Spassked Pty Ltd v Commissioner of Taxation (No 3)

[2002] FCA 490

FEDERAL COURT OF AUSTRALIA

Spassked Pty Ltd v Commissioner of Taxation (No 3) [2002] FCA 490

PRACTICE AND PROCEDURE – subpoena to produce documents – motion by subpoenaed party to set aside on ground of oppression – burden and cost of identifying documents covered by subpoena

SPASSKED PTY LIMITED (ACN 003 255 847)

v COMMISSIONER OF TAXATION

STANLEY PARK PTY LIMITED (ACN 008 432 997)
v COMMISSIONER OF TAXATION

INDUSTRIAL EQUITY LIMITED (ACN 004 617 164)
v COMMISSIONER OF TAXATION

N 1362 OF 1999
N 1363 OF 1999
N 1364 OF 1999

LINDGREN J
17 APRIL 2002
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY		N 1362 OF 1999
BETWEEN:	SPASSKED PTY LIMITED (ACN 003 255 847) APPLICANT
AND:	COMMISSIONER OF TAXATION RESPONDENT

JUDGE:	LINDGREN J
DATE OF ORDER:	17 APRIL 2002
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.The subpoena for production issued on 2 April 2002 be set aside.

2.The costs of the motion brought by notice of motion filed on 9 April 2002 be reserved.

3.PKF as moving party on the motion and the Commissioner each have liberty to restore the matter in relation to costs on one day’s notice.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY		N 1363 OF 1999
BETWEEN:	STANLEY PARK PTY LIMITED (ACN 008 432 997) APPLICANT
AND:	COMMISSIONER OF TAXATION RESPONDENT

JUDGE:	LINDGREN J
DATE OF ORDER:	17 APRIL 2002
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.The subpoena for production issued on 2 April 2002 be set aside.

2.The costs of the motion brought by notice of motion filed on 9 April 2002 be reserved.

3.PKF as moving party on the motion and the Commissioner each have liberty to restore the matter in relation to costs on one day’s notice.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY		N 1364 OF 1999
BETWEEN:	INDUSTRIAL EQUITY LIMITED (ACN 004 617 164) APPLICANT
AND:	COMMISSIONER OF TAXATION RESPONDENT

JUDGE:	LINDGREN J
DATE OF ORDER:	17 APRIL 2002
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.The subpoena for production issued on 2 April 2002 be set aside.

2.The costs of the motion brought by notice of motion filed on 9 April 2002 be reserved.

3.PKF as moving party on the motion and the Commissioner each have liberty to restore the matter in relation to costs on one day’s notice.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY		N 1362 OF 1999
BETWEEN:	SPASSKED PTY LIMITED (ACN 003 255 847) APPLICANT
AND:	COMMISSIONER OF TAXATION RESPONDENT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY		N 1363 OF 1999
BETWEEN:	STANLEY PARK PTY LIMITED (ACN 008 432 997) APPLICANT
AND:	COMMISSIONER OF TAXATION RESPONDENT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY		N 1364 OF 1999
BETWEEN:	INDUSTRIAL EQUITY LIMITED (ACN 004 617 164) APPLICANT
AND:	COMMISSIONER OF TAXATION RESPONDENT

JUDGE:	LINDGREN J
DATE:	17 APRIL 2002
PLACE:	SYDNEY

REASONS FOR JUDGMENT (No 3)

INTRODUCTION

1. These three proceedings are being heard together and the evidence in each is evidence in the others.  They are appeals by taxpayers against the disallowance by the respondent (“the Commissioner”) of objections to assessments of income tax.

   THE NOTICE OF MOTION AND THE SUBPOENA

2. By a notice of motion filed on 9 April 2002 in each proceeding, the partners of the accounting firm PKF, formerly Pannell Kerr Foster, seek an order that a subpoena for production issued on behalf of the Commissioner be set aside on the ground that it is oppressive.  The three subpoenas and notices of motion are in identical terms.  For convenience, I will refer to the Spassked proceeding (N 1362 of 1999) alone.

3. The subpoena was issued on 2 April 2002, and required the partners of PKF to produce, six days later, on 8 April 2002, the following documents:

   “1.All correspondence, file notes, diary notes or other documents (whether or not in computer readable form i.e. an email, disk, tape, random access memory or the like) brought into existence during the period 1 July 1984 to 30 June 1995 inclusive recording:

   Ainstructions received by PKF (formerly Bowie Wilson Miles) from Industrial Equity Limited (‘IEL’), IEL Finance Limited (‘IEF’), Spassked Pty Limited (formerly known as Denore (No 1) Pty Limited) (Spassked) or Group Investment Holdings Pty Limited (formerly known as Bikinga Pty Limited (‘GIH’) or from any director, officer or employee of IEL, IEF, Spassked or GIH during the period 1 July 1984 to 30 June 1992 inclusive; and/or

   Bopinions or advice provided to IEL, IEF, Spassked or GIH or to any director, officer or employee of IEL, IEF, Spassked or GIH during the period 1 July 1984 to 30 June 1992 inclusive,

   in connection with:

   (a)the incorporation of Spassked on 17 March 1987;

   (b)the acquisition on 20 March 1987 by IEL of shares in the capital of Spassked;

   (c)the provision by IEF of a loan of $25,000,000 to Spassked on 30 December 1987;

   (d)the provision by IEF of a loan of $950,000,000 (or loans totalling $950,000,000) to Spassked on 18 January 1988;

   (e)the provision by IEF of a loan of $675,000,000 to Spassked on 31 March 1988;

   (f)the provision by IEF of a loan of $280,000,000 (or loans totalling $280,000,000) to Spassked on 1 April 1988;

   (g)the acquisition by Spassked on the dates set out in the table immediately below of promissory notes issued by IEF having the face values as set out in the table:

   [There followed a table divided into two columns headed, respectively, “Date” and “Face Value” and containing two line-entries, each showing a date and amount, the dates being 15 March 1989 and 30 March 1989 and the amounts totalling $407,351,681.]

   [(h) – (m).These paragraphs were not pressed.]

   (n)the acquisition by Spassked on the dates set out in the table below of promissory notes issued by IEF having the face values as set out in the table:

   [There followed a table divided into two columns headed, respectively, “Date” and “Face Value” and containing thirty four line-entries, each showing a date and amount, the dates extending from 31 May 1989 to 28 June 1990 and the amounts totalling $1,318,791,185.]

   (o)the subscription by Spassked for ‘A’ class shares in the capital of GIH on the following dates:

   [Nine dates were stated, extending from 30 December 1987 to 28 June 1990.]

   (p)the subscription by IEL for ‘B’ class shares in the capital of GIH on 2 February 1988;

   (q)the subscription by Southern Farmers Group Limited for ‘C’ class shares in the capital of GIH on 24 June 1988;

   (r)the subscription by Acmex Holdings Limited for ‘D’ class shares in the capital of GIH on 24 June 1988;

   (s)the subscription by GIH for shares in the capital of the following companies:

   [There followed a list of the names of 58 companies]

   (t)the presentation to IEF or payment of the promissory notes referred to in sub-paragraph (n) above, and the deposit with IEF by any company listed in sub-pars (i) to (lviii) of paragraph (s) above of funds which had been subscribed by GIH;

   (u)the subscription by any of the companies listed in sub-paragraphs (i) to (lviii) of paragraph (s) above for shares in the following companies:

   [There followed the names of three companies]

   (v)the subscription for shares in National Super Market Pty Limited (NSM) by the following companies:

   [There followed the names of eight companies]

   (w)the subscription for shares in Harbourfort Pty Limited (formerly Faywell Pty Limited and Industrial Equity Acquisition No 43 Pty Limited) by NSM on 18 September 1985, 28 June 1991 and 30 June 1992.

   (x)the deposit with IEF by any company listed in paragraphs (u), (v) and (w) above of funds which had been received as subscriptions.

   2.All correspondence, file notes, diary notes or other documents (whether or not in computer readable form i.e. an email, disk, tape, random access memory or the like) brought into existence during the period 1 July 1984 to 30 June 1995 inclusive recording:

   Ainstructions received by PKF (formerly Bowie Wilson Miles) from IEL, IEF, Spassked or GIH or from any director, officer or employee of IEL, IEF, Spassked or GIH during the period 1 July 1984 to 30 June 1995 inclusive; and/or

   Bopinions or advice provided to IEL, IEF, SPA or GIH or to any director, officer or employee of IEL, IEF, Spassked or GIH during the period 1 July 1984 to 30 June 1995 inclusive,

   in connection with:

   (a)the repayment by IEF of any moneys held by IEF on deposit to any company listed in sub-paragraphs (i) to (lviii) of paragraph (s) above:

   (i)on 30 June 1992;

   (ii)during the period 1 July 1992 to 30 June 1993 inclusive; and

   (iii)during the period 1 July 1993 to 30 June 1994 inclusive;

   (b)borrowing by GIH of funds from any of the companies listed in sub-paras (i) to (lviii) of paragraph 1(s) above;

   (c)the borrowing by Spassked from GIH of the following amounts:

   (i)$2,066,945,064 on 30 June 1992;

   (ii)$728,275,275 on 30 June 1993;

