Macquarie International Health Clinic Pty Ltd v Sydney Local Health District; Sydney Local Health District v Macquarie Health Corporation Ltd

Procedural history

1. The Court delivered the Principal Judgment on 10 November 2016. The parties were then given an opportunity to review the Principal Judgment and, with the assistance of the experts, to identify any further questions which it was necessary for the Court to answer to enable the final damages calculations to be made. Insofar as the parties were unable to resolve their differences in relation to any such additional questions, the Court fixed a further hearing on 14 February 2017 with the intention of resolving all outstanding questions on that occasion.
2. On 14 February 2017, the parties and the experts attended before the Court. On that day a number of the outstanding disputes between the parties were able to be resolved. However, it became apparent that the bed day inflation rate and issues around the taxation treatment of Macquarie's damages would require additional evidence and detailed consideration.
3. Directions were made for the exchange of additional evidence and submissions. Ultimately, the four questions identified in paragraph [3] above were the subject of a further hearing which took place on 9-11 May 2017, with additional written submissions being ordered to be filed after the hearing in relation to some of the taxation issues.
4. At the further hearing, Mr M Richmond SC appeared with Mr S Kanagaratnam of Counsel for Macquarie. The Health District was represented by Mr I Jackman SC with Mr T Marskell of Counsel.

Bed day rate inflation rate - introduction

1. As part of determining the revenue for PAPH, in the Principal Judgment (at paragraph [435]) the Court accepted the approach and revenue figures of Macquarie's witness Mr Anderson, intending thereby to express the finding (inter alia) that the applicable bed day rate for PAPH was as postulated by Mr Anderson: $969 as at 2004. This was how the Health District (correctly) understood the Principal Judgment. The measure of agreement the experts had reached (see paragraph [434] of the Principal Judgment) was daily revenue of about $180,000 per day, but on the basis of differing assumptions about the bed day rate and the number of beds. These were the matters the Court had to resolve in the Principal Judgment, along with the separate debate about margin.
2. In reaching the figure of $969 (2004 value) which the Court had ultimately accepted, the Health District noted that this had involved Mr Anderson applying an inflation rate of 2.5% between 2001-2004 to his starting figure of $900 per bed day in his original expert report. The Principal Judgment had not made an express finding as to the rate at which the bed day rate figure should be inflated over the life of PAPH and the question was the subject of further evidence and argument.
3. There were three periods of time to which the parties directed attention: 1. 2001-2004, being the hypothetical construction period of PAPH, leading to Mr Anderson's 2004 figure of $969; 2. 2005-2017, that is up to the date of judgment; 3. 2018-2099, the balance of the term of the Hospital Lease.
4. In relation to the second of these, there was some debate as to whether it should be to the date of the end of the trespass in 2015. Given my ultimate conclusion, this debate makes no difference. However, given that various data were available up to 2016 and I consider that the actual should be preferred to the hypothetical as far as possible (see paragraph [14] below), I will make findings for the period up to this year.
5. There was agreement that for the entirety of the period of time under consideration, the Consumer Price Index ("CPI") should be accepted as being 2.5% per annum.
6. In considering this issue, it is convenient to set out the overall approach identified in the Principal Judgment, which I will continue to apply: "[351] It is against this background that the parties ultimately agreed that the residual land value approach was the best method to determine Macquarie's loss (if any). What was to be determined was a notional annual rental for the Hospital Site with both the benefit and the burden of having to build and operate the private hospital for each year the Hospital District was wrongfully in possession. This was how Macquarie would be compensated in accordance with the authorities relating to mesne profits for the loss of just over 15 years of exclusive possession under a 103 year lease. [352] As has also already been noted (see paragraphs [173] to [174] above), a consequence of the view I have taken of the user principle is that many of the negative scenarios proposed by the Health District are not required to be considered by the Court. However, the approach agreed by the parties left open a number of fundamental questions relating to both the costs of building, fitting out and maintaining the private hospital as well as its likely revenue. Only when the Court has answered those questions (to the extent that the parties have not been able to agree on answers) can the experts apply the agreed methodology. [353] The Court has therefore approached its task by - where relevant - asking itself the question whether, in relation to any particular integer, the Court is able to make, on the balance of probabilities, a finding that reflects the situation that is likely to have occurred if the private hospital had been built by someone (not necessarily Macquarie). However, it is not a scientific exercise where precision is possible in every particular. As a Canadian judge observed when determining mesne profits, "this is an assessment rather than a calculation": Initiate School of the Canadian Rocky Mountains Ltd v Wolfenden Ventures Ltd., 2013 BCSC 257 at [46] per PJ Rogers J."
7. I also made this observation in the Principal Judgment in relation to using evidence of what has in fact occurred: "[176] The exclusion of the hypothetical and speculative is unsurprising when the user principle is properly understood. In a case such as this, identified rights commencing with, but not limited to, the fundamental right to exclusive possession as lessee of the Car Park Site and the Hospital Site, have been infringed for a known period in the past. To borrow the Earl of Halsbury's pithy example, the chair was taken for a specified period irrespective of the facts that there were other chairs available or that the true owner could not or would never have sat in that chair. It is not an assessment of future economic loss but a retrospective one. In approaching the task, relevant events that have in fact happened or not happened during the period of the trespass are to be preferred over speculation (no matter how well informed) as to what might have happened. "Where actual facts are known, speculation as to the probability of those facts occurring is surely an unnecessary second-best": Willis v The Commonwealth (1946) 73 CLR 105; [1946] HCA 22 at 109 per Latham CJ."

