Federal Court of Australia

Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation (No 2) [2022] FCA 260

ORDERS

THE COURT ORDERS THAT:

1.    The applicant’s appeal against the objection decisions dated 27 September 2019 be dismissed.

2.    The applicant pay the respondent’s costs of the proceeding on a party and party basis, as agreed or taxed.

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

REASONS FOR JUDGMENT

MOSHINSKY J:

Introduction

1    These reasons deal with issues concerning the form of final orders and costs. They should be read together with my judgment in respect of the principal issues in the proceeding: Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2021] FCA 1597 (the Judgment). I will adopt the abbreviations used in the Judgment.

2    The issues to be dealt with in these reasons can be summarised as follows.

3    In relation to the form of final orders, the Commissioner contends that there should be an order that the appeal against the objection decisions dated 27 September 2019 be dismissed. STAI accepts that that is the appropriate order in respect of the years ending 31 March 2012 and 31 March 2013, but contends that the appeal should be allowed in part in respect of the year ending 31 March 2011. STAI’s contention is that, on the hypothesis that STAI had made interest payments in accordance with the No Amendment Model over the life of the LNIA, there would have been a carried forward loss available for the year ending 31 March 2011, and this should be taken into account under the relevant legislative provisions. The effect would be to reduce STAI’s taxable income for the year ending 31 March 2011 compared with the amended assessment for that year.

4    In relation to costs, there is no issue that the Commissioner has been substantially successful in the proceeding and is entitled to an order for costs in his favour. The issue concerns the basis of assessment of such costs. The Commissioner seeks an order that, for the period after 11.00 am on 19 July 2021, STAI pay the Commissioner’s costs on an indemnity basis, relying on an offer to compromise and a Calderbank offer served on 14 July 2021. STAI opposes this, and contends that costs after that time and date should be payable on a party and party basis. It is common ground that, in respect of the period up to 11.00 am on 19 July 2021, there should be an order that STAI pay the Commissioner’s costs on a party and party basis.

5    The parties have filed outlines of submissions. The Commissioner has filed an affidavit of Hannah O’Connor, a solicitor employed by the Australian Government Solicitor, dated 25 February 2022.

Form of final orders

6    The following matters should be noted by way of background and context for the issue concerning the form of final orders.

7    As noted in the Judgment at [166], in the course of opening submissions, senior counsel for the Commissioner outlined three alternative cases (while emphasising that the burden was on the taxpayer to show that the assessments were excessive). These alternative cases were based on Mr Johnson’s Further Calculations, which were dated 8 August 2021 and which became Exhibit R4 (see the Judgment at [18(b)]). The Commissioner’s primary case was based on the Without Bridge Model. The Commissioner’s secondary case was based on the No Amendment Model. The Commissioner’s tertiary case was based on the No Third Amendment Model.

8    As also noted in the Judgment at [166], senior counsel for the Commissioner provided a document that set out calculations based on each of those cases, including a comparison between the interest deductions allowed under the amended assessments and the interest deductions that would be allowed under each of the three cases. That document was titled “Respondent’s Schedules Based on Mr Johnson’s Models, dated 8 August 2021”. It was provided to the Court on the second day of the hearing, that is, on 10 August 2021. As noted in the Judgment at [166], the effect of those calculations was that, if either the primary case or the secondary case were accepted, the amended assessments would not have been shown to be excessive. Further, as noted in that paragraph, no issue was taken with those calculations.

9    Ultimately, I accepted the Commissioner’s secondary case, which was based on the No Amendment Model: see the Judgment at [355]. I stated at [355] that, on the basis of the calculations handed up by senior counsel for the Commissioner during opening, it followed that STAI had not shown the amended assessments to be excessive. I also stated that the appropriate order was therefore that the appeal be dismissed. I did not, however, make final orders. Rather, I made an order that the parties provide a proposed minute of orders to give effect to the Court’s reasons.

10    In the course of seeking to agree final orders, an issue emerged between the parties. In summary, STAI contends that the appeal in respect of the year ending 31 March 2011 should be allowed in part, having regard to a carried forward loss of $259,584,589 that would have been available for that year on the hypothesis that STAI had made interest payments in accordance with the No Amendment Model over the life of the LNIA. In substance, this amounts to a challenge to the calculations provided by senior counsel for the Commissioner on the second hearing day, being the calculations referred to above. Although STAI did not challenge those calculations during the course of the hearing, I consider it open to STAI to do so now. The calculations were provided late in the course of the litigation, namely on the second day of the hearing. Given the number of issues to be dealt with during the hearing, it is understandable if the issue now sought to be raised was not appreciated at the time. Further, the issue is one that may properly be seen as consequential upon my acceptance of the Commissioner’s secondary case. As noted above, at [355] of the Judgment I stated that the appropriate order was that the appeal be dismissed. That statement was predicated on the calculations put forward by the Commissioner and there having been no challenge to those calculations. I do not consider that statement to preclude STAI now raising the issue outlined above concerning the appropriate order in respect of the year ending 31 March 2011.

