Tuesday, May 17, 2011

Denlay's Case - The use of illegally obtained material by the ATO.

The recent Federal Court case of Denlay v Commissioner of Taxation (see link below for full transcript) held that amended assessments by the Commissioner (ATO) based on illegally obtained information supplied by a third party, were valid assessments under the Income Tax Assessment Acts. The taxpayers (Kevin and Mirja Denlay) had argued that the amended assessments were tainted with jurisdictional error due to 'conscious maladministration' by the tax office.

In short, the case involved a situation whereby the Commissioner had issued an amended assessment to the taxpayers for the years 2002-2007. In preparing the amended assessment, the Commissioner utilised documents sourced from a third party who had illegally obtained the information from his employer. The taxpayers argued that the ATO had breached s400.9 of the Criminal Code 1995, and as a result, the amended assessments should be invalid pursuant to s175 of the ITAA 1936.

However, the full Federal Court found that the Commissioner had a duty to determine the taxpayer's taxable income from 'returns and from any other information in his posession or from any one or more of these sources'. As such, the Commissioner or any authorised officer was to have at all times full and free access to all buildings, places, books, documents and other papers for any of the purposes of the ITAA 1936 & ITAA 1997, pursuant to s166 & s263(1) of the ITAA. It was clear to the Federal Court that when the ATO officers obtained the documents, they were acting for the purposes of the ITAA 1936 & ITAA 1997 and for no other purpose. Similarly, their actions had not been in 'bad faith' and as such, did not amount to conscious maladministration.

This case clearly demonstrates the ATO's very broad powers under s.166 and s263(1) of the ITAA 1936 which effectively allows for the use of materials from various sources (both legal and illegal) to determine amended assessments.  


David Sylvester
Solicitor Director