FEDERAL COURT OF AUSTRALIA

Balgra Shopping Centre Management Pty Ltd in its Capacity as Trustee of the Balgra Shopping Centre Management Trust v Commissioner of Taxation

[2010] FCA 1172

THE COURT ORDERS THAT:

1.                  The applicant pay to the respondent 75% costs of the respondent to be taxed.

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

1                     This action was resolved by agreement between the parties shortly before the hearing, by orders made on 4 August 2010. At the same time, factually related proceedings in matter SAD 46 of 2009 in which Balgra Pty Ltd (Balgra) as trustee of the Con Makris Family Trust (Makris Family Trust) also brought proceedings against the Commissioner of Taxation.  The two actions were to be heard together, and evidence in one to be evidence also in the other.  They involved appeals from decisions of the Commissioner of Taxation, disallowing objections to three assessments.

2                     Although the parties agreed on final orders as to the outcome of the issues, they did not agree on appropriate costs orders.  They have made written submissions on that topic.

The Nature of the Proceedings

3                     As noted, Balgra is trustee of the Makris Family Trust.  Balgra Shopping Centre Management Pty Ltd (BSCM) is the trustee of the Balgra Shopping Centre Management Trust (the Balgra Trust).  The Balgra Trust is a unit trust.  All the units in the Balgra Trust are held by Balgra as trustee for the Makris Family Trust.

4                     The complex interests include the Oakden Trust, North Adelaide Le Village Royale No 1 Trust (Royale 1 Trust), North Adelaide Le Village Royale No 2 Trust (Royale 2 Trust) and the Makris Trust.  Each of the Oakden Trust, Royale 1 Trust and Royale 2 Trust are beneficiaries of the Makris Trust, and the Oakden Trust and the Balgra Trust are each beneficiaries of the Makris Family Trust.  Shopping Centre Management Pty Ltd (SCM) is trustee of the Makris Trust.

5                     The principal issues in the two proceedings flow from deductions totalling $3,064,106 claimed by or on behalf of the Makris Trust in the financial years ended 30 June 1999, 2000, 2001, 2002 and 2003.  It is not necessary to discuss the correctness of those claims.  They arise following the acquisition of a yacht, the Lady Carol.  These concern the expenses incurred in relation to the Lady Carol during those years.

6                     On 30 June 2003, SCM as trustee of the Makris Trust resolved that its net income for the year ending 30 June 2003 be applied for the benefit of its beneficiaries as follows: Oakden Trust – 55% of net income; Royale 1 Trust – an amount of income to offset any residual losses in that related entity after taking into account distributions from other related entities; and Royale 2 Trust – balance of trust income.

7                     On 30 June 2003 each of the trustees of those beneficiaries resolved that 100% of the net income of each trust be applied to the Balgra Trust.  BSCM as trustee of the Balgra Trust also on that date resolved “that the net income for the year ending 30 June 2003 be accumulated”.

8                     On 30 June 2003, Balgra as the trustee of the Makris Family Trust resolved that its income for the year ending 30 June 2003 be applied for the benefit of the beneficiaries as follows: Oakden Trust – an amount of income to offset any residual losses in that related entity after taking into account distributions from other related entities; and Balgra Trust – balance of trust income.

9                     On 30 June 2004, BSCM as trustee of the Balgra Trust resolved that its net income of the year ending 30 June 2004 be accumulated.

10                  On 26 May 2008 the respondent disallowed the deductions claimed by the Makris Trust referred to in [5] above. This reduced the carried forward losses claimed as a deduction by the Makris Trust in the 2003 and 2004 years of income.   It also resulted in a very significant increase of the net income of the Makris Trust in 2003, and so an increase on the applications of income by the Makris Trust to the Oakden Trust and the Royale 1 and Royale 2 Trusts, and in turn an increase in the net income of the Balgra Trust.  It also resulted in there being no application of income by the Makris Family Trust to the Oakden Trust as it did not have any residual losses in light of its increased entitlement to income from the Makris Trust, and so all its income was received by the Balgra Trust. 

11                  In the 2004 year of income the disallowance of the deductions in respect of the Lady Carol resulted again in a very significant increase in the net income of the Makris Trust, and consequently a more significant appointment of income by the Makris Trust to the Balgra Trust.

12                  On 26 May 2008 and 30 May 2008, the Commissioner issued notices of assessment to BSCM as trustee of the Balgra Trust for the 2003 and 2004 years of income respectively. Both assessments were issued pursuant to s 99A of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) on the basis that there was no beneficiary presently entitled because the trustee of the Balgra Trust had determined to accumulate the net income of the trust in each of those years.

13                  On 26 May 2008, the Commissioner issued a notice of assessment to the trustee of the Balgra Trust and to the trustee of the Makris Family Trust for the 2003 year of income pursuant to s 102UM of the 1936 Act. This was in the alternative to the assessment under s 99A, in the event that the resolution of the trustee of the Balgra Trustee to accumulate the net income of the trust was ineffective. 

14                  On 24 July 2008, BSCM as trustee of the Balgra Trust objected to each of those three notices of assessment and Balgra as trustee of the Makris Family Trust objected to the assessment under s 102UM concerning it.  On 30 January 2009, the Commissioner disallowed each of those objections.

15                  That led to the current proceedings.  The two proceedings appeal from the three decisions of the Commissioner of 30 January 2009.  This proceeding does so on behalf of the Balgra Trust in relation to the three decisions.  Proceeding SAD 46 of 2009 does so on behalf of the Makris Family Trust, confined to the decision relating to the assessment notice under s 102UM of the 1936 Act. 

16                  On 4 August 2010, by consent, the Court ordered in this proceeding that:

1.                  the appeal be allowed in part;

2.                  the objection decision of the respondent dated 30 January 2009 disallowing the applicant’s objection to the respondent’s assessment for the 2003 year of income the subject of paragraph B of the application filed on 30 March 2009 is confirmed;

3.                  the objection decision of the respondent dated 30 January 2009 disallowing the applicant’s objection to the respondent’s assessment for the 2003 year of income the subject of paragraph A of the application filed on 30 March 2009 be set aside and in substitution for that decision allowing the applicant’s objection in full; and

4.                  the objection decision of the respondent dated 30 January 2009 disallowing the applicant’s objection to the respondent’s assessment for the 2004 year of income the subject of paragraph D of the application filed on 30 March 2009 be set aside and in substitution for that decision allowing the applicant’s objection in full

and in proceeding SAD 46 of 2009 that:

1.                  the appeal be allowed; and

2.                  the objection decision of the respondent dated 30 January 2009 is set aside and in substitution for that decision a decision allowing the applicant’s objection in full.

17                  Orders were also made for the exchange of submissions as to costs.

18                  The immediate effect of those orders, as is apparent from the application in each matter, is that in this matter:

·                    the notice of assessment issued to BSCM as the trustee of the Balgra Trust by the Commissioner on 26 May 2008 under s 99A of the 1936 Act in respect of the year ending 30 June 2003 stood;

·                    the notice of assessment issued to BSCM as the trustee of the Balgra Trust by the Commissioner on 30 June 2003 under s 99A of the 1936 Act in respect of the year ending 30 June 2004 was set aside, and the objection of BSCM as trustee of the Balgra Trust was allowed in full; and

·                    the notice of assessment issued to BSCM as the trustee of the Balgra Trust by the Commissioner on 5 June 2008 under s 102UM of the 1936 Act in respect of the year ending 30 June 2003 was set aside, and the objection of BSCM as trustee of the Balgra Trust was allowed in full;

and (in proceeding SAD 46 of 2009):

·                    the notice of assessment issued to Balgra as the trustee of the Makris Family Trust by the Commissioner on 5 June 2008 under s 102UM of the 1936 Act in respect of the year ending 30 June 2003 was set aside, and the objection of Balgra as trustee of the Makris Family Trust was allowed in full.

It is also accepted that the consequence of the first-mentioned of those decisions is that the yacht deductions were not allowable or deductible under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act).

The Costs Contentions

19                  In matter SAD 46 of 2009, Balgra as trustee for the Makris Family Trust says that, as it was entirely successful in the appeal, it ought to be awarded its costs on the long established principle that costs follow the event. In this matter, BSCM as trustee for the Balgra Trust says that, because the Commissioner succeeded in upholding the s 99A assessment for the 2003 year of income, and Balgra succeeded in having the other two assessments set aside, there should be no order as to costs.  Alternatively it contends the only other order that would do justice between the parties is that Balgra pay the Commissioner’s costs relating to the assessment for the 2003 year of income and that the Commissioner pay its costs of the balance of the proceeding.

20                  Balgra relies rely on the observations of Lord Blackburn in Elliot v Lord Rokeby (1881) 7 App Cas 43 at 47 where his Lordship said:

… I most completely agree that there being a success to the appellants on one point of their appeal, it is not reasonable that they should pay the costs to the other side. But there being so very much upon which they have forced the respondent to come her for no purpose, I think the respondent on the other hand should not be obliged to pay costs either. Consequently as Lord Campbell used frequently to say in the Court of Queen’s Bench in such cases, “the costs are to the victor but where there is no victor there can be no costs”.

21                  The Commissioner contends that he should recover costs of both proceedings in their entirety.  He contends that that is the appropriate costs order because BSCM and Balgra conceded at a pre-trial conference on 29 July 2009 (when the matters were listed for hearing on the week commencing 9 August 2010) that the expenditure on the Lady Carol was not an allowable deduction, and also then asserted positively that the resolution of BSCM as trustee to accumulate the net income of the Balgra Trust for the period ending 30 June 2003 was valid and effective.  Consequently, it is argued, the Commissioner’s primary assessment under s 99A for that period on the additional assessable income, arising following the disallowance of the yacht expense deduction, stood.  Both in this matter and in matter SAD 46 of 2009, the Commissioner says that once the correctness of the primary assessment under s 99A was acknowledged, the alternative assessment under s 102UM became unnecessary so he agreed to excise that liability.  As to the 2004 assessment under s 99A, the Commissioner asserts that he agreed to it being set aside merely because it was incorrect due to an arithmetic error which BSCM could have raised at a very early state in the proceeding but did so on 16 July 2010, shortly before the pre-trial conference.

Consideration

22                  Section 43 of the Federal Court Act 1976 (Cth) gives the Court discretion to order costs. This discretion is unfettered, save only that it be exercised judicially and that it not be exercised against the successful party except for some reason connected with the case: Grey v Mango Pre Paid Calling Cards Pty Ltd [2005] FCA 362.

23                  Generally an order for costs follows the event, and is to be taxed on a party/party basis. However, if the substantive issues have not been before the Court it will usually make no order as to the costs of the proceeding as there has been no hearing on the merits: L & A Maglio Pty Ltd v Commissioner of Taxation [2007] FCA 1365 at [22]-[24].   In Gribbles Pathology Pty Ltd v Health Insurance Commission (1997) 80 FCR 284 Finkelstein J emphasised at 287 that:

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

24                  Also, in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 143 ALR 1, McHugh J said to the same effect at 625:

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

25                  In this matter there is material which enables me to go beyond that starting point.  Underlying each of the notices of assessment is the issue as to whether the yacht deductions should have been allowed.  BSCM, by acceding to an order dismissing its appeal in relation to the s 99A assessment for the 2003 year, has accepted that the Commissioner’s decision not to allow them should stand.  In matter SAD 46 of 2009, I infer that Balgra also have accepted that.  It is not suggested that BSCM and Balgra took different positions on that issue.

26                  The notice of assessment under s 102UM issued to each of BSCM and Balgra was described in the Appeal Statements of each of them as having “purportedly” been issued in the alternative to the assessment under s 99A.  The Appeal Statement of Balgra as trustee for the Makris Family Trust in matter SAD 46 of 2009 identifies two issues: the yacht deductions issue, and then whether s 102UM applies to impose ultimate beneficiary non-disclosure tax.  It asserts that because the claimed yacht deductions should have been allowed, there is no consequential increase in the income of the Makris Trust to which ultimately the Makris Family Trust was entitled, and that in the case of the Balgra Trust because there was no additional net income of the Balgra trust (because the yacht deductions should have been allowed) there was no ultimate beneficiary.  Similarly, in this matter, the Appeal Statement of BSCM on behalf of the Balgra Trust indicates that the principal issue was the correctness of the disallowance of the yacht deductions, and that there was a consequential issue then as to whether the determination of BSCM to accumulate its net income in respect of each of the years 2003 and 2004 was effective, before identifying the third issue concerning the validity of the s 102UM assessment.  In my view, it is proper to proceed on the basis that the s 102UM assessment was an alternative assessment, applicable only if the yacht deductions were properly disallowed by the Commissioner and if the determination to accumulate income of the Balgra Trust was not effective. 

27                  In my view, therefore, it is apparent that the principal issue in each of the two proceedings was as to the correctness of the disallowance of the yacht deductions.  By the order consented to by BSCM in respect of the s 99A assessment for the 2003 year, it accepted the correctness of that decision and then for its part that the decision to accumulate its net profit was effective in the 2003 year.  It is not in issue that those matters were acknowledged by BSCM at a relatively late stage.

28                  The only explanation proffered for the order allowing the appeal concerning the s 99A assessment in respect of the 2004 year, is that there was an arithmetical error in the assessment, first pointed out by BSCM on 16 July 2009 and then accepted by the Commissioner.  The nature of that error is not explained in the submissions.  There is no responsive submission on behalf of BSCM that that explanation for that order is incorrect.  I proceed on the basis that it is correct.  It is a matter which was not raised in the Appeal Statement of BSCM, presumably because the error was not by then identified.  There would have been no point in delaying pointing out such an error, and I am confident that it would have been brought to the attention of the Commissioner promptly once it was ascertained by BSCM or its advisors.

29                  Accordingly, I am satisfied that on the principal issue in each of the proceedings the Commissioner’s position was accepted.  Once it became apparent at the pre-trial conference that BSCM was prepared to accept the effectiveness of its resolution to accumulate its net income, the assessment under s 102UM effectively became unnecessary or redundant.  It is appropriate to determine the appropriate orders for costs in that light.  There is ample precedent for doing so: Hughes v Western Australian Cricket Association Inc (1986) 8 ATPR 40-748; BHP Billiton Iron Ore Pty Ltd v National Competition Council (No 2) [2007] FCA 557 at [27]; Cretazzo v Lombardi (1975) 13 SASR 4 at 12; Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (No 2) [2008] FCAFC 107 at [3]-[5].

30                  In the circumstances, I order that BSCM as trustee of the Balgra Trust pay to the Commissioner 75% of the costs of this proceeding to be taxed.  I have allowed that percentage, to reflect the fact that the s 99A assessment in respect of the 2004 year has been set aside (albeit for reasons unrelated to the identified issues), so that it would be inappropriate to allow the Commissioner the full costs of the proceeding, and to reflect the fact that, although an alternative assessment, the assessment under s 102UM has also been set aside.

31                  In matter SAD 46 of 2009, I propose to make no order for costs.  Balgra as trustee for the Makris Family Trust was ultimately successful, but it was successful notwithstanding that the principal issue in that proceeding as to the correctness of the yacht deductions was accepted by BSCM in this proceeding, and I have inferred that in that matter also Balgra took a similar view.  The assessment in that matter was, therefore, set aside simply because it was an assessment based upon the alternative scenario that BSCM’s determination to accumulate its net profit in the 2003 years was not effective, and BSCM prior to the hearing accepted that it was.

32                  Accordingly, in this matter, the order as to costs will be that BSCM as trustee for the Balgra Trust pay to the Commissioner 75% of his costs of the proceeding to be taxed.  In matter SAD 46 of 2009, there will be no order as to costs.

Associate:

Dated:         29 October 2010