Tax litigators will now have to consider, inter alia, the impact of certain provisions under the Tax Administration Act No. 28 of 2011 (the TAA) as amended by the Tax Administration Laws Amendment Act No. 21 of 2012 on the doctrine of legal professional privilege and a recent judgment reflecting the view of a court with regards to the adherence to the rules of the Tax Court by the South African Revenue Service (SARS).
Legal Professional Privilege
The underlying purpose of the doctrine of legal professional privilege was described by Botha JA in the case of S v Safatsa [1988] (1) SA 868 (A), where it was affirmed that for the better functioning of the law, it was necessary that there should be freedom of communication between an attorney and his client for the purpose of giving and receiving legal advice as well as for the purpose of litigation and that this entailed immunity from disclosure of such communications between them. The doctrine of legal professional privilege is regarded as a fundamental common law right. Because the doctrine is derived from the common law, it is not necessary to replicate this right in legislation. In interpreting SARS powers to access information from a taxpayer, it has been held that the doctrine of legal professional privilege overrides these powers.
Section 64 of the TAA provides that if SARS foresees the need to search and seize relevant material that may be alleged to be subject to legal professional privilege, SARS must arrange for an attorney from the panel appointed under section 111 of the TAA to be present during the execution of the warrant. Section 64 of the TAA provides further that if, during the carrying out of a search and seizure by SARS, a person alleges the existence of legal professional privilege in respect of relevant material and an attorney from the panel appointed under section 111 of the TAA is not present, SARS must seal the material and hand over such material to the said attorney. Furthermore, the said attorney must within 21 business days make a determination as to whether the privilege applies and may do so in the manner the attorney deems fit, including considering representations made by the taxpayer and his attorney.
There are other practical aspects that arise for the taxpayer. For example, in terms of section223(3) of the TAA, SARS must remit a penalty imposed for a substantial understatement if SARS is satisfied, inter alia, that the taxpayer was in possession of an opinion by a registered tax practitioner. The TAA contains detailed requirements as to the contents of such an opinion. The effect of these provisions is that the taxpayer is required to make a comprehensive disclosure of the transaction including the steps of the transaction in which individual third parties (other than the taxpayer) are involved in, in certain circumstances, if the taxpayer wishes to rely on this opinion in mitigating their exposure to penalties.
Not all tax practitioners will be or are attorneys, therefore not all of these opinions will be legally privileged. Where opinions are written by registered tax practitioners who are attorneys or advocates then these opinions may or may not be legally privileged.
It would, therefore, seem that the practical challenge is that taxpayers may have to weigh up the risk of being liable to penalties if they do not disclose an opinion which complies with the requirements of section 223 of the TAA versus the risk of waiving legal privilege and handing in an opinion to SARS, thereby giving SARS an insight into the tax practitioners legal advice. This may well put the taxpayer in a very difficult position given the deeply enshrined concept of being able to take legal advice in confidence, which will be difficult to sustain in practice. SARS, when it assesses a taxpayer, typically raises an assessment with penalties (perhaps unjustifiably) and the onus is on the taxpayer to rebut this. Thus, where a taxpayer seeks the remission of a penalty envisaged above, an otherwise privileged opinion could aid in the remission of such penalty.
There is no provision in the current legislation which permits a taxpayer to protect the privileged status of an opinion, whilst simultaneously relying on the disclosure thereof to SARS, to mitigate penalties.
Compliance with Tax Court Rules by the SARS
In an as yet unreported case, wherein judgment was handed down in the Western Cape Tax Court, SARS sought condonation for the late filing of the statement of grounds of assessment in terms of rule 10 of the tax court rules, promulgated in terms of section 107A of the Income Tax Act No. 58 of 1962. SARS argued that the reason for the delay in delivering the rule 10 statement was that the person who previously dealt with this case had since left their employ and that for a significant period; no person was involved in the case. SARS argued further that counsel, who had initially prepared the rule 10 statement, did not perform expeditiously and that they were thus seeking new, preferred counsel. The taxpayer argued that this was not a comprehensive enough reason for the delay in the delivery of the rule 10 statement some 4 months after the date on which the rule 10 statement ought to have been filed.
In delivering its judgment, the court stated that the Tax Bar is small in South Africa, is a specialist field and that there are not many specialised counsel who perform such complex tax tasks. With regard to good cause, SARS had to satisfy the court that the explanation provided in respect of the aforementioned delay was bona fide and not patently unfounded.
The court noted that it should be very careful to place a threshold at so high a level that it would result in the inability of SARS to prosecute what may well be a legitimate case regarding unpaid taxes from a party such as the taxpayer; that the public interest demands that all South African citizens pay their due taxes and that technical arguments should be placed in proper perspective. The court was of the view that the taxpayer did not suffer major prejudice by the time that the matter was heard. The court acknowledged that the purpose of the condonation application is to introduce some nature of pragmatism into the manner in which parties litigate and was of the view that the taxpayers insistence that the condonation application be made, postponed the matter unduly.
The court concluded that, based on the facts, this was not the kind of case where condonation should be refused and that it would be a significant overreach of the scope of the powers of the court to set aside such an assessment. It was thus ordered that SARS was to deliver its rule 10 statement to the respondent within 5 days of the date of the order, with no order as to costs.
This judgment is therefore of very limited assistance to taxpayers seeking to hold SARS to the rules of the Tax Court.
Edward Nathan Sonnenbergs
TAA: Sections 64, 111 and 223
ITA: Section 107A
Tax Court Rules promulgated in terms of section 107A