EASTERN NITROGEN LTD v FC of T

Judges:
Spender J

Court:
Federal Court of Australia

Judgment date: 16 May 1996

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Spender J

By notice of motion filed on 10 May 1996, the Commissioner of Taxation seeks an order for the discovery of various categories of documents. In general, the first four categories relate to documents which Eastern Nitrogen Ltd may have in its possession or control which touch upon the entry into agreements with which these proceedings are concerned, which one can in a non-precise way refer to as a sale and lease-back proposal resulting in agreements between Eastern Nitrogen Ltd, BBL Australia Limited and the State Bank of South Australia in about August 1989.

This and related proceedings QG 22 of 1996 are concerned with whether Part IVA of the Income Tax Assessment Act 1936 (``the Act'') applies to those agreements. The agreements relate to an ammonia production plant in Newcastle NSW operated by Eastern Nitrogen Ltd.

The present motion falls for decision having regard to the provisions of O 52B of the Federal Court Rules. Order 52B does not on its face incorporate by reference the general practice specified in other rules of court, and in particular O 15. I accept, as do counsel, that O 52B on its face does not confer a right to discovery, but that O 52A r 13 is incorporated and it provides:

``(1) On a directions hearing under this Order the Court or a Judge shall give such directions with respect to the conduct of the proceeding as is thought proper.

(2) Without prejudice to the generality of subrule (1) the Court or a Judge may-

• ...
• (c) make orders with respect to:
  • (i) discovery and inspection of documents,
  • ...''

In
FC of T v Hydocarbon Products Pty Ltd 87 ATC 4258; (1987) 14 FCR 359, a Full Court of the Federal Court held that discovery was not available in a taxation suit as a right. The Court held at ATC p 4274; FCR p 378 that:

``... whether the taxpayer should be ordered to provide particulars or afford discovery to the Commissioner was a matter to be resolved in the exercise of his Honour's [the trial judge's] discretion.''

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ATC 4533

The Full Court said in that case that taxation appeals are proceeding sui generis. I accept therefore that the Commissioner has no right to discovery, and whether any discovery, and what discovery, is to be ordered lies within the Court's discretion. In particular, what I am doing now is exercising the discretionary power which is conferred in a suit such as the present by O 52A r 13(2)(c)(i).

Because of the nature of this proceeding, the onus is on the taxpayer and it is a peculiar onus, now referred to in s 14ZZO(b)(i) of the Taxation Administration Act 1953:

``In proceedings on an appeal under section 14ZZ to the Federal Court against an appealable objection decision:

• ...
• (b) the appellant has the burden of proving that:
  • (i) if the taxation decision concerned is an assessment (other than a franking assessment) - the assessment is excessive;
  • ...''

There has been an exchange of statements of facts, issues and contentions. These proceedings arise after there has been an extensive audit and full access by the Commisioner's officers to the documents of Eastern Nitrogen Ltd. I think it fair to record in relation to this present application the contents of the affidavit of Trevor George Hauff, who is the legal manager of Incitec Ltd, the parent company of Eastern Nitrogen Ltd. He says that:

``... The classes of documents which the Respondent [Commissioner] wishes to obtain through discovery have either already been examined by the Respondent in the course of a taxation audit which commenced in late 1990 or the Respondent had full and free access to those classes of documents if the Respondent so desired during that taxation audit... [which] commenced in late 1990 and concluded in approximately mid-1992...''

Mr Hauff says that the applicant company cooperated fully, as did its parent company, in the audit, and the Commissioner had full access to documents which related to the sale and lease-back transaction at issue in the present matter, which access included a waiver of professional privilege in respect of the number of the applicant's documents, including advices fom counsel.

Mr Logan, counsel for the taxpayer, has urged that I ought to decline to make the limited discovery sought by the Commissioner, having regard to considerations which motivated Tadgell J at first instance in the Hydrocarbon Case, where his Honour declined to order limited discovery, and mentioned the fact that the issues had been defined, the peculiar onus that does lie on the taxpayer in this kind of appeal, the history which included an extensive access by the Commissioner to documentary material and whether there would be any extra benefit accruing to the Commissioner from ordering discovery compared with the delay, burden and expense to which the taxpayer would be exposed.

I have had regard to those matters, but it seems to me that the documents for which discovery is sought have a bearing on the issues which are defined in the respective statements of facts, issues and contentions. In particular, s 177D(b)(i) of the Act requires attention to be directed at the question whether the taxpayer has obtained or would, but for s 177F of the Act, obtain a tax benefit in connection with a scheme, and:

• ``...
• (b) having regard to-
  • (i) the manner in which the scheme was entered into or carried out;
  • (ii) the form and substance of the scheme;
  • ...
• it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).''

The working documents associated with the entry into the agreements between Eastern Nitrogen Ltd, BBL Australia Limited and The State Bank of South Australia in about August

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ATC 4534

1989 seem to me to have a relevance to those central questions. The fact that the Commissioner would have had opportunity to inspect and take copies of any such document during the course of the audit does not seem to me to conclude the matter.

I am conscious that if I were to deny the limited discovery as sought, one possible consequence is that out of an abundance of caution every single scrap and skerrick of documentary material that is available during an audit inquiry would be photocopied so as to avoid having to bring applications such as this in future matters.

Speaking basically, the purpose of discovery is to ensure, as far as possible, that litigation is decided on its merits without ambush and surprise and to provide the parties with the relevant documents they need to prepare their cases for trial. What might have been thought to be relevant during an audit is not necessarily what might be thought to be relevant to a party who is now a litigant to proceedings in the Court.

I do not think the fact that the Commissioner had access to a large number of the documents sought by the notice of motion is a consideration which would preclude him from bringing an application for discovery now. If it be the case that those documents have a relevance or may have a relevance to the issues in the taxation suit, it seems to me that there are documents subequent to the conclusion of the audit which may also have a bearing on those issues. I do not wish to burden the taxpayer with general dicovery of all documents that may be relevant subsequent to that time, but I will specify the nature of the post-audit documents for which discovery should be made.

In an unreported judgment of Jenkinson J of 24 April 1995 in Broken Hill Proprietary Campany Limited v Commissioner of Taxation, his Honour seems to have directed his attention to the provisions of O 15, notwithstanding that it seems to me that, by O 52B, really I have to direct my attention to O 52A r 13(c)(i). The considerations which his Honour expressed in that judgment have weight in the present case. There, as here, there had been an audit and extensive access granted by the taxpayer to the Commissioner in the course of it.

His Honour said at the first page of his judgment:

``... during a very large audit of a very large company, were such that it would not be at all surprising if there were mistakes and misunderstandings. Apart from that, and as a separate consideration, a party to litigation once the litigation has started, and certainly once the issues have been defined, is prima facie entitled to the careful search and consideration which the rules relating to discovery contemplate. The circumstance that at an earlier stage material was supplied voluntarily which will be the subject of discovery will not necessarily provide a satisfactory substitute...''

And later he said:

``The people to whom the documents were disclosed in the course of the audit are no doubt highly skilled in taxation law and in examining documents, but they are not, at that time, engaged to concern themselves with preparation for major litigation. Nor were the people within the applicant's organisation who were asked to cooperate in providing material themselves at that time aware that a proceeding in a court was in prospect. Nor were the questions being asked of those people thought by them to be questions asked so that compliance could be made with court discovery procedures by an officer of the company who would then be required to swear in the form of an affidavit of discovery.''

All of those observations apply here. While I acknowledge that there will be inconvenience, time and expense occasioned to the taxpayer in compliance with the order for discovery sought by the Commissioner, I propose to make costs orders which will alleviate some of that difficulty. Further, it seems to me, that I ought to give a direction imposing some element of mutuality on the discovery process. There is an unresolved question as to the obligation of the Commissioner pursuant to O 52B, r 5(a)(iv) and what the words ``other document'' in that rule comprehend.

Counsel for the Comissioner, Mr Newton, does not resit my making an order under O 52A r 13(c)(ii) that relates to documents of third parties which are in the Commissioner's possession or under the Commissioner's control and which are relevant to the hearing of the matter.

