A millionaire media CEO whose investment goals included paying “little or no income tax” has chastened one of the country’s big banks and convinced a court compensation for its misleading advice should be “grossed-up” by an additional $201k for the income tax payable on the recovery of his financial loss.
In May 2007 while CEO of APN Newspapers, Mark Jamieson and wife Corelle, accepted the recommendations from their banker “for decades” – Westpac – to borrow $5 million from competitor Macquarie to place in its “capital protected” MQ Gateway Trust.
The bank’s second gem was a recommendation to borrow a further $700k for an undeducted contribution to their superannuation fund for investment in equities.
By March 2009 “the impact of the global financial crisis had come home to roost” resulting in the catastrophic failure of both investment strategies.
The final chapter – played out yesterday in Queensland’s Court of Appeal – sees Westpac paying the couple’s substantial legal costs of their trial and appeal in addition to $1.08 mil ordered in compensation.
The bank’s Statement of Advice to Jamieson – now mayor of Sunshine Coast in Queensland – recorded wealth creation; management of tax; and asset protection – as the strategy’s objectives.
The $5 mil margin loan generated $375k deductible interest expenses annually with half of the interest deferred until the investment’s maturity in three years.
Unbeknown to them until 2009, their exposure under Macquarie’s Capitalised Interest Assistance Loan – which financed the interest on the borrowed investment funds – was in fact $1.2 mil, rather than the $600k that financial planner Robert Tindall had quoted.
Westpac conceded Tindall had failed to pass on Macquarie’s own product disclosure statement and had also mistakenly told the high earners that by “using $5 million gearing we put less than 10% of your overall net wealth at risk of loss.”
With losses amassing, the superannuation loan also turned out to be unsuitable given their suddenly impaired repayment capacity.
The bank’s defence to the calamity in which by clumsy counsel its customers had been caught up, was that the “experienced investors” should have figured out the real risks for themselves.
Attempts to resolve the impasse with the bank proved futile and having settled up with Macquarie, the Jamiesons filed a lawsuit in 2011.
Dismissing Westpac’s contentions that the customers should have known – because its advice statement referred only to “after-tax losses” – that the potential total losses were much higher than the quoted numbers stated, all four judges of Queensland’s Supreme Court before whom the dispute was aired, were scathing.
First, the Statement of Advice did not make clear that 50 per cent of the interest would still have to be repaid on maturity.
Second, there was no clear statement about the assumptions upon which an after-tax loss limited to $600k – the extent of their wealth claimed only to be at risk – was based.
Third, that the Jamiesons required a large cash flow to limit the loss on an after-tax basis was an important and unexplained feature.
Fourth, the use of “examples of losses or gains only on an after-tax basis” tended to understate the amount of the actual cash at risk.
It did not matter that the loss was caused by the GFC – ruled the appeal judges – because it arose from the decision to enter into the transaction, as opposed to any erroneous performance projections.
The couple’s hurt on MQ Gateway was $623k but because from 2003 – 2006, Mr Jamieson had taken up agribusiness financial products (that reduced income tax liability to nil) the court accepted Westpac’s contention that if repeated in 2007 (in lieu of MQ Gateway) as was likely, a GFC related loss in any event of about $134k would have resulted.
Damages were therefore reduced to $490k but Westpac was ordered to pay an extra $201k “to ensure that after payment of income tax [on the damages] he was left with the full $490k”.
The customers also succeeded in proving Westpac failed to exercise due care and skill in advising about the superannuation loan because it ignored consideration of “where the cash flow to repay the debt might come from”.
“In the absence of a likely source of cash flow to pay down the non-deductible borrowing, in my view the strategy of borrowing $700,000 from the Bank to make contributions to superannuation in the 2007 year was flawed,” ruled Justice David Jackson on the first hearing of the dispute.
Further damages of $162k were awarded for that loan and another $230k for interest overall. The total confirmed by the appeal court that Westpac must compensate its customers is $1.08 mil.
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