FEDERAL COURT OF AUSTRALIA Kimche v Commissioner of Taxation [2005] FCA 293 PATRICIA CAROL KIMCHE v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA V 807 of 2001 RYAN J 23 MARCH 2005 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 807 of 2001 BETWEEN: PATRICIA CAROL KIMCHE Applicant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: RYAN J DATE OF ORDER: 23 MARCH 2005 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The respondent pay one half of the applicant's costs of the application including any reserved costs and the costs of her written submissions as to costs filed on 6 September and 19 November 2004. 2. There be no order as to the respondent's costs of the application. 3. The applicant's costs referred to in paragraph 1 of this Order be taxed in default of agreement. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 807 of 2001 BETWEEN: PATRICIA CAROL KIMCHE Applicant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: RYAN J DATE: 23 MARCH 2005 PLACE: MELBOURNE REASONS FOR RULING ON COSTS 1 In August 2004 I published reasons for orders which I then made setting aside assessments by the respondent Commissioner of Taxation ("the Commissioner") assessing the applicant to income tax for each of the years ended 30 June 1995, 30 June 1996, 30 June 1997, 30 June 1998 and 30 June 1999. I then further ordered that each assessment be remitted to the Commissioner for recalculation in accordance with law and that the costs of the application, including any reserved costs, be reserved to await further submissions from the parties. Those reasons, published on 26 August 2004 ([2004] FCA 1108), ("the principal reasons") should be read in conjunction with the present reasons for the orders made today in respect of costs. Submissions on behalf of the applicant 2 For the applicant it was urged that costs should follow the event and that no discount or allowance should be made in accordance with the principles outlined by French J in Inn Leisure Industries Pty Ltd v D F McCloy Pty Ltd (No 2) (1991) 28 FCR 172 in respect of those issues on which the Commissioner had been successful. It was next submitted on behalf of the applicant that an order should be made in her favour for costs to be taxed on an indemnity basis or as between solicitor and client. That submission was founded on the proposition that the Commissioner had continued to resist the application when, properly advised, he should have known that he had no chance of success; cf Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397, at 401. Counsel for the applicant suggested that once he had learned that the applicant, in the relevant years, had received sums of money from Mr Raveh, the Commissioner was "duty bound" to satisfy himself as to what was the appropriate law, to apply that law to those facts, and then to reach a conclusion as to what amount, if any, of those amounts were, as a matter of law, income in the hands of the applicant." However, according to Counsel for the applicant, the Commissioner had not turned his mind to the characterisation of receipts from Mr Raveh of amounts other than those identified in the principal reasons as having been by way of interest. 3 That argument was said to be reinforced by the fact that the officer entrusted with consideration of the objections to the relevant assessment had failed to turn his or her mind to the proper legal characterisation of the amounts paid by Mr Raveh. Even in final submissions after the hearing of the application to this Court, it was said, that issue was not addressed by Counsel for the Commissioner. The omissions which were claimed to have attended the original assessments, the resolution of the objections and the presentation of argument on the application to this Court rendered, on the applicant's argument, the reasoning underlying the respondent's decision on the amounts other than interest "extremely opaque." That, in turn, was claimed to have caused the applicant to incur considerable expenditure in the preparation of her case. 4 The submissions for the applicant in respect of costs anticipated reliance by the Commissioner on s 167 of the ITAA which is reproduced at [24] of the principal reasons. To rebut that reliance, it was contended that s 167 is directed to circumstances like those in which a taxpayer has kept no books of account or other records and has filed no tax return. In those circumstances, the Commissioner is compelled to resolve the factual difficulty by estimating the taxpayer's income eg by constructing a betterment statement. 5 On the other hand, so the argument went, s 167 does not excuse the Commissioner from correctly applying the law to the available factual material. The failure to make such a correct application at any stage in the assessment and objection process or during the hearing of the application was said properly to expose the Commissioner to a liability to pay the applicant's costs taxed as between solicitor and client. Submissions on behalf of the Commissioner 6 For his part, the Commissioner contended that there should be no order as to costs except for the costs occasioned by the applicant's re-opening of her case which were the costs incurred between August 2003 and April 2004. In support of that contention, it was pointed out that the applicant had, at no point, conceded that there had been an agreement that she should receive 13% per annum or interest at any other rate on moneys advanced by her to Mr Raveh. Rather, her case initially was that all the payments received from Raveh had been by way of maintenance and the assessments for the relevant years should be reduced to nil. That case changed during the hearing when several different hypotheses to explain the receipts were advanced. The Court's imputation of a return by way of income to the applicant of 13% per annum was based on contemporaneous documents which the applicant claimed not to have read or understood. This was said to be a case, like Martin v Federal Commissioner of Taxation (1993) 93 ATC 5,200, where the Court did not accept the taxpayer's evidence but nevertheless found that the assessments were excessive. 7 In that case, Davies J was, to some extent, critical of the Commissioner's approach to the assessment of the taxpayer's income, concededly on the basis of incomplete or non-existent records, observing at 5,207; 'I regard it as unsatisfactory that the Taxation Office has not sought to come to a conclusion about Mr Martin's costs of earning his income save to say that expenditure not proven would not be allowed. An unwilling taxpayer, even though he is a tax evader whose evidence is not reliable should not be assessed to tax on gross income. The Act requires that a judgment be made as to allowable deductions. I have sought to undertake this task, doing the best I can on the inadequate information available, and keeping in mind that the burden of proof lies on the taxpayer Mr Martin.' 8 Without making a formal order as to costs, his Honour concluded by remarking, at 5,208; '…… I should perhaps mention that, as presently advised, I would order that each party pay his own costs of the proceedings. Mr Martin has succeeded, but I do not in general accept his evidence. The case which was put on his behalf, that the net margin should be accepted as 12%, I reject.' 9 Alternatively, it was submitted on behalf of the Commissioner that the applicant should have 40% of the costs up to the re-opening representing the extent to which she had succeeded in having the assessments reduced. Any suggestion that taxation of those costs should be as between solicitor and client was rejected as unsupported by any evidence or findings made by the Court. 10 In support of the claim for the Commissioner's costs after the re-opening, Ms Harding of Counsel for the Commissioner pointed out that the applicant had received an indulgence when she was given leave at the end of the hearing to re-open her case and present further material. That further material, so it was said, had always been available to the applicant and could have been presented as part of her case in chief. In any event, the further material had no bearing on the Court's ultimate finding that the applicant should be treated as having received income at the rate of 13% per annum on the moneys advanced by her from time to time to Mr Raveh. Accordingly, it was submitted that the applicant should pay the Commissioner's costs from the re-opening as was said to have occurred in Murray v Figge (1974) 4 ALR 612. Exercise of the Court's discretion (i) Indemnity Costs 11 I have come to a clear view that this is not an appropriate case in which to order the Commissioner to pay any part of the applicant's costs taxed on an indemnity basis. It is true, as Sheppard J acknowledged in Colgate-Palmolive Co v Cussons Pty Limited (1993) 46 FCR 225 at 233, that the categories of cases in which the discretion to award indemnity costs should be exercised are not closed. However, his Honour continued in the same passage to observe; 'Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud (both referred to by Woodward J in Fountain and also by Gummow J in Thors v Weekes (1989) 92 ALR 131 at 152; evidence of particular misconduct that causes loss of time to the Court and to other parties (French J in Tetijo); the fact that the proceedings were commenced or continued for some ulterior motive (Davies J in Ragata) or in wilful disregard of known facts or clearly established law (Woodward J in Fountain and French J in J-Corp (supra)); the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions (Davies J in Ragata); an imprudent refusal of an offer to compromise (eg Messiter v Hutchinson (1987) 10 NSWLR 525; Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 (Court of Appeal); Crisp v Keng (unreported, Court of Appeal, NSW, Kirby P, Priestley JA, Cripps JA, No 40744/1992, 27 September 1993) and an award of costs on an indemnity basis against a contemnor (eg Megarry V-C in EMI Records (supra)). Other categories of cases are to be found in the reports. Yet others to arise in the future will have different features about them which may justify an order for costs on the indemnity basis. The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis.' 12 Although there were respects in which the present litigation could have been more expeditiously conducted if proper concessions of fact and law had been made, a failure to make those concessions occurred at least equally on each side. This was a matter in which the applicant taxpayer bore the onus of proving that the Commissioner's assessments were excessive. For four of the five relevant years, she had not lodged any income tax returns, thereby impliedly asserting that she had not derived any income at all which was contradicted by the finding in the principal reasons that she had received amounts by way of interest on the moneys advanced from time to time by Mr Raveh. Neither by an initial return, nor later in her negotiations with the Commissioner, did the applicant ever propose an amount or a basis on which she was concededly liable to tax. Accordingly, no refusal of an offer to compromise can be imputed to the Commissioner. 