012 and its validity

G6(xi) The Seage complaint and reporting Mr Seage to the Tax Practitioner’s Board

G6(xii) Advocating for the issue of a Departure Prohibition Order (DPO)

G6(xiii) The manner in which the cross claimant’s tax position was ascertained

G7(i) Factual background of second misfeasance

G7(ii) Perpetuation of improper motivations

G7(iii) The defendant knew the assessments were incorrect

G7(iv) Genuine dispute

G7(v) Improper purpose and assessments made in bad faith

G7(vi) Assessments issued outside of time period prescribed

G7(vii) Failed to follow internal ATO guidelines

G7(viii) Judgment could not be obtained

G7(ix) Limited resources and assets and substantial time, cost and emotional burden

G7(x) Claim could be withdrawn and filed without prejudice

G8(i) Compromise proposal requirements

G8(ii) AAT proceedings

G8(iii) DCT’s submissions in relation the third misfeasance

G8(iv) Continue undermining the review of a tax decision known to be grossly incorrect

G8(v) To bully, harass and cause emotional distress to the cross claimant

G8(vi) Perpetuating the original intentions of the audit officers

G8(vii) Knowing that withdrawing from proceedings would not prejudice DCT

G8(viii) Knowing the statement of claim would need to be amended

H Abuse of process

I Duty to act in good faith

J Conclusion

K Damages

K1 Economic damages

K1(i) Loss of opportunity and inability to obtain finance

K1(ii) Sale of properties that otherwise would not have been sold

K1(iii) Incurrence of further debts

K1(iv) Incurrence of accounting, legal and other expenses

K1(v) Humiliation, embarrassment, stress, anxiety, emotional hurt and inconvenience

K2 Aggravated and exemplary damages

K2(i) Aggravated damages

K2(ii) Exemplary damages

L Costs of the recovery proceedings

L1 Short chronology in relation to costs

L2 Costs generally

L3 Costs of the cross claim

L4 Set-off

M Orders

JUDGMENT

1. HER HONOUR: There are two matters before this Court.

2. Mr Frangieh’s cross claim, filed 19 June 2015, (CB 1, Tab 2) against the Deputy Commissioner of Taxation in those recovery proceedings, for misfeasance in public office, abuse of process and breach of duty of good faith. (“the substantive issue”).

3. Mr Frangieh’s motion dated 26 August 2015 (CB 1, Tab 6) seeking costs on an indemnity basis in respect of the dismissal of the Deputy Commissioner of Taxation’s statement of claim and further amended statement of claim on 31 July 2015. (“the recovery proceedings”).

4. The Deputy Commissioner of Taxation (“the DCT”) is the plaintiff/cross defendant in the recovery proceedings. Mr Frangieh is the defendant/cross claimant.

5. Pursuant to Sch D, Part 3 para 4 of the Supreme Court Rules 1970 (NSW) this matter has been referred to me by the list judge for hearing.

A Overview

6. On 15 November 2012, the DCT filed a statement of claim against Mr Frangieh for unpaid tax, penalties and interest.

7. On 12 June 2015, leave was granted by this Court, for Mr Frangieh to file a cross claim against the DCT.

8. On 31 July 2015, by consent, the further amended statement of claim in the recovery proceedings was dismissed (JTB 10.473). Mr Frangieh seeks costs on an indemnity basis in relation to the recovery proceedings. The DCT agreed to pay Mr Frangieh’s costs of the recovery proceedings but on an ordinary basis.

9. By cross claim Mr Frangieh, the cross claimant, seeks damages against the DCT for misfeasance in public office, abuse of process, and breach of duty to act in good faith. There are three misfeasance in public office claims, two abuse of process claims and one claim of breach of duty to act in good faith. In summary, the causes of action against defendant’s employees arise out of:

(a)   Their conduct in commencing and continuing with the audit of the cross claimant (the audit of the 2007 tax year);

(b)   Their involvement in the issuing of the amended notice of assessment; and

(c)   Their involvement in commencing and continuing the recovery proceedings, in the knowledge that their conduct constituted misfeasance in public office relating to (a) and (b).

10. The cross claim separates the 11 employees of the ATO into three litigation groups. The first misfeasance in public office claim involves the actions of Jessie Agbola, Michelle Johnston, Cindy Sandford and Marianne Rogers (“the first litigation group”).

11. The second misfeasance in public office claim and the first abuse of process claim involves the actions of Lauren Benjamin, Venus Shakuntala Lakshman, Desiree Armstrong, Grahame Tanna and the Deputy Commissioner of Taxation himself (“the first recovery officers”).

12. The third misfeasance claim and the second abuse of process claim involves the actions of Trudy Hobart, Grahame Tanna and DCT (“the second recovery officers”).

13. The allegation of breach of duty to act in good faith claim involves the actions of all of the above named employees as well as the DCT and the Commissioner of Taxation.

14. As a result of the DCT’s alleged misfeasance in public office, abuse of process and failure to act in good faith Mr Frangieh, the cross claimant, claims that firstly, he could not obtain the finance he needed to engage in property development; secondly, he lost the opportunity to proceed with property development opportunities; thirdly, he sold properties for less than market value; fourthly, incurred further debts including legal and accounting fees; and finally suffered humiliation, embarrassment, stress, anxiety, emotional hurt and inconvenience. He also claims aggravated and exemplary damages. He seeks the amount of $8,750,000 for damages. He also claims equitable damages and compensation.

B Short factual chronology

15. On 17 September 2007, the ATO’s notice of assessment (“notice of assessment”) stated that Mr Frangieh’s taxable income was $101,740 for the financial year ended 30 June 2007. (JTB 1.14A).

