On what grounds can a machine make a legally-binding decision?

This was a key question asked in a recent tax case that could have major implications for millions of Australian taxpayers about whether any computer-generated correspondence from the Australian Taxation Office (ATO) can be relied on.

The case, which is now under consideration for appeal in the High Court, follows a recent full Federal Court ruling that a taxpayer was liable for interest charges on a tax debt, even though he received a letter from the deputy commissioner suggesting that he was not.

The letter was automatically generated by a computer and, while stating that it was from the deputy commissioner, the full Federal Court decision in Joe Pintarich v Deputy Commissioner of Taxation found machine-generated correspondence could not be relied on.

The letter, the court found, did indicate that the taxpayer interest charge was inclusive of the debt owed rather than separate to it, but it could not be relied on since there was no related "mental" decision involved in it being issued.

Tax lawyers said the case raised serious questions about accountability in the technology age, and whether taxpayers could now rely on ATO machine-generated correspondence.

Selwyn Black, a partner with Carroll & O'Dea lawyers, said the decision basically means the ATO is not held to a higher standard.

"The courts say, you cannot rely on what they say," he argued.

"The ATO can make mistakes and reverse them, and for the other side, bad luck."

An ATO spokeswoman told ABC News the agency could not comment specifically on matters before the court.

"When corresponding with taxpayers, we aim to provide accurate, consistent and clear information to help them to understand their rights and entitlements and meet their obligations," she said.

The facts of the case

Joe Pintarich, the taxpayer involved in the case, sought to enter a payment arrangement with the ATO as he was facing a tax debt of $1.17 million with a general interest charge of about $335,000 applied.

According to his court evidence, the ATO officer told Mr Pintarich in early December, "if you make sure you can pay it by February 2015 then it will all be over and done with".

After that conversation, Mr Pintarich, on December 8, 2014, got a letter from the ATO headed "Payment arrangement for your Income Tax Account debt". It read:

"Thank you for your recent promise to pay your outstanding account. We agree to accept a lump sum payment of $839,115.43 on or by 30 January 2015. "This payout figure is inclusive of an estimated general interest charge (GIC) amount calculated to 30 January 2015. Amounts of GIC are tax deductable in the year in which they are incurred. "If you have any difficulties in making this payment by the agreed date, please contact us immediately. "Failure to make this payment by the agreed date may result in the commencement of legal action without further notice."

Mr Pintarich, on the back of that letter, had borrowed money from the bank.

He also paid the outstanding tax debt (minus the general interest charge) by the due date.

The court heard that the deputy commissioner's name was automatically applied on the letter. Although the letter had a signature block, which recorded the name of the first deputy commissioner, it was unsigned.

The ATO officer — named in court as Ian Celantano — was authorised to exercise certain of the deputy commissioner's powers, including remitting (reducing) the general interest charge.

Mr Celantano told the court he had not made any decision to remit the general interest charge owing by Mr Pintarich.

He said that he had caused the letter to issue but was unable to explain how the sentence in the second extracted paragraph had come to be included.

He said he had "keyed in" certain information into a computer-based "template bulk issue letter". This process had generated the document. He had not read the letter before it was despatched, he said.

Mr Celantano also had a slightly different recollection of the verbal discussions that took place with Mr Pintarich before the letter was issued.

The ATO official believed the verbal agreement with Mt Pintarich was that the primary tax debt was to be paid in full "whilst we consider the remission of general interest charge".

Mr Celantano's recollection of the discussions were supported by contemporaneous notes in the ATO system.

On May 13, 2016, the ATO wrote to the taxpayer advising that only a partial remission (reduction) of the general interest charge owing would be granted, and that the letter dated December 8, 2014 was issued in error.

The decision, and the dissenter

The taxpayer applied to the Federal Court for judicial review, but the full Federal Court majority (Moschinsky and Derrington JJ) denied the taxpayer's appeal.

It found that the automated letter to remit the general interest charge was not a "decision" at all because there was no mental process accompanying it.

The court acknowledged the finding may be perceived as unfair if the deputy commissioner could go back on what was said in the ATO letter but the majority held that, because the ATO officer did not undertake the necessary mental process in reaching the decision, it did not constitute a decision.

However, there was also a dissenting judgement delivered by Justice Kerr, who said the majority's decision "would turn on its head fundamental principles of administrative law" and that "it would be productive of administrative uncertainty and confusion if the deputy commissioner were entitled to rely on a distinction between his officers' subjective mental processes and the objective manifestation of those processes where correspondence has been sent in his name which, on its face, appears to the world to be a decision".

The majority judges accepted that there may be some perceived unfairness in the circumstances of this case but said that this type of situation is unlikely to arise very often.

Justice Kerr disagreed with the majority that this was likely a one-off, noting, "the growing interdependency of automated and human decision making".

"There is reason, in my view, to be concerned with giving license to such unfairness."

Lawyers warn taxpayer confidence could be undermined

A number of lawyers and tax experts that ABC News spoke to have also expressed concern that the case could create further uncertainty for taxpayers and give rise to more disputes.

The case comes as the ATO, like other Government agencies, is on a major digital transformation push. It wants more taxpayers engaging online and is increasingly using data analytics and automated correspondence to deal with Australians.

Given the recent years' ATO internet technology outages that have plagued the agency and its public reputation, lawyers argue it is no time for taxpayers to be losing confidence in the system.

The Tax Institute's senior tax counsel, Bob Deutsch, said taxpayers needed to be very careful about communications received from the ATO regarding settlement of outstanding debts.

"The case in my view leaves taxpayers, particularly Mr Pintarich, in an understandably perplexed and confused state when they receive correspondence from the ATO," he said.

"For the ATO to first state that the payout figure is inclusive of an estimated general interest charge amount, only to advise later that the letter was issued in error is a highly unsatisfactory situation, especially as we move more and more into an automated world where taxpayers should have a quite legitimate expectation that plain words emanating from the ATO — even if not falling within the technical requirements of the law — can be relied upon with certainty."

Keith Swan, a partner with KPMG's tax dispute resolution and controversy practice said "there's a risk that circumstances similar to this case will arise again whereby an automated letter is issued, and the taxpayer will want to rely on it, and the ATO can refer to this case as precedent".

"Taxpayers want to know that they can rely on the wording of the correspondence that's issued to them by the ATO, especially in circumstances where the ATO is relying more and more on automated processes."

Sam Campbell, an associate in business law at Sladen Legal, said it could set a dangerous precedent for taxpayers.

"This decision opens the door to the [Tax] Commissioner arguing in other matters there may be a failure in the mental process in decision making involving automated correspondence," he said.

But Mr Black suggested that, as the ATO continues its digital transformation journey, it could consider introducing certification by way of some kind of stamp or symbol offering taxpayers greater certainty that its correspondence can be relied on.

"Otherwise, how do people have confidence in the system?" he said.