FEDERAL COURT OF AUSTRALIA Barkworth Olive Groves Limited (ACN 076 441 551) v Carmody [2002] FCA 592 BARKWORTH OLIVE GROVES LIMITED (ACN 076 441 551) AND BARKWORTH OLIVES MANAGEMENT LIMITED (ACN 084 316 101) v MICHAEL CARMODY, COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Q 41 OF 2002 DRUMMOND J BRISBANE 1 MAY 2002 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q 41 OF 2002 BETWEEN: BARKWORTH OLIVE GROVES LIMITED (ACN 076 441 551) FIRST APPLICANT BARKWORTH OLIVES MANAGEMENT LIMITED (ACN 084 316 101) SECOND APPLICANT AND: MICHAEL CARMODY, COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: DRUMMOND J DATE OF ORDER: 1 MAY 2002 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. No orders be made as to costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q 41 OF 2002 BETWEEN: BARKWORTH OLIVE GROVES LIMITED (ACN 076 441 551) FIRST APPLICANT BARKWORTH OLIVES MANAGEMENT LIMITED (ACN 084 316 101) SECOND APPLICANT AND: MICHAEL CARMODY, COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: DRUMMOND J DATE: 1 MAY 2002 PLACE: BRISBANE REASONS FOR JUDGMENT 1 By application filed on 25 March 2002, the applicants sought: "1. An order pursuant to s 39B of the Judiciary Act 1903 for a writ of mandamus requiring the respondent to perform the duty imposed upon him by s. 14ZAAE of the Taxation Administration Act 1953 to make a decision in relation to the applicants' application for a product ruling made by application dated 31 October 2001. 2. Alternatively, an order for review pursuant to s 7 of the Administrative Decisions (Judicial Review) Act 1977 in respect of the respondent's failure to make a decision in relation to the applicants' application for a product ruling made by application dated 31 October 2001 on the ground that there has been unreasonable delay in making the decision. 3. Costs." 2 The only relief sought was an order compelling the Commissioner to make a decision on the applicants' application of 31 October 2001 not to issue a favourable ruling to the applicants. The matter came before the Court on 3 April 2002, when a judge of the Court directed that the respondent file and serve all the affidavits upon which he intended to rely at the hearing of the substantive application by 11 April and that the application be adjourned for further directions to 12 April. The Court indicated that it anticipated that it would hear the substantive application on 18 April. 3 It is common ground now that issue of the ruling, rather than the mere making of a decision on whether or not to issue the ruling sought by the applicants, is imminent. By letter of 11 April 2002 to the Court, the solicitor for the applicants wrote: "We confirm that the parties have agreed that the Australian Taxation Office (ATO) will issue the draft product ruling to our clients (for them to sign the terms of use) by the close of business on Wednesday 24 April 2002. The ATO will ensure that the product ruling is published in the Gazette by Wednesday 8 May 2002. Accordingly, the parties would like to vacate the mention date on 12 April 2002 and the hearing date on 18 April 2002. We confirm that you will arrange for those dates to be vacated without the necessity for an appearance by the parties. Our clients would like to keep the application on foot for the time being to ensure that the terms of the settlement are complied with." 4 Consequently, the matter has come before me today. While continued prosecution of the action is futile, the applicants want their costs of the proceeding. The applicants have relied on two affidavits. The Commissioner has chosen not to put any evidence before the Court. 5 In re Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622, McHugh J dealt with the proper approach to an application for costs where an action does not proceed to a final judgment on the merits. His Honour said (at 624 - 625): "In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. … When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order. In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. In administrative law matters, for example, it may appear that the defendant has acted unreasonably in exercising or refusing to exercise a power that the plaintiff had no reasonable alternative but to commence a litigation. … Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. … 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 proceedings. This approach has been adopted in a large number of cases." 6 The applicants sought the product ruling in respect of its investment scheme, which can be described as Project No 6, by application made to the Commissioner on 31 October 2001. The material given to the Commissioner included the applicants' draft prospectus. The closing date for investors to take up the offer in the planned prospectus was 31 May 2002. The applicants' recent experience in relation to its earlier projects, Nos 3, 4 and 5, has been that the Commissioner has determined each application within four to five months of the making of the application in late December of the particular financial year. 7 Between 31 October 2001 and 8 February 2002, representatives of the applicants and the Commissioner communicated both orally and in writing with respect to the applicants' product ruling application. On 8 February 2002, during a conversation between the representatives of the parties, the Commissioner's representative said words to the effect that: "Consideration of the application has been delayed. However, it should only take two weeks to complete the review process, and we hope to issue the product ruling by the end of the month." 8 On 5 March 2002, the Australian Taxation Office ("the ATO") wrote to the applicants raising some concerns about the scheme the subject of the product ruling application. The Commissioner concluded his letter as follows: "… Your full co-operation is sought in determining how the arrangement outlined in your current application will operate to ensure that income from the Project No 6 that is derived by entities in the Barkworth group is not sheltered from tax and how this differs from the arrangements which have been put into effect in relation to earlier Projects. Until these issues are resolved, the application for a Product Ruling for Product No 6 will not be progressed. Our ability to progress this issue will therefore depend on the timeliness and fullness of the information that Barkworth provides." 9 The applicants' agents, Ernst & Young, responded immediately by letter the next day, 6 March, in which the applicants provided the information sought and concluded by saying: "You will appreciate our clients have incurred significant costs and efforts in preparing the Product Ruling Application and lodging it on a timely basis. In light of the above delays and given the assurance from our clients in relation to 'sheltering of income', we asked for a prompt review of the Product Ruling Application." 