Zelino v Budai

[2001] NSWSC 501

CITATION:	Zelino and Ors v. Budai [2001] NSWSC 501
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 5622/92
HEARING DATE(S):	22-25, 28-31 May, 1, 4-8, 12-15 June 2001
JUDGMENT DATE:	24 July 2001
PARTIES :	Zelino Pty Ltd (First Plaintiff) Peter Tesoriero (Second Plaintiff) Tonia Tesoriero (Third Plaintiff) Frank Budai (Defendant)
JUDGMENT OF:	Palmer J

COUNSEL :	P.D. White [Solicitor], M.K. Condon (Plaintiff) Dr P. Budai
SOLICITORS:	P.D. White Litigant in person
CATCHWORDS:	PROFESSIONAL NEGLIGENCE - INCOME TAX - Second and third plaintiffs retain defendant to prepare income tax returns - defendant advises that profits derived from a development are assessable income arising from the carrying on of a profit-making scheme under s.25A(1) ITAA - whether advice is negligent. - PROFESSIONAL NEGLIGENCE - TAX FRAUD - Second and third plaintiffs agree with defendant that he will prepare false accounts for development venture and insert false figures in their tax returns - contract for performance of illegal act by defendant and in furtherance of illegal purpose of second and third plaintiffs - whether an action for breach of contractual duty of care will lie. - PROFESSIONAL NEGLIGENCE - ACCOUNTANT - Whether second and third plaintiffs retained defendant as accountant - whether a term of the retainer that defendant would do all things necessary to procure third party to issue special rights units in a unit trust - term would be impossible of performance - no such contract found - no such term could be implied. - COSTS - ILLEGALITY - Defendant succeeds on one of three issues by proving that the contract sued upon was for the commission of offences under the Income Tax Assessment and the Taxation Administration Act 1953 - discretion as to whether to award the costs of that issue to the defendant - it would be contrary to public policy to permit the defendant to recover costs of that issue - defendant's costs reduced by one-third. - TAX FRAUD - SOLICITORS - ACCOUNTANTS - Serious offences under Taxation Administration Act revealed in course of litigation - both parties to litigation involved - other parties in venture probably involved - grounds for believing that solicitor and accountant involved - Court cannot turn blind eye to serious breaches of revenue law and serious breaches of professional ethics - Court directs copies of judgment to be sent to Australian Taxation Office and professional regulatory bodies and directs exhibits to be retained pending outcome of investigations.
LEGISLATION CITED:	Crimes Act 1914 Income Tax Assessment Act 1936 Supreme Court Act 1970 Supreme Court Rules Taxation Administration Act 1953
CASES CITED:	- Burrows v Rhodes [1899] 1 QB 816 - Donald Campbell & Co v Pollak [1927] AC 732 - Everet v Williams (1893) 9 LQR 197 - Fitzgerald v F.J. Leonhardt Pty Ltd (1997) 189 CLR 215 - Igaki Australia Ltd v Coastmine Pty Ltd (unrep. FCA, Drummond J., 2 November 1994) - Igaki Australia Pty Ltd v Coastmine Pty Ltd (1996) 3 IPR 37 - Jamal v Secretary, Department of Health (1988) 14 NSWLR 252 - Jones v Merioneth Shire Permanent Benefit Building Society [1892] 1 Ch 188 - Kratzmann v Federal Commissioner of Taxation (1970) 44 ALJR 293; (1970) 70 ATC 4043 - McCurry v FCT 98 ATC 4487 - Milne v AG of the State of Tasmania (1956) 95 CLR 460 - Ritter v Godfrey [1920] 2 KB 47 - St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267 - Steinberg v FCT (1973) 134 CLR 640 - Sunday Times Newspaper Co Ltd v McIntosh (1933) 33 SR(NSW) 371 - Tesoriero v Chief Commissioner of Stamp Duties [2001 NSWSC 489, at paras.24-40] - Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410
DECISION:	Judgment for the defendant; plaintiffs to pay two-thirds of the defendant's costs; copies of judgment to be sent to Australian Taxation Office and other professional regulatory bodies; exhibits not to be released but to be retained pending conclusion of investigations.

Introduction

1    In 1725 Mr Everet commenced proceedings in the Court of Exchequer against Mr Williams seeking an account of partnership profits. The plaintiff alleged that the partnership between himself and the defendant dealt in commodities such as plate, rings, watches and other valuables, that the plaintiff and the defendant had dealt successfully in these commodities in the course of the partnership but that the defendant had failed to come to a fair account with the plaintiff concerning the partnership profits. In the course of the trial it was revealed that the business in which the partners were engaged was actually highway robbery and that the plaintiff was aggrieved that the defendant had not handed over a fair share of the spoils. The case was thrown out of Court, both parties were hanged, the plaintiff’s solicitors were attached for contempt and the plaintiff’s counsel was made to pay the costs of the proceedings: see Everet v. Williams (1893) 9 LQR 197; cited in Burrows v. Rhodes [1899] 1 QB 816, at 826 per Grantham J. 2 Human nature does not change. These proceedings are another example of that obstinate folly which blinds people to the ruin to which their course of action must inevitably lead if they insist upon pursuing it. For at the heart of these proceedings lies a series of revenue frauds perpetrated by the plaintiffs which would never have seen the light of day had the plaintiffs not set their minds on coming to a court of law to vindicate their grievances. 3 In early 1985 a group of investors formed a joint venture to acquire a property in Milson Road, Cremorne Point, upon which there was a substantial Federation residence called “Holyoak”. Their intention was to redevelop the site as twelve luxury townhouses. 4 The vehicle for the venture was a unit trust called the Cremorne Unit Trust (“CUT”) in which each venturer or the venturer’s company subscribed for units. The trustee of the CUT was Zelino Pty Ltd (“Zelino”) of which the venturers were the directors and, directly or indirectly, the shareholders. There were five venturers, namely Mr Peter Tesoriero jointly with his wife Tonia (the plaintiffs in these proceedings), Count Felice Sassoli di Bianchi through his company Feangil Pty Ltd (“Feangil”), Mrs Caterina Zanin through a trustee company Beila Corporation Pty Ltd (“Beila”), Mr Charles Gagliardi through his company Danza Pty Ltd (“Danza”), and Mr Guiseppe Socini. 5 The construction of the new development was completed in late 1987. Seven of the townhouses were sold to the venturers or their nominees and five were sold to third parties, leaving the venture with a considerable profit. On 14 December 1988 the venturers or their representatives signed final accounts prepared by the accountant for the venture, Mr Budai, who is the defendant. On 16 December 1988 the profits of the venture were distributed amongst the venturers in accordance with the signed accounts. 6 The relationship between the venturers during the construction had often been very difficult, even hostile. They disagreed about many aspects of the construction and about the financial arrangements which should be made to carry the venture to a successful conclusion. 7 As part of the resolution of these disputes it was intended by the venturers that on and from 16 December 1988 control of the trustee company, Zelino, should pass to Mr and Mrs Tesoriero alone. Mr and Mrs Tesoriero were to acquire all the shares in Zelino not already held by them. Further, they were to acquire all the issued units in the CUT save for those held by Mr Socini. 8 While the venturers disagreed amongst themselves from the very beginning about virtually every aspect of the conduct of the venture, on one matter they were in enthusiastic agreement: everything possible should be done to avoid having to share any part of their profits from the venture with the revenue authorities. In that endeavour they were earnestly abetted by Mr Budai. 9 From their earliest discussions in 1984 the venturers focussed upon minimising or avoiding altogether income tax and stamp duty. The Trust Deed for the CUT was drafted with the assistance of a revenue specialist, Mr David Raphael. It contained a complicated stamp duty avoidance mechanism involving the creation of “special rights units”. The mechanism might have worked if all of the levers and switches had been pushed and pulled in the ordained sequence and at the designated propitious times. But, as happens in so many of these subtle and sophistical tax schemes, cleverness in devising was not attended by diligence in execution. 10 Moreover, as fate would have it, the stamp duty legislation was amended significantly during the life of the venture so that the utility of the special rights units mechanism in the Trust Deed was cast into doubt. The very complexity of the mechanism came back to haunt the venturers in ways which I will later recount. 11 After the distribution of proceeds of the venture on 16 December 1988 Mr Budai prepared an income tax return for the CUT for the year ended 30 June 1988 and income tax returns for that financial year for Mr and Mrs Tesoriero. The tax return for the CUT was not lodged with the Australian Tax Office (“ATO”) but the returns for Mr and Mrs Tesoriero were lodged late 1988. Those returns were in accordance with the contents of the draft tax return for the CUT. The Tesorieros’ tax returns each disclosed a sum of $170,890 as income distributed from the CUT. Mr and Mrs Tesoriero paid tax on that income. 12 It is admitted by Mr and Mrs Tesoriero and Mr Budai that their tax returns were based upon deliberately concocted figures. The prices at which townhouses had been sold to venturers were grossly understated and the expenses of the venture were unjustifiably inflated. The profits of the venture, upon the basis of which distributions had been made to Mr and Mrs Tesoriero, had been understated by more than one million dollars. Further, assessable income derived by Mr Tesoriero from the venture was not disclosed in his tax return. 13 It rankled with Mr Tesoriero that he had paid any tax at all. In 1989 Mr Tesoriero consulted Mr Philip White, a solicitor, who now appears with Mr Condon of Counsel for the plaintiffs. Mr White had a conference with Mr Tesoriero and Mr Budai in which Mr Budai explained the fraudulent tax scheme which he said he had devised for the benefit of all the venturers, including Mr and Mrs Tesoriero. 14 Mr White then engaged the services of Mr Richard Elkan, a tax specialist. After a lengthy and expensive investigation, Mr Elkan came to the conclusion that a case could be put to the ATO that the distributions of profit which Mr and Mrs Tesoriero had received from the CUT were not assessable income but, rather, were capital profit not subject to capital gains tax. 15 Mr Elkan put that case to the ATO by letter dated 18 November 1991. He did not disclose that the tax returns previously lodged were fraudulent. He falsely represented to the ATO that the tax returns were wrong because Mr Budai did not understand the law as it applied to the facts of the CUT. He deliberately did not disclose to the ATO that Mr Budai had prepared the previous tax returns on the basis of his perception of the facts, namely, that Mr and Mrs Tesoriero had received distributions from the CUT as part of a profit making undertaking, so that the distributions were assessable under s.25A of the Income Tax Assessment Act, 1936 (“ITAA”). He falsely suggested that, due to ignorance, Mr Budai had not taken into account the provisions of the Act relating to capital gains tax. 16    Mr Elkan’s submission was successful and on 23 March 1992 the ATO issued to Mr and Mrs Tesoriero notices of Amended Assessment reducing their taxable income for the year ended 30 June 1988 to nil. Mr Tesoriero received a refund of tax of $52,511 and Mrs Tesoriero received a refund of $56, 917. 17    Mr and Mrs Tesoriero were not satisfied. They and Zelino commenced these proceedings against Mr Budai to recover the costs which they had paid to Mr Elkan in order to obtain their refunds of tax. They also claim recovery of the costs and expenses which they have incurred in successfully objecting to a stamp duties assessment raised against them by the Chief Commissioner of Stamp Duties. They contend that the Commissioner would never have raised the assessment at all if Mr Budai had caused the “special rights units” mechanism in the Trust Deed to have been put into operation. 18    Mr and Mrs Tesoriero and Zelino, which they now control, made many other claims against Mr Budai in their Statement of Claim. All have been abandoned save for the claim in respect of income tax returns and the claim arising out of the stamp duties assessment. Although many of the underlying facts are common to both of these remaining claims, it will be convenient to deal with the claim based upon the income tax returns separately from the claim based upon the stamp duty assessment.
THE INCOME TAX CLAIM
The issues 19    Mr and Mrs Tesoriero’s claim in negligence is founded, not in tort, but exclusively in contract. They allege that they entered into a retainer with Mr Budai whereunder he agreed to exercise all reasonable care, skill and diligence as an accountant in advising and assisting them in the preparation of their personal income tax returns for the year ended 30 June 1988. Mr Budai does not deny that he entered into such a retainer. 20    Mr and Mrs Tesoriero allege that Mr Budai breached his contractual duty of care, in that he “advised [them] to include income in their … Returns for the year ended 30 June 1988, and he did include in personal Income Tax Returns prepared by him, a distribution of income of $170,890 to each of them from the [CUT]”: Statement of Claim para.53. 21    Inherent in this pleading are two implied allegations of negligence on the part of Mr Budai. The first allegation is that he was negligent in advising that any part of the profits of the CUT to be distributed to Mr and Mrs Tesoriero was assessable income under ITAA s.25A as having arisen from the carrying on or carrying out of a profit-making undertaking or scheme, when in fact there had been no such profit-making undertaking or scheme. 22 The second allegation is that Mr Budai was negligent in advising Mr and Mrs Tesoriero to include in their respective returns income in the sum of $170,890 when “in fact the net income of the [CUT] for the year ended 30 June 1988 was $241,248 of which [Mr and Mrs Tesoriero’s] taxable interest ought to have been $25,395 each” and “the amount which ought to have been included in [their tax returns] … after deductions … was $15,167 each” : Statement of Claim paras.55, 56. 23 The amount of $15,167 which, it is alleged, ought to have been included in Mr and Mrs Tesoriero’s returns is the figure which Mr Elkan, in his letter to the ATO of 18 November 1991, submitted should have been returned as the assessable income of Mr and Mrs Tesoriero in the returns prepared by Mr Budai. Mr Elkan’s figures were calculated on the basis that no profits had been received by Mr and Mrs Tesoriero arising from the carrying on of a profit-making undertaking or scheme. His submission was that Mr and Mrs Tesoriero’s profits were capital gain and that part of that gain was not subject to capital gains tax as it related to the disposal of a composite asset, being a building acquired prior to the introduction of capital gains tax on 19 September 1985, to which an improvement was made to which s.160P(6) ITAA applied. 24 As to the first allegation, Mr Budai admits that he advised Mr and Mrs Tesoriero that the distribution received by them from the CUT in the financial year ended 30 June 1988 was assessable under s.25A ITAA as profit arising from the carrying of a profit-making undertaking or scheme but he denies that he was negligent in so advising. The issue is: could a competent accountant in the position of Mr Budai have reasonably given that advice. 25 As to the second allegation, Mr Budai by his Amended Defence says that the figure of $170,890 which was included as assessable income in each of Mr and Mrs Tesoriero’s returns was false to the knowledge of Mr and Mrs Tesoriero and was included as part of a fraudulent tax evasion scheme engaged in by all venturers and devised by him at their request. He says that, in fact, it was an express term of his contract of retainer with Mr and Mrs Tesoriero that he prepare fraudulent tax returns for them showing in each the amount of $170,890 as assessable income from the CUT. He says that he performed his contract in accordance with that term but, even if he was negligent in some way in doing so, Mr and Mrs Tesoriero are not entitled to make any claim against him for damages occasioned thereby because the contract upon which they rely was illegal both in its formation and in its performance. He relies upon the principle “ex turpi causa non oritur actio”. Finally, he says that the costs and expenses charged by Mr Elkan were incurred by Mr and Mrs Tesoriero as part of a second fraudulent tax evasion scheme and are, therefore, irrecoverable. 26 Mr and Mrs Tesoriero deny all of those allegations. Credit 27    The principal witnesses of fact who gave evidence at the trial were Mr Tesoriero and Mr Budai. Although Mr and Mrs Tesoriero claim that the intent of the venturers in entering into the venture was not to make a profit, Mrs Tesoriero herself did not give evidence nor were Mr Gagliardi, Mr Socini and Mr Gardini called. Mrs Zanin has died and Count Sassoli had himself commenced proceedings against Zelino and Mr and Mrs Tesoriero which were compromised during the course of this trial. 28    There are many points of difference in the evidence of Mr Tesoriero and Mr Budai as to what was said and done during the life of the project from mid-1984 until December 1988. Not many of those differences are, however, of any real significance in the ultimate determination of the issues in the case as the essential facts appear from contemporaneous documents – at least, from those of the documents which are not now conceded to be bogus. 29    Where there are any significant differences in the evidence of Mr Tesoriero and Mr Budai I have preferred the evidence of Mr Budai. 30    I found Mr Tesoriero prone to exaggeration and inaccuracy. He tended to see the facts only from a perspective which supported the case which he wished to present. He professed to have a good memory for conversations which occurred fifteen or sixteen years ago of which there was no contemporaneous note, when those conversations appeared to support his case. He professed to have a poor memory of conversations or other circumstances when those conversations or circumstances did not appear to support his case. 31    He seemed to be insensitive to his obligation to be accurate and careful with the truth. For example, on 27 February 1985 he wrote a letter to the Law Society of New South Wales seeking a ruling as to whether there was any ethical objection to his becoming financially interested in the venture in the circumstance that an existing client of his (Mr Gagliardi) “has expressed an interest in joining the partnership and becoming the project manager … I have also advised [Mr Gagliardi] that if he wishes to join the partnership he should have a separate solicitor” . 32    Mr Tesoriero agreed in cross examination that the sequence of events as to his early discussions with the venturers which he gave in his letter to the Law Society in February 1985 was different from the sequence which he gave in his affidavit in these proceedings sworn on 16 April 1998. He said that the account given in his affidavit was correct. Further, he said in his letter that after he agreed in principle to become involved in the venture an opportunity arose to acquire an option in the property to be developed. In his affidavit he said that the option was acquired some time before he decided to become involved in the venture. Again, he said that the account given in his affidavit was correct. Finally, he clearly suggested in his letter to the Law Society that Mr Gagliardi had not, as at February 1985, decided to join the venture, yet in his affidavit he said that in January 1985 he believed that Mr Gagliardi not only intended to be part of the venture but intended to retain a townhouse as his personal residence. Again, he said that the evidence in his affidavit was correct. 33    The explanation which he gave for the contradictions between his affidavit evidence and what he said to the Law Society in his letter of February 1985 was that his letter was “carelessly” inaccurate, “badly drafted” and his tenses were “a bit confused” . 34    I formed the distinct impression that Mr Tesoriero had put a slant on the facts one way for the purposes of getting a ruling from the Law Society and another way for the purposes of this case, and that he could see nothing objectionable in having done so. On many occasions during Mr Tesoriero’s evidence I observed the same tendency to slant or distort facts to suit his case, often to the point of untruthfulness. 35    For example, a critical issue in the case was Mr Tesoriero’s intention and understanding as to the purpose of the venture at the time he decided to commit to it in January 1985. He asserted vehemently that that it was then his understanding that all venturers intended that all townhouses in the project be retained as residences or for investment and that none be sold to outsiders: see his affidavit paras.79, 14. Yet in a memorandum which he prepared jointly with Mr Gagliardi in August 1984, months before he subscribed for units in the CUT, he recorded that some of the townhouses would be sold to outsiders and the nett proceeds, after repayment of the construction loan, would be distributed to the venturers: see para.45 below. There were contemporaneous documents, pre-dating and post-dating Mr Tesoriero’s commitment to the venture in January 1985, which clearly gave the lie to Mr Tesoriero’s assertion as to his understanding, yet he steadfastly maintained it. 36    I found that I could not accept Mr Tesoriero as a witness of credit. 37    On the other hand, I found that Mr Budai endeavoured to be as accurate and precise as possible in his evidence. He had kept contemporaneous diary notes and memoranda during the history of the project and was able to draw upon them to aid his recollection. 38    I bear very much in mind the fact that, on his own evidence, Mr Budai deliberately devised a fraudulent tax evasion scheme for the venturers and made public disclosure of his wrongdoing only when it became necessary by way of defence to Mr and Mrs Tesoriero’s claim in these proceedings – a circumstance which must severely reflect upon his credit. However, he did not seek to justify his conduct nor to minimise its gravity. When confronted with his own wrongdoing he gave frank, direct answers. 39    I could detect no instance in which Mr Budai’s evidence in the proceedings was contradictory or implausible. Allowing for inaccuracies of recollection due to the passage of time, I found Mr Budai’s evidence to be essentially reliable. The venturers commit to the project 40    In 1984 Mr Tesoriero was a solicitor practising on his own account in Chatswood. He had been a solicitor for many years and his practice consisted chiefly of conveyancing and other small commercial matters for personal clients, mostly in the Italian community. He had previously acted for Mr Charles Gagliardi and Mrs Caterina Zanin. Mr Gagliardi and Mrs Zanin were also clients of Mr Budai. 41    By letter dated 10 August 1984 from Mrs Zanin, Mr Tesoriero was instructed to prepare an option to purchase the property in Milson Road, Cremorne Point. It was made clear that Mrs Zanin was acting in association with a Count Sassoli di Bianci and that Count Sassoli was one of a number of proposed investors in a development of the site. Mr Tesoriero was instructed to liaise with Mr Budai as to the name of the proposed grantee of the option. 42    Mr Budai met Mrs Zanin and Count Sassoli in August 1984 to discuss the proposed venture. They requested him to advise on an appropriate financial structure for the development. On 15 August 1984 Mr Budai wrote to Mrs Zanin confirming his understanding of the venture in the following terms:

“It is my understanding that:
a) land at 25 Milson Road, Cremorne, is to be acquired with a view to the construction of home units/townhouses;
b) a number of venturers are to contribute capital and are to take an equity interest in the project.
c) some of these units/townhouses are to be sold and the balance retained as long term real estate investments .
d) once the desired number of properties have been sold each of the venturers would prefer if this equity in the long term real estate investment would be passed out of the joint venture structure to an entity completely within his control .
e) some or all of the venturers prefer to remain anonymous.
It is my opinion that the most appropriate financial structure under these circumstances is a unit trust …” [Emphasis added.]
43    On or about 20 August 1984, Mr Budai purchased a shelf company, Zelino, to act as trustee for the proposed unit trust for the venture. He and Mr Gagliardi became the first directors of Zelino. 44    Also in August 1984 Mr Tesoriero met Count Sassoli in company with Mr Gagliardi. It was suggested that Mr Tesoriero join with other investors in the venture. He expressed interest. 45    Shortly afterwards, in August 1984, Mr Tesoriero and Mr Gagliardi prepared a memorandum recording the proposal for the venture. Its terms are significant. The relevant parts are as follows:
“The Joint Venturers (hereinafter called ‘the Partners’) decided to acquire an option to purchase property at the corner of Milson Road and Rialto Avenue, Cremorne Point for the sum of $950,000.

It is proposed that if the option is exercised a number of home units/ townhouses will be constructed. Some of these townhouses will be sold and the balance will be retained by the Partners as long term real estate investments or for their own personal use and occupation …
[The memorandum then discussed how the construction of the development would be carried out.]

Dyson Austen Pty Ltd, Valuers, will then value the project from the plans and will provide an estimate of the selling prices of the new units from the plans …
After the valuation of Dyson Austen has been received, the Partners will decide on the value at cost of each townhouse in proportion to the expected total cost of the project (including interest and all sundries) e.g. assuming the total cost is $2,700,000.00, assuming that the estimated market value according to Dyson Austen for unit No.10 is $400,000.00, and the aggregate market value of all the townhouses is $4,000,000.00, then the value, at cost, of No.10 is $270,000.
Using this formula equitable distribution will be arranged for each of the Partners. Each Partner shall be attributed a townhouse whose cost is closest to that investor’s contribution. … The difference between the cost of the townhouse (calculated as above) and the contribution already made by the Partner will be contributed to the general fund for final distribution between all of the Partners. …
The amount received by the sale of townhouses outside the Partnership will be applied firstly for the repayment of the loan to the bank, and secondly, after all other costs are paid and an appropriate sum set aside for contingencies, distribution among the Partners. A sum to be assessed will be set aside covering expenses of sales promotion and advertising .
Each Partner who has been assigned a townhouse must, for tax purposes, undertake not to sell within a period of one year of the construction.” [Emphasis added]
46    On 23 October 1984 Zelino entered into an agreement with the owner of the Cremorne Point land whereunder Zelino was granted an option to acquire the land exercisable by 23 April 1985. 47    The task of drawing the Trust Deed for the venture was given to Mr D. Raphael, a solicitor specialising in revenue law. As I have noted, it contained an extremely complex mechanism, involving the issue of “special rights units” designed to avoid stamp duty on conveyances of townhouses in the development. I will refer to the contents of the Trust Deed when dealing with the claim against Mr Budai arising out of the stamp duty assessment. 48    On 15 November 1984 Mr Budai had a meeting in his office with Count Sassoli, Mr Mirizzi (an employee of Count Sassoli) and Mrs Zanin. Mr Budai’s unchallenged evidence is that at this meeting Count Sassoli asked: “Do we hold [the townhouses upon completion of the development] for one year or two years to become entitled to an exemption from income tax?” Mr Budai responded: “If you sold them within twelve months then you would become liable to income tax. [He was referring to s.26AAA ITAA.] Your liability to taxation depends on your intentions; if you are asking at this stage how long you need to keep the units before selling them, this indicates an intention to sell.” 49    A meeting of the proposed venturers took place in Mr Tesoriero’s office in early December 1984. Present at the meeting were Count Sassoli, Mr Gagliardi, Mrs Zanin, Mr Tesoriero and Mr Budai. The precise date of the meeting is in dispute but there is no disagreement that it took place, that Mr Tesoriero took notes and that a document which is dated 4 December 1984, produced by Mr Tesoriero, records with substantial accuracy what was discussed. 50    It was agreed at the meeting that, for tax reasons, Zelino itself should not borrow the money required for development and construction of the project. Rather, the venturers should form a partnership to borrow the money and lend it to Zelino. Under the heading “Alienation of the Townhouse” [sic] the document records the following:
“This [i.e., alienation] can be done by the following means:
1. The unit holder can direct the trustee to convey legal title to him by a transfer of the title so that he becomes vested as owner under the Real Property Act, (having is [sic] own name on the certificate of title) and then he can transfer to the ultimate purchaser. However, it is to be noted that if this procedure is to be adopted there is a possibility that stamp duty could be levied on the transfer from the trustee to the unit holder.
2. The second means of affecting [sic] a sale of the home unit would be for the unit holder after having first ascertained the price that he would obtain from his purchaser, request that the trustee redeem the special rights unit for the same price and then he would direct the trustee to sell the townhouse to the proposed purchaser for that price. In this way there is no possibility of stamp duty being levied on the transaction.”

51    The procedure for alienation applies equally in the case where a venturer wishes conveyance to himself of legal title to a townhouse, for retention by him, and also to the case where a venturer wishes to sell directly to an outsider. 52    In January 1985 Mr and Mrs Tesoriero decided that they would invest in the venture. It seems that that decision was made principally by Mr Tesoriero. He was, at all times, the active party representing the joint interest of his wife and himself in the venture. Mrs Tesoriero never attended any meetings of venturers either before or after January 1985. 53    Mr Tesoriero says that in January 1985 the intention of himself and Mrs Tesoriero was, and remained at all times thereafter, to acquire one of the townhouses as their home and to acquire as many others as they could afford as long term investments. He says that at that time he believed all of the other venturers intended to acquire the remaining townhouses as their personal residences and for investment. I have referred to the falsity of this assertion in paragraph 35 above and will revert to the issue shortly. 54    On 25 February 1985 Mr Budai had a meeting with Mr Socini and Mr Gardini. Mr Socini was a tax client of Mr Budai. They discussed the possibility of Mr Gardini investing in the venture through Mr Socini as his nominee. 55    On 1 March 1985 Mr Gagliardi wrote to the Commonwealth Bank seeking finance for the development. The letter caused consternation to Mr Budai and Mr Tesoriero because it referred to the possible sale of the townhouses. Mr Budai says, and I accept, that he told Mr Tesoriero at this time that if the letter fell into the hands of the ATO it would compromise any claim that the project was not a profit-making undertaking. I accept that Mr Tesoriero was very well aware by this time that he and Mrs Tesoriero could escape income tax on whatever profit they derived from the venture only if it could be claimed that that profit did not arise from the carrying on or carrying out of a profit-making venture or scheme. I am satisfied that from this time onwards Mr Tesoriero was concerned to ensure that, if possible, no documentation should emanate from the venture to outside parties which could support a claim by the ATO that the venturers had been carrying on a profit-making venture. 56    A diary note of Mr Budai of 2 March 1985 records a telephone conversation between him and Mr Gagliardi. The result of a meeting of the venturers was conveyed to Mr Budai. He was told that Mr Tesoriero was now responsible for finance and that Mr Gagliardi “is to recover his submission to [United Permanent] and [Commonwealth Trading Bank] . As the contents do not reflect the wishes of the members” [sic] . 57    A letter dated 1 March 1985 from Mr Gagliardi to the Commonwealth Bank seeking finance is in evidence. It was not produced on subpoena from the Commonwealth Bank but came from Mr and Mrs Tesoriero’s discovery. It contained the following:
“Preselling will be considered, although the recommendation is that construction and finishes should be completed before a sales program in order to maximise on final appearance.
The land title is offered free of encumbrances, as guarantee.
We would also to mention that it is the intention of the developers to retain the 12 townhouses on completion as a long term investment and that the repayment of the construction loan will be arranged by the mortgagors through personal funds that will become available by the time of completion of construction.”
58    The last of the quoted paragraphs contradicts the first paragraph in that the first paragraph assumes a sales programme whereas the last paragraph clearly makes such a programme purposeless. 59    This contradiction and the non sequitur after the second paragraph suggests to me that a letter dated 1 March 1985 containing only the first of the quoted paragraphs had been sent to the Bank and that the last quoted paragraph was later inserted in another version of this letter, also dated 1 March 1985. Whether the second version was sent to the Bank or merely retained in the venturers’ files, I cannot determine. 60    According to Mr Budai’s diary, on 9 March 1985 a meeting of the venturers took place at which were present Count Sassoli, Mr Gagliardi, Mrs Zanin and Mr Tesoriero. Mr Budai believes that Messrs Gardini and Socini may also have been present. The diary note records:
“Went to meeting re Zelino, took control! Got consensus on pessimistic, optimistic and most likely project costs, sale prices and profits …”
61    Mr Budai’s evidence of what transpired at the meeting (which I accept) was that he asked each of those present to write down three estimates of the cost of building the project, an optimistic, a most likely and a pessimistic estimate. He then asked each of them to write down three estimates of the market value of the project on completion, optimistic, probable and pessimistic. After doing some calculations on the figures so produced he told the venturers that on their own estimates the project was likely to return about 30% and that, bearing in mind the risks involved in that type of development, they should not contemplate proceeding for that rate of return. 62    Mr Budai says (and I accept) that it was at this meeting that he became convinced that the true intention of the venturers there present, whatever they might have otherwise protested, was that only some of the townhouses might be acquired and retained by some of the venturers and the remainder would be sold to outsiders for a profit, if possible. This had been his understanding of the purpose of the venture from the commencement of his involvement, as evidenced by his letter to Mrs Zanin of 15 August 1984: see paragraph 42 above. 63    As a result of the meeting of 9 March, it appears that some of the venturers were in doubt as to whether the option to acquire the property should be exercised and whether the project should proceed at all. 64    A letter dated 18 May 1985 from Mr Gagliardi to Mr Tesoriero contains a summary of the history of the venture up to that date. There is no reason to believe that that summary is not substantially accurate. Mr Gagliardi’s summary for March 1985 is as follows:
“March 1985: In August 1984 (before proceeding with the DA) the partners requested a paid valuation of project and sales prices to Dyson Austen, [sic] valuers known for their conservative approach.
Their reaction was favourable, with a preliminary conservative sales value of $3,900,000.
Peter Miller of HUHQ (Cremorne) valued the complex (Feb 1985) at $4,200,000 minimum.
Mirvac (presently interested in the purchase of the land from the partners) value the project at $4.5 - 4,700,000.
The total project cost (land, construction, on-costs, interest) is estimated at $3.45 - 3.5 million.
There is a limited interest in proceeding with the project if the lower Dyson figures of 3.9 million are valid. This would in the best of cases give a gross return of 40% on the risk capital of 1 million .
If the Mirvac values are valid, there would be a return of over 100% on the risk capital mentioned. (The yearly return on the capital would be lower as the venture may take 1.5 to 2 years to complete .)
Peter Tesoriero undertakes to explore sale of the land to Mirvac.
Mirvac becomes very interested in the project and makes observations and comments. Some of these are valid (and shared by the partners since the inception of the project), others are considered more towards the scope of reducing the land purchase price. Mirvac offers $1,200,000 for the land. (Cost to partners $1,000,000 incl. DA.)” [Emphasis added]
65    Mr Gagliardi’s letter contains an analysis of six different possible scenarios for the development. Some scenarios depend upon the acquisition of an adjoining parcel of land. Each of the scenarios analyses cost of acquisition, cost of construction, “on costs” and interest. In each scenario a final sales value of the development is shown based upon an average sales price for the townhouses. The first scenario, which is based upon the original design of twelve townhouses, shows a final sales value of the project of $4,400,000 based upon an average sale price for twelve units of $366,000. The calculation shows that on this basis there would be 105% return on capital invested. The same process is followed for each of the other scenarios, showing returns on capital ranging from 84% to 190%. 66    Mr Gagliardi’s letter gives rise to the strong inference that what was discussed amongst the venturers during March 1985, in the absence of Mr Budai, included a document headed “Project Costs updated 15.3.85”, which was amongst Mr and Mrs Tesoriero’s discovered documents. That document calculated total costs of construction of the project at $2,151,275, to which was added interest of $351,120 and “sales commission $50,000?” . Costs of construction together with a “margin for finance” of $100,000 were added to a land value of $950,000 to give a total cost for the project of $3,550,000. 67    The analysis then proceeds:

“Dyson Austen sales prices (conservative)	3,900,000
Hence return on capital 30%
HUHQ detailed pricing	4,300,000
Hence return on capital 70%
Possible prices for this type of project due
to various economic factors in Sept. 1986	4,600,000
Return on capital 100%

An exacting assessment is not possible because of amy [sic] economic factors affecting the economic outcome to Sept. 1986:
Imposition of tax on building materials.
Union superannuation program.
Capital gains tax (not considered to have impact at this level of investment).
Present ease of sale of expensive, superior projects.
There is no money for the average 100,000 investment, but there is money for large investments, according to present general Sydney experience.
(The buyer of a Porsche is not affected by the economic climate.)
Unique project in area where there are area restrictions which have been waived in our case.
It is felt that in the very worst of cases we may make no profit.
In the best of cases we may be able to realise 100%.”
68    The reference in the document to “Dyson Austen sales prices” was a reference to a report from Dyson Austen & Co Pty Ltd (“Dysen Austen”), Valuers and Real Estate Agents, dated 27 September 1984, procured on the instructions of Mr Gagliardi. The report contains a market feasibility of the proposed development. 69    The report assesses the anticipated gross sales prices of each of the units, giving a total for the development of $3,900,000. It discusses a marketing programme, suggesting that it was important not to promote sales until construction was substantially completed and that two or three units should be furnished as display units to aid marketing. 70    There is no reference in the report to estimated rental returns on any townhouse nor is there any reference to any part of the development being retained by the venturers for long term investment. 71    It is likewise notable that neither in Mr Gagliardi’s summary of discussions in his letter of 18 May 1985, nor in the various scenarios which he discusses therein, nor in the document headed “Project Costs updated 15.3.85” is there any reference to any part of the development being retained by the venturers for long term investment nor is there any reference to possible rental income from any townhouse. 72    I am satisfied that in March 1985 all proposed venturers were giving consideration as to whether the venture should proceed and whether the option to acquire the land, which expired on 23 April 1985, should be exercised. In that consideration they had sole regard to the estimated return on capital invested, upon the basis that all townhouses would be sold at current market prices, some to the venturers and the rest to outsiders. Those venturers who wished to buy townhouses for themselves, either as residences or as investments, would benefit to the extent that their share of profit from sales to outsiders would reduce the acquisition cost of the townhouses which they purchased. Those who did not wish to buy a townhouse would simply receive their share of the profits in cash. 73    By 26 March 1985 the venturers had come to a decision that they would proceed with the venture. On that day a meeting of directors of Zelino was held. Present were Count Sassoli and Mr Gagliardi, then the only two directors of Zelino, and Mr Socini, Mrs Zanin, Mr Tesoriero and Mr Budai. Mr Socini, Mrs Zanin and Mr Tesoriero were appointed as directors. Share transfers were approved and allotments of further shares were made so that all the venturers held shares in Zelino. A total of 950,000 ordinary 10¢ units in the CUT were issued to the venturers. The amount payable in respect of those subscriptions, $95,000, was equal to the 10% deposit which was payable upon exchange of contracts for the purchase of the Cremorne Point land. Payment of the subscription monies was not made by all venturers on 26 March but at various times shortly thereafter. 74    On 22 April 1985, the option to purchase having been exercised, Zelino exchanged contracts for the purchase of the Cremorne Point land. 75    On 22 July 1985 Home Unit Headquarters, a real estate agent, provided to Mr Gagliardi an opinion of the selling price for each of the twelve townhouses in the development. The total of the sale prices was $4,420,000. 76    On or about 15 August 1985, the contract for the purchase of the Cremorne Point land was settled and Midland International Aust Ltd (“Midland”) advanced $2,675,000 to the venturers upon the security of a first registered mortgage over the land. The venturers, as identified in the security documents, were Feangil (Count Sassoli’s company), Mr Socini, Mr and Mrs Tesoriero jointly, Danza (Mr Gagliardi’s company), and Beila (trustee for Mrs Zanin’s family trust). In accordance with the plan worked out in the meeting of venturers in December 1984 (see paras.49, 50), the venturers borrowed the funds as a partnership, called the “Holyoak Partnership”, and that partnership immediately on-lent the funds to Zelino. The venturers obtain tax advice 77    By June 1986 construction of the project was well under way. On 7 and 8 June Mr Tesoriero had a number of conversations with Mr Budai in which Mr Tesoriero said that Mr Gagliardi was proposing that the venture sell some of the townhouses off the plan. Mr Budai said that selling at this point would undermine the objective of claiming to the ATO that the purpose of the venture was to retain the townhouses for rental purposes. 78    It was agreed that the venturers would seek expert tax advice as to how they could sell townhouses to non-venturers without compromising their claim that the profits to be derived from the venture did not arise from the carrying on of a profit-making undertaking. 79    On 17 July 1986 Mr Tesoriero wrote to Messrs Freehill Hollingdale & Page seeking tax advice on behalf of Zelino. He set out a recitation of the facts giving rise to the questions for advice. In the course of that recitation, he said:

“The original intention of the venturers was to pass beneficial ownership in some of the apartments to themselves as individuals and to keep the remaining apartments for rental purposes. The trust deed was drafted to enable ownership of a particular apartment to pass from the unit trust to an individual unitholder. It is now evident that it may be desirable to dispose of some of the apartments to persons who are not currently owners of units in the unit trust. …
[He then referred to a procedure, devised by Mr Budai, for issuing ‘special rights units’ in the CUT to outsider purchasers.]
At the outset it was never intended that ‘special rights’ units entitling their owner to a beneficial interest in a particular apartment would be available to anyone other than the owners of ordinary units (the original venturers). Nor was it ever intended that apartments would be disposed of by sale. Now that we are considering the possibility of allowing an outsider to apply for special rights units we would not want it to be done in a manner that could compromise the fiscal situation of the original unit holders. By disposing of one or more of the apartments in the manner described above, Mr Budai assures us, we would not be ‘selling’ anything and we would not be running any risk of liability for Income Tax.
We would be grateful if you would confirm that Mr Budai’s advice is correct and further advise on the liability of the trust for Capital Gains tax (particularly with reference to the debate on this matter currently being reported in the press).”
80    I am satisfied that the false statements in this letter as to the “original intention of the venturers” were made by Mr Tesoriero so that, if necessary, he might later support his claim to the ATO by reference to this letter. He provided that letter to Mr Elkan much later in order to assist Mr Elkan’s submission to the ATO for a refund of tax. 81    On 8 August 1986 Mr Tesoriero, Mr Gagliardi, Mrs Zanin, Mr Budai and, possibly, Mr Pringle (Count Sassoli’s accountant) attended a meeting with a partner of Freehill Hollingdale & Page, Mr Clive Cullinan QC, a well known tax specialist. Apparently, the meeting had to conclude before Mr Cullinan was able to give advice and a further meeting was convened for 11 August 1986. At this meeting, Mr Socini’s solicitor, Mr Danieletto, attended as well as the previously mentioned venturers. 82    It is clear from a letter of advice written by Mr Cullinan, to which I refer in paragraph 86 below, that despite Mr Tesoriero’s protestations as to the “original intentions of the venturers” Mr Cullinan elicited information in these meetings which caused him to doubt what he had been told. 83    Mr Tesoriero says that he cannot remember what advice Mr Cullinan gave at these meetings. Mr Budai says that at the 11 August meeting Mr Cullinan advised that in the light of the decision in Kratzmann’s Case he was of the view that even if the venturers followed the procedure suggested by Mr Budai in issuing “special rights units” in the CUT to outsider purchasers of townhouses, the venturers would still receive assessable income if the result of the transactions was that the Trust ended up receiving more money for the townhouses than the cost of their construction. 84    According to Mr Budai, at the conclusion of this meeting he, Mr Danieletto and Mr Tesoriero went to a nearby coffee shop and had a discussion about the meeting. Mr Budai said:
“It is clear that there is no point in trying to have sales to outsiders in the way described in [the letter of instructions to Mr Cullinan] . It is obvious from what Cullinan said that if there were any transfers of strata lots to outsiders which resulted in the Trust having greater assets afterwards, then there is no question the ‘profit’ would be taxable.”

He says that Mr Tesoriero responded: “That seems obvious. We still have some time. See if you can develop some other alternatives.” I accept that evidence of Mr Budai.

85    Mr Budai then set about devising a mechanism to overcome the problem raised by Mr Cullinan. On 27 September 1986 he wrote a letter to the directors of Zelino in which he outlined his suggestions. He recommended a series of complicated calculations, based on the cost of construction of the whole project and the sale prices of the individual townhouses, to arrive at the issue price for “special rights units” in the CUT which could be sold to outside purchasers. The calculation would also determine the issue price for ordinary units in the CUT which could be issued to those venturers who wished to buy townhouses for themselves. He continued:
“When all special rights have been disposed of in this way the funds received by the Trustee from the foundation unitholders for application for ordinary units plus the funds received by the Trustee for the cash component of the application for the special rights units will precisely equal the cost of constructing the twelve strata units. … The Trust’s in-flow of funds will entirely have been from applicants to the various classes of units and funds made available by way of loans.
The total amount raised is to be expended to build the twelve strata lots or to repay loans.
On the completion of the issue of all the special rights the Trust will not have equitable ownership of any assets.
In these circumstances it is hard to imagine that the Trust would be liable for any income tax.”
86    Mr Tesoriero forwarded a copy of Mr Budai’s letter to Mr Cullinan and sought his advice as to the procedure suggested by Mr Budai. Mr Cullinan responded by letter dated 27 October 1986. In the course of his comments, he said:
“Provided there is unequivocal evidence of their purpose of acquisition being to reside or invest for income producing purposes in the Trust I consider that they should not be liable for income tax under s.25A. At the conference held some little time back I referred to a number of matters which, unexplained, might be taken as indicative of a purpose, at least on the part of some unitholders, of selling units or apartments at profit rather than to reside therein or derive income thereupon.
To a large extent taxability will depend upon satisfying the Commissioner (or on appeal a Court) as to these matters. Objective matters will also be important e.g. how many apartments are in fact sold and to what extent is the cost of apartments retained, reduced by the profits made by the sales. At the conference I referred to Kratzmann’s Case (70 ATC 4043) as providing some authority for the view that a profit can be represented by an asset rather than cash e.g. by the apartments themselves.
On the other hand a particular investor who continues to hold his apartment for a period of years consistently with his original purpose will, in ordinary circumstances, be in a much better position to demonstrate that his purpose was not that of profit-making.”
87    It is necessary to explain what Mr Cullinan meant by his reference to Kratzmann’s Case. In Kratzmann v. Federal Commissioner of Taxation (1970) 44 ALJR 293 the Commissioner contended that the taxpayer had bought land for the purpose of a profit-making scheme so that the profit arising from the sale of the land was assessable under s.26(a) ITAA (then the equivalent of s.25A). The taxpayer’s scheme was said to have involved the following steps: (1) the taxpayer would sell the land to a specially incorporated company in exchange for shares in the company; (2) there would be attached to particular blocks of shares in the company rights to occupy certain parts of a building to be erected on the land so that rights to possession would be based, not upon strata titles, but upon ownership of shares; (3) another company of the taxpayer would construct on the land a building comprising shops, offices and flats; (4) a loan would be obtained from a financial institution covering the major part of the cost of construction; (5) the costs of construction would be recouped by selling blocks of shares to purchasers wanting shops and offices in the completed building; (6) the taxpayer would retain for himself the remaining shares in the company and the rights of occupation in the building attaching thereto. 88 Menzies J. said that if the Commissioner had proved his contention as to what was the taxpayer’s purpose in purchasing the land, he would have had no doubt that the land had been purchased as a step in carrying out a profit-making scheme. His Honour said at p.294:
“Upon the whole I have reached the conclusion that the taxpayer bought the land in question, not to sell it at a profit, but to carry out a profit-making scheme thereon involving the borrowing of money to erect a building, the realisation of units in the building to cover the repayment of loans and the cost of the project to leave him with a substantial asset which would constitute a surplus or profit. I do not accept the argument of counsel for the taxpayer that, in the circumstances, a surplus of this sort would be something different from a profit. I find affirmatively that the taxpayer did buy the land for the carrying out of a profit-making scheme.
It follows, therefore, that any profit arising from the carrying on or the carrying out of that profit-making scheme is assessable income pursuant to s.26(a) [later, s.25A] of the Act.”
89 His Honour then found as a fact that before the taxpayer’s scheme could be carried into effect, a change in financial circumstances compelled the taxpayer to sell the land, with the result that the profit on sale was not a profit assessable under s.26(a) ITAA as arising from the carrying out of the taxpayer’s scheme. 90 It is clear that what Mr Cullinan had in mind when advising the venturers in August 1986 was that the Commissioner might very easily be able to claim successfully that the venturers’ scheme was not essentially different from Mr Kratzmann’s scheme. Like Mr Kratzmann’s scheme, the venturers’ scheme involved the acquisition and development of property, the sale of some of the development to third parties in order to repay the construction loan and the retention of the balance of the development by the venturers. In accordance with the reasoning of Menzies J., the townhouses remaining in the hands of the venturers would be a profit and, therefore, the scheme itself would be a profit-making scheme within the meaning of s.25A ITAA. If, in addition to securing the benefit of the townhouses to be retained by them, the venturers received distribution of profits derived from the sale of townhouses to outsiders, those profits would clearly have arisen from the carrying out of a profit-making scheme so as to be assessable income within s.25A ITAA. 91 Mr Budai’s proposal, as formulated in his letter of 27 September 1986 to Zelino, was designed to overcome the problem foreseen by Mr Cullinan as arising from Kratzmann’s Case by ensuring that the venture did not make any form of profit at all: the proceeds received from sales to outsiders and to the venturers would together equal the total costs of the project. 92 However, Mr Budai’s proposal could not be implemented in September 1986 or for a considerable time thereafter, if ever. The proposal depended upon being able to quantify with exactness the total costs, expenses and liabilities of the project so as to ensure that the income of the Trust from sales would not exceed such costs, expenses and liabilities. As at September 1986 the project was still about a year away from completion. The venturers were embroiled in endless wrangles over finishes and other matters affecting the cost of construction; the cost of construction was continually escalating. There was no possibility in September 1986 of being able to work out a reliable figure for the total costs of the finished project. Even when the profits of the venture came to be distributed on 16 December 1988, there was disagreement as to the costs of rectification work, that disagreement eventually only being resolved by a reluctant compromise. Townhouses are sold to outsiders 93    On 12 August 1986, the day following the venturers’ second meeting with Mr Cullinan, a directors’ meeting of Zelino was held at which were present Mr P. Mirrizi (representing Count Sassoli), Mr Tesoriero, Mr Gagliardi, Mrs Zanin, Messrs Socini and Gardini, Mr Danieletto representing Mr Socini, and Mr Budai. The meeting took six and a half hours. A great deal of time was spent in heated debate as to the role of each venturer in the decision-making process. 94    A record of the meeting prepared by Mr Danieletto notes:
“Priority must be given to completing one townhouse for demonstration purposes. This was unanimously agreed to. CG indicated that 2 townhouses would be finished in about 3 weeks.”
95    It is fair inference that the decision to complete the townhouse “for demonstration purposes” was in accordance with the recommendation in the Dyson Austin report dated 27 September 1984 that two or three townhouses should be furnished for display as an aid to marketing: see paragraphs 68-70 above. 96    At a directors’ meeting of Zelino held on 23 September 1986 consideration was given to appointing various real estate agents for the sale of townhouses to outsiders and the finalisation of demonstration townhouses 5 and 6 was discussed. At a directors’ meeting of Zelino held on 14 October 1986 a unanimous resolution was passed fixing the “values” of each townhouse in the development. Another unanimous resolution authorised the payment of a 1% sales commission to any venturer who found a purchaser for a townhouse, except where a real estate agent was also entitled to claim commission on the sale. 97    It is clear that by this time a number of outsiders were keenly interested in purchasing townhouses in the development. Diary notes of Mr Tesoriero (at Ex. B1, p.1679) reveal that he was actively involved in discussions with real estate agents and directly with prospective purchasers of townhouses. 98    At various times between October 1986 and September 1987 those of the venturers who wished to acquire townhouses for themselves gave written notice to Zelino of their election to do so, at the prices stipulated for those townhouses in the directors’ meeting of 14 October 1986. Mr and Mrs Tesoriero elected to acquire Lots 3, 4, 11 and 12; Count Sassoli (through Feangil) elected to acquire Lot 8; Mrs Zanin (through Beila) elected to acquire Lot 9; Mr Socini elected to acquire Lot 2. A detailed recitation of the circumstances in which the venturers acquired and paid for their respective townhouses is set out in my judgment in Tesoriero v. Chief Commissioner of Stamp Duties [2001] NSWSC 489, at paras.24-40. To avoid overburdening these reasons, I incorporate herein the findings of fact which I made in those paragraphs. 99 Four of the remaining five townhouses were sold to non-venturers between July and October 1987. Mr Tesoriero himself found two of those purchasers and became entitled to a 1% commission on the sales in accordance with the resolution of the Zelino directors on 14 October 1986. The strata plan for the development was registered on 8 September 1987 and, upon completion of the contracts for sale to non-venturers, strata title in their respective lots was transferred to them by Zelino. The title to townhouses which had been acquired by the venturers, however, remained with Zelino. 100 By February 1988, all but one of the townhouses in the project had been sold, the proceeds of sales to outsiders had been received by Zelino and all that remained in terms of further expenditure by the venturers on the project was the cost of rectification work. Like practically every other matter which arose in the history of the project, the extent of rectification work was the subject of acrimonious dispute between the venturers, Mr Tesoriero claiming that substantial rectification work needed to be done to the four townhouses which he and Mrs Tesoriero had acquired, the other venturers claiming that a substantial part of that work was enhancement of the townhouses at their expense, not rectification work. 101 At a meeting of directors of Zelino held on 1 February 1988 it was resolved that 80% of the venturers’ capital contribution be distributed to them by 22 March 1988. In February 1988 Mr Budai began to prepare financial accounts for the CUT. Was Mr Budai negligent in advising of liability under s.25 ITAA 102    By mid-April 1988 the last townhouse had been sold to an outside purchaser for a surprisingly high price. It was apparent that the CUT would show a substantial profit, even though the exact amount could not be quantified because adjustments were to be made to the purchase prices of Mr and Mrs Tesoriero’s townhouses in respect of the cost of rectification work. 103    Probably from early 1988 the venturers began to press for a final distribution of funds from the Trust. Mr Budai prepared financial accounts of the Trust and of the Holyoak Partnership as at 15 April 1988. 104    A meeting of directors of Zelino was held on 29 April 1988 at which were present Mr Gagliardi, Mrs Zanin, Mr Danieletto, Mr Socini, Mr Tesoriero and Mr Budai. The minutes of that meeting do not record that Mr Budai’s accounts as at 15 April 1988 were tabled. However, Mr Budai says that those accounts were presented to the venturers at that meeting and the following exchange occurred:
“Budai: ‘On the basis of these accounts and on Mr Cullinan’s advice, there will be significant taxable income for each venturer.’
Zanin: ‘That’s not what you said when we asked your advice at the beginning.’
Budai: ‘But you told me you were going to hold the strata lots for rental investment.’
Zanin: ‘Can’t you do something?’
Budai: ‘Let me think about it.’”
105    According to Mr Budai, the next time he spoke to Mr Tesoriero was on 4 July 1988, when a conversation to the following effect took place:
“Tesoriero: ‘I am not very happy about income tax. My original and continuing intention should not give rise to an income tax problem.’
Budai: ‘It’s not your intention that’s critical but the intention of the Board. What the intention of the Board was will be inferred in the light of their actions and not what they say their intention was. You recall what Cullinan advised when we set out what these actions were. For these reasons I cannot advise that the Commissioner will conclude that it was not a profit making scheme. But obviously what the Board finally decides to include in the tax return is for the Board to decide.’
Tesoriero: ‘I invested in the Cremorne Unit Trust on the under-standing that the project was for the purpose of providing each of the unitholders with a residence and investment for rental purposes.’
Budai: ‘I gave advice on the basis that the project was for the purpose of providing the unitholders with an investment for rental purposes. But we both know that this has proved not to be correct. Not only is it not correct, but there is an abundance of evidence representing the contrary.’
Tesoriero: ‘I expected that the strata lots would be acquired by ordinary unitholders and that nothing would be sold to outsiders.’
Budai: ‘When I was originally approached in 1984, I was told that the strata lots would be held for rental purposes for a period sufficient to satisfy the Commissioner and then sold or used for residences. I had my personal views on whether what I was told was true or not. But I gave advice as to what the taxation situation was on the basis of the intentions I was told about. It was not my role to investigate whether what I was being told was true or not.’
Tesoriero: ‘You know that I did not want to pay income tax because my intention was for my equity in the trust to be held by Zelino for me to live in and for rental return.’

“A successful defendant in a non-jury case has no doubt, in the absence of special circumstances, a reasonable expectation of obtaining an order for the payment of his costs by the plaintiff; but he has no right to costs unless and until the Court awards them to him, and the Court has an absolute and unfettered discretion to award or not to award them. This discretion, like any other discretion, must of course be exercised judicially, and the Judge ought not to exercise it against the successful party except for some reason connected with the case.”
226    In Ritter v. Godfrey [1920] 2 KB 47, Atkin LJ said at p.60:
“In the case of a wholly successful defendant, in my opinion the Judge must give the defendant his costs unless there is evidence that the defendant (1) brought about the litigation, or (2) has done something connected with the institution or the conduct of the suit calculated to occasion unnecessary litigation or expense, or (3) has done some wrongful act in the course of the transaction of which the plaintiff complains.”

His Lordship at p.61 said of the third category of exceptions that it:

“… extends to cases where the facts complained of, though they do not give the plaintiff a cause of action, disclose a wrong to the public.”

A wrong to the public, in his Lordship’s opinion, included fraud or crime but, even so, the disentitling conduct must be in the course of the transaction which was the subject of the proceedings. His Lordship’s statement of principle was adopted by Long Innes J. in Sunday Times Newspaper Co Ltd v. McIntosh (1933) 33 SR(NSW) 371, at 377.

227    In Jamal v. Secretary, Department of Health (1988) 14 NSWLR 252 at p.271 Mahoney JA, after referring to the general rule as to costs, said of the exceptions to it:
“First, if the costs of the appeal have been increased by an issue on which the successful parties failed and those costs are of sufficient significance to warrant a special order, the parties who succeeded on that issue should have the costs of it. … And, secondly there may be reasons why the costs of appeal or the costs of particular issues will be ordered otherwise. Thus, for example, the conduct of the successful respondent may have justified the appeal being brought … or his conduct in relation to the matter under appeal may be discreditable to an extent warranting his being deprived of costs.”
228    Examples may be found of cases where costs have not been awarded to a defendant who has succeeded on a discreditable defence or on one founded upon illegality. In Jones v. Merioneth Shire Permanent Benefit Building Society [1892] 1 Ch 188, the plaintiffs gave promissory notes to the defendant in consideration that the defendant would stifle the criminal prosecution of a relative for embezzlement of the defendant’s funds. When the defendant brought an action at law to enforce the promissory notes against the plaintiffs, the plaintiffs brought an action in Chancery to set aside the notes on the ground that they were given for an illegal consideration. The plaintiffs succeeded at first instance and on appeal. However, they were denied their costs. Lindley LJ, with whom the other members of the Court agreed, said at p.188:
“We are very much struck with the character of the defence [ to the action to enforce the notes] and the circumstances under which it was raised. It is an extremely discreditable defence, to which we are compelled to give effect upon grounds of public policy. Upon these grounds, therefore, the appeal is dismissed without costs.”
229    In Igaki Australia Ltd v. Coastmine Pty Ltd (unrep. FCA, Drummond J., 2 November 1994), the applicants claimed that the respondents had induced them to acquire shares in a company carrying on a restaurant business by means of certain misrepresentations. The respondents succeeded because the trial judge found that the inducing representations were to the effect that the company’s business would be carried on in such a way that the applicants would receive large sums of money which would not be disclosed for tax purposes, in breach of s.8C and s.8L of the Taxation Administration Act 1953 and s.29D of the Crimes Act 1914. The applicants’ claim therefore failed, since the case was one in which:
“… a person has been induced to buy property by a representation that the acquisition would enable him to obtain benefits in circumstances that will necessarily involve a breach of the criminal law. Even if the representation as to the availability of large sums of undisclosed income was fraudulently false, it is against public policy to give a remedy to such a purchaser." (para.[67])
230    At paragraph [78], his Honour said:
“Although these respondents have ultimately succeeded in resisting all of the applicants’ claims, they were successful because I have found that the applicants acted on a representation not pleaded, i.e. that illegal monies would be paid to them. … That they have succeeded in the litigation because Igaki could not resist their promise to share their dishonest gains with him does not entitle them to their costs of the proceedings.”
231    The case was taken on appeal and the appeal dismissed: see Igaki Australia Pty Ltd v. Coastmine Pty Ltd (1996) 3 IPR 37, at 51-52. In dismissing the appeal, Spender, Whitlam and Beazley JJ said at p.52:
“… we consider that the Court ought not be involved in any way in condoning conduct which is clearly in contravention of the income tax laws. To award costs to [the successful respondents] in this case would have that effect.”
232    Special leave to appeal to the High Court was refused. 233    In the present case, I think it would be contrary to the principles discussed in the authorities to which I have referred and highly offensive to public policy if I were to award to Mr Budai the costs of an issue on which he has succeeded only by demonstrating that he and Mr and Mrs Tesoriero were engaged in conduct flagrantly and deliberately in contravention of the income tax laws. 234    There were three broad claims of negligence against Mr Budai, namely, that he negligently advised that tax was payable because Mr and Mrs Tesoriero had derived income from a profit-making scheme or undertaking, that he negligently advised that the sum of $170,890 should be inserted in their tax returns and, finally, that he negligently failed to procure the issue of special rights units. Mr Budai’s successful defences to the first and third claims did not depend upon his illegal conduct and there is no reason in public policy that he should be deprived of his costs on those issues. 235    Weighing up how much time, effort and cost in the preparation and presentation of this case were expended on the issue as to whether there was a fraudulent tax evasion scheme and how much time, effort and cost were devoted to other issues is much more a matter of impression than exact calculation as so many factual issues overlap, particularly those bearing upon credit. However, doing the best I can, I am of the view that Mr Budai should be deprived of one-third of the costs against Mr and Mrs Tesoriero to which he would otherwise be entitled.
ORDERS
236    The orders of the Court are as follows:

(1) There will be judgment for the defendant on the Statement of Claim.

(2) Without prejudice to any other costs orders already made, I order that the plaintiffs pay two-thirds of the defendant’s costs of the proceedings.

237    Normally these formal orders of the Court would dispose completely of the matter. However, in this case several serious frauds on the revenue authorities have been revealed. The participants in the frauds have included not only the plaintiffs, the defendant and the other directors of Zelino but, possibly, certain professional advisers. There are grounds for believing that those professional advisers may themselves have either committed offences against the Taxation Administration Act 1953 or may deliberately have aided their clients to commit such offences. 238    It would be an affront to justice and to all professional people striving to maintain the ethical standards of their calling if the Court, having become aware of possible serious breaches of the law by members of a profession, turned a blind eye and failed to draw those matters to the attention of the relevant authorities and professional regulatory bodies for further investigation. 239    In paragraph 15 of this judgment I have referred to false statements made by Mr Elkan to the ATO in his submissions dated 18 November 1991. In her submissions at T1090.10-1093.25, Dr P. Budai, who appeared by leave of the Court for the defendant, summarised a number of other matters which raised serious concerns as to whether Mr Elkan has knowingly misled the ATO. All of these matters should be investigated in order to determine whether or not Mr Elkan is a fit and proper person to remain a registered tax agent and a chartered accountant, and as to whether he himself has committed offences against the income tax legislation. 240    The Australian Taxation Office, the Tax Agents Board, the Australian Institute of Chartered Accountants and the Public Accountants Registration Board should investigate the conduct of Mr Budai for the purpose of determining whether he is a fit and proper person to remain a registered tax agent, a Chartered Accountant and a Public Accountant. 241    Mr Danieletto was Mr Socini’s solicitor, attended many of the meetings of the Zelino Board, and signed the false CUT accounts of 16 December 1988 as Mr Socini’s attorney. There are grounds to suspect that Mr Danieletto knew about the fraudulent tax scheme and facilitated its implementation. Mr Danieletto appears no longer to be practising as a solicitor in New South Wales. The Law Society should be made aware of Mr Danieletto’s involvement in the matters the subject of this judgment in the event that he reapplies for admission as a solicitor. 242    Likewise, the Law Society should be made aware of the findings concerning Mr Tesoriero made in this judgment in the event that Mr Tesoriero reapplies for admission as a solicitor. 243    The ATO will also be concerned to enquire whether the venturers other than the plaintiffs have furnished proper income tax returns in respect of the profits derived from the venture. 244    According, I make a further direction as follows: I direct that the Registrar of the Court forward a copy of this judgment to the Australian Taxation Office, the Tax Agents Board, the Law Society of New South Wales, the Australian Institute of Chartered Accountants and the Public Accountants Registration Board. 245    I direct that the exhibits herein and all other papers in the Court file not be released to the parties to the proceedings but be retained by the Court until all of the bodies referred to have notified the Court either that all investigations and proceedings have concluded or that no action is to be taken by them.

246    I direct that the exhibits and other papers in the Court file, or copies thereof, may be released to the bodies referred to upon application to a Judge of the Court and subject to proper arrangements for their safe keeping, for the purposes of the investigations of those bodies.

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Last Modified: 07/26/2001