Mills v Fordham Business Advisors Pty Ltd
[2012] VCC 1716
•30 November 2012
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE CIVIL DIVISION | Revised |
COMMERCIAL LIST
GENERAL DIVISION
Case No. CI-12-00395
| ROBERT EVERARD MILLS & ORS | Plaintiffs |
| v | |
| FORDHAM BUSINESS ADVISORS PTY LTD (ACN 140 981 853) | Defendant |
---
JUDGE: | HER HONOUR JUDGE KENNEDY | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 25, 26, 29, 30 and 31 October and 1, 7 and 8 November 2012 | |
DATE OF JUDGMENT: | 30 November 2012 | |
CASE MAY BE CITED AS: | Mills & Ors v Fordham Business Advisors Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2012] VCC 1716 | |
REASONS FOR JUDGMENT
---
Catchwords: Claim against accountant – whether breach of duty of care by reason of failure to warn of risk that ATO would disallow claim to small business concession and/or by reason of failure to advise plaintiffs to seek a private ruling – whether any breach caused loss in any event – comments on damages claimed
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr D. V. Aghion | Sackville Wilks Pty Ltd |
| For the Defendant | Mr F. O’Loughlin | TressCox Lawyers |
HER HONOUR:
1 This proceeding concerns a claim brought by Mr Mills, Mrs Mills and Mills Family Holdings Pty Ltd as then trustee of the Mills Family Trust (Mills Family Group). The claim is in respect of advice given by the defendant accounting firm in 2006, which firm was then known as “Grant Thornton”.
2 In opening, Counsel for the plaintiffs conceded that the advice given represented a reasonably arguable position. Further although various matters were pleaded, the case proceeded on the basis that the issues were defined by reference to those set out in a “Joint Issues Statement”, dated 24 October 2012.
3 Counsel are to be congratulated for containing the case in this way.
4 It was not in contention that the defendant owed a duty of care to the plaintiffs. However, the plaintiffs alleged a breach of the duty of care by reason of an omission, namely, by an alleged “failure to warn” of the risks that the Australian Taxation Office would disallow a claim to the small business concession (“SBC”), and a failure to advise the plaintiffs to seek a private ruling.
5 The SBC provides taxpayers with relief from capital gains tax on the sale of a small business in certain circumstances if their net assets are less than $5 million.
6 The plaintiffs claim that they transferred property and lost the opportunity to sell their family business for a higher price in order to gain eligibility for the SBC.[1] They also claim penalties/interest and advisor fees.[2]
[1]The intention being that the Mills Family Trust as owner of the business, would receive the capital gain on the sale of the Mills Display business and claim the SBC, and Mr Mills as a beneficiary of the trust would receive a distribution of the taxable amount (Joint Issues Statement at footnote 1)
[2]The alleged loss was:
·(a) CGT and stamp duty on properties transferred to Mrs Mills $153,477
·(b) Sale proceeds (first tranche) $279,259
·(c) Sale proceeds (second tranche) $431.728
·(d) Penalties and interest $ 89,614
·(e) Advisor fees $ 92,014
7 There were issues as to causation and loss, but the primary issue for the court was whether there had been a breach of the duty of care, as follows:
a.Did Grant Thornton give an adequate warning of the risk that the ATO would disallow the claim to the SBC?
b.Should Grant Thornton have advised the plaintiffs to seek a private ruling as to eligibility for the SBC?[3]
[3] Closing Submissions on Behalf of the Plaintiff (Plaintiff’s Closing Submissions) para 2.
8 Before examining these issues, a significant issue between the parties was what exactly was the advice, and how was it structured. In particular, there was some conflict in the evidence as to what transpired at a meeting which occurred on 4 April 2006.
9 However, in order to analyse this, a reasonably detailed understanding of the background facts is necessary.
Background
Preliminary
10 In 1985, Mr Robert Mills commenced a business then known as Robert Mills & Associates from premises at Glen Iris. The business later became known as Mills Display Pty Ltd, the directors and shareholder being both Mr Robert Mills and his wife, Jennifer. Mills Display was the trustee of the discretionary trust, the Mills Family Trust.
11 Mills Display sold display products to retailers, including to supermarkets. By 2005 to 2006, Mills Display had about 70 employees with annual turnover of about $11 million, gross profit around $4.5 million and net profit of about $1.4 million.
12 During 2004, Mr Mills was approached by a major competitor, Sydney Point of Sale (SPOS), to discuss the purchase of Mills Display. Mr Mills then engaged Benjamin King Money (BKM), an accounting and financial planning firm, to represent him at discussions concerning a possible sale.
13 However, the evidence of Mr Mills was that he ended discussions with SPOS in March 2005, after realising that he would not be able to work in a public company.
14 BKM thereafter had a number of “interested parties”, but Mr Mills said that none of these discussions “materialised into anything”.
15 Then, by letter dated 23 September 2005, Mr Green of Styrox Pty Ltd forwarded correspondence stating he would be “… extremely keen to be considered as a potential buyer”. However, Mr Mills delayed responding to Mr Green because he wanted to terminate arrangements with BKM first.
Contact with Grant Thornton
16 In late 2005, Mr Mills attended a seminar held by Grant Thornton.
17 The copy of the brochure/slides and handouts indicates that a range of “exit strategy” issues were discussed for business owners. Further, although the application of the SBC was discussed, it was the subject of only (part of) one out of approximately 30 slides.
18 The Mills later attended a meeting in 19 December 2005 with Mr Sutherland and Mr Alp of Grant Thornton. There were general discussions at that meeting wherein Mr Mills outlined the general structure of his business. Although Mr Green was identified as a potential suitor for the business, the evidence of Mr Sutherland was that a number of other matters were discussed. These included that the Mills had limited wealth in superannuation with debt at both business and personal levels. Mr Sutherland’s evidence was that the structure they had in place did not “protect their wealth”.[4]
[4]Witness Statement of Michael Sutherland dated 18 October 2012 at para 7.
19 Mr Mills then committed to a planning session in early 2006 which included 2 half day workshops on 31 January 2006, and 2 February 2006 .
20 A “strategy plan” document was produced as a result of the discussions which took place at the workshops. That plan identified both strengths and weaknesses relating to Mills Display. It further identified “critical issues” as including estate planning and that both Robert and Jenny were directors (with properties owned jointly; exposure to risk; and that they were not using a super fund as their primary investment vehicle).
21 The concluding “action plan” identified issues as including the “sale of business”, as well as “asset protection & estate planning”. In terms of the sale of the business, the aim was expressed as being “[t]o exit the business for fair value”. There was no reference to the SBC.
22 The action plan suggested any offers were to be directed to Grant Thornton. However, the evidence of Mr Sutherland was that it was also discussed that Mr Mills approach Mr Green indicating that, although Mr Mills was working on improving the business, any offer would be considered. There is a file note of 20 February 2006 which confirms that Mr Mills had such a meeting with Daniel Green who would be “putting in an offer.”
Offer to sell business
23 Then by email of 1 March, 2006, Mr Green of Styrox made an offer to purchase Mills Display for four times earnings before interest, taxes, depreciation, and amortization (“EBITDA”) in two tranches (of 50% each) over two years, with Mr Mills to remain in control as Managing Director. This was followed up by an email from Mr Green of 8 March.
24 Following this offer there was a further meeting between the Mills and Grant Thornton on 15 March. The diary note suggests information/documents were being chased up, such as the members statement for the superfund. There is no reference to the SBC.
25 Grant Thornton also wrote a letter to Joe Canny, the accountants of the Mills family group, dated 16 March, noting Grant Thornton had been approached “to act as advisers for the proposed sale… and also to undertake a tax review of the Mills family structure”, and inquiring whether there were any professional matters they should be aware of before deciding whether or not to accept the appointment.
26 Following receipt of documents, the evidence of Mr Sutherland is that Grant Thornton commenced to “scope” the assignment and to make initial findings which would inform the terms of a retainer and an estimate of fees.
27 An internal memorandum of 22 March thus documents “initial findings” relating to the Mills family group from an “… asset protection, succession planning and taxation perspective”. In terms of asset protection, the document cites that properties were in personal names with both Mills being directors of the trading entity.
28 In terms of tax issues, it was noted that properties should be moved “…to more tax effective vehicle–superfund…” However, the oral evidence of Mr Sutherland was that, although their intention was to transfer all properties into super at this time, this later became “derailed” as a result of budget night on 8 May, such that it was no longer appropriate to transfer the residential properties to the super fund.
29 A mention was made of the SBC in the 22 March document. Thus, in terms of “actions” said to be required they included to “[a]ssess whether small business concession may be available”.
30 During March to May 2006, Mr and Mrs Mills attended a number of meetings with Mr Sutherland and his assistant, Kate Rogers, to discuss the offer and the sale process. Critically, a meeting occurred on 4 April 2006, which is the subject of some controversy and which will be discussed further below.
31 By “engagement letter” of 5 April 2006, Grant Thornton submitted a fee estimate to the Mills for consulting services, which included five particular matters, namely, retirement strategy advice; small business concessions advice; business sales structure advice; business sales, coordinate sale process; and estate planning.
32 In terms of the SBC component, the letter of retainer records the proposed consulting services as a:
Detailed review of the small business concessions and consideration as to whether Mills Display Pty Ltd is eligible to access these concessions and prepare written advice [at a fee estimate of $6000]
33 The Mills executed this correspondence acknowledging that it was in accordance with their “understanding of the arrangements” on 20 April, 2006.
34 On Friday, 7 April, Mr Green forwarded an email to Mr Mills which reads as follows:
Hi Robert,
Seeing Michael spoke to me on Wednesday indicating we were in agreement on the sale price for the business, I wanted to write to you to say how pleased I am that we will be working together. I am extremely glad to be buying into such an excellent company.
35 Agreement on sale price [of EBITDA four] was, therefore, reached by about 5 April.
36 Work thereafter took place in relation to what the EBITDA actually was. Around this time, a deed of confidentiality was also executed by Mr Green and Mr Mills in relation to the proposed sale, so that Mr Green could undertake his due diligence in contemplation of the proposed sale.
37 There then followed 2 advices.
Formal advices up to sale of business
38 By written advice dated 11 May 2006, Grant Thornton provided a letter of advice entitled “Retirement Strategy”. That advice provided taxation advice in relation to the transfer of investment assets into the superannuation fund.
39 The letter contained a disclaimer which relevantly read as follows:
The analysis contained in this letter is based upon applying the current legislation, judicial authorities and Commissioner’s rulings to the facts and circumstances as noted. However, it must be recognised that there is no guarantee that such implications will last into the future and/or that the Commissioner may hold a different view as to how such authorities should be interpreted (“the relevant disclaimer”).
40 By letter of advice of 12 May 2006, Grant Thornton provided a further letter of advice entitled “ASSET PROTECTION – MILLS FAMILY GROUP”.
41 That letter indicated that the advice related to the risks with the current office holdings; the appointers of discretionary trusts in the family group; and investment assets held in personal names.
42 This letter recommended that Jenny Mills should immediately resign as director of Mills Display Pty Ltd, being a trustee of a trading trust.
43 In terms of “asset protection” the letter also stated that:
Given that Robert is likely to continue as a director of Mills Display Pty Ltd, we recommend the transfer of Robert’s 50% share of these residential investment properties to Jenny Mills.
Subsequent to Jenny’s resignation as a director of Mills Display Pty Ltd and removal of Jenny from providing a personal guarantee in relation to borrowings by the business… the overall business risk of Mills Display to the Mills family assets should be reduced.
44 No relevant disclaimer was contained in this advice.
45 During the financial year ended 30 June 2006, the investment properties were transferred to the superannuation fund. The residential properties were also transferred to Mrs Mills. The transfers were effected by Harwood Andrews.
46 The evidence of Mr Mills was that, on 1 July 2006, he sold the first half of Mills Display to Styrox. He recalls that the sale date was meant to be 30 June but for some reason he cannot recall, the sale was delayed by one day.
47 The evidence of Mr Sutherland was that the sale agreement document was actually executed on 5 July 2006, but with an “effective date” of 1 July 2006.
48 Then by letter of advice of 1 July 2006 Grant Thornton provided a letter of advice entitled “Capital Gains Tax (“CGT”) Small Business Concessions”. That letter included the following:
We have reviewed your position in relation to the above test. The results of our preliminary review are outlined in Appendix 1 and are indicative only. We are unable to confirm that this threshold will be satisfied until we review and recalculate your position based on financial information available at the time of the business sale. Please advise us when this information is available.
However, based on our preliminary review, you should satisfy this requirement (emphasis added).
49 The letter also included the relevant disclaimer as indicated above.
50 In his evidence, Mr Sutherland explained that they would be unable to confirm whether the $5 million threshold would be satisfied until they were able to review and re-calculate the information based on the net asset values at the time of the sale of the business.
51 By email of 3 July 2006 Kate Rogers suggested a meeting to explain the CGT Small Business Concession Advice.
52 However, there is no diary note recording that any such suggestion was taken up.
Post Sale of Business
53 By email from Kate Rogers of Grant Thornton to Mr Mills of 29 August 2006, some updated calculations were provided which indicated that the net value was within the $5m limit, though subject to “finalised financial[s]”.
54 However, that email also noted that several clients were “currently under ATO review” in relation to use of the SBC, and suggested responses be prepared in relation to an ATO questionnaire.
55 There was no response to this email from Mr Mills.
56 Ms Rogers sent a further request for information on 6 September in order to “…finalise the small business concession calculations and ATO documentation folder…”
57 Then, by correspondence of 14 March 2007, a further advice was provided in relation to SBC. This advice included the following:
We have reviewed your position in relation to the above test. The results of our review are outlined in Appendix 1 and are based on information that you have provided.
Based on our review, we advise that you satisfy the maximum net asset test as the net assets included in the test sum to less than $5m as at 1 July 2006.
58 That letter of advice also contained the relevant disclaimer.
59 Mr Mills then claimed SBC on the first half of the sale on his 2006/2007 tax return.
60 On 1 July 2008, the remaining 50% of the partnership interest was sold.
61 By email from Mr Sutherland of 23 June 2009, Mr Sutherland advised that Mr Mills was not eligible for SBC for the sale of the second half of the business. Mr Mills then sent an email expressing disappointment on 9 July 2009.
62 The response of Mr Sutherland of 3 August 2009 then followed, which was relied on by the plaintiffs and will be referred to, below.
63 Then, on 11 August 2009, Mr Mills received a letter from the ATO stating that their preliminary analysis indicated that they may not have met the maximum net asset test. This was apparently because the residential assets transferred to Mrs Mills had to be taken into account.
64 A notice of amended assessment was issued in respect of the year ended 30 June 2007, dated 25 November 2010, which, inter alia, imposed a penalty of $120,674.30 by reason of a shortfall amount of tax.
65 Mr Mills later retained Daniel Smedley of Harwood Andrews who lodged an objection with the ATO, which objection was disallowed.
66 A proceeding was then commenced in the AAT.
67 On 14 July 2011, the ATO made an offer to settle the AAT proceeding by remitting some of the penalties by 80% from $120,674.30 to $24,110.90; to further remit the interest charge from $86,028.74 to $66,981.25; and for allowance of mature age worker tax offset of $479.20.
68 Mr Smedley recommended that the offer was “…an appropriate basis to settle the current dispute”, in an email of 19 July 2011, which advice was accepted by the Mills.
69 By orders dated 3 August 2011, the AAT then made orders setting aside the decision, and in substitution deciding that, for the year ended 30 June 2007 in respect of the notice of assessment of shortfall penalty issued on 25 November 2010:
a) the tax shortfall penalty of $120,674.30 will be remitted by 80% to $24,110.90;
b) the proceedings have terminated in a manner favourable to the Applicant.
Witnesses
70 The plaintiffs called Mr and Mrs Mills. They also called Mr Green who was the Director of Styroxmills Pty Ltd, purchaser of the Mills Display business; and Mr Farley, (director Sydney Point of Sale). They also called their accountant, Mr Canny, and a tax lawyer, Mr Young.
71 The defendant called Mr Sutherland, partner of Grant Thornton (now Fordhams) and Mr Kokkinos (a chartered accounting expert).
72 An order had been made that this case proceed by way of witness statements.[5] However, both parties were permitted to adduce oral evidence in examination of chief of the critical conversations which allegedly occurred in April 2006.
[5]Order of His Honour Judge Lacava dated 26 September 2012.
73 I did not find Mr and Mrs Mills to be impressive witnesses. Their recollection of events was poor, and they were unable to give clear evidence about pivotal events.
74 Although this may be explained by the effluxion of time, they appeared, at times, to be intent on giving evidence that favoured their case, rather than providing reliable and accurate testimony.
75 For example, Mr Mills gave evidence that Mr Sutherland told him to “ignore” correspondence from the ATO. I did not find this evidence credible. It was also against the objective evidence. For example, in the email dated 19 August 2009, from Fordhams to Mr Canny, Fordhams stated that Mr Sutherland would mention the ATO notice to Mr Mills, and that it needed to be discussed, as there was a chance he would be selected for a full audit. The work timesheet entries also indicated that Grant Thornton did substantial work in the event of an ATO review.
76 The plaintiffs were also prepared to criticise Mr Sutherland and alleged he had given “certain” or “ironclad” advice. This despite the fact that, as will be seen below, their recollections were very poor in relation to what was actually said.
77 Mrs Mills was also inclined to maintain a position, namely, that properties were transferred “to access the SBC” despite the fact that she “did not remember” a lot of other matters surrounding the transaction. This was also despite the fact that the effect of her evidence was that she had been prepared to participate in the transfer of assets in order to access a tax benefit, while permitting her accountant to articulate a completely different explanation for such transfer.
78 By way of contrast, I found Mr Sutherland to be an impressive, straightforward witness.
79 Not only did he present as a reliable witness, he also made concessions where appropriate. Thus, for example, he accepted that if he did not have a file note of a particular conversation he was not able to recall it clearly.
80 The evidence of all witnesses was affected given the effluxion of time. In such circumstances, I have had regard to the objective evidence where appropriate, to resolve any factual matters.
81 However, to the extent there is a divergence in testimony, I generally preferred the evidence of Mr Sutherland.
Breach
82 Prior to resolving the question of breach, it is important to resolve what actually occurred on 4 April.
Events of 4 April
Mr Mills
83 In his witness statement Mr Mills said that Mr Sutherland told him that in order to access the SBC he would need to divest his property assets.[6] In oral evidence he said that Mr Sutherland proposed a “strategy” for two commercial properties to be transferred into the super fund and that they could transfer 6 residential properties into Jennifer’s name.
[6]Witness Statement of Robert Everard Mills dated 18 October 2012 at para 31.
84 In his witness statement Mr Mills also alleged that during March to May 2006 Mr Sutherland provided calculations to him which suggested that, after transferring the properties out of his name, that he would come just under the $5 m threshold. He further alleged that “Mr Sutherland’s calculations showed that it immediately became counter-productive to negotiate a higher price with Mr Green.”[7]
[7]Witness Statement of Robert Everard Mills dated 18 October 2012 at para 32.
85 In oral evidence he described this such that Mr Sutherland “showed” him he would need to sell the business for no more than 4 times the earnings multiple to come in under the $5m. This was done by one of those electronic whiteboards and there were “numbers flying around everywhere…” There was discussion about “getting under this threshold of $5m, so that if the sale value was too high, that that would take me over the $5m threshold and, therefore, would be counterproductive”.
86 Mr Mills further said that he asked about the “strength” of what Mr Sutherland was telling him about the SBC in a meeting (more than once), using words like “adventurous” or “courageous”. His evidence was then as follows:
I can’t remember the exact answer, but he conveyed to me that the advice was certain. I think he mentioned the word “iron cast”, “iron” or “iron clad”, or something of that nature. It was a very - it was a certain strategy.
87 However, when asked what Mr Sutherland said his response was “I can’t remember exactly what he said. It was six years ago… I can’t remember specifically, but I think “iron clad” was the thing that I seem to remember, but I couldn’t swear to that…”
88 Under cross examination Mr Mills conceded that nowhere in the calculations provided was there an indication of a sale of only 50% of the business (as was ultimately the case). Further, that the final sale value of the business was not determined until after 30 June 2006 (because the performance of the business from March to June needed to be determined).
89 He also alleged that his recollections were “very specific” on the discussions they had with Grant Thornton, and that their advice was “very specific” and “unequivocal” that they would access the small business concession.
90 However he did not have a recollection of the dates and places of meetings, and did not have specific recollections of specific statements on specific dates in some cases, noting that there were “many, many meetings”.
91 Under re-examination his evidence was more confused as to when he was given the “unequivocal” advice. Thus, when taken to the notes of the 4 April meeting (at page 741 of the court book and which contain a typed table of “scenarios”) (“table 741”), he suggested he was unclear on dates and that there must have been “some discussion” prior to 4 April.
Mrs Mills
92 In her witness statement Mrs Mills stated that she and her husband met with Mr Sutherland to talk about the sale of Mills display about six times. Further that the main discussions in these meetings were about restructuring their joint assets in order for Mr Mills to be eligible for the SBC. Mr Sutherland said that the threshold for the SBC was $5 million, and their starting point to access the SBC should be to move Robert’s assets into her name and the super fund.[8] Further that at no time were the assets transferred into her name and the superfund for the purposes of asset protection. They were merely transferred so Robert could obtain the SBC….[9]
[8]Witness Statement of Jennifer Kay Mills dated 19 October 2012 at para 13.
[9]Witness Statement of Jennifer Kay Mills dated 19 October 2012 at para 16.
93 Mrs Mills further said that Robert asked Mr Sutherland whether “the strategy” was adventurous. She did not remember Mr Sutherland’s exact words in reply but, “I do remember though that Mr Sutherland told us that by re structuring our finances we would get the concession”[10].
[10]Witness Statement of Jennifer Kay Mills dated 19 October 2012 at para 17.
94 In oral evidence she said that there was a meeting in early 2006 wherein it was suggested that if they transferred Robert out of the title of those properties into her name solely, they would be able to access the small business concession.
95 She further said Robert asked whether there was any risk involved and Mr Sutherland said “there was definitely no risk involved”, though she could not remember the exact words.
96 Under cross examination she maintained that the properties were transferred for reasons of the small business concession, “not asset protection”, notwithstanding that there was a “bonus” in the transfer to the super fund. However, she did not recall the actual day of the meeting nor recall any meeting where the content of table 741 (included in the notes of 4 April) was discussed.
Mr Sutherland
97 In his witness statement, Mr Sutherland said that the 4 April meeting was a follow up session where they discussed a range of issues which formed the basis of their “[e]ngagement letter” following on from issues identified in the earlier planning sessions. At this meeting, it was agreed that they would move forward and provide them with advice with respect to asset protection, estate planning, retirement advice and assistance with the sale of the business.[11]
[11]Witness Statement of Michael Sutherland dated 18 October 2012 at para 29.
98 At the meeting they also “…worked through a number of hypothetical examples of the taxable capital gains that could arise on selling the business”. This included calculating the after tax proceeds of selling the business at $5 million, illustrating how the SBC could work, and how the tax calculation would be affected if the Mills Family Trust was to sell the business for more than $5m.[12]
[12]Witness Statement of Michael Sutherland dated 18 October 2012 at para 30.
99 He suggested the discussion focused on a hypothetical example using different sale options. At that meeting the Mills were informed that if they could access the concessions effectively, there are benefits, “…however we would need to do further work to determine whether the Family Trust would be eligible” (emphasis added).[13]
[13]Witness Statement of Michael Sutherland dated 18 October 2012 at para 31.
100 In oral evidence he explained that, as was evident from the memo of 22 March, they needed to work out the EBITDA of the business to “…have a feel for whether or not, on first instance, the small business concessions are going to be appropriate for us to have a look at.” They therefore put some spreadsheets together for internal purposes, though they did get discussed with the Mills.
101 They also discussed a range of issues including the structure for the sale (including whether there would be a CGT rollover into a company with the shares sold to Mr Green, or whether they were going to sell the business out of it and have a partnership of trusts), asset protection, and estate planning.
102 They also discussed the potential offer from Mr Green and came up with a “potential figure” for the business value of approximately $6,188,000. This figure was then inserted into table 741 (for scenarios 1A and 1B).
103 There were then 3 scenarios discussed with the Mills: scenario 1A was where the business was sold without the SBC and without the transfer of a commercial bill debt facility worth $1m; scenario 1B was where the only difference was that the commercial bill facility was also transferred and assumed by the purchaser.
104 In each of these cases the sale proceeds exceeded the $5 million limit such that it was clear that, in accepting the offer from Mr Green and getting a business value of $6,188,000, that they were not going to access the CGT SBC.
105 Scenario 2 (entitled “sell business and utilise small business concessions”), was a little different wherein the amount of $6 million was simply “plugged into the spreadsheet”, having regard to the fact that they knew the commercial bill was also valued at $1 million, and they knew the maximum asset value was $5 million. This amount, along with some other assumptions, thus formed the basis for which the mechanics of how the small business concessions would work.
106 However, his evidence as to what was actually said on the topic of the SBC was as follows:
[t]hat simply that we didn’t pass them and it was the first item of the maximum net asset value test is simply how much is the business – or how much are the shares that are represent [sic] of the business, if you like. That’s the very first item. That was north of $5 million, so it was unlikely that we were going to be able to get them at that point in time… (emphasis added)
107 He further said that it was discussed that there were a number of unknown “moving parts” including the profit, the amount of debt and a working capital adjustment, which could affect the calculation.
108 He denied making a statement in the period March to June 2006 that the Mills should restructure their assets by entering into residential transfers, and that once the residential transfers had occurred the net value of the assets would not exceed the SBC threshold.
109 He denied communicating that his advice in relation to eligibility for the SBC was cast iron and not in any way adventurous. Rather, after the Mills were subject to a CGT review, Mr Mills did ask him about whether or not he had a level of confidence that they could object to the ATO, and whether the advice was adventurous, to which Grant Thornton replied no, and that he should continue with his objection to the ATO.
110 He also said that the transfer of the residential properties of itself would not satisfy the net asset value test.
111 Under cross examination, Mr Sutherland agreed that the discussion of 4 April was about his “preliminary workings”.
112 He also agreed that to get a better after-tax position without the SBC you would have to sell the business for $7.45 million, or more (which equated to $6.45 taking into account the commercial bill).
113 He agreed that he did not recall specific words used, but that it was clear and proposed by them that they were “reasonably close” to the limit. If profits were in decline,[14] “who knows”, there was a prospect that it might be available.
[14]He had noted that the Mills advised it had been hard to maintain growth and revenue was in decline in January 2006 (see Witness Statement of Michael Sutherland dated 18 October 2012 at para 10).
114 He agreed that the letter of 12 May “ultimately” had an implication in respect of the small business concession, since the transfers of the properties, redemption of units, and the value of the business going down all needed to happen to satisfy the SBC.
115 However, as it transpired, what made the Mills eligible was the actual decrease in the purchase price, which came about because of a working capital shortfall of $804,000 (not movement in profit). That was the major reason they later made the eligibility criteria.
116 Mr Sutherland maintained that he had not told Mr and Mrs Mills that they would pass the SBC until 1 July, which was preliminary, indicative and qualified advice. Further, that at the meeting of 4 April he told the Mills that they would not pass, when it was clear that the purchase price was in excess of the limit and prima facie they would not pass.
117 He agreed that they provided advice for asset protection and retirement advice, and noted that acting on that advice would have an inference for their maximum net asset value test, though that was not the purpose for which the advice was prepared.
118 He said that had both the transfer of assets and reduction in working capital not occurred, they would not have passed the $5m test.
119 Finally, he stated that it was clear that in accepting the price they would not be eligible for SBC, and he believed the transaction was “already locked in”, or it would be difficult to move Mr Green.
Findings regarding 4 April 2006
120 In resolving what occurred on this day, I have made findings in the light of my earlier comments as to presentation of the witnesses, above.
121 It is also important to have regard to the surrounding objective evidence.
122 The note of the discussions of 4 April 2006 supports Mr Sutherland’s evidence that the meeting was a preliminary meeting concerned with hypotheticals. Thus, the note is entitled “Mills Display Pty Ltd Business sale – after tax cash position comparison FOR DISCUSSION PURPOSES ONLY”. The typed section then provides calculations for each of the scenarios as described by Mr Sutherland. This is consistent with Mr Sutherland’s position that no actual advice was being provided; rather the purpose of the exercise was to “workshop” some numbers to see if it was worth considering the SBC further.
123 There is also handwriting on the page, which includes the notation “Discussed with R & J Mills on 4/4/06”, and which also includes the following: A Remove Jenny as Director; B Structure diagram; C estate planning; and D cost estimate for “advice 1-4”. The latter appears to be a reference to further handwritten notations later on the page which are: 1 retirement advice (transfer properties to superfund); 2 sale of business advice; 3 structure partnership; and 4 estate planning.
124 The note is therefore consistent with Mr Sutherland’s evidence that a range of issues were discussed.
125 The engagement letter of 5 April is also significant since, as well as recording a fee estimate for retirement, business sale, and estate planning, it provides an estimate for an advice for a “detailed review” of the SBC, including consideration “as to whether” Mills Display was “eligible…” This, then, is consistent with the notion that what had been done the day before was to consider whether it was worth looking into the SBC further, by way of the provision of advice.
126 Mr Sutherland’s evidence that he told the Mills that they would not pass was also corroborated by the calculations appearing in the 741 table. Thus, it is apparent that the sale proceeds in the cases of both scenarios 1A and 1B, placed the Mills above the requisite $5 million.
127 However, as indicated already, the Mills gave evidence that they were told to transfer the properties “in order to pass.”
128 The strongest evidence that this might have been the case was the contents of a much later letter of 3 August 2009 from Mr Sutherland which contained the following:
Firstly, in the lead up to a probable sale of 50% of the business, we undertook a review of your current asset position and determined that based on a likely sale price in the order of near $5m, with a maximum asset value being $5m, that it was clear that neither Jenny or yourself would be able to access the CGT small business concessions. This, as you recall led to a significant “reshuffle” of your assets, some of which found their way into superannuation (which I note you cannot do in today’s environment, given the contribution caps), which enabled you to access CGT Small Business Concessions on the sale of the first 50% stake in the business.
129 The use of the phrase “led to” might give support to the plaintiffs’ suggestion. However, a loosely framed email forwarded some months later is of less significance when compared with the more contemporaneous objective evidence.
130 Thus, firstly, the 741 table shows that the calculations for the SBC as at 4 April just didn’t work even if the properties were transferred.
131 Secondly, the documentary trail is consistent with the proposition that the advice to move assets was given to secure asset protection, better retirement and reduced tax independent of the SBC. This trail has already been described earlier and includes the detailed advices on retirement strategy and asset protection of 11 and 12 May. Moreover, it includes the following:
· the notes of the first meeting of 19 December 2005 specifically cite personal ownership of assets and the low amount in the superfund;
· the “strategy plan” document also identified an issue with ownership of properties, exposure to risk, and that the Mills were not using the superfund as their primary investment vehicle without any reference to the SBC;
· the 22 March internal document cites that properties were held in personal names and also includes a notation that they “move properties to more tax effective vehicle - superfund”;
· the notes of the 4 April meeting also include the handwritten notation “retirement advice-transfer properties to s’fund”; and
· the retainer letter costs consideration of the issues associated with the transfers to the super fund as part of the “retirement strategy advice”.
132 All of this evidence is consistent with the evidence of Mr Sutherland, that the intention was to transfer the properties for reasons other than the SBC. Although it was initially intended that they be transferred to the superfund, this was later altered as a result of the May 2006 Budget.
133 Thus his evidence was as follows:
…all of the actions that you’ve got there in terms of contributing real property, redeeming units, resigning Jenny as a director, transfer asset holdings jointly, they’re all for other benefits which were identified in the original planning session and indeed on the 19 December meeting.
134 Although, then, as Mr Sutherland accepted, the transfer “ultimately” had an implication in respect of the SBC, I accept his evidence that he did not suggest they restructure their assets in order to access the SBC. I therefore do not accept the evidence of the Mills that transfers were effected as part of a “strategy” to access the SBC.
135 I also do not accept that Mr Sutherland suggested his advice was “cast iron”. Firstly, no “advice” was given as at 4 April in terms of the SBC at all. Secondly, such a statement is contrary to the way the ultimate advice given in July was framed, namely as “preliminary” and “indicative”. This was also consistent with the evidence of Mr Sutherland, that they were unable to definitively determine what the sale price would be for the purposes of the SBC calculation during April to 1 July.
136 The case for the plaintiffs that they had been given firm advice in April was also not supported by their inaction at significant times.
137 Thus, notwithstanding their claim that certain or “cast iron” advice was given that they were eligible in about 4 April, they executed an engagement letter on 20 April, which indicated that the SBC issue was to be the subject of detailed review and consideration.
138 They also made no complaint when they received only “preliminary” and “indicative” advice in July, which also included a disclaimer. This is inherently improbable if they had been given “certain” advice. Rather, consistent with the evidence of Mr Sutherland, it is more probable that the strength of his advice was only raised after the ATO position was known.
139 The plaintiffs placed much weight on a handwritten notation on the 4 April note which read: “[n]eed to obtain > $6.45m to have same after tax cash position as $5m [if] using SBC”.
140 The evidence of Mr Sutherland was that this note was in the handwriting of Mr Sutherland’s assistant, Kate Rogers. His evidence was also that, depending on a range of other matters (e.g. no value for the New Zealand business, no working capital adjustments), the calculations showed that in order to get a better after-tax position without the SBC, you would have to sell the business for $7.45 or more (which equated to $6.45 net of the commercial bill).
141 He could see that Ms Rogers had made the annotation and “suspected” it might have been discussed at the meeting on 4 April, but he could not be definitive since it might have been added by Ms Rogers after the event. However, it was clear that in accepting the price as currently offered that the Mills would not be eligible.
