Serial entrepreneur Gary Donoghue has had his $30 million tax bill quashed after the Federal Court found the Australian Tax Office acted unlawfully in pursuing its claim.
Donoghue was the founder and former chairman of listed company Plus SMS before quitting after the company admitted it had misled investors with “unrealistic statements”.
He has also had interests in New Zealand companies Prestige Boat Sales and Q-Tel and sports marketing scheme Ultimate Rugby, which went bust owing more than $800,000.
The ATO started chasing Donoghue after he sought legal advice from a friend of his daughter, Simeon Moore, who was not admitted to legal practice, but was studying law at Bond University at the time.
Moore claimed “outrageously extortionate” fees of $753,174 which Donoghue refused to pay.
“Garry, if you don’t pay me and my family, I will have no hesitation in giving the ATO everything I have on you. You should be very worried,” Moore wrote to Donoghue.
“A family friend is an Assistant Commissioner and I’ve reported people to him before and he’s taken them down. There’s no doubt he’ll look at you and take everything from you and the Donoghue Family Trust. If you don’t want that to happen, pay up what you owe.”
When Donoghue failed to pay up, Moore leaked the information to the ATO, resulting in the $30 million tax bill that’s now been rescinded by the Federal Court.
The Federal Court found the ATO knowingly and deliberately used documents subject to legal professional privilege in arriving at the assessments.
Justice John Logan found the ATO deliberately chose to keep a covert audit secret from Donoghue, instead of affording him with an opportunity to claim legal professional privilege over documents which had been delivered to the ATO by Moore.
Justice Logan found the ATO acted in reckless disregard of Donoghue’s right to claim an important common law privilege and quashed the notices of assessment.
The judgment also identified a lack of supervision and guidance present in the ATO, which coupled with inexperience and zeal, resulted in “conscious maladministration” by the ATO.
Ashley Tiplady, partner of Russells and solicitor for Donoghue, said when he first attempted to raise the issue of the privileged documents, the responses from the ATO were evasive and designed to conceal what had actually gone on.
In a statement to SmartCompany, Tiplady says Donoghue “feels justified” now.
“He took a stand against the ATO and the court found there to have been deliberate decision-making by the Commissioner that was unlawful,” he said.
“The ATO was confronted with the facts early in the piece but instead of admitting any wrongdoing, it chose to hide what had happened and put my client to great expense in jumping through every possible hoop to call the ATO to account.
Tiplady said it was fortunate Donoghue refused to back down and give in to the ATO’s “bullying” tactics.
He said the decision illustrates the ATO can and does get it wrong, but it’s out of reach for most Australians to fight the Commissioner.
“Action of this level is expensive and the ATO has such extraordinary powers which allow it to suffocate its opponents by restraining their resources and forcing them to fight with one arm tied behind their back,” he said.
“What sets this case apart from the rest is that someone has been willing and financially able to take on the ATO and won. Though this result does beg the question, how much of this behaviour is going on and is never brought to the surface?”
Justice Logan also ordered that the Commissioner of Taxation pay Donoghue’s costs of the proceedings.
The ATO told SmartCompany it plans to appeal the decision.