Oswal v Commissioner of Taxation

1 On 15 June 2016 the Commissioner applied for costs thrown away by reason of the abandonment of an issue in proceedings which had been brought under Part IVC of the Taxation Administration Act 1953 (Cth). The application for costs was heard on 17 June 2016 immediately after the conclusion of the hearing of the Part IVC proceeding. The Commissioner relied upon an affidavit by Ms Rimma Miller affirmed on 15 June 2016. The taxpayers opposed the application for costs and relied upon an affidavit affirmed on 16 June 2016 by Ms Rebekah Ruth Giles. 2 The Part IVC proceedings contested assessments made by the Commissioner in respect of the year of income ending 30 June 2007. The Part IVC proceeding also involved a challenge to the Commissioner's assessments to penalty tax for the year of income ended 30 June 2010, but the substantive issues in dispute in the Part IVC proceedings concerned liability to capital gains tax in the 2007 income year. The Commissioner's assessments had been issued on 22 February 2011 to Mrs Oswal, and in the alternative to Mr Oswal in his personal capacity and also to him in his capacity as trustee of a trust known as the Burrup Trust. Each of the taxpayers objected against the assessments on 28 April 2011 and in the following year, on 20 April 2012, the Commissioner disallowed the objections in full. The appeals to this Court under Part IVC were filed on 19 June 2012 and appeal statements were filed on 6 August 2012. Separate and preliminary questions were ordered on 19 December 2012 by Edmonds J to be determined under r 30.01 of the Federal Court Rules 2011 (Cth). His Honour heard the separate and preliminary questions on 29 and 30 April 2013 and determined the questions and published reasons on 31 July 2013: Oswal v Commissioner of Taxation (2013) 233 FCR 110. Amended appeal statements were filed on 5 November 2014. 3 The substantive dispute in the Part IVC proceedings for the 2007 year concerned the CGT consequences from a resolution by Mr Oswal as the trustee of the Burrup Trust in favour of Mrs Oswal in relation to 1,148 shares in Burrup Holdings Pty Ltd ("Burrup Holdings"). The issues in dispute in the Part IVC proceedings concerned the existence, timing and quantum of the capital gains assessed by the Commissioner. The resolution of some of the issues in the Part IVC proceedings required consideration of the value of the shares which Burrup Holdings held in Burrup Fertilisers Pty Ltd ("Burrup Fertilisers") which, in turn, raised questions about the value of the assets of Burrup Fertilisers. 4 On 12 March 2015 those acting for Mr and Mrs Oswal in the Part IVC proceedings informed the Commissioner that an issue had arisen in other proceedings involving Mr and Mrs Oswal which might have an impact upon the value of the shares in Burrup Holdings to be determined in the Part IVC proceedings. The solicitors ("Kennedys") acting for the taxpayers in the Part IVC proceedings did not act for Mr and Mrs Oswal in the other proceedings but had received instructions from their clients about matters which had been raised in those proceedings that appeared to bear upon the issues in the Part IVC proceedings. 5 On 12 March 2015 Kennedys wrote to the solicitors ("Minter Ellison") acting for the Commissioner informing the Commissioner that the applicants in the Part IVC proceedings were also parties to proceedings in the Supreme Court of Victoria which included a proceeding that had recently been cross-vested to that Court from the Western Australian registry of the Federal Court. That proceeding had been commenced against Mr and Mrs Oswal by Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) and was referred to in the letter from Kennedys as the "costs overruns proceedings". Mr Oswal had alleged in those proceedings the existence of agreements (by way of defence and counterclaim) between Mr Oswal and Burrup Fertilisers for Mr Oswal to pay costs overruns associated with the construction by Burrup Fertilisers of an ammonia plant and for Burrup Fertilisers to repay the costs overruns to, or at the direction of, Mr Oswal together with interest ("the costs overruns agreement"). The letter identified some areas of overlap between the costs overruns proceedings in the Supreme Court of Victoria and the Part IVC proceedings in the Federal Court and proposed various courses which the parties to the Part IVC proceedings might take to deal with the overlap and to avoid the potential oppression or unfairness which was said to arise from the same issues being litigated simultaneously or more than once. It is unnecessary to consider in detail the nature of the costs overruns proceedings, or the details of, or the evidence relating to, the costs overruns agreement alleged by Mr Oswal, but to note the existence of the other litigation involving the taxpayers which had raised issues that were thought by those acting for the taxpayers in the Part IVC proceedings to affect the value of the shares that had been the subject of the assessments in dispute in the Part IVC proceedings in this Court. 6 The costs overruns issue had a significant impact on the preparation for the hearing of the Part IVC proceedings. The applicants filed detailed and complex expert reports including from a Mr Wayne Basford and a significant number of affidavits from non-expert witnesses. There was also significant interlocutory preparation including the inspection of documents. The Commissioner also obtained and filed expert reports including an expert report from a Mr John Paul Temple-Cole and valuation evidence from a Mr Brendan Halligan. Other interlocutory steps were taken by the parties including the issue of subpoenas to obtain information from third parties. 7 The Part IVC proceedings were given hearing dates in December 2015 to commence on 6 June 2016. On 5 May 2016 Kennedys wrote to Minter Ellison informing the Commissioner that the taxpayers no longer relied on the costs overruns issue in the Part IVC proceedings and would not be calling on evidence in relation to costs overruns. That letter helpfully identified seven affidavits from lay witnesses which would not be read or relied upon, and informed those acting for the Commissioner that further reply evidence from Mr Basford would not be filed. The letter also helpfully made clear that a number of people would not be called at the hearing. The abandonment of the costs overruns issue in the Part IVC proceedings coincided with the abandonment by Mr Oswal of the argument in relation to the costs overruns agreement in the proceedings in the Victorian Supreme Court. The affidavit by Ms Miller filed for the Commissioner concluded by referring to, and exhibiting, the transcript of, and the orders made at, the scheduling conference on 5 May 2016 in the Victorian Supreme Court proceedings. Ms Miller's affidavit noted that the argument in relation to the costs overruns agreement had also been abandoned in the Victorian proceedings and that Mr Oswal had agreed to pay the costs thrown away in those proceedings on the standard basis in the context of being given leave to file amended pleadings. 8 The Commissioner submitted that costs should be awarded in his favour for those costs thrown away on the costs overruns issue in the Part IVC proceedings. The taxpayers submitted, in contrast, that the issue of costs relating to abandoning the costs overruns argument in the lead up to the trial ought to be considered in accordance with the general principle that costs ought to be resolved when the proceedings have been concluded and the rights of the parties have been finally determined. In Brasington v Overton Investments Pty Ltd [2001] FCA 571, Emmett J referred to the former rule in O 62 r 3(3), which provided that a party with an order for costs of an interlocutory provision was not entitled to have a bill taxed until the principal proceeding was concluded or further order, and said at [13]: The rationale for such a provision appears to me to be that, since an interlocutory proceeding does not resolve the final issues between the parties, it would, in ordinary circumstances, be inappropriate that an unsuccessful party in an interlocutory proceeding be required to pay costs immediately, since that party might ultimately be entitled to an order for costs in the substantive proceeding. The general principle appears to be that costs ought to be resolved when the proceeding has been concluded, and the rights of the parties have been finally determined. An important consideration in deciding when a court should determine applications for costs is that the Court may not be able to decide where justice lies between the parties until the proceedings are finally concluded: Castel Electronics Pty Ltd v TCL Airconditioner (Zhongshan) Co Pty Ltd [2013] VSC 92, [28]. 9 The Court has a broad discretion to award costs: see Caason Investments Pty Ltd v Cao (No 2) (2015) 237 FCR 351, [25]-[26]. An important principle reflected in the awarding of costs is that a party should be compensated for having been put to an expense which might otherwise have been avoided, taking into account the merits as ultimately found on the trial of the action: Caason at [25(9)]. The usual order is for costs to follow the event with the successful party being awarded the costs of the proceeding even though there may be some issues on which the party did not succeed, but that is not an inflexible rule and it may produce unfair outcomes: Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (No 2) [2008] FCAFC 107, [3]-[5]. It may, therefore, be appropriate to award costs against a successful party for those costs thrown away on issues which are abandoned: Oil Basins Limited v Watson [2014] FCAFC 154; Sobey v Commissioner of Taxation [2008] FCA 1621, [21]. It is common for costs orders to be made on interlocutory proceedings when the court can determine where justice lies between the parties. That occurs, at times, when costs are "thrown away" by reason of an adjournment which results in "costs that have been incurred once and will be incurred again for the purpose of the trial that is fixed a second time": Sobey v Commissioner of Taxation [2008] FCA 1621, [21]. The costs sought by the Commissioner in this instance are not those thrown away in that sense but which were submitted to have been unnecessarily incurred because an issue was abandoned. A party may be ordered to pay costs for an issue which was unreasonably introduced and withdrawn without adequate explanation: Oil Basins Ltd v Watson [2014] FCAFC 154. In general, however, questions about costs should be resolved when the proceedings are concluded. 10 The Commissioner submitted that the costs overruns issue was abandoned late and that the late abandonment of issues is not desirable nor what is expected from practitioners (see Central Queensland Development Corporation Pty Ltd v Sunstruct Pty Ltd (2015) 231 FCR 17, [108]-[109], [112]-[113]) especially in cases which have been judicially case managed. On the other hand, justice may not be served by discouraging the abandonment of issues which mature reflection suggests should be abandoned and which will save further costs and further judicial resources even if abandoned "late". The "abandonment" by the taxpayers in the Part IVC proceedings of the costs overruns issue resulted in a saving of court time and in avoiding further costs being incurred. The Commissioner submitted that the costs overruns issue was abandoned "late" in the proceedings, but that is not an accurate description of the events in these proceedings. It is true that the costs overruns issue was abandoned in the Part IVC proceedings "just over four weeks prior to the commencement of the trial" in the Part IVC proceedings (as was stated by Ms Miller in her affidavit), but it seems to have been abandoned promptly on the very same day that the argument in relation to the costs overruns agreement ceased to be a live issue in the Victorian Supreme Court proceedings. 11 There is no basis to conclude that the costs overruns issue was not raised responsibly in the Part IVC proceedings. It was an issue which had been engaged in the proceedings in the Supreme Court of Victoria and which, until Mr Oswal abandoned the argument in relation to the costs overruns agreement in those proceedings, appears responsibly to have been considered relevant to the determination of the quantum of any taxable capital gain to be determined in the Part IVC proceedings. It would not have been in the interest of justice not to have raised in the Part IVC proceedings a matter which was responsibly thought to bear upon the judicial determination of those proceedings and which had arisen for judicial determination in the Victorian Supreme Court. Part IVC proceedings have a significant defensive element (Oswal v Commissioner of Taxation (No 2) [2015] FCA 1143; Hii v Commissioner of Taxation (No 3) [2016] FCA 58; Vasiliades v Federal Commissioner of Taxation [2016] FCA 420) and matters bearing upon the quantum of the subject matter of the Commissioner's assessment were proper to be raised in the proceedings in which the Commissioner's assessment was in issue. The Court's discretion to award costs would not serve justice if a party is dissuaded by the risk of costs from canvassing all issues which might be material to the decision in the case: Cretazzo v Lombardi (1975) 13 SASR 4 at 12; Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd (1993) 26 IPR 261, 272; Mobile Innovations Ltd v Vodafone Pacific Ltd [2003] NSWSC 423, [4]. 12 It is neither possible, nor desirable, for the Court in the Part IVC proceedings to consider the strength or merits of Mr Oswal's arguments in the Victorian proceedings in relation to the costs overruns agreement, nor to evaluate the decision made by Mr Oswal, or by those advising and acting for him in the Victorian proceedings, to abandon in those proceedings the reliance upon arguments in relation to the costs overruns agreement. The fact that the costs overruns agreement was abandoned in the Victorian proceeding, and that the costs overruns issue was abandoned in the Part IVC proceedings, does not, however, mean that the issues abandoned in the Part IVC proceedings were unarguable or were not properly raised in the Part IVC proceeding until the argument in relation to the costs overruns agreement was abandoned in the proceedings in the Supreme Court of Victoria. In Young v Lalic [2006] NSWSC 379 Brereton J observed at [10] that the abandonment of a point ultimately not pressed was not to be taken as a concession that it was unarguable, and that counsel and parties to proceedings "should not be discouraged by the risk of an adverse costs order from making responsible judgments". 13 This is not a case in which the Commissioner should have an award of costs before judgment in the proceedings. The Commissioner may ultimately be successful in seeking an order for his costs thrown away even if unsuccessful in the proceeding but that is a matter which should be determined in these proceedings in the usual way once final orders are made. The likelihood of a party being ultimately successful is not a relevant consideration on the question of whether an order for costs thrown away should be made (Sobey at [21]), but the findings, reasons and orders at the conclusion of the proceedings may be relevant to determine whether costs have been thrown away and whether an order should be made that a party be ordered to pay those costs. A party abandoning issues which had caused unnecessary costs to be incurred may be assumed to be required to pay the costs thrown away by the opposing party but that will not always be the case, and the first question to be determined in the present circumstances is when that issue should be determined. The reasons for an issue having been raised and abandoned may play some part in deciding whether costs should be awarded against the party abandoning an issue in a proceeding (Oil Basins), but those explanations in this proceeding are best explored at their conclusion. A full explanation may require waiving legal professional privilege. Ms Giles said in her affidavit that she was not instructed to waive privilege to explain why the costs overruns agreement was not pursued in the Part IVC proceeding: cf Payne v Parker [1976] 1 NSWLR 191, 202. There may be many compelling or sound reasons for clients not abandoning claims for privilege especially where, as was the case here, disputes were ongoing and where, as was also the case here, the issue abandoned in the Part IVC proceeding had also been relevant to other ongoing litigation between different parties. The absence of any further explanation after the determination of the proceedings may leave the party maintaining the privilege without an explanation, or a reason, to resist an order that costs follow the event or to resist an order to pay the costs thrown away by reason of the abandonment of an issue even if otherwise successful in the proceeding. But the reasonableness of raising the issue and the adequacy of any explanation, and any other issues bearing upon where justice between the parties lies in making costs orders, are best left in these proceedings to their conclusion. The Part IVC proceedings have been heard and judgment has been reserved, and there is no reason for a costs order to be made on the abandoned issue before judgment is given. The Court will be in a better position then to determine where justice lies between the parties in relation to the costs. 14 Accordingly, the Commissioner's interlocutory application will be dismissed. I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Pagone.