Doug Sim Enterprises Pty. Ltd. v. Patrick Wan & Co.

Members:
Kelly SPJ
Connolly J
Moynihan J

Tribunal:
Full Supreme Court of Queensland

Decision date: Judgment handed down 11 December 1987.

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Kelly S.P.J.

In an action in the District Court the appellant claimed damages for losses allegedly caused by breach of contract by and/or negligence of the respondent, a firm of chartered accountants, in acting on the appellant's behalf in relation to its taxation and financial affairs during the income year ended 30 June 1980. The learned trial Judge dismissed the appellant's claim and gave judgment for the respondent with costs to be taxed.

The appellant was trustee of a trust called ``The Douglas William Sim Trust''. The primary beneficiaries were Douglas William Sim (referred to as ``the principal''), his wife, his children, spouses of the children, and grandchildren and any company (other than any company acting as trustee of the settlement) in existence at the vesting date, shares in which are registered in the name of the principal or any of his children.

In December 1979 Mr Douglas William Sim, who with his wife was a director of the appellant company, sought advice from the respondent which for a number of years had attended to his taxation and company affairs. The evidence of Mr Sim, which was accepted by the learned trial Judge, was that he had a discussion with Mr Patrick, a partner in the respondent firm, in relation to two matters, one concerning the profits of the trust which, in the financial year to that date, were about $140,000, and the other being a problem concerning his children who were questioning the extra income tax for which they might be liable. According to Mr Sim, Mr Patrick said that he would sort it all out and come up with an idea to close the trust and minimise the tax and get everything cleaned up in the one issue. Mr Sim said that, in answer to a question, Mr Patrick had told him that what he proposed was legal and was a tried and tested method.

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ATC 4080

The respondent then prepared a scheme which it is unnecessary to set out in detail but which involved distribution of $140,000, being the income of the trust, through two other trusts, namely, MIS Family Trust and MIS Unit Trust, in succession with ultimately $119,000 going to another Sim enterprise, Doug Sim Shipping Pty. Ltd. and the balance of $21,000 going to the respondent. According to Mr Wan, who also was a partner in the respondent firm, that sum comprised $10,000 for certain expenses incurred by the respondent in setting up the scheme and $11,000 for professional services rendered by the respondent. The evidence as to how the $21,000 was made up is somewhat imprecise and there is no finding in relation to it by the learned Judge, who was not very impressed with Mr Wan. Although the claim in the pleadings was for $40,000 damages, the only alleged loss which is particularised is the sum of $21,000 which is referred to in the amended plaint in this manner:

``As a result of the arrangements carried out by the Defendant the Plaintiff payed [sic] or caused to be paid the sum of Twenty one thousand dollars ($21,000.00) by way of commission and other fees for the carrying into effect of the arrangements advised by the Defendant.''

At all events by the notice of appeal the sum for which judgment is sought is $21,000.

An income tax return on behalf of the appellant for the year ended 30 June 1980 was subsequently prepared by the respondent and duly submitted and an assessment issued which took no account of any income derived from the Douglas William Sim Trust. However, in March 1984 the Australian Taxation Office issued an adjustment sheet in respect of the income of that trust estate for the year ended 30 June 1980 making adjustments to the net income shown in the return lodged for that year and resulting in the issue of notices of amended assessment to the beneficiaries requiring the payment of additional tax. The basis of the adjustment was that the distribution to the MIS Family Trust was a sham and also that sec. 260 of the Income Tax Assessment Act or, alternatively, the doctrine of fiscal nullity applied. Notices of objection were lodged but were subsequently withdrawn as part of a compromise with the Commissioner of Taxation under which only about one half of the amount of the tax which would have been payable under the notices of amended assessment was paid.

The learned trial Judge took the view that the scheme was doomed to failure and this is based on his finding that the purported distribution by the appellant of income of the Douglas William Sim Trust to the MIS Family Trust was outside the terms of the trust deed for the former trust and, as I understand his reasons for judgment, the subsequent purported distribution from the MIS Family Trust to the MIS Unit Trust was likewise of no effect.

The learned Judge said that were it necessary to do so he would hold that Mr Patrick fell far short of the professional conduct to be expected of a chartered accountant acting in the field of taxation matters. However he decided the matter on the basis that the causes of action sued upon were misconceived and he held that the expenditure sued for did not arise out of and was not a loss consequent upon the rejection of the scheme devised by the respondent firm.

With respect, I am unable to agree with the view taken by the learned Judge that for the reasons which he gave the scheme was doomed to failure. In my view cl. 5.02 of the trust deeds of the Douglas William Sim Trust and of the MIS Family Trust which, except for an immaterial minor variation, are in identical terms, authorise the respective distributions made, but it is unnecessary to examine this matter further as the question for determination is not whether the distributions were outside the terms of the trust deeds but is rather whether the respondent was in breach of a duty owed to the appellant to take reasonable care and skill as a result of which the appellant has suffered damage.

What has not been demonstrated is that the advice given by the respondent in December 1979 to adopt the scheme which it had devised was other than proper advice at the time that it was given. The fact that over four years after the scheme had been put into effect the Commissioner of Taxation rejected it as a sham, as being void against the Commissioner by reason of sec. 260 of the Income Tax Assessment Act and as being a fiscal nullity does not mean that this was the only view which could properly have been taken in the state of the law as it stood in December 1979. In any event whether or not the Commissioner

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ATC 4081

was correct in the view which he took was never put to the test.

Moreover, it has not been shown that a reasonably competent chartered accountant consulted in December 1979 would have advised that such a scheme should not have been adopted. Evidence was given by a Mr Ireland, a chartered accountant of some experience, but it was not directed to this aspect.

There was then no basis for making a finding of breach of contract or of negligence against the respondent and consequently the appellant has failed to make out either cause of action on which it relies. I might mention that by the amended plaint the appellant also pleaded negligent misrepresentation and breach of warranty, but, although it does not appear whether or not these additional causes of action were formally abandoned at the trial, they are not dealt with in the reasons of the learned trial Judge and they are not the subject of any ground of appeal so that they may be disregarded.

In the circumstances the fact that the scheme devised by the respondent was rejected by the Commissioner with the result that the beneficiaries in the trust paid tax which they would not have been required to pay had it not been so rejected does not mean that moneys paid by the appellant to the respondent for the services which it rendered and the expenses which it incurred in connection with the setting up of the scheme are to be regarded as a loss for which the appellant is then entitled to recover damages.

In my opinion the learned trial Judge came to the right conclusion, although, as I have indicated, that conclusion might be reached in a somewhat different way. I would dismiss the appeal with costs. [Connolly and Moynihan JJ. both concurred with the reasons of Kelly S.P.J.]