FEDERAL COURT OF AUSTRALIA

Clark v Commissioner of Taxation [2010] FCA 415

THE COURT ORDERS THAT:

1.                  The respondent pay the costs of the applicant of and incidental to the proceeding up to and including 9 December 2008 on a party and party basis;

2.                  The respondent pay the costs of the applicant of and incidental to the proceeding from 10 December 2008 on an indemnity basis;

3.                  The respondent pay reserved costs of the proceeding reserved prior to 9 December 2008 on a party and party basis (save for those costs already ordered to be paid by Greenwood J on 12 August 2008 and Kiefel J on 7 February 2007). 

4.                  The costs of the application for an Order for indemnity costs are reserved for brief further submissions having regard to the published reasons. 

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

THE COURT ORDERS THAT:

1.                  The respondent pay the costs of the applicant of and incidental to the proceeding up to and including 9 December 2008 on a party and party basis;

2.                  The respondent pay the costs of the applicant of and incidental to the proceeding from 10 December 2008 on an indemnity basis;

3.                  The respondent pay reserved costs of the proceeding reserved prior to 9 December 2008 on a party and party basis (save for those costs already ordered to be paid by Greenwood J on 12 August 2008 and Kiefel J on 7 February 2007).  

4.                  The costs of the application for an Order for indemnity costs are reserved for brief further submissions having regard to the published reasons. 

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

Background

1                     On 30 November 2009 the Court pronounced judgment in each appeal by Mr and Mrs Clark (“the applicants”) from the Commissioner’s appealable objection decision dated 27 October 2006: Clark v Commissioner of Taxation [2009] FCA 1401.  The Court published the reasons for allowing each appeal and adjourned each application to 14 December 2009 for the making of formal orders in light of the published reasons.  On 14 December 2009 the Court made the following two substantive orders in each application:

1.                  The appeal be allowed.

2.                  The objection decision of the respondent dated 27 October 2006 is varied by setting aside the disallowance of the applicant’s objection to the respondent’s Amended Assessment the subject of para 1 of the Application filed on 15 September 2006 and substituting for that decision, a decision allowing the objection of the applicant.

2                     Further orders were made directing the Commissioner to issue an Amended Assessment taking account of the reasons for judgment and to pay the costs of the applicant in each proceeding: Orders 3 and 4, 14 December 2009.  Order 3 was vacated in light of an appeal to the Full Court and s 14ZZQ of the Taxation Administration Act 1953 (Cth) (the “TA Act”).  Order 4 was vacated in favour of a further costs hearing as the applicants contended that an offer to settle each proceeding had been made in accordance with Order 23 r 2 of the Federal Court Rules and by operation of Order 23 r 11(4), each applicant was entitled to a more favourable order. 

3                     The applicants also contended, alternatively, that a Calderbank offer made by them ought to be taken into account in the exercise of the discretion arising under s 43 of the Federal Court of Australia Act 1976 (Cth) (the “Federal Court Act”).  The applicants further contended that a “special feature” of the case warranted an order for costs of the proof of a particular issue on an indemnity basis.  As to that, the applicants contended that they were unreasonably put to proof on the factual question of the acquisition and sale of the Rothwells shares (that is, the cost base issue) on which they were successful, in circumstances where the Commissioner had been provided with all of the witness statements and material relied on by the applicants on that issue; the Commissioner had resiled from an earlier view arising out of an audit that the cost base was that contended for by the applicants; and (among other considerations) the Commissioner did not assert an affirmative contrary case.  The conjunction of these special features is said to warrant an order for indemnity costs in putting the applicants to proof of the foundation facts on the issue. 

4                     Accordingly, directions were made for the filing of affidavits and written submissions by each side in relation to the determination of the costs of each proceeding.  

The orders now sought

5                     By this application, each applicant seeks orders that:

1.                  The Respondent pay the costs of the Applicants of and incidental to the appeal on an indemnity basis from 25 November 2008.

2.                  The Respondent pay the costs relating to the establishment of the cost base of the Rothwells shares on an indemnity basis.

3.                  The Respondent otherwise pay the Applicants’ costs of the proceedings including reserved costs on a party and party basis (save for those costs already ordered to be paid by Greenwood J on 12 August 2008 and Kiefel J on 7 February 2007).

6                     The first order sought by the applicants provides for the payment by the Commissioner of indemnity costs from 25 November 2008 as that was the date of each applicant’s Calderbank offer.  The applicants contend that if the application of the Calderbank principles in the circumstances of each proceeding do not warrant in the exercise of discretion an order for indemnity costs, the first order ought nevertheless to provide for the payment of indemnity costs under Order 23 r 11(4) from 9 December 2008 as that was the date of the Order 23 Notice of Offer.  The applicants say that the proposed Order 1 adopts a date of 25 November 2008 simply as a matter of chronology as that was the first offer of compromise.  The applicants say that the principal question to be decided in this application concerns the application and operation of Order 23 in proceedings arising under s 14ZZ(a)(ii) of the TA Act having regard to the operation of the Federal Court Rules and, in particular, the proper construction to be adopted in relation to Orders 52A and 52B of the Federal Court Rules.  

The issues to be determined

7                     Therefore, there are three issues to be determined. 

8                     First, whether Order 23 applies to a proceeding concerning an appeal to this Court from the Commissioner’s objection decision under s 14ZZ of theTA Act and if so whether the offer of compromise of 9 December 2008 satisfies the elements of Order 23.  Secondly, if Order 23 does not apply to such a proceeding, whether in the exercise of the Court’s general discretion, the applicants have demonstrated that the Commissioner’s refusal to accept the offer of 25 November 2008 was unreasonable by reference to the circumstances facing the Commissioner at the time of the offer: CGU Insurance Limited v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2008] FCAFC 173 per Moore, Finn and Jessup JJ at [75]; Premier Building & Consulting Pty Ltd v Spotless Group Limited (No 13) [2007] VSC 516 per Byrne J at [9] to [19].  Thirdly, whether the applicants have made out the contended special feature of the case in relation to the cost base issue justifying an order for indemnity costs in the proof of the relevant facts. 

9                     As to the first two questions, the Commissioner contends that neither offer is a “genuine” offer of compromise as each offer simply invites the Commissioner to concede the merits of each applicant’s appeal on the footing that each applicant “walks away” having absorbed some costs.

The Calderbank offer

10                  On 25 November 2008, the advisers to the applicants put the following offer to the Australian Government Solicitor (“AGS”) on behalf of the Commissioner:

…

Dear Madam

1.         We have instructions to put an offer [“Without Prejudice, Save as to Costs”] to you.  The offer is one which is made in the form suggested by Cairns LJ in Calderbank v Calderbank [1975] 3 ALL ER 333.  It is an offer which will be relied upon in seeking appropriate costs orders upon the conclusion of the trial. 

2.         It is also an offer which will obviate the need for further costs to be expended in preparation for and at trial. 

3.         The terms of the offer are as follows:

            3.1        that your client consent to orders that each appeal is allowed;

            3.2        that your client issue amended assessments for the 2005 income year (or withdraw the existing amended assessment to both Mr and Mrs Clark);

            3.3        that each party bear their own costs of these proceedings (and that our clients forego the benefit of any existing costs orders).

4.         Obviously, if this offer is acceptable, then any funds already paid shall be refunded in full. 

5.         We are instructed that this offer shall remain open for a period of fourteen (14) days though may be withdrawn at any time prior to this date. 

6.         Please let us have your client’s response. 

11                  The reference at 3.2 to the 2005 income year ought to be a reference to the 2001 income year. 

The Order 23 offer

12                  On 9 December 2008, the advisers to the applicants served a Notice of Offer under Order 23, r 3 of the Federal Court Rules in these terms:

To:       The Commissioner of Taxation

            …

The Applicant hereby offers to settle all claims in this proceeding [the same offer was made in each proceeding] on the following terms:

1.         The Respondent consents to an order varying the appealable objection decision made by the Respondent on 27 October 2006 disallowing the Applicant’s objection to the notice of amended assessment issued for the year of income ended 30 June 2001 to allow the objection. 

2.         The Respondent withdraws the notice of amended assessment issued for the year of income ended 30 June 2001.

3.         The parties bear their own costs of the proceeding (and the Applicant foregoes the benefit of any existing costs orders)

This offer is made under Order 23 of the Federal Court Rules and remains open for acceptance for a period of 14 days from the date the offer is made. 

Signed:             Solicitor for the Applicant

                        9 December 2008

Order 23 issues

13                  Order 23, r 1 addresses the interpretation of terms.  It provides:

In this Order, unless the contrary intention appears:

applicant includes cross-claimant.

respondent includes cross-respondent

proceeding does not include a proceeding in an interlocutory application that is not capable of: 

(a)        substantially disposing of the proceeding or of the whole or any part of any claim for relief in the proceeding; or

(b)        rendering unnecessary any trial or further trial in the proceeding or of the whole or any part of any claim for relief in the proceeding. 

claim in the proceeding includes a claim in relation to costs to which Order 62 applies. 

14                  Order 23, r 2 provides for the application of the Order.  Order 23, r 2(1) provides that in any proceeding, a party may make to another party an offer to compromise any claim in the proceeding on the terms set out in the notice of offer.  Accordingly, Order 23 applies to any proceeding although not a proceeding consisting of an interlocutory application not capable of substantially disposing of the proceeding or rendering any trial in the proceeding unnecessary.  Otherwise, the Order has broad application by force of the definition of “proceeding”.  The term is not otherwise defined.  However, the term “proceeding” is defined in s 4 of the Federal Court Act in these terms:

“proceeding” means a proceeding in a court, whether between parties or not, and includes an incidental proceeding in the course of, or in connection with, a proceeding, and also includes an appeal. 

15                  Section 59 of the Federal Court Act confers power on the Judges of the Court to make rules of Court, not inconsistent with the Act, making provision for the practice and procedure to be followed in the Court and in relation to all matters and things incidental to any such practice or procedure, or necessary or convenient to be prescribed for the conduct of any business of the Court.  The definitions adopted in the Federal Court Act apply for the purposes of the Federal Court Rules unless a particular Order otherwise provides.  The definition of “proceeding” in s 4 of the Federal Court Act applies for the purposes of Order 23 subject to the exclusionary qualification contained in Order 23, r 1.  In a proceeding as defined by s 4, a party to such a proceeding may make an offer to compromise any claim in the proceeding on the basis of a notice of offer in the form required by Order 23, r 3. 

16                  Order 23, r 11(4) is in these terms:

(4)        If:

            (a)        an offer is made by an applicant and not accepted by the respondent;                   and

            (b)        the applicant obtains judgment on the claim to which the offer relates not less favourable than the terms of the offer;

then, unless the Court otherwise orders, the applicant is entitled to an order against the respondent for costs incurred in respect of the claim: 

            (c)        up to and including the day the offer was made – taxed on a party and party basis; and

            (d)        after that day – taxed on an indemnity basis. 

The applicants’ contentions

17                  The applicants put their central contention in these terms.  They, as applicants, are parties to a proceeding in the Court.  The Commissioner, as respondent, is also a party to that proceeding.  The applicants put a notice of offer to the Commissioner to compromise the entirety of their claims in each appeal the subject of the proceeding.  The offer was made in the form required by Order 23, r 3.  The offer is a genuine offer in the sense that it is not a sham nor put in bad faith.  The offer was capable of acceptance.  The offer was not accepted by the respondent.  The applicants obtained judgment in the principal proceeding not less favourable than the terms of the offer.  Therefore, it necessarily follows that unless the Court otherwise orders, the applicants are entitled to an order against the Commissioner for costs up to the date of the offer taxed on a party and party basis and thereafter costs taxed on an indemnity basis. 

The s 14ZZ proceeding

18                  The proceeding to which Order 23 is said to apply arises by operation of s 14ZZ of Part IVC of the TA Act which provides that a person dissatisfied with the Commissioner’s objection decision may appeal to the Federal Court against the decision. 

19                  Division 5 of Part IVC addresses questions such as the time limit for appeals, grounds of objection, burden of proof and, by s 14ZZP, the power conferred on the Court to make an order in relation to the appealable objection decision as the Court thinks fit including an order confirming or varying the decision.  The respondent says the jurisdiction as to costs of a proceeding in relation to the objection decision is to be found in s 43 of the Federal Court Act to the exclusion of Order 23 of the Federal Court Rules.  Once the s 14ZZ jurisdiction is enlivened, “s 14ZZ of the [TA Act] does not purport to instruct the court on the manner in which ‘appeal’ proceedings are to be commenced or conducted in the court”:  McDermott Industries (Aust) Pty Ltd v Federal Commissioner of Taxation (2003) 52 ATR 423 at 424; [2003] FCA 139 at [5] per Lee J (McDermott (No 1)). 