11    STAI submits that the parties were agreed, and the Court accepted, that it was “necessary to consider the issues in relation to the whole life of the LNIA, not just the LNIA as it stood during the years ending 31 March 2010, 2011, 2012 and 2013” because “[u]nless one goes back to the beginning of the transaction, that is, when the LNIA was entered into, one cannot sensibly apply the provisions of Subdiv 815-A to the years ending 31 March 2010, 2011, 2012 and 2013”: Judgment, [300].

12    STAI submits that, under the EP Report (see the Judgment at [104]) and under the No Amendment Model, arm’s length deductions were hypothesised in the years ended 31 March 2003 to 2006, when STAI did not claim any deductions in its tax returns. The consequence of this was that, under the EP Report and under the No Amendment Model, the hypothetical arm’s length deductions in some years exceeded the actual deductions claimed by STAI, while in other years the actual deductions claimed exceeded the hypothetical arm’s length deductions.

13    STAI submits that the effect of the determinations made under Div 13 of the ITAA 1936 is that “for all purposes of the application of this Act in relation to the taxpayer, consideration equal to the arm’s length consideration in respect of the acquisition shall be deemed to be the consideration given or agreed to be given by the taxpayer in respect of the acquisition”: see s 136AD(3). STAI submits that the effect of this is that the taxpayer’s taxable income must be calculated based on the interest held to be “arm’s length” over the life of the LNIA as set out in the No Amendment Model (see Annexure D to the Judgment, the column headed “Accrued NET Interest + 10/9 Escalation” in the second table). STAI submits that the consequence of this deeming is that the arm’s length interest is deemed to be deductible in each relevant year (i.e. each year of the life of the LNIA), with the consequence that there would be a carried forward loss to be taken into account in the year ending 31 March 2011.

14    Thus, STAI submits, the deduction to be disallowed in the year ending 31 March 2011 (taking into account the carried forward loss) is $285,360,830 and not $475,004,109 as per the amended assessment (see the table in the Judgment at [11]).

15    STAI submits that the same result follows under Subdiv 815-A of the ITAA 1997. It submits that the correct calculation of the “transfer pricing benefit” under s 815-15 for the year ending 31 March 2011 based on the No Amendment Model is $285,360,830 and not $475,004,109 as per the amended assessment. STAI submits that, based on the No Amendment Model, the “profits which, but for the conditions mentioned in the article, might have been expected to accrue to the entity [which] by reason of those conditions [have] not so accrued” for the period to the end of the year ending 31 March 2011 is $285,360,830. Accordingly, STAI submits, that is the amount of the deduction which can be disallowed. STAI submits that the sum of $475,004,109, which was disallowed, exceeds the transfer pricing benefit by $189,643,279 and, accordingly, the assessment of taxable income for the year ending 31 March 2011 is excessive by this amount.

16    The Commissioner submits that the appropriate order is to dismiss the appeal without the adjustment for which STAI contends, for essentially the following reasons:

(a)    STAI’s contentions are premised on there being an additional carried forward loss of $259,584,589 which is to be taken into account in the year ending 31 March 2011. However, the so-called “additional carried forward loss” is merely the result of notional deductions for interest arising in the years ending 31 March 2003 to 2010 under the hypothesis that the No Amendment Model applied in those years. These amounts were not in fact incurred as allowable deductions, and so it is a notional (or hypothetical) carried forward loss for the year ending 31 March 2011. As such, it cannot be taken into account in determining STAI’s taxable income for the year ending 31 March 2011.

(b)    The only mechanism under which that notional carried forward loss could be taken into account is by way of consequential adjustments, and no such consequential adjustment issue is before the Court in this proceeding (and no application for a consequential adjustment can be made in this proceeding).

(c)    The most appropriate time to determine whether consequential adjustments should be made is once the primary transfer pricing issues between the parties have been finally resolved in the current proceeding (and any appeal from this proceeding).

17    For the reasons that follow, I do not accept STAI’s contention that a carried forward loss of $259,584,589 is to be taken into account in applying s 136AD(3) of the ITAA 1936 or s 815-15(1) of the ITAA 1997 to the year ending 31 March 2011.

18    Insofar as STAI contends that the deeming effect referred to in s 136AD(3) is to apply for each year of the LNIA, I do not accept that contention. Section 136AD(3) is set out in the Judgment at [125]. A critical integer of s 136AD(3) is the making of a determination by the Commissioner that the subsection should apply in relation to the taxpayer in relation to the acquisition: s 136AD(3)(d). Where all of the integers in paragraphs (a) to (d) of the subsection are present, then “for all purposes of the application of this Act in relation to the taxpayer, consideration equal to the arm’s length consideration in respect of the acquisition shall be deemed to be the consideration given or agreed to be given by the taxpayer in respect of the acquisition”. The deeming effect there described depends upon (among other things) the making of a determination. In the present case, the Commissioner made determinations for only four years (the years ending 31 March 2010, 2011, 2012 and 2013); he did not make determinations for every year of the LNIA. Plainly, for some years of the LNIA, it was not open to the Commissioner to make determinations because no interest was actually paid in those years, and thus the actual interest paid was inevitably less than any amount the Commissioner considered to be the arm’s length consideration. The determinations made by the Commissioner for the four years ending 31 March 2010, 2011, 2012 and 2013 are summarised at [101]-[104] of the Judgment. A separate determination was made for each of those years of income. The amounts referred to in the Div 13 determinations were the amounts considered to be the arm’s length consideration. Those amounts appear in the table in [11] of the Judgment in the column headed “Interest determined to be deductible”. Thus, the approach taken by the Commissioner in making the Div 13 determinations was to make determinations for a particular year of income and to determine the amount considered to be the arm’s length consideration for that year (see s 136AD(4)).

19    In light of the above, I do not accept STAI’s submission that the findings made by the Court as to the arm’s length consideration for the years ending 31 March 2003 to 2009 are deemed to be the consideration given, or agreed to be given, by the taxpayer for all purposes of the application of the Act to the taxpayer. The deeming effect referred to in the last paragraph of s 136AD(3) depends upon there having been a determination by the Commissioner. Here, there were no determinations by the Commissioner for the years ending 31 March 2003 to 2009.

20    In the course of oral submissions, senior counsel for STAI noted that paragraph (d) of s 136AD(3) refers to the Commissioner making a determination that the subsection should apply “in relation to the taxpayer in relation to the acquisition”, and that it does not refer to a particular year of income. While this is correct, there are other indications in the legislative scheme that s 136AD(3) is intended to apply to a particular year (or particular years) of income: see, eg, s 136AF(1). In any event, in the present case, the determinations were made in respect of particular years of income, namely the years ending 31 March 2010, 2011, 2012 and 2013. In these circumstances, and in light of the above matters, I am not satisfied that the deeming effect referred to in the last paragraph of s 136AD(3) operates in respect of the Court’s findings as to the arm’s length consideration for the years ending 31 March 2003 to 2009.

21    Insofar as STAI contends that the correct calculation of the “transfer pricing benefit” under s 815-15(1) for the year ending 31 March 2011 based on the No Amendment Model is $285,360,830, I do not accept that contention. Section 815-15(1) is set out in the Judgment at [114]. An entity obtains a “transfer pricing benefit” if the requirements in paragraphs (a) to (d) of that subsection are satisfied. Under paragraph (c), it is a requirement that: but for the conditions mentioned in the associated enterprises article, an amount of profits might have been expected to accrue to the entity; and, by reason of those conditions, the amount of profits has not so accrued. Paragraph (d) then requires that, had that amount of profits so accrued to the entity, (relevantly) the amount of the taxable income of the entity for an income year would be greater than its actual amount. The statutory scheme provides for the making of determinations by the Commissioner to negate a transfer pricing benefit: ss 815-10(1), 815-30(1). It is clear from the terms of those provisions that a determination is to be made for a particular year of income. It is also clear from paragraph (d) of s 815-15(1) that whether there is a transfer pricing benefit, and the amount of any such benefit, is a matter that arises in relation to a particular income year. In the present case, the Commissioner made determinations pursuant to Subdiv 815-A for the years ending 31 March 2010, 2011, 2012 and 2013. These are summarised in the Judgment at [101]-[104].

22    STAI does not dispute that the “transfer pricing benefit” is to be ascertained for a particular year of income. Its contention is that, in working out the “transfer pricing benefit” for the year ending 31 March 2011, the amount of profits for each year during the life of the LNIA up to and including the year ending 31 March 2011, as per the No Amendment Model, should be taken into account. STAI submits that that period equates to the period during which the relevant conditions were operating. The difficulty with this submission is that s 815-15(1) proceeds on the basis that the “amount of profits” referred to in paragraph (c), and its effect on the taxable income of the entity as referred to in paragraph (d), are to be ascertained by reference to a particular year of income. It is inconsistent with the language of the provision and the statutory scheme to take into account a carried forward loss arising from amounts of profits in other years of income in the way that STAI seeks to do.

23    The existence, in both Div 13 and Subdiv 815-A, of provisions relating to the making of consequential adjustments in relation to any year of income, supports the views expressed above: see s 136AF of the ITAA 1936 and s 815-35 of the ITAA 1997. These provisions enable the Commissioner to make consequential adjustment determinations to allow deductions which have not been allowed (i.e. increase deductions). Those determinations would, if made, deem the relevant amounts to be deductible by reason of s 136AF(2) and s 815-35(4). I note that the operation of s 815-35(4) is different from s 136AF(2), but the practical result is the same for present purposes. It is open to STAI to request in writing that the Commissioner make consequential adjustment determinations under s 136AF(4) and/or s 815-35(9).

24    For these reasons, I consider that the appropriate order to give effect to the Judgment in respect of the year ending 31 March 2011 is that the appeal be dismissed. As indicated above, it is common ground that the appropriate order to give effect to the Judgment in respect of the years ending 31 March 2012 and 2013 is that the appeal be dismissed. Accordingly, I will make an order that STAI’s appeal against the objection decisions dated 27 September 2019 be dismissed.

Costs

25    As indicated above, on 14 July 2021, the Commissioner made an offer to compromise and sent a Calderbank offer to STAI offering to resolve the proceeding. Both the offer to compromise and the Calderbank offer were provided under cover of a letter from the Australian Government Solicitor dated 14 July 2021. That letter set out detailed reasons why the Commissioner considered that he would be able to demonstrate not only that the amended assessments were not excessive, but that the transfer pricing benefit was more than the amount determined by the Commissioner following the audit. The letter referred in detail to the expert evidence filed by the Commissioner, namely the reports of Mr Johnson and Mr Weiss.

26    The offers set out in the offer to compromise and the Calderbank offer were substantially the same. They were calculated as follows:

(a)    the additional income tax payable by STAI (that is, in addition to the amounts in its original tax returns) in relation to the years in dispute would be $133,804,990, being 50% of the additional income tax payable by reason of the amended assessments;

(b)    the amount of the shortfall interest charge payable by STAI would be reduced by 50% of the interest liability showing on the amended assessments; and

(c)    those liabilities would be offset by:

(i)    the payment made by STAI under the 50/50 payment arrangements; and

(ii)    a consequential adjustment of $44,601,663, subject to STAI making a request for consequential adjustments under the ITAA 1997, and the Commissioner deciding the request in STAI’s favour (on the basis, in particular, that he is satisfied that no foreign tax credit was available to the SingTel group).

27    Rule 25.14(2) of the Federal Court Rules 2011 applies where an applicant unreasonably fails to accept an offer made by a respondent and the applicant’s proceeding is dismissed. In such a case, the respondent is entitled to an order that the applicant pay the respondent’s costs before 11.00 am on the second business day after the offer was served on a party and party basis, and after that time on an indemnity basis. As indicated in a note under r 25.14, the Court may make an order inconsistent with the rules in r 25.14, under r 1.35.

28    The principles that apply in determining whether an indemnity costs order should be made following a Calderbank offer are conveniently summarised in Specsavers Pty Ltd v Luxottica Retail Australia Pty Ltd (No 2) [2013] FCA 807 at [10] per Griffiths J; see also Dobrinski v Shepard (Trustee); in the matter of Slade (No 3) [2020] FCA 696 at [9] per Flick J. Those principles are also of assistance in considering whether, for the purposes of r 25.14(2), an applicant has unreasonably failed to accept an offer.

29    In the present case, I consider that it was not unreasonable for STAI to reject the offer to compromise and the Calderbank offer by reference to the circumstances as they existed at the time of the offers. Significantly, at that time, the Commissioner had not yet put forward his secondary case, based on the No Amendment Model, in respect of which he was successful in the Judgment. The Commissioner’s covering letter dated 14 July 2021 referred in detail to the expert evidence upon which the Commissioner relied, but parts of that evidence were not accepted in the Judgment. In the circumstances as they existed at the time of the offers, it was not unreasonable for STAI to reject the offers.

30    In light of the above, it is unnecessary to consider whether, having regard to the conditional nature of part of the offer to compromise (namely the part concerned with consequential adjustments), it qualified as an offer to compromise for the purposes of Pt 25 of the Federal Court Rules. It is also unnecessary to consider whether this feature of both the offer to compromise and the Calderbank offer constituted a further reason why it was not unreasonable for STAI to reject the offers.

31    For these reasons, I consider it appropriate that STAI pay the Commissioner’s costs on a party and party basis, rather than on an indemnity basis, for the period after 11.00 am on the second business day after the offers were served. As indicated above, there is no issue that (based on the Judgment) STAI should pay the Commissioner’s costs on a party and party basis for the period before that time and date.

32    Accordingly, I will make an order that STAI pay the Commissioner’s costs of the proceeding on a party and party basis, as agreed or taxed.

Associate:

Dated:    22 March 2022