Clarke v Deputy Commissioner of Taxation

REASONS FOR JUDGMENT 1 The question presently for determination in these proceedings is the order that should be made concerning the costs of proceedings brought by the four applicants pursuant to the provisions of the Administrative Decisions (Judicial Review) Act 1977 (Cth)("the AD(JR) Act"). The respondent submits that the applicants should have their costs on the usual basis, that is to say on a party and party basis; the applicants contend that costs should be awarded on an indemnity or solicitor and client basis. 2 The competing contentions arise out of the following circumstances. On 20 April 2000, each of the four applicants made an application for a private ruling under s 14ZAF of the Taxation Administration Act 1953 (Cth) ("the Admin Act") which relevantly provides: "A person may apply to the Commissioner for a ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to the person in respect of a year of income in relation to an arrangement." 3 The application for a private ruling related to the taxation consequences of making contributions to a superannuation fund under what is know as a "controlling interest superannuation arrangement". The effect of the Commissioner complying with the applicants' application for a private ruling would have been that each of the applicants could invoke the protection of s 226U and/or s 226A of the Income Tax Assessment Act 1936 (Cth) ("the Tax Act") against the imposition of penalties in respect of their participation in the controlling interest superannuation arrangement stated in their application for a private ruling. 4 Section 14ZAN of the Admin Act relevantly provides: "The Commissioner is not required to comply with an application for a private ruling if: … (j) in the opinion of the Commissioner, it would be unreasonable to comply, or continue to attempt to comply, having regard to: (i) the extent of the Commissioner's resources that would be required to comply; or (ii) any other matters that the Commissioner considers relevant." 5 The respondent did not comply with the applications for a private ruling and, by letter dated 31 July 2000, informed the applicants: "You are advised that the Commissioner is not required to comply with your application for Private Ruling and has decided not to exercise his discretion to comply." 6 Reference was made to Paragraph 14ZAN(j)(ii) of the Admin Act earlier set out, and the letter then continued: "The Commissioner has formed the opinion that it would be unreasonable to comply with your application having regard to the following matters: s The Private Rulings system - Part IVAA of the TAA operates to provide certainty of the Commissioner's opinion on the application of the law to an arrangement. s The rulee has entered into an arrangement that was the subject of Tax Office Media Release (Nat 99/16) dated 19 May 1999. This stated that controlling interest superannuation arrangements 'fail both at law and in their implementation'. The Media Release quoted the Commissioner: 'Far from securing the claimed benefits, it is the Tax Office's view that in their contrivance participants are exposing themselves to possible multiple taxing points and penalties.' s At the same time the Commissioner's position under the law was accessible on the Tax Office website . s Your application for Private Ruling was lodged a considerable time after the issue of the Media Release. s The rulee ought to have been aware of the Commissioner's view prior to the lodging of your application for Private Ruling. s You, as the applicant and tax practitioner, ought to have been aware of the Commissioner's view prior to the lodging of your application for Private Ruling. s The Media Release provides certainty as to how the Commissioner will deal with the rulee's participation in the arrangement. For your information some of the fundamental questions of tax law associated with these arrangements will be before the Courts and Administrative Appeals Tribunal; accordingly the Commissioner's position on the application of the law will be tested. s The Commissioner intends to issue a Notice of Intention to Audit to the rulee relating to the rulee's participation in the arrangement. The audit will determine the precise manner in which the arrangement was implemented and will result in assessments being raised in respect of the rulee. The rulee will have review rights against any such assessment." 