Leda Pty Ltd v Weerden (No 2) - [2006] NSWSC 125

No judgment structure available for this case.

Reported Decision:
62 ATR 100

New South Wales

Supreme Court

CITATION: Leda Pty Ltd & Anor v Weerden (No 2) [2006] NSWSC 125
This decision has been amended. Please see the end of the judgment for a list of the amendments.

HEARING DATE(S): 06/02/06, 07/02/06, 08/02/06, 09/02/06

JUDGMENT DATE :
10 March 2006

JUDGMENT OF: Gzell J

DECISION: Tax adviser negligent in failing to qualify advice but conduct not a material cause of loss or damage. Not liable to damages in negligence or under the Fair Trading Act 1987, s 68.

CATCHWORDS: TORTS - Negligence - General Matters - Purchase of shares in unitholder and trustee of trust with carry-forward tax losses and capital profit on sale of hotel - Whether tax adviser's letter constituted advice that carry-forward losses were available to offset future assessable income in the trust - Whether advice without qualification negligent - Whether client aware of the matters the subject of reasonable qualifications - Sophisticated client aware of risk of future offset being set aside under the Income Tax Assessment Act 1936 (Cth), Pt IVA - Purchase of tax losses bargained to 6 cents in the dollar when tax rate 39% - Significance of vendors' warranty that tax losses available to offset future income and solicitor's advice that they and the tax adviser could be sued if losses not available for offset - Commissioner of Taxation subsequently assesses capital gain on sale of hotel as on revenue account and tax losses are absorbed - Whether negligence of tax adviser a material cause of the loss or damage - Whether tax adviser liable to damages in negligence or under the Fair Trading Act 1987, s 68

LEGISLATION CITED: Income Tax Assessment Act 1936 (Cth)
Taxation Administration Act 1953 (Cth)
Fair Trading Act 1987
Corporations Act 2001 (Cth)
Trade Practices Act 1974 (Cth)
Taxation Administrative Act 1953 (Cth)

CASES CITED: Rogers v Whitaker (1992) 175 CLR 479
Pech v Tilgals 94 ATC 4206
Allen v Tobias (1958) 98 CLR 367
Grant v Sun Shipping Co Ltd [1948] AC 549
March v Stramare (E & MH) Pty Ltd (1990-1991) 171 CLR 506
Medlin v State Government Insurance Commission (1994-1995) 182 CLR 1
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640

PARTIES: Leda Pty Ltd - Plaintiff
John Weerden - Defendant/Cross Claimant
Leisure Management Pty Ltd - Cross Defendant

FILE NUMBER(S): SC 3503/05

COUNSEL:
Mr F Douglas QC/ Mr M Dicker - Plaintiffs/Cross Defendant
Mr B McClintock SC/ Mr R McHugh - Defendant/Cross Claimant

SOLICITORS: Paul Bard Solicitors
Blake Dawson Waldron Solicitors

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

GZELL J

FRIDAY 10 MARCH 2006

3503/05 LEDA PTY LTD & ANOR v JOHN WEERDEN (NO 2)

JUDGMENT

The acquisition of the Leisure Trust

1 Leisure Management Pty Ltd was the trustee of a unit trust called the Leisure Developments Trust. It acquired land at Surfers Paradise in Queensland before 20 September 1985. It constructed a hotel and managed it. In so doing it generated losses of approximately $39 million. It sold the hotel in March 1988 and retained the management rights.

2 In April or May 1991 the plaintiff, Leda Pty Ltd, began to investigate the prospect of acquiring the Leisure Trust. By then Leisure Management held a unit, office and shop relating to a bowling club.

3 The proposal was for Leda to acquire the shares in Leisure Management and the shares in Leisure Developments (Queensland) Pty Ltd which owned all the units in the Leisure Trust.

4 Leda was entitled to units in the Tuggeranong Town Centre Trust that had constructed a shopping centre in Canberra. It was poised to make a large profit assessable to income tax. It was proposed that some of its entitlement to those units be transferred to the Leisure Trust so that net income of the Tuggeranong Trust could be distributed to the Leisure Trust to off-set its tax losses.

5 The Income Tax Assessment Act 1936 (Cth) contained anti-avoidance measures with respect to transfers of tax losses. Section 80A, as it then stood, required a continuity of beneficial ownership of more than 50% of the shares in a loss company from the year of incurrence of the loss to the year a claim to deduct the loss was made under s 80(1) or s 79E. Section 80E provided that if that test was not satisfied, the company had to carry on the same business before and after the change in beneficial ownership if the losses were to constitute a deduction. Neither of those requirements, however, then applied to trusts.

6 Losses incurred before the end of the year ended 30 June 1989 could only be carried forward to offset assessable income in the seven years following the incurrence of the loss under the Income Tax Assessment Act 1936 (Cth), s 80(2).

