PECH & ANOR v TILGALS & ANOR

Members:
Dunford J

Tribunal:
New South Wales Supreme Court

Decision date: Judgment handed down 15 April 1994

Dunford J

In these proceedings the plaintiffs sue the defendant for damages arising out of the alleged failure of the defendant, who was their tax agent, to prepare and submit accurate income tax returns on their behalf for the year ended 30th June 1982. The proceedings are framed in contract, tort and pursuant to s 251M, Income Tax Assessment Act 1936. The defendant denies any breach of duty on his part, alleges contributory negligence and claims that any cause of action is statute barred under the Limitation Act 1969.

The plaintiffs also in the alternative allege breach of a further duty owed by the defendant to them both in contract and in tort in failing to advise the plaintiffs to make a voluntary disclosure to the tax office when it was discovered that the 1982 return was incorrect. The defendant denies that any such duty existed.

By his cross-claim, the defendant seeks to be indemnified by the cross-defendant under a policy of insurance for any damages for which he may be found liable, and the cross-defendant denies liability relying on a clause in the policy which it claims is effective to exclude cover in the circumstances of this case.

Facts

Some facts are not in dispute. The plaintiffs were at all material times, directors and shareholders of W Pech Investments Pty Limited (``the company'') which was incorporated in 1967. The first plaintiff always acted as managing director of the company, making all business decisions concerning the company and he also attended to his own and his wife's taxation affairs. The defendant had been the accountant and tax agent for the plaintiffs and the company since about 1975 and had regularly prepared their tax returns over that period.

The company carried on business as a building company. Initially it engaged in speculative building work but from the mid 1970s until about late 1984 its business consisted of building only on a contract basis, firstly for the Commonwealth Bank and then for the Housing Commission. In about November 1984, the company ceased business.

In about 1972 the company purchased lots 9 and 10 Clyde Avenue, Cronulla for $76,000. There were, at the time, two old houses on the property and Mr Pech intended that the company would demolish the houses, build home units on the land, and sell the units. However, after demolishing one of the houses, these plans were shelved for various reasons until around late 1981, when the company demolished the other house and started work on the construction of the home units.

On or about 1 April 1982, the company transferred the property to the plaintiffs for no consideration, although at the time the value of the property was $350,000, which was the consideration shown in the contract of sale and memorandum of transfer and the amount on which stamp duty was paid.

As a result of this transaction, the plaintiffs each received a ``deemed dividend'' within the meaning of ss 21 and 108 and the definition of ``dividend'' in s 6, Income Tax Assessment Act (``the Act'') which should have been included as part of their ``assessable income'' in their tax returns for that year. The defendant prepared the plaintiffs' tax returns for the year ended 30 June 1982 in the period March, April, May 1983 but did not include such deemed dividends in the plaintiffs' assessable income. He also prepared the company's tax return at

ATC 4209

about the same time, but again made no reference to the transfer of the Cronulla land.

After the returns were signed by the plaintiffs on or about 23 March 1983 they were lodged no later than 30 March 1983, when they were date stamped by the Taxation Office.

Meanwhile the Commissioner had issued Ruling IT2011, effective 14 February 1983, concerning the exercise of his discretion to remit in whole or part the additional tax imposed by s 226(2) for non-disclosure of assessable income in a taxpayer's return. Those guidelines were to the effect that a much lesser penalty would be imposed in the case of a full and true voluntary disclosure not due directly or indirectly to any departmental activities relating to the affairs of the taxpayer or his private company.

Early in 1984 when the defendant came to prepare the various tax returns for the year ended 30th June 1983 he dealt with the transfer of the block of land by including a reference to it in Schedule 16 of the company's return as follows: ``The Company sold a block of land owned by it for some ten years. As the land was not acquired with the intent of reselling it at a profit, any profit derived from the sale is exempt from income tax.''

On 13 May 1983 in the case of Mr Pech and 21 April 1983 in the case of Mrs Pech, Notices of Assessment were issued in respect of the 1982 returns as lodged; but on 15 May 1986 following a tax audit Notices of Amended Assessment were issued which added the deemed dividends to each of the plaintiffs' respective assessable incomes and also assessed additional or penalty tax of $226,563.29 in the case of Mr Pech and $228,610.66 in the case of his wife on account of the omission of the dividends from the 1982 returns. At no stage prior to the commencement of the tax audit in about mid 1985 did the defendant advise the plaintiffs to have him notify the tax office of the incorrect entries in the plaintiffs' 1982 returns, nor did he seek to submit amended returns.

In about September 1988 following the lodgment of an appeal and negotiations, further Notices of Amended Assessment were issued which, besides reducing the income tax assessed, reduced the penalty tax to $101,663 in the case of Mr Pech and $112,952 in the case of Mrs Pech.

From the time the amended assessments issued in 1986 until the settlement of the tax appeals the plaintiffs incurred legal costs of $16,296 in obtaining advice and prosecuting the appeals. These costs were paid, apparently about October 1988.

The first plaintiff and the defendant gave differing versions of what passed between them concerning the transfer of the property and what, if anything, the defendant knew of the transaction at the time he prepared the 1982 returns. I found them both unsatisfactory witnesses.

The plaintiff appeared to be very vague and forgetful as to what had occurred and he purported to have such lack of memory that ultimately I could only put it down to deliberate evasiveness. On the other hand, the defendant's evidence in many respects lacked credibility (especially as to what enquiries he did or did not make of Mr Pech), was evasive, and he contradicted himself from time to time. In addition, a lot of what he said was later shown to be inaccurate by the production of various documents including the land tax returns for the year ended 31st December 1982, which he initially did not recall preparing but, after being shown an account he sent, was compelled to admit he had prepared and had done so in about January/February 1983. From time to time when confronted with documentary evidence or reminded of evidence he had given earlier, he changed his evidence or conceded that ``it would appear that way''. He appears to have used formulae in the returns, for example, Schedule 16 of the 1983 company return, which he thought would satisfy the tax office without any regard to the facts of the transactions. Generally speaking, I would only accept the evidence of either the first plaintiff or the defendant where that evidence was corroborated by some document, and usually such documents tend to corroborate the first plaintiff rather than the defendant. I gained the distinct impression that the first plaintiff told the defendant as little as possible and the defendant sought as little information as possible. They appear to have both worked on the principle that the Commissioner should be told as little as possible in the hope that he would not notice any discrepancies or inaccuracies.

ATC 4210

Having regard to the various documents, I have come to the following conclusions in respect of the disputed matters of fact.

The decision to transfer the property from the company to the Pechs was made at least partly in the context of a compensation dispute which the company was at the time having with a sub- contractor and his son; and although the company had workers' compensation the insurer was denying liability on the grounds that they were not ``workers'' as defined in the policy and legislation. Mr Pech told Tilgals of the proposal in late 1981 or early 1982 and, according to Pech, Tilgals said he could not see any problem and told him to see a solicitor whilst Tilgals claimed he told Pech there could be a taxation problem relating to a deemed dividend and told him to consult a solicitor about that. Ultimately, in cross-examination Tilgals conceded that the taxation problem he was concerned with was whether the company would be taxed on the profit made by it on the sale and he was not at that time concerned with any taxation problems for Mr and Mrs Pech, and whether he turned his attention to the deemed dividend problem (or whether he was even aware of the deemed dividend provisions), I am satisfied he made no reference to it when speaking to Pech late in 1981 or early 1982; and I do not accept that he advised Pech to get taxation advice from his solicitor, although he probably did tell him to see a solicitor. He certainly never asked Pech what advice the solicitor had given in respect of the deemed dividend problems, which would have existed even if, as he claimed, he was told the property was being transferred at its original price, the value obviously being considerably greater. Saxton (the Pechs' solicitor) did not organise a transfer by way of gift or for merely nominal consideration, but obtained a valuation and documented a transfer at the property's valuation although no money changed hands, and no book entries were made such as debits in the Pechs' loan accounts with the company.

At the time the defendant prepared the tax returns for the year ended 30 June 1982 (ie early 1983) he was also completing the Pechs' personal 1983 land tax return being for land owned as at 30 December 1982. That return related to land with a taxable land value of $185,000 which Tilgals conceded was the Cronulla property. The previous year's return in respect of the same land was a return in the name of the company (see Exhibit E).

Moreover when writing up the company's cash book Tilgals came across the cheque butts in respect of the two amounts of $921 and $8,750.50 being the money paid to Saxton for the valuation and stamp duty respectively. Tilgals claims he asked Pech about these and was told they were for a legal dispute and private matter respectively, and he entered them in the cash book as ``leg'' meaning legal and ``s duty'' meaning stamp duty. I do not accept he was told the larger of those amounts was for a private matter because firstly, if he was so told it would in my view be incumbent on him to seek more details to ascertain if this private matter involving a significant amount of stamp duty had any tax implications for the Pechs; secondly, he would have entered it in the Director's Loans column and not in Sundries; and thirdly, although Pech said he was not asked these questions, which seems surprising as the butts do not provide the information shown in the cash book, I can think of no reason why, if asked, Pech would say anything other than that they were expenses related to the transfer of the Cronulla land.

Ultimately in cross-examination Tilgals conceded that when preparing the 1982 tax returns in early 1983, he knew that the land had been transferred in April, May or June of 1982.

He says he did not know at what price it had been transferred and that in a conversation with Pech about a year later when preparing the 1983 returns (a conversation which he now concedes took place, if at all, about a year earlier, ie when preparing 1982 returns) Pech told him that Saxton had transferred the land at the original purchase price, whereupon Tilgals indicated that he would show it as being sold and exempt from income tax, no profit having been made on the sale.

I am not satisfied a conversation took place in these terms at any time. Whether he had looked at the price shown on the contract for sale or not, Pech had no reason to believe that the price shown was $76,000 (which it was not) and therefore no reason to tell Tilgals that it was. Moreover, Tilgals must have realised that if the property had been transferred for its original purchase price it would be necessary to explain such an artificial price; and in any event, when he did refer to the transaction in the 1983 return he did not assert that the land had

ATC 4211

been sold at its original purchase price but that, as it had not been purchased for the purpose of resale at a profit, any profit derived from the sale was not subject to income tax.

I am left with a suspicion that a conversation about the transfer probably did take place, at the time of preparation of the 1982 returns, that Tilgals was aware of the main details and there may have been some arrangement to be less than frank with the Commissioner. However, there is no evidence to that effect and such inferences would be pure speculation, and I can only proceed on such evidence as there is; and such evidence satisfies me that the defendant, at the time he prepared the 1982 tax returns for the company and the Pechs, knew that the land had been transferred and either knew or had the means of knowing the date of transfer, the price paid and the value of the land transferred, yet not only did he fail to show it in the Pechs' individual returns as deemed dividends, but he failed to deal with it at all in either the Pechs' or the company's returns.

Having prepared the returns the defendant claims he went over them with Mr Pech, explaining the relevant entries, whilst Mr Pech claims there was no explanation and he simply signed them without reading them; he also agrees that he asked no questions and in particular did not ask Tilgals how he had dealt with the transfer of the Cronulla land. I accept Mr Pech's evidence on these matters. He and his wife signed the relevant returns, certifying they were correct on 23 March 1983 and the returns were lodged shortly thereafter. Assessments based on those returns were issued on 13 May and 21 April 1983.

On the defendant's own case he became aware of the transfer in about March 1984 when preparing the 1983 returns. He claims he believed that the sale price had been the original purchase price and that cheques had been exchanged although in cross-examination he agreed that an ``exchange'' of cheques (as opposed to a ``passing'' of a cheque) was inappropriate and nowhere in the books of the company or the Pechs did he record such a payment, and I do not believe he was told any such cheque had been passed. Moreover he believed the land originally had been purchased for the purpose of building units and reselling them and so he had in previous years treated the Cronulla land as trading stock in the books of the company, yet in the company's 1983 return, he did not treat it as the disposal of trading stock but in schedule 16 asserted that the land had not been purchased for resale at a profit. This explanation for the price on the sale not being taxable is inconsistent with a genuine belief that the land had been transferred at its original purchase price. He also described it in Schedule 16 as a block of land instead of (more accurately) a block of land with partially completed units thereon. Once again he claimed he explained the tax returns to Pech and once again Pech claimed there was no explanation and he signed them without reading them.

Notwithstanding that by early 1984 he knew, or as a reasonably competent tax agent should have known, that the 1982 and 1983 returns were incorrect, at no time prior to the tax audit which commenced in mid 1985 did the defendant advise the Pechs to make a voluntary disclosure to the Commissioner nor did he seek to submit amended returns.

Liability

As a person holding himself out as possessing professional skill as an accountant and tax agent the defendant was bound to exercise the skill and diligence of a reasonably competent and careful practitioner in that profession: Charlesworth on Negligence 6th ed para 935. The contract between the parties and the relationship between them required the defendant to take reasonable care to submit accurate returns disclosing the correct taxable income for each of the parties; what was required was reasonable care, that is the care to be expected of a reasonably prudent and careful accountant:
Walker & Ors v Hungerfords & Ors 88 ATC 4920 at 4929. The purpose of engaging tax agents and accountants is to ensure that the tax returns are prepared on a correct basis: ibid at 4935. The duty arises both in contract and in tort:
Hawkins v Clayton (1987-1988) 164 CLR 539 at 574-5,
Sacca v Adam & Anor 83 ATC 4326; (1983) 33 SASR 429.

I am satisfied on the evidence that the defendant failed to exercise the care and skill of a reasonably competent accountant and tax agent in that, although aware of the transfer of the Cronulla land, he made no reference to it in the 1982 returns, made no appropriate enquiries of Mr Pech as to the transaction particularly the consideration shown on the transfer and whether that or any other amount had actually passed from the plaintiffs to the company and

ATC 4212

either was unaware of the nature and effect of a ``deemed dividend'', as he should have been, or overlooked this aspect of the matter. The plaintiffs have accordingly established causes of action in contract and in tort.

The plaintiffs also claim pursuant to s 251M(1) Income Tax Assessment Act which provides as follows:

``251M.(1) If, through the negligence of a registered tax agent, or of a person exempted under section 251L, a taxpayer becomes liable to pay a fine or other penalty or any additional tax, the registered tax agent, or the person, as the case may be, shall be liable to pay to the taxpayer the amount of that fine or other penalty or additional tax, and that amount may be sued for and recovered by the taxpayer in any court of competent jurisdiction.''

It has been submitted on behalf of the defendant that the section does not provide a separate cause of action but only identifies the damages recoverable if an action in negligence at common law against a tax agent is successful. However, the words of the section are not directed to quantifying damage but conferring a statutory right to recover the relevant amount; and in particular there would be no point in expressly providing that the amount may be sued for and recovered in any court of competent jurisdiction if the section was only directed to quantifying the damages in an action which was already available. Moreover, consequential damages, such as legal costs incurred in attempting to mitigate the loss, are not recoverable under the section although they would be recoverable at common law. Accordingly, I am satisfied that the section does provide for a separate statutory cause of action and this appears to have been the view of Pidgeon J in
Markham & Ors v Lunt & Ors 84 ATC 4010 at 4016.

Here I am satisfied that through the negligence of the defendant in preparing and lodging inaccurate returns the plaintiffs become liable to pay penalty or additional tax, and are entitled to recover those amounts under the statutory cause of action.

Limitation Act

The plaintiffs concede that their cause of action in contract is statute barred, the limitation period under s 14, Limitation Act 1969 running from the date of the breach, namely the date when the returns were lodged, no later than 30 March 1983. The Statement of Claim was not filed until October 1989.

Where the cause of action is the tort of negligence, it accrues when the damage is suffered, and the limitation period runs from that time. In a number of cases to which I was referred involving the negligent preparation by solicitors of documents it was held that the damage was suffered at the time of the preparation and execution of the documents, because at that time the rights of the plaintiff had been diminished or the potential liability established, although it was only later when the plaintiff or another sought to exercise a right that the effect of the document crystallised and actual demonstrable damage occurred; and it was submitted that from the time the inaccurate returns were first lodged by 30 March 1983 the plaintiffs were liable to pay additional tax pursuant to s 226 of the Act, and the only unascertained matter was how much additional tax, not being less than 10% (Taxation Ruling IT2012) would be levied, although s 226(3) provided that additional tax may be wholly remitted. Those cases were
Forster v Outred & Co (a firm) [1982] 1 WLR 86,
DW Moore & Co v Ferrier [1988] 1 All ER 400,
Bell v Peter Browne & Co [1990] 2 QB 495,
Doundoulakis v Antony Stridinis & Co [1989] VR 781,
Gillespie v Elliott [1987] 2 Qd R 509,
Edelfern Pty Ltd v Flatfare Investments Pty Ltd (Young J, 27 July 1988),
Blackwood Investments Pty Ltd v Blessington & Ors (Studdert J, 5 March 1991).

However although the lodgment of the incorrect returns rendered the plaintiffs liable for additional tax, the plaintiffs were not liable to pay any such tax until it was included in an assessment notice pursuant to ss 166, 174, 204 and 208; and the Commissioner had power to remit the whole of the additional tax as well as part thereof: s 226(3). The amended assessments were not issued until 1986.

In addition, the line of cases referred to above particularly the English ones were considered in
Wardley Australia Limited & Anor v The State of Western Australia (1992) ATPR ¶41-189; (1992) 175 CLR 514, where the High Court held that when as a result of misleading or deceptive conduct contrary to s 52, Trade Practices Act 1974 a person becomes liable to suffer a loss on a contingency, the damage is not suffered until the contingency is

ATC 4213

fulfilled. At ATPR 40,574; CLR 531 the majority said:

``It has been contended that the principle underlying the English decisions extends to the point that a plaintiff sustains loss on entry into an agreement notwithstanding that the loss to which the plaintiff is subject by the agreement is a loss upon a contingency. For our part, we doubt that the decisions travel so far. Rather, it seems to us, the decisions in cases which involve contingent loss were decisions which turned on the plaintiff sustaining measurable loss at an earlier time, quite apart from the contingent loss which threatened at a later date. Forster v. Outred & Co. and D.W. Moore & Co. v. Ferrier illustrate the point.''

And at ATPR 40,574; CLR 532, they said:

``If, contrary to the view which we have just expressed, the English decisions properly understood support the proposition that where, as a result of the defendant's negligent misrepresentation, the plaintiff enters into a contract which exposes him or her to a contingent loss or liability, the plaintiff first suffers loss or damage on entry into the contract, we do not agree with them. In our opinion, in such a case, the plaintiff sustains no actual damage until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred. A deferred liability may stand in a different position but there is no occasion here to discuss that matter.''

As loss or damage is an essential element of the tort of negligence it seems to follow that similar considerations would apply, and the damage was not suffered and hence the cause of action was not complete and the limitation period did not commence to run until the issue of the Notice of Amended Assessment, ie 15 May 1986; as until then any loss was only prospective or contingent. Accordingly the plaintiffs' causes of action in tort are not statute barred.

Similar considerations would apply to the statutory cause of action under s 251M. The statutory right of recovery only arises when ``a taxpayer becomes liable to pay... additional tax'', and for the reasons I have indicated that can only be when the Amended Notice of Assessment is issued.

Contributory negligence

I have already referred to the conflict in the evidence between Mr Pech and the defendant as to whether the latter explained the returns to the former and whether he or his wife read them before signing them and have found that Mr Pech did not read the returns, but he and his wife simply signed whatever returns the defendant put before them without bothering what they contained.

However the plaintiffs also had a responsibility to ensure that their tax returns were accurate, and they each signed a declaration to the effect that the return etc was true and correct in every detail. This signature was opposite a box headed ``IMPORTANT'' which drew attention to the need for care and the fact that there were severe penalties for false statements. Indeed the mere fact that their signatures as well as those of the agent were required should have indicated that the Commissioner was relying on them, as well as the agent, to ensure the accuracy of the return. Moreover this was not some minor detail, but the first sale of land by the company for many years, Mr and Mrs Pech were both directors and Mr Pech was giving instructions for, and as public officer certifying the accuracy of, the company return. In these circumstances it seems to me the least that could be expected of Mr Pech was to remind the agent that the land had been sold and/or ask him how the sale had been dealt with, at least in the company return. It is to me immaterial that the company was technically a separate legal entity to Mr Pech personally - he was giving instructions for, and certifying both returns; and a mere query was the obvious step to take. In addition whilst he would not be expected to have any knowledge of the ``deemed dividend'' provisions, a mere cursory reading of the company return balance sheet, which it was his duty as a director to ensure was accurate, showed as ``current assets'' Stock and WIP at cost $185,000, and if he read it he would have known that was wrong. Moreover the second question at the top of page 3 of the company return specifically asked if there had been any sales of property; an appropriate reminder to ask the tax agent how he had dealt with their particular sale of real estate.

I am therefore satisfied that in failing to draw attention to the sale of the land, in failing to ask how the sale of the land had been dealt with and

ATC 4214

failing to read the returns before signing them both plaintiffs were guilty of contributory negligence.

However, the major responsibility must be that of the defendant who was the expert employed for reward and who had all the necessary information. I assess the plaintiffs' responsibility for the damage at twenty per cent.

No submissions were made in relation to the applicability of the defence of contributory negligence to a claim under s 251M. However, as the right to recover the amounts specified is conferred by a Commonwealth statute, I fail to see how that right could be cut down or qualified by a State statute such as the Law Reform (Miscellaneous Provisions) Act 1965, s 10(1): Constitution s 109; and so I hold that contributory negligence is not available as a defence to the claim under the section.

Damages

In the case of Mr Pech, by the original Notice of Assessment issued 13 May 1983 he was assessed as liable for $17,257.49 including tax on taxable income, $13,180.12, which was paid by the due date, 14 June 1983.

By the Notice of Amended Assessment issued 15 May 1986 the tax payable was increased to $460,563.29 including tax on taxable income, $247,180.12, and additional tax by way of penalty for incorrect return, $226,563.29, which was due by 16 June 1986.

After objection and appeal the matter was settled and it was agreed that the tax on taxable income be reduced to $118,180.12, that the additional tax for incorrect return be reduced to $101,663, and additional tax for late payment of the outstanding balance was agreed at $24,810.29 all of which was paid on 28 October 1988.

In the case of Mrs Pech by the original Notice of Assessment issued 21 April 1983, she was assessed as liable for $15,496.61 including tax on taxable income, $10,881.64 which was paid by the due date, 23 May 1983.

By the Notice of Amended Assessment issued 15 May 1986, the tax payable was increased to $462,083.14 including tax on taxable income, $244,354.12, and additional tax by way of penalty for incorrect return, $228,610.66, which was also due by 16 June 1986.

As a result of the settlement her tax on taxable income was reduced to $115,354.12, the additional tax for incorrect return was reduced to $112,952.00 and the additional tax for late payment of the outstanding balance was agreed at $26,102.23. Once again it was all paid on 28 October 1988.

The legal costs incurred in the objection and appeal amounted to $16,148.18 and it is agreed this should be apportioned one half to each plaintiff.

Mr Pech therefore claims the ultimate penalty for incorrect return, $101,663, together with legal costs, $8,148.18, and interest pursuant to the Supreme Court Act, s 94 from the date of payment, namely 28 October 1988. Mrs Pech claims the ultimate penalty for incorrect return, $112,952.00, legal costs, $8,148.17, and interest.

On behalf of the defendant it has been submitted that there should be offset against these amounts the benefit the plaintiffs gained by having the use of the difference in primary tax from the time it should have been paid (14 June 1983) until the time it was paid (28 October 1988) a period of 5 years 4½ months and tables were annexed to the defendants' written submissions purporting to calculate the appropriate amount on the assumption that the money had been invested at the Australia Savings Bond rate of 12.25% per annum.

In Markham & Ors v Lunt & Ors 84 ATC 4010, a case involving additional tax for late lodgment of returns, Pidgeon J refused to allow such an offset saying at 4017:

``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.''

Although earlier in his judgment, his Honour had distinguished between the common law action for negligence and the statutory right under s 251M, it appears to me, with respect, that he has here confused the two and whilst his

ATC 4215

Honour's remarks are appropriate to the statutory cause of action which specifies the amount recoverable, I see no reason why the common law action should not be governed by the ordinary principles of assessment of damages, the hallmark of which is just compensation so that while consequential losses may be recovered, any benefits received must be brought into account.

However, if such offsets were to be allowed they would need to be reduced by the additional tax paid for late payment of the amended assessments (Mr Pech, $24,810.29 and Mrs Pech $26,102.23) as these reduced the benefits received by having the use of the money in the meantime. In the following assessments I have adopted Table B of the calculations, ie on the basis that the interest earned was reinvested.

I reject a further submission on behalf of the defendant to the effect that because the transaction involved the plaintiffs paying no money at all to the company, they also ended up with a property valued at $350,000 in 1982 for a payment of $475,000 in October 1988 and that left them in a better position than if they had paid the $350,000 for the property in 1982. That seems to me to confuse the acquisition of the property with the negligence of the defendant in the preparation of the tax returns.

In assessing the interest to be allowed I have had regard to the rates set out in Supreme Court Rules, Schedule J and allowed interest from the time of final payment (October 1988) until the present, a period of 5½ years.

In relation to the claim under s 251M, the statute gives the taxpayer the right to recover a specific amount, namely the amount of the additional tax, and so there is no room for reducing this amount, by reference to principles relating to the assessment of damages in tort, just as there is no room for adding to it damages for consequential loss. It has been submitted on behalf of the defendant that, if no allowance is made for the benefit received by the plaintiffs having the use of the difference in primary tax from 1983 to 1988 (which I have held is the case under the section), no interest should be allowed because it is said, those financial and economic advantages would result in a complete windfall for the plaintiffs. But having held that under the section the plaintiffs upon payment of that penalty tax were forthwith entitled to recover those amounts from the defendant and the defendant had no defence to such claims, it follows that since October 1988 the defendant has had the use of money to which the plaintiffs were entitled, and in such circumstances it is appropriate to allow interest:
Falkner v Bourke (1990) 19 NSWLR 574.

I therefore assess the damages in negligence as follows:

Mr Pech: 

    Penalty tax                                        $101,663.00

    Benefit for use of
    money                            $41,470.80

    Additional tax for
    late payment                     $24,810.29        $ 16,660.51
                                                       -----------
                                                       $ 85,002.49

    Legal costs                                        $  8,148.18
                                                       -----------
                                                       $ 93,150.67
    Less 20% for contributory
    negligence                                         $ 18,630.13
                                                       -----------
                                                       $ 74,520.54
    Interest from October 1988 to
    April 1994 (5/1/2; years at 15%
    pa)                                                $ 61,479.46
                                                       -----------
    Total:                                             $136,000.00
                                                       -----------

Mrs Pech: 

    Penalty tax                                         $112,952.00

    Benefit from use of
    money                            $41,262.46

    Additional tax for
    late payment                     $26,102.23         $ 15,160.23
                                                        -----------
                                                        $ 97,791.77
    Legal costs                                         $  8,148.17
                                                        $105,939.94
    Less 20% for contributory
    negligence                                          $ 21,187.99
                                                        -----------
                                                        $ 84,751.95
    Interest at 15% for 5/1/2 years                     $ 69,920.36
                                                        -----------
    Total:                                              $154,672.31
                                                        -----------

I assess the damages under s 251M as follows:

Mr Pech: 

    Penalty tax                                          $101,663.00

    Interest (5/1/2; years at 15% pa)                    $ 83,871.97
                                                         -----------
                                                         $185,534.97
                                                         -----------

Mrs Pech: 

    Penalty tax                                          $112,952.00
    Interest (5/1/2 years at 15% pa)                     $ 93,185.40
                                                         -----------
                                                         $206,137.40
                                                         -----------

ATC 4216

The plaintiffs are therefore entitled to judgment for the larger of these amounts namely: Mr Pech $185,534.97, Mrs Pech $206,137.40.

Plaintiffs' alternative claim

The plaintiffs rely for an alternative cause of action on the failure of the defendant to advise them to make a voluntary disclosure of the error in the 1982 tax returns relating to the sale of the property between the time the erroneous returns were submitted in March 1983, until the commencement of the tax audit in mid 1985, and submit that if the primary causes of action in negligence or under s 251M are statute barred, this alternative cause of action is not so affected because the defendant had a continuing duty to give such advice up until 1985, and having failed to do so was negligent. The proceedings having been commenced in 1989 no question of limitation arises under this alternative claim.

The evidence establishes that the defendant was the accountant and tax agent for both plaintiffs and also for the company throughout the relevant period. When he came to prepare the 1983 tax returns late that year or early 1984, on his own admission he received the relevant rental statements relating to the property and decided to make an entry in the tax returns relating to the disposal of that real estate. This he did in the company's return and disclosed it in Schedule 16 as being property which had not been acquired for resale at a profit. He claimed in his evidence that he believed it had been transferred for the same price for which it had been purchased, but I have already indicated why I do not accept that part of his evidence. Moreover, if he believed that it had been disposed of for the same price for which it had been purchased his disclosure in the schedule that it had not been acquired for profit making by sale was nonsensical and improper. But whatever his motivation or whatever his thought processes, the fact is that at the time he prepared the 1983 returns he had the sale of this Cronulla property in his mind, and as a reasonably competent accountant and tax agent should have realised then, if not previously, that there had been an error and non-disclosure in the 1982 returns. He was therefore under a duty, taking reasonable care for the interests of the plaintiffs and the company, to advise them to make a voluntary disclosure to the Commissioner. If such voluntary disclosure had been made the penalty tax levied would only have been 10% in the light of the taxation department ruling, IT2011, to which I have previously referred, which issued in February 1983, and which the defendant claims he was familiar with.

In this regard it is relevant to consider that not only was he then preparing the 1983 returns for the company but also for the plaintiffs themselves and his duty of care on their behalf continued. Whether or not there be a continuing duty, such as was adverted to in
Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp (a firm) (1979) 1 Ch 384, he should have considered the matter at the time he prepared the 1983 returns, and he should have taken some action then.

In my view, it is not relevant that no additional fee was payable for any further advice. The duty, at least in tort, arose because the defendant should have been aware that if the relevant advice was not given the plaintiffs could suffer damage and his relationship to the plaintiffs as their accountant and tax adviser, in which capacity he was receiving fees from time to time, gave rise to a relationship of proximity to them.

In such case the plaintiffs would have been liable for 10% additional tax in accordance with the ruling and so their damages would comprise 90% of the additional tax payable together with their legal costs and interest; but once again, as they failed to read or check the 1983 returns, I would still deduct 20% on account of contributory negligence.

In respect of this alternative claim, the plaintiffs do not rely on s 251M.

Cross-claim

By his Cross-Claim the defendant claims indemnity from the cross-defendant pursuant to a policy of professional indemnity insurance which commenced on 20 January 1989 pursuant to a proposal dated 30 November 1988. The policy contained Special Exclusions in the following terms:

``You are not covered under this Policy 1 with respect to claims:

  • 1....
  • 2....
  • 3.1 Made or threatened or in any way intimated before the commencement of insurance cover under this Policy 1.

    ATC 4217

  • 3.2 Arising from any circumstance or circumstances of which You shall become aware, prior to the commencement of insurance cover under this Policy 1 and which a reasonable Accountant in Your position would at any time prior to the commencement of cover have considered may give rise to a Claim or Claims.''

The cross-defendant submits that in the events which have happened and the circumstances which were known to the cross- claimant at the time of the commencement of the policy, a claim of this nature is not within the terms of the risk. The cross-claimant on the other hand submits that as the plaintiffs at no time told the defendant that they were going to sue him or that they considered that he had done anything wrong a reasonable accountant in the position of the insured would not have considered that the circumstances which had arisen may give rise to a claim, and in particular that the mere fact that something had gone wrong was not of itself sufficient for the defendant to have considered the possibility that a claim might arise.

There is no evidence that at any time prior to the commencement of the policy either of the plaintiffs, or anyone acting on their behalf, had threatened or intimated that a claim might be made against the defendant in respect of the matters now complained of; so that Special Exclusion 3.1 has no application and it is only necessary to consider the impact of Special Exclusion 3.2.

The cross-defendant relied on the report and evidence of Mr Grew and the cross-claimant on those of Mr Bolton. In his report Mr Grew referred to various matters, some of which eg 2(a), (b), (e), (f), (i) etc were not proved in evidence before me, but in oral evidence the facts as ultimately proved in the case were put to Mr Grew and his opinion was that in those circumstances a reasonable accountant would have been quite concerned and would have considered that there was a likelihood that a claim may arise.

Mr Bolton in his report based his conclusions very largely on the fact that, because the plaintiffs and the company had received substantial benefits by way of cash flow and use of the money in the meantime, a reasonable accountant would be surprised if a claim were made. In his oral evidence, he agreed that up until the settlement with the Commissioner at the Administrative Appeals Tribunal on 4 October 1988 a reasonable accountant would have been concerned, but that because of what he regarded as a very advantageous settlement and the use of the money in the meantime the reasonable accountant's concern would have become less or disappeared after that time.

Special Exclusion Clause 3.2 directs attention to two matters:-

It is therefore necessary to consider what circumstances were known to the insured prior to the commencement of the policy and to then consider whether a reasonable accountant in the position of the insured would have considered that such circumstances may give rise to a claim. In my view the words ``at any time'' (prior to the commencement of cover) do not embrace circumstances which may have existed some time previously but which have been overtaken by subsequent events, as such a construction could at times lead to absurd results; but refer rather to what the reasonable accountant should consider right down to the commencement of cover. Moreover the hypothetical accountant must not only be reasonable, but must also be placed in the position of the insured, and this includes his relationship with and knowledge of possible claimants.

Finally, the issue is whether such circumstances MAY give rise to a claim as opposed to whether they would, should or were considered likely to give rise to a claim, but the word does not include a bare theoretical possibility of a claim.

I am satisfied that leading up to the commencement of the policy a reasonable accountant in the position of Mr Tilgals should have considered the following circumstances, which the evidence establishes he was aware of:

Taking these matters into account, I believe that a reasonable accountant in the position of the cross-claimant would not have expected or anticipated that a claim against him would or should be made; but the circumstances, including the sudden termination of his services, were such that the possibility of a claim was not so remote or fanciful that it could be disregarded, and therefore he should have considered that a claim MAY be made.

It was submitted on behalf of the cross- claimant that the wording of the Special Exclusion Clause excludes claims which, having regard to the provisions of s 28 of the Insurance Contracts Act would not be excluded; and therefore that the operation of this clause is void pursuant to s 52 of that Act in that it would have the effect of excluding, restricting or modifying the operation of the Act by excluding claims that would not be excluded under the principles of non-disclosure.

But the Special Exclusion Clause 3.2 is not concerned with non-disclosure; the claims specified are excluded from the cover whether the circumstances are disclosed or not, and accordingly the provisions of s 28 are not excluded or modified by the clause. A clause excluding claims notified to the insured before the commencement of the policy or arising out of anything done or omitted before such commencement would not have anything to do with non-disclosure, and similar considerations,

ATC 4219

in my view, apply to the clause here under consideration.

For these reasons I am satisfied that the plaintiffs' claim is not the subject of cover under the insurance policy and there will be judgment for the cross-defendant on the cross- claim.

Costs

Finally the defendant has submitted that irrespective of the outcome the plaintiffs should be ordered to pay the defendant's costs from 20th February 1992 (the date of the Plaintiffs' List of Documents), or that the parties should bear their own costs from that date by reason of the failure of the plaintiffs to include in their List of Documents the Land Tax documents which ultimately proved crucial to the proof of the plaintiffs' case. It was submitted that the proper disclosure of those documents would have materially affected the conduct of the case and probably shortened it, and reference was made to the correspondence in Exhibit 4, particularly the plaintiffs' solicitors' letter of 29 July 1993.

I have no doubt that the Land Tax documents should have been discovered and their non- disclosure has rendered the discovery procedure less effective than it should have been, and no really satisfactory explanation for their non- disclosure has been forthcoming. There is no evidence they were deliberately withheld for an improper motive; if I thought they were, I would take a very different approach. In all the circumstances I consider the appropriate order for costs is for the defendant to pay the plaintiffs' costs of the proceedings, save and except the costs relating to discovery and inspection of documents in respect of which each party is to bear their own costs. The cross- claimant must pay the costs of the cross- defendant.

ORDERS:

1. Direct the entry of judgment for the First Plaintiff against the Defendant for $185,534.97 and for the Second Plaintiff against the Defendant for $206,137.40.

2. Direct the entry of judgment for the Cross- Defendant on the Cross-Claim.

3. Order the Defendant to pay the Plaintiffs' costs of the claim, save and except the costs relating to discovery and inspection of documents, in respect of which each party is to bear their own costs.

4. Order the Cross-Claimant to pay the Cross-Defendant's costs of the Cross-Claim.

 

Disclaimer and notice of copyright applicable to materials provided by CCH Australia Limited

CCH Australia Limited ("CCH") believes that all information which it has provided in this site is accurate and reliable, but gives no warranty of accuracy or reliability of such information to the reader or any third party. The information provided by CCH is not legal or professional advice. To the extent permitted by law, no responsibility for damages or loss arising in any way out of or in connection with or incidental to any errors or omissions in any information provided is accepted by CCH or by persons involved in the preparation and provision of the information, whether arising from negligence or otherwise, from the use of or results obtained from information supplied by CCH.

The information provided by CCH includes history notes and other value-added features which are subject to CCH copyright. No CCH material may be copied, reproduced, republished, uploaded, posted, transmitted, or distributed in any way, except that you may download one copy for your personal use only, provided you keep intact all copyright and other proprietary notices. In particular, the reproduction of any part of the information for sale or incorporation in any product intended for sale is prohibited without CCH's prior consent.