7 That decision of the respondent was the subject of the applicants' application under the provisions of the AD(JR) Act, which application was filed on 1 February 2001. For present purposes, it is useful to set out the first ground of that application: "1. The making of the decisions was an improper exercise of the power conferred by sub-paragraph 14ZAN(j)(ii) of the Taxation Administration Act 1953 in pursuance of which it was purported to be made [para.5(1)(e) of the AD(JR) Act]. PARTICULARS (a) The Commissioner took irrelevant considerations into account [para. 5(2)(a) AD(JR) Act], being (i) the fact that he had issued a media release (which suggested that taxpayers might, 'depending on the facts', be subject to one or more different tax implications) (ii) the fact that the Commissioner's media release was available on his website (iii) the fact of the Private Rulings System simpliciter (iv) the consideration that the Commissioner is involved in litigation concerning controlling interest superannuation with other taxpayers (v) the consideration that the Commissioner intended to audit the applicants (vi) the consideration that he had purported to formulate a general policy, including a policy on the application of Part IVA, that he would apply irrespectively of the circumstances of the Applicants. (b) The Commissioner failed to take relevant considerations into account [para.5(2)(b) AD(JR) Act], being his prima facie duty under the enactment to comply with a ruling request where the application of the law to a particular taxpayer's circumstances is uncertain. (c) the Commissioner exercised the power for the purpose other than a purpose for which the power was conferred and or in bad faith [paras. 5(2)(c) and (d) AD(JR) Act], in that the Commissioner exercised the power to deny the Applicants the protection against the tax shortfall penalty provisions and to pressure the Applicants into paying an amount of tax that they were not under any obligation to pay. (d) the Commissioner exercised the power in bad faith [para 5(2)(d) AD(JR) Act], in that the Commissioner had already decided prior to considering the position of the Applicants as he was required to do to place an embargo on all private rulings. The reasons he has given are a mere pretext. In particular, the Commissioner knew that his public statements other than in a Binding Public Ruling do not provide any certainty of law for taxpayers, a fortiori for the circumstances of the Applicants. (e) the Commissioner exercised the power in accordance with a policy without regard to the merits of the particular case, in particular by placing a general embargo on the issuance of private rulings irrespective of a taxpayer's circumstances [para. 5(2)(f) AD(JR) Act]. (f) the Commissioner's exercise of the power was so unreasonable that no reasonable person could have so exercised the power [para. 5(2)(g) AD(JR) Act]. In particular, no reasonable decision maker would have exercised the power under paragraph 14ZAN(j)(ii) of the Taxation Administration Act 1953 at all. (g) the Commissioner's exercise of the power constituted an abuse of the power [para. 5(2)(j) AD(JR) Act]." 8 On 30 August 2000 the applicants had, amongst other things, asked if the decision of 31 July 2000 included a Statement of Reasons pursuant to s 13 of the AD(JR) Act. By letter dated 4 January 2001, the respondent advised that the decision of 31 July 2000 did not contain the Statement of Reasons, and provided the reasons with that letter. Those reasons, however, are almost precisely the matters which were referred to in the letter of 31 July 2000 which communicated the decision not to comply with the application for private rulings. 9 In April 2001, the respondent disclosed a large number of documents relevant to the applicant, which included documents relevant to the making of the decision not to comply with the request for private rulings. In early May, further documents were delivered by the Australian Government Solicitor on behalf of the respondent to the solicitors for the applicants. 10 On 5 July 2001, the applicants filed their Statement of Facts, Issues and Contentions in relation to the AD(JR) application, and the respondent's Statement of Facts, Issues and Contentions was filed on 24 July 2001. 11 Meanwhile, on 27 March 2001, the Australian Tax Office ("the ATO") wrote to the first applicant and advised that "as a result of audit action" an amended assessment would issue shortly denying deductions for $4,000,000 and $73,019, and foreshadowing the imposition of penalties. On 9 April 2001 the ATO issued a Notice of Amended Assessment to the first applicant for the year ending 30 June 1999 denying the deductions claimed and imposing penalties of ten per cent of the assessed "tax shortfall". On the following day the ATO issued a Notice of Assessment to the first applicant for the year ending 30 June 2000. On 11 May 2001 the first applicant delivered a Notice of Objection dated 10 May 2001 in respect of the ATO's Notice of Amended Assessment. In June and July there was correspondence concerning settlement. 12 By letter dated 7 December 2001 the applicants were informed of the Commissioner's willingness to remove penalties, and by letter dated 17 December 2001 the applicants were informed of the Commissioner's willingness to consent to the first three orders sought in the application for an order to review. The Commissioner also indicated his willingness to pay party and party costs of the applicants in respect of the proceedings, save for any costs that had already been ordered in favour of the respondent. The application under the AD(JR) Act had been set down for hearing on 4 and 5 February 2002. The parties were advised of the dates of trial by letter from the Registry of the Court of 9 November 2001. 