Cases update – Commissioner ordered to pay Indemnity Costs and Role of Tribunal on review of Private Rulings

Amongst the excitement of the appeal and decision of the Full Federal Court in the Multiplex case (I will post my analysis of the decision on Monday), during the last week there were two decisions handed down which also warrant a mention.  The cases do not directly involve GST, but are nevertheless important decisions.

Indemnity costs ordered against the Commissioner

In Commissioner of Taxation v Clark [2011] FCAFC 140 (10 November 2011) the Full Federal Court granted the taxpayer’s application that the Commissioner pay indemnity costs of the appeal as from the date on which an offer of compromise was made.  A similar order was made by the Federal Court in International All Sports Ltd v Commissioner of Taxation (No 2) [2011] FCA 1027 and my post on that decision can be accessed here.

The taxpayer was successful at first instance and during the course of the appeal by the Commissioner, made an offer of compromise of $5,000 plus the Commissioner’s costs of the appeal to date.  The Commissioner rejected the offer on the basis that it was significantly below the tax thought to be owed by the Commissioner – indeed, before the Full Court the Commissioner argued that the offer was “trivial”.

The Commissioner relied on a number of contentions, which the Court summarised into the following four propositions (at [20]):

  • the Commissioner is neither permitted nor obliged to take into account, in deciding whether to accept any of the offers, the outcome at first instance and the reasons given for that outcome;
  • the Commissioner asserts that his decision was taken in accordance with his own policies and procedures and that this assertion is an answer to the applications for costs on an indemnity basis;
  • 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 purposes of Order 23 of the Federal Court Rules, must involve the offer of a substantial amount, having regard to the amounts of the assessment in question.

While the Full Court did not reject the proposition that the Commissioner’s policies and procedures on settlement may, in an appropriate case, inform any exercise of the Court’s discretion on costs, the Court (at [28]) rejected the contention that these policies allowed the Commissioner to “escape the Court’s scrutiny of his conduct of litigation, including his conduct in refusing to accept offers of settlement”.  Interestingly, the Court made reference to the Commissioner’s response to the request for test case funding as being potentially relevant in considering this issue.

The Court rejected the other contentions by the Commissioner.  In doing so, the Court noted that the Commissioner faced significant problems in the appeal and that he should have taken those into account in the course of considering the offer.  In taking this view, the Full Court expected the Commissioner to take into account the same considerations faced by private taxpayers when conducting litigation.

This decision, along with that of Jessup J in International All Sports, have the potential to change the way taxpayers approach Part IVC litigation with the Commissioner.  One may expect to see a greater use of Offers of Compromise by taxpayers.  Also, it may put additional pressure on the Commissioner to agree to test-case fund more cases.

Private Rulings – the binding nature of the “arrangement”

In Yip and Commissioner of Taxation [2011] AATA 785 (4 November 2011) the Tribunal considered the scope of its role in an application to review a private ruling made by the Commissioner.  While the case involved Part IVA of the Income Tax Assessment Act 1936, the case is nevertheless important for GST as it considered the private rulings regime under Chapter 5 of Schedule 1 to the Taxation Administration Act 1953, being the same provisions under which taxpayers can now object to GST private rulings.

The following points can be taken from the judgment:

  • the private ruling is made on the “arrangement”, which means the set of facts that constitute the arrangement.
  • the taxpayer specifies what the relevant facts are that constitute the arrangement.  The Commissioner may request further information, but once the private ruling is made the Commissioner and the taxpayer are bound by it.
  • When making a private ruling, the Commissioner does not make findings of fact, he simply identifies facts that then states his opinion about the way in which the relevant tax laws apply to the applicant in relation to those identified facts.
  • If a taxpayer seeks a review of the private ruling before the Tribunal, the subject matter of that review is the arrangement as identified by the Commissioner in his private ruling.  Upon review, the Tribunal is limited to the facts that constitute the arrangement.  The Commissioner and the Tribunal are bound by those facts.
There are lessons from this decision for those taxpayers who are looking to request, or to object to,a GST private ruling, as well as for the Commissioner.  While it remains true that a private ruling is only effective to the extent that the facts of the arrangement reflect what actually happens, this decision shows that it is not open to the Commissioner, the Tribunal (or indeed the taxpayer) to “re-open” the factual basis of the private ruling once it is made.

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