7 There were, however, general anti-avoidance provisions in the Income Tax Assessment Act 1936 (Cth), Pt IVA. Under s 177F(1) the Commissioner of Taxation had a discretion to cancel a tax benefit. That concept was defined in s 177C(1), relevantly for present purposes, as a deduction being allowable where the whole or part of it would not have been allowable, or might reasonably be expected not to have been allowable, if a scheme had not been entered into or carried out. Section 177D provided that Pt IVA applied to any scheme where, having regard to eight specified matters, it would be concluded that one of the persons who entered into or carried out the scheme or any part of it, did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme. Purpose was defined in s 177A(5). It provided that a reference to a scheme being entered into or carried out for a particular purpose should be read as including a reference to the scheme, or part of it, being entered into or carried out for two or more purposes of which that particular purpose was the dominant one.

Price Waterhouse’s retainer

8 The defendant, John Weerden, was a partner of Price Waterhouse, chartered accountants, and was sued as the representative of that firm. He had given advice to Leda in the past. He was retained to give advice with respect to the proposed acquisition of the shares of Leisure Developments and Leisure Management. He provided a letter of 6 June 1991. Leda claims that it relied on that letter and purchased the shares in July 1991. It attributed the bulk of the purchase price to the tax losses at 6 cents in the dollar amounting to approximately $2.38 million.

The profit on sale of the hotel

9 Price Waterhouse had been retained to prepare the accounts and tax returns of the Leisure Trust in the period when the hotel was sold. That sale generated a profit of over $45 million. That profit was not subject to capital gains tax because the Income Tax Assessment Act 1936 (Cth), s 160L(1)(b) restricted the operation of those provisions to disposals of property acquired on or after 20 September 1985. Price Waterhouse treated the profit as on capital account in the Leisure Trust income tax return.

10 In the years that followed, there was no cause to set-off any of the losses in the Leisure Trust against assessable income of the trust.

11 In 1988, the Income Tax Assessment Act 1936 (Cth), s 25A(1) applied to property acquired before 20 September 1985. It provided that the assessable income of a taxpayer should include profit arising from the sale by the taxpayer of any property acquired by it for the purpose of profit-making by sale or from the carrying on or carrying out of any profit-making undertaking or scheme.

The Commissioner’s assessment

12 In August 1993, the Commissioner of Taxation issued a position paper claiming that the profit on sale of the hotel constituted assessable income under the Income Tax Assessment Act 1936 (Cth), s 25A(1). Amended notices of assessment issued that exhausted the tax losses by setting them off against the profit on sale of the hotel. From adverse decisions on its notices of objection, Leisure Management applied to the Administrative Appeals Tribunal for a review of the decisions of the Commissioner under the Taxation Administration Act 1953 (Cth), s 14ZZ(a)(i) as it then stood. The Tribunal upheld the Commissioner’s amended assessments on the basis that at least one of the intentions of the former directors of Leisure Developments and Leisure Management, Richard Tweedy Holt and Richard John Graham, was to construct the hotel for the purpose of resale.

The issues

13 Leda claims that Mr Weerden’s letter of 6 June 1991 was negligently prepared and was misleading or deceptive. It claimed damages including damages under the Fair Trading Act 1987, s 68 quantified as the difference between the purchase price of the shares and the proceeds of sale of the assets of the Leisure Trust plus the costs of objecting to the amended assessments and the costs of the proceedings in the Administrative Appeals Tribunal.

14 Mr Weerden claims that he was not retained to give an opinion on the availability of tax losses as prospective deductions to the Leisure Trust, and he did not give such advice. He denies that the letter was misleading or deceptive and he denies that Leda relied upon the letter in entering into the agreement for purchase of the shares.

15 If, contrary to his primary submission, Mr Weerden was negligent, he claims that Leda was contributorily negligent. He also alleges that any claim under the Fair Trading Act 1987 is statue barred. Mr Weerden also claims that in incurring costs in objecting to the amended assessments and applying to the Administrative Appeals Tribunal for review, Leda failed to mitigate its losses. Further, Mr Weerden claims that he and the other partners of Price Waterhouse acted honestly and ought to be excused from any liability under the Corporations Act 2001 (Cth), s 1318.

16 Mr Weerden filed a cross-claim against Leisure Management alleging that it failed to inform him of its intention to develop the hotel for sale. Mr Weerden argues that in so doing, Leisure Management engaged in conduct in trade or commerce that was misleading or deceptive or likely to mislead or deceive in contravention of the Trade Practices Act 1974 (Cth), s 52. He seeks damages and an order under s 87(1A) that he and Price Waterhouse be indemnified against any liability to Leda.

17 By its defence, Leisure Management alleges that it was an implied term of Price Waterhouse’s retainer that it should exercise reasonable care to ensure that it had full and complete instructions on all relevant matters and, in breach of that term, it did not ask all necessary questions to ensure that it had such knowledge. Leisure Management also pleaded that any claim under the Trade Practices Act 1974 (Cth) was statute barred.

The lead-up to the letter of 6 June 1991

18 In about April 1991, Stephen John Robinson, the financial controller of Leda, had a conversation with Mr Weerden who said he had spoken to Peter Maletz, a partner of his at the Gold Coast, who had confirmed that the Leisure Trust had tax losses of about $40 million and that Price Waterhouse had done all the accounting and tax work for the trust.

19 On 14 May 1991, Leda wrote to Mr Weerden outlining a proposal for the purchase of the Leisure Trust and the appropriation of net income of the Tuggeranong Trust to it to offset tax losses of approximately $39 million. Mr Weerden was asked to comment on the tax consequences of the purchase in general and was asked to advise specifically on the possible impact of the Income Tax Assessment Act 1936 (Cth), Pt IVA and on alternatives to the proposed structure.

