GSM Pty Ltd v Commissioner of Taxation

1. The applicant pay 90% of the respondent's costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

THAWLEY J: 1 These reasons concern the costs in NSD 908 of 2021 in which GSM Pty Ltd was partially successful. This proceeding was decided together with other related proceedings in Merchant v Commissioner of Taxation [2024] FCA 498. The Court concluded that the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (Cth) applied to the BBG Share Sale Scheme, but that GSM had discharged its onus of establishing that the GSM Amended Assessment was excessive. GSM demonstrated that the assessment was excessive by establishing that the market value of the Future Payment Rights was less than the market value which had been used in calculating the GSM Amended Assessment. It relied on an expert report of Mr Tony Samuel in this regard. The Commissioner was successful on all other issues in the proceeding. 2 The Commissioner contended that the appropriate order for costs was for GSM to pay 90% of his costs of the proceeding. GSM contended that the appropriate order was for GSM to pay 75% of the Commissioner's costs. 3 The Court's power to make an award of costs is discretionary: s 43 of the Federal Court of Australia Act 1976 (Cth). The power must be exercised judicially, not arbitrarily or capriciously or on grounds unconnected with the litigation, having regard to relevant principle and the justice of the case in all the circumstances: Minister for Immigration, Citizenship, Migrant Services and Multicultural Affairs v Mukiza [2022] FCAFC 105 at [4]. Both parties referred to EMI Songs Australia Pty Limited v Larrikin Music Publishing Pty Ltd [2011] FCAFC 92 at [9] in which the Full Court stated: … The discretion is broad but is to be exercised judicially. The fundamental purpose of the discretion is to compensate the successful party, not to punish the unsuccessful party. The furtherance of the goal of compensation means that, in general, a successful party will obtain an order for costs in its favour (Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11 at [65]-[68]). However, "a successful party who has failed on certain issues may not only be deprived of the costs of those issues but may be ordered as well to pay the other party's costs of them…" (Hughes v Western Australian Cricket Association (Inc) (1986) ATPR 40-748 at 48,136). If apportionment of costs is appropriate, the object is not mathematical precision (Dodds Family Investments Pty Ltd (formerly Solar Tint Pty Ltd) v Lane Industries Pty Ltd (1993) 26 IPR 261 at 272) but a result that best reflects the interests of justice in the overall circumstances of the case. 4 The principles relevant where there has been mixed success were summarised by the Full Court in Roadshow Films Pty Ltd v iiNet Ltd (No 2) [2011] FCAFC 82 at [3] in the following way: Under s 43(2) of the Federal Court of Australia Act 1976 (Cth), the Court has a general discretion to award costs. Ordinarily costs follow the event, and a successful litigant receives its costs in the absence of circumstances that would justify some other order. Where a litigant succeeds on only a portion of its claim, the circumstances may make it reasonable that that litigant bear the expense of litigating the portion upon which it has failed. A successful party who has failed on certain issues may not only be deprived of the costs of those issues, but may also be ordered to pay the other party's costs in relation to those issues. On the other hand, justice may not be served if parties are dissuaded, by the risk of an adverse costs order, from canvassing all issues that might reasonably be raised in the conduct of a proceeding. Against that consideration is the community interest in greater economy and efficiency in the conduct of litigation, which may properly be reflected in a qualification of the presumption that a successful party is entitled to all of its costs. Where there is a mixed outcome in proceedings, the question of apportionment is very much a matter of discretion for the trial judge. Mathematical precision is illusory, and the exercise of the discretion will often depend upon matters of impression and evaluation (see Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd (1993) 26 IPR 261 at 271-2). 5 GSM's submissions included: (1) GSM succeeded on the question of market value, with the consequence that the objection decision was set aside, and the application allowed. This was not a trivial or inconsequential issue. The market value of the Future Payment Rights was shown to be about $11.3 million less than the amount used in the GSM Amended Assessment. (2) An order that GSM pay 90% of the Commissioner's costs would not make sufficient allowance for the fact that GSM will not be recovering the costs for the issue on which it succeeded, and will in fact mean it is paying 90% of the Commissioner's costs of the issue despite its success. (3) Significant time was spent at the hearing on the market value issue. There were ultimately only two days of evidence and one half of one of those days was spent on Mr Samuel's evidence. (4) The cost of Mr Samuel's report was significant. (5) While Mr Samuel's report was not before the Commissioner at the time of the objection, it was filed in the proceedings two years before the hearing commenced, and the Commissioner nonetheless contested the issue at the hearing. 6 The Commissioner's submissions included: (1) The GSM Amended Assessment was based on the market value which the Merchant Group had calculated at the time of the relevant events, based on expert evidence it had then received. Although GSM contended at the objection stage that the market value was less than was reflected in the relevant books and records, it did not provide any evidence in respect of a reduced market value or state what the reduced market value was contended to be. The issue was not litigated because of any error by the Commissioner at the audit or objection stage. Rather, the Commissioner took the relevant books and records at face value. (2) The costs of Mr Samuel's report are properly borne by GSM because it was essential for the applicant to obtain the report to substantiate a market value different to the market value recorded in its books and records. Further, half of Mr Samuel's report related to a different issue and was not relied upon at all. (3) The earliest time at which the Commissioner could have conceded the point was after Mr Samuel's report was served and all evidence in relation to market value was complete. (4) With respect to the hearing and preparation time required, the s 177D issues vastly exceeded the market value issue. The s 177D issues involved detailed evidence, including large amounts of documentary evidence, none of which was relevant to the market value issue. Mr Samuel gave evidence for 50 minutes, not a half-day. (5) With the new market value applied, the MFT's capital gain was 13.36% less than the $84,885,502 initially calculated. 7 I accept that the overwhelming majority of issues and time spent in preparation and hearing were not related to the market value issue. Mr Samuel's evidence was confined and roughly half of his report did not relate to market value. The legal costs incurred in relation to the market value issue (including the costs of that part of Mr Samuel's report which was relied upon) would be seriously outweighed by the legal costs of the parties on the issues on which the Commissioner succeeded. 8 The Commissioner did not act unreasonably in not conceding the market value issue, particularly when regard is had to the fact that his assessment was based on the Merchant Group's books and records and contemporaneous expert evidence obtained by the Merchant Group at the time of the relevant transaction. 9 I take into account that the effect of the order for costs is that GSM bears all of its own costs, including its costs on that part of the case on which it succeeded, in addition to a percentage of the Commissioner's costs. 10 The appropriate order is for GSM to pay 90% of the Commissioner's costs. This apportionment appropriately reflects the Commissioner's success on most of the issues in the proceeding and GSM's success on the market value issue. I certify that the preceding ten (10) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Thawley.