16. In September 2009, officers in the Australian Taxation Office (“ATO”) started conducting an audit (“the audit”) in relation to Mr Frangieh’s tax return for the year ended 30 June 2007 (“FY2007”). He was notified of the audit by letter dated 20 October 2009. (JTB 1.19). At that stage, the audit centred upon the receipt by the ATO of the sum of around $700,000 from a company called Western Jetz Pty Ltd (“Western Jetz”). Some five months later, by letter from the ATO dated 30 March 2010, Mr Frangieh was notified that the scope of the audit had been extended to cover all of his income in FY2007. (JTB 1.32).

17. On 12 May 2011, the ATO issued a position paper to Mr Frangieh in relation to the audit. The ATO’s position was that there were unexplained deposits of $3,572,517.16 that would be treated as income and the $700,000 received from Western Jetz, $350,000 would also be treated as income. (JTB 2.70).

18. On 25 June 2012, Mr Howarth, an ATO officer, formed the evasion opinion. (JTB 4.199).

19. On 4 September 2012, the ATO wrote to Mr Frangieh advising that the unexplained deposits of $3,234,064 would be treated as income, being deposits that remained unexplained or for which inadequate evidence was provided to support his contentions; and of the $700,000 received from Western Jetz, $350,000 would be treated as income. (JTB 5.227).

20. The audit decision concluded that Mr Frangieh had understated his income by $3,584,065. The amount of $2,393,725.38 due under the notice of amended assessment was payable by 25 October 2012. (JTB 5.234).

21. On 12 October 2012, a complaint was made by Mr Christopher Seage to the ATO on behalf of Mr Frangieh, in relation to the conduct of the audit (“the complaint”). (JTB 5.237).

22. On 15 November 2012, the recovery proceedings were commenced by the DCT. The relief claimed by the DCT included judgment against Mr Frangieh in respect of unpaid income tax (plus penalties and shortfall interest charges) for FY2007, plus two other outstanding tax debts, being a Running Balance Accounts deficit debt (“RBA”) relating to BAS and administrative penalties concerning the GJN Discretionary Trust (of which Mr Frangieh was the trustee), and an RBA deficit debt in respect of Mr Frangieh’s BAS obligations.

23. On 4 February 2013, orders for substituted service of the statement of claim were obtained by the DCT in the recovery proceedings. (JTB 5.267).

24. On 2 April 2013, the amended statement of claim in the recovery proceedings was served on Mr Frangieh pursuant to the orders for substituted service. (JTB 6.282).

25. On 15 April 2013, Mr Butler, the ATO officer dealing with Mr Frangieh complaint, emailed Mr Seage and Mr Frangieh attaching a letter setting out Mr Butler’s reasons for not upholding the complaint. (JTB 6.285).

26. On 1 May 2013, Mr Frangieh lodged an objection to the audit decision in relation to the amended assessment. (JTB 6.291).

27. On 13 May 2013, Mr Frangieh filed his defence in the recovery proceedings. On 16 May 2013, his defence was served on the ATO.

28. On 18 September 2014, the ATO wrote to Mr Frangieh enclosing its reasons for the objection decision. The objection was partially allowed and reduced his taxable income for the FY2007 from $3,685,805 to $827,609. (JBT 7.371).

29. On 30 September 2014, an amended notice of assessment, reflecting the objection decision, was issued. (JBT 7.373). It relevantly states:

Notice of amended assessment – year ended 30 June 2007

Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997

We have received some of the information reported in your income tax return for the period ending 30 June 2007 and have amended your assessment for that period.

30. On 29 October 2014, Mr Frangieh applied to the Administrative Appeals Tribunal (“the AAT”) seeking review of the objection decision (“AAT proceedings”). (JTB 7.384). On 4 June 2015, the AAT conducted a conciliation conference.

31. On 12 June 2015, this Court granted leave to Mr Frangieh to file his cross claim: see Deputy Commissioner for Taxation v Joseph Frangieh [2015] NSWSC 727.

32. On 16 July 2015, by consent, the AAT made a decision pursuant to s 42C of the Administrative Appeals Tribunal Act 1975 (Cth) that set aside the objection decision; and decided, in substitution, that Mr Frangieh’s taxable income was reduced from $827,609 to $101,740. (JTB 8.401).

33. The notice of amended assessment dated 16 July 2015 (JTB 8.406) relevantly states:

Notice of amended assessment – year ended 30 June 2007

Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997

We have received some of the information reported in your income tax return for the period ending 30 June 2007 and have amended your assessment for that period.

Description	Debits $	Credits $
Your previous taxable income was $827,609
Your amended taxable income is $101,740

The Commissioner rounds down certain amounts that may be owed by you or may be refunded to you. You may have transactions on your account where this has occurred.

The following adjustments have been made to your assessment:

Description	Original value $	New Value $	Variation $
Losses
Taxable income or loss
Allowed	827,609.00	101,740.00	725,869.00
Supplement Income
Total Other income Category 2 Amount
Adjusted as a result of audit or investigation	725,869.00	0.00	725,869.00

34. In other words, on 16 July 2015, nearly eight years later, the assessment of tax for FY2007 payable by Mr Frangieh was for exactly the same amount as set out in the original notice of assessment issued on 17 September 2007. This sum had already been paid.

35. On 31 July 2015, the DCT’s recovery proceedings were dismissed by consent. Costs in respect of the recovery proceedings were reserved.

C Witnesses at trial

36. At the hearing of the cross claim Mr Frangieh, Mrs Sharon Pamela Frangieh, Mr George Cheihk, Mr Damien Andrew Brown, Mr Christopher Brian Seage, Dr John Albert Roberts and Ms Anita Duffy gave evidence and were cross examined.

37. Sharon Frangieh, the cross claimant’s wife, did not play any substantial role in the cross claimant’s business affairs but gave evidence as to the effect Mr Frangieh’s dispute with ATO had on his health and wellbeing and upon their marriage. Her evidence is dealt with in the damages section of this judgment.

38. Messrs Cheihk and Seage gave brief evidence in relation to Mr Frangieh’s business activities. Messrs Cheihk and Seage’s evidence will be covered in chronological order. Mr Cheihk gave evidence as to his companies and his dealings with Mr Frangieh. He also observed the cross claimant’s psychological condition during the time that the cross claimant was in conflict with the ATO. Mr Seage’s evidence appears where he writes to the tax office.

39. Ms Duffy psychologist, retained by the cross claimant, and Dr Roberts psychiatrist, retained by the DCT, provided medical opinions in relation to the cross claimant’s psychological condition. This evidence will be referred to in the damages section of this judgment.

40. Aside from the evidence of Mr Damien Brown, the cross claimant elected not to rely on any further affidavits.

D Pleadings in the cross claim

41. By cross claim, the cross claimant alleges that various officers of the ATO engaged in three instances of misfeasance in public office (“misfeasance”), two of which he characterises as abuses of process. He also alleges that the alleged conduct in all three alleged misfeasances amounted to breaches of a duty of good faith, which gives rise to damages.

42. The first alleged misfeasance is pleaded at X/C [11]-[14] (“first alleged misfeasance”). Broadly speaking the allegations concerning the first alleged misfeasance relate to two aspects of the audit of the 2007 tax year. The first is an allegation that the decision to conduct an audit of the cross claimant (to “target” the cross claimant) was made for an “improper purpose”. (X/C [11]). The second is that the audit was undertaken in a way that no reasonable ATO officer would undertake it and that it was undertaken in bad faith. (X/C [12]).

43. The second alleged misfeasance is pleaded at X/C [15]-[21] (“second alleged misfeasance”). Broadly speaking the allegations concerning this alleged misfeasance is that a number of ATO officers “commenced and maintained” the recovery proceedings for an improper purpose. This alleged misfeasance occurred during the period from the commencement of the recovery proceedings up to September 2014, when the objection decision was made.

44. The third alleged misfeasance is pleaded at X/C [22]-[28] (“third alleged misfeasance”). Broadly speaking the cross claimant alleges that several ATO officers maintained the recovery proceedings for an improper purpose.

45. From this brief summary, it can be observed that all of the allegations of misfeasance are based upon allegations that various named ATO officers engaged in conduct either in bad faith or for improper purposes. The cross claimant submitted that these allegations are allegations of deliberate, advertent behaviour. In light of the principles concerning the tort of misfeasance in public office, it appears that these allegations are ones of targeted malice.

E Vicarious liability and the structure of the taxation office

46. Mr Frangieh’s cross claim names the Deputy Commissioner as the sole cross defendant on the basis that he, Mr Ravanello, is vicariously liable for the actions of the ATO officers against whom the cross claimant’s allegations of misfeasance, abuse of process and breach of duty to act in good faith are directed. The DCT submitted that the DCT is not the correct cross defendant. The question is whether the Deputy Commissioner is capable of being held vicariously liable for the acts of ATO officers. If he is not, then the cross claim must fail prior to attending to considerations of whether those officers did engage in any of the alleged wrongdoing.

47. It is convenient to set out an overview of the structure and workings of the ATO.

48. Under s 4 of the Taxation Administration Act the Commissioner of Taxation holds a public office. The Commissioner of Taxation has the general administration of the Tax Administration Act pursuant to s 3A. Neither the Commissioner nor the various Second Commissioners and Deputy Commissioners can administer the entirety of the taxation laws.

49. Pursuant to subsection 4A(2) of the Tax Administration Act, the Commissioner of Taxation and the public officers assisting the Commissioner of Taxation engaged under the Public Service Act (the ATO public officers) constitute the ATO with the Commissioner of Taxation at its head. ATO officers are appointed by the Commissioner to carry out his or her functions and are employed by the Crown in right of the Commonwealth. They are employees under the Public Service Act. They are not authorised by the Deputy Commissioner.

50. At all material times Jessie Agbola, Michelle Johnston, Cindy Sandford, Marianne Rogers, John Howarth, Lauren Benjamin, Venus Shakuntala Laksham, Desiree Armstrong, Trudy Hobart and Grahame Tanna were ATO public officers. This much is common ground: see [5], [6], [8] and [9] of the defence to the cross claim (DX/C). While the DCT admits he has been delegated some powers and functions of the Commissioner of Taxation he otherwise denies the allegations.

51. By s 7 of the Tax Administration Act there shall be such Deputy Commissioners as required. By s 8(1) of the Tax Administration Act, the Commissioner may delegate to a Deputy Commissioner or any other person “all or any of the Commissioner’s powers or functions under a taxation law”. Generally speaking a power or function so delegated, when exercised or performed by the delegate, for the purposes of the taxation law or the other law, may be deemed to have been exercised or performed by the Commissioner.

52. At any given time, there are numerous Deputy Commissioners. From the organisational charts, each Deputy Commissioner has a different role in a different business service line within the ATO. (s 8(2)). Assistant Commissioner Damien Browne confirmed that as a delegate of the Commissioner of Taxation, he stands in the shoes of the Commissioner of Taxation, subject to any limitations imposed on his delegation. (T 169.1-14).

53. The cross claimant referred to a document entitled “General Delegation”. This document, dated 2 July 2012, is the instrument by which the Commissioner delegated his powers and functions under a number of Acts that deal with tax and tax related matters to delegates including the Second Commissioner of Taxation, eighteen Deputy Commissioners of Taxation and four First Assistant Commissioners. Not included in this list of Acts is the Public Service Act, which grants the Commissioner of Taxation powers and functions in relation to employment of the staff of the Australian Taxation Office as employer. (s 20).

54. Since January 2012, Robert Ravanello, has been the Deputy Commissioner of Taxation for Service Delivery and in that role, is responsible for the collection of outstanding debts for the Commissioner of Taxation. (DC/X [7]). The signature of Mr Robert Ravanello, a Deputy Commissioner, has been applied to an Instrument of Authorisation signed by him dated 19 July 2012 (CB 9.468), which demonstrates that he was both a Deputy Commissioner and the Chief Operating Officer. This document grants officers of the ATO in Client Account Services, Customer Services and Solutions, Client Contact, Debt, and Operations Support and Capability the authority to exercise all the powers of the Deputy Commissioner of Taxation expressly granted or otherwise delegated by the Commissioner, as set out in the Schedule to the Instrument of Authorisation, in the name of the holder of the position of Deputy Commissioner of Taxation, insofar as those powers and functions result in notices, determinations, correspondence or other documents.

55. Mr Damien Browne, an Assistant Commissioner, relied on his affidavit sworn 23 February 2016, which sets out the organisation of the ATO. He gave evidence and was cross examined. No challenge was made to credibility. He was articulate and I have no hesitation accepting his evidence.

56. Mr Browne explained that, within the ATO there are a number of departments which are commonly called “business service lines” (“BSLs”). From time to time, the names of BSLs change, or one BSL is amalgamated with another. Mr Browne gave the following evidence about the Debt BSL.

57. Within the Debt BSL, there is a section which is now called “Significant Debt Management”, which used to be called “Debt Strategic Recovery”. ATO officers in this section undertake various actions in order to recover tax debts, which can include:

(a)   Liaising with the taxpayer, for example to determine whether a payment arrangement can be agreed upon;

(b)   Identifying assets held by the taxpayer and issuing garnishee notices in respect of them;

(c)   Commencing court proceedings to recover outstanding debts.

58. Mr Browne explained that in relation to court proceedings commenced to recover outstanding debts, if the taxpayer files a defence in such proceedings, the usual practice within the ATO is for that case to be referred to a lawyer in the ATO’s Review and Dispute Resolution BSL.

59. Mr Browne gave evidence about the Review and Dispute Resolution BSL (“RDR”). RDR was established in July 2013, prior to that, its functions were part of the Legal Services Branch (“LSB”) within Law & Practice. Some, but not all, ATO officers in RDR are lawyers. ATO officers in RDR are responsible for conducting court proceedings referred to them by officers in the Debt BSL. In addition, ATO officers in RDR conduct other proceedings, such as proceedings in the Tribunal and the Federal Court regarding assessments. (Aff 9(b)).

60. In relation to Mr Browne’s evidence concerning the independent review within the ATO’s RDR, Mr Browne was asked the following question in cross examination:

“Q. You’ve mentioned the word independent, an independent branch.  I take it - well first of all what do you mean, independent?  Independent from whom?  Independent from the rest of the tax office, independent from a particular area in the tax office?  What do you mean?

A. So it is both a sort of structural form of independence, so operating independently and separately from the original decision making areas. Whether that is in relation to an audit or objection, as it was then, or in relation to debt decisions, but it was also to reflect bringing to bear an independent perspective. Still clearly operating as a delegate of the Commissioner but the way we generally describe this is a fresh set of eyes to look at the problem.”

(T 170.52059; T 171-1).

61. With regard to the Small and Medium Enterprises BSL (“SME” or “S&ME”), which is now part of the Private Groups and High Wealth Individuals BSL (“PGH”), Mr Browne stated that it was responsible for, inter alia, corporate risks of trust, phoenix, fringe benefits tax, Division 7A and aggressive tax planning. It is also responsible for managing certain categories of individuals and groups with a high turnover. (Aff 9 (c)).

62. One of the functions of PGH was to ensure compliance by taxpayers with taxation laws, for example, by identifying potential non-compliance by taxpayers, and undertaking audits of such taxpayers. ATO officers who undertake audits are often referred to as “compliance officers” or “auditors”.

63. In 2013 and 2014, there was a separate section in this BSL, called “Interpretive Assistance” (“IA”) and later “Technical Excellence Services”, which was responsible for considering and determining objections to assessments or amended assessments lodged by a taxpayer. ATO officers who consider objections were referred to as “objections officers”. In cross examination, Mr Browne explained that in July 2015, the objections function which had been undertaken within the relevant BSL was moved to within RDR. (T 173.19-22).

64. Mr Browne gave evidence about “ATO complaints”. He explained that this area was established in 2002 and is now within the ATO Corporate BSL. ATO complaints has the overall management of complaints in the ATO. He explained that all BSLs have complaints networks which liaise with ATO complaints to resolve complaints and ensure that this is done in a consistent and effective manner. (Aff 9 (e)). In cross examination, Mr Browne explained that complaints can be handled by individual officers or by managers or if unresolved at one level may be addressed by ATO complaints. (T 179.49-180.5).

E1 Vicarious liability of Deputy Commissioner

65. The cross claimant contends that the DCT is a “public officer” for the purposes of the tort of misfeasance in public office and that the relevant conduct was carried out in the course of the exercise of the DCT’s public functions The cross claimant submitted that in cases involving the conduct of officers of the ATO, it is appropriate to name the cross defendant as the Commissioner of Taxation, or alternatively, his delegate, the Deputy Commissioner of Taxation, standing in the shoes of the Commissioner.

66. The Deputy Commissioner has been named the cross defendant as he, according to the cross claimant, may be held vicariously liable for the actions of the ATO officers in performing their duties in public office including, raising assessments, audits, issuing garnishee notices and suing for outstanding taxation in Courts. As I have observed, the parties agree that the ATO officers were public officers at the relevant times.