Order 52B

20                  Order 52B, however, addresses the procedural mechanism for commencing and maintaining a proceeding in the Court arising under s 14ZZ of the TA Act. 

21                  It does so in this way. 

22                  Section 14ZZ was inserted into the TA Act by the Taxation Laws Amendment Act (No. 3) 1991 (Cth) (No. 216 of 1991).  Pursuant to s 59 of the Federal Court Act, Order 52B of the Federal Court Rules was adopted in 1992 by (Federal Court Rules (Amendment)) Statutory Rule No. 43 of 1992 which commenced operation on 1 March 1992.  By Order 52B, r 2, Order 52B applies to an appeal against an appealable objection decision under s 14ZZ of the TA Act.  Such an appeal must, by Order 52B, r 4(1), be commenced by filing an application in accordance with Order 4, r 1(1).  That rule provides that except as otherwise provided by the Federal Court Rules, “all proceedings in the Court’s original jurisdiction shall be commenced by filing an application”.  An appeal under s 14ZZ is an application in the Court’s original jurisdiction.  The application must be in accordance with Form 55D and set out the prescribed particulars. 

23                  Order 52B, r 4(2) applies, with any appropriate changes and subject to any direction of the Court or a Judge, rules 4, 5, 7, 8, 10, 11, 13 and 14 of Order 4 to an appeal arising under s 14ZZ of the TA Act.  Those rules of Order 4 deal with particular features of the “commencement of proceedings” under Order 4 and address such matters as the requirement for an application to contain the name and address of the applicant, the capacity of the applicant and the need for an address for service of the applicant:  r 4; the requirement for a notice to appear:  r 5; the affixing of the Court’s seal on copies of an application and affidavit or statement of claim in support of the application:  r 7; the endorsement upon the application of a date for a directions hearing:  r 8; obtaining the directions hearing date from the Registry:  r 10; prescribed times for service of the application:  r 11; a procedure for altering the date for service where service occurs less than five days before the hearing:  r 13; and the right of any person to proceed in the Court by a solicitor or in person:  r 14. 

24                  Order 52B, r 5 provides for the documents that are to be filed by the Commissioner after service of an application (other than an appeal relating to a private ruling) including the objection decision; the taxpayer’s objection; the return; any relevant document in the Commissioner’s control or possession relating to the objection; and an appeal statement or appeal affidavit.  The Commissioner must serve on the applicant a copy of the appeal statement or affidavit and a list of the documents filed by the Commissioner.  Order 52B, r 5A addresses the filing and service of documents relating to a private ruling.  Rule 6 addresses providing notice of the details of the hearing date. 

Order 23 not expressly excluded by Order 52B

25                  The applicants contend that what is most notable about Order 52B is that there is nothing in the language of the Order that expressly excludes the application of Order 23 which applies, having regard to the wide language of Order 23, to a proceeding in the Court including a s 14ZZ proceeding, unless expressly excluded or excluded as a matter of necessary implication.  Secondly, the applicants say that the proceedings to which Order 52B applies are those commenced by an application in which the moving party is an applicant and the Commissioner is a respondent and thus Order 52B is adapted to the language of the Federal Court Rules governing the commencement of proceedings and the conduct of proceedings which brings to bear the entitlement under Order 23 of a party to a proceeding to make an offer to compromise any claim in the proceeding.

26                  The applicants say that since an Order 52B proceeding is to be commenced by a primary document described as an application within the meaning of the Federal Court Rules, with particular modifications, the orders of the Federal Court Rules governing the practice and procedure to be followed in the Court in such applications apply unless excluded or modified by particular Orders.  The source of that modification is to be found, it is said, in the express adoption from Order 52A of particular rules qualifying the operation of the general rules. 

The Commissioner’s contention as to Order 52B’s exhaustive role

27                  The Commissioner accepts that the application of Order 23 to a proceeding to which Order 52B applies is not expressly excluded by Order 52B in terms of the language of that Order.  However, the central contention of the Commissioner is, in effect, that Order 52B is an exhaustive statement of the rules which apply to a proceeding in the Court under s 14ZZ, and unless Order 52B adopts or otherwise incorporates Order 23 within the procedural rules governing an appeal from an appealable objection decision, Order 52B operates as an exhaustive statement (both inclusionary and exclusionary) of the applicable procedural rules of the Court. 

28                  That arises for this reason. 

29                  Order 52B expressly reflects a degree of intersection with Order 52A.  Order 52A was introduced in the Federal Court Rules in 1987 by Statutory Rule 174 of 1987.  Order 52A applies to an appeal to the Court or a proceeding in the Court under a law of the Commonwealth dealing with the assessment of taxation and to questions referred to the Court under such a law:  Order 52A, r 2(1).  By r 2(2), appeals from a single Judge of the Court to the Full Court are to be dealt with under Order 52 and by r 2(3) appeals to the Court from a decision of the Administrative Appeals Tribunal made under a Commonwealth law dealing with the assessment of taxation are to be dealt with under Order 53.  More particularly, Order 52A then expressly provides by r 3 for the application of other Orders of the Federal Court Rules by providing that subject to Order 52A itself and any law of the Commonwealth, “the provisions of this Order and any other Orders of these Rules apply, so far as is practicable, to proceedings to which [Order 52A, r 2] applies and for the purposes of this Order and other Orders of these Rules, the applicant and the Commissioner shall be parties to the proceedings”.  Accordingly, by Order 52A, r 3, the other Orders of the Federal Court Rules apply to a proceeding to which Order 52A applies. 

30                  The next step in the Commissioner’s argument is that Order 52B, r 3 provides for the scope of intersection between Order 52B and Order 52A.  Order 52B, r 3 provides that subject to Order 52B and to any other law of the Commonwealth, the following provisions of Order 52A apply to an appeal against an appealable objection decision, namely, r 1, r 2(2) and r 2(3), rules 4, 5, 10, 13 and 14, and rules 17 to 24 (inclusive). 

31                  Rule 1 deals with the definition of the term “Commissioner”.  Rules 2(2) and 2(3) deal with the matters described at [29].  Rule 4 deals with the mode of service of documents.  Rule 5 deals with adducing evidence in the proceedings by affidavit.  Rule 10 describes the parties to the proceeding which has the effect of characterising the moving taxpayer as the applicant and the Commissioner as the respondent.  Rule 13 deals with matters to be addressed at a directions hearing and in that regard modifies a number of the general rules of the Federal Court.  Rule 13 is in these terms:

13(1)    On a directions hearing under this Order the Court or a Judge shall give such directions with respect to the conduct of the proceeding as is thought proper. 

(2)        Without prejudice to the generality of subrule (1) the Court or a Judge may –

            (a)        determine what additional documents shall be forwarded to the Registry;

            (b)        direct the joinder of parties;

            (c)        make orders with respect to:

                        (i)         discovery and inspection of documents;

                        (ii)        interrogatories;

                        (iii)       admissions of fact or of documents;

                        (iv)       the defining of the issues;

                        (v)        the filing and serving of affidavits;

                        (vi)       the giving of particulars;

                        (vii)      the place, time and mode of hearing;

                       (viii)      the giving of evidence at the hearing, including whether evidence of witnesses in chief shall be given orally or by affidavit, or both; and

                       (ix)        costs. 

32                  Rule 14 deals with the dismissal of an appeal for want of prosecution and rules 17 to 24 deal with applications for extension of time and address the topics of the Commissioner sending a relevant application to the Court; the form of application; filing; notice of hearing; signing notices of hearing; service; abridgement and the requirements of a notice of address for service. 

33                  The next step in the Commissioner’s argument is to observe that Order 52B, r 3 does not apply Order 52A, r 3 to an appeal against an appealable objection decision.  Therefore, as a matter of necessary implication, it is said, the Orders and rules that would otherwise apply to a proceeding commenced in the Court do not apply to a proceeding in the exercise of a right of appeal under s 14ZZ of the TA Act because Order 52B fails to provide that the Rules of Court will apply so far as practicable.  It follows, it is said, that since the Rules do not apply because of a failure of express application in the same or similar terms as Order 52A, r 3, any other Order of the Federal Court Rules that would, according to the terms of the relevant Order, otherwise have an application to a proceeding to which Order 52B applies, do not apply. 

The Explanatory Statement for Order 52B

34                  Order 52B therefore has the effect, it is said, of exhausting the application of any such Order. 

35                  Order 52B was inserted on 18 February 1992 by SR 43 of 1992.  According to the Explanatory Statement accompanying the amendment instrument:

These amendments are necessary because of changes to the [TAA] amending the procedure for taxation appeals to the Court.

36                  Specifically, O 52B was inserted:

to provide for appeals against appealable objection decisions made under the [TAA] to be filed directly with the Federal Court.

37                  Order 52B r 2:

[p]rovides that this Order applies to an appeal against an appealable objection decision.

38                  Order 52B r 3:

[p]rovides that certain provisions in Order 52A (Taxation Appeals) apply to appeals against an appealable objection decision.  For example, definitions, provisions for modes of service of documents and evidence by affidavit.

39                  Order 52B r 4:

[p]rovides for the commencement of appeals in accordance with Order 4 of the Federal Court Rules and for the application of certain rules in Order 4 for dates for a directions hearings [sic], time for service of documents and notices of appearances.

40                  Nothing in the Explanatory Statement demonstrates an intention that Order 52B and the rules it expressly incorporates operate to entirely regulate the practice and procedure in respect of appeals against appealable objection decisions under s 14ZZ. 

The difficulties with the Commissioner’s contention

41                  There are a number of difficulties with the Commissioner’s central contention. 

42                  First, the Federal Court Rules do not find the source of their application to a proceeding in the Court commenced by an application, in the adoption of the rules by particular Orders although the application of the rules (or some of them) might well be excluded or qualified by a particular Order.  Secondly, Order 52A, r 3 has a contextual historical explanation that suggests that the authors of Order 52B, in electing not to adopt within Order 52B a rule in the same or similar terms to Order 52A, r 3, found it unnecessary to expressly attract the application of the Federal Court Rules to a proceeding governed by Order 52B as the rules would otherwise apply generally although modified according to the specific rules adopted from Order 52A. 

43                  In Commissioner of Taxation v Hydrocarbon Products Pty Ltd (1987) 14 FCR 359 (“Commissioner of Taxation v Hydrocarbon”) the Full Court of the Federal Court gave consideration to the relationship between sections 185, 187 and 196A of the Income Tax Assessment Act 1936 (Cth) (the “ITA Act”) and the question of the application of the High Court Rules in force under the provisions of the Judiciary Act 1903 (Cth) to a proceeding in the relevant Supreme Court arising under s 187 of the ITA Act which was on appeal to the Federal Court from the Supreme Court of the State.  Section 185 of the ITA Act enabled a taxpayer to lodge with the Commissioner an objection in writing to an assessment and by s 187 a taxpayer dissatisfied with the Commissioner’s decision was entitled to refer the decision to a Board of Review for review or treat the objection as an appeal and forward it to a specified Supreme Court:  s 187(1)(b) ITA Act.  Section 196A(1) applied the High Court Rules to such a referral as the relevant procedural rules.  Under those rules, Order 65, r 1 was, for all relevant purposes, in the same terms as Order 52A, r 2(1) and Order 65, r 2 was also relevantly in the same terms as Order 52A, r 3.  Order 65, r 2 had the effect, subject to Order 65 and any law of the Commonwealth, of applying the other Orders of the High Court Rules, so far as was practicable, to proceedings to which Order 65, r 1 applied. 

44                  A question then arose as to whether an entitlement to discovery conferred by Order 32, rr 9 and 10 of the High Court Rules would apply to the relevant proceeding so as to enable the Commissioner to serve a notice of discovery and impose a corresponding obligation on the taxpayer to make an affidavit in answer to the notice within 14 days.  In resolving that question, Woodward, Wilcox and Ryan JJ at p 377 accepted that:

… the effect of the insertion of O 65 was to lay down for the hearing of a taxation appeal by the High Court or the Supreme Court of a State or Territory a procedural codewhich incorporates by reference other orders of the High Court Rules by making them apply ‘so far as is practicable’.

