Carmody v Priestley & Morris Perth Pty Ltd
[2005] WASC 120
•15 JUNE 2005
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: CARMODY & ORS -v- PRIESTLEY & MORRIS PERTH PTY LTD & ANOR [2005] WASC 120
CORAM: HASLUCK J
HEARD: 23, 24 & 29 MARCH 2005
DELIVERED : 15 JUNE 2005
FILE NO/S: CIV 2105 of 2003
BETWEEN: MAUREEN ELIZABETH CARMODY
First Plaintiff
MAUCARMOD PTY LTD (ACN 008 812 556)
M CARMODY HOLDINGS PTY LTD (ACN 008 688 935)
Second PlaintiffsMICHAEL FRANCIS CARMODY
DAVID JOHN CARMODY
PETER GERARD CARMODY
STEPHEN ANTHONY CARMODY
Third PlaintiffsAND
PRIESTLEY & MORRIS PERTH PTY LTD (ACN 056 660 407)
First DefendantMARK HENRY RANDALL
Second Defendant
Catchwords:
Professions and trades - Accountants - Professional negligence - Nature of retainer in determining scope of duty of care - Effect of circumstances in determining scope of duty of care - Advice sought by telephone concerning purchase of property by trustee company - Whether sufficient information provided - Whether accountant obliged to draw on previous knowledge of client's affairs - Whether accountant obliged to proffer advice about adverse tax implication being a matter not raised with him expressly - Accountant held liable for breach of duty of care
Legislation:
Income Tax Assessment Act 1936 (Cth) s 44, s 95A, s 97, s 109D, s 251M
Result:
Judgment for plaintiffs
Category: A
Representation:
Counsel:
First Plaintiff : Mr K J Martin QC & Ms C H Thompson
Second Plaintiffs : Mr K J Martin QC & Ms C H Thompson
Third Plaintiffs : Mr K J Martin QC & Ms C H Thompson
First Defendant : Mr L A Tsaknis
Second Defendant : Mr L A Tsaknis
Solicitors:
First Plaintiff : McCallum Donovan Sweeney
Second Plaintiffs : McCallum Donovan Sweeney
Third Plaintiffs : McCallum Donovan Sweeney
First Defendant : Allens Arthur Robinson
Second Defendant : Allens Arthur Robinson
Case(s) referred to in judgment(s):
Astley v Austrust Ltd (1999) 197 CLR 1
Commonwealth of Australia v Verwayen (1990) 170 CLR 394
Dalleagles Pty Ltd v Australian Securities Commission (1991) 4 WAR 325
Finamore v Slater & Gordon (1994) 11 WAR 250
Hall Chadwick Corporation Finance (WA) Pty Ltd v Axiom Properties Ltd [2002] WASC 179
Hawkins v Clayton (1988) 164 CLR 539
Heydon v NRMA Ltd (2000) 51 NSWLR 1
Leotta v Public Transport Commission (NSW) (1976) 50 ALJR 666
Midland Bank Trust Co Ltd v Hett Stubbs & Kemp (a firm) [1979] Ch 384
Mohr & Mohr v Cleaver & Cleaver [1986] WAR 67
Pech v Tilgals (1994) 28 ATR 197
Rogers v Whitaker (1992) 175 CLR 479
State of Queensland v JL Holdings Pty Ltd (1997) 189 CLR 146
Tip Top Dry Cleaners Pty Ltd v Mackintosh (1998) 98 ATC 4346
Tony Sadler Pty Ltd v McLeod Nominees Pty Ltd (1994) 13 WAR 323
Voli v Inglewood Shire Council (1963) 110 CLR 74
Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642
Water Board v Moustakas (1988) 180 CLR 491
Case(s) also cited:
Bell v Vahexi Pty Ltd (1998) 99 ATC 4055; (1998) 40 ATR 459
City of Botany Bay Council v Jazabas Pty Ltd [2001] NSWCA 94
Custom Credit Corporation Ltd v Dallas Development Corporation Pty Ltd [2004] WASC 92
Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (Reg) (1997) 188 CLR 241
L Shaddock & Associates Pty Ltd v Paramatta City Council (No 1) (1981) 150 CLR 225
March v E & MH Stramare Pty Ltd (1991) 171 CLR 506
Orszulak v Hoy (1989) Aust Torts Reports 80-293
San Sebastian Pty Ltd v Minister Administering Environmental Planning Act (1986) 162 CLR 340
Thors v Weekes (1989) 92 ALR 131
Walker v Hungerfords (1987) 49 SASR 93
HASLUCK J:
Background
The plaintiffs are members of the Carmody family or companies associated with the family. For many years family members have managed and worked on two farming properties at Kulin and Esperance. These farms were made up of various separate titles as a result of a gradual expansion of the farms.
The registered proprietors of the farms are M Carmody Holdings Pty Ltd (known in these proceedings as "Holdings") and Maucarmod Pty Ltd as trustee for the M B Carmody Family Trust (known in these proceedings as "Maucarmod"). Michael Carmody is a director of the two companies and, after the death of his father in 1986, became the family member who was principally responsible for liaising with accountants in relation to the affairs of Holdings and Maucarmod.
Income from operation of the family businesses was paid to Holdings and all expenditure required for the operation of the family farms was paid by that company. In the period 24 February 1988 to 4 May 1994 six properties were acquired by Maucarmod as trustee for the family trust using funds advanced by Holdings. These properties included not only properties linked to the farming operations but also a unit at 3/118 Deanmore Road, Scarborough within the metropolitan area of Perth which was used by Michael Carmody's sister – the first plaintiff Maureen Carmody – as a residence.
It is apparent from various financial statements adduced in evidence that funds advanced by Holdings to Maucarmod were treated as loans made by Holdings to Maucarmod. Thus, the amounts in question were characterised as assets in the accounts of Holdings and as non‑current liabilities in the accounts of Maucarmod. I note in passing that Maucarmod held two shares in Holdings.
It was common ground at the trial that the Carmody family had been dealing with the accountancy firm Richardson & O'Meara. However, following the merger of that practice with the firm Priestley & Morris in 1988, Michael Carmody began dealing with the latter firm in relation to the financial affairs of the Carmody family. He dealt primarily with the second defendant, Mark Randall, but also with accountants employed by Priestley & Morris such as Leanne Devereaux and Linda Horsely.
The defendant firm carried on business as an incorporated company from 1 July 1992. For ease of reference I will refer to the first defendant as Priestleys, being the term used in the pleadings.
Taxation amendments
On 4 December 1997 amendments to the Income Tax Assessment Act 1936 (Cth) were announced which were aimed at treating advances of funds to a related company in certain circumstances as a deemed dividend, and thereby as income assessable to taxation by the recipient or by the persons receiving a distribution of the recipient company's net income in the financial year in which the loan funds were received. The relevant legislation was given retrospective effect to 4 December 1997.
Section 109D, which falls within Div 7A of the Income Tax Assessment Act, provides that a private company is taken to pay a dividend to an entity at the end of one of the private company's years of income if the private company makes a loan to the entity during the current year and the loan is not fully repaid by the end of the current year and the entity is a shareholder in the private company or an associate of such a shareholder when the loan is made.
By s 109D(3) the term "loan" includes an advance of money or a transaction (whatever its terms or form) which in substance effects a loan of the money.
Section 109D(5) bears upon loans made before 4 December 1997. It provides that if the terms of a loan made before 4 December 1997 are varied on or after that day by extending the term of the loan or increasing its amount, Div 7A applies to the loan as if it were made on the new terms when the variation occurred.
I note in passing that the process whereby additional advances are added to an earlier loan is generally described as "freshening".
It will be readily apparent from my brief description of the taxation amendments that after 4 December 1997 the process of freshening could have adverse consequences for a taxpayer in certain circumstances. However, evidence before me at the trial established that if a later transaction was kept separate from an earlier transaction by the use of discrete entries or "sub‑accounts" in the books and financial statements of a company, a later loan was not likely to be characterised as a freshening loan of the kind contemplated by s 109D(5) of the Income Tax Assessment Act.
It emerges, then, that after 4 December 1997 there was a risk that if the trustee company, Maucarmod, purchased a property with funds advanced by Holdings, the advance or loan might come to be treated as a deemed dividend if it were not fully repaid by the end of the year in question, for Maucarmod held two shares in Holdings.
I pause to note that at the trial of the action the plaintiffs adduced expert evidence from Mr Ross Watson, who is currently a principal within the Taxation Services Division of the accountancy firm RSM Bird Cameron in Perth, in support of the plaintiffs' plea at par 17 of the statement of claim concerning the taxation amendments.
His evidence was to the effect (as is reflected in the plea at par 17) that as at 23 February 2000 persons holding themselves out as competent providers of professional accounting services to business clients knew or should have known that an advance of moneys by Holdings to Maucarmod (bearing in mind that the latter company was a shareholder of Holdings) would, after 4 December 1997, be likely to attract the application of s 109D of Div 7A.
Purchase of the Price Street property
On 22 February 2000, Michael Carmody, as a director of Maucarmod, executed an offer to purchase a residential property in Price Street at Kulin. The offer was set out on a standard printed form contract for sale of land by offer and acceptance.
The purchase price was given as $133,000 to be paid by a deposit of $13,300 of which $1330 was paid "herewith" and $11,970 was to be paid on acceptance. The settlement date was described as 17 March 2000. The common seal of Maucarmod appears on the printed form in conjunction with the signatures of Michael Carmody and his brother David Carmody. It appears from the form that the offer was accepted by the vendors on 24 February 2000.
I note in passing that the printed form included a special condition set out in handwriting to the effect that "this offer is valid until 29 February 2000". The form also bears a so‑called "special condition 2" in a typewritten form to the effect that "this contract is subject to the offer Begg to Bradford dated 2 February 2000 being formally cancelled by the vendors and purchasers on or before 4.00 pm 28 February 2000".
I understood from evidence given by Michael Carmody at the trial of the action that the special conditions were thought to be necessary because a prior offer had been submitted to the vendors by a third party. I will return to this point at a later stage in the course of determining the sequence of events bearing upon the plaintiffs' claim.
The plaintiffs relied upon cheque butts and related bank statements to establish that on 22 February (being the date the offer was made) a cheque for $1330 was drawn in favour of Wesfarmers Real Estate Agency. A further cheque for $11,970 was drawn in favour of the Agency on 28 February 2000. It appears from the Holdings bank statement that these two amounts were drawn against the Holdings' account at the National Bank on 3 March 2000.
A further cheque for $119,706 was written out in favour of AJ & LA Begg on 17 March 2000 and drawn against the Holdings' account at the National Bank in due course.
Michael Carmody gave evidence at the trial of the action that the settlement date in respect of the Price Street property was 17 March 2000. He said in evidence (at par 54 of his witness statement) that in fact he saw Mr Randall of Priestley's on that day and discussed the issue of fringe benefits tax ("FBT") in relation to the Price Street house; that is, whether any FBT would be payable by the Trust or by Holdings. According to him, they discussed the fact of the purchase generally, without going into detail as to how the transaction occurred. He could recall saying words to the effect that he had been thinking of going to the settlement for the Price Street house but that he would not have time.
