Legal professional privilege and tax audits

Following the April 2019 budget, the ATO looks set to secure an additional $1 billion in funding to tackle tax avoidance. We have recently seen the ATO move its audit activity towards arrangements that many advisers consider to be sensible commercial tax planning rather than tax avoidance.

The ATO also now has significantly more access to information, which is only assisted by data provided by banks under the Common Reporting Standard and releases of information like the Paradise Papers and Panama Papers.

The importance of legal professional privilege

Legal professional privilege is one of the foundations of our justice system. The ‘advice’ form of legal professional privilege allows clients and lawyers to have full and frank communications so that legal advice may be provided without clients fearing that another person can demand copies of that advice if it is unfavourable or highlights risks.

This means that there is often a tension between:

1. the ATO accessing information that allows it to build a case against the targeted taxpayers
2. protecting the taxpayer’s rights where they have obtained advice that is, or should be, covered by legal professional privilege.

This tension is highlighted with Glencore’s claim before the High Court seeking orders compelling the ATO to return documents it obtained in the Paradise Papers release in relation to a restructure it carried out.

Commissioner Chris Jordan has also highlighted the tension in a speech at the Tax Institute’s National Convention in Hobart in March 2019, where he discussed advisers improperly claiming privilege to potentially conceal a contrived tax arrangement.

Is tax advice from accountants covered by privilege?

As a starting point, privilege generally only attaches to communications within the solicitor and client relationship. This means that privilege does not attach to advice that accountants give on tax issues, even where the accountant has a law degree.

The ATO has granted an ‘accountants’ concession’ where they generally do not seek access to advice documents prepared by professional accounting advisers; however, this administrative concession is not binding on the ATO and cannot be enforced against the ATO. If the audit relates to tax avoidance, the ATO will often not accept the ‘accountants’ concession’.

This means that whenever clients look for tax advice, advisers should consider whether the advice should be given by their client’s lawyers. The adviser will often need to stay involved in the matter, and it is then important to ensure that all relevant communications between the adviser, client and lawyer are protected by privilege.

What happens when privileged documents are handed over to the ATO?

Advisers also need to be careful to not inadvertently waive privilege and undo all the good work to ensure privilege existed in the first place.

Where taxpayers receive advice that is privileged, they often want to disclose it to friendly parties – whether that be their accountant, insurers, or other business advisers in a project team. This will generally result in a waiver of privilege.

How do I manage these issues?

For advisers who provide advice on transactions, you should consider whether your client should also engage lawyers to advise on the transaction, particularly where you are providing tax advice.

Where you are responding to requests for information from the Commissioner in audits or objections, examine each document individually and decide whether privilege attaches to that communication.

In these situations, consider whether disclosing the advice to a third party will amount to waiving privilege. If it doesn’t, then it is always good practice to explain the basis for providing the privileged material, state that it is confidential and advise that it should not to be disclosed by the party receiving it.

Please contact a team member if you would like to discuss.