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Focus: Tax – February 2008

Proposed changes to protection from production of tax advice to the ATO

In brief: The Australian Law Reform Commission has recommended enshrining in legislation protections against the Australian Tax Office accessing tax advice, and changing the scope of the protection afforded to tax advice provided by non-lawyers. Partner Malcolm Stephens (view CV), Senior Associate Chris Peadon and Lawyer Pouyan Afshar of our Tax Dispute Group report.

How does it affect you?

  • Corporate taxpayers are required to comply with a voluminous and complex array of legislation, rulings and guidelines concerning their tax obligations.
  • Enabling taxpayers to seek tax advice, without risk of disclosure to the ATO, encourages taxpayers to be full and frank with their advisers, which is more likely to result in taxpayers obtaining advice that enables them to comply with their obligations.
  • Taxpayers should take care to understand the different protections from production to the ATO available when seeking tax advice from (a) lawyers and (b) other professionals, and ensure they have appropriate policies in place to minimise the risk of those protections being lost inadvertently.

Introduction

In AAR Focus: Commercial Litigation – October 2007, we reported on the release of the Australian Law Reform Commission's (the ALRC) discussion paper outlining a range of proposals concerning whether Commonwealth bodies, including the Australian Taxation Office (the ATO), should have the power to access legal and tax advice. On 13 February 2008, the ALRC published its report. Relevantly for corporate taxpayers, the ALRC recommended that:

  • Client legal privilege (privilege) be retained in its current form, and not be extended to other professionals' advice.
  • A separate narrower 'tax advice privilege' be created to protect 'tax advice documents' provided by a registered, independent tax adviser (ie not a lawyer).
ATO's current information-gathering powers

Parliament has conferred broad powers on the ATO to compel persons to produce documents and answer questions in interviews for the purpose of the ATO administering Commonwealth tax laws. Currently privilege is recognised as a valid basis for not providing information to the ATO. The ATO also has a policy of not seeking access to certain other documents, including, relevantly, documents prepared by external accounting advisers providing tax advice, although the ATO will seek access to such documents in 'exceptional circumstances'. The scope of these protections and the ALRC's recommended changes are discussed below.

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Privilege

Privilege is a fundamental common law right. It attaches to confidential communications between a lawyer and a client made for the dominant purpose of:

  • providing legal services in relation to court proceedings; or
  • providing legal advice.

The privilege may, in some cases, extend to communications with third parties.

As privilege attaches to a communication (and not a particular document), reproductions or summaries of the communication (eg for board papers) will also be privileged, subject to the circumstances in which they are created.

Privilege does not attach to communications made in furtherance of a fraud or improper purpose.

Since the decision of the Full Federal Court in FCT v Citibank1, it has been settled law that the ATO cannot compel a person to disclose privileged information (eg requests for, and the provision of, tax advice by a legal adviser).

The ALRC has recommended that this broad protection be enshrined in legislation. Whether this will occur is, of course, a matter for the legislature. Nevertheless, as the law presently stands, the ATO is not entitled to access privileged information.

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The accountants' concession

Currently, it is ATO policy not to seek access to certain other documents, including, relevantly, documents prepared by an independent tax adviser (other than a legal practitioner) solely for the purpose of providing tax advice. This is commonly known as the 'accountants' concession'.

The scope of the concession is narrower than the scope of the protection afforded by privilege. First, the concession only protects a document recording tax advice, rather than all communications relating to the giving of the advice. Accordingly, summarising or reproducing the advice in another document (eg board papers) may mean that the accountants' concession will not apply to the advice in the new document. Second, ATO policy provides that it will seek access to such documents in 'exceptional circumstances'. 'Exceptional circumstances' is an ill-defined concept, and a decision by the ATO to seek access to such documents on this basis is difficult to challenge successfully. There is no such exception for privilege.

The ALRC recommends that legislation be enacted effecting the following changes to this protection:

  • The protection apply to documents prepared by a registered tax agent2 for the 'dominant' (and not 'sole') purpose of providing confidential advice about the operation and effect of tax laws. It is not to apply to advice created in relation to the commission of a fraud or offence, or where the adviser knew or ought to have known that the document was prepared in furtherance of a deliberate abuse of power.
  • The 'exceptional circumstances' exemption be abolished.
  • The protection afforded to each document not extend to 'tax contextual information' (eg facts or assumptions on which the advice is based). This means that, as occurs under the New Zealand model, the tax advice document must be produced, and only those sections recording actual tax advice may be masked. That is, the ATO will be entitled to see all the facts/assumptions set out in the tax advice document on which the advice is based, and any advice that does not concern the operation or effect of tax laws.

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Resolution of claims for protection

The ALRC recommends that a procedure be enshrined in legislation for the resolution of disputes between investigatory bodies, including the ATO, and persons concerning claims for privilege or other protections. Broadly, the ALRC recommends a process that involves:

  • a claimant providing particulars of any claim on request;
  • the claimant verifying those particulars on oath or affirmation on request;
  • a lawyer certifying the claim;
  • the ATO in its discretion giving the claimant an opportunity to seek an independent review of the claim; and
  • the claimant having an opportunity to prove the claim in court.

Implementation of these recommendations should hopefully lead to a more efficient mechanism for dealing with disputed claims.

Observations

It is, of course, a matter for the legislature as to whether it will adopt the ALRC's recommendations. In the interim, corporate taxpayers should be aware of the scope and nature of the protections presently available when seeking tax advice. As discussed above, the scope and nature of those protections differ depending on whether the advice is sought from (a) lawyers or (b) other professionals. Taxpayers should put in place policies for communicating with tax advisers and disseminating advice within an organisation for the purpose of minimising the risk that any protections from production are lost inadvertently.

Footnotes
  1. (1989) 20 FCR 403.
  2. See section 251A of the Income Tax Assessment Act 1936.

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