SCOTT & ORS V WILSON & ORS CA CA15/04

SCOTT & ORS V WILSON & ORS CA CA15/04 12 November 2004IN THE COURT OF APPEAL OF NEW ZEALAND CA15/04BETWEEN ALASTAIR OLIVER SCOTT, GEORGINA JANE SCOTT AND RITCHIE TRUSTEE SERVICES LIMITED Appellants AND LINDSAY MONTGOMERY WILSON, EUAN FRANK PLAYLE, ADAM SHAYLE DAVY, PETER HARTLEY WHITTINGTON AND GAVIN LLOYD SEBIRE Respondents Hearing: 27 September 2004 Coram: Anderson P McGrath J William Young J Appearances: J S Kós and K M Massey for Appellants J M Morrison for Respondents Judgment: 12 November 2004JUDGMENT OF THE COURT DELIVERED BY WILLIAM YOUNG J Table of Contents Paragraph Number Introduction [1] The facts [2] The issues at trial [12] The judgment under appeal – an overview [20] Issues on appeal [26] What was the nature of the duty owed by Horwaths to the Scotts? [28] When should Horwaths have alerted the Scotts to the application of the accruals regime to the fund?Overview [34]The approach of Goddard J [35]The argument for the Scotts [36]Argument for Horwaths [38]Evaluation [39]If properly alerted to the application of the accruals regime to the fund, would the Scotts, in response, have bulked-up the fund?Overview [48]The approach of Goddard J [51]Argument for the Scotts [52]Argument for Horwaths [54]Evaluation [62] Is an award of damages available for any loss which the Scotts may have suffered?Overview [67]The approach of Goddard J [68]Argument for the Scotts [69]Argument for Horwaths [72]Evaluation [73] The result [79] Introduction[1] This is an appeal against a judgment of Goddard J, delivered on 22 December 2003, in which she dismissed a claim for damages by the present appellants against the present respondents.The facts[2] Mr Alastair Scott and his wife, Mrs Georgina Scott, are New Zealanders who lived overseas between 1989 and 1997. During that time, Mr Scott was employed by Credit Suisse Financial Products in a series of increasingly senior roles involving currency trading. [3] In late 1997, Mr and Mrs Scott returned to New Zealand. At this time they had cash assets of approximately US$13m. In March 1997, they began to convert these assets in to New Zealand dollars. At that time the New Zealand dollar was worth approximately US$0.70. By September 1997, all the money had been transferred in to New Zealand dollars save for approximately US$2.5m which was held in three separate accounts. We will refer to this as "the fund".[4] The fund was initially left in the three accounts to which we have referred. Mr Scott's position is that in September 1997 he made a conscious decision to retain the fund as a partial hedge against his New Zealand assets. [5] In December 1997, Mr and Mrs Scott retained the defendants who were then practising as chartered accountants ("Horwaths") to act as their accountants to provide services and advice on tax compliance, tax minimisation and asset protection. The Horwaths' partner with whom they dealt was Mr Gavin Sebire. The contract of retainer is evidenced by two letters from Horwaths to Mr Scott of 9 and 10 December 1997. The second letter relates to the establishment of business structures in relation to proposed forestry, property and viticulture investments and is not particularly relevant for present purposes. The first letter, which is associated with tax, is more important. It begins:This letter outlines our involvement with the taxation return for you. As agreed we will compile these from information provided by you .This letter contained provision for Mr Scott's signature. The copy which we have seen is not signed by Mr Scott but it is clear enough that Horwaths were retained to provide tax compliance services in relation to the then current (ie the 1998) tax year. [6] Horwaths did not initially take any steps to address the obligations of Mr Scott for the 1998 tax year. Mr and Mrs Scott were not entered into their tax system until April 1998. The tax position of Mr Scott was slightly complicated due to the fact that he returned to live in New Zealand in the course of the 1998 tax year. Mr Sebire would appear not to have adverted either to the possibility that Mr Scott might have provisional tax obligations for the 1998 year or that, in order to avoid use of money charges in relation to that year, a payment of tax ought to have been made prior to the date of payment of terminal tax. [7] As a result of advice from Mr Sebire, Mr and Mrs Scott set up a family trust (of which the third appellant is also a trustee) as a form of creditor protection. In June 1998, the fund was transferred to the trust (along with virtually all of the substantial assets owned by Mr and Mrs Scott). In this judgment we will refer to Mr and Mrs Scott and the trust as "the Scotts".[8] Initially neither Mr Scott nor Mr Sebire adverted to the tax status of the fund. Mr Scott assumed that exchange gains and losses were not assessable. He did not realise that by virtue of the accruals regime, unrealised gains and losses were assessable. Once Mr Sebire became aware of the existence of the fund (which occurred by early April 1998) he mistakenly assumed that tax liabilities associated with the fund would be mopped up by resident withholding tax, an assumption which was wrong because it did not allow for the assessability of unrealised gains under the accruals regime. [9] During the period of time which is primarily relevant to this case (December 1997 - December 2000), there was a depreciation of value of the New Zealand dollar against the United States dollar. This meant that there were exchange gains of the fund which were taxable for the 1998-2001 tax years. Because neither Mr Sebire nor Mr Scott appreciated the assessability of unrealised gains, these gains were initially not returned as part of the taxable income of the Scotts. [10] In October 2000, Mr Scott chanced upon an article which alerted him to the impact of the accruals regime on the unrealised exchange gains made by the fund. He alerted Mr Sebire to the article. Mr Sebire immediately realised that there was a problem and undertook to fix it. So Horwaths filed amended returns, succeeded in having late payment penalties waived, and reduced their own fees proportionately with the interest payable on the unpaid tax. In effect, the Scotts have not suffered any net loss in relation to their position vis à vis the Commissioner of Inland Revenue. [11] In the meantime, Mr Scott closed out the fund. This was in December 2000. At this time the New Zealand dollar was worth approximately US$0.43. Mr Scott considered that the New Zealand dollar was reaching a nadir in relation to the United States dollar. In this he was right. The New Zealand dollar went as low as US$0.40 but has since significantly appreciated.The issues at trial[12] Horwaths conceded negligence in not advising the Scotts as to the assessability of the fund's exchange gains and losses and associated failures to pay tax and file appropriate returns. The only difference between the parties on these issues was as to timing. The Scotts maintained that Horwaths were negligent as early as February 1998 whereas Horwaths' admission related to the period which commenced in June 1998. [13] It is common ground that Horwaths should have addressed the impact of the accruals regime on the fund for the purposes of determining what tax should be paid provisionally on 7 July 1998 and good practice would have required this assessment to be made a few weeks before the tax was due to be paid. So this is why it is accepted that Horwaths was negligent by June 1998. [14] The Scotts claimed compensation on the basis that had Mr Scott been alerted to the assessability of exchange gains and losses, he would have bulked-up the fund by approximately 50% (ie to counteract the 33% tax). This would have increased his exchange rate gains and in this way would have countered the effects of the accruals regime for the 1999 - 2001 tax years. To counteract tax at 33%, the precise bulk-up required would have been 49.25% but 50% has been used for the sake of simplicity. [15] All of this is most easily explained by reference to the following table:Year A - Actual exchange gains and tax ($) B – Exchange gains and tax on the bulking-up hypothesis ($)1999 159,905 239,858 2000 294,945 442,418 2001 826,400 1,239,600 TOTAL 1,281,250 1,921,876 Tax 422,814 634,219NET GAIN 858,436 1,287,657VARIANCE IN NET GAIN (B-A) $429,221[16] Column A shows what happened. The tax eventually paid was $422,814. [17] Column B shows what the Scotts say would have happened if they had known that the unrealised exchange gains and losses were taxable. They say that the net exposure associated with a "capital" fund of US$2.5m is the same as for a "revenue" fund of US$3.75m. This is so providing the Scotts had, at all relevant times, sufficient other assessable income to mop up any conceivable exchange losses. It is common ground that they did so. So the position of the Scotts is that, armed with the correct information as to the tax status of unrealised gains and losses, they would have bulked-up the fund so as to provide the same exposure as they thought they had with what they assumed was a "capital" fund of US$2.5m [18] The variance between columns A and B is $429,221. This broadly corresponds to the tax paid ($422,814) but not exactly because of the difference between the 49.25% bulk-up actually required to counteract tax and the 50% bulk-up which has been assumed for the sake of simplicity. [19] Horwaths did not take issue with the arithmetic associated with this table. In particular, Horwaths did not seek to maintain any argument that there was any relevant off-set to be allowed for in relation to investment gains foregone on the money which would have been required for the bulking-up exercise. We were told that at the relevant time, interest rates in New Zealand and the United States were broadly similar.The judgment under appeal – an overview[20] We will shortly discuss the key findings made by Goddard J. At this point in the judgment, however, it is appropriate to provide a brief overview of the judgment as a whole. [21] Goddard J held that the fund was primarily a hedge fund, but that Mr Scott intended also to maximise the investment gains from it. She accepted that the amount of the fund was calculated carefully, but doubted that it had been done withthe kind of precision suggested in Mr Scott's evidence, a point to which we will revert shortly. [22] Goddard J did not make a firm finding as to when Horwaths should have addressed the assessability of the exchange gains and losses associated with the fund but accepted that by June 1998, at the latest, they should have made enquiries as to the profits and losses incurred by the fund. [23] She held that had Mr Scott been informed of the tax implications in June/July 1998, he would have reconsidered his investment strategy but that he would not have bulked-up the fund as he contended. She acknowledged that if he had been alerted to the accruals regime in February 1998 he might have done so. The reason for this differential approach related to the movement of the New Zealand dollar as against the United States dollar. In February 1998, the New Zealand dollar was worth approximately US$0.58 whereas, by July 1998, the rate was US$0.50 which, on the findings of Goddard J, was then thought to be towards the bottom end of its likely range. [24] Further, Goddard J concluded that the damages claimed were too remote and unforeseeable. [25] Finally, Goddard J noted that it was also difficult to characterise the tax obligation as a loss, particularly in the light of the fund's dual function as a hedge and an investment for profit.Issues on appeal[26] We consider that the appeal raises four issues: 1. What was the nature of the duty owed by Horwaths to the Scotts? 2. When should Horwaths have alerted the Scotts to the application of the accruals regime to the fund?3. If properly alerted to the application of the accruals regime to the fund, would the Scotts, in response, have bulked-up the fund? 4. Is an award of damages available for any loss which the Scotts may have suffered? [27] We will discuss the case by reference to those issues.What was the nature of the duty owed by Horwaths to the Scotts?