Dispute Issues

Privilege: a client right

The Australian Taxation Office has tested claims of Legal Professional Privilege (LPP) rigorously in recent years. Disputes concerning the ambit of these claims are now coming before the Courts. A recent illustration is CUB Australia Holding Pty Ltd v Commissioner of Taxation [2021] FCA 43 (CUB) regarding the reach of the Commissioner’s powers pursuant to a statutory notice[1].

Precision is required to maintain and substantiate LPP claims as various scenarios can lead to the inadvertent loss of privilege. Common examples include:

  1. Engagement of experts.

  2. Board minutes (depending on the capacity of the Director)[2].

  3. Email chains.

The principle is that LPP attaches to confidential communications between lawyer and client for the dominant purpose of providing legal advice, or in connection with contemplated litigation[3]. The term ‘dominant’ has been ascribed different meanings by the Courts[4]. The dominant purpose test is a question of fact where the Court analyses the client’s state of mind. As such, LPP is a client right. The lawyer’s role is to take steps to guard the right. The case law illustrates that outcomes turn on particular factual scenarios where the margins may be fine.

Implied waiver of privilege

The conduct of the client and its advisors (whether legal or non-legal) can lead to an unintentional waiver of privilege. The test for an implied waiver was provided by the High Court in Mann v Carnell [5] at paragraph 29:

What brings about the waiver is the inconsistency, which the courts, where necessary informed by considerations of fairness, perceive, between the conduct of the client and maintenance of the confidentiality; not some overriding principle of fairness operating at large

Any conduct or communication which discloses the substance of legal advice will lead to privilege being waived. The mere disclosure that legal advice has been sought is not sufficient to waive privilege.

 This test for inconsistency was recently applied in a contract law context in Mirabela Nickel[6] where the WA Supreme Court found the majority of email correspondence between the parties did not state the substance of the legal advice received. In this respect, the conduct of the party asserting privilege was consistent with maintaining the requisite confidentiality. However, there was disclosure of a ‘Draft Deed’ which the Court ordered be inspected. 

This decision highlights the perils of email chains and the specificity required in lawyer/client communications.

Regulator scrutiny

In a tax context, balance must be struck between redactions to protect LPP and providing sufficient information to enable the Commissioner to assess the LPP claim. Taxpayers should provide an explanation of the approach/purpose test adopted by the taxpayer in preparing information for the ATO. CUB illustrates that the ATO must be able to assess the validity of each LPP claim.

In CUB, the Court was not given the opportunity to test the substantive elements of privilege given the status of the dispute when it came before the Court. The scope of the client’s rights and the mechanisms adopted by the lawyers to protect those rights is a delicate balance. Lawyers must be cognisant of the duty to mitigate an implied waiver of privilege.

It is recommended that clients institute LPP protocols in complex matters (e.g. contemporaneous evidence outlining the purpose underlying the creation of the document and the client particulars to assert LPP) to:

  1. negate protracted litigation with the ATO; and

  2. establish clear parameters for resolving disputes.

The ATO has demonstrated their appetite to test LPP claims and indicated they will not be fatigued by assessing large volumes of information. Clients typically bear the onus of proof and must satisfy the ATO that assertions can be substantiated.

[1] s353-10 of Sch 1 to the Taxation Administration Act 1953 (Cth)
[2] Standard Chartered Bank of Australia Ltd & Anor v Antico & Ors (1993) 36 NSWLR 87
The ATO have published the following statement on their website: ‘advice prepared for a corporate board on tax compliance risk should, in all but exceptional circumstances, remain within the confidence of a board’
[3] Esso Australia Resources Ltd v Commissioner of Taxation (1999) 201 CLR 49
[4] Rio Tinto Ltd v Commissioner of Taxation (2006) 235 ALR 127
[5] Mann v Carnell [1999] HCA 66 
[6]Mirabela Nickel Ltd (in liquidation)(receivers and managers appointed) v Mining Standards International Pty Ltd [No 2] [2020] WASC