Expert evidence in taxation appeals a paper delivered at the Taxation Institute of Australia

National Infrastructure Conference

Sydney

Justice Logan 29 April 2022
 

Unless and until one engages in practice, the importance of evidence, let alone expert evidence, in the hearing and determination of any litigation is apt to be understood only in the abstract, as a subject necessarily undertaken at Law School but divorced from the reality of translating an event in personal or business life into evidence admissible in court. Judgments, including those given in taxation appeals, may highlight the importance of particular evidence in the determination of a given case but will rarely offer any insight into how or, sometimes even, why that evidence was obtained and the challenges obtaining it presented. For accountants the gulf is even greater, as studies in commerce or business do not customarily include the law of evidence at all.

My aim in this paper is to offer some such insight, to endeavour to bridge that gulf with particular reference to expert evidence in taxation appeals.

It would be idle to attempt to do that otherwise than against the background of the similarities and differences between the law and practice and procedure governing the conduct of a taxation appeal and general civil litigation.

By “taxation appeal”, I mean an appeal to the Federal Court of Australia, pursuant to s 14ZZ(1)(a)(ii) of the Taxation Administration Act 1953 (Cth) (TAA), against a reviewable objection decision of the Commissioner of Taxation.

Although termed an “appeal”, such a proceeding is heard in the Court’s original jurisdiction. It is therefore best regarded as a statutory appeal, sui generis in character, in which the Court’s role is itself to determine, by reference to the grounds stated in the relevant taxation objection, whether the assessment concerned is excessive.[1] The burden of proving the assessment to be excessive falls on the applicant taxpayer.[2]

A right of recourse to an exercise of Commonwealth judicial power so as to determine on the merits whether an assessment is excessive is constitutionally necessary for the valid exercise of legislative power to make a law with respect to taxation.[3]

The general content of the law of evidence applicable to a taxation appeal is not the subject of legislation applicable only to such appeals. Rather, it is found in the Evidence Act 1995 (Cth). This Act applies not just to a taxation appeal but to each and every other proceeding in the Court.[4]

The Evidence Act follows the model of the so-called “Uniform Evidence Act”, as do the Evidence Acts of New South Wales and Victoria. This means that, in a taxation appeal, as well as prior decisions of the Court, decisions of the superior courts of those States have particular persuasive force in the construction of the Evidence Act.

It follows that, in order to discharge the applicable burden of proof, an applicant in a taxation appeal must do so by evidence which is admissible under the Evidence Act. This applies just as much to expert evidence as to any other evidence.

Although the focus of this paper is on taxation appeals, it is desirable to make some reference to the position which prevails in a taxation review proceeding in the Administrative Appeals Tribunal (AAT). Review by the AAT, pursuant to s 14ZZ(1)(a)(i) of the TAA, of a reviewable taxation objection is the alternative means of challenge offered by the TAA. Although in such a proceeding an applicant also bears the onus of proving the assessment concerned to be excessive,[5] the AAT is not in point of law bound by the rules of evidence in reviewing a taxation objection decision.[6] In practice however, the AAT is unlikely in a taxation review to afford much weight to material put forward as expert evidence which would not be admissible as such in a taxation appeal.

The overarching requirement of the Evidence Act in relation to the admissibility of any evidence, expert or otherwise, is that it must be relevant.[7] Evidence will be relevant if, were it accepted, it “could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue in the proceeding”.[8]

In ordinary civil litigation, the facts in issue in a proceeding, and thus what evidence will be relevant, emerge from a consideration of the pleadings (statement of claim, defence or reply) exchanged. The facts in issue will be those material facts which are not admitted on the pleadings. It is these facts which a party must prove by admissible evidence. In any civil litigation, thus including in a taxation appeal, such facts must be proved, only but necessarily, on the balance of probabilities.[9]

The exercise of identifying the facts in issue and the evidence necessary to prove those facts, be that oral or documentary, expert or lay, is, in any properly conducted litigation, undertaken via the preparation of an advice on evidence. Conventionally, this is prepared after the close of pleadings by counsel briefed for that purpose or, if Silk and junior are retained, by junior counsel, who will consult as required with his or her leader for that purpose. The advice on evidence ought also to identify whether there is any need to apply for discovery and, if so, the scope of discovery or whether there is any need for non-party discovery or the issuing of a subpoena for production of documents or the attendance of a witness.

