The Duty of Solicitors to Give Tax Advice - A Rebuttal of the Reply

Transcription

1 The Duty of Solicitors to Give Tax Advice - A Rebuttal of the Reply HE Editor has kindly provided me with the opportunity to respond to the T reply written by a correspondent to my article 'The Duty of Solicitors to Give Tax Advice: Recent Developments'.l That article was written for the information of practitioners who read Brief, the journal of the Law Society of Western Australia. The aim was to alert practitioners to the existence of the cases discussed, and to protect them in their practices by recommending that they take a particular course of action. If they adopted the course I recommended, they would not be held to be liable for damages. The editors of two other journals, CCH's Tax Week and The University of Western Australia Law Review, asked for my permission to republish the article and that is how it came to be published in The Review, which presumably is principally a journal for academics. The article did not start out as one directed at academics but, as I have said, as one giving practical advice to legal practitioners. The correspondent states that I considered 'two recent cases', whereas I discussed three recent cases, and he bases his criticism upon my analysis of only one of those cases,2 whereas the conclusion of my article was based upon the dicta (quoted in my article) in the three cases discussed. The passage of my article which most offends the correspondent was as follows: Clearly, the position is that solicitors have a duty to advise their clients on the tax aspects of whatever matter they are acting in. Alternatively, they must obtain from another tax-competent practitioner the necessary specialist tax advice for the benefit t Queen's Counsel. 1. (1998) 27 UWAL Rev Hurlingham Estates Ltd v Wilde & Partners (1997) 1 Lloyd's Rep 525; (1996) 37 ATR 261.

2 JAN SOLICITORS AND TAX ADVICE - A REBUTTAL of the client. Failure to do this could result in the solicitors being held liable to the client for negligence andor breach of c0ntract.l Two immediate points I wish to make. First, later in his reply the correspondent focuses on the expression 'whatever matter they are acting in'.wowever, the expression to which attention should be given is more fully the tax aspects of whatever matter they are acting in. Secondly, I said that failure to take the recommended action 'could' result in the solicitors being held liable to the client. I have not said that in every case liability will be imposed upon the solicitor. Every case depends upon its facts, and there may be some facts in a particular case which would lead to the result that the solicitor is not held to be liable. The main point of my article is that, if there are 'tax aspects' involved in a matter in which a solicitor is acting, the solicitor should himself or herself be aware of those tax implications and act accordingly; if there are such tax implications, and the solicitor is unaware of the details of them (which was the situation which existed in Hurlingham Estates), then from a practical point of view the solicitor must seek the advice of a tax-competent practitioner within the same firm or elsewhere (another firm or a barrister at the Bar). The latter course was not followed by the solicitor in Hurlingham Estates. If that solicitor had himself had the required tax knowledge and applied it, he would not have been held liable. If he had referred the matter to another tax-competent practitioner, he would not have been held liable. He undertook neither of those two courses and was held liable. Even if he did not have the tax competence himself, if he had referred the matter to another taxcompetent practitioner he would have avoided the liability held against him by Lightman J. The correspondent states in his second paragraph: Given that there are few areas of civil law practice that are immune from the reaches of taxing statutes, and hence the need to furnish tax advice, if Mr O'Connor's assessment of the case law is correct, the very complexity of tax law dictates that reference to a 'tax-competent practitioner' should be a standard procedure as a hedge against negligence action^.^ I stand by the proposition which I have put. My proposition relates to matters having 'tax aspects', and the correspondent himself has conceded that 'there are few areas of civil law practice that are immune from the reaches of taxing statutes'. Further, the correspondent says that 'Lightman J's observations are indeed app~site'~ because the solicitor involved was engaged in a conveyancing and 3. O'Connor supra n 1, Supra p Supra p Supra p 128.

3 134 WESTERN AUSTRALIAN LAW REVIEW [VOL 28 commercial transaction and he did not have 'any basic knowledge or competence',' that is, given that he had a complete lack of understanding of a field of law in which he was practising, he was liable to the client because he continued to act in that matter without providing such tax advice. Where there are 'tax aspects' involved, which will frequently be the case, the solicitor, if he or she does not have the necessary tax knowledge, could refuse to act. The solicitor would thereby avoid liability. However, as was the case with the solicitor in Hurlingham Estates, most solicitors do not wish to refuse work in their particular field. If they decide to act in the matter and do not have the required tax knowledge, then they must adopt the course which I have recommended, which is to refer the matter for the tax advice to someone else in the firm or to another taxcompetent person. I also take issue with the following matters raised by the correspondent. In his reply, some time is spent in discussing how the solicitor can avoid the problem by restricting the terms of the retainer agreement entered into between the solicitor and the client. In my view, that is not a desirable approach from a practical point of view because it does not directly assist the client in obtaining the full legal services which he or she deserves. The approach should be to advise the client properly and fully on all aspects (including tax aspects) of the matter, rather than merely to protect the solicitor's 'backside'. The correspondent suggests that, if the solicitor who is not tax-competent expressly restricts the scope of the retainer agreement, the client may then make an 'informed ch~ice'~ to engage another solicitor to advise on tax aspects. However, he does not say how the client will be in a position to make the 'informed choice'. A more appropriate expression would be that the client would be left to make an 'uninformed choice'. This perhaps highlights the difference between the approach of the correspondent and my approach. Whereas he regards the most important task as the practitioner narrowing his field of service and entering into documentation to formalise the limited service being provided, I am looking to how the client's interests can be fully attended to and, at the same time, to how the non-tax practitioner might retain the client's work but also protect himself or herself by referring the client to a tax-competent practitioner to handle the tax aspects. Discussion in the reply then takes place on 'Cases Where the Solicitor is Retained to Provide Taxation Ad~ice'.~ However, that is not presently under consideration. The pertinent questions arise in the next section of the 7. Hurlingham Estates supra n 2, Supra p Supra pp

4 JAN SOLICITORS AND TAX ADVICE - A REBUTTAL 135 correspondent's reply, namely, 'Cases Where the Solicitor is Retained to Provide General Advice - Hurlingham estate^'.'^ The quoted extract from Lightman J's reasons for judgment shows that the course of the solicitor entering into an agreement to restrict the scope of the duty of care would be highly unusual. The judge said that, if done, the solicitor must fully inform the client of the reason for such a restriction: '(ie, the solicitor's lack of any basic knowledge or competence), that this limitation is not a normal term of a solicitor's engagement, and that the client may be better advised to go to another solicitor who is not so handicapped'." What solicitor, particularly if he or she is a partner in a firm, and practising in the field of conveyancing and commercial transactions, would be prepared to state to a client that he or she was suffering from such a degree of ignorance? Rather, the judge would expect that the solicitor would have such knowledge or would refer the client to another taxcompetent practitioner for the additional advice on the tax aspects. The correspondent also attempts to make a point as to whether the solicitor 'presently' lacks the requisite competence. He says: 'many solicitors may be able quickly to gain the requisite competence'.12 That was not the course which the solicitor in Hurlingham Estates decided to take. It seems to be assumed by the judge that the solicitor had no intention of doing the further work necessary to give himself confidence in dealing with that matter. It is therefore a question of whether, at the time of doing the job, the solicitor has the necessary competence. The correspondent says: Any comments by Lightman J which can be construed as stricter than the aforesaid must be viewed in light of the extreme facts of the case and, in particular, his desire to discourage solicitors from undertaking legal work for which they are not sufficiently competent merely for financial gain.13 To the extent to which the facts may be extreme, this is because it is highly unusual for a partner in a conveyancing and commercial area to have no basic tax competence. Hence my suggestion that, if the solicitor is to avoid the possibility of liability to the client, the tax aspects of the matter must be referred to a taxcompetent practitioner. The correspondent claims that the position reached by my conclusion is as follows: If Mr O'Connor is correct, solicitors retained to perform any form of transactional work must, in addition to carrying out the mechanics of the transaction or structure 10. Supra pp Hurlingham Estates supra n 2, Supra p Supra pp 127.

5 WESTERN AUSTRALIAN LAW REVIEW [VOL 28 in question, do so in the most tax-effective fashion whether or not the client has given an express direction to this end.'? That claim takes the matter further than I have stated. The position for which I contend is that, irrespective of whether the client has given express direction to be advised on the tax aspects, the solicitor engaged in carrying out the mechanics of the transaction or structure must himself or herself be able to advise on the tax aspects or must refer the client to a tax-competent practitioner who can provide advice on the tax aspects. I do not say that it must be done in 'the most taxeffective fashion'. The advice must be at the level of competence which a tax practitioner in that field would give. Not every tax-competent solicitor has the knowledge to provide 'the most effective' tax advice. For example, there may be some arrangements which would involve the use of off-shore facilities in a tax haven or the use of conceptually difficult tax avoidance techniques, which could only be suggested by a practitioner engaged in international tax practice. That is not the standard required in the normal case, even where the practitioner is a tax specialist. However, where the remedy is reasonably straightforward, as was the case in Hurlingham Estates, the practitioner must have sufficient knowledge to be able to give that advice. It is interesting to note that in the recent decision of Yates Property Corporation v Boland15 the Full Court of the Federal Court held that a specialist in a particular field has a higher standard of care than a non-specialist. But, in my view, even then not every specialist can be taken to know every 'most effective' tax minimisation technique. The correspondent says: One wonders whether a solicitor practising in general commercial law can really be required to provide tax advice, and more significantly, tax-effective solutions in all cases. To suggest that a retainer involving any of the above separate fields of law would necessarily entail, or be presumed to require, the giving of (often complex) taxation advice would be to set the bar too high.16 The proposition I am putting is that the solicitor practising in general commercial law is expected to provide tax advice, but if he or she feels that they are unable to do so competently then they have a duty to refer the matter or the client to a tax-competent practitioner who can provide the client with the necessary advice to which the client is entitled by virtue of engaging the services of a lawyer. If the solicitor himself or herself cannot deal with the 'tax aspects', then the solicitor must ensure that the client is appropriately advised by referring the matter to a tax- 14. Supra p (1998) 157 ALR 30; Aust Torts Reports ; Drummond, Sundberg and Finkelstein JJ. 16. Supra p 130.

6 JAN SOLICITORS AND TAX ADVICE -A REBUTTAL 137 competent practitioner. The advice then given by the tax-competent practitioner would be 'a tax-effective solution', although possibly not the 'most' tax-effective. The correspondent also says that though Buyer v Bulkin17 'has (largely because of some misconceived dicta of Cohen J) been touted as raising the solicitors' standard of care to encompass the giving of tax advice, its outcome supports no such proposition'.18 I suggest that the correspondent is wrong. Cohen J's words, as quoted in my article, speak for themselves. The correspondent has consigned to a footnote the fact that Cohen J's decision in Buyer v Bulkin has been confirmed on appeal.19 However, not only was Cohen J's decision affirmed, but all three judges in the Court of Appealz0 also agreed with the dicta of Cohen J quoted in my original article. Mason P (with whom the other two judges concurred) said: I am in entire agreement with what Cohen J has written on the issue of the appellants' cross-claim against the trustees in their capacity as solicitors. I respectfully adopt it. It may be summarised as follows. Cohen J assumed that the solicitors owed a duty of care to the beneficiaries of the trust and that this duty extended to one of advice as to benefits and possible disadvantages, if any, which might arise from transferring ownership of the flat to an off-shore company.?' Thus, the Court of Appeal in New South Wales has expressly agreed with Cohen J on the 'duty of care' of solicitors in the circumstances under consideration in Buyer v Bulkin. This duty applies equally to any matter in any other area of law in which there are tax aspects. Examples which readily come to mind are the rollover provisions of the capital gains tax legislation where shares in companies are involved;" or the trust estate provisions; or the sole or principal residence capital gains tax exemption, which (depending upon the contents of the Will) may need to be considered in the preparation of a Will for a client. If the solicitor doing that work is unable to provide the necessary advice on the tax aspects, the solicitor must refer the matter to another tax-competent practitioner because, if he or she does not do so, he or she 'could' be liable to the client for any damages. This is the best advice that can be given to solicitors in the light of the most recent cases dealing with this subject. Solicitors who decide not to take this advice could be failing to look fully after the tax (ie, financial) interests of their clients and as a result, depending on the particular facts, they could be held to be liable for any damages which are suffered. 17. (1995) 31 ATR Supra pp (footnote omitted). 19. See Balkin v Peck (1998) 98 ATC Mason P, Priestley JA and Sheppard AJA. 21. Supra n 19,4849 (emphasis added). 22. As in Briar Holdings v Capolingua (unreported) WA Sup Ct 25 Jul 1997 no the third case discussed in my article.