SUPREME COURT OF WESTERN AUSTRALIA

BRIAR HOLDINGS PTY LTD and OTHERS v CAPOLINGUA

Master Bredmeyer

17, 25 July 1997 - Perth

Master Bredmeyer This is an application by the defendant at the outset of an action to dismiss the plaintiffs' action under O 20 r 19 and/or under the inherent jurisdiction of the court for failing to disclose any reasonable cause of action.

The plaintiffs' statement of claim is endorsed on the writ which was issued on 8 May 1997 and in summary is as follows. From about 1983 the second, third and fourth plaintiffs, together with another operated a mailing house business under the name "Postdata". They retained the defendant as their accountant and tax agent. In or about April 1987 they approached the defendant for advice in respect of a proposal by the defendant that the partnership transfer its business to a company. The defendant was requested to advise on the financial and taxation consequences of the transfer. It was a term of the retainer that the defendant would advise them with a reasonable degree of skill and care as to how to minimise their tax exposures and the best structure for their affairs from a tax perspective and to take the necessary steps to achieve the same. Likewise, the defendant owed them a duty of care to do the same things.

The defendant advised the partners to acquire a shelf company and to become directors and shareholders of that company and to sell their business to the company. The partners accepted that advice and a shelf company was acquired namely the first plaintiff, and the partners became the directors and shareholders of that company. They sold the assets of the partnership to that company for a purchase price of $235,952 of which $200,000 was allocated to goodwill and $35,952 allocated to net assets. The purchase price was unsecured debt payable by the first plaintiff upon demand by the members of the partnership.

The plaintiffs plead that the defendant breached his contractual retainer and his tortuous liability to exercise reasonable skill and care in carrying out this transaction in that he failed to structure the transaction in a way so as to obtain "rollover relief" provided by s 160ZZN of the Income Tax Assessment Act 1936 (Cth). Alternatively, he failed to give an election notice to the Commissioner of Taxation for the purposes of taking advantage of that relief as prescribed by subss (2)(h) and (13) of that section. He also failed to refer them to an experienced accountant or solicitor for advice with respect to the tax consequences of the transfer.

Capital gains tax was introduced in Australia with effect from 20 September 1985 under Part IIIA of the Income Tax Assessment Act 1936. If an asset was acquired by the taxpayer before 20 September 1985 and sold after that date, then any capital gain on the sale of that asset was exempt from taxation. Conversely if an asset was acquired after that date and then sold at a later date for a gain, then the gain was taxable. Section 160ZZN of the Income Tax Assessment Act 1936 gave "rollover relief " to the transfer of an asset from an individual taxpayer to a wholly owned company. In summary it provided that where a taxpayer owned a pre-capital gain asset and disposed of that asset to a company under certain conditions, then the company was deemed to have acquired the asset before 20 September 1985. In other words, the company was deemed to have acquired a capital gains-free asset The conditions on such a transfer were (1) that the taxpayer was to sell the asset to a company; (2) the consideration in respect of the disposal was to consist only of shares in that company; and (3) the taxpayer was to become the beneficial owner of all the shares in the company. The taxpayer was also required to give notice in writing to the Commissioner of Taxation on or before the day of lodgement of his income tax return for the year in which the disposal took place, or within such further period as the Commissioner allowed, of his election to apply the section in respect of the disposal. The section applied to individual taxpayers and partners. Where partners of pre-capital gain assets sold those assets to a company the ex-partners had to own all the shares in the new company, and each ex-partner had to hold the shares in the company in the same proportions as he held his interest in the partnership. And again the partners had to elect that this section was to apply to them by notifying the Commissioner in the manner stated above.

As I have said the pleading alleges that the defendant did not structure the disposal in a way so as to take advantage of s 160ZZN of the Act. For example, instead of allocating shares in the new company to the ex-partners in payment of their partnership interest, the contract provided that the purchase price was an unsecured debt payable by the new company upon demand by the members of the partnership. The defendant also failed to give the election notice to the Commissioner saying that the plaintiffs were taking advantage of the rollover relief provided by the section. It is pleaded that as a consequence of these breaches the plaintiffs lost the ability to dispose of the business without incurring a liability for capital gains tax under Part IIIA of the Income Tax Assessment Act 1936 . The relief sought by the plaintiffs is:

(a) damages;

(b) further or in the alternative to (a), a declaration that the defendant is liable to indemnify the plaintiffs in respect of any net capital gain which may be included in their assessable income as a result of the disposal of the business;

(d) such further or other relief as the court thinks fit; and

(e) costs.

The defendant contends that there is a fundamental flaw in the plaintiffs' pleading, namely that the plaintiffs have not yet sold their business or shares so that they have not yet incurred any capital gains tax, and hence, until they do, they have not suffered any damage. Hence, both the contractual and the negligence causes of action are incomplete as loss or damage is an essential element of each. There are two ways in which the plaintiffs could sell the business or their assets and be liable for capital gains tax. The first is if the first plaintiff, ie the company, sells the business to another entity in which case it would be liable to pay capital gains tax on any capital gain made. Second, the second, third and fourth plaintiffs, who own all the shares in the first plaintiff, could sell their holdings to strangers and, if they made a capital gain on that sale, then they would be liable for capital gains tax. Neither of these events has yet happened. The defendant says the causes of action are not yet complete. Also to ask the court to decide this case is asking the court to decide hypothetical questions which the court will not do. For example, if the plaintiffs' business fails, or is sold at less than its pre-1987 worth, then the plaintiffs will not be liable for capital gains tax.

The plaintiffs' counter argument to this is that the causes of action in the contract and tort are complete because when the disposal of the business occurred on the defendant's advice in 1987 without complying with the provisions of s l60ZZN, the plaintiffs lost the tax-free status which they previously enjoyed. To be more specific the first plaintiff, ie the company, lost the tax-free status which it would have enjoyed if the section had been complied with, and the second, third and fourth plaintiffs lost the tax-free status which they enjoyed as the former owners of a pre-20 September 1985 asset. The plaintiffs' counsel says that the loss of that pre-capital gains tax status is a real loss. By itself, without the sale of the business at a capital gain, the loss may be a small one but it is a loss nevertheless which is sufficient to complete the two causes of action. The plaintiffs' counsel has argued that once there is such a loss, which is more than de minimis, the court is capable of assessing damages based on its assessment of the degree of probability that the business would be sold at a profit and that capital gains tax would be incurred. Alternatively, if the court was not willing to embark upon that exercise, it could grant a declaration that the defendant is liable to indemnify the plaintiffs in respect of any future capital gains which might be incurred when they come to dispose of the business or their shares in the business as the case may be.

For the first proposition the plaintiffs rely on Malec v J C Hutton Pty Ltd (1990) 169 CLR 638 and Sellars v Adelaide Petroleum NL (1994) 179 CLR 332. I consider that the argument is flawed and that neither of these cases really assists the plaintiffs. Malec is a typical personal injuries case where the plaintiff suffered actual loss and damage. He contracted brucellosis through the defendant's negligence whilst working in the defendant's meatworks. The assessment of damages included past loss, eg for pain and suffering and medical expenses and also an assessment for future loss - whether as a result of contracting brucellosis he was unlikely to work again. In the present case I consider that the plaintiffs have not established any actual loss because their loss will only be suffered if and when they sell the business or their shares at a profit.

In Sellars the plaintiffs had lost the opportunity through the defendant's misconduct of entering into a more favourable deal with Pagini Resources NL (Pagini) than they were later able to achieve. In the trial court, French J concluded that there was more than a mere speculative possibility that the Pagini agreement would have been concluded and completed. He then assessed damages on the basis that a contact between Adelaide Petroleum and Pagini would have been concluded and discounted the expected profits for a number of heads of loss by 60% to allow for the contingency that the contract would not have proceeded. On appeal to the High Court this approach was confirmed.

According to Brennan J (at CLR 364) to succeed in this loss of opportunity claim there must be at least a "substantial prospect" of a financial return:

Provided an opportunity offers a substantial, and not merely speculative, prospect of acquiring a benefit that the plaintiff sought to acquire … the opportunity can be held to be valuable. And if an opportunity is valuable, the loss of that opportunity is truly "loss" or "damage" for the purposes of s 82(1) of the Act and for the purposes of the law of torts. (Emphasis added.)

Brennan J said (at CLR 367):

There is no reason why the balance of probabilities should not be the standard of proof required to establish both causation and the existence of a loss, although that standard is inappropriate to the assessment of the amount of a loss where the assessment is merely an evaluation of future possibilities.

I consider that Sellars is distinguishable from the facts of this case. I consider that it is not arguable that the plaintiffs in this case have lost the opportunity of the substantial prospect of a tax-free gain. Their loss of this opportunity at the present time is, in my view, entirely speculative.

