Davan Developments Pty Ltd v HLB Mann Judd (SE Qld) Pty Ltd [2016] QCA 90 [2017] 1 Qd R 254

SUPREME COURT OF QUEENSLAND CITATION: Davan Developments Pty Ltd v HLB Mann Judd (SE Qld) Pty Ltd [2016] QCA 90 PARTIES: DAVAN DEVELOPMENTS PTY LTD ACN 102 189 864 (appellant) v HLB MANN JUDD (SE QLD) PTY LTD ACN 114 097 648 (respondent) FILE NO/S: Appeal No 5920 of 2015 DC No 4338 of 2013 DIVISION: Court of Appeal PROCEEDING: General Civil Appeal ORIGINATING COURT: District Court at Brisbane – [2015] QDC 121 DELIVERED ON: 12 April 2016 DELIVERED AT: Brisbane HEARING DATE: 22 February 2016 JUDGES: Gotterson, Morrison and Philip McMurdo JJA Separate reasons for judgment of each member of the Court, each concurring as to the orders made ORDERS: 1. Appeal dismissed. 2. Parties given leave to make submissions as to costs in accordance with Court of Appeal Practice Direction. CATCHWORDS: PROFESSIONS AND TRADES – ACCOUNTANTS AND AUDITORS – ACCOUNTANTS – DUTIES AND LIABILITIES – NEGLIGENCE – where the appellant company retained the services of the respondent to prepare and lodge the appellant’s tax statements and returns – where the appellant acquired two adjoining lots in East Brisbane in 2005 with an intention to amalgamate and subdivide the property into three lots – where three investors of the appellant were the intended transferees of the subdivided lots – where the investors verbally agreed to contribute equally to development costs and held a right of first refusal over each lot – where in August and November 2007 the appellant sold two of the lots and, based on tax returns prepared by the respondent, the appellant paid GST on those sales – where the appellant claimed it was not liable to pay any tax on the transactions because the appellant held the land on trust and the respondent was aware or ought to have been aware of that arrangement – where the appellant -- 1 of 18 -- 2 alternatively claimed that the sales were not taxable supplies for GST purposes – whether the respondent was negligent in discharging its professional services A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 7-1, s 9-5, s 9-20, s 75-13 Income Tax Assessment Act 1936 (Cth), s 318 Income Tax Assessment Act 1997 (Cth), s 104-10, s 116-30 Bahr v Nicolay [No 2] (1988) 164 CLR 604; [1988] HCA 16, cited Davan Developments Pty Ltd v HLB Mann Judd (SE Qld) Pty Ltd [2015] QDC 121, approved Kauter v Hilton (1953) 90 CLR 86; [1953] HCA 95, cited Korda v Australian Executor Trustees (SA) Ltd (2015) 255 CLR 62; (2015) 89 ALJR 340; [2015] HCA 6, cited COUNSEL: R J Anderson QC for the appellant R M Derrington QC, with M Ballans, for the respondent SOLICITORS: Thomson Geer for the appellant Carter Newell Lawyers for the respondent [1] GOTTERSON JA: I agree with the orders proposed by Philip McMurdo JA and with the reasons given by his Honour. [2] MORRISON JA: I have read the reasons of Philip McMurdo JA and agree with those reasons and the orders his Honour proposes. [3] PHILIP McMURDO JA: In November 2007 the appellant transferred land which it owned at Laidlaw Parade, East Brisbane for a consideration of $1,600,000. For that transaction, the Australian Taxation Office (ATO) assessed the appellant as liable to pay an amount of GST, an amount of income tax and penalties on each of those amounts. [4] The respondent conducts a practice of accountants, business and financial advisers. From 2005 it provided its services to the appellant. In particular, the respondent prepared and lodged with the ATO all of the statements and returns which were relevant to this transaction. [5] In a proceeding brought in the District Court, the appellant claimed that it was by the respondent’s breach of contract and negligence that the appellant had to pay any tax for this transaction. The claim was dismissed.1 The trial judge held that there was no breach of contract or negligence by the respondent and that in any case, the alleged wrongdoing had not caused the appellant to suffer any loss. He further held that had the appellant proved its case, its damages would have been reduced by more than a half for the appellant’s contributory negligence. By this appeal the appellant challenges each of those conclusions. For the reasons that follow, the appeal should be dismissed. The land transactions [6] At all relevant times the sole director of the appellant company was Mr D R Pearse. Through the appellant company, he invested in real estate. He had been a bank officer and more recently, a finance broker. 1 [2015] QDC 121. -- 2 of 18 -- 3 [7] The appellant company acquired a property at Dakabin in about late 2002 before acquiring the land which became relevant to this case, being two adjoining parcels at East Brisbane. They were acquired by the appellant and a company called TTK Holdings Ltd in 2004. That company was controlled by a Mr Kearney. Mr and Mrs Pearse and Mr Kearney had long been friends. It was Mr Kearney who proposed that the two parcels be acquired, amalgamated and subdivided into three lots, each of which would have a river frontage and a street frontage to Laidlaw Parade. At the same time, Mr Kearney also spoke to his uncle, a Mr Collins, about the proposal. Mr Collins had expertise as a property developer. Mr Pearse, Mr Kearney and Mr Collins decided to pursue this development with the common intention that, upon the (amalgamated) land being subdivided into three lots, each would take a transfer of a lot in order to build a house there for his own residence. Each gave evidence that from the time of the purchase of the two parcels, they had agreed on which lot would be transferred to which investor. The trial judge accepted this evidence and found that this was their common intention.2 [8] In early 2005, the appellant became the sole owner of the two parcels to be amalgamated. Again as the trial judge found,3 the parties’ intentions as to the ultimate use of the proposed three parcels were then unchanged. [9] No written agreement was made between the three investors. At one stage lawyers did prepare a draft of a joint venture agreement, but the draft was never executed or otherwise adopted. Each party engaged an architect to design a house for his proposed lot. [10] The two parcels which were purchased by the appellant cost in total about $4.1 million, which was funded by borrowings by the appellant from a bank. That lending was guaranteed by Mr and Mrs Pearse, Mr Kearney and Mr Collins. Mr Pearse and Mr Collins sometimes paid some of the development costs, for which they were reimbursed by the appellant, again from funds borrowed by the appellant. The progress of the development was slower than the parties had initially expected. The subdivision was completed by about April 2006. It had been agreed at the outset that the land which became 1 Laidlaw Parade would be transferred to Mr Collins, that which became 3 Laidlaw Parade would be transferred to Mr Kearney and that which became 5 Laidlaw Parade would be transferred to Mr and Mrs Pearse. [11] After the land was subdivided, Mr Collins lost interest in acquiring his intended lot and told the others that he wished to withdraw from the project. On 11 August 2007, that lot was sold by the appellant on the open market for a price of $2,600,000. The proceeds of sale were used mainly to repay external financiers with the remainder being retained by the appellant to meet further development expenses. None of the proceeds of sale were claimed by, or paid, to Mr Collins. [12] A few months later, on 28 November 2007, 3 Laidlaw Parade was transferred to Mr and Mrs Kearney for a consideration of $1,600,000. This was the transaction upon which the relevant tax was assessed and ultimately paid by the appellant. According to the evidence of Mr and Mrs Pearse and Mr Kearney, that transfer was pursuant to the original agreement which had been made between the three parties. It then remained the intention of Mr Kearney to use this land for the construction of his residence and the Kearneys did build a house on the land as their residence. 2 [2015] QDC 121, [37], [39] and [40]. 3 [2015] QDC 121, [37]. -- 3 of 18 -- 4 [13] After the transfer to Mr and Mrs Kearney, (like Mr Collins) Mr Kearney took no part in the project save that he remained a guarantor for the company’s borrowings. The third lot, which had been intended for the Pearses, remained owned by the appellant and under Mr Pearse’s control as its director. Eventually, in November 2009, Mr Pearse caused it to be sold by the appellant on the open market for a price of $2,190,932. The proceeds of sale were used to pay the appellant’s remaining debt and other expenses of the development. Intended ownership of the land - the appellant’s case [14] The appellant pleaded that in or about March 2004, Mr Pearse, Mr Kearney and Mr Collins made an oral agreement containing the following terms: “5.2 Terms of Agreement … (a) The Plaintiff and TTK Holdings Pty Ltd ACN 104 352 981 (TKK) were to purchase and hold the Original Properties; (b) Following settlement of the purchase of the Original Properties, the existing structures on the properties would be demolished and removed to create a vacant site; (c) Council approval would be sought to subdivide the Original Properties into three new properties; (d) Following Council approval, the three new properties would be developed; (e) The three new properties would be addressed 1, 3 and 5 Laidlaw Parade, East Brisbane; (f) Pearse, Ralph Collins and James Kearney were to each have one of the three new properties designated to them, with the designated lot to be transferred to each of them respectively by the Plaintiff and TTK Holdings upon completion of the development; (g) The three new properties following transfer were to be used by their respective owners to construct a family home or for other purposes as wished by the owners; (h) Pearse, Ralph Collins and James Kearney each had a first right of refusal over one designated lot against the Plaintiff and TTK Holdings at a price representing a share of the costs associated with the development; (i) Pearse, Ralph Collins and James Kearney were each to bear equally the costs of the development by way of sharing in the repayment of the bank loan drawn down by the Plaintiff to pay each of Pearse, Ralph Collins and James Kearney, or associated entities, for their respective contributions to the development; (j) Ralph Collins, a director of a civil construction company, was to contribute his construction expertise to the development; -- 4 of 18 -- 5 (k) James Kearney was to contribute his real estate experience and contacts to assist in negotiation of contracts and trades that were involved in providing structural, civil, construction and demolition works to the development; and (l) Pearse was to assist with his experience in property development and to contribute his expertise in arranging the finance for the development.” [15] At the trial, each of Mr Pearse, Mr Kearney and Mr Collins gave evidence to the effect that they agreed in those terms. The trial judge accepted that evidence.4 In any case, as the trial judge held, those terms were not put in issue by the respondent’s pleading.5 [16] After pleading that certain “dealings” occurred in relation to the land (the substance of which I have already summarised) the appellant alleged as follows: “7A. In the premises of the Agreement and the dealings plead[ed] in paragraph 5 hereof, the correct tax and accounting treatment of the purchases, holding costs, development and sales of the Laidlaw Parade land should have been as set out in the Objection pleaded at paragraph 15 hereof, and on the basis that Pearse (as to Lot 1), James Kearney (as to Lot 2) and Ralph Collins (as to Lot 3) were the beneficial owners of the Laidlaw Parade land which the Plaintiff acquired and held in trust for them.” (Emphasis added) The “Objection” referred to in that paragraph was the appellant’s objection made to assessments of GST and income tax which were made in 2011. As I will discuss, that objection was partly successful in that the amounts of GST and income tax, as well as associated penalties, were reduced by a compromise between the appellant and the ATO in 2013. The objection to the assessment of income tax, which was accepted by the ATO in the compromise, was that the land which was amalgamated and subdivided was not trading stock of the appellant and that instead, the transfer to Mr and Mrs Kearney was assessable as a CGT event A1 under s 104-10 of the Income Tax Assessment Act 1997 (Cth). The appellant’s principal argument in its objection to the assessment of GST, which the appellant withdrew in the compromise with the ATO, was that the development involved no “enterprise” as defined by s 9-20 of what I will call the GST Act.6 [17] As appeared from paragraph 7A of the appellant’s pleading, the appellant had not claimed in its objection to the ATO that it had held the land in trust. Rather, that was an allegation which was first made by an amendment to the statement of claim. The trial judge rejected the trust case. None of the witnesses said he or she thought that there was such a trust. Nor was there any document in evidence which had recorded or represented that there was such a trust. But the appellant’s case at the trial and on this appeal is that such a trust must be inferred from the oral agreement made by the three investors. [18] Although the trial judge accepted that there was an agreement made in the terms alleged in paragraph 5 of the pleading, his Honour held that the agreement was “over 4 [2015] QDC 121, [37]. 5 [2015] QDC 121, [8]. 6 A New Tax System (Goods and Services Tax) Act 1999 (Cth). -- 5 of 18 -- 6 time … modified and changed,”7 but not before July 2005, when the appellant first engaged the respondent.8 His Honour referred to evidence from Mr and Mrs Pearse that at March 2006 “there was an intention to sell all of the three Lots”.9 His Honour found that it was clear that by September 2006 there was an intention to sell all three lots.10 [19] The trial judge also found that “[by] December 2006, Mr Collins decided to depart from that arrangement”.11 His Honour referred to an email from the respondent of March 2007, which was said to record an intention that a sale to Mr Collins was to proceed. But in truth the email referred to a proposed sale to Mr Kearney. By this stage Mr Collins did not wish to take a transfer of his designated lot. [20] The effect of the trial judge’s reasons is that the parties abandoned their agreement, insofar as it related to the lots which had been designated for Mr and Mrs Pearse and Mr Collins but not in relation to Mr Kearney’s lot. That appears from the trial judge’s acceptance of the analysis of a witness Mr West, a solicitor who had prepared the appellant’s objection to the ATO. Mr West’s opinion, with which the trial judge expressly agreed, was that the project had not been an “enterprise” for the purposes of the GST Act and the subsequent abandonment of the proposed transfers of two of the lots did not mean otherwise for the Kearney lot.12 Was there a trust? [21] The appellant’s case was that upon an objective view of what the parties agreed (as it had pleaded), it had to be inferred that the land was intended to be held by the appellant, not in any way for its benefit, but for the benefit of the investors. In Korda v Australian Executor Trustees (SA) Ltd,13 French CJ said:14 “The question whether an express trust exists must always be answered by reference to intention. An express trust cannot be created unless the person or persons creating it can be taken to have intended to do so. Absent, as in this case, an explicit declaration of such an intention, the court must determine whether intention is to be imputed. It does so by reference to the language of the documents or oral dealings having regard to the nature of the transactions and the circumstances attending the relationship between the parties.” In the same case, Gageler J said:15 “[W]here parties to a contract have refrained from contractual use of the terminology of trust, an intention to create a trust will be imputed to them only if, and to the extent that, a trust is the legal mechanism which is appropriate to give legal effect to the relationship, between the parties or between a party and a third party, as established or acknowledged by the express or implied terms of the contract. The question is whether recognition and enforcement of a trust is appropriate to give effect in law to entitlements 7 [2015] QDC 121, [37]. 8 Ibid. 9 Ibid, [44]. 10 Ibid, [45]. 11 Ibid. 12 Ibid, [39], [40], [41] and [64]. 13 (2015) 89 ALJR 340. 14 Ibid, [3]. 15 (2015) 89 ALJR 340, [109]. -- 6 of 18 -- 7 and obligations which the parties, according to ordinary principles of contractual interpretation, can be taken together to have intended to exist in fact.” [22] There was no issue as to the identity of the persons whose intentions were relevant. And according to the evidence and the arguments, there was no difference between the parties (the investors and the appellant) as to what was intended for the subject land. The sole question was what could be deduced from what the parties were found to have agreed and from their subsequent dealings. [23] In Bahr v Nicolay [No 2],16 Mason CJ and Dawson J said that there should be no general reluctance by courts to infer that parties have created an express trust17 and that: “If the inference to be drawn is that the parties intended to create or protect an interest in a third party and the trust relationship is the appropriate means of creating or protecting that interest or of giving effect to the intention, then there is no reason why in a given case an intention to create a trust should not be inferred.” In Korda, French CJ warned that this passage should not be misconstrued and that:18 “A trust is not to be inferred simply because a court thinks it is an appropriate means of protecting or creating an interest.” [24] Importantly, the intention to constitute a trust must be clear, as Dixon CJ, Williams and Fullagar JJ said in Kauter v Hilton.19 And in Korda, Keane J said:20 “The need for clarity as to the intention to create a trust and its subject matter is of particular importance in a commercial context where acceptance of an assertion that assets are held in trust is apt to defeat the interests of creditors of the putative trustee.” [25] The respondent submitted that one indication of the absence of a trust was the fact that the subdivision into the three lots had not been effected at the time when the alleged trust was said to have been constituted, yet the allegation was that an investor was the beneficial owner of his lot. That submission misinterpreted the appellant’s case, which was that from the time of acquisition of the two parcels for development, that land was held by the appellant as a trustee for the three investors, on terms that the lots would be held for the investors severally upon the registration of the plan of subdivision. [26] The trial judge identified several facts and circumstances which led him to conclude that there was no trust. They were: (a) the agreement for a right of first refusal, which his Honour said was “entirely inconsistent with the existence of a trust”;21 (b) the absence of any declaration of a trust; (c) the absence of any executed documents recording the agreement; 16 (1988) 164 CLR 604, 618-619. 17 Citing Fullagar J in Wilson v Darling Island Stevedoring & Lighterage Co Ltd (1956) 95 CLR 43, 67. 18 (2015) 89 ALJR 340, [11]. 19 (1953) 90 CLR 86, 97. 20 (2015) 89 ALJR 340, [205]. 21 [2015] QDC 121, [21]. -- 7 of 18 -- 8 (d) the absence within the material provided to the ATO, in particular within statutory declarations of Mr Pearse, Mr Kearney and Mr Collins, of any reference to a trust; (e) the absence of any reference to a trust in any of the documents relating to the transfers of the three subdivided parcels; (f) that as at March 2004, when the property was acquired, the three lots did not exist as such; (g) the absence of any separation of the funds received for or expended in the development from other funds of the appellant which had other property dealings; (h) that the appellant mortgaged not only the land the subject of the development but other land for the development; and (i) that in Mr Kearney’s evidence, he referred to his “purchase” of his land from the appellant. [27] As to the agreed right of first refusal, his Honour referred to authority22 to the effect that the holder of such a right:23 “…does not, on the occurrence of the triggering event, become the holder of an equitable interest in the relevant land…” It was the absence of an equitable interest in the holder of such a right which caused his Honour to conclude that such a right was “entirely inconsistent with the existence of a trust.”24 [28] According to the parties’ original agreement, they did intend that the land would be developed, not for the appellant’s benefit, but for the benefit of the investors. They agreed that ultimately they would bear the costs of the development. The intention of each investor was to obtain a home site at a cost which included no component of a profit for the appellant company. The transfer of a lot to an investor was to be at “a price representing a share of the costs associated with the development.”25 Neither Mr Kearney nor Mr Collins, or any interest associated with him, was a shareholder of the appellant. Yet each was a guarantor of the appellant’s borrowing for the development and had agreed to contribute equally with the appellant’s shareholders towards the development’s costs. Those circumstances would suggest a common intention that the land, although held by the appellant, was not held for the appellant’s benefit. [29] But the agreement contained no reference to what should happen if an investor decided not to take a transfer of his lot. In that event, if the lot was sold to a third party profitably (meaning that its price exceeded one-third of the costs of the project), was that profit to be enjoyed by the appellant company, all three investors, the two other investors or (consistently with the pleaded trust) the investor for whom the lot had been designated? Alternatively, if the lot was sold to a third party at a loss (meaning that its price was less than one-third of the costs), was the relevant investor still bound to contribute the balance his one-third? [30] I agree with the trial judge that the agreed term for a right of first refusal, at least absent further terms by which the proceeds of sale of the lot to another party would 22 Chipper v Octra Nominees Pty Ltd [2006] FCA 1633. 23 [2015] QDC 121, [20]. 24 [2015] QDC 121, [21]. 25 As pleaded in paragraph 5.2(h) of the appellant’s statement of claim and set out in paragraph [12]. -- 8 of 18 -- 9 be held by the appellant for the benefit of the relevant investor, is inconsistent with the existence of a trust. [31] Absent a trust, the relationship between the parties, in their participation in this investment, would not have been impracticable. The funding for costs of the development came from loans by external financiers. According to the agreement, the contributions by the investors to those costs was to occur upon the acquisitions of the lots by the investors. [32] Further, because any trust would have its basis in the agreement between the investors made in 2004, it would have been susceptible to extinguishment or variation by variation of that agreement. [33] The facts and circumstances of the transfer to Mr Kearney were inconsistent with the trust or trusts for which the appellant contended. That is not so much because Mr Kearney referred to his acquisition of his lot as a “purchase”. Rather, it is because the consideration for the transfer to him was quantified by reference to an assessed value of the lot, rather than any estimate of Mr Kearney’s one-third share of the development costs. In his statutory declaration which was provided on behalf of the appellant to the ATO in support of the appellant’s objection to the assessments, Mr Kearney said that “the amount of $1.6M would be close to representing one third of the costs incurred by [the appellant] in originally purchasing the two properties”. But in his evidence at the trial, he agreed that this price was not “based on cost” but instead was “based on market value”. That was a value according to a letter from an estate agent obtained a few days prior to the transfer. At the trial, there was no attempt to prove, by reference to the appellant’s records, that the price of $1.6 million represented a third share of the costs of the development. In evidence-in-chief Mr Kearney said: “And how was that price struck?---We got a real estate evaluation for the land at the time and I think that’s all we did. Had - did you give any consideration to the costs had been incurred at that stage?---I’m just trying to remember. Did we - look, there would have been significant interest costs for that period before it was transferred to me, and to the civil works, but I think they were paid for as we went through as opposed to that was just a straight transfer of the land.” He gave evidence to the same effect in cross-examination, after being referred to what he had said in the appellant’s objection. It is true that Mr Kearney had still intended to use the lot for the site of his home. But he did not purchase on the terms of the investors’ initial agreement. [34] For these reasons, at least by the time of transfer to Mr and Mrs Kearney in November 2007, that land was not owned by the appellant as a trustee. [35] The appellant’s case included a complaint that the respondent should have given advice to the appellant to the effect of documenting the agreement between the parties including the alleged trust. But the appellant’s case did not go as far as suggesting that the respondent should have advised the appellant to constitute a trust, if that had not been the parties’ intention. And there was no evidence from the investors that they would have agreed to that course, one which may have had taxation consequences for him personally. [36] It follows that the appellant’s case was properly dismissed, insofar as it alleged that it should have paid no tax for this transaction because it was merely a transfer by a trustee to its beneficiary. -- 9 of 18 -- 10 Dealings with the ATO [37] On 28 February 2008, the appellant lodged its Business Activity Statement for the quarter ended 31 December 2007, reporting its sales of the Collins lot and the Kearney lot as relevant supplies. On 18 April 2008, the appellant lodged its income tax return for the year ended 30 June 2007, based upon financial statements for that year which showed each of the three lots at Laidlaw Parade as trading stock of the appellant. On 14 May 2009, the appellant lodged its income tax return for the year ended 30 June 2008, in which the sales of the Collins lot and the Kearney lot were reported as ordinary income. All of these statements and returns were prepared and lodged for the appellant by the respondent. [38] According to the appellant’s pleading the preparation and lodgement of these documents involved breaches of contract or negligence in essentially two ways. The first was that because the appellant was a trustee for the owners, it should not have been reporting or acknowledging any liability of the appellant to GST or income tax in respect of the two sales. Because the trial judge correctly rejected the submission that the appellant sold the lots as a trustee, this complaint was without foundation. The second complaint was that no GST was payable because the sales of the two lots were not taxable supplies under the GST Act, these sales not being made in the course or furtherance of an enterprise carried on by the appellant.26 [39] In the appellant’s pleading, there was no particular complaint that the lots had been treated as trading stock, so that the proceeds of sale were ordinary income rather than the proceeds of the sale of a capital item. But as the case was argued, that complaint was made. As already noted, that was one of the arguments advanced within the appellant’s objection to the assessment of income tax for the 2008 year and it was an argument which was ultimately accepted within the compromise with the ATO. [40] By December 2010,27 the ATO was reviewing the affairs of the appellant, not only in relation to the Laidlaw Parade property but also a property at Coorparoo. After a meeting between representatives of the respondent and the ATO on 20 December 2010, in which the respondent said that there was nothing further to be disclosed to the ATO, the respondent provided its GST working papers to the ATO showing its calculations of the GST payable on the sale of the Laidlaw Parade lots. The papers showed GST payable on the sale of the Collins lot in an amount of $128,415.66 and on the sale to the Kearneys of $21,805.04. The disparity was explained by the difference in the sale prices. [41] During 2011 there was correspondence between the respondent and the ATO in the course of what had become the ATO’s audit. This revealed more of the circumstances under which the Laidlaw Parade land came to be developed and in particular the relationship for that investment between the three investors. It also revealed the way in which the appellant, in several transactions with financiers for this development, had described it in terms which were inconsistent with a trust or an essentially not for profit project. [42] At issue between the appellant and the ATO was whether Mr Kearney was to be treated as an “associate” of the appellant as that term is defined in s 318 of the Income Tax Assessment Act 1936 (Cth). If Mr Kearney was an associate, then according to 26 GST Act s 9-5. 27 Incorrectly described in the judgment as December 2011: [2015] QDC 121, [50]. -- 10 of 18 -- 11 s 75-13 of the GST Act, GST was to be assessed on the transaction as if the consideration had been the GST inclusive market value of the land.28 There was a similar issue in relation to income tax. If the sale of the Kearney lot was to be treated as one of a capital asset rather than trading stock of the appellant, the capital proceeds of the CGT Event (constituted by the sale) would be the market value of the land if the appellant and Mr and Mrs Kearney had not dealt with each other at arm’s length in connection with the transaction.29 [43] The ATO took the view that for both GST and income tax, it was the true market value of the Kearney lot, rather than $1.6 million, which was to be used and that the true market value was $2.6 million. In April and May 2012 the ATO issued amended assessments. [44] By this stage the respondent had referred Mr and Mrs Pearse to the solicitor Mr West for advice in respect of the ATO’s audit and ultimately these assessments. Mr West prepared and lodged for the appellant the objection. On the GST assessment, the objection maintained that there had not been a supply in the course of an enterprise and that Mr Kearney had not been an associate of the appellant. For the income tax assessment, it claimed that the lot was not trading stock or a revenue asset but instead that its sale was a CGT event A1 and that the property had been disposed of to Mr Kearney “at cost”, such that the “cost base was equal to the capital proceeds (of $1.6 million)”. It claimed that the appellant and Mr Kearney had transacted on an arm’s length basis. [45] On 16 November 2012 the ATO disallowed those objections. The appellant then applied to the Administrative Appeals Tribunal but in May 2013, prior to a hearing, the parties reached a compromise. The ATO conceded that the Kearney sale should not be treated as a revenue item but instead was a CGT event. It also agreed to reduce the market value of the lot to be used both for the purpose of calculating the appellant’s capital gain and the consideration for its supply for the assessment of GST. But the ATO and the appellant agreed that Mr Kearney was to be treated as an associate not dealing at arm’s length with the appellant. They further agreed that the supply to him was in the course of an enterprise conducted by the appellant. [46] In the appellant’s case at the trial, Mr West gave evidence of the facts of relevant dealings with the ATO as I have described. He was also allowed to give opinion evidence as to the legal responsibility of the appellant for GST and tax on this transaction. The effect of his evidence was that the transaction should have always been presented to the ATO as it was ultimately presented within the objections. He explained that those claims were compromised with the ATO because of what he described as a “technical risk” that the Administrative Appeals Tribunal may have taken a different view. Liability for GST [47] By s 7-1 of the GST Act, GST is payable on a taxable supply. According to the definition of that term in s 9-5 of the GST Act, the question of whether the sale to the Kearneys was a taxable supply turned upon whether the supply was “made in the course or furtherance of an enterprise” carried on by the appellant. [48] Section 9-20 of the GST Act relevantly defines an enterprise to be an activity or series of activities done: 28 The definition of “associate” in the dictionary of the GST Act employing the definition of that term in s 318 of the Income Tax Assessment Act 1936 (Cth). 29 Income Tax Assessment Act 1997 s 116-30(1). -- 11 of 18 -- 12 “(a) in the form of a business; or (b) in the form of an adventure or concern in the nature of trade…” Because the relevant activity need not amount to a business, this project for Laidlaw Parade could have been an enterprise although not part of the appellant’s land development business. [49] By s 9-20(2) of the GST Act, an enterprise does not include an activity or series of activities: “(c) by an individual…or a partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain…” Absent a trust, it could not be said that this development was conducted by the three individual investors rather than by the appellant company. There was no basis for the operation of an exclusion. So the question was whether this sale was made in the course of an activity in the form of an adventure or concern in the nature of trade. [50] In its report on the completion of its audit, dated 12 April 2012, the ATO accepted, in the appellant’s favour, several facts including the following: “…Mr Kearney had a “beneficial interest in Lot 2 and/or the development project. …Mr Kearney had, by verbal agreement a first right of refusal to acquire Lot 2 from [the appellant]. It was always the intent of [the appellant] that Mr Kearney would acquire Lot 2…” Nevertheless, the ATO there concluded that the sale was part of the appellant’s enterprise. The reasons set out in that report show that the ATO was influenced by the way in which the project had been represented to others on behalf of the appellant over previous years. Some of those representations were made in the appellant’s dealings with its financiers, in which it had consistently represented the project as a commercial profit making undertaking by and for the appellant. There were also the representations to the same effect in the earlier dealings between the appellant and the ATO. In those dealings the appellant had been represented by the respondent. In the appellant’s favour, it can be said that had the appellant received advice at the outset that this project should not be put forward as its own, then the ATO may not have had as many reasons to conclude that there had been an enterprise. [51] However the difficulty for the appellant in contending that there was no enterprise in the course of which this sale was made was that the argument depended upon the effect of an agreement between the investors which was no longer in place. Absent that agreement between the investors, as pleaded and proved by the appellant, there could have been no basis for disputing the existence of an enterprise in this project. Whilst that agreement was in place there was a sound basis for doing so. But as the trial judge found, the agreement was not in place at least from late 2006. [52] As it happened, the land designated for Mr Kearney was sold to him. But as I have discussed, it was not sold according to the terms of the original agreement because it was sold at a price fixed by an agent’s estimate of value, rather than for an amount representing Mr Kearney’s one-third contribution to the costs of the development. -- 12 of 18 -- 13 [53] The trial judge concluded that for this question the focus should be on “what Mr Kearney (with his wife) eventually did with his parcel of land that was transferred to him…”30 I accept that it was relevant to consider the intention of Mr and Mrs Kearney when they purchased this land. But that was not determinative of the issue, which was whether the sale to them had been made in the course or furtherance of an enterprise. That required the focus to be upon the appellant and to characterise the appellant’s use of its land by this point in time. [54] The case which was put to the ATO, and argued to the trial judge and here, was that by the time of the sale to Mr Kearney, there was an enterprise carried on by the appellant for this development but one which excluded the Kearney land. In my view that is an artificial characterisation of the appellant’s venture. By November 2007, the appellant was concerned to make a profit or at least minimise a loss and it is to be inferred that the appellant acted with that objective when agreeing upon Mr Kearney’s price. As the ATO noted in its audit report, in giving its reasons for a conclusion that this was a sale for an enterprise: “That [the appellant] took steps around November 2007 to obtain a market appraisal from Ray White Bulimba indicates that the transfer of Lot 2 was conducted in a business like manner and that [the appellant] considered it part of [its] business.” [55] The appellant was not to be indemnified by the three investors. Mr Pearse as its director may have considered that he was obliged to offer this lot to Mr Kearney before taking it to the market. But again the sale was made on the apparent understanding that the price represented the market value. [56] It follows that the appellant was liable to pay GST upon the sale to Mr and Mrs Kearney. It was no part of the pleaded case that it was the respondent’s fault that Mr Kearney was characterised as an associate or that the true value of the land was ultimately treated as more than $1.6 million. The appellant did plead that the “correct tax and accounting treatment” of the relevant purchases and sales should have been as set out in the objections to the ATO. But that allegation was made upon certain premises which did not include the specific matters of the status of Mr Kearney or the true value of the land. [57] Similarly, the ultimate assessment of the income tax in respect of this sale could not be said to be incorrect. Again there is no specific case here to the effect that Mr Kearney should have been treated at arm’s length from the taxpayer and this did not occur because of some default by the respondent. [58] In turn the penalties and interest upon the assessments ultimately agreed with the ATO could not be said to have resulted from any default by the respondent. Ultimately they were the result of a non-disclosure to the ATO of the relationship between the appellant and Mr Kearney and of the fact that the true value of the land was more than the price he paid. The alleged loss [59] Each party retained a forensic accountant to prepare calculations of the financial consequences for the appellant of different tax treatments of the transaction. A joint report of those experts and their individual reports were tendered. It is unnecessary to discuss the detail of their evidence, because it can be seen without that evidence 30 [2015] QDC 121 at [10] and [64]. -- 13 of 18 -- 14 that no compensable loss as claimed could be attributed to the respondent’s alleged breach of contract or negligence. [60] I have compared the appellant’s agreed position with the ATO with that which, with an accurate presentation of the transaction, would have been the appellant’s position. As I have concluded, the appellant did not prove a difference between those positions. [61] The appellant also claimed losses in the nature of accounting and legal fees. It claimed that it incurred legal costs “in relation to the ATO’s audit, the dispute [with the ATO] and in negotiating and entering into the Deed of Settlement [with the ATO].” An amount of $122,839.79 was claimed for those costs. But the basis for the recovery of those costs is not established. The first difficulty of this comes from my conclusion that, contrary to one of the main arguments which was put to the ATO, the transaction was subject to GST. A second difficulty is, as I have noted, the fact that much of the argument to the ATO was as to the amount which should be treated as the consideration for the supply. That question, upon which the ATO was not persuaded, was not complained of in this litigation as contributing to a loss which was avoidable with due care on the part of the respondent. A third difficulty is that the audit was not confined to this transaction. [62] It may be accepted that the appellant had some success in arguing its case to the ATO, by the reductions which it achieved in the ultimate settlement, so that it could be said that some legal costs were spent productively in correcting what should have been presented differently at the outset. But there would appear to be no basis for apportioning the amount claimed between what would have been spent in arguing that case as distinct from the other arguments which were advanced unsuccessfully. [63] Another component of the claimed loss was a sum of $23,555 for fees paid by the appellant to the respondent for services “relating to the development, the ATO audit, and the dispute [with the ATO] for which the Plaintiff received no value.” This sum comprised six invoices over a period of 12 months from March 2007 and appeared to include the respondent’s fees for the preparation of the relevant documents presented to the ATO. It does not appear that all of that work was worthless. On the appellant’s case, the respondent ought not to have treated the land as trading stock. But if the respondent was in breach in that respect, it would not follow that it was disentitled to any fee for any of its work over this period. Breach of contract or negligence [64] In essence the appellant’s complaint is that the documents which were prepared and lodged with the ATO were inconsistent with the agreement between the investors. An essential element of the appellant’s case was that the respondent knew, or ought to have known, of the agreement as originally made between the investors. The appellant’s case was argued in alternative ways. The first was that the respondent did know of that agreement, because at a meeting in mid 2005 between Mr and Mrs Pearse for the appellant and representatives of the respondent, the respondent was so informed. Alternatively, it was argued that the respondent should have inquired as to the circumstances of this investment and had it done so, the agreement would have been revealed. [65] In the hearing in this court, counsel for the respondent strongly argued that the alternative case had not been made to the trial judge and to that end, referred the court to the absence of such a case in the statement of claim and in the opening address by the appellant’s counsel. However the alternative case was argued to the trial judge as appears -- 14 of 18 -- 15 from the appellant’s written submissions at the trial,31 and a consideration of that argument in the judgment.32 Consequently that alternative argument may be considered. [66] There was evidence from Mr and Mrs Pearse that they had explained the agreement to the respondent’s Mr Henderson at their meeting with him and another employee of the respondent in July 2005. In evidence-in-chief, Mrs Pearse gave this evidence: “What do you recall, if anything, about those - a discussion about those broader arrangements taking place at the meeting with Mann Judd?--- At the meeting with Mann Judd? Yes?---We advised that we had purchased the two blocks. One had settled at that stage and that it was going to be subdivided into three lots. There was three parties involved with the intention to build a home on those. Whose intention?---So there was an intention for - out of the three parties, each person would have a block. So that would be David and Jim and Ralph would each have a block and they would build their home on that. That is their own personal home or a home to sell?---No, their own personal home to live in. And was that intent in relation to the lot that was to be created for yourself?---Yes, it was. Okay. Do you recall what was said to Mann Judd about that part of the relationship or that part of the arrangement?---It was just advised that that was what was going to take place. There was three blocks and that is what would occur.” [67] Mr Pearse gave similar evidence, saying that at this first meeting between the parties he explained to the respondent’s representatives that “We were acquiring the two adjoining properties and that there were other people involved, in Jim and Ralph, and what our intentions were with those properties”. [68] The respondent’s representatives at the 2005 meeting, Mr Henderson and Ms Stanford, gave evidence. Neither had a detailed recollection of the meeting but each disputed that Mr or Mrs Pearse said things to the effect that Mrs Pearse related and which I have set out above at [66]. The trial judge remarked that no witness had any detailed recollection of what was then said although “[the] recollection of Mrs Pearse was, certainly, the most detailed.”33 There were subsequent meetings over the years including one in June 2006. But the appellant’s case at the trial was argued for the most part upon the evidence of Mr and Mrs Pearse as to what was said to the respondent in the 2005 meeting. [69] The trial judge paid particular attention to the documents of one or other of the parties which were prepared in relation to these meetings. But ultimately they did not appear to have been important in his Honour’s conclusion that it was improbable that Mrs Pearse did provide information at the meeting as she said in her evidence. 31 Paragraph 2 of the appellant’s Outline of Submissions. 32 [2015] QDC 121, [65]. 33 [2015] QDC 121, [30], [31]. -- 15 of 18 -- 16 [70] One of those documents was a short typed document, prepared by Mrs Pearse ahead of the July 2005 meeting, entitled “Questions - James Henderson”. It recorded her intention to discuss various subjects. There are some references to the appellant company within that document and to “the Laidlaw site”. The document contained no particular reminder to tell the respondent about the terms of the investors’ agreement. But the document was very brief and not in the terms of a comprehensive list of instructions which the accountants were to be given. It did not indicate an improbability that the investors’ agreement was discussed. [71] A similar document was prepared by Mrs Pearse ahead of a meeting in June 2006, again apparently as a list of topics which the Pearses’s planned to discuss with Mr Henderson and others. It referred to “Laidlaw” as “going on the market as of Saturday 17/06/06.” It contained this note: “In regards to sale proceeds after BankWest has been paid out the profits are to be distributed to all 3 parties, therefore are invoices from Jim & Ralph’s Companies sufficient and we can arrange for funds to be transferred from [the appellant] to their accounts after settlement.” That note was evidence of the then intention of the parties that the entire site was to be sold so that the original agreement was by then at an end. But that was not to say that Mrs Pearse’s evidence as to the 2005 meeting was incorrect. [72] Mr Henderson also had some notes although, as his Honour observed,34 they may have been made by his staff and at least some weeks after the July 2005 meeting. One such note did refer to the two parcels of land being acquired for subdivision into three lots. It did not contain a record of the instructions which, according to the Pearses’s evidence, were given. But that was not adverse to the appellant’s case; rather it meant simply that the respondent’s notes did not support it. [73] The trial judge accepted that it was clear that Mr and Mrs Pearse were seeking some advice both for the appellant company and for themselves and that it was not simply that the respondent was being asked to prepare and lodge income tax and other returns.35 [74] His Honour remarked that “important additional background facts