REASONS FOR JUDGMENT
1 This matter was determined by the Court on 31 July 2015: Davies v Deputy Commissioner of Taxation [2015] FCA 773. There remains the issue of costs and the form of the orders. The parties agree that the following orders should be made:
- The objection dated 3 December 2012 to the amended assessments for the 2010 and 2011 income years issued on 21 October 2013, the assessment issued for the 2012 income year on 16 July 2013, and the penalty assessments for the 2010 and 2011 income years issued on 21 October 2013, is allowed in full.
- The amended assessment and the penalty assessment for the 2010 income year issued on 21 October 2013 are set aside.
- The amended assessment and the penalty assessment for the 2011 income year issued on 21 October 2013 are set aside.
- The assessment for the 2012 income year issued on 16 July 2013 is set aside.
- The respondent pay the applicant's costs from 11am on 27 May 2015 on the indemnity basis.
2 Those orders will be made. The parties differ over the costs incurred prior to 11am on 27 May 2015. Mr Davies says that the ordinary rule should be applied and he should receive all of his costs on a party-party basis. The Deputy Commissioner says that he should only receive 30% of his costs or, failing that, he should not receive his costs of preparing certain affidavits.
3 The parties' agreement on the issue of indemnity costs arises from an offer made on 25 May 2015 under Pt 25 of the Federal Court Rules 2011 (Cth). Since this is not in dispute I mention it only for the sake of completeness.
4 The basis for the Deputy Commissioner's contention that he should pay only 30% of Mr Davies' costs prior to 11am on 27 May 2015 is that there were two main issues in the case and he only lost one of them; further, that the issue upon which he prevailed occupied most of the preparatory work that needed to be carried out to that point.
5 The power of the Court under s 43 of the Federal Court of Australia Act 1976 (Cth) to apportion costs on an issue by issue basis is not in doubt. The basic question is one of fairness: Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (No 2) [2008] FCAFC 107 at [5].
6 There were two issues in the instant case:
(a) the operation of s 83A-15 of the Income Tax (Transitional Provisions) Act 1997 (Cth); and
(b) if that claim did not succeed, a claim that Div 13A of the Income Tax Assessment Act 1936 (Cth), prior to its amendment, applied by reason of a promissory estoppel that took the case outside Fowler v Federal Commissioner of Taxation (2013) 212 FCR 149 ('Fowler').
7 These were very different debates. The first was concerned with an analysis of the rights generated by the deed of 27 April 2009 and how it interacted with s 83A-15. This was essentially a legal argument.
8 The second argument involved an attempt by Mr Davies to prove that by reason of the conduct of Whitehaven's directors they had become bound to use their voting rights arising from their position as shareholders to procure passage of a resolution approving his shares and options package at a general meeting. If accepted it meant that whilst Whitehaven was only bound under the deed to put the resolution to a general meeting, the directors were obliged to vote in favour of that resolution. When combined with Mr Davies' additional allegation that the directors controlled a majority of the shares, this formed the foundation for the argument that he had an enforceable right to have the shares and options issued to him. This was said to take the matter outside Fowler where the rights were not enforceable to that extent.
9 This claim failed for two reasons. First, Mr Davies was aware from 25 March 2009, before the deed was executed, that the Whitehaven directors did not control a majority of the shares so that even if the alleged promissory estoppel arose, no right arose because the outcome of the meeting was not a fait accompli. Secondly, there was no conduct giving rise to the estoppel.
10 This debate involved a good deal of evidence from Mr Davies' side of the ledger. Affidavits from eight witnesses were prepared which sought to detail the relationship between the directors and Mr Davies and, in fine detail, the negotiations which took place in the lead up to the Board's decision to offer Mr Davies the shares and options package.
11 On the other hand, whilst this involved a reasonably ample factual canvas, the Deputy Commissioner did not really seek to respond to it, other than to point out (correctly) that it did not work, even on its own terms.
12 The Deputy Commissioner seeks, in effect, that he be relieved of 70% of Mr Davies' costs prior to 27 May 2015 on the basis that 70% of the work done by Mr Davies' solicitors was devoted to, or should be taken to have been devoted to, the estoppel issue. Alternatively, he submitted that I should disallow the costs of the affidavits.
13 For Mr Davies it was submitted that:
(a) the promissory estoppel argument arose out of a common substratum of fact;
(b) the decision of Sundberg J in Orica Ltd v Commissioner of Taxation (No 2) [2010] FCA 336 illustrated that in such cases only a minimal reduction would be warranted; and
(c) there was a general practice, particularly in tax appeals of awarding costs in favour of a taxpayer which had wholly succeeded.
14 I do not think (a) and (b) assist because I do not accept that the two arguments arose out of the same factual substratum. As I have indicated above, the factual substratum for the first argument largely consisted of the terms of the deed whereas the second argument involved an analysis of the whole of the negotiating process. As to (c), Mr Davies submitted that Bondi Beachside Pty Ltd v Chief Commissioner of State Revenue (No 2) [2014] NSWCA 128 and Oil Basins Ltd v Bass Strait Oil Co (No 2) [2012] FCA 1197 were examples of cases where taxpayers had been awarded all of their costs even though their success had been only partial. Indeed, in the former case the taxpayer had received all of its costs even though it had prevailed on an argument not raised in the Court below.
15 In neither of those cases was there a clear distinction, in terms of the evidence put together for the hearing, between the issues. In Oil Basins Gordon J observed at [5]:
'5 In the circumstances of this case, BAS should be ordered to pay OBL's costs of and incidental to the proceedings. OBL was successful in its primary claim. The substantive issue that arose for determination in that primary claim involved a breach of the ASX Listing Rules by BAS, a publicly listed company. The other issues raised in the proceeding added to the length and cost of the proceeding. However, this is not a case where apportionment of costs by issue is justified. The additional cost, time and complexity raised by those other issues were not large. The hearing took just one day. And, as OBL submitted: (1) a significant part of the evidence relevant to at least some of those other issues was relevant to the hearing and determination of OBL's primary claim of contravention of the ASX Listing Rules; and (2) important aspects of BAS' contentions in relation to those other issues were rejected by the Court: see [45]-[54] and [72]-[75] of the Substantive Decision.'
16 And in Bondi Beachside Ward JA (for the Court) said at [29]:
'29. The general position where an appellant succeeds on appeal is, as recognised by the Chief Commissioner, that the appellant will recover its costs both of the appeal and of the proceedings below. Although the fact that the appellant succeeds on a point not raised below may in appropriate cases lead to a departure from ordinary order, this will not necessarily be the case. In circumstances where the appeal turned on issues of statutory construction and the new argument raised was one (at least in its alternative iteration) broadly connected with the non-contractual forbearance argument run in the proceedings below, this is not an appropriate matter in which to depart from the usual order as to costs.'
17 That is not this case. Rather this is a case where some apportionment should take place. My reasons for taking this course relate to the clear distinction which exists between the issues from a factual perspective. I also take into account, in light of modern provisions such as s 37M of the Federal Court of Australia Act 1976 (Cth) which exhort the Court to facilitate the prompt and efficient dispatch of business, the fact that the argument always appeared unable to succeed if the directors did not control a majority of the shares. I do not think it would be to do the parties a favour to award costs by reference to the affidavits themselves which might just engender a protracted process of taxation. Rather, it seems to me better to proceed on the basis that I should reduce the recoverable amount by a percentage. Of course, this sort of process is not a science. It seems to me that prior to 27 May 2015 Mr Davies' solicitors' work included:
the preparation of all of the affidavits;
research and advice into the case;
conferences;
correspondence;
meetings; and
preparation of court documents and appeal papers.
18 None of this, of course, includes the period after 27 May 2015 when, I imagine, much of the preparation for the trial was done. Taking it all into account, it seems to me that a reduction of 40% is warranted in the earlier period. I will therefore make an order 6: