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Professional Privileges And The Tax Practitioner

Wednesday, 04 March 2009   (0 Comments)
Posted by: Author: Prof Lynette Olivier
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Professional  Privileges And The Tax Practitioner
It is an undisputed fact that SARS has extensive powers to compel taxpayers and their advisers to provide information. This raises the question whether, under the South African law, valid grounds exist whereby an adviser may refuse to provide information to SARS.

In the United States, a tax practitioner may refuse to provide information on the basis that the information is protected by one of three privileges, namely the attorney-client privilege, the tax practitioner-client privilege and the work-product privilege (United States vs. Textron Inc & Subsidiaries 507 F Supp 2d 138, 2007 US Dist.)

As South African law regarding privilege information differs from that of the law in the United States of America, it would be erroneous simply to assume that a taxpayer could, on the basis of the Textron judgment, refuse to submit documents to SARS.
Privilege in South African Law
Under South African law, a taxpayer could also refuse to disclose information to SARS should such information be protected.One of the best-known grounds on which a taxpayer may refuse to disclose information under South African law is the so-called legal professional privilege.Legal professional privilege clearly forms an integral part of South African law; however, the precise ambit of this privilege is not always clear.Schwikkard and Van der Merwe op cit 135–6 indicate that four requirements have to be met before this privilege may be claimed, namely:

1. The communications that are sought to be protected must have been made to a legal adviser acting in a professional capacity.
2. The information must have been supplied in confidence.
3. The information must have been supplied for the purpose of pending litigation or for the purpose of obtaining professional advice.
4. The client must claim the privilege.
In Kommissaris van Binnelandse Inkomste vs. Van der Heever 1999 (3) SA 1051 (SCA), the court accepted that legal professional privilege also applied where an advocate in employment of a firm of auditors gave legal advice to a client.This position was confirmed in Mohamed v President of the Republic of South Africa and others 2001 (2) SA 1145 (C), but held that in-house legal advisers should remain scrupulously aware of the distinction between communications made in that capacity, which would enjoy the protection of legal professional privilege, and communications not made in that capacity, which would not be privileged.

The mere fact that a lawyer is in possession of confidential information, for example where a non lawyer such as an auditor hands over to a lawyer a file containing confidential information, does not create a legal professional privilege (R vs. Davies 1956 (3) SA 52 (A)), as the lawyer was not consulted to obtainlegal advice.
In Chantrey Martin & Co vs. Martin (1953) 2 All ER 691, the Court of Appeal held that communications by and to a chartered accountant were not protected by legal professional privilege.South African courts, however, have not yet been required to adjudicate on the question whether an accountant enjoys legal professional privilege.It seems inappropriate, therefore, to confine legal professional privilege to communications by and to a lawyer.Although specific types of legal work are reserved for legal practitioners such as advocates and attorneys, no provision exists under South African law to prohibit a non-lawyer from performing general legal services (s 83 of the Attorneys Act merely prohibits a person from holding him- or herself out as a legal practitioner).
Since tax is not to be regarded as a realm of pure law, but rather as a discipline overlapping law, economics and accounting, non-lawyers, especially auditors and accountants, often find themselves in a position where they have no choice but to give legal advice.It may even be argued that should an accountant be denied the privilege only on the grounds that he acted in the capacity of an accountant and not in that of a lawyer, this would infringe upon the equality clause provided for in s 9 of the Constitution.Even assuming that the denial of legal privilege to accountants does infringe on the equality clause, however, it may be argued, in the light of the divergent roles that accountants and lawyers play, that the infringement can be justified under the general limitation clause, s 36 of the Constitution.
The argument may surely be raised that it amounts to unfair discrimination where, for example, a person who does not have any formal qualifications but who has extensive tax experience, such as a person previously employed by SARS, can be forced to hand over communications, but that a person with formal legal qualifications is under no such obligation.Information supplied in confidence It is a question of fact whether the information was supplied in confidence.In H Heiman, Maasdorp and Barker vs. Secretary for Inland Revenue 1968 (4) SA 160 (W), it was held that the presence of a third party during the communication usually indicates a lack of intention for the communication to remain confidential.A similar rule applies in the USA (see Michael W Loudenslager Cover me: The effects of attorney-accountant multidisciplinary practice on the protections of the attorney-client privilege (2001) 53 Baylor LR 34 at 59). It is submitted, however, that it would be wrong to assume that the presence of a third party necessarily indicates a lack of intention for the communication to remain confidential.
The purpose of the presence of an auditor during consultations with a lawyer may well be, for example, to assist the taxpayer in explaining a complicated tax position to the lawyer.The facts of each case should therefore be scrutinised before determining whether the purpose of the meeting was to obtain legal advice from the lawyer or whether it was to obtain accounting or business advice from the accountant.

Problems could arise if an attorney in a multi-disciplinary practice consisting of lawyers and accountants were to share confidential information with one of his or her accounting partners.On the one hand, it may be argued that since the privilege belongs to the client and not to the legal professional, the sharing of the confidential information by the legal professional amounts to a waiver of the privilege by the client.On the other hand, where a client consults a lawyer in a multidisciplinary practice it may be argued that the client knew or ought to have know that the information would be shared, and that such consultation necessarily implies that the client never had the intention to keep the information confidential.

Information supplied for the purposes of giving legal advice

If the information were supplied in confidence but not for the purposes of giving legal advice, it would not be protected by the privilege.Contrary to popular belief, however, communications would be protected by legal professional privilege not only where legal advice was sought in anticipation of litigation, but also where legal advice was sought in general (Sasol III (Edms) Bpk vs. Minister van Wet en Orde (supra) at 774J).The origin of this misconception is no doubt that previously, justification for the existence of legal professional privilege was to be found solely in the proper conduct of litigation, whereas it is currently seen as necessary for the functioning of the legal system as a whole.

The question that arises is whether tax advice should be regarded as legal advice.Where the information is supplied in preparation of litigation, for example, and where a lawyer is required to interpret and research information and draft opinions and defend taxpayers before the tax court as part of the objection-and-appeal process, it can safely be assumed that the information will be protected by the privilege.The position is less clear where a lawyer is required to assist a taxpayer with completing a tax return.

In addition, the question remains whether people other than lawyers, for example accountants, could provide tax advice. Katharine D Black and Stephen T Black A national tax bar: An end to the attorney-accountant tax turf war (2004) 36 St Mary’s LJ 1 indicate that, broadly speaking, tax advice covers the following four main areas: the preparation of tax returns; tax planning; objections or disputes; and appeals.Each of these areas must be analysed in order to determine whether or not communications by the tax adviser constitutes legal advice.
Preparation of tax returns

The preparation of an income tax return by a corporation, for instance, presupposes a sound knowledge and interpretation of the Income Tax Act 58 of 1962.It can be argued that preparation of such returns amounts to the giving of legal advice.The same does not hold true for the completion of less complicated returns.It was held in the USA (in Blair vs. Motor Carriers Service Bureau, Inc 40 Pa D & C 413 (Pa Com Pl 1939)) that the preparation of an uncomplicated tax return does not constitute giving legal advice.

A similar conclusion was reached in United States vs. El Paso Co 682 F 2d 530, where it was held that the preparation of tax returns by a lawyer generally does not fall within the ambit of the attorney-client privilege, as it does not constitute giving legal advice.In Textron it was made clear that the completion of a tax return does not in itself amount to providing legal advice; but it does not follow that an attorney cannot, in the course of completing a tax return, provide legal advice that may be privileged.

In practice, a legal professional is often required to attend meetings with clients in an attempt to protect communications.It should be made clear that the mere presence of a legal professional at meetings does not in itself protect communications.The purpose of the meeting should be established, i.e. whether it was to obtain legal or accounting advice.

