The Risks of Cheating the ATO

A recent decision by the Court serves as an alarming reminder to separated couples that the risks of improper or fraudulent tax accounting during the marriage remain even if Court proceedings between former spouses (or partners) settle before a Judge hears their case. Further, evidence filed by either of them in relation to proceedings can still be accessed by the Australian Taxation Office ("ATO") after the case settles.

In Commissioner of Taxation & Darling, the Court examined whether the ATO has authority to access documents produced by parties to proceedings. This issue arose in circumstances where the ATO had first sought permission from the Registry Manager of the Court to inspect an affidavit and annexures sworn by the husband in proceedings then before the Court.

Initially, the Registry Manager declined access to the ATO, but granted access after receiving later correspondence from the ATO. The parties were unaware of the ATO's requests or of the inspection, but in the meanwhile settled the proceedings by agreement between them. Approximately 6 months later, the ATO filed an Application to intervene in the proceedings to obtain copies of documents it had flagged on the Court file. The trial judge refused that request, and the ATO appealed.

On appeal, the Court agreed that although the ATO had by virtue of certain provisions of the Income Tax Assessment Act, coercive powers to demand access to documents, that power did not extend to override the principle that documents produced by parties to proceedings can only be used for purposes other than the the proceedings they relate to if they are read into, and become part of the evidence of the case.

However, the Court did find that in exercising its statutory authority to carry out tax audits, the ATO had a substantial public interest. The Court granted the ATO access to the documents it sought and said:

"...Family Court proceedings are one of the very few occasions when it may be in the interest of a party to acknowledge or to assert conduct amounting to tax evasion. Put another way, documents in Family Court proceedings may contain information that may not be otherwise available or may be withheld in examinations conducted by the Commissioner [of Taxation]".

The Court went on to comment that in ordinary circumstances, parties should be given notice of any request to inspect documents, and an opportunity to be heard about that request.