Logan, Justice John --- "Expert Evidence in Taxation Appeals" (FCA) [2022] FedJSchol 7

The opinion rule

(1) Evidence of an opinion is not admissible to prove the existence of a fact about the existence of which the opinion was expressed.

Of the exceptions, the most frequently encountered in taxation appeals, and the subject of particular focus in this paper, is the exception for which s 79 provides, aEURoeopinions based on specialised knowledgeaEUR, sometimes termed the expert evidence rule.

Section 79 states:

Exception: opinions based on specialised knowledge

(1) If a person has specialised knowledge based on the person's training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge.

(2) To avoid doubt, and without limiting subsection (1):

(a) a reference in that subsection to specialised knowledge includes a reference to specialised knowledge of child development and child behaviour (including specialised knowledge of the impact of sexual abuse on children and their development and behaviour during and following the abuse); and

(b) a reference in that subsection to an opinion of a person includes, if the person has specialised knowledge of the kind referred to in paragraph (a), a reference to an opinion relating to either or both of the following:

(i) the development and behaviour of children generally;

(ii) the development and behaviour of children who have been victims of sexual offences, or offences similar to sexual offences.

Obviously enough, s 79(2) is most unlikely to be encountered in a taxation appeal.

Subsection 79(1) of the Evidence Act contains two conditions, each of which must be satisfied for an opinion of a witness to be admissible:

(a) the witness must have aEURoespecialised knowledge based on the personaEURtms training, study or experienceaEUR; and

(b) the opinion expressed by the witness must be aEURoewholly or substantially based on that knowledgeaEUR.

Neither of these expressions is, or perhaps meaningfully ever could be, the subject of definition. Instead, elucidation as to their meaning is offered by case law. Being statutory expressions, it is a mistake to approach their meaning as if either is but a restatement of a pre-existing, common law understanding about the admissibility of expert evidence.

In respect of the first condition, the High Court stated in Honeysett v The Queen that:

[The] aEURoefirst condition directs attention to the existence of an area of specialised knowledge. Specialised knowledge is to be distinguished from matters of common knowledge. Specialised knowledge is knowledge which is outside that of persons who have not by training, study or experience acquired an understanding of the subject matter. It may be of matters that are not of a scientific or technical kind and a person without any formal qualifications may acquire specialised knowledge by experience. However, the person's training, study or experience must result in the acquisition of knowledge. The Macquarie Dictionary defines aEUR~knowledgeaEURtm as aEUR~acquaintance with facts, truths, or principles, as from study or investigationaEURtm (emphasis added) and it is in this sense that it is used in s 79(1). The concept is captured in Blackmun J's formulation in Daubert v Merrell Dow Pharmaceuticals Inc [1993] USSC 99; (1993) 509 US 579 at 590: aEUR~the word aEURoeknowledgeaEUR connotes more than subjective belief or unsupported speculation. ... [It] applies to anybody of known facts or to any body of ideas inferred from such facts or accepted as truths on good groundsaEUR.

Within the first condition, training, study or experience may be cumulative or alternative sources of a qualification to express an admissible opinion. Such is the breadth of the language of s 79(1), even experience gained ad hoc can provide the requisite qualification.

As to the second condition, the High Court stated in Honeysett:

The second condition of admissibility under s 79(1) allows that it will sometimes be difficult to separate from the body of specialised knowledge on which the expertaEURtms opinion depends aEURoeobservations and knowledge of everyday affairs and eventsaEUR. It is sufficient that the opinion is substantially based on specialised knowledge based on training, study or experience. It must be presented in a way that makes it possible for a court to determine that it is so based.

[emphasis in original; footnote references omitted]

Even so, care must be taken to distinguish between what is a subject of admissible opinion, which may in part (see s 80(b), Evidence Act) but not substantial part be based on a matter of common rather than specialised knowledge and a subjective appreciation of facts, which may be equivalently assessed by the tribunal of fact. In a taxation appeal, the tribunal of fact is the trial judge.

That the factual basis for an expert opinion may be controversial and incapable of resolution until delivery of judgment in respect of the trial does not render the opinion inadmissible. The opinion is admissible in evidence if there is evidence which, if accepted, is capable of establishing the truth of the assumptions upon which the opinion is based.

Any notion that an expert cannot aEURoeswear the issueaEUR is put to rest by s 80(a) of the Evidence Act, which provides that evidence of an opinion is not inadmissible only because it is about aEURoea fact in issue or an ultimate issueaEUR.

As with all superior courts in Australia, the Court has particular expectations in relation to the duties of expert witnesses and those who retain them for the purposes of a proceeding. These expectations are found in the CourtaEURtms Expert Evidence Practice Note (GPN-EXPT). This Practice Note is just as applicable to a taxation appeal as to any other proceeding in the Court.

The Practice Note offers a reminder that, aEURoethe purpose of the use of expert evidence in proceedings, often in relation to complex subject matter, is for the Court to receive the benefit of the objective and impartial assessment of an issue from a witness with specialised knowledge (based on training, study or experience)aEUR.

The importance of bringing home to any expert the expectation of objectivity, not partisanship, and impartiality, not advocacy, cannot be over-emphasised. One means by which the Court seeks to achieve this is by requiring any expert witness to be briefed with, and to acknowledge that he or she is bound by the Practice Note and, a Harmonised Expert Witness Code of Conduct, as approved by the Council of Chief Justices' Rules Harmonisation Committee.

A feature of this Code is provision for conferences of experts and joint-reports. Provision for these is now routine feature of interlocutory case management directions, including in taxation appeals, where expert evidence is to be adduced.

That is not to say that there is any expectation that experts must agree, only that they endeavour in good faith to identify areas of agreement and disagreement.

Care must be taken in the formulation of questions for the expression of expert opinion so as not to suggest the answer desired. Like caution must be exercised in conferring with experts. A party may be compelled to disclose communications with experts. I have seen the credibility of an expert discounted on the basis of such a disclosure, which made it obvious, by the exchange of pre-trial communications, that the expert had, in effect, become part of a partyaEURtms team of advocates.

The Practice Note and the Code operate in conjunction with the provisions of Division 23.2 of the Federal Court Rules aEUR" aEURoePartiesaEURtm expert witnesses and expert reportsaEUR. Rule 23.13 is prescriptive as to the contents of an expertaEURtms report:

23.13 Contents of an expert report

(1) An expert report must:

(a) be signed by the expert who prepared the report; and

(b) contain an acknowledgement at the beginning of the report that the expert has read, understood and complied with the Practice Note; and

(c) contain particulars of the training, study or experience by which the expert has acquired specialised knowledge; and

(d) identify the questions that the expert was asked to address; and

(e) set out separately each of the factual findings or assumptions on which the expertaEURtms opinion is based; and

(f) set out separately from the factual findings or assumptions each of the expertaEURtms opinions; and

(g) set out the reasons for each of the expertaEURtms opinions; and

(ga) contain an acknowledgement that the expertaEURtms opinions are based wholly or substantially on the specialised knowledge mentioned in paragraph (c); and

(h) comply with the Practice Note.

(2) Any subsequent expert report of the same expert on the same question need not contain the information in paragraphs (1)(b) and (c).

Rule 23.14 confirms that there is no property in an expertaEURtms report, by providing that, aEURoeA party may apply to the Court for an order that another party provide copies of that other partyaEURtms expert report.aEUR

The Rules also contemplate that innovative orders as to the reception of expert evidence may be made perhaps with experts, if there be more than one on the same subject, giving evidence in immediate succession one after another, perhaps even concurrently.

A failure to draw to an expertaEURtms attention either the Practice Note or the related Code is not an automatic bar to the admissibility of that expertaEURtms opinion. Neither is non-compliance with a particular expectation in that Code. Rather, as highlighted in Wood v R, depending on the nature and extent of the departure in a given case, occasion may arise for the exclusion of the opinion pursuant to s 135 of the Evidence Act, on the basis that its probative value is substantially outweighed by the danger that it might mislead or confuse or be unfairly prejudicial to a party.

For those who would read further as to the obligations of experts both under the Code and the general law, I respectfully commend recourse to paragraphs [719] to [729] in the judgment of McClellan CJ in Wood, where pertinent authorities are collected. In particular, his Honour offers, at [719], this helpful summary of influential observations about expert evidence made by Cresswell J in National Justice Compania Naviera SA v Prudential Assurance Co Ltd (The Ikarian Reefer):

