Refund proceedings and Interest and Costs Decision

The Supreme Court of Victoria (Delaney J) handed down a decision in favour of the taxpayers in Razzy Australia Pty Ltd & Anor v Commissioner of State Revenue [2021] VSC 409 on 9 July 2021 (“Interest and Costs Decision”).

Importantly, the decision has decided a number of previously grey areas in relation to interest and costs for successful taxpayers in proceedings against the Commissioner of State Revenue.

In Razzy Australia Pty Ltd & Anor v. Commissioner of State Revenue [2021] VSC 124 (“Refund proceedings”) the taxpayers were successful in obtaining judgment for a refund of duty paid on the basis that the relevant transactions were exempt under Chapter 3 of the Duties Act 2000 (Vic). The Court ordered refunds of the landholder duty that had been previously paid by the taxpayers.

In the Interest and Costs Decision, the Court found that the successful taxpayers were entitled to the following in relation to the Refund proceedings:

  1. interest on the refunded amount from the date of payment in accordance with section 58 of the Supreme Court Act 1986 (Vic) (“SC Act”) at the rate of 10% per annum, rather than the market rate contained in Part 10 of the Tax Administration Act 1997 (Vic) (“TA Act”), specifically section 25(1)(a), which is currently 0.04%;
  2. indemnity costs for the whole of the proceeding, on an issue maintained by the Commissioner but abandoned at trial, without explanation; and
  3. indemnity costs on all other issues in the proceeding from 1 November 2020 on the basis that the Commissioner’s refusal to accept a Calderbank offer was unreasonable; alternatively, indemnity costs on these issues from 4 February 2021, pursuant to the Offer of Compromise under the Supreme Court Rules (Order 26).

DCC Law acted for the taxpayers in both of these proceedings.

Important issues determined against the Commissioner of State Revenue

The Interest and Costs Decision has established the following principles:

  1. Proceedings for refund applications are brought under Part 4 of the TA Act. Part 10 of the TA Act regulates assessments, objections and appeals from or reviews of objections. The Commissioner contended that the rate of interest payable under Part 4 of the TA Act should be the same as under Part 10 so as not to discriminate between taxpayers who pay the disputed amounts pursuant to an assessment rather than making a voluntary payment of tax and bringing a refund application under Part 4.The Court found as a matter of statutory construction that there was nothing in the TA Act requiring the interest payable for a Part 4 application to be the interest rate applied under Part 10 of the TA Act.
  2. Successful taxpayers are ordinarily entitled to interest at the maximum prescribed rate unless good cause can be shown otherwise. Even if it is appropriate to have regard to the rate prescribed in Part 10 of the TA Act, those provisions are not “good cause” to depart from the usual practice so as to give effect to the policy that underpins section 58 of the SC Act namely, as Delaney J stated at [31], to:“…encourage early resolution of dispute, by all Litigants, including the Commissioner…”.
  3. If the Commissioner maintains a position relating to its defence of a proceeding which, as stated by Delany J at [62], was “…flawed both as a matter of construction and having regard to the detailed legislative history….”, causing the taxpayers to be put to considerable trouble and expense in relation to that issue, and then at the very last moment abandons that position without explanation, it will support an order for indemnity costs from the outset in relation to that issue.The Commissioner in the conduct of its litigation is subject, as stated by Delaney J at [61], to:“…the overarching obligation to narrow issues in section 23 of the [Civil Procedure Act 2010 (Vic)] and that is not a duty that only applies once the case gets to trial. It is a duty that applies throughout the whole of the proceeding.”
  4. Two separate proceedings involving an overlap of issues do not preclude one or other of the party’s to those proceedings making an application for indemnity costs because the costs of each party are separate costs and must be considered separately, even if there is common representation, the proceedings were conducted together and that Calderbank offers were made in both proceedings.
  5. The Commissioner’s obligations under the Civil Procedure Act 2010 (Vic) and as a model litigant are not displaced by the fact that the Commissioner seeks the Court to interpret and apply the provisions of the Act. As stated by Delaney J at [78]:“The Commissioner is a person bound by the overarching obligations in the CPA including the section 23 obligation to narrow issues in dispute. In addition, the Commissioner is a person bound by the model litigant guidelines. If there is a matter of statutory construction upon which the Commissioner seeks guidance, it is open to the Commissioner, as submitted on behalf of the Plaintiffs, to offer to pay the costs of the taxpayer so that matter might be properly tested in court. That did not happen in this case”.
  6. The Commissioner is not treated differently to other parties in relation to Calderbank offers or offers of compromise under the Rules and the submission by the Commissioner that taxation appeals are, as stated by Delaney J at [86](e):“…‘all or nothing’ proceedings and the Commissioner must ensure consistent application of taxation laws to all taxpayers is not supported by legislation…”.This proposition was also not supported by Mandie J in Landrow Properties Pty Ltd v Commissioner of State Revenue [2009] VSC 108 (Landrow).
  7. Any practical difficulty in calculating the amount of any costs across two proceedings where indemnity costs are ordered in one proceeding and standard in another should not be a basis for refusing the indemnity costs application where it is appropriate to order.
  8. The Calderbank offer, which represents a reduction of 10% of the refund amount claimed, was a genuine compromise, and not a capitulation, when viewed in the context of:
  • Landrow and North West Recycling Pty Ltd v Commissioner of State Revenue (No 2) [2017] VSC 726 where the offers of compromise where found to be genuine where the offers amounted to 85% – 90% of the amount claimed.
  • The Commissioner not being liable for the taxpayers costs to date.
  • Interest
  • The Commissioner having to further incur its own costs.
  • At the time of the offer, the facts and legal issues were not in dispute. The Commissioner was on notice concerning the taxpayers’ views on the Commissioner’s arguments and filed its defences during the extended offer period.
  • The refusal by the Commissioner to accept the offer was unreasonable.

Key take outs

  1. In disputed stamp duty matters, taxpayers should now carefully consider whether to pay the duty in dispute and apply for a refund under Part 4 of the TA Act, rather than draw an assessment and object, because, if successful, interest may be awarded at the substantially higher rate under section 58 of the SC Act.
  2. Delaney J has made it crystal clear that the “all or nothing” approach historically taken by the Commissioner in tax litigation regarding Calderbank offers, offers of compromise or settling or resolving issues in dispute is inconsistent with the CPA and the Victorian Model Litigant Guidelines.As a consequence, the Commissioner is required to, and taxpayers are entitled to expect, the Commissioner to negotiate a resolution of tax disputes, including the narrowing of issues in dispute, in a manner consistent with the obligations and requirements of the CPA and Victorian Model Litigant Guidelines.
  3. Questions of statutory construction which the Commissioner considers to be matters of public interest should be dealt with by way of test-case funding (where the Commissioner pays the taxpayers’ costs of the litigation), rather than forcing taxpayers to incur substantial costs (for a matter which is of much wider public interest).
  4. The Commissioner should now properly formulate, and clearly bring to the attention of taxpayers:
  • dispute resolution processes and principles consistent with the CPA and the Victorian Model Litigant Guidelines; and
  • test-case funding processes and principles for matters where the Commissioner seeks judicial guidance on questions which the Commissioner considers to have a wider public interest (in the administration of State taxes),

by publishing them on its website.

The final orders in relation to the Refund proceedings and the Interest and Costs Decision were made on 9 July 2021. The time period in which the Commissioner may appeal the Refund proceedings and the Interest and Costs decision has not yet expired.