Donoghue v Commissioner of Taxation

1. On or before close of business on Wednesday, 4 April 2018, the applicant give security for the respondent's costs in the sum of $10,000 by payment into court or by one or more bank guarantees or in a form otherwise acceptable to the Registrar.
2. Pending the giving of such security, all further proceedings herein be stayed.
3. In default of the provision of such security, the respondent be at liberty to apply for the dismissal of the proceedings.
4. The costs of and incidental to the security for costs application be costs in the proceedings.
5. The Registrar forthwith notify the applicant, at his service address in Australia and via email, a copy of the orders made today. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

LOGAN J: 1 Much, and perhaps, with respect, too much, has been written in respect of the ordering of security for costs. I make that observation because at the heart of any such application is a discretion which must be exercised judicially in the particular circumstances of a given case. There is always a danger in relation to a discretion cast, in terms limited only by the text of the statutory provision and the subject matter, scope and purpose of the Act concerned, of elevating particular outcomes on particular facts into principles governing the exercise of a discretion granted in general terms. For reasons which I shall explain shortly, that particular point is one for which it is possible to find authority, both in the original jurisdiction of this Court, as well as at intermediate appellant level. 2 By s 56 of the Federal Court of Australia Act 1976 (Cth) (Act), it is provided: Security (1) The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her. (2) The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs. (3) The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given. (4) If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed. (5) This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security. Also relevant, and invoked specifically by the Commissioner of Taxation (the Commissioner) who is the respondent in the taxation appeal and the applicant for security, is r 19.01 of the Federal Court Rules 2011 (Cth), which provides: 19.01 Application for an order for security of costs (1) A respondent may apply to the Court for an order: (a) that an applicant give security for costs and for the manner, time and terms for the giving of the security; and (b) that the applicant's proceeding be stayed until security is given; and (c) that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed. (2) An application under subrule (1) must be accompanied by an affidavit stating the facts on which the order for security of costs is sought. (3) The respondent's affidavit should state the following: (a) whether there is reason to believe that the applicant will be unable to pay the respondent's costs if so ordered; (b) whether the applicant is ordinarily resident outside Australia; (c) whether the applicant is suing for someone else's benefit; (d) whether the applicant is impecunious; (e) any other relevant matter. (4) In this rule: applicant includes a cross-claimant. respondent includes a cross-respondent. 3 The background to this application is as follows. 4 On 21 December 2011, Mr Donoghue was issued with notices of assessment in respect of both income tax and related penalties by the Commissioner for the income years ending 30 June 2005 to 30 June 2007 (inclusive). A very large sum of tax, Medicare levy and penalties in total comprises the assessed liability. In respect of the 2005 income year, the total is $10,487,412.09. In respect of the 2006 year, the sum is $3,439,790.04, and in respect of the 2007 year, the sum is $3,072,561.14. To these sums, the statutory general interest charged would have to be added in terms of present statutory indebtedness. On 17 February 2012, Mr Donoghue lodged objections against these assessments. On 19 April 2013, those objections were disallowed. Mr Donoghue thereafter appealed against the resultant appealable objection decision. 5 At the same time Mr Donoghue sought in this Court the judicial review of the assessing decisions on the basis that the assessments concerned were unlawful. That proposition had particular attraction to me, Donoghue v Federal Commissioner of Taxation (2015) 100 ATR 893, but not to the Full Court, Federal Commissioner of Taxation v Donoghue (2015) 237 FCR 316. A subsequent application by Mr Donoghue for special leave to appeal to the High Court was dismissed. Thereafter, the taxation appeal, which had been dormant pending the outcome of the judicial review proceeding, was re-enlivened. 6 The hearing of the taxation appeal has been delayed by a grave illness with which, unfortunately, Mr Donoghue has been afflicted. It is now though at an advanced stage towards the hearing of that appeal on the merits. A fortnight in June this year has been set aside for that hearing with the dates for the hearing having been recently notified to the parties by the registrar. 7 Evidence in respect of the hearing has been filed. In effect, subject to the need for consideration of the reception of Mr Donoghue's evidence by video link from abroad, the case is ready for trial. 