[28] Given the concession that Horwaths had been negligent comparatively little attention would appear to have been devoted at trial to the identification of the nature of the duty owed by Horwaths to the Scotts. For reasons which will become apparent later, we see this as an important issue. [29] Horwaths' retainer undoubtedly extended to ensuring tax compliance in relation to the 1998 and 1999 tax years. Their duties associated with those tax years undoubtedly extended to making appropriate inquiry of the Scotts as to their taxable income. From April 1998, Mr Sebire was aware of the existence of foreign currency cash deposits. It is common ground that in failing to address the impact of the accruals regime on the fund, he did not take reasonable care in relation to the terminal tax returns for the 1998 tax year and provisional tax calculations for the 1999 tax year. The primary question which was left unresolved by the concession was whether there was a similar breach of duty as early as February/March or April 1998. We will address this question in the next section of this judgment. As will become apparent, the evidence which was addressed to this issue was firmly focused on Horwaths' tax compliance functions. [30] Mr Kós argued that Horwaths' relevant duties were wider than ensuring tax compliance. [31] It is certainly true that Horwaths provided services to the Scotts which went beyond tax compliance and these extended more generally to tax minimisation and creditor protection. These services seem to us to have been associated with thebusiness structures which were to be established in relation to proposed forestry, property and viticulture investments. As it turned out, the fund wound up in the trust which was set up as part of the eventual business structure which was chosen. [32] On the other hand, Horwaths did not advise the Scotts on investment strategy generally and thus were not advising the Scotts as to the extent to which it was appropriate to retain United States dollar denominated cash deposits. [33] In context, therefore, the failure of Horwaths to alert the Scotts to the impact of the accruals regime on the fund was negligence simply because it was a breach of Horwaths' obligations to ensure tax compliance and that there was no relevant wider duty which was breached.When should Horwaths have alerted the Scotts to the application of the accruals regime to the fund?Overview[34] This is an important question because it defines the point at which the Scotts would have become aware of the accruals regime and thus the point at which a response could have been implemented. If Horwaths were negligent as far back as February 1998, the position of the Scotts is stronger factually in relation to the next issue to be discussed.The approach of Goddard J[35] In her judgment, Goddard J said:[48] The defendants acknowledge that they first became aware of the existence of the USD fund in April 1998, specifically on 8 April 1998. They have further acknowledged that, having become aware of the fund, they should have enquired as to losses or gains on the fund when advising Mr Scott and the Scott Family Trust in relation to their 7 July provisional tax obligations. It is accepted that an enquiry relating to those obligations should have been made some time in June. Mr Kós submitted that the enquiry should have been made even earlier. He said the tax complianceresponsibilities undertaken by Horwaths required them to have also enquired about and advised on any provisional tax obligations Mr and Mrs Scott may have owed on 7 March 1998. That would have necessitated undertaking an enquiry of Mr Scott in February 1998. Such enquiry should have encompassed income assessable under the accruals regime, had the checklist been completed properly. Such enquiry would also have elicited that Mr Scott should have paid provisional tax on 7 November 1997. [49] Horwaths' account ledger shows that the Scott family was not entered into Horwaths' billing system for tax compliance purposes until 7 April 1998. In light of Mr Sebire's evidence that neither he nor Horwaths knew of the existence or specifics of the USD fund until 8 April 1998, the question arising is whether it was reasonable for Mr Sebire to have simply assumed that resident withholding tax would have taken care of the 7 March provisional tax situation, or whether he should have made express enquiries of Mr Scott in February. On the evidence the point is somewhat moot, and it is not clear whether the contract of retainer (as evidenced by Mr Sebire's letter of 9 December 1997) envisaged tax compliance advice commencing with enquiry about the forthcoming provisional tax date; or whether the retainer as a whole envisaged that compliance advice would be initiated in conjunction with the establishment of the trust structures and LAQCs. On balance, although the evidence is not clear, I think it can be assumed that Horwaths were seized of the Scott family's affairs sufficiently to have enquired and advised about Mr Scott's provisional tax obligations due 7 March 1998 but that it may also have been reasonable in the circumstances for Mr Sebire to conclude that resident withholding tax would cover that situation, particularly in the absence of any specific disclosure or more detailed discussion about asset holding, such as the USD fund. [50] My finding under this head is therefore, that Mr Scott and the Scott Family Trust could have had the taxability of gains or losses on the USD fund brought to Mr Scott's attention as early as February 1998, and should have by June 1998. However, in view of the findings that I shortly make under Causation my somewhat equivocal finding on this issue is of no relevance.The argument for the Scotts[36] Mr Kós understandably accepted the first of the propositions set out in [49] of the judgment of Goddard J but rejected what he described as the "clemency rider" in relation to coverage of the provisional tax liability at 7 March 1998 by withholding tax. He said that the responsibility of Mr Sebire was to ascertain everything that was relevant to the tax position of Mr and Mrs Scott. He was able to point to expert evidence (including concessions made by witnesses called by Horwaths) to this effect. Mr Sebire knew that Mr and Mrs Scott were wealthy (by New Zealand standards), that they had been working overseas and that their wealth had originatedoverseas. These inquiries necessarily should have extended to foreign cash deposits and thus to the existence of the fund. [37] By 8 April 1998, Mr Sebire did know all about the assets of the trust including the fund. At the very latest he should have alerted the Scotts to the problems which they faced in relation to the application of the accruals regime. Mr Kós complains that the Judge did not address whether Horwaths should be considered negligent as from 8 April 1998.Argument for Horwaths[38] Mr Morrison for Horwaths contended that no provisional tax was due on 7 March 1998 (although use of money charges would be incurred if provisional tax was not paid). The first date for the payment of provisional tax was not until 7 July 1998. It would have been reasonable to defer, until June 1998, the making inquiries as to likely assessable income.Evaluation[39] We see this issue as being very closely balanced. Further, our ability to assess it has been complicated by the way the issue was dealt with evidentially. [40] Initially the focus of the Scotts in the briefs of evidence, which were filed before trial, was on the theory that the first relevant tax date was 7 July 1998, being the first date for the payment of provisional tax for the 1999 year. Then, on the eve of trial, it was asserted that the first relevant tax date was in fact 7 March 1998 (being the last provisional tax payment date for the 1998 year). It would appear to have been accepted at trial and thus by Goddard J that this was correct and that Mr Scott had an obligation to pay provisional tax on that date. As is apparent from what we have said, Mr Morrison maintains that there was no such obligation. This was in the end accepted by Mr Kós in his reply submissions although it was common ground between and him and Mr Morrison that non-payment of provisional tax on that date exposed Mr Scott to use of money charges.[41] Horwaths had been retained to provide tax compliance services for the 1998 tax year. Accepting, as we do (given the concession made by Mr Kós), that Mr Scott was not required to pay provisional tax on 7 March 1998, there were potential tax consequences (in terms of use of money charges) for him if provisional tax was not paid. It might be thought therefore that Horwaths ought to have made a thorough analysis of the tax position of Mr and Mrs Scott prior to the 7 March 1998 provisional tax payment date. This was very much the argument of Mr Kós. [42] On the other hand, the contact between Mr and Mrs Scott and Mr Sebire in the period prior to the end of March 1998 was limited. Mr and Mrs Scott must have known at that time that no work was underway on establishing their tax obligations for the 1998 year given the very limited information which they provided to Mr Sebire. So presumably they were content for the situation to be left on that basis. Further, although Mr Kós was able to take us to what would appear to be concessions as to liability made in cross-examination by both Mr Sebire and Mr Malcolm Innes-Jones who was an expert witness called by Horwaths, those concessions were in a sense contributed to by their assumption that Mr Scott was required to pay provisional tax on 7 March 1998. [43] On the arguments before us, Mr Scott had a choice between making provisional tax payments which were not required by law but which avoided a liability for use of money charges or not making provisional tax payments, thereby deriving the associated immediate cash flow benefits but also incurring use of money charges. If there was no (or only very limited) potential difference in net economic effect between these two options, there is certainly scope for the view that it was not negligent of Horwaths to defer analysis of Mr Scott's position until after the end of the tax year. If there was an appreciable potential difference, then Horwaths would indeed appear to have been negligent. [44] We think that this is largely the point Goddard J was making in what she accepted was her "equivocal finding" (albeit that she was approaching the issue on the basis that provisional tax was payable on 7 March 1998). Mr Sebire, on her findings, was not aware that there were significant assets held in United States dollar denominated accounts. If the cash assets of Mr Scott were in New Zealand dollardenominated accounts, resident withholding tax would have mopped up (at least largely) provisional tax obligations, if there were any, and thus avoided (at least largely) use of money charges. [45] Mr Kós' criticism of the Judge's approach is that it begs the question whether Mr Sebire should have inquired as to the existence of foreign currency denominated cash deposits. If he had made that inquiry and discovered that there were such deposits, then there would have been no scope for a safe assumption that resident withholding tax was mopping up provisional tax obligations. However, his criticisms of the Judge's approach in turn are weakened by his concession that there was no obligation to pay provisional tax on 7 March 1998. [46] Because of the way the case was run, there is an evidential lacuna as to the economic significance of the potential liability of Mr Scott to pay use of money charges associated with Mr Sebire deferring substantial consideration of his tax position. In those circumstances we are not persuaded that the Scotts have proved that Horwaths departed from its duty of care until it was first required to address the Scott's provisional tax obligations for the 1999 tax year. This was not until, at the earliest, June 1998. In this context it seems to us that it is beside the point that Mr Sebire became aware of the fund in April 1998. He was not, at that time, required to address the significance of the fund for tax purposes. [47] To anticipate a point to which we will revert later in this judgment, this issue feels strangely hypothetical. This case is not about penalties or use of money charges imposed in relation to non-payment of provisional tax in March 1998. It is rather about the detail of a particular investment strategy which the Scotts embarked on entirely independently of any advice which they sought from Horwaths.If properly alerted to the application of the accruals regime to the fund, would the Scotts, in response, have bulked-up the fund?Overview[48] On the basis of the conclusions just reached, this issue falls to be determined by reference to what would have probably happened had the Scotts become aware in June 1998 of the assessability of exchange gains and losses associated with the fund. [49] This, in a sense, is a loss of chance case but it falls to be determined on an all or nothing basis. This is because the case depends on the choices the Scotts would have made, see Benton v Miller & Poulgrain CA118/03 15 June 2004 at [47]-[48]. On this basis, the Scotts had to show that, had they been alerted to the tax status of the fund, it is more probable than not that they would have bulked-up the fund. [50] We note that the case was presented as involving a dichotomy, either the Scotts would have bulked-up completely or they would have done nothing. That seems to us to have been perhaps an artificial approach as there were many courses of action which would have been open to them. This, however, is the way the case was presented and we are content to address it on that basis.The approach of Goddard J[51] The Judge said this:[51] At the point in 1998 at which Mr Scott was advised of his and the Family Trust's provisional tax obligations, he would have become acquainted with the existence and implications of the accruals regime. I have no doubt that this would have triggered some sort of immediate response in him. As he is a particularly astute currency analyst he would, at the least, have considered and reflected on his existing investment strategy in light of that information. Having so reflected, I am satisfied that he would have made a decision as to whether or not he wished to alter his existing strategy in light of the tax consequences of which he had hitherto been unaware. Whether that decision would have been to maintain the USD investment, but alter his level of exposure upwards in order to neutralise the effect of the tax, is the central issue. Of the three options that Mr Scott says he would have considered, I regard it as unlikely that he would have cashed the fund up as early as February 1998, or even in June/July 1998, because it would not have been to maximum advantage to do so. Nor do I regard it as likely thatMr Scott would have chosen to bulk the fund up in June/July 1998 in the calculated way that he now says he would have, rather than leaving the fund intact at USD 2.5 million. This is because by June/July 1998 the exchange rate had moved from 0.63 in September 1997 (when the size of the fund was determined) to somewhere between 0.55 and 0.50. In this regard, I accept Mr Innes-Jones' opinion that given the widespread commentary and belief in mid 1998 that the NZD at 0.50 to the USD had slipped as low as it would go, it was highly unlikely that any prudent investor, including Mr Scott, would have added to his USD investment during that period - unless on a purely speculative basis. Whether Mr Scott would have decided to bulk up the fund in February 1998, however, at which time the exchange rate had moved from 0.63 to 0.58, is another matter.Argument for the Scotts[52] Mr Kós presented his case on the basis that the exposure which the Scotts wanted was a net US$2.5m. Given the accruals regime, their net exposure was only only US$1,675,000 (being two thirds of US$2.5m). To obtain a net exposure of US$2.5m they would have been required to increase the size of the fund by approximately 50%. Mr Kós maintained that the Judge ought to have accepted that it is more likely than not that this is what the Scotts would have done if aware of the tax status of the fund. [53] In support of this argument, he made ten points; 1. Only two choices fall for assessment, to do nothing or to bulk-up. 2. The original choice to leave US$2.5m had been carefully made. 3. This figure was chosen on the basis that gains and losses fell outside the tax system. 4. Goddard J found that Mr Scott would have re-assessed his position if alerted to the impact of the accruals regime. 5. In February, April, and June 1998 Mr Scott thought that the New Zealand dollar was likely to continue to depreciate against the United States dollar and accordingly did not close out the fund. So it is logical to assume that he would not have been averse to putting more money in United States dollars.6. The Scotts were in a financial position to bulk-up the fund. 7. Bulking-up would have given the Scotts the level of exposure that Mr Scott was expecting. 8. Mr Scott was not cross-examined on the basis that the apparently greater level of risk would have put him off bulking-up. 9. In fact bulking-up would not have involved a greater level of risk, for two reasons; Mr Scott could readily shut down the position with a phone call and in any event the exposure remained the same. 10. So the logical and probable course would have been for him to bulk-up in the simple way that he has suggested.Argument for Horwaths[54] Mr Morrison took us through the way the claim evolved. [55] From the outset Mr Scott took the view that Horwaths should pay the tax. He conveyed this to Mr Sebire in a meeting which took place on 8 December 2000 and he backed this up with a letter of 10 December 2000:I then [ie at the meeting on 8 December 2000] made it clear to yourself that I thought Horwaths should be paying the penalties due to late payment of tax, and to pay the total amount of tax due to the capital gain associated with the USD deposit. Horwaths have clearly given me bad advice, or more specifically did not have the knowledge-competence to give me the appropriate advice I expected from a professional accounting firm.[56] Mentioned neither at the meeting on 8 December 2000 nor in the letter was the bulking-up strategy. Instead, Mr Scott suggested that that if he had been alerted as to the impact of the accruals regime, he would have invested in United States unit trusts (ie an equity investment) and that there would have been no tax on exchange gains associated with such investments.[57] On 21 August 2001, Russell McVeagh wrote to Mr Sebire giving formal notice of the claim. This letter complained that Mr Sebire had not advised the Scotts of the impact of the accruals regime and then went on:12. Had the Scotts been so advised, they would have restructured the holding of these funds in such a way as to have minimised their exposure to tax. 13. Our client's objective in holding the US dollar deposit with ANZ was to obtain an appropriate level of exposure, as a proportion of their overall investment portfolio, to movements in the US dollar against the NZ dollar. The New Zealand income tax regime arbitrarily draws a distinction between the tax treatment of debt and equity instruments. You failed to appraise our client of this distinction. 