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 (There followed a list of instructions as to the filling-out of the Substantiation Schedules and an indication that they should be returned to Mr Walton's office by 10 May 1991. The letter continued by indicating that there were substantial penalties for the making of false or misleading statements in a return or in a letter to the ATO and that where the tax payer thinks this may have occurred, an explanation should be provided of "the factors that lead to the making of the statement". Such an explanation could be taken into account in determining "the extent to which any penalties may apply." The letter ended with the admonition that claims might be disallowed if there was a failure to respond to the request. The letter was over the signature of the Deputy Commissioner of Taxation.) 137 I am satisfied that Mr Moon forwarded this letter to Mr Smiles. It is to be noted that the first paragraph indicates that some substantiation had occurred in respect of the 1988 tax year and that, later, it is indicated that substantiation was currently held for that year. A careful reading of the letter would have indicated to the defendant that there had in fact been substantiation procedures in train in respect of at least that year of income. When he was taken to these matters in his oral evidence, he expressed surprise and asserted that he was confident that he had been totally unaware of these procedures and that he would necessarily have taken account of the fact of their occurrence at the time of the preparation and forwarding of the 1989 and 1990 tax returns. In other words, he would have been particularly alert in taking steps to ensure that the returns were in accordance with documents which might be called for in substantiation procedures. Because he had not done so, he was confident that he had not focused upon the relevant portions of the letter of 10 April 1991. 138 It is difficult to evaluate the significance of these facts. In the first place, having closely observed Mr Moon when he was being cross-examined, I formed the view that he was, in fact, genuinely surprised when these aspects of the letter were brought to his attention. I am also satisfied that when he discussed the letter with Mr Smiles, shortly after its receipt, Mr Smiles did not then bring to his attention that substantiation procedures had already been in train and that he had supplied material relating to the 1988 return. I am also satisfied that Mr Walton had not mentioned the matter in the telephone conversation nor had Mr Smiles, as I have already found, brought the matter to his attention in any way at an earlier time. The fact remains, of course, that a proper reading of the letter should have revealed to Mr Moon the existence of the substantiation procedures already in train in relation to the 1988 return. However, by this time, the 1989 and 1990 returns had already been furnished to the ATO. If he had raised any queries with Mr Smiles as to what had occurred in the 1988 substantiation, he would not, in my opinion, have been told anything to cause him concern. 139 Like the plaintiff, Mr Moon spent a number of days in the witness box. He was by no means a perfect witness. His evidence was at times confused and unfocused. He was by no means as quick thinking as Mr Smiles. However, he readily enough gave answers against his interest, without prevarication, to which I shall make reference later in these reasons. Having regard to the imperfections of his recollection over the long period of time involved and to the inevitable processes of reconstruction in some areas I felt that, generally speaking, his evidence could be regarded as reliable and that he was genuinely endeavouring to be accurate and truthful. 140 There are numerous conversations between the plaintiff and the defendant after the receipt of the letter of 10 April 1991. There is, in many instances, a significant lack of correspondence between their accounts of these conversations, both in their affidavits and their oral evidence. As I have indicated, there are no written notes of these conversations and I can, in reaching a conclusion as to what was said be guided only by my general view of their reliability and also of the probabilities arising from the circumstances in which the conversations took place. It is, no doubt, a necessary feature of them that each participant will remember those aspects of the conversation which resonated with him. It is not unreasonable, in my view, in such circumstances, to see relevant conversations as being, in many respects, a composite of the recollections of the participants. 141 It is clear that soon after the receipt by the two men of the letter of 10 April 1991, there was a telephone conversation between them. All I am prepared to find in relation to that conversation is that agreement was reached between them that, because of the potential cost involved, the plaintiff would undertake the substantiation procedures himself. I am satisfied that the defendant told the plaintiff that if he undertook the work it would cost the plaintiff "an arm and a leg". This seems to be something of which the defendant is particularly sure. I accept that it was said. Whether, in the circumstances, the defendant should have insisted upon participating in these procedures or should have given further advice, is a matter which I will consider later. For the moment I merely indicate that I am satisfied that as a result of this conversation the plaintiff and Mrs Lawrie undertook in relation to the financial years 1987, 1989 and 1990 the substantiation work which they had already undertaken in relation to the 1988 year. 142 It is claimed on behalf of the plaintiff that, even though he was prepared to undertake the work of substantiation, it was on the basis that Mrs Lawrie would have access to advice from Mr Moon and should, in effect, attend only to the merely clerical side of the substantiation process. Whilst there is some broad and general evidence in the case to the effect that Mrs Lawrie would seek to speak to Mr Moon during her work and an acknowledgement by Mr Moon that she was in touch from time to time, there is no indication of the topics which Mrs Lawrie sought to discuss or whether, indeed, she encountered any problems at all in complying with the substantiation procedures. Indeed, so far as the case is concerned, there appears to have been no difficulty, resulting in any demonstrable harm to Mr Smiles, that occurred in the course of the substantiation process. The significant difficulty that arose, related not to the provision of documentary evidence relating to the expenses claimed as deductions but to the fact that the claims for secretarial expenses were viewed by Mr Walton as being, in effect, fraudulent. This view did not arise because of the substantiation process but because of enquiries he was making outside it. It is quite plain, in my view, that it was not until the final interview of 28 August, to which I shall make reference, that Mr Smiles revealed that the payments were made to young women who were engaged as nannies in the household. Had Mr Moon been aware of this potential problem on 10 April, or earlier, I am satisfied that he would have taken a different approach to the substantiation procedure. 143 It is appropriate at this stage to refer to an allegation made by Mr Smiles in relation to the substantiation process. He asserts in his affidavit that at some stage whilst it was in progress, he specifically asked Mr Moon how the payments to the young women should be recorded in the substantiation documents. He asserts that Mr Moon advised him that he should include the amounts actually paid to them for secretarial work. This conversation, as so deposed, makes the assumption, of course, that Mr Moon was aware that the young women had a dual role and gave his advice in the context of this understanding. I am satisfied that Mr Smiles, in neither the Local Court nor District Court proceedings made any such allegation. It would, of course, have been most relevant to his defence against the charges brought against him. I am satisfied that I should reject this evidence, which is denied by Mr Moon. I am, indeed, satisfied that no such conversation took place. 144 The evidence makes it clear that, after the discussion in relation to the letter of 10 April, the substantiation procedures were conducted by Mr Smiles and Mrs Lawrie directly with Mr Walton. Because of Mr Smiles being involved in the work of a State election, it became necessary for extensions of time to be sought for the provision of the Substantiation Schedules. These were granted from time to time, sometimes orally in the first instance but always confirmed by letter, directed to Mr Smiles via Mr Moon's office. 145 It clearly appears that, whilst the Substantiation Schedules were being attended to by Mr Smiles and Mrs Lawrie, the ATO investigation was being carried on via interviews with Mrs Ruth Smiles, Lisa Robinson and Robyn White. These were unknown to Mr Smiles although, it would appear from something he said to Mr Walton, recorded in one of Mr Walton's file notes in evidence, that he was harbouring some suspicion that his wife, Mrs Ruth Smiles was, somehow involved in the ATO audit. Also, the press were displaying some interest in and knowledge of the existence of the audit, Mr Smiles regarded this as damaging to him as a politician. He suspected that there were "leaks" from the ATO. He complained to his Federal member, Mr Michael Mackellar, who wrote a letter of complaint on his behalf to the Commissioner of Taxation, asserting breaches of confidentiality. 146 On 6 June 1991 Mr Smiles was appointed Assistant Treasurer of the State of New South Wales, having been re-elected member for North Shore in the election of 25 May 1991. 147 On 25 June 1991 there was a meeting at Parliament House between Mr Smiles, Mrs Lawrie and Mr Walton. At this meeting Mrs Lawrie provided Mr Walton with Substantiation Schedules for the 1987, 1989 and 1990 taxation financial years and also written up cash books for the same years. I am satisfied that Mr Moon was not advised that this meeting was to be held or that the Schedules had been so supplied. At this meeting Mr Walton was provided with a letter signed by Mr Smiles, replying to certain matters that had been raised by Mr Walton. It dealt with motor vehicle expenses and interest and dividends. It also provided the following information:- "(2) Secretarial Salaries. A Wages Book was kept but this book was lost or mislaid, due to Family Court matters re divorce as previously explained. Deductions for tax were made from wages in accordance with Australian Taxation Office instructions. Declaration forms re employees were sited and were forwarded to the Taxation Office. NB:L All relative tax stamp returns have been forwarded to the Taxation Office over the years." 148 It must be noted that in this letter, there is no indication by Mr Smiles as to the nature of the "Secretarial" salaries or as to any claimed dual role of the young women in the Smiles household. In my opinion, this is consistent only with an intention on Mr Smiles part not to divulge this information, despite his knowledge that the payments were undoubtedly in a "grey" area and that this was a matter proper to disclose in the audit. In my view, he deliberately chose not to make this disclosure, in the hope that the circumstances of the payments would not be revealed. I have already made comment about the reference to these salary payments in the Substantiation Schedules and Mr Smiles' role in describing them, including the payments to Nicole Tamblyn, as legitimate expenses incurred in the SMS Consultancy business. 149 Eventually an arrangement was made by Mr Walton to interview Mr Smiles in relation to the audit, at Parliament House on 28 August 1991. Mr Moon has given evidence that he was not advised that this meeting was to take place. There is a conflict between him and Mr Smiles in this regard. I consider that, if Mr Moon had been asked to attend the meeting with Mr Smiles, he would have done so. This would have been a completely normal response for an accountant or tax agent, who had prepared the client's returns which had been subject to substantiation audit. I accept his evidence that no request was made to him and that he had received no information prior to the holding of the meeting that it was, in fact, to take place. Nor, indeed, had Mr Moon seen any of the Substantiation Schedules which had been supplied to Mr Walton. I am satisfied that he was quite unaware that Mr Smiles had claimed that the young women had been employed as secretaries between the hours of 9.00am and 3.30pm, as set out in those Schedules. 150 Within a short period after the holding of the meeting, Mr Walton made an extensive file note. I have no reason to doubt that it was a conscientious attempt to record the salient features of this meeting. Mr Walton was accompanied by another officer of the ATO, Mr Damian Ryan. He also prepared a note of the interview. In my view, these two notes when considered together, provide me with the best available evidence of what was said at the meeting between the participants. It is clear that the meeting commenced by a consideration of the claims for meal expenses and motor vehicle expenses that had been made in the relevant tax returns. This part of the discussion is not presently relevant and I omit it. However, I need to set out the notes made by Mr Walton and Mr Ryan respectively. 151 Mr Walton's note relating to "Secretaries" reads as follows:- "SECRETARIES: I said: You employed the following people on the four year period looked at; K. Parkinson, K. White, R. White and N. Tamblyn. Could you indicate the duties performed by these people? He said: that between 0 and 3 they work as secretaries, answering phones, doing some typing. I asked: What did they do outside the hours of 9 to 3? He said: Outside that time they worked for his wife as a personal assistant or nanny. I asked: If they all performed the same type of duties. He said: Yes they all worked part-time as secretaries for him. I asked: Were they all nannies? He said: Yes at varying times I suppose they were. I asked: How were they employed? He said: My wife sourced them and then we interviewed them. His wife specifically chose them and he interviewed them also for his duties. I asked him where his wife had "sourced" them from? He said he couldn't remember. He said he specifically employed one but couldn't remember who. I asked him who directed them in their day to day duties? He said his wife did specifically but he did in relation to the answering of the phones and whatever typing or mailing he needed done. I asked if he had gotten them to fill out Instalment Declarations or Employment Declarations? He said that he did get tax forms off them, but did not remember specifically what they were. I asked what was annotated in the column marked occupation? He said he couldn't remember. He said his electoral secretary Christine helped organise the tax stamps etc. I asked him how they were paid? He said that they were paid by cheque. I asked who appeared as the payer on the cheque? He said: Me or Smiles Management Services. He said: At times the secretaries weren't available to him but generally during 9 to 3 they performed duties for him. I asked if they were paid for their separate nanny duties? He said that that was a matter that his wife would take care of. He said they were given food and accommodation and at times were given extra cash by Ruth. I asked how often and how much were they paid? He said he really couldn't remember. Damien asked if these cash payments could have been reimbursements for money she had spent maybe buying things? He said, that yes they could have been….During different times, they had to answer a lot of calls; at other times they could be just sun-baking on the back deck. He said they answered a lot of calls but did a minimal amount of typing. He then explained that employed them mainly because of the fact that he needed someone there. I asked if they were all live-in nannies? He said that they sometimes resided at the home. He said that Tamblyn had a boyfriend on the Central Coast and resided a lot of the time up there. I asked what duties Nicole Tamblyn did and where after you left the home in November 1988?: He said that she helped for awhile doing various things, running around for me. I asked where she performed these duties? He said that she at times came into Parliament House, or the Electoral Office and did various running around for him. I explained to him again that I had talked to some of the employees, and they had stated that they did no secretarial duties. I said that it seems that these expenses are private in nature. The taxpayer again said that they were employed by him during 9 to 3 to answer the phone, even though, at times it would not call very often. I told him that the statements we had were to the contrary and that I would submit both arguments to my manager and that we would make a decision and tell him about it early next week." 152 Mr Ryan, under the heading "Secretarial Expenses" provided the following note:- "SECRETARIAL EXPENSES: Taxpayer stated the duties performed at Sirius Cove Rd (home office) was to answer the phone. All secretaries performed the same type of work. These duties were performed between the hours of 9.00 to 3.00. The secretaries performed duties outside this time for his wife which was of a personal assistance ie. Child minding and housework. His wife "sourced" applicants however he cannot remember from where. The duties to be performed was directed specifically by his wife and himself. Taxpayer remembers employee's filling out Instalment Declarations however he doesn't remember specifically what was annotated in the occupation box. Taxpayer re-stated that secretary duties were to answer the phone. Sometimes there are many calls, very little typing was required. It was essential to have someone there during the 9.00 to 3.00 period. Taxpayer drafted the check for secretaries; additional amount may of been provided by his wife although taxpayer unsure of consideration. Taxpayer was asked about the secretary N. Tamblyn who was entered in the cash book as receiving $400.00 per week even though he had ceased the home office after November 1988. Taxpayer stated that there was some carry over of business work, ie. Storage of materials however he did agree and didn't realise that he continued to pay her for 7 months thereafter. Only explanation was that it was "habitual" to enter her in the cash book under the heading secretarial. Taxpayer indicated that cash book was written up at 2 and 3 months at a time. Cash book in the 88/89 Yr was in taxpayers hand writing while in the 89/90 Yr it was in his secretary's writing." 153 Mr Ryan's note contains more detail in relation to the N. Tamblyn entries, including the explanation that he had made the incorrect entries because "it was "habitual" to enter her in the cash book under the heading "secretarial." This accords with the evidence of Mr Smiles and also of Mrs Lawrie who was present at this meeting, although they made no notes relating to it. I am satisfied that Mr Smiles did offer this as an explanation and I am equally satisfied, as I have already indicated in the previous discussion relating to the Tamblyn entries in the cash book, that Mr Smiles sought to justify the earlier entries on what I regard as spurious grounds. 154 There is some further material in Mr Walton's statement, dated 30 January 1992. Although it does not appear in the notes, it corresponds to matters recollected by Mrs Lawrie and is also referred to by Mr Smiles in his evidence. I am satisfied that the most reliable version of it is to be found in Mr Walton's statement, which I now set out. It appears after a passage relating to Mr Smiles' explanation of his inclusion of the Nicole Tamblyn entries because "it was just "habitual"…". "I said: "In the 1990 financial year why are payments to Nicole Tamblyn secretarial and yet payments to Lisa Robinson are under drawings as it seems from my information that they performed the same type of work?" He said: "Again in regard to Nicole it was just habitual to write her up in that way. I do remember that Beth was writing up the cash book for the 1990 year and I was on the phone to Nick Greiner and she interrupted me and asked where should I put the payments to Lisa Robinson. I said immediately to her they're personal drawings." Elizabeth Lawrie then said: Yes I remember that conversation. I was writing up the cash book while he was on the phone and I asked him where should payments to Lisa Robinson go and he told me personal drawings." 155 I have already made reference to and findings in respect of this part of the interview, when holding that I could not accept that the post November 1988 entries in the cash book relating to Nicole Tamblyn were simply the result of an innocent mistake on the part of Mr Smiles. 156 Mr Walton, in his statement refers to two further conversations with Mr Smiles, one on the following day, 29 August 1991 and the next on 3 September 1991. Mr Smiles does not refer to these conversations in his affidavit. They are, however, supported by notes made by Mr Walton shortly after their occurrence. I am quite satisfied that they took place. I feel that they have been confused in Mr Smiles' recollection, with the result that he attributes incorrectly significant portions of them to the interview conversations on 28 August 1991. Mr Walton's accounts of these conversations are as follows commencing with 29 August 1991:- " Mr Smiles telephoned the next day. He said: I want to confirm a few things that we spoke of yesterday. In regard to Nicole Tamblyn after moving in November 1988 she did still work for me for about two months. The last four months that appear in the cash book were in fact private. Beth did the books and I was surprised the payments went on for six months." I said: "Yes". Mr Smiles then said: During the two months her duties involved sorting files at Brookvale, postings and mailings for me and other running around for me. In regard to the home office it was a difficult time in my life. For awhile I did actually divert my business phone over to my electoral office but it was only for awhile. Bob Carr actually got into me in Parliament about this and I took the diverter off." I said: "Yes." He said: "About the housekeeping while we were at Lennox Street, Ruth and I did all the shopping and all the cleaning. They may have done some cleaning but they weren't employed as housekeepers. There were in fact lengthy periods where we got in cleaners. Some of them did mailings and postings for me." Mr Smiles then went on: "After the separation it was part of our separation agreement that I would pay the nannies but this was mainly because I would pay them on time. During nine to three they weren't full-time housekeepers, they were my secretaries." I said: "I'll call you about the results. I'll have to talk to my manager." 157 It seems fair to comment that the more Mr Smiles sought to provide information to Mr Walton, the more he came into conflict with information provided by Mrs Ruth Smiles and the young women or other facts objectively established. In the first place, Mrs Lawrie (Beth) did not make the entries in the cash book relating to Nicole Tamblyn. This was the work of Mr Smiles, a matter of which he should have been well aware. Secondly, Nicole Tamblyn did no work for Mr Smiles or the consultancy, which could remotely be described as "secretarial" after leaving the Mosman home. As I have already indicated, she did not know where Brookvale was. Also, there was ample information available to Mr Walton that the girls assisted Ruth Smiles in relation to the shopping and the cleaning of the house. It is plain that Mrs Smiles regarded the alleged agreement to pay the nannies after the separation as something that was being forced upon her; further, she did not accept that the reason for Mr Smiles continuing to make the payments was the need for them to be made on time. She clearly held the view that Mr Smiles wanted to continue making the payments directly himself so that he could continue to claim them as a tax deduction. She effectively brought this to an end by taking the Family Court proceedings towards the end of 1990, after which maintenance payments were made direct to her and she took over the payment of the nannies. Furthermore, Mr Smiles reiteration of his contention that between 9.00am to 3.00pm the girls were his secretaries, did not accord with information from Mrs Smiles or from the girls. 158 The second conversation between Mr Walton and Mr Smiles, which took place on 3 September 1991 is recorded in Mr Walton's statement as follows:- "On 3 September 1991 I telephone Mr Smiles at his Parliamentary office. We firstly spoke about motor vehicle expenses and meal expenses. I than said: "With regard to the secretarial wages claimed, from the evidence I have gathered the payments look to be of a private nature. I have already told you at the interview that I had spoken to some of the employees and from these statements it looks to be a private expense. I have taken the evidence you have stated at the interview and the evidence I have and discussed it with my manager, we have decided that the payments were private and not an allowable deduction. Because the employees were employed through nanny agencies there was no extra payment for their nanny's duties. The fact that they answered the phone does not make them a business expense." Mr Smiles said: "It was a waste then building a house with a separate office and getting advice from accountants saying that it was allowable." I said: "Given the duties which they said that they performed, they were principally employed as nannies. I will be adjusting the four returns for 1987 to 90, and not allowing the deductions for these expenses. When false returns are lodged section 223 automatically imposes a 200% penalty in regard to the tax avoided. In regard to meal expenses the penalty will be remitted down to nil. In regard to secretarial expenses the penalty will be remitted down to 45%. At this level prosecution action can be considered and I have kept it at this level because of the fact the cash books don't reflect the true nature of the payments. The weight of the evidence shows the claims to be incorrectly made and show that the false claims were made knowingly and to evade tax." Mr Smiles said: "How much money is involved in the tax on the assessments? I said: "It's the principal tax payable on the 1989 return which is the largest amount." Mr Smiles said: "How much is that?" I said: "About 45 to 50 thousand dollars. The total liability is about 60 thousand dollars. You can contact debt management and enter into an arrangement to pay the outstanding tax." He said: "After the divorce settlement I don't have enough money to pay the debt outright." I said: "The adjustment sheets will be sent separately to you." Mr Smiles said: "I'm disappointed with the view the office is taking." I said: "The notice of assessments will be issued in the next few days and you can object within 60 days after their issue." I made a note of our conversation as soon as we had finished talking. I adjusted the 1987 return by increasing the taxable income by the amount of $5,249. I reached this figure by disallowing $3,600 claimed in the substantiation schedule said to have been paid to Karen White plus $2,000 which is described in the 1987 cash book and the substantiation schedule against the date 3/4/87 as a payment of Mrs Smiles's tax. I remember speaking to Mr Smiles about this last item some time after receiving the 1987 substantiation schedule. I'm not sure of the occasion. I remember I said to Mr Smiles: "It seems from the cash book that this (referring to the entry $2,000) is a personal payment of your wife's outstanding tax bill and as such it's not an allowable deduction." Mr Smiles said: "Yes I can understand that." 159 Mr Smiles is adamant in his evidence that, at no time, did Mr Walton indicate that prosecution action could be considered. Indeed, it is part of Mr Smiles' case that, upon payment of the tax and penalties, he understood that the whole matter would be at an end. He speaks of relying upon the principle of "double jeopardy", meaning, as I understand it, that once having paid the departmental penalties he could not then be subject to any further action by way of prosecution. I have given due consideration to his evidence. However, I can see no reason for rejecting the evidence of Mr Walton, which, in this regard is supported by a file note. Moreover, the expert evidence in the case indicates that what Mr Walton said was correct. The remission of the penalty down to the 45% level did, in fact, enable prosecution for tax evasion offences to be considered. There would appear to be no reason why Mr Walton would not have brought this to Mr Smiles' attention in this conversation which was, clearly, intended to relay the decision that had been reached and its possible ramifications. It may be that this statement did not fully register with Mr Smiles at the time or he may have mistaken its import, thinking that if the 45% penalty were paid this would, in effect, be in lieu of prosecution. Be that as it may, I am satisfied that the statement was made and should reasonably have put him on notice that prosecution was a possibility. 160 It is clear that, following upon the receipt of this information from Mr Walton, there was a conversation between the plaintiff and the defendant. Mr Smiles suggests that the conversation took place immediately after the meeting of 28 August. I think he is wrong in his recollection. It seems far more likely that it took place after the telephone conversation between him and Mr Walton of 3 September 1991. 161 There is considerable divergence between the recollections of the plaintiff and defendant in relation to this conversation. Neither made a note of it and the probabilities are that the conversation contained elements of each man's recollection. 162 I am satisfied that Mr Smiles made known to Mr Moon, in general terms, what he had been told by Mr Walton as to the intended disallowance of the amounts claimed for secretarial services provided by the young woman. It is also likely that he told Mr Smiles that Mr Walton did not believe that they had done any work for him and that the source of that information was his ex wife and one of the girls of whom he said "they hate me and will do anything they can to try to ruin me." I also consider it likely that, as he claims, he spoke of clients who could swear that they had phoned the SMS phone number and "left messages with my staff" and that "some even came to my home office and met them" and "knew them by name". It is also likely that he advised Mr Moon that he had told Mr Walton that he "should interview all my previous accountants and my clients." 163 I am satisfied, however, that this was the first occasion that Mr Moon was appraised of the fact that the claims for "secretarial expenses" in the income tax returns related to young women who were employed as nannies in the Smiles' household. I accept that when Mr Smiles told him of the disallowance of the deductions, he enquired why that was so and was advised by Mr Smiles that it was "because the claimed deductions related to payments to nannies who undertook secretarial work for me during the hours 9.00am to 3.00pm" (or words to this effect). I am also satisfied that, when this information was provided to him, Mr Moon stated that Mr Smiles had never told him this at the time of the preparation of the returns. 164 I accept that Mr Moon asked Mr Smiles what else had been said by "the ATO people" and was told that the deductions had been refused because the women had performed no secretarial work during that time period and "were solely employed as personal nannies for my children". When Mr Moon enquired as to what "secretarial work" had been done between 9.00am to 3.00pm, he was told that it consisted of answering the phones and taking messages, Mr Smiles indicating that this could be proved because he had clients who could support him. 165 I consider that Mr Moon then ventured the view, that if such secretarial work had been undertaken during that period then there was "an argument for apportionment". He enquired whether the evidence of the clients could be obtained and Mr Smiles said that it could. 166 I also think it likely, as asserted by Mr Smiles that the conversation terminated by Mr Moon saying words to the effect of "The Tax Office has really tightened up. It's pretty hard to challenge them when they believe your deductions are not allowable. I'm puzzled they haven't allowed anything, though. We'll just have to wait for the Amended Assessment. It's bad luck. They are bastards". 167 In fact the Amended Assessments for the tax years 1987, 1988, 1989 and 1990 were not issued to Mr Smiles until 15 October 1991. In the meantime a number of things occurred, to which it is necessary to make some reference. 168 In the first place Mr Walton completed his audit report, dated 3 September 1991. It was submitted to his superiors in the ATO. It is part of Exhibit 51 in these proceedings, which is a compilation of the documents considered by the ATO and the DPP in relation to the prosecution brought against Mr Smiles. It refers to the fact that Mr Smiles was a Restricted Access Taxpayer and a member of the N.S.W. Legislative Assembly. It referred to the fact that the audit was conducted "in the mode of a desk audit" and "basically looked at specific items of deduction of the tax payer's sole trader consultancy business". It is a lengthy document and deals with the various deductions which were under investigation. In relation to "secretarial services and wages" reference is made to the following interviews, conducted by Mr Walton during the course of his audit. 169 On 28 May 1991 a tape recorded interview was held with Karen White, who signed a written statement on 15 July 1991. In the interview and statement, it appears that she provided information along the same lines as already indicated in these reasons. 170 An interview was held with Robyn White on 2 July 1991, a tape recording was made and a copy provided to her. She provided similar information, but did not give a written statement. 171 Nicole Tamblyn could not be contacted, but Mrs Ruth Smiles provided information as to the nature of her employment in the Smiles' household. Information was also obtained from Lisa Robinson. 172 A tape recorded interview and written statement was obtained from Mrs Ruth Smiles on 5 August 1991, the information obtained from her being summarised as follows:- "Ruth Smiles identified the people known as Karen White, Robyn White, Nicole Tamblyn and Lisa Robinson as people she had employed through nanny agencies, who were employed as nannies or nanny/housekeepers. Ruth stated that these people performed no business or secretarial duties. She also stated that she believed that they were paid by cheque by Phillip Smiles. Ruth Smiles stated that the taxpayer paid these people up until 13 July 1990, when the arrangement changed and Ruth began to pay Lisa Robinson her wages." 173 In relation to the interview with the plaintiff on 28 August 1991, Mr Walton reported as follows:- "At the audit interview with the taxpayer on 28 August 1991, the taxpayer stated that these people were employed by him between 9 am and 3 pm. He stated that outside these hours they performed duties as his wife's personal assistant or nanny. When asked if they were paid an extra amount for the nanny duties, the taxpayer said that they were given food and accommodation, and occasionally some extra cash by his wife. When questioned, the taxpayer agreed that this extra cash may have just been a reimbursement for money spent on such things as groceries. When the taxpayer was asked as to how these people were employed, he stated that his wife sourced them. They were then either interviewed by her first then him, or by a dual interview. When asked where his wife "sourced" them from, the taxpayer said that he couldn't remember. The taxpayer was asked who directed these people in the course of their duties, he stated that his wife did specifically, but he did in relation to the answering of phones, the typing, and mailings that needed to be done. The taxpayer was asked what duties, and where Nicole Tamblyn performed her functions after he moved out of the residence at 28 Lennox St. The taxpayer said that for a month or two (that being until Jan '89), she did various jobs either through the electoral office or Parliament House. He later called (refer folio C51) and stated that she did work storing files in Brookvale, and did mailings. When asked why payments to her appear in the cash [book] under the title of "secretary" until at least the June 1989 when she ceases work for him in Jan '89, he said that he was amazed he paid her for so long, and then said that the incorrect writing up of the cash book must be because it was "habitual" to write it up that way. When asked why these payments where claimed as a deduction in the 1989 return, he agreed that they were incorrect and that the return should be adjusted accordingly." 