R&D Compliance Series: The King vs Julie Clarke (a pseudonym)

The R&D Tax Incentive (R&DTI) landscape has continued to evolve over the past year, with several key compliance cases shaping the way claims are prepared. In Ascentium's  R&D Compliance Series, we explore these recent cases and share practical insights to help claimants remain compliant.

Background

A recent decision by the Supreme Court of Queensland has exposed serious misconduct by the Australian Taxation Office (ATO) and has raised urgent questions about taxpayer rights, procedural fairness, and the integrity of government investigations. The case centred around a biotech entrepreneur (Ms Clarke) who, through her company Venika Biotech Pty Ltd (Venika), lodged an R&DTI claim in 2017 in relation to the development of a novel manufacturing technique for DBH (a chemical utilised to treat/manage conditions such as cancer, obesity, and diabetes). The ATO alleged the claim was fraudulent, asserting that Ms Clarke had fabricated invoices and overstated R&D expenses. This led to both a federal prosecution for tax fraud and a parallel state prosecution for alleged misappropriation of investor funds.

Findings

The Supreme Court’s judgment is a scathing indictment of the ATO’s conduct. Namely, the Supreme Court identified the following acts of misconduct:

• Unlawful use of interview powers

The ATO initially alleged that the R&D claim falsely stated that Venika had incurred $8,456,800 in expenditure and sought a refund of $3,678,708. The key issue was Venika’s inability to explain and substantiate the expenditure in respect of the drug manufacturing technique that was being developed.

As such, the ATO conducted a compulsory interview with Ms Clarke under section 353-10 of the Taxation Administration Act. The ATO told Ms Clarke that the interview was for “clarifying gaps” in the R&D claim. Taxpayers are compelled to answer questions in these types of interviews as the investigation focuses on a civil matter. Unlike a criminal case, if a taxpayer refuses to answer a question and ‘remains silent’, they can be prosecuted. Due to this, the ATO’s audit team (the team tasked to investigate civil matters) conspired with the ATO’s criminal investigation team (the team tasked to investigate criminal matters) prior to the interview to intentionally mislead Ms Clarke. Generally, the ATO must inform an individual that they are being investigated for a criminal matter so that they can exercise their rights.

Due to this, the court found that the main purpose of the interview was to unlawfully gather evidence for a criminal prosecution. It was found that the interview undermined Ms Clarke’s fundamental right to silence and deprived her of the ability to make informed forensic choices in her defence.

• Cross-contamination of evidence

The ATO’s audit and criminal investigation teams failed to maintain proper separation, resulting in the cross-contamination of evidence. The material obtained, such as the claimant’s answers to the interview as well as her consultant’s notes, was unlawfully disseminated by the audit team to the criminal investigation team, the Commonwealth Director of Public Prosecutions (CDPP), and even state police, without proper records or authorisation. Furthermore, , it is to be noted that the ATO failed to comply with its own policies and statutory secrecy provisions and did not obtain the required approvals for disclosures.

• Fabrication and withholding of evidence

The lead ATO criminal investigator, Anthony Rains (Mr Rains), was found to have fabricated and withheld evidence. Specifically, he:

• • Failed to disclose the existence of the meeting between the ATO audit and criminal investigation teams prior to the compulsory interview (which would have highlighted the unlawful nature of the interview).

  • Deliberately altered key documents, including removing exculpatory statements from an expenses spreadsheet.

  • Drafted and included false witness statements, including falsifying information received from Industry Innovation and Science Australia (IISA) regarding the eligibility of Venika’s R&D activities.

  • Provided misleading statements in affidavits to obtain search warrants and in communications with the Queensland Bar.

  • Failed to disclose exculpatory evidence to the police and prosecution, including emails and financial records showing legitimate business expenses.

Both the ATO and the Commonwealth Director of Public Prosecutions (CDPP) also repeatedly failed to make timely disclosures of critical documents, even after court orders were made.

• Oppressive prosecution and collateral purpose

The claimant was subjected to two simultaneous prosecutions (state and federal), both relying on the same unlawfully obtained evidence. It was also evident that the state fraud charge was continued for a collateral purpose to assist investors in recovering their money (which Mr Rains assisted in), rather than to serve the interests of justice. The court found that this amounted to oppression and an abuse of process.

Outcome

The Supreme Court ordered the investigation to be permanently halted, finding that the ATO’s conduct had brought the administration of justice into disrepute and fundamentally undermined the integrity of the court. The judge concluded that nothing short of this would protect the integrity of the court’s processes.

The end result is a positive outcome for the claimant after battling the ATO for over eight years. Had the investigation not been halted, it is likely that Ms Clarke would not have been afforded a fair trial due to the ATO’s false allegations and unlawfully gathered, and in some cases, manufactured evidence.

Key Takeaways

The key takeaways of the case can be summarised as:

• Right to silence: Taxpayers and claimants retain a fundamental right to silence in criminal matters. The ATO cannot use civil audit powers to compel answers for criminal investigations.

• Separation of teams: The ATO must maintain strict separation between civil and criminal investigations. Cross-contamination can taint an entire prosecution.

• Model litigant: The ATO is expected to act justly and without bias. Misleading the court, fabricating evidence, or pursuing prosecutions for collateral purposes will not be tolerated.

Conclusion

Overall, this case is a wake-up call for claimants. Whilst the outcome of the case was positive for the claimant, it highlights the importance of keeping meticulous contemporaneous records and being transparent in dealings with the ATO, as well as seeking legal advice immediately if the ATO signals a move from audit to investigation. Above all, it is also a reminder that the rule of law applies to everyone, including the ATO.

If you would like more information on the above, please reach out to your Ascentium Australia's engagement team or Victoria Campbell at victoria.campbell@incorpadvisory.au.

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