The ATO's appetite for challenging claims of legal professional privilege (LPP) has been highlighted by a recent Federal Court of Australia decision (Commissioner of Taxation v PricewaterhouseCoopers  FCA 278) and the consultation in the lead-up to the imminent release of the ATO's new LPP Protocol.
Increased scrutiny by ATO
From at least late 2018, the ATO has noted it had been 'increasingly testing the engagement' of legal advisors where it had received LPP claims in response to formal notices that appeared to be 'excessive'.
One of the ATO's key messages at the 30 November 2018 National Tax Liaison Group meeting was that law firms involved in providing advice on the validity of LPP claims should ensure their engagement included confirming the fundamental elements required to establish privilege, rather than make assumptions that these elements had been satisfied.
The National Tax Liaison Group ultimately resolved to establish a working group consisting of ATO and National Tax Liaison Group members to consider the ATO's view of the scope of LPP and establish guidance in this area (LPP Working Group).
The final ATO LPP Protocol is expected to be released imminently, following the release of the draft LPP Protocol in September 2021, stakeholder consultation and internal review continuing into this year.
In its draft LPP Protocol, the ATO recommended steps for the assessment of whether LPP arises, and consequential steps to particularise a LPP claim, where the service or engagement involves (among others):
- legal practitioners acting in their capacity as legal
- in-house counsel; or
- non-legal persons or legal practitioners not acting in their capacity as legal practitioners.
For services provided by (among others) non-legal persons or legal practitioners not acting in their capacity as legal practitioners, further steps and particulars are recommended over and above those required where only legal practitioners and (or) in-house counsel are involved.
In its submissions sent to the LPP Working Group in late 2021 on the ATO's draft LPP Protocol, the Law Council of Australia raised concerns over this aspect of the draft Protocol in that it would trigger additional obligations where law graduates and paralegals would be involved in a matter, albeit supervised by legal practitioners.
Further, it noted that the singling out of the involvement of non-lawyers would raise a broader issue for multi-disciplinary practices and how non-lawyers should be acknowledged in the LPP Protocol.
Complexity in structuring multi-disciplinary / multi-jurisdictional matters
In Commissioner of Taxation v PwC, the Commissioner disputed privilege claims over approximately 15,500 documents, relying on three grounds. The ATO asserted that:
- the form of the engagements, reflected in the relevant
'Statements of Work' by which PwC Australia purported to
provide legal services to its clients in this matter, did not
establish a relationship of lawyer and client sufficient to ground
a claim for privilege;
- as a matter of substance, the services provided by PwC
Australia were not provided pursuant to a relationship of lawyer
and client sufficient to ground a claim for privilege; and
- the documents are not, or do not record, communications made for the dominant purpose of giving or obtaining of legal advice from one or more lawyers of PwC Australia - a ground which is quite separate to the issue of structuring multi-disciplinary and (or) multi-jurisdictional matters.
In this case, a critical part of the context is that the services were provided by a multi-disciplinary partnership and that the team carrying out the work comprised both lawyers and non-lawyers. The engagement documents identified the PwC team which would provide the services, and split that into members who provide legal services and non-legal services.
Another contextual matter is the involvement of overseas PwC firms in many of the same projects (under separate engagement arrangements). The engagement terms made clear that those non-lawyers:
- would assist in the provision of the legal services under the
direction of the Australian legal practitioners; and
- were appointed by the client as the client's agent for the purpose of communications to and from the legal services team. This includes giving instructions to and receiving legal advice and services from the Australian legal practitioners.1
Moshinsky J did not accept the ATO's general propositions encapsulated in the first two points above. The judge was satisfied that, at least in some relevant circumstances, a lawyer-client relationship existed between the relevant PwC partner - an Australian legal practitioner - and other Australian legal practitioners at PwC Australia and one or more of its client entities.
The Court did not accept key assertions made by the ATO - which it said underpinned a view that there was no real relationship of client and lawyer. Specifically, the Court accepted that the appointment of a multi-disciplinary firm (made up of lawyers and non-lawyer tax experts, both in Australia and overseas) was not determinative of the nature of the relationship. The fact that a non- lawyer who was working with the lawyer may have been significantly more experienced than the lawyer, or charged at a significantly higher rate did also not point to the lawyer's involvement not being a substantive role.
Rather than accepting these high level and global arguments, the Court undertook a traditional approach - looking at each communication, in its context, to determine whether the "dominant purpose" was for the giving or receiving of legal advice.
Where the Court did not accept a claim of privilege, it was usually because the purpose of giving or receiving legal advice was not the dominant purpose, but one of multiple purposes. For example - where a non lawyer at an overseas member firm was providing input to the Australian lawyer to allow them to be able to understand foreign tax issues in order to provide Australian legal advice. Here, the Court found that another relevant purpose was the giving of advice by non-lawyers.
The Court also clarified that it is not uncommon for law graduates (not yet admitted as lawyers) to prepare draft advice before it is reviewed by a supervising lawyer and that in this scenario, the role of lawyer is substantive: "the lawyer is not merely a conduit through which advice is provided by the law graduate to the client" and therefore LPP may arise.
The recently released (and redacted) judgment of Commissioner of Taxation v PwC emphasises the importance of clear and well-structured engagement documentation, especially in circumstances where non-lawyers and (or) where foreign admitted lawyers will be involved in aspects of the matter.
It also highlights the importance of considering how best to structure and run matters involving teams from different countries and (or) where non-lawyers are involved in the provision of legal advice or litigation.
It is crucial to be mindful that regulators in countries other than Australia could have powers to gather documents in relation to matters spanning different jurisdictions and so it is important to ensure that when there is a widely dispersed team of lawyers involved on those matters, they are in a jurisdiction where legal professional privilege is recognised.
For example, in jurisdictions such as South Korea or China, LPP is not recognised generally or in a way that is substantially similar to the concept in Australia. Unlike in Australia, LPP does not always extend to in-house counsel, such is the case under European Union law (though the situation may differ within each European state's domestic law).
1 This appointment appears to have occurred to ensure the arrangements fell within the treatment of agents, as approved in Pratt Holdings Pty Ltd v Commissioner of Taxation (2004) 136 FCR 357. That case held at  that if it is determined that a person is an agent of the client, and the agent communicates with the lawyer on behalf of, and at the direction of, the client for the dominant purpose of obtaining legal advice, then those communications are privileged.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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