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ATC 4535

For these reasons, I make the following orders:

• 1. The applicant file and serve within 28 days of today a list of documents verified by affidavit in the following clases:
  • (a) Working papers and notes of discussions negotiations and arrangements between the officers of Macquarie Bank Limited, BBL Australia Limited, The State Bank of South Australia, Incitec Ltd, Eastern Nitrogen Limited, and/or associated entities in relation to the sale/leaseback proposal which culminated in agreements between Eastern Nitrogen Limited, BBL Australia Limited and The State Bank of South Australia on or about 2 August 1989;
  • (b) Notes of discussions and working papers of the Sub-Committee appointed by the Board of Directors of Incitec Limited in relation to the proposals and negotiations leading up to the execution of the documents mentioned in paragraph (a) including but not limited to consideration of accounting advices obtained in relation to the said transaction;
  • (c) Internal notes, working papers and memoranda of officers of Incitec Ltd, Eastern Nitrogen Limited and/or associated entities in relation to the proposals and negotiations leading up to the execution of the documents mentioned in paragraph (a) including but not limited in consideration of accounting advices obtained in relation to the said transaction;
  • (d) Correspondence, minutes of meetings, records, working papers and notes of discussions involving Macquarie Bank Limited, Incitec Limited, Eastern Nitrogen Limited, The State Bank of South Australia and/or BBL Australia Limited resulting in agreement on or about 12 October 1989 to vary the due date of pre-payment of lease payments pursuant to the documents mentioned in paragraph (a);
  • (e) All documents, correspondence and memoranda relating to payments made pursuant to the purported sale/leaseback transaction to its conclusion, including all documents relevant to the determination of the purported lease, any extension or further lease, and any subsequent reacquisition of the ammonia plant;
  • (f) Copies of statements of account from BBL Australia Ltd and The State Bank of South Australia relating to the purported sale/leaseback transaction.
• 2. The respondent to file and serve within 28 days of today a list, verified by affidavit, of all documents of persons not parties to this litigation, in the respondent's possession or control which are relevant to these proceedings.
• 3. Mutual inspection of material is to be within 21 days after that.
• 4. All material filed in proceedings No. QG 197/95 is to be evidence in proceedings No. QG 22/96 and vice versa.
• 5. Costs of complying with these orders and of today are reserved.
• 6. Liberty to apply is given.

THE COURT ORDERS THAT:

1. The applicant file and serve within 28 days of today a list of documents verified by affidavit in the following classes:

• (a) Working papers and notes of discussions negotiations and arrangements between the officers of Macquarie Bank Limited, BBL Australia Limited, The State Bank of South Australia, Incitec Ltd, Eastern Nitrogen Limited, and/or associated entities in relation to the sale/leaseback proposal which culminated in agreements between Eastern Nitrogen Limited, BBL Australia Limited and The State Bank of South Australia on or about 2 August 1989;
• (b) Notes of discussions and working papers of the Sub-Committee appointed by the Board of Directors of Incitec Limited in relation to the proposals and negotiations leading up to the execution of the documents mentioned in paragraph (a) including but not limited to consideration of accounting advices obtained in relation to the said transaction;
• (c) Internal notes, working papers and memoranda of officers of Incitec Ltd, Eastern Nitrogen Limited and/or associated entities in relation to the proposals and negotiations leading up to the execution of the documents mentioned in paragraph (a)

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  ATC 4536

  including but not limited in consideration of accounting advices obtained in relation to the said transaction;
• (d) Correspondence, minutes of meetings, records, working papers and notes of discussions involving Macquarie Bank Limited, Incitec Limited, Eastern Nitrogen Limited, The State Bank of South Australia and/or BBL Australia Limited resulting in agreement on or about 12 October 1989 to vary the due date of pre-payment of lease payments pursuant to the documents mentioned in paragraph (a);
• (e) All documents, correspondence and memoranda relating to payments made pursuant to the purported sale/leaseback transaction to its conclusion, including all documents relevant to the determination of the purported lease, any extension or further lease, and any subsequent reacquisition of the ammonia plant;
• (f) Copies of statements of account from BBL Australia Ltd and The State Bank of South Australia relating to the purported sale/leaseback transaction.

2. The respondent to file and serve within 28 days of today a list, verified by affidavit, of all documents of persons not parties to this litigation, in the respondent's possession or control which are relevant to these proceedings.

3. Mutual inspection of material is to be within 21 days after that.

4. All material filed in proceedings No. QG 197/95 is to be evidence in proceedings No. QG 22/96 and vice versa.

5. The costs of complying with these orders, and of today, are reserved.

6. There be liberty to apply.