Gadens Lawyers Sydney Pty Limited v Symond - [2015] NSWCA 50 - NSWCA 2014 case summary — Zoe

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Gadens Lawyers Sydney Pty Limited v Symond

[2015] NSWCA 50

Court of Appeal (NSW)|2014-08-19|Before: McColl JA, Gleeson JA, Beech-Jones J

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At a glance

Source facts

Court

Court of Appeal (NSW)

Decision date

2014-08-19

Before

McColl JA, Gleeson JA, Beech-Jones J

Catchwords

174 CLR 64 D'Orta -Ekenaike v Victoria Legal Aid [2005] HCA 12
223 CLR 1 Heydon v NRMA Ltd (No 2) [2001] NSWCA 445
53 NSWLR 600 Johnson v Perez [1988] HCA 64
166 CLR 351 Mamo v Surace [2014] NSWCA 58

Source

Original judgment source is linked above.

Catchwords

174 CLR 64 D'Orta -Ekenaike v Victoria Legal Aid [2005] HCA 12223 CLR 1 Heydon v NRMA Ltd (No 2) [2001] NSWCA 44553 NSWLR 600 Johnson v Perez [1988] HCA 64166 CLR 351 Mamo v Surace [2014] NSWCA 5886 NSWLR 275 Metwally v University of Wollongong [1985] HCA 2860 ALR 68 Mills v Commissioner of Taxation (2011) 198 FCR 89 Mills v Commissioner of Taxation [2012] HCA 51216 CLR 388 Ng v Filmlock Pty Ltd [2014] NSWCA 389 Sellars v Adelaide Petroleum NL [1994] HCA 4(1994) 179 CLR 332 Suttor v Gundowda Pty Ltd [1950] HCA 35175 CLR 51 Water Board v Moustakas [1988] HCA 12

Judgment (34 paragraphs)

[1]

Pty Ltd [2013] NSWSC 955 Wardley Australia Ltd v Western Australia [1992] HCA 55; 175 CLR 51 Water Board v Moustakas [1988] HCA 12; 180 CLR 491 Category: Principal judgment Parties: Gadens Lawyers Sydney Pty Limited (Appellant) John Joseph Symond (Respondent) Representation: Counsel: J de Wijn QC / D McInerney (Appellant) AJ Payne SC / JO Hmelnitsky SC / MS Symon (Respondent)

[3]

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] HEADNOTE [This head is not to be read as part of the judgment] In 2003, the respondent (who was the founder of Aussie Home Loans) sought legal advice from a tax partner of the appellant as to the tax consequences of a revised ownership structure of the business which would involve its corporatisation. One aspect of that advice concerned a tax effective means by which the respondent could continue to borrow funds from the business to construct his home at Point Piper. The appellant provided the respondent with advice and a restructure was effected in 2003 and 2004. Part of the restructure included a mechanism whereby the respondent could withdraw funds from the Aussie Home Loans Group by redeeming preference shares issued to him by the new corporate vehicle, AHL Holdings Pty Ltd (Holdings), that owned the entities making up the Group. During the financial years ending 30 June 2004, 2005 and 2006, the respondent drew down around $57 million. The manner in which the respondent had extracted funds out of the business attracted the ATO's attention and in 2007 it commenced an audit of the respondent's affairs. This led to a deed of settlement with the Commissioner of Taxation in December 2007 in which the respondent agreed to pay the sum of $7,018,864 (comprising tax, penalties and interest). As part of the settlement, Holdings agreed to deduct the amount of $5,014,286 from its franking account, which it maintained in accordance with s 200.15 of the Income Tax Assessment Act 1997 (Cth). In 2009 the respondent instituted proceedings against the appellant seeking damages due to the appellant's negligence, breach of contract and contravention of provisions of the Trade Practices Act 1974 (Cth). The appellant argued that the respondent had suffered no loss because the benefit of the restructure as implemented exceeded the amount paid by the respondent under the settlement and related expenses. The "benefit" of the restructure was said to arise because profits in the 2005 and 2006 years were not distributed to the respondent in those years and accordingly tax was not paid by the respondent in those years on such profits; whereas if the respondent had pursued the alternative structure that should have been recommended by the appellant, profits in the 2005 and 2006 years would have been distributed to the respondent in those years and tax paid thereon. The primary judge rejected the "no loss" argument and found in favour of the respondent and awarded $4,979,800 in damages. The appellant appealed against the primary judge's assessment of damages. The 3 issues on appeal were: (1) Did the primary judge err in concluding that the respondent had suffered loss when the comparing the respondent's financial position in the events that transpired under the restructure with the financial position the respondent would have been in if he had received and followed competent advice to pursue an alternative structure? (2) Did the primary judge err in concluding that the respondent had suffered a loss as a consequence of the forfeiture of the franking credits in Holdings' franking account? (3) Did the primary judge err in determining the amount of pre-judgment interest to be included in the respondent's damages? Held, per the Court allowing the appeal in part In relation to (1) The primary judge did not err in undertaking the comparison of the respondent's financial position in terms of the actual tax, penalties, interest and expenses imposed over the 2004 to 2011 years with the hypothetical cost to the respondent if he had pursued the alternative structure that should have been recommended by the appellant. The benefit of the restructure was the value to the respondent of the delay in payment of tax on dividends distributed by Holdings under the restructure. That benefit was a timing difference, not a permanent tax saving: (at [77] - [78]). Applied: Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64; Wardley Australia Ltd v Western Australia [1992] HCA 55; 175 CLR 514; Murphy v Overton Investments Pty Ltd [2004] HCA 3; 216 CLR 388. Further, it was not open to the appellant to raise a new point on appeal that the comparison undertaken by the primary judge in respect of the 2004 to 2011 years was flawed because, it was said, his Honour did not compare "like" business with "like": (at [80]-[85]). Applied: Water Board v Moustakas [1988] HCA 12; 180 CLR 491; Suttor v Gundowda Pty Ltd [1950] HCA 35; 81 CLR 418; Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631; Metwally v University of Wollongong [1985] HCA 28; 60 ALR 68; Mamo v Surace [2014] NSWCA 58; 86 NSWLR 275; D'Orta-Ekenaike v Victoria Legal Aid [2005] HCA 12; 223 CLR 1. In any event, the appellant had not demonstrated on appeal that the relevant comparison undertaking by his Honour for the assessment of the respondent's loss was flawed: (at [90]). In relation to (2) The primary judge erred in awarding as an integer of the respondent's damages the amount of $1,291,178.50 together with pre-judgment interest of $290,710 as representing the respondent's loss due to the forfeiture of franking credits by Holdings in the amount of $5,014,286. The respondent did not establish that he sustained any loss or detriment as a consequence of the forfeiture of those franking credits: (at [166]). Applied: Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36; (2014) 88 ALJR 911; McCrohon v Harith [2010] NSWCA 67; Johnson v Perez [1988] HCA 64; 166 CLR 351; Miliangos v George Frank (Textiles) Ltd [1976] AC 443; Golden Strait Corporation v Nippon Yusen Kubishika Kaisha [2007] UKHL 12; [2007] 2 AC 353; Ng v Filmlock Pty Ltd [2014] NSWCA 389. In relation to (3) The primary judge was correct in observing that the benefits of the restructure and the relevant integers thereof which would attract pre-judgment interest were of an entirely different character to those amounts which the respondent was required to pay pursuant to the settlement together with the professional fees he incurred for that purpose. The latter involved actual payment by the respondent from the respondent's own funds; the former did not. Accordingly, there was no error by the primary judge in compensating the respondent for the loss of use of his own funds at court rates and in calculating interest on the benefit of the restructure at Holdings' rate of earnings acquired on its own funds: (at [173] and [185]). In relation to relief, as the appellant had already paid the judgment, which included the amount referred to in (2) above, the appellant had overpaid the respondent $1,581,889. The appellant had a right to restitution for the amount overpaid together with interest on restitution moneys: (at [190]-[191]). Applied: Heydon v NRMA Ltd (No 2) [2001] NSWCA

[4]

Judgment

THE COURT: In 1992 the respondent founded a business known as Aussie Home Loans (the business). Over time the business was owned and conducted by a variety of entities, generally in the form of unit trusts, all of which were ultimately owned or controlled by the respondent or entities over which he had control.
In 2003 the respondent sought legal advice from the appellant and, in particular, from one of its tax partners, as to the tax consequences of a revised ownership structure of the business which would involve its corporatisation. One aspect of the advice was directed to the means by which the respondent could continue to borrow funds from the business for the purpose of completing the construction of his home in Point Piper.
The appellant, through the relevant partner, provided the respondent with the advice he sought and a restructure was effected in 2003 and 2004 (the Restructure). As part of the Restructure, a mechanism was put in place by which the respondent could withdraw funds from the Aussie Home Loans Group (the Group) by redeeming preference shares issued to him by the new corporate vehicle, AHL Holdings Pty Ltd (Holdings), that owned the entities making up the Group. During the financial years ending 30 June 2004, 2005 and 2006, the respondent drew down around $57 million. The ultimate source of those funds was the external financier to the Group, the Australia and New Zealand Banking Group Ltd (ANZ).
In January 2005 the relevant partner left Gadens and joined the law firm Abbott Tout. He continued to provide advice and assistance to the respondent. Later that year the Australian Taxation Office (ATO) commenced a review of the respondent's taxation affairs as part of a process of scrutinising the taxation affairs of high net worth individuals. The manner in which the respondent had extracted funds out of the business attracted the ATO's attention. In 2007 it commenced an audit of the respondent's affairs. This led to a deed of settlement on 21 December 2007 with the Commissioner of Taxation (Settlement Deed) in which the respondent agreed to pay the sum of $7,018,864 (comprising tax, penalties and interest), although it seems to be common ground that the settlement sum subsequently paid by the respondent on 5 September 2008 was $7,018,866.10. As part of the settlement, Holdings agreed to deduct the amount of $5,014,286 from the franking account that it maintained in accordance with s 200.15 of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act).
In 2009 the respondent instituted proceedings against the appellant seeking damages due to the appellant's negligence, breach of contract and contravention of provisions of the Trade Practices Act 1974 (Cth). Although the appellant denied the respondent's allegations the primary judge, Beech-Jones J, in a judgment published on 19 July 2013 found in favour of the respondent holding that the appellant was guilty of negligence, breach of retainer and contravention of s 52 of the Trade Practices Act: Symond v Gadens Lawyers Sydney Pty Ltd [2013] NSWSC 955 (the primary judgment). His Honour then stood the matter over to enable the parties to calculate the amount of damages to which he held the respondent was entitled. In a further judgment of 31 October 2013 his Honour determined that the amount of damages to which the respondent was entitled was $4,979,800 and on that date he entered judgment for the respondent against the appellant in that sum: Symond v Gadens Lawyers Pty Ltd (No 2) [2013] NSWSC 1578 (the supplementary judgment). For convenience references below to paragraphs of his Honour's reasons are to those in the primary judgment unless otherwise indicated.
The appellant now appeals against the primary judge's assessment of damages. There is no challenge to his Honour's findings on liability. It contends that in the circumstances the respondent suffered no loss as a consequence of the appellant's actionable conduct. In order to understand the two principal issues and the one subsidiary issue argued on the appeal, it is necessary first, to refer to some additional background facts and, secondly, to summarise the primary judge's findings as to the respondent's loss and its quantum, and the nature of the appellant's challenges thereto. It is to be also noted that the respondent filed a notice of cross-appeal, which was not pressed. Counsel for the respondent accepted that the cross-appeal should be dismissed with costs.

[5]

