Phillip Murray SMILES v Thomas William MOON [2003] NSWSC 519

New South Wales Supreme Court

CITATION : Phillip Murray SMILES v Thomas William MOON [2003] NSWSC 519 HEARING DATE(S) : 24/03/03 to 16/04/03 and 28/04/03 to 09/05/03 JUDGMENT DATE : 18 June 2003 JURISDICTION: Common Law JUDGMENT OF : Foster AJ at 1 DECISION : 1. The proceedings be dismissed.; 2. The Plaintiff pay the defendant's costs on an indemnity basis including reserved costs.

CATCHWORDS : Informations and summonses served alleging the commission by plaintiff of offences under the Taxation Administration Act 1953 (Cth) and the Crimes Act 1914 (Cth). LEGISLATION CITED : Taxation Administration Act 1953 (Cth) Crimes Act 1914 (Cth) PARTIES : Phillip Murray SMILES - Plaintiff Thomas William MOON - Defendant FILE NUMBER(S) : SC 20817/1997 COUNSEL : Mr C. Stevens QC - Plaintiff Mr R. Dubler - Defendant SOLICITORS : Beazley Singleton - Plaintiff Phillips Fox - Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

FOSTER AJ

WEDNESDAY, 18 JUNE, 2003

20817/97 Phillip Murray SMILES v Thomas William MOON

JUDGMENT 1 HIS HONOUR: The plaintiff in these proceedings Phillip Murray Smiles ("Mr Smiles") was, on 29 January 1992, served with three informations and summonses alleging the commission by him of offences under the Taxation Administration Act 1953 (Cth) and the Crimes Act 1914 (Cth). Mr Smiles was then a member of the Parliament of New South Wales. He had been elected as member for Mosman in 1984 and, upon the abolition of that electorate in early 1991, he had been successful in obtaining election as member for the newly constituted seat of North Shore. At the time when the summonses were served, he had achieved the position of Deputy-Treasurer in the Liberal government of the day, the Premier then being Mr Greiner. As a result of the laying of the charges, he stood aside from that position, losing certain emoluments attributable to it. On 21 December 1993 Mr Smiles, after a defended hearing, was convicted by a Magistrate in the Local Court on eight counts under sections of the Taxation Administration Act 1953 (Cth) and was acquitted of one count under s 7A of the Crimes Act 1914 (Cth). 2 Upon these convictions being recorded, and after consultation with persons including the then Premier of New South Wales, Mr Fahey, Mr Smiles resigned his seat in the parliament. He has never re-entered the New South Wales parliament, attempts to do so by way of seeking Liberal Party pre-selection, having been unsuccessful. Mr Smiles appealed from his convictions to the District Court of New South Wales. The appeal, which was a hearing de novo, resulted in his acquittal on 21 June 1996, the learned District Court Judge being not satisfied beyond reasonable doubt as to Mr Smiles's guilt. Accordingly, the convictions in the Local Court were quashed. 3 Thereafter, by Notice of Motion in the District Court, Mr Smiles sought an order for the payment of his legal costs in the amount of $402,481.63. This motion was unsuccessful. His Honour's judgment dismissing the motion has, by consent, been placed in evidence before me. His Honour was not satisfied that any of the four criteria enumerated in s 125 of the Justices Act 1902 had been satisfied, these being a pre-requisite to the awarding of costs. His Honour was not satisfied, pursuant to that section, that the investigation into the offences had been conducted in an unreasonable or improper manner, or that the proceedings had been initiated without reasonable cause or in bad faith or had been conducted in an improper manner, or that the prosecution had unreasonably failed to investigate the relevant matters of which it was aware or ought reasonably to have been aware suggesting that the defendant might not be guilty or that, for any other reason the proceedings should not have been brought, or that because of other exceptional circumstances …it was just and reasonable to award costs. His Honour, in declining to find these grounds made out, stated that it was "in the present context, not insignificant that I did not find the applicant 'innocent'". 4 In these proceedings Mr Smiles seeks to recover the amounts expended by him in legal costs in the defence of these charges and also in other respects. He also seeks to recover losses incurred by him as a result of the loss of his parliamentary career. He seeks to recover these losses by way of an award of damages against the defendant Thomas William Moon ("Mr Moon") whom he alleges was, at all relevant times, acting as his accountant. His case, put broadly at this stage, is that Mr Moon was in breach of his contract of retainer and guilty of professional negligence in relation to acts and omissions in the course of acting for Mr Smiles in relation to his taxation affairs. It is contended that had Mr Moon acted in accordance with his duty to Mr Smiles, the prosecutions, convictions and consequent losses would not have occurred. 5 The informations were laid by an officer of the Australian Taxation Office ("ATO") after a decision had been made by the Commonwealth Director of Public Prosecutions ("DPP") that the evidence was "capable of supporting charges in relation to incorrectly keeping accounts and the making of false statements contrary to the Taxation Administration Act." The view was also expressed that prosecution was warranted for an offence against s 7A of the Crimes Act. 6 Although they are lengthy, I consider that for the purpose of the better understanding of this case, it is necessary to set out, in full, the text of the relevant informations which were exhibited at the Local Court at the St. James Centre on 29 January 1992. They are as follows:- "On or about 10 February 1990 did encourage the commission of an offence against a law of the Commonwealth, namely section 8P(a) of the Taxation Administration Act 1953: Particulars: The defendant encouraged one Lisa Maree Robinson to knowingly make a statement to a taxation officer that was false in a material particular in that the defendant requested Lisa Maree Robinson sign an "Employment Declaration" form which incorrectly stated her occupation as "Personal Assistant. Contrary to section 7A of the Crimes Act 1914." "1. Between 1 July 1986 and 20 October 1988 at Sydney, in the State of New South Wales did keep accounts, namely a cash book for the business of Smiles Management Services for the year ending 30 June 1987, in such a way that they did not correctly record and explain the matters, transactions, acts of operations to which they related with the intention of deceiving the Commissioner of Taxation: Particulars: (i) The defendant incorrectly annotated entries in the cash book in respect of "K. Parkinson" as "Secretarial" so as to imply that the expenditure to which each entry related was an outgoing which had been incurred entirely in carrying on the business of Smiles Management Services whereas each of the outgoings had in fact not been incurred entirely in carrying on the business: (ii) The defendant incorrectly annotated entries in the cash book in respect of "K. White" as "Secretarial" so as to imply that the expenditure to which each entry related was an outgoing which had been incurred entirely in carrying on the business of Smiles Management Services whereas each of the outgoings had in fact not been incurred entirely in carrying on the business: And the informant further informs me that the defendant: 2. Between 1 July 1987 and 30 May 1989 at Sydney in the State of New South Wales did keep accounts, namely a cash book for the business of Smiles Management Services for the year ending 30 June 1988, in such a way that they did not correctly record and explain the matters, transactions, acts or operations to which they related with the intention of deceiving the Commissioner of Taxation: Particulars: (i) The defendant incorrectly annotated entries in the said cashbook in respect of "K. White" as "Secretarial" so as to imply that the expenditure to which each entry related was an outgoing which had been incurred entirely in carrying on the business of Smiles management Services whereas each of the outgoings had in fact not been incurred entirely in carrying on the business: (ii) The defendant incorrectly annotated entries in the said cash book in respect of "Com. Of Tax" as "Secretarial" so as to imply that the expenditure to which each entry related was an outgoing which had been incurred entirely in carrying on the business of Smiles Management Services whereas each of the outgoings had in fact not been incurred entirely in carrying on the business: (iii) The defendant incorrectly annotated entries in the said cash book in respect of "R. Cook" as "Secretarial" so as to imply that the expenditure to which each entry related was an outgoing which had been incurred entirely in carrying on the business of Smiles Management Services whereas each of the outgoings had in fact not been incurred entirely in carrying on the business: (iv) The defendant incorrectly annotated entries in the said cash book in respect of "R. White" as "Secretarial" so as to imply that the expenditure to which each entry related was an outgoing which had been incurred entirely in carrying on the business of Smiles Management Services whereas each of the outgoings had in fact not been incurred entirely in carrying on the business: (v) The defendant incorrectly annotated entries in the said cash book in respect of "N. Tamblyn" as "Secretarial" so as to imply that the expenditure to which each entry related was an outgoing which had been incurred entirely in carrying on the business of Smiles Management Services whereas each of the outgoings had in fact not been incurred entirely in carrying on the business: And the informant further informs me that the defendant:- 3. Between 1 July 1988 and 12 March 1991 at Sydney in the State of New South Wales did keep accounts, namely a cash book for the business of Smiles Management Services for the year ending 30 June 1989, in such a way that they did not correctly record and explain the matters, transactions, acts or operations to which they related with the intention of deceiving the Commissioner of Taxation: Particulars: (i) The defendant incorrectly annotated entries in the said cash book in respect of "N. Tamblyn" as "Secretarial" so as to imply that the expenditure to which each entry related was an outgoing which had been incurred entirely in carrying on the business of Smiles Management Services whereas each of the outgoings had in fact not been incurred entirely in carrying on the business: (ii) The defendant incorrectly annotated an entry in the said cash book in respect of "Comm. Of Taxation" as "Secretarial" so as to imply that the expenditure to which the entry related wan an outgoing which had been incurred entirely in carrying on the business of Smiles Management Services whereas each of the outgoings had in fact not been incurred entirely in carrying on the business: And the informant further informs me that the defendant: 4. Between 1 July 1989 and 12 March 1991 at Sydney in the State of New South Wales did keep accounts, namely a cash book for the year ending 30 June 1990, in such a way that they did not correctly record and explain the matters, transactions, acts or operations to which they related with the intention of deceiving the Commissioner of Taxation: Particulars: (i) The defendant incorrectly cause to be annotated entries in the cash book in respect of "Tamblyn N." as "Secretarial" so as to imply that the expenditure to which each entry related was an outgoing incurred entirely in producing the defendant's salary or wages whereas each of the outgoings had in fact not been incurred entirely in producing his salary or wages: Contrary to sections 8T and 8V of the Taxation Administration Act 1953. 1. Between 20 October 1988 and 30 November 1988 at Sydney, in the State of New South Wales did knowingly make a statement to a taxation officer that was false in a material particular: Particulars: The defendant in his tax return for the year ending 30 June 1987 stated that the outgoings in the sum of $7,974 in respect of "Wages/Secretarial Services" had been incurred entirely in carrying on the business of Smiles Management Services whereas out of this amount outgoings in the sum of about $5,175 had in fact not been incurred entirely in carrying on the business of Smiles Management Services: And the informant further informs me that the defendant: 2. Between 25 May 1989 and 31 May 1989 at Sydney, in the State of New South Wales did knowingly make a statement to a taxation officer that was false in a material particular: Particulars: The defendant in his tax return for the year ending 30 June 1988 stated that outgoings in the sum of $10,649 in respect of "Secretary & Secretarial Services" had been incurred entirely in carrying on the business of Smiles Management Services whereas out of this amount outgoings in the sum of about $8,434 had in fact not been incurred entirely in carrying on the business of Smiles Management Services. And the informant further informs me that the defendant: 3. Between 12 March 1991 and 15 March 1991 at Sydney, in the State of New South Wales did knowingly make a statement to a taxation officer that was false in a material particular: Particulars: The defendant in his tax return for the year ending 30 June 1989 stated that outgoings in the sum of $15,222 in respect of "Secretary & Secretarial Services" had been incurred entirely in carrying on the business of Smiles Management Services whereas out of this amount outgoings in the sum of about $14,256 had in fact not been incurred entirely in carrying on the business of Smiles Management Services. And the informant further informs me that the defendant: 4. Between 12 March 1991 and 15 March 1991 at Sydney, in the State of New South Wales did knowingly make a statement to a taxation officer that was false in a material particular: Particulars: The defendant in his tax return for the year ending 30 June 1990 stated that he had incurred outgoings in the sum of $30,350 which outgoings had been incurred entirely in producing his salary or wages whereas out of this amount outgoings in the sum of about $1,138.50 were in fact not incurred entirely in producing his salary or wages: Contrary to sections 8P and 8R of the Taxation Administration Act 1953." 7 As can be seen the alleged defences related to the taxation years ending 30 June 1987, 1988, 1989 and 1990 respectively, although some of the offences were alleged to have been committed in 1991. The alleged acts and omissions of Mr Moon are said to have occurred from approximately December 1988. The Amended Statement of Claim in these proceedings particularises a very large number of allegations of breach of retainer and professional negligence. It is unnecessary to set them out in full as, in the course of the hearing, they were reduced in number to certain issues, to which I shall make reference later in these reasons. I note, at this stage, that it is Mr Moon's contention that Mr Smiles was in fact guilty of the acts of tax evasion comprised in the charges that were laid against him and that these acts were concealed from him in circumstances which absolve him from breaches of retainer or professional negligence. 8 The evidence in this case has been extremely lengthy, both Mr Smiles and Mr Moon having been cross-examined for approximately six days each. Considerable bodies of evidence have been given in documentary form, consisting of prior written statements of witnesses and of transcripts of their evidence given in the Local Court or the District Court or in both. Expert evidence has also been called on both sides, with the expert witnesses having been cross-examined at some length. The opinions of the experts, to a large extent, have depended upon the assumption of hypothetical facts. They have been expressed in reports of considerable length which have been tendered in the proceedings. Before I can give effect to them in any way, it is necessary that I make findings of fact in relation to the activities of Mr Smiles and Mr Moon. These findings, in themselves, must be dependent upon findings that I make in respect of the other witnesses who have given evidence as to relevant facts. 9 A considerable amount of the evidence depends upon the memory of witnesses of events occurring between seventeen and twelve years ago. Even without deliberate untruthfulness, witnesses recalling matters over such lengthy periods tend subconsciously to reconstruct matters in their memory to accord better with the positions that they adopt. A judge must always make such allowance, as seems proper in the circumstances, for this peculiarity of the human mind. Moreover, a judge must form impressions of witnesses, based upon their demeanour in the giving of their testimony, in assessing their reliability, the more so in circumstances where witnesses are deposing to events long ago. This aspect of judging is, of course, by no means infallible but is, nevertheless, an essential part of the process and is a risk that determined litigants must run. Apart from the factual evidence which is in purely documentary form, from witnesses whose evidence has been admitted under provisions of the Evidence Act 1995, through their unavailability or otherwise, I have had the opportunity of forming such impressions because witnesses, giving oral evidence, have spent fairly lengthy periods in the witness box under cross-examination. The amount of documentary material in this case is very considerable. I have considered it all more than once. It is not possible to refer to all of it in these reasons. 