Bed day inflation rate 2001-2004 - a "hardwired" rate of 2.5%?

1. Consideration of this as a separate topic was necessary because the Health District submitted that an inflation rate of 2.5% was "hardwired" into Mr Anderson's bed day rate of $969 as at 2004 and therefore that was the rate that should continue to be applied beyond 2004. It argued that the figure of 4% which he was now propounding was inconsistent with his November 2013 expert's report and the joint experts' reports of Messrs Anderson and Palassis dated 22 August 2014 and 17 November 2014. The Health District submitted that a 2.5% figure was adopted or implied in these reports and that reliance on a 4% figure amounted to impermissible relitigation of a fact that had been decided in the Principal Judgment. Mr Gower expressed a similar view in a joint experts' report by him and Mr Coleman dated 8 February 2017.
2. For the reasons which follow, the Court does not accept the Health District's submission and finds that it is not inconsistent or impermissible for Mr Anderson to express the opinion that a 4% rate should apply after 2004 or for Macquarie to argue for that result.
3. Mr Anderson gave evidence that in the conclave process he had not changed his view as to what the rate ought to be: the 2.5% rate was only assumed for the sake of comparing and reconciling the experts' calculations and was never agreed with Mr Palassis. The Health District submitted that this cannot be correct and that, in any event, it represents a mistake allowed by Mr Anderson and Macquarie's legal representatives to continue all the way through to a final judgment of the Court.
4. Macquarie also referred to the data and considerations that informed Mr Anderson's "revised opinion" that 4% was "more appropriate" and characterised the earlier use of a 2.5% figure as a previous opinion "based on more limited data". Macquarie also characterised the 2.5% figure as a "compromise … for the purposes of a comparison" with Mr Palassis' calculation.
5. The Court has found that for the purposes of the damages calculation, the bed day rate is to be taken as $969 (2004 value). I accept that Mr Anderson had come to that figure in the conclave process as part of a process of compromise and, in so doing, is not to be taken as having expressed a final view as to the rate to apply to the bed day rate once it had been determined. I accept that because I am satisfied that, contrary to the Health District's submissions, the evidence demonstrates that Mr Anderson maintained a position that 4% was the appropriate rate for inflating the bed day rate.
6. Mr Anderson's expert report of 8 November 2013 stated (at page 7), in commenting on an earlier joint expert model, that "the CPI factor used to increase the revenue rate per bed day appears to be on the low side at 2.5% compared to health reimbursements increases since 2004 when the new hospital is proposed to commence operations. I have therefore adopted the average increase in hospital benefit revenue growth rates over the last 9 years at 4% summarised below".
7. Mr Anderson's revision of his figures to a bed day rate of $969 in his joint report with Mr Palassis dated 22 August 2014 was not driven by interest rate calculations (which are nowhere referred to). At page 2 of that report it is recorded (emphasis added): "Mr Anderson provided background regarding the construct of the $900 per bed day (in 1997 terms) applied in previous cases which joint experts in 2007 having reference to St George [Private Hospital] as guidance on revenue rate per day. Mr Anderson confirmed that this rate included an assumption regarding increased throughput and efficiency that may result from the base assumption, as the top down model is driven by beds. As such was an assumption alone, Mr Anderson provided a revised value of $969 per bed day in 2004 terms that excluded the assumption regarding increased throughput and efficiency of day surgery activity."
8. Similarly, Mr Anderson adheres to that figure of $969 in the joint report of 17 November 2014 with no mention of interest rates. Finally, and importantly for present purposes, at paragraph [37] of a document tendered in March 2015 entitled "Issues arising from evidence on 19-20 November 2014 and earlier conclaves", Mr Anderson, in considering yet another postulated bed day rate figure, says "However, in my view, a higher uplift rate of 4% per annum should be used as per my report of 8 November 2013".

Past bed day rate inflation 2005-2017 - the evidence

1. In a report dated 7 April 2017 (the "Palassis Inflation Report"), Mr Palassis (called by the Health District) considered the appropriate rate of inflation for the period from 1 July 2004 to 1 December 2014, concluding that it should be 2.72%. Mr Palassis reached that conclusion by considering data from the Australian Bureau of Statistics ("ABS"), the Australian Institute of Health and Welfare ("AIHW"), the Private Hospital Data Bureau ("PHDB"), the Hospital Casemix Protocol ("HCP") and the Private Health Insurance Administration Council and Australian Prudential Regulation Authority ("PHIAC/APRA"). After considering the limitations of each data source, Mr Palassis concluded that PHIAC/APRA's NSW private health insurance charge per bed day index, as adjusted for patients' out-of-pocket expenses ("patient gap"), provided the most appropriate rate of inflation for the period from 1 July 2004 to 1 December 2014, namely, 2.72% per annum. He also concluded that a CPI rate of 2.5% per annum should be applied from 2014 to 2099.
2. In a joint experts' report of Messrs Anderson, Coleman (also called by Macquarie) and Palassis dated 3 May 2017, completed after a conclave on 24 April 2017 (the "Joint Inflation Report"), Mr Palassis expressed a revised view that the appropriate bed day inflation rate should be 3.2% from 1 July 2004 to 1 December 2014 and 2.5% from that date to 1 December 2099. Messrs Anderson and Coleman considered that the appropriate rate would be 4% from 1 July 2004 to 1 December 2099.
3. Mr Anderson also commented in the Joint Inflation Report on points on which he disagreed with the Palassis Inflation Report. He indicated that he had found and provided to Mr Palassis data from PHDB and HCP to which Mr Palassis had not had regard on the basis that it was not available - although Mr Palassis subsequently took that data into account in his revised views in the Joint Inflation Report. Mr Anderson also expressed the view that applying a growth rate above the CPI published by the ABS is appropriate because hospital revenue growth rates have exceeded CPI for at least 15 years; that indices used in the Palassis Inflation Report needed to be corrected for technical and compounding errors; that the PHIAC/APRA data set was the most incomplete of the various sources available; that the PHIAC/APRA data showed higher annual growth rates when averaged over 18 years than over 11 years; and that the PHDB data most closely reflected patient revenue received by private hospitals. Mr Anderson also observed that the PHIAC/APRA data excluded revenue from patients without private health insurance. Mr Palassis considered that there was no evidence of differing growth rates between revenue from patients with such insurance and revenue from those without. In the witness box, Mr Anderson ultimately expressed a preference for the PHDB followed by HCP data, whereas Mr Palassis did not think he could identify a "least worst" data set.
4. Mr Palassis nonetheless maintained that the PHIAC/APRA data was more complete and that the PHDB data was less consistently collected, although he acknowledged that services covered by the PHDB data corresponded more closely with PAPH services than those covered by the PHIAC/APRA data. Mr Anderson accepted that there was a gap of two years in collection of the PHDB data. He also agreed with Mr Palassis that there were inconsistencies in collection of the PHDB data, although he considered them immaterial.
5. Mr Palassis also gave evidence, and Mr Anderson accepted, that limitations of the PHDB data included that it was not specific to New South Wales and that it included both overnight and daytime bed days. He maintained that certain data referred to by Mr Anderson was "irrelevant', including national ABS and PHIAC/APRA data, and Department of Health private health insurance premium data as well as the medical and hospital services CPI which he considered over-inclusive.
6. Mr Palassis indicated in the Joint Inflation Report that the differences in annual growth rates as averaged by him and by Mr Anderson from the same data are attributable, inter alia, to Mr Anderson's inclusion of prosthesis revenue and "other revenue", and a different time frame for PHIAC/APRA data, and failure to account for patient gap. Mr Palassis maintained that inflation in prosthesis charges should be excluded from a calculation of bed day rate inflation. As Mr Palassis saw it, inclusion of prostheses together with the decided earnings before interest and tax margin ("EBIT") of 15% (as required by the Principal Judgment at [435]), would be inapt in circumstances that it was agreed that prostheses were a "pass-through" or "margin neutral" item. He calculated that their inclusion would increase EBIT per bed day by $24 in 2017 and to $4,254 by 2099.
7. Mr Anderson accepted that margins for prosthesis procedures were typically minimal and did not, in his experience, ever exceed 7%. Mr Anderson took the view, however, that the 15% EBIT should cover gross revenue, including low and high margin items. Mr Palassis acknowledged that the 15% EBIT finding in the Principal Judgment was made by reference to a case mix that included prosthesis procedures. But Mr Palassis considered that, even if a small margin was attributable to prostheses, prostheses should be excluded from the case mix for the purposes of calculating revenue growth so as not to attract the higher 15% EBIT on a procedure with a lower margin.
8. Mr Palassis accordingly expressed his views as to the appropriate growth rates to be inferred from the data sources accounting for differences in approach, including in respect of prosthesis and non-patient revenue, and patient gap. He calculated the growth rate from the PHDB data excluding prostheses as 3.4%, as opposed to Mr Anderson's calculation of 3.8%; the HCP implied growth rate (adjusting for patient gap and excluding prostheses) as 3.3%, as opposed to Mr Anderson's calculation of 4%; and the ABS Private Hospitals NSW data implied growth rate as 3.7% (excluding non-patient revenue but including prostheses) or 3.2% (excluding both non-patient revenue and prostheses) as opposed to Mr Anderson's calculation of 3.8%. Mr Anderson had agreed that prostheses accounted for 0.4 percentage points of the relevant total growth rate.
9. Whereas Mr Anderson considered the PHIAC/APRA data to show a 4.4% growth rate, Mr Palassis excluded pre-2004 data, bringing the rate to 3.7%. Mr Anderson then included same day benefits rather than only overnight benefits to come to 3.4%, and finally accounted for the patient gap to reach a 3.1% implied growth rate. Mr Palassis also considered that Mr Anderson's annual growth rate from the PHIAC/APRA data assumed an equivalent growth rate between overnight patient days and same day patient days, which is required by the Principal Judgment (at [435]) in calculating the PAPH's bed day rate inflation but cannot be applied to historical data sets. Accordingly, Mr Palassis' calculation did not assume an equivalent growth rate between overnight patient days and same day patient days.
10. Mr Anderson maintained that gap adjustments were made by Mr Palassis to PHIAC/APRA's NSW data in reliance on HCP's national data when, presumably, they should have been made in reliance on NSW patient gap data. He said that Mr Palassis' adjustment to ABS private acute and psychiatric hospital revenue data to exclude growth of non-patient revenue was unnecessary since it was to be applied to the $969 bed day revenue from 1 July 2004, which was already calculated to include non-patient revenue except car park revenue. A question of deductions made by Mr Palassis to the PHIAC/APRA data for prosthesis, medical and nursing-home-type patient revenue that was already excluded from that data was resolved by accounting for that in Mr Palassis' treatment of the PHIAC/APRA data after the 24 April 2017 conclave.
11. Mr Anderson also expressed the view that regard should be had to inflationary factors such as day episode growth rates and a shift to more complex case types. Moreover, the AIHW Health Expenditure Australia index (from which Mr Palassis derived a 2.4% average growth rate) was selectively considered, had minimal relevance to private hospital revenue, and appeared to account for activity growth but not for price growth. Mr Palassis responded by giving reasons why he considered the AIHW data relevant, stating that he "specifically selected the best data" from the AIHW, including by using a more recent AIHW report, and extracting a description given by the AIHW of its data which indicated that it "is a measure of the change in average health prices from year to year at the national level".
12. Mr Palassis' ultimate opinion was that a conclusion should be formed from a "blended view" across the various data sources in order to address the different limitations of each and that an appropriate rate was in the range of 3.2%-3.4%, if prostheses are excluded, or 3.6%-3.8% otherwise. Messrs Anderson and Coleman did not oppose a "blended" approach to the various data sources, although Mr Richmond SC submitted for Macquarie that a better approach was to "identify the data set which is the most closely aligned to the actual range of services of the hypothetical hospital". He said this was the PHDB data with some adjustments for the fact that it was a national database.
13. Finally, Mr Anderson concluded in the Joint Inflation Report that, having tested a 2.5% rate and a 4% rate against PHDB and HCP data from 2004 to 2015 and confidential examples of surgical medical private hospitals tendered during the trial, a 4% rate represented a conservative approach. He said that it is not unexpected that the appropriate rate should exceed CPI, in light of care model trends and increasing cost intensity per episode of care.
14. In terms of understanding the result of the complexities of the parties' respective analyses, the Court was assisted by this table: Data Source Mr Palassis Mr Anderson Differences PHDB 3.4% 3.8% Mr Anderson includes: • prostheses revenue which contributes 0.4% per annum to the annual growth rate. Mr Anderson: HCP 3.3% 4% • fails to take into patient gap as his analysis is performed relative to hospital benefits per patient day (as opposed to hospital charges per patient day). • includes prostheses revenue which contributes 0.4% per annum to the annual growth rate. Mr Anderson includes: ABS 3.2% 3.8% • prostheses revenue; and • other revenue. Mr Anderson: PHIAC NSW 3.2% 4.4% • performs his assessment over a different time period of FY98 to FY16 (which is prior to the date from which the damages are to be calculated). • fails to take into patient gaps as his analysis is perofmred relative to hospital benefits per patient day (as opposed to hospital charges per patient day). • is mathematically incorrect in determining the appropriate growth rate that would apply to the total revenue rate determined by the Judgement.

Bed day rate inflation 2005-2017 - submissions

1. Macquarie submitted that the bed day inflation rate for 2004-2017 should reflect the actual rate of inflation in that period, and that the opinion of Messrs Anderson and Coleman as to that inflation rate should be preferred for five reasons.
2. First, Macquarie submitted that PHDB and HCP data is to be preferred, since, unlike Mr Palassis' favoured PHIAC/APRA data, it most closely corresponds with PAPH's hypothetical services, and excludes services such as rehabilitation not relevant to the PAPH case mix.
3. In evaluating the value of data sources for calculating the 2004-2014 bed day rate inflation, Mr Palassis had regard to whether the data included non-patient revenue since "the revenue rate per bed day in the [Principal] Judgment … was specifically linked to patient revenue". Macquarie submitted that there is no finding in the Principal Judgment that non-patient revenue should be excluded and that the Court should have serious reservations about the ultimate opinions expressed in the Palassis Inflation Report.
4. Second, Macquarie submitted that Mr Palassis' adjustments to data were incorrect or unnecessary, for the reasons given by Mr Anderson in the Joint Inflation Report, and that, even if PHIAC/APRA data is considered, despite Mr Anderson's opinion of that data, it is consistent with 4% inflation after being appropriately adjusted.
5. Third, Macquarie submitted that inflation of the bed day rate is the correct integer in which to account for growth in the form of case mix changes and, in particular, increasing day-only work that can grow volume without affecting bed occupancy rates. Macquarie submitted that this is consistent with the top-down revenue model prescribed in the Principal Judgment and findings at paragraph [436] as to day beds and co-located Sydney private hospitals undertaking day surgery. It submitted that Mr Palassis' methodology should have allowed for higher activity rates for day-only episodes since the bed day rate was to be calculated based on overnight beds. The Health District submitted that organic growth should be excluded, and referred to concerns expressed by Mr Palassis that including organic growth would require recalculation of other integers and was outside the scope of the experts' task.
6. Fourth, Macquarie contended that Mr Anderson's 4% figure should be accepted because he tested it for reasonableness against historical data, concluding that it was a conservative figure based on that data, and, quoting Mr Anderson's evidence, that the figure is not unexpected where there is evidence of "lower lengths of stay, lower relative stay and increases in complexity over recent years" in private hospitals. Macquarie also submitted that Mr Coleman's December