New South Wales Supreme Court CITATION : Invacare v Hartog [2007] NSWSC 1172 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 18/07/2007 JUDGMENT DATE : 23 October 2007 JURISDICTION : Commercial List JUDGMENT OF : Associate Justice Macready at 1 CATCHWORDS : Procedure. Adoption of Referee's report. Matter referred back to Referee for further report. PARTIES : Invacare Australia Pty Ltd v Phillip Henry Hartog and Ors FILE NUMBER(S) : SC 50178/2005 COUNSEL : JR Sackar QC & P Kulevski for plaintiff JC Kelly SC & JAC Potts for defendants SOLICITORS : Mallesons Stephen Jaques for plaintiff Clayton Utz for defendants - 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST Associate Justice Macready Tuesday 23 October 2007 50178/05 Invacare Australia Pty Ltd v Phillip Henry Hartog & ors JUDGMENT 1 His Honour: This is the hearing of two amended notices of motion filed on 22 June 2007. The plaintiff seeks orders for the adoption of the report provided to the court by Mr Gower on 5 April 2007 as amended by the report provided to the court by him on 1 June 2007. The defendants seek an order that certain matters be referred back to the referee for further consideration in respect of the amended report. 2 The parties' submissions have helpfully set out some of the background in the matter and I and will incorporate them with some amendments. 3 This case concerns a Share Sale and Purchase Agreement dated 29 December 2004 pursuant to which the plaintiff purchased all of the issued share capital of a company known as Australian Healthcare Equipment Pty Ltd from the first and second defendants Mr & Mrs Hartog for a price of $11,455,394. 4 The Agreement included provisions for the retention of $2.4 million in escrow to secure the performance of certain contractual warranties and for a price adjustment that was subject to the preparation of certain Completion Accounts by the plaintiff, as at 30 December 2004. 5 The third defendant, represented by its executive director, the fourth defendant, was the adviser to the first and second defendants during the sale, including a lengthy period of due diligence by the plaintiff. 6 The plaintiff seeks various forms of relief, essentially on the basis of alleged misleading and deceptive conduct by the defendants prior to 29 December 2004 and the breach of various contractual warranties. Mr and Mrs Hartog have cross-claimed seeking repayment of the $2.4 million held in escrow and an adjustment to the purchase price in their favour. 7 By agreement of the parties on 1 September 2006 the Court referred a number of accounting questions that are relevant to the misrepresentation and warranty case, and the cross-claim, to Mr G.C.A. Gower, for inquiry and report, including the accuracy of the Completion Accounts. 8 The referee's report was delivered on 5 April 2007 ("the First Report"). The plaintiff and the defendants identified a number of errors in the First Report and, by agreement between the parties, on 11 May 2007 the Court ordered the referee provide an explanation by way of further report in relation to a number of matters, including: 4. When calculating the material to sales ratio why did you confine yourself to particular ledger accounts and: (a) not include all sales and sales returns in "sales"; (b) include in "materials" items which were not themselves materials; (c) include inter-company sales within the AHE group in both "sales" and "materials"; (d) use "contra adjustments in Schedule 3.2 to the Report? 5… 6. Why did you apply the calculated materials to sales ratio to determine the inventory in the Completion Accounts when the inventory amount in the Completion Accounts did not solely include materials? 7. With respect to the "Tax Expense" figure of $273,737 in paragraph 293 of the Report: … (c) Did you apply Accounting Standard 1020 when determining income tax expense for the 6 months ending 31 December 2004 and the carrying value for FITB? If not, why not? What is the effect on your calculations had you done so? 8.. . 9. What corrections, if any, would you like to make to the Report, in light of your answers to any of the above questions? 9 The referee provided his explanation by way of a further report dated 1 June 2007 and made a number of corrections to the First Report, which are no longer in issue. Two areas remain in dispute. 10 The first area is the referee's calculation of the material to sales ratio ("MS Ratio"), which is relevant for the purpose of the misrepresentation and breach of warranty case and his application of that ratio to determine inventory as at 30 December 2004 for the purpose of calculating the true Completion Accounts. 11 The second area is the correct application of the tax effect accounting standard to the preparation of the Completion Accounts. The legal principles applicable to the adoption of a referee's report 12 The principles have been discussed in a number of cases. In Abigroup Contractors Pty Ltd v Sydney Catchment Authority [2005] NSWSC 662 McDougal J summarised the principles in these terms: ""11 SCR Pt 72 r 13 empowers the Court to adopt, vary or reject a report in whole or in part, and to decide any question for itself either on the evidence taken before the referee or on that and additional evidence. It reads: "13 Proceedings on the report (1) Where a report is made, the Court may, of its own motion, after notice to the parties, or on application by any party, on a matter of fact or law or both: (a) adopt, vary or reject the report in whole or in part, (b) require an explanation by way of report from the referee, (c) on any ground, remit for further consideration by the referee the whole or any part of the matter referred for a further report, (d) decide any matter on the evidence taken before the referee, with or without additional evidence, and shall give such judgment or make such order as the Court thinks fit. (2) Evidence additional to the evidence taken before the referee may not be adduced before the Court except with the leave of the Court." 