Supreme Court of WA|2005-06-15|Before: Hasluck J

Carmody & Ors v Priestley & Morris Perth Pty Ltd & Anor [2005] WASC 120 (15 June 2005)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : CARMODY & ORS -v- PRIESTLEY & MORRIS PERTH PTY LTD & ANOR [2005] WASC 120

Professions and trades - Accountants - Professional negligence - Nature of retainer in determining scope of duty of care - Effect of circumstances in determining scope of duty of care - Advice sought by telephone concerning purchase of property by trustee company - Whether sufficient information provided - Whether accountant obliged to draw on previous knowledge of client's affairs - Whether accountant obliged to proffer advice about adverse tax implication being a matter not raised with him expressly - Accountant held liable for breach of duty of care

First Plaintiff : Mr K J Martin QC & Ms C H Thompson

Second Plaintiffs : Mr K J Martin QC & Ms C H Thompson

Third Plaintiffs : Mr K J Martin QC & Ms C H Thompson

Commonwealth of Australia v Verwayen (1990) 170 CLR 394

Dalleagles Pty Ltd v Australian Securities Commission (1991) 4 WAR 325

Finamore v Slater & Gordon (1994) 11 WAR 250

Hall Chadwick Corporation Finance (WA) Pty Ltd v Axiom Properties Ltd [2002] WASC 179

Leotta v Public Transport Commission (NSW) (1976) 50 ALJR 666

Midland Bank Trust Co Ltd v Hett Stubbs & Kemp (a firm) [1979] Ch 384

Mohr & Mohr v Cleaver & Cleaver [1986] WAR 67

Pech v Tilgals (1994) 28 ATR 197

State of Queensland v JL Holdings Pty Ltd [1997] HCA 1; (1997) 189 CLR 146

Tip Top Dry Cleaners Pty Ltd v Mackintosh (1998) 98 ATC 4346

Tony Sadler Pty Ltd v McLeod Nominees Pty Ltd (1994) 13 WAR 323

Voli v Inglewood Shire Council [1963] HCA 15; (1963) 110 CLR 74

Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642

Water Board v Moustakas [1988] HCA 12; (1988) 180 CLR 491

Bell v Vahexi Pty Ltd (1998) 99 ATC 4055; (1998) 40 ATR 459

City of Botany Bay Council v Jazabas Pty Ltd [2001] NSWCA 94

Custom Credit Corporation Ltd v Dallas Development Corporation Pty Ltd [2004] WASC 92

Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (Reg) [1997] HCA 8; (1997) 188 CLR 241

L Shaddock & Associates Pty Ltd v Paramatta City Council (No 1) [1981] HCA 59; (1981) 150 CLR 225

March v E & MH Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506

San Sebastian Pty Ltd v Minister Administering Environmental Planning Act [1986] HCA 68; (1986) 162 CLR 340

Thors v Weekes (1989) 92 ALR 131

Walker v Hungerfords (1987) 49 SASR 93

1 The plaintiffs are members of the Carmody family or companies associated with the family. For many years family members have managed and worked on two farming properties at Kulin and Esperance. These farms were made up of various separate titles as a result of a gradual expansion of the farms.

2 The registered proprietors of the farms are M Carmody Holdings Pty Ltd (known in these proceedings as "Holdings") and Maucarmod Pty Ltd as trustee for the M B Carmody Family Trust (known in these proceedings as "Maucarmod"). Michael Carmody is a director of the two companies and, after the death of his father in 1986, became the family member who was principally responsible for liaising with accountants in relation to the affairs of Holdings and Maucarmod.

3 Income from operation of the family businesses was paid to Holdings and all expenditure required for the operation of the family farms was paid by that company. In the period 24 February 1988 to 4 May 1994 six properties were acquired by Maucarmod as trustee for the family trust using funds advanced by Holdings. These properties included not only properties linked to the farming operations but also a unit at 3/118 Deanmore Road, Scarborough within the metropolitan area of Perth which was used by Michael Carmody's sister - the first plaintiff Maureen Carmody - as a residence.

4 It is apparent from various financial statements adduced in evidence that funds advanced by Holdings to Maucarmod were treated as loans made by Holdings to Maucarmod. Thus, the amounts in question were characterised as assets in the accounts of Holdings and as non-current liabilities in the accounts of Maucarmod. I note in passing that Maucarmod held two shares in Holdings.

5 It was common ground at the trial that the Carmody family had been dealing with the accountancy firm Richardson & O'Meara. However, following the merger of that practice with the firm Priestley & Morris in 1988, Michael Carmody began dealing with the latter firm in relation to the financial affairs of the Carmody family. He dealt primarily with the second defendant, Mark Randall, but also with accountants employed by Priestley & Morris such as Leanne Devereaux and Linda Horsely.

6 The defendant firm carried on business as an incorporated company from 1 July 1992. For ease of reference I will refer to the first defendant as Priestleys, being the term used in the pleadings.

7 On 4 December 1997 amendments to the Income Tax Assessment Act 1936 (Cth) were announced which were aimed at treating advances of funds to a related company in certain circumstances as a deemed dividend, and thereby as income assessable to taxation by the recipient or by the persons receiving a distribution of the recipient company's net income in the financial year in which the loan funds were received. The relevant legislation was given retrospective effect to 4 December 1997.

8 Section 109D, which falls within Div 7A of the Income Tax Assessment Act, provides that a private company is taken to pay a dividend to an entity at the end of one of the private company's years of income if the private company makes a loan to the entity during the current year and the loan is not fully repaid by the end of the current year and the entity is a shareholder in the private company or an associate of such a shareholder when the loan is made.

9 By s 109D(3) the term "loan" includes an advance of money or a transaction (whatever its terms or form) which in substance effects a loan of the money.

10 Section 109D(5) bears upon loans made before 4 December 1997. It provides that if the terms of a loan made before 4 December 1997 are varied on or after that day by extending the term of the loan or increasing its amount, Div 7A applies to the loan as if it were made on the new terms when the variation occurred.

11 I note in passing that the process whereby additional advances are added to an earlier loan is generally described as "freshening".

12 It will be readily apparent from my brief description of the taxation amendments that after 4 December 1997 the process of freshening could have adverse consequences for a taxpayer in certain circumstances. However, evidence before me at the trial established that if a later transaction was kept separate from an earlier transaction by the use of discrete entries or "sub-accounts" in the books and financial statements of a company, a later loan was not likely to be characterised as a freshening loan of the kind contemplated by s 109D(5) of the Income Tax Assessment Act.

13 It emerges, then, that after 4 December 1997 there was a risk that if the trustee company, Maucarmod, purchased a property with funds advanced by Holdings, the advance or loan might come to be treated as a deemed dividend if it were not fully repaid by the end of the year in question, for Maucarmod held two shares in Holdings.

14 I pause to note that at the trial of the action the plaintiffs adduced expert evidence from Mr Ross Watson, who is currently a principal within the Taxation Services Division of the accountancy firm RSM Bird Cameron in Perth, in support of the plaintiffs' plea at par 17 of the statement of claim concerning the taxation amendments.

15 His evidence was to the effect (as is reflected in the plea at par 17) that as at 23 February 2000 persons holding themselves out as competent providers of professional accounting services to business clients knew or should have known that an advance of moneys by Holdings to Maucarmod (bearing in mind that the latter company was a shareholder of Holdings) would, after 4 December 1997, be likely to attract the application of s 109D of Div 7A.

16 On 22 February 2000, Michael Carmody, as a director of Maucarmod, executed an offer to purchase a residential property in Price Street at Kulin. The offer was set out on a standard printed form contract for sale of land by offer and acceptance.

17 The purchase price was given as $133,000 to be paid by a deposit of $13,300 of which $1330 was paid "herewith" and $11,970 was to be paid on acceptance. The settlement date was described as 17 March 2000. The common seal of Maucarmod appears on the printed form in conjunction with the signatures of Michael Carmody and his brother David Carmody. It appears from the form that the offer was accepted by the vendors on 24 February 2000.

18 I note in passing that the printed form included a special condition set out in handwriting to the effect that "this offer is valid until 29 February 2000". The form also bears a so-called "special condition 2" in a typewritten form to the effect that "this contract is subject to the offer Begg to Bradford dated 2 February 2000 being formally cancelled by the vendors and purchasers on or before 4.00 pm 28 February 2000".

19 I understood from evidence given by Michael Carmody at the trial of the action that the special conditions were thought to be necessary because a prior offer had been submitted to the vendors by a third party. I will return to this point at a later stage in the course of determining the sequence of events bearing upon the plaintiffs' claim.

20 The plaintiffs relied upon cheque butts and related bank statements to establish that on 22 February (being the date the offer was made) a cheque for $1330 was drawn in favour of Wesfarmers Real Estate Agency. A further cheque for $11,970 was drawn in favour of the Agency on 28 February 2000. It appears from the Holdings bank statement that these two amounts were drawn against the Holdings' account at the National Bank on 3 March 2000.

21 A further cheque for $119,706 was written out in favour of AJ & LA Begg on 17 March 2000 and drawn against the Holdings' account at the National Bank in due course.

22 Michael Carmody gave evidence at the trial of the action that the settlement date in respect of the Price Street property was 17 March 2000. He said in evidence (at par 54 of his witness statement) that in fact he saw Mr Randall of Priestley's on that day and discussed the issue of fringe benefits tax ("FBT") in relation to the Price Street house; that is, whether any FBT would be payable by the Trust or by Holdings. According to him, they discussed the fact of the purchase generally, without going into detail as to how the transaction occurred. He could recall saying words to the effect that he had been thinking of going to the settlement for the Price Street house but that he would not have time.

23 The crucial question in the present case is whether (as alleged by the plaintiffs) Michael Carmody sought and obtained certain verbal advice from Mr Randall of Priestley's concerning the effect of the taxation amendments prior to acceptance of the Maucarmod offer for the Price Street property. I will return to that aspect of the matter in due course.

Financial statements for the year ended 30 June 2000

24 It is apparent from the financial statements prepared by Priestley's for Holdings and Maucarmod in respect of the year ended 30 June 2000 that the sum of $133,000 advanced by Holdings to Maucarmod to facilitate settlement of the Price Street property was treated in the accounts in the same manner as the advances made in the period 24 February 1988 to 4 May 1994 when six properties were acquired by Maucarmod using funds advanced by Holdings; that is, subject to a comparatively small adjustment in respect of moneys owed by Holdings, the sum advanced for the purpose of acquiring the Price Street property was treated as a non-current asset in the balance sheet of Holdings and as a non-current liability in the balance sheet of Maucarmod.

25 I understand that at the time of completing taxation returns for the various family members and family companies, Priestley's, through Mr Randall, prepared and provided to Michael Carmody for execution by Maucarmod (acting as trustee of the Carmody Family Trust) a directors' meeting minute for Maucarmod in respect of the net income of the trust for the financial year ended 30 June 2000. This minute purported to allocate all net income to Maureen Carmody consistently with a practice which had been annually applied in respect of the net annual income of the trust since 30 June 1993. This was thought to be the most tax-effective means of distributing the income, bearing in mind that Mr Carmody's sister Maureen was not a high income earner.

26 The relevant minute was allegedly provided to Michael Carmody by Mr Randall of Priestley's for execution by Michael Carmody in or about August 2000; that is, after the expiration of the financial year in question. Income tax returns of Maureen Carmody and the subject companies were submitted to the Australian Taxation Office on the basis contemplated by the financial statements and the distribution minute, namely, that the advance made by Holdings was a loan and that the income of the Carmody Family Trust had been distributed as to the whole of the Trust income to Maureen Carmody. It was never put to Michael Carmody or to Maureen Carmody that Maureen Carmody might be exposed to liability or income tax in respect of the amount distributed by reason of s 109D and the trustee's resolution to distribute to her the net income of the Carmody Family Trust in the financial year ending 30 June 2000.

27 It emerged from the evidence of Mr Randall at trial that in or about November 2001 Michael Carmody advised that he was planning to move to Perth and, consequently, the farm at Kulin was to be sold. This had given rise to a question of how the assets of the Carmody group could best be divided up between the four brothers.

28 In April 2002 Michael Carmody informed Mr Randall that the Carmody family would be moving its taxation and accounting work to RSM Bird Cameron because Peter (who ran the Esperance farm) was going to continue farming and had decided to use RSM Bird Cameron in Esperance, as this was more convenient to him. Thus, some months later, Mr Randall transferred all relevant files relating to the Carmody family farming business to RSM Bird Cameron. The last work that Priestley's did for the Carmody family generally was for the year ended 30 June 2001. Priestley's did not do any further work after that time, save for preparing tax returns for Maureen Carmody, who continued to use Priestley's.

29 In addition to giving expert evidence, Mr Watson gave evidence at the trial of the action about his involvement in the dispute. He said that he obtained a Bachelor of Business Accounting from the Western Australian Institute of Technology (now Curtin University) in 1976 and is currently a principal within the taxation services division of RSM Bird Cameron, chartered accountants. He said that he reviewed the affairs of the Carmody family in August and September 2002 and looked at the tax implications of restructuring the family's affairs.

30 In the course of his review, Mr Watson noted that the loan balance between Holdings and Maucarmod (as evidenced by a comparison between the 1999 and 2000 figures) had increased. This caused him to prepare a document headed "Special Note - Div 7A" (exhibit P58 at vol 3 p 493). Mr Watson's Special Note referred to the application of Div 7A of the Income Tax Assessment Act to loans or advances made by a company to shareholders or associates after 4 December 1997. He noted that Holdings had funded the acquisition of a property at Kulin in the 2000 financial year, acquired by Maucarmod. He noted also that the advance by Holdings was added to an existing loan to the Carmody Family Trust.

31 He went on to say that where a loan or advance provided before 4 December 1997 is varied (ie, increased or term of repayment extended) then the whole loan is deemed to have been made at the time of the variation pursuant to the rule known as "freshening".

32 Watson's Special Note concluded with an observation as follows:

"It would appear, subject to other contrary evidence, that the loan by MCH to the M B Carmody Family Trust was varied in the 2000 financial year and would for the purposes of Div 7A, be in total, a deemed unfranked dividend in that year. The amount of the loan deemed to be an unfranked dividend in the 2000 financial year would be $1,241,353.59. The debit to the franking account would be the same figure.

The impact of this would be substantial, not only in respect to the 2000 year but the planning now being undertaken."

33 In other words, the matter principally of concern to Mr Watson at this stage was the possibility that the Price Street transaction could be regarded as "freshening" some loan arrangements preceding 4 December 1997 and thus give rise to a very substantial tax liability. He said in evidence that he discussed this with the Carmody brothers and their mother at his office in Perth and understood that a discussion was to be held with Mr Randall of Priestley's in regard to the freshening issue.

34 It was common ground at the trial that on the afternoon of 3 September 2002 the Carmody family members met with Mr Randall at his office to discuss a "serious matter". On that occasion Michael Carmody handed over Mr Watson's Special Note and asked Mr Randall to provide a response promptly. It is apparent from this sequence of events that at this stage the "serious matter" was thought to be the "freshening" issue.

35 In due course, with the assistance of his colleague Linda Horsley, Mr Randall ascertained that a separate sub-account had been kept in relation to the post 4 December 1997 loans, with the result that a substantial tax liability of the kind adverted to by Mr Watson in his Special Note was not likely to arise. In due course, the financial statements of Holdings and of Maucarmod were corrected so as to take account of the requirements of Div 7A of the Income Tax Assessment Act and s 109D of the Act.

36 In the meantime, having discovered that Maureen Carmody was the residual beneficiary of trust income from Maucarmod, Mr Watson advised Michael Carmody that the deemed dividend would therefore comprise part of Maureen's taxable income for the financial year ending 30 June 2000. He advised Mr Carmody that this matter should be brought to the attention of the ATO as the deemed dividend had not been accounted for in Maureen's tax return for the financial year ending 30 June 2000.

37 Mr Watson was instructed by Michael Carmody to write a letter of disclosure in relation to the matter. In October 2002 he did so. He said in evidence that in making the disclosure he was careful to couch it in terms of a voluntary disclosure in order to gain the full benefit of the ATO's policy of remitting the culpability component of the penalty in circumstances of voluntary disclosure by the taxpayer. He also made a submission that, as the trustee had not been aware of the breach of Div 7A at the time that it occurred, the penalty should, for this reason, be remitted to nil.

38 This led to an amended assessment being issued to Maureen Carmody. Accordingly, by letter dated 9 December 2002 Mr Randall, on behalf of Priestley's, wrote to Maureen to say that the amended assessment had arisen due to an additional amount of income distributed to her from the Carmody Family Trust of $125,611. The total amount of tax payable was $80,254.90 and included $2,995.30 penalty and $17,352.70 interest. He indicated that she would be able to claim interest of $17,352.70 as a deduction in her 2003 income tax return. The amount of the amended assessment was payable to 10 January 2003.

39 By this time the situation had been discussed by members of the family. Mr Carmody and his brothers were all willing to contribute to payment of the tax figure. It was agreed that in the event that they were able to recover any of the amount in question from Priestley's, the amount would be payable to each of the four brothers who had paid the tax. It was agreed also that they would bear the cost of any legal action taken on Maureen's behalf. A formal agreement described as an acknowledgement of loan by deed was eventually prepared and executed in order to carry these arrangements into effect.

40 On 17 December 2002 Michael Carmody wrote a cheque to the Deputy Commission of Taxation for the total sum of $80,254.92, noting on the cheque butt that this was to be paid by himself and each of his brothers in equal shares. The cheque was written on the Holdings cheque account. These payments were accounted for as a drawing down on each brother's loan account with Holdings.

