Case Studies

Situation: Taxation advice was provided to a client in relation to deductibility of a business expense. The insured prepared their client’s tax return for their business and claimed a tax deduction for a business related expense which was processed and the client obtained the deduction and the tax return was completed and finalised.

A subsequent review by the ATO revealed that the deduction claimed was incorrectly assessed by the taxation consultant who had made an error in the interpretation of the tax laws and regulations resulting in a claim for a higher tax deduction than the laws allowed. The ATO then issued an amended assessment to the client claiming additional tax and penalties and the client subsequently claimed loss and damages from the tax adviser for incorrect advice including the additional tax and penalties imposed.

Result: The claim was successful and damages of an amount in excess of $100,000 were paid to the client.

Explanation: Claims relating to tax are very common and usually involve either human error or a lack of understanding of the tax laws and regulations or, failure to properly research and confirm the correct interpretation of the laws. As many areas of tax law can be very complex, it is often advisable to have another person review assessments, calculations and eligibility so as to eliminate any possibility of error.

Over the past 12 months there has been a noticeable increase in claims involving the valuation of a business for varying purposes (potential purchase, bringing in a new partner, break up of business, sale of business, financing). The main area of concern is the valuation of a business that the tax adviser / accountant has not had any prior knowledge of or involvement in and is therefore unable to properly assess the value and nature and quality of the business. As well, a common factor is the casual and offhand manner in the way the valuation was requested and a lack of clarity and agreement around what was to be done and the manner in which the information and valuation was reported.

In situations where a business valuation is to be undertaken, the following three issues need to be dealt with carefully:

• Undertaking business valuations or assessments on business that you have no prior involvement or knowledge of should be avoided. If they must be done, then it is vital to obtain clear understanding of what is to be done and to be clear that certain information may not be available or reliable. This should be put in writing. Disclaimers regarding accuracy and reliability and use of valuation should also be used
• Casual requests for business valuations should be avoided at all cost (refer 1 above)
• Requests for a business valuation from non-client parties for a business that there is no prior knowledge or involvement in should also be totally avoided

There have been a number of incidents where the insured party has changed insurers and claims have subsequently arisen from past activities which are not currently undertaken and were not disclosed to the current insurer, therefore excluding them from being covered in the new policy.

The activity could involve something that is one off or not related to the normal professional services, or be specifically excluded by the policy. It is likely that full disclosure of these activities would have resulted in cover being provided but the fact they were in the past and therefore obscure has led to the lack of disclosure and therefore the potential not to be covered.

When completing a PI proposal form for renewal of a policy or taking cover out with a new insurer, it is vital to provide full disclosure to the insurer of any activities, either past or future, that may not form part of the normal professional services description as detailed by the insurer. If there is any doubt, full information should be provided to the insurer and their confirmation should be obtained that cover is extended to these activities