This article was originally published by The Tax Institute in its journal Taxation in Australia Vol 56(7) Feb 2022 at p 431.
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:
Some additional information on each of these matters is provided below.
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.
In the context of the Commissioner’s enquiries of large multinational organisations, what the authors have seen is:
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:
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:
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) 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;
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). 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;
Moshinsky J reserved judgment in the case; and
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 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), 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, 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:
In addition, while the Commissioner will only seek to “lift” the accountants’ concession in “exceptional circumstances”, given:
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:
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.
  FCA 840.
  FCA 1234.
  HCA 26.
  FCAFC 183.
 Federal Court, Victoria Registry, 2 June 2020, No. VID 364/2020.
 Federal Court, Victorian Registry, 30 October 2017, No. VID1183/2017.
  HCA 63.
  HCA 67.
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