In late June 2022, the ATO finalised its ‘Protocol’ for taxpayers claiming ‘legal professional privilege’ (LPP) – see related TT article. The issue of the draft Protocol, its finalisation, and the surrounding issues, created quite a bit of ‘heat’ (see related TT article). The ATO consulted on the issue of the draft Protocol, and released a ‘compendium‘ of the issues raised, in the consultation, and the ATO’s response (see related TT article). One of these items was the submission made by the Law Institute of Victoria (LIV) that, if the ATO pushed too hard (not just on LPP), it could commit a offence under s39 of the Legal Practitioners Uniform Law, if they ‘cause, induce or attempt to to cause or induce a [lawyer] to … contravene [their] … professional obligations’ (which include lawfully protecting LPP). The LIV’s point was that ATO ‘overreach’, on LPP claims, and other kinds of ‘undue influence’, on lawyers’ legal obligations, could amount to committing this offence (and to that end, it gave a number of examples of behaviour of various ATO staff). The Compendium dealt with this s39 issue directly (in ‘Item 34’) – see below.
Various Tax Technical articles have mentioned the LIV Submissions and the ‘Counterbalancing Offence’ point – see the articles on the LIV Submission; AFR covering on ‘undue influence’ on lawyers; and s39B and ATO ‘chain rattling’ on LPP. The LIV has called the s39 offence a ‘counterbalancing’ offence, as the Commissioner’s exposure to committing an offence, gives more balance, than if it was all the Commissioner’s way, and taxpayers and their lawyers were reliant on the Commissioner, to be as ‘restrained’, as he felt he needed to be.
Interestingly, the s39 ‘counterbalancing offence’ point was acknowledged by the ATO in item 34 of the Compendium. They said:
“The Commissioner may potentially be in breach of section 39 of the Legal Profession Uniform Law (NSW) 2014 as a result of legal practitioners being required to contravene their professional obligations to their clients by complying with the draft Protocol.” [Strictly, this is the ‘Legal Profession Uniform Law’]
The ATO’s response was:
We do not consider that practitioners will be ’caused’ or ‘induced’ to breach their professional obligations, or that the Protocol should be regarded as an ‘attempt’ by us to cause or induce them to do so because the legal practitioner will act on instructions from their client in responding to a formal notice including providing any particulars requested. If a legal practitioner is acting in accordance with the client’s instructions when providing particulars it is difficult to see how that could, of itself, breach the practitioner’s obligations. Further, the recommended approach in the Protocol is voluntary to follow.
Paragraph 34 of the final Protocol states that taxpayers are not expected to waive LPP when following the Protocol. The paragraph also provides that where practitioners are assisting taxpayers in responding to the Commissioner’s formal information gathering notice, the Protocol does not intend for practitioners to advise their clients in a manner that is contrary to their professional obligations. See also paragraph 10 to Addendum 1 to the final Protocol.
EDITORIAL COMMENT – there are real limitations to the ATO’s response to this
- The ‘Protocol’ could have been, a means by which the ATO exerted ‘undue influence’, on legal practitioners, but it is far from the only way this might manifest.
- The LIV’s submission was made in relation to the draft Protocol, which the Compendium admits, has been softened, reducing the potential for the Protocol alone to relevantly ’cause’, ‘induce’ or ‘attempt’ to cause or induce a a lawyer to breach their ‘professional obligations’ (see item 4, noting that paras 11, 34 & 35 have been added to soften its impact). See the TT article on the Compendium, for more detail on this.
- The undue influence might get exerted outside the ATO using formal/mandatory information gathering powers – for instance much earlier in the audit/investigation/review stage.
- The Commissioner’s suggestion that a lawyer is completely protected (from ATO ‘undue influence’), because they are ‘acting on instructions’, is not true. The undue influence could be exerted before the lawyer can get instructions (for instance, when the staff first arrive in a raid). The undue influence could be exerted over the advice the lawyer subsequently gives (for instance – to give advice that the privileged advice was not privileged, or the privilege had already been waived, when it had not). It could be exerted by threatening meritless consequences, for their client, if the client doesn’t waive the privilege. It could be exerted by threatening meritless investigation, of the lawyer’s tax affairs, and/or meritless adverse consequences, for the lawyer, in relation to their own tax affairs. And, it could be exerted, when there is no particular client involved, or involved yet. One of the examples of ATO conduct (included in the LIV’s Submission) was just this.
- The ATO says nothing about the five examples of ATO staff exerting overt efforts to influence the legal practitioner (with and without a client) to waive LPP. One of the persons involved in the consultation was one the ATO staff mentioned in the examples.
- Though I don’t suggest that this is so, it is possible to imagine a situation, where there was a web of general intimidation, that existed outside the Commissioner’s exercise of any particular mandatory information gathering power, and, for that matter, without any particular taxpayer or client being involved.
In the end, the objective is not to have the proper administration of the tax system frustrated, but neither is it to deprive taxpayers of their rights, or press lawyers to do this. It is in this context that the LIV was submitting that, the ATO being aware, that it too, could commit an offence, ought help bring about the right kind of balance, in this equation.
[Tax Month – June 2022 – Previous Month, 3.7.22]