The recent cases of FCT v Darling  FAM CAFC 59 (Darling) and International Litigation Partners Pte Ltd v FCT FCA 671 (Litigation Partners) have cast the spotlight on the Commissioner of Taxation’s (Commissioner) ability to access information from the contents of Family Court files in order to assist him with his tax administration and collecting powers.
The Commissioner’s information collection powers
Broadly, the Commissioner has available to him a range of powers enabling him to collect information generally so that he can perform his function. These include:
- Informal powers of investigation and coercion. For example the Commissioner is able to simply request that a taxpayer or his or her agent provide further information in relation to a tax return in order to clarify a certain matter or matters.
- Formal powers under the Income Tax Assessment Act 1936, Income Tax Assessment Act 1997 (Cth) (ITAA97) and Taxation Administration Act 1953 (Cth) (ITAA36). These include the power to:
- access premises (section 263 ITAA36);
- require information to be provided (section 264(1)(a) ITAA36); and
- require to attend and give evidence (section 264(1)(b) ITAA36). With respect to this power, the decided cases have held that a claim for legal professional privilege may be made, which will avoid having to disclose certain information to the Commissioner. However a taxpayer cannot refuse to provide information on the basis that to do so may incriminate him. That is, the claim against self incrimination is unable to be made in such instance.
- Offshore information notices. Where the Commissioner has reason to believe that certain information relevant to the assessment of tax of a taxpayer in Australia is located outside of Australia and is within the knowledge of the person outside Australia, recorded in a document outside Australia or kept by means of a mechanical, electronic or other device outside Australia, and the document is relevant to the assessment of a taxpayer, the Commissioner may by notice in writing serve on the taxpayer a request that the taxpayer give to the Commissioner such information.
- Various information exchange agreements have been entered into by Australia with certain other countries whereby these agreements aim to establish an effective information exchange protocol as well as improve transparency of a taxpayer’s financial arrangements/transactions for tax purposes. The agreement outlines the obligation between Australia and the other jurisdiction to help each other by exchanging correct tax information relevant to the administration and enforcement of their respective domestic laws (both civil and criminal). Importantly however, information may only be provided on request. That is, a jurisdiction is not obliged to provide information unless it has been specifically asked for that information by the other jurisdiction. These exchange agreements differ from comprehensive international double tax agreements as they do not contain any provisions concerning the allocation of taxing rights over income (which double tax agreements may do). They are also different to the exchange of information article contained in double tax agreements in the following ways:
- tax information exchange agreements are broader than double tax agreements as they cover all taxes administered by the Commissioner of Taxation in Australia as well as criminal and civil tax matters; and
- tax information exchange agreements are narrower than international double tax agreements in that the information exchanged can only relate to a specific investigation occurring at the time, whereas the exchange of information article under the traditional double tax agreement allows for specific, spontaneous and automatic exchange of information.
Access to Family Court files
- In the Federal Court, access to a Family Court file is generally provided for in Rule 24.24 of the Federal Court Rules 2011/Rule 2.08 of the Federal Circuit Court Rules 2001. A similar rule is contained in Rule 24.13 of the Family Law Rules. Rule 24.13 provides as follows:
(1) The following persons may search the court record relating to a case, and inspect and copy a document forming part of the court record:
(a) the Attorney-General;
(b) a party, a lawyer for a party, or an independent children's lawyer, in the case;
(c) with the permission of the court, a person with a proper interest:
(i) in the case; or
(ii) in information obtainable from the court record in the case;
(d) with the permission of the court, a person researching the court record relating to the case.
(2) The parts of the court record that may be searched, inspected and copied are:
(a) court documents; and
(b) with the permission of the court--any other part of the court record.
(2A) A permission:
(a) for paragraphs (1) (c) and (d) and (2) (b)--may include conditions, including a requirement for consent from a person, or a person in a class of persons, mentioned in the court record; and
(b) for paragraph (1) (d)--must specify the research to which it applies.
(3) In considering whether to give permission under this rule, the court must consider the following matters:
(a) the purpose for which access is sought;
(b) whether the access sought is reasonable for that purpose;
(c) the need for security of court personnel, parties, children and witnesses;
(d) any limits or conditions that should be imposed on access to, or use of, the court record.
(4) In this rule:
"court document" includes a document filed in a case, but does not include correspondence or a transcript forming part of the court record.
Note 1: Section 121 of the Act restricts the publication of court proceedings.
Note 2: Access to court records may be affected by the National Security Information (Criminal and Civil Proceedings) Act 2004 .
[Emphasis in bold added].
- As the Commissioner will not, generally, be a party to the Family Court proceeding, he must obtain the permission of the Court in order to obtain access to the Family Court file. In particular, pursuant to Rule 24.13(1)(c), the Commissioner must prove that he is a person “with a proper interest in the case” or “a person with a proper interest in information obtainable from the court record in the case”.
- It is also noted that in the court determining whether to give permission to the Commissioner to access the file, the court must consider the following matters:
- the purpose for which access is sought;
- whether the access sought is reasonable for that purpose;
- the need for security of court personnel, parties, children and witnesses; and
- any limits or conditions that should be imposed on access to, or use of, the court record.
- In Darling, it was accepted that the Commissioner was subject to a general law rule to the effect that where the party to litigation impelled, either by reason of a rule of Court, a specific order of the Court, or otherwise, to disclose documents or information, the party obtaining the disclosure cannot, without the leave of the Court, use it for any purpose other than that for which it is given unless it is received into evidence. This rule has been referred to as the “implied obligation” not to use information for purposes unrelated to the litigation. In Darling, the issue was whether the Commissioner was subject to the implied obligation or whether he could be released from the obligation not to make use of the documents he obtained by virtue of access to the Family Court file.
- At first instance, McMillan J noted that Rule 24.13 of the Family Court Rules provides that a person with a “proper interest” may inspect and copy a document forming part of the Court record, although her Honour also observed that the rule does not say what constitutes a “proper interest”. Furthermore, her Honour said that the purpose of the obligation was “to preserve the party’s privacy and to encourage full and frank disclosure” and both of those concepts were “of particular importance and sensitivity in relation to proceedings” in the Family Court. In considering the decided case in point, Her Honour referred to the matter of Springfield Nominees Pty Ltd v Bridgelands Limited. The Court there considered the factors that would need to be taken into account, and noted that one factor which is perhaps the most important of all, is the likely contribution of the document to achieving justice in the proceeding to which it is to be used. In conclusion, the Primary Judge recorded that she was not satisfied that the release of the Commissioner from the obligation was necessary or in the public interest or should be given priority over the public interest in maintaining the privacy of the parties to the contents of their proceedings in the Family Court and to encourage their full and frank disclosure in such proceedings.
It is worth noting that the primary judge in Darling said
”…..even if a proper interest could be shown, it does not follow that an unrelated party would be released from the implied obligation to use that document”’.
That is, the factors described above still need to be considered.
- In terms of the interplay between the Commissioner’s powers arising out of sections 263 and 264 of the ITAA36, and the Commissioner’s ability to obtain access to Family Court files and the subsequent use of material contained in those files, the Full Court of the Family Court in Darling said:
“We proceed on the basis that if the Commissioner’s powers of coercion do not extend to demanding documents from a Court file, the purported use of the powers for that purpose prima facie constitutes contempt. To then make use of the documents obtained by such means would seem to us to aggravate the contempt and as we have seen, statutory authorisation permitting a contempt of Court should not be lightly inferred.”
“We are unable to find anything in the text of sections 166 and 167 of the [Income Tax] Assessment Act which could be construed as “clear words” relieving the Commissioner from compliance with the compliant obligation. Nor is there anything in the legislation which would provide a basis for concluding there is a “necessary implication” that he has been relieved from compliance. Using the phrase employed in Daniel’s Corporation, ....it is far from obvious that the obligation to the Commissioner would significantly impair the performance of his duties. Indeed, his own manual suggests the contrary.”
- The Full Court held that a statutory duty must be clear that it is overriding the implied obligation. To use documents obtained without clear authority will constitute contempt. In finding in favour of the Commissioner being relieved from the implied obligation, the Full Court stated:
- The Commissioner is performing an important public duty. Access to Family Court documents will assist in the conduct of any audit being undertaken by the Commissioner. The public interest is to be advanced by ensuring that all taxpayers pay their fair share of tax.
- The Commissioner in Darling was engaged in a substantial, targeted audit. It was not a “random audit”.
- The material contained in the Family Court files would be of material value in determining whether there has been a full disclosure of income for income tax purposes. The Commissioner suspected that many of the taxpayer’s assets were outside of Australia and information regarding such assets could only be obtained from interviews with the parties where they may have an incentive not to be frank.
- There are restrictions on the way in which the Commissioner can use the information obtained from the Family Court file which would ensure that the documents are not disclosed into the public arena, thereby ensuring that no breach of section 121 of the Family Law Act occurs. It is significant that the affidavits and financial statements given by the parties were not given in discovery or obtained under a warrant but were sworn by the parties for the purposes of proceedings and therefore in the expectation that they might be read in open court. Once the documents were filed and served, the decision as to whether the documents would pass into the public domain moved from the control of the party who filed them. This was a significant factor to be taken into consideration.
- In the Full Family Court’s view, the most important consideration was whether or not granting the Commissioner relief from the obligation was likely to discourage litigants in Family Court proceedings from making a full and frank disclosure. It was acknowledged that there is a heavy obligation on litigants in Family Court proceedings to make full and frank disclosure, noting that there is a requirement to provide a written undertaking to the Court that they have in fact done so. Furthermore, it was recognised that there is already a disincentive for parties to Family Court proceedings to be frank with the Family Court about tax evasion matters because the Family Court can and often does, refer such matters to the relevant authorities for further investigation.
- In conclusion, the Court was dissuaded that relieving the Commissioner of the implied obligation in some cases would likely result in any greater disincentives to parties being frank with the Court. As the Court noted, one of the parties may still see it as being to their advantage to disclose their knowledge of tax evasion having occurred.
Pursuant to the Full Family Court’s decision in Darling, the husband applied for special leave to appeal to the High Court, which was refused. Accordingly, at least for now, there appears to be a clear pathway by which the Commissioner can, in appropriate circumstances, obtain access to Family Court files for the purposes of his role of administering the tax laws of this country.
- In the further recent case of Litigation Partners, the Family Court refused to exercise its discretion to allow the Commissioner access to documents filed in the Family Court. International Litigation Partners Pte Ltd had had an assessment raised against it by the Commissioner of Taxation. The company had lodged an objection against the assessment.
- In the Federal Court, the Commissioner sought leave to inspect all documents on the Family Court file regarding the family law dispute between Mr Lindholm (who was associated with International Litigation Partners Pte Ltd) and his former wife, concerning both property related matters as well as matters in relation to a child of the marriage. By attempting to obtain access to the Family Court file, the Commissioner was of the belief that the file would contain certain relevant information regarding the tax residency of the company, including whether it carried on a business in Australia via a “permanent establishment” by way of involvement of Mr Lindholm. If a “permanent establishment” could be proven, the company would be subject to tax in Australia.
- The Family Court file was provided to the Federal Court and the question was whether or not the Commissioner should be allowed access to the file pursuant to Rule 24.24 of the Federal Court Rules 2011.
- As a matter of procedure, following the Commissioner’s application for access to inspect the Family Court file and at Counsel for the Commissioner’s suggestion, Jagot J requested that the Registrar of the Federal Court notify both Mr Lindholm and his former wife of the Commissioner’s application. Mr Lindholm’s former wife did not object to access being granted. Mr Lindholm, however, vigorously opposed the Commissioner’s application.
- In its judgment, the Federal Court referred to what it thought may have been the only decision of the Federal Court relating to a similar application, namely Graham v Colonial Mutual Life Assurance Society Limited  FCA 1213. There, McKerracher J identified the following as key considerations in determining whether to grant access to the court file:
- there were clear indications that the legislature contemplated that Family Court Western Australian proceedings should remain private and that the exchanges arising in the Graham case should not in the ordinary course of events enter the public domain;
- access to the Family Court file should not be permitted until the views of the former wife were sought, obtained and considered by the Registrar in relation to access;
- the implied obligation of confidentiality is a factor to take into account. Parties engaging in dispute resolution being required to observe obligations of confidentiality, would not in the ordinary course of events, expect third parties to obtain access to those confidential materials;
- in the circumstances, His Honour was unable to discern any client legal privilege or other privilege which might be relevant; and
- the fact that inspection of the file may constitute “fishing” would not be sufficient to preclude it. However, it must be clear that some usefulness would come from inspection of the Family Court file.
- The Court in Litigation Partners analysed the Darling decision and noted that:
“The affidavits and financial statements were not given in discovery or obtained under a warrant but were sworn by the parties for the purposes of the proceedings and therefore in the expectation that they might be read in open court. Having served the documents, the decision as to whether the documents would pass into the public domain moved from the control of the party who filed them. Whilst in no way determinative, this factor is of significance …”
- In determining whether or not to grant access to the Family Court file to the Commissioner, the Court reasoned as follows:
“While I consider that the [Applicant, International Litigation Partners Pte Ltd] does have standing to object to the application by the Commissioner, it is Mr Lindholm’s submissions, rather than those of the Applicant, which should be given weight. His submissions were as follows:
- It is inherently unlikely, given the nature of the issues in this proceeding, that the family law file will be of any real utility.
- The family law file involves personal information confidential to Mr Lindholm and his former wife and information relating to child custody issues, the confidentiality of which in accordance with Graham, should be given a high value.
- It should be anticipated that there would be significant or real practical difficulty in separating out documents relating to child custody from other material, which the Commissioner seeks to inspect.
- Unlike the decision in Darling, Mr Lindholm is not the taxpayer the subject of this proceeding. The taxpayer is International Litigation Partners Pte Ltd. Further, proceedings as between the Applicant and the Commissioner is at the stage of an objection appeal. Accordingly, the circumstances are quite different from those in Darling where the Commissioner was involved in an audit process of one of the parties to those proceedings.
- In any event, the Commissioner otherwise has, and has exercised, extensive powers to carry out audits of both International Litigation Partners Pte Ltd and Mr Lindholm. This supports the submission that inspection of the family law file will be of little, if any, utility.”
- The Court also held that the exercise of its discretion must necessarily involve weighing the likelihood of the Family Court file disclosing to the Commissioner anything of real utility against the interest in preserving the confidential and personal nature of the documents contained in the file. In that respect, the Court held that it must have particular regard to the fact that Mr Lindholm is not a party to the tax dispute. It considered this to be a relevant distinguishing factor from the circumstances in Darling. Furthermore, the Family Court file in Litigation Partners involved issues relating to a child. The Court accepted Mr Lindholm’s submissions in this regard that there was likely to be a real and substantial practical difficulty in separating documents dealing with issues that might be of relevance to the Commissioner from those which might disclose information touching upon the interests and concerns of the child.
- In considering whether or not the Family Court file would contain any information useful to the Commissioner, the court held that while the Commissioner submitted that it is necessarily the case that it is pure speculation to surmise that the Family Court file would not contain relevant information, the reverse is also necessarily true. That is, it is also pure speculation on the Commissioner’s part that the Family Court file might contain relevant information. On balance, the court held that there was force in Mr Lindholm’s submission that the very nature of the issues in the tax litigation, compared to the nature of the issues in the Family Court proceeding, made it improbable that the file would yield any information of real value for the Commissioner.
