Legal professional privilege (LPP) remains a hot issue for the Australian Taxation Office (ATO). Since 2018 it's been publicising its concerns that some taxpayers and advisers may be abusing LPP claims, and that it is being denied access to information it is lawfully entitled to.
Just in the last month there have been several interesting developments, including:
- a five-day hearing in the Federal Court of Australia in proceedings brought by the ATO against PricewaterhouseCoopers (PwC) about its LPP claims over advice it provided to a subsidiary in a global meat processing group, JBS Australia;
- a Full Federal Court judgment on the information Carlton & United Breweries (CUB) must provide for the ATO to assess whether to challenge its LPP claims; and
- the release of the ATO's LPP Protocol outlining how it would like LPP claims to be made by those responding to statutory information gathering Notices issued by the ATO pursuant to section 353-10 of Schedule 1 to the Taxation Administration Act 1953.
The issues in both these cases are not unusual; the proposed Protocol is an attempt to give some certainty to LPP claims generally. Below we'll examine what the cases mean for future claims of LPP, how they integrate with the proposed Protocol, and why (and how) taxpayers will still need to be careful with any LPP claims they make.
Making a claim of legal professional privilege: the PwC case
In early September 2021, Justice Moshinsky of the Federal Court heard the dispute between the ATO, PwC and JBS Australia regarding whether documents over which PwC's client (JBS) had claimed LPP were required to be provided to the ATO (Commissioner of Taxation v PricewaterhouseCoopers & JBS (VID364/2020)).
The background to the dispute is that:
- JBS is under ATO audit in relation to transactions upon which PwC had advised JBS.
- PwC is a multi-disciplinary partnership (MDP), meaning it has both lawyers and non-lawyers as partners. JBS had engaged PwC to provide it with legal services.
- The ATO issued a Notice to PwC requiring it to provide certain documents. PwC declined to provide approximately 15,000 documents to the ATO on the basis that they were each the subject of claims of LPP by JBS.
The trial lasted for five days, demonstrating the number and complexity of issues involved and the extent of evidence required to be adduced to allow the court to consider the issues. Three barristers were appointed amici curiae (friends of the court) to assist the court by providing independent submissions on the relevant legal principles. Some of the issues ventilated in argument during the hearing included:
- the significance of the involvement of non-lawyers in engagements for legal services, particularly in MDPs;
- how analogous the involvement of non-lawyers in a MDP context is to other scenarios which have previously been considered, and judicially determined, in an LPP context (e.g. expert witnesses, graduate lawyers, foreign lawyers);
- the relevance of clients' understandings and expectations about different aspects of these arrangements (eg. a client might not ordinarily know precisely which staff members had been involved in drafting a particular piece of advice);
- the impact on LPP claims of the contractual arrangements between an MDP and its client which govern the legal engagement, including the non-lawyers being appointed as agents of the client for certain purposes; and
- which party bears the onus of proof in LPP disputes, taking into account that the proceedings had been initiated by the ATO.
Only 100 sample documents were considered as part of the trial, meaning that there may well be further dispute between the parties about the application of any principles to the balance of the documents. It is also likely that the unsuccessful party or parties will appeal Justice Moshinsky's first instance decision, once handed down.
More broadly, the outcome of the case is very likely to inform the approach going forward by the ATO and taxpayers or third party recipients of Notices to claims of LPP.
How much information the ATO can seek about documents when there's a claim of legal professional privilege
On 21 September 2021, the Full Federal Court handed down judgment in favour of the ATO in CUB Australia Holding Pty Ltd v Commissioner of Taxation [2021] FCAFC 171.
The context for the dispute is that the ATO, in conducting an audit of CUB:
- issued a Notice to require CUB to provide certain documents. CUB had responded to the ATO in part, but not to the degree which the ATO believed it ought to have. CUB claimed that over 1,400 documents were subject to LPP;
- engaged in correspondence with CUB for some time about the basis for CUB's LPP claims. The ATO then issued a further Notice requiring provision of additional information by CUB about each document over which LPP had been claimed (eg. the document title or subject line, the author's name, and to whom the communication had been sent). CUB had responded in a more limited manner than requested; and
- CUB then challenged the validity of the Notice on the basis that it was issued for an improper purpose.
The ATO's statutory information gathering power in section 353-10 of Schedule 1 to the Taxation Administration Act 1953 requires a taxpayer to "give the Commissioner any information that the Commissioner requires for the purpose of the administration or operation of a taxation law". CUB argued the ATO was acting beyond the scope of section 353-10 because it sought the additional information so it could determine the validity of the LPP claims, based on ATO comments in communications.
