The Australian Taxation Office will receive a $650 million boost to extend a crackdown on high-net-worth individuals and those using trusts and overseas jurisdictions to avoid tax.
In a concession to a core Coalition constituency, the government has extended the minimum pension drawdown requirement for another year, allowing wealthy retirees to retain their superannuation balances without having to sell their assets.
In the federal budget, the government has pledged $325 million in 2023-24 and $327.6 million in 2024-25 to allow the ATO’s so-called Tax Avoidance Taskforce to operate for another two years until June 2025.
The six-year-old taskforce targets high-net-worth individuals, as well as multinational companies, private firms and trusts that may not be complying with tax obligations.
It also regulates specialist tax advisers and other professionals who may be promoting tax avoidance schemes. The taskforce’s work in reining in tax dodgers is expected to add $2.1 billion to the budget bottom line.
The government is also committing to extend its previous changes to the superannuation minimum drawdown requirement for another year.
“The government has extended the 50 per cent reduction of the superannuation minimum drawdown requirement for account-based pensions and similar products for a further year to June 30, 2023,” the 2022-23 budget documents said.
Drawdown rates
“The minimum drawdown requirements determine the minimum amount of a pension that a retiree has to draw from their superannuation in order to qualify for tax concessions.”
Drawdown rates range from 4 per cent to 14 per cent depending on age. The extension of the halved rate would drop the rate from 7 per cent to 3.5 per cent for someone aged between 80 and 84.
The move – foreshadowed by The Australian Financial Review on March 25 – is expected to apply to 1.8 million superannuation accounts and cost $52.8 million over the forward estimates period. It was billed in the budget papers as a measure to “support retirees”.
But the SMSF Association, which represents self-managed superannuation fund trustees and their accountants and advisers, confirmed that the measure was aimed at wealthy individuals.
“Retirees who may have other sources of income [other than pensions], or who simply don’t need to draw down the normal minimum amount each year, will benefit most,” said Peter Burgess, the association’s deputy chief executive and director of policy and education.
Impact of volatility
“For retirees who don’t need to withdraw the normal prescribed minimum amount, this measure will enable them to withdraw less from their super pension account than would otherwise be required. This means they can retain more in their super pension account – which is a tax-free requirement – for longer.”
Mr Burgess said the extension would help retirees “manage the impact of volatility in financial markets” by ensuring they do not need to hastily sell assets to satisfy the drawdown requirements.
Certified financial planners said the extension would be welcomed by some wealthy clients. “Retirees should be drawing the pension payments needing to fund their lifestyle,” said Corey Wastle, founder of Verse Wealth. “If drawing the temporary minimum affords enough income to do that, then this is likely a good option.”
Fellow CFP Josh Dalton of Dalton Financial Planners added: “The good thing about account-based pensions is that the retired member is in control and should they want to increase their payments above the minimum, they can.”
The measure comes as the government revised its tax receipts from superannuation funds up by $3 billion in 2022-23 and $8.6 billion across the four years to 2025-26.
Tax receipts from super funds rose by 89.6 per cent in 2021-22 after “substantial one-off capital gains” from the unexpected sharemarket rallies that followed the first wave of the coronavirus pandemic. The growth also reflects higher employment earnings, which trigger a higher tax on contributions.
However, tax receipts from super funds are expected to decline by 36.2 per cent in 2022-23
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On 25 March 2022, Moshinsky J, sitting in the Federal Court of Australia, handed down a much‑anticipated judgment in the ongoing dispute between the Commissioner of Taxation (the Commissioner) and PricewaterhouseCoopers (PwC) in relation to legal professional privilege (LPP).
The decision in Commissioner of Taxation v PricewaterhouseCoopers & ors [2022] FCA 278 arises out of an application by the Commissioner for a declaration to the effect that approximately 15,500 documents held by PwC Australia or their clients (certain members of the JBS Australia group of companies (the JBS Parties) were not covered by LPP.
While the judgment is (for now) heavily redacted and the Judge’s reasons are not fully available to the public, the decision will be welcomed by clients of multi-disciplinary practices (such as some large accounting firms) that provide legal and non-legal services, insofar as it suggests they may be able to establish a lawyer-client relationship sufficient to support a claim for LPP.
At the same time, the judgment appears to vindicate the Commissioner’s decision to challenge the JBS Parties’ claims of LPP, as the Judge found that over half the sampled documents which were the subject of claims of LPP were not in fact privileged.
Partner JP Wood and Senior Associates Bradley Baker and Olivia Doray consider the decision and its implications below.
The Application
The Commissioner relied on three grounds to dispute the LPP claims:
- The form of the engagements by which PwC Australia purported to provide legal services to the JBS Parties did not establish a relationship of lawyer and client sufficient to ground a claim for LPP.
- As a matter of substance, the services provided by PwC Australia to the JBS Parties were not provided pursuant to a relationship of lawyer and client sufficient to ground a claim for LPP.
- The documents in dispute did not record communications made for the dominant purpose of giving or obtaining legal from one or more lawyers (of PwC Australia).
The Decision – general grounds
If the first two general grounds had been made out, they would have determined the whole application. However, Moshinsky J decided them against the Commissioner.
As indicated above, his reasons for doing so have been redacted, for now. However, he appears to have considered the following matters to be relevant:
- PwC Australia’s umbrella engagement agreement and nine “statements of work” identified the work to be carried out for the JBS Parties and described that work as “legal services”;
- the statements of work identified Australian legal practitioners and non-legal practitioners as the team that would carry out the work; and
- they also indicated that the JBS Parties appointed the non‑legal practitioners as their agents for the purpose of communications to and from the legal services team, including giving instructions and receiving legal advice, in order to assist in the provision of the legal services.