13 Of course, many of the categories of cases enumerated by Sheppard J in Colgate-Palmolive (supra) have no application to a respondent, especially one like the Commissioner discharging statutory functions. I can discern nothing in the Commissioner's issuing of the relevant assessments or the conduct of the litigation which constitutes "some special or unusual feature" which would justify a departure from the usual order for taxation of costs as between party and party; see Re Wilcox, Ex parte; Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151 per Cooper and Merkel JJ, at 156-157. (ii) Apportionment of costs 14 In Inn Leisure Industries Pty Ltd v D F McCloy Pty Ltd (No 2) (supra) to which I was referred by Counsel for the applicant, French J observed, at 174; ' … even where an applicant is not successful on all issues, the usual rule that governs the discretion is that costs will follow the event, but that, according to the circumstances of the case and where there are special circumstances, an apportionment may be made of the amount of costs to be paid. In my opinion, in this particular case which occupied at trial, although listed for some five days, only half a day of evidence and half a day of argument, there was a common substratum of fact applicable both to the misleading and deceptive conduct claim and to the claim of mistake at law. There were certain elements of the factual matters to which I have already referred which were canvassed at the hearing and were distinct and severable from those issues on which the applicant succeeded. I am of the view that in this particular case, it is appropriate to recognise that fact. I propose therefore to make a minor apportionment of the costs recoverable by the applicant from the first respondent.' 15 In the present case, as noted above in relation to indemnity costs, the applicant did not succeed entirely in her claim which was that her objections be allowed in full and that her liability to income tax be fully eliminated. Her initial case was that all moneys paid to her by Mr Raveh should be treated as domestic payments of maintenance by way of "taking care" of herself and her son. That claim was largely rejected on the grounds explained in the principal reasons. As well, the applicant failed to make good her assertions that various sums of money in the "other" column of Mr Pavlidis' reconciliation were attributable to sales by her from time to time of jewellery and furs. However, the applicant did succeed in showing that the assessments made by the Commissioner were excessive and should be set aside. 16 Although there were respects in which the applicant's evidence was not accepted, this was not a case like Martin v Federal Commissioner of Taxation (supra) where, because he did "not in general accept his evidence", Davies J was inclined to make no order at all for costs in favour of the successful applicant taxpayer. By contrast, I accepted the present applicant's evidence of her total reliance on Mr Raveh for management of her financial affairs and her complete ignorance of what he did in that respect, particularly in relation to financing the purchase of the Melbourne property; see [10] of the principal reasons. 17 As already observed at [12] of these reasons, responsibility for the excessive time expended on identifying the matters really at issue and on the hearing of the application can be attributed to each party. As the applicant succeeded in having the disputed assessment set aside, she should not be wholly deprived of the fruits of that success by having no order made as to her costs. On the other hand, there were discrete issues on which time was expended unnecessarily at the behest of the applicant or on which the Commissioner was successful. There is much force in the Commissioner's contention that the re-opening of the applicant's case and the further hearing which that entailed would have been unnecessary had the applicant and her advisers earlier identified the real issues and prepared to meet them at the outset. Moreover, I retain the impression that the evidence adduced and submissions made after leave was given to re-open her case did not significantly contribute to the applicant's success on those issues which led to the setting aside of the disputed assessments. However, these features do not assimilate the present case to Murray v Figge (supra) which was relied on in this context by Counsel for the Commissioner. In that case, leave to the plaintiff to re-open his case was refused and Muirhead J ordered that the defendant should have his costs of the application for leave to re-open. In the present case, by contrast, leave was granted to the applicant to re-open her case. 18 I do not consider that this is a case which calls for a minute examination of the issues on which each party has succeeded and a dissection of the time and costs referable to each issue so that, after taxation, an order for costs in favour of one party could be set off against a corresponding order in favour of the other party. Rather, an overall impression of the whole litigation has led me to conclude that justice would best be served by an order that the Commissioner pay one half of the applicant's costs of the whole application including any reserved costs. That order will mean that the Commissioner will not receive from the applicant any part of his costs referable to issues on which he has succeeded or costs thrown away as a result of errors or omissions by the applicant. The absence of a set-off of that kind and an award of half of her total costs will, I consider, broadly reflect the net extent to which the applicant should recover her costs of the action. Conclusion 19 For the reasons explained above, the order of the Court will be that the Commissioner pay one half of the applicant's costs of the application, including any reserved costs and her costs of the written submissions as to costs filed on 6 September and 19 November 2004. The applicant's claim that her costs be taxed as between solicitor and client on an indemnity basis is refused and the order will simply recite that the costs be taxed in default of agreement, thereby implying that the taxation is to be as between party and party. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Ruling on Costs herein of the Honourable Justice Ryan. Associate: Dated: 23 March 2005 Counsel for the Applicant: Mr F E Farrow Solicitors for the Applicant: Sholl Nicholson Pty Counsel for the Respondent: Ms D Harding Solicitors for the Respondent: Australian Government Solicitor Dates of Hearing: 23, 24 & 25 July 2003, 25 and 29 March, and 6 April 2004 Written submissions as to costs filed: 6 September, 21 September and 19 November 2004 Date of Judgment: 26 August 2004 Date of Costs Ruling: 23 March 2005