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14 Nov 1111 Commissioner ordered to pay indemnity costs to taxpayer - Clark (No 2)

The Full Federal Court (Dowsett, Edmonds and Gordon JJ) has ordered the Commissioner to pay the taxpayer's costs of the Commissioner's unsuccessful appeal in FCT v Clark [2011] FCAFC 5 (21 January 2011) on an indemnity basis (as opposed to the less generous but more usual party and party basis) from 13 February 2010, being the date on which the taxpayer made an offer to the Commissioner to settle the appeal by payment of the sum of $5,000, which offer was rejected by the Commissioner. Following the rejection of the offer, the matter proceeded and the Commissioner's appeal against the decision at first instance in favour of the taxpayer was dismissed.

The Court summarised the reasons that the Commissioner gave for rejecting the taxpayer's offer as follows:

  • 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;
  • if the Commissioner asserts that his decision was taken in accordance with his own policies and procedures, such assertion is an answer to the Taxpayers’ 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 Rules of Court, must involve the offer of a substantial amount, having regard to the amounts of the assessment in question.

The Court said none of the 4 propositions was justified.

Their Honours said at para 28: "It does not follow that 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."

Their Honours then said at para 29:

"We accept that the Commissioner was obliged to deal with the appeals transparently and in accordance with general practice. It does not follow that he was entitled to persevere in the prosecution of the 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. He should have taken those problems into account in the course of considering the Taxpayers’ offers. There is no evidence that he did so."

Their Honours also said, at para 33:

"Two other points require comment. First, the Commissioner submits that something hangs upon the fact that the appeals could only be disposed of by orders of the Court, and that the Commissioner could not be seen to be seeking such orders in view of the position which he had adopted concerning the appeals. This submission assumes that the Commissioner was not obliged to take into account the decision at first instance and, in particular, the adverse findings as to credibility and the findings of fact which he had to displace in order to be successful on appeal. Secondly, he submits that some difficulty arose out of the fact that the assessments stood until he varied them. This submission ignores the fact that the Court had ordered that the objection decisions be set aside and the objections allowed. In those circumstances, subject only to successful appeals, it was for the Commissioner to amend the assessments, not to pretend that they were still valid."

FCT v Clark (No 2) [2011] FCAFC 140 (Full Federal Court; Dowsett, Edmonds and Gordon JJ; 10 November 2011).


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