Zelino and Ors v. Budai [2001] NSWSC 501

Supreme Court of NSW|2001-06-15|Before: Palmer J, Dr P, Drummond J

CITATION : Zelino and Ors v. Budai [2001] NSWSC 501 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 5622/92 HEARING DATE(S) : 22-25, 28-31 May, 1, 4-8, 12-15 June 2001 JUDGMENT DATE : 24 July 2001

Zelino Pty Ltd (First Plaintiff) PARTIES : Peter Tesoriero (Second Plaintiff) Tonia Tesoriero (Third Plaintiff) Frank Budai (Defendant) JUDGMENT OF : Palmer J

1 In 1725 Mr Everet commenced proceedings in the Court of Exchequer against Mr Williams seeking an account of partnership profits. The plaintiff alleged that the partnership between himself and the defendant dealt in commodities such as plate, rings, watches and other valuables, that the plaintiff and the defendant had dealt successfully in these commodities in the course of the partnership but that the defendant had failed to come to a fair account with the plaintiff concerning the partnership profits. In the course of the trial it was revealed that the business in which the partners were engaged was actually highway robbery and that the plaintiff was aggrieved that the defendant had not handed over a fair share of the spoils. The case was thrown out of Court, both parties were hanged, the plaintiff's solicitors were attached for contempt and the plaintiff's counsel was made to pay the costs of the proceedings: see Everet v. Williams (1893) 9 LQR 197; cited in Burrows v. Rhodes [1899] 1 QB 816, at 826 per Grantham J. 2 Human nature does not change. These proceedings are another example of that obstinate folly which blinds people to the ruin to which their course of action must inevitably lead if they insist upon pursuing it. For at the heart of these proceedings lies a series of revenue frauds perpetrated by the plaintiffs which would never have seen the light of day had the plaintiffs not set their minds on coming to a court of law to vindicate their grievances. 3 In early 1985 a group of investors formed a joint venture to acquire a property in Milson Road, Cremorne Point, upon which there was a substantial Federation residence called "Holyoak". Their intention was to redevelop the site as twelve luxury townhouses. 4 The vehicle for the venture was a unit trust called the Cremorne Unit Trust ("CUT") in which each venturer or the venturer's company subscribed for units. The trustee of the CUT was Zelino Pty Ltd ("Zelino") of which the venturers were the directors and, directly or indirectly, the shareholders. There were five venturers, namely Mr Peter Tesoriero jointly with his wife Tonia (the plaintiffs in these proceedings), Count Felice Sassoli di Bianchi through his company Feangil Pty Ltd ("Feangil"), Mrs Caterina Zanin through a trustee company Beila Corporation Pty Ltd ("Beila"), Mr Charles Gagliardi through his company Danza Pty Ltd ("Danza"), and Mr Guiseppe Socini. 5 The construction of the new development was completed in late 1987. Seven of the townhouses were sold to the venturers or their nominees and five were sold to third parties, leaving the venture with a considerable profit. On 14 December 1988 the venturers or their representatives signed final accounts prepared by the accountant for the venture, Mr Budai, who is the defendant. On 16 December 1988 the profits of the venture were distributed amongst the venturers in accordance with the signed accounts. 6 The relationship between the venturers during the construction had often been very difficult, even hostile. They disagreed about many aspects of the construction and about the financial arrangements which should be made to carry the venture to a successful conclusion. 7 As part of the resolution of these disputes it was intended by the venturers that on and from 16 December 1988 control of the trustee company, Zelino, should pass to Mr and Mrs Tesoriero alone. Mr and Mrs Tesoriero were to acquire all the shares in Zelino not already held by them. Further, they were to acquire all the issued units in the CUT save for those held by Mr Socini. 8 While the venturers disagreed amongst themselves from the very beginning about virtually every aspect of the conduct of the venture, on one matter they were in enthusiastic agreement: everything possible should be done to avoid having to share any part of their profits from the venture with the revenue authorities. In that endeavour they were earnestly abetted by Mr Budai. 9 From their earliest discussions in 1984 the venturers focussed upon minimising or avoiding altogether income tax and stamp duty. The Trust Deed for the CUT was drafted with the assistance of a revenue specialist, Mr David Raphael. It contained a complicated stamp duty avoidance mechanism involving the creation of "special rights units". The mechanism might have worked if all of the levers and switches had been pushed and pulled in the ordained sequence and at the designated propitious times. But, as happens in so many of these subtle and sophistical tax schemes, cleverness in devising was not attended by diligence in execution. 10 Moreover, as fate would have it, the stamp duty legislation was amended significantly during the life of the venture so that the utility of the special rights units mechanism in the Trust Deed was cast into doubt. The very complexity of the mechanism came back to haunt the venturers in ways which I will later recount. 11 After the distribution of proceeds of the venture on 16 December 1988 Mr Budai prepared an income tax return for the CUT for the year ended 30 June 1988 and income tax returns for that financial year for Mr and Mrs Tesoriero. The tax return for the CUT was not lodged with the Australian Tax Office ("ATO") but the returns for Mr and Mrs Tesoriero were lodged late 1988. Those returns were in accordance with the contents of the draft tax return for the CUT. The Tesorieros' tax returns each disclosed a sum of $170,890 as income distributed from the CUT. Mr and Mrs Tesoriero paid tax on that income. 12 It is admitted by Mr and Mrs Tesoriero and Mr Budai that their tax returns were based upon deliberately concocted figures. The prices at which townhouses had been sold to venturers were grossly understated and the expenses of the venture were unjustifiably inflated. The profits of the venture, upon the basis of which distributions had been made to Mr and Mrs Tesoriero, had been understated by more than one million dollars. Further, assessable income derived by Mr Tesoriero from the venture was not disclosed in his tax return. 13 It rankled with Mr Tesoriero that he had paid any tax at all. In 1989 Mr Tesoriero consulted Mr Philip White, a solicitor, who now appears with Mr Condon of Counsel for the plaintiffs. Mr White had a conference with Mr Tesoriero and Mr Budai in which Mr Budai explained the fraudulent tax scheme which he said he had devised for the benefit of all the venturers, including Mr and Mrs Tesoriero. 14 Mr White then engaged the services of Mr Richard Elkan, a tax specialist. After a lengthy and expensive investigation, Mr Elkan came to the conclusion that a case could be put to the ATO that the distributions of profit which Mr and Mrs Tesoriero had received from the CUT were not assessable income but, rather, were capital profit not subject to capital gains tax. 15 Mr Elkan put that case to the ATO by letter dated 18 November 1991. He did not disclose that the tax returns previously lodged were fraudulent. He falsely represented to the ATO that the tax returns were wrong because Mr Budai did not understand the law as it applied to the facts of the CUT. He deliberately did not disclose to the ATO that Mr Budai had prepared the previous tax returns on the basis of his perception of the facts, namely, that Mr and Mrs Tesoriero had received distributions from the CUT as part of a profit making undertaking, so that the distributions were assessable under s.25A of the Income Tax Assessment Act, 1936 ("ITAA"). He falsely suggested that, due to ignorance, Mr Budai had not taken into account the provisions of the Act relating to capital gains tax. 16 Mr Elkan's submission was successful and on 23 March 1992 the ATO issued to Mr and Mrs Tesoriero notices of Amended Assessment reducing their taxable income for the year ended 30 June 1988 to nil. Mr Tesoriero received a refund of tax of $52,511 and Mrs Tesoriero received a refund of $56, 917. 17 Mr and Mrs Tesoriero were not satisfied. They and Zelino commenced these proceedings against Mr Budai to recover the costs which they had paid to Mr Elkan in order to obtain their refunds of tax. They also claim recovery of the costs and expenses which they have incurred in successfully objecting to a stamp duties assessment raised against them by the Chief Commissioner of Stamp Duties. They contend that the Commissioner would never have raised the assessment at all if Mr Budai had caused the "special rights units" mechanism in the Trust Deed to have been put into operation. 18 Mr and Mrs Tesoriero and Zelino, which they now control, made many other claims against Mr Budai in their Statement of Claim. All have been abandoned save for the claim in respect of income tax returns and the claim arising out of the stamp duties assessment. Although many of the underlying facts are common to both of these remaining claims, it will be convenient to deal with the claim based upon the income tax returns separately from the claim based upon the stamp duty assessment. THE INCOME TAX CLAIM The issues 19 Mr and Mrs Tesoriero's claim in negligence is founded, not in tort, but exclusively in contract. They allege that they entered into a retainer with Mr Budai whereunder he agreed to exercise all reasonable care, skill and diligence as an accountant in advising and assisting them in the preparation of their personal income tax returns for the year ended 30 June 1988. Mr Budai does not deny that he entered into such a retainer. 20 Mr and Mrs Tesoriero allege that Mr Budai breached his contractual duty of care, in that he "advised [them] to include income in their … Returns for the year ended 30 June 1988, and he did include in personal Income Tax Returns prepared by him, a distribution of income of $170,890 to each of them from the [CUT]": Statement of Claim para.53. 21 Inherent in this pleading are two implied allegations of negligence on the part of Mr Budai. The first allegation is that he was negligent in advising that any part of the profits of the CUT to be distributed to Mr and Mrs Tesoriero was assessable income under ITAA s.25A as having arisen from the carrying on or carrying out of a profit-making undertaking or scheme, when in fact there had been no such profit-making undertaking or scheme. 22 The second allegation is that Mr Budai was negligent in advising Mr and Mrs Tesoriero to include in their respective returns income in the sum of $170,890 when "in fact the net income of the [CUT] for the year ended 30 June 1988 was $241,248 of which [Mr and Mrs Tesoriero's] taxable interest ought to have been $25,395 each" and "the amount which ought to have been included in [their tax returns] … after deductions … was $15,167 each" : Statement of Claim paras.55, 56. 23 The amount of $15,167 which, it is alleged, ought to have been included in Mr and Mrs Tesoriero's returns is the figure which Mr Elkan, in his letter to the ATO of 18 November 1991, submitted should have been returned as the assessable income of Mr and Mrs Tesoriero in the returns prepared by Mr Budai. Mr Elkan's figures were calculated on the basis that no profits had been received by Mr and Mrs Tesoriero arising from the carrying on of a profit-making undertaking or scheme. His submission was that Mr and Mrs Tesoriero's profits were capital gain and that part of that gain was not subject to capital gains tax as it related to the disposal of a composite asset, being a building acquired prior to the introduction of capital gains tax on 19 September 1985, to which an improvement was made to which s.160P(6) ITAA applied. 24 As to the first allegation, Mr Budai admits that he advised Mr and Mrs Tesoriero that the distribution received by them from the CUT in the financial year ended 30 June 1988 was assessable under s.25A ITAA as profit arising from the carrying of a profit-making undertaking or scheme but he denies that he was negligent in so advising. The issue is: could a competent accountant in the position of Mr Budai have reasonably given that advice. 25 As to the second allegation, Mr Budai by his Amended Defence says that the figure of $170,890 which was included as assessable income in each of Mr and Mrs Tesoriero's returns was false to the knowledge of Mr and Mrs Tesoriero and was included as part of a fraudulent tax evasion scheme engaged in by all venturers and devised by him at their request. He says that, in fact, it was an express term of his contract of retainer with Mr and Mrs Tesoriero that he prepare fraudulent tax returns for them showing in each the amount of $170,890 as assessable income from the CUT. He says that he performed his contract in accordance with that term but, even if he was negligent in some way in doing so, Mr and Mrs Tesoriero are not entitled to make any claim against him for damages occasioned thereby because the contract upon which they rely was illegal both in its formation and in its performance. He relies upon the principle "ex turpi causa non oritur actio". Finally, he says that the costs and expenses charged by Mr Elkan were incurred by Mr and Mrs Tesoriero as part of a second fraudulent tax evasion scheme and are, therefore, irrecoverable. 26 Mr and Mrs Tesoriero deny all of those allegations. Credit 27 The principal witnesses of fact who gave evidence at the trial were Mr Tesoriero and Mr Budai. Although Mr and Mrs Tesoriero claim that the intent of the venturers in entering into the venture was not to make a profit, Mrs Tesoriero herself did not give evidence nor were Mr Gagliardi, Mr Socini and Mr Gardini called. Mrs Zanin has died and Count Sassoli had himself commenced proceedings against Zelino and Mr and Mrs Tesoriero which were compromised during the course of this trial. 28 There are many points of difference in the evidence of Mr Tesoriero and Mr Budai as to what was said and done during the life of the project from mid-1984 until December 1988. Not many of those differences are, however, of any real significance in the ultimate determination of the issues in the case as the essential facts appear from contemporaneous documents - at least, from those of the documents which are not now conceded to be bogus. 29 Where there are any significant differences in the evidence of Mr Tesoriero and Mr Budai I have preferred the evidence of Mr Budai. 30 I found Mr Tesoriero prone to exaggeration and inaccuracy. He tended to see the facts only from a perspective which supported the case which he wished to present. He professed to have a good memory for conversations which occurred fifteen or sixteen years ago of which there was no contemporaneous note, when those conversations appeared to support his case. He professed to have a poor memory of conversations or other circumstances when those conversations or circumstances did not appear to support his case. 31 He seemed to be insensitive to his obligation to be accurate and careful with the truth. For example, on 27 February 1985 he wrote a letter to the Law Society of New South Wales seeking a ruling as to whether there was any ethical objection to his becoming financially interested in the venture in the circumstance that an existing client of his (Mr Gagliardi) "has expressed an interest in joining the partnership and becoming the project manager … I have also advised [Mr Gagliardi] that if he wishes to join the partnership he should have a separate solicitor" . 32 Mr Tesoriero agreed in cross examination that the sequence of events as to his early discussions with the venturers which he gave in his letter to the Law Society in February 1985 was different from the sequence which he gave in his affidavit in these proceedings sworn on 16 April 1998. He said that the account given in his affidavit was correct. Further, he said in his letter that after he agreed in principle to become involved in the venture an opportunity arose to acquire an option in the property to be developed. In his affidavit he said that the option was acquired some time before he decided to become involved in the venture. Again, he said that the account given in his affidavit was correct. Finally, he clearly suggested in his letter to the Law Society that Mr Gagliardi had not, as at February 1985, decided to join the venture, yet in his affidavit he said that in January 1985 he believed that Mr Gagliardi not only intended to be part of the venture but intended to retain a townhouse as his personal residence. Again, he said that the evidence in his affidavit was correct. 33 The explanation which he gave for the contradictions between his affidavit evidence and what he said to the Law Society in his letter of February 1985 was that his letter was "carelessly" inaccurate, "badly drafted" and his tenses were "a bit confused" . 34 I formed the distinct impression that Mr Tesoriero had put a slant on the facts one way for the purposes of getting a ruling from the Law Society and another way for the purposes of this case, and that he could see nothing objectionable in having done so. On many occasions during Mr Tesoriero's evidence I observed the same tendency to slant or distort facts to suit his case, often to the point of untruthfulness. 35 For example, a critical issue in the case was Mr Tesoriero's intention and understanding as to the purpose of the venture at the time he decided to commit to it in January 1985. He asserted vehemently that that it was then his understanding that all venturers intended that all townhouses in the project be retained as residences or for investment and that none be sold to outsiders: see his affidavit paras.79, 14. Yet in a memorandum which he prepared jointly with Mr Gagliardi in August 1984, months before he subscribed for units in the CUT, he recorded that some of the townhouses would be sold to outsiders and the nett proceeds, after repayment of the construction loan, would be distributed to the venturers: see para.45 below. There were contemporaneous documents, pre-dating and post-dating Mr Tesoriero's commitment to the venture in January 1985, which clearly gave the lie to Mr Tesoriero's assertion as to his understanding, yet he steadfastly maintained it. 36 I found that I could not accept Mr Tesoriero as a witness of credit. 37 On the other hand, I found that Mr Budai endeavoured to be as accurate and precise as possible in his evidence. He had kept contemporaneous diary notes and memoranda during the history of the project and was able to draw upon them to aid his recollection. 38 I bear very much in mind the fact that, on his own evidence, Mr Budai deliberately devised a fraudulent tax evasion scheme for the venturers and made public disclosure of his wrongdoing only when it became necessary by way of defence to Mr and Mrs Tesoriero's claim in these proceedings - a circumstance which must severely reflect upon his credit. However, he did not seek to justify his conduct nor to minimise its gravity. When confronted with his own wrongdoing he gave frank, direct answers. 39 I could detect no instance in which Mr Budai's evidence in the proceedings was contradictory or implausible. Allowing for inaccuracies of recollection due to the passage of time, I found Mr Budai's evidence to be essentially reliable. The venturers commit to the project 40 In 1984 Mr Tesoriero was a solicitor practising on his own account in Chatswood. He had been a solicitor for many years and his practice consisted chiefly of conveyancing and other small commercial matters for personal clients, mostly in the Italian community. He had previously acted for Mr Charles Gagliardi and Mrs Caterina Zanin. Mr Gagliardi and Mrs Zanin were also clients of Mr Budai. 41 By letter dated 10 August 1984 from Mrs Zanin, Mr Tesoriero was instructed to prepare an option to purchase the property in Milson Road, Cremorne Point. It was made clear that Mrs Zanin was acting in association with a Count Sassoli di Bianci and that Count Sassoli was one of a number of proposed investors in a development of the site. Mr Tesoriero was instructed to liaise with Mr Budai as to the name of the proposed grantee of the option. 42 Mr Budai met Mrs Zanin and Count Sassoli in August 1984 to discuss the proposed venture. They requested him to advise on an appropriate financial structure for the development. On 15 August 1984 Mr Budai wrote to Mrs Zanin confirming his understanding of the venture in the following terms: "It is my understanding that: a) land at 25 Milson Road, Cremorne, is to be acquired with a view to the construction of home units/townhouses; b) a number of venturers are to contribute capital and are to take an equity interest in the project. c) some of these units/townhouses are to be sold and the balance retained as long term real estate investments . d) once the desired number of properties have been sold each of the venturers would prefer if this equity in the long term real estate investment would be passed out of the joint venture structure to an entity completely within his control . e) some or all of the venturers prefer to remain anonymous. It is my opinion that the most appropriate financial structure under these circumstances is a unit trust …" [Emphasis added.] 43 On or about 20 August 1984, Mr Budai purchased a shelf company, Zelino, to act as trustee for the proposed unit trust for the venture. He and Mr Gagliardi became the first directors of Zelino. 44 Also in August 1984 Mr Tesoriero met Count Sassoli in company with Mr Gagliardi. It was suggested that Mr Tesoriero join with other investors in the venture. He expressed interest. 45 Shortly afterwards, in August 1984, Mr Tesoriero and Mr Gagliardi prepared a memorandum recording the proposal for the venture. Its terms are significant. The relevant parts are as follows: "The Joint Venturers (hereinafter called 'the Partners') decided to acquire an option to purchase property at the corner of Milson Road and Rialto Avenue, Cremorne Point for the sum of $950,000. It is proposed that if the option is exercised a number of home units/ townhouses will be constructed. Some of these townhouses will be sold and the balance will be retained by the Partners as long term real estate investments or for their own personal use and occupation … [The memorandum then discussed how the construction of the development would be carried out.]

Dyson Austen Pty Ltd, Valuers, will then value the project from the plans and will provide an estimate of the selling prices of the new units from the plans … After the valuation of Dyson Austen has been received, the Partners will decide on the value at cost of each townhouse in proportion to the expected total cost of the project (including interest and all sundries) e.g. assuming the total cost is $2,700,000.00, assuming that the estimated market value according to Dyson Austen for unit No.10 is $400,000.00, and the aggregate market value of all the townhouses is $4,000,000.00, then the value, at cost, of No.10 is $270,000. Using this formula equitable distribution will be arranged for each of the Partners. Each Partner shall be attributed a townhouse whose cost is closest to that investor's contribution. … The difference between the cost of the townhouse (calculated as above) and the contribution already made by the Partner will be contributed to the general fund for final distribution between all of the Partners. … The amount received by the sale of townhouses outside the Partnership will be applied firstly for the repayment of the loan to the bank, and secondly, after all other costs are paid and an appropriate sum set aside for contingencies, distribution among the Partners. A sum to be assessed will be set aside covering expenses of sales promotion and advertising . Each Partner who has been assigned a townhouse must, for tax purposes, undertake not to sell within a period of one year of the construction." [Emphasis added] 46 On 23 October 1984 Zelino entered into an agreement with the owner of the Cremorne Point land whereunder Zelino was granted an option to acquire the land exercisable by 23 April 1985. 47 The task of drawing the Trust Deed for the venture was given to Mr D. Raphael, a solicitor specialising in revenue law. As I have noted, it contained an extremely complex mechanism, involving the issue of "special rights units" designed to avoid stamp duty on conveyances of townhouses in the development. I will refer to the contents of the Trust Deed when dealing with the claim against Mr Budai arising out of the stamp duty assessment. 48 On 15 November 1984 Mr Budai had a meeting in his office with Count Sassoli, Mr Mirizzi (an employee of Count Sassoli) and Mrs Zanin. Mr Budai's unchallenged evidence is that at this meeting Count Sassoli asked: "Do we hold [the townhouses upon completion of the development] for one year or two years to become entitled to an exemption from income tax?" Mr Budai responded: "If you sold them within twelve months then you would become liable to income tax. [He was referring to s.26AAA ITAA.] Your liability to taxation depends on your intentions; if you are asking at this stage how long you need to keep the units before selling them, this indicates an intention to sell." 49 A meeting of the proposed venturers took place in Mr Tesoriero's office in early December 1984. Present at the meeting were Count Sassoli, Mr Gagliardi, Mrs Zanin, Mr Tesoriero and Mr Budai. The precise date of the meeting is in dispute but there is no disagreement that it took place, that Mr Tesoriero took notes and that a document which is dated 4 December 1984, produced by Mr Tesoriero, records with substantial accuracy what was discussed. 50 It was agreed at the meeting that, for tax reasons, Zelino itself should not borrow the money required for development and construction of the project. Rather, the venturers should form a partnership to borrow the money and lend it to Zelino. Under the heading "Alienation of the Townhouse" [sic] the document records the following: "This [i.e., alienation] can be done by the following means: 1. The unit holder can direct the trustee to convey legal title to him by a transfer of the title so that he becomes vested as owner under the Real Property Act, (having is [sic] own name on the certificate of title) and then he can transfer to the ultimate purchaser. However, it is to be noted that if this procedure is to be adopted there is a possibility that stamp duty could be levied on the transfer from the trustee to the unit holder. 2. The second means of affecting [sic] a sale of the home unit would be for the unit holder after having first ascertained the price that he would obtain from his purchaser, request that the trustee redeem the special rights unit for the same price and then he would direct the trustee to sell the townhouse to the proposed purchaser for that price. In this way there is no possibility of stamp duty being levied on the transaction." 51 The procedure for alienation applies equally in the case where a venturer wishes conveyance to himself of legal title to a townhouse, for retention by him, and also to the case where a venturer wishes to sell directly to an outsider. 52 In January 1985 Mr and Mrs Tesoriero decided that they would invest in the venture. It seems that that decision was made principally by Mr Tesoriero. He was, at all times, the active party representing the joint interest of his wife and himself in the venture. Mrs Tesoriero never attended any meetings of venturers either before or after January 1985. 53 Mr Tesoriero says that in January 1985 the intention of himself and Mrs Tesoriero was, and remained at all times thereafter, to acquire one of the townhouses as their home and to acquire as many others as they could afford as long term investments. He says that at that time he believed all of the other venturers intended to acquire the remaining townhouses as their personal residences and for investment. I have referred to the falsity of this assertion in paragraph 35 above and will revert to the issue shortly. 54 On 25 February 1985 Mr Budai had a meeting with Mr Socini and Mr Gardini. Mr Socini was a tax client of Mr Budai. They discussed the possibility of Mr Gardini investing in the venture through Mr Socini as his nominee. 55 On 1 March 1985 Mr Gagliardi wrote to the Commonwealth Bank seeking finance for the development. The letter caused consternation to Mr Budai and Mr Tesoriero because it referred to the possible sale of the townhouses. Mr Budai says, and I accept, that he told Mr Tesoriero at this time that if the letter fell into the hands of the ATO it would compromise any claim that the project was not a profit-making undertaking. I accept that Mr Tesoriero was very well aware by this time that he and Mrs Tesoriero could escape income tax on whatever profit they derived from the venture only if it could be claimed that that profit did not arise from the carrying on or carrying out of a profit-making venture or scheme. I am satisfied that from this time onwards Mr Tesoriero was concerned to ensure that, if possible, no documentation should emanate from the venture to outside parties which could support a claim by the ATO that the venturers had been carrying on a profit-making venture. 56 A diary note of Mr Budai of 2 March 1985 records a telephone conversation between him and Mr Gagliardi. The result of a meeting of the venturers was conveyed to Mr Budai. He was told that Mr Tesoriero was now responsible for finance and that Mr Gagliardi "is to recover his submission to [United Permanent] and [Commonwealth Trading Bank] . As the contents do not reflect the wishes of the members" [sic] . 57 A letter dated 1 March 1985 from Mr Gagliardi to the Commonwealth Bank seeking finance is in evidence. It was not produced on subpoena from the Commonwealth Bank but came from Mr and Mrs Tesoriero's discovery. It contained the following: "Preselling will be considered, although the recommendation is that construction and finishes should be completed before a sales program in order to maximise on final appearance. The land title is offered free of encumbrances, as guarantee. We would also to mention that it is the intention of the developers to retain the 12 townhouses on completion as a long term investment and that the repayment of the construction loan will be arranged by the mortgagors through personal funds that will become available by the time of completion of construction." 58 The last of the quoted paragraphs contradicts the first paragraph in that the first paragraph assumes a sales programme whereas the last paragraph clearly makes such a programme purposeless. 59 This contradiction and the non sequitur after the second paragraph suggests to me that a letter dated 1 March 1985 containing only the first of the quoted paragraphs had been sent to the Bank and that the last quoted paragraph was later inserted in another version of this letter, also dated 1 March 1985. Whether the second version was sent to the Bank or merely retained in the venturers' files, I cannot determine. 60 According to Mr Budai's diary, on 9 March 1985 a meeting of the venturers took place at which were present Count Sassoli, Mr Gagliardi, Mrs Zanin and Mr Tesoriero. Mr Budai believes that Messrs Gardini and Socini may also have been present. The diary note records: "Went to meeting re Zelino, took control! Got consensus on pessimistic, optimistic and most likely project costs, sale prices and profits …" 61 Mr Budai's evidence of what transpired at the meeting (which I accept) was that he asked each of those present to write down three estimates of the cost of building the project, an optimistic, a most likely and a pessimistic estimate. He then asked each of them to write down three estimates of the market value of the project on completion, optimistic, probable and pessimistic. After doing some calculations on the figures so produced he told the venturers that on their own estimates the project was likely to return about 30% and that, bearing in mind the risks involved in that type of development, they should not contemplate proceeding for that rate of return. 62 Mr Budai says (and I accept) that it was at this meeting that he became convinced that the true intention of the venturers there present, whatever they might have otherwise protested, was that only some of the townhouses might be acquired and retained by some of the venturers and the remainder would be sold to outsiders for a profit, if possible. This had been his understanding of the purpose of the venture from the commencement of his involvement, as evidenced by his letter to Mrs Zanin of 15 August 1984: see paragraph 42 above. 63 As a result of the meeting of 9 March, it appears that some of the venturers were in doubt as to whether the option to acquire the property should be exercised and whether the project should proceed at all. 64 A letter dated 18 May 1985 from Mr Gagliardi to Mr Tesoriero contains a summary of the history of the venture up to that date. There is no reason to believe that that summary is not substantially accurate. Mr Gagliardi's summary for March 1985 is as follows: "March 1985: In August 1984 (before proceeding with the DA) the partners requested a paid valuation of project and sales prices to Dyson Austen, [sic] valuers known for their conservative approach. Their reaction was favourable, with a preliminary conservative sales value of $3,900,000. Peter Miller of HUHQ (Cremorne) valued the complex (Feb 1985) at $4,200,000 minimum. Mirvac (presently interested in the purchase of the land from the partners) value the project at $4.5 - 4,700,000. The total project cost (land, construction, on-costs, interest) is estimated at $3.45 - 3.5 million. There is a limited interest in proceeding with the project if the lower Dyson figures of 3.9 million are valid. This would in the best of cases give a gross return of 40% on the risk capital of 1 million . If the Mirvac values are valid, there would be a return of over 100% on the risk capital mentioned. (The yearly return on the capital would be lower as the venture may take 1.5 to 2 years to complete .) Peter Tesoriero undertakes to explore sale of the land to Mirvac. Mirvac becomes very interested in the project and makes observations and comments. Some of these are valid (and shared by the partners since the inception of the project), others are considered more towards the scope of reducing the land purchase price. Mirvac offers $1,200,000 for the land. (Cost to partners $1,000,000 incl. DA.)" [Emphasis added] 65 Mr Gagliardi's letter contains an analysis of six different possible scenarios for the development. Some scenarios depend upon the acquisition of an adjoining parcel of land. Each of the scenarios analyses cost of acquisition, cost of construction, "on costs" and interest. In each scenario a final sales value of the development is shown based upon an average sales price for the townhouses. The first scenario, which is based upon the original design of twelve townhouses, shows a final sales value of the project of $4,400,000 based upon an average sale price for twelve units of $366,000. The calculation shows that on this basis there would be 105% return on capital invested. The same process is followed for each of the other scenarios, showing returns on capital ranging from 84% to 190%. 66 Mr Gagliardi's letter gives rise to the strong inference that what was discussed amongst the venturers during March 1985, in the absence of Mr Budai, included a document headed "Project Costs updated 15.3.85", which was amongst Mr and Mrs Tesoriero's discovered documents. That document calculated total costs of construction of the project at $2,151,275, to which was added interest of $351,120 and "sales commission $50,000?" . Costs of construction together with a "margin for finance" of $100,000 were added to a land value of $950,000 to give a total cost for the project of $3,550,000. 67 The analysis then proceeds: "Dyson Austen sales prices (conservative) 3,900,000 Hence return on capital 30%

HUHQ detailed pricing 4,300,000 Hence return on capital 70%

Possible prices for this type of project due to various economic factors in Sept. 1986 4,600,000 Return on capital 100%

An exacting assessment is not possible because of amy [sic] economic factors affecting the economic outcome to Sept. 1986: Imposition of tax on building materials. Union superannuation program. Capital gains tax (not considered to have impact at this level of investment). Present ease of sale of expensive, superior projects. There is no money for the average 100,000 investment, but there is money for large investments, according to present general Sydney experience. (The buyer of a Porsche is not affected by the economic climate.) Unique project in area where there are area restrictions which have been waived in our case. It is felt that in the very worst of cases we may make no profit. In the best of cases we may be able to realise 100%." 68 The reference in the document to "Dyson Austen sales prices" was a reference to a report from Dyson Austen & Co Pty Ltd ("Dysen Austen"), Valuers and Real Estate Agents, dated 27 September 1984, procured on the instructions of Mr Gagliardi. The report contains a market feasibility of the proposed development. 69 The report assesses the anticipated gross sales prices of each of the units, giving a total for the development of $3,900,000. It discusses a marketing programme, suggesting that it was important not to promote sales until construction was substantially completed and that two or three units should be furnished as display units to aid marketing. 70 There is no reference in the report to estimated rental returns on any townhouse nor is there any reference to any part of the development being retained by the venturers for long term investment. 71 It is likewise notable that neither in Mr Gagliardi's summary of discussions in his letter of 18 May 1985, nor in the various scenarios which he discusses therein, nor in the document headed "Project Costs updated 15.3.85" is there any reference to any part of the development being retained by the venturers for long term investment nor is there any reference to possible rental income from any townhouse. 72 I am satisfied that in March 1985 all proposed venturers were giving consideration as to whether the venture should proceed and whether the option to acquire the land, which expired on 23 April 1985, should be exercised. In that consideration they had sole regard to the estimated return on capital invested, upon the basis that all townhouses would be sold at current market prices, some to the venturers and the rest to outsiders. Those venturers who wished to buy townhouses for themselves, either as residences or as investments, would benefit to the extent that their share of profit from sales to outsiders would reduce the acquisition cost of the townhouses which they purchased. Those who did not wish to buy a townhouse would simply receive their share of the profits in cash. 73 By 26 March 1985 the venturers had come to a decision that they would proceed with the venture. On that day a meeting of directors of Zelino was held. Present were Count Sassoli and Mr Gagliardi, then the only two directors of Zelino, and Mr Socini, Mrs Zanin, Mr Tesoriero and Mr Budai. Mr Socini, Mrs Zanin and Mr Tesoriero were appointed as directors. Share transfers were approved and allotments of further shares were made so that all the venturers held shares in Zelino. A total of 950,000 ordinary 10¢ units in the CUT were issued to the venturers. The amount payable in respect of those subscriptions, $95,000, was equal to the 10% deposit which was payable upon exchange of contracts for the purchase of the Cremorne Point land. Payment of the subscription monies was not made by all venturers on 26 March but at various times shortly thereafter. 74 On 22 April 1985, the option to purchase having been exercised, Zelino exchanged contracts for the purchase of the Cremorne Point land. 75 On 22 July 1985 Home Unit Headquarters, a real estate agent, provided to Mr Gagliardi an opinion of the selling price for each of the twelve townhouses in the development. The total of the sale prices was $4,420,000. 76 On or about 15 August 1985, the contract for the purchase of the Cremorne Point land was settled and Midland International Aust Ltd ("Midland") advanced $2,675,000 to the venturers upon the security of a first registered mortgage over the land. The venturers, as identified in the security documents, were Feangil (Count Sassoli's company), Mr Socini, Mr and Mrs Tesoriero jointly, Danza (Mr Gagliardi's company), and Beila (trustee for Mrs Zanin's family trust). In accordance with the plan worked out in the meeting of venturers in December 1984 (see paras.49, 50), the venturers borrowed the funds as a partnership, called the "Holyoak Partnership", and that partnership immediately on-lent the funds to Zelino. The venturers obtain tax advice 77 By June 1986 construction of the project was well under way. On 7 and 8 June Mr Tesoriero had a number of conversations with Mr Budai in which Mr Tesoriero said that Mr Gagliardi was proposing that the venture sell some of the townhouses off the plan. Mr Budai said that selling at this point would undermine the objective of claiming to the ATO that the purpose of the venture was to retain the townhouses for rental purposes. 78 It was agreed that the venturers would seek expert tax advice as to how they could sell townhouses to non-venturers without compromising their claim that the profits to be derived from the venture did not arise from the carrying on of a profit-making undertaking. 79 On 17 July 1986 Mr Tesoriero wrote to Messrs Freehill Hollingdale & Page seeking tax advice on behalf of Zelino. He set out a recitation of the facts giving rise to the questions for advice. In the course of that recitation, he said: "The original intention of the venturers was to pass beneficial ownership in some of the apartments to themselves as individuals and to keep the remaining apartments for rental purposes. The trust deed was drafted to enable ownership of a particular apartment to pass from the unit trust to an individual unitholder. It is now evident that it may be desirable to dispose of some of the apartments to persons who are not currently owners of units in the unit trust. … [He then referred to a procedure, devised by Mr Budai, for issuing 'special rights units' in the CUT to outsider purchasers.] At the outset it was never intended that 'special rights' units entitling their owner to a beneficial interest in a particular apartment would be available to anyone other than the owners of ordinary units (the original venturers). Nor was it ever intended that apartments would be disposed of by sale. Now that we are considering the possibility of allowing an outsider to apply for special rights units we would not want it to be done in a manner that could compromise the fiscal situation of the original unit holders. By disposing of one or more of the apartments in the manner described above, Mr Budai assures us, we would not be 'selling' anything and we would not be running any risk of liability for Income Tax. We would be grateful if you would confirm that Mr Budai's advice is correct and further advise on the liability of the trust for Capital Gains tax (particularly with reference to the debate on this matter currently being reported in the press)." 80 I am satisfied that the false statements in this letter as to the "original intention of the venturers" were made by Mr Tesoriero so that, if necessary, he might later support his claim to the ATO by reference to this letter. He provided that letter to Mr Elkan much later in order to assist Mr Elkan's submission to the ATO for a refund of tax. 81 On 8 August 1986 Mr Tesoriero, Mr Gagliardi, Mrs Zanin, Mr Budai and, possibly, Mr Pringle (Count Sassoli's accountant) attended a meeting with a partner of Freehill Hollingdale & Page, Mr Clive Cullinan QC, a well known tax specialist. Apparently, the meeting had to conclude before Mr Cullinan was able to give advice and a further meeting was convened for 11 August 1986. At this meeting, Mr Socini's solicitor, Mr Danieletto, attended as well as the previously mentioned venturers. 82 It is clear from a letter of advice written by Mr Cullinan, to which I refer in paragraph 86 below, that despite Mr Tesoriero's protestations as to the "original intentions of the venturers" Mr Cullinan elicited information in these meetings which caused him to doubt what he had been told. 83 Mr Tesoriero says that he cannot remember what advice Mr Cullinan gave at these meetings. Mr Budai says that at the 11 August meeting Mr Cullinan advised that in the light of the decision in Kratzmann's Case he was of the view that even if the venturers followed the procedure suggested by Mr Budai in issuing "special rights units" in the CUT to outsider purchasers of townhouses, the venturers would still receive assessable income if the result of the transactions was that the Trust ended up receiving more money for the townhouses than the cost of their construction. 84 According to Mr Budai, at the conclusion of this meeting he, Mr Danieletto and Mr Tesoriero went to a nearby coffee shop and had a discussion about the meeting. Mr Budai said: "It is clear that there is no point in trying to have sales to outsiders in the way described in [the letter of instructions to Mr Cullinan] . It is obvious from what Cullinan said that if there were any transfers of strata lots to outsiders which resulted in the Trust having greater assets afterwards, then there is no question the 'profit' would be taxable."

He says that Mr Tesoriero responded: "That seems obvious. We still have some time. See if you can develop some other alternatives." I accept that evidence of Mr Budai. 85 Mr Budai then set about devising a mechanism to overcome the problem raised by Mr Cullinan. On 27 September 1986 he wrote a letter to the directors of Zelino in which he outlined his suggestions. He recommended a series of complicated calculations, based on the cost of construction of the whole project and the sale prices of the individual townhouses, to arrive at the issue price for "special rights units" in the CUT which could be sold to outside purchasers. The calculation would also determine the issue price for ordinary units in the CUT which could be issued to those venturers who wished to buy townhouses for themselves. He continued: "When all special rights have been disposed of in this way the funds received by the Trustee from the foundation unitholders for application for ordinary units plus the funds received by the Trustee for the cash component of the application for the special rights units will precisely equal the cost of constructing the twelve strata units. … The Trust's in-flow of funds will entirely have been from applicants to the various classes of units and funds made available by way of loans. The total amount raised is to be expended to build the twelve strata lots or to repay loans. On the completion of the issue of all the special rights the Trust will not have equitable ownership of any assets. In these circumstances it is hard to imagine that the Trust would be liable for any income tax." 86 Mr Tesoriero forwarded a copy of Mr Budai's letter to Mr Cullinan and sought his advice as to the procedure suggested by Mr Budai. Mr Cullinan responded by letter dated 27 October 1986. In the course of his comments, he said: "Provided there is unequivocal evidence of their purpose of acquisition being to reside or invest for income producing purposes in the Trust I consider that they should not be liable for income tax under s.25A. At the conference held some little time back I referred to a number of matters which, unexplained, might be taken as indicative of a purpose, at least on the part of some unitholders, of selling units or apartments at profit rather than to reside therein or derive income thereupon. To a large extent taxability will depend upon satisfying the Commissioner (or on appeal a Court) as to these matters. Objective matters will also be important e.g. how many apartments are in fact sold and to what extent is the cost of apartments retained, reduced by the profits made by the sales. At the conference I referred to Kratzmann's Case (70 ATC 4043) as providing some authority for the view that a profit can be represented by an asset rather than cash e.g. by the apartments themselves. On the other hand a particular investor who continues to hold his apartment for a period of years consistently with his original purpose will, in ordinary circumstances, be in a much better position to demonstrate that his purpose was not that of profit-making." 87 It is necessary to explain what Mr Cullinan meant by his reference to Kratzmann's Case. In Kratzmann v. Federal Commissioner of Taxation (1970) 44 ALJR 293 the Commissioner contended that the taxpayer had bought land for the purpose of a profit-making scheme so that the profit arising from the sale of the land was assessable under s.26(a) ITAA (then the equivalent of s.25A). The taxpayer's scheme was said to have involved the following steps: (1) the taxpayer would sell the land to a specially incorporated company in exchange for shares in the company; (2) there would be attached to particular blocks of shares in the company rights to occupy certain parts of a building to be erected on the land so that rights to possession would be based, not upon strata titles, but upon ownership of shares; (3) another company of the taxpayer would construct on the land a building comprising shops, offices and flats; (4) a loan would be obtained from a financial institution covering the major part of the cost of construction; (5) the costs of construction would be recouped by selling blocks of shares to purchasers wanting shops and offices in the completed building; (6) the taxpayer would retain for himself the remaining shares in the company and the rights of occupation in the building attaching thereto. 88 Menzies J. said that if the Commissioner had proved his contention as to what was the taxpayer's purpose in purchasing the land, he would have had no doubt that the land had been purchased as a step in carrying out a profit-making scheme. His Honour said at p.294: "Upon the whole I have reached the conclusion that the taxpayer bought the land in question, not to sell it at a profit, but to carry out a profit-making scheme thereon involving the borrowing of money to erect a building, the realisation of units in the building to cover the repayment of loans and the cost of the project to leave him with a substantial asset which would constitute a surplus or profit. I do not accept the argument of counsel for the taxpayer that, in the circumstances, a surplus of this sort would be something different from a profit. I find affirmatively that the taxpayer did buy the land for the carrying out of a profit-making scheme. It follows, therefore, that any profit arising from the carrying on or the carrying out of that profit-making scheme is assessable income pursuant to s.26(a) [later, s.25A] of the Act." 89 His Honour then found as a fact that before the taxpayer's scheme could be carried into effect, a change in financial circumstances compelled the taxpayer to sell the land, with the result that the profit on sale was not a profit assessable under s.26(a) ITAA as arising from the carrying out of the taxpayer's scheme. 90 It is clear that what Mr Cullinan had in mind when advising the venturers in August 1986 was that the Commissioner might very easily be able to claim successfully that the venturers' scheme was not essentially different from Mr Kratzmann's scheme. Like Mr Kratzmann's scheme, the venturers' scheme involved the acquisition and development of property, the sale of some of the development to third parties in order to repay the construction loan and the retention of the balance of the development by the venturers. In accordance with the reasoning of Menzies J., the townhouses remaining in the hands of the venturers would be a profit and, therefore, the scheme itself would be a profit-making scheme within the meaning of s.25A ITAA. If, in addition to securing the benefit of the townhouses to be retained by them, the venturers received distribution of profits derived from the sale of townhouses to outsiders, those profits would clearly have arisen from the carrying out of a profit-making scheme so as to be assessable income within s.25A ITAA. 91 Mr Budai's proposal, as formulated in his letter of 27 September 1986 to Zelino, was designed to overcome the problem foreseen by Mr Cullinan as arising from Kratzmann's Case by ensuring that the venture did not make any form of profit at all: the proceeds received from sales to outsiders and to the venturers would together equal the total costs of the project. 92 However, Mr Budai's proposal could not be implemented in September 1986 or for a considerable time thereafter, if ever. The proposal depended upon being able to quantify with exactness the total costs, expenses and liabilities of the project so as to ensure that the income of the Trust from sales would not exceed such costs, expenses and liabilities. As at September 1986 the project was still about a year away from completion. The venturers were embroiled in endless wrangles over finishes and other matters affecting the cost of construction; the cost of construction was continually escalating. There was no possibility in September 1986 of being able to work out a reliable figure for the total costs of the finished project. Even when the profits of the venture came to be distributed on 16 December 1988, there was disagreement as to the costs of rectification work, that disagreement eventually only being resolved by a reluctant compromise. Townhouses are sold to outsiders 93 On 12 August 1986, the day following the venturers' second meeting with Mr Cullinan, a directors' meeting of Zelino was held at which were present Mr P. Mirrizi (representing Count Sassoli), Mr Tesoriero, Mr Gagliardi, Mrs Zanin, Messrs Socini and Gardini, Mr Danieletto representing Mr Socini, and Mr Budai. The meeting took six and a half hours. A great deal of time was spent in heated debate as to the role of each venturer in the decision-making process. 94 A record of the meeting prepared by Mr Danieletto notes: "Priority must be given to completing one townhouse for demonstration purposes. This was unanimously agreed to. CG indicated that 2 townhouses would be finished in about 3 weeks." 95 It is fair inference that the decision to complete the townhouse "for demonstration purposes" was in accordance with the recommendation in the Dyson Austin report dated 27 September 1984 that two or three townhouses should be furnished for display as an aid to marketing: see paragraphs 68-70 above. 96 At a directors' meeting of Zelino held on 23 September 1986 consideration was given to appointing various real estate agents for the sale of townhouses to outsiders and the finalisation of demonstration townhouses 5 and 6 was discussed. At a directors' meeting of Zelino held on 14 October 1986 a unanimous resolution was passed fixing the "values" of each townhouse in the development. Another unanimous resolution authorised the payment of a 1% sales commission to any venturer who found a purchaser for a townhouse, except where a real estate agent was also entitled to claim commission on the sale. 97 It is clear that by this time a number of outsiders were keenly interested in purchasing townhouses in the development. Diary notes of Mr Tesoriero (at Ex. B1, p.1679) reveal that he was actively involved in discussions with real estate agents and directly with prospective purchasers of townhouses. 98 At various times between October 1986 and September 1987 those of the venturers who wished to acquire townhouses for themselves gave written notice to Zelino of their election to do so, at the prices stipulated for those townhouses in the directors' meeting of 14 October 1986. Mr and Mrs Tesoriero elected to acquire Lots 3, 4, 11 and 12; Count Sassoli (through Feangil) elected to acquire Lot 8; Mrs Zanin (through Beila) elected to acquire Lot 9; Mr Socini elected to acquire Lot 2. A detailed recitation of the circumstances in which the venturers acquired and paid for their respective townhouses is set out in my judgment in Tesoriero v. Chief Commissioner of Stamp Duties [2001] NSWSC 489, at paras.24-40. To avoid overburdening these reasons, I incorporate herein the findings of fact which I made in those paragraphs. 99 Four of the remaining five townhouses were sold to non-venturers between July and October 1987. Mr Tesoriero himself found two of those purchasers and became entitled to a 1% commission on the sales in accordance with the resolution of the Zelino directors on 14 October 1986. The strata plan for the development was registered on 8 September 1987 and, upon completion of the contracts for sale to non-venturers, strata title in their respective lots was transferred to them by Zelino. The title to townhouses which had been acquired by the venturers, however, remained with Zelino. 100 By February 1988, all but one of the townhouses in the project had been sold, the proceeds of sales to outsiders had been received by Zelino and all that remained in terms of further expenditure by the venturers on the project was the cost of rectification work. Like practically every other matter which arose in the history of the project, the extent of rectification work was the subject of acrimonious dispute between the venturers, Mr Tesoriero claiming that substantial rectification work needed to be done to the four townhouses which he and Mrs Tesoriero had acquired, the other venturers claiming that a substantial part of that work was enhancement of the townhouses at their expense, not rectification work. 101 At a meeting of directors of Zelino held on 1 February 1988 it was resolved that 80% of the venturers' capital contribution be distributed to them by 22 March 1988. In February 1988 Mr Budai began to prepare financial accounts for the CUT. Was Mr Budai negligent in advising of liability under s.25 ITAA 102 By mid-April 1988 the last townhouse had been sold to an outside purchaser for a surprisingly high price. It was apparent that the CUT would show a substantial profit, even though the exact amount could not be quantified because adjustments were to be made to the purchase prices of Mr and Mrs Tesoriero's townhouses in respect of the cost of rectification work. 103 Probably from early 1988 the venturers began to press for a final distribution of funds from the Trust. Mr Budai prepared financial accounts of the Trust and of the Holyoak Partnership as at 15 April 1988. 104 A meeting of directors of Zelino was held on 29 April 1988 at which were present Mr Gagliardi, Mrs Zanin, Mr Danieletto, Mr Socini, Mr Tesoriero and Mr Budai. The minutes of that meeting do not record that Mr Budai's accounts as at 15 April 1988 were tabled. However, Mr Budai says that those accounts were presented to the venturers at that meeting and the following exchange occurred: "Budai: 'On the basis of these accounts and on Mr Cullinan's advice, there will be significant taxable income for each venturer.' Zanin: 'That's not what you said when we asked your advice at the beginning.' Budai: 'But you told me you were going to hold the strata lots for rental investment.' Zanin: 'Can't you do something?' Budai: 'Let me think about it.'" 105 According to Mr Budai, the next time he spoke to Mr Tesoriero was on 4 July 1988, when a conversation to the following effect took place: "Tesoriero: 'I am not very happy about income tax. My original and continuing intention should not give rise to an income tax problem.' Budai: 'It's not your intention that's critical but the intention of the Board. What the intention of the Board was will be inferred in the light of their actions and not what they say their intention was. You recall what Cullinan advised when we set out what these actions were. For these reasons I cannot advise that the Commissioner will conclude that it was not a profit making scheme. But obviously what the Board finally decides to include in the tax return is for the Board to decide.' Tesoriero: 'I invested in the Cremorne Unit Trust on the under-standing that the project was for the purpose of providing each of the unitholders with a residence and investment for rental purposes.' Budai: 'I gave advice on the basis that the project was for the purpose of providing the unitholders with an investment for rental purposes. But we both know that this has proved not to be correct. Not only is it not correct, but there is an abundance of evidence representing the contrary.' Tesoriero: 'I expected that the strata lots would be acquired by ordinary unitholders and that nothing would be sold to outsiders.' Budai: 'When I was originally approached in 1984, I was told that the strata lots would be held for rental purposes for a period sufficient to satisfy the Commissioner and then sold or used for residences. I had my personal views on whether what I was told was true or not. But I gave advice as to what the taxation situation was on the basis of the intentions I was told about. It was not my role to investigate whether what I was being told was true or not.' Tesoriero: 'You know that I did not want to pay income tax because my intention was for my equity in the trust to be held by Zelino for me to live in and for rental return.' Budai: 'I didn't even know that you were a prospective venturer when I first met you. I didn't find out you had actually joined until February 1985. You didn't ask my advice at the time. You didn't become a client until December 1986, and you certainly didn't tell me what your intentions were when you became a venturer.' Tesoriero: 'What the others have done should have been handled in such a way as not to give me an income tax liability.' Budai: 'Peter, you know how hard I worked to ensure that no decisions could be forced upon you or anyone else. What has happened has happened with your support or at the very least without an objection from you. You may well say that your intentions are what you claim, but the vast amount of evidence available to the Commissioner which contradicts your claim would make it foolhardy to submit that there was no intention to sell. Apart from everything else, just look at the fact that you are getting paid a commission for selling some of the strata lots.'" 106 The conversation, according to Mr Budai, continued for some time with recriminations on the part of Mr Tesoriero and justifications on the part of Mr Budai, all essentially repeating and elaborating upon the substance of what is recorded above. 107 Mr Tesoriero gives an account of these events which is somewhat different. He says that no accounts were tabled by Mr Budai at the 29 April 1988 meeting of Zelino and that all Mr Budai said on that occasion was that everyone should look at the accounts which he would be preparing because they should consider the tax implications. 108 Mr Tesoriero says that later - he is not more precise about the time - he had a telephone conversation with Mr Budai to the following effect: "Tesoriero: 'Frank, I'm not very happy about income tax. My original and continuing intention should not give rise to an income tax problem. I invested in the Cremorne Unit Trust on the understanding that the project was for the purpose of providing each of the unitholders with a residence and investment for rental purposes. I expected that all of the apartments would have been acquired by ordinary unitholders and that nothing would be sold to outsiders. You know that I did not want to be exposed to the payment of income tax because my clear intention was for my equity in the trust to be held by Zelino for me to live in and for rental return. What the others wanted you to do should have been handled in such a way as not to give me an income tax liability. That is why I wanted you to take the advice of Freehills. I did not expect that they would stand back and refrain from taking up all the special rights units. As you know I was bitterly opposed to any suggestion of selling off the plan to the public. I insisted that before any apartment was offered for sale, prices should be put on them all and then the ordinary unitholders should be given every opportunity of deciding to acquire the special rights units to the whole range of the apartments before they were able to sell the penthouse to an outsider. It was only pressure from me that brought about the situation where all the apartments were offered for agreed values to the unitholders before they were offered to the public. They had your full support and their attempts to sell to the public and now you tell me we have a tax problem.' Budai: 'Look Peter, you know that I was the accountant for Charles Gagliardi and Caterina Zanin for their North Ryde Town House Development. There is no way that they will not be perceived as having had the intention to build and sell for profit. Sassoli and his friends are in the same boat. Sassoli has a history of previous development. They had their Fairlight development. You are the only one who could convincingly say your intentions were not of a nature to attract income tax.' Tesoriero: 'Yes, but I thought the way you had set up the Cremorne Unit Trust would insulate me from their past history. You were their accountant before you were mine. You should have warned me this might happen. I expected you to protect me and discipline them from corrupting the express intention that induced me to enter the trust.' Budai: 'Look, I believe that the unitholders will be up for income tax. But that does not mean that tax cannot be minimised or even eliminated. Leave it to me, I will come up with something that should satisfy you.'" 109 While the accounts of Mr Tesoriero and Mr Budai as to their discussions differ as to timing, emphasis and detail, I am satisfied that the substance of what occurred was as follows. 110 At the Zelino directors' meeting on 29 April 1988 Mr Budai made it clear to those present that the CUT would be showing a substantial profit and that each venturer would therefore be liable for income tax. The venturers protested that that was not what Mr Budai had told them previously. The discussion was not taken much further at that stage because final accounts were still some time away from completion. 111 Mr Tesoriero and Mr Budai had a separate conversation which, I accept, was probably around early July 1988. The conversation occurred in the context that Mr Budai was giving advice to Mr Tesoriero concerning Mr and Mrs Tesoriero's own tax position. Mr Budai had prepared the tax returns for Mr and Mrs Tesoriero for 30 June 1986 and 30 June 1987. There is no dispute that he was retained to prepare their tax returns for 30 June 1988 and I am satisfied that the conversation in July 1988 occurred in the context of both parties' appreciation that it would soon be necessary to decide how Mr and Mrs Tesoriero's tax returns for 30 June 1988 should be prepared. Mr Budai, in making the statements which he did in the conversation in July 1988, was speaking as Mr Tesoriero's tax adviser, appreciating that Mr and Mrs Tesoriero would be relying upon his advice. 112 Mr Tesoriero expressed himself strongly to Mr Budai that he was not happy about paying income tax on profits from the venture. He emphasised that his own intention in going into the venture had been to acquire a residence and a number of townhouses for retention as investments. 113 I accept that Mr Tesoriero said to Mr Budai that he had invested in the venture on the understanding that the project was for the purpose of providing each of the unitholders with a residence and an investment for rental purposes and that nothing would be sold to outsiders. As I have already found, that statement was false: see paragraphs 35 and 45 above. Both he and Mr Tesoriero knew that what Mr Tesoriero was saying about his understanding in entering into the venture was false and could not withstand any scrutiny by the Commissioner. 114 I am satisfied that in this conversation Mr Budai gave advice to Mr Tesoriero, the substance of which may be summarised as follows. First, it was not Mr Tesoriero's intention alone which was determinative of his liability to tax under s.25A ITAA but rather the intention of all the venturers, as represented by the Board of Zelino. Second, the Commissioner would determine the relevant intention in the light of what the venturers had actually done in the venture, not merely upon the basis of what they said had been their intention in undertaking the venture in the first place. Third, there would be a substantial body of evidence available to the Commissioner which would contradict Mr Tesoriero's claim that his own purpose in entering into the venture was not to make a profit from the sale of townhouses to outsiders. That evidence would show that what had been done by the venturers in deriving profit from sales to outsiders was done with Mr Tesoriero's approval and support. Fourth, in Mr Budai's opinion, it was likely that the venturers, including Mr and Mrs Tesoriero, would be liable for tax on their share in the profits of the venture as income arising from the carrying out of a profit-making scheme. 115 I accept that Mr Tesoriero and, through him, Mrs Tesoriero, relied upon that advice in taking the course which they did, leading eventually to the filing of their tax returns for 30 June 1988 in which a sum of $170,890 was shown as profits derived by each of them from the CUT. 116 There is no doubt that in advising Mr Tesoriero as he did, Mr Budai owed Mr and Mrs Tesoriero a contractual duty to act with the care and skill of a competent tax adviser and accountant, that Mr and Mrs Tesoriero relied upon Mr Budai's advice, and that Mr Budai would be liable in damages if, in giving that advice, he breached his duty of care. The critical question is: could a competent accountant in the position of Mr Budai, knowing what he then knew of the facts of the matter, reasonably have held the opinions which he expressed in his advice to Mr Tesoriero? 117 In my opinion, the answer to that question is yes. 118 Section 25A(1) ITAA (as it was in 1988) provides as follows: "The assessable income of a taxpayer shall include profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme." 119 The first issue to which Mr Budai had to address himself was: did the enterprise in which the venturers were engaged, through their shareholding in Zelino, their membership of the Holyoak Partnership and their unitholding in the CUT, constitute the carrying on or carrying out of an undertaking or scheme? 120 In Steinberg v. FCT (1973) 134 CLR 640, Gibbs J., 699, defined a profit-making scheme as: "… a plan, design or programme of action devised and put into effect for the purpose of making a profit. It must be a scheme carried out by the taxpayer himself or on his behalf. It appears that it should - at least where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. The mere realisation of a capital asset, albeit in an enterprising way, would not amount to the carrying out of a profit-making scheme."