The crucial question in the present case is whether (as alleged by the plaintiffs) Michael Carmody sought and obtained certain verbal advice from Mr Randall of Priestley's concerning the effect of the taxation amendments prior to acceptance of the Maucarmod offer for the Price Street property. I will return to that aspect of the matter in due course.
Financial statements for the year ended 30 June 2000
It is apparent from the financial statements prepared by Priestley's for Holdings and Maucarmod in respect of the year ended 30 June 2000 that the sum of $133,000 advanced by Holdings to Maucarmod to facilitate settlement of the Price Street property was treated in the accounts in the same manner as the advances made in the period 24 February 1988 to 4 May 1994 when six properties were acquired by Maucarmod using funds advanced by Holdings; that is, subject to a comparatively small adjustment in respect of moneys owed by Holdings, the sum advanced for the purpose of acquiring the Price Street property was treated as a non‑current asset in the balance sheet of Holdings and as a non‑current liability in the balance sheet of Maucarmod.
I understand that at the time of completing taxation returns for the various family members and family companies, Priestley's, through Mr Randall, prepared and provided to Michael Carmody for execution by Maucarmod (acting as trustee of the Carmody Family Trust) a directors' meeting minute for Maucarmod in respect of the net income of the trust for the financial year ended 30 June 2000. This minute purported to allocate all net income to Maureen Carmody consistently with a practice which had been annually applied in respect of the net annual income of the trust since 30 June 1993. This was thought to be the most tax‑effective means of distributing the income, bearing in mind that Mr Carmody's sister Maureen was not a high income earner.
The relevant minute was allegedly provided to Michael Carmody by Mr Randall of Priestley's for execution by Michael Carmody in or about August 2000; that is, after the expiration of the financial year in question. Income tax returns of Maureen Carmody and the subject companies were submitted to the Australian Taxation Office on the basis contemplated by the financial statements and the distribution minute, namely, that the advance made by Holdings was a loan and that the income of the Carmody Family Trust had been distributed as to the whole of the Trust income to Maureen Carmody. It was never put to Michael Carmody or to Maureen Carmody that Maureen Carmody might be exposed to liability or income tax in respect of the amount distributed by reason of s 109D and the trustee's resolution to distribute to her the net income of the Carmody Family Trust in the financial year ending 30 June 2000.
Subsequent events
It emerged from the evidence of Mr Randall at trial that in or about November 2001 Michael Carmody advised that he was planning to move to Perth and, consequently, the farm at Kulin was to be sold. This had given rise to a question of how the assets of the Carmody group could best be divided up between the four brothers.
In April 2002 Michael Carmody informed Mr Randall that the Carmody family would be moving its taxation and accounting work to RSM Bird Cameron because Peter (who ran the Esperance farm) was going to continue farming and had decided to use RSM Bird Cameron in Esperance, as this was more convenient to him. Thus, some months later, Mr Randall transferred all relevant files relating to the Carmody family farming business to RSM Bird Cameron. The last work that Priestley's did for the Carmody family generally was for the year ended 30 June 2001. Priestley's did not do any further work after that time, save for preparing tax returns for Maureen Carmody, who continued to use Priestley's.
In addition to giving expert evidence, Mr Watson gave evidence at the trial of the action about his involvement in the dispute. He said that he obtained a Bachelor of Business Accounting from the Western Australian Institute of Technology (now Curtin University) in 1976 and is currently a principal within the taxation services division of RSM Bird Cameron, chartered accountants. He said that he reviewed the affairs of the Carmody family in August and September 2002 and looked at the tax implications of restructuring the family's affairs.
In the course of his review, Mr Watson noted that the loan balance between Holdings and Maucarmod (as evidenced by a comparison between the 1999 and 2000 figures) had increased. This caused him to prepare a document headed "Special Note – Div 7A" (exhibit P58 at vol 3 p 493). Mr Watson's Special Note referred to the application of Div 7A of the Income Tax Assessment Act to loans or advances made by a company to shareholders or associates after 4 December 1997. He noted that Holdings had funded the acquisition of a property at Kulin in the 2000 financial year, acquired by Maucarmod. He noted also that the advance by Holdings was added to an existing loan to the Carmody Family Trust.
He went on to say that where a loan or advance provided before 4 December 1997 is varied (ie, increased or term of repayment extended) then the whole loan is deemed to have been made at the time of the variation pursuant to the rule known as "freshening".
Watson's Special Note concluded with an observation as follows:
"It would appear, subject to other contrary evidence, that the loan by MCH to the M B Carmody Family Trust was varied in the 2000 financial year and would for the purposes of Div 7A, be in total, a deemed unfranked dividend in that year. The amount of the loan deemed to be an unfranked dividend in the 2000 financial year would be $1,241,353.59. The debit to the franking account would be the same figure.
The impact of this would be substantial, not only in respect to the 2000 year but the planning now being undertaken."
In other words, the matter principally of concern to Mr Watson at this stage was the possibility that the Price Street transaction could be regarded as "freshening" some loan arrangements preceding 4 December 1997 and thus give rise to a very substantial tax liability. He said in evidence that he discussed this with the Carmody brothers and their mother at his office in Perth and understood that a discussion was to be held with Mr Randall of Priestley's in regard to the freshening issue.
It was common ground at the trial that on the afternoon of 3 September 2002 the Carmody family members met with Mr Randall at his office to discuss a "serious matter". On that occasion Michael Carmody handed over Mr Watson's Special Note and asked Mr Randall to provide a response promptly. It is apparent from this sequence of events that at this stage the "serious matter" was thought to be the "freshening" issue.
In due course, with the assistance of his colleague Linda Horsley, Mr Randall ascertained that a separate sub‑account had been kept in relation to the post 4 December 1997 loans, with the result that a substantial tax liability of the kind adverted to by Mr Watson in his Special Note was not likely to arise. In due course, the financial statements of Holdings and of Maucarmod were corrected so as to take account of the requirements of Div 7A of the Income Tax Assessment Act and s 109D of the Act.
In the meantime, having discovered that Maureen Carmody was the residual beneficiary of trust income from Maucarmod, Mr Watson advised Michael Carmody that the deemed dividend would therefore comprise part of Maureen's taxable income for the financial year ending 30 June 2000. He advised Mr Carmody that this matter should be brought to the attention of the ATO as the deemed dividend had not been accounted for in Maureen's tax return for the financial year ending 30 June 2000.
Mr Watson was instructed by Michael Carmody to write a letter of disclosure in relation to the matter. In October 2002 he did so. He said in evidence that in making the disclosure he was careful to couch it in terms of a voluntary disclosure in order to gain the full benefit of the ATO's policy of remitting the culpability component of the penalty in circumstances of voluntary disclosure by the taxpayer. He also made a submission that, as the trustee had not been aware of the breach of Div 7A at the time that it occurred, the penalty should, for this reason, be remitted to nil.
This led to an amended assessment being issued to Maureen Carmody. Accordingly, by letter dated 9 December 2002 Mr Randall, on behalf of Priestley's, wrote to Maureen to say that the amended assessment had arisen due to an additional amount of income distributed to her from the Carmody Family Trust of $125,611. The total amount of tax payable was $80,254.90 and included $2,995.30 penalty and $17,352.70 interest. He indicated that she would be able to claim interest of $17,352.70 as a deduction in her 2003 income tax return. The amount of the amended assessment was payable to 10 January 2003.
By this time the situation had been discussed by members of the family. Mr Carmody and his brothers were all willing to contribute to payment of the tax figure. It was agreed that in the event that they were able to recover any of the amount in question from Priestley's, the amount would be payable to each of the four brothers who had paid the tax. It was agreed also that they would bear the cost of any legal action taken on Maureen's behalf. A formal agreement described as an acknowledgement of loan by deed was eventually prepared and executed in order to carry these arrangements into effect.
On 17 December 2002 Michael Carmody wrote a cheque to the Deputy Commission of Taxation for the total sum of $80,254.92, noting on the cheque butt that this was to be paid by himself and each of his brothers in equal shares. The cheque was written on the Holdings cheque account. These payments were accounted for as a drawing down on each brother's loan account with Holdings.
The plaintiffs' claim
It emerged from the evidence given by Mr Carmody and Mr Watson at trial that soon after the initial meeting with Mr Randall on 3 September 2002 some thought was given to advancing a claim against Priestley's. As a consequence of discussions between Mr Carmody and Mr Watson bearing upon that point Mr Watson prepared a letter of claim to Priestley's in draft and, by email dated 16 September 2002, forwarded the draft to Michael Carmody for his consideration. This email and the draft letter to Priestley's dated 13 September 2002 prepared by Mr Watson were received in evidence at the trial as exhibit D90.
The 13 September draft letter is addressed to Mr Randall and reads as follows:
"Thank you for the opportunity to meet with you and discuss the issue concerning the loans made by M Carmody Holdings Pty Ltd ("the Company") to the M Carmody Family Trust ("the Trust").
As confirmed at the meeting the funding for the purchase of the Price Street, Kulin property acquired by the Trust was from the Company in the year ended 30 June 2000 and has led to the family being exposed under Division 7A of the Income Tax Assessment Act 1936 ("1936 Act"). As a consequence the family will suffer financially from the imposition of tax, penalties and interest as well as from the reduction in the franking credits available.
It is our contention that the purchase of the Price Street, Kulin property by the Trust was discussed with you and that you should have from your understanding of the family been aware that funding for the purchase would have to come from the Company. Alternatively you should have enquired as to the source of the funding so as to satisfy yourself that we would not be exposed to the operation of Division 7A.
Also, that you should have provided advice as to the tax outcomes in respect of such action by the Company in terms of Division 7A of the 1936 Act and advised us of actions that may have ameliorated the position, ie, entering into excluded loans under Section 109N of the 1936 Act.
As a consequence of you not advising us correctly the Trust for the purposes of Division 7A is deemed to have received an unfranked dividend in the 2000 year. Also the Company has suffered a debit to its franking account
Further on preparation of the 2000 Financial Reports you should have identified the fact that Division 7A requirements had been breached and advised us at that time, at least then not exposing the family to penalties and interest.
We require that you indemnify us in respect of:
•The additional tax to be paid by Maureen as a consequence of being the residual beneficiary of the Trust for the year ended 30 June 2000.
•Any penalties raised by the Australian Taxation Office in respect of Maureen's amended 2000 assessment.
•Any GIC penalties that are raised by the Australian Taxation Office, in respect of the amended assessment for the [sic] 2000 to Maureen.
•The impact to shareholders generally from the reduction in the franking account based on the maximum individual tax rate of 48.5% by the debit amount to the franking account required from the application of Division 7A."
It is clear from the evidence given by Mr Carmody and Mr Watson at trial that a letter in terms of the draft was not sent to Mr Randall. Nonetheless, the draft letter was said to be significant in that this represented the first occasion on which an attempt was made on behalf of the plaintiffs to formulate the grievance that was eventually reflected in the plaintiff's statement of claim.
An allegation is made in the draft letter that the purchase of the Price Street property was "discussed with you" but there is a lack of specificity as to when and where the alleged discussion took place and as to whether it preceded the making of the subject contract. Moreover, the 13 September draft does not suggest that the tax implications of the purchase was raised specifically as a matter of concern by Mr Carmody. The key passage (in the first sentence of the third paragraph) points not to any query or matter of information put to Mr Randall but rather to an expectation that Mr Randall, drawing upon his knowledge of the family's affairs, would himself, in his role as adviser, raise with Mr Carmody any matter of concern relevant to the tax implications of the proposed transaction.