12 The principles by which the discretion conferred by the Rule is to be exercised are well known, and were not in dispute. I stated them, at least to my own satisfaction, in Seven Sydney v Fuji Xerox [2004] NSWSC 902. I set out what I there said at paras [11] and [12]: "11 The principles to be applied, in exercising the discretion conferred upon the Court by Pt 72 r 13 to adopt, vary or reject in whole or in part a report of a referee, are well established. There are a number of cases to which, customarily, reference is made. They include Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549; the unreported proceedings in that case before Giles J (19 May 1992: the relevant considerations referred to by his Honour are sufficiently extracted in the decision of the Court of Appeal); Chloride Batteries Australia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60; White Constructions (NT) Pty Ltd v Commonwealth of Australia (1990) 7 BCL 193; and Foxman Holdings Pty Ltd v NMBE Pty Ltd (1995) 38 NSWLR 615. As to the nature and content of the referee's obligation to give reasons, the relevant authorities include Xuereb v Viola (1988) 18 NSWLR 453 and Hughes Bros Pty Ltd v Minister for Public Works (Rolfe J, 17 August 1994, unreported; BC 9402885). 12 The relevant principles, distilled from those decisions, can be stated as follows: (1) An application under Pt 72 r 13 is not an appeal either by way of hearing de novo or by way of rehearing. (2) The discretion to adopt, vary or reject the report is to be exercised in a manner consistent with both the object and purpose of the rules and the wider setting in which they take their place. Subject to this, and to what is said in the next two sub paragraphs, it is undesirable to attempt closely to confine the manner in which the discretion is to be exercised. (3) The purpose of Pt 72 is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation; that purpose would be frustrated if the reference were to be treated as some kind of warm up for the real contest. (4) In so far as the subject matter of dissatisfaction with a report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh. (5) Where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition towards acceptance of the report, for to do otherwise would be to negate both the purpose and the facility of referring complex technical issues to independent experts for enquiry and report. (6) If the referee's report reveals some error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than "unsafe and unsatisfactory". (7) Generally, the referee's findings of fact should not be re-agitated in the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. Thus, the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence. (8) The purpose of Pt 72 would be frustrated if the Court were required to reconsider disputed questions of fact in circumstances where it is conceded that there was material on which the conclusions could be based. (9) The Court is entitled to consider the futility and cost of re-litigating an issue determined by the referee where the parties have had ample opportunity to place before the referee such evidence and submissions as they desire. (10) Even if it were shown that the Court might have reached a different conclusion in some respect from that of the referee, it would not be (in the absence of any of the matters referred to in sub para (6) above) a proper exercise of the discretion conferred by Pt 72 r 13 to allow matters agitated before the referee to be re-explored so as to lead to qualification or rejection of the report. (11) Referees should give reasons for their opinion so as to enable the parties, the Court and the disinterested observer to know that the conclusion is not arbitrary, or influenced by improper considerations; but that it is the result of a process of logic and the application of a considered mind to the factual circumstances proved. The reasoning process must be sufficiently disclosed so that the Court can be satisfied that the conclusions are based upon such an intellectual exercise. " 13 To that statement I add the following: (1) The right to be heard does not involve the right to be heard twice. (2) A question as to whether there was evidence on which the referee, without manifest unreasonableness, could have come to the decision to which he or she did come is not raised "by a mere suggestion of factual error such that, if it were made by a trial judge, an appeal judge would correct it". The real question is far more limited: "to the situation where it is seriously and reasonably contended that the referee has reached a decision which no reasonable tribunal of fact could have reached; that is, a decision that any reasonable referee would have known was against the evidence and weight of evidence." (3) Where, although the referee's reasons on their face appear adequate, the party challenging the report contends that they are not adequate because there was very significant evidence against the referee's findings with which the referee did not at all deal, examination of the evidence may be undertaken to show that the reasons were in fact inadequate because they omitted any reference to significant evidence. (4) Where the court decides that the reasons are flawed, either on their face or because they have been shown not to deal with important matters, the court has a choice. It may decline to adopt the report. Or it may itself look at the detail of the evidence to decide whether or not the expense of further proceedings before the referee (which would be the consequence of non adoption) is justified. 14 The first point restates the aphorism of Mahoney JA in Super at 567. The second, third and fourth points are drawn (and include direct quotations) from the judgment of Hodgson CJ in Eq (with whom Priestley JA agreed and with whom, as to the relevant principles, Fitzgerald AJ also agreed) in Franks & Anor v Berem Constructions Pty Ltd (NSWCA 2/12/98, unreported; BC 9806367). If I may say so with respect, I regard what his Honour said as giving content, on the facts of the particular case, to the operation of relevant principles rather than as stating any new principle." 13 The plaintiff, who seeks the adoption of the two reports, submitted that the reports showed an appropriate analytical and scientific approach to the assessment of the subject matter, showed no perversity or manifest unreasonableness and did not come to a decision that no reasonable tribunal of fact could have reached. The materials to sales ratio question 14 The materials to sales ration question arises from a representation alleged in paragraph 26 of the Commercial List statement filed by the plaintiffs: "26 At all material times on and after 14 December 2004, the Hartogs represented that: (a) AHE had a materials to sales ratio ( 'MS Ratio') of 42.0% for the years ended 30 June 2003 and 30 June 2004, and a MS Ratio for the period 1 July 2004 to 30 November 2004 of 42.6% (41.1% excluding certain strategic Perpetual sales); and (b) there were no circumstances known to the Hartogs which might reasonably be expected materially and adversely to affect the MS Ratio." 15 The particulars of the representation indicated that it was contained in an email of 14 December 2004 from Mr Robinson to the plaintiff purchaser. In paragraph 27 of the statement the representation is alleged to be false incomplete and inaccurate. The particulars give details of this falsity including that for the year ended 30 June 2005 the MS ratio for AHG was substantially higher than that represented in the 14 December 2004 email. On the pleadings the accuracy of the representation of the MS ratio is in issue for the years ended 30 June 2003, 30 June 2004 and the period up to 30 November 2004. The matter is also raised for the year ended 30 June 2005. 16 The actual question asked of the referee in the first reference reflected the simple allegation and was in these terms: "What was the material-to-sales ratio for AHE for: (a) The year ended 30 June 2003; (b) The year ended 30 June 2004; (c) The five months ended 30 November 2004; (d) The year ended 30 June 2005." 17 In his initial report the referee, after stating that the material to sales ratio is calculated as the dollar value of materials consumed as a percentage of the dollar value sales at a point in time, went on to refer to the submissions of each of the parties. The plaintiff and their expert Dr Ferrier made reference to the actual calculations by Mr Robinson. Mr Robinson remained with the company for some time after the sale but then left and was bound by various confidentiality agreements. All this meant was that he was not available to give details of how he actually calculated the ratio which he set out in his e-mail of 14 December 2004. 18 The referee noted that for any comparisons to be relevant it is necessary to calculate the MS ratios on a consistent basis for each relevant date and noted that they should comprise the same components. After analysing the plaintiff's submissions the referee went on to make a reconstruction of Mr Robinson's calculations which were reflected in the e-mail of 14 December 2004. 19 Having discovered his methodology he then went on to calculate the MS ratio using Mr Robinson's method for the period to 30 November 2004 and the year ended 30 June 2005. He then determined the relevant material to sales ratio in respect of manufacturing to be as follows: Year ended 30 June 2003 42.0% Year ended 30 June 2004 42.9% Five months ended 30 November 2004 48.4% Year ended 30 June 2005 46.7% 20 This was an unwelcome finding for the defendants as it indicated falsity and a decreasing trend in profitability of the company that they were selling. 21 As I have set out in paragraph 8 there was agreement on the questions to be asked of the referee by way of further report. The referee was invited to make corrections to his report. However, the submissions about his methodology which were made before me were not put in a straightforward way to the referee. 22 In paragraph 26 of his second report the referee's answers reiterated the basis upon which he had made his calculations in these terms: "26. In my First Report I reconstruct Mr Robinson's MS Ratio calculation at 30 June 2003 and 2004 and 25 November 2004 and consistently apply Mr Robinson's methodology in calculating the MS Ratio at 30 November 2004 and 30 June 2005" 23 The referee went on to deal with the individual questions which were: 4. When calculating the material to sales ratio why did you confine yourself to particular ledger accounts and: (a) not include all sales and sales returns in "sales"; (b) include in "materials" items which were not themselves materials; (c) include inter-company sales within the AHE group in both "sales" and "materials"; (d) use "contra adjustments in Schedule 3.2 to the Report? 24 In respect of question 4(a) he only indicated that he was simply following Mr Robinson's methodology. In respect of 4(b) concerning materials he said it included items which were not themselves materials and said that they were still included consistent with the methodology adopted by Mr Robinson. He gave reasons for such an approach. In respect of question 4 (c) he gave reasons which indicated that Mr Robinson's methodology avoided any duplication from this inclusion. In respect of question 4(d) he said he was unaware of Mr Robinson's basis for these inclusions and noted that they did not materially impact on the MS ratio calculation. 25 The defendants submitted that the fundamental problem with the way the referee has answered the question is that he does not answer the question that was asked of him in accordance with its terms so that a true answer is produced. It was submitted further that: "In this case, the referee chose a methodology which he believed would aid comparison with other figures. But this is a misrepresentation and breach of warranty case. The question asked of the referee called upon him to ascertain the true ratio between materials and sales at each of the nominated dates; that does not entitle him to adopt the methodology of another person, which may or may not be correct, simply to produce an aid for comparison with the work of that other person. Indeed, this is a case in which issue has been joined in terms which impugn the integrity of Mr & Mrs Hartog referable to their understanding of the true financial condition of their company. It is entirely inappropriate in such a case that a referee should take it upon himself to serve any purpose other than to answer the question posed in strict accordance with its terms. Moreover, the plaintiff's misrepresentation and breach of warranty case is pleaded under the heading "MS Ratio Misrepresentation and Contraventions", in paragraphs 25 to 32 of the Commercial List Statement. In paragraph 26 of that statement, the plaintiff asserts that Mr & Mrs Hartog represented in an email from Mr Robinson to the plaintiff dated 14 December 2004 (which became part of the disclosure documents) that AHE had a material to sales ratio of certain percentages during certain periods up to 30 November 2004 and "there were no circumstances known to the Hartogs which might reasonably be expected materially and adversely to affect the MS Ratio" ( "the M/S Ratio Representation" ). In paragraph 27, it is alleged that the M/S Ratio Representation was false, incomplete and inaccurate because there was a report which indicated that "AHE had a trend of decreasing sales and increasing costs" and "for the year ended 30 June 2005, the MS ratio for AHE was substantially higher than that represented in the 14 December email". Self-evidently, the questions asked of the referee in relation to the M/S ratios at various dates go to the falsity of the representation, in the respects pleaded, not in some other or different respect. That being so, there is no basis for any enquiry concerning the M/S ratio for the year ended 30 June 2005, or any other period, other than in strict accord with the true position; not a position which is affected by use of methodology which is selected to serve some purpose and does not reflect the true position." 26 The plaintiff's response to the submission was twofold. It was submitted that this is not the case where one is searching for the ultimate truth because Mr Robertson attached a schedule to his e-mail for the purposes of expressing his opinion which opinion may turn on or involve issues of characterisation. The attachment to the e-mail does not really assist the question of characterisation of the material to sales ratio as all it gave was gross figures for each item and does not on its face show how those items are calculated. 27 The second basis was that the referee did give reasons for his conclusions and that they should be accepted in preference to accepting Dr Ferrier's evidence which was before the court on the question of whether the referee's reasons revealed some error of principle. 28 The evidence of Dr Ferrier: (a) Challenges the referee's assertion that he had reconstructed Mr Robinson's MS ratio, (b) Presented an alternative reconstruction to Mr Robinson's calculations using what he determined was the basis adopted by Mr Robinson and found them to be: Year ended 30 June 2003 42% Year ended 30 June 2004 42% Five months ended 30 November 2004 42.6% Year ended 30 June and 2005 41.6% 29 A consideration of the reports of the expert and the comments upon them by Dr Ferrier disclose that there has been an attempt to determine the MS ratio using Mr Robinson's methodology. The question asked of the referee did not propose that methodology and simply asked the direct question as to what was the relevant MS ratio. The problem seems to have arisen from the form of the submissions made to the referee. 30 The purpose of the questions is to enable the Court to apply any answers to determine the issues in the proceedings. The issues in the proceedings, as I have earlier indicated, include the truth or falsity of the representations made in the e-mail for the year ending 30 June 2003 and subsequent years. By way of example an issue is whether in the MS ratio for the year ended 30 June 2003 was as represented by Mr Robinson namely 42%. Plainly he had a method for calculating that figure and that method may or may not have provided a true answer to the factual question of what was the MS ratio. 31 It may well be that the referee was of the view that Mr Robinson's methodology was the correct methodology for producing an answer to the factual question which has to be determined. There are suggestions in the way the referee has answered the second report that indicate he thinks the methodology used in certain respects is appropriate to the determination of the true fact. However nowhere is there a statement in any of the answers provided to the Court that the methodology which has been adopted is one which does provide the true answer to the question. Instead the answers take as their starting point the methodology of Mr Robinson. 32 Absent of any such indication a court could be in error in accepting the answer as evidence of the correct factual matter. It is notable that the referee in dealing with the periods for the year ended 30 June 2003 has not made any adjustments and he has simply adopted Mr Robinson's methodology and calculations. He does not express a view as to whether it provides the correct answer in fact. 33 If one could infer from the reports that the answers gave a true answer it seems to me that this is a case where there are different opinions on the characterisation adopted and no sufficient reason is shown to not accept the referee's analysis. However there is the more important point as to whether the answers now will provide a useful basis for the Court to continue to a deal with the matter by using the referee's report and answers. In my view it is preferable to refer the matter back to the referee with an instruction to determine the question asked by reference to what he believes to be the correct methodology for determining the MS ratio be it that of Mr Robinson or otherwise. 34 Such a reference assisted by the submissions of the parties will no doubt produce an answer which will be of use to the Court and ultimately perhaps save expense to the parties. I note that it is intended to use the answers to found a summary judgment application. Tax effect accounting 35 At paragraph 293 of the original Report, the referee has calculated two components of income tax expense, viz: Tax payable as reflected in the company's income tax return: 117,953 Tax expense (based on tax effect accounting) of referee's adjustments 155,784 Total tax expense $273,737 36 The referee, in the Second Report, in response to question 7 asserted that the figure of $117,953 is "tax effected. 37 The defendants' submissions explained the term "tax effect accounting". It is a term of art among accountants and takes its meaning from the Accounting Standard ASRB 1020 "Accounting for Income Tax ("Tax-Effect Accounting)". 38 The defendants witness Dr Ferrier describes "tax effect accounting" in the following terms: "Tax effect accounting is not a complex accounting process. Put simply, tax effect accounting is accounting for income tax expense in accordance with Australian Accounting Standard ASRB 1020, which requires income tax expense to be determined by applying the income tax rate to the profit as shown in the profit and loss statement, rather than by applying the income tax rate to the profit as shown in the income tax return." 39 He also went on to explain the way in which "tax effect accounting" is applied in these terms: "In order to apply tax effect accounting in accordance with accounting Standard ASRB 1020, it is necessary only to determine two amounts: (a) the income tax expense, which is determined by multiplying the profit shown in the profit and loss statement (adjusted for permanent differences) by the income tax rate; and (b) the income tax payable, which is determined by multiplying the taxable profit shown in the income tax return by the income tax rate. The difference between the amounts determined for (a) and (b), if any, is recorded in the balance sheet as either a provision for deferred tax or a future income tax benefit." 40 Apparently this process is necessary in order to report the income tax expense in the same financial period as the period in which the profit on tax is payable was reported. 41 According to the defendants' submissions the referee has made four errors in attempting to apply tax effect accounting to his calculation of income tax. Those errors are said to be: (a) first, whereas the accounting standard requires that accounting profit be adjusted only for permanent differences, the referee contradicts the accounting standard by stating that accounting profit is to be adjusted for both permanent and timing differences; (b) second, whereas the accounting standard specifies that income tax expense is to be brought to account when items are reflected in the accounting profit, even if they will not be included in the taxable profit until a later period, the referee contradicts the accounting standard by stating that it is inappropriate to do so; (c) third, the referee misunderstands and misapplies the concept of "permanent differences" as properly understood within the meaning of the accounting standard; and (d) fourth, the referee has failed to apply the basic and obvious principle that an increase in profit will result in a higher income tax expense, and a decrease in profit will result in a lower income tax expense. 42 It was the plaintiff's submission that in the Further Report the Referee: (a) expressly rejected the defendants' submission that the sum of $117,953 was not tax effected (see paragraph 51 of the Further Report); (b) confirmed that he had applied AASB 1020 in determining the income tax expense for the 6 month period to 31 December 2004 and the carrying value for FITB; and (c) set out in detail his methodology for applying tax effective accounting. 43 The plaintiff therefore submitted that there was factual material sufficient to entitle the referee to reach his conclusions in relation to income tax expenses. In the circumstances it was submitted that the Court should follow the general principle that it will not reconsider disputed questions of fact where there was sufficient factual material available to enable the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee has appropriate expertise. 44 I turn to consider each of the criticisms of the second report. It is apparent from paragraph 50 and 51 of the referee's report that the tax expense is calculated by taking account of permanent and timing differences. Paragraph 10 of accounting standard ASRB 1020 provides as follows: "The amount of the income tax expense attributable to the transactions included in the profit and loss account for a financial period shall be brought to account in that profit and loss account irrespective of whether the income tax is currently payable, or has already been paid, or will become payable in the future. The amount of such income tax expense shall be calculated on the pre-tax accounting profit or loss, adjusted for permanent differences (if any), by using the liability method of tax-effect accounting. Where the permanent differences are material, a note to the accounts and group accounts shall state the general nature and the extent to which they have affected the amount of income tax expense." 45 As is apparent it is only permanent differences in respect of which an adjustment is made. Dr Ferrier's evidence was that by including an adjustment for the timing differences and permanent differences this simply resulted in calculating taxable profit as shown in the income tax return. The inclusion of timing differences on its face appears to contravene the standard and could be described as an error of principle. 46 The second matter seems to be related to the previous matter as it concerns paragraph 55 which is included in the section in which the referee dealt with the tax expense in paragraph 293 of his earlier report. After having already dealt with the inclusion of timing and permanent differences he comments that the relevant profit includes expense items which are not deductible until a future period. He then concludes that is inappropriate to simply apply tax rate of 30% to the accounting profit of $73,324. 47 As can be seen from the standard quoted in the first sentence of that paragraph this seems to be inappropriate. It illustrates the referee used a different approach than that contemplated by the standard without providing any relevant explanation for the departure from the standard. 48 The next error also relates to the same matter and is a reference in paragraph 53 of the second report to the referee's statement of permanent differences increasing the provision for income tax and taking that into account. 49 Paragraph .06 of accounting standard ASRB 1020 defines "permanent differences" as follows: "permanent differences" means differences between taxable income or tax loss and pre-tax accounting profit or loss arising from the existence of: (a) particular expenses and particular items of revenue, which, under current tax legislation, will never be included in the determination of taxable income or tax loss although they are brought to account in the profit and loss account; and (b) particular amounts which are allowable deductions or which are assessable income for income tax purposes although these amounts will never be brought to account in the profit and loss account;" 50 As can be seen from the definition of "permanent differences" they will increase the provision for income tax. It is apparent from the referee's calculations that amongst the permanent differences are a number of the expenses such as depreciation, audit fees and superannuation which would be allowable income tax deductions and would not be described as permanent differences within the meaning of the definition in the standard. 51 The nature of these three errors is such that this matter should be referred to the referee for a further report. As it arose out of the second report and was not apparent on the face of the first report the referee should be given the opportunity to deal with them. The fourth error is a suggestion of inconsistent calculation of tax differences. When considering the particular matters of principle to which I have referred the referee could also reconsider this aspect. The referee should also deal with any consequential effects of changes. 52 I direct the parties to bring in short minutes to reflect the matters referred to in this judgment. ********** 29/10/2007 - Correction to initials of counsel - Paragraph(s) Not applicable 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.