Rowsthorn v Nexus Accountants (Aust) Pty Ltd
[2019] VSC 803
•13 December 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROFESSIONAL LIABILITY LIST
S ECI 2018 02342
| PETER ROWSTHORN | Plaintiff |
| v | |
| NEXUS ACCOUNTANTS (AUST) PTY LTD | Defendant |
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JUDGE: | Daly AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 12 September 2019 and 22 November 2019 |
DATE OF JUDGMENT: | 13 December 2019 |
CASE MAY BE CITED AS: | Rowsthorn v Nexus Accountants (Aust) Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2019] VSC 803 |
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PRACTICE AND PROCEDURE – Application for summary judgment by defendant on the basis that the plaintiff’s claim is time barred pursuant to s 5 of the Limitation of Actions Act 1958 (Vic) – Plaintiff claimed that his accountant was negligent in providing tax advice – Whether the defendant had a limitations defence which was bound to succeed – Test for granting summary judgment on an interlocutory basis – Bodycorp Repairers Pty Ltd v Holding Redlich [2018] VSCA 17, referred to – Where the plaintiff’s claim was brought more than six years after the lodgment of tax returns, but within six years of the ATO issuing amended notices of assessment in respect of the relevant tax years – When did loss and damage accrue – Wardley Australia v Western Australia (1992) 175 CLR 514, referred to – Whether there was a continuing duty of care – Hammond v Minister for Works (1992) 8 WAR 505; Taluja v Orford [2014] NSWSC 714, referred to – Whether the opportunity to alter the plaintiff’s accounting records to support the plaintiff’s claim for a tax deduction ‘irretrievably lost’ after submitting tax returns for each tax year – Christie v Purves (2007) 69 ATR 155, referred to – Factual and legal issues concerning the scope of the retainer and the tax assessment regime – Summary judgment refused.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Ms C Pierce | SBA Law |
| For the Defendant | Mr C Archibald QC with Mr J Corbett | Norton Rose Fulbright Australia |
HER HONOUR:
Introduction and background to the application
The plaintiff, Mr Peter Rowsthorn, is a businessman with interests in the thoroughbred breeding and racing industry. The defendant, Nexus Accountants (Aust) Pty Ltd (‘Nexus’) is a firm of accountants which between 1998 and 2017 provided accounting, tax agent, and tax related advisory services to Mr Rowsthorn and his related entities.
Wadham Nominees Pty Ltd (‘Wadham Nominees’) is the trustee of a family trust, of which Mr Rowsthorn is the primary beneficiary. Wadham Nominees is also the owner of a number of companies which together constitute the Wadham Park Group, which operates the Wadham Park stables and stud in Tylden, Victoria. One of the principals of Nexus, Mr Domenic Tempone, was also a director of a number of Wadham Park Group entities between 2005 and 2009.
In or around July 2006 Mr Rowsthorn purchased a stallion, Grey Swallow, for US$4 million. Between August 2007 and September 2014, Mr Rowsthorn allowed one of the Wadham Park Group entities, Woodside Park Stud Pty Ltd (‘Woodside’) to use Grey Swallow for its breeding operations. The arrangements between Mr Rowsthorn and Woodside were said to be, in the amended statement of claim dated 6 November 2019, that Woodside Park would pay stud fees to Mr Rowsthorn for ‘serves’ over and above a certain amount per year, and charge Mr Rowsthorn for the expenses associated with maintaining and promoting Grey Swallow.[1]
[1]This allegation is to be contrasted with the allegation in the original statement of claim to the effect that Nexus should have advised Mr Rowsthorn to enter into such an agreement with Woodside but did not.
However, this arrangement was not reflected in the accounts and taxation returns prepared by Nexus for Mr Rowsthorn and the Wadham Park Group. Instead, Mr Rowsthorn’s tax returns for the 2008, 2009, 2010 and 2011 tax years (‘relevant period’) recorded no income having been received by Mr Rowsthorn for Woodside’s use of Grey Swallow. Accordingly, on 18 February 2015, following an audit of the Wadham Park Group’s affairs by the Australian Tax Office (‘ATO’), the ATO issued amended notices of assessment for the 2008, 2009, 2010, and 2011 tax years to Mr Rowsthorn, including $541,164.00 referrable to the ATO’s finding that Mr Rowsthorn was not entitled to claim an allowance for the depreciation in the value of Grey Swallow for the relevant period. The ATO also assessed Mr Rowsthorn as being liable for shortfall interest and general interest charges totalling $315,923.00.[2]
[2]All references to the ATO in these reasons are intended to encompass the Commissioner for Taxation.
Mr Rowsthorn’s complaint against Nexus is that, when preparing the Wadham Group’s accounts and tax returns in the relevant period, Nexus failed to include income associated with Woodside’s use of Grey Swallow in the accounts of the Woodside and his personal tax returns, thus qualifying Grey Swallow as an income producing asset for the purposes of claiming the depreciation allowance as a tax deduction in each of the relevant tax years. He alleged that Nexus was in breach of its contractual and common law duties of care owed to him, and, as a result, he has suffered loss, claiming the total of the amended assessments referrable to the ATO’s disallowance of the depreciation allowance with respect to Grey Swallow, and the legal and accountancy costs associated with an unsuccessful appeal of the ATO’s claim arising from the amended assessments to the Commonwealth Administrative Appeals Tribunal (‘AAT’).
It is not disputed that Nexus owed Mr Rowsthorn and the Wadham Group of companies a duty of care, although Nexus denies any breach of duty, and denies that Mr Rowsthorn has suffered loss and damage by reason of its conduct during the course of its retainer. Nexus has brought an application for summary judgment on the basis that, in issuing proceedings on 21 November 2018, more than six years after the end of the 2011 tax year, Mr Rowsthorn’s claims in this proceeding have no real prospects of success, on the basis that Mr Rowsthorn has no real prospect of overcoming Nexus’ defence that his claims are time barred pursuant to s 5 of the Limitation of Actions Act 1958 (Vic).
In Sloan v Arnold Thomas & Becker (No 2),[3] I had cause to consider when it is appropriate to grant summary judgment on the basis that the defendant had a limitations defence which was bound to succeed, as follows:
[3][2019] VSC 682.
Traditionally, the Courts have been reluctant to grant summary judgment where the sole issue is whether a plaintiff’s claims are time barred, save in the clearest of cases.[4]
In D’Aquino v Trovatello,[5] the Court referred to the difficulties faced by the defendant seeking summary judgment on limitations grounds. In response to a defendant’s contention that, on the plaintiff’s case as pleaded, and on the plaintiff’s own material, the case would be unable to succeed, McLeish JA stated as follows:
In taking this course, the respondents assumed a heavy burden. In order to show that the claim had no real prospect of success, it was necessary for the respondents to establish that the applicants had no real prospect of overcoming the limitations defence. That in turn meant, either that the pleaded claims fell wholly outside the limitation period, or that, although there were claims that arose within the limitation period, there was no real prospect of sustaining them at trial.[6]
However, in Bodycorp Repairs Pty Ltd v Holding Redlich,[7] the Court of Appeal stated that granting summary judgment upon limitation grounds may be appropriate ‘where there was no relevant issue of fact which required resolution, and nothing to suggest that there is any prospect further evidence could materially alter [the date upon which the cause of action accrued]’.[8]
[4]Wardley Australia Ltd v Western Australia (1992) 175 CLR 514, 533. See also Hewitt v Henderson Corporations Pty Ltd [2006] WASCA 233 [30] (where the Court of Appeal of Western Australia held that the question of whether a statutory limitation period applied to an equitable claim was generally not appropriate for summary determination) and Westraint Resources Pty Ltd v BHP Iron Ore Pty Ltd [2001] WASC 111 [69].
[5](2015) 47 VR 31.
[6]Ibid [53].
[7][2018] VSCA 17 [130].
[8]Sloan v Arnold Thomas & Becker (No 2) [2019] VSC 682 [22]-[24].
Nexus’ application has been heard over two stages: the application having been adjourned after it became apparent from the submissions advanced on behalf of Mr Rowsthorn at the hearing on 12 September 2019 that the manner in which he put his case did not quite reflect what was pleaded in the statement of claim. His legal representatives were offered, and took up, an opportunity to replead. However, Nexus maintains that the amendments did not cure the fundamental problem facing Mr Rowsthorn, being that, even if his claims against Nexus were made out, his cause of action accrued when his liability for tax was incurred during the course of each tax year in the relevant period, that is, no later than 30 June 2011.
The claims in this proceeding
Prior to turning to the parties’ submissions concerning the application, it is necessary to consider the allegations in the amended statement of claim in some detail. Mr Rowsthorn’s claims are summarised below:
(a) paragraphs 1 to 4 of the amended statement of claim introduces the parties, the duration and terms of Nexus’ retainer, and the work carried out by Nexus pursuant to the retainer. In paragraph 3 of the amended statement of claim, Mr Rowsthorn alleges that he retained Nexus to provide accounting, tax agent and tax related business advisory services to him and the Wadham Park Group entities;
(b) paragraph 6 pleads the section of the Income Tax Assessment Act 1997 (Cth) entitling a taxpayer to deduct an amount for depreciation from assessable income where the asset concerned is an income producing asset;
(c) paragraphs 7 and 8 of the amended statement of claim provide as follows:
7.At all material times during the currency of the retainer, Nexus knew or ought reasonably to have known that:
a)Mr Rowsthorn had claimed a GST refund in respect of his purchase of Grey Swallow and expenses associated with its purchase; and
…
b)Grey Swallow was capable of treatment by Mr Rowsthorn for his personal income tax purposes as a depreciating asset but subject to and in accordance with the provisions of Division 40 of the 1997 Act.
…
c)from time to time between August 2007 and September 2014, Mr Rowsthorn offered Grey Swallow to Woodside Park Stud Pty Ltd (Woodside Park Stud) to use for the purposes of a breeding operation carried on by that company on terms including that:
ii)Woodside Park Stud would be entitled to 15 serves of Grey Swallow per year free of charge;
iii)Woodside Park Stud would pay stud fees to Mr Rowsthorn for serves of Grey Swallow additional to the 15 serves per year to which it was entitled without charge;
iv)Woodside Park Stud would provide and charge Mr Rowsthorn for stud master services in respect of Grey Swallow, including feeding and procuring stud services; and
v)Woodside Park Stud would incur other expenses related to promotion and marketing, insurance and veterinary care and pay for those expenses in the first instance, and then require Mr Rowsthorn to reimburse Woodside Park Stud in respect of those expenses;
vi)Woodside Park Stud would pay to Mr Rowsthorn stud fees net of expenses incurred in providing stud master services in respect of Grey Swallow such that, if the fees charged by Woodside Park Stud for stud master services exceeded the stud fees, Mr Rowsthorn would be required to pay to Woodside Park Stud an amount representing the difference between the fees for stud master services and the stud fees,
those terms constituting the Stud Master Agreement.
…
f)Mr Rowsthorn otherwise derived no income in his personal capacity from activities referable to his ownership of Grey Swallow; and
…
g)the derivation by Mr Rowsthorn in his personal capacity of income from activities referable to his ownership of Grey Swallow was necessary to [evidence] Mr Rowsthorn’s use of Grey Swallow for a taxable purpose within the meaning of s 40-25(7) of the 1997 Act.
…
8.In the premises, Nexus ought to have advised Mr Rowsthorn to include in his personal income tax return for each of the years from 2008 to 2011 income representing payment or compensation for the use of Grey Swallow by Woodside Park Stud.
