In our October 2011 update we reported on the High Court decision in Jones v WHK Sherwin Chan & Walshe & Ors (together, SCW), which involved a claim by the Trustees of the Tirohanga Family Trust for damages as a result of negligent tax advice. The High Court held that SCW was not entitled to set-off the value of the benefits that had accrued to Sir Bob Jones and the Tirohanga Family Trust as a result of the competent part of their advice against the losses flowing from the negligent aspects of the same advice.
SCW subsequently appealed the High Court's findings and advanced the following arguments:
- The Trust had incurred extra tax liability as a result of negligent or wrongful advice from its new adviser. SCW argued that the new adviser's unreasonableness, wrongfulness or negligence should be attributed to the Trust. In the alternative, it argued the new adviser's actions severed the chain of causation between SCW's negligence and the Trust's liability
- If SCW had given timely advice to the Trust, the Trust would have incurred costs of approximately $1.3 million. These should be off-set
- The Trust obtained a benefit from the restructuring transaction which completely off-set its total tax liability.
The Court of Appeal ((2012) 25 NZTC 20-146 (CA)) rejected all of these arguments (the second and third arguments having already been advanced unsuccessfully in the High Court). The Court held that:
- There was no reason to apply the attribution principle, and SCW's negligence was the operative or proximate cause of the Trust incurring the tax liability. The chain of liability was not broken by later events
- The Trust was not obliged to prove a negative i.e. that it would not have incurred costs to be off-set against this loss. Nor was the Trust bound to lead evidence to disprove a contingent hypothetical. The Trust was entitled to take the view that it would not have incurred any costs which SCW might properly set-off against the normal measure
- The restructuring transaction did not actually yield a tax saving benefit to the Trust. Therefore, the Trust's entitlement to any benefit was immaterial. For the sake of completeness, however, the Court noted that an innocent party claiming compensation for breach of a contractual obligation should not be expected to surrender by set-off a benefit separately promised by the wrong-doer. If the Trust had obtained a benefit, the Court considered that it would not be attributable to the breach by SCW. The benefit would be a separate or independent gain incidental of the service provided by SCW, rather than a result of its omission to consider the CFC Rules, which could not be off-set.