FEDERAL COURT OF AUSTRALIA

L & A Maglio Pty Ltd v Commissioner of Taxation [2007] FCA 1365

PRACTICE AND PROCEDURE – costs – taxation appeal allowed by consent – whether costs should follow the event

Federal Court of Australia Act 1976 (Cth) s 43

Income Tax Assessment Act 1936 (Cth) s 51

Income Tax Assessment Act 1997 (Cth) s 8-1

Taxation Administration Act 1953 (Cth) Pt IVC

Cajkusic v Commissioner of Taxation (2006) 155 FCR 430

Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168

Cirillo v Consolidated Press Property Ltd (No 2) [2007] FCA 179

Findlay v Commissioner of Taxation [2002] FCA 1074

Yates Property Corporation Pty Ltd v Boland (2000) 179 ALR 664

L & A MAGLIO PTY LTD v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

VID 1546, 1550 OF 2004

PRESTON POINT PTY LTD v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

VID 1551, 1555 OF 2004

VID 327 OF 2006

PA & LR PTY LTD v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

VID 1556, 1560 OF 2004

BANNISTER FORGE PTY LTD v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

VID 1603 OF 2004

vid 326 of 2006

MAGCHIA PTY LTD v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

VID 328 OF 2006

COLAND ENTERPRISES PTY LTD v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

VID 329 OF 2006

GORDON J

29 AUGUST 2007

MELBOURNE

THE COURT ORDERS THAT:

1.                  By consent, the appeal is discontinued.

2.                  The respondent pay the applicant’s cost of the proceeding up to and including 31 August 2005.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

THE COURT ORDERS THAT:

1.                  By consent, the appeal is discontinued.

2.                  The respondent pay the applicant’s cost of the proceeding up to and including 31 August 2005.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

THE COURT ORDERS THAT:

1.                  By consent, the appeal is discontinued.

2.                  The respondent pay the applicant’s cost of the proceeding up to and including 31 August 2005.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

THE COURT ORDERS THAT:

1.                  By consent, the appeal is discontinued.

2.                  The respondent pay the applicant’s cost of the proceeding up to and including 31 August 2005.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

THE COURT ORDERS THAT:

1.                  By consent, the appeal is discontinued.

2.                  The respondent pay the applicant’s cost of the proceeding up to and including 31 August 2005.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

THE COURT ORDERS THAT:

1.                  By consent, the appeal is discontinued.

2.                  The respondent pay the applicant’s cost of the proceeding up to and including 31 August 2005.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

VID 1546, 1550 OF 2004

REASONS FOR JUDGMENT

Introduction

1                     These proceedings are related.  Each is an appeal against an appellable objection decision brought under Part IVC of the Taxation Administration Act 1953 (Cth).  The substantive tax issues have been resolved in favour of the applicants.  The question of costs remains.

2                     In the financial years ended 30 June 1995 to 30 June 1999 (“the relevant period”), Macom Pty Ltd (“Macom”) as trustee of the Macom Unit Trust (“the Macom Trust”), claimed deductions for contributions to employee trusts which the respondent, the Commissioner of Taxation of the Commonwealth of Australia (“the Commissioner”), subsequently disallowed under s 51(1) of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”) or s 8-1 of the Income Tax Assessment Act 1997 (Cth) (“the 1997 Act”) and Part IVA of the 1936 Act.  The Commissioner’s decisions disallowing Macom’s objections to those assessments were not in issue in these proceedings.

3                     Four family trusts were unit holders in the Macom Trust.  Each trust was a discretionary trust.  The Commissioner issued the following alternative assessments to the trustees of those unit holders:

(collectively “the alternative assessments”).

4                     These appeals concern only the 1995 and 1999 years of income.  Appeals concerning the balance of the period (the income years 1996, 1997 and 1998) have been earlier discontinued by consent on the basis that the Commissioner pay each taxpayer’s costs of those appeals. 

5                     There is no dispute that the Commissioner had power to issue these alternative assessments:  Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 at 200-202.  Each of the taxpayers appealed against the Commissioner’s decisions to disallow in whole or in part objections against the alternative assessments issued to them.  The Commissioner accepts that the alternative assessments are excessive.  As I have noted earlier, the sole remaining issue between the taxpayer and the Commissioner concerns the costs of each proceeding.  Each taxpayer seeks an order that the Commissioner pay its costs.  The Commissioner seeks an order that each taxpayer bear its own costs on and from 1 September 2005.  For the reasons that follow, the appropriate order is that each taxpayer bear its own costs on and from 1 September 2005.

