Federal Court of Australia

Hyder v Commissioner of Taxation [2024] FCA 654

ORDERS

THE COURT ORDERS THAT:

1.    The applicants pay the respondent’s costs.

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

ORDERS

THE COURT ORDERS THAT:

1.    There be no order as to costs.

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

ORDERS

THE COURT ORDERS THAT:

1.    The respondent pay the applicant’s costs.

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

REASONS FOR JUDGMENT

THAWLEY J:

1    The general background relevant to these proceedings may be found in part in the reasons given in Hyder v Commissioner of Taxation [2024] FCA 464. For convenience, parts are repeated here and expanded upon.

2    In early 2015, Mr Elton Matthew Hyder IV took steps to establish the Screaming Eagle Partnership (SEP). The SEP was a form of general law partnership, sometimes referred to as a “controlled partnership”. The partners were Screaming Eagle Pty Ltd (SEPL) and Mr Hyder. SEPL was entitled to 99% of the profits and Mr Hyder was entitled to 1% of the profits.

3    The SEP was established on the advice of Mr Stuart Dreves, an accountant, and Mr Lister Harrison QC, a barrister. In their advice, the advisers noted that a partnership needed to operate a business. They recommended Mr Hyder commence an equipment hire business in which SEP could lease equipment “in-house”, namely to an associated business.

4    The SEP, and associated structure, was conceived at a time when Mr Hyder was expecting substantial profits to arise in his property development businesses and when Mrs Amy Hyder (Mr Hyder’s wife) had exchanged a contract to purchase a house in Bellevue Hill in Sydney for $9.4 million. Mr Hyder wanted to fund the purchase of the family home by using the profits expected to arise in his property development business.

5    The anticipated profits were generated by unit trusts which carried out Mr Hyder’s (and others’) property development activities and substantial profits were paid to EMH IV Pty Ltd as trustee for the EMH IV Trust.

6    The EMH IV Trust appointed the bulk of its income for the 2015 income year ($18,040,507) to the SEP. In the 2015 income year, an amount of $13,304,054.61 was paid to the SEP by the EMH IV Trust, leaving the SEP with an unpaid present entitlement (UPE) of $4,701,501. In the 2016 year, an amount of $1,357,000 was paid to the SEP by the EMH IV Trust. Mr Hyder’s evidence was that this was paid by mistake.

7    Mr Hyder withdrew a total of $13,250,000 from the SEP’s bank account in the 2015 income year. The first withdrawal was of an amount of $9,700,000 on 20 February 2014 which was used by Mr Hyder to fund Mrs Hyder’s purchase of the family home.

8    Mr Hyder signed SEPL’s tax return for the 2015 income year on 19 May 2016, recording that it was liable to $5,354,424.21 in tax, being 30% of SEPL’s 99% share of the distribution which had been made to the SEP by the EMH IV Trust.

9    On 27 May 2016, Mr Hyder and Mr Dreves executed a “Purchase of Business Agreement” for the sale of all the issued shares in Screaming Eagle Co Pty Ltd (SEC) to Mr Dreves for $1.00, payable “in one lump sum”. Mr Hyder resigned as secretary and director of SEPL and SEC, and Mr Dreves was appointed in his place.

10    On 6 June 2016, SEPL was notified of an overdue tax liability of $5,376,187.55, including GIC. Mr Dreves placed SEPL into liquidation on 28 October 2016.

11    On 8 May 2017, the Commissioner commenced a risk review of Mr Hyder’s taxation affairs. This was escalated into an audit on 24 April 2018.

12    On 24 June 2018, SEPL was deregistered by ASIC. SEPL was reinstated on 21 October 2019.

13    On 7 November 2019, SEPL paid its income tax liability for the 2015 income year. It also paid GIC of $222,803.87 accrued until 28 October 2016.

14    After the audit was completed, the Commissioner issued:

1.    on 20 May 2020: an assessment to EMH IV as trustee of the EMH IV Trust in respect of the 2015 income year;

2.    on 22 May 2020:

•    an amended assessment to Mr Hyder in respect of the 2015 income year; and

•    an amended assessment to Mr Hyder in respect of the 2016 income year; and

3.    on 7 September 2020, penalty assessments to EMH IV and Mr Hyder.

15    EMH IV and Mr Hyder objected against the assessments. On 8 February 2021, the Commissioner issued a Notice of Objection Decision disallowing all taxation objections.

16    These events ultimately resulted in various proceedings in this Court and in the Administrative Appeals Tribunal. There was a judicial review proceeding determined by Greenwood J which was also the subject of an appeal: Hyder v Commissioner of Taxation [2022] FCA 264 and Hyder v Commissioner of Taxation [2023] FCAFC 29; 297 FCR 124. An application for special leave to appeal was dismissed: [2023] HCASL 99.

17    There were also five proceedings in this Court and two in the Tribunal each of which was listed for hearing for two weeks at the end of April and early May this year.

18    The first proceeding was Elton Matthew Hyder IV v Commissioner of Taxation (QUD 40 of 2021). This was Mr Hyder’s appeal from the Commissioner’s objection decision concerning the 2015 and 2016 years. The first issue in this proceeding concerned whether Div 7A of the Income Tax Assessment Act 1997 (Cth) applied to deem Mr Hyder to have received unfranked dividends from SEPL:

(a)    in the 2015 and 2016 years, in amounts of $13.25 million and $1.35 million withdrawn by Mr Hyder from the SEP bank account; and

(b)    in the 2016 income year, in an amount of $3.35 million that was reclassified from a UPE held in the EMH IV Trust to a capital contribution from Mr Hyder to the EMH IV Trust.

19    The second issue in this proceeding was whether, if Div 7A did not apply, the general anti-avoidance provision in Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) applied to include a tax benefit in Mr Hyder’s assessable income. The assessments issued to Mr Hyder were cumulative to the assessment issued to (and ultimately paid by) SEPL, but alternative to the assessment issued to EMH IV.

20    The second proceeding was EMH IV as trustee for the EMH IV Trust v Commissioner of Taxation (QUD 41 of 2021). This was EMH IV’s appeal under Part IVC of the Taxation Administration Act 1953 (Cth) (TAA 1953) in relation to the objection decision concerning the assessment issued to EMH IV which gave effect to the Commissioner’s view that s 100A of the ITAA 1936 applied with the result that the SEP was deemed not to be presently entitled to the income appointed to it in the 2015 income year. If EMH IV’s Part IVC appeal in this proceeding were unsuccessful, then the first proceeding would not strictly have needed to be determined because the assessments issued to Mr Hyder were in the alternative to the assessment issued to EMH IV.

21    The two Tribunal proceedings were Part IVC reviews of the objection decisions concerning penalties in relation to the assessments the subject of QUD 40 and QUD 41.

22    QUD 40, QUD 41 and the two Tribunal proceedings were heard first. Just before the end of closing submissions these four proceedings were resolved by consent. The consent position was that s 100A applied with the result that the SEP was never presently entitled to the income appointed to it. The Part IVC appeal in QUD 40 was therefore allowed by consent and the Part IVC appeal in QUD 41 was dismissed. The parties agreed to bear their own costs of these proceedings.

23    The two Tribunal proceedings were also resolved by consent. The objection decisions the subject of both proceedings were varied such that the objections were allowed in full. The Commissioner conceded that there could be no scheme shortfall penalty in relation to the assessment issued to EMH IV, notwithstanding the parties’ agreement that s 100A applied.

24    The remaining three Federal Court proceedings were scheduled to be heard immediately after the four proceedings just mentioned. These proceedings were:

    Hyder & Ors v Commissioner of Taxation (QUD 384 of 2022): This was an application brought by Mr Hyder, EMH IV as trustee for the EMH IV Trust and ACN 603 939 939 Pty Ltd (formerly SEPL) for judicial review of the Commissioner’s decision to refuse to exercise discretion under s 255-10 in Sch 1 to the TAA 1953 to defer the due dates for payment of the tax-related debts of Mr Hyder and EMH IV for the 2015 and 2016 income years.

    Hyder v Commissioner of Taxation (QUD 558 of 2023): This was Mr Hyder’s application for judicial review of the Commissioner’s decision to refuse to remit all of the GIC that had accrued with respect to his income tax liability for the period 15 June 2020 to 20 April 2023.

    EMH IV Pty Ltd as trustee for the EMH IV Trust v Commissioner of Taxation (QUD 559 of 2023): This was EMH IV’s application for judicial review of the Commissioner’s decision to refuse to remit all of the GIC that had accrued with respect to its income tax liability for the period 7 June 2016 to 20 April 2023.

25    At the commencement of the hearing of these three remaining proceedings, QUD 558 was resolved by consent, with an order that the proceeding be dismissed, but costs reserved. This left two proceedings for determination: QUD 384 and QUD 559. These two proceedings were heard on 2 May 2024. On 7 May 2024, QUD 384 was dismissed and QUD 559 was allowed.

26    The orders made in QUD 384 included:

 1.    The application be dismissed.

2.    Unless a party applies for a different order as to costs within 7 days of these orders, the applicants pay the respondent’s costs.

27    The orders made in QUD 559 included:

 1.    The application be allowed.

 2.    The decision of the respondent made on 14 November 2023 be set aside.

3.    The applicant’s request for remission of GIC under s 8AAG of the Taxation Administration Act 1953 (Cth) be remitted to the respondent for reconsideration by a different decision-maker in accordance with law.

4.    Unless either party applies for a different order as to costs within 7 days of these orders, the respondent pay the applicant’s costs.

28    The parties sought variations to the orders which had been made in QUD 384 and 559 and addressed the question of costs which had been reserved in QUD 558. Mr Hyder (and where relevant his associated entities) sought costs in each of QUD 384, QUD 558 and QUD 559 on an indemnity basis. The Commissioner’s primary position was that there should be no order as to costs in any of the proceedings. The Commissioner submitted, in the alternative, that the appropriate orders were:

    the applicants pay the respondent’s costs of and incidental to QUD 384 and QUD 558;

    the respondent pay 75% of the applicant’s costs of and incidental to QUD 559; and

    there be no order for costs of and incidental to the costs applications.

29    The submissions advanced by Counsel for Mr Hyder may be grouped into two broad categories. First, Counsel contended that the litigation as a whole – which I took to mean each of the proceedings mentioned in these reasons – were only brought because of the Commissioner’s incorrect and “unlawful” assertions that:

(a)    a penalty was payable by EMH IV in relation to the assessment issued to it and that GIC was payable in relation to the penalty; and

(b)    GIC was payable by EMH IV in relation to the assessment issued to it from 7 June 2016 when in fact GIC was only lawfully payable from May 2020 (although this submission was ultimately not pressed).

30    Counsel for Mr Hyder contended that, had the Commissioner not made these incorrect assertions, the Court should infer that Mr Hyder would have settled the dispute with the Commissioner before commencing any of the proceedings and, therefore, that the Commissioner should bear the costs of QUD 384, QUD 558 and QUD 559 on an indemnity basis.

31    Counsel submitted that the Commissioner should also have borne the costs in relation to QUD 40 and QUD 41 on an indemnity basis, but acknowledged it was too late to revisit those proceedings given the parties had consented to each party bearing its own costs of those proceedings.

32    Counsel referred to the decision of Wigney J in Australian Competition and Consumer Commission v Colgate-Palmolive Pty Ltd (No 5) [2021] FCA 246; 151 ACSR 26 at [10]:

The circumstances in which it may be found to be unreasonable for the successful party to be subjected to the expenditure of any costs are not fixed or closed, but have been found to include, relevantly: where “the applicant, properly advised, should have known that he had no chance of success” (Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Ltd (1988) 81 ALR 397 at 401; De Alwis v Minister for Immigration and Multicultural and Indigenous Affairs [2004] FCAFC 77 at [7]); where the moving party “persists in what should on proper consideration be seen to be a hopeless case” (J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers (WA Branch) (No 2) (1993) 46 IR 301 at 303); where the applicant’s case was “always clearly foredoomed to fail” and “they ought to have known this to be so” (Smolle v Australian and New Zealand Banking Group Ltd (No 2) [2007] FCA 1967 at [25]); where an application is “wholly untenable and misconceived” (Henke v Carter [2002] FCA 492 at [22]); and where an applicant persists in prosecuting a proceeding without regard to the evidentiary difficulties in the case (Yates Property Corporation Pty Ltd v Boland (No 2) (1997) 147 ALR 685 at 693): see generally Melbourne City Investments at [5]; Seven Network at [1102]; Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 233.

33    His Honour went on to say at [11] and [12]:

Two things should perhaps be noted about these descriptions of the types of cases in which an indemnity costs order may be warranted. First, they use expressions which suggest a high degree of certainty concerning the deficiencies in the losing party’s case. It would appear not to be enough that the losing party’s case was simply weak or tenuous. Second, and relatedly, the deficiencies must be sufficiently manifest and clear such that it can be inferred that the losing party would or should have appreciated them when the action was commenced or continued, at least if they had given proper consideration to, or been properly advised about, the merits of their case.

