Kafataris v Joseph [2016] NSWSC 1556

Supreme Court New South Wales

Medium Neutral Citation: Kafataris v Joseph [2016] NSWSC 1556 Hearing dates: 4 – 7 October 2016 Date of orders: 11 October 2016 Decision date: 11 October 2016 Jurisdiction: Common Law Before: Fagan J Decision: 1. Judgment for the defendants. 2. The plaintiffs are to pay the defendants' costs of the proceedings. Catchwords: TORTS – negligence – breach of duty – false tax return lodged – Capital Gains Tax event not declared – penalties imposed by ATO on plaintiff – whether defendant provided erroneous financial advice concerning avoidance of Capital Gains Tax – causation – whether plaintiff relied on erroneous advice or instructed false returned to be lodged Legislation Cited: Income Tax Assessment Act 1997 (Cth) Category: Principal judgment Parties: Christos Kafataris (1st plaintiff) Theodora Kafataris (2nd plaintiff) Kirk Joseph (1st defendant) Graham Leslie Lennan (2nd defendant) Representation: Counsel: Mr James Emmett (1st and 2nd plaintiff) Mr Kirk Joseph (1st defendant)

Solicitors: Alvin Ng (1st and 2nd plaintiff) File Number(s): 2014/109202

Judgment 1. The plaintiffs claim damages against the defendants for alleged negligence in the discharge of professional duties with respect to preparation and lodging of the plaintiffs' personal income tax returns and partnership income tax return for the financial year ended 30 June 2003. 2. In that year there occurred a Capital Gains Tax ("CGT") event in the plaintiffs' affairs. By ss 100-20(1), 104-5, 102-5(1) and 108-5(1) of the Income Tax Assessment Act 1997 (Cth) the plaintiffs were required to report this event in their respective personal returns and bring to account 50% of the gain as income. They allege that the first defendant erroneously and negligently advised them that they need not report the event and need not return the income, provided they elected not to claim an old age pension. 3. The plaintiffs assert that they acted upon this advice by instructing the first defendant to prepare returns which omitted these matters. Returns were lodged and did not declare the capital gain. The Commissioner of Taxation assessed the plaintiffs on the basis of the returns to an amount of tax which was significantly less than the tax which would have been payable if the capital gain had been declared. 4. After an audit by the Australian Tax Office ("ATO") during 2010 and 2011, amended assessments were issued in mid-October 2011. The first plaintiff was required under these amended assessments to pay the following additional amounts: 1. Shortfall in primary tax, including Medicare levies: $296,535. 2. Penalty at 75% of the shortfall in primary tax for intentional disregard of the tax laws: $215,474. In addition, the first plaintiff was required to pay a General Interest Charge ("GIC") on the shortfall in primary tax and on the penalty from about the dates when they ought to have been paid. 1. The amended assessment issued to the second plaintiff required her to pay these amounts: 1. Shortfall in primary tax, including Medicare levies: $133,325. 2. Penalty at 75% of the shortfall in primary tax for intentional disregard of the tax laws: $94,289. The second plaintiff also was required to pay GIC from the time when the shortfall tax ought to have been paid. 1. On 16 December 2011 objections to the amounts of penalty in the amended assessments were lodged on behalf of both plaintiffs by a solicitor, Mr Andrew Noolan. The objections were disallowed by the Commissioner in early 2013. The Commissioner refused to remit the penalties or the GIC. 2. Appeals to the Administrative Appeals Tribunal were instituted by the plaintiffs in early 2013. These appeals were settled in July of that year. The penalties were reduced to $86,189.63 for the first plaintiff and $37,715.81 for the second plaintiff. The plaintiffs had to pay these reduced penalties and GIC in respect of them. They incurred legal and accounting costs associated with the audit, the objections and the appeal. Their damages claimed in the present negligence action are quantified as the sum of the incurred penalties, GIC and legal and accounting costs. Of course the shortfall in primary tax which each plaintiff was required to make up to the Commissioner in respect of the 2003 financial year is not part of the damages claim. This is tax which would have to have been paid if the returns had correctly brought the capital gains to account in the first place. 3. The first defendant disputes that he advised the plaintiffs they need not disclose the CGT event or declare the amount of their capital gain in their 2003 tax returns. On the contrary, he says he was aware of the sales of the two parcels of real property on which the gain was realised and that he prepared and showed to the plaintiffs draft tax returns acknowledging the CGT event and declaring amounts of taxable capital gain. He said the plaintiffs rejected his advice, refused to allow their returns to be lodged in those terms and instead instructed that the returns be lodged with the capital gains information withheld. 4. The issue of liability in this case turns first upon whether the plaintiffs have discharged their burden of proving that advice was given in the terms to which they have deposed and that they acted on such advice. If the advice was given, it was clearly wrong. That is common ground. The lodging of the original inadequate returns certainly caused the losses to which the plaintiffs point. That also has not been contested. 5. A second factual question upon which liability turns is whether the first defendant received affirmative instructions from the plaintiffs to cause their returns to be lodged without CGT disclosure. Only if there were such instructions could the first defendant escape a finding of negligence for his admitted conduct of causing the returns to be lodged in the form in which they were. The lodgement took place through the second defendant, a tax agent.