Minerva Financial Group Pty Ltd v Commissioner of Taxation

1. The applicant pay 50% of the respondent's costs as agreed or, failing agreement, as taxed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

O'CALLAGHAN J: 1 On 16 September 2022, I published reasons for judgment in Minerva Financial Group Pty Ltd v Commissioner of Taxation [2022] FCA 1092. 2 On 10 October 2022, I made the following orders by consent: 1. The Respondent's objection decision dated 14 May 2020 be set aside and the matter be remitted back to the Respondent to give effect to the reasons of the Court pronounced on 16 September 2022. 2. On or before 21 October 2022, the parties are to confer and submit to the Court a joint proposal, or if they are unable to agree, separate proposals, for the determination of the questions of costs of the proceeding. 3 The parties did not agree about costs, so it is necessary now to deal with the issue. 4 I assume that the reader is familiar with the 16 September reasons. 5 The applicant submitted that it succeeded in relation to the entire first scheme. It said that it was that scheme which gave rise to nearly all of the disputed factual issues. 6 The applicant was unsuccessful in relation to the second and third schemes, but it submitted that "it was in respect of that part of the schemes which consisted of the trustee not exercising a discretion to make a distribution to special unitholders" and "[t]hat aspect of the schemes did not involve any material factual disputes". 7 The applicant also submitted: In relation to all three schemes, the [Commissioner] made numerous factual contentions (some raised for the first time during trial) which he either ultimately abandoned or on which he was unsuccessful. This caused [the applicant] to expend substantial resources in preparing evidence (lay affidavit evidence exceeding 5,500 pages and two expert reports) and lengthy opening and closing written submissions. It also resulted in the unnecessarily lengthy cross-examination of witnesses which extended the duration of the trial. 8 The three issues that it said took up the most substantial resources were: (1) the Commissioner's case that there were three restructures, not one, that the IPO was abandoned, and that the steps taken by the group could not be explained by wanting to be "IPO ready"; (2) the Commissioner's case that there was a lack of evidence regarding the benefits of the stapled arrangement; and (3) the Commissioner's case (relevant to all three schemes) that the non-distribution by MHT of all or substantially all of its income to LF was detrimental to LF's financial position, and that LF needed or required MHT's income, the lack of which caused cash flow shortages and put LF's credit rating at risk. 9 The applicant said that it "was successful in having the objection decision set aside and any amended assessments giving effect to the decision will be for materially reduced amounts". 10 The applicant submitted that, adopting an "issue by issue" approach, given that any amended assessments will be for materially reduced amounts and "given it was successful on almost all of the disputed questions of fact and law, the [Commissioner] should pay 50% of [the applicant's] costs as agreed or, failing agreement, as taxed". 11 The Commissioner, on the other hand, submitted that although the orders made on 10 October 2022 set aside the objection decision against which the applicant had appealed, the applicant's objection was not allowed in full. He submitted that he put his case that he was entitled to make determinations under s 177F of the ITAA36 cancelling tax benefits obtained by the applicant in the relevant years on the basis that Part IVA applied to three alternative schemes, and that he was successful in establishing that Part IVA applied to two of the schemes on which he relied. 12 The Commissioner submitted that there was only one issue in dispute, viz, whether Part IVA applied to a scheme, and that he was successful in establishing that Part IVA applied. He submitted that the fact that the court did not accept his submissions with respect to the first scheme does not necessarily make it appropriate to deal with costs on an issue by issue basis. 13 He further submitted that there was nothing about the conduct of his case to justify depriving him of his costs, or indeed ordering him to pay the applicant's costs, and that his claim was not exaggerated, and did not unreasonably prolong the proceedings. 14 Nonetheless, the Commissioner "recognise[d] that the Court found that Part IVA did not apply to the first scheme and that, as a result, some discounting of his costs may be appropriate to the extent his reliance on the first scheme gave rise to separately identifiable questions of fact on which the Commissioner failed". However, he submitted that "the award of costs should reflect the Commissioner's ultimate success in the proceeding and must not be used to punish the Commissioner for relying on alternative formulations of the scheme, which were not fanciful", and that therefore there was no basis for an order that the Commissioner pay any part of the applicant's costs. 15 The Commissioner submitted that the applicant's case also featured contentions that were abandoned or on which it was not successful, in particular: (1) With respect to the first step of the second scheme, significant court time was taken up due to the evidence given by both Mr Ma and Mr Pillai that the first two units in MFGT were held by the applicant as nominee or as a trustee for Jupiter, despite substantial documentary evidence to the contrary. In its closing submissions, the applicant conceded that it was not part of its case that it held the two units in MFGT as nominee or as trustee for Jupiter. (2) With respect to the commercial benefits of the restructure, the applicant: (a) put forward Mr Ali as its expert in this regard, but his evidence was not relied on for much; (b) ultimately did not press its contention that the restructure provided improved operational efficiency and greater ability to attract funding and investors for specific assets; (c) said that the restructure improved borrowing flexibility but the court did not agree, beyond recognition of the "marginal technical legal advantage" of the RIUs not being under the NAB charge; and (d) failed in its contention that LF was subject to limitations on dividend payments as a result of the NAB facility. 16 The Commissioner accordingly sought an order that the applicant pay 50% of his costs as agreed or, failing agreement, as taxed. 17 The disposition of costs is in the court's discretion. That discretion must of course be exercised judicially, having regard to the applicable principles and the justice of the case in all the circumstances. See s 43 of the Federal Court of Australia Act 1976 (Cth). As Black CJ and French J (as he then was) said in Ruddock v Vadarlis (No 2) (2001) 115 FCR 229 at 235 [11]: Within the general discretion of the courts to award costs it is accepted by decisions in both Australian and English jurisdictions that: • Ordinarily costs follow the event and a successful litigant receives costs in the absence of special circumstances justifying some other order. • Where a litigant has succeeded only upon a portion of the claim, the circumstances may make it reasonable that the litigant bear the expense of litigating that portion upon which he or she has failed. • 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 parties' costs of them. In this sense "issue" does not mean a precise issue in the technical pleading sense but any disputed question of fact or law. 18 In my view, the Commissioner's submission that the applicant should pay 50% of his costs of the proceeding is to be accepted, essentially for the reasons he submitted. In particular, looking at the matter in the broad, it seems to me that the more realistic way to characterise the outcome is that the Commissioner was successful in establishing that Part IVA applied, although he was unsuccessful as to one of the three schemes alleged - and that, as he put it, some discounting of his costs is appropriate to the extent his reliance on the first scheme gave rise to separately identifiable questions of fact on which he failed. In my view, a 50% discount is appropriate to reflect the nature and extent of that failure. 19 I do not accept the applicant's submission that the court should look at the matter on an issue by issue basis and weigh in the balance how much time was dedicated in preparation and at the hearing on issues that the applicant won, or which the Commissioner abandoned. As the Commissioner pointed out, the applicant's case also featured contentions that were abandoned or on which it was not successful, so such an exercise, it seems to me, would be unhelpful at best. 20 For those reasons, I will order that the applicant pay 50% of the respondent's costs as agreed or, failing agreement, as taxed. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Callaghan.