Geoffrey Holden & Marilyn Holden v Greater Western Financial Services Co PL No. Scciv-03-74

GEOFFREY HOLDEN AND MARILYN HOLDEN v GREATER WESTERN FINANCIAL SERVICES CO PTY LTD
[2003] SASC 83
Magistrates Appeal

DEBELLE J This is an appeal from a magistrate dismissing the plaintiffs’ claim for damages for negligent financial advice. The magistrate held that the plaintiffs had failed to prove that the defendant had not exercised due care and skill. The plaintiffs appeal from that decision.
In 1996 the plaintiffs were in receipt of the old age pension. On the death of his aunt in 1996, Mr Holden became the executor of her estate and a substantial beneficiary. In the same year, Mr Holden sought advice from the defendant for the purpose of arranging his and his wife’s financial affairs so that he could receive the benefits under the Will with as little adverse effect as possible upon their pension entitlements. The defendant gave advice. However, the plaintiffs’ pensions were stopped in the financial years ending 30 June 2001 and 30 June 2002. The plaintiffs alleged that was because the advice given by the defendant was incorrect. The defendant denied the allegations. It said that the advice was sound but that the plaintiffs did not properly act upon it.
It was common ground that a term of the contract between the plaintiffs and the defendant was that the defendant would exercise care and skill to ensure that the plaintiffs’ entitlement to the pension was affected as little as possible by the benefits Mr Holden received from his aunt’s estate.
The defendant gave advice through one of its employees, Mr Gordon. From the time he was first consulted in June 1996, Mr Gordon acted for the plaintiffs both as a taxation and financial planning adviser. In correspondence with Centrelink, he described himself as the “authorised representative” of the plaintiffs. They had signed an authority for him to act on their behalf in dealings with Centrelink. The advice was given orally at a series of meetings with the plaintiffs and, in particular, with Mr Holden. Mr Gordon did not reduce his advice to writing. Mr Gordon’s reasons for not giving written advice were quite unsatisfactory. Mr Gordon advised the Holdens to establish a family trust of which they were both the trustees and the beneficiaries. The Holdens established the trust on 12 June 1996. The Trust Deed was not proved. Mr Gordon also advised the plaintiffs to pay the benefits Mr Holden received under his aunt’s Will into the family trust. The plaintiffs did so.
The issues at the trial concerned the nature and content of the advice given by the defendant and whether the plaintiffs had acted upon it. The central issue concerned the character of the payments to the family trust, that is to say, whether they were gifts or loans. The plaintiffs say that they were advised to make gifts to the family trust. They also say that the defendant ought to have advised them to lend the money to the family trust so that drawings against the loan would not be treated by Centrelink as income and their pensions would not have been reduced. The payments to the trust were described as gifts. The plaintiffs drew on the funds in the trust. Centrelink deemed those drawings to be income and stopped the payment of the pension to both pensioners in both the financial years ending 30 June 2001 and 30 June 2002. The plaintiffs claim the pension entitlements lost by them in those two years.
In order to understand the issues, it is necessary to have an appreciation of the manner in which assessments of assets and income were made by Centrelink when determining whether pensions were payable and, if so, the amount of the pension. The methodology was described by Mr Shearer, a senior officer employed by Centrelink, and by Mr Gordon. It was common ground that, upon the establishment of the family trust, two options were available to the plaintiffs. The first was to make gifts to the trust of the benefits received under the Will. The other was to lend those benefits to the trust. If gifts were made, the gift was to be quarantined for a period of five years, in the sense that the trust should not pay any portion of that gift to the plaintiffs in that period of five years. If a payment were made, the payment would be treated as income. On expiry of the five year period, the trust could make payments to the plaintiffs without those payments being treated as income. If, instead, the funds were lent to the trust, the trust could make payments to the plaintiffs without those payments being treated as income. It was the defendant’s case that it advised the plaintiffs to implement a combination of gifts and loans.