Background

6                     It is both unnecessary and inappropriate to set out the history of these proceedings and the interlocutory steps taken in relation to the alternative assessments. 

7                     It is sufficient to refer to some of the history in order to appreciate the unsatisfactory manner in which these proceedings have been conducted.  Some of the appeals the subject of these proceedings were lodged in the Federal Court in December 2004.  Further appeals were lodged in March 2006.  Settlement of the substantive issues in these proceedings was directly raised by the Commissioner with the taxpayers’ legal advisers no later than February 2005.  Despite settlement being discussed and settlement offers being made, the parties continued to prepare their respective cases for trial for in excess of two years. 

8                     By no later than 30 June 2005, the Commissioner had requested the taxpayers provide trust deeds, financial statements and trustee resolutions for the relevant years of income to support the taxpayers’ assertions regarding the income of the unit holders (the trusts) and the beneficiaries of those trusts.  At that point in time, the 1995 to 1999 years of income (inclusive) were in dispute.  On 28 July 2005, the Commissioner informed the taxpayers’ legal adviser that he would no longer be pursuing the alternative assessments for the years ended 30 June 1996, 1997 and 1998 on the basis that the Macom Trust was in a trust loss position for that period.  The appeals in relation to these assessments were later discontinued by consent on the basis that the Commissioner pay the relevant taxpayer’s costs of the appeals.  However, the Commissioner confirmed that he was pursuing the alternative assessments for the income years ending June 1995 and June 1999 and again asked the taxpayers to provide the trust deeds, financial statements and trustee resolutions for each year in dispute.  That request was reiterated on 29 August 2005. 

9                     On 1 September 2005, the taxpayers’ legal adviser forwarded a letter to the Commissioner’s solicitor.  The contents of that letter are worth restating.  It provided as follows:

“Further to yesterday’s telephone conversation, we enclose:

1.         copy deed dated 1 June 1993 which constitutes the Entire Group Unit Trust;

2.         copy deed dated 19 December 1990 which constitutes the Bannister Forge Discretionary Trust;

3.         copy deed dated 1 June 1993 which constitutes the A & J Morris Family Trust;

4.         copy deed dated 1 June 1993 which constitutes the P & L Coleman Family Trust;

5.         copy deed dated 1 June 1993 which constitutes the L & A Maglio Family Trust;

6.         copy undated deed of amendment by which the L & A Maglio Family Trust is varied;

7.         copy minutes of a meeting of Bannister Forge Pty Ltd held on 26 June 1995.

We are instructed that in connection with Bannister Forge Pty Ltd as trustee of the Bannister Forge Discretionary Trust, that no “distribution” minutes in respect of the years ended 30 June 1996, 1997, 1998 and 1999 exists.

In respect of each of Preston Point Pty Ltd as trustee of the A & J Morris Family Trust, PA & LR Pty Ltd as trustee of the P & A Coleman Family Trust and L & A Maglio Pty Ltd as trustee of the L & A Maglio Family Trust, no distribution minutes exist in respect of the years ended 30 June 1995, 1996, 1997, 1998 and 1999.

Finally, by a deed of retirement and appointment, Magchia Pty Ltd ACN 101 889 114 replaced A & L Maglio Pty Ltd as trustee of the L & A Maglio Family Trust on 31 August 2002 and by a second deed Coland Enterprises Pty Ltd replaced PA & LR Pty Ltd as trustee of the P & A Coleman Family Trust on the same day.”

The significance of the contents of this letter will become apparent later in these reasons.

10                  On 8 September 2005, the taxpayers’ legal adviser provided the Commissioner with a copy of the financial accounts for the Macom Trust for the 1996, 1997 and 1999 years of income.  The accounts for the 1996 year included, by way of comparison, the accounts for the 1995 year.  The accounts for the 1999 year included, by way of comparison, the accounts for the 1998 year.  Those accounts recorded that Macom did not distribute its accounting income for the 1995 year and that there were carried forward losses in the 1996, 1997 and 1998 years of income.