                                                                                    [emphasis in bold added]

45                  Therefore, in circumstances where an Order applies to a proceeding and the terms of that Order both contain specific rules adapted to the particular proceeding and a general rule applying so far as practicable all of the other rules of the Court, such an Order, having regard to the judgment of their Honours in Commissioner of Taxation v Hydrocarbon Products Pty Ltd, would be likely to be regarded by the authors of Order 52B as a procedural code with the result that in formulating an Order, such as Order 52B, which does not adopt a rule such as Order 65, r 2 or Order 52A, r 3, the authors must be taken as having elected not to craft within Order 52B a procedural code for appeals to the Court in respect of appealable objection decisions under s 14ZZ of the TA Act but rather to have crafted rules of specific application within the framework of the application of the Federal Court Rules generally.  In other words, the authors of Order 52B must be taken not to have crafted Order 52B as an exhaustive procedural code but rather an Order to be construed and applied in conjunction with the operation of the rules generally as specifically modified by Order 52B. 

The Commissioner’s more fundamental contention

46                  The Commissioner relies upon Commissioner of Taxation v Hydrocarbon in support of a more fundamental contention to this effect.  It is said that whether a particular rule such as Order 23 has any application to a proceeding is a function of the nature of the proceeding.  Order 52B, properly understood, it is said, is a procedural rule formulated to provide the enabling procedure for translating a right of appeal from an appealable objection decision of the Commissioner to the Court and only those rules required to engage that proceeding have any application.  Order 52B has selected those rules by its terms.  This approach to an understanding and construction of Order 52B is said to be entirely consistent with the framing of procedural rules by the Court adapted to a procedure that recognises, in the context of an objection decision, that the foundation facts in issue in the proceeding are peculiarly within the knowledge of the taxpayer and, further, that the taxpayer has the onus under s 14ZZO of the TA Act of demonstrating that the assessment is excessive. 

47                  Consistent with that view, counsel for the Commissioner contended that the Commissioner is not in any orthodox sense a “party” to a proceeding in the Court arising under s 14ZZ although that specific aspect of the submission was ultimately not pressed.  The particular character of the proceedings to which Order 52B applies was said, however, to explain the limited application of the rules more generally. 

48                  It seems to me unlikely that the authors of Order 52B in establishing rules in 1992 to give effect to a taxpayer’s right of “appeal” under the new s 14ZZ enacted in 1991, chose to do so in a way designed to exclude the application of the Federal Court Rules when Order 52A recognised the application of the rules “so far as is practicable”.  A much more purposive approach to construction is to recognise that the authors of Order 52B felt it unnecessary to expressly adopt the application of other rules of Court (modifications apart) as the authors did not intend to construct a code within Order 52B and crafted Order 52B on the footing that the Federal Court Rules would apply unless excluded or modified in their application. 

A s 14ZZ proceeding as a sui generis proceeding

49                  Nevertheless, the Commissioner relies upon the decision of the Full Court in Commissioner of Taxation v Hydrocarbon as authority for the proposition that an appeal to the Court under s 14ZZ is to be treated, like a proceeding under s 187(1)(b) of the ITA Act was treated, as a proceeding sui generis to which any particular provision of the Federal Court Rules will apply only “so far as the substance of that provision and the nature of the proceeding make such application practicable”. 

50                  Accordingly, the question of whether a proceeding arising under s 14ZZ to which Order 52B applies is to be treated as a sui generis proceeding of a particular nature which conditions whether Order 23 or other Orders of the Federal Court Rules apply to the proceeding requires examination.  In George v Federal Commissioner of Taxation (1952) 86 CLR 183 (George v FCT) Fullagar J said this at pp 207 and 208 (in adding supplementary remarks to the joint judgment of the Court to which Fullagar J was also a member of the plurality):

It is common practice, in the Court lists and in the Law Reports to entitle a taxation appeal as if it were a proceeding between a named taxpayer and the Commissioner of Taxation.  But the Commissioner is only nominally a “party” to the proceedings.  The proceedings are really proceedings between Crown and subject. … The substance of the position in taxation cases is not affected by the fact that the Commissioner is given eo nomine a right of appeal from decisions of the Board of Review.  The Commissioner is an officer who, in the performance of his statutory functions, does acts which prima facie create an obligation between the Crown and a particular subject, and the statute provides means whereby the subject may test before a court or a board the question whether the Commissioner has acted according to law.  In proceedings before court or board the Commissioner’s acts are called in question, but he is in no real sense a party.  This does not mean that he is not, in many respects, subject to orders of the court, but itdoes mean that certain orders which are quite appropriate as between parties to an action are quite inappropriate as between an appellant taxpayer and the Commissioner. 

                                                                                                [emphasis added]

51                  In George v FCT the taxpayer sought particulars of the information that formed the basis of the Commissioner’s increased assessment.  The application was made in an appeal against the Commissioner’s decision to disallow an objection.  In the joint judgment of Dixon CJ, McTiernan, Williams, Webb and Fullagar JJ, the High Court said that a taxpayer has no right to particulars against the Commissioner as, at p 201: 

[T]he source of the large increase year by year in the [taxpayer’s] assets would be a matter peculiarly within his own knowledge.  … It is a fact outside any knowledge the commissioner can have except from inquiry into the affairs of the [taxpayer] and it is not unreasonable that the onus of proof should be placed by law upon the latter. 

                                                                                    [emphasis in bold added]

52                  The High Court recognised that asymmetry of information subsisted as between the Commissioner and individual taxpayers whose knowledge about their own tax affairs was “peculiar” to them.  It is probably no longer the position, having regard to the powers of information gathering available to the Commissioner today that such a degree of information asymmetry subsists in the modern era, 58 years later, although the taxpayer remains ultimately the source of the information and documents relating to the taxpayer’s affairs.  Section 14ZZO of the TA Act casts the burden of proving that the Commissioner’s assessment is excessive, on the taxpayer.  More fundamentally, even if it is accepted that the Commissioner stands in a position of special disadvantage by reason of asymmetry of information in dealings with the taxpayer, it is difficult to identify the basis upon which a necessary implication arises that the general procedural rules applying to applications in the original jurisdiction of the Court do not apply to an appeal from an objection decision, by reason of the Commissioner’s asymmetric relationship with the taxpayer. 

The Statement of Principle

53                  In Commissioner of Taxation v Hydrocarbon, as earlier mentioned, the Commissioner sought discovery from the taxpayer in the s 187 appeal.  The relevant issue in the present context of the Commissioner’s argument was whether such an appeal was a “suit” to which s 64 of the Judiciary Act 1903 (Cth) applied.

54                  The Full Federal Court considered s 64 of the Judiciary Act 1903 (Cth), which provided that:

In any suit to which the Commonwealth or a State is a party, the rights of parties shall as nearly as possible be the same, and judgment may be given and costs awarded on either side, as in a suit between subject and subject [emphasis added] –

and s 2 of that Act, which provided, relevantly:

In this Act, unless the contrary intention appears –

“Suit” includes any action or original proceeding between parties;

“Cause” includes any suit, and also includes criminal proceedings;

“Matter” includes any proceeding in a Court, whether between parties or not, and also any incidental proceeding in a cause or matter –

before concluding with a statement of principle at p 378 relied on by the Commissioner in these terms:

Although it is clear that the Commonwealth may be a party to a suit, it is equally clear that not every cause or matter in which the Commonwealth or some person representing the Commonwealth is involved is a suit.  We prefer to regard an appeal to a specified Supreme Court pursuant to s 187(1)(b) of the Act as a proceeding sui generis, to which any particular provision of the High Court Rules will be applicable, so far as the substance of that provision and the nature of the proceeding make such application practicable. 

                                                                                                [emphasis added]

55                  In the proceeding before it, the Full Court determined that the power to order discovery was a matter of discretion. 

56                  The Full Court’s conclusion quoted above that a s 187 appeal was a proceeding sui generis involved two considerations.  First, a consideration of the particular statutory structure providing the foundation for a taxation appeal and the statutory conception of causes, matters and suits contained in s 2 of the Judiciary Act which led to the conclusion that an appeal proceeding was not a suit.  It followed that since an appeal proceeding was not a suit, s 64 would not apply and thus the rights of the taxpayer and the Commissioner were not necessarily “as nearly as possible … the same, and judgment … given and costs awarded on either side, as in a suit between subject and subject”.  Secondly, the sui generis proceeding would attract the application of any particular rule within the High Court Rules “so far as practicable to and in relation to” such a proceeding:  s 196A(1); Order 65, r 2, High Court Rules. 

The changed statutory foundation for appeals

57                  The statutory foundation for taxation appeals has been amended by the Parliament.  Section 187 of the ITA Act was amended by the Income Tax Assessment Act (No. 3) 1973 (Cth) (No. 53 of 1973); the Income Tax Assessment Amendment (Jurisdiction of Courts) Act 1976 (Cth) (No. 165 of 1976); the Income Tax (Arrangements with the States) Act 1978 (Cth) (No 87 of 1978); the Income Tax Laws Amendment Act 1981 (Cth) (No. 108 of 1981); the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986) (Cth) (No. 48 of 1986); and the Jurisdiction of Courts (Miscellaneous Amendments) Act 1987 (Cth) (No. 23 of 1987); before finally being repealed and replaced by s 14ZZ of the TA Act by the Taxation Laws Amendment Act (No. 3) 1991 (Cth) (No. 216 of 1991). 

58                  In 1987, the Jurisdiction of Courts (Miscellaneous Amendments) Act 1987 (Cth) (No. 23 of 1987) conferred jurisdiction on the Federal Court to hear appeals by taxpayers against decisions of the Commissioner in place of the jurisdiction conferred on the Supreme Courts of the States.  In so doing, the Parliament repealed s 196A, which had applied the High Court Rules “so far as practicable, to and in relation to a proceeding”, as the transfer of jurisdiction to the Federal Court rendered s 196A (and s 198) of the ITA Act superfluous:  Explanatory Memorandum, Jurisdiction of Courts (Miscellaneous Amendment) Bill 1986 (Cth). 

59                  Order 52A was introduced into the Federal Court Rules by Statutory Rule 174 of 1987. 

60                  In Commissioner of Taxation v Hydrocarbon the Full Court accepted that the Commissioner fell within the definition of “Commonwealth” in s 67A of the Judiciary Act and would have been subject to s 64 but for the notion that an s 187(1)(b) proceeding is not properly characterised as a “suit”.  The Full Court’s conclusion in 1987 that a taxation “appeal” under s 187(1)(b) of the ITA Act is not a suit but rather a proceeding sui generis is said by the Commissioner to remain an accurate and binding description of a proceeding by way of appeal to the Federal Court under s 14ZZ of the TA Act to which any particular provision of the Federal Court Rules will apply only so far as the substance of the rule and the nature of the proceeding make such application practicable. 

61                  However, the procedural translation under Order 52B of an appeal from an appealable objection decision starts, as mentioned earlier, by requiring an appeal to be commenced by filing an application in the Court in accordance with Order 4, r 1 which necessarily characterises the appeal as a “proceeding” in the Court between an applicant taxpayer and a respondent Commissioner who are treated as parties to the disposition of a controversy framed, of course, by reference to the particular subject matter of that proceeding.  The proceeding starts on the footing that it exhibits the characteristics of an orthodox application under the rules of the Federal Court, not a sui generis proceeding of a special nature, procedurally.  Order 52B itself determines which of the generally applicable rules are to be modified by selecting the adapted versions of particular rules by means of Order 52B, r 3.  Section 196A(1) was repealed and Order 65, r 2 of the High Court Rules no longer applied to such a proceeding as a procedural code.  The Federal Court Rules apply to the proceeding. 

The applied assumption

62                  Nevertheless, let it be assumed that a proceeding in the Court arising under s 14ZZ of the TA Act is a proceeding (just as a proceeding under s 187(1)(b) under the earlier statutory arrangements for tax appeals was such a proceeding) sui generis to which any particular provision of the Federal Court Rules will apply only so far as the substance of the rule and the nature of the proceeding make such application practicable.  In Eastern Nitrogen Ltd v Federal Commissioner of Taxation (1996) 33 ATR 4 (“Eastern Nitrogen v FCT”), Spender J proceeded on that assumption (although the question was not examined in the judgment) when his Honour said at p 5: 

The Full Court said in [Commissioner of Taxation v Hydrocarbon] that taxation appeals are proceeding[s] sui generis.  I accept therefore that the Commissioner has no right to discovery, and whether any discovery, and what discovery, is to be ordered lies within the court’s discretion.  In particular, what I am doing now is exercising the discretionary power which is conferred in a suit such as the present by Order 52A, r 13(2)(c)(i). 