8 At the heart of the taxation appeal lies what is, par excellence, a question of fact. That is whether in the income years in question Mr Donoghue was a resident for income tax purposes in Australia? In that field too, there is a risk of elevating outcomes on particular facts into principles of law. That is because it is well-settled that, as used in our income legislation, the word "reside" carries its ordinary meaning and entails consideration of, "Where a man has his settled or usual abode and if that is ascertained he is not the less resident there because from time to time he leaves it for the purpose of business or pleasure." Levene v Inland Revenue Commissioners (1928) AC 217 per Viscount Cave LC, a passage referred to with express approval in Federal Commissioner of Taxation v Miller (1946) 73 CLR 93. 9 Rule 19.01(3) requires that an affidavit in support of an application for security for costs by a respondent to a proceeding should state a number of matters. These are matters which, in a non-exhaustive way, are relevant to the determination of such an application. The affidavits relied upon by the Commissioner do not, in terms, state that Mr Donoghue is ordinarily resident outside Australia, but that is most emphatically one basis upon which the Commissioner seeks the ordering of security. In any event, a statement that a person is ordinarily a resident outside Australia is not by itself conclusory. It would always be necessary in the absence of admission to have some facts by reference to which a conclusion as to ordinary residence might be reached. In reaching that conclusion, considerations very similar to those which I have described as being at the heart of the taxation appeal would arise for consideration. 10 There is a certain irony in the Commissioner's reliance upon acceptance that Mr Donoghue is ordinarily resident outside Australia in that were that conclusion to be reached in respect of the income years in question, the assessments concerned would have to be set aside. Of course, the position more than a decade ago is in no way determinative of the present position, but it is nonetheless somewhat ironic. 11 However that may be, the Commissioner's material is not devoid of evidence on the subject of where Mr Donoghue should be regarded as presently ordinarily resident. 12 Mr Donoghue chose not to seek to appear today, either by counsel, solicitor or in person from abroad. The Commissioner though, with the consummate fairness only to be expected of the Commonwealth's chief revenue officer, included as an annexure to one of Mr Hanson's affidavits a statutory declaration made by Mr Donoghue on 2 February 2017. On its face, that declaration was made in London. It records that Mr Donoghue is of "Pinar Alto Paseos de Pinchincha, Etapa 9 Casa #66, Quito, Pinchincha, Ecuador." 13 Ever since Mr Donoghue withdrew instructions from his former solicitors, he has been participating at interlocutory directions hearings by telephone from London. It is there that he has been receiving, and is yet further to receive, medical treatment. 14 Some time ago, but while the hearing of the appeal was pending, Mr Donoghue was granted by the Commissioner a departure authorisation certificate which authorised his lawful departure from Australia, notwithstanding the existence of a departure prohibition order made on the strength of the assessments in question. Against this background, it appears to me that for the purposes of the present proceeding. 15 Mr Donoghue is ordinarily resident outside Australia. His statutory authorisation to remain outside Australia granted by the departure authorisation certificate expired, I was told in the course of submissions, in August 2017. He has nonetheless chosen to remain outside Australia. That fact rather emphasises why I have found that he is ordinarily resident outside Australia. 16 In Madgwick v Kelly (2013) 212 FCR 1 at [8] (Madgwick), Allsop CJ and Middleton J observed in their joint judgment: The primary judge thereafter framed his consideration of the application by reference to these factors. All these factors were legitimate to consider in an application such as this. Nevertheless, it should not be taken that every case requires an examination of all these factors. Much will depend on the facts of the individual case and, importantly, how the application is argued by the parties. That observation had attraction for Kenny and Edelman JJ in Commissioner of Taxation v Vasiliades (2016) 344 ALR 558 at [91] (Vasiliades), where their Honours stated of it that: Indeed, the Full Court in Madgwick v Kelly effectively approved a multifactorial approach to an exercise of the discretion conferred by s 56 of the Federal Court Act. 17 The observation made in Madgwick and cited with approval in Vasiliades is one reason why I commenced these reasons for judgment with the particular observation I made, but truly the subject of the exercise of a discretion in respect of the ordering of security for costs is no new subject. In King v Commercial Bank of Australia Limited (1920) 28 CLR 289 at [292] Rich J opined as follows in respect of the proper approach to be taken to an application for security for costs: The legislature, however, has left absolute discretion to the court and has done so without prescribing any rules for its exercise. In these circumstances, no rules can be formulated in advance by any judge as to how the discretion shall be exercised. It depends entirely on the circumstances of each particular case. The discretion must, of course, be exercised judicially, which means that in each case the judge has to inquire how, on the whole, justice will best be served. 18 That passage held attraction for Morling J in Barton v Minister for Foreign Affairs (1984) 2 FCR 463 at 470, as it had, in turn, for Brennan J when a judge of the High Court in Lucas v Yorke (1983) 58 ALJR, p 20. 19 There are many factors in this case to consider and they most certainly do not all point one way. I have already referred to Mr Donoghue's present ordinary residence. His ability to reside overseas was, though, facilitated by the Commissioner by the grant of a departure authorisation certificate. That militates somewhat against what is otherwise a circumstance favouring the ordering of security. As against that, and as was highlighted by the Commissioner, Mr Donoghue has chosen to remain overseas after the expiry of the authorisation. 20 The character of the proceeding is also pertinent but hardly determinative. In character, though the proceeding is one brought by Mr Donoghue as applicant, its substance is defensive. By that I mean that, by statute, the assessments concerned created a debt due to the Commonwealth. Mr Donoghue has challenged that indebtedness via his taxation appeal. The right to recourse to an exercise of judicial power is constitutionally necessary for the validity of the statutory creation of the indebtedness by assessment. It is established that the essentially defensive character of a taxation appeal is not in itself a reason to decline to make an order for security: see Vasiliades at [95] per Kenny and Edelman JJ. It is just another factor to take into account in the exercise of a discretion. 21 Related to those tax appeals and also relevant, in my view, is an assessment, albeit in a necessary preliminary way, of prospects. The evidence comprises an affidavit made by Mr Donoghue and a tender bundle of documents to be tendered by the Commissioner. The Commissioner has also signified a disposition to cross-examine Mr Donoghue on his affidavit. In the income years in question, Mr Donoghue spent wildly disparate lengths of time in Australia, from as little as 63 days in one income year to as many as 184 in another. At present, the most which can be said, in my view, is that Mr Donoghue's basis for challenging the assessments is not frivolous. Much in the end may depend not just upon inferences to draw from the documents in the Commissioner's tender bundle but also upon Mr Donoghue's answers in cross-examination and re-examination and then a consideration of the evidence as a whole. It is certainly possible that Mr Donoghue will not fail in each income year. He, of course, carries the onus of proving the assessments excessive but, as I have said, at the moment, in the discharge of that onus, his case, insofar as it can be discerned from the evidence filed, including that of the Commissioner, could not be classified as frivolous. 22 Impecuniosity is also always a relevant consideration when raised on the facts. It would be a strong thing in the case of an individual ordinarily resident in Australia who has brought a non-frivolous appeal against a taxation assessment to make an order for security for costs which might, at the behest of the Commissioner, have the effect of stifling the exercise of a constitutionally necessary right of recourse to this Court. 23 On the subject of impecuniosity, the statutory declaration to which I have referred yields an uncertain picture. I say that because one of the assets to which Mr Donoghue refers is a 75 per cent shareholding in what apparently is a company by the name of NIC-EC. There is no particularity given as to the worth of that shareholding. As against that, he discloses multi-million-dollar liabilities. Notably, these include a loan from one Nicholas Berrera "in respect of living and operational costs of circa AU$400,000" and a "loan from Alexandra Morgan Donoghue in respect of funding costs for ATO disputes of circa $120,000", presumably Australian. I should also make reference to the, in that list, loan from Nicholas Berrera in respect of funding cost for ATO disputes of circa AU$700,000. 24 Mr Donoghue has, inferentially, been able, since February 2017, to continue to live in London and to meet medical treatment expenses which, having regard to the medical opinions he has earlier filed in this proceeding, must have been substantial. 25 So it appears to me that the loans to which I have referred might be described as "soft" or "benign". More than that it is not possible to tell on the face of the statutory declaration, and one must be careful not to reach any greater or any more definitive conclusion at present as to their character. 26 A conclusion as to impecuniosity is far from certain, even on the balance of probabilities. On the face of the statutory declaration there are substantial debts disclosed, but an apparent source of funds, seemingly at call, at least from Mr Berrera, if not also from Ms Donoghue, whom I infer is his daughter. Mr Donoghue might appear to be impecunious, having regard to the debts listed in that statutory declaration, but whether truly that is the position is moot. 27 The Commissioner advanced a submission in support of his application that Mr Donoghue was taking advantage of the system for the challenging of the assessments. This was put as if there were some pejorative quality in relation to Mr Donoghue's conduct. I am not prepared to draw such an inference. As I have observed, he is exercising a right which is constitutionally necessary for the validity of the foundation of the assessments and his case is not frivolous. Further, whilst on the evidence, he has not shown a disposition readily to communicate with the Commissioner in relation to the regularising of his position in respect of the expired departure authorisation certificate permission, he has, as and when truly necessary, participated in interlocutory directions hearings. A limiting factor in that regard for him has been not just his acting for himself but also the nature of his medical condition and the course of treatment. In that regard, he is, on present materials, to undergo further surgical treatment in the middle of next month, on medical advice. 28 The application is one made at a very late stage in the proceedings. The Commissioner offered, by way of explanation, a reference to a conclusion reached by Edmonds J in Commissioner of Taxation v Donoghue [2015] FCA 337 at [27] in relation to whether a bill of mortgage given by Mr Donoghue's wife, Mrs Sandra Donoghue, as trustee of the Donoghue Family Trust over a property at Hamilton in Brisbane to the Commonwealth secured payment of an obligation to the Commonwealth as represented by the Commissioner or otherwise. The conclusion reached by Edmonds J was that the bill of mortgage did not provide such security. 29 I was informed, and am prepared to accept, that a contrary view as to the efficacy of the bill of mortgage had informed the Commissioner's disposition to grant a departure authorisation certificate. 30 His Honour's judgment was delivered almost two years ago on 2 April 2015, so whatever discomfort the Commissioner received from the view there expressed in relation to the efficacy of the bill of mortgage as security has been long in place, yet that has not motivated, until now, an application for security. 31 Evidence has also been given as to the extent of costs allowed to the Commissioner as a result of the failed judicial review and related appeal proceeding. The Commissioner on 20 October 2017, obtained the benefit of a certificate of taxation in respect of the judicial review and related appeal proceeding in the sum of $272,604.64. Mr Donoghue was sent the certificate by email on 20 December 2017, but has chosen not to make any reply to the Commissioner's solicitor. 32 In respect of the prospective hearing of the taxation appeal, evidence has also been given as to the costs likely to be encountered by the Commissioner. Quite fairly, Mr Hanson, who has provided that evidence and who is by qualification and lengthy experience well qualified to express an opinion in relation to likely costs, has qualified his opinion by sounding a cautionary note as to the impact which might occur in respect of costs, depending on whether or not evidence and, for that matter, participation of Mr Donoghue, by video link were permitted. The long and the short of it, though, is that the estimate, inclusive of outlays, including counsel's fees, is that the Commissioner would encounter likely costs in the sum of $163,300. That, in turn, has informed the Commissioner's seeking of security in the sum of $100,000. 33 Part of Mr Hanson's evidence refers to costs, according to the solicitors' guideline hourly rates in the United Kingdom, which might be encountered by the Commissioner in the event of it being necessary to engage a London agent of the Australian Government Solicitor for the purposes of any reception of evidence by video link from the United Kingdom. For a London-based solicitor, the guideline hourly rate for a solicitor with over four years' experience is, AUD$525, with that for a solicitor for over eight years' experience, AUD$725. 34 Mr Hanson also opines, and I accept, that engagement of a London-based practitioner would require delivery of a brief as well as necessary telephone conferences about the matter, together with costs of their attendance at a video link facility and not less than eight hours per day. He also opines, and I accept, that the preparatory days would involve some six hours of professional time. 35 In summary, then, there are these features: Mr Donoghue is, ordinarily, a resident overseas. That is a factor which tells in favour of the making of an order for security, particularly given that, on the evidence, notably his statutory declaration, he has no assets in Australia. As against that, he is seeking in a non-frivolous way to invoke, defensively, a constitutionally necessary right of challenge to the asserted indebtedness. 36 Mr Donoghue may be impecunious, which would be a factor telling against, in the case of an Australian resident, the ordering of security, particularly in a case like the present, but whether or not truly he is in that position is moot. 37 His residence overseas has occurred with the permission of the very person who seeks security. That might be thought to be telling, perhaps even fatal, to the success of the Commissioner's application. But, as against that, his statutory permission expired in August last year. 38 The application is made at a very late stage, which is a factor which would tell against the ordering of security, particularly in a case which is not frivolous. 39 That is why I observed other factors are not all one way. 40 Though raised by me in the course of submissions, there was no definitive position given as to whether, in the event of success, the Commissioner would be able to enforce in the United Kingdom, much less in Ecuador, a judgment debt in respect of costs. That he may be able so to do is no reason in itself for not ordering security for costs. The same applies in respect of the substantive revenue liability debt. As to that, at common law, an Australian judgment in respect of that liability would have the status of a foreign revenue judgment such that its enforceability abroad may be moot. That, of course, could be the subject of alteration by international agreement and related statutory provision. As I have said, though the subject was raised, it was not definitively answered in submissions. I have not, in the time available, been able to reach any concluded view myself on that subject. 