67. Vicarious liability can apply to the tort of misfeasance in public office: see Racz v Home Office [1994] 2 AC 45 at 53 (“Racz”) and Mengel at 307. In relation to claims of abuse of process which are also asserted by the cross claimant, theoretically there is no obvious impediment to a claim of vicarious liability for the acts of an employee in relation to their employment under the ordinary principles of vicarious liability: see R P Balkin and J L R Davis, Law of Torts (5th ed, 2013, LexisNexis Butterworths) at 735ff. The issues that arise here are whether the respective acts of the ATO officers which are complained of were connected with their duties in public office by way of some de facto authority and whether that authority was delegated by the Deputy Commissioner: Mengel at 347. The focus of the DCT’s refutation of vicarious liability is that the DCT was unable to delegate the de facto authority on which the ATO officers purportedly acted by statute or alternatively as he was not their employer.

E1(i) Activities connected with public duties

68. The parties agree that the ATO officers were public officers. According to the cross claimant the issuing notices of assessment and garnishee orders, commencing debt recovery proceedings and contemplating the issue of a departure prohibition order are quintessential acts of the individual ATO officers that are not unconnected with public office.

69. In State of South Australia v Lampard-Trevorrow (2010) 106 SASR 331 (“Lampard”) at 390 the Full Court of the Supreme Court of South Australia stated at [275]:

“In the present case the Secretary and the APB each acted in apparent performance of their duties under or derived from the 1934 Act. They were doing the kind of thing (fostering a child) that was an appropriate exercise of statutory powers. It is evident that they believed that the particular circumstances called for action to be taken. They acted deliberately, but they acted for the benefit of the public and of the State, and not for any personal or private gain. If necessary, we conclude that this is a case in which the Crown in right of the State of South Australia is vicariously liable for the conduct of the tortfeasor, be it the Secretary or the APB.”

70. The cross claimant submitted that applying Lampard, the individual ATO officers involved in amending the cross claimant’s FY2007 assessment and in the debt recovery proceedings based on that assessment, were acting in the apparent performance of their duties and not for any personal or private gain. According to the cross claimant it follows that the office of the Commissioner and his delegate the Deputy Commissioner of Taxation can be held vicariously liable for the conduct of the individual ATO officers.

E2(ii) Delegation

71. It is uncontroversial that the administration of taxation laws can be delegated to the staff of the ATO and the Deputy Commissioners.

72. The powers and functions conferred on the Deputy Commissioner include the standing to act in legal proceedings. Counsel for the DCT referred to s 255-5(2) of Schedule 1 to the Tax Administration Act, which reads:

“The Commissioner, a Second Commissioner or a Deputy Commissioner may sue in his or her official name in a court of competent jurisdiction to recover an amount of tax-related liability that remains unpaid after it has become due and payable.”

73. The DCT initially brought proceedings against the cross claimant.

74. The cross claimant’s claim is made against the public office of the Commissioner of Taxation with the Deputy Commissioner standing the shoes of the Commissioner. He placed reliance on the ATO’s Delegations and Authorisations Manual (JTB 10. 472) which states (at 2.1.2):

“The High Court of Australia has held that delegation enables delegates to act completely in the place of the person who gave the power to them.”

75. As the DCT has standing to act in legal proceedings for the Commissioner, the cross claimant contends that the DCT is positioned to defend the claim as the delegate of the Commissioner of Taxation.

76. What is problematic with the cross claimant’s approach to vicarious liability is firstly, that the evidence does not support a finding that the authority under which the officers were allegedly acting had been delegated to the Deputy Commissioner of Taxation in accordance with either s 8 of the Tax Administration Act (JTB 9.466) or s 78 of the Public Service Act. Section 78 states that an agency head may, in writing, delegate to another person any of the agency head’s powers or functions under the Public Service Act. Secondly, notwithstanding the lack of identification of the specific Deputy Commissioner against whom the cross claim was brought, the Deputy Commissioner, Robert Ravanello, who was assumed to be the relevant Deputy Commissioner against whom the proceedings were brought, was not named as a person involved in the alleged acts of the first misfeasance. Nor was the Deputy Commissioner involved in the activities constituting the second and third misfeasance.

77. The cross claimant referred to Carltona Ltd v Commissioner of Works [1943] 2 All ER 560 (“Carltona”), where the Court of Appeal stated (at 563):

“It cannot be supposed that this regulation meant that, in each case, the minister in person should direct his mind to the matter. The duties imposed upon ministers and the powers given to ministers are normally exercised under the authority of the ministers by responsible officials of the department. Public business could not be carried on if that were not the case. Constitutionally, the decision of such an official is, of course, the decision of the minister. The minister is responsible. It is he who must answer before Parliament for anything that his officials have done under his authority, and, if for an important matter he selected an official of such junior standing that he could not be expected competently to perform the work, the minister would have to answer for that in Parliament.”

78. The cross claimant submitted that, applying Carltona, the Commissioner and his delegate, the Deputy Commissioner of Taxation, answers for anything ATO officers have done in the performance of their duties.

79. Carltona does not assist the cross claimant in establishing the DCT’s liability. It was concerned with ministerial responsibility. The powers given to ministers are normally exercised by responsible ministers of the department. The application of Carltona does not result in a conclusion that the Deputy Commissioner answers for anything ATO officers have done in the performance of their duties but it does support the conclusion that the responsible ministers answer for anything ATO officers, including the Commissioner and the Deputy Commissioners, have done in the performance of their duties.

80. The DCT submitted that if the cross claimant’s claim of vicariously liability is based on characterising the ATO officers as employees the claim must fail. This is because neither the Deputy Commissioner nor the Commissioner is the employer of the named ATO officers.