41 It emerged from the evidence given by Mr Carmody and Mr Watson at trial that soon after the initial meeting with Mr Randall on 3 September 2002 some thought was given to advancing a claim against Priestley's. As a consequence of discussions between Mr Carmody and Mr Watson bearing upon that point Mr Watson prepared a letter of claim to Priestley's in draft and, by email dated 16 September 2002, forwarded the draft to Michael Carmody for his consideration. This email and the draft letter to Priestley's dated 13 September 2002 prepared by Mr Watson were received in evidence at the trial as exhibit D90.

42 The 13 September draft letter is addressed to Mr Randall and reads as follows:

"Thank you for the opportunity to meet with you and discuss the issue concerning the loans made by M Carmody Holdings Pty Ltd ("the Company") to the M Carmody Family Trust ("the Trust").

As confirmed at the meeting the funding for the purchase of the Price Street, Kulin property acquired by the Trust was from the Company in the year ended 30 June 2000 and has led to the family being exposed under Division 7A of the Income Tax Assessment Act 1936 ("1936 Act"). As a consequence the family will suffer financially from the imposition of tax, penalties and interest as well as from the reduction in the franking credits available.

It is our contention that the purchase of the Price Street, Kulin property by the Trust was discussed with you and that you should have from your understanding of the family been aware that funding for the purchase would have to come from the Company. Alternatively you should have enquired as to the source of the funding so as to satisfy yourself that we would not be exposed to the operation of Division 7A.

Also, that you should have provided advice as to the tax outcomes in respect of such action by the Company in terms of Division 7A of the 1936 Act and advised us of actions that may have ameliorated the position, ie, entering into excluded loans under Section 109N of the 1936 Act.

As a consequence of you not advising us correctly the Trust for the purposes of Division 7A is deemed to have received an unfranked dividend in the 2000 year. Also the Company has suffered a debit to its franking account

Further on preparation of the 2000 Financial Reports you should have identified the fact that Division 7A requirements had been breached and advised us at that time, at least then not exposing the family to penalties and interest.

We require that you indemnify us in respect of:

• The additional tax to be paid by Maureen as a consequence of being the residual beneficiary of the Trust for the year ended 30 June 2000.

• Any penalties raised by the Australian Taxation Office in respect of Maureen's amended 2000 assessment.

• Any GIC penalties that are raised by the Australian Taxation Office, in respect of the amended assessment for the [sic] 2000 to Maureen.

• The impact to shareholders generally from the reduction in the franking account based on the maximum individual tax rate of 48.5% by the debit amount to the franking account required from the application of Division 7A."

43 It is clear from the evidence given by Mr Carmody and Mr Watson at trial that a letter in terms of the draft was not sent to Mr Randall. Nonetheless, the draft letter was said to be significant in that this represented the first occasion on which an attempt was made on behalf of the plaintiffs to formulate the grievance that was eventually reflected in the plaintiff's statement of claim.

44 An allegation is made in the draft letter that the purchase of the Price Street property was "discussed with you" but there is a lack of specificity as to when and where the alleged discussion took place and as to whether it preceded the making of the subject contract. Moreover, the 13 September draft does not suggest that the tax implications of the purchase was raised specifically as a matter of concern by Mr Carmody. The key passage (in the first sentence of the third paragraph) points not to any query or matter of information put to Mr Randall but rather to an expectation that Mr Randall, drawing upon his knowledge of the family's affairs, would himself, in his role as adviser, raise with Mr Carmody any matter of concern relevant to the tax implications of the proposed transaction.

45 In other words, the description of what is said to have occurred seems to put Mr Carmody's grievance in this way: at some stage Mr Randall was informed that another property was about to be purchased by Maucarmod. He must have known that this would be done via funds provided by Holdings which could give rise to a tax liability as a deemed dividend under the new regime. Nonetheless, Mr Randall failed to mention or give any warning about this risk.

46 The complaint seems to be not that bad advice was given but, rather, that there was a failure to ask pertinent questions with the result that no advice was given about the risk; or, putting it another way, the absence of any warning amounted to advice that it was safe to proceed with the transaction. I will return to these issues later.

47 The 13 September draft letter was not sent, but in due course Mr Carmody instructed solicitors to inquire into the matter. Thus, by letter dated 2 January 2003 (exhibit 67 at vol 3/504) the law firm McCallum Donovan Sweeney wrote to Priestley's to say that they were instructed to investigate whether any of the Carmody entities had a cause of action against Priestley's relating to the purchase of the Price Street property. They requested copies of all documents relevant to the preparation of the 2000 financial statements including file notes, telephone notes and notes of meetings and all correspondence generated during the period 1 January 1999 to date.

48 It is apparent from a fair reading of the relevant exchanges that the plaintiffs' solicitors did not have clear instructions as to what might be the meeting or telephone conversation or related correspondence bearing upon a discussion between Mr Carmody and Mr Randall about the purchase of the Price Street property. However, it seems that after a careful examination of the documentary materials provided by Priestley's, including telephone records, the plaintiffs' solicitors established that there was a telephone communication between Priestley's' office and Mr Michael Carmody's mobile phone on 23 February 2000 of 3 minutes 16 seconds in duration, for which a charge of $16 was raised by Priestley's.

49 It was a matter of acute controversy in the trial as to whether these documentary materials jogged Mr Carmody's memory about the telephone call in question or whether Mr Carmody's description of what occurred was arrived at as a matter of reconstruction from the relevant documentary materials. However, in any event, by letter dated 24 March 2003 from McCallum Donovan Sweeney to Priestley's, it was put to Priestley's specifically for the first time that a crucial conversation had taken place between Mr Carmody and Mr Randall which was sufficient to found a cause of action against Priestley's (exhibit 72 at p 513).

50 It was alleged by the McCallum Donovan Sweeney letter dated 24 March 2003 that Michael Carmody, on behalf of the Carmody entities, consulted Mark Randall by telephone on 23 February 2000 (having attempted to contact him on 22 February 2000) in order to ascertain whether it was in order for Holdings to purchase the property for the Trust. It was alleged that in the course of the 23 February telephone conversation Mr Carmody was assured by Mark Randall that it was appropriate to purchase the property in this way.

51 The letter from the plaintiffs' solicitors went on to say that as at 23 February 2000 and at all times between that date and 17 March 2000 Priestley's failed to advise Michael Carmody that the sum paid for the property would be a deemed dividend and that this would result in the ultimate beneficiary incurring a liability to pay taxation in respect of that deemed dividend, and would also result in a loss of franking credits in Holdings.

52 It was said further that Priestley's failed at any time after 30 June 2000 to advise Michael Carmody that the purchase price was a deemed dividend and therefore caused Maureen Carmody (who was in that financial year the ultimate beneficiary in respect of the Trust) to suffer further loss by reason of having to pay both interest and penalties in respect to the tax payable on the deemed dividend.

53 Later, by letter dated 19 August 2003, the plaintiffs' solicitors forwarded to Priestley's a copy of the writ of summons and statement of claim that had been settled by senior counsel on their behalf in anticipation of legal proceedings. For ease of reference, I will refer to the enclosure as the "draft statement of claim" bearing in mind that various changes to the statement of claim were made in due course after legal proceedings were commenced.

54 The draft statement of claim set out the history of the relationship between the parties and noted, in par 12, that on 22 February 2000 Michael Carmody, as a director of Maucarmod, executed an offer to purchase the Price Street property. It was said further in par 13 that prior to executing the offer he sought to ascertain from Mr Randall of Priestley's (in accordance with the general practice within the Carmody family of seeking professional advice before committing to significant acquisitions of property), whether there was any reason why Maucarmod as trustee of the Carmody Family Trust should not be the entity purchasing property using funds advanced to it by Holdings. He endeavoured to obtain that advice from Randall by telephoning Randall's Perth office on two occasions prior to executing the offer and, being unable to contact Randall, left messages asking Mr Randall to contact him urgently.

55 The plaintiffs' central allegation is set out in par 14 of the draft statement of claim. I will call this the "plaintiffs' par 14 telephone call allegation. It reads as follows:

14.1 Randall telephoned Michael and spoke to him at approximately 8.20 am;

14.2 Michael thereupon informed Randall of the Offer and of the Kulin Homestead Transaction;

14.3 Michael asked Randall for advice as to whether there was any reason why the Trust should not acquire the Kulin Homestead or why Holdings should not advance the funds to the Trust for the purchase of the Kulin Homestead by the Trust; and

14.4 Randall thereupon advised Michael, in effect, that he saw no reason why the Kulin Homestead ought not be purchased by the Trust pursuant to the Offer, or why the purchase price should not be provided by an advance of funds from Holdings."

56 The draft statement of claim went on to allege that as at 23 February 2000 Priestley's, through Randall, either knew or should have known that if Maucarmod did commit to acquire the Price Street property (described in the claim as the Kulin Homestead) that it could only do so upon a basis of obtaining funds from another source so as to obtain the required purchase price for settlement, and that the likely source of such funds would be from Holdings (par 15). For ease of reference, I will call this the "par 15 likely source of funds allegation".

57 It was alleged further than Randall knew or ought to have known on and prior to 23 February 2000 that when funds had been required in the past in order for the Trust to acquire other properties, that the required funds had been advanced from Holdings to the Trust as loans not required to be repayable in the short term (par 16). The particulars in support of that plea include reference to the purchase of the six properties by the Trust using funds advanced by Holdings in the period 24 February 1988 to 19 May 1995 mentioned earlier including the purchase of the property at unit 3/118 Deanmore Road, Scarborough. I will call this the "par 16 previous knowledge allegation".

58 Under cross-examination at the trial of the action, Mr Randall accepted, having regard to telephone records, that in response to a message left at his office he did initiate a telephone call to Mr Carmody at 8.20 am on 23 February 2000, and that a fee for professional services was rendered by Priestley's in respect of that conversation.

59 However, he disputed that Mr Carmody asked him the questions alleged in par 14.3 of the draft statement of claim or that he responded as alleged. He accepted that the call lasted 3 minutes and 16 seconds and that he had not made any note regarding the conversation.

60 I will return to the controversy between the parties as to what was said during the course of the 23 February telephone conversation in greater detail shortly, as this lies at the heart of the dispute. However, for present purposes, in order to complete the narrative, it will be useful to draw attention to certain notations made by Mr Randall in his own hand upon receipt of the draft statement of claim.

61 Mr Randall's handwritten note as to par 14.1 was "this was a 3-minute call!". His note as to par 14.2 was "conversation which I do not recall exactly may have been along the lines of 'We are buying a house for mum. I am thinking of putting it in the trust, is this okay' ". His note with respect to par 14.3 was "He did not ask this question". Mr Randall's note as to par 14.4 was "I did not say this".

62 For ease of reference, I will call these notations the "par 14 Randall notes".

63 In due course the plaintiffs commenced legal proceedings. The pleadings are set out in the papers for the judge approved 23 March 2005 subject to what I have to say later about the defendants' proposed amendment in terms of the defendants' minute dated 29 March 2005 concerning par 31 of the statement of defence. I will henceforth refer to these documents simply as "the pleadings".

64 The plaintiffs' statement of claim begins by setting out various facts and matters bearing upon the relationship between the parties. It is said in par 8.1 that from about 1 April 1988 until approximately April 2002 the professional accounting services of Priestleys were provided under engagement for reward to the individuals and entities comprising the Carmody family to facilitate the preparing of all required annual statements, income tax returns, required trust and corporations law documentation including pro forma minutes of directors' meetings and annual trust distribution resolutions together with general accounting advice and services as requested from time to time "or as thought appropriate by Randall at his own instigation on behalf of Priestleys".

65 This cluster of services is said to comprise the "retainer agreements". Each of the retainer agreements is said to be evidenced by a course of conduct over the retainer period with particulars being provided of the relevant facts and matters such as Randall routinely attending to the preparation of income tax returns and related documentation and rendering accounts for such services, including accounts in respect of advice provided in response to specific requests as well as advice volunteered by Randall on behalf of Priestleys when considered appropriate. The plaintiffs pleaded that Randall obtained knowledge as to the financial and accounting arrangements for each member of the Carmody family and knowledge going to the affairs of the Carmody family as a whole (par 9).

66 The plaintiffs pleaded that it was a term implied by law into each of the retainer agreements that the defendants would exercise reasonable skill and care at all times in going about the discharge of the subject work for members of the Carmody family (par 10). Further, both Priestleys and Randall owed to members of the Carmody family a common law duty of care to exercise reasonable care in the provision of professional accounting advice so as to avoid any act or omission likely to cause foreseeable loss or damage to any member of the family by the incurring of an unnecessary liability to pay income tax (par 11).

67 The events relevant to the acquisition of the Price Street property and the 23 February telephone conversation are then described along the lines I have previously indicated including references to the par 15 likely source of funds and par 16 previous knowledge allegations.

68 It is said further in par 17 that as at 23 February 2000 both Priestleys and Randall knew, or should have known, as competent providers of professional accounting services, that Div 7A had come into force with the result that an advance by Holdings to the Trust (given that Maucarmod as trustee of the Trust was a shareholder of Holdings) would mean that an advance of funds by Holdings would have to be treated by Maucarmod as a deemed dividend, and thereby as income assessable to taxation by Maucarmod or by the person receiving a distribution of the Trust's net income in the financial year in which the loan funds had been received by the Trust from Holdings. I will call this the "par 17 competent advice allegation".

69 The plaintiffs pleaded in par 18 that in reliance upon the advice received from Mr Randall the offer of 23 February 2000 in respect of the subject property was not withdrawn, as would otherwise have been the case had competent advice been provided as to the potentially adverse taxation implications. Following acceptance of the offer by the vendor on 24 February 2000 Maucarmod and Holdings proceeded to settlement on 17 March 2000 upon the basis that Maucarmod received an advance of $125,611 from Holdings to enable the Trust to complete the purchase. (I note in passing that Holdings Advanced $133,000 but after setting off $7389 against moneys owed by Holdings to the Trust the net sum advanced for the purchase was $125,611).

70 The plaintiffs pleaded in par 19 that in or about August 2000, in conjunction with completing the relevant accounts for the year ended 30 June 2000, Randall prepared and presented to Michael Carmody a minute allocating all net income to Maureen Carmody (continuing the practice which had been annually applied from the financial year ended 30 June 1993).

71 The events giving rise to Maureen Carmody's obligation to pay the so-called "tax debt" of $80,254.90 as at 6 December 2002 are then described ($59,906.91 additional tax; $17,352.70 interest; $2995.30 penalty).

72 The plaintiffs pleaded in par 27 that negligently, in breach of the implied term or alternatively in breach of the alleged common law duty of care pleaded in par 11, Priestleys and Randall, having the knowledge the subject of the par 15, par 16 and par 17 allegations, failed as at 23 February 2000 or at any time thereafter to advise any of the plaintiffs as to the likely adverse tax implications in respect of the advance of funds by Holdings and failed to advise Maureen at the time of preparing her tax return and the operative minute that the amount advanced ought to have been accounted for as a deemed dividend.

73 It is pleaded in par 28 that but for the failures of Priestleys and Randall the subject offer would have been either withdrawn or novated such that Holdings or another member of the Carmody family would have acquired the property in lieu of Maucarmod on behalf of the Trust (par 28.1); that Maureen would not have been nominated to receive the allocation to her of the net income of the Trust so that she would not then have become subjected to the tax debt (par 28.2).

74 It is said further in pars 30 - 32 of the statement of claim that by reason of the defendants being registered agents and by reason of their negligence they are liable to Maureen Carmody in the amount of the tax debt as a result of the operation of s 251M of the Income Tax Assessment Act 1936. By that provision, if, through the negligence of the registered tax agent, a taxpayer becomes liable to pay any additional tax, interest or penalty, the registered tax agent shall be liable to pay to the taxpayer the amount in question.

75 By their statement of defence (in its final form) the defendants admit many of the allegations bearing upon the history of the relationship between the parties. However, as to par 8 of the claim and the allegations concerning the contents of the retainer agreements, the defendants do not admit that the services they were to provide included providing such advice as Randall thought appropriate at his own instigation. According to the defendants, the retainer agreements were to provide professional accounting services for reward including preparing annual statements, income tax returns, minutes of directors' meetings and annual trust distribution resolutions, maintaining company secretarial registers and providing general accounting advice and services as requested from time to time.

76 The defendants stated further that the terms of engagement after 16 February 2000 were contained in a letter from Priestleys to Holdings on behalf of all of the plaintiffs dated 16 February 2000 (P25 @ 81). I digress to say that there was a controversy at trial as to whether this "engagement" letter was received by Michael Carmody on behalf of the plaintiffs prior to 23 February 2000. There was evidence before me that a copy of the letter was signed by him and returned to the accountants. The letter reads in part as follows:

"However, this letter also gives us the opportunity to update our understanding of the scope and objectives of our engagement as your accountant and tax agent. It likewise gives you an input into the defining of our role and we would welcome any comments that you may have.

General

1. The preparation of the annual financial statements and income tax returns for all the entities and individuals associated with your family group, checking assessments and other Tax Notices and dealing with the Australian Taxation Office on your behalf;

2. When requested, advising or instructing management or staff on the maintenance of the accounting and internal control system.

3. When requested, undertaking special assignments for such matters as management consulting services, finance applications, tax planning, business acquisitions and valuations and other similar matters."

77 I note in passing that the engagement letter did not contain any passage purporting to exclude liability for negligence. I will come back to the question of whether it was in fact received prior to 23 February 2000 in due course.

