YWCA Australia v Chief Commissioner of State Revenue (No 2)

On 15 December 2020, I delivered judgment in YWCA Australia v Chief Commissioner of State Revenue [2020] NSWSC 1798. What follows assumes familiarity with that decision. I made an order for costs as follows:

On 21 December 2020, YWCA Australia filed two notices of motion in proceeding numbers 2019/223120 and 2018/336819 seeking the following orders:

The following evidence was relied on for the purpose of the motions by YWCA Australia. I have treated that evidence as read on the motions and have taken it into account:

The Commissioner relied on the Guidelines approved by the Treasurer for the purposes of s 275(3)(b)(iii) of the Duties Act 1997 (NSW) which were Exhibit B in the principal proceedings. I have treated the Guidelines as part of the evidence and have taken them into account.

The terms of YWCA Australia’s offer were as follows:

The offer was open for 28 days from 11 May 2020. The Commissioner acknowledged receipt of the offer, but the offer lapsed without a substantive response.

Rule 20.26 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) provides, relevantly:

Rule 42.14 of the UCPR provides:

The principles in Calderbank v Calderbank [1976] Fam 93 are well known and need not be repeated here.

Section 3(1) of the Taxation Administration Act 1996 (NSW) defines “assessment” as:

The Duties Act is a “taxation law” for the purpose of s 3: s 4 of the Taxation Administration Act. By s 8(1) of the Taxation Administration Act, the Commissioner “may make an assessment of the tax liability of a taxpayer”.

By s 12 of the Taxation Administration Act, the Commissioner has the power to make a compromise assessment in the circumstances of, relevantly, s 12(1)(b):

Section 12(1)(b) was inserted into the Taxation Administration Act by the State Revenue Legislation Further Amendment Bill 2012 (NSW). The insertion of s 12(1)(b) clarified the Commissioner’s power to make a compromise assessment. The then Treasurer explained in the Second Reading Speech:

YWCA Australia submitted that:

YWCA Australia submitted that if the offer was treated as a Calderbank offer, the question would then be whether the Commissioner’s failure to accept the offer, in all the circumstances, warrants departure from the ordinary rule that costs follow the event. It was submitted that such a departure would be justified where in all the circumstances it was unreasonable of the Commissioner not to accept the offer. In considering the stage of the proceedings, the time allowed to consider the offer, the extent of the compromise and the Commissioner’s prospects of success, it was submitted to be unreasonable in all the circumstances for the Commissioner to have not accepted the offer.

YWCA Australia submitted that s 12(2) of the Taxation Administration Act expressly conferred power on the Commissioner to issue a “compromise assessment” in an amount specified in, or determined in accordance with, an agreement.

In essence, the Commissioner submitted that he was not in a position to accept and implement the offer because paragraph 1(d) of the offer required the Commissioner to issue an assessment or assessments pursuant to s 12(1)(b) of the Taxation Administration Act which would not have represented a valid and bona fide exercise of the Commissioner’s power to make an assessment. The difficulty with the offer from the Commissioner’s perspective was that paragraph 1(d) required the Commissioner to issue an assessment that would not have involved a properly available application of the law to the taxable facts. The Commissioner pointed out that ultimately in the trial YWCA Australia eschewed reliance on ss 275(3)(b) and 275A with respect to the Song Hotels. An assessment of any liability where s 275(3)(a) was engaged could not be above a nil amount.

The Commissioner submitted that Grofam Pty Ltd v Federal Commissioner of Taxation [1997] FCA 660; (1997) 36 ATR 493 was authority for the proposition that where a settlement of a dispute contemplates the issue of an assessment under the Act, the Commissioner must nevertheless produce an assessment capable or representing a valid and bona fide exercise of his power to make assessments of a taxpayer’s liability. The Commissioner contended that a compromise assessment issued under s 12 of the Taxation Administration Act must still involve a properly available application of the law to the taxable facts. The Commissioner submitted that there was no properly available method by which the Commissioner could have issued an assessment in respect of the properties the subject of the proceedings relying on any combination of ss 275(1)(a)/(3)(a) or 275(1)(a)/(3)(b) or 275A of the Duties Act in a total amount of $380,653.68.

I accept, as YWCA Australia submitted in reply, that the power to issue a compromise assessment under s 12(1)(b) should be given a broad interpretation. The power to compromise proceedings by issuing an assessment should not be read down unless it is necessary to do so. The extent of the Commissioner’s power of general administration of the tax legislation permits him to compromise litigation. It is clear that when the word “assessment” is used in the Taxation Administration Act it refers to “the process by which the provisions of the Act relating to liability to tax are given concrete application in a particular case with the consequence that a specified amount of money will become due and payable as the proper tax in that case”: Batagol v The Commissioner of Taxation of the Commonwealth of Australia (1963) 109 CLR 243; [1963] HCA 51 at 252 (Kitto J). In the case of a compromise assessment under s 12(1)(b) the amount specified becomes the amount due and payable as the proper tax in that case.

The cases referred to by the Commissioner as providing authority for the proposition that an assessment of the kind sought in the offer of compromise could not be made, R v Commissioner of Taxation (WA); Ex parte Briggs (1986) 12 FCR 301 and Grofam, are very different cases under different statutory regimes and no general principle applicable to this case may be extracted from them.

In my view the Commissioner had power to issue a compromise assessment in the amount the subject of the settlement offer. The provisions of s 12 of the Taxation Administration Act granting wide powers to make a compromise assessment should not be read down or limited unless it is necessary to do so. No reason to limit the existence of the power was shown. I would be very reluctant to conclude that making an assessment as part of accepting an offer of settlement was not a valid and bona fide exercise of the Commissioner’s power to make assessments. The offer made by YWCA Australia was an offer within the meaning of UCPR r 20.26 and the outcome for the Commissioner before me was less favourable than the terms of the offer. It was not seriously in dispute that the offer involved a substantial compromise by the taxpayer from the position it achieved in the litigation.

I have concluded, however, that despite there being power to make the compromise assessment, this is a case where, in the exercise of the power in UCPR r 42.14(2), I should “otherwise order”. It is relevant in the exercise of the power in UCPR r 42.14(2) that the offer of compromise asked the Commissioner to exercise a public power to make an assessment, albeit a compromise assessment. The peculiar facts of this case make it one where I should “otherwise order”.

There is a difference in the authorities about whether r 42.14(2) requires exceptional circumstances for the court to “otherwise order”: see Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 at [15] (Spigelman CJ, Beazley JA and McColl JA); Barakat v Bazdarova [2012] NSWCA 140 at [42]-[49] (Tobias AJA, with whom Bathurst CJ and Whealy JA agreed). It is not possible to state the circumstances in which the court’s discretion to “otherwise order” might be exercised: Leach v The Nominal Defendant (QBE Insurance (Australia) Ltd) (No 2) [2014] NSWCA 391 at [48] (McColl JA, with whom Gleeson JA and Sackville AJA agreed). It is not necessary to determine whether a court’s discretion to “order otherwise” under r 42.14(2) is confined to “exceptional circumstances”: see Barakat v Bazdarova at [48]; Leach v The Nominal Defendant (QBE Insurance (Australia) Ltd) (No 2) at [46]-[48]; Perisher Blue Pty Ltd v Nair-Smith (No 2) [2015] NSWCA 268 at [32]-[38] (Gleeson JA and Tobias AJA). To the extent that such circumstances are required, they are present here.

Although I accept that the Commissioner had power to make a compromise assessment, the taxable facts in the present case bore no relation, on either the Commissioner’s case or YWCA Australia’s case, to one warranting an assessment for the 2018 year in an aggregate amount (including duty, penalty taxes, interest or any other amount) not exceeding $380,653.68.

Although I continue to have considerable sympathy for YWCA Australia in being required to conduct these proceedings, it would in my view amount to an exceptional circumstance warranting my “otherwise ordering” for the Commissioner, as the officer responsible for enforcement and collection of the revenue in NSW, to be forced, on pain of an indemnity costs award, to make an assessment which in no way reflected a view of the taxable facts which may be established in the litigation.

In many revenue cases it is no doubt possible to reach a compromise figure and issue a compromise assessment reflecting a view of the taxable facts which was different from that which each party argued for but which reflected a sensible view about what a court may find in the matter. This was not such a case.

The case was framed initially as one where the court would be invited, in the alternative, to make an assessment for an amount less than the amount of the ultimate assessment pursuant to ss 275(3)(b)/275A. As I explained in the primary judgment at [232]-[244], however, by the time of the trial that part of YWCA Australia’s case involved a comparatively small sum. The issues in the trial essentially involved an all or nothing result for the Commissioner and YWCA Australia. Neither the Commissioner nor the taxpayer contended that the proper application of the law gave rise to taxable facts from which an assessment in the amount suggested in the offer of settlement could be made.

Despite the existence of the statutory power to make a compromise assessment, accepting YWCA Australia’s offer would have involved the Commissioner making an assessment contrary to any reasonably available argument about the operation of the taxable facts and the operation of the Guidelines. This in my view provides an exceptional and sufficient reason to “otherwise order”.

For essentially the same reasons, the rejection of the offer as a Calderbank offer by the Commissioner was not unreasonable in all the circumstances of the case.

It follows that the motions filed by YWCA Australia should be dismissed. Although the Commissioner succeeded in resisting an award of indemnity costs, he failed on his principal contentions about a lack of power to make a compromise assessment which involved a separable issue. For this reason, each party should pay their own costs of the motions.

I make the following orders: