When a professional's mistake costs you money, the fight over compensation often comes down to tax. A NSW Supreme Court ruling reported this week shows how much that can matter. A judge has upheld court-appointed referees who took $4.6 million in carried-forward tax losses into account when working out what law firm HWL Ebsworth owes. For anyone pursuing an adviser, the claimant's own tax position can shape the payout.

What the court decided

The case is Lindsay-Owen v HWL Ebsworth Lawyers [2026] NSWSC 1324, decided by Justice Ian Harrison.

Gregory Lindsay-Owen and his company, Dairycorp, had already won a finding that HWL Ebsworth was negligent. What remained was how much the firm should pay.

The question of damages went to referees. The applicants challenged the third referees' report on damages, mainly over how it treated tax.

According to the report, the referees adopted an actual tax figure of $4,368,871. The applicants had put forward $8,219,111. The referees also counted $4.6 million in carried-forward losses, and the tax-loss issue in dispute was reported at $2.46 million.

Justice Harrison rejected every challenge. On the tax figure, he found no sufficient reason to interfere with the referees' conclusion, given their expertise.

He held that the carried-forward losses were relevant to damages. A separate challenge over Capital Gains Tax and unrecovered legal costs was also rejected.

The judge invited submissions on whether final orders should wait until the question of costs is resolved. The litigation is therefore not quite over, even though the tax arguments have been settled at this level.

Why tax losses can change a damages bill

Damages in negligence are generally meant to put a claimant back in the position they would have been in without the mistake. That makes the claimant's real after-tax position relevant.

Under long-standing Australian tax law, a company with Revenue losses can usually carry them forward and deduct them against future income, provided it passes the continuity of ownership test or the Business continuity test. Those losses can absorb an income or capital gain that would otherwise be taxed.

Capital losses work differently. They can only be offset against capital gains, not against ordinary income, although unused capital losses can also be carried forward. The type of loss a claimant holds can therefore affect how much tax it would really have paid.

So when a claimant says a mistake caused a tax bill, the other side may argue that available losses meant the real tax was smaller. The reported decision does not set a universal rule. It turned on the referees' findings and on how reluctant courts are to second-guess expert referees.

Hypothetical example: how losses can shrink a tax claim

Hypothetical example: A company acts on poor advice and triggers a $10 million taxable gain it would otherwise have avoided. It sues the adviser for the resulting tax.

At a 30% company tax rate, the tax on $10 million is $3 million. The company claims that $3 million.

The company also has $4 million in carried-forward losses. Applied against the gain, they leave $6 million taxable, and tax of $1.8 million.

On that approach, the extra tax actually paid is $1.8 million, which is $1.2 million less than the claim. That $1.2 million equals the value of the $4 million in losses at 30%.

The company could reply that losses used up on the gain can no longer shelter future profits, so they had value of their own. How that argument goes depends on evidence about whether, and when, the losses would otherwise have been used.

Lessons for anyone suing an adviser

Expect your tax returns, loss schedules and history to be examined closely. If you claim a tax cost as damage, the defendant will look for anything that reduces it.

Where a matter goes to referees, the time to win the tax argument is in front of them. This decision shows that courts give real weight to referees' expertise, and challenging their findings afterwards is an uphill battle.

Records that prove the loss position, including how the losses arose and who has owned the company since, matter. If the continuity tests are in doubt, the losses may not be worth what they appear to be, and either side may argue about that.

Specialist forensic accounting and tax evidence prepared early can make a difference to the final figure. Costs also matter, and here they could still affect the timing of final orders.

Losses are also on the policy agenda

Tax losses are not only a courtroom issue. The Tax Reform No. 2 Act, which received assent in August, introduced a loss carry-back for businesses that are not significant global entities.

That law is now enacted, so it may affect how future losses are valued, both in tax planning and in disputes.

The trust tax package now before the Senate has also raised questions about losses. In its submission to the Senate inquiry, Pitcher Partners asked for transitional relief for property groups facing stranded tax losses, along with more targeted consultation.

That package includes the Tax Reform No. 3 bill, whose Schedule 4 is the second Tranche of the CGT changes and covers complex cases including trusts, according to the Treasurer's second reading speech. The bills were reported to have passed the House of Representatives on 29 October.

What to watch

  • Lindsay-Owen v HWL Ebsworth: submissions on whether final orders wait for the costs question, then the final orders themselves.
  • 5–6 November: Senate Economics Legislation Committee hearings on Tax Reform No. 3 and the minimum tax on discretionary trusts bill.
  • 13 November: the committee's report is due.
  • Third week of November: the government's reported target for getting the package through the Senate. That timing is not guaranteed.
  • 1 July 2028: proposed start date for the trust minimum tax, if the bill passes.

For businesses with losses on the books, whether in a dispute or a restructure, the message is the same: those losses carry real value, and someone will try to count it.