This is a simplistic summary of the position. It must be noted that an assessment of deemed income would also be made on the asset represented by the moneys given or lent to the trust. As the parties have agreed the legal position, it is not necessary to set out the relevant provisions in the Social Security Act 1991 (Cth) on which the above summary is based. I simply mention s 8 which defines “income”, the definitions of “financial asset” and “deprived asset” in s 9, and s 1077. This does not purport to be an exhaustive examination of all of the necessary statutory provisions. The law has changed since 1 January 2002 so that it is no longer possible to engage in a scheme of the kind proposed by the defendant for the plaintiffs.
The plaintiffs’ gave evidence that Mr Holden paid the benefits he received from his aunt’s estate into the family trust and that at a later date Mr Gordon characterised those payments as gifts. The payments described as gifts and the date and the amount of each were as follows:
$10,000 on 3 September 1996,
$59,000 on 13 January 1997,
$60,000 on 3 June 1997, and
$10,000 on 22 September 1997.
The plaintiffs said that Mr Gordon informed Centrelink of the nature of the payments stating that they were gifts to the family trust. The plaintiffs’ evidence was that from time to time they drew on the funds in the family trust to meet living expenses without being aware that the drawings would be treated as income. They said that they did not consent to the payments being described as gifts and that Mr Gordon did not warn them against drawing on those gifts within the period of five years.
The plaintiffs’ assertion that they did not consent to the characterisation that the payments were gifts was not borne out by the evidence. Letters were produced by the plaintiffs as part of a bundle of documents marked “Exhibit P1” which included letters from Mr Gordon to Centrelink asserting that Mr Holden consented to payments being characterised as gifts. In addition, other payments to the trust were characterised as loans. The loans varied in amount. At 5 December 1996, the loans totalled $36,025.
Essentially, the plaintiffs’ case was that the defendant had been negligent in that it had not advised them that they should not withdraw funds from the payments gifted to the family trust. It was their withdrawal of funds from the moneys gifted to the trust which was the predominant cause for Centrelink to stop payment of pensions to the plaintiffs.
Mr Gordon’s evidence, which was accepted by the magistrate, was that he had advised the plaintiffs that the combination of loans and gifts to the family trust would assist in securing the highest pension possible in the circumstances, that he advised them that the gifts to the trust had to be quarantined for five years, and that they could draw on the loans at any time. He said that he had characterised particular payments to the trust as gifts as a result of a discussion with Mr Holden. The amounts of each gift were not based, he said, on any amount moved from one bank account to another or on figures in any bank statement. They were a composite of a series of transactions.
Mr Gordon also gave evidence that from January to June 1997, when he characterised the payments to the family trust as gifts, he understood that Mr Holden would receive further benefits from his aunt’s estate and, in particular, a parcel of shares and about $90,000 from the proceeds of the sale of a home unit. He said that he was not sure of exactly when these payments would be received. Mr Gordon did not say how he intended to treat the receipt of any further entitlements. It was implicit that the later payments would be treated as loans and he made that clear in cross-examination. It is to be noted that the evidence given by Mr Gordon fell far short of the defence as pleaded. What is notably absent from his evidence is any advice as to the amount which the plaintiffs could withdraw from their loan account in any one year and any evidence as to the appropriate amount to be characterised as gifts and the appropriate amount to be characterised as loans, having regard to the amount which the plaintiffs would require as living expenses. Plainly, the success of the scheme depended in part on whether the plaintiffs would have sufficient for living expenses. In this respect, it is relevant to refer to a file note made by Mr Gordon of a consultation on 17 June 1966 he had with the plaintiffs. That note contains no record of the amount required by the plaintiffs for living expenses. The only other file note of Mr Gordon which was tendered was made on 23 January 1997. That too has no record of what the plaintiffs might require for living expenses.