13 Pursuant to the agreement between the parties as to the substantive orders that should be made on the application, on 4 February 2002 I signed consent orders in the following terms: "The Court: 1. Orders that the decisions of the Respondent not to issue a private ruling to the Applicants be set aside. 2. Declares that the application for a private ruling is one that the Commissioner had to comply with at the time that it was lodged. 3. Orders the Commissioner to comply with the Applicants' application for a private ruling." 14 Consequently, the only live issue is the basis on which costs should be calculated. That is the sole issue of present concern. It is necessary, in the context of the submissions of the parties, to refer to the history of the matter. 15 On 4 April 2000 (which it should be noted was prior to the application by the four applicants for a private ruling which was made on 20 April 2000) an officer of the respondent sent to other officers of the respondent an email message which included the following: "Michael O'Neill has asked me to escalate an issue to you, with a possibility that it is referred to external counsel, relating to private ruling applications on Controlling Interest Superannuation arrangements. The issue under consideration is whether we are required to rule on the application for private ruling. Further to this, as the application for private ruling was lodged on or before the lodgement of their return, the applicants are requesting that no penalty apply should the claim not be deductible to the rulee. This seems to raise equity issues we feel uncomfortable about. This is especially the case when the applicants seem more concerned about the issue of penalties than whether they will receive a ruling." 16 Mr Walter Sofronoff QC, senior counsel for the applicant in the principal proceedings said that "escalate an issue to you" meant "bring it to your attention". At the time, s 226A of the Tax Act provided, in effect, that if a person made an application and the application was one with which the Commissioner ought properly to comply, the person would not be exposed to penalties. 17 An officer of the respondent, Ms Balik, replied to that email attaching a report which commenced by referring to the Employee Benefit Arrangements ("EBA"), and said in par 1: "The purpose of this paper is to highlight the decisions that need to be made to enable the EBA Taskforce to: · bring to finality via settlement and litigation EBA arrangements; and · attack mutated versions of these aggressive tax planning arrangements." 18 Later in that email, under the heading "Impact - Private Binding Ruling Requests",the following appears: · "The delay in not advising tax agents that we refuse to rule is encouraging them to continue to lodge more and more PBR's. Managing this process is tying up valuable resources. · All PBR's have requested a Part IVA clearance. Ruling on 320 PBR's (this figure is growing each day) would require 2 people 5 years to complete. · If we decide to rule and not impose penalties these tax avoiders will be afforded better treatment than other EBA participants who voluntarily disclosed under safe harbour. Is this the sort of message we want to get out to aggressive tax planners? · We are not complying with Taxpayer Charter requirements." 19 In an email dated 5 April 2000, an officer of the respondent, Anne McCarthy, sent an email to officers of the respondent, including Michael O'Neill and Barrie Graham, which included the following: "Thank you for sending this message to me. I don't know the context in which Barrie raised this issue with Michael O'Neill, but as you are aware this issue is being dealt with by TCN and our view on this matter was set out in my e-mail of 16 March 2000. (I will forward that message to everyone again). If there is any dispute with the view expressed in that message, it should first be escalated within the Tax Counsel Network and not elsewhere. The position as set out in my e-mail is that if a taxpayer has applied for a private ruling on or before lodgment of the relevant return, and has supplied sufficient information for the Commissioner to make the ruling, s 226A (either with the application or on request) applies to waive the scheme penalty that would otherwise apply. This is consistent with the policy as stated in the EM introducing s 226A - taxpayers are to be protected from scheme penalties where they had previously sought but had not received a ruling by the particular time. If insufficient information is supplied to allow the Commissioner to make the ruling, in my opinion, s 14ZAM requires the Commissioner to request the required information before he can be in the position of not being able to comply with the ruling application in one of the circumstances specified in s 14ZAN." Later: "The comment is made that 'applicants seem more concerned about the issue of penalties than whether they will receive a ruling'. The ruling application, if complete, provides the ATO with all the information it needs to make a decision on the tax treatment on the particular issue. True, when issues are complex it can take us some time to come to a decision on how we are going to deal with the matter. It is not unreasonable for applicants to be concerned about penalties and to avail themselves of the protection provided under the law to minimise their exposure to penalties. In fact, advisers who fail to do so risk being sued for negligence." The email concludes: "In my opinion, pretending we have not received a ruling application does not provide any strategic advantage, is poor administration and certainly does not provide grounds for avoiding the application of s 226A." 20 It is, of course, clear that one of the purposes and effects of s 226A is to give an incentive to a taxpayer to be candid with the Commissioner of Taxation concerning that taxpayer's state of affairs. The incentive offered is that if one's view of the law which gave rise to the arrangements is wrong, the taxpayer is protected against penalties. It seems to me clear that the purpose and focus of s 226A was the avoidance of the imposition of penalties in circumstances where what had been done was a candid explanation of the taxpayer's arrangements. On Wednesday 5 April 2000, Michael O'Neill sent to a number of officers, including Anne McCarthy, an email which commenced: "Anne, I've no doubt that the legal views you've expressed are correct. I am very concerned that these legal process will continue to drive ATP by: · encouraging people to participate in schemes, and · avoiding penalties." The reference to ATP is a reference to Aggressive Tax Planning. After referring to a particular matter not associated with the present at all, the email from Michael O'Neill said: "I recommend: · that we decline to rule on these 70-80 PBRs as our position is clear; · that we clarify the position that no penalties apply in situations like that of Mr Bonnell's clients (with counsel, if necessary). If this is the case, the misuse of rulings to shelter ATP arrangements from penalty may bring us to controversy. (You are aware, no doubt, of the Commissioner's review of the PBR/Advance Opinion process to ensure integrity etc), and; · that we consider legislative change a) re: 274 etc. as protective measure, with EM stating the ATO is proceeding with litigation (? Governments full legislative agenda and willingness to legislate with retrospective effect) b) re: penalty - provisions (eg 226A)" 21 On 30 August 2000, an accountant on behalf of the present applicants wrote to the Deputy Commissioner of Taxation referring to a letter of 31 July 2000 received on 3 August 2000 wherein the Commissioner refused to issue a private ruling in respect of, amongst others, Mr Ross Clarke. The letter says, in part: "We have read the media release Nat 99/16, whose release you claim means that it is unreasonable for you to rule on our clients' individual circumstances. This is surprising, and indicates an ulterior purpose, since the media release says: 'The Commissioner's view is that, depending on the facts, one or more of the following will apply …' Furthermore, your letter is inconsistent with the media release itself, which states that you had already placed an embargo on issuing any private rulings since March 1999." The letter concluded with the claim: "In the absence of a satisfactory response, we will invite the court to infer that you have taken the stance you have taken with a view to putting yourself in a position to impose penalties on our clients that the legislation contemplates should not be imposed under the self-assessment regime." 22 In response, the Deputy Commissioner replied: "The possible 'multiple taxing points' referred to by the Commissioner in his Media Release of 19 May 1999 (Nat 99/16) was a reference to the tax consequences that may arise in relation to participants in superannuation and employee share arrangements. Such tax consequences will be determined after a review of the circumstances of each participant's involvement in the arrangement. In this regard, the Commissioner will issue Notices of Intention to Audit to such participants. The information requested therein will assist the Commissioner in determining the taxpayer's individual circumstances and the precise manner in which the arrangement was implemented." 23 The Media Release of 19 May 1999 of the ATO herein referred to included the statement: "The Tax Office placed an embargo on the issuing of private binding rulings and advance opinions on these arrangements in March pending the review and consultation with industry. Previously issued advice was also withdrawn. 'It became clear to us that previously provided private binding rulings or advance opinions have been used as marketing tools to attract people into these arrangements' Mr Carmody said." 24 The Statement of Reasons of the Commissioner pursuant to s 13 of the AD(JR) Act includes the following: "a. Pursuant to sub-paragraph 14ZAN(j)(ii), the Commissioner is not required to comply with an application for a Private Ruling if in the opinion of the Commissioner, it would be unreasonable to comply, or continue to attempt to comply, having regard to any matter that the Commissioner considers relevant. b. The Commissioner formed the opinion that it would be unreasonable to comply with your application having regard to the following matters: (i) The Private Rulings system - Part IVAA of the Taxation Administration Act 1953 - operates to provide certainty of the Commissioner's opinion on the application of a tax law to an arrangement. (ii) The Commissioner's opinion on a taxpayer's participation/involvement in a controlling interest superannuation arrangement/scheme according to law, is stated in the Media Release of 19 May 1999. (iii) The Commissioner's position under the law was also accessible on the ATO website. c. Thus, the Media Release and the ATO website provide certainty as to how the Commissioner will deal with the Taxpayer's participation in a controlling interest superannuation arrangement without the need to comply with a request for a private ruling on the matter. d. As your application for a Private Ruling was dated 20 April 2000, you ought to have been aware of the Commissioner's view prior to the lodging of your application for a Private Ruling. e. The Commissioner is in the process of judicially testing the fundamental questions of law associated with a controlling interest superannuation arrangement before the Administrative Appeals Tribunal and the Courts. f. Further, the Commissioner intends to issue a Notice of Intention to Audit to the Taxpayer in relation to his participation in a controlling interest superannuation arrangement. Therefore, the audit (as opposed to a ruling) will determine the precise manner in which the arrangement was implemented and may result in assessments being raised in respect of the Taxpayer. The Taxpayer will then have review rights against any such assessment. g. On the basis of the information provided above, the Commissioner decided not to exercise his discretion under sub-section 14ZAL(2) to comply with the application in this case." 25 I accept, as I said in the course of discussions with counsel on the hearing of this matter, that the Commissioner's position was that it was made plain in the media release that the view was that this scheme was ineffective, with the consequence that there was no obligation to give a private ruling. 26 The applicants refer to the Statement of Reasons and repeat the claim that there was no concern expressed about aggressive tax planning and the need to remove incentive for such people who would be able thereby to avoid penalties. It is relevant to note that a letter dated 22 December 2000 to Dooleague Superannuation Fund included the statement: "We have concluded that any amount contributed to your fund may be a taxable contribution under section 274 of the Income Tax Assessment Act (ITAA)." Later: "Voluntary provision of the information / documentation within 42 days of receipt of this letter will ensure that the penalty is reduced in accordance with Taxation Rulings TR95/4 and TR94/6. These rulings set out the guidelines for remission of additional tax arising from audit action and allow for a reduction of the penalty in cases of positive co-operation." Later: "Depending on the particular circumstances applicable to your case, the outcome of the audit may involve issuing amended assessments to cover various taxing points. On the basis of our view of the application of the Income Tax and Fringe Benefits Tax laws to Controlling Interest Superannuation arrangements generally, this could include one or more of the following: · Disallowing deductions claimed under sections 82AAC or 82AAE of the Income Tax Assessment Act 1936 (ITAA 1936); · Disallowing deductions under subsection 51(1) of the ITAA 1936 or section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the interest expense (if any) incurred by the taxpayer in relation to a loan to finance a contribution; · Raising a fringe benefits tax assessment or amendment for the reimbursement of a contribution, with the taxable value of the fringe benefit to the trustee equal to the amount of the contribution; · Raising an assessment or amendment to the superannuation fund to include the contributions as a taxable contribution, as defined in section 274 of the ITAA 1936; · Including the contribution as a surchargeable contribution under section 8 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997; · Applying section 108, section 109 and/or Division 7A of the ITAA 1936 to deem a contribution or loan a dividend from the employer company; · Making a determination under Part IVA of the ITAA 1936 to cancel the income tax deduction claimed by the employer in respect of each contribution; and · Applying section 67 of the Fringe Benefits Tax Assessment Act 1986 to the Arrangement. Interest would also be payable on the tax shortfall from the due date or the deemed due date of the original assessment to the date of issue of the amended assessment." And later: "If you wish to settle this matter, you should provide a suitable settlement proposal to the Tax Office for consideration." 