Commissioner of Taxation v Clark

IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 1 of 2010

IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 2 of 2010

JUDGES: DOWSETT, EDMONDS AND GORDON JJ DATE: 10 NOVEMBER 2011 PLACE: MELBOURNE (VIA VIDEO LINK TO BRISBANE)

INTRODUCTION 1 On 21 January 2011 the Court dismissed appeals by the appellant (the "Commissioner") against decisions of Greenwood J setting aside objection decisions of the Commissioner and allowing objections by the respondents (the "Taxpayers") against amended assessments of income tax for the year of income ended 30 June 2001. This Court effectively upheld the findings and reasoning at first instance. Following publication of our reasons, counsel for the Taxpayers sought costs orders against the Commissioner, such costs to be taxed on an indemnity basis. Following the decisions at first instance, and prior to the hearing of the appeal, each Taxpayer had made offers of settlement. As appears from the affidavit of the Taxpayers' solicitor, Mr Bourke: 2. On instructions received from my clients, I prepared Notices of Offer in accordance with Order 23 Rule 3 of the Federal Court Rules which were served on the solicitors for the [Commissioner] on 12 February 2010 ("the February offers"). Offers were made in each appeal proceeding, QUD 1/2010 and QUD 2/2010, and were in terms as follows: (a) "The [Taxpayer] shall pay the [Commissioner] $5,000 within seven (7) days of acceptance of this offer; (b) The appeal be dismissed; (c) The [Taxpayer] shall pay the [Commissioner's] costs of the appeal following the making of orders by his Honour Greenwood J on 14 December 2009." 3. Each Notice of Offer was in identical terms and was stated to remain open for a period of 14 days … 4. On 10 April 2010, upon instructions from my clients, I made further offers to the [Commissioner] to compromise the appeal proceedings ("the April offers"). These offers also were made pursuant to Order 23 of the Federal Court Rules and were sent on 10 April 2010. The offer made on behalf of Mr David Clark was in the following terms: (a) "The [Taxpayer] shall pay the [Commissioner] $30,000 within 7 days of acceptance of this offer; (b) The appeal be discontinued; (c) The [Taxpayer] shall pay the [Commissioner's] costs of the appeal." The offer made on behalf of Mrs Helen Clark was in identical terms and each offer was stipulated to remain open for a period of 14 days. A copy of each of these offers is now annexed. 5. Additionally on 13 April 2010 under cover of a letter dated (incorrectly) 13 February 2010 I made an offer to the [Commissioner] in the form of offer suggested by Calderbank v Calderbank [1975] 3 All ER 333 ("the Calderbank offer"). The terms of the Calderbank offer were the same as the formal offers which were served on 10 April 2010. 2 Mr Bourke sets out the Commissioner's responses to these offers as follows: 6. The February offers were rejected. By facsimile from the Australian Government Solicitor, received on 26 February 2010, the [Commissioner] advised: "One of the terms of both offers is that the relevant appeal be dismissed. If the Commissioner were to agree to the appeals being dismissed at this stage of the proceedings, the Commissioner would be required to amend the assessments in circumstances where the Commissioner has maintained consistently before the court that the taxpayer has not proved that the assessments are excessive. The Commissioner stands by the position expressed in his Notices of Appeal and will not be accepting these offers. …" 7. The April offers were rejected by the Commissioner on 23 April 2010 by facsimile of that day. The Australian Government Solicitor advised on behalf of the [Commissioner]:- "The Commissioner considers that he is empowered to compromise tax debts in only limited situations. The policies published in a document entitled 'ATO Receivables Policy' and the relevant area of that policy document is Chapter 27. Furthermore, details of all assets and liabilities, a statement of income and detailed statement of expenditure must be received from both of the taxpayers, together with written reasons for seeking to compromise. A form incorporating these subjects to be detailed, is available and can be provided if your clients wish to pursue or compromise their tax debts. …" 8. The Commissioner also rejected the Calderbank offer by facsimile from the Australian Government Solicitor on 27 April 2010. The stated reason given was similar to that which is set out above, in the 23 April 2010 letter. … 3 In para 9 of his affidavit, Mr Bourke provides the following chronology: Date Event 4.1.2010 Notice of Appeal filed 11.3.2010 Notice of Appearance filed by the respondents 23.2.2010 Draft Index to Appeal Book submitted 1.3.2010-6.4.2010 Correspondence exchanged with respect to the contents of the appeal book 3.3.2010 Settlement of appeal book index 6.4.2010 Appeal book prepared by the appellant and submitted to the respondents' solicitors 4.5.2010 Appellant's submissions filed and served 7.5.2010 Respondent's submissions filed and served 11.5.2010 Hearing of Appeal

4 Mr Bourke estimates that at the time of the February offers, the Taxpayers' recoverable costs on a party and party basis would have been of the order of $2,000. He considers that the Commissioner's party and party costs would have significantly exceeded that amount. Mr Bourke estimates that at the time of the April offers the Taxpayers' party and party costs were $16,445, and that the Commissioner's party and party costs would have been approximately the same.

OFFERS TO SETTLE AND INDEMNITY COSTS 5 At all relevant times O 23 of the Rules of Court dealt with offers to settle. Relevantly, O 23 r 11(6) provided: If: (a) an offer is made by a respondent and not accepted by the applicant; and (b) the respondent obtains an order or judgment on the claim to which the offer relates as favourable to the respondent, or more favourable to the respondent, than the terms of the offer; then, unless the Court otherwise orders: (c) the respondent is entitled to an order that the applicant pay the respondent's costs in respect of the claim incurred up to 11 am on the day after the day the offer was made, taxed on a party and party basis; and (d) the respondent is entitled to an order that the applicant pay the respondent's costs in respect of the claim incurred after that time, taxed on an indemnity basis. 6 Order 52A r 2(1) provided: This Order applies to an appeal to or proceedings in the Court under or pursuant to a law of the Commonwealth dealing with the assessment of taxation and to questions referred under such a law to the Court. 7 Order 52A r 3 provided: Subject to this Order and to any law of the Commonwealth, the provisions of this Order and other Orders of these Rules apply, so far as is practicable, to proceedings to which the last preceding rule applies and, for the purposes of this Order and other Orders of these Rules, the applicant and the Commissioner shall be parties to the proceedings. 8 Although the Commissioner submits that for various reasons, he ought not be compelled to pay costs on an indemnity basis, we do not understand him to dispute the taxpayer's submission that on its face, O 52A applied O 23 to proceedings of the present kind. 9 Further, s 64 of the Judiciary Act 1903 (Cth) (the "Judiciary Act") provides: In any suit to which the Commonwealth or a State is a party, the rights of parties shall as nearly as possible be the same, and judgment may be given and costs awarded on either side, as in a suit between subject and subject. 10 We understand it to be well-settled that instrumentalities of the Commonwealth are generally subject to s 64 in the same way as is the Commonwealth itself. See, for example, Pitcher v Federal Capital Commission (1928) 41 CLR 385 at 390-391 and 395-396. See also Maguire v Simpson (1977) 139 CLR 362 at 378-279. We understand the Commissioner to accept this proposition. Even in the absence of O 52A r 3, s 64 would seem to be sufficient authority for applying O 23 in the present case. 11 We should also say something about the decision in Calderbank v Calderbank [1975] 3 All ER 333. The decision establishes that a court may, in considering the award of costs, take into account an offer to compromise the relevant proceedings, even if such offer is not made in accordance with any specific statutory provision or rule. The decision in Calderbank has led to such offers displacing payments into court as the principal method by which one party to litigation may seek to protect itself from exposure to adverse orders for costs where it is willing to settle on reasonable terms, but the other side is not. In modern litigation, there are many cases in which payment into court is inappropriate. Again, s 64 of the Judiciary Act permits the Calderbank approach in considering the appropriate orders as to costs in the present proceedings.

THE COMMISSIONER'S SUBMISSIONS 12 The Commissioner submits that a tax appeal differs significantly from private litigation in that: a taxpayer's objection to an assessment will "invoke questions of consistency and fairness of treatment for all taxpayers in like circumstances"; as a tax debt is, until the relevant assessment is amended, due to the Commonwealth and payable to the Commissioner, he is responsible for recovering it pursuant to the Financial Management and Accountability Act 1997 (Cth); the Commissioner is obliged to manage the affairs of the Australian Taxation Office in a way that promotes the efficient, effective and ethical use of Commonwealth resources; although commercial settlement of litigation involving disputed assessments is within the power of the Commissioner, the general power of administration must be exercised solely for the purpose of the relevant legislation, and in accordance with law and the policies of the Commonwealth; the Commissioner may negotiate a settlement of a tax liability by agreeing with a taxpayer as to the payment of an appropriate amount less than that otherwise due; the Commissioner's Code of Settlement Practice and other policy documents provide guidance to staff of the Australian Taxation Office concerning the settlement of taxation disputes; settlement necessarily involves negotiation as to the proper amount of tax payable or the compromise of a tax liability under an assessment, the Commissioner having no power to waive a tax debt; the Commissioner has prescribed that any payment arrangements included as part of the settlement of a tax dispute must be in accordance with his Receivables Policy; in an appropriate case the Commissioner may make proper use of his resources in making a commercial decision to settle litigation, but where questions of principle governing the administration of the Act are in dispute, the Commissioner must weigh his decision to agree to a commercial settlement against his duty to administer the Act fairly and his accountability to all taxpayers; where disputes as to matters of principle have application beyond the interests of the individual taxpayer, it is incumbent upon the Commissioner to seek clarity in the future administration of the Act; and where an appeal involves matters important to the general administration of an Act, commercial settlement may be contrary to the Commissioner's proper exercise of his general power of administration. 13 The Commissioner submits that in applying O 23, regard must be had to these matters. In summary he submits that: As a general proposition the successful offeror's presumptive entitlement to indemnity costs will be rebutted and the Court should "otherwise order", when the Commissioner as a party to a taxation appeal under O 52A rejects an O 23 offer in circumstances where principles of administration of the Acts are in dispute and the Commissioner as a party properly exercises his general powers of administration in pursuing the Court resolution of those principles for the very purpose of administering the Acts. In that case there is no basis for the Court to award indemnity costs against the Commissioner for his proper exercise of that statutory power; A fortiori where the rejection of the offer was the only decision consistent with the proper exercise of the Commissioner's general powers of administration. 14 The Commissioner also submits that the offers were not "offers to compromise", and that his rejection of them was the only appropriate response. Particulars of that assertion are that: the Taxpayers did not seek to negotiate with the Commissioner as to appropriate assessments; as the Commissioner had consistently maintained that the Taxpayers could not establish that the assessments were excessive, to consent to dismissal of the appeals would have been contrary to the proper exercise of his power; had the Commissioner accepted the offers he would have had to amend his assessments in the absence of any reasonable basis for doing so; the Taxpayers offered no evidence to support the proposition that the offers were capable of acceptance by the Commissioner; the offers of $5,000 and costs of the appeal were "trivial"; and the offers were "more of a procedural move to trigger costs consequences than of a genuine attempt to reach a negotiated settlement". 15 As to the Calderbank offers, the Commissioner submits that failure to accept such offers did not raise any prima facie entitlement to the award of indemnity costs. The question was whether such failure was unreasonable in the circumstances. In this regard, the Commissioner points out that one member of the Court dissented with respect to the question of continuity of the trust estate. 16 Finally, the Commissioner takes issue with the Taxpayers' assertion that if he wished to have a particular question resolved by the Court in the public interest, then the public ought to bear the cost of such determination. He submits that such a submission concerns the general discretion conferred by s 43 of the Federal Court of Australia Act 1976 (Cth) (the "Federal Court Act"), and that the Taxpayers, at the time at which judgment was delivered, did not seek leave to raise such a case. 17 We do not accept that proposition. At the hearing on 21 January this year, frequent reference was made to the "O 23 offer" and to the application of O 23. However reference was also made to the Calderbank decision. Counsel said that the Taxpayers wished to make submissions concerning the O 23 offers. At ts 3 ll 23-27 Counsel said: The onus of - the onus is on the Commissioner under O 23 to establish that his objection was reasonable. In Calderbank, the onus is on the party relying on the Calderbank offer to establish the rejection is unreasonable. So if the Commissioner wants to resist an O 23 application for costs on an indemnity basis, it is his case to make that his rejection was reasonable. 18 However orders were made in the following form: Respondent file and serve any submissions as to costs within seven days. 19 As can be seen, the orders were in general terms. If the Commissioner wished to limit the ambit of any such submissions, he should have done so at that time. We see no reason to limit the Taxpayers to submissions based on O 23.

