Hilton International Australia Pty Ltd v Commissioner of Taxation

Federal Court of Australia|2023-12-01|Before: Abraham J

The respondent's application is dismissed.
The respondent is to pay the costs of the applicant to be agreed or assessed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ABRAHAM J: 1 The Commissioner of Taxation (Commissioner, the respondent) seeks an order under r 23.01(1)(a) of the Federal Court Rules 2011 (Cth) (FCR) for the appointment of an expert, as well as procedural orders to facilitate the appointment and reporting of that expert. The orders are sought pursuant to an interlocutory application filed by the Commissioner on 27 October 2023 (interlocutory application). 2 The background to the interlocutory application is that by notice of appeal dated 15 June 2023, Hilton International Australia Pty Ltd (Hilton, the applicant) appealed against an objection decision made by the Commissioner on 21 April 2023. The appeal concerns whether an amount of $173,300,032 should have been included in the assessable income of Hilton for the 2015 tax year. To that end, the key issue in the appeal is whether Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) applies in respect of the sale by Hilton of its Sydney hotel and related assets in 2015. If so, the Commissioner will be permitted to make a determination pursuant to s 177F of the ITAA 1936 and deem Hilton's assessable income for the 2015 tax year to include a net capital gain of $173,300,032. 3 Both parties wish to put before the Court opinion evidence from an expert witness with legal expertise in structuring hotel sales who would give evidence as to the merits (or otherwise) from a legal perspective of the scheme that was in fact implemented by Hilton to sell its Sydney hotel, and of the Commissioner's alternative postulates. The Commissioner has been unable to secure a suitable legal expert to opine on this issue and therefore seeks orders for a Court-appointed expert. 4 For the reasons which follow, I dismiss the application.

Context 5 Part IVA of the ITAA 1936 will only apply to a "scheme" that is entered into for the sole or dominant purpose of obtaining a "tax benefit". Part IVA relevantly directs attention to whether an amount has not been included in the assessable income of a taxpayer "where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out": s 177C(1)(a) of the ITAA 1936. 6 The term "tax benefit" is defined by s 177C of the ITAA 1936 which provides: 177C Tax benefits (1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with the scheme shall be read as a reference to: (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included or might reasonably be expected to have been included in the assessable income of the taxpayer of that year of income if the scheme hadn't been entered into or carried out; … 7 Section 177CB(3) explains that "a decision that a tax effect might reasonably be expected to have occurred if the scheme had not been entered into or carried out must be based on a postulate that is a reasonable alternative to entering into or carrying out the scheme". 8 Therefore, the legislative scheme requires a comparison between the "scheme" which was adopted by a taxpayer and a hypothetical "alternative postulate" or "counterfactual" of what the taxpayer may have done and in which the tax benefit would not have been obtained: Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3 (Guardian AIT) at [155] citing Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd [2010] FCAFC 94; (2010) 186 FCR 410 at [25]-[26]. The alternative postulate requires a "prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and that prediction must be sufficiently reliable for it to be regarded as reasonable": Guardian AIT at [155]. 9 The scheme identified by the Commissioner in this case is that Hilton sold its Sydney hotel and related assets by transferring the hotel real estate and related assets to Admiral Holdings Australia Pty Ltd (AHA) at a price, and then selling the shares in AHA to a third-party purchaser for approximately $450,000,000 (comprising $29,021,786 for the shares and $420,000,000 by way of repayment of intra-group debt owed by AHA). No assessable income was returned by Hilton. A net capital gain of $21,010,282.50 was returned in the assessable income of the non-resident shareholder of AHA (being Hilton Worldwide International Luxembourg Holding S.a.r.l, a Luxembourg entity and parent company to AHA and Hilton). 10 It is the Commissioner's case that there were "alternative postulates" by which Hilton might reasonably be expected to have returned $173,300,032 as a net capital gain. The first is an asset sale. The second is a transfer of assets to an entity which did not have substantial intra-group debt and that indirectly owned the hotel real estate (rather than an entity that did not), and a sale of the shares in that entity. 11 In the appeal, the Court will need to evaluate whether the alternative postulates put forward by the Commissioner were "reasonable" alternatives to the scheme adopted by Hilton. The parties agree that whether the Commissioner's alternative postulates are reasonable is a matter informed by expert evidence: citing Commissioner of Taxation v Futuris Corporation Limited [2012] FCAFC 32; (2012) 205 FCR 274 as an example of where such evidence was relied on. The parties seek to provide expert evidence from both a commercial advisor and a legal advisor experienced in structuring hotel sales. This application focuses on the appointment of a joint legal expert, as commercial advisors have already been retained by both the Commissioner and Hilton. 12 The Court will also have to determine whether the steps taken by Hilton were for the sole or dominant purpose of obtaining a tax benefit (if one were found to exist) or whether those actions were explicable by commercial drivers. Hilton intends to file expert evidence in support of their contention that the steps taken to sell the hotel were not carried out for the sole or dominant purpose of obtaining a tax benefit.

Evidence 13 The Commissioner read the affidavit of Rimma Miller affirmed 27 October 2023, including accompanying exhibit RM-1. That affidavit outlined the difficulties the Commissioner has encountered in seeking to secure a suitable legal expert. A summary is as follows: (a) In around July 2020, the Commissioner retained an expert, Mr Rahul Parrab, for the purposes of a mediation between Hilton and the Commissioner. The Commissioner's view is that Mr Parrab is not a suitable expert for these proceedings because he has been briefed with without prejudice material and his independence (amongst other factors) was the subject of criticism by Hilton in its objection. (b) The Commissioner has made ongoing enquiries with at least 16 potential experts since December 2021. The majority of these have indicated that they are "commercially conflicted" - that is, their firm does not wish to be briefed by a party adverse to the interests of Hilton, presumably at least so as not to lose Hilton's potential business. (c) One such example is Mr Thomas Page, who the Commissioner contacted in August 2023. Mr Page was not legally conflicted from acting for the Commissioner, but his firm only permitted him to be engaged by the Commissioner if Hilton provided a waiver. The Commissioner requested Mr Page seek a waiver from Hilton. Hilton refused to provide such a waiver. (d) After it became apparent that the Commissioner was not able to secure an appropriate expert, the Commissioner wrote to Hilton on 6 October 2023, seeking Hilton's consent to a Court-appointed expert. No agreement was reached. It was in this context that the interlocutory application was filed.

Legal principles 14 Rule 23.01 of the FCR empowers the Court to appoint an expert: 23.01 Appointment of Court expert (1) A party may apply to the Court for an order: (a) that an expert be appointed (a Court expert) to inquire into and report on any question or on any facts relevant to any question arising in a proceeding; and (b) fixing the Court expert's remuneration, including the cost of preparing the expert's report; and (c) for the Court expert's attendance before the Court; and (d) terminating the liability to pay the Court expert's remuneration. Note 1: Expert is defined in the Dictionary. Note 2: The Court may give instructions relating to the inquiry and report including the carrying out of an experiment or test. Note 3: The Court may make an order of its own motion - see rule 1.40. (2) If the Court makes an order under paragraph (1)(b), the expert's remuneration is payable jointly and severally by the parties. 15 Of course, the power to appoint a Court expert must be exercised by reference to the "overarching purpose" in s 37M of the Federal Court of Australia Act 1976 (Cth), being the facilitation of the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible. 16 The scope of the power given by r 23.01(1) of the FCR has been considered by a number of cases: see Tyler v Thomas [2006] FCAFC 6; (2006) 150 FCR 357 (Tyler) at [22] and [29]; TICA Default Tenancy Control Pty Ltd v Datakatch Pty Ltd [2015] FCA 867 at [2] (TICA); Gale v New South Wales Minister for Land & Water Conservation [2001] FCA 1652; (2001) 6(4) AILR 66 at [5] and Transport Workers' Union of Australia v Qantas Airways Limited (No 5) [2022] FCA 782 (Qantas) at [11]. 17 In Tyler, Branson J identified at [29] the following broad principles that could be deduced from the authorities relating to Court-appointed experts: (1) the power to appoint a court expert is part of the armoury made available to courts for the purpose of ensuring the just, efficient and cost-effective management of litigation; (2) the power to appoint a court expert is to be broadly understood and is not available to be exercised only where litigation calls for expert evidence of a scientific or technical kind; (3) a court expert may be appointed to express an opinion on the major issue to be decided in the litigation; (4) generally speaking, the correct approach will be to regard the appointment of a court expert as the first step, but not necessarily the only step, in the obtaining of expert evidence on a particular issue; (5) ordinarily the appropriate time for the exercise of the power is well before trial so that the parties have adequate time to give consideration to the report of the court expert and to make decisions on whether they wish to challenge any part of that report; and (6) the power to appoint a court expert is not ordinarily to be exercise [sic] for the purpose of assisting an impecunious party to gather evidence - although the appointment of a court expert may in fact provide such assistance. 18 These principles have been cited and applied: see, for example, Qantas at [11]; Taylor v Saloniklis (No 2) [2014] FCA 410 (Taylor) at [11]. 19 Circumstances which may warrant a r 23.01 appointment include where savings may be identified, and delays mitigated: see TICA at [3]. However, the Court will generally refrain from appointing an expert where issues of jointly instructing an expert may arise and such an appointment will not lead to a narrowing of the issues: see Taylor at [14].

Submissions 20 The Commissioner submitted that the power under r 23.01 of the FCR is sufficiently broad to permit the appointment of an expert in the present circumstances. The Commissioner contended that if an expert is not appointed, the likely outcome is that Hilton, but not the Commissioner, will have an expert on a critical issue in the appeal, and in this event, the Commissioner would be left to cross-examination. The Commissioner made the submission that it is not in the interests of justice that there be an imbalance on this critical issue; nor that the Court receive assistance from a single party expert. To that end, it was emphasised in oral submission that the application had not been brought to assist the Commissioner, but rather, it had been brought to assist the Court and to serve the interests of justice. 21 The Commissioner accepted that Hilton would have incurred cost to date in obtaining evidence from a legal expert. However, the Commissioner noted that he has been taking steps to secure an expert since at least late 2021, and that he has acted promptly to seek agreement to the appointment of a Court expert and now, to apply for such an order. The Commissioner also noted that, subject to further order, he would be liable for the cost of the expert in the first instance. The Commissioner's submission was that Hilton's costs are not wasted; at the least Hilton can use material from its current expert to facilitate its consideration of the Court expert. Moreover, the Commissioner did not apprehend that there would be difficulties in formulating a brief and questions for an expert as the essential issue pertains to the merits of the scheme and alternative postulates. 22 It was submitted that the Commissioner's proposed directions serve the interests of justice, save costs and Court time, and provide for a path directed to ensuring that the Court receives a report which will assist it to resolve the real issues in the appeal. The Commissioner noted that a single Court-appointed expert would eliminate the need for a joint report and save time at the hearing. 23 Hilton advanced seven reasons in support of its submission that the Court should not make an order that a joint expert be appointed in preference to the parties filing their own independent expert evidence, and that such an order would be highly prejudicial to them. 24 First, any expert evidence filed by them will be prepared by an expert subject to the obligations applicable to expert witnesses in this Court, and the Commissioner will be able to put any relevant matter to the expert witness in cross-examination to test that evidence. Considering the independent nature of experts, there is no basis for the Commissioner to demand that a single joint expert is necessary, especially prior to seeing the evidence of the experts engaged by Hilton. 25 Second, Hilton is due to file its evidence by 20 December 2023, and as such, their evidence is well advanced. It would be highly prejudicial if Hilton is now, at this late stage, prohibited from filing and relying on that extensive independent evidence obtained in compliance with the timetabling orders of this Court. 26 Third, the proposed course of briefing a new joint expert would require material resources on the part of Hilton's legal team in identifying a new potential expert and agreeing as between the parties the terms, questions and content of a brief to such an expert. Hilton contended that it would be unreasonable to impose this additional cost on Hilton, especially where they have already incurred significant resources to date in identifying and briefing experts. 27 Fourth, Hilton submitted that it is inconsistent for the Commissioner to contend on the one hand that "no suitable" expert can be identified, but on the other hand that the Court should have confidence that a suitable joint expert will be found. Hilton noted that if the orders sought by the Commissioner were made, the Court and parties could be left in the invidious position where no joint expert is able to be identified and Hilton is not able to rely on the expert evidence it has already procured. 28 Fifth, Hilton noted that the Commissioner's contention concerning the inability to find a suitable expert is contradicted by the Commissioner's acknowledgement that he has previously briefed an expert in this matter. 29 Sixth, Hilton contended that the Court ought to reject the Commissioner's submission that he "acted promptly to seek to secure an expert". The Commissioner issued his amended assessment on 7 December 2020, at which time Hilton became subject to a very substantial taxation liability. Hilton objected to the Commissioner's amended assessment on 8 February 2021. The Commissioner had already obtained expert evidence from Mr Parrab by that time "in around July 2020". The Commissioner then only raised the issue of a joint expert with Hilton in October 2023, after previously consenting to orders that Hilton file its own evidence (without limitation). 30 Finally, Hilton submitted that the weight of authorities reveal how rare it is that this Court has found an appointment pursuant to r 23.01 (or its predecessor) to be warranted, and that there are no circumstances which justify such an appointment in this case: (1) there are no "savings" to be obtained in an appointment as Hilton has already incurred significant costs and the Commissioner will incur costs whether he retains his own expert, or whether a joint expert is ordered. Additional costs will be incurred by both parties in engaging on the identification and terms of any appointment, likely leading to delays in the resolution of the matter; (2) the Commissioner's purported difficulties in putting on expert evidence do not warrant the Court's intervention to deny Hilton the ability to rely on its own expert evidence; and (3) this is not an instance where the parties have jointly come to the Court seeking orders for a joint expert. To the contrary, Hilton anticipates the instructions to a joint expert, and the underlying assumptions they may be asked to rely on, are likely to be contested and need to be tested in Court. Accordingly, the prospects of being able to agree on those instructions, relevant briefing material, and the questions to be put, are likely to be vigorously disputed which will lead to additional cost and delay.

Consideration 31 On 14 August 2023, the first orders as to the filing of evidence by the parties were made by consent, which required Hilton to file any evidence by 7 November 2023. On 3 November 2023, by consent, that order was extended to 20 December 2023. 32 This application has only come about at this time because of difficulties the Commissioner has experienced with retaining a legal expert to opine on the issues referred to at [11] above, (noting it has already obtained a commercial expert to do so). There was no suggestion before this time by the Commissioner that the nature of the matter was such that a joint expert report ought to be ordered. No authority could be pointed to where a joint expert had been ordered in these circumstances, with the Commissioner acknowledging this is a "very unusual application". 33 I am not persuaded that such an order should be made. 34 First, the accepted consequence of making an order is that Hilton would not be entitled to rely on the expert evidence it is well advanced in preparing. This would prejudice Hilton in the conduct of its case. It is to be assumed that the expert evidence it intends to file supports its position on the appeal. If the joint expert expresses a different view, Hilton could only cross-examine that expert. It would be deprived of evidence it had sought to rely on. Hilton bears the onus of proof in the substantive proceeding. It is entitled to file the expert report it has obtained. Any issues of admissibility of its content, and the weight to be attached to it, are matters for the substantive proceeding. 35 Second, the Commissioner's submission that Hilton would not be prejudiced because it could use the work it has done to date with the expert it intended to rely on to prepare for cross-examination of the joint expert, does not take account of the prejudice referred to above at [34]. Rather, it confines the issue of prejudice to the expenses incurred in preparation of evidence on which it could no longer rely. There is no basis to do so. 36 Third, the Commissioner's application for a Court-appointed expert will not decrease costs, as Hilton has already retained its own expert and incurred the expense of obtaining a report, to be filed shortly. That Hilton could use in cross-examination any work it has done to date in relation to the expert they had intended to file does not establish otherwise. 37 Fourth, the timetable suggested by the Commissioner if the application is granted - which would not, prima facie, delay the proceedings - is based on the proposition that there should be no issue in determining the factual assumptions and questions to be asked of the expert. That proposition is not acceded to by Hilton, who submitted that these matters, or at least some, will be the subject of contest. Moreover, in this process, an expert would need to be identified, which as returned to below, may be problematic. If one is unable to be identified, the Commissioner submitted that the matter could return to Court for further orders. All this suggests that an order for a Court-appointed expert may delay the proceedings. 38 Fifth, the substantive proceeding arises from the Commissioner's amended assessment of Hilton's tax liability. One assumes the Commissioner considered he had a basis and reasons for issuing the assessment it did. The Commissioner had relied on an expert whom he says can no longer be relied on because he was used in the mediation process. In the current circumstances, the Commissioner submits he does not seek a joint expert to assist him, but rather to assist the Court, as without which the position would likely be that he would be confined to cross-examination of Hilton's expert and any submission that Hilton had failed to discharge its onus. The Commissioner accepted that that latter approach is one commonly taken by the Commissioner. Apart from submitting that a joint expert would assist the Court and therefore be in the interests of justice, the Commissioner did not articulate why this situation required an approach different to that commonly taken, and calls for a joint expert at this stage. It was suggested that ordering a joint expert is fairer to the parties because both parties can cross-examine the witness. Hilton does not accept that. Nor could it be said it is fairer to Hilton to be deprived of reliance on the expert it has retained when attempting to discharge the onus on it. 39 In any event, if a joint expert were to be ordered, and the expert expresses an opinion consistent with that sought by Hilton, the Commissioner, as conceded during the hearing, would be left to cross-examine and argue that Hilton had not discharged its onus. That would result in a situation the same as now faced by the Commissioner. By contrast, if the joint expert were to express a position consistent with that sought by the Commissioner, Hilton could cross-examine the witness, but would still be left with a lacuna in their case (on which it bears the onus); an issue not faced by the Commissioner. 40 Sixth, the Commissioner's proposed orders require one party to provide the other with a list of three potential experts from which the joint expert will ultimately be chosen. The Commissioner suggests that in relation to nominating three experts, it would use names on the list of persons already contacted where there is described a commercial conflict. It was submitted this was appropriate as such a person is likely to accept a court appointment as they would not be seen as acting "against" Hilton. There is no real basis to suggest that the persons who the Commissioner have already approached would be in any different position if I were to make the order sought. None have suggested as much. The correspondence annexed to the affidavit evidencing some of the communications does not suggest that conclusion. There appears to be an amount of surmise in the submission, including as to the basis of the conflict these persons have. 41 Seventh, once Hilton has filed its evidence, the Commissioner can consider that evidence and then act accordingly, depending on its content. This may involve continuing to seek to obtain an expert report, cross-examining the expert witness on the report relied on by Hilton and/or making submissions directed to whether the Court should accept the evidence and, if so, the weight to be attached. As noted above, the latter two steps were accepted by the Commissioner to be a common approach. In making that observation, I accept the efforts that the Commissioner has gone to since late 2021 to retain a legal expert. That said, one expert was found and used by the Commissioner (albeit now it is said that he cannot be relied on), and a commercial expert has been retained. I note that the use made of the legal expert it had retained in mediation, which prevents his use in these proceedings, was a matter for the Commissioner. 42 At this stage, the Commissioner has no knowledge of the content of Hilton's expert evidence. The Commissioner understands that a commercial and legal expert is to be relied upon. It is in that context that he has sought to do the same. Any expert relied on must ascribe to this Court's code of conduct. I have approached the application on that basis. 43 Finally, I note that it would be an unusual circumstance for each party to rely on the separate commercial experts they have each retained, but at the same time be required to rely on a joint legal expert appointed by this Court. 44 Applying the relevant principles to the very particular circumstances of this case, I am not persuaded that the order sought should be made.

Conclusion 45 The application is dismissed with costs. I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Abraham.

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