Lawyers Negligent for Failing to Obtain Tax Advice

In April this year the NSW Court of Appeal unanimously agreed that a commercial lawyer was negligent in failing to advise on the tax consequences of a proposed buy-back: Ralston v Jurisich [2017] NSWCA 63.

In brief

Mrs Jurisich was the holder of pre-CGT shares and sought the advice of a commercial solicitor (Mr Ratner) following a proposal to voluntarily wind up the company.  Apparently, there were concerns about historical compliance issues and as a result, Mr Ratner agreed with the client’s suggestion that it would be “cleaner” to have the company buy Mrs Jurisich’s shares back.

In off-market buy-backs, the amount by which the buy-back price exceeds the amount debited to the company’s share capital account is assessable to the shareholder as a dividend.  Mrs Jurisich received an assessment for $600,000 on the $1.3m she received under the buy-back.

The parties agreed that had Mrs Jurisich received her entitlement as a liquidator’s distribution the entire $1.3m would have been tax free.

Notably:

  • Mr Ratner’s retainer did not extend to advising on tax, and nor was his advice on the tax consequences ever requested;
  • Mr Ratner had made a note after one conversation suggesting the client “would check tax”; and
  • Mrs Jurisich’s explicit instructions (through her husband) were to pursue the buy-back, stating at one point that “[n]o way would [they] go through liquidation”.
Lawyers have always had a duty to advise on tax

In upholding the District Court’s decision the Court confirmed what has always been the case: that when it comes to tax, lawyers have a duty to “warn the client of any material risk”: Heydon v NRMA Ltd [2000] NSWCA 374.

In practical terms, this means that lawyers must either advise their clients on the tax consequences of a transaction, or recommend that they seek tax advice from someone competent to give it.

This will be the case even where:

  • the solicitor has no knowledge of (and does not hold herself out as having knowledge of) tax law; and
  • tax advice was neither requested nor included in the lawyer’s remit.
So, what should you do?

Simply, lawyers acting on transactions that could have tax consequences (i.e. virtually everything!) must either:

  • advise their clients of the tax outcomes, if within their competency; or
  • recommend that the client seek specialist advice.

At a minimum, practitioners must identify and convey to clients that there may be tax issues which they have not yet considered.

Common transactions triggering a (perhaps unexpected) tax liability include forgiving debts and issuing or transferring interests for less than market value.

Commercial lawyers advising private and SME clients are particularly at risk, given the complex tax laws surrounding trusts, the small business CGT concessions and the deemed dividend rules on loans and payments made to shareholders and associates of private companies.

Further, otherwise straightforward transactions such as adding and removing trust beneficiaries and transferring shares or units in companies or trusts that are beneficiaries (discretionary or otherwise) of land-holding trusts, may trigger a transfer or landholder duty charge.