10 Regrettably, neither Mr Smiles nor Mr Moon made any written notes of conversations that allegedly took place between them, with the result that, in evaluating their evidence, I have had to have considerable regard to their demeanour in determining their respective reliability and also to the probabilities, having regard to other evidence in the case, of the conversations between them taking place as asserted by each. On the other hand, the evidence of Mr Walton, the auditor of the ATO, is supported by file notes made by him shortly after the conversations to which he deposes. Similarly, other evidence from officers of the ATO is supported by similar file notes or transcripts of tape recordings of evidence obtained from potential witnesses. I shall make reference to this material later in these reasons. 11 At this stage, it is necessary for me to relate facts which are not in dispute and make certain findings of fact in more or less chronological order, to provide the essential basis for the issues which I am called upon to decide between the parties to this litigation. Indeed, I shall make some of these decisions as I proceed. 12 In the first place it may be noted that the persons referred to under the description "Secretarial" in the plaintiff's cash books in the charges set out above were all young women employed in Mr Smiles's household in the financial years in question. It was the contention of the ATO, in the prosecution, that these descriptions were deliberately misleading in that the young women were each employed in the household to do the work of nannies and that the payments that were made to them, in respect of which deductions were sought in the plaintiff's relevant tax returns, were made to them for the performance of their duties in that role and in no other. 13 Prior to entering parliament in 1984 Mr Smiles had conducted a management consultancy under the business name "Smiles Management Services" ("SMS"). Mr Smiles was a significantly well educated person. He had bachelor degrees in law and economics from Sydney University, a Diploma of Education, and also held a Master of Business Administration degree from the University of New South Wales. In his Master of Business Administration degree he had followed courses with an emphasis on marketing. It is clear that he had and has significant vendible skills in this area. In 1975 he commenced SMS which was, apparently, until his entry into the New South Wales parliament in 1984, his major source of income, apart from fees earned through lecturing in fields of his expertise. In June 1974 he married his first wife Ruth ("Mrs Smiles"). She plays, according to the evidence, a significant part in the events which ultimately led to the charges being laid against Mr Smiles. They had two children, Simon, born 22 March 1978 and Andrew (known as "Sandy") born 8 December 1982. Until late 1986 the family lived in premises at Castlecrag. Mrs Smiles, also, was and is a well educated person. She had a degree in law and has pursued a number of occupations relating to that degree. It appears that, at all stages, when Mr and Mrs Smiles were living together, they formed a dual income family, each working long hours. As a result, it was necessary that help be employed for the proper caring of their young children. Whilst they lived at Castlecrag, although the evidence is fairly sparse, it appears that full-time nannies were employed so that Mrs Smiles could follow her daily employment away from the home. These nannies were not involved in any way in Mr Smiles' operation of the SMS business. Certainly no tax deductions were claimed in respect of monies paid to them by way of salary, in those years. 14 In the financial years ending 30 June 1983, 1984 and 1985, Mr Smiles engaged as his accountant Mr Timothy Trumbull. It appears that the two men were personal friends and shared sporting interests. Mr Trumbull ceased to be Mr Smiles accountant after June 1995, when he sold out to his partner in his accounting practice. It seems that, for a short while, accounting work was done for Mr Smiles by Mr Trumbull's partner, but the evidence is very sparse as to this. It is clear that the two men remained on friendly terms. After Mr Smiles became member for Mosman, he commenced to build a residence in that electorate. It is clear that this enterprise was a financial disaster for him, as the building costs escalated well beyond their previously intended limits. The house was not completed to a habitable level until fairly late in 1986. Mr Trumbull, in fact, assisted Mr Smiles in some labouring work involved in the erection of a retaining wall. 15 Mr Trumbull was made aware of Mr Smiles's increasing financial difficulties. In particular Mr Smiles made known to him that the steeply increasing building costs necessitated a mortgage of such size that the required repayments would, in themselves, take the whole of Mr Smiles parliamentary salary. In those circumstances, there was discussion of the reactivating of the SMS consultancy business which had, apparently, lapsed upon Mr Smiles entering parliament. 16 The design of the house included two separate rooms which were somewhat detached from the main living areas. These consisted of self-contained accommodation which could be used for a person employed in the household and, adjacent to it, a room designed as a study. There is conflict in the evidence as to the purpose of building the study. Mrs Smiles, asserts in her evidence, which, due to her unavailability is only in documentary form, that the room was intended to be her study because of her special needs in her employment as a lecturer. Mr Smiles asserts that it was being constructed, predominantly, for his use. This conflict of testimony is, regrettably, fairly typical. I think the truth lies in between, namely that although it was originally seen as a room which would be mainly occupied for the purposes of Mrs Smiles, when it became necessary for Mr Smiles to earn additional money through recommencement of the SMS business, it was considered, at least in part, to be his domain. There is no doubt that he installed a dedicated phone line to the study for the purposes of his business. 17 Mr Trumbull was called as a witness. He affirmed the evidence he had previously given as a witness in the District Court appeal. He was not cross-examined. Accordingly, I am satisfied to accept that he gave the advice to Mr Smiles, that appears in this evidence. This related to the use of the home office and also to the employment of assistants in SMS. I prefer this evidence to Mr Smiles' asserted recollection in his evidence, of this advice. I feel it necessary to set out the whole of his evidence, which is to be found at pages 487 et seq of his District Court transcript (Exhibit 44). In answer to a question, seeking what advice he gave to Mr Smiles in relation to "his parlous financial situation," he said, endeavouring to put it in direct speech, the following:- "A. You have to establish a home office. You have no choice and in doing that you need to have a room set aside for your office activities. In particular, you need a telephone, a separate telephone to be manned and the answering of the calls is critical to the success of your business, Phillip, and you have to do it professionally." Q. Do you recall whether or not at about that time you provided Mr Smiles with some advice as to the keeping of a cash book? A. Yes. In those days, this was before the cheap PCs, Phillip couldn't afford it, $20,000 and $30,000 computers so it was to be a Collins cashbook with various columns and this was very standard procedure for small businesses and still is for those people who are not computer literate. I explained to him the various columns in the book and to list his debts and cash and so on so that he could keep track of his business profits and losses. Q. During the time of the retaining wall incident, apart from the advice in relation to the home office and the other general advice, did you give him any other advice? A. Yes, well it was about the home office expenses. This was and still is common practice for professionals who conduct business from home that the tax office allows the business expenses incurred. In the pursuit of earning, expenses and income is a valid deduction. Some expenses are clearly and directly associated so they are allowable. Others are indirect and there is to be some pro rata between the business activities and the private activities involved in those expenses." 18 Mr Trumbull went on to indicate that the telephone should be answered correctly and that that was "basically critical to the frontline viability of any business". He then gave the following evidence:- "Q. At some other time, did Mr Smiles raise with you the fact that he and his wife had been thinking of getting some live-in girls? A. Yes. He said to me on a number of occasions, knowing the background of his wife Ruth that she was raised in, where I guess she couldn't cope on her own with the children so it was raised that girls should be hired, from a professional point of view to primarily look after the business whilst he conducted the business and if there were other periods where they didn't look after the business then that would be the private activities of the girls. Q. Did you give him any advice as to the deductibility for tax purposes of these girls in a home office/domestic/nanny environment? A. No, because it is very grey and I left it up to Phillip as to what he should do. Q. Did you mention "grey" to him? A. I guess I did, yes. Q. Was it the situation that this dual role of the young ladies was something that you and he discussed? A. Discussed the dual roles? Q. Yes? A. We did and once again from a professional viewpoint I made it clear that he should keep timesheets for the girls as to the times they conducted their business affairs and claim a pro rata of the expenses paid for the girls. Q. Do you recall him saying to you words to the effect "Tim, what about when the kids are around the house?" or something like that? A. Well, often – sorry, it was clear that clients could call at any time so it would not make the slightest difference, no." 19 Mr Trumbull indicated that, whilst the house was being built, he discussed, on probably half a dozen to a dozen occasions, with Mr Smiles the "question of the girls managing the office and looking after the children" and that his advice "always was that you clearly had to be precise as to what the business activities undertaken by the girls were and the whole office as compared to the domestic side of things." He emphasised that it was "very grey, a very grey area." He said that he could not recall "any discussions taking place about the remuneration of the girls in the dual role." 20 Mr Trumbull was also aware that Mr Smiles had an "enormous debt" hanging over his head which "he couldn't service unless he did something about it." He also said that during these discussions about the dual role of the young ladies the term "nanny" was never mentioned. 21 In cross-examination, he agreed that he had told Mr Smiles that "he had to be very very careful in this area" because "the taxation department would look very closely at payments that were made to domestic employees. He also said that he "had not heard of a dual role before, so this was why it was such a grey area." 22 There is no suggestion, in the evidence, that Mr Smiles received any further advice in relation to this "grey area" before the lodging of his income tax return for the year ending 30 June 1987. 23 It appears that Mr Trumbull prepared Mr Smiles' income tax return for the financial year ending 30 June 1985 and that his partner prepared the 1986 return. Both these returns were in respect of periods before the Smiles family moved into the newly built Mosman residence, in the latter part of 1986. It was after they moved in that the employment of the young women referred to in the informations occurred. Prior to the move, as previously indicated, young women were employed in the previous household, as nannies, because of the busy and time consuming workload of both Mr and Mrs Smiles. It also appears that no "dual" role was attempted to be assigned to them and that payments to them, for their work, were regarded as a purely domestic, and, therefore, non-deductible, outgoings of the household. 24 It is clear that, consequent upon the cost of building the new home in Mosman, the family financial situation suffered significant change. As already indicated, Mr Smiles found that his earnings as a parliamentarian were required to service the unexpectedly increased size of the mortgage on the property. It is equally clear that the demands on the time of both Mr and Mrs Smiles were unchanged. It was necessary that Mrs Smiles pursue her career and earn the income associated with it. This led to the perceived necessity of maintaining a nanny in the household in order to take over the main burden of caring for the young children and also to assist in the general running of the home. It is also clear that the expense associated with their employment could be met only if Mr Smiles earned additional income from the re-establishment of his SMS consultancy, as had been discussed with Mr Trumbull. I am quite satisfied that, in these circumstances, Mr Smiles decided that the cash salary of the young women, to be employed in the household from time to time, would be paid from the SMS account and that a tax deduction would be sought in respect of those payments. 25 As the evidence in relation to these arrangements is in a situation of some conflict, it is necessary that I indicate, now, that I did not form a favourable impression of Mr Smiles as a witness, both as to the content of his testimony and as to the manner of its giving. He was most articulate but, at times, when in somewhat difficult situations, voluble, unresponsive and evasive. Where his evidence is in conflict with that of his wife and of the young women employees, I have come to the conclusion that I should accept their evidence in preference to his. I have done so even where, as in the case of Mrs Smiles, Robyn White, Renée Cook, Nicole Tamblyn and Lisa Robinson, their evidence was not given orally before me but consisted of previous statements and transcripts of evidence, given under oath in the earlier proceedings in the Local Court and District Court. I have reached this conclusion after a very considerable expenditure of time in reading, re-reading and considering the evidence of the witnesses at a time when I was able clearly to recall the demeanour of those giving oral evidence before me. These included the first two employees, Kirsten Cotton (née Parkinson) employed at the end of 1986, after the Smiles family had moved into the Mosman home, and Karen White employed from late January 1987 to September 1987. 26 In his income tax return for the year ending 30 June 1987, which was prepared by a friend Dobra Zanefska, in circumstances to which I shall make reference later, Mr Smiles claimed as a deduction the entire cash salary paid to Kirsten Parkinson and Karen White. He did so, on the basis that these payments were incurred by his SMS consultancy for "Secretarial" services provided by those young persons. It was later asserted, after investigation by the ATO, to which I shall make later reference, that these claims for deduction amounted to tax evasion. It is necessary, therefore, to consider the circumstances of the employment of each of them, their duties in the household and other aspects of their relationship with Mr and Mrs Smiles. It is appropriate to mention that, at the time when the Smiles family moved to Mosman, the marriage was under significant strain. The parties in fact separated in November 1988 and were divorced in November 1990. During the period of their living in the Mosman home, there were arguments between them, some of which related to the employment of the young women. 27 It is also appropriate to note, at this stage, that, during the subsequent investigation by the ATO, Mr Smiles sought to justify the claimed deduction of the whole of the cash salary paid to these young women on the basis, mainly, that they were employed by his consultancy between the hours of 9.00am and 3.00pm, to attend the SMS dedicated telephone in the study, to take messages and deal with them appropriately, either by recording them on paper to be delivered to him later or, in cases of urgency, to be relayed to him as soon as possible by telephone to his Electoral Office, Parliament House or elsewhere. It was necessarily part of this assertion that there was an obligation placed upon the young women to be present within the home and close by the telephone throughout those hours. The period of time in question coincided, it was asserted, with the period during which the young sons Sandy and Simon would be at school. 28 Mr Smiles, in his evidence, appeared to adopt an attitude that both Ms Parkinson and Ms White were employed primarily to perform these duties on behalf of his consultancy and that, outside those hours they were, in effect, employed by his wife to mind the children and perform other household chores. It seems to be part and parcel of this asserted division, that the remuneration for the women's domestic duties was, in effect, the free board and lodging they received whilst working in the home, use of a car and telephone, and some unstipulated and unspecified extra amounts of money from Mrs Smiles (which was denied by her). There was, thus, a form of dual employment with, apparently, separate employers. I am not persuaded, in fact, that Mr Smiles genuinely saw the employment arrangements in these terms at the time when the young women were employed. This approach has all the appearance, to my mind, of an ex post facto attempt at justification of the course that Mr Smiles adopted at the time. 29 The services of both Ms Parkinson and Ms White were, in fact, obtained by Mrs Smiles. They were, quite plainly, obtained because Mrs Smiles required the assistance of nannies in the care of the young children, in the same way as they had been needed before the move to Mosman. I am satisfied that, to the knowledge of Mr Smiles, Mrs Smiles contacted nanny agencies for the purpose of obtaining a suitable live-in nanny. I do not accept Mr Smiles' evidence to the effect that he was not really aware that the relevant agencies were nanny agencies but thought that they were some kind of general employment agency, which could provide secretarial assistance. I am satisfied that Mrs Smiles, as she says in her statement dated 24 January 1992, which is in evidence, told her husband that she had made contact with a nanny agency and that she was going to interview two girls, who were being sent to her. The evidence is precise and inherently probable. I am quite persuaded that, at all relevant times, Mr Smiles would have been well aware that both Ms Parkinson and Ms White were obtained from agencies that dealt in the provision of nannies and that they were to be employed in his household in that role. It is quite clear that he took no steps, himself, to obtain any person or persons to work for him in his SMS consultancy, as secretaries or, secretarial assistants. 30 Mrs Smiles, having interviewed both young women decided that Ms Parkinson would be the more appropriate employee, although Ms White would also be acceptable. Her evidence is to the effect that she told her husband "I've seen two nannies. I think I'll take Kirstie. She can help with the cooking when we do entertaining." She recalls that he said words to the effect "that's good." 31 The evidence satisfies me that the agency provided these young women on the basis that they would live in the home and be given free accommodation and food, in effect becoming, for the period of their employment, members of the family. In addition they were to be paid a recommended cash salary at the going rate. Mrs Smiles says in her statement "I offered Kirstie the job and she moved in around November 1986. I said to Phillip words to the effect: "Look, the agency is paying nannies (such and such an amount) at the moment." I don't remember the figure now. Phillip said: "Okay." Kirstie's wages were paid by Phillip." 32 I accept this evidence. It is inherently probable. I regard Mr Smiles' evidence that he did not know that the amount in question was an agreed amount of wages for nanny services but was simply an amount that he was directed to pay by his wife as being, in the circumstances, quite improbable. 33 Ms Parkinson only remained for two months. During this period she was paid her wages by Mr Smiles through his SMS account. He subsequently claimed, in the 1987 tax return, the full amount of these wages as a business deduction, being for "Secretarial" services. 34 The evidence of Miss Parkinson, now Mrs Cotton, was given orally by video link. I regarded her as a reliable witness, although she was speaking of events that had occurred some seventeen years previously. I have also had regard to the transcript of her evidence given in the Local Court and in the District Court, which transcripts, together, form Exhibit 45 in these proceedings. Her evidence appears to be internally consistent and to correspond, in significant respects, with the evidence of Mrs Smiles, given in the statement I have referred to and in other statements and transcripts of her testimony, which have been tendered and which form Exhibit 55. This evidence satisfies me that Ms Parkinson worked as a nanny for the period of her employment and that she did not see herself as having any role in Mr Smiles' consultancy business. 35 In her evidence given in the Local Court in November 1992, Ms Parkinson deposed that her duties were "as a nanny". She looked after the children, got them up in the morning, helped them get ready for school, made their lunches and got them their breakfast, drove the elder child to school and, later in the day picked him up and brought him home. The younger child Sandy went to kindergarten two or three days a week. On the days that he was at home she looked after him all day at home or by taking him to the park. When the children were at home in the afternoon she looked after them, prepared or helped with the meals at night and put the children to bed. When the children were not at home during the day, she said that "my time was my own, the Smiles were very generous in that matter." She remembered the phone in the study but didn't recall anything being said about it and didn't recall being given any specific instructions as to how it should be answered if it rang. She also remembered that she had one day off during the week and during the week-end, if it suited the Smiles. She wasn't aware that Mr Smiles had a business called Smiles Management Services. 36 In her evidence in the District Court given in June 1996 she deposed again that she wasn't specifically asked to remain at the house when the children were at school. She recalled taking messages on the phone in the study and writing them down for Mr and Mrs Smiles but didn't know where she would have left them. She had no recollection of answering any telephone calls involving an urgent message for Mr Smiles or of running errands for him, or of dealing with business mail coming into the house in any particular way. Generally her later evidence seems to accord with that previously given. 37 Karen White had completed a course of training at a school for nannies and had been sent for an interview with Mrs Smiles by an agency associated with that school. Like Ms Parkinson she came to the Smiles household to work as a live-in nanny. That was the job she was trained for and the job she expected to do. In so far as Mr Smiles' evidence might seem to suggest that he regarded her as coming from some general employment agency in order that she might work in his business and, outside the hours that he required her, to perform nanny duties and provide general household help, I reject it. It is clear, however, that Ms White did perform some tasks in relation to Mr Smiles' consultancy, at his request. I accept that he explained to her that he had a private business and that there was a phone in the study, which was the phone belonging to that business. I also accept that he requested that she answer the phone, if it rang, and use the expression "Smiles Management Services" or something similar when so answering. I also am satisfied that he asked her to answer the phone in a "professional" tone of voice and to take a message, if so requested by the person at the other end of the phone. If the message was urgent, then she was asked to relay it to him at his Electoral Office or at Parliament House, if possible. Otherwise messages were to be placed on a spike in the study. Also she was requested to bring in mail from the mail box and, if any mail was addressed to the consultancy, to place it on the window sill in the study, for his attention. She was prepared to perform these tasks for him and did so from time to time. The evidence is unclear as to with what frequency these tasks were performed, although I am satisfied that she did them willingly. I am quite unpersuaded, however, that the performance of this work was in any way a term of her engagement. In my view these activities can only realistically be viewed as an adjunct to her role as a live-in nanny and member of the household. Obviously, if she were alone in the house, she would, as a matter of course, answer any phone that rang. In the case of the study phone she answered it, as requested, in a particular way. The taking of messages would be appropriate behaviour, whether the phone that rang in the house was the ordinary domestic phone or the phone in the study. 38 Moreover, I am quite unable to find that she undertook any obligation to hold herself available in the home between the hours of 9.00am and 3.00pm in order to answer the SMS phone and take and relay any messages. In the first place, it is clear that in the period of two days per week, when the young child Sandy was not at school, she was mostly away from the house looking after and entertaining him in the outdoors. Mrs Smiles had told her that, when she was not looking after the children or performing the range of household chores that were expected of her, she was free to come and go as she pleased. Mr Smiles was aware of this and did not seek to countermand it. Moreover, a machine described as a diverter was installed in the study. When switched on this redirected any calls on the business phone to Mr Smiles' Electoral Office. When Ms White was leaving the house, in circumstances where there would be no one at home, she would switch on the diverter. In these circumstances it can hardly be said that her personal presence to answer the business phone was part of her employment role. 39 Some time after she commenced her employment, Ms White was asked by Mr Smiles to fill out a necessary tax declaration form relating to her employment. She thought that it was about three or four weeks after she started but acknowledged that the form was in fact dated from the commencement of her employment. I do not think anything turns on this. More importantly, however, I am satisfied that Mr Smiles asked her to show Smiles Management Services as her employer on the form, that being the entity that paid her salary and also to describe herself as a "Secretary". Furthermore, she was requested to show her address on the form as being that of her parents' home rather than the Smiles home. She asked why he wanted the form filled-in in this way. I am satisfied, by her evidence, that he told her that he had done that with all his nannies, that being the "way he could claim them as a tax deduction." Ms White did as she was requested. She was, however, distressed at being required to do this and made some complaint to Mrs Smiles. Mrs Smiles, who had legal qualifications, remonstrated with her husband. 40 An argument developed. Mrs Smiles told Mr Smiles that he should not involve the girl, who was then only eighteen, in what she described as a tax fraud. Mr Smiles told her to mind her own business. On another version of this exchange, appearing in another part of the voluminous evidence in this case, it is said that he told her he was doing it on professional advice. 41 Mr Smiles plainly had no professional advice to the effect that he could treat Ms White, who had clearly been employed as a nanny, as an employee of SMS, describe her as a secretary, and allocate the whole of her cash salary as a nanny to that alleged employment. It is unlikely that, at the time of this conversation, he had transferred his tax return work to Dobrinka Zlatevska to whom reference will be made later. Accordingly, the only advice he had received was that from Mr Trumbull, which has already been set out in these reasons. That advice fell well short of providing any sanction for what he was doing and proposed to do, in relation to the claiming of deductions for payments to Ms Parkinson and Ms White, for services described as "secretarial" and allegedly performed for SMS. Although it has been claimed in these proceedings that their services, particularly in relation to the answering of the business phone in a professional way, were of significant assistance in the development of the consultancy from 1986 onwards, no steps were taken by Mr Smiles to comply with Mr Trumbull's suggestions in what Mr Smiles would have been perfectly well aware was a "grey" area. He kept no timesheets for the tasks performed by either of these young women. Although it would not have been difficult to have kept some record of the phone calls that were received, with appropriate notification of the caller and any job to which the call related, this relatively simple course was not taken. The written messages were not retained for record purposes nor was any record made of any follow-up phone calls made by Mr Smiles himself consequent upon the receipt of any message recorded by Ms White. In these circumstances I am persuaded that it was clearly wrong for him to assert that he was justified, as a result of professional advice, in claiming in a formal taxation document that Ms White was employed as a secretary in his business, let alone on the full salary which was payable to her for her work as a nanny. 42 I should add that, at a later point of time, in 1989, after Mr and Mrs Smiles had separated and Mrs Smiles was living in premises at Redfern with the children, she employed Ms White for a short period as a nanny. At that time, as part of a maintenance arrangement between them, Mr Smiles was paying the wages of nannies employed by Mrs Smiles. In relation to the wages paid to Ms White in this period, Mr Smiles, I am satisfied, presented her with an employment declaration form in which she was described as "personal assistant", the employer being either himself or SMS. She declined to sign such a form asserting that she was a nanny. I have, with regret, come to the conclusion that this evidence, which I accept, coupled with other evidence to which I shall make reference later, shows that Mr Smiles, even at that late stage, was prepared to seek an illicit taxation advantage from what were purely domestic payments. 43 At a date which is not made clear in the evidence, but which I am prepared to find was sometime after 30 June 1987, Mr Smiles sought to change accountants. He knew a lady Dobrinka Zlatevska who carried on practice as a solicitor and also as a tax agent. She was a friend of Mrs Smiles and Mr Smiles from university days. He approached her in relation to the preparation and lodgement of his tax return for the year ending 30 June 1987. They were on friendly terms and Mrs Zlatevska had been a visitor, on occasions, to the house at Mosman. At the time when Mr Smiles asked her to act in relation to his income tax return, her registration as a tax agent had lapsed. She had made an arrangement with the defendant, who was a friend, and who practised as an accountant and tax agent, to certify and lodge, after appropriate checking, tax returns that Mrs Zlatevska had prepared on behalf of her clients. There were, as the evidence indicates, a large number of such returns. One of them was, in fact, the 1987 return of Mr Smiles, which Mrs Zlatevska prepared for him on his instructions. 44 The return, as so prepared, contained a claimed deduction for "Wages/Secretarial Services" in the amount of $7,974.00. The evidence indicates that this amount comprised the wages of Ms Parkinson and also the wages paid to Ms White up to the end of that financial year, her employment continuing until September 1987. It also contained an amount of $2,000.00, which, it later transpired, was, in fact, an amount paid by Mr Smiles to the ATO in respect of some tax indebtedness of his wife. This alleged deduction was later sought to be justified by Mr Smiles on the basis that he owed his wife this amount for past services to the consultancy in a prior tax year. No attempt was made to justify this payment in any specific way and it was, quite properly in my view, disallowed by the ATO, in the course of the investigation to which I shall later make reference. I am satisfied that this amount was not the subject of any disclosure by Mr Smiles to Mrs Zlatevska in any written material or in any discussion relating to the preparation of his 1987 tax return. 