At pp.699-700 his Honour said: "I am in agreement with the view expressed by Mason J that 'it is not an essential element of a profit-making scheme in sec 26(a) that every step which culminates in the making of a profit should be planned or foreseen before the scheme is put into operation'. Schemes may be precise or vague; every detail may be arranged in advance, or the working out of the plan may be left for decision in the light of circumstances as they arise. It is no objection to a plan that it allows room for manoeuvre. When property is bought with the purpose of making a profit in the easiest and most advantageous way that may present itself, and the taxpayer adopts 'one of the many alternatives' that his plan leaves open, thereby returning himself a profit, he will rightly be said to be carrying out a profit-making scheme."

See also McCurry v. FCT 98 ATC 4487 and the cases therein cited. 121 In my opinion, the enterprise in which Mr and Mrs Tesoriero engaged, although elaborate in its legal structure, was nothing more than a concerted "plan, design or programme of action" put into effect by the venturers to achieve a commercial purpose. The whole of the venture, as embodied in the structure of corporation, partnership and trust, was an undertaking or scheme for the purposes of s.25A(1) ITAA. 122 The second issue to which Mr Budai had to address himself was: whose intention is the determinative intention for the purpose of ascertaining whether the undertaking or scheme is a "profit-making" one under s.25A ITAA? 123 The ITAA does not define what constitutes a "profit-making" scheme or undertaking. Section 25A does not make it clear whether, if a taxpayer engages in an enterprise with others, the character of the enterprise as a profit-making scheme or undertaking is determined by reference to the taxpayer's own dominant purpose in engaging in the enterprise, or by reference to the dominant purposes of all or a majority of the participants in the enterprise. A third possibility is that, as far as the taxpayer's liability to assessment is concerned, the character of the enterprise should be determined by examining whether, by its very nature, it is such as to be calculated to produce a profit. All three possibilities are, in my opinion, available as a matter of construction of s.25A. 124 Probably, as a matter of reality in most cases, it will not matter which of the possibilities is selected because they will all produce the same result. For example, if three participants in an enterprise have agreed upon a plan designed to produce profits and a fourth participant, knowing of that plan, decides to join the enterprise then it will be tolerably clear that the fourth participant joined the enterprise for the purpose of participating in the profits which the agreed plan was designed to produce. It will not matter what the fourth participant protests to the contrary. 125 Neither party was able to refer me to any authority which answers these questions. 126 Fortunately, I do not need to determine the proper construction of s.25A. It is sufficient for the purposes of this case to decide whether a competent accountant could have come to the view which Mr Budai expressed as to whose purpose was relevant in determining the character of the CUT. 127 Mr Budai's advice was founded upon a construction of the second limb of s.25A(1) which determines the character of an undertaking or scheme by reference to the actual intentions of all those engaged in it, not by reference only to the purpose of the taxpayer who is merely one of the participants. This happens to accord with the view of Mr Elkan, a tax expert called by Mr and Mrs Tesoriero, who regarded the critical intention as that of Zelino as Trustee of the CUT, that intention being discernible from the intentions of the directors, who were either the venturers or their representatives. 128 Mr McGee, another tax expert called by Mr and Mrs Tesoriero, was of the contrary view. In determining whether the profits from the CUT were assessable as arising from a profit-making undertaking or scheme, he regarded the intention of Mr and Mrs Tesoriero alone as relevant. 129 In the absence of a clear intention in the text of s.25A, in the absence of authority directly upon the point and bearing in mind that Mr and Mrs Tesoriero's two experts disagree on whose intention is relevant in the circumstances of this case for the purposes of s.25A, I conclude that a competent accountant could reasonably hold either of the competing views. 130 Which of the two views is correct is, probably, of no consequence in the end result. It will be seen that in giving his advice to Mr Tesoriero in early July 1988, Mr Budai, in fact, was covering both possible views. He was, in effect, saying to Mr Tesoriero that it did not matter whether the relevant intention was that of all of the venturers or of Mr and Mrs Tesoriero alone, because the evidence clearly demonstrated that Mr and Mrs Tesoriero had the same intention as the other venturers. 131 The fundamental question is, therefore, could a competent accountant in Mr Budai's position, knowing the facts which he knew, have reasonably formed the opinion that, whatever the venturers including Mr Tesoriero might say, there was a substantial body of evidence which would indicate to the Commissioner that the venture was a profit-making undertaking or scheme and that profit-making was the purpose of Mr and Mrs Tesoriero in entering into it. 132 In my view, there was ample evidence known to Mr Budai as at July 1988 showing that all venturers, from the very inception of the venture proposal in mid-1984, intended that all townhouses would be sold at current market prices, some to the venturers and the remainder to outsiders, that the profit thereby derived would discharge the costs of construction and that, hopefully, a cash surplus would be distributed to the venturers. The cash surplus would have the effect of reducing the acquisition cost of those townhouses purchased by the venturers. In other words, I am satisfied that there was evidence available to show that the result which the venture actually achieved was the result which all the venturers intended and hoped to achieve when they decided to commit to it. 133 I have referred to only a sample of this evidence in paragraphs 52 to 72 above. Some of the documents which I have referred to had not been seen by Mr Budai as at July 1988, but their content must have been the subject of many discussions between the venturers at which Mr Budai attended, and all the documents repeat a consistent pattern showing what the intentions of the venturers were from the outset. Many other documents supporting Mr Budai's conclusion were referred to in his affidavit and in Ex.B1. It would be unduly tedious to refer to them all. 134 A competent accountant in Mr Budai's position, believing that such evidence would be available to the Commissioner, would be justified in forming the view that the Commissioner could well assess the profits of the CUT coming into the hands of the venturers as having arisen from the carrying on or carrying out of a profit-making scheme or venture under the second limb of s.25A ITAA. The profits would be represented by cash in the hands of those venturers who had chosen not to buy townhouses for themselves. In the case of those venturers who had bought townhouses, the profits would be represented by the reduced cost of the townhouses after taking into account the cash surplus distributed to those venturers. 135 To support such a view Mr Budai had not only his own understanding of s.25A ITAA but had also had the advice of Mr Cullinan in August 1986 that the venturers' scheme could be viewed by the Commissioner in the same way as the Kratzmann scheme. Further, Mr Budai had Mr Cullinan's written advice of 27 October 1986 repeating the admonition that no matter what the venturers or any of them claimed were their intentions in embarking upon the venture, the Commissioner and the Courts would look at objective matters such as how many townhouses were sold and to what extent the cost of the townhouses purchased by the venturers was reduced by the profits made by sales to outsiders. Mr Cullinan's written advice made it clear that he himself had reservations as to whether the Commissioner and the Courts would accept the venturers' statements as to their intentions. 136 I conclude that Mr Budai was not negligent in advising Mr Tesoriero and, through him, Mrs Tesoriero that, in his opinion, they and the other venturers would be liable for tax under s.25A ITAA on the profits derived from the CUT. 137 In arriving at this conclusion I have not overlooked the evidence of Mr Elkan and Mr McGee, the tax experts called by Mr and Mrs Tesoriero. Mr Elkan was of the view that the profits of the CUT did not arise from a profit-making undertaking or scheme and were therefore not assessable in the hands of Mr and Mrs Tesoriero. As I have noted, Mr Elkan's view was that it was the intention of Zelino which was material in determining the character of the venture. 138 I can give no weight at all to Mr Elkan's evidence, for the obvious reason that what was the intention of Zelino, represented by the intention of the venturers constituting its Board of Directors, was a question of fact for the Commissioner or the Court to determine, not one for expert opinion. Mr Elkan accepted at face value what he was told by Mr Tesoriero - he made no independent investigations to satisfy himself as to the truth of what he was told. Clearly, he did not see many of the documents which would have been of great interest to the Commissioner. For example, he did not recall seeing the memorandum written by Mr Tesoriero and Mr Gagliardi in about August 1984 (paragraph 45) or Mr Budai's letter to Mrs Zanin dated 15 August 1984 (paragraph 42). When shown those documents, he admitted that the former would have been material to his consideration as to the purpose of the venture and that the latter would probably have made a difference to the views he formed as to that purpose. 139 Mr Elkan did see enough of the documents, however, to warn Mr White, in a letter of 17 July 1991, that a tax audit of Mr and Mrs Tesoriero could not be contemplated. Further, he said that having read Mr Tesoriero's files, he was of the view that "there is information in them which, if discovered by the Tax Office, would make it possible to come to the view that some participants may not have shared Peter's purpose, despite what they said in loan applications or elsewhere. This is an issue that must be treated with the utmost caution." 140 Likewise, I have not given any weight at all to the evidence of Mr McGee. He was of the view that it was the intention of Mr and Mrs Tesoriero alone that was material in determining the character of the undertaking or scheme carried on by Zelino. Like Mr Elkan, Mr McGee relied upon what he was told by Mr Tesoriero and upon a very small number of highly selective documents provided to him by Mr Tesoriero. 141 In the result, the first allegation of negligence referred to in paragraph 21 above fails. The venturers' fraudulent tax scheme 142 According to Mr Tesoriero, at the conclusion of his discussion with Mr Budai in early July 1988, Mr Budai proffered the suggestion that he "come up with something" that would minimise or eliminate tax. According to Mr Budai, the conversation was in the following terms: "Tesoriero: 'Can't you find a way to help us?' Budai: 'I've looked at every legal way that I could think of.' Tesoriero: 'The important thing is not to get caught. Just see what you can do.' Budai: 'I'll see what I can come up with.'" 143 According to Mr Budai, he had a similar conversation with Mrs Zanin on 21 June 1988. Mrs Zanin told him that she did not think that any of the other venturers would be "too fussed" about whether Mr Budai's ideas involved illegality. 144 In their evidence as to who originated the proposal for a fraudulent tax scheme, Mr Budai and Mr Tesoriero were each endeavouring to shift blame onto the other. Bearing in mind the alacrity with which Mr Budai prepared his various fraudulent proposals and the enthusiasm with which they were implemented by Mr Tesoriero, I am of the view that neither was at all resistant to the idea of fraud, although Mr Budai later went through the motions of ethical propriety. 145 By the end of July 1988 Mr Budai had prepared five "Alternatives" as to the manner in which the venturers' tax position could be treated on the basis of accounts of the CUT to be drawn up as at 30 June 1988. The first "Alternative" was to disclose and treat properly in the Trust's accounts all the transactions of the Trust. The second to fifth "Alternatives" escalated in degree the falsity of the accounts to be prepared and the complexity of the evasion mechanisms to be employed but at the end of the day, whichever of Alternatives 2 to 5 was employed, each of the venturers was intended to receive a distribution of profits from the CUT equal to what that venturer would have received if the accounts had been properly drawn up. 146 "Alternative 2" provided that the actual prices for townhouses sold to venturers would not be shown but, rather, the prices would be shown at values for those townhouses appearing in a valuation report of Jones Lang Wooton made in August 1985, less 2%. All other transactions of the CUT were to be properly disclosed. 147 "Alternative 3" provided that not only were the prices at which townhouses were sold to venturers to be understated as in Alternative 2, but various payments from the CUT to venturers, which would otherwise be assessable as income in their hands, were to be "camouflaged so that they [would] not be traceable" . 148 "Alternative 4" incorporated Alternative 3 and added the proposal that the legal title to Lots 3 and 4, which had been purchased by Mr and Mrs Tesoriero, remain with Zelino so as to enable a representation that those townhouses had not been sold as at 30 June 1988, thereby reducing the profits of the CUT. Mr and Mrs Tesoriero would gain control of Zelino and the CUT by acquiring the shares in Zelino and the ordinary units in the Trust held by the other venturers. Lots 3 and 4 would be effectively owned by Mr and Mrs Tesoriero but would retain their capital gains tax exemption, having been acquired by Zelino prior to September 1985. 149 "Alternative 5" incorporated Alternatives 3 and 4 and added the proposal that the title to Lot 2, which had been purchased by Mr Socini, likewise remained with Zelino so as to enable the representation that three of the townhouses had not been sold, thereby reducing even further the profits of the CUT. Mr and Mrs Tesoriero would acquire the units in the CUT of all other venturers save Mr Socini. Mr Socini, also, would derive the benefit that his townhouse would retain its capital gains tax exemption until he chose to sell it. 150 Alternatives 2 to 5 made no provision for two of the townhouses which Mr and Mrs Tesoriero had bought, namely Lots 11 and 12. According to Mr Budai's evidence, which I accept, Mr Tesoriero had by this time determined that Lot 11 would be shown, falsely, as having been purchased by his mother as her principal place of residence, whereby he himself would not be subject to land tax nor would Lot 11, when sold, attract capital gains tax. The title to Lot 11 was therefore to be registered in his mother's name. Lot 12 was to be the principal place of residence of himself and Mrs Tesoriero. 151 Mr Budai says, and I accept, that he explained Alternatives 1 to 5 fully to Mr Tesoriero in late July and early August 1988. He explained that the benefits of Alternatives 4 and 5, which involved Mr and Mrs Tesoriero acquiring the units of other venturers in the CUT, was that those venturers who sold their units in the Trust would account for their profit as capital gain, not income. Mr and Mrs Tesoriero would benefit in that their townhouses would remain within the CUT and would retain their capital gains exemption as Zelino had "acquired" those townhouses prior to the introduction of capital gains tax. 152 Mr Budai says, and Mr Tesoriero agrees (T265.25), that when he explained the alternatives to Mr Tesoriero in July and August 1988 he made it very clear that Alternatives 2 to 5 were not tax avoidance or minimisation but "evasion of tax through fraud" which was clearly illegal. He gave Mr Tesoriero a photocopy of the relevant page of the CCH Master Tax Guide which set out the penalties under ss.8P and8T of the Taxation Administration Act 1953 for making false statements in tax returns. The penalties, which included substantial fines, double tax and up to twelve months imprisonment, were not sufficient to deter Mr Tesoriero. 153 The other venturers were also shown Mr Budai's Alternatives 1 to 5 in August 1988 and Mr Budai gave them the same explanation which he had given to Mr Tesoriero, together with copies of the CCH Master Tax Guide pages showing the penalties for tax fraud. They, like Mr Tesoriero, were undeterred. 154 In mid-August Mr Budai prepared draft accounts for the CUT as at 30 June 1988 upon which the income tax returns for each of Alternatives 1 to 5 would be based. From these accounts he prepared a schedule setting out the effect of each of the Alternatives on each venturer. On or about 23 August 1988 each of the venturers received his or her own schedule but not the schedule of any other venturer. 155 On 24 August 1988 Mr Budai had a telephone conversation with Mr Tesoriero in which Mr Tesoriero pointed out that under Alternative 3 he would pay no tax, but under Alternative 5 he would have to pay tax on about $271,000. When asked why he should choose Alternative 5, Mr Budai said that the choice was not Mr Tesoriero's alone: under Alternative 3 Mr Tesoriero, Mrs Zanin and Count Sassoli would benefit, but not the other venturers; all venturers had to agree if any Alternative other than Alternative 1 was to be adopted. Mr Tesoriero protested that it was not fair that he had to pay tax and others would not. Mr Budai said that he would try to come up with something else. 156 Mr Budai then prepared Alternative 6, which affected only Mr and Mrs Tesoriero and Mr Socini. He provided Mr Tesoriero and Mr Socini with Alternative 6 and with amended schedules showing how that Alternative affected their respective tax positions. 157 Mr Tesoriero and Mr Budai agree that on 25 August 1988 Mr Budai explained Alternative 6 to Mr Tesoriero in detail. Alternative 6 was essentially the same as Alternative 4, with some variations: Mr and Mrs Tesoriero were to acquire Mr Socini's units in the CUT after 30 June 1988 rather than being shown to have acquired them prior to 30 June; the CUT was to pay a "management fee" to Mr Socini of about $50,000, which would reduce the disclosed profits of the CUT even further. The nett effect of Alternative 6 would be that Mr and Mrs Tesoriero would pay tax on about $140,000, whereas if a proper accounting and disclosure were made they would have to pay tax on $430,000. Mr Socini (who was also a tax client of Mr Budai) was said to have available tax losses so that he might be willing to agree to Alternative 6. 158 As with every other matter arising amongst the venturers, the adoption of a fraudulent tax scheme was the subject of protracted squabbling from August to December 1988. The disagreement had nothing to do with whether or not any venturer would be party to a fraud; it was all to do with whether one was getting more out of the fraud than another. 159 Several versions of the fraudulent accounts for the CUT were prepared by Mr Budai as he made fine adjustments to Alternative 6. Eventually, he produced a version showing figures to be received by each venturer by way of a final distribution with which all venturers were prepared to agree. These are the accounts for the CUT for the period ended 16 December 1988. 160 At a meeting on 14 December 1988 the venturers or their representatives signed a copy of the 16 December accounts by way of acknowledgment that they agreed with the amount shown therein as the amount to be distributed to each venturer by way of final distribution of the proceeds of the venture. Mr Tesoriero signed the accounts for himself and on behalf of Mrs Tesoriero; Mr Pringle, Count Sassoli's accountant, signed for Count Sassoli's company, Feangil; Mr Danieletto signed as Mr Socini's attorney; Mr Gagliardi signed for his company, Danza; and Mrs Zanin signed on behalf of Beila. 161 At the meeting Mr Budai distributed to each of those present a set of documents, comprising a page headed "The Facts" and a number of bogus minutes of directors' meetings of Zelino. Mr Budai told those present to study the documents carefully as they contained the representations that all of them would have to make in their tax returns and in the event that there was a tax investigation. The document entitled "The Facts" contained a summary of a series of Zelino directors' meetings, never in fact held, which would be necessary in order to effect Alternative 6. The meetings were all shown to be held between 13 January 1986 and 5 July 1988. 162 Mr Tesoriero does not dispute that "The Facts" stated in the document bearing that title are false, that the minutes of the purported directors' meetings referred to therein are bogus, and that he knew that at the time that the documents were given to him: Tesoriero affidavit, 16 April 1988, para.90. 163 I accept Mr Budai's evidence that he explained the fraudulent scheme to all of the venturers or their representatives before they signed the 16 December accounts for the CUT. I specifically reject Mr Pringle's evidence that he was not aware of any fraud or error in the accounts which he signed on Feangil's behalf. When confronted with statements in the accounts which he admitted he must have seen at a glance were wrong, he said that he could give no explanation as to why he had signed the accounts: see T219.1-221.5. His demeanour when giving this evidence, coupled with the inherent improbability that he gave no attention to the accounts which he, as Count Sassoli's accountant, was called upon to sign, convinced me that he was not telling the truth when he said that he was unaware that the accounts were false. 164 On 16 December 1988 the venturers received payment of their final distributions. The amount each venturer received is shown in the 16 December accounts on the page headed "Notes to the Balance Sheet" - this was the page of the accounts signed by or on behalf of the venturers. The amounts to be distributed are shown under the heading "Other Current Liabilities - Unsecured Loans At Call". That description of the payments to the venturers was false in itself, but it was merely one of a multitude of false statements in the accounts, to the knowledge of all venturers. What was important to the venturers when they signed the accounts was their own distribution figures - what Mr Budai had done otherwise in falsifying the accounts was a matter of indifference to them. 165 It is now necessary to summarise the effect on the venturers of the implementation of Alternative 6. Mr Budai was careful and precise in his evidence as to how he manipulated the CUT accounts to produce distribution figures which were acceptable to all parties and yet provided a completely false basis of accounting which the venturers could use to falsify their tax returns. 166 Mr Budai prepared a set of accounts showing "what really happened" in the transactions between the venturers and the CUT so as to explain what he had done to manipulate the figures ultimately appearing in the 16 December accounts signed by the venturers. The accounts showing "what really happened" as compared with the accounts prepared in accordance with Alternative 6 are at pp.3300-3321 of Ex.B1. His evidence in explanation is at T944-957, T965-969, T971-982 and T984-990. That evidence was not seriously challenged. 167 The effects of Alternative 6 as implemented are summarised in paragraphs 168 to 177 below. 168 It was misrepresented in the bogus Zelino minutes of 13 January 1986 and in the sales figures contained in the false CUT accounts that on 13 January 1986: • special rights units had been issued to Mr and Mrs Tesoriero for the acquisition of Lot 12 at a price of $637,000 whereas the true price agreed to be paid for that townhouse in November 1986 was $923,496 (after adjustments;

