FEDERAL COURT OF AUSTRALIA Pearson v Commissioner of Taxation [2002] FCA 1311 TAXATION – whether applicant has disclaimed any and all income which applicant was entitled to in relation to specified trusts – factual matters tending against validity of claim for disclaimer – whether disclaimer issue would determine all matters between parties – whether disclaimer issue can properly be determined apart from the other issues in the appeal PRACTICE AND PROCEDURE – whether Court should order the hearing as a preliminary question of an issue in the proceedings – whether disclaimer issue should be dealt with separately prior to trial of remaining issues – effect on length and cost of trial – single issue trials should be embarked upon only when the utility, economy and fairness to the parties is beyond question Federal Court Rules, O 29 Tepko Pty Ltd v Water Board (2001) 206 CLR 1 followed Tallglen Pty Ltd v Pay TV Holdings Pty Ltd (1996) 22 ACSR 130 approved JANETTE ANN PEARSON v COMMISSIONER OF TAXATION No Q 264 of 1999 SPENDER J BRISBANE 23 OCTOBER 2002 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q 264 OF 1999 BETWEEN: JANETTE ANN PEARSON APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: SPENDER J DATE OF ORDER: 23 OCTOBER 2002 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The motion be dismissed. 2. The costs of the motion be the respondent's costs in the principal proceedings. 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 264 OF 1999 BETWEEN: JANETTE ANN PEARSON APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: SPENDER J DATE: 23 OCTOBER 2002 PLACE: BRISBANE REASONS FOR JUDGMENT 1 This is a notice of motion which was filed on 26 September 2002 by Mrs Janette Ann Pearson ("the applicant"), which seeks an order that the court hear and determine as a separate matter prior to trial the following issue raised by her, namely: " 'Whether the applicant has disclaimed any and all income said by the respondent to have been income to which the applicant was presently entitled in relation to, respectively, the Jancy Trust and the Cigma Trust', and which is the subject of the adjustments given effect by the amended assessments issued to her by the respondent on the 10th December 1996 for the years of income ended 30 June 1992, 30 June 1993 and 30 June 1994, with the effect that no such income had entered into the calculation of the applicant's assessable income for those years." 2 In support of that motion, there is an affidavit by John Alexander Baker, who currently has carriage of the matter. The applicant has previously been represented by other solicitors, and has received advice, through those solicitors, of other counsel. 3 The focus of Mr Baker's affidavit is the purported distribution of income from the Cigma Trust to the applicant, and an associated issue concerning delay in objecting to that income. The affidavit refers to particular aspects of the history of the matters and then, in dealing with the merits of the Cigma income issue, Mr Baker deposes: "11. The Applicant will contend that: (a) the Commissioner ought properly have assessed the trustee and not the Applicant. In the 1991 year the Commissioner in like circumstances assessed Jancy Pty Ltd as trustee of the Jancy Trust. …" The affidavit continues: "12. Mr Hanson, the solicitor for the Respondent, stated to me on the 1st August 2002 that the amount due by the Applicant with respect to the assessment relating to the Cigma income including additional tax penalties and interest is of the order of $575,000. If the relief sought is not granted then I am concerned that the Commissioner will seek payment of this tax to which he would otherwise not be entitled. 13. With respect to the trial of the three appeals excluding the disclaimer issue I anticipate that the trial will occupy several hearing days. There are some 41 unresolved issued [sic] between the Applicant and the Commissioner which are presently contested. The issues are variously affected by factual legal and accounting considerations. I anticipate that the following witnesses will be required to be examined. The Applicant C.J. Pearson B.F. Delaney (accountant) Onus Maynes (accountant) I.C. Bartley (Taxation Office) D. Henry (Taxation Office) S. Glyn (ASIC) J. Taylor (ASIC) 14. It may therefore suit the convenience of the Court for the disclaimer issue to be dealt with separately and prior to the trial." 4 Pursuant to O 29 of the Federal Court Rules, the Court has power to order the hearing as a preliminary question of an issue in the proceedings. Order 29 provides: "RULE 1 INTERPRETATION 1. In this Order, 'question' includes any question or issue in any proceeding, whether of fact or law or partly of fact and partly of law, and whether raised by pleadings, agreement of parties or otherwise. RULE 2 ORDER FOR DECISION 2. The Court may make orders for – (a) the decision of any question separately from any other question, whether before, at or after any trial or further trial in the proceedings; and (b) the statement of a case and the question for decision. RULE 3 ORDERS, DIRECTIONS UPON DECISION 3. Where any question is decided under this Order, the Court shall, subject to rule 4, make such order, grant such relief or give such directions as the nature of the case requires. RULE 4 DISPOSAL OF PROCEEDINGS 4. Where the decision of a question under this Order – (a) substantially disposes of the proceeding or of the whole or any part of any claim for relief in the proceeding; or (b) renders unnecessary any trial or further trial in the proceeding or on the whole or any part of any claim for relief in the proceeding, the Court may, as the nature of the case requires – (c) dismiss the proceeding or the whole or any part of any claim for relief in the proceeding; or (d) pronounce any judgment; or (e) make any other order. RULE 5 CONSOLIDATION, ETC 5. Where several proceedings are pending in the Court, then, if it appears to the Court – (a) that some common question of law or fact arises in both or all of them; (b) that the rights