63                  If an Order 52B proceeding is assumed to fall within the Full Court’s characterisation of the earlier s 187(1)(b) proceedings, any particular provision of the Federal Court Rules will apply to the proceeding “so far as the substance of that provision and the nature of the proceeding make such application practicable”.  There seems to me to be nothing in the substance of Order 23, expressed in wide language, that suggests that any consideration of what is practicable would render Order 23 inapplicable.  Why is it not practicable in an appeal proceeding for a party to the proceeding to consider and, if thought appropriate, make an offer of compromise within the terms of Order 23?  Encouraging offers of compromise in proceedings seems to be the policy of Order 23 and presumably the Commissioner and the Commonwealth believe that litigation ought to be compromised if possible.  Similarly, there seems to be nothing in the nature of the proceeding arising under s 14ZZ that suggests that any consideration of what is practicable would render Order 23 inapplicable. 

The further aspect of Eastern Nitrogen v FCT

64                  The respondent also relies on Eastern Nitrogen v FCT in support of the proposition that Order 52B operates to exclude the other Orders of the Federal Court Rules.  In Eastern Nitrogen v FCT, the Commissioner sought discovery of documents relating to a transaction that formed the basis of an amended assessment by the Commissioner.  At issue was whether Order 15 of the rules or Order 52A, r 13 applied.  Order 15 would have obliged the taxpayer to provide discovery.  Order 52A, r 13 adopted by Order 52B, r 3 conferred a power on the Court to make Orders at a directions hearing with respect to discovery and inspection of documents.  Spender J at p 5 said this:

Order 52B does not on its face incorporate by reference the general practice specified in other rules of court, and in particular O 15.  I accept, as do counsel that O 52B on its face does not confer a right to discovery, but that O 52 r 13 is incorporated …

65                  Spender J, correctly, with respect, observed that Order 52B does not expressly, on its face, incorporate by reference the general practice of the Court specified in the Federal Court Rules.  His Honour does not address whether Order 52B need expressly adopt the general practice rules; whether they apply in any event as modified by reference to Order 52B, r 3; or whether they are excluded as a matter of necessary implication as the Commissioner contends.  His Honour observed that the general rules are not expressly adopted and thus it followed, for his Honour, that the question of discovery fell to be determined under the power conferred by Order 52A, r 13 as adopted by Order 52B, r 3.  The applicants contend that rather than support the Order 52B exhaustion of the Federal Court Rules proposition of the Commissioner, this case simply illustrates that a modified discovery rule applied to the proceeding rather than Order 15.  Order 52B specified a modification of the general rule relating to discovery in Order 15 by adopting the procedural rule as to discovery reflected in Order 52A, r 13(2)(c)(i) by force of Order 52B, r 3.  I accept the submissions of the applicants in this regard. 

The Order 62, rule 24 analogue

66                  A question arose in the course of the present hearing as to the application of Order 62 to a proceeding arising under s 14ZZ of the TA Act.  The Commissioner seems to accept that Order 62 of the Federal Court Rules, in principle, applies to a proceeding arising under s 14ZZ without the need to find the express adoption of Order 62 within Order 52B.  That follows, it is said, because the nature of the proceeding determines whether the application of Order 62 is appropriate or practicable.  Order 62, r 24 provides:

Where a party to a proceeding serves a notice disputing a fact under Order 18 rule 2 (which relates to notices to admit facts) and afterwards that fact is proved in the proceeding he shall, unless the Court otherwise orders, pay the costs of proof. 

67                  In McDermott Industries (Aust) Pty Ltd v Federal Commissioner of Taxation (2004) 57 ATR 212; [2004] FCA 1299 (“McDermott (No 2)”), R D Nicholson J dismissed an appeal by McDermott Industries (“MIA”) from the disallowance by the Commissioner of MIA’s objection to an amended assessment in respect of three income years.  His Honour then considered the appropriate costs orders to be made in the exercise of discretion under s 43 of the Federal Court Act.  MIA contended that special circumstances existed arising out of the application of Order 62, r 24 as MIA had issued two notices to admit facts although ultimately MIA relied on only one notice.  As to that notice, MIA sought an admission of facts recited in para 9 of the notice which were disputed by the Commissioner and ultimately proved by MIA.  MIA sought a special order for the costs of proof of those facts.  The Commissioner contended that the giving of a notice to admit facts was inappropriate to an s 14ZZ proceeding as that procedure applied to orthodox commercial or common law adversarial proceedings and not proceedings under s 14ZZ where the facts or events lie wholly within the knowledge of the taxpayers.

68                  The Commissioner contended that it followed from those considerations that the jurisdiction to vary a costs order under Order 62, r 24 should not be exercised.  Nicholson J concluded at [20] and [21] that:

20.       I agree with MIA’s submission in reply that the operation of the presumption established by the Federal Court Rules, O 62, r 24 does not depend on the nature of the proceedings or becomes unreasonable in proceedings such as the present.  There is nothing in the term of the Federal Court Rules which suggests it should be so confined. 

21.       The issue here should be decided on the basis of whether or not the Federal Court Rules, O 62, r 24 applied in the circumstances. 

No relevant point of differentiation as to Order 23

69                  The applicants contend that there is no relevant point of distinction in principle between the application of Order 62, r 24 and Order 23 and thus it follows that the application of Order 23 does not depend on the nature of the proceedings and is not rendered unreasonable in its application to proceedings arising under s 14ZZ.  The Commissioner contends that Order 62, r 24 applies to an s 14ZZ proceeding according to its terms and since the Commissioner is not amenable to a notice to admit facts under Order 18 as Order 18 does not apply to Order 52B proceedings, Order 62, r 24 can have no field of operation as it depends upon a notice of dispute under Order 18, r 2.  Order 52A, r 13(2)(c)(iii) adopted by Order 52, r 3 confers a power on the Court to make Orders with respect to admissions of fact or documents and thus modifies Order 18.  Nevertheless, there is nothing in the nature of the proceeding itself that prevents Order 62, r 24 applying to an s 14ZZ proceeding.  The application of the Federal Court Rules as modified by Order 52B, r 3 will cause, as a matter of textual construction, Order 62, r 24 not to operate if its operation is dependent upon Order 18.  Although the textual limitation of the reach of Order 62, r 24 was not discussed by R D Nicholson J, his Honour was plainly of the view that there was nothing in the nature of the proceedings arising under s 14ZZ which would have the effect of excluding that Order of the Federal Court Rules and in that sense the applicants are correct in suggesting that McDermott (No 2), although not dealing with Order 23, lends support to the proposition that the nature of the proceeding itself does not exclude the application of Order 23. 

A comparison with the other rules of the Federal Court

70                  It may be of assistance to have regard to other orders of the Federal Court Rules that regulate discrete aspects of the Court’s jurisdiction in order to ascertain whether those orders purport to entirely regulate the particular subject matter in question.  Appendix A to these reasons sets out in chronological order the orders in the Federal Court Rules that purport to regulate discrete subject matter and identifies the extent to which the general provisions in the Federal Court Rules are made expressly applicable by those orders.  Appendix B places those orders in the categories set out in the schedule.

71                  Category A Orders expressly state that other orders of the rules apply so far as they are relevant and not inconsistent with the specific order.  These orders are Orders 48, 51A, 51B, 52A, 54, 54A, 57, 58, 66, 67, 68, 69, 69A, 78 and 81.

72                  Category B Orders expressly provide that another set of Rules applies in lieu of the Federal Court Rules.  They are Orders 71, 71A and 77.

73                  Category C Orders are Orders that rely on the procedure set out in Order 52, which provides for the procedure in relation to the Court’s appellate jurisdiction.  They are Orders 53, 53B, 56, 61 and 61A.  Orders 53B, 56, 61 and 61A (each of which regulate appeals from different tribunals) provide that Order 53 applies.  Order 53 in turn provides that Order 52 applies. 

74                  Category D Orders are silent as to whether the other Orders of the Rules apply, but clearly contemplate that other Orders apply by their express reference to specific Orders.  They are Orders 54B, 59 and 60.

75                  Category E Orders are entirely silent as to whether the other Orders of the Rules apply.  They are Orders 51, 65, 70, 74 and 76.  Some refer to directions hearings and time limits without referring explicitly to which rules apply.  Where the specific Orders do not refer to the operation of the other Orders of the Rules, then either those other Orders apply or s 37P of the FCA Act applies.  Subsection (2) of that section provides that:

The Court or a Judge may give directions about the practice and procedure to be followed in relation to the proceeding, or any part of the proceeding.

76                  Where a specific Order is silent about whether the other Orders of the Rules apply, the better view is that those other Orders apply so far as practicable, for three reasons.  First, the Rules themselves are expressed in very broad terms.  Section 59 of the Federal Court Act provides that the Rules are formulated:

in relation to the practice and procedure to be followed in the Court … and for or in relation to all matters and things incidental to any such practice or procedure, or necessary or convenient to be prescribed for the conduct of any business of the Court.  [emphasis added]

77                  Secondly, there is significant utility in achieving consistency in procedural provisions across all civil proceedings.  Unless a particular civil proceeding expressly requires otherwise, it is unlikely that a different set of rules would have been intended to apply.

78                  Thirdly, Order 1, r 8 provides that the Court may dispense with compliance with any of the requirements of the Rules at any time.  This mechanism guards sufficiently against injustice in the application of a particular Rule in a particular proceeding.

79                  Category F Orders are Orders 52B and 52C.  These Orders are similar to Category E Orders, in that they do not refer expressly to the operation of the other Orders of the Rules. 

80                  For these reasons the other Orders of the Federal Court Rules apply unless specifically modified. 

Conclusions as to Order 23

81                  An appeal proceeding under s 14ZZ of the TA Act is a proceeding in the Court’s original jurisdiction commenced by an application in accordance with Order 4, r 1(1) using Form 55D in which the moving party is an applicant and the Commissioner is a respondent party.  Such an application is a proceeding for the purposes of s 4 of the Federal Court Act and Order 23 of the Federal Court Rules.  The Federal Court Rules apply to such a proceeding except to the extent that any particular rule is expressly excluded or expressly modified in its application to the proceeding.  Order 52B, r 3 provides for those modifications by adopting modifications reflected in Order 52A, rr 1, 2(2), 2(3), 4, 5, 10, 13, 14 and 17 to 24.  Order 52B, r 4 provides for commencement of applications and Order 52B, r 5 and r 5A provide for document filing and service of material specific to the subject matter of the proceeding.  There is nothing in the nature of the proceeding which limits the application of Order 23 to the proceeding. 

82                  A proceeding in the Federal Court arising under s 14ZZ involving questions of fact and law is only a proceeding “of its own kind”, that is, sui generis,in the sense that it concerns an examination of whether the respondent party’s decision as to a taxpayer’s objection is sustainable rather than a contention that a respondent has engaged in conduct in contravention of a statutory norm or prescription giving rise to a remedial order directed to loss, damage, a pecuniary penalty, or threatened conduct.  Nor is the subject matter of the proceeding in the nature of a suit between citizens asserting or resisting claims to relief arising out of orthodox causes of action.  However, that said, the very subject matter of the proceeding is whether the Commissioner’s assessment is excessive and whether the Commissioner is seeking to obtain, from the citizen, taxation for which the citizen is not liable.  The expressly chosen method of testing those questions is by a proceeding in the Court by application between parties who are an applicant and a respondent, governed by the Federal Court Rules.  The resolution of the questions in issue in the application may result in a determination that an assessment is excessive with remedial orders directed to the Commissioner as the Court thinks fit. 

83                  The subject matter of the proceeding is specific but the procedural mechanism for dealing with the matters in issue is by an application under and in accordance with the rules of Court. 

The application of Order 23, r 11(4)(c) and (d)

84                  The Commissioner contends that if Order 23 applies, three further issues arise.  First, the offer is not a genuine offer.  Secondly, the applicants did not obtain judgment “not less favourable than the terms of the offer” and thirdly, there are good reasons why the Court should, in any event, make Orders otherwise than in terms of Order 23, r 11(4)(c) and (d). 

Is the offer a genuine offer?

85                  As to the question of whether the offer is genuine, the applicants on 9 December 2008 offered to settle the proceedings on the footing that the objection of the taxpayers be allowed (with a consequential variation of the objection decision); the notice of amended assessment for the income year ending 30 June 2001 be withdrawn; and the parties bear their own costs of the proceeding (with the applicants foregoing any costs orders in their favour at that date).  That offer amounted to the Commissioner accepting that the objection taken by the applicants was good and the applicants would not claim the recovery of any costs incurred in the proceeding. 

The evidence

86                  The solicitor for the applicants, Mr Damien Bourke, swore an affidavit on 2 February 2010 in which he deposes to these things:

17.       I have calculated the quantum of the costs which had been incurred (solicitor/client) by the Applicants as at 25 November 2008.  The Applicants at this time had filed a significant body of evidence including affidavits from each of the Applicants Mr/s Clark (filed 29 August 2008 and 15 September 2008 respectively); an Affidavit of Mr Denoon (filed 29 August 2008); a further Affidavit of Mr Scott (filed 15 September 2008); an Affidavit of Mr Anthony Lovett (filed 1 September 2008) and an affidavit of Mr Roxborough (filed 26 September 2008). 

18.       The Respondent was fully informed by 25 November 2008 of the nature of the case it was to meet – a fortiori since it had the benefit of the sworn evidence of Mr Denoon as well as the Judgment which was given in the Carringbush proceedings [Carringbush Corporation v ASIC (2008) FCA 474]. 

19.       The investigations which were carried out with witnesses as well as the history of the matter (including the Respondent’s shifting of position), resulted in costs totalling $307 510 (solicitor/client – including Counsel). 

20.       I am a solicitor having been admitted to practice in 1987.  I have conducted and been engaged on numerous “Taxations/Assessments” of costs – within both the State and Federal Courts.  I have during my career been primarily involved in commercial litigation type matters and have knowledge of the likely recovery of costs in different types of matters.  In my opinion the likely percentage recovery of costs in general ranges between 40‑60%.  Taxation matters are generally more expensive to conduct due (in my respectful view) to the onus of proof being cast upon the Applicant/Appellant. 

21.       Of the above total (which, for the avoidance of doubt) does not include costs associated with the application by the Carringbush companies for approval of the disposal of the Rothbury shares) I would estimate that on a party/party basis the Applicants were foregoing between $123 004 and $184 506 at the date the “Calderbank” offer was made. 

87                  In a further affidavit sworn 9 March 2010, Mr Bourke at para 2 said this:

I also refer to paragraph 21 of my affidavit filed 5 February 2010 [sworn 2 February 2010].  Between the date of making of the “Calderbank” offer and the date of the formal offer made under Order 23 of the Federal Court Rules … there was no significant addition to the costs of the applicants as no additional steps were taken.  At the date of making of the Order 23 offer on 9 December 2008, I consider that there would be no change to the applicants’ costs – either on a solicitor/client basis or on a party/party basis.

The timing of the offer

88                  At the date of the offers of 25 November 2008 and 9 December 2009, the applicants were offering to abandon any claim for costs (ultimately shown to be a good claim as the respondent does not now oppose an order for party and party costs of the proceeding) of between $123,000 and $184,000 (the average of the range being $153,000).  That offer is an offer of substance notwithstanding that it calls upon the Commissioner to concede the merits of the subject matter of the proceeding.  The offer was made after the costs were incurred.  The offer was not simply a risk management device in the form of an offer at the outset of the proceedings to try and position a party for a particular form of order on the ultimate resolution of the matter at trial. 

The Commissioner’s contention as to lack of genuineness

89                  The Commissioner contends that the offer is simply an offer by the applicants to “walk away” with all that they claim in the proceeding and they offer no compromise on the substance of the matter.  In other words, the Commissioner says that, in an analogous sense, the applicants are not willing to give up “one dollar” of their principal claim and thus the applicants are not engaged in an offer of compromise as a compromise connotes a party giving something away:  Hobartville Stud Pty Ltd v Union Insurance Co. Ltd (1991) 25 NSWLR 358 at 368 per Giles J.  The offer was not “a real compromise for a consideration of real value”:  Australian Competition and Consumer Commission v Universal Music Australia (No. 2) [2002] FCA 192 at [60] per Hill J.  Further, the offer is said to be a procedural move to trigger a cost consequence rather than a genuine attempt to reach a negotiated settlement:  The Uniting Church in Australia Property Trust (NSW) v Takacs (No. 2) [2008] NSWCA 172 at [14] per Hodgson JA, McColl JA agreeing. 

Conclusions as to the genuineness of the offer

90                  However, the notion that the applicants are giving up nothing of substance by offering to compromise on the footing that they will absorb the recoverable costs incurred to the date of the offer misunderstands the lay community’s concerns about legal costs and therefore the concerns lay litigants hold about costs.  Costs do not lie at the margins for litigants.  They are real and of value.  When a party elects as part of its offer to abandon a claim to recoverable costs (which in the circumstances must be taken to be a good claim) in the order of $123,000 or $153,000 or possibly $184,000, a real concession arises.  As Finkelstein J observed in Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd (No. 4) (“Brookfield Multiplex v ILFP”) [2009] FCA 803 at [13] and [14]:

13.       One can easily envisage circumstances where a “walk away’ offer must be regarded as a genuine offer of compromise.  Take for example a case that has progressed for some time and the party’s costs are quite high.  In that event an offer to walk away may, in a business sense, be a significant offer:  see for example Commissioner of Taxation v Evenfont (No. 2) (2009) 223 FLR 28 at 31. 

14.       Conversely there are circumstances … where an offer to walk away does not involve any real give and take.

91                  In Uniline Australia Ltd v SBriggs Pty Ltd (No. 2) (2009) 82 IPR 56; [2009] FCA 920, I put these considerations in the following terms at [38]:

In the modern world of commercial litigation and various subsets of that litigation such as intellectual property litigation, costs are a very real and quantifiable concern. It would be extremely odd to think otherwise. Costs are incurred in a recoverable inter-parties sense from the moment the proceedings issue and they continue to be incurred at every point along the continuum of the litigation. Litigants who are required to pay these costs in order to assert or resist a claim, regard them as a very real and present expense, if not a real and present danger. Very often these costs are a significant business expense. They invariably require a commitment of significant resources and separate budget allocations. An offer to compromise which is framed in terms of a party’s willingness to abandon the recovery of costs so incurred along that continuum through the preparation and analysis of statements, disclosure, analysis of documents and the preparation and review of expert reports, is undoubtedly considered by the litigant as an offer that involves giving up something meaningful, real and measurable. This is particularly so after the completion of case managed preparatory steps at various phases of the litigation which may have the effect of front-end loading significant costs in order to save trial costs. In many cases although not in all cases, the notion that a party is giving up nothing by inviting another party to discontinue a claim on the footing that the offeror will not make any claim for payment of its costs incurred to the date of the offer, is a fundamentally abstracted notion from the practical perspective of the engaged litigant confronting the management of the proceeding and the appropriation of expenditure to conduct it. An offer, on the other hand, that invites discontinuance of a claim on the payment of the offeror’s costs to date offers not very much at all other than the stemming of future costs which in a particular case may nevertheless be very real. 

                                                                                    [emphasis in original]

92                  To describe an offer to abandon a good claim to costs in the range $123,000 to $184,000 as “not genuine” is apt to suggest, as Logan J observed in Granitgard Pty Ltd v Termicide Pest Control Pty Ltd [2010] FCA 381 at [24], a pejorative quality that suggests that the offer was not made in good faith.  I accept that the offer was made in good faith and in making that offer the applicants were willing to abandon a good claim of substance that represented a real element of compromise on their part. 

The result at trial compared with the offer

93                  As to the second contention that the applicants did not achieve a result not less favourable than the offer, the position is this.  The applicants offered to settle all claims on the footing that the objection was good; the objection decision be set aside; the objection be allowed; and the amended assessment that failed to allow the capital loss be withdrawn.  That was the substance of the judgment the appellants obtained although the question of amending the assessment will only arise upon the final resolution of the matter upon appeal:  s 14ZZQ. 

The four special circumstances supporting an order “otherwise” than Order 23, rule 11(4)(c) and (d)

94                  As to the third matter, the Commissioner contends that the following four considerations lead to the conclusion that the Court should order costs of the proceedings to the applicants on a party and party basis rather than an order for party and party costs to the date of offer and indemnity costs thereafter in accordance with Order 23, r 11(4)(c) and (d).  As to the principle to be applied, where a moving party offers to settle for a sum which is less than he or she eventually achieves at trial, there is a presumptive entitlement to indemnity costs under Order 23, r 11(4) of the Federal Court Rules:  CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd (supra, [7] of these reasons).  An offeree ought to only be relieved of the consequences of the rule in support of an order “otherwise” if the offeree can demonstrate compelling and exceptional circumstances to support a different order. 

(a)        A real prospect of success

95                  The first consideration is that at 9 December 2008, the Commissioner’s contentions set out in the Further Amended Statement of Facts Issues and Contentions at [2] to [5] had a real prospect of success.  The Commissioner says that the applicants in the course of a hearing on 27 June 2008 had not opposed the Commissioner’s proposed amendments to contentions addressing the issue of the “continuity of the trust”, on the basis that the reformulated contentions had “no chance of success”.  The Commissioner says that since those contentions were open and arguable and enjoyed a chance of success, an Order other than in accordance with Order 23, r 11(4) ought to be made. 

96                  However, the notion that an ultimately unsuccessful party had a reasonable chance of success in the proceeding is not an exceptional circumstance.  As Finkelstein J observed in Brookfield Multiplex v ILFP at [1]:

Each side has a probability of winning and a complementary probability of losing.  The parties may dislike the risk that is involved and pay something to avoid it.  Making an offer of compromise is designed to put pressure on a risk‑averse party by adding significantly to the cost of losing. 

(b)        The public interest point

97                  The second circumstance is put in these terms:

The continuity of trust contention raises a question of significant importance.  It is a matter of public interest that the issue be resolved, one way or another. 

98                  The fact that a proceeding raises a significant and unresolved question of law that is of public interest is not of itself an exceptional circumstance.  The public interest question of law, of course, will arise in the context of particular facts the resolution of which involves a controversy between the taxpayer and the Commissioner which is a bilateral contest between the Commissioner and that taxpayer.  It is difficult to identify the basis upon which the particular taxpayer ought not to have the benefit of an Order under Order 23, r 11 on the footing that the general community has a broader public interest in the resolution of the question of law.  If the public has an interest in the resolution of the public interest question, the community ought to be expected to bear, through the Commissioner, the costs the particular taxpayer is entitled to recover under Order 23, r 11. 

99                  The question in issue, for present purposes, is not whether the Commissioner reasonably or unreasonably contested the issue of the continuity of the trust but whether having contested that issue, the public interest in resolving legal questions associated with continuity is an exceptional circumstance that warrants depriving the particular taxpayer of the presumptive entitlement to indemnity costs from the date of the offer.  In my view, the public interest consideration is not an exceptional circumstance. 

(c)        The cost base issue remained arguable

100               The third consideration is put in these terms by the Commissioner:

Notwithstanding the filing of the applicants’ affidavits, the respondent’s contention that the applicants had failed to satisfy the onus of proof pursuant to s 14ZZO in establishing the cost base of the Rothwell shares and the existence of the claimed capital losses in the 1991 and 1992 income years remain arguable. 

101               Accordingly, the Commissioner maintained the position that the taxpayers would need to prove on the balance of probabilities those facts necessary to establish the cost base.  In putting the taxpayers to proof on that issue, the Commissioner elected to cross‑examine the taxpayers’ witnesses.  In doing so, the Commissioner did not put an affirmative case but simply tested the quality of the evidence of facts going to the cost base issue.  That was the position the Commissioner was, of course, entitled to take.  However, the Commissioner’s failure to establish through cross‑examination a lack of proof of the relevant facts is not an exceptional circumstance. 

(d)        An important matter of legal principle

102               The fourth consideration is put by the Commissioner in these terms:

Where there are important questions of legal principle and contentious factual issues bearing directly on the amount of the assessment it is incumbent on the respondent in the performance of his statutory duty to collect “neither a penny more nor a penny less” than the amount of tax lawfully payable to vigorously defend the correctness of the amount of an assessment by any and all reasonable bases. 

103               This consideration is essentially in the same terms as the second circumstance.  The Commissioner elected to run a facts case in order to support a legal point of principle on continuity.  The Commissioner sought to recover more tax than was payable by the taxpayer.  The Commissioner contends that in the discharge of his statutory duty, that was a proper and reasonable course to take.  That is not the question for present purposes.  The question is whether the circumstance that the Commissioner believed the assessment to be correct and one that ought to be defended both as to the merits and in the discharge of a statutory duty to support on any and all grounds an amended assessment, is a circumstance which ought to displace the presumption arising under Order 23, r 11. 

104               I am not satisfied that these four considerations constitute exceptional circumstances. 

105               Accordingly, there are no exceptional circumstances that justify departure from the presumptive entitlement of the applicants to indemnity costs under Order 23, r 11 from the 10 December 2008. 

