The NSW Supreme Court has dismissed proceedings brought by a plaintiff against an accounting partnership for alleged misleading advice on the tax consequences of entering into an option deed.
The facts were as follows.
- The Court said Mr Peter Hall was beneficially the sole shareholder of Hampshire Assets and Services Pty Ltd (Hampshire), and its sole director.
- Mr Hall had founded the investment management company known as Hunter Hall International Limited (Hunter Hall).
- The events the subject of the case involved what had originally been conceived of as a sort of employee share scheme, in Hunter Hall, for the senior portfolio managers. But the plan went through several iterations and became an allocation of options in HHL to Mr Hall and a number of Portfolio Managers who were responsible for attracting and investing funds to be managed by Hunter Hall. Hunter Hall earned income by way of fees on funds under management.
The fundamental issue, according to the Court, was whether the defendants (the partnership) were liable to the plaintiff (Hampshire) for advice that the partnership, through the first defendant (Mr Blackman, Mr Hall’s and Hampshire’s accountant), is said to have given Hampshire about a CGT liability.
- Hampshire said that advice was given, that it was misleading or deceptive, and that Hampshire relied on the advice in entering into an agreement known as a Put and Call Option Deed (the option deed).
- Hampshire’s primary claim sought damages of about $1.8 million for additional CGT payable, a shortfall interest charge (SIC), audit costs and other losses.
The defendants denied that Mr Blackman’s conduct was misleading or deceptive.
- The partnership said that, if Mr Blackman did give any advice, Hampshire did not rely on it in deciding to enter into the option deed.
- Further, and in any event, the partnership said that the Trade Practices Act 1974 (Cth) had no application, because the partnership was not a corporation. Hampshire’s response was that the Trade Practices Act did apply, because the relevant conduct involved the use of telegraphic or telephonic services, and was thus within the extended operation of that Act given by s 6(3).
Also the defendants relied on the concurrent wrongdoer law, saying another accounting firm should bear the greater part of the financial burden.
- That alleged concurrent wrongdoer was the accounting firm known as Deloitte Touche Tohmatsu Pty Ltd (Deloitte).
- The secretary of Hunter Hall had retained Deloitte and an engagement letter described the scope of work as being to “provide assistance with the design and implementation of a management equity scheme, in line with instructions that you provide us from time to time”.
Further, the partnership said, it was entitled to limit its liability by reference to a “scheme” prepared for the purposes of the Professional Standards Act 1994 (NSW).
In dismissing Hampshire’s case against the partnership, the Court said:
- “Mr Blackman was not negligent in his preparation of the relevant income tax returns.
- He prepared them in accordance with the advice given by Deloitte: that is to say, on the basis that the relevant capital gain was the difference between the strike price of $6 and the cost base for the options actually exercised in the year of income.
- For the reasons I have given, Mr Blackman was entitled to assume that Deloitte’s advice was correct.
- It must follow that he was entitled to act on it, in his capacity as Hampshire’s accountant.
- There was no want of due care in his so acting. Nor (if he owed a common law duty of care) could he have breached it by so acting.”
(Hampshire Assets and Services v Blackman [2018] NSWSC 1096, NSW Supreme Court, McDougall J, 18 July 2018)
FJM 14.8.18
[LTN 141, 25/7/18; Tax Month – July 2018]
Comprehension questions (answers available)
- Was the accountant, who prepared the returns, liable for the plaintiff’s tax losses?
- Was this because he was entitled to rely on the expert advice, given by Deloitte being right?
- Was the plaintiff’s case framed in terms of negligence?
