Commissioner of Taxation v Hicks

Commissioner of Taxation v Crown Insurance Services Ltd (No 2) [2012] FCAFC 182

Commissioner of Taxation v Hicks [2025] FCAFC 171

Director, Office of the Fair Work Building Industry Inspectorate v Construction, Forestry, Mining and Energy Union (No 2) [2013] FCAFC 34; (2013) 209 FCR 297

Ierna v Commissioner of Taxation [2024] FCA 592

JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 95

Rakman International Pty Ltd v Boss Fire & Safety Pty Ltd [2023] FCAFC 202

Re Wilcox; Ex parte Venture Industries Pty Ltd (1996) 72 FCR 151

Sandoz Pty Ltd v H Lundbeck A/S (No 2) [2021] FCAFC 47

SNA Group Pty Ltd v Commissioner of Taxation (No 2) [2025] FCA 281

Taleb v GM Holden Ltd [2011] FCAFC 168; (2011) 286 ALR 309

Wu v Chu (2025) 312 FCR 89

1. The appellant pay the respondents' costs of the appeal on a party and party basis as agreed or assessed.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

1. On 3 December 2025, this Court dismissed an appeal by the Commissioner of Taxation (the Commissioner), finding that s 45B and Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) did not apply to a capital distribution scheme involving a selective buy-back of a company's shares: Commissioner of Taxation v Hicks [2025] FCAFC 171 (Hicks (No 1)). The parties were invited to file written submissions as to the issue of costs. Subsequently, the successful respondents to the appeal - Messrs Ierna and Hicks, as well as a company controlled by the latter, Hicks Beneficiary Pty Ltd (Hicks Beneficiary) (the taxpayers) - filed submissions seeking orders under r 25.14 of the Federal Court Rules 2011 (Cth) (the Rules) that the Commissioner pay their costs of the appeal on an indemnity basis.
2. For the reasons that follow, the orders sought should not be granted. In short, the taxpayers have failed to discharge their onus of proving that the Commissioner unreasonably failed to accept their offers to settle the proceedings under r 25.14(2). Their alternative submissions under r 25.14(1) and (3) also fail, as neither provision applies in the circumstances of this appeal.
3. Nevertheless, the ordinary rule should apply, and the respondents are entitled to an order that they recover their costs of the appeal on the standard basis.

1. The appeal concerned three separate proceedings between each taxpayer and the Commissioner, which, owing to common facts, were heard together. The taxpayers were jointly represented by the same counsel and firm of solicitors.
2. On 3 October 2024, the taxpayers' solicitors sent the Commissioner three formal offers to settle each of the proceedings (the Offers). It is relevant that the Offers were made after the Commissioner filed the relevant notices of appeal, but prior to the filing of any submissions. In those offers:

(a) Mr Ierna offered to pay $250,000;

(b) Mr Hicks offered to pay $100,000; and

(c) Hicks Beneficiary offered to pay $150,000,

in satisfaction of the Commissioner's claims.

1. Each Offer stipulated that in exchange for those amounts, the Commissioner was to:

(a) withdraw the amended income tax assessments for the 2016 income tax year that were issued to the taxpayers;

(b) remit any interest or penalties applied to the taxpayers as a result of the amended income tax assessments; and

(c) pay the taxpayers' costs of the proceedings.

1. Each Offer was prepared in accordance with the prescribed Form 45 (see r 25.01(1) of the Rules) and expressed to be open for acceptance for 14 days. The Offers also confirmed that the relevant sums would be paid within 28 days of the Commissioner's acceptance.
2. On 15 October 2024, the Commissioner's legal representative rejected the Offers. No explanation for the rejection was given, nor was any counteroffer made.
3. The taxpayers submit that the Commissioner's rejection of the Offers enlivens the Court's discretion under r 25.14 of the Rules to award indemnity costs, in circumstances where the Commissioner's appeal was ultimately dismissed.

1. It is settled in this court and others that standard costs will usually follow the event, subject to the awarding of indemnity costs in exceptional circumstances. As Black CJ explained in Re Wilcox; Ex parte Venture Industries Pty Ltd (1996) 72 FCR 151 at 152:

The circumstances under which indemnity costs will be ordered have been discussed in many cases in this Court and it is well established that the starting point for any consideration of an application for indemnity costs is that in the ordinary case costs will follow the event and the Court will order the unsuccessful party to pay the costs of the successful party, on a party and party basis, a basis which will fall short of complete indemnity. Nevertheless the court has an absolute and unfettered jurisdiction in awarding costs, although that discretion must be exercised judicially. So, indemnity costs may properly be awarded where there is some special or unusual feature in the case justifying the Court exercising its discretion in that way.

1. One such "special or unusual feature" which enlivens the Court's discretion to award indemnity costs is encapsulated by r 25.14 of the Rules, upon which the taxpayers rely:

25.14 Costs where offer not accepted

(1) If an offer is made by a respondent and not accepted by an applicant, and the applicant obtains a judgment that is less favourable than the terms of the offer:

(a) the applicant is not entitled to any costs after 11.00 am on the second business day after the offer was served; and

(b) the respondent is entitled to an order that the applicant pay the respondent's costs after that time on an indemnity basis.

(2) If an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant's proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent's costs:

(a) before 11.00 am on the second business day after the offer was served - on a party and party basis; and

(b) after the time mentioned in paragraph (a) - on an indemnity basis.

(3) If an offer is made by an applicant and not accepted by a respondent, and the applicant obtains a judgment that is more favourable than the terms of the offer, the applicant is entitled to an order that the respondent pay the applicant's costs:

(a) before 11.00 am on the second business day after the offer was served - on a party and party basis; and

(b) after the time mentioned in paragraph (a) - on an indemnity basis.

Note 1: Costs on an indemnity basis is defined in the Dictionary.

Note 2: The Court may make an order inconsistent with these rules - see rule 1.35.

1. It should be noted that, despite being located in Chapter 2 of the Rules (which deals with the original jurisdiction of the Court), it is now accepted that r 25.14 also applies to proceedings in the Court's appellate jurisdiction: Wu v Chu (2025) 312 FCR 89, 95 [22] (Wu v Chu).
2. In essence, the object of r 25.14 is to encourage the early settlement of disputes: JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 95 [23] (JMC). Functionally, it illustrates the prima facie manner in which the Court will exercise its discretionary power under s 43(1) of the Federal Court of Australia Act 1976 (Cth) to award costs: SNA Group Pty Ltd v Commissioner of Taxation (No 2) [2025] FCA 281 [4]. However, the Court may make an order inconsistent with that prima facie position pursuant to r 1.35 of the Rules: see Caporaso Pty Ltd v Mercato Centrale Australia Pty Ltd [2025] FCAFC 29 [21].

The taxpayers' grounds for seeking indemnity costs under r 25.14

1. The taxpayers make three submissions as to their entitlement to an indemnity costs order under r 25.14. Their primary submission is that the Commissioner's rejection of the Offers entitles them to an indemnity costs order pursuant to r 25.14(3). Alternatively, they submit that such orders may be made under r 25.14(1) or (2).

1. Dealing first with the taxpayers' primary submission, r 25.14(3) concerns the rejection by a respondent of an offer to settle made by an applicant (see supra [11]). The obvious initial difficulty for the taxpayers is that they are the respondents to the appeal. In an attempt to circumvent this issue, they sought to position themselves as the "applicants" for the purposes of r 25.14, on the basis that they brought the original application with which the appeal was concerned (and were accordingly the "applicants" before the primary judge).
2. That submission ought to be rejected, as it relies upon an interpretation of r 25.14(3) that is divorced from its context. In simple terms, the point of r 25.14(3) is to provide a prima facie position as to the costs consequences of a responding party failing to accept an offer to settle made by a moving party. Its use of the terms "applicant" and "respondent" is merely a product of its location within Chapter 2 of the Rules, which, as mentioned, concerns the Court's original jurisdiction. Since it is now settled that r 25.14 applies broadly to proceedings in both the original and appellate jurisdictions (see Wu v Chu; supra [12]), those words need to be understood in context, as references to, simply, the moving party and responding party in the relevant proceedings.
3. Moreover, the taxpayers' submission is inconsistent with the accepted view that an appeal is, by its nature, a separate and distinct proceeding from the trial. In Director, Office of the Fair Work Building Industry Inspectorate v Construction, Forestry, Mining and Energy Union (No 2) [2013] FCAFC 34; (2013) 209 FCR 297 at 299 [13] (Director v CFMEU), the Full Court observed that:

[s]ince it involves the exercise of a different jurisdiction (viz original and appellate) an appeal is properly to be seen, in our opinion, as a separate proceeding. Consideration of the origin and nature of appeals leads to the same conclusion. An appeal is, as Lord Westbury LC observed in Attorney-General (UK) v Sillem [1864] EngR 352; (1864) 10 HL Cas 704 at 724; [1864] EngR 352; 11 ER 1200 at 1209, "the right of entering a superior Court, and invoking its aid and interposition to redress the error of the Court below". Were an appeal and its related trial to be seen as but one proceeding then the difference between appellate and original jurisdiction might well become elided: cf: Construction, Forestry, Mining and Energy Union v CSBP Ltd (No 2) (2012) 202 FCR 149 at [9]-[11]. In that case it was held that an appeal proceeding was not a proceeding under the enactment which had conferred original jurisdiction on the trial court but was instead a proceeding under s 24(1) of the Federal Court of Australia Act 1976 (Cth). What is involved in appeal is, therefore, a separate proceeding.

1. This is the context within which r 25.14 should be interpreted and applied. It follows that where an offer is made to settle an appeal, the reference to the "applicant" in r 25.14 should be read as a reference to the appellant, being the moving party in the appeal proceedings.
2. Here, the Offers were made to resolve the appeal, given they (a) were made after the relevant notices of appeal were filed, and (b) bore the court file numbers assigned to the appeal proceedings. Therefore, for the purposes of r 25.14, the Commissioner is the "applicant", and the taxpayers are the "respondents". Rule 25.14(3) therefore has no application to the Offers.

1. The taxpayers' second submission relied upon r 25.14(1), which applies in circumstances where an applicant rejects an offer to settle made by a respondent, and the former obtains a less favourable judgment than the terms of the offer (see supra [11]). However, as the Commissioner correctly submitted, this provision only applies where the applicant has obtained a favourable judgment: Commissioner of Taxation v Crown Insurance Services Ltd (No 2) [2012] FCAFC 182 [29] - [32] (Crown Insurance Services); Sandoz Pty Ltd v H Lundbeck A/S (No 2) [2021] FCAFC 47 [17]. It follows that r 25.14(1) does not apply here, in circumstances where the appeal was dismissed.

1. The issue of indemnity costs, therefore, falls to be determined under r 25.14(2), in respect of which the taxpayers submitted that the Commissioner unreasonably rejected the Offers, and therefore, given the appeal was ultimately dismissed, the Court's discretion to award indemnity costs is enlivened (see supra [11]).
2. For the purposes of demonstrating the unreasonableness of the Commissioner's rejection, the taxpayers have relied solely on the fact that the appeal was dismissed. To that end, the taxpayers referred to Commissioner of Taxation v Clark (No 2) [2011] FCAFC 140; (2011) 197 FCR 251 at 259 [32], where Dowsett, Edmonds and Gordon JJ said:

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.

1. With respect, those obiter remarks - which were made in respect of the former Federal Court Rules 1979 (Cth) O 23 r 11(6) - do not reflect the correct application of r 25.14(2) of the Rules. As the subsequent authorities have made abundantly clear, for the purposes of r 25.14(2), the reasonableness of a refusal to accept an offer to settle is to be determined from the date of rejection, without regard to the ultimate conclusion of the proceedings: Rakman International Pty Ltd v Boss Fire & Safety Pty Ltd [2023] FCAFC 202 [155]. Accordingly, the relevant enquiry is whether, given the information available to the Commissioner, he should have known that his case was likely to fail: Anchorage Capital Partners Pty Ltd v ACPA Pty Ltd [2018] FCAFC 6; (2018) 259 FCR 514, 567 [239].
2. The taxpayers chose not to advance submissions as to what the Commissioner knew or should have known at the relevant time, save only for the fact of the primary judge's decision. That alone is insufficient to establish that the Commissioner should have known his case was likely to fail, particularly in circumstances where the primary judge's decision (a) was the first occasion on which s 45B of the ITAA 1936 had been the subject of judicial consideration (see Ierna v Commissioner of Taxation [2024] FCA 592 [189]), and (b) was, in certain respects, not followed by the Full Court: see, for example, Hicks (No 1) [113] - [117]. The taxpayers have, therefore, failed to discharge their onus of proving that the Commissioner's rejection was unreasonable in the circumstances: see Taleb v GM Holden Ltd [2011] FCAFC 168; (2011) 286 ALR 309, 318 - 319 [49]. Consequently, it is unnecessary to address the submissions offered by the Commissioner as to why it was not unreasonable for him to reject the Offers.

1. In the result, although the taxpayers made an offer to settle the proceedings early, and subsequently obtained a more favourable judgment, they have not established an entitlement to an award of indemnity costs. In this regard, it is important to bear in mind the observations of Lander and Foster JJ in Crown Insurance Services at [29] and [32]:

[29] Rule 25.14(2) is couched in different terms to r 25.14(1), which applies when a respondent has made an offer and the applicant succeeds in the proceeding, but obtains a judgment that is less favourable than the terms of the offer. Rule 25.14(1) does not require an examination as to whether the applicant unreasonably failed to accept the offer as is required in r 25.14(2). The costs consequences, subject of course to the exercise of discretion, follow if the applicant obtains a judgment less favourable than the respondent's offer.

[32] If r 25.14(2) were in similar terms as r 25.14(1), a respondent could put himself or herself at an advantage by filing an offer for $1, and if the applicant's proceeding were dismissed, the respondent could claim to be entitled to costs on an indemnity basis for that offer, which was never a genuine offer to settle the proceeding. That result was recognised, as the Full Court had in Seven Network Ltd v News Ltd, as being an unfair result. Rule 25.14(2) has been drawn so that if the respondent makes an offer of compromise, it has to be an offer that the applicant has unreasonably failed to accept before the respondent can rely upon the offer for obtaining an order for indemnity costs.

1. These remarks make clear the intended application of r 25.14 to respondent offerors. The additional unreasonableness requirement is deliberately imposed to dissuade respondent offerors from making an unreasonably low offer to settle the proceedings merely as a means of securing an entitlement to indemnity costs if the proceedings are ultimately dismissed. That is not to say the taxpayers adopted such an approach here; rather, it is simply to note that, as respondent offerors, they were required to establish that the Commissioner unreasonably rejected their Offers, which they have not done. In those circumstances, indemnity costs orders cannot be made.
2. The taxpayers are therefore entitled only to their costs on the standard party-party basis.

I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Derrington, Feutrill and Hespe.