22 August 2019

Talking Tax – Issue 168

Legal professional privilege - a shield but not a sword

The High Court in the case of Glencore International AG & Ors v Federal Commissioner of Taxation [2019] HCA 26 has unanimously rejected an application for an injunction brought by the Glencore Group (Glencore) to restrain the Federal Commissioner of Taxation (Commissioner) from using documents that were released as a part of the ‘Paradise Papers.’

Following the Glencore decision, it is clear that once the Commissioner has a taxpayer’s confidential information in its possession, the Commissioner is entitled to use that information as it sees fit to fulfil its statutory duties unless the taxpayer can show there has been a breach of the equitable duty of confidence.

The facts in the Glencore decision relate to the theft of confidential documents from Glencore’s lawyers.

In or about 2017, volumes of documents were allegedly stolen from the electronic file management system of Appleby, a Bermuda based law firm, and made public.  These documents became known as the ‘Paradise Papers’ and disclosed sensitive information about many of Appleby’s clients.

These papers included documents relating to Glencore (Glencore documents) which Glencore claimed had been created by Appleby for the sole or dominant purpose of providing legal advice to Glencore and were therefore protected by legal professional privilege.

Documents that are subject to legal professional privilege will be exempt from having to be produced to the court, by operation of the court process or where compelled by statute.

The Court in this case noted that there was no issue that the Glencore documents were subject to legal professional privilege. The issue was that Glencore claimed that the protection of legal professional privilege was, on its own, a sufficient cause of action to secure the injunction sought.

Glencore’s argument was unanimously rejected by the Court which concluded that legal professional privilege is not a legal right that is capable of being enforced and therefore cannot be relied on as a separate cause of action.

Instead, the Court confirmed that legal professional privilege may only be relied on to provide an immunity from the exercise of powers which would otherwise compel the disclosure of privileged communications. In other words, legal professional privilege can only act as a shield and cannot be used as a sword.

Accordingly, Glencore was unable to establish a cause of action sufficient to justify its application for an injunction and the Commissioner was free to use the Glencore documents in its possession in order to exercise its statutory powers.

Notably, the Court identified that Glencore would be unlikely to succeed if it brought an application for an injunction for breach of confidentiality. This was because the Glencore documents had been released as a part of the Paradise Papers and were already in the public domain.

Personal services income: the impact of customs and practices

On 12 August 2019, the Federal Court in the case of Douglass v Federal Commissioner of Taxation [2019] FCA 1246 upheld an earlier decision by the Administrative Appeals Tribunal and concluded that a personal services entity (PSE) did not satisfy the results test contained in section 87-18 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). Consequently, the personal services income (PSI) received by the PSE was assessable as the income of the individual providing the services, and not the PSE.

This case focused on the operation of section 87-18(4) of the ITAA 1997 which deals with the consideration of customs and practices relating to the kind of work being tested under the results test.

During the 2013 and 2014 income years, the taxpayer provided electrical engineering and management services through a partnership with his wife where the income was split equally between the two partners (the PSE). The ATO made a determination that the PSI rules contained in Div 86 of the ITAA 1997 applied so as to include all income received by the partnership in the individual taxpayer’s assessable income for the 2013 and 2014 income years.

The taxpayer objected to this determination, arguing that the results test in section 87-18 of the ITAA 1997 was satisfied meaning the income was generated by a personal services business and the PSI rules in Div 86 of the 1997 Act did not apply.

The taxpayer submitted that the engineering and managerial work done by him would ordinarily be done by an independent contractor and that it was the custom or practice that work of the relevant kind was not performed by an employee but by an independent contractor, which meant that the results test at section 87-18(4) of the ITAA 1997 was satisfied (as a result of the application of section 87-18(4) of the ITAA 1997).

Section 87-18(3) of the ITAA 1997 provides that a PSE will satisfy the results test in an income year (such that there is no PSI attributable to an individual) if, in relation to at least 75% of the individual’s PSI during the income year:

  • the income was for producing a result; and
  • the PSE was required to supply the plant and equipment, or tools of trade, needed to perform the work from which the PSE produced the result; and
  • the PSE is, or would be, liable for the cost of rectifying any defect in the work performed.

Section 87-18(1) of the ITAA 1997 sets out the same conditions that an individual will need to meet to satisfy the results test.

Under section 87-18(4) of the ITAA 1997, when considering the tests in section 87-18(1) and (3), regard is to be had to whether it is custom or practice, when the work is performed by an entity rather than an employee:

  • for the PSI from the work to be for producing a result; and
  • for the entity to be required to supply the plant and equipment, or tools of trade, needed to perform the work; and
  • for the entity to be liable for the cost of rectifying any defect in the work performed.

The taxpayer argued that where section 87-18(4) of the ITAA 1997 is satisfied, it operates to modify the requirements of sections 87-18(1) and (3) of the ITAA 1997. Specifically, the taxpayer submitted that where section 87-18(4) is satisfied, then the results test is passed without needing to have regard to conditions contained in sections 87-18(1) and (3) of the 1997 Act.

The taxpayer argued that sections 87-18(1) and (3) of the ITAA 1997 were satisfied and the taxpayer could validly be considered as performing a personal services business that was not subject to the PSI rules in Div 86 of the ITAA 1997.

The argument was rejected by the Court which held that the taxpayer’s interpretation of section 87-18 of the 1997 Act was unsupported by the text and context of the provision.

Ultimately, the Court concluded that where a custom or practice that satisfies section
87-18(4) is identified, that custom or practice is only to be regarded as a factor pointing towards a conclusion that the results test is satisfied in accordance with section 87-18(1) and (3). That is, a custom or practice is merely probative and does not modify the requirements of sections 87-18(1) and (3) of the ITAA 1997 which must still be satisfied in order to meet the results test.

The taxpayer was unable to meet the conditions of either section 87-18(1) or (3) of the ITAA 1997 and subsequently failed to satisfy the results test. Consequently, the PSI rules in Div 86 of the ITAA 1997 applied and the full income received by the partnership was held to be assessable to the individual taxpayer.

The long arm of the ATO: intercepting overseas tax debtors

The ATO has released an updated version of the Law Administration Practice Statement 2011/13 (PS LA 2011/13) which outlines the options available to the ATO in relation to recovering a tax debt where the debtor is located overseas. The statement also explains how the ATO will deal with a request that is received from another country for assistance in the recovery of a tax debt owing to that country.

Specifically, the practice statement covers:

  • the ATO’s ability to require payment pursuant to domestic tax legislation, for instance by issuing a garnishee order;
  • the ability of trustees and liquidators to recover debts in a foreign jurisdiction and how the ATO may assist them;
  • the ATO’s ability to obtain judgment in a foreign jurisdiction to recover debts in that jurisdiction; and
  • the ATO’s ability to request assistance from foreign jurisdictions.

Importantly, the ATO has specified in this statement that it will only be appropriate to undertake these actions where the taxpayer:

  • has been notified of their tax liability;
  • has been given a clear opportunity to pay but has failed to do so by the due date; and
  • has not engaged with the Commissioner to manage the debt after being given a clear opportunity to do so.

This practice statement should also serve as a pertinent reminder for all taxpayers that just because they are overseas does not mean that the ATO will not attempt to pursue a tax debt that is outstanding.

This article was written with the assistance of Charlies Renney, Law Graduate.

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Peter is the section leader of the firm's Tax team. Peter has joined Hall & Wilcox in 2016 after nearly 30 years with KPMG where he was a Senior Tax Partner.

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Jim has over 10 years’ experience providing taxation advice on a broad range of corporate and trust tax matters, with a particular focus on the banking and finance, government and property and construction sectors.

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