Ringwood Plus Pty Ltd v Commissioner of State Revenue [2004] VSC 494

2. This is one of four related proceedings in this court,[1] each of which relates to the stamp duty payable under the Duties Act 2000 in respect of the acquisition of property by the relevant appellant.

5. The appellant in each proceeding is a company controlled by Mr Chew Loon Tan or a member of his family. Under separate contracts of sale dated 17 December 2001, each of the appellants purchased certain land and improvements and the restaurant business conducted thereon under the name "Smorgy's". The appellants paid stamp duty calculated according to the values of the real property and plant and equipment specified in the contracts of sale.

8. In each case, in July 2002 the respondent ("the Commissioner") issued a notice of assessment in which he assessed duty on the basis of certain dutiable values which he ascribed to the transfer of land ("the assessments"). The appellants paid the assessments and lodged notices of objection. The basis of each objection was that the Commissioner had incorrectly assessed duty on the whole amount of the consideration (excluding that paid for stock), which included goodwill. The Commissioner disallowed the objections.

11. Each proceeding was commenced on 4 May 2004, by the Commissioner referring the appellant's notice of objection to the court to be set down as an appeal.

14. The summons for directions in each proceeding has been adjourned by consent on several occasions, to enable the appellants and the Commissioner to undertake settlement negotiations. In fact, no settlement has occurred.

17. At the directions hearing in each proceeding on 25 November 2004, I was informed that the Commissioner intends to withdraw the assessments and to refund any excess duty. His solicitor informed me that the Commissioner would give an undertaking to the Court to withdraw each assessment. In those circumstances, the appellants do not wish to continue the proceedings. The parties agree that the appropriate order in each case would be that the proceeding be struck out, with a right of re-instatement in the unlikely event that the Commissioner does not withdraw the relevant assessment.

20. The only issue which requires my determination is the question of the costs of each proceeding.

24. The appellants seek orders that the Commissioner pay their costs. They say that the Commissioner should never have issued the assessments, and the fact that he has said he will withdraw them confirms that fact. They say that although there has been no determination on the merits, the Commissioner has "effectively capitulated".

27. The Commissioner argues that there should be no order as to costs. As there has been no adjudication on the merits, there is no clear "winner". The Commissioner says that the ordinary rule, where there has been no adjudication and where both sides have acted reasonably, is that each party should bear its own costs.

30. The Commissioner says that he acted reasonably (or has not acted manifestly unreasonably) in issuing the assessments and rejecting the objections shortly after, and in reliance upon, the decision of Pagone J in Morvic Pty Ltd v Commissioner of State Revenue[2] ("Morvic"). The subsequent cases of Primelife (Glendale) v Commissioner of State Revenue[3] ("Primelife") and Commissioner of State Revenue v Uniqema Pty Ltd[4] ("Uniqema") are said to have cast doubt on the correctness of Morvic and to have caused the Commissioner to withdraw the assessments.

33. The appellants reject the suggestion that there has been any relevant change in the law, such as to make the Commissioner's change of position reasonable.

36. Morvic and the subsequent cases will be discussed later in these reasons.

40. The court has a very wide discretion in respect to orders for costs.[5] It is a discretion which must be exercised judicially, that is to say, taking into account all relevant matters and making a decision which is fair and just to the parties. The courts have laid down certain principles to guide them in the exercise of that discretion in cases such as these, but they are merely guidelines and do not fetter the court's discretion.

43. After considering earlier cases, the following general propositions were enunciated by Hill J in Australian Securities Commission v Aust-Home Investments Ltd[6]:

"(1) Where neither party desires to proceed with litigation the Court should be ready to facilitate the conclusion of the proceedings by making a cost order...

(2) It will rarely, if ever, be appropriate, where there has been no trial on the merits, for a Court determining how the costs of the proceeding should be borne to endeavour to determine for itself the case on the merits or, as it might be put, to determine the outcome of a hypothetical trial ... This will particularly be the case where a trial on the merits would involve complex factual matters where credit could be an issue.

(3) In determining the question of costs it would be appropriate, however, for the Court to determine whether the applicant acted reasonably in commencing the proceedings and whether the respondent acted reasonably in defending them.

(4) In a particular case it might be appropriate for the Court in its discretion to consider the conduct of a respondent prior to the commencement of the proceedings where such conduct may have precipitated the litigation ...

(5) Where the proceedings terminate after interlocutory relief has been granted, the Court may take into account the fact that interlocutory relief has been granted ..."

51. As McHugh J noted in Re Minister for Immigration and Ethnic Affairs; ex parte Lai Qin,[7] this general approach has been adopted in a large number of cases, including in this Court.[8] McHugh J went on to say that if it appears that both parties have acted reasonably in commencing and defending a proceeding, and their conduct continued to be reasonable until the proceeding was settled or further prosecution became futile, the court will usually exercise its discretion not to make any order for costs of the proceeding.[9]

54. A number of other judges have sought to explain or add some gloss to the principles in the ASC v Aust-Home decision.

57. After discussing Hill J's propositions, Finkelstein J in Gribbles Pathology Pty Ltd v Health Insurance Commission[10] made the following observation:

"For my own part I should wish to emphasise that in the absence of a hearing on the merits it is difficult to see how any order, other than an order that each party bear its own costs, can be made except in exceptional circumstances. To do otherwise would require some prediction of the outcome of the case."[11]

61. However, in Champagne View Pty Ltd v Shearwater Resort Management Pty Ltd, Gillard J said that he would not go so far as Finkelstein J had, in saying that costs would only be ordered in "special circumstances".[12]

"Each case must depend upon its own circumstances. As a general proposition if there is no other material before the court other than the pleadings then it would be extremely difficult to make any order other than each party bear its own costs."[13]

65. In Hyder Consulting (Vic) Pty Ltd v CGU Insurance Ltd,[14] Mandie J said that he also would not go as far as Finkelstein J, because each case must depend on its own circumstances.[15] I agree with the comments of Gillard and Mandie JJ.

68. The appellants referred me to the decision of Burchett J in One.Tel Ltd v Commissioner of Taxation.[16] After considering Ex Parte Lai Qin, ASIC v Aust-Home and other relevant authorities, his Honour said it was important to draw a distinction between "cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the Court's discretion otherwise than by an award of costs to the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs."[17] The validity of this distinction between the "effective surrender" and "supervening event" cases was affirmed by Hodgson CJ in Eq. in Tsaprazis v Goldcrest Properties Pty Ltd.[18]

71. However, in the One-Tel case there was evidence before the Court which would entitle it to conclude that there had been a "surrender" by the Federal Commissioner, that there was indeed a "clear winner." The appellants in that proceeding sought to challenge the validity of certain notices and to have them set aside. The Federal Commissioner initially defended the proceeding, before finally conceding that he could not locate the instrument of authorisation pursuant to which he said the notices had been issued. Without that evidence, he was doomed to lose the case. That is quite a different situation from the cases before me. I am not in a position to predict what the outcome of the present cases might be.

74. Although counsel for the appellants sought to distinguish it, in my opinion, this case bears considerable similarity to the facts in Cassaniti v Federal Commissioner of Taxation.[19] In that case, the Federal Commissioner issued certain notices due to the taxpayer's failure to lodge income tax returns. This led to the taxpayer initiating proceedings against the Federal Commissioner. Shortly after the proceedings had been commenced, the Federal Commissioner allowed the taxpayer extensions of time within which to lodge the income tax returns. As a result, the proceedings became irrelevant and both parties agreed they should be dismissed. Healy J decided that both parties had acted reasonably and there should be no order as to costs. In arriving at that conclusion, his Honour accepted that it was not an appropriate exercise for him to embark on a trial of the action so as to forecast its likely outcome. That is not dissimilar to the situation here, where the Commissioner has decided to withdraw the assessments.

77. I accept that the principles laid down in ASIC v Aust-Home are a useful starting point, but that each case must be determined on its own facts.

81. Here, there has been no settlement. Further prosecution of the proceedings will be futile once the Commissioner withdraws the assessments. The Commissioner's conduct in issuing the assessments undoubtedly precipitated the commencement of the proceedings, so it is necessary for me to consider the reasonableness of the issuing of the assessments, as well as the reasonableness of the parties' conduct in prosecuting and defending the proceedings.

84. There is no material before the court other than the notices referring the objections to the court and the folders of transaction documents filed by the Commissioner under rule 7.06 of Chapter II of the Rules. In particular, there is no affidavit material deposing to communications between the parties, or other circumstances which might show that the Commissioner has acted unreasonably or has "surrendered" an obviously hopeless case. There is also no affidavit material going to the merits of any of the appeals.

