Thomas v Commissioner of Taxation

1. The Respondent's application to vary the costs order of the Court dated 12 April 2017 be dismissed with costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

BETWEEN: COMMISSIONER OF TAXATION Appellant

AND: MARTIN ANDREW THOMAS Respondent

JUDGES: DOWSETT, PERRAM & PAGONE JJ DATE OF ORDER: 18 SEPTEMBER 2017

1. The Respondent's application to vary the costs order of the Court dated 12 April 2017 be dismissed with costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 The question now is costs. On 12 April 2017, this Court made orders in four separate appeals. The appeals were: (1) Martin Andrew Thomas v Commissioner of Taxation - QUD 72 of 2016 This appeal related to the liability of Mr Thomas, as a beneficiary of the Thomas Investment Trust ('the Trust'), to income tax for the financial years 2006-2009. (2) Martin Andrew Pty Ltd v Commissioner of Taxation - QUD 78 of 2016 This appeal related to the liability of another beneficiary of the Trust, Martin Andrew Pty Ltd, to income tax in the 2008 financial year. (3) Commissioner of Taxation v Thomas Nominees Pty Ltd - QUD 79 of 2016 This appeal related to the liability of the trustee, Thomas Nominees Pty Ltd, to income tax in the 2009 financial year. (4) Commissioner of Taxation v Martin Andrew Thomas - QUD 80 of 2016 This appeal related to Mr Thomas' liability to administrative penalties for the financial years 2006-2009. 2 The principal issue in QUD 72 and 78 of 2016 was whether Mr Thomas and Martin Andrew Pty Ltd were entitled to franking credits in the relevant income years. The Full Court concluded that they were. These two appeals were, therefore, allowed: Thomas v Commissioner of Taxation [2017] FCAFC 57. The two appeals brought by the Commissioner in QUD 79 and 80 of 2016 were dismissed. At the hearing, no separate debate was flagged by the taxpayers that any further submissions would need to be made about costs. When that judgment was delivered on 12 April 2017, the Court ordered that the Commissioner pay the taxpayers' costs in the two appeals which were allowed. In the other two appeals, no order was made as to costs. 3 Mr Thomas now seeks to vary the costs orders which have been made in appeals (1) and (4) above. In his substantive appeal (QUD 72 of 2016) he seeks to substitute the costs order which has already been made in his favour with an indemnity costs order. In the appeal which related to administrative penalty (QUD 80 of 2016) he seeks a similar costs order. In the Commissioner's appeal dealing with the assessment of the trustee (QUD 79 of 2016), Thomas Nominees Pty Ltd now seeks its costs on a party-party basis. No alternative costs orders are sought in QUD 78 of 2016. 4 The New South Wales Court of Appeal has firmly cautioned against the conduct in which the present applicants for costs in this case have engaged. In Kable v New South Wales (No 2) [2012] NSWCA 361 Basten JA, with whom the other members of the Court agreed, warned at [14]: 'As a general rule, any party which would seek to be heard in opposition to the usual order as to costs should raise the issue with the Court at the hearing of the appeal. If it does not, and seeks to be heard with respect to costs after orders have been made, even if the application is made in a timely fashion, that party should expect to have to explain and justify its failure to take advantage of the opportunity to address on costs at the hearing of the appeal and, if there were reasons for not doing so, why those reasons were not explained to the Court on the hearing of the appeal…' 5 This Court too has repeatedly stated that if a departure from the usual approach to costs is to be urged this should be flagged with the Court before judgment is reserved. Most recently, in Westpac Banking Corporation v Wittenberg (No 3) [2016] FCAFC 51 Buchanan, McKerracher and White JJ explained the general principle at [9] as follows: 'Normally it is to be expected that a party will deal with costs during the course of the proceedings or at least indicate clearly that it desires an opportunity to make further, and later, submissions on costs.' For other examples in this Court see: Preston Erection Pty Limited v Speedy Gantry Hire Pty Limited [1999] FCA 122 at [4]-[5]; Hanave Pty Ltd v LFOT Pty Ltd [1999] FCA 572; ACCC v Daniels Corporation Pty Ltd [2001] FCA 936 at [9]; Hewlett Packard Pty Ltd v GE Capital Finance Pty Ltd [2003] FCAFC 278 at [13]; Tristar Steering and Suspension Australia Ltd v Industrial Relations Commission of New South Wales (No 2) [2007] FCAFC 95; (2007) 159 FCR 274 at 280 [26]; Shahid v Australasian College of Dermatologists (No 2) [2008] FCAFC 98 at [11]; Siminton v Australian Prudential Regulation Authority (No 2) [2008] FCAFC 113 at [4]; Harding v Deputy Commissioner of Taxation [2008] FCA 1516; (2008) 172 FCR 469 at 473 [13]). 6 Despite these clear statements, counsel for the taxpayers rose at the time that judgment was delivered to suggest that different costs orders might be made. An explanation was proffered for why the matter had not been raised. This was that the offers to compromise had been overlooked and that there was some confusion about the practice of this Court in relation to when such matters should be raised. The former is not really an adequate justification to depart from the usual procedure (although it is a description of what occurred). The latter is certainly not in light of the authorities referred to in the preceding paragraph which are perfectly clear. 7 The precise nature of what the taxpayers wanted by way of costs orders has varied. Initially, counsel indicated that there had been offers to compromise which affected the costs debate in the two appeals which had succeeded. This has now narrowed to one of the appeals, QUD 80 of 2016. Subsequently, an attempt was made to broaden the costs debate to include a suggested consideration of what costs orders the primary judge should make. This was remitted to the primary judge on 3 August 2017. More recently, Mr Thomas' representatives have located a further set of offers to compromise from 2014 which they had overlooked but now seek also to rely upon. Additionally, the trustee now wishes to seek its costs in one of the appeals brought by the Commissioner (QUD 79 of 2016). 8 Eventually, the position adopted by the taxpayers in their submissions was as set out at [3] above. It is convenient to deal with the trustee's position first.