The plaintiffs also rely on the decision of Pidgeon J of this court in Markham v Lunt & Ors (1983) 81 FLR 37 at 51-2; 15 ATR 136 at 148-9; 84 ATC 4010 at 4021-2. That case also concerned a negligence action against a firm of accountants. The part of the plaintiff's claim in that action which is relevant to this action is that the defendants failed to prepare and lodge within time objections to certain assessments of taxation made by the DCT, and as a result of that failure, the objections became time barred and could not be raised. The objections if they had succeeded would have disallowed tax paid of $12,850. My point of distinction here is again that the loss occasioned by the defendant's action in that case was substantive and not speculative. The plaintiff had lost the opportunity of raising these objections with the Commissioner. The loss of that opportunity had occurred. It was not speculative, but the trial judge in quantifying that loss had to assess the likelihood that the objections would have succeeded. He said at FLR 52: "I consider the only basis that I can assess damages is on the basis similar to that of 'loss of a chance"'. In making this assessment he took notice of the fact that similar objections raised in relation to other years of income had succeeded and he thought that was a strong indication that the plaintiffs had an arguable case in respect of each disallowed objection. He awarded $8000 under this heading; in effect a discount of the actual loss by about one-third.

I agree with the defendant's submissions on this part of the case. I consider that no loss or damage has yet been suffered by the plaintiffs and hence their causes of action in contract and tort are not yet complete. I consider that the 1987 loss of their capital gains tax-free status is not really a loss or damage. I consider it is a hypothetical loss only and that is not a sufficient actual loss to enable the court to engage in that exercise which it did in the three cases discussed of examining the loss of an opportunity in assessing the quantum of damages. I consider that in principle the court will not, and should not, embark on an enquiry of what the plaintiffs' loss or damage might be if it were to sell the business or the shares for a gain at some time in the future. I consider that is speculative, hypothetical and a waste of the court's time and resources. If and when the plaintiffs sell the business or their shares that is the appropriate time to bring an action such as the present one.

The plaintiffs' alternative argument is that, even if the facts are not such as to entitle the plaintiffs to an award of damages at the present time, they are entitled to a declaration that the defendant is liable to indemnify them in respect of any capital gain which may be included in their assessable income as a result of disposing of the business or the shares at some time in the future. The plaintiffs' argument on this is that s 25(6) of the Supreme Court Act 1935 (WA) provides:

No action shall be open to objection on the ground that a merely declaratory judgment is sought thereby, and it shall be lawful for the court to make binding declarations of right without granting consequential relief.

They also rely on O 18 r 6 of the Rules which is in similar terms:

No action or other proceeding shall be open to objection on the ground that a merely declaratory judgment or order is sought thereby, and the court may make binding declarations of right whether or not any consequential relief is or could be claimed.

The plaintiffs quoted to me from the High Court in Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 581-2:

It is now accepted that superior courts have inherent power to grant declaratory relief. It is a discretionary power which it is neither possible nor desirable to fetter … by laying down rules as to the manner of its exercise.

They also quoted to me some words of Viscount Radcliffe approved by Gibbs J in Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421 at 438 that:

… the power to grant a declaration should be exercised with a proper sense of responsibility and a full realisation that judicial pronouncement ought not to be issued unless there are circumstances that call for their making. Beyond that there is no legal restriction on the award of a declaration.

Although I have no doubt that the court has power to grant a declaratory relief in the form of an indemnity in an appropriate case, I do not consider that it is arguable in this case that that relief is appropriate. The court will generally not decide academic or hypothetical questions: Re Barnato [1949] Ch 258. Whether the plaintiffs will sell their business or shares in the future and make a gain subject to capital gains tax, is hypothetical. If and when they do sell at a gain, the plaintiffs can sue the defendant then in negligence for damages.

For the reasons given I consider that the whole plaintiffs' claim is not arguable and is so obviously untenable that it cannot possibly succeed and is manifestly groundless. I consider that the plaintiffs' action should be dismissed. I am aware that action should not be struck out under O 20 r 19 or under the inherent jurisdiction lightly, that this power to dispose summarily of an action before there has been a trial should be used sparingly. But I consider that this is an appropriate case. In coming to that view I am also mindful of the sixth point made by Staples M in Kimberley Downs Pty Ltd v Western Australia (unreported, SC(WA), No 6414, 1986, at p 6):

A court at first instance should be careful not to risk stifling the development of the law by summarily rejecting a claim where there is a reasonable opportunity that, as the law develops, it will be found that a cause of action will lie.

In reaching this conclusion I consider it is not necessary for me to rule on the defendant's limitation arguments, but, if I be wrong in that and it is necessary for me to rule on them, I consider that the plaintiffs' causes of action are not time barred because I consider they are not yet complete. I consider that it is only when the business or the shares are sold at a profit and capital gains tax is incurred that the causes of action are complete. So, far from being time barred, the six-year time period is not yet running. In dismissing this action I consider that the plaintiffs are free to bring a similar action in the future if and when they sell their business or their shares at a capital gain.