FEDERAL COURT OF AUSTRALIA Taras Nominees Pty Ltd as Trustee for the Burnley Street Trust v Commissioner of Taxation of the Commonwealth of Australia [2014] FCA 131 Citation: Taras Nominees Pty Ltd as Trustee for the Burnley Street Trust v Commissioner of Taxation of the Commonwealth of Australia [2014] FCA 131 Parties: TARAS NOMINEES PTY LTD AS TRUSTEE FOR THE BURNLEY STREET TRUST v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA File number: VID 1196 of 2011 Judge: KENNY J Date of judgment: 25 February 2014 Catchwords: COSTS – unsuccessful applicant sought order for costs to reflect "partial success" in proceeding - consideration of whether special circumstances justified not awarding costs in favour of successful party – history of application relevant – costs awarded in favour of successful party. Legislation: Federal Court of Australia Act 1976 (Cth) Cases cited: Taras Nominees Pty Ltd as Trustee for the Burnley Street Trust v Commissioner of Taxation of the Commonwealth of Australia [2014] FCA 1 Ruddock v Vadarlis (No 2) (2001) 115 FCR 229 Oshlack v Richmond River Council (1998) 193 CLR 72 Victoria Gardens Developments Pty Ltd v Commissioner of State Revenue (No 2) (1999) 41 ATR 214 Date of hearing: Determined on the papers Date of last submissions: 4 February 2014 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 32 Counsel for the Applicant: M T Flynn Solicitor for the Applicant: Logie-Smith Lanyon Counsel for the Respondent: Dr J E Jaques Solicitor for the Respondent: Legal Services Branch, Australian Taxation Office IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 1196 of 2011 BETWEEN: TARAS NOMINEES PTY LTD AS TRUSTEE FOR THE BURNLEY STREET TRUST Applicant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: KENNY J DATE OF ORDER: 25 FEBRUARY 2014 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The applicant's taxable income for the year ended 30 June 1999 be reduced by $1,986,281. 2. The application be otherwise dismissed. 3. The applicant pay the respondent's costs, to be taxed unless agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 1196 of 2011 BETWEEN: TARAS NOMINEES PTY LTD AS TRUSTEE FOR THE BURNLEY STREET TRUST Applicant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: KENNY J DATE: 25 FEBRUARY 2014 PLACE: MELBOURNE REASONS FOR JUDGMENT what this is about 1 On 14 January 2014, the Court delivered reasons for judgment in which it held that: 1. Taras made a taxable capital gain under Part 3-1 of the ITAA 1997 in relation to transactions in August 1998, because there was a CGT event E1. There was also a CGT event A1. 2. The market value of the Taras land at the time of the transfer was $16,626,115 plus an appropriate allowance for the relevant proportion of development costs. 3. Taras was liable to the imposition of administrative penalties at the rate of 25% of the tax shortfall for the 2000 and 2002 tax years. See Taras Nominees Pty Ltd as Trustee for the Burnley Street Trust v Commissioner of Taxation of the Commonwealth of Australia [2014] FCA 1 ("Taras v Commissioner"). 2 On that day, the Court directed the respondent to prepare draft orders to give effect to those reasons. The respondent subsequently submitted the following draft orders: 1. The applicant's taxable income for the year ended 30 June 1999 be reduced by $1,986,281. 2. The application be otherwise dismissed. 3. The applicant pay the respondent's costs, to be taxed unless agreed. 3 There is no dispute that the first two of the proposed orders give appropriate effect to the Court's reasons for judgment. There remains a dispute about the disposition of costs. 4 Both parties have since filed written submissions on costs. The applicant submits that the Court's order for costs ought to reflect that it has been partially successful "by reducing the percentage of costs recoverable by the Respondent from [it] (say by 20%)". That is, in the applicant's words, it - … succeeded in reducing its taxable income by almost $2 million, an adjustment that the Respondent failed to concede was appropriate until shortly before trial, almost 12 months after [the applicant] had filed its application. 5 The respondent submits that the applicant should bear its costs on a party-party basis. 6 For the following reasons, I would order that the applicant pay the respondent's costs of the application, on a party-party basis, to be taxed in default of agreement. consideration 7 Under s 43(2) of the Federal Court of Australia Act 1976 (Cth), the award of costs is at the discretion of the Court. This discretion must be exercised judicially on grounds connected with the case: see Ruddock v Vadarlis (No 2) (2001) 115 FCR 229 ("Ruddock v Vadarlis (No 2)") at 234 [9] (Black CJ and French J). 8 Ordinarily, a successful party is entitled to an award of costs in its favour in the absence of special circumstances justifying some other order: see Ruddock v Vadarlis (No 2) at 234 [11]; Oshlack v Richmond River Council (1998) 193 CLR 72 at 97 [67] (McHugh J) and 120–122 [134] (Kirby J). 9 The substantive application in this case gave rise to three main issues. These issues were: (1) whether or not there was a CGT event; (2) what was the market value of the asset disposed of; and whether or not administrative penalties were correctly imposed: see Taras v Commissioner at [3]-[5]. The Court found that: (1) there was a CGT event; (2) the market value of the asset was $16,626,115 plus an allowance for development costs; and (3) administrative penalties were correctly imposed. 10 As the respondent submitted, there can be no dispute that the respondent was wholly successful on the first and third issues. Disagreement now centres on the resolution of the second issue. As appears below, I reject the applicant's contention that the respondent did not ultimately succeed on this second issue. 11 The applicant put its case as follows: Taras was partly successful because the Respondent originally assessed Taras on a capital gain based on the market value of the Taras land being $20,178,005, on the basis that this amount was 70.8% of the sale price of the Taras land in Schedule B to the Joint Venture Agreement ($28,500,000). The Respondent derived the ratio of 70.8% from the value of the Marpine Land determined in the stamp duty case, which was $17,700,000. One of Taras' grounds of objection was that the Respondent's method of determining the market value was incorrect … The Respondent rejected this ground of objection in its reasons for decision disallowing the objection … The Applicant then filed its Application in the Court on 2 November 2011. In his Appeal Statement filed on 30 November 2011 the Respondent again insisted that his methodology for determining the market value of the Taras Land was correct … It was not until the Respondent filed his written submissions on 14 November 2012 that he finally conceded that the methodology used to determine the market value of the Taras Land was flawed, and that it was less than $20,178,005. 12 In order to assess this submission, it is necessary to consider the history of the market value issue more closely. As appears hereafter, the applicant's submission disregards certain salient facts that bear on the disposition of costs and leads me to reject its submission that the costs payable to the respondent should be reduced. 13 As the applicant said, the respondent initially assessed the market value of the relevant asset, being the Taras land, at the time of the CGT event as $20,178,005, on the basis of the undisputed market value of the Marpine land recorded in Gillard J's decision in Victoria Gardens Developments Pty Ltd v Commissioner of State Revenue (No 2) (1999) 41 ATR 214 (referred to in Taras v Commissioner and hereafter as "Victoria Gardens (No 2)") and the respective "prices" of the Marpine and the Taras land in Annexure B to the joint venture agreement executed on 20 August 1998 ("the JVA"): see Taras v Commissioner at [36]. This was the best information about the market value of the asset available to the Commissioner at the time he made the assessment. On this basis, as stated in Taras v Commissioner at [36]: [T]he Commissioner determined the market value of the Taras land as 70.8% of the sale price of the Taras land in Schedule B to the JVA ($28,500,000). The Commissioner derived the 70.8% ratio from the value of the Marpine land determined in Victoria Gardens (No 2) compared with the price attributed to the Marpine land in the JVA. By applying this formula, the Commissioner determined the market value of the Taras land as $20,178,005 (approximately $432.92 per m²). The result was that the respondent assessed the applicant's taxable income for the year ended 30 June 2009 on the basis of a market value of $20,178,005. 14 The applicant objected to the assessment on 30 June 2010 and contended, relevantly, that the market value of the Taras land at the relevant time was the amount on which duty was calculated, which it asserted to be $16,759,848. The applicant provided the respondent with a table of rates of duty and a letter dated 1 November 2001 from the Victorian State Revenue Office to Victoria Gardens Developments Pty Ltd setting out a duty payment arrangement, from which the applicant apparently derived the figure of $16,759,848. As the respondent observed in submissions, this letter did not identify the land that was the subject of this arrangement. 15 The respondent issued a notice of decision on objection to the applicant on 5 September 2011, allowing the applicant's objection in part by increasing the cost base of the Taras land. 16 As we have seen, the applicant instituted a taxation appeal in this Court: see Taras v Commissioner. On 30 November 2011, the Commissioner filed his Appeal Statement in which he contended that the market value of the Taras land was $20,178,005. The applicant filed its Appeal Statement on 16 December 2011, in which it contended that the market value of the Taras land at the relevant time was between $16.2 million and $16.75 million. In its Appeal Statement, the applicant alleged that the respondent's valuation was flawed because: [I]t assumes that the proportion by which the price of the Marpine Land (Lot 1) in Schedule B of the JVA exceeds its market value is the same as the proportion by which the price of the Taras land (Lots 2, 3, 4 and 5) in Schedule B of the JVA exceeds its market value. Taras' land was less valuable than the Marpine land because Lot 1 was a larger parcel of land than Taras' land and was better located in that it predominantly fronted on to Victoria Street. This argument was not aired at the subsequent hearing. 17 On 23 January 2012, the respondent wrote to the applicant requesting a copy of, amongst other things, the affidavit of Mr Sweeney dated 22 October 1998 (which was referred to in Victoria Gardens (No 2)) "[i]n the interests of providing all relevant information in this matter and a possible basis for revision of the market valuation which is in dispute". The applicant did not immediately provide the affidavit to the respondent in response to this request. 18 Some months later, on 6 March 2012, the applicant filed an expert report of Mr Sweeney dated 5 March 2012, in which he gave the opinion that the market value of the Taras land at the relevant time was $11.88 million. This figure was markedly less than the original figure for which the applicant contended of $16,759,848 in its 30 June 2010 objection. The report of 5 March 2012 included reference to Mr Sweeney's affidavit of 22 October 1998, which was apparently provided to him with his letter of instruction of 21 February 2012. Notwithstanding this, a copy of Mr Sweeney's affidavit of 22 October 1998 was not given to the respondent at this time. 19 On 14 March 2012, the respondent again wrote to the applicant asking for a copy of, amongst other things, Mr Sweeney's affidavit of 22 October 1998. This affidavit was ultimately provided to the respondent on 21 March 2012. In his 22 October 1998 affidavit, Mr Sweeney opined that the four parcels of land making up the Taras land had values at the relevant time that together totalled $16,626,115. 20 Under timetabling orders, the Commissioner was due to file expert valuation evidence on which he intended to rely by 3 May 2012. The Commissioner did not file any such evidence at this time. 21 The parties attended mediation on 10 May 2012, but the matter was not resolved. 22 On 15 June 2012, the applicant filed its Outline of Argument, in which it contended that the market value of the Taras land at the relevant time was $8.45 million on the basis of a further report made by Mr Sweeney dated 13 June 2012 and an expert report by Mr Woods dated 7 June 2012, both of which are discussed in Taras v Commissioner. At that time, neither of the reports had been sighted by the respondent. 23 The trial, which had been listed for 26 July 2012, was vacated on 22 June 2012. There were orders for the filing of further evidence and the matter was relisted for trial, commencing on 6 February 2013. 24 On 19 October 2012, the applicant filed its Amended Outline of Argument, in which it reiterated that the market value of the Taras land at the relevant time was $8.45 million. On 14 November 2012, the respondent filed his Outline of Argument in which he contended that the market value of the Taras land at the relevant time was $16,626,115 based on Mr Sweeney's affidavit of 22 October 1998. 25 The trial proceeded on 6, 7 and 8 February 2013. In evidence in cross-examination, Mr Sweeney unequivocally acknowledged that there was an unintended error in this affidavit in so far as the attributed value of $16,626,115 did not include part of the development costs that had been incurred in relation to the land prior to August 1998 and that these costs had been erroneously omitted: see Taras v Commissioner at [180]-[185]. 26 As indicated above, after reasons for judgment were delivered, the respondent provided draft orders as requested, which were based on a market value for the Taras land at the relevant time of $18,191,719 (providing for the inclusion of these development costs). 27 In the circumstances set out above, I would not accede to the applicant's submissions as to costs. First, it should be borne in mind that the respondent was successful not just on the first and third issues that fell for determination in the substantive application but also on the second issue of market value. In this context, whether or not the respondent was successful on that issue is to be judged by reference to the case that the respondent ultimately ran at trial and not by reference to his position before he had received any pre-existing valuations in the applicant's possession or any other expert valuation evidence. 28 Secondly, when the respondent issued the assessments on 11 December 2009, he did this on the basis of the information available to him at the time. The respondent nonetheless indicated a willingness to consider pre-existing valuations when he requested them in his letters of 23 January 2012 and 14 March 2012. The applicant did not make these valuations (including Mr Sweeney's affidavit of 22 October 1998) available to the respondent until 21 March 2012. 29 Thirdly, the respondent's contention – that the market value of the Taras land was $16,626,115 – was made in written submissions filed on 14 November 2012 almost three months before the hearing. At this time, the respondent conceded (quite properly) that that the assessed amount of the capital gain was excessive. Practically speaking, as stated, the Court ultimately accepted the respondent's contention, subject to an adjustment to allow for the conceded error on the part of the applicant's expert, Mr Sweeney. 30 Fourthly, at no point during the trial, did Taras indicate that it might entertain the possibility that the Commissioner's figure or something like it was correct. On the contrary, in preparing for trial, the applicant, as noted above, adjusted the amount it contended was the market value of the land downwards from the figure of $11.88 million; and until immediately prior to the originally scheduled trial date in July 2012, the applicant maintained (as it did at the trial in February 2013) that the market value of the Taras land was $8.45 million. 31 In these circumstances, the carriage of the trial was not affected by the fact that in the written submissions filed on 14 November 2012 the respondent reduced the figure that he contended was the market value of the land at the relevant time. This is so, notwithstanding the Commissioner's concession in written submissions in November 2012 that the assessed amount of the capital gain was excessive. 32 For these reasons, I would not depart from the ordinary rule that the respondent, as the successful party, is entitled to his costs. I would therefore order that the applicant pay the respondent's costs, to be taxed in default of agreement. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny. Associate: Dated: 25 February 2014