Monday 15 November 2010

Chance to benefit from tax-free home transfers

The Taxation Laws Amendment Bill, 2010, was introduced in Parliament by the Minister of Finance on August 24 and contains the final rules whereby taxpayers may transfer the home that they live in from a company or trust into their own name without incurring capital gains tax (CGT), secondary tax on companies (STC) or transfer duty.

The final rules for the tax-free transfers will be contained in paragraph 5lA of the Eighth Schedule to the Income Tax Act, 1962. The rules have undergone a number of refinements since first released for public comment during May and it is appropriate therefore to summarise the framework regulating the tax-free transfers of certain residences from companies, close corporations and trusts.

In accordance with paragraph 51A(1) of the Eighth Schedule to the act, the interest in the residence must be disposed of by a company, including a close corporation or trust, on or before December 31 2012.

New law offers wider options than expected to acquire company-owned homes, but there is a time limit.

The residence to be transferred must be used mainly for domestic purposes during the period beginning on February 11 2009 and ending on the date that the property is disposed of, which can be no later than December 31 2012.

The property must be transferred to natural persons who are connected persons in relation to the company or trust and that typically means that they are beneficiaries of the trust or shareholders of the company or members of the close corporation.

It is critical that once the property has been transferred from this company or close corporation that the company from which the property was transferred has within six months taken steps to liquidate, wind up or deregister, or where it is a trust, dispose of the residence; the founder, the trustees and the beneficiaries of that trust have agreed in writing to the revocation of the trust; or alternatively, that an application has been made to court for the revocation of the trust.

The purpose of paragraph 51A is to allow persons who own their homes in companies or close corporations of trusts to take ownership without incurring tax costs, but at the same time to remove either companies or trusts from the tax register. The South African Revenue Service sees this as a means of increasing efficiencies in tax administration.

In accordance with paragraph 51A(2), the company or trust disposing of the residence is deemed to have disposed of that residence for an amount equal to the base cost of the interest in that residence as at the date of disposal. On this basis, no CGT can arise when the property is transferred from a company or close corporation or trust to a natural person. It is therefore not possible to step up the cost of the property for CGT purposes.

Paragraph 51A distinguishes between transfers of residences to persons who bought shares in a company after the company acquired the residence and cases where shareholders created the structure that owns the residence in question.

If the company in question owns other assets, and the residence does not amount to 90% or more of the market value of the assets held by the company, the relief is not available where the company was acquired by a taxpayer at the time that it owned the property.

In those cases where a natural person takes transfer of the property from a company and paragraph 51A(3) does not apply, the base cost for the natural person taking transfer of the property is the same as the base cost of the property to the company concerned.

Paragraph 51A(5) of the Eighth Schedule to the act deals with those residences owned by a trust that are ultimately transferred to a natural person, and provides that the date of acquisition of the residence by the trust will be deemed to be the date on which the natural person acquired the asset in the event that the residence is disposed of later. Any expenditure incurred by the trust in acquiring the property will be deemed to have been incurred by the natural person taking transfer of the property as well.

Previously, the government made it clear that it would only entertain transfers of fixed residences from companies or close corporations directly to a natural person, or from a trust directly to a natural person, and that it would not allow for tax-free transfers from multiple-tiered structures, whereby residences would be transferred from a company owned by a trust of which a natural person was a beneficiary.

The bill, as introduced in Parliament, now allows for tax-free transfers when residences are owned in multiple-tiered structures, and the effect of this is that the residence can be transferred free of taxes from a company to a trust and ultimately to a beneficiary of a trust as long as the conditions contained in paragraph 51A of the Eighth Schedule are complied with.

The quid pro quo for transferring residences free of taxes from a company or trust structure is that the company or trust that previously owned the residence must be terminated.

Paragraph 51A requires that the disposal of the residence takes place from a trust or company to a natural person on or before December 31 2012.

The advantages of applying for the relief available under paragraph 51A is that the residence may be transferred free of CGT from a company or trust to a natural person, and that when the residence is finally disposed of the exemption applicable to the primary residence will then apply to the capital gain realised on disposal of the primary residence.

Furthermore, the legislation provides that no transfer duty will be payable on such transfers and in addition no STC will arise by virtue of section 64B(5)(kA). It must be remembered that when the residence is owned by a trust and it is transferred to a natural person, that will increase the value of the natural person's estate for estate duty purposes once that person dies.

The relief available in paragraph 51A is now wider than what was mooted in the draft bill released for comment during May.

Therefore, persons residing in residences owned by companies or trust structures should evaluate their circumstances to determine whether it is appropriate to transfer those residences out of the structures and into their own names, thereby taking advantage of the concessions available in the legislation whereby no CGT, STC or transfer duty will be payable.

Clearly, to give effect to the tax-free transfer it will be necessary to complete documents for submission to SARS and the Deeds Office and it remains to be seen when these documents will be released.

In practice it would make sense that when the residence is owned by a trust, for the trust merely to award the property to the natural person who is a beneficiary of the trust, and in the case of a company, to award the property as a dividend to the shareholder being a trust or natural person.

When the company is owed by a trust it would be necessary to transfer the property from the company to the trust and ultimately to a natural person beneficiary in order to utilise the concession available in paragraph 51A of the act and related exemptions contained in the bill.

 Dr Beric Croome is a tax executive at ENS. This article first appeared in the November 2010 edition of “Business Law & Tax Review” in Business Day

Free image from ClipArt

Wednesday 10 November 2010

Tax Administration Bill and Taxpayers' Rights (Part 3)

Part 1 (The importance of taxpayers' rights) appeared here

Part 2 (Important changes contained in TAB)  appeared here

Remedy for taxpayers

The TAB introduces a number of provisions that enhances taxpayers’ rights in South Africa, but unfortunately does not introduce a cost effective remedy where SARS has abused its powers or as has acted badly. Currently, taxpayers would be obliged to seek relief in the form of damages or costs of the High Court, which is a costly and time consuming exercise.

Taxpayers who are aggrieved about the manner in which they have been dealt with by SARS can lodge a complaint with the Service Monitoring Office, which is currently structured such that it is an office within SARS. It would be preferable if an independent ombudsman is created where taxpayers could lodge formal complaints against SARS and seek redress from SARS where the authorities have abused their position. Unfortunately, many taxpayers are reluctant to complain about SARS for fear of victimisation, whether such victimisation may or may not occur, and an ombudsman-type office would go some way in alleviating this concern.

In a number of democracies taxpayers are entitled to recover wasted costs from the revenue authority where the authorities have failed to comply with their statutory obligations or have caused taxpayers to incur costs as a result of poor administration of the fiscal statutes. Unfortunately, there is no provision currently whereby taxpayers can recover wasted costs from SARS.

Left: The TAB goes some way towards providing a remedy for taxpayers' complaints.

Recently, a number of taxpayers have encountered difficulties with SARS regarding the first provisional tax return submitted. In one case, SARS issued a letter to a taxpayer who had timeously submitted the first provisional tax return stating as follows:

"The IRP6 return submitted by you cannot be accepted and processed due to the following reasons:

1. You have not calculated the tax on estimated taxable income correctly for the amount declared and the year of assessment specified on the return. Please calculate the tax using the correct tax tables and estimated taxable income amount to enable the processing of the return

The completed return must be submitted as soon as possible as your filing obligations have not been met until such time as you have fully completed and filing [sic] the return.”

We are aware of other instances where letters have been issued by SARS for the first provisional tax return which incorrectly referred to the income threshold contained in paragraph 19 of the Fourth Schedule to the Act, which in fact deals with the second provisional tax payment and not the first provisional tax payment. In some cases, SARS has been required to withdraw letters issued by it to taxpayers.

In those cases where taxpayers have received letters advising that their provisional tax returns were incomplete, they have travelled to their closest SARS office, spending some hours at the SARS office waiting for an opportunity to discuss the matter with a consultant. Once the SARS official reviewed the letter and checked the taxpayers’ status on the system, it was established that the letters were erroneously issued. In such cases, taxpayers should, as a matter of right, be entitled to recover the costs incurred in travelling to SARS and be recompensed for the time wasted by them in attending to SARS erroneous letters. Currently, there are no provisions in our law which cater for this and it is unfortunate that the TAB does not address this lacuna.

