Roose v Duthie
| Jurisdiction | New Zealand |
| Judge | Mallon J |
| Judgment Date | 15 December 2016 |
| Neutral Citation | [2016] NZCA 600 |
| Docket Number | CA538/2015 |
| Court | Court of Appeal |
| Date | 15 December 2016 |
[2016] NZCA 600
Wild, Mallon and J Williams JJ
CA538/2015
IN THE COURT OF APPEAL OF NEW ZEALAND
Appeal against a High Court decision that claims arising from alleged negligent advice were commenced too late — the context was a property transaction involving the sale of property by one entity, owned and controlled by the appellant to another entity, also owned and controlled by the appellant — the appellant said that the advice she had received from the respondents led to the transaction incurring a tax liability — the appellant said the transaction was only entered into because the respondents gave negligent advice that it would not attract tax liability — the High Court ruled that the time at which loss was suffered was when the unconditional agreement was executed and the tort cause of action was out of time — discussion of “flawed transaction” and “no transaction” cases in cases of negligent professional advice — whether the appellant's loss occurred when the unconditional agreement was executed or when the agreement was settled — whether an alleged failure of the respondents to disclose a conflict of interest amounted to “fraud” under s28 Limitation Act 1950.
K J Crossland and J S Langston for the Appellants
G D Pearson and L M Pelly for the Respondents
A The appeal is allowed.
B The determinations in paragraph [119(a), (b) and (c)] of the judgment of the High Court are set aside.
C The proceeding is remitted to the High Court for directions as to the filing of an amended statement of claim.
D The respondents are to pay the appellants costs for a standard appeal on a band A basis plus usual disbursements.
REASONS OF THE COURT
(Given by Mallon J)
This appeal concerns whether claims arising from alleged negligent advice were commenced too late. In the High Court Toogood J found they were and therefore could not proceed for determination at trial. 1
The context is a property transaction that attracted tax liability. The transaction involved the sale of property by one entity, Denise Developments Ltd (DDL), owned and controlled by Ms Roose to another entity, DMR Development Ltd (DMR), also owned and controlled by Ms Roose. Ms Roose claims the transaction was entered into because the respondents gave negligent advice that it would not attract tax liability. She claims the transaction would not have been entered into had the negligent advice not been given.
There are two issues in this appeal:
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(a) The first is whether the High Court was correct to find the cause of action in tort accrued when the agreement between DDL and DML was entered into, or whether it accrued when that agreement was settled. If it is the former, then it is common ground that the tortious cause of action is time-barred.
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(b) The second issue is whether the High Court was correct to find that the time for bringing the contract and tort causes of action was not deferred on the basis the respondents had failed to disclose a conflict
of interest once the Inland Revenue Department (the IRD) began investigating the transaction.
The High Court judgment arose from the appellants' application for determination of a separate question, namely the date their causes of action arose. It proceeded on the basis of the facts as pleaded, in the same way as would have been the case on a strike-out application.
The Denise Roose Butcher Family Trust owned a property in Pukekohe. Ms Roose was a trustee of the trust. Mr Duthie was also a trustee. He was an accountant and partner in Duthie Taylor Ruiterman (the first respondents are sued in their capacity as partners of the firm), which later became DRK Chartered Accountants Limited (the second respondent).
Ms Roose wished to buy a 1.9560 hectare property that adjoined the trust's property. This property had previously been owned by her forebears. On or about 28 October 2005 Ms Roose contacted Mr Duthie by telephone about that possible purchase. Ms Roose asked Mr Duthie to advise her on the most suitable ownership structure for that purchase. There is a dispute between them about what Ms Roose told Mr Duthie her intentions for the property were.
Ms Roose says she told Mr Duthie she wished to reclaim part of the property, landscape it to create a walkway and park with a commemorative plaque celebrating her forebears, adjust the boundary between the two properties, build a new home for her own use and graze stock in the interim. She says Mr Duthie advised her that a company would be the best entity to purchase the property and, because Ms Roose was intending to graze stock, the company could claim GST on the purchase.
Mr Duthie says Ms Roose told her she intended to subdivide the property and sell the lots for profit. He says he took advice from an accounting firm that had tax expertise. That firm advised him the IRD would tax any sale of the land if Ms Roose were to develop it. Therefore she should purchase the property through a company to minimise the tax liability she would incur.
On 21 December 2005 DDL, with Ms Roose as its sole director, was incorporated in order to purchase the property. Mr Duthie's firm registered DDL for GST. In the GST registration form Mr Duthie recorded DDL as being in the business of property development. On 27 January 2006 DDL purchased the property. 2 A GST return was filed seeking a GST refund on the purchase. Mr Duthie completed the 2006 financial accounts, in which he recorded DDL as a property developer.
In December 2006 DDL applied to the local council for approval to create a public reserve, adjust the boundary between the two properties and subdivide the property into 11 sections. The council granted consent to a subdivision into seven sections and declined the proposal to create a public reserve.
In early 2008 Ms Roose wished to protect the property from any relationship property claims. She sought advice from Mr Duthie about the tax implications of transferring the property from DDL to a trust. Mr Duthie advised the transfer would not attract income tax and the sale would be zero rated for GST purposes. Following this advice:
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(a) DMR and DMR Development Trust (the Trust) were established. DMR was the trustee company for the Trust and Ms Roose was DMR's sole director. The beneficiaries of the Trust were Ms Roose and her family trust.
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(b) On 14 April 2008 Ms Roose, on behalf of DDL and DMR, executed an agreement under which DDL sold the property to DMR for $1,950,000 (GST inclusive). This price was based on a registered market valuation.
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(c) On the same date Ms Roose, on behalf of DDL and DMR, signed an Acknowledgement of Debt in favour of DDL for the purchase price.
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(d) Under the 14 April 2008 agreement settlement was to take place on 21 April 2008. This was subsequently varied to occur on 2 May 2008. The transfer took place on this date.
Mr Duthie completed the 2009 financial statements and tax returns for DDL and the Trust. These financial statements recorded DDL's and the Trust's businesses as being property development. They recorded the sale and purchase of the property at $1,733,333 with a GST refund due to the Trust of $216,667. DDL's tax return recorded zero tax on zero taxable activity.
As part of a review, on 27 April 2010 the IRD wrote to Mr Duthie seeking confirmation of, amongst other things, the taxable activity of DDL and DMR, and the reason for DDL's claim for the GST refund in 2006. Mr Duthie responded by letter dated 19 May 2010 confirming, amongst other things, the taxable activity of DDL was property development. Ms Roose says she did not have the opportunity to review the letter before it was sent.
On 13 July 2010 the IRD commenced an audit of DDL, DMR and another related entity, DMR Property Investment Ltd. On that date the IRD wrote to Mr Duthie seeking financial statements and other information. Mr Duthie replied by letter dated 6 September 2010. He said the GST payable on DDL's sale to DMR had been overlooked and DMR should not have been registered for GST. Ms Roose says she did not review this letter before it was sent. In February 2011, in response to a request from the IRD, Mr Duthie provided the DDL financial statements for 2006 to 2009.
On 13 April 2011 the IRD interviewed Mr Duthie and Ms Roose. Mr Duthie said DDL purchased the property to hold it indefinitely, graze some cattle and carry out a boundary adjustment. He also said DDL's taxable activity was cattle grazing and, at the time of the sale to DMR, DDL was not carrying out any taxable activity. Following further correspondence, Mr Duthie said the long-term intention was to develop the property into a lifestyle block, and in the meantime to run livestock and receive grazing income. Ms Roose says she did not review this letter before it was sent.
The IRD audit was completed on 29 September 2011. The IRD determined DDL's taxable activity was property development, reassessed DDL's income tax for the 2009 year and imposed a shortfall penalty. On 12 July 2012 DDL and the IRD agreed to settle matters by payment of a sum less than the 29 September 2011 reassessment. Ms Roose says she was forced to sell three sections of the property, which she had intended to hold on to as an investment, in order to meet this reassessment.
On 1 May 2014 Ms Roose, DDL and DMR filed their proceeding against the respondents. They brought a number of causes of action alleging:
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(a) a failure to advise her on the adverse tax implications of the transfer from DDL to DMR before that transaction took place on 2 May 2008;
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(b) failures in completing the DDL...
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...On that basis the Supreme Court decision of Thom v Davys Burton [2008] NZSC 65, [2009] 1 NZLR 437 might be distinguished. (see Roose v Duthie [2016] NZCA 600 at [27], [28], [32] and [43].). On this analysis, the cause in action in negligence could be said to have accrued on 28 September 2......