10 There is nothing before me to suggest that this letter, forwarded on behalf of the applicants, did not satisfy the Commissioner's concern raised in his earlier letter of 5 March. At that stage, the applicants could therefore have expected issue of the ruling or, at the very least, a decision on whether or not a ruling would be issued, within a short while after 6 March. 11 On 13 March, a number of notices from the ATO were received by entities within the Barkworth Group of companies, including the applicants. The notices were delivered to the accountants for the Barkworth Group. They required detailed financial information from each of those companies. However, the Commissioner has not put on any evidence and there is nothing before me to answer the submission by applicants' counsel that this action by the Commissioner provided any justification for delay by the Commissioner in determining the applicants' product ruling application. 12 On 19 March, the applicants wrote to the Commissioner in these terms: "We have been advised by Mr. Leigh Devine of Ernst & Young that you are unable to provide any update verbally on the progress of the Product Ruling Application for Barkworth Olives Project No.6. Given that your letter of March 7, 2002 advised that our requests would receive due consideration and we would be advised as soon as possible, and another 12 days have elapsed since then, we request either a written update or the name of an appropriate person to contact at the Australian Taxation Office to obtain an update." 13 It appears that no response was received by 25 March when the present action was commenced. 14 However, on 11 March 2002, the Australian Securities and Investment Commission ("ASIC") placed an interim stop order on the Barkworth Olive Project No 6 prospectus, its concerns being that "the forecasts in the prospectus contain information on future olive prices that are not based on reasonable grounds". The media release by ASIC, exhibit 3, continues: "The prospectus offers shares in the landholding company Barkworth Olive Groves Limited as well as interest in the project. ... The interim stop order prevents the offer, sale, issue or transfer of securities under the prospectus. ASIC may revoke the order if its concerns are met, otherwise a hearing will be held to determine whether a permanent stop order should be made." 15 The applicants' letter of 19 March 2002 to the ATO does not refer to this interim stop order which was then still in place. The ASIC interim stop order was removed only some weeks after the applicants commenced these proceedings. 16 It appears from the evidence before me that the ATO's response to the ASIC interim stop order was itself to stop processing the applicants' application for the product ruling until ASIC lifted the order. In his letter of 10 April 2002 to the applicants, exhibit 1, the Commissioner said: "Reference is made to your facsimile of 10 April 2002 and to the copy of the letter provided from ASIC which indicates that the Interim Stop Order was revoked on 9 April 2002. As the Project may now be sold, the ATO will recommence to process the Product Ruling Application received for Project No 6. In this context the Commissioner has considered your offer made in your letter of 6 March 2002 and will accept the offer to amend paragraph 28.4 of the Product Ruling Application for Barkworth Olives Project No 6 to clarify that all income derived by Barkworth Olives Management Limited in its capacity as Trustee of the BOML 6 Trust will be distributed to corporate entities within the Barkworth Group … While a Draft Ruling had previously been prepared, it is noted that the draft Prospectus forwarded with the application and on which the Draft Ruling was based is not the document which was lodged with ASIC. It is also noted that a Supplementary Prospectus has been lodged. Accordingly these documents will need to be reviewed and considered in connection with the other documents and/or information already provided, particularly in relation to the exercise of the Commissioner's discretion under Division 35. This process has already commenced on the assumption that Barkworth will supply the confirmation requested above as this confirmation will be required before the Product Ruling issues." 17 On 11 April 2002, the Commissioner's solicitors wrote to the solicitors for the applicants in these terms: "2. As discussed, we now confirm the timeframe for the decision-making process outlined in Ms Jean Weaver's letter to your clients yesterday. 3. Subject to your clients' satisfactory response to any requests for additional information, we are instructed that our client should be in a position to forward the draft product ruling to your clients for review and signature of the terms of use by close of business on Wednesday, 24 April 2002." 18 It is common ground that requests for information were made by the Commissioner and were responded to by the applicants. As I have said, the issue of the ruling is now imminent. 19 It was submitted by the applicants that ASIC's stop order of 11 March does not provide any justification for the Commissioner delaying thereafter in making his determination on the applicants' product ruling application of 31 October 2001. I am not prepared, however, to characterise the Commissioner's conduct in not determining the application while ASIC's stop order remained in place as unreasonable. 20 During that period, I do not think the Commissioner can be said to have left the applicants with no reasonable alternative but to commence the action it did on 25 March 2002. The Commissioner's attitude, expressed in exhibit 1, of not being prepared to deal with an application for a tax ruling where action has been taken by ASIC that means that the scheme in respect of which the ruling is sought may never be marketed, cannot, on the evidence before me, limited though it is, be said to be such as to entitle the applicants to the costs incurred in connection with the institution of the proceedings when the applicants took that course. 21 It was not suggested that the Commissioner's conduct after 10 April 2002 in requiring information and in pretty promptly thereafter determining to issue the ruling had any impact on what should be done about any of the costs of these proceedings. 22 For these reasons, I decline to make any order in respect of the costs of the applicants' proceedings. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Drummond. Associate: Dated: 8 May 2002 Counsel for the Applicants: PE Hack SC Solicitor for the Applicants: Teys McMahon Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 1 May 2002 Date of Judgment: 1 May 2002