27 In respect of the Court's power to award costs, s 43 of the Federal Court of Australia Act 1976 (Cth) relevantly provides: "(1) … the Court or a Judge has jurisdiction to award costs in all proceedings before the Court … other than proceedings in respect of which any other Act provides that costs shall not be awarded. … (2) Except as provided by any other Act, the award of costs is in the discretion of the Court or Judge." The parties accept that the usual order for costs is on a party and party basis. It is further accepted that the Court has discretion to award costs on some other and higher basis where circumstances justify departure from the usual order. 28 In Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397, Woodward J said at 401: "I believe that it is appropriate to consider awarding 'solicitor and client' or 'indemnity costs', whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law." In Australian Federation of Consumer Organisations Inc v Tobacco Institute of Australia Limited (1991) 100 ALR 568, Morling J said at 571: "[I]t would be wrong to hold that an order for costs on an indemnity or solicitor and client basis should only be made in circumstances where the conduct of the party against whom the order is made is deserving of criticism. To so hold would be to fetter the discretion referred to in section 43(2) of the [Federal Court of Australia Act 1976 (Cth)] in a manner not justified by the words of the sub-section." 29 In Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225, Sheppard J reviewed the authorities and the situations where costs on a solicitor/client or indemnity basis might be appropriate and concluded that in particular, one ground on which such an order might be made was that the proceedings were continued for some ulterior motive or in wilful disregard of known facts or clearly established law. 30 Branson J in Yates Property Corporation Pty Ltd v Boland (No. 2) (1997) 147 ALR 685 noted at 693 that whilst there was nothing itself improper or unreasonable in the pursuit of claims involving legal difficulty or enjoying limited authoritative support, "[t]he fact that the applicant persisted with the proceeding without apparent regard to significant deficiencies in the evidence available to be called to establish its case is sufficient, in my view, to enliven the discretion of the court to make orders for costs on a basis other than a party and party basis." 31 In this case it is clearly apparent that officers of the respondent were concerned with not only the precise legal application of the Act to the circumstances of the applicants, but with the broader strategic concerns of the ATO. It is relevant in this context to again note the observation by Michael O'Neill: "Anne, I've no doubt that the legal views you've expressed are correct. I am very concerned that these legal processes will continue to drive ATP [Aggressive Tax Planning] by: · encouraging people to participate in schemes, and; · avoiding penalties." 32 The view I take of the matter is that the declining to issue private rulings in particular individual circumstances was viewed by the relevant officers against a much broader picture of the strategic consequences of such a concession in an individual case. While the capitulation of the ATO in the making of the orders which ultimately were sought by the applicants in the present case indicates that that view was erroneous, I am not of the opinion that this is a case where the applicant was aware that he had "no chance of success" or where the proceedings were continued for some ulterior motive or in wilful disregard of known facts or clearly established law. In the view I take of the matter, the capitulation of the respondent in relation to the making of the substantive orders in the principal proceedings is a recognition that his view of the matters was erroneous, but does not amount to an acceptance that the adoption or the holding of those views was such as to call for the imposition of indemnity costs. 33 It follows that I am not satisfied that this is a matter where an order for costs on an indemnity or solicitor and client basis is appropriate. Nonetheless, this matter had been set down for trial prior to the communication by the respondent of its agreement to consent to the making of orders which would dispose of the principal complaints in the proceedings. In those circumstances I think, having regard to the discretion given to the Court under s 43 of the Federal Court of Australia Act 1976 (Cth), the appropriate order to make is that the applicants in the principal proceedings have their costs of and incidental to those proceedings, those costs however to be on the usual party and party basis, but with costs to include the costs of the hearing set down for 4 February 2002. Liability for the costs of that hearing would have crystallised, in my view, prior to the communication by the respondent of its willingness to consent to the making of the substantive orders in the application. 34 The order that I make is that the applicants have their costs of and incidental to the application, including any reserved costs, to be assessed on a party and party basis; those costs to be as taxed unless agreed; and those costs to include the costs of the hearing of 4 February 2002.