The Commissioner of Taxation was dealt a heavy blow in the
Federal Court last Thursday, when ordered to pay taxpayers' costs
in respect of the appeal on an indemnity basis, pursuant to Order
23 Rule 11(6) of the Rules of Court.
On 21 January 2011, the Federal Court dismissed appeals by the
Commissioner against decisions of Greenwood J to set aside
objection decisions of the Commissioner, and allowed objections by
the taxpayers against amended income tax assessments. Following
this 'victory', the taxpayers sought costs orders against the
Commissioner.
Prior to the hearing of the appeal, the taxpayers had made
several settlement offers to the Commissioner, all of which were
quickly rejected by the Commissioner. The court rejected the
proposition made by the Commissioner that a tax appeal differs
significantly from a private litigation, and ruled that the
Commissioner could not escape the court's scrutiny of his conduct
in refusing to accept the offers.
The court found four propositions implicit in the Commissioner's
reasons for rejecting the taxpayers' offers. These propositions
were:
- the Commissioner is not obliged to take into account the
outcome at first instance in deciding whether to accept any
offer;
- the Commissioner's assertion that payment arrangements included
as part of a settlement of a tax dispute must be in accordance with
his own policies and procedures, is an answer to the taxpayers'
application for costs on an indemnity basis; and
- the Commissioner has, by his prescription of policies and
procedures, limited his own power to compromise litigation to which
he is a party; and any offer to settle, for the purpose of Order
23, must involve the offer of a substantial amount.
The Commissioner also asserted that the taxpayers in question
could not establish that the Commissioner's assessments were
excessive, and that the offers were not genuine attempts to reach a
negotiated settlement.
The court rejected the Commissioner's assertions but accepted
that in appropriate cases, the public interest may be better served
by having the '[c]ourt decide a case…rather than settling it
upon the basis of purely commercial considerations'. However,
the court did not accept that the Commissioner had identified any
particular aspect of his policies and procedures that entitled him
to 'persevere in the prosecution of the appeals in the face of
reasonable offers of settlement'. The court held that it was
unreasonable for the Commissioner to reject the offers made to him,
at least in the absence of any countervailing consideration, and
therefore was liable to compensate the taxpayers for the
consequential losses incurred.
The court noted the High Court case of Australian
Communication Exchange Ltd v Deputy Commissioner of Taxation
(2003) in which they commented, in relation to an appeal
against the Commissioner's disallowance of an objection, that
'this remains civil litigation between parties who have
identified the issues upon which they are joined'. The Federal
Court maintained that the Commissioner was not in a special class
of litigant and remained answerable to the court regarding his
conduct in litigation. This decision thereby offers encouragement
to taxpayers that in an appeal from a single judge of the Federal
Court to a Full Court, the Commissioner may still be required to
pay the taxpayers' costs on an indemnity basis where he has
rejected offers of compromise because, according to section 64 of
the Judiciary Act 1903 (Cth), 'the rights of parties
shall nearly as possible be the same… as in a suit between subject
and subject'.