The recent Federal Court case of Krok v Commissioner of Taxation has provided a reminder that a taxpayer may impliedly waive their right to legal professional privilege by disclosing documents which refer to the purpose and reasoning of legal advice. As a result of the implied waiver, the taxpayer may be required to discover documents that would otherwise have been protected by legal professional privilege.
In this case, the taxpayer was appealing against the decision of the Commissioner of Taxation (Commissioner) to disallow objections to notices of amended assessments of income tax. The Commissioner alleged that a number of agreements and transactions entered into by the taxpayer were shams, and that the taxpayer obtained, and intended to obtain, a tax benefit. The Commissioner had sought discovery of documents which would otherwise attract legal professional privilege, arguing that the taxpayer impliedly waived privilege due to his partial disclosure of the gist of the legal advice given to him.
The taxpayer had filed affidavits from advisors, which referred to previous legal advice and background information and reasoning relating to the structures and arrangements put in place. The court held that the taxpayer’s purpose in disclosing the “gist, substance or effect of the advice” was to advance his case against the Commissioner. The court further held that it would be unfair to deny the Commissioner an opportunity to consider the advice in full, as the partial disclosure of the advice had “necessarily put in issue and laid open to scrutiny the confidential communications”. Thus, the partial disclosure of the advice provided to the taxpayer, or the disclosure of the gist, substance or effect of it, was inconsistent with the confidentiality which would otherwise attach to the privileged communications and advice, such that privilege was found to have been waived.
The case highlights the importance of exercising care in disclosing information which is subject to legal professional privilege, and to seek professional advice in responding to enquiries or disputes with the Commissioner.
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