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Advice can be taxing

Feature Articles

Cite as: June 2013 87 (6) LIJ, p.52

Tax practice issues can confront lawyers who do not specialise in taxation law. The implications are far-reaching.

By Bernard Marks

The unfortunate preface to the article is the proposition that lawyers often work with and rely on the tax advice of their clients’ accountant/tax agent because, as a class, lawyers have little knowledge of tax law and tax practice and often lack the confidence to even question an accountant’s tax advice. Indeed, one commentator on the legal profession has even stated that tax advice is “outside the competence of most lawyers”.1

However, whenever lawyers rely on the advice of a tax agent, as opposed to consulting a tax lawyer, they must be vigilant not to breach their duty of care to their clients as well as their ethics rules – and that will be the case if a tax agent has crossed the line from giving “tax advice” to “legal advice”. This situation would generally occur whenever competent tax advice for a particular matter would necessarily involve the interpretation of a legal agreement or a deed or a will or the application of non-tax statutes, or the application of common law or equity principles. That issue has been the subject of the author’s article in a previous issue of the LIJ.2

“Tax negligence”

The starting point for non-tax specialist lawyers who are retained to provide advice on a general matter in which there might be incidental tax issues – and who are either ignorant of the tax issues or give incorrect or incomplete tax advice – is that they may be liable not only for the tax penalties and interest that the Commissioner of Taxation imposes for an incorrect return but also for the tax that might have been saved had the tax issues been properly addressed, such as by the adoption of a legitimate alternative solution.

The rationale for this proposition is not hard to fathom. An observation of Lightman J in Hurlingham Estates Ltd v Wilde & Partners, an English case concerning the malpractice liability of a solicitor, will suffice:

“Since the practice of conveyancing and commercial law must necessarily involve time and again considering the tax implications of proposed transactions and decisions, I find it difficult to comprehend how a solicitor possessed of no real knowledge of tax law can be allowed to occupy such a position, at any rate in a case such as the present where he does not have the necessary tax law backup; certainly it must be questionable whether he should be allowed to do so if any regard is to be paid to the safety of the public”.3

The general rule is that in any area of legal practice in which tax issues ordinarily arise the lawyer has an obligation to consider and advise on them or to ensure that suitable tax advice is obtained and considered. For example, a lawyer who advises on a sale by a trustee of trust property must consider whether there is a taxable supply for GST purposes – and if the lawyer fails to give or obtain and consider proper tax advice there could be a liability to the beneficiaries. In this example, a lawyer who advises the trustee to register for GST could be liable to the beneficiaries if the sale was actually not a taxable supply.4 Lawyers who practise in any area in which tax issues typically arise should assume that they could reasonably be expected to possess a sufficient knowledge of tax law such that they would know the type of tax issues that affect their client. On the other hand, if a lawyer advises their client that a specialist tax lawyer should be retained to confirm the tax issues and give separate tax advice and the client rejects that approach, it is difficult to see how there can be any liability for negligence unless the matters were so relatively simple and obvious that it was not necessary to obtain specialist advice.

Duty of care

Can lawyers satisfy their duty of care through simple reliance on a tax agent’s advice?

The issue of whether in a matter which necessarily involves the application of non-tax statutes, or common law or equity principles, or the interpretation of a legal agreement or a deed or a will, and where the matter is not a “simple” question of law, a lawyer can absolve their legal responsibilities and ethical duties by relying on the advice of a registered tax agent is a relatively simple one – and it is a situation that has been incidentally considered by the Administrative Appeals Tribunal (AAT).

Registered tax agents, even in a small firm, are expected not only to know the tax law but must also know what can lawfully be done to bring about a result that is in the best interests of the client.5 However, there is no authority to the effect that an accountant/tax agent is expected to have the same competence as that of a lawyer in dealing with the application of common law, equity, non-tax statutory laws or the interpretation of agreements, deeds or wills. Indeed, they cannot be expected to have that competence because they will be committing an offence if they give advice on any matter that involves a difficult or doubtful question of law, even if that advice is a necessary part of giving tax advice.

The “impaired” position of a tax agent who is not a lawyer is illustrated in Sinclair v FC of T.6 There a taxpayer who had some business (but not tax) knowledge was held not to have taken “reasonable care to comply with a taxation law” for a remission of a 25 per cent tax penalty7 because he relied on the tax advice of his accountant/tax agent (who also had the letters “FTIA” after his name) when he should have sought legal advice.

The tax issue was not a particularly complicated one. As part of the purchase of a building the taxpayer agreed to pay the interest under the vendor’s mortgage until the settlement date. The tax agent advised his client to deduct the interest payment under the Income Tax Assessment Act 1997 (Cth) (ITAA97) s8-1 as an outgoing incurred in gaining or producing his assessable income. However, to give this advice the tax agent would have had to read the contract for purchase, understood the rights and obligations of the parties, and understood the jurisprudence on s8-1 and the former Income Tax Assessment Act 1936 (Cth) (ITAA36) s51(1).

The ATO audited the taxpayer’s return in which he claimed a deduction for the interest – the interest deduction was disallowed and a 25 per cent penalty was imposed. The AAT upheld the disallowance of the interest. In dealing with the penalty for an incorrect return, deputy president Forgie said that, in these circumstances, a “reasonable [taxpayer] would be on notice to obtain legal advice about those consequences”8 and that the tax agent “could not give legal advice regarding the taxation implications of the arrangements”9 and that “a reasonable person would have sought legal advice from a tax lawyer before claiming the deduction”.10

Consequently, the AAT confirmed the 25 per cent tax penalty and, presumably, the taxpayer was left to recover the penalty from his tax agent. While the imposition of tax penalties on a taxpayer is no longer an issue where a taxpayer relies on his tax agent’s advice, because of legislative change,11 the clear implication of the Sinclair decision is that a lawyer who relies on the tax advice of a tax agent in the course of acting for their own client – and who does not independently question and check that advice and, if necessary, obtain separate advice from a tax lawyer – may be skating on very thin ice if it turns out that the tax agent’s advice was wrong.

Principles

It is suggested that until there is a decision of a superior court judge that deals with this issue, lawyers should be guided by the following two principles:

1. When an accountant/tax agent must make a determination about specific rights or obligations as they apply to a particular set of facts and that exercise involves a reasoned consideration of the application of non-tax statutes, or common law or equity principles, or the interpretation of a legal agreement or a deed or a will, as part of the exercise of ascertaining liabilities, obligations or entitlements of an entity that arise, or could arise, under a taxation law, that tax agent is either acting as an unauthorised lawyer, acting beyond what he is authorised to do under the Tax Agent Services Act 2009 (Cth) (TASA09) or acting beyond their professional competence; and

2. A lawyer cannot absolve their legal responsibilities and ethical duties by relying on a tax agent in such matters, at least without becoming significantly involved in the matter and understanding and checking and independently affirming the tax agent’s legal analysis.

Tax exemption clauses

Another practice issue is whether a lawyer can effectively limit their liability for either wrong tax advice, or for not providing any tax advice at all, through an exemption clause. For example, what is the effect of a firm of solicitors writing to its clients as part of its standard retainer and costs agreement:

“We do not give tax advice and take no responsibility for the tax consequences of what we might advise you to do or not to do”.

The answer to that question will, of course, depend on the facts of each case. There appears to be no judicial guidance on the precise question of an exemption clause in a lawyer’s retainer letter that exempts them from any responsibility for tax law advice. This writer suggests that the cautious view is that it is difficult for any lawyer to limit the area of their advice because it is difficult for a lawyer to restrict their liability. For example, in Austrust Pty Ltd v Astley12 a highly experienced commercial solicitor who thought he was simply instructed to give advice on a draft trust deed and compliance with corporations law – and where the client had its own experienced inhouse solicitor – was held liable for not advising his client that a trustee has personal liability for the trust’s debts and that this personal liability could have been limited or excluded in various ways, even where that subsidiary issue only arose because the trustee separately asked the external solicitor to give general advice about contemplated transactions.

It is now well established that a lawyer’s duty of care requires practitioners to bring to the attention of their clients all matters of importance that are related to their instructions. Obviously the terms of the retainer are important,13 especially if there are specific limitations, but it seems impossible for lawyers to relieve themselves of the liability to advise a client about a reasonably foreseeable risk of injury, such as a tax liability. For example, in Christodoulou v Christodoulou Kaye J said:

“. . . the duty of the solicitor to advise is not rigidly confined to the strict terms of the retainer. Rather, given the terms of the retainer, the obligation of the solicitor is to advise in relation to such matters upon which a solicitor, of reasonable competence, would advise the client, in the exercise of reasonable care and skill on behalf of the client”.14

Hence, if in the course of a conference, matters that might appear to be outside the retainer are raised by a client, a lawyer cannot simply ignore them since their duty then becomes a wider one – that is, to advise on all legal matters that might be of importance to their client. The lawyer must reasonably determine what type of legal issues face their client and then deal with them, even if the client has failed to articulate those issues, because the client’s ostensible need for advice determines the scope of the lawyer’s duty of care.15

Implications

It is clear that a lawyer who advises on any matter that has any tax aspect must either be fully aware about the tax implications of their advice, including issues to be addressed or alternative strategies that might produce a different tax result, or recommend the obtaining of specialist tax advice. The lawyer must deal with the tax issues even if their retainer does not specifically state that tax advice is required. The position was explained in a case dealing, in part, with the duty of care of a family lawyer in conducting litigation. In Goddard Elliot v Fritsch Bell J said (with footnotes omitted):

