9.33 It is immediately apparent that the Australian provision is more concise than its New Zealand equivalent. It undoubtedly applies to third parties. The main difference between section 16(2) and the section 263 is that the latter does not require that the investigator’s questions are answered. However, it is arguable that the requirement to answer questions set out in section 16(2) is redundant, because the Commissioner must be given all reasonable assistance and has other information-gathering powers. Answering questions orally would generally come within the ambit of the requirement to give the investigator all reasonable assistance. As well as not obstructing the investigator and providing such things as sufficient light, air, and space for an inspection, reasonable assistance would extend to answering questions on the precise location of an item. For example, a bank manager would be required to identify the taxpayer’s safety deposit box in a vault. The committee notes that in practice, the Commissioner would not rely on section 17 for answers to such questions, because that section requires information to be furnished only in writing and not orally. Such an approach would not be practical when conducting a search of premises for particular items. Section 17, of course, could be relied on if the investigator wanted written answers to any questions.

9.34 The Australian section 263 also differs in that it applies only to the current occupier of the place being inspected, whereas section 16(2) can apply to former employees, for example, a former bank employee who handled the taxpayer’s transactions with the bank. If investigators had to rely on the wording in the Australian provision, they would need to use section 17 to extract written answers from the ex-employee. If investigators wanted oral answers from the ex-employee, they could use section 19 of the Tax Administration Act 1994, which gives the Commissioner the power to conduct an inquiry for the purpose of obtaining information by requiring people to attend before the Commissioner and answer questions.

9.35 In summary, then, the committee recommends that the following amendments should be made to sections 16 and 17 of the Tax Administration Act 1994:

Section 17 should be amended to deem the records of an offshore entity controlled by a New Zealand resident to be under the control of that New Zealand resident.

Section 17 should be amended to remove the words ‘necessary or relevant’.

Section 17 should be amended to give the Commissioner the discretion to require that documents requisitioned under that section should be sent to an Inland Revenue office.

Section 16 should be amended to allow documents to be removed from premises for copying and to be returned as soon as practicable.

Section 16(2) should be amended to clarify that it applies to third parties.

Legal Professional Privilege

Introduction

9.36 The main limitation on the Commissioner’s information-gathering powers is legal professional privilege. Legal professional privilege can attach to both communications in which legal advice is sought and given, and also to communications in the context of litigation. This common law doctrine is embodied in section 20 of the Tax Administration Act 1994.

9.37 In this chapter, the committee considers whether the ambit of legal professional privilege preventing disclosure of information to the Commissioner is too wide, and makes some recommendations limiting the scope of legal professional privilege and its abuse. Two distinct issues arise: first, the abuse of the privilege, and secondly, the Inland Revenue Department’s challenges of that abuse.

9.38 Section 20 was originally enacted in 1958 as section 16A of the Inland Revenue Department Act 1952 in response to the Court of Appeal’s decision in CIR v West-Walker.¹⁵⁸ The enactment was an attempt to express that decision in statutory form, while preventing its application to certain financial records, such as trust accounts. In West-Walker, the court held that a solicitor was entitled to decline to furnish to the Commissioner information protected from disclosure by legal professional privilege without the prior consent of the client.

9.39 Section 20 provides that any information or book or document is privileged from disclosure in the following circumstances:

If it is a confidential communication passing directly or indirectly between a legal practitioner in his or her professional capacity and a client, or between legal practitioners in their professional capacity; and

If it is made for the purpose of obtaining or giving legal advice; and

If it is not made for the purpose of committing some illegal or wrongful act.

9.40 Section 20 probably constitutes a code for legal professional privilege to the extent that it applies to communications between a lawyer and a client. A claim for privilege in relation to such communications does not lie apart from the privilege permitted by the section. However, the section is silent on the application of legal professional privilege to protect communications with third parties relating to actual or contemplated litigation. If anyone refuses to disclose information to the Commissioner on the ground that it is privileged under section 20, an application can be made to a District Court Judge to determine whether the claim of privilege is valid.

9.41 The New Zealand courts have followed the approach taken in the United Kingdom and have held that privilege applies if the dominant purpose of the communication relates to the provision of legal advice: Guardian Royal Exchange v Stewart.¹⁵⁹ In contrast, the High Court of Australia has adopted a sole purpose test: Grant v Downs.¹⁶⁰ However, in practice this approach, as illustrated in FCT v Citibank Ltd¹⁶¹ has not significantly assisted the Australian Tax Office in preventing its investigations being hindered by privilege claims.

9.42 If documents are merely lodged with a lawyer for safe custody, they are not privileged from disclosure: CIR v West Walker¹⁶².

