09 May 2013

Accountants, lawyers and the privileged class: R v Special Commissioner of Income Tax

by Philip Bisset, Antony Barrier

It's likely that only those communications by and to lawyers acting in their professional capacity will be truly confidential and unavailable to the Australian Taxation Commissioner.

I enjoy my rights, but I revel in my privileges. – Mason Cooley

Legal professional privilege is a fundamental right attaching to qualifying communications between lawyers and their clients.

The ATO has conceded there are good grounds for extending the privilege to communications between accountants/tax agents and their clients.

A recent UK case has confirmed that legal professional privilege attaches to lawyer-client communications only, even in the context of advice on the application of the law relating to tax.

Background – what does legal professional privilege cover?

In its basic form, legal professional privilege (LPP) applies to communications (whether oral or written) brought into existence for the dominant purpose of:

  • obtaining or giving legal advice ("advice privilege"); or
  • preparing for existing or reasonably anticipated litigation ("litigation privilege").

LPP can extend to copies made of original documents and can include notes made of privileged communications, made by either the client or lawyer.

The privilege is considered to be a right of the client (rather than the lawyer) and has its roots in the notion that fairness and the public interest require that a person be able to make full and frank disclosure to his or her legal advisor without the risk of prejudice and damage by subsequent compulsory admission.

LPP is considered to be fundamental to the proper administration of justice and the "oldest of the privileges for confidential information known to the Common Law" (Berd v Lovelace (1577) 21 Eng. Rep. 33).

What powers does the Commissioner have under the Act?

The ATO has broad legislative powers enabling it to access buildings and documents in pursuit of its legal aims. Sections 263 and 264 of the Income Tax Assessment Act 1936 (ITAA36) provide that:

  • an authorised officer must be given full and free access to all buildings and may make copies of (but not seize) all documents; and
  • the Commissioner may, by notice in writing, require any person to furnish the ATO with such information as it may require and/or attend and give evidence before an authorised officer under oath.

Section 263(1) provides that the power to access buildings or documents must be "for the purpose of this Act", which is defined in section 6(1) of the ITAA36 to mean the two primary taxing Acts plus Part IVC and Schedule 1 of the Taxation Administration Act 1953, which contains the powers dealing with objections, reviews and appeals, and collection and recovery of income tax respectively.

Can LPP be used to resist disclosure under section 263 & 264?

Since 1983 and the High Court decision of Baker v Campbell (1983) 153 CLR 52, communications and documents properly the subject of LPP have not been available for inspection by the Commissioner under sections 263 and 264.

Further, in exercising its powers, the ATO must take care to ensure that the opportunity to claim LPP is not obstructed. The Federal Court has warned that this meant only in exceptional circumstances would an entry onto a taxpayer's premises without warning be justified (FCT v Citibank (1989) 20 ATR 292).

Who may make communications covered by LPP?

Under the common law, to qualify as being subject to LPP the communication (ie. written, or written notes of an oral communication) must be made in the context of the client-lawyer relationship and advice given for existing or anticipated litigation or to provide confidential advice.

Subject to a concession by the Commissioner (the so-called "accountant's exemption", mentioned below) LPP does not extend to communications between accountants and those who they advise.

In the 1980s it became apparent that the ability of lawyers to claim LPP gave them a competitive advantage over the accounting profession when it came to the provision of tax advice. Following pressure from the accounting profession, the ATO issued the Access and Information Gathering Manual guidelines recognising that "taxpayers should be able to consult with their professional accounting advisors on a confidential basis" and creating self-imposed limits on ATO access to accountant's papers.

There are, however, boundaries on the Guidelines which do not exist in relation to the common law right of LPP. The Federal Court has previously said that a taxpayer had no legal recourse against the ATO's decision to "lift the concession" and seek papers prepared by its accountants (White Industries Aust Ltd v Commissioner of Taxation (2007) 66 ATR 306). Accordingly, the ATO could effectively ignore the Guidelines when it encountered what it considered were exceptional circumstances.

If common law LPP extended to advice provided by accountants, then this would not be a concern. This precise question recently needed to be decided by the UK Supreme Court in the case of R (on the application of Prudential plc and another) v Special Commissioner of Income Tax and another [2013] UKSC 1.

R v Special Commissioner

The Court had to decide whether certain documents by which the taxpayer (Prudential) had sought or received legal advice from a firm of accountants (PricewaterhouseCoopers) were protected by LPP. It was acknowledged that the advice was not provided by lawyers, but Prudential argued that LPP should nevertheless extend to legal advice provided by other qualified professionals, such as accountants in this instance.

By a majority of 5 to 2 the Court dismissed Prudential's appeal, stating that LPP should extend only to advice provided by lawyers in their professional capacity. The key reasons cited by the Court were that:

  • extending LPP would create uncertainty;
  • the question of whether LPP should be extended to non-lawyers is one that should be left to Parliament rather than the courts; and
  • certain legislation operated on the assumption that LPP only extended to legal advice provided by lawyers, meaning it would be inappropriate to widen it by judicial pronouncement.

The case was of great interest in the UK to the legal and accounting professions alike.

What does this mean for the future of LPP in Australia?

It is interesting to note, in light of the UK Supreme Court's comments on the extension of LPP being a question best left to the Parliament, that the Australian Law Reform Commission has recommended that a statutory privilege be created for accountants. However, as at the date of this article, amending legislation has yet to be introduced.

Accordingly, LPP remains limited to client-lawyer communications, even when provided by a registered "tax agent" who is not a lawyer. The "accountant's exemption" offers some protection to clients of non-legally qualified advisors, though as was demonstrated in White Industries, the ATO is not averse to lifting the concession when it suits.

In light of the UK Supreme Court's decision in R v Special Commissioner, clients and advisers should be aware that absent statutory amendment, the position in Australia is likely to mirror that in the UK, with only those communications by and to lawyers acting in their professional capacity being truly confidential and unavailable to the Commissioner.


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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.