this product is unavailable for purchase using a firm account, please log in with a personal account to make this purchase.

Knockout punch: the taxpayer gets An equal shot

Feature Articles

Cite as: September 2012 86 (09) LIJ, p.50.

The Federal Court recently held that the Commissioner of Taxation has the same rights and obligations as any other litigant, including the obligation to properly consider offers of compromise.

By Ruth Hamnett


Commercial lawyers are familiar with the principles of offers of compromise, a main objective being to achieve the timely resolution of litigation and avoid unnecessary expense.1 Commissioner of Taxation v Clark (No. 2) (Clark)2 confirms the application of these principles to appeals against the Commissioner of Taxation (the Commissioner). In Clark, the Full Court of the Federal Court (Dowsett, Edmonds and Gordon JJ) awarded indemnity costs against the Commissioner and upheld the findings and reasoning at first instance of Greenwood J allowing appeals by the respondents (the taxpayers) from a decision to amended income tax assessments under s14ZZ of Part IVC of the Taxation Administration Act 1953 (Cth) (TA Act).3

After the decision at first instance and prior to the hearing of the appeal, each taxpayer had made offers of settlement both in accordance with the provisions of O.23 of the Federal Court Rules 1979 (Cth) (1979 Rules) and in the form of offer suggested in Calderbank v Calderbank (Calderbank).4

At the relevant time O.23 dealt with offers to settle. Since then, the Federal Court Rules 2011 (Cth) (2011 Rules) have been enacted. Part 25 of these rules now addresses offers to settle, reflecting the provisions of O.23 in the 1979 Rules but in a simpler form.

Offers of compromise

The case concerned the application of O.23, r11(6) of the 1979 Rules, which provided:

“(6) If:

(a) an offer is made by a respondent and not accepted by the applicant; and

(b) the respondent obtains an order or judgment on the claim to which the offer relates as favourable to the respondent, or more favourable to the respondent, than the terms of the offer;

then, unless the Court otherwise orders:

(c) the respondent is entitled to an order that the applicant pay the respondent’s costs in respect of the claim incurred up to 11am on the day after the day the offer was made, taxed on a party and party basis; and

(d) the respondent is entitled to an order that the applicant pay the respondent’s costs in respect of the claim incurred after that time, taxed on an indemnity basis.”

Section 64 of the Judiciary Act 1903 (Cth) (Judiciary Act) provides that “in any suit to which the Commonwealth or a State is a party, the rights of the 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”. Consequently, once the Court’s jurisdiction is engaged, the Commissioner becomes a litigant subject to s64 of the Judiciary Act. In any event, the decision in Calderbank established that in considering the award of costs, a court may take into account an offer to compromise the relevant proceedings, even if such an offer was not made in accordance with any specific statutory provision or rule. This approach is permitted by s67 of the Judiciary Act in considering the appropriate orders as to costs proceedings against the Commonwealth.

General administration of Acts

Pursuant to s3A of the TA Act, s8 of the Income Tax Assessment Act 1936 (Cth) and ss1-7 of the Income Tax Assessment Act 1997 (Cth), the Commissioner has the general administration of those Acts. The breadth of the Commissioner’s power has been long recognised.5

Nonetheless, the Commissioner argued that by his own policies and procedures, he has limited his own power to compromise litigation to which he is a party.6 The Court accepted that the Commissioner must discharge his duties according to law and in a way that is transparent and consistent. It further acknowledged that there may be cases in which prescribed policies and procedures may inform the exercise by the Court of its discretion as to costs under either s43 of the Federal Court Act 1976 (Cth)7 or O.23 of the 1979 Rules. However, it held that the Commissioner cannot hide behind his own policies and procedures in refusing to accept offers of compromise.8

Public interest

The Commissioner argued that the case concerned a matter of principle and that the litigation was conducted in the broader public interest. The Court acknowledged that, in an appropriate case, the public interest may be better served by having the Court decide a case which has wider ramifications, rather than settling it on the basis of purely commercial considerations. However, in this case, the Commissioner had expressly refused public funding to the taxpayers on the basis that the outcome of the proceedings would “not clarify a contentious area of law”.9 Consequently, the Court found that the Commissioner cannot hide behind the “public interest” in refusing to accept offers of compromise.10

Offer more favourable than eventual outcome

The Commissioner contended that any offer to settle must be a “real” offer, not a “tactical” offer designed to “put pressure on the appellant without offering any true compromise” and that it must involve the offer of a substantial amount, having regard to the amount of the assessment in question. However, the Court held that there is no factual or legal foundation for such propositions.11

The Court inferred from the fact that the ultimate outcomes of the appeals were less favourable to the Commissioner than any of the offers that it was unreasonable for him to reject them, at least in the absence of any countervailing consideration.12


Clark establishes that the Commissioner has the same rights and obligations as any other litigant, including the obligation to properly consider offers of compromise under O.23. It is also authority for the proposition that the Commissioner cannot rely generally on policy and procedure or public interest as the basis for arguing that a costs order should not be awarded against him.

Practically speaking, the decision in Clark suggests that a taxpayer ought to apply for test-case litigation funding prior to the commencement of proceedings in the Federal Court. If test-case funding is refused and the taxpayer is ultimately successful in his or her appeal, the earlier refusal of test-case funding could be used to argue that the litigation was not in the wider public interest and could bolster a subsequent application for costs from the date of any offer of compromise. Similarly, a taxpayer should make such an offer of compromise at an early stage in proceedings in order to safeguard their entitlement to costs in the event that they are ultimately successful.

RUTH HAMNETT LLB (Hons), LLM is a barrister practising in taxation law, administrative law and criminal law. She signed the Bar Roll in 2006 and has previously worked as a lawyer for the Australian Taxation Office and as Associate to Justice Ryan of the Federal Court of Australia.

1. For a discussion of the principles in the Victorian jurisdiction see Matthew Hicks, “Building a Bridge”, May 2012 LIJ, p38.

2. [2011] FCAFC 140.

3. [2011] FCAFC 140 at [1].

4. [1975] 3 All ER 333. See also Hicks, note 1 above.

5. See for example Spender J in Precision Pools Pty Ltd v Commissioner of Taxation (1992) 37 FCR 554 at 566-7; [2011] FCAFC 140 at [22].

6. [2011] FCAFC 140 at [12].

7. [2011] FCAFC 140 at [30].

8. [2011] FCAFC 140 at [28].

9. [2011] FCAFC 140 at [24].

10. [2011] FCAFC 140 at [28].

11. [2011] FCAFC 140 at [31]-[32].

12. [2011] FCAFC 140 at [32].


Leave message

 Security code
LIV Social