The interlocutory applications of 7 September 2007 and 26 June 2008

106               The Commissioner relies upon these applications in a number of respects.  It is not necessary to recite the content of the applications.  It is sufficient to say that they dealt with questions concerning whether the Commissioner was entitled to raise the s 468(1) Corporations point as a matter of procedural fairness; whether each taxpayer should be given leave to amend grounds of objection to the decision and questions going to the adequacy of particulars of the Commissioner’s Statement of Facts Issues and Contentions.  The Commissioner does not seek any order for costs in respect of the these applications.  In any event, the applicants were successful on a number of matters and the amendments to objections were largely responsive to contentions advanced by the Commissioner.  To the extent that there are said to be costs arising out of these applications which might go some way towards offsetting the costs identified by Mr Bourke, I am satisfied that the costs would be, in the scheme of things, quite small and in any event the Commissioner does not press for costs in respect of any reserved costs.  I have taken the matters into account and I do not regard those applications as influencing in any way the determination of whether the offer made by the applicants is to be regarded as genuine. 

The Calderbank offer

107               Order 23 does not operate to the exclusion of the general principles governing Calderbank offers: Henderson v Amadio Pty Ltd [1996] FCA 1341 at [51] per Heerey J; Alpine Hardwoods (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121 at 124‑125; [2002] FCA 224 at [18]‑[19] per Weinberg J.  If Order 23 does not apply to the proceeding, it is necessary to consider whether the applicants’ offer of 25 November 2008 satisfies the principles applicable to the purported Calderbank offer. 

108               A Calderbank offer must be genuine and the offer put by the party must be equal to or better than the party’s ultimate result at trial.  The offer of 25 November 2008 satisfies each of these requirements.  However, the offeree’s refusal of the Calderbank proposal must be shown to be unreasonable.  In CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd (supra), the Full Federal Court said at [75]:

However, where recourse is not had to O 23, but reliance is placed upon the court’s general discretion, it is necessary for the party seeking indemnity costs to demonstrate that the other party’s refusal of the Calderbank offer was unreasonable. 

109               The Full Court cited Black v Lipovac (1998) 217 ALR 386 at 342 and Maniotis v JH Lever & Co Pty Ltd (No 2) [2006] FCAFC 28 in support of that proposition and went on to say at [75]:

It is not sufficient that the offer was a reasonable one: Alpine Hardwoods (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121, 128 [35]; Dais Studio Pty Ltd v Bullet Creative Pty Ltd [2008] FCA 42, [11].  In considering this question in a particular case, the matter of unreasonableness will be judged by reference to the circumstances facing the offeree at the time of the offer.  While the eventual outcome in the case may go part of the way in this regard, there is no presumption that ultimate success in the proceeding for the offeror necessarily renders the offeree’s rejection unreasonable. 

                                                                                    [emphasis in bold added]

See also Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 40 at [11] per Tamberlin, Finn and Sundberg JJ; IFTC Broking Services v Commissioner of Taxation [2010] FCAFC 31 at [12] per Stone, Edmonds and Jagot JJ.  The offeree’s rejection must be unreasonable, not “plainly unreasonable”, because, as the Full Court said in Black v Lipovac (1998) 217 ALR 386 at 342:

To adopt an especially high standard of unreasonableness would operate as a fetter on the discretion to award indemnity costs and diminish the effectiveness of the Calderbank offer as an incentive to settlement. 

Unreasonableness

110               In Hazeldene’s Chicken Farm v Victorian Workcover Authority (No 2) (2005) 13 VR 435 at 442; [2005] VSCA 298 at [25], the Victorian Court of Appeal (Warren CJ, Maxwell P and Harper AJA) under the heading “Factors relevant to assessing reasonableness” said:

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 [order] in the event of the offeree’s rejecting it. 

111               The Victorian Court of Appeal went on to say (at [27]) that it is not necessary for an offeror to set out with reasonable specificity why the offer should be accepted.  Nor is it necessary to establish misconduct by the offeree to demonstrate that the rejection was unreasonable at [28] and [29].  Nonetheless, these are factors that inform the assessment of unreasonableness and ultimately the exercise of the discretion to award indemnity costs.

112               Hazeldene’s Chicken Farm v Victorian Workcover Authority (No 2) was cited with approval by the Full Federal Court in Software AG v Racing & Wagering (WA) (2009) 175 FCR 121 at 138; [2009] FCAFC 36 at [82] per Spender, Sundberg and Siopis JJ and by the WA Court of Appeal in Ford Motor Co v Lo Presti [2009] WASCA 115 at [16] to [22] per Buss JA (Wheeler JA agreeing).

113               The applicants rely upon NMFM Property Pty Ltd v Citibank Ltd (No 2) (2001) 109 FCR 77 at 98, [2001] FCA 480 at [87] per Lindgren J; Westpac v Commissioner of State Revenue [2004] QSC 19 at [27] to [29], [33] to [34] per White J; and Premier Building & Consulting v Spotless Group Ltd (No 13) [2007] VSC 516 at [8] to [14] per Byrne J in support of their position.  However, these cases are illustrative examples of the application of the principles discussed above.

The applicants’ contentions as to unreasonableness on the part of the Commissioner

114               In the present case, the applicants bear the onus as the parties seeking indemnity costs to demonstrate that the Commissioner’s refusal of their offer of 25 November 2008 was unreasonable.  The applicants say the Commissioner’s rejection of the offer was unreasonable because:

·        as at the date of the offer, the Commissioner was fully apprised of the case it had to meet and therefore was able to consider the offer properly against all of the evidence upon which the applicants proposed to rely when advancing their case at the hearing.  The nature of that material is outlined at paras 17 and 18 of the affidavit of Mr D G Bourke quoted at [86] of these reasons;

·        the respondent was afforded 14 days in which to consider the offer, a period which the respondent did not seek to extend;

·        the offer was “summarily dismissed” the day after the offer was made;

·        the offer was a substantial compromise, with the applicant foregoing between $123,004 and $184,506.

Consideration of the circumstances facing the offeree

115               The issues to be resolved at the trial of the action were essentially divided into two clusters of issues.  The first cluster concerned those facts going to the question of the cost base.  The Commissioner chose to test the evidence by cross‑examination on that issue.  In making that election, the Commissioner had before him all of the evidence, uncontradicted, establishing the cost base giving rise to the capital loss arising out of the acquisition and disposal of the shares.  The second cluster of issues concerned the nature of the arrangements between Mr Denoon and Mr Clark in the context of the documents brought into existence to reflect relationships between entities controlled by those individuals concerning the CU Trust. 

116               The Commissioner chose to cross‑examine the witnesses of the applicants and in particular Mr Clark and Mr Denoon to explore the circumstances which prevailed, during the relevant period, between the relevant entities pending Mr Denoon making, if possible, a capital contribution of $1.8m to the CU Trust.  As to those circumstances, regard should be had to the primary judgment:  Clark v Commissioner of Taxation [2009] FCA 1401.  The cross‑examination of those witnesses led to explanations by Mr Clark and Mr Denoon as to the circumstances in which neither a company controlled by Mr Denoon, Gemridge Pty Ltd, nor Mr Denoon were to enjoy any right to the income of the CU Trust nor any claim upon the assets of the CU Trust in the relevant period unless and until Mr Denoon made a contribution of $1.8m or, in the absence of a contribution by the agreed date, a transfer of Mr Denoon’s interest in the CU Trust.  The examination of those facts in controversy between the parties resulted in findings of fact reflected at [87] of the principal judgment. 

117               The factors identified by the applicants and described at [114] of these reasons are not factors which demonstrate that the Commissioner acted unreasonably in electing to reject the offer of 25 November 2008 and test the strength and quality of the evidence as to the structural continuity of the CU Trust in the period giving rise to the capital loss upon disposal of the Rothwells shares and the generation of a capital gain upon the sale of the Gladstone properties.  Ultimately, the Commissioner was unsuccessful in his central contention and plainly the Commissioner ought to pay the costs of the proceeding. 

118               However, the question of whether the Commissioner should pay indemnity costs from the date of the Calderbank offer in the exercise of discretion, is not simply determined on the basis of whether the Commissioner elected to support the amended assessment, chanced his arm at the trial and lost.  Nor is an indemnity costs order a form of order that arises, as a matter of discretion, only when the Commissioner has acted with reckless disregard in conducting a contest against the taxpayer.  In the latter circumstance, it would be difficult to identify a basis on which an indemnity costs order ought not to be made.  However, the question to be determined is whether the Commissioner acted unreasonably at the moment in time he rejected the offer, in electing to reject the offer and contest the proceedings.  Having regard to the factors to be taken into account in determining the question of what is unreasonable, as a matter of principle, I am not satisfied in the exercise of discretion that the Commissioner acted unreasonably in rejecting the offer. 

Form of order as to Order 23 and the Calderbank offer

119               Since Order 23 applies to the proceeding and no circumstances have been demonstrated by the Commissioner for an order otherwise, the applicants are entitled to an order for the costs of the proceeding up to and including 9 December 2008 taxed on a party and party basis and the costs of the proceeding on and from 10 December 2008 taxed on an indemnity basis.  Had I concluded that Order 23 did not apply to the proceeding, the applicants would have been entitled to an order for the costs of the proceeding on a party and party basis subject to the question of whether the costs of the proof of the cost base issue ought to be the subject of an indemnity costs order in the exercise of discretion under s 43 of the Federal Court Act. 

The separate question of proof of the cost base issue

120               As to that question, the applicants seek an order that the Commissioner pay “the costs relating to the establishment of the cost base of the Rothwells shares on an indemnity basis”, that is, in the proceeding generally.  The Commissioner is entitled to put the taxpayer to the burden of proving, in the proceeding, that the Commissioner’s amended assessment is excessive:  s 14ZZO(b)(i).  That means, in effect, the Commissioner is entitled to call upon the taxpayer to prepare, file and serve affidavits which constitute admissible evidence of the foundation facts demonstrating that the assessment is excessive, rather than simply rely upon contentions of the taxpayer.  It is not, in principle, unreasonable for the Commissioner to do so.  Mr Bourke’s affidavit deposes to the affidavit material prepared by the applicants going to the cost base issue which is described at [86] (para 17 of the affidavit).  At para 18 of Mr Bourke’s affidavit he describes other material available to the Commissioner at 25 November 2008. 

121               A question arises as to whether the statutory obligation of the taxpayer to adduce admissible evidence of relevant facts sufficient to discharge the burden of proof cast upon him or her by the TA Act of proving that the amended assessment is excessive, confers a corresponding right on the Commissioner to first see and examine that evidence and secondly, to test the evidence by cross‑examination of the witnesses.  The statutory burden cast upon the taxpayer is ultimately one of demonstrating in the proceeding before the Court on the balance of probabilities that the assessment is excessive.

122               Why then would it be unreasonable for the Commissioner to seek to exercise a right, before the Court, to test the evidence said to discharge the taxpayer’s burden even though the Commissioner is not in a position to contradict the evidence or run a contrary case?  Is it unreasonable, in the sense that that term is used in the context of a consideration of an order for indemnity costs, for the Commissioner to say to the taxpayer in the formality of the proceeding, “I am not sure if your evidence is good enough on that issue.  I want to test it”?  It might well be unreasonable in the indemnity costs sense and, in addition, inconsistent with model litigant obligations, for the Commissioner to put the taxpayer to proof of facts the Commissioner knows to be true.  It might also be unreasonable in the relevant sense for the Commissioner to resile from a previous admission when doing so places the taxpayer in a position of prejudice. 

The applicants’ contentions as to unreasonableness on the cost base issue

123               The essential contention of the applicants is that two particular factors are important.  The first is that the Commissioner elected to conduct an audit of the affairs of the taxpayers and concluded that the Rothwells shares had been acquired at a certain price and an event of disposal had occurred crystallising a capital loss as the taxpayers had contended.  Notwithstanding that conclusion, the Commissioner resiled from the audit conclusion and elected to put the taxpayers to proof of the cost base issue. 

124               Secondly, the Commissioner, although armed with all of the affidavits of the taxpayers’ witnesses on the cost base issue, put the taxpayers to proof and chose to cross‑examine the witnesses when the Commissioner knew that the evidence was admissible; the evidence established proof of the relevant facts; and the evidence could not be contradicted. 

125               The applicants say that without good reason and with no basis for adopting a contradictory position, the Commissioner caused the taxpayers to incur unnecessary costs.  They say that the Commissioner could not and did not advance any alternative case and the costs incurred in proving the cost base on the balance of probabilities were unnecessarily and unreasonably incurred.  It follows, it is said, that the taxpayers should not be burdened with the differential between party and party costs and indemnity costs on that issue.  Therefore, the discretion should be exercised in a way that does justice between the parties by providing for the recovery of those costs on an indemnity basis.  The applicants contend that indemnity costs should be awarded prior to 9 December 2008 and not simply from the moment in time when the Commissioner was armed by the applicants with all material relevant to an informed decision to put the applicants to proof on that issue. 

The sequence of events relevant to the cost base issue

126               The claim for indemnity costs on the cost base issue must be assessed in the context of the following events. 

127               On 18 May 2005, the Commissioner delivered reasons for the view that the Carringbush Unit Trust had been “resettled”.  The Commissioner did not make a positive finding that the sale of the Rothwells shares led to a capital loss of $2.5m.  Nonetheless, the Commissioner formed a view of the facts in reliance on the information set out at pages 3 and 4 of the Reasons for Decision of the Australian Taxation Office (ATO):  Annexure DGB 4, affidavit D G Bourke filed 26 June 2008. 

128               On 19 December 2005, the applicants commenced Part IVC proceedings objecting to the amended assessments.

129               On 26 October 2006, the Commissioner disallowed the objections of the taxpayers.

130               On 14 December 2006, the applicants filed appeals to the Federal Court from the appealable objection decisions.

The 1^st SFIC

131               On 23 March 2007, the Commissioner filed his first Statement of Facts, Issues and Contentions (the “1^st SFIC”) which recited, in the Preamble:

except for any facts expressly agreed or admitted in writing, [the respondent] puts the Applicant to proof on all facts on which the Applicant seeks to rely to establish that the assessment the subject of this application is excessive.  None of the facts contained in this statement constitutes an admission of proof by the Respondent.

132               At p 21 of the 1^st SFIC, the Commissioner identified that the issues for determination were, relevantly for present purposes:

1.         whether, by reason of s 468(1) of the Corporations Law, the purported disposal in 1993 of the shares in Rothwells was void;

2.         whether, if that purported share disposal were rendered void in the manner alleged, it was capable of giving rise to a capital loss in respect of that purported disposal for the purposes of the ITAA36.

[…]

4.         if, which is denied, there were lawfully available capital losses arising from the disposal of the Rothwells shares, whether the trustee for CUT was entitled in the 2001 year to utilise those capital losses arising from the sale of the Rothwell shares.

133               At p 22 of the 1^st SFIC, the Commissioner contended, relevantly for present purposes:

1.         The effect of s 468(1) of the Corporations Law was that the purporteddisposal of the Rothwells shares in 1993 was void.

2.         A purported disposal of shares, rendered void by s 468 of the Corporations Law is incapable of giving rise to a capital loss in respect of the disposal of those shares for the purposes of the ITAA36.

[…]

4.         Accordingly, if, which is denied, there were any capital loss which accrued as a result of the disposal of the Rothwells shares, the trustee for CUT was not entitled to reduce the capital gain it derived on the sale of the Gladstone properties by any part of that capital loss.

                                                                                                [emphasis added]

The 2^nd SFIC

134               On 1 June 2007, the Commissioner filed an Amended Statement of Facts, Issues and Contentions (the “2^nd SFIC”).  The Preamble was repeated in the 2^nd SFIC in the same terms.  At p 22, issues 1 and 2 were repeated in the same terms but the following relevant amendments were made to the other issues:

3.         whether there was otherwise a disposal of the shares in Rothwells;

            […]

4.5.      if, which is denied, there were lawfully available capital losses arising from the disposal of the Rothwells shares was a disposal of the shares in Rothwells, whether the trustee for CUT was entitled in the 2001 year to utilise those capital losses arising from the sale of the Rothwell shares whether the amount of the capital losses was as alleged;

135               At pp 23 and 24 of the 2^nd SFIC, the Commissioner amended his contentions, relevantly for present purposes:

1.         The applicant has failed to satisfy the onus of proof pursuant to s 14ZZO of the Taxation Administration Act 1953 in establishing:

a.         that Carringbush Pty Ltd as trustee for CUT disposed of the shares in Rothwells to Carringbush Corporation Pty Ltd on or about 26 May 1993; and

b.         the amount of the reduced cost base of the shares in Rothwells.

1.2.      The effect of s 468(1) of the Corporations Law was that the purporteddisposal of the Rothwells shares in Rothwells in 1993 was void.

2.3.      A purported disposal of shares, rendered void by s 468(1) of the Corporations Law is incapable of giving rise to a capital loss in respect of the disposal of those shares for the purposes of the ITAA36 and the ITAA97.

4.         There was not otherwise any disposal of the shares in Rothwells, because:

a.         with respect to the purported disposal of shares on or about 26 May 1993, no chance occurred in the ownership of the shares; and

b.         no election has ever been made pursuant to s 160WA of ITAA36.

[…]

4.6.      Accordingly, if, which is denied, there were was a disposal of the shares in Rothwells and there was any capital loss which accrued arose as a result of the disposal of the Rothwells shares, the trustee for CUT was not entitled to reduce the capital gain it derived made on the sale of the Gladstone properties by any part of that capital loss.

7.         Further in relation to the alleged loss, and as already signified above, the accuracy of the assertions recorded in paragraph 81.3 above is not admitted.  It is not otherwise admitted that the reduced cost base of the shares in Rothwells and the loss are as alleged by the Applicant.

Carringbush v ASIC

136               The applicants sought to resolve the Commissioner’s contentions as to s 468(1) of the Corporations Act 2001 (Cth) (“the Act”) by commencing proceedings in relation to the validity of the transfer of the Rothwells shares.  In December 2007, Carringbush Corporation Pty Ltd (“CCPL”) and Carringbush Pty Ltd (“CPL”) sought an order from the Federal Court under s 468(1) of the Act that the Court approve the transfer on 26 May 1993 of the Rothwells shares (the subject of the cost base issue) by CPL to CCPL.  Section 468(1) of the Act rendered any transfer of shares in Rothwells after the commencement of the winding up of that company by the Court, void, unless the Court otherwise ordered. 

137               The application was unusual as it was made 15 years after the transaction for the reasons set out at [5] to [10] of the reasons published in Carringbush Corporation Pty Ltd v Australian Securities and Investments Commission (“Carringbush v ASIC”) [2008] FCA 474; (2008) 72 ATR 17, which I will not repeat in these reasons.  The securities regulator (ASIC) and the liquidators of Rothwells did not contest the application although served with the papers and given notice of the hearing.  The Commissioner did not appear although served with the papers and also given notice of the hearing.  As there was no prejudice to Rothwells or its former liquidators arising out of the disposition of the shares which were fully paid and the transaction did not have the effect of avoiding any liability on the part of CPL as the entity recorded in the share register of Rothwells and no prejudice arose to the shareholders, the Court ordered that the transfer of the Rothwells shares by CPL to CCPL on 26 May 1993 was not rendered void by operation of s 468(1) of the Act. 

138               In that application Mr Denoon, a director of CCPL and CPL, filed an affidavit in which he deposed to these facts: 

5.         In or about 1987/88 I caused Carringbush Pty Ltd to pay $2.5 million to acquire the following Rothwells shares:–

5.1       949,583 12.5% cumulative redeemable convertible preference shares of $1.75 each fully paid.

5.2       474,791 ordinary shares of $1.75 ordinary shares each fully paid.

Annexed to his affidavit was a copy of the Share Register of Rothwells showing the interest of CPL as shareholder.

139               On 10 April 2008, the Court gave judgment in Carringbush Corporation Pty Ltd & Anor v ASIC and for the reasons indicated at [5] to [10], the Court concluded that CPL had paid approximately $2.5m in 1987/1988 to acquire the Rothwells shares.  At [16], the Court noted on the evidence before it that it was not contended by the Commissioner that the value of the shares as at the date of disposal was anything other than $1.

The 3^rd SFIC

140               On 1 May 2008, the Commissioner filed a Further Amended Statement of Facts, Issues and Contentions (“3^rd SFIC”).  The Preamble was repeated in the same terms as the 1^st and 2^nd SFIC.  At p 27 of the 3^rd SFIC, the issues were reformulated, relevantly, as follows:

3.         whether a capital loss was suffered by the CUT on 26 May 1993 when it disposed of the Rothwell shares and, if so, the amount of that loss.

141               At pp 28 to 30 of the 3^rd SFIC, the Commissioner amended his contentions, relevantly for present purposes in this way:

1.         The applicant has failed to satisfy the onus of proof pursuant to s 14ZZO of the Taxation Administration Act 1953 in establishing:

a.         that Carringbush Pty Ltd as trustee for CUT disposed of the shares in Rothwells to Carringbush Corporation Pty Ltd on or about 26 May 1993; and

[…]

c.         the date of acquisition and the amount of the reduced cost base of the shares in Rothwells.

1.2.      The effect of s 468(1) of the Corporations Law was that the purporteddisposal of the Rothwells shares in Rothwells in 1993 was void.

2.3.      A purported disposal of shares, rendered void by s 468(1) of the Corporations Law is incapable of giving rise to a capital loss in respect of the disposal of those shares for the purposes of the ITAA36 and the ITAA97.

4.         There was not otherwise any disposal of the shares in Rothwells, because:

a.         with respect to the purported disposal of shares on or about 26 May 1993, no chance occurred in the ownership of the shares; and

b.         no election has ever been made pursuant to s 160WA of ITAA36.

[…]

4.6.3.    Accordingly, if, which is denied, there were was a disposal of the shares in Rothwells and there was any there were any capital losses which accrued arose as a result of the disposal of the Rothwells shares, the trustee for the CUT was not entitled to reduce the capital gain it derived made on the sale of the Gladstone properties by any part of thoseat capital losses.

4.         Further in relation to the alleged capital losses, and as already signified above, the accuracy of the assertions recorded in paragraph 93.3 above is not admitted.  It is not otherwise admitted that the reduced cost base of the shares in Rothwells and the capital losses in respect of the shares, the ‘irrecoverable loans’ and the other ‘investments’ are as alleged by the Applicant.

The correspondence

142               On 8 May 2008, the applicants’ solicitor wrote to the Commissioner’s solicitor inviting the respondent to identify what further evidence would satisfy the Commissioner to the standard required to discharge the taxpayers’ burden that the Rothwells shares were acquired for approximately $2.5m.  The applicants directed the Commissioner’s attention to the following matters which were said to support “the inherent probability that they were purchased and purchased in a public transaction for the price Mr Denoon said”:

·                     The view taken by the ATO auditors, who had “no doubt” that the shares were acquired and the reduced cost base was as recorded;

·                     The affidavit of Mr Denoon (who directly caused the Rothwells shares to be purchased, as filed in the s 468 proceedings), which annexed a copy of the Rothwells share register showing the interest of Carringbush Pty Ltd as shareholder.

143               The applicants pointed to the Commissioner’s obligations as a model litigant and said:

Alternatively, if nothing more will satisfy your client, please say so.  … If the court gives leave to allow this allegation now to be made, our clients will be seeking costs on an indemnity basis in gathering the further evidence that undoubtedly exists.

144               The applicants enclosed with that letter a Notice to Produce requiring the Commissioner to produce any documents in his possession or control purporting to show that CPL did not acquire the Rothwells shares, or showing that the price at which the shares were acquired was other than that contended for by the taxpayers.

145               On 5 June 2008, the applicants’ solicitor wrote a further letter to the Commissioner’s solicitor substantially repeating contents of the letter of 8 May 2008.

146               On 6 June 2008, the Commissioner’s solicitor replied to the applicants’ solicitor, relevantly, in these terms:

7.         The contention that your client has failed to establish the date of acquisition and the amount of the reduced cost base of the Rothwell shares is not a new argument, it is simply a particularisation of the proposition contained in our client’s original Statement of Facts Issues and Contentions to the effect that your client was being put to proof on all those facts upon which your client relies to establish that the assessment is excessive.

The 4^th SFIC

147               On 4 July 2008, the Commissioner filed a Further Amended Statement of Facts, Issues and Contentions (“4^th SFIC”).  At pp 28 to 30, the Commissioner amended his contentions, relevantly for present purposes, by providing the following particulars of Contention 1(c):

Particulars as to the date of acquisition

i.          The Respondent’s knowledge of the facts relevant to this application, including the facts as to the date of acquisition by Carringbush Pty Ltd as trustee for the Carringbush Unit Trust (“CUT”) of the shares in Rothwells Limited, and the reduced cost base of those shares, is derived from documents and information supplied by the Applicant and the Applicant’s representatives.

ii.         The date of acquisition is a particular only of the contention that the applicant has failed to establish the facts that give rise to the claimed reduced cost base of the shares and to the claimed capital loss on disposal;

iii.         Neither the Applicant nor the Applicant’s representatives have provided to the Respondent prior to the Respondent’s decision on objection, or in the course of these proceedings up until the date of these particulars:

            1.         any information with respect to:

a.         the specific date upon which Carringbush Pty Ltd as trustee for the CUT acquired the shares;

b.         from whom Carringbush Pty Ltd as trustee for the CUT acquired the shares; or

c.         the manner in which Carringbush Pty Ltd as trustee for the CUT acquired the shares.

