Case: Rubber Improvement Ltd v Daily Telegraph Ltd [1964] AC 234
Outcome: followed
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.) 32 Studdert J considered that, although counsel had not referred him to any Australian authority directly in point, he should follow Rubber Improvement v Daily Telegraph . Thus, the damages awarded to SRSC were not to be treated as its ' ordinary income ' for the purposes of s 6 -5 of the ITAA and the quantum of damages had to be reduced to take account of the notional tax SRSC would have had to pay on the net revenue it would have earned from its lost laser procedures. Otherwise SRSC would be over-compensated for its loss. 33 Studdert J then addressed a submission made on behalf of SRSC that the payment of damages would be treated as a ' capital gain ', thereby attracting liability to income tax pursuant to s 102-5 of the ITAA . If accepted, the effect of this submission would have been to increase the damages award to take account of SRSC's liability to pay capital gains tax on the Sum. 34 His Honour adverted to the terms of s 118-37 of the ITAA , which requires a capital gain made from a CGT event to be disregarded if it relates to compensation or damages received for any wrong or injury suffered in the recipient's occupation. He pointed out that the Commissioner had issued a ruling excluding corporations from the exemption, but noted that the defendants (Seven and Dr Beaumont) had argued that the ruling related to the terms of the ITAA 1936 and did not apply to the different language used in the ITAA . The defendants had submitted that the damages award would not result in any capital gain to SRSC for the purposes of the ITAA . 35 Studdert J considered that there was merit in the defendants' submission and, accordingly, that SRSC would have a substantial argument to make to the Commissioner as to why it should not have to pay capital gains tax in relation to the award of damages. However, his Honour thought that, in the circumstances, justice could best be served by reserving leave to SRSC to apply for additional damages referable to capital gains tax, should it be found liable to pay such tax. Accordingly, he made no provision for capital gains tax in his assessment of the damages to be awarded to SRSC. 36 Although Studdert J made no provision for capital gains tax in the damages award, he reduced SRSC's ' lost nett profit ' by 36 per cent to take account of the tax that SRSC would have had to pay on its lost profit, had that profit been derived by it. After rounding off, this produced an amount of $844,264.00. 37 Studdert J assessed the damages attributable to each defamatory publication as follows: &#8226; in respect of the 1998 interview (the publication of which was limited) - $4,000.00; &#8226; in respect of the program broadcast on 4 May 1998 in Victoria - $75,000.00; and &#8226; in respect of the program broadcast on 5 May 1998 in New South Wales - $765,624.00. 38 Studdert J then considered the responsibility of the defendants (Dr Beaumont, HSV and ATS) as joint tortfeasors. His Honour proceeded to make the following orders relevant to SRSC's claims (retaining the original numbering): '4. In the proceedings by [SRSC] arising from the publication in April 1998, verdict for [SRSC] against [Dr Beaumont] in the sum of $4000, together with interest in a sum to be determined. 5. In the proceedings by [SRSC] arising from the publication on 4 May 1998: (a) verdict for [SRSC] against [Dr Beaumont] and [HSV] concerning imputations (b), (d), (e), (f) and (g) in the sum of $62,500, together with interest in a sum to be determined; (b) verdict for [SRSC] against [HSV] concerning imputation (h) in the sum of $12,500, together with interest in a sum to be determined. 6. In the proceedings by [SRSC] arising from the publication on 5 May 1998: (a) verdict for [SRSC] against [Dr Beaumont] and [ATS] concerning imputations (b), (d), (e), (f) and (g) in the sum of $638,020, together with interest in a sum to be determined; (b) verdict for [SRSC] against [ATS] concerning imputation (h) in the sum of $127,604, together with interest in a sum to be determined. 7. In respect of the claim by [SRSC] against [Dr Beaumont] and [HSV] and in respect of the claim by [SRSC] against [Dr Beaumont] and [ATS] I reserve leave to [SRSC] to apply for additional damages referable to capital gains tax considerations should [SRSC] be found liable to pay such tax'. 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.