Thalia Corporation Pty Ltd v Bentleys (SA) Pty Ltd - [2013] SASC 172

SUPREME COURT OF SOUTH AUSTRALIA
(Magistrates Appeals: Civil)
THALIA CORPORATION PTY LTD v BENTLEYS (SA) PTY LTD
[2013] SASC 172
Judgment of The Honourable Justice Sulan
12 November 2013
PROFESSIONS AND TRADES - ACCOUNTANTS AND AUDITORS - ACCOUNTANTS - DUTIES AND LIABILITIES - NEGLIGENCE
TORTS - NEGLIGENCE - ESSENTIALS OF ACTION FOR NEGLIGENCE - STANDARD OF CARE
TORTS - NEGLIGENCE - ESSENTIALS OF ACTION FOR NEGLIGENCE - DAMAGE - CAUSATION
TORTS - NEGLIGENCE - CONTRIBUTORY NEGLIGENCE - GENERALLY
The respondent is an accountancy firm which had been retained by the appellant to provide services including lodging quarterly activity statements at the Australian Taxation Office, and drafting and lodging annual income tax returns. The respondent sued the appellant in the Magistrates Court for outstanding fees. As part of its defence, the appellant maintained that the respondent’s negligence had caused the Australian Taxation Office to conduct an audit of the appellant’s business, such that the respondent was liable for the fees which it charged in relation to the audit.
The Magistrate concluded that the respondent had been negligent in failing to correct a misallocation of elevator invoices in three BASs in the 2008 financial year. The 2008 income tax return was lodged by the respondent on the correct basis, creating a significant discrepancy between business statements and income tax returns. The Magistrate found that while discrepancies between business statements and tax returns were a cause of the audit, the appellant had not established that the respondent’s negligence as to the elevator invoices was a sufficient cause of the audit. As to other discrepancies between business statements and tax returns, the Magistrate found that without evidence as to how those discrepancies arose he could not find the respondent negligent.
On appeal the appellant submits that the Magistrate erred in finding that it had not established that the respondent’s negligence as to the elevator invoices was a sufficient cause of the audit. The appellant further submits that the Magistrate erred in finding that the respondent was not negligent in respect of the other discrepancies. The respondent maintains the correctness of the Magistrate’s findings. Further, the respondent submits that losses deriving from the ATO audit are not recoverable because the audit was not within a reasonably foreseeable class of loss. The respondent submits that if it is liable, the appellant is liable for contributory negligence.
HELD (allowing the appeal):
1. The Magistrate correctly found that the respondent had been negligent in respect of the elevator invoices.
2. The Australian Taxation Office audit was within a reasonably foreseeable class of loss resulting from the respondent’s negligence.
3. The Magistrate erred in finding that the appellant had not established that the respondent’s negligence as to the elevator invoices was a sufficient cause of the audit.
4. The appellant’s bookkeepers’ conduct was such that the appellant should be liable for contributory negligence. It is appropriate to fix the respondent’s liability at 75 per cent and the appellant’s liability at 25 per cent. The judgment of the Magistrate is set aside, and in substitution there will be a judgment in favour of Bentleys in the amount of $3,096.03, plus interest.
Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) s 7, referred to.
Walker v Hungerfords (1987) 49 SASR 93; Voli v Inglewood Shire Council (1963) 110 CLR 74; Henderson v Amadio Pty Ltd (No 1) (1995) 62 FCR 1; Pech v Tilgals (NSWSC unreported, 15 April 1994) BC9402477; Wallace v Kam [2013] HCA 19; Rosenberg v Percival (2001) 205 CLR 434; Sacca v Adam and R Stuart Nominees Pty Ltd (1983) 33 SASR 429; Hungerfords v Walker (1989) 171 CLR 125; Podrebersek v Australian Iron and Steel Pty Ltd (1985) 59 ALR 529; Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361, considered.

THALIA CORPORATION PTY LTD v BENTLEYS (SA) PTY LTD
[2013] SASC 172
Magistrates Appeal: Civil

SULAN J: The respondent Bentleys (SA) Pty Ltd (‘Bentleys’) sued the appellant Thalia Corporation Pty Ltd (‘Thalia’) for outstanding fees due for accounting services. A Magistrate entered judgment for Bentleys in the sum of $29,103.40. Thalia now appeals against the judgment.
Background
Bentleys is an accountancy firm which provided services to Thalia and other companies and entities associated with it. At the relevant times, Thalia was the trustee of the Adelaide Discretionary Trust (‘ADT’), and in that capacity held and dealt with commercial properties which were leased through the agency of Knight Frank. For ease, I will refer to “Thalia” as constituting both the trustee company and the ADT.
From approximately 2004 until early 2011, Bentleys provided accountancy services to Thalia and related entities, including the lodgement of quarterly Business Activity Statements (‘BASs’) and annual income tax returns (‘ITRs’).
In March 2010, the Australian Taxation Office (‘ATO’) advised Thalia and Bentleys that the ATO intended to conduct an audit of Thalia’s BAS lodgements for the periods 1 January 2006 to 31 December 2009, and its ITR lodgements for the financial years ended 30 June 2005 to 30 June 2008 inclusive.
Bentleys sought to recover fees for work done in relation to the audit. Thalia claimed that Bentleys were negligent in failing to reconcile inconsistencies between the BASs and the ITRs, which was a substantial reason for the ATO determining to conduct the tax audit. Thalia contends that it should, therefore, not be required to pay Bentleys for work carried out by them related to the tax audit.
In the lead-up to and during the ATO audit, which was conducted between March 2010 and March 2011, the ATO corresponded extensively with Thalia and Bentleys. The ATO provided reasons as to why it was conducting the audit. At a meeting on 1 October 2010 between Ms Karen Adams of the ATO and Mr Iammarrone, then employed by Bentleys, Ms Adams advised that the reason for selecting Thalia for audit was because of discrepancies between ITRs and BASs. At or prior to the meeting on 1 October 2010, there had been no explanation proffered to the ATO for the large discrepancy between the 2008 BASs and ITR.
The ATO had prepared a table (marked ‘L’) which its officers provided to Mr Iammarrone at the meeting. That table outlined discrepancies between Thalia’s BASs and ITRs for the 2005-2009 tax years. In 2006, there was a discrepancy in expenses of $339,242, and a discrepancy in income of $476,358. In 2008, the income discrepancy was $17,480 and there was a discrepancy in expenses of $262,884. The other years in the period had discrepancy figures ranging from about $17,000 up to $99,403. At that meeting, Ms Adams agreed to limit the period of the audit to 2008.
In the 2008 financial year, Thalia commissioned a contractor, KONE Elevators Pty Ltd (“KONE”) to upgrade lifts in one of the buildings it owned. The work was carried out, and Thalia made three payments to KONE in the 2008 financial year, totalling $278,932.20.
In three BASs lodged in the 2008 financial year, the KONE invoices were incorrectly allocated as non-capital expenditure. When Thalia’s 2008 ITR was prepared by Bentleys, Bentleys treated the three payments as capital expenditure. This created a significant discrepancy between the 2008 BASs and ITR.
In March – April 2011 Bentleys rendered three invoices to Thalia, totalling $34,892.55, for accountancy work. Thalia refused to pay. Bentleys commenced proceedings in the Magistrates Court, seeking to recover the fees.
Thalia defended Bentleys’ claim. It asserted that Bentleys’ charges were excessive, that some of the work charged was not authorised by Thalia, that some of the work was for entities related to Thalia, and that Bentleys had failed to provide part of the work to Thalia. Each of those bases was rejected by the Magistrate. They are not maintained on appeal.
Thalia submitted before the Magistrate that the ATO audit was caused by the negligence of Bentleys and, accordingly, it was entitled to damages equivalent to the fees charged by Bentleys for work necessitated by the audit.
Mr Storer, a Director of Bentleys who had ultimate responsibility for the Thalia file during the ATO audit, gave evidence. Bentleys also called Mr Vlassis, an accountant who Bentleys had retained to provide an expert report. Mr Iammarrone, a former employee of Bentleys who was the primary accountant working on the Thalia file prior to and during the ATO audit gave evidence. In late 2010 Mr Iammarrone resigned from Bentleys. At the time of the trial he was working at a different accountancy practice, but continued to provide accountancy services to Thalia. Ms Travers, the sole director of Thalia, gave evidence.