In other words, the description of what is said to have occurred seems to put Mr Carmody's grievance in this way: at some stage Mr Randall was informed that another property was about to be purchased by Maucarmod. He must have known that this would be done via funds provided by Holdings which could give rise to a tax liability as a deemed dividend under the new regime. Nonetheless, Mr Randall failed to mention or give any warning about this risk.
The complaint seems to be not that bad advice was given but, rather, that there was a failure to ask pertinent questions with the result that no advice was given about the risk; or, putting it another way, the absence of any warning amounted to advice that it was safe to proceed with the transaction. I will return to these issues later.
The plaintiffs' solicitors
The 13 September draft letter was not sent, but in due course Mr Carmody instructed solicitors to inquire into the matter. Thus, by letter dated 2 January 2003 (exhibit 67 at vol 3/504) the law firm McCallum Donovan Sweeney wrote to Priestley's to say that they were instructed to investigate whether any of the Carmody entities had a cause of action against Priestley's relating to the purchase of the Price Street property. They requested copies of all documents relevant to the preparation of the 2000 financial statements including file notes, telephone notes and notes of meetings and all correspondence generated during the period 1 January 1999 to date.
It is apparent from a fair reading of the relevant exchanges that the plaintiffs' solicitors did not have clear instructions as to what might be the meeting or telephone conversation or related correspondence bearing upon a discussion between Mr Carmody and Mr Randall about the purchase of the Price Street property. However, it seems that after a careful examination of the documentary materials provided by Priestley's, including telephone records, the plaintiffs' solicitors established that there was a telephone communication between Priestley's' office and Mr Michael Carmody's mobile phone on 23 February 2000 of 3 minutes 16 seconds in duration, for which a charge of $16 was raised by Priestley's.
It was a matter of acute controversy in the trial as to whether these documentary materials jogged Mr Carmody's memory about the telephone call in question or whether Mr Carmody's description of what occurred was arrived at as a matter of reconstruction from the relevant documentary materials. However, in any event, by letter dated 24 March 2003 from McCallum Donovan Sweeney to Priestley's, it was put to Priestley's specifically for the first time that a crucial conversation had taken place between Mr Carmody and Mr Randall which was sufficient to found a cause of action against Priestley's (exhibit 72 at p 513).
It was alleged by the McCallum Donovan Sweeney letter dated 24 March 2003 that Michael Carmody, on behalf of the Carmody entities, consulted Mark Randall by telephone on 23 February 2000 (having attempted to contact him on 22 February 2000) in order to ascertain whether it was in order for Holdings to purchase the property for the Trust. It was alleged that in the course of the 23 February telephone conversation Mr Carmody was assured by Mark Randall that it was appropriate to purchase the property in this way.
The letter from the plaintiffs' solicitors went on to say that as at 23 February 2000 and at all times between that date and 17 March 2000 Priestley's failed to advise Michael Carmody that the sum paid for the property would be a deemed dividend and that this would result in the ultimate beneficiary incurring a liability to pay taxation in respect of that deemed dividend, and would also result in a loss of franking credits in Holdings.
It was said further that Priestley's failed at any time after 30 June 2000 to advise Michael Carmody that the purchase price was a deemed dividend and therefore caused Maureen Carmody (who was in that financial year the ultimate beneficiary in respect of the Trust) to suffer further loss by reason of having to pay both interest and penalties in respect to the tax payable on the deemed dividend.
Later, by letter dated 19 August 2003, the plaintiffs' solicitors forwarded to Priestley's a copy of the writ of summons and statement of claim that had been settled by senior counsel on their behalf in anticipation of legal proceedings. For ease of reference, I will refer to the enclosure as the "draft statement of claim" bearing in mind that various changes to the statement of claim were made in due course after legal proceedings were commenced.
The draft statement of claim
The draft statement of claim set out the history of the relationship between the parties and noted, in par 12, that on 22 February 2000 Michael Carmody, as a director of Maucarmod, executed an offer to purchase the Price Street property. It was said further in par 13 that prior to executing the offer he sought to ascertain from Mr Randall of Priestley's (in accordance with the general practice within the Carmody family of seeking professional advice before committing to significant acquisitions of property), whether there was any reason why Maucarmod as trustee of the Carmody Family Trust should not be the entity purchasing property using funds advanced to it by Holdings. He endeavoured to obtain that advice from Randall by telephoning Randall's Perth office on two occasions prior to executing the offer and, being unable to contact Randall, left messages asking Mr Randall to contact him urgently.
The plaintiffs' central allegation is set out in par 14 of the draft statement of claim. I will call this the "plaintiffs' par 14 telephone call allegation. It reads as follows:
"14.On 23 February 2000:
14.1Randall telephoned Michael and spoke to him at approximately 8.20 am;
14.2Michael thereupon informed Randall of the Offer and of the Kulin Homestead Transaction;
14.3Michael asked Randall for advice as to whether there was any reason why the Trust should not acquire the Kulin Homestead or why Holdings should not advance the funds to the Trust for the purchase of the Kulin Homestead by the Trust; and
14.4Randall thereupon advised Michael, in effect, that he saw no reason why the Kulin Homestead ought not be purchased by the Trust pursuant to the Offer, or why the purchase price should not be provided by an advance of funds from Holdings."
The draft statement of claim went on to allege that as at 23 February 2000 Priestley's, through Randall, either knew or should have known that if Maucarmod did commit to acquire the Price Street property (described in the claim as the Kulin Homestead) that it could only do so upon a basis of obtaining funds from another source so as to obtain the required purchase price for settlement, and that the likely source of such funds would be from Holdings (par 15). For ease of reference, I will call this the "par 15 likely source of funds allegation".
It was alleged further than Randall knew or ought to have known on and prior to 23 February 2000 that when funds had been required in the past in order for the Trust to acquire other properties, that the required funds had been advanced from Holdings to the Trust as loans not required to be repayable in the short term (par 16). The particulars in support of that plea include reference to the purchase of the six properties by the Trust using funds advanced by Holdings in the period 24 February 1988 to 19 May 1995 mentioned earlier including the purchase of the property at unit 3/118 Deanmore Road, Scarborough. I will call this the "par 16 previous knowledge allegation".
Under cross‑examination at the trial of the action, Mr Randall accepted, having regard to telephone records, that in response to a message left at his office he did initiate a telephone call to Mr Carmody at 8.20 am on 23 February 2000, and that a fee for professional services was rendered by Priestley's in respect of that conversation.
However, he disputed that Mr Carmody asked him the questions alleged in par 14.3 of the draft statement of claim or that he responded as alleged. He accepted that the call lasted 3 minutes and 16 seconds and that he had not made any note regarding the conversation.
I will return to the controversy between the parties as to what was said during the course of the 23 February telephone conversation in greater detail shortly, as this lies at the heart of the dispute. However, for present purposes, in order to complete the narrative, it will be useful to draw attention to certain notations made by Mr Randall in his own hand upon receipt of the draft statement of claim.
Mr Randall's handwritten note as to par 14.1 was "this was a 3‑minute call!". His note as to par 14.2 was "conversation which I do not recall exactly may have been along the lines of 'We are buying a house for mum. I am thinking of putting it in the trust, is this okay' ". His note with respect to par 14.3 was "He did not ask this question". Mr Randall's note as to par 14.4 was "I did not say this".
For ease of reference, I will call these notations the "par 14 Randall notes".
Legal proceedings and pleadings
In due course the plaintiffs commenced legal proceedings. The pleadings are set out in the papers for the judge approved 23 March 2005 subject to what I have to say later about the defendants' proposed amendment in terms of the defendants' minute dated 29 March 2005 concerning par 31 of the statement of defence. I will henceforth refer to these documents simply as "the pleadings".
The plaintiffs' statement of claim begins by setting out various facts and matters bearing upon the relationship between the parties. It is said in par 8.1 that from about 1 April 1988 until approximately April 2002 the professional accounting services of Priestleys were provided under engagement for reward to the individuals and entities comprising the Carmody family to facilitate the preparing of all required annual statements, income tax returns, required trust and corporations law documentation including pro forma minutes of directors' meetings and annual trust distribution resolutions together with general accounting advice and services as requested from time to time "or as thought appropriate by Randall at his own instigation on behalf of Priestleys".
This cluster of services is said to comprise the "retainer agreements". Each of the retainer agreements is said to be evidenced by a course of conduct over the retainer period with particulars being provided of the relevant facts and matters such as Randall routinely attending to the preparation of income tax returns and related documentation and rendering accounts for such services, including accounts in respect of advice provided in response to specific requests as well as advice volunteered by Randall on behalf of Priestleys when considered appropriate. The plaintiffs pleaded that Randall obtained knowledge as to the financial and accounting arrangements for each member of the Carmody family and knowledge going to the affairs of the Carmody family as a whole (par 9).
The plaintiffs pleaded that it was a term implied by law into each of the retainer agreements that the defendants would exercise reasonable skill and care at all times in going about the discharge of the subject work for members of the Carmody family (par 10). Further, both Priestleys and Randall owed to members of the Carmody family a common law duty of care to exercise reasonable care in the provision of professional accounting advice so as to avoid any act or omission likely to cause foreseeable loss or damage to any member of the family by the incurring of an unnecessary liability to pay income tax (par 11).
The events relevant to the acquisition of the Price Street property and the 23 February telephone conversation are then described along the lines I have previously indicated including references to the par 15 likely source of funds and par 16 previous knowledge allegations.
It is said further in par 17 that as at 23 February 2000 both Priestleys and Randall knew, or should have known, as competent providers of professional accounting services, that Div 7A had come into force with the result that an advance by Holdings to the Trust (given that Maucarmod as trustee of the Trust was a shareholder of Holdings) would mean that an advance of funds by Holdings would have to be treated by Maucarmod as a deemed dividend, and thereby as income assessable to taxation by Maucarmod or by the person receiving a distribution of the Trust's net income in the financial year in which the loan funds had been received by the Trust from Holdings. I will call this the "par 17 competent advice allegation".
The plaintiffs pleaded in par 18 that in reliance upon the advice received from Mr Randall the offer of 23 February 2000 in respect of the subject property was not withdrawn, as would otherwise have been the case had competent advice been provided as to the potentially adverse taxation implications. Following acceptance of the offer by the vendor on 24 February 2000 Maucarmod and Holdings proceeded to settlement on 17 March 2000 upon the basis that Maucarmod received an advance of $125,611 from Holdings to enable the Trust to complete the purchase. (I note in passing that Holdings Advanced $133,000 but after setting off $7389 against moneys owed by Holdings to the Trust the net sum advanced for the purchase was $125,611).
The plaintiffs pleaded in par 19 that in or about August 2000, in conjunction with completing the relevant accounts for the year ended 30 June 2000, Randall prepared and presented to Michael Carmody a minute allocating all net income to Maureen Carmody (continuing the practice which had been annually applied from the financial year ended 30 June 1993).
The events giving rise to Maureen Carmody's obligation to pay the so‑called "tax debt" of $80,254.90 as at 6 December 2002 are then described ($59,906.91 additional tax; $17,352.70 interest; $2995.30 penalty).
The plaintiffs pleaded in par 27 that negligently, in breach of the implied term or alternatively in breach of the alleged common law duty of care pleaded in par 11, Priestleys and Randall, having the knowledge the subject of the par 15, par 16 and par 17 allegations, failed as at 23 February 2000 or at any time thereafter to advise any of the plaintiffs as to the likely adverse tax implications in respect of the advance of funds by Holdings and failed to advise Maureen at the time of preparing her tax return and the operative minute that the amount advanced ought to have been accounted for as a deemed dividend.
It is pleaded in par 28 that but for the failures of Priestleys and Randall the subject offer would have been either withdrawn or novated such that Holdings or another member of the Carmody family would have acquired the property in lieu of Maucarmod on behalf of the Trust (par 28.1); that Maureen would not have been nominated to receive the allocation to her of the net income of the Trust so that she would not then have become subjected to the tax debt (par 28.2).
It is said further in pars 30 – 32 of the statement of claim that by reason of the defendants being registered agents and by reason of their negligence they are liable to Maureen Carmody in the amount of the tax debt as a result of the operation of s 251M of the Income Tax Assessment Act 1936. By that provision, if, through the negligence of the registered tax agent, a taxpayer becomes liable to pay any additional tax, interest or penalty, the registered tax agent shall be liable to pay to the taxpayer the amount in question.
Statement of defence
By their statement of defence (in its final form) the defendants admit many of the allegations bearing upon the history of the relationship between the parties. However, as to par 8 of the claim and the allegations concerning the contents of the retainer agreements, the defendants do not admit that the services they were to provide included providing such advice as Randall thought appropriate at his own instigation. According to the defendants, the retainer agreements were to provide professional accounting services for reward including preparing annual statements, income tax returns, minutes of directors' meetings and annual trust distribution resolutions, maintaining company secretarial registers and providing general accounting advice and services as requested from time to time.
The defendants stated further that the terms of engagement after 16 February 2000 were contained in a letter from Priestleys to Holdings on behalf of all of the plaintiffs dated 16 February 2000 (P25 @ 81). I digress to say that there was a controversy at trial as to whether this "engagement" letter was received by Michael Carmody on behalf of the plaintiffs prior to 23 February 2000. There was evidence before me that a copy of the letter was signed by him and returned to the accountants. The letter reads in part as follows:
"However, this letter also gives us the opportunity to update our understanding of the scope and objectives of our engagement as your accountant and tax agent. It likewise gives you an input into the defining of our role and we would welcome any comments that you may have.
General
We will be responsible for:
1.The preparation of the annual financial statements and income tax returns for all the entities and individuals associated with your family group, checking assessments and other Tax Notices and dealing with the Australian Taxation Office on your behalf;
2.When requested, advising or instructing management or staff on the maintenance of the accounting and internal control system.
3.When requested, undertaking special assignments for such matters as management consulting services, finance applications, tax planning, business acquisitions and valuations and other similar matters."
I note in passing that the engagement letter did not contain any passage purporting to exclude liability for negligence. I will come back to the question of whether it was in fact received prior to 23 February 2000 in due course.
The defendants went on to plead that it was an implied term of the retainer agreements that Priestleys would exercise reasonable care and skill in performing work under the retainer agreements to a standard appropriate to the accountancy profession (par 10). They owed a duty at common law to exercise reasonable care and skill in relation to providing advice where it was made clear by the members of the Carmody family that they were seeking considered advice from Priestleys.
The defendants admitted that Michael Carmody, as a director of Maucarmod, executed an offer to purchase the subject property on or about 22 February 2000 but pleaded that he did not obtain any advice from the defendants prior to executing the offer. The defendants denied the allegations contained in par 14 of the claim and stated further that the 23 February telephone conversation lasted for 3 minutes 16 seconds (par 14(e)(i)); that prior to the conversation the plaintiffs had not forwarded the offer, or any documentation or information to the defendants, nor discussed the source of funds required to purchase the subject property, nor did so subsequently (par 14(e)(ii)); that the plaintiffs did not at any time, including on the day in question, request any advice in relation to the advancing of funds to Maucarmod, whether as trustee of the Trust or otherwise, from Holdings or any other person, or entity, and no advice was given by the defendants in that regard (par 14(e)(iii)).
In following paragraphs the defendants denied that they were liable to the plaintiffs as alleged or at all. They pleaded that Randall knew that Div 7A had come into force on 4 December 1997. It is said that as at 23 February 2000 neither of the defendants as competent providers of professional accounting services knew or should have known of the need to advise Holdings or any of the other plaintiffs of the application of s 109D of the Act to the subject transaction.
It is said further at par 33 of the statement of defence that to the extent that the plaintiffs have suffered any loss and damage as alleged, the plaintiffs failed to mitigate the loss and damage by not seeking to have those components of the tax debt comprising general interest charges and penalties remitted or reduced on the basis that the relevant transaction could have been avoided using inter‑entity debits and credits; it was not part of a scheme to distribute profits as a loan to avoid income tax and, therefore, was not a transaction of the kind to which Div 7A of Pt III of the Act was intended to apply. By reason of the premises the defendants denied that they were under a duty to provide timely and accurate accounting advice concerning the existence of and likely adverse tax implications upon the transaction and, if, which is denied, the defendants were under a duty to the plaintiffs or any of them, the defendants did not breach that duty.
The issues
It will be apparent from this summary of the pleadings that I must begin by addressing the plaintiffs' par 17 competent advice allegation. I have to say that, having regard to the expert evidence I mentioned earlier and the legal principles I will come to later, I have little difficulty in concluding that, if Priestleys and Randall were sufficiently instructed, they should have known as at 23 February 2000 that under the new tax regime an advance by Holdings to Maucarmod to purchase a property in the latter's name could be characterised as a deemed dividend.
Mr Randall said in evidence that he knew of the amendments. There appeared to be little dispute that if he had been sufficiently briefed by his client as to the nature of the subject transaction, and the question had been put to him squarely as to whether an advance by Holdings to an associated company might be treated as a deemed dividend, he and any other competent adviser would have been obliged in the proper performance of his duties to answer in the affirmative. I will not dwell upon this point because the matter essentially in issue between the parties in the present case concerns the nature of the retainer, the nature of the advice sought by the plaintiffs and whether Mr Randall was sufficiently instructed to give the advice sought.
I must therefore proceed to make certain determinations as to the nature of the duties to be performed by the defendants as a consequence of the relationship in existence between them as at 22 February 2000 being the date on which Mr Carmody signed the offer in respect of the subject property. This requires that I give consideration not only to evidence bearing upon the course of dealing between the parties over a number of years but also to the letter of 16 February 2000 referred to in the statement of defence which is said to have reflected the terms of engagement after that date.
More particularly, there is a contentious issue as to whether the accountancy services to be provided by Randall on behalf of Priestleys included the provision not only of accounting advice and services as requested from time to time but also advice "as thought appropriate by Randall at his own instigation". I will call this the "advice at own instigation issue".
Having determined the nature of the services to be provided, it will then be necessary to ascertain what duties of care, if any, were to be observed by the defendant and to proceed to the question of whether the relevant facts and matters gave rise to any breach of duty. I feel obliged to keep steadily in mind a submission put forcefully by counsel for the defendants that the nature of the service to be provided, and thus the care to be exercised, will inevitably be affected by the nature of the query raised with the adviser and the surrounding circumstances. This underlines the importance of the factual findings which must be made as to the nature of the relationship between the parties and the contents of the exchanges between them at the relevant time.
It appears to be common ground between the parties that in response to a message left at his office, Mr Randall telephoned Mr Carmody on the morning of 23 February 2000. However, findings must be made as to what occurred in the course of that conversation and whether the plaintiffs' have made out the allegations in par 14 of the statement of claim. I remind myself in passing that the plaintiffs bear the burden of proof in that regard and must satisfy me on the balance of probabilities that the matters contended for by the plaintiffs occurred.
I am conscious that certain events which took place later will have a bearing upon the par 14 telephone call issues. For example, I must give consideration to the way in which Mr Randall prepared the accounts in respect of the year ending 30 June 2000. I must look also at the events surrounding preparation of the 13 September draft letter and the later events which led to the 23 February telephone conversation being identified as the crucial call. It will be necessary to determine what weight should be given to the par 14 Randall notes.
Findings as to matters of this kind will assist me in determining whether any duties of care were breached. It will be necessary also to determine whether there is a causal connection between the alleged breach and the loss allegedly suffered.
Put shortly, I must be satisfied that if Mr Carmody had received the advice he claims he ought to have received, then he would have taken steps to withdraw the subject offer and to reconstitute the transaction so that the tax debt would not have been incurred. There is also the question of whether liability for the alleged loss could have been averted by taking remedial action after 23 February 2000 which might have led to the accounts and related minutes being prepared in a different form. There is a further issue concerning mitigation of loss.
Before turning to these various issues, it will be useful to review the relevant legal principles.
Legal principles
Until comparatively recently, the mutual rights and duties of a professional person (such as a solicitor or accountant) and the client were regarded as regulated exclusively by the express and implied terms of the relevant retainer. However, the law has now evolved to the conclusion that concurrent liabilities in both contract and tort may arise in cases of professional negligence. Prima facie, a plaintiff may sue a solicitor or an accountant in either contract or tort or both. Where concurrent liability in tort and contract exists the plaintiff has the right to assert the cause of action that appears to be the most advantageous to him in respect of any particular legal consequence: Astley v Austrust Ltd (1999) 197 CLR 1 at 20.
Where a professional provides a service to a client, in the absence of an express term to the contrary, an implied term of the contract under which the service is supplied is that the professional will exercise reasonable care and skill in providing the service. Where there is a contract, the extent of the professional's liability to the client may depend upon or be affected by the terms of the contract. The terms may confine or exclude the existence of a duty of care owed by one part to the other: see generally Walmsley, Abadee & Zipser: "Professional Liability in Australia" at par 1.30 to par 1.320.
In Midland Bank Trust Co Ltd v Hett Stubbs & Kemp (a firm) [1979] Ch 384 the Court rejected a plea that a solicitor, who had been instructed to advise the client on the tax implications of exercising an option to purchase land, should also have checked to see whether the option was registered. Oliver J said at 402 that there is no such thing as a general retainer in that sense. The expression "my solicitor" is as meaningless as the expression "my tailor" or "my bookmaker" as establishing any general duty apart from that arising out of the particular matter in which his services are retained. The extent of his duty depends upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do. In the same case the learned Judge observed at 434 that a contract gives rise to a complex of rights and duties of which the duty to exercise reasonable care and skill is but one.
It follows that even where concurrent liability in contract and tort exists careful consideration must be given to the contractual matrix with a view to defining the task undertaken by the professional on behalf of the client from which the duty to exercise care may be thought to arise. For example, in Mohr & Mohr v Cleaver & Cleaver [1986] WAR 67 the second respondent was an accountant who had prepared tax returns for a company that made some ill‑fated loans. The lending company had made an informal telephone enquiry of the accountant as to the advisability of advancing the money. That informal enquiry was incidental to the main purpose of the telephone call but nonetheless the lending company was left with an impression that it was safe to proceed. The Full Court in this State upheld the trial Judge's decision to dismiss the claim against the accountant for negligence.
