On 22 June 2022, the Australian Taxation Office (ATO) published its finalised Protocol for claiming legal professional privilege (the Protocol). The Protocol has been developed to assist taxpayers in making claims for legal professional privilege (LPP) in response to requests for information made by the ATO under its information gathering powers. The genesis for the Protocol was concerns the ATO had since about 2018 that some claims for LPP were made inappropriately or blanket in nature, and made without proper consideration.
The intention of the ATO by publishing the Protocol is to set out its recommended approach, which, in the ATO’s view, will best assist the ATO in deciding whether to accept, review or challenge a LPP claim. The concept of “review” was inserted into the Protocol following consultation. In our view, it is unclear when (or indeed how) the Commissioner of Taxation (Commissioner) would “review” a claim for LPP – he either accepts it or challenges it based on the information provided by the taxpayer.
The Protocol is not intended to provide an analysis of the law of LPP, or to replace the need for taxpayers to obtain independent advice about their claims. While it is voluntary to follow the approach set out in the Protocol, it can be expected that a failure to follow the Protocol will likely lead to increased scrutiny of LPP claims, including the potential for the ATO issue a formal notice to seek particulars in relation to LPP claims and quite possibly Court action to challenge the basis for the claim. The ATO’s appetite for challenging claims of LPP is demonstrated by cases such as Commissioner of Taxation v PricewaterhouseCoopers [2022] FCA 278 (PwC),[1] however, given the outcome of this decision and the cost involved in running court cases, we query whether the Commissioner may pursue less formal alternative dispute resolution processes to attempt to resolve LPP disputes with taxpayers in future.
The notice and access powers the ATO can use to gather documents are limited where those documents are protected by LPP or where the ATO is willing to acknowledge its administrative concessions regarding professional accounting advisor papers and corporate board advice.
The Protocol has been developed to assist taxpayers and their advisors respond to formal requests for information and documents. Formal notice and access powers are used by the ATO to assist it in assessing and managing the risk to the revenue and to enhance its understanding of litigation risk. Other scenarios include cases where there are high risk or behavioural issues. In addition, cases involving international issues and complex structures may also see an increased use of formal access powers.
Whilst the Protocol is stated to apply to formal requests for information, taxpayers should expect that the Commissioner will require a similar level of detail when making LPP claims in respect of any informal requests for information by the Commissioner.
Taxpayers should expect that whenever they make LPP claims, the ATO will now expect them to identify whether and to what extent they have applied the Protocol. If taxpayers have not applied the Protocol, they will now need to explain why they have not done this.
A large information request involving significant issues can produce tens of thousands of documents to review. In the PwC case, whilst we don’t know how many documents were potentially relevant to the information request, we do know that LPP was claimed over approximately 44,000 documents. Of those documents, the ATO challenged approximately 15,500 documents. If taxpayers choose to follow the Protocol, this will add a significant amount of time and costs to an already monumental task of responding to a request. This will also significantly increases the time taken by the Commissioner to finalise an audit, which seems counter-productive to reducing red tape and working with taxpayers to assist them to comply with their tax obligations.
Taxpayers already need to undertake a review of documents on a communication by communication basis and provide a schedule of particulars to the Commissioner outlining any claims for LPP or administrative concessions. The fact that the Protocol expects a significant amount of new information to be provided such as details of if, when and why a document was forwarded, is, in our view, an unreasonable request and creates a significant amount of duplication. If a communication by communication review is already being undertaken, both the original document and forwarded documents would (at least in most cases) already have been addressed. Requiring this additional information does not add anything to the Commissioner’s understanding, but does increase the overwhelming compliance burden on taxpayers.
The Protocol recommends that extensive information is to be provided in respect of each LPP claim, such as the title or subject line of the communication, and the purpose for which the communication was made. As noted above, the concept of providing particulars about a claim to the ATO is not new. For a number of years, the ATO has published forms which it requested taxpayers complete to assist the ATO in determining whether to accept or challenge LPP claims.
As part of the consultation process, there were concerns raised that the Protocol requests information which may in fact be privileged and if provided, would result in a waiver of LPP. In our view, it is inappropriate for the ATO to be seeking such information from taxpayers. LPP belongs to the client and lawyers are obliged to maintain confidentiality over privileged material. In responding to the release of the Protocol, the Law Council of Australia identified that by seeking information on the topic or subject matter upon which advice is given, which is as much a part of the confidential communication as other parts of the communication, the ATO may “unwittingly lead a member of the public who is not regularly involved in the law of LPP to think that it is appropriate that this information be provided. If it were to be provided by a practising lawyer, it may put the lawyer in breach of his or her ethical duties to their clients”.[2]
The ATO sought advice from the Australian Government Solicitor on the issue of waiver and reported that that advice concluded that in the majority of cases, there will be a low risk of waiver of privilege where the particulars of a privilege claim are provided consistently with the recommendations in the Protocol. Further, in the unlikely event that privilege is inadvertently waived by voluntary provision of the recommended particulars to the ATO, this is likely to operate as a limited waiver and preserve the privilege holder’s ability to enforce their claim against the world at large.
As many of the particulars are stated to be “to the extent” the information is not privileged, this adds an additional layer of analysis/judgment to each review. We therefore query in fact how “low risk” the chances of waiver indeed are. Taxpayers also need to consider other potential implications from a waiver, such as the possible disclosure to another revenue authority. If there has been a limited waiver in favour of the Commissioner, can the Commissioner share the information with other revenue authorities?
It remains to be seen how this will play out in practice, particularly in light of the decision in Glencore International AG v Commissioner of Taxation (2019) 265 CLR 646 (where the High Court concluded that LPP was not a legal right which could find a cause of action – it was only an immunity from exercise of powers that would otherwise compel the disclosure of privileged information) and section 166 of the Income Tax Assessment Act 1936 (Cth), which provides that the Commissioner must make an assessment of a taxpayer’s taxable income from the taxpayer’s returns and from any other information in the Commissioner’s possession.
As part of its role in administering the tax system, it makes sense that the ATO has access to information that is relevant to determining the correct taxation outcomes. Equally important is the need to recognise taxpayer’s rights to seek, obtain, and maintain the confidentiality of legal advice about their taxation affairs. Striking the right balance on such matters is critical to the effective management of taxation disputes.
[1] Since the publication of the decision in relation to the sample documents considered by the Court, the parties have been focused on how to address the claims for LPP in relation to the remaining 15,384 documents. On 20 June 2022, the Court made Orders in relation to the costs for dealing with the proceedings to date, including that each party bear its own costs for the proceedings, and that the costs in relation to the Amici Curiae are allocated as follows, 50% to the Commissioner, 25% to PwC and 25% to PwC’s client, JBS. The parties will appear again before the Court in March 2023.
[2] https://www.lawcouncil.asn.au/media/media-releases/ato-legal-professional-privilege-protocol
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