87. Both sides were content to argue this application solely by reference to whether or not there has been a change of substantive law such as might justify the Commissioner changing his position in relation to the assessments.[20]

90. In rejecting the appellants' notices of objection,[21] the Commissioner said that goodwill is inherently inseverable from the business to which it relates,[22] but the goodwill of a business usually adds value to the land or house on which it is carried on if sold with the business.[23] Thus, where goodwill is attached to and not separable from the premises to which it relates, its value may be treated as an enhancement of the value of the premises, as it can only be regarded as situated with those premises.[24] I do not understand the appellants to dispute the correctness of these general principles.

93. The Commissioner then relied upon the decision of Pagone J in Morvic. In that case, his Honour held that the Commissioner was not bound to accept the parties' allocation of goodwill and may assess to reflect what an open market transaction should achieve for the land and its improvements. Furthermore, he said that the taxpayer bears the onus of establishing that no part of the goodwill attaching to the business was acquired with the real property.

96. Applying the principles in Morvic, the Commissioner decided that the goodwill in each of the Smorgy's businesses was to be regarded as being attached to and not separable from the business premises to which it related. He also decided that the appellant had not discharged the onus of establishing that a separate value should be attributable to the goodwill of the business.

99. In Uniqema, the Court of Appeal found that no goodwill could be said to have a source in the land in question, as it had only a factory on it and no sales went through the premises. The court left open the question of whether some part of goodwill could be attributed to the land where the goodwill has multiple sources, one of which was land.

102. In Primelife, Harper J expressly disagreed with Pagone J in Morvic. His Honour held that goodwill could not be included, for the purposes of the assessment of stamp duty, in the value of real property as if it were an element of that real property. The decision in Primelife was handed down in June of this year.

105. This is not a case in which it is possible to say who would have succeeded had the proceedings continued to a final hearing, even if that were an appropriate exercise to embark upon. Nor is it appropriate or necessary for me to determine which of the Morvic or Primelife decisions I might have followed. I have considered the goodwill cases only in so far as they touch upon the issues of "reasonableness" in the context of the costs applications.

108. I accept that the parties have acted reasonably in commencing and defending the proceedings and that their conduct continued to be reasonable until it became apparent that further prosecution would be futile. In those circumstances, it is appropriate that there be no order as to the costs of the proceedings.

112. In each proceeding, I propose to order that the proceeding be struck out with a right of reinstatement.

[1] Nos 5766, 5767, 5768 and 5769 of 2004.

[2] [2002] VSC 171.

[5] Supreme Court Act 1986 s.24(1); Order 63 of the Rules of Court.

[6] [1993] FCA 585; (1993) 44 FCR 194 at 201.

[7] [1997] HCA 6; (1997) 186 CLR 622 at 625.

[8] See, eg, WST Securities Pty Ltd v Go-Tell Nominees Pty Ltd (unreported, SC(Vic), Mandie J, 30 May 1997); Acacia Resources Ltd v Delta Gold NL (Nos 1 and 2) (1999) 33 ACSR 144 at 159 per Warren J; Champagne View Pty Ltd v Shearwater Resort Management Pty Ltd [2000] VSC 214 per Gillard J.

[10] (1997) 80 FCR 283.

[12] Finkelstein J had actually spoken of "exceptional" rather than "special" circumstances, but nothing turns on the distinction for present purposes.

[14] [2003] VSC 223.

[16] [2000] FCA 270; (2000) 101 FCR 548.

[18] [2000] NSWSC 765.

[19] (2001) 49 ATR 104.

[20] The change of substantive law is said to arise only from decisions of this court. It is not suggested that there has been any relevant change of law since the Stamps Act 1958 was replaced by the Duties Act 2000.

[21] Presumably these cases were also relied upon in issuing the initial assessments, although I have no evidence one way or the other as to that.

[22] FCT v Williamson [1943] HCA 24; (1943) 67 CLR 561; FCT v Murry (1998) 193 CLR 605.

[23] IRC v Muller & Co's Margarine Ltd [1901] AC 217.

[24] Tooth & Co Ltd v Commissioner of Stamp Duties (1909) 9 SR (NSW) 652; Daniell v FCT [1928] HCA 17; (1928) 42 CLR 296; Box v Commissioner of Taxation [1952] HCA 61; (1952) 86 CLR 387.