to relief claimed therein are in respect of, or arise out of, the same transaction or series of transactions; or (c) that for some other reason it is desirable to make an order under this rule, the Court may order those proceedings to be consolidated or may order them to be tried at the same time or one immediately after another or may order them to be stayed until after the determination of any of them." 5 The contention by Mr Robertson, counsel for the applicant, is that the question raised for separate decision under O 29 would determine all matters between the applicant and the Commissioner, if answered favourably to the applicant. The adjustments notified to the applicant by the Commissioner relate to the applicant's alleged share of the net income of two trust estates, the Jancy Trust and the Cigma Trust, and the separate point for decision relates to the applicant's purported disclaimer of income from those trust estates. 6 The contention for the applicant is that the issues between the parties, as appears from the applicant's Statement of Issues, Facts and Contentions, are numerous and detailed and that the trial of all issues would be quite lengthy. In par 13 of Mr Baker's affidavit, set out above, eight potential witnesses are referred to. It is submitted on behalf of the applicant that the above point concerning disclaimer is a discrete point of "mixed fact and law", and if determined favourably to the applicant, no other point need be agitated. 7 It is, of course, notorious that efforts to shorten trials by the determination of preliminary questions prior to trial backfire more often than not. 8 I set out at length some observations by Kirby and Callinan JJ in Tepko Pty Ltd v Water Board (2001) 206 CLR 1 at 55: "The appeal should be allowed. However, we should not leave this case without making four comments. Both Mason P (Tepko Pty Ltd [1999] Aust Torts Reports 81-525 at 66,317 [5]) and Fitzgerald JA (Tepko Pty Ltd [1999] Aust Torts Reports 81-525 at 66,325 [37]) were critical of the course of limiting the issues to be tried that the primary judge adopted. In Perre v Apand Pty Ltd ((1999) 198 CLR 180) attention was drawn to difficulties that can be caused when that course is adopted. In light of the experience in this case, what was there said should be restated with emphasis. The attractions of trials of issues rather than of cases in their totality, are often more chimerical than real. Common experience demonstrates that savings in time and expense are often illusory, particularly when the parties have, as here, had the necessity of making full preparation and the factual matters relevant to one issue are relevant to others, and they all overlap. The second and related comment is this. A party whose whole case is knocked out on a trial of a preliminary or single issue, may suspect, however unjustifiably, that an abbreviated course was adopted and a decision reached in the court's, rather than the parties', interests. Thirdly, there is an additional potential for further appeals to which the course of the trial on separate issues may give rise. Indeed, that could occur here were this appeal to be allowed and a retrial had in which the remaining issues of causation and damages were decided. Single-issue trials should, in our opinion, only be embarked upon when their utility, economy, and fairness to the parties are beyond question." 9 In par 1 of her Statement of Issues, Facts and Contentions, the applicant asserts that she has effectively disclaimed her entitlement to all income from, and all interest in, the Jancy Trust. It is common ground between the parties that if there was a valid disclaimer by the applicant, it would operate as a renunciation of the entirety of the property which is the subject of the Jancy Trust, and the consequent entitlement to income. It follows that the applicant's appeals would be successful, and the amended assessments would be set aside. 10 It therefore is plain to me that if the disclaimer issue can be properly determined, apart from the other issues in these appeals, it would be more convenient to hear it as a separate matter prior to the listing of the other matters for trial, because such an approach may save considerable court time and costs for the parties. The question, however, is whether it can be said that the disclaimer issue can properly be determined apart from the other issues in the appeals. 11 The disclaimer issue is not purely a question of law, as the submissions of counsel for the applicant, Mr Robertson, to which I have earlier referred, acknowledge. Ms Ford for the Commissioner contends that there is a real issue as to the factual basis for the disclaimer issue. 12 In Supreme Court proceedings number 404 of 1997, the applicant pleaded in par 5 of her defence as follows: "In the alternative, if, which is denied, the defendant [the applicant] became entitled to the income which the plaintiff by the purported notices of assessment and/or certain adjustment sheets accompanying them alleges to be the defendant's income, the defendant has disclaimed or in the alternative, hereby disclaims, any entitlement which she may have had to such income." And in other proceedings in the Supreme Court, number 446 of 1997, the applicant stated in par 3 of an affidavit of 8 April 1997: "None of the amounts which have been included in my assessable income in the notices of amended assessment the subject of these proceedings has been paid to me, nor applied for my benefit and to the best of my knowledge information and belief, I have no means of obtaining any of it. I hereby disclaim all such income." 13 The submissions on behalf of the Commissioner indicate that there are a considerable number of factual matters which tend against the validity of the claim for disclaimer. In a schedule to the written submissions on behalf of the Commissioner, some of that evidence is referred to. 14 The Jancy Trust Deed dated 1 November 1983 is signed by the applicant in her maiden name of Fenton. Clause 1(1)(a) of that deed provides: "the 'Primary Beneficiaries' means – CYRIL JOHN PEARSON JANETTE ANN FENTON." There is reference in the schedule to the income tax return of the applicant for 1992 and dated 5 January 1994, and a further income tax return of the applicant for the 1992 year dated 22 February 1994, which contains the usual declaration that: "the particulars shown in this return and the accompanying documents are true and correct in every detail, disclosing a full and complete statement of the total income derived from all sources in and out of Australia during the year of income;" and there is declared a distribution from the Jancy Trust in the sum of $4131. In the 1993 income tax return of the applicant dated 22 February 1994 there is a similar declaration, in addition to a declaration of a distribution from the Jancy Trust in the sum of $8872. The applicant's 1994 income tax return dated 10 August 1994 contains a similar declaration as well as a declaration of a distribution from the Jancy Trust in the sum of $2166. 15 There is also evidence contained in minutes of meetings of directors of Jancy Pty Ltd as trustee of the Jancy Trust, which minutes bear the date 30 June 1994 and which contain as a resolution: "…[resolve] that the income of the above family trust for the year ended 30th June 1994, be distributed as follows: 100% solely to: Janette Ann Pearson." Those minutes are signed by the applicant in her capacity as Chairman. 16 The evidence also suggests that a company search of Jancy Pty Ltd, the trustee of the Jancy Trust, reveals that the applicant was appointed a director of that company on 1 November 1983. The contested assessments issued as the result of audit activity on the part of the Commissioner. 17 There is, it seems to me, a very real nexus between what is in fact the quantum of the distribution to the applicant (which amount, whatever it is, she asserts she has disclaimed) and whether this was in truth a disclaimer. There seems to be some measure of affirmation, as opposed to non-disclaimer, in the amounts referred to in the personal income tax returns to which I have referred, yet when the trust income in each relevant year is said by the Commissioner to be considerably more than the sums returned in those personal income tax returns, the claim of disclaimer of all income is made. 18 It is asserted on behalf of the Commissioner that the factual basis for the disclaimer is dependent on the credit to be given to the applicant and also on the credit of Mr Pearson, the applicant's husband. If the question of disclaimer were to be tried as a preliminary question, no doubt there would be evidence directed to the credit of the applicant and her husband in respect of those matters. But the weight to be given to the evidence of the applicant and her husband should be determined after their credit has been assessed on the basis of the evidence given on this and other issues. It seems to me that the Commissioner ought not be deprived of the opportunity to test these issues of credit in the ordinary way. 19 To fragment the issue, involving as it does questions of credit, with the question of disclaimer determined independently of the factual questions of the admissions or acknowledgments of receipt of distributions of small amounts from the Jancy Trust in the various years, leads to the possibility of unfairness. 20 The cases are littered with examples where, rather than save costs and shorten trials, the procedure of the trial of preliminary questions has had quite the opposite consequence. I am in respectful agreement with the observations by Giles CJ in the Commercial Division of the Supreme Court of New South Wales in Tallglen Pty Ltd v Pay TV Holdings Pty Ltd (1996) 22 ACSR 130 at 141-142, where his Honour said: "In the ordinary course all issues in proceedings should be decided at the one time, but separate decision of a question may be appropriate where, for example, the decision of the question is critical to the outcome of the proceedings and (at least if decided in one way) will bring the proceedings to an end. In particular circumstances the separate decision of a question may be appropriate even if it will not bring the proceedings to an end, such as where there is a strong prospect that the parties will agree upon the result when the core of their dispute is decided or where the decision will obviate unnecessary and expensive hearing of other questions, but such occasions must be carefully controlled lest fragmentation of the proceedings (particularly when the exercise of rights of appeal is borne in mind) brings delay, expense and hardship greater than that which the making of an order was intended to avoid. It is often the case that the need to make findings of fact for a decision of the separate question, especially findings which may involve issues of credit, tell strongly against the making of an order because related facts, and renewed issues of credit, will or may arise at a later stage in the proceedings. Experience teaches that it should be able to be seen with clarity that decision of a separate question will be beneficial in the conduct of the proceedings and the resolution of the parties' dispute." (Emphasis added) 21 The discretion which O 29 gives can, on occasions, be of positive benefit, but as Kirby and Callinan JJ pointed out in Tepko v Water Board (supra), single issue trials should be embarked upon only where the utility, economy and fairness to the parties is beyond question. In my view, that is not the case in the present matter. Consequently, I decline to order the trial of the preliminary question. 22 As to costs, it seems to me that I should order that the costs of the motion be the Commissioner's costs in the principal 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 Spender J. Associate: Dated: 25 October 2002 Counsel for the Applicant: Mr M. Robertson Solicitor for the Applicant: Hewlett & Company Counsel for the Respondent: Ms E. Ford Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 7 October 2002 Date of Judgment: 23 October 2002