Russell v Commissioner of Taxation of the Commonwealth of Australia

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

REASONS FOR JUDGMENT 1 When I published my reasons for judgment in respect of these taxation appeals on 30 October 2009 I directed the parties to bring in proposed short minutes of orders to give effect to the conclusions which I had reached. These reasons for judgment should be read in conjunction with those which I published that day: Russell v Commissioner of Taxation of the Commonwealth of Australia [2009] FCA 1224. 2 As those reasons reveal, a particular motivation for not then pronouncing final orders was an apprehension on my part that procedural fairness required the affording of an opportunity to the parties to make submissions as to whether the jurisdiction conferred upon the Court by the Taxation Administration Act 1953 (Cth) (TAA) in relation to the hearing and determination of a taxation appeal extended to the remission of a matter to the Commissioner of Taxation (Commissioner) for the purpose of amending an income tax assessment so as to increase the amount of the appellant taxpayer's taxable income for a given income year. Another motivation was the need for the parties to have an opportunity to assimilate lengthy reasons for judgment in respect of appeals raising a plethora of issues in respect of which each party had enjoyed mixed success before making submissions in respect of costs. 3 The parties have now made submissions with respect to the question of the powers exercisable on a taxation appeal, costs and the form of orders disposing of the appeals. I shall deal with each in turn.

Power to make orders authorising an assessment increasing taxable income 4 The Commissioner's submission was that, for the reasons which I had set out in my earlier reasons for judgment, the provisional conclusion which I then reached in my earlier reasons for judgment (at para 177) was correct. That provisional conclusion was that the powers exercisable by the Court in the circumstances obtaining in respect of the 2001 income year did not extend to the setting aside of the decision disallowing the objection, the making of an order setting aside the assessment concerned and the making of a declaration that Mr Russell's taxable income for that income year was $1869.23 higher than that assessed. In short, the Commissioner's submission was that "the Court's powers under s 14ZZP of the TAA had to be exercised conformably with the scope of the Commissioner's powers under s 14ZY of the TAA". His further submission was that, subject to the impact of any statutory time limitation, it would be open to him to issue an amended assessment increasing Mr Russell's liability for the 2001 income year. 5 Mr Russell, who had the benefit by then of the Commissioner's supplementary written submissions, did not advance any contrary submission. Instead, he submitted that I should make whatever determination I sought fit in relation to orders in respect of the 2001 income year in light of the submissions made on behalf of the Commissioner. 6 As he had, similarly, earlier also not sought in the High Court in Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 181 CLR 466 at 481 (ANZ Savings Bank Case), the Commissioner did not seek to rely upon the legislative stipulation, previously found in s 200B(1) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936), now found in s 14ZZQ(1) of the TAA, that "when the order of the Federal Court in relation to the decision becomes final, the Commissioner must, within 60 days, take such action, including amending any assessment or determination concerned, as is necessary to give effect to the decision". Thus, in the present case, the Commissioner did not contend that this section authorised the issuing of an amended assessment so as to give effect to the conclusion which I had reached as to the income tax assessment for the 2001 income year had not been shown to be excessive because it understated Mr Russell's true taxable income for that year. That position was adopted even though then, as now, this Court is empowered on the hearing and determination of an appeal against an objection decision, to "make such order in relation to the decision as it thinks fit, including an order confirming or varying the decision": see s 14ZZP of the TAA, which replicates a like conferral of power found at the time of the ANZ Savings Bank Case in the then s 199 of the ITAA 1936. 7 It is, on further reflection prompted by consideration of these supplementary submissions, by no means impossible to conceive of a basis upon which, in the circumstances of the present case, power would exist to order remission to the Commissioner for the purpose of making the requisite amendment. 8 Section 200B of the ITAA 1936 was one of the provisions introduced into the ITAA 1936 by the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 (Cth) (Transfer of Jurisdiction Act) to which I made reference in my earlier reasons for judgment. In their joint judgment in the ANZ Savings Bank Case (at 481), Brennan, Deane, Dawson and Toohey JJ observed of it that it "has an essentially mechanical operation, aimed at ensuring that in the absence of a power in the Tribunal or a court itself to amend an assessment the Commissioner will do so in order to implement a decision of the Tribunal or a court". In a footnote to this passage their Honours note that such a power was removed from the courts by the Transfer of Jurisdiction Act. The way in which their Honours describe this section and the tenor of their joint judgment in relation to the then s 190(b) and s 199(1) of the ITAA 1936 does not, with respect, suggest that they apprehended that a consequence of the amendments made by the Transfer of Jurisdiction Act was that a sequel to the Commissioner's being able to support an assessment on a taxation appeal on a ground not taken into account at the time of assessment might be that it was no longer possible for that assessment to be amended so as to give effect to the basis upon which the Commissioner had successfully supported the assessment before a court. Rather, all it suggests is that they considered that the change wrought by the Transfer of Jurisdiction Act was, in substance, nothing more than to the way in which necessary amendment of the assessment was to occur, ie by administrative action by the Commissioner instead of, as had hitherto been the case, by court order; hence the description, "mechanical". 9 Commonwealth taxation legislation must necessarily provide for a taxpayer to have the ability to have recourse to an exercise of judicial power so as to contest a decision by the Commissioner that he is subject to a taxation liability: see the High Court authorities to which I refer in Russell v Commissioner of Taxation (2008) 168 FCR 330 at 333, [13]. The administrative decision by which that liability is ascertained is an assessment, not an objection decision. The latter decision might result in the confirmation or varying of an assessment but it remains an assessment by which the taxable income and the tax payable thereon is, in the absence of further challenge, fixed for a given income year. 10 The exercise of judicial power having in this case been sought, there is, at least on reflection, something rather odd about the notion that, even though, in the exercise of that judicial power, a conclusion has been reached that an assessment is not excessive because, as the Commissioner has permissibly and successfully contended that, in truth, the assessment understates the taxable income, and even though s 14ZZP of the TAA is broadly expressed, warrant for the making of an amended assessment is to be found only in s 170 of the ITAA 1936 (but not s 170(7)), assuming that conditions then obtain for the administrative exercise of that power. That would leave open the prospect of a further objection and appeal or review proceeding in respect of that amended assessment. That would also mean that the exercise of judicial power had not resulted in the final determination, as between the Commissioner and the taxpayer, of the latter's assessed taxation liability for a given income year. In truth, it is as yet an open question as to whether there is power to order remission for the purpose of amendment so as to increase a taxation liability. 11 Be this as it may, the position which obtains is that, though he has now been offered the opportunity to seek the same, the Commissioner has expressly not sought the making of any order which would have the effect of authorising him to amend Mr Russell's 2001 income tax assessment so as to increase his taxable income and, necessarily, the tax payable thereon. Further, Mr Russell has not sought the making of any such order. That being so, and like Sackville J in DB Rreef Funds Management Ltd v Commissioner of Taxation (2005) 218 ALR 144 at 149, [19], I consider that the following observations made by the High Court in Australian Communication Exchange Ltd v Deputy Commissioner of Taxation (2003) 77 ALJR 1806 at 1813-1814, [41] are apposite: We appreciate the width of the power conferred upon the Federal Court by s 14ZZP of the [TAA] to vary the disallowance of objections to assessments. Nevertheless, we question, at least in the circumstances of this particular case, the appropriateness of the adoption by the Full Court of an approach, and a conclusion, that neither party has sought. Perhaps it is desirable in the public interest that contributions be made to an approved fund calculated in accordance with the Full Court's compromise formula. But even though that may be so, which we are inclined to doubt as the respondent as the party responsible for the administration of the Acts advanced no such proposition, this remains civil litigation between parties who have identified the issues upon which they are joined. Even if we thought the reasoning of the Full Court correct, we would still entertain doubt whether we should uphold its conclusion, unwanted as it is by each side. I shall not therefore make an order remitting the matter to the Commissioner for the purpose of amending the 2001 income tax assessment so as to increase the amount of the taxable income and the tax payable thereon. I expressly refrain from voicing any opinion as to whether, either in light of the position he has adopted in this case or otherwise, the Commissioner has any other power to raise such an amended assessment.

Costs 12 The power to award costs reposes in s 43 of the Federal Court of Australia Act 1976 (Cth). While s 43(2) of that Act generally consigns the awarding of costs to the exercise of a discretion, that does not mean that the power may be exercised arbitrarily, whimsically or capriciously. Generally, costs follow the event. In this instance, as the submissions of each of the parties recognise, an uncritical adoption of that approach would not do justice between them. 13 There were many issues raised by the appeals. In respect of those issues and as I have already observed, the parties enjoyed mixed success. In these circumstances, one way of resolving the awarding of costs might be to make orders which provided for an issues based taxation. Neither party sought such an order. That is understandable as such a taxation of costs would, in this instance, be a complex task, especially where there was an overlap of evidence as between issues on which one party or the other succeeded to some extent at least and issues on which one or the other failed. 14 The Commissioner submitted that costs should be awarded on a percentage basis. He submitted that he should receive 80% of the costs of the appeals but that this percentage should be reduced to 75% so as to obviate a need for taxation of costs to which Mr Russell submitted he was entitled. Mr Russell's primary position was that there should be no order as to costs. However, if I was not disposed to make such an order, he, too, suggested that the allocation of a percentage would be appropriate. 15 While a percentage approach involves an element of value judgement upon which reasonable minds might reasonably differ, I agree that it is an appropriate method to adopt in the circumstances, subject to the allowance to Mr Russell of particular disbursements. 16 Neither party, rightly, submitted that costs should be awarded other than on a party and party basis. 17 Unsurprisingly, the parties' submissions gave different emphasis to the nature and extent their respective forensic successes and failures in the appeals. 18 The Commissioner's submission offered the following, accurate summary of the principal income tax liability issues, in respect of each of which Mr Russell had not enjoyed success: (a) whether the personal services business exception applied (which in turn concerned the "results test" and the "80% rule"); (b) whether a foreign registered company was a "company" for the purposes of the 86-15(2) of the Income Tax Assessment Act 1997 (Cth); (c) whether the International Tax Agreements Act 1953 (Cth) had the consequence that Part 2-42 of the ITAA 1997 could have no application in respect of the deeming of Ancath's income to be the Applicant's income; (d) whether there were two amounts ($3,350.00 and $16,667.75) which were not a reward for the Applicant's efforts or skills; and (e) whether two amounts (NZ$27,680.83 and NZ$21,266.23) were "refunds". 19 The Commissioner's submission also highlighted that, in the income tax appeal, Mr Russell had, by concession, enjoyed the modest success of a reduction in his taxation income for the 2002 income year by an amount of $416.00. He reminded that this concession was made of his own motion in an Amended Appeal Statement (Income Tax) filed on 2 May 2008 (at para 19B), almost three months prior to the commencement of the hearing of the appeals. 20 Again accurately, the Commissioner noted that, with respect of the income tax penalty appeal, Mr Russell had success to the extent that: (a) the uplift of 20% was not pressed by the Commissioner [as notified at an early stage in the Commissioner's Appeal Statement filed on 20 December 2007 (see para 31)]; and (b) the base penalty was reduced to 25% and the base penalty liability was remitted in full. 21 As to the goods and services tax appeal, the Commissioner conceded that Mr Russell had enjoyed success to the extent that: (a) the resident agent amount was not pressed by the Commissioner [as notified at an early stage in the his Appeal Statement filed on 21 February 2008 [see para 13(a)]; (b) the Court had determined that Mr Russell is entitled to input tax credits in relation to the farm forestry enterprise (although this success was limited to the extent that the partnership carried on such enterprise only until 23 February 2004). 22 The Commissioner emphasised that Mr Russell's goods and services tax appeal had failed insofar as it concerned each of the alleged accountancy practice and the naturist retreat enterprises. I recall, too, in this regard, the misconception on Mr Russell's part of the effect on the ability for the partnership A W Russell & Co to continue as an enterprise following the resignation of his wife. 23 As to the goods and services tax services tax penalty appeal, the Commissioner conceded that Mr Russell had enjoyed success to the extent that: (a) the uplift of 20% was not pressed by the Commissioner, but that this concession as notified as early as 21 February 2008 in the Commissioner's Appeal Statement filed: [para 13(b)]; (b) the penalty referable to the resident agent amount was not pressed (again as notified in the Commissioner's Appeal Statement filed on 21 February 2008): [para 13(a)]; (c) the penalty relating to the farm forestry operations will correspondingly be eliminated; and (d) the base penalty in respect of the naturist retreat has been reduced to 50%. 24 The Commissioner noted, accurately, that Mr Russell's goods and services tax penalty appeal had failed to the extent that he had not secured any reduction in the base penalty concerning the alleged accounting practice enterprise and in respect of remission of the partnership's base penalty liability in respect of that alleged enterprises and the alleged naturist retreat enterprise. 25 In response, Mr Russell emphasised, accurately, that he had secured a considerable reduction in the amount now payable by him to the Commissioner. He submitted that it would give appropriate recognition to the relative successes and failures to make no order as to costs. That submission was based on the following propositions, which I quote: (a) The Income Tax Matter (i) Whilst the amount of income tax payable has not been reduced, the combined penalties have been reduced from 95% to 25%. (ii) Whilst the [Commissioner] in his Appeal Statement advised that he no longer sought an increase in the base penalty amount of 20% for obstruction, he did not make this concession at the time of notifying the Applicant of the outcome of his Objection and yet nothing had happened between advising of the Objection Decision and the lodging of the Appeal Application with the Court. Clearly if the Appeal had not been lodged the [Commissioner] would have insisted on the payment of the additional 20%. If it was good enough not to insist on payment of the 20% after lodging an Appeal Application why was it not good enough to make the concession in the Notice of Objection? Clearly the Commissioner has not acted fairly or in good faith despite saying in The Tax Payers Charter that he does so. The gain made by [me] in the abandonment of this 20% uplift in the base penalty should be taken into consideration in determining the level of costs. (b) The GST Matter (i) The amount now payable to the Commissioner has been reduced by the GST content of the farm forestry expenses which up to 23/2/04 amounted to $1002.50 and $520.03 from 23/2/04 to 30/6/06, by the amount of GST on the Income of [Ancath] $43,898.00, by the amount of the penalties on these 2 items $40,913, plus by the amount of the reduction in penalty on one of the remaining matters that were at issue. (ii) Whilst the [Commissioner] in his Appeal Statement advised that he no longer sort the GST on the [Ancath] income, he did not make this concession at the time of notifying the Applicant of the outcome of the Objection and yet nothing had happened between advising of the Objection Decision and the lodging of the Appeal Application with the Court. Clearly if the Appeal had not been lodged the [Commissioner] would have insisted on the payment of this item after lodging an Appeal Application why was it not good enough to make the concession in the Notice of Objection? Clearly the Commissioner has not acted fairly or in good faith despite saying in The Tax Payers Charter that he does so. The gain made by [me] in the abandonment of this item should be taken into consideration in determining the level of costs. (iii) Despite the concession made by the [Commissioner] mentioned above at paragraph 2(b)(ii), the Commissioner has continued to issue demands for payment of the gross amount of his assessments including the GST on the [Ancath] income, together with interest thereon, the most recent demand being a statement of account issued on 24 October 2009 which statement had attached to it a return addressed envelope for payment." 26 Mr Russell set out the costs that he incurred that he considered recoverable by him should an order for costs nonetheless be made: My return airfare Mackay to Brisbane 233.00 Airport Parking Fee (one day) 20.00 Air train in Brisbane (return) 25.00 Mr McKenzie's return airfare 190.00 Mr McKenzie's time & expenses for appearing (per his account. [Mr Russell attached an appendix giving particulars of these expenses. It is not necessary to reproduce that appendix for the purposes of these reasons for judgement] 695.20 One night's accommodation in Brisbane 109.65 Meals in Brisbane (one day allowance) 50.00 Total costs claimed $1,322.85

27 As was his right, Mr Russell appeared on his own behalf. In so doing, he did not thereby become entitled to any award of costs in respect of the time which he spent in the preparation for and presentation of his case. The reason why that is so was explained by the High Court in Cachia v Hanes (1993-1994) 179 CLR 403 at 410-411: It has not been doubted since 1278, when the Statute of Gloucester ((4) 6 Edw.I c.1.) introduced the notion of costs to the common law, that costs are awarded by way of indemnity (or, more accurately, partial indemnity) for professional legal costs actually incurred in the conduct of litigation. They were never intended to be comprehensive compensation for any loss suffered by a litigant. As Coke observed of the Statute of Gloucester, the costs which might be awarded to a litigant extended to the legal costs of the suit, "but not to the costs and expences of his travell and losse of time" ((5) Coke, Second part of the Institutes of the Laws of England at 288. See also Howes v Barber [1852] EngR 15; (1852) 18 QB 588 at 592 [1852] EngR 15; (118 ER 222 at 224); Dowdell v The Australian Royal Mail Co. (1854) 3 El and Bl 902 at 906 [1854] EngR 604; (118 ER 1379 at 1381).) These types of costs do not therefore fall within the terms of the power to award costs conferred on the Court by s 43 of the Federal Court of Australia Act. Absent such statutory authority, the Court has no power to award any costs. 28 Mr Russell did not seek an award of costs in respect of the time which he spent in the preparation for and presentation of his case but he did seek disbursements related to his appearance. The latter though are what Coke termed in the passage quoted "the expences of his travell". In my opinion, there is no power to award Mr Russell such costs. This must follow from the proposition that he is not entitled to any award in respect of the costs of the appearance itself. Such travel expenses were not allowed in Cachia v Hanes (1993-1994)179 CLR 403 at 417, although that outcome is there described as one within the discretion of the taxing officer. Having regard to Coke's observation, the disentitlement might, with respect, have been regarded as absolute rather than discretionary. 29 The position is different in respect of the disbursements incurred by Mr Russell in securing the attendance of Mr McKenzie. These are disbursements in respect of a witness. There is power to make an award in Mr Russell's favour in respect of them. The amounts claimed in this regard strike me as reasonable, even modest. I therefore intend to make an order in Mr Russell's favour in respect of these disbursements. I shall also order that the amount thereof be set off against the percentage costs which I am disposed to award to the Commissioner. I conceive that the interests of justice are best served by an express recognition in Mr Russell's favour of disbursements intimately associated with an issue upon which he enjoyed conspicuous success rather than by some arbitrary adjustment of a percentage of costs otherwise appropriate to award in favour of the Commissioner. 30 It will be apparent from the indication in the preceding paragraph as to the awarding to the Commissioner of a percentage of his costs that I am not disposed to make no order as to costs. Such an order is sometimes made as a matter of discretion in, for example, a case where each party is legally represented and each has enjoyed degrees of success and failure on issues such that, albeit as a matter of advance impression, were there to be issues or percentage based taxations of their respective costs and mutual set off of the resultant awards the end result might be that neither party came to owe the other anything in respect of costs. Even assuming that the parties had enjoyed roughly equal measure of success, to adopt that approach in this instance would be but a different way of giving impermissible recognition by way of set off to costs associated with Mr Russell's case preparation and appearance. 31 This apart, the Commissioner's legal representatives conducted the proceedings with consummate fairness. There has, in relation to the proceedings, been no conduct on the part of the Commissioner or those representing him which would disentitle him to an award of costs. 32 It may, with respect, be that a degree of rigidity of thinking and misconception attended the objection decisions insofar as they affirmed the penalty uplift for obstruction. This is not the first occasion either when in practice or thereafter when I have seen an obstruction based penalty uplift imposed on assessment and maintained on objection only to be abandoned in appeal or review proceedings. Those within the Commissioner's office who conceive such a penalty uplift is applicable on assessment or who review the same on objection would be well advised to read the observations made by Helman DCJ (as his Honour then was) on the subject of what does and does not amount to obstruction in Scanlan v Swan (1982) 61 FLR 468 at 472-473 (Special leave to appeal to the High Court from this decision was granted but then revoked on the hearing of the appeal), a judgment described by Gray J in Australian Federation of Air Pilots v Ansett Transport Industries (Operations) Pty Ltd (No 1) (1991) 28 FCR 379 at 385 as, "helpful". What is relevant for present purposes though is that, in these proceedings, the Commissioner readily and at an early stage conceded that Mr Russell ought to succeed in respect of this aspect of his appeals. That is hardly behaviour consistent with an absence of good faith on the Commissioner's part. The same may be said in respect of the Commissioner's ready and voluntary concession that the amount assessed in the 2002 income year was excessive and in respect of his conceding that the goods and services tax and related penalty assessments were excessive insofar as they related to the "resident agent amount". 33 Assuming for the moment that the Commissioner did, as Mr Russell submitted, as recently as 29 October 2009, press for the payment of outstanding goods and services tax, that is not conduct in respect of these appeals. Further, unless and until the assessment is set aside, the amount of goods and services tax assessed remains payable notwithstanding the institution of an appeal to this Court: s 14ZZR of the TAA. 34 Though I can understand the sense of grievance Mr Russell feels in that he has had to come to court to secure concessions that one might perhaps have hoped would have occurred at the objection stage, in truth there is no evidence of a want of good faith on the part of the Commissioner in relation to these appeals. 35 So far as the determination of a percentage of costs is concerned, there is merit in each of the approaches evident in the submissions of the parties. On the one hand, the Commissioner points to the preponderance of issues upon which he has succeeded. On the other hand, Mr Russell points to the substantial reduction he has achieved in his hitherto assessed indebtedness to the Commonwealth as a result of these appeals. It will recognise the former of these approaches to award the Commissioner the greater part of his costs. However, it would give undue recognition to the latter of these approaches for that greater part to be, before set off or adjustment, the 80% sought by the Commissioner. In my opinion, the percentage that is more appropriate in the circumstances is 66.67% or, expressed another way, two thirds. 36 As it happens, a similar result is achieved by a rough approximation based on a hearing time of six days for the appeals. I agree with the Commissioner's broad estimate in his submissions that the forestry operation issue occupied, in all, no more than a day's hearing time. Allowance ought then also to be made for some at least of the time spent in the making of submissions referable to all of the issues upon which the Commissioner did not succeed. Taking this also into account also results, in my opinion, in the Commissioner being entitled to two thirds of his costs. 37 Mr Russell also enjoyed success in an interlocutory controversy in respect of which I gave directions on 14 March 2008: Russell v Commissioner of Taxation (2008) 168 FCR 330. The costs of and incidental to that interlocutory proceeding should not form part of the Commissioner's costs. There are also other reserved costs. The Commissioner should have two thirds of these as well as those two thirds of the appeal hearing costs.

Orders 38 Mr Russell agrees with the draft short minute of orders for the disposing of the appeals proposed by the Commissioner. These, in turn, have evidently been drawn by reference to my earlier reasons for judgment. 39 I was initially inclined to think that, in respect of the 2001 income year, I should make an order confirming the objection decision insofar as it concluded that the assessment in respect of the 2001 year was not excessive but on the basis that Mr Russell's taxable income for that year was $1869.23 higher than that assessed and thus his assessed tax was in fact lower than that payable in respect of that higher taxable income. The draft proposes the making of such an order. 40 Were I to have made an order remitting the matter so as to enable the making of an amended assessment increasing Mr Russell's taxable income, I should also have had to set aside the objection decision insofar as it related to that year and to declare what was his true taxable income for that year. However, neither party has contended for such a remitter order. On reflection, that poses something of a conundrum. What has occurred is that Mr Russell has failed to show that an assessment confirmed on objection is excessive for the reason that the Commissioner has shown that his taxable income was in truth higher than that assessed. Relevantly, the actual decision on the objection was to confirm the assessment. While the power granted by s 14ZZP of the TAA is broadly stated, it expressly includes a power to confirm or vary the objection decision, not the reasons for that decision. The Commissioner has not sought to have the objection decision set aside, instead opining in submissions that he may nonetheless be able to amend the assessment for that income year if the statutory conditions for so doing are met. In these circumstances, I consider that I should do nothing more in respect of this income year than to dismiss the appeal insofar as it relates to that income year. 41 Save as aforesaid and with the addition of the orders foreshadowed as to costs and making provision for remitter in respect of the income tax penalty assessment, I shall make orders in terms of the proposed short minutes. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan.

Associate: Dated: 10 December 2009 Counsel for the Applicant: The Applicant appeared in person

Counsel for the Respondent: Mr KD Dorney QC with Mr SR Lumb

Solicitor for the Respondent: Australian Government Solicitor

Date of Hearing: 30 October 2009

Date of Written Submissions filed on behalf of the Respondent: 13 November 2009

Date of Written Submissions filed on behalf of the Applicant: 26 November 2009

Date of Judgment: 11 December 2009