Australia: If you do not tell your client to get tax advice, you may be found negligent

Lawyers and advisors who don't advise their clients to obtain tax advice may be found liable for professional negligence.

This is what happened in Ralston v Jurisich [2017] NSWCA 63.

In that case, a lawyer's failure to advise his client on the tax consequences of a share buy-back agreement or, alternatively, advise her to obtain tax advice from a specialist tax lawyer, cost his client in excess of $600,000 in tax. As a result, the District Court of New South Wales, confirmed on appeal to the New South Wales Court of Appeal, held the lawyer liable to compensate his client to the tune of $740,000.

What happened?

The basic facts of the case are as follows.

Mrs Jurisich was a shareholder of a company together with her mother and brother. It came to light that the company had potential problems in relation to its tax affairs, and a voluntary winding up was proposed. Mrs Jurisich, however, was concerned that she would not realise the full value of her shares in the company in the event of a winding up and, further, of the potential delay that would be occasioned by it. She subsequently decided it would be better "to simply sell her shares back to the company." She sought the advice of her solicitor, Mr Ratner, who agreed that a buy-back would be a good idea, and a buy-back agreement was then executed. Mrs Jurisich received $1,308,285 for her shares, however, $608,172 of that amount had to be paid to the tax office. On the other hand, had Mrs Jurisich participated in the voluntary winding up, the amount she would have received would not have been subject to tax.

Mrs Jurisich commenced proceedings against Mr Ratner and his fellow partners and argued that Mr Ratner should have advised her of the tax consequences of proceeding by way of buy-back as opposed to proceeding by way of liquidation or, alternatively, he should have advised her to seek specialist tax advice on the subject.

Both the District Court of New South Wales and the New South Wales Court of Appeal agreed and awarded Mrs Jurisich $739,873, being equivalent to the amount of tax she was required to pay, plus interest and a proportion of the accounting fees she incurred for advice in relation to the tax liability.

Implications of the decision

The case provides a stern warning to lawyers and advisors as it shows that the law imposes a duty on them to ensure that clients are fully informed of the tax risks associated with their transactions.

The decision is interesting in light of the very different outcome in the UK Court of Appeal case of Mehjoo v Harben Barker (a firm) & Anor [2014] EWCA Civ 358, which overturned the decision of the High Court of England & Wales (a link to our discussion of the High Court decision can be found here: http://pointonpartners.com.au/taxation-update/) in holding that a firm of high street chartered accountants that advised in general tax matters did not have an obligation to refer a tax "mitigation" matter to a specialist.

In that case, the subject of the advice was considered to be outside the remit of the accountants' retainer, despite the fact the accountants advised on general tax matters. In Ralston v Jurisich, it was more or less assumed that Mr Ratner had a duty to ensure Mrs Jurisich was informed of the tax risks of the buy-back. This was in spite of the fact that Mr Ratner was not expressly asked to advise on tax matters. It would therefore appear that the scope of liability for failing to refer clients to specialist tax advisors is significantly broader in Australia than in the UK.

It is also interesting to consider whether Mrs Jurisich could have sought in alternate proceedings an order for rectification to unwind the buy-back agreement, which would mean the tax would no longer have to be paid to the ATO. In saying this, we draw parallels between the facts in this case and those in HWG Holdings Pty Ltd v Fairlie Court [2015] VSC 519. There the taxpayers also entered into a buy-back agreement, this time under a mistaken assumption that one party could obtain a franking tax offset as a result of the arrangement. However, the party was not entitled to the offset because it had not held the relevant shares for the statutory 45 day period. Four years later, upon realising the mistake, the parties sought an order of rectification from the Court. The Court, obligingly, agreed to make an order declaring the buy-back agreement void so that it was as if the taxpayers had never entered into the arrangement.

It is not possible to provide a definitive answer as to whether rectification would have been available to Mrs Jurisich. It would certainly have produced a more favourable outcome for her lawyer, Mr Ratner. However, practical difficulties, including the murkiness of the case law on rectification, may have made the prospects of success more remote. This is not to discount the possibility, however, that Mr Ratner or his insurer could have influenced Mrs Jurisich – by covering the cost of the proceeding – to seek an order for rectification by the court as a legitimate means of averting the damage and thereby escaping liability. This could have also produced a more favourable outcome for Mrs Jurisich if, in the circumstances, Mr Ratner did not have the level of insurance cover or the financial means to compensate Mrs Jurisich to the full extent of her loss.

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Authors
Jonathan B Slade
 
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