81. So far as the claim of misfeasance is concerned, the DCT submitted that there could be no vicarious liability in the case as pleaded because the cross claimant alleges conduct actuated by targeted malice, which is to say that he claims the activities of the ATO officers were without authority and of bad faith and improper purpose. The ATO says that to allege vicarious liability for an employee’s conduct when such conduct is outside their authority is inconsistent with the principles of agency.

82. The DCT referred to a prior hearing in these proceedings where Mr Frangieh sought leave to file a cross claim. The pleadings in the cross claim sought relief against 14 named ATO officers, but did not name them as cross defendants. The DCT sought to strike out these paragraphs of the cross claim. When this issue was raised during the hearing on 7 May 2015, the then counsel for the cross claimant said that references to seeking damages against the named ATO officers would be removed (T 21.48-50). Counsel then made the decision not to join them as cross defendants or seek damages against them personally (T 22.41-44), on the basis that the Commissioner would be “vicariously liable” (T 22.23-24). That decision by the cross claimant was reflected in my decision in Deputy Commissioner of Taxation v Frangieh [2015] NSWSC 727 at [44]-[46], and in the terms of the orders the Court made granting leave which required removal of paragraphs seeking damages against the named ATO officers.

83. The Commissioner of Taxation is the head of the ATO for the purposes of the Public Service Act. (s 4A of the Tax Administration Act). Section 20(1) of the Public Service Act reads that an “Agency Head, on behalf of the Commonwealth, has all the rights, duties and powers of an employer in respect of APS employees in the Agency.” It follows that the Commissioner of Taxation, on behalf of the Commonwealth, has the rights, duties and powers of an employer of the ATO public officers. As the agency head, the Commissioner of Taxation may from time to time determine the duties of ATO public officers employed by the ATO. (s 25 of the Public Service Act). The ATO officers’ authority and employment is derived from the authority of the Commissioner of Taxation on behalf of the Commonwealth.

84. Hence, the Deputy Commissioner of Taxation is not vicariously liable for the conduct of the ATO public officers which the cross claimant claims amounts to the torts of misfeasance in public office and abuse of process. While it is not necessary that I decide who the proper defendant is, it should be noted that as it is the Commissioner of Taxation on behalf of the Commonwealth who has the rights, duties and powers of an employer of the ATO officer, it is arguable that it is the Commissioner who is vicariously liable for torts committed by them. I also note the operation of s 59(1) of the Judiciary Act, which states that a claim in tort may be made against the Commonwealth, and s 64 of the Judiciary Act, which states that in any suit to which the Commonwealth is a party, the rights of the parties shall as nearly as possible be the same as in a suit between subject and subject. The Commonwealth is also possibly liable for the tortious conduct of the ATO officers.

85. My conclusions are firstly, that the Deputy Commissioner of Taxation is the wrong defendant. Secondly, the Deputy Commissioner of Taxation is not vicariously liable for the acts of the public officers. Even if I am wrong and the named tax officers are personally liable (see Mengel at 347), I have made findings (later in this judgment) that their actions are valid and authorised and not done with malice. Hence, the cross claimant claims three claims of misfeasance in public office must fail.

86. If I am wrong, there are two other matters of general application in relation to the three alleged occasions of misfeasance in public office. They are whether firstly, the Briginshaw test is applicable to that tort and whether the states of mind of public officers can be aggregated and secondly, whether Jones v Dunkel (1959) 101 CLR 298 should be drawn in relation to Ms Johnston and Ms Benjamin. I will return to these issues later in the judgment.

F The relevant tax legislative provisions

87. It is now convenient that I set out some of the central provisions of the tax legislation that deals with returns and assessments, the collection and recovery of tax, objections against assessments, reviews and appeals. These provisions relate to the powers that were exercised by officers on behalf of the ATO and are the subject of the cross claimant’s claims in these proceedings.

88. Section 166 of the Income Tax Assessment Act 1936 (Cth) (“ITAA 1936”) imposed an obligation on the Commissioner to “make an assessment of the taxable income” of any taxpayer, on the basis of returns, and “from any other information in the Commissioner’s possession”.

89. Section 167 of the ITAA 1936 provides for the Commissioner to make “default assessments” in one of three circumstances. They are firstly, if a person defaults in furnishing a return; secondly, if the Commissioner was not satisfied with the return furnished by any person; or thirdly, if the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income.

90. In each of these circumstances, the Commissioner is empowered to “make an assessment of the amount upon which in his judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166.”

91. The cross claimant had furnished a return for FY2007, and an assessment had been issued on the basis of it. After that, the audit was conducted, and as the result of that audit, the amended assessment was issued pursuant to s 167(b) of the ITAA 1936. In Commissioner of Taxation v Dalco (1990) 168 CLR 614, Brennan J (with whom Mason CJ, Deane J, Dawson J agreed) observed (at 618) that the amended assessments had been made under s 167(b). It follows that, in this case, the amended assessment was issued pursuant to s 167(b) of the ITAA 1936.

92. In Dalco v Federal Commissioner of Taxation (1988) 82 ALR 669 at 689 (Wilcox J in the Court below) held that the assessments originally issued to the taxpayer had been based on the returns submitted by the taxpayer. The cross claimant submitted that the facts in Dalco are indistinguishable from the DCT’s case.

93. Section 170(1) of the ITAA 1936 prescribes the time limits within which the Commissioner is authorised to amend assessments, calculated from the day on which the Commissioner gave the original assessment. Section 170(1), Item 1 provides that the time limit is two years for individuals, but that provision does not apply if the individual carried on a business (that was not a small business entity), or was the beneficiary of a trust. If s 170(1), Item 1 does not apply, then the time limit is four years: s 170(1), Item 4. In either case, the Commissioner is empowered to amend an assessment “at any time” if he or she is “of the opinion that there has been fraud or evasion”: s 170(1), Item 5 of the ITAA 1936.

94. Section 175 of the ITAA 1936 is a short but important provision. It reads:

“The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with.”

95. The operation of the Pt IVC of the Taxation Administration Act 1953 (Cth) is triggered by s 175A(1) of the ITAA 1936 which reads:

“A taxpayer who is dissatisfied with an assessment made in relation to the taxpayer may object against it in the manner set out in Part IVC of Taxation Administration Act 1953.”

96. Section 177(1) of the ITAA 1936 (now repealed) reads:

“The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct.”

97. Section 175 must be read with ss 175A and 177(1). If that is done, the result is that the validity of an assessment is not affected by failure to comply with any provision of the ITAA 1936, but a dissatisfied taxpayer may object to the assessment in the manner set out in Pt IVC of the Taxation Administration Act. In review or appeal proceedings under Pt IVC the amount and all the particulars of the assessment may be challenged by the taxpayer but in accordance the burden of proof set out in s 14ZZK and 14ZZO of the Taxation Administration Act. Where s 175 of the ITAA 1936 applies, errors in the process of assessment do not go to jurisdiction and so do not attract the remedy of a constitutional writ under s 75(v) of the Constitution or relief under s 39B of the Judiciary Act 1903 (Cth).

98. Section 255-5(1) of Schedule 1 to the Taxation Administration Act1953 states that a tax-related liability that is due and payable is a debt due to the Commonwealth that is payable to the Commissioner. Section 255-5(2) provides that the Commissioner, a Second Commissioner or a Deputy Commissioner may sue in his or her official name in a court of competent jurisdiction to recover an amount of a tax-related liability that is due and payable.

99. As soon as convenient after any assessment is made, the Commissioner is obliged by s 174 of the ITAA 1936 to serve notice in writing by post or otherwise upon the person liable to pay the tax. Any income tax assessed shall be due and payable by the person liable to pay it on the date specified in the notice as the date upon which the tax is due and payable, not being less than 30 days after service of the notice. (s 204). In the event of a deemed assessment pursuant to s 166A(1) of the ITAA, service of a notice of assessment is deemed to have occurred on the day specified by s 166A(1)(c). When it becomes due and payable, income tax shall be a debt due to the Commonwealth and payable to the Commissioner in the manner and at the place prescribed. (s 208). Any tax unpaid may be sued for and recovered in any court of competent jurisdiction by the Commissioner or a Deputy Commissioner. (s 209).

100. Sections 14ZZM and 14ZZR of the Taxation Administration Act provide that the fact that a review or appeal is pending in relation to a taxation decision does not affect the decision, and any tax and additional amounts may be recovered as if no review or appeal were pending. These provisions demonstrate a legislative intention that proceedings to recover tax debts may be commenced even though reviews of various kinds may be on foot. In Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 (“Broadbeach Properties”), the High Court referred to the statutory provisions in taxation legislation (such as s 177 of the ITAA) and authorities demonstrating this “long-standing policy to protect the revenue” (at [44]). In Broadbeach Properties, the High Court (at [44]), referred to Deputy Commissioner of Taxation v Niblett (1965) 8 FLR 134 (“Niblett”) at 140, where Asprey J stated, the fact that an objection is on foot does not affect the assessment in issue or prevent recovery action based upon it. This proposition in Niblett was applied by this Court in Deputy Commissioner of Taxation v Sakovits [2010] NSWSC 865 at [50(7)] (“Sakovits”).

G Misfeasance in public office

101. Misfeasance in public office can be summarised as an intentional tort committed when damage is suffered as a result of an invalid or unauthorised act (or omission) done by a public officer with the malicious intention of causing harm to a claimant, or which the officer knows (or ought to have known) there is no power to do the act relied on and there is a foreseeable risk of harm being caused by that act.

102. Deane J in Mengel at 370 set out the elements of the tort as follows:

“(a)   an invalid or unauthorised act;

(b)   done maliciously;

(c)   by a public officer;

(d)   in the purported discharge of his or her public duty;

(e)   which causes harm to the plaintiff.”

G1 Invalid or unauthorised act of a public officer

103. Mengel identifies that the first element of the tort of misfeasance in public office is that act complained of must be “an invalid or unauthorised act”: Mengel (at 370) per Deane J. At 356 of that judgment Brennan J sought to characterise conduct which may constitute an invalid act within the context of the tort:

“A number of elements must combine to make a purported exercise of administrative power wrongful. The first is that the purported exercise of power must be invalid, either because there is no power to be exercised or because a purported exercise of the power has miscarried by reason of some matter which warrants judicial review and a setting aside of the administrative action. There can be no tortious liability for an act or omission which is done or made in valid exercise of a power. A valid exercise of power by a public officer may inflict on another an unintended but foreseeable loss - or even an intended loss - but, if the exercise of the power is valid, the other’s loss is authorised by the law creating the power. In that case, the conduct of the public officer does not infringe an interest which the common law protects. However, a purported exercise of power is not necessarily wrongful because it is ultra vires. The history of the tort shows that a public officer whose action has caused loss and who has acted without power is not liable for the loss merely by reason of an error in appreciating the power available. Something further is required to render wrongful an act done in purported exercise of power when the act is ultra vires.”

104. It has been recognised that this element may not need to be established where targeted malice is alleged. In such circumstances where the act was done with the improper or ulterior motive of doing the target harm, then the act can be said to have been in bad faith and exercised unlawfully: Chapel Road Pty Limited v Australian Securities Investments Commission (No 10) [2014] NSWSC 346 at [54]-[55]; Cornwall v Rowan[2004] SASC 384; 90 SASR 269 at [209]-[216]; Three Rivers DC v Bank of England No 3[2000] 3 All ER 1 at 49.