The appeal is limited to the issue of whether Bentleys was negligent and whether that negligence was a sufficient cause of the ATO audit.
The pleadings
Thalia’s assertion of negligence was not pleaded as a counterclaim. In the week prior to trial, Thalia filed a separate claim against Bentleys in the Magistrates Court. In that claim Thalia pleaded that Bentleys was negligent, and that Bentleys’ negligence had caused the ATO audit. The Magistrate ordered that the majority of Thalia’s claim be heard with the claim at trial.[1]
[1] The remainder of Thalia’s claim is no longer pressed.
Thalia contended before the Magistrate that given the amount and nature of the KONE invoices, Bentleys should have investigated their allocation in the BASs. Further, when Bentleys identified the misallocation, it should have corrected the errors in the BASs so as to reduce discrepancies between ITRs and BASs. Thalia contended that Bentleys was responsible for all of the discrepancies between BASs and ITRs for the period 2005 to 2009. It appears that Thalia’s position was that Bentleys had a duty to not only correct the discrepancies which arose by way of the KONE invoice misallocation, but had a duty to correct all discrepancies which arose between BASs and ITRs, for the years 2005 to 2009.
Bentleys’ submissions focused exclusively on the KONE invoices. Bentleys submitted that Thalia had failed to establish negligence in respect of those invoices. Bentleys submitted that, because the errors made no difference to the GST payable, there was no need to amend the BASs and thus no breach of duty. Bentleys contended that in any case the misallocation of the KONE invoices was not a sufficient cause of the audit, and that the audit was not within a reasonably foreseeable class of loss as to be recoverable in negligence. Bentleys also asserted that Thalia, by its bookkeepers, was liable for contributory negligence.
The Magistrate’s reasons
The Magistrate referred to a letter from the ATO to Ms Travers, dated 21 September 2010, in which the Deputy Commissioner of Taxation advised that the reasons for Thalia’s selection for audit were:
·GST credits claimed are outside the benchmark for commercial property leasing enterprises,
·Discrepancies between the amounts of expenses and income reported on income tax returns and BAS over comparable periods of time, and
·The risks assessed were considered sufficient to warrant an audit.
The Magistrate observed that the ATO had prepared table L, which sets out discrepancies between the totals for incomes and expenses reported on ITRs and BASs over the years to which the audit was proposed to relate. The Magistrate concluded that the reason for the audit was the discrepancies between the amounts of expenses and income reported in the ITRs and the BASs.
The Magistrate concluded that Thalia’s bookkeeper had incorrectly recorded the KONE invoices as non-capital expenditure and that Bentleys had treated the expenditure as non-capital expenditure in three BASs lodged with the ATO. When Thalia’s 2008 ITR was prepared by Bentleys, the three payments were treated as capital expenditure. This created a significant discrepancy between the 2008 BASs and ITR.
The Magistrate also noted the other discrepancies listed in table L.
As to the discrepancies arising from the misclassification of the KONE invoices, the Magistrate said:
At the hearing the only discrepancy in focus and explained on the evidence was the discrepancy between capital and non-capital expenditure in the 2008 returns. Thalia’s case was that as Bentleys lodged the BAS returns it was their job to ensure they were accurate. It was accepted that Bentleys had been given inaccurate information by Thalia’s bookkeeper who had apparently failed to identify the expenditure for the KONE invoices as being of a capital nature and incorrectly recorded it in Thalia’s MYOB accounting system. Bentleys response was somewhat muted. Mr Storer, the only representative of the firm to give evidence, said he was not certain that Bentleys had checked the return and indicated they may have acted only as an agent to file the BAS statements which had been prepared by Thalia so as to allow Thalia the one month extension which the ATO allowed when a tax agent lodged BAS returns. This suggestion was speculative and I reject it.
