Markham & Ors. v. Lunt & Ors.
Members:Pidgeon J
Tribunal:
Supreme Court of Western Australia
Pidgeon J.
In this action the plaintiffs are claiming damages against the partners of firms of accountants they engaged on the basis that the accountants breached the terms of the agreement under which they were engaged or, alternatively, were negligent in failing to carry out their work with skill, care and diligence.
I propose firstly to set out what I am satisfied are the facts and to do this I am acting on the evidence of Mr. Markham and Mr. Heath whose evidence I preferred to that of the defendants' witnesses and in particular to that of the defendant Mr. Harding. Prior to 1968 Mr. Markham was carrying on business on his own account as a land developer. He was originally an estate agent and continued to carry on that business but he would purchase tracts of broadacre land and would do what was necessary to bring them into subdivision, namely, he would obtain the necessary zonings and subdivision approvals and he would arrange to have carried out the engineering works. It would be necessary for him to obtain finance and when the land was available for sale in subdivision he would either sell that through his firm or arrange for it to be sold. He engaged Mr. Heath as a salesman and in 1968 took him into partnership. At this time Mr. Markham was concerned with the amount of tax that he was called upon to pay and in particular of the amount of provisional tax. He discussed the matter with Mr. Heath who had married a daughter of the first defendant Mr. Lunt and the result of the conversations were that Mr. Markham and Mr. Heath decided to engage Mr. Lunt's firm as their accountants in preference to the firm that was then acting for them. This resulted in Mr. Lunt's firm taking over all the accountancy work of Mr. Markham and Mr. Heath. It involved auditing their land agents' trust account and it reached the stage of doing the personal tax returns of Mr. Markham and Mr. Heath and their wives. One of the defendants' tasks, in fact I consider their prime task, was to advise the plaintiffs in respect of their tax commitments and to rearrange their affairs to alter the incidence of tax. There was no written contract of service between the plaintiffs and the defendants. The contract must be spelt out from the requests made and from
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what was done. There were discussions between the plaintiffs and Mr. Lunt with a view to altering the burden of taxation by avoiding provisional tax but accepting a greater burden of group tax. It was suggested that this be done by the formation of private companies so that when a parcel of broadacre land came up for acquisition a private company was to be formed for the purpose of acquiring it and this was in fact done. A number of companies were incorporated and they have been joined as plaintiffs, although I will generally refer to the plaintiffs as Mr. Markham and Mr. Heath. The companies were formed as needed when land became available to be acquired. Mr. Lunt took over in respect of the taxation year commencing on 1 July 1968 and the first company, Rokeby Developments Pty. Ltd. was formed shortly after that. There is no need for me to go into detail as to how the companies altered the burden of taxation. Suffice it to say that by the payment out of directors' fees and salaries the plaintiffs accepted the obligation of tax being deducted at its source as group tax rather than their receiving the whole of the proceeds and paying provisional tax. The companies may have been a means to allow assets to be spread over more members of the family, but if this was the position then the plaintiffs accepted a possibility of paying probate duty if a member of a family who had such assets died. They were embarking on what at that time was a legitimate means to alter the burden of their obligations and in particular not to pay a large amount of tax in advance as provisional tax. The defendants were professional and skilled accountants and there could be no question that they were under the normal obligation of carrying out the accountacy work in a skilful manner and to advise the plaintiffs in a skilful manner in respect of their taxation obligations and the options that were legitimately open to them. At an early stage Mr. Lunt arranged for one of his employed accountants, Mr. Harding, to carry out the plaintiffs' work. In 1971 Mr. Harding subsequently became a partner in Mr. Lunt's firm and at all relevant times he was the person mainly responsible for carrying out the plaintiffs' work and he would make regular visits to the plaintiffs' premises to do this. The plaintiffs' procedural bookwork was considerable and Mr. Harding, at an early stage, recommended to the plaintiffs that they employ a bookkeeper as they needed a person with greater skills than the persons then employed making the entries but not with the degree of skill of a professional accountant and it was mentioned by Mr. Harding that it would be uneconomic to employ Mr. Harding to do that part of the work which a competent bookkeeper would do. The plaintiffs agreed to this suggestion and Mr. Harding recommended a man he knew, Mr. Bamford who had done similar work for Wentworth Motors. He was described as being a bookkeeper of the old school. He was employed by the plaintiffs until his death in 1977. I am satisfied he did his work meticulously and did all that was required of him. He had lost a leg during the war and in fact had been on the Burma Railway. Mr. Markham made mention of the fact that he would work during lunch hour as his handicap hindered his leaving the office and his work was in effect his hobby. He was required to post the entries in the books of the respective companies and at the end of the financial year to bring the books to a trial balance stage. He was not required to make what was described as ``the closing entries'' as he did not have sufficient skill to do this and this was to be the defendants' task. The closing entries (t/s. 199) were directors' bonuses payable by each company and interest on the loan accounts. These would be matters very relevant to the incidence of taxation and from which Mr. Harding could prepare the tax returns. I would also mention, in passing, that it appeared that the plan was that the companies would not have much capital and there appeared to be no question of their reducing capital when the land the particular company had acquired was sold.On 2 July 1973 the constitution of Mr. Lunt's firm changed. Mr. Harding and Mr. Ruthven retired from it and commenced to carry on business in a new firm Messrs. Clifford Ruthven Harding & Co. The plaintiffs considered the question whether to continue with Mr. Lunt's firm or with the new firm and decided to continue with Mr. Harding and his new firm. Mr. Lunt's firm ceased to be employed after that date.
The position was that when Mr. Harding started acting the plaintiffs were very satisfied with him. They must have still been satisfied in July 1973 when they decided to employ his new firm. Most of the breaches later complained of would have occurred by this time but they had not become apparent. I am satisfied the position developed of Mr. Harding devoting less and less
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time to the plaintiff's business. The evidence satisfies me that at an early stage Mr. Harding was not attending to the plaintiffs' affairs properly and I shall later be referring to particular instances of this. Deficiencies in Mr. Harding's performance started to come to the plaintiffs' notice during the latter part of 1973 when Mr. Bamford became concerned at Mr. Harding's lack of attention. During 1972 Mr. Harding visited once a month. During the latter part of 1973 he became more and more difficult to contact and Mr. Bamford was becoming concerned at not being able to obtain from Mr. Harding the closing entries. It reached the stage where Mr. Harding said to leave the closing entries blank and for Mr. Bamford to endeavour to carry on the bookkeeping with these blanks. The plaintiffs were receiving monthly accounts for the accounting work and matters came to a head when comments were being made to the effect that the accounts were being paid but the work was not being done. At a time which appeared to be the early part of 1974 the plaintiffs made the decision to change their accountants. Mr. Markham consulted another firm of public accountants, Messrs. Kennerly Nicholson and asked them to take over the plaintiffs' work. Mr. Markham appeared to be reluctant to be involved in the actual dismissing and told the new accountants that he would leave the hand-over to them. I do not know precisely how the decision to change was brought to the defendants' notice, but on 5 March 1974 the following letter was written which I will set out in full as the defendants place significance on it:``Mr. M. Harding,
Clifford, Ruthven, Harding & Co.,
18-20 Richardson Street,
WEST PERTH 6005.
Dear Malcolm,
Both Colin and I would like to record our appreciation of all the help you have afforded us over the years.
There was many a time when your ability to defer tax payments certainly `saved our bacon'.
To transfer auditors was not an easy decision to make. However, because of the complexity of the Markham affairs it does seem prudent to have all the family business under the one roof.
Relationship will still exist through our mutual clients, and we do hope you will continue to call in from time to time.
Once again Malcolm, many thanks for all your assistance.
Kindest regards,
John and Colin.''
Mr. Markham in evidence gave an explanation why the letter was written in these terms (t/s. 104). He said that he envisaged difficulty in obtaining a smooth change-over and in the new accountants obtaining their records. He said: ``It seemed prudent to try and change our affairs in the easiest manner possible''. I am satisfied from the whole of the evidence that the plaintiffs became dissatisfied with Mr. Harding. He was guilty of earlier neglect of which the plaintiffs were not aware as they still had faith in him when they decided in July 1973 to instruct his firm and not continue with Mr. Lunt's firm. It was the dissatisfaction to which I have referred that led the plaintiffs to change to Messrs. Kennerly Nicholson and the letter that I have set out (Ex. 5) does not lead me away from that conclusion. I am satisfied it was written to make the change-over as painless as possible. I would mention the new accountants experienced great difficulty in obtaining the records and information from Mr. Harding and the firm of which he was then a member and the records were in a poor state.
One of the most serious areas of neglect was the failure on Mr. Harding's part to lodge tax returns on time or at all. Returns were lodged late and often 12 to 18 months late. In some cases it was longer than that and in other cases returns were not lodged at all. The serious state to which the matter reached can be gauged from the fact that when the new accountants took over the Taxation Department had prepared summonses against some of the plaintiffs for their failure to lodge returns and one of the first tasks for the new accountants was to give sufficient undertakings to persuade the Commissioner to withdraw these summonses. I have to date made general comments indicating that Mr. Harding did not carry out the work in a competent manner. One of the matters raised in the defence was that it was alleged that there were difficulties in obtaining information from the plaintiffs. I will at this stage make the general remark that I am satisfied on the evidence that Mr. Harding was receiving the
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necessary information and it was available to him by the records Mr. Bamford kept. I consider Mr. Harding received the necessary information but was unable to process it. In fact the impression I gained was that he could not cope with it. It is apparent that this occurred at an early stage, but this was not apparent to the plaintiffs at the time as some years elapsed before they became apprehensive. Correspondence in respect of the company's returns was directed to Mr. Lunt as the public officer and was not sent to the plaintiffs.It has not been alleged in the defence that the plaintiffs specifically requested the defendants to delay lodging returns. I do not consider on the evidence that any of the plaintiffs were a party to the late lodgment other than a possible failure to take stronger action to ensure that Mr. Harding lodged the returns quicker. It was no part of the tax planning to gain an advantage by failing to lodge returns. A possible inference may be open from the second sentence of Ex. 5 referring to an ability to defer tax payments as ``saving the plaintiffs' bacon''. I would not make that inference having regard to the plaintiffs' explanation and the absence of any evidence that I would accept that would show that the plaintiffs made such request. Mr. Harding during his cross-examination (t/s. 844) said that he informed the plaintiffs that penalties would be incurred if the returns were late. I do not accept this evidence.
It is the plaintiffs' claim that the new accountants were required to spend time rectifying the defendants' work and there is a claim in respect of this and there are claims arising from the fines imposed in respect of late returns. I have indicated generally that I am satisfied the defendants did not carry out their work according to the requirements of the contract and I propose now to examine the particular instances where it has been alleged that they so failed to see if those instances have been established and what, if any, is the damage arising from it. When that has been determined it will be necessary to determine which of the defendants are liable in respect of the particular breach established. The plaintiffs have joined those persons who are partners in Mr. Lunt's firm prior to 2 July 1973 and have also joined the partners in the firm Mr. Harding joined after that date.
The plaintiffs' first specific claim is contained in para. 10(a) of the statement of claim as a particular of negligence or breach of contract and reads:
``(a) The Defendants failed to prepare and lodge within the time prescribed by the said Act income tax returns on behalf of the Plaintiffs for the years ended the 30th day of June 1970 the 30th day of June 1971 the 30th day of June 1972 and the 30th day of June 1973 as a result of which fines were imposed upon certain of the Plaintiffs by the Deputy Commissioner of Taxation pursuant to the said Act.''
The returns concerned are set in particulars (p. 13 pleading book) and there is no need for me to set them out in detail. I am satisfied that the defendants had agreed to do the returns referred to. They were the personal returns of Mr. Markham and Mr. Heath and each of their wives as well as the returns of the companies that had been formed. Mr. Markham and Mr. Heath carried on business in partnership as estate agents under the firm name ``Markham and Heath''. The partnership return does not appear in the particulars. The wives were not partners in the business but received income from the companies. The returns were therefore those of the partners and their wives (first to fourth plaintiffs) and the eight companies that had been formed (fifth to the twelfth plaintiffs). There were four taxation years involved in each case, namely, the years ending 30 June 1970, 1971, 1972 and 1973. In each case the defendants did, during the time they were acting, lodge returns for the years ending 1970 and 1971 but in most and it would appear in all cases they were very late and penalties were incurred. An example of lateness was Mr. Markham's personal return for the year ending 30 June 1970. It was not lodged until 9 May 1972. The evidence showed (t/s. 38 Ex. 1 Vol. 1 p. 16) that generally returns are required to be lodged by 31 August following the year ended 30 June but tax agents can expect extensions until 31 December. If returns are not lodged by then tax agents would expect that additional tax for late lodgment of income tax returns would be incurred by their taxpayer client. The 1971 return should have been lodged by 31 December 1971 but was not lodged until 23 November 1972. Mr. Markham's return for 30 June 1972 had not been lodged by the defendants at the time their services were terminated in March 1974. In respect of the other returns for the year ended 30 June 1972 some were lodged late by
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the defendants but others had not been lodged by them prior to their ceasing to act. In all cases the dates on which the returns were lodged were dates well past 31 March of the year following that date of the return. The defendants had not lodged any of the returns for the year ending 30 June 1973 by the time they ceased to act in March 1974 and each of these returns incurred a penalty. Penalties were raised in respect of each of the returns listed in the particulars. My finding under this head is that the defendants concerned are in breach of the terms of their contract in failing to lodge the returns in a manner where penalties were not incurred.I make this finding on the basis that the defendants had the necessary information and they failed to carry out their part of the agreement to prepare returns from it within proper time. This would dispose of that part of the defence that there was an implied condition for the plaintiffs to supply the necessary information to enable the returns to be completed on time and failed to do this or alternatively were guilty of contributory negligence by reason of failing to do this. I do not consider the facts have been established whereby the merits of these pleas can be considered further. I come to this view on the evidence of Mr. Markham and Mr. Heath who were aware of Mr. Bamford's work and whose evidence was that the books were kept up to date; that the trial balances were struck and that difficulties arose through not being able to contact Mr. Harding or arrange for him to do his part of the work. Mr. Miller (t/s. 488) referred to Mr. Bamford being a meticulous bookkeeper. If in truth the accountants were having difficulty in obtaining the information then I would consider it was their part under the contract to apply to the Commissioner for an extension in time if there was a real difficulty or alternatively to advise the plaintiffs that further extensions were not available and that they were at risk as to penalties if they did not provide the information requested. I do not consider either of these things were done. Penalties were incurred and no adequate warning as to the position that was developing was given to the plaintiffs. I would also mention that although the work was detailed there was no apparent reasons why there should be inordinate delays in having returns prepared.
I must now assess the damage payable in respect of this breach. The plaintiffs are claiming the amount of the additional tax for late lodgment which was a total of $8,103.84, in respect of all the returns concerned. The plaintiffs are claiming a further sum representing the loss of use of that money from the time the penalty was imposed until the date of trial which amounted to $7,592.45. I would mention at this stage that a taxpayer has a right of action pursuant to sec. 251M of the Income Tax Assessment Act 1936 to sue for any penalty or additional tax if that is brought about through the negligence of a registered tax agent. There was no claim under this section in the statement of claim. At the trial the plaintiffs sought to amend the statement of claim to include a claim under this section but I would not allow this amendment for reasons I gave. The claim is therefore purely one for damages at common law but this section may be a factor to take into account in determining what are the damages payable. I am satisfied that the amount of the additional tax is the appropriate amount of damage. That was the direct monetary loss arising from the defendants' default. It would not compensate for a depreciation in the plaintiffs' credibility with the Taxation Department in respect of filing their returns so late. I have indicated that no factor has been established where contributory negligence or a breach of implied terms would cause a reduction in the amount of damage. There was however a factor submitted by the defendants that I was requested to take into account in assessing the true loss and that is as a result of the failure to submit the returns the assessments did not issue until 18 December 1974 and the defendants were not required to pay the amount of the assessment until 20 January 1975. That is, quite some time elapsed before the Commissioner issued an assessment. The position in regard to the 1970 return had it been filed correctly would have been that that assessment would have been payable in the normal course of events by 1 April 1971. Calculations based on this assumption in respect of all returns (Ex. 34) would indicate that the plaintiffs have suffered no economic loss by reason of having to pay the additional tax. The calculations were made on the interest that the plaintiffs would have been required to pay if it was borrowed money or alternatively, on the extra amount the money could be earned by not having to be disbursed at the earlier time.
