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Accountants & Lawyers’ Legal Professional Privilege

Friday, 14 May 2004

The Full Federal Court has held that legal advice privilege is capable of extending to non-agent third party authored documentary communications.  



The taxpayer was the ultimate holding company of the Pratt group of companies. Between 1990 and 1995, the Pratt group underwent a major balance sheet reconstruction and refinancing program. In the course of this "reconstruction program,” an issue arose concerning the taxation consequences of significant losses incurred by an entity in the Pratt Group. In this context, in early 1992, the group's tax manager sought advice from a law firm (“Lawyers”).

As part of this advising, the Lawyers suggested that the taxpayer obtain a valuation of assets from an independent accounting firm to assist in determining the exact quantum of the losses and, in particular, a loan receivable ("Yoni valuation"). The taxpayer then engaged accountants (“Accountants”), to do a valuation, and to prepare a paper for obtaining tax advice from the Lawyers. Although the Accountants were aware that the taxpayer intended to provide the Yoni valuation and the Accountant’s paper to the Lawyers, the taxpayer did not provide the Accountants with details of its instructions to its Lawyers.

In the course of a tax audit relating to entities, which were either controlled foreign companies, or attributable taxpayers of the Pratt group, for the purposes of Part X of ITAA 1936, the Commissioner sought access to various documents held by the group's accountants. The Accountants provided certain source documents to the Commissioner but claimed that various "restricted source" and "non-source" documents were protected by legal advice privilege. The documents alleged to be "protected" included:

a)   Documents created by the Accountants or other accounting firms for the purpose of providing advice to the taxpayer (whether or not disclosed to the taxpayer);

b)   Documents created by the taxpayer that were provided to the Accountants for the purpose of obtaining advice; and

c)   Documents containing legal advice created by the Lawyers, and disclosed by the taxpayer to the Accountants

The Commissioner sought declarations from the Federal Court that the documents were not protected by legal advice privilege.  


Kenny J held that in the absence of contemplated or actual litigation, legal advice privilege did not attach to a communication between lawyers or client with a third party unless the third party is an agent of the client or solicitor for the purpose of the communication. Accordingly, legal advice privilege did not attach to the communications between the Accountants and the taxpayer in categories (1) and (2). Her Honour said that the Accountants were the taxpayer's representative only in the sense that it was employed by the taxpayer to prepare the paper and the valuation; the Accountants were not the taxpayer's agent for the purpose of making (or receiving) communications to (or from) the Lawyers. However, her Honour held that the taxpayer did not waive legal advice privilege in relation to the communications in category (3) by disclosing them to the Accountants (see 2003 ATC 4005).  


The Full Court held that the coherent rationale for legal professional privilege does not lend itself to artificial distinction between situations where that expert assistance is provided by an agent or alter ego of the client and where it is provided by a third party. Nor should the availability of privilege depend on whether the expert opinion is delivered to the lawyer directly by the expert or by the client. If the dominant purpose requirement is met, there is no reason why privilege should not extend to the communication by the expert to the client. Accordingly, Kenny J's decisions in relation to the category (1) and (2) documents should be set aside.

Further, the Full Court held that as Kenny J did not consider the taxpayer's dominant purpose in creating the category (3) documents, the matter should be remitted for reconsideration.  

Source: [2004] FCAFC 122 (Finn, Merkel and Stone JJ), 12 May 2004, Melbourne

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