(d) paragraphs 9 and 10 of the amended statement of claim allege that Nexus failed to advise Mr Rowsthorn of the above requirements, but advised Mr Rowsthorn to claim the depreciation allowance in the relevant period, notwithstanding that the tax returns showed no income having been derived by Mr Rowsthorn for the use of Grey Swallow, and Mr Rowsthorn instructed Nexus to lodge the tax returns in accordance with that advice in each of the tax years in the relevant period;
(e) paragraph 10A of the amended statement of claim provides as follows:
In the premises of paragraphs 3 to 10, having failed to advise Mr Rowsthorn to the effect set out in paragraph 8, Nexus
a)ought to have:
i)caused to be created and issued invoices for stud fees in respect of Grey Swallow from Mr Rowsthorn to Woodside Park Stud for each of the 2008 to 2011 income years;
ii)caused to be created and issued by Woodside Park Stud to Mr Rowsthorn invoices for expenses incurred in respect of the provision of stud master services for Grey Swallow for each of the 2008 to 2011 income years;
iii)amended the financial accounts of Woodside Park Stud to reflect stud fees payable to Mr Rowsthorn in respect of Grey Swallow for each of the 2008 to 2011 income years;
iv)amended the income tax returns of Mr Rowsthorn for each of the 2008 to 2011 income years to reflect the derivation by Mr Rowsthorn of income from stud fees in respect of Grey Swallow and to reflect expenses incurred by him in respect of fees for stud master stud services payable to Woodside Park Stud;
v)amended the income tax returns of Woodside Park Stud for each of the 2008 to 2011 income years to reflect income in the form of net fees for stud master services payable by Mr Rowsthorn;
b)further or in the alternative to (a), caused Woodside Park Stud to waive its entitlement pursuant to the Stud Master Agreement to offset its fees for services against stud fees payable to Mr Rowsthorn in respect of Grey Swallow for each of the 2008 to 2011 income years, such that Mr Rowsthorn would be entitled to receive an amount of stud fees in each of those income years;
c)could have advised Mr Rowsthorn and Woodside Park Stud to take, and could have caused them to have taken, all of the steps pleaded in sub-paragraphs (a)(i) to (iii) above at any time following the conclusion of each of the 2008 to 2011 income years, including in any subsequent income year, until:
i.the issue on 18 February 2015 of amended assessments to Mr Rowsthorn in respect of each of the 2008 to 2011 income years;
ii.alternatively to (i), the expiration of the period for objection to those amended assessments.
(f) paragraph 11 of the amended statement of claim pleads that by reason of the above, Nexus breached its duty to exercise all the reasonable skill and diligence of a competent tax accountancy and business advisory firm; and
(g) paragraph 12 of the amended statement of claim particularises the loss and damage said to have been caused by Nexus’ breach of duty.
Mr Rowsthorn sues Nexus in both contract and tort with respect to the conduct said to be a breach of duty. He says that Nexus was negligent in failing to advise him to ensure that he received income from Woodside for the use of Grey Swallow in the relevant period, thus qualifying Grey Swallow as an income producing asset for the purpose of claiming a depreciation allowance to offset against his taxable income. But he goes further than alleging that Nexus provided negligent advice in the period leading up to the lodgement of the tax returns. Mr Rowsthorn says that, at any time up to the issue of the amended assessments by the ATO in February 2015, Nexus could have made the necessary entries in the books and records of Woodside, and submitted amended tax returns to show income received by Mr Rowsthorn for the use of Grey Swallow in the relevant period. Accordingly, Mr Rowsthorn’s cause of action did not accrue until his liability for additional tax crystallised with the issue of the amended assessments (and possibly, not until the expiry of the applicable objection and appeal periods available to Mr Rowsthorn after the issue of the amended assessments).
The issues in the application and the parties’ submissions
Given that Mr Rowsthorn sues in both contract and tort, the applicable limitation period of six years commences to run from the later date upon which the causes of action accrue, being Mr Rowsthorn’s cause of action in negligence, where time began to run from when he suffered any loss and damage attributable to Nexus’ alleged breach of duty.[9]
[9]Chesworth v Farrar [1966] 1 QB 407, 416.
The question of how to determine when loss is first suffered in a case involving negligent conduct causing pure economic loss has been subject to considerable discussion in the authorities. First, it may be relevant whether the duty imposed upon a defendant is an ongoing or continuous duty, or one which is capable of being fulfilled or breached by a single act or omission. Secondly, it is generally necessary to identify the economic interest which has been infringed or impaired by the negligent act or omission. Thirdly, it is often necessary to distinguish between actual loss or damage from potential or likely damage, with the latter only arising upon some contingency being fulfilled. Each of these questions arise for consideration in the current application.
As noted above, Nexus’ application for summary judgment was adjourned after Mr Rowsthorn was granted leave to amend his statement of claim to better reflect the manner in which he put his case. In the first hearing of the application, senior counsel for Nexus relied upon the decision of the New South Wales Court of Appeal in Christie v Purves[10] (‘Christie’), where a claim against an accountant for failing to ensure that its client paid the maximum amount of superannuation contributions to enable him to claim tax deductions in tax years which pre‑dated the issue of the proceeding by more than six years. Senior counsel submitted that the facts in the current case are materially indistinguishable from the facts in Christie,[11] and that no additional facts will alter the position.
[10](2007) 69 ATR 155.
[11]Ibid.
Senior counsel for Nexus submitted that the only consequence of the audit by the ATO was the exposure of a liability that was already there, being Mr Rowsthorn’s inability to legally claim the depreciation allowance in each tax year. It was suggested that Mr Rowsthorn’s position in the current case is on all fours with the position of the plaintiff in Christie,[12] where Ipp JA stated as follows:
Section 17 of the ITAA 1936, therefore, imposed an obligation on Mr Christie to pay income tax at the appropriate rates for each financial year. It was common ground that the income tax for each financial year only became payable on receipt by Mr Christie of the ATO’s assessment of the taxation payable by him. On 11 December 2001, Mr Christie received amended notices of assessment for the years in which erroneous tax returns had been submitted. His income tax became due and payable as at that date.
