The Qld Court of Appeal has dismissed appeals by a bank and cross-appeals by a husband and wife concerning damages awarded for a financial loss stemming from advice given by a financial planner.
- In mid-2007, a husband and wife obtained a statement of advice from a financial planner employed by Westpac Banking Corporation.
- The husband acted on that advice by borrowing $5m and investing it in a registered managed investment scheme for 3 years.
- He hoped to generate a profit and to offset the costs of and interest on the loan to eliminate his substantial income tax liability.
- The couple also acted on the planner’s advice to borrow $600,000 for their superannuation fund to invest in shares, which they hoped would be profitable, ultimately borrowing $700,000 for that purpose.
- Following the global financial crisis in late 2007, both investment strategies became unprofitable and the couple subsequently suffered significant losses.
- They and their super fund trustee company sued Westpac for damages arising from the financial planner’s advice for breach of contract, negligence and statutory contraventions.
They were successful on some claims. The primary judge found that Westpac was negligent and in breach of contract and of its statutory obligations under s 12DA(1) of the Australian Securities and Investments Commission Act 2001.
- His Honour determined that the husband’s loss on the managed investment scheme, after tax, was $623,236.
- Had he not taken up the Westpac recommendations, he would have invested $200,000 in agribusiness, resulting in a loss, unrelated to Westpac’s advice, of id=”mce_marker”34,107.
- The Court said the damages of $623,236 should be reduced by id=”mce_marker”34,107 to reflect this, so that his net damages after tax were $489,129.
- As the husband would have to pay tax on his damages of $489,129 pursuant to s 20-20 of the ITAA 1997, that figure had to be “grossed up” by an amount of $200,992 to ensure that he was left with $489,129 after tax.
- His Honour assessed the husband’s total damages arising from the investment as $690,121.
- After adding interest of $228,535, his Honour gave judgment in the sum of $918,656.
In his reasons, his Honour made clear that he considered the assessable amount of the judgment for taxation purposes under s 20-20 was $489,129.
In the claim arising out of the super fund investment, his Honour gave judgment for the couple inclusive of interest in the sum of id=”mce_marker”61,799.
Westpac appealed and the husband and wife cross-appealed, filed a notice of contention and applied to adduce further evidence in the appeal. After reviewing the matter, the Court unanimously refused the appeal, the cross-appeal and the application to adduce further evidence, although each Judge gave separate reasons.
(Westpac Banking Corporation v Jamieson & Ors [2015] QCA 50, Qld Court of Appeal, Margaret McMurdo P and Morrison JA and Applegarth J, 10 April 2015.)
[LTN 68, 13/4/15]
Catchwords [2015] QCA 50
DAMAGES – GENERAL PRINCIPLES – OTHER MATTERS – where a bank was found to have given negligent and misleading investment advice to a customer – where the advice did not adequately disclose that more than 10 per cent of the investor’s wealth would be at risk if the investment performed poorly – where the investment performed poorly, partly as a result of the GFC, and the customer was liable for interest under loans made to finance the investment – whether the bank is responsible for the total loss suffered by the customer – whether the rule in Potts v Miller should have been applied to assess the loss – whether the primary judge erred in considering what the customer would have done had he not been induced to make the investment and associated loans – whether the investor would have borrowed and invested in a tax minimising scheme and suffered a loss on that alternative investment
CORPORATIONS – FINANCIAL SERVICES AND MARKETS – FINANCIAL PRODUCTS – GENERALLY – where a bank advised a customer to borrow to contribute to a self-managed superannuation fund – whether bank was negligent in failing to adequately advise the customer of the detriments of using borrowed money to make undeductible contributions
DAMAGES – INCIDENCE OF TAXATION AFFECTING DAMAGES – where the primary judge found that an award of damages would be assessable income under the Income Tax Assessment Act 1997 (Cth) – where the primary judge “grossed-up” the amount of damages on account of the tax treatment of the award – whether the figure used by the primary judge as the customer’s net loss was correct – whether the methodology used by the primary judge to “gross-up” the assessed loss was correct – whether the “grossed-up” award of damages should be “grossed-up” ad infinitum
Income Tax Assessment Act 1997 – s20-20
20.20 – Assessable recoupments
Exclusion
(1) An amount is not an assessable recoupment to the extent that it is * ordinary income, or it is * statutory income because of a provision outside this Subdivision.
Insurance or indemnity
(2) An amount you have received as * recoupment of a loss or outgoing is an assessable recoupment if:
(a) you received the amount by way of insurance or indemnity; and
(b) you can deduct an amount for the loss or outgoing for the * current year, or you have deducted or can deduct an amount for it for an earlier income year, under any provision of this Act.
Other recoupment
(3) An amount you have received as * recoupment of a loss or outgoing ( except by way of insurance or indemnity) is an assessable recoupment if:
(a) you can deduct an amount for the loss or outgoing for the * current year; or
(b) you have deducted or can deduct an amount for the loss or outgoing for an earlier income year;
under a provision listed in section 20-30.
FJM Comment
It’s not clear to me that the Applicant customers were entitled to a gross-up for their damages being taxable after they had (as a requirement for s20-20(2) operating) got a deduction for their losses.