REASONS FOR JUDGMENT
(Revised from transcript)
1 The successful applicants in this proceeding have sought their costs on an indemnity basis from 21 November 2013 in reliance upon a Calderbank offer that had been made by them to the Commissioner by letter dated 1 November 2013. The test to determine whether to order that costs be paid on an indemnity basis by reason of a failure to accept an offer to compromise the proceeding on a more favourable basis than the result obtained at trial has been stated in many cases and is fundamentally about whether the losing party was unreasonable in not accepting an offer at the time that it was made: see Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435, 441; Clark v Federal Commissioner of Taxation (2010) 83 ATR 555; Software AG (Australia) Pty Ltd v Racing and Wagering Western Australia (2009) 175 FCR 121, 138 [82]; NMFM Property Pty Ltd v Citibank Ltd (No 11) (2001) 109 FCR 77. The formulation of the test in that way expresses the policy, in giving effect to Calderbank offers, of discouraging unreasonable continuation of litigation which is capable of being settled, rather than of discouraging litigants from having their day in court or of preventing their cases from being tested at trial. The important policy objective of encouraging the settlement of disputes does not warrant the award of indemnity costs where a litigant has failed but has not unreasonably refused to accept an earlier offer.
2 The test, in those terms, and the policy so understood, informs both the form and the content that Calderbank offers should have. It is not sufficient to award indemnity costs that a party has been unsuccessful. An unsuccessful party will ordinarily have to pay the costs of a successful party on the usual basis. Having been unsuccessful in a proceeding, or having been less successful than had been offered to settle the proceeding, may be a qualifying condition to applications for indemnity costs being granted but is not and cannot be determinative of whether an offer, whether good or reasonable, ought to have been accepted at an earlier date.
3 Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435 (approved in Software AG (Australia) Pty Ltd v Racing and Wagering Western Australia (2009) 175 FCR 121, 138 [82]) identified some of the factors to take into account to determine whether a party in receipt of a Calderbank offer was unreasonable not to have accepted the offer. In Hazeldene it was said at 442:
The discretion with respect to costs must, like every other discretion, be exercised taking into account all relevant considerations and ignoring all irrelevant considerations. It is neither possible nor desirable to give an exhaustive list of relevant circumstances. At the same time, a court considering a submission that the rejection of a Calderbank offer was unreasonable should ordinarily have regard at least to the following matters:
(a) the stage of the proceeding at which the offer was received;
(b) the time allowed to the offeree to consider the offer;
(c) the extent of the compromise offered;
(d) the offeree's prospects of success, assessed as at the date of the offer;
(e) the clarity with which the terms of the offer were expressed;
(f) whether the offer foreshadowed an application for an indemnity costs in the event of the offeree's rejecting it.
[Citations omitted]
Those factors are not to be applied slavishly but provide indicators to determine whether an offer had been rejected unreasonably. One may add to those factors such matters as may now relevantly arise by virtue of ss 37M and 37N of the Federal Court of Australia Act 1976 (Cth) which imposes overarching obligations on parties and their lawyers to conduct and dispose of proceedings efficiently.
4 The offer conveyed to the Commissioner in this case in a letter of 1 November 2013 was a good offer as events turned out. On 14 October 2013, the solicitors for the Commissioner had written to the solicitors for the applicants setting out the Commissioner's views about the merits of the applicants' cases from which one can deduce why the subsequent offer was not accepted. Much of the Commissioner's letter is argumentative but it does reveal the matters bearing upon the state of mind of the Commissioner in the proceeding at about the time of the offer by the applicants. It is relevant in this case to consider the reasons which the Commissioner had when not accepting the offer, and in this case it is also relevant to take into account the fact that the Commissioner had statutory duties to perform and that the compromise that he was being asked to accept was a compromise not of private rights and duties but of public rights and duties.
5 The obligations upon litigants to act efficiently and diligently fall upon all parties, including the Commissioner of Taxation, and such matters as were relevant to the decision maker's state of mind must ultimately be ones which are defensible; that is to say, they must be matters that make a rejection of an offer objectively not unreasonable. It will not be sufficient to avoid an order to pay costs upon an indemnity basis for the Commissioner to rely only upon the fact that he had a public or statutory duty. Nor will it be sufficient to rely upon his statutory entitlement to require the taxpayer to discharge the statutory burden of proof: Clark v Federal Commissioner of Taxation (2010) 83 ATR 555, [120], [160].
6 Applications for indemnity costs ought not to be an occasion for the parties to rehearse, in a different context, the disputes that had previously engaged them; nor should the courts encourage the parties to anticipate disputes of that kind by rewarding offers, or by their rejection, which are expressed in argumentative, tendentious or overly generalised terms that are likely, after the hearings, to prolong or re-ignite disputes. Calderbank offers, and their rejection, ought to reveal genuine attempts by parties to compromise the proceedings.
7 The offer of 1 November 2013 was to compromise the proceeding on one of two alternative bases. The first was for the Commissioner to allow deductions to the taxpayers for each of the relevant accounting periods for amounts substantially less than had been claimed. Thus, for example, SPI PowerNet had offered to accept a deduction of $2.478 million in each of the fiscal years from 1997 to 2005 instead of the $6.8 million which had been claimed in each year. In total, including the amount for the 2006 year, SPI PowerNet had offered to accept allowable deductions in the sum of $21 million instead of the $58.7 million which had been claimed. SPANT offered to forego the deductions as claimed and to accept lesser amounts for each of the 2007 to 2010 years. An alternative offer was also made in the letter which was, in general terms, for SPANT (being the head company of the tax consolidated group) not to claim 75 percent of the deductions it would otherwise be entitled to claim in future years from the 2011 year of income on the basis that all deductions as claimed by the applicants previously for the 1998 to 2010 years would be allowed by the Commissioner. It is the first offer which the applicants rely upon in seeking indemnity costs from the expiry of 20 days after the offer was made, being the period in which it was available for the Commissioner to accept.
8 The applicants contended that the offer as made satisfied all of the requirements identified by the authorities. It was made at a time when the parties were in a good position to know the relevant strengths and weaknesses of their respective cases. The matter had been set down to be heard from 25 November 2013 and extensive affidavits and submissions had been filed by the parties. Next it is said that the time allowed to the Commissioner, being 20 days, was ample time in which to consider the offer. It is said that the extent of the amount that was to be compromised could be ascertained clearly by the terms of the offer, and that the prospects of success of the applicants could be assessed at the date of the offer, being only a few weeks before the trial with substantially all of the evidence having been filed together with detailed submissions. The terms of the offer were also said to be sufficiently clear as was the foreshadowed application for indemnity costs in the terms of the letter in the event that the Commissioner did not accept the offer.
9 The Commissioner submitted, however, that, having regard to the matters which had been set out in the letter from his solicitors to the applicants dated 14 October 2013, he was justified (that is, that he was not acting unreasonably) in rejecting the applicants' offer. In written submissions on the indemnity costs application the Commissioner submitted that:
(a) the applicants had not, in their evidence filed at the time the offer was made, identified the particular items of copyright the subject of the claimed deductions. No register of the alleged items of copyright was produced, they were not recorded in the company accounts and there was no evidence relating to their use - a requirement for deductibility under Division 10B;
(b) the applicants had failed to identify which items of copyright were created between 6 November 1997 and 26 June 2006 and were therefore deemed by s 701A-10(2) of the Income Tax Assessment Act 1997 (Cth) to be of nil value;
(c) the applicants' evidence had failed, in the Commissioner's view, to distinguish between copyright in the works, property in those works and the facts or information contained in those works;
(d) the Commissioner considered, on reasonable grounds, that much of the applicants' evidence in relation to the value of the items of copyright was inadmissible or of limited probative value;
(e) having regard to the applicants' accounts and the valuation reports upon which they were based, there was a legitimate factual question as to whether the applicants had already claimed depreciation deductions in respect of the items of copyright.
10 To some extent the Commissioner's contentions on the indemnity costs issue were assertions about the reasonableness of the unsuccessful contentions which he had advanced at trial. The question of whether it was unreasonable to reject or fail to accept an offer is to be determined at the point in time at which it is said that it ought to have been accepted. Care must be taken when answering that question not to be influenced by matters which may occur after that time, and which could not reasonably have borne upon an earlier decision about whether or not to accept the offer. Care must be taken, therefore, not to take into account matters which may arise at the trial or from the reasons for judgment which could not reasonably have borne upon the Commissioner's decision when considering the offer. It is clear, however, that the proceeding raised complex questions concerning the application of provisions which had not previously been considered. The potential relevance of the separate identification of value in the copyright, and its application in the replacement cost methodology, was complex and was a matter about which the Commissioner had an independent external expert opinion. The Commissioner did not rely in the indemnity cost application upon any prior independent external legal advice concerning his prospects of success at trial but he did have the external expert opinion of Mr Samuel concerning valuation upon which he did rely. The Commissioner's repetition of unsuccessful submissions may do little to support his claim that his rejection of the offer was not unreasonable, but the Commissioner did have evidence in support of the assessments, including evidence from an independent expert, upon which it was not unreasonable to rely in seeking to uphold the assessments in the context of complex and relatively unexplored statutory provisions.
11 Accordingly, the application for indemnity costs will not be granted but there will be an order for the Commissioner to pay the taxpayers' costs on the usual basis.
I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Pagone.