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ATO warns law firms not to be ‘wilfully blind’
The Australian Taxation Office has set its sights on law firms misusing legal professional privilege to “obfuscate the facts and frustrate investigations” as a result of recently obtained intelligence, it has said.
Grace Ormsby
In supplementary information attached to last year’s key messages from the National Tax Liaison Group, it was noted that “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”.
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Some of the key concerns outlined in the notice included claims being made over documents that clearly could never meet the dominant purpose test, claims made on the ‘decision rule’ that all documents where a lawyer is cc:ed are privileged, without consideration as to the lawyer’s role or the purpose of the communication, and claims where in-house counsel are involved which has given rise to questions and issues concerning independence.
Documents being prepared for an improper purpose, such as tax evasion, was also listed as a key concern, as were engagements conducted in all real senses by a non-lawyer, with a legal practitioner merely rubber stamping a deliverable.
The engagement of third-party law firms to assess bulk LPP claims was also called out, with concerns including that work may be being conducted by junior lawyers without the skillset to properly judge contentious documents with insufficient supervision, among others.
Calling it a practical challenge for privilege claims “not grounded in the applicable law and established principles”, the National Tax Liaison Group re-iterated a “key interest” in finding out the facts when reviewing a taxpayer’s position.
“Our understanding is LPP protects certain confidential communications between a lawyer and their client from production to the ATO”, it was written.
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, it said.
“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”, the statement continued, while noting its respect for LPP as “an important common law right that generally allows a client to freely exchange information with their lawyer to obtain confidential legal advice”.
Fundamental to the operation of the tax system is that the ATO is able to access all relevant facts, it explained, with the statement pointing out that “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)”.
The information warned that any 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,” it said.