There are a number of conflicts between the evidence of the plaintiffs and Mr Gordon. The first concerns the characterisation of payments as gifts. There can be little doubt that Mr Holden, on behalf of the plaintiffs, authorised Mr Gordon to describe a number of payments as gifts and the magistrate so found. The effect of Mr Holden’s evidence was that he relied on Mr Gordon to make the characterisation. That evidence was confirmed both by the documents and by Mr Gordon’s evidence. What is not clear from the evidence is what was the state of Mr Holden’s knowledge when he gave that authorisation.
The evidence, therefore, clearly shows that it was Mr Gordon who characterised the payments to the family trust as either gifts or loans. The magistrate’s finding that Mr Holden consented to the characterisation of payments as gifts does not preclude a finding that the characterisation was made by Mr Gordon. The plaintiffs were, as the magistrate found, relying on the skills of Mr Gordon for their financial planning decisions. As Mr Holden said, he was on a “learning curve”. The plaintiffs had gone to Mr Gordon for assistance in an area which is relatively complex. He held himself out as the expert and they relied on his advice as to the payments to the family trust. Mr Holden accepted Mr Gordon’s advice and that some payments were characterised as gifts.
Another area of conflict is whether Mr Gordon advised the plaintiffs to characterise some payments to the family trust as loans. The magistrate found that Mr Gordon did advise that some payments should be characterised as loans. Her finding is borne out by the evidence. Some of those payments were described as loans.
However, the characterisation of the payments to the trust is not the only issue. The important question was whether the plaintiffs were aware of the reason for the distinction between gifts and loans and whether they were advised they could not draw against the funds gifted to the family trust. The magistrate found that Mr Gordon had given that advice.
The magistrate’s reasons are expressed in these terms:
“¹⁰ It appears from the evidence of both Mr. Gordon and Mr. Shearer that treatment of the monies in question as loans or gifts would not have altered the assessment by Centrelink. Notwithstanding the absence of almost all relevant supporting documents, I found the evidence of Mr. Gordon honest and believable. Where there is a conflict between the evidence of Mr. Holden and that of Mr. Gordon, I indicate that I prefer the evidence of Mr. Gordon. His advice to the plaintiffs was to treat the inheritance monies as partly gifts and partly loans to the family trust. I accept his evidence that the benefit of gifting was that after 5 years the gifts would not be treated as assets. In this context I note that it is not in dispute that the plaintiffs received the full aged pension as from June 2002. I further accept Mr. Gordon’s evidence that he advised the plaintiffs not to draw down on the amount of the gifts but rather to increase the amounts loaned to them by the trust for their living expenses.
¹¹ It may be that the plaintiffs either did not understand or appreciate this distinction. It may be that it was discussed early in the piece, that is to say in 1996, when their on-going expenses were limited. Again I note that the difficulties with the pension entitlements did not arise until 2001. It may be that they overlooked this advice due to stress or misunderstanding. I accept that Mr. Gordon became difficult to contact during 2000 because of the illness and subsequent death of his wife in July of that year. Lack of documentation and lack of communication have contributed to the result in question, but on the evidence before me I simply cannot be satisfied that the defendant failed to exercise due care and skill. Had the plaintiffs followed his advice then the assessment by Centrelink may well have been different.”
There is a significant flaw in this reasoning. It appears in the first sentence of para [10] of the magistrate’s reasons where she misstates the effect of the evidence. I have already mentioned the effect of the evidence of Mr Gordon and Mr Shearer. If the magistrate’s finding were correct, it would have been pointless for Mr Gordon to establish the scheme. Neither the plaintiffs nor the defendant contended for that position. Thus, the magistrate’s reasoning is grounded on an entirely false premise.
In addition, for the reasons which follow, the magistrate’s finding that Mr Gordon did advise the plaintiffs not to draw down on the amount of the gifts but rather to increase the amount lent to the trust and draw on those loans for their living expenses is inherently improbable.
