INTRODUCTION

In rapidly changing times it is particularly important that society understands the way its enduring institutions operate.

One of those institutions is the judicial system. There is a strong tradition in the judicial system that the reasons for decisions are set down in writing and made public. Shortly I will be handing down my written reasons in this case consistent with that principle.

However, in an effort to assist in the understanding of those reasons, in cases of public interest, it is now common for the judge to provide a short explanation in straightforward terms. I will provide such a statement in this case. Of course, the only authoritative and complete version of the reasoning of the Court is contained in the formal reasons to be published.

STATEMENT

1. This case was brought by accountants, Clements, Dunne & Bell Pty Ltd (CDB). CDB sought orders against the Commissioner of the Australian Federal Police (AFP) preventing the AFP from obtaining access to documents seized under search warrants from CDB.

2. The documents relate to an investigation of alleged criminal activity by Mr Nick Petroulias, who was an Assistant Commissioner of Taxation, and others associated with him, in relation to the promotion and sale of tax avoidance schemes.

3. The documents seized were communications between CDB and its solicitors, Andrew Gray & Associates. These communications concerned legal advice given by Mr Gray to CDB acting on behalf of its clients. The legal advice concerned the establishment of employee benefit schemes by the clients.

4. Ordinarily, communications between solicitor and client are privileged. This means that, amongst other things, they are protected from seizure under a search warrant.

5. The law accords privilege to communications between solicitor and client in order to ensure that people are free to speak with their legal advisers without fear that the communications will be made available for the purpose of legal proceedings.

6. The privilege is, however, not absolute. The law accepts that communications between solicitor and client are not privileged where the communications arise from an improper or illegal transaction.

7. The question in this case was whether the communications between Mr Gray and CDB were privileged.

8. The AFP argued that the communications were part of improper or illegal conduct by Mr Petroulias and Mr Gray and some others.

9. It was alleged that Mr Petroulias used his position as Assistant Commissioner of Taxation to have his subordinates in the Australian Tax Office make private binding rulings which indicated that the ATO accepted the validity of the employee benefit schemes. These formal rulings were, it was alleged, used as a tool for the marketing of the schemes. Acting on behalf of some clients, CDB paid Mr Gray for advice concerning the schemes. It was alleged that a bank account was established in Hong Kong for the deposit of the proceeds of sale, and that Mr Petroulias received some of these funds in return for his role in assisting in the marketing of the schemes, including procuring the private rulings.

10. Further, it was alleged by the AFP that the employee benefit schemes purportedly entered into by the clients of CDB were a sham, that is to say, the clients did not genuinely enter into the transactions. For instance, although the central concept of the employee benefit scheme was to provide a target to be reached by employees in return for an incentive payment, no such targets were ever set. It was further alleged that Mr Petroulias, Mr Gray and CDB all knew that the clients had not genuinely entered into the scheme.

11. Finally, it was also alleged that the dominant purpose of the clients in attempting to enter into the scheme was to avoid tax. If so, the Commissioner was entitled, under the tax legislation, to ignore the scheme for the purposes of taxation, and to impose penalty tax.

12. The AFP argued that the conduct of Mr Petroulias, Mr Gray and CDB was illegal and improper and, consequently, legal client privilege did not apply to the communications between Mr Gray and CDB concerning the acquisition and implementation of the scheme.

13. It is most important to explain that this case does not involve determining whether Mr Petroulias, Mr Gray, or CDB or its directors have committed criminal offences. In order to find that legal client privilege does not apply, the Court must be satisfied that there is evidence which gives colour to the charge or, in other words, there is prima facie evidence that the allegation has a foundation in fact. This is a very different inquiry to the inquiry that occurs in criminal proceedings. In criminal proceedings, proof of guilt must be established beyond reasonable doubt. It would be wrong to conclude from these reasons that the Court has found that Mr Petroulias, Mr Gray or CDB have committed criminal offences.

14. However, I have concluded that there is sufficient evidence, which is described in the reasons for judgment, to establish the improper and illegal conduct alleged. This means that the documents passing between Mr Gray and CDB are not protected by client legal privilege.

Melbourne, 20 December 2001

This judgment is available in full text on the internet at the following address: www.fedcourt.gov.au

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