ATO signals crackdown on privilege claims

Key takeaways

• The ATO has signalled a toughening of its approach to claims of legal client privilege, making clear that its scrutiny of claims of privilege will not be confined to multi-disciplinary practices but also blanket claims of privilege on behalf of clients of traditional law firms.  
• This follows the ATO’s success in challenging a claim of privilege by PwC on behalf of its client, in Commissioner of Taxation v PricewaterhouseCoopers [2022] FCA 278.  
• The decision is expected to prompt the ATO to challenge more privilege claims, and act as a springboard for a concerted push by the ATO for more transparency. 
• The ATO is in the process of developing a new legal professional privilege protocol, having prepared a draft in consultation with the Law Council of Australia. 
• The implications for clients under review, audit or investigation, and how they and their lawyers respond, are significant regardless of whether they are clients of Big Four multidisciplinary practices or boutique specialist law firms.

The PwC Case

The PwC Case concerned claims of privilege by PwC on behalf of its client JBS over approximately 44,000 documents.  PwC had provided tax advice to its clients, and lawyers and non-lawyers made up the team providing the service.  

The ATO initially sought to not only apply the dominant purpose test, but also challenge the privilege on the basis that the services provided by PwC were not provided pursuant to a relationship of lawyer and client.

The ATO alleged that PWC had sought to cloak non-legal tax advice with privilege, as part of its multi-disciplinary business model, in providing its clients with the benefit of privilege they might not otherwise have.

PwC claimed that it was being unfairly targeted on the basis of being a multi-disciplinary practice and that a traditional law firm would not have been subject to the same allegations.

Moshinsky J did not accept the general proposition that the multi-disciplinary practice lacked the necessary relationship of lawyer and client, his Honour did note that in considering the dominant purpose, reference should be had to the context of the document, including, where relevant, that the services were provided by a multi-disciplinary partnership and the team carrying out the work comprised both lawyers and non-lawyers.  Rather, the Court indicated a document-by-document analysis was required, to assess the ‘dominant purpose’ of each communication.

Considering a sample of 116 documents over which PwC claimed privilege Moshinksy J held that 61 (or 58%) were not privileged on the basis of the ‘dominant purpose’ test.  

The broader implications

The ATO’s approach in the PwC Case, and its subsequent statements, appear to be part of a general push by the ATO to force more transparency.  Indications are this will be pursued against traditional law firms, not just multi-disciplinary practices. The ATO have indicated that it will not accept blanket claims for privilege.

Further, while the Federal Court did not accept the ATO’s claim that the multi-disciplinary nature of PwC’s business precluded the relevant client and lawyer relationship, it will not prevent the ATO from relying upon this as a basis to challenge privilege, as part of the relevant context in assessing the ‘dominant purpose’ of the communication.

Beyond multi-disciplinary practices, there is a clear indication of a hardening of the ATO’s approach to privilege claims, potentially indicative of a general hardening, after more than 2 years of limited investigative and enforcement activity due to the COVID-19 pandemic and looming federal election.  This, among other indicators, point to the ATO preparing to ramp up investigative, enforcement and collection activity across the board in the second half of 2022.

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The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.

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