An advice on evidence is the litigation equivalent of a military appreciation. Just as a military operation conducted with no or no adequate prior planning is apt to prove shambolic, so too, is any litigation, including a taxation appeal, conducted without a prior advice on evidence.

There is, I suspect, a tendency in modern times to neglect the briefing of counsel for the purpose of advising on evidence. Truly, where funds are available, a solicitor is penny wise and pound foolish not to deliver a brief for this purpose. Even where funds do not extend to the retention of counsel, a good litigation solicitor ought always informally undertake a consideration of evidence once pleadings close.

A useful precedent of an advice on evidence is to be found in the superb English practice work, Atkins’ Court Forms.[10]

However, in a taxation appeal, there are no pleadings.

That does not mean that it is impossible to identify the facts in issue. Neither does it mean that there is no corresponding need to identify, desirably via an advice on evidence, the evidence, including any expert evidence, necessary to prove those facts. If anything, the absence of pleadings makes the need to give detailed and early attention to these subjects even more acute in a taxation appeal than in ordinary civil litigation.

While the ultimate issue in any taxation appeal is whether the assessment concerned is excessive, an understanding of what facts are likely to be in issue ought to emerge from a consideration of the grounds of objection.

Innumerable examples might be given. A ground of objection might, for example, allege that a sum included in an assessment as a receipt of income was not income but rather a receipt of capital. From this it would follow that the facts in issue will be those which tend to prove the receipt was one of capital, not income. Or a ground might allege that a tax benefit in the form of a deduction, cancelled by a determination made under Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936), should not have been cancelled, because Part IVA was not applicable to the scheme identified by the Commissioner. In such a case, the facts in issue might be those which, in light of the considerations identified in s 177D of ITAA 1936, show that the applicant’s dominant purpose was not to obtain that tax benefit. Or the issue might be one of market value, a term which appears no less than 418 times in the Income Tax Assessment Act 1997 (Cth).

In each instance, the question becomes what are the facts which reveal the application or non-application of the taxing statute? Such material facts are sometimes termed the “taxable facts”.

It follows that the ascertaining of the taxable facts in a taxation appeal and thus the requisite proofs requires a thorough understanding of the meaning and effect of the pertinent provisions of the taxing statute.

Frequently, a large corporation will have an in-house general counsel, sometimes even a whole general counsel division. An applicant taxpayer will almost invariably have an accountant who has prepared the taxation return for the income year(s) in question. My experience from practice is that the temptation for such a person to be the client representative and to act as a “filter” for communications between solicitor and counsel retained for a taxation appeal is one to be resisted. Operational managers in a corporation are invariably busy people. But it is such persons who are the repositories of first-hand knowledge of the conduct and challenges in the conduct of a given business. More often than not, it is only by drawing upon that knowledge, in conjunction with a knowledge of revenue law and the law of evidence, that a need for, and sources of, particular evidence, including expert evidence, is brought to light. The best service which a general counsel or accountant can give an applicant is to bring home to operational managers, sometimes very senior officers, the need to devote time to providing instructions directly to the retained solicitor, and perhaps later also counsel, in conference.

Just as in ordinary civil litigation, it is bad practice to draw a pleading alleging admitting or denying material facts without at least a general understanding of the evidence which is likely to be available, so, too, it is bad practice to draw grounds of a taxation objection without at least such an understanding. Indeed, best practice is that a pleading or a taxation objection should be drawn by reference to already obtained, signed proofs of evidence. 

In turn this means that, for a taxpayer, the first identification of the facts in issue, able if need be to be proved by evidence, ought to occur at the time when the assessment and any accompanying reasons (for example, an audit report) given by the Commissioner are received and the grounds of objection are being drawn.

Prior to the institution of a taxation appeal, greater precision as to the assessing provision concerned and how it is said by the Commissioner to be applicable will be revealed by the Commissioner in the reasons furnished by him for the objection decision he makes pursuant to s 14ZY of the TAA. A careful study of these reasons ought to yield for a taxpayer a better understanding of the facts likely to be at issue in a taxation appeal. If they are well drawn, it should be apparent from the Commissioner’s reasons in respect of his objection decision which facts he accepts and which facts he does not.

From the Commissioner’s perspective, the facts likely to be at issue should be apparent initially at the time when the assessment is made and then refined at the time when the objection decision is made.

There is a good policy reason why the onus of proof is cast on an applicant in a taxation appeal (or taxation review). It is the applicant, not the Commissioner, who will have firsthand knowledge of the taxable facts. That the onus of proof is cast this way does not mean that it is either necessary or appropriate for the Commissioner to put an applicant to formal proof by admissible evidence in respect of each and every fact in each and every case. Even prior to the specification, in the Federal Court of Australia Act 1976 (Cth) (FCA Act) of an overarching purpose of civil litigation that it be conducted according to law and as quickly, inexpensively and efficiently as possible,[11] and a corresponding duty for parties and their legal representative to advance that purpose,[12] the Commissioner was (and remains) subject to an obligation to act as a model litigant, an obligation to act fairly.[13] A model litigant does not put an opposing party to unnecessary proofs but instead admits the fact concerned. A like obligation now flows from a duty to comply with the overarching purpose of civil litigation.

The Court’s practice in relation to taxation appeals[14] provides for an exchange of what are termed “Appeal Statements”.  One requirement of an Appeal Statement is that it must state “the principal matters of fact upon which the party intends to rely”.

Appeal Statements serve an important procedural fairness role in ensuring that neither applicant taxpayer nor the Commissioner is taken by surprise as to the issues of fact and law at large in a taxation appeal. They do serve to identify facts in issue. However, another requirement of the practice applicable to a taxation appeal is the preparation, prior to the first case management hearing, by both the applicant and the Commissioner, of an “initial witness list”. This list must identify the name of each witness the party intends to call at trial, including “a very brief summary of the expected evidence of each witness and the relevance of the evidence”. This dictates that an examination of the evidence, including any expert evidence, to be led so as to prove a fact in issue usually occur well prior to the institution of the taxation appeal and, at the latest, prior to the first case management hearing. That is not to say that a witness cannot be later identified but it is very much the Court’s expectation, as revealed by the practice note, that witnesses for each party will be identified before the first case management hearing.

By these means, the facts in issue in a taxation appeal, and thus what will or will not be relevant evidence, ought to be ascertained. This may reveal that a particular fact can only be proved by expert evidence, or by a combination of expert and other evidence.

In relation to expert evidence, the scheme of the Evidence Act is to commence with a prohibition and then to provide for exceptions to that prohibition.

The prohibition is found in s 76(1), in what is termed “the opinion rule”, which provides:

The opinion rule

             (1)  Evidence of an opinion is not admissible to prove the existence of a fact about the existence of which the opinion was expressed.

Of the exceptions, the most frequently encountered in taxation appeals, and the subject of particular focus in this paper, is the exception for which s 79 provides, “opinions based on specialised knowledge”, sometimes termed the expert evidence rule.

Section 79 states:

Exception: opinions based on specialised knowledge

             (1)  If a person has specialised knowledge based on the person's training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge.

             (2)  To avoid doubt, and without limiting subsection (1):

                     (a)  a reference in that subsection to specialised knowledge includes a reference to specialised knowledge of child development and child behaviour (including specialised knowledge of the impact of sexual abuse on children and their development and behaviour during and following the abuse); and

                     (b)  a reference in that subsection to an opinion of a person includes, if the person has specialised knowledge of the kind referred to in paragraph (a), a reference to an opinion relating to either or both of the following:

                              (i)  the development and behaviour of children generally;

                             (ii)  the development and behaviour of children who have been victims of sexual offences, or offences similar to sexual offences.

Obviously enough, s 79(2) is most unlikely to be encountered in a taxation appeal.

Subsection 79(1) of the Evidence Act contains two conditions, each of which must be satisfied for an opinion of a witness to be admissible:

 

(a) the witness must have “specialised knowledge based on the person’s training, study or experience”; and

 

(b) the opinion expressed by the witness must be “wholly or substantially based on that knowledge”.

Neither of these expressions is, or perhaps meaningfully ever could be, the subject of definition. Instead, elucidation as to their meaning is offered by case law. Being statutory expressions, it is a mistake to approach their meaning as if either is but a restatement of a pre-existing, common law understanding about the admissibility of expert evidence.

In respect of the first condition, the High Court stated in Honeysett v The Queen[15] that:

[The] “first condition directs attention to the existence of an area of specialised knowledge. Specialised knowledge is to be distinguished from matters of common knowledge. Specialised knowledge is knowledge which is outside that of persons who have not by training, study or experience acquired an understanding of the subject matter. It may be of matters that are not of a scientific or technical kind and a person without any formal qualifications may acquire specialised knowledge by experience. However, the person's training, study or experience must result in the acquisition of knowledge. The Macquarie Dictionary defines ‘knowledge’ as ‘acquaintance with facts, truths, or principles, as from study or investigation’ (emphasis added) and it is in this sense that it is used in s 79(1). The concept is captured in Blackmun J's formulation in Daubert v Merrell Dow Pharmaceuticals Inc (1993) 509 US 579 at 590: ‘the word “knowledge” connotes more than subjective belief or unsupported speculation. ... [It] applies to anybody of known facts or to any body of ideas inferred from such facts or accepted as truths on good grounds”.

Within the first condition, training, study or experience may be cumulative or alternative sources of a qualification to express an admissible opinion. Such is the breadth of the language of s 79(1), even experience gained ad hoc can provide the requisite qualification.[16]

As to the second condition, the High Court stated in Honeysett:

The second condition of admissibility under s 79(1) allows that it will sometimes be difficult to separate from the body of specialised knowledge on which the expert’s opinion depends “observations and knowledge of everyday affairs and events”. It is sufficient that the opinion is substantially based on specialised knowledge based on training, study or experience. It must be presented in a way that makes it possible for a court to determine that it is so based.[17]

[emphasis in original; footnote references omitted]

Even so, care must be taken to distinguish between what is a subject of admissible opinion, which may in part (see s 80(b), Evidence Act) but not substantial part be based on a matter of common rather than specialised knowledge and a subjective appreciation of facts, which may be equivalently assessed by the tribunal of fact. In a taxation appeal, the tribunal of fact is the trial judge.

That the factual basis for an expert opinion may be controversial and incapable of resolution until delivery of judgment in respect of the trial does not render the opinion inadmissible. The opinion is admissible in evidence if there is evidence which, if accepted, is capable of establishing the truth of the assumptions upon which the opinion is based.[18]

Any notion that an expert cannot “swear the issue” is put to rest by s 80(a) of the Evidence Act, which provides that evidence of an opinion is not inadmissible only because it is about “a fact in issue or an ultimate issue”.

As with all superior courts in Australia, the Court has particular expectations in relation to the duties of expert witnesses and those who retain them for the purposes of a proceeding. These expectations are found in the Court’s Expert Evidence Practice Note (GPN-EXPT).[19] This Practice Note is just as applicable to a taxation appeal as to any other proceeding in the Court.

The Practice Note offers a reminder that, “the purpose of the use of expert evidence in proceedings, often in relation to complex subject matter, is for the Court to receive the benefit of the objective and impartial assessment of an issue from a witness with specialised knowledge (based on training, study or experience)”.

The importance of bringing home to any expert the expectation of objectivity, not partisanship, and impartiality, not advocacy, cannot be over-emphasised. One means by which the Court seeks to achieve this is by requiring any expert witness to be briefed with, and to acknowledge that he or she is bound by the Practice Note and, a Harmonised Expert Witness Code of Conduct, as approved by the Council of Chief Justices' Rules Harmonisation Committee.

A feature of this Code is provision for conferences of experts and joint-reports.[20] Provision for these is now routine feature of interlocutory case management directions, including in taxation appeals, where expert evidence is to be adduced.

That is not to say that there is any expectation that experts must agree, only that they endeavour in good faith to identify areas of agreement and disagreement.

Care must be taken in the formulation of questions for the expression of expert opinion so as not to suggest the answer desired. Like caution must be exercised in conferring with experts. A party may be compelled to disclose communications with experts. I have seen the credibility of an expert discounted on the basis of such a disclosure, which made it obvious, by the exchange of pre-trial communications, that the expert had, in effect, become part of a party’s team of advocates.

The Practice Note and the Code operate in conjunction with the provisions of Division 23.2 of the Federal Court Rules – “Parties’ expert witnesses and expert reports”. Rule 23.13 is prescriptive as to the contents of an expert’s report:

23.13 Contents of an expert report

(1) An expert report must:

(a) be signed by the expert who prepared the report; and

(b) contain an acknowledgement at the beginning of the report that the expert has read, understood and complied with the Practice Note; and

(c) contain particulars of the training, study or experience by which the expert has acquired specialised knowledge; and

(d) identify the questions that the expert was asked to address; and

(e) set out separately each of the factual findings or assumptions on which the expert’s opinion is based; and

(f) set out separately from the factual findings or assumptions each of the expert’s opinions; and

(g) set out the reasons for each of the expert’s opinions; and

(ga) contain an acknowledgement that the expert’s opinions are based wholly or substantially on the specialised knowledge mentioned in paragraph (c); and

(h) comply with the Practice Note.

(2) Any subsequent expert report of the same expert on the same question need not contain the information in paragraphs (1)(b) and (c).

Rule 23.14 confirms that there is no property in an expert’s report, by providing that, “A party may apply to the Court for an order that another party provide copies of that other party’s expert report.”

The Rules also contemplate[21] that innovative orders as to the reception of expert evidence may be made perhaps with experts, if there be more than one on the same subject, giving evidence in immediate succession one after another, perhaps even concurrently.

A failure to draw to an expert’s attention either the Practice Note or the related Code is not an automatic bar to the admissibility of that expert’s opinion.[22] Neither is non-compliance with a particular expectation in that Code. Rather, as highlighted in Wood v R, [23] depending on the nature and extent of the departure in a given case, occasion may arise for the exclusion of the opinion pursuant to s 135 of the Evidence Act, on the basis that its probative value is substantially outweighed by the danger that it might mislead or confuse or be unfairly prejudicial to a party.

For those who would read further as to the obligations of experts both under the Code and the general law, I respectfully commend recourse to paragraphs [719] to [729] in the judgment of McClellan CJ in Wood, where pertinent authorities are collected. In particular, his Honour offers, at [719], this helpful summary of influential observations about expert evidence made by Cresswell J in National Justice Compania Naviera SA v Prudential Assurance Co Ltd (The Ikarian Reefer)[24]:

 
  1.       
  2. Expert evidence presented to the court should be, and should be seen to be, the independent product of the expert uninfluenced as to form or content by the exigencies of litigation. See also Whitehouse v Jordan (1981) 1 WLR 246 at 256 per Lord Wilberforce.   
  3. An expert witness should provide independent assistance to the court by way of objective, unbiased opinion in relation to matters within his expertise. An expert witness should never assume the role of an advocate.   
  4. An expert witness should state the facts or assumptions upon which his opinion is based. He should not omit to consider the material facts which could detract from his concluded opinion.   
  5. An expert witness should make it clear when a particular question or issue falls outside his expertise.   
  6. If an expert’s opinion is not properly researched because he considers that insufficient data is available, then this must be stated with an indication that the opinion is no more than a provisional one. In cases where an expert who has prepared a report cannot assert that the report contains the truth, the whole truth and nothing but the truth without some qualification, that qualification should be stated in the report.   
  7. If, after exchange of reports, an expert witness changes his view on a material matter having read the other side’s expert’s report, or for any other reason, such change of view should be communicated (through legal representatives) to the other side without delay and when appropriate to the court. 
  8. Where expert evidence refers to photographs, plans, calculations, analyses, measurements, survey reports or other similar documents, these must be provided to the opposite party at the same time as the exchange of reports.
 