The Background Facts

Prior to the transactions which were the subject of the appellant's advice, the business was owned and operated by Aussie Home Loans Limited as trustee of the Aussie Home Loans Unit Trust (AHLUT). When the respondent commenced building his home at Point Piper, he obtained funds by borrowing from the AHLUT. The AHLUT was not profitable at that stage but it was able to borrow funds from the ANZ which it on-lent to the respondent. The respondent owned or controlled 100 per cent of the units in the AHLUT. At the time of the restructure he owed the AHLUT some $15.5 million which he had borrowed for the purpose of funding the construction of his home.
The respondent desired to corporatise the business so that it was owned by a company the shares in which might be traded more readily. In the course of advising the respondent how that specific outcome could be achieved, the appellant also advised the respondent to implement a series of circular or "round robin" transactions which, so it was said, would provide a tax effective means by which the respondent could continue to borrow funds from the business to construct his home.
In essence those transactions resulted in the respondent borrowing some $75 million from a new unit trust known as the "Alice Trust" which was controlled by the respondent; using part of those funds to repay his outstanding borrowings in the sum of $15.5 million from the AHLUT; and using the balance to lend to the AHLUT and then, as part of a later refinement to the structure, to invest in certain redeemable preference shares (RPS) issued by Holdings. The implemented Restructure as at 1 July 2004 can be diagrammatically represented as follows:
Thus the Restructure, which was implemented in June and September 2003, culminated in the respondent applying for and being issued 57,738,001 $1 RPS in Holdings. The funds for his acquisition of the RPS came from the interest free loan of $75 million to the respondent from the Alice Trust, which was only required to be repaid by agreement between that Trust and the respondent. The Alice Trust in turn had received the funds by issuing 75 million $1 units to the AHLUT. The respondent used the balance of the loan to him of $75 million from the Alice Trust to repay his existing loan of $15.5 million to the AHLUT.
During the period 30 June 2004 to early 2006 the respondent obtained $57,662,999.70 from Holdings by redeeming the RPS as follows: (a) $20,652,804.70 in the year ended 30 June 2004 (2004 income year). (b) $16,251,485.00 in the year ended 30 June 2005 (2005 income year). (c) $20,758,710.00 in the year ended 30 June 2006 (2006 income year). (the redemption amounts) On advice, the respondent treated the redemption amounts as non-assessable returns of capital.
The ATO's review of the respondent's tax affairs included an examination of the redemption of the RPS and the possible tax consequences thereof. The respondent ultimately entered into the settlement pursuant to which he agreed to pay the sum of $5,975,744 in income tax, $597,574 in penalties and $445,339 in interest, calculated by treating $11,700,000 of the redemption amounts as being a deemed dividend under s 109C of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act).
By way of explanation, in general terms Division 7A of the 1936 Act, which includes s 109C, provides a disincentive to a shareholder of a private company borrowing or otherwise accessing money on non-commercial terms from the company rather than paying dividends which would be subject to what is commonly referred to as "top-up tax". This is effectively the difference between the company tax rate (30%) and the relevant marginal rate of personal tax of an Australian resident (being in the case of the respondent either 48.5% or 46.5%, including the Medicare levy, in the relevant years).
The primary judge held that a competent solicitor in the position of the appellant would not have advised the respondent to enter into the Restructure but instead would have advised him to adopt what his Honour described as Scenario 2 and that the respondent would have pursued that scenario had he been so advised. At [269] of his reasons, his Honour set out a description of Scenario 2 as determined by the experts and which, it being common ground on the appeal, the appellant ought to have advised the respondent to pursue: "(i) That rather than implementing the Restructure of the Aussie Group, and adopt a structure under which redeemable preference shares were issued and redeemed, Mr Symond would have interposed a company between the unit holders and the [AHLUT], which for the purposes of the scenario has been assumed to have [the] same name as the actual entity, [Holdings]; (ii) Mr Symond would have borrowed funds from [the] AHLUT in the same amount and at the same time as actually occurred with respect to the redemption of the RPS under Project Alice; (iii) The Trustee of [the] AHLUT would declare any assessable trust income on or before 30 June in the relevant assessable income year and distribute that income to [Holdings] (as sole beneficiary) by 31 October following the end of the tax year; (iv) [Holdings] would have included any distribution from [the] AHLUT as part of its profit for the year and pay taxes upon those profits at the corporate rate; (v) [Holdings] would have declared and paid (payments to be made on or before 31 October following the end of the tax year) to its shareholders (ultimately Mr Symond) a dividend along with any available franking credits that attach to that dividend, representing all of the after tax income received from [the] AHLUT: ● In cash to the extent necessary to satisfy Mr Symond's taxation liabilities with respect to the dividend declared; and otherwise ● By applying the balance to reduce the balance of the loan account with [the] AHLUT; and (vi) Mr Symond would have included the dividend received from [Holdings] (including any franking credits with respect to the tax already paid by [Holdings]) in his personal tax return and used the cash component of his dividend to pay any additional tax required, and (vii) Sale of 33 percent of Mr Symond's interest in the Aussie Group to CBA to CBA [sic] would have occurred on 31 October 2008."
A diagrammatic depiction of Scenario 2, which was not in dispute, is as follows:
As a consequence of the ATO's audit in respect of the receipt between 2003 and 2006 by the respondent of $57 million and as provided by the Settlement Deed (see [4] above), the respondent was required to pay income tax, interest and penalties totalling $7,018,864. At trial the parties agreed that $6,633,570 (the Actual Tax Cost) of this amount was in respect of the $57 million received by the respondent on redemption of the RPS.
The basis for the settlement was as follows: the business and Holdings had become profitable during a period in which the respondent redeemed the RPS to obtain funds to construct his home; the consequence of obtaining funds in this manner was that the amounts paid to the respondent to redeem the RPS should for tax purposes have been treated as if they were distributions of those profits to him, at least up to the amount of those profits (being a "distributable surplus" as relevantly defined in Div 7A of the 1936 Act). Thus the redemption of the RPS, which the appellant had wrongly advised could simply be treated as a return of capital that would not give rise to any tax liability, in fact gave rise to a very substantial tax liability under that Division. It was that liability which was the subject of the settlement with the ATO. There was no issue but that the terms of the settlement were reasonable.
On the other hand, had the respondent entered into the alternative restructure described as Scenario 2, he would have received the same amount as he in fact received, initially by way of loan of $57 million but ultimately also by the payment of dividends totalling $30,555,367 in respect of the 2005 and 2006 years of income. These dividends would have been franked to the extent of $8,944,416 resulting in a debit to Holdings' franking account of this amount. The net proceeds of these dividends, after the payment by the respondent of top-up tax in the sum of $10,212,797 (the Scenario 2 Tax Cost), would have been used to repay part of the $57 million loan. The payment of dividends in respect of those years was necessary under Scenario 2 so as to avoid the operation of Div 7A which would otherwise have deemed the loan amount (or a significant part thereof) to have been an unfranked dividend.
The trial proceeded on the assumption that no further dividends needed to be declared in respect of years of income commencing after 30 June 2006 to avoid the operation of Div 7A under Scenario 2 as there were no further advances for the Point Piper project after that date. After the repayment of part of the initial loan debt with the net proceeds of the dividends, there would be a remaining debt of $37,320,429.70 (being the original hypothetical loan sum of $57,662,999.70 less the repayment required under Scenario 2 of $20,342,570). The last mentioned amount was the net of the Scenario 2 dividends of $30,555,367 less the top-up tax that would be paid by the respondent of $10,212,797. That amount could be left outstanding indefinitely on interest free terms as the respondent in reality owed the money to himself. The net result of the foregoing, when compared to what in fact occurred in what was referred to as "the real world", was summarised in paragraph 18 of the respondent's written submissions on the appeal in the following terms: "The net result of Scenario 2 was therefore that the respondent would obtain funds to construct his home by receiving distributions of all available profits, franked to the extent possible, and by borrowing the balance from his business. This would result in him deriving assessable income in the amount of those distributions, together with franking credits, and using the after tax proceeds of those distributions to pay down his loans. It is convenient here to recall the incorrect advice that was in fact given and followed: that the respondent could in substance borrow funds from the business, regardless of the existence of distributable profits, a course which resulted in the respondent being audited and ultimately being required to pay tax on those borrowed funds, in circumstances where the respondent remained obliged to repay the loan, and at the same time being required to debit the Holdings franking account." (Emphasis in original.)
In or about October 2008 the respondent sold or caused to be sold 33 per cent of the shares in Holdings to the Commonwealth Bank of Australia (the CBA) and in December 2012 he sold or caused to be sold a further 47 per cent of those shares to the CBA, a total of 80 per cent.
We have referred at [4] above to the fact that the tax partner of the appellant who provided the relevant advice to the respondent left the appellant in January 2005 and joined Abbott Tout where he continued to advise the respondent. The latter also sued Abbott Tout. The primary judge apportioned liability to the appellant as to 85 per cent of the respondent's loss and Abbott Tout as to 15 per cent. Expressed in monetary terms, the appellant's liability was $5,878,789 and Abbott Tout's liability was $1,037,433. By reason of Abbott Tout having entered into a deed of settlement with the respondent pursuant to which it paid him $1.85 million, being an amount in excess of its liability as determined by the primary judge after adjusting for pre-judgment interest, he concluded that the appellant's liability should be reduced by $898,998. Consequently, the primary judge awarded damages against the appellant, including pre-judgment interest, in the amount of $4,979,800.

[6]

The respondent's loss as determined by the primary judge

Relevant to the appeal there were three heads of loss awarded to the respondent by the primary judge. The first was constituted by his finding that if the respondent had been given competent advice, he would have paid less tax in the 2004 to 2011 years of income compared to the amounts that were in fact paid during that period; but that he would have paid most of that lesser amount during the 2005 and 2006 income years. The extent to which the incompetent advice permitted the respondent to delay or reduce the payment of tax was taken into account in undertaking this comparison. In this respect his Honour found that the respondent benefited from this delay until 30 June 2011. He thereby concluded that the respondent suffered a loss of $6,916,222 (of which the appellant was liable for $4,979,800) which represented the amount of the tax, penalties, interest and costs that would have been avoided if Scenario 2 had been adopted, less the value to the respondent of any delay or overall reduction in his tax payments that resulted from following the incompetent advice.
The issue raised by the appellant with respect to this head of loss is whether it ought to be calculated on the basis of comparing the Actual Tax Cost (plus certain incidental costs being audit fees and the value of franking credits) and the Scenario 2 Tax Cost (plus those incidental costs) in full or, alternatively, the Actual Tax Cost (plus incidental costs) and the Scenario 2 Tax Cost in part only.
In other words, the appellant argued that the primary judge should have undertaken an entirely different exercise to that which he adopted, limiting himself to a comparison of the amount of tax paid by the respondent in two years of income only, namely the 2005 and 2006 years of income, without regard to whether there would also have been any other change in the respondent's financial position in those years or in later years if he had followed competent advice and adopted Scenario 2. On the appellant's approach, the Restructure placed the respondent in a permanently better financial position than if he had adopted Scenario 2.
Accordingly, it was contended that the primary judge "incorrectly calculated the 'benefits' of the Restructure by assuming that the quantum of tax saved by undertaking the Restructure would be eroded by the hypothetical non-payment of dividends (under Scenario 2) when those dividends were actually received by [the respondent] and were not paid as a consequence of the advice tendered by the appellant."
The second head of loss was based on the primary judge's conclusion that the respondent, who was the 100 per cent beneficial owner of Holdings, suffered a loss when the company was required to debit its franking account pursuant to the settlement in the amount of $5,014,286. The primary judge determined that the respondent had sustained a loss of $1,291,178.50 as a consequence of that debit.
The issue raised on the appeal with respect to this element of the respondent's damages was whether his loss ought to include an element referable to the franking credits which Holdings forfeited under the terms of the settlement. The appellant submitted that the franking credits debited by Holdings did not have any significant value to the respondent as Holdings had ample franking credits and would not have, and in fact did not, declare any partly franked or unfranked dividends. Further, there was no evidence that the CBA, who (as noted at [20] above) ultimately acquired 80 per cent of Holdings, ascribed any value to the franking credits of Holdings when it purchased the respondent's shares in that company.
The third head of loss related to pre-judgment interest to 31 October 2013 (being the date of the supplementary judgment). His Honour awarded the respondent interest in the net amount of $1,576,788 based on the 'gross' losses sustained by him (being the Actual Tax Cost ($6,633,570) and audit fees ($1,853,955)). The appellant submitted that his Honour erred in calculating interest on the 'gross' loss and ought to have calculated interest only on the 'net' loss, if any, to the respondent from time to time. In this respect his Honour, so it was submitted, ought to have had regard to the tax saved by the respondent in undertaking the Restructure. We would add that the primary judge also awarded interest on this assessment of the respondent's loss with respect to the forfeited franking credits for the period 1 January 2011 to 31 October 2013 (the date of judgment). If his Honour was correct in that assessment we do not understand the interest so calculated to be in contest. The appellant's case is that there was no such loss and, therefore, no interest payable.
Accordingly, the primary judge calculated the respondent's loss and damage caused by the appellant and Abbott Tout to be as follows: Component of Damage Principal Pre judgment interest to 31 October 2013 Total Income tax paid on settlement with ATO $5,674,500 $2,377,616 $8,052,116 Penalty paid on settlement with ATO $567,450 $237,762 $805,212 GIC [general interest charge] paid on settlement with ATO $391,620 $115,921 $507,541 Audit Fees $1,853,955 $644,106 $2,498,061 Additional fees payable under Scenario 2 ($100,000) - ($100,000) Value of franking credits deducted on settlement with ATO $1,291,179 $290,710 $1,581,889 Benefit of Restructure ($4,339,268) ($2,089,327) ($6,428,595) TOTAL $5,339,436 $1,576,788 $6,916,224

[8]

The Grounds of Appeal

Although we have summarised the issues contested on the appeal, it is instructive as a lead in to the analysis and consideration of those issues to record the grounds of appeal that were pressed on the appeal.
Grounds 1 and 2 relate to the Restructure loss. They are as follows: "1 Having concluded that if the respondent had not received the advice he had received from the appellant then the respondent and entities under his control would not have undertaken the transactions they in fact undertook (the 'Restructure' transactions) but would have instead undertaken transactions described as 'Scenario 2', the [primary judge] erred in concluding that the respondent suffered: (a) any loss or damage as a consequence of following the appellant's advice; or (b) loss or damage in the sum of $4,979,800.00. 2 In deciding whether the respondent suffered any loss or damage the primary judge should have: (a) calculated the loss arising from the adoption of the advice received by comparing the actual cost to the respondent of receiving $57,662,999.70 from the entities under his control (the 'Restructure Receipts' during the course of the years ended 30 June 2004, 30 June 2005 and 30 June 2006 with the hypothetical costs of receiving that amount under Scenario 2; and (b) concluded that the respondent had not incurred any loss because the actual cost of receiving the Restructure Receipts (assuming that the loss arising in connection with franking credits was $1,291,178, which is not conceded - see ground 3 below) was $9,678,703, which was less than the hypothetical cost of receiving the Restructure Receipts under Scenario 2, being a sum of $10,212,979 plus an amount attributable to having to pay the sum of $10,212,979 earlier than sum of $9,678,703."
Grounds 3 and 4 relate to the franking credit issue. They state: "3 The [primary judge] erred in finding that the respondent had suffered a loss in the sum of $1,291,178.50 in connection with the reduction of franking credits of AHL Holdings Pty Ltd pursuant to the terms of the respondent's settlement of his taxation audit with the Commissioner of Taxation in circumstances where: (i) the ledger of AHL Holdings Pty Ltd recorded franking account balances on 30 June 2005, 30 June 2006, 30 June 2007, 30 June 2008, 30 June 2009 and 30 June 2010 of $9,887.00, $5,940,175.00, $15,316,251.00, $20,663,251.00, $19,357,091.00 and $13,975,038.00 respectively (the last of which reflected the reduction required by the settlement with the Commissioner of Taxation); (ii) there had been no payment of unfranked dividends by AHL Holdings Pty Ltd and there was no evidence that AHL Holdings Pty Ltd would be likely to pay unfranked dividends in the foreseeable future; (iii) at all material times after December 2007 AHL Holdings Pty Ltd's surplus of franking credits meant that even after reducing the franking credits in accordance with the settlement there was no reasonable likelihood that all of the surplus would be used in declaring fully franked dividends; (iv) there was no evidence that the consideration paid to the respondent for one third of his shares in AHL Holdings Pty Ltd by the Commonwealth Bank of Australia was lower than it would have otherwise been but for the reduction in franking credits; (v) there was no or no proper evidence on which to support a finding that the respondent had suffered a loss of $1,291,178.50 as a consequence of AHL Holdings Pty Ltd agreeing to reduce its franking account balance; and/or (vi) under Scenario 2, the franking account balance of AHL Holdings Pty Ltd would have been reduced by $661,546 in respect of the year ended 30 June 2005 and by $8,282,870 in respect of the year ended 30 June 2006 resulting in a greater reduction in the franking account than occurred as a result of the settlement. 4 The [primary judge] ought to have concluded, having regard to the circumstances identified at ground 3(i)-(vi) above, that the respondent had not suffered any loss or any measurable loss in connection with AHL Holdings Pty Ltd agreeing to reduce its franking credits."
Grounds 7 and 8 relate to the pre-judgment interest issue. They state: "7 The [primary judge] erred in including in his calculation of damages interest calculated pursuant to s 100 of the Civil Procedure Act 2005 (NSW), on the actual gross costs to the respondent of receiving the Restructure Receipts as they were incurred from time to time without offsetting against those costs by the hypothetical costs of receiving the Restructure Receipts under Scenario 2. 8 If the respondent had incurred a loss from the adoption of the advice received… the [primary judge] ought to have included in his calculation of damages interest calculated pursuant to s 100 of the Civil Procedure Act 2005 (NSW) on the net loss, if any, incurred by the respondent from time to time determined by offsetting against the actual gross costs to the respondent the hypothetical costs that the respondent would have incurred under Scenario 2."
We now turn to the three issues the subject of the appeal.

[10]

Critical to the appellant's "no loss" argument is the item in the calculation described as the "benefit of the Restructure" which was deducted from the amount paid by the respondent under the settlement and related expenses. Mr Potter assessed the "benefit" as $1,201,883 whereas Ms Jones assessed the "benefit" as $10,212,989. As will be seen, his Honour adopted a different calculation of the benefit of the Restructure to that proposed by both experts.
At [336]-[337] the primary judge explained what the parties meant by the "benefit of the Restructure". This was that in the "real world" the respondent did not pay the Scenario 2 Tax cost in the 2005 and 2006 years because the profits in those years were not distributed to the respondent in those years. The fact that the respondent did not pay the Scenario 2 Tax Cost, was said to be the "benefit" accruing to the respondent from pursuing the Restructure.
At [338]-[339] the primary judge recorded the issue between the parties in the following terms: was the "benefit" of pursuing the Restructure, as compared with Scenario 2, only a temporary one, or did it result in the respondent obtaining a permanent tax saving of $10,212,979?
As his Honour noted (at [340]), the respondent's case was that the only value to be attributed to the benefit of the Restructure was a timing difference, that is, the advantage to the respondent of delaying the payment of tax under the Restructure compared to Scenario 2, rather than avoiding its payment forever. This was because the "loss"' under Scenario 2 associated with the payment of tax on dividends at an earlier point of time, cannot be a permanent loss because the profits which led to those dividends being distributed were, would be, or should be taken to be ultimately distributed to shareholders in the events that occurred. Mr Potter's contention as recorded by his Honour was that the cessation of that "loss" depended upon when the actual dividends that were paid "caught up" with the level of (hypothetical) dividends paid under Scenario 2. He further contended that the higher dividends paid in earlier years necessarily meant that at some later point lower dividends would be paid. This must be so (according to Mr Potter) because in Scenario 2, Holdings will have less retained earnings and cash as at 30 June 2006 than in the events that actually transpired: see at [341].
The primary judge observed (at [344]), that the underlying justification given by Mr Potter for his conclusion that the tax benefit of the Restructure was only temporary, was that the making of distributions by the company in earlier years affects the level of distributions in later years. His Honour (at [345]) described Mr Potter's thesis as being that the tax benefit is said to "unwind" because, over a period of time, the total distributions out of the company in the actual case and the hypothetical case should be the same.
At [346], the primary judge noted the competing thesis of Ms Jones. This was that there was no reason why the distribution of extra dividends in the early years under Scenario 2 (in the 2005 and 2006 years) would have affected the level of distribution of dividends in later years. Ms Jones pointed to the level of profits that were in fact earned over that period and said that it could have accommodated the hypothetical distribution under Scenario 2 at the same level as the dividends that were actually distributed in the "real world" (during the period 30 June 2007 to 30 June 2012).
The primary judge found that the timing of the hypothetical dividend distribution under Scenario 2 of $30.5 million in the 2005 and 2006 years, gave rise to some permanent differences compared to the Restructure. This was because some benefits obtained under the Restructure (of not paying $10,212,979 in top-up tax in the 2005 and 2006 years) were not eroded over time - these benefits arose because of: (a) a reduction in the respondent's marginal tax rate in the 2007 year (at [358]); (b) the partial franking of dividends in the 2005 and 2006 years under Scenario 2 (at [364]); and (c) the sale of one third of Holdings to the CBA in October 2008 (at [370]). These findings are not in issue on this appeal.
His Honour observed (at [361]) that in seeking to determine how the entire tax benefit could be unwound, Mr Potter assumed that the respondent would pay the "same" amount of tax under Scenario 2 as he did by reason of the Restructure and accordingly, his model assumed that Holdings would not declare any dividends in the period from 30 June 2008 to 30 June 2012 compared to the grossed up dividends of $107,394,971 that were in fact declared.
The primary judge noted (at [362]), that Mr Potter's modelling departed from his underlying rationale as explained in his evidence - namely, that the making of distributions by Holdings in earlier years affects the level of distributions in later years. To be consistent with the rationale for his approach, Mr Potter should have modelled the reduced level of tax the respondent would have paid under Scenario 2, had the level of distributions by Holdings been the same in a specified period as under the Restructure.
Having identified this deficiency in Mr Potter's modelling, the primary judge stated what he considered to be the proper approach in the following paragraphs of his reasons: [365] I consider that the proper approach requires that, in comparing the events which transpired with Scenario 2, it is the amount distributed by Holdings that should be the same over a specified period of time and not the amount of tax paid by Mr Symond. To give effect to the former respects the fundamental assumption behind the whole exercise of modelling the same business in the "real world" and Scenario 2. It means that over a period that same business distributes the same amount of cash to its shareholders. It thus enables a measurement of the cost of extracting the same level of net profit out of Holdings under Scenario 2 compared with the events that transpired. In the end result Ms Jones' approach involves the business in Scenario 2 distributing greater amounts than the business in the "real world". Mr Potter's approach involves it distributing less. I consider that it should be the same. [366] Subject to what follows I consider that the proper approach is to assess the extent of the benefit accruing from the adoption of the structure proposed by Gadens on the basis that under Scenario 2 and in the period after 30 June 2006, the net dividends that would have been distributed would have been $30,555,367.00 less than those in fact distributed. The tax consequences for Mr Symond of receiving that lower level of distributions should then be compared with the payment of $10,212,979.00, being the tax paid on the partially franked dividends for FY05 and FY06, and which he would have had to pay under Scenario 2.
We interpolate here that counsel for the appellant accepted (in oral argument) that the first sentence of [365] was correct, but contended that the error by the primary judge commenced in the third sentence of [365] and continued in [366]. As will be seen, it was argued by the appellant that the issue was not whether the distribution out of profits was the same under the Restructure and Scenario 2, but whether the amount of the distributions "received" by the respondent was the same, irrespective of the legal form of the distributions.
The primary judge observed (at [371]) that between 30 June 2007 and 30 June 2011, Holdings distributed $67,976,480 in net dividends; and distributed a further $22 million for the year ended 30 June 2012.
Given the level of profits that were distributed by Holdings, His Honour considered (at [372]) that it was artificial to conclude that the level of profits that were in fact distributed by Holdings in the period up to 30 June 2011 were not at least, in part, attributable to the profits earned in the 2005 and 2006 years (but which had not in fact been distributed in those years). His Honour found that 30 June 2011 was the realistic end point for undertaking the measurement referred to in his reasons at [365].
In finding that a seven year period from 30 June 2004 to 30 June 2011 was the appropriate period over which that measurement should be made, his Honour recognised (at [373]), that the chosen period was necessarily imprecise and a number of factors could make that time period shorter or longer. He considered however that the chosen period seemed to accord with the business cycle appropriate to the business.
Taking into account that the hypothetical dividends under Scenario 2 in the 2005 and 2006 years totalled $30,555.367, his Honour concluded (at [373]) that only a further $37.4 million in net dividends would have been distributed under Scenario 2 in the period 30 June 2007 to 30 June 2011.
The approach adopted by his Honour required the benefit of the Restructure to be recalculated. His Honour explained what was required in the following paragraphs of his reasons: [374] It follows that there will need to be a recalculation of the reduction in Mr Symond's taxation liability under Scenario 2 that would have resulted from the distribution of $30,555,367.00 less in net dividends than was in fact distributed in the period up to and including 30 June 2011. This recalculation, including the differences in timing of payments of tax (and earnings as per Mr Potter's analysis), will yield a figure which is to be deducted from the extra tax payable under Scenario 2. It will diminish the amount referable to the benefit of the Restructure noted in Ms Jones' table, but increase the amount shown in Mr Potter's table. The resulting figure for the benefit of the Restructure will represent those aspects of the benefit of the Restructure which are permanent, namely the timing differences and the matters I have described at [364] and [370]. [375] The recalculation of this amount should first accommodate a proportionate reduction in the dividends distributed on 30 June 2007 and 30 June 2008 equivalent to yielding the amount of the settlement sum paid to the ATO in Mr Symond's hands (because under Scenario 2 Mr Symond would not have to pay that amount), and then a proportional reduction of the remaining net dividends in those years and for the period after the sale to the CBA up to 30 June 2011. They are all to be treated as though they were fully franked. These calculations will need to accommodate Mr Symond's 100% shareholding up to October 2008 and his two thirds shareholding thereafter, as well as any changes in his marginal rate over that period.
In his supplementary judgment, the primary judge resolved certain issues relevant to the calculation of the respondent's damages in accordance with the methodology for its calculation which he had set out in the primary judgment. One of those issues concerned pre-judgment interest, which is the subject of Appeal Grounds 7 and 8.
After reserving judgment his Honour requested the parties to provide figures for the quantum of the judgment as at 31 October 2012 in accordance with Mr Potter's figures subject to variations to allow for the outcome of his Honour's consideration of two other issues: the termination date for calculation of the benefit of the Restructure and what was referred to as the third party beneficiary's issue. Neither of those matters are the subject of appeal and it is unnecessary to say anything further about them.
His Honour concluded that the material provided on behalf of the respondent yielded a figure of $4,979,791, which his Honour rounded up to the nearest $100, as the amount of the judgment to be entered in the respondent's favour, utilising the methodology set out in the primary judgment, supplemented by his Honour's determination of the outstanding issues: at [74] of the supplementary judgment.

[11]

The appellant's submissions

The appellant contended that his Honour erred in concluding that the respondent suffered any loss at all as a consequence of following its advice (Ground 1) and that his Honour should have concluded that the respondent was in fact better off under the Restructure than if he had pursued Scenario 2 (Ground 2). The premise of these contentions is that his Honour undertook the wrong comparison exercise.
The appellant's primary position was that, in calculating whether the respondent suffered any loss, the correct comparison was between the actual cost to the respondent of receiving the redemption amounts of $57 million from Holdings (in 2004 to 2006) as a consequence of the Restructure as implemented, with the hypothetical cost of receiving the same amount (in 2004 to 2006) under Scenario 2, being $57 million in loans from AHLUT. It was not in dispute that the Scenario 2 Tax Cost (plus incidental costs) exceeded the Actual Tax Cost (plus incidental costs) of the respondent receiving the redemption amounts totalling $57 million under the Restructure. Thus the appellant argued that the respondent had suffered no loss.
Alternatively, if it was appropriate to consider a wider period from 2004 to 2011, the appellant challenged his Honour's assumption that the making of the hypothetical dividend payments of approximately $30 million under Scenario 2 in respect of profits derived in the 2005 and 2006 years, would have led to lower dividend payments under Scenario 2 in the 2007 to 2011 years. The appellant pointed to the fact that the actual dividends paid to the respondent in the 2007 to 2011 years amounted to $50 million (in fact, $51,525,102). It was submitted that there was no basis on which his Honour could conclude that those actual dividends would not have been paid "but for" the Restructure, that is, would not have been paid under Scenario 2 if it had been pursued.
The appellant advanced the further argument, which had not been raised at trial, that in considering the wider period of 2004 and 2011, the primary judge erred in focusing only on distributions in the legal form of dividends. It was argued that his Honour should have looked at total "distributions" in whatever form, whether by way of redemption of share capital or a distribution of profits, and looked at the economic consequences of those distributions.
The appellant contended that if a wider view of distributions was taken, then the comparison undertaken by the primary judge in the period 2004 and 2011 was fundamentally flawed because his Honour did not compare "like" business with "like". The argument ran as follows: 1. under the Restructure, the respondent "received" the redemption amounts of $57 million (to construct his home) and a further $50 million in dividends up to 2011; 2. by contrast, under Scenario 2 the respondent would have "received" $57 million by way of loans (to construct his home) and $50 million in dividends; but it was said that the respondent would have in fact been left with only $87 million, because the respondent would have used $20 million of the dividends to repay the loan from AHLUT; 3. his Honour therefore undertook an incorrect approach by comparing the tax imposed on the actual distributions of $107 million in the "real world", with the tax imposed on hypothetical distributions of only $87 million under Scenario 2. This meant, according to the appellant, that his Honour had effectively compensated the respondent because he had paid more tax on receiving $107 million than he would have hypothetically paid on receiving the $87 million under Scenario 2.

