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The Importance of Documenting Oral Advice!

A recent court case involving high-profile financial executive "Aussie" John Symond (the founder of Aussie Home Loans) again highlights the importance of Tax Agents and BAS Agents contemporaneously documenting oral advice.

Facts

Back in 1998, “Aussie John” bought land in Point Piper on Sydney’s harbor-side and, over the course of the next eight years, constructed a $57 million mansion. Prior to June 2003, he paid for the construction work by borrowing funds interestfree from the trust through which he ran Aussie Home Loans. Around the same time, “Aussie John” was in discussion with a number of potential investors in his business and came to the view that the existing trust structure may make diversification of ownership difficult. To overcome this, he consulted his solicitors (a high profile Australian law firm) with a view to restructuring his business. The restructure needed to meet certain key objectives including facilitating a future public offering and also enabling Aussie John to continue borrowing funds tax-free in order to complete construction of his mansion. For this objective to be met, certain anti-avoidance provisions in the Tax Act needed to negotiated, which would otherwise make the advances from the trust taxable in “Aussie John’s” hands. The Solicitor provided written advice proposing that the group adopt a particular corporate structure which would meet all of “Aussie John’s” above-stated objectives. The advice contained no reference to any risk that the advanced funds would not be tax-free. The restructure was completed in July 2003. One month later, the Solicitor suggested the structure be replaced by an alternative structure involving redeemable preference shares. Once again, the written advice contained no warning about any tax risks – in this case those associated with the receipt of funds following redemption. Over the following few years, all went well and “Aussie John” continued to fund the construction of his house using the funding arrangements recommended and put in place by his advisors. However, some years later in 2007, “Aussie John” was audited by the ATO who applied Division 7A to treat the funds received as dividends and therefore taxable to “Aussie John”. After the imposition of penalties and interest on the tax shortfall, “Aussie John” received amended assessments with more than $6 million owing.

Claim

“Aussie John” pointed fingers at his advisor. He sued his Solicitor for negligence for failing to warn him that the antiavoidance provisions of the Tax Act may apply to the arrangement and render the advanced funds taxable to him personally. For their part, the Solicitor claimed that they advised “Aussie John” and his representatives orally several times in conferences that the anti-avoidance provisions may have application. This was denied by “Aussie John” who said that no such advice was given.

Decision

The Court resolved the disputed claim by referring to the file notes of the conferences, and the written advice referred to earlier. Nowhere therein, or in any subsequent written exchanges, was the disputed advice relating to the possible application of the anti-avoidance provisions mentioned. Despite the Solicitor giving evidence in court that the oral advice was in fact given, the trial judge rejected this evidence. The following are excerpts from his written judgement:

 There is no file note to support the solicitor’s testimony. If such a proposal had been made in meetings between the parties, I would have expected it to be raised in subsequent correspondence. And

 This is another occasion on which the solicitor asserts he provided a verbal warning which detracted from the emphatic nature of the written advice he provided, yet there is no documentary evidence to support his assertion and much against it. I do not accept his testimony. 

And

There is no substitute for a proper attendance note (or written communication) recording the gist of the advice that was given. The lack of attendance notes has materially increased the number of successful claims that are made against practitioners.

Accordingly, the Court found in favor of “Aussie John” – the solicitors were found negligent and were ordered to pay $4.9 million in damages.

Take-Home Message

Although this case is at the extreme end – involving a high profile litigant, complex income tax advice, and millions of dollars at stake – the lessons for BAS Agents are no less relevant than for blue-chip law firms. Written documentation should be kept in respect of oral advice provided to clients especially where that advice could result in loss or damage if not followed. File notes (even in the form of subsequent emails to clients confirming the advice you have just provided) are an essential risk management tool that is often overlooked. Without them, as demonstrated in this case, adjudicative bodies such as the AAT and Courts are unlikely to find in favor of advisors (such as BAS Agents and Tax Agents) where a dispute arises in relation to oral advice that you claim to have provided.

Article written by Australian Bookkeepers Network (ABN)

To find out more about ABN visit www.austbook.net