What then of examples of the use of experts in taxation appeals?

Although I have encountered expert evidence when sitting either in the original or appellate jurisdiction in such cases, and others, it is a long established, and salutary, rule of judicial conduct that a judge does not comment publicly about a decision once reasons for judgment have been delivered, even to clarify ambiguity. The reasons for judgment must speak for themselves.[25] So instead I am going to offer some examples from my time in practice.

Eastern Nitrogen Ltd v Commissioner of Taxation[26] offers a useful illustration of the role of expert evidence in a case where the Commissioner sought to rely on Part IVA of the ITAA 1936 so as to cancel tax benefits represented by deductions of rent claimed by the taxpayer pursuant to s 51(1) of that Act.

Eastern Nitrogen Ltd was the registered proprietor of land at Kooragang Island in New South Wales. A large ammonia production plant was situated on that land. Eastern Nitrogen operated that plant for the purpose of conducting its business as a manufacturer of fertiliser.

In August 1989, Eastern Nitrogen entered into a sale and lease-back transaction

with two financiers, BBL Australia Ltd and State Bank of South

Australia in respect of the ammonia plant. Under an Instalment Purchase Agreement, it agreed to sell the ammonia plant to the financiers. Under an Agreement for Lease entered into on the same day, it agreed to lease the plant back from the financiers for a period of five years. The land to which the ammonia plant was affixed was not part of the sale and lease-back transaction.

Eastern Nitrogen claimed the rent paid as a deduction. This claim was disallowed by the Commissioner, who instead allowed deductions amounting to one-fifth of the total claim in each of the three years of income with which these appeals were concerned, as borrowing expenses under s 67 of the ITAA 1936, but disallowed the balance of the claimed deduction.

Eastern Nitrogen failed at trial but its deduction claim was allowed by a unanimous Full Court. Expert evidence played a role in that success.

A disclosure is necessary. I was one of the counsel retained by Eastern Nitrogen.[27]

Eastern Nitrogen led two discrete bodies of expert evidence at trial, one more influential than the other as it transpired, in seeking to demonstrate that the dominant purpose of the sale and leaseback transaction was not the obtaining of the tax benefit represented by the deduction of rent under the lease.

One body of expert evidence went to the existence of an international market for the sale, removal and re-erection of ammonia plants. It transpired that it was economically advantageous in certain circumstances, even allowing for the costs of decommissioning and recommissioning, to acquire an existing plant rather than to acquire new and then assemble all of the components for an ammonia plant. Lead times before a plant could be brought into production could be truncated and component costs reduced without compromising production quality. The existence of such a market formed part of a body of specialised knowledge. Evidence, not determinative as it transpired, of the existence of such a market was tendered as a riposte to an impression that there was an artificiality about the sale of a large industrial plant but not the land upon which that plant was situated.

The other body of expert evidence came from a senior officer of BBL, who had lengthy experience in large scale corporate finance. His evidence was that this type of lease, characterised as a finance lease, had long been an alternative means of raising large scale corporate finance in Australia and presented benefits other than just the deduction in full of rent. This was highly influential in relation to the ultimate result.

Eastern Nitrogen had the benefit of an experienced solicitor, Mr Bill Thompson, then tax partner at Minister Ellison. He was well familiar not just with the issues of revenue law at large but no less importantly with his client and its business. Even so, the leading of such expert evidence did not just happen. It required advice on evidence. It then required careful taking of instructions from knowledgeable corporate officers and related identification and conferring with prospective expert witnesses, thorough assimilation of their opinions by solicitor and counsel and resultant drafting and settling of affidavits. It also then required close liaison and sensitive diplomatic skills by the solicitors with these witnesses to ensure their availability to give evidence at trial.

I mention diplomatic skills because not all of those who come to give expert evidence do so as their principal calling. The person with relevant expertise may be heavily engaged in trade or commerce. Giving evidence in court is apt to be a distraction from this. Further, although all judges are sensitive to this consideration, the course of a trial can be unpredictable. So it is not always possible to give an expert witness a precise time when he or she will be called as a witness, let alone when their evidence will conclude.

