02 Jun 2014

Corporate & Commercial Newsletter, Legal Privilege - Beware of Fee Notes

Practice Area(s): Corporate & Commercial | Tax |

Legal Advice Privilege ("LAP") has long provided some comfort to both legal advisors and their clients.  This is especially true for taxpayers in the light of the South African Revenue Service's ("SARS") widening collection of information powers under the Tax Administration Act 28 of 2011.  Taxpayers know that communications with their legal advisors, who are acting in a professional capacity and which communications are made for the purpose of obtaining legal advice, are privileged and need not be disclosed to SARS.  Essentially, this privilege extends to all communications directly related to the seeking or giving of the advice.  However, does this privilege extend to the contents of an invoice which is issued to the taxpayer by the legal advisor for the professional services that were rendered?

This was the question in the unreported Western Cape High Court case of A Company v Commissioner of the South African Revenue Service (case no 16360/2013).  The applicants sought a declaratory order from the Court, to the effect that the contents of a fee note, forming part of an invoice, are protected by reason of LAP.  The applicants were three companies in a group of companies.  SARS requested copies of certain invoices issued to them by their attorneys in the course of conducting an audit into the applicants' tax affairs.  Forming part of these invoices were fee notes which referred to the legal services provided.  The applicants sought to provide SARS with redacted copies of the invoices in which some of the fee note entries were censored.  SARS were not satisfied with this on the basis that the detail provided in the fee notes did not constitute advice given by an attorney to a client. 

The applicants did not provide any context or sufficient details as to why the references in the fee notes to work done or documents considered would ‘undermine’ the applicants’ LAP.  As such, the Court stated that the only way in which the applicants could succeed is if the invoices were, as a whole, by their very nature privileged.  The applicants however abandoned the argument that the invoices were, as a whole and by their nature, privileged, and only pursued the argument that the redacted portions of the invoices were privileged. 

According to the Court, to determine whether a specific part of a document is subject to privilege, the test is whether "upon an objective assessment…the references disclose the content, and not just the existence, of the privileged material”.  This is because the Court held that referring to advice sought or given is not the same as disclosing the substance of the advice.  In particular, the Court held as follows:

"[i]t is the actual communications between the client and the lawyer involved in the seeking and giving of the advice …or references in other documents that would disclose their content or from which their content might be inferred that are the matter in respect of which legal advice privilege may be claimed… [this] does not include the content of a document which merely records, without disclosing their substance, that such communications have occurred

As such, the Court had to make a finding on whether or not the references in the fee notes disclose the content, and not just the existence of the privileged material.  This determination had to be made without the applicants providing any legal context or details as to why privilege was claimed.  In the end, the Court could only find three references in the fee notes from which the substance of the advice sought by the client may be inferred.  In these few instances, the references were subject to LAP.  However, the majority of the references did not set out the substance of any request for legal advice or the content of any advice given.  As such, the applicants only enjoyed a limited amount of success. 

Taxpayers and their legal advisors should therefore take heed of this decision.  The content of invoices, as contained in a fee note, may disclose confidential information to SARS.  SARS may use this information to the detriment of a taxpayer.  Although not necessarily subject to LAP, the content of a fee note may give SARS just enough information to carry out an unwelcome investigation or draw an adverse inference (e.g. a taxpayer's participation in a tax avoidance scheme).  Perhaps this is a case for, the less said the better.

Murray Terwin, Candidate Attorney

Contact: 031 575 7517 or mterwin@wylie.co.za