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THE COURT: 1 Reasons for judgment for allowing this appeal were delivered on 23 May 2023: JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76. 2 By an interlocutory application dated 8 June 2023, the appellant, JMC Pty Ltd, applies for orders that the respondent, the Commissioner of Taxation, pay: (1) indemnity costs of the trial proceedings from after 11.00 am on 31 March 2020 in an amount to be fixed by the Registrar, if not agreed; (2) the costs of the appeal and the interlocutory application in an amount to be fixed by the Registrar, if not agreed. 3 In relation to the indemnity costs order sought in relation to the trial proceedings, JMC relies on an offer of compromise dated 27 March 2020 made under r 25.14 of the Federal Court Rules 2011 (Cth). The offer of compromise was in the following terms: The Applicant offers to compromise this proceeding on the following terms: 1. The Applicant pay the amount of $3,200 to the Respondent; 2. The 16 Notices of Assessment of Superannuation Guarantee Charge issued on 25 March 2019 be set aside; 3. Each party bears their own costs as at the date of this offer; and 4. This offer is made on a without admission basis. The amount of the offer is $3,200. This offer of compromise is open to be accepted for 14 days after service of this offer of compromise. The amount of the offer will be paid within 28 days after acceptance of this offer. 4 JMC's offer was rejected by the Commissioner on 7 April 2020. The stated reason for the Commissioner's rejection of the offer, having observed that it was "an offer to pay less than 20% of the assessed superannuation guarantee debt", was that the Commissioner did "not consider it reasonable to accept [the] offer". 5 Rule 25.14(3) provides: Costs where offer not accepted … (3) If an offer is made by an applicant and not accepted by a respondent, and the applicant obtains a judgment that is more favourable than the terms of the offer, the applicant is entitled to an order that the respondent pay the applicant's costs: (a) before 11.00 am on the second business day after the offer was served - on a party and party basis; and (b) after the time mentioned in paragraph (a) - on an indemnity basis. 6 Rule 25.14 does not expressly or implicitly turn on whether a rejection of an offer was "reasonable". Rather, it turns on the question whether the judgment "is more favourable than the terms of the offer". Where the judgment "is more favourable than the terms of the offer" the applicant "is entitled" to indemnity costs in accordance with the terms of r 25.14(3). Rule 25.14 has been considered in various decisions including Lodestar Anstalt v Campari America LLC (No 2) [2016] FCAFC 118 and Australian Skills Quality Authority v Western Institute of Technology Pty Ltd [2017] FCAFC 183. 7 It was not in dispute that, by reason of the orders made on appeal, the appellant obtained a judgment that "is more favourable than the terms of the offer" which JMC had made. It follows that, unless r 25.14(3) is disengaged, JMC "is entitled" to indemnity costs. 8 Rule 1.35 provides a discretionary power to make an order that is "inconsistent" with the Rules. It provides: 1.35 Orders inconsistent with Rules The Court may make an order that is inconsistent with these Rules and in that event the order will prevail. 9 If the Court were to make an order that the Commissioner pay JMC's costs of the trial on the ordinary basis rather than the indemnity basis that order would be "inconsistent" with r 25.14. Plainly enough, once the applicant has established that r 25.14 is engaged, the Commissioner bears the onus of establishing that an inconsistent order should be made under r 1.35. 10 The discretion in r 1.35 is confined by the requirement that it be exercised judicially having regard to the purpose for which it was conferred. It has been said that the discretion to make an order inconsistent with the Rules must "be exercised for proper reasons which will generally only arise in exceptional circumstances": Lodestar at [27]. This is undoubtedly correct, although care must be taken not to transform or confine the broad statutory discretion by permitting judicial descriptions of the circumstances in which the discretion might be exercised to become constraints not sourced in the statute or glosses on the terms of the statute: Sydney Equine Coaches Pty Ltd v Gorst [2017] FCAFC 34 at [22]. 11 In exercising the discretion under r 1.35 to make an order inconsistent with r 25.14, the reasonableness of the rejection of the offer will be relevant. It is most unlikely that an order inconsistent with r 25.14 would be made where the rejection of an offer was not reasonable. On the other hand, merely establishing that the rejection of an offer was reasonable at the time of rejection is not necessarily sufficient. 12 The former r 23.11 of the Federal Court Rules 1979 (Cth) provided that a successful applicant was entitled to an order for indemnity costs if the judgment was more favourable than the offer, but this entitlement was qualified by the words "unless the Court otherwise orders". In Australian Skills at [23], the Full Court stated: The operation of r 25.14 is not qualified by a phrase such as "unless the Court otherwise orders". Although the Court retains power to make such costs orders as it considers appropriate, the absence of such a qualification tends to emphasise the presumptive nature of r 25.14: see Lodestar Anstalt v Campari America LLC (No 2) [2016] FCAFC 118 at [23] and [27] (Allsop CJ, Greenwood, Besanko, Nicholas and Katzmann JJ); Sydney Equine Coaches Pty Ltd v Gorst [2017] FCAFC 34 at [22] (Rares, Flick and Bromwich JJ) … 13 It should also be observed that there are degrees of reasonableness which, amongst other things, must ordinarily be assessed by reference to the extent of the compromise which was offered. It may be reasonable to reject an offer which amounts to something close to capitulation where the case is reasonably and properly arguable. It may be unreasonable to reject a generous offer where the respondent's prospects are slim. 14 At the time the offer was made, the High Court's decisions in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1; 398 ALR 404 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2; 398 ALR 603 had not been handed down. Both parties were proceeding on the basis that the question whether a person was an employee was to be assessed on the basis of the relationship between the parties as exposed both by the terms of the contractual relationship and the manner of performance of the contract. The offer was about 18% of the superannuation guarantee charge (SGC) the subject of the assessments. On the parties' understanding of the law at the time the offer was made and rejected, and based on the materials available to the Commissioner, it was not unreasonable for the Commissioner to reject the offer. 15 The rejection of the offer would also have been reasonable if the parties had understood that the issue was to be resolved on the basis only of the terms of the contract. Even on this hypothesis, the result was not one which was so clear that the Commissioner acted unreasonably in not accepting the offer. This is underscored by the fact that the Commissioner was successful at trial. 16 On either scenario, it cannot be said that the Commissioner "should … have known [that his] case was likely to fail": State Street Global Advisors Trust Company v Maurice Blackburn Pty Ltd [2022] FCAFC 57; 399 ALR 704 at [123]. 17 The Court invited the Commissioner to identify any matter beyond the reasonableness of his rejection of the offer which should be taken into account in exercising the discretion under r 1.35 to make an order inconsistent with r 25.14. 18 First, the Commissioner submitted that an unusual feature of the proceeding was that much time and expense had been incurred in running the case on the basis of the parties' understanding of the law referred to earlier, that is, the question whether a person was an employee was to be assessed on the basis of the relationship between the parties as exposed both by the terms of the contractual relationship and the manner of performance of the contract. Adopting the primary judge's language, it was submitted that the High Court decisions had moved the goalposts. It may be accepted that the High Court's decisions, which were delivered after the time for acceptance of the offer of compromise had expired, altered the way in which the parties understood the law and approached the case. This is not such an unusual feature of litigation as to warrant a departure from the ordinary operation of r 25.14. The Commissioner's position entailed risk whether assessed on the parties' understanding of the law before or after the High Court decisions. Even if the High Court decisions are understood as moving the goalposts, a proposition which the majority of the High Court probably would not embrace, that is not of itself a sufficient reason to deny the ordinary operation of the Rules by departing from them in the circumstances of this case. 19 The Commissioner next pointed to the fact that the proceeding concerned SGC which when collected the Commissioner is statutorily required to pay for the benefit of the employee, referring to s 63B of the Superannuation Guarantee (Administration) Act 1992 (Cth). The Commissioner observed that the proceeding was not for the recovery of general tax revenue for the benefit of consolidated revenue; rather, it was ultimately for the benefit of an individual who was a third party to the proceeding. The Commissioner submitted: These are significant points of distinction from Federal Commissioner of Taxation v Clark (No 2) [2011] FCAFC 140; 197 FCR 251. That case concerned income tax (which, once collected, forms part of the Consolidated Revenue Fund) and where the party affected by any reduced settlement amount was a party to the Part IVC proceeding and hence a necessary participant in any settlement negotiations. In contrast, in proceedings concerning SGC where, as here, the Commissioner's position is at least reasonably arguable, the public interest is best served by having the Court decide the appeal from the objection decision, as the attendant ramifications are wider than pure commercial considerations of receipts to the Consolidated Revenue Fund: Clark, [28]. The absence of any counter-offer from the Commissioner is consistent with a proper recognition that the public interest was best served by a judicial determination, rather than the Commissioner purporting to compromise, or to bargain away, the superannuation entitlements of a worker. 