In assessing whether a case can be said to “have no chance of success”, or to be “hopeless” or “foredoomed to fail”, and that the losing party should have known that to be the case, it is also necessary to be wary of reasoning with the benefit of hindsight. As Goldberg J said in Re Kingsheath Club of the Clubs Ltd (in liq) [2003] FCA 1589 at [5], it is “easy with hindsight to make an observation that an action has no chance of success, after the matter has been fully argued and has enjoyed considered attention of experienced solicitors and senior and junior counsel”.

34    Counsel for Mr Hyder submitted that the Commissioner should be liable for indemnity costs because the Commissioner’s “claim” for a scheme shortfall penalty in relation to EMH IV was “hopeless” and “untenable” and should never have been made.

35    Secondly, Counsel relied on a series of Calderbank offers, submitting that the Commissioner’s rejection of the offers was unreasonable with the result that the Commissioner should bear the costs of the three proceedings on an indemnity basis.

36    Contrary to the submission advanced for Mr Hyder, the litigation did not arise because the Commissioner “unreasonably insisted that Mr Hyder or the Trustee must pay a substantial penalty”. Mr Hyder (and associated entities) entered into transactions with contended tax effects which the Commissioner would obviously not have accepted as correct or in respect of which the Commissioner was likely to contend that anti-avoidance provisions operated. Mr Hyder’s decisions (and those of his associated entities) led to the issuing of a number of assessments, including an assessment to EMH IV which was alternative to the assessment issued to SEPL. The case against EMH IV was only one alternative. The Commissioner also contended that, if s 100A of ITAA 1936 did not apply, then the assessments to Mr Hyder were correct by reason of Div 7A or alternatively Part IVA. The assessments issued to Mr Hyder were not alternative to the assessment issued to SEPL. The litigation arose because of the decisions made by Mr Hyder and entities associated with him, including forensic decisions to commence a multitude of proceedings to challenge GIC and the due date for payment in circumstances where the Commissioner’s position was that the GIC position should be finally determined once it was known which alternative assessments were excessive.

37    Evidently recognising the weakness of his position, Mr Hyder attempted to settle the dispute, but never made an offer which commended itself to the Commissioner as one which should be accepted in properly administering the income tax legislation. Nor did Mr Hyder accept any counteroffer made by the Commissioner. None of the Calderbank offers made by Mr Hyder have been shown to be substantially better for the Commissioner than the result achieved in relation to the litigation as a whole, including the liability which EMH IV now faces as a result of the settlement. At least in part, that is because the position with respect to GIC has not been finally determined. More importantly, the Commissioner’s rejection of each of the Calderbank offers was reasonable. The offers and counteroffers were made on reasoning which varied as to which entity was liable and as to the basis of quantification of the amounts payable. Some offers relied upon by the applicants related to the proceedings addressed by Greenwood J. Other offers related not only to the three proceedings the subject of the present application, but also to QUD 40 and QUD 41 and the two Tribunal proceedings which were settled.

38    Both parties acted reasonably in the offers and rejections which they made, particularly those which occurred closer to the commencement of the hearing. The parties were engaged in genuine and meaningful attempts to settle all of the proceedings. Ultimately, no settlement was achieved in relation to all of the proceedings although the parties came relatively close.

39    There was no Calderbank offer made solely in relation to the two Federal Court proceedings which were not settled, namely QUD 384 and QUD 559. Nor was there a Calderbank offer made solely in respect of QUD 558, in respect of which Mr Hyder also seeks indemnity costs. It is not possible to manufacture a sensible case for an order for indemnity costs on the basis of the global settlement offers which were made, including those made closer to the commencement of the hearing. I note that these later offers were made on the basis that each party bear its own costs.

40    As to Mr Hyder’s reliance on the Commissioner’s position with respect to penalties, I make the following observations. The Commissioner ultimately submitted in closing submissions at trial that, in the event that the Court concluded that it was EMH IV that was liable on the assessment issued to it, EMH IV was not liable to a scheme shortfall penalty. This concession was not based on any argument which had been advanced by Mr Hyder’s legal representatives and clearly came as a surprise to them. It is tolerably clear from the history of the dispute, the submissions which had been filed and the offers, and counteroffers that were made, that it was not until very late during the hearing that the Commissioner came to the view that the concession was necessary. The Court did not need to, and did not, address whether the concession was properly made. It could not be said that the Commissioner should have appreciated the issue when the action was commenced or continued. The issue was not obvious to either Senior or Junior Counsel for Mr Hyder and EMH IV who examined with great care and in detail what arguments could properly be advanced on behalf of their clients and did not raise the issue which the Commissioner considered required him to concede penalties.

41    Mr Hyder submitted that there were reasons apart from the concession ultimately made why the Commissioner’s position on penalties was misconceived. The Tribunal never decided penalties, either on the basis of the assessments to Mr Hyder or on the basis of the assessment to EMH IV. It is not appropriate for the Court to embark on a detailed inquiry into how the penalties cases might have been decided by the Tribunal were it not for the Commissioner’s concession and the resulting settlement: Re Minister for Immigration & Ethnic Affairs (Cth); Ex Parte Lai Qin [1997] HCA 6; 186 CLR 622. It is sufficient to record that, in the absence of the Commissioner’s concession in relation to penalties concerning EMH IV, it is not obvious that EMH IV’s position with respect to penalties was the position which the Tribunal would have adopted as the correct or preferable decision. It is also necessary to note that, if QUD 40 and QUD 41 had not been resolved by consent, the outcome might have been different. The assessments issued to Mr Hyder may have been found to be correct and the Tribunal may have considered that the penalty assessments issued to Mr Hyder were also correct.

42    Counsel for Mr Hyder ultimately did not press the argument that the Commissioner unlawfully claimed GIC in relation to EMH IV from 7 June 2016: T30.6. It is therefore not necessary to determine whether or not the Commissioner was wrong about the calculation of GIC in this respect. In any event, the argument would not have advanced the case for an order that the Commissioner pay EMH IV’s costs on an indemnity basis. The argument fails to recognise that the Commissioner was pursuing an alternative case against Mr Hyder which involved GIC and penalties. It was not suggested that the Commissioner was wrong about the calculation of GIC in relation to Mr Hyder. I also note that the argument that the Commissioner was wrong about the calculation of GIC in relation to EMH IV was not raised with the Commissioner until 11 June 2024.

43    In proceeding QUD 384, Mr Hyder and his associated entities were wholly unsuccessful on each of the numerous grounds of review advanced. There is no sensible basis to award costs in favour of those entities, less still to award costs on an indemnity basis. The Commissioner is entitled to his costs in those proceedings.

44    Proceeding QUD 558 was resolved by consent. It is not appropriate to embark on an inquiry into what the result would have been had the parties not resolved the proceeding by consent: Ex Parte Lai Qin. The circumstances in QUD 559 (in which EMH IV was successful) are distinguishable from the circumstances in QUD 558, including because the assessment to EMH IV (relevant in QUD 559) was alternative to the assessment issued to SEPL, whereas the assessment to Mr Hyder (relevant to QUD 558) was not alternative to the assessment issued to SEPL. Proceeding QUD 558 was resolved because the parties reached a consent position that the assessment to EMH IV would stand with the consequence that proceeding QUD 558 became moot. There should be no order as to costs in this proceeding.

45    EMH IV was successful in QUD 559 on a basis which was not articulated in its lengthy written or oral submissions, but which was at least partially pleaded. The proceeding was likely to be more costly than it should have been had it been pleaded and argued in a focussed way. Nevertheless, EMH IV won and the way in which the proceeding was pleaded and argued was not so unsatisfactory as to suggest an exercise of discretion not to order costs in the applicant’s favour or to reduce those costs. The Commissioner submitted that a reduction of 25% was appropriate to recognise that a substantial argument advanced by EMH IV was unsuccessful, that argument being that the decision-maker acted at the behest of others. It is true that the argument was unsuccessful, but I do not consider that the circumstances are such that it is appropriate to make a costs order by reference to the success or failure of particular arguments.

46    The application for costs made by Mr Hyder and his associated entities is dismissed. I also dismiss the Commissioner’s application with respect to costs. If it were clear that the costs in QUD 384 and QUD 559 were roughly equivalent, it may have been desirable to make no order as to costs in either of those proceedings to avoid future disputation and the incurring of costs in relation to the determination of costs. However, neither party submitted that the costs were roughly equivalent. There is no basis for Mr Hyder to pay the costs of QUD 558 as submitted by the Commissioner. For the reasons given earlier, I do not accept that EMH IV is only entitled to 75% of the costs in QUD 559.

47    The result is that the costs orders which were made in QUD 384 and QUD 559, subject to the parties applying for other orders, should now be made on a non-conditional basis. There will be no order as to costs in QUD 558 in which costs were reserved.

48    There will also be no order as to costs in relation to the applications for costs given that both sides of the dispute applied for orders different to those which were foreshadowed and both sides have been unsuccessful.

Associate:

Dated:    18 June 2024