For Mr Christie to have reduced his income tax for the financial years 1991, 1992 and 1993 by making appropriate contributions to superannuation, the contributions would have had to have been made in the years in question (and he would have had to have shown in each of those years that he was entitled to the benefit of income tax concessions available to self-employed persons for superannuation contributions).
If no such superannuation contribution was duly made in the financial year concerned, the opportunity for reducing the taxpayer’s taxable income for that financial year was lost, irretrievably, at the end of that financial year.
Thus, at the end of each of the 1991, 1992 and 1994 financial years, Mr Christie, by not making the requisite contributions in each such year (and in being incorrectly described as an employee of Bretfind in the tax returns of those years), irretrievably lost his entitlement to have his taxable income (and the income tax payable by him) reduced for the year in question. The fact that the income tax only became due on receipt of the income tax assessment was immaterial to the question of when his loss occurred.
Therefore, the damages Mr Christie sustained by Mr Purves’ negligence, in respect of the failure to make the requisite superannuation contributions in due form, were incurred at the end of each of the tax years in which those contributions should have been made.
It follows that, as Mr Christie commenced his proceeding on 15 May 2003, his claims in respect of the loss he sustained by reason of his failure properly to make those contributions are time-barred.[13]
[12]Ibid.
[13]Ibid, 164.
Senior counsel for Nexus submitted that Mr Rowsthorn lost his entitlement to a reduction in his tax liability for the tax years in the relevant period by failing to arrange his affairs so as to earn and record income referable to Grey Swallow in those tax years. Accordingly, any subsequent date (such as the date of the amended assessments) was not the date when Mr Rowsthorn first suffered loss in reliance upon Nexus’ allegedly negligent advice.
In response, counsel for Mr Rowsthorn submitted that his case was that his tax liability was not conclusively fixed by the tax legislation in the relevant tax year by the lodgment of his tax returns, but rather only crystallised with the issue of the amended assessments in February 2015, that is, within the relevant limitation period. She observed that the claim for shortfall interest and the general interest charge was not referable to a tax liability which crystallised in the relevant tax year, as those charges are levied at the discretion of the ATO when issuing an amended assessment.
Counsel for Mr Rowsthorn distinguished the position in the current case from the position in Christie.[14] She submitted that the critical difference between the position in that case and the current case was that, in Christie,[15] the tax legislation required the superannuation contributions to have been paid in the relevant tax year in order to give rise to the entitlement, such that the error could not have later been rectified with retrospective effect. However, in the current case, the legislative regime governing the self-assessment of tax, and the operation of the ATO’s audit and assessment process means that Mr Rowsthorn’s tax liability was not fixed by his submission of the tax returns prepared by Nexus, but rather once the process of audit, assessment, objection and appeals was exhausted. Up until that time, it was open to Mr Rowsthorn (and Nexus) to make amendments to his financial records, and the financial records of Woodside, which carried with it the opportunity to alter his tax liability in any particular tax year. In her written outline of submissions, counsel for Mr Rowsthorn submitted as follows (citations omitted):
Correctly characterized, Mr Rowsthorn’s economic interest infringed was the liability he incurred first upon the issue of the amended income tax assessments in February 2015, as a consequence of Nexus’ negligence in the preparation of Mr Rowsthorn’s income tax returns, to pay tax equal to the deductions he had previously claimed. Until the issue of the amended income tax assessments, no loss was ascertainable.
[14]Ibid.
[15]Ibid.
Counsel for Mr Rowsthorn submitted that he was not exposed to any loss in the relevant period, and thus Mr Rowsthorn’s position was analogous to the position of the plaintiff in Wardley v Western Australia (‘Wardley’),[16] where the plaintiff’s loss was contingent upon events occurring which may not occur.[17]
[16](1992) 175 CLR 514.
[17]See a further discussion of Wardley at paragraphs 35 and 36 of these reasons.
At the resumed hearing after the filing of the amended statement of claim, senior counsel for Nexus submitted that, notwithstanding the amendment to the statement of claim to include an allegation that Nexus’ negligent conduct extended to its failure to correct the errors that it had made by earlier failing to ensure that Mr Rowsthorn earned income from the use of Grey Swallow, Mr Rowsthorn’s cause of action was complete at the time the tax returns were lodged with respect to the tax years in the relevant period. An allegation that there has been a failure to rectify a mistake does not bring into existence an additional cause of action over and above the cause of action which accrued upon the making of the original mistake. Further, a failure to fulfil a definite obligation results in a breach, and the continual failure to fulfil that obligation is not a further breach. In any event, the failure to rectify the mistake occurred immediately after the mistake: that is, any obligation to rectify the mistake arose as soon as the mistake was made, such that Mr Rowsthorn’s claims would still be time barred. The reference in the amended statement of claim to what ‘could’ have been done at any time prior to the issuing of the amended assessments illustrates what should have been done immediately.
Senior counsel for Nexus submitted that the relevant economic interest said to have been infringed was Mr Rowsthorn’s entitlement to reduce the tax payable by him by validly claiming the depreciation allowance in each relevant tax year. The issue of the amended assessments by the ATO was merely an exposure of Mr Rowsthorn’s inability to claim the depreciation allowance in the tax years in the relevant period. The loss sustained as a result was not contingent on the issue of the amended assessments or the subsequent decision of the AAT. It was a consequence of the operation of the revenue legislation upon Mr Rowsthorn’s liabilities in each tax year in the relevant period.
Senior counsel for Nexus submitted that the inclusion of shortfall interest and general interest charges in the claim for loss and damage reveals that the interest infringed is the original liability for tax – not Mr Rowsthorn’s interest in avoiding review by the ATO. In any event, the amended statement of claim does not refer to any obligation on the part of Nexus to guard against the possibility of the ATO exercising its powers of review. Senior counsel relied upon the decision of the New South Wales Court of Appeal in Winnote v Page,[18] where the Court held that where a solicitor had made an error which could have later been corrected, the cause of action accrued at the time the initial error was made, not when the period within which the error could have been corrected expired.[19] He submitted that a plaintiff cannot choose to ignore the limitation consequences of an earlier breach by confining its claim to a failure to rectify that breach within the limitation period.
[18](2006) 68 NSWLR 531.
[19]Ibid, 544.
Counsel for Mr Rowsthorn submitted that the filing of a tax return is merely the proffering of one’s assessment of one’s own tax liability, not the crystallisation of that liability. It is always open to a taxpayer (and it was always open to Mr Rowsthorn during the period of Nexus’ retainer) to amend the tax return and the underlying records to alter the basis upon which his tax liability was calculated. Contrary to the submissions made on behalf of Nexus, this is not a case where the ATO audit exposed a liability that was always there: the exposure was contingent upon there being no positive action taken by Nexus to remedy the error in the underlying records supporting the tax returns to give effect to the agreement between Mr Rowsthorn and Woodside. It was Nexus’ ongoing failure to protect Mr Rowsthorn’s interests, in circumstances where the exposure to additional tax (and interest charges) remained conditional for a period of time, that was a breach of its continuing obligations under its retainer.
Counsel for Mr Rowsthorn submitted that the reference to ‘could’ in paragraph 10A of the amended statement of claim is intended to refer to the fact that it was feasible for Nexus to take action to amend the tax returns (and the underlying records) at any time up to the issue of the amended assessments, by reason of the machinery put in place by the Income Tax Assessment Act 1936 (Cth) (‘ITAA’). The current case is also distinguishable from the position in Bodycorp Repairers Pty Ltd v Holding Redlich[20] (‘Bodycorp’), where the Court held that the relevant economic interest infringed by the defendant solicitors’ conduct was the failure to include in an agreement between Bodycorp and AAMI (parties which would subsequently be embroiled in protracted litigation) an enforceable restraint of trade clause (which was a critical element of its business model). Macaulay J held (and the Court of Appeal agreed) that Bodycorp suffered loss from the time that AAMI conducted itself on the basis that the restraint clause was unenforceable, not when the unenforceability of the relevant clause was confirmed by this Court over a decade later. Counsel for Mr Rowsthorn contrasted the circumstances in Bodycorp[21] (where it would not have been feasible to negotiate an agreement with an enforceable restraint of trade clause after the agreement had been executed) with the position in the current case, where it would have been feasible for Nexus to advise Mr Rowsthorn to take steps to alter his liability at any time prior to the issue of the amended assessments.
[20][2017] VSC 215 (Macaulay J) and [2018] VSCA 17 (Court of Appeal).
[21]Ibid.
Counsel for Mr Rowsthorn submitted that Nexus’ position in this application is based upon a misapprehension of the time at which the tax liability becomes unconditional for all purposes. The loss claimed by Mr Rowsthorn is not a loss which was ‘always there’. Indeed, the imposition of interest charges and the incurring of fees were not losses which arose in the tax years in the relevant period. Ultimately, the question of when Mr Rowsthorn actually suffered loss will require an analysis of the relevant legislative scheme, and possibly expert evidence regarding the operation of the process of self-assessment and assessment.
Discussion
Accordingly, the issue in the current case is whether Nexus’ contention that Mr Rowsthorn suffered loss and damage at the end of each tax year in the relevant period (or when the tax returns for those tax years were submitted to the ATO by Nexus) is so likely to succeed that Mr Rowsthorn’s claims have no real prospects of success. Put another way, is Mr Rowsthorn’s contention that the tax liability for each tax year in the relevant period did not crystallise until the issue of the amended assessments in 2015 (or, perhaps, after the expiry of the applicable objection and/or appeal period) sufficiently arguable to justify the claims in this proceeding going to trial?
In my view, the current proceeding is not of a nature where it could safely be said, using the language of the Court of Appeal in Bodycorp,[22] that there is no relevant issue of fact which requires resolution, and there is no likelihood that there is any prospect further evidence could materially alter the date upon which Mr Rowsthorn’s cause of action in negligence accrued. Further, while the facts in other cases where it is necessary to determine when actual damage was first suffered are illustrative of the relevant principles, I note the observations of Brennan J in Wardley[23] to the effect that the determination of whether damage is suffered immediately upon a plaintiff’s entry into a relevant transaction, or is contingent upon certain events occurring, requires an analysis of the particular facts of the case, and the answer may vary according to the facts of the particular case.[24] Here, the factual inquiry is made more complex by the ongoing nature of Nexus’ retainer, and by the particular features of the Australian income tax assessment regime.
[22][2018] VSCA 17.
[23](1992) 175 CLR 514.
[24]Ibid, 540-1. See also the decision of the New South Wales Court of Appeal in Murgolo v AAI Ltd (t/as AAMI) [2019] NSWCA 295, delivered while judgment in this application was reserved, where Basten JA observed (at [62]) that ‘limitation questions should generally not be decided in interlocutory proceedings except in the clearest of cases’.
A number of the authorities referred to me by senior counsel for Nexus in support of Nexus’ application are what can be described as ‘transaction’ cases, where a defendant’s allegedly negligent advice had caused the plaintiff to enter into an improvident transaction (in that it caused the plaintiff to be exposed to an unforeseen liability, or was not effectual in achieving its objects), or a transaction which was less advantageous than the plaintiff understood it to be. The following are examples of ‘transaction’ cases:
(a) Bodycorp,[25] where the solicitor’s advice caused the plaintiff to enter into an agreement with an ineffective restraint of trade clause;
(b) Winnote v Page,[26] where the solicitor negligently advised the plaintiff to enter into a real property lease rather than obtain a mining licence; and
(c) Taluja v Orford,[27] where the solicitor had failed to ensure that a lease included certain covenants favouring the interests of the client.
[25][2019] VSC 215; [2018] VSCA 17.
[26](2006) 68 NSWLR 531.
[27][2014] NSWSC 714.
It is generally accepted in the ‘transaction’ cases that, once a solicitor or other professional advisor has negligently advised or permitted the client to enter into a disadvantageous transaction, the breach has occurred and actual damage has been suffered, and any subsequent failure to take steps to remedy the breach does not give rise to a fresh cause of action. In Hammond v Minister for Works (‘Hammond’),[28] the Full Court of the Supreme Court of Western Australia observed that:
In none of the authorities to which we were referred, and which I have read in my own researches, has it been held that a breach of an obligation to perform a single act, by a date capable of determination, results in a fresh cause of action each day there is non‑performance. Once the obligation is to be completely discharged by a single act, the failure to perform gives rise to only one cause of action, although that failure to perform may continue indefinitely and the obligation may even be capable of being specifically enforced.[29]
[28](1992) 8 WAR 505.
[29]Ibid, 516.
Relevantly for the purposes of the current application, Ipp J in Hammond[30] considered when a continuing cause of action might arise, stating as follows:
… what is a continuing duty to act? This is not capable of being answered by a ready definition. It all depends upon the nature of the duty, the parties’ intention will be inferred from the nature and terms of the duty; relevant factors are whether it is capable of being performed within a time capable of determination, and whether it is capable of being performed over a continuous period.[31]
[30](1992) 8 WAR 505.
[31]Ibid, 511.
Ipp J in Hammond[32] also referred to the decision of Dixon J in Larking v Great Western (Nepean) Gravel Limited (in liquidation)[33] (‘Larking’) where his Honour stated:
If a convenantor undertakes that he will do a definite act and omits to do it within the time allowed for the purpose, he has broken his covenant finally and his continued failure to do the act is nothing but a failure to remedy his past breach and not the commission of any further breach of his covenant. His duty is not considered as persisting and, so to speak, being for ever renewed until he actually does what he promised. On the other hand, if his covenant is to maintain a state or condition of affairs, as, for instance, maintaining a building in repair, keeping the insurance of a life on foot, or affording a particular kind of lateral or vertical support for a tenement, then a further breach arises in every successive moment of time during which the state or condition is not as promised, during which, to pursue the examples, the building is out of repair, the life uninsured, or the particular support unprovided.
The distinction may be difficult of application in a given case, but it must be regarded as one depending upon the meaning of the covenant.[34]
[32](1992) 8 WAR 505.
[33](1940) 64 CLR 221.
[34]Ibid, 236.
To interpolate here, the last observation above indicates that determining whether a duty owed by Nexus is a duty that can be breached ‘once and for all’, or is a continuing obligation, is heavily dependent upon the terms of the retainer between the parties.[35]
[35]Ibid. See also Midland Bank Trust Co v Hett, Stubbs and Kemp [1979] Ch 384, where Oliver J distinguished the circumstances where a solicitor had given wrongful advice from a failure to carry out a step required in a transaction, the latter being a continuing breach of a continuing duty.
The statement in Larking[36] reproduced above was also referred to by the New South Wales Court of Appeal in Winnote v Page.[37] In that case, a solicitor negligently advised a client, a peat miner, to take a lease over the property on which the peat was mined, rather than obtain a mineral extraction licence. A third party subsequently obtained the right to extract peat from the property, effectively putting the client out of business. The advice to enter into the lease, and the preparation and execution of the lease, took place more than six years prior to the issue of the proceeding, although it was arguable that the solicitor’s retainer extended into the limitation period. The majority of the New South Wales Court of Appeal held that the plaintiff suffered actual damage upon the execution of the lease, because he obtained an inferior bundle of rights than he would have if the solicitor had not been negligent. The client’s loss and damage accrued immediately, and was not contingent upon the third party obtaining a mining licence (which occurred within the limitation period). Further, the solicitor did not owe the plaintiff a continuing duty to provide accurate advice regarding the acquisition of the right to extract peat. The failure of the solicitor to correct the advice did not give rise to an independent breach of duty occurring within the limitation period, as it was a failure to remedy the existing breach, not the commission of a further breach.
[36](1940) 64 CLR 221.
[37](2006) 68 NSWLR 531.
Similarly, in Taluja v Orford,[38] another case involving solicitors, the plaintiff sought to amend her pleading to include an allegation that the solicitors were obliged, even after the conclusion of the relevant retainer, to consider whether they had acted negligently in advising upon and preparing a lease for execution by the plaintiff, and if so, to advise accordingly. The application was rejected by Slattery J on the basis that the proposed pleading was insufficient to found a continuing duty to keep a matter under constant review. His Honour stated that, even if there was a continuing duty of care: ‘… a fresh cause of action will only arise if a fresh breach causes loss going beyond the loss resulting from the barred cause of action.’[39]
[38][2014] NSWSC 714.
[39]Ibid [111].
Based upon the authorities above, it seems that Mr Rowsthorn’s contention that there was an ongoing duty on the part of Nexus to monitor the situation and take corrective action to ensure that Mr Rowsthorn received income from Woodside in each tax year after the lodgment of the relevant tax returns is not strong. However, given the manner in which Mr Rowsthorn’s case is pleaded, I would be reluctant to conclude that Mr Rowsthorn’s claims in that regard have no real prospects of success, given that, unlike in Winnote v Page,[40] or in Taluja v Orford,[41] there was an ongoing retainer of Nexus well beyond the tax years in the relevant period.
[40](2006) 68 NSWLR 531.
[41][2014] NSWSC 714.
However, Mr Rowsthorn seems to me to be on stronger ground when contending that his loss and damage was contingent only until the ATO issued the amended assessments. The critical authority of relevance to this contention is the decision of the High Court in Wardley,[42] which concerned a claim by the government of Western Australia, which was induced by misleading and deceptive statements to enter into an agreement to indemnify a bank in relation to loans made to a customer. The Court held that the claim was not time barred, because the loss and damage did not accrue until the customer defaulted on its obligations to the bank, thus triggering the bank’s claim for an indemnity. The plurality distinguished the English line of authority whereby the loss is held to accrue at the time of entry into an improvident transaction, stating:
In our opinion, in such a case, the plaintiff sustains no actual damage until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred.[43]
[42](1992) 175 CLR 514.