[12]

The respondent's submissions

The respondent contended that the primary judge adopted the correct approach when comparing the respondent's financial outcome in the "real world" with the hypothetical outcome under Scenario 2 - namely, that the amount distributed by Holdings should be the same over a specified period of time. It was said that this approach enabled a measurement of the costs of extracting the same level of net profit out of Holdings under Scenario 2, to be compared with the costs which were in fact incurred under the Restructure.
The respondent accepted that, at a superficial level, a comparison of the Actual Tax Cost of receiving the redemption amounts of $57 million (in 2004 to 2006) was less than the Scenario 2 Tax Cost of receiving the same amount (in 2004 to 2006) as loans from AHLUT. The respondent submitted however that this comparison erroneously disregarded the manner and legal form in which the respondent obtained funds for the construction of his home.
The respondent further submitted that the primary judge was correct to proceed on the basis that if the same business had distributed some $30 million in profits in 2005 and 2006, the business would have correspondingly distributed less in later years, so that over the years 2004 to 2011 the total amount distributed would be approximately the same. The respondent contended that the alternative approach suggested by Ms Jones, that the business would have distributed $51 million in dividends between 2007 and 2011 in Scenario 2, in addition to the $30 million distributed in 2005 and 2006, implied a fundamentally different company than the one being modelled.
The respondent pointed to a number of suggested difficulties with the appellant's wider approach to "distributions". These included that the appellant's submissions on appeal departed from the way the case was run at trial and the approach of the appellant's expert valuer (Ms Jones), including in the joint expert report. The matter that had divided the experts at trial was said to be the extent to which the benefit of the Restructure was permanent, not whether his Honour should have taken into account "distributions" other than in the form of dividends.
Counsel for the respondent argued that what was in issue at trial relating to the benefit of the Restructure had nothing to do with either the form of the payments made to the respondent during the 2004 to 2006 years, or whether the loans under the Restructure or in Scenario 2 were genuine or otherwise. Counsel emphasised that it was common ground between the parties and the experts (at Black 65J-N), as the primary judge recorded (at [327] and [329]), that the existence of the loans made no difference to the respondent's ultimate net position.
The respondent asserted that the appellant's submission that "to say that the respondent should be compensated because he paid more tax on receiving $107 million rather than $87 million, effectively treated the receipt of the extra $20 million as a tax free windfall", was a false comparison and factually wrong. It was accepted that in the "real world" the respondent had borrowed approximately $57 million from the Alice Trust (to construct his home) and received distributions in dividends totalling $51,525,102 in the 2004 to 2011 years (in fact, this amount was received in the 2007 to 2011 years). However, it was also submitted that, had he pursued Scenario 2, the respondent would have received roughly the same dividends during 2004 to 2011, that is approximately $51 million (although at different times), and would have also borrowed $57 million from AHLUT to construct his house. The respondent's written submissions continued as follows: 44. The total amount "paid" to the respondent (in the sense the appellant asserts was "distributed" to him) would therefore also have been $107 million in Scenario 2, not $87 million as the appellant suggests. But, following the advice of a competent solicitor, he would then have used $20 million in after tax funds (being dividends on which he had paid tax) to repay the AHLUT, bringing his total borrowings down to $37 million. When regard is had to these facts (as found), it may be seen that in Scenario 2 the respondent would have received approximately the same amount of distributions as were actually received; he would have paid tax only on distributions, instead of (as actually occurred) distributions and borrowings; he would still have borrowed the balance to construct his house ("tax free", as the appellant would say), but those net borrowings would have been much smaller than they were in fact; and in the process he could still have built his house. What the appellant would describe as a "tax free windfall" of $20 million in fact represents the extent to which the respondent, following competent legal advice, would have used after tax funds to repay loans taken out to construct his house.
The respondent emphasised that the kind of comparison referred to in the preceding paragraph did not reveal the respondent's loss and was not advanced by any of the experts at trial. Rather it was said that both experts approached the matter in a more principled way, by seeking to determine whether, after using available franking credits, the tax on dividends that would have been paid in Scenario 2 was more or less than the amounts of tax, penalties, interest, and expenses that had been incurred as a result of the respondent pursuing the Restructure.
In oral submissions, counsel for the respondent submitted that the $30 million in dividends, which would have been paid to the respondent under Scenario 2 in the 2005 and 2006 years, represented profits of Holdings that were always going to be distributed at some point in time, at which point the respondent would be liable to pay tax on those profits. It was submitted that the exercise that the valuers had undertaken at trial was to assess what was a time value of money, or a permanent benefit, arising from the delay in the respondent receiving dividends in the "real world" representing profits that Holdings had made in the 2005 and 2006 years.

[14]

The relevant comparison

The starting point in the analysis of loss is to identify the loss and damage that has been suffered by the respondent: Murphy v Overton Investments Pty Ltd [2004] HCA 3; 216 CLR 388 at [52]. No issue arises in the present case in relation to loss and damage that "will likely be suffered" for the purposes of the claim for damages under s 82 of the Trade Practices Act. Here the respondent's loss is the amounts of tax, penalties, interest, and expenses that had been incurred as a result of following the appellant's negligent advice, compared to the tax that would have been imposed had the respondent pursued Scenario 2; there being no challenge to his Honour's finding (at [318]), that the most likely alternative scenario "but for" the appellant's negligence was that the respondent would have pursued Scenario 2.
The primary judge found that under Scenario 2, Holdings would have distributed the same amount of dividends as were actually distributed to the respondent, but that the respondent would have received his dividends, and paid tax on them, earlier in Scenario 2 than was the case in the "real world". The appellant's contention that there was "no basis" to conclude that the actual dividends paid to the respondent in 2007 to 2011 would not have been paid "but for" the Restructure must be rejected. This ignores the concession by Ms Jones in cross-examination that the company she modelled in addressing, relevantly, Scenario 2 (the "hypothetical world") was different to the company in the "real world" under the Restructure.
The relevant part of the cross-examination of Ms Jones, some of which is set out by the primary judge at [355], is as follows: "PAYNE: In the assumptions that you have made in comparing the hypothetic and actual worlds, what else is different other than these distributions to Mr Symond upon which he has paid tax that you have assumed? WITNESS JONES: There is no differences. PAYNE: So the only difference between the actual and hypothetical company is this amount of tax difference? WITNESS JONES: That's correct. PAYNE: And you say that's permanent? WITNESS JONES: That's right. PAYNE: What I'm asking you for your consideration is as a valuer in those circumstances, do you agree with me that you have assumed a company in the hypothetical world which is worth less than the company in the actual world? WITNESS JONES: In those circumstances, yes. PAYNE: And that's the basis of your assumption of this permanent taxation difference you describe? WITNESS JONES: That would be correct."
No attempt was made in the appellant's submissions to challenge his Honour's rejection of Ms Jones' approach.
As his Honour noted (at [365]), the approach advocated by Ms Jones involved the business in Scenario 2 distributing greater amounts (in dividends) than the business in the "real world"; and Mr Potter's approach involved the business distributing less (in dividends) in Scenario 2. His Honour rejected both approaches and considered, correctly in our view, that it should be assumed that the business distributed the same amount (in dividends) over a specified period of time. We agree with his Honour that this assumption was necessary to measure the cost of extracting the same level of net profit out of Holdings under Scenario 2, compared with the events that transpired under the Restructure.
To confine the relevant comparison of the respondent's financial position to the 2004 to 2006 years, as the appellant suggests, fails to recognise that the loss suffered by the respondent in implementing the Restructure was the tax, penalties, interest, and expenses in relation to the settlement with the ATO. If the respondent had pursued Scenario 2 the tax imposed would have involved the respondent making earlier, but lesser in total, tax payments than were paid in the "real world".
Accordingly, other than those benefits of the Restructure which his Honour found were permanent, and which are not in dispute on appeal, the "benefit of the Restructure" was not the non-payment of tax by the respondent; it was the value to the respondent of the delay in payment of tax on dividends distributed by Holdings.
In comparing the position under the Restructure to Scenario 2, his Honour was required to estimate when the profits in the 2005 and 2006 years would have been distributed by Holdings in the "real world". In choosing a period ending on 30 June 2011, his Honour had regard to the significant level of dividends in the 2007 to 2012 years. In our view, his Honour did not err in undertaking the comparison of the respondent's financial position in terms of tax, penalties, interest, and expenses imposed over the 2004 to 2011 years.

[15]

New point on appeal

As already mentioned, the appellant's contentions on appeal sought to advance a new argument to that relied upon at trial. This was that when undertaking the comparison of the respondent's financial position over the 2004 to 2011 years, the primary judge erred in focusing upon "distributions" by Holdings in the form of dividends. It was said that he should have considered distributions in whatever form they may take, such as the redemption amounts under the Restructure.
This wider view of "distributions" was the premise of the appellant's contention that the comparison undertaken by the primary judge in respect of the 2004 to 2011 years was flawed because, it was said, he did not compare "like" business with "like".
As mentioned above, the respondent objected that this was not the case advanced at trial, and not the case addressed by the experts. So much should be accepted. Indeed, the appellant's contentions on appeal depart from the approach advanced by Ms Jones, the appellant's expert, at trial. This was that, in addition to the hypothetical dividends in the 2005 and 2006 years, the business would have distributed the same dividends in Scenario 2 over the 2007 to the 2011 years as in fact was the case.
In accordance with well-established principle, the appellant is not entitled to advance a fresh argument on appeal if that argument "could possibly have been met by the calling of evidence below": Water Board v Moustakas [1988] HCA 12; 180 CLR 491 at 497; Suttor v Gundowda Pty Ltd [1950] HCA 35; 81 CLR 418 at 438, or if, had the ground been raised below, the other party might have conducted the case differently at trial: Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631 at 645. The present is such a case.
The new point raised issues concerning the change in value of the respondent's shareholding in the Group and whether the loans from the Alice Trust or AHLUT (as the case may be) were an integer in the calculation of loss which, as we have mentioned already, was not the way the case was run at trial. We have described the Restructure as implemented at [8]-[11] above. The "distributions" in the form of the redemption amounts received by the respondent under the Restructure cannot be separated from the $75 million interest free loan from the Alice Trust. This is because without the $75 million loan from the Alice Trust, the actual structure by which the respondent invested in the RPS issued by Holdings, and subsequently received the redemption amounts by redeeming the RPS, could not have been implemented. The "value" of the redemption amounts cannot be measured in isolation from the loans from the Alice Trust.
It may be accepted that if the appellant had raised this point at trial, the respondent most likely would have conducted its case differently - it is most unlikely that it would have been common ground that the loans to the respondent were not an integer in the calculation of loss.
It is elementary that a party is bound by the conduct of its case: Metwally v University of Wollongong [1985] HCA 28; 60 ALR 68 at 71. Fundamental to this principle is the notion of finality of litigation. The few narrowly defined circumstances in which controversies, once quelled, may be reopened, reflect this fundamental proposition: Mamo v Surace [2014] NSWCA 58; 86 NSWLR 275 at [79] (McColl JA; Ward JA and Tobias AJA agreeing) citing D'Orta-Ekenaike v Victoria Legal Aid [2005] HCA 12; 223 CLR 1 at [34]-[35].
The appellant did not point to any exceptional circumstances in this case which would permit it to raise a new point on appeal.
In any event, insofar as the new point relied upon the proposition that the comparison undertaken by the primary judge effectively treated the receipt of the so-called "extra" $20 million under the Restructure as a "tax free windfall", the argument is misconceived. The premise of this contention is, as the appellant submitted in oral argument in reply, that the hypothetical $30 million dividends under Scenario 2 (in 2005 and 2006) "weren't his [the respondent's] beneficially to do with as he likes".
The appellant submitted that the respondent would not have "beneficially" received the hypothetical $30 million in dividends in 2005 and 2006 under Scenario 2, because it was an essential element of this scenario that the respondent would repay $20 million of the $57 million loan from AHLUT from these dividends. The difficulty with the appellant's argument is that it conflates the receipt of the hypothetical dividends, with the use to which such dividends would be put by the respondent. The latter says nothing about the former. Undoubtedly the hypothetical dividends would be received by the respondent beneficially.
Thus, the premise of the appellant's argument that the respondent would only have "received" a "net" $87 million under Scenario 2 was incorrect. Even if a wider view of "distributions" is taken, as the appellant contends, approximately the same amount would be "received" by the respondent in the 2004 to 2011 years under the Restructure and Scenario 2 - $107 million, albeit the legal form would be different. The difference in the financial consequences for the respondent in terms of the tax imposed is that under Scenario 2, the respondent would have paid tax only on the hypothetical distributions (of profit), instead of as actually occurred under the Restructure of paying tax on distributions (of profit) and the deemed dividends under s 109C of the 1936 Act. The difference in the tax imposed (including penalties, interest, and costs), allowing for timing differences and the permanent benefits as found by his Honour, represented the respondent's loss.
The appellant did not demonstrate on appeal that the relevant comparison undertaken by his Honour for the assessment of the respondent's loss was flawed. This is unsurprising, as this is not the case which the appellant sought to make at trial, or in support of which it sought to lead evidence. In the absence of evidence, it was not a case which the appellant was able to make out on appeal even if permitted to do so.