are that Mr Henderson was informed at the relevant time that the property at Dakabin was part of [the appellant’s] business”.36 I accept that this was relevant, because absent instructions which revealed the agreement between the investors about the Laidlaw Parade property, the accountants could have assumed that this land also was to be developed by the appellant for its own benefit. [75] The trial judge referred also to a 2004 tax return for the appellant, as having an entry for “closing stock” of $140,000 representing sums already paid for the Laidlaw Parade land. At the 2005 meeting, this was a draft which had been prepared by another firm. The Pearses had been dissatisfied with that firm and for that reason had retained the respondent. Again, absent some disclosure to the respondent by which it should have been aware of the investors’ agreement, this document may have provided some further support for an assumption that the development would be undertaken for the appellant’s benefit. But it did not indicate the probability or otherwise that instructions were given as the Pearses’s testified. 34 [2015] QDC 121, [32]. 35 Ibid, [33]. 36 Ibid, [36]. -- 16 of 18 -- 17 [76] His Honour rejected the evidence of the Pearses, more particularly the relatively detailed evidence of Mrs Pearse, within this passage: “[38] The conclusion that I reach about the engagement of [the respondent] is that it is improbable that Mrs Pearse did refer, at least in some more significant way than those words that appear in the agenda document, to the three relevant persons who had contributed funds to purchase the Laidlaw land. On that conclusion, I reach the further conclusion that Mr Henderson, as the moving party for [the respondent] at the time, did pay sufficient attention to the information that he was given by Mr Pearse and Mrs Pearse. There is nothing, therefore, which should have led to an elaboration, by simple request to them, of what was occurring and the limited role played by [the appellant].” [77] It was strongly argued for the appellant that the evidence of Mrs Pearse should have been accepted. Indeed at one point of the appellant’s argument, it was suggested that his Honour did accept that in the 2005 meeting, the respondent had been told that there were three parties involved and that each intended to build a “personal home” on his lot. That submission misinterpreted what was said by the trial judge in a passage in which his Honour was doing no more than describing the evidence of Mrs Pearse rather than accepting it.37 In the passage I have set out above, it is clear that his Honour did not accept her evidence in the critical respects. [78] It was further submitted that there was “no finding…made that Mrs Pearse should not be accepted.” But again it is clear that such a finding was made, as to the critical part of her evidence. [79] It is of some concern that his Honour concluded that her evidence was improbable without there explaining why that was so. Mrs Pearse’s evidence was not inherently improbable. With the passage of time between the relevant meeting and the trial, there was good reason to doubt the reliability of the evidence of any of the participants insofar as it involved a purported recollection of what was or was not said. But on the occasion of this first meeting between the clients and the accountants, it was not so unlikely that Mrs Pearse described the Laidlaw Parade project in at least the detail that she related in her evidence. [80] Had Mr and Mrs Pearse been aware that the nature of this venture, according to the investors’ agreement, was relevant for the taxation affairs of the appellant, very probably they would have provided the respondent with this information. But because they were apparently unaware of that relevance, they would not have a good reason to do so or have a clear recollection of having done so. [81] The question is finely balanced, because the relevant evidence indicated neither a likelihood or otherwise that her evidence in this respect was correct. Ultimately I would not be persuaded to reverse the trial judge’s finding on this question. [82] The alternative case, which was that the respondent was put on inquiry as to the true position between the investors, was rejected by the trial judge as follows: “[65] The next point for consideration is what HLB Mann Judd should have done on the conclusion that I have reached that insufficient information was disclosed to Mr Henderson at the first meeting. 37 [2005] QDC 121 at [31]. -- 17 of 18 -- 18 Given the knowledge (attributed to Mr Henderson in particular) of Davan Developments as a property developer, the 2004 tax return (which formed a basis for the 2005 return), and the other information available to him as sparingly given, in particular by Mrs Pearse, it was not sufficient - unlike the circumstances encountered by Mr West - to indicate to him, or put him on inquiry in any way, that there were underlying factual circumstances as I have found them to be as at mid-2005.” [83] I respectfully agree with that reasoning. If the evidence of Mr and Mrs Pearse was not accepted, there was no factual basis for imposing a duty on the accountants to inquire as to whether this particular development of the appellant was different because it was not to be conducted for its benefit. The nature of the venture, according to the investors’ agreement, was unusual indeed and the accountants were not required to make inquiries in case it existed. [84] It follows, therefore, that the trial judge was correct in holding that there was no breach of contract or negligence. Contributory negligence [85] The trial judge did not have to consider this question and his reasons were brief. He said:38 “I do not see in this case that the Court could make, on my acceptance of the available evidence, any contributory finding that would not place the major responsibility on the plaintiff. The reasonable complexity was an overwhelming reason for it to be mentioned to the defendant in detail. Paraphrasing relevant authority, the comparative examination of the whole of the conduct of each party in determining responsibility for damage would show that the acts of [the appellant] were of the greater relative importance …” There is an apparent premise within that reasoning, which is that the appellant, through Mr and Mrs Pearse, ought to have appreciated the need for the circumstances of the investment, and in particular the agreement between the investors, to be explained to the respondent. That is not a premise which I would readily accept and had it been necessary to decide the question, I may not have been persuaded to reduce the award of damages upon this ground. Conclusion and Orders [86] The trial judge was correct to dismiss the appellant’s claim. I would order as follows: (1) Appeal dismissed. (2) Parties given leave to make submissions as to costs in accordance with Court of Appeal Practice Direction. 38 [2015] QDC 121, [85]. -- 18 of 18 --