…[T]he [KONE] expenditures were significant enough to review and apparently Bentleys did obtain copies of the relevant invoices. There was enough information in these invoices to show that they probably related to expenditure of a capital nature. In my opinion Bentleys should have detected the error.
As to the discrepancies generally, listed in table L, the Magistrate observed:
The case presented on behalf of Thalia was that because Bentleys prepared all of the BAS statements and all of the income tax returns between 2005 and 2009 they were responsible for all of the errors that lead to the preparation of table ‘L’ by the ATO. I do not think this submission can be accepted without, at the very least, an identification of the errors.
…
I cannot assume that all or any of this misinformation should have been identified by Bentleys and corrected prior to lodgement of the BAS statements. I was able to make findings regarding the 2008 BAS statements because of the nature of the errors and the fact that Bentleys had been given the KONE invoices and therefore had the means to review the incorrect work of Thalia’s bookkeeper. Absent at least, some explanation to the differences which occurred in the relevant years, it cannot be assumed that Bentleys were at fault for other unidentified inconsistencies.
The defendant’s bald submission that Bentleys were responsible for all of the errors identified in table ‘L’ cannot be sustained. The matter must be determined upon the basis that Bentleys’ mistake in not correctly identifying the nature of the KONE invoices was the only proven negligence of relevance.
The Magistrate considered whether Bentleys’ negligence was a cause of the audit. The Magistrate accepted the reasons given by the ATO in its letter of 21 September 2010 for determining to conduct the audit. He opined that he could not discount the possibility that there were additional reasons to those referred to in the letter.
As to the KONE invoice misallocation, the Magistrate concluded that Thalia had failed to establish that the negligence of Bentleys was a sufficient cause of the ATO audit. Thus Thalia could not recover the fees referrable to the audit.
The appeal
Thalia’s submissions on appeal are twofold. First, it submits that the Magistrate erred in finding that it had not been established that the KONE invoice misallocation was a sufficient cause of the audit. Secondly, Thalia submits that Bentleys owed a broader duty to ensure consistency between the BASs and ITRs lodged at the ATO. The discrepancies identified in table L amount to breaches of this duty. Those breaches were a cause of the audit.
Bentleys maintains that any discrepancies regarding the KONE invoices were not a sufficient cause of the ATO audit. As to the discrepancies generally, Bentleys submits that Thalia has failed to show that those discrepancies were errors caused by Bentleys’ negligence. With regards to both the KONE invoice misclassification and the discrepancies generally, Bentleys submits that an ATO audit was not within a reasonably foreseeable category of loss such that Bentleys is not liable in negligence for it.
The relationship between Thalia and Bentleys
Before considering the parties’ submissions in detail, it is necessary to describe the relationship between Thalia and Bentleys.
Mr Storer, Ms Travers and Mr Iammarrone all gave evidence of the relationship between Thalia and Bentleys. There was no written retainer between Thalia and Bentleys. Mr Storer stated that Bentleys was retained to assist in the preparation of ITRs for a number of entities under Thalia’s control. Bentleys was required to provide advice from time to time, as well as prepare and lodge BASs. As to the ADT, Mr Storer’s understanding was that Bentleys took data prepared by Knight Frank and combined it with data from Thalia in order to prepare quarterly BASs. Mr Storer said that, as with other clients who do in-house bookkeeping, Bentleys’ role as to Thalia’s bookkeeping records was to look at the data produced by Thalia and assess it for reasonableness. He maintained that Bentleys were not required to audit the data provided.
Mr Storer accepted that the process conducted by Bentleys was that an employee of Bentleys would examine the details provided by Thalia’s bookkeeper for the purpose of submitting the BASs, and raise any queries with the bookkeeper which arose from examination of the details provided.
Mr Iammarrone gave evidence that bookkeeping data would be provided to Bentleys by Thalia. Information for preparation of BASs included material provided by Knight Frank. The role of Bentleys was to convert that data into BASs.
There is no dispute that the bookkeeping of Thalia over the relevant period from 2005 to 2009 was, at times, deficient. Bentleys were aware of that and, on occasions, employees of Bentleys spent time training and advising the bookkeepers about their role. Invoices show that from 2005 to 2010 Bentleys charged for work training Thalia’s bookkeeper and reviewing Thalia’s bookkeeping records.
