REASONS FOR JUDGMENT (No 6)
1 I published reasons for judgment relating to the main legal issues raised by these proceedings on 14 February 2003 (Spassked Pty Ltd v Commissioner of Taxation (No 5) [2003] FCA 84 ("Reasons for Judgment (No 5)")). The respondent ("the Commissioner") was successful. All three proceedings were stood over for the making of orders, including orders as to costs.
2 It is common ground that any costs order in favour of the Commissioner should be made against all three applicants since the proceedings were heard together and the evidence in one was evidence in each of the others. It is also common ground that the Commissioner should pay the applicants' costs of the motion brought by notice of motion filed by the Commissioner on 1 December 2000, objecting to the competency of the Spassked proceeding (N 1362 of 1999).
3 The argument in relation to costs has concentrated largely on the affidavits of Stephen John McClintock sworn 22 January 2002 and 13 March 2002. Mr McClintock is a Fellow of the Institute of Chartered Accountants in Australia and a partner of PricewaterhouseCoopers, Sydney. His affidavits and the exhibits to them constituted almost the whole of the Commissioner's evidence in the case.
4 The applicants objected to the reading of those two affidavits and to the admission into evidence of the exhibits to them. In Spassked Pty Ltd v Commissioner of Taxation (No 2) (2002) 49 ATR 642 ("Reasons for Judgment (No 2)") of 17 April 2002, I addressed that objection. At that stage, I allowed both affidavits to be read and admitted into evidence the four exhibits to them.
5 Reasons for Judgment (No 2) as well as Reasons for Judgment (No 5) constitute the background to these present reasons for judgment which can therefore be kept short. I assume a reading of the earlier ones and will use the abbreviated forms of reference used in Reasons for Judgment (No 5).
6 Although I allowed Mr McClintock's two affidavits to be read and admitted the exhibits to them into evidence, I indicated that it was premature to make a final ruling until the further evidence in the case was in, and that a final ruling would have to await final submissions and the final reasons for judgment. In fact neither the parties nor I returned to the matter again, although it may be possible to find implications in the parties' final submissions and in Reasons for Judgment (No 5).
7 Mr McClintock's first affidavit exhibited over forty loose-leaf lever arch files of documents. They constituted exhibit SJM1. The documents fell into two categories: source documents and narratives. The source documents were the documents on which the narratives were based. Generally, but not exclusively, the source documents comprised financial records of the numerous companies in the IEL Group. The narratives, as the name may suggest, were chronologically arranged summaries of financial positions and movements. A separate narrative related to each company.
8 The source documents and narratives were not assembled only by Mr McClintock and his staff. Much of the work was done by the Commissioner's solicitor, the Australian Government Solicitor ("AGS"). There was much interaction between the AGS and Mr McClintock and his staff. For example, the AGS would prepare a draft narrative and supply it to Mr McClintock as a working document, and the final version would result from a process of interaction between him and the AGS.
9 In so far as the applicants object to being ordered to pay the costs of the preparation of Mr McClintock's affidavits and the exhibits to them, I treat the objection as relating also to the associated work done by the AGS. Accordingly, these reasons for judgment relate not simply to the work done by Mr McClintock and within his office, but to the totality of the work done which resulted in the affidavits and the exhibits to them, whether undertaken by Mr McClintock and his staff or by the AGS. All that work must have formed a large proportion of the Commissioner's costs of the proceedings.
10 Mr McClintock's second affidavit (the one sworn on 13 March 2002) exhibited exhibits SJM2, SJM3 and SJM4. Exhibit SJM2 comprised four volumes, as did exhibit SJM3. The eight volumes comprised a report by Mr McClintock and materials referred to in that report. The report and supporting materials related to the Commissioner's case that there was a "scheme" associated with the Spassked Structure to which Part IVA of the Income Tax Assessment Act 1936 (Cth) ("the Act") applied, and that the Commissioner had made an effective determination under s 177F of the Act.
11 In his report Mr McClintock sought to address the question of what the tax positions of the members of the IEL Group would have been "but for" the supposed scheme associated with the Spassked Structure. He concluded that the "financial benefit" to the Group amounted to $126,894,028. One of the objections made by the applicants to the admissibility of Mr McClintock's opinion was that it did not identify a "tax benefit" within s 177C of the Act.
12 I turn now to exhibit SJM4. That exhibit comprised a fairly slim lever arch file of narratives which had been removed from exhibit SJM1 and replaced by substituted narratives. I will say more of this below.
13 In my opinion the voluminous source documents and the narratives which comprised exhibit SJM1 were admissible for the reasons I gave in Reasons for Judgment (No 2). It is conceivable that within the numerous volumes of that exhibit, there may have been particular documents that were inadmissible, but I am unaware of, and had no regard to, any such documents, and the applicants' objection was not addressed to individual documents. Even if the narratives were not admissible, the Commissioner would be entitled to recover the cost of preparing them as aids to an understanding of the source documents.
14 Mr McClintock's report and supporting documents (exhibits SJM2 and SJM3) are of a different kind for two reasons. First, they constituted an expert opinion, rather than an expert's interpretation and summary of historical financial records. But, more importantly, I did not resolve any of the issues under Pt IVA of the Act, and therefore exhibits SJM2 and SJM3 were rendered irrelevant. I will return to this consideration below.
15 I turn now to exhibit SJM4. Someone took the view that six of the many narratives contained in exhibit SJM1 were inaccurate and needed to be replaced. Unfortunately, they were in fact literally removed from exhibit SJM1 and replaced there by substituted narratives. I dealt with this matter in Reasons for Judgment (No 2) at [7] to [9]. Mr McClintock's affidavit of 13 March 2002 sought to make it clear what had happened and exhibit SJM4 to that affidavit contained the six original narratives which had previously constituted part of exhibit SJM1.
16 The applicants submit that the appropriate order in relation to the Commissioner's evidence in chief is that the costs of preparation and tender of it should be excluded from the costs which they are ordered to pay.
17 I think there should be some allowance in favour of the applicants in relation to the costs touching the removal and replacement of the six narratives. This is a matter, not of punishment, but of not ordering the applicants to pay costs unreasonably incurred by the Commissioner and of compensating them for the associated costs which they were caused to incur. The matter did occupy a significant amount of time on one day of the hearing and was a source of delay and inconvenience, indeed, exasperation, in that it made it difficult to understand what had happened. No doubt a reason for that difficulty was that it was not readily accepted that the integrity of an affidavit had been disturbed. Probably, to the minds of those on the Commissioner's side, the position was quite plain, but it was clear to me that the legal representatives of the applicants had difficulty understanding what had occurred, as I did. It is difficult to know how much allowance should be made. It is to be measured, not only by the time wasted in court by the two senior counsel and two junior counsel who represented each party, but also by the work done on the Commissioner's side in correcting the six narratives, removing and replacing them, and preparing the correcting affidavit material and exhibit SJM4.
18 The other matter in respect of which I have concluded that some allowance should be made in favour of the applicants is the "but for" opinion of Mr McClintock expressed in his report and supporting documents (exhibits SJM2 and SJM3).
19 As noted, the questions of whether there was a scheme and a tax benefit and the validity of the Commissioner's determination were not resolved by me. Although the position is not entirely the same as one in which a proceeding is settled and no issue needs to be resolved by the Court, I have found assistance in the approach taken by McHugh J in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622. In that case, the Minister exercised his discretion under s 417 of the Migration Act 1958 (Cth) by granting an asylum seeker a protection visa. In the result, the asylum seeker's application for constitutional writs arising out of the earlier refusal to grant such a visa to her became moot. His Honour said that the appropriate course was to ask whether the asylum seeker had acted reasonably in commencing the proceeding for the constitutional writs and whether the Minister had acted reasonably in his response, including his failure to inform her that he was reconsidering the matter under s 417. His Honour concluded that both had acted reasonably, with the result that there should be no order for costs.
20 While the asylum seeker's application for an order for costs was made under O 71 r 39 of the High Court Rules 1952 which has no counterpart in the Federal Courts Rules, I think it appropriate to follow his Honour in the exercise of the broad discretion as to costs conferred by s 43 of the Federal Court of Australia Act 1976 (Cth). The issues under Part IVA of the Act were distinct from those under s 51.
21 While I appreciate the force of the submissions made on behalf of the applicants, I think that the Commissioner acted reasonably in seeking to defend his determination under s 177F of the Act and that the applicants acted reasonably in attacking it.
22 Accordingly, in my view the appropriate order for costs is one which will leave the parties to bear their own costs of the Part IVA issues.
23 Rather than leave to the taxing officer the difficult task of identifying which items of work related to the removal and replacement of the six narratives and to the Pt IVA issues, I think it better that I seek to cover those matters by making an order that the applicants pay a certain percentage of the Commissioner's costs of the proceeding as a whole. Of course, necessarily, this is a matter of approximation. I think that an appropriate percentage is 75 per cent.
24 There will be orders accordingly.