What happens when the Commissioner of Taxation disputes legal professional privilege claims

There have been a number of developments relating to legal professional privilege (LPP) over the last two weeks, including:

• the decision of the Full Federal Court in CUB Australia Holding Pty Ltd v Commissioner of Taxation [2021] FCAFC 171 (21 September 2021)
• the widely reported hearing in the Federal Court of JBS v Commissioner of Taxation
• the release by the ATO of a draft protocol on the approach to identifying and resolving taxpayer claims for LPP.

This article deals with the CUB decision.

The decision

The Full Federal Court decision in the CUB case, handed down on 21 September 2021, is an important reminder of the difficulties taxpayers encounter when responding to information notices and the degree of vigour and expertise required to successfully keep confidential communications that attract LPP or documents which fall within the Commissioner’s accountants concession. 

The challenges this case considers have been brewing for some years.

A claim that LPP or the accounting concession applies to a particular communication is liable to be challenged by the Commissioner, particularly when:

• the claim was made without due regard to the legal principles applicable to establishing that LPP applies to the communication
• the claim involves a large number of documents (there were about 20,000 documents involved in the CUB case)
• the Commissioner apprehends the communication was between the client and a non-lawyer (for example, a tax practice in an accounting firm)
• the communication has travelled outside of the privileged circle (waiver)
• the Commissioner believes the taxpayer (or its advisors) are trying to throw a privileged cloak over a non-privileged communication.

CUB sought to have a formal notice issued by the Commissioner seeking detailed information about LPP and accounting concession claims made by CUB set aside on the basis the notice was issued for an improper purpose. Although CUB was unsuccessful in having the notice set aside, the case highlighted an important legal consideration in privilege disputes with the Commissioner, one which was accepted by CUB, the Commissioner and endorsed by the Full Court, namely, the determination of whether a communication is privileged is a matter for the Court, not the Commissioner.

If one of the Commissioner’s purposes in issuing the notice was to determine whether the communications were privileged, the notice would have been set aside.

Why is this case important?

The Commissioner is authorised to issue a notice under section 353-10 of the Taxation Administration Act 1953 “for the purpose of the administration or operation of a taxation law.” The Federal Court in Re Citibank Limited v Commissioner of Taxation [1988] FCA 196 (16 June 1988) held that the Commissioner’s power to obtain information and evidence does not abrogate LPP.

As the power to obtain information and evidence does not abrogate LPP, it follows that this power does not include the power to determine whether privilege actually applies, as the only way to definitively make that determination is to look at the communication.

The Full Court accepted the Commissioner could ask questions to enable him to determine whether or not to challenge the claims for LPP.

Practical considerations for taxpayers

• When responding to a formal notice, it is critical that a process is established to identify all documents or classes of documents that can potentially be called for in the notice.
• Where it is likely the number of documents that could potentially fall within a formal notice is very large, the use of advanced technology to conduct the review and record the analysis undertaken is essential.
• Each document (communication) must be reviewed to:
  • determine whether or not it falls within the notice
  • if the document is within the notice, is it either a privileged communication (LPP) or a document that falls within the accounting concession.
• For each document that falls within the notice, the following minimum information should be recorded internally (but not necessarily communicated to the Commissioner):
  • date of communication
  • name, title and organisation of the author and recipient
  • what category in the formal notice does the document fall under
  • a brief summary of the substance of the communication
  • whether the communication is subject to LPP or the accounting concession and sufficient information to establish the claim. For example, John Smith, partner Law Firm, letter of advice to Joe Bloe constructions, etc.
• The process for determining whether LPP or the accounting concession applies should be conducted or reviewed by a qualified lawyer who has a robust understanding of how the law on privilege applies and the scope and limitations involved in making claims under the Commissioner’s accounting guidelines.
• Particular care should be taken to ensure the answer to any question asked by the Commissioner does not amount to a waiver of LPP.
• Whether LPP or the accounting concession applies is to be determined on a document-by-document basis. There is no scope to review “a representative sample” and apply the outcome of that review to all documents over which LPP claims have been made. 

We are aware that the ATO has agreed to appoint independent barristers to review representative samples of LPP claims as a way of verifying the robustness of the review process applied by a taxpayer. That process may be an appropriate way to resolve an otherwise intractable LPP dispute with the Commissioner. In addition, we note the ATO draft protocol on LPP includes a provision for alternative dispute resolution.

If you have any questions regarding privileged documents or other tax disputes, please speak to us or contact us here.

Author: Stephen Jones

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Stephen Jones

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