A multi-disciplinary firm has used legal privilege to shield documents from the ATO during an audit of its multinational clients, a judge has found, in a ruling that has put multi-disciplinary firms on notice.
In Commissioner of Taxation v PricewaterhouseCoopers  FCA 278 Federal Court Justice Moshinsky ruled that a legitimate relationship between lawyer and client existed but PwC had incorrectly applied privilege to more than half the documents requested by the Australian Tax Office.
Since 2019 Commissioner of Taxation Chris Jordan AO has been on a mission to stamp out the ‘reckless’ and ‘baseless’ use of legal privilege in tax matters as part of a campaign to eliminate multinational tax evasion.
In September 2021 the ATO declined prosecute PwC for its alleged role in assisting Swiss mining group Glencore in moving $30 billion of international shares into offshore tax structures. More recently, however, the ATO had success in a similar matter against Carlton United Breweries where it was once again Justice Moshinsky who dismissed the company’s efforts to use legal professional privilege to withhold information during a tax audit.
In this proceeding, s 118 of the Evidence Act 1995 (Cth) is not engaged; rather, the common law doctrine and principles of legal professional privilege were applied. This proceeding concerned the advice limb of the common law doctrine of legal professional privilege. In essence, that limb protects from the disclosure of confidential communications between a lawyer and client made for the dominant purpose of giving or obtaining legal advice or the provision of legal services.
Issues considered in the case
Justice Moshinsky addressed several issues in this case, including the agency of clients, third parties, the place of law graduates, the onus of proof and other general matters. These pose considerations for those dealing with multi-disciplinary firms.
For privilege to arise, it is not sufficient that giving or obtaining legal advice or providing legal services was in part the purpose; it must be the dominant purpose of the relevant communication. In Commissioner of Taxation (Cth) v Pratt Holdings Pty Ltd (2005) 225 ALR 266 (Pratt Holdings), on remitter from the Full Court, Kenny J said at :
The dominant purpose is not the same as the ‘primary’ or the ‘substantial’ purpose. Where two purposes are of equal weight, neither is dominant in the relevant sense. Hence:
- a document is not privileged from production where one purpose for its creation is to obtain legal advice, but there is another equally important purpose; and
- if the decision to bring the document into existence would have been made irrespective of any intention to obtain legal advice, the purpose of obtaining legal advice cannot be the dominant purpose for the making of the document.
Applying this principle to the context of multi-disciplinary firms:
- a document is not privileged from production where one purpose is to discuss legal advice, but another service such as accounting, consulting or auditing is raised for an equally important purpose; and
- suppose the decision is made to bring a document into existence for a professional service such as accounting, consulting, or auditing, and in the process, a tax issue arises that a lawyer advises on. In that case, that document may not have access to privilege.
This reveals a potential operational risk in multi-disciplinary firms when discussing other services with clients. Even where the ‘primary’ purpose is for legal advice, individual documents will lose privilege when legal advice does not dominate the materials.
The Scope of Information Available for Privilege
The Court also went to considerable lengths to explain what information is subject to privilege and to clarify the procedure for classifying privileged information. This is a question of fact.
Continuum of communications
Privilege may attach to a broad range of communication and is not limited to formal legal advice and requests for such advice. This broadens the scope of information available to legal privilege outside of just legal documents. In Balabel v Air India  1 Ch 317 (Balabel), Taylor LJ (with whom Lord Donaldson MR and Parker LJ agreed) said at 330:
In most solicitor and client relationships…advice may be required or appropriate on matters great or small at various stages. There will be a continuum of communication and meetings between the solicitor and client…Where information is passed by the solicitor or client to the other as part of the continuum aimed at keeping both informed so that advice may be sought and given as required, privilege will attach….Moreover, legal advice is not confined to telling the client the law; it must include advice as to what should prudently and sensibly be done in the relevant legal context.
For multi-disciplinary firms this widens the scope of communications beyond documents and increases the likelihood that it is not for a legal purpose.
Parts of documents
Treating all client-lawyer communication as privileged threatens the balance between parties’ rights in disputes as all relevant information may not be accessible. The dominant purpose test presents a challenge in this regard. If information is considered in its entirety, then the dominant purpose will often not be legal advice which poses a threat to the client’s right to confidentiality. In Kennedy v Wallace, Allsop J stated at –:
If a conversation or a note can be divided up such that privileged and non-privileged material can be segregated, the communications or writing made for the dominant purpose of obtaining legal advice will be privileged, even if the balance of the communications, perhaps even if most of the communications go to other matters. One does not lose privilege on a note made as an aide-memoire for the asking of legal advice by putting 10 other notes on the same page to remind one to ask about 10 other topics. It depends on the nature of the communication or writing and the circumstances of the creation of the document.
The Court offers no guidance on exactly when communications or documents are to be divided up into parts, but the critical determination will be their nature.
The most common form of business communication is emails. This presents a challenge for courts: are emails a continuum of communication or to be treated in parts?
The application of the principles of legal professional privilege in the context of email chains was discussed by Thawley J in Kenquist Nominees at . Relevantly for present purposes, I consider that the principles apply to email chains in the following way (referring to the latest email in time as the ‘latest email’).
The continuum of communications has expanded the scope of information that can be privileged. Accordingly, the Court has emphasised it has discretion to classify individual parts of documents and emails as privileged. If all documents were to be assessed in their entirety, the dominant purpose test would mean topics of equal importance would disqualify the information from privilege.
The Court considered a sample of 116 documents concealed from the tax office, citing legal privilege (out of a possible 44,000). Justice Moshinsky found that 49 were legitimately privileged, 61 were not, and six were ‘partly privileged’.
Documentation on stamp duty, valuation, and accounting were not privileged, including some accounting advice provided by lawyers as ‘legal advice.’
Email exchanges on a proposed transaction or procuring third-party advice from PwC overseas were not for the dominant purpose of receiving legal advice.
However, advice and draft advice (email or memorandum) provided by a lawyer on Australian taxation law that “would tend to reveal the substance or content of…legal advice given or to be given” was held to be privileged.
The underlying rationale for legal professional privilege is that a person will be less apprehensive to share the truth if they are protected from a subsequent disclosure. The principal issue concerning the court is whether multidisciplinary firms are extending this power to situations outside of a legal context.
The doctrine of legal professional privilege seeks to strike an appropriate balance between the competing interests of full and frank disclosure between lawyers and clients and all relevant information being publicly available for the court to make its decision.
The Dominant Purpose
The dominant purpose principle adds a consideration when seeking legal advice from multi-disciplinary firms. It does not matter how confidential the information included in communications is; if another equally important purpose is raised e.g. outside legal advice, for example, tax advice, it will not be privileged.
This risk is exacerbated on a company-wide basis. Team members at various levels are in constant communication within multi-disciplinary firms, discussing the range of services they are providing. Any team member could jeopardise the ‘dominance’ of communications with the multi-disciplinary firms for a legal purpose.
The Scope of Information Available for Privilege
The interpretation of parts of documents and email chains has shown that the mere mention of services engaged by the firm will not jeopardise confidentiality. However, there is a non-trivial risk of substantively discussing two topics in dealings.
This operational hazard will likely require added layers of procedures and protocols for multi-disciplinary firms and their clients to ensure an information wall exists between tax advisers and other services. This complicates day-to-day interactions.
While multi-disciplinary firms are fit for purpose in many ways for clients’ needs, if those needs encompass legal advice which is meant to be kept confidential then this case has raised additional considerations for clients.