20 On 23 May 1991, Mr Robinson reported to William Robert Ell, the executive chairman of Leda, on the proposal including the verbal advice from Price Waterhouse.

21 On 27 May 1991, Mr Robinson sent a facsimile to Mr Weerden stating that the purchase of Leisure Developments was “on hold” until Leda had received written advice from him. Mr Robinson said there were two crucial points to be addressed: “Do the losses exist and are they available for use by Leda?” Mr Robinson said that the final terms of the deal had not been determined. The facsimile went on to describe alternative approaches and stated that Leda acknowledged the need to continue the business of the Leisure Trust although Mr Ell was looking for a way to minimize his financial exposure. The letter concluded with the words: “Do you have any suggestions?”

22 On 28 May 1991, Mr Robinson gave Mr Weerden explicit instructions on the opinion Leda sought from him:

(i) Leisure Developments Trust

23 Mr Weerden telephoned Mr Robinson and told him that he could not say whether the tax losses were available without conducting a due diligence review. Mr Weerden then wrote to Raymond Phillip Fazzolari, the finance director of Leda, on 29 May 1991 reiterating that he could not give an opinion on the availability of the tax losses without conducting a due diligence exercise. He referred to Mr Robinson’s letter and said:

24 Mr Weerden and Mr Robinson had a telephone conversation in which Mr Robinson said that Mr Ell refused to pay for a due diligence review since Price Waterhouse had already done the work. Mr Robinson said this conversation occurred before Mr Weerden’s letter of 6 June 1991. He said Mr Weerden responded that he would have to speak to Mr Maletz about the tax losses and then reply to Mr Robinson’s letter.

25 Mr Weerden said the conversation occurred after he sent his letter of 6 June 1991 while he was still awaiting instructions to carry out the due diligence exercise and he responded that he could not confirm the deductibility of the losses without due diligence as he knew nothing of the financial affairs of the Leisure Trust and Price Waterhouse had not already done the work. It was Peat Marwick who were Mr Holt’s advisers outside the construction period of the hotel and he would not sign off on the matter without a due diligence review. Mr Weerden said he had no further contact with Leda about the matter after this conversation.

26 For reasons that appear later in this judgment, I do not have to resolve this issue.

The letter of 6 June 1991

27 Having referred to Mr Robinson’s letter of 28 May 1991 and Mr Weerden’s response of 29 May 1991, the letter stated that Mr Weerden was able to answer some of the questions more fully, and he did so:

28 The attached letter of Mr Maletz contained the following:

Year ended 30 June 1986	7,569,490
Year ended 30 June 1987	25,003,814
Year ended 30 June 1988	7,094,729

29 To return to the letter of 6 June 1991, Mr Weerden went on to deal with point 3 of Mr Robinson’s letter and then point 5 of that letter. No mention was made of point 4 of the letter.

30 Having mentioned that the specific anti-avoidance provisions with respect to transfers of carry-forward losses in the IncomeTax Assessment Act 1936 (Cth) as it then stood applied only to companies, Mr Weerden went on to discuss the general anti-avoidance provisions in Pt IVA. Mr Weerden warned:

“The commerciality of the acquisition of units in LDT as an investment by the Leda Group should be obvious so as not to run the risk of the Commissioner forming an opinion that Leda entered into the transaction to avail themselves of tax losses shown to be available in LDT.”

31 The letter then went on to deal with point 7 of Mr Robinson’s letter, mentioning again the possible application of the Income Tax Assessment Act 1936, Pt IVA. It then concluded:

Did Mr Weerden advise on deductibility?

32 Kenneth Aubrey Traill and Edgar Martin Baltins, chartered accountants, prepared reports on whether Mr Weerden acted as a reasonably competent taxation adviser, acting in accordance with professional standards at the time, in providing the letter of 6 June 1991. Much of the reports contained the accountants’ views of the proper construction of the correspondence. Those opinions stand outside the expertise of these gentlemen and I have ignored them.

33 It was submitted on Mr Weerden’s behalf that the letter did not give advice on the deductibility of the carry-forward losses of the Leisure Trust when income was introduced to it from the Tuggeranong Trust. It was pointed out that the letter did not refer to point 4 of Mr Robinson’s letter of 28 May 1991. But nor did it refer to points 6 and 8 of Mr Robinson’s letter.

34 It was submitted that point 6 had been categorically considered in Mr Weerden’s letter of 29 May 1991 and with respect to point 8, he had there said that the major obstacle to the proposed transaction was the Income Tax Assessment Act 1936 (Cth), Pt IVA.

35 It was submitted that the attached letter of Mr Maletz of 4 June 1991 was advice to the directors of Leisure Management and not advice to Leda. But Mr Weerden’s attachment of the letter and his reference to it in his letter of 6 June 1991 made it part of his advice to Leda.

36 It was submitted that when Mr Weerden said of Mr Maletz’ letter that it: “details by loss year the quantum of losses” and “The total carried forward losses as shown in the 30 June 1990 income tax return for LDT is $39,668,033”, Mr Weerden was merely stating the amount and year of the losses claimed in the Leisure Trust’s income tax returns.

