RCI Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia - [2009] FCA 910 - FCA 2009 case summary — Zoe

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RCI Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia

[2009] FCA 910

Federal Court of Australia|2009-08-19|Before: Stone J

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Court

Federal Court of Australia

Decision date

2009-08-19

Before

Stone J

Source

Original judgment source is linked above.

Judgment (38 paragraphs)

[1]

Background 1 The substantive application in this proceeding concerns an amended assessment issued by the respondent, the Commissioner of Taxation, dated 21 March 2006 in respect of the income tax year ending 31 March 1999. The amended assessment was based on the Commissioner's determination under s 177F(1) of the Income Tax Assessment Act 1936 (Cth) (1936 Act) that, by operation of Pt IVA, the amount of $478,237,746 should have been included in the assessable income of the applicant, RCI Pty Ltd, for the year of income ended 31 March 1999. The Commissioner also assessed RCI as liable to pay additional tax by way of penalty in the amount of $43,041,397. The applicant's objection to the amended assessment was disallowed on 30 May 2007. At issue in the substantive proceeding is whether Pt IVA of the 1936 Act supports theamended assessment; whether the penalty is properly payable pursuant to the 1936 Act and, if so, whether the Commissioner acted contrary to law in exercising his discretion not to remit the penalty. 2 At all relevant times prior to 31 March 2003, ABN 60 Pty Ltd, then known as James Hardie Industries Ltd, was the ultimate parent company of the James Hardie Group of companies and of the applicant. From 31 March 2003 the applicant's ultimate parent company has been James Hardie Industries NV, a Netherlands company. ABN 60 is not a member of the James Hardie Industries NV group and is not a party to this proceeding. 3 The dispute arises from RCI's transfer of its shares in James Hardie (Holdings) Inc to another member of the James Hardie Group. The transfer was part of a proposed reorganisation of the corporate group known as "Project Chelsea" which eventually did not proceed. The Commissioner contends that the sale price of the shares was depressed as a result of a dividend of almost half a billion dollars that RCI received shortly before the sale. The dividend was exempt from Australian income tax. The Commissioner contends that these transactions were part of a "scheme" to which Pt IVA of the 1936 Act applies.

[2]

[8]

12 Lockhart J's approach was cited with approval by Gleeson CJ, Gaudron and Gummow JJ in Esso at 70. It was followed by Gummow J in Hartogen Energy Limited v The Australian Gas Light Company (1992) 36 FCR 557 at 561 when his Honour permitted the cross-examination of three deponents. 13 There is nothing in any of these cases to suggest that cross-examination in these circumstances should now be the usual course. So much was recognised by O'Loughlin J in Auspine Ltd v HS Lawrence and Sons Pty Ltd [1999] FCA 1749 at [102] when his Honour, after referring to National Crime Authority v S and Hartogen,noted that these cases point to a degree of relaxation in the old rule but added, "I do not see it as anything more than a relaxation to some degree". All of this points to cross-examination of such a deponent being a course that should be permitted when, in the discretion of the Court, the circumstances of the particular case and the interests of justice (including the importance of pre-trial procedures being kept to a minimum) require it. 14 In this case Mr Clough deposed to the circumstances in which the disputed documents had been created and obtained by Mallesons. He also deposed to the steps taken by Mallesons to locate documents required under the terms of the notices to produce. In his oral submissions in support of the application to cross-examine Mr Clough, Mr Hilton stated that he wanted to explore with Mr Clough whether the copies produced were the only documents that answer the notice to produce. The implication was that RCI had chosen to produce what Mr Hilton referred to as "Propend copies" so as to avoid its obligation to produce original non-privileged documents. In support of his application Mr Hilton took me to a great many documents that are before the Court but as he said himself, ultimately what he wanted to explore was whether there were other documents in the possession or control of RCI that did not have the benefit of Propend privilege and that should have produced. 15 Mr Thawley for RCI submitted that if the Commissioner's complaint was that there has been an inadequate response to a notice to produce or to discovery then the proper procedure (assuming that informal inquiries had not been able to resolve the issue) is for the Commissioner to put on a motion supported by an affidavit. In such circumstances Mr Thawley submitted the respondent should not be permitted to raise these issues at a hearing directed to determining the privilege status of documents that RCI has produced. 16 Strictly speaking Mr Thawley is correct, however the question of whether the notices to produce have been complied with is germane to the proceeding and to the Commissioner's case. The hearing of substantive issues in this proceeding is listed for two weeks commencing on 7 September 2009. Given the proximity of the hearing it is important that the issues raised by Mr Hilton be clarified as soon as possible. As Mr Clough had deposed to the steps taken by Mallesons to comply with the notices to produce there was no element of ambush or surprise in permitting him to be cross-examined. Although Mr Thawley submitted that "the days of litigation by ambush are over" he did not refer to any particular difficulty that cross-examination would pose for RCI. 17 The particular circumstances of this case therefore provided two reasons to permit the cross-examination of Mr Clough: firstly, such cross-examination might assist in determining the subjective dominant purpose for which the documents were created; and secondly, cross-examination of Mr Clough may help to elucidate when and how the documents produced came to be in Mallesons' possession, thus clarifying the issues surrounding the adequacy of RCI's response to the notice to produce. The absence of any identifiable prejudice to the applicants further suggested that this course was appropriate. 18 For these reasons I determined that the Court would be assisted by the cross-examination and in my discretion gave the Commissioner leave to cross-examine Mr Clough.

[11]

24 The focus on the purpose for which the document is created and the fact that legal professional privilege protects communications not documents, led the High Court in Propend to accept the seemingly "illogical - even absurd - proposition that the copy of a document can be privileged from disclosure when the original document is not privileged"; McHugh J at 550. Legal professional privilege maintains the confidentiality of communications between legal adviser and client made for the purpose of advice or for use in existing or pending litigation, "thereby inducing the client to retain the solicitor and seek his advice, and encouraging the client to make a full and frank disclosure"; Grant v Downs (1976) 135 CLR 674 at 685. The same policy applies to communications made by the provision of copy documents even where the document that has been copied was not privileged. The purpose leading to the creation of the original and the purpose of the copy may be quite different; Propend per Brennan CJ at 507. McHugh J elaborated as follows at 553 - 554: The privilege attaches whenever the communication or material is made or recorded for the purpose of confidential use in litigation or the obtaining of confidential legal advice. The protected communication or material may be a telephone conversation between a solicitor and client, a research memo of the legal adviser on an issue pertinent to the client's affairs or … the collection and collation of material and documents for the purpose of litigation or obtaining legal advice. As long as the communication was made or the material recorded for the sole purpose of legal advice or pending litigation and was intended to be confidential, the actual form of the communication or recording is irrelevant. … Where a claim for privilege is made in respect of the copy of the document given to a lawyer for the purpose of obtaining legal advice or assistance, it is likely that the copy was prepared solely for that purpose. Because this is so, the copy will usually have a stronger claim to privilege than the original document. It will usually have a stronger claim because the relevant communication is not the original document; it is the client's conduct in giving the copy to the lawyer. Handing the copy to the lawyer is as much a part of the communication between lawyer and client as an oral summary of the original document would be part of a communication between lawyer and client. … It follows that, if a solicitor makes a copy of a document that was not privileged, the copy will be privileged if it was created for the sole purpose of obtaining or giving confidential legal advice or for the confidential use of legal advisers in pending litigation. Similarly, if the client makes a copy of the document solely for that purpose or use, the copy will be privileged. If this were not so, inspection of the copied material could expressly or inferentially reveal information that would destroy the confidentiality of the communication between the legal representative and client. Either in their assembly or their selection, disclosure of the documents could reveal a line of reasoning as to the relevant issues in the case or their relative merit. Moreover, once the privilege attaches, it remains until the client waives it.

[12]

25 The eight documents were produced in response to items 1, 3, 6 and 9 of the notice to produce. Those items state: 1. Documents recording or evidencing the tax review conducted by Larry Magid in or about March 1998 in relation to a proposed restructure of the James Hardie Group known as "Project X", "Project Scully" or "Project Chelsea", being the tax review referred to on the second bullet point of the document entitled "Meeting Notes" dated 18 March 1998 of SBC Warburg Dillon Read, a copy of which appears as Exhibit PGM-32 to the affidavit of Philip Graham Morley sworn 11 June 2008 and filed by you in this proceeding. 3. The following documents referred to in the facsimile from Keith Sheppard to Mr Michael Rigby dated 19 June 1998 on the subject "Project Chelsea", a copy of which is attached as "Annexure B" to this Notice to Produce. 3.1 the "revised copy of our advice on the Australian taxation consequences" referred to in the first paragraph of the facsimile; 3.2 the Allen Allen & Hemsley "opinion" said to have been prepared on 1 June 1998 and any subsequent amendments to that opinion; and 3.3 documents recording or evidencing any opinion provided by Allen Allen & Hemsley after the facsimile of 19 June 1998 and described in the second paragraph of the facsimile as being in preparation and as "an opinion similar to the one which Allens prepared on 1 June 1998". 6. The following documents referred to in the letter of 29 June 1998 of Coopers & Lybrand to the Directors of James Hardie Industries Limited a copy of which appears as exhibit AEC-18 to the affidavit of Anthony Edward Clemens sworn 12 June 2008 and filed by you in this proceeding: 6.1 the "second opinion" of Allen Allen & Hemsley referred to in paragraph 3 of the letter of 29 June 1998 of Coopers & Lybrand; and 6.2 the supporting "opinion from AAH" referred to in paragraph 8(b) of the letter of 29 June 1998 of Coopers & Lybrand. 9. Documents recording or evidencing the advice given or comments made by Mr LM Magid to the Board of James Hardie Industries Limited on 30 June 1998, and "his opinion to the Company dated 30 June 1998" which are referred to on page 2 of the Minutes of the Meeting of Directors of James Hardie Industries Ltd held on 30 June 1998 a copy of which appears as Exhibit PGM-43 to the affidavit of Philip Graham Morley sworn on 11 June 2008 and filed by you in this proceeding. 26 As already noted, paragraph 27 of Mr Clough's affidavit of 26 February 2009 contains a table in which each of the documents in respect of which RCI claims legal professional privilege is described. The table also contains a brief comment about the nature and purpose of each communication. The description of each document is reproduced below. The comments about the nature and purpose of each document are summarised separately. Document Item in Notice Description No 1 1 Two copies of a facsimile from Mr Tony Clemens and Mr Keith Sheppard (Coopers & Lybrand) Mr Larry Magid (Allens) dated 3 March 1998 and accompanying briefing paper. 2 1 Fax from Mr Sheppard to Mr Magid dated 4 March 1998, attaching a memorandum drafted by Mr Sheppard 3 3.1 Copy of memorandum and attached documents prepared by Coopers & Lybrand or about 19 June 1998 (referred to in Annexure B to the Notice to Produce) 4 3.2 Three copies of a letter dated 1 June 1998 from Mr Magid to Mr Morley 5 3.3 Copy of facsimile from Mr Magid and Mr Rigby to Mr Clemens and Mr Sheppard attaching a copy of a letter from Allens to the JHIL/ABN 60 Board of Directors dated 19 June 1998. 6 3.3 Copy of file copy of letter dated 19 June 1998 (see document 5 in this table) 7 3.3 Two copies of the letter dated 19 June 1998 (see document 5 in this table), one of which is incomplete. 8 6.1, 6.2 and 9 Copy of a file copy of a letter from Allens to Mr Morley, dated 30 June 1998.

[14]

28 The table in the affidavit indicates that all the documents other than document 7 were obtained from Allens and that Allens provided the copies to the applicant's solicitors for the limited purposes discussed in paragraphs 17 to 24 of Mr Clough's affidavit. In those paragraphs Mr Clough records that he wrote to Mr Magid, a partner at Allens, on 7 September 2007 requesting that Allens "review its files to determine whether it had any documents relating to the Applicant's dispute with the Respondent". It appears from correspondence exhibited to Mr Clough's affidavit that Allens identified certain files and that these files were inspected by RCI's legal advisers. Copies of some documents, including documents 1, 2, 3 and 5 in the above table, were then provided by Allens under cover of a letter dated 7 November 2007 which stated: We confirm that the accompanying documents are provided to you subject to common interest privilege and on a confidential basis for the limited purpose of assisting James Hardie and its subsidiaries in the conduct of litigation in the above matter. 29 Mr Clough states that document 7 was obtained from PwC legal and was provided "to the Applicant's solicitors on the Applicant's authority for the purposes of the Applicant obtaining legal advice relating to the current proceedings." 30 On cross-examination Mr Clough was questioned extensively about the steps taken to respond to the notices to produce. He said that RCI had no documents answering the description of documents sought by the notice to produce. RCI informed Mallesons that it had provided all documentation or copies of documentation to PwC Legal. He said that when Mallesons took over carriage of the dispute from PwC Legal, as part of the handover PwC Legal had provided copies of the documents in its files to Mallesons. 31 Mr Clough agreed that no direct enquiry was made of PwC Legal concerning the original of documents required by the notice to produce. He agreed that, with the authority of RCI he could have asked PwC Legal for the originals of certain documents. He denied that copies of documents had been produced in response to the notices to produce in order to rely on Propend privilege. Mr Clough said that the copies had been made "to assist us to advise in the conduct of the dispute and ultimately litigation for RCI" and that the copies had been made in 2005. 32 With reference to documents 1-4 and 8, Mr Hilton pressed Mr Clough as to whether Mallesons independently had any of the documents, copies of which it obtained from Allens. Mr Clough was confident that Mallesons did not independently have copies of the briefing paper referred to as part of document 1 or documents numbered 2 and 3. In response to questions about Annexure B to the first notice to produce, Mr Clough said "certainly the material that's attached to it we would have had copies of [independently of Allens]". Mr Clough was not able to be confident either way in relation to the other documents about which he was cross-examined. 33 Ultimately, nothing that Mr Clough said on cross-examination undermined the assertions made in his affidavit to the effect that the disputed documents were obtained from Allens and PwC Legal and were given to Mallesons for the purpose of Mallesons providing legal advice to RCI or in contemplation of litigation. Given that the documents were either requested by Mallesons for that purpose or were provided as part of a handover on RCI changing its solicitors from PwC Legal to Mallesons it is reasonable to assume that they were created for that purpose. 34 I am therefore satisfied that, by the application of the Propend principles, and subject to issues of waiver, the documents are protected from disclosure by legal professional privilege.

[15]

35 The Commissioner submits that even if the documents under consideration were privileged on creation, that privilege has been waived as a result of their disclosure or the disclosure of their contents in documents filed in this proceeding. The Commissioner bears the onus of proving that there has been waiver, express or imputed; The Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission (2002) 213 CLR 543; Nine Films and Television Pty Ltd v Ninox Television Ltd (2005) 65 IPR 442. 36 The doctrine of waiver is not always easy to apply - a fact which has been the subject of comment on many levels, including in the High Court; Craine v The Colonial Mutual Fire Insurance Co Limited (1920) 28 CLR 305 at 326. Whatever the difficulties of application the concept itself is not difficult. As RJ Desiatnik comments in Legal Professional Privilege in Australia 2nded, 2005 at 132, the concept is one of abandonment of confidentiality as indicated by actions that are inconsistent with the maintenance of the confidentiality. 37 In Attorney-General for the Northern Territory v Maurice (1982) 161 CLR 475 the High Court was much concerned with unfairness as a criterion against which to determine whether waiver should be imputed. In their joint judgment Mason and Brennan JJ commented at 487, that "an implied waiver occurs when, by reason of some conduct on the privilege holder's part, it becomes unfair to maintain the privilege". Their Honours added at 488, "Hence, the implied waiver inquiry is at bottom focused on the fairness of imputing such a waiver". In Mann v Carnell (1999) 201 CLR 1, the High Court placed less emphasis on unfairness and more on inconsistency. In their majority judgment, Gleeson CJ, Gaudron, Gummow and Callinan JJ made the following observations at 13: At common law, a person who would otherwise be entitled to the benefit of legal professional privilege may waive the privilege. It has been observed that "waiver" is a vague term, used in many senses, and that it often requires a further definition according to the context. Legal professional privilege exists to protect the confidentiality of communications between lawyer and client. It is the client who is entitled to the benefit of such confidentiality, and who may relinquish that entitlement. It is inconsistency between the conduct of the client and maintenance of the confidentiality which it effects a waiver of the privilege…. Waiver may be express or implied. Disputes as to implied waiver usually arise from the need to decide whether particular conduct is inconsistent with the maintenance of the confidentiality which the privilege is intended to protect. When an affirmative answer is given to such a question, it is sometimes said that waiver it is "imputed by operation of law". This means that the law recognises the inconsistency and determines its consequences, even though such consequences may not reflect the subjective intention of the party who has lost the privilege. … What brings about the waiver is the inconsistency, which the courts, where necessary informed by considerations of fairness, perceive, between the conduct of the client and maintenance of the confidentiality; not some overriding principle of fairness operating at large...

[19]

Document No 1 41 Document 1 is described as "Two copies of a facsimile from Mr Tony Clemens and Mr Keith Sheppard (Coopers & Lybrand) to Mr Larry Magid (Allens) dated 3 March 1998 and accompanying briefing paper". The Commissioner referred to minutes of a meeting of the Project Chelsea - Board Subcommittee Meeting held on 18 March 1998. Those minutes are exhibited (PGM-32) to the affidavit of Phillip Graham Morley sworn 11 June 2008. Under the heading "Other Matters" there is the following entry: Larry Magid (Allens) tax review - the meeting foreshadowed in the minutes for the Subcommittee meeting on 3 March occurred on Friday, 6 March. Conclusion from the tax review meeting was no "show stoppers" identified but Magid also waiting on detailed memo of advice from C&L to further his review. 42 I was also referred to another exhibit to Mr Morley's affidavit, PGM-29. This is a memorandum dated 26 February 1998 on letterhead of SBC Warburg Dillon Read. The heading of the memorandum is Project Chelsea. It states that it encloses the agenda for the next subcommittee meeting as well as "a tax structure briefing paper" and that the meeting will be held on Tuesday 3 March 1998. 43 The Commissioner invites me to infer from the two documents, taking into consideration the dates of the meeting mentioned, that the tax structure briefing paper referred to in the memorandum is the "accompanying briefing paper" mentioned in the description of document 1. Moreover he submits that the mention of "no show stoppers" discloses the conclusion of the tax review meeting referred to in the minutes in PGM-32 and thus discloses the gist of the Magid legal advice. 44 This seems to me to be an extremely tenuous argument and it is discussed fully in relation to document 2 below. In relation to document 1 however, it is not necessary for me to consider it further. Document 1 has been produced to the Court and at Mr Thawley's invitation I inspected it. As a result, I can confirm that it has not been disclosed by the documents to which the Commissioner has referred. Consequently privilege in the briefing paper mentioned in document 1 has not been waived.

[26]

55 Mr Hilton submitted that the principles in Bennett also apply here with the effect that the applicants had waived any legal professional privilege in respect of this document. The submission depends upon a close examination of the dates of this document and other documents that are exhibited (in AEC-16, AEC-17 and AEC-18) to an affidavit of Anthony Edward Clemens sworn on 12 June 2008. 56 AEC-16 is a memorandum dated 11 June 1998 on SBC Warburg Dillon Read letterhead, referring to the distribution of documents to the board for a 30 June board meeting. It lists the documents to be distributed as including "all final tax advices and sign-offs from C&L, GDC and AAH (including the approvals from relevant authorities)." AEC-17 is a fax from Coopers & Lybrand dated 12 June 1998. It is addressed to, among others, SBC Warburg Dillon Read, James Hardie Industries Limited, Mr Magid at Allens and the American lawyers, Gibson Dunn & Crutcher LLP. The salutation is "Dear Fellow Chelsea Advisers". The heading is "Tax Opinions". The message states: On June 22, a package of opinions will be handed to the Chelsea subcommittee for review prior to the meeting on June 24 at which final confirmation of the Press Release will be given. Each of us has previously confirmed in principle agreement with the tax assumptions of Chelsea applicable to our own jurisdiction. By June 22 it is necessary more formally express our opinions in order for Chelsea to be confident as it proceeds to registration of the SEC documents and makes public statements. … In the case of the US and Australia, C&L will prepare detailed advice specific to The Transaction Steps by revising existing lengthy memoranda to largely exclude reference to alternative courses of action not being followed. Legal counsel in the US and Australia are asked to confirm concurrence in all material respects with the C&L memoranda. While legal counsel may seek to distinguish their views from C&L in various ways, lengthy discussions to date and prior confirmatory notes have not highlighted material differences of view. … C&L Sydney will issue a further opinion to Chelsea in which it will conclude that based on The Transaction Steps, the advisers of each jurisdiction have issued opinions that appear to be soundly based and that as co-ordinators of the project, we are not aware of any material issue that has been omitted from the opinions.