The Full Court held that the accountant owed no duty of care to the appellants because he did not carry on the business of giving advice or information, nor had he held himself out as doing so. Further, the lending company had not made it clear to the accountant that it was seeking considered advice. Moreover, according to Rowland J, the advice was sought after the agreement to lend the money had been made, and it was not the lending company's case that it was seeking advice as to whether it should carry the agreement into effect.
Burt CJ said this at 72:
"I would hold that on the facts of this case no duty of care arose. I would so hold because I do not think that it could be held that the appellants had made it clear to the second respondent that they were 'seeking considered advice'. All that could be said, I think, is that Mrs Mohr, in passing and in the course of a telephone conversation initiated by the second respondent for some other reason, was asking for his off-the-cuff or kerb stone opinion. And if that could be said to give rise to a duty of care the legal obligation was to take such care as was reasonable in those circumstances. The circumstances were that the enquiry made, as the trial Judge found, was an 'incidental' enquiry made in a telephone conversation initiated by the second respondent for another purpose. The second respondent was not asked to make any specific enquiries. He was not asked for hard information. He was not in his professional capacity retained to do anything. He was simply asked for his opinion and the opinion asked for was, as I have said, a 'kerb stone' opinion. But if at the kerb stone the giving of off‑the‑cuff opinions may call for the exercise of reasonable care the care which satisfied that test is controlled by that circumstance."
It follows from the reasoning in these cases that the scope of the duty of care and the nature of the standard of care to be exercised by the professional will depend upon the circumstances of each case including the quality of instructions given and the urgency of the situation. However, although the contract of retainer will be an important indicium of the nature of the relationship which gives rise to the common law duty of care, it will not chart exclusively the parameters of that duty, for it has been held in some cases that the duty of care may require the taking of positive steps beyond the specifically agreed professional task or function where the steps in question are necessary to avoid a real and foreseeable risk of economic loss being sustained by the client: Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642; Dalleagles Pty Ltd v Australian Securities Commission (1991) 4 WAR 325 at 332.
No duty of care will be owed to the plaintiff unless injury or loss to the plaintiff is reasonably foreseeable. However, in the context of professional negligence claims, injury or loss to a client or patient as a result of careless conduct by the professional is nearly always foreseeable to a person in the professional's position.
Until recently, the decided cases suggested that where the loss is purely economic loss, it is necessary to establish that a relationship of proximity existed between the claimant and the professional person arising from known reliance on advice or the assumption of responsibility by one party to the other. This must now be read subject to later decisions of the High Court which suggest that the notion of proximity in addition to foreseeability is of limited use. The circumstances that call a duty of care into existence will arguably be determined by reference to various discrete categories of liability apparent in the previously decided cases.
I pause to say that in the present case there is no need to explore issues of this kind in depth, for the decided cases clearly show that the relationship of accountant and client gives rise to a duty of care, and this was not seriously contested by the defendants. The central issue concerned the nature of the advice sought and the scope of the duty of care, if any, in the circumstances of the case.
Where a defendant owes a duty of care to a plaintiff, the defendant is liable to the plaintiff if the defendant breaches the duty of care. In negligence claims against professionals, the usual approach of courts, in order to determine what a reasonable man would do by way of response to the risk, is to consider the standard of care and skill demonstrated by the reasonable professional. The basic rule is that the professional is required to exercise the care and skill of the ordinarily skilled professional within the same profession: Voli v Inglewood Shire Council (1963) 110 CLR 74 at 84. Also see Walmsley, Abadee & Zipser (supra) at par 1.440 to par 1.450.
The duty of care of a professional person and the need to warn of risks was considered by the High Court in Rogers v Whitaker (1992) 175 CLR 479. It appears that in the case of a medical practitioner the law imposes a duty to exercise reasonable care and skill in the provision of professional advice and treatment. The standard of reasonable care and skill required is that of the ordinary skilled person exercising and professing to have that special skill, which in that case was the skill of an ophthalmic surgeon specialising in corneal and interior segment surgery.
In Heydon v NRMA Ltd (2000) 51 NSWLR 1 Malcolm J said (at 53) that in his opinion the approach adopted in Rogers v Whitaker (supra) was applicable to legal practitioners. It was a nice question whether there was a duty on the part of a barrister to volunteer advice beyond the scope of the brief, although counsel may well and generally would volunteer additional advice which was considered relevant, but not specifically raised in the instructions. Malcolm J said further that the content of the duty of care and the liability is the same whether it is founded on contract in the case of a solicitor, or whether it is founded on a duty of care in tort in the case of a barrister. In each case the duty is to apply the relevant degree of skill and exercise reasonable care to carrying out the task. There is no implied undertaking that the advice is correct, but only that the requisite degree of professional skill and care has been exercised in the giving of the advice. Where there is reason for doubt or there are risks which a person possessing the relevant degree of skill and competence should perceive, it follows from the above that there may be a duty to warn of the kind recognised by their Honours in Rogers v Whitaker (supra).
In Hawkins v Clayton (1988) 164 CLR 539 it was indicated by Deane J at 583 that, in the case of the solicitor, an action for breach of the contractual duty lies when the breach occurs but an action for breach of the tortious duty lies only if and when damage has been sustained and the cause of action is complete.
There are various decided cases which suggest that where an accountant who provides tax advice professes expertise, his or her liability will be measured against the standard of a reasonably competent tax adviser specialising in the subject area.
For example, in Pech v Tilgals (1994) 28 ATR 197 it was held that the accountant in question failed to exercise the care and skill of a reasonably competent accountant and tax agent in that, although aware of the transfer of the subject land, he made no reference to it in the tax returns under notice, made no appropriate enquiries of the taxpayers as to the transaction, and was either not aware of the nature and effect of a "deemed dividend", as he should have been, or overlooked this aspect of the matter. The taxpayers accordingly established causes of action in contract and in tort.
In Tip Top Dry Cleaners Pty Ltd v Mackintosh (1998) 98 ATC 4346 a proposal was devised by a solicitor (Rankine) under instruction from the plaintiff taxpayer's accountant and tax agent (Mackintosh) to reduce a potential tax liability on accrued profits by a pre‑purchase of trading stock. The professional advisers did not deny that a contract with the taxpayer existed nor that they had a duty of care. They defended the claim essentially on the basis that the risk of incurring additional tax had been sufficiently outlined to the taxpayer. This line of defence succeeded.
Debelle J held that both the solicitor and accountant owed the taxpayer a duty of care. In the circumstances, there was not perceivable difference between the degree of skill and care required of a chartered accountant or solicitor giving tax advice. The scope of the duty depended on the client's need for advice. However, because of his involvement with the taxpayer, the duty of the accountant Mackintosh extended to giving advice which the taxpayer appeared to need, regardless of whether it had been specifically requested.
It was held that Mackintosh and Rankine had discharged their duty of care in relation to the transaction advice. Further, as the taxpayer had entered into an entirely different transaction from that advised, its claim for negligence failed. Even if the solicitor and accountant had been negligent, the taxpayer failed to prove that the negligence had caused it any loss. Although it had incurred loss in the form of penalties and interest, that alone was not sufficient. The taxpayer had to prove that Mackintosh and Rankine had caused that loss by proving that, had it received proper advice, it would not have made a pre‑purchase of petrol and would not have lodged the tax return in the form in which it did.
Let me now return to the issues in the present case.
The nature of the retainer
It will be useful to begin by looking at the nature of the relationship between the parties prior to 16 February 2000; that is, prior to the preparation of the so‑called "engagement" letter that was sent to Holdings. To my mind, there can be little doubt that from about 1 April 1988 up to 16 February 2000 the professional accounting services of Priestley's were provided under engagement for reward to the individuals and entities comprising the Carmody family to facilitate the preparation of all required annual statements, income tax returns, and trust minutes together with general accounting advice and services as requested from time to time.
The ongoing contractual relationship between the parties undoubtedly gave rise to a situation in which Mr Randall and his colleagues at the accounting firm assumed responsibility for attending to the matters just described and responding to requests for advice as to the tax implications of various matters. It was known to the defendants that the plaintiffs relied upon their advisers and were generally inclined to act upon the advice provided. It follows from the reasoning in the decided cases that in these circumstances the defendants were subject to a duty of care arising concurrently in contract and in tort at common law in dealing with any matter falling within the range of services generally provided that required specific action or a considered response.
I arrive at this conclusion having regard to the evidence given by Mr Carmody and Mr Randall and to the correspondence and other documents directed to Mr Carmody. For example, the exhibits at trial included various circulars put out by the defendant firm concerning changes to the statutory regime bearing on the affairs of a farming business and these documents were clearly designed to encourage a belief in clients of the firm that up to date advice could be obtained from the firm in respect of a range of matters. There are also various specific letters written by Mr Randall to Mr Carmody which confirm that in various ways the defendant firm was taking steps to ensure that tax liabilities would be kept to a minimum and that the firm was putting in place the appropriate steps and documentation in that regard.
For example, by letter dated 9 December 1993 Mr Randall submitted to Mr Carmody income tax returns with attached schedules to be signed by himself and members of his family. It is said in that letter that the distribution from the M B Carmody Family Trust was being received tax free by Maureen. Enclosed was a letter from Maureen gifting the amounting of income back to the Trust with a view to avoiding any loan balance building up in the Trust. Mr Carmody was to arrange for Maureen to sign the letter and have it returned to the defendant firm also.
However, it is important to keep in mind that the range of matters which might give rise to a need for advice was very wide. It is apparent from the correspondence and circulars before me that capital gains tax, superannuation, tax deductions and depreciation were among the many matters being kept under notice. Indeed, the cross‑examination of Mr Carmody by counsel for the defendants gave rise to this exchange:
"Do you recall what some of the significant issues were over that period from 1988 to early 2000?---Well, it would have just been a range of issues. We would have leased tractors. I know we leased tractors, or there could have been a question of whether we HP'd it or leased it. Of course, the acquisition of these places, the, I suppose, general accounting day‑to‑day stuff, and there was – I was going to say the stock issues, but I mean they were always part of the annual accounts. Yes, I suppose, to get onto taxation, capital gains, FPT, all those range of issues that you run into running a farm or running a business.
Would it be an accurate description to describe those issues as many and varied?---Yes, it would be, I'd say."
It follows from the reasoning in the decided cases that in circumstances of this kind care must be exercised in defining the services to be performed by and responsibilities of the defendant firm, especially in regard to the plaintiffs' contention at par 8.1 of the claim that the services to be provided from time to time included the provision of advice as thought appropriate by Mr Randall at his own instigation on behalf of Priestleys.
I am of the view, in general terms, that in circumstances where Mr Randall or his colleagues from the firm were performing well defined tasks pursuant to a well defined pattern of performance such as the preparation of financial statements, or the provision of advice in response to a specific request such as the availability of a tax deduction in respect of some item of expenditure, then the nature of the contractual relationship between the parties would require that the defendant firm proffer any advice reasonably necessary in order to protect the client's interests in regard to the matter in hand whether expressly requested or not. I find support for this in the decided cases mentioned earlier including the Tip Top Dry Cleanerscase (supra).
However, at the same time, I am conscious, having regard to the decided cases, and especially the Midland Bank Trust case (supra) and Mohr v Cleaver (supra), that different considerations might apply where the client raised a new matter in circumstances of urgency and without himself defining to some extent the nature of the advice being sought. In other words, I give weight to the notion that unless special arrangements are made there is no such thing as a general retainer and the nature of the services to be provided and the scope of the related duty of care will depend upon the circumstances in which the advice is sought. An accountant cannot be expected at a moment's notice to address every conceivable matter that might impact adversely upon his client's business and, in any event, the client might not be prepared to pay for advice bearing upon possibilities that were of minor importance or too far‑fetched.
It emerges, then, that it would be inappropriate and possibly misconceived for me to attempt to make a finding in general terms as to whether the retainer or contract between the parties included an additional term of the kind contended for by the plaintiffs without having examined closely the circumstances in which the particular duty of care is said to have arisen. However, before proceeding to examine the relevant circumstances, I feel obliged to make the obvious point in passing that the existence of a longstanding contractual relationship between the parties combined with a pattern of reliance upon Mr Randall is a relevant factor in the situation. The decision in Mohr v Cleaver (supra) demonstrates that the weight to be given to an off the cuff opinion may be affected by the nature of the previous relationship between the parties.
Before leaving this aspect of the matter I must determine whether the observations I have just made are affected by the 16 February engagement letter.
The 16 February 2000 engagement letter
Mr Randall gave evidence at the trial that in February 2000 Priestleys decided to review and confirm in writing its arrangements with the Carmody family. The reason for this was the implementation of GST on taxable supplies after 30 June 2000 and the implications that would have on fees. His evidence in that regard is consistent with the terms of the letter which was aimed at defining the role of Priestleys as accountant and tax agent.
I remind myself briefly that in referring to the services to be provided, mention was made of the preparation of financial statements and income tax returns. Importantly, for present purposes, it was said also that the accountants would be responsible for "when requested, undertaking special assignments for such matters as management consulting services, financial applications, tax planning, business acquisitions and valuations and other similar matters".
In his evidence at trial Mr Randall said that the letter dated 16 February 2000 was returned to Priestleys a few days later, duly signed. The signature of Mr Carmody appeared on the letter. It was common ground at the trial that the original of the letter bears a notation "Returned 2/2000" (transcript 165).
Mr Carmody said in his evidence‑in‑chief (transcript 103) that he remembered receiving it, and signing it, and sending it back to Mr Randall. Under cross‑examination he acknowledged that he probably would have dealt with it (in the sense of signing it and returning it to the accountants) "fairly promptly". He agreed that if it took two or three days to arrive he would have signed it and sent it back straight away (transcript 128). In the course of re‑examination the possibility was canvassed with him that he might not have collected the letter from his mail box prior to 23 February 2000, but this evidence was not specific, and I did not find it convincing (transcript 164).
Having regard to the evidence on this point as a whole, I find that the letter in question was received and signed by Mr Carmody prior to 23 February 2000 and can therefore be said to represent a more precise definition of the terms of the retainer. Having regard to the previous course of dealing between the parties, I am of the view that in signing the letter Mr Carmody was acting on behalf of the various individuals and entities comprising the Carmody family group with the result that the terms of the contract reflected in the letter are applicable to the plaintiffs generally. The letter therefore becomes an important point of reference in determining the responsibilities of the defendant firm.
However, to my mind, that conclusion does not to any significant extent displace or override the observations I made earlier concerning the nature of the retainer. The description of Priestley's role provided in the letter is succinct but nonetheless couched in general terms which reflect the previous course of dealing between the parties and clearly allows for the Carmody family to seek advice from time to time upon tax issues affecting their business or upon the tax implications of a specific transaction.
It follows from this, as I noted in earlier discussion, that the service to be provided in respect of a particular matter and the scope of the related duty of care will, in the final analysis, be determined by the nature of the advice sought and the particular circumstances. In weighing up the relevant circumstances it will be necessary to take account of the fact that if advice was sought from Priestleys by Mr Carmody on behalf of the plaintiffs, it was not being sought by a stranger but by an existing client who was known to act upon advice given to him.
Accordingly, I must now turn to the circumstances bearing upon the plaintiffs' par 14 telephone call allegation.
The plaintiffs' par 14 telephone call allegation
There is no dispute that on 22 February 2000 Mr Carmody and his brother, on behalf of Holdings, signed an offer in respect of the Price Street property. The form of offer contained a clause requiring that a competing offer be cancelled by 28 February 2000. The Carmody offer document shows that the Carmody offer was accepted by the vendors on 24 February 2000. All of this suggests that Mr Carmody was keen to acquire the property and that in his mind the transaction was attended by a degree of urgency. When these factors are considered in conjunction with the brevity of the crucial telephone call on 23 February 2000, I am inclined to doubt that Mr Carmody was looking for detailed advice or the answer to an intricate problem as he sought to make contact with his accountant, Mr Randall.
The relevant telephone records establish that in response to messages left at his office Mr Randall contacted Mr Carmody by phone and spoke to him for 3 minutes 16 seconds. In the course of his evidence at the trial Mr Randall accepted that he did have a telephone conversation with Mr Carmody on 23 February 2000. He said that he was unable to recall the contents of the conversation and confirmed that he did not make any note concerning it. It was an undisputed fact that Mr Randall later charged a fee referable to the conversation. It was common ground at the trial that whatever was said in the conversation was not followed up by any written commentary or advice. Whatever was said in the course of the telephone call apparently did not prompt Mr Carmody to seek any further information from Mr Randall, in writing or otherwise, or deter Mr Carmody from proceeding with the transaction.
It was an undisputed fact at the trial that the financial statements for Holdings and Maucarmod in respect of the year ended 30 June 2000, prepared under the supervision of Mr Randall, reflected the pattern of previous purchases whereby an advance made by Holdings to facilitate the purchase of the property by Maucarmod was treated as a loan, notwithstanding that such an approach under the new tax regime established by Div 7A would give rise to a deemed dividend. The financial statements were prepared from primary records, including bank statements and cheque butts, showing that the funds to acquire the Price Street property had been drawn from the Holdings' account.
These facts and matters of themselves, when considered in combination, provide a basis for inferring that as at 23 February 2000 Mr Carmody was minded to seek advice of some kind from Mr Randall in respect of the pending Price Street transaction and that the advice given was sufficient to put his mind at rest. The indications are, having regard to the brevity of the conversation, that the question asked and the answer given was in a general form. Further, bearing in mind the way in which the financial statements were subsequently prepared, it seems unlikely that any mention was made of the deemed dividend matter.
It is against this background that I turn to the recollections of the two parties to the conversation. Mr Carmody said in evidence at the trial that he recalled receiving a telephone call from Mr Randall on his mobile telephone. During this telephone conversation he told Mr Randall what he had done, that is, that he had executed an offer on behalf of the trustee company (Maucarmod) and asked whether it was okay to proceed. According to him, Mr Randall said that it was okay, and he was very relieved to hear this as he had been worried about it since signing the offer the day before.
Mr Carmody, in his evidence‑in‑chief, then proceeded to refer to matters which went to the heart of the par 14 telephone call allegation. On his account, he went on to say to Mr Randall that he thought it would be okay because that was the way "we had bought all the other properties" but he thought he should check. He said further that he recalled asking whether it was okay for the purchase funds to be paid out of Holdings. Mr Randall said that it was fine to use funds from Holdings. Mr Carmody then said words to the effect: "I'll just pay it out of the company account and you'll sort it out at 30 June".
In due course, when Mr Carmody instructed his solicitors to pursue the claim, it is clear from the subject correspondence that he was not able to identify when the crucial call was made until the telephone records became available, and, even then, once the relevant call was identified, it seems Mr Carmody failed to instruct his solicitors in terms corresponding with what has now become the plaintiffs' par 14 telephone call allegation. I found Mr Carmody to be generally unconvincing under cross‑examination as to the details of the call. Moreover, the brevity of the call weighs against the account he provided.
It follows from what I have said previously that Mr Carmody's imperfect recollection cannot be treated as an end to the matter. A telephone call was undoubtedly made on 23 February 2000. There are various facts and matters including Mr Randall's admission against interest and the Randall notes on the draft statement of claim which permit me to arrive at certain findings as to the making of the call and the contents of it.
When I draw together all the evidentiary considerations, including the available inferences, I consider, and so find, that in the course of a telephone conversation on the morning of 23 February 2000 Mr Carmody conveyed to his accountant, Mr Randall, that he (Carmody) had signed an offer whereby the Price Street property would be acquired by the trustee company, Maucarmod to the intent that the property would be occupied by his mother. He made it clear to Mr Randall that he was anxious to proceed but sought his advice as to whether there was any reason why the property should not be purchased by Maucarmod as had been done on previous occasions. I conclude that Mr Randall said words to the effect that it was safe to proceed in that manner, and did not make any mention of the deemed dividend issue or any other adverse tax implication. This comparatively brief telephone call was sufficient to provide Mr Carmody with the reassurance he was looking for.
It is inherent in this finding that the plaintiffs have not satisfied me on the balance of probabilities (as alleged in par 14.3 of the claim) that Mr Randall was asked whether there was any reason why Holdings should not advance the funds required to meet the purchase price. In other words, in my view, it was not raised specifically by Mr Carmody with Mr Randall that the funds would be coming from Holdings so that Mr Randall might arguably have been put on notice that the new deemed dividend provisions could apply.
I consider (and so find) that the draft letter of 13 September reflects the true position, namely, Mr Randall was told that a property was to be purchased in the name of Maucarmod to accommodate Mr Carmody's mother but Mr Randall was not told expressly in the course of the telephone call that the funds would be provided by Holdings. This finding is consistent with and is reinforced by the Randall notes on the draft statement of claim. Thus, as set out in the 13 September draft, the plaintiffs' real complaint is (which is allowed for by the par 15 likely source of funds and the par 16 previous knowledge allegations in the statement of claim) that Mr Randall should have from his understanding of the family affairs been aware that funding for the purchase would have to come from Holdings and because Maucarmod held shares in Holdings that this could give rise to liability for a deemed dividend.
I must now explore the implications of these findings of fact.
The duty of care
In the course of earlier discussion I concluded that as at 23 February 2000 there was an ongoing contractual relationship between the parties of the kind contended for by the plaintiffs. The so‑called engagement letter dated 16 February 2000 was an operative and important point of reference in determining the nature of the services to be performed and the scope of the duty of care in circumstances where the client was accustomed to seek advice by phone and was known to rely upon his accountant's advice. I noted that the engagement letter was expressed in sufficiently general terms to allow for advice to be given on an ad hoc basis from time to time in which event the nature of the task and related circumstances would have a bearing upon the scope of the duty of care and the question of whether the duty of care had been breached. I am of the view, having regard to the decided cases, that in some circumstances an accountant or other professional adviser might be required to offer advice or give some warning about a risk at his own instigation, even though a specific question about the matter of concern had not been put to the adviser by the client.
It was against this background that I have reviewed the evidence concerning the plaintiffs' par 14 telephone call allegation and made certain findings with a view to determining the nature of the advice sought by Mr Carmody, if any, and the circumstances relevant to the service to be provided and the care to be exercised.