2.          any documentation with respect to any agreement by Carringbush Pty Ltd as trustee for the CUT to acquire the shares.

Particulars as to the amount of the reduced cost base

iv.        The Respondent repeats and relies on the particulars stated in paragraph 1c.iii above;

v.         Neither the Applicant nor the Applicant’s representatives have provided to the Respondent prior to the Respondent’s decision on objection or in the course of these proceedings up until the date of these particulars;

1.         any documentation with respect to the making of a payment by Carringbush Pty Ltd as trustee for the CUT in the sum of $2,496,655 or any amount for the acquisition of the Rothwell shares;

2.         any information with respect to the manner in which the alleged payment was effected.

148               Contentions 3 and 4 were maintained in the same terms.

149               On 26 June 2008, the applicants’ solicitor, Mr D G Bourke, filed and served on the Commissioner an affidavit annexing at DGB‑6 the affidavit of Mr Denoon (without annexures) filed in the Carringbush v ASIC proceedings deposing to the factual contention that Mr Denoon had caused CPL to acquire the Rothwells shares for approximately $2.5m in 1987/1988.

The affidavits filed on behalf of the applicants

150               Substantial affidavits were prepared on behalf of the applicants to discharge the burden of proof on the cost base issue.  Mr Clark and Mrs Clark filed affidavits on 29 August 2008 and 15 September 2008 respectively.  An affidavit of Mr Denoon was filed on 29 August 2008.  A further affidavit of Mr Scott was filed on 15 September 2008.  An affidavit of Mr Lovett was filed on 1 September 2008 and an affidavit of Mr Roxburgh was filed 26 September 2008. 

The issues the subject of cross‑examination

151               At the trial of the proceeding on 9 to 11 March 2009, Mr Denoon, Mr Roxburgh and Mr Scott were each cross-examined extensively by counsel for the Commissioner.  The evidence emerging out of the evidence‑in‑chief of each witness and a cross‑examination of those witnesses is discussed at [12] to [32] of the principal judgment.  One issue given close attention by the Commissioner in the cross‑examination of these witnesses was an apparent anomaly that the Rothwells shares had been acquired at a price of $1.75 per share when the market price for a share in Rothwells at the relevant time was fluctuating between 65 and 80 cents. 

152               A second issue given close attention in the cross‑examination was that there were no primary documents able to be produced by the taxpayers to support the acquisition of the shares such as ledgers and journals or loan documentation for the financing of the acquisition or any minutes or records of CPL to support its subscription for and acquisition of the shares.  A third area of close examination was the proposition that the financial statements for the income year ending 30 June 1988 did not show a loan to CPL from any Carringbush entity to enable CPL to acquire the shares for approximately $2.5m.  A further area of cross‑examination involved reference to a series of ASIC records which suggested that CCPL had not commenced operating, at least by that name, until 1 July 1989. 

153               In cross‑examination, Mr Denoon, as a director of CPL and CCPL, was not able to recall the transaction for the acquisition of the shares by CPL although he quite clearly recalled the acquisition of the relevant parcel of shares and the price he caused to be paid for the shares.  His evidence was that he had no independent recollection of CPL acquiring the shares or the mechanism by which CPL financed that acquisition.  As to the anomaly concerning the price, Mr Roxburgh, as the merchant banker in control of the share issue (with its attendant special redemption rights), recognised, in effect, that the subscription price for the shares was a non‑market price by saying that he knew securing subscriptions was going to be difficult although it was ultimately achieved at that price. 

154               Ultimately, Mr Denoon said that he necessarily relied upon the matters contained in the financial statements for CPL prepared by CPL’s independent professional accountants.  Those statements reflected the acquisition of the subject parcel of shares by CPL and the diminution in the share values in 1988 and 1989.  Mr Scott gave evidence that the independent accountants (BDO Nelson Parkhill) had access to all of the primary documents in preparing the financial statements. 

155               There is no doubt that some concessions were made by each of the witnesses which went beyond the affirmative position adopted in the affidavits.  However, while the matters in issue on the cost base question were not plainly unarguable, the Court accepted the evidence of each of Mr Denoon, Mr Roxburgh and Mr Scott and found, on the balance of probabilities, particularly having regard to the financial statements, that CPL, as trustee of the CU Trust, acquired the Rothwells shares for $2,492,655.00:  Principal Judgment at [31].

Consideration of the issue

156               Plainly, the Commissioner is entitled to put the applicants to proof of all matters relied on by the applicants to demonstrate that the Commissioner’s assessment is excessive.  The Commissioner is also entitled, with proper procedural notice, to support the assessment in appeal proceedings on a ground not taken into account at the time the assessment or objection decision was made.  No conduct of the Commissioner can operate as an estoppel against the operation of the Act:  Federal Commissioner of Taxation v Wade (1951) 84 CLR 105 at 117 per Kitto J.  However, in Bailey v Federal Commissioner of Taxation (1977) 136 CLR 214 at 217, Barwick CJ said this:

[T]he process of assessment requires the application of [ITAA 1936] to the facts as known to and accepted by the Commissioner.  He must of necessity, as part of that process, adopt a view of the relevant facts.  They must be facts which disclose a taxable income.  If those facts are the result of the operation of s 260, the Commissioner must observe and act in his assessment upon that operation.  Hence the identification by the Commissioner of that contract, agreement or arrangement which the section has avoided is indispensable to the formation of the view of the facts which are the basis of the assessment. 

                                                                                                [emphasis added]

157               The obligation to adopt a view of the facts is directed to the process of assessment.  Bailey v Federal Commissioner of Taxation does not oblige the Commissioner to maintain a view of the facts previously adopted by him.  His election to resile from a position on the facts would usually be reflected plainly and clearly in a Statement of Facts, Issues and Contentions filed in the proceedings or amended versions of such a statement. 

158               In Bailey v Federal Commissioner of Taxation the question was whether the Court could order the Commissioner to provide particulars of an arrangement that formed the basis of a tax assessment.  The High Court determined that such a power subsisted in the Court once an appeal proceeding against that assessment had been commenced.  The Court’s power to so order was an incident of enabling “the issues before the court to be ascertained and the proceedings conducted in an orderly and just manner”:  per Aickin J at p 232.  The question of whether the Commissioner could put the taxpayer to proof in respect of a fact previously accepted by his delegate was not expressly considered. 

159               In Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 624-625, Brennan J (with whom Mason CJ, Deane, Dawson, Gaudron and McHugh JJ agreed) said:

The manner in which a taxpayer can discharge that burden varies with the circumstances.  If the Commissioner and a taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it will suffice for the taxpayer to show that he is entitled to succeed on that point.  Absent such a confining of the issues for determination, the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment, though the taxpayer is limited to the grounds of his objection.  In Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 at 89, Mason J said:

The Act does not place any onus on the Commissioner to show that the assessments were correctly made.  Nor is there any statutory requirement that the assessments should be sustained or supported by evidence.  The implication of such a requirement would be inconsistent with s 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.

That view, expressed in a dissenting judgment, now prevails: Macmine Pty Ltd v Commissioner of Taxation (1979) 53 ALJR 362 at 366, 371 and 381; McCormack’s Case (1979) 143 CLR at 303, 306 and 323.

160               However, unreasonable insistence on the part of the Commissioner in electing to put a taxpayer to proof may give rise, once the judicial power of the Commonwealth is engaged, to questions of procedural fairness:  Pacific Exchange Corporation v Federal Commissioner of Taxation (2009) 180 FCR 300 at p 308, at [39].  By analogy, such insistence may also give rise to special costs consequences.  However, at what point does the Commissioner’s insistence upon a right to see and test admissible evidence of foundation facts relied upon by the taxpayer to demonstrate that an amended assessment is excessive, give rise to any special order for costs rather than an order for party and party costs against the Commissioner in a taxpayer’s successful appeal proceeding? 

161               In Colgate‑Palmolive Company v Cussons Pty Limited (1993) 46 FCR 225 at 233 at point 5, Sheppard J identified a number of circumstances in which it would be appropriate to order indemnity costs having recognised that there must be some demonstrated special or unusual feature in the case to justify the Court in departing from the ordinary practice (see point 4 at p 233).  Those circumstances include: 

·         Making allegations of fraud knowing them to be false or making irrelevant allegations of fraud;

·         Misconduct that causes loss of time to the court and the opponent;

·         Commencing or continuing proceedings for some ulterior motive or in wilful disregard of known facts or clear law;

·         Making groundless allegations; and

·         An imprudent refusal of an offer to compromise.

162               However, his Honour emphasised the earlier observation at point 4 by observing at p 234 that the “question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis”.  In Sony Computer Entertainment Australia Pty Ltd v Dannoun (No 2) [2001] FCA 1530, Lindgren J at [4] observed that the circumstances that give rise to an award of indemnity costs: 

must be “special”, must take the case out of the “ordinary” category of case, and must involve behaviour associated with the conduct of the proceeding by the person sought to be made liable which is so unreasonable as to make it unjust that the other party should be limited in its recovery to party and party costs.

This formulation was expressly approved recently by the Full Federal Court in Dowling v Fairfax Media Publications Pty Ltd (No 2) [2010] FCAFC 28 per Graham J at [41] and per Logan and Flick JJ at [140]. 

163               However, as Gummow J said in Council of the Municipality of Botany v Secretary, Department of the Arts, Sport, the Environment, Tourism and Territories (1992) 34 FCR 412 at 415:

… I accept that the discretion conferred by s 43 is not so circumscribed that an order of this character [an order for indemnity costs] may be made only against an ethically or morally delinquent party. 

164               Having regard to the issues addressed in the course of cross‑examination, I am not satisfied that the Commissioner was persisting in a hopeless and wasteful exercise in putting the applicants to proof.  Some concessions were made beyond the scope of the affirmative affidavits and the Commissioner was entitled to test the strength of the evidence.  By the 2^nd SFIC filed on 1 June 2007, the applicants were put on notice that proof of the cost base would be in issue.  This occurred six months after the commencement of the proceeding and two years prior to the trial in March 2009.  Nor can it be said that the Commissioner indulged in a “wilful disregard of known facts”.  The ATO reasons for decision of 18 May 2005 reveal that for the purposes of the assessment process the Commissioner assumed that the Rothwell shares had been acquired by CPL as trustee of the CU Trust for the price asserted by the applicants.  As to the Carringbush v ASIC proceedings, the Commissioner did not appear and there was no contradictor before the Court. 

165               The question of whether the Commissioner has acted unreasonably in a way which would take the case out of the ordinary category is not determined by asking whether, objectively viewed, a person could reach a reasonable decision not to put facts as to the acquisition of the Rothwells shares and the price of acquisition in issue. 

166               No doubt the decision of the Commissioner might be described as a little “strict” in the circumstances but the question is whether the election to put the applicants to proof was unreasonable.  An election to take a different position to that reflected in the reasons for decisions of the ATO is not a circumstance of unreasonableness. 

167               The principal complaint is that the Commissioner was provided with all of the evidence and had the benefit of the judgment in Carringbush v ASIC and for no good reason persisted in putting the applicants to proof. 

168               However, having regard to the scope of the cross‑examination, I am not satisfied that it was unreasonable on the Commissioner’s part to test the evidence of the applicants. 

169               Accordingly, the Orders of the Court will be these: 

1.                  An Order that the respondent pay the costs of the applicants of and incidental to the proceeding up to and including 9 December 2008 on a party and party basis;

2.                  An Order that the respondent pay the costs of the applicants of and incidental to the proceeding from 10 December 2008 on an indemnity basis;

3.                  An Order that the respondent pay reserved costs of the proceeding reserved prior to 9 December 2008 on a party and party basis (save for those costs already ordered to be paid by Greenwood J on 12 August 2008 and Kiefel J on 7 February 2007). 

4.                  The costs of the application for an Order for indemnity costs are reserved for brief further submissions having regard to the published reasons. 

Associate:

Dated:         30 April 2010

Appendix A: Orders relating to specific subject matters (in chronological order)

Appendix B: Orders relating to specific subject matters (by category)