- For the reasons mentioned above, the Court came to the view that it was not satisfied that the Commissioner would find that the file contained relevant information and that this outweighed the interest of Mr Lindholm in maintaining the confidential status of the Family Court file or indeed the public interest that must exist in such confidentiality being maintained.
The following observations arise out of the Darling and Litigation Partners decisions.
It is clear that these two cases are likely to be simply the beginning of a string of cases to come before the courts over time whereby the Commissioner seeks to gain access to Family Court files. As a result, the jurisprudence in this area will continue to develop over time. However, at present, some points to note are as follows:
- it appears to be the case that the Commissioner of Taxation is looking at this avenue as an additional way in which to obtain information relating to its tax administration function. It is no secret that in these economic times the Government needs to do all it can to collect revenue;
- there is clearly a pathway for the Commissioner to take under the Family Court and/or Federal Court rules in order to obtain access to the Family Court file;
- whether the Commissioner will be successful depends upon weighing up certain factors. Matters can be finely balanced. For example the Family Court at first instance in Darling found against the Commissioner whereas the Full Family Court on appeal found in his favour;
- both parties to the marriage will have standing to object to the Commissioner’s attempt to access the Family Court file. Their submissions, rather than the relevant taxpayer who’s tax affairs are being examined by the Commissioner (for example the taxpayer company in Litigation Partners) are to be given weight;
- a balance is required between the legislature’s contemplation that Family Court proceedings remain private and should not in the ordinary case enter the public domain (see Graham v Colonial Mutual Life Assurance Limited FCA 1213 at , referred to in Litigation Partners). Note, however, in Darling, that the court said that some weight needed to be given to the fact that the parties swore affidavit material which contemplated that it be disclosed in open court. In other words, this contemplated that such information was not meant to remain private. Parties should therefore consider the possibility of affidavit material ending up in the hands of the Commissioner;
- the implied obligation of confidentiality is a factor to be taken into account. The parties in dispute would expect matters disclosed in such proceedings to remain confidential and for third parties to not have access to those confidential materials. In Darling, the Court noted the high level of disclosure required by the parties in Family Court matters and that a possibility of disclosure of confidential material would lead to an erosion of the parties’ willingness to disclose. This is also a matter/factor to be weighed up in determining whether an entity can be released from the implied obligation not to disclose such information;
- no legal professional privilege appears to apply as a general rule, regarding matters and information disclosed in Family Court proceedings;
- the Commissioner appears to be able to use access to Family Court files to “fish” for additional information;
- one matter to be weighed up is the additional utility to be gained by the Commissioner in accessing the Family Court file;
- child information/issues being on the Family Court files, together with other relevant Family Court issues, may complicate matters in a real and practical way such that this may weigh against the Commissioner’s ability to access the Family Court file;
- where the Commissioner is locked in a Federal Court tax dispute with an entity related to or controlled by a party to the marriage, attempted access to the Family Court file would appear more difficult given that it will only be indirectly relevant to the tax dispute (the Family Court file relating to the individuals themselves, not the entity);
- further, a distinction appears to be made between the Commissioner seeking access to the Family Court file where a tax matter is at the review or audit stage, and where it is at the Federal Court/appeal stage. The Commissioner may be more successful in obtaining access to Family Court files where the tax matter is in its earlier, information gathering phases, rather than its decision and/or appeal phase; and
- furthermore, where the issues in dispute between the Commissioner and the taxpayer would not appear to align with the issues considered in the Family Court proceedings, there would appear to be an improbability that there would be any utility in obtaining access to the Family Court file. The requirement of the Court is to weigh up the likelihood of the Family Court file disclosing to the Commissioner anything of real utility against the interest in preserving the confidential and personal nature of the documents contained in the Family Court file.
The Darling decision would appear to herald a new era regarding the Commissioner of Taxation’s avenues of access to information for the purposes of him administering the tax laws of this country. It is envisaged that the Commissioner will in the future continue to rely on the Darling decision to seek access to Family Court files while at the same time continue to test the bounds of the principles contained in the decision.
For more information or discussion, contact HopgoodGanim's Taxation team.