National Tax Liaison Group key messages 30 November 2018

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National Tax Liaison Group key messages 30
November 2018
    https://www.ato.gov.au/General/Consultation/In-detail/Stewardship-groups-
    minutes/National-Tax-Liaison-Group/National-Tax-Liaison-Group-key-
    messages-30-November-2018/
    Last modified: 11 Feb 2019
    QC 57874

National Tax Liaison Group key messages 30
November 2018

Introduction
Second Commissioner Andrew Mills, Law Design and Practice; and Grant Wardell-
Johnson, Chartered Accountants Australia and New Zealand

ATO Co-chair Second Commissioner Andrew Mills welcomed members and noted
that this would be Second Commissioner Neil Olesen’s last NTLG meeting. Andrew
Mills expressed his appreciation of Neil Olesen’s contribution to the NTLG.

On behalf of NTLG members, non-ATO Co-chair Grant Wardell-Johnson thanked
Neil Olesen for his contribution to the NTLG. Grant Wardell-Johnson noted Neil
Olesen was highly regarded by members and has provided valuable insights to the
group. Neil Olesen has been a long-term ATO officer with a strong sense of the
organisation’s culture and a great wealth of experience. Grant Wardell-Johnson
wished Neil Olesen all the very best for the future.

Grant Wardell-Johnson also expressed his thanks to Deputy Commissioner
Deborah Hastings. Grant Wardell-Johnson noted that Deborah Hastings has made
a significant contribution to the Independent Review process and has been a great
asset to building co-operation between business and the ATO. Grant Wardell-
Johnson conveyed his best wishes to Deborah Hastings for the future.

NTLG updates
Co-chair Second Commissioner Andrew Mills

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Independent Review for entities that are not ‘large’ or ‘small’
Members queried how the ATO plans to provide independent review for entities that
do not fall into the ‘large’ sector or the ‘small’ sector. Members wanted to suggest
ideas on how the ATO could undertake this.

The ATO noted it would like to allow the current independent review of small
business pilot run to completion (June 2019) for the ATO to assess the key
learnings from the current Independent Review processes before considering any
further expansion.

The ATO has a range of services that are available to promote the earlier resolution
of disputes, or prevention of disputes. For example, the ATO’s In-House Facilitation
service (conducted by an independent facilitator in Review and Dispute Resolution)
is available at audit and objection stages, and can be requested by either the
taxpayer or ATO officer.

Changes to the ATO Legal Database
The ATO noted edited versions of private rulings over 15 years old have been
removed from the Database. There are particular edited versions that have been
retained that may be incorporated into other guidance.

The transition to the new ATO Legal Database is now complete. Feedback has
been positive and the co-location of the edited versions with the other technical
information has been a great practical improvement. Further releases are expected
in 2019. The ATO is working on improving the search function. The ATO welcomes
any feedback from members.

In response to a member’s query, the ATO noted that a request can be made for an
edited version to be incorporated into a product.

Environmental scan
All members

Members noted various matters that are on the horizon and may have an impact on
the taxation and superannuation systems. Topics included:

     ATO communications on Single Touch Payroll
     Cryptocurrencies – ATO to discuss concerns with CPA Australia representative
     Paul Drum
     Tax policy in 2019
     Tax administration in school curriculums – members noted this as a positive
     ATO initiative
     Tax gap.

     Action item      1811/1

     Due date         4 March 2019 NTLG meeting

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Responsibility    Deputy Commissioner, Private Groups and High Wealth
                       Individuals

     Cryptocurrencies
     ATO to discuss concerns regarding cryptocurrencies with CPA Australia
     representative Paul Drum

Treasury report
Paul McCullough, Division Head, Corporate and International Tax Division,
Revenue Group, Treasury

Paul McCullough provided the following update:

     Legislative program:
          Twelve bills have received Royal Assent since September 2018 with more
          Bills expected to be introduced into Parliament
          There were around 90 ‘announced but un-enacted measures’. It is
          expected this will be reduced to approximately 13 by end December 2018.
          This is due partly to Treasury’s improved and more efficient law design
          office practices
          The suite of corporate tax integrity measures is almost complete

     Petroleum Resource Rent Tax (PRRT) review – on 2 November 2018 the
     Government released its final response to the PRRT review undertaken by
     Mike Callaghan AM PSM.
     Consultation was undertaken on issues regarding the digital economy and
     Australia’s corporate tax system – comments closed 30 November 2018.
     The Government introduced the Treasury Laws Amendment (Making Sure
     Foreign Investors Pay Their Fair Share of Tax in Australia and Other
     Measures) Bill 2018 (Stapled Structures Bill) on 20 September 2018.
     Open consultation on Taxation of insurance companies – comments due by
     31 January 2019.
     Announced changes to Division 7A were proceeding.
     The Federal Budget, as announced, will be handed down on 2 April 2019.

Digital economy paper
Grant Wardell-Johnson, Chartered Accountants Australia and New Zealand; and
Paul McCullough, Division Head, Corporate and International Tax Division,
Revenue Group, Treasury

The Government is working with other countries, through the G20 and the OECD,
to address the challenges to Australia’s tax systems with the potential adoption of a
Digital Services Tax (DST).

Members raised this item to discuss whether Australia should take unilateral action
in relation to a DST and its position on multilateral action. Grant Wardell-Johnson
congratulated the Treasury officers involved with the consultation undertaken on

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the digital economy and Australia’s corporate tax system.

Grant Wardell-Johnson noted the following key points regarding the adoption of a
DST:

     World Trade Organisation rules – a DST is aimed at non-residents with a
     strong digital presence in Australia. To comply with the rules, a DST would
     also need to apply to residents.
     The UK has indicated that in adopting a DST, the UK would make an
     exception to companies in losses or those in low margin businesses resulting
     in many companies being impacted. A DST would most likely override this.
     It could be damaging for competition as it would affect companies differently
     and would impact on those with low margins.
     It may be difficult to draw clear boundaries, for example, what is the boundary
     between digital and other services. If there is a DST in another jurisdiction and
     one in Australia, this could result in duplication of taxes.
     Australia should embrace taxation law on good principle.
     Query whether a long-term solution is feasible.
Paul McCullough thanked Grant Wardell-Johnson for his comments regarding the
Treasury officers and noted the consultation paper was well received. The focus of
the paper was on digitalisation of the economy supporting a multilateral solution.
There are many countries that have different motivations for adopting a DST.

Paul McCullough acknowledged the key points made by Grant Wardell-Johnson
and noted that another concern is whether a DST would increase effective tax rates
for Australian companies. Australia has the benefit of observing the approach taken
by other jurisdictions and could improve on those positions.

Grant Wardell-Johnson congratulated Treasury officer Brendan McKenna on his
three year appointment as Minister-Councillor (Economic) for the OECD.

Development of guidance materials for new law
Adrian Varrasso, Law Council of Australia; Tracey Rens, The Tax Institute; Paul
McCullough, Division Head, Corporate and International Tax Division, Revenue
Group, Treasury; Louise Clarke, Deputy Commissioner, Policy, Analysis and
Legislation, ATO; and Andrew Orme, Deputy Chief Tax Counsel, Public Advice and
Guidance, ATO

Members noted they have observed a trend where explanatory materials produced
by Treasury contain limited interpretation material and instead reference ATO
guidance material (for example, Rulings and Determinations). Members provided
some examples and wanted to discuss their concerns with this trend. A copy of The
Tax Institute’s submission to the Review of the Australian Public Service that
included similar examples was also provided to members.

Adrian Varrasso noted that the Law Council has queried whether it is appropriate to
cite ATO views published in Tax Determinations in Treasury’s Explanatory
Memoranda (EMs). The ATO views in Tax Determinations are made at a particular
point in time and are referenced at the time the EM is issued. Second Commissioner

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Mills observed that this may simply be a short-hand way of describing what is
understood to be the current state of the law to give context to the changes
proposed in the amending Bill. He queried whether members thought that it would
be better or different if that view of the law was spelt out in full rather than through a
reference to an ATO (or other) document.

Paul McCullough noted that references to cases and the current state of the law are
included in EMs for the benefit of the reader to provide context to the current state
of the law. The current state of the law also relevantly includes the interpretation
taken by the ATO as the administrator of the law. The material provided in the EM
to a new Bill cannot be used to interpret the existing law; rather it provides guidance
on the application of the Bill that is being introduced.

The Tax Institute’s submission was provided to Treasury’s Law Design Office. Paul
McCullough undertook to follow-up with Treasury’s Law Design Office whether
there is a technical basis for the concern.

      Action item            1811/2

      Due date               4 March 2019 NTLG Meeting

      Responsibility         Treasury representative Paul McCullough

      Explanatory Memoranda
      Paul McCullough to follow-up with Treasury’s Law Design Office whether
      there is a technical basis for concern for including ATO views published in
      Tax Determinations in Treasury’s Explanatory Memoranda

ATO Policy Analysis and Legislation business line
Grant Wardell-Johnson, Chartered Accountants Australia and New Zealand; and
Louise Clarke, Deputy Commissioner, Policy, Analysis and Legislation, ATO

Members wanted to discuss with Deputy Commissioner Louise Clarke her strategic
vision for the Policy Analysis and Legislation (PAL) business line.

Louise Clarke provided an overview of the PAL business line. The business line
was established to provide a central area for working with Treasury. It brought
together the revenue analysis, policy, law and administrative design capabilities
from across the office. The business areas are:

     Revenue Analysis Branch (RAB), as far as policy development is concerned,
     provides estimates of the impact on revenue collections of proposed changes
     to tax and superannuation law and new measures; estimates costs of
     compliance associated with law changes; assists with measuring the cost to
     the ATO of administering these new measures; and makes revenue forecasts
     for use in Budget cycles. RAB also monitors revenue flows, contributes to the
     Government’s financial statements, and assists with performance
     measurement in the ATO. The area works closely with the Tax Analysis

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Division in Treasury.
     Law and Policy Design (LAPD) – leads the ATO’s work in law design and has
     responsibility for coordinating and providing the ATO’s input into announced
     policy measures, the drafting of instructions and explanatory memoranda to the
     Treasury, which has responsibility for tax policy. Together with the Treasury,
     LAPD also has responsibility for providing assurance that draft law gives effect
     to the Government’s policy intent and can be administered. It is also the central
     point for advocacy, and managing ideas from within the ATO for dealing with
     loopholes, administrative issues in the law and ideas for how the law can be
     improved.
Louise Clarke noted that a key aspect of the strategic vision for PAL is to make the
ATO’s advocacy more focussed on overall ATO priorities and linking it to the ATO
2024 vision for improving the administration of the tax and super systems. This
means being more proactive in prioritising issues, bringing together ideas on how
we can make it easier for taxpayers to comply with the tax system and what law or
policy changes are needed to address issues with the law, and working with
Treasury on these ideas.

Black economy
Grant Wardell-Johnson, Chartered Accountants Australia and New Zealand; Patrick
Boneham, Division Head, Black Economy, Revenue Group, Treasury; and Peter
Holt, Assistant Commissioner, Small Business, ATO

Members raised this item to discuss with Treasury their priorities for the 72 out of 75
Black Economy measures the Government wishes to proceed with. Members also
wanted to discuss how the ATO plans to implement these measures.

Patrick Boneham noted that of the 80 recommendations, 12 have been actioned.
Eight recommendations are not progressing at this time as they are dependent on
other recommendations progressing first. Treasury is currently consulting on 16
recommendations. The penalty paper Improving Black Economy Enforcement and
Offences released on 22 November 2018 included eight recommendations.
Treasury is still in the process of developing the policy parameters for the work. It is
expected the paper on the sharing economy will be released shortly that will cover
international and domestic issues.

Another tranche of work involves 26 recommendations of which 18 are progressing
such as the digital identity, cross agency data sharing, legislation on Phoenix
arrangements, high value bank notes, and the review on vulnerable workers.

Treasury is building a rolling amount of work deliberately in small traches to
maintain the momentum. The first papers were released in July 2018 followed by a
second tranche in November 2018. There will be a similar timeframe in the future for
the release of papers.

Grant Wardell-Johnson queried if there was a program to measure the effectiveness
of the black economy measures. Patrick Boneham noted this is an ongoing process.
There are two tranches of work, one is working on the report recommendations and
the other will be a five year review in 2022 of the work done on the

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recommendations.

Peter Holt noted the ATO has a large program of work. This includes following-up
lodgment obligations, protecting the rights of employees and creating level playing
fields. There are mobile strike teams which have visited over 2300 businesses
around Australia raising ATO visibility and gathering intelligence.

The ATO is part of a taskforce with various agencies. Charters and MOUs have
been prepared to ensure transparency and governance of the cross-agency work. A
challenge is identifying where the different taskforces start and end.

The ATO is preparing for implementation and is using the same methodology for
any new measure/initiative, for example communication plans, risk management,
EST system program, telephony solutions and data analytics programs. There are
project managers over each to ensure deliverables and accountability.

Patrick Boneham noted that if members would like to raise any issues relating to the
penalties consultation, to contact the team to discuss these before the consultation
closed on 21 December 2018.

Inspector-General of Taxation’s Review of Fraud Control
Management
Tony Greco, Institute of Public Accountants; and Michelle Rak, A/g Assistant
Commissioner, ATO Corporate, ATO

The Inspector-General of Taxation (IGT) Review into the ATO’s Fraud Control
Management was commenced at the request of the Senate Economics References
Committee to examine the ATO’s management of internal and external fraud risks.
The IGT report on the Review of ATO’s Fraud Control Management was released
on 22 October 2018.

A paper was provided to members noting the following key points:

     The IGT found no evidence of internal fraud or corruption of a systemic nature.
     The IGT acknowledged that generally the ATO has sound systems in place for
     managing risks of internal fraud.
     The IGT report recognises that the ATO has undertaken a number of internal
     reviews to further improve its integrity culture procedures and training.
     The IGT made one recommendation as a matter for Government and
     13 recommendations for the ATO.
Michelle Rak advised a number of recommendations have been implemented but
there is still a large program of work. Michelle Rak updated members on the status
of the other IGT reviews:

     Review of the Future of the Tax Profession – this has been provided to the
     Minister for consideration by Government.
     Review of ATO’s use of garnishee notices – work is continuing on this review.

Taxpayers’ Charter
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Michelle Rak, A/g Assistant Commissioner, ATO Corporate, ATO

Michelle Rak briefed members on the revised Taxpayers’ Charter. Key points noted:

    The revised Taxpayers’ Charter was released on 22 October 2018 following
    extensive consultation with the taxpayer community which addresses
    recommendations made by the Inspector-General of Taxation (IGT) in his
    report Review into the Taxpayers’ Charter and taxpayer protections (December
    2016) .
    The revised Taxpayers' Charter is available through multiple channels to
    ensure its accessibility including online, via PDF and hardcopy and in 24
    different languages.
    The Taxpayers’ Charter now includes more information about the ATO’s digital
    interactions with the community, simplified information about review and audit
    processes and uses plain language to improve readability.
    A one page overview of rights and obligations is now available Taxpayers’
    Charter – Essentials.
    The Taxpayers’ Charter reaffirms the ATO’s commitment to a mutual
    relationship of trust, confidence and respect with taxpayers and tax
    professionals to foster willing participation in the tax and superannuation
    systems. It provides a framework for all interaction with clients, outlining their
    rights and obligations and clarifies mutual expectations.
    There is improved visibility of the Taxpayers’ Charter through revised and
    invigorated internal and external communications.
Michelle Rak noted that the Taxpayers’ Charter will be reviewed in 12 to 18 months
to ensure it maintains its currency.

ATO/taxpayer engagement in FIRB applications
Adrian Varrasso, Law Council of Australia; and Simon Hellmers, A/g Assistant
Commissioner, Public Groups and International, ATO

Members raised this item to discuss the ATO’s and Treasury’s engagement in the
FIRB process. Adrian Varrasso provided two examples for discussion regarding
ATO engagement and the potential breach of conditions and secrecy provisions.

Simon Hellmers noted Treasury and the ATO have a process in place that the ATO
does not discuss proposed conditions with the applicant. The ATO provides advice
to Treasury but Treasury will engage with the applicant to discuss any issues.

The ATO provides advice to Treasury on tax risks which may include advice on how
the risks could be managed by proposed conditions, however ultimately it is the
Treasurer that decides whether to impose conditions and what conditions to
impose. When the ATO is engaged by Treasury to review a FIRB application for tax
risks, the ATO is performing an advisory function only and has no decision making
authority with regards the application. As such, an applicant would need to engage
with Treasury if they would like to discuss any concerns regarding the proposed
conditions. Members discussed examples when it would be inappropriate for the
applicant to discuss tax conditions with the ATO.

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Members noted that although the FIRB Guidance Note 47 has been updated, this
element of the application process is not clear in the guidance note and there is a
need for further guidance to provide certainty to FIRB applicants.

It was agreed that Simon Hellmers would raise the issue of insufficient public
guidance regarding interactions with the ATO during the application process with
Roger Brake, Division Head, FIRB, and Treasury. The ATO will also look to
facilitate a subsequent meeting with Treasury and nominated NTLG members to
discuss the application process and see whether improvements can be made to
FIRB guidance.

     Action item        1811/3

     Due date           4 March 2019 NTLG meeting

     Responsibility     Simon Hellmers, A/g AC Public Groups and International

     ATO/Treasury engagement with FIRB applicants
     Simon Hellmers to raise the issue of insufficient guidance regarding
     interactions with the ATO during the FIRB application process with Roger
     Brake, Division Head, FIRB, Treasury. The ATO will also look to facilitate a
     subsequent meeting with Treasury and nominated NTLG members to
     discuss the application process and see whether improvements can be
     made to FIRB guidance

‘Reporting entities’ and who should prepare General
Purpose Financial Statements
Paul Drum, CPA Australia; Jeremy Hirschhorn, Deputy Commissioner, Public
Groups and International, ATO; and Kasey Macfarlane, Assistant Commissioner,
Private Groups and High Wealth Individuals, ATO

The Australian Accounting Standards Board (AASB) is consulting on the reporting
entity concept and general purpose financial reports (GPFS) and special purpose
financial reports (SPFS). Members wanted to discuss with the ATO the AASB’s
proposals and potential implications for various sectors, and what it means for the
Australian economy in the context of transparency, consistency and accountability.

Members noted there is a statement on the AASB’s website that the ATO supports
the AASB’s proposals.

Jeremy Hirschhorn noted this is an AASB initiative and it is about standardisation
and having a consistent reporting framework. Having a consistent framework may
make the whole tax compliance burden on small businesses easier. Increasingly the
accounting standards link to tax and the ATO is working closely with the AASB to
ensure there is an awareness of what it means as there could be follow-on tax
implications for businesses.

Kasey Macfarlane noted the Treasurer released a media release on 16 November

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2018 stating that the Government will reduce the reporting burden for small and
medium businesses by raising financial reporting thresholds which have not been
adjusted since 2007.

For small businesses, standardisation of accounting records is likely to occur
through accounting software.

Jeremy Hirschhorn noted that relevant ATO contacts are Kasey Macfarlane
(Kasey.macfarlane@ato.gov.au) and Stan Spasojevic
(Stan.Spasojevic@ato.gov.au) should members wish to discuss this AASB initiative
further.

ATO’s approach to advisers
Sue Williamson, CPA Australia; and Jeremy Hirschhorn, Deputy Commissioner,
Public Groups and International, ATO

Members raised this item to discuss the ATO’s approach to advisers in the context
of how adviser behaviour impacts how the related taxpayer issue is treated. The
discussion also covered the tools available for direct action against advisers in light
of current Legal Professional Privilege (LPP) disputes and the broadening of
promoter penalty regime.

Jeremy Hirschhorn noted the ATO’s use of formal notices has been at the same
level for the past three years. One change is that the formal notices have been used
earlier in the process when a problem emerges. Another change is that the ATO
has been issuing notices to advisers where it is identified that the firm has been
involved in taxpayer alert type schemes.

The ATO has received some LPP claims in response to formal notices that appear
to be excessive, for example, having regard to the number of documents said to be
covered by the claim. When the relevant documents are reviewed, it is clear they
were never privileged. Where there is a formal legal engagement, the ATO is
increasingly testing the engagement to see if the document said to be privileged
was prepared for the relevant purpose. Firms that are involved in providing advice
on the validity of LPP claims should ensure that their scope of engagement is
appropriately aligned. The engagement should include confirming the fundamental
elements required to establish privilege (rather than making assumptions that these
are satisfied).

There are concerns about breaching formal notices, holding back facts and
evidence, promoter penalty issues and making false and misleading statements.
There is potential evasion were documents are concealed from the Commissioner
to prevent an assessment being made and potential fraud where communications
illustrate a ‘mutual unveiling’ of non-tax commercial purposes. Over the next six
months, there will be a number of cases that will be made public to test these
behaviours.

Tim Neilsen asked if the ATO proposes to release some information that could be
used as a guide to address the concerns. A suggestion was that the information on
LPP on the ATO website could be updated with the additional information.

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It was noted that LPP needs greater coverage in education and practice to improve
its use and understanding. Members discussed fora sub-group to be established
with ATO officers and nominated NTLG members to discuss the concerns regarding
the use and understanding of LPP and to work together on potential solutions such
as guidance and the development of standardised engagement for the review of
LPP.

      Action item       1811/4

      Due date          4 March 2019

      Responsibility    Jeremy Hirschhorn, A/g Second Commissioner, Client
                        Engagement

      Legal Professional Privilege in taxation advice and services – scope and
      guidance
      A sub-group to be established with ATO officers and nominated NTLG
      members to discuss the ATO’s view of the scope of Legal Professional
      Privilege (LPP), establishment of guidance in this regard and the
      development of standardised engagement for the review of LPP

Supplementary information is at Attachment A

Role of NTLG and the contribution made by NTLG
members as representatives
All members

Members raised this item to discuss their role and responsibilities as NTLG
members and how they can best represent and serve their members.

Members noted that the NTLG is regarded as a forum that addresses strategic
issues to benefit Australia’s taxation and superannuation system. Members
discussed what the ATO’s expectations are regarding NTLG members passing on
information to their organisations’ members. Members noted that as a group, they
have been very responsible regarding what is passed on. The ATO noted that
members provide insight to the system by raising issues. This helps the ATO
identify whether it is an isolated or a systemic issue and put in place strategies to fix
the issue.

It was acknowledged there is mutual trust between the ATO and NTLG members
and sharing information provides joint oversight of the system that is designed to
continue and improve it.

Effectiveness and contribution of NTLG for 2018
All members

Members were asked for their views on the effectiveness of the NTLG, that is, do

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discussions/outcomes meet the intent for the group, what works well, what needs to
be changed, is the work of the group effectively communicated. If not, what needs to
be done?

Andrew Mills noted that the group works well together. Contribution to the agenda
from members is positive and topics are raised to discuss and find solutions for
improvements on issues that could impact on the tax system. There is a lot of trust
within the group.

Jeremy Hirschhorn noted a challenge for this group (and all stewardship groups) is
identifying how members can provide the ATO with greater insight on what is
happening in the system. This information could influence the ATO’s approach on
issues.

Grant Wardell-Johnson noted that agenda topics are raised on issues members
consider may have an impact on the system or issues they are currently dealing
with. Grant Wardell-Johnson suggested that members need to consider what they
would like to achieve in 2019. There are improvements that can be made, for
example, the way taxation statistics are presented.

Members will be provided with a set of questions seeking their feedback on the
effectiveness of the NTLG.

NTLG action item update
Second Commissioner Andrew Mills, Law Design and Practice

Andrew Mills provided a status update on NTLG 1703/1 – Rewrite of PS LA on
Taxpayer Alerts. It was noted that this action item remains ongoing.

Michelle de Niese noted an initial discussion had occurred with Deputy
Commissioner Jeremy Hirschhorn and NTLG members Adrian Varrasso and
Michael Croker. Michelle de Niese advised she was not aware of the changes that
had been made to the Practice Statement. It was agreed that the ATO provides a
final marked-up version of the rewritten Practice Statement to Michelle de Niese,
Adrian Varrasso and Michael Croker to show the changes made.

Post-meeting update: A final marked-up version of the rewritten Practice Statement
showing the changes made was sent to Michelle de Niese, Adrian Varrasso and
Michael Croker on 19 December 2018.

Attachment A – Supplementary information
     https://www.ato.gov.au/General/Consultation/In-detail/Stewardship-groups-
     minutes/National-Tax-Liaison-Group/National-Tax-Liaison-Group-key-
     messages-30-November-2018/?page=2
     Last modified: 11 Feb 2019

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QC 57874
We have been asked to expand on recent commentary in relation to the ATO’s
approach to advisers to the large market, the role of Legal Professional Privilege
(LPP), promoter penalty legislation and other provisions.

The ATO wants all taxpayers to get high quality professional advice, whether from a
lawyer or an accountant as this underpins the self-assessment system. Accordingly,
we fully support taxpayers obtaining LPP on independent legal advice they seek
from their legal advisers as to the tax consequences of their actual or proposed
transactions. Most advisers, whether at accounting or law firms, give high quality
advice and support the tax system.

In reviewing a taxpayer’s position, our key interest is in finding out the facts.
Fundamental to the operation of the tax system is that the ATO is able to access all
the relevant facts. Particularly with sophisticated taxpayers, those facts include not
only the primary documents (accounts, contracts, etc.) but also the taxpayer’s
reasons for embarking on the particular structuring arrangement or transaction –
internal emails and communications will often be a source of contemporaneous
evidence (in particular we are interested in understanding the non-tax commercial
considerations including their development and importance).

Role of formal powers in obtaining evidence
Our preference is to work cooperatively with taxpayers to obtain information we
require, however we will resort to using our formal powers when this approach does
not work.

The ATO’s use of formal notices in the large market has remained broadly
unchanged over the last few years. However, we are in some cases issuing them
earlier in the process and holding taxpayers to account in meeting the response
timeframes, especially where we do not have a cooperative relationship.

We also issue notices to advisers identified as being involved in the instigation of
taxpayer alert type schemes, to seek to identify taxpayers who may have
participated in those schemes, as well as to better understand the manner in which
schemes are developed and marketed.

A core exception to document production under formal notices is in relation to
documents over which the client has LPP. There is also the administrative
concession afforded by the Commissioner in appropriate cases to advice provided
by appropriately qualified accountants. While LPP and the Accountants Concession
(AC) are distinct, because of some similarities we often see the same approach
applied to claims for both. As a result, the scope of LPP becomes very important.

Legal professional privilege
Our understanding is LPP protects certain confidential communications between a
lawyer and their client from production to the ATO. Those communications must be
for the dominant purpose of obtaining independent legal advice about the taxpayer’s
legal rights and obligations, or current or possible litigation. LPP also protects some
of the other communications associated with getting that advice. We cannot access

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privileged information, and we do not have any problem with this – as above, we
want taxpayers to obtain high quality advice from high quality advisers. We respect
LPP is an important common law right that generally allows a client to freely
exchange information with their lawyer to obtain confidential legal advice.

