Fyna Projects Pty Ltd v Deputy Commissioner of Taxation

1. The respondent pay 50% of the applicant's costs, except with respect to grounds 1 and 2 of the Further Amended Originating Application.
2. The applicant pay 50% of the respondent's costs of grounds 1 and 2 of the Further Amended Originating Application. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

THAWLEY J: 1 On 21 December 2018 the Court made an order that the parties confer with a view to agreeing orders to give effect to the reasons handed down by the Court in Fyna Projects Pty Ltd v Deputy Commissioner of Taxation [2018] FCA 2041. 2 Orders and declarations were made on 15 March 2019 which dealt with all of the issues between the parties, except the question of costs. The parties agreed that issue would be determined on the papers. 3 The applicant submits that the appropriate order is for the respondent to pay 80% of its costs on the ordinary basis. 4 The respondent submits that: (1) subject to (2), he should pay 50% of the applicant's costs; and (2) the applicant should pay the respondent's costs thrown away by reason of its abandonment of grounds 1 and 2 of the Further Amended Originating Application (FAOA). 5 The factual background to these proceedings is set out in detail in Fyna. 6 In summary, Fyna Projects Pty Ltd applied to review decisions of the Deputy Commissioner of Taxation to give 11 notices under s 260-5(2) of Sch 1 to the Taxation Administration Act 1953 (Cth) (TAA). These included a notice to Fyna, being an entity which allegedly owed or might later owe money to Pladmira Pty Ltd (Fyna Notice), and ten other notices to entities which allegedly owed or might later owe money to Fyna (Other Notices). 7 When the proceedings were commenced two of the principal issues in dispute were: (1) whether Fyna failed to comply with the Fyna Notice by paying amounts to Pladmira - this revolved around whether Fyna owed or might later owe money to Pladmira when Fyna paid amounts to Pladmira and involved disputed facts; and (2) if Fyna did fail to comply with the Fyna Notice, whether that failure gave rise to a "tax-related liability" such that the Other Notices could lawfully be issued: s 255-1 of Sch 1 to the TAA - this revolved around questions of statutory construction rather than disputed facts. 8 Fyna challenged the various notices on 9 grounds. Two grounds (grounds 1 and 2) were abandoned after the hearing was adjourned on 19 July 2018 and before the hearing resumed on 18 October 2018. The abandonment of these grounds removed the first issue identified above. 9 Ultimately only one ground was successful: ground 3. The consequence was that the Other Notices were declared to have no operative effect. The remaining grounds were rejected. 10 Accordingly, Fyna failed with respect to the Fyna Notice but succeeded with respect to the Other Notices. Although that means that 10 notices were invalid and that one was valid, that might give the false impression that Fyna enjoyed more success than it did. In substance, the Other Notices were dealt with as one set of notices; the relevant legal arguments were equally applicable to all notices within the group and there were no factual differences between the individual notices which relevantly affected the time or cost involved in addressing them. 11 It is necessary to say something about the grounds which were abandoned. Grounds 1 and 2 of the FAOA were as follows: 1. At the time the Garnishee Notices were issued, s 260-5(1) of Sch 1 of the TAA was not satisfied because at no time did the Applicant owe any moneys to Pladmira Pty Ltd. Particulars (i) The Commissioner may give a s 260-5 notice only if s 260-5(1) is satisfied at the time of the giving of the notice. (ii) At the time of the giving of the Garnishee Notices, none of the amounts identified in s 260-5(1)(a)-(d) were payable to the Commonwealth by the Applicant. (iii) In particular, the Applicant was not subject to a duty to pay moneys to the Commissioner under the s 260-5 notice issued to it on 20 June 2017. On and from the date that that notice was issued, the Applicant did not at any time owe any money to Pladmira Pty Ltd within the meaning of s 260-5(2) and (3). Amounts paid to Pladmira Pty Ltd by the Applicant were paid at the election of the Application [sic] and not pursuant to any obligation. 2. The Garnishee Notices were invalid because: (a) a notice under s 260-5 cannot require the payment of an amount exceeding the debt referred to in s 260-5(1); (b) the Garnishee Notices purported to require the payment of $408,453.32 (in respect of some) or $408,711.05 (in respect of others); and (c) at the time the Garnishee Notices were issued, the Applicant did not owe $408,452.32 or $408,711.05 (respectively) to Pladmira Ptd Ltd or more than those amounts. 12 Fyna filed submissions on 29 June 2018, before the hearing commenced on 19 July 2018. Fyna contended that the payments it made to Pladmira were not made in breach of the Fyna Notice and that it made payments to Pladmira only because it chose to, not pursuant to any relevant obligation. 13 Fyna contended that the amounts were paid on account and not because they were owed. It contended that there was a practice between Fyna and Pladmira according to which Fyna would advance money to Pladmira for various operating expenses and that those amounts were by way of advance, creating a debt from Pladmira to Fyna. The overwhelming majority of the factual issues in dispute in the case went to the circumstances of the payments made by Fyna to Pladmira. 14 The Commissioner filed submissions in response. These were dated 13 July 2018, 6 days before the hearing commenced. The Commissioner submitted that the evidence adduced was not sufficient to discharge the onus of proving that Fyna did not relevantly owe moneys to Pladmira such that the payments to Pladmira were made in breach of the Fyna Notice. He submitted that the amounts were not loans. The submissions also stated, in the alternative, that any purported loan arrangements were sham transactions. 15 Fyna's reply submissions contended that it was not appropriate for the Commissioner to advance a case of sham, for the first time by way of discursive submission, less than one week before the hearing and after the close of evidence. It was also contended that the respondent's submissions had, in any event, not adequately particularised the contention. Fyna reiterated these arguments at the hearing on 19 July 2018. 16 The Commissioner submitted, at the hearing on 19 July 2018, that it was tolerably plain from a case management hearing which had occurred on 5 December 2017 before the previous docket judge that he did not accept the genuineness of the asserted loans and he was not required to have fully articulated his position at any time before 13 July 2018. It was also clear from evidence filed by the Commissioner that he was likely to advance a case that the asserted loans between Pladmira and Fyna were not genuine. 17 Having heard argument on the issue on 19 July 2018, the proceedings were adjourned and orders were made for the Commissioner to particularise his case of sham and providing for the parties to file and serve any evidence in respect of that question before the hearing resumed. A timetable was set to resume the hearing on 18 October 2018. This was done on the basis that Fyna asserted it had not understood sham to be an issue that was in fact being taken until it received the Commissioner's submissions. It is one thing to flag an issue as one which is available to be taken, it is another to give notice that a point is being taken. 18 Much of the Commissioner's evidence, filed well in advance of hearing, appeared to be directed to a challenge to the genuineness of the asserted loans between Pladmira and Fyna. It might be thought that, in those circumstances, Fyna may have been aware that the Commissioner was likely to submit that the loans were a sham. I suspect Fyna well knew that a submission that the loan arrangements were a sham was likely to be made. Nevertheless, where sham is alleged, the allegation should be made expressly at a time which properly enables the party against whom such an allegation is made to deal with it. Not only should the allegation be express, it should be made precisely with the scope of the allegation clearly identified. It should not be left to the person against whom sham is alleged to infer that it is an issue from an examination of the evidence filed, less still from statements made from the bar table at an early stage of proceedings that a "significant cloud of suspicion" or "pall" hung "over the entirety of the arrangements". 19 Sham involves an element of deception and thus connotes a species of fraud. In Raftland Pty Ltd v Federal Commissioner of Taxation (2008) 238 CLR 516, Gleeson CJ, Gummow and Crennan JJ stated (footnotes omitted): [35] The term "sham" may be employed here, but as Lockhart J emphasised in Sharrment Pty Ltd v Offıcial Trustee in Bankruptcy the term is ambiguous and uncertainty surrounds its meaning and application. With reference to remarks of Diplock LJ in Snook v London and West Riding Investments Ltd, Mustill LJ later identified as one of several situations where an agreement may be taken otherwise than at its face value, that where there was a "sham"; the term, when "[c]orrectly employed", denoted an objective of deliberate deception of third parties. [36] The presence of an objective of deliberate deception indicates fraud. This suggests the need for caution in adoption of the description "sham". … See also Coshott v Prentice (2014) 221 FCR 450 at [63] to [64]. 20 It is a basic obligation of procedural justice to confront a party in clear terms with the allegation that a case or an element of it is false or fraudulent - cf: Sgro v Australian Associated Motor Insurers Ltd (2015) 91 NSWLR 325 at [56] (Beazley P). The case of sham should have been clearly articulated with particularity: Forrest v ASIC (2012) 247 CLR 486 at [26] (French CJ, Gummow, Hayne and Kiefel JJ). It did not matter that the Commissioner was not required to file a defence - see: Quarter Enterprises Pty Ltd v Allardyce Lumber Company Ltd (2014) 85 NSWLR 404 at [124] (Bathurst CJ). Whilst these were judicial review proceedings and the Commissioner was not required to file a defence, he was obliged as a matter of fairness to make clear that he in fact would be advancing a case of sham and to do so at a sufficiently early stage of the proceedings. A letter indicating that the Commissioner would be asserting sham and setting out clearly and with sufficient particularity the precise case to be put in that respect would have sufficed. 21 After the hearing was adjourned on 19 July 2018, the Commissioner filed and served particulars of sham. That was on 30 July 2018. Thereafter, Fyna chose not to press grounds 1 and 2 of the FAOA. The Court made consent orders noting that the grounds were not pressed. As a consequence, the Commissioner did not press a case of sham. A further consequence was that the only real factual dispute in the case was taken out of play and the balance of the case proceeded almost exclusively as legal argument. 22 Grounds 3 to 9 of the FAOA were, accordingly, the only grounds which remained to be determined at the resumed hearing. These 7 grounds gave rise to 6 issues, set out in Fyna at [32]: (1) Issue 1: whether as at 12 October 2017 and 24 October 2017, by reason of the issue of the Fyna Notice and Fyna's non-compliance with it, Fyna had a "tax-related liability" within the meaning of s 255-1(1) in the amount of at least $408,453.32 on 12 October 2017, and at least $408,711.05 on 24 October 2017 (Ground 3, FAOA); (2) Issue 2: whether the Fyna Notice and the Other Notices were invalid because they were ambiguous in stating the amount required to be paid to the Commissioner as an identified amount (respectively, $777,643.47, $408,453.32 and $408,711.05) or, if the amount owed by the recipient of the notice to the relevant debtor (respectively, Pladmira or Fyna) (available money) was less than that identified amount, the whole of the available money (Grounds 4 and 5, FAOA), or because they were otherwise ambiguous in certain identified respects; (3) Issue 3: whether, if s 260-5 of Sch 1 authorised the issue of a notice in relation to a tax-related liability created by an anterior notice issued under s 260-5, the provision is constitutionally valid (Ground 6, FAOA); (4) Issue 4: whether the Other Notices were invalid because they were issued for an improper purpose, that being the purpose of recovering amounts which ought to have been, but were not, paid by Fyna to the Commissioner under the Fyna Notice (Ground 7, FAOA); (5) Issue 5: whether all of the notices were invalid because they were issued by decision-makers who were not authorised to make the relevant decisions (Ground 7A, FAOA); and (6) Issue 6: whether the Fyna Notice was invalid because it was issued by a person without authority to issue the notice (Ground 7B, FAOA). 23 Issue 1/ground 3 was decided in favour of Fyna. The 5 remaining issues were decided in favour of the Commissioner. The Fyna Notice was valid. The Other Notices were not. 24 The Commissioner submitted that more time and attention was directed in written and oral submissions to Issue 1/ground 3 (on which Fyna was successful) and Issue 3/ground 6 (on which the Commissioner was successful) than the matters raised in issues 5 and 6. He submitted that it was not the case that Fyna had succeeded on a predominant issue but failed on subsidiary or consequential issues. The Commissioner further submitted that Issue 2/grounds 4 and 5 and Issue 6/ground 7B had little or no substance but were earnestly pressed, occupying Court time and the parties' resources. 25 Fyna submitted that the Commissioner should pay 80% of its costs because it was substantially successful in its challenge, succeeding in impugning 10 of the 11 notices. Seven of the grounds advanced in the FAOA were directed to the Other Notices, and only 3 were directed to the Fyna Notice. Of the grounds pressed at hearing, 5 issues (issues 1, 2, 3, 4 and 5) were directed to the Other Notices, and 3 issues (issues 2, 5 and 6) were directed to the Fyna Notice. 26 Fyna did succeed in impugning 10 of the 11 notices. However, as a matter of substance, it won half of its case. It lost in respect of the Fyna Notice and it won in respect of the Other Notices. 27 The Court has a wide discretion in relation to making costs orders: s 43(2) of the Federal Court of Australia Act 1976 (Cth). The discretion must be exercised judicially: Ruddock v Vadarlis (No 2) (2001) 115 FCR 229 at [9] (Black CJ and French J). 28 The ordinary rule is that costs follow the event. However, where there is mixed success on separate issues, it may be appropriate for the Court to apportion costs - see Cadbury Schweppes Pty Ltd v Darrell Lea Chocolate Shops Pty Ltd (No 3) [2007] FCAFC 119 at [11]; Asahi Holdings (Australia) Pty Limited v Pacific Equity Partners Pty Limited (No 3) [2014] FCA 758 at [5]. Should apportionment be appropriate, the Court may make costs orders reflecting a broad assessment of the degree of respective success and failure of the parties on the various issues. 29 Fyna was only partially successful. In my view, the Commissioner should pay 50% of its costs, except with respect to grounds 1 and 2. 30 In relation to grounds 1 and 2: (1) I doubt that Fyna was in fact taken by surprise by the Commissioner submitting that the asserted loans were a sham. (2) However, whilst Fyna was probably not taken by surprise by the fact the submission was made, it was not required to conduct itself on the basis that the case was in fact being put until the case was in fact put against it. That should have occurred earlier than in submissions filed 6 days before the hearing. This may have resulted in grounds 1 and 2 being abandoned earlier. (3) The sham argument was only an alternative to the principal argument that Fyna could not discharge the onus of demonstrating that it did not relevantly owe money to Pladmira at the time it made the payments to Pladmira. (4) Even if Fyna failed in relation to grounds 1 and 2 had they been pressed, it would have succeeded in relation to the Other Notices. Grounds 1 and 2 were not relevant to the validity of the Fyna Notice, only to whether it had not been complied with. (5) Grounds 1 and 2 represented a quite distinct attack advanced in respect of the contended invalidity of the Other Notices, involving a disputed factual inquiry. Ground 3, upon which Fyna succeeded, essentially involved application of law to facts which were not in dispute. (6) It is likely that significant costs were incurred in investigating the principal factual issue in dispute raised by grounds 1 and 2, namely whether Fyna relevantly owed moneys to Pladmira, including whether there were loans made to Pladmira. It is not known whether grounds 1 and 2 were abandoned because a sham argument was formalised or because of a view taken as to prospects of the grounds succeeding overall. Whatever the reason, Fyna pursued grounds which were ultimately abandoned or discontinued. As a consequence, the respondent incurred costs that were ultimately thrown away. 31 In Cadbury, the Full Court noted at [11]: … It is appropriate that, where one party, although successful overall, raised and pursued unsuccessful grounds or abandoned grounds that the other party was expected to meet in preparation of and in the course of the hearing, and as a consequence costs have been thrown away or incurred, such costs should be paid by the successful party. 32 Taking all of the various matters into account, the applicant should pay 50% of the respondent's costs in respect of grounds 1 and 2. 33 Accordingly, the order for costs is: (1) the respondent pay 50% of the applicant's costs, except with respect to grounds 1 and 2 of the FAOA; (2) the applicant pay 50% of the respondent's costs with respect to grounds 1 and 2. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Thawley.