41 In reflecting as to what ought to be done in respect of this application, given the conflicting signals which are sent by the particular facts, and looking at the case as a whole, I have gained some assistance from the approach adopted by Morling J in Barton v Minister for Foreign Affairs, which in turn took up an approach which had commanded itself to Rath J in Connop v Varena Pty Ltd [1994] 1 NSWLR 71 (Connop). 42 In Connop, the plaintiff was ordinarily a resident in New Zealand. There was legislation in force in that country which made it possible to enforce, by registration in that country, a judgment of the Supreme Court of New South Wales. Rath J stated that an order for costs against the plaintiffs might be registered without difficulty in New Zealand, although there might be some delay, inconvenience and expense arising from registration of the judgment. In the result, and taking up in turn an approach much earlier adopted by Jessel MR in Re Percy & Kelly Company (1876) 2 Ch D 531 at 531, Rath J made an order for security for costs, fixing the amount of that security at $750. That apparently was an estimate of the costs of registration and execution in New Zealand of a judgment for costs in the Supreme Court of New South Wales. 43 In turn, in Barton v Minister for Foreign Affairs, Morling J, at [470] and [471] (Barton v Minister for Foreign Affairs), made a like order. The issue in that case related to the loss of Australian citizenship and refusal of an Australian passport, so it was serious, indeed, for Mr Barton. His Honour stated: His apparent impecuniosity is no reason why he should be prevented from pursuing his application. The order which I propose to make will leave the respondent in no worse position than he would be were the applicant to return to Australia and, again, be a resident of this country. His explanation for seeking employment in London is readily explicable in light of the notoriety attaching to his name in Australia. His Honour then made an order providing for an amount estimated by him to be the costs of registering and enforcing a judgment of the Federal Court in the United Kingdom. 44 In my view, were I to order security at this stage in the sum sought by the Commissioner, it may have the effect of stifling Mr Donoghue's challenge to the assessments. As I have observed more than once, that challenge is not frivolous. 45 The position, it seems to me, which does justice both to the Commissioner as well as Mr Donoghue as follows. 46 I cannot exclude the consideration that one reason, not the only one, why Mr Donoghue may not wish to return to Australia is the prospect of a refusal of permission to leave. Another reason for his absence is that his medical condition and related treatment in any event impacted on his ability to travel. 47 So what I propose to do is to make an order which would give the Commissioner a sum, referable to an estimate of the costs either of registering a judgment in the Commissioner's favour in the United Kingdom, or at least exploring, in consultation with reputable practitioners in the United Kingdom, whether such a course was possible. That will put the Commissioner, as far as security provision can, to that in which he would be were Mr Donoghue to be in Australia, fail in his taxation appeal and be subject to an adverse costs order which the Commissioner sought to explore here. 48 That type of approach accords with that of Morling J in Barton v Minister for Foreign Affairs, and, in turn, with that of Rath J in Connop's case. 49 As to what to allow, that particular subject has not, in terms, been addressed in the Commissioner's affidavit material but there is, as I have related, some evidence as to costs charged by solicitors in the United Kingdom. The subject of enforcing in that country a judgment in favour of the Commissioner is as one which is not straightforward. Having regard to the hourly rates and what one might expect would be entailed, both in briefing a solicitor to consider the point, consulting in that regard with such a solicitor from Australia, and either taking steps to secure registration, or at least to advise as to whether that was possible, the view I have reached, perhaps generously, is that the Commissioner ought to be allowed security for costs in the sum of $10,000. 50 I do not consider that a requirement for provision of the security in that sum will stifle the taxation appeal, but it will provide the Commissioner with an amount which at least puts him in a similar position to that in which he would find himself were Mr Donoghue either an ordinary resident in Australia at the moment or, at least, had he returned to Australia after the expiry of the departure authorisation certificate. 51 The reason why I have made an order for the costs of the application to be costs in the proceedings is that, whilst the Commissioner has had partial success, he has not succeeded on his major argument. That particular consideration motivated Morling J in Barton v Minister for Foreign Affairs to make an order in like terms. 52 I further order that the registrar send forthwith to Mr Donoghue, both at his address for service in Australia and his email address, a copy of the order made today. I certify that the preceding fifty-two (52) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan.