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Australian regulators consider the application of legal professional privilege

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Paul McNab of DLA Piper presents the tax highlights from September 2020 in Australia, which includes clarifications to the hybrid mismatch rules and wider discussion on legal professional privilege.

Australian Tax Office ‘Top 1,000’ program launched

The Australian Tax Office (ATO) has announced on their website the commencement of the ‘Top 1,000 combined (income tax and goods and services tax) assurance program’. This program of taxpayer reviews replaces the previous ‘Top 1,000’ program. Domestic and foreign companies who were involved in that program should expect to be approached for a combined review. The program targets companies with combined income tax and goods and services tax (GST) payments of AUD$250 million (US$177 million), but it excludes companies who fall under the ‘Top 100 program’.

Legal professional privilege

The application of legal professional privilege (LPP) remains a topic of focus for regulators in Australia. The ATO is engaged in at least two matters currently before the Federal Court which seek to explore the application of LPP to new business models adopted by non-traditional law firms.

In ASIC v RI Advice Group Pty Ltd [2020] FCA 1277, the Federal Court has rejected a claim for LPP in relation to documents provided to the Australian Securities and Investment Commission (ASIC). The fact pattern and issues are also relevant to dealings with the ATO.

Essentially, ASIC used its statutory information gathering powers and issued statutory notices to demand certain documents. The company provided them, though later sought to claim that LPP prevented the documents being used in proceedings concerning a civil penalty. It provided evidence from its solicitor about the circumstances of their creation, and suggested that their provision was the result of an error and inadvertent.

The court pointed to a number of problems with the claim. It said there was not appropriate evidence on the question of whether the documents were privileged in the first place (they must have been created for the dominant purpose of receiving legal advice). The court also pointed out that when ASIC had issued its notices it had invited a claim for LPP. When supplying some of the documents the covering letter said that their production did not constitute a waiver of privilege. However, some appear to have been provided without any such reservations.

The judgment points to a need for greater care to identify and claim LPP when responding to statutory notices. Moreover, to the difficulty of claiming inadvertent errors in production, without explaining in detail the nature of the circumstances leading to the inadvertent error.

Clarifications to hybrid mismatch rules

On September 3 2020 the Treasury Laws Amendment (2020 Measures No.2) Act 2020 received royal assent.

Among other things, the amendments:

  • Clarify the operation of the hybrid mismatch rules for trusts and partnerships;

  • Clarify the circumstances in which an entity is a deducting hybrid;

  • Clarify the operation of the dual inclusion income rule by:

    • Deeming certain types of foreign sourced income to be subject to Australian income tax in determining if that income is dual inclusion income;

    • Removing the need for non-corporate entities to reduce their dual inclusion income where they have a foreign income tax offset;

    • Clarifying the operation of the dual inclusion income on-payment rule; and

    • Expanding the definition of dual inclusion income group such that, if in a country two or more entities share the same multiple liable entities (and those alone), then those entities are members of a dual inclusion income group in that country;

  • Clarify the operation of provisions that have regard to the operation of corresponding foreign hybrid mismatch rules;

  • Clarify that, for the purpose of applying the hybrid mismatch rules, foreign income tax does not include foreign municipal or state taxes (except in considering the application of the integrity rule);

  • Clarify that the hybrid mismatch rules apply to multiple entry consolidated (MEC) groups in the same way as they apply to consolidated groups;

  • Ensure that the integrity rule can apply appropriately to financing arrangements that have been designed to circumvent the operation of the hybrid mismatch rules; and

Some of the amendments have retrospective effect, and the ATO has offered guidance to taxpayers on how to deal with this in their tax filings.

Glencore appeal heard

In four days of hearings, from September 7 to September 10, the Full Federal Court heard the ATO’s appeal from the decision in Glencore Investment Pty Ltd v FCT [2019] FCA 1432. The court had there decided in favour of the taxpayer.

The appeal focusses on the question of whether the actual decision to alter related party agreements could, itself, be the subject of the arm’s-length rule. In other words, even if the agreements in place before and after the change were themselves to be found in arm’s-length dealings, would arm’s-length parties have decided to make the change. It also focusses on the question of the quality of evidence required to establish that a transaction is comparable. 

Paul McNabT: +61 292 868 664E:

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