“The duty of care which the lawyer owes the client may require the lawyer to bring the attention of the client, and give advice in relation to, the potentially harmful consequences of an event or circumstance. In accordance with the general principle that the duty is ‘to take reasonable care to avoid foreseeable risk of injury’, the duty to do so may apply in relation to matters giving rise to reasonably foreseeable risks to which the client would reasonably be likely to attach significance, as for example in a complex commercial transaction giving rise to taxation issues whose consequences the solicitors could reasonably be expected to consider”.16

In some matters, especially in the trusts and estates area, a lawyer’s ethical responsibility may extend to advising that a separate tax lawyer should be retained for the trustee and the beneficiaries, as well as the other trust parties, such as the trust creator or a manager, because of a potential conflict of interest and because they each have their own tax liabilities.

More importantly, if a registered tax agent has given advice that a competent lawyer should know is wrong or – as often is the case given the context of the client’s affairs – incomplete, the lawyer has a further responsibility to alert their client to those matters even if they have not been included in their instructions or retainer.

And, finally, a lawyer who makes the bald statement to their client that “I know nothing about tax law and I am not responsible for any tax consequences of what I advise you” faces the ethical dilemma of whether they are a “fit” person to be practising in any area of law in which a tax issue might incidentally arise.

Breaches

A lawyer who acts on the advice of a tax agent who is not a lawyer and who has given “legal advice” should be aware that the tax agent may have committed an offence under s2.2.2(1) of the Legal Profession Act 2004 (Vic) (LPA04). In certain circumstances the lawyer may be guilty of aiding and abetting a tax agent in the unauthorised practice of law (an offence under s2.2.2(2)(a) of LPA04). The lawyer may also have breached the LIV Professional Conduct and Practice Rules 2005 “by permitting or assisting an unqualified person to engage in legal practice”.17

In addition to the LPA04, lawyers should be aware that if they have become actively involved with a tax agent’s unauthorised practice of law they both might attract the attention of the consumer protection regulators. Section 5 of the former Victorian Fair Trading Act 1999 provided that there was an offence if a person “in trade or commerce, engage[s] in conduct that is misleading or deceptive or is likely to mislead or deceive”.18 In Goddard Elliot v Fritsch a client sued his solicitor for a misleading statement about his tax liability. Bell J held that except for statements made in court or in court documents, a solicitor’s representations to his client are made “in trade or commerce”.19



BERNARD MARKS is a Melbourne based tax lawyer who practises predominantly in the areas of complex tax audits, trusts and estates, and tax negligence. He is the author of numerous books and articles on taxation law. He is a member of the LIV’s Taxation and Revenue Committee and Succession Law Committee. He can be contacted at taxlawyers@gmail.com.

1. GE Dal Pont, Lawyers’ Professional Responsibility (4th edn) (2010), p127.

2. B Marks, “Getting the right advice: lawyer or tax agent?” (2013) 87(05) LIJ 34.

3. Hurlingham Estates Ltd v Wilde & Partners [1997] 1 Lloyd’s Rep 525, sp527.

4. This type of issue arose in Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC 83.

5. See Carmody v Priestley & Morris Perth Pty Ltd [2005] WASC 120.

6. [2010] AATA 902.

7. Under item 3 of Table to s90(1) in TAA53 Schedule 1.

8. [2010] AATA 902 at [91].

9. [2010] AATA 902 at [92].

10. [2010] AATA 902 at [93].

11. Since 1 March 2010 the position has been that a taxpayer is not subject to an administrative penalty for making a false or misleading statement if the statement was made by their registered tax agent, the taxpayer provided all the relevant information to the tax agent, and the penalty was due to the tax agent’s lack of reasonable care. See TAA53 Schedule 1 s284-75(6).

12. Austrust Pty Ltd v Astley (1996) 67 SASR 207. This matter was not an issue in the subsequent High Court appeal, Astley v Austrust Pty Ltd (1999) 197 CLR 1.

13. See, especially, Tasmanian Sandstone Quarries Pty Ltd v Legalcom Pty Ltd [2010] SASCFC 6.

14. [2009] VSC 583 at [131].

15. See Tip Top Drycleaners Pty Ltd v Mackintosh (1989) 39 ATR 30.

16. [2012] VSC 87 at [416]. See also Snopkowski v Jones [2008] VCAT 1943.

17. See LIV Ethics Guidelines, Unqualified practice guidelines (25 September 2009).

18. Australian Consumer Law and Fair Trading Act (Vic) 2012 and Commonwealth Australian Consumer Law (being Schedule 2 of Commonwealth Competition and Consumer Act 2010).

19. [2012] VSC 87 at [519].

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