Surviving a visit from the ATO
Information is power, and in today’s complex and sophisticated business world our regulators are more often turning to legislative search and access powers to collect information about taxpayers.
This article makes some general observations about the statutory powers available to the Commissioner of Taxation to access and inspect documents usually held by the taxpayer’s accountant, financial adviser, banker or lawyer.
Why is this relevant? Because financial planners, more than any other profession, often hold information about the wants, desires and strategic directions that clients have or will embrace and, as such, their files are a minefield of sensitive information.
The Commissioner’s legislative power to command complete access to buildings, books and documents for the purposes of the tax laws is found in section 263 of the Income Tax Assessment Act 1936. The current provision encapsulates the changes to that Act.
The particular provision says that the Commissioner, or any officer authorised by him or her in that capacity, shall have full and free access to all buildings, places, books and documents for the purpose of any tax law, and may make copies of these documents.
Yes, the power is far reaching and, except in some limited circumstances mentioned below, there is little you can do to resist the raid.
The power has been successfully used by the Commissioner to raid the offices of accountants, financial advisers, bankers and lawyers to inspect information about their client, a taxpayer, and copy documents relating to that client’s tax affairs.
The rights of taxpayers
There has been recent judicial debate about the tension between the protection of civil liberties and a taxpayer’s right to legal professional privilege, and the opposing view to allow the government to collect information for the purposes of collecting taxes for our nation’s greater good.
However, the common judicial comment is if the legislation is followed, the raid is lawful.
In Table 1 are some key matters to bear in mind should the Commissioner knock on your door and ask to inspect your files.
It is important to bear in mind that an excessive use of the power does not of itself invalidate the notice, but does give rise to a claim of denial of fundamental rights of the taxpayer to challenge the documents inspected and copied by the Commissioner.
An authorisation for an Australian Taxation Office (ATO) officer to carry out a raid under section 263 of the Act can be in the form of a letter or written authority. There is no particular form of authorisation and its existence is not a precursor to the exercise of rights, but it is relevant only if the right to remain on premises is demanded by the occupier.
Obtaining legal privilege
A raid is an intrusion on civil liberties and the law in this area with respect to the denial of sufficient time to obtain legal advice during a raid has been clouded with the recent decision of the JMA case.
The long-held proposition under the Citibank case was that ATO officers conducting a search are to provide the occupier of the premises with an adequate opportunity to claim legal professional privilege on behalf of the party, the taxpayer, for whom it holds the rights, otherwise the search under section 263 is invalid.
However, the recent decision in JMA is a departure from the approach of the Citibank case saying, in effect, that allowing that opportunity at seizure time may defeat the purpose of the raid. If the ATO officers’ actions were excessive, then their conduct in carrying out the raid would be liable to a claim of trespass or abuse of power, and the copied documents would need to be returned.
The effect of the case is to place an onus on the taxpayer to take swift legal action to preserve documents that are privileged.
The ATO would be liable to court action, such as injunctions, to prevent it from making any direct or indirect use of that information.
Recently, the ATO released its policy in respect of making a claim of legal professional privilege that attaches to a particular document and an array of forms, which all take precious time to complete.
A duty to clients
If this all sounds like heady stuff, welcome to taxation administration in 2006. You owe a duty to your clients to be prepared, so what should you consider? Here are my top tips.
First, carefully review what information you hold for or on behalf of clients.
To satisfy the ‘know your client’ rule of section 945A of the Corporations Act, you must keep sufficient information on your file to enable you to demonstrate that your advice was appropriate. But to the extent that it involves taxation related issues, you may want to think carefully about what you hold on the file.
Re-examine your Statements of Advice (SOAs). Are these unbalanced? If your SOA spends too much time on taxation matters, are you suggesting that taxation was the driving or motivating issue for the client?
If this is true, you probably need this for your records to demonstrate that your advice was appropriate, but in the hands of the ATO this may bring the client’s apparent intentions undone.
Seek professional help
To the extent that your advice and the particular taxation affairs of a client are inextricably bound together, consider advising your client to seek your advice through the client’s lawyer and as part of legal advice.
If the circumstances allow this to be available, you will have the best chance of clothing the advice in legal professional privilege, and you’re therefore likely to be protected from an ATO information raid.
If your client seeks your advice through their lawyer as part of legal advice, and thereby invokes the best chance of being able to prevent access to information using the legal professional privilege argument, make sure that the relevant information is clearly marked with this benefit.
Immediately notify the taxpayer, and if known, their lawyer, of the raid and organise legal representation during the raid.
Also, notify your own lawyer and, if appropriate, obtain legal representation during the raid.
Stay in attendance
Always ask the ATO officers to show proof of authorisation from the Commissioner to conduct the raid.
Seat the ATO officers in a conference room and bring the information requested to them in that room. You are entitled to remain in the room throughout the duration of the inspection.
Even while in the middle of an ATO raid, you must remember and observe your duty to maintain confidentiality and legal professional privilege that attaches to particular documents. These duties continue to operate during the heat and uncertainty of an ATO raid.
The occupiers ought to take some steps to verify the extent of copying, scanning or downloading by the ATO officers during the raid, to ensure that the documents do have some relevance to the tax affairs of the taxpayer or the administration of the Act generally.
The occupiers are entitled to remain on the premises to supervise the raid, and, if necessary, to contact legal representatives and obtain legal advice on claims of legal professional privilege or conduct beyond the scope of the notice.
Finally, keep the material inspected by the ATO officers separate from the balance of your file and allow your client, the taxpayer, access to the files that were inspected.
Knock knock, who’s there? It may sound funny at first, but not when it involves the ATO. Are you prepared?
Mark Petrucco is a partner at the Argyle Partnership Lawyers.
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