Another example from my experience in practice of expert evidence in a taxation proceeding is Peerless Marine Pty Ltd v Commissioner of Taxation.[28] This was a taxation review, not a taxation appeal proceeding. But there was a great deal at stake and it was conducted before a first rate bench for all practical purposes in the same manner as a taxation appeal.[29]

Peerless Marine was set up to manufacture and sell luxury powered catamarans, but ceased business after selling a slowly-constructed prototype for half its manufacturing cost. Its managing director and driving force was a longstanding boating enthusiast but his considerable success in business and ability to pursue this enthusiasm in commerce, via the operation of Peerless Marine, came from an unrelated business endeavour. Income tax deductions and input tax credits, claimed by Peerless Marine for all phases of the operation, were disallowed after objection.

Once again, Peerless Marine had the benefit of sound tax litigation solicitors.[30] An analysis of the facts in issue disclosed that one critical issue was whether Peerless Marine was carrying on a business. Another, in relation to goods and services tax, was whether expenditures were ‘‘for a purpose that is

essential to the efficient conduct of a business that you carry on’’.

For the applicant, and also the Commissioner, I feel sure, a great deal of attention was given to identifying marine sales experts, gaining an understanding of the importance of a prototype and to preparing and filing witness statements of experts.

Sometimes, with experts, especially if they are in small business, you must go to them to confer. I can remember visiting with my instructing solicitor small boatyards and marinas for this purpose in that case. Such visits yielded the added benefit of seeing firsthand industry conditions. Time spent on reconnaissance is seldom wasted.

As the following excerpt from the Tribunal’s reasons[31] reveals, determinative evidence, corroborative of that led by Peerless Marine, came from the Commissioner’s expert, a Mr Barry-Cotter, in cross-examination and in consequential questions posed by the Tribunal, prompted by the answers given in cross-examination:

[115] Mr Barry-Cotter was called by the respondent on the basis of his 40 odd years of experience in the day-to-day involvement with the design, production, costing, marketing and sale of luxury power boats. He was, if I may say so, a very impressive witness. He described the process of getting started in the business of boat building in this way:

I … started off building one boat I was sailing in a sailing club at the time ant that sort of gave me quite a few contacts. I sort of lobbied boating magazines, and the boating journalists, to get some really make myself known with them, and did some repair work and then started to build a boat on spec. I sold a car and built the boat on spec and put a finally, then, put one ad in the paper and sold it.

He described this first boat as ‘‘quite important’’.

[116] His first boat was a wooden hulled vessel. Some little time after that his company turned to building fibreglass boats. He described the first of the fibreglass boats as experimental and ‘‘overbuilt’’. This passage in cross-examination by Mr Logan is revealing:

 

Q. With the first boat then, in fibreglass, important to get one then out to the market to show that your company could produce a good fibreglass one? Most definitely.

And then is it the case that a first sale of the new product is very important Very important. It’s, you know, sometimes you know it’s the whole business relies on it, you know, and a lot of people’s jobs.

Yes? So with a new model, in that way it’s not that different today.

 

Later on, and in answer to a question from me, Mr Barry-Cotter said:

You know, you’d have a you know, for the custom boats, a photograph album, and you would really try and do a deal with the customer to get access to take prospective buyers and show them the boat, and then that was, sort of, early days. Today you’ve really got to build boats, put them in stock, and so they’re there for people to see.

‘‘This is what we can build for you?’’ Yes, exactly, like a project house.

 

[117] The evidence that I have recited satisfies me that being able to demonstrate what the boat builder can accomplish and the look and feel of the finished product is an important element in, the business of boat building. And, for that reason, it may be readily concluded that the use of ‘‘White Spirit’’ in this way was for a purpose that was important in the efficient conduct of the business of a boat builder.

There is an obvious vanity, forgivable I hope, in citing this excerpt. I do so because it offers an example of the adage that there is no property in a witness, including an expert witness, of a constructive, not destructive, feature of cross-examination and of the absolute need for thorough prior preparation by counsel and instructing solicitor, not just on the law but also the facts. The preparation for the hearing, in particular the understanding, gained from experts, of the importance of a prototype in marine sales, gave me a confident expectation, in considering Mr Barry-Cotter’s evidence in chief, that he would give particular answers in cross-examination. So it proved.

