Clough Limited v Commissioner of Taxation

Federal Court of Australia|2021-03-23|Before: Colvin J

The applicant pay 70% of the respondent's costs of the appeal up to and including 16 October 2020.
The applicant pay the respondent's costs of the appeal after 17 October 2020.
These orders include reserved costs.
The costs be assessed if not agreed.
There be liberty to apply for orders to the effect that the costs be assessed on a lump sum basis with the assessment to be referred to a Registrar. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

COLVIN J: 1 Clough Limited claimed that an amount paid to cancel employee entitlements under an employee option plan and an employee incentive scheme were deductible as a general business outgoing incurred in producing assessable income. In the alternative, Clough claimed that the amount was deductible over five years as business capital expenditure. The Commissioner of Taxation of the Commonwealth disallowed any deduction for the amount. An objection by Clough was unsuccessful. On 16 October 2020, a few days before the hearing of an appeal against the objection decision, the Commissioner unconditionally conceded that the amount could be deducted over five years as business capital expenditure. 2 The hearing of the balance of the appeal proceeded and Clough's claim that the amount was deductible as a general business outgoing was dismissed: Clough Limited v Commissioner of Taxation [2021] FCA 108. As a result, the appeal was dismissed. The question of costs was reserved. The parties have been unable to agree costs. 3 The Commissioner says that the appropriate costs order is for Clough to pay 80% of the costs up until 16 October 2020 and thereafter to pay the Commissioner's costs to be taxed if not agreed. Clough says that the Commissioner should pay 80% of Clough's costs and thereafter the order should be in the terms proposed by the Commissioner. 4 For the following reasons there should be a costs order as proposed by the Commissioner, but the percentage to be applied should be 70%.

General principles 5 The award of costs is discretionary: s 43 of the Federal Court of Australia Act 1976 (Cth). The discretion is unconfined, but must be exercised judicially, that is according to relevant considerations and taking account of the contextual features and facts of the litigation: Kazar (Liquidator) v Kargarian; In the matter of Frontier Architects Pty Ltd (In Liq) [2011] FCAFC 136; (2011) 197 FCR 113 at [4]. Settled principle guides the exercise of the discretion: Oshlack v Richmond River Council (1998) 193 CLR 72 at [38]. Generally, the discretion is exercised in favour of the successful party: Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52 at [25] and Firebird Global Master Fund II Ltd v Republic of Nauru (No 2)[2015] HCA 53 at [6]. So, a costs order usually follows the event, but need not do so. This may be expressed in the following terms as stated in IFTC Broking Services Limited v Commissioner of Taxation [2010] FCAFC 22 at [8]: ... the compensatory principle informs the usual approach to costs (costs follow the event), an approach which generally is not displaced other than in special circumstances, with such circumstances to be assessed in the context of the particular case. 6 It may be appropriate to adjust costs orders by reference to the outcome on particular issues: PKT Technologies Pty Ltd (formerly known as Fairlight.au Pty Ltd) v Peter Vogel Instruments Pty Ltd (No 2) [2020] FCAFC 46 at [14]‑[15]. This is especially so where the event of success is contestable: Plaintiff M76/2013 v Minister for Immigration, Multicultural Affairs and Citizenship [2013] HCA 53; (2013) 251 CLR 322 at [241]. Even so, rather than order costs by issues, the court may deal with costs compendiously by adopting a percentage reduction approach to avoid the complexities associated in allocating costs to particular issues: Phonographic Performance Company of Australia Limited v Copyright Tribunal of Australia (Costs) [2019] FCAFC 192 at [6]-[7].

Appropriate order in this case 7 Clough says that if the Commissioner had not conceded the claim by Clough to a deduction over five years as business capital expenditure then it would have been successful and costs would have followed the event. Therefore, so it is submitted, that outcome should be reflected in the approach to costs before 16 October 2020. 8 I do not accept that contention. If the matter had proceeded on both issues, there would have been relatively few forensic issues relating to the deduction on the grounds of business capital expenditure. This is evident from the submissions filed for Clough which preceded the concession by the Commissioner. They were quite confined and did not require the detailed attention to the factual issues that were required to deal with the deduction claimed on the basis that the amount was a general business outgoing that was not capital in nature. An outcome in which Clough succeeded only on the part of the case that, in the actual event, was conceded by the Commissioner would have invited the consideration of an issues based order for costs. In that hypothetical case, the manner in which the forensic material was addressed may have been different. It is also quite possible that in such an event, Clough may have been ordered to pay the costs of the Commissioner in relation to the general business outgoing deduction. 9 In my view, the discretion should be exercised by reference to what is known to have occurred rather than what might have occurred if the appeal had proceeded to a final hearing on a different basis. 10 Clough points to no significant evidentiary preparation that was wasted. It identifies no significant part of the evidence that was relied upon by Clough as being relevant only to the conceded claim. In my assessment, the bulk of the affidavit material related squarely to the general business outgoing claim. 11 The Commissioner says that Clough relied upon evidentiary material that was not advanced as part of the objection process. It says that once it received that material, it assessed its significance and that led to discussions between the parties and the concession by the Commissioner. It would appear to be implicit in the Commissioner's position that the concession was only as to one-fifth of the commercial value of the claim. However, the concession will mean that the whole of the amount will be deductible over time. 12 The Commissioner also pointed to the fact that the appeal by Clough initially relied in the further alternative upon s 25-50 of the Income Tax Assessment Act 1997 (Cth). However, that claim was not pressed and the Commissioner makes no submission to the effect that any particular costs were incurred in dealing with that aspect. 13 No doubt some costs incurred by Clough have been wasted. By reason of the late concession, it is appropriate for allowance to be made in favour of Clough in respect of those costs. However, the order proposed by Clough would mean that it would be entitled to a substantial costs order in its favour when it has failed on a substantial part of its claim that it maintained throughout. 14 In all the circumstances, I consider it appropriate to award the Commissioner 70% of his costs up until 16 October 2020 and make an order for costs in favour of the Commissioner thereafter.

Appropriate order to reflect the concession 15 An order has been made dismissing Clough's appeal. In making submissions on the question of costs, Clough maintained that the appeal ought to have been allowed in part. However, by the time the appeal was heard (by reason of the concession) it was confined to the question of the deductibility of the amount as a general business outgoing. 16 It appears that in order for the Commissioner to have power to amend the assessment to reflect the concession, an order may be required to give effect to the concession. If that be so, then I would entertain an application for an appropriate order to give effect to that aspect which relates to the part of the appeal that was not determined by my decision. The order could be made by consent if the parties considered it appropriate for that course to be followed or the matter could be relisted if necessary to deal with orders consequent upon the concession. I do not make any order at this point simply because it was a matter addressed only by Clough and the question of costs is being addressed on the papers. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Colvin.

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