Vicwal Pty Ltd v Commissioner of Taxation

REASONS FOR JUDGMENT 1 On 31 October 2008, I made an order by consent allowing the taxpayer's appeal in this matter. However, the parties were unable to agree on the question of costs. 2 The consent order was made in the following circumstances. The taxpayer failed to lodge a return for the tax year ended 30 June 1998. On 8 June 2006, the Commissioner issued a notice of assessment for that year under s 167 of the Income Tax Assessment Act 1936 (Cth) (the Act) assessing that the taxpayer had made a capital gain on the sale of a property located in Hay Street, West Perth. The taxpayer objected to the assessment, the objection was disallowed and the taxpayer appealed. During the course of the appeal proceeding, and before the hearing, the taxpayer filed an affidavit annexing a number of documents relating to the development costs of the property and an expert report dealing with those costs. These materials satisfied the Commissioner that certain costs had been incurred by the taxpayer in developing the property, and that when the costs were included in the cost base for capital gains tax purposes, the taxpayer made a capital loss on the sale of the property. On that basis the Commissioner consented to the appeal being allowed before the hearing. 3 Both parties accepted that the question of costs is in the discretion of the Court, and that the usual order is that costs should follow the event. However, the Commissioner contended that that general rule should not be applied because the litigation was brought about by reason of the taxpayer's failure to disclose, at a much earlier stage, the details of the basis upon which the taxpayer ultimately succeeded. Had this been done, said the Commissioner, the litigation could have been avoided. 4 The Commissioner identified a number of occasions when, before the appeal was commenced, the taxpayer had an opportunity to disclose the underlying facts and circumstances relating to the loss incurred in the development and sale of the property. 5 The first such occasion, said the Commissioner, was when the taxpayer was obliged to lodge a tax return for the year in question. 6 The Commissioner said that the next occasion when the taxpayer had an opportunity to provide the relevant documents and information was during the course of an audit conducted by the Australian Taxation Office arising from the failure of the taxpayer to file a tax return for the 1998 tax year and a number of other tax years. The audit commenced in March 2003. During the audit the Australian Tax Office requested that the taxpayer provide relevant documents, but no documents were produced. Further, during the audit, Mr Uratoriu, who is, and was at the material time, the sole director of the taxpayer was interviewed by officers of the Australian Taxation Office. During that interview, Mr Uratoria's legal representative said that the taxpayer had provided the documents to his accountant but had not been able to retrieve the documents because his accountant was on holiday. However, the taxpayer produced no documents before the audit ended in May 2006. 7 As a result of the audit, the Commissioner issued the notice of assessment under s 167 of the Act referred to above. 8 On 24 August 2006, the taxpayer lodged an objection to that assessment. Ground 6 of the objection stated that there was no capital gain in respect of the sale of the Hay Street property, as the consideration received in respect of the disposal of the property did not exceed the cost base of the property. However, that was the full extent of the information provided in the objection. 9 The Commissioner contended that the next stage at which it was open to the taxpayer to make the necessary disclosures was during the stage that the Commissioner considered and decided the taxpayer's objection to the notice of assessment. 10 During that period, an officer of the Australian Taxation Office, by a letter dated 14 September 2006, wrote to the taxpayer and requested that the taxpayer provide "the workings on the capital gain or loss on the sale of the property including documentary evidence for the relevant transaction". The letter requested that the information be provided within 28 days 11 By a letter dated 12 October 2006, the taxpayer's solicitors sought an extension of time to provide the information and documents until 22 December 2006. That application was granted by the Australian Taxation Office. 12 Shortly prior to the expiry of that extended period, the taxpayer's solicitors wrote again stating that Mr Uratoriu was unwell and seeking an extension to comply with the Commissioner's request. The solicitors stated that they expected to be "in a position to provide you with the requested information early in the new year". 13 The Australian Taxation Office granted a further extension of time until 12 January 2007. 14 By a letter dated 11 January 2007, the taxpayer's solicitors sought a further extension until April 2007 to provide the documentation on the grounds that Mr Uratoriu was still unwell. That request for an extension was refused. The taxpayer did not provide the documents by 12 January 2007. On 14 February 2007, the Commissioner disallowed the objection. 15 On 5 April 2007, the taxpayer filed its notice of appeal. An outline of the taxpayer's case was provided for the first time on 28 September 2007, in response to an order that the taxpayer provide particulars of its grounds of appeal. It was then that the extent of the development expenditure was revealed. By then the taxpayer had instructed its expert witness, Mr Matthew van Riessen of Mack & Co. Mr van Riessen's affidavit was sworn on 6 May 2008. On 23 June 2008, Mr Uratoriu swore an affidavit annexing documentation supporting the expert's opinion. 16 The Commissioner's primary contention was that, in assessing costs, the Court can have regard to the taxpayer's conduct before the formal commencement of the appeal proceeding in this Court. The Commissioner contended that it was the taxpayer's conduct, before the commencement of the proceeding, which effectively caused the litigation to be commenced, because the taxpayer was capable of providing, but did not provide, prior to the disallowance of its objection, details of its case that it made a capital loss. 17 Mr Romano, who appears for the taxpayer, said that that the taxpayer's conduct prior to the commencement of the proceeding was not relevant in the costs context because this was a tax case. No costs consequences, said Mr Romano, should flow from a taxpayer's failure to cooperate with the Australian Taxation Office prior to the commencement of the appeal. A taxpayer, said Mr Romano, was entitled to act within his or her rights in not providing documentation and information when requested to do so by the Australian Taxation Office prior to the disallowance of a notice of objection. The Act, said the taxpayer, gave the Commissioner compulsory powers under the Act to obtain the documentation and information and it was always open to the Commissioner to use those powers. 18 Further, said Mr Romano, any absence of cooperation by Mr Uratoria up to the commencement of the appeal, did not amount to an intentional disregard by Mr Uratoriu of the Commissioner's interest in avoiding unnecessary litigation. This was because Mr Uratoriu had since 1992 been suffering from depression. The taxpayer relied on an affidavit by Mr Skea, which annexed a very short medical certificate to the following effect: This is to certify that Mr Luciano Uratoriu has suffered from anxiety and depression dating from approximately 1992. 19 First, I deal with Mr Romano's contention in relation to the exercise of the discretion as to costs in tax cases. In my view, although there are some specific procedural provisions relating to the prosecution of tax appeals, it does not follow that the discretion in respect of costs is to be exercised on different principles in tax cases to other cases. Accordingly, the general rule that the successful party should expect to receive his or her costs, applies to tax cases as it does in other kinds of cases. Likewise, in considering the question of costs in tax cases, the Court will also have regard to whether the successful party has conducted himself or herself in a way which has brought about litigation which could have been avoided, or in a way which has unnecessarily prolonged litigation. 20 Mr Vaughan for the Commissioner referred me to the case of Findlay v Commissioner of Taxation [2002] FCA 1074 (Findlay) and to the case of L & A Maglio Pty Ltd v Commissioner of Taxation (2007) 67 ATR 302 (Maglio). Both of these cases demonstrate that in determining the question of costs in tax cases it is permissible for the Court to take into account the question of whether the successful taxpayer has conducted himself or herself in a way which has led to the commencement of litigation which could have been avoided or which has unnecessarily prolonged litigation. In Findlay, the successful taxpayer was deprived of his costs because of his conduct and in Maglio the successful taxpayer was deprived of part of its costs for the same reason. In my view, these cases are germane to the circumstances of this case. 21 The question then is, whether there is a sufficient explanation in the affidavits as to why Mr Uratoriu did not provide the documents and information in support of his contention that there was no capital gain earlier on in the process leading up to the commencement of the appeal. 22 I accept that Mr Uratoriu has suffered a serious misfortune in his life which caused him to be depressed. However, there is no explanation in the affidavits as to why it was not possible for Mr Uratoriu to instruct someone else to take charge of the search for documents and the provision of information so that the request from the Australian Taxation Office for these documents and information could have been satisfied within the time limits provided by the Australian Taxation Office whilst it was considering the taxpayer's notice of objection. 23 I note that in their letter of 12 October 2006, the solicitors representing the taxpayer said that they expected to be in a position to provide the documents and information sought by the Australian Taxation Office, by the January deadline. However, there was no explanation given in the affidavits as to the basis on which the solicitors made that representation and why it was not met. Nor was there an explanation given as to how it came about that the taxpayer was able ultimately to discover the documents and provide them to the expert witness, but was not able to provide them to the Australian Taxation Office at an earlier stage in the process, before the commencement of the litigation. 24 In my view, the evidence does not sufficiently explain why the information and documentation was not provided to the Australian Taxation Office, either during the audit process or subsequently whilst the taxpayer's objection was under consideration by the Australian Taxation Office. Accordingly, I accept the submission by Mr Vaughan for the Commissioner, that it was the taxpayer's own conduct which brought about the disallowance of the objection and the consequential litigation. If, during the course of the audit or the objection process, the taxpayer had made the disclosure it subsequently made during the litigation process, it is likely that there would have been no litigation. 25 It may be the case, as Mr Romano submitted that, in the absence of the exercise of compulsory power, the taxpayer is at liberty not to cooperate with the Australian Taxation Office. However, this submission does not recognise that whilst a party may be entitled to not cooperate with another party prior to the commencement of litigation, there may be costs consequences for that party if the stance brings about the commencement of unnecessary litigation and the attendant expenses associated therewith. 26 I, therefore, find that, notwithstanding that the taxpayer was successful on the appeal, it should not be entitled to its costs of the appeal. However, in my view, there is no reason to go any further than that and require the applicant to pay the respondent's costs. In my view, an order that each party is to bear its own costs meets the exigencies of this case. I certify that the preceding twenty‑six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis.