Limits to our formal powers

Overview of our limits

The notice and access powers we use to gather information are limited in some circumstances. You may be able to claim your documents are protected from production by either:

• legal professional privilege
• the administrative concessions that apply to      
  • professional accounting advisers’ papers (the accountants’ concession)
  • corporate board advice on tax compliance risk.

Where our published statements and guidance are followed, we won't draw an adverse inference merely because you make a claim and do not provide your documents to us.

Legal professional privilege

Legal professional privilege protects confidential communications between you and your lawyer that are made for the dominant purpose of:

• legal advice – enabling you to get, or your lawyer to give, legal advice
• litigation – where litigation is taking place or is reasonably anticipated at the time the communication was made.

Privilege belongs to a client and not the lawyer. Only the client (or their lawyer under a retainer) has the power to decide whether or not privilege should be claimed. Communications made with the intention to obtain or give legal advice or for the conduct of actual or contemplated litigation, even though they are not in fact used in the litigation, may be privileged. In some circumstances, communications made between either you or your legal adviser and a third party may also be privileged.

Privilege can be claimed in other circumstances, including when:

• the client is an entity rather than a natural person
• there has been a disclosure of privileged communications to a third party who has an interest sufficient for 'common interest privilege' to apply
• there is more than one client who has retained the lawyer in the matter in question, in which case 'joint privilege' may apply.

A copy made of a document that is subject to legal professional privilege is normally also privileged in the hands of the lawyer or the client, particularly if the copy is made for record-keeping purposes, unless the privilege has been expressly or impliedly waived.

Dominant purpose test

The purpose for which the communications or documents were made is central to legal professional privilege. They must be made or brought into existence for one of the following:

• the dominant purpose of obtaining or giving legal advice
• the dominant purpose of conducting actual or contemplated litigation
• more than one purpose, where the dominant purpose is one of giving legal advice or conducting litigation.

The dominant purpose test is an objective test – the onus is on you as the claimant to establish your privilege claim.

Exceptions

Legal professional privilege doesn't always protect communications, including if:

• privilege is waived, either expressly or impliedly
• there is evidence of illegal or improper purpose and the communication was made to further that purpose
• the communication consists of observed facts.

Waiver

Legal professional privilege can be waived by you, a lawyer acting on your behalf or through the conduct of a third party. Waiver of privilege can be express or implied.

'Express waiver' (or intentional waiver) usually occurs where you consent to the release of certain privileged communications or documents.

'Implied waiver' (or unintentional waiver) may occur in the circumstances where your conduct is inconsistent with maintaining the privilege.

Privilege may be waived if a third party other than your lawyer (for example, a bank) has custody of your documents that are subject to a privilege claim.

Illegal or improper purpose

Legal professional privilege will be lost if a communication is made for a purpose that is contrary to public interest; that is, where the communication is made in furtherance of an illegal or improper purpose. The illegal or improper purpose covers all forms of fraud and dishonesty. This applies whether or not the lawyer dealing with the matter is ignorant of the illegal purpose.

It also applies where the illegal or improper purpose was that of a third party, even if neither you nor your lawyer had an improper purpose.

Observed facts

Legal professional privilege won't apply to communications which evidence transactions which do not by themselves amount to the giving or receiving of advice or for litigation – for example, contracts, conveyances, declarations of trust or receipts.

We can request information from an adviser about clients who have purchased, implemented or entered into certain arrangements. The provision of names and addresses in these circumstances doesn't require the disclosure of privileged communications to us.

Documents partly privileged

In some cases, only parts of a document are created for the dominant purpose of legal advice or litigation and will be covered by legal professional privilege – for example, minutes of a meeting.

In this situation, the part you're claiming is privileged must satisfy the dominant purpose test. You must provide the complete document and redact (edit out) the part you claim is subject to privilege.

In-house lawyers

We recognise that legal professional privilege can apply to advice given by a lawyer employed by the client, provided the dominant purpose test is satisfied and the lawyer:

• can demonstrate an appropriate level of independence from the employer client
• was acting in the capacity of a lawyer at the time that the communication was made
• has been admitted to practice as a lawyer.

If an in-house lawyer holds more than one position or function, it may be unclear as to which role they are acting in when providing the advice – a person giving legal advice may not necessarily be acting in a lawyer and client relationship.

When reviewing the level of an in-house lawyer’s independence, we may consider:

• the lawyer’s role within the organisation and their reporting lines to management
• if the lawyer's remuneration is linked to business performance
• if the lawyer has authority to report directly to the directors where their opinion differs from management's position.

A communication from an in-house lawyer must be made (or the document prepared) in their capacity as a lawyer, and not in a management role or other capacity.

The lawyer must be acting in a legal or professional capacity, and the advice given must be of a legal nature. Generally, the advice can't relate to policy or executive decision making or be commercial in nature.

The following factors may be relevant to an in-house lawyer's legal or professional capacity:

• how the lawyer signed or described him or herself in the document or communication
• whether the lawyer also holds a senior role within the organisation, and if job descriptions are attached to each position
• whether the lawyer has several functions, positions, roles and responsibilities within the company
• the capacity in which the lawyer was acting at the time the document or communication was made or prepared.

Third parties

Legal professional privilege can extend to non-agent third parties who have made a communication – for example, communications may be authored by an accountant for their client to be used in obtaining legal advice.

The third-party communication must satisfy the dominant purpose test, and the communication must be confidential to be privileged.

Communications between a lawyer or client and a third party which are for actual or reasonably contemplated litigation may also be privileged.

How to claim legal professional privilege

We will give you an adequate opportunity to claim legal professional privilege (LPP). When using our notice or access powers, we will allow time for you to consult with your lawyers.

Compliance with formal notices – claiming legal professional privilege in response to formal notices – Legal professional privilege (LPP) protocol contains our recommended approach for identifying communications covered by legal professional privilege and making legal professional privilege claims to the ATO. A compendium is published together with the LPP Protocol.

The LPP Protocol has been developed to help you and your advisors when making legal professional privilege claims in response to requests for information we make under our formal information gathering powers.

Its purpose is to set out an approach which, in our view, will best help us in deciding whether to accept, review or challenge a legal professional privilege claim. It is voluntary to follow the approach set out in the LPP Protocol.

We expect that a person claiming legal professional privilege will provide us with an explanation that allows us to decide what to do with a claim for privilege. The LPP protocol sets out the approach and information that we think would allow us to quickly decide how to treat your claim for privilege.

Our forms for claiming legal professional privilege

Use our legal professional privilege forms to provide sufficient details to support your claim.

If you're:

• responding to formal notices to explain your privilege claim, as recommended in the LPP protocol, use the LPP form - responding to formal notices
• providing us with information, but we haven't issued you with a formal notice, use the LPP form – general claims.

You can download the forms as both PDF and excel versions.

We will work with you to resolve disputed claims, or where more details are needed to support your claims.

Resolving claims

We will work with you where possible to agree on a procedure for resolving legal professional privilege claims. If we reach an agreement, we will give you a written statement of what was verbally agreed and ask you to sign it.

There are limited circumstances when we may look at a privileged document while exercising our access powers, including:

• to determine if the document is relevant to our enquiries in order to decide whether to copy it
• when there is no one present to make a claim
• when you have made a blanket claim for privilege.

If we look at your documents in these circumstances, we won't argue that your privilege has been waived.

Inspection agreements

We may use an inspection process to resolve multiple claims for legal professional privilege. Under this approach, each party nominates a person to inspect the documents or alternatively an independent expert will be appointed to consider the claims for legal professional privilege.

An inspection agreement will usually clarify certain matters, including setting a date for completion and deciding a process for resolving disputes if either party disagrees with the decision of the independent expert.

Considering your claims

We consider your claims for legal professional privilege against your supporting material and decide whether to:

• accept the claims
• ask for more information in support of your claims
• refuse the claims
• negotiate any disputed issues with you.

If we decide more information is needed to support your claims, we will usually:

• specify what further information is required
• request completion of a claim form
• specify a timeframe for you to provide the information and forms.

Where a claim for legal professional privilege has been made, but is disputed by the ATO, we will first attempt to resolve the dispute with the person. An alternative dispute resolution process may be engaged. However, if the matter can't be resolved within a reasonable time, then we may notify the person that the documents in question may be accessed within 28 days unless the person starts legal proceedings. The ATO may itself start legal proceedings.

Securing documents

If we decide to secure the documents, we may ask you to seal them in a suitable container – for example, an envelope, box, locked filing cabinet or locked room, depending on the volume of documents.

We sometimes use this approach before you have made a legal professional privilege claim, especially where a large volume of documents is to be inspected. In this case, we may arrange for:

• a secure room at your business premises to be available for the duration of the access which can be sealed by our representative at the end of each day
• the potentially relevant documents to be taken to the secure room where we can inspect the contents to determine their relevance.

When we secure your documents in a container, we will:

• not argue implied waiver because of our inspection
• usually ask you to prepare a schedule of documents held in the container together with a description of each document.

We may allow you to make photocopies of the documents under our supervision before the container is sealed.

We may agree to use a container of a third party to hold the documents if privilege has been claimed and is in dispute. If we agree on a third party – for example, a firm of solicitors – we may get a written undertaking from the third party in relation to the safe keeping and return of the documents.

Accountants’ concession

The accountants’ concession is an administrative concession we have granted to clients of professional accounting advisers. Under the concession, we will generally not seek access to certain advice documents, which we refer to as restricted source and non-source documents.

The concession recognises that while we have the statutory power to access most documents, there is a class of documents that should, in all but exceptional circumstances, remain confidential to you and your professional accounting advisers.

In respect of such documents, you should be able to consult with your professional accounting adviser to enable full discussion of your rights and obligations under tax laws, and for that advice to be communicated frankly.

Forms for claiming the accountants' concession are available via:

• Accountants' concession form 1 (AC1), which is relevant to a claim for the concession in relation to a document
• Accountants' concession form 2 (AC2), which is relevant to a claim for the concession in relation to an attachment to a document (note that an attachment isn't covered by the concession merely because it is attached to a primary document which is prima facie covered by the concession).

Document classification

Our approach to access under the concession varies for differing types of documents. These are classified as:

• Source documents – records of transactions (we seek unrestricted access to these documents).
• Restricted source documents – advice documents shedding light on transactions (we seek access to these documents only in exceptional circumstances).
• Non-source documents – other advice documents (we seek access to these documents only in exceptional circumstances).

The following are some examples of how we may classify various types of documents under the accountants’ concession.

Source documents

Accounting records, including:

• ledgers, journals and working papers (used for financial statement preparation)
• profit and loss accounts – balance sheets
• source records – passbooks, invoices and similar.

Permanent audit file documents, including:

• those outlining an organisation's history, structure or chain of command
• a company's constitution
• the chart of accounts
• copies of continuing contracts – for example, leases.

Tax working papers used to:

• compile information for completing tax returns
• prepare a trial balance and tax return reconciliation
• maintain files and documents for record retention or self-assessment requirements
• analyse shareholding continuity prior to the completion of tax returns.

Other documents including:

• certain non-tax advice on debt restructuring
• transaction documents – contracts and conveyances
• formation documents – partnership agreements and declarations of trust
• accountant trust records and client lists.

Restricted source documents

Advice papers:

• on how to structure or record a transaction or arrangement which is carried out
• solely for the purpose of advising a client on tax-related matters.

Non-source documents

Advice papers:

• provided after the relevant transaction has been completed
• relating solely to transactions or arrangements which haven't, and are not intended to be put into effect
• that don't materially contribute to a tax strategy.

Current audit and assurance files (including statutory audit, prudential tax audit and due diligence reviews), such as:

• the engagement letter
• the audit plan
• letters of confirmation
• testing results and analysis
• working papers and commentaries.

Non-source documents also include tax return opinions that merely state an accountant’s opinion on the matters presented in a tax return.