105. There is a lack of clarity as to the cross claimant’s formulation of the three alleged torts of misfeasance in that while not expressly indicating that the allegations are based on targeted malice, the pleadings and particulars appear to base the allegations of misfeasance on unlawful conduct expressed as being performed improperly or in bad faith. Where pleadings are framed by reference to “invalidity” with regard to the ATO’s conduct in conducting an audit of the cross claimant’s loan account and issuing of the amended assessments, Commission of Taxation of the Commonwealth v Futuris Corporation Limited (2008) 237 CLR 146; [2008] HCA 32 provides support for the proposition that in order to prove invalidity in the tort of misfeasance, the cross claimant must show that there was conscious maladministration. The DCT contends, and I agree, that the cross claimant’s claims in misfeasance are based on targeted or actual malice. However, I accept that there are some allegations which refer to alleged reckless indifference.

G2 Actual malice – Conscious maladministration, improper purposes and bad faith

G2(i) Invalidity by conscious maladministration

106. Futuris provides guidance for determining whether the default assessment is invalid. In that case the High Court set out the effect of ss 175, 175A and 177 (extracted above). At [24]-[25] the majority (Gummow, Hayne, Heydon and Crennan JJ) commented that consistent with s 175, the validity of an assessment is not affected by “errors in the process of assessment”. Where such errors arise, a dissatisfied taxpayer can object in the manner as set out in Part IVC. However, in circumstances where an assessment is tentative or provisional – i.e. indeterminate in fixing the amount of tax due and payable – or where there has been “conscious maladministration of the assessment process”, s 175 does not apply and therefore in either circumstance an assessment may be deemed invalid.

107. Any unlawful conduct by ATO officers in the course of processes anterior to the making of an assessment is not sufficient to establish conscious maladministration and render an assessment invalid. As recognised by the Full Court in Denlay v Federal Commissioner of Taxation [2011] FCAFC 63; (2011) 193 FCR 412 at [76] there must be some “actual bad faith, not with some form of ‘constructive’ bad faith established by unwitting involvement in an offence”. The threshold to establishing such conduct is high. As observed by the majority later in Futuris at [60], “Allegations that statutory powers have been exercised corruptly or with deliberate disregard to the scope of those powers are not lightly to be made or upheld.”

108. The fact that there may be some guesswork or estimation involved in an assessment will not render it invalid provided that there is some intelligible justification for the figures reached by the commissioner or provided that the Commissioner had not merely plucked a figure from the air or engaged in uninformed guesswork: Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 at 87-88; Briggs v Deputy Commissioner for Taxation (WA); Ex parte Briggs (1987) 14 FCR 249 at 269 (“Briggs”). The issue here is whether the cross claimant can prove that there was conscious maladministration, in the sense of actual bad faith, in the audit and issuance of the amended assessments.

G2(ii) Malice, bad faith and improper purpose

109. Central to this dispute is whether the ATO officers acted with the requisite malicious intent. In short the cross claimant alleges that relevant acts of the officers were actuated by malice whereas the DCT argues that the cross claimant has mischaracterised the officers’ conduct as malicious when in fact it was not.

110. Counsel for the cross claimant submitted that an exercise of power must be accompanied by one of the following forms of “bad faith”:

L3 Costs of the cross claim

795. The cross claimant did not succeed on the cross claim. The DCT seeks that the costs of the cross claim be paid by him on an ordinary basis. As previously stated the usual rule is that costs should follow the event (UCPR 42.1). The cross claimant is to pay the DCT’s costs on an ordinary basis as agreed or assessed. I make an order that the cross claimant is to pay the cross defendant’s costs of the cross claim, on an ordinary basis as agreed or assessed.

L4 Set-off

796. Each party has a costs order in his or its favour. The Deputy Commissioner submits that an order should be made that the costs to which the cross claimant is entitled, and the costs to which the Deputy Commissioner is entitled, be set-off.

797. This Court has an inherent power to direct that orders for damages or costs be set-off: Wentworth v Wentworth (Supreme Court (NSW), Young J, 12 December 1994, unrep). The source of this power is the Court’s power to control its own proceedings: see Lahoud v Lahoud [2012] NSWSC 284 (“Lahoud”) at [73]-[79]. Whether or not an order for set-off should be made is a matter for the Court’s discretion: see State of New South Wales v Hamod [2011] NSWCA 376 at [35] per Giles JA (with whom Beazley and Whealy JJA agreed).

798. In respect of set-off of costs orders against other costs orders, in Lahoud, Ward J (as her Honour then was) cited (at [76]), with apparent approval, a statement by Scott LJ in Lockley v National Blood Transfusion Service [1992] 1 WLR 492 at 497 that setting-off costs orders against other costs orders (as distinct from setting-off costs orders against damages orders, for example) “seems so natural and equitable as not to need a special justification. I would expect a party objecting to the set-off to give some special reason for that objection.”

799. The DCT submitted that an order that the costs orders in each party’s favour be set-off is appropriate. The cross claimant has not provided a reason why this should not occur. It is my view that the costs order made against the parties should be set-off.

M Orders

The Court orders that:

1. The plaintiff is to pay the defendant’s costs of the recovery proceedings on an ordinary basis.

2. The cross claim filed 19 June 2015 is dismissed.

3. The cross claimant is to pay the cross defendant’s costs of the cross claim.

4. There is to be set off between the parties in relation to the costs orders set out in orders in paragraphs (1) and (3) above.

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Decision last updated: 20 March 2017