Supreme Court New South Wales Medium Neutral Citation: Dungog Hardware 1 Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 1340 Hearing dates: 30 August 2013 Decision date: 30 August 2013 Jurisdiction: Equity Division - Revenue List Before: White J Decision: Refer to paras [27]-[29] of judgment. Catchwords: PROCEDURE - costs - substantive proceedings resolved by consent - whether defendant capitulated or there was genuine compromise by both sides - distinction between costs incurred in objection process and in review proceedings under Pt 10 of the Taxation Administration Act 1996 - whether special costs order warranted in respect of purported joinder as plaintiff of deregistered corporation Legislation Cited: Pay-roll Tax Act 1971 Payroll Tax Act 2007 Taxation Administration Act 1996 Cases Cited: Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 Australian Securities Commission v Aust-Home Investments Limited (1993) 44 FCR 194 One.Tel Limited v Commissioner of Taxation (2000) 101 FCR 548 Category: Principal judgment Parties: Dungog Hardware 1 Pty Ltd (1st Plaintiff) Clarencetown Hardware Pty Ltd (2nd Plaintiff) Freedom Homes Pty Ltd (3rd Plaintiff) Custom Transportable Buildings Pty Ltd (4th Plaintiff) Custom Transportable Buildings Kooragang Pty Ltd (5th Plaintiff) Chief Commissioner of State Revenue (Defendant) Representation: Counsel: C J Bevan (Plaintiffs) I Young (Defendant) Solicitors: Turner Freeman (Plaintiffs) Crown Solicitor (Defendant) File Number(s): 2010/142296 Judgment 1HIS HONOUR: On 7 June 2010 the plaintiffs filed their summons challenging Notices of Assessment issued by the Chief Commissioner on or about 12 February 2009 and seeking various declarations. The assessments covered periods both before and after the tax year ended 30 June 2007. There were five plaintiffs named in the summons, namely Dungog Hardware 1 Pty Limited (the first plaintiff), Clarencetown Hardware Pty Limited (the second plaintiff), Freedom Homes Pty Limited (the third plaintiff), Custom Transportable Buildings Pty Limited (the fourth plaintiff) and Custom Transportable Buildings Kooragang Pty Limited (the fifth plaintiff). By 7 June 2010 Custom Transportable Buildings Kooragang (CTBK) had been deregistered. 2The issues raised by the summons and by the assessments concerned the grouping of the plaintiffs for the purposes of the Pay-roll Tax Act 1971 and the Payroll Tax Act 2007. The Chief Commissioner had issued Notices of Assessment in the name of Dungog Hardware Pty Limited. That notice was issued incorrectly, either because there was no company of that name or, if there were, it was not the taxpayer that was intended to be the subject of the assessment. The Commissioner had intended to assess the partnership or the partners who carried on business under the name "Dungog Hardware". 3On the first return date, namely 16 July 2010, orders were made by consent. These included the making of the declaration sought in paragraph 1 of the summons that the Notices of Assessment in the name of Dungog Hardware Pty Limited were not Notices of Assessment issued to the first plaintiff, Dungog Hardware 1 Pty Limited. 4The Taxation Administration Act 1996 limits the proceedings in which assessments can be reviewed to proceedings following the Chief Commissioner's review of an objection. Accordingly, the parties agreed to a course that the defendant would issue Payroll Notices of Assessment to the Dungog Hardware Partnership, that the plaintiffs would lodge further objections in relation to grouping under s 72 of the Payroll Tax Act 2007, and the defendant would consider and determine any such objections. As a result of the parties agreeing to the procedure involving assessment, objection and review (the latter under Part 10 of the Taxation Administration Act) the proceedings were effectively put on hold. 5Objections and submissions were made. The Chief Commissioner took them into account in relation not only to the fresh Notices of Assessment issued to the Dungog Hardware Partnership, but in relation to other matters that were the subject of dispute in the proceedings. As a result, on 1 June 2012 the Chief Commissioner upheld the objection against the Dungog Hardware Partnership being included within what he called the primary group, consisting of the partners of that partnership, the plaintiffs and two other individuals or businesses. The Chief Commissioner said that having reviewed the material, including certain additional material, he determined that the Dungog Hardware Partnership was not grouped with the "Dungog Group" under the provisions of the Payroll Tax legislation. The effect of that decision was that it was unnecessary for Dungog Hardware 1 Pty Limited to pursue its claim for relief. 6By the same letter the Chief Commissioner also advised that he had come to the conclusion that the business of the second plaintiff, Clarencetown Hardware Pty Limited, was carried on independently of and was not substantially connected with the carrying on of the business of Freedom Homes or any other member of the group. He granted an exclusion to Clarencetown Hardware Pty Limited for all of the years in dispute. That exclusion would have been granted pursuant to ss 16B and 16C of the Pay-roll Tax Act 1971 in relation to the years up to 30 June 2007 and s 79 of the Payroll Tax Act 2007 in respect of the subsequent period. As a result of that decision it was unnecessary for Clarencetown Hardware to pursue its claims raised in the summons. Effectively, as a result of the objection process those plaintiffs obtained the substance of the relief they were seeking in the summons. 7In his Appeal Statement and Amended Appeal Statement the Chief Commissioner accepted that he should pay the first plaintiff's costs of the proceedings up to and including the directions hearing of 16 July 2010 and he accepted that he should pay the second plaintiff's costs of the proceedings, but not the costs of the objection process carried out pursuant to Part 10 of the Taxation Administration Act. 8In correspondence between the Crown Solicitor, acting for the Chief Commissioner, and Turner Freeman, acting for the plaintiffs, Turner Freeman accepted that each party should bear its own legal costs incurred during the period from 16 July 2010 to 1 June 2012. That was an acceptance, and a correct acceptance, of the proposition that legal or other expenses incurred in the Part 10 procedures for objections and the making of submissions should not form part of the costs of these proceedings. In due course I will make orders for the payment of the costs of the first and second plaintiffs, but because of the issues raised on this hearing about costs I will make an order for the benefit of the costs assessor to make it clear that costs incurred in the objection procedure are not to be included in the assessment of costs pursuant to the order that I will make. 9Following the Chief Commissioner's letter of 1 June 2012 the issues between the parties were essentially whether payroll tax should be assessed in respect of the remaining plaintiffs on the basis that Freedom Homes, the third plaintiff, and Custom Transportable Buildings (CTB), the fourth plaintiff, and CTBK, the purported fifth plaintiff, should be grouped. Different issues arose in respect of the years before 30 June 2007 and for the tax year ended 30 June 2008. That was because under s 79 of the Payroll Tax Act 2007 the Chief Commissioner has a wider discretion to exclude persons from a group than he did under s 16C of the 1971 Act. 10On 3 September 2012 Turner Freeman wrote to the Crown Solicitor and advised that CTB, CTBK and Freedom Homes accepted that the Commissioner did not have the power to de-group them for the periods before 1 July 2007. Counsel for the plaintiffs submits that from that time the only real issue in the proceedings was the payroll tax liability of Freedom Homes and CTB for the 30 June 2008 tax year. As I understood the submissions of Mr Bevan, who appeared for the plaintiffs, the work done from September 2012 related to the plaintiffs' liabilities for payroll tax in respect of the period after 1 July 2007. 11On 26 July 2013 I made orders by consent that resolved the substantive obligations of the plaintiffs. In substance, Freedom Homes consented to orders requiring it to pay payroll tax for the years ended 30 June 2005 and 30 June 2007. CTB agreed to orders requiring it to pay tax for the year ended 30 June 2005, and also agreed to pay payroll tax that had been assessed for CTBK for the years ended 30 June 2007 and 30 June 2008. The assessments for Freedom Homes and CTB for the year ended 30 June 2008 were set aside. 12The orders provided that the assessment for Freedom Homes for the year ended 30 June 2007 was also set aside. The Chief Commissioner says that was a mistake and is inconsistent with the order made whereby Freedom Homes agreed to pay the payroll tax in respect of that tax year. An issue was raised as to whether or not the orders did contain such a mistake. In the absence of agreement it was not possible to deal with that question under the slip rule as the orders could only be set aside on grounds on which a contract could have been set aside. In any event both parties are agreed that nothing of substance turned on that question, except possibly in relation to the costs argument, because of the order that Freedom Homes pay the payroll tax in an identified amount for the tax year ended 30 June 2007. I was told that that payment has been made. 13As nothing turns on the order setting aside the assessment for Freedom Homes for the year ended 30 June 2007, it can be seen that in substance CTB and Freedom Homes agreed to pay the tax for the earlier years, but the Commissioner accepted that the assessment for the year ended 30 June 2008 should be set aside. Presumably the reason for the difference is the wider discretion to exclude CTB, CTBK and Freedom Homes from a group pursuant to s 79 of the Payroll Tax Act 2007. 