11                  On 14 December 2005, the Commissioner advised the taxpayers’ legal adviser that the amended assessments raised against certain beneficiaries of the unit holders for the years ended 30 June 1995 and 30 June 1999 had been raised after the four year period prescribed by s 170(2)(b) of the 1936 Act and that the Commissioner had decided to withdraw those amended assessments.  Appeals in respect of those matters were later discontinued by consent on the basis that the Commissioner pay the relevant taxpayer’s costs of the appeals. 

12                  On 24 March 2006, in relation to the 1999 year of income, the Commissioner requested Macom’s legal adviser to provide information as to the treatment by Macom of the accounting profit in that year including minutes of meetings and other documents or correspondence recording or evidencing steps taken by Macom in relation to the accounting profit.  On 3 April 2006, Macom’s legal adviser informed the Commissioner that Macom passed no distribution minute because it took the view that there was no accounting profit available for distribution.  The Commissioner was not prepared to accept such an assertion and informed him that in the absence of documents recording or evidencing steps taken by Macom in respect of the accounting profit in the 1999 year, the Commissioner was not in a position to determine whether or not there was a beneficiary presently entitled to a share of income in that year. 

13                  The period between August 2006 and May 2007 is significant.  In August 2006, the taxpayers filed and served their statements of facts, issues and contentions (“the SFICs”).  It is to be presumed that the SFICs were prepared on proper instructions. 

14                  On 24 November 2006, the Full Court of the Federal Court handed down its reasons for decision in Cajkusic v Commissioner of Taxation (2006) 155 FCR 430 which concerned an employee benefit trust arrangement.  As the reasons for decision made clear, the terms of the relevant trust instrument, inter alia, were critical to the determination of whether a beneficiary of the trust was properly to be assessed in respect of the income of the trust estate. 

15                  On 24 December 2006, the taxpayers filed and served their lists of documents.  The lists included references to distribution minutes of Macom.  The Commissioner requested copies of the minutes in March 2007. 

16                  On 16 April 2007, the taxpayers’ legal adviser wrote to the Commissioner in the following terms:

“We refer to our letter dated 1 September 2005.

We believe that the contents of that letter may have misled you.  The last paragraph of the first page of the letter suggests that each of Preston Point Pty Ltd as trustee of the A & J Morris Family Trust, PA & LR Pty Ltd as trustee of the P & A Coleman Family Trust and L & A Maglio Pty Ltd as trustee of the l & A Maglio Family Trust passed no distribution minutes and no minutes exist in respect of the years ended 30 June 1995, 1996, 1997, 1998 and 1999.

As your examination of the respective applicants’ discovered documents will show, distribution minutes do indeed exist for each of these years foe each of those trusts.  The difference is due to a misunderstanding of our instructions.

All minutes are in substantially similar form and show that “nil” was distributed to the various beneficiaries of the respective trusts.

A minute in a substantially similar form was passed by the Entire Group Pty Ltd (as Macom Pty Ltd then was) as trustee of the Entire Group Unit Trust (as the Macom Unit Trust then was) in respect of the years ended 30 June 1995, 1996, 1997, 1998 and 1999.  We enclose, for your assistance, a copy of the minute dated 30 June 1995.  All minutes referred to above are in the respective applicants’ discovered documents.”

17                  The minute dated 30 June 1995 referred to in the letter was in part in the following terms:

“Resolved that the income for the year ended 30 June 1995 be appropriated, set aside and applied for the benefit of the various Beneficiaries as follows:

NIL

It was further resolved that the income so appropriated shall be applied for the Beneficiaries by settling the same aside and by crediting the same to the Beneficiaries accounts in the books of the Trust, and such sums shall upon being so credited vest in and become the absolute property of the Beneficiaries and shall be held for them in separate Trust funds.

Resolved further that the balance held on behalf of the Beneficiaries shall be available to them on demand.”

The minutes for the other year of income were in the same form. 

18                  On 24 April 2007, the High Court refused the Commissioner special leave to appeal the decision of the Full Court of the Federal Court in Cajkusic:  see [2007] HCATrans 157. 

19                  On reviewing the relevant trust deed and the minutes, the Commissioner formed the view that for years ended 30 June 1995 and 30 June 1999, the unit holders did not have a right to demand payment of income from Macom and could not have been presently entitled to that income.  Accordingly, on 2 May 2007, the Commissioner informed the taxpayers that he was prepared to agree that the taxpayer to be assessed for all years in question was Macom and proposed that the current proceedings be finalised.  That was over 3 months ago.