Thomas Nominees Pty Ltd and the Commissioner's Appeal in QUD 79 of 2016 9 The Court sees no reason to interfere with its earlier order that there should be no order as to costs in this proceeding. In the 2009 year, the Trust made a loss but had net income of $173,743 for the purposes of s 95 of the Income Tax Assessment Act 1936 (Cth). Since the Commissioner took the view that the s 95 net income of the Trust had not been distributed, the trustee (Thomas Nominees Pty Ltd) was assessed under s 99A. Once this Court arrived at the view that it did about what the resolutions in the 2009 year had done this meant that the Commissioner's conclusion on objection that none of the s 95 income had been distributed to the beneficiaries was incorrect. How much of the s 95 income was so distributed remains yet to be determined. But the Commissioner's conclusion that all of the s 95 income was to be assessed to the trustee under s 99A obviously enough could no longer stand. Consequently, the objection decision in relation to the trustee also had to be set aside. The Commissioner had originally appealed from the primary judge's conclusion which was that the trustee was not liable because Mr Thomas was presently entitled on a basis separate from the franking credit issue upon which the Court later decided the matter. The parties had joined issue in the appeal on that debate but it was rendered moot by the Court's conclusions on the franking credit issue. Since the appeal became moot it is not the case that the taxpayers can say that they have succeeded. In particular, it is still possible that following further determination, the trustee may still be assessed to pay tax. The Court's dismissal of the appeal, therefore, reflects only the fact that the appeal has no ongoing relevance and not necessarily victory on the trustee's part. There is, in that circumstance, no reason to interfere with the order that there should be no order as to costs in the trustee's proceeding.

Martin Andrew Thomas' appeal against the Commissioner: indemnity costs in QUD 72 of 2016 10 This appeal was concerned with the substantive issue of how the franking credit provisions operated in relation to the distributions which had been made in the 2006-2009 financial years. The penalty appeal in QUD 80 of 2016 is a separate proceeding from the one in which indemnity costs is now sought, QUD 72 of 2016, although as will be seen, it bears upon the arguments which the taxpayer made in relation to that proceeding. 11 On 3 August 2016, the taxpayer served on the Commissioner a notice of offer to compromise under Part 25 of the Federal Court Rules 2011 (Cth) ('FCR') in relation to the penalty appeal, QUD 80 of 2016. The offer to compromise the appeal was on the basis that the assessments to penalty would be set aside. The offer did not deal explicitly with the appeal proceeding concerned with the liability to tax. Its full text was as follows: 'To the Appellant The Respondent offers to compromise the "penalties" component of this proceeding (by which is meant the Respondent's contention that the Respondent is not liable to administrative penalties in relation to the tax shortfalls for the income years 2006 of $856,714.20, 2007 of $1,604,425.95, 2008 of $280,868.50 and 2009 of $261,886.00) as contained in the Respondent's Notice of Contention dated 03 March 2016. The offer is as follows: 1. The Appellant agrees to set aside the penalties imposed on the Respondent under the following assessments: a. Assessment to administrative penalty dated 23 May 2011 for the income year ended 2006 (ATO File Reference: 1012135361185); and b. Assessment to administrative penalty dated 9 September 2011 for the income years ended 2007 and 2008, and dated 13 September 2011 for the income year ended 2009 (ATO File Reference: 1012135456938). 2. Each party will bear their own costs in relation to the penalties component of this proceeding. 3. Acceptance of this offer by the Appellant is in full and final satisfaction of all claims and rights which each party has against the other or may have against the other arising out of, or in any way connected with , the matters the subject of the "penalties" component of this proceeding, and as to costs. This offer of compromise is open to be accepted for fourteen days after service of this offer of compromise. This offer is made without prejudice.' 12 Contrary to the taxpayer's submissions, this offer cannot have any direct impact on the costs in QUD 72 of 2016. FCR 25.14(2) provides: '(2) If an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant's proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent's costs: (a) before 11.00 am on the second business day after the offer was served--on a party and party basis; and (b) after the time mentioned in paragraph (a)--on an indemnity basis.' 13 This rule applies to a 'proceeding' and it is tolerably apparent that the offer to which it refers is an offer made in respect of that proceeding. Here the offer was made in proceeding QUD 80 of 2016 (the penalty appeal). Where the offer is made in one proceeding, FCR 25.14(2) neither authorises nor requires an indemnity costs order in other proceedings such as QUD 72 of 2016. It is not difficult to think that the result which Mr Thomas now seeks to bring about could have been achieved if a Part 25 offer had been issued in his appeal proceeding QUD 72 of 2016 but, for whatever reason, this was not done. 14 The taxpayers then sought to rely upon another earlier offer under Part 25 made on 19 March 2014 which related to the trial proceedings in this Court. That offer was in these terms: 'To the Respondent The Applicant offers to compromise all claims in this proceeding. The offer is 1. The Respondent consent to an order varying the reviewable objection decisions made by him on 19 April 2009, in which he disallowed the Applicant's objections against amended assessments issued for the four years of income ended 30 June 2006 - 30 June 2009, to be decisions that those objections be allowed in full. 2. The Respondent implement the order referred to in paragraph 1 by withdrawing the amended assessments issued for those years and, for the avoidance of doubt, allowing the Applicant the claimed tax offsets. 3. The parties each bear their own costs of the proceeding. This offer is inclusive of costs. This offer of compromise is open to be accepted for 21 days after service of this offer of compromise. This offer is made without prejudice.' 15 This was submitted by Mr Thomas to engage FCR 25.14(3): 'If an offer is made by an applicant and not accepted by a respondent, and the applicant obtains a judgment that is more favourable than the terms of the offer, the applicant is entitled to an order that the respondent pay the applicant's costs: (a) before 11.00 am on the second business day after the offer was served - on a party and party basis; and (b) after the time mentioned in paragraph (a) - on an indemnity basis.' 16 Again, it is clear that the offer which is referred to in this rule is an offer to settle the proceeding in which the offer itself is made. Since an appeal is a separate proceeding from the trial proceeding to which it relates this would ordinarily be expected to mean that an offer made under FCR 25.14(3) before trial does not directly apply in any subsequent appeal. The taxpayers accepted that the Full Court held in Austin Nichols and Company Inc v Lodestar Anstalt (No 2) [2012] FCAFC 72; (2012) 202 FCR 506 ('Austin Nichols') at 512 [30]-[31] that an offer to compromise served prior to trial did not engage the rules relating to offers to compromise for the purposes of an appeal (although its existence remained relevant to the exercise of the Court's costs discretion). 17 The taxpayers sought to distinguish Austin Nichols by submitting that it had been decided under Order 23 Rule 11(4) of the former Federal Court Rules 1979 (Cth). That rule had explicitly referred to an applicant obtaining judgment 'on the claim to which the offer relates' whereas under the new FCR 25.14(3) those words had been omitted. We do not accept this submission. The new rules were not intended to change the substantive operation of the old rules. This was explained in the Explanatory Statement which accompanied their introduction which said at p 5: 'The new Rules do not substantially alter existing practice and procedure but rather explain it in a way that it can be more easily followed and applied. They do contain a number of new provisions and some innovative and streamlined procedural approaches. All provisions have been developed with ease of understanding in mind and so that, individually and collectively, the new Rules speak for themselves.' 18 In relation to the specific terms of Part 25, the Explanatory Statement went on to say at p 17: 'Part 25 adopts, simplifies and streamlines the process and procedures which operated under the former Rules. It does not substantially alter existing practice but provides better guidance to parties on some aspects (for example the content of an offer) and more flexibility on aspects to do with the structure of offers (for example in relation to interest). Rule 25.12 limits the costs which can be recovered on an offer being accepted (if that offer is not inclusive of costs) to up to and including 14 days after the offer was made regardless of when the offer may be accepted. 19 These statements need to be read with s 15AC of the Acts Interpretation Act 1901 (Cth) which provides that: 'Where: (a) an Act has expressed an idea in a particular form of words; and (b) a later Act appears to have expressed the same idea in a different form of words for the purpose of using a clearer style; the ideas shall not be taken to be different merely because different forms of words were used.' 20 This applies to the FCR through the combined operation of s 59(4) of the Federal Court of Australia Act 1976 (Cth) and s 13 of the Legislation Act 2003 (Cth). Although the new rules have, on occasion, resulted in unintended substantive alterations, this has only been where the language has otherwise proved intractable cf. Poole v Australian Pacific Touring Pty Ltd [2017] FCA 424 at [52]-[53]. That is not the case here. There is no good reason to read the word 'offer' as meaning anything other than an offer in relation to the proceeding which is then on foot and hence no reason to depart from the Full Court's earlier conclusions on this topic in Austin Nichols. 21 The taxpayers next sought to rely upon a Calderbank offer in similar terms also issued on 19 March 2014. The Calderbank offer picked up by reference the Part 25 offer and was in these terms: 'Alternative Calderbank Offers 12. In the alternative to the enclosed offers, our client makes offers in the same terms in accordance with the principles set out in Calderbank v Calderbank [1976] Fam 93.' 22 We are prepared to assume in Mr Thomas' favour (without deciding) that this offer could provide a basis for an award of indemnity costs (despite it relating to the trial rather than the appeal). Consistently with those principles, we would need to be satisfied that the refusal by the Commissioner to accept the offer could be described as unreasonable. We do not think that it could. The offer which had been made was one which called for the Commissioner to capitulate to the taxpayers on every point with the only balm being that he would not have to bear their costs. The Commissioner was reasonably entitled to take the view that (a) the distributions were ineffective to distribute the franking credits and (b) that the proceedings in the Queensland Supreme Court did not impact on that outcome. Although the view to which the Court has come is that the Commissioner was incorrect in these conclusions, his position was hardly an insubstantial one and was certainly not unreasonable. Indeed, it had the merit that it was anchored in the very words which had been used in the resolutions. In that circumstance, the offer made by the taxpayers that the Commissioner should abandon his position in its entirety was not one which it was unreasonable for the Commissioner to reject.

The Commissioner's appeal against Martin Andrew Thomas: indemnity costs in QUD 80 of 2016 23 A similar conclusion flows in relation to the Commissioner's penalty appeal. The issues which the parties were set to debate in that appeal have become moot. And because it remains possible that after further assessment Mr Thomas may still be assessed as having assessable income, it is not possible to say that he has yet succeeded on the penalty issues which may even now arise. Consequently, the dismissal of the Commissioner's appeal does not signify any more than that the issues on this appeal have ceased to be relevant. Accordingly, insofar as the usual costs rule is concerned there is no reason to make a costs order. 24 It is true that Mr Thomas did make a Part 25 offer in this case. The relevant rule is FCR 25.14(2) which is set out at [12] above. For the reasons already given, it was not unreasonable for the Commissioner not to capitulate entirely. 25 Mr Thomas also relied upon the offers made in 2014. For the reasons already given they cannot assist.

Conclusions 26 There is no basis on which indemnity costs should be ordered in QUD 72 of 2016 or QUD 80 of 2016. There is also no basis for interfering with the order already made in QUD 79 of 2016 that there should be no order as to costs. In those circumstances, the applications to vary the costs orders in QUD 72, 79 and 80 of 2016 will each be dismissed with costs. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Dowsett, Perram and Pagone.