Commissioner of Taxation v Clark (No 2)
Document type: Decision Impact Statement
Venue: Federal Court of Australia (QUD 1 of 2010, QUD 2 of 2010)
Judgment date: 10 November 2011
Date published: 10 July 2012

Summary of decision:
Outlines the ATO's response to this case which concerns offers of compromise under Order 23 of the Federal Court Rules and Calderbank offers.

Overview of facts:
On 30 November 2009, Greenwood J, in Clark v Commissioner of Taxation [2009] FCA 1401, delivered judgment in relation to the taxation appeals in favour of the taxpayers. | On 4 January 2010, the Commissioner lodged an appeal to the Full Federal Court against his Honour's decision. | On 12 February 2010, prior to the hearing of the appeal, the taxpayers made offers of compromise pursuant to Order 23 of the Federal Court Rules (FCR). The offers were to settle the appeal proceedings on the basis that each taxpayer would pay the Commissioner $5,000 within 7 days of acceptance of the offers, that the appeals would be dismissed and that the taxpayers would pay the Commissioner's costs of the appeal. | On 26 February 2010, the Commissioner rejected the offers. | On 10 April 2010, the taxpayers made further offers pursuant to Order 23 of the FCR on the same terms as the offers made on 12 February 2010 except that each taxpayer offered to pay the Commissioner the sum of $30,000 within 7 days of acceptance of the offers. | On 13 April 2010, the taxpayers also made offers upon the principles associated with Calderbank v Calderbank [1976] Fam 93 ( Calderbank ). The terms of the Calderbank offers were the same as the Order 23 offers made on 10 April 2010. A Calderbank offer is an offer made to settle the dispute which is without prejudice save as to costs. | On 23 April 2010, the Commissioner rejected the Order 23 offers made on 10 April 2010. | On 27 April 2010, the Commissioner rejected the Calderbank offers. | On 11 May 2010, the Full Federal Court, comprising of Dowsett, Edmonds and Gordon JJ, heard the appeal. | On 21 January 2011, the Full Federal Court (with Dowsett J dissenting), in Commissioner of Taxation v Clark [ 2011 ] FCAFC 5 , delivered judgment in relation to the appeal in favour of the taxpayers. | The taxpayers then sought costs orders against the Commissioner in relation to the appeal with such costs to be taxed on an indemnity basis. | The Commissioner filed submissions acknowledging that the Commissioner should pay the taxpayers' costs on a party and party basis and submitting, inter alia, that: • a tax appeal may invoke questions of consistency and fairness of treatment of all taxpayers in like circumstances. As a general proposition, the successful offeror's presumptive entitlement to indemnity costs will be rebutted and the Court should "otherwise order" when the Commissioner rejects an Order 23 offer in circumstances where principles of administration of the tax Acts are in dispute and the Commissioner, as a party, properly exercises his general powers of administration in pursuing the Court resolution of those principles for the very purpose of administering those Acts; • the offers made on 12 February 2010 and 10 April 2010 were not in this case "offers to compromise" because the taxpayers did not seek to negotiate. The offers were more a procedural move to trigger costs consequences than a genuine attempt to reach a negotiated settlement; and • the Commissioner's refusal of the Calderbank offer dated 13 April 2010 was not unreasonable. | • a tax appeal may invoke questions of consistency and fairness of treatment of all taxpayers in like circumstances. As a general proposition, the successful offeror's presumptive entitlement to indemnity costs will be rebutted and the Court should "otherwise order" when the Commissioner rejects an Order 23 offer in circumstances where principles of administration of the tax Acts are in dispute and the Commissioner, as a party, properly exercises his general powers of administration in pursuing the Court resolution of those principles for the very purpose of administering those Acts; • the offers made on 12 February 2010 and 10 April 2010 were not in this case "offers to compromise" because the taxpayers did not seek to negotiate. The offers were more a procedural move to trigger costs consequences than a genuine attempt to reach a negotiated settlement; and • the Commissioner's refusal of the Calderbank offer dated 13 April 2010 was not unreasonable. | On 10 November 2011, the Full Court ordered that: • the Commissioner pay the taxpayers' costs of the appeal, incurred up to 11.00am on 13 February 2010, to be taxed on a party and party basis; and • the appellant pay the Commissioner's costs of the appeal, incurred after that time, to be taxed on an indemnity basis. | • the Commissioner pay the taxpayers' costs of the appeal, incurred up to 11.00am on 13 February 2010, to be taxed on a party and party basis; and • the appellant pay the Commissioner's costs of the appeal, incurred after that time, to be taxed on an indemnity basis. | Issues decided by the court | 1. Is the Commissioner able to refuse to accept the Order 23 offers simply on the basis of the Commissioner's policies and procedures? | No. The Court observed that it was beyond doubt that the Commissioner must discharge his duties in accordance with law and do so in a way which is transparent and consistent. The Court did not reject out of hand the proposition that policies and procedures prescribed for use in the ATO may, in an appropriate case, inform any exercise by the Court of its discretion as to costs, whether that be the general discretion under section 43 of the Federal Court Act or that conferred by Order 23 of the FCR. | The Court observed that, it does not follow, the Commissioner may, simply by referring to such policies and procedures, escape the Court's scrutiny of his conduct of litigation, including his conduct in refusing to accept offers of settlement. The Court also observed that, once the Court's jurisdiction is engaged, the Commissioner becomes a litigant, subject to s64 of the Judiciary Act 1903 [1] , the provisions of the Federal Court Act and the FCR. The Commissioner's conduct as a litigant is to be judged by reference to all relevant circumstances, including, in an appropriate case, his policies and procedures. | Further, the Court observed that the Commissioner did not identify any particular aspect of his policies and procedures as relevant for present purposes. Rather, the Commissioner impliedly asserted that the Court should simply accept that he properly decided that it was inappropriate to accept the offers, on the basis of his policies and procedures, without any real explanation as to why that was the case. | 2. In considering the Order 23 offers, is the Commissioner permitted or obliged to take into account the outcome at first instance and the reason for that outcome? | Yes. The Court accepted that the Commissioner was obliged to deal with appeals transparently and in accordance with general practice. However, it did not follow that the Commissioner was entitled to persevere with appeals in the face of reasonable offers of settlement. The decision, at first instance, involved substantial questions of fact, the resolution of which involved the credibility of witnesses. In those circumstances, the Commissioner faced substantial problems in any appeal and he should have taken those problems into account in the course of considering the taxpayers' offers. | 3. Does an Order 23 offer need to involve the offer of a substantial amount having regard to the amounts of the assessment in question? | No. The Court referred to the Commissioner's submission that any offer had to be "substantial" and held that the submission lacked foundation. The real question is whether the offer turns out to be more favourable to the offeree than is the eventual litigated outcome. | 4. Were the taxpayers' offers of 12 February 2010 and 10 April 2010 genuine "offers of compromise"? | Yes. The Court held that Courts expect that parties will make realistic assessments of their prospects and act accordingly. If one party makes an assessment which turns out to be accurate, that party should generally have the benefit of Order 23 of the FCR, unless some factor points to a contrary outcome. The Court stated that it inferred from the fact that the ultimate outcome of the appeals was less favourable to the Commissioner than was any of the offers, that it was unreasonable for him to reject them, at least in the absence of any countervailing consideration. | 5. Whether in the exercise of the Court's general discretion, the applicants demonstrated that the respondent's refusal to accept the offer of 13 April 2010 (that is the Calderbank offer) was unreasonable by reference to the circumstances at the time. | The Court held that it was not necessary to make any orders in relation to the Calderbank offers. | As a result, indemnity costs were awarded under Order 23 Rule 11(6) of the FCR from 11.00am on 13 February 2010, being the day after the first offer under Order 23.

Issues decided:
1. Is the Commissioner able to refuse to accept the Order 23 offers simply on the basis of the Commissioner's policies and procedures?: No. The Court observed that it was beyond doubt that the Commissioner must discharge his duties in accordance with law and do so in a way which is transparent and consistent. The Court did not reject out of hand the proposition that policies and procedures prescribed for use in the ATO may, in an appropriate case, inform any exercise by the Court of its discretion as to costs, whether that be the general discretion under section 43 of the Federal Court Act or that conferred by Order 23 of the FCR. The Court observed that, it does not follow, the Commissioner may, simply by referring to such policies and procedures, escape the Court's scrutiny of his conduct of litigation, including his conduct in refusing to accept offers of settlement. The Court also observed that, once the Court's jurisdiction is engaged, the Commissioner becomes a litigant, subject to s64 of the Judiciary Act 1903 [1] , the provisions of the Federal Court Act and the FCR. The Commissioner's conduct as a litigant is to be judged by reference to all relevant circumstances, including, in an appropriate case, his policies and procedures. Further, the Court observed that the Commissioner did not identify any particular aspect of his policies and procedures as relevant for present purposes. Rather, the Commissioner impliedly asserted that the Court should simply accept that he properly decided that it was inappropriate to accept the offers, on the basis of his policies and procedures, without any real explanation as to why that was the case. | 2. In considering the Order 23 offers, is the Commissioner permitted or obliged to take into account the outcome at first instance and the reason for that outcome?: Yes. The Court accepted that the Commissioner was obliged to deal with appeals transparently and in accordance with general practice. However, it did not follow that the Commissioner was entitled to persevere with appeals in the face of reasonable offers of settlement. The decision, at first instance, involved substantial questions of fact, the resolution of which involved the credibility of witnesses. In those circumstances, the Commissioner faced substantial problems in any appeal and he should have taken those problems into account in the course of considering the taxpayers' offers. | 3. Does an Order 23 offer need to involve the offer of a substantial amount having regard to the amounts of the assessment in question?: No. The Court referred to the Commissioner's submission that any offer had to be "substantial" and held that the submission lacked foundation. The real question is whether the offer turns out to be more favourable to the offeree than is the eventual litigated outcome. | 4. Were the taxpayers' offers of 12 February 2010 and 10 April 2010 genuine "offers of compromise"?: Yes. The Court held that Courts expect that parties will make realistic assessments of their prospects and act accordingly. If one party makes an assessment which turns out to be accurate, that party should generally have the benefit of Order 23 of the FCR, unless some factor points to a contrary outcome. The Court stated that it inferred from the fact that the ultimate outcome of the appeals was less favourable to the Commissioner than was any of the offers, that it was unreasonable for him to reject them, at least in the absence of any countervailing consideration. | 5. Whether in the exercise of the Court's general discretion, the applicants demonstrated that the respondent's refusal to accept the offer of 13 April 2010 (that is the Calderbank offer) was unreasonable by reference to the circumstances at the time.: The Court held that it was not necessary to make any orders in relation to the Calderbank offers. As a result, indemnity costs were awarded under Order 23 Rule 11(6) of the FCR from 11.00am on 13 February 2010, being the day after the first offer under Order 23.

ATO view of decision:
The Commissioner notes the Court's finding that the Commissioner's conduct as a litigant is to be judged by reference to all relevant circumstances, including, in an appropriate case, his policies and procedures. The Commissioner maintains that each offer of compromise made under Order 23 of the FCR (or Rule 25 of the Federal Court Rules 2011, as the case may be) must be dealt with on its own merits and having regard to the particular facts and circumstances of each offer. For example, the question of whether a matter raises issues of public interest and importance may be a relevant consideration. [2]

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | None identified | Implications for Law Administration Practice Statements | No changes to be made to PSLA 2009/9. | [1] S64 of the Judiciary Act provides that "In any suit to which the Commonwealth or a State is a party, the rights of parties shall as nearly as possible be the same, and judgment may be given and costs awarded on either side, as in a suit between subject and subject." | [2] See, for example, Australian Competition and Consumer Commission v Metcash Trading Limited (No 2) [2012] FCAFC 55, which considered sub-rule 25.14(2) of the Federal Court Rules 2011.

Legislative references: Federal Court Rules (as in operation immediately prior to 1 August 2011) Federal Court Rules
Case references: Clark v Commissioner of Taxation [2009] FCA 1401 Commissioner of Taxation v Clark [2011] FCAFC 5 Calderbank v Calderbank [1976] Fam 93 Australian Communication Exchange Ltd v Deputy Commissioner of Taxation [2003] HCA 55 201 ALR 271 53 ATR 834 2003 ATC 4894 Australian Competition and Consumer Commission v Metcash Trading Limited (No 2) [2012] FCAFC 55
Subject references: Costs Offer of compromise Indemnity Costs Party and Party Basis Quantum Federal Court Rules (as in operation immediately prior to 1 August 2011)