78 The defendants went on to plead that it was an implied term of the retainer agreements that Priestleys would exercise reasonable care and skill in performing work under the retainer agreements to a standard appropriate to the accountancy profession (par 10). They owed a duty at common law to exercise reasonable care and skill in relation to providing advice where it was made clear by the members of the Carmody family that they were seeking considered advice from Priestleys.

79 The defendants admitted that Michael Carmody, as a director of Maucarmod, executed an offer to purchase the subject property on or about 22 February 2000 but pleaded that he did not obtain any advice from the defendants prior to executing the offer. The defendants denied the allegations contained in par 14 of the claim and stated further that the 23 February telephone conversation lasted for 3 minutes 16 seconds (par 14(e)(i)); that prior to the conversation the plaintiffs had not forwarded the offer, or any documentation or information to the defendants, nor discussed the source of funds required to purchase the subject property, nor did so subsequently (par 14(e)(ii)); that the plaintiffs did not at any time, including on the day in question, request any advice in relation to the advancing of funds to Maucarmod, whether as trustee of the Trust or otherwise, from Holdings or any other person, or entity, and no advice was given by the defendants in that regard (par 14(e)(iii)).

80 In following paragraphs the defendants denied that they were liable to the plaintiffs as alleged or at all. They pleaded that Randall knew that Div 7A had come into force on 4 December 1997. It is said that as at 23 February 2000 neither of the defendants as competent providers of professional accounting services knew or should have known of the need to advise Holdings or any of the other plaintiffs of the application of s 109D of the Act to the subject transaction.

81 It is said further at par 33 of the statement of defence that to the extent that the plaintiffs have suffered any loss and damage as alleged, the plaintiffs failed to mitigate the loss and damage by not seeking to have those components of the tax debt comprising general interest charges and penalties remitted or reduced on the basis that the relevant transaction could have been avoided using inter-entity debits and credits; it was not part of a scheme to distribute profits as a loan to avoid income tax and, therefore, was not a transaction of the kind to which Div 7A of Pt III of the Act was intended to apply. By reason of the premises the defendants denied that they were under a duty to provide timely and accurate accounting advice concerning the existence of and likely adverse tax implications upon the transaction and, if, which is denied, the defendants were under a duty to the plaintiffs or any of them, the defendants did not breach that duty.

82 It will be apparent from this summary of the pleadings that I must begin by addressing the plaintiffs' par 17 competent advice allegation. I have to say that, having regard to the expert evidence I mentioned earlier and the legal principles I will come to later, I have little difficulty in concluding that, if Priestleys and Randall were sufficiently instructed, they should have known as at 23 February 2000 that under the new tax regime an advance by Holdings to Maucarmod to purchase a property in the latter's name could be characterised as a deemed dividend.

83 Mr Randall said in evidence that he knew of the amendments. There appeared to be little dispute that if he had been sufficiently briefed by his client as to the nature of the subject transaction, and the question had been put to him squarely as to whether an advance by Holdings to an associated company might be treated as a deemed dividend, he and any other competent adviser would have been obliged in the proper performance of his duties to answer in the affirmative. I will not dwell upon this point because the matter essentially in issue between the parties in the present case concerns the nature of the retainer, the nature of the advice sought by the plaintiffs and whether Mr Randall was sufficiently instructed to give the advice sought.

84 I must therefore proceed to make certain determinations as to the nature of the duties to be performed by the defendants as a consequence of the relationship in existence between them as at 22 February 2000 being the date on which Mr Carmody signed the offer in respect of the subject property. This requires that I give consideration not only to evidence bearing upon the course of dealing between the parties over a number of years but also to the letter of 16 February 2000 referred to in the statement of defence which is said to have reflected the terms of engagement after that date.

85 More particularly, there is a contentious issue as to whether the accountancy services to be provided by Randall on behalf of Priestleys included the provision not only of accounting advice and services as requested from time to time but also advice "as thought appropriate by Randall at his own instigation". I will call this the "advice at own instigation issue".

86 Having determined the nature of the services to be provided, it will then be necessary to ascertain what duties of care, if any, were to be observed by the defendant and to proceed to the question of whether the relevant facts and matters gave rise to any breach of duty. I feel obliged to keep steadily in mind a submission put forcefully by counsel for the defendants that the nature of the service to be provided, and thus the care to be exercised, will inevitably be affected by the nature of the query raised with the adviser and the surrounding circumstances. This underlines the importance of the factual findings which must be made as to the nature of the relationship between the parties and the contents of the exchanges between them at the relevant time.

87 It appears to be common ground between the parties that in response to a message left at his office, Mr Randall telephoned Mr Carmody on the morning of 23 February 2000. However, findings must be made as to what occurred in the course of that conversation and whether the plaintiffs' have made out the allegations in par 14 of the statement of claim. I remind myself in passing that the plaintiffs bear the burden of proof in that regard and must satisfy me on the balance of probabilities that the matters contended for by the plaintiffs occurred.

88 I am conscious that certain events which took place later will have a bearing upon the par 14 telephone call issues. For example, I must give consideration to the way in which Mr Randall prepared the accounts in respect of the year ending 30 June 2000. I must look also at the events surrounding preparation of the 13 September draft letter and the later events which led to the 23 February telephone conversation being identified as the crucial call. It will be necessary to determine what weight should be given to the par 14 Randall notes.

89 Findings as to matters of this kind will assist me in determining whether any duties of care were breached. It will be necessary also to determine whether there is a causal connection between the alleged breach and the loss allegedly suffered.

90 Put shortly, I must be satisfied that if Mr Carmody had received the advice he claims he ought to have received, then he would have taken steps to withdraw the subject offer and to reconstitute the transaction so that the tax debt would not have been incurred. There is also the question of whether liability for the alleged loss could have been averted by taking remedial action after 23 February 2000 which might have led to the accounts and related minutes being prepared in a different form. There is a further issue concerning mitigation of loss.

91 Before turning to these various issues, it will be useful to review the relevant legal principles.

92 Until comparatively recently, the mutual rights and duties of a professional person (such as a solicitor or accountant) and the client were regarded as regulated exclusively by the express and implied terms of the relevant retainer. However, the law has now evolved to the conclusion that concurrent liabilities in both contract and tort may arise in cases of professional negligence. Prima facie, a plaintiff may sue a solicitor or an accountant in either contract or tort or both. Where concurrent liability in tort and contract exists the plaintiff has the right to assert the cause of action that appears to be the most advantageous to him in respect of any particular legal consequence: Astley v Austrust Ltd (1999) 197 CLR 1 at 20.

93 Where a professional provides a service to a client, in the absence of an express term to the contrary, an implied term of the contract under which the service is supplied is that the professional will exercise reasonable care and skill in providing the service. Where there is a contract, the extent of the professional's liability to the client may depend upon or be affected by the terms of the contract. The terms may confine or exclude the existence of a duty of care owed by one part to the other: see generally Walmsley, Abadee & Zipser: "Professional Liability in Australia" at par 1.30 to par 1.320.

94 In Midland Bank Trust Co Ltd v Hett Stubbs & Kemp (a firm) [1979] Ch 384 the Court rejected a plea that a solicitor, who had been instructed to advise the client on the tax implications of exercising an option to purchase land, should also have checked to see whether the option was registered. Oliver J said at 402 that there is no such thing as a general retainer in that sense. The expression "my solicitor" is as meaningless as the expression "my tailor" or "my bookmaker" as establishing any general duty apart from that arising out of the particular matter in which his services are retained. The extent of his duty depends upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do. In the same case the learned Judge observed at 434 that a contract gives rise to a complex of rights and duties of which the duty to exercise reasonable care and skill is but one.

95 It follows that even where concurrent liability in contract and tort exists careful consideration must be given to the contractual matrix with a view to defining the task undertaken by the professional on behalf of the client from which the duty to exercise care may be thought to arise. For example, in Mohr & Mohr v Cleaver & Cleaver [1986] WAR 67 the second respondent was an accountant who had prepared tax returns for a company that made some ill-fated loans. The lending company had made an informal telephone enquiry of the accountant as to the advisability of advancing the money. That informal enquiry was incidental to the main purpose of the telephone call but nonetheless the lending company was left with an impression that it was safe to proceed. The Full Court in this State upheld the trial Judge's decision to dismiss the claim against the accountant for negligence.

96 The Full Court held that the accountant owed no duty of care to the appellants because he did not carry on the business of giving advice or information, nor had he held himself out as doing so. Further, the lending company had not made it clear to the accountant that it was seeking considered advice. Moreover, according to Rowland J, the advice was sought after the agreement to lend the money had been made, and it was not the lending company's case that it was seeking advice as to whether it should carry the agreement into effect.