[18]

The primary judge's decision

As already noted, part of the settlement involved the deduction of $5,014,286 from Holdings' franking account (the forfeited credits). The primary judge held (at [414]) that the value to be attributed to those forfeited credits was $1,291,178.50 on the assumption that Holdings, over time, would have distributed one half of its franking credits. His Honour reasoned (at [410]-[413]) that a loss of $1 in franking credits in those circumstances would lead to additional tax of 25.75 cents payable by a resident shareholder such as the respondent (who was paying the highest marginal rate of tax). His Honour therefore held that the respondent suffered a loss equivalent to the value to be attributed to the forfeited credits.
At [378] of his reasons the primary judge adopted the explanation as to the nature of franking credits and the franking account maintained by a company of Gageler J in Mills v Commissioner of Taxation of the Commonwealth of Australia [2012] HCA 51; (2012) 250 CLR 171 at [12]-[13] where his Honour remarked (omitting citations): "[12] The imputation system in Pt 3-6 of the [1997 Act] partially integrates the income tax liabilities of Australian corporate tax entities and their Australian members. The main object of the Part is expressed to be 'to allow certain corporate tax entities to pass to their *members the benefit of having paid income tax on the profits underlying certain distributions'. Other objects of the Part are expressed to be to ensure that the imputation system it establishes is not used 'to give the benefit of income tax paid by a *corporate tax entity to *members who do not have a sufficient economic interest in the entity' or 'to prefer some members over others when passing on the benefits of having paid income tax' as well as to ensure that 'the *membership of a corporate tax entity is not manipulated to create either of [those] outcomes'. An asterisk is used in the [1997 Act] to indicate that the relevant term is defined elsewhere. [13] By operation of Pt 3-6 of the [1997 Act], every corporate tax entity has a 'franking account', which is 'used to keep track of income tax paid by the entity, so that the entity can pass to its members the benefit of having paid that tax when a distribution is made'. A corporate tax entity, if not a mutual insurance company and if not acting in a capacity of trustee, is a 'franking entity'. The franking account of a franking entity that satisfies an Australian residency requirement for an income year typically receives a 'franking credit' when the entity pays income tax or receives a franked distribution in respect of the year, and typically receives a 'franking debit' when the entity receives a refund of tax or franks a 'frankable distribution' A franking entity franks a distribution by allocating a franking credit to it in which case the amount of the franking credit is to appear on a statement that accompanies the distribution. As a general rule, an amount equal to the franking credit on the distribution is included in the member's or the equity holder's assessable income and the member or equity holder is entitled to a tax offset equal to the same amount."
At [379] his Honour recorded s 200.15 of the 1997 Act which described the account in the following terms: "The franking account (1) A franking account is used to keep track of income tax paid by the entity, so that the entity can pass to its members the benefit of having paid that tax when a distribution is made. (2) Each corporate tax entity has a franking account. (3) Typically, a corporate tax entity receives a credit in the account if the entity pays income tax or receives a franked distribution. A credit in the franking account is called a franking credit. (4) Typically, a corporate tax entity receives a debit in the account if the entity receives a refund of tax or franks a distribution to its members. A debit in the franking account is called a franking debit." (Emphasis added by the primary judge.)
The primary judge acknowledged (at [380]) that the purpose of the franking account was to enable the entity to pass to its shareholders the benefit of the tax already paid by it. Further, each franking credit forms part of a pool of credits in the franking account which is credited and debited during the life of the corporate tax entity. It is from that pool that such credits are distributed to shareholders. His Honour noted that except in the simplest of examples, it is not possible to identify some franking credits distributed in one period as referable to a particular amount of profit earned in another.
Consistent with the foregoing, Holdings maintained a ledger recording the various entries in its franking account. His Honour observed (at [381]) that a franking account was not an accounting concept but a creature of statute so that it would exist by operation of the 1997 Act and regardless of whether the relevant entity maintained an internal ledger. The balance at any time of a franking account would be ascertainable by applying the legislation to relevant events. He observed that the ledger maintained by Holdings recorded that it first accrued a franking credit in March 2005 arising from the processing of its 2005 income year tax return.
The primary judge then noted (at [382]) that from 1 July 2005 Holdings lodged PAYG returns on a quarterly basis so that franking credits accrued on a quarterly basis if those returns reported a profit. Its franking account was debited when franked dividends were distributed and when a full year's tax return was lodged and reconciled with the quarterly PAYG returns. In respect of the period up to 30 June 2010, fully franked dividends were recorded as having been declared on 28 June 2007, 6 July 2007, 19 December 2008, 22 January 2009, 29 October 2009 and 30 April 2010. The company's ledger recorded the following financial year franking account balances (after deducting the franking credits distributed with those dividends): Year ending 30 June Ledger balance 2005 $9,887 2006 $5,940,175 2007 $15,316,251 2008 $20,663,251 2009 $19,357,091 2010 $13,975,038

[19]

Although the ledger records the deduction of $5,014,286 as having been made on 30 June 2010, his Honour considered that it should be taken to have occurred as at the date of the settlement, namely, 21 December 2007. It therefore follows that the forfeited credits should be reflected in the ledger balance as at 30 June 2008. Accordingly, the balance of $20,663,251 should be reduced by $5,014,286 and the balance of $13,975,038 increased by that amount.
The respondent contended below that the deduction of $5,014,286 from Holdings' franking account as a result of the settlement caused compensable damage to him which should be valued at its "full face value" in the manner calculated by Mr Potter, the respondent's expert. Having rejected the appellant's argument that a comparison of the respondent's position in the events that happened with his position under Scenario 2 confirmed that he had not suffered any loss as a result of the deduction of the forfeited credits from Holdings' franking account, the issue then became whether that deduction effected a loss to the respondent and, if so, how its value should be assessed.
At [390] his Honour noted that Mr Potter had concluded that the loss of the forfeited credits was a matter that was capable of affecting the free cash flow to shareholders and thus represented a loss of value to them. He also concluded that 33 per cent of that lost value was crystallised by the sale by the respondent to the CBA on 31 October 2008 of that percentage of his shares in Holdings. He considered that the balance of the loss would crystallise at some time in the future, when there was a distribution of dividends to which franking credits did not attach (presumably because there were none available) or on the sale of the remaining stake of the respondent's shareholding in Holdings.
The primary judge then described (at [391]) Mr Potter's method of calculating the value to a shareholder of the forfeited credits in the following terms: "Mr Potter calculated the value to a shareholder of the lost franking credits as the difference in their tax position on the basis that they were a resident taxpayer paying tax at the highest marginal rate who received a dividend that was fully franked as compared with the same dividend that was wholly unfranked. In the case of the former, the shareholder would pay 46.5% of the grossed up dividend (ie the net dividend and the franking credit). In the case of the latter the shareholder would pay 46.5% of the net dividend. In the case of a franking credit of $5,014,286.00 he calculated the difference to the taxpayer as $2,582,357.00. At this stage I note that this amount assumes that all of the lost franking credits were or would have been distributed. Mr Potter regarded the uncertainty about the time frame over which that distribution would have occurred as being reflected in the absence of any allowance by him for pre-judgment interest."
In fact, the actual calculation prepared by Mr Potter utilised a tax rate of 48.5 per cent. The calculation is set out in the following table and utilises the deemed dividend of $11,700,000, the subject of the settlement (see [12] above): Franked Unfranked Dividend $11,700,000 Dividend $11,700,000 Franking credit $5,014,286 Franking credit Nil

[21]

Thus according to Mr Potter, the theoretical excess tax of $2,582,357 constituted the value to the respondent of the forfeited credits.

At [388] his Honour recorded the appellant's submission that the respondent had not suffered any loss because the evidence suggested that it was unlikely that Holdings would ever pay an unfranked dividend. His Honour then noted that the appellant's expert, Ms Jones, stated in her report that "no loss has been suffered whilst there are sufficient franking credits to distribute full[y] franked dividends". Ms Jones noted that Holdings' franking account would only have gone into debit as at 30 June 2008 if it had fully distributed all profits as at that date, a circumstance that she regarded as unlikely given the cash needs of the business and the then forthcoming sale to the CBA. She stated that she had no basis for verifying what she said was Mr Potter's assumption that the debit to Holdings' franking account materially impacted CBA's purchase of 33 per cent of Holdings.
However at [389] his Honour considered that in cross-examination Ms Jones had conceded that the forfeited credits meant that there was a loss to the respondent of some value. The relevant exchange was as follows: "PAYNE: As a valuer, if a resident taxpayer and [sic] came to you and said as a valuer, Ms Jones, all things being equal this company in the actual world having $5 million less in its franking account than in the hypothetical world, you would tell them: Buy the hypothetical company, wouldn't you? WITNESS JONES: Yes. PAYNE: It's worth more? WITNESS JONES: That's correct, yes."
However it was common ground that there was no evidence that the CBA, when acquiring 33 per cent of the respondent's shareholding in Holdings, had taken into account in the price it paid the fact that Holdings had been required to forfeit franking credits in the amount of $5,014,286 in the year prior to the acquisition. This notwithstanding, at [394] the primary judge, presumably on the basis of the concession of Ms Jones referred to in the preceding paragraph, concluded that the shares in Holdings represented a less attractive proposition to a potential purchaser of the entire company than they would if the same company had an additional $5,014,286 in its franking credits account. In theory this may be correct given that the exchange with Ms Jones was in the form of a hypothetical only. As such, it had no relationship to actual events.
His Honour then set out (at [395]) his reasons for acceding to the respondent's submission that he had sustained a loss as a consequence of the forfeited credits: "I regard the evidence of both Ms Jones and Mr Potter as confirming that the deduction of franking credits as at 30 June 2006 represented a loss of something of value attaching to the shares owned by Mr Symond. As conceded by Ms Jones, an investor who is a resident taxpayer would regard the shares in a company with a higher franking account as more valuable than an otherwise identical company with a lower franking account balance. The above discussion illustrates various reasons (or contingencies) that support that assessment. The higher franking account balance means that the shares are at least more attractive to a potential corporate purchaser who may want to acquire the whole company and distribute them. The higher franking account may make the company more inclined to distribute a higher level of dividends than would otherwise be the case. The higher franking account means that the company has more scope to distribute franked or partly franked dividends from existing profits even if losses are subsequently incurred. The circumstance that the company subsequently earns substantial tax profits and does not distribute all of its profits as dividends thereby acquiring a large franking account balance does not render the franking credits worthless."
The primary judge then turned to the final question on this issue, namely, what value, if any, could be attributed to the forfeited credits. At [397] he recorded the appellant's submission that the high level of profitability of Holdings in the period after the date of the settlement generated a significant level of franking credits, not all of which were used. Accordingly, it was submitted that the "overwhelming likelihood, on the basis of the available evidence, is that the company will never pay a dividend that it is unable to frank". In this respect, the pooled nature of franking credits meant that until the pool is drained or close to draining no loss is occasioned to the shareholder.
His Honour (at [398]-[399]) rejected this argument which he considered was based upon the assumption that the forfeited credits could be separated from the remaining credits earned by Holdings and the former treated as the last credits to be distributed. This approach meant that the deduction of the forfeited credits did not represent any loss to the shareholder until the pool of franking credits was about to drain, although when it did, that represented the full extent of their value in the hands of the shareholder. His Honour could see no reason why this should be so. He therefore posed the following rhetorical (albeit hypothetical) questions: why not treat franking credits on the basis of being distributed on a first in, first out or proportionate basis? Why discount the possibility that the dividend distribution would have been higher had more credits been available? Why assume that there is no possibility that Holdings will commence to incur losses but seek to distribute dividends (presumably out of accumulated profits)? Are not all these potentialities as well as others reflected in the concession made by Ms Jones that, all other things being equal, shares in a company with $5,014,286 more in franking credits are more valuable than shares in another company without?
At [399] his Honour rejected the appellant's approach for two reasons. First, he considered that it was inconsistent with the pooled nature of franking credits. The flaw in that approach was that it attempted to compartmentalise the forfeited credits that would be available had they not been deducted. Secondly, it sought to apply a "but for" approach in determining the value that was lost by reason of the deduction to the franking account. In effect, the appellant was contending that the proper approach was to ask whether, but for the deduction, would or will the respondent receive a dividend that will only be partially franked or wholly unfranked? Reference was made to the following statement of the High Court in Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332 at 355: "However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities." (Emphasis in original.)
We interpolate that in our view the questions posed by his Honour at [398] do not, in the events which occurred, lead to the conclusion that the respondent suffered a loss of a commercial opportunity due to the deduction of the forfeited credits from Holdings' franking account. The probability or possibility of any of the posited events occurring was, in the circumstances which prevailed, nil or at least negligible.
We also observe that a higher fully franked dividend distribution could have been made but was not (and it was not suggested by the respondent that it could have but for the forfeited credits). Furthermore, losses were not incurred over the relevant years and there was nothing to indicate that distributing franking credits on a first in first out or proportionate basis would have made any difference to Holdings' capacity to make a fully franked distribution. In any event such a proposition is inconsistent with the pooled nature of the franking credits account and the inability to identify, as his Honour accepted (at [380]), some franking credits distributed in one period as referable to a particular profit earned in another.
Turning to the question of the assessment of the respondent's loss, the primary judge referred (at [401]) to Mr Potter's contention that, had the franking account not been debited with the forfeited credits, the respondent would have attributed a greater value to the future cash flows of the business 33 per cent of which he sold to CBA on 31 October 2008. However, at [402] his Honour noted his finding that in the absence of evidence concerning the sale to the CBA, it could not be assumed that retained profits were treated by the CBA in any particular manner when determining the purchase price. Whilst the primary judge was prepared to infer that the CBA probably attributed some value to the franking credits, he was not prepared to infer that the CBA attributed any particular value to them, much less their full face value as calculated by Mr Potter. We again interpolate that the inference that the CBA probably attributed some value to the franking credits sits uncomfortably with his Honour's observation at [158] that he was not provided with any details concerning this sale nor any evidence as to the manner in which it was negotiated. The inference is, with respect, speculative. On one view of it, this finding undermined at least one of the planks upon which his Honour relied to find that the respondent had sustained a loss as a consequence of the forfeited credits.
At [408] the primary judge rejected the approach of Ms Jones, which was to only treat the forfeited credits as causing loss to the shareholders when the pool of franking credits was about to run dry. In her view, there was no likelihood of that happening in the case of Holdings. The proper approach, his Honour considered, was to treat the diminution in the entire volume of the pool as what effected a loss to the respondent and attempt to place a value on each credit in the pool. Thus the loss of $1 in franking credits will translate to $1 less in franking credits being distributed to the shareholder. According to Mr Potter, this would represent a loss of 51.5 cents in tax to a shareholder such as the respondent.
However, his Honour seems to have accepted (at [410]) that if on average over time, a company distributes only one half of its earned franking credits, then $1 of credits earned would translate to 50 cents in credits being distributed to shareholders. A loss of $1 of the franking account balance would thus translate to a 50 cent reduction in the face value of the credits distributed to the shareholder and an extra or top-up tax payment of 25.75 cents by a taxpayer such as the respondent: see [92] above. Such an average rate, his Honour observed, "may provide a reasonably good guide to an investor as to the appropriate value to attribute to the franking account balance". This finding was challenged in Appeal Ground 3(v).
As we understand his Honour's reasoning on this point, the forfeited credits had value to a shareholder, and therefore to the respondent, as an investor was likely to attribute value to the company's franking account balance in what, for instance, the investor would pay for the shares. A reduced balance would be reflected in a reduced offer and thus the shares would be worth less. That difference would constitute a loss in the value of the shares and thus a loss to the shareholder. However, as pointed out below, loss of value of his shares due to the forfeited credits was never part of the respondent's case, although in oral argument it was contended that the shares in Holdings might be "less attractive" and therefore less valuable to a future potential purchaser. However, no attempt was or could be made to quantify this loss of value.
The primary judge's conclusion with respect to the issue of determination of loss was stated by him in the following paragraphs of his reasons: "[412] In the events that occurred, during the period 30 March 2005 to 30 June 2011 Holdings distributed $29,132,772.00 in franking credits. A calculation of the credits that it earned in the same period is not straightforward on the material available to me. I have adopted the approach of calculating 30% of the tax profit for the years up to 30 June 2010 and three quarters of the following year. This seeks to reflect the fact that Holdings was lodging quarterly PAYG returns and earning credits quarterly. It means that as at 30 June 2011 franking credits for the last quarter's profit for that year would not be available to distribute [until the following year]. This yields a figure of $80,716,845.00 in earned credits (30% of $269,056,153.00) and $75,702,559.00 after the deduction of $5,014,286.00. The distribution rate [of franking credits] was 38.5% ($29,137,772.00 / $75,703,559.00). [413] This analysis yields a figure for the distribution rate that in my view is too low for a number of reasons. First, it excludes the period prior to 2005 when losses were incurred. This is especially relevant if the matter is being considered from the perspective of the time of the settlement with the Commissioner when those losses would have been quite recent. Second, the last year that was partially included (2011) was very profitable for Holdings, yet the level of dividend distribution was the same as the previous year. Third, it takes no account of the possibility of CBA moving to 100% ownership and consolidating the franking credits. Bearing those matters in mind I consider that a distribution rate of 50% should be adopted. [414] If this rate is applied to the value to [the respondent] of the deduction to the franking account as calculated by Mr Potter, it yields a figure of $1,291,178.50. Thus, I assess the value of the imposition of a $5,014,285.00 [sic] deduction to the franking account on his shareholding as $1,291,178.50." As noted at [111] above it was not suggested that the level of dividend distribution up to 2011 or 2012 was in any way influenced by the forfeited credits.

