AI-generated summaries. Not legal advice. Always verify against the official judgment on NSW Caselaw.
← All decisions
Supreme Court 24 July 2001

Zelino and Ors v. Budai

[2001] NSWSC 501

Fraud & dishonesty
PROFESSIONAL NEGLIGENCE INCOME TAX MAKING SCHEME UNDER S.25A(1) ITAA WHETHER ADVICE IS NEGLIGENT. PROFESSIONAL NEGLIGENCE TAX FRAUD

Citation: Zelino and Ors v Budai [2001] NSWSC 501
Court: Supreme Court of New South Wales (Equity Division)
Date: 24 July 2001
Judge(s): Palmer J

Background

A group of investors formed a joint venture in 1985 to redevelop a Cremorne Point property into twelve luxury townhouses, using a unit trust structure. The venture generated a significant profit, distributed in December 1988. Two of the plaintiffs (a husband and wife) were among the five venturers; the defendant was the accountant retained to prepare accounts and tax returns for the venture and for the plaintiffs personally.

After the profit distribution, disputes arose over the defendant's professional conduct. The plaintiffs brought proceedings alleging professional negligence in three respects: first, that the defendant gave negligent tax advice about how profits should be characterised for income tax purposes; second, that the defendant failed to perform agreed tasks relating to special rights units in the trust; and third, that the defendant breached a duty of care in preparing the tax returns.

The proceedings unravelled in an unexpected direction. Evidence revealed that both plaintiffs and the defendant had agreed to prepare false accounts and insert false figures in the plaintiffs' income tax returns, constituting serious revenue fraud under the Income Tax Assessment Act 1936 and the Taxation Administration Act 1953.

  • Whether the defendant gave negligent advice in characterising the venture's profits as assessable income arising from a profit-making scheme under s 25A(1) of the Income Tax Assessment Act 1936.
  • Whether the plaintiffs could maintain an action for breach of a contractual duty of care where the contract itself was for the preparation of false accounts and the lodgement of false tax returns, making it a contract for the performance of illegal acts.
  • Whether the defendant was retained to procure the issue of special rights units in the unit trust and, if so, whether that term was enforceable.
  • How costs should be awarded where the defendant succeeded on one issue by proving the contract was for the commission of criminal offences, but was himself a participant in that illegality.
  • What obligations the Court had upon discovering serious revenue fraud and potential professional misconduct by advisers in the course of litigation.

Decision

On the professional negligence claim concerning tax advice, the Court rejected the plaintiffs' case. The defendant's characterisation of the profits as assessable income under the profit-making scheme provision was found not to constitute negligent advice in the circumstances.

On the tax fraud issue, the Court found that both plaintiffs and the defendant had agreed to prepare false accounts and lodge false tax returns. A contract for the commission of criminal offences cannot support an action for breach of contractual duty of care. This principle, long established in the common law, meant the plaintiffs' claim on this basis failed entirely. The Court's opening reference to the 1725 highwayman case, Everet v Williams, was deliberate: parties who bring proceedings to vindicate claims founded in their own illegality cannot expect the courts to assist them.

On the special rights units claim, the Court found no contract requiring the defendant to procure the issue of such units. Such a term, even if it could be implied, would have been impossible of performance and could not be read into the retainer.

The Court entered judgment for the defendant on all three issues.

Orders Made

  • Judgment for the defendant on all claims.
  • The plaintiffs to pay two-thirds of the defendant's costs of the proceedings (the defendant's costs reduced by one-third on public policy grounds, because the defendant was himself a participant in the illegal conduct that gave rise to his successful defence on the fraud issue).
  • The Registrar to forward a copy of the judgment to the Australian Taxation Office, the Tax Agents Board, the Law Society of New South Wales, the Australian Institute of Chartered Accountants, and the Public Accountants Registration Board.
  • All exhibits and court file papers to be retained by the Court and not released to any party until all nominated bodies confirm that investigations have concluded or that no action is to be taken.
  • Exhibits and court file papers, or copies, may be released to those bodies on application to a Judge for the purposes of their investigations.

Key Takeaways

  • A contract whose purpose is the commission of criminal offences, including the preparation of false tax returns, cannot found an action for breach of contractual duty of care. The Supreme Court applied the long-standing common law principle that courts will not assist a party seeking to enforce rights arising from an illegal agreement.
  • Where a defendant succeeds by proving illegality in which the defendant also participated, public policy considerations may weigh against a full costs award in the defendant's favour. Palmer J reduced the defendant's costs entitlement by one-third to reflect this.
  • The court held that it cannot remain passive when serious revenue fraud and potential professional misconduct are revealed in the course of litigation, even if neither matter was the direct subject of the proceedings. The Court used its powers to direct notification to regulatory bodies and to secure the court file.
  • Findings adverse to professional advisers, including a chartered accountant and a solicitor, were expressly directed to the relevant regulatory bodies for independent investigation, even where those advisers were not parties to the proceedings.
  • The complexity of a tax scheme is no guarantee of its effectiveness: the Court noted that elaborate stamp duty avoidance mechanisms in the trust deed failed due to errors in execution, illustrating that sophistication in design does not substitute for rigour in implementation.

Legislation and Cases Referenced

Legislation
- Income Tax Assessment Act 1936 (Cth), including s 25A(1)
- Taxation Administration Act 1953 (Cth)
- Crimes Act 1914 (Cth)
- Supreme Court Act 1970 (NSW)
- Supreme Court Rules (NSW)

Cases
- Everet v Williams (1893) 9 LQR 197
- Burrows v Rhodes [1899] 1 QB 816
- Donald Campbell & Co v Pollak [1927] AC 732
- Jones v Merioneth Shire Permanent Benefit Building Society [1892] 1 Ch 188
- St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267
- Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410
- Fitzgerald v F.J. Leonhardt Pty Ltd (1997) 189 CLR 215
- Steinberg v FCT (1973) 134 CLR 640
- Kratzmann v Federal Commissioner of Taxation (1970) 44 ALJR 293
- McCurry v FCT 98 ATC 4487
- Jamal v Secretary, Department of Health (1988) 14 NSWLR 252
- Ritter v Godfrey [1920] 2 KB 47
- Sunday Times Newspaper Co Ltd v McIntosh (1933) 33 SR(NSW) 371
- Milne v AG of the State of Tasmania (1956) 95 CLR 460
- Tesoriero v Chief Commissioner of Stamp Duties [2001] NSWSC 489
- Igaki Australia Ltd v Coastmine Pty Ltd (unrep., FCA, Drummond J, 2 November 1994); (1996) 3 IPR 37