"I would hold that on the facts of this case no duty of care arose. I would so hold because I do not think that it could be held that the appellants had made it clear to the second respondent that they were 'seeking considered advice'. All that could be said, I think, is that Mrs Mohr, in passing and in the course of a telephone conversation initiated by the second respondent for some other reason, was asking for his off-the-cuff or kerb stone opinion. And if that could be said to give rise to a duty of care the legal obligation was to take such care as was reasonable in those circumstances. The circumstances were that the enquiry made, as the trial Judge found, was an 'incidental' enquiry made in a telephone conversation initiated by the second respondent for another purpose. The second respondent was not asked to make any specific enquiries. He was not asked for hard information. He was not in his professional capacity retained to do anything. He was simply asked for his opinion and the opinion asked for was, as I have said, a 'kerb stone' opinion. But if at the kerb stone the giving of off-the-cuff opinions may call for the exercise of reasonable care the care which satisfied that test is controlled by that circumstance."

98 It follows from the reasoning in these cases that the scope of the duty of care and the nature of the standard of care to be exercised by the professional will depend upon the circumstances of each case including the quality of instructions given and the urgency of the situation. However, although the contract of retainer will be an important indicium of the nature of the relationship which gives rise to the common law duty of care, it will not chart exclusively the parameters of that duty, for it has been held in some cases that the duty of care may require the taking of positive steps beyond the specifically agreed professional task or function where the steps in question are necessary to avoid a real and foreseeable risk of economic loss being sustained by the client: Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642; Dalleagles Pty Ltd v Australian Securities Commission (1991) 4 WAR 325 at 332.

99 No duty of care will be owed to the plaintiff unless injury or loss to the plaintiff is reasonably foreseeable. However, in the context of professional negligence claims, injury or loss to a client or patient as a result of careless conduct by the professional is nearly always foreseeable to a person in the professional's position.

100 Until recently, the decided cases suggested that where the loss is purely economic loss, it is necessary to establish that a relationship of proximity existed between the claimant and the professional person arising from known reliance on advice or the assumption of responsibility by one party to the other. This must now be read subject to later decisions of the High Court which suggest that the notion of proximity in addition to foreseeability is of limited use. The circumstances that call a duty of care into existence will arguably be determined by reference to various discrete categories of liability apparent in the previously decided cases.

101 I pause to say that in the present case there is no need to explore issues of this kind in depth, for the decided cases clearly show that the relationship of accountant and client gives rise to a duty of care, and this was not seriously contested by the defendants. The central issue concerned the nature of the advice sought and the scope of the duty of care, if any, in the circumstances of the case.

102 Where a defendant owes a duty of care to a plaintiff, the defendant is liable to the plaintiff if the defendant breaches the duty of care. In negligence claims against professionals, the usual approach of courts, in order to determine what a reasonable man would do by way of response to the risk, is to consider the standard of care and skill demonstrated by the reasonable professional. The basic rule is that the professional is required to exercise the care and skill of the ordinarily skilled professional within the same profession: Voli v Inglewood Shire Council [1963] HCA 15; (1963) 110 CLR 74 at 84. Also see Walmsley, Abadee & Zipser (supra) at par 1.440 to par 1.450.

103 The duty of care of a professional person and the need to warn of risks was considered by the High Court in Rogers v Whitaker [1992] HCA 58; (1992) 175 CLR 479. It appears that in the case of a medical practitioner the law imposes a duty to exercise reasonable care and skill in the provision of professional advice and treatment. The standard of reasonable care and skill required is that of the ordinary skilled person exercising and professing to have that special skill, which in that case was the skill of an ophthalmic surgeon specialising in corneal and interior segment surgery.

104 In Heydon v NRMA Ltd [2000] NSWCA 374; (2000) 51 NSWLR 1 Malcolm J said (at 53) that in his opinion the approach adopted in Rogers v Whitaker (supra) was applicable to legal practitioners. It was a nice question whether there was a duty on the part of a barrister to volunteer advice beyond the scope of the brief, although counsel may well and generally would volunteer additional advice which was considered relevant, but not specifically raised in the instructions. Malcolm J said further that the content of the duty of care and the liability is the same whether it is founded on contract in the case of a solicitor, or whether it is founded on a duty of care in tort in the case of a barrister. In each case the duty is to apply the relevant degree of skill and exercise reasonable care to carrying out the task. There is no implied undertaking that the advice is correct, but only that the requisite degree of professional skill and care has been exercised in the giving of the advice. Where there is reason for doubt or there are risks which a person possessing the relevant degree of skill and competence should perceive, it follows from the above that there may be a duty to warn of the kind recognised by their Honours in Rogers v Whitaker (supra).

105 In Hawkins v Clayton (1988) 164 CLR 539 it was indicated by Deane J at 583 that, in the case of the solicitor, an action for breach of the contractual duty lies when the breach occurs but an action for breach of the tortious duty lies only if and when damage has been sustained and the cause of action is complete.

106 There are various decided cases which suggest that where an accountant who provides tax advice professes expertise, his or her liability will be measured against the standard of a reasonably competent tax adviser specialising in the subject area.

107 For example, in Pech v Tilgals (1994) 28 ATR 197 it was held that the accountant in question failed to exercise the care and skill of a reasonably competent accountant and tax agent in that, although aware of the transfer of the subject land, he made no reference to it in the tax returns under notice, made no appropriate enquiries of the taxpayers as to the transaction, and was either not aware of the nature and effect of a "deemed dividend", as he should have been, or overlooked this aspect of the matter. The taxpayers accordingly established causes of action in contract and in tort.

108 In Tip Top Dry Cleaners Pty Ltd v Mackintosh (1998) 98 ATC 4346 a proposal was devised by a solicitor (Rankine) under instruction from the plaintiff taxpayer's accountant and tax agent (Mackintosh) to reduce a potential tax liability on accrued profits by a pre-purchase of trading stock. The professional advisers did not deny that a contract with the taxpayer existed nor that they had a duty of care. They defended the claim essentially on the basis that the risk of incurring additional tax had been sufficiently outlined to the taxpayer. This line of defence succeeded.

109 Debelle J held that both the solicitor and accountant owed the taxpayer a duty of care. In the circumstances, there was not perceivable difference between the degree of skill and care required of a chartered accountant or solicitor giving tax advice. The scope of the duty depended on the client's need for advice. However, because of his involvement with the taxpayer, the duty of the accountant Mackintosh extended to giving advice which the taxpayer appeared to need, regardless of whether it had been specifically requested.

110 It was held that Mackintosh and Rankine had discharged their duty of care in relation to the transaction advice. Further, as the taxpayer had entered into an entirely different transaction from that advised, its claim for negligence failed. Even if the solicitor and accountant had been negligent, the taxpayer failed to prove that the negligence had caused it any loss. Although it had incurred loss in the form of penalties and interest, that alone was not sufficient. The taxpayer had to prove that Mackintosh and Rankine had caused that loss by proving that, had it received proper advice, it would not have made a pre-purchase of petrol and would not have lodged the tax return in the form in which it did.

111 Let me now return to the issues in the present case.

112 It will be useful to begin by looking at the nature of the relationship between the parties prior to 16 February 2000; that is, prior to the preparation of the so-called "engagement" letter that was sent to Holdings. To my mind, there can be little doubt that from about 1 April 1988 up to 16 February 2000 the professional accounting services of Priestley's were provided under engagement for reward to the individuals and entities comprising the Carmody family to facilitate the preparation of all required annual statements, income tax returns, and trust minutes together with general accounting advice and services as requested from time to time.

113 The ongoing contractual relationship between the parties undoubtedly gave rise to a situation in which Mr Randall and his colleagues at the accounting firm assumed responsibility for attending to the matters just described and responding to requests for advice as to the tax implications of various matters. It was known to the defendants that the plaintiffs relied upon their advisers and were generally inclined to act upon the advice provided. It follows from the reasoning in the decided cases that in these circumstances the defendants were subject to a duty of care arising concurrently in contract and in tort at common law in dealing with any matter falling within the range of services generally provided that required specific action or a considered response.

114 I arrive at this conclusion having regard to the evidence given by Mr Carmody and Mr Randall and to the correspondence and other documents directed to Mr Carmody. For example, the exhibits at trial included various circulars put out by the defendant firm concerning changes to the statutory regime bearing on the affairs of a farming business and these documents were clearly designed to encourage a belief in clients of the firm that up to date advice could be obtained from the firm in respect of a range of matters. There are also various specific letters written by Mr Randall to Mr Carmody which confirm that in various ways the defendant firm was taking steps to ensure that tax liabilities would be kept to a minimum and that the firm was putting in place the appropriate steps and documentation in that regard.

115 For example, by letter dated 9 December 1993 Mr Randall submitted to Mr Carmody income tax returns with attached schedules to be signed by himself and members of his family. It is said in that letter that the distribution from the M B Carmody Family Trust was being received tax free by Maureen. Enclosed was a letter from Maureen gifting the amounting of income back to the Trust with a view to avoiding any loan balance building up in the Trust. Mr Carmody was to arrange for Maureen to sign the letter and have it returned to the defendant firm also.

116 However, it is important to keep in mind that the range of matters which might give rise to a need for advice was very wide. It is apparent from the correspondence and circulars before me that capital gains tax, superannuation, tax deductions and depreciation were among the many matters being kept under notice. Indeed, the cross-examination of Mr Carmody by counsel for the defendants gave rise to this exchange:

"Do you recall what some of the significant issues were over that period from 1988 to early 2000?---Well, it would have just been a range of issues. We would have leased tractors. I know we leased tractors, or there could have been a question of whether we HP'd it or leased it. Of course, the acquisition of these places, the, I suppose, general accounting day-to-day stuff, and there was - I was going to say the stock issues, but I mean they were always part of the annual accounts. Yes, I suppose, to get onto taxation, capital gains, FPT, all those range of issues that you run into running a farm or running a business.

Would it be an accurate description to describe those issues as many and varied?---Yes, it would be, I'd say."

117 It follows from the reasoning in the decided cases that in circumstances of this kind care must be exercised in defining the services to be performed by and responsibilities of the defendant firm, especially in regard to the plaintiffs' contention at par 8.1 of the claim that the services to be provided from time to time included the provision of advice as thought appropriate by Mr Randall at his own instigation on behalf of Priestleys.

118 I am of the view, in general terms, that in circumstances where Mr Randall or his colleagues from the firm were performing well defined tasks pursuant to a well defined pattern of performance such as the preparation of financial statements, or the provision of advice in response to a specific request such as the availability of a tax deduction in respect of some item of expenditure, then the nature of the contractual relationship between the parties would require that the defendant firm proffer any advice reasonably necessary in order to protect the client's interests in regard to the matter in hand whether expressly requested or not. I find support for this in the decided cases mentioned earlier including the Tip Top Dry Cleaners case (supra).

119 However, at the same time, I am conscious, having regard to the decided cases, and especially the Midland Bank Trust case (supra) and Mohr v Cleaver (supra), that different considerations might apply where the client raised a new matter in circumstances of urgency and without himself defining to some extent the nature of the advice being sought. In other words, I give weight to the notion that unless special arrangements are made there is no such thing as a general retainer and the nature of the services to be provided and the scope of the related duty of care will depend upon the circumstances in which the advice is sought. An accountant cannot be expected at a moment's notice to address every conceivable matter that might impact adversely upon his client's business and, in any event, the client might not be prepared to pay for advice bearing upon possibilities that were of minor importance or too far-fetched.

120 It emerges, then, that it would be inappropriate and possibly misconceived for me to attempt to make a finding in general terms as to whether the retainer or contract between the parties included an additional term of the kind contended for by the plaintiffs without having examined closely the circumstances in which the particular duty of care is said to have arisen. However, before proceeding to examine the relevant circumstances, I feel obliged to make the obvious point in passing that the existence of a longstanding contractual relationship between the parties combined with a pattern of reliance upon Mr Randall is a relevant factor in the situation. The decision in Mohr v Cleaver (supra) demonstrates that the weight to be given to an off the cuff opinion may be affected by the nature of the previous relationship between the parties.

121 Before leaving this aspect of the matter I must determine whether the observations I have just made are affected by the 16 February engagement letter.

122 Mr Randall gave evidence at the trial that in February 2000 Priestleys decided to review and confirm in writing its arrangements with the Carmody family. The reason for this was the implementation of GST on taxable supplies after 30 June 2000 and the implications that would have on fees. His evidence in that regard is consistent with the terms of the letter which was aimed at defining the role of Priestleys as accountant and tax agent.

123 I remind myself briefly that in referring to the services to be provided, mention was made of the preparation of financial statements and income tax returns. Importantly, for present purposes, it was said also that the accountants would be responsible for "when requested, undertaking special assignments for such matters as management consulting services, financial applications, tax planning, business acquisitions and valuations and other similar matters".

124 In his evidence at trial Mr Randall said that the letter dated 16 February 2000 was returned to Priestleys a few days later, duly signed. The signature of Mr Carmody appeared on the letter. It was common ground at the trial that the original of the letter bears a notation "Returned 2/2000" (transcript 165).

125 Mr Carmody said in his evidence-in-chief (transcript 103) that he remembered receiving it, and signing it, and sending it back to Mr Randall. Under cross-examination he acknowledged that he probably would have dealt with it (in the sense of signing it and returning it to the accountants) "fairly promptly". He agreed that if it took two or three days to arrive he would have signed it and sent it back straight away (transcript 128). In the course of re-examination the possibility was canvassed with him that he might not have collected the letter from his mail box prior to 23 February 2000, but this evidence was not specific, and I did not find it convincing (transcript 164).

126 Having regard to the evidence on this point as a whole, I find that the letter in question was received and signed by Mr Carmody prior to 23 February 2000 and can therefore be said to represent a more precise definition of the terms of the retainer. Having regard to the previous course of dealing between the parties, I am of the view that in signing the letter Mr Carmody was acting on behalf of the various individuals and entities comprising the Carmody family group with the result that the terms of the contract reflected in the letter are applicable to the plaintiffs generally. The letter therefore becomes an important point of reference in determining the responsibilities of the defendant firm.

127 However, to my mind, that conclusion does not to any significant extent displace or override the observations I made earlier concerning the nature of the retainer. The description of Priestley's role provided in the letter is succinct but nonetheless couched in general terms which reflect the previous course of dealing between the parties and clearly allows for the Carmody family to seek advice from time to time upon tax issues affecting their business or upon the tax implications of a specific transaction.

128 It follows from this, as I noted in earlier discussion, that the service to be provided in respect of a particular matter and the scope of the related duty of care will, in the final analysis, be determined by the nature of the advice sought and the particular circumstances. In weighing up the relevant circumstances it will be necessary to take account of the fact that if advice was sought from Priestleys by Mr Carmody on behalf of the plaintiffs, it was not being sought by a stranger but by an existing client who was known to act upon advice given to him.

129 Accordingly, I must now turn to the circumstances bearing upon the plaintiffs' par 14 telephone call allegation.

The plaintiffs' par 14 telephone call allegation

130 There is no dispute that on 22 February 2000 Mr Carmody and his brother, on behalf of Holdings, signed an offer in respect of the Price Street property. The form of offer contained a clause requiring that a competing offer be cancelled by 28 February 2000. The Carmody offer document shows that the Carmody offer was accepted by the vendors on 24 February 2000. All of this suggests that Mr Carmody was keen to acquire the property and that in his mind the transaction was attended by a degree of urgency. When these factors are considered in conjunction with the brevity of the crucial telephone call on 23 February 2000, I am inclined to doubt that Mr Carmody was looking for detailed advice or the answer to an intricate problem as he sought to make contact with his accountant, Mr Randall.

131 The relevant telephone records establish that in response to messages left at his office Mr Randall contacted Mr Carmody by phone and spoke to him for 3 minutes 16 seconds. In the course of his evidence at the trial Mr Randall accepted that he did have a telephone conversation with Mr Carmody on 23 February 2000. He said that he was unable to recall the contents of the conversation and confirmed that he did not make any note concerning it. It was an undisputed fact that Mr Randall later charged a fee referable to the conversation. It was common ground at the trial that whatever was said in the conversation was not followed up by any written commentary or advice. Whatever was said in the course of the telephone call apparently did not prompt Mr Carmody to seek any further information from Mr Randall, in writing or otherwise, or deter Mr Carmody from proceeding with the transaction.

132 It was an undisputed fact at the trial that the financial statements for Holdings and Maucarmod in respect of the year ended 30 June 2000, prepared under the supervision of Mr Randall, reflected the pattern of previous purchases whereby an advance made by Holdings to facilitate the purchase of the property by Maucarmod was treated as a loan, notwithstanding that such an approach under the new tax regime established by Div 7A would give rise to a deemed dividend. The financial statements were prepared from primary records, including bank statements and cheque butts, showing that the funds to acquire the Price Street property had been drawn from the Holdings' account.

133 These facts and matters of themselves, when considered in combination, provide a basis for inferring that as at 23 February 2000 Mr Carmody was minded to seek advice of some kind from Mr Randall in respect of the pending Price Street transaction and that the advice given was sufficient to put his mind at rest. The indications are, having regard to the brevity of the conversation, that the question asked and the answer given was in a general form. Further, bearing in mind the way in which the financial statements were subsequently prepared, it seems unlikely that any mention was made of the deemed dividend matter.

134 It is against this background that I turn to the recollections of the two parties to the conversation. Mr Carmody said in evidence at the trial that he recalled receiving a telephone call from Mr Randall on his mobile telephone. During this telephone conversation he told Mr Randall what he had done, that is, that he had executed an offer on behalf of the trustee company (Maucarmod) and asked whether it was okay to proceed. According to him, Mr Randall said that it was okay, and he was very relieved to hear this as he had been worried about it since signing the offer the day before.

135 Mr Carmody, in his evidence-in-chief, then proceeded to refer to matters which went to the heart of the par 14 telephone call allegation. On his account, he went on to say to Mr Randall that he thought it would be okay because that was the way "we had bought all the other properties" but he thought he should check. He said further that he recalled asking whether it was okay for the purchase funds to be paid out of Holdings. Mr Randall said that it was fine to use funds from Holdings. Mr Carmody then said words to the effect: "I'll just pay it out of the company account and you'll sort it out at 30 June".

136 According to Mr Carmody, his accountant then went into a technical explanation about the mechanics of how the payment would be dealt with, that is, to the effect that there would be an inter-company loan. He did not discuss the taxation effect of the transaction. Mr Randall did not advise him that the transaction would result in the payment of a dividend to the Trust. As a consequence of this conversation Mr Carmody felt relieved and later paid from the Holdings cheque account the balance of the 10 per cent deposit required.

137 Counsel for the defendants cross-examined Mr Carmody at considerable length with a view to testing the reliability of that part of Mr Carmody's evidence at trial bearing upon the plaintiffs' par 14 telephone call allegation. As I have indicated, the tenor of Mr Carmody's evidence-in-chief was that in the 23 February 2000 telephone call, which lasted 3 minutes 16 seconds, he conveyed to Mr Randall that he had signed an offer whereby the trustee company, Maucarmod, would purchase the Price Street property using funds advanced by Holdings. He (Mr Carmody) was told that it would be fine to proceed in that manner.

138 It was put to Mr Carmody by the cross-examiner in various ways that the evidence in question amounted to a reconstruction of what was said with the benefit of hindsight and that Mr Carmody did not have any precise recollection of the conversation. It will be useful to look at the details of the cross-examination.

139 Mr Carmody acknowledged that in the years preceding the subject telephone call he and his family operated various companies in addition to the defendant companies and that he was in the habit of giving instructions to and receiving advice from Mr Randall in relation to "a bundle of entities" (transcript 121). He agreed that the telephone was used as to the vast majority of their communications and that if he were purchasing a property he would mainly make a general enquiry as to whether it was "okay to go ahead in this way?". He would not quote any tax Acts or anything of that kind (transcript 134). However, he did have an expectation that Mr Randall would advise him in respect to any matter that "affects how you do things" even though he might not have been asked expressly about it (transcript 127).

140 When Mr Carmody was taken to the telephone records he agreed that he did not have any specific recollection as to what was said in those calls. As to call number 205 which lasted 32 minutes 9 seconds he was prepared to "hazard a guess" that it would have been about the preparation of annual returns because the call occurred at that time of the year (transcript 131).

141 As to the subject call, Mr Carmody agreed that he could not remember where he was when he took the call, although being at 8.20 am in the morning, he "could well have been driving" (transcript 138). At a later stage in the cross-examination, he said that "when the matter became active I recalled that I had had a conversation with Mark". He said further that he "wouldn't have been able to pinpoint it to the 23rd" and it could have been the 24 or 25 February (transcript 153). Mr Carmody acknowledged that the conversation took place after he had signed the offer which was contrary to his usual practice of seeking advice from his accountant before entering into a transaction.

142 When the cross-examiner pressed Mr Carmody as to what was said, this exchange occurred:

"During your conversation with Mr Randall on 23 February 2000 did you raise capital gains tax issues or implications about the purchase of the Price Street property with him?---I can't remember raising any particular issues. It was just, was it okay to proceed the way we were? I was very concerned by that time to know because the offer had already gone in. I can't remember raising it. I just wanted to know if it was okay to go ahead in the way we normally did. I can't remember raising any great issues on it, no.

Did you tell him how much would be loaned by Holdings?

---No, I didn't - I might have told him the purchase price but I can't remember touching on the purchase price. I might have. I can't remember touching on it. The phone call to me was extremely important to satisfy myself that it was okay to go ahead and that's what I sort of recall it for. It was a great relief to have that call and let me know what I had done was okay, and I must have expressed some - either expressed it, or my tone of voice was such that my worry was evident.

Can I ask you to repeat as best you are able, word for word, the conversation that occurred on 23 February 2000?---As best I'm able, I suppose. I mean, I can remember the main parts of it, and of course I would have said hello. I did thank him for ringing because that was an issue that I was very keen to hear about. I mean, it was a call I was keen to have, you know, a conversation I was keen to have, and when I said 'We're buying a house' or words to this effect, 'We're buying a house in town, and we're buying it in the name of the trust. Is that okay?' - that's when I thought he said 'Yes, that's okay,' and I said, 'I mean, we're paying for it with the company, the company's paying for it' - but I was very specific - 'We're buying it in the name of the trust.' I wanted to be sure about what that - - -

What words did you use when you said that, when you said, 'I was very specific'? What did you say to him? You said, 'We're buying a property'?---I said, 'We're buying it in the name of the trust but - the company's paying for it but it's going to be in the name of the trust,' so I was then - I mean, I'm sure they're not the exact words but pretty close to it.

And what was his response?---That it was fine, it was okay."

143 When it was put to Mr Carmody that as at 23 February the only matter of concern to him was in whose name the property should be purchased, he contested this and said that it was a matter of concern also as to who was paying for it (transcript 145). He acknowledged that he could not remember precisely the date on which the words comprising the conversation were said but he could remember what was said (transcript 147).

144 Mr Carmody accepted under cross-examination that at the time he spoke to Mr Randall the offer had not been sent to Mr Randall and nor had Mr Randall seen a copy of the offer and acceptance. Mr Randall did not know what Mr Carmody was ringing about. Mr Carmody accepted that the first Mr Randall would have known about the matter was when he (Mr Randall) phoned Mr Carmody back at 8.20 am on a day after the offer and acceptance had been signed (transcript 138). The next time that anything was said about the transaction was on settlement day, 17 March 2000 on which occasion there was some discussion about fringe benefits tax issues (transcript 139).

145 The cross-examiner proceeded to question Mr Carmody about various events that took place after the plaintiffs' new accountant, Mr Weston, had drawn attention to the deemed dividend issue.

146 Mr Carmody acknowledged that when members of the Carmody family met with Mr Randall on 3 September 2002 to discuss a "serious matter" he did not put an allegation to Mr Randall directly to the effect that he had informed Mr Randall at the time of the transaction that the funds were to be advanced by Holdings and that Mr Randall had got him into trouble by not advising against the transaction (transcript 143).

147 Mr Carmody acknowledged that Mr Weston had prepared the draft letter of 13 September 2002 addressed to Priestleys. Mr Carmody acknowledged that the 13 September draft letter reflected his discussion with Mr Weston and was checked by him. He did not say that the draft was incorrect, notwithstanding that it made no mention of a telephone call shortly after the offer was signed. Mr Carmody acknowledged that the 13 September draft put Mr Carmody's contention in this way: "the purchase of the Price Street, Kulan property by the Trust was discussed with you and that you should have from your understanding of the family been aware that funding for the purchase would have to come from the company" (transcript 155 - 156).

148 Mr Carmody acknowledged that the plaintiffs' par 14 telephone call allegation was not formulated until after Mr Carmody's solicitors had examined telephone records and notes and memoranda on the Priestleys' file. By this time it had become apparent that a telephone call of 3 minutes 16 seconds was made on 23 February. By then it was also apparent that Mr Randall did not have any note or record of what was said.

149 Mr Carmody acknowledged that the plaintiffs' par 14 telephone call allegation was set out initially in a letter from the plaintiffs' solicitors dated 24 March 2003 to Priestleys, being three years after the telephone call took place and about six months or so after the deemed dividend issue had been brought to the plaintiffs' attention by Mr Weston (Exhibit 72/transcript 151).

150 In that letter the allegation was formulated in this way:

"Mr Michael Carmody, on behalf of Holdings, the Trust, himself and other members of his family, consulted Mark Randall by telephone on 23 February 2000 (having attempted to contact him on 22 February 2000) in order to ascertain whether it was in order for Holdings to purchase the property for the Trust. At that time he was assured by Mark Randall that it was appropriate to purchase the property in this way."

151 Mr Carmody agreed under cross-examination that this description of what allegedly took place in the course of the subject telephone call was not correct in that he was not in fact seeking to ascertain whether it was in order for Holdings to purchase the property but rather whether it was in order for Maucarmod to purchase the property with funds provided by Holdings (transcript 151). Mr Carmody could not provide any clear explanation as to why the allegation was put in this form other than it might have been "a typo" or that it "slipped through the net, so to speak" (transcript 152).

152 Mr Carmody could provide no explanation as to why the first version of the plaintiffs' par 14 telephone call allegation was not put forward until 24 March 2003 and agreed that he did not ask his solicitors to correct the letter or send another letter in order to put the plaintiffs' par 14 telephone call allegation correctly; that is, as presently formulated in par 14 of the statement of claim (transcript 152).

Carmody & Ors v Priestley & Morris Perth Pty Ltd & Anor [2005] WASC 120

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (272 paragraphs)

Carmody & Ors v Priestley & Morris Perth Pty Ltd & Anor [2005] WASC 120 (15 June 2005)

Parties

Legislation Cited (2)

Cases Cited (19)