Commissioner of Taxation’s access powers

This article was originally published by The Tax Institute in its journal Taxation in Australia Vol 56(7) Feb 2022 at p 431.

Introduction

The Commissioner of Taxation has broad powers to obtain information and documents for the purposes of his administration of Australia’s tax laws. The Commissioner is entitled to (and does) use these access powers to undertake a broad survey of, and/or “fish” for, information and documents which may be relevant to his tax administration role.

The authors’ recent experience in advising multinational corporate clients regarding the Commissioner’s use of his access powers has shown that:

• the Commissioner appears more inclined than ever to use his formal access powers to obtain information and documents rather than seeking the information and documents through informal means;
• when he does use his formal access powers, he tends to make very broad requests and to duplicate requests (by issuing multiple notices to the one entity and/or notices to multiple entities containing the same information and document requests), presumably to ensure that he has closed off every possible avenue of enquiry;
• the Commissioner appears more inclined than ever to question and, potentially test, legal professional privilege claims, particularly in circumstances where the claims relate to the tax advice and/or services of multidisciplinary practices (MDPs) comprised of both accounting and legal professionals (and this also aligns with the Commissioner’s stated concerns that some taxpayers and advisers may be abusing privilege); and
• the Commissioner continues to interpret the scope of application of the accountants’ concession narrowly and is more inclined than ever to seek to lift the concession, including prospectively and where assessment decisions have already been made.

Some additional information on each of these matters is provided below.

Use of Commissioner’s formal access powers as opposed to informal information requests  

Recent experience is that the Commissioner is more inclined than ever to use his formal access powers to obtain information and documents from taxpayers. The Commissioner’s rationale for doing so appears to be that use of the formal powers is the only way in which he can obtain assurance that he is provided with all of the facts necessary for him to make fully informed decisions.

Broad requests

In the context of the Commissioner’s enquiries of large multinational organisations, what the authors have seen is:

• formal notices issued containing large amounts of information and document requests which are very broadly framed and which, in a litigation setting, would likely be described as constituting “general discovery of documents”;
• formal notices issued containing requests which are vague and ambiguous in their terms, requiring the recipients of the notices to interpret the scope of the requests; and
• the Commissioner being unprepared to consult with taxpayers to clarify the scope and terms of requests in formal notices, instead placing the onus on the taxpayers to use their professional judgment to interpret the requests.

Duplicate/multiple requests

The authors have also seen formal notices being “duplicated”, with the taxpayer receiving the exact same requests in both a s 353-10 notice (ie seeking information within the knowledge of, and documents in the custody or under the control of, the taxpayer) and a s 353-25 notice (ie seeking information within the knowledge of, and documents in the custody or under the control of, the taxpayer’s foreign affiliates) and, on occasion, the formal notices being “duplicated” across multiple entities within the taxpayer group (if the Commissioner is unsure where custody or control of documents may reside).   

While the Commissioner’s perspective of wanting to ensure that he has obtained all of the facts may be understandable, the approaches referred to above mean that taxpayers are obliged to commit substantial resources to the task of responding to the Commissioner’s notices. The Commissioner’s current approaches to information and document gathering may demonstrate that there has been no improvement in the level of trust between the Commissioner and taxpayers in relation to tax audit activity. However, a focus on how the Commissioner’s information and document gathering could be streamlined, without compromising the level of assurance that there has been discovery of all of the facts, would be welcome.

In that regard, matters worth some reflective thought on the Commissioner’s part include:

• information and document requests which are vague and ambiguous can be extremely counterproductive:
  • for taxpayers because the task of responding to information and document requests in formal notices can be enormous and only made bigger if the task involves interpreting the scope of vague and ambiguous requests, with the taxpayer’s natural (and understandable) inclination being to err on the side of adopting a broad interpretation of the vague and ambiguous requests; and
  • for the Commissioner because vague and ambiguous requests are likely to lead to the taxpayer producing a great deal of information and documents which may fit the strict terms of the requests in the notice but which are in fact irrelevant to, and a distraction from, the Commissioner’s enquiries; 

• following on from the point above, in order to avoid vague and ambiguous requests, it would be worthwhile if the Commissioner formally reinstituted past practices (in the authors’ experience, now essentially lapsed) of ATO officers engaging with taxpayers on the terms of information and document requests prior to the formal notices being issued; and
• duplicating formal notices can be extremely counterproductive:
  • for taxpayers because it adds significant time and cost to the task of complying with the notices; and
  • for the Commissioner because inevitably a taxpayer’s attention and resources must be directed first to responding to any s 353-10 notices (non-compliance with which is an offence), with responses to any s 353-25 notices actioned second. This is the case even where the same information and documents provided in response to the s 353-10 notice could be provided as part of what would be a larger response to the s 353-25 notice.  

The Commissioner’s approach to legal professional privilege claims

The legal professional privilege immunity against the compulsion to produce documents otherwise required to be produced at law is an important part of the fabric of Australian society because it facilitates the conduct of candid and confidential discussions between legal advisers and their clients concerning the clients’ business and/or personal affairs. In a tax setting, the legal professional privilege immunity promotes candid and confidential discussions between a taxpayer and their legal adviser concerning the taxpayer’s tax affairs, and often comes into focus when the Commissioner seeks documents from the taxpayer during the conduct of an ATO tax audit.  

Generally, in his public statements regarding legal professional privilege, the Commissioner will acknowledge the importance of the legal professional privilege immunity and say that he is not interested in obtaining a taxpayer’s legal advice, but rather only the facts.

Over the last several years, the Commissioner has taken active steps to test and/or to resist privilege claims made by clients of lawyers and has enjoyed varying degrees of success in the process. Those steps include:

• resisting privilege claims asserted over communications made through a third party and legal advice provided by or sought from a foreign lawyer. The Commissioner’s resistance to the privilege claims resulted in litigation culminating in the Federal Court decision in Song v FCT.[1] The Commissioner appears to have tried to explore the efficacy of the application in practice of a range of agreed principles concerning legal professional privilege which had been formulated by the courts over a number of years. Issues considered included:
  • whether the applicant in the case had established that the communications in question were undertaken for the dominant purpose of giving or obtaining legal advice;
  • for communications made through a third party, whether the third party was an agent of the applicant for the purposes of communicating with the lawyer to obtain or receive the legal advice; and
  • for the legal advice sought from or provided by a foreign lawyer, whether the applicant had established that the person from whom the advice was sought or provided was a qualified lawyer, and whether the advice was sought from or provided by the person in that capacity.

The Commissioner was largely unsuccessful in his challenge, with the court (Davies J) finding that, of the 23 primary documents which it examined, 19 were wholly privileged and one attracted privilege in part. The approach of the court in Song to considering the privilege claims in question is a general demonstration of the observations made by the court in AWB Ltd v Cole (No. 5)[2] that the advice which attracts legal professional privilege is of broad, though not unlimited, compass. In Song, Davies J provided useful guidance on what evidence needs to be adduced to confirm the validity of privilege claims. Her Honour tested whether the contents of each document asserted by the applicant to contain wholly privileged communications accorded with the evidence of the applicant regarding those communications. Her Honour also provided guidance on what inferences can reasonably be drawn as to the status of individuals and the nature of their advice based on their employment, and on what inferences can reasonably be drawn as to the nature of legal advice based on documents — both key considerations when determining whether a privilege claim can be made and maintained;     

• refusing to return privileged documents. Having received copies of documents containing privileged material (referred to as the “Paradise Papers”) which had originally been obtained from a Bermudan law firm by a third party using illegal means, the Commissioner refused to return them. That refusal became the subject of the High Court decision in Glencore International AG v FCT.[3] The High Court held that the holder of privilege over documents which are in the possession of the Commissioner and in the public domain cannot recover the documents by bringing legal action based on a claim of legal professional privilege. In doing so, the court explained that legal professional privilege is an immunity from the exercise of powers that would otherwise compel the disclosure of privileged communications; it is not a legal right capable of being enforced (ie that may found a cause of action).