45 As to the balance of this claimed deduction, Mr Smiles would have been, in my view, well aware that the claims were in the "very grey" area described by Mr Trumbull. He would also have been well aware that his wife, who was appraised of the circumstances, described them as a taxation fraud. In those circumstances, it would, obviously, have been most appropriate for Mr Smiles to bring to the attention of his new accountant and tax agent the way in which he claimed that the payments made to the two young nannies were deductible as payments for secretarial services in his business. Mr Smiles in his affidavit of 19 November 2002 asserts that he did discuss this claim with Mrs Zlatevska, who, at that stage, was a cross-defendant in these proceedings. The relevant passage in the affidavit reads as follows:- "I recall we discussed my claiming the young women's wages for the time between 90.00am and 3.30pm, when the children were at school. I said to her words to the effect:- "I believe I can claim $4 to $7 per hour for the girls' wages because the work they do between 9.00am and 3.30pm is for Smiles Management Services." I recall the cross-defendant said to me words to the effect:- "That should be deductible. That's all right."" 46 This conversation is totally denied by Mrs Zlatevska. There is no dispute that Mr Smiles attended at her office with information relating to the preparation of his 1987 income tax return and that conversations took place between them at that time. In relation to those conversations, Mrs Zlatevska provided the following information in her affidavit of 31 July 2001:- "36. At no point during my conversations with Smiles were the young ladies employed within his household discussed either in the context of their providing childcare or secretarial services. Smiles did not inform me of any tasks the girls may have performed in relation to the business or that they worked for the business from 9 am to 3 pm. My only knowledge of the work undertaken by the girls was from the child care activities I had observed them engaged in during my visits to the Smiles' home. I did not tell Smiles that the nannies would be deductible during that time. 37. We did not discuss his claim for secretarial services at all. I relied upon the general information provided by Smiles in preparing his returns. I do not recall Smiles providing me with any specific information in relation to payments for secretarial services." 47 Mrs Zlatevska was cross-examined extensively upon this and upon other matters. I observed her closely during the giving of her evidence. I formed the view that, although she was confused on some occasions, she was basically a genuine and reliable witness. She was quite adamant that Mr Smiles did not provide her with any information as to the nannies in the home providing secretarial services to his consultancy business or that they had some sort of dual role which could lead to an apportionment for taxation purposes between pecuniary and non-pecuniary benefits provided to them in respect of their roles as nannies and also as secretaries. I am quite satisfied that she was telling the truth in this regard. I am equally satisfied that Mr Smiles refrained from revealing to her the true nature of his claim for secretarial services, including the $2,000.00 claim to which I have made reference above. I have further formed the view that Mr Smiles so refrained because he did not wish to receive advice of an embarrassing kind, namely that the amounts were non-deductible. I am fortified in this view by Mrs Zlatevska's evidence, which I also accept, that had this disclosure been made to her she would immediately have raised the question of whether some part of the amounts paid could be claimed on an apportionment basis. I am satisfied that no such question arose because the matter was not raised at all. 48 On behalf of Mr Smiles a secondary or fall-back argument was raised, namely that, in the circumstances, Mrs Zlatevska would not have needed to be told that "Secretarial" deductions were being sought in respect of payments made to the nannies. It was submitted that, as a result of Mrs Zlatevska's visits to the Mosman home, she had become acquainted with the young women, particularly Karen White, whom she agreed she knew by name. It was then put that Mrs Zlatevska, when considering Mr Smiles' cash book, which it was claimed he had brought with him to his conference with her, would have observed payments made to K. White to in the column marked "Secretarial". A copy of the relevant parts of the cash book is in evidence as Exhibit 4. The relevant entries are in Mr Smiles' handwriting and I mean him no disrespect when I say that they are far from easy to read. Moreover, I have considerable doubt as to whether the cash book was, in fact, presented for her inspection and consideration at this conference. An argument was sought to be made that, because of certain entries in the tax return relating to charitable donations, it must necessarily follow that Mrs Zlatevska had had available to her the cash book. It was alleged that it was only from entries in the cash book that this information could have been obtained. I have carefully considered the relevant entries and, so far as I can see, there is a significant lack of correspondence between the material in the tax return and those entries. This suggests to me that the material in the tax return was in fact supplied to Mrs Zlatevska in some other way and perhaps on some other occasion. 49 In any event, the simple question arises, why would Mr Smiles have left this important matter to be the subject of detective work amongst his records, when he could so readily have informed Mrs Zlatevska as to what he was doing in respect of the claims for secretarial expenses? This was a "very grey" area in respect of which he needed her advice. The argument in relation to the cash book entries does not alter the finding which I have made above. 50 Criticism was levelled at Mrs Zlatevska, in cross-examination, in relation to her failure to consult what were described as "source documents" in relation to Mr Smiles' taxation affairs. He alleged that he brought with him a box, of small fruit case size, containing cheque butts, bank statements, invoices and the like, as well as a written-up cash book. It would appear, from Mrs Zlatevska's evidence, that, in fact, he did bring some documents with him, although it is far from clear whether they were of the comprehensive nature that he alleges. What he did bring was a summary of income and expenditure, obtained and incurred by him in his parliamentary and business activities for the relevant year. This was a comprehensive summary and, I am satisfied, was adequate to enable Mrs Zlatevska to prepare the relevant income tax return. Mr Smiles was a friend of hers and, as she states in evidence, she trusted him to give her correct information for inclusion in his return. She was not asked to audit his affairs, nor were any particular problems brought to her attention. Accordingly, she merely transposed the material in Mr Smiles' summaries to an appropriate format for the tax return, which she then sent on to Mr Moon for checking and lodgement. She did not, in fact, charge Mr Smiles for her work. 51 Most importantly, for the purposes of this case, I am satisfied that she did not advise Mr Smiles that he was entitled to deduct, as secretarial wages, in whole or in part the amounts paid by him to Ms Parkinson and Ms White. It was a constant refrain, in Mr Smiles' evidence, that he had acted on the advice of Mr Trumbull and Mrs Zlatevska, whom he referred to as Dobra, in taking the course that he did in relation to these claimed deductions. I am satisfied that he received no such advice from either of them. 52 I should add, at this stage, that it was another recurrent claim by Mr Smiles, in the course of his evidence, that the young women acceded to his requests to answer the business phone in a professional way during the hours of 9.00am to 3.00pm because over the period his consultancy increased in productivity and income. The fact that he received no complaints from clients or potential clients in relation to the answering of his business home line indicated that it was in fact answered in a professional way. I find it quite remarkable, having regard to the advice he had received from Mr Trumbull, as to the mode of operating in this grey area, that he should need to resort to such an argument. If even simple records of incoming phone calls had been kept, including the name and business of the caller, there would have been available evidence to indicate the level of phone call activity in the home office in relation to particular SMS projects. The absence of such records is, in my view, strongly suggestive of the fact that Mr Smiles well knew that he had no established agreement with the young women that they would hold themselves available to answer his phone at this particular period during the day or at any time, as a regular part of their employment. He was reliant upon their performing this task in a voluntary way as members of the household in which they were employed as nannies. Additionally such records, if kept, might well have indicated that the level of such phone activity was significantly low. 53 I do not consider it necessary to set out, in these reasons, the summary documents that Mr Smiles supplied to Mrs Zlatevska for the purpose of his 1987 tax return. They are clearly summaries of income and expenditure, from which it would be possible to construct the return and which were, in fact, used for that purpose. A consideration of the source documents, as I have said, would have added nothing to the information which, in my view, she was quite justified in receiving on trust from him. In any event, these source documents have not been placed in evidence. I do not know what, for instance, the cheque butts would disclose, even if examined closely, as in an audit procedure. I do not consider that Mrs Zlatevska was called upon to conduct any such audit, before producing the tax return. I arrive at this view as a matter of plain common sense. It is also supported by expert evidence to which I shall refer later. 54 I note, however, from the first page of the summary materials that he supplied to her, a reference to a person "George Kostas" described as a "tax office contact", with his phone number and a note that he was "expecting return this week". Because of his parliamentary status Mr Smiles was a Restricted Access Tax Payer. I infer that Mr Kostas was the officer in the ATO who was assigned the task of dealing with Mr Smiles, having regard to this status. I also infer that the return was late and that Mr Kostas was requesting or requiring that it be lodged during the week that Mr Smiles had supplied the necessary material to Mrs Zlatevska. In addition to the matters I have already referred to, she was also acting under some time constraint occasioned by Mr Smiles' apparent delay in assembling the necessary materials for his return. 55 I note also that on 7 March 1985 Mr Smiles sent a letter to Mr Kostas (Exhibit 17) in which he answered certain queries, obviously raised by Mr Kostas in relation to his 1984 tax return. The letter was said to be a reply to Mr Kostas "following your telephone call to my Accountants, Meakin & Trumbull….and our subsequent telephone conversation." The letter then dealt in detail with the topics of electoral expenses, research expenditure, promotional expenditure, payments to Mrs Ruth Smiles for work in the SMS Consultancy and payments in respect of office premises. The letter concludes with the sentence, "I do hope the above information clarifies the matters raised." This letter, in my view, indicates that Mr Smiles felt quite at home in dealing directly with the relevant officer of the ATO, even when he had accountants and tax agents acting for him. 56 I have asked myself what I consider Mr Smiles' state of mind was, at the time of the preparation of his 1987 tax return, in relation to his claim for deductions of secretarial expenses, allegedly incurred in the conduct of the SMS Consultancy. I have come to the conclusion that, even if he did not have a fully formed intention at that stage to evade income tax, he had, at the least, the knowledge that the claims were highly artificial and significantly vulnerable to any challenge. He was not prepared to subject them to professional scrutiny by disclosing their true nature to Mrs Zlatevska and was prepared to take the risk that they would not be scrutinised by the ATO. If they were, he was prepared to justify them by claiming that the young women worked for his consultancy from 9.00am to 3.00pm each day of their employment, performing secretarial duties. This was in fact the claim that he ultimately made during the ATO investigation. In my view he took a calculated risk, the nature of which he decided not to disclose to his accountant. At the least, he was deliberately reckless as to the truth or falsehood of his claim for the deductions. 57 At the risk of lengthening these reasons, I set out the following passage from his cross-examination in relation to the $2,000.00 claim for secretarial expenses paid to his wife, as shown in his cash book and to which reference has already been made:- "Q. I'm showing you a copy of your cash books. Again, if you could count with me pages from the back, five pages in from the back, please, Mr Smiles? A. Yes, sir. Q. Do you have on your page a second entry under particulars, R. Smiles? A. That's correct, sir. Q. Now that entry is in your handwriting. Is that correct? A. It is, sir. Q. And could you read, please, everything that appears on that line? A. Well, it appears to be "Mrs P.M. Smiles, R" and then over to "secretarial, $2,000" and then across on the far column again the entry to assist in tabulating all the expenses, "$2,000". Q. Now, firstly, there is a number entered, being a cheque number that corresponds with the $2,000, is there not? A. Yes, sir. Q. That is the fact, is it not, that if one goes to the cheque butt, it corresponds with that, it is actually a payment to the Commissioner of Taxation? Correct? A. That's correct, sir. Q. It is also the fact, is it not, that Ruth Smiles performed no secretarial work in the financial year 1987 for you? A. That's correct. Q. It is also the fact, is it not, that you did not bring to Ms Stanefska's attention – I withdraw that. In your summary under "secretarial", part of the $7,000 figure includes $2,000 to your wife, does it not? A. That's right, sir. Q. It is the fact, is it not, that you did not bring to Ms Stanefska's attention the deduction for secretarial services to your wife? A. To the extent that Dobra Stanefska was supplied with my cash book, yes I did. Can I recall verbally bringing it to her attention? No. Q. And you do not recall, do you, any inquiry being made by Ms Stanefska of the payment or the claim of $2,000 secretarial to your wife? A. No, I don't recall, sir. Q. And I want to suggest to you that if you had the expectation that Ms Stanefska was going to go to source documents, you would have expected her to inquire why there is $2,000 secretarial which actually went to the Commissioner of Taxation? A. I have no expectation. That would depend on her professional judgment. Q. By that, are you suggesting that you could have expected at the time Ms Stanefska to not make inquiry if she looked and saw that there was payment allegedly for Ruth Smiles that actually went to the Commissioner of Taxation? Is that right? A. Sir, I have no judgment as to what I could expect in Dobra Stanefska's mind. She held herself out as an accountant and had professional qualifications, as I understood it, far above mine. I'm sorry, I cannot project what she may or may not have thought. Q. Mr Smiles, the claim for $2,000 for your wife was false, to your knowledge, at the time? A. No, it wasn't false, sir. Q. The claim for the nannies was false at the time, wasn't it, to your knowledge? A. No, sir. Q. What explanation do you give for the claim for $2,000 for Ruth Smiles? A. It was for work done in previous year or years and it was paid to the Australian Tax Office in lieu of going direct to Ruth Smiles. I conducted a cash based busi8ness using cash accounting principles. That means regardless of when you incur the liability to pay someone for a service rendered, you put it in your books and claim it as a deduction if it can be claimed as a deduction in the year you actually pay it. Q. What services and over what period? A. For Ruth Smiles? Q. Yes? A. I cannot recall the specific services for the $2,000 but, yes, Ruth Smiles in previous times assisted me considerably in my consultancy work. Q. Are you unable to say even the period of time it relates to? A. I would be guessing, sir, but it goes back prior to that year or years. There was a period where Ruth Smiles undertook work and I did not pay her directly, or did not pay her. HIS HONOUR: Q. This $2,000 was in fact paid to the Commissioner of Taxation, is that the point? A. Yes, sir. DUBLER: Q. And that was your tax liability; is that right? A. No, sir, not that I can recall. Q. Whose tax liability was it? A. As best I can recall it was Ruth Smiles', but I stress, it's a long time ago and I can't recall in detail the circumstances, but it was not an improper payment. Q. It was made from Smiles Management Services cheque account? A. It was, sir. Q. And none of that's revealed in your companies documents that you gave to Ms Stanefska, is that right, that is identifying that it was payment to your wife; correct? A. No, sir, but in the summary don't believe I have identified anything but the general total. Q. Your expectation at the time was, I want to suggest to you, that Ms Stanefska would go off your summary and you were desirous of that happening? A. Absolutely not, sir, nor was there any reason for me to be desirous of that. Q. What do you say about the number of hours this $2,000 relates to? A. I can't recall now, sir. Q. You can't recall the hours, can't recall the time period, is that right? A. No, sir. Q. Did you make any calculation which would allow you to fairly arrive at $2,000 at the time? A. I can't recall, sir. Q. Isn't the plain fact that you were just making a false claim and would hope no one would find out? A. No, sir. Q. Do you recall that in the audit interview with Mr Walton you were asked what the payment to Ruth Smiles was? A. I can recall a question was asked. Q. Can you recall your answer? A. No, sir. Q. ……………. A. ……………. Q. Sorry, I will go back to your interview with Mr Walton. I want to suggest to you when Mr Walton inquired about the $2,000 he said to you words to this effect "it seems from the bash book, that this", referring to the $2,000, "is a personal payment of your wife's outstanding tax bill and as such it is not an allowable deduction" and I suggest to you in answer you said "yes, I understand that", and that was the end of the discussion; is that right? A. I do recall Mr Walton bringing it up. Q. Is what I put to you correct? A. In that circumstance, yes, I have a broad memory of Mr Walton making comment. Q. And it follows, doesn't it, Mr Smiles, that when you were asked about it by Mr Walton at the time you did not offer an explanation of your wife doing work at some unspecified period for some unspecified hours in the past; correct? A. I can't recall, sir." 58 I am driven to the conclusion that this claimed deduction of $2,000 would have been known by Mr Smiles to have been, if not totally unsupportable, at least highly questionable. It was, in my view, disguised in his cash book as a payment for secretarial services to his wife. He chose not to reveal this fact to his accountant and took the risk that it would simply be accepted as a legitimate deduction for services rendered for the year in question. It is also illustrative of the difficulty I have experienced in accepting Mr Smiles as a reliable witness. 59 As I have indicated, Mrs Zlatevska did not, herself, lodge Mr Smiles' 1987 tax return. Her tax agent's certificate had lapsed. She had an arrangement with the defendant Mr Moon that he would lodge tax returns prepared by her for her clients under his tax agent's certificate. He charged a small fee for checking their general format and arithmetical correctness. Pursuant to this arrangement he, in fact, lodged the plaintiff's 1987 tax return amongst a number of others. At the relevant times Mr Moon was a Chartered Accountant as well as a registered Tax Agent. He had a busy practice conducted in the suburb of Rockdale in relation to the lodging of tax returns and, apparently, general accounting work. He and the plaintiff had met at a social function in 1987. It appears that the plaintiff, then or later, became aware that he and Mrs Zlatevska were known to each other. It seems clear that the two men got on well with each other socially. When Mr and Mrs Smiles separated in November 1988, Mr Smiles decided that, as Mrs Zlatevska was a friend of his wife's, it was not appropriate that she continue to handle his tax returns. He decided to put them in the hands of Mr Moon, it would appear, to the knowledge of Mrs Zlatevska who had no objection and, properly, encouraged the transfer. The plaintiff and the defendant had a preliminary meeting in December 1988 at Parliament House, to which I shall shortly refer. 60 In the tax year 1 July 1987 to 30 June 1988, Karen White continued her employment in the Smiles household until a date in September 1987. After she left Mrs Smiles employed a young woman, Renée Cook, from November 1987 for about two months. In his evidence Mr Smiles was unable to recollect much about her or her employment. He had "no specific recollection of giving her any instructions or duties". However, he agreed that he showed her wages in his cash book as having been paid for secretarial duties performed for SMS. This was on the asserted basis that his business continued and he got his phone calls answered. It is plain from other evidence in the case that Ms Cook was obtained from a nanny agency, performed nanny duties and domestic duties such as shopping and housework. No basis appears in the evidence for a claim that the whole of her cash salary, payable to her as a nanny, could be appropriated in this way to alleged secretarial work for Mr Smiles' consultancy. 61 It is clear from the evidence of Renée Cook, given in the District Court (Exhibit 57), that she did not consider herself under any obligation, as a result of any conversation with Mr Smiles or otherwise, to hold herself available between the hours of 9.00am and 3.00pm to answer the SMS phone in his study. She indicated that during the day, while the children were at school, "I just considered that my own time. Well, I'd work and do what had to be done and then I'd just go out for a little while before I had to pick them up." Although she knew of the existence of Mr Smiles private business, she did not recall being required to answer the study phone in any particular way. She took messages when there were phone calls in the house, when she was the only one present. She regarded this as a normal thing to do irrespective of whether it was the SMS phone that rang or the ordinary domestic phone. 62 The evidence of Mr Smiles is in conflict with the evidence of Mrs Smiles and the young women. I am satisfied, however, that they were employed as nannies by Mrs Smiles, having been obtained from appropriate nanny employment agencies. She would outline their duties in relation to care of the children, housework, taking them to school, picking them up, shopping, cooking and the like. Mr Smiles would then make what has been referred to in the evidence as "his little speech", in which he would request that they answer the study phone in a professional manner, saying "Smiles Management Services" or the like and take any messages. He would indicated that he might ask them to run some errands for him and, at times, iron his shirts. Mrs Smiles would indicate, in these circumstances, that their primary obligation was to care for the children and follow her instructions, that they could assist Mr Smiles if they wished but that they were not obliged to do so. I am satisfied, on the balance of probabilities, that Mr Smiles never stipulated that it was, in any way, a term of their engagement that they should hold themselves available between the hours of 9.00am and 3.00pm or at any time during the day to perform secretarial, in particular phone answering services for his consultancy. It is clear that they did help out in this regard from time to time but I cannot see that this was otherwise than on a voluntary basis. 63 After Renée Cook left, a young woman, Robyn White, was employed by Mrs Smiles. The evidence relating to her is of the same general pattern to that to which I have just referred. In the case of both Ms Cook and Ms White, the salary paid was in accordance with that recommended by the agency. They were entitled to that salary and also to live-in accommodation and food, as being their emoluments for working as a nanny in the household. Mr Smiles, as previously, paid this salary through the SMS account and purported to treat it as a secretarial wage and, accordingly, a deductible business expense. 64 When Robyn White left, in approximately May 1988, another young woman, Nicole Tamblyn, was obtained by Mrs Smiles from a nanny agency. She was employed as a nanny on the recommended wage plus the usual live-in benefits. The evidence suggests that she was also the recipient of "the little speech" but, again, I am satisfied that it never became a term of her employment that she should make herself available to perform secretarial services between the hours of 9.00am and 3.00pm or at any other time during the course of the working day. Again, it is clear that she did answer the telephone and take messages, when she was alone in the house. This applied to the study phone and the ordinary domestic phone. 65 Again, it is clear that Mr Smiles intended to and later did claim the whole of the cash salary of these young women as a deduction against his business income, in his 1988 tax return. 66 Mr and Mrs Smiles separated in November 1988. At that time Nicole Tamblyn was still employed in the household. Mrs Smiles obtained accommodation in Redfern. She moved there with the children. She was accompanied by Ms Tamblyn who continued to perform nanny and domestic duties. The Mosman house was sold. Mr Smiles moved to temporary accommodation and, shortly thereafter, acquired a new home in a unit in Mosman Street, Mosman. When the Mosman home was sold, of course, he lost the use of the study or home office that had been built there. However, he set aside one bedroom in the two bedroom unit as an office and claimed it as such in his 1988 tax return. The SMS consultancy was being wound down as from the sale of the Mosman home. It was no longer needed for the purpose of servicing the mortgage which was, of course, discharged on sale. As no detail whatever has been provided in the evidence as to the individual projects undertaken by the consultancy or the extent to which they were current at the time of sale of the Mosman home, it is not possible to determine the extent to which the new home office was used by Mr Smiles for the purpose of SMS work. He claimed a proportion of its outgoings as a business deduction on the basis that it was a home office. Presumably it was used for some business purpose after it was established. 67 The bank account of SMS contained funds. After Nicole Tamblyn moved into residence with Mrs Smiles at Redfern, an arrangement was entered into whereby Mr Smiles continued to pay Ms Tamblyn's wages as, apparently, a form of maintenance payment for Mrs Smiles. I am satisfied that Mr Smiles instigated this arrangement and that Mrs Smiles acquiesced in it with some reluctance. The suggestion that it was necessary in order to ensure that the wages were paid on time was angrily refuted by Mrs Smiles in her evidence. I am satisfied that she wished to make the payments herself on the basis that maintenance be paid to her directly. However, no alteration was made in this mode of payment until Mrs Smiles took proceedings in the Family Court in 1990, as a result of which, I am satisfied, Mr Smiles commenced to pay maintenance directly to her, from which provision she made the payments to Nicole Tamblyn for her services as a nanny and domestic help. 68 It must be noted that Mr Smiles, until the change of arrangements, paid Nicole Tamblyn from money in the account of SMS. He also paid her the same amount as she had previously received, notwithstanding that she had ceased to perform any services in relation to SMS. Accordingly, no conceivable basis remained for Mr Smiles to claim her wages as a tax deduction. Nevertheless, Mr Smiles, in circumstances to which I shall make reference later, entered these wage payments in his cash book in the column "Secretarial" and claimed them as part of a general sum for secretarial expenses in his 1988 and 1989 tax returns. 69 It is asserted on behalf of Mr Smiles that this was no more than an innocent error. To the contrary, the defendant claims that it was an example of deliberate tax evasion. 70 This latter contention gains support from other events which occurred after the separation. 71 In the first place the tax stamps sheets provided to Nicole Tamblyn by Mr Smiles for the year ending 30 June 1988, 1989 and 1990 all showed her employer as being Smiles Management Services. That for 1988 showed her address as being that of her parents rather than the Mosman address where she was in fact residing. All the wages shown in these documents, ending at the last week of August 1990, were subsequently claimed as tax deductions in Mr Smiles' returns for the relevant years. 72 I have already referred to Mr Smiles' attempt to have Karen White describe herself in her wages declaration, for the short period that she worked for Mrs Smiles at Redfern, as a personal assistant and her refusal to acquiesce in this incorrect description. 73 Prior to Mrs Smiles, through her application to the Family Court, achieving the payment direct to her of amounts of maintenance by Mr Smiles, she had arguments with him in relation to the continued payment to Nicole Tamblyn of her wages by way of SMS cheques. She asserted that this was an improper attempt to obtain a taxation advantage and that she did not wish the girls to be involved in it. She asserts that Mr Smiles told her that he would arrange for the cheques to be paid by him personally so that she need not know. 74 Some events in early 1990 are also of significance in this regard. In January of that year Mrs Smiles obtained the services of a young nanny, Lisa Maree Robinson, who remained with her until 16 August 1991. Mr Smiles paid her wages by his personal cheque, until such time as this was changed through the Family Court proceedings. 75 Mr Smiles, whilst visiting the Redfern premises, shortly after the commencement of her employment, had told her that he would be paying her wages and asked where she had lived before moving into the Redfern home. She gave him an address, which was the address of her parents at Aberdare. Shortly thereafter she received a letter from Mr Smiles' secretary enclosing a tax declaration form with a request to complete it and return it. The form contained the Aberdare address and described her as a personal assistant. After discussion with Mrs Smiles she made alterations to the form. Ms Robinson crossed out that address and substituted Mrs Smiles' Redfern address. She also crossed out the words "personal assistant" and wrote in "live-in nanny". Before returning the altered form, at Mrs Smiles suggestion, she took a photo copy of it. Mrs Smiles was clearly suspicious that her nanny might be involved in the giving of misleading information to the ATO by Mr Smiles. 76 Shortly thereafter, when delivering the boys to Parliament House to see their father and whilst parked in an illegal position, Ms Robinson was approached by Mr Smiles' secretary, who advised her that the declaration she had returned had been ruined through its having had coffee spilt upon it. She was requested to sign a new form. She did not see the whole form, only the part for her signature. The form was folded in such a way as prevented her from seeing the top portions of it. In the circumstances she hurriedly signed the form and drove off. Later she was concerned that she might have signed an incorrect form. She so advised Mrs Smiles who made repeated efforts to obtain a copy of the form that Ms Robinson had signed on that occasion. These efforts were unavailing. 77 The signing and obtaining of this latter form was the basis of the first charge of "incitement" brought against Mr Smiles. It was dismissed, in circumstances where the form itself was not available to be put into evidence. Of course, this may not have been the only reason for dismissal. However, in these proceedings during the course of the defendant's case, the form was obtained from the plaintiff's subpoenaed documents and tendered in evidence. The form (Exhibit "N") shows the correct Redfern address but Ms Robinson's occupation is, once again, shown as "personal assistant". Mr Smiles did not re-enter the witness box to give evidence in reply to explain the existence of this form and the use to which it was or was not put. 78 I shall return to these matters when discussing the alleged incorrect inclusion in Mr Smiles' 1988, 1989 and 1990 tax returns of claims for deductions of wages paid to Ms Tamblyn. 79 The events which I have been discussing occurred, for the most part, after the initial meeting between Mr Smiles and the defendant at Parliament House in December 1988. 