Legal Professional Privilege – what is it and how easy is it to use?

Legal Professional Privilege (LPP) can protect a taxpayer from having to produce certain documents during ATO audits or legal proceedings. However, without care the privileged status of documents can easily be lost.

LPP is once again a topic of discussion after the recent Glencore case in the High Court and the ATO’s crackdown on what it sees as misuse of what is otherwise an essential part of our legal system.

This article explains how LPP arises, how it can be lost, and how you can preserve a document’s privileged status. 

What is Legal Professional Privilege (LPP?)
LPP applies to communications, whether oral or written, brought into existence for the dominant purpose of obtaining legal advice, or for use in existing or reasonably anticipated litigation. For example, legal advice provided by Moore Stephens Legal would generally be covered by LPP whereas tax advice provided by an accountant would not. In the event of an audit or legal proceedings LPP can ‘shield’ documents from compulsory production, meaning a taxpayer will not have to provide them to the ATO or the Court.

Advice provided by accountants will generally not be subject to LPP; however, there is an administrative concession whereby the Commissioner undertakes not to access certain documents prepared by external accountants  - essentially, those providing tax advice to the client. The concession does not apply in ‘exceptional circumstances’, such as when:

  • documents provided do not enable them to determine the tax consequences of a transaction;
  • the law requires ATO to determine the purpose of a transaction or arrangement e.g. Part IVA or the promoter penalty laws;
  • they have reasonable suspicion of tax evasion or fraud, certain offences or other illegal activity; or
  • there is a likelihood that source documents may be lost or destroyed.

It is evident in practice that the concession offered to accountants has limited application and, being an administrative practice rather than a legal right, can be revoked by the ATO should they choose. Therefore, tax advice given under LPP will always offer greater protection.
 
How can LPP be lost?
LPP is easy to lose. In fact, LPP can be waived impliedly or inadvertently by conduct inconsistent with the confidentiality on which LPP rests. For example, an organisation may risk privilege by referring to privileged communications in a non-confidential forum such as during negotiations, disclosure to regulators, or in a media statement.  

If information or advice is made public due to a data-breach or the actions of a whistleblower, such documents won’t necessarily lose their privilege. However, once the document is out in the open, LPP does not provide a right to recover or restrain a third party from using the documents (as demonstrated in the recent decision of Glencore International v Commissioner of Taxation)1. As highlighted in this case, the ATO may seek to use leaked or hacked documents when assessing your tax liability.

That said, the Glencore case did not address the issue of what happens if such an assessment is challenged in court and whether hacked or leaked documents can be introduced by the ATO as evidence in the resulting legal proceedings.

How you can protect LPP
The ATO has broad and wide-reaching powers to obtain information relating to a Taxpayer’s tax affairs, and LPP acts as a check on these powers. Therefore, it is important to proactively protect LPP on privileged documents in order to prevent them from being used against you an audit or litigation.

Things to consider in the context of LPP include:

  • Keeping documents confidential – Confidentiality is essential to maintaining LPP. Avoid accidental waiver by:
    • Minimising the circulation of legal advice both within your business and externally;
    • Minimising the reference to legal advice in board minutes and papers; and
    • Not disclosing the substance (or even the nature or conclusion) of legal advice in external communications.
  • Beware of hackers and whistleblowers – the Glencore case highlighted the relationship between cybersecurity, data protection, confidentiality and LPP – once information is in the public domain you may be unable to prevent the ATO from using it. Even without the LPP ramifications, cybersecurity and data protection should already be a priority for your organisation in order to meet your privacy obligations and protect valuable information.
  • Establish procedures regarding LPP - The ATO is focusing on claims of LPP by lawyers in audit, investigations and assurance processes and has recently made comments expressing concern about the way LPP is being used. LPP is on the ATO’s radar and there is always a risk that they will dispute claims of LPP where they believe it is being inappropriately asserted. It is recommended taxpayers proactively establish procedures to determine which documents may be subject to LPP, and be prepared to explain your process to the ATO, and to go into detail. A new protocol dealing with LPP is being developed by the Law Council of Australia and the ATO will help avoid unnecessary and protracted disputes over claims of LPP. We will provide further updates once this protocol is released.

How can we help?
Beyond the ability to provide privileged advice, Moore Stephens Legal can help you with strategies for maintaining and asserting privilege should the need arise. We can also advise around the associated cybersecurity, data protection, privacy and whistleblowing issues.

 
1 [2019] HCA 26.