For the reasons given previously, I have come to the conclusion that as at 23 February 2000 Mr Randall had been acting as the plaintiffs' accountant for a good many years and knew or ought to have known that pursuant to tax and family planning strategies various properties had been purchased by the trustee company (Maucarmod) utilising funds provided by the operating company (Holdings) upon the basis that such advances were characterised as loans in the books of the two companies.
I am able to find as a fact that Mr Randall was not given any prior warning and did not have any prior knowledge at the time of the subject telephone call that Mr Carmody, on behalf of the plaintiffs, would seek some advice from him as to the wisdom of proceeding with the proposed purchase of the Price Street property. Nonetheless, bearing in mind the practice that had grown up between them of communicating by telephone, I am of the view that, notwithstanding the absence of any prior instructions, the circumstances were such that Mr Randall must have understood that he was being asked for something more than a kerb stone or off the cuff opinion. He was being asked for considered advice as to whether there was any reason which might weigh against Mr Carmody proceeding with the proposed transaction and with a real likelihood that his advice would be acted upon.
Thus, to my mind, Mr Randall was subject to a duty to ensure that loss was not caused to any of the individuals or entities within the Carmody family circle who might be adversely affected by a lack of care in the giving of the advice. I noted in earlier discussion that the standard of care to be exercised was the provision of advice in the manner to be expected of a competent provider of accounting and tax advisory services because Mr Randall, on behalf of Priestleys, held himself out as being able to provide such services.
It follows from this view of the matter that if by chance (and I am now speaking hypothetically) Mr Carmody had conveyed to Mr Randall all the information comprising the plaintiffs' par 14 telephone call allegation and then, drawing upon some reading of his own in the newspapers or otherwise, proceeded to ask Mr Randall specifically whether funds provided by Holdings to Maucarmod would attract a tax liability as a deemed dividend, bearing in mind that Maucarmod was a shareholder of Holdings, there can be little doubt that an answer in the negative would have to be regarded as negligent in the circumstances. In such a case Mr Randall would have been possessed of sufficient information to express a view and, on my earlier finding, a competent provider of accounting services would have known that there was a risk of liability arising.
If, in this hypothetical situation, Mr Randall or any other accountant in the same position felt that he was not in a position to give an answer immediately because he had to check the structure and relationship of the companies in question, then it seems to me that the duty of care arising from the client's request for a considered opinion, required him to express no opinion until such time as he had the necessary information before him, and to warn the client against proceeding further until he was in a position to express an opinion.
I am conscious, of course, that the scenario I have just described does not conform to the circumstances of the present case. My review of the evidence has led to a finding that Mr Carmody did speak to Mr Randall by telephone on the morning of 23 February prior to the subject offer being accepted. The call was brief and, as suggested by the par 14 Randall notes, Mr Carmody simply explained that he had signed an offer whereby the Price Street property would be purchased in the name of the trustee company, Maucarmod, in the same manner as had been done on previous occasions. The property was to be used for residential purposes by his mother. He sought advice from Mr Randall as to whether there was any reason why he should not proceed with the transaction.
I am of the view (and so find) that Mr Randall did not refer to any reason why the purchase should not be proceeded with and did not warn against taking any step upon the basis that he was not in a position to express a concluded view until further information was brought before him. Thus, in effect, I am satisfied on the balance of probabilities that Mr Randall indicated (and by implication so advised) that it was safe to proceed as there was not likely to be any adverse consequences. There is no suggestion in any of the evidence that either party to the telephone conversation referred expressly to the deemed dividend issue and I therefore have no difficulty in finding that nothing was said about that matter.
It emerges from all of this that the crucial question is the matter raised in the 13 September draft letter, namely, as to whether Mr Randall should have from his understanding of the family trust structure been aware that funding for the purchase would have to come from Holdings, or should have enquired as to the source of funding, so as to satisfy himself that individuals or entities within the Carmody family circle would not be exposed to liability in respect of a deemed dividend.
In looking at this question I am inclined to give weight to this exchange in the course of Mr Randall's cross‑examination (transcript 254):
"…you would accept, would you not, that he would have an expectation that you would have a knowledge of the companies' affairs or the family's affairs over those 12 years to that point, including the way assets were acquired and the basis upon which Holdings lent money to the trust in order for that to be done and he would have an expectation that you would know that. Would you accept?---Yes, I accept that."
The contention that Mr Randall was in breach of a duty of care of the kind relied upon by the plaintiffs is reflected in the plaintiffs' par 15 likely source of funds allegation and the par 16 previous knowledge allegation. At the end of the day, I am satisfied on the balance of probabilities that the facts and matters underlying these allegations as pleaded have been made out.
It is pleaded in par 27 that negligently in breach of an implied term or in breach of the common law duty of care Priestleys and Randall, having knowledge sufficient to give rise to the duty of care referred to in the pleading, failed to advise any of the plaintiffs as to the likely adverse application of the deemed dividend provision.
In essence, the question that falls to be decided is whether, in the circumstances of the actual case as I have found them to be, Mr Randall was obliged to draw upon his own knowledge of the plaintiffs' affairs and offer advice at his own instigation in the form of a warning not to proceed further for the time being because there was or might be an adverse tax implication because any funds advanced by Holdings (as the likely source of funds) to Maucarmod (which was not usually in a position to provide the purchase price from its own resources) would probably be characterised as a deemed dividend.
As to this question also the defendants contend that Mr Randall's actions were dictated essentially by the circumstances. Mr Carmody's inquiry was concerned only with the ownership of the property and not the means of funding its acquisition. There was nothing in the situation which put Mr Randall on notice that he should volunteer advice about any adverse tax implications. However, this appears to overlook the fact that the company structure as to distribution of income and other matters had for many years been used as an instrument of tax planning as illustrated by the pre‑existing pattern of distributing income to Maureen Carmody to achieve the most effective outcome. Thus, a general query as to the wisdom of Maucarmod acquiring another property brought with it by implication a query as to whether there were any adverse tax implications.
To my mind, when one draws together all the relevant evidentiary matters, it must follow that in the particular circumstances of this case Mr Randall was subject to a duty to offer advice at his own instigation bearing upon any aspect of the proposed transaction which might have an adverse tax implication. I consider that the par 15 likely source of funds allegation and the par 16 previous knowledge allegation are substantiated by the evidence. It is not disputed that there had been a number of prior transactions in which the trustee company, Maucarmod, had purchased properties utilising funds provided by the operating company, Holdings. These arrangements had been characterised as loans in the financial statements of the respective companies, and those statements and related income tax returns had been prepared by the defendants under the supervision of Mr Randall.
The pre‑existing relationship between the parties clearly encompassed the notion that their accountant was privy to and familiar with their affairs and this knowledge formed part of the services he was providing. There was clearly an expectation that he would be in a position to respond to requests for advice, even by telephone. It was always open to Mr Randall as a professional adviser to decline to provide advice or express a considered opinion if he felt that he was not sufficiently briefed to respond to the matter in hand. In fact, by responding to the query as he did (that is, by indicating that it was safe to proceed) there was an assumption of responsibility by Mr Randall. He accepted that he was in a position to give considered advice and conveyed to his client that the advice being given was of that kind. This brought with it a duty to exercise reasonable care.
Put shortly, then, I am of the view that, in effect, Mr Randall was asked to provide considered advice in circumstances in which he had sufficient information before him by way of previous knowledge and particulars of the proposed transaction to infer that Maucarmod would purchase the Price Street property utilising funds provided by Holdings and that under the new regime this could give rise to an adverse tax implication; that is, the advance would probably be characterised as a deemed dividend. To my mind, in the circumstances I have described as they emerge from my findings of fact, the duty of care imposed upon him under and by virtue of the ongoing contractual relationship between the parties and at common law required him to offer advice at his own instigation that there was a significant reason why the proposed transaction should not be proceeded with. I am of the view that he failed to provide the necessary warning or advice and was thereby in breach of the common law duty of care owed to members of the Carmody family as pleaded in par 11 of the claim to exercise reasonable care in the provision of advice.
I am of the view that there is a sufficient causal link between the negligent breach of duty and the loss incurred in the form of the tax debt having regard to the evidence given by Mr Carmody at trial. His evidence was to the effect that he was accustomed to act on advice given to him by Mr Randall concerning taxation matters. He said he was also accustomed to confer with Mr Randall before proceeding with the acquisition of land on behalf of any corporate entity associated with his family. As to this aspect of the matter, I found his evidence convincing, and I am conscious that there is no evidence of any real significance to the contrary. In various ways Mr Randall seemed to accept both in his evidence‑in‑chief and under cross‑examination that Mr Carmody had looked to him for advice over many years and the advice was usually taken. This view of the matter is reinforced by the fact that minutes and resolutions prepared by Mr Randall in order to carry into effect various strategies were generally signed by members of the Carmody family without question.
These findings are underpinned by Mr Carmody's evidence‑in‑chief (at par 91 of his witness statement) that if Mr Randall had advised him of the impact of taxation law in respect of the purchase transaction when he spoke to him on 23 February 2000, he would have sought further advice from him as to how the transaction could be structured. He said further that he would have withdrawn or novated the offer, and the person or entity to purchase could have made a fresh offer to the vendors or could have executed a novated offer.
The evidence before me suggests that Mr Carmody was keen to proceed with the offer he had made, bearing in mind especially that the vendors had received a competing offer. It is, of course, possible that even if the advice that ought to have been given about the deemed dividend had been given that Mr Carmody would have proceeded nonetheless. However, I am of the view that this can only be regarded as a matter of speculation. In the face of evidence from Mr Carmody that he would have withdrawn the offer, and in the absence of evidence refuting his assertion in that regard, I am obliged to conclude that the matters complained of led directly to Maureen Carmody being exposed to liability for the tax debt. In addition, I consider that those plaintiffs who agreed to indemnify her in respect of the tax debt and provided funds to meet the debt are entitled to recover damages in the relevant amount because they fall within the range of those who were foreseeably exposed to injury in the event of the negligent act giving rise to loss.
I noted in earlier discussion that an issue of mitigation was raised by the statement of defence. However, I am not persuaded that the defendants' liability can be set aside or reduced by the facts and matters relied upon in support of this plea. I am of the view that the liability referable to the deemed dividend was levied properly by the income tax authorities with associated liabilities for penalty tax and interest. To my mind, it is in the realm of speculation as to whether the liability could have been averted or removed by action of a kind adverted to by the defendants in their statement of defence.
My reasoning leads to the conclusion that the defendants are liable to the first plaintiff in respect of the amount comprising the tax debt. This liability arises from their negligent breach of the common law duty of care described in par 11 of the statement of claim to exercise reasonable care in the provision of professional accounting advice to members of the Carmody family from time to time so as to avoid any act or omission likely to cause foreseeable loss or damage to any member of the Carmody family by the incurring of an unnecessary liability to pay income tax. I noted earlier in my review of the decided cases that where concurrent liability in tort and contract exists the plaintiff has the right to assert the cause of action that appears to be the most advantageous to him in respect of any particular legal consequence. It follows from this that the first plaintiff is entitled to succeed in their claim in tort. Having regard to the manner in which the tax debt was discharged, I consider that the other plaintiffs were properly joined as parties to the action.
