Howard v Commissioner of Taxation

REASONS FOR JUDGMENT 1 In orders which I made in disposition of these tax appeals on 14 December 2011, I directed the parties to file written submissions as to costs. They have now done so, the applicant's submissions in reply having been filed on 9 March 2012. These reasons deal with the question of costs, and should be read together with my reasons of 14 December 2011: Howard v Commissioner of Taxation (No 2) [2011] FCA 1421. 2 In their submissions as to costs, the parties took fundamentally different approaches. The applicant took a conventional approach of starting with the proposition that costs should follow the event in respect of each of the two appeals which were before the Court. From that starting point, the applicant then proposed the making of specific adjustments to recognise some aspects of the way in which the parties conducted their respective cases. 3 By contrast, the respondent's approach - while informed by the general principle that costs should follow the event - involved an invitation for the Court to view the proceedings as a single forensic entity, and to apportion costs by reference to its own assessment of the extent to which the proceedings were concerned with issues upon which the applicant succeeded, and with issues upon which the respondents succeeded. This approach, if accepted, would involve the Court itself applying some kind of rule of thumb to guide the process of apportionment, such as allocating pages of transcript to one issue or another. 4 Saving all just exceptions, I would not be disposed to depart from the conventional approach of costs following the event unless either the parties consented or there was a good case for doing so. The respondent's approach would, in my view, involve the court in the minutiae of issues of allocation and apportionment, more properly the function of the taxing officer. As the applicant made clear in his submissions in reply, even the rules of thumb proposed by the respondent would be far from uncontroversial. 5 I appreciate that, by following the conventional approach, I expose the taxing officer to the prospect that some fairly complex discriminations will need to be made. This, however, is the essence of taxation in complex litigation, and I am not disposed to view the present proceedings as exceptional in that regard. 6 I turn next to the exceptions to the conventional approach which are proper to be made in the circumstances of the present case. It is convenient to commence with a notice to admit facts which the applicant served upon the respondent on 15 March 2011. The respondent served a notice disputing the facts on 23 March 2011. As it happens, the respondent's notice disputing facts was not filed, and I have not seen it. However, in submissions made on his behalf on 2 March 2012, the respondent made it clear that he did dispute the facts referred to, and I shall proceed on that basis. 7 There were two facts referred to in the applicant's notice. The first was that a document attached to the notice and headed "Income Tax (Jersey) Act 1961" was the "Jersey Tax Act" as amended. The second constituted a series of propositions about the contents and, to a limited extent, operation of that Act. In his submissions on costs, the applicant claimed that, as a consequence of the respondent's notice of dispute, he was - … put to the cost of establishing foreign law facts and the characterisation of the proceeds of the sale by Juris Limited of its shareholding in Esparto Limited, the nature of the distribution from the Juris Trust in the Esparto Trust, the subsequent creation of the Howard Appointed Fund and the capital distribution from corpus of the Esparto Trust to the applicant. Although I allow for the possibility that the applicant was put to the cost of establishing some of these things, these were not the facts covered by the notice to admit. It is not apparent what were the costs incurred by the applicant in establishing the facts which were covered by the notice, save for the cost of photocopying the Jersey legislation referred to - a cost which was, apparently, incurred when a copy of the legislation was attached to the notice. 8 Notwithstanding that, one course would be to make no order, and to allow O 62 r 24 of the Federal Court Rules, as in force at the time of the respondent's notice of dispute, to operate according to its terms. However, I am not disposed to adopt that course. The provisions of the Jersey Act of 1961 played no part in my determination of the Esparto Trust issues in the case. Indeed, I consider that such questions were irrelevant, and that the notice to admit was based upon a misunderstanding of the case that the applicant would be required to make in order to defeat the Commissioner's assessments for the year ended 30 June 2006. I propose to make an order excluding the operation of O 62 r 24, and of the corresponding provision of the Federal Court Rules 2011. 9 I turn next to the costs of the examination in London which commenced on 28 March 2011. The applicant asserts that the Commissioner insisted on cross examining at least Mr Donovan and Mr Hornby other than by video link because there would be issues of credit that would arise in the Court's consideration of the evidence of those witnesses. The applicant now submits that, as things transpired, the Commissioner did not challenge the credit of these witnesses, and the evidence might have been more conveniently, and at less expense, taken by video link. 10 In order to deal with this point raised by the applicant, I have revisited the transcript of the directions hearings at which the necessity for taking the evidence of these witnesses at an examination was discussed. It is true that counsel for the Commissioner did, at one stage, indicate that issues of credit would arise, but that was not the only circumstance which caused them to reject the suggestion that the evidence in question be taken by way of video link. The gravamen of the Commissioner's point was that the cross-examination of these witnesses would be substantial, and that it was important that the Court receive their evidence face to face. On 18 November 2010, counsel for the applicant accepted that, if cross-examination were to be substantial, they could not resist the Commissioner's insistence that it be conducted directly. In the result, I was much assisted by having at least the more important of these witnesses give their evidence directly, and I do not accept the applicant's recent submission that the circumstance that no real question of credit has come out of that evidence justifies the conclusion that evidence by video link would have been appropriate. 11 The next point for consideration involves the respondent's submission that, regardless of the outcome of the case, he ought not be required to contribute to the common costs incurred in connection with the examination (the costs of the court, of the venue and of the transcript). The justification for this approach was said to be that the examination was held abroad only because one of the applicant's witnesses refused to travel to Australia, and that it was the applicant's conventional obligation to ensure that his own witnesses were present at court when required to give evidence. Where the applicant would have had to pay for his witnesses to travel to the court, he should likewise be obliged to pay for the court to travel elsewhere, and for the associated infrastructure. 12 As will be apparent, the respondent's argument is based on an implicit counterfactual, namely, one in which the applicant would have brought his witnesses to Melbourne, or paid for the video link necessary to take the evidence of the less substantial witnesses without them having to travel to Melbourne. Under that counterfactual, Mr Donovan and Mr Hornby would have been obliged to travel to Melbourne on any view. The others, or at least some of them, may not have. Substantially all of Mr Donovan's evidence related to issues upon which the applicant succeeded. In the normal case, the costs which the applicant would have recovered from the respondent would have included the costs of bringing Mr Donovan to Melbourne. The evidence of the remaining witnesses related to issues upon which the applicant failed, and the cost of bringing those witnesses to Melbourne would have lain where it fell, that is, with the applicant. Thus, although it is true that the applicant would have had to bring his own witnesses to the court at Melbourne at his own expense, in the case of one of them he would have recovered the costs involved from the respondent. That would, presumably, have covered Mr Donovan's travel, accommodation and incidental expenses. 13 The immediate necessity for the court to travel abroad arose because of the refusal of Mr Donovan to travel to Melbourne. As I made clear in my reasons of 23 February 2011, it ought not, in the very special circumstances of this case, be the applicant who suffers as a result of that refusal. But neither do I apportion any responsibility for that refusal to the respondent. The applicant submitted that, because it was Donovan's refusal to travel to Melbourne which gave rise for the need for the examination, and because he succeeded on the aspect of the case with which Donovan's evidence was largely concerned, he should not be required to pay any of the costs of the court or the infrastructure. There is something in this point, but it is counterbalanced by the fact that, in relation to aspects of the case upon which the respondent succeeded, the applicant secured the evidence of one witness (Hornby) without having to bring him to Melbourne and of three others without having to meet the cost of video transmission facilities. 14 All things considered, I consider that it would be just if the parties contributed equally to the costs of the court, of the venue, and of the transcript in relation to the examination which commenced on 28 March 2011. That means that the respondent will be required to meet one half of the costs referred to in Order 17 made on 23 February 2011, and that the costs covered by Orders 18-20 made on that day should lie where they fall. 15 That leaves the costs of the parties themselves made necessary only by the circumstance that the examination was held abroad rather than in Melbourne. Here a reference to a simple counterfactual is not available as an aid, since there is no equivalent cost that the applicant would have incurred for a hearing in Melbourne which he would, in the event of complete success, have been able to recover from the respondent. By Notice of Motion dated 17 February 2011, the respondent sought an order that he not, under any circumstances, be required to pay the applicant's costs of travel, accommodation etc for the examination, and that the applicant be required to pay his own corresponding costs. That Notice of Motion was adjourned, and now must be dealt with. 16 I consider that the respondent's motion should be granted in both respects. Assuming that the case was heard in Melbourne, even total success on the part of the applicant would not have led to a result in which the respondent was required to meet any of these costs. The need for the parties - both parties - to incur them arose only because the court acceded to the applicant's request to take evidence abroad. I make no judgment as to the rights and wrongs of the circumstances leading to that request, but the fact remains that, as was submitted on behalf of the respondent, it was the hearing of the applicant's evidentiary case that made the examination necessary. A respondent to an Australian proceeding is entitled to make a conventional assumption that, in order to test important evidence called against him, he needs to go no further than the shores of this country. That assumption should be available to him generally, and not merely to the extent that he succeeds in the case. 17 I shall, therefore, order the applicant to pay the respondent's reasonable travel, accommodation and incidental expenses made necessary by the taking of evidence on examination in London. There will be no order as to the applicant's own corresponding expenses. 18 The next point for consideration relates to a specific submission made by the applicant that, to the extent that the examination related to the matter upon which the respondent succeeded - the Esparto Trust distributions - it was made necessary substantially because the respondent refused to accept, until the stage of final submissions, that the distributions were of capital rather than income. The respondent should therefore, it was said by the applicant, be entitled to none of the costs of the examination. The concession ultimately made could and should have been made at the outset. 19 The need for the examination arose not because the respondent was required to prove that the distributions from the trust were of income. It was the applicant who was obliged to prove that the respondent's assessments were excessive. In that project, he chose to prove as a fact that the distributions were of capital. The evidence of the witnesses taken at the examination was partly, but by no means substantially, concerned with that subject. The need for the examination arose because of the respondent's conventional entitlement to cross-examine those witnesses, and others. In the form it took at the opening of the trial (done in Melbourne, before the examination), the respondent's case was that, because of certain statutory deeming provisions, the result would be unaffected by the capital or income character of the distributions. 20 In the result, I am not persuaded that the allocation of costs with respect to the examination otherwise proper to be ordered should be varied by reason of the course, and outcome, of such controversy as there was as to the character of the distributions from the Esparto Trust. 21 The final question arises as a result of the applicant's submission that the respondent should not get his costs of the hearings on 15 November and 1 December 2011. Here it is necessary to refer to the order of events which preceded those hearings. Having heard the case in the conventional way, I reserved judgment on 22 June 2011. In the period following, and during the course of preparing my reasons, it became apparent that there were aspects of the case - regarding the Esparto Trust - that had not been fully or adequately dealt with in the parties' submissions. As a result, by emails from my associate dated 25 and 29 August 2011, I invited the parties to forward written submissions on these matters. They did so, on 30 September 2011 in both cases. 22 In a number of respects, the written submissions of 30 September 2011 developed new lines of argument that had not previously been advanced. This was particularly so in the case of the respondent's submissions. This moved me to cause my associate to communicate with the parties on 19 October 2011, in the following terms: His Honour has noted that the parties' submissions, filed in response to questions raised in my emails dated 25 and 29 August 2011, deal with issues, and in some respects advance factual and legal propositions, that may be thought to travel beyond both the respective party's case at trial and the ambit of the questions in my emails. While his Honour regards that as regrettable, nonetheless the submissions have been made and cannot simply be ignored. His Honour proposes to list the proceeding on a date to be arranged with the parties for the purpose of hearing the parties on the following matters: (1) whether the submissions advanced by the Commissioner - a. at para 75(3) and 96; b. at paras 112 and 114-116; c. at paras 135-144; and of his submission dated 30 September 2011 should be received; (2) if yes to (1) in any respect, whether - a. the receipt of those submissions would make it just to allow the applicant to call further evidence, and if so whether he would wish to do so; and b. whether the submissions should be accepted; (3) the scope and application of s 475 of the 1936 Act in the circumstances of the case, with respect both to income and to corpus; and (4) the relevance of pages 1248 and 1249 of the Court Book to - a. the submissions advanced by the Commissioner at para 75(1) of his submission dated 30 September 2001 [sic]; and b. the operation of the definition of "attribution percentage" in s 96C(5) of the 1936 Act. His Honour has it in mind that, if the applicant proposes to seek leave to adduce further evidence, he should ensure that it is placed on affidavit and served on the Commissioner at least 7 days before the date fixed for the further listing of the proceeding, so that, if leave be granted, no adjournment is required to facilitate the calling and, if necessary, the testing of that evidence. As a result of this communication, the proceeding was listed for further hearing on 15 November 2011. 23 The necessity for that hearing arose substantially because a number of important matters argued by the respondent in his submissions of 30 September 2011 either raised issues to which the applicant had to be given the opportunity to respond, including, in one instance, the opportunity to lead further evidence, or gave rise to the need for further elaboration, or for a consideration of the relevance of certain material which was before the court in the light of those submissions. I do not accept the argument to the contrary recently advanced on behalf of the respondent. It was put by the respondent that it had not been until 30 June 2011 (eight days after I had reserved) that he had issued a "Decision Impact Statement" with respect to the judgment in Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16, and that it was that statement that provided a basis for important parts of the submission of 30 September 2011. If this was intended to justify the respondent's omission to develop the relevant points in its submissions made at trial, I could not accept it. Judgment in Colonial First State was handed down on 18 January 2011, some five months before the making of final submissions at trial in the present matter. 24 In other respects, the content of the respondent's supplementary submissions of 30 September 2011 was - to the extent that it touched issues which gave rise to the need for a listing of the proceeding on 15 November 2011 - substantially such as might have been put at trial. It should not have been necessary to convene a hearing of the matter on 15 November 2011. In my view, the respondent should not get his costs of that hearing, or of the written submissions (uninvited by the court) which he caused to be filed in anticipation of that hearing on 28 October and 15 November 2011. 25 The position is different, however, with respect to the hearing on 1 December 2011. That hearing was made necessary because the applicant was not, on 15 November 2011, in a position to lead the further evidence the need for which was contingently foreshadowed in my associate's communication to the parties of 19 October 2011. There was no satisfactory explanation for that omission. The costs of 1 December 2011 will not, therefore, be carved out of the respondent's conventional entitlement to his costs in relation to the appeals upon which he succeeded. 26 In other respects, costs should follow the event. For these purposes, I would regard the disposition of the appeal against the penalties assessment for the year ending 30 June 2006 as an event in its own right, and give the applicant his costs of that accordingly. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jessup.