District Court New South Wales Medium Neutral Citation: Mark Hackelton T/as Hackeltons Accountants and Advisers v Manbead Pty Ltd & Another [2019] NSWDC 147 Hearing dates: 6 August 2018 – 8 August 2018; 15 August 2018 Date of orders: 17 April 2019 Decision date: 17 April 2019 Jurisdiction: Civil Before: Hatzistergos DCJ Decision: See [278] Catchwords: TAXES AND DUTIES – Income tax and related legislation – Duties of accountants/tax agents TORTS – Negligence – Standard of care required by accountants/tax agents – What steps are required to be taken to mitigate against risk of a client paying additional interest penalties and fees as a consequence of submitting tax returns to the ATO where there may be grounds to doubt information given by the client Legislation Cited: Civil Liability Act 2002 (NSW) Income Tax Assessment Act 1936 (Cth) Cases Cited: Astley v Austrust Ltd (1999) 197 CLR 1 Australia Property trust (NSW) v Miller [2015] NSWCA320 Chappel v Hart [1998] HCA 55; 195 CLR 232 BRK (Bris) Pty Ltd v FCT [2001] FCA 164 Effem Foods Pty Ltd v Lake Cumbeline Pty Ltd (1999) 161 ALR 599; [1999] HCA 15 Fuller-Lyons v New South Wales [2015] HCA 31 Garzo v Liverpool/Campbelltown Christian School [2012] NSWCA 151 Henderson v Queensland (2014) 255 CLR 1; [2014] HCA 52 Imbree v McNeilly (2008) 236 CLR 510 Kligowski v Metrobus (1959)101 CLR 298; [1959] HCA 8 Machs v Viscariello [2017] SAFC 172 at 601 Seltsam Pty Ltd v McGuiness (2000) 49 NSWLR 262 South Western Sydney Local health District v Gould [2018 NSWCA 69 State of New South Wales v Fuller-Lyons [2014] NSWCA 424 Thalia Corporation Pty Ltd v Bentleys (SA) Pty Ltd [2013] SASC 172 Ucak v Avante Developments Pty Ltd [2007] NSWSC 3767 Walker v Hungerfords [1987] 44 SASR 532 Warner v Hung, In the matter of Bellpac Pty Limited (Receivers and Managers Appointed) (In Liquidation) (No 2) (2011) 297 ALR 56; [2011] FCA 1123 Texts Cited: N/A Category: Principal judgment Parties: Mark Hackelton T/as Hackeltons Accountants and Advisers (Plaintiff/ Cross-Defendant) Manbead Pty Ltd (First Defendant) Vito Pennimpede (Second Defendant/Cross Claimant) Representation: Counsel: Mr S J Philips (Plaintiff/ Cross-Defendant) Mr C R C Newlinds SC & Mr D Robertson (Defendants/ Cross-Claimants) Solicitors: Colin Biggers & Paisley Lawyers (Plaintiff/ Cross-Defendant) CVC Law (Defendants/ Cross-Claimants) File Number(s): 14/360341001; 14/360341003 Publication restriction: N/A Judgment Introduction 1. The Plaintiff Mark Hackelton conducts a practice trading as "Hackeltons Accountants and Taxation Advisers" [1] specialising in tax. [2] The Plaintiff's parents Robert Hackelton and Janet Hackelton established the business in 1968. [3] 2. Mark Hackelton holds an Advanced Diploma in Accounting (Taxation) which he obtained from the Illawarra Institute of Technology in 1998. [4] In 1999, he became a registered tax agent with the Tax Practitioner's Board, however according to his evidence he never lodged documents with the Australian Taxation Office [5] or dealt with that Office on behalf of clients as a registered tax agent. He stated that it was Hackelton's policy that all lodgements and communications with the ATO were handled under his father, Robert Hackelton who was also a registered tax agent. 3. The Second Defendant Vito Pennimpede was a boilermaker by trade who conducted a property rental/development business through the first Defendant, Manbead Pty Ltd. [6] Mr Pennimpede was the only shareholder and director of Manbead. [7] Mr Pennimpede and Manbead were clients of Hackeltons between about March 2007 and late 2014. 4. The Plaintiff's claim relates to unpaid fees arising from responding to tax investigations carried out in relation to the Defendants' affairs. The Defendants' cross claims, alleging that the Plaintiffs were negligent in the first instance resulting in the Defendants unnecessarily being asked to pay fees for work that ought to have been performed properly in the first instance and penalties and interest by the ATO. Evidence Vito Pennimpede 1. Mr Pennimpede stated that his property development business was primarily conducted by Manbead. 2. He said that he also had a labour hire business that was conducted by Manbead from about 1995 to 1999 but subsequently by Cougar Industries Pty Ltd [8] which was (incorporated in 2006) until 2004. 3. Emplus Pty Ltd [9] was a labour hire business that Mr Pennimpede said he had founded to supply to the engineering and construction industries. In about 2004 he said that Mr David Carvana bought half the business. [10] Mr Pennimpede said that his then wife Mladena and Mr Carvana were the directors of the company and he was not a director. [11] Nevertheless, he had personal Deeds of Agreement. Due to personal disagreements, Mr Pennimpede said that he walked away from Emplus in about early 2006 and it was around that time that he started Manning Solutions Pty Ltd. [12] Manning Solutions was incorporated in February 2007 and operated a hire business until taken over by Universal Labour Pty Ltd, [13] which was incorporated in October 2007. [14] 4. Universal People Resourcing Pty Ltd was incorporated in June 2009 and took over the labour hire business previously conducted by Universal Labour. Universal Recruitment Pty Ltd was incorporated in April 2013. Mladena Pennimpede was the sole director and shareholder of that company. Mr Pennimpede stated that he did not believe that the Plaintiff performed any work relating to that business as it had only been operating a short time until 2014. 5. In about 1995 when Mr Pennimpede stated that he started the property development and labour hire business, he retained Decker and Associates to provide accounting and taxation advice. The accounting services for Cougar were provided Russo and Co. [15] 6. In or about 1999 to 2006 Mr Pennimpede said that he retained Mr Carvana from Carvana and Associates to provide financial and taxation advice to himself his then wife Mladena, Emplus Solutions and Manbead. [16] 7. In around early or mid-2006, Mr Pennimpede said began looking for a firm to replace Mr Carvana as accountant and financial and taxation advisor for himself, Manbead and other companies. [17] He stated that he knew Mr Robert Hackelton (being the father of Mr Mark Hackelton) as they were both members of the Ferrari Club, Australia and he knew Mr Robert Hackelton as an accountant and taxation adviser. He stated that he then had an occasion to speak to Robert Hackelton and ask him if he would take over his work, to which Robert Hackelton agreed. It was following this conversation that he decided to retain Robert Hackelton to provide accounting and tax advisory services for himself, his then-wife Mladena, Manbead, Manning and Universal Solutions. [18] 8. He stated that he provided Hackeltons with contact details for Carvana and Associates so that Mr Mark Hackelton could contact them and arrange for the transfer of all the files from Carvana and Associates to Hackeltons and he believed that occurred. [19] 9. Mr Pennimpede said that Hackeltons provided accounting and tax advisory services to himself, Mladena and Manbead from about mid-2006 until late 2014 and to Manning Solutions/Universal from 2007 until 2014. [20] 10. During most of this time, work was carried out by Mark Hackelton. [21] Mr Pennimpede said that that he was never told that Mark Hackelton stopped doing his work for himself his then wife and his companies or that he had given the work to one of his employees. He said that he usually continued to deal with Mark Hackelton although he acknowledged form time to time meeting employees. He denied being informed that they were unable to properly prepare the return of the document or that the return or document was incomplete or inadequate because of incomplete or missing information. He stated that neither Mark Hackelton nor any other employees went through the documents with him to explain the contents before he signed them. 11. Mr Pennimpede said that did not instruct Hackeltons in relation to Cougar, although he said that he informed Mark Hackelton of that business when he retained the Hackeltons in 2007. [22] He said that during the entire time that he retained Hackeltons, Cougar owned one property and had its own accountant. Mr Pennimpede said that he also did not provide any information in relation to Emplus as he said that he did not have any interest or involvement in that company at any time that he retained the Plaintiff. [23] 12. In cross examination Mr Pennimpede denied that he had been handed all the files from David Carvana. [24] His attention was drawn to a letter dated 23 March 2007 in which Robert Hackelton requested Mr Carvana to amongst other things, "make available for collection all records and documents pertaining to Manbead Pty Ltd, Cougar Industries Pty Ltd, Mladena Moras-Pennimpede and Vito Pennimpede." [25] That letter was returned to the Plaintiff with a hand written notation signed by Mr Carvana stating: "Please note all relevant records and documentation you would require was given to Mr Pennimpede personally approximately two (2) months ago." [26] 1. Mr Pennimpede denied that this was the case although he accepted that Mr Carvana provided him with some files in 2007 relating to him and his companies. [27] As Cougar had its own accountant it is not clear whether Robert Hackelton was aware of this at the time he requested documents from Carvana and Associates. Nevertheless, it can be accepted that he was aware of the existence of that company. The letter did not refer to Manning Solutions which had been incorporated in February 2007. 2. Mr Pennimpede accepted that when he went to Hackeltons he asked for tax returns to be prepared for himself and Manbead based on the work of Mr Carvana. He accepted that he did not ask for a complete overhaul of the structure of his financial affairs. [28] He accepted that within a few weeks of 23 March 2007 Mark Hackelton requested that he provide copies of all of the documentation and financials for himself his wife, Manbead and Cougar for 2006. [29] He accepted that soon after this, he delivered the documentation. [30] However he denied that he provided two versions of the financial statements of Manbead for the 2006 year to Mark Hackelton. [31] 3. Mr Pennimpede also denied having a meeting or conversation in which Mark Hackelton questioned him and Mladena about an assertion that he made that they had nil income to declare. His evidence was that Mark Hackelton told him that he could file a nil tax return for 2007 and he could not recall whether or not he told him the reason or whether he asked questions about it. He said that the return was presented to him for signature and he signed it believing that it was accurately prepared on the basis of the information he provided. [32] 4. Mr Pennimpede stated that he provided company bank accounts, statements and cheque books to Hackeltons to prepare BAS annual accounts, financial reports and income tax returns for Manbead and for himself. [33] Mr Pennimpede stated that he did not himself maintain any books, records or accounts for Manbead and relied on Hackeltons to perform that work. [34] He stated that he provided any additional information that Hackeltons requested, such as a copy of any invoice or to provide an explanation for a particular transaction or payment recorded in the bank statement or cheque book. [35] 5. Despite involvement in the above mentioned businesses, Mr Pennimpede gave evidence that he had no experience in financial accounting or taxation matters. [36] His said that he did not earn any income other than the drawings he made by drawing cash from Manbead, Manning Solutions, Universal Labour or Universal People from time to time by writing a cheque to himself which he then cashed at the bank and he also paid personal expenses from the company's account from time to time such as school fees and mortgage repayments on his home. [37] Mark Hackelton 1. Mark Hackelton gave evidence that in March 2007, Hackeltons were retained by Manbead to prepare its financial statements and income tax returns and by Mr Pennimpede to prepare his personal income tax returns. Hackeltons continued to do this work for Manbead and Mr Pennimpede for the 2007 to 2012 income tax years, inclusive. 2. According to Mark Hackelton, Mr Pennimpede turned up unannounced at Hackeltons offices in about March 2007 and requested that Hackeltons take over the accounting work for him, his wife, Mladena and the companies of Manbead and Cougar Industries. [38] Following this initial meeting, Mr Mark Hackelton said he contacted Mr Pennimpede's former accountant, Mr David Carvana and requested him to send relevant records and document relating to the clients' tax affairs. In fact the letter was dent by Robert Hackelton. Be that as it may the response was as previously indicated that he had provided documents to Mr Pennimpede personally "approximately two months ago." [39] 3. A few days later, Mr Pennimpede arrived unannounced at Hackeltons offices and had a meeting with Mark Hackelton. Mark Hackelton stated that he was provided with 2 copies of Manbead's 2006 financial statements, one marked "for the bank" and the other marked "for the tax office". [40] In his evidence, Mr Mark Hackelton stated that the two documents looked the same but they had different handwriting on the top right hand corner on the front page. At the time of swearing the affidavit, he stated that he was unable to locate any of these documents. [41] He stated that Mr Pennimpede told him "which one do you want?" Mr Mark Hackelton said that he was taken aback from these comments. He stated the documents appeared to have been prepared by Mr Carvana. He then asked Mr Pennimpede which one was true and Mr Pennimpede responded "it depends who's asking." Mr Mark Hackelton stated that he then felt "shocked and slightly offended by his apparent contempt for the tax system by producing two alternative sets of financial statements." [42] He stated that he then asked Mr Pennimpede about Cougar and was told that "Cougar doesn't do anything." He said Mr Pennimpede promised to bring him further information about the income and expenses. [43] 4. Thereafter, Mr Mark Hackelton said that he compared the two financial statements in further detail and could see that other than the hand writing on the front of the page, there was a few hundred thousand dollars in contracted payments that were included in the financial statement marked "for the tax office" version but not the "for the bank" version. Mr Mark Hackelton said that he assumed that the "for the tax office" version was accurate and that Mr Pennimpede had deliberately left out the contracted payments the copy marked "for the bank" in order to make Manbead's profit look better. [44] 5. In the course of his oral evidence, Mark Hackelton described these as "shocking documents". [45] Copies of the two documents said to have been provided on this occasion were tendered, noted as having been marked "tax" and "Bank & Chrysler" as Exhibits F(1) & F(2) respectively. [46] These hand-written notations were on the bottom on the documents. Mark Hackelton maintained that these documents which were subsequently located and he believed that they were the documents referred to in his affidavit as having been presented by Mr Pennimpede. [47] 6. In cross-examination, Mark Hackelton conceded that he did not raise the matter of the two different accounts with Mr Carvana as it wasn't his place. [48] He further conceded that Mr Pennimpede did not give him instruction as to which of the two sets of accounts were true. [49] Nevertheless, Mark Hackelton used the "for the tax office" version of Manbead's 2006 financial statements as the starting point to prepare the 2007 financial statements and returns. [50] 7. Mark Hackelton stated that the only variation was that the "for tax office" version was that it had a few hundred thousand dollars in contractor payments that were included whereas the "for bank version" did not. He said that he assumed that Mr Pennimpede had deliberately left out the contractors in the bank version in order to make Manbead's profit look better. [51] Thereafter Mr Pennimpede came to the office unannounced. Unable to see Mark Hackelton, Mr Pennimpede delivered documents to his office. Mark Hackelton later observed that these provided nothing relating to himself, Cougar or Mladena's income. [52] 8. Mark Hackelton stated that in his experience it was common for businesses such as Manbead to rely on cheque stubs and bank statements as accurately reflecting what had transpired over time from the point of view of their business' financials if they were not running their own accounting software. [53] Thereafter, he began preparing Manbead's financial statements for the 2007 financial year on the basis of the information that he had been provided. [54] That involved referring to the Manbead's financial statements for the 2006 income year (that is, for the "for tax" version of the financial statements), reviewing cheque stub and bank statements that Mr Pennimpede had provided, preparing a cash book of income and expenses that reconciled with Manbead's cheque stubs and bank statements and seeking from Mr Pennimpede further clarification/explanation for some of the cheque stubs and transactions listed in the bank statements. [55] 9. Mark Hackelton stated that after reviewing Manbead's cheque stubs and bank statements, he observed:- 1. A number of the cheque stubs were blank or only partially completed and therefore he could not work out whether they were a legitimate expense to include in the cash book; 2. Many transactions in the bank statements were not easily referrable to expenses incurred in the conduct of Manbead's business as the description was not detailed enough or appeared to be for personal expenditure. 3. A number of the cheque stubs and transactions listed on the bank statements related to a property which did not appear in Manbead's balance sheet for the 2006 financial year. [56] 1. Thereafter, Mark Hackelton telephoned Mr Pennimpede on his mobile to discuss these issues and stated that he was informed that further documentation would be provided to assist. Further information was brought to the office, however he stated that this related to Manbead only. [57] In a further telephone conversation, Mr Pennimpede was asked about an unsecured loan from Cougar which appeared on Manbead's balance sheet for the 2006 financial year. However he was told that there was no need for information from Cougar's financials because Cougar doesn't do anything. [58] Mr Pennimpede recalled saying this to Mark Hackelton on one occasion. [59] 2. Mark Hackelton said that further information was then brought to Hackeltons offices by Mr Pennimpede which again appeared to only relate to Manbead. [60] Mark Hackelton stated that he telephoned Mr Pennimpede on a number of occasions to clarify issues as a result of the 2006 balance sheet and in the preparation of the cash book, which he stated was unusual and very frustrating because most of his clients provide him with the documents he needs from the outset. [61] Mr Pennimpede in reply stated that his usual practice was to provide Hackeltons relevant documents for himself Mladena, Manbead and Manning Solution although the later had only recently started to trade. He conceded however that Mark Hackelton telephoned him from time to time to ask specific questions about a particular accounting matter. 3. At one point Mark Hackelton asserted that when Mr Pennimpede turned up unannounced he saw him and a conversation took place that Mark Hackelton described as follows: Me: Vito, I get the feeling that you're only supplying me with limited information. If you want me to look after you I need to know everything that is going on with Manbead, Cougar and with you and Mladena. You've given me nothing for your personal returns. Vito: There's nothing to give you. Me: How have you lived for the last 12 months? Vito: I've lent money to the company over the years and I'm drawing on a repayment of my loan. [62] 1. In response Mr Pennimpede said that Mark Hackelton telephoned him from time to time to ask specific questions about a particular accounting matter. [63] More broadly he had stated that in the period between 2006 and 2014 this could also be contact by either Mark Hackelton or another employee requesting a particular document or to resolve a discrepancy. [64] 2. Mark Hackelton stated that he observed that the comment about living from drawing on the loan account was consistent with the balance sheet for the 2006 financial year which recorded a $1,839,066 shareholder loan and he assumed that this was the loan that was being referred to. He stated that he then asked him whether he had no income that needed to be included in his personal return from any other source and was told that he did not, nor did his wife. [65] Mark Hackelton stated: "[47] I was troubled by Vito's comments. I knew that Vito drove an expensive car and owned a very large house in Wollongong which I fussed would have cost millions. It therefore troubled me how he was able to afford it all if neither he nor his wife earned an income and Manbead wasn't making large profits. I suspected that he was probably getting money from somewhere but he wasn't being truthful with me about it. We exchanged words to the following effect:- Me: So you have zero income to declare and your wife has zero income to declare but you live in Wollongong's most expensive house? I find that hard to believe. Vito: I assure you, it's true. Whatever you need, I can give it to you. I have all the documents to prove it. There's no issues. Me: This sounds a bit like bullshit, Vito. How do you expect me to work for you like this? Vito: Don't worry, it's all fine. I have the paperwork. [48] I was frustrated and I ended the meeting quite abruptly as a result. My frustration reflected that fact that Vito had been "drip-feeding" me information which was making my job time consuming and difficult and that he was not telling me that he did not earn any income which I found hard to believe. After Vito left our offices, I thought I may actually never see him again given our conversation had been quite heated. [49] A few days later, Vito turned up at Hackeltons offices unannounced and asked to see me. After receiving an internal call from Carol, I went downstairs and met Vito in our reception area. I was frankly quite surprised to see him. He had another bundle of loose documents with him and his demeanour was conciliatory. He told me that the further documents should contain everything I need to finish the job. [50] Using the further information Vito provided, I was able to complete Manbead's financial accounts and balance sheet for 2007 and associate tax return and Vito's individual tax return. As was my general practice, I then provided Robert with draft copies for review. As Robert was the registered tax agent at Hackeltons, it was our policy that he would review all draft documentation before it was sent to the client for review and approval. [51] Robert had no issues with the documents, so I subsequently arranged for our administrative staff to post the documentation to Vito. I am unable to locate a copy of the exact letter I sent to Vito. However, exhibited at page 2 of MH-2 is a copy of an example of such letter in a similar form as I sent to Vito. [52] On 8 November 2007, Carol came up to my office to let me know that Vito has been in to deliver the signed financial accounts and balance sheet and tax returns and to pay his bill. Carol handed me a copy of the signed documents that Vito had delivered. [53] As was my general practice, I gave the documents to Robert to sign as registered tax agent, together with our standard "Accountants Report" which accompanies all company financial accounts. [54] I then instructed Carol to arrange for the tax returns to be lodged with the ATO. Exhibited at pages 3 to 33 at MH-2 is a copy of Manbead's tax return and financial accounts (which includes a copy of the "Accountant's Report") and Vito's tax return for 2007." [66] 1. In a further affidavit Mark Hackelton stated that despite his initial misgivings the contemporaneous information provided by Mr Pennimpede and information otherwise available was consistent with his instructions that he had been drawing on his loan to Manbead to pay his personal expenses. That information included: 1. The Portal did not report any income earned based on information supplied from third parties, including interest; 2. Mr Pennimpede had previously lodged a nil tax return for 2006; 3. Manbead's statement did not disclose the payment of any dividend or consistent wage to Mr Pennimpede; 4. As he prepared Manbead's cashbook he became aware that a number of expenses were of a private nature (such as clothing or school fees) or were a lump sum cash withdrawals which could not be allocated to company expenses and thus were consistent in both type and amount with Mr Pennimpede paying living expenses; and 5. Manbead's 2006 balance sheet recorded a significant loan owing to Mr Pennimpede in the amount of $1,839 million. [67] 1. Manbead's 2007 financial statements prepared by Mark Hackelton recorded a "shareholder loan" of $2,727,849 as at 30 June 2007 [68] which was an increase over the year by $888,783 from the balance of the shareholder loan of $1,839,066 as at 30 June 2006. That is, the balance sheet records that during the 2007 financial year, rather than drawing down on loans, the suggestion is that Mr Pennimpede loaned a net additional amount of $888,783 to the company. 2. In cross-examination, Mark Hackelton conceded that there was nothing in the balance sheet that explained why the loan account, that is the amount that Manbead owed Mr Pennimpede, went up by $888,783 in a year where instructions were that Mr Pennimpede was living by drawing down on the loan account without access to a cash book. [69] 3. When cross-examined in relation to this upward movement in the loan account in 2007 Mark Hackelton stated:- Q. Nothing? So there's nothing in this balance sheet that explains why it is that the loan account - that is the amount that Manbead owes Mr Pennimpede goes up by the best part of a million dollars? A. 888,000, I believe. Q. Yeah, in a year when your instructions were that Mr Pennimpede was living by drawing down on that loan account? A. Without the cash book, no. Q. So just to understand this. ……… Q. So we can put this away, can we? A. Yes. Q. So, so far, am I right? You can't offer any explanation for why it is - in circumstances where you say your instructions were - that the way Mr Pennimpede was living was simply by being paid back money from the company; that somehow in that period it looks like he's actually lent more money to the company than the year before. A. I can't explain that without the cash book. [70] 1. Mark Hackelton said that in 2012 there was an office break in at Hackelton's offices during which a laptop and hard drive were stolen. Whilst it was Hackelton's practice to retain all client records (including working papers) for a sufficient period of time to meet the legal requirements of record retention given the length of time he couldn't say whether the working papers relevant to the preparation of Manbead's tax return and financial accounts and Mr Pennimpede's tax return for 2007 were stolen I the break in or destroyed after the retention period. [71] 2. He maintained that by the time Manbead's tax returns and financial accounts for 2007 were lodged with the ATO he had adequate source documentation to be satisfied that the lodgements were accurate with Mr Pennimpede's instructions. [72] 3. The closing balances of the shareholder loan account in Manbead's financial statements in the years that followed also fall to be considered. 4. In 2008, Mark Hackelton stated that he was stepping up to become the practice manager. [73] He stated that for the purposes of Manbead and Mr Pennimpede he was doing communication with the client, answering questions and putting questions to the client and overseeing what was going on. [74] Notwithstanding this, Mark Hackelton accepted that he had the general gist of what was going on and if there were questions to be answered as between Mr Macakanja and Mr Pennimpede, they would be asked and answered through him. [75] 5. Notwithstanding this, Mark Hackelton did not recall asking Mr Pennimpede how he was getting money for himself. [76] Earlier he had stated that Mr Pennimpede's instructions throughout the years 2008-2012 were expressed to be always the same answer every time that Mr Pennimpede was living by withdrawing money from Manbead's bank account. [77] 6. Mark Hackelton stated that after he took on the role as Practice Manager at Hackeltons in 2009, he did little accounting work directly for clients and Slavenko Macakanja took on most of his existing clients. However, in his position as practice manager, he was involved in client liaison and would not only meet new clients but also act as the interface between Hackeltons and the client and Hackeltons on behalf of the client and the ATO. [78] He acknowledged that most communication with clients and requests for information went through him and most correspondence with the ATO was referred to him to be actioned regardless of whether he was doing the accounting work directly or for particular clients. [79] Mark Hackelton described his involvement in the following terms:- "[58] Although I didn't do his work, I knew that Vito continued to use Hackeltons to do his accounting work as, from time to time, Vito would drop off documents to Hackeltons offices and request that Hackeltons prepare his Business Activity Statements (BAS) and tax returns. The administrative staff would deliver Vito's documents to my office, along with any messages from Vito, and I would pass on this information to Slav. [59] This was also reflected in Hackeltons invoices, which I was responsible for preparing. I could see from the invoices that Slav was doing most of the work, including preparing ongoing BAS for Manbead and annual tax returns for Manbead and Vito. [60] Likewise, Slav came to see me in my office to discuss issues arising from the source documents Vito had provided from time to time On more than a few occasions, I called Vito on his mobile to ask for further information or explanation of entries in the bank statements and cheque butts that Slav needed to prepare the cash book However, I do not recall any specifics." [80] 1. He accepted that the way that things were set up in 2009, in the ordinary course, was that accounts and tax returns were prepared by Mr Macakanja but would still be signed by Robert Hackelton, but he would review them mostly all the way through. [81] He accepted that on the balance of probabilities that he did review them at the time [82] and he imagined that he would have been satisfied about them [83] but he did not recall anything about them. [84] 2. In the 2008 financial year, the loan account went from $2,727,849 credit balance (meaning that Manbead owed Mr Pennimpede that amount) to a $599,226 debit balance (meaning that Mr Pennimpede owed Manbead that amount). [85] The Defendants argued that this implied that the company had paid Mr Pennimpede an amount of $3,327,075 in the 2008 financial year. Mark Hackelton had no recollection of this transaction or the reasons for it. [86] 3. In the 2009 financial year, the loan account went from a $599,226 debit balance to a $768,590 credit balance, meaning that the company now owed Mr Pennimpede that amount. [87] The 2009 movement from a debit to a credit implied that Mr Pennimpede paid to the company an amount totalling $1,367,816 during the 2009 financial year. Mark Hackelton had no recollection of this transaction or the reasons for it. [88] In the same 2009 financial year, Hackeltons prepared Mr Pennimpede's income tax return in which Mr Pennimpede's declared taxable income was only $25,000. [89] 4. In the 2010 financial year, the shareholder loan went from $768,590 credit balance (and recorded as a current liability) to a $2,546,530 debit balance (recorded as a current asset). [90] This meant that as at 30 June 2010, Mr Pennimpede owed Manbead $2,546,530. Mark Hackelton's evidence was that he had no recollection of this transaction. [91] 5. Further in the 2010 financial year, Manbead's balance sheet recorded an unsecured loan from Cougar Industries in the amount of $3,942,000. Mr Pennimpede apparently had previously instructed Mark Hackelton that Cougar "doesn't do anything." [92] However Mark Hackelton did not recall asking any questions as to how Cougar managed to loan such a large amount to Manbead. [93] 6. In the 2011 financial year, the shareholder loan disappeared from Manbead's balance sheet. This suggested that Mr Pennimpede repaid Manbead the sum of $2,546,530 during the 2011 financial year. Mark Hackelton accepted that it appeared that the loans had been paid back. [94] Again, he had no recollection of the transaction or the reasons for it. [95] In the 2011 financial year, Hackeltons prepared Mr Pennimpede's income tax returns where Mr Pennimpede's declared taxable income was $37,000. [96] 7. In cross examination Mark Hackelton was asked about the movements in the loan account. The transcript records as follows: Q. Yes, all right. Looking at the summary that we looked at now, can you see the obvious disconnect between on the one hand Mr Pennimpede having the ability to advance large amounts of money to his company and on the other hand Mr Pennimpede personally returning no income tax or negligible income tax? Can you see the disconnect? A. No. Q. If you would noticed what is a disconnect at the time surely you would have asked Mr Pennimpede to explain where he was getting the money from. Correct. A. Can you repeat that question? Q. Well, if Mr Pennimpede had cash to advance to his company, lots of cash, he must've got it from somewhere. That must be right. A. I don't know whether he had lots of cash to advance. Q. Well-- A. Perhaps it was loans. Q. But if you lend money - we went through this - if his lending money to his company, he's got cash, hasn't he? A. No, he's got access to money possibly from a bank. Q. Sure, so he might have borrowed it from a bank. A. Or another colleague, or-- Q. Sure. A. I don't know. Q. But on any view of it, he's got access to cash. That's the starting point, isn't it? A. Look, I'm sorry, but we don't use the word "cash" as in money. I mean, I've got to be careful with my words as well. So access to funds. Q. Sure, if you want to call them funds. But I mean these accounts are actually meant to record actual transactions, correct. A. Correct. Q. And a loan account is a loan, correct. A. Correct. Q. And if someone lends money to someone else they have transferred the value of money to that person somehow. A. Correct. Q. They may have given them cash with the bank's transferred money, but there has been an advance of money. A. Correct. Q. And so the starting point has to be that Mr Pennimpede had to have some money, correct. A. Access to money over the years, yeah, sure. Q. Large amounts of money. A. Large amounts of money. Q. In some years, it seems. A. Yeah. Q. So that raises the obvious question for Mr Pennimpede whose tax returns you were also preparing. Where is this money coming from and why is it not taxable? Can you see that? A. Correct. Q. And you never asked that question. A. No, I did. Q. What question did you ask him and when? A. I have asked him over the years how he's living and it's been the same answer every time. Q. What's that? A. That I withdraw money from ManBead's bank account Q. Correct, and that's what you say A. for my living. Q. And that's what you say in your affidavit, but we've been through the state of the loan accounts over the years between Mr Pennimpede and ManBead today, haven't we? A. We have been over the balance of the loan account, on one day in an entire year, which is what a balance sheet is. A balance sheet doesn't show the movement for the other 364 days, it's a snapshot of one day. Q. Yes, thanks very much for that, but what it does is compare that one day, to the one day the year before A. Correct. Q. and you've seen today, have you not, that in certain years, the loan account moves on a net basis in a way that can only mean that Mr Pennimpede has transferred funds in some way, from himself into the company? A. Correct. Q. And yet you never asked him, "What is the source of those funds?" did you? A. Yes. Q. Indeed, you never even noticed that that was going on. You accepted, you say, his assertion that he lived from day to day, just by drawing down on money was owed from ManBead, didn't you? A. Personally Q. That's what you say. A. as Vito as an individual, yes. Q. And yet the accounts, the very accounts that you and your firm prepared, showed that what he was telling you, could not be right, didn't they? A. No. Q. Because he was in fact in some years, doing the opposite. A. No. Q. He was providing money to ManBead. Can you see that? A. Yeah, I can see it, he may have contributed $1 million and taken out 80,000 in return of capital. Q. Sure, so where did that million dollars come from? Isn't that the question you should have asked him? A. I can't answer that question. Q. Well, why not? You didn't ask that question, did you? A. No. Q. But you should have, shouldn't you? A. I'm not saying - I didn't answer that - I'm not saying, "I didn't answer that question - ask him that question." Q. But you're not saying you did, are you? A. I can't answer that. Q. Because you can't remember? A. Because I can't recall. Q. But it's a question you should have asked, it should have been obvious to you, shouldn't it? A. And I would have, assuming. Q. But the only explanation you can remember being given, is a nonsense when you compare it against the very accounts you prepared? A. No, it's not - it's not a nonsense - it's Q. It is. A. I could see, in the years that I was doing, that he was in fact drawing money out of ManBead Pty Ltd. Q. Sure, that's the first year. A. Correct. Q. But then what about all the other years? A. I didn't do the cash books. Q. So, you didn't ask the question, "It's someone else's job," is that what you're saying? A. If there wasn't an issue - then the question wouldn't have been asked. If there was, it would have been. 1. In his affidavit of 8 November 2017, Mark Hackelton stated:- [18] Whether I am preparing returns or statements, I am wholly reliant on the client to provide me with the necessary information. This includes copies of their books and records and verbal instructions insofar as required. I then use my professional expertise to collect, classify and summarise the information provided to me as required in the tax return or statement in the case of a business. [19] I am not an auditor and I do not verify or validate the information provided to me by a client for its accuracy. That is not my role as an accountant. It is the client's responsibility, and their alone, to ensure that the tax return or statement presents a true and fair view of their position. [97] 1. Mark Hackelton stated that his job did not involve telling taxpayers that their affairs need to be in such an order so as to survive a review or an audit by the ATO. [98] He said that his job was to make sure that the information that was going to the ATO was correct. [99] To that end, he stated that he needed to be reasonably satisfied that the information that is submitted to the ATO is true and correct based on documentation that he has in front of him and also verbal information. [100] Robert Hackelton 1. Robert Hackelton was also an accountant and registered tax agent. He stated that he got his qualifications through the tax agents board and was neither university trained nor a Certified Practicing Accountant or a Chartered Accountant. [101] 2. Robert Hackelton gave evidence that he first knew of Mr Pennimpede being a client of Hackeltons around some time in 2007 when he attended the office and met with Mark Hackelton. He stated that he was surprised that he had made contact with Mark Hackelton as Mr Pennimpede had been an acquaintance of his. [102] He stated that Mark Hackelton came to his office and said words to the effect that "Mr Pennimpede had come to the office and wanted Hackeltons to do his tax." [103] Robert Hackelton stated that he had never met Mr Pennimpede for the purpose of preparing his income tax returns or Manbead's tax returns and financial statements. He stated that Mr Pennimpede's instructions were communicated to him through the accountant who prepared those documents, although during the subsequent ATO audit, he met with Mr Pennimpede several times and had numerous discussions regarding Manbead's financial statements for the purposes of protracted settlement negotiations with the ATO. [104] 3. So far as his involvement in the accounting and tax work performed for Mr Pennimpede and Manbead, he stated that this was limited to reviewing the draft financial statements and returns, giving instructions in the event that issues arise as a result of insufficient information, being advised on the response and then relaying the information so that the return can be lodged. He stated that once the return is printed by the accountant and sent to the client, a client meeting would be held, the accountant would go through any queries and after the return was signed, it would be forwarded to him for signature before lodgement. [105] So far as Mr Pennimpede was concerned, he stated that due to the length of time that had passed he could not specifically remember viewing the draft documents, however it is most likely that he would have questions in light of the fact that Mr Pennimpede's work was complex. [106] He stated that for clarification being attended to, Mark Hackelton provided him with the tax returns for Mr Pennimpede and Manbead on 8 November 2007 which he then attended to lodging. [107] Robert Hackelton thereafter does not recall any particular matters about any of the draft financial statements or tax returns that he reviewed. [108] 4. He conceded in cross examination that during the income tax years finishing 30 June 2007 all the way through to 2013 he did not have direct dealing with Mr Pennimpede. He said he was aware of the fact that Mr Pennimpede lived a reasonably lavish lifestyle during the whole of the period. He enquired from Mark Hackelton as to how Mr Pennimpede was living his lifestyle an yet wasn't earning any taxable income and was informed that he was getting repaid a loan that he had already put into the company. [109] 5. As for fluctuations in the movements in the accounts of Manbead he said he noticed these at the time, can't remember what he was told but was satisfied with the explanation that was given which came from Mark Hackelton. He said he didn't make independent enquiries himself. [110] 6. In oral evidence Robert Hackelton produced Exhibit F1 and F2 which he described as financial statements for Manbead for 2006 marked "Copy Tax and "Copy tax Chrysler." He stated that he did not recognise the writing but stated that they were copies of the originals. He stated that he did not recall whether he first saw the documents in 2007 however he may have. He said that he provided the documents to the Plaintiff's counsel a week earlier and he hadn't discussed them with Mark Hackelton. [111] He said he found the documents in the previous couple of weeks amongst documents that he had photographed. [112] Slavenko Macakanja 1. Mr Slavenko Macakanja was the person at Hackeltons responsible for preparing the financial statements and income tax returns for Mr Pennimpede and Manbead for the 2008-2012 financial years. [113] Mr Macakanja's evidence was that he received instructions from Mark Hackelton as to the amount of income to record in Mr Pennimpede's income tax return each year, being a nil amount in 2008; [114] $25,000 in directors' fees in 2009; [115] $31,200 in directors' fees in 2010; [116] $37,000 in directors' fees in 2011; [117] and $35,324 in 2012 comprised of $22,100 from Universal Group Resourcing and $13,224 in directors' fees from Manbead. [118] 2. Mr Macakanja stated that he prepared the financial statements and income tax returns for Manbead. This was based on his "usual practice" which involved preparing the cash book being a summary of deposits and expenses of the business for the year. He would then prepare a bank reconciliation. Utilising that information he would prepare draft financial statements which he would then discuss with Mark Hackelton. [119] After obtaining approval he would then prepare the draft tax return for Manbead which was subsequently provided to Mark Hackelton for review and approval by Robert Hackelton. In preparing documentation he would also utilise the prior year's tax return financial statements and the online ATO tax portal. 3. Mark Hackelton did not recall providing any instructions to Mr Macakanja about Mr Pennimpede's income for 2008-2012 financial years, [120] nor did he recall receiving instructions from Mr Pennimpede as to the amount of directors' fees that Mr Pennimpede received in the 2008-2012 financial years. Audit 1. In about October 2011, the ATO commenced a "preliminary risk review" of the tax affairs of Mr Pennimpede and his related entities including Manbead for the 2009 and 2010 income tax years. [121] The identified "risks" and "anomalies" identified by the ATO in the 2009 and 2010 income years included the following:- 1. Manbead accounts show a shareholder loan to the sole shareholder, Mr Pennimpede for $2,561,428; 2. Manbead's 2010 accounts show a loan from Cougar Pty Ltd for $3,492,000 in 2010, however Cougar's income tax return showed zero income and minimal assets; 3. Mr Pennimpede and his wife purchased a property for $3,240,000 and took out a $2,520,000 mortgage with NAB to assist in the purchase of the property, together with an additional $720,000 put down by the taxpayer. However it was not known how they could pay the mortgage repayments nor fund the additional amount when they have not declared any income on their individual returns. 4. The financial reports of all of Mr Pennimpede's associated entities show liabilities that exceeded assets, which made the solvency of all the companies questionable. [122] 1. In April and May 2012, the ATO gave the Plaintiff the opportunity to respond to the risks and anomalies identified by the ATO. The Plaintiff was unable to provide the ATO with any information to answer the ATO's queries, citing a lack of time to respond. [123] The ATO noted that information supplied by Hackeltons had "not satisfied the ATO" and had in fact "raised further questions." [124] 2. In about May 2012, the ATO commenced a tax audit of the Defendants to investigate, inter alia:- 1. Undeclared income for Mr Pennimpede for the 2008-2010 financial years; 2. A "Division 7A Deemed Dividend" to Mr Pennimpede as a result of a loan to him from Manbead during the 2010 financial year; 3. Undeclared fringe benefits tax by Manbead for the 2008-2010 financial years; 4. Manbead paying private expense for the 2008-2010 financial years; 5. Undeclared business income for Manbead for the 2008-2010 financial year; 6. Tax losses carried forward by Manbead and three other companies associated with Mr Pennimpede, being Manning Solutions Pty Ltd, Universal Labour Hire Pty Ltd and Cougar Industries Pty Ltd, for the 2008-2010 financial years. [125] 1. Between 2012 and 2014, the scope of the ATO's audit expanded considerably. Ultimately, the ATO audited the Defendants for the 2000-2012 financial years. Hackeltons continued to act for the Defendants in responding to the ATO's audit. 2. One matter in particular that the ATO focused on during the audit was the shareholder loans between Mr Pennimpede and Manbead recorded in Manbead's financial statements. The ATO noted that in Manbead's 2006 accounts (which had been prepared by its previous accountant, Mr David Carvana), the shareholder loan had a credit balance of $1,839,066, indicating that Manbead had borrowed that amount from Mr Pennimpede. However in Manbead's 2007 accounts prepared by Hackeltons, the shareholder loan account had a credit balance of $2,727,849, indicating that Manbead had borrowed an additional $880,783 from Mr Pennimpede in the 2007 financial year. However, Mr Pennimpede's 2007 income tax return prepared by Hackeltons recorded a nil income. The ATO treated the $880,783 increase in the shareholder loan account as Mr Pennimpede's undisclosed income, which the ATO treated as part of Mr Pennimpede's assessable income. [126] 3. Robert Hackelton gave evidence of carrying out work to respond to the ATO's enquiries. 4. In doing so Robert Hackelton wrote a letter to the ATO on 28 March 2014. In that document, Robert Hackelton states that at the time of preparing the 2007 financials, Mark Hackelton was told by Mr Pennimpede that a deposit of $1,247,019.21 was a loan from him to the company (Manbead). He stated that when he spoke to Mr Pennimpede during the extensive time used in responding to the ATO's position paper, he was told that the deposit was from the sale of his property. He then responds that neither explanation was correct. In the course of examining 23 files produced by Mr Pennimpede, he stated he came across a letter from CBA showing that the proceeds were in fact proceeds of a refinance arrangement and if that transaction was to stand alone in the shareholder's loan account for 2007, the shareholder's loan account would read:- 2006: $1,839,066 2007: $1,480,830 corrected And the $888,783 reduced to nil. Non-current liabilities now included a Members Equity Loan of $1,247,019. [127] 1. Robert Hackelton stated that as he did not have the necessary information for the financial years provided by David Carvana and Associates. In order to review the 2007 income tax return, he needed to establish whether the balance of the shareholder loan account in 2006 was accurate as a starting point for 2007. [128] He stated that his review revealed that there were a number of discrepancies in the 2006 financial statements prepared by David Carvana and Associates and that they could not be relied upon and he needed to revisit the financial statements in the 2007-2012 financial years on a standalone basis, free of the inaccuracies passed down by David Carvana and Associates. [129] He stated; "[112] It was therefore clear to me that the tax returns prepared by David Carvana & Associates could not be relied upon and that we needed to revisit the financial statements in the 2007 to 2012 financial year tax returns on a "stand alone" basis, free of the inaccuracies passed down from David Carvana & Associates. A stand alone financial statement is prepared based on source documents only, such as bank statements, invoices and cheque books, without reference to the previous year's tax return. As a result of this exercise, we would be able to show the ATO the correct shareholder loan amount in each financial year. [113] I asked Slav to prepare the 2007 stand alone financials in doing so, I asked him to isolate the business expenses from the personal expenses. I knew from my discussions with Vito that he used the shareholder loan account to pay for his personal expenses, which he considered to be "repayments" of his loan account with Manbead, and as such were tax free. He had been doing this for as long as he could remember and certainly prior to Hackelton's involvement. A way to isolate the nature of the expenses was to prepare a schedule of Vito's personal drawings from the shareholder loan account. [114] My strategy was to submit the schedule of personal drawings from the shareholder loan account as an alternative default assessment of Vito's taxable income in order to facilitate settlement discussions with the ATO and reduce Vito's tax liability. This strategy, and the likelihood for a reduction in tax liability, was repeatedly discussed with Vito over various stages of the ATO audit and negotiations." [130] 1. Robert Hackelton was asked about this correspondence with the ATO of 28 March 2014 and calculations in cross-examination. The transcript records:- Q. And then you say, "Well, neither explanation is correct." Right. And then you set out what you think the explanation is and you say you came across a letter from the CBA saying it was proceeds of some refinance arrangement? A. That's correct. Q. Who did the refinance? Can you tell us? A. Members Equity loan, it was. Q. What, to the shareholders? What does that mean? A. That was the loan to the company. Q. So it's a loan by the CBA to the company? A. That's correct. Q. How does that become, in the books of the company, a loan to the company by Vito? A. Well, it doesn't and that's why I go on to, sort of, say that we altered the actual method of it. Q. So the first thing that happened when you went through the records was that you identified that there was a mistake of $888,000 in that 2007 year? A. That's correct. Q. Correct? Now, you don't know, yourself, whether Vito was asked for any explanation by Mark at the time in 2007, do you? A. No. Q. Then if you turn to consider what happened in the 2008 income tax year. Do you remember that that balance of $2.7 million in favour of Vito - so a liability of the company - turned around to be an asset of the company in Vito's - yes, turned around to be Vito owing the company $599,000? Do you remember noticing that? A. Yes. Q. That again needed to be explained, didn't it? A. That's correct. Q. You couldn't work it out from looking at the books and records, could you? A. No. Q. In the end you just couldn't reconcile these loan accounts through the years 07, 08, 09, 10, 11, 12, could you? A. No. Q. So you went back to ground zero and you tried to recreate them. Correct? A. That's correct. Q. Does it follow then that if you had been doing the work that Mark was doing during those years, that you would have formed the view that you couldn't reconcile these loan accounts and the result would have been different? Because we know what happened when you actually did the work. You came to completely different conclusions? A. That's correct. Q. You can't really explain why that is because you weren't involved in the first round of things? A. That's correct. Q. You would have come to a different conclusion. I think you nodded. Did you, to the first question? A. What was the first question? Q. If you had done the job the first time around, in 2007, 8, 9, 10, you would have come to a different conclusion? A. And the answers was no. Q. Why is that? Because you don't know what would have happened? A. No, because I took the information that Mark provided me and I accepted that as the situation. Q. But then you concluded that the results that have been recorded in those financials just couldn't be justified? A. That's right. [131] 1. Mr Macakanja responded to a similar effect. [132] 2. Initially as a result of the audit, the ATO raised default assessment for unpaid tax, penalties and interest against the Defendants, totalling approximately $8,000,000. Ultimately the Defendants and the ATO entered into a Deed of Settlement, [133] by which they agreed to pay the ATO an amount of $1,778,749.39 which included amounts totalling $254,941.06 for penalties and interest for the 2007 to 2012 income years. 3. At about 18 August 2015, the Plaintiff received a letter from Pellegrino Perry Accountants advising that they had been approached by Mr Pennimpede to perform accounting duties for himself and Manbead and requesting copies of their client records in the Plaintiff's possession. 4. At the time that the retainer was terminated, invoices remaining payable to the Plaintiff by Manbead totalled $28,985 and payable by Mr Pennimpede totalling $134,004.40. [134] These were for fees outstanding to the Plaintiff for acting for the Defendants in response to the ATO audit. On 15 October 2015, Manbead paid $17,864 in part payment of the amount owing, leaving a balance payable by Manbead of $11,112. The total outstanding sum of $145,125.40 is the subject of the Plaintiff's claim. 5. Invoices for work done in the period of February to August 2014 remain unpaid. [135] Hackeltons relies on those invoices. [136] It was not disputed that pursuant to those invoices, the amount of $11,121 in respect of Manbead and the amount of $134,004.40 in respect of Mr Pennimpede remain outstanding. 6. As at 2016, the Defendants had been unable to pay the ATO the amount of $1,778,749.39 owing under the Deed of Settlement. The parties negotiated a further settlement which was recorded in an agreement executed on or about 26 August 2016. [137] Under the terms of the agreement, the Defendants agreed to pay the ATO the sum of $1,363,578.81 which the Defendants contend were paid in full. 7. The Plaintiff asserted that unless the Defendants succeed in their cross-claim, there is no defence to Hackelton's unpaid fee claims. [138] Defence and Cross Claim 1. The Defendants summarised their Defence and Cross-Claim asserting:- 1. Denial that they were liable to pay the amount of $145,125.40 claimed by the Plaintiff on the basis that the work for which the Plaintiffs have charged and which the Defendants have refused to pay was to remedy previous work which had been defectively performed by the Plaintiff in earlier years (being work for which the Plaintiff charged and the Defendants paid for), namely the preparation of tax returns and accounts for the Defendants for the 2007-2012 financial years (which were subsequently the subject of the ATO's audit) and for responding to the ATO's audit on the Defendant's behalf; and, 2. Claiming damages from Hackeltons in the sum of $327,737.84 for the loss and damages caused by Hackeltons by the Plaintiff's negligent work in the 2007 to 2012 financial years. [139] 1. Essentially, the Defendants argued that there was no criticism in respect of the work done by Hackeltons in 2014, but that if the work was done properly in the first instance, it wouldn't have needed to be re-worked and a lot that occurred involved fixing of Hackeltons' mistakes. [140] 2. To that extent, paragraph 2(b) of the Defence which denied that Mr Pennimpede undertook to pay any fees for work done by Hackeltons to Manbead was not pressed. [141] Mr Pennimpede suggested that the reference to that paragraph referred to audit work. 3. The Defendants submitted that of the invoices issued to Manbead, $11,121 was not due and payable and of the invoices issued to Mr Pennimpede, $17,582.40 was not due and payable. 4. The Defendants did not contend that the audit would not have occurred at some point in time. [142] Issues 1. Just prior to final submissions being delivered the Court received a consolidated Agreed Schedule of Issues. 2. The essential issue between the parties is the adequacy of the accounting working performed by the Plaintiff for the Defendants for the 2007-2012 financial years and whether that work was carried out to a reasonable standard. 3. The Defendants say that the deficiencies in the accounting work which resulted in the damages suffered (the liability to Hackeltons fees and penalties and interest in the 2007-2012 financial years) were due to the Plaintiff's negligence because Mr Pennimpede had provided any and all information and documents that Hackeltons requested of him. [143] 4. Apart from requesting that Hackeltons prepare accounts and returns, Mr Pennimpede did not provide any particular instructions to Hackeltons about this and Manbead's accounting and tax affairs because Mr Pennimpede did not have any knowledge of accounting or taxation matters. [144] It was argued that the Defendants were wholly reliant on Hackeltons to prepare accurate and reliable accounts and returns which they have failed to do. 5. The Defendants' case was that if the Court accepts Mark Hackelton's evidence and that of the Plaintiff's other witnesses, the Defendants still succeed because that version of events reveals that Hackeltons were plainly negligent in the work they performed for the Defendants. [145] The Defendants argue that their case is even stronger if the Court was to accept Mr Pennimpede's version of event or some hybrid version, being a combination of the witnesses' recollections. [146] 6. The Defendant also advanced a claim against the Plaintiff under s 251 M of the Income Tax Assessment Act 1936. [147] 7. The Agreed Statement of Issues further identified: "Whether Hackelton's can be liable to Manbead or Pennimpede for any loss and damage (including fees payable to Hackelton's for professional services and fees for legal advice relating to the ATO audit and settlement) associated with the financial years ending 2000 to 2006 (when David Carvana & Associates was the accountant and registered tax agent for Manbead and Pennimpede). [148] 1. Although a claim was pleaded for misleading and deceptive conduct, [149] it was also not advanced in submissions. 2. The Defendant accepted that some of the original claim for fees would have been incurred anyhow leading to the preparation of the Further Amended Schedule of Damages. [150] The Defendants further did not seek recovery of the fees paid in respect of invoice 511 which the Plaintiff conceded related to preparation of financial statements. [151] 3. The Plaintiff submitted that the only significant factual dispute related to the instructions and documents provided by Mr Pennimpede to Mr Mark Hackelton in 2007 and whether the fees incurred would have been incurred in any event. [152] 4. The Plaintiff claims that the accounting work was not negligent but performed in accordance with Mr Pennimpede's instructions and that any deficiencies in the work identified by the ATO during the audit were due to the Plaintiff being provided with incorrect/incomplete instructions, documents and records by Mr Pennimpede and/or due to prior accounting work undertaken by the previous accountant, Mr David Carvana which the Plaintiff alleges was incorrect. 5. The issue of whether any failure to exercise due care or skill caused Manbead or Mr Pennimpede loss was therefore in issue. [153] 6. The Plaintiff also submitted that in the event it was liable then the previous accountant was a concurrent wrongdoer and section 35 of the Civil Liability Act 2002 should be applied. Further it advanced the Defendants would be found contributory negligent. [154] 7. No issue was advanced on a pleaded limitation claim. [155] Expert Evidence 1. Two experts were called; Philip Price on behalf of the Plaintiff and Brett Goodyer on behalf of the Defendant. In addition to separate reports [156] a joint report was prepared [157] 2. In their joint report the experts reported two areas of disagreement: i. To what standard of professional conduct should a competent and prudent accountant be held in undertaking an assignment to provide accounting and tax services to a member of the public? Mr Goodyer's opinion is that "competent and prudent practice" of an accountant or tax agent will align with all applicable professional accounting standards, regardless of whether the accountant in question is a member of a recognised professional accounting body. Specifically, he considers that APES 110, 220 and 305 represent "competent and prudent practice" as they relate to the matter at hand. Mr Price's opinion is that APES 110, 220 and 305 are mandatory only to members of the Institute of Chartered accountants, CPA Australia and the Institute of Public Accountants and that the same standard of competence and prudence does not apply to non-members. The experts agree that the standards do not apply mandatorily to Hackeltons'. The difference in opinion relates to whether the standards represent "competent and prudent practice" that should be considered a minimum standard of competence and prudence in relation to the conduct Hackeltons'. The experts agree that the standards are not statutorily required to be applied but disagree as to their relevance to the practice of Hackeltons'. ii. To what extent should Hackelton's have sought additional information and verification to accurately ascertain the true taxable income of Mr Pennimpede? Mr Goodyer's opinion is that Hackeltons' did not undertake such steps so as to 'satisfy themselves as to the completeness and/or accuracy of that information' provided by Mr Pennimpede, given the initial level of scepticism as evidenced in their Affidavits, to substantiate Mr Pennimpede's assertion that he derived $0 taxable income during 2007. Mr Goodyer refers to paragraph 4.30 of the PP Report #2 [158] , which quotes the Code of Professional Conduct for Tax Practitioners as follows: … Where there are grounds to doubt the information provided by a client, the registered tax practitioner must take positive steps and make reasonable enquiries to satisfy themselves as to the completeness and/or accuracy of that information… In BG Report #1 [159] Mr Goodyer opines that the affidavits of Mark Hackelton, Robert Hackelton and Slavenko Macakanja were silent as to whether further 'positive steps' were taken by Hackeltons to satisfy themselves of the accuracy of the information being provided by Mr Pennimpede. In the event that Hackeltons did not undertake further analysis, request further documents, or undertake any work in order to substantiate a 'zero tax return' as allegedly instructed by Mr Pennimpede, it is his opinion that Hackeltons did not act in a prudent and competent manner as professional accountants of tax agents. Mr Price's opinion is that it was reasonable for Hackeltons (in accordance with their evidence) to rely upon their numerous conversations with Mr Pennimpede and on a variety of supporting documents in forming an opinion that the accuracy of a $0 tax return was supportable and acceptable. The experts agree that whether Hackeltons' sought sufficient additional and sufficient supporting information comes down to the differing representation of facts in the affidavits of Mr Pennimpede and of Hackeltons. 1. The Code of Professional Conduct for Tax Practitioners mentioned in the joint report by Mr Goodyer became applicable after 1 March 2010. It was referred to more extensively by Mr Price after noting the steps Mark Hackelton took to check the instructions that he had received. Mr Price records: By way of example, the Code applicable after 1 March 2010 refers to circumstances that may suggest a lack of competence. Such circumstances can include but are not limited to; not making sufficient enquiries to ascertain the affairs of clients to enable the registered tax agent to be reasonably satisfied that documents they prepare and lodge on behalf of these clients are correct. It was reasonable practice for Hackeltons' to conclude that Mr Pennimpede was telling the truth regarding his nil income and the use of shareholder loan repayments to satisfy living expenses. Such a conclusion was supported by evidence in the prior year financial statements and the tax agent portal. The Code also states; it should be noted at the outset that this ("reasonable care") under the Code does not create a requirement that a registered tax agent effectively 'audits' all the registered tax practitioner's clients before providing tax agent services to avoid breaching the Code. The level of reasonable care imposed by the Code is set out as follows: In most cases, this will require that a registered tax practitioner ask the client appropriate questions, based on the registered tax practitioner's professional knowledge and experience, to ascertain the accurate factual basis upon which the tax agent services are provided and, where appropriate, to obtain supporting documents and records evidencing these facts. The requirement to take reasonable care relates to the services that are to be provided and is therefore subject to the agreed scope of the engagement with the client. A registered tax practitioner would not be required to make further enquiries and it would be reasonable to rely on information or advice, if the scope of the tax agent services excludes the examination of information provided by the client or requires the registered tax practitioner to rely on the information or advice of another expert. These observations must also be considered in light of other paragraphs in this section and with the obligations under the TASA, which must be complied with. Taking reasonable care will in many cases require that a registered tax practitioner ask questions based on their professional knowledge and experience in seeking information. Where there are grounds to doubt the information provided by a client, the registered tax practitioner must take positive steps and make reasonable enquiries to satisfy themselves as to the completeness and/or accuracy of that information. Where a statement provided by a client seems plausible and is consistent with previously established statements and the registered tax practitioner has no basis on which to doubt the client's reliability or the veracity of the information supplied, the registered tax practitioner may discharge their responsibility by accepting the statement provided by the client without further checking. However, if the information supplied by a client seems implausible or inconsistent with a previous pattern of claim or statement, further enquiries would be required. Again, whilst there is no requirement to audit, examine or review books and records or other source documents supplied by a client, a registered tax practitioner does not discharge their responsibility in such a case by simply accepting what they have been told. Where information has been provided by a suitable, independent, third party expert and there is no prior experience to the contrary, it may be reasonable for a registered tax practitioner to rely on that information without further checking or enquiries. 1. The above statement was referenced to the Tax Practitioner's Board explanatory paper. It was described as providing assistance to and explanation of the general principles and matters relating to the professional and ethical conduct of tax agents. 2. Mr Goodyer stated that in his opinion competent and prudent practice of a tax agent would align with applicable professional accounting standards including the Australian Professional Ethical Standards ("APES") and any specific legislation related to the provision of tax agent services regardless of whether the accountants in question are members of an Australian professional accounting body. He accepts that neither Mark Hackelton, Robert Hackelton nor Slavenko Macakanja were members of or holders of practicing certificates of the Institute of Professional Accountants, CPA Australia or Chartered Accountants Australia and New Zealand. 3. Mr Goodyer concedes that he is not a registered tax agent. He accepts that the Tax Agent Services Act provides the Code of Professional Conduct must be complied with by registered tax agents. Nevertheless he asserts without elaboration that the fundamental aspects of the Code requires a similar requirement as to due care, competence and prudence to ensure that any statement made in a tax return is made on a reasonably informed basis. His opinion is prefaced on the APES informing the appropriate standard of care without addressing the detail of Code of Professional Conduct referred to by Mr Price 4. In joint evidence dichotomy was explained as follows: WITNESS PRICE: Probably a question for me, your Honour. The mandatory nature of the APES standards is there for reason in my opinion. And applies particularly to members of the institute. So, chartered accountants, CPAs, because of the profile and accountability that members or accountants who hold those qualifications have to - have to the public. Now, it's not easy to become a chartered accountant - the Institute of Chartered Accountants came about as a Royal Charter, and to become a Chartered Accountant involves a higher degree of education and experience over and above what you get out of a university, or out of working for a book keeper for example. So those people are held to a much higher duty of care, than I think that a regional accountant preparing tax returns would be held. The expectations of clients is very different, therefore I think that the mandatory nature of those standards should not necessarily - or it's unreasonable to apply those to the example of a regional accounting firm preparing tax returns. You could also - oh sorry WITNESS GOODYEAR: No, you - go for it. WITNESS PRICE: You could also point to a set of professional code of conduct, that it does apply to - to tax agents, which has been released by the tax agents board, or the tax practitioners board, more correctly. Which is actually only applicable for March 2010, so this matter here at hand predominantly precedes that professional code of conduct, which is relevant for tax agents. HIS HONOUR: And, I take it prior to 2010 there wasn't WITNESS PRICE: There wasn't a precedent code of conduct for tax agents. HIS HONOUR: Do you wish to respond? WITNESS GOODYEAR: Yes. So, obviously I took a - a - a different approach to that. I considered that, yes, I understand that those - those standards are not mandatory in terms of - there is no way of sanctioning a - a - individual who's not a member of those professional bodies. Mostly because at this point, the legislation only points to members of the professional bodies. But in terms of setting a standard of what is expected for the preparation of accounts and financial statements, I believe they set the standard up in the standard up in the name. But they - they provide a base level of what's expected of a professional accountant in practice. Whether that is a practice affiliated with a professional body or not. So, my - my - my approach to that is that I believe that their standards should be applied. But I understand that they're not mandatory. As a duty of care level. 1. Mr Price gave evidence that the negotiated amendment to the taxable income does not necessarily reflect the true taxable income of the taxpayer. [160] Mr Goodyer agreed with that view. [161] 2. Both Mr Price and Mr Goodyer accepted that a person performing the task of a tax agent need to take reasonable steps to satisfy themselves that the figures that appear in the tax returns can be justified. [162] In terms of what are the reasonable steps, Mr Goodyer accepted that reasonable steps could include a positive statement from the client. [163] 3. Mr Price accepted that a new accountant doesn't necessarily need to rely upon a client but could rely on a signed financial statement. [164] 4. Both experts accepted that if there was some doubt in an agent's mind as to the veracity of the accounts, steps would need to be taken. Mr Goodyer accepted that you would need to take reasonable steps to satisfy yourself that the balances are true and correct. In his report Mr Goodyer referred to APES 110 at [210] which provided guidelines for professional appointment requiring members to determine whether there are any reasons, professional or otherwise for not accepting the engagement and seeking known information or facts or circumstances that a successor needs to be aware of. [165] 5. Mr Price said that you could rely on previous accountants and their work and upon the statements of Directors as to the correctness of the accounts. [166] In his report Mr Price noted that Mr Carvana in his response to Robert Hackelton did not indicate any ethical or professional impediment to Hackeltons undertaking the work. There was no evidence of any disputes with the ATO to that point and Mr Carvana held professional qualifications. [167] 6. If in a hypothetical situation involving a new client coming in with 2 sets of accounts, stating that which version was correct depended upon "who I'm speaking to," Mr Goodyer stated that that would indicate a high level of professional scepticism and he would need to take more steps that he would ordinarily. [168] Mr Price stated that he would enquire whether both sets were signed or whether they were prepared for different purposes. He stated that he would not necessarily be sceptical but he would take steps to rely upon the opening balances. [169] 7. Turning to the facts of the case, the experts were then asked if following the preparation of the financial statements of 2007 there was a net movement of a particular loan account in that year (so that at the end of the year, the actual amount owed to Mr Pennimpede was more than it was at the start), whether that indicated that there was something wrong with the instructions initially given. This related to the instruction that Mr Pennimpede lived by drawing out money in the loan account as in the 2007 year, it appears that money was actually put in. [170] 8. The recorded exchange was as follows: NEWLINDS: But then they prepared the financials for the 2007 year and, in fact, the net movement of the particular loan account in that year was that at the end of the year, the company actually owed Mr Pennimpede more money than it did at the start. Have you noticed that in the 2007 accounts? WITNESS PRICE: I've now become aware of it, yes. WITNESS GOODYEAR: I have seen that, yes. NEWLINDS: Now, would you both agree with me that what that demonstrates is that there's something wrong with the instructions that were initially given to the effect that the way this gentleman lived was by drawing out money on that loan account because in the 2007 year, he seems to have actually put money in? WITNESS GOODYEAR: It may indicate that, but it also - the way that the account works is it may - may go up and down, so if it's gone up more than it's down, then the - the net movement is simply what's going to be reflected at the end of the period, being the balance sheet. But it would beg the question of what has gone on, and I'd probably look at the reconciliation of that account. NEWLINDS: And that's really my point; it begs the question as to whether the explanation is satisfactory, does it not WITNESS PRICE: So my comment would NEWLINDS: Mr Price? WITNESS PRICE: be that it doesn't necessarily mean at all that the answer that they lived off the drawings was not an unreasonable answer to take on board and - and to use. The reason for that is that any increase or decrease to the shareholders loan account during the year is a sum difference of amounts that have been drawn out, and amounts that have been put in by the shareholder. NEWLINDS: Yes. All right, well, I think we all agree with that. But doesn't that show that if overall it's moved up, that the shareholder must have another source of funds, other than money drawn out of the company? WITNESS PRICE: I agree with that. WITNESS GOODYEAR: Yes. NEWLINDS: Now, that may or not be taxable, of course. But do you both agree that the question should be asked? WITNESS GOODYEAR: I do. WITNESS PRICE: It might not need to be asked. It might be evident from the bank statements of ManBead in this situation, where the funds actually came from. WITNESS GOODYEAR: Sure. NEWLINDS: But if you don't know anything else, you would ask the question, wouldn't you? WITNESS GOODYEAR: I would ask the question of the bank statement. That, I think without putting words into Phillip's mouth, that's the first point of call for an accountant, would be look at the account and see where the movement has come from, to satisfy yourself. NEWLINDS: Mr Price? WITNESS PRICE: I agree with that. 1. In his affidavit of 8 November 2017, Mark Hackelton stated:- [18] Whether I am preparing returns or statements, I am wholly reliant on the client to provide me with the necessary information. This includes copies of their books and records and verbal instructions insofar as required. I then use my professional expertise to collect, classify and summarise the information provided to me as required in the tax return or statement in the case of a business. [19] I am not an auditor and I do not verify or validate the information provided to me by a client for its accuracy. That is not my role as an accountant. It is the client's responsibility, and their alone, to ensure that the tax return or statement presents a true and fair view of their position. [171] 1. In cross-examination, Mark Hackelton accepted that whilst he was reliant upon the client to provide information, he then exercised professional judgment to interpret what had been given to him. [172] Mark Hackelton accepted that he needed to be reasonably satisfied that information that is submitted to the ATO was true and correct and that he wouldn't necessarily be satisfied just on the basis of verbal information but also documentation. [173] Defendant's Submissions 1. In it Cross Claim the Defendants assert that in relation to both of them the Plaintiff failed to exercise due care and skill in providing accounting and tax advisory services to them as: 1. Mark Hackelton failed to exercise the standard of care which should have been exercises by a professional providing the services provided; 2. To the extent information provided to Mark Hackelton was insufficient to determine the correct taxation treatment of various receipts or expenses, or to prepare accurate financial statements or income returns, he should have sought further information or instructions from the Defendants; 3. Mark Hackelton should have prepared and advised the Defendants to instruct another tax agent to lodge income tax returns on a basis other than in fact lodged in particular recording the correct amount of assessable income and deductions for the Defendants in each of the identified years; 4. Mark Hackelton should have advised the Defendants about the risks associated with the income tax returns he prepared and lodged in light of the records and information (or lack of information) Mark Hackelton had used to prepare the returns and the various questions and issues those records (or lack of records ) gave rise to , including the risk of audit by the ATO and the risk of being issued with amended assessments and being liable for tax, penalties and interest in amount significantly higher that the tax which would have been payable had the returns been carefully and correctly prepared. [174] 1. In submissions the Defendants refined their position and argued that Mark Hackelton owed the Defendants a duty of care which was breached by: 1. By relying on Manbead's 2006 financial statement as the open balances for the 2007 financial statement without taking any steps to confirm the accuracy of the 2006 financial statement; 2. The accounts prepared by Hackeltons did not accord with the instructions given; 3. Mr Pennimpede and Manbead had manifestly inadequate documents and records, but Hackeltons gave no advice to them about those matters, in particular the need to have sufficient documentary records to satisfy the ATO in the event of an audit; and 4. Hackeltons allowed accounts and tax returns to be signed off and lodged despite them being plainly inaccurate in material respects. Hackeltons knew or ought to have known that the accounts and tax returns did not accord with the clients' instructions at the time they were lodged. [175] 1. The Defendants contended that Mark Hackelton was negligent in his use of Manbead's 2006 financial statement marked "for tax" as the opening balances for the 2007 financial statement without having confirmed the accuracy of that financial statement with either David Carvana or Mr Pennimpede. It was contended that based on the expert evidence an accountant would have taken steps to determined which set of accounts (if any ) were true and correct and Mark Hackelton failed to do so. [176] 2. The Defendants argued that the increase in the loan to Manbead in the 2007 financial statements by $888,783 was directly contrary to Mr Pennimpede's claimed instructions to Mark Hackelton that he was not earning any income because he was drawing down on loan he had made to Manbead. 3. The Defendant points out that it was not apparent that Manbead in the 2008 financial year had the funds available to loan $599,225 to Mr Pennimpede. [177] Further the 2009 accounts if accurate suggested that Mr Pennimpede had access to a source of funds to loan to Manbead which ought to have prompted Mark Hackelton to ask questions about whether Mr Pennimpede had any income to declare. However he failed to ask that question. 4. The Defendant contended that the debit balance of $2,546,530 in 2010 ought to have led to questions from Mark Hackelton as to how Mr Pennimpede would repay the principal on the loan or pay interest on the loan given that Mr Pennimpede's income tax returns showed that he had nil or negligible income. [178] Similarly it was argued that it ought to have made Mark Hackelton consider the possibility that the recorded payment to Mr Pennimpede would be treated as a deemed dividend – something that Robert Hackelton was aware of as a possibility. [179] 5. The Defendant draws attention to the fact that the 2011 transaction ought to have led Mark Hackelton to query Mr Pennimpede as to how he had the funds to repay that amount of $2,546,530 if he earned nil or negligible income. 6. The Defendants submitted:- "[62] None of Hackeltons' witnesses gave any evidence of Vito's instructions to them for preparation of the financial statements and returns for the 2008 to 2012 income years. In any event, the plaintiff does not suggest that the balance of the loan account at the end of each income year was based on instructions received from Vito. [63] However, it calls for some explanation from the persons who prepared the returns. According to the financial statements and returns prepared by Hackeltons, Manbead made losses year after year and Vito earned nil or minimal income year after year. Yet no one from Hackeltons has explained how these financial statements and returns came to be prepared, and how they believed that the documents accurately reflected the financial position of Vito and Manbead." [180] 1. It was submitted that the lack of explanation from persons who prepared the returns should lead the Court to no doubt that the accounts and tax returns of both Mr Pennimpede and Manbead for the 2007-2012 financial years prepared by Hackeltons were clearly deficient and failed to correctly and accurately disclose the taxable income for each of the Defendants. This was said to be made clear by the following:- 1. During the ATO audit in 2012, Mark Hackelton was questioned by the ATO about changes in Manbead's loan account in the 2009-2010 financial years and was unable to provide any explanation for the changes. [181] This was despite the fact that Hackeltons had only recently prepared the relevant financial statements and tax returns. 2. During the ATO audit, Robert Hackelton and Mr Macakanja couldn't provide information to the ATO to substantiate the balance of the loan account for the 2007-2012 financial years. [182] 1. Defendants argued that the Plaintiff had not sought to prove that the balances of the loan account are correct either on Mr Pennimpede's instructions to Hackeltons or source-documents that Mr Pennimpede provided to Hackeltons to prepare the accounts and tax returns. It noted that the Plaintiff's contention that nothing should be taken from the fact that Hackeltons prepared amended financial statements because they were prepared for the purposes of negotiations with the ATO. [183] However the Defendants contended that that submission was destroyed by Robert Hackelton's evidence that the amended financial statements prepared by him during the ATO audit was his best work to try and put forward the true tax position for both Defendants [184] 2. Referring to the letter of 28 March 2014 by Robert Hackelton to the ATO Counsel for the Defendants submitted:- NEWLINDS: Yes. So 386 is, in our submission, a problematic piece of evidence because Mark Hackelton says nothing about it. And at best, it's some sort of hearsay record of what Mark Hackelton has told Robert Hackelton. And it's not clear at what‑‑ HIS HONOUR: It does identify some of the issues which Robert Hackelton says he had. NEWLINDS: It does, but the‑‑ HIS HONOUR: But in terms of the attempted rationalisation of the changes between 2006, 2007. It doesn't take us anywhere. NEWLINDS: It just falls flat. And it just begs the question, well, if there's 1.2 that's come in, where did that come from? And that's the question that was never asked, in our submission. HIS HONOUR: 1.247. NEWLINDS: Yes. That's the question that was never asked. That's our case. Our learned friend says if it had been asked, that wouldn't have resulted in any extra tax being returned in the earlier years, and therefore these interest and penalties would've been payable in any event. He says that I haven't discharged my onus by proving what would've happened. Well, what I say in answer to that is, these are the accountants who were acting at the time. If they had asked the question, they're the ones who would've given advice as to what should've happened. The Court would infer, though, that the parties would conduct themselves legally. And if there is no explanation for where that money came from, then it is taxable in Mr Pennimpede's hands. And if that's right, it would've been returned as such and the interest and penalties‑‑ HIS HONOUR: So you're saying the absence of any explanation for the figure. NEWLINDS: Correct. HIS HONOUR: An inference should be drawn that it's taxable and that it should've been declared. NEWLINDS: The inference drawn that it's taxable, it should've been declared, and it would've been declared. Because it's both Mr Hackelton and Pennimpede who would've been involved in this. And if that's right, then the interest in penalties wouldn't have been incurred, because the tax that they related to would've been paid at the right time. That's our case. [185] 1. The Defendants argued that the difficulty with Robert Hackelton's correspondence with the ATO of 28 March 2014 was that on the one hand the Plaintiff argued that everything that was going on between Hackeltons and the ATO in 2014 was just negotiations and on the other hand, it wanted Mr Hackelton's re-categorisation of the loan amount to mean what it said. [186] Plaintiff's Submissions 1. The Plaintiff's submissions were that when Mark Hackelton met Mr Pennimpede in March or April of 2007, he was not asked to undertake a complete overhaul of the structure of Mr Pennimpede's financial affairs, rather to prepare tax returns for himself and Manbead for the 2007 financial year based on the work which had been done his previous account, David Carvana. [187] So much was acknowledged by Mr Pennimpede under cross-examination. [188] The Plaintiff further submitted:- "The actual financial statements for Manbead for 2007 prepared by Mark Hackelton reflect these instructions. ln particular, they do not disclose any assessable income for Mr Pennimpede. On the Defendants' case and submissions, the only way that the financial statements for Manbead for 2007 prepared by Mark Hackelton do not accord with Mr Pennipede's instructions (as recalled by Mark Hackelton) is that the shareholder loan balance for Manbead for 2007 has gone up in circumstances where Mr Pennimpede was apparently drawing down on that loan in order to pay for living expenses. However, the mere fact that the net shareholder loan balance went up by a substantial amount on a net basis during the 2007 year in comparison to the 2006 year is not inconsistent with Vito Pennimpede having no assessable income. As all of the accountants who gave evidence, both expert and lay, accepted, and as material which was not made available to Mark Hackelton in 2007 subsequently demonstrated, there can be other sources of funds available to a taxpayer (such as from the sale of assets or a re-finance or other borrowings) which can be used to lend to the company which are not assessable. Far from being contrary to Mr Pennimpede's instructions, the financial statements and tax returns prepared by Mark Hackelton in 2007 were entirely consistent with Mr Pennimpede's instructions (as Mark Hackelton recalled and understood them)." 1. The Plaintiff submitted that one might rhetorically ask the question in the Defendant's case as to what Mark Hackelton should have done differently to what he actually did. It was noted that it was not put to Mark Hackelton in cross-examination that there are other identified steps reasonably available to him which he did not take to verify the information which had been provided to him by Mr Pennimpede, particularly in circumstances where the client had not asked for Hackeltons to undertake a complete overhaul of his financial affairs but instead asked for a limited task to be undertaken being the preparation of financial statements and tax returns based on the previous accountant's work and the previous accountant informed Hackeltons that he had delivered all that work to the client. The answer to the rhetorical question it was submitted cannot reasonably be to disbelieve the client's instructions and seek to again contact the previous accountant. [189] 2. The Plaintiff drew attention to the fact the report which was provided by Hackeltons and which accompanied the financial statements from Manbead in 2007 (and each subsequent year) expressly limited the reliance which can be placed on those financial statements because their role did not include verification or validation of the information which had been provided by the client and they expressly had not audited the accounting reports which had been provided by the client. [190] 3. It was argued that the Defendants sought to escalate the role of Hackeltons to that of an auditor and then to criticise their work as falling short of the standard of care expected of an auditor. It submitted that in all of the circumstances, Mark Hackelton's evidence that he was reliant on the veracity and accuracy of information provided to him by Mr Pennimpede should be accepted. Further there was nothing unorthodox in the finding that tax agents and accountants were not auditors and had not been retained to undertake a complete overhaul of the client's financial affairs – they were reliant on and not required to independently verify the information provided to them by the client. 4. The Plaintiff submitted that by process of employing what it described as "fallacious reasoning", the Defendants were seeking to invert the onus of proof and insist wrongly that it was incumbent upon the Plaintiff to establish that its work during the period of the 2007-2012 financial years was not negligent in circumstances where the Defendants have not properly identified or established on the balance of probabilities, that is by reference to evidence, any breach of duty of care by Hackeltons. References in this regard, was made to the Defendant's submissions that no one from Hackeltons had explained how financial statements and returns for the period 2007-2012 came to be prepared, and further, by wrongly suggesting that it was incumbent upon Hackeltons to justify and explain each financial statement and tax return which they prepared and submitted on behalf of the Defendants. [191] 5. The Plaintiff argued that this ignores the evidence of Slavenko Macakanja as to how he went about preparing these financial statements and tax returns. [192] Further, it was argued that the Defendant's submission ignored the absence of actual evidence (as opposed to inference) that the work performed by Hackeltons in the period of the 2007-2012 financial years was negligent. It was noted that the Defendants' expert Mr Goodyer was not provided with information to allow him to determine whether the amendments made to the financial statements of Manbead in 2014 were justified or correctly applied. [193] Mr Goodyer conceded that the amendments could be due to discovery or provision of new material, discovery of errors or due to instructions received from third parties. [194] 6. The Plaintiff drew attention to Robert Hackelton's evidence that the statements were amended due to inaccuracies in the work undertaken by Mr David Carvana, prior to the 2007 financial year, which resulted in an inability to verify the shareholder loan balance and Manbead's 2006 financial statements to satisfaction of the ATO. [195] 7. The Plaintiff submitted that contrary to the Defendant's submission, there was no deficiency in the accounts and tax returns for the 2007-2012 financial years prepared by Hackeltons. That can be inferred because:- 1. Mark Hackelton's inability to explain changes in Manbead's loan account in the 2009-2012 financial years during the ATO audit in 2012 arose in circumstances where the cash book had been stolen [196] and Mr Pennimpede was unable to assist (at the audit stage). [197] 2. The inability of Robert Hackelton and Mr Macakanja to provide information to the ATO to substantiate the balances of the loan for the 2007-2012 financial years during the ATO audit was predominantly due to Mr Pennimpede's incorrect instructions to Mark Hackelton in 2007 and the inability to verify the shareholder loan balance in Manbead's 2006 financial statements prepared by Mr David Carvana, [198] as opposed to being unable to explain the movements in the years 2007-2012. Reference in this regard was to Robert Hackelton's evidence as his correspondence of 28 March 2014 and in particular Annexure B. [199] 1. The Plaintiff asserts that in fact there was no negligence relying on the contents of correspondence forwarded to the ATO by Robert Hackelton on 28 March 2014. [200] 2. The Plaintiff submitted that the fact that there was a Members Equity Loan appears apparent in a letter to Mr Pennimpede from the Commonwealth Bank, dated 10 August 2006, [201] adding:- [43] ln any event, even if Mark Hackelton had been made aware of the re-finance and had reflected that in a reduced loan balance in the 2007 financial statement, there is no evidence or reason to infer that the tax return submitted by Mr Pennimpede for 2007 would have been any different to that which was in fact submitted. lt must be remembered that in the period 2000 to 2006, Mr Pennimpede had submitted tax returns with only modest assessable income. A reduced loan balance in Manbead would not necessarily have caused Mark Hackelton to alter the nil income tax return for 2007 because Mr Pennimpede still would have been able to live off drawings from the (reduced) loan balance, and the reason for the reduction in the loan balance (namely a refinance and thereby access to greater borrowed funds) was not inconsistent with having no assessable income. [202] 1. The Plaintiff orally submitted:- PHILIPS: So that's where I come down to the narrow position and your Honour is absent the very narrow piece of breach that is alleged against Mr Hackelton. And it's really - he didn't ask the appropriate question. If he had asked the appropriate question; he would have still been satisfied that there was a loan balance. It would have been but there was still a loan balance owed by Manbead to him - Mr Pennimpede - he would still have been able to properly declare nil assessable income in 2007 and the world would have carried on. The financial statements in 2008, et cetera, would have been exactly the same; there wouldn't have been any change. [203] 1. The Plaintiff argued that the preparation of amended financial statements for Manbead, given that they were prepared solely for the purposes of negotiations with the ATO in response to the ATO's default assessment of Mr Pennimpede's tax liability on the basis of movements in the Manbead shareholder loan account, were neither requested nor formally lodged with the ATO. In this respect, references made to the evidence of Mr Robert Hackelton. [204] 2. The Plaintiff argued that there was no evidence whatsoever of any inaccuracy in Manbead's original financial statements for the 2007-2012 financial years and it was not correct to interpret Robert Hackelton's evidence that the financial statements prepared by him during the audit was his best work to try and put forward the true tax position of the Defendant's as proof of the original financial statements are not his best work or not representative of the true tax position of the Defendants. The Plaintiff drew attention to Robert Hackelton's evidence that based on the information that Mr Mark Hackelton provided to him at the time, he would not have come to a different conclusion had he done the job the first time round. Mr Robert Hackelton stated:- Q. If you had done the job the first time around, in 2007, 8, 9, 10, you would have come to a different conclusion? A. And the answers was no. Q. Why is that? Because you don't know what would have happened? A. No, because I took the information that Mark provided me and I accepted that as the situation. Q. But then you concluded that the results that have been recorded in those financials just couldn't be justified? A. That's right. [205] 1. The Plaintiff argued that the instructions received from Mr Pennimpede went beyond mere absence of proper record and extended to a deliberate and calculated attempt at misinformation which led to errors in financial statements not caused by any error or omission by Hackeltons. This it said was best demonstrated by the contents of a letter sent Mr Robert Hackelton to the ATO on 28 March 2014, [206] where he records and it was not challenged that:- 1. "the discrepancy in the shareholder loan account for Manbead in the 2007 year occurred because Mr Pennimpede had not informed Hackelton's (or provided them with any documents disclosing) of the fact that there had been a refinance of certain bank facilities held by Manbead and Cougar in August 2006; 2. Mr Pennimpede initially told Mark Hackelton in 2007 that a deposit of $1,247,019 was a loan from Mr Pennimpede to Manbead and, it must be inferred, formed the principal basis for the substantial increase in the shareholder loan balance in 2007; 3. not only was this representation by Mr Pennimpede in 2007 incorrect (unknown to Mark Hackelton at the time), but in 2014 Mr Pennimpede told Robert Hackelton that the source of funds for this deposit was the sale of a Unanderra property, which representation to Robert Hackelton was also incorrect; 4. Hackelton's only became aware of the fact of the 2006 refinance (and the documents relating to it) in 2014 following examination of 23 files provided by Mr Pennimpede (in 2014); and 5. as a result, the loan balance shown in the 2006 financial statement for Manbead prepared by David Carvana was not correct and was unreliable, which in turn gave rise to the need for Robert Hackelton to start from scratch and prepare the "stand alone" financial statements (as explained in detail in paragraphs 107-115 of the affidavit or Robert Hackelton in Exhibit B)." [207] 1. The Plaintiff argued that to the extent that a proper particularisation of negligence can be gleaned from the Defendant's contentions, it can only be that Mark Hackelton breached his duty of care by preparing the 2007 financial statements and the 2007 tax returns by failing to take into account the 2006 refinance and by accepting Mr Pennimpede's instructions that a deposit of $1,247,019 was loaned to him from Manbead, rather than a as the proceeds of a refinance. 2. In this respect, it argued that Mr Mark Hackelton cannot be regarded as being negligent for the following reasons:- 1. It was reasonable for him to rely on Mr Pennimpede's instruction that a deposit was a loan from him to Manbead in circumstances where Mr Pennimpede did not make any reference to or disclose the existence of the refinance in August 2006 and Mr Mark Hackelton was only undertaking a limited task (namely the preparation of tax returns and financial statements based on the work of David Carvana) rather than a complete overall of Mr Pennimpede's financial affairs; 2. It was not necessary or reasonable for Mr Mark Hackelton to seek to contact Mr David Carvana and ask him further questions about the deposit and the loan in circumstances where Mr Carvana had informed Mr Mark Hackelton that Mr Pennimpede had all the relevant documents and Mr Mark Hackelton had a copy of the financial statements prepared by Mr Carvana for Manbead for 2006 which disclosed the existence of a substantial shareholder loan balance; 3. Mr Pennimpede clearly has available to him, a copy of the letter from the CBA, dated 18 August 2006; [208] which provided details of the refinance but did not provide a copy of the document to Mr Mark Hackelton; 4. The fact that Mr Pennimpede did not in 2014 provide a copy of the document or disclose the existence of the refinance to Mr Robert Hackelton but instead gave him a different (false) set of instructions, indicate that even if Mark Hackelton had tried to contact Mr David Carvana to obtain further information and verification (which he did not have an obligation to do), no difference result would have ensued. 1. Finally, the Plaintiff argued that even if Mr Hackelton had been aware of the refinance and had reflected that in the reduced loan balance in the 2007 finance statement, there was no evidence or reason to infer that the tax returns submitted by Mr Pennimpede for 2007 would have been any different to that which was in fact submitted. It was argued that in the period of 2000-2006, Mr Pennimpede had submitted tax returns with only modest taxable income. [209] Further a reduced loan balance in Manbead would not have necessarily caused Mr Mark Hackelton to alter the nil income tax return for 2007 because Mr Pennimpede would still have been able to live off drawing from the reduced loan balance and the reason for the reduction in the loan balance (namely a refinance and thereby access greater borrowed funds) was not inconsistent with having no assessable income. [210] Duty of Care 1. In Thalia Corporation Pty Ltd v Bentleys (SA) Pty Ltd, Sulan J summarised the duty of care in the following terms:- [33] An accountant owes a duty of care to her or his clients, which requires the accountant to exercise the care and skill of an ordinarily skilled accountant. [34] In Walker v Hungerfords King CJ said: …The very purpose of engaging tax advisers and accountants is to ensure that the returns are prepared upon a correct basis. Any calculation submitted by the taxpayer to his tax expert is necessarily submitted upon the basis that its conformity with tax law and correct tax and accounting practice will be verified by the expert. The taxpayer and his staff, in the absence of agreement to the contrary, do not, by furnishing such information, assume responsibility for its conformity to tax law and practice. If a taxpayer were to be considered to be lacking in reasonable care for his own interests for that reason, much of the advantage of engaging experts would be lost. The taxpayer, as it seems to me, cannot be expected to exercise skill or knowledge in relation to such matters. He is entitled to rely upon the tax expert whom he has engaged to check any calculations submitted by him to ensure their conformity to tax law and practice and in that way to ensure that the tax returns are correct… [35] In Pech v Tilgals, Dunford J observed: As a person holding himself out as possessing professional skill as an accountant and tax agent the defendant was bound to exercise the skill and diligence of a reasonably competent and careful practitioner in that profession. The contract between the parties and the relationship between them required the defendant to take reasonable care to submit accurate returns disclosing the correct taxable income for each of the parties; what was required was reasonable care, that is the care to be expected of a reasonably prudent and careful accountant. The purpose of engaging tax agents and accountants is to ensure that the tax returns are prepared on a correct basis. The duty arises both in contract and in tort… [36] Walmsley, Abadee and Zipser in Professional Liability in Australia expressed the position as follows: In completing tax returns (or providing tax advice generally), the accountant will rely upon the information provided by the client. A failure by the client to render accurate information to the accountant may yield a good case of contributory negligence (if not a more general defence to the accountant's liability). [211] 1. In BRK (Bris) Pty Ltd v FCT, Cooper J observed that recklessness in relation to the operation of taxation law, meant:- [77] … to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real as opposed to fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement maker would see there was a real risk that … [the relevant Act and regulations] may not operate correctly to lead to the assessment of the proper tax payable because of the content of the statement. [212] 1. An accountant/tax agent may rely on information provided to him by his client where it is reasonable in all of the circumstances to do so. [213] 2. The Plaintiff is a registered tax agent. He accepts that he and his firm were retained to prepare financial statements and income tax returns for Manbead and income tax returns for Mr Pennimpede from the 2007 to 2012 financial years. 3. Mark Hackelton held himself out as qualified to provide professional service (in this case the preparation of income tax returns and financial statements) and is held to the standard of a reasonably competent professional for that task. 4. It was not in issue that the Plaintiff owed the Defendants a duty of care to perform such accounting and tax work with reasonable skill and care. [214] Breach of Duty 1. I do not accept that the standard of care is informed by the APES as Mr Goodyer suggested. Neither Mark Hackelton, Robert Hackelton nor Slavenko Macakanja had the qualifications and skill for membership of the three bodies identified by Mr Goodyer as those to which the APES applied. The Defendants' reliance on Imbree v McNeilly [215] is misplaced. [216] 2. As to what reasonable care involved, I accept Mr Phillips' evidence and would not accept reliance on the APES as informing the relevant standard for the reason he had given. 3. I would also accept consistent with the expert evidence that an accountant in the Plaintiff's position would need to take reasonable steps to be satisfied that the figures that appear in the tax returns can be justified. 4. Although the Defendants intimated otherwise, [217] they accepted that an accountant tax agent may rely on information provided to him by his client where it is reasonable in all the circumstances to do so. [218] 5. Mark Hackelton pleaded reliance on s 5O of the Civil Liability Act 2002 (NSW). [219] As he bears the onus of establishing the preconditions and no argument was advanced that the section had been engaged, then sections 5B and 5C of the 2002 Act are to be applied. [220] 6. Section 5B of the Civil Liability Act 2002 (NSW) provides: 5B General principles (1) A person is not negligent in failing to take precautions against a risk of harm unless: (a) the risk was foreseeable (that is, it is a risk of which the person knew or ought to have known), and (b) the risk was not insignificant, and (c) in the circumstances, a reasonable person in the person's position would have taken those precautions. (2) In determining whether a reasonable person would have taken precautions against a risk of harm, the court is to consider the following (amongst other relevant things): (a) the probability that the harm would occur if care were not taken, (b) the likely seriousness of the harm, (c) the burden of taking precautions to avoid the risk of harm, (d) the social utility of the activity that creates the risk of harm. 1. Section 5B of the 2002 Act requires an identification of the risk of harm in accordance with the principles discussed in Uniting Church in Australia Property trust (NSW) v Miller. [221] That task was made more difficult by the failure to identify the relevant risk of harm in pleadings and submissions. [222] 2. In Garzo v Liverpool/Campbelltown Christian School Meagher JA stated: To address the questions and considerations in s 5B, it is necessary to formulate a plaintiff's claim in a way which takes account of the precautions which it is alleged should have been taken and identifies the risk or risks of harm which the plaintiff alleges eventuated and to which those precautions should have been directed. [223] 1. As far as I can determine the risk of harm is the risk of a client paying additional interest penalties and fees as a consequence of the accountant not clarifying the accuracy of information and instructions in submitting tax returns to the ATO where there may be grounds to doubt such information. 2. The precautions the Defendants ultimately alleged Hackeltons should have undertaken were to advise about the need for sufficient documentary records to satisfy an ATO audit, and to enquire from Mr Pennimpede, where Hackeltons knew or ought to have known that the account and tax returns did not accord with the client's instructions. [224] 3. The Defendants' submission that the Plaintiff had a duty to advise about the need for sufficient documentary records to satisfy an ATO audit was scantily argued. [225] There was no evidence that it was part of Mark Hackelton's task to tell the Defendants that their affairs needed to be in such an order as to be able to survive an audit by the ATO. Mark Hackelton stated that that was not part of his job and neither expert gave contrary evidence. The Defendant did not identify how it alleged a failure to take such a precaution amounted to a breach of duty causative of the Defendants loss. Nor was there any identification of documents the Defendants assert should have been retained that were not. 4. The other matters raised are considered below. Reliance of Previous Accounts 1. Mark Hackelton was challenged about being given two sets of accounts by Mr Pennimpede in relation to Manbead for the 2006 year. [226] He rejected the assertion that he created his memory of that over the past ten years. [227] His evidence as to the existence of these documents were referred to in his affidavit at a time that he was not able to locate the documents. His said that it was provided to him by his lawyer after being supplied by his father Robert Hackelton. [228] Mark Hackelton maintained that they were copies of the documents that were given to him by Mr Pennimpede and were the same as what he saw. [229] 2. Robert Hackelton also gave evidence that the documents were supplied by him to the Plaintiff's counsel a week before the hearing having been found by him a week earlier. He said the copies were retained by him from a small number of documents he copied before supplying the originals to the previous lawyers in the matter. [230] 3. Mr Pennimpede denied giving two sets of accounts for the 2006 financial year. [231] 4. I am satisfied he did so. I accept that these were the copies of documents that were supplied by Mr Pennimpede to Mark Hackelton in the first instance. Their existence was referred to in Mark Hackelton's evidence at a point that they could not be located. [232] Robert Hackelton's evidence as to copying them and supplying them to the previous lawyers was not challenged. Nor was his evidence that he had not spoken to his son about them before he supplied the copies to the Plaintiff's counsel. 5. In the presentation of the financial statements of 2006 for Manbead by the Defendants to the Plaintiff, I am satisfied that they represented Mr Pennimpede had an outstanding loan owing by Manbead of $1,839,066. That figure was contained in both Exhibits F1 and F2, which I am satisfied was provided to the Plaintiff by Mr Pennimpede in circumstances where the Plaintiff was requested to proceed on the basis of Mr Carvana's work. 6. Accepting that that information had been provided by the Defendants, it is not clear what the basis was for the Plaintiff to question the loan amount recorded in the 2006 statements. Mr Carvana did not in his response to Robert Hackelton indicate any ethical or professional impediment to Hackeltons' undertaking the work. There was no evidence of any disputes with the ATO to that point. Beyond that, Mr Pennimpede acknowledged that he requested the preparation of tax returns for himself and Manbead and financial statement for Manbead based on the work which had been done by David Carvana and Associates. 7. Whilst Mark Hackelton raised the difference between the two accounts that he was provided with, he was given an explanation apparent on the face the documents and Mr Pennimpede responding "depends who is asking." 8. I accept that in the context of that explanation and the instructions received, the Plaintiff was not required to make further enquires of David Carvana and Associates. In any event I am not satisfied that Mr Carvana would have cooperated bearing in mind the contents of his earlier correspondence with Robert Hackelton. 9. I accept Mr Phillip's evidence that it was reasonable for Hackeltons to rely on the information provided by the client and that it had no duty or obligation to verify financial statements and tax returns prepared by the previous accountant and lodged with the ATO. 10. In considering the factors in 5B (1) of the 2002 Act, I would accept that the risk of harm was foreseeable and not insignificant. I would accept that the likely seriousness of harm would be significant. There was no submission advanced that based on knowledge of Mr Pennimpede, Mark Hackelton had reason to disbelieve the information he was ultimately given which relevantly as to the loan account figure was the same in both accounts. The burden of taking the precautions would have required the Plaintiff to re-check the work that had previously been undertaken by David Carvana and Associates. Looking at the matter prospectively the probability of harm occurring if care were not taken, I would regard this as low bearing in mind Mr Pennimpede's instructions and request and the previous professional involvement of Mr Carvana. No question of social utility arises. Taking into account the matters in s 5B(2) of the 2002 Act, I am not satisfied that a reasonable person in the Plaintiff position would have taken the precautions raised by Mr Goodyer. and advanced by the Defendants 11. It is clear on the evidence obtained during the audit process that there were other explanations for the loan funds in question. However it was not suggested that Mr Pennimpede provided those at the time the 2007 financial statements were prepared. In particular I am satisfied that the letter of refinance from CBA dated 18 August 2006 was not provided until the audit stage and prior to that Mr Pennimpede maintained that the source of the funds was as described in Robert Hackelton's letter to the ATO of 28 March 2014. [233] Findings as to Income 1. Mark Hackelton stated that he was told in 2007 by Mr Pennimpede that he had nil taxable income and that he was drawing on a loan made by him to Manbead. Mark Hackelton expressed scepticism about this claim and challenged Mr Pennimpede about it. Mark Hackelton stated that he observed that the comment about living from drawing on the loan account was consistent with the balance sheet for the 2006 financial year which recorded a $1,839,066 shareholder loan and he assumed that this was the loan that was being referred to. 2. Mark Hackelton however did not just rely on Mr Pennimpede's statements. His unchallenged evidence was that he checked the Portal to see if there was income from third parties, observed that the client had lodged a zero return in 2006, observed that Manbead's statement did not disclose payment of dividends or wage to Mr Pennimpede and saw private expenditure as he prepared Manbead's cashbook. He also observed that the 2006 balance sheet had a significant loan. 3. It was not put to Mark Hackelton in cross examination what else he should have done beyond this. 4. Robert Hackelton gave evidence that he knew from discussions with Mr Pennimpede that he used the shareholder loan account to pay his personal expenses which he considered to be repayments of his loan account with Manbead and were tax free. He asserted that Mr Pennimpede was doing this as long as he could remember and certainly prior to Hackelton's involvement. [234] 5. For his part, Mr Pennimpede denied ever having a meeting or conversation to this effect asserted by Mark Hackelton in which he stated that he had nil earnings. He stated that if asked for further information he would have supplied it and that it was Mark Hackelton who told him that he could file a nil tax return but could not recall the reason why or that he asked questions about it. [235] He rejected the suggestion that in 2007 he did not provide to Hackeltons all of the documents that he had available to him relating to Manbead or his personal affairs. [236] 6. Mr Pennimpede denied stating to Robert Hackelton that he said "I use my shareholder account with Manbead to pay my personal expenses." He asserted that he was never aware that he had a shareholder loan account with Manbead and first learned about that in his meeting with the ATO at the time of the commencement of the audit in 2012 and 2013. [237] In cross examination he maintained that a contrary suggestion was not true. [238] 7. I do not accept Mr Pennimpede's evidence in this regard. I am satisfied that he did state to Mark Hackelton that he had nil income to declare and that he deliberately withheld information from him that may have suggested otherwise. I accept the Plaintiff's submissions in this regard. I further accept that Mr Pennimpede advised both Robert and Mark Hackelton that he was living by drawing on the loan account with Manbead. 8. Mr Pennimpede conceded that on 30 March 2006 Mr Carvana wrote to Hayden Dale, the relationship manager at the National Australia Bank, stating in relation to and Mladena and himself that over the past two calendar years since the incorporation of Emplus had received approximately $350,000 per annum from the company as consulting fees. Further, Mr Carvana expected that the same would apply for the future if not more. [239] He stated that the suggestion that he knew that Mr Carvana was making the representations on his behalf was partly correct and partly incorrect. He said the $350,000 was correct but it wasn't him personally it was combined between the company and himself. [240] Subsequently he asserted that the money wasn't received personally but was invoiced by a company. He conceded that he didn't tell Mark Hackelton about Emplus in March 2007 asserting that it had nothing to do with him [241] and there was "another accountant doing the work for Cougar at the time." [242] He acknowledged not telling Mark Hackelton about the receipt of consulting fees from Emplus. 9. In my view it is inconceivable that Mr Pennimpede was not aware that he had a loan account with Manbead, not only because it pre-existed Hackelton's involvement but also because he had been drawing on it for his personal expenses. This is particularly so in circumstances where he was the Chair of Manbead, in which he had tabled and resolved the adoption of the financial statements of the company for 2007 that recorded the shareholder loan [243] and signed the financial statements as true and correct knowing that they would be relied upon by the ATO for accuracy. 10. Mr Pennimpede also acknowledged that he told Mark Hackelton in 2007 that Cougar didn't do anything. [244] He stated however that the company was active but not trading. [245] Yet he had another accountant for their work and did not suggest that he disclosed the financials for that company to Hackeltons. As noted Cougar was recorded to have an unsecured loan to Manbead in the latter's financial statements 2010. 11. I accept Mr Price's evidence that it was reasonable for Hackeltons to conclude that the Plaintiff was telling the truth regarding his nil income and the use of a shareholder loan repayments to satisfy living expenses. 12. At no point in his evidence does Mr Goodyer assert that Hackelton's in relying on information supplied by Mr Pennimpede acted outside the Code of Professional Conduct as it now stands. Rather he references another standard that he accepts did not mandatorily apply to the Plaintiff being APES, 110,220, 305 and 315, which outline that a professional tax agent and accountant would undertake a minimum level of client due diligence at the outset of the engagement and ensure all relevant facts have been disclosed including completion of a questionnaire to ensure a thorough understanding of the background to the matter. Although he asserts that the fundamental basis of the Code of Professional Conduct as set out in the Tax Agent Services Act 2009 (Cth) has similar requirements, he does not address the issue of whether the conduct of Hackeltons fell short of standard set out in the Code noting that it didn't apply until 1 March 2010. 13. Mark Hackelton gave evidence that he was told by Mr Pennimpede in 2007 and beyond that he lived off the repayments made on the loan he made to Manbead. Although this was denied by Mr Pennimpede, I do not accept his denials. Mr Hackelton gave clear evidence that he repeatedly sought access to all documents relevant to enable him to complete Mr Pennimpede's financials and the information was incrementally given as it was questioned. The evidence satisfies me that Mr Pennimpede's assertion in cross examination that when he signed the 2007 financial statement for Manbead that he was not aware of the existence of a shareholder account [246] was implausible. Nor do I accept Mr Pennimpede's evidence that he signed numerous financial statements in relation to the many companies over an extended period including companies of which he was a director without understanding anything about those financial statements. [247] Despite Mr Pennimpede's vocational background, he operated a sophisticated suite of companies and businesses. In my view he sought to significantly underplay the state of his financial knowledge of their affairs. 14. Both experts accepted that Mark Hackelton's evidence that the explanation of Mr Pennimpede drawing on the loan from Manbead was plausible with Manbead's 2006 financial statement. [248] I accept this is so. Movement in the Loan Account 1. The Defendants next asserted that the upward movement in the Manbead loan by $888,783 should have led the Plaintiff to question their compatibility with Mr Pennimpede having no source of taxable income such that an inference of breach of duty should arise. stating: "[62] None of Hackeltons' witnesses gave any evidence of Vito's instructions to them for preparation of the financial statements and returns for the 2008 to 2012 income years. In any event, the plaintiff does not suggest that the balance of the loan account at the end of each income year was based on instructions received from Vito. 1. As to the movements in the loan account figure in 2007, both experts accepted enquiring as to the source of the additional income would not be asked unless it could not be otherwise explained in source material. There is no evidence before me as to whether material was such that required the relevant enquiries to be made. Mark Hackelton stated that he could not answer the question because he couldn't recall without the cashbook. 2. There is no direct evidence identifying of the source information in the financial statements for 2008-12. Mark Hackelton's evidence was that he was less hands on in the years that followed particularly in the preparation of the cashbooks. [249] Nevertheless, Mark Hackelton stated that when he prepared financials in terms of assessing the information received, he got instructions from Mr Pennimpede. He maintained when he presented them to him he would say: Here's the information that I've prepared on the basis of what you've given me, told me, supplied me, and from other sources. Now, do you believe they're correct, if you do, sign them." [250] 1. This evidence is consistent with the terms of the various acknowledgement letters Mr Pennimpede signed in relation to his tax returns and the letters accompanying the financial accounts and balance sheets for Manbead signed by Robert Hackelton. [251] 2. The Defendant's accounts from 2008 were overseen at stages by each of Mark Hackelton, Robert Hackelton and Slavenko Macakanja. 3. The Defendants argued that even accepting Mark Hackelton's version of events, the deficiencies in the accounting work were due to the Plaintiff's negligence in not enquiring as to the source of potentially declarable income. 4. The expert evidence however was that you would only make such enquiries if you had cause on the basis of an explanation not being otherwise apparent from the material. 5. That material was not before me. 6. Assuming the question as to potential source of income needed to be asked, Mark Hackelton again could not recall whether it was but stated that if it had needed to have been asked, it would have been. Robert Hackelton's evidence was that he couldn't recall the reason for the fluctuations but he was certainly satisfied with any explanation that was given. He accepted that the explanation would come from Mark Hackelton in the ordinary course and he has no memory what it was. He stated that he asked the question but he can't remember the answer but it satisfied him. In the course of evidence he accepted that other potential source of funds included from disposal of assets or loans. [252] 7. In assessing the evidence, I bear in mind what was stated by Tamberlin J in Lake Cumbeline Pty Ltd & Ors v Effem Foods Pty Ltd (trading as Uncle Ben's of Australia):- "[Given the lapse of time] between the events and conversations raised in evidence and the hearing of the evidence before me, the only safe course is to place primary emphasis on the objective factual surrounding material and the inherent commercial probabilities, together with the documentation tendered in evidence. In circumstances where the events took place so long ago, it must be an exceptional witness whose undocumented testimony can be unreservedly relied on." [253] 1. I also bear in mind what was stated by Emmett J (as his Honour then was) in Warner v Hung, In the matter of Bellpac Pty Limited (Receivers and Managers Appointed) (In Liquidation) (No 2): When proof of any fact is required, the Court must feel an actual persuasion of the occurrence or existence of that fact before it can be found. Mere mechanical comparison of probabilities, independent of any belief in reality, cannot justify the finding of a fact. Actual persuasion is achieved where the affirmative of an allegation is made out to the reasonable satisfaction of the Court. However, reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequences of the fact to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, and the gravity of the consequences flowing from a particular finding are considerations that must affect whether the fact has been proved to the reasonable satisfaction of the Court. Reasonable satisfaction should not be produced by inexact proofs, indefinite testimony or indirect inferences (see Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 361-2). [254] 1. In essence the Defendant seeks to infer a breach of duty from the circumstances above described. That was said to arise from a failure to make enquires as to other sources of taxable income. 2. The principles relevant to inferential reasoning were canvassed by Spigelman CJ in Seltsam Pty Ltd v McGuiness. [255] where it was stated:- "[84] It is often difficult to distinguish between permissible inference and conjecture. Characterisation of a reasoning process as one or the other occurs on a continuum in which there is no bright line division. Nevertheless, the distinction exists. [85] Lord Macmillan in Jones v Great Western Railway Co (1930) 144 LT 194, in the context of stating that a possibility that a negligent act caused injury was not enough, said (at 202): "The dividing line between conjecture and inference is often a very difficult one to draw. A conjecture may be plausible, but is of no legal value, for its essence is that it is a mere guess. An inference in the legal sense, on the other hand, is a deduction from the evidence, and if it is a reasonable deduction it may have the validity of legal proof. The attribution of an occurrence to a cause is, I take it, always a matter of inference." [86] After referring to this passage, Sir Frederick Jordan in Carr v Baker [1936] NSWStRp 20; (1936) 36 SR (NSW) 301 at 306 said: "The existence of a fact may be inferred from other facts when those facts make it reasonably probable that it exists; if they go no further than to show that it is possible that it may exist, then its existence does not go beyond mere conjecture. Conjecture may range from the barely possible to the quite possible." [87] As Lord Wright put it in a frequently cited passage in Caswell v Powell Duffryn Associated Collieries Ltd [1940] AC 152 at 169-170: "Inference must be carefully distinguished from conjecture or speculation. There can be no inference unless there are objective facts from which to infer the other facts which it is sought to establish. In some case the other facts can be inferred with as much practical certainty as if they had been actually observed. In other cases the inference does not go beyond reasonable probability. But if there are no positive proved facts from which the inference can be made, the method of inference fails and what is left is mere speculation or conjecture." [88] The test is whether, on the basis of the primary facts, it is reasonable to draw the inference: see, eg, Luxton v Vines [1952] HCA 19; (1952) 85 CLR 352 at 358." 1. This decision was favorably cited in State of New South Wales v Fuller-Lyons. [256] Although the factual findings in that case were reversed on appeal by the High Court, the principles relating to the application of inferential fact-finding were not. [257] 2. In Henderson v Queensland Gageler J referred to the principles for drawing inferences and stated:- "[89] Generally speaking, and subject always to statutory modification, a party who bears the legal burden of proving the happening of an event or the existence of a state of affairs on the balance of probabilities can discharge that burden by adducing evidence of some fact the existence of which, in the absence of further evidence, is sufficient to justify the drawing of an inference that it is more likely than not that the event occurred or that the state of affairs exists. The threshold requirement for the party bearing the burden of proof to adduce evidence at least to establish some fact which provides the basis for such a further inference was explained by Kitto J in Jones v Dunkel: "One does not pass from the realm of conjecture into the realm of inference until some fact is found which positively suggests, that is to say provides a reason, special to the particular case under consideration, for thinking it likely that in that actual case a specific event happened or a specific state of affairs existed." [258] , 1. Although His Honour's decision was a dissenting one, the principles expressed have not been doubted. [259] 2. In Jones v Dunkel, Dixon J stated:- It is possible of course to say that if you have an empty diesel truck coming down a winding road on the outside at thirty-five miles per hour and an International truck going up the road on the inside at twenty-five miles per hour, the former is more likely than the latter to be over the centre line of the road on its wrong side. But that is only to say that of two guesses one is more probable than another. It may be remarked that these are not the only two guesses open as to the cause of the accident. But in any case we are not concerned with a choice among rival conjectures. In an action of negligence for death or personal injuries the plaintiff must fail unless he offers evidence supporting some positive inference implying negligence and it must be an inference which arises as an affirmative conclusion from the circumstances proved in evidence and one which they establish to the reasonable satisfaction of a judicial mind. It is true that "you need only circumstances raising a more probable inference in favour of what is alleged". But "they must do more than give rise to conflicting inferences of equal degree of probability so that the choice between them is mere matter of conjecture". These phrases are taken from an unreported judgment of this Court in Bradshaw v. McEwans Pty. Ltd. (Unreported, delivered 27th April 1951). which is referred to in Holloway v. McFeeters [1956] HCA 25; (1956) 94 CLR 470 , by Williams, Webb and Taylor JJ. The passage continues: "All that is necessary is that according to the course of common experience the more probable inference from the circumstances that sufficiently appear by evidence or admission, left unexplained, should be that the injury arose from the defendant's negligence. By more probable is meant no more than that upon a balance of probabilities such an inference might reasonably be considered to have some greater degree of likelihood." (1956) 94 CLR, at pp 480, 481 But the law which this passage attempts to explain does not authorise a court to choose between guesses, where the possibilities are not unlimited, on the ground that one guess seems more likely than another or the others. The facts proved must form a reasonable basis for a definite conclusion affirmatively drawn of the truth of which the tribunal of fact may reasonably be satisfied. [260] 1. I accept the Plaintiff's submission that the Defendants had every opportunity to have their expert examine the substance of the accounting work undertaken by Hackeltons but instead chose to run a case which did not permit the Court to review the authenticity of the Defendant's affairs. It was noted that Mr Goodyer made it clear that he had sought access to, but was not given, a remit to look at the materials. [261] 2. Nor is breach established on the basis of the evidence of Robert Hackelton's subsequent work. The fact that amended returns were prepared does not demonstrate a breach of duty. [262] I accept the evidence of both experts that these were prepared for negotiation purposes and as such no conclusion is to be drawn from them. Beyond that I am satisfied that the material relied upon by Robert Hackelton was not material that Mr Pennimpede made available at the time of the original returns being submitted. Mr Robert Hackelton described some 23 folders being reviewed which he stated included material relating to David Carvana's preparation and lodgement years. [263] I reject the evidence of Mr Pennimpede that he provided Hackeltons in 2007 all of the documents that he had available to him relating to Manbead and his financial affairs. [264] Nor am I satisfied that he was forthcoming about the true state of his financial affairs and those of Manbead at the time the original returns were first prepared. 3. The Defendant's submissions canvased various possibilities. [265] It accepted that there were others consistent with non-taxable sources of income. [266] However as the evidence of both experts stated the question as to an explanation would only be asked if it could not otherwise be accounted for. 4. I am unable to infer that there was ground for Plaintiff to doubt the information as to Mr Pennimpede having no other sources of taxable income on the basis of the primary facts. The Defendants have not established that the figures contained in the 2007 to 2012 financial records do not accord with the source information supplied by Mr Pennimpede nor that such source material required the relevant enquiry to be made in the circumstances. The evidence of both expert witnesses was that the movements combined with the declared income are not necessarily inconsistent. 5. I am satisfied that Mark Hackelton, Robert Hackelton and Slavenko Macakanja were generally credible witnesses. The Defendants drew attention to the inability of Mark and Robert Hackelton and Mr Mackanga to respond to the ATO audit as to explanation for the balances in the loan account. [267] Nevertheless they did not submit that their inability to recall was other than genuine. [268] They accepted that Mark Hackelton's memory may be susceptible to failure. [269] Nor did the Defendants challenge Mr Macakanja's evidence as to the way he performed his work particularly as it related to Manbead. I accept the Plaintiff's submission that a deficiency in the accounts and tax returns for 2007 to 2012 cannot be inferred on this basis. [270] Even if I was to reject their evidence that does not establish the opposite. [271] 6. In my view the movements in the loan account (each of which represented an amount at a point in time) combined with the absence of other evidence as to whether the Plaintiff should and did in fact make further enquires rises no higher than conjecture. 7. Accepting that the risk of harm is as I have earlier referred, the Defendants have not demonstrated how it contends that the risk of harm arose and was breached by a failure to take precautions identified. The Defendants as Cross Claimants bore the onus to establish it. Indeed neither party sought to address the matters in s 5 B of the 2002 Act. 8. Even if the Defendants' contention is accepted and the circumstances indicated by the loan amounts was such that enquiries as to possible other sources of taxable income needed to be explored, it has not been established on the balance of probabilities that Mark Hackelton did not do so let alone that a truthful and accurate response would have been forthcoming from Mr Pennimpede. 9. Mark Hackelton's evidence was that he could not recall whether he asked the question and if there was an issue it would have been. 10. This issue of causation will be further explored below. Causation 1. In the event I am wrong on the question of breach I turn to consider the question of causation. Defendant's Submissions 1. The Defendants submitted that the balance of Manbead's shareholder loan account, in particular the 2007, 2009 and 2010 income years was one of the reasons why the ATO commenced its audit of Mr Pennimpede and Manbead's tax affairs. Specifically it observed that this was made clear from the following: 1. In October 2011, the ATO commenced a "preliminary risk review" of the tax affairs of Mr Pennimpede and his related entities including Manbead for the 2009 and 2010 income years. [272] 2. In May 2012, the ATO prepared a "S&ME PRR Report", which identified "risks" and "anomalies" in the financial statements and income tax returns lodged by Vito and Manbead in the 2009 and 2010 income years, including that: [273] 1. Manbead's 2010 accounts showed shareholder loan to the sole shareholder, Vito Pennimpede, for $2,561,429; and 2. Manbead's 2010 accounts showed a loan from Cougar for $3,482,000 in 2010, however, Cougar's income tax return showed zero income and minimal assets. 1. In January 2014, the ATO prepared a position paper for Mr Pennimpede for the 2007 and 2008 income years in which the ATO concluded that, on the basis of the fluctuation in the shareholder loan account in Manbead's balance sheet between the 2006 and 2007 income years, Mr Pennimpede had fraudulently failed to disclose because his personal income tax return disclosed nil income. The ATO concluded that the amount of $888,783 was taxable in the hands of Mr Pennimpede and he was liable to pay penalties and interest. [274] 2. Subsequently, in light of these matters, and the discovery of apparent fraud and evasion, the ATO's audit expanded to include the 2000 to 2012 income years. 1. The Defendants argued that had the Plaintiff exercised due care and skill then on the balance of probabilities: 1. The accounts and returns would have accurately reflected Mr Pennimpede's apparent instructions to Mark Hackelton and Mr Pennimpede would have been advised to, and would have, retained appropriate documentary records to verify the accuracy of the lodged accounts and returns in the event of an ATO audit. 2. Therefore, whilst ATO audits are random, the likelihood of an ATO audit of Mr Pennimpede and Manbead would have been reduced and in the event that there was an ATO audit Mr Pennimpede (and their accountant) would have been able to provide any necessary documentation to satisfy the ATO of the accuracy for the lodged returns for the 2007 to 2012 income years; and 3. Therefore Mr Pennimpede and Manbead would have avoided the loss and damage they in fact suffered (as particularised above), namely the fees they paid Hackeltons for responding to the ATO audit, plus the penalties and interest that the ATO imposed. [275] 1. In oral submissions the Defendants advanced that their loss as claimed was caused by: 1. The Plaintiff accepting the opening balance of the loan account in the Manbead 2006 financial statements in circumstances where they had not corroborated that figure at least by getting instructions; and 2. The failure of the Plaintiff to enquire as to taxable sources of income in circumstances where the loan account for the 2007 financial year increases as reflected in Manbead's financial statement and Mr Pennimpede has a nil tax return. Plaintiff's Submissions 1. The Plaintiff submitted that the Defendant's submission on causation was that whilst there would have been an audit it would have been conducted differently. [276] The Plaintiff draws attention to the contents of the SNME PRR PWA report. [277] In that document, the ATO identified, as at 22 May 2012, three risks being, inter-company loan and director loans, ability to support life/maintain general living expenses and solvency of all companies. [278] 2. The Plaintiffs submitted that the second and third risks were not in any way related to Hackeltons' conduct and even within the first risk, the report makes reference to the shareholder loan account as only one of at least two significant aspects to the risk that was being identified. Under the heading of "Intercompany and Director Loans," documents state:- "Intercompany and Director Loan Manbead Pty Ltd show a shareholder loan as of 2010 of $2,561,428. Vito Pennimpede is the sole shareholder. Mr Pennimpede's ITR's do not show he has the capacity to pay a loan this size. No financials have been received for Cougar Pty Ltd because there is a different accountant. Cougars ITR's show $0 income and minimal assets, however have loaned $3,492,000 to Manbead Pty Ltd in 2010. They also owe Manbead $599,764 but do not show this as a liability in the ITR's There are several other loans between all of these entities. Are there loan documents in place? There is no interest income recorded in any of the ITR's. [279] 1. Counsel for the Plaintiff submitted:- PHILIPS: To trigger an audit and this is two parts to the first risk. So if your Honour goes back to the bit to do with Manbead, it records that it shows a shareholder loan for 2010 of some $2.5 million. As I understand the way the case is put, if you make the adjustment that my friends say should have been made in 2007 to the loan account, there would have been a difference of about a million dollars in that shareholder loan. So as far as the ATO is concerned, they would have still been asking the same question, even if Mr Hackelton, Mark Hackelton, in 2007 had made the adjustment to the shareholder loan balance that it's now said that he should have made. That's where I get to say even just on the issue of Manbead as to the negligence, the audit still would have happened, because the ATO still would have made the query how does Mr Pennimpede have the capacity to repay a loan and this also shows the major variation in the loan account. [280] 1. The Plaintiff submitted that there were many triggers that the ATO was interested in and the 2007 discrepancy in the loan account was not the only thing that triggered the audit. [281] 2. The Plaintiff argued that even if the amendments were made to the 2007 financial statements, the audit would have proceeded basically in the same way, particularly bearing in mind the contents of the first position paper produced by the ATO. [282] In these circumstances it argues that none of the fees subject to the Cross-Claim can be claimed as loss or damage caused by the negligence of Hackeltons, as it is fees for dealing with the ATO audit responding on Mr Pennimpede's behalf. [283] 3. The Plaintiff's counsel further submitted:- In my submission, the audit we know in that hypothetical scenario would have been conducted in exactly the same way, and would have led to almost the exactly the same outcome, which is a very substantial amount of interest and tax being paid by Mr Pennimpede and, importantly, it would have still resulted in that matter happening in 2014, not earlier. What your Honour is being invited, as I understand it, to find or to infer is that somehow because the amendments were made to the 2007 to 2012 financial statements there wouldn't have been any additional tax payable by Mr Pennimpede, therefore he wouldn't have incurred any interest and penalties for the period 2007 to 2012. HIS HONOUR: He would have just paid whatever was owing? PHILIPS: Correct. Now, in my submission, that falls down at a couple of levels, not least because you can't just assume that if the amendments were made to the financial statements that the amount of tax payable would have changed - sorry - the tax returns would have changed, and therefore the amount of tax would have changed and, therefore, it would have been paid. My learned friend's submission asks your Honour to make a number of assumptions which, in my submission, just can't be established on the balance of probabilities. They have to prove that it would have been different and they haven't done that. [284] 1. The Plaintiff points out that in the first Pennimpede position paper produced by the ATO office, the total amount of tax which the ATO was claiming was approximately 78% of the total tax bill, being an amount of $6,114,456.75. [285] This covered the period from 2000 to 2006, involving significant increases in assessable income for each year as a result of undisclosed sources of funds being used to increase the director loan account with Manbead in the 2000, 2002, 2003 and 2004 years and undisclosed consulting fee income received from Emplus in 2005 and 2006. All of this was said to have preceded Hackelton's involvement. 2. The Plaintiff submitted that the second Pennimpede Position Paper made plain that there were three main reasons for the audit into the 2007 and 2008 years namely undisclosed sources of funds of $888,763 being credit increases in the Manbead shareholder loan account, undisclosed income of $40,000 being cheques from Emplus to Mr Pennimpede's home loan account, and undisclosed income of $478,194 being cheques from the CBA and a real estate agent's trust account into Mr Pennimpede's home loan account. It argued that the first figure would not have come to the attention of the ATO absent the alleged negligence (accepting the true position referred to by Robert Hackelton had been known), however the second and third would have. Consequently it submitted that the 2007 and 2008 years would still have proceeded absent negligence. 3. The Plaintiff submitted that absent the alleged negligence, if the reference to the sum of $888,783 was taken out, all other concerns would have remained and the audit would have proceeded in the same way. [286] It argued that Mr Pennimpede admitted that he didn't inform Hackeltons of the existence of Emplus or his receipt of consulting fees from them. Robert Hackelton later determined that the ATO's assessment of the $40,000 was incorrect. The Plaintiff contended that the audit was still required for 2007 and 2008 and would have occurred in any event because of Mr Pennimpede's failure to provide information to Hackelton's and because of the ATO's incorrect assessment of the cheque from Emplus, rather than any failure by Hackelton's. 4. Accordingly it was contended that Mr Pennimpede would still have declared "no income' in the 2007 year and only modest dividend income for the years 2008-2012 if the shareholder loan balance had been reduced to about $1.5 million in 2007. 5. The Plaintiff submitted that Mr Pennimpede did not amend his tax returns for the years 2007-2012 and there is no evidence that if the 'standalone' reconstructed financial statements prepared by Robert Hackelton had been adopted in 2007, then Mr Pennimpede's taxation position would have been different. It was therefore submitted that the Defendants had not established on the balance of probabilities that absent negligence the additional tax either would not have been incurred or would have been incurred and paid earlier than 2014. 6. So far as Manbead was concerned, the Plaintiff drew attention to the Executive summary of the Manbead Position Paper that made it plain that the sole reason for the audit in relation to the FBT on vehicles owned by Manbead was because of the under declaring of FBT totalling $119,540 in the years 2008-2013 arising because Manbead and Mr Pennimpede did not maintain any logbooks for the vehicle involved despite giving false declarations to Hackeltons that it had done so. In evidence Mr Pennimpede admitted that he did not keep logbooks to substantiate his claims for 2007, 2009, 2010 and 2012. [287] 7. The Plaintiff submitted that the audit in relation to Manbead's FBT would have proceeded because of the supply of false information and not because of the alleged negligence. 8. In respect of the claim for tax and penalties relating to Manbead the ATO's position paper identified the failure of the Defendant to have log books to substantiate the claims made. Conclusion on Causation 1. Whilst the initial letter dated 5 October 2011 advising of the risk review was expressed to be for the 2009 to 2010 income years, it did not identify any specific risk. It was expressed in the following terms: "This review is part of our ongoing examination of the tax affairs of major business groups. The information obtained will help us understand various industries, promote voluntary compliance, minimise the costs of compliance for low risk taxpayers, and ensure that we focus on areas of greatest risk." [288] 1. I accept that the SNME PRR PWA report indicates that the ATO identified three risks as at 22 May 2012, being inter-company loan and director loans, ability to support life/maintain general living expenses, and solvency of all companies. [289] 2. Even accepting that the issue with intercompany loans was a risk which the ATO focussed, only part of that related to Manbead. It was not in issue that the Plaintiff was not instructed by Mr Pennimpede in relation to Cougar. Mr Pennimpede accepted having informed Mark Hackelton in 2007 that it did not do anything. 3. The Defendant drew attention to the inability on the part of Hackeltons to explain the shareholder loan to the ATO in 2010. The 2010 balance sheet recorded it to stand at $2,561,428 leading to a decision to escalate the matter. However the SNME PRR PWA review came to identify "Division A deemed distribution," "solvency of associated entities," "source of funds to service mortgage debt", 'validity of tax losses carried forward," and "FBT motor vehicles" as reasons to escalate the matter. So much was confirmed to Mr Pennimpede in the letter from the ATO finalising the review and advising him of the audit. [290] 4. The movement in relation to the shareholder loan account in 2010 with Manbead was in this sense only one of a number of factors that triggered the audit. As at 27 June 2012 the initial the audit management plan was for the period 1 July 2007 to 30 June 2010. [291] On 21 January 2014 Mr Pennimpede was formally advised that it was amended to cover the period from 1 July 1999 to 30 June 2012. [292] Both versions of the audit plan plainly identified a broader range of issues than the shareholder loan. 5. The first Pennimpede position paper produced by the ATO discloses that, the total amount of tax which the ATO was claiming was approximately 78% of the total tax bill, being an amount of $6,114,456.75 for the period from 2000 to 2006, involving significant increases in assessable income for each year as a result of undisclosed sources of funds being used to increase the director loan account with Manbead in the 2000, 2002, 2003 and 2004 years and undisclosed consulting fee income received from Emplus in 2005 and 2006. All of this preceded Hackelton's involvement and was not in issue. 6. It is also clear that in light of the other risks identified by the ATO confirmed in the second Position paper, the audit would have proceeded notwithstanding the alleged negligence by the Plaintiff resulting in the need for fees being incurred. 7. Even if the disputed sum of $888,783 on account of the increase in the loan account was taken out, all other concerns would have remained and the audit would have proceeded in the same way. [293] Mr Pennimpede conceded that he didn't inform Hackeltons of the existence of Emplus or his receipt of consulting fees from them. Robert Hackelton later determined that the ATO's assessment of the $40,000 was incorrect. Beyond that the undisclosed income of $478,00 being cheques from the Commonwealth Bank and a real estate agent that were deposited in 2008 into Mr Pennimpede's home loan account was not the subject of any claim in negligence. 8. During submissions I enquired of the Defendant's counsel as to this aspect of the Plaintiff's submissions. The transcript records: HIS HONOUR: He says, Mr Pennimpede had not informed Hackeltons, or provided them with information that there had been a re finance of certain bank facilities helped by ManBead and Cougar industries in August 2006. That dealt with something here, I didn't see in your submissions. Yes, you prepared them beforehand. NEWLINDS: My answer to that is, well, so what? That all depends on what questions were asked, and our case is that the right question was not asked. Now, there's no suggestion that the money came from any of those particular sources. So this is just a bit of rhetoric by our learned friend, where he's trying to make your Honour think that Mr Pennimpede's a really bad guy. Now, Mr Pennimpede might be a bad guy for all sorts of reason, not the least of which is he seems to as a director without turning his mind to his director's duties, he signs declarations to the tax office without turning his mind to whether they're right or not. All of that may be accepted. But that is a separate and distinct question to whether there's been a breach of duty by the accountants. Now, there is an intersection between the two topics when you come to causation, which I think is what your Honour is pressing me on. HIS HONOUR: Yes. NEWLINDS: Is well, what would have happened if the right question had been asked? But my answer is, well in the absence of any other evidence - and in the absence of it not having been put to Mr Pennimpede, that he would have made something up, and insisted that the accountants go ahead and finalise the returns, which of course is inconsistent to what - at least Mr Goodyear said an accountant should do if they're not satisfied as to the veracity of their client - he says, well you sack the client. Something lawyers would often like to be able to do, we can't, but accountants can. So, if you're not satisfied with the veracity of your client's instructions, you get rid of the client, says Mr Goodyear. [294] 1. This latter submission was repeated in the following exchange: HIS HONOUR: You're saying, if the question was asked, if the interrogation was conducted, then additional income would have been identified, which may have been taxable? NEWLINDS: Yes. HIS HONOUR: Which may have had to have been declared. And had that occurred, the penalties and interest would not have been NEWLINDS: Correct. And the 2007 accounts wouldn't have to be re done. That's what I was saying. Now, if your Honour was to find that if that question had been asked of Mr Pennimpede, and he had just told an outright lie, then I would lose. If your Honour was to find that Mr Pennimpede was asked that question and he was not satisfied with what the accountants were up to, and he sacked them and he went to another firm of accountants, then I would lose. But none of those propositions were put to Mr Pennimpede. 1. These submissions overlook that causation was for the Defendants to establish. It is not established by referring to an absence of questions being put to Mr Pennimpede by the Plaintiff's counsel. In Chappel v Hart McHugh J stated: "Human nature being what is, most Plaintiffs will genuinely believe that, if he or she had been given an option that would or might have avoided the injury, the option would have been taken. In determining the reliability of the Plaintiff's evidence in jurisdictions where the subjective test operates, therefore, demeanour can play little part in accepting the Plaintiff's evidence. It may be a ground for rejecting the Plaintiff's evidence. But given that most Plaintiffs will genuinely believe that they would have taken another option, if presented to them, the reliability of their evidence can only be determined by reference to objective factors, particularly the attitude and conduct of the Plaintiff at or about the time when the breach of duty occurred." [295] 1. In the circumstances it has not been established that Mr Pennimpede would have given answers that would be truthful and reliable had he been asked. Mr Pennimpede's answers, along with the selective information provided as discussed earlier in these reasons, suggest otherwise. Mr Pennimpede repeatedly sought to understate his taxable income in circumstances where he must have known he was doing so. I am not satisfied that had an enquiries been made further taxable sources of income would in any event have been revealed. Whether any such answers would have required the Plaintiff to discontinue its involvement is not able to be determined on the evidence. 2. Accordingly I am satisfied that the audit for 2007 and 2008 would have occurred in any event because of Mr Pennimpede's failure to provide information to Hackelton's and because of the ATO's incorrect assessment of the cheque from Emplus, along with the other risks identified unrelated to Hackeltons. 3. I am not satisfied that if standalone reconstructed financial statements prepared by Robert Hackelton had been adopted in 2007, then Mr Pennimpede's taxation position would have been any different as Mr Pennimpede would still have declared "no income' in the 2007 year and only modest dividend income for the years 2008-2012 if the shareholder loan balance had been reduced to the recalculated sum in 2007. 4. The Defendant contended that this approach contradicts the Plaintiff's contention as to the use to which the amended returns could be put bearing in mind that they were prepared for negotiation purposes. However, it did not dispute the true nature and extent of the loan advance to Manbead as disclosed by Robert Hackelton during his enquires following his review of the letter from the CBA dated of 18 August 2006 [296] in the context of responding to the ATO audit. That letter related to a refinance to Cougar in respect of which Mr Pennimpede had another accountant. There was no evidence that this information had been provided at the time of the preparation of the 2007 financial statements for Manbead and the subject matter indicates it wasn't. 5. In respect of Manbead, the Defendant advanced no submission that in relation to the penalties and interest arising they would not have been incurred. The failure to keep log books was identified as the sole reason for the penalties and interest and were incurred in circumstances where Mr Pennimpede was advised and acknowledged that he was required to keep log books. [297] 6. Section 5D (1) of the 2002 Act provides: 5D General principles (1) A determination that negligence caused particular harm comprises the following elements: (a) that the negligence was a necessary condition of the occurrence of the harm ("factual causation" ), and (b) that it is appropriate for the scope of the negligent person's liability to extend to the harm so caused ( "scope of liability" ). 1. On the evidence I am not satisfied that the alleged negligence if established was a necessary condition of the harm said to have been suffered by the Defendants. Damages under s 251 M of the Income Tax Assessment Act 1936 (Cth) 1. The Defendants in their Cross Claim pleaded reliance on s 251M of the Income Tax Assessment Act 1936 (Cth) which provided: 251M Negligence of registered tax agent etc. (1) If, through the negligence of a registered tax agent, or of a person exempted under section 251L, a taxpayer becomes liable to pay a fine or other penalty, the general interest charge under a provision of this Act, or to pay shortfall interest charge, the registered tax agent, or the person, as the case may be, shall be liable to pay to the taxpayer the amount of that fine or other penalty, additional tax, general interest charge or shortfall interest charge, and that amount may be sued for and recovered by the taxpayer in any court of competent jurisdiction. Note 1: The general interest charge is worked out under Part IIA of the Taxation Administration Act 1953 and shortfall interest charge is worked out under Division 280 in Schedule 1 to that Act. Note 2: Subsection 8AAB(4) of that Act lists the provisions that apply the general interest charge. (2) Nothing in this section shall exonerate the taxpayer from his liability. 1. Although repealed with effect 1 March 2010 it was not in issue that the provision was effective prior to that day such enable Mr Pennimpede to claim from the Plaintiff penalties and interest in respect of the 2007 and 2008 income years being $37,324. 2. For the reasons given however I am not satisfied that the claim in negligence has been made out. Proportionate Liability Under Section 35 of the Civil Liability Act 2002 (NSW) 1. I proceed to consider the Plaintiff's claim under s 35 of the 2002 Act in the event that my primary finding is incorrect. 2. The Plaintiff argued that in the event he is found liable for breach of duty to the Defendants David Carvana and Associates should be found a concurrent wrongdoer under Part 4 of the 2002 Act. 3. A pleaded claim of misleading and deceptive conduct was not pursued. 4. In short the Plaintiff pleaded that David Carvana and Associates, being engaged to provide accounting and tax advisory services for the period 2000 to 2006, had a duty of care to exercise reasonable care, skill and judgment in the lodgement of returns for and financial statements for the Defendants. It was asserted that this was breached by failing and/or under declaring income, failing to seek further information or instructions to determine the correct taxation treatment and failing to advise the Defendants about the associated risks. [298] 5. The Defendants argued that as that claim relates to work preparing returns for the 2000 to 2006 income years, and the Plaintiff has not established any negligence on the part of David Carvana or that it caused the loss in respect of the 2007 to 2013 income years, the principles of proportionate liability are not engaged. It argued that the criticisms of David Carvana's work were a "red herring." Further it was contended that the Plaintiff did not plead particulars in respect of the alleged concurrent wrongdoer which was essential to any claim. [299] In oral submissions the Defendant accepted that the accounts prepared by David Carvana would have been relevant to causation of the penalties and interest that it claims against the Plaintiff, however it stated that there was no evidence of what questions were asked by Mr Carvana, what instructions he was given, and Mr Pennimpede was not asked any questions relating to the matter. [300] 6. Beyond that the Defendants appeared to accept the Plaintiff's substantive argument that the work undertaken by David Carvana and Associates caused the loss or damage which necessitated the preparation of the amended financial statements on a 'stand-alone' basis. However, they did not accept that breach on the part of David Carvana was established in respect of the inability to verify the shareholder loan account balance in Manbead's 2006 financial statements which the Plaintiff relied upon in the preparation of Manbead's 2007 financial statements and the penalties and interest that followed in respect of ensuing years. 7. The Plaintiff relied on the statements of Robert Hackelton that in the process of preparing a response to the First Position Paper prepared by the ATO he became aware of a number of inconsistencies and inaccuracies in the tax returns prepared by David Carvana prior to 2007 and that his concerns regarding the 2006 financial statements were subsequently articulated to the ATO in his letter of 28 March 2014. [301] In that letter Mr Robert Hackelton stated that he was unable to establish the correctness of the $1,839,066 loan as shown in the 2006 Manbead balance sheet. His evidence was that it became clear to him that the returns prepared by David Carvana and Associates could not be relied upon and that he needed to revisit the financial statement in the 2007 to 2012 financial years free of the inaccuracies passed down from David Carvana. [302] Robert Hackelton said that he made enquires of David Carvana but was told "Vito knows all about this." [303] 8. In the circumstance were it necessary to determine the matter, I would have accepted that the acts or omissions caused the loss or damage which is the subject of the Defendant's claim as the inability to verify the 2006 shareholder loan balance in the financial statements prevented the Plaintiff from satisfying the ATO that the drawings were not assessable income. 9. Any issue as to the state of pleading was not taken until closing submissions. No attempt was taken to limit any evidence to the extent that it might be contended that it caused prejudice to the Defendants. Be that as it may, the Plaintiff has pointed to no evidence to make out its pleaded case as to what information or instructions Mr Carvana did or did not seek, what instructions or information was provided to David Carvana and what advice he gave. Whilst I accept that Robert Hackelton identified inconsistencies and inaccuracies the circumstances in which they arose was not elaborated on. 10. In the circumstances were I to have accepted that the inaccuracies in the Manbead loan account was causative of the interest and penalties claimed against the Plaintiff I would not have found the case on proportionate liability has been made out in respect of David Carvana. 11. Damages were also claimed based on the interest and penalties paid by Mr Pennimpede and Manbead under the Revised Settlement Deed dated 26 August 2016 calculated in the sum of $187,355.73 on account of Mr Pennimpede and $8,045.11 on account of Manbead. [304] Quantum of Damages 1. I proceed to the calculation of damages that would have been awarded in the event that the Defendants had succeeded on their Cross Claim. 2. Mr Pennimpede also claimed penalties and interest payable to the ATO pursuant to an agreement dated 26 August 2016 in the sum of $187,355.73 should be paid by the Plaintiff. This was calculated on the basis that under the terms of the Deed of Settlement, Mr Pennimpede was to pay penalties and interest totalling $244,411.86 for the 2007-2012 financial years (being the income year for which Hackeltons were responsible for preparing accounts). The amount of $244,411.86 was said to comprise 13.74% of the total settlement amount of $1,778,749.39 that the Defendants agreed to pay to the ATO. However as Mr Pennimpede did not pay that amount but rather paid the amount of $1,363,578.81 under the terms of agreement dated 26 August 2016, that agreement did not particularise the break-up of the amount paid for unpaid tax, interest and penalties. Accordingly, an amount of $187,355.73 was claimed as the equivalent of penalties and interest, comprising 13.74% of the Settlement amount of $1,363,578.81. 3. In respect of Manbead the claim was for fees paid to the Plaintiff to respond to the ATO audit of $6,930, in respect of invoice 0511, [305] plus penalties and interest paid to the ATO, pursuant to the agreement dated 26 August 2016, totalling $8,045.11. This was calculated on the basis that under the terms of the Deed of Settlement, Manbead was to pay penalties and interest totalling $10,529.20 for the 2011-2012 financial years (being the income years for which the Plaintiffs were responsible for preparing the accounts) the amount of $10,529.20 was said to comprise 0.59% of the total settlement amount of $1,778,749.39 that the Defendants agreed to pay to the ATO. However the Defendants did not pay this amount, but rather paid the amount of $1,363,578.81 under the terms of the agreement dated 26 August 2016. That agreement had not particularised the break-up of the amount paid for unpaid tax, interest and penalties. Therefore the amount of $8,045.11 was described as the equivalent of the penalties and interest comprising, 0.59% [306] of the Settlement amount of $1,363,578.81. 4. The Plaintiff contended that as Mr Pennimpede could not meet the terms of the repayment that he had initially agreed with the ATO interest was accruing on the settlement amount such that the total amount owing at the time the revised settlement deed was entered was $2.678 million. In this sense the revised settlement amount of $1,363,578.81 was 49.25 % of that in the initial Deed. Accordingly it was argued that the figure that more accurately represents the proportion for penalties and interest under the revised deed owing based on the reduction from the First Deed was to be 49.25% of $244,441 (for Mr Pennimpede0. and $10,529 (for Manbead). [307] being $124,039 and $5,343.47 5. For the reasons advanced by the Plaintiff I accept that the calculations submitted on his behalf more accurately represents the calculation of interest and penalties claimable in the event that the Mr Pennimpede succeeded on his Cross Claim. 6. The Plaintiff also advanced that there should be a further deduction on the grounds that it has not been established that the tax and penalties have been paid. Exhibit 4 was tendered as an agreement but it was only signed by Mr Pennimpede and Manbead not the ATO was submitted that no actual evidence of payment was produced. [308] In oral submissions it was conceded that Mr Pennimpede gave evidence of payment [309] but stated that the Court should be wary of accepting his "blithe assertions that he has paid the money." [310] The Defendant submitted that Mr Pennimpede gave evidence as to payment and was not challenged. [311] On balance I would accept the Defendant's argument and would not make a further reduction on this amount. 7. The Defendants' Counsel conceded that the amounts contested were in relation to the amendment of financial statements of both Manbead and Mr Pennimpede as noted earlier. It was ultimately conceded that the only defence available to the Defendants with respect to the unpaid fees related to set-off as set out in the Defendant's Further Revised Schedule of Damages. "1. As for the invoices issued to Manbead: 1 Inv-0626 $1,430 (Preparation of amended 2008 financial statements) Inv-0627 $1,430 (Preparation of amended 2009 financial statements) Inv-0628 $1,430 (Preparation of amended 2010 financial statements) Inv-0629 $6,831 (Preparation of amended 2011 and 2012 financial statements) Total $11,121.00 2. As for invoices issued to Vit[o]: Inv-0583 $6,217.20 (Preparation of amended 2008 financial statements) Inv-0584 $5,247 (Preparation of amended 2009 financial statements) Inv-0585 $6,118.20 (Preparation of amended 2010 financial statements) Total $17,582.40 [312] 1. As to the cost of preparing amended returns the Plaintiff submitted that a careful analysis of the invoices which are the subject of the Cross Claim reveals that Hackelton's actual fees involved in preparing the amended financial statements are only a small proportion of the overall costs and invoices involved. Of the $128,333 in paid invoices which are the subject of the Cross Claim, only one of those invoices (namely invoice 511 dated 22 May 2014 in the sum of $6,930 paid by Manbead) contains a reference to the preparation of the amended financial statements. It argued that the remaining 94.5% of this claim ($121,403) related to work which did not involve the preparation of the amended financial statements but rather related to the more general work involved (over a period of several years) in responding to the ATO's enquiries and dealing with and responding to the audit. 2. The Plaintiff argued that he bulk of the work involved in the preparation of the amended financial statements was contained in Hackelton's invoices numbered 0583, 0584, 0585 and dated 22 May and 3 July 2014 (which total some $81,577.40 but also include significant other work) which have not yet been paid (and from part of the unpaid fee claim by Hackelton's) and therefore cannot form part of the Cross Claim for damages by Mr Pennimpede. 3. It contended that the invoices the subject of the Cross Claim include a very substantial amount of work undertaken by Hackelton's which relate to tasks other than the preparation of the stand-alone financial statements, including work which was done prior to the 2014. For example, some of the pre-2014 invoices relate to discussions involving Family Court issues, responding to the ATO risk review in relation to Universal Labour Pty Ltd and Manning Solutions Pty Ltd, finalisation of the ATO Comprehensive Risk Review and attending to the audit generally. The invoices rendered in 2014 include work done briefing and meeting with senior counsel in relation to the audit generally, reviewing the ATO papers and the voluminous material received from the ATO which had in turn been acquired from David Carvana, preparing an FOI request and reviewing and responding to the Third ATO Position Paper (dealing with Manbead FBT issues). On any view, all of this this work would have been necessary even if the alleged breach of duty of care has not occurred. [313] 4. I accept the Plaintiff's submissions. The invoices in the Further Amended Schedule included work on amended financial statements but were not confined as such. Some of that work related to matters outside the Defendant's claim in negligence. Beyond that no questions were put by the Defendants to Mark Hackelton as the composition of the invoices concerned. 5. On the state of the evidence I would I would have allowed the Plaintiffs claim notwithstanding. 6. Accordingly had the Defendants succeeded in their Cross Claim the amount I would have offset would be 1. $3,343.47 from the from the Plaintiff's claim of $11,121 in respect of the First Defendant reducing the amount payable to the Plaintiff to $7777.53 2. $124,039 from the Plaintiff's claim of $134,004.40 in respect of the Second Defendant reducing the amount payable to the Plaintiff to $9,965.40. 3. I would further have allowed interest pursuant to District Court Practice Note 15 ORDERS 1. For these reasons the orders will be as follows: 1. Verdict for the Plaintiff against the First Defendant in the sum of $11,121; 2. Verdict for the Plaintiff against the Second Defendant in the sum of $134,004; 3. Verdict for the Cross Defendant on the Cross Claim; 4. Direct the parties lodge with my Associate proposed agreed short minute of order in accordance with this decision including interest and costs by 3 May 2019; 5. In default of agreement as to (4) each party prepare their own proposed draft short minute of order together with written submissions to be lodged with my Associate by 3 May 2019; 6. Matter listed (if necessary) for argument as to final orders on 17 May 2019; 7. Defer entry of final orders pending resolution of matters referred to herein. 8. Exhibits are to be retained for 28 days after entry of final orders. Endnotes 1. Hereinafter referred to as "Hackeltons". See Amended Statement of Claim at [1] and Defence at [1]. 2. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [7]. 3. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [7]-[9]. 4. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [6]. 5. Hereinafter referred to as the "ATO". 6. Hereinafter Manbead. 7. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [6]-[7]; [10]. 8. Hereinafter "Cougar". 9. Hereinafter "Emplus". 10. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [17]. 11. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [17]. 12. Hereinafter "Manning Solutions". 13. Hereinafter "Universal Labour". 14. Exhibit 1, Affidavit of Vito Pennimpede of 23 February 2018 at [21 (c) (iv)]. 15. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [14]. 16. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [15] and [18]. 17. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [20]. 18. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [21-[23]. 19. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [25]. 20. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [26]-[27]. 21. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [24]. 22. Exhibit 1, Affidavit of Vito Pennimpede of 23 February 2018 at [21(g)]. 23. Exhibit 1, Affidavit of Vito Pennimpede of 23 February 2018 at [21(b)]. 24. T 135.20. 25. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [27]; MH 2, p 1. 26. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [27]; MH 2, p 1. 27. T 135.22-137.15. 28. T 137.28-.31. 29. T 137.17-.22. 30. T 137.24-.26. 31. T 137.43-139.03. 32. Exhibit 1, Affidavit of Vito Pennimpede of 23 February 2018 at [11]. 33. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [32]; Affidavit of Vito Pennimpede of 23 February 2018 at [21(g)]. 34. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [29]-[32]. 35. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [33]. 36. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [7]-[8]. 37. Exhibit 1, Affidavit of Vito Pennimpede of 23 February 2018 at [21(g)]. 38. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [20]-[23]. 39. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [27]; Exhibit MH-2, p. 1. 40. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [29]-[35]. 41. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [31]. 42. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [33]. 43. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [34]. 44. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at 35]. 45. T 43.13. 46. T 31.35-.39. 47. T 39.21-43.50. 48. T 44.38-.48. 49. T 46.01-11. 50. T 46.1-.15; See Exhibit F(1); The figures that appear in Manbead's 2006 income year financial statements are the same as those that appear in Manbead's financial statements for the 2007 income year financial statement at Exhibit 1, Exhibit VPP-1, p 272-275. 51. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [35]. 52. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [38]. 53. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [37]. 54. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [38]. 55. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [39]. 56. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [39]. 57. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [41]. 58. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [42]. 59. Exhibit 1, Affidavit of Vito Pennimpede of 23 February 2018 at [10](e). 60. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [43]. 61. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [44]. 62. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [45]. 63. Exhibit 1, Affidavit of Vito Pennimpede of 23 February 2018 at [10](e). 64. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [33]. 65. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [46]. 66. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [47]-[54]. 67. Exhibit A, Affidavit of Mark Hackelton 30 July 2018 at [10 (c)] 68. Exhibit 1 at Exhibit VPP-1, p. 275. 69. T 61.16-64.31. 70. T 64.08-.31. 71. Exhibit A, Affidavit of Mark Hackelton of30 July 2018 at [11]. 72. Exhibit A, Affidavit of Mark Hackelton of30 July 2018 at [12]. 73. T 65.32. 74. T 65.40-.42. 75. T 66.26-.28. 76. T 66.34. 77. T 79.05-.21. 78. T 65.44-66.05. 79. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [56]-[57]. 80. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [58]-[60]. 81. T 69.41-.47. 82. T 69.50-70.01. 83. T 70.03-.04. 84. T 70.07. 85. Exhibit 1 at Exhibit VPP-1, p. 326. 86. T 67.25-.35. 87. Exhibit 1 at Exhibit VPP-1, p. 361. 88. T 69.16-.20. 89. Exhibit B at Exhibit RH-1, p. 81. 90. Exhibit 1 at Exhibit VPP-1, pp.418-9. 91. T 72.03-.05. 92. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [34]. 93. T 71.40-72.05. 94. T 75.14-.16. 95. T 75.18-.19. 96. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017, Exhibit RH-1, p. 145. 97. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [18]-[19]. 98. T 53.20. 99. T 53.24. 100. T 54.11-.26. 101. T 93.5-.36 102. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017 at [16]-[17]. 103. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017 at [18]. 104. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017 at [22]. 105. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017 at [25]. 106. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017 at [29]. 107. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017 at [32]. 108. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017 at [25], [29], [32], [34]-[36], [38], [41], [48], [51]; T 94.19-.20. 109. T96.38-.46 110. T 98.19-99.6 111. T 86.20-87.50 112. T 89.12 113. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [57]-[60]. 114. Exhibit C, Affidavit of Slavenko Macakanja of 8 November 2017 at [14]. 115. Exhibit C, Affidavit of Slavenko Macakanja of 8 November 2017 at [24]. 116. Exhibit C, Affidavit of Slavenko Macakanja of 8 November 2017 at [31]. 117. Exhibit C, Affidavit of Slavenko Macakanja of 8 November 2017 at [44]. 118. Exhibit C, Affidavit of Slavenko Macakanja of 8 November 2017 at [56]. 119. Exhibit C, Affidavit of Salvenko Mascakanja of 8 November 2017 at [10]-[11], [18]-[22], [25]-[29], [33]-[37], [45]-[51], [57]-[61]. 120. T 81.03-.23. 121. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017 at [44]; Exhibit RH-1, pp. 141-142. 122. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1, p 23, 26-28. 123. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1, p 26-28, 32. 124. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1, p 32. 125. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1, pp. 37-38. 126. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1, pp. 107 at [36]-[37], 114 at [84], 115 at [88]. 127. Annexure B, Affidavit of Robert Hackelton of 8 November 2017; Exhibit RH-1, p. 386. 128. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017 at [110]. 129. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017 at [11]. 130. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017 at [112]-[114]. 131. T 103.10-104.32. 132. T 108.48-109.22. 133. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1, pp. 249-265. 134. Exhibit B, Affidavit of Robert Hackelton of 30 November 2016 at [12]-[13]. 135. T 35.01-.05. 136. Exhibit A, Affidavit of Mark Hackelton of 30 November 2016 at [12]-[15], Exhibit MH-1, pp. 2-25. 137. Exhibit 4. 138. Plaintiff's Written Submissions at [8]. 139. Defendant's written submissions at [17]. 140. T 9.10-.28. 141. T 126.48-127.46. 142. T 274.45-275.05. 143. Agreed Statement of Issues at [1]-[10]. 144. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017 at [29]. 145. Defendant's written submissions at [25]. 146. Defendant's written submissions at [24]. 147. Cross Claim at [87]-[89] Agreed Statement of Issues at [11] 148. At [12]. 149. Cross Claim at [73]-[76] and [83]-86]. Agreed Statement of Issues at [10]. 150. T 275.7-.14. 151. See T 275.32-.35. Agreed Statement of Issues at [1]-[3]. 152. Agreed Statement of Issues at [3] and [5]. 153. Agreed Statement of Issues at [10]. 154. Cross Claim at [94] Agreed Statement of Issues at [14] 155. Defence to Cross Claim at [101]. Omitted from Agreed Schedule of Issues 156. Exhibits D and 2 157. Exhibit 3L 158. Exhibit D 159. Exhibit 2 160. Exhibit D, Affidavit of Philip Price of 15 November 2017, p 35. 161. Exhibit 2 BG 2at [7.45]-[7.49] 162. T 176.44-177.01. 163. T 178.07. 164. T 178.13-.19. 165. Exhibit 2 BG2 at [6.20]-[6.24] 166. T 178.27-.37. 167. Exhibit D Affidavit of Philip Price dated 26 July 2018 at [4.34]-[4.37] 168. T 178.39-.47. 169. T 179.09-.11. 170. T 179.45-180.08. 171. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [18]-[19]. 172. T 51.34-.44. 173. T 54.08-.26. 174. At [71] and [81]. 175. Defendant's Written Submissions at [68]. 176. Defendant's Written Submissions at [67]. 177. Defendant's Written Submissions at [61(a)]. 178. Defendant's submissions at [61(c)]. 179. T 96.16-.23. 180. Defendant's Written Submissions at [62]-[63]. 181. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017, Exhibit VPP-1, pp. 26-7, 32. 182. Exhibit B, Affidavit of Robert Hackelton of 8 November 2018, Exhibit RH-1, p. 386. 183. T 115.29-116.26. 184. T 104.45-105.12. 185. T 273.38-274.32. 186. T 271.01-.04. 187. Plaintiff's Written Submissions at [29]. 188. T 137.28-.41. 189. Plaintiff's Written Submissions at [33]. 190. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017, Exhibit MH-1, p. 19. 191. Plaintiff's Written Submission at [37]. See Affidavit of Robert Hackelton 8 Novemeber 2017,Exhibit RH1 p20,57,88,118, 187. 192. Exhibit C, Affidavit of Slavenko Macakanja at [13]-[62], Exhibit SM-1. 193. Exhibit 2, Report of Brett Goodyer of 19 July 2017 at [2.5]. 194. Exhibit 2, Report of Brett Goodyer of 19 July 2017 at [6.9], [6.41], [6.68], [6.85], [6.103], [6.131]. 195. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017 at [107]-[112]. 196. T 36.25-.50. 197. Exhibit A, Affidavit of Mark Hackelton of 8 November 2017 at [82]-[84]. 198. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017, Exhibit RH-1, p. 386. 199. T 99.35-100.5 200. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017; Exhibit RH-1, pp. 368-373, 386. 201. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017; Exhibit RH-1, p. 387. 202. Plaintiff's Written Submissions at [43]. 203. T 266.15-.23. 204. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017 at [112]-[114]. 205. T 104.22-.32. 206. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017; Exhibit RH-1, p. 174. 207. Plaintiff's Written Submissions at [41]. 208. Exhibit B, Affidavit of Robert Hackelton of 8 November 2017; Exhibit RH-1, p. 387. 209. T 139.15-140.21; Plaintiff's Written Submissions at [43]. 210. Plaintiff's Written Submissions at [43]. 211. [2013] SASC 172 at [33]-[36]. 212. [2001] FCA 164 at [77]. 213. Walker v Hungerfords [1987] 44 SASR 532 at 546-9, per Bollen J. 214. Astley v Austrust Ltd (1999) 197 CLR 1, 47-48. 215. [(2008) 236 CLR 510 at [53]. 216. See Imbree v McNeilly (2008) 236 CLR 510 at [67]. 217. Defendant's Written Submissions at [51]. 218. Defendant's Written Submssions at [50]. 219. Defence to Cross Claim at [92]-[93] 220. South Western Sydney Local health District v Gould [2018 NSWCA 69 at [123] (Leeming JA with whom Basten and Meagher JJA agreed). 221. [2015] NSWCA 320 Leeming JA at [102]-[106] Basten and Simpson JJA agreeing). 222. at [128]. 223. [2012] NSWCA 151. 224. Defendant's Written Submissions at [68]. 225. Defendant's Written Submissions at [68 (c)] and [70 (a)] 226. T 48.14-.16. 227. T 48.18-.19. 228. T 39..38-42.18. 229. T 40.26 and t 43.40-44.18. 230. T 87.45-88.06. 231. T 138.50-130.03. 232. Exhibit A, Affidavit of mark Hackelton of 8 Novermber 2017 at [31]. 233. Affidavit of Robert Hackelton dated 8 November 2017; RH1 at p 386. 234. Exhibit B, Affidavit of Robert Hackelton 8 novemeber 2018 at [113]. 235. Exhibit 1, Affidavit of Vito Pennimpede 23 February 2018 at [11]. 236. T 151.28-.35. 237. Exhibit 1, Affidavit of Vito Pennimpede 23 February 2018 at [25] 238. T 151.43-.50. 239. Exhibit K; T 141.42-142.23. 240. T 142.25-.31. 241. T 144.18-.24. 242. T 144.35-.39. 243. Exhibit A, Affidavit of Mark Hackelton dated 8 November 2016; MH2 p 16-23. 244. T 166.46.48 and 167.14 245. T 167.11. 246. T 153.48-.154.01. 247. T 155.4-.13. 248. T 179.36-.43 Defendants' Written Submissions 249. T 65.15.35. 250. T 83.10-.12. 251. Affidavit of Robert Hackelton 8 November 2017 Exhibit RH1 at p47,57,84,88,114,118,185 and 187. 252. T 97.30-98.50. 253. (Unreported, Federal Court of Australia, Tamberlin J, 29 June 1995) at 122 – 123 (in a passage cited with approval by the High Court when it upheld his Honour's decision: Effem Foods Pty Ltd v Lake Cumbeline Pty Ltd (1999) 161 ALR 599; [1999] HCA 15 at [15]). 254. (2011) 297 ALR 56; [2011] FCA 1123 at [48] (Emmett J). 255. (2000) 49 NSWLR 262 at [84] – [88]. 256. (2015) Aust Torts Reports 82-189 and [2014] NSWCA 424. 257. Fuller-Lyons v New South Wales [2015] HCA 31. 258. (2014) 255 CLR 1; [2014] HCA 52. 259. Machs v Viscariello [2017] SASFC 172 at [601]. 260. Kligowski v Metrobus (1959)101 CLR 298 at p 305; [1959] HCA 8. 261. Plaintiff's Written Submissions at [40]. 262. S 5C of the 2002 Act. 263. Exhibit B Affidavit of Robert Hackleton at [78]-[79] 264. T 151.28-.31 265. Defendant Written Submissions at [59] 266. T 189.13-190.4 267. Defendants' Written Submissions at [65 (a)-(b)] 268. See T196.33-.36 269. T 196.33-.36 and Defendant's Written Submissions at [92] 270. Plaintiff's Written Submissions at [38 (a)-(b)] 271. Kuligowski v Metrobus (2004) 220 CLR 363. 272. Exhibit B, Affidavit of Robert Hakelton 8 November 2017 at [44]; Exhibit RH1, pp141-2. 273. Exhibit 1, Affidavit of Vito Pennimpede 4 May 2017; Exhibit VPP1, pp 23-28. 274. Exihbit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1, pp 103,107 and 114. 275. Defendant's written submissions at [70]. 276. T 239.11. 277. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1, pp. 5-32. 278. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1, p. 23. 279. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1, p. 23. 280. T 242.28-.41. 281. T 243.12-.16. 282. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1, p. 61 (as summarised). 283. T 245.49-246.02. 284. T 246.29-.50. 285. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1, p. 64. 286. T 248.35-249.50. 287. T 168.13-170.25. 288. Exhibit B, Affidavit of Robert Hackelton dated 8 November 2017; Exhibit RH,1 p141. 289. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1,p. 23. 290. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1,pp 37-42. 291. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1,pp 43-48. 292. Exhibit 1, Affidavit of Vito Pennimpede of 4 May 2017; Exhibit VPP-1,pp 49-55. 293. T 248.35-249.50. 294. T 192.1-.23 295. (1998) 195 CLR 232 at p 246. See also Kirby J at 272 and Gleeson CJ in Rosenberg v Percival [2001] HCA 18; (2001) 205 CLR 434 at [16]. 296. Exhibit B, Affidavit of Robert Hackelton dated 8 November 2017; Exhibit RH1 p374- Annexure B. 297. Exhibit B, Affidavit of Robert Hackelton dated 8 November 2017; Exhibit RH1p46,84,114,1185 298. Defence to Cross Claim at [97]. 299. Reliance was placed on Ucak v Avante Developments Pty Ltd [2007] NSWSC 3767 at [41]. 300. T 204.26-205.50. 301. Exhibit B, Affidavit of Robert Hackelton dated 8 November 2017; Exhibit RH1p374- Annexure B at p 386. 302. Exhibit B, Affidavit of Robert Hackelton dated 8 November 2017 at [111]-[112]. 303. Exhibit B, Affidavit of Robert Hackelton dated 8 November 20117 at [84(a)]. 304. Defendant's Further Revised Schedule of Damages. 305. Exhibit 1, Affidavit of Vito Pennimpede of 23 February 2018, Exhibit VPP-3, p. 160. 306. The Further Amended Schedule of Damages described it as 13.74%. 307. Plaintiff's Written Submissions at [68]-[69] 308. Plaintiff's Written Submissions at [68] and [70] 309. Exhibit 1 Affidavit of Vito Pennimpede 4 May 2017 at [54] 310. T 268.28-.34 311. T 268.45-.49 312. See also Defence at [3C], [7B]. 313. Plaintiff's written submissions at [59]-[61]. Amendments 09 August 2019 - Error regarding identities of first and second defendants amended pursuant to UCPR 36.17 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. Decision last updated: 09 August 2019