In the matter of Farah Custodians Pty Limited v Commissioner of Taxation (No 2) [2019] FCA 1076, the Federal Court has held that a taxpayer should be able to proceed with their claim for negligence against the ATO, arising from the Commissioner of Taxation’s performance of his duties or responsibilities regarding refunds of Running Balance Account (‘RBA’) surpluses.

The taxpayer’s tax agent had provided the details of a bank account he controlled to the ATO as the bank account into which refunds payable to the taxpayer in respect of RBA surpluses should be paid.

Officers of the ATO had conducted an audit or investigations into the activities of the tax agent. By mid-2013 they were aware, at the very least, that there was a risk that the tax agent had been abusing his position as a tax agent by directing refunds payable to clients, including the taxpayer, to bank accounts held by companies associated with him, and was not in due course remitting those funds to his clients.

Those officers, however, had not passed that information onto the taxpayer, or otherwise warned of the risk that the agent had been defrauding them or otherwise misusing his position as their tax agent.

Perhaps more significantly, despite the knowledge possessed by the tax officers, the ATO continued to pay refunds arising from surpluses in the taxpayers RBA into the tax agent’s bank account throughout the second half of 2013 and up to January 2014.

That is, the ATO did not, in light of the information uncovered in the course of the audits, delay or defer the payment of refunds into that account while it conducted further inquiries.

The taxpayer commenced proceedings against the ATO, alleging not only that the Commissioner failed to pay the refunds in accordance with the Taxation Administration Act 1953, but also that the Commissioner was liable to pay damages to it for the tort of negligence.

The Commissioner tried to have the applications struck out, because they were ‘futile’. According to him, there was no proper basis for finding that he owed the taxpayer a duty of care and no basis for finding that taxpayer suffered any loss or damage arising from breach of that duty of care (the elements of negligence).Despite this assertion by the Commissioner, the Court held for the taxpayer; stating that if the Commissioner did owe a duty of care and did breach that duty, it is reasonably arguable that the taxpayer suffered damage and loss. The Court further noted that these facts would still stand if the payment of refunds was within powers.


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