17 March 2021
The Australian Tax Office (ATO) continues to dispute claims for legal professional privilege (LPP) made by large corporate groups in the context of tax audits and investigations. Those disputes are increasingly heading to court as taxpayers seek to resist the ATO’s wide-ranging information gathering powers.
The ATO has acknowledged that taxpayers are not required to provide documents to the ATO where they can claim the benefit of LPP or the concessions relating to accountants’ papers (“the accountant’s concession”) and corporate board advice regarding tax compliance risk.
But increasingly, the ATO is disputing claims to withhold documents made in respect of large volumes of documents where there is doubt over the validity of the LPP claim.
The ATO’s ongoing Federal Court case against meat processor JBS and PwC illustrates the challenges for multidisciplinary structures seeking to make LPP claims. In that case, the ATO has queried whether lawyers were sufficiently involved in communications to support a claim for LPP.
Here, JP Wood, Brad Baker and Preeti Varadarajan of our Perth office explain some of the implications for taxpayers and their advisors arising out of the recent decision in CUB Australia Holding Pty Ltd v Commissioner of Taxation [2021] FCA 43, in which the ATO successfully defended a challenge to its information gathering powers.
Background
Since about April 2013, the Commissioner has been examining the tax affairs of the SAB Australia consolidated group, of which Carlton & United Breweries company, CUB Australia Holding Pty Ltd (CUB), was the provisional head company in Australia.
In May 2018, in connection with an audit into CUB’s tax affairs, the Commissioner issued a notice to CUB requiring the production of documents. CUB withheld many of the requested documents on the ground of LPP. It provided some details of those documents in schedules prepared by its lawyers to support a claim for LPP but did not provide other details requested by the Commissioner.
CUB contended that, consistent with its prior practice, the information provided in its schedules, which had been prepared by qualified and practising lawyers, was sufficient to allow the Commissioner to form a view in relation to the claims for LPP. It offered to give the ATO an explanation of the processes adopted to make LPP claims and otherwise maintained its claims for LPP.
The Commissioner rejected CUB’s offer, on the basis it would not put the Commissioner in a position to make an informed assessment of each LPP claim. The Commissioner stated that its main concerns with the LPP claims was the volume of documents over which LPP had been claimed (over 20,000 documents) combined with the relatively limited information provided to allow the ATO to assess the validity of each claim. The Commissioner also expressed doubt about the scope and validity of redactions made to certain documents and the descriptions of the purpose of the privileged communications provided by CUB, on the basis they did not provide the Commissioner with sufficient information to enable him to engage properly with the LPP claim.
Following further discussions between CUB’s legal representatives and the ATO, the ATO issued a notice (the Notice) for further information from CUB which the ATO said was necessary to allow the Commissioner to evaluate the legitimacy of CUB’s LPP claims, including whether each document for which LPP was claimed was brought into existence for the dominant purpose of requesting or providing independent legal advice or revealed a communication made for that purpose; and whether LPP in any of those documents had been waived. The Notice also referred to the need to assess whether an alternative dispute resolution process would be an appropriate method of resolving the disputed claims.
CUB objected to the Notice and sought judicial review of the Commissioner of Taxation's decision to require the provision of further information from CUB.
– The main issues were:
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whether the decision to give the notice was beyond the power conferred by s353-10 of Sch 1 to the Taxation Administration Act 1953 (Cth) (the TAA); and/or
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whether the decision to give the Notice was an improper exercise of the power conferred by s353-10 in that it was an exercise of a power for a purpose other than a purpose for which the power was conferred; and/or
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whether the decision to issue the Notice was an improper exercise of the power conferred by s 353-10 in that the Commissioner took an irrelevant consideration into account in exercise of the power.
CUB contended that, in issuing the Notice, the Commissioner’s purpose (or substantial purpose) was to determine the validity of CUB’s LPP claims, which CUB said was outside the power and authority conferred on the ATO by s353-10 of Schedule 1 of the TAA.
The Commissioner contended that the purpose (or substantial purpose) of issuing the Notice was to obtain information that the Commissioner considered necessary not to determine the LLP claims but to determine whether to accept or challenge them.
Judgment
Moshinsky J dismissed CUB's application. In summary:
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CUB’s primary contention, that the Commissioner had requested further information in order to determine CUB’s claims for LPP, was rejected – it was clear overall that the Commissioner was seeking information from CUB not to determine the LPP claims, but to determine whether to accept or challenge them;
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that conclusion was reinforced by the fact that the Commissioner sought particulars which would not enable him to determine the LLP claims – access to the documents themselves would likely be required in order to do that;
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if the Commissioner’s purpose had been to determine the validity of the privilege claims, the Commissioner would not have sought particulars to make an informed decision as to whether an alternative dispute resolution process would be required;
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evidence of the communications between the parties, including written correspondence and a telephone conversation between the Commissioner and CUB, supported that conclusion;
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the terms and effect of the Notice were consistent with the Commissioner seeking further particulars for that purpose; and
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the Commissioner not taking up CUB’s invitations either to review its processes in making LPP claims or to have some or all of the documents reviewed by an independent arbiter, did not lead to an inference that the Commissioner’s purpose was as alleged by CUB – those facts were equally consistent with the Commissioner’s case.
In disputing the ATO’s entitlement to further information, CUB contended that the ATO had issued the March Notice for an improper purpose and sought to establish that the purpose was improper by reference to a narrow view of the Commissioner’s information gathering powers under s353-10.
However, after reviewing the authorities relating to former s264 of the Income Tax Assessment Act 1997 (the predecessor to s353-10), Moshinsky J confirmed that the Commissioner’s powers under s353-10 could be validly invoked to make wide-ranging or “roving” enquiries (and what are sometimes referred to as “fishing” expeditions) and there is nothing in the wording of the statutory provision to indicate otherwise.
Commentary
The decision is a victory for the ATO in its campaign to challenge what it has described as illegitimate claims for LPP by multinational groups. The ATO’s ongoing Federal Court case against JBS and PwC is another example of these types of challenge. It is a recurring theme of those cases that the volume of documents over which LPP is sought – the CUB and JBS cases each involve well in excess of 10,000 documents – has provoked a concern regarding the validity of the LLP claims.
In July 2019, amidst concerns the ATO was seeking to undermine LPP in investigations, audits and assurance processes, the Law Council of Australia announced that a new protocol was being developed with the ATO, CPA Australia and Chartered Accountants Australia and New Zealand, to provide a balanced framework for making LPP claims, in order to avoid unnecessary disputes.
The working group was to focus on four key objectives:
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developing a standardised “scope of engagement” process, where a taxpayer wishes to engage an independent law form to assess potential LPP claims;
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revision of the ATO’s pro forma templates for LPP claims, with improved guidance on making claims;
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an industry endorsed process for engaging independent bodies, where appropriate, for reviewing disputed LPP claims and providing assurance; and
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improved guidance for the taxpayer community regarding the ATO’s view of the scope of LPP.
It is unclear what progress has been made towards producing that protocol. In the meantime, the ATO has denied seeking to undermine LPP and has updated the guidance and forms on its website to assist taxpayers in making LPP claims.
Despite those updates, LPP claims look likely to remain a contentious and costly area for taxpayers, who will be required to itemise claims for LPP or administrative concessions which, in some cases, may give rise to individual claims in relation to thousands of documents and take many months to resolve.
In the CUB case, the ATO’s initial notices for documents were sent in May 2018 and CUB’s lawyers gave evidence of the process followed to claim LPP in responding to those notices in December 2018 and February 2019.
In summary, that process involved document reviews first to identify documents meeting the terms of the document requests made by the ATO and then claims for LPP and the accountant’s concession. Those reviews were conducted by qualified and practising lawyers from two law firms, with some assistance for the first level review obtained from paralegals who were trained to conduct the review and were under the close supervision of qualified and practising lawyers.
The reviews resulted in lawyers preparing schedules containing details of the LPP and accountants’ concession claims provided to the Commissioner, which included (for each document over which privilege was claimed): a document identification number; a description of the nature of the document; the number of documents and pages comprising the document; the date of the privileged communication; the name or names of the organisation/s that authored the privileged communication; the name or names of the receiving organisation/s; a physical description of the document containing the privileged communication; an explanation of the subject matter of the privileged communication in accordance with one of four descriptors, indicating whether the privileged communication was legal advice from an internal or external legal advisor, a request for legal advice from an internal or external legal advisor or a forward communication of any of those privileged communications.
Although that exercise appears to have involved a significant amount of work by CUB’s lawyers over a considerable period of time, no doubt at significant cost to CUB, it did not satisfy the ATO because it did not provide the ATO with sufficient information to enable them to assess the claims for LPP. This appears to have been mainly because of:
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excessive redactions to documents which went beyond what the ATO considered necessary for the purpose of preventing the disclosure of privileged communications – they included obscuring the names of the participants in the correspondence and the subject or title of the correspondence (which the ATO said would not ordinarily be expected to disclose the substance or gist of any advice given);
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inadequate descriptions of the purpose of the relevant communications to the degree required to support a claim for privilege or to permit the Commissioner to engage with CUB regarding the claims;
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difficulties in matching up part claims for LLP with partially redacted documents; and
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the large volume of documents over which LPP claims were made.
Key takeaways
Where LLP claims are made over a high volume of documents and limited information is provided to the ATO to allow them to assess the claims for privilege, the taxpayer runs a higher risk of a dispute.
Where redactions are made in support of claims for LPP or the accountant’s concession, care needs to be taken to ensure they are no more than is necessary to prevent the disclosure of the privileged part of the communication.
The basis for any redactions needs to be properly explained and matched up with a claim for LPP.
The purpose of each document over which LPP is claimed should be properly explained in order to allow the ATO to assess the claim for LPP over that document.
Large multinational groups can expect the ATO to take a forensic approach to LPP claims and to continue to challenge claims where they are voluminous and there is doubt over their validity.
Taxpayers can expect the Australian courts to support the exercise by the ATO of wide-ranging powers of enquiry in the context of audits and investigations, in some cases well beyond the scope of enquiry that might ordinarily be expected in judicial processes.
LPP remains a fundamental right of the taxpayer and the ATO has indicated it accepts its information gathering powers are limited by LPP, as well as the administrative concessions relating to accountants’ papers and corporate board advice on tax compliance risk.
Those limitations enable the taxpayer in certain circumstances to withhold documents from the ATO. However, claims to withhold documents will not be as effective, and the taxpayer is unlikely to avoid a dispute, where the ATO is not provided with sufficient information to enable it to assess the claim.
For further information, please contact:
Bradley Baker, Associate, Clyde & Co
bradley.baker@clydeco.com