SUMMARY 20 Four propositions seem to be implicit in the Commissioner's reasons for rejecting the Taxpayers' offers. They are that: the Commissioner is neither permitted nor obliged to take into account, in deciding whether to accept any of the offers, the outcome at first instance and the reasons given for that outcome; if the Commissioner asserts that his decision was taken in accordance with his own policies and procedures, such assertion is an answer to the Taxpayers' applications for costs on an indemnity basis; the Commissioner has, by his prescription of policies and procedures, limited his own power to compromise litigation to which he is a party; and any offer to settle, for the purposes of O 23, must involve the offer of a substantial amount, having regard to the amounts of the assessment in question. 21 None of these assertions is justified.

THE TAXPAYERS' SUBMISSIONS 22 The Taxpayers point out that, pursuant to s 3A of the Taxation Administration Act 1953 (Cth), s 8 of the Income Tax Assessment Act 1936 (Cth) and s 1-7 of the Income Tax Assessment Act 1997 (Cth), the Commissioner has the general administration of those Acts. The breadth of the power so conferred has been long recognized. In Precision Pools Pty Ltd v Commissioner of Taxation (1992) 37 FCR 554 at 566-7, Spender J said: I reject the suggestion that there is no power in the Commissioner to agree to receive moneys on the basis that, if it were to be held subsequently that he had no right to be paid those moneys, the Commissioner would repay them. By s 4 of the [Sales Tax Assessment Act] the Commissioner is given the general administration of that Act. That administration has to be bona fide and for the purposes of the Act, but it is a grant of a wide power and would encompass, for instance, the power to compromise proceedings in which he was a party or to make agreements or arrangements concerning the efficient management of a dispute in which he was involved. 23 We do not understand the Commissioner to assert that such an approach is incorrect. 24 The Taxpayers also point out that if these proceedings were conducted by the Commissioner in the broader public interest, one might have expected that he would pay their costs in any event, or at least that he would seek no order as to costs against them. It seems that on 15 May 2007 the Commissioner expressly refused public funding to the Taxpayers on the basis that the outcome of the proceedings would "not clarify a contentious area of taxation law". 25 The Taxpayers also reject the proposition that the Commissioner can hide behind his own policies and procedures or the public interest.

THE COMMISSIONER AS A LITIGANT 26 In considering this matter, we note the observations of the majority (McHugh, Gummow, Callinan and Heydon JJ) in Australian Communication Exchange Ltd v Deputy Commissioner of Taxation (2003) 201 ALR 271 at 281 where their Honours observed, in connection with an appeal against the Commissioner's disallowance of an objection, that: This remains civil litigation between parties who have identified the issues upon which they are joined. 27 That the Commissioner must discharge his duties in accordance with law is beyond doubt. That he should do so in a way which is transparent and consistent is also beyond doubt. There can be no challenge to the appropriateness of his giving directions to his staff as to the ways in which they should address issues which arise in the administration of the various acts of which he has the administration. We do not reject out of hand the proposition that policies and procedures prescribed for use in the Australian Taxation Office may, in an appropriate case, inform any exercise by the Court of its discretion as to costs, whether that be the general discretion under s 43 of the Federal Court Act or that conferred by O 23 of the Rules of Court. 28 It does not follow that the Commissioner may, simply by referring to such policies and procedures, escape the Court's scrutiny of his conduct of litigation, including his conduct in refusing to accept offers of settlement. Once the Court's jurisdiction is engaged the Commissioner becomes a litigant, subject to s 64 of the Judiciary Act, the provisions of the Federal Court Act and the Rules. His conduct is to be judged by reference to all relevant circumstances including, in an appropriate case, his policies and procedures. We accept that in an appropriate case, the public interest may be better served by having the Court decide a case which has wider ramifications, rather than settling it upon the basis of purely commercial considerations. Despite the Commissioner's frequent references to this proposition, it seems not to have applied in the present case. His response to the Taxpayers' request for funding suggests otherwise. 29 We accept that the Commissioner was obliged to deal with the appeals transparently and in accordance with general practice. It does not follow that he was entitled to persevere in the prosecution of the appeals in the face of reasonable offers of settlement. The decision at first instance involved substantial questions of fact, the resolution of which involved the credibility of witnesses. In those circumstances the Commissioner faced substantial problems in any appeal. He should have taken those problems into account in the course of considering the Taxpayers' offers. There is no evidence that he did so. 30 As we have said, in considering the Commissioner's conduct, it may well be appropriate to take into account any relevant policies or procedures. However he has not identified any particular aspect of his policies and procedures as relevant for present purposes. Rather, he impliedly asserts that the Court should simply accept that he properly decided that it was inappropriate to accept any of those offers, on the basis of his policies and procedures, without any real explanation as to why that was the case. 31 To the extent that any particular point was made concerning the offers, it was that they were not really attempts to negotiate. The submission seems to depend upon considerations of the kind addressed by the Full Court in Sagacious Legal Pty Ltd v Westfarmers General Insurance Ltd [2011] FCAFC 53. The case deals with the proposition that in some circumstances, an "offer" may properly be characterized as "in substance a tactical offer aimed to put pressure on the appellant without offering any true compromise", and that such an offer should not be treated as being an offer for the purposes of either O 23 or a Calderbank order. We have difficulty in seeing the validity of such an approach. By definition, the question only arises where an offer turns out to be more favourable to the offeree than is the eventual litigated outcome. Courts expect that parties will make realistic assessments of their prospects and act accordingly. Any offer should be based upon such an assessment and assessed by the offeree on the same basis. If one party makes an assessment which turns out to be accurate, that party should generally have the benefit of O 23, unless some factor points to a contrary outcome. Although, in the case of a Calderbank offer, the focus may be slightly different, that difference will generally be more apparent than real. 32 A negotiation will generally start with an offer. It will only proceed if there is a counter-offer. We see no basis for distinguishing between "tactical" and "real" offers. The Taxpayers were not obliged to establish that the offers were reasonable, or that the Commissioner ought to have accepted one or other of them. We infer from the fact that the ultimate outcomes of the appeals were less favourable to the Commissioner than was any of the offers, that it was unreasonable for him to reject them, at least in the absence of any countervailing consideration. The Commissioner submits that any offer had to be "substantial", presumably in comparison to the relevant assessment. That submission lacks any factual or legal foundation. 33 Two other points require comment. First, the Commissioner submits that something hangs upon the fact that the appeals could only be disposed of by orders of the Court, and that the Commissioner could not be seen to be seeking such orders in view of the position which he had adopted concerning the appeals. This submission assumes that the Commissioner was not obliged to take into account the decision at first instance and, in particular, the adverse findings as to credibility and the findings of fact which he had to displace in order to be successful on appeal. Secondly, he submits that some difficulty arose out of the fact that the assessments stood until he varied them. This submission ignores the fact that the Court had ordered that the objection decisions be set aside and the objections allowed. In those circumstances, subject only to successful appeals, it was for the Commissioner to amend the assessments, not to pretend that they were still valid. 34 A question arises as to which of the offers should be treated as operative for the purposes of O23. We see no reason why the Taxpayers should not have the benefit of the offers made on 12 February 2010. 35 Pursuant to O 23 r 11(6), each Taxpayer is entitled to an order that the Commissioner pay his or her costs of the relevant appeal, incurred up to 11.00 am on 13 February 2010 on a party and party basis. Each taxpayer is also entitled to an order that the Commissioner pay his or her costs in respect of the relevant appeal, incurred after that time, taxed on an indemnity basis. 36 As to the Calderbank offers, it is not necessary that we make any order in relation to them. 37 In the circumstances there will be orders as indicated above. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Dowsett, Edmonds and Gordon.