[22]

The Appellant's submissions

In its written submissions the appellant submitted that the primary judge erred in two respects in holding that the respondent suffered a loss as a result of Holdings forfeiting the franking credits as required by the settlement. First, regardless of their value his Honour should have concluded that Holdings' franking account balance would have been greater under the Restructure and the settlement than under Scenario 2 with the consequence that there could be no loss to the respondent as a result of a reduction in available franking credits due to the settlement.
Thus, having found that if the respondent had not undertaken the Restructure he would have undertaken Scenario 2, his Honour also appeared to accept at [281]-[282] of his reasons that the Holdings franking account under Scenario 2 would have been reduced by a total of $8,944,416 in the 2005 and 2006 income years. This is because under Scenario 2 for the 2005 income year the respondent would have received a dividend of $7,162,814 and franking credits of $661,546. For the following year, he would have received dividends in the sum of $23,392,553 and franking credits of $8,282,870. Although these dividends would have been in each case only partly franked, nevertheless the total of $8,944,416 in franking credits would have effected a reduction in that amount in Holdings' franking account whereas under the Restructure and settlement the amount of any reduction would only be $5,014,286. Therefore, the Restructure and settlement left Holdings with an additional $3,930,130 in franking credits than it would have had under Scenario 2. On this basis it was impossible to conclude that the deduction of the forfeited credits pursuant to the settlement caused the respondent any loss. This argument (being Appeal Ground 3(vi)) was not elaborated upon in the appellant's oral submissions. Rather, those submissions were confined to the second reason as it clearly had greater force.
The second reason advanced by the appellant (and encapsulated in Appeal Grounds 3(i)-(iii)) related to his Honour's assumption that there was a loss on the footing that Holdings would have declared sufficient dividends to use up one half of its franking credits over time. Even if it was assumed that sufficient dividends would have been declared to use up one half of the available franking credits including the forfeited credits, an assumption for which there was no evidence, at all times there was more than enough franking credits in Holdings' franking account to fully frank such dividends with the consequence that the respondent would not have incurred any additional top-up tax and, accordingly, suffered no loss.
It was submitted that in order to ascertain whether the forfeited credits were of any significant value to the respondent, his Honour should have considered whether they would have been attached to dividends in the foreseeable future. That is, would the forfeited credits have attached to dividends payable after the forfeiture occurred on 21 December 2007 with the result that the respondent would, but for the forfeiture, have paid additional top-up tax as a consequence of receiving only partly franked dividends? It was contended there was no evidence to suggest that this was likely. Thus even after the deduction of the forfeited credits, as events actually transpired the respondent received $50 million in dividends which were fully franked. Those events also established that even after debiting the franking account in accordance with the settlement, Holdings still had a franking account balance at the end of each of the 2008-2010 income years of over $13 million: see [97] above.
Furthermore, as the appellant observed, provided a company does not distribute by way of dividends amounts greater than its taxable profit, it will always be able to fully frank its dividends. As companies do not usually distribute 100 per cent of their profits, they generally have surplus franking credits. This occurred in the present case for, as noted above, the respondent received $50 million of dividends which were fully franked even after December 2007 when the forfeited credits were deducted from Holdings' franking account. As at 30 June 2007 the franking account balance was $15,316,251 and as at 30 June 2008 its balance was $15,648,965 (see [98] above).
Accordingly, it was submitted that the forfeited credits would only have given rise to a possible loss in the respondent's hands if it could be reasonably concluded that he would in the future have received a dividend which could not be fully franked. Not only did this not occur, it was highly unlikely that it would or could. In these circumstances his Honour ought not have adopted Mr Potter's speculation as to the potential utilisation of Holdings' franking credits.
Finally, it was submitted that what his Honour had done (see [108]-[109] above) was to compare the loss of the forfeited credits with the loss of a commercial opportunity, the latter being the value placed on those credits by the CBA. It was contended that there was no evidentiary basis for his Honour to have concluded that those credits would have had any value to the CBA had they not been deducted and that his Honour's preparedness (at [402]) to infer that the CBA probably attributed some value to them presumably upon the basis of Ms Jones' evidence recorded at [104] above, was no more than speculative. For the reasons set out at [112] and [115] above, we would agree with this submission.
In oral submissions the appellant reiterated that Mr Potter's calculation recorded at [102] above begged the very question whether there was any likelihood that Holdings would ever declare an unfranked or partly franked dividend. Although Mr Potter referred to some academic articles that related to the extent to which franking credits hypothetically might be reflected in the value of the shares of a publicly listed company and about which the authors of the articles were in disagreement, in the present case Holdings was not a listed company and there was no evidence that the CBA placed any value on the franking credits that it acquired on 31 October 2008.
Mr Potter's analysis, as refined by his Honour, was that the respondent had lost $1,291,178.50 as a result of the forfeited credits. That could only come about, so it was contended, if there was a likelihood that unfranked or only partly franked dividends would have been declared after the forfeiture took place with the effect that Holdings' franking account balance was reduced to a level which would result in any distribution by it of 50 per cent of its profits by way of dividend being other than fully franked. Given that from 31 October 2008 CBA was a major shareholder in Holdings, a shareholding that increased to 80 per cent in 2012, it was highly unlikely that that institution would agree to the declaration of a dividend that was other than fully franked.
In this context it was submitted that franking credits have no inherent value in themselves: they are not an asset of the company available to be traded; they are not reflected in the company's balance sheet. They are only of value to a shareholder if he or she receives a dividend as they effectively give the shareholder a credit for the company tax that has been paid by the company on its taxable profits. Accordingly, the only time that the value of a franking credit crystallises is at the time a franked dividend is paid. However, in the present case, all dividends declared after the forfeited credits were deducted were fully franked and the evidence established (see [97] above) that at all material times Holdings had substantial franking balances even after the forfeited credits were deducted.
It was therefore submitted that the only time a company will ever exhaust its franking account balance is if it distributes by way of dividends an amount greater than its taxable income. Given his Honour's finding of a dividend distribution rate of 50 per cent (meaning thereby that Holdings was only ever likely to distribute by way of dividend 50 per cent of its after tax accounting profits), it followed that in light of its franking account balances, there was no prospect of the respondent receiving a dividend which was other than fully franked and this likelihood was borne out by the events which occurred.
In further support of this submission the appellant sought to illustrate that up to and including the year ended 30 June 2012, the after tax accounting profit of the business was $193,456,456; yet only dividends totalling $90,176,480 had been declared, being 46 per cent of the accounting profit. Over the period referred to, tax of approximately $110 million was paid upon a taxable profit of $335,177,656 at 30 cents in the dollar resulting in franking credits in the same amount as the tax paid.
The total franking debit as a consequence of the dividends being fully franked and including the forfeited credits, totalled $43,661,348. A comparison of that amount broken up into financial years indicates that the balance of the franking account for each year from 2007 to 2012, taking account of the forfeited credits deducted, did not fall below $13.9 million. Accordingly it was submitted that the respondent suffered no loss in the sense that he received unfranked or partly franked dividends over the relevant period due to the loss of the forfeited credits.
We interpose that at [412] of his reasons the primary judge carried out a similar exercise with respect to the period 30 March 2005 to 30 June 2011 during which Holdings distributed $29,132,772 in franking credits. His Honour then calculated the franking credits earned during the same period which resulted in a figure of $80,716,845 in earned credits or $75,702,559 after deduction of the $5,014,286 as required by the settlement. True, the primary judge carried out that exercise for a different purpose as he was seeking to determine the dividend distribution rate which, on those figures, he calculated at 38.5 per cent but which he regarded as too low (see [116] above). Yet the figures which we have extracted from [412] of the primary judgment supports the appellant's submission that the actual profits, dividends paid and franking credits earned and debited establish that in fact the respondent suffered no actual loss in that, notwithstanding the deduction of the forfeited credits, not only did the respondent in fact receive only fully franked dividends but also, given the balance of the franking account from year to year, there was no prospect of his receiving other than fully franked dividends at any material time.
It being no part of the respondent's case at trial that the value of his shares was reduced as a consequence of the forfeited credits, it followed that the evidence of Ms Jones extracted at [104] above could not provide a measure of the respondent's loss, if any. Even if one accepts that all things being equal a company is better off having more franking credits than less, it did not follow in the present case, as distinct from the hypothetical put to the witness, that the respondent had sustained any actual loss as a consequence of the deduction of the forfeited credits required by the settlement.
The primary judge thus approached the matter by simply comparing the tax cost of receiving the deemed dividend of $11,700,000 on a franked and unfranked basis, the difference, according to Mr Potter, being the value of the forfeited credits. As noted above, his Honour then assumed a 50 per cent distribution rate which, the appellant submitted, will always leave 50 per cent of the franking credits in the company's franking account which would continue to accumulate.

[23]

The Respondent's Submissions

In his written submissions the respondent addressed both errors asserted by the appellant and recorded at [117]-[118] above. However, we confine ourselves to the second error for the reasons referred to at [118] above.
As to the second error, the respondent contended in his written argument that notwithstanding the appellant's submission that no loss due to the forfeited credits was proved as Holdings had sufficient franking credits to fully frank dividends declared in the foreseeable future, there was comprehensive evidence from the respondent's damages expert, Mr Potter, who expressed an opinion according to orthodox valuation theory which was addressed and accepted by the primary judge at [389]-[395] and [414]. (We will return to these passages below.).
The respondent further contended that the appellant's submission proceeded on the incorrect basis that companies do not ever reduce their franking accounts to nil. He asserted that this was wrong in principle for reasons explained by Edmonds J (in dissent, but whose ultimate decision was upheld in the High Court) in Mills v Commissioner of Taxation (2011) 198 FCR 89 at [28] and referred to by the primary judge at [380]. In that paragraph Edmonds J did no more than explain one of the ways in which a company could use franking credits from prior years, namely, where it has had a period of losses but then returns to profit in which case it could use franking credits earned during an earlier period to frank dividends out of profits earned during a later period. The primary judge referred to this possibility at [395] to which we shall also return.
The respondent relied upon the evidence of Mr Potter that there are other ways in which a shareholder might enjoy franking credits even in the absence of a distribution of current year profit, such as by selling shares back to the company, an example also referred to by the primary judge at [394]. It was submitted, therefore, that the proposition accepted by the primary judge that the deduction of the forfeited credits represented a loss to the respondent could not in the circumstances be described as guesswork or conjecture.
In support of the foregoing the respondent also relied upon the following cross-examination of Ms Jones, the appellant's expert: "PAYNE: Franking credits are kept in a franking account? WITNESS JONES: Yes. PAYNE: If you were to assume, for example, a company earns $100 profit in year 1. It pays tax on that, 30 per cent, $30, to franking? WITNESS JONES: That's right. PAYNE: In year 2 that company makes a loss of $100. In year 3 the company makes another $100 profit. So there is no tax payable, correct? WITNESS JONES: Year 3, 100 profit, yes. PAYNE: Yes, and a $100 profit the year before. No tax payable. Nonetheless, that company, should it choose to do so, can pay a dividend and frank that dividend with the $30 in the franking account? WITNESS JONES: Yes"
He also sought support in the following exchange between the primary judge and Mr Potter: "HIS HONOUR: Can I ask you this: your opinion that the loss crystallised by 31 October 2008, is that premised on your analysis that the CBA price was likely to be undertaken by reference to the diminution in the franking credit balance? WITNESS POTTER: I'd have to say partly informed, your Honour. I think there is a variety of reasons why the loss of the franking credits would occur. One of them is at some stage before, as you correctly identified, the falling in of the life of the company those unfranked dividends would be paid out. Another is, as I identified earlier, the company might incur trading losses or it might decide to have a share buy back or something like the CBA. The other one is I believe what Mr Symond had before he sold the business was a right to a stream of revenue and as a result of the sale exchanged that for sale consideration and therefore crystallised, if you like, the effect of that diminished after tax dealings."
At [392] his Honour recorded some cross-examination of Mr Potter in which he agreed that the history of a company might reveal the extent to which franking credits have accumulated because the company's dividends policy has resulted in dividends not absorbing the whole of the available franking credits. He further agreed that the history of Holdings indicated a consistent profit since 2007 and that there had been a history of accumulated franking credits. The following exchange then occurred: "DONALDSON: And I'd suggest to you that any hypothetical purchaser looking today at this company would conclude that the likelihood of the company paying a dividend that it couldn't frank due to the state of its franking account was remote? WITNESS POTTER: Someone looking at it today might take that view but as I said earlier there are other ways to use franking credits shared by banks and things and [the] CBA exhibited a practice of doing that so one would argue franking credits are of value to [the] CBA."
It was therefore submitted that the evidence referred to established not only that the forfeited credits had value but also that the respondent had sustained a loss as a consequence of the forfeiture given the possibilities with respect to the use of those credits in the various scenarios postulated in the questions asked and the answers given (such as those referred to at [108] above. It was accordingly submitted that the loss to the respondent determined by the primary judge could "hardly be described as speculative".
It was then submitted that the respondent could not be criticised for not leading any evidence as to the value placed on the franking account by the CBA when it purchased shares in Holdings. Details of that asset sale would not have disclosed a market value for the prior debit to the franking account because it was not the subject of the transaction as it was not a company asset. All that could be gleaned - if it could be gleaned at all - from an examination of that transaction (which did not occur) would be the extent to which a particular buyer (the CBA) would otherwise have been prepared to ascribe value to the account if the debit had not been made; a fact that could never suffice to establish a market value for an asset, much less a franking account.
We interpolate that the difficulty with the last proposition is although it is true, nevertheless both the respondent and the primary judge relied upon the proposition that the balance of the franking account would have affected the price the CBA paid, that the CBA may have paid less due to the loss of the forfeited credits and, further, that had those credits been available, the CBA may have used them in other ways. Therefore the franking credits were of value but, as Mr Potter noted, to the CBA, not the respondent.
The respondent submitted that the appellant's real complaint was that it had not been shown that the franking account had any particular special value either to the respondent or to the CBA. That complaint was characterised by the respondent as being that Holdings had so many franking credits that its shareholder (the respondent) could afford to lose some five million of them. That approach was said to be flawed as a comparison of the respondent's position in the real world under the Restructure and in Scenario 2 established that the $5,014,286 debit to the franking account "resulted in a negative change in the respondent's financial position". The debit to the franking account diminished the capacity of the business to generate free cash flow. The question addressed by the primary judge, therefore, was the value of the reduced opportunity to generate that cash flow. It is the measurement of that diminution as undertaken by his Honour which was the subject of the appellant's attack and then only at a very high level of generality.
In oral submissions the respondent contended that the forfeited credits could, in effect, be placed in a special locked box of franking credits which can be assumed to be protected by the amount of franking credits otherwise in the company's franking account. The fundamental basis of that thesis, which his Honour rejected, was that the forfeited credits could only have a value when the pool of franking credits drained down to zero or close to zero. His Honour then properly analysed the question of value upon the basis of the possibilities and probabilities of what the forfeited credits may have been attached to in terms of dividends even if, for example, the company went through a period of losses when no tax would be payable and no franking credits earned. In such a scenario the pool of franking credits could then be used to fully frank dividends paid in the future and it is in that context that the loss of the forfeited credits has a value.
After referring to what Gageler J said in Mills as extracted at [93] above, the respondent submitted that first, a franking account is, as the primary judge had remarked at [381] (see [96] above), a creature of statute; secondly, there is a pool of franking credits such that it is not possible to identify separately within the pool a particular franking credit so that, for example, many companies after the Global Financial Crisis would have had losses which they carried forward but had made current year profits in respect of which dividends were declared fully franked notwithstanding the losses because the franking account was carried forward indefinitely.
There being a pool of franking credits available, the forfeited credits would have remained available to enable potential distributions in the future to be fully franked. His Honour determined an appropriate distribution rate at [412]-[413] which he then applied to Mr Potter's calculation of value based on the difference in terms of tax payable, between a franked and unfranked deemed dividend of $11.7 million. In so doing, his Honour adopted (at [408]) the approach of treating the diminution in the entire volume of the pool due to the forfeiture as effecting a loss to the respondent. It was then necessary to place a value on each credit in the pool which he did (see [113]-[116] above).
It was submitted that this was a perfectly acceptable valuation exercise culminating in the primary judge's assessment at [414] that the value of the imposition of a $5,014,285 deduction to Holdings' franking account on the respondent's shareholding was $1,291,178.50.

[24]

Did the Respondent suffer a loss with respect to the forfeiture of the franking credits?

At [395] the primary judge advanced three reasons for his conclusion that the debit of the forfeited credits represented a loss to the respondent. Although we have extracted that paragraph at [106] above, it is appropriate to summarise them in order to consider their validity. The first reason was that the higher franking account balance meant that the shares in Holdings were at least more attractive to a potential corporate purchaser who may want to acquire the whole company and distribute them. The respondent accepted that that reason addressed the 80 per cent acquisition by CBA, as well as a potential buyer of 100 per cent. The same difficulties with this reason that have already been explained at [105], [112], [115], [123] and [141]-[142] above in relation to CBA also apply to a potential buyer of 100 per cent. There was no evidence to support it.
The second reason was that a higher franking account balance may have made Holdings more inclined to distribute a higher level of dividends than might otherwise be the case. Again there was no evidence to support this theoretical possibility. The first reason, if it went beyond speculation, would be a loss to the respondent as shareholder in selling his shares; the second, if available on the evidence, would be a loss to the respondent continuing to hold his shares.
The third reason was that a higher franking account balance meant that the company had more scope to distribute franked or partly franked dividends from existing profits even if losses were subsequently incurred. Accordingly, had Holdings incurred losses for a period of time (which it did not, his Honour again entering the realm of speculation), it would still be able to declare fully franked dividends when it became profitable by calling upon a larger franking account which included the forfeited credits. However, notwithstanding the circumstance that Holdings subsequently earned substantial taxable profits and did not distribute all of its profits as dividends thereby acquiring a substantial franking account balance, the forfeited credits still had value. According to his Honour (at [369]), the question was to determine what it was.
The respondent drew the Court's attention to [380] and [390] as supporting his Honour's first reason (see [95] and [100] above). That reason, so it was submitted, was supported by both experts as a matter of "valuation theory". In other words, as a matter of valuation theory Holdings was worth more to the respondent, as the 100 per cent shareholder, with a larger franking credit account than a diminished one. His Honour thus held (at [394]) that shares in Holdings represented a less attractive proposition to a potential purchaser of the entire company than they would if the same company had an additional $5,014,286 in franking credits. As we observed at [105] above, this may be so in theory, but was inconsistent with the evidence as to the reality of the situation.
The primary judge's three reasons were sourced in his acceptance of Mr Potter's evidence (relied on by the respondent: see [138]-[140] above) that the loss of the forfeited credits was a matter that was capable of affecting the free cash flow to shareholders and thus represented a loss of value insofar as there may not have been sufficient franking credits in the balance of Holdings' franking account to fully frank distributions in the future. However, in the relevant period that was simply not the case.
All declared dividends in the relevant period after Holdings became profitable in 2007 were fully franked. The forfeited credits did not in fact diminish the value of the respondent's shareholding or cause him to receive other than fully franked dividends up to December 2012 when CBA acquired a further 47 per cent of his shareholding. Any sale in the future of the respondent's remaining 20 per cent of his shares in Holdings would only crystallise a loss to him if there was a proper evidentiary basis for finding that the purchaser of that 20 per cent would more likely than not pay more had the forfeited credits remained in the franking account. No such basis was established. Accordingly, the forfeited credits were irrelevant to the respondent's financial position and thus caused him no loss capable of resulting in compensatory damages. There was no evidence that they affected Holdings' cash flow in any relevant manner.
As a matter of principle a theoretical loss sustained by the respondent would be insufficient to justify an award of damages in his favour given the legal basis of the appellant's liability to him. The respondent must, as a consequence of the forfeited credits, have suffered a real, and not a theoretical, loss in the sense that his assets have been diminished or he has incurred an avoidable expense: cf Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36; (2014) 88 ALJR 911 at [67], [149]-[150] (Crennan, Bell and Keane JJ). Had the effect of the forfeiture been a provable diminution in the value of the respondent's shares, he would have been entitled to recover to the extent of that diminution. But the reality was that the respondent had no need for the forfeited credits in order to receive fully franked dividends. They may not have been worthless but their deduction did not cause him any loss or detriment in the circumstances which prevailed.
For present purposes one can accept that the evidence was sufficient to support a finding that in theory a potential purchaser who wished to use franking credits for their own buyback needs or otherwise would have been prepared to pay more for the shares in Holdings had there been no deduction of the forfeited credits. The difficulty is identifying how the primary judge then placed a value on the shares so diminished. Although the respondent submitted that the answer was to be found at [413] of his Honour's reasons, in our view what his Honour said there does little to advance the matter. At [413] his Honour referred to three matters which did no more than provide support for his finding that a franking credit distribution rate of 38.5 per cent was too low and should be 50 per cent. The distribution rate is distinct from any diminution in value of the shares in the eyes of the hypothetical potential purchaser (and thus in the respondent's hands).
Moreover, in our view his Honour was there determining an appropriate franking credit distribution rate upon the basis that the CBA may move to 100 per cent ownership of Holdings and thereby consolidate its franking credits with its own. However, that did not establish precisely what the respondent was said to have lost. Did he lose a potential stream of income on his shares? Did he lose effectively because there was a greater tax cost in a stream of income to him? Or did he lose because his shares were of lesser value? In oral argument the respondent adopted an affirmative answer to the second and third of these questions but not to the first as the premise to that question is whether one can identify particular franking credits which have been forfeited, a proposition which was rejected by the primary judge. The second question should have also attracted a negative response.
As to the third question, even accepting the starting premise in his Honour's reasoning that Holdings might represent a less attractive proposition to a potential purchaser without the forfeited credits as distinct from with them, the difficulty was to apply that general proposition in light of the evidence (or lack of it) to determine what a potential purchaser might have been prepared to pay for the shares in Holdings absent the loss of the forfeited credits. The respondent conceded that this was the nub of the dispute: nonetheless he contended that there was evidence that the shares might be less attractive to a potential purchaser in the future.
However in our view it was insufficient for the respondent to simply assert that in a hypothetical situation, as a matter of valuation principle, a company with additional franking credits of $5,014,286 would necessarily be a more attractive proposition to a purchaser of 100 per cent of the company than one that did not have the benefit of franking credits in that amount. Of course, a judicial valuer is not obligated to accept the valuation of the experts of either party and can come to his or her own determination but in doing so he or she may only determine value based on admissible evidence: in the present case, evidence that enabled a determination to be made as to the reduction in the value of the shares in Holdings as a consequence of the loss of the forfeited credits. In our view that evidence was missing.
The primary judge nevertheless determined that the respondent's loss was $1,291,178.50. He did this by simply taking 50 per cent of the loss of value determined by Mr Potter which was based on the difference in tax paid on a franked and unfranked dividend. The effect of his Honour's decision, as conceded by the respondent, was that the respondent would have received $1,291,178.50 more for his shares had there been no loss of the forfeited credits. In our view the evidence simply did not support such a finding and was no more than a theoretical calculation in what was accepted to be a hypothetical situation.
The respondent accepted that there were problems with the valuation of franking credits in the hypothetical exercise which the primary judge attempted to undertake. Relevantly, his Honour valued the franking credits in a manner which did not reflect a decreased value of the respondent's shares. The logic of his Honour's reasoning seems to have been first, a hypothetical purchaser of 100 per cent of the shares in Holdings would pay more for those shares if at the time of purchase the franking account of Holdings had not been reduced by the forfeited credits; secondly, the value of the forfeited credits to such a purchaser was that the forfeited credits would have constituted free cash flow that would enable the company to frank distributions even where losses were incurred, which was valuable to the shareholders of Holdings (and which it would not necessarily have been able to do as a consequence of the reduction in its franking account by the amount of the forfeited credits); thirdly, that an appropriate level of distribution of franking credits would be 50 per cent; and fourthly, that therefore the forfeited credits had a value equivalent to 50 per cent of the "full face value" of the forfeited credits calculated by Mr Potter (see [102] above).
The difficulty with this process of reasoning is that it is entirely theoretical. As at 30 June 2008, excluding the forfeited credits, the balance of Holdings' franking account stood at $20,663,251. On forfeiting franking credits of $5,014,286 in December 2007, there still remained a balance in the franking account as at 30 June 2008 of $15,648,966. In these circumstances, there could be no finding by the primary judge, and he did not purport to make one, that in the period ending 30 June 2012 (shortly after which CBA became an 80 per cent shareholder in Holdings) there was any possibility of dividends being declared which were other than fully franked.
In a sense this was recognised by the primary judge in the calculations he made at [412] of his reasons which we have extracted at [116] above. There, his Honour determined an historical distribution rate of franking credits of 38.5 per cent, and then increased that to 50 per cent for the reasons he recorded at [413]. At [414] he applied that rate to the value to the respondent of the deduction to the franking account "as calculated by Mr Potter" thereby yielding a figure of $1,291,178.50 which he assessed as the "value of the imposition of a $5,014,285.00 [sic] deduction to the franking account on [the respondent's] shareholding". In other words, his Honour assessed the reduction in the value of the respondent's 100 per cent shareholding in Holdings as a consequence of the forfeited credits in the sum of $1,291,178.50.
In our view that does not represent the true loss, if any, to the respondent as a consequence of the forfeited credits. In the absence of evidence that the CBA paid more, or that a potential purchaser would have paid more, for shares in Holdings had the forfeited credits not been deducted, there would only be such a loss if there was a probability that as a consequence of the forfeited credits the respondent may have received dividends which were other than fully franked due to the reduction of franking credits in Holdings' franking account. The onus lay upon the respondent to demonstrate that as a consequence of the forfeited franking credits he sustained an actual loss of something of value. In our view the primary judge's approach was no doubt dictated by the fact that the respondent was unable to demonstrate either the probability or the possibility that as a consequence of the forfeited credits he would receive declared dividends which were other than fully franked.
The general rule as stated in McCrohon v Harith [2010] NSWCA 67 (at [54] ‑ [55]) is that "'damages for tort or for breach of contract are assessed as at the date of the breach' - the date of breach rule: Johnson v Perez (at 367) quoting Miliangos v George Frank (Textiles) Ltd [1976] AC 443 (at 468) per Lord Wilberforce. However, the general rule is not rigid and 'will yield if, in the particular circumstances, some other date is necessary to provide adequate compensation': Johnson v Perez (at 367) per Wilson, Toohey and Gaudron JJ; (at 370 - 371) per Brennan J; (at 386 - 387) per Dawson J; see also Golden Strait Corporation v Nippon Yusen Kubishika Kaisha [2007] UKHL 12; [2007] 2 AC 353." The general rule is flexible because the object of the award (and assessment) of damages is to give an injured plaintiff that amount in damages which will most fairly compensate for the wrong suffered: Johnson v Perez [1988] HCA 64; 166 CLR 351 (at 355 - 356) per Mason CJ; (at 367) per Wilson, Toohey and Gaudron JJ; (at 371) per Brennan J; (at 380) per Deane J; (at 386) per Dawson J; see also the discussion in Ng v Filmlock Pty Ltd [2014] NSWCA 389 at [47]-[56] per Gleeson JA with whom Tobias AJA agreed. In the present case, the appellant breached its duty of care and thus committed a tort; it was in breach of contract; and it also contravened the Trade Practices Act. In the circumstances it was appropriate for his Honour to ignore the date of breach and to assess the respondent's loss as at the date of hearing. No point was taken on the appeal as to him having done so: see also [70] above. On that basis and on the historical evidence, it became impossible for the respondent to establish that had the forfeited credits not been lost, he would have received dividends which were other than fully franked.
In these circumstances it was necessary for the primary judge to pursue a different approach to ascertain the effect of the deduction of the forfeited credits on the value of the respondent's shareholding. In our view the approach his Honour took was flawed as it does not reveal, let alone establish, the respondent's true loss whether as at the date of hearing or at the date of the settlement. The true question, as the appellant contended, was whether the respondent could demonstrate a loss to him as a consequence of Holdings forfeiting the franking credits in circumstances where there was no evidence of any loss in the value of his shares. In our opinion he could not.

[28]

The middle column of the table sets out interest on each of the first four integers pursuant to s 100 of the Civil Procedure Act 2005 (NSW) at what his Honour referred to in the supplementary judgment as the "Court rates" applicable at the time and, in respect of each integer (the amount of which was in dispute), for the period commencing on the date each amount was paid or otherwise incurred by the respondent and ending on the date of judgment on 31 October 2013.
Although Mr Potter assessed the benefit of the Restructure in the sum of $1,201,833, his Honour accepted the recalculation of that figure to $6,033,725 which Mr Potter was required to undertake after publication of the primary judgment. This figure included his Honour's calculation of timing benefits under the Restructure that he based on Holdings' internal rate of return which was an interest rate considerably less than the Court rates. At [45] of the supplementary judgment the primary judge therefore adopted the case put by the respondent that: "allowed interest on the amount paid to the Commissioner in tax and penalties (and associated professional costs) at Court rates and included in the Benefit of the Restructure a component to be calculated by using an earnings rate equal to that achieved by Holdings on its own funds."
In so doing his Honour rejected the appellant's submission that the Court rates should only be imposed on the "net loss" suffered by the respondent from time to time. His Honour illustrated this submission at [35] of the supplementary judgment referring to part of a spreadsheet prepared by Ms Jones which provided for interest to be calculated "on the cumulative net position" of the respondent from time to time to which a consistent rate of interest was to be applied at either the Court rates or Holdings' earnings rate, a matter Ms Jones left to his Honour to determine.
The primary judge rejected Ms Jones' approach as he considered (at [36] of the supplementary judgment) that it involved a misconception about the two integers that were sought to be combined, namely, the extra tax and expenses paid by the respondent represented by the first four items in the table referred to at [167] above and what was said to be the benefit of the restructure. Certainly the benefit of the restructure involved a quantification of the (offsetting) value to the respondent on the adoption of the Restructure. At [37] of the supplementary judgment his Honour noted that he had determined that that value should be measured by calculating the lower tax cost paid on the distribution of the net dividends distributed by Holdings in the period up to 30 June 2011 under the Restructure compared with what would have been paid had the same dividends been distributed by Holdings under Scenario 2.
At [38] of the supplementary judgment the primary judge remarked that the error in Ms Jones' approach was to treat the benefit of the restructure as simply involving the net effect of a series of payments made (or not made) by the respondent from time to time which could be included on a ledger with other payments that he did make. However, his Honour considered that the payments which were "not made" were of a different character to those that were made. The offsetting "value" represented by the adoption of the Restructure as compared with Scenario 2 had a number of integers and one of those integers could not be plucked out of the assessment and inserted into the quite different analysis required for payments that were in fact made by the respondent from his own funds.
Thus at [42]-[43] of the supplementary judgment his Honour held that the tax (and professional fees) paid by the respondent in 2007 and 2008 pursuant to the settlement represented a completely different set of liabilities to that incurred as a consequence of the dividend distribution postulated by Scenario 2. The amounts paid by the respondent to the Commissioner were payable as a consequence of the Restructure but were not payable in respect of or as a consequence of any dividend distribution by Holdings. Although under both the Restructure and Scenario 2, $67 million in net dividends was distributed, the relevant difference between them was that under the Restructure the respondent lost the opportunity to enjoy the use of the funds paid pursuant to the settlement when they were otherwise payable to him (rather than by him). It accordingly followed that his loss of the use of those funds should be compensated for by applying the Court rates to them. In contrast, the tax payments considered in assessing the benefit of the restructure were amounts to be paid either to the Commissioner or otherwise retained by Holdings but were never to be received by the respondent. It thus followed that the calculation of interest on the benefit of the restructure should apply Holdings' rate of earnings acquired on its own funds.

[29]

The Appellant's Submissions

The appellant submitted that there were various integers that the primary judge was required to take into account in working out whether the respondent had sustained a loss which would sound in damages; there were credits and debits going into this analysis. His Honour erred by applying the Court rates of interest to the integers on one side of the balance sheet but not to the net loss. This was said to be impermissible because s 100 interest is to be paid on the damages awarded to a plaintiff, which in the context of the present case involved a net concept.
The primary judge calculated interest at the higher, statutory rate (being the Court rates) on the gross integers utilised by him for the purpose of calculating the respondent's damage but when it came to the other side of the balance sheet he applied a lower rate of interest. What his Honour should have done was to have worked out the net loss and then determined the pre-judgment interest on that amount. In this respect it was submitted that based on Ms Jones' spreadsheet no actual loss would have arisen until about April or possibly July 2009. It was only at this point of time that the respondent sustained damage and, therefore, it was only from that point of time that pre-judgment interest accrued.
His Honour was therefore in error in taking each of the relevant integers, determining when each amount was paid and then calculating interest at the Court rates from that moment of time to the date of judgment. It was wrong in principle for his Honour to calculate interest at the Court rates on all outgoings and only calculate interest at Holdings' internal rate of return in respect of the benefit of the restructure which was to be offset against the detriment constituted by the amounts required to be paid pursuant to the settlement as well as the professional fees incurred by the respondent.
The appellant accepted that it was appropriate to apply Holdings' internal rate of return to the relevant integers of the benefits of the restructure. It submitted that that rate should have been used in respect of the integers that made up the ultimate calculation up to a particular point in time and it was only after that point of time was reached (determined as being April or July 2009) that the Court rates of interest should then be applied for it was only at that point that the net damages sustained by the respondent could be determined.

[30]

The Respondent's Submissions

The respondent submitted that by about September 2008, as a result of the appellant's negligent advice, the respondent paid tax, penalties and interest pursuant to the settlement and had incurred considerable professional costs. Those amounts were paid out of his own funds. At that time he had neither received dividends nor paid the tax that he would have paid under Scenario 2. He had not avoided the payment of tax altogether but had merely delayed it. His loss was the avoidable outgoings (tax, penalties, interest and expenses) less the benefit to him of keeping funds invested in his business for longer than would have been the case under Scenario 2.
The benefit of the Restructure was the time value of keeping funds invested in the business for longer than would otherwise be the case at a rate of return below the Court rates. In the meantime the respondent suffered a loss by paying the tax, penalties, interest and expenses associated with the Restructure and the settlement, which were caused by the appellant and were avoidable. The respondent was therefore always in a loss position as a result of those payments save only to the extent that he had the benefit of keeping funds invested in Holdings for a longer period.
It was therefore submitted that it was wrong to suggest that the respondent had no loss at that point or that the actual funds kept in the business, as opposed to the time value of keeping them there, represented a benefit to be "netted off" against the avoidable settlement payments. The respondent's "practical, economic loss" was making entirely avoidable payments that were more than he needed to make, less the benefit to him of being able to keep some funds invested in his business slightly longer.
In oral submissions the respondent pointed to [38] of the supplementary judgment in which his Honour found that in the "real world" (as a consequence of implementing the Restructure), the respondent suffered a loss by paying the amounts required by the settlement and incurring expenses in relation thereto, these being avoidable had the appellant not been negligent. It was therefore incorrect for the appellant to suggest that the respondent had no loss at the point that he paid these amounts to the Commissioner and equally incorrect to suggest that the actual funds kept in the business, as opposed to the time value of keeping them there, represented any benefit to be netted off against the avoidable settlement payments. The essence of his Honour's benefit of Restructure findings was that the respondent would have paid more tax sooner and less tax later but that was of an entirely different character to the loss he sustained by making what were entirely avoidable payments pursuant to the settlement which were more than he needed to make, less the benefit of being able to keep some funds invested in the business for a longer period.
It was further submitted that the problem with Ms Jones' spreadsheet referred to by his Honour at [35] of the supplementary judgment was that it treated the non-payment of tax in the real world as a sum to be netted off in full against avoidable costs that were actually incurred. The effect of that evidence, which his Honour correctly rejected, was that the respondent was better off in the real world because he avoided making tax payments. But the benefit of the Restructure was not the non-payment of tax but only the value to him of keeping those funds in his business for a longer period. If the non-payment of hypothetical tax is included in the ledger as postulated by the appellant, then it would obtain the benefit of the respondent's non-payment of tax whereas on the basis of the primary judge's findings it was only entitled to the benefit of the time value of the later payment.
In essence, the respondent's submission was that the hypothetical tax payments which would have been paid under Scenario 2 were simply of a different character to the amounts which the respondent was required to pay out of his own pocket pursuant to the settlement. What was being offset against the costs and expenses actually incurred by the respondent from his own funds was a benefit of an entirely different character which the primary judge separately quantified.

[33]

The Disposition of the Appeal

The appellant has only succeeded only on Appeal Grounds 3 and 4 and failed on Appeal Grounds 1, 2, 7 and 8. Appeal Grounds 5 and 6 were abandoned at the hearing. Appeal Grounds 1 and 2 were the primary grounds which the appellant needed to establish if it was to generally succeed on the appeal. It has failed to do so.
Nevertheless, the effect of the appellant succeeding on Appeal Grounds 3 and 4 is that the damages awarded by the primary judge in the amount of $4,979,800 must be reduced by $1,581,889 to $3,397,911. That reduction comprises $1,291,179 representing the primary judge's finding as to the value of the lost franking credits together with his award of pre-judgment interest on that amount in the sum of $290,710: see [29] above.
In the foregoing circumstances although the appeal succeeds in part, in our view the appellant has substantially failed and should therefore pay 75 per cent of the respondent's costs of the appeal. As at present advised we see no reason to disturb the primary judge's costs order in respect of the proceedings at first instance. However, the parties should have the opportunity, if they so desire, of seeking a variation of this order if they proceed to do so in accordance with the rules.
It is common ground that the appellant has paid the judgment debt to the respondent. The appellant has a right to restitution for any amount overpaid following the reversal, in part, of the judgment below. As a consequence of the orders to be made on appeal the appellant has overpaid the respondent $1,581,889. The appellant is entitled to interest upon restitution of moneys paid under a judgment that is later set aside. In this Court the practice is to award restitutionary interest at the rates payable on judgments unless special circumstances exist: Heydon v NRMA Ltd (No 2) [2001] NSWCA 445; 53 NSWLR 600 at [32] (Mason P; Beazley JA and Ipp JA agreeing).
The respondent did not dispute the appellant's right to restitution for any amount overpaid, nor its entitlement to interest upon restitution of moneys overpaid as claimed by the appellant in order 5 of its amended notice of appeal, pursuant to s 101 of the Civil Procedure Act 2005 (NSW). It is appropriate that a restitution order be made. As the parties have not had an opportunity to agree on the interest calculations at the rates prescribed by Uniform Civil Procedure Rules 2005 (NSW), r 36.7(1), a declaration will be made concerning interest. If it becomes necessary to enter judgment against the respondent with respect to interest, the effective date should be the date of these orders. Interest can thereafter accrue pursuant to s 101 of the Civil Procedure Act 2005 (NSW): Heydon v NRMA Ltd (No 2) at [55].
The orders of the Court are, therefore, as follows: 1. Appeal allowed in part. 2. Order that the judgment for the respondent in the amount of $4,979,800 made by Beech-Jones J on 31 October 2013 be set aside and in lieu thereof there be judgment for the respondent in the amount of $3,397,911. 3. Order that the appellant pay 75 per cent of the respondent's costs of the appeal. 4. Order that the cross-appeal filed on behalf of the respondent be dismissed with costs. 5. Order that the respondent repay to the appellant the sum of $1,581,889. 6. Declare that the respondent is obliged to pay to the appellant interest calculated in accordance with the rates prescribed by Uniform Civil Procedure Rules 2005 (NSW), r 36.7(1), from the date of payment of so much of the judgment debt as exceeded $3,397,911. 7. Liberty to apply for further relief.

Gadens Lawyers Sydney Pty Limited v Symond

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Judgment (34 paragraphs)

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Cases Cited (22)

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