Aussies' move towards privilege could lay a marker for the UK

by Kevin Reed

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17 May 2011

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The City meets the outback

ANY MOMENTUM in the battle to afford legal professional privilege upon tax advice seemed to be halted last year when the Court of Appeal decreed that such a right was not for the courts to decide upon.

Yet events in recent weeks suggest the ball is rolling again, not necessarily apace but trundling along at the very least.

The Australian Treasury launched a discussion paper over extending LPP to all tax advice last month. Just hours earlier it was announced that the argument over extending LPP in the UK will be heard at the Supreme Court, despite the judges initially ruling out a further appeal.

So how are the Australian authorities approaching the issue? Are they as concerned about some of the things that bothered the UK courts? If so, how do they propose to deal with them: will they give the ball a push in the right direction as far as advisors are concerned?

The discussion paper covers the background, rationale and arguments for and against establishing a tax advice privilege.

Most of the key issues covered in the Australian Treasury's paper are the same as those dealt with in the UK courts. The nub of the issue is that, while it seems inequitable to have tax advisors provide the same advice but without privilege, extending privilege could open up claims by other types of professionals that they should be afforded privilege for professional advice. Such an extension could open a can of worms.

The paper asks whether the accountants' concession, which exists in Australian law to protect certain tax documents from being accessible by the revenue authorities, is appropriate protection; it notes that the protection fails to cover all documents created in the process of tax advice.

A previous report by the Australian Law Reform Commission found that a procedure should be considered for formalising how tax advice privilege could work. The privilege, rather than an extension of that for lawyers, could be created afresh. It would apply to registered advisors and protect documents created for the 'dominant purpose' of providing tax advice, as opposed to the concession rule that applies only to those created for the sole purpose.

A key concern is that a privilege could obstruct the Australian Commissioner of taxation from exercising its duties.

"A good case may be made that there is insufficient justification for changing the current arrangements in the short term," according to the discussion paper.

However, it points out that competitive neutrality requires tax lawyers and accountants' communications with clients to be treated equally. On the other hand, the paper warns that advisors' privilege must not extend beyond that for lawyers.

Another concern voiced in the paper is that the water becomes muddied when an advisor provides a client with more than just tax advice. How would the non-tax advice communications be ringfenced? This issue also caused UK judges headaches when the issue arose.

"If a tax advice privilege were established, it might be problematic to isolate communications regarding one professional function from another," says the paper.

Another area in which the UK courts and Australian government have cause for concern is accountants' professional codes of practice. Both have questioned if tax advisors have the same degree of oversight as lawyers. As in the UK, some tax advisors are not qualified accountants or members of a professional body.

The Australians have suggested that their accountants might need to receive specific, ongoing, ethical training. Ironically, those lawyers are on occasions using their powers to impede tax investigations, says the paper, suggesting that creating wider privilege would see more instances of delays and difficulties.

The rise of multi-disciplinary practices in the US, where lawyers and non-lawyers work together, has seen privilege extend to the professional non-lawyers providing similar services to their legal counterparts, the paper noted. This point holds relevance here in the UK, where such structures should become easier to create after October when the Legal Services Act comes into force.

Would creating privilege for tax advice cause difficulties for taxing multinationals? Potentially, the paper suggests. The creation of privilege would need to be carefully considered to avoid creating unexpected or uncertain outcomes when data is shared under information exchange agreements. Such a privilege would also need to avoid hindering Australia's ability to participate in cross-border taskforces or investigations.

So, how could the tax advice privilege be formed in Australia and what would it look like?

A separate regime for accountants would be difficult to manage because it could create inequities with tax lawyers. It also suggests that codifying the current common law protection that tax advisors receive could work, outlining which documents were covered.

The paper notes that the problems associated with extending common law privilege from lawyers to tax advisors would remain unresolved.

Another option would be to extend privilege only to a tax advice document outlined in Australian tax law. This would differentiate it from a wider privilege for tax professionals.

The discussion paper has a certain tone of understanding the theory of extending privilege, yet it is wary about the consequences.

Those expecting the Australian model to open a new dawn of wide privilege for tax advisors across the globe are mistaken; it is angled more towards how to create a more equitable system through a narrow extension of rights.

Any movement in the right direction would be promising for UK tax advisors: the Australian model is likely to push things further, albeit the likelihood is that it will be by a smaller amount than accountants hope.

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