9.43 In Leary v Federal Commissioner of Taxation¹⁶³, a decision of the Australian Federal Court, it was held that a lawyer acting primarily in the role of a promoter of a scheme was unable to rely on legal professional privilege. Brennan J explained that:

[The] activities of an entrepreneur in the promotion of a scheme in which taxpayers would be encouraged to participate fall outside the field of professional activities; those activities are not pursued in discharge of some antecedent professional activity. Entrepreneurial activity does not attract the same privilege nor the same protection as professional activity; and the promotion of a scheme in which particular clients may be advised to participate is pregnant with the possibility of conflict of entrepreneurial interest with professional duty.¹⁶⁴

9.44 In Miller v CIR¹⁶⁵, the High Court held that legal professional privilege extends to communications between salaried solicitors and their employer clients, if the solicitor is acting in his or her capacity as a legal adviser, and not in some other capacity, such as an executive capacity. The case involved discovery of legal opinions prepared by Inland Revenue solicitors. Baragwanath J applied the main Commonwealth precedent of Alfred Crompton v Customs and Excise Commissioners (No 2).¹⁶⁶

9.45 In Dinsdale v CIR¹⁶⁷, the High Court has also recently held that legal professional privilege does not extend to the notes of interviews conducted with a number of third parties by auditors of a bank on instruction from the bank’s solicitors. The notes were not communications between a lawyer and client, so section 20 did not apply. The High Court’s decision was upheld by the Court of Appeal.¹⁶⁸

Hindrance of investigations

9.46 There is ground for arguing that legal professional privilege is being used to obstruct the Inland Revenue Department whose auditors are obliged at present to allow taxpayers the opportunity to claim privilege for any requisitioned documents: FCT v Citibank Ltd¹⁶⁹. In evidence before the Davison Commission, legal professional privilege was cited by the Inland Revenue Department as:

... one of the biggest obstacles to the Inland Revenue Department when it is conducting large corporate investigations. ... The veil of privilege weakens the department’s ability to carry out its [revenue collection] duty because of the opportunity it provides for exploitation.¹⁷⁰

9.47 The following examples of where the Inland Revenue Department considers that its investigations have been hindered, and which mainly concern privilege claims, were given by the department in its evidence to the Davison Commission:

Claiming privilege for materials held on a solicitor’s file but clearly not involving matters of legal advisory nature.

Taking a restrictive interpretation of the word ‘control’ over information held by a corporation’s solicitors, when faced with a wide-ranging Inland Revenue Department information request.

Removing documents from files made available for inspection and not informing the Inland Revenue Department that legal professional privilege has been claimed.

Mixing documents relating to transactions with, or not separating them from legal advisory papers, and claiming a blanket privilege for all documents.

Including transaction details in the document containing legal advice to hide them from the Inland Revenue Department.

Preventing access to offices where important records may be retained without giving the owner sufficient notice that a claim of legal professional privilege can be made.

Claiming privilege through accountants and officers of companies holding legal practising certificates.

9.48 Some of these practices seem to the committee so clearly outside the scope of any valid claim to privilege that they are clearly beyond the limits of acceptable professional behaviour.

9.49As well as severely limiting the Inland Revenue Department’s powers to obtain information, such broad claims for legal professional privilege provide lawyers with a competitive advantage vis-à-vis other tax advisers. Privilege may be claimed for tax advice from a lawyer when advice of exactly the same nature provided by an accountant, would not be privileged. Accounting professionals have expressed their concern, although their preference is to widen professional privilege to include advice from accountants.

9.50 It is well established that no privilege exists against self-incrimination in relation to the Commissioner’s information-gathering powers: Singh v CIR¹⁷¹; Commissioners of Customs and Excise v Ingram¹⁷². Lord Goddard CJ stated that such privilege would ‘stultify the whole purpose’ of the revenue’s information-gathering powers.

9.51 It seems to the committee that the existence of legal professional privilege in tax matters, other than litigation-related privilege, is inconsistent with the absence of any privilege against self-incrimination on tax matters. In his dissenting judgment in CIR v West-Walker¹⁷³ which led to the original enactment of section 20, Stanton J wrote:

I cannot think that the rules of evidence relating to the protection of privileged communications is of any higher status than the similar rule against requiring a witness to incriminate himself.

9.52 The committee regards the privilege against self-incrimination as more fundamental than legal professional privilege. Considering the former privilege no longer applies in tax cases, there is a strong argument that the latter privilege should also not apply in tax cases. Therefore, on the issue of the application of legal professional privilege, other than litigation-related privilege, tax cases can be distinguished from other cases.

