“ATO targets legal privilege”, cries the front page of today’s Australian Financial Review, neatly bringing together the second and the third of life’s certainties (the first certainty being one with which we try not to concern ourselves unduly here at Worth Knowing).
The article quotes ATO Commissioner Chris Jordan as having said in March that “[the ATO’s] understanding of what advice is subject to legal professional privilege significantly differs from the position taken by some taxpayers and their advisers”, and, “we expect that these different views as to the scope of legal professional privilege will be tested shortly”. That expectation may shortly become reality, with reports that mining company Glencore has commenced proceedings in the High Court of Australia seeking to prevent the ATO from using documents obtained as part of the “Paradise Papers” leak (on the basis of a claim by Glencore that the documents are subject to legal professional privilege).
A number of issues need to be considered in relation to the creation, and maintenance, of legal professional privilege in relation to taxation advice. The first is that legal privilege relates to communications from lawyers, so that if the advice is not given by a lawyer (even where it concerns legal matters) it is all but impossible for the advice to be privileged.
The difficulties that this creates were identified in 2007 by the Australian Law Reform Commission, in its report, “Privilege in Perspective: Client Legal Privilege in Federal Investigations“. That Report recommended the creation of a special privilege for “tax advice documents”, being “confidential documents created by independent professional accounting advisors for the dominant purpose of providing taxpayers with advice about the operation and effect of tax laws”. However, no legislative response to the Report ever eventuated.
The second issue is that care is needed when the advice is provided by in-house lawyers, because to attract privilege, it will be necessary for an in-house lawyer to show both that they are sufficiently independent of their client/employer, and also to show that in giving the advice, they are acting as a lawyer and not as the client’s “man of business” (to use an expression coined by the House of Lords in 2004). There are a number of factors which are relevant to establishing independence, but they were helpfully summarised by former Federal Court judge Peter Graham as follows:
“If the responsibility of the in-house counsel is to say, without fear or favour, “no” and be respected for it, then the in-house counsel has sufficient independence to render documents to which privilege would attach”.
The third issue is that privilege (if it has been successfully created) will be lost in relation to advice given in furtherance of “the commission of a fraud” or the commission of criminal or civil penalty offences. “Fraud” has been defined widely (some synonyms include, “dishonesty”, “lack of probity”, and “trickery and sham contrivances”) and privilege will be lost if the client has a fraudulent purpose even if the lawyer was unaware of that purpose. The cases make it clear that although legal privilege is a substantive right which is not “lightly to be overthrown”, the law is also assiduous to ensure that privilege is not used as a cloak for fraud.
The importance of the ability to obtain privileged legal advice as a substantive right (and even, at least according to former High Court Justice Michael Kirby, as a human right) has been frequently emphasised. However, the importance of the right does not mean that it is easy to either create or maintain. If ATO Commissioner Chris Jordan is correct in saying that there is a significant divergence of views about the effect of legal professional privilege in relation to tax advice, then it cannot be said that the High Court decision will be able to be predicted with the certainty of death or taxes. However, what is certain is that taxpayers and their advisers can act now to ensure that their understanding of legal professional privilege, and its consequences, is sound.
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