Recent experience suggests that the Commissioner considers that he is entitled to retain and rely on any privileged documents which he receives, no matter what the circumstances in which the documents came into the Commissioner’s possession. More particularly, the Commissioner considers that he can use and not return privileged documents which are not in the public domain and which have been inadvertently disclosed to the Commissioner. Generally, the Commissioner will say that he is under an obligation to use such documents for the purposes of the exercise of his powers of assessment (on the authority of Donoghue v FCT[4]). A likely (and unfortunate) consequence of the Commissioner’s approach of not returning privileged documents inadvertently disclosed to him is that taxpayers will require more time to respond to ATO information and document requests as heightened care will need to be taken to ensure that all available privilege claims are identified and made at the outset, it being quite apparent that the Commissioner will not return privileged material provided in error. This will be a particular issue for large-scale ATO document requests;

• challenging legal professional privilege claims made in relation to MDP advice and services. In line with the ATO belief that some taxpayers and their advisers in MDPs might not be making sustainable legal professional privilege claims, the Commissioner brought proceedings in the Federal Court in FCT v PricewaterhouseCoopers.[5] The matter concerned how the legal professional privilege immunity applies in practice in circumstances where an MDP (in this case, PricewaterhouseCoopers (PwC)) employs both qualified legal practitioners and qualified accountants to provide tax advice and services to its clients (in this case, entities within the JBS SA meat processing group (JBS)). The matter was heard by a single judge of the Federal Court, Moshinsky J, in the first and second weeks of September 2021. Based on the submissions made by the Commissioner’s Counsel during the hearing, it appears that the Commissioner is resisting the privilege claims in this case on three bases, being that:
  • the retainer or engagement structure between PwC and JBS was inconsistent with there being a lawyer/client relationship;
  • the work performed by PwC under the retainer was not work performed pursuant to a lawyer/client relationship; and
  • alternatively, the documents themselves were not privileged because the communications in them failed the dominant purpose test (ie were not made for the dominant purpose of giving or requesting legal advice or services).

Moshinsky J reserved judgment in the case; and

• testing privilege claims over documents seized on execution of search warrants. The Commissioner commenced a Federal Court proceeding in October 2017, FCT v Brandi,[6]  in a challenge to privilege claims. The case management conferences in the matter disclosed that documents had been provided to an independent court-appointed referee for inquiry and to report  on thelegal professional privilege status of the documents (an understandable, practical course of action for the court to take when faced with needing to rule on a challenge to the privileged status of a large body of documents). However, prior to a hearing in relation to the disputed documents reported on by the referee, the case was discontinued by consent on 24 August 2021.   

JWS is also involved in a matter concerning aspects of the making and maintenance of legal professional privilege claims which is currently before the courts and so will not be discussed in this article.

Additionally, the Commissioner has uploaded to the ATO website a draft “Legal professional privilege (LPP) Protocol”, dated September 2021 (the draft protocol). The consultation period for the draft protocol ended in October 2021, however, at the date of publication of this article, the draft protocol had not yet been finalised. The draft  protocol sets out the Commissioner’s recommended approach by taxpayers for identifying and making legal professional privilege claims. Essentially, the Commissioner’s draft protocol sets out his views on when and how taxpayers ought to make privilege claims, including the types and amounts of information which the Commissioner says he needs to receive in order to be able to determine whether to accept or challenge privilege claims. Such views are not based on or supported by any particular legal principle or requirement.

One concern with the draft protocol is that some of the actions which the Commissioner suggests taxpayers take may result in the Commissioner being provided with privileged communications, and information in relation to such communications, which may also give rise to questions regarding the extent of any waiver of privilege. A further concern is that it would be highly impractical (both time-consuming and costly) to comply with the suggested approaches in the draft protocol regarding privileged communications made in the course of any significant transaction or other commercial undertaking.

