Case: British Transport Commission v Gourley [1955] UKHL 4 ; [1956] AC 185
Outcome: discussed
Nonetheless, Studdert J addressed at some length (at [374]), the question of whether the Sum ought to be treated as ' ordinary income ' for the purpose of s 6 -5 of the ITAA . He referred to Cullen v Trappell (1980) 146 CLR 1 , in which a majority of the High Court, following British Transport Commission v Gourley [1955] UKHL 4 ; [1956] AC 185 , held (in his Honour's words) that: 'in an action for tort where a person is claiming damages in respect of impairment of earning capacity following injury, any allowance in respect of such a claim is made by reference to nett loss. The court does not include in the assessment the income tax that the person would have had to pay on lost earnings because he does not have to pay income tax on that assessment. ... The damages are awarded for loss of earning capacity, even though they may be measured for the past by reference to comparable earnings of others and even though there may be agreement between the parties as to wage loss for the past'. 31 Studdert J referred to Rubber Improvement Ltd v Daily Telegraph Ltd [1964] AC 234 , in support of the proposition that the Gourley principle applies where a company establishes that its profits has been diminished by defamatory publications. His Honour quoted a well-known passage from the speech of Lord Reid ([1964] AC, at 262): 'There can be no difference in principle between loss of income caused by negligence and loss of income caused by a libel. Let me take first the case of the plaintiff company. A company cannot be injured in its feelings, it can only be injured in its pocket. Its reputation can be injured by a libel but that injury must sound in money. The injury need not necessarily be confined to loss of income. Its goodwill may be injured. But in so far as the company establishes that the libel has, or has probably, diminished its profits, I think that Gourley's case is relevant' . (Emphasis added.) 52 Lord Reid first referred to Gourley , which held that damages for loss of income caused by a tort must be assessed after allowing for the income tax that would have been payable by the plaintiff had he or she actually earned the income. His Lordship explained (at 261-262) the rationale for the decision in Gourley as follows : 'As damages are not subject to tax, [the plaintiff] would have recovered far more than his real loss, if he had recovered the gross amount [of his loss of income] and accordingly it was held that he was only entitled to receive [the after-tax amount] in respect of his loss of income as this was sufficient to compensate him fully for the income which he had lost by the fault of the defendants.' Lord Reid continued as follows (at 262): 'There can be no difference in principle between loss of income caused by negligence and loss of income caused by a libel. Let me take first the case of the plaintiff company. A company cannot be injured in its feelings, it can only be injured in its pocket. Its reputation can be injured by a libel but that injury must sound in money . The injury need not necessarily be confined to loss of income. Its goodwill may be injured. But in so far as the company establishes that the libel has, or has probably, diminished its profits, I think that Gourley's case is relevant. But damages for libel have to be assessed by a jury, and juries are not expected to make mathematical calculations, so they can only deal with this matter on broad lines. I think that a jury ought to be directed to the effect that if they think that the plaintiff company has proved that it has suffered or will suffer loss of profit as a result of the libel they must bear in mind that the company would have had to pay income tax at the standard rate out of that profit if it had been earned and would only have been entitled to keep the balance. So in assessing damages they ought not to take into account the whole of that profit, but should make allowance for the obligation to pay income tax out of it.' (Emphasis added.) 53 On its face, this reasoning suggests that an award of damages for business defamation, insofar as it incorporates compensation for loss of income by reason of injury to a trading corporation's business reputation, is not taxable. However, the analysis by Lord Reid is not necessarily determinative of the issue before me, for three reasons. 54 First, the issue presented by Rubber Improvements was not specifically whether the damages award was taxable in the hands of the successful plaintiff. Lord Reid plainly assumed that it would not be taxable, but their Lordships did not strictly have to decide that question. (I leave to one side any conceivable differences between the definition of income for tax purposes in the United Kingdom in 1964 and the criterion embodied in s 6 -5 of the ITAA. ) 57 Nonetheless, the reasoning in Rubber Improvements is important for present purposes. In part, this is because of the reliance placed by Lord Reid on the decision in Gourley and the subsequent acceptance of that decision in Australia. In part, it is because the statement of principle in Rubber Improvements suggests that an award of damages for business defamation is not to be characterised as income for tax purposes, even if assessed by reference to lost profits. 58 The principle for which Gourley stands has been controversial in Australia: see, generally, H Luntz, Assessment of Damages for Personal Injury and Death (4th ed, 2002), at [5.7.3]-[5.7.4]. In Atlas Tiles, decided in December 1978, a bare majority of a five member High Court refused to follow Gourley (Barwick CJ, Jacobs and Murphy JJ; Gibbs and Stephen JJ dissenting). Seventeen months later, a bare majority of a seven member High Court overruled Atlas Tiles and followed Gourley : Cullen v Trappell (Gibbs, Stephen, Mason and Wilson JJ; Barwick CJ, Murphy and Aickin JJ dissenting). 59 The decision in Cullen v Trappell effectively ended the continuing controversy so far as Australian courts are concerned. However, in determining the significance of the Gourley principle for present purposes the key judgment is that of Gibbs J in Atlas Tiles. In Cullen v Trappell, Gibbs J said that his views had been fully expressed in his dissenting judgment in Atlas Tiles and that there was no point in restating them. The other three members of the majority in Cullen v Trappell simply expressed their agreement with the reasoning of Gibbs J. 60 The issue in Atlas Tiles was whether the trial Judge had been correct, when assessing damages for wrongful dismissal, to disregard the incidence of income tax on the remuneration the plaintiff would have received had he continued in employment. Gibbs J said (at 220) that the issue could be restated by asking whether the principle in Gourley should have been applied to the assessment of damages. 61 Gibbs J pointed out that the principle in Gourley is not confined to damages for personal injury. He specifically noted that in Rubber Improvements the House of Lords had applied the principle to ' the assessment of damages for loss of profit arising from libel '. His Honour added (at 223-224) that: 'Speaking generally, the principle will apply only where the earnings or profits lost would have been taxable if the plaintiff had received them but the damages awarded to compensate the plaintiff are not taxable: see Parsons v B.N.M. Laboratories Ltd [[1964] 1 QB 95, at 124-126, 133-135] and Groves v United Pacific Transport Pty Ltd and Thompson [[1965] Qd R 62 , at 63].' 63 His Honour considered (at 223-224) that Gourley rested on ' sound principles ' and that the English Courts had been correct to apply Gourley to the assessment of damages in wrongful dismissal cases. The latter proposition was, however, subject to the proviso that: 'the lost earnings would have been taxable in the hands of the plaintiff if he had received them, and that the damages when received are not subject to tax '. (Emphasis added.) 64 Gibbs J thought it plain that portion of the plaintiff's lost remuneration would have been taxable had he received it. Section 26(d) of the ITTA 1936 had the effect that five per cent only of a lump sum award in consequence of termination of employment, whether made by a court or otherwise, was taxable, while the remaining 95 per cent was not (at 225). His Honour held (at 227) that Gourley should apply to the assessment of damages where only a small proportion of the damages award was taxable, since to do otherwise would over-compensate the plaintiff. Under-compensation could be avoided by adjusting the result to take account of the taxation regime applicable to the lump sum award. 66 The issue in Groves v United Pacific Transport , which predated both Atlas Tiles and Cullen v Trappell, was whether Gourley required income tax to be taken into account in the assessment of damages in respect of earnings during the period up to the date of trial . Gibbs J quoted the remark of Pearson LJ in Parsons v BNM Laboratories, a case also cited by Gibbs J in Atlas Tiles, that (at 134): 'the principle of the Gourley Case is applicable only if the lost earnings or profits are taxable and the damages are not '. (Emphasis added.) 69 The following propositions seem to me to emerge from the authorities I have discussed. 1. The Gourley principle applies in Australia to damages awards in personal injury cases. That is, a damages award, insofar as it compensates the plaintiff in respect of loss of income, must be assessed after taking into account the plaintiff's liability to pay tax on the income he or she would have derived but for the compensable injury: Cullen v Trapell. 2. Subject to limited exceptions, the Gourley principle applies where the lost income would have been taxable if received by the plaintiff and the damages award is not assessable income in the hands of the plaintiff: Groves v United Pacific Transport , per Gibbs J; Atlas Tiles , per Gibbs J. An example of an exceptional case (in the context of a wrongful dismissal claim) is Atlas Tiles, where a small portion of the damages award was taxable . 3. Subject to any relevant statute, an award of damages in a personal injuries claim, even if calculated by reference to lost income, is not income according to ordinary concepts for the purposes of s 6-5 of the ITAA : Cullen v Trapell (endorsing the judgment of Gibbs J in Atlas Tiles ); Groves v United Pacific Transport. The reason is that the award of damages is, in point of principle, for impairment of the plaintiff's earning capacity and not for loss of income as such: Graham v Baker. 4. This proposition applies even if the award is limited to damages in respect of lost income (in the sense explained in the previous paragraph) during a period prior to trial: Graham v Baker ; Groves v United Public Transport. 5. It follows that there is a clear distinction between the character of a payment for the purposes of s 6-5 of the ITAA and the manner of its calculation or quantification: Tinkler v FCT. Indeed, the latter might provide a quite misleading guide to the former: Tinkler v FCT. 6. The Gourley principle applies in Australia to an award of damages for wrongful dismissal, notwithstanding that the calculation of damages is based on the precise amount of income lost by the plaintiff in consequence of the wrongful termination of his or her employment: Atlas Tiles, per Gibbs J, approved in Cullen v Trapell. A damages award in such a case is not income according to ordinary concepts. 7. A damages award for defamation of a trading corporation is intended to compensate for the injury sustained by the corporation to its reputation in the way of business: Gacic v John Fairfax ; ABC v Comalco. The assessment of damages is ' at large ', but may be undertaken in a particular case by reference to the loss of income attributable to the defamatory publication: Barnes &amp; Co v Sharpe . 8. Where damages for defamation are awarded to a trading corporation and are assessed by reference to the plaintiff's loss of income, the Gourley principle applies to the assessment: Rubber Improvement ; Atlas Tiles, per Gibbs J, approved in Cullen v Trappell. 9. As has been noted, subject to limited exceptions, Gourley applies only where the income that would have been derived by the plaintiff would have been taxable and the damages award is not subject to tax. It follows that a damages award in favour of a trading corporation for injury to its reputation in the way of business, assessed in the manner described, is not income according to ordinary concepts when received by the plaintiff corporation. The reason why this is so is that damages for defamation of a trading corporation are awarded for loss of business reputation, however they may be calculated: see authorities cited in para 7 above. Thus even if the award is assessed exclusively by reference to loss of income, the award does not constitute income in the hands of the plaintiff corporation. In this respect the award is conceptually similar to damages awarded for loss of earning capacity. 73 In Thames Haven, a company owned jetties which were damaged by the negligence of the operators of a tanker. The company sustained loss in the form of physical damage to the jetty and consequential loss in the form of lost profits during the period of 380 days the jetty was unusable. The Court of Appeal held that the damages for physical injury were quite separate from the damages recovered in respect of the loss of profitable use of the jetty. The latter were held to be taxable as a trading receipt. Diplock LJ stated the relevant rule as follows (at 134): 'Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received instead of the compensation.' No reference was made to Gourley.