There is nothing unique to a taxation appeal, or even to expert evidence, about the importance of informed and attentive listening by counsel and solicitor in the course of a trial. It is important in all litigation. Further, sometimes particular answers in evidence provoke a question from the bench. Of course a judge or tribunal member may not assume the role of an advocate for either party. But within proper limits they are entitled to ask questions in clarification. If so, the best course for counsel to take, and the excerpt offers an example of this, can sometimes be silence.

Yet further case examples might be given but the law of diminishing returns would apply to their illustrative value. The reference to Peerless Marine offers a note of happy recollection, at least for that company and its legal representatives, on which to conclude this paper.

(C) J. A. Logan, 2022. Moral right of author asserted. Non-exclusive publication licence granted to the Taxation Institute of Australia.


[1] s 14ZZO(a), TAA.

[2] s 14ZZO(b), TAA.

[3] Deputy Commissioner of Taxation v Brown (1958) 100 CLR 32 at 40; Giris Pty Ltd v Commissioner of Taxation (1969) 119 CLR 365 at 378-379; MacCormick v Commissioner of Taxation (1984) 158 CLR 622; Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 at [9] – [10].

[4] s 4, Evidence Act and definition of “federal court” in the “Dictionary” to that Act. As a court created by the Commonwealth Parliament, the Federal Court of Australia is a “federal court” as so defined.

[5] s 14ZZK, TAA.

[6] 33(1)(c), Administrative Appeals Tribunal Act 1975 (Cth).

[7] s 56, Evidence Act.

[8] s 55, Evidence Act.

[9] s 140, Evidence Act.

[10] Atkins’ Court Forms, 2nd edition, Vol. 18 (1985 Reissue), pp 373-375.

[11] s 37M, FCA Act.

[12] s 37N, FCA Act.

[13] Melbourne Steamship Co Ltd v Moorehead (1912) 15 CLR 333, 342.

[14] Taxation Practice Note (TAX-1): see Federal Court of Australia website: https://www.fedcourt.gov.au/law-and-practice/practice-documents/practice-notes/tax-1

[15] (2014) 253 CLR 122, at [23].

[16] R v Leung (1999) 47 NSWLR 405 at [36]–[40].

[17] (2014) 253 CLR 122, at [24].

[18] Rhoden v Wingate (2002) 36 MVR 499; [2002] NSWCA 165, at [86].

[19] Federal Court of Australia website: https://www.fedcourt.gov.au/law-and-practice/practice-documents/practice-notes/gpn-expt

[20] See clauses 6 and 7 of the Code attached as Annexure A to practice note GPN-EXPT.

[21] See Rule 23.15; see also, as to concurrent evidence, the Concurrent Expert Evidence Guidelines, Annexure B to the Practice Note.

[22] Chen v R (2018) 97 NSWLR 915.

[23] Wood v R (2012) 84 NSWLR 581, [2012] NSWCCA 21, at [729].

[24] [1993] 2 Lloyd’s Rep 68 at 81–82.

[25] Australasian Institute of Judicial Administration, Guide to Judicial Conduct, 3rd Edition. Paragraph 5.7.2.

[26] In the Full Court, (2001) 108 FCR 27, 46 ATR 474, 188 ALR 415, 2001 ATC 416, [2001] FCA 366. In the original jurisdiction, [1999] FCA 1643.

[27] Junior to Mr D Bloom QC and to Mr A Slater QC.

[28] (2006) 63 ATR 1303, 2006 ATC 2419, [2006] AATA 765.

[29] The Tribunal was constituted by Deputy President Hack SC. I appeared for the applicant. Mr N J Williams SC and Mr C D Coulsen appeared for the Commissioner.

[30] Cooper Grace Ward.

[31] Peerless Marine (2006) 63 ATR 1303, 2006 ATC 2419, [2006] AATA 765, at [115] – [117].


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