The ‘counterbalancing offence’ point gets some oxygen in the AFR – in relation to the ATO exerting ‘undue influence’ on lawyers from the point when they initially claim legal professional privilege

The ATO had a significant victory in the High Court over mining giant Glencore and is now battling PwC over a privilege claim related to its work for JBS, the world’s largest meat producer.

The Law Council tried to persuade the Law Institute of Victoria to be part of a submission on behalf of all the nation’s law societies and bar associations, but the Institute insisted on going alone. [This is true, but LIV did explicitly endorse the peak LCA submissions, on the ATO’s draft LPP Protocol – see p1 of the LIV submission in my previous article, before going on to make the ‘counterbalancing offence’ point.]  The LCA has said it is concerned about over-reach, but is yet to lodge its submission.

The main sticking point was whether the ATO could be in breach of section 39 of the Legal Profession Uniform Law (LPUL), which applies to lawyers in NSW and Victoria.

Section 39 has the heading “undue influence” and says “a person must not cause or induce or attempt to cause or induce a law practice or a legal practitioner associate of a law practice to contravene this law, the uniform rules or other professional obligations”. The maximum penalty is 100 units, or $11,000.

Section 6 of the LPUL lists “duties to clients, including disclosure” among those obligations.

John Morgan, a Victorian barrister specialising in revenue law, said in a commentary on the website Tax Technical that “a very serious issue of contention” was the ATO wanting taxpayers or advisers to disclose document headings and email subject headings, to help it assess whether to challenge a claim for privilege.

“That is all very well, but the ATO needs to decide whether to challenge the claim, for privilege, without that information,” Mr Morgan writes.

“Amongst the most serious concerns is that disclosing the heading/subject line, could, itself, amount to disclosing the privileged communication and be a ‘waiver’ of that privilege.” [My ‘That is all very well’ comment, was about these ‘heading/subject lines’ and only applies to the ‘privileged’ examples or portions thereof.]

He said the scope of section 39 “plainly includes a lawyer’s duty to claim LPP over relevant or potentially relevant documents” and covered public officials. He called it a “counter-balancing offence”.

“So, simply finalising this LPP protocol, in a form that involves ‘overreach’, could involve the Commissioner, and the relevant ones, of his officers, in contravening section 39 of the Uniform Law and, thus, committing the offence that this section creates…

“The law is clear, that the Commissioner’s powers to compel production of, or access to, material, does not extend to documents subject to LPP.”

Mr Morgan said the ATO “frequently pushes taxpayers, and their advisers hard, to waive LPP, or push for disclosure, in circumstances that breach that privilege, or make it difficult for the lawyers to give frank and fearless advice, on privilege issues”.

The LIV submission gives six such examples. It also questions the ATO’s claim that compliance with the protocol would be voluntary, because of a clause allowing the ATO to continue asking for information.

Public scrutiny

In the first LIV case study, the ATO told a law firm its LPP claims were questionable in certain categories. “In some cases, these views are not supported by case law (i.e. the law is uncertain), and in other cases, these views are materially at odds with case law,” the submission says.

“The ATO tells the firm that their LPP claims will be given more scrutiny than others’ claims. The ATO tells the firm that they will be taking test cases against the firm, with likely public scrutiny the result, if the firm allows its clients to make any LPP claims with which the ATO disagrees.

“The ATO tells the firm that they are at risk of criminal prosecution or civil penalty proceedings if they make LPP claims with which the ATO disagrees.”

Eventually, the firm handed the documents for “Client A” to the ATO over the client’s insistence that the documents should be withheld for LPP.

[If this were true, one can see, why there is a need for a ‘counterbalancing offence’ of using undue influence, on a lawyer, to breach their ‘professional obligations’.]

In another case, the ATO heard about a solicitor who said at a consultation roundtable that the ATO ”should take more care to ensure that the public understands that the courts, and not the ATO, are the ultimate arbiters of LPP”.

“The senior [ATO] officer berates and harangues the solicitor on the telephone for about one hour.”

In another, ATO officers told a firm, that if their client persisted with LPP claims, that the ATO would assume the [underlying tax] claims were invalid.

Other lawyers had been told “things will go better” if LPP claims are dropped, or that penalties of 75 per cent would be imposed on taxpayers who they claimed had “LPP form”. [The later of these two cases was example 6, where the ATO imposed 75% penalties for intentional disregard for the law, assuming that the ‘advice’, over which privilege had been claimed (in the ‘LPP Form’), was about the issue in question, without the ATO officers having seen the privileged advice, much less known whether the taxpayer disregarded its contents (because the privilege had not been waived). And, had the advice been on the relevant issue, and the taxpayer had followed advice (with which the ATO disagreed) there ought not be more than a 25% penalty, for lack of a ‘reasonably arguable position. In my opinion, if this example was true and fairly represented, the ATO conduct was wrong on multiple levels.]

The ATO said in a written statement that it had consulted extensively with the LCA and that it “does not seek to be the arbiter of privilege claims”.

“However, in order to appropriately conduct investigations and audits, the ATO must be able to properly consider, and potentially challenge, claims for privilege.”

It said the protocol meant taxpayers “could obtain a level of certainty and confidence as to whether the Commissioner is likely to accept or challenge their LPP claims”.

[The problem, of course, is whether the Commissioner needs privileged information, in order to get the ‘level of certainty and confidence’ about the ‘privilege claim’, that he says he wants.]