Miller v Commissioner of Inland Revenue [2004] NZCA 177; (2004) 21 NZTC 18,691 (10 August 2004)

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Miller v Commissioner of Inland Revenue [2004] NZCA 177 (10 August 2004); (2004) 21 NZTC 18,691

Last Updated: 18 December 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

CA177/03

BETWEEN B L MILLER & OTHERS

Appellants

AND COMMISSIONER OF INLAND REVENUE
Respondent

AND BETWEEN MANAGED FASHIONS LTD AND OTHERS
Appellants

AND COMMISSIONER OF INLAND REVENUE
Respondent

Hearing: 13 July 2004

Coram: Anderson P Glazebrook J William Young J

Appearances: G J Judd QC for Appellants
A C Beck for Respondent

Judgment: 10 August 2004

JUDGMENT OF THE COURT DELIVERED BY GLAZEBROOK J

Introduction

[1] This case has had a long history. Its genesis was the use by the taxpayers of the “Russell template” in their taxation affairs. Lengthy court proceedings followed. The current appeal is against a judgment of Baragwanath J of 20 August 2003 awarding the Commissioner costs of $41,500 with regard to one aspect of the litigation.
[2] In an earlier costs judgment (HC AK M103/93, M105/93 and M1002/94, 26 September 1997) Baragwanath J had awarded costs of some $80,000 to the Commissioner. That costs judgment was made without the benefit of the Judge having been informed of an aborted settlement that had been entered into between the taxpayers and the Commissioner and an indemnity costs award made in favour of other taxpayers who had also ordered their affairs in accordance with the “Russell template” and who had entered into a similar settlement – see Kemp v Commissioner of Inland Revenue (1999) 19 NZTC 15,110. Those settlements, both with the taxpayers in this case and in the Kemp litigation, were unable to be completed because the Minister of Finance had not approved them, a requirement because the settlements were in excess of $50,000.
[3] Once the Kemp litigation had come to the attention of the taxpayers they applied to Baragwanath J to recall his earlier costs judgment. In a judgment (reported as Miller v Commissioner of Inland Revenue (1999) 19 NZTC 50,300) Baragwanath J refused the request for recall. On appeal to this Court, the taxpayers’ appeal was allowed and an order was made recalling the costs judgment of 26 September 1997 and requiring a fresh costs assessment to be made – see Miller v Commissioner of Inland Revenue (2002) 20 NZTC 17,826. The reasons for that decision were set out by this Court as follows:

[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 [NZTC p 15,306] 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.

Baragwanath J’s new costs judgment of 20 August 2003

[4] Baragwanath J recognised that, at a high level of generality, responding to the Commissioner’s repudiation of the settlement by issuing proceedings to enforce it could be said to have something in common with challenging the whole of the avoided tax that the statute, by prohibiting the settlement, continues to treat as payable. He also recognised that he had to demonstrate that he had given due regard to this Court’s recall decision and the assessment in that decision of similarities between the Kemp litigation and this litigation.
[5] Baragwanath J began his analysis by stating that the taxpayers in this case had sought to avoid the income tax liability imposed by statute law by a mechanism that had been described as blatant tax avoidance. He also pointed out that the purported settlement was prohibited by law, save to the extent of the $50,000 for which the Commissioner had jurisdiction. In the normal course, having elected to dispute the tax liability, costs would have followed the event. He recognised however, that the Crown had not acted well with regard to the settlement, particularly taking into account the strict standards of conduct imposed upon those exercising public powers.
[6] In Baragwanath J’s view, the loss of the taxpayers in this case had been the time and trouble entailed in the settlement negotiations and the dashing of their expectations by the Commissioner taking the point that the settlement could not be effected. He, therefore, accepted the Commissioner’s submission that the appropriate way to take into account the Crown’s unacceptable behaviour was to make a deduction from costs in the sum of $10,000 as being equivalent to notional compensation for the worry and nuisance to which the aborted settlement gave rise.
[7] He accepted that there would have been force in the Commissioner’s argument that the Court should re-exercise its discretion and award the Commissioner costs on the basis of Auckland Gas Co Ltd v Commissioner of Inland Revenue [1999] 2 NZLR 409 (CA). He, however, decided that to do so would not give full weight to the ratio of this Court’s recall decision. In addition, he accepted Mr Judd QC’s submission that this litigation was in the nature of a test case and that was an added reason for not reassessing costs on an Auckland Gas principle.

Appellants’ contentions

[8] The main contention for the appellants is that like cases should be treated alike. Except in one respect, it was submitted that the position of the taxpayers in this case and the Kemp litigants was the same. The respect in which they differed was that, had the taxpayers succeeded in their case, they would have had no tax to pay whereas the Kemp litigants would have had to meet the settlement sums. This distinction in Mr Judd’s submission could be met by limiting the costs award to the $85,000 awarded to the Kemp litigants. Mr Judd also submitted that many of the factors taken into account by the Judge were irrelevant.

Discussion

[9] There are a number of points that arise from the recall decision of this Court that are relevant to this appeal. The first is the recognition in that recall decision that the different course followed by the Kemp litigants could justify some differential costs treatment. Mr Judd has acknowledged that it is a fundamental difference between the two cases that the current litigants, if successful, would have had no tax to pay whereas the Kemp litigants would have had to pay the agreed settlement sum. This is sufficient in our view to justify a differential in the costs awards. Secondly there is the recognition in the recall decision that costs would normally follow the result. In this case the fact that the taxpayers failed in their litigation cannot be an irrelevant consideration. By contrast, the Kemp litigants were successful to a limited degree in their proceedings, at least insofar as the first $50,000 of the settlement. Although the current taxpayers will also benefit to the same degree that did not directly arise out of the litigation at issue in this appeal.
[10] The third point is the recognition in the recall judgment that it was possible that any effect the conduct surrounding the failed settlement might have had would have been offset by a revised costs award had costs been calculated on the basis of Auckland Gas. This was a factor taken into account by the Judge in refusing to recalculate the costs on the basis of the Auckland Gas principles. Fourthly, this Court made it clear in the recall decision that, if the complaint had merely been a question of weight given to a particular factor, this Court would not have interfered. In our view the complaints of the taxpayers about the new costs judgment amount to claims about the weight given to various factors by the Judge.
[11] Finally, we remark that the costs award in the Kemp case can in any event be seen as unusual. It arose to some degree because of certain aspects of the conduct of the Kemp litigation by the Commissioner not present in this case. The Commissioner and the Kemp litigants had, for example, initially asked for a consent order to uphold the settlement, even though Ministerial approval had not been sought. Even taking that into account, it was a surprisingly generous award. We do not consider, therefore, that there can be any requirement that it be replicated in this case.

Result and costs

[12] For the reasons given above, we see no reason to interfere with Baragwanath J’s decision. The appeal is accordingly dismissed. Costs of $4,000 (plus reasonable disbursements to be set by the Registrar if necessary) are awarded to the Commissioner on this appeal.

Solicitors:
R J Warburton, Auckland for Appellants
Crown Law Office, Wellington for Respondent