Howard v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: High Court (M140/2013)
Judgment date: 11 June 2014
Date published: 14 August 2014

Summary of decision:
This case concerns whether an award of equitable damages was received by the taxpayer in his personal capacity or as a constructive trustee, or was assigned such that it was otherwise not derived beneficially by the taxpayer.

Overview of facts:
In 1999 the taxpayer and five other individuals formed a joint venture to pursue a property investment opportunity ("the investment opportunity") involving the purchase of a property in Rowville, Victoria, on which was conducted the public golf course known as "Kingston Links Golf Course" ("the property"). | The investment opportunity involved the purchase, letting, and thereafter, the sale, of the property to a third party investor for a day one profit. | The taxpayer was a director of Disctronics Ltd ("Disctronics"). | The taxpayer and two other directors of Disctronics who were also joint venture members asserted Disctronics' intention and right to become the equity participant for the investment opportunity and purchaser of the property as the third party investor. Two other joint venture members disputed this right, entered into a new arrangement with a third party, acquired the property and carried out the investment opportunity to the exclusion of the other joint venture members (including the taxpayer). | The taxpayer, other excluded joint venture members and Disctronics instituted proceedings in the Supreme Court of Victoria for breach of fiduciary duty. The court of appeal of the Supreme Court of Victoria upheld the decision of the primary judge in favour of the excluded joint venture members (including the taxpayer, but not Distronics) and awarded them each an amount of equitable damages. | The Commissioner included the taxpayer's share of the award of damages in the taxpayer's assessable income for the year ended 30 June 2005. | At first instance in the Federal Court, the primary judge held that the award was not assessable income in the taxpayer's hands as he had received it in a fiduciary capacity as a director of Disctronics. This was overturned by the Full Federal Court. | Issues Decided by the Court | The issues in the High Court appeal were: 1. Whether the taxpayer received the sum of equitable compensation awarded by the Supreme Court as constructive trustee for Disctronics? (No). 2. If not, whether the taxpayer had assigned the right to receive that amount such that the income was not derived by him beneficially? (No). 3. Whether the taxpayer incurred liability in respect of the costs of the proceedings in the Supreme Court which should properly have been taken into account in ascertaining the amount of any gain made by the taxpayer and, alternatively, whether those costs were an outgoing of a revenue nature incurred in gaining the income comprised in the award made by the Supreme Court? (No). | 1. Whether the taxpayer received the sum of equitable compensation awarded by the Supreme Court as constructive trustee for Disctronics? (No). 2. If not, whether the taxpayer had assigned the right to receive that amount such that the income was not derived by him beneficially? (No). 3. Whether the taxpayer incurred liability in respect of the costs of the proceedings in the Supreme Court which should properly have been taken into account in ascertaining the amount of any gain made by the taxpayer and, alternatively, whether those costs were an outgoing of a revenue nature incurred in gaining the income comprised in the award made by the Supreme Court? (No).

Issues decided:
The issues in the High Court appeal were: 1. Whether the taxpayer received the sum of equitable compensation awarded by the Supreme Court as constructive trustee for Disctronics? (No). 2. If not, whether the taxpayer had assigned the right to receive that amount such that the income was not derived by him beneficially? (No). 3. Whether the taxpayer incurred liability in respect of the costs of the proceedings in the Supreme Court which should properly have been taken into account in ascertaining the amount of any gain made by the taxpayer and, alternatively, whether those costs were an outgoing of a revenue nature incurred in gaining the income comprised in the award made by the Supreme Court? (No). 1. Whether the taxpayer received the sum of equitable compensation awarded by the Supreme Court as constructive trustee for Disctronics? (No). 2. If not, whether the taxpayer had assigned the right to receive that amount such that the income was not derived by him beneficially? (No). 3. Whether the taxpayer incurred liability in respect of the costs of the proceedings in the Supreme Court which should properly have been taken into account in ascertaining the amount of any gain made by the taxpayer and, alternatively, whether those costs were an outgoing of a revenue nature incurred in gaining the income comprised in the award made by the Supreme Court? (No).

ATO view of decision:
The views expressed by the High Court are consistent with the Commissioner's view and current practices.

Administrative treatment:
Implications for impacted ATO precedential documents (Public Rulings & Determinations etc) | N/A | Implications for impacted Law Administration Practice Statements | N/A

Legislative references: Taxation Administration Act 1953 14ZZ Income Tax Assessment Act 1936 6(1) 69 97 Corporations Act 2001 197(1) Pt 2D.1
Case references: Barnes v Addy Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 35 ALR 273 Booth v Commissioner of Taxation [1987] HCA 61 164 CLR 159 19 ATR 514 87 ATC 5100 Bray v Ford [1896] AC 44 [1895] All ER Rep 1009 Breen v Williams (1996) 138 ALR 259 (1996) 186 CLR 71 Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41 229 CLR 386 229 ALR 58 Canadian Aero Service Ltd v O'Malley [1974] SCR 592 Chan v Zacharia (1984) 154 CLR 178 (1984) 53 ALR 417 Clay v Clay (2001) 202 CLR 410 (2001) 178 ALR 193 [2001] HCA 9 Disctronics Ltd v Edmonds (No. 2) [2002] VSC 534 Disctronics Ltd v Edmonds [2002] VSC 454 Edmonds v Donovan [2005] VSCA 27 (2005) 12 VR 513 Federal Commissioner of Taxation v Everett (1980) 143 CLR 440 (1980) 80 ATC 4076 (1980) 10 ATR 608 Furs Ltd v Tomkies (1936) 54 CLR 583 [1936] HCA 3 Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483 [1968] HCA 37 Hirsche v Sims [1894] AC 654 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 [1984] HCA 64 Howard v Federal Commissioner of Taxation (2012) 206 FCR 329 [2012] FCAFC 149 (2012) 2012 ATC 20-355 Howard v Federal Commissioner of Taxation (No 2) (2011) 86 ATR 753 [2011] FCA 1421 (2011) 2011 ATC 20-298 Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 Keech v Sandford (1726) Sel Cas T King 61 Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342 Maguire v Makaronis (1997) 188 CLR 449 Mills v Mills (1938) 60 CLR 150 Ngurli Ltd v McCann (1953) 90 CLR 425 [1953] HCA 39 Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 Pacifica Shipping Co Ltd v Andersen [1986] 2 NZLR 328 Phelan v Middle States Oil Corporation 220 F 2d 593 at 602 (1955) Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 49 ATR 324 R v Byrnes (1995) 183 CLR 501 [1995] HCA 1 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 Richard Brady Franks Ltd v Price (1937) 58 CLR 112 [1937] HCA 42 United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 Warman International Ltd v Dwyer (1995) 182 CLR 544
Subject references: Accountability of company officers & directors (Directors duties) Assignment of rights and entitlements Constructive trusts Derivation of income Equitable interests Fiduciary duties Whether expense incurred