[43]Ibid, 532 (per Mason CJ, Dawson, Gaudron and McHugh JJ).
Writing separately, Brennan J said that a loss could be incurred upon entry into an agreement if loss is inevitable, but if loss depends upon extrinsic circumstances, the loss will not accrue until the contingency has eventuated.
It is difficult to fully reconcile the decision of the majority in Winnote v Page[44] with Wardley,[45] and some of the authorities which have followed Wardley.[46] In Murphy v Overton Investments Pty Ltd (‘Murphy’),[47] the High Court found that the plaintiffs had entered into a lease relying upon misleading and deceptive statements, the terms of which permitted the landlord to increase the outgoings payable by the plaintiffs, were not barred from bringing their claims by reason of a statutory limitation period. Notwithstanding the fact that, as in Winnote v Page,[48] the wrongful conduct of the defendant had caused the plaintiff to obtain an inferior bundle of rights, the High Court in Murphy[49] held that loss was only suffered when the landlord actually commenced charging the additional outgoings.
[44](2006) 68 NSWLR 531.
[45]Ibid.
[46](1992) 175 CLR 514.
[47](2004) 216 CLR 388.
[48](2006) 68 NSWLR 531.
[49](2004) 216 CLR 388.
Similarly, in Bodycorp,[50] the Court of Appeal held that, consistent with Wardley,[51] the time did not commence to run from the date upon which Bodycorp entered into the agreement with the unenforceable restraint of trade clause, but when AAMI ignored the restraint, which Bodycorp was legally powerless to enforce. This finding did not assist the plaintiff in Bodycorp,[52] as that later date was also outside the limitation period.
[50][2018] VSCA 17.
[51](1992) 175 CLR 514.
[52][2018] VSCA 17.
A similar approach was adopted by the New South Wales Court of Appeal in Wardman v Hatfield,[53] by White J in Issa v Issa,[54] and the High Court in Commonwealth of Australia v Cornwell.[55]
[53][2003] NSWCA 283.
[54][2015] NSWSC 112.
[55](2007) 229 CLR 519.
A review of the above authorities tends to suggest that the decision in Winnote v Page[56] is somewhat of an outlier,[57] given that it was arguable that the plaintiff did not suffer loss until the risk to which he was exposed by the solicitor’s negligence came to pass by reason of the conduct of a third party, being the party who ultimately obtained the mining licence. Indeed, in that case, Basten JA, who disagreed with the majority, considered that it was arguable that no loss was suffered until it became impossible for the plaintiff to obtain a mining licence, that is, until the situation was, using the language of Ipp JA in Christie[58], irretrievable.
[56](2006) 68 NSWLR 531.
[57]Described by Professor Dal Pont in Law of Limitation (2016, LexisNexis Butterworths) at [6.13] as a ‘difficult case’.
[58](2007) 69 ATR 155.
Another way of approaching the issue of when loss and damage accrue for the purposes of determining from what time the limitation period commences to run is to consider whether the negligent conduct caused the loss of a chance (which carries with it actual and ascertainable loss and damage) or the chance of a loss (a contingent loss). As stated by Hodgson JA in Segal v Fleming:[59]
In the former case, where a chance is lost, it will never be known how things would have turned out if the chance had not been lost, so that the only possible compensation a plaintiff can obtain is compensation for the value of the chance itself. Accordingly it is reasonable to require a plaintiff to commence proceedings within the limitation period once the chance has been lost, and reasonable to award damages on that basis against a defendant.
On the other hand, where a person incurs a chance, even a substantial chance, of suffering a loss, in due course it may become clear that no loss is ultimately suffered; and so long as there is some appreciable chance that no loss will be suffered, it is unreasonable to require a plaintiff to commence proceedings and unreasonable to award damages against a defendant. However, once there is actual loss, even if there is also the chance of further loss, a plaintiff must commence proceedings within the appropriate limitation period, and can obtain damages reflecting actual loss suffered plus damages reflecting the chance of any further loss.[60]
[59][2002] NSWCA 262.
[60]Ibid [25]-[26].
What the above discussion illustrates is that the question of whether a loss is suffered immediately upon entry into an improvident transaction (in this case, analogous to the time of the lodgment of the tax returns), or does not crystallise until the risk to which a plaintiff is exposed eventuates (equivalent to the date of the issue of the amended assessments), necessitates a very fact specific enquiry. Here, it seems to me to be at least arguable that, upon lodgment of the tax returns, Mr Rowsthorn became exposed to the ‘chance of a loss’, where the loss was contingent upon action being taken by the ATO.
What then are the factual matters that require resolution in this proceeding, or would at least shed some light upon the question of when Mr Rowsthorn suffered actual damage? First, the nature and scope of Nexus’ retainer are relevant to the question of whether Nexus had a continuing duty to Mr Rowsthorn to minimise his exposure to pay tax, including any additional interest charges and penalties (which would not have been due under the original assessments). While Nexus does not deny the existence of its retainer, there are subtle differences between the parties on the pleadings. Mr Rowsthorn pleads the retainer in very broad terms: as well as pleading that Mr Rowsthorn retained Nexus to provide accounting, tax agent, and tax related business advisory services to him and other entities within the Wadham Park Group, he also alleged that:
… Nexus knew or ought reasonably have known that Mr Rowsthorn required its services for the management of his personal financial affairs, including the preparation and lodgment of his personal income tax returns, and the management of the financial affairs of all of the entities within the [Wadham Park Group].
In its defence, Nexus pleaded in response to Mr Rowsthorn’s allegations regarding the terms of its retainer as follows:
3. To the allegations in paragraph 3 of the SOC, Nexus:
(a) says that:
(i)since about 21 September 2005, Mr Rowsthorn engaged Nexus in each financial year to assist with preparation and compilation of his personal income taxation returns (and Quarterly Instalment Activity Statements and Business Activity Statements) for self-assessment, and to lodge them, when instructed and as directed, and on the basis of information and records provided by Mr Rowsthorn as to the dealings and arrangements which Mr Rowsthorn had undertaken in the relevant financial period (Rowsthorn Services);
…
(ii)there were terms of the engagement that:
(A)the extent of Nexus’ procedures and services would be limited exclusively for the purpose of the Rowsthorn Services;
(B)Mr Rowsthorn was responsible under self‑assessment of taxation for keeping full and proper records to facilitate the preparation of a correct return;
(C)Mr Rowsthorn was responsible for the reliability, accuracy and completeness of the accounting records, particulars and information provided to Nexus for the purpose of the engagement; and
(D)the engagement of Nexus could not be relied on by Mr Rowsthorn to disclose irregularities and errors that may exist, but Nexus would inform Mr Rowsthorn of any matters that came to its attention:
…
(iii)for the financial years ending 30 June 2008 to 2011, pursuant to Mr Rowsthorn’s instructions, Nexus prepared annual income tax returns for Mr Rowsthorn, and lodged them;
(b)says that:
(i)since about September 2005, other companies in the Wadham Park Group each engaged Nexus to provide accounting and tax agent services, when instructed and as directed, and on the basis of information and records provided by those companies as to the dealings and arrangements which each had undertaken in the relevant financial period;
(ii)for the financial years ending 30 June 2008 to 2011, pursuant to the instructions of the companies in the Wadham Park Group, Nexus prepared financial statements and income taxation returns for the companies, and lodged them; and
…
(c)otherwise denies every allegation in paragraph 3.
In effect, Mr Rowsthorn alleges that he entrusted the management of his financial affairs and those of the Wadham Park Group to Nexus, while Nexus contends that it had a more confined role, assisting Mr Rowsthorn with the preparation and lodgment of tax returns and other tax related documents, but otherwise acting on the instructions and information provided by Mr Rowsthorn. Whether Nexus had an ongoing obligation to avoid exposure to payment of additional tax above and beyond the preparation of tax returns in each tax year in the relevant period may well turn upon the precise nature and scope of Nexus’ retainer, which is not amenable to summary determination. While this contention is not the strongest plank of Mr Rowsthorn’s argument, it is difficult to say that it is so hopeless that it should not proceed.
Secondly, as highlighted by counsel for Mr Rowsthorn in her submissions, the question of whether Mr Rowsthorn suffered actual damage at the end of each of the tax years in the relevant period, or whether any loss was contingent upon other events occurring, requires some further analysis underpinning a taxpayer’s liability to pay tax. My brief review of the relevant provisions of the ITAA indicates that, in the case of tax returns lodged by an individual, the ATO may accept the information provided by a taxpayer, in whole or in part, before issuing an assessment of the tax payable by the taxpayer in any given tax year, which is presumably what occurred in Mr Rowsthorn’s case. Section 170 of the ITAA provides that the ATO may issue an amended assessment within two years of the issue of the original assessment, although the period in which an amended assessment can be issued is extended to four years in the case of individuals with more complex taxation and/or business affairs (Mr Rowsthorn may well fit into the latter category, but there is no evidence on that matter), or for any period of time in the event of fraud or tax evasion.
Arguably, if the original assessment was based upon the inclusion of the depreciation allowance for Grey Swallow in Mr Rowsthorn’s tax returns, Mr Rowsthorn suffered no actual loss at the time that Nexus lodged the tax returns on his behalf, as the original tax returns incorporated a deduction for the depreciation in the value of Grey Swallow, and the original assessment was calculated on that basis. However, for the two or four year period after the original assessment, Mr Rowsthorn was exposed to a loss in the event that the ATO undertook an audit of the financial records of the Wadham Park Group, and issued amended assessments (which it in fact did). It seems to me to be at least arguable that Mr Rowsthorn did not suffer actual loss and damage until the ‘contingency’ (being the audit and the issue of the amended assessments) occurred.
I accept Nexus’ characterisation of Mr Rowsthorn’s economic interest as being the reduction of his tax liability in any given tax year by claiming the depreciation allowance in respect of Grey Swallow, rather than his economic interest in avoiding review by the ATO. However, the relevant question in the current application is not when Nexus first breached its duty, but rather when that economic interest was irrevocably or irretrievably infringed? Contrary to the submissions advanced on behalf of Nexus, I cannot be so confident that it is at the end of each tax year in the relevant period, or upon the lodgment of each tax return, to conclude that Nexus is entitled to summary judgment at this stage of the proceeding.
One issue in the current application is whether, once Nexus had submitted the tax returns for each tax year in the relevant period, the opportunity to alter the records of Mr Rowsthorn and Woodside to reflect the arrangement between them regarding the payment of fees for the use of Grey Swallow was ‘irretrievably lost’. To someone without a great deal of experience in the taxation sphere, it seems to be unlikely that the ATO would look kindly upon taxpayers retrospectively re‑engineering their financial records to improve their taxation position, but the question of whether it would have been feasible for Mr Rowsthorn to do so after the lodgment of the original tax return is really a factual matter going to causation which is difficult to resolve on a summary basis.
For completeness, given that I have found that it is at least reasonably arguable that Mr Rowsthorn’s claims against Nexus in this proceeding are not time barred, it is unnecessary for me to consider the evidence and submissions advanced by Nexus with respect to the likely costs associated with proceeding to trial. I understand that evidence and those submissions are directed towards urging upon the Court a more robust approach to determining limitations questions upon a summary basis, given the potential saving in time and costs. Consideration of the extent to which these matters are relevant to whether a proceeding should be dismissed summarily by reason of the overarching obligations of the Court under the Civil Procedure Act 2010 (Vic) is best left to a more clear cut case.
Accordingly, the application for summary judgment is dismissed, without prejudice to Nexus’ right to press its limitations defence at trial. I shall hear further from counsel regarding further directions for the conduct of the proceeding and the question of costs.
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