ATO ‘disappointed’ by use of legal privilege, warns big 4 sins will reoccur
PwC Australia has been criticised over its misuse of legal privilege to obscure ATO investigations, a trend the ATO has warned will grow as the lines between legal and consulting services continue to blur.
ATO second commissioner Jeremy Hirschhorn has urged the Senate to turn its mind to the risk of abuse of legal privilege at firms offering both legal and consulting services.
He said the Tax Office had been “disappointed” by the test applied in claiming legal professional privilege (LPP) among both standalone law firms and multidisciplinary firms.
“We [the ATO] have been disappointed with the law firms, whether that is the law division of multidisciplinary firm or a law firm itself, in how they have gone about doing the test as to whether something truly is privileged,” he said.
“Instead, in some cases almost viewing it like a negotiating tactic by making a blanket claim and forcing us to go document-by-document.”
While the big four have offered legal services for some time, a number of large law firms, including Ashurst and King & Wood Mallesons, have recently expanded their non-legal advisory practices.
The idea of a one-stop professional services shop is certainly not new, but Hirschhorn said he had observed a recent trend of law firms “getting into consulting businesses and saying those consulting services are offered under the aegis of a law firm.”
“When I read that, I worry that the exact same problem that we had with the big four accounting firms will be replicated in the big law firms,” he added.
Big four firms have been criticised for abusing LPP on a number of occasions, though perhaps none so hotly as PwC’s refusal to produce the so-called Linklaters report investigated the extent of the confidentiality breach arising from the firm’s engagement with the Australian government.
Senator Richard Colbeck, chair of the consulting inquiry, said the firm’s unwillingness to share the report undermined its commitments to change.
“They’ve been refusing to provide us with the Linklaters report for some time, claiming legal professional privilege,” he said.
“That was how they pushed back against the Tax Office when they were trying to look into the tax schemes that had been designed using this information in the first place.”
Both reports of the Senate Finance and Public Administration Reference Committee into the PwC tax leaks scandal identified potential abuse of legal professional privilege as obscuring investigations.
The first Senate report found that “Based on evidence from the ATO, it is open to the committee to conclude that PwC did this by the inappropriate and incorrect application of legal professional privilege to tens of thousands of PwC documents.”
Hirschhorn was quoted in the first report as saying the Tax Office had been “frustrated through large claims for [LPP] on behalf of clients.”
The report cited a 2022 Federal Court decision in which Justice Moshinsky held that PwC had wrongly applied LPP to more than half of the 15,500 requested by the ATO.
Appearing as a “friend of the court”, David Batt QC said that applying traditional legal privilege to the work of multidisciplinary firms was “at best, awkward.”
In reference to this case, the Senate committee said, “It seems clear that PwC's use of this tactic is not restricted to the Collins matter.”
According to PwC Australia, the firm reviewed its approach following a challenge from the ATO. That review concluded that certain engagements had not been directed by legal practitioners despite claiming to be in their engagement letters. This practice, it said, was “contrary to PwC Australia’s values and policies.”
However, the firm denied that it withheld documents containing evidence of confidentiality breaches based on LPP.
“There is no evidence that any of the documents called for by the ATO or TPB notices showing breaches of confidentiality were withheld from production in response to those notices on grounds of LPP,” it said.