14. Had our client been aware of the different tax treatment they could have achieved the required exposure to currency movements in a number of ways which would have resulted in the desired after-tax outcome. These alternatives included: (a) investing in a US resident unit trust with primarily US dollar debt investments, which is characterised as an equity investment for New Zealand tax purposes, with the appropriate attributes such that it is not subject to the Foreign Investment Fund regime; (b) buying shares in 'blue chip' US companies and adjusting the portfolio of other equity investments accordingly; (c) increasing the amount of the US dollar deposit with ANZ such that the appropriate exposure to currency movements was obtained, notwithstanding the tax impost. As you are aware our client had significant funds invested in NZ dollar debt instruments and it would have been a simple matter to transfer some of these investment to US dollar debt – with the only consequence being an increase in the investment exposed to currency movements sufficient to offset the tax impost; and (d) take out a futures contract to purchase US dollars to increase the exposure to currency movements sufficient to offset the tax impost. The outcome of this alternative is similar to (c) above but does not require a switching of funds from NZ dollar debt investments to US debt investments.So the bulking-up strategy was mentioned but only as one of four possible courses of action.[58] In the amended statement of claim which was filed on the eve of trial, the damages claim was advanced in this way:22. Had the plaintiffs been advised by the defendants that the Exchange Gains were assessable as income in New Zealand, then they would have restructured the US Dollar Fund in such a way as to have avoided the Unadvised Discount [ie the tax on the exchange gains].ParticularsEither by: (a) by grossing up the US Dollar Fund to US$3,750,000 - thereby effectively maintaining the NZ $1,281,250Exchange Gains entire after tax; or (b) avoiding the tax liability altogether by investing in capital instruments.So, in the pleading that was current at the time of trial, the bulking-up strategy was postulated as being only one of two possible courses of action which would have been taken by Mr Scott had he been alerted to the impact of the accruals regime. [59] Mr Morrison also took us to the brief of evidence of Mr Scott and his explanation as to how he calculated the size of the fund:16. [I]n 1997 we had not yet bought or developed our export business. It then became a question of how much of our assets should remain offshore. Many investment advisors advocate 70% or more to be held offshore. With my intention of investing in export markets I took a different view. I said, "how much are we willing to risk for every tick movement in the currency?" (a "tick movement" being the movement from say 0.5999 to 0.600, ie a one hundredth of a cent movement in the USD) "What if the NZD went to 30 cents, what would our asset value look like?" Clearly we would be badly off as our NZD assets have lost a lot of purchasing power. Conversely if the currency went back to 70 cents, how much would we be willing to lose on the hedge? Clearly New Zealanders generally would be happy as their wealth has increased as the currency increases. 17. Weighing up these factors, we concluded that a deposit of USD 2.5 million, which gave approximately USD 420 profit or loss for every tick (ie one hundredth of a cent movement in the USD), was appropriate. It never occurred to me that such profits were assessable for tax. 18. Therefore the remainder of our USD funds (after leaving USD 2.5 million) were converted to NZD.Mr Scott reverted to this point in paragraph 79(b) and (c) of his brief:(b) The level of exposure was set on the basis set out in paragraphs 16-17 of my evidence. We chose to leave USD 2.5 million in that currency on the basis that it generated a gain or loss of USD 420 per tick. That was the right number for us. (c) The effect of tax was to reduce the effective level of exposure. In effect the level of exposure was as if we had only set aside USD 1.66 million. And, effectively, our per tick gain was reduced to USD 280.[60] But, as Mr Morrison pointed out, Mr Scott was driven to concede in cross-examination that the arithmetic which he claimed to have used to calculate the size of the fund did not work. Mr Scott stood to gain or lose "US$420 a tick" if the New Zealand dollar was worth US$0.5999. But in September 1997, the New Zealand dollar was actually worth approximately US$0.63. At this exchange rate, Mr Scott stood to gain or lose US$390 a tick. [61] So Mr Morrison's position was that the fund was not as precisely calculated as Mr Scott suggested. It was not a simple hedge but rather was in the nature of an investment, with the Scotts seeking to maximise from it their gain (in New Zealand dollar terms). On this basis, the Scotts would not necessarily have been looking to maintain an economic exposure identical to what they thought they had with a "capital" fund of US$2.5m.Evaluation[62] In favour of the Scotts' position are two considerations: 1. The logic of the decision initially made, if applied in light of a true understanding of the accruals regime, would have warranted an investment of US$3.75m; 2. The strategy actually applied was consistent with the Scotts' case in that the Scotts did not close out the fund until December 2000, at which stage the New Zealand dollar was near its low point as against the United States dollar.If Mr Scott had assumed that the New Zealand dollar was reaching a low point against the United States dollar in June/July 1998, it is at least likely that he would have closed out the fund at that time given that this is what he was later to do in December 2000. [63] Nonetheless, this was an aspect of the case on which the Scotts had to make the