I am conscious that pursuant to its minute dated 29 March 2005 amending par 31 of the defence the defendants put up a plea that any loss sustained by the first plaintiff was not caused by the defendants but by the failure of the trustees to distribute the income efficaciously. As to this plea, I reserved my ruling as to whether a late amendment to the statement of defence should be allowed. To my mind this represented an attempt to go behind the operative minute dated 30 June 2000 and opened up an entirely new area of controversy as to which further evidence is required. In these circumstances, I consider that the amendment should not be allowed on the grounds that it comes too late. My reasons are set out in full below.
My findings and related rulings make it unnecessary for me to resolve the further issue as to whether the defendants are liable to pay Maureen the amount of the tax debt as a result of the operation of s 251M of the Income Tax Assessment Act whereby a liability can be attached to a registered agent in respect of negligent acts. However, for the sake of completeness, I find that for the reasons I have given earlier, which underpin a finding of negligence on the part of the defendants, I consider that the first plaintiff is entitled to relief also pursuant to the statutory provision I have just mentioned.
For the sake of completeness, I will make a further finding in response to par 27 of the statement of claim that the defendants were negligent in failing after 23 February to advise any of the plaintiffs as to the likely adverse implications of the deemed dividend provisions in circumstances where, in the course of preparing financial statements and income tax returns for the year ended 30 June 2000, the defendants were aware that Maucarmod had purchased the property utilising funds provided by Holdings. The failure to advise led to foreseeable loss being suffered in that the advances were treated as loans, not deemed dividends, and a distribution made to Maureen Carmody pursuant to that treatment which gave rise to the tax debt.
My primary finding makes it unnecessary for me to explore the facts and matters bearing upon these further findings at greater length. The rules against double recovery require that these findings be put to one side.
I must now deal at greater length with the proposed amendment to par 31 of the statement of defence.
Proposed amendment to statement of defence
It is apparent from the pleadings that the plaintiffs sought to establish a causative connection between the allegedly negligent breach of a duty of care owed by the defendants to Maureen Carmody or, alternatively, to the other plaintiffs. The plaintiffs would only become entitled to relief if it were established that Maureen Carmody was obliged to pay the tax debt including amounts in respect of penalty and interest. The plaintiffs' case proceeds from the premise that the distribution of income effected by the directors of the trustee company Maucarmod by a minute dated 30 June 2000, whereby the net income of the Trust for the year ended 30 June 2000 was to be distributed to Maureen Carmody entirely, gave rise to a binding assessment and a liability for income tax that had to be discharged by Maureen Carmody.
It was against this background that the plaintiffs alleged in par 31 of the statement of claim that by reason of the negligence of the first defendant, or alternatively the second defendant, Maureen Carmody became liable to pay the tax debt.
The defendants in par 31 of the statement of defence denied this allegation and therefore put the plaintiffs to proof that there was a causative link between the breach and the alleged loss. However, as matters stood at the commencement of the trial, the defendants did not seek to make out an affirmative case on the face of the pleadings that some other party was responsible for the tax debt or any portion of it.
The statement of claim contains a further allegation which bears upon this issue. It is pleaded in par 19 of the claim that the subject minute allocated all the net income of the family trust to Maureen for the year ended 30 June 2000 pursuant to a practice which had been annually applied from the financial year ended 30 June 1993. That plea was supported by certain particulars to the effect that the subject minute was provided to Mr Carmody by Mr Randall either by Randall posting the minute to Mr Carmody or by Randall presenting the minute to Mr Carmody for execution at the offices of Priestleys in or about August 2000; that is, after the financial year in question had ended.
Evidence presented to the Court at trial was consistent with the plea just mentioned. Under cross‑examination, Mr Carmody confirmed that the subject minute was signed by him at some stage after 30 June 2000 but before Mr Watson of Bird Cameron came into the matter.
This prompted counsel for the defendants to give consideration to another line of argument. In summary, the new line of argument was that as no valid distribution had been effected prior to 30 June 2000 the amount in question should have been treated as deemed income of the Trust for the tax year ended 30 June 2000 with the result that the loss (if any) allegedly sustained by Maureen Carmody was not caused by the defendants but by the failure of the trustees to distribute the income and by RSM Bird Cameron submitting an amended notice of assessment on behalf of Maureen Carmody instead of on behalf of the Trust.
In other words, putting it more simplistically (which is how I put it to counsel in the course of discussing the proposed amendment), the defendants were minded to contend that it was open to the plaintiffs and their advisers to persuade the Tax Office that the subject minute should be treated as a nullity with the result that the purported distribution to Maureen was ineffective. For ease of reference, I will henceforth call this the "defendants' proposed nullity plea".
It was against this background that counsel for the defendants, in the course of his closing address on the final day of the trial, applied to amend par 31 of the statement of defence in the terms of a minute dated 29 March 2005. The proposed nullity plea was set out at considerable length in sub‑paragraphs (a) to (k) of the 29 March minute in order to raise an affirmative case to the effect that there was a party other than Maureen Carmody who ought to have paid the tax debt referable to the deemed dividend.
When pressed, counsel acknowledged that, bearing in mind the plaintiffs' allegation in par 19 of the claim about the subject minute not being signed until August 2000, it would have been open to counsel to have formulated the proposed nullity plea before the trial commenced. Nonetheless, he contended that the amendment should be allowed pursuant to the precept that all matters properly and reasonably in controversy should be disposed of.
Counsel for the plaintiffs opposed the proposed amendment on the grounds that it came too late. This was not a case in which the pleadings were simply being adjusted to take account of some facet of the evidence that had emerged at trial. The defendants were seeking to raise an entirely new ground of defence of a kind which had to be raised as a specific affirmative plea. The defendants' proposed nullity plea could not be regarded as being encompassed by the broad denial of any causative link between the alleged breach of duty and the loss complained of set out in par 31 of the plaintiffs' statement of claim.
Counsel for the plaintiffs submitted further that if such a plea had been raised as a matter in issue on the pleadings at the commencement of the trial the plaintiffs might have presented evidence and cross‑examined in a different manner, bearing in mind that there was an assertion on the face of the claim, which was subsequently underpinned by evidence given at trial, that the subject minute was simply reflecting an existing pattern of distribution going back to 1993 whereby Trust income was generally distributed to Maureen Carmody. In other words, there was a prospect that the defendants' proposed nullity plea could be rebutted by matters other than the facts and matters surrounding the preparation and execution of the subject minute.
In the end, as appears in the transcript, I reserved my ruling upon the application to amend upon the basis that if the amendment was allowed I would hear from the parties again as to whether the trial should be adjourned to allow the plaintiffs to address any requirements or perceived injustice that might flow from the amendment being allowed in the circumstances I have described. Counsel for the parties recognised that a factor bearing upon allowance or refusal of the amendment was whether the outcome of the case was likely to turn upon the defendants' proposed nullity plea.
By O 21 r 5 of the Supreme Court Rules an amendment to the pleadings may be made with leave at any stage of the proceedings. The general rule is that a party should be allowed to make any necessary amendments so that all matters truly in controversy are determined with a view to bringing finality to the dispute.
An amendment may be made as a matter of discretion, even after evidence has been led. It should not be thought that principles of case management stand in the way of allowing amendments so that the true issues in controversy can be tried. The overriding principle is the attainment of justice: Finamore v Slater & Gordon (1994) 11 WAR 250; State of Queensland v JL Holdings Pty Ltd (1997) 189 CLR 146. Nevertheless, it is appropriate to refuse leave to amend, if to grant leave may bring about an injustice to the other party which cannot be compensated by an adjournment or an order for costs: Commonwealth of Australia v Verwayen (1990) 170 CLR 394.
It must be kept steadily in mind that pleadings play an essential part in civil actions in defining the issues to be dealt with at trial before the trial commences so that a party opposing the case is not taken by surprise. A trial is not at large, but deals with those issues joined by the pleadings: Water Board v Moustakas (1988) 180 CLR 491 at 496. However, if the proposed amendments are simply directed to straightening out a rather confused position that may have arisen at trial concerning the timing of certain events, then the Court can take account of the precept that prior to closure of its case, a party should be permitted to ensure that its pleadings conform to the evidence given at the trial: Leotta v Public Transport Commission (NSW) (1976) 50 ALJR 666 at 668.
It is generally more difficult for a party to obtain leave to make substantial amendments during a trial in the era of case flow management. It is open to the Court to respond to an application to amend brought at a late stage by giving weight to the case flow management approach as appears from Tony Sadler Pty Ltd v McLeod Nominees Pty Ltd (1994) 13 WAR 323 at 335 and 336.
Put shortly, it is in the public interest that litigation is disposed of efficiently, and with a view to maximising the economical use of judicial and administrative resources, bearing in mind that it is notorious that parties incur expenses in litigation which are not recoverable by way of party and party costs: Hall Chadwick Corporation Finance (WA) Pty Ltd v Axiom Properties Ltd [2002] WASC 179 per Pullin J at par 28 and par 29.
When I apply these principles to the proposed amendment in the circumstances of the present case I must begin by noting that, to my mind, this is not simply a situation in which the moving party sought to bring its pleading into conformity with evidence that emerged during the course of the trial. To my mind, this was a situation in which the defendants were seeking to raise an entirely new plea or line of argument which, as the minute dated 29 March 2005 clearly recognises, has to be pleaded specifically as an affirmative case so that the other party is not taken by surprise. It seems to me that it raised a significant matter which would oblige the opposing party to undertake a fresh and rather extensive round of factual enquiries in order to address the plea.
I feel obliged to give weight also to the fact that the defendants' proposed nullity plea is a matter which could have been identified as a prospective issue if the existing pleadings had been subjected to a very close analysis prior to the commencement of the trial. This should not be construed as a criticism of defence counsel because it is in the nature of the trial process that the implications of the pleadings only become fully apparent as the evidence emerges. However, now that I am faced with the application to amend, the decided cases oblige me to take account of the factor I have just mentioned in determining whether, in the case management era, the proposed amendment should be allowed. I accept that the proposed amendment is a matter of some importance because it emerges from my earlier findings that the plaintiffs have satisfied me that there was a negligent breach of the duty of care and thus it is necessary that there be a sufficient causative connection between the breach and the loss complained of.
At the end of the day, I have come to the conclusion that the proposed amendment should not be allowed. It comes late and raises an entirely new issue. The application could have been made prior to the commencement of the trial. Considerable delay, cost and inconvenience will arise if the amendment is allowed because I do consider that it will be necessary to allow the plaintiffs an adjournment in order to consider their position and, if necessary, to adduce further evidence bearing upon the circumstances in which the controversial distribution was made. Further, in circumstances in which the tax office has made and acted upon what appears to be a binding assessment, I cannot see that the outcome of the present case is likely to turn upon the plea in respect of which the amendment is sought.
Accordingly, for all these reasons, I am not persuaded that the amendment should be allowed and have ruled accordingly.
Summary
I find that the first plaintiff is entitled to damages against both defendants for breach of their duty of care in the sum of $80,254.91. Interest on the said amount of damages will be awarded to the first plaintiff calculated at the rate of 6 per cent pursuant to s 32 of the Supreme Court Act 1935 as at the date of payment of those moneys to the Australian Taxation Office on 17 December 2002. I will hear from the parties as to whether any further orders or directions are required and as to the costs of the action.
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