What You Need To Know
- Krok serves as a reminder that legal professional privilege (LPP) may be impliedly waived through the
partial disclosure of legal advice.
What You Need To Do
- When dealing with revenue authorities, care should be taken to ensure that LPP over documents is not
accidentally waived through partial disclosure of the existence of legal advice.
Krok v FCT [2015] FCA 51
Facts
The taxpayer, Mr Krok, a South African national, and
the Commissioner were involved in a dispute
concerning whether the taxpayer or an associated
company derived income and capital gains during the
period in which the taxpayer was resident in Australia.
The Commissioner contended that arrangements to
purportedly transfer assets to the associated company
were a sham or façade, or alternatively the general
anti avoidance rules in Part IVA applied and in respect
of which the taxpayer obtained, and intended to
obtain, a tax benefit.
During discovery, the Commissioner requested certain
documents. These were confidential communications
between the taxpayer and his Australian and British
legal advisers, containing advice in respect of setting
up the relevant structures. The taxpayer claimed LPP
over these communications.
The Commissioner disputed this claim. The
Commissioner accepted that ordinarily such
confidential communications would attract LPP, but
contended that in the circumstances the taxpayer had
implicitly waived LPP. This was because aspects of the
legal advice contained within the confidential
communications were referred to in affidavits prepared
by the foreign lawyers and filed on behalf of Mr Krok
as part of the court proceedings.
The relevant affidavits were sworn by the taxpayer's
South African lawyers and, in explaining the rationale
for the relevant transactions, included a reference to
legal advice obtained in South Africa and Australia.
The affidavits referred to the fact that the relevant
structures were established following the legal advice
obtained.
Issue
Was LPP in relation to the confidential communications implicitly waived by the taxpayer through disclosure of aspects of the advice in the affidavits?
Decision
The Court held that the taxpayer had waived LPP in relation to the confidential communications. In particular:
- Case law indicates that implied waiver of LPP may occur where the party claiming LPP has
"expressly or impliedly made an assertion about the contents of an otherwise privileged communication for the purpose of mounting a case or substantiating a defence. Where the privilege holder has put the contents of the otherwise privileged communication in issue, such an act can be regarded as inconsistent with the confidentiality that would otherwise pertain to the communication."
- Determination of whether the disclosure of the conclusion, gist, substance or effect of legal advice does not necessarily result in implied waiver, but rather also depends on the surrounding facts and circumstances.
- The taxpayer argued that the partial disclosure of the legal advice in the affidavits was not inconsistent with the maintenance of the confidentiality of the otherwise privileged documents that recorded the legal advice. The taxpayer argued that all was disclosed was that "as a result of the input of various lawyers, Mr Krok was advised to establish certain structures". The taxpayer argued that only the "process" followed was disclosed, that is: "that he was following legal advice when he entered into the agreements and arrangements that established the structures. The process undertaken is said to be relevant because Mr Krok's intention is in issue in relation to the Commissioner's contention that the relevant arrangements were a sham or a façade. Mr Krok submits that no taxpayer who has acted on legal advice could sensibly respond to an allegation of sham without disclosing that fact."
- The Court disagreed with the taxpayer and found that there had been a partial disclosure of the purpose and reasoning behind a number of aspects of the advice concerning the structures.
- The Court inferred that the taxpayer's purpose in disclosing the gist of the advice in these affidavits, was to "advance his case in his taxation appeals…to secure a forensic advantage in the proceedings". Therefore, the Court found that it would be unfair deny the Commissioner the opportunity to see the full text of the relevant legal advice referred to.
The case highlights the tension that arises with respect to the disclosure of otherwise privileged legal advice in taxation litigation that focuses on the intention of the taxpayer or the rationale for particular actions. The strategic benefit of any such disclosure needs to be carefully thought through given the likelihood that such disclosure will be regarded as waiving LPP in the advice in question.