Mr Holden’s evidence was that no such advice was given. When cross-examined on that topic, he again said that no such advice had been received, adding that his wife was present on 12 June 1996 when Mr Gordon had said they could draw from the family trust whenever funds were needed without making any distinction between drawing on funds gifted to the trust and funds lent to that trust. Mr Holden was not asked in cross-examination whether he was confusing withdrawals from the loans to the family trust with withdrawals from gifts to the trust. His evidence as to the content of the conversation was not challenged. Mrs Holden also gave evidence that on 12 June 1996 Mr Gordon had told both her husband and herself that they could withdraw money from the family trust whenever funds were needed. She also said that they were not advised as to the distinction between loans and gifts. Counsel for the defendant did not ask her one question in cross-examination. This was credible evidence given on a topic central to the issues in the action.
I do not say that the failure to cross-examine either Mr or Mrs Holden on the fact or content of the alleged conversation was a breach of the rule in Browne v Dunn (1894) 6 R 67, particularly as the parties had joined issue in the pleadings on the question whether Mr Gordon had given advice that drawings should not be made against payments gifted to the trust. However, the failure to cross-examine on a particular matter is, as a matter of commonsense, often a good reason for accepting the evidence of the witness on that matter unless the evidence is incredible or unconvincing, or it was contradicted by other evidence worthy of belief: Bulstrode v Trimble [1970] VR 840 at 848; Thomas v Van den Yssel (1976) 14 SASR 205 at 207; Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1 at 26. In this case, there is more than a mere failure to cross-examine on this topic. Mr Gordon had heard the evidence of the plaintiffs. However, in his evidence he did not deny the fact or content of the conversations related by both Mr and Mrs Holden. He did not in any sense address or contradict that conversation in his evidence. He made no more than a general statement that he advised the plaintiffs not to draw on the gifts and that he expected further payments out of the estate of Mr Holden’s aunt which would be lent to the trust from which drawings could be made. However, Mr Gordon did not have any particulars of the amount which Mr and Mrs Holden required for living expenses. The absence of cross-examination, the failure to deny the conversation, and the absence of any note of the living expenses required by Mr and Mrs Holden were all material issues when determining whose evidence should be accepted. In addition, while Mr Holden might have been confused on other issues, there is nothing which suggests that he was confused as to the content of this conversation. The question whether the conversation occurred was very material to the nature and content of Mr Gordon’s advice. The issue was not addressed in any sense by the magistrate.
To all of this must be added two very important factors which have the result that the magistrate’s conclusion is glaringly improbable. The first is, as the magistrate found, that the plaintiffs were on a learning curve and entirely reliant on the advice and assistance of Mr Gordon. They were in an area which was so unfamiliar to them that they required his advice. The second, and perhaps more significant, factor is that the scheme was pointless and futile if the plaintiffs made drawings against the gifts to the family trust. The scheme propounded by Mr Gordon depended on two key features. The first was characterising some payments to the trust as gifts and others as loans. The second was not drawing against the funds gifted to the trust for a period of five years from the date of the gift. The whole scheme was pointless if the plaintiffs withdrew from the funds gifted to the trust. Mr Holden is a retired scientist. It is apparent from his evidence that he has a degree of experience in financial matters. He was not a financial babe in the woods. It is highly unlikely that he would fail to follow advice central to the success of a scheme. The magistrate has failed to address these critical factors which point to the conclusion that the evidence of each plaintiff should have been accepted by the magistrate. More importantly, these two factors make the magistrate’s conclusion glaringly improbable so that this Court may interfere: DeVries v Australian National Railways Commission (1993) 177 CLR 472 at 479. For the reasons already expressed, I find that it was wrong.
I acknowledge the advantage the magistrate had in seeing the witnesses give evidence. The magistrate was critical of Mr Holden’s evidence, describing it as earnest but confused. She found the evidence of Mr Gordon to be honest and believable and preferred the evidence of Mr Gordon when it conflicted with Mr Holden’s evidence. I have read and re-read the transcript. For the reasons above, I believe her criticisms of Mr Holden are unjustifiably harsh. Her acceptance of Mr Gordon’s evidence does not sit well with one unsatisfactory part of his evidence which I identify in a moment and with the objective facts. More significantly, the magistrate’s findings as to credit do not materially assist in resolving a central issue in the action, namely, whether Mr Gordon advised the plaintiffs not to draw against the gifts to the family trust. Although Mr Gordon gave evidence that he did give that advice, his evidence was entirely inconsistent with the uncontroverted evidence of both Mr and Mrs Holden.
There is one other important aspect of the evidence which reinforces the conclusion that the magistrate was wrong in finding that Mr Gordon had advised the plaintiffs not to draw against the gifts to the trust. In 2000 and 2001 Mr Koo was the managing director of the defendant. After Centrelink had given notice to the plaintiffs in June 2001 that they were no longer entitled to the pension, the plaintiffs consulted the defendant. Mr Gordon was not then able to see them. The plaintiffs therefore consulted Mr Koo. Mr Koo corresponded with Centrelink on a number of occasions. On 17 April 2001 he wrote to Centrelink asserting that errors had been made in the accounting statements prepared by the defendant which had resulted in two payments to the trust of $59,000 and $60,000 being described as gifts. Both, he said, should have been described as loans. Not surprisingly, Centrelink was not prepared to allow the gifts to be reclassified as loans and informed both the plaintiffs and Mr Koo by letters dated 26 April 2001 that it had so decided. By letter to the plaintiffs dated 27 April 2001, Mr Koo informed the plaintiffs of the letter he had received from Centrelink. In the course of his letter to the plaintiffs, Mr Koo said:
“We refer to our recent meetings and the letter we forwarded to Centrelink regarding your pension and the Family Trust and their subsequent reply, a copy of which was forwarded to us.
In their letter to you dated 26^th April 2001, they state that they can not reverse the loan and are clearly not accepting the fact that we misinterpreted your instructions. We find this to be a most unbelievable situation and they appear to be totally ignoring this fact.” (Emphasis added.)
He then went on to advise of the capacity of the plaintiffs to appeal from the decision of Centrelink. The plaintiffs did not appeal against the decision. The reasons for not appealing were not explored in the evidence.

Mr Koo was not called. At the time of the trial he was no longer employed by the defendant. No other explanation for his failure to give evidence was provided. There was nothing to suggest that he could not have been called. Although the reference in the letter to the defendant misinterpreting the instructions of the plaintiffs must be read with the defendant’s letter to Centrelink of 17 April 2001, the reference requires explanation. Plainly, Mr Koo could have thrown some light on what he meant by the expression “we misinterpreted your instructions”. It is reasonable to infer, as the magistrate did, that any evidence from Mr Koo would not have assisted the defendant’s case.
The magistrate referred to this letter but placed no weight on it stating, in effect, that Mr Koo was endeavouring ex post facto to alter the arrangements to the advantage of the plaintiffs. She said:
“I note that, after some dissatisfaction with Mr. Gordon, the plaintiffs consulted Mr. Koo, who at that time was also a member of the defendant company for advice. Mr. Koo subsequently wrote to Centrelink (pp. 73-76 of Exhibit P1) attempting to change the description of the amounts in question from gifts to loans on the basis that the defendant had misinterpreted the instructions of the plaintiffs. I am satisfied that he did so to try and improve the position of the plaintiffs in claiming the pension. This was necessary because of the position they had got into by drawing down from the gifts to the trust (the trust capital) rather than from their loan accounts with the trust. However, as previously stated, I am satisfied that the plaintiffs had been given advice by Mr. Gordon of the defendant company about the need to draw down from the loans and not from the gifts. Mr. Gordon’s evidence was that he did not agree with the contents of Mr. Koo’s letter and I accept that evidence. I find that the plaintiffs simply either did not remember or did not understand Mr. Gordon’s advice and its consequences. When they attempted to follow up this issue in 2000, Mr. Gordon was not available for the reasons already outlined.”
