FEDERAL COURT OF AUSTRALIA Sandini Pty Ltd v Commissioner of Taxation (No 2) [2017] FCA 905 File number: WAD 754 of 2015 Judge: MCKERRACHER J Date of judgment: 7 August 2017 Catchwords: COSTS – whether departure from usual rule is appropriate – discretion to apportion costs on an issues basis – indemnity costs sought – whether contentions made ought not to have been advanced – whether contentions made prolonged the matter unnecessarily warranting indemnity costs order Legislation: Federal Court of Australia Act 1976 (Cth) s 43(2), 43(3)(c) Federal Court Rules 2011 (Cth) rr 40.01, 40.02 Cases cited: Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 Donoghue v Commissioner of Taxation [2015] FCA 301 Lamesa Holding BV v Commissioner of Taxation [1999] FCA 738 Major Engineering Pty Ltd v Helios Electroheat Pty Ltd (No 2) [2006] VSCA 114 McFazdean v Construction, Forestry, Mining and Energy Union (2007) 20 VR 250 Re Wilcox; Ex parte Venture Industries Pty Ltd (1996) 72 FCR 151 Sandini Pty Ltd v Commissioner of Taxation [2017] FCA 287 Spotless Group Ltd v Premier Building and Consulting Pty Ltd [2008] VSCA 115 Date of hearing: Determined on the papers Date of last Submissions: 27 July 2017 Registry: Western Australia Division: General Division National Practice Area: Taxation Category: Catchwords Number of paragraphs: 24 Counsel for the Applicants: Mr SHP Steward QC with Mr FD O'Loughlin Solicitor for the Applicants: Jackson McDonald Counsel for the First Respondent: Mr TP Burrows Solicitor for the First Respondent: Australian Government Solicitor Counsel for the Second and Third Respondents: Mr S Owen-Conway QC with Mr JF Park Solicitor for the Second and Third Respondents: Park Legal Solutions ORDERS WAD 754 of 2015 BETWEEN: SANDINI PTY LTD (ACN 008 921 417) AFT THE KARRATHA RIGGING UNIT TRUST First Applicant WABELO PTY LTD (ACN 008 921 426) AFT THE ELLISON FAMILY TRUST Second Applicant CHRISTOPHER JAMES ELLISON (and another named in the Schedule) Third Applicant AND: COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA First Respondent DEBBIE MAREE ELLISON Second Respondent WAVEFRONT ASSET PTY LTD (ACN 139 479 968) ATF THE FELSTEAD FAMILY TRUST Third Respondent JUDGE: MCKERRACHER J DATE OF ORDER: 7 AUGUST 2017 THE COURT ORDERS THAT: 1. The first respondent pay 40% of the applicants' costs on a party and party basis, to be assessed if not agreed. 2. The second and third respondents pay 60% of the applicants' costs on a party and party basis, including the costs of the interlocutory application heard on 7 September 2016, to taxed if not agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT MCKERRACHER J: INTRODUCTION 1 In Sandini Pty Ltd v Commissioner of Taxation [2017] FCA 287 (Sandini No 1), I granted declaratory relief in favour of the applicants. I adopt the terms as defined in Sandini No 1. The Commissioner and Ms Ellison opposed the relief. 2 The parties requested the opportunity to make submissions in relation to costs. Those submissions have now been filed. The submissions for the respondents were filed on 21 July 2017. 3 The applicants enjoyed success in almost all arguments raised on the issues between the parties. They seek costs as against the respondents, but on some matters, as against Ms Ellison on an indemnity basis. For reasons developed below, I consider that the applicants should have its costs as against the respondents, but with a greater preponderance of costs being borne by Ms Ellison. I am not satisfied that the award of costs should be on an indemnity basis. GENERAL PRINCIPLES 4 Relevantly to this costs debate, it is well established that: (a) ordinarily costs follow the event and are on a party and party basis: Federal Court Rules 2011 (Cth) (FCR), r 40.01 and see Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 per Sheppard J (at 232); (b) the Court can order that costs be paid on another basis (r 40.02 FCR), including on an indemnity basis (r 40.02, Note 1 FCR); (c) the circumstances of the case must be such as to warrant a departure from the ordinary case (Colgate (at 233)). There should be some special or unusual feature in the case (Colgate (at 233)) and while categories of case warranting departure from the usual rule have been listed from time to time, those categories are not closed (Colgate (at 233), Donoghue v Commissioner of Taxation [2015] FCA 301 per Logan J (at [11])); (d) wilful disregard of known facts or clearly established law, conducting litigation with an ulterior motive, making allegations or contentions that ought never have been made and prolonging a case unnecessarily can attract an indemnity costs order (Colgate (at 233-234) and Donoghue (at [12])); (e) the rationale for an indemnity costs order is not punitive; rather it is compensatory (Donoghue (at [19])); (f) an indemnity costs order can relate to part of a case (Donoghue (at [19])); (g) cases (and in light of the above parts of cases) manifestly weak from the outset can attract such an order (Lamesa Holding BV v Commissioner of Taxation [1999] FCA 738 per Sackville J (at [3])); (h) the phrase 'costs as between party and party' is defined in the Dictionary at Sch 1 FCR as 'only the costs that have been fairly and reasonably incurred by the party in the conduct of the litigation'; (i) the Court has a broad discretion on the issue of costs: see s 43(2) of the Federal Court of Australia Act 1976 (Cth), which provides that 'except as provided by any other Act, the award of costs is in the discretion of the Court or Judge'. This discretion is absolute and unfettered, subject to the requirement that it be exercised judicially (Re Wilcox; Ex parte Venture Industries Pty Ltd (1996) 72 FCR 151 (at 152)); (j) the Court is explicitly empowered to order the parties to an action to bear costs in specified proportions (s 43(3)(c) of the Act); (k) the Court can apportion costs between the parties by taking into account the success (or lack of success) of the parties on an issues basis, so as to do 'substantial justice' between the parties (McFazdean v Construction, Forestry, Mining and Energy Union (2007) 20 VR 250 (at [153]) and Spotless Group Ltd v Premier Building and Consulting Pty Ltd [2008] VSCA 115 (at [14]-[16])); and (l) the Court will apportion costs between parties on a broad basis as a 'matter of impression and evaluation rather than arithmetic precision' (Major Engineering Pty Ltd v Helios Electroheat Pty Ltd (No 2) [2006] VSCA 114 (at [5])). THE APPLICANTS' COSTS CONTENTIONS 5 The applicants point to the fact that Ms Ellison argued, amongst other matters, the following propositions: (a) no matter had arisen in a constitutional sense, leaving the Court without jurisdiction to make a declaratory order; (b) the Court should not exercise its jurisdiction to make a declaration in the applicants' favour because there was an appropriate legislative scheme under Pt IVC of the Taxation Administration Act 1953 (Cth) which provides the mechanism for the conduct of taxation objections, reviews and appeals; (c) the description of the applicants in the Family Court Order as the Trustee of the Ellison Family Trust, as distinct from the Karratha Rigging Unit Trust, meant that it was impossible to comply with the Family Court Order; and (d) Ms Ellison did not send or it had not been proved that she had sent the 29 September Email by which I found that she made the relevant direction to Mr Ellison. (discrete issues) 6 The Commissioner did not argue these discrete issues, indeed argued against some of them. The Commissioner limited his argument to the entitlement to roll-over relief pursuant to s 126-5 and s 126-15 of the Income Tax Assessment Act 1997 (Cth). Ms Ellison also argued those matters, both by adoption of the Commissioner's arguments and by some additional contentions. 7 The applicants say that the discrete issues prolonged the hearing, caused additional unnecessary costs to be incurred and ought not to have been advanced at all. The applicants also say that an interlocutory hearing conducted on 7 September 2016 was not necessary. 8 The applicants submit that the appropriate orders are that all respondents should pay the applicants' costs of the proceedings on a party and party basis, to be taxed if not agreed, except that Ms Ellison should pay the costs on the discrete issues on an indemnity basis or, alternatively, on a solicitor/client basis, to be taxed if not agreed. 9 This order may be problematic because the first limb of the order in requiring the Commissioner to pay costs of all the hearing would be unjust. The Commissioner expressly disavowed reliance on those matters raised solely by Ms Ellison. The Commissioner was also put to cost and expense on those issues. THE APPROACH TAKEN BY THE Commissioner 10 The Commissioner correctly, in my assessment, accepts the contention of the applicants that the discrete issues increased the cost of the proceedings and Ms Ellison was unsuccessful in all of them. 11 If indemnity costs are not awarded, the Commissioner says an appropriate allocation of costs would be that the Commissioner pay 40% of the applicants' costs, to be assessed if not agreed and Ms Ellison should pay 60% of the applicants' costs, to be assessed if not agreed. 12 The Commissioner contends that these are the most appropriate orders because it was necessary for the Commissioner also to deal with the additional discrete issues raised by Ms Ellison in that he was required to: (a) consider and respond, including by way of pleadings and submissions to the discrete issues; (b) increase the amount of time spent preparing for the main hearing and attending on a longer trial to deal with argument on the discrete issues; and (c) prepare for and attend the interlocutory hearing to deal with some of the discrete issues. 13 As noted, the Commissioner did not rely upon those discrete issues. He considered there was a 'matter' and a declaration would be helpful and functional if the Court were so minded. He argued against the declaration on other grounds. 14 The allocation on a percentage basis, the Commissioner says, would result in 'substantial justice' between the parties. MS ELLISON'S CONTENTIONS 15 Quite surprisingly, Ms Ellison suggests there should be no costs of the proceedings made against her or, in the alternative, a discount should be applied. Ms Ellison argues that the applicants and the Commissioner joined her to the proceedings without prior consultation about such proposed joinder and on the terms of consent orders agreed between the applicants and the Commissioner, which orders were not circulated to Ms Ellison prior to the application being made. 16 I disagree. Ms Ellison could have applied not to be joined to the proceedings if she objected to that course. Rather, she took a particularly active role in the proceedings, more so than the Commissioner, and argued more points than the Commissioner. It was clear that the outcome of the proceedings, at least in this Court, if not ultimately in the Family Court of Western Australia, would have a significant impact on her interests. The Court could not have proceeded without Ms Ellison having had the opportunity to be heard in these matters. There would justly have been complaint had it done so. 17 Secondly, Ms Ellison says she was not directly involved in the dispute between the applicants and the Commissioner. But Ms Ellison was directly involved in the commercial affairs in a very material way. She (or the trust she controlled) was the recipient of the shares on which the CGT argument revolved. Ms Ellison says that she has not received a position paper from the Commissioner, nor has she been invited to put forward to the Commissioner her submissions regarding any potential tax which may at some time later be assessed against her (or the trust she controlled) in respect of a share transaction. 18 The applicants were entitled to seek the declaratory relief. It directly arose out of a significant transaction in which Ms Ellison benefited and her interests were directly affected. Those matters should not have been resolved in the absence of Ms Ellison having the opportunity to present her arguments. She was afforded that opportunity and did not suggest she did not wish to be heard. At no time did she raise any contention in the proceedings that she should not have been a party. 19 Ms Ellison contends that the description by the applicants of the discrete issues is inaccurate. She says that the constitutional issue about whether there was a matter arose only because notices under s 78B of the Judiciary Act 1903 (Cth) were issued. No attorney sought to intervene, but the constitutional issue was squarely raised by Ms Ellison, not by the issuing of the notices. 20 The raising of the discrete matters did extend the hearing. I do accept, however, all matters were dealt with efficiently by all counsel. 21 It will be apparent from my reasons in Sandini No 1 that I did not agree with the discrete issues that were raised. However, while there was no doubt that the applicants and the Commissioner are entitled to costs in respect of those discrete issues, I do not consider that the raising of those issues should attract an order for costs made on an indemnity basis. Without going into detail, in my assessment, to varying degrees, the discrete issues were not sufficiently unmeritorious to warrant an indemnity costs order. 22 There were some difficulties at the interlocutory level. In order to aid the efficiency of the main hearing, the interlocutory hearing was conducted to deal with some of those matters. Whilst no doubt cost was occasioned in this interlocutory hearing, it clearly reduced the length of time of the main hearing. Matters were resolved largely as a result of exchanges. It was not necessary to produce written reasons disposing of the matters arising at that hearing. Ms Ellison also says that the applicants should pay the second and third respondents costs of the interlocutory application because: (a) Ms Ellison requested documents and particulars from the applicants by correspondence, each of which requests were denied; (b) the applicants asserted they would not respond to Ms Ellison's requests unless Ms Ellison brought an interlocutory application; (c) the applicants satisfied Ms Ellison's requests and amended their claim, each of which actions affected the argument at the interlocutory hearing; (d) Ms Ellison's argument for a stay of the proceedings would have been successful but for the undertaking given by senior counsel for the applicants to withdraw Mr Ellison's 'nunc pro tunc' application in the Family Court; (e) The interlocutory hearing canvassed matters outside the terms of the interlocutory application including: (i) the further amendment to the applicants' originating application; (ii) the applicants' objections to Ms Ellison's 'first' affidavit; (iii) the referral of the matter to mediation; and (f) the 'jurisdictional issues' the subject of part of the interlocutory application were very briefly heard as part of the trial and did not prolong the hearing of the trial. 23 As indicated above, in my view, the interlocutory application was necessary to progress the matter to a final hearing and to limit the costs of that final hearing. I accept that the applicants did not necessarily succeed on every argument in that interlocutory hearing and that Ms Ellison may have succeeded in some of her contentions. Notwithstanding this, the parties were at an impasse on some matters and it was inevitable that those matters should be resolved by the Court to ensure that the matter could proceed as efficiently as possible in relation to time and costs. My impression is that the position taken by the applicants at that hearing was in large measure entirely reasonable and was certainly necessary as part of the preparation of the matter for ultimate hearing. I consider it should have its costs of the interlocutory application. CONCLUSION 24 In short, in my view, for the reasons stated, the costs order most appropriate to do justice between the parties is that advanced by the Commissioner. I will make an order in those terms. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher. Associate: Dated: 7 August 2017 SCHEDULE OF PARTIES WAD 754 of 2015 Applicants Fourth Applicant: ELLISON (WA) PTY LTD (ACN 135 966 773)