Of course, if a taxpayer wishes to share their advice with us, we will pay it due
regard (but even then will likely be more focused on the underlying facts and
assumptions than the legal analysis). As above, we are much more interested in
facts and evidence than in someone else’s legal analysis of tax provisions.

The challenge for us on LPP is mainly a practical one – dealing with privilege claims
not grounded in the applicable law and established principles, but grounded in a
desire to obfuscate the facts and frustrate investigations. In an increasing number of
cases, we are seeing claims of privilege over thousands or even tens of thousands
of documents: when we ultimately obtain the documents sometimes (presumably
inadvertently) even in the same production process (for example, as attachments to
other emails) they were clearly never privileged. We are seeing LPP being claimed
using both industrial processes and on an industrial scale.

This has led to serious consideration of the mechanisms to test LPP and/or the
consequences for reckless claims. Further, we are exploring judicial and legislative
options to efficiently resolve disputed LPP claims. This includes the options
available to other regulators who face similar practical challenges with LPP, in an
effort to get matters to the court more quickly.

Key concerns with purported LPP claims
We have set out below some of the categories of concern that we have identified in
the course of cases:

     Claims are made over documents that clearly could never meet the dominant
     purpose test.
     Claims are made over documents like (pre-engagement) pitchbooks,
     engagement letters and fee accounts.
     Claims being made on the assumption or 'decision rule' that all documents
     where a lawyer (external or internal) is cc:ed are privileged, without
     consideration as to the role of that lawyer and/or the purpose of the
     communication.
     Documents being provided but subject to some form of general reservation that
     privilege may be claimed on some or all of the documents at some stage in the
     future, with no attempt to determine privilege claims prior to provision.
     Claims being made on the basis that subsequent entry into a (purported) legal
     services engagement retrospectively covers all pre-engagement interactions
     and treats them as communications made in the course of that subsequent
     engagement (often on the proposition that the non-lawyer in the original
     meeting agreed that there would, in due course, be a legal service
     engagement that would have this retrospective effect).
     The gist of the advice ultimately received, purportedly as independent legal
     advice from a lawyer, was actually promised by a non-lawyer prior to
     engagement, thus losing its independence.

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Claims where ‘in-house counsel’ are involved, giving rise to a variety of
    different questions and issues concerning independence.
    Engagements conducted in all real senses by a non-lawyer (from instigation of
    the engagement/transaction to its delivery), with the primary role of the legal
    practitioner being to ‘rubber stamp’ the 'deliverable'. The lawyer’s involvement
    is minimal at best and often only late in the piece, often at the direction of the
    non-lawyer.
    In some of these cases, the 'controlling mind' non-lawyer is purported to have a
    range of seemingly incompatible legal capacities, including some or all of:
    being the purported agent of the client in dealing with the lawyer, the purported
    agent of the lawyer in dealing with the client, some form of 'Pratt-style' expert
    upon whom the lawyer relies (as well as often being a partner of the lawyer in
    reality as partners in the same firm).
    Commercial/entrepreneurial activities of promoting transactions: even if the
    entrepreneurial promoter is a lawyer, these activities are not privileged legal
    advice. A subsequent engagement by that lawyer (or another) may also be
    tainted, in that the subsequent 'promised' legal advice may not be sufficiently
    independent to confer privilege.
    Requiring a client to 'sign up' to privilege in order to access a pitchbook or
    other 'intellectual property'. Not only is this a fundamental misunderstanding of
    privilege and whose it is, it may also form a type of disguised confidentiality
    agreement, effectively (purportedly) requiring a taxpayer to conceal (improperly
    withhold) information from the ATO
    No consideration of waiver of (actual or purported) privilege when documents
    and/or the gist of advice are shared with third parties (including other sister
    firms).
    Failure to appreciate potential waiver where advice has been inconsistently
    distributed internally for consideration.
    Providing insufficient, inaccurate, and misleading details, or generic/formulaic
    statements when making and supporting LPP claims so we cannot properly
    assess the claims.
    Documents prepared for an improper purpose, including tax evasion.
    During the course of the engagement, advisers effectively 'creating facts' and
    assumptions underpinning the advice (in particular as to non-tax commercial
    purposes). This is often through 'suggesting' non-tax commercial purposes
    when the client initially cannot itself identify a non-tax commercial purpose.

Key concerns with LPP processing engagements
We have also identified concerns in how third party law firms are engaged to
assess bulk LPP claims, often due to assumptions in the scope of engagement
and/or its conduct, for example:

    Conducting the LPP processing engagement on the assumption that the
    underlying engagement is capable of conferring privilege (without
    consideration of the factors above).
    When it should have become manifestly clear from the documents being
    reviewed that those assumptions do not hold, there is no revision of the scope
    of the engagement or a refusal to act.

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The scope being simply to identify all documents involving lawyers (even a cc:)
     rather than to judge LPP.
     The work being conducted by junior lawyers who do not have the skillset to
     properly judge contentious documents, with insufficient supervision from senior
     skilled lawyers.
Firms involved in processing LPP claims should be very careful that their scope of
engagement aligns with how their work is represented to the ATO / Court. They
should also ensure they are not being asked to be wilfully blind, for example,
assume a purported legal engagement is capable of conferring LPP.

Promoter penalties and other consequences
There has been no change in practice to our application of promoter penalties.
There are several criteria to be met before they can be applied – this includes the
requirement that relevant advice be not only wrong but not reasonably arguable.
Where the adviser has been involved in 'developing' the facts and assumptions, this
examination will go beyond the technical merits of a final deliverable based on those
facts and assumptions.

There are a range of other conduct based approaches being considered as a result
of intelligence recently obtained, including:

     Declaratory relief over LPP claims.
     Prosecution for reckless LPP claims.
     Actions based on false and misleading statements (including that a reckless /
     baseless privilege claim may itself form a false or misleading statement).
     Actions based on fraud and/or evasion, noting that:
          deliberate obstruction of the Commissioner from obtaining facts can
          constitute evasion in its own right – the Commissioner will be seeking to
          test whether reckless / baseless privilege claims may constitute evasion
          development and communication of knowingly incorrect and/or
          manufactured facts and assumptions to the Commissioner, particularly
          non-tax commercial purposes, may constitute participation in fraud.

Next steps
The ATO is currently conducting a series of reviews of particular transactions and
schemes. It is anticipated that there will be a range of cases in the short to medium
term testing many of the propositions above.

Separately and concurrently, it is intended to form a small working group to consult
on the above issues with a view to developing:

     Clear guidance for the taxpayer community concerning the ATO’s view of the
     scope of LPP, in particular relating to advice and services regarding taxation
     affairs.
     Revised pro forma templates for LPP claims, with improved guidance regarding
     the requirements for acceptable claims.
     A standardised 'scope of engagement' where a taxpayer wishes to engage an

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independent law firm to assess potential LPP claims.
   An industry endorsed standard process for engaging independent bodies,
   where appropriate, for reviewing disputed LPP claims and providing
   assurance.

Members
   https://www.ato.gov.au/General/Consultation/In-detail/Stewardship-groups-
   minutes/National-Tax-Liaison-Group/National-Tax-Liaison-Group-key-
   messages-30-November-2018/?page=3
   Last modified: 11 Feb 2019
   QC 57874

Organisation             Name

Australian Taxation        Andrew Mills, Second Commissioner, Law Design
Office                     and Practice (Co-chair)
                           Neil Olesen, Second Commissioner, Client
                           Engagement (morning session)
                           Jeremy Hirschhorn, Deputy Commissioner, Public
                           Groups and International
                           Sandra Roussel, Assistant Commissioner,
                           Enterprise Strategy and Design
                           Justen Nixon, Senior Technical Adviser, Tax
                           Counsel Network
                           Brendan Shannon, Director, Governance and
                           Committees, Enterprise Strategy and Design
                           (Secretariat)

Treasury                   Paul McCullough, Division Head, Corporate and
                           International Tax Division, Revenue Group (morning
                           session)

Chartered Accountants      Grant Wardell-Johnson (Co-chair)
Australia and New
Zealand

Corporate Tax            Michelle de Niese
Association

CPA Australia              Paul Drum
                           Sue Williamson

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Institute of Public                   Tony Greco
 Accountants

 Law Council of                        Adrian Varrasso
 Australia                             Clint Harding

 The Tax Institute                     Tracey Rens
                                       Tim Neilsen

Apologies
 Organisation                       Name

 Australian Taxation                Robyn Theacos, Director, ATO Consultation Hub,
 Office                             Enterprise Strategy and Design (Secretariat)

 Treasury                              Maryanne Mrakovcic, Deputy Secretary, Revenue
                                       Group
                                       Paul McCullough, Division Head, Corporate and
                                       International Tax Division, Revenue Group
                                       (afternoon session)

 Chartered Accountants              Michael Croker
 Australia and New
 Zealand

 The Tax Institute                     Bob Deutsch
                                       Stephanie Caredes (Professional Bodies’
                                       Coordinator)

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