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DEAR SARS
Legal Privilege in Tax Arena

The issue is relevant to tax advisors because some tax advisors are legally trained and have either been enrolled as an Attorney or an Advocate of the High Court of South Africa and others may be Chartered Accountants or other accountants. Clients often enquire as to whether an accountant's client is entitled to claim legal professional privilege.

It is necessary to point out that the right to claim privilege is not a statutory right but flows from the common law (See for example: L H Hoffmann and D T Zeffertt, The South African Law of Evidence (Butterworths Professional Publishers (Pty) Ltd, Fourth Edition, 1989) at chapter 11 on page 236 and P J Schwikkard et al, in Principles of Evidence (Juta Law, Second Edition, 2002) at chapter 10 at page 115. The right to claim privilege was first recognised in the case of Stradling v Morgan (1560) 1 Ploud 199, (75 ER 305).

Hoffmann, writing in the South African Law of Evidence expresses the view that privilege extends not only to the rules of evidence, but it is a "fundamental common-law right (of which, no doubt, the evidentiary aspect is a manifestation) that entitles a person to seek legal advice in confidence", (Page 247).

In Jeeva and Others v Receiver of Revenue, Port Elizabeth and Others [1997] 57 SATC 187, a case which considered an application by taxpayers for the release of the information held by the Commissioner, Jones J evaluated the scope of legal professional privilege and stated as follows:

"These cases lay down the principle that the right to keep professional communications between legal advisor and client confidential is a fundamental right. Gibbs C J comments that 'this is a new development, which goes beyond any decision in England or Australia' [Baker v Campbell (supra at 65 (CLR)]. It does not seem to me to matter whether this is really a new development, or whether the law has come to recognise that what it previously treated as a rule of evidence has always been something more and that the rule of evidence is only one way of giving expression to a more fundamental right. It is certainly a new way of looking at privilege."

If the Commissioner requests information from taxpayers or their advisors that is protected by privilege, taxpayers would, based on the decision in Jeeva's case supra, be entitled to refuse to disclose the information protected by privilege. The first ground for refusing to release the information is that the taxpayer's right to privacy contained in the Constitution protects such information from disclosure. Secondly, the right to claim privilege on the requested information would make the refusal lawful.

Clients often take the view that all communication that has passed between the client with an attorney or advocate is protected by legal professional privilege. This is not the case and Schwikkard, in Principles of Evidence (supra) states the following at page 135:

"Before legal professional privilege can be claimed the communication in question must have been made to a legal advisor acting in a professional capacity, in confidence, for the purpose of pending litigation or for the purpose of obtaining professional advice. The client must claim the privilege and the lawyer can claim the privilege on behalf of his client once the latter has made an informed decision."

For the privilege to apply it is not essential that the advice sought relates directly to actual or impending litigation. The privilege will also operate where the client is seeking legal advice.

It must be noted that, based on the authorities, an accountant cannot claim privilege on communications that have passed between him or her and their client. See for example the case of Chantrey v Martin 1953, 2 All ER 691, where the court held that an accountant does not enjoy legal professional privilege.

In Heiman Maasdorp and Barker v Secretary for Inland Revenue and Another [1968], 30 SATC 145, the taxpayer contended that privilege precluded the disclosure of the information called for by the Commissioner. Snyman J, commented on the Commissioner's powers to call for information under the erstwhile section 74(1) of the Income Tax Act, Act 58 of 1962, as amended (the Act) as follows:

"The crisp issue raised before me by counsel for all three parties was whether or not the usual privilege which a person consulting an attorney had, namely that the latter could not without his consent be compelled to divulge any confidences communicated to him or documents handed to him in the course of an attorney-client relationship, persisted in spite of the provisions of section 74(1) of the Income Tax Act.
…
The language of this section would be decisive unless it is subject to the rule generalia specialabus non-derogant. In order to resolve the issue my enquiry becomes: whether the provision in section 74(1) is of a general nature as against a special nature of the privilege.”

The court decided that the old section 74(1) of the Act did not override the taxpayer's right to claim privilege to legal advice procured from the taxpayer's legal advisor. It was correctly pointed out by Snyman J that whether attorney-client privilege exists depends on the facts and that the privilege exits within well defined legal limits.

Clients cannot secure privilege by merely handing over documents to their legal advisor. Legal professional privilege will only protect documents obtained by taxpayers from their legal advisor for securing legal advice. Furthermore, privilege will not apply where the legal advisor assists a taxpayer in completing schedules for a tax return or drafts other schedules for the taxpayer's personal use. Communications that have passed between the taxpayer and his/her advisor must relate to the obtaining of advice or in contemplation of litigation for the privilege to apply.

It is appropriate to point out that the Australian Commissioner of Taxation has extended privilege to certain documents passing between registered accountants and their clients according to D Bentley in Taxpayers' Rights: An International Perspective (Revenue Law Journal, School of Law, Bond University, Queensland, Australia, 1998) at page 7. The privilege conferred on clients of accountants can be withdrawn by the Australian Commissioner of Taxation at any time, as such right to privilege arises out of a concession made by the Commissioner and is not based on law.

Currently, in South Africa, clients of lawyers advising on tax matters, whether working for their own account or in an accounting firm should enjoy privilege. However, a client seeking advice from an accountant does not enjoy the legal right to claim privilege. It is submitted that the distinction between lawyers and accountants in the tax arena appears unjustifiably discriminatory in contravention of section 9 of the Constitution of the Republic of South Africa, Act 108 of 1996, as amended.

It would appear that in Germany persons other than lawyers are not required to provide information to the German tax authorities on the basis that the client must release the advisor, whether an attorney, lawyer, tax accountant, auditor or certified accountant, from the legal obligation to protect that information (See C Daiber in chapter 7 entitled Protection of Taxpayers' Rights in Germany contained in D Bentley's Taxpayers' Rights: An International Perspective at page 173).

According to P Howarth and R Maas in Taxpayers' Rights and Revenue Powers (Reed Elsevier (UK) Ltd, Lexus Nexus 2004) at page 62, auditors that prepare documents as part of their function as auditors are not obliged to make those documents available to United Kingdom Inland Revenue. Howarth points out that communications between a tax advisor in the United Kingdom and his/her client are protected where the purpose of the communications related to the giving of tax advice.

More recently, the Inland Revenue department of New Zealand reached an agreement with the New Zealand Association of Chartered Accountants conferring privilege on tax accountants in that country (see "Tax and Privilege: A proposed new structure", a government discussion document, published in May 2002 by the policy advice division of the Inland Revenue Department, New Zealand, available at http://www.id.govt.nz).

Furthermore, the United States fiscal legislation was amended to confer privilege on all persons that are authorised to practise before the Internal Revenue Service in accordance with section 3411 of Taxpayer Bill of Rights 3, which amended section 7525 of the Internal Revenue Code. Privilege applies to:

"The communication between a taxpayer and any federal authorised tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney."

Taxpayers in South Africa cannot secure legal professional privilege on documentation not subject to privilege merely by handing that documentation over to their attorney or advocate. To rely on legal professional privilege in refusing to supply information to the Commissioner, a taxpayer must satisfy a court that documentation handed to the attorney or advocate relates directly to the obtaining of legal advice or for the purposes of litigation.

At the time that the regulation of tax practitioners was being discussed at the Commissioner's office, the South African Institute of Chartered Accountants, Taxation Committee requested that the Commissioner considers extending the right to claim privilege to advice obtained from accountants as well. Unfortunately, nothing has happened in this regard when reference is made to the draft Tax Practitioners' Bill released during 2006. From a Constitutional point of view, it is contended that a taxpayer should be entitled to obtain advice from either an accountant or legal advisor with the same result, namely, that that advice is protected by legal professional privilege.

The next article in this series considers whether taxpayers are obliged to complete the so-called Lifestyle Questionnaire. It also discusses whether a taxpayer will succeed in obtaining the name of an informant from SARS.

Beric J Croome BCom, BProc, LLB, FCMA, H Dip Tax Law (cum laude), CA(SA), is an  Advocate of the High Court of South Africa and a Tax Executive - Edward Nathan Sonnenbergs Inc.

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