Federal Court Judge – Notes on Tax Litigation Principles

In a talk given by Federal Court Judge (Thawley J) on 14/10/19 at Sydney University, he spoke about the following tax litigation principles, including Legal professional privilege, Onus of proof (how it operates in the practical setting), strategy (achieving outcome for your client). The onus of proof is on the taxpayer. The taxpayer must prove, beyond all reasonable doubt that all their elements of the case were true.

Case example: Stallion (NSW) Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2019] FCA 1306

This case concerns the luxury car tax, in which the party would un-sell cars to a third party car dealer, then claim back the luxury car tax. Where this would look like a genuine sale, the Commissioner found that CJS was the true principle purchaser and Stallion was the agent. There was a contract between the principle and the car dealer.

Where tax invoices were going between both parties, with sham transactions, there was not a genuine transaction. The Commissioner doesn’t have to prove the onus. Reducing the evidence is on Stallion, he had to fully explain the transactions. These tax invoices had to be proven also. Otherwise, if the judge was left unpersuaded then the taxpayer fails. Note that between both parties there were no relation other than being school friends, and there were no other transactions made outside of these two.

For the tax, the GST is equivalent to Part 4A, as seen in the Fletcher case. The purchase price was always dictated by CJS. There is zero evidence of any negotiation between the parties, which would have positively defined action on behalf of CJS.

We should not ask is the policy correct, we should ask is this case permissible under the policy? We can use case management hearing to see how the case would go. Two things to take away from this case are: sham and agent (for in-disclosed principle). Once filed, the taxpayer bears the onus of proof, and litigation usually does not work this way as compared to other legal cases.

A method to make the allegation in a different way would be to have material usually under a proper basis. Meaning we can shift the evidential onus to the Commissioner. See such cases as Rich Walter in the Full Federal court and Lockart and Hill, the Commissioner does not bear the onus of the true nature. This contrasts, with the persuasive onus, where the allegation is serious. When is commissioner opened up to an appeal, if to fail on onus of proof, then it is bad.

Matter of personal choice. On appeal, at best the full court wouldn’t have gone so far, but doesn’t matter the fact is they agree.

Points about advocacy. Chervon case, banking experts e.g. interest rates, economics. In this case, there was an enormous amount of advice from solicitors. Therefore, it required good cross examination, the case got pleadings, this witness what admissions do I need? Which I cant get out of evidence documents. There is a limited number of admissions. When you say x you mean y? When you say this interest rate you mean this rate, do you accept this as true? Just focus on getting 5 admissions, how do you get them.

Two ways: #1 point out things that have been said so it becomes too embarrassing or absurd to say no to the question, #2 shut all gates, focus in, this can take weeks to prepare. Reducing issues in litigation, beforehand, when in audit you need to maintain flexibility, reduce issues, the real issue is this. The objective is to shut down side issues, narrow the issues, only 3 issues with few sub issues if possible. 99% of facts of a case are determined in cross-examination. Don’t just read emails out or mistakes in documents. Written advocacy is critical to the case, the judge will read beforehand and form a view of the case hearing. Forming strengths and weakness to the evidence. Always open to persuasion. When judge asks for clarification and you don’t know, just say you will come back to that. Make the point concisely. First thing the judge asks in court is if there are any objections or amendments to the written submissions. If the judge hasn’t read them at all, you must go through all, ask the judge to clarify if they have read them. A lot can improve on their structure of the afa davis, what we want, your power to do it arises under this rule, give them the judgement. To oppose this, this order shouldn’t be made due to these three reasons.

Privilege, a problem area, can get people into trouble. Can arise before any dispute arise, with multi-disciplinary firms, big tier accounting firm, when the ATO asks for information. Assuming that the client has been told that the consulting is privileged, professional and ethical problems may arise, if at the end the client is told they are not privileged. For example, a transfer-pricing economist gave advice to a taxpayer with the lawyers name on a document, however this does not make it privileged, unless it contains only legal advice. The ATO is going to ask for bills of organization, and will find the economists hours on this time sheet are the same as the lawyer hours. All will be factored in. Second time this arises is in audit and settlement litigation.

Second thing to be careful about, is that you decide the privileged thing (document) is in your favor then you waive and give to ATO, you open up communications, and you cannot selectively waive privilege. The ATO will ask for the brief to council, containing the 3 containers of documents. Look at the flow on effect.

Third thing to be careful about, is claims for privilege, you get a 353 notice, and you claim privilege. What happens if this gets challenged, and goes to court, then receive notice to court, that this document is not actually privileged. There is no objective basis of the claim then this can have its suspicions, then this is unsatisfactory legal ethical conduct. Big issue with the ATO, going to review them.

Lastly, email chains, they deserve special attention. Principles have never been properly applied to the question. Say an email chain of 10 emails, see if they are privileged. 2018 853 case kenquist FCA case, is a complicated task. Privilege is attached to communications and not documents. What was the dominant purpose of the communication? Why was it communicated? Examined at each stage of the chain, not just the first email. Each email in the chain is a separate document. Either you raise with other side or the court in the evidence. See Archer capital case, osland case, regarding waivers.

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