Case: Cullen v Trappell (1979) 146 CLR 1
Outcome: followed
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'. 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. 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.) 68 The decision in Groves v United Pacific Transport, given that it was approved in Atlas v Tiles and Cullen v Trappell , establishes that an award of damages for loss of earning capacity is not taxable even if calculated precisely by reference to earnings lost prior to the date of the trial. The principle applies to an award of pre-judgment interest, which has been held to have the character of a receipt of a capital nature: Whitaker v Commissioner of Taxation (1998) 82 FCR 261. The reason is that the award of an interest is an integral and essential element in the compensation for the plaintiff's list or diminished earning capacity: at 264, per Black CJ. 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.