20 The Commissioner submitted that the relevant policies, procedures and general practice of the Australian Taxation Office (ATO) reinforced the reasonableness of the Commissioner's position, referring to Commissioner of Taxation v Clark (No 2) [2011] FCAFC 140; 197 FCR 251 at [27]-[30]. The Commissioner relied on an affidavit of an Assistant Commissioner, Technical Leadership and Advice, Superannuation and Employer Obligations within the ATO, explaining that the considerations relevant to settling a dispute in relation to superannuation differ from the typical case of recovery of general tax. The evidence included: 8. A worker may report to the ATO an allegation that their payer has not made superannuation contributions for them, and consequently that the payer may be liable for SGC. The ATO is publicly committed to investigating all reports that it receives from workers to identify if the payer is liable. … COMMISSIONER'S APPROACH TO SGC ASSESSMENT AND COLLECTION OF LIABILITY 10. When the ATO investigates an allegation by a worker that a payer did not make SG contributions, and the A TO forms a view that the payer is liable for SGC, the ATO will ensure the assessment of that SGC either through: (a) encouraging and assisting the payer to lodge SG statements, constituting a self assessment of the SGC; or (b) raising default assessments. 11. This approach will be followed in all but the most exceptional of cases. While the Commissioner's general administration of the SGAA empowers him with the capacity to not collect 'every part of due tax', in the context of the SGAA the Commissioner has considered this to extend only to directing activity away from cases where a payer has taken reasonable steps to comply with their obligations, and only has a putative liability due to circumstances beyond their control. 12. This reflects the role of the Commissioner in administering the SGAA as not being one of conventional tax collection, but rather a redistributor of money a worker is beneficially entitled to. As an example to illustrate this distinction, a relatively high cost of collection may be a reasonable basis for ceasing to take action to collect tax the Commissioner believes a taxpayer is liable to pay. However, the cost of collection would be generally inappropriate as a basis for failing to pursue a payer for SGC that represents amounts owing to the subject worker(s). 13. Where the Commissioner investigates a worker's allegation and forms a view that the payer is not liable for SGC, the worker is generally afforded the right to seek an informal review of that decision. This is so despite the worker not having any legal recourse to compel the Commissioner to take action. 14. This reflects the Commissioner's view that the worker, as putative beneficiary of a significant portion of the SGC collected, is a participant in the tax and superannuation system to whom rights and protections are owed by the Commissioner under the Taxpayer's Charter. COMMISSIONER'S APPROACH TO ALTERNATIVE DISPUTE RESOLUTION IN MATTERS CONCERNING SGC LIABILITY 15. The above principles at paragraphs 5 to 14 are reflected in the Commissioner's approach to dispute resolution, including potential settlement decisions, where a payer objects to and/or appeals an assessment of SGC. 16. The ATO's Code of Settlement requires all of the following matters to be considered when deciding whether or not to enter into a settlement: (a) the relative strength of the parties' position; (b) the cost versus the benefits of continuing the dispute; (c) the impact on future compliance for the taxpayer and broader community. A copy of the ATO's Code of Settlement is at Tab 1 (pages 9 to 12). 17. However, as noted at paragraph 12, the costs of pursuing an SGC liability would generally not outweigh the benefits of pursuing the dispute even where they are relatively high. Whereas other tax disputes lend themselves to a like-for-like comparison of the cost to consolidated revenue versus the potential accretion to it, the SGC predominately reflects a worker's putative entitlements, which cannot easily be compared to a cost to revenue. 18. Similarly, the impact on future compliance is generally not given significant weight when considering settlements of disputed SGC liabilities. While the nature of disputes may often be relatively fact-specific, it is reflective of the broader sentiment of the importance of the Commissioner's role in securing worker entitlements that any risk of broader impact in other worker arrangements is given due gravity. This is particularly so where a finding that an SGC liability exists may have broader impacts for a payer's arrangements with other workers, and it's potential future engagement of workers. 19. Additionally, one of the common factors weighing against settlement is where it is in the public interest to litigate. There is significant public interest in the Commissioner's action to secure workers' superannuation entitlements and reduce the superannuation guarantee gap. The Commissioner will generally consider pursuing disputed SGC liabilities will generally be in the public interest. 20. The "superannuation guarantee gap" is an estimate of the difference between the amount of superannuation guarantee contributions that are being voluntarily made, and the amount of total superannuation contributions that would either be made or redistributed as paid SGC pursuant to the SGAA. In 2019-20 the ATO estimated the gap at 4.9% or $3.4 billion. 21. Consequently, the only prevailing consideration that is likely to lead to a settlement of a disputed SGC liability is the strength of the party's position. Specifically, in line with the ATO's Code of Settlement, the Commissioner is generally only likely to enter into a settlement of SGC (and forgo entitlements that are putatively owed to a worker or workers) where he perceives the risk of an adverse litigation outcome as being significant or higher. 22. It is also considered generally inappropriate for the Commissioner to effect settlement based on a partial securement of worker entitlements in proportion to his estimated likelihood of success at litigation. This is particularly so in matters concerning whether a worker falls within the meaning of 'employee' in section 12 of the SGAA, as at law they are either "fully entitled" or "fully disentitled" … 23. A potential exception to the above where a partial offer may be entertained is where it: (a) concerns a partial period, and factual changes in the arrangements mean the Commissioner's position is weaker for part of the period in question; or (b) concerns only some of the workers that were covered in the SGC assessment, and factual discrepancies between the different worker arrangements mean the Commissioner's position is weaker for some workers. 21 In Clark, the Full Court observed: THE COMMISSIONER AS A LITIGANT [26] In considering this matter, we note the observations of the majority (McHugh, Gummow, Callinan and Heydon JJ) in Australian Communication Exchange Ltd v Deputy Commissioner of Taxation (2003) 201 ALR 271 at 281 where their Honours observed, in connection with an appeal against the Commissioner's disallowance of an objection, that: This remains civil litigation between parties who have identified the issues upon which they are joined. [27] That the Commissioner must discharge his duties in accordance with law is beyond doubt. That he should do so in a way which is transparent and consistent is also beyond doubt. There can be no challenge to the appropriateness of his giving directions to his staff as to the ways in which they should address issues which arise in the administration of the various acts of which he has the administration. We do not reject out of hand the proposition that policies and procedures prescribed for use in the Australian Taxation Office may, in an appropriate case, inform any exercise by the Court of its discretion as to costs, whether that be the general discretion under s 43 of the Federal Court Act or that conferred by O 23 of the Rules of Court. [28] It does not follow that the Commissioner may, simply by referring to such policies and procedures, escape the Court's scrutiny of his conduct of litigation, including his conduct in refusing to accept offers of settlement. Once the Court's jurisdiction is engaged the Commissioner becomes a litigant, subject to s 64 of the Judiciary Act, the provisions of the Federal Court Act and the Rules. His conduct is to be judged by reference to all relevant circumstances including, in an appropriate case, his policies and procedures. We accept that in an appropriate case, the public interest may be better served by having the Court decide a case which has wider ramifications, rather than settling it upon the basis of purely commercial considerations. Despite the Commissioner's frequent references to this proposition, it seems not to have applied in the present case. His response to the Taxpayers' request for funding suggests otherwise. [29] We accept that the Commissioner was obliged to deal with the appeals transparently and in accordance with general practice. It does not follow that he was entitled to persevere in the prosecution of the appeals in the face of reasonable offers of settlement. The decision at first instance involved substantial questions of fact, the resolution of which involved the credibility of witnesses. In those circumstances the Commissioner faced substantial problems in any appeal. He should have taken those problems into account in the course of considering the Taxpayers' offers. There is no evidence that he did so. [30] As we have said, in considering the Commissioner's conduct, it may well be appropriate to take into account any relevant policies or procedures. However he has not identified any particular aspect of his policies and procedures as relevant for present purposes. Rather, he impliedly asserts that the Court should simply accept that he properly decided that it was inappropriate to accept any of those offers, on the basis of his policies and procedures, without any real explanation as to why that was the case. 22 Section 64 of the Judiciary Act 1903 (Cth), referred to in Clark at [28], provides: Rights of parties In any suit to which the Commonwealth or a State is a party, the rights of parties shall as nearly as possible be the same, and judgment may be given and costs awarded on either side, as in a suit between subject and subject. 23 As noted earlier, the Commissioner's rejection of the offer of compromise was entirely reasonable. Of itself, in the circumstances of this case, that is not sufficient to deny JMC's entitlement to indemnity costs in accordance with r 25.14(3). The object of r 25.14 is to promote the early settlement of disputes. JMC acted consistently with this object and with the overarching purpose referred to in s 37M of the Federal Court of Australia Act 1976 (Cth) (FCA Act). The intended effect of r 25.14(3) is substantially negated if inconsistent orders are routinely made under r 1.35 on the basis only that the rejection was entirely reasonable. 24 From JMC's perspective it faced a proceeding in which the difference between party / party costs and its actual costs was likely to exceed by many times the amount in dispute. As one would expect, it sought to take advantage of r 25.14 to protect itself from this commercially undesirable outcome by serving an offer of compromise which contained a real compromise. 25 From the Commissioner's perspective, this proceeding was not a test case. The Commissioner's "compliance activity" commenced after Mr Harrison lodged a report with the ATO alleging that JMC had failed to make superannuation contributions. The proceeding was not what might be described as public interest litigation with wide ramifications. It was a highly fact specific dispute. The Commissioner's position entailed risk, both before and after the High Court's decisions in Personnel Contracting and Jamsek. The Commissioner may decide, as he apparently did here, not to settle a dispute because he takes the view that an offer is not reasonable (or that it is reasonably arguable that superannuation is payable) and insist that the Court determine the dispute. That is not a sound basis to make an order inconsistent with r 25.14. Without wishing to suggest that the Commissioner has not complied with the obligation, it is to be emphasised that - like any other litigant - the Commissioner has an obligation to comply with the overarching purpose in s 37M of the FCA Act and that this requires proper attention to appropriate resolution of disputes through negotiation. 26 By reference to the Assistant Commissioner's affidavit, the Commissioner submitted that the Court's decision might have ramifications for JMC's arrangements with other workers. The Commissioner may well want an answer to a particular question because of the assistance that might provide in relation to other matters or his duties of administration more generally. Again, that is not a reason to deny the opposing party an entitlement to indemnity costs where that party sought to compromise the proceedings early and in accordance with the Rules. 27 As to the Commissioner's reliance on his internal policies concerning settlement, the following observations should be made. First, the rejection of the offer was stated to be because of the perception that the offer was too low, not for some other reason whether or not contained in an internal policy. Secondly, whilst policies may be relevant, they cannot shield the Commissioner from his obligations as a litigant. Thirdly, there was nothing about the "Code of settlement" relied on, or the "practical guide to the ATO code of settlement", which lent any real support for the proposition that JMC should be disentitled to indemnity costs, even though the existence and application of such policies may be relevant in a given case: Clark at [28]. At best, those documents in this case support the contention that it was not unreasonable not to accept the offer, noting that the refusal of the offer made no mention of those policies, giving JMC no opportunity to consider that as one of the bases for refusal and an opportunity to respond. 28 There is no apparent injustice in requiring the Commissioner to make good the costs incurred by JMC on the indemnity basis in the way contemplated by r 25.14(3). That is particularly so having regard to the likely future costs of the litigation at the time the offer was made, the amount in dispute, JMC's appropriate conduct in making a genuine offer under r 25.14 intended to protect its position and the absence of any reference to the application of the policies as any part of the reason for refusing the offer. The Commissioner has not discharged his onus of establishing the existence of circumstances which justify an order inconsistent with r 25.14. 29 Although JMC's interlocutory application was framed in a way which suggested that it was seeking the various costs orders on a lump sum basis, that was not pressed at the hearing. 30 The following order should be made: Order 4 of the orders made on 23 May 2023 be set aside and in its place, order: (a) pursuant to r 25.14(3) of the Federal Court Rules 2011 (Cth), the respondent pay the applicant's costs of and incidental to proceeding NSD 175/2020: (i) up to 11.00 am on 31 March 2020 on a party and party basis; and (ii) thereafter on an indemnity basis, as agreed or assessed. (b) the respondent pay the appellant's costs of the appeal and the interlocutory application on a party and party basis as agreed or assessed. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Bromwich, Thawley and Hespe.