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Australia: ATO wins legal professional privilege dispute and sets COVID-19 PE risk guidance

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The Australian Taxation Office has had a busy start to 2021

From judicial decisions to ATO guidance updates, Paul McNab of DLA Piper summarises the tax-related developments from early 2021 in Australia.

Court cases

CUB Australia Holding Pty Ltd v FC of T

On February 2 2021, Moshinski J of the Federal Court of Australia handed down judgment in CUB Australia Holding Pty Ltd v FC of T [2021] FCA 43. This was a dispute involving a formal statutory notice from the Australian Taxation Office (ATO) demanding certain information, and the application of legal professional privilege.

The ATO has been on record since 2018 with ‘concerns’ about whether legal professional privilege is being properly claimed in disputes. In particular, it refers to disputes with legal practitioners who operate in firms that are ‘multi-disciplinary’ or firms that also provide services other than legal services (see Attachment A to the ‘National Tax Liaison Group key messages November 30 2018’ minutes” where the ATO concerns are summarised).

The ATO put Australian legal professionals on notice that it will strictly test claims for privilege, especially by such firms. A number of privilege disputes with the ATO have continued to reach the courts in recent times.

The events that led to this dispute started with an earlier statutory notice issued by the ATO in 2018 to the company (when its name was AB Australia Holdings Pty Ltd). That notice demanded certain documents for the purpose of a tax audit of the group. The company claimed, however, that a number of the documents sought were subject to legal professional privilege. 

The ATO has a long standing policy of demanding additional information about the allegedly privileged documents, so that it can assess whether privilege has been properly claimed. It therefore asked for more information and it appears that the taxpayer declined to provide that information. In 2020, the ATO issued another formal statutory notice, this time seeking:

  • The title of each (allegedly privileged) document and if it was an email, the title in the subject line;

  • The name of the person authoring it;

  • The name of each person to whom it was communicated; and

  • Where it is an email, whether the person who received it was sent it directly or it was copied.

Attachment A (referred to above) suggests the ATO might use this information to determine whether the documents fall into many of the categories listed there. For instance:

“Claims being made on the assumption or 'decision rule' that all documents where a lawyer (external or internal) is cc:ed are privileged, without consideration as to the role of that lawyer and/or the purpose of the communication.”

It is common for notices requesting documents to give a relatively short time period within which to respond, although extensions may sometimes be granted. If the request involves corporate emails, it can be necessary to analyse tens of thousands of documents to determine those that meet the notice, and then further identify those that are (or may be) privileged.

The notice time period can normally only then be met by using analytical tools adopting conservative assumptions about document characteristics. Penalties for error, however, include custodial sentences for the person to whom the notice is directed.

The main argument by the taxpayer was that such statutory notices could effectively only be used to assist the ATO gather information to determine a taxpayer’s tax obligations. Also, that in issuing this notice, the ATO’s purpose was to actually test the taxpayer’s privilege claim, which was an ‘improper’ purpose. The notice was, then, invalid.

The court held that the notice was valid because the power to issue the notice was broad, and the purpose of determining whether privilege applied was indirectly but sufficiently connected to the statutory purpose.

The taxpayer also argued that the titles of at least some of the emails were themselves privileged, but this claim was held over to be tried separately in the future.

This matter reminds taxpayers and their lawyers of the importance of agreeing the guidelines for communication in any situation where there is a risk of dispute with the ATO. The roles of lawyers in the team, and the way they deal with non-lawyers must be clearly defined and followed.

FCT v Addy

For analysis of the Full Federal Court decision from August 2020, see here.

The High Court of Australia has granted leave to appeal to the taxpayer in FCT v Addy [2020] FCAFC 135. From 2017, taxpayers who worked in Australia under a ‘working holiday visa’ were subject to a higher rate of tax than residents. Ms Addy appealed on, among other grounds, this was a breach of the relevant ‘anti-discrimination’ provision in Australia’s international tax treaty.

The fact that the High Court has granted leave confirms that it accepts that tax disputes, which otherwise meet the criteria for special leave (such as division in the courts below and an issue of principle with wide application) are important matters.

The dispute in Addy is over a little more than AUD2,000 (US$1550). However, it has been reported in the press that the issue could affect more than 70,000 taxpayers with a total of more than AUD200m at stake.

ATO guidance updates

COVID-19 and permanent establishments

The ATO has updated its website guidance on COVID-19 permanent establishment (PE) risk. It says it will not review situations where:

  • You did not otherwise have a PE in Australia before the effects of COVID-19;

  • The temporary presence of employees in Australia continues to solely be as a result of COVID-19 related travel restrictions;

  • Those employees temporarily in Australia will relocate overseas as soon as practicable following the relaxation of international travel restrictions; and

  • You have not recognised those employees as creating a PE or generating Australian source income in Australia for the purpose of the tax laws of another jurisdiction.

It will now maintain this position until June 30 2021. Employers who do not meet these criteria can expect their situation to be reviewed. In many cases, there are steps that should be taken to mitigate such risks.

Buy-back or redemption of hybrid securities

The ATO has released PCG 2021/1, which gives guidance on how to value hybrid instruments which are bought back or redeemed. The guidance is for certain hybrid instruments that are equity interests held on capital account.

On the specified call date, the ATO accepts that market value is equal to face value. Prior to this date, a formula using a volume weighted average price, or a formal valuation will be accepted.

Paul McNab



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