Negligence – general principles
An accountant owes a duty of care to her or his clients, which requires the accountant to exercise the care and skill of an ordinarily skilled accountant.[2]
[2] Voli v Inglewood Shire Council (1963) 110 CLR 74, 84; Henderson v Amadio Pty Ltd(No 1) (1995) 62 FCR 1, 135.
In Walker v Hungerfords King CJ said:[3]
…The very purpose of engaging tax advisers and accountants is to ensure that the returns are prepared upon a correct basis. Any calculation submitted by the taxpayer to his tax expert is necessarily submitted upon the basis that its conformity with tax law and correct tax and accounting practice will be verified by the expert. The taxpayer and his staff, in the absence of agreement to the contrary, do not, by furnishing such information, assume responsibility for its conformity to tax law and practice. If a taxpayer were to be considered to be lacking in reasonable care for his own interests for that reason, much of the advantage of engaging experts would be lost. The taxpayer, as it seems to me, cannot be expected to exercise skill or knowledge in relation to such matters. He is entitled to rely upon the tax expert whom he has engaged to check any calculations submitted by him to ensure their conformity to tax law and practice and in that way to ensure that the tax returns are correct…
[3] (1987) 49 SASR 93, 96.

In Pech v Tilgals, Dunford J observed:[4]
As a person holding himself out as possessing professional skill as an accountant and tax agent the defendant was bound to exercise the skill and diligence of a reasonably competent and careful practitioner in that profession. The contract between the parties and the relationship between them required the defendant to take reasonable care to submit accurate returns disclosing the correct taxable income for each of the parties; what was required was reasonable care, that is the care to be expected of a reasonably prudent and careful accountant. The purpose of engaging tax agents and accountants is to ensure that the tax returns are prepared on a correct basis. The duty arises both in contract and in tort.
[Citations omitted.]
[4] Pech and Anor v Tilgals and Anor (NSWSC unreported, 15 April 1994, BC9402477, 13).
Walmsley, Abadee and Zipser in Professional Liability in Australia expressed the position as follows:[5]
In completing tax returns (or providing tax advice generally), the accountant will rely upon the information provided by the client. A failure by the client to render accurate information to the accountant may yield a good case of contributory negligence (if not a more general defence to the accountant’s liability).
[5] 2^nd Ed, 2007, 668.
The KONE invoices
It is convenient to first consider whether Bentleys was negligent in respect of the KONE invoices’ misallocation, and whether any such negligence was a sufficient cause of the ATO audit.
Mr Iammarrone, who was managing the Thalia file during the latter part of the 2008 financial year, said that the KONE invoices were originally misallocated as non-capital expenditure in data prepared by Thalia’s bookkeeper. The first KONE invoice was misallocated in the December 2007 BAS. The manager of the Thalia file at Bentleys at the time was Mr Phillips. In a letter to the ATO dated 30 November 2010, Bentleys observed that this first invoice was “on file.” In the March 2008 BAS, a second KONE invoice was misallocated, an error which was not corrected by Mr Phillips. By the time the June 2008 BAS was being prepared, Mr Iammarrone had replaced Mr Phillips as Bentleys’ tax manager of the Thalia file.
Mr Iammarrone gave evidence that in June 2008, when a third KONE invoice was wrongly allocated, he was aware that the BAS statement may not have been accurate but, because it was necessary to lodge the BAS and there was no sufficient time to check the source documents, Mr Storer, the partner, agreed that Bentleys should submit the BAS with a view to reconciling the position later, once Bentleys had had an opportunity to review the work of the bookkeeper.
Both Mr Vlassis and Mr Iammarrone agreed that the KONE invoices were sufficiently large as to warrant investigation beyond Bentleys’ practice of checking the allocations on the bookkeeping data. They accepted that on reading the KONE invoices a reasonable accountant would be put on notice that they did not relate to capital expenditure.
When Bentleys prepared Thalia’s 2008 ITR, the KONE invoices were correctly treated as capital expenditure. On 30 November 2010, Bentleys wrote to the ATO stating that having reviewed the BAS working papers, Bentleys had identified the misclassification. The wording of the letter suggests the misclassification had been recently discovered.
The Magistrate correctly concluded that Bentleys was negligent in failing to identify the KONE invoices and correct or explain to the ATO the discrepancy which resulted between the BASs and Thalia’s 2008 ITR. The size of the invoices was significant enough to review. On their face, the invoices would have indicated to a reasonable accountant that they were capital in nature. Even if Bentleys did not have actual knowledge of the discrepancies which arose when the 2008 ITR was correctly completed, it should have known of those discrepancies at that time. The error, once identified, should have been corrected or explained to the ATO.
Reasonable foreseeability
On appeal, Bentleys submits that the ATO audit is not within a reasonably foreseeable class of loss arising from the discrepancies caused by the KONE invoices’ misallocation. This submission goes to both the question of remoteness of loss and whether Bentleys breached its duty of care to Thalia.[6]
[6] See Wallace v Kam [2013] HCA 19, [26].
In Rosenberg v Percival Gummow J observed:[7]
A risk is real and foreseeable if it is not far-fetched or fanciful, even if it is extremely unlikely to occur. The precise and particular character of the injury or the precise sequence of events leading to the injury need not be foreseeable. It is sufficient if the kind or type of injury was foreseeable, even if the extent of the injury was greater than expected.
[Footnotes omitted.]
[7] (2001) 205 CLR 434, [64].
Where an accountant’s negligence in completing tax returns results in an underpayment of tax, the client may recover damages for the interest accrued on the tax owing,[8] or for additional tax or penalties.[9] In Sacca v Adam and R Stuart Nominees Pty Ltd,[10] an accountant negligently failed to advise a family that the sale of a property within 12 months of its acquisition would incur additional tax. The accountant was found to be liable for the additional tax. In Hungerfords v Walker accountants had negligently completed income tax returns, resulting in an overpayment of tax. The accountants were liable for the tax which could not be recovered from the ATO, and for damages for the opportunity cost associated with being unable to use the overpayment.[11]
[8] See Divune Pty Ltd v Gould Ralph Services Pty Ltd [2004] NSWSC 8.
[9] See Pech and Anor v Tilgals and Anor (unreported, NSWSC, 15 April 1994 BC9402477).
[10] (1983) 33 SASR 429.
[11] (1989) 171 CLR 125.
In this case, as part of the service it provided to Thalia, Bentleys assessed Thalia’s BASs for reasonableness. Bentleys completed the 2008 ITR in a manner inconsistent with the BASs for that period. Bentleys should have known of those inconsistencies. The cost of the audit resulted from a decision of the ATO, which must have been primarily based on the accounting records provided to it. Leaving aside the question of contributory negligence, Bentleys created a situation where inconsistent BASs and ITRs were provided to the ATO. This created a risk that the ATO would take adverse action against Thalia on the basis of those tax records. In the circumstances, and particularly considering the relationship between Thalia and Bentleys, the cost of the audit was within a reasonably foreseeable class of loss.
It follows that the Magistrate correctly found that Bentleys was negligent in respect of the KONE invoices’ misallocation.
Causation
Counsel for Thalia submits the Magistrate erred in finding Bentleys’ negligence as to the KONE invoices was not a sufficient cause of the audit. Counsel for Bentleys maintains that the discrepancies resulting from the KONE invoices’ misallocation were not the “initial trigger” of the audit, and were not a cause of the audit.
On 22 March 2010, the ATO gave its first indication to Bentleys that it was investigating the ADT. Mr Barrett from Bentleys received a telephone call from the ATO. He noted:
“(1) BAS + Tax returns. Re: Variations in BAS vs tax rtrns in levels of income (+ ComBank etc?) --- obtain ALL BAS’s + Tax Rtns since 30/6/06 ASAP to review…
On 23 March 2010 the ATO wrote to Thalia, care of Bentleys. The ATO advised that it would be auditing the transactions occurring in the tax periods 1 January 2006 to 31 December 2009, and the ITRs for 2005, 2006, 2007 and 2008. BAS working papers for June 2006, September 2007, March 2009 and December 2009 were requested. There is no mention of the BASs on which the KONE invoice misallocations are found.
On 19 May 2010 Mr Iammarrone met with Mr Koang and Ms Branford of the ATO.
On 26 July 2010, the ATO wrote to Thalia. The letters referred to acquisitions in the 2008 BAS as an outstanding issue. The ATO referred to a discrepancy of $262,884. The KONE invoices amounted to $278,939. On 9 September 2010 Bentleys wrote to the ATO and said that it believed the ATO’s discrepancy was due to a miscalculation on the ATO’s part as to interest deductions. In its response of 21 September 2010, the ATO erroneously considered Bentleys’ position to be that it had misallocated interest expenses, and thus had incorrectly claimed GST credits of $12,182. On 30 November 2010, Bentleys reasserted that it had not misallocated interest payments and thus had not incorrectly claimed GST credits. It was in this letter that Bentleys notified the ATO that the large discrepancy was caused by the KONE invoices’ misallocation.
On 21 September 2010, the ATO indicated that a reason Thalia was selected for audit was the discrepancies between the amounts of expenses and income reported on ITRs and BAS over comparable periods. In a meeting on 1 October 2010 Mr Iammarrone was provided with table L.
Following negotiations with the ATO, Bentleys was able to restrict the audit to the 2008 financial year. This is of little significance in establishing the cause of the audit.
The ATO’s earliest indications to Thalia demonstrate that the 2008 financial year was within the ambit of the ATO’s investigations. The ATO indicated that discrepancies between BAS and ITRs were a cause of the audit. The discrepancy caused by the KONE invoices’ misallocation was the largest outside the 2006 financial year.
In determining the reasons for the audit, the Magistrate concluded that the main trigger for the audit related to GST credits claimed which were outside the ATO benchmark for commercial leasing enterprises. In so doing, the Magistrate relied on a statement in the letter from the ATO of 21 September 2010. That statement had been withdrawn by the ATO in a subsequent letter of 1 October 2010. The Magistrate appears to have overlooked this later correspondence. The Magistrate also relied on a letter from Mr Iammarrone, dated 9 September 2010. That letter recalled a meeting with the ATO where the reason for selecting the period of 2005 to 2009 was given. That statement did not relate to the reason for the decision to conduct the audit.
The Magistrate concluded that Thalia had not established that the KONE invoices’ misallocation was a sufficient cause of the audit. In arriving at his conclusion, he stated that the KONE discrepancy was relatively insignificant when considered against the total discrepancies over the relevant period. I observe that the discrepancy which resulted from the KONE invoices’ misallocation was one of only three discrepancies over $200,000. Importantly, the 2006 and 2008 financial years contain significantly larger discrepancies than are found in other years.
Considering the correspondence from the ATO, the Magistrate erred in so finding.
Contributory negligence
The Magistrate observed that even if he had concluded that Bentleys’ negligence had caused the audit, since the other inconsistencies in table L had not been explained, he could not undertake the exercise of apportioning liability between the parties.
In Podrebersek v Australian Iron and Steel Pty Ltd, Gibbs CJ, Mason, Wilson, Brennan and Deane JJ observed:[12]
The making of an apportionment as between a plaintiff and a defendant of their respective shares in the responsibility for the damage involves a comparison both of culpability, ie of the degree of departure from the standard of care of the reasonable man and of the relative importance of the acts of the parties in causing the damage. It is the whole of the conduct of each negligent party in relation to the circumstances of the accident which must be subjected to comparative examination. The significance of the various elements involved in such an examination will vary from case to case…
[Citations omitted.]
[12] (1985) 59 ALR 529, 532-533.
Section 7(2) of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) requires a court to determine the damages to which a claimant would have been entitled, and reduce that amount to the extent the court thinks just and equitable having regard to the contributory negligence.
The evidence which I have summarised is that Thalia’s bookkeeper would prepare accounting records from invoices and other data. Those records would be provided to Bentleys for the preparation of the BASs. While Bentleys was to review Thalia’s records for reasonableness, its role did not include a bookkeeping function, nor an auditing function. Bentleys would have a more significant role in the creation and lodgement of Thalia’s annual ITRs. Both Bentleys and Thalia were aware that Thalia’s bookkeeping was deficient. Mr Iammarrone said that the KONE invoices were originally misallocated by Thalia’s bookkeepers. This was accepted by the Magistrate.
Thalia’s bookkeepers were not called. In Kuhl v Zurich Financial Services Australia Ltd, Heydon, Crennan and Bell observed:[13]
The rule in Jones v Dunkel is that the unexplained failure by a party to call a witness may in appropriate circumstances support an inference that the uncalled evidence would not have assisted the party’s case. That is particularly so where it is the party which is the uncalled witness. The failure to call a witness may also permit the court to draw, with greater confidence, any inference unfavourable to the party that failed to call the witness, if that uncalled witness appears to be in a position to cast light on whether the inference should be drawn…
[Footnotes omitted.]
[13] (2011) 243 CLR 361, [63].
Thalia’s failure to call its bookkeepers allows this Court greater confidence in drawing an inference, based on the other evidence referred to, that Thalia’s negligence contributed to the loss arising from the KONE invoices’ misallocation.
As the Magistrate concluded, there is little evidence as to who was responsible for the other major discrepancies in table L, which could each be said to be a cause of the ATO audit. However, both parties accepted that Thalia’s bookkeeping was deficient. I assume that if the bookkeepers were called this would not have assisted Thalia’s case. I conclude that Thalia’s negligence as to the KONE invoices is representative of its overall conduct. As to Bentleys, table L shows a number of occasions when inconsistent records were filed at the ATO. Bentleys should have known of these larger discrepancies and taken some steps to either explain them to the ATO or correct them. I start from the position that each party should equally bear the liability of the ATO audit. Bentleys was engaged to provide some supervision and training for Thalia’s bookkeeping, and knew that Thalia’s bookkeeping was deficient. Bentleys was negligent in failing to make further enquiries into the discrepancies and to alert the ATO and explain the discrepancies to the ATO. In the circumstances, there was a greater responsibility upon Bentleys to check the bookkeeping records. I conclude that the apportionment of liability is to be 75 percent to Bentleys and 25 per cent to Thalia.
Quantum of damages
To ascertain the quantum of damages between the parties, it is necessary to identify which of Bentleys’ fees relate to the ATO audit.
Some of Bentleys’ fees referable to the ATO audit are evidenced in the three invoices on which Bentleys brought its claim, and on which the Magistrate entered judgment in favour of Bentleys.[14] In a March 2011 invoice an amount of $10,000 relates to the ATO audit. In another March 2011 invoice, it is not clear what amounts relate to the ATO audit. This is due to Bentleys’ failure to particularise each item on the invoice. In the circumstances, I am prepared to include as relating to the ATO audit all items which include work correcting matters resulting from the ATO audit. On this basis, $10,023 of fees relate to the ATO audit. In the April 2011 invoice, $1,614 of fees relate to the ATO audit. The total amount of fees which relate to the ATO audit in the three invoices is $21,637. To this amount GST must be added, giving a total of $23,800.70.
[14] Exhibit P2.
Two earlier Bentleys’ invoices rendered to Thalia and paid by it also relate to the ATO audit. These invoices, of June and October 2010,[15] total $11,660 including GST.
[15] See exhibit D11, invoices 502928 and 502499.
The total of the fees which relate to the ATO audit is $35,460.70. In accordance with my apportionment of liability, Thalia’s liability is, therefore, $8,865.18.
The Magistrate reduced Bentleys’ entitlement by offsets totalling $5,769.15. There has been no argument on appeal as to those offsets. Thalia’s liability must be reduced by that amount.
Conclusion
The appeal is allowed. The judgment of the Magistrate is set aside. There will be judgment in favour of the respondent in the amount of $3,096.03, plus interest, to be determined. The order for costs is set aside.
I will hear the parties on the issues of interest and costs of the proceedings in the Magistrates Court, and this appeal.