80 It is impossible to arrive at a clear picture of what occurred between the two men at this first meeting. I think it was largely a social occasion in which the two men got to know each other over lunch. The upshot of it was that Mr Moon agreed to take over the work that Mrs Zlatevska had previously been doing for the plaintiff. I am unable to conclude that Mr Moon's retainer was any more extensive than that, despite the plaintiff's evidence to the effect that he wanted Mr Moon to take a "fatherly" approach to all his accounting matters. Mr Moon, I am satisfied, had seen the 1987 tax return which he would have received from Mrs Zlatevska. He had formed the view that it was a simple return consisting of wages, tax deducted at source, and the financial results of the operation of a small business. I think he told Mr Smiles that it was a simple return and that there would, in effect, be no problem his taking over the work of Dobra. It is possible that he was told that, consequent upon the separation of Mr and Mrs Smiles, the house at Mosman was sold or in course of sale and that the SMS business was being wound down. These would not have been matters of major concern at the time as there was, apparently, no immediate necessity to lodge Mr Smiles' 1988 tax return. 81 Either at that meeting or at a later meeting in February, I am satisfied, reference was made to Mr Smiles' "source documents", which he may have had in his parliamentary office at the time. Mr Moon would have been aware that the 1987 return was prepared from summaries provided by Mr Smiles and which were adequate for the purpose. Mr Smiles was not seeking any audit of his business nor, having regard to his extensive tertiary education and his position then as Deputy Treasurer of the State, would Mr Moon have felt that there was any particular need to verify information provided to him by conducting some sort of an audit through the source documents. I think, on balance, that it is likely that Mr Smiles told him the documents, which would have consisted of cheque butts, invoices, bank statements and the like were available for inspection but that Mr Moon, reasonably in my view, did not see any necessity to undertake such a task. 82 There is one curious aspect, however, of Mr Moon's evidence. Whilst in earlier evidence he seems to have been quite clear that he made a cursory inspection of Mr Smiles' cash book at either one or the other of those earlier meetings, he had achieved a firm view, in the present proceedings, that he had not seen the cash book until after the completion of the subsequent ATO audit. I think he is confused and mistaken in this although, from my observation of him, I think he genuinely held the view he expressed. I am satisfied that he did in fact glance through the cash book, as it was then being kept by Mr Smiles, for the purpose of observing its general format. It may be remembered that Mr Trumbull had advised Mr Smiles to keep a cash book with appropriate columns. I think that Mr Moon saw that the cash book was being kept in an orthodox and correct way, such that it could be used for the purpose of providing information in summary form to be included in an income tax return. Apart from that he was not interested in any particular entries. On a later occasion, after the audit, I am satisfied that he did look at the cash book to observe particular entries in the "secretarial expense" column, these entries having achieved prominence in the investigation. I have come to the conclusion that he has confused in his mind these two separate occasions. 83 Much has been made in the plaintiff's case of Mr Moon's failure to establish, at the outset, the extent of his retainer and also to record it in writing. I am unable to attach much significance to this. Nor do I think the question whether Mr Moon described himself as an "accountant" or a "tax agent" has any real importance, although a deal of time was spent on it in cross-examination and in the affidavit evidence. I consider that Mr Moon did not regard himself as doing accounting work for Mr Smiles because he was not required to produce for him financial statements such as profit and loss accounts or balance sheets. He accepted, however, quite properly, that he had the role of preparing appropriate tax returns, which would involve the giving of appropriate advice, if directly or indirectly required, and the seeking of any necessary clarification of information supplied by his client. It is convenient to state, at this stage, that I am quite satisfied that he was under no obligation to conduct an audit of Mr Smiles' financial affairs in the absence of a clear request to do so. This would have created expense, for which clear authorisation would have been required. Also, having regard to Mr Smiles' educational status, he would hardly have regarded it as appropriate to, as it were, cross-examine him to test the veracity of information that was being supplied. He was entitled, in my opinion, to rely upon information provided to him by Mr Smiles, subject to clarification of any areas of doubt. I add that this view is in accordance with the evidence of Mr Green, an expert witness called by the defendant. 84 The occasion for the preparation of Mr Smiles' 1988 tax return was hastened by a letter dated 1 May 1989 from the ATO to Mr Moon, as Mr Smiles' tax agent, pointing out that the final date for lodgement for 1988 return had passed and requiring that Mr Smiles furnish a return, within fourteen days, for the year ended 30 June 1988. The letter also enclosed a final notice for the furnishing of the return. 85 This notice provoked a response from Mr Smiles, who sent, by fax, to Mr Moon five documents containing information for the preparation of the return. There is no need to set out these documents in these reasons. They provided summaries of income and expenditure appropriate for inclusion in the return. 86 So far as I can gather from the evidence the defendant conducted a busy suburban accounting practice in which he employed qualified assistants. He did not personally concern himself with the task of preparing returns which could be regarded as simple and straight forward. He considered Mr Smiles' return to be one of this type. Such returns were placed in the hands of an assistant, who would prepare a sheet of queries, if thought appropriate. These queries would be referred to Mr Moon. If he could answer them without reference to the client he would do so, if it was necessary to talk to the client he would undertake that task rather than the assistant. It has been faintly argued that it was in some way negligent or improper of Mr Moon to delegate the preparation of Mr Smiles' return to an assistant. However, I think that Mr Moon was perfectly entitled to do so. Such a delegation was not inappropriate for a well run practice. It was clear that Mr Smiles was not expecting to pay anything but ordinary fees and could not reasonably require that his return received the attention, in all respects, of the principal of the firm. 87 Some queries were raised, relating to Mr Smiles' claims for motor vehicle expenses and the expenditure of his electoral allowance. These matters were referred to him and cleared up. The amount of $10,649.00 claimed for secretary and secretarial services was not the subject of any inquiry. It was acknowledged by Mr Smiles, in his evidence, that he did not bring to Mr Moon's attention the fact that the nannies were performing secretarial work. His case was, that, having fully explained these matters to Dobra and having obtained her imprimatur, he assumed that this information would have been passed on to Mr Moon and that he would have been fully aware of it. Having regard to my earlier findings, this claim is unsustainable. That being so, the question is whether Mr Moon and his assistant should have taken, at face value, the claim for these expenses, having regard to their description. Mr Moon, in my view, has both common sense and expert evidence, to which I will make later reference on his side when he asserts that there would have been no apparent need to query these expenses, nor, in effect, cross-examine Mr Smiles about their origin. The nature of the business was one that would reasonably incur such expenses. There would be no reason to doubt Mr Smiles' claim. 88 It appears that the return was duly prepared and lodged at the end of May 1989, just slightly outside the limit stipulated in the final notice. 89 Nothing appears to have occurred in the remainder of 1989 and throughout 1990 involving matters between Mr Smiles and the defendant. It appears that, throughout 1990 problems grew more severe between Mr and Mrs Smiles, particularly after the incident involving Lisa Robinson's employment declaration. On 28 June 1990 Mr Smiles wrote to his wife, indicating that he had only been able to afford continued payments for a live-in nanny since their separation in 1988 on the basis of his maintaining two jobs. He stated that he now regarded the concept of a full-time nanny "as a luxury neither of us can afford". Although it is not entirely clear, I feel that this attitude provoked a claim by Mrs Smiles in the Family Court for maintenance, which resulted, as I have already indicated, in her being provided directly with monies for the payment of a live-in nanny at Redfern and the cessation of Mr Smiles's direct payments to them. 90 It seems clear that towards the end of 1990, at least, the estrangement of Mr and Mrs Smiles had become acrimonious. Her evidence makes it clear that she believed that Mr Smiles had been engaged in improper taxation practices in relation to the employment of the young nannies and she resented their involvement, as she saw it, in these alleged practices. This may well have led to the involvement of the ATO in the matter of the deductibility of the payments to the nannies. I turn to that matter now. 91 On or about 5 November 1990 the following letter was received by its addressee:- "THE OFFICER IN CHARGE INVESTIGATIONS BRANCH AUSTRALIAN TAX OFFICE BANKSTOWN. 5TH NOV. 1990 DEAR SIR, RE PHILLIP MURRAY SMILES MOSMAN ROAD, MOSMAN, N.S.W. 2088 IT HAS BEEN BROUGHT TO MY ATTENTION THAT THE ABOVE NAMED TAXPAYER HAS BEEN MAKING FALSE CLAIMS TO THE DEPARTMENT REGARDING PEOPLE EMPLOYED BY HIM AS LIVE-IN NANNIES, IN SO MUCH THAT HE HAS BEEN CLAIMING THEM TO BE EMPLOYED BY HIS BUSINESS "SMILES MANAGEMENT SERVICES" AND MAKING THE PEOPLE USE THE HOME ADDRESS INSTEAD OF THE ADDRESS WHERE THEY WERE ACTUALLY LIVING. YOU WILL I THINK BE AWARE THAT THIS GENTLEMAN IS A MEMBER OF N.S.W. STATE PARLIAMENT AND SHOULD KNOW BETTER. I AM NOT PREPARED TO SIGN THIS LETTER BECAUSE I DO NOT TRUST YOUR SECURITY BUT THE FOLLOWING PEOPLE WERE EMPLOYED BY THE MAN AND I AM ONE OF THESE:- NICOLE TAMBLYN MARCH 1988 TO SEPT 1989 KAREN WHITE JANRY 1987 TO SEPT 1987 LISA ROBINSON JANRY 1990 TO JULY 1990 YOURS SINCERELY ANON" 92 I am satisfied that this letter initiated an investigation which was conducted by the audit group within the Australian Taxation Office at Chatswood. It was conducted by James Walton, a taxation auditor employed in that office. His evidence, which is to be found comprised in the documents in the folder which is Exhibit 54, indicates that he commenced his investigation in early January 1991 by obtaining a computer search to determine what tax returns had been lodged by Mr Smiles. It was found that the 1989 and 1990 returns were outstanding. He obtained copies of the 1987 and 1988 returns from the ATO files. 93 On 14 January 1991 Mr Walton contacted Mr Smiles by telephone. He made a file note of the conversation. He followed this practice in relation to all significant conversations that occurred during the course of his investigation. This appears from the collection of documents which constitute Exhibit 54. It should be noted that these documents were admitted into evidence in the absence of oral testimony from Mr Walton, on the basis that he was "unavailable" as a result of legislative provisions. This question has been dealt with in a separate judgment. These file notes are significant and lengthy documents. I shall need to make reference to them in the course of these reasons but it is not possible to set them out in full. They are not, in all respects, contemporaneous records of the conversations but were, I am satisfied, for the most part, brought into existence as soon as reasonably practicable after the conversations occurred. Obviously, they constitute evidence which is significantly more reliable than unaided memory, which is, for the most part, relied upon by other witnesses in the case. 94 Mr Walton not only made these file notes but also gave evidence in the Local Court and District Court proceedings, the transcripts of which are included in this exhibit. 95 The file note of 14 January 1991 and Mr Walton's statement based upon it indicate that he spoke to Mr Smiles and advised him that he was calling for two reasons, firstly that he had not lodged income tax returns for the 1989 and 1990 taxation years and also that he was seeking records and substantiation of certain matters of deduction claimed in the returns for 1987 and 1988. These included the claims for secretary and secretarial services. Wage books and tax stamp receipts were also sought. He indicated that he wanted the outstanding returns and records at the same time and that he would call again the following week to organise a date "for the audit". He noted that Mr Smiles said he would need two or three weeks to get everything together and that his accountant was very busy and also that the records were still at the Family Court, he having just gone through a messy divorce. He also stated that he was no longer in business as a consultant under the name Smiles Management Services which had only been a part-time business. 96 There appears to be no dispute that a conversation along these lines took place on that date. It seems quite clear that Mr Walton had not made any approach to Mr Moon before speaking to the plaintiff, which was an unusual procedure but was probably reflective of the nature of the investigations he was undertaking. It may also be noted that there had been, apparently, no contact between Mr Smiles and Mr Moon since the lodging of the 1988 tax return in May 1989, despite the fact the final date for the lodging of the 1989 return was long past and that for the 1990 return must surely have been imminent. 97 Mr Walton made a follow-up call on 29 January. The file note indicates that Mr Smiles told him that he would be interstate the following week, that the major part of the records were ready and all would be ready from the following Monday but that it would take a further one to two weeks for the returns to be ready. Mr Walton said he would make contact on the following Monday. 98 There is a dispute between the plaintiff and the defendant as to whether the plaintiff made any contact with the defendant upon receiving these communications from Mr Walton. As neither made any file notes, this conflict is difficult to resolve. Mr Moon does not dispute that at a later stage, in April, he became aware that the ATO was seeking substantiation of Mr Smiles' returns, which at that stage included the returns for 1989 and 1990, which had by then been filed. I have no doubt that at some stage there was a conversation between the two men whereby it was agreed that, because of the cost involved, Mr Smiles and his staff would undertake compliance with the substantiation requirements of the ATO. Mr Smiles, in effect, asserts that a conversation along these lines occurred in January in circumstances where, in a state of some concern, he notified Mr Moon of the ATO requirements. In ordinary circumstances, I would consider it probable that he would have done so. However, there had been no contact, apparently, with Mr Moon since the middle of 1989 and, as I have already noted, Mr Smiles had some experience of dealing directly with the ATO in relation to inquiries about his returns. I consider that Mr Smiles bears the onus of satisfying me that he made contact with Mr Moon at this time. In all the circumstances, although the matter is fairly finely balanced, I am not persuaded that he did. 99 I am fortified in this view because, in my opinion, Mr Smiles would have been well aware of the fragility of his position in regard to the deductibility of these "secretarial" expenses. Indeed, as already indicated, I feel comfortably satisfied that he, having determined upon the course of appropriating as business deductions the salaries paid to these nannies, did not inform his accountant of what he was doing, let alone seek advice as to its correctness or propriety. Moreover, he was and is a person not lacking in self-confidence. I consider that, he saw himself as able to deal satisfactorily with the ATO inquiries, something which he had obviously done in the past. 100 In this context, Mr Smiles does not claim that he told the defendant of his use of the nannies for the performance of secretarial services. He assumed that Mrs Zlatevska would have passed this information on to him. I have already discussed this matter. However, Mr Smiles appears also to assert that he held the belief that Mr Moon would necessarily have been aware of the source of these secretarial services as a result of making a survey or study of Mr Smiles' "source documents" and his cash book, so far as it was then written up. Indeed, it appears to be claimed that Mr Moon's failure to familiarise himself with this documentary material was a breach of duty leading, ultimately, to the damage for which the plaintiff seeks financial redress in these proceedings. I can see nothing in this assertion. Mr Moon, without further information being provided to him by the plaintiff, could not have known that the persons described as providing secretarial services in the cash book, were in fact employed nannies. He had not met them and their names would have meant nothing to him. The cheque butts relating to payments to them have not been put in evidence. I assume, however, that there would have been no note upon them to the effect that they were payments of "nanny wages". In fact it is not unlikely that they were endorsed with the word "secretarial" or something similar. Consequently the "source of material" would have provided no information to Mr Moon, any more than it did to Mrs Zlatevska of what the plaintiff was doing in relation to these claimed deductions. 101 I have, then, formed the view, on the balance of probabilities, that Mr Smiles, after this contact from Mr Walton, decided to seek the defendant's aid only in respect of the preparation of the outstanding taxation returns. 102 It is clear that the plaintiff was under pressure at this time. Apparently his financial records had been subpoenaed for the proceedings in the Family Court and were still with the Court. It was necessary that he obtain them not only for the purpose of answering Mr Walton's queries but also for the preparation of the material he would need to send to the defendant for the urgent preparation of his 1989 and 1990 returns. Moreover, at about this stage he became aware of the proposal that the seat of Mosman be abolished. This required urgent work for him at the political level, some details of which are referred to in his affidavit and need not be repeated here. He says that he mentioned these matters in a telephone conversation with Mr Moon relating to Mr Walton's requests to him. I am satisfied that Mr Walton's intervention did come at an inopportune time for Mr Smiles and this would have been in his mind. I am not persuaded, however, as indicated, that he passed these concerns on to the defendant. 103 Mr Smiles had the twin problems after 14 January 1991 of organising the assembling of records relating to the two earlier returns and of preparing appropriate information to be conveyed to the defendant for the preparation of the two later returns. As he had not written up his cash book for over two years and as his financial records had been sent to the Family Court this was, no doubt, a somewhat daunting task. He obtained the records from the Family Court on 28 January 1991. They were said to be in a box in a mess. There is no evidence as to what order they were in when they were sent to the Court nor as to what, in fact, was sent. I can only assume that they consisted of cheque butts, invoices, receipts, bank statements and the like being, in effect, the materials which Mr Smiles asserts he assumed were inspected by the defendant for the preparation of the 1988 return and similar materials which had accumulated since that time. 104 Mr Smiles' evidence is to the effect that upon receiving this box of confused documents, he set about, late at night on 28 January to collate them and use them for the purpose of writing up the cash book which had been in a stagnant state for two years. It is plain, of course, that over that period he had sought no assistance from the defendant in relation to his accounting procedures. I am satisfied that in late 1988 or early 1989 Mr Moon had observed the format of the cash book and the manner in which it was written up, had told Mr Smiles that it was satisfactory and that he should continue to keep his records in that way. Mr Smiles had failed to do so, with the result that his 1989 and 1990 tax returns were significantly late and he was faced with the urgent need to rectify the situation. 105 It is his case that he worked late into the night entering up the cash book in what has been described as a "robotic" fashion, simply recording names, dates and amounts from cheque butts without being fully aware of what he was doing. He did not complete the task. The next day he was offered assistance by Mrs Elizabeth Lawrie, who had been doing voluntary work in his electoral office. She had considerable book keeping experience resulting from many years working in a company with her husband. She volunteered to complete the writing-up of the cash book and, thereafter, was engaged in the preparation of material to be sent to the defendant and to the ATO. 106 It is clear that the plaintiff gratefully accepted her offer of assistance. It is, however, unclear as to what information and instructions he gave her. In this regard the evidence is surprisingly general in form. He asked her to continue the writing-up of the cash book and to check what he had done. She was also to liaise with the defendant if she needed assistance. The plaintiff seeks to give the impression in his evidence that he passed over everything in relation to his dealings with the defendant and with the ATO to Mrs Lawrie and the defendant, whilst he got on with dealing with the demands of his political life. However, there were two areas of concern in relation to the writing-up of the cash book, namely that "secretarial" payments were made to nannies allegedly performing a dual role and that the payments to Nicole Tamblyn for secretarial services continued well beyond the time when such services could have been performed. 107 In relation to the first matter the evidence does not indicate that Mr Smiles provided any explanation of this alleged dual role to Mrs Lawrie. It appears that she later became aware of it as a result of the audit. In fact there was some discussion between her and an officer of the DPP, as to the need for the cash book to show some apportionment of the wages, if some part of them was being claimed as a deduction for secretarial work. It is clear that she had received no instructions along these lines from Mr Smiles. Indeed, such instructions would scarcely have been appropriate, insofar as he was claiming the whole of the nannies' cash salary as a deductible "secretarial" expense and not simply some proportion of it. 108 As to the second, it is plain that Mrs Lawrie whom I accept as a conscientious and competent bookkeeper, was told nothing by Mr Smiles to cast doubt on the accuracy or propriety of his listing payments to Nicole Tamblyn in the column "secretarial", after Ms Tamblyn had ceased to work in the Mosman home. I can only assume that he did not provide her with this information, or with information as to when the SMS business ceased to operate. He could hardly have expected her to check what he had done unless he had given her a full and satisfactory explanation of these matters. Mrs Lawrie gave evidence orally and by affidavit. Her evidence gave no indication that she had been provided with this sort of information by Mr Smiles. Indeed, on 30 January 1992, after prosecution proceedings had been commenced, following upon the ATO audit, she wrote to Mr Smiles a letter (Exhibit 33) in which she indicated that she had "taken every care, but no responsibility" in respect of her duties and that "my work has always been under your instructions, and for your perusal and approval." 109 As I have decided that Mr Smiles' evidence in relation to the alleged error in his writing-up in the cash book of the post November 1988 payments to Nicole Tamblyn in the "secretarial" column is quite unacceptable, it is convenient to deal with that matter now. In doing so it will be necessary to refer to some matters which are out of chronological sequence. It is Mr Smiles' position that the error resulted from fatigue and lack of attention and that he became aware of it only when it was pointed out to him by Mr Walton in a final interview taking place in his parliamentary office on 29 August 1991. On this occasion, he says that he both experienced and expressed great surprise when the error was pointed out to him and immediately conceded that he "owed tax" in respect of the mistaken deductions. It is clear that the ATO officers and subsequently officers of the DPP did not share the view that the entries were merely erroneous. 110 It was Mr Smiles' case that the entries were transcribed, all in the one sitting, from the relevant cheque butts. The cheque butts have not been produced in evidence. Accordingly I do not know what appeared on them. Seeing he transcribed the payments into the "secretarial" column it is at least highly possible that the payments were so described on the cheque butts themselves. If that be so, and there is no evidence to the contrary, then the writing of each cheque butt, fortnight by fortnight from the end of November 1988 until the end of August 1989 was also done in error. This is, of course, a ridiculous proposition. At the time of the writing of the relevant cheques and their corresponding butts, Mr Smiles would have been well aware that Ms Tamblyn was performing no duties which could remotely be described as "secretarial". If, on the other hand, the butts contained only the name of the payee and the amount, then, one is being asked to accept that Mr Smiles could have made the significantly large number of entries involved for the relevant period without once registering in his mind that, during this period, Ms Tamblyn was no longer living at the Mosman home but was, in fact, performing duties as a nanny and domestic help for his wife in other premises. Mr Smiles is a highly intelligent and focused person. That he could make such a mistake simply beggars belief. 111 Quite apart from these considerations, the evidence makes it clear that Mr Smiles must have observed a number of other documents which came into existence relating to the relevant payments to Ms Tamblyn. 112 Exhibit 21 is a set of Approved Substantiation Schedules prepared by Mrs Lawrie with necessary input from Mr Smiles, for provision to the ATO in the course of the audit. The Schedule for the 1988-1989 year has an introductory page explaining the "secretarial/secretarial services" referred to in the Schedule. These include "Expenditure incurred for employment of personal assistant for telephone answering, client liaison, and general office duties approximately 9.00am to 3.00pm daily". After November 1988 there are listed sixteen separate payments to N. Tamblyn of amounts of $420.00 until 15 April 1989 when the payments increased to $440.00. 113 Exhibit 21 also includes an introductory sheet for the 1989-1990 year. It refers to "secretarial/personal assistant/research services during intense local political campaign". The accompanying Schedule lists two payments to N. Tamblyn, one on 16 August 1989 for $440.00 and one on 31 August 1989 for $698.50 (which, presumably, included some amount for holiday pay on termination of her employment). The evidence indicates that, even if Mrs Lawrie performed the function of transcribing these entries from the cash book to the Substantiation Schedules, Mr Smiles was responsible for the written description on the introductory sheet. However busy he may have been in relation to other matters, he cannot have failed, in my view, to have appreciated that he was asserting, in this formal document to be presented to the ATO, that Ms Tamblyn had been employed by him in the relevant period on a "secretarial/personal assistant" basis, which was obviously untrue. It may be noted that the very next entry on the Schedule is for an amount of $220.00 paid to M.A. Adams. This was an error which was brought to Mr Smiles' attention by Mrs Lawrie and was corrected in an appropriate note to Mr Walton. It is extremely difficult to accept that he could have failed to note the even more significant errors relating to the payments to Ms Tamblyn, which appear directly and clearly above in the Schedule. 114 The document correcting the M.A. Adams clerical error is an amended introductory sheet (Exhibit 22). It makes reference to the "M.A. Adams clerical error…should have been included in personal drawings" but continues to describe the N. Tamblyn payments as being for "secretarial/personal assistant/researcher services". 115 Furthermore, another formal ATO document, being the "Summary Sheet – Employer's Copy" (Exhibit 23) in respect of the 1988-1989 tax year shows the employer as being Phillip Murray Smiles trading as Smiles Management Services Marketing/Management Consultancy. It contains as part of the summary of wages record for that year, wages paid to Nicole Maree Tamblyn from 1/7/88 to 30/6/89 of what appears to be $13,176.00 with tax deductions of $2,256.80. The document is signed by Mr Smiles and dated 30/6/89. Moreover, in the Summary Sheets provided to the defendant for the preparation of Mr Smiles' tax returns for the 1989 year, similar incorrect claims are made for wages paid to Ms Tamblyn. 116 Furthermore, although Mr Smiles claims in evidence that he was completely surprised when Mr Walton, on 28 August 1991, drew his attention to these erroneous Tamblyn entries and immediately conceded that they were a mistake and had been simply entered up as a matter of habit, Mr Walton's file note suggests a different version. According to his recollection, supported by the note, Mr Smiles told him that Ms Tamblyn had in fact worked for the consultancy after November 1988 by doing a variety of things, running around for him and coming to Parliament House and his Electoral Office. Moreover, the following day he contacted Mr Walton by telephone and had a conversation of which Mr Walton made a note. He discussed, inter alia, what Ms Tamblyn had done for him after November 1988. According to Mr Walton's note Mr Smiles averred that she performed duties such a storing files at Brookvale and also postings and that these matters occupied some two months, whilst the last four months were "private". Ms Tamblyn's evidence was to the contrary. She did not even know where Brookvale was. Accordingly, it seems quite clear that Mr Smiles did not make any immediate and outright concession of error, as he claims. He indeed sought to justify, in what appears to be an evasive way, at least portion of the payments in the period as being valid deductions. 117 I have already made reference to the events concerning the Employment Declaration of Lisa Robinson and also Karen White, during the period that she was employed by Mrs Smiles at Redfern. In my view, these incidents provide further evidence that Mr Smiles was hoping to obtain an improper taxation advantage by claiming the wages paid to these young women in 1989 as being taxation deductions. No claim was in fact made. The wages declarations were not provided in accordance with his expressed wishes and in terms of the documents proffered for signature. Nevertheless, this evidence, in my view, sufficiently indicates an on-going intention to make false claims for deductions for wages paid by him or from his business account in 1989. It can be taken into account when assessing whether the entries made for Nicole Tamblyn in the cash book and the consequent claims for deductions were in fact instances of genuine error on Mr Smiles part. 118 There is also some rather confused evidence in the case as to an occasion when Mr Smiles gave a direction to Mrs Lawrie, whilst speaking on the phone to the Premier, to write-up "the girls" in the cash book as "personal drawings". Mrs Lawrie did not, in fact, write any of the entries relating to Ms Tamblyn. I am satisfied that the conversation could not have related to those entries nor that they can be attributed, in some way, to some error on Mrs Lawrie's part. There is some suggestion in the evidence that the conversation related only to Lisa Robinson entries. This may be so. Lisa Robinson had refused to co-operate in respect of her employment declaration, with the result that Mr Smiles may well have decided not to make any claim for deductions in respect of her wages. 119 After careful consideration of all of this evidence and, having regard to the standard of proof required, I have come to the conclusion that I must find that Mr Smiles made these entries in the cash book relating to Nicole Tamblyn intending to create a misleading picture that she was involved in and paid for secretarial duties on his behalf or on behalf of his business after November 1988 and that his claims, in his tax returns, for deductions in respect of those wages were knowingly false. 120 After Mrs Lawrie had completed Mr Smiles unfinished task of entering up the cash book, it would have been possible to prepare materials for submission to the defendant for the preparation of the outstanding tax returns, required by Mr Walton. Mr Smiles had advised Mr Walton on 29 January 1991, as appears from Mr Walton's statement, that it would then take two weeks to get the returns together. In relation to the substantiation request Mr Smiles had advised Mr Walton that some of the records were hard to find. I am satisfied that the defendant was not advised of any of these conversations between Mr Smiles and Mr Walton. It may be that some time in February 1991 Mr Moon or his secretary made contact with Mr Smiles regarding the lodgement of the outstanding returns. It would not be surprising if this were so, but the evidence is not clear. I am satisfied, however, that in this period Mr Smiles and Mrs Lawrie were working on the details for the 1989-1990 tax return. This is evidenced by the document Exhibit 18 which, although largely prepared in Mrs Lawrie's handwriting, contains a written addition by Mr Smiles on the sheet devoted to "home office outlays July 1989/June 1990". Mr Smiles has written "represents total expenditure for unit – 2 bedrooms – 1 used as home office". This obviously refers to the intended claim by Mr Smiles that he had converted one of the bedrooms in the unit he had purchased after the sale of the Mosman home, for the purpose of use as a home office. This claim was in fact made in the relevant tax returns and does not appear to have been the subject of any dispute with the ATO, as a result of the audit. 121 On 4 February 1991 a fax was sent to the defendant which enclosed Summary Schedules for the purpose of the 1989-1990 tax return. This included the reference to expenditure for home office outlays in that period and also made a claim for $1,521.30 for "secretary/secrtl services". Other Schedules were included which were appropriate for consideration and use in the preparation of the tax return for that financial year. These Summary Schedules are in evidence as Exhibit M to Mr Moon's affidavit of 15 June 2001. 122 It appears to be part of Mr Smiles' case that he expected that these Schedules would be considered by the defendant in conjunction with a full examination of his source material and records. He deposes that he evinced surprise and alarm to Mrs Lawrie, when he later discovered that this was not so. I do not see any relevance in this assertion. It is clear that if records had been examined by Mr Moon or his assistants they would not have indicated that the claims for "secretarial assistance" were in any way suspect. 123 The evidence does not make clear why the material for the 1990 return was forwarded to the defendant before the material for the 1989 return. Ideally, Mr Moon and his staff would have been in a better position to consider the returns if the material had been provided in proper chronological sequence. However, there was obviously a degree of urgency in relation to the preparation, signing and lodging of the return, which reasonably required that it be attended to immediately, although out of sequence. The assistant who dealt with the preparation of the return drew attention to the fact by enquiring whether the firm was also to prepare the 1989 return, the material for which had not yet arrived. Insofar as a complaint appears to have been made, in these proceedings, on behalf of the plaintiff that the returns were dealt with out of sequence, I am satisfied that it has no basis. The plaintiff himself, apparently, chose to produce and forward to the defendant the material, in this way. 124 The material provided indicated, firstly, that there was a home office in Mr Smiles new residence and that secretarial expenses were being claimed under the heading of "P.M. Smiles MP." In those circumstances, even given the knowledge that SMS had ceased trading, there was, in my view, nothing to cast doubt upon the propriety of the claim for secretarial expenses in what was a fairly small amount. It is, of course, the plaintiff's assertion that an inquiry should have been made and that would have revealed his "error" in relation to recording Nicole Tamblyn as a secretary. I do not think there was any "error" for the reasons already given. In those circumstances, any attempt to determine what Mr Smiles' response might have been to such an inquiry would be, in my view, merely conjectural. The view accords with the expert evidence of Mr Green to which I shall refer later. 125 This tax return was prepared in the defendant's firm in the manner that I have already indicated. It was a small return, referred to an assistant. The assistant raised some inquiries which, in my view, were dealt with appropriately in the circumstances. They did not relate to the secretarial expenses. That was unnecessary. This return was provided to Mr Smiles for signature, together with the 1990 tax return which had then been prepared, at a meeting at Parliament House on 12 March 1991. 126 The material for the 1989 return, in the customary form of Summaries was sent by Mr Smiles to the defendant, by fax, on 5 March 1991. That material is Exhibit M to Mr Moon's affidavit of 15 June 2001. Before it was received there had been further meetings between Mr Smiles and Mr Walton relating to the substantiation material requested in respect of the earlier returns. Although evidence of a very general kind is given by Mr Smiles and Mrs Lawrie, as to contacts being made between them and the defendant in this period, these are not supported by any notes or other documentary material. It is particularly noteworthy, in my view, that the evidence provides no detail even as to any type of inquiry directed to Mr Moon in this period. I am not persuaded that there was any such contact. The thrust of the evidence, in my view, establishes that Mr Smiles and also Mrs Lawrie were obtaining all the information they needed as to what documents they should produce to Mr Walton, from Mr Walton himself. It appears that there was a misunderstanding as to the format in which the information was to be provided, Mrs Lawrie having not used the ATO's official forms. It seems that Mr Walton may have failed to provide them in the first place but later remedied this omission. 127 On 12 February 1991 the plaintiff wrote an elaborate letter to Mr Walton providing information relating to his 1987-1988 income tax return in response to what was described as a recent telephone call from Mr Walton. The details were provided of work done by SMS for the Double Bay Chamber of Commence in that year. The nature of the services provided was described with some particularity and an explanation given as to payment of sub-contractors. An explanation was given as to the item "rent" relating to the home office at 28 Lennox Street, Mosman. I am satisfied that Mr Smiles undertook this explanation without reference to his accountant, it not being suggested anywhere that he did. Reference is made to difficulties in obtaining "all substantiating documentation and efforts to obtain duplicates". The letter has all the appearance of one being prepared by Mr Smiles without the need for professional help. In fact the letter was handed to Mr Walton at a meeting between himself and the plaintiff at the plaintiff's parliamentary offices on 21 February 1991. I am satisfied that Mr Moon knew nothing of this letter and was not asked to assist in relation to it. 128 There was a meeting between Mr Walton, Mr Smiles and Mrs Lawrie at the parliamentary office on 21 February 1991. Some documents in relation to the 1988 financial year were provided together with the relevant cash book. It appears that there was no wages book provided. Indeed the evidence does not make clear whether there ever was in fact such a book. In response to Mr Walton's request for substantiation of secretarial payments, Mr Smiles handed to him, as part of a composite document, headed "1987/1988 tax year claim substantiation", a page headed Secretarial/Salaries/Sub-contracting (totalling $10,649.00). This page related to "Smiles Management Services" and commenced with the following statement:- "Please note that 4 young ladies undertook secretarial services generally between 9.00am to 3.30pm Monday to Friday. Also several ladies were engaged as sub-contractors for word processing services being the business service they offered to the general public." 129 The first group of four young ladies were K. White, R. Cook, R. White and N. Tamblyn. The amounts paid to them by way of salary were tabulated in respect of each of them in accordance with date of payment and amount paid. The sub-contractors were separately described on the same page. Reference was made to the records having been returned in a mess from the Family Court together with a statement "Wage Book withdrawn at Family Law Court when all records subpoenaed for Divorce Case". I should add that the whole of this document (Exhibit "16") is directed to the areas of substantiation, obviously requested by Mr Walton. These included, for instance, motor vehicle expenses, advertising and promotions, rent expenditure and printing and stationary, together with some supporting invoices and receipts. It appears to have been a carefully prepared document and, on the evidence, would appear to be the work largely of Mrs Lawrie, working from the cash book and other relevant documents. It is to be noted that there is no reference to the "secretaries" also being employed as "nannies" performing domestic duties. Having observed Mrs Lawrie in the witness box, I feel confident that had this allegedly dual role been explained to her she would have wished to include some reference to it in this document. I have come to the conclusion that Mr Smiles, being unaware of the investigations then conducted by the ATO pursuant to the anonymous letter of the previous November, preferred to keep this to himself. 130 The Summaries sent by fax to the defendant on 5 march 1991 showed expenditure on "secretary/secretarial services" in the amount of $15,222.00 for SMS and an amount of $1,320.00 for P.M. Smiles MP. There was no indication of any allegedly dual role of secretary/nannies. There had been an increase in the gross earnings of SMS as disclosed that year. I am satisfied that there was nothing, in the absence of any suspicion, to suggest that the claim for these expenses was other than genuine or that it needed any further investigation. There was nothing, reasonably to indicate that the tax agent should not certify to the correctness of a return containing these claims for deductions. In so saying, I bear in mind what appears in the expert evidence in the case. It is more convenient, however, to deal with this separately later in these reasons. Again, it would, in my view, be merely conjectural to seek to determine what response the plaintiff might have made to the defendant had the defendant raised any query about these expenses. I am far from persuaded that Mr Smiles would have revealed that the young women were, in fact, employed as nannies in the household. 131 I should say, at this stage, that the evidence establishes that whilst Mr Walton was in contact with Mr Smiles during this period, he was also involved in investigating the circumstances of the employment of the young women from other sources. On 6 March 1991 he had a substantial telephone conversation with Mrs Smiles in relation to the young women, their duties as nannies and the payments made to them. It will be necessary to refer, in a different context, to Mr Walton's gathering of information and the nature of that information. It is more convenient, now, to recount my findings in relation to his dealings with the plaintiff and the defendant. 132 On 8 March 1991, I am satisfied, Mr Walton made his first direct approach to Mr Moon as tax agent for the plaintiff. The contact was by telephone. He made, as was customary, a file note of the conversation. It was to the effect that rang in order to check the progress of Mr Smiles' income tax returns for the 1989 and 1990 years. He was told that they were incomplete but that the defendant was working on them and that they should be ready within the next week or two. Mr Walton said that he would like to pick them up on Friday 15 March. Mr Moon responded by saying that he would be seeing Mr Smiles at dinner on Tuesday when he would show him the draft and that he would have them available on the Friday. 133 The defendant and the plaintiff did in fact meet for dinner at Parliament House. The returns had been duly prepared in accordance with the information which had been provided in the form of summaries, as already indicated. They were signed by Mr Smiles. Later the appropriate certificate was completed by Mr Moon. They were not picked up by Mr Walton that Friday, as he had left on a period of leave. However, they were handed over to a representative of the ATO at Mr Moon's office, within that period. They were available for consideration by Mr Walton when he returned from leave. 134 Mr Moon did not tell Mr Smiles that he had had the conversation with Mr Walton on 8 March 1991 or that the ATO were to pick up Mr Smiles' 1989 and 1990 tax returns directly from his office. This was unusual conduct on the part of the ATO and might well have been reported to Mr Smiles. However, I am prepared to accept that, at least at that stage, Mr Moon, who had had no previous experience of a high profile or Restricted Access client, thought that this was an ATO procedure applicable to such tax payers. I shall return to this matter later when considering the claims made against Mr Moon for breach of retainer and professional negligence and the expert evidence. 135 On 10 April 1991, Mr Walton, having, apparently, considered the returns and other material then available to him telephoned Mr Moon. Again, he made a note of the telephone conversation which, in any event, does not seem to be the subject of any dispute. He told Mr Moon that there were some areas of dispute in relation to the 1988 financial year, there being no wages book and no original substantiation of the claim for secretarial salaries shown in the cash book. The defendant indicated that he would not be able to answer the queries but that he would write them down and hand them on to Mr Smiles. Mr Walton then indicated that there were other areas to be discussed. These included the areas of motor vehicle expenses, rent, printing and stationary and advertising. He also indicated that he needed the records for the 1987, 1989 and 1990 financial years and would be issuing a letter of request in this regard. Mr Moon again indicated it would be necessary for him to talk to Mr Smiles about getting the records for those years and that he would get Phillip to call him. I am satisfied that Mr Walton did not advise Mr Moon of the previous conversations with Mr Smiles and Mrs Lawrie and of the substantiation procedures that were already being engaged in. Of course, he may well have assumed that Mr Smiles had already told Mr Moon about this, which I have found not to be the case. 136 As indicated, Mr Walton sent a letter dated the same day to Mr Smiles, care of Mr Moon. This letter was accompanied by appropriate blank Substantiation Summary documents and cross-reference forms together with written instructions on how the Schedules were to be completed. There was also a booklet on the substantiation of motor vehicle expenses and on the substantiation process in general. The letter has achieved some significance in the case and I set out now the relevant portions of it. It was addressed to Mr Smiles and read as follows:- "Dear Sir, SUBSTANTIATION OF CLAIMS In your income tax return for the years ended 30 June 1987, 30 June 1989, and 30 June 1990, you made claims for deductions for which the law requires you to retain documentary evidence. It should be noted that the abovenamed officer currently holds the documentary evidence for the substantiation of some of the claims for deductions in the tax return for the year ended 30 June 1988. Our purpose in writing to you now is to request that you forward to us the documentation so that we can review your claims. By doing this we are looking to ensure that you pay the correct amount of tax. To assist you in this request, our requirements have been set out in the form of a check list which will help to ensure that all necessary information is provided and that the documents you produce to substantiate your claims contain sufficient information. An information guide is also enclosed to help you in completing these forms. It is suggested that you carefully read the guide before you start work on the forms. In your return for the year ended 30 June 1987 you specifically claimed for the following deductions - Advertising $3,144.00 Accountancy/sub-cont. $2,586.00 Gifts to clients $ 278.00 Motor vehicles $4,574.00 Petty cash $1,492.00 Rent/repair/office $1,311.00 Wages/Secretarial $7,974.00 Substantiation is currently held for year ended 30 June 1988. In your return for the year ended 30 June 1989 you specifically claimed for the following deductions - Accountancy/sub-cont. $ 5,668.00 Advertising $ 1,626.00 Donations $ 2,195.00 Motor Vehicle $ 3,785.00 Rent $ 3,434.00 Secretarial & sec. Services $15,222.00 Stationary & office sund. $ 4,175.00 Travelling expenses $ 3,781.00 In your return for the year ended 30 June 1990 you specifically claimed for the following deductions - Work related deductions $30,350.00