20                  The explanation as to why the minutes could not have been provided by the taxpayers years earlier and, in any event, prior to the parties taking steps to prepare the appeals for trial was explained by the taxpayers’ legal adviser as follows:

“Only in the course of preparing [the] ...  affidavits of documents did I locate these minutes.  Prior to locating the minutes as part of the discovery process, I had been told by Mr John Denton, a former accountant for the Macom Unit Trust and some of the other, but not all, Applicants, that there were no distribution minutes”.

Analysis

21                  The court’s discretion with respect to costs is broad and unfettered although it must be exercised judicially:  s 43 of the Federal Court of Australia Act 1976 (Cth) and Cirillo v Consolidated Press Property Ltd (No 2) [2007] FCA 179 at [3]. 

22                  In Yates Property Corporation Pty Ltd v Boland (2000) 179 ALR 664 at [4] – [5] Goldberg J discussed the principles relevant to the exercise of the Court’s discretion where the matter has not proceeded to determination on the substantive issue in the following terms:

“There have been a number of cases where a court has determined the issue of the costs of a proceeding although the matter has not proceeded to determination on the substantive issue before the court either because the substantive issue has been settled or because the matter has otherwise become moot: South East Queensland Electricity Board v Australian Telecommunications Commission(Pincus J, 10 February 1989, unreported); R v Gold Coast City Council; Ex parte Raysun Pty Ltd (1971) QWN 13; J T Stratford & Son Ltd v Linley (No 2) (1969) 1 WLR 1547; Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194; Gribbles Pathology Pty Ltd v Health Insurance Commission (1997) 80 FCR 284.  In each of these cases the court did not consider it necessary to determine the substantive merits of the matter before determining the appropriate order as to costs.

In Australian Securities Commission v Aust-Home Investments Ltd (supra), Hill J examined a number of authorities and concluded that they supported the following propositions (at 201):

"(1)      Where neither party desires to proceed with litigation the Court should be ready to facilitate the conclusion of the proceedings by making a cost order: Stratford and the SEQEB case.

(2)        It will rarely, if ever, be appropriate, where there has been no trial on the merits, for a Court determining how the costs of the proceeding should be borne to endeavour to determine for itself the case on the merits or, as it might be put, to determine the outcome of a hypothetical trial: Stratford.  This will particularly be the case where a trial on the merits would involve complex factual matters where credit could be an issue.

(3)        In determining the question of costs it would be appropriate, however, for the Court to determine whether the applicant acted reasonably in commencing the proceedings and whether the respondent acted reasonably in defending them (SEQEB).

(4)        In a particular case it might be appropriate for the Court in its discretion to consider the conduct of a respondent prior to the commencement of the proceedings where such conduct may have precipitated the litigation: cf: Sunday Times Newspaper Co Ltd v McIntosh (1933) 33 SR (NSW) 371.

(5)        Where the proceedings terminate after interlocutory relief has been granted, the Court may take into account the fact that interlocutory relief has been granted: cf Re Asiatic Electric Co Pty Ltd [1973] 1 NSWLR 603 at 606, a case which, however, depended upon the specific wording of the statute under consideration."

In Gribbles Pathology Pty Ltd v Health Insurance Commission (supra) Finkelstein J emphasised that (at 287):

"in the absence of a hearing on the merits it is difficult to see how any order, other than an order that each party bear its own costs, can be made except in special circumstances."

In Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 143 ALR 1, McHugh J said (3-4):

"If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceeding.”

23                  Counsel for the taxpayers submitted that those principles were distinguishable because the merits of these Part IVC appeals were before the Court.  I was referred to the decision of Heerey J in Findlay v Commissioner of Taxation [2002] FCA 1074 in support of that proposition.  In that case, his Honour was considering two issues – an application for costs by the unsuccessful party and an application for costs by the successful party – where the Commissioner had conceded that the assessments were excessive.  After noting that as a general rule costs should follow the event (at [12]), the question of costs of the successful party was resolved by his Honour (at [18]) as follows:

“There remains the question whether the taxpayers, as the successful parties on the merits, should nevertheless be deprived of their costs by reason of some matter in connection with the prosecution of the proceedings.  I think there is force in the argument of counsel for the Commissioner that the problem which has led to this litigation arises from matters entirely within the knowledge of the taxpayers.  The bank statements clearly show the receipt of the payment in question in the 2001 year.  This on the face of it seems a very simple and routine record.  It remains a matter of some puzzlement to me as to why the factual inquiry became as protracted as it did.  Had the correct date of the payment been disclosed in the ordinary way, this litigation in relation to the 2000 tax year would never have occurred.”

24                  The distinction between the two lines of authority is the starting point, namely whether the merits of the substantive issues were before the Court.  The answer to that question is important.  The answer will determine the general rule or proposition on the question of costs.  If the substantive issues were before the Court, costs usually follow the event.  If they were not, the court will usually make no order as to the costs of the proceeding.  In Part IVC proceedings, the question of whether the substantive issues were before the Court may sometimes be more easily resolved if the Commissioner concedes the assessments were excessive on a particular identified basis or bases.  However, each Part IVC proceeding needs to be considered by reference to the particular substantive issues, the history of the proceedings and the manner in which the proceedings are ultimately resolved.  The present appeals provide a good example of why there can be no hard and fast rule. 

25                  In each of the current appeals, the Commissioner accepted the assessments were excessive.  The circumstances in which, and the basis on which, the Commissioner made that concession was not in dispute.  However, as the background to these proceedings demonstrates (see [6] to [20] above, the history of the proceedings and the manner in which the proceedings were resolved is far from straightforward. 

26                  In May 2007 after the taxpayers produced the minutes referred to in [17] above, being the minutes requested by the Commissioner by no later than 30 June 2005, the Commissioner accepted that the assessments the subject of these proceedings were excessive.  The minutes had in fact been listed by the taxpayers in lists of documents provided to the Commissioner on 24 December 2006.  Copies of the documents were obtained by the Commissioner in March 2007.  And it was not until April 2006 that the taxpayers’ legal advisers wrote to the Commissioner and corrected what he had told the Commissioner in September 2005 - that the minutes did not exist. 

27                  In substance, the taxpayers assert that the minutes were unnecessary and the Commissioner should have made the concession earlier.  The Commissioner submits that the minutes should have been provided by 1 September 2005 and that the taxpayers’ explanation is unsatisfactory.  There is force in the Commissioner’s submissions. 

28                  First, the taxpayers’ explanation for the delay in producing these minutes is less than satisfactory.  The taxpayers’ legal adviser informed the court that the minutes were not located until he was in course of preparing the affidavits of documents in December 2006.  His explanation for the delay was that, up until that time, he had relied upon what he had been told by a former accountant for the Macom Unit Trust and some of the other, but not all, of the taxpayers.  When he asked the accountant about the existence of the minutes was not disclosed.  Where the minutes were ultimately located and, in what circumstances, was never disclosed. 

29                  Secondly, the minutes were, by hypothesis, relevant.  The minutes had been requested by the Commissioner since 30 June 2005.  The taxpayers’ legal adviser had asked the accountant about their existence.  The taxpayers’ legal adviser had written to the Commissioner saying that they did not exist.  The minutes were disclosed in the taxpayers’ lists of documents dated 24 December 2006 and were the subject of the letter of correction to the Commissioner dated 16 April 2007.  Finally, each minute was exhibited to the affidavits filed on behalf of the taxpayers which were intended to be relied upon by them at any hearing of the substantive issues. 

30                  The taxpayers’ submission that the minutes were not critical to the resolution of the substantive issues and that the financial accounts provided in September 2005 provided the necessary information may ultimately have proved to be correct.  However, having regard to the terms of the Macom Trust instrument, the contents of the accounts that were produced, the fact that no separate accounts were produced for the 1995 year and the history of the correspondence between the parties including the events from August 2006, it is apparent the taxpayers did not commence detailed preparation of their appeals and, in particular, identification and location of documents relevant to particular issues, sufficiently early in the conduct of the litigation. 

31                  The taxpayers’ alternative submission was that they, in any event, should be entitled to their costs in respect of the 1999 year of income.  Even if I was to put to one side the inevitable practical difficulties of allocating particular costs to a particular year, I see no basis for drawing a distinction between the 1995 and 1999 years of income. 

32                  In my view, as a result of the taxpayers’ conduct (or that of their advisers), they should be deprived of their costs from 1 September 2005.  Who ultimately bears those costs is a matter for the taxpayers to resolve with their respective advisers.  However, those costs should not be borne by the Commissioner.  In each proceeding, I order the Commissioner to pay the applicant’s costs of the proceeding up to and including 31 August 2005.

Associate:

Dated:         29 August 2007