FEDERAL COURT OF AUSTRALIA

Merchant v Commissioner of Taxation (Costs) [2025] FCAFC 81

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be allowed in part.

2.    The orders of the primary judge made on 29 May 2024 in proceeding number NSD907/2021 be set aside and in lieu thereof it be ordered that:

(a)    The appeal be allowed in part.

(b)    The respondent’s objection decision dated 27 July 2021 be set aside and remitted to the respondent for reconsideration according to law.

(c)    The respondent pay 70% of the applicant’s costs of the proceeding, to be determined by a Registrar on a lump sum basis, in the absence of agreement.

3.    The appellants pay 70% of the respondent’s costs of the appeal, to be determined by a Registrar on a lump sum basis, in the absence of agreement.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

1    On 22 April 2025, we published reasons for judgment in respect of an appeal from related first instance judgments: Merchant v Commissioner of Taxation [2025] FCAFC 56 (the substantive reasons). These reasons, which deal with costs issues, should be read together with the substantive reasons. The abbreviations used in the substantive reasons are adopted in these reasons.

2    The substantive reasons dealt with a single notice of appeal from the first instance judgments in each of the following proceedings, which had been heard together by the primary judge:

(a)    Merchant v Commissioner of Taxation (NSD 907 of 2021). These proceedings related to determinations made under s 177E of Part IVA of the 1936 Act.

(b)    GSM Pty Ltd v Commissioner of Taxation (NSD 908 of 2021). These proceedings related to determinations made under s 177D of Part IVA of the 1936 Act.

(c)    Merchant v Commissioner of Taxation (NSD 1161 of 2021). These proceedings related to Div 230 of the 1997 Act.

3    Each of the first instance proceedings emanated from a common substratum of facts. Each dealt with different issues, one set of proceedings dealt with different income years (NSD 1161 of 2021) and two of the proceedings overlapped in the sense that the outcome in NSD 908 of 2021 affected the outcome in NSD 907 of 2021.

4    No party was entirely successful on appeal.

5    The parties were given a period of time to file any agreed minute of proposed orders and, if they could not agree, were required to file short submissions on the form of the orders each proposed, in which case the orders would be determined on the papers.

6    The parties could not agree on the form of orders or as to costs. Each has filed a short submission with their competing forms of order. The main issue separating the parties concerns the proportion of costs. The respective position of the parties is as follows:

(a)    The appellants submit that the respondent should pay 50% of the costs of and incidental to the trial in each of the proceedings, and of the appeal to this Court.

(b)    the respondent submits that the appellants should pay the costs of the appeal from the judgments in the s 177D Proceeding (NSD908 of 2021) and in the TOFA Proceeding (NSD1161 of 2021). As to the s 177E Proceeding (NSD907 of 2021), the respondent submits that the appellants should pay 70% of the costs of the trial, and 50% of the costs of the appeal.

7    The appellants submit that the appropriate costs orders should reflect the following matters:

(a)    the respondent succeeded on significant issues at first instance and on appeal, but the taxpayers also succeeded on significant issues, the financial impact of which was said to outweigh the issues on which the respondent succeeded. The s 177D Proceedings concerned primary tax of $12.877 million which was reduced to $10.061 million after the primary judge’s decision. The s 177E Proceedings concerned primary tax of $26.659 million. On appeal, the primary tax was reduced to approximately $2.065 million. The Div 230 Proceedings concerned primary tax of approximately $1.352 million.

(b)    the significant overlap in, and practical difficulty in disaggregating, costs as between the ‘event’ in respect of which the appellants succeeded on appeal (i.e. setting aside the s 177E Proceeding order and partially setting aside the underlying objection decision) and the balance of the proceeding.

(c)    the costs of the trial at first instance, and of the appeal, would have been avoided if the respondent had not refused the taxpayers’ offers to settle made in March 2024. The refusal was said to be unreasonable because it was contended that the respondent would have recovered more had he accepted those offers.

(d)    the respondent’s approach to the proceedings was unreasonable given that he pressed forward to trial, and before this Court, on a case that involved significant double-taxation (and declined to confirm to the taxpayer or to the Court what compensating adjustment would be made under s 177F(3) to ameliorate that double-taxation).

8    The appellants submit that a separate cost order in respect of each of the separate proceedings, or an issue-based costs order, would give rise to significant complexity in taxation and may also result in the respondent recovering more by way of costs from the appellants than the appellants recover from the respondent. It is submitted that that would be an unfair outcome. The respondent issued amended assessments for a total primary tax shortfall of some $39.5 million which has now been reduced to $12.127 million. The appellants submit that an order, which is fair and relatively easy to administer, is that the respondent pays one half of the appellants’ costs of and incidental to the three proceedings at first instance, and on appeal to this Court.

9    The respondent submits that:

(a)    his conduct in refusing the offers of settlement made was not unreasonable. The offers made were on a rolled-up basis. The offers to settle were premised on the appellants retaining the benefit of accrued capital losses that have been denied as a consequence of his success in the s 177D Proceedings and the appeal. The offers were not renewed when the appeals were pending.

(b)    the submission that it was necessary to consider the effect of the s 177D Determination when analysing the effect of a scheme in applying s 177E was not part of the appellant’s case as articulated at objection, nor was it articulated in their Amended Appeal Statement filed 21 January 2022. The issue was a novel one and it cannot be said that he should have known that his case on s 177E was likely to fail.

(c)    he was substantively successful on all issues across the 177D, 177E and TOFA Proceedings apart from only two issues. Those were the valuation of future payment rights at first instance (which was not appealed), and the impact of a determination under s 177D on the assessment of the effect of a scheme otherwise having substantially the effect of a scheme by way of or in the nature of a dividend stripping. As to the s 177E Proceeding, the appellants were successful on appeal in relation to the GSM Debt Forgiveness Scheme. Nevertheless, they were not successful in relation to the Tironui Debt Forgiveness Scheme, nor generally on the question of the dominant purpose of both schemes.

(d)    in respect of the s 177E Proceeding, a reasonable reduction to 70% of the respondent’s costs at first instance, and 50% of his costs of the appeal, is appropriate.

10    The principles regarding costs are well established. In Sandvik Intellectual Property AB v Quarry Mining & Construction Equipment Pty Ltd (No 2) [2017] FCAFC 158, the Full Court summarised these principles at [9]-[11] (a passage approved by the Full Court in Caffitaly System SPA v One Collective Group Pty Ltd (No 2) [2021] FCAFC 164 at [5]). Relevantly:

(1)    Section 43(3)(e) of the Federal Court of Australia Act 1976 (Cth) provides that an award of costs may be made in favour of, or against, a party whether or not that party is successful in the proceeding. The approach usually taken is that costs follow the outcome of an appeal: see Firebird Global Master Fund II Ltd v Republic of Nauru (No 2) [2015] HCA 53; (2015) 327 ALR 192 at [6] per French CJ, Kiefel, Nettle and Gordon JJ; see also Les Laboratoires Servier v Apotex Pty Ltd (2016) 247 FCR 61 at [303]; Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 at [66]-[68].

(2)    There are at least three distinct categories of situation in which a successful party might be deprived of costs, or even ordered to pay the costs of the other side. These were identified as follows:

(a)    Where the applicant has been only partially successful in that it has not obtained all of the relief sought.

(b)    Where a party has succeeded in obtaining the relief sought, but has not succeeded on all bases (factual or legal) upon which it sought such relief.

(c)    A third category involves consideration of the successful party’s conduct of the case.

11    In relation to the settlement offers, it is observed that the appellants do not seek indemnity costs. The appellants rely on the conduct concerning the settlement offer as part of submissions made in relation to the respondent’s overall conduct of the case.

12    We do not consider that the respondent’s conduct in relation to his refusal of the settlement offers in this case is of such a kind as to disentitle him from costs in the proceedings in which he was successful. The basis on which the offers were formulated and proposed was that he “withdraw” the s 177D assessments and determinations. The respondent succeeded in the s 177D proceedings. The appellants’ success in the s 177E proceedings flowed because of the respondent’s success in the s 177D proceedings. Furthermore, by the appellants’ own submissions the offers were left open for only short periods of time.

13    If there is to be criticism of the parties’ conduct in these proceedings it is related to the issue of double-taxation. Both parties proceeded on the basis that they would be entirely successful. As the primary judge observed, the appellants had not made a request for a compensating adjustment. The issue of compensating adjustments was not agitated by either party prior to being prompted to do so by the primary judge (acting as judicial deputy president of the AAT in respect of penalty proceedings). As was observed in the substantive reasons, the respondent had not turned his mind to what compensating adjustments would be made notwithstanding the assessments and proceedings had been on foot for years. The appellants’ success in the s 177E proceedings arose from the need to take into account the effect of the cancellation of the capital losses by reason of the s 177D Determinations on the effect of the schemes the respondent had identified as having the effect of schemes by way of or in the nature of dividend stripping.

14    Having regard to the nature of the proceedings involved in this case, notwithstanding that the appeal took the form of a single appeal, we do not consider it appropriate to adopt the appellants’ approach of setting aside orders made by the primary judge in proceedings against which the appellant did not succeed as a matter of substance. The orders made by the primary judge in NSD 908 of 2021 and NSD 1161 of 2021, including the orders as to costs, will not be disturbed.

15    In relation to the proceedings NSD 907 of 2021, in circumstances where this Court reached a different view to the primary judge as to the appropriate orders, the issue of costs needs to be re-visited to approach the matter on the basis that the primary judge ought to have reached the same conclusion as we did. It may be accepted that the taxpayer did not obtain all of the relief sought in relation to the s 177E Determinations and did not succeed on all the factual and legal issues upon which it sought such relief. However, the taxpayer was substantively successful in relation to the most quantitatively substantial s 177E Determination. Taking a broad brush approach, we consider that the respondent should pay 70% of the appellant’s costs of the proceedings in NSD 907 of 2021.

16    The respondent’s proposed orders for the costs of the appeal were drafted as though there were separate appeals for each proceeding. That was not the case. As was observed in the substantive reasons, a single notice of appeal was filed. This was unsatisfactory and should not recur. There were different issues with different taxpayers.

17    On appeal, the respondent was successful on s 177D and Div 230. The appellants were largely successful on s 177E. Because the appeal to the Full Court was filed as a single appeal, it is necessary to make a single costs order in respect of a single appeal proceeding. We consider that the respondent is entitled to 70% of the costs of the appeal.

18    As for the practical issues arising from the proposed costs orders, it is always open to the parties to reach an agreement on quantum and thereby adopt a practical and pragmatic approach to the determination of quantum. Given the complexity should costs have to be taxed, it seems to us that a more inexpensive and efficient course, if agreement cannot be reached, is for the quantification of costs on the appeal to be referred to a Registrar of the Court for determination on a lump sum basis.

19    Orders are made accordingly.

Associate:

Dated:    18 June 2025