14The principles in relation to a determination of costs where proceedings have been resolved without a contested hearing were not in dispute (Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624-625; Australian Securities Commission v Aust-Home Investments Limited (1993) 44 FCR 194 at 201; One.Tel Limited v Commissioner of Taxation (2000) 101 FCR 548 at [6]). The difference between the parties is that the plaintiffs contend that the Chief Commissioner has effectively surrendered or capitulated, whereas the Chief Commissioner contends that there has been a genuine compromise involving give and take on both sides and as a result there should be no order as to costs. The plaintiffs seek their costs. Some particular issues arise in relation to the position of CTBK. 15As the first and second plaintiffs have been wholly successful I think they should have their costs of the proceedings and, indeed, that was conceded by the Chief Commissioner in his Appeal Statement. However, those costs are not likely to be substantial and will not extend to costs incurred after 16 July 2010 because the parties were agreed that subsequent costs related to the objection procedures. 16Mr Bevan submitted that the agreement of Turner Freeman to that position was extracted by duress and by the Chief Commissioner's having refused to perform his duty under the orders made by Gzell J on 16 July 2010 and by his refusal to perform his statutory duty under Part 10 of the Taxation Administration Act. I reject that submission. 17The Chief Commissioner complied with his obligations under the orders made on 16 July 2010 by issuing further assessments and dealing with the objections and ruling on them in accordance with his letter of 1 June 2012. In their letter of 3 September 2012 Turner Freeman addressed the question of how the whole controversy between the parties could be resolved. By that time the controversy included the periods after 1 July 2008. Turner Freeman noted that the plaintiffs would wish to raise s 79 of the Payroll Tax Act 2007 for de-grouping for each of the years after 1 July 2008, and in at least some cases they had not received assessments in respect of those years. It was in response to Turner Freeman's query as to how the whole controversy could be resolved that the Chief Commissioner advised that he would not agree to any course whereby legal costs of the process involving objections and the determination of objections would be bound up in the costs of the current proceedings. He stated correctly that there was a clear distinction in Part 10 of the Taxation Administration Act between the objection process and the review proceedings process in the Supreme Court and said that even if the plaintiffs obtained costs orders in the current proceedings, the plaintiffs were not entitled to any costs incurred between 16 July 2010 to 1 June 2012. He said that before he would consider engaging in a proceeding which would involve the plaintiffs applying to the Chief Commissioner for the de-grouping of Freedom Homes from CTB and CTBK he would need the parties to agree that each party would bear its own costs of any further exclusion application and any associated objection application and that such costs would not be referable to the current proceedings. That position was acceded to by Turner Freeman on 7 September 2012. They accepted what is clearly the correct position. No duress was applied. There was no failure on the part of the Chief Commissioner to obey the orders of Gzell J or to perform his statutory duties under the Taxation Administration Act. I do not think that that submission ought to have been made. 18The substance of the plaintiffs' submission in relation to the third and fourth plaintiffs, as I understood it, was that although those plaintiffs had agreed to make payments in respect of the years prior to 1 July 2007, all or at least the substantial majority of the costs that were incurred after 3 September 2012 related to those plaintiffs' post 1 July 2007 liability. In respect of that liability the Chief Commissioner had capitulated. 19Had the plaintiffs adhered to their position stated in Turner Freeman's letter of 3 September 2012 there may have been merit in that submission. However, the plaintiffs did not adhere to that position. 20In the plaintiffs' amended appeal statement filed on 8 April 2013 the plaintiffs stated that there was a live issue about the Chief Commissioner's discretion, which the Court would be asked to re-exercise, to exclude group members pursuant to ss 16B and 16C of the 1971 Act from the tax years up until 30 June 2007. (See paras 24 and 28). They contended in paragraph 32 that one of the real issues was whether the third and fourth plaintiffs carried on business in the relevant tax years independently of each other and were not connected with each other in the sense used in ss 16B and 16C of the 1971 Act for the period ending on 30 June 2007, and s 79 of the 2007 Act for the period commencing on 1 July 2007. They contended that those plaintiffs carried on business in the relevant tax years independently of each other and were not connected with each other in the sense used in ss 16B and 16C of the 1971 Act (para 37). 21Mr Bevan submitted that these statements were plainly a typographical error. I do not accept that. It appears clearly from the Amended Appeal Statement filed on 8 April 2013 and a draft of the Amended Appeal Statement annexed to the affidavit of Mr Goldberg of 4 April 2013 that there were deliberate inclusions of some of those matters in the Amended Appeal Statement as ultimately filed. Moreover, the plaintiffs' evidence sworn on 13 June 2013 expressly raised the issue of the grouping provisions for periods prior to 1 July 2007 and the exclusion provisions in s 16B and s 16C of the Pay-roll Tax Act 1971. 22When account is taken of the fact that notwithstanding Turner Freeman's letter of 3 September 2012, the third and fourth plaintiffs maintained the position that they were entitled to relief in respect of tax years prior to 1 July 2007, I think it is clear that the result ultimately arrived at by consent reflected in the orders of 13 June 2013 was a genuine compromise of the issues between the Chief Commissioner and those plaintiffs. 23It is necessary to say something about CTBK. In the orders of 26 July 2013 CTB consented to an order for it to pay payroll tax for which CTBK had been purportedly assessed. The amount involved is only $7,609.24. Mr Bevan for the plaintiffs submitted that this was a consent to the making of what he characterised as an ex gratia payment. I do not accept that analysis. There does not seem to have been any issue that CTB and CTBK formed a group for the purposes of the Payroll Tax Act 2007 and the Pay-roll Tax Act 1971. Even if neither company were grouped with Freedom Homes, CTB had a wages threshold that exceeded $600,000 and CTBK would have been liable for the tax as assessed. But for the deregistration of CTBK it seems that CTB would clearly have had a joint and several liability for the same tax. 24The deregistration of CTBK raised an issue that CTB might have sought to agitate as to whether it could be made jointly and severally liable when CTBK did not exist when the notice of assessment was issued. That question has not had to be decided. The plaintiff sensibly took the position that the costs involved in a reinstatement application in relation to CTBK and the issues that were raised were out of all proportion to the amount in dispute. 25Nonetheless, that payment as well as the other payments of tax that CTB and Freedom Homes agreed to make were part of a compromise. The characterisation of the payment as an ex gratia payment is unwarranted. 26The Chief Commissioner sought special costs orders in relation to the purported joinder of CTBK as a plaintiff, notwithstanding that it had been deregistered. Initially he sought an indemnity costs order from the other plaintiffs in respect of CTBK but ultimately sought an ordinary costs order. As I understood the Chief Commissioner's argument it was that he incurred additional costs by reason of the joinder of CTBK that should not have been incurred and that the other plaintiffs were responsible for that joinder. It would be very difficult, I think, on an assessment for a costs assessor to identify how much of such additional costs were truly caused by the joinder of CTBK as a party, bearing in mind that the dispute between the parties, had it gone to a final resolution, would have required the reinstatement of CTBK either by the Chief Commissioner or by the other plaintiffs, and that CTBK's liability for additional payroll tax was part of the dispute. But leaving aside the difficulties of identifying what, if any, additional costs were incurred by reason of CTBK's having been purportedly joined - and I must say none is apparent to me from the materials to which I have been taken - nonetheless it seems to me that all such questions fall away owing to the compromise of the proceedings. 27For these reasons, and subject to any submissions counsel may have as to the appropriate form of the order to be made, I propose the following orders: (1)Order that the defendant pay the costs of the first plaintiff and the second plaintiff of the proceedings. (2)Note that such costs do not include legal costs incurred during the period from 16 July 2010 to 1 June 2012, but do include costs of 16 July 2010. (3)Note that there was no issue between the defendant and the first and second plaintiffs after 1 June 2012. (4)Without disturbing prior costs orders, order that there be no order as to costs as between the third and fourth plaintiffs and the defendant, subject to any order that might be made as to the costs of this hearing. [Counsel addressed.] 28I make those orders. [Counsel addressed on costs.] 29The parties are agreed that there should be no order as to the costs of the costs application and I so order. I order that there be no order as to costs in respect of the hearing on costs. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 17 September 2013