When considering legal professional privilege (legal privilege) in the Australian tax environment, taxpayers must necessarily have regard to the Australian Taxation Office (ATO) views on legal privilege, as well as its broad ranging powers to access documents and information.
This article provides an overview of the ATO’s power to access documents, ATO processes relating to access, and the impact of legal privilege on those powers.
Commissioner’s access powers
The Commissioner and his authorised officers have extensive legislative powers to obtain access to information or documents from any person or legal entity. Under these powers, the Commissioner may interview people, access business premises or personal dwellings, or demand production of documentation both domestically and from overseas.
The Commissioner’s access powers in respect of income tax are found in sections 263, 264 and 264A of the Income Tax Assessment Act 1936 (the Act). Powers equivalent to sections 263 and 264 are found in other Acts (eg. in respect of GST, see sections 65 and 66 of the Taxation Administration Act 1953). In this article, reference will only be made to the income tax powers.
These powers have been challenged by taxpayers in Australian Courts with only marginal success. The general approach of the Australian Judiciary has been to acknowledge that the legislation has provided a broad power of access that should not be unduly fettered by the Courts. Thus Courts have tended to allow ATO officers considerable latitude in the types of documents they can seek and even the manner in which they seek them - so long as the documents relate in some discernable way to a tax assessment of any taxpayer and the approach used by the ATO is reasonable in the circumstances.
This approach is reflected in the judiciary’s tendency to allow the Commissioner to carry out “roving inquiries” and “fishing expeditions” for documents or information.
However, the Courts have maintained certain limits on the use of the Commissioner’s access powers. For example, they cannot be used in bad faith or for improper purposes: the powers must only be exercised for ‘the purposes of the Act’ - ie. to assess a taxpayer for tax in a year of income.
ATO Access Manual
The ATO has published an Access and Information Gathering Manual on its website, which details the ATO’s view on its access powers as well as the procedures to be undertaken by ATO officers in exercising those powers. The manual has been created to ensure that ATO officers have a detailed understanding of issues relating to access so the exercise of those powers is not later challenged in Court proceedings.
The manual is often updated to reflect recent changes in the law but has no substantive legal standing of itself. The ATO undertook a review of the entire manual in 2005, the outcomes of which are still being released on a piecemeal basis.
Informal access
The ATO will not usually use its formal powers as a first option. Often it is more efficient and less adversarial if information is sought and provided on a voluntary or informal basis. This involves the voluntary provision of information and documents, or granting of access to buildings.
Responding to informal information or document requests by the ATO might be seen as merely accepting the inevitable, given that the ATO are likely to be able to compel the disclosure of documents using formal powers anyway. However, taking an informal approach does have the advantage of minimising administrative procedures, cutting back the time a risk review or audit might take, and also provides the opportunity to respond without risking legal sanctions if the response is insufficient in some way. By not making the ATO use its formal powers, there is a greater chance of an agreed outcome to the risk review/audit process or, at a minimum, a reduction in any penalties that might arise from adjustments that the ATO may wish to make.
Formal interviews
Section 264(1)(b) provides the Commissioner with the power to require any person to attend and give evidence as well as provide documents. This process is often compared to cross examination in a Court proceeding, with the notable difference being that the Commissioner’s officers or representatives are not limited by Court procedures or issues of strict relevance.
The similarity with cross examination does extend to the fact that the Commissioner can engage external counsel to ask the questions. However, a particular restriction that the Courts have identified is that the questioning process cannot become oppressive, and generally only one person will be permitted to ask questions on a particular topic.
It is prudent for interviewees to be well prepared for a formal interview and take steps to elicit from the ATO details of the topics that will be covered in the interview. A written statement may be prepared and provided to the ATO at the commencement of the interview, which will assist the interviewee in responding calmly and confidently to questions.
An interviewee will be permitted to have representation at an interview, but that representative will generally have a limited role and limited ability to shape the questioning by the ATO.
Document requests
Section 264(1)(b) also provides the Commissioner with power to request documents. The scope of this power is, as with the other powers, very broad. The power is generally exercised by the issue of a section 264 notice which identifies documents or classes of documents that should be provided.
The main practical difficulty ATO officers have with this power is to try to identify documents or classes of documents with sufficient clarity to ensure that all relevant documents are collected.
The conventional wisdom in relation to document requests is to read the request down, so that a minimum level of documentation is provided in response to an ATO request. This approach reflects a desire to not give anything away to the ATO unnecessarily.
Although, a minimalist approach to responding to a section 264 notice does seem initially attractive, such an approach may have undesirable consequences, for instance:
- an audit may be extended if the ATO is not receiving the documents it expects
- a minimal response may provide a misleading picture of the facts, and
- the opportunity for minimising penalties will be reduced.