37 It was submitted that the letter of 6 June 1991 emphasised that Mr Weerden was not giving an opinion confirming the deductibility of the tax losses when he again referred to Mr Maletz’ letter and said: “As mentioned in that letter, losses that the Commissioner accepts as available to be carried forward may only be carried forward for seven years”. It was submitted that the words: “For example, should the Commissioner accept the $7,569,490 of losses incurred during the year ended 30 June 1986” made it quite clear that the question whether the Commissioner of Taxation would accept the losses as deductions was unresolved. But a statement that the Commissioner had not ruled on the deductibility of the losses is not inconsistent with an expression of opinion by Mr Weerden that the losses would be deductible.

38 It was submitted that Mr Maletz’ letter of 4 June 1991 could not be interpreted as stating an opinion about the existence or deductibility of the losses. The letter said that the income tax returns of the trust showed specified losses in specified years. But the letter went on to say that the losses could be carried forward for seven years from the year of incurrence: “and offset against future income of the Trust during that period.”

39 Furthermore, in referring to Mr Maletz’ letter, Mr Weerden said:

“This letter details by loss year the quantum of losses shown to be available to be carried forward to offset against LDT’s future assessable income. The total carried forward losses as shown in the 30 June 1990 income tax return for LDT is $39,668,033.”

40 In my opinion that paragraph is to be construed as the expression of opinion by Mr Weerden that the losses were available to be carried forward to offset the Leisure Trust’s future assessable income.

41 It was argued that this construction was not open because Mr Weerden had said he needed to conduct a due diligence review, he had not done so and when he wrote his letter he was still awaiting instructions to carry out that due diligence. But there is no mention of due diligence in the letter of 6 June 1991. It says that the questions raised by Mr Robinson may be more fully answered following Mr Weerden’s discussion with Mr Maletz. The inference to be drawn is that Mr Weerden had abandoned his requirement for due diligence before expressing his opinion on the deductibility of the carry-forward losses.

42 And the absence of specific reference to point 4 of Mr Robinson’s requests is explicable on the basis that, having expressed the view that the losses were available to be carried forward to offset future income, there was no need to address point 4 specifically. It sought an opinion as to the deductibility of the losses against future income. Mr Weerden had already expressed his opinion on that issue in his answers to points 1 and 2.

Was the opinion qualified?

43 Mr Weerden’s letter of 6 June 1991 contained a qualification that deductibility of the tax losses against future income might not be available if the Commissioner invoked the Income Tax Assessment Act 1936 (Cth), Pt IVA. But it contained no other qualification. It did not contain a qualification that due diligence was a prerequisite to any opinion on the deductibility of the carry-forward losses against future income. It did not contain any specific statement that the Commissioner had not ruled on the deductibility and the qualification that he might not accept the losses as deductible. It did not state that it was essential to analyse the nature of the profit on sale of the hotel, because if it were on revenue account, the tax losses would have been absorbed.

44 If Mr Weerden was still waiting for instructions to carry out due diligence he should, at the very least, have included a warning in the letter of 6 June 1991 that he was expressing no opinion on the deductibility of the carry-forward losses pending his carrying out of a due diligence review.

The duty of care

45 Professionals are expected to exercise a standard of care that may reasonably be expected of practitioners practising in the relevant area of expertise. Thus in Rogers v Whitaker (1992) 175 CLR 479 at 483 the High Court said:

“The law imposes on a medical practitioner 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.”

46 In Pech v Tilgals 94 ATC 4206 at 4211, Dunford J said:

“As a person holding himself out as possessing professional skill as an accountant and tax agent the defendant was bound to exercise the skill and diligence of a reasonably competent and careful practitioner in that profession.”

The views of the experts

47 Mr Traill expressed the view that Mr Weerden’s advice of 6 June 1991 should have referred to a number of issues. First, the fact that the availability of tax losses in the Leisure Trust was dependent on the profit realised on the sale of the hotel being categorised as a capital profit and being accepted by the Commissioner of Taxation as such. Secondly, that the treatment of the profit on sale of the hotel as a capital profit depended on the Commissioner conducting a tax audit of the tax return of the Leisure Trust and accepting that the subjective intentions of the directors of Leisure Management were to hold the hotel as a long-term investment. Thirdly, that there was, or might be, some doubt that the Commissioner would accept that the stated intentions of the directors of Leisure Management were to hold the asset as a long-term investment, because the hotel was sold within two years of the completion of the development. Fourthly, to the extent to which the Commissioner disallowed the treatment of the profit from the sale of the hotel as a capital profit, it would be treated as an assessable gain on revenue account and reduce the quantum of the available tax losses. Finally, if the Commissioner disallowed the treatment of the profit as a capital profit, the only redress against the decision of the Commissioner was to object against that decision and then, if the objection was disallowed by the Commissioner, to appeal to either the Administrative Appeals Tribunal or the Federal Court of Australia against the Commissioner’s decision.

48 Mr Traill said that the absence of qualification in relation to the carry-forward losses was inconsistent with what he considered that a reasonably competent taxation adviser, acting in accordance with good professional standards applicable at that time, would have included in the letter.

49 Mr Traill based this opinion upon assumptions he was asked to make. They were that Mr Weerden was aware that notices of assessment had not issued to Leisure Management, that the hotel was sold for a substantial capital profit approximately equal to the revenue losses, and that the hotel was sold within two years of the completion of its development.

50 Mr Baltins took the view that Leda’s refusal to instruct Mr Weerden to carry out a due diligence review meant that Mr Weerden was not obliged to give any tax opinion. Mr Baltins took the view that Mr Weerden gave no advice in the letter of 6 June 1991 and, in consequence, there was no need to qualify it, particularly as on the assumptions he was asked to make, Mr Weerden was unaware of the matters assumed by Mr Traill. For example, Mr Baltins said that a reasonably competent taxation adviser would not have warned a sophisticated client like Leda that the Commissioner of Taxation had not accepted the carry-forward losses if he was unaware of the Commissioner’s views and was not aware of any tax audit.

51 In a subsequent report, Mr Traill said that if Mr Weerden was not aware of the matters he had been asked to assume, it would have been appropriate to carry out a due diligence review and since that had not been approved, it was even more appropriate to qualify the advice suitably in the letter of 6 June 1991.

The extent of Mr Weerden’s knowledge

52 There was a conflict in the evidence as to the extent of Mr Weerden’s knowledge of the matters assumed by Mr Traill. On 20 October 1987 Mr Weerden signed a memorandum headed Kumagai Gumi Company - Holiday Inn Project - Leisure Developments Queensland Trust. The memorandum stated that the Leisure Trust had incurred tax losses arising from interest during construction, investment allowance and operating and pre-opening expenses of about $45 million as at 30 June 1987. It stated that the cost of construction of the hotel at that date was about $81 million and as a consequence of the sale to be made for about $125 million, the Leisure Trust would make a capital profit on sale of about $44 million. The memorandum continued:

“This profit is not, in our view, taxable, because the hotel was acquired by the Trust before capital gains tax commenced (19 September 1985). Further, it would be argued that the profit is also not taxable, because the Trust did not buy the hotel for resale at a profit, but as an asset of a business to be carried on by it.”

53 The memorandum went on to state that the profit on sale, not being taxable, would not use up the tax losses, except with respect to depreciation on plant and equipment and claims for investment allowance. Accordingly, the memorandum noted that after the sale of the project, the Leisure Trust would have remaining in it substantial tax losses that could be carried forward for up to seven years. The memorandum noted that a change in all or part of the ownership of the Leisure Trust to Kumagai would not cause the tax losses to be lost because there were no tests applied to trusts such as continuing ownership or the same business:

“As a result, the Trust could earn income or profits from any source (such as interest) and use up the tax losses in the trust, without paying tax and without generating any taxable income which would otherwise be taxable to unit holders.”

54 Mr Weerden said that the memorandum summarised information given to him by Mr Maletz in a telephone conversation. It was a proposal Mr Maletz was developing and they were workshopping the idea. Mr Weerden said he had no recollection of the document when he swore his affidavit but since reading the document, he had a very clear idea of its origin.

55 Mr Maletz gave evidence that he had a conversation with Mr Weerden that precipitated the memorandum being sent to him in the Brisbane office and he had no role as to the figures contained in the document and that Mr Weerden must have prepared the memorandum from various bits of information that he had at his disposal.

56 Were it necessary for me to resolve this issue, I would prefer the evidence of Mr Maletz and reject Mr Weerden’s evidence of the origin of the memorandum as unconscious reconstruction on his part. Mr Maletz was a forthright witness and I see no reason to reject his evidence. On the other hand, Mr Weerden had little recollection of the correspondence and conversations and only recalled the document and its origin during cross-examination.

Breach of Duty

57 The terms of Mr Weerden’s letter of 29 May 1991 make it clear that he did not regard it as part of his retainer to advise on the deductibility of the carry-forward tax losses in the absence of a due diligence review. However, Mr Weerden chose to write his letter of 6 June 1991 in the absence of due diligence containing, as I have found, advice on the issue of deductibility. Having elected to take that course, Mr Weerden was bound to exercise the degree of care and skill required of the competent accountant and tax adviser.

58 In my view, it does not matter whether Mr Weerden was aware of the issues referred to by Mr Traill or not. If he was, I accept Mr Traill’s opinion that he was duty bound to warn Leda of the problems. If he was not, and was ignorant of the circumstances in which the carry-forward losses had arisen and the hotel had been sold, it was even more important for him to qualify any opinion that the losses were available for deduction against future income of the Leisure Trust.

59 In my view, in writing the letter of 6 June 1991 without the advantage of due diligence and without expressly qualifying his statement that the quantum of losses shown in the tax returns were available to be carried forward to offset future assessable income of the Leisure Trust, Mr Weerden failed to meet the standard of a prudent and reasonable taxation adviser.

The timing of the rejection of the request for due diligence

60 As I have indicated, this finding means that it is unnecessary for me to determine when the conversation between Mr Weerden and Mr Robinson, to the effect that Mr Ell would not pay for due diligence, took place. Had it been necessary for me to resolve that issue, however, I would have preferred the evidence of Mr Robinson.

61 Mr Robinson last worked for Leda at the end of 1993 and had no real interest in the proceedings. His version of the conversation with Mr Weerden, that he said took place soon after he received Mr Weerden’s letter of 29 May 1991, was to the effect:

“I got your letter. Bob says there’s no way he’s going to pay Price Waterhouse $10,000 to do a due diligence on the tax losses because your firm did the audit on Leisure and have already been paid for that work. Bob cannot understand why you need to do a due diligence: you’ve already done the work and there is no reason to repeat that work. That is why Bob wants your sign off: he wants you to confirm the value of the tax losses and the availability of them to Leda or he won’t proceed.”

62 Mr Robinson said Mr Weerden responded that he would have to speak to Peter Maletz about the tax losses and then reply to the letter.

63 Mr Robinson was taken to task because, in cross-examination, he said he discussed with Mr Weerden ways round the due diligence issue on the basis that Mr Maletz would provide a letter certifying that the losses were there but he had made no mention of this in his affidavit.

64 When Mr Robinson left Leda, he made a hand written note on 1 December 1993. That note confirmed what Mr Robinson said in cross-examination. It contained the following:

65 Mr Robinson went on to say that most correspondence and work papers were shredded due to their tax implications. The evidence did not identify who ordered the shredding. That was a discreditable act that usually gives rise to the strongest possible presumption that if the documents were produced they would have told against the party who destroyed them (Allen v Tobias (1958) 98 CLR 367 at 375). But that rule depends upon the content of the destroyed documents. In this case the material documents relating to Mr Weerden’s advice were before the court. And while Mr Robinson’s complicity in the destruction does not aid his credibility, it does not alter the fact that the diary note is consistent with Mr Robinson’s version of the conversation with Mr Weerden and its timing and inconsistent with Mr Weerden’s version.

66 Mr Weerden’s lack of recollection of conversations is understandable since the events in question took place in 1991. But that lack of recollection contrasted with his adamant assertion that the conversation with Mr Robinson in which he was informed that Mr Ell refused to pay for due diligence took place after 6 June 1991. His recollection that this was so may well be due to unconscious reconstruction.

67 The facts that Mr Weerden did contact Mr Maletz and Mr Maletz did write his letter of 4 June 1991 are consistent with Mr Robinson’s version of events. And Mr Weerden’s opening comments in his letter of 6 June 1991 are consistent with the compromise to which Mr Robinson referred, a comprise that abandoned Mr Weerden’s insistence upon due diligence and replaced it with reliance upon Mr Maletz’ letter:

“We refer to Steve Robinson’s letter of 28 May 1991 and our response of 29 May 1991. We are now able to more fully answer some of the matters raised in Steve’s 28 May letter after further discussions with yourself and Peter Maletz of Price Waterhouse Brisbane.”

Causation

68 There is no doubt that Leda regarded Mr Weerden’s advice as significant. On the day after the letter was sent, Price Waterhouse was thanked for its advice and was asked for further information about the possibility, if debts of the Leisure Trust were released, of claiming a deduction under the Income Tax Assessment Act 1936 (Cth), s 70B(2) upon a disposal of a traditional security.

69 In Mr Robinson’s memorandum of 15 July 1991, the day before the settlement, it was stated that Mr Weerden had reviewed the original documentation and had agreed to all subsequent changes and all their advice, including advice on the existence and use of the tax losses was on file.

70 But it does not necessarily follow that, but for Mr Weerden’s advice, the transaction would not have gone ahead. Leda was not an unsophisticated taxpayer. It was Mr Fazzolari who put to Mr Weerden a detailed proposal for the acquisition of Leisure Developments and Leisure Management and changes to the structure of the Tuggeranong Trust to assign to the Leisure Trust the right to at least 60.75% of the profits to be offset against the losses of approximately $39 million in the Leisure Trust in his letter of 14 May 1991. That letter sought Mr Weerden’s comments on a number of issues including the possible impact of the Income Tax Assessment Act 1936 (Cth), Pt IVA. Leda’s executives were well aware of the danger that Pt IVA posed and they, no doubt, used that risk in negotiating the figure of 6 cents in the dollar for the tax losses. The rate of tax for a private company in 1991 was 39% (Income Tax Rates Act 1986 (Cth), s 23(3)(a)). The huge discount that Leda was able to achieve reflected the high degree of risk that the carry-forward losses would not be available as a deduction against Tuggeranong assessable income.

71 Furthermore, each of Messrs Ell, Fazzolari and Robinson was aware that a profit on sale of property acquired prior to the introduction of capital gains tax was included in assessable income if the property was acquired for the purpose of profit-making by sale or from the carrying on or carrying out of any profit-making undertaking or scheme. Mr Ell had been told by Mr Holt that Leisure Management’s purpose in developing the hotel was to hold it for the long term. Mr Fazzolari had a similar understanding. He said he was aware that there would be an issue as to the tax treatment of the profit on sale of the hotel: “It was an issue we needed to understand. That is why we engaged Mr Weerden”. Leda was not ignorant of the risk that the Commissioner of Taxation might treat the profit on sale of the hotel as on revenue account. Senior executives had made their own enquiries from Mr Holt.

72 Furthermore, most of the matters that Mr Traill said ought to have been raised by way of warning in the letter of 6 June 1991 were already known to Mr Ell and Mr Fazzolari. Each of them set forth five matters that they said, had they been advised of any of them, Leda would not have acquired the shares.

73 First, it was said that had Mr Weerden advised that there was some doubt that the profits realised from the sale of the hotel were treated, properly, as capital profits, the share acquisition would not have proceeded. Mr Fazzolari said he knew in 1991 that this issue would arise if the matter came before a tribunal and it was one of the matters that would have been addressed by Mr Weerden in due diligence. When the proposition was put to Mr Ell that he was aware of the problem, he evaded the question with the answer: “We had no advice that they were not properly treated.”

74 The second matter was the failure to advise that it was unlikely that the Commissioner of Taxation would decide whether to allow the revenue losses and the treatment of profits from the sale of the hotel as capital profits until revenue losses were relied upon as deductions by the Leisure Trust. Mr Fazzolari conceded that he was aware of this issue. Mr Ell said: “We knew possibly, yeah.”

75 The third issue was that the availability of the revenue losses was dependent upon the Commissioner of Taxation accepting that the profit on sale of the hotel was on capital account. Mr Ell was aware of this issue prior to completion and Mr Fazzolari was aware of the issue in May and June of 1991.

76 The fourth matter, that was raised by Mr Ell alone, was that Price Waterhouse, in treating the profit on sale of the hotel on capital account, had relied on the subjective intentions of the previous directors of Leisure Developments, Messrs Holt and Graham, as advised to Price Waterhouse. Mr Ell agreed that prior to completion he knew that the proper treatment of the profit depended upon the subjective intentions of Messrs Holt and Graham.

77 The fifth matter was whether the profit on sale of the hotel was treated properly depended upon a tribunal accepting the credibility of the evidence of Messrs Holt and Graham, as to their subjective intentions at the time of the development. Both Mr Ell and Mr Fazzolari agreed that they were aware of this matter prior to completion.

78 The sixth matter, raised by Mr Fazzolari alone, was that Mr Weerden failed to advise that the Commissioner of Taxation had not accepted the tax losses. But Mr Fazzolari was aware that there had been no ruling by the Commissioner about the deductibility of the losses.

79 The assertions of Mr Ell and Mr Fazzolari that, had any of these matters been raised in Mr Weerden’s advice, the purchase of the shares would not have taken place, are self-serving. The fact that they were aware of the matters to which they complained Mr Weerden had not adverted, suggests, strongly, that his raising of these risks would have had no effect on Leda’s ultimate decision. Leda was aware of the risks and went ahead.

80 Furthermore, Leda sought advice from Mallesons Stephens Jacques in May 1991 on the proposal having regard to, amongst other things, indemnities to be obtained by Leda in respect of the liabilities of Leisure Developments and the Leisure Trust and the deductibility of the losses being purchased. A warranty was included in the share sale agreement, and Mallesons commented in July 1991:

“I note that your main concern is the effect of a breach of the warranty with respect to the amount of carry forward tax losses in LDQPL and in the Trust. I would confirm that if this warranty is breached, then Leda would be entitled to claim as damages an amount equal to the loss it suffers as a consequence of that breach of warranty.”

81 And Mr Robinson had sought advice from Mallesons before settlement on the prospect of suing Price Waterhouse. Mr Robinson conceded that it was one outcome.

82 Mr Robinson’s memorandum of 15 July 1991, the day before settlement, noted that the vendors’ warranties included that the tax losses carried forward amounted to over $39 million for the Leisure Trust and over $2 million for Leisure Developments and Leisure Management. The longest entry in the memorandum was under the heading Tax Losses and was as follows:

83 The common law, common sense test of causation, accepts that negligent conduct may be causally connected to resultant loss or damage if it materially contributes to that result, even if other factors have contributed to the loss or damage. (Grant v Sun Shipping Co Ltd [1948] AC 549 at 563, Bonnington Castings Ltd v Wardlaw [1956] AC 613 at 620, Gould v Vaggelas (1983-1985) 157 CLR 215 at 236, 250-251, March v Stramare (E & MH) Pty Ltd (1990-1991) 171 CLR 506 at 512-513, Medlin v State Government Insurance Commission (1994-1995) 182 CLR 1 at 7, Henville v Walker (2001) 206 CLR 459 at [60], [97], [106]).

84 But in this case, I do not see Mr Weerden’s failures in his advice as having materially contributed to Leda’s loss. Leda had the unqualified advice of Mr Weerden but they also had vendors’ warranties and they had advice that they could sue the vendors and Price Waterhouse if the losses were not available to be offset against assessable income of the Tuggeranong Trust. And Leda was aware of the risks it said Mr Weerden failed to bring to its attention and went ahead despite the alleged shortcomings in his advice. Even if it could be said, and I doubt that it could, that Mr Weerden’s failures played some part in the losses suffered by Leda, they were trifling. They could not, in my view, be regarded as material.

85 In my judgment Leda has failed to establish that Mr Weerden’s breach of duty was a material cause of any loss or damage it sustained.

Damages

86 It follows from what I have said that I am of the view that Leda is not entitled to damages in negligence.

The alternative cause of action

87 Leda also claimed that in failing to qualify his advice of 6 June 1991, Mr Weerden, in trade or commerce, engaged in conduct that was misleading or deceptive or likely to mislead or deceive contrary to the Fair Trading Act 1987, s 42.

88 It follows from what I have said that I do not need to determine whether the unqualified advice of Mr Weerden was likely to mislead or deceive, because Leda did not suffer loss or damage by that conduct and is not entitled to damages under the Fair Trading Act 1987, s 68. Leda did not rely upon the advice. Nor need I determine whether Leda’s claim was statute barred.

Other issues

89 It was alleged that Leda was contributorily neglect in failing to instruct Mr Weerden to carry out the due diligence review. It is unnecessary for me to deal with that issue.

90 Likewise, it is unnecessary for me to deal with the issue of the way in which Leda claimed damages. Leda argued that but for Mr Weerden’s advice it would not have purchased the shares and, in consequence, the proper measure of damages was the purchase price of the shares together with the cost of proceedings before the Administrative Appeals Tribunal less the proceeds of sale of the assets acquired in the transaction in reliance upon HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640.

91 In order to obtain the evidence of the former directors of Leisure Developments in the prosecution of its review before the Administrative Appeals Tribunal, Leda released them from the warranty. It was argued that in so doing, Leda failed to mitigate its loss. That, too, is a matter that I need not decide.

92 The Corporations Act 2001 (Cth), s 1318 empowers the court in certain circumstances to relieve a person from liability for negligence. I need not consider whether that power should be invoked in this case, because I have found that Mr Weerden is not liable to Leda in negligence.

The cross-claim

93 It is unnecessary for me to deal with the issue under the Trade Practices Act 1974 (Cth), s 52 raised in the cross-claim because it was predicated upon liability in Mr Weerden which I have found did not exist. It is unnecessary to decide whether relief under s 87 was statute barred.

Conclusion

94 In my view, Mr Weerden was negligent in giving the advice contained in his letter of 6 June 1991. I am of the view, however, that his advice was not a material cause of any loss or damage sustained by Leda and he is not liable to Leda in negligence or under the Fair Trading Act 1987, s 68.

95 I will dismiss the further amended statement of claim and I will dismiss the amended cross claim. I will hear the parties on costs.

96 I direct the parties to bring in short minutes of orders reflecting these reasons.

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30/03/2006 - To give judgment number - Paragraph(s) Judgment Titles

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Citations

Leda Pty Ltd v Weerden (No 2) [2006] NSWSC 125

Cases Citing This Decision

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Cases Cited

5

Statutory Material Cited

6

Astley v AusTrust Ltd [1999] HCA 6

Allen v Tobias [1958] HCA 13

CITATION:	Leda Pty Ltd & Anor v Weerden (No 2) [2006] NSWSC 125 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	06/02/06, 07/02/06, 08/02/06, 09/02/06
JUDGMENT DATE :	10 March 2006
JUDGMENT OF:	Gzell J
DECISION:	Tax adviser negligent in failing to qualify advice but conduct not a material cause of loss or damage. Not liable to damages in negligence or under the Fair Trading Act 1987, s 68.
CATCHWORDS:	TORTS - Negligence - General Matters - Purchase of shares in unitholder and trustee of trust with carry-forward tax losses and capital profit on sale of hotel - Whether tax adviser's letter constituted advice that carry-forward losses were available to offset future assessable income in the trust - Whether advice without qualification negligent - Whether client aware of the matters the subject of reasonable qualifications - Sophisticated client aware of risk of future offset being set aside under the Income Tax Assessment Act 1936 (Cth), Pt IVA - Purchase of tax losses bargained to 6 cents in the dollar when tax rate 39% - Significance of vendors' warranty that tax losses available to offset future income and solicitor's advice that they and the tax adviser could be sued if losses not available for offset - Commissioner of Taxation subsequently assesses capital gain on sale of hotel as on revenue account and tax losses are absorbed - Whether negligence of tax adviser a material cause of the loss or damage - Whether tax adviser liable to damages in negligence or under the Fair Trading Act 1987, s 68
LEGISLATION CITED:	Income Tax Assessment Act 1936 (Cth) Taxation Administration Act 1953 (Cth) Fair Trading Act 1987 Corporations Act 2001 (Cth) Trade Practices Act 1974 (Cth) Taxation Administrative Act 1953 (Cth)
CASES CITED:	Rogers v Whitaker (1992) 175 CLR 479 Pech v Tilgals 94 ATC 4206 Allen v Tobias (1958) 98 CLR 367 Grant v Sun Shipping Co Ltd [1948] AC 549 March v Stramare (E & MH) Pty Ltd (1990-1991) 171 CLR 506 Medlin v State Government Insurance Commission (1994-1995) 182 CLR 1 HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640
PARTIES:	Leda Pty Ltd - Plaintiff John Weerden - Defendant/Cross Claimant Leisure Management Pty Ltd - Cross Defendant
FILE NUMBER(S):	SC 3503/05
COUNSEL:	Mr F Douglas QC/ Mr M Dicker - Plaintiffs/Cross Defendant Mr B McClintock SC/ Mr R McHugh - Defendant/Cross Claimant
SOLICITORS:	Paul Bard Solicitors Blake Dawson Waldron Solicitors