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  • Attachment A – Supplementary information

    We have been asked to expand on recent commentary in relation to the ATO’s approach to advisers to the large market, the role of Legal Professional Privilege (LPP), promoter penalty legislation and other provisions.

    The ATO wants all taxpayers to get high quality professional advice, whether from a lawyer or an accountant as this underpins the self-assessment system. Accordingly, we fully support taxpayers obtaining LPP on independent legal advice they seek from their legal advisers as to the tax consequences of their actual or proposed transactions. Most advisers, whether at accounting or law firms, give high quality advice and support the tax system.

    In reviewing a taxpayer’s position, our key interest is in finding out the facts. Fundamental to the operation of the tax system is that the ATO is able to access all the relevant facts. Particularly with sophisticated taxpayers, those facts include not only the primary documents (accounts, contracts, etc.) but also the taxpayer’s reasons for embarking on the particular structuring arrangement or transaction – internal emails and communications will often be a source of contemporaneous evidence (in particular we are interested in understanding the non-tax commercial considerations including their development and importance).

    Role of formal powers in obtaining evidence

    Our preference is to work cooperatively with taxpayers to obtain information we require, however we will resort to using our formal powers when this approach does not work.

    The ATO’s use of formal notices in the large market has remained broadly unchanged over the last few years. However, we are in some cases issuing them earlier in the process and holding taxpayers to account in meeting the response timeframes, especially where we do not have a cooperative relationship.

    We also issue notices to advisers identified as being involved in the instigation of taxpayer alert type schemes, to seek to identify taxpayers who may have participated in those schemes, as well as to better understand the manner in which schemes are developed and marketed.

    A core exception to document production under formal notices is in relation to documents over which the client has LPP. There is also the administrative concession afforded by the Commissioner in appropriate cases to advice provided by appropriately qualified accountants. While LPP and the Accountants Concession (AC) are distinct, because of some similarities we often see the same approach applied to claims for both. As a result, the scope of LPP becomes very important.

    Legal professional privilege

    Our understanding is LPP protects certain confidential communications between a lawyer and their client from production to the ATO. Those communications must be for the dominant purpose of obtaining independent legal advice about the taxpayer’s legal rights and obligations, or current or possible litigation. LPP also protects some of the other communications associated with getting that advice. We cannot access privileged information, and we do not have any problem with this – as above, we want taxpayers to obtain high quality advice from high quality advisers. We respect LPP is an important common law right that generally allows a client to freely exchange information with their lawyer to obtain confidential legal advice.

    Of course, if a taxpayer wishes to share their advice with us, we will pay it due regard (but even then will likely be more focused on the underlying facts and assumptions than the legal analysis). As above, we are much more interested in facts and evidence than in someone else’s legal analysis of tax provisions.

    The challenge for us on LPP is mainly a practical one – dealing with privilege claims not grounded in the applicable law and established principles, but grounded in a desire to obfuscate the facts and frustrate investigations. In an increasing number of cases, we are seeing claims of privilege over thousands or even tens of thousands of documents: when we ultimately obtain the documents sometimes (presumably inadvertently) even in the same production process (for example, as attachments to other emails) they were clearly never privileged. We are seeing LPP being claimed using both industrial processes and on an industrial scale.

    This has led to serious consideration of the mechanisms to test LPP and/or the consequences for reckless claims. Further, we are exploring judicial and legislative options to efficiently resolve disputed LPP claims. This includes the options available to other regulators who face similar practical challenges with LPP, in an effort to get matters to the court more quickly.

    Key concerns with purported LPP claims

    We have set out below some of the categories of concern that we have identified in the course of cases:

    • Claims are made over documents that clearly could never meet the dominant purpose test.
    • Claims are made over documents like (pre-engagement) pitchbooks, engagement letters and fee accounts.
    • Claims being made on the assumption or 'decision rule' that all documents where a lawyer (external or internal) is cc:ed are privileged, without consideration as to the role of that lawyer and/or the purpose of the communication.
    • Documents being provided but subject to some form of general reservation that privilege may be claimed on some or all of the documents at some stage in the future, with no attempt to determine privilege claims prior to provision.
    • Claims being made on the basis that subsequent entry into a (purported) legal services engagement retrospectively covers all pre-engagement interactions and treats them as communications made in the course of that subsequent engagement (often on the proposition that the non-lawyer in the original meeting agreed that there would, in due course, be a legal service engagement that would have this retrospective effect).
    • The gist of the advice ultimately received, purportedly as independent legal advice from a lawyer, was actually promised by a non-lawyer prior to engagement, thus losing its independence.
    • Claims where ‘in-house counsel’ are involved, giving rise to a variety of different questions and issues concerning independence.
    • Engagements conducted in all real senses by a non-lawyer (from instigation of the engagement/transaction to its delivery), with the primary role of the legal practitioner being to ‘rubber stamp’ the 'deliverable'. The lawyer’s involvement is minimal at best and often only late in the piece, often at the direction of the non-lawyer.
    • In some of these cases, the 'controlling mind' non-lawyer is purported to have a range of seemingly incompatible legal capacities, including some or all of: being the purported agent of the client in dealing with the lawyer, the purported agent of the lawyer in dealing with the client, some form of 'Pratt-style' expert upon whom the lawyer relies (as well as often being a partner of the lawyer in reality as partners in the same firm).
    • Commercial/entrepreneurial activities of promoting transactions: even if the entrepreneurial promoter is a lawyer, these activities are not privileged legal advice. A subsequent engagement by that lawyer (or another) may also be tainted, in that the subsequent 'promised' legal advice may not be sufficiently independent to confer privilege.
    • Requiring a client to 'sign up' to privilege in order to access a pitchbook or other 'intellectual property'. Not only is this a fundamental misunderstanding of privilege and whose it is, it may also form a type of disguised confidentiality agreement, effectively (purportedly) requiring a taxpayer to conceal (improperly withhold) information from the ATO
    • No consideration of waiver of (actual or purported) privilege when documents and/or the gist of advice are shared with third parties (including other sister firms).
    • Failure to appreciate potential waiver where advice has been inconsistently distributed internally for consideration.
    • Providing insufficient, inaccurate, and misleading details, or generic/formulaic statements when making and supporting LPP claims so we cannot properly assess the claims.
    • Documents prepared for an improper purpose, including tax evasion.
    • During the course of the engagement, advisers effectively 'creating facts' and assumptions underpinning the advice (in particular as to non-tax commercial purposes). This is often through 'suggesting' non-tax commercial purposes when the client initially cannot itself identify a non-tax commercial purpose.

    Key concerns with LPP processing engagements

    We have also identified concerns in how third party law firms are engaged to assess bulk LPP claims, often due to assumptions in the scope of engagement and/or its conduct, for example:

    • Conducting the LPP processing engagement on the assumption that the underlying engagement is capable of conferring privilege (without consideration of the factors above).
    • When it should have become manifestly clear from the documents being reviewed that those assumptions do not hold, there is no revision of the scope of the engagement or a refusal to act.
    • The scope being simply to identify all documents involving lawyers (even a cc:) rather than to judge LPP.
    • The work being conducted by junior lawyers who do not have the skillset to properly judge contentious documents, with insufficient supervision from senior skilled lawyers.

    Firms involved in processing LPP claims should be very careful that their scope of engagement aligns with how their work is represented to the ATO / Court. They should also ensure they are not being asked to be wilfully blind, for example, assume a purported legal engagement is capable of conferring LPP.

    Promoter penalties and other consequences

    There has been no change in practice to our application of promoter penalties. There are several criteria to be met before they can be applied – this includes the requirement that relevant advice be not only wrong but not reasonably arguable. Where the adviser has been involved in 'developing' the facts and assumptions, this examination will go beyond the technical merits of a final deliverable based on those facts and assumptions.

    There are a range of other conduct based approaches being considered as a result of intelligence recently obtained, including:

    • Declaratory relief over LPP claims.
    • Prosecution for reckless LPP claims.
    • Actions based on false and misleading statements (including that a reckless / baseless privilege claim may itself form a false or misleading statement).
    • Actions based on fraud and/or evasion, noting that:
      • deliberate obstruction of the Commissioner from obtaining facts can constitute evasion in its own right – the Commissioner will be seeking to test whether reckless / baseless privilege claims may constitute evasion
      • development and communication of knowingly incorrect and/or manufactured facts and assumptions to the Commissioner, particularly non-tax commercial purposes, may constitute participation in fraud.

    Next steps

    The ATO is currently conducting a series of reviews of particular transactions and schemes. It is anticipated that there will be a range of cases in the short to medium term testing many of the propositions above.

    Separately and concurrently, it is intended to form a small working group to consult on the above issues with a view to developing:

    • Clear guidance for the taxpayer community concerning the ATO’s view of the scope of LPP, in particular relating to advice and services regarding taxation affairs.
    • Revised pro forma templates for LPP claims, with improved guidance regarding the requirements for acceptable claims.
    • A standardised 'scope of engagement' where a taxpayer wishes to engage an independent law firm to assess potential LPP claims.
    • An industry endorsed standard process for engaging independent bodies, where appropriate, for reviewing disputed LPP claims and providing assurance.
      Last modified: 11 Feb 2019QC 57874