FEDERAL COURT OF AUSTRALIA

McDermott Industies (Aust) Pty Ltd v Federal Commissioner of Taxation

[2004] FCA 1299

R D Nicholson J

7 October 2004 - Perth

R D Nicholson J.    On 13 August 2004, I delivered reasons for judgment dismissing an appeal by the applicant against the disallowance of its notice of objection made against an amended assessment of income tax in respect of the years of income ended 31 March 1994, 31 March 1995 and 31 March 1997: McDermott Industries (Aust) Pty Ltd v FCT (2004) 56 ATR 592. The effect of the decision was to disallow deductions claimed by the applicant (MIA) pursuant to s 51 of the Income Tax Assessment Act 1936 (Cth) in respect of payments it made between 1993 and 1997 to a Singaporean entity, Chartering Co (Singapore) Pte Ltd (CCS), to charter vessels from CCS for the purpose of MIA's offshore marine construction business. These supplementary reasons consider the appropriate costs order in the circumstances.

  2  It is not in dispute that pursuant to s 43 of the Federal Court of Australia Act 1976 (Cth), costs of the proceeding are in the discretion of the court and that such discretion is a wide discretion. The starting point is the general rule that, in the absence of special circumstances, costs follow the event: Hewlett Packard Pty Ltd v GE Capital Finance Pty Ltd (2003) 203 ALR 51; 47 ACSR 589; 22 ACLC 146; citing Hughes v Western Australian Cricket Association Inc (1986) ATPR 40-748 (48,134) at 48,136 per Toohey J; Ruddock v Vadarlis (2001) 115 FCR 229 at 234-240 [9]-[25] per Black CJ and French J.

  3  MIA submits that the special circumstance which exists here arises from the application of O 62, r 24 of the Federal Court Rules which reads:

   

24. Where a party to any proceeding serves a notice disputing a fact under Order 18, rule 2 (which relates to notices to admit facts) and afterwards that fact is proved in the proceeding he shall, unless the Court otherwise orders, pay the costs of proof.

 Order 18, r 2 relevantly provides:
   

2(1) A party to a proceeding may, by notice in accordance with Form 25 served on another party, require him to admit, for the purpose of the proceeding only, the facts or documents specified in the notice.

 

(2) If, as to any fact or document specified in the notice, the party on whom the notice is served does not, within 14 days after service, serve, on the party serving the notice to admit facts or documents, a notice in accordance with Form 26 disputing that fact or document, that fact or document shall, for the purpose of the proceeding, be admitted by the party on whom the notice to admit facts or documents is served in favour of the party serving the notice.

  4  The facts relevant to the determination of the legal issues in this proceeding were set out in MIA's statement of grounds filed on 18 April 2002.

  5  Although each of those facts have been asserted, accepted or not contested by the respondent (the Commissioner) in his objection decision and his statement of facts, issues and contentions dated 21 March 2002, a significant number were not admitted by the Commissioner in response to MIA's statement of grounds.

  6  On 19 June 2003, MIA served on the Commissioner a notice to admit the facts (the first notice) not admitted by the Commissioner in his statement of grounds. That notice sought admission for the purpose of the proceedings for the following 9 matters:

   

 1.  The applicant is a body corporate.
 2.  The applicant carries on business as an offshore marine construction contractor.
 3.  The applicant has, at all times, carried on business in Australia.
 4.  For the purposes of its business referred to in para 2 above, between 1 April 1993 and 31 March 1997, the applicant:
 (a)  bareboat chartered vessels (the vessels) from Chartering Co Singapore Pte Ltd (CCS) pursuant to lease agreements (the lease agreements) with CCS;
 (b)  at all material times used the vessels in Australia.
 5.  At all material times, the vessels referred to in para 4(a) constituted:
 (a)  industrial, commercial or scientific equipment;
 (b)  substantial equipment.
 6.  CCS is a body corporate.
 7.  CCS is incorporated in Singapore.
 8.  CCS has, at all material times, carried on a vessel chartering business in Singapore.
 9.  Pursuant to the lease agreements, between 1 April 1993 to 22 May 1996 the applicant paid charter fees (charter fees) to CCS in respect of the vessels bareboat chartered from CCS, as follows:

Period

Amount

1/4/1993 - 31/3/1994

$25,235,365

1/4/1994 - 31/3/1995

$15,749,917

1/4/1995 - 31/3/1996

$   844,586

1/4/1996 - 22/5/1996

$ 1,421,910

Total

$43,251,778

  7  By a notice disputing facts served pursuant to O 18, r 2 and dated 18 July 2003, the Commissioner disputed that the facts specified in paras 2, 3, 4, 5 and 8 of the first notice were questions of fact to be admitted, asserting that they were conclusions of mixed fact and law. The notice also stated that the matters raised in item 9 were not known or admitted. Additionally the notice admitted items 1, 6 and 7.

  8  By a second notice to admit facts (the second notice) dated 6 October 2003, MIA required the Commissioner to admit the matters according with items 4 and 5 of the first notice (save that the words "For the purposes" through to "above" were omitted).

  9  The solicitors for the Commissioner responded asserting that it was their view that the proposed changes outlined in correspondence between the parties did not cure defects in the first notice and that, as it was MIA's view that the matter was covered by its evidence, there was little point in incurring costs in debating the formulation of an unnecessary admission. It stated that the Commissioner would only seek to cross-examine a Mr Cuthbertson and would not require 2 other witnesses for cross-examination.

  10  In anticipation of a contest on the facts MIA prepared prior to trial a further affidavit of a Mr Rao with respect to a question of payment, but did not serve that affidavit.

  11  On the day of the trial, 2 March 2004, the Commissioner conceded there was no dispute as to the facts the subject of MIA's statement of grounds. As a consequence the need to cross-examine Mr Cuthbertson was avoided and the affidavit of Mr Rao was not filed. No reason was proffered by the Commissioner for making that concession.

  12  MIA submits that cost orders should be made in the following form:

 1.  Save as provided for in order 2, the applicant shall pay the respondent's costs of this proceeding.
 2.  The respondent shall pay the applicant's costs of proving each of the facts referred to in the applicant's notice to admit facts dated 19 June 2003.

  13  In support MIA says that the principles underlying the rule were those spelt out by Byrne J speaking of the equivalent provision in the Supreme Court Rules 1986 (Vic) in Meadow Gem Pty Ltd v ANZ Executors and Trustees (unreported, Supreme Court, Vic, Byrne J, 11 June 1996) where he stated:

   

Under r 63.18 [which is the equivalent costs order to rule 62.24 of the Federal Court Rules] prima facie, the disputing party must pay the costs of proof of a fact where a notice to admit has been given. The question raised in the present application, then, is whether the party so entitled to the costs should be deprived of those costs. In general, the incidence of party and party costs in litigation does not depend upon reasonableness or upon matters such as whether it was part of a party's cause of action or whether it was within a party's knowledge; it depends upon success. Rule 35.03 [which provides for the service of notices to admit] is intended to encourage parties, especially those who expect to be ultimately successful, to consider realistically whether they will put the other party to the cost of proving each and every fact. As a general rule, the respondent to a notice to admit a fact should, in my view, be in no different position with respect to that fact from the position of a defendant who puts the allegations in the plaintiff's statement of claim in issue. Absent some special factor, each of them thereby runs the risk that, if the plaintiff or the party giving the notice to admit succeeds, a costs burden must be accepted. It must be remembered, too, that this is not a once and for all decision for it is always open to a party at any later time to admit a fact alleged by an opposing party. The use of costs as an incentive to narrow the issues, to shorten trials and to save costs is found elsewhere in the rules, for example, r 26.18 (offer of compromise not accepted). In my opinion the primary question which a party in receipt of a notice to admit a fact or an offer of compromise must address is whether the noticegiver will prove that fact and obtain a result not less favourable than that contained in the offer.

  14  In reliance upon that statement, MIA submits that the Commissioner, having chosen to put it to proof of facts which were the subject of the first notice and thereafter established in the proceeding, must pay the costs of such proof. It is said no question of reasonableness arises. Further it is said that there can be no warrant in the circumstances for departing from the general rule applied by the Federal Court Rules, O 62, r 24 that the Commissioner should pay MIA's costs of proving each of the facts disputed by the Commissioner in his notice disputing facts dated 18 July 2003. The circumstances said to be particularly relevant are:

 (1)  the Commissioner's acceptance or assumption of the relevant facts for the purposes of his objection decision, statement of facts, issues and contentions, amended assessment, disallowance of MIA's objections;
 (2)  MIA's filing and service of extensive affidavit evidence in the context of no evidence being filed by the Commissioner;
 (3)  MIA's attempts to obtain admissions;
 (4)  the fact that the Commissioner had waited until the day of trial to indicate there was no contest on the facts; and
 (5)  no explanation was proffered by the Commissioner as to why it had not been possible to make a concession at some earlier time.

  15  The Commissioner submits that a response to a notice which goes beyond the power afforded by the Federal Court Rules, O 18, r 2 should not be visited with a costs sanction imposed by the Federal Court Rules, O 62, r 24 unless the notice clearly and unambiguously states a fact, admission of which is sought. Here it is said that the capacity to extract an admission in default of response conferred by the former rule is one given in respect of facts and not questions of law. It is argued that paras 2, 3, 4, 5 and 8 of the first notice sought admissions in relation to questions of law. Therefore, MIA's first notice did not ground the penalty provided for by the Federal Court Rules, O 62, r 24.

  16  Furthermore it is submitted that the Commissioner did not serve a notice disputing those facts but rather challenged the quality of MIA's notice as one within the Federal Court Rules, O 18, r 2.

  17  The Commissioner also submits that the second notice suffered the same defects as the first notice. In the latter case, additionally, the Commissioner did not serve a notice disputing MIA's notice so that the the Federal Court Rules, O 62, r 24 did not come into operation.

  18  Additionally, the Commissioner contends that the first notice did not narrow the issues to shorten the trial or to save costs as referred to by Byrne J in Meadow Gem. It is submitted the only potential function of the first notice was to shield MIA's witnesses from cross-examination should the Commissioner wish thereby to supplement MIA's evidence.

  19  Additionally, the Commissioner argues that in circumstances such as the present, the giving of a notice to admit facts (and the seeking of admission on pleadings) was inappropriate. This arises, it is said, because proceedings under Pt IVC of the Taxation Administration Act 1953 (Cth), although called "appeals", are in fact in the original jurisdiction of the court: TNT Skypak International (Aust) Pty Ltd v FCT (1988) 19 ATR 1067; 88 ATC 4279; 82 ALR 175. The result is that the Commissioner comes to argue events wholly within the knowledge of taxpayers. Consequently, it is contended adversarial procedures appropriate to a contest between parties to a commercial or common law dispute are inappropriate to judicial review proceedings. The Commissioner also says the jurisdiction to vary the award of costs under the Federal Court Rules, O 62, r 24 should not be exercised having regard to the circumstances set out above. The Commissioner submits, therefore, that MIA should be ordered to pay the Commissioner's costs on the usual basis.

  20  I agree with MIA's submission in reply that the operation of the presumption established by the Federal Court Rules, O 62, r 24 does not depend on the nature of the proceedings or becomes unreasonable in proceedings such as the present. There is nothing in the term of the Federal Court Rules which suggests it should be so confined.

  21  The issue here should be decided on the basis of whether or not the Federal Court Rules, O 62, r 24 applied in the circumstances.

  22  It is apparent from examination of Form 25 that a notice to admit facts is indeed confined to the admission of facts and the admission of authenticity of documents. Form 26 is similarly structured. The first notice was not compliant with Form 25, in that paras 2, 3, 4, 5, and 8 sought admissions of mixed questions of law and fact rather than of fact only. It operated, therefore, as a notice to admit facts only in respect of paras 1, 6, 7 and 9. The first 3 of those were admitted and the last was not admitted.

  23  The second notice sought again to obtain admissions of what had substantially been paras 4 and 5 in the first notice. The deletion of the words "for the purposes of its business referred to in para 2 above" from the second notice may arguably have had the effect of confining that item in the latter notice to an issue of fact. It has to be read with para 2 in the second notice which required a conclusion as to a mixed question of fact and law. However, MIA does not place any reliance on the second notice in seeking the special costs order.

  24  MIA disputes that any of the matters to which its notices related involve a mixed question of fact and law. It says the matters the subject of paras 2, 3, 4, 5, 8 and 9 of the first notice were matters alleged in paras 1(c), 2, 3, 4(c) and 5 of MIA's statement of grounds dated 18 April 2002 and that each was patently a question of fact. It argues this was acknowledged by the Commissioner's counsel at trial when he referred to paras 1-11 as involving matters of a factual character requiring findings to be made by the court, which were then approached by the court as such.

  25  I am unable to agree with MIA that the admissions sought in the first notice identified by the Commissioner as mixed questions of fact and law were not exactly that. They were clearly not only issues of fact. Their treatment at trial cannot preclude a true characterisation of them. I agree with what has recently been said by Gyles J in Multigroup Distribution Services Pty Ltd v TNT Australia Pty Ltd (2001) 109 FCR 528 at 530-531 [6] that if a matter specified in a notice to admit facts is not a fact, there will be no implied admission and no costs consequence. The large part of the first notice therefore should have no costs consequence.

  26  Order 62, r 24 is expressed in mandatory terms. So far, therefore, as the first notice related to facts which were disputed but then proved, MIA would be entitled to the application of that order in its favour. The only item being an issue of fact that was disputed is item 9 in the first notice and that was proved as a consequence of the Commissioner's admission. Therefore the special costs order sought by the applicant can operate only in respect of that item.

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