G J LUPTON V THE COMMISSIONER OF INLAND REVENUE DEPARTMENT HC WN CIV 2008-485-2460

G J LUPTON V THE COMMISSIONER OF INLAND REVENUE DEPARTMENT HC WN CIV 2008-485- 2460 3 May 2011IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYCIV 2008-485-2460UNDER THE TAX ADMINISTRATION ACT 1994IN THE MATTER OF THE INCOME TAX ACT 1994 AND THEINCOME TAX ACT 2004BETWEEN G J LUPTONPlaintiffAND THE COMMISSIONER OF INLANDREVENUE DEPARTMENTDefendantHearing: On PapersCounsel: P S Davidson and J Fyfe for PlaintiffP H Courtney and J Cheng for DefendantJudgment: 3 May 2011COSTS JUDGMENT OF RONALD YOUNG J[1] In March 2008 the Commissioner of Inland Revenue alleged that Mr Lupton for the income years 2001 to 2006 (inclusive) had undisclosed income of $15,447,593.71. Mr Lupton issued proceedings challenging that assessment.[2] By June 2010 as a result of a separate investigation by the Serious Fraud Office, the Commissioner reduced his assessments alleging the undisclosed income for the 2001 to 2006 years was $2,331,813.81. Effectively, therefore, the Commissioner abandoned some alleged $13 million of income during those years.[3] The case came to trial before me with the onus on Mr Lupton to prove on thebalance of probabilities that the Commissioner's assessments for each of theindividual years totalling the additional $2.3 million in income were wrong and by how much.[4] At the end of my judgment I concluded that save for one aspect Mr Lupton had failed to convince me to the required standard that the Commissioner'sassessment was wrong. The one exception was the sum of $228,465.34. I concluded that Mr Lupton had established that that sum was not assessable income. The additional assessable income, therefore, total approximately $2.1 million.[5] In a memorandum dated 23 March 2011 the parties advised (with respect to costs) that given the Commissioner's reduction of the original assessment from$15.4 million to $2.3 million the Commissioner should pay eighty five per cent ofthe plaintiff's pre 30 June 2010 costs. The plaintiff's pre 30 June 2010 costs were $18,988 and so the amount payable by the Commissioner should be $16,139.80.[6] The defendant says that subject to that agreement the appropriate approach to costs is firstly, to conclude that the Commissioner is entitled to costs given he was substantially successful at the hearing. Secondly, given the Commissioner has succeeded with regard to most of the claimed additional taxable income the plaintiff should pay ninety per cent of the fifteen per cent of the Commissioner's pre 30 June costs and the plaintiff should pay ninety per cent of the Commissioner's remainingcosts. Thirdly, the amounts payable by the Commissioner to the plaintiff and the plaintiff to the Commissioner should be set-off against each other. Finally, costs should be on a 2B basis. The result of these calculations means that the plaintiff would pay the defendant $8,593.82.[7] The Commissioner acknowledges that the plaintiff is legally aided and so s 40 of the Legal Services Act 2000 applies. He says, however, that there are exceptional circumstances here and a costs order should be made against the plaintiff subject only to a consideration of the plaintiff's means and ability to pay.[8] The plaintiff takes quite a different approach to costs. He says the proper approach is to assess these proceedings overall and reach a conclusion as to who was the successful party. The plaintiff says he was the successful party in these proceedings and accordingly costs should be awarded in his favour reduced only by virtue of the findings with respect to the $2.1 million that the Commissioner succeeded on.[9] The plaintiff stresses that he has been able to reduce the original assessment by over $13 million and in the circumstances he should be considered successful. A set-off of the respective costs orders would involve the Commissioner paying him $29,850.60.[10] As to s 40 of the Legal Services Act the plaintiff says that there are no exceptional circumstances but in any event there is no evidence that he has the means to meet such a costs order.[11] As a broad observation I accept the Commissioner's approach to costs ratherthan the plaintiff's. In my view it is misleading to say that the plaintiff has primarily succeeded in this litigation. It is correct that of the original assessment of $15.4 million the Commissioner succeeded only with respect to $2.1 million. But of that the vast majority of over $13 million was abandoned well prior to the commencement of this trial.[12] As I have noted the original assessment by the Commissioner alleged additional taxable income of $15.4 million. After an investigation by the Serious Fraud Office in about June 2010 well prior to trial the Commissioner abandoned some $13.1 million of alleged additional taxable income. The costs agreement between counsel reflects that fact. That is, eighty five per cent of the plaintiff's costsup until the abandonment of $13 million of alleged additional taxable income are properly payable by the Commissioner.[13] However, from that date on, 21 June 2010 through the trial of the case the Commissioner succeeded with regard to $2.1 million of the $2.3 million additional taxable income claim. Therefore, from that time onwards the Commissioner shouldhave costs, reduced. I consider by ten per cent to reflect the reduction of the original assessment from $2.3 million to $2.1 million. The ten per cent reduction reflects not only the percentage monetary reduction but my best estimate of time spent with regard to this aspect of the claim.[14] This was a somewhat unusual set of circumstances. It would, however, bequite false in my view to ultimately assess the plaintiff as the "winner" in this case.The fast majority of the contested part of the case occurred after June 2010. In this the Commissioner essentially succeeded. To approach the matter on the basis that overall the plaintiff has succeeded in this litigation would be false and unreal.[15] The appropriate approach is to set-off the respective parties' entitlement as tocosts (r 14.17). As a result the plaintiff should pay the Commissioner $8,593.82.[16] As I have noted the plaintiff is in receipt of legal aid. Section 40(2) prohibits the Court from awarding costs against a legally aided person unless it is satisfied that there are exceptional circumstances.[17] While I would have been prepared to hold that there were exceptional circumstances such a finding in this case is somewhat hollow. While there is suspicion regarding Mr Lupton's personal finances the only evidence currentlybefore the Court is of an impecunious plaintiff who has no assets and only a state retirement benefit. In those circumstances I could not possibly make an order requiring Mr Lupton to pay costs.[18] So that my view is clear, however, as to exceptional circumstances s 40(3) identifies a list of factors (amongst any other relevant factors) which guide the Court in considering whether any exceptional circumstances. These include any misleading or deceitful conduct and any unreasonable pursuit of one or more issues on which the aided person fails. My judgment makes it clear particularly paragraphs [97], [98] that I did consider Mr Lupton's conduct was misleading and deceitful.[19] Further, I considered significant portions of his evidence were misleading as I identified at paragraph [97]. This would have been sufficient to satisfy me there were exceptional circumstances on the facts of this case.[20] For the reasons given, therefore, I make no order as to costs.____________________________Ronald Young JSolicitors:P S Davidson, Barrister, Wellington, email: pamdavidson@clear.net.nzP H Courtney, Barrister, Crown Law, PO Box 2858, Wellington, email:Pauline.courtney@crownlaw.govt.nz