In a negligence claim, the NSW Court of Appeal has ruled that an SMSF auditor breached his duty of care by failing to qualify the fund’s audit reports in relation to an unsecured loan which had been classified as cash.

The plaintiff is the corporate trustee of an SMSF for a doctor and his wife. The fund’s investment manager (Lewis Securities Ltd) was operated by a good friend of the doctor pursuant to a custodian authority. The SMSF did not have its own bank account and would instead make payments to Lewis Securities Ltd. The doctor understood that the SMSF’s money was lent to a related entity (LSL Holdings P/L) to obtain a higher interest rate. The fund’s money was described in the accounts as “Cash – LSL Holdings”. However, the assets of LSL Holdings were primarily unlisted assets for which there was an excess of liabilities. An administrator was appointed to the Lewis companies in 2009, resulting in a $950,000 impairment for the SMSF.

At first instance, the primary judge found that the SMSF auditor had breached his duty of care by failing to qualify the fund’s audit reports but ultimately held that the loss was not actionable. Rather, the primary judge ruled that the loss was caused by the inappropriate level of trust the director-trustee placed in the fund’s investment manager.

The Court of Appeal allowed the SMSF trustee’s appeal after finding that the primary judge erred, in failing to have regard to the breath of the findings of negligence that he had previously made, when considering the loss caused by the breach of duty. As to contributory negligence, the Court of Appeal apportioned only 10% of the loss, to the fault of the SMSF trustee. According to the Court of Appeal, the auditor’s negligence was of “significantly greater importance” in causing the loss and should be apportioned 90% to the auditor.

(Cam & Bear Pty Ltd v McGoldrick [2018] NSWCA 110, NSW Court of Appeal, McColl AP, Macfarlan and White JJA, 23 May 2018.)

FJM 16.7.18

[LTN 134, 16/7/18; Tax Month – July 2018]

 

Comprehension questions (answers available)

  1. Was the auditor found to be negligent but only 10% responsible for the loss?
  2. Was the loss to the SMSF $95,000?
  3. Was the loss detected when the borrower became insolvent?
  4. Did the borrower use the money to fund investments in unlisted assets?
  5. Did the accounts reflect the nature of this loan?

[answers:1.no(90%responsible;2.no(10timesThat);3.yes;4.yes;5.no(recordedAsCashThat’sWhatWasNegligent)]

 

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