A NATIONAL proposal extending client privilege to tax accountants has created waves within the tax sector. The legal profession, however, remains unconvinced.
The Australian Law Reform Commission (ALRC) has specified the new privileges be enforceable against federal regulators in their search for information.
Morgan Kelly, a partner at insolvency specialists Ferrier Hodgson, supported the move.
“I can see that tax advice is like legal advice; quite sensitive, quite important. So what this proposal will do is inadvertently end up giving people the ability to structure their affairs prior to going bankrupt in a manner that’s going to be privileged,” he said.
Kelly acknowledging that tax advice is covered by professional privilege under the Bankruptcy Act. He said: “The extension of legal privilege to cover tax advice as well as legal advice is not really an extension. It is so close to legal advice that it makes sense that it should fall under that spectrum.”
Nevertheless, Kelly argued that if the proposal becomes legislated, it would make the liquidator’s job harder. That is if the proposal comes to fruition at all.
Amid fears that the proposal will create a haven for bankrupts looking to hide assets from their creditors, Graeme Cooper, a professor of tax law at the University of Sydney, highlighted that “the ALRC report refers to privilege as a doctrine of fundamental importance”.
Cooper said bureaucrats, who have the ear of government, think of privilege as a “shield for rogues”.
“So they are not going to be keen to keep this issue on any government’s agenda, especially if it would lead to an expansion of privilege.”
Kelly agreed that if accepted this proposal could serve as a cloak for “recalcitrant offenders” enabling them to go “beyond the reach of creditors under the guise of tax re-structuring” and “the trustee won’t be able to penetrate that”.
Yet Cooper was hesitant on the efficacy of the planned change. “There’s a good chance that the proposal to extend privilege to communications with accountants will be misunderstood by some because privilege attaches to such a limited range of communications,” he said.
“It’s pretty unlikely that much of what passes between accountants and clients will qualify, and the same is true for lawyers — a lot of the communications between lawyers and their clients are not privileged. To get privilege, the communication has to be made in connection with litigation,” Cooper said.
“Advice to a client about how to implement some structure or transaction, or the tax implications of the various ways of doing some deal, is not likely to be privileged whether it is given by a lawyer or accountant,” he said.
Reserved about the importance of the proposal, Cooper said “it may be just a bit premature for the accounting profession to celebrate a famous victory — the experience is that governments have not enthusiastically rushed to adopt every ALRC report in the past. A lot of reports have been politely consigned to the dustbin of history by the very governments that commissioned them.”
Yet Kelly was prophetic, asserting that “given the timing where we are now in the economic cycle, it will probably become more relevant”. Noting that the proposed legislation has the scope to make waves in the commercial sector, Kelly added: “[It] will have an impact on commercial insolvency as well.”
The new Law Council of Australia president, Ross Ray, was unavailable for comment. However, former Law Council president, Tim Bugg, told Lawyers Weekly last month that there was no clear need to introduce the change, illustrating that lawyers and accountants are subject to different levels of professional scrutiny.
“We do not think that client legal privilege should be extended beyond lawyers. Lawyers are officers of the court and we are significantly regulated,” Bugg said.
“The ATO certainly regard some documents as privileged, [but] there is no need to formalise that by extending the principle.”
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