The concession only applies to documents prepared by external professional accounting advisers who are independent of you. It does not apply if either:

• you make any documents covered by the concession available to us
• the documents relate to non-tax purposes – for example, to determine a potential liability under a contract.

A document prepared by an accountant could also be subject to legal professional privilege if it was created for the dominant purpose of obtaining legal advice or use in actual or contemplated litigation. In that case, the privilege claim would generally be determined first – if privilege does not apply, we would then consider the accountants’ concession.

Guidelines to accessing professional accounting advisers' papers

It is accepted that there is a class of documents which should, in all but exceptional circumstances, remain within the confidence of taxpayers and their professional accounting advisers. In respect of such documents the ATO acknowledges that taxpayers should be able to consult with their professional accounting advisers on a confidential basis in respect of their rights and obligations under taxation laws to enable full and frank discussion to take place and for advice to be communicated on that basis.

For more information, view the guidelines to accessing professional accounting advisers' papers.

Exceptional circumstances

We will only seek access to restricted source documents and non-source documents in exceptional circumstances and with the approval of a designated senior officer.

We may consider there are exceptional circumstances and lift the accountants' concession when:

• the documents provided do not enable us to determine the tax consequences of the particular transactions or arrangements
• the law requires us to determine the purpose for which a transaction or arrangement was entered into – for example, under Part IVA of the ITAA 1936 or the promoter penalty laws
• we have reasonable suspicion of tax evasion or fraud, an offence under the TAA or any other illegal activity
• there is a likelihood that your source documents may be lost or destroyed.

The accountants’ concession isn't the same as legal professional privilege – there are several significant differences, including:

• a request for tax advice or instructions isn't protected by the concession
• you can't redact part of a document based on the concession because it is based on a sole purpose test.

If we intend to lift the concession, we will specify the nature of the exceptional circumstances we intend to rely on. In most cases, you will be given adequate opportunity to respond and argue your position.

Corporate board advice concession

The corporate board advice concession is an administrative concession we have granted in respect of advice for a corporate board on tax compliance risk. This is the information within a document created:

• by advisers (being suitably qualified in-house or independent advisers)
• for the sole purpose of providing advice or opinion to a corporate board (including properly constituted sub-committees) relating to a major transaction, arrangement, corporate system or process                      
  • on the likelihood and impact of the tax compliance risk
  • as to whether the ATO or an administrative or judicial decision making authority may take a contrary view or position to that of the taxpayer on the tax compliance issue, or
  • for courses of action to effectively manage the tax compliance risk.

We will seek access to these documents only in exceptional circumstances, such as when:

• you haven't cooperated or are not cooperating with us to provide full and complete information in a timely manner and the advice or information subject to a claim for the concession is considered relevant to the compliance activity (relevance is a matter for us to determine)
• information important to the compliance activity, including evidence as to the purpose for entering into or carrying out a transaction or arrangement, can't be sufficiently established from your documents and other enquiries
• you have a history of serious non-compliance, for example, involving fraud or evasion or persistent avoidance of your tax obligations, or are under investigation in that regard
• the Commissioner has reasonable grounds to believe that an anti-avoidance provision may apply
• you have a demonstrated history of aggressive tax positions that we have significant concerns about.

The decision to lift the protection under the corporate board advice concession must be made by a designated senior officer. The decision will specify the nature of the exceptional circumstances we intend to rely on. In most cases, we allow you an adequate opportunity to respond before the decision is made.

Some advice for a corporate board on tax compliance risk may also be subject to claims for legal professional privilege or the accountants’ concession. In these circumstances, claims regarding the documents in dispute will generally be evaluated in the following order:

• legal professional privilege
• accountants’ concession
• corporate board advice concession.

The corporate board advice concession does not cover documents:

• prepared for a reason other than providing advice, but attached to that advice
• merely labelled as advice, but which identify a transaction.

Under the corporate board advice concession, redaction is possible if the advice is for the sole purpose of advising the board on tax risk.

For more about our policy regarding ATO access to advice for a corporate board on tax compliance risk, refer to PS LA 2004/14 - ATO access to advice for a corporate board on tax compliance risk

Find out more about how to submit a claim for the concession.