A Treasury discussion paper is considering privilege in relation to tax advice. Why is it needed? Does legal professional privilege provide better protection than the accountants’ concession? How do they differ in practice?
Legal professional privilege
Legal professional privilege is a common law right protecting the confidentiality of communications made for the dominant purpose of obtaining legal advice or for use in existing or reasonably anticipated litigation. A similar statutory right is known as client legal privilege.
Legal professional privilege does not apply to communications with a professional accounting advisor for the dominant purpose of obtaining tax advice.
The accountant’s concession is an administrative concession made by the Commissioner of Taxation because he accepts that certain documents should remain within the confidence of taxpayers and their professional accounting advisors. The concession is documented in guidelines published by the Commissioner.
The rationale for the concession mirrors the rationale for legal professional privilege: to encourage taxpayers to seek advice about their tax affairs and to allow taxpayers to have confidential, full and frank discussions with their professional accounting advisors.
There are differences between legal professional privilege and the accountants’ concession that are key to understanding why the practical scope of the concession is limited:
- The accountants’ concession can be lifted by the Commissioner in “exceptional circumstances”. These circumstances include the application of the anti-avoidance provisions in Part IVA. The concession does not apply in many situations because the Commissioner frequently relies on Part IVA , often as an alternative ground of assessment. Insufficiency of information can also be an exceptional circumstance, for example, because documents have been lost or destroyed, are maintained overseas or are not provided by the taxpayer’s professional accounting advisors in a timely manner.
Legal professional privilege can be waived by the taxpayer, but it cannot be “lifted” by the Commissioner. It can only be abrogated by statute with clear words or by necessary implication.
- The accountants’ concession only covers advice prepared by an external professional accounting advisor for the sole purpose of advising on matters associated with taxation. It does not cover a client’s instructions to their professional accounting advisor or any communications with third parties. The concession will also not apply to advice created for more than one purpose, for example, to advise on matters associated with taxation and corporate governance.
Legal professional privilege covers client-lawyer communications and can also extend to communications with third parties as long as they are made for the dominant purpose of obtaining legal advice or for use in existing or reasonably anticipated litigation.
- A Project Wickenby court decision involving Paul Hogan’s tax affairs recently held that the accountants’ concession only covers documents in the possession of the taxpayer or their professional accounting advisor, not a third party. For example, the Commissioner can seek access to tax advice that the Australian Crime Commission obtained under a search warrant.
Legal professional privilege can be claimed even over communications that are obtained from a third party as long as the privilege has not been waived.
- The concession only covers external advisors who are independent of the taxpayer. In-house professional accounting advisors do not have the benefit of the concession.
On the other hand, a number of authorities have accepted that legal professional privilege can attach to communications with in-house legal staff providing certain conditions in relation to their qualifications and independence are met.
The proposal for privilege in relation to tax advice
Clients of professional accounting advisors have sought stronger confidentiality protection for their tax advice. In response, a tax advice privilege (“TAP”) was proposed by the Australian Law Reform Commission in 2007.
In April 2011, the Assistant Treasurer, Bill Shorten MP, released a discussion paper on TAP. The discussion paper highlights many issues that need to be addressed before a TAP regime is implemented in Australia:
- Will TAP extend to all communications between professional accounting advisors and their clients, or only to documents prepared by the advisors?
- Who is an “external professional accounting advisor”? Will TAP be limited to registered tax agents?
- What is the scope of “tax advice” and will TAP adopt a dominant purpose test?
- How will TAP interact with legal professional privilege? Will the approach be essentially uniform like in the United States, or will a separate and different regime be established like in New Zealand?
- Will the protection of TAP be extended to other government agencies, or will it only bind the Commissioner? Will the Commissioner be able to seek TAP documents from other agencies and third parties?
- What exclusions will apply to TAP? Will Part IVA remain as an “exceptional circumstance”?
The introduction of TAP will no doubt be welcomed by professional accounting advisors and their clients. However, given that there are likely to be significant differences between the scope of TAP and legal professional privilege, the protection of TAP may not be as strong as many desire.