FEDERAL COURT OF AUSTRALIA Hart v Commissioner of Taxation (No 3) [2017] FCA 571 File number: QUD 29 of 2010 Judge: BROMWICH J Date of judgment: 26 May 2017 Catchwords: PRIVILEGE – whether legal professional privilege waived in two opinions of senior counsel – where substance of the opinions was referred to in pleadings, submissions and evidence of the party seeking to maintain privilege in proceedings concerning the same subject matter – held: waiver of legal professional privilege established Legislation: Income Tax Assessment Act 1936 (Cth), Pt IVA Cases cited: Attorney-General (NT) v Maurice [1986] HCA 80; (1986) 161 CLR 475 Australian Unity Health Ltd v Private Health Insurance Administration Council [1999] FCA 1770 Bennett v Chief Executive Officer of the Australian Customs Service [2004] FCAFC 237; (2004) 140 FCR 101 Mann v Carnell [1999] HCA 66; (1999) 201 CLR 1 Date of hearing: 5 August 2016 Registry: Queensland Division: General Division National Practice Area: Taxation Category: Catchwords Number of paragraphs: 16 Counsel for the Applicant: Mr K N Wilson QC with Mr A J Anderson Solicitor for the Applicant: Cleary Hoare Solicitors Counsel for the Respondent: Mr N Williams SC with Ms M Brennan QC and Mr R Jedrzejczyk Solicitor for the Respondent: Australian Government Solicitor ORDERS QUD 29 of 2010 BETWEEN: MICHAEL JAMES PATRICK HART Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: BROMWICH J DATE OF ORDER: 5 august 2016 THE COURT ORDERS THAT: 1. Upon the Court finding waiver of legal professional privilege over the opinions produced to the Court in answer to a subpoena to the applicant issued at the request of the respondent, namely: a. the opinion of Mr Russell QC dated 8 February 1996 (internal opinion); and b. the undated opinion of Mr Russell QC (external opinion), the respondent be given access to both of the abovementioned opinions. 2. The applicant pay the costs of the respondent of and incidental to the legal professional privilege argument. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT BROMWICH J: 1 This is the third judgment in proceedings which ultimately concern an appeal by a taxpayer, Mr Michael James Patrick Hart, against a notice of objection decision by a delegate of the Commissioner of Taxation in relation to the 1997 financial year. The live question in the proceedings is whether two determinations made on behalf of the Commissioner to include two amounts in Mr Hart's assessable income in the 1997 financial year were correctly made. A component of the Commissioner's case is that Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) applies to include the two amounts in Mr Hart's assessable income. Mr Hart's case in resisting the application of Part IVA included an argument that he had relied upon two opinions of Mr David Russell QC provided in 1996. 2 On 5 August 2016, I heard submissions from the parties on the question of whether a claim of legal professional privilege should be upheld in respect of the two opinions provided by Mr Russell QC. The two opinions were produced to the Court in response to a subpoena to Mr Hart issued by leave of the Court at the request of the Commissioner. The two opinions were produced to the Court, subject to a claim of legal professional privilege to deny access to the Commissioner. Accordingly, the two opinions were maintained in sealed envelopes pending the resolution of the claim. The first in time of the opinions was dated 8 February 1996 and was referred to as the internal opinion. The second in time external opinion is undated and makes internal reference to the internal opinion. 3 When the argument came on for hearing I invited the parties first to address the Court on the question of the establishment of legal professional privilege over the opinions. Upon hearing brief submissions from senior counsel for Mr Hart, senior counsel for the Commissioner indicated that any argument that legal professional privilege did not attach to the opinions at the time of their creation was no longer pressed. Accordingly, the argument then turned to the question of whether or not legal professional privilege had been waived. 4 At the hearing of the application two affidavits were read without objection and without cross-examination. The first was an affidavit of Mr Hart sworn 25 July 2016; the second was an affidavit of Jane Lye, the lawyer at the Office of the Australian Government Solicitor (AGS) with carriage of the proceedings for the Commissioner, sworn 15 July 2016, including annexures. 5 Each of the parties relied upon written submissions filed in accordance with directions previously made. Argument proceeded on the basis that the submissions had been read. 6 In the context of all the authorities referred to in written submissions, senior counsel for the Commissioner, who bore the onus in relation to establishing waiver, placed particular reliance on the Full Court decision in Bennett v Chief Executive Officer of the Australian Customs Service [2004] FCAFC 237; (2004) 140 FCR 101 as follows: (1) Tamberlin J, agreeing with Gyles J, after referring to Mann v Carnell [1999] HCA 66; (1999) 201 CLR 1 at 13 [29] and 15 [34] and Attorney-General (NT) v Maurice (1986) 161 CLR 475 at 481, 488 and 493, applied those authorities to the case at hand to find that legal professional privilege had been waived over an advice because the substance of the advice was conveyed in a letter sent to the solicitors for the successful appellant in order to emphasise and promote the strength and substance of the case to be made against him. His Honour found at 104 [6] that it would be inconsistent and unfair of the AGS, having disclosed and used the substance of the advice in that way, now to seek to maintain privilege in respect of the parts of the advice which pertained to the conclusion that had been expressed. His Honour observed that it might have been different had it simply been asserted that the client of the AGS had taken legal advice and that the position adopted followed consideration of that advice. That was because in those circumstances the substance of the advice was not disclosed, but merely the fact that there was advice and that it had been considered. However, once the conclusion of the advice was stated together with its effect, there was an imputed waiver. (2) Emmett J was in dissent in that his Honour would have dismissed Mr Bennett's appeal. (3) Gyles J at 119 [64]-[65] referred to Australian Unity Health Ltd v Private Health Insurance Administration Council [1999] FCA 1770 in which Goldberg J held that a statement in a letter that separate legal advice supporting the Council's view of a rule had been received amounted to waiver. Gyles J went on to agree with that reasoning, observing at 119 [65] "[t]he voluntary disclosure of the gist or conclusion of the legal advice amounts to waiver in respect of the whole of the advice to which reference is made including the reasons for the conclusion". 7 Senior counsel for the Commissioner then took the Court to particular parts of the pleadings, evidence and submissions which he contended constituted a sufficient level of reliance such that it would be unfair to maintain privilege over the two opinions themselves: (1) Mr Hart's further amended appeal statement dated 27 November 2015 included the following specific references and reliance upon the opinions (per original): 3.27 The Applicant relied on advice Cleary Hoare had received from senior counsel as to the efficacy of the NVI scheme. … 7. In relation to the Practice Trust only; 7.2 The Applicant contends that if s97 does apply to assess any amount, it was "reasonably arguable" that no amount was so assessable and, in that regard, the Applicant relied on the advice of senior counsel that the NVI scheme worked, such that the appropriate penalty rate would be 0% (s226K). … 9.5 The Applicant contends that the penalties in relation to the Part IVA argument were incorrectly imposed under s.226 at the rate of 50%. … 9.5.4 Alternatively, it was "reasonably arguable" (within the meaning of s 222C) that Part IVA did not apply. In that regard the Applicant relied on the advice of senior counsel that the NVI scheme worked and that Part IVA did not apply. Accordingly, the penalty percentage for the purposes of s 226 (if any) was properly 25% [citation omitted]." … (2) Mr Hart's witness statement dated 14 June 2011 contained the following: 41. Had the NVI arrangement not been implemented in the 1997 income year with respect to the Income Earning Trust Amount, under no circumstances would it have been distributed to me. Not only was that income derived by trusts and appropriate to be dealt with through NVI, such action was consistent with my belief (supported by the opinion of Senior Counsel) in terms of the efficacy of NVI. Had it not been dealt with through NVI, it would have been distributed as per para 39. Note that this paragraph was rejected following objections by the Commissioner ruled upon subsequently to the arguments on this issue. There is room for debate as to whether, in those circumstances, there is still reliance of the kind giving rise to the relevant unfairness and inconsistency, or whether historic reliance is enough. I consider this further below. (3) Paragraph 11 of Mr Hart's statement refers to an Attachment 1, which is a document headed "SCHEDULE 1" followed by "NVI SCHEME", followed by: 1. NVI had been developed in the 1996 income year following consideration by the Applicant of the judgment in Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359. The opinion of senior counsel was obtained in February 1996 which both analysed and supported the efficacy of the NVI concept. 2. While NVI came within the definition of a "Scheme" (s177A(1)), it was considered that it was not adversely affected by the anti-avoidance provisions contained within Part IVA because it would not be a scheme to which Part IVA applied as set out in s177D since it would not be possible to identify a taxpayer who was intended to obtain a tax benefit. This was primarily because it was to be used by taxpayers who utilised trusts, without a pattern of previous income distributions, to commence new income earning ventures. … Senior counsel for the Commissioner submitted that whilst the language in the first sentence of the second paragraph reproduced above of "it was considered" was passive, that is plainly a reference to or reliance upon the advice referred to in the first paragraph. (4) Among the documents that were provided by Mr Hart to the Commissioner, also forming part of the evidence in the case, was a document entitled: RE: INCOME TAX ASSESSMENT ACT 1936 PRECIS OF SENIOR COUNSEL'S OPINION DATED 8 FEBRUARY 1996. That précis document contained a summary of one of the opinions in some considerable detail as to the conclusions reached, questions asked and answers given. Senior counsel for the Commissioner said the voluntary disclosure of this précis itself was sufficient to constitute a waiver in circumstances where it was sought to be relied upon to obtain a particular outcome from the Commissioner, namely that Part IVA would not be deployed. That is, any waiver from this précis took effect from the time of its provision to the Commissioner and did not require reliance on its later deployment in these proceedings. (5) Mr Hart's submissions in chief in respect of the challenge to the objection decision included the following: 116. In addition, Queen's Counsel opinion is held, and was held at all relevant times, in the context of the distributions by the Income Earning Trusts in the 1997 financial year, supporting the principles upon which the Applicant contends that a tax benefit under Part IVA does not exist in relation to the Applicant for the financial year.64 64 Court Book, v 4, tab 22, 1830-1843. The footnote is a reference to the location in the Court Book of the précis of the opinion referred to above, which in fact commences at Court Book page 1836. 8 The Commissioner's case on waiver was that any of the individual instances above would have been sufficient reliance to constitute waiver. Senior counsel for the Commissioner submitted that this case was on all-fours with Bennett and in fact was a clearer case than Bennett because Mr Hart had specifically pleaded reliance on the opinions. 9 Senior counsel for Mr Hart argued that no waiver of privilege occurred for the following reasons: (1) Mr Hart's case in resisting the application of Part IVA depended on him establishing that he had not received a tax benefit, that there was no scheme, or that the factors in s 177D of the ITAA 1936 were not satisfied. The opinions of Mr Russell QC were not directed to those points and therefore having the opinions was beside the point. (2) The existence of the opinions of Mr Russell QC was of no forensic assistance to Mr Hart in respect of, in effect, the substantive part of his appeal against the objection decision. (3) The opinions of Mr Russell QC were relevant to Mr Hart's case only in respect of the penalty component, although it was conceded that the opinions had been referred to more broadly than just in relation to penalty. (4) Mr Hart's argument on penalty that he had exercised reasonable care would be unsustainable if the opinions were not provided on that point, if it was reached (i.e. assuming that Mr Hart failed on the substantive challenge and needed to address penalty). Until that point, no waiver had occurred because the opinions themselves had not been put into evidence. This was in effect a submission that the benefit of deploying the opinions did not take place when the opinions were referred to in evidence and submissions, but only when the entire opinions themselves had been put into evidence. (5) Insofar as the précis may be said to be a waiver, it only related to the external opinion. This is addressed further below. 10 Senior counsel for Mr Hart did not directly address the question repeatedly put as to why evidence was being led in the substantive case that was supposedly not relevant and had no forensic advantage to Mr Hart's case. At a number of points I probed senior counsel for Mr Hart as to how it could be that there was not substantial reliance on the opinions of Mr Russell QC by referring to them and their effect in support of the approach that had been taken by Mr Hart, yet Mr Hart was still seeking to withhold the very documents which contained the advice itself. Whilst privilege was argued by senior counsel for Mr Hart to have been maintained, the argument ended up being somewhat meekly advanced. 11 There was some debate as to whether the précis was of the internal opinion or the external opinion. Senior counsel for the Commissioner drew attention to the following paragraphs of Mr Hart's affidavit (per original): 4.12 Until very recently, I was unaware that the External Opinion was not dated. Until then, and so far as I was concerned, both opinions were dated 8 February 1996. 4.13 Mr Collie prepared a précis of the External Opinion (to précis the Internal Opinion would have defeated its function) being the Précis referred to at paragraph 15 of the Respondent's submissions. The intention was to use the Précis to summarize possibilities for suitable persons. It was our preference and that of senior counsel that the External Opinion not be seen as a marketing tool. 12 Senior counsel for the Commissioner did not accept the assertion that the précis was only of the external opinion. As the heading of the précis referred to above referred to a dated document, senior counsel for the Commissioner asserted that the better and safer view was that the précis was a reference to the dated opinion, namely the internal opinion, rather than a reference to the undated external opinion. I accept the Commissioner's argument that the précis was, it is to be reasonably inferred, drawn from the dated internal opinion rather than the undated external opinion. However, in light of the conclusions I have reached, nothing turns on this. 13 Senior counsel for the Commissioner also noted that Mr Hart's affidavit of 25 July 2016 referred to both opinions in a collective sense in different paragraphs, with no clear statement that regard was had to only one of the opinions, and therefore the references in the pleadings, submissions and other evidence should properly be read as referring to both opinions. I accept this submission. 14 In all the circumstances I was satisfied that a compelling case for waiver had been made out in accordance with the principles identified in Mann v Carnell and Bennett. I was able to reach that conclusion without reliance on [41] of Mr Hart's statement referred to at [7(2)] above and accordingly do not need to resolve the question as to whether reliance stated in a part of an affidavit that is ultimately rejected as inadmissible constitutes sufficient reliance for wavier of privilege. Had that required resolution I would have been inclined to the view that once reliance in evidence or by other means has taken place, waiver takes place regardless of whether the evidence is ultimately admitted. The genie is out of the bottle, so to speak. However, without reliance on the disallowed evidence, but by virtue of the other instances of reliance, the privilege has been lost by waiver and the Commissioner was entitled to have access to the two opinions as no other basis for resisting production and access was advanced. 15 Mr Hart must pay the Commissioner's costs. 16 The foregoing are the reasons for the orders I made on 5 August 2016, reproduced with these reasons, granting access to the two opinions of Mr Russell QC to the Commissioner. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Bromwich. Associate: Dated: 26 May 2017