The Court held that the Notice was valid, with the ATO being able to seek information to allow it to properly consider the validity of LPP claims and if it will dispute any of them. CUB's contention that the ATO was seeking the information to determine the validity of LPP claims for itself was rejected; that role would be performed by a court if the ATO sought to challenge the claims.
One of the grounds of application in the original proceedings concerned whether the titles of the documents are themselves subject to LPP; this is yet to be heard by the Court.
The ATO Protocol on how it will deal with claims of legal professional privilege
During September 2021, the ATO released its draft Protocol for public consultation, setting out what it regards as best practice for identifying communications subject to LPP and making LPP claims in response to a Notice from the ATO. The Protocol is open for feedback until 31 October 2021.
The Protocol is a detailed document which will be highly relevant to taxpayers which are under scrutiny from the ATO and at risk or in receipt of a Notice requiring the production of information. It's akin to a Practical Compliance Guideline, serving as an administrative signal to taxpayers of the circumstances in which the ATO will apply greater resources (in this instance, regarding claims for LPP).
It is important to note that the Protocol:
- is an expression of the ATO's views only: it does not have force of law;
- ·neither professes to be nor is a summary of the law of LPP;
- is only a guide as to what the ATO regards as best practice processes for the making of LPP claims;
- indicates that the ATO will consider much more closely LPP claims made by MDPs and/or in respect of legal engagements that also involve non-legal partners and staff;
- is voluntary for taxpayers in terms of compliance; and
- even if followed, may still result in the ATO challenging LPP claims.
Having said this, there will be consequences for taxpayers that choose not to comply with the ATO's Protocol in making LPP claims, including more intensive ATO scrutiny of, and possible challenges to, LPP claims. Both possibilities are costly and time consuming.
The key issues to keep an eye on going forward in the further development and implementation of the Protocol will likely include:
- the extent of the document description sought by the ATO, with attendant issues regarding what the ATO is entitled to under law (as opposed to Protocol) and LPP waiver risk;
- the use of technology both in the identification of potentially privileged material and the preparation of LPP claims;
- the reasonableness of the ATO's Protocol requirement that information regarding each LPP claim be provided at the due date of the Notice (along with the non-privileged information falling within the ambit of the Notice); and
- the ATO's willingness to accept the information requested under the Protocol being provided on a grouped basis, rather than for every individual communication, particularly when a broadly drafted Notice may capture hundreds or thousands of documents.
There's no doubt more to come with the Protocol, both during the current public consultation period, in its initial application once finalised, and then judicial guidance when the inevitable disputes begin, which should be relatively soon after the Protocol's implementation.
What's next for legal professional claims in tax disputes
The PwC and CUB cases demonstrate how frustrated the ATO can become by an inability to access documents to which he believes he should be entitled, or in relation to which he cannot form a proper opinion on his entitlement. Both cases concern what appear to be extensive audits by the ATO.
Given the status of the PwC hearing (judgment reserved) and the further issue to be determined in CUB, the ATO's timing in releasing the Protocol now is noteworthy, and demonstrates how important the ATO sees the issue to be. The Protocol will presumably need to be revisited once the further judicial guidance arrives relatively shortly.
Although these two cases may assist in clarifying some of the relevant principles, court decisions on such matters very rarely provide a code for deciding all future disputes on a topic. LPP applies to individual communications, so a detailed consideration of the relevant facts will always be required. This will often be contentious.
Apart from the legal issues, the cases show regulators' practical difficulties in dealing with LPP claims. Litigation over access to documents can be expensive and protracted. The initial Notice issued to CUB in May 2018, and the Full Federal Court decision in September 2021 only confirms that the ATO is entitled to information about the documents, not necessarily the documents themselves. Going forward, however, the CUB decision may serve to reduce the timeframe because it confirms that the ATO can use its statutory powers to obtain information about documents the subject of LPP claims.
As with all interactions with the ATO, taxpayers and third parties will need to carefully assess their specific facts and circumstances when making LPP claims. Neither the two cases mentioned above, nor the Protocol, change this. Often these disputes can be managed without recourse to the Courts. The ATO and taxpayers have, on occasion, agreed to appoint a third party (such as an independent, jointly appointed barrister) to act as mediator or arbiter in order to facilitate resolution of LPP disputes. Practical and effective resolution of LPP claim issues is often going to be preferable to litigation. Litigation, however, will always have its place, particularly in an environment in which the appetite of regulators for information is only ever increasing, and critical issues underpinning some LPP claims remain unresolved.
There are likely to be a few more eventful months to come in the ATO LPP landscape. We have assisted many clients to successfully navigate responses to Notices including the objective assessment and making of LPP claims. Contact us if you need to manage these themes while the current state of flux persists, and beyond.