FEDERAL COURT OF AUSTRALIA Commissioner of Taxation v Arnold [2014] FCA 959 Citation: Commissioner of Taxation v Arnold [2014] FCA 959 Parties: COMMISSIONER OF TAXATION v STEPHEN PAUL ARNOLD, LEAF CAPITAL PTY LTD (ACN 136 955 265) and DONORS WITHOUT BORDERS (ACN 139 263 871) File number: NSD 1351 of 2012 Judge: EDMONDS J Date of judgment: 10 September 2014 Catchwords: PRACTICE AND PROCEDURE – application to give evidence by video link – reliance on business commitments, treatment by regulatory authorities in Australia on previous occasions and litigation in Canada – evidence to be given centrally relevant to facts in dispute – witness credit in issue – cross-examination involving many documents – undertaking by Commissioner not to restrain departure of witness after giving evidence Legislation: Federal Court of Australia Act 1976 (Cth) s 47A(1) Taxation Administration Act 1953 (Cth) Sch 1, s 290-50 Cases cited: Australian Competition and Consumer Commission v Pirovic Enterprises Pty Ltd [2014] FCA 544 cited Australian Competition and Consumer Commission v World Netsafe Pty Ltd (No 1) (2002) 119 FCR 303 cited Campaign Master (UK) Ltd v Forty Two International Pty Ltd (No 3) (2009) 181 FCR 152 cited Dorajay Pty Ltd v Aristocrat Leisure Limited [2007] FCA 1502 cited Date of hearing: 26 August 2014 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 23 Counsel for the Applicant: Mr DJ Fagan SC with Mr JR King Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondents: Mr H Mirza Solicitor for the Respondents: Carmody Lawyers IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1351 of 2012 BETWEEN: COMMISSIONER OF TAXATION Applicant AND: STEPHEN PAUL ARNOLD First Respondent LEAF CAPITAL PTY LTD (ACN 136 955 265) Second Respondent DONORS WITHOUT BORDERS (ACN 139 263 871) Third Respondent JUDGE: EDMONDS J DATE OF ORDER: 10 SEPTEMBER 2014 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application be dismissed. 2. Costs of the application be costs in the cause. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1351 of 2012 BETWEEN: COMMISSIONER OF TAXATION Applicant AND: STEPHEN PAUL ARNOLD First Respondent LEAF CAPITAL PTY LTD (ACN 136 955 265) Second Respondent DONORS WITHOUT BORDERS (ACN 139 263 871) Third Respondent JUDGE: EDMONDS J DATE: 10 SEPTEMBER 2014 PLACE: SYDNEY REASONS FOR JUDGMENT Introduction 1 This is an interlocutory application filed by the first respondent ("Mr Arnold") on 17 July 2014 seeking an order that he be allowed to give testimony via video link in accordance with s 47A(1) of the Federal Court of Australia Act 1976 (Cth) ("the Act"). 2 I heard the interlocutory application on 26 August 2014. 3 An affidavit sworn by Mr Arnold on 16 July 2014 and filed the following day was read in support of the interlocutory application. 4 By originating application filed on 10 September 2012, the applicant ("Commissioner") seeks a declaration that each of Mr Arnold, the second and third respondents, companies of which Mr Arnold is a director, engaged in conduct that resulted in that or another entity being a promoter of a tax exploitation scheme, in contravention of s 290-50(1) of Sch 1 of the Taxation Administration Act 1953 (Cth) ("TAA"), and an order that each of Mr Arnold, the second and third respondents pay to the Commonwealth a monetary penalty in an amount to be determined by the Court. 5 The allegations made against the respondents were pleaded in a statement of claim filed the same day as the originating application. An amended statement of claim was filed on 30 April 2013 and an amended defence was filed on 8 May 2013. 6 The matter has been set down for hearing commencing Thursday, 2 October 2014 with an estimate of six days. 7 The Commissioner has filed some 31 affidavits, most of which he proposes to read on the hearing. The respondents have filed some 12 affidavits which they propose to read on the hearing, including two sworn by Mr Arnold. The Statutory Context 8 Section 47A(1) of the Act provides: (1) The Court or a Judge may, for the purposes of any proceeding, direct or allow testimony to be given by video link, audio link or other appropriate means. 9 Section 47C provides constraints upon the exercise of the power conferred by s 47A(1), however, those constraints are not relevant for present purposes. It is the manner in which the discretionary power conferred by s 47A(1) should be exercised in the present proceeding which divides the parties. Mr Arnold's Case 10 In his affidavit of 16 July 2014, Mr Arnold deposes that he is a Canadian resident and presently resides in North Rustico in the province of Prince Edward Island. Under the heading "Current Business Commitments", Mr Arnold deposes: 5. I cannot physically attend or come to Australia. I run a Bed and Breakfast business located in North Rustico on Prince Edward Island, Canada called "Around the Sea Rotating House, Suites & Tours". It is the only rotating Bed and Breakfast business which I am aware of in the world. 6. It is open for business 365 days per year and I am the main employee. The premises have 4 condo/suites which can sleep up to 6 people each and at any one time will have up to 24 guests on any given day. The guests require my full attention in order for me to successfully provide the services to them. 7. My wife, Ms Stephanie Arnold, is employed in a low paying job as a Research Assistant at the Climate Lab at the University of Prince Edward Island in a different city, Charlottetown and cannot look after the business if I were to go away. She is too busy with her job and in any case does not have the expertise to competently perform it. 8. I also personally provide tours of our facility and the premises to the public for additional income if there is sufficient demand in the market. I solely conduct these tours, which require my specific expertise as the world's only rotating bed and breakfast operator. These additional tours are based on demand from the public, but demand has been strong and I have conducted these tours almost daily for the last few months. The tours take place at the premises where the guests are staying. 9. Apart from my wife, my dependants include my two year old daughter and parents (72 and 75 years of age). My parents do not have their own income source other than old age pension and rely on my wife and me to provide for them and to take care of them. 10. On 15 July 2014, I accessed my business's TripAdvisor webpage and noted the reviews about the hospitality, which I personally provide at our business. I verily believe that a big feature and strength of our business is the great level of hospitality that I personally provide to guests … 11. I verily believe that our business would stop if I were not present to run it on a daily basis. The business cannot afford to hire somebody else. Even if the business could hire somebody else, that person would need to have specialised and expert knowledge to operate a rotating Bed and Breakfast. I do not think anyone else in the world would have the subset of skills or knowledge to operate such a business because this business is the only one of its kind on the planet. 12. Further, I verily believe that my parents are too old to physically withstand the day-to-day needs of the guests, my daughter is only two years old, and my wife works in another city every week so the business is totally dependent upon me to run it. 11 Under the heading "Previous Treatment in Australia", Mr Arnold deposes to his and his wife's previous treatment at the hands of regulatory authorities in Australia including their detention by Customs at Sydney Airport when departing Australia and the confiscation of their luggage; their detention by Customs at Sydney Airport on their return to Australia and the confiscation of their laptops for over two months denying them access to proprietary and business critical data; correspondence from the Australian Taxation Office to "cease and continue to desist from all promotion of this arrangement as a matter of urgency"; "raids" on the offices of the second and third respondents by officers of the Australian Taxation Office and armed police while "I was in Canada", and only his wife was present; the duplicate service of process in this proceeding when he was summoned off a plane at Sydney Airport waiting to take off to fly back to Canada; all of which "treatment and harassment" he puts down to his involvement "in the Donors Without Borders initiative". 12 Under the heading "Involvement in Legal Proceedings in Canada", Mr Arnold deposes that he has recently been informed by his Canadian lawyer that he should "stay close by and don't go far", so as to be available to give evidence in a proceeding to be shortly heard in the Tax Court of Canada. 13 In conclusion Mr Arnold deposes: Based on all of the reasons above, I am unable to be physically present in Australia for the Australian court proceedings. I am willing though to make myself available to provide evidence or to be cross-examined by video-link while in Canada. I verily believe that the Donors Without Borders project is an important initiative from a philanthropic perspective, that I and my related entities have been transparent about the initiative with the ATO at all times and that there is nothing to hide about it. The Commissioner's Opposition 14 The Commissioner opposed Mr Arnold's application on the following grounds. The Commissioner submitted that Mr Arnold's evidence is centrally factual to the dispute in a number of respects; indeed, at that time and absent the evidence filed by the respondents over the last two weeks, he was the respondents' case. The Commissioner submitted that it will be critical to the outcome of the case for the Court to assess Mr Arnold's credit, in particular, his evidence as to the veracity and genuineness of various loan agreements and his evidence concerning the ruling obtained from the Australian Taxation Office. Senior Counsel for the Commissioner estimated that Mr Arnold's cross-examination would be in the order of a couple of days, at least a day and a half, and that his cross-examination would involve taking him through many documents, a task which would be exceedingly difficult to effectively conduct and manage if he was to give his evidence by video link. 15 The Commissioner indicated that he was not in a position to assess the impact on Mr Arnold's business if he was to come to Australia. The Commissioner pointed out however, that Mr Arnold's stay here would only be short and that the period of his absence from his business would be no more than about one week. In any event, the Commissioner submitted, that was a subordinate consideration to the issue of Mr Arnold's credit, the importance of his evidence to the factual findings of the Court and the efficiency with which the case could be conducted. 16 In Australian Competition and Consumer Commission v Pirovic Enterprises Pty Ltd [2014] FCA 544 (27 May 2014), Flick J canvassed the authorities on both sides of the fence at some length and concluded, correctly in my view, that the exercise of the discretion conferred by s 47A(1) must be guided by the facts and circumstances of the individual case in which permission is sought to adduce evidence by way of video link. His Honour, again correctly in my view, indicated that it would be unwise, if not impossible, to attempt any exhaustive list of considerations relevant to the exercise of the discretion. Despite the lack of wisdom in doing so, his Honour indicated (at [11]) that the following considerations may assume relevance: (1) The extent to which the proposed witness seeks to give evidence of facts relevant to the dispute as opposed to opinions founded upon, or largely founded upon, agreed facts or assumptions; (2) whether the parties are in agreement as to the utility in allowing evidence to be given by way of video link; (3) whether the proposed evidence is centrally relevant to the issues to be resolved or more tangential to those matters of real dispute; (4) the extent to which any cross-examination may be inhibited by the absence of the witness being present; (5) the relevance of the evidence the subject of any cross-examination – the more limited the cross-examination and the more questionable the relevance of the evidence the more limited may be the prejudice to the cross-examiner; (6) the reasons proffered by the witness as to the inability to come to Australia; and (7) the practical impediments that a refusal to allow cross-examination to proceed by way of video link upon the ability of a party to present its case. 17 His Honour indicated that considerations in any particular case could also include: (1) Factors peculiar to the proposed witness, including ill-health or an inability to freely travel to and depart from Australia; and (2) the extent to which the Court itself may consider that it would be assisted by evidence being given in person. 18 Finally, his Honour said that the overriding consideration must forever remain what is considered by the Court to be in the best interests in the administration of justice, including the need to ensure that justice is done as between the parties. That is undoubtedly correct. 19 Not all of these considerations are relevant in the present case however, those that are relevant, point strongly in the direction that Mr Arnold's application should be refused and that he should be required to give his evidence, and be cross-examined on that evidence, in person. Mr Arnold's evidence goes to the facts central to the dispute and its resolution by the Court; Mr Arnold's application to give his evidence by video link is opposed by the Commissioner; any cross-examination of Mr Arnold will be inhibited if he gives his evidence by video link – both in terms of the efficiency of its conduct and in forensic assessment. Mr Arnold's credit in respect of the evidence he proposes to give is very much in issue in this proceeding. 20 For all these reasons, I am mindful of what was said by Buchanan J in Campaign Master (UK) Ltd v Forty Two International Pty Ltd (No 3) (2009) 181 FCR 152 at [77] and [78]. His Honour there reviewed the authorities (including Australian Competition and Consumer Commission v World Netsafe Pty Ltd (No 1) (2002) 119 FCR 303 and Dorajay Pty Ltd v Aristocrat Leisure Limited [2007] FCA 1502) and observed: [77] However, with respect to those who have taken a different view, I think there is a significant difference in emphasis in the two lines of authority. One, essentially pragmatic, matter which arises from the differences of view to which I have drawn attention is where the practical onus of persuasion lies. Despite the undoubted efficiencies available in an appropriate case, the trend of authority seems to me to emphasise the need for a persuasive case to be made out to use a video link to take evidence, particularly to impose it on an unwilling cross-examining party, rather than the reverse. [78] I share the concerns expressed by Spender J in World Netscape [sic] and by Stone J in Dorajay about the limitation on the effectiveness of video link arrangements as a means of taking oral evidence. I am particularly troubled by the prospect (or possibility) that the cross-examination of an important witness might be rendered less effective by the limitations of video link technology or the absence of the witness from the courtroom. Although the days are gone when witnesses are expected to feel any sense of intimidation as an aid to telling the truth, there is no doubt in my mind that the requirement to give evidence on oath or affirmation in the (generally) solemn atmosphere of a courtroom in the presence of a judge, and to answer questions in cross-examination in the presence also of cross-examining counsel, has at least three potential benefits. It enhances the prospect that the witness will remain conscious of the nature and solemnity of the occasion and of his or her obligations. It affords the cross-examiner some reassurance that the gravity and immediacy of the moment, and of the supervising presence of the judge, are not lost on the witness and the cross-examination is not thereby rendered any less effective, to the possible prejudice of the cross-examining party. It provides the Court with a more satisfactory environment in which to assess the nature, quality and reliability of responses by a witness, both to questions and to the overall situation presented by the necessity to give evidence in court. To my mind there remains, even in the modern context, a certain "chemistry" in oral interchanges in a courtroom, whether between a judge and counsel (or other representative) or between cross-examiner and witness. I would not wish too lightly to deprive a cross-examiner of that traditional forensic element in the exchange although, as the cases universally make clear, the Court must now, if asked to do so, balance the interests of a cross-examining party against claimed inconvenience both in individual cases and with respect to individual witnesses. Notwithstanding the increased availability and use of video link technology, in my view, a case must be made out for the use of video link evidence if it is opposed by an affected party. I do not share the view expressed by Katz J. My own view and, I think, the weight of authority, is to the contrary. 21 The only matter which causes me some concern is the possibility that if Mr Arnold was to come to Australia for the hearing, he might be restrained from leaving to return to Canada after the hearing on account of Australian tax liabilities he presently has. My concern in this regard has been alleviated by the Commissioner proffering an undertaking in the following terms: Having had regard to Mr Arnold's individual circumstances as a person owing tax-liabilities, within the meaning of s 255-1 of Schedule 1 of the TAA, if Mr Arnold comes to Australia to give evidence in this proceeding the Commissioner undertakes not to issue a departure prohibition order, within the meaning of s 14S of the TAA, in respect of Mr Arnold or to seek some other similar form of restraint against Mr Arnold, upon the conclusion of Mr Arnold giving evidence in this proceeding. 22 In the face of this undertaking, and for the reasons previously canvassed, Mr Arnold's application to give evidence by video link must be refused. 23 The costs of this application should be costs in the cause. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds. Associate: Dated: 10 September 2014