In short, Moshinky J declared he was satisfied a lawyer-client relationship existed between some of the PwC lawyers and one or more of the JBS parties sufficient to support a claim for LPP.
The Decision – sample documents
It was then necessary for the Judge to consider a sample of the documents in dispute. The process for doing that was broadly as follows:
- The Court set down a hearing to consider 100 sample documents.
- 50 were to be selected by the Commissioner and 50 by the JBS Parties.
- For obvious reasons, the Commissioner and his lawyers did not have access to the documents themselves but had access to a schedule that listed the documents and provided some details about them.
- The Court appointed three barristers as amici curiae to assist the Court with the LPP claims.
- The JBS Parties provided the Court with a copy of the sample documents and an index in chronological order.
- The process for identifying the 50 sample documents was described as “somewhat iterative”. After the Commissioner had served an initial list of 50 sample documents, the JBS Parties withdrew their claims of privilege over some of those documents, resulting in the Commissioner having to identify more documents to complete his list. This occurred twice more in relation to the Commissioner’s list and the JBS Parties also revised their list of sample documents, following which, the lists were filed with the Court.
- However, the JBS Parties then withdrew their claims of privilege over some documents in the revised lists and parts of other documents, resulting in the revised lists including documents over which privilege was no longer claimed.
- Moshinsky J read the sample documents.
- Parts of the hearing were conducted without the Commissioner and his lawyers being present, as it was necessary to refer to the contents of documents over which privilege was claimed. The amici curiae made submissions at the hearing, which were provided to the Court on a confidential basis.
The judgment attaches a list of the sample documents, together with the judge’s conclusion as to privilege. Moshinsky J found that many of the sample documents were privileged but many were not, as the communication was not (and did not record) a communication made for the dominant purpose of giving or receiving legal advice. In summary:
- 49 were privileged;
- 6 were partly privileged; and
- 61 were not privileged.
Key Takeaways
Of the 934 paragraphs that make up the judgment, only 39 paragraphs have been released to the public. That limits any detailed analysis of the Judge’s reasons for judgment. However, the following key takeaways can be offered:
- The decision may come as a relief to many taxpayers and multi-disciplinary practices, insofar as it indicates that such practices may in principle be able to establish a lawyer-client relationship sufficient to support a claim of LPP, where legal practitioners are involved in delivering the work, notwithstanding the involvement of non‑legal practitioners.
- While the structure and terms of the engagement may assist in determining the existence of a lawyer-client relationship, the description of the services as “legal services” in the terms of engagement will not determine the privilege issue.
- Only where the lawyer-client relationship is found to exist, will it be necessary to consider claims for privilege over individual documents. In the context of ATO audits and investigations, in the absence of actual or contemplated litigation, the relevant test will be whether the communication was made for the dominant purpose of giving or receiving legal advice.
- This case highlights the potential difficulties in claiming privilege over very large volumes of documents, particularly where they relate to communications involving legal and non-legal practitioners. According to the judgment, privilege was claimed by the JBS Parties over some 44,000 documents, and the Commissioner disputed the claims of privilege over some 15,500 of those documents. Not only did the JBS Parties withdraw multiple claims of privilege in the run up to the hearing, but the Judge found that more than half of the sample documents over which privilege had been claimed were not privileged. It remains to be seen how this decision will impact on the process for determining the JBS Parties’ claims of privilege over the balance of the documents.
- This is not the first time claims of privilege over large volumes of documents have been made and challenged in the Federal Court. CUB Australia Holding Pty Ltd v Commissioner of Taxation [2021] FCAFC 171 involved a claim for privilege over 20,000 documents and a challenge by CUB to the Commissioner’s powers to require details of those documents for the purpose of assessing CUB’s claims of LPP. Moshinsky J handed down judgment in favour of the Commissioner on 21 September 2021.
- While recent cases have assisted in clarifying some general principles relating to claims of LPP, it seems likely that the Commissioner will continue to challenge claims of LPP over individual documents, where the basis for the claim is unclear.
- Further, where large volumes of documents are involved, the task of assessing and making claims of privilege will continue to give rise to practical and logistical challenges, as well as time and cost issues. Technological solutions, such as AI/automated computer processes, may assist in identifying potentially privileged documents, but may not be sufficient by themselves to ensure that a claim for LPP is valid, without review by experienced legal practitioners.
- The ATO issued a draft protocol for making claims of LLP in September 2021. The draft protocol recommends what information taxpayers and their advisors should provide to the ATO in respect of documents over which LPP is claimed and the process by which that claim is made, to assist the Commissioner to assess whether to accept or challenge the claim. Among other things, the protocol expresses concern at claims of LPP made over communications arising out of certain arrangements, such as arrangements that route communications through lawyers merely for the purpose of obtaining privilege.
- The Law Council of Australia has in turn expressed concern that the draft protocol overreaches in the amount of information that the ATO recommends is provided by taxpayers and their lawyers (and, presumably, accountants) to maintain the claim for LPP.
- The outcomes of recent cases are only likely to increase the Commissioner’s skepticism of “blanket” claims of privilege and increase its willingness to challenge those claims. Together with the controversy over the ATO’s draft protocol, they suggest that taxpayers may need to review their processes for claiming LPP, including the arrangements under which the documents came into existence and the purpose for which they were produced. In addition, they will need to consider carefully how they propose to demonstrate to the Commissioner that their claims of LPP are valid, failing which further court actions seem likely.