The suggested approaches in the draft protocol to gathering information in relation to the privileged communications would need to be implemented contemporaneously with the transaction or undertaking. The impracticality of applying the Commissioner’s draft protocol in relation to, and contemporaneously with, any significant transaction or other commercial undertaking in preparation for possible subsequent ATO scrutiny is underlined  by the fact that, ordinarily, there would be uncertainty regarding each of the fact , scope and timing of any such ATO review.     

The Commissioner’s approach to the accountants’ concession

The accountants’ concession is not a legal right. It is an administrative concession on the Commissioner’s part and so, unlike legal professional privilege, does not have the status of a legal immunity against the compulsion to produce documents sought by the Commissioner. However, as with legal professional privilege, the accountants’ concession ought to be an important part of the fabric of the Australian tax system in facilitating the conduct of candid and confidential discussions between taxpayers and their external professional accounting advisers concerning the taxpayers’ income tax affairs.  

When the Commissioner originally introduced the accountants’ concession, it was on the basis that the concession ought to afford the same scope of protection to (albeit not the same status as) certain communications between taxpayers and their external professional accounting advisers in relation to the provision of Australian income tax advice as was afforded to communications between taxpayers and their legal advisers in relation to legal advice and requests for legal advice. As such, because at that time the test that needed to be applied to determine whether a communication was privileged was a sole purpose test (in line with case law authority such as Grant v Downs),[7] similarly, the test to be applied to determine whether the accountants’ concession was available in any given case was framed as a sole purpose test. Of course, subsequently, the High Court of Australia in Esso Australia Resources Ltd v FCT,[8] overruling Grant v Downs, held that the common law test for legal professional privilege is the dominant purpose test rather than the sole purpose test. However, the Commissioner has retained the sole purpose test for determining the availability of the accountants’ concession.

While it would be logical, and in line with the Commissioner’s policy objective in introducing the accountants’ concession, to align the scope of application of the accountants’ concession as closely as possible to the scope of application of legal professional privilege, this is not the approach taken by the Commissioner currently. The authors’ experience is that the Commissioner is interpreting the scope of application of the accountants’ concession narrowly, such that, according to the Commissioner, the concession is limited in its application to the formal written communications of external professional accounting firms, given for the sole purpose of providing Australian income tax advice. In that regard, for example, the Commissioner would say that the accountants’ concession does not apply to communications constituting:

• requests for Australian income tax advice; or
• the Australian income tax advice of an external professional accounting adviser contained in a document which also contains other communications, ie communications that do not constitute the Australian income tax advice of the external accounting adviser.

In addition, while the Commissioner will only seek to “lift” the accountants’ concession in “exceptional circumstances”, given:

• that “exceptional circumstances” include any instance where the Commissioner is investigating the possible application of the general anti-avoidance rule in Pt IVA of the Income Tax Assessment Act 1936 (Cth); and
• the propensity for the Commissioner to consider the application of Pt IVA as his default argument in any large-scale tax audit,

the authors’ experience is that, in the conduct of any such audit, invariably the Commissioner will seek to lift the accountants’ concession in relation to the tax advice of the external professional accounting advisers.

Indeed, the authors have even seen the Commissioner saying that he intends to lift the accountants’ concession:

• prospectively in relation to any accountants’ concession claims not yet made, but which may be made in the future; and
• in circumstances where he has already issued Pt IVA determinations and amended assessments giving effect to those determinations (and so, necessarily, must have already come to a considered view on the application of the Part).

In the authors’ view, the Commissioner’s approach of putting the accountants’ concession on a different footing to legal professional privilege by failing to align the scope of application of the accountants’ concession with the scope of application of legal professional privilege, and by being prepared to lift the concession in circumstances that do not appear to be exceptional, is counterproductive to the proper operation of the Australian tax system. It ought to be a matter for reflective thought on the Commissioner’s part that this approach to the accountants’ concession constitutes a fundamental flaw in the manner in which ATO officers undertake information and document gathering exercises in the course of the Commissioner’s taxation audits.    

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).