   (iii)$3,596,412,841 on 30 June 1994; and

   (iv)$60,000,000 on 1 July 1994

   (d)the repayment by Spassked to IEF of the following amounts:

   (i)$2,110,907,203 on 30 June 1992;

   (ii)$728,275,275 on 30 June 1993; and

   (iii)$3,596,412,841 on 30 June 1994;

   (e)the provision by IEL to Spassked on 1 July 1994 of a loan of $259,876,034;

   (f)the provision by GIH to Spassked on 1 July 1994 of a loan of $60,000,000;

   (g)the repayment by Spassked to IEF on 1 July 1994 of an amount of $319,876,034; and

   (h)the subscription by IEL for shares in the capital of Spassked on 5 October 1994.

   3.All correspondence, file notes, diary notes or other documents (whether or not in computer readable form i.e. an email, disk, tape, random access memory or the like) brought into existence during the period 1 July 1984 to 30 June 1995 inclusive recording:

   Ainstructions received by PKF (formerly Bowie Wilson Miles) from IEL, IEF, Spassked or GIH or from any director, officer or employee of IEL, IEF, Spassked or GIH during the period 1 July 1984 to 30 June 1995 inclusive; and/or

   Bopinions or advice provided to IEL, IEF, Spassked or GIH or to any director, officer or employee of IEL, IEF, Spassked or GIH during the period 1 July 1984 to 30 June 1995 inclusive,

   in connection with:

   (a)the payment of dividends between any of IEL, Spassked, GIH, IEF and any company listed in sub-paras (i) to (lviii) of paragraph 1(s) (all of which are hereinafter referred to as ‘the IEL Group members’);

   (b)the creation of interest liability or the payment or foregoing of interest between IEL Group members;

   (c)the application of section 46 of the Income Tax Assessment Act 1936 to any of the IEL Group members.”

4. An earlier subpoena had been issued on 27 February 2002 (in each proceeding), purportedly to PKF, seeking production of the same documents.  A notice of motion was filed (in each proceeding) on 26 March 2002, seeking an order setting it aside also.  There was apparently a difficulty with the identification of the partners of PKF in those earlier subpoenas and the Commissioner chose to issue the present subpoenas in their place.

   BACKGROUND FACTS ACCORDING TO MR HARRIS

5. The ground of oppression is said to be established by an affidavit of Geoffrey John Harris, sworn 5 April 2002. 

6. The following is an account of the background facts as revealed by his affidavit.

7. Mr Harris is a partner of PKF and has been since that firm’s inception on 1 January 2000.  He was before that a partner in its predecessor firm, Pannell Kerr Foster, from its inception in July 1991 until December 1999; before that a partner in its predecessor firm, Bowie Wilson Miles, from approximately 1973 until July 1991; and before that an accountant employed in that firm from 1969 to 1973.

8. Mr Harris has been involved in matters concerning the applicant in proceeding N 1364 of 1999, Industrial Equity Limited (“IEL”) and companies within the IEL group since about 1969.  In about 1975 he was appointed audit partner of IEL matters and has remained audit partner throughout the changes of firm to which I have referred.

9. Mr Harris gives an account of the work which he did as audit partner.  The number of staff in the audit division working on IEL matters varied from time to time.  Mr Harris estimates that from about 1970 to about 1980, six professional staff worked from time to time in that position and that about ten did so over the period from about 1980 to about 1992.  After 1992, the number progressively dropped in circumstances revealed in the evidence in the principal proceedings.  Mr Harris is the only partner at PKF who has continually been involved in IEL related matters.  Over the years some 100 professional staff in the audit division have worked on such matters. 

10. Most of PKF’s files relating to IEL have been archived and are stored off site in a storage facility.  The files are automatically destroyed once they have been archived for ten years – this does not mean ten years from the date of the creation of a document but ten years from the time it goes into the archives.  According to Mr Harris’s estimate some 500 archived IEL files still exist in the storage facility.  In PKF’s offices there are more than 250 IEL audit files and 530 IEL tax files – a total of 780 files of which approximately two-thirds are tax files.  In order to comply with the subpoena Mr Harris would need to review all 1,280 files.  The size of the files varies from 30 to 40 pages up to 100 to 150 pages.

11. The task of examining all these files in order to identify documents falling within the subpoena would take Mr Harris more than three months of almost continuous work.  The reason is that the subpoena refers to hundreds of different matters, each of which he would need to consider.  Moreover, it would be impossible for him to remember all of the individual matters referred to in the subpoena at any one time, so he would need to have a checklist to which he would have to refer repeatedly.

12. Given that he is the only person at PKF who has continually worked on IEL related matters, Mr Harris believes he is the only person who can properly examine the files to determine whether PKF holds particular documents caught by the subpoena.  He does not believe he can properly delegate the task to more junior staff.

13. Finally, Mr Harris’s hourly charge out rate is $400, that is $3,200 per eight hour day.  Application of that rate yields figures of $16,000 for a week, $69,333 for a month and $208,000 for three months.  These figures do not include any fees which might have to be paid for legal advice in relation to the subpoena or in relation to any particular documents.

14. Cross-examination of Mr Harris revealed as follows.

15. A former tax partner, Mr Grahame Libbesson, who ceased to be a partner some three years ago, may be available to be consulted, but Mr Harris has not consulted him yet.  Robert Dunn was a subordinate of Mr Libbesson’s and still works for PKF.  The tax files were kept separate from the audit files.  Mr Harris could identify the audit files and put them to one side (it seems to be accepted that, if any documents caught by the subpoena are held by PKF, most of them would probably be found within the tax files rather than the audit files, although this is not known for sure).

16. There is another person with whom Mr Harris could consult but has not yet done so, namely, Mr Anthony Sloan, who took over from Mr Libbesson in the preparation of tax returns for companies in the IEL group.  Mr Sloan is still with PKF.

17. About six to twelve months ago, PKF suspended the application of its policy of destroying files which have been archived for ten years, in relation of IEL group files.

    REASONING

18. PKF does not submit that the subpoena is too wide in the sense that it requires production of documents lacking potential relevance to any issue in the proceeding.  The only ground on which PKF relies to have the subpoena set aside is that compliance with it would be oppressive to PKF.

19. A subpoenaed party is entitled to insist on being satisfied that documents fall within the subpoena before producing them to the Court.  A subpoenaed party might in fact prefer simply to produce all its files, leaving it to others to deal with them as they might.  I need not discuss the various implications, or the propriety, of such a response to a subpoena.  All that matters for present purposes is that, not having its clients’ authority to take such a course, PKF is entitled to insist on not producing documents lying outside the subpoena and on satisfying itself that documents held by it fall within the subpoena before producing them.

20. It may be that Mr Harris’s estimates would be shown to be excessive if he were to consult the persons I have mentioned.  But it would still be necessary for him to look through many files – the 530 tax files in PKF’s offices and those of the 500 archived files which are tax files.  Even if only one-half of the 500 archived files are tax files, the total number of tax files to be reviewed would be 780.  On the basis of an average of 100 pages per file, Mr Harris would have to review 78,000 pages.

21. Even if Mr Harris’s estimated period of three months were reduced to one month, the subpoena would still impose an oppressive burden.  Moreover, compliance would be futile because the present hearing is fixed for only four weeks.

22. It should not be forgotten that the three proceedings were commenced on 22 November 1999.  On 4 June 2001 they were fixed for hearing for four weeks commencing on 4 March 2002.  Those dates were vacated and on 23 July 2001 they were fixed for hearing for four weeks commencing on 15 April 2002.  Accordingly, there has been ample time for a subpoena of this kind to be issued.  I do not know why it was left until 27 February 2002 to issue a subpoena calling for production of so many documents.

23. PKF also relied on other matters as establishing oppression.  For example, it was said that the use of the expression “in connection with” unfairly required PKF, a non-party to the proceeding, to form a judgment.  Certain particular paragraphs within the schedule of documents were also said to give rise to unfairness. 

24. I decide the motion, however, simply on the basis of the extent of work and cost involved in complying with the subpoena and I take into account the fact that  the hearing commenced on Monday of this week and has some three weeks and two days to run.

25. I do not intend to suggest that it would be impossible for another subpoena in different terms to be issued and complied with timeously.  It may or may not be: I do not know.

    CONCLUSION

26. The result in relation to the subpoena issued on 2 April 2002 is that it should be set aside.  I will so order (in each proceeding) and reserve the questions of costs as asked on the hearing. 

27. The Court orders that:

    1.The subpoena for production issued on 2 April 2002 be set aside.

    2.The costs of the motion brought by notice of motion filed on 9 April 2002 be reserved.

    3.PKF as moving party on the motion and the Commissioner each have liberty to restore the matter in relation to costs on one day’s notice.

I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Associate:

Dated:  23 April 2002

Counsel for the Applicants on the motion:	Mr G O’L Reynolds SC
Solicitor for the Applicants on the motion:	Coudert Brothers
Counsel for the Respondent (to the motion and in the proceedings):	Mr D J Fagan SC and Ms M A C Painter
Solicitor for the Respondent (to the motion and in the proceedings):	Australian Government Solicitor
Date of Hearing:	17 April 2002
Date of Judgment:	17 April 2002