Access visits
Section 263 permits the Commissioner or his officers to attend any premises (in Australia) to view and copy documents. ATO officers generally exercise this power by attending premises either with their ‘wallet authority’ or with a document which sets out a decision of a delegate of the Commissioner to authorise access.
The access power is usually used in one of two circumstances. The first is where the potential range of documentation is so broad that an ATO officer attending the premises to copy relevant documents is a more efficient way of proceeding. This type of visit will occur at an agreed time and generally with an agreed process in place. The second circumstance is where the ATO makes an unannounced visit to secure documents that might otherwise be destroyed. These unannounced visits are uncommon and generally only occur in cases of serious tax avoidance or evasion.
In either case, it is highly desirable to seek to agree a process with the ATO in writing. An access agreement should seek to:
- minimise the disruption of the access visit
- identify the scope of the types of documents being sought
- agree times and locations for access
- agree security measures for the documents
- provide for copies of documents to be made for both the ATO and the taxpayer, and
- ensure adequate opportunity for claims for legal privilege or the “accountants’ concession” to be made. The “accountants’ concession” is an administrative concession granted by the Commissioner designed to grant a level of protection from disclosure to tax advice received from professional accounting advisers.
In the Federal Court case JMA Accounting Pty Ltd v Commissioner of Taxation, the Commissioner sought access to documents and records pursuant to his powers under section 263 of the Act. It was held that whilst the ATO had broad access powers, including the power to search computer hard drives and databases, such powers do not allow ATO officers to take control over a taxpayer’s office and the powers have to be exercised reasonably.
Offshore access
Section 264A allows the Commissioner to seek documents from taxpayers that are not held in Australia. These notices must be issued to a taxpayer in Australia and cover both documents and information. Refusal to provide information or documents in response to a section 264A notice will, with some exceptions, render that information or those documents inadmissible in Court proceedings disputing the taxpayer’s assessment, except with the consent of the Commissioner.
[NB: Offshore information gathering processes, including the impact of treaties, will be discussed in greater detail in a forthcoming article].
Legal professional privilege and the ATO access powers
One of the major curbs on the Commissioner’s extensive access powers is the fact that they are still subject to claims for legal privilege. Thus, if a document is protected by legal privilege, the ATO is not able to use its power to force disclosure. Similarly, an interviewee may decline to answer a question in a formal interview if the answer would reveal the content of a communication that is protected by legal privilege.
One area of concern in the ATO’s attitude to legal privilege stems from a Federal Court case Clements, Dunne and Belle v Commissioner of Australian Federal Police (2002) ATC 4072. In that case, legal privilege was overturned on communications as they were made in connection to an alleged fraud. The ATO leaves open in its access manual the question of whether the Commissioner would try to overturn legal privilege in cases of tax avoidance - ie, in cases where Part IVA is being argued by the Commissioner.
However, we would expect that a Court would not agree to unduly fetter the protection provided by legal privilege in this way without extenuating circumstances such as fraud.
In a situation where documents have been requested by section 264 or section 264A notices, the recipient of the notice will be asked to make claims for legal privilege by filling out a detailed form. However, a person claiming legal privilege bears the onus of making good that claim, and the ATO form provides a useful basis for doing so.
In circumstances where there are a large number of documents at issue, the ATO will often accept a schedule setting out the documents which are subject to legal privilege, rather than requiring separate claim forms to be filled out. Blanket claims for legal privilege will not be accepted by the ATO.
In a situation where the ATO is accessing a building using the section 263 power, the Court has found that the ATO may quickly examine a document to see if legal privilege could apply before copying it. In access situations, ideally a process will be agreed between the ATO and the claimant for the making of claims for legal privilege.
If the ATO disputes the claim for legal privilege over documents, the documents in dispute will be sealed in an envelope or container and lodged with an independent person such as the Australian Government Solicitor. Independent counsel may be used to adjudicate on disputed claims for legal privilege if the claimant and the ATO cannot resolve their dispute.
Conclusion
The Commissioner has extensive powers to request information or documents from a taxpayer or any other person. When responding to requests, you should be mindful of the fact that Court challenges to the exercise of these powers are unlikely to be successful and instead focus on developing a response that is consistent with your overall strategy for dealing with the ATO audit or risk review.
Even though the Commissioner’s access provisions are extensive, they are still subject to the doctrine of legal privilege and the professional accounting advisors’ concession. In order to limit any exposure to potentially protected communications it is imperative to either have a working knowledge of the Commissioner’s access powers and associated procedures or contact a specialist.
For more information please contact:
| Michael Bersten
Partner
+ 61 2 8266 6858
Send email
|
| Daniel McInerney
Senior Associate
+ 61 3 8603 5625
Send email
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