174 This information accords with the notes made of the interview by Mr Walton and Mr Ryan which are set out above and with the record of the conversation between Mr Walton and the plaintiff on the following day. 175 In relation to the claims for secretarial expenses, Mr Walton provided his "conclusions" as follows:- "In regard to Secretarial Expenses, the evidence stated and produced by the employees is contrary to the statements made by the taxpayer. When added to the fact that the cash book was, for at least a seven month period, drafted incorrectly, and the statements made by the ex-wife, the weight of evidence is that: 1. These people were employed in a private and domestic arrangement, and that payments to them are not an outgoing which is incurred in gaining or producing assessable income. The payments are therefore, not an allowable deduction. False claims have therefore been made in the returns for the years ended 30 June 1987, 1988, 1989, and 1990. 2. The false claims have been made KNOWINGLY. Evidence of this is the fact that the Cash Books and the Substantiation Schedules have been annotated with the term "secretary". Also the statements about the Instalment/Employment Declarations show an act of attempted concealment. 3. The Cash Books themselves are records that have been kept incorrectly. The taxpayer noted all of the payments in dispute in the column annotated as "Secretary". After the audit had begun, the taxpayer subsequently started annotating the payments to the nanny in the "personal drawings" column. No disclosure was made to me that he may have been doing it incorrectly in the past. 4. The fact that Phillip Smiles and/or his secretary asked or told Karen White to complete the Instalment Declarations incorrectly, may be an offence unto itself. The completion of an Instalment Declaration incorr3ectly is a False or Misleading Statement under the provisions of s.8 of the TAA. If Phillip Smiles or his secretary "PROCURED" or "INCITED" Karen White to commit that offence, he may be liable to a charge under ss.5 or S 7A of the Commonwealth Crimes Act 1914 for "Aiding or Abetting" or "Inciting to or urging the Commission of an offence", respectively. These are not things that are actionable by an auditor, but might be looked at by the Audit Prosecution Unit." 176 Under the heading "Recommendations", Mr Walton expressed the view that the claims for secretarial expenses were private expenses that had been hidden so as to conceal their true nature. He said:- "The evidence shows an intention to deceive the Commissioner with the purpose being to evade tax. The returns will be adjusted accordingly, with a 45% culpability penalty being imposed in accordance with par. 19 & 41 of ITR 2517." 177 He completed his report as follows:- "In regard to this claim I believer the taxpayer has committed offences with the necessary mens rea so as to warrant prosecution action pursuant to the guidelines laid down in Income Tax Rulings 2517 and 2246. This necessitates that when the audit is completed, the file be referred to the Audit Prosecution Unit for further investigation and a decision as to whether prosecution action should proceed. Under this heading, the taxpayer seems to have "Knowingly made a False or Misleading Statement" under s.8P of the TAA, in the 1987, 1988, 1989 and 1990 returns. The taxpayer may have also incorrectly kept records under s.8L, 8Q or 8T of the TAA, for incorrectly recording the true nature of these payments in the Cash Books. As stated above, the taxpayer may also have committed the offence of "Procuring" or "Incitement" under s.5 or s.7A of the Commonwealth Crimes Act." 178 On the same day, Mr Walton's manager endorsed the report, indicating (inter alia) that "claims for secretary wages when in fact they were not employed in such a capacity is a serious offence particularly when attempts have been made to conceal the true picture." He concurred in the referral of the matter to the Audit Prosecution Unit. 179 It is apparent that two officers of that unit, Messrs. Smith and Fitton considered the material obtained in the audit and produced a document which is part of Exhibit 51, and which is headed "Audit Prosecution Unit – Potential Prosecution Case – Brief of Evidence." In this document the evidence of the potential witnesses already referred to is reviewed and summarised. I shall not further lengthen these reasons by setting it out. It finished with the following observation:- "From the information gained by former employees of Mrs Smiles and Mrs Smiles herself it can be shown that the claims made by the taxpayer in respect of personal assistants/secretaries are fraudulent. All the nannies were recruited from nanny agencies and only for incidental moments of answering the phone or running an errand they all state with a minor exception from Nicole Tamblyn that they provided Mr Smiles with no secretarial or business services. With Nicole Tamblyn she states that she provided an average of 3-5 hours a week in helping Mr Smiles but it can be seen in her case that after she had left the Mosman address and proceeded to provide her services as a nanny to Mrs Smiles, she was still being paid and claimed by Smiles Management Services as a secretary but with no decrease in salary." 180 The document is not dated and, possibly, contains information obtained through further inquiries made by Messrs. Smith and Fitton. In particular, it appears that some direct contact had been made with Nicole Tamblyn who appears to have largely confirmed what Mrs Ruth Smiles had previously said in relation to her employment. It appears that this document was prepared for submission to the DPP for the consideration of that organisation. It contains an endorsement from the relevant manager of the unit, supporting the submission. The manager states:- "It is felt that in view of the seriousness of the offences committed and the continuing utterances by Mr Smiles that these claims are "normal" in business, that he has shown no remorse at all in respect of these serious offences." 181 The "continuing utterances" relate, in my view, to statements made by Mr Smiles to the media, as a result of information that had been "leaked" in relation to the audit, its results and the possibility of prosecution. An article by a journalist Alex Mitchell entitled "Greiner Minister tax probe" appeared in the Sun-Herald newspaper on 6 October 1991. This resulted in Mr Smiles providing an interview to press and television at a railway station in the Blue Mountains, where he was holidaying at the time. The article had spoken of Mr Smiles having been "asked to pay back tax of about $14,000 plus a 45% interest penalty." It went on to say, "Now the office of the Commonwealth Director of Public Prosecutions is deciding whether Mr Smiles has breached the Income Tax Assessment Act and should be charged with any offence. A decision will be made within the next couple of weeks." 182 The article reported Mr Smiles as indicating that he would not resign from parliament if he were charged and that "the Premier and his team have known all along that I was the subject of a tax audit." He was also reported as having said: "This matter is typical of thousands of differences of opinion each year between the business community and the Australian Tax Office. If the Tax Office choses to take a different interpretation of what is a legitimate tax deduction, then so be it." 183 Mr Smiles does not dispute that he had been interviewed by the journalist Alex Mitchell prior to publication of this article. In his evidence before me, he asserted that he had not believed Mr Mitchell, when Mr Mitchell confronted him with the information that the matter was before the Commonwealth DPP. He said that, in effect, he believed Mr Mitchell was simply trying to trap him into making some unwary statement. Other evidence in the case, to which I shall refer later, satisfies me that I should reject this. I consider that Mr Smiles accepted that the DPP was, in fact, considering the matter but hoped that his public status and his stance would result in a decision not to prosecute. 184 It is quite plain that Mr Smiles, as a prominent politician, was disturbed by the material that was, apparently, being leaked to the media at this time. He enlisted the aid of the Federal Member for Warringah who wrote on his behalf to the Commissioner of Taxation complaining of breaches of confidentiality and noting that "the journalist not only had details of the amounts and nature of the matters being investigated, but said that the case was to be referred to the DPP. The name of the investigating tax officer and of the person handling the case in the DPP was mentioned". The letter went on to state "that the nature of the information known to the journalist is so detailed as to have had to originate from the Taxation Office source, and almost certainly from your Chatswood Office, where the audit of Mr Smiles was being conducted." 185 Mr Smiles's assertion that the matter was no more than a difference of opinion as to deductibility, typical of many such cases considered annually, was repeated in the televised press statement at the railway station. The relevant television reports have been put in evidence and have been viewed by me during the hearing. 186 The Amended Assessments for the relevant years were, as indicated, issued on 15 October 1991. The secretarial expenses, except for those in respect of Ms Parkinson and Ms Cook were disallowed and a 45% penalty rate of interest was applied. The Cook and Parkinson claims survived as Mr Walton did not believe he had sufficient evidence to justify their disallowance. There was a conversation between the plaintiff and the defendant in relation to the assessments, which occurred on 16 October 1991. Once again, there is significant disparity between the versions of this conversation. There is a major question, however, in relation to it, namely whether Mr Moon advised Mr Smiles not to object to the assessment. Mr Moon asserts that he positively advised Mr Smiles to object. Mr Smiles asserts the contrary. 187 In his evidence, Mr Smiles portrayed this conversation as involving a discussion between the two men as to the cost of pursuing an objection against the Amended Assessments to the Administrative Appeals Tribunal, the upshot being that, after payment of legal and accounting fees, the probable nett return to Mr Smiles of a partially successful objection would be "two or three thousand dollars at most". In addition, the process would take six to nine months to be completed. Faced with this prospect, Mr Smiles asserts that he and the defendant had the following additional conversation:- "I said: Hell. Frankly, from a political point of view, I'm not sure it's worthy it." He said: What do you mean? I replied: "These bastards have leaked on me fifteen times during my audit and Nick Greiner is getting twitchy. I know there is a cabinet reshuffle coming up. The bastards will leak on me again to the media and Nick Greiner has had a gut-full of my being controversial." The Defendant replied: "I can understand. I'd advise any of my clients just not to bother. It is better to have it over and done with. Just pay it and that will be the end of the matter, and then you can get on with your life."" 188 The plaintiff says that as a result of this conversation he paid the Amended Assessment in full without lodging an objection. 189 Mr Moon's version of this conversation is as follows:- "He said: "I have received the Amended Assessment. What do you think?" I said: "If the nannies did secretarial work for you during the hours of 9a.m. to 3p.m. as you say, then there is an argument for apportionment. If that is the case you should object against the Amended Assessment." He said: "I am concerned with the publicity that would surround the case. Already the Labour Party are questioning my use of Parliamentary privileges. As Assistant Treasurer I can't be involved in any personal taxation issues." I said: That is another issue. However if the nannies did secretarial work for you as you say then you should object against the Amended Assessment. There is a good argument for apportionment if what you say is correct." He said: "No, I think it is better that I just pay the tax so the matter will be over and done with." I said: "It is your call."" 190 It is clear that both men have a recollection of Mr Smiles indicating concerns about media leaks, adverse publicity and consequent problems for him in his political career. I am satisfied, however, that Mr Moon provided positive advice that Mr Smiles should lodge an objection based upon an argument for apportionment. That argument related to and was dependent upon the previous information he had received from Mr Smiles, that the nannies had performed secretarial work for him in his business between the hours of 9.00am and 3.00pm. This was, of course, also the argument that Mr Smiles had put to Mr Walton. I consider that Mr Smiles, having been told by Mr Walton that the employees had been interviewed and did not agree with him and knowing that the ATO had obviously accepted their versions and that of his wife, would have had considerable doubt as to the viability of a claim for apportionment based on these grounds, especially where he knew full well that he had appropriated, for the purpose of claiming a tax deduction, the whole of the cash salary payable to the young women for the performance of their nanny duties. I am satisfied that he would not have wished to expose himself to further adverse publicity, especially by way of further leaked information which might tend to expose the frailty and mendacity of his arguments for deductions. He preferred, in discussions with Mr Moon, to adopt the approach that for political reasons he preferred simply to pay the assessment and bring the matter to an end. I am persuaded that this was his personal decision, arrived at contrary to Mr Moon's advice that he could have a good argument for apportionment, if he chose to object. I am quite satisfied that Mr Moon did not advise or even encourage him to refrain from objecting. 191 I am fortified in these views by other evidence in the case. 192 Early in 1992, on legal advice, Mr Smiles took proceedings in the Federal Court of Australia, seeking a review of the decision to prosecute him, on the grounds that, broadly stated, it amounted to an abuse of power. In the course of the preparation of these proceedings, Mr Smiles provided written material to his then solicitors and also provided information in conference, which was properly recorded by his solicitor Ms Harris. Questions of legal professional privilege in relation to this material were disposed of during the case and need not be referred to now. Exhibit 25 is one such document. It is attributable to Mr Smiles. It contains the following entry:- " 15 Nov . Cheque paid via Australia Post, 15/11/91. The amended assessment of tax totalled $58,882.12. Due date of Assmt to pay was 18 November 1991. Tax Objection time permitted 60 days – approx. 15.12.91 and Xmas time! PMS under extreme high work pressure and domestic matters…including the two position – Asst Tsr. And MP for North Shore.. and in view of the adverse publicity which was bound to come, PMS paid the requested tax amount and let the matter rest. After all, what M.P. seeking a Ministership with Mr Greiner's Government would want that kind of publicity!!" 193 Exhibit 50 is a document provided by Mr Smiles to Ms Harris. It refers to "at least fifteen separate occasions", prior to the service of the summonses upon him in January 1992, "on which print and other media reported that a tax audit was in the process." The document ends with a "comment", namely "during the 60 day period Smiles exercised his discretion not to appeal for reasons associated with the avoidance of political and personal controversy, particularly the avoidance of continuing ATO or DPP leaking of information to the media." Ms Harris also prepared two documents, relating to material obtained in conference with Mr Smiles and Senior Counsel who was then advising in relation to the Federal Court proceedings. Ms Harris gave evidence before me. I formed the view that she was, in every respect, a reliable witness and that the material she attributed to Mr Smiles was correctly recalled by her and accurately recorded in documents which are exhibits. 194 Exhibit 48 is a handwritten note made by Ms Harris in such a conference. It reads:- "Details of course of audit – statement made to Mr P. Smiles by ATO Officers suggesting that if he did not object to the assessments, and paid the penalty tax assessed, no prosecution would be brought against him, and that was the only reason why he did not lodge objections within 60 days of the issue of the assessments." 195 This record was made on 5 March 1992. It relates to the Federal Court proceedings and also to an application for extension of time to be made to the ATO for the lodging of an objection to the Amended Assessments. This information obtained from Mr Smiles was later urged as a ground for such an extension. It may be noted that the extension was at first refused and then later granted. An objection was duly lodged but, has not been proceeded with. 196 Exhibit 49 is a chronology prepared by Ms Harris from information supplied by Mr Smiles. It contains the following paragraphs, all of which are supportive of Mr Moon's contentions in these proceedings:- "8. Audit continues through 1991 as PMS seeks extension of time to submit evidence of substantiation of items claimed as State Election was in progress. PMS decided to undertake this task rather than have his accountant do so. 9. Amended Assessments issued 15 October 1991 – in respect of year ending 1987 amount due $4,280.27; in respect of year ending 1988 amount due $6,880.65. 10. Reject accountant's advice re objections to Amended Assessments and Assessments for years 1987/1988 (Amended Assessments and Assessments 1989/90). 11. Pays $58,882.12 on 18.11.1991." 197 One other matter must be mentioned on this topic. Mr Moon swore an affidavit for use in the Federal Court proceedings which were heard in April 1992. In this affidavit, he indicated that he had advised Mr Smiles to object against the Assessment. Mr Smiles asserts that on 13 April 1992 in a letter, a copy of which is Exhibit FF to his affidavit of 19 November 2002, he advised Ms Harris that he was concerned about this statement in Mr Moon's affidavit. The letter says:- "My memory of the conversation is entirely different. Tom Moon, in fact, recommended that I pay the Assessment rather than go to the trouble of appealing. I recall him particularly stating: "That is what I would advise any of my other clients to do."" The letter continues by stating that he brings the matter to Ms Harris's attention for her comment. 198 Ms Harris denies ever having received this letter. She swears that if she had received it she would have brought it to the attention of Counsel, as the affidavit was about to be read in the proceedings. She would have regarded it as a matter of considerable concern. Also, she kept meticulous notes of all important letters for costing purposes. She had no note of receiving or perusing this particular letter. Furthermore, the file relating to her firm's work for Mr Smiles was subpoenaed. The plaintiff's legal advisors had access to it for the purpose of searching for the original of this letter, on the basis that if it were discovered, there would be application to admit it in evidence. No such application has been made. I assume that there is no indication whatever that the letter was ever received by Ms Harris or her firm. In these circumstances, I am satisfied that it was never sent and am not prepared to place any reliance upon it in these proceedings. 199 As a result of these considerations, I have come firmly to the view that Mr Moon, on the basis of what Mr Smiles had told him as to the nannies being employed as secretaries between 9.00am and 3.00pm, did advise Mr Smiles that he had an argument for apportionment and should object to the Assessments. I am also satisfied that Mr Smiles, at all relevant times, was aware that this was the true position. 200 I should add, however, that I am satisfied by the evidence of Mr Moon that the argument for apportionment was never any more than a suggestion. It would have required very considerable further discussion and elucidation. It is clear that Mr Moon was unaware that the amounts claimed for secretarial deductions were in fact the whole of the cash salary payable to the young women for the performance of their nanny duties. Any investigation of apportionment based upon a concept of the "total package" provided to the nannies was, according to Mr Moon, foreclosed by Mr Smiles insistence that he did not wish to object, for political reasons. I accept Mr Moon's evidence in this regard, with the result that I am persuaded that, at no relevant time, did he have any information from Mr Smiles relating to any possible argument of apportionment other than Mr Smiles' claim that he employed the nannies as secretaries between 9.00am and 3.00pm and paid them wages for this work equivalent to the amounts claimed as deductions. The evidence does not enable me to form any satisfactory view as to what information Mr Smiles would have provided, if Mr Moon had sought further enlightenment from him on this topic. I fully accept, however, the submission by Counsel for the defendant that no responsible accountant, even taking the most benign view of the amount of work done by the nannies to assist Mr Smiles in his business, would have advised Mr Smiles that he was justified in allocating the whole of their cash salaries to that work. In fact, the discovery that that was the position would have raised serious questions in the mind of such an accountant as to whether the claiming of deductions in that amount, without disclosure that the young women had been employed as nannies in the household, might well amount to tax evasion. 201 These considerations are important when assessing certain major claims raised against Mr Moon relating to his alleged failure to take a pro-active role in favour of his client, particularly in relation to the advancement of arguments for apportionment. These claims form the main basis for the case that Mr Moon breached his retainer and was guilty of professional negligence. It is important, then, to consider, at this stage, the extent to which Mr Moon might have reasonably undertaken a more assertive role, both with Mr Smiles and with the officers of the ATO. 202 In the first place, I am satisfied, by the weight of expert evidence in the case, and also by considerations of common sense, that Mr Moon was under no obligation to obtain further information from Mr Smiles as to his claims for secretarial expenses. This assertion on the part of the plaintiff is linked with a co-ordinate claim that he should have sought, at the outset of the professional relationship, a full understanding of the "nature" of the plaintiff's business. In this regard, I accept Mr Moon's evidence that there was nothing basically complicated about the business which would require further inquiry into the true character of the payments for secretarial expenses. This was a perfectly normal category of claim in relation to the type of business conducted by the plaintiff and required no investigation, unless the accountant was put on notice by the client that there were particular features, which needed consideration in terms of the tax law. I have already indicated that, as a matter of common sense, an examination by Mr Moon of the source documentation, without further disclosure from Mr Smiles, would not have suggested that either the cash book or the summaries provided, contained concealed problems in relation to the deductibility of the secretarial expenses. 203 As I have found that Mr Moon was unaware of the tax audit, until 10 April 1991, the only areas in which it could be asserted that he might have taken at an earlier stage, a more pro-active role are to be found in March 1991 when, in circumstances where the 1989 and 1990 tax returns were overdue, he was told by Mr Walton that they would be collected from his office. It is submitted for the plaintiff that this indication of particular interest on the part of Mr Walton should have acted as an "alarm bell". It is said that he should have discussed this with Mr Smiles when, shortly thereafter, in the same week, Mr Smiles signed the returns and Mr Moon, himself, signed the relevant certificates as Mr Smiles' tax agent. As I have indicated, I accept Mr Moon's explanation that Mr Smiles was his only Restricted Access Taxpayer and that he viewed Mr Walton's wish to uplift the returns directly from his office as being something related to that status. Moreover, the evidence simply does not enable me to come to any conclusion as to what would have been the result of Mr Moon's bringing to the attention of Mr Smiles that the returns were to be uplifted in this way. It is not suggested that Mr Smiles, if he had been appraised of that fact, would have unburdened himself to Mr Moon as to the true nature of the "secretarial" deductions in the returns. Indeed, having regard to his failure to inform the ATO during the Substantiation procedures that the secretaries were in fact nannies employed in the household, until such time as he was confronted with the information held by Mr Walton during the interview on 28 August, I feel quite confident that he would not have divulged any further information to Mr Moon on this topic, even if he had been told that the returns were to be picked up by the ATO rather than delivered to them. 204 It is next asserted that, upon being told by Mr Smiles at the end of August or in early September, that the ATO would not allow the deduction for secretarial expenses, on the basis that they were purely domestic payments to persons who were nannies rather than secretaries, he should have, as it were, insisted that an argument then and there be mounted to the ATO on the basis of "apportionment". It is submitted that he should have given positive advice that an immediate letter be sent to the ATO asserting that the deductions were legitimate and justifiable. This course would have required that Mr Smiles make a full disclosure to him of the arrangements, or lack of them, in relation to the nannies' work in his business, the nature of the payments to them and the relationship of those payments to their agreed wages and conditions for performance of their nanny duties. I am not persuaded that Mr Smiles would have made any such disclosure to Mr Moon, had he been insistent that an aggressive stance should have been adopted in the face of the ATO's asserted intention to disallow the deductions. In my view, accordingly, the claim on behalf of Mr Smiles that Mr Moon should have, at this stage, taken a more "pro-active" approach goes nowhere. 205 A similar argument is put in relation to the period following immediately upon receipt of the Amended Assessments. It is contended that, at this stage, Mr Moon should have, in effect, demanded that Mr Smiles, in his own interests, instruct him to write in strong terms to the ATO asserting arguments based upon "apportionment" and referring to the "total package" provided to the nannies. As already indicated, I am satisfied that Mr Smiles expressed desire not to object, prevented any submission being made to the ATO along these or any other lines. 206 Of more significance, however, is the plaintiff's assertion that, upon receipt of the Amended Assessments, Mr Moon should have advised him that there was a possibility that he would be prosecuted, even if the Assessments were paid without the lodging of an objection. In this regard, the plaintiff's case is supported by the expert evidence, including that called on behalf of the defendant. The reference to the 45% level of penalty imposed should have operated as a warning that prosecution was a real possibility. Mr Moon accepts that he did not advise the plaintiff of this possibility in the context of their discussions as to whether an objection should be lodged. It is the plaintiff's contention that, had he been so advised, he would have proceeded with the objection and that this would have had the effect of either preventing, or deferring for a substantial period of time, the commencement of any prosecution. He would also have sought senior legal and accounting advice. It is contended that the obtaining of such advice could or would have resulted in steps being taken which would have prevented the prosecution. 207 It is also contended that Mr Moon's failure to provide this advice and also to be pro-active in the plaintiff's interest was compounded, when he participated in an interview on 31 October 1991 with Messrs. Smith and Fitton, the representatives of the audit prosecution unit to whom reference has already been made. The tape recording of this interview is in evidence and it was played during the hearing. Before making further reference to it, it is necessary to consider some other matters. 208 The interview between the defendant and Messrs. Smith and Fitton took place only a fortnight after the Amended Assessments issued and the conversation in relation to the objection had occurred. It is clear that an appointment was made, prior to 31 October, for the two ATO officers to call upon Mr Moon. There is an issue in the case as to whether Mr Moon advised Mr Smiles that the interview was going to take place. It would be surprising if there had been no contact between the two men, when the ATO's wish was made known to Mr Moon. The defendant gives no evidence in his affidavit of any such contact. However, in the absence of any file note, Mr Moon necessarily relied upon his memory of this period, the situation being that, at the time of preparation of the affidavit and in the witness box, he could provide no recollection. There is, however, in Exhibit 25 which is a set of diary notes from Mr Smiles' Electoral Office, a note that Mr Moon had telephoned Mr Smiles on 29 October 1991 leaving a message asking him to call. Also, in Exhibit 35, which is a long note of a conference held between Mr Moon and Mr Poberezny, an officer of the DPP, on 16 December 1991, there is reference to a recollection which Mr Moon then held of a conversation shortly before the 31 October 1991 interview. As this recollection was no more than two months old at the time it was recorded, I feel that I can safely act upon it. It is recorded as follows:- "I was interviewed by the tax office on 31 October 1991. I remember shortly before that I had a conversation with Phillip. I said words to the effect: "I'm going to get a visit from the audit prosecution people." Mr Smiles said: "What for?" I said: "They're looking at prosecuting you rather than fining you. It'll probably take the matter out of the secretary arena into the public arena." ("Secretary" is probably a misprint for "secret"). 209 I find, on the balance of probabilities, that this conversation occurred. I also consider that, as I have already said, Mr Smiles knew from the interview he had had with the journalist Alex Mitchell in early October 1991, where he had been confronted with considerable leaked information, that prosecution as a result of the audit was definitely in contemplation by the ATO. Moreover, in Exhibit 28, a document dated 24 March 1992, supplied by Mr Smiles to Ms Harris, in relation to a proposed affidavit to be sworn by him, for use in the Federal Court proceedings, the following paragraph appears:- "Given that either the ATO (Chatswood) or the DPP leaked information on seven occasions to my knowledge prior to the serving of the Summonses I was left in no doubt that the ATO was after maximum embarrassing publicity. It must be remembered that Mosman Daily journalist, Sue Hicks, and my major political opponent at the 1991 State Election, Robin Read, then MP, both had considerable detail of my financial affairs during the month of May. Note, Sun-Herald's detailed information in October long weekend – which they attributed to me, correctly - but the extensive questioning by the Assistant Editor at the time, Alan Mitchell, left me in no doubt he knew it all." 210 I conclude that, prior to the ATO interview with the defendant on 31 October 1991, Mr Smiles knew that it was going to take place and also that he had a significant awareness that his prosecution was probably in contemplation. 211 It is clear that Mr Moon had never experienced such an interview before. Indeed, none of the expert witnesses had been placed in a similar situation. The interview commenced with a blunt assertion from one of the ATO officers that: "We're here to decide whether to prosecute you or Mr Smiles". Mr Moon thought, not unreasonably, that this utterance was intended to intimidate him. Nevertheless, I am satisfied that, fairly early in the interview, and certainly by the end of it, he was satisfied that there was no intention to prosecute him, with the result that no conflict of interest between him and Mr Smiles could be said to have arisen. In the interview he indicated the manner in which he received the information from Mr Smiles, for the purpose of its inclusion in his tax returns, and the absence of any knowledge on his part that the secretarial expenses were in any way suspect. 212 The interview is relied on by the plaintiff more for what was not said in it than for what was. In particular, it is contended that Mr Moon, in the interests of his client, should have used it as an opportunity to advance his client's case for an "apportionment", indicating that, whatever the position might be as to deductibility of the expenses, nevertheless Mr Smiles had an honest belief that the claims could be made. I think this claim of breach of duty must necessarily fail. In the first place, as is clear from the evidence, Mr Moon's concept of an argument for apportionment was based solely upon Mr Smiles' assertion that the secretaries worked for him in his business from 9.00am to 3.00pm. The ATO had, by the time of the interview, significant evidence in its possession to refute that proposition. Moreover, Mr Smiles had been quite adamant in the conversation, less than a fortnight before, that he did not intend to object, with the consequence that the nature of any possible apportionment argument had simply not been explored. Mr Green, the expert witness called on behalf of the defendant, whose evidence I accept, was quite clear that it was in every way appropriate for Mr Moon not to have advanced any defence on behalf of his client at this interview, let alone a half baked one. He could reasonably take the view that such matters should be kept unstated, at that point of time. It was an opportunity to gain what information was made available from the ATO officers but to seek to avoid giving anything in return. I am satisfied that there was no relevant negligence or breach of duty involved in the manner in which Mr Moon conducted himself at this interview. 213 However, Mr Moon was subject to criticism from Mr Green, on the basis of omissions following the interview. In Mr Green's opinion, Mr Moon should have rendered a full report to Mr Smiles of what had occurred and should have made available to him the tape of the interview, which had been provided to him and was noted to be the "taxpayer's copy". It was also Mr Green's view that, because the content of the interview made it apparent that there was a very high probability that Mr Smiles would be prosecuted, Mr Smiles should have been told of this and should have been actively encouraged to lodge an objection and to seek specialised legal and accounting advice. 214 In cross-examination Mr Moon readily agreed that he did not do these things and that he didn't know why he had not done so. However, I am not persuaded that he, in fact, did nothing at all at this time. Once again, documents tendered in the case appear to provide more reliable information than can be obtained from witnesses' unaided recollection. In another portion of Exhibit 28, Mr Smiles spoke of the interview with Mr Moon. He said: "However, Tom Moon, my Accountant, informed me that when he was being interviewed it was indicated that prosecution, or the ATO's continuing interest in my case, WAS because of my position." 215 Also, in a document headed "ATO/DPP Gestapo Tactics" provided by him to Ms Harris, in which he makes extensive complaints as to the conduct of the investigation, he makes he following statement: " During a telephone conversation after I had paid the Amended Assessment, i.e. late November or early December, the current accountant Tom Moon indicated that he had been visited by ATO officers and his view was "That they were out to get me."" 216 In light of this material I am unable to accept that Mr Moon did nothing either before or after his interview with Messrs. Smith and Fitton to acquaint Mr Smiles with the likelihood that a prosecution might be brought, irrespective of whether he paid the amount of the Amended Assessment. 217 The interview had occurred during the period of sixty days available for the lodging of an objection. An objection could have been lodged within the period, if Mr Moon had sought to force the issue and, Mr Smiles had been prepared to accept that advice. In this regard, it must be noted that Mr Smiles does not say in his evidence that he would have lodged an objection at that point of time if so advised by Mr Moon. In his affidavit of 19 November 2002, at paragraph 115, Mr Smiles says:- "At no time did the defendant say to me, prior to the issuing of the Summonses, that I could be prosecuted. The defendant never advised me of the potential for prosecution. Had the defendant done so, I would have immediately sought senior legal and accounting advice and would have approached the matter differently." 218 Two comments must be made in relation to this paragraph. Firstly, I am quite satisfied that both before and after receipt of the Amended Assessment, Mr Smiles was well aware of the possibility that he might be subject to prosecution in respect of the disallowed deductions. As indicated, I accept that Mr Walton had spoken to him about this possibility in the conversation of 3 September. I am also satisfied that he regarded Mr Mitchell as being improperly in possession of leaked information, in quite specific form, which was to the same effect. He also knew that Mr Moon was to be interviewed in circumstances where the ATO was looking at prosecuting him rather than fining him. He also knew, after the interview had taken place, that Mr Moon thought that the ATO was "out to get him." Whilst it can be said that Mr Moon should have pushed him harder he, nevertheless, had, in my view, sufficient information as to the ATO's intentions, to propel him in the direction of seeking the senior level of advice of which he speaks in this paragraph. In the second place, he does not, in this paragraph, indicate in what way he would have approached the matter differently, after obtaining senior legal and accounting advice. 219 In this regard, all that I can obtain from his evidence and from submissions made in his case is that, if the probability of his prosecution had been forcefully brought home to him by Mr Moon, he would have taken advice at a senior level. It appears to be implicit in this argument, as presented, that that advice would have been to write, in a robust way, to the ATO asserting the validity of an "apportionment" approach to the claimed deductions, with emphasis upon the nannies having accepted a "total package" which, apparently, resulted in them being partly employed as nannies and partly employed as secretaries, with the full amount of their negotiated nanny wage being appropriately apportioned to their secretarial duties. This, it is contended, would probably have resulted in the ATO and the DPP rethinking the situation and deciding not to prosecute. 220 It seems to me that, unless Mr Smiles can make good this proposition, then he must necessarily fail in these proceedings, whatever may be said by way of criticism of Mr Moon's rather supine position during and after the interview of 31 October. 221 If nothing could reasonably have been done by Mr Moon to halt what seems to have been the inexorable progress towards prosecution, then Mr Smiles's damage flows simply from the fact that he was convicted by the Magistrate. Once the prosecution was launched, Mr Smiles was in the same position as anyone else charged with an offence. He had the same rights as any citizen to defend himself to the full by employing competent legal representatives to prepare and conduct his case, calling all necessary witnesses and presenting arguments which would, no doubt, embrace the legitimacy of the claimed deductions, asserting his versions, through his own evidence, of conversations with the ATO officers, and emphasizing the advice he claimed to have received as to the propriety of his whole course of action, including the setting-up of the home office and the use of the young women as secretaries in his business. 222 There is no evidence before me as to the course followed in the defence of the charges set out in the informations. The simple fact must be accepted that he fought the case, asserting, no doubt, an honest belief in the legitimacy of what he had been doing, and lost. This loss and its consequences cannot be attributable to Mr Moon. Indeed, in a letter sent to Mr Moon after the conviction and Mr Smiles' resignation from the New South Wales State Parliament, he wrote:- "In retrospect, my defence suffered due to key witnesses not being prepared to give evidence, another key witness being overseas at the time of the case, and my deliberate decision to be very circumspect in a number of areas which may have distressed my two wonderful sons." He also said:- "In addition, it is difficult to assess both what awareness the Court had concerning the realities of small business, and the significance to the Court of making an example of me because I was considered a high-profile politician." Although this letter was sent to a very large number of people, the copy sent to Mr Moon had a personal handwritten note upon it from Mr Smiles saying: "Will call and say hello soon. Hope all is well with you." 223 Needless to say, it was a matter for Mr Smiles and his legal advisors to determine whether the reluctant "key witnesses" should have been subpoenaed to give their evidence and whether an adjournment should have been sought to enable the other "key witness" to return from overseas. These decisions were not matters for Mr Moon's advice. 224 Mr Smiles succeeded in his District Court appeal. I do not know whether this was a result of Mr Smiles being able to call evidence which he had not called before the Magistrate or whether some new argument was placed before his Honour which led him to find the prosecution case not established beyond reasonable doubt or whether it was simply a case of arguments succeeding on appeal which had not won acceptance in the first hearing. It was submitted to me that it became apparent in cross-examination of Mr Walton, on appeal, that he had not considered whether the payments made to the young women were a legitimate part of a "total package" of benefits provided to them for the performance of their combined duties. I have read and considered this part of his evidence. I am in no way persuaded by it to the view that had Mr Moon or anyone else put such an argument, having been given by Mr Smiles any necessary facts to support it, it would have, on the probabilities, dissuaded the ATO and DPP from launching the prosecution. 225 Even if Mr Moon had prevailed upon Mr Smiles, when the likelihood of prosecution became apparent, to seek senior advice and lodge an objection, together with submissions to the ATO as to Mr Smiles' lack of culpability, I am far from persuaded that this would have deflected the ATO from the course that had been decided upon in early September and later confirmed by the DPP. In my view, the plaintiff's submissions in this case fail to take any proper account of the strength of the prosecution case that was being constructed. Following upon the anonymous letter of November 1990, the investigation conducted by Mr Walton, including the interviews with most of the young women, significantly bore out the allegations in the letter. Moreover, these allegations were lent considerable weight by the evidence of Mrs Ruth Smiles and the concealment by Mr Smiles from Mrs Zlatevska and from Mr Moon, of the fact that the "secretaries" were employed in the household as nannies. A similar concealment was evident from the cash book entries and the Substantiation documents. 226 The evidence that was available to the ATO and DPP prior to the launching of the prosecutions is collected in Exhibit 51. It is a very imposing body of material, to significant portions of which I have already made reference. 227 I ask myself what could reasonably have been the effect of a submission, made to the ATO and DPP before the Summonses were served in January 1992, to the effect that the nannies had a form of dual employment, which resulted in Mr Smiles honestly believing that he could allocate the whole of their cash salaries, previously negotiated by Mrs Smiles for their nanny duties, to tasks performed for him in his consultancy business. I am satisfied that such a submission could not have succeeded in preventing or halting the prosecution. Quite apart from the facts that were marshalled against it, it would have lacked substance in other ways. Insofar as the "total package" included lodging, that element was provided in premises which were jointly owned by Mr and Mrs Smiles, so that he would also have been contributing to the benefits provided to them for their work as nannies. It is not clear, also, whether Mr Smiles contributed to the ordinary household bills from which the food and drink consumed by the nannies would have been purchased. The same may be said of their use of a telephone on the house, which was free of charge to them. 228 It was, quite clearly, well known to the ATO in the course of its investigations, that the young nannies received, as part of their "live-in status", free board and lodging. It was quite plainly part of the "package" but, equally plainly, the package comprised the whole of their emoluments for their work as nannies. If there cash salaries were removed from the package and appropriated to their alleged secretarial work for SMS, then their very considerable work as nannies and domestic helpers would be rewarded only by free board and lodging and some minor benefits. This would be plainly ridiculous. I should add that I am satisfied that Mrs Smiles provided no additional wages to the nannies. 229 If there were any argument for an apportionment, then, in my opinion, it could only have related to some very small part of their cash salaries. This was not the approach adopted by Mr Smiles, nor would it have had any bearing upon the prosecutions. The informations all relate to the relevant expenditure entries providing false indications of outgoings "which had been incurred entirely in carrying on the business of Smiles Management Services." 230 It is apparent that, in the proceedings in the Federal Court, which were taken after Mr Smiles had had recourse to senior legal and accounting advice, the brief of evidence, which the audit prosecution unit had prepared and sent to the office of the DPP, was introduced into the evidence before Davies J. This brief is included in Exhibit 51 together with all the other material which would have been available for consideration in determining whether Mr Smiles should be prosecuted for the offences with which he was subsequently charged. His Honour considered this material and in his judgment (107ALR 4439 at 450) said:- "It is unnecessary to set out the contents of the Brief of Evidence. It is sufficient to say that what was alleged against Mr Smiles was the deliberate evasion of tax in circumstances, which if proved, would seem to justify the prosecution of any taxpayer." 231 I have read the identical material. I respectfully agree with his Honour's description of its effect. In my view, even if Mr Moon had, in the context that there was a likelihood of prosecution, advised Mr Smiles to seek senior legal and accounting assistance for the purpose of making a submission that this should not occur, then such a submission, if made, would have been, in my opinion, ineffective. 232 I am satisfied that any omissions by Mr Moon to give advice to Mr Smiles after he became aware of the prospect of prosecution, did not result in any damage to Mr Smiles. No submission along the lines argued for in these proceedings would, in my view, have deflected the ATO from its intention to prosecute Mr Smiles on the basis of the very compelling evidence it had accumulated. 233 I should mention the expert evidence in the case and some arguments, founded upon it, that I have not already dealt with in these reasons. I note that, although the evidence was very extensive in form, it was largely based upon factual assumptions many of which have disappeared in the course of these reasons. Also I have, from time to time, referred to my acceptance of aspects of it, in the making of factual findings. 234 Three expert witnesses were called in the case, Messrs. David Clark and Paul St. Clair for the plaintiff and Mr Michael Green for the defendant. All provided very extensive reports and each gave oral evidence. Mr Clark's evidence was primarily relied upon by the plaintiff. It incorporated a great deal of the material supplied by Mr St. Clair. 235 I formed the firm view that I should rely upon the evidence of Mr Green. In my opinion, Mr Clark, in many instances, set too high a standard by which to judge the work of the defendant. Quite obviously, if a client wished to have work done to the standards particularised by Mr Clark, then he would have to be prepared to pay much higher fees than were paid by Mr Smiles to Mr Moon. In my view, the relationship between Mr Smiles and the defendant did not, in itself, demand that work be done to these standards, which involved, in all circumstances, the auditing and close examination of expenditures before claiming them as deductions. Moreover, I must necessarily have some reservations as to Mr Clark's objectivity in this case. It transpired, during the course of his oral evidence, in cross-examination, that he could not be regarded as a truly independent expert witness. In fact, he had been acting as Mr Smiles' accountant for the past six years. This important fact was not divulged in his reports or in his evidence-in-chief. This does not mean, of course, that I must wholly disregard his evidence, but I must necessarily view it in the light of his relationship with the plaintiff. I note, however, as will appear, that there was substantial agreement, in a number of areas, between the evidence of Mr Clark and Mr Green. 236 From time to time during the course of these reasons I have relied on Mr Green's evidence. I found him to be a thoroughly objective witness who, in a number of respects, criticised the work of the defendant. He expressed the view, which I have accepted, that the description of the defendant as an accountant and/or tax agent does not establish the scope of the responsibilities undertaken. Each must observe appropriate standards of professional conduct. I have accepted his view that, in the absence of an express agreement with the client, it is not necessary for an accountant, in preparing the client's tax return to substantiate each item of expenditure. In relation to the size of the secretarial expenses which was a factor of particular significance in Mr Clark's evidence, I accept Mr Green's view that "in the context of a consulting business and in the absence of specific information that might set off a train of inquiry, we do not consider that the biggest expense item of the business makes it "undeniably essential" that an accountant should check this expense with his client." In line with this opinion I consider that, consistently with the increase in gross income in the consulting business in the tax years in question, there was nothing which would have necessarily caused Mr Moon to query or investigate an increase in size of the secretarial expenses. 237 I have also accepted Mr Green's view, contrary to that of Mr Clark, that the provision of a summary of entries from a cash book, known to be maintained by the client in a regular way, would be a sufficient source of information, without the need to go behind the cash book and make an examination of source documents. I would add that Mr Moon's knowledge of the level of education of his client and also his status as Assistant-Treasurer would reasonably have led him to trust the accuracy of the material being supplied. Moreover, as Mr Green points out, "an inspection of original source documents, such as bank statements and cheque butts would not have alerted the defendant to the fact that the secretarial expenses were otherwise than as shown." 238 I also accept Mr Green's view that the Code of Professional Conduct applicable to members of the Institute of Chartered Accountants did not require that the defendant, when taking over Mr Smiles's work from Mrs Zlatevska, to make inquiries of her in relation to the secretarial expenses regularly claimed as deductions by Mr Smiles. 239 Mr Green agreed with Mr Clark's propositions that: (a) It is appropriate to act as facilitator and liaise with the ATO in relation to correspondence and communications between the ATO, the ATO audit function and a client. (b) It would have been sensible for the Defendant to review the results of the Plaintiff's substantiation exercise and for him to be present at meetings with the ATO, if he was aware of the meetings. (c) It would be prudent to request a list of questions for the taxpayer under audit prior to any meetings with the ATO to enable the taxpayer to properly prepare for the meetings." 240 However, Mr Green acknowledges that the opportunities for the defendant to become involved in meetings between the ATO and the plaintiff were limited. This was the more so, having regard to my findings that the plaintiff did not keep the defendant informed as to the meetings. Also, what would have happened if the defendant had requested a list of questions, is most difficult to determine. The plaintiff was under investigation in relation to allegations which were in addition to and outside the scope of the Substantiation audit. The defendant would reasonably have understood the audit to require only the provision of documentation to support the claims for deductions. There was nothing to alert the defendant to the underlying basis of the inquiry, namely allegations that the claims for secretarial expenses were fraudulent. I am not able to find that any list of questions would have exposed this problem. 241 Mr Green considered that it would have been prudent for the defendant to have reviewed the Substantiation Schedules prepared, without his assistance, by the plaintiff and Mrs Lawrie, before they were submitted to the ATO. He says that this would be subject to any agreement to the contrary. It may well be that the conversation which I have referred to earlier in these reasons amounted to such an agreement. Even if it did not, a review of the Substantiation Schedules would have revealed no problem. There was no complaint by the ATO that the Schedules did not accord with the source documentation. The complaint was that that documentation did not reflect the reality of the "secretarial expenses". 242 Mr Green makes an analysis of the situation relating to the incorrect entries of payments to Ms Tamblyn in the plaintiff's cash book. It was argued on behalf of the plaintiff that, had the defendant prepared the 1989 and 1990 tax returns in the correct order, he would have been more likely to have observed the potential "error" in relation to these entries. These returns were prepared, quite obviously, in some haste having regard to the requirement of the ATO that they be furnished promptly. As I have already noted, it appears that the material for the preparation of the 1990 return was forwarded to Mr Moon by the plaintiff before the material for the 1989 return. It was, accordingly worked on by the defendant's employees in that order. Indeed, one of the queries raised by the employee working on the 1990 return was as to whether the 1989 return was also to be prepared, the last return having been the 1988 return which had been furnished some time previously. In any event, as I have found, the relevant entries were not "errors". It is at least likely that, in those circumstances, any query by Mr Moon in relation to them would have been met by a response justifying their inclusion in the "secretarial" column. As Mr Green points out, the plaintiff's 1990 tax summaries record that the SMS business ceased trading on 30 June 1989 and an examination of the cash book would not have alerted the defendant to the fact that Ms Tamblyn could no longer be assisting the plaintiff because she had gone with the plaintiff's wife after November 1988. Moreover, after the sale of the Mosman home, the plaintiff continued to claim home office expenses in respect of portion of the home unit later occupied by him. Mr Green expresses the opinion that the claims made by the plaintiff relating to these secretarial expenses, continuing after the sale of the Mosman home, did not need special attention on the part of the accountant. I agree with and accept his reasoning in this regard. 243 In the main, the criticisms of the defendant made by Mr Green, and which accord with those made by Mr Clark, related to his lack of activity on behalf of the plaintiff, when he became aware of the real possibility that a prosecution might occur. He should have been aware of this possibility upon consideration of the Amended Assessments and the reference to the 45% level of penalty. He would have been most particularly aware of the likelihood of prosecution after his interview with the ATO for prosecution purposes on 31 October, about a fortnight after the issue of the Amended Assessments. At that point of time, even taking into account Mr Smiles' expressed determination to pay the assessments and avoid further political repercussions, he should have pointed out that prosecution could occur even if the assessments were paid. It would have been appropriate to renew, with some vigour, the advice to object. It would also have been appropriate to advise Mr Smiles to seek specialised tax and accounting advice in order to determine the best course of action. 244 I have already considered these criticisms, which I accept as appropriate. However, they must be considered in light of the fact that, as I have found, Mr Smiles was concealing the true position in relation to the secretarial expenses, claiming, even at that stage, that they were payment for work done by the relevant nannies, on a regular basis between the hours of 9.00am to 3.00pm. Also, as I have discussed, I am simply not persuaded that any efforts on the part of senior advisors at that time would have prevented the prosecution. The fact is, of course, that efforts were taken somewhat later, on senior advice. These resulted in Federal Court proceedings to halt the prosecution, which proceedings failed at first instance and on appeal. 245 Accordingly, the expert evidence in this case does not alter the views that I have expressed. I should add that I do not accept a submission that the lodging of an objection would have delayed or deferred the prosecution. Although that suggestion was made in evidence, there is nothing to support it. 246 Other evidence called on behalf of the plaintiff from lay witnesses, to the effect that business calls made to the home were answered professionally and that, from time to time, the nannies were to be observed answering the phone in the study do not, in my view, advance the plaintiff's case to any significant degree. Such evidence is quite consistent with the relevant nannies performing some acts of voluntary assistance to Mr Smiles and are not necessarily indicative that they were employed as secretaries. The evidence of another lay witness to the effect that Mr Smiles' "staff" assisted in various ways with work associated with the consultancy did not impress me. It was certainly not supported by the evidence of the young women themselves nor, on close examination, did it appear to be based, in any significant sense, upon personal observations made by the witness. 247 On behalf of the plaintiff, I have been referred to a number of taxation cases. I do not consider that they assist the plaintiff. I do not consider that a submission based upon them, made to the ATO in October 1991 or thereafter would have prevented the prosecution of the plaintiff. The question under consideration was whether the claims for deduction of the secretarial expenses had been genuinely and honestly made. The ATO and the relevant staff of the DPP had obviously formed a firm view that this was not the position. The expenditures, being the total cash salaries referrable to the young women employed as nannies had not be "incurred" as a business expense of SMS. 248 I have now dealt with all the matters ultimately relied upon by the plaintiff to establish the liability of the defendant to him for alleged breaches of duty in contract and in tort. In my judgment the plaintiff has failed to establish the defendant's liability to him for any damage allegedly suffered by him as a result of his prosecution, on the informations set out at the commencement of these reasons. In these circumstances it is unnecessary for me to consider the question of damages, as there must be a verdict for the defendant. 249 I make the following orders:- 1. The proceedings be dismissed. 2. The plaintiff pay the defendant's costs on an indemnity basis including reserved costs. *************** Last Modified: 06/19/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.