running in terms of persuading the Judge that it was more likely than not that they would have bulked-up the fund if alerted to the accruals regime implications. [64] Their claim as to what they would have done did perhaps invite scepticism. Such initial scepticism as there may have been was enhanced by the way in which the claim came out, the initial demand that Horwaths pay the tax and then the only slowly emerging contention that if properly informed they would have inevitably bulked-up the fund. [65] If it were the case that an arithmetical exercise had been performed at the time the size of the fund was determined (in September 1997) and the logic of that exercise coupled with the accruals regime dictated that the fund be bulked-up, the position of the Scotts would have been much stronger. But the attempt by Mr Scott to assert that there had been such an exercise by reference to his "US$420 a tick" explanation collapsed. In saying this, we do not wish to be thought to be unfairly critical of Mr Scott. In a situation of this sort, it is easy enough to rationalise with the benefit of hindsight and in the course of such an exercise to come up with rationales which are incorrect at least as to detail. The fact remains, however, that the onus of proof on this point was on the Scotts. Their ability to discharge that onus of proof rested on the evidence of Mr Scott. In that context, the unhappy "US$420 a tick" evidence cast a serious shadow over their case. [66] Against that background, the conclusion by the Judge seems to have been well-open to her. We see no basis upon which we could legitimately interfere with her finding of fact.Is an award of damages available for any loss which the Scotts may have suffered?Overview[67] Given our conclusions in relation to the second issue, this last question is not determinative of the case. It is, nonetheless, important.The approach of Goddard J[68] This is what the Judge said:[52] In my view, the major issue and difficulty for the plaintiffs in this case is that of proving causation and foreseeability on Mr Sebire's part. The issue of causation has been stated in various ways by the plaintiffs and their witnesses. Mr Scott's description of the issue (with emphasis added) was as follows: ... our objective in having a USD account was to expose ourselves to that particular and full amount of money: USD 2.5 million. I wanted the full gains or losses of that capital exposure. My background for the last 10 years was managing foreign exchange risk. That was the exposure level we had decided on by applying the considerations I mentioned earlier. If we'd known the gains were taxable, we would have increased that exposure.To explore the possibility of these options [grossing up by 50%; entering into a forward foreign exchange contract, or sourcing and investing in an offshore company] I needed Horwarth to first alert me to the fact foreign currency accounts in New Zealand are assessed not just for interest, but also for exchange gains.These options would have been relevant whether I was alerted to the taxability of exchange gains in December 1997 (when I first met with Gavin Sebire), or whether it was in July 1998 (when my first provisional tax payment was made). [53] Mr Best put the causation issue this way: If [Mr Scott] had been asked about how he wanted to approach provisional tax in relation to currency movement on the USD deposit, that would have alerted him to the overall tax consequences of the foreign currency deposit. [54] Mr Kós submitted: ... it is clear, on the balance of probabilities, that had Horwath's advised the Scotts that the FX gains on the USD deposit weretaxable, the Scotts would have changed their investment and therefore obtained their true desired profit. The Scotts ought to be compensated to the extent of the tax paid (the net diminution in their wealth) [55] I do not find Mr Sebire's failure to enquire about any exchange gains or losses on the USD fund in June 1998, for the purpose of estimating and advising Mr Scott and the Scott Family Trust on their provisional tax obligations (whether 3 March or 7 July), sufficiently connected, either in fact or degree, to any alleged loss resulting from Mr Scott's failure (through lack of knowledge about the accruals regime) to bulk up the USD fund by 50% at that time. Mr Sebire and Horwaths were under no general or specific duty to alert Mr Scott to the overall consequences of his foreign currency deposit. Whilst Mr Sebire's duty was to advise the Scott family of their provisional tax obligations in relation to the USD fund, he could not have advised Mr Scott how to minimise tax on that fund, as it is not possible to minimise accrued tax. Bulking up of itself will not minimise tax: bulking up simply results in the payment of more tax on a particular investment rather than on some other investment. The advice that Mr Sebire was asked to give, and did give, was about the wisdom of transferring the USD into the Scott Family Trust as an asset of the Trust. I cannot therefore find a causative link between Mr Sebire's admitted negligence in failing to advise on Mr Scott's provisional tax obligations in February 1998 and the Trust's provisional tax obligations in June 1998, and the effect of the accruals regime on the USD 2.5 million investment. Any such link is too remote. Certainly it was not one that could have been reasonably foreseen by Mr Sebire. [56] The scope of the defendants' liability in negligence for failing to enquire about and advise on the provisional tax obligations cannot be the loss (or potential loss) occasioned by Mr Sebire's failure. All that the failure gave rise to was exposure to penalties for late payment of provisional tax on the USD fund and use of money interest. Those losses have been made good to Mr Scott and the Scott Family Trust. [57] The fact is that the real cause of the liability to pay tax was Mr Scott's original election to retain a portion of his USD coupled with the subsequent fall in the NZD to a spectacular low: the loss (if that is what it can be characterised as) in the form of tax payable on the exchange gain was not a loss attributable to any failure on Mr Sebire's part but directly attributable to the movement in exchange rates. [58] In summary therefore, Mr Sebire's failure to advise did not cause the loss claimed: that was caused by currency movements which cannot be gauged on past history or predicted with any certainty as a future event and by the decision to cash out and crystallise the gain.Was there a loss?