Currently, where a taxpayer makes a mistake with a tax return, SARS will issue an additional assessment and impose additional tax for that mistake whereas when SARS makes a mistake, there is no apology, nor is there any recompense to the taxpayer.


The TAB was approved by cabinet on September 2 2010 and it is anticipated that the bill will be introduced to parliament during November 2010. It has not yet been indicated by when the TAB will take effect but it is more than likely to take effect over a period of time, commencing during 2011.

It is clear that the TAB does provide for feedback to be supplied to taxpayers subject to an audit, which was previously not the case and in other instances the TAB does seek to improve and uphold taxpayers’ rights.

Unfortunately, the TAB lacks a cost effective remedy for taxpayers and it would be far more preferable if measures were introduced whereby taxpayers could recover wasted costs and damages for mistakes made by SARS or where SARS abuses its powers. Ideally, a separate and distinct ombudsman’s office should be introduced to address taxpayers' complaints and grievances in dealing with SARS, as is the case in a number of democracies around the world.

Croome is a tax executive with Edward Nathan Sonnenbergs. This article first appeared in Without Prejudice November 2010 issue.
Free Image from Clipart

Tuesday 9 November 2010

Tax Administration Bill and Taxpayers' Rights (Part 2)

Part 1 (The importance of taxpayers' rights) appeared here.

Important changes contained in TAB

The TAB will create a single framework for all tax types which must be welcomed as taxpayers are currently required to submit different forms to register for different taxes, and the administrative burden of procuring registration numbers for the different taxes is onerous. Hopefully, this administrative burden will be eased somewhat once the TAB is fully operational.

The TAB will also broaden the scope of third party reporting to SARS to facilitate the greater pre-population of information on tax returns issued by SARS to taxpayers. Currently, taxpayers who are required to submit tax returns will receive a return reflecting details of remuneration received from employers and it is anticipated that the return will be enhanced whereby interest, medical aid related information and other third party information will be set out in tax returns, thereby reducing the administrative burden in submitting returns to SARS.

Currently, it is unclear what level of SARS official is authorised to exercise the powers contained in the various fiscal statutes. The TAB contains an innovation in this regard whereby certain powers can only be exercised by the Commissioner personally and a second tier of powers may be exercised by so-called "senior SARS officials" only. The remaining powers can be exercised by the third tier, namely, SARS officials generally. SARS will, therefore, need to indicate which officials fall into which category so that taxpayers can satisfy themselves that the more important powers have indeed been exercised by a senior SARS official as defined in the TAB.

The TAB also seeks to extend SARS information-gathering powers to enhance compliance by taxpayers with the fiscal statutes.

Currently, when a taxpayer is subject to an audit by SARS, there is no process whereby SARS is required to inform the taxpayer as to the status of that audit and this will change as a result of the enactment of the TAB. The TAB specifically provides that SARS must provide regular feedback to taxpayers informing them as to the status of the audit, which will bring South Africa into line with a number of other democracies. Importantly, SARS must, in terms of the TAB, inform a taxpayer that an audit has been concluded. Currently, a taxpayer may receive a request for information or be subjected to an audit and is never formally advised that the audit has been completed. It may take many months and sometimes years for SARS either to request further information or issue an amended assessment. With the TAB, this will change and SARS will be legally required to inform taxpayers that the audit has been completed.

Currently, the fiscal statutes do not clearly demarcate between routine audits and criminal investigations that may be undertaken by SARS. Under the Constitution, persons facing criminal prosecution enjoy certain rights and in light thereof, the TAB requires the separation of audit and criminal investigations by SARS to comply with the constitutional rights conferred on an accused.

It will be necessary for SARS to indicate to the taxpayer that an audit is no longer a routine audit but that the taxpayer is facing a criminal prosecution. This should enhance the protection of taxpayers' rights in this area.

The TAB contains a provision whereby SARS seeks to obtain a power to conduct searches of premises without a search warrant to protect documents from destruction. Currently, under s74D of the Income Tax Act (58 of 1962, as amended), the Commissioner is required to apply to the high court for a warrant authorising the search of premises and seizure of documents.

The TAB also contains a provision that, where SARS is concerned that documents may be destroyed prior to obtaining of a search warrant, a senior SARS official may authorise a search and seizure operation without a warrant issued by a court. There are concerns that this power may be abused as there is no independent check on the manner in which the power is exercised. It must be noted though that other statutes in South Africa, such as the Competition Act (89 of 1998), contain provisions whereby the state can conduct search and seizure operations without procuring a warrant from a court where there is a serious concern that documents will be destroyed prior to the obtaining of the search and seizure warrant.

Clause 88 of the TAB contains a provision whereby SARS may issue what is referred to as a "jeopardy assessment.” This entails SARS issuing an assessment in advance of the date on which a tax return would normally be due, so long as a senior SARS official, as defined, is satisfied that it is required to secure the collection of tax that would otherwise be in jeopardy. Currently, and based on the decision of the courts, SARS can only collect tax once an assessment has been issued to a taxpayer.

Clause 88 of the TAB seeks to neutralise the decision of Singh v Commissioner for SARS 65 SATC 203, which decided that SARS may only seek to recover tax once an assessment has been issued. Clause 88 seeks to confer on SARS the power to issue an assessment here SARS is of the opinion that the tax reflected as payable on that assessment will not be paid. This is a draconian provision and, as a result, clause 88(2) provides that in addition to the normal rights of objection and appeal to an assessment, a taxpayer can submit a review application against an assessment to the high court on the basis that the jeopardy assessment is excessive or, alternatively, that the circumstances do not justify the issue of such an assessment.

The TAB also proposes that all judgements delivered by the tax courts in the country are published, thereby placing taxpayers on an equal footing with SARS. Currently, SARS is in possession of all judgements delivered by the tax court, whereas taxpayers are only aware of those decisions which are published in some form or another. This is discriminatory and unfair and the move to publish all judgements of the tax court must be supported. There is no reason why all judgements of the tax court should not be published. Clearly judgements of the tax court cannot contain details of the taxpayer as this would violate the secrecy provisions contained in the various fiscal statutes.

The TAB contains rules refining the imposition of additional tax, which will bring South Africa into line with other democracies. Currently, SARS may, under s76 of the Act, impose additional tax of up to 200% where a taxpayer has failed to disclose all income or has sought a deduction to which they were not entitled. Typically, SARS is required to start off on the basis that the 200% additional tax should be levied and to reduce that by taking account of extenuating circumstances.

The TAB proposes a system whereby the conduct of the taxpayer will determine the scale of the additional tax levied whereby voluntary disclosure made by the taxpayer before SARS commences an audit will be treated far more leniently than those taxpayers who are obstructive or intentionally seek to evade tax. The TAB, therefore, proposes introducing objective criteria to be used in determining the quantum of additional tax to be levied where a taxpayer is in default under a fiscal statute.

To follow:

Croome is a tax executive with Edward Nathan Sonnenbergs. This article first appeared in Without Prejudice November 2010 issue.

Monday 8 November 2010

Tax Administration Bill and Taxpayers' Rights (Part 1)


The concept of a separate and distinct Tax Administration Bill (TAB) was first mooted in the Budget review published by National Treasury at the time of the 2005 Budget. It was indicated that National Treasury was contemplating introducing a single piece of legislation to deal with all the administrative provisions contained in the fiscal statutes administered by the South African Revenue Services (SARS), except for customs and excise duties.

The draft TAB was released for public comment on October 30 20O9 and its purpose is to harmonise the administrative provisions contained in all the various fiscal statutes except, as already pointed out, customs and excise which is subject to a separate process of review and legislative amendment.

In drafting the TAB, SARS consulted with domestic tax and constitutional law experts to ensure that the Bill does not violate the Bill of Rights contained in the Constitution as amended.

The TAB comprises some 20 chapters made up of approximately 254 draft sections. Many of the provisions contained in it will be familiar to taxpayers as they are currently found in the various fiscal statutes administered by SARS. The TAB deals with the various processes taxpayers will face when dealing with SARS, ranging from the registration as a taxpayer, to submitting tax returns, receiving assessments, challenging assessments and the information-gathering powers of the Commissioner. Clearly, as South Africa is a constitutional democracy, it is important that the TAB complies with taxpayers' rights as enshrined in the Constitution.

The importance of taxpayers' rights

All legislation introduced in South Africa must uphold the Bill of Rights. While the Constitution does not specifically refer to taxpayers' rights, it is clear that taxpayers can rely on the Bill. As a result of the constitutional dispensation, all fiscal statutes must adhere to the provisions contained in the Constitution, failing which the courts could strike down legislation as being repugnant under the constitutional provisions.

The Bill of Rights, therefore, affects the powers conferred on SARS in the fiscal statutes and, more importantly, how SARS conducts itself in dealing with taxpayers.

It must be remembered also that the rights contained in the Bill of Rights are capable of being limited under a law of general application in terms of s36 of the Constitution.

That section provides that rights may be limited in certain circumstances where it is reasonable and necessary in an open and democratic society. In the tax context, the taxpayers’ right to privacy enshrined in s14 of the Constitution is important in that it protects information held by a taxpayer and prevents the state from conducting searches of premises or from seizing documents and records, unless authorised by specific statutory provisions.

s32 of the constitution confers the right of access to information, whereby taxpayers can request information about themselves from SARS and in accordance with the provisions contained in the Promotion to Access to Information Act (2 of 2000). In addition, the right to just administrative action contained in s33 of the constitution confers on taxpayers a right to request reasons from SARS for decisions made by it in its dealings with taxpayers and as more fully set out in the Promotion of Administrative Justice Act (3 of 2000).

It is important, therefore, that the provisions contained in the TAB adhere to the provisions contained in the Constitution and particularly the rights available to taxpayers.

To follow:

Part 2 (Important changes contained in TAB)

Part 3 (Remedy for taxpayers)

Croome is a tax executive with Edward Nathan Sonnenbergs. The full article first appeared in Without Prejudice November 2010 issue.

Monday 1 November 2010

United Kingdom Court of Appeal Rules on Legal Professional Privilege and Accountants

In South Africa, taxpayers may lawfully refuse to supply information to the Commissioner: South African Revenue Service ("SARS"), which is subject to legal professional privilege. The concept of legal professional privilege originated in the English law of evidence and has been in existence for hundreds of years, having first having been adjudicated in the case of Stradling v Morgan (1560)1 Plowd 199, 75 ER 305. Legal professional privilege has played an important part in the law of evidence but has become more than merely a rule of evidence and has more recently been regarded as a basic right to ensure the proper administration of justice.

Left: The judge has ruled on professional privilege.

In principle, legal professional privilege applies where a person seeks legal advice from an attorney or advocate on a professional basis, the so-called "advice privilege" or where advice is sought in anticipation of litigation from an attorney or advocate acting in a professional capacity, the so-called "litigation privilege".

In Heiman, Maasdorp and Barker v Secretary for Inland Revenue and Another [1968] 30 SATC 145, the taxpayer contended that privilege prevented the disclosure of the information required by the Commissioner. That case, which was decided in 1968, held that the Commissioner's powers to seek information did not trump the taxpayer's right to claim privilege. More recently in Jeeva v Receiver of Revenue, Port Elizabeth 1995 (2) SA 433 (SE), SARS sought an order from the High Court forcing the taxpayer to disclose information which would otherwise have been protected by legal professional privilege. In Jeeva the court refused to accede to the SARS request and thus upheld the taxpayer's right to claim privilege on the information requested by SARS.

In S v Safatsa 1988 (1) SA 868 (A), the Supreme Court of Appeal ruled that legal professional privilege is a fundamental right which is necessary for the proper functioning of the legal system in South Africa. Based on the cases and the common law in South Africa, legal professional privilege can be claimed by a taxpayer only where the taxpayer has sought legal advice from an attorney or advocate on a professional basis. Legal professional privilege does not extend to advice supplied by an accountant, even though the accountant may be rendering advice on the tax laws of South Africa. This distinction is questionable when reference is made to the provisions of the Constitution of the Republic of South Africa, Act 108 of 1996, as amended ("the Constitution") and the comments made in S v Safatsa.

The question of whether legal professional privilege should be extended to accountants was considered by Charles J in Prudential Plc and Others v Special Commissioner of Income Tax and Others [2009] EWHC 2494 (ADMIN) where it was decided that it was not possible to extend legal professional privilege to accountants advising clients on tax matters in the United Kingdom.

Prudential being dissatisfied with the decision of Charles J, noted an appeal against his decision and, as a result, the case proceeded to the Court of Appeal. Judgment was delivered in that case on 13 October 2010.

In the lower court, Charles J decided that he was unable to go against the precedent set by the higher courts whereby legal professional privilege applied only to legal advice supplied by barristers and solicitors in a professional capacity. Thus, the case proceeded on appeal and the court allowed for The Institute of Chartered Accountants in England and Wales, the General Council of the Bar and the Law Society to intervene in the matter because of the importance of the issues raised in the dispute between Prudential and Her Majesty's Revenue and Customs ("HMRC").

Lord Justice Lloyd, at paragraph 2, summarised the issues facing the court in Prudential Plc and Another v Special Commissioner of Income Tax and Another [Institute of Chartered Accountants in England and Wales and others intervening] [2010] EWCA Civ 1094 as follows:

"In the present case, the Claimants and Appellants (whom I will call Prudential) seek to establish that the principle extends further than has yet been recognised. They assert (and it is not really in dispute) that, nowadays, on many if not most occasions on which a person seeks advice about fiscal liabilities, which often involves a consideration of, and advice about, the relevant law, that person does so by approaching accountants rather than lawyers. They contend that the rationale which lies behind the LPP rule requires that a client's communications with his advisers should be just as much protected from disclosure if the advice, being legal advice is sought from and given by an accountant as if the advice given is sought from and given by a solicitor or barrister."

In the case of R (Morgan Grenfell and Co.) v Special Commissioner of Income Tax [2002] UKHL 21, Lord Hoffmann stated as follows:

"LPP (legal professional privilege) is a fundamental human right long established in the common law. It is a necessary corollary of the right of any person to obtain skilled advice about the law. Such advice cannot be effectively obtained unless the client is able to put all the facts before the adviser without fear that they may afterwards be disclosed and used to his prejudice."

In view of the importance of whether legal professional privilege applies where legal advice is sought from and given by accountants to clients, the court granted permission to the Institute of Chartered Accountants in England and Wales, the Bar Council and the Law Society to intervene in the appeal. The court therefore canvassed the question of legal professional privilege thoroughly and, particularly, whether it should be extended to legal advice, particularly in the tax arena, supplied by accountants to clients.

The dispute between Prudential and HMRC arose from the fact that HMRC requested that Prudential produce certain documents. The United Kingdom fiscal legislation precludes the production of documents protected by legal professional privilege. Certain of the documents in question had been prepared by accountants for Prudential and Prudential sought to extend the application of the legal professional privilege to the documents prepared by its accountants.

HMRC asserted that the notices issued under the United Kingdom fiscal legislation sought the production of documents pertaining to legal advice on tax matters received from counsel, from foreign lawyers and also from a leading firm of accountants. Prudential argued that it was not obliged to disclose any documents relating to any advice obtained on the fiscal legislation, whether that advice was supplied by United Kingdom lawyers, foreign lawyers or accountants.

The court pointed out that legal professional privilege is a Judge-made rule and Prudential's lawyers argued that it was open to the court to declare the law by ruling that legal professional privilege is available in respect of communications obtained for purposes of giving legal advice, whether or not the adviser is a lawyer. The court reviewed the legal position in the United Kingdom and the manner in which legal professional privilege was extended to patent agents and foreign lawyers. Furthermore, the court referred to the Committee on Enforcement Powers of the Revenue Departments, the so-called "Keith Committee", which recommended "that legal professional privilege should be extended to duly appointed tax agents, who have been admitted members of an incorporated society of accountants or of the Institute of Taxation, and should apply only to advice given by a tax agent. This recommendation by the Keith Committee was not implemented." (at paragraph 50 ii of the judgment).

Justice Lloyd referred to the decisions of the European Court of Human Rights, which held that the interference with the privacy of a person's communications with their lawyer violates Article 8 of the European Convention on Human Rights (see Campbell v UK (1992) 15 EHRR 137 and Foxley v UK (2001) 31 EHRR 25).

Lord Pannick, arguing for Prudential, submitted that Article 14 of the European Convention on Human Rights stated that if privilege only exists where advice is sought from and given by a member of the legal profession that constitutes discrimination and should, for that reason, be extended to apply to advice given by an accountant. The court rejected the argument that limiting legal professional privilege to advice procured from a lawyer was discriminatory. At paragraph 69, the court referred to the restriction of legal professional privilege to advice supplied by lawyers in the following terms:

"It seems to me plain that a rule which limits LPP to communications with a member of a relevant legal profession (a) is in accordance with law and (b) can properly be regarded as necessary in a democratic society in one or more relevant interests, in particular for the protection of the rights and freedoms of others."

Prudential argued that legal professional privilege should be extended to accountants and the court analysed what is meant by the term "an accountant" and how that should be interpreted. The court pointed out that there is no restriction on persons wishing to set themselves up in business as an accountant, even though they may not be registered with a professional body.

After reviewing the principles applicable to legal professional privilege, and the definitional problems pertaining to accountants, the court pointed out that it is for Parliament in the United Kingdom and not for the courts to extend the scope of legal professional privilege.

The court referred to the position of legal professional privilege in other countries and, in this regard, stated as follows:

"We were shown some material about the position in Canada, Australia, New Zealand and the United States of America, and in some other jurisdictions. In New Zealand and the USA there is legislation on the point. In Australia legislation is being proposed. In Canada the application of LPP in relation to accountants appears to have been rejected. We were not shown any examples of LPP applying in relation to accountants except as a result of legislation.

... However, it is noteworthy that no example of the application of LPP in relation to any professional adviser other than lawyers has been found except as a result of statutory interventions. That seems to me to be consistent with the conclusion to which I have come, namely that, even if there is a strong case for applying LPP in such a way, it is not a matter which can properly be achieved by the courts; it requires legislation." (at paragraph 80).

As a result, the court ruled that legal professional privilege does not apply in relation to any professional, other than a qualified lawyer, a solicitor or barrister, or an appropriately qualified foreign lawyer. The court concluded that the human rights argument did not assist in satisfying the court that legal professional privilege should be extended to accountants in the United Kingdom when such accountants render to advice to clients on tax law.

Thus, the court declined the request to expand legal professional privilege to accountants and, furthermore, refused permission for Prudential to appeal to the Supreme Court, that is, the court that succeeded the erstwhile House of Lords.

It does not appear that any case has come before a South African court where a taxpayer has refused to supply information to SARS on the basis that the advice obtained was secured from an accountant. Under the provisions of the Constitution, our courts can take account of decisions handed down in foreign courts insofar as they are relevant to the application of the law in South Africa. It is possible, therefore, that a South African court, if called on to deal with the issues faced by the court in Prudential, would reach a similar conclusion.

However, it remains to be seen what weight the court will place on the Bill of Rights contained in the Constitution, which is different to the Human Rights Act of the United Kingdom. It is clear that under existing statutory provisions, tax advice supplied by an accountant to a client is not subject to legal professional privilege under current law.

It remains to be seen if the legislature will intervene in this regard as has happened in other countries. Clients seeking legal advice on tax matters should, therefore, be aware that where advice is being procured from an accountant, such advice is not protected by legal professional privilege and if called on by SARS, such information would, on the face of it, be required to be supplied to SARS, thus placing attorneys and advocates in a preferential position in advising clients on tax matters.

This article first appeared in tax ENSight, October 2010
Free image obtained from Please contact blog owner for any copyright issues.