While I agree with the magistrate that Mr Koo was endeavouring to extricate the plaintiffs ex post facto from the consequences of drawing on the gifts rather than the loan account, the balance of her reasoning is flawed for the reasons which have already been given.
The expression “we misinterpreted your instructions” certainly called for an explanation. In the absence of explanation, it is reasonable to conclude that it refers at least to Mr Gordon not having a full appreciation of the amount the plaintiffs required for living expenses and the timing of the benefits Mr Holden was to receive under his aunt’s will. It may refer also to the fact that too much had been characterised as gifts and too little as loans so that there was an inadequate sum to provide for living expenses in a way which would least affect the entitlement to pensions. It is reasonable to infer that, if the expression “we misinterpreted your instructions” had an innocent explanation, it would have been given by Mr Koo. The failure of the defendant to call Mr Koo justifies the conclusion that the defendant did misinterpret the plaintiffs’ instructions in some way.
Mr Gordon’s evidence that he understood that Mr Holden was to receive further entitlements under his aunt’s will and that those entitlements were to be transferred to the family trust as loans does not assist the defendant. There are at least two reasons for that conclusion. First, Mr Gordon’s own evidence indicates that he did not know when the entitlements would be received. It is clear that the plaintiffs wanted to ensure that they had sufficient for living expenses. Secondly, Mr Gordon did not know how much Mr Holden would receive as further benefits under his aunt’s will. He gave evidence that Mr Holden was to receive a total of about $300,000. However, that evidence is entirely inconsistent with a note made by Mr Gordon on 19 June 2001 at a meeting with the plaintiffs when he recorded that Mr Holden’s anticipated benefits under the will would amount to $200,000. Mr Gordon could not satisfactorily explain the difference between his evidence and the effect of his note in June 2001. This is one of the unsatisfactory aspects of Mr Gordon’s evidence.
The magistrate held that advice from a properly qualified and experienced financial planner was necessary to prove that Mr Gordon had been negligent. That financial planner, she said, would have examined the allocation of loans and gifts advised by Mr Gordon and have given evidence whether they should have been differently characterised in order to preserve pension entitlements. She relied on the following observations of Kirby P in Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541 at 556:
“To decide what a reasonably careful insurance broker would have done in particular circumstances, it is normally necessary that expert evidence be given upon the basis of which the court may reach its conclusion.”
The above is but one of a series of principles stated by Kirby P when discussing what must be established to prove that an insurance broker had acted negligently. In the very next paragraph he said:
“However, where the default of the broker relied upon by the insured is so rudimentary and obvious, expert evidence of broker practice will not be necessary. The rudimentary failure of a broker to take a step which was obviously necessary and prudent will entitle the court to reach its own conclusion of negligence.”
In this action, the question on which the parties joined issue was the content of the advice and whether an important part of that advice, namely, the warning to draw against the gifts to the family trust was given to the plaintiffs. Although there was a dispute as to the content of the advice, that issue was resolved in favour of the defendant. That left the issue whether the plaintiffs were advised not to draw against the gifts to the family trust. For the reasons already given, that advice was central to the success of the scheme. Without it, there was no point in proceeding with the scheme. It does not require evidence from another financial planner to establish that the failure to give advice of such a fundamental and rudimentary kind was negligent. It was so obviously necessary for the success of the scheme that the court is able to conclude whether or not a failure to give such advice was negligent.
For these reasons, this appeal must be allowed and the magistrate’s decision that the defendant was not negligent must be set aside. In place of that decision, I find that the defendant acted negligently in failing to advise or in failing adequately to advise the plaintiffs that they should not draw from the gifts to the family trust.
The plaintiffs have proved the loss suffered by them. Each plaintiff lost $4,113 in the financial year ending 30 June 2000 and $2,522 in the financial year ending 30 June 2001. Each plaintiff is therefore entitled to an award of $6,635 damages, that is to say, the plaintiffs will recover a total award of $13,270. I will hear the parties as to interest and costs.

[2003] SASC 83

20 March 2003