The value of a good legal tax opinion

Taxpayers have ended up in tax disputes because the advice they received was wrong.
A taxpayer who is left defenceless against Sars could have a claim against the person who provided the opinion, but only in certain circumstances. Image: AdobeStock

Several taxpayers are finding themselves in disputes with the South African Revenue Service (Sars), despite having obtained a legal opinion on the tax position they took.

It is only in very limited instances that Sars has to remit an understatement penalty when the taxpayer is in possession of a legal opinion from an independent registered tax practitioner, warns Peter Dachs, executive at ENSafrica.

“A tax opinion can only get you so far. We are seeing more instances where the client did not take proper advice or ignored the advice, or the facts were incorrect. They find themselves in disputes with Sars.”

Elle-Sarah Rossato, head of tax controversy and dispute resolution at PwC, says it becomes relevant when Sars wants to impose a penalty.

The penalty has to be remitted if the taxpayer obtained an opinion from a registered tax practitioner, it was done before a tax return was due, and the opinion was based on all the facts relevant to the taxpayer’s affairs, she says.

Risk assessment

Keith Engel, CEO of the South African Institute of Taxation, says the value of a good opinion is not whether the tax liability would be lower if a certain tax position was taken. It is whether the opinion will survive court scrutiny.

“A good opinion should give you assurance. It is more a risk assessment than a green light,” he says.

“The ultimate test whether it is a good opinion is when the judge finds in your favour.”

Dachs says it is important for taxpayers to read and understand their opinion. Tax advisors may make assumptions about facts. “If the taxpayer does not read it carefully and make sure that the facts on which the opinion is based [are] absolutely right, the advice could be wrong.”

It is also important to carefully consider the conclusions. In some instances the conclusion of the tax outcome is “on balance” as opposed to a definite outcome. People think they have a “positive” opinion and stick it into a file somewhere.

Sars can still disagree with the opinion, argue that it is an “on balance” opinion anyway, and issue an assessment. The matter may end up in the tax court, which is an arduous process.

Watch out for phrases like “it is arguable”. Look out for the strength of the conclusion on all aspects, advises Dachs.

Alarm bells

Alarm bells should ring if the tax advisor did not consider the wide-ranging anti-tax avoidance provisions. These need to be considered in every tax opinion.

“If Sars attacks the transaction on anti-avoidance rules then there is no remittance of penalties,” says Dachs.

It remains important to obtain an opinion, particularly when the taxpayer wants to enter into a large and complicated transaction.

“If the tax consequences are unfavourable the taxpayer can either walk away or ask for advice on how to better structure the transaction. It is possible that the transaction may attract double tax or even layers of tax and it just becomes uneconomical to continue with it. Tax can kill transactions.”

Proven track record

If it is a major transaction it is better to approach tax experts who have expertise in a particular field of tax as opposed to a general tax practitioner. It is almost like going to a medical specialist as opposed to a general practitioner.

Quite often taxpayers will go for a second opinion on big matters. “The client will end up with two opinions. If they do not draw similar conclusions, the taxpayer can rightly get a little nervous,” says Dachs.

Rossato advises taxpayers to ensure that the tax expert has a proven track record of success and is independent from the taxpayer.

The expert must consider the newest legislation and case law, provide an accurate account of all the material facts to the issue at hand, and include a discussion of the strengths of a taxpayer’s case as well as the weaknesses.

“When in doubt, get a second opinion,” she says.

In many instances taxpayers do not have a big budget to spend in the case of smaller transactions, and can only get one opinion. They may end up with someone who does not have the expertise and the result is an opinion that is just wrong, says Dachs.

“There are millions of little transactions and tax is complicated. I do worry that there are opinions where people simply miss things.”

Read:

Although this leaves them defenceless against Sars, they potentially have a claim against the person who gave them the opinion. It does not really help them if the tax practitioner does not have indemnity insurance.

Sars will not think the taxpayer “at least tried”. It will apply the law.

The goal of a good opinion is a proper risk assessment with the position standing firm if challenged because of the solid foundations upon which the opinion is drawn, says Engel.

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