Even though the completion of a simple income tax return for salaried individuals often does not require an interpretation of legislation, the same does not hold true for the completion of more complicated returns.Where, for example, a South African resident taxpayer boasts considerable offshore investments, the provisions of s 9D of the Income Tax Act have to be interpreted to determine whether the foreign investments are taxable in South Africa.Anyone who has ever attempted to interpret s 9D would no doubt agree that such interpretation does not amount to mere accounting work.

The conclusion that may be drawn from this is that it would be wrong to assume that the completion of a tax return by a lawyer could never constitute the rendering of legal services.In practice, however, it is often difficult to determine where legal work ends and where accounting work or simple tax return preparation begins.

Tax planning

Since tax planning requires a sound understanding of the revenue laws, it is submitted that information supplied to and by a lawyer during such planning would be protected by legal professional privilege.In New York County Lawyers’ Association (In re Bercu) 78 NYS 2d 209 (NY App Div 1948), it was held that when an accountant deals with a question of law which is merely incidental to preparing a tax return, he or she is not engaged in the practice of law.This view was, however, rejected in Agran vs. Shapiro 273 P 2d 619, where it was held that an accountant does indeed provide legal advice, even if only in connection with his or her regular work as an accountant in tax matters. 

Objections or disputes

Where a lawyer is assisting a taxpayer in a tax dispute adjudicated either by SARS or by a court of law, he or she is clearly rendering legal services (Jeeva vs. Receiver of Revenue, Port Elizabeth (supra)).In order to facilitate the speedy resolution of disputes, the Income Tax Act was amended in 2003 to provide for alternative dispute resolution. In the so-called ADR process, taxpayers are often represented by accountants.It is also established practice in the tax court that representation of a taxpayer is not restricted to lawyers.In representing a taxpayer in the tax court, the accountant clearly renders legal services.
In Mandelbaum vs. Gilbert & Barker Manufacturing Co 290 NYS 462 (NY City Ct 1936) it was held that "[a]ny one who renders an opinion as to the proper interpretation of a statute, or gives information as to what judicial or quasi judicial tribunals are deciding, and receives pay for it, is to that extent, practising law”.The conclusion that can be drawn is that the representation of a taxpayer either as part of the ADR process or before the tax court amounts to the giving of legal advice.The client must claim the privilege.A court will not mero motu invoke the privilege; the client has to claim it (see Zeffertt, Paizes & Skeen op cit 584).Communications will not be protected by legal professional privilege if the legal advice was sought in connection with a crime, even if the legal adviser did not know the purpose for which his or her advice was sought (see RWF Sceales‘Privileged communications: A snare for the unwary?(1985) 1 SA Tax J 37).The Income Tax Act provides for several criminal offences (ss 75 and 104). It may well be, therefore, that a dispute that started off as civil turns into a criminal one. The result is that where a criminal dispute arises, communications that would have been protected if the dispute were civil in nature would no longer be protected by legal professional privilege.

The South African law on legal professional privilege is far from clear as to its application to tax advice.What does seem clear, however, is that a person other than a lawyer cannot currently claim legal professional privilege, as the privilege is only available to legal advisers acting in their professional capacity.The Tax Committee of the South African Institute of Chartered Accountants recently asked SARS to recommend to Parliament that as part of the regulation of tax practitioners, accountants be awarded the same privilege as lawyers.It is regrettable that the current version of the Tax Practitioner’s Bill, however, does not provide for such a privilege.
RWF Sceales Privileged communications:  A snare for the unwary? (1985) 1 SA Tax J 37
Schwikkard & Van der Merwe op cit 135–6
Michael W Loudenslager: Cover me: The effects of attorney accountant multidisciplinary practice on the protections of the attorney-client privilege (2001) 53 Baylor LR 34 at 59
Katharine D Black & Stephen T Black: A national tax bar: An end to the attorney-accountant tax turf war (2004) 36 St Mary’s LJ 1
Zeffertt, Paizes & Skeen op cit 584
Source: By Prof Lynette Olivier (Tax TALK)



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