Deputy Commissioner of Taxation v Zammitt

District Court of NSW|2015-03-10

Judgment

On 31 August 2012 I gave judgment in these proceedings (see Deputy Commissioner of Taxation v Zammitt [2012] NSWDC 135) ordering that the Deputy Commissioner of Taxation's claim be dismissed with costs. On 4 April 2014 the New South Wales Court of Appeal upheld an appeal by the Deputy Commissioner (see Deputy Commissioner of Taxation v Zammitt [2014] NSWCA 104) and made the following orders: 1. Appeal allowed. 2. Set aside the orders made by his Honour Judge Peter [sic, properly Philip] Taylor SC on 31 August 2012. 3. Judgment for the appellant in the sum of $365,066.49. 4. Remit to his Honour Judge Peter [sic] Taylor SC for determination the question of interest on the judgment sum as well as the costs of the proceedings at first instance. 5. Each party to pay its and his own costs of the appeal.
Notwithstanding the error in my name, the content of orders (2) and (4) clearly show an intention that the matter be remitted to the primary judge in respect to interest and costs. That is the subject of this hearing.
In my earlier decision, I made comments in respect of the appropriate orders for interest and costs in the event that I was mistaken as to the success of the Deputy Commissioner, and concluded (at [156]): "For these reasons, were the plaintiff to succeed, I would be minded to find judgment for the Deputy Commissioner in the sum of the debt, being $365,066.49, with no interest to run until 29 November 2011 and order that the Deputy Commissioner pay Mr Zammitt's costs up to 29 November 2011. An order in favour of the Deputy Commissioner for costs after 29 November 2011 may be appropriate, although that would involve consideration of the impact of the adjournment sought on 3 May 2012 and late evidence tendered by the Deputy Commissioner."
The Court of Appeal found that I was mistaken on one of the primary issues but made no comment regarding interest, costs or the comments I had made regarding interest and costs.

INTEREST

The judgment sum awarded by the Court of Appeal in order (3) above did not include any interest.
The purpose of interest is to ensure that the successful party is properly compensated for the loss it has suffered. It will ordinarily be a means of compensating the delay in a party receiving monies owed.
Awarding interest to the Deputy Commissioner is complicated by two factors. First, the moneys did not become recoverable until the passage of retrospective legislation enacted on 29 November 2011. Until that date, as the Deputy Commissioner accepts, there was no debt owing by Mr Zammitt in that there was a statutory bar on recovery in accordance with the decision in Soong v Deputy Commissioner of Taxation (2011) 278 ALR 538. After 29 November 2011, the effect of Schedule 7 of the Tax Laws Amendment (2011 Measures No. 7) Act 2011 (Cth) ("Sch 7") was to create a recoverable debt by validating a previously invalid director penalty notice issued on 27 November 2009.
A valid director penalty notice issued on 27 November 2009 could create a recoverable debt after the expiration of 14 days, namely, on 12 December 2009.
Secondly, the Deputy Commissioner has waived the interest for the period 18 April 2011 until 14 February 2012.
Mr Zammitt, who was self‑represented, opposes interest being awarded principally on the basis that the retrospective legislation was unjust. This asserted basis may be correct but I do not see it as precluding adverse costs orders in circumstances where Mr Zammitt proceeds unsuccessfully to defend proceedings following the passage of that legislation. There does not seem to me to be any reason why interest is not payable from 14 February 2012, the date concluding the period for which interest was waived, a date almost three months after the retrospective legislation was passed. I propose to allow interest for that period.
The remaining question is whether interest should be awarded for the period from 12 December 2009 until the start of the waiver period on 18 April 2011 ("the initial period"). That there was no debt recoverable from Mr Zammitt during this period speaks against interest. But Sch 7 created a recoverable debt arising from events in December 2009. The Deputy Commissioner submits that I am not compelled by Sch 7 to award interest from the earlier date but that I have a discretion as to the amount of interest to be awarded which is to be exercised according to the principle that interest should fairly compensate the Deputy Commissioner for the delay in payment.
The decision in Deputy Commissioner of Taxation v Meredith [2007] NSWCA 354 (at [75]) determined that the event of sending a director penalty notice by post constituted the giving of notice under the Income Tax Assessment Act 1936 (Cth). This may have led some, including the Deputy Commissioner, to believe that the director penalty notice issued to Mr Zammitt was valid at the time it was issued. The decision in Soong on 25 February 2011, which overruled Meredith, corrected this mistaken belief. The Deputy Commissioner indicated that his claim for interest in the period after the decision in Soong, when the law was clear, was weaker than the claim for interest before that decision. But the awarding of interest, in my view, does not depend upon the reasonableness of the Deputy Commissioner's conduct in pursuing the claim during that period when the notice remained invalid.
In overruling Meredith, the decision in Soong did not prospectively change the law. It declared what the law always was. In Ha v The State of New South Wales (1997) 189 CLR 465; [1997] HCA 34, Brennan CJ, McHugh, Gummow and Kirby JJ started at 503 (agreed to by Dawson, Toohey and Gaudron JJ at 515): "The Court was invited, if it should come to that conclusion, to overrule the franchise cases prospectively, leaving the authority of those cases unaffected for a period of twelve months. This Court has no power to overrule cases prospectively. A hallmark of the judicial process has long been the making of binding declarations of rights and obligations arising from the operation of the law upon past events or conduct (148). The adjudication of existing rights and obligations as distinct from the creation of rights and obligations distinguishes the judicial power from non-judicial power (149). Prospective overruling is thus inconsistent with judicial power on the simple ground that the new regime that would be ushered in when the overruling took effect would alter existing rights and obligations. If an earlier case is erroneous and it is necessary to overrule it, it would be a perversion of judicial power to maintain in force that which is acknowledged not to be the law."
This passage found agreement with the other members of the Court, Dawson, Toohey and Gaudron JJ, at 515. See also Residual Assco Group v Spalvins [2000] HCA 33 at [59], cf PGA v R [2012] HCA 21 at [192]-[193].
The awarding of interest either before or after the decision in Soong (but before the retrospective legislation) is afflicted with the difficulty that the interest relates to a period where the proceedings, as the law then stood (whether revealed or not) were destined to be lost by the Deputy Commissioner.
The real question is whether Sch 7 not only rendered the debt recoverable, but also necessarily implied that interest should be awarded from about 14 days after the date of the invalid but subsequently validated notice.
In my view, the awarding of interest should, in the absence of a contrary provision, depend on matters of substance rather than form, on the historical fact of whether the debt was recoverable rather than the statutory fiction that the debt was deemed on 29 November 2011 to be recoverable pursuant to a valid director penalty notice issued in November 2009.
Before the enactment of Sch 7 on 29 November 2011 recovery of any liability was statutorily barred. Until that date interest could not properly be avoided by early payment since no debt was properly payable. This suggests that the Deputy Commissioner should not be awarded interest for that period. I am not persuaded that Sch 7 requires me to ignore this historical fact.
Further, I do not think I should enlarge the retrospectivity of Sch 7 beyond that which is compelled by its terms. As was stated by Hill J in Boral Windows v Industry Research and Development Board (1998) 83 FCR 215 at 221: "Retrospective legislation is somewhat distasteful. Retrospective legislation which takes away accrued rights is even more so. A construction not retrospective and a construction that does not operate in respect to vested rights will always be preferred if open."
This principle has some application to the question of whether the undoubtedly retrospective provision of Sch 7 should carry with it the retrospective accrual of an interest entitlement, when the alternative construction is open.
Accordingly, I do not read Sch 7 as requiring payment of interest for the initial period. Schedule 7 does not require that for the purposes of interest (and not merely for "the purpose of former s 220AOE", see Sch 7, item 1(2)) the debt was deemed to be recoverable at the earlier date. For this reason, interest will be awarded from 12 February 2012 only.
I note that interest on the principal debt from the date of the Court of Appeal judgment will be payable in accordance with the provisions governing post‑judgment interest. The Deputy Commissioner does not seek interest on any amount of interest awarded for the period from the date of the Court of Appeal judgment until today. Thus the relevant amount of pre‑judgment interest at the prescribed rates on the sum of $365,066.49 from 14 February 2012 until 4 April 2014 totals $56,326.45, according to the following table: Start Date End Date Days Rate Amount Per Day ($) Total (%) ($) 14/2/12 30/6/12 138 8.25 82.2896 11,355.96 1/7/12 31/12/12 184 7.5 74.8087 13,764.80 1/1/13 30/6/13 181 7 70.0128 12,672.31 1/7/13 31/12/13 184 6.75 67.5123 12,422.26 1/1/14 4/4/14 94 6.5 65.0118 6,111.11 Total 56,326.45

COSTS

The Deputy Commissioner seeks his costs for the proceedings on the basis that costs should follow the event. The issues that arise in relation to costs are whether this was a test case, what the impact of retrospective legislation is and what is the impact of Mr Zammitt having advanced other unsuccessful grounds, namely, the effect of the transitional provisions.
First, as to the test case issue, the Deputy Commissioner submits that although the decision in this case has a wider application, this was not apparent at the commencement of the hearing. Mr Zammitt did not challenge this proposition.
In some circumstances litigation impacting on a significant number of members of the public might provide an exception to the usual rule that costs follow the event. See Oshlack v Richmond River Council (1998) 193 CLR 72. This exception has not been widely applied, see, for example, Friends of Hinchinbrook Society Inc v Minister for the Environment (No 5) (1998) 83 FCR 304, Physical Disability Council of NSW v Sydney City Council [1999] FCA 815 but compare Ruddock v Vadarlis (No 2) (2001) 115 FCR 229.
So far as Mr Zammitt was concerned proceedings were principally concerned with whether he could resist the monetary claim of the Deputy Commissioner. That the case may have had a wider application than merely Mr Zammitt's debt does not alter the principally commercial purpose of the dispute. The wider application is not sufficient to persuade me that Mr Zammitt should bear none of the costs of the proceedings.
I note that it was common ground that, notwithstanding the Court of Appeal's orders, Mr Zammitt's costs on the appeal were reimbursed by the Deputy Commissioner.
The second issue concerns the retrospective nature of the legislation. As I indicated in the previous judgment, the passage of retrospective legislation raises the prospect that costs prior to the enactment of the legislation ("the first set of costs") might be in a different category from those incurred thereafter.
The first set of costs was incurred by the Deputy Commissioner in proceedings destined to fail without the retrospective statutory change in the law. The latter set of costs was incurred in proceedings destined to succeed. The impact of retrospective legislation on pending proceedings is a relevant factor to consider in the discretion on costs, see Bawn Pty Ltd v Metropolitan Meat Industry Board (1970) 92 WN (NSW) 823 at 842, TJM Products Pty Ltd v Industry Research and Development Board (1998) 83 FCR 379 at 389G-390A.
Thirdly, the Deputy Commissioner raised the circumstance that Mr Zammitt maintained an unsuccessful argument, namely, that based on the transitional provisions. That unsuccessful argument was largely unrelated to the retrospective legislation in Sch 7. This fact, although correct, is not of any significance. Mr Zammitt would have been successful in the proceedings had Sch 7 not been enacted.
Further, the transitional provisions argument was not raised by Mr Zammitt until the hearing, well after the enactment of Sch 7 on 29 November 2007. Accordingly, it seems only to be relevant to the costs in the later period when the claim by the Deputy Commissioner for costs is stronger.
The Deputy Commissioner also submitted that I did not have sufficient basis to find that "the DCT misled the defendant". That quotation from the Commissioner's submissions does not accurately state my findings in the earlier decision. Counsel for the Deputy Commissioner before me accepted that the following submission was made: "Probably correct that the Deputy Commissioner anticipated if the special leave application wasn't successful, amending legislation would be required but I can't say whether or not I made that submission."
The earlier judgment stated at [148] that: "the Deputy Commissioner appears to have been aware of the prospect of utilizing retrospective legislation to turn Mr Zammitt's certain success in the proceedings into likely failure" and made reference to the above quoted submission of counsel. This stated finding is founded upon the concession of counsel.
The earlier judgment also stated at [155] that "the defendant was apparently misled about the prejudice he might suffer by not obtaining an earlier hearing date."
This finding seems justified in circumstances where Mr Zammitt was unaware of the proposed retrospective legislation before it was enacted, and no reason to explain his consent to the delay if he was.
Whether these findings I made support the finding asserted by the Deputy Commissioner that I did not make does not need to be determined, as it is not the basis of the costs order I make.
Finally, I do not propose to diminish the costs order in favour of the Deputy Commissioner after 29 November 2011 on account of what may have occurred on 3 May 2012, particularly since any wasted costs on that day appear to be at least equally attributable to the late raising of arguments by Mr Zammitt. Mr Zammitt does not assert that any special costs order should result from the conduct at the hearing.
In my view, the just order is to award Mr Zammitt his costs for the period up to the enactment of the retrospective legislation during which his accrued rights would have resulted in his success in the proceedings. Thereafter, his defence became deficient because of Sch 7 and his pursuit of that defence should be at the usual peril of an adverse costs order.

ORDERS

Accordingly, the orders of the Court are: 1. Judgment in favour of the plaintiff in the sum of $56,326.45 in respect of prejudgment interest on the principal sum of $365,066.49 from 14 February 2012 to 4 April 2014. 2. Order that the defendant pay the costs of the plaintiff of the proceedings in this Court from 29 November 2011, including the costs of the remitted proceedings; and that the plaintiff pay the defendant's costs of the proceedings up to and including 29 November 2011.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 17 April 2015

Measures No. 7) Act 2011(Cth)

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