Australia: When a tax write-off becomes a complete write-off: The duties of a financial adviser in providing advice
Curwoods Case Note

Tomasetti v Brailey [2012] NSWCA 399

In Brief

• When providing financial advice, a financial adviser must look at all aspects of the products and the circumstances of each client in order to ensure they are not negligent or misleading in their advice.
• A court will look at the entire context and content of representations in order to determine if they are misleading or negligent; it is insufficient to rely simply on the use or misuse of one term where the concept is conveyed through other representations.
• A husband and wife will not be considered a single financial entity unless they have specifically given instructions that this is so or provided a guarantee over one another's investments.
• The limitation period relating to financial products may commence from a variety of different times, depending on the nature of the product, but it is necessary that an actual loss is ascertainable before time will commence to run.

Background

In 1998, Mr Tomasetti engaged Mr Brailey to act as his tax agent, accountant and financial adviser. Between 2000 and 2005, Mr Brailey recommended that Mr Tomasetti, his wife, Ms Cordony, and Tomasetti Investments Pty Ltd as trustee for the Tomasetti Superannuation Funds (TSF), Mr Tomasetti's self-managed superannuation fund, (collectively the Claimants) invest in various schemes for the growing of timber, almonds, grapes and citrus (Schemes). For a variety of reasons these investments were unsuccessful, resulting in a loss for the Claimants allegedly exceeding $4,000,000.

The Schemes each operated in a slightly different manner but, broadly speaking:

• The investor would be granted a lease over a parcel of land by the promoter, along with a management agreement by which the promoter would establish, maintain and harvest and sell the produce.
• An initial fee was payable to cover the cost of establishing the plantation and the initial rent of the land. The promoters also offered investors the opportunity to obtain financing for this sum to be paid under a loan agreement.
• There were ongoing expenses for the investor which could include rent, maintenance, licence fees, insurance and pruning services.
• The investor was entitled to a tax deduction for the amounts of the initial payment and ongoing rent and management expenses, together with interest on any associated borrowings.
• Between 5 and 13 years after the initial investment, the lots would be harvested and the investor would obtain a distribution from the pooled proceeds of sale from the harvest.
• The promoters of each of the Schemes published a prospectus or product disclosure statement (PDS), included in which was an application in the form of a power of attorney which was to be endorsed in order for the investment to be made.

The Claimants commenced proceedings against Mr Brailey, amongst others, in the Supreme Court of New South Wales alleging, as confined by the time of the appeal, that Mr Brailey:

• engaged in misleading and deceptive conduct in contravention of s 42 of the Fair Trading Act 1987 by representing to Mr Tomasetti and TSF that the investments were sound, prudent and sensible commercial investments and making other representations, including that the investments would make reasonable commercial returns over time (FTA Claim);
• acted negligently and in breach of a duty of care that he owed to Mr Tomasetti and TSF in recommending the investments (Negligence Claim);
• contravened s 42 and acted negligently in recommending the investments to Ms Cordony as prudent and sensible for her personal circumstances (Ms Cordony Claim).

In the initial judgment, RA Hulme J rejected all of the Claimants' claims, essentially finding that Mr Brailey had apprised the Claimants of the risks associated with the Schemes by providing Mr Tomasetti with the PDSs. With regards to the unique claim for Ms Cordony, his Honour's primary reasoning was based on her inability to recall the terms of the conversations that she had with Mr Brailey. The Claimants appealed.

Mr Tomasetti and TSF's claims

As to the FTA Claim and the Negligence Claim, neither party challenged the primary judge's finding that, given Mr Tomasetti's circumstances, the investments that Mr Brailey recommended to him were not inherently unsound. The Claimants did argue, though, that Mr Tomasetti and TSF invested in the Schemes without Mr Brailey properly informing them of the associated risks.

At trial, Mr Tomasetti had given evidence that Mr Brailey did not orally inform him of the risks involved in the Schemes despite being aware that Mr Tomasetti would not be reading the PDSs. Mr Brailey gave evidence that he had both orally advised Mr Tomasetti of the risks involved in the Schemes and pointed him to the PDSs for details. The primary judge made various findings as to the credibility of the witnesses, finding that he was unable to rely on either party's account, although he found that PDSs were usually provided by Mr Brailey.

On appeal, the parties agreed that the risks associated with the Schemes were adequately described in the prospectuses. However, Macfarlan JA, with whom the other judges agreed, noted that the primary judge had appeared to find that it was enough to disprove misleading and deceptive conduct if Mr Brailey simply provided the PDSs, even if he did not tell Mr Tomasetti to read them, or have any basis for thinking that Mr Tomasetti would read them.

Macfarlan JA found that more needed to be established than this and the whole of the circumstances needed to be considered. If an oral representation would otherwise have a misleading character, then the provision of a written qualification at the same time would only affect the character of that representation if a reasonable person in the position of the person providing the document would have expected the other party to read the document in such a manner as to apprise themselves of the relevant qualification. Thus, if it was shown that Mr Brailey's conduct was otherwise misleading and deceptive, he would need to show that a reasonable person would have expected that Mr Tomasetti would have reviewed the PDSs so as to understand the risks inherent in the Schemes.

Considering the broader picture, the Claimants argued that that Mr Brailey had made admissions in cross-examination which proved that Mr Brailey had recommended investments in an unqualified fashion without informing Mr Tomasetti that they did not conform to his earlier instructions. Mr Brailey's admissions were that:

• he did not inform Mr Tomasetti some of the PDSs described their respective schemes as "speculative";
• his instructions in 1998 were to avoid investment in anything speculative, and those instructions did not change until at least 2003;
• Investments would not be sound, prudent and sensible if they were aptly described as speculative.

Macfarlan JA found that this argument erred in placing too much importance on the term "speculative". It was unnecessary for Mr Brailey to use the term "speculative" so long as he conveyed the concept of there being considerable risks associated with the Schemes. Mr Brailey had consistently maintained that he apprised Mr Tomasetti of the risks associated with the Schemes and Mr Tomasetti failed to prove otherwise. Therefore, the FTA Claim could not be sustained.

For the Negligence Claim, the principle relied upon was that it would have been a breach of Mr Brailey's duty to have put the Schemes forward without the Claimants being aware of the risks. Thus, the Negligence Claim turned on the same issues as the FTA Claim and had not been proven.

The Ms Cordony Claim

The Ms Cordony Claim was unlike the other claims, in that it was premised on the Schemes recommended by Mr Brailey being inherently unsuitable for her personal circumstances regardless of her knowledge of the risks involved.

Ms Cordony had been in a long-term relationship with Mr Tomasetti since 1993; married him in 2003; and worked part-time for him as his personal assistant from 2002. Ms Cordony's gross income was approximately $60,000 for the 2003/2004 financial year and approximately $68,000 the following year (compared to Mr Tomasetti's income of $954,000 on average per year from 2000-2005). Ms Cordony had serious health problems of which Mr Brailey was aware.

Macfarlan JA found that in light of Ms Cordony's health issues, age, income, and the long-term nature of the Schemes rendering her liable for ongoing expenses irrespective of income, Mr Brailey was not justified in recommending the Schemes to her. Furthermore, Macfarlan JA found that it would have been unreasonable for Mr Brailey to assume that Mr Tomasetti and Ms Cordony functioned as a single financial unit without a firm basis for such an assumption and instructions from Ms Cordony to act on it. As such, Mr Brailey had engaged in misleading and deceptive conduct and been negligent under the Ms Cordony Claim.

Macfarlan JA then found that reliance is, in at least one sense, established by the fact that Mr Brailey, acting as Ms Cordony's financial adviser, recommended Ms Cordony invest in the Schemes and she did so in response to that advice.

However, the question of causation was remitted to the primary judge for determination. Macfarlan JA noted that for all of the claims the question remained of whether the Claimants would have refrained from investing in the Schemes if the representations had been suitably qualified. It was particularly relevant that it was very important for Mr Tomasetti to obtain the tax deductions that the Schemes provided. However, this issue was not explored in sufficient detail at first instance to make a final decision on appeal.

Limitation period

In obiter, Macfarlan JA considered Mr Brailey's argument that portions of the FTA Claim and the Negligence Claim were statute barred as the Schemes had been entered into more than 6 years before the claim was brought. (Note that the Ms Cordony Claim only related to Schemes invested in after the limitation date.)

Macfarlan JA found that even though a price had been paid at the time of investment in the Schemes, they were not inherently worth less than the price paid at the time, and so only created a contingent loss or liability. Therefore, the Claimants did not suffer a loss until such a time as the contingency was fulfilled and the loss became actual.

Even in these circumstances, where the Claimants included in their damages amounts relating to the initial payments and payments made on the Schemes prior to the limitation date, the causes of action did not accrue until it became ascertainable that the Claimants had suffered an overall loss on each investment.

Proportionate liability

Mr Brailey had contended that he and TJC Financial Planning Pty Limited (TJC), a company owned in part by Mr Brailey which conducted his financial planning business rather than his tax agency and accounting business, were "concurrent wrongdoers", the consequence of which would be that Mr Brailey's liability was limited to the proportion of the loss that the Court considered just having regard to Mr Brailey's degree of responsibility for the loss.

Macfarlan JA found that neither the liability of Mr Brailey nor TJC was limited by the proportionate liability provisions. Mr Brailey was, in effect, TJC and the acts and omissions of Mr Brailey in advising the Claimants were the corporate acts of TJC. Thus, Mr Brailey and TJC were each fully responsible for the losses.

Implications

In litigation regarding financial advice, it is critical to consider the financial products as a whole. In circumstances such as in this case, products may be designed to make a loss for a period of time in order to serve a tax purpose and subsequently generate a return. In these cases all functions of the product must be considered.

Equally, all financial products will carry different degrees of risk and these risks will mean different things for different investors. The term "speculative" does not carry a universal meaning and must be considered in regards to the product as a whole as well as the circumstances of the individual receiving advice. Furthermore, even if advice is being given to a husband and wife, you cannot consider them a single financial unit unless instructions or guarantees were given to that effect.

In determining misleading and deceptive conduct, the courts will not look to a single statement or document in isolation. The whole character of conversations and the content of the representations will be assessed in more detail than simply looking to individual terms or phrases. Equally, one cannot rely on a qualification to a representation provided in a document unless a reasonable person would expect the party who received the document to read and understand that qualification.

To determine the limitation period for financial products, one must consider the date at which a loss occurred or was ascertainable. If a product is designed to make a loss before it generates income, it carries a contingent loss which will only crystallise when the contingency occurs and the product fails to perform as expected. Alternatively, if at the date a product is purchased, it is actually worth less than was paid due to negligence or misleading conduct, the damage has occurred at the moment of purchase.

Finally, proportionate liability will not have a role to play where 2 entities share the same mind and acts. If the acts and omissions of a person and a company are the same, and the person is the directing mind and will of the company, the Court will treat both as equally and wholly responsible for the loss.

Footnotes

¹ McColl, Campbell and Macfarlan JJA

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