The taxpayers won the appeal. Their offers had been rejected. They still only got standard costs.
You win the appeal. You made a settlement offer the Commissioner rejected. You still only get standard costs. Because the costs application was run poorly.
Commissioner of Taxation v Hicks (No 2) [2026] FCAFC 14 is a reminder that winning is only half the battle. Getting indemnity costs in the Federal Court is a different fight. This one was lost before it started.
The facts
The Commissioner appealed a decision finding s 45B and Part IVA did not apply to a capital distribution scheme involving a selective share buy-back. Three taxpayers, Hicks, Hicks Beneficiary and Ierna, successfully defended. The appeal was dismissed in December 2025 [1].
Before the hearing, the taxpayers made formal settlement offers under r 25.14 of the Federal Court Rules. Ierna offered $250,000, Hicks $100,000, Hicks Beneficiary $150,000, in exchange for the Commissioner withdrawing the amended assessments and paying costs. The Commissioner rejected without explanation and made no counteroffer [5]-[8].
Why all three arguments failed
The taxpayers sought indemnity costs under three limbs of r 25.14. All three failed [14].
First, r 25.14(3). This applies where an applicant’s offer is rejected by a respondent. The taxpayers argued they were the “applicants” because they brought the original proceedings below. Rejected. An appeal is a separate proceeding. The Commissioner was the moving party [15]-[19].
Second, r 25.14(1). This requires the applicant to have obtained a judgment, albeit less favourable than the offer. The appeal was dismissed entirely. No judgment was “obtained”. Inapplicable [20].
Third, r 25.14(2). The only viable path. It requires the applicant to have “unreasonably” rejected the offer. But the taxpayers relied solely on the fact the appeal was dismissed. They chose not to advance submissions on what the Commissioner knew or should have known at the time of rejection [24]. Fatal. The test is assessed at the date of rejection, not with hindsight [23].
The lesson
Getting indemnity costs is hard. The starting point is always party and party costs. But this application made it harder than it needed to be. Two arguments were never going to succeed on the rules. The one that could have was not properly argued.
On r 25.14(2), the rejection must be shown to be unreasonable at the time it was made. Here, s 45B had never been judicially considered before the primary judge [24]. That made the Commissioner’s decision to appeal at least arguable. The taxpayers needed to explain why, despite that novelty, the Commissioner should have known the appeal would fail. They did not.
If you are making a formal offer, build the indemnity costs case from the start. Document why rejection is unreasonable at the time, not after the judgment lands.
General information only. This note was accurate when written. The law may have changed since and the note is not updated. It is not legal or tax advice, does not take account of your circumstances and must not be relied upon as a substitute for advice on your own matter. If the issue is live for you or your client, email arda@nortonquaytaxlaw.com.au for advice on the current position.