[59] Having concluded that the plaintiffs have not proved any causal link between Mr Sebire's failure to estimate and advise on provisional tax at that time and the tax liability incurred, or proved on the balance of probabilities that Mr Scott would have bulked up the USD fund by 50% when he learned about the accruals regime (whether in February/March 1998 or June/July 1998) the issue of loss becomes academic.[60] The plaintiffs' maintain that the amount of their loss is the amount of tax claimed. Their claim lies in the fact that they say they have incurred a net diminution in their wealth as the result of tax paid on the USD2.5 million fund, when they say they could and would have counteracted that tax consequence if they had been informed about it. It is on that basis that they have argued that the taxability of the USD fund constituted a loss to them. Although one could accept the argument that the effect of the tax component was as if the Scotts had only USD 1.66 million invested rather than USD 2.5 million, it is nevertheless difficult to categorise an obligation to pay tax as a loss. In assessing loss in a case such as this, there are also other contingencies that require consideration, such as the Scotts having had necessarily to apply funds that might have been invested elsewhere to bulk up the USD fund in February/March or June/July. There is also difficulty in the assertion that the tax was a loss in light of the dual function of the fund as a hedge against currency movement as well as an investment for profit.Argument for the Scotts[69] Mr Kós says that the Judge missed the point in [60] of her judgment; the case was not really about the tax but rather about the way in which the Scotts would have organised their affairs if properly informed. [70] He contended that the Judge gave four reasons for finding against his clients on this aspect of the case: 1. It is not possible to minimise accrued tax. 2 The real causes of the liability to pay tax were the retention of the fund and currency movements. 3. The linkage between tax advice and consequences associated with the loss of opportunity to make an informed decision whether to bulk-up the fund is too remote. 4. The associated consideration that the negligence in question could only give rise to damages involving penalties and interest. [71] Mr Kós asserted that the first two reasons were "freighted with misunderstandings" about what the claim was about. Of course it is not possible to avoid accrued tax but the evidence showed that it was possible to counteract theassociated disadvantages. Further, there was no reason why the foreseeable consequences of Horwaths' negligence should be confined to disadvantages suffered by the Scotts in their dealings direct with the Inland Revenue Department. Mr Kós maintained that an accountant could fairly be expected to foresee that wrong tax advice may result in ill-judged investment decisions and, in any event, in this case the retainer was wider than tax and compliance.Argument for Horwaths[72] Mr Morrison in effect adopted the Judge's approach.Evaluation[73] We accept that investment decisions are necessarily affected by tax considerations. So tax advice by an accountant can fairly be expected to have an effect on the investment strategies of the client. Accordingly, an accountant giving tax advice should usually be able to foresee that if that advice is wrong, inappropriate investment decisions may be made. Thus, where a particular decision has been made on the basis of faulty tax advice the consequences may well be regarded as properly the subject of an award of damages. [74] It is at this point that we have difficulty with the arguments of Mr Kós as to causation and remoteness. [75] The allegation is not that the investment which was made (in the form of the retention of the fund) was unwise. Rather the complaint is that the Scotts would have increased the investment (ie bulked-up the fund) if fully apprised of the impact of the accruals regime. So, in a real sense, the complaint is not that the Scotts made a particular investment which was imprudent; it is rather that they would have conducted their general affairs differently if properly informed of the impact of the accruals regime. [76] In this respect there is a counter-intuitive aspect of the case. Where the complaint is that the tax adviser failed to advise that a particular transaction orinvestment would produce taxation consequences, the client's position is likely to be that, properly advised, he or she would not have entered into that transaction or made that investment. But here the Scotts say that if they were aware that the fund's exchange gains and losses were assessable, they would have invested more. Although such a course of action would be logical, the logic would not immediately be apparent to someone who was not involved in currency trading. [77] Cases of this nature require an analysis of whether the consequences in respect of which damages are sought were within the risk intended to be addressed by the services which were provided and, in that sense, the scope of the duty, see for instance South Australia Asset Management Corporation v York Montague Ltd[1997] AC 191 and Bank of New Zealand v NZ Guardian Trust Co Ltd [1999] 1 NZLR 664. Applying this approach, we think that the consequences in respect of which damages are sought were not within the risks which the tax compliance services, to be provided by Mr Sebire, were intended to address. [78] We think that this, in substance, is what the Judge held on this aspect of the case.The result[79] For the reasons given, the appeal is dismissed. [80] The respondents are entitled to costs in the sum of $6,000 together with disbursements (including the travelling and accommodation expenses), if any, of counsel to be agreed and in default of agreement to be fixed by the Registrar.Solicitors: Russell McVeagh, Wellington for Appellants Rainey Collins, Wellington for Respondents