Findlay v Commissioner of Taxation

REASONS FOR JUDGMENT 1 There are before the Court two appeals against appellable objection decisions brought under s 14ZZ of the Taxation Administration Act 1953 (Cth). The substantive question has now been resolved and the taxpayers have succeeded. However, there remains a difficult issue as to costs. 2 The proceedings arise out of assessments by the Commissioner of each taxpayer, which treated an amount of $34,006 paid to each as not being a bona fide redundancy payment and hence not exempt from assessable income by virtue of ss 27A(19) and 27CB(1)(b)(ii) of the Income Tax Assessment Act 1936 (Cth). The assessments related to the tax year ended 30 June 2000. 3 It is now accepted that the payments were received in the following year, that is the year ended 30 June 2001, and are therefore for that reason not assessable in the year of income, whether or not they are bona fide redundancy payments. An amended assessment has been issued in respect of the 2001 year. I understand that the validity or otherwise of the redundancy payments remains to be resolved. 4 The history of the matter commences with the payment of the two amounts by the employer company to the two taxpayers who were directors of that company. The payments were made by an electronic funds transfer facility on Friday, 30 June 2000. That transfer did not take effect until funds were in the relevant account sufficient to meet it. This did not occur until Monday 3 July. The amount of $34,006 was credited to each account of the taxpayers at the Bank of Melbourne on that day. The ordinary bank statement was in evidence and it shows an entry, "2000, 3 July, deposit R.J. Findlay and Associates, wages deposit $34,006." 5 Tax agents on behalf of the taxpayers lodged in October 2000 an electronic return for the 2000 year which did not disclose this payment. Because the return was lodged electronically, group certificates were not provided. In October 2000, at the Commissioner's request, the taxpayers provided copies of their group certificates for the year which showed the amount of $34,006 as an eligible termination payment. 6 On 4 April 2001 the Commissioner issued notices of assessment for the 2000 year, treating that payment as non-exempt income. On 11 July 2001 the applicants lodged objections. On 26 October 2001 the Commissioner issued notices of a decision disallowing the objection. On 14 December 2001 the taxpayers commenced these proceedings. 7 Various procedural directions were made. On 22 March 2002 the Commissioner sought informal discovery from the applicants. In June 2002 the taxpayers claimed for the first time that the amounts in dispute were derived in the 2001 year. In that month and the following month correspondence passed between the parties concerning the date of the applicants' receipt of the payments. In the course of that correspondence the taxpayers' solicitors sent on 17 June copies of the bank statements already referred to. 8 On 16 July the directions hearing was adjourned to allow the applicants further time to obtain information as to the date of receipt of the payments. On 30 July the Commissioner issued amended assessments for the 2001 year. By letter dated 21 August 2002 the taxpayers' solicitors provided the Commission with further information as to the date of receipt of the payments and offered an undertaking that in any appeal in relation to the 2001 year the taxpayers would not seek to argue that the amounts were derived in the 2000 year. On 23 August the taxpayers' solicitors informed the Commissioner that they would be seeking an order that their appeal be allowed and that costs be awarded in their favour. 9 When the matter came on before me today it became readily apparent that the only matter in dispute was the question of costs. I gave the taxpayers leave, pursuant to s 14ZZO(a) of the Taxation Administration Act, to amend their notices of objection to raise a further ground: "7. Further, the payment was received by me after 30 June 2000 and it is therefore not assessable to me in the year of income." 10 In its unamended form the notice of objection had asserted that the company "paid me an amount of $34,006 as a bona fide redundancy payment". In other words, a positive assertion was made that the payment was made in the 2000 year of income. 11 I accepted from counsel for the taxpayers a motion ore tenus for judgment. This was not opposed by counsel for the Commissioner, on the basis that she reserved her right to argue that costs should be awarded to the Commissioner. 12 It seems to me that the starting point is the proposition that, as a general rule, costs should follow the event. I was referred to the decision of McHugh J in Re Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622, where his Honour said (at 624): "In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually decisions whether or how it will make a costs order." 13 His Honour then goes on to discuss the circumstances which may affect costs when there is no hearing on the merits and says (at 625): "If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceeding." 14 However, it is clear from the context that his Honour was dealing with the position where no determination on the merits had been made. The applicant had challenged a decision of the Minister to refuse a protection visa and before the application was heard the Minister exercised his discretion under s 417 of the Migration Act and granted the visa. So in that case the merits of the applicant's claim as to the lawfulness of the refusal of his application for a protection visa were never considered by the court. 15 In the present case, however, the merits have been before the court. The taxpayers have succeeded on the basis that the 2000 assessments wrongly included the sums in question, since they were not received until the following year. 16 It is clear from the decision of the High Court in Latoudis v Casey (1990) 170 CLR 534, particularly at 543 per Mason CJ and at 566 - 568 per McHugh J, that costs are not awarded by way of punishment of the unsuccessful party. So while I do not think the Commissioner has acted unreasonably, costs are not to be seen as a penalty or sanction against the Commissioner for not succeeding on the merits. 17 I am satisfied it would not be right to make an order in favour of the unsuccessful party, the Commissioner, against the taxpayers. However belatedly the point was raised, the fact remains that the taxpayers have succeeded on the merits on the issue before the Court, namely whether the sum of $34,006 should have been included in their assessments for the 2000 tax year. 18 There remains the question whether the taxpayers, as the successful parties on the merits, should nevertheless be deprived of their costs by reason of some matter in connection with the prosecution of the proceedings. I think there is force in the argument of counsel for the Commissioner that the problem which has led to this litigation arises from matters entirely within the knowledge of the taxpayers. The bank statements clearly show the receipt of the payment in question in the 2001 year. This on the face of it seems a very simple and routine record. It remains a matter of some puzzlement to me as to why the factual inquiry became as protracted as it did. Had the correct date of the payment been disclosed in the ordinary way, this litigation in relation to the 2000 tax year would never have occurred. 19 So I think this is an error in connection with the prosecution of this proceeding and I think it is a sufficient reason for not making an order in favour of the taxpayers. The order then will be that each appeal will be allowed, with no order as to costs.