• special rights units had been issued to Mr Tesoriero's mother, Mrs B. Tesoriero, for the acquisition of Lot 11 at a price of $372,400 whereas in truth that townhouse had been purchased by Mr and Mrs Tesoriero in March 1987 for $615,658 (after adjustments);

• special rights units had been issued to Count Sassoli's son, Fabrizio, for the acquisition of Lot 8 for a price of $465,500 whereas the true price agreed to be paid for that townhouse by Feangil in November 1986 was $611,132 (after adjustments);

• special rights units had been issued to Mrs Zanin for the acquisition of Lot 9 for a price of $441,000 whereas the true price agreed to be paid for that townhouse by Beila in March 1987 was $595,262 (after adjustments);

• special rights units had been issued to Mr Socini for the acquisition of Lot 2 for a price of $264,600 whereas the true price agreed to be paid for that townhouse by Mr Socini in September 1987 was $589,583 (after adjustments). 169 It was misrepresented in the CUT accounts that Lots 3 and 4 had not been sold by 30 June 1988 whereas in truth they had been sold to Mr and Mrs Tesoriero in December 1987 and March 1987 respectively. 170 The effect of these misrepresentations was that the accounts of the CUT understated the income of the Trust by $1,155,027. 171 The CUT accounts further misrepresented that $40,000 was due and paid to Mr Socini for "management services" as a Trust expense. This amount was neither due nor paid. The nett profits of the CUT were falsely reduced by that amount. 172 Private expenses incurred by Mr and Mrs Tesoriero in connection with their own townhouses, totalling some $94,500, were falsely represented as expenses of the project; so too were private expenses incurred by Mrs Zanin, totalling some $36,000. The nett profits of the CUT were falsely reduced by these amounts. 173 Amounts paid or credited to Mr Tesoriero by the CUT which should have been disclosed by him as assessable income were neither disclosed within the CUT accounts nor in Mr Tesoriero's tax return. These amounts were: $21,280 for bobcat hire, $20,000 for legal fees, $6,000 for clearing and gardening, $162,127 for interest on loans made by Mr Tesoriero to the CUT, $13,750 for commission earned by Mr Tesoriero for the sale of Lots 5 and 7, and $6,000 for project management fees. 174 Interest paid by the CUT to Feangil totalling $31,189 and interest paid to Mrs Zanin totalling $15,137 was not disclosed in the CUT accounts. Neither was a sum of $11,092 paid by way of salary to Mrs Zanin. 175 The total amount of payments to Mr and Mrs Tesoriero, Feangil and Mrs Zanin not disclosed in the CUT accounts was $287,175. 176 On the basis of the false CUT accounts prepared in accordance with Alternative 6, Mr Budai prepared a draft tax return for CUT for the year ended 30 June 1988. It showed a nett profit before tax of $517,987. After depreciation, the nett profit of $505,355 was shown as having been distributed to Mr Tesoriero in the sum of $170,890, Mrs Tesoriero in the sum of $170,890, and Mr Socini in the sum of $163,575. Mr Socini was also shown as having received $40,000 from the CUT in respect of his "services" as "assistant project manager". 177 Mr and Mrs Tesoriero's tax returns for the year ended 30 June 1988 showed that they had each received a distribution of $170,890 from the CUT and it was on this basis that they paid tax in respect of that financial year. 178 Mr Tesoriero endeavoured to suggest in his affidavit evidence and in the witness box that he had been "bludgeoned" into agreeing to implement Alternative 6 by pressure from Mr Budai and the other venturers. He suggested that he had strenuously resisted the idea of a fraudulent scheme but his will had been overborne so that his responsibility for the fraudulent CUT accounts and for subsequently lodging a fraudulent tax return was somehow diminished. 179 I completely reject that suggestion. The only concerns which Mr Tesoriero had as to his involvement in a fraudulent tax evasion scheme were whether the other venturers were getting more out of it than he was and whether he would be caught. The truth is revealed in a handwritten note which Mr Tesoriero made recording a telephone conversation between himself and Mr Budai on 6 July 1989. In the course of a discussion recounting what had happened in December 1988 Mr Budai said: "I know you think I was pushing you towards Alternative 6" . Mr Tesoriero responded: "I made the decision. You pushed me but I should have known better - I am a solicitor" . 180 I am satisfied that in or about December 1988 Mr Tesoriero agreed with Mr Budai, on behalf of himself and his wife, that Mr Budai would, as their tax agent, prepare and lodge tax returns for the year ended 30 June 1988 which were in accordance with Alternative 6 and which were, accordingly, false. I am satisfied that Mr Budai included the false figure of $170,890 in the returns of Mr and Mrs Tesoriero on the express instruction of Mr Tesoriero. In doing so, he performed his retainer to the letter and breached no contractual duty of care to Mr and Mrs Tesoriero. 181 Accordingly, the second allegation of negligence, referred to in paragraph 22 above, fails on the facts. 182 Because of my finding that the contents of Mr and Mrs Tesoriero's tax returns for 30 June 1988 were in accordance with their express instructions and did not result from Mr Budai's negligence, it is unnecessary to consider Mr Budai's alternative defence of illegality. If it had been necessary to do so, I would have held that the defence succeeded. 183 The contract of retainer between Mr and Mrs Tesoriero and Mr Budai in respect of the 30 June 1988 tax returns was entered into expressly, consciously and deliberately to give effect to an unlawful purpose on the part of Mr and Mrs Tesoriero, namely, the making by them of false statements contrary to the provisions of ss.8P and 8T of the Taxation Administration Act 1953 . The contract also expressly required Mr Budai, in signing their returns as their tax agent, to give a false certificate that he had satisfied himself that the books of account and other sources of information upon which the returns were based were correct and disclosed the whole of Mr and Mrs Tesoriero's income from all sources, in breach of ss.8P and 8T of the Taxation Administration Act . Mr Tesoriero and Mr Budai were both acutely aware of the illegality of what they were doing and of the penalties provided by the law: see paragraph 152. 184 The contract was therefore within the first category of illegality referred to by Gibbs ACJ in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410, at 413. The Court will not enforce a contractual duty of care arising from such a contract. People who deliberately set out to breach the law cannot expect to be aided by a Court: see St John Shipping Corporation v. Joseph Rank Ltd [1957] 1 QB 267, at 288; Fitzgerald v F.J. Leonhardt Pty Ltd (1997) 189 CLR 215, at 221.

THE STAMP DUTY CLAIM The issues 185 In their Statement of Claim Mr and Mrs Tesoriero allege that: • in and from March 1985 and between August 1985 and October 1989, Mr Budai was retained by them as their accountant to advise on "the formalities concerning the issue [to them] of shares in Zelino and units in the [CUT] " : SC para.23, 34;

• prior to March 1985 they informed Mr Budai of their intention to acquire one or more special rights units in the CUT for the purpose of thereby acquiring a townhouse in the development: SC para.25(a);

• it was a term of Mr Budai's retainer that he would advise them of the best means of implementing their intentions having regard to taxation and stamp duty implications: SC para.26;

• it was a term of Mr Budai's retainer that he would execute all reasonable care, skill, diligence and competence as an accountant in discharging the retainer: SC para.33(a);

• pursuant to the retainer Mr Budai advised Mr and Mrs Tesoriero that the unitholder need only request that he be granted the apartment of his choice under the CUT and Mr Budai would attend to all the formalities necessary for the issue of the appropriate special rights units: SC para.38;

• by notice to Zelino dated 29 October 1986 Mr and Mrs Tesoriero elected to acquire Lots 3 and 12 and by notice dated 17 December 1986 they applied for special rights units in the CUT referable to Lots 11 and 4: SC para.39;

• at various meetings of directors of Zelino up to 11 March 1987 it was resolved that documents be prepared to effectuate the issue to Mr and Mrs Tesoriero of special rights units in the CUT referable to Lots 3, 4, 11 and 12: SC para.40;

• on and from 11 March 1987 Mr and Mrs Tesoriero ought to have been registered as the joint holders of special rights units in classes F, G, N and O of the CUT pursuant to Clause 2 and the Sixth Schedule of the Trust Deed: SC para.41;

• in breach of his retainer Mr Budai did not prepare any documents recording or purporting to record the issue or holding by Mr and Mrs Tesoriero of their special rights units in the CUT: SC para.42;

• in breach of a retainer between himself and Zelino to act as Zelino's accountant, Mr Budai did not call directors' meetings of Zelino to be held on 14 December or 16 December 1988 whereby all shares in Zelino not already held by them were transferred to Mr and Mrs Tesoriero and all ordinary units in the CUT were repurchased by Zelino and reissued to Mr and Mrs Tesoriero: SC paras.31, 83, 85;

• Mr Budai ought to have advised the directors of Zelino and the unitholders in the CUT in August 1985 and up to 21 November 1986 to hold a meeting in August 1985 or shortly thereafter for the purpose of resolving the special rights units under the CUT be issued to the parties at the prices referred to in a valuation of Jones Lang Wooton dated 14 August 1985 and ought to have caused such special rights units to issue and be registered in the records of Zelino in the names of the holders: SC para.86;

• in consequence of the breaches of the retainer between Mr Budai and Zelino referred to in paragraph 85 of the Statement of Claim and (possibly) in consequence of the breach of a retainer between Mr and Mrs Tesoriero as unitholders of the CUT hinted at but not pleaded in paragraph 86, Mr and Mrs Tesoriero suffered loss and damage in respect of legal fees paid to Lane & Lane and accountancy fees paid to Mr Elkan of Greenwood & Challender: SC para.91. 186 Mr Budai denied all allegations on bases which it is now not necessary to particularise. 187 In his final submission, Mr White refined Mr and Mrs Tesoriero's claim for damages: T1028.25ff. He acknowledged that the fact that Mr and Mrs Tesoriero had not been issued with special rights units had not caused them loss in the form of payment of stamp duty. That was so because in Tesoriero v Chief Commissioner of Stamp Duties (supra) I had set aside the Commissioner's assessment of stamp duty as against Mr and Mrs Tesoriero for reasons which, for the sake of brevity, I will not now repeat but will incorporate by reference in this judgment. 188 Nevertheless, Mr White submitted that had Mr Budai attended to "the formalities" necessary for the issue of special rights units for Lots 3, 4, 11 and 12 on or shortly after various dates between 12 November 1986 and 19 September 1987, when Zelino resolved that the townhouses be sold to the relevant venturers - or at least prior to 10 June 1987 - then the Commissioner of Stamp Duties would never had levied an assessment for stamp duty against Mr and Mrs Tesoriero but would have accepted that no stamp duty was payable. If that had happened, he said, Mr and Mrs Tesoriero would never have been put to the expense of taking proceedings to set aside the Commissioner's assessment. Mr White, however, did not claim legal costs of the proceedings against the Commissioner. He limited the claim to a sum of about $31,000 paid to Mr Elkan by Mr and Mrs Tesoriero for Mr Elkan's work in making various submissions to the Commissioner of Stamp Duties: T1047.50-1048.15. 189 It is rather difficult to identify with precision the issues raised by the Statement of Claim and by Mr White's submissions. The pleading is confusing as to whether Mr and Mrs Tesoriero are relying upon breach of a contract between Mr Budai themselves or upon breach of a contract between Mr Budai and Zelino: see SC paras.31, 83, 85, 86, 91. Zelino is not pressing a claim against Mr Budai. It was not explained how Mr and Mrs Tesoriero could rely upon Mr Budai's alleged breach of a contract with a third party in order to support a claim for breach of a contractual duty to themselves. It was, at least, made clear by Mr White that Mr and Mrs Tesoriero's only cause of action in negligence against Mr Budai was founded upon contract and not in tort: T1049.20-.55. 190 It was never made clear precisely when the alleged contract between Mr Budai and Mr and Mrs Tesoriero relating to special rights units was made, and what was the consideration supporting that contract which was said to be provided by Mr and Mrs Tesoriero. 191 The first issue seems to be: was there a contract between Mr and Mrs Tesoriero and Mr Budai whereunder Mr Budai undertook responsibility to procure that Mr and Mrs Tesoriero were issued with special rights units in the CUT in respect of townhouses which they elected to acquire? 192 The second issue seems to be: did Mr Budai breach that contract by failing to do something which he could have done and should have done in order to procure the issue of the relevant special rights units? 193 The third issue seems to be: did Mr Budai's alleged breach of the contract have a sufficient causal connection with the raising of the Stamp Duty Commissioner's assessment of stamp duty? 194 The fourth issue seems to be: would the fees paid to Mr Elkan have been avoided if the Stamp Duty Commissioner's assessment had not been made? Was there a contract of retainer? 195 The contract alleged in SC paras.23 and 34 whereunder Mr Budai was to give advice as to special rights units seems to be a separate and distinct contract from that alleged in SC para.32 whereunder Mr Budai was retained to prepare Mr and Mrs Tesoriero's personal tax returns for the year ended 30 June 1986, 30 June 1987 and 30 June 1988. 196 The contract as to special rights units is alleged to have come into existence from March 1985 and between August 1985 and October 1989: SC paras.23, 34. It is said that fees in respect of that contract were paid by Mr and Mrs Tesoriero to Mr Budai. No other consideration in support of the contract is alleged. The fees are said to have been rendered by Mr Budai in three memoranda, the first dated 23 March 1985 in the sum of $200, the second, undated, in respect of services rendered to 2 February 1987 in the sum of $630, and the third dated 2 January 1989 in the sum of $808: SC para.64. Mr Budai admits that those memoranda of fees were rendered by him but says that they were not pursuant to a contract relating to the issue of special rights units. 197 Needless to say, there is no document which evidences the terms of the alleged contract as to special rights units. Mr Tesoriero's evidence in support of the existence and terms of the contract is summarised in paragraphs 198 to 205 below. 198 At a meeting of Zelino directors on 27 October 1986 at which Mr Budai was present Mr Tesoriero made it clear that he wanted to have the opportunity to have special rights units allotted to himself and his wife: affidavit 16 April 1998, para.31. 199 At a meeting on the project site on 28 October 1986 at which Mr Tesoriero, Count Sassoli and Mr Budai were present, the sale of townhouses to outsiders and venturers was discussed. Mr Tesoriero said that he needed to apply formally for special rights units and Mr Budai said: "Don't worry about the formalities. We are giving an undertaking that you will get your special rights units if you make your application and notify the Board tomorrow morning" : affidavit, para.33. 200 At a meeting of Zelino directors on 12 November 1986 at which Mr Budai was present a resolution was passed for the transfer of Lot 8 to Count Sassoli and Lot 12 to Mr and Mrs Tesoriero. Mr Tesoriero queried Mr Budai as to whether the terms of the resolution gave him special rights units; Mr Budai responded that Mr Tesoriero should not worry, it was not important: "You and Count Sassoli will get your special rights units. I will attend to that" : affidavit, para.40. 201 At a meeting of Zelino directors on 16 December 1986 at which Mr Budai was present Mr Tesoriero asked Mr Budai what sort of notice he wanted in order that he and Mrs Tesoriero could apply for Lots 4 and 11, to which Mr Budai responded: "Just write the same as you wrote last time" : affidavit, para.43. 202 In late 1986 Mr Tesoriero had a conversation with Mr Budai in which he said: "Would you like to be my accountant?" . Mr Budai said: "Certainly. From what I have seen of your affairs they could do with some rearranging. I am surprised you don't have a family trust. It's about time you had a look at a number of matters." Mr Tesoriero said: "The first thing I want you to do is to prepare the income tax returns for Tonia and me." Thereafter, he supplied information to Mr Budai who prepared and lodged income tax returns for himself and Mrs Tesoriero for the year ended 30 June 1986: affidavit, paras.47, 48. 203 Mr Tesoriero refers to Mr Budai's memorandum of fees for services to February 1987 immediately following the evidence relating to the preparation of the tax returns for the year ended 30 June 1986. He does not suggest that the fees relate to the provision by Mr Budai of any services other than the preparation of the tax returns. 204 On 11 March 1987 at a meeting of Zelino directors which Mr Budai attended it was resolved that documents be prepared for the issue to Mr and Mrs Tesoriero of special rights units for Lots 11 and 4. After that meeting Mr Tesoriero "continued to be of the view that Budai would attend to the preparation of necessary documentation to give effect to the resolution passed at that meeting" : affidavit, para.54. 205 At some time after 16 December 1988 Mr Budai lodged Mr and Mrs Tesoriero's tax returns for the year ended 30 June 1988, which Mr Budai had prepared: affidavit para.75. Immediately after giving that evidence, Mr Tesoriero refers to Mr Budai's memorandum of fees dated 2 January 1989. He does not suggest that the fees relate to the provision by Mr Budai of any services other than the preparation of the tax returns: affidavit, para.76. 206 There is no reference in Mr Tesoriero's affidavit to the memorandum of fees dated 23 March 1985 in the sum of $200 referred to in SC para.64. No such memorandum of fees is to be found amongst Mr Budai's memoranda of fees in Ex.B1, pp.1318-1347. There is a memorandum of fees dated 23 March 1985 but it is addressed to Zelino and it is for a total of $2,085. 207 Mr Budai certainly did a great deal of work for Zelino for which he regularly sent memoranda of fees. Those fees were paid as expenses of the venture. In carrying out that work he was doing so pursuant to a contract with Zelino, not pursuant to contracts with its directors or with any of the unitholders of the CUT. 208 The only conversation which could possibly be put forward as evidencing the contract in respect of special rights units for which Mr and Mrs Tesoriero contend is that recorded in paragraph 202. Mr Budai denies that the conversation occurred in those terms. His evidence as to the conversation and as to the circumstances in which he prepared Mr and Mrs Tesoriero's tax returns for 30 June 1986 are set out in paragraphs 126.1-129.4 of his affidavit. I prefer the evidence of Mr Budai to that of Mr Tesoriero. 209 Even if I had accepted the evidence of Mr Tesoriero, I could not be satisfied that Mr Budai, in agreeing to act as Mr Tesoriero's accountant and to advise in relation to his affairs generally, agreed as a term of that contract to procure that Zelino did all things necessary to ensure that Mr and Mrs Tesoriero were issued with special rights units. There is no evidence to support a suggestion that that obligation was an express term of the contract. It is impossible to supply such a term by implication: for one thing, Mr Budai had no control over Zelino or the venturers. He had ceased to be even a secretary of the company in November 1984. It was painfully clear to all venturers from March 1985 onwards that they were controlled by nothing except their perceived self interest. 210 In my opinion, there was no contract between Mr and Mrs Tesoriero and Mr Budai relating to the issue of special rights units in the terms alleged. Causation 211 Even if Mr Budai had agreed with Mr and Mrs Tesoriero to procure Zelino to issue special rights units, it would have been impossible for him to perform that agreement. As I have held in Tesoriero v. Chief Commissioner of Stamp Duties (supra), under the terms of the CUT Trust Deed special rights units had to be issued pursuant to a determination by Zelino made not later than twenty-four hours after it had accepted money for the subscription of units in the Trust. The venturers subscribed the total of $950,000 for their units in the Trust in March 1985 or very shortly afterwards. No determination by Zelino for the issue of special rights units was made in the requisite period of twenty-four hours and no such determination could thereafter have been validly made in accordance with the terms of the Trust Deed: see Tesoriero v. Chief Commissioner of Stamp Duties (supra), paras.15-20, 46, 47, 43. 212 Mr White accepts that it would have been impossible for Mr Budai to have procured a valid issue of special rights units to Mr and Mrs Tesoriero in accordance with the Trust Deed after March 1985. He accepts that as at March 1985 neither Mr and Mrs Tesoriero nor any of the other venturers had selected which, if any, townhouses they wished to purchase. Mr White submits, however, that it is not necessary to enquire how Mr Budai might have fulfilled his contractual obligation "to attend to the formalities necessary to the issue of special rights units" . All that is relevant is that he undertook that obligation and failed to perform it: T1030.1-1031.55. 213 I cannot accept that submission. Mr and Mrs Tesoriero bear the onus of proving with specificity what the alleged contract required Mr Budai to do. If the act in breach of the contract is not clearly identified it is impossible to determine whether or not the loss claimed was in fact caused by the breach. 214 Mr White submits, in the alternative, that Mr Budai could have ensured a valid issue of special rights units to Mr and Mrs Tesoriero by procuring an amendment to the CUT Trust Deed. 215 I cannot accept that it must be implied as a term of the alleged contract between Mr and Mrs Tesoriero and Mr Budai that Mr Budai would, if necessary, give legal advice, draw legal documents and somehow coerce or cajole all other unitholders of the CUT into agreeing to amend the Trust Deed in order to accommodate the wishes of Mr Tesoriero, with whom they all seemed to be on extremely bad terms. 216 Alternatively, Mr White submits that Mr Budai should simply have procured the issue of certificates under the common seal of Zelino showing that Mr and Mrs Tesoriero were entitled to special rights certificate in respect of the townhouses which they acquired. He submits that it would not have mattered that those certificates were invalidly issued under the terms of the Trust Deed - the Commissioner would simply have accepted "the piece of paper" at face value, accepted that the certificates evidenced that Mr and Mrs Tesoriero were the beneficial owners of Lots 3, 4, 11 and 12 as at 16 December 1988 and would, therefore, have raised no stamp duties assessment: T1035.20-.55, T1037.40-1039.50, T1043.55-1044.5, and esp. at T1046.5-1047.5. 217 I cannot accept that submission. Firstly, it assumes that Mr Budai had it in his power, prior to 16 December 1988, simply to write out special rights units certificates and to affix thereto the common seal of Zelino on his own authority. He had no such power. I cannot imply into the alleged contract a term that Mr Budai would, in effect, forge company documents in order to deceive the Commissioner into believing that they had been issued with the authority of the Zelino Board. 218 Secondly, and even more importantly, even if Mr Budai had forged special rights units certificates for Mr and Mrs Tesoriero, the loss which they claim would still have been suffered. Mr White's submission speculates that if Mr Budai had simply written out special rights units certificates and had affixed thereto Zelino's seal, the Commissioner would have accepted them, without further enquiry, as evidencing Mr and Mrs Tesoriero's beneficial ownership of Lots 3, 4, 11 and 12. The submission speculates that the Commissioner would not have examined the provisions of the Trust Deed, investigated the time at which subscriptions for units in the Trust had been made, and concluded that no issue of special rights units after March 1985 could have been valid. 219 Such speculation flies not only in the face of common sense, it flies in the face of fact. The Commissioner, very predictably, did undertake an investigation of the provisions of the Trust Deed and the times at which subscriptions for units had been made. He did come to the conclusion that no special rights units could validly have been issued after March 1985. He came to the conclusion, wrongly, that the CUT still held Lots 3, 4, 11 and 12 as assets of the CUT as at December 1988. It would not have made the slightest difference to that conclusion if Mr and Mrs Tesoriero had produced special rights certificates issued at any time after March 1985 - the Commissioner would rightly have disregarded them as invalidly issued under the Trust Deed. Accordingly, even if Mr and Mrs Tesoriero had succeeded on all other issues in relation to this claim, they would have failed on the issue of causation. Conclusion 220 In my opinion, Mr and Mrs Tesoriero have failed on all issues necessary to support their claim against Mr Budai arising out of the Commissioner's assessment of stamp duty.

COSTS 221 As Mr and Mrs Tesoriero have failed on all claims against Mr Budai the order of the Court would normally be that costs follow the event, so that Mr and Mrs Tesoriero should pay Mr Budai's costs of the proceedings on a party/party basis: SCR Pt 52A r.11; Milne v AG of the State of Tasmania (1956) 95 CLR 460, at 477. There is, however, a complicating factor in this case. 222 In order to defeat the allegation that he had negligently advised Mr and Mrs Tesoriero to include the sum of $170,890 in their tax returns for 30 June 1988 (see paras.19-23 above), Mr Budai pleaded and proved that he had prepared the tax returns on that basis pursuant to and in accordance with a contract of retainer the essence of which was that he would assist Mr and Mrs Tesoriero to make false statements in their tax returns and that he himself, as their tax agent, would falsely certify the truth and accuracy of the tax returns and of the accounts of the CUT on which they were based. He successfully proved that the contract was unenforceable against him because it was a contract the performance of which required him to commit serious offences under s.8P and s.8T of the Taxation Administration Act 1953 and because it was a contract for the purpose of enabling Mr and Mrs Tesoriero to commit serious offences under s.8P and s.8T of that Act. 223 A substantial part of this case, both in preparation and in the trial itself, has been devoted to the advancement of that defence by Mr Budai and its rebuttal by Mr and Mrs Tesoriero. 224 Notwithstanding the general rule as to costs encapsulated in SCR Pt 52A r.11, costs are in the discretion of the Court, which has full power to determine by whom and to what extent costs are to be paid: Supreme Court Act, 1970 , s.76(1). 225 The principles upon which the Court's discretion as to costs may be exercised are now well settled. In Donald Campbell & Co. v. Pollak [1927] AC 732, Viscount Cave LC said, at pp.811-812: "A successful defendant in a non-jury case has no doubt, in the absence of special circumstances, a reasonable expectation of obtaining an order for the payment of his costs by the plaintiff; but he has no right to costs unless and until the Court awards them to him, and the Court has an absolute and unfettered discretion to award or not to award them. This discretion, like any other discretion, must of course be exercised judicially, and the Judge ought not to exercise it against the successful party except for some reason connected with the case." 226 In Ritter v. Godfrey [1920] 2 KB 47, Atkin LJ said at p.60: "In the case of a wholly successful defendant, in my opinion the Judge must give the defendant his costs unless there is evidence that the defendant (1) brought about the litigation, or (2) has done something connected with the institution or the conduct of the suit calculated to occasion unnecessary litigation or expense, or (3) has done some wrongful act in the course of the transaction of which the plaintiff complains."

His Lordship at p.61 said of the third category of exceptions that it: "… extends to cases where the facts complained of, though they do not give the plaintiff a cause of action, disclose a wrong to the public."

A wrong to the public, in his Lordship's opinion, included fraud or crime but, even so, the disentitling conduct must be in the course of the transaction which was the subject of the proceedings. His Lordship's statement of principle was adopted by Long Innes J. in Sunday Times Newspaper Co Ltd v. McIntosh (1933) 33 SR(NSW) 371, at 377. 227 In Jamal v. Secretary, Department of Health (1988) 14 NSWLR 252 at p.271 Mahoney JA, after referring to the general rule as to costs, said of the exceptions to it: "First, if the costs of the appeal have been increased by an issue on which the successful parties failed and those costs are of sufficient significance to warrant a special order, the parties who succeeded on that issue should have the costs of it. … And, secondly there may be reasons why the costs of appeal or the costs of particular issues will be ordered otherwise. Thus, for example, the conduct of the successful respondent may have justified the appeal being brought … or his conduct in relation to the matter under appeal may be discreditable to an extent warranting his being deprived of costs." 228 Examples may be found of cases where costs have not been awarded to a defendant who has succeeded on a discreditable defence or on one founded upon illegality. In Jones v. Merioneth Shire Permanent Benefit Building Society [1892] 1 Ch 188, the plaintiffs gave promissory notes to the defendant in consideration that the defendant would stifle the criminal prosecution of a relative for embezzlement of the defendant's funds. When the defendant brought an action at law to enforce the promissory notes against the plaintiffs, the plaintiffs brought an action in Chancery to set aside the notes on the ground that they were given for an illegal consideration. The plaintiffs succeeded at first instance and on appeal. However, they were denied their costs. Lindley LJ, with whom the other members of the Court agreed, said at p.188: "We are very much struck with the character of the defence [ to the action to enforce the notes] and the circumstances under which it was raised. It is an extremely discreditable defence, to which we are compelled to give effect upon grounds of public policy. Upon these grounds, therefore, the appeal is dismissed without costs." 229 In Igaki Australia Ltd v. Coastmine Pty Ltd (unrep. FCA, Drummond J., 2 November 1994), the applicants claimed that the respondents had induced them to acquire shares in a company carrying on a restaurant business by means of certain misrepresentations. The respondents succeeded because the trial judge found that the inducing representations were to the effect that the company's business would be carried on in such a way that the applicants would receive large sums of money which would not be disclosed for tax purposes, in breach of s.8C and s.8L of the Taxation Administration Act 1953 and s.29D of the Crimes Act 1914. The applicants' claim therefore failed, since the case was one in which: "… a person has been induced to buy property by a representation that the acquisition would enable him to obtain benefits in circumstances that will necessarily involve a breach of the criminal law. Even if the representation as to the availability of large sums of undisclosed income was fraudulently false, it is against public policy to give a remedy to such a purchaser." (para.[67]) 230 At paragraph [78], his Honour said: "Although these respondents have ultimately succeeded in resisting all of the applicants' claims, they were successful because I have found that the applicants acted on a representation not pleaded, i.e. that illegal monies would be paid to them. … That they have succeeded in the litigation because Igaki could not resist their promise to share their dishonest gains with him does not entitle them to their costs of the proceedings." 231 The case was taken on appeal and the appeal dismissed: see Igaki Australia Pty Ltd v. Coastmine Pty Ltd (1996) 3 IPR 37, at 51-52. In dismissing the appeal, Spender, Whitlam and Beazley JJ said at p.52: "… we consider that the Court ought not be involved in any way in condoning conduct which is clearly in contravention of the income tax laws. To award costs to [the successful respondents] in this case would have that effect." 232 Special leave to appeal to the High Court was refused. 233 In the present case, I think it would be contrary to the principles discussed in the authorities to which I have referred and highly offensive to public policy if I were to award to Mr Budai the costs of an issue on which he has succeeded only by demonstrating that he and Mr and Mrs Tesoriero were engaged in conduct flagrantly and deliberately in contravention of the income tax laws. 234 There were three broad claims of negligence against Mr Budai, namely, that he negligently advised that tax was payable because Mr and Mrs Tesoriero had derived income from a profit-making scheme or undertaking, that he negligently advised that the sum of $170,890 should be inserted in their tax returns and, finally, that he negligently failed to procure the issue of special rights units. Mr Budai's successful defences to the first and third claims did not depend upon his illegal conduct and there is no reason in public policy that he should be deprived of his costs on those issues. 235 Weighing up how much time, effort and cost in the preparation and presentation of this case were expended on the issue as to whether there was a fraudulent tax evasion scheme and how much time, effort and cost were devoted to other issues is much more a matter of impression than exact calculation as so many factual issues overlap, particularly those bearing upon credit. However, doing the best I can, I am of the view that Mr Budai should be deprived of one-third of the costs against Mr and Mrs Tesoriero to which he would otherwise be entitled.

ORDERS 236 The orders of the Court are as follows: (1) There will be judgment for the defendant on the Statement of Claim.

(2) Without prejudice to any other costs orders already made, I order that the plaintiffs pay two-thirds of the defendant's costs of the proceedings. 237 Normally these formal orders of the Court would dispose completely of the matter. However, in this case several serious frauds on the revenue authorities have been revealed. The participants in the frauds have included not only the plaintiffs, the defendant and the other directors of Zelino but, possibly, certain professional advisers. There are grounds for believing that those professional advisers may themselves have either committed offences against the Taxation Administration Act 1953 or may deliberately have aided their clients to commit such offences. 238 It would be an affront to justice and to all professional people striving to maintain the ethical standards of their calling if the Court, having become aware of possible serious breaches of the law by members of a profession, turned a blind eye and failed to draw those matters to the attention of the relevant authorities and professional regulatory bodies for further investigation. 239 In paragraph 15 of this judgment I have referred to false statements made by Mr Elkan to the ATO in his submissions dated 18 November 1991. In her submissions at T1090.10-1093.25, Dr P. Budai, who appeared by leave of the Court for the defendant, summarised a number of other matters which raised serious concerns as to whether Mr Elkan has knowingly misled the ATO. All of these matters should be investigated in order to determine whether or not Mr Elkan is a fit and proper person to remain a registered tax agent and a chartered accountant, and as to whether he himself has committed offences against the income tax legislation. 240 The Australian Taxation Office, the Tax Agents Board, the Australian Institute of Chartered Accountants and the Public Accountants Registration Board should investigate the conduct of Mr Budai for the purpose of determining whether he is a fit and proper person to remain a registered tax agent, a Chartered Accountant and a Public Accountant. 241 Mr Danieletto was Mr Socini's solicitor, attended many of the meetings of the Zelino Board, and signed the false CUT accounts of 16 December 1988 as Mr Socini's attorney. There are grounds to suspect that Mr Danieletto knew about the fraudulent tax scheme and facilitated its implementation. Mr Danieletto appears no longer to be practising as a solicitor in New South Wales. The Law Society should be made aware of Mr Danieletto's involvement in the matters the subject of this judgment in the event that he reapplies for admission as a solicitor. 242 Likewise, the Law Society should be made aware of the findings concerning Mr Tesoriero made in this judgment in the event that Mr Tesoriero reapplies for admission as a solicitor. 243 The ATO will also be concerned to enquire whether the venturers other than the plaintiffs have furnished proper income tax returns in respect of the profits derived from the venture. 244 According, I make a further direction as follows: I direct that the Registrar of the Court forward a copy of this judgment to the Australian Taxation Office, the Tax Agents Board, the Law Society of New South Wales, the Australian Institute of Chartered Accountants and the Public Accountants Registration Board. 245 I direct that the exhibits herein and all other papers in the Court file not be released to the parties to the proceedings but be retained by the Court until all of the bodies referred to have notified the Court either that all investigations and proceedings have concluded or that no action is to be taken by them. 246 I direct that the exhibits and other papers in the Court file, or copies thereof, may be released to the bodies referred to upon application to a Judge of the Court and subject to proper arrangements for their safe keeping, for the purposes of the investigations of those bodies.

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