2. Expert evidence presented to the court should be, and should be seen to be, the independent product of the expert uninfluenced as to form or content by the exigencies of litigation. See also Whitehouse v Jordan [1980] UKHL 12; (1981) 1 WLR 246 at 256 per Lord Wilberforce.
3. An expert witness should provide independent assistance to the court by way of objective, unbiased opinion in relation to matters within his expertise. An expert witness should never assume the role of an advocate.
4. An expert witness should state the facts or assumptions upon which his opinion is based. He should not omit to consider the material facts which could detract from his concluded opinion.
5. An expert witness should make it clear when a particular question or issue falls outside his expertise.
6. If an expertaEURtms opinion is not properly researched because he considers that insufficient data is available, then this must be stated with an indication that the opinion is no more than a provisional one. In cases where an expert who has prepared a report cannot assert that the report contains the truth, the whole truth and nothing but the truth without some qualification, that qualification should be stated in the report.
7. If, after exchange of reports, an expert witness changes his view on a material matter having read the other sideaEURtms expertaEURtms report, or for any other reason, such change of view should be communicated (through legal representatives) to the other side without delay and when appropriate to the court.
8. Where expert evidence refers to photographs, plans, calculations, analyses, measurements, survey reports or other similar documents, these must be provided to the opposite party at the same time as the exchange of reports.

What then of examples of the use of experts in taxation appeals?

Although I have encountered expert evidence when sitting either in the original or appellate jurisdiction in such cases, and others, it is a long established, and salutary, rule of judicial conduct that a judge does not comment publicly about a decision once reasons for judgment have been delivered, even to clarify ambiguity. The reasons for judgment must speak for themselves. So instead I am going to offer some examples from my time in practice.

Eastern Nitrogen Ltd v Commissioner of Taxation offers a useful illustration of the role of expert evidence in a case where the Commissioner sought to rely on Part IVA of the ITAA 1936 so as to cancel tax benefits represented by deductions of rent claimed by the taxpayer pursuant to s 51(1) of that Act.

Eastern Nitrogen Ltd was the registered proprietor of land at Kooragang Island in New South Wales. A large ammonia production plant was situated on that land. Eastern Nitrogen operated that plant for the purpose of conducting its business as a manufacturer of fertiliser.

In August 1989, Eastern Nitrogen entered into a sale and lease-back transaction

with two financiers, BBL Australia Ltd and State Bank of South

Australia in respect of the ammonia plant. Under an Instalment Purchase Agreement, it agreed to sell the ammonia plant to the financiers. Under an Agreement for Lease entered into on the same day, it agreed to lease the plant back from the financiers for a period of five years. The land to which the ammonia plant was affixed was not part of the sale and lease-back transaction.

Eastern Nitrogen claimed the rent paid as a deduction. This claim was disallowed by the Commissioner, who instead allowed deductions amounting to one-fifth of the total claim in each of the three years of income with which these appeals were concerned, as borrowing expenses under s 67 of the ITAA 1936, but disallowed the balance of the claimed deduction.

Eastern Nitrogen failed at trial but its deduction claim was allowed by a unanimous Full Court. Expert evidence played a role in that success.

A disclosure is necessary. I was one of the counsel retained by Eastern Nitrogen.

Eastern Nitrogen led two discrete bodies of expert evidence at trial, one more influential than the other as it transpired, in seeking to demonstrate that the dominant purpose of the sale and leaseback transaction was not the obtaining of the tax benefit represented by the deduction of rent under the lease.

One body of expert evidence went to the existence of an international market for the sale, removal and re-erection of ammonia plants. It transpired that it was economically advantageous in certain circumstances, even allowing for the costs of decommissioning and recommissioning, to acquire an existing plant rather than to acquire new and then assemble all of the components for an ammonia plant. Lead times before a plant could be brought into production could be truncated and component costs reduced without compromising production quality. The existence of such a market formed part of a body of specialised knowledge. Evidence, not determinative as it transpired, of the existence of such a market was tendered as a riposte to an impression that there was an artificiality about the sale of a large industrial plant but not the land upon which that plant was situated.

The other body of expert evidence came from a senior officer of BBL, who had lengthy experience in large scale corporate finance. His evidence was that this type of lease, characterised as a finance lease, had long been an alternative means of raising large scale corporate finance in Australia and presented benefits other than just the deduction in full of rent. This was highly influential in relation to the ultimate result.

Eastern Nitrogen had the benefit of an experienced solicitor, Mr Bill Thompson, then tax partner at Minister Ellison. He was well familiar not just with the issues of revenue law at large but no less importantly with his client and its business. Even so, the leading of such expert evidence did not just happen. It required advice on evidence. It then required careful taking of instructions from knowledgeable corporate officers and related identification and conferring with prospective expert witnesses, thorough assimilation of their opinions by solicitor and counsel and resultant drafting and settling of affidavits. It also then required close liaison and sensitive diplomatic skills by the solicitors with these witnesses to ensure their availability to give evidence at trial.

I mention diplomatic skills because not all of those who come to give expert evidence do so as their principal calling. The person with relevant expertise may be heavily engaged in trade or commerce. Giving evidence in court is apt to be a distraction from this. Further, although all judges are sensitive to this consideration, the course of a trial can be unpredictable. So it is not always possible to give an expert witness a precise time when he or she will be called as a witness, let alone when their evidence will conclude.

Another example from my experience in practice of expert evidence in a taxation proceeding is Peerless Marine Pty Ltd v Commissioner of Taxation. This was a taxation review, not a taxation appeal proceeding. But there was a great deal at stake and it was conducted before a first rate bench for all practical purposes in the same manner as a taxation appeal.

Peerless Marine was set up to manufacture and sell luxury powered catamarans, but ceased business after selling a slowly-constructed prototype for half its manufacturing cost. Its managing director and driving force was a longstanding boating enthusiast but his considerable success in business and ability to pursue this enthusiasm in commerce, via the operation of Peerless Marine, came from an unrelated business endeavour. Income tax deductions and input tax credits, claimed by Peerless Marine for all phases of the operation, were disallowed after objection.

Once again, Peerless Marine had the benefit of sound tax litigation solicitors. An analysis of the facts in issue disclosed that one critical issue was whether Peerless Marine was carrying on a business. Another, in relation to goods and services tax, was whether expenditures were aEUR~aEUR~for a purpose that is

essential to the efficient conduct of a business that you carry onaEURtmaEURtm.

For the applicant, and also the Commissioner, I feel sure, a great deal of attention was given to identifying marine sales experts, gaining an understanding of the importance of a prototype and to preparing and filing witness statements of experts.

Sometimes, with experts, especially if they are in small business, you must go to them to confer. I can remember visiting with my instructing solicitor small boatyards and marinas for this purpose in that case. Such visits yielded the added benefit of seeing firsthand industry conditions. Time spent on reconnaissance is seldom wasted.

As the following excerpt from the TribunalaEURtms reasons reveals, determinative evidence, corroborative of that led by Peerless Marine, came from the CommissioneraEURtms expert, a Mr Barry-Cotter, in cross-examination and in consequential questions posed by the Tribunal, prompted by the answers given in cross-examination:

[115] Mr Barry-Cotter was called by the respondent on the basis of his 40 odd years of experience in the day-to-day involvement with the design, production, costing, marketing and sale of luxury power boats. He was, if I may say so, a very impressive witness. He described the process of getting started in the business of boat building in this way:

I aEUR| started off building one boat I was sailing in a sailing club at the time ant that sort of gave me quite a few contacts. I sort of lobbied boating magazines, and the boating journalists, to get some really make myself known with them, and did some repair work and then started to build a boat on spec. I sold a car and built the boat on spec and put a finally, then, put one ad in the paper and sold it.

He described this first boat as aEUR~aEUR~quite importantaEURtmaEURtm.

[116] His first boat was a wooden hulled vessel. Some little time after that his company turned to building fibreglass boats. He described the first of the fibreglass boats as experimental and aEUR~aEUR~overbuiltaEURtmaEURtm. This passage in cross-examination by Mr Logan is revealing:

Q. With the first boat then, in fibreglass, important to get one then out to the market to show that your company could produce a good fibreglass one? Most definitely.

And then is it the case that a first sale of the new product is very important Very important. ItaEURtms, you know, sometimes you know itaEURtms the whole business relies on it, you know, and a lot of peopleaEURtms jobs.

Yes? So with a new model, in that way itaEURtms not that different today.

Later on, and in answer to a question from me, Mr Barry-Cotter said:

You know, youaEURtmd have a you know, for the custom boats, a photograph album, and you would really try and do a deal with the customer to get access to take prospective buyers and show them the boat, and then that was, sort of, early days. Today youaEURtmve really got to build boats, put them in stock, and so theyaEURtmre there for people to see.

aEUR~aEUR~This is what we can build for you?aEURtmaEURtm Yes, exactly, like a project house.

[117] The evidence that I have recited satisfies me that being able to demonstrate what the boat builder can accomplish and the look and feel of the finished product is an important element in, the business of boat building. And, for that reason, it may be readily concluded that the use of aEUR~aEUR~White SpiritaEURtmaEURtm in this way was for a purpose that was important in the efficient conduct of the business of a boat builder.