I have come to the view that I ought not to take this factor into account in reducing what I
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consider is the prime head of damage, namely the amount of the additional tax. The requirements of the Act are that there is the obligation to submit the returns on time or within any extension of time and the aim of the additional tax and penalties is to deter persons from failing to carry out that duty. The Commissioner in assessing an appropriate penalty may well take into account the economic gain. However, it is nevertheless a penalty. I do not consider it is open for a person who has brought about this penalty by his neglect to point to an economic advantage that may occur by a breach of the law. It would not in reality be an advantage by reason of the drop in credibility that the plaintiffs must incur through not carrying out their obligations. In addition the policy of the Act in particular by reason of its having sec. 251M would indicate that penalties and additional tax are a loss to be borne by the defaulting tax agent and it would be contrary to the principles of the Act to be weighing up any economic advantage.I shall now deal with the claim for loss of use of the money. I do not consider any amount should be allowed under this head. Most of the assessments were received at the time the new accountants were acting. It was open to the plaintiffs and was a simple matter to have brought action under sec. 251M to recover from the defendants additional tax. It would have the appearance of a comparatively simple action the plaintiffs being able to establish that the defendants did in fact not lodge the returns and if it was necessary it would not appear to have been a great difficulty to establish that the information was supplied by the plaintiffs and available in the books they were keeping. The plaintiffs commenced an action at common law on 24 April 1975 and it was an action that did not get to trial until 21 March 1983. If the loss of use of the money was a head of damage the plaintiffs have not mitigated against it. Also in respect of this particular head of damage I would consider that the economic advantage the plaintiffs have gained by not making payment at an earlier stage can be weighed up in considering any claim for loss of use of the money they have been called upon to pay by way of additional tax. In this respect I would consider the claim is different from seeking recoupment of the additional tax itself. I am satisfied that any loss of use of the money between the time the plaintiffs disbursed the money and the time they could have brought action for its recovery would be more than offset by the advantage gained in not being called upon to pay their assessments for some years after they were normally due. There are some small payments by way of additional tax that do not come within the category to which I have been referring and that is some small amounts were imposed in 1972 while the defendants were acting. For example, the assessment that issued in 1972 in respect of Mrs. Markham's return had a penalty of $84.30. I am satisfied that the plaintiffs were not advised of this penalty as the assessments generally issued to the defendants and the defendants requested a cheque. The total amount of penalty involved in this area would appear to be in the region of $500 and the loss of use of the money from the time it was incurred until the time when the plaintiffs were aware of the position and could have brought action would not be great and again would I consider be offset by the economic advantage gained. A further matter came into question but was not specifically relied on by the defendants and that is it was open to the plaintiffs after they became aware that returns for the appropriate years had not been lodged to have themselves lodge the returns or instructed other tax agents. I do not consider that there has been any failure to mitigate by reason of this, or that there is any factor arising from this, to affect the damages claimable as I consider that the plaintiffs acted reasonably in this area. The time must be inevitably reached when it becomes obvious that the plaintiffs were in breach of their duties to lodge returns. It would be difficult to determine when such time arrived as accountants, as a matter of practice, obtain automatic extensions and one is entitled to assume that having given them the information, if the accountants themselves are unable to produce the return in on time, they would themselves obtain any necessary further extension. Mr. Lunt was the public officer of the companies concerned and had the obligation to see that they lodged their returns. The plaintiffs were endeavouring to contact Mr. Harding to attend to the matters. I do not consider on all the facts that I could make the inference that the plaintiffs ought to have taken different action at an earlier stage. When they realised the extent of the position they dismissed the defendants.
Overall I find that damages arising from the breaches I have found is the additional tax imposed and that would be the limit of the
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damage. The total additional tax appears to come to $8,103.84. The defendants, Mr. Harding and Mr. Ruthven, who are members of each of the firms that are in default would be jointly and severally liable for the full amount of the loss. I consider that the members of Mr. Lunt's firm would be jointly and severally liable in respect of the amount of additional tax arising from the returns for the years ending up to 30 June 1972 but they would not be liable in respect of any penalties for the returns of 30 June 1973. They ceased to be engaged after 30 June 1973 and it would be unlikely that they would have received any instructions for the 1973 returns. It follows that the members of the new firm Mr. Harding joined would be jointly and severally liable for the amount of the additional tax raised in respect of the 1973 returns. When the defendants' second firm (Clifford Ruthven Harding & Co.) took over the work as at 2 July 1973 there were still some outstanding returns that were not lodged in respect of which Mr. Lunt's firm had received instructions. I do not consider it could be said that the new partnership received instructions for or undertook the work in respect of these returns and I do not consider they would be liable for the additional tax arising therefrom. Their liability would be limited to the 1973 returns. The amount can be calculated from Ex. 1.1 but I am leaving it to counsel to calculate the appropriate amount of judgments arising from the principles I have outlined.The next head of claim is under para. 10(b) which reads:
``(b) An application was made by the `C.L. Lunt Ruthven and Partners' on behalf of the Third Plaintiff for the variation of the assessment of Provisional Tax for the year ended the 30th day of June 1970 which application understated income and as a result a penalty of $1,000 was imposed on the Third Plaintiff by the Deputy Commissioner of Taxation pursuant to the said Act.''
This related to an application on behalf of Mr. Health to vary the provisional tax in respect of his personal return for 30 June 1970. This return was lodged very late by the defendants on 10 August 1972. The assessment issued on 22 May 1973. The application to vary was not dated. The position is that by reason of the late returns Mr. Harding ought to have been in possession of all the necessary information to know exactly what the forecast income was in reality to be as it was for a year that had passed. In my view the skills that he was required to exercise ought to have enabled him to insert accurately in the application the necessary information and I consider that Mr. Heath has incurred penalty by reason of that lack of skill and is entitled to judgment for it. I consider the damage suffered would be limited to this. An explanation as to why the application was wrong may lie in para. 10(e) of the claim with which I shall now deal and which reads:
``(e) The Defendants failed to include certain losses incurred by the Third Plaintiff (Mr. Heath) in share trading in the returns prepared and lodged on behalf of the Third Plaintiff for the years ended 30th day of June 1970 and 30th day of June 1971 as a result of which the Third Plaintiff overpaid a sum of $4,416 for taxation for those years in June 1973 and lost the use of that money until it was refunded by the Deputy Commissioner of Taxation in December 1974.''
These share losses were ultimately allowed for the year of income and this was demonstrated by the fact that the new accountants, Messrs. Kennerly Nicholson, filed an amended return in respect of them and the deduction sought was allowed. Had this deduction been claimed in the return the defendants prepared then that would have resulted in the actual income for that year approximating the forecast income in the application to vary the provisional tax. This supports the fact that if the combined exercise of making the assessment to vary the tax combined with properly preparing the return for that year had in each case been properly carried out, there would have been no penalty. It is convenient that I deal with the claim under para. (e) at this stage. The share trading loss was ultimately allowed and a refund or credit obtained and the claim is for the loss of use of the money between the time when the higher assessment for that year was paid and when the refund was obtained. I would consider overall that this is a claim that I ought not to allow on the basis that I do not consider damage has been suffered in this area. The effect of the defendants' failure to carry out their work is that the plaintiffs have obtained a financial advantage in not being required to meet their income tax obligations for some years after they would normally be due. I do not consider that it is open to the plaintiffs to request the defendants in effect to be required to
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pay interest on an overpayment of a particular assessment for which they later received credit and whereby the plaintiffs are out of pocket for the money for approximately 18 months. Overall there has been no loss in this particular area. The defendants' default has caused some higher amount to be paid earlier, but much tax to be paid at a later date. This occurred in respect of Mr. Heath's assessments and I do not consider a loss has been demonstrated by the defendants' default. The evidence does satisfy me on the balance of probabilities that Mr. Harding was at fault in this area and that arises from the fact that the new accountants were able to demonstrate how the loss could have been claimed. Mr. Harding was aware of share trading and had made some calculations in the area but did not provide any explanation why he did not make any claim.The next claim on behalf of the plaintiffs is:
``(c) An incorrect income tax return for the year ended the 30th day of June 1971 was prepared and lodged by `C.L. Lunt Ruthven and Partners' on behalf of the Seventh Plaintiff Hamersley Projects Pty. Ltd. as a result of which a penalty of $1,700 was imposed on the Seventh Plaintiff by the Deputy Commissioner of Taxation pursuant to the said Act.''
The facts that led to this claim were that in April or May 1970 (t/s. 110) Mr. Harding approached Mr. Markham and recommended that the plaintiff firm should purchase ``an excess distribution company''. The defendants said they were operating through a firm of solicitors, Messrs. C.J. Kenneison & Co., that had access to such companies. Mr. Markham said he would think about it. A few days later Mr. Harding made a further approach and stated that Mr. Markham would be required to make up his mind immediately as someone else was after the company and Mr. Markham then agreed to go ahead to purchase it. He was told the purchase price was $13,161 and Mr. Markham paid this amount. Mr. Harding then arranged with Mr. Kenneison to purchase a company Southmont Survey Equipment Co. Pty. Ltd. It was a company registered in New South Wales and arrangements were made for the plaintiffs to become shareholders of it. A closing entry was subsequently made for the year ended 30 June 1971 in the books of the seventh plaintiff Hamersley Projects Pty. Ltd. This debited a fee of $10,000 to the Hamersley company and credited to the Southmont company and it was noted as being ``administration charges''. These administration charges were claimed as an outgoing in the taxation return for the Hamersley company. The closing entry was in Mr. Bamford's handwriting but it was the plaintiffs' submission that this could only have been done on Mr. Harding's initiative as he was the one that advised in respect of closing entries and I am satisfied that this was the position. The facts subsequently showed that an administration fee by the recently acquired Southmont company could not be justified. The Commissioner subsequently requested details of the fee and in effect called upon the plaintiffs to justify it. This resulted in Mr. Harding filing an amended return showing the payment as a dividend from the Hamersley company to the Southmont company. This meant that it could not appear as an outgoing in the Hamersley return. This resulted in the Commissioner issuing an amended assessment to Hamersley deleting it as an outgoing and imposing a fine of $1,700. It is this that the plaintiffs claim from the defendants on the basis of a failure on Mr. Harding's part to exercise the skill required. The plaintiffs, at Mr. Harding's suggestion, had embarked on what has the appearance of a risky and artificial tax venture. A company was acquired from the Eastern States to enable book entries to be made to reduce the incidence of tax of the plaintiff companies. One of the risks arising would be that fines would be incurred if the entries made were not considered to be proper by the Commissioner and it would not follow that the taxpayer could obtain the penalties from his tax agent in the areas where the attempt to obtain the tax advantage was not successful. Mr. Markham and Mr. Heath were directors of each company concerned and would be the ones to approve the payments of dividends. It must have been apparent that the entry was an artificial one and that administration to that degree could not have been carried out by the Southmont company. Although the plaintiffs relied on the advice of Mr. Harding they were nevertheless experienced in running their own business. They made the decision to enter this type of tax scheme with a higher risk of penalties being imposed and the facts do not satisfy me that this penalty was imposed as a result of a breach of skill or duty on Mr. Harding's part.
A further claim is contained in para. 14 of the statement of claim in respect of the Southmont
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transaction and that arose from correspondence that is identified in Ex. 12. I mentioned that the plaintiffs were called upon to pay a cheque for $13,161 in respect of the acquisition of the Southmont company and they forwarded this cheque to the trust account of Mr. Kenneison. This happened while Mr. Heath was in England. On 11 February 1972 Mr. Heath sought particulars of how this amount was arrived at. These were ultimately obtained from Mr. Kenneison who in a letter dated 27 March 1972 advised:``I refer to my letter of 15 February 1972, and apologise for not writing before this date.
I wish to state with regard to the $13,000 this was previously in accounts rendered to C.L. Lunt, Ruthven & Associates, to whom were sent all the various documents, papers, etc., relating to the acquisition of this company. However, with regard to the $13,000 this money was expended as follows:
$10,000 to purchase the shares from the existing shareholders for Southmont Survey Equipment Co. Pty. Ltd.;
$1,000 to C.L. Lunt, Ruthven & Associates on account of costs;
$620 on account of travelling costs to Sydney, hotel accommodation, etc., for a period of seven days negotiating with Mr. Lockyer for the acquisition of this Company;
$429 payable to Malcolm Begbie, Public Accountant of Wahroonga, for work done on our behalf in Sydney
and the balance represented our professional fees, being at the rate of $200 per day for absence from Perth, plus instructions fees - C.L. Lunt, Ruthven & Associates.
I trust this information is of help to you.
Yours faithfully,
KENNEISON & CO.''
It was the plaintiffs' belief expressed in correspondence at the time that the money they paid would cover the purchase of shares together with requisite stamp duties and fees payable by them as purchasers associated with the sale and transfer. They were not conscious of having instructed Mr. Kenneison and they wanted further details. His reply was that he had been instructed by the defendants to act on behalf of the plaintiffs as purchasers and the plaintiffs now appear to have accepted this. It leaves unexplained the sum of $1,000 paid by Mr. Kenneison to the defendants and the plaintiffs are seeking to recover this in equity on a number of grounds but basically that the defendants are in breach of their duty as agent and have become liable in equity to account for this amount which they requested from the plaintiffs. The inference I make from the correspondence in Ex. 12 which includes correspondence from the defendants is that this amount was a commission payable to the defendants. I make this inference after weighing up the explanation in evidence of Mr. Ruthven that it was in respect of costs payable by Mr. Kenneison to his firm. Mr. Ruthven's evidence in this area did not impress me. I would in any event expect between two professional firms proper vouchers if that was the true explanation. It would in any event be difficult to see in normal circumstances how the defendant firm would be instructed to act on behalf of Mr. Kenneison in such a transaction especially as Mr. Kenneison charged the plaintiffs for work he stated he did. There is no bill rendered by Mr. Kenneison in respect of this work nor was there any accounting to the plaintiffs at the time of the transaction. The information ultimately came in a letter from Mr. Kenneison pursuant to the request made by Mr. Heath. I consider the plaintiffs are entitled in equity to a return of the money and to interest for a reasonable time. Delay would defeat equity but I will allow interest up to the time when the matter would normally be expected to be recovered and on this basis I would award to the plaintiffs a total sum including interest of $1,500. This would be payable jointly and severally by the partners of Mr. Lunt's firm to Mr. Markham and Mr. Heath who made the original disbursement. I would mention that Mr. Robertson gave evidence as to the ethical standards of the accounting profession and it is a contravention of those standards for an accountant to receive a commission in these circumstances. The only area that anything of that nature is authorised is in respect of an agency fee where other accountants are instructed.
The next claim with which I shall deal is contained in para. 10(d) as follows:
``(d) The Defendants failed to prepare and
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lodge within the time prescribed by the said Act objections to assessments of taxation made by the Deputy Commissioner of Taxation with regard to the income of certain of the Plaintiffs as a result of which the objections are barred and those Plaintiffs have lost the prospect of having deductions allowed and/or the assessments varied in their favour.''
Further particulars submitted (Ex. 1 Vol. 1 p. 24 et seq.) showed that all objections were in relation to directors' fees and bonuses paid by the plaintiffs during the years ended 30 June 1971 and 30 June 1972. The Commissioner issued amended assessments treating part of the directors' fees and bonuses as deemed dividends under sec. 109 of the Act. Messrs. Kennerly Nicholson lodged objections against the amended assessments on the grounds that the remuneration was a reasonable amount and was an outgoing of a business nature and allowable under sec. 51. Objections lodged on behalf of certain of the plaintiffs were barred because they were outside the time limit. The barred objections were treated as requests for amendments and some additional deductions were allowed by the Commissioner, but it is claimed that the remaining deductions were lost to the plaintiffs. The plaintiffs' case is that notwithstanding the subsequent allowance of part of the deductions the ground for all objections whether they were allowed (due to the objections being lodged within the time) or were barred (due to objections being lodged outside the time) were exactly the same. The assessments were sent to the defendants as it was their address that was on the return as being the address to which notices should be sent and a member of this firm was the public officer of the company. There was a 60 day period from service of the assessment in which to lodge objections. The defendants' services were terminated on 5 March 1974 and Messrs. Kennerly Nicholson took over. The defendants handed over the relevant assessments to the new accountants, but some were out of time in which to lodge objections, some had only a short time to run and some had a reasonable time to run. Examples are that time for objection of the assessment for Apricot Holdings expired 17 October 1973 (Ex. 1 Vol. 2 D. 9), J.R.P. Markham Pty. Ltd. expired 23 March 1974 (D. 12). On 24 April 1974 the new accountants lodged objections but some were out of time as at that date. The Commissioner treated those objections that were out of time as a request for amendment and made an ex gratia review but pointed out in a letter there would be no further right of appeal to a court in respect of those objections that were out of time. His ultimate decision on the objections was that he allowed those objections that were lodged within time. However in respect of those objections that were out of time on his ex gratia review, he allowed same to some extent but much was disallowed and there was no further right of appeal. The plaintiffs ask the inference to be drawn that if the objections had been lodged in time then it would have followed that they would have been allowed either by the Commissioner or on appeal. It is the defendants' contention that it was not their duty to lodge objections. It was submitted that this was the taxpayer's duty and that in any event it would not follow that they would have been allowed. I would consider on the circumstances of this case the nature of the contract between the defendants and the plaintiffs is such that the defendants should have lodged the objections in time or alternatively if they were not themselves going to lodge objections then the assessments as soon as they were received by the defendants should have been sent to the plaintiffs and that the plaintiffs should have been advised that deductions that the defendants had included in the return were disallowed and of the fact that they had 60 days in which to instruct them to lodge appeals. I have come to this view firstly from the basis that one of the fundamental areas in which the defendants were advising was in the area of saving of taxation and of provisional taxation and one of the basic areas was the amount of fees payable to the directors so as to lessen company tax. The defendants in the returns they prepared caused the initial claim to be made and as it was disallowed then I consider the nature of the contract required the defendants to have immediately directed their minds to lodging objections and if it was their view that the plaintiffs should have taken action then the plaintiffs should have been informed of the fact that time was running out. I am satisfied that Mr. Harding did not take the appropriate action. As he failed to do this I consider that on handing over the assessments he should have advised someone of the fact that time had almost run out on some of the assessments and I do not consider he did this. I do not consider that there has been any new intervening cause or fault on the new accountants' part arising from the fact
ATC 4022
that the new accountants did not lodge the objections earlier. They could not have been expected to have appreciated the position in such a short time without specific advice. The plaintiffs claim that the tax paid as the result of the objections being disallowed was $12,850 and this is the claim together with loss of use of the money. It is made on the assumption that if they were within time they would have been allowed in full. I do not consider that I could make this inference. The merits of each particular application were basically the same but there may be other factors present. I would work on the basis that the Commissioner in making his determination on the request to review was acting judicially. There is always the prospect of any decision being reversed on appeal and the result of the defendants' actions were that the right of appeal was lost. I consider the only basis that I can assess damage is on the basis that I can assess damage is on the basis similar to that of ``a loss of a chance''. It would not be possible for me to determine on the material before me whether I would have allowed the appeal if it had ultimately come before me and I consider it would have been wrong to have brought forth material with a request that I undertake that exercise and this is the basis of the plaintiffs' submission. I must assess the loss of a chance and do it on what is before me, but I would weigh up the fact that the matters were allowed in situations of a similar nature. There is a strong indication that there would have been an arguable case in respect of each disallowed objection. The quantum of damage in such a case can only be a matter of judgment taking into account the factors to which I have referred. These include the fact that the plaintiffs kept detailed records and some thought had been given to what could be faithfully claimed in this area. I would award a sum of $8,000. I have based this assessment on the value of money at the time I would have expected the amounts to have been recovered if prompt action had been taken after it was known that the appeals that were lodged in time were successful. For that reason I would not make any added amount for loss of use of the money. I would award to the plaintiff companies in respect of which the assessments issued and where the appeals were lodged out of time pro rata in respect of the amount of tax the subject of the appeal. The assessments concerned appear to have been received after 2 July 1973 and accordingly the amount of the judgment would be against the members of the defendants' second firm.The next claim with which I shall deal is contained in para. 10(f) as follows:
``(f) `C.L. Lunt Ruthven and Partners' incorrectly advised the First Plaintiff that a sum of $5,199.01 was due to the Deputy Commissioner of Taxation and requested that the First Plaintiff put that firm in funds in that amount for payment to the said Deputy Commissioner. Pursuant to that request the First Plaintiff on or about the 16th day of November 1972 paid that sum to the Fifth Defendant. The Deputy Commissioner had not issued any assessment in that sum and the said sum was not then due to the Deputy Commissioner as a result of which the First Plaintiff lost the use of that money until December 1974.''
The facts that I am about to outline are an illustration of the way in which Mr. Harding carried out the work and is an indication that he was not doing it with the competence to be expected from a professional accountant. In November 1972 he arranged to be lodged Mr. Markham's personal return for the year ended 30 June 1971 (Ex. 4). It showed as income a net sum of $15,612 being the amount arrived at in the final accounts that were attached to the return and which included bonuses and director's fees received. It showed in the space provided, for tax instalments deducted, the following:
``Group 75000 $5,199.01.''
Mr. Harding requested from Mr. Markham a cheque for this amount. Mr. Harding sent this to the Commissioner at about the time the return was sent but I do not know the manner in which this cheque was sent. I am satisfied that Mr. Harding intended to remit it under an option then open to taxpayers known as Group 75000 whereby they could, at the time they lodged the return or shortly after the year had closed, remit group tax payable on directors' fees and bonuses they received. If these amounts had been declared by the company after the close of the financial year there was an option to include it in respect of the year they actually declared or for the preceding year being the year in which the company was purporting to pay them. I consider the defendants' contract placed them under an obligation to make it clear to the Commissioner
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the purpose for which the money was being paid and this could be done by a letter specifying that the amount was being payable as group tax in respect of particular income and this would result in that amount being credited as group tax when the assessment issued. Mr. Harding did remit it to the Commissioner but it is clear from the receipt the Commissioner issued and posted back to Mr. Harding that the Commissioner did not know the purpose why it was received and the receipt indicated that the money had been placed in a suspense account. Clearly it had not been credited to any group tax. This would have called for some action on the accountant's part. It would also be an indication that the cheque was not attached to the return on the basis that if it was pinned to a return making reference to group tax one would have expected the credit to be along those lines. The assessment in respect of this particular return issued on 14 December 1974. It was part of a group of assessments issued for four returns. One of the effects of the group tax scheme is there would not be provisional tax payable in respect of the amount concerned. When the assessments issued the sum received was credited to the total amount but not as group tax. One of the defendants' aims was to reduce provisional tax and this of course would be done by paying group tax. The final assessment that issued did have some provisional tax but not a great amount although I have not attempted to reconcile the figures. One matter has become clear to me and that is the plaintiffs in this instance have not lost as a result of Mr. Harding's action. The plaintiffs are claiming the loss of use of the money between the date the cheque was sent and the date when the credit was given on the assessments but I do not consider this was a loss. One of the objects of the instructions given to the defendants was to reduce provisional tax. One of the ways of doing this was to remit group tax on what was in effect salaries at the time it was paid. It was therefore consistent with their obligations to have remitted such tax at the time the 1971 return was completed. Had the matter been done efficiently it should have been sent the year before. The effect would be the same, namely, there would have been a credit to the assessment that ultimately issued. There was this credit but not in the way it ought to have been, but the effect is again the same.The next area of claim is that in consequence of the defendants' breach of contract or negligence the plaintiffs have been put to the expense of employing new accountants (Messrs. Kennerly Nicholson) to carry out and complete and correct and repair the work of the defendants. The defendants were paid on a monthly basis while they were doing the work. I am satisfied the contract was breached by reason of Mr. Harding not carrying out his work correctly and that work he did and for which he was paid required rectification. Extra expense was incurred as a result of work he left undone and there was the extra expense involved in having to arrange for the summonses being withdrawn and obtaining extensions of time. I have detailed evidence from the new accountants how the amount claimed was arrived at. I am satisfied that the figure to be awarded is the amount set out in Ex. 3, namely, $14,169. The evidence satisfies me that the amount is a faithful assessment of the work in this area and that the account is reasonable. I consider it is an amount over and above what the plaintiffs ought to have paid if the defendants carried out their work properly. Mr. Markham and Mr. Heath appear to be jointly and severally liable to Messrs. Kennerly Nicholson for this amount as they requested the work to be done and accordingly they are the parties entitled to judgment for it. I will need to hear further submissions as to which defendant's judgment for this particular amount or portion thereof should be entered.
The final area of claim was in respect of interest under sec. 32 of the Supreme Court Act which was proclaimed to have come into effect on Monday 17 July 1983. I am assuming without deciding that the operation of this section is retrospective as I did not at the time hear argument on this matter. The awarding of interest in these circumstances under the section is discretionary and there is no question in my mind that I ought not to exercise the discretion in the plaintiffs' favour for many reasons. Had the action been dealt with expeditiously it would have been brought to finality well before the section had been proclaimed. Delay would, in my view, be a reason for not exercising discretion under this section and that is the further reason I would not exercise it. The plaintiffs had many explanations as to why the matter was delayed some of which they blamed on the defendants but which matters I am not attempting to adjudicate. I am working on the basis that the plaintiffs had the conduct of the action and that the lapse of eight years between
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the issue of the writ and the hearing is sufficient for me to exercise the discretion in the way I have and to limit the plaintiffs' claim in the other areas I have indicated. If the defendants were at fault in taking steps in the action the plaintiffs could have taken appropriate action under the rules. The length of the delay speaks for itself. The respective plaintiffs are entitled to judgment against the defendants, liable in the way I have indicated in the reasons, but it will be a matter for counsel to make the detailed calculations based on my finding before there is a motion for judgment.A summary of the total amounts is under.
$
10(a) 8,103.34
10(b) 1,000.00
10(c) Nil
10(d) 8,000.00
10(e) Nil
10(f) Nil
11 14,169.00
14 1,500.00
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32,772.34
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