ATO set to crack down on lawyers
AUSTRALIAN BUSINESS REVIEW February 12, 2019 Ben Butler
The ATO is worried that some law firms could be concealing their commercial activities behind legal professional privilege.
The Australian Taxation Office is planning to launch legal action — potentially including criminal prosecutions for fraud — against lawyers at top-tier firms who misuse legal privilege to shield their blue-chip clients.
In a note posted on its website, the ATO said it would launch “a range of cases in the short to medium term” attacking the misuse of legal professional privilege. Fraud against the Commonwealth carries a maximum jail sentence of 10 years.
ATO officers have become frustrated after lawyers have claimed the privilege, which is supposed to protect the advice they give to clients, over as many as 30,000 documents in a single case sought by the agency — far more than the 30 to 50 normally seen in such cases.
“It’s just multiple orders of magnitude over what you’d expect for an ordinary privilege claim,” second commissioner Jeremy Hirschhorn said.
In recent years the use and potential misuse of legal professional privilege has emerged as a major challenge for regulators, with the corporate regulator currently fighting AMP in the Federal Court over its refusal to produce documents relating to its fee-for-no-service scandal.
In August, NAB also unsuccessfully claimed the privilege over documents dealing with its fee-for-no-service wrongdoing that it wanted shielded from use by banking royal commissioner Kenneth Hayne.
And in a case already before the Federal Court, Glencore is challenging the ATO’s use of documents from offshore law firm Appleby — although that case is different because the ATO already has the documents as part of the Paradise Papers leak.
The warning the ATO published on Monday was a follow-up to a November 30 meeting of the National Tax Liaison Group, which includes lawyers and accountants who represent the big end of town, and comes after it also raised concerns about misuse of privilege during parliamentary hearings last month.
Mr Hirschhorn said one way fraud charges could arise came out of concerns tax lawyers were helping clients cook up ways to get around the Tax Act’s powerful general anti-avoidance provision, Part IVA. A scheme that avoids tax only runs foul of Part IVA if it was entered into for the “sole or dominant purpose” of doing so.
“The thing we have seen hints of, which I hope not to be the case, is the firm helping the client discover its non-tax purpose,” Mr Hirschhorn said. “The firm says, ‘Here’s some we prepared earlier which you may find useful’, which are then presented to the commissioner as the real justification.
“That’s actually fraud.”
The ATO is also considering criminal prosecutions over the relatively minor offence of failing to provide documents to it following a formal notice, raising the prospect magistrates who normally deal with offences such as assaults and theft, might be confronted with a technical legal argument over tens of thousands of documents. Also in the mix is civil action ranging from asking courts to declare privilege claims invalid to alleging statements to the ATO were false or misleading.
The ATO is also concerned that some law firms could be trying to conceal their commercial activities behind legal professional privilege that actually belongs to their clients.
Mr Hirschhorn said firms would approach taxpayers and tell them: “We think you’ve got a problem. They rock up with a series of slides that have structures on them,” he said. “Sometimes they’re saying you’ve got to sign up to privilege to see them. It looks like a disguised confidentiality agreement.”
The ATO’s warning is aimed at a small group of practitioners at some of Australia’s top law firms.
“It’s only a few partners,” Mr Hirschhorn said.