Miller v Commissioner of Inland Revenue [2002] NZCA 202; (2002) 20 NZTC 17,826 (19 August 2002)

Last Updated: 15 December 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

CA157/99

	BETWEEN	BRENT LEROY MILLER, PATRICIA ANN MILLER, BRIAN ANDREW O’NEIL, AND MOIRA O’NEIL
		Appellants

	AND	COMMISSIONER OF INLAND REVENUE
		Respondent

AND

	BETWEEN	MANAGED FASHIONS LTD, BRENT LEROY MILLER, PATRICIA ANN MILLER, BRIAN ANDREW O’NEIL, AND MOIRA O’NEIL
		Appellants

	AND	COMMISSIONER OF INLAND REVENUE
		Respondent

Hearing:	1 August 2002
Coram:	Tipping J McGrath J Glazebrook J
Appearances:	B M Grierson for Appellants A C Beck and T J Hutchison for Respondent
Judgment:	19 August 2002

JUDGMENT OF THE COURT DELIVERED BY GLAZEBROOK J

Introduction

[1] The appellants used what has become known as the Russell template in ordering their taxation affairs. The Commissioner took the view that this amounted to tax avoidance and litigation ensued. In 1994, after the Taxation Review Authority had found against them, all the present appellants except Managed Fashions Ltd signed deeds with the Commissioner intended to settle the appeals against the Taxation Review Authority decisions. At the end of 1995 the Commissioner advised that the settlement deeds were not effective as he had not obtained (and indeed had not sought) the necessary approval from the Minister. The litigation continued, both through appeals against the Taxation Review Authority decisions and judicial review proceedings. In the case of the O’Neils the litigation reached the Privy Council. The appellants were unsuccessful. This case relates to costs in the High Court in relation to that litigation.
[2] The appeal is against the decision of Baragwanath J (M103/93, M1002/92, High Court Auckland, 17 June 1999) refusing to recall an earlier costs judgment. That earlier costs judgment (M103/93, M105/93 and M1002/94, High Court Auckland, 26 September 1997) awarded costs of some $80,000 to the Commissioner on the basis of the principles set out in an earlier interim costs judgment (M 103/93, M 105/93 and M 1002/94 High Court Auckland, 15 July 1997). The costs awards were in respect of both the appeal and judicial review proceedings undertaken by the appellants as well as in respect of an application to recall substantive judgments in the review proceedings.
[3] The appellants submit that the costs judgment of 26 September 1997 should have been recalled because new information relevant to the question of costs had arisen since that judgment. The new information includes the failed settlement and the differential treatment with regard to costs of other taxpayers in the same position as the appellants. The appellants also argue that new assessment methods in respect of the Russell template cases should have been taken into account.

The appellants’ submissions in more detail

[4] The appellants submit that the application for recall should have been allowed. Their primary submission is that the Commissioner was guilty of conduct that necessitated continuation of the litigation and/or was calculated to defeat or delay justice. Because of this conduct (which was not known to the judge at the time the costs order was made) costs should instead have been awarded to the appellants. This was also the argument before the High Court.
[5] The most important matter that was not taken into account was the failed settlement. The judge was unaware of the failed settlement, and (more importantly) the circumstances of that failed settlement, at the time of his costs judgement. The Commissioner’s conduct in relation to that settlement (and particularly the fact that he did not even attempt to seek Ministerial approval at the time) should have been taken into account in any costs award.
[6] In addition, other taxpayers in the same position as the appellants had costs awards made in their favour in other proceedings. This was because Robertson J in those proceedings held that the litigation had arisen “because of errors made by the Commissioner” – see Kemp & Ors v CIR (1999) 19 NZTC 15,110 at 15,120. The Commissioner has a duty to act impartially. By analogy taxpayers should be treated in a similar fashion with regard to litigation, including costs awards.
[7] The taxpayers in the Kemp litigation and the appellants in the present case had a choice once the Commissioner had repudiated the settlement. They could either litigate or they could pay the whole amount of the assessed tax (including additional tax which the Commissioner later, on the basis of Withey & Ors v Commissioner of Inland Revenue (1998) 18 NZTC 13,732, accepted was not payable by the appellants). Both chose to litigate.
[8] The Kemp group of taxpayers chose litigation to uphold the settlement. The appellants chose to litigate the substantive tax liability, having taken the view that an attempt to uphold the settlement would not succeed and not wishing to litigate in such circumstances. The appellants have, however, paid taxation amounts due under the failed settlement (although, in the case of the O’Neils, not fully). The appellants’ view as to the prospect of success in litigation to enforce the settlement turned out largely to be correct as the settlement was upheld in respect of $50,000 of core tax only, the limit of the Commissioner’s powers to remit without Ministerial approval. The settlement was also upheld in relation to additional tax (although the Commissioner subsequently accepted, on the basis of Withey, that at least some of that additional tax was not payable).
[9] The outcome of the appellants’ litigation was that they had a costs award of some $80,000 made against them. The Kemp litigants, on the other hand, had costs awarded in their favour. This was unfair, given the similarities in the position of the two sets of litigants. At the very least no costs should have been awarded against the appellants.
[10] We note as an aside at this point that we understand that the appellants have not been given a reduction on core tax of $50,000, unlike the Kemp litigants. We would have thought that the appellants, being in same position as the Kemp litigants, should have been treated the same in respect of the $50,000 concession.
[11] The appellants also raise a number of matters in relation to the conduct of the litigation itself, including failure to call the correct witnesses and withholding of evidence. In particular they argue that the withholding of evidence in relation to different approaches to tax adjustments (known as Track C and D) in respect of taxpayers using the Russell template was significant. Those tracks would have resulted in at least some of the appellants not being liable for taxation at all. Even though the appellants failed in their attempt to have the substantive judgments on their tax liability recalled because of this, they argue that the Track C and D matters should have been taken into account in any costs award. They also say that the Commissioner’s opposition to the Taxation Review Authority hearing administrative law issues was calculated to defeat or delay justice.

The Commissioner’s submissions

[12] The Commissioner submits that the appeal must fail. He points out that a decision to recall a judgment is a discretionary decision and the discretion is strictly circumscribed. In addition, the recall decision itself was made in respect of a costs award, in itself a discretionary decision. The appellants are therefore asking this Court to reverse a discretionary decision made in respect of a discretionary decision. The exercise of a discretion will not be reversed on appeal unless a Judge acted on a wrong principle, failed to take into account some relevant matter, took account of some irrelevant matter, or was plainly wrong – see Alex Harvey Industries Ltd v CIR [2001] NZCA 356; (2001) 15 PRNZ 361 (CA). The appellants have not shown any of these to be the case.
[13] The Commissioner further argues that no error has been shown in Baragwanth J’s approach to costs. On ordinary principles the Commissioner, having succeeded in the litigation, was entitled to costs. The principles as to the exercise of the discretion to award costs were carefully considered by Baragwanath J in his interim costs judgment of 15 July 1997. That decision has not been appealed and the costs award in the costs judgment of 26 September 1997 was in accordance with those principles. It is further submitted that the actual award was generous to the appellants.
[14] In the Commissioner’s submission, the appellants’ arguments come down to the single point that they wish to be compensated for the problems with settlement. In his submission unsuccessful settlement negotiations confer no rights in relation to costs, except perhaps in the limited circumstances of a Calderbank letter, which are not relevant in this case. In addition, there was no differential treatment between the Kemp litigants and the appellants. The litigation was fundamentally different. The Kemp litigation was designed to uphold the settlement and thus directly related to that failed settlement. The Commissioner would have conceded that litigation if Robertson J had not raised concerns about this proposed course. The appellants, on the other hand, engaged in litigation to challenge the whole of the assessments. If the Kemp litigants subsequently mount challenge proceedings in relation to the assessments and such litigation reaches the High Court then they will also risk a costs award against them if they are unsuccessful.
[15] Finally, the Commissioner submitted that the other matters in relation to Tracks C and D and witnesses that are raised by the appellants appear to relate to the substance of the litigation and are not able to be raised again in this context.

Baragwanath J’s judgments

[16] Baragwanath J, on 15 July 1997 in his interim costs judgment, set out the principles to be applied in awarding costs in respect of the appeal against the Taxation Review Authority decision and the judicial review proceedings. The judge outlined two principles that could limit the costs award to the Commissioner. The first was that the case could be seen as having been in the nature of a test case, and thus of benefit to the Commissioner. The second was that tax cases are considered to be in a special category when it comes to costs. Baragwanath J then went on to consider in detail each aspect of the litigation in light of the principles set out. The decision of 26 September 1997 on costs was stated to be in accordance with those principles.
[17] In his recall judgment of 17 June 1999 refusing to recall his costs judgment, Baragwanath J rejected the argument that the failed settlement should have resulted in costs being awarded to the appellants. He held at p9 that:

There is, in my view, no substance in the argument that the Commissioner’s repudiation on 18 December 1995 of the settlement ..... should result in modification of the costs orders pronounced following arguments and judgments made during the ensuing two years. [Judge’s emphasis].

It is unfortunate that the Commissioner failed to recognise that he lacked authority to enter the deeds of settlement and that, having secured execution and substantial performance by the parties to them, found it necessary to repudiate them.

[18] The judge went on to say that the Commissioner was bound to repudiate the settlements, having received advice that he lacked power to enter settlements for sums of more than $50,000 without the Minister’s consent. That the Millers had wholly and the O’Neils substantially performed their obligations under the repudiated settlement does not alter the fact that, having received advice that the Commissioner lacked the power to settle, the appellants

... elected to pursue their challenge to the assessments both by judicial review and on appeal. Subject to the next argument, there is nothing to remove their cases from the ordinary principle that costs follow the event.

[19] In relation to the argument that there was differential treatment between taxpayers, Baragwanath J distinguished the Kemp litigation at p11 on the basis that the litigants in that case were seeking to uphold the settlement. They were not, unlike the appellants, seeking to challenge the existence of any tax liability at all. The cases were therefore different and the appellants should have expected that costs would follow the event even though, being made prior to the decision in Auckland Gas Company Limited v Commissioner of Inland Revenue [1999] 2 NZLR 409 (CA), costs against the appellants were assessed on a lower basis than would now be employed.
[20] The judge said at p15 that the Millers had heard about the Kemp litigation but had elected not to participate in it. Although the O’Neils had not heard of the litigation until early December 1997, Mr Grierson acknowledged that his advice would have been not to participate. The judge then said:

To have allied themselves with the Kemp litigation would have required an election to discontinue their own. They did not do so and cannot be heard to complain of the adverse cost consequences.

[21] With regard to the argument in respect of the Track C and D matters, Baragwanath J took the view that this was an attempt to re-litigate the issues already dealt with by him in his judgment of 26 September 1997 refusing to recall the substantive judgments in the review proceedings.

Refusal to recall: discussion

[22] It is clear that Baragwanath J’s costs judgment of 26 September 1997 was made without knowledge of the aborted settlement deeds. None of the parties raised the failed settlements with the judge at that time. Mr Grierson did not know about them and the appellants apparently considered themselves bound by confidentiality clauses in the aborted settlement deeds. The costs judgment also pre-dated the Kemp litigation. We accept, therefore, that there was new material before the judge when he was considering the application for recall.
[23] In relation to the settlement we note first that the appellants’ tax liability does not arise out of the settlement. It arises out of the use of the Russell template. As Baragwanath J pointed out, the litigation was undertaken to assert that no tax liability arose. The taxpayers failed in that litigation and costs would normally follow the result. The fact of a failed settlement on its own would not warrant any modification to any costs award.
[24] In this case, however, the appellants argue that it is not the fact of the failed settlement but the conduct of the Commissioner in relation to that settlement that should have been taken into account. There are aspects of that conduct that cause us some concern and the conduct appears to us to be sufficiently connected with the litigation to warrant consideration in the matter of costs. The weight it is accorded would be for the judge.
[25] We note that the judge remarked that the appellants elected to pursue the litigation and should therefore have expected to pay costs. In the circumstances we consider there is some force in the appellants’ submission that the only alternative to pursuing some type of litigation (after the Commissioner had withdrawn from the settlement) was to pay the assessment amount in full (and that assessment amount included additional tax which has since been accepted not to be payable).
[26] We move on to a discussion of the alleged unequal treatment meted out to the appellants as against the Kemp litigants. Baragwanath J held that there is a conceptual difference between litigation seeking to uphold the settlement and litigation challenging the assessment and that this justified the differential treatment. He pointed out at pp 8-9 of a further judgment of 27 August 1999 that, if any of the Kemp litigants pursue challenge litigation in relation to the assessments and such challenges reach the High Court, they will expose themselves to costs liability. While this is undoubtedly true, we consider that the distinction drawn is overly technical. Both the Kemp litigants and the appellants were reacting by litigation to the actions of the Commissioner in withdrawing from the settlement. The fact that they reacted in different ways may justify some differential costs treatment but not the total differential that is the case at present.
[27] The appellants’ decision not to pursue litigation to enforce the settlement is explainable in the light of advice they had received from Mr Grierson (substantially correct as it turned out) that there was no power for the Commissioner to settle in respect of the sums involved without Ministerial consent and thus presumably that litigation to enforce the settlement would not succeed unless that consent was forthcoming.
[28] Had there merely been the two matters discussed above, however, we may not have disturbed Baragwanath J’s decision, given that the decision whether or not to recall is a discretionary decision. He was the trial judge and had been involved with these cases over a long period. It may be, for example, that Baragwanath J considered that any effect the conduct surrounding the failed settlement would have had on costs would be offset by the revised award if costs were calculated under the Auckland Gas (supra) principles. If that were the case then it would only be a question of weight and this Court would not have interfered with the judge’s discretion.
[29] There is, however, a further matter. Baragwanath J stated (at p15 of his recall decision judgment of 17 June 1999) that the appellants could not have allied themselves with the Kemp litigation without electing to discontinue their substantive challenge. The Commissioner submits that this statement is correct. He points out that the settlement deeds required the appeals to be withdrawn. Therefore he submits that the appellants could not have sought orders to reinstate the settlements if they were in breach themselves of the settlement deeds. He refers to Spry, Principles of Equitable Remedies (5th ed 1997) at 217. In this regard we note first that some of the Kemp litigants themselves may still be pursuing their objections through the courts and thus it appears were able to continue their challenge despite being involved in the litigation on the settlement deeds.
[30] Secondly, the extract from Spry refers to a plaintiff needing to be ready and willing to perform his or her obligations before relief will be granted. Certainly therefore the appellants would have to have discontinued their substantive challenge if they had allied themselves with the Kemp litigation and the settlement had been held to be binding. To suggest, however, as Baragwanath J appears to do, that they would have had to discontinue at the time of allying themselves with the Kemp litigation is not correct. This would have put them in the position, if the settlement was not upheld, of having acted on a bargain from which the Commissioner had withdrawn. The appellants must only have been ready and willing to discontinue the appeal if the settlement was held to be binding. There is, as we understand the position, no evidence to suggest they were not. They had after all provided notices of discontinuance at the time the settlement deeds were entered into. There is also no evidence to suggest that they would not have accepted a new offer to settle from the Commissioner, had such an offer been made, as it presumably would have been had the Kemp litigation succeeded.
[31] We are concerned that the erroneous assumption that discontinuance of the substantive challenge would have been required before association with the Kemp litigation may have influenced the judge’s conclusion, expressed in the next sentence, that, as a result, the appellants “cannot be heard to complain of the adverse costs consequences” of the litigation option they pursued. This further matter, coupled with the concerns expressed above, has persuaded us that the appeal should be allowed.
[32] For completeness we note that, in relation to the other matters raised by the appellants and in particular in relation to Track C and D matters, we agree with Baragwanath J that these were an attempt to re-litigate the substantive matters already decided by the Courts. We can see no reason why costs should be approached on the basis that the appellants should be deemed to have been successful in having the substantive judgments recalled, which seemed to be the thrust of the appellants’ argument.

Result and Costs

[33] For the reasons given the appeal is allowed. We make an order recalling the costs judgment of 26 September 1997. The Judge will now have to make a fresh costs assessment in the light of this judgment.
[34] Costs of $5000 are awarded in favour of the appellants, together with disbursements (including travel and accommodation costs if any) to be set by the Registrar if necessary. We also set aside the costs award on the recall judgment. The appellants are entitled to costs on that recall application in the High Court. In absence of agreement between the parties such costs are to be set by the High Court, in the light of this judgment.

Solicitors:

B M Grierson, Auckland for Appellants

Crown Law Office, Wellington for Respondent