Future of privilege in tax matters

9.53 The Organisational Review Committee considered the issue of legal professional privilege¹⁷⁴. It stated that it might be appropriate to reconsider legal professional privilege generally in relation to tax matters, noting a growing trend in litigation to place all cards on the table. This statement was made following submissions by the New Zealand Society of Accountants that privilege should be extended to tax advice given by its members. ¹⁷⁵

9.54 The committee notes that it was the view of the Davison Commission¹⁷⁶ that legal professional privilege in all tax matters should be abolished. The Commission itself experienced considerable difficulties with privilege claims during the course of its investigations.¹⁷⁷

9.55 The Law Commission has also considered the issue of legal professional privilege in tax matters. If the Commission proceeds in the way the committee understands is likely, its approach will solve a number of the problems that have arisen in the tax area.

9.56 The committee understands that the Law Commission is to recommend the abolition of privilege for tax advice. The proposal is intended to allow the Commissioner to have access to all communications between a lawyer and client which are generated before the filing of the taxpayer’s return. The New Zealand Law Society has opposed this change. The Law Commission’s rationale for the exclusion of tax advice from privilege is based on a strong public interest in keeping the Commissioner fully informed. It considers that because tax collection is dependent on disclosure, there must be full disclosure.

9.57 The Law Commission proposes an amendment to section 20(1)(b) of the Tax Administration Act 1994, so that privilege would be available only for confidential communications with legal advisers when those communications are brought into existence for the purpose of obtaining or giving legal advice or assistance in relation to the subject matter of an income tax return that at the time of obtaining the legal advice or assistance, has been or ought to have been furnished.

9.58 The Law Commission’s proposals remain in draft form and have not been published. The committee would have no quarrel with what the Law Commission is proposing.

9.59 The committee does not make any final recommendation on the scope of the existing legal professional privilege rule applying in tax matters, because it would prefer the government to refer to the more detailed work undertaken by the Law Commission, which has had more time to consider this issue than has the committee.

9.60 However, apart from any consideration of the wider issue of whether the rules of privilege applying in tax matters should be relaxed, the committee recommends that two specific amendments should be made to section 20. The committee supports an amendment to ensure the physical protection of documents once a claim for privilege is made, and pending the determination of its validity by a District Court Judge under section 20(5) of the Tax Administration Act 1994. If claims for privilege are made, procedural rules would be necessary to safeguard documents by, say, ensuring they are placed in a package which is sealed and delivered to the nearest District Court registrar for safe custody. Such rules would be necessary to protect documents from abusive practices such as removal, destruction or tampering. A precedent for such protective procedures is contained in section 232 of the Canadian Income Tax Act.

9.61 The committee also favours an amendment to section 20 to make conditions of privilege the identification of the document and the ground on which privilege is claimed. At present, section 20 contains no such requirement. This deficiency was reflected in the evidence of the Inland Revenue Department to the Davison Commission which referred to the practice of documents being removed from files made available for inspection and Inland Revenue Department not being informed that privilege had been claimed for them.

9.62 The rules used for identifying documents for which privilege has been claimed for discovery purposes in civil litigation proceedings could form the basis of such an amendment. Those claiming privilege would be required to identify the documents and state the grounds for privilege by affidavit.

9.63 In summary, the committee recommends that the government should await the outcome of the Law Commission’s study of legal professional privilege before making any decisions on the scope of this privilege. In the interim, the committee recommends two specific amendments to section 20:

An amendment should be made to ensure the physical protection of documents for which legal professional privilege is claimed pending judicial determination of the claim’s validity.

An amendment should be made to require the identification of documents for which privilege is being claimed as a condition of obtaining privilege.

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Footnotes

¹⁵⁸ [1954] NZLR 191 Back
¹⁵⁹ [1985] 1 NZLR 596 Back
¹⁶⁰ [1976] 135 CLR 674Back
¹⁶¹ (1989) 89 ATC 4268 Back
¹⁶² [1954] NZLR 191 Back
¹⁶³ (1980) 80 ATC 4438 Back
¹⁶⁴ (1980) 80 ATC 4438 at 4452 Back
¹⁶⁵ (1997) 18 NZTC 13,001 Back
¹⁶⁶ [1972] 2 QB 102 Back
¹⁶⁷ (1997) 18 NZTC 13,244 Back
¹⁶⁸ (1998) 18 NZTC 13,583 Back
¹⁶⁹ (1989) 89 ATC 4268 Back
¹⁷⁰ Nash, July 1995, Supplementary Brief of Evidence, page 19 Back
¹⁷¹ (1996) 17 NZTC 12,471 Back
¹⁷² [1948] 1 ALL ER 927 Back
¹⁷³ [1954] NZLR 191 Back
¹⁷⁴ Organisational Review Committee, Report on the Organisational Review of the Inland Revenue Department, April 1994, para 9.52 Back
¹⁷⁵ Arguments for extension are mainly based on accountants achieving horizontal equity with lawyers in the area of tax advice. Back
¹⁷⁶ Commission of Inquiry into Certain Matters Relating to Taxation, Report of the Winebox Inquiry, August 1997 Back
¹⁷⁷ See pages 1:5:26-1:5:31 Back

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