Spassked Pty Ltd v Commissioner of Taxation

introduction 1 These three proceedings are being heard together and the evidence in each is evidence in the others. They are appeals by taxpayers against the disallowance by the respondent ("the Commissioner") of objections to assessments of income tax. The taxpayer-applicants are related companies, all being members of the Industrial Equity Limited ("IEL") group of companies. The cases concern a "restructuring" of that group in which the applicant in proceeding N 1362 of 1999 ("Spassked") played such a key role that the new structure has been referred to as "the Spassked structure" and the process as "the Spassked restructuring". 2 On 6 March 2002 the applicant in each proceeding issued a subpoena to Stephen John McClintock, a partner at PricewaterhouseCoopers ("PwC"), to produce documents on 20 March 2002. Mr McClintock is an expert witness retained on behalf of the Commissioner. The schedules of documents in the three subpoenas were identical. The following is the schedule: "SCHEDULE 1. All 'documents', which expression shall include, all correspondence, instructions, draft reports, file notes, diary notes, minutes of meetings, notes of telephone conversations, internal memoranda, working papers or other documents of any kind or description whatsoever (whether printed or in computer readable form eg an email, disk, tape, random access memory or the like) brought into existence during: (a) the period from 1 August 2001; or (b) such earlier date that any instructions were received by you or another partner or employee of PricewaterhouseCoopers ("PwC") from the Australian Government Solicitor and/or the Commissioner of Taxation their officers, employees, agents or representatives (collectively 'your client') in connection with these proceedings to the date of this subpoena inclusive ('the relevant period') that record: A. instructions, background information, source documents and other correspondence received by you from your client during the relevant period in connection with these proceedings; and/or B. opinions or advice provided by you to your client during the relevant period in connection with these proceedings; and/or C. all documents referred to or relied on by you or generated by you during the course of the preparation of your report presented to your client on 22 January 2002 ('your report') or for the purposes of your engagement as referred to in your affidavit sworn on 22 January 2002 ('your affidavit') including but not limited to: (a) any instructions received from your client, howsoever recorded, in respect of your report and these proceedings generally, including but not limited to those referred to in section II of your report; (b) any other documents received or obtained by you from your client or any other third party in respect of these proceedings; (c) any draft versions of your report whether distributed internally within PwC or provided to your client and comments provided by other partners or employees within PwC or by your client in respect of any draft versions of your report; (d) any documents provided by you to your client, and records of other correspondence entered into between you and your client, arising during the preparation of your report; (e) any advice provided to you by a partner or employee of PwC for the purpose of assisting you in the preparation of your report or otherwise in respect of these proceedings, including but not limited to advice in respect of taxation and corporations law matters referred to in your report; (f) any documents, in particular internal memoranda, emails, minutes of meetings, working papers and file notes, provided to you by, or arising from any discussions with, employees of PwC working under your supervision or assisting you in the preparation of your report or otherwise in respect of these proceedings; (g) any correspondence between you or other employees of PwC working under your supervision and your client regarding the formulation of the 'but for' scenario and the assumptions made in respect thereof referred to in section II of your report; (h) any correspondence between you or other employees of PwC working under your supervision and your client regarding the terminology and expression of entries in the narrative documents included in the exhibit marked SJM1 to your affidavit ('the narratives'); (i) any correspondence between you or other employees of PwC working under your supervision and your client regarding the calculation of figures within the narratives; (j) any other correspondence between you or employees of PwC working under your supervision and your client regarding the content of the narratives generally; (k) any other documents between you or other partners or employees of PwC and your client in respect of your report and these proceedings generally; 2. BUT shall not include any documents already provided as appendices or extrinsic material to your report or included in the exhibit marked SJM1 to your affidavit." 3 In the substantive proceedings the Commissioner relies upon affidavits of Mr McClintock sworn 22 January 2002 and 13 March 2002 and in particular upon a report exhibited to the latter affidavit, as expert opinion testimony. The Commissioner makes a claim of "client-legal privilege" (or legal professional privilege) in respect of many of the documents covered by the subpoenas. The claim raises what has been referred to as "expert witness privilege" - a subject which is apt to give rise to difficulties. Notwithstanding the expression just mentioned, the privilege asserted is, of course, a privilege of the client, in this case the Commissioner, not of the expert witness. 4 Some documents have been produced, pursuant to the subpoena, directly to the applicant's solicitors but the claim of privilege is made in respect of thirty-one boxes of documents or of volumes (lever-arch files) of documents, which have been delivered to the Registry of the Court. 5 For the purpose of the claim of privilege, the Commissioner relies upon two affidavits sworn 10 April 2002: one sworn by Julie Anne Noonan and the other by Janette Patricia Farrell. I will outline briefly their content. 6 The affidavit of Janette Patricia Farrell, sworn 10 April 2002, supports the claim for privilege in relation to boxes one to eighteen of the thirty-one boxes. The documents in those boxes are, for present purposes, of a different kind from the documents in boxes nineteen to thirty-one. The difference is that the documents in boxes one to eighteen came into existence at a much earlier point of time and for a different purpose. According to Ms Farrell, who is a Senior Assistant Commissioner of Taxation and has been employed with the Australian Taxation Office ("ATO") since March 1978, in about July 1999 she engaged PwC to assist with an analysis required to provide evidence to counsel and to prepare reports and analyses concerning various aspects of the Spassked structure and the IEL group of companies. Her dominant purpose was to furnish the PwC reports and analyses to counsel for advice and to have them available to be tendered in evidence if required. In fact, none of the reports has been served and they remain confidential to the ATO and its legal advisers. In the case of the documents in volumes one to eighteen, the privilege asserted appears to include both advice privilege and litigation privilege. 7 In contrast, the documents in boxes nineteen to thirty-one were part of communications directed to the production by Mr McClintock of "narratives" of series of transactions and of a report, for the purpose of the case to be made by the Commissioner in the present proceedings. In the case of the documents in these boxes, the privilege asserted is litigation privilege alone. 8 Ms Noonan is a Senior Lawyer employed in the office of the Australian Government Solicitor ("AGS") in Sydney. She and Grahame Tanna have the day to day carriage of these proceedings on behalf of the Commissioner. 9 Annexure B to Ms Noonan's affidavit is a fifty page schedule of the documents in the thirty-one boxes. The schedule identifies the documents, and in respect of each document, its author and the basis of the claim of privilege. In the text of her affidavit Ms Noonan identifies nine categories into which all of the documents identified in annexure B, and therefore contained in the thirty-one boxes, variously fall. In the schedule, the basis of the claims of privilege in respect of each document is indicated by its being assigned one of the numbers one to nine, to indicate to which of the nine categories the document belongs. 10 The categories of documents outlined in Ms Noonan's affidavit are: "1. Drafts of reports, narratives and affidavits. 2. Schedules of instructions on transactions prepared by ATO. 3. Draft and final correspondence (letters, facsimile transmissions and electronic mail) and attachments between any and all of AGS, PwC, ATO and Counsel. 4. AGS action plans and schedules. 5. PwC terms and conditions. 6. ATO briefing papers. 7. Extracts and minutes of meetings between AGS, PwC, ATO and Counsel. 8. PwC notes and billing details. 9. Material contained in boxes 1-18 referred to on page 39 of the Schedule".

"Category 1: drafts of reports, narratives and affidavits Within category number 1, all draft narratives were provided either: · by AGS to PwC for the sole purpose of enabling Mr McClintock and PwC to perform the professional services for which they were engaged as described in Mr McClintock's affidavit sworn 22 January 2002 or · by way of revised draft sent from PwC to AGS for consideration by and discussion with AGS or · in the case of draft narratives received by AGS from PwC, to the Australian Taxation Office and/or to Counsel for consideration and discussion. Draft affidavits within Category 1 were prepared by AGS and submitted to Mr McClintock, or vice versa, for the purpose of settling the terms of affidavits to be sworn by Mr McClintock. Draft reports within Category 1 were prepared by PwC for the purpose of submission to AGS for consideration by solicitors and Counsel for the Respondent and for discussion in conference with solicitors and Counsel, as part of the process of settling the matters which the final report of Mr McClintock was to address and settling the format of the final report. Category 2: Schedules of instructions on transactions, prepared by ATO All of the documents listed in annexure 'B' with the category number 2, being schedules of instructions on transactions prepared by ATO, were provided by ATO to AGS for the purpose of: · briefing Counsel to review and give advice with respect to the narratives to be submitted to PwC and · providing them to PwC to enable Mr McClintock and PwC to perform the professional services for which they were engaged as described in Mr McClintock's affidavit sworn 22 January 2002. The schedules of instructions consisted of summaries of relevant transactions for various IEL subsidiary companies. Category 3: correspondence and attachments All of the documents listed in annexure 'B' with the category number 3 were communications (by mail, facsimile, electronic mail or otherwise) from PwC to AGS or ATO or from AGS or ATO to PwC. They were confidential communications provided for the purpose of enabling Mr McClintock and PwC to perform the professional services for which they were engaged as described in Mr McClintock's affidavit sworn 22 January 2002. These documents concerned: · the production of narratives and the correction, verification and settling of them, by Mr McClintock and PwC; · the revision of drafts of Mr McClintock's report and · related matters such as the provision of instructions, information and/or documents from AGS to PwC and vice versa. Category 4: AGS action plans and schedules The AGS Action Plans and schedules are lists of tasks to be undertaken in preparation of these proceedings for hearing. They were in most cases prepared after meetings of AGS officers, ATO officers and Counsel. The Action Plans listed deadlines and objectives for work being undertaken. The items listed included aspects of PwC's work but they also covered tasks of Counsel, solicitors and ATO officers, unrelated to PwC's work. These were provided by AGS to PwC for the dominant purpose of enabling Mr McClintock and PwC to perform the professional services for which they were engaged as described in Mr McClintock's affidavit sworn on 22 January 2002 within the time period required and to facilitate coordination of work by all ATO officers and professionals concerned in the preparation of the Respondent's case. Category 5: PwC terms and conditions All of the documents listed in annexure 'B' with the category number 5, being PwC Terms and Conditions, were confidential communications from AGS to PwC for the purpose of engaging Mr McClintock and PwC to perform the professional services described in Mr McClintock's affidavit sworn on 22 January 2002. The subject of these communications was negotiation of the terms of the engagement, culminating in the engagement letter referred to in Mr McClintock's affidavit sworn 22 January 2002. Category 6: ATO briefing papers All of the documents listed in annexure 'B' with the category number 6, being ATO briefing papers to AGS and Counsel, were initially provided by ATO to AGS for the dominant purpose of briefing Counsel in the conduct of these proceedings. AGS provided copies of these to PwC. Category 7: extracts and minutes of meeting All of the documents listed in annexure 'B' with the category number 7 are minutes and extracts of minutes of the meetings between AGS officers, PwC personnel, ATO officers and Counsel, as referred to in paragraph 11 [first paragraph category 4] above. They were provided by AGS to PwC for the same purpose as the action plans and schedules were provided, as deposed to in paragraph 12 [second paragraph category 4] above. These minutes and extracts of minutes recorded confidential communications between AGS, PwC, ATO and Counsel regarding the conduct of the proceedings, including the progress of Mr McClintock's work. Category 8: PwC notes and billing details All of the documents listed in annexure 'B' with the category number 8, being PwC notes and billing details, are, on reflection, not covered by the schedule to the subpoena and are not therefore required to be produced. Category 9: Boxes 1 to 18 All of the documents listed in annexure 'B' with the category number 9, being material contained in boxes 1-18 referred to on pages 49-50 of the Schedule are dealt with in the affidavit of Jan Farrell sworn on 10 April 2002." 11 I accept the uncontradicted affidavit testimony of Ms Farrell and Ms Noonan as to the reasons why the various categories of documents were brought into existence. 12 In his affidavit of 22 January 2002 (referred to earlier), Mr McClintock set out the terms of the letter of retainer of him by the AGS on behalf of the ATO and described the steps by which he verified, and where necessary amended, the draft narratives which were supplied to him by the AGS. 13 In the final paragraph of her affidavit Ms Noonan states as follows: "During the process of inspecting documents and determining which ones would be the subject of a claim for privilege … I supervised the selection of documents and directed others who were assisting me as to the criteria by which the selection was to be made. The criterion which was applied by myself and others assisting me, was to identify, and claim privilege for, documents which constituted communication back and forth between PwC and AGS and ATO. Where documents were identified as being internal PwC working papers and communications between PwC staff, no claim for privilege was made." 14 I was referred in argument to various authorities on the subject of client-legal privilege, in so far as it may arise in relation to communications to or from an expert witness. In particular, I was referred to a decision of the Queensland Court of Appeal in Interchase Corporation Ltd (In Liq) v Grosvenor Hill (Qld) Pty Ltd (No 1) [1999] 1 Qd R 141 ("Interchase"); Instant Colour Pty Ltd v Canon Australia Pty Ltd (RD Nicholson J, FCA, 30 October 1995, unreported); Linter Group Ltd v Price Waterhouse (a firm) (Harper J, SCVic, 25 June 1999; unreported) and Rozmus v Illawarra Area Health Service (Master Greenwood, SCNSW, 21 October 1996, unreported). I was also referred to an article by Paul Mendelow, "Expert Evidence: Legal Professional Privilege on Experts' Reports" (2001) 75 ALJ 258. 15 In Interchase, five categories of documents were in issue, designated categories A, B, C, D and E. The case was chiefly concerned with documents brought into existence by the expert witness (a valuer in that case, Richard Ellis (Qld) Holdings Pty Ltd) and retained by it and copies of documents already in existence and obtained by it to assist it in the performance of its function as an expert witness. Documents of these kinds fell within categories B, C, D and E. It was held that they did not attract privilege because they were not in the nature of communications arising out of the retainer of the expert. But privilege was held to attach to the category A documents, which were: "Letters, facsimiles, and enclosures passing between Feez Ruthning as solicitors for the plaintiff and Richard Ellis regarding the Retrospective Valuation, numbered 1 to 12 inclusive, contained in a folder marked with the letter 'A' and entitled 'Richard Ellis - Writ of Non-Party Discovery'." (at 150) (my emphasis) These documents were all in the nature of communications. In the present case, the claim of privilege is sought to be supported only on the basis that all the documents in respect of which it is asserted formed part of communications. The affidavits mentioned above establish that they did. 16 In Interchase, Pincus JA thought that there was a distinction between the English authorities down to that time and the view which had been taken by Street CJ in R v Ward (1981) 3 A Crim R 171, in relation to documents which had been sent by a party's solicitors to an expert. Pincus JA stated (at 151): "The only question to which acceptance of the English position would give rise ... is whether it includes documents not in origin privileged, but used by the expert in forming an opinion; on the basis of the English cases, such documents would not be privileged, although supplied by the solicitor to assist in the expert's work." It was established in Commissioner of Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501, that client-legal privilege will attach to a copy of a document (even a copy of a public document) to which privilege would not otherwise attach, where the purpose of the making of the copy attracts the privilege (at that time, the "sole purpose" test of Grant v Downs (1976) 135 CLR 674 was applicable, but since Esso Australia Resources Ltd v Commissioner of Taxation (1999) 201 CLR 49 the test has been a "dominant purpose" test). In Interchase Pincus JA held that privilege attached to copy documents which constituted enclosures to the letters and facsimiles passing between the solicitors and the expert valuer. Thomas J agreed with the orders proposed by Pincus JA, although Thomas J does not appear to have expressed any reasoning specifically in relation to the category A documents. De Jersey J agreed with Pincus JA. 17 I would follow the Queensland Court of Appeal and accept that privilege can attach to copies of documents, not otherwise privileged, where the copies were made for the purpose of forming part of the communications, to and fro, between the client, the client's legal representatives and the expert witness. 18 In the present case, the AGS letter of retainer is disclosed. The privilege dispute concerns numerous other documents constituting communications to and fro between the ATO, AGS and PwC, and, in particular, copy documents, including copies of public documents, furnished by the AGS to PwC as part of those communications. Mr McClintock furnished in exhibit SJM1, which comprises forty volumes, narratives in relation to the numerous IEL subsidiary companies. The narratives refer to the documents on which they are based, and those documents are disclosed. Accordingly, so far as the narratives are concerned, the case is not one in which the expert has made a statement which relies on documents furnished to him, but in respect of which the client seeks to maintain privilege. 19 In exhibit SJM2, comprising four volumes, Mr McClintock has expressed certain opinions which have been characterised as his "but for" opinions. In substance, these are his opinions as to what the financial and tax positions of the various companies would have been but for that which the Commissioner contends is a "scheme" within Part IVA of the Income Tax Assessment Act 1936 (Cth) ("the Act"). The narratives form the basis, or part of the basis, of the "but for" opinions and are disclosed. 20 In summary, the Commissioner has disclosed the following, in respect of which the authorities recognise that client-legal privilege cannot be maintained:

At a glance

Court

Decision date

Before

Source

Judgment (12 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (4)