ontributed by Associate Professor Justin Dabner, James Cook University; Principal, Tax Re-Solutions
The NSW Court of Appeal decision in Ralston v Jurisich  NSWCA 63 is a reminder to general practitioners of how tax law impacts all commercial transactions and of the need to seek specialist tax advice. In upholding the decision at first instance (Jurisich v Ralston  NSWDC 82), the court confirmed that a failure to advise on the tax implications of a share buy-back, or suggest that specialist advice be obtained, breached the duty of care owed by the client’s solicitor resulting in a damages award of $740,000.
Mrs Jurisich was a (pre-CGT) shareholder in a family company proposed to be voluntarily wound up. She wished to maximize her return from the company and consulted a solicitor, Mr Ratner, to advise her. In particular, Jurisich was anxious that a winding-up of the company might identify tax irregularities which would impact on how much she would receive and delay any payment.
During a lengthy period of negotiation an alternative of Jurisich disposing of her interest in the company by a share buy-back was proposed. Ultimately this was the route chosen and Jurisich received $1.3m for her shares on which she was subsequently assessed to $608,000 tax. The evidence was that had she participated in the winding-up she would have likely received a similar amount which would have been tax-free. At no time did Ratner advise her on the tax implications of the share buy-back or suggest that she obtain specialist tax advice.
Five issues were identified at first instance:
- (1) Did the solicitor owe a duty of care to advise on tax?
- (2) If so, was this duty breached?
- (3) What loss could be attributed to any breach?
- (4) Was Jurisich contributorily negligent?
- (5) What was the quantum of damages?
Did the solicitor owe a duty of care to advise on tax?
There was no written retainer nor was Ratner specifically asked for advice in relation to tax matters. His engagement was for the purpose of ensuring that Jurisich obtained full value for her shares, particularly given the concern that unpaid tax liabilities of the company might impact her return.
His Honour made reference to the decision in Heydon v NRMA Ltd  NSWCA 374 and the acknowledgement in that case of the duty to “warn the client of any material risk” (Malcolm AJA at 145). Hurlingham Estates Ltd v Wilde & Partners (1996) 37 ATR 26 was also referred to as establishing that a solicitor owed a duty to warn where the structure adopted exposed the client to a risk of a tax liability and to advise how else the transaction might be structured.
Given these authorities, his Honour concluded that a duty clearly existed on Ratner to either provide tax advice in relation to the consequences of a share buy-back or advise the client to seek specialist advice. It mattered not that the client never expressly raised with the solicitor any question as to the tax consequences of the proposed transaction.
The other issues
Once the existence of a duty was identified it followed from the failure to advise that it had been breached. His Honour then applied the “but for” causation test concluding that had advice been given as to the adverse tax consequences of the buy-back it was probable that Jurisich would have proceeded to participate in the winding-up instead.
As to the assertion of contributory negligence, his Honour observed that Mr Jurisich (a barrister specialising in personal injury litigation) had been heavily engaged in the negotiations and the Jurisichs were very reluctant to participate in the liquidation. However, notwithstanding the robustness of their demands to achieve the best possible financial outcome, they had engaged a commercial solicitor in recognition of their ignorance in these matters and there was no evidence that they did or would not follow the advice tendered.
The quantum of damages was calculated by reference to the tax payable on the buy-back, interest and additional accounting fees arising from the subsequent engagement with the ATO in relation to the tax consequences of the buy-back.
The solicitor’s appeal to the court was dismissed. Significantly, only the findings as to causation and quantum were challenged. The solicitors accepted that they had a duty of care to advise in relation to tax, that they had breached it and no contributory negligence could be attributed to their clients.
As to causation and quantum the court identified that the failure to advise Jurisich of the potential for a $600,000 tax liability was fundamental to her decision to proceed by way of buy-back rather than participate in the winding-up. Although she had a pre-disposition against participating in the winding-up due to concerns as to the company’s tax liabilities and the amount she might ultimately receive, and the possible delay, the court took the view that she would have preferred to accept these risks in lieu of a $600,000 tax liability. Furthermore, there was ample evidence to support the proposition that had Jurisich elected to participate in the winding-up she would have received as much as on a buy-back so supporting the decision at first instance as to the calculation of damages.
No commercial transactions occur without tax consequences. The application of the income tax laws are beset with results likely to surprise general practitioners, business advisers and their clients. That an off-market buy-back might give rise to an assessable dividend is but one example. Other common transactions of a structuring nature that in the author’s experience contain particular tax traps for the unwary include the foregiveness of debts, the gifting of assets, the issue of shares and units (at less than market value) and, indeed, any transaction involving a private company with pre-CGT assets or shareholdings.
And this is not to mention potentially nasty GST and stamp duty surprises.
Good tax advice may not come cheap and news of adverse tax implications can be an unwelcome irritant to advisers and clients attempting to negotiate and structure a commercial dealing. Possibly a deal breaker. But the alternative is far worse, as the defendants in Ralston v Jurisich discovered.