142 Having regard to the above matters, my findings in relation to the events on 4 April may be summarised as follows:
· that insofar as the SBC was concerned, the discussion was “preliminary”, focusing on “hypothetical examples”, such that Grant Thornton would need to do further work to determine if the Mills were eligible;
· that a range of issues were discussed on 4 April, not just the SBC;
· that Mr Sutherland told the Mills that they would not pass the SBC given it was clear that the purchase price was in excess of the limit so prima facie they would not pass;
· that Mr Sutherland did not make a statement that the Mills should restructure their assets by transferring assets and that once this occurred the net value would not exceed the SBC; nor did he propose a “strategy” for transferring properties in order to access the SBC;
· That Mr Sutherland did not at this time (nor at any time) suggest that his advice as to the eligibility for the SBC was “cast iron” or words to that effect; and
· that although calculations were provided which suggested that (subject to various assumptions) in order to get a better after tax position without the SBC, you would have to sell the business for $6.45 m (net), this was in a context of “preliminary” discussions wherein the SBC was not satisfied in any event.
143 It remains to consider the issue of breach in the light of these findings.
Whether Breach
Principles
144 The plaintiffs relied on Rogers v Whittaker, wherein the High Court established the circumstance in which a professional may be held liable for failing to warn of a material risk. That test (with necessary adjustments given this is not a doctor/patient scenario) is as follows:
… a [professional] has a duty to warn [a client] of a material risk inherent in the proposed treatment; a risk is material if, in the circumstances of the particular case, a reasonable person in the [client’s] position, if warned of the risk, would be likely to attach significance to it or if the [professional] is or should reasonably be aware that the particular [client], if warned of the risk, would be likely to attach significance to it (emphasis added).[15]
[15]Rogers v Whitaker (1992) 175 CLR 479, 490.
145 Section 50 of the Wrongs Act 1958 further provides:
A person (the defendant) who owes a duty of care to another person (the plaintiff) to give a warning or other information to the plaintiff in respect of a risk or other matter, satisfies that duty of care if the defendant takes reasonable care in giving that warning or other information.
Plaintiffs’ case
146 The plaintiffs have identified the risk as constituted by the “risk” that the ATO would disallow the claim to the SBC.
147 The plaintiffs have further identified two limbs to the “failure to warn” case: firstly that Mr Mills specifically sought and obtained a response that the advice was “iron clad”, or something of that nature; and a second limb operating even if this first is not established.
148 The alleged failure was also said to have occurred prior to about 5 July (when the contract was signed). In particular, reference was made to the dates of 4 April (at the time of the meeting) and 11 /12 May (when the advices as to transfer were provided).
149 Firstly, as I have found already, I do not accept Mr Mills’ evidence on the “iron clad” matter; indeed no advice as to the SBC was given at all prior to 1 July, which advice was preliminary, indicative and subject to a disclaimer.
150 However, in terms of the second limb, the plaintiffs in closing put this in 2 ways:
· that advice was given on 4 April 2006 about eligibility for the SBC and restructuring of assets; and
· that no advice was given at all in respect of SBC until 1 July 2006 at which time it was accompanied by a written disclaimer.[16]
[16]Closing Submission on Behalf of the Plaintiffs at para 35(b).
151 Firstly, for reasons given already, I am not satisfied that any “advice” was given on 4 April. Contrary to the plaintiff’s suggestion, I do not accept that the file note suggests that there was. Rather, the retainer letter, in particular, is consistent with the SBC being identified as an appropriate matter for advice to be provided in due course after a “detailed review” and “consideration”.
152 However, in the event that no advice was given, the plaintiffs suggest that it was then incumbent upon Grant Thornton to do more than what they did. This was put in a number of ways.
153 Firstly it was suggested that they should have considered eligibility of the SBC when considering the asset transfer.[17]
[17]Closing Submission on Behalf of the Plaintiffs at para 37.
154 Secondly it was suggested that Grant Thornton should have advised the Mills Family Group to seek a private ruling as to eligibility.
155 Finally, it was submitted that the disclaimer was too late and deficient in any event.
Alleged failure to consider eligibility
156 In considering whether there has been a breach, relevant factors would include the nature of the advice and the matter to disclose. Additional matters are also the desire of the client for information; the temperament and condition of the client; and the general surrounding circumstances.[18]
[18]Rogers v Whitaker (1992) 175 CLR 479, 488
157 In terms of the nature of the advice, the defendant not only identified a risk that the SBC might not be gained, it had in fact advised that it would not, prima facie, be met in the meeting of 4 April.
158 If there be any doubt about this, the engagement letter of 5 April makes it crystal clear that eligibility for the SBC would need to be the subject of a detailed review and consideration.
159 Moreover, there is nothing in the formal May advices which suggest that consideration should have been given to the SBC. Rather, such advices were given consistently with the need for asset protection identified earlier.
160 For reasons given already, I also do not accept that these advices were given as part of a “strategy” proposed to gain the SBC. There was therefore no need to consider any “interplay” with the SBC as the plaintiff suggested.
161 It is true that the transfers had an incidental effect on eligibility for the SBC. However, the Mills were already apprised of the fact that they were prima facie not eligible. Although there was a possibility of eligibility, they had also been told that this was to be the subject of a further detailed review and consideration.
162 There is, therefore, nothing in the way the May advices were provided which suggested some obligation to further identify risks (which had already been identified).
163 In terms of desire for advice, there was also no evidence that the Mills were desiring the SBC advice as a matter of urgency. Thus, there was no contemporaneous request from them to consider the SBC before they executed transfers, notwithstanding the retainer letter had been clear as to the topics on which advice was to be provided.
164 There was also no request for identification of the risks. Significantly, there was no such request even after 1 July when the defendant identified that it could only give “preliminary” or “indicative” advice. This is to be compared with the complaints Mr Mills was able to make later on (for example, in July 2009), and the “incessant” questioning as to complications by the respondent in Rogers.[19]
[19]Rogers v Whitaker (1992) 175 CLR 479, 491.
165 In terms of the temperament and condition of the Mills, there was some evidence that they had previously been careful and cautious.[20]
[20]For example, Witness Statement of Joseph Patrick Alan Canny dated 19 October 2012 at para 9.
166 However, Mr Mills (who was clearly the spokesman) had run a business with 70 employees, and with an annual turnover of some $11 million. He had also engaged his own accountant, and the accounting and financial planning firm BKM, when he considered that Joe Canny did not have the requisite qualifications. He also retained lawyers (Harwood Andrews) to act for him to arrange the transfers of the properties and to deal with the ATO.
167 He was not an inexperienced person in business affairs and ought to have been aware that there was a risk that he would not be eligible for the SBC in circumstances where, even in his own words “there were numbers flying around everywhere”, and particularly given the terms of the retainer letter.
168 The current case is also distinguishable from Rogers. Thus, in Rogers there was a total lack of identification of the risk that the patient might develop a condition in her left eye (in circumstances where a surgeon operated on the right eye). By way of contrast, not only has the risk been identified, the clients were actually advised that they did not prima facie satisfy the SBC test.
169 The complaint really amounted to a complaint that the Mills should have received the SBC advice earlier, rather than that there was a failure to warn.
170 However, the evidence of Mr Sutherland was that, in April and May 2006, he had insufficient information to form a view as to whether the Mills Family Trust would satisfy the SBC. Moreover, at the time, the focus of activity was satisfying the due diligence because Mr Mills had a real and interested buyer.[21]
[21]Witness Statement of Michael Sutherland dated 18 October 2012 at para 39.
171 I accept such evidence, and can see no basis for a breach in such circumstances. Moreover, such a conclusion is fortified given the client made no request for the advice prior to its delivery, which was provided in accordance with a carefully laid out proposal on 5 April 2006.
172 In my view, then, taking into account the nature of the advices given; the desire of the client for the advice; as well as the temperament of the clients themselves, I am not satisfied that it was “incumbent” on Grant Thornton to consider eligibility for the SBC when considering asset transfer, nor at any time prior to 1 July.
173 It follows that there has been no breach of duty on this basis.
Ruling
174 The plaintiffs relied on certain opinions expressed by Mr Canny, Mr Young and Mr Kokkinos in support of their claim, that the defendant should have advised the plaintiffs to obtain a private ruling.
175 Mr Canny, chartered accountant, said that, given the quantum of the capital gain involved, the proper advice was to retain a tax expert to advise as to eligibility for the SBC or obtain a private ruling.[22]
[22]Witness Statement of Joseph Patrick Alan Canny dated 19 October 2012 at para 14.
176 However, Mr Canny appeared to have limited information about the “advice” provided, which he said was “explained to [him] by Mr Mills”. In oral evidence he agreed that he was not aware of the information provided by Mr and Mrs Mills, nor the specifics of the communications from Grant Thornton. In particular, it was unclear that his opinion operated in relation to the 1 July advice, which was only “preliminary” and “indicative”.
177 In any event, Mr Sutherland could be seen as a “tax expert”, as suggested by Mr Canny. Thus, he was a qualified chartered accountant, chartered tax advisor himself. His evidence was also that the SBC advice of 1 July was “signed off” by an internal Tax Counsel of Grant Thornton, who was required to review the advice to ensure that the relevant legislation and authorities had been contemplated and applied to the facts.[23]
[23]Witness Statement of Michael Sutherland dated 18 October 2012 at para 51.
178 Mr Young’s evidence was that because there was a possibility for Mrs Mills’ assets to be included in the SBC assessment, he would have advised the Mills to obtain a private ruling, which would have identified whether Mrs Mills could be said to control the Mills Family Trust.[24]
[24]Witness Statement of John Young dated 19 October 2012 at para 6.
179 However, this opinion was based on an assumption that Grant Thornton had advised the Mills to transfer properties “for [the SBC] purpose”, and that if those assets were transferred then those assets would be excluded from the SBC calculation.[25]
[25]Witness Statement of John Young dated 19 October 2012 at para 4.
180 These assumptions are not appropriate given my findings above.
181 In terms of Mr Kokkinos, he was a Partner/Executive Director in the Taxation Services group of Pitcher Partners, with business and accounting qualifications. He also had extensive experience advising taxpayers for over 16 years (including as a partner in a “big 4 firm” as leader of their National Tax Technical Division).
182 He provided 2 reports. However, the plaintiffs placed significant reliance on his first report, wherein he opined that the taxpayer could have obtained certainty by obtaining a private binding ruling.
183 However, in his second report of 24 October 2012 Mr Kokkinos suggests that the plaintiff had misconstrued his earlier statements and also says:
4.1.3 In this type of retainer, the choice of obtaining a Private Binding Ruling is for the taxpayer and is generally a choice made by a taxpayer where they are indifferent to the outcome, but would not otherwise proceed with a transaction unless they have certainty of the tax outcome. That is, while a Private Binding Ruling provides some certainty in relation to the ATO view, it does not guarantee that a favourable position would be obtained by the ATO and accordingly does not change the outcome if the transaction has already been completed.
…
4.1.5 I highlight that in letters of advice concerning the application of the taxation provisions, it is uncommon for there to be a paragraph stating that the taxpayer should seek a Private Binding Ruling from the Commissioner.
…
4.1.7 However, unless the ruling is received prior to entering into the arrangement, the receipt of a ruling does nothing more than dictate what goes into the tax return. Accordingly, where tax neither makes nor breaks the transaction, in my experience it would be very rare for a taxpayer to seek a Private Binding Ruling. Where a tax liability is so substantial that a transaction would not go ahead without certainty of the tax position, then one would expect the taxpayer to request that their tax agent apply for a ruling on their behalf.
4.1.9 However, it must be questioned why, after several warnings that the ATO could take a contrary view and that the ATO were reviewing such transactions, that neither the taxpayer nor the tax agent sought to obtain further certainty on the tax issues, if tax were a major concern. The reason I question this is simply due to my experience with conservative taxpayers. Where taxpayers are conservative, such warnings would typically result in taxpayers requesting further information as to how one could mitigate any risk.
4.1.10 While I have limited facts upon which to analyse, it would seem that on the information before me, this does not appear to be such a case. Having read the witness statement of Mr Sutherland, and the offers of the relevant purchase price being provided well before the calculation of the small business CGT concessions, it does not appear to me that the reduction in tax liability under the small business CGT concessions was a substantial factor for either Mr or Mrs Mills entering into the relevant transaction. In my experience, the facts presented to me are indicative of a case where the taxpayer would have entered into the transaction irrespective of any tax benefits, and thus the application of the small business CGT concessions would essentially result in a windfall gain to the taxpayer. Accordingly, in my experience, this is not a case where I would have expected advice to have prompted a requirement to seek a Private Binding Ruling. (emphasis added)
184 In this case, no advice was provided until 1 July, which post dated the transfer of the properties. The Mills therefore appear to have transferred the properties in the absence of receiving any advice that they were eligible for the SBC. In fact, Mr Mills accepted under cross examination that the transfers were made to implement the formal advices he received.
185 However, the Mills also state that they had not heard of a private ruling and, had they known of it, they would have instructed Grant Thornton to apply for a private ruling and would have put the sale on hold until the results of the ruling were obtained.[26]
[26]Witness Statement of Robert Everard Mills dated 18 October 2012 at paras 59-60; Witness Statement of Jennifer Kay Mills dated 19 October 2012 at para 21.
186 They highlight that this evidence was not directly challenged and also rely on evidence of Mr Green. Thus, Mr Green stated that Mr Mills mentioned the SBC even prior to him making an offer (Mr Green had never heard of the SBC before). Mr Mills then mentioned it again when he accepted the offer stating it was in his tax interests to accept it.
187 However, it is significant in this regard that Mr Mills accepted Mr Green’s offer on price on about 5 April. This was notwithstanding that he had been advised the day before (4 April) that he was not in fact eligible for the SBC.
188 The chronology therefore suggests that Mr Mills, as an experienced businessman, determined for himself that he wanted to satisfy the SBC test. Alternatively, that he accepted the offer for other reasons. (He in fact admits that it had other redeeming features for him).
189 However, regardless of why Mr Mills accepted the offer, and fixed the price, it had nothing to do with any SBC advice of Mr Sutherland given no such advice had yet been given.
190 It is also significant in this context that Mr Mills entered the sale with an effective date of 1 July, notwithstanding that the July advice was only dated the same day. The sale of business agreement was also executed notwithstanding that that advice was expressly “preliminary” and “indicative” and included a disclaimer.
191 I am, therefore, unable to be satisfied that Mr Mills would have really deferred the sale to obtain a private ruling.
192 There are also other reasons that suggest the seeking of a ruling was not warranted.
193 Firstly, as I have found already, the defendant did not provide any advice until 1 July. Even then, as stated in that advice, Grant Thornton was unable to confirm whether the $5 million threshold would be satisfied, until they were able to review and recalculate the information based on the net asset values at the time of the sale. In such circumstances, it was still hypothetical as to whether the SBC could be met with no final advice able to be provided.
194 In such circumstances, there is nothing in any of the witness statements, which suggest that a ruling should be obtained on an “indicative” or “preliminary” case, as was reflected in the 1 July advice.
195 Secondly, according to the opinion of Mr Kokkinos, it was “uncommon” for there to be a paragraph stating that a taxpayer should seek a private ruling. Although such evidence of good accounting practice is not determinative, it is a “useful guide”, and was not challenged by the plaintiffs.[27]
[27]Rogers v Whitaker (1992) 175 CLR 479, 487
196 Having particular regard then to the chronology, the nature of the advice given and the evidence of the experts, including Mr Kokkinos, the plaintiffs did not establish any breach of duty by reason of the omission to specifically raise the option of a private ruling.
Disclaimer
197 The disclaimer cannot affect the transfer of assets, since these had already occurred prior to the delivery of the 1 July advice.
198 The disclaimer may, however, have some operation in relation to the sale given the sale of business was executed on 5 July.
199 The plaintiffs, however, complain about the terms of the disclaimer in any event, and allege that the disclaimer was wrong (there were no applicable rulings or cases); was not individualised; and was incomplete (for example, it ignores a private ruling).
200 I do not accept that the disclaimer was “wrong” since it did not warrant that directly applicable rulings and cases were actually in existence. I do accept, however, that the disclaimer could have been more individualised, and is clearly a “standardised” boilerplate provision.
201 Nevertheless, the crucial thing about it is that it identifies that the Commissioner “may hold a different view.”
202 As Mr Kokkinos states at paragraph 5.1.3 of his first report:
That is, the [Grant Thornton] advice outlines that the Commissioner would be open to take a different interpretation. Accordingly, I note that [Grant Thornton] took a view based on their understanding of the taxpayer and the operation of the law, which appears reasonable in the circumstances.[28] (emphasis added)
[28]Report of Mr Kokkinos dated 24 October 2012 taken as exhibit 5.
203 I accept this opinion. In my view, the disclaimer sufficiently identifies the risk about which the plaintiffs now complain, namely, that the ATO might take a “different view.” This is also in circumstances where they accept that the advice itself was “reasonably open” and in circumstances where that advice was expressed to be preliminary and indicative.
204 I do not consider that the disclaimer was inadequate.
Conclusion
205 The plaintiffs have not demonstrated any breach of a duty to warn on any of the bases suggested. More particularly, I do not consider there is any breach by reason of a “failure” to consider SBC eligibility when considering asset transfer and/or by reason of a “failure” to advise the Mills to seek a private ruling. I also consider that, from 1 July, the terms of the disclaimer operated to directly identify the risk about which the plaintiffs now complain.
206 The plaintiffs have thereby failed to demonstrate any breach of the standard of care with the result that the proceeding is to be dismissed.
207 It is, therefore, unnecessary for me to consider other aspects of this claim. However, out of deference to the submissions of Counsel, I will summarise my views, in brief, on the issue of causation, and make some comments in relation to the damages claimed.
Causation/Damages
208 The issues identified in relation to causation critically turned on whether the settlement that the Mills Family Group entered into with the ATO was an intervening “novus actus” event; and, also, whether the Mills relied on the “advice” when transferring assets and accepting the offer to purchase the business.
209 Firstly, if it was necessary to consider, I would not be satisfied that the settlement that the Mills Family Group entered into with the ATO was an intervening event that broke the chain of causation.
210 Thus, I consider that, if there had been a negligent failure to warn of the ATO position, such conduct would generate the very risk of injury that resulted, namely a dispute with the ATO.[29] Put another way, a dispute was reasonably foreseeable, such that Grant Thornton should generally remain liable unless there is, for example, subsequent “gross negligence”.[30]
[29]March v E & MH Stramare Pty Ltd (1991)171 CLR 506 [518-9].
[30]Mahony v J. Kruschich (Demolitions) Proprietary Limited (1985) 156 CLR 522, 528-530
211 Although the defendant criticised the advice given in relation to the subsequent settlement, the Mills appear to have obtained and followed legal advice of a specialist taxation lawyer to settle the dispute. That advice also appears to contain a reasoned basis for settlement. If it was necessary to determine, I do not consider that the chain of causation would be broken in these circumstances.
212 However, even if the plaintiffs succeeded on the “novus” issue, I would not be satisfied that the plaintiffs had demonstrated the requisite reliance.
213 Firstly, for reasons already given, the properties were transferred in circumstances where the Mills had been advised that the SBC would not apply, and that a further detailed review was necessary.
214 It follows that any failure to warn about the SBC did not materially contribute to the decisions to transfer properties, which properties were transferred for other reasons related to asset protection.
215 Additionally, as also set out above, Mr Green’s offer was accepted on the day after the Mills were advised that the SBC was not satisfied.
216 In such circumstances, any omission of Grant Thornton did not materially contribute to a lost commercial opportunity at all to negotiate a higher price on the sale.
217 There would also be other issues to be resolved in terms of the damages claimed. Thus, the plaintiffs appear to have claimed the full costs of the transfers, without any allowance for the likelihood that the (residential) properties would have been subject to CGT in any event on a subsequent sale.
218 There would also be an issue as to whether there really was a lost opportunity to sell the business in any event. There was some evidence that SPOS was prepared to pay up to a multiple of 5 EBIT in 2005. However, the evidence of Mr Mills was that he terminated discussions with SPOS because he did not want to work in a public company (and he was nervous about retiring). The next actual offer was that of Mr Green. However, the evidence of Mr Green was that, although the acceptance of his offer by Mr Mills took him by “surprise”, he could not say he would or would not have paid more for the business. There was also no other offer made in 2006, or at all.
219 It is unnecessary, however, to consider these matters further since, in the absence of sustaining any breach, the plaintiffs’ claims must be dismissed.
Conclusion
220 The plaintiffs’ claim should be dismissed.
221 I will hear from the parties as to the appropriate orders as to costs.
- - -
0
3
0