There is an obvious vanity, forgivable I hope, in citing this excerpt. I do so because it offers an example of the adage that there is no property in a witness, including an expert witness, of a constructive, not destructive, feature of cross-examination and of the absolute need for thorough prior preparation by counsel and instructing solicitor, not just on the law but also the facts. The preparation for the hearing, in particular the understanding, gained from experts, of the importance of a prototype in marine sales, gave me a confident expectation, in considering Mr Barry-CotteraEURtms evidence in chief, that he would give particular answers in cross-examination. So it proved.

There is nothing unique to a taxation appeal, or even to expert evidence, about the importance of informed and attentive listening by counsel and solicitor in the course of a trial. It is important in all litigation. Further, sometimes particular answers in evidence provoke a question from the bench. Of course a judge or tribunal member may not assume the role of an advocate for either party. But within proper limits they are entitled to ask questions in clarification. If so, the best course for counsel to take, and the excerpt offers an example of this, can sometimes be silence.

Yet further case examples might be given but the law of diminishing returns would apply to their illustrative value. The reference to Peerless Marine offers a note of happy recollection, at least for that company and its legal representatives, on which to conclude this paper.

(C) J. A. Logan, 2022. Moral right of author asserted. Non-exclusive publication licence granted to the Taxation Institute of Australia.

---

s 14ZZO(a), TAA.

s 14ZZO(b), TAA.

Deputy Commissioner of Taxation v Brown [1958] HCA 2; (1958) 100 CLR 32 at 40; Giris Pty Ltd v Commissioner of Taxation [1969] HCA 5; (1969) 119 CLR 365 at 378-379; MacCormick v Commissioner of Taxation [1984] HCA 20; (1984) 158 CLR 622; Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 at [9] aEUR" [10].

s 4, Evidence Act and definition of aEURoefederal courtaEUR in the aEURoeDictionaryaEUR to that Act. As a court created by the Commonwealth Parliament, the Federal Court of Australia is a aEURoefederal courtaEUR as so defined.

s 14ZZK, TAA.

33(1)(c), Administrative Appeals Tribunal Act 1975 (Cth).

s 56, Evidence Act.

s 55, Evidence Act.

s 140, Evidence Act.

AtkinsaEURtm Court Forms, 2^nd edition, Vol. 18 (1985 Reissue), pp 373-375.

s 37M, FCA Act.

s 37N, FCA Act.

Melbourne Steamship Co Ltd v Moorehead [1912] HCA 69; (1912) 15 CLR 333, 342.

Taxation Practice Note (TAX-1): see Federal Court of Australia website:

(2014) 253 CLR 122, at [23].

R v Leung [1999] NSWCCA 287; (1999) 47 NSWLR 405 at [36] aEUR"[40].

(2014) 253 CLR 122, at [24].

Rhoden v Wingate (2002) 36 MVR 499; [2002] NSWCA 165, at [86].

Federal Court of Australia website:

See clauses 6 and 7 of the Code attached as Annexure A to practice note GPN-EXPT.

See Rule 23.15; see also, as to concurrent evidence, the Concurrent Expert Evidence Guidelines, Annexure B to the Practice Note.

Chen v R [2018] NSWCCA 106; (2018) 97 NSWLR 915.

Wood v R (2012) 84 NSWLR 581, [2012] NSWCCA 21, at [729].

[1993] 2 LloydaEURtms Rep 68 at 81aEUR"82.

Australasian Institute of Judicial Administration, Guide to Judicial Conduct, 3rd Edition. Paragraph 5.7.2.

In the Full Court[2001] FCA 366; , (2001) 108 FCR 27, 46 ATR 474, 188 ALR 415, 2001 ATC 416, [2001] FCA 366. In the original jurisdiction, [1999] FCA 1643.

Junior to Mr D Bloom QC and to Mr A Slater QC.

[2006] AATA 765; (2006) 63 ATR 1303, 2006 ATC 2419, [2006] AATA 765.

The Tribunal was constituted by Deputy President Hack SC. I appeared for the applicant. Mr N J Williams SC and Mr C D Coulsen appeared for the Commissioner.

Cooper Grace Ward.

Peerless Marine [2006] AATA 765; (2006) 63 ATR 1303, 2006 ATC 2419, [2006] AATA 765, at [115] aEUR" [117].

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