Sherwin Chan & Walshe Ltd ((in Liquidation)) v Sir Robert Jones and Yorgen Holdings Ltd

• Jurisdiction: New Zealand
• Judge: Harrison J
• Judgment Date: 15 October 2012
• Neutral Citation: [2012] NZCA 474
• Docket Number: CA505/2011
• Court: Court of Appeal
• Date: 15 October 2012

Between

Sherwin Chan & Walshe Limited (In Liquidation)

First Appellant

and

WHK (NZ) Limited

Second Appellant

and

Sir Robert Jones and Yorgen Holdings Limited

Respondents

[2012] NZCA 474

Court:

Ellen France, Harrison and White JJ

CA505/2011

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal from judgment awarding $5 million in damages — respondent trust had incurred substantial and unexpected tax liability due to negligent performance of professional services by appellant (accountant and tax advisor) — appellant had given negligent advice on corporate restructuring which had resulted in a tax liability — appellant accepted it was liable for $3.5 million but challenged the remainder alleging extra tax liability had been incurred through reliance on negligent or wrong advice of new tax adviser, that trust would have incurred costs in elimination of its tax exposure which had to be offset against liability, and that trust had obtained a benefit from the restructuring transaction which completely offset its total tax liability — whether appellant was entitled to offset any costs or benefits.

Counsel:

L J Taylor, O M Meech and J M Peterson for Appellants

M P Reed QC and M G Colson for Respondents

A The appeal is dismissed.

B The appellants must pay the respondents costs for a standard appeal on a band A basis and usual disbursements. We certify for two counsel.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Harrison J)

Table of Contents

	Para No
Introduction	[1]
Background	[5]
Issues	[31]
Causation	[31]
(a) SCWL's case	[31]
(b) Legal principles	[35]
(c) Factual inquiry	[42]
(d) Voluntary disclosure	[47]
(e) Taxation liability	[65]
Costs	[71]
(a) SCWL's case	[71]
(b) Legal principles	[74]
(c) Factual analysis	[77]
Benefits	[82]
(a) SCWL's case	[82]
(b) High Court	[87]
(c) Legal principles	[88]
(d) No benefit	[95]
Result	[101]

Introduction

1 This appeal, on largely uncontested facts, raises issues of causation and liability for damages for negligent provision of tax advice.

2 Sir Robert Jones and Yorgen Holdings Ltd are the trustees of the Tirohanga Family Trust (the Trust), the beneficial owner of companies within what is known as the Robert Jones Group (the Group). Sherwin Chan & Walshe Ltd (SCWL) acted on a retainer as accountant and tax adviser for both entities for some years. The firm does not dispute that it performed its professional services negligently in: (a) failing continually to advise the Trust about the effect of a discrete taxation regime upon annual increases in intercompany debt; and (b) advising the Trust to enter into a corporate restructuring transaction designed to eliminate that debt. In the result, the Trust incurred a substantial and unexpected tax liability.

3 The Trust sued SCWL for breach of contract, effectively seeking an indemnity against its tax liability. SCWL admitted its negligence but denied liability. Following a trial in the High Court, Whata J found for the Trust. He entered judgment for damages of $4.285 million 1 and separately for interest and costs of $899,635. 2

4 SCWL accepts that before exercising rights of set-off it is liable for $3.454 million of the Trust's losses being its liability to tax on the corporate restructuring transaction. However, on appeal to this Court the firm challenges the damages judgment on these three separate grounds:

• (a) First, the Trust unnecessarily incurred an extra liability to tax on the annual increases in intercompany debt of $1.667 million, 3 being the balance of the damages judgment above $3.454 million, as a result of reliance upon unreasonable, negligent or wrongful advice from its new tax adviser, Ernst & Young (EY) which is attributable to the Trust. Alternatively, EY's unreasonableness or negligence severed the chain of causation between SCWL's negligence and the Trust's adjusted liability to tax.

• (b) Second, if SCWL had given timely advice to the Trust of its potential taxation liability, the Trust would necessarily have incurred costs of $1.286 million in eliminating its taxation exposure which must be offset against that liability.

• (c) Third, the Trust obtained a benefit from the restructuring transaction which completely offset its total tax liability of $4.285 million.

Background

5 The facts are set out comprehensively in Whata J's judgment. However, those which are relevant to the issues can be reduced to more summary form as follows.

6 Sir Robert Jones is the beneficial owner of and driving force behind the Group. The Trust is his primary ownership vehicle. He has participated in commercial property development in Australasia for more than 50 years. The Group is a low geared property investor, using its cash flow to acquire new buildings or enhance existing ones. Between 2004 and 2011 New Zealand companies in the Group acquired about $250 million worth of commercial buildings in Auckland and Wellington. For most of that time SCWL provided taxation advice and accountancy services to the Trust, including preparation of annual accounts for companies within the Group.

7 The Group comprises a number of Australasian companies. Two are particularly relevant. One is Robert Jones Holdings Ltd (Holdings), a New Zealand company formed in 2006 following an amalgamation of Sofia Ltd and Featherston Assets Ltd. The other is Pamiers Pty Ltd, an Australian company. The Trust through intermediary companies owns Holdings and, equally with Holdings, it owns Pamiers.

8 From February 2003 Pamiers made frequent and escalating advances to Holdings on what we are satisfied was a current or running account. Pamiers' accountants in Australia were concerned about the taxation effect of this indebtedness. In October 2006 SCWL advised Sir Robert on what in its opinion was a tax efficient method of eliminating the loan. Its proposal was that Pamiers should acquire 20 per cent of Holdings, with part of the purchase price to be paid by offsetting Holdings' current account liability. By restructuring itself in this way, SCWL advised, the Trust would minimise the risk of incurring taxation liability in New Zealand on funds transferred here which had already been the subject of Australian taxation.

9 The Trust implemented this advice on 13 March 2007. Pamiers' advances to Holdings were then $10.24 million. This amount was offset against the total purchase price of $16.2 million. However, a balance of AUD 42,049 still remained due and owing by Holdings to Pamiers on 13 March 2007 – this fact assumed significance at trial and in argument on appeal.

10 SCWL now accepts that when advising Sir Robert to implement the restructuring transaction it failed to take into account the attributed repatriation rules within the controlled foreign company (CFC) rules then in force under the Income Tax Act 2004. 4 The CFC rules were introduced to counteract the ability of New Zealand companies to defer New Zealand income tax by using off-shore companies. The statutory purpose was to attribute to New Zealand shareholders for income tax purposes income earned by off-shore companies under their ownership and control even though the income was not actually distributed to them. The attributed repatriation rules operate to attribute as income any increase in value of New Zealand property held by a CFC in an accounting year to the extent that the increased investment was less than the unrepatriated income.

11 Two elements of the CFC rules are relevant to this appeal. First, the CFC rules treated Pamiers' purchase of the Holdings' shares as a financial arrangement constituting “an investment in New Zealand property”. The acquisition represented an increase in Pamiers' associated party equity (that is, in its New Zealand property). The CFC rules deemed this increase to be an attributed repatriation dividend payable by Pamiers equally to its two shareholders which was taxable accordingly. On this basis, the Trust's taxable income was $8.1 million, being the 50 per cent of Pamiers' purchase price attributable to its shareholding.

12 Second, the intra-group lending between 2003 and 2007 was arguably also a financial arrangement within the CFC regime. If so, increases in Holdings' loan balance in any of Pamiers accounting years represented an increase in Pamiers' associated party debt (also in its New Zealand property). As with increases in

associated party equity, the increase in Pamiers' New Zealand property was treated as an attributed repatriation dividend payable by Pamiers to its shareholders in equal proportions. This provision was the basis for the Trust's additional taxation liability of $1.667 million. 5 However, the financial arrangement would be disregarded for the purposes of the attributed repatriation rules if it matured within five years of the date it was entered into. This relief provision also assumed importance at trial and in argument on appeal

13 On 23 September 2008 the Commissioner of Inland Revenue advised SCWL of his intention to audit the financial activities of the Trust and the New Zealand companies in the Group in the period between 2003 and 2007. This advice followed his letter dated 26 May 2008 notifying his commencement of a risk review. On 9 October 2008 he requested SCWL to provide information about the Group restructuring transaction. In November, when reviewing the Group's position following receipt of the Commissioner's notice, SCWL discovered its erroneous advice to the Trust on the restructuring transaction.

14 However, SCWL did not disclose its error to Sir Robert until February 2009. In the firm's assessment, the Trust's taxation liability on the restructuring transaction was $2.673 million, being a 50 per cent share of the attributed dividend at the rate of 33 per cent. Additionally, use of money interest would...