Tax advice: Keeping it confidential

Tuesday 20 September 2005

Recent changes to the tax legislation extend the circumstances where you can refuse to disclose tax advice.

Legal privilege

The changes have been referred to as extending the doctrine of legal privilege to "non-legal" tax advisors.

In fact, although the new provisions do provide some welcome restrictions on Inland Revenue's ability to obtain information, they do not go as far as extending legal privilege.

Although the exact scope of legal privilege could be the subject of a book in itself, it means (broadly speaking) that a lawyer can refuse to disclose any document or communication that is made confidentially for the purpose of attaining or giving legal advice.

"Tax advice documents"

Inland Revenue uses its statutory information gathering powers to request or take documents. The new provisions say that confidential "tax advice documents" no longer need to be disclosed to Inland Revenue.

To be a "tax advice document", the document must be confidential and not created for the purpose of "an illegal or wrongful act". The same restrictions apply to legal privilege.

The tax advice document must be created either by the client or the tax advisor (a "document" includes data stored or transferred by electronic means) and may be:

• a person's instructions requesting advice about the operation and effect of tax laws;
  
  
• the tax advisor providing a record of research and analysis about the operation and effect of tax laws; or
  
  
• a tax advisor actually giving advice (or recording advice previously given) about the operation and effect of tax laws.

A tax advice document does not include attachments to tax advice documents that do themselves meet the eligibility criteria.

Inland Revenue considers that various documents will not be tax advice documents, including tax calculations and worksheets, board minutes, structure diagrams and confidentiality agreements.

"Tax advisor"

A "tax advisor" is a person who is a member of an "approved advisor group". The Institute of Chartered Accountants of New Zealand (ICANZ) is an approved advisor group.

Claims that a document is a "tax advice document"

Even if these conditions are satisfied, confidentiality for the document is not automatic. If Inland Revenue requests a document, the recipient or their tax advisor (as the case may be) must formally claim the document to be a tax advice document.

Where a document was created by a person (who is not a tax advisor), the claim must contain:

• a broad description of the form or contents of the document;
  
  
• the name of the tax advisor involved;
  
  
• the date on which the book or document was created.

If the document was created by a tax advisor, a claim must also:

• name the approved advisor group;
  
  
• detail the statute or other enactment involved;
  
  
• specify the type of revenue that was the subject of the advice.

Any claim that a document is a tax advice document is also subject to time limits. For example:

• where a search of premises is carried out under section 16 of the Tax Administration Act, the claim must be made on the actual day of the search unless Inland Revenue approves an extension of time;
• for documents requested by the Inland Revenue under section 17 of the Tax Administration Act, the person has at least 28 days to claim confidentiality.

Inland Revenue has produced a form IR 519 to facilitate claiming that a document is a tax advice document. It is not compulsory to use this form, but we anticipate that most people will use the form as a matter of convenience.

"Tax contextual information"

A significant limitation on the statutory confidentiality regime is the requirement that a person (generally the tax advisor) must, when requested, provide Inland Revenue with "tax contextual information" for the tax advice document.

"Tax contextual information" is essentially background material, but the definition of the phrase includes what, in many cases, will be seen as sensitive information. This includes:

• facts or assumptions relating to a transaction or even a postulated transaction;
  
  
• a description of steps involved in the performance of a transaction that has occurred or is postulated;
  
  
• non-tax advice documents;
  
  
• advice that concerns tax laws related to Inland Revenue's debt collection powers;
  
  
• a fact or assumption relating to advice that is referred to in the above points;
  
  
• a fact or assumption relating to financial statements or other document that the person is required to provide to Inland Revenue.

As all this information must be disclosed on request, it will be very difficult for client-created documents to benefit from the new regime. Clearly, most client instructions do not actually contain tax advice. However, these client-created documents do frequently contain factual summaries and the "type of revenue" that is to be the subject of the advice from the advisors. As a result, they will be "tax contextual information" and have to be disclosed.

Similarly, any factual content (including postulated steps) of advisor-created documents will need to be disclosed.

Although Inland Revenue has indicated that it will use its power to request tax contextual information "sparingly", it has the power to request tax contextual information where it thinks that:

• there are material gaps in the factual information available;
  
  
• there is a credibility issue in relation to the information;
  
  
• the information provided is inconsistent; or
  
  
• there is factual complexity that requires clarification.

Conclusions

The statutory requirements to make timely claims and, particularly, to provide "tax contextual information" where requested must be borne in mind in considering the effectiveness of the statutory confidentiality regime.

As the regime only protects the actual tax advice, in circumstances where facts or steps that are only "postulated" may be of importance, the requirement to disclose this information may be seen to defeat the purpose of a confidentiality regime.

By contrast, legal privilege applies to both opinion and fact and also is not subject to specific time-limits for making claims or the need to complete formal, detailed claims.

Advice and information

For further advice or information on tax issues, please contact any member of Bell Gully's tax team listed below.

AUCKLAND

Niels Campbell 
Partner

David Simcock 
Partner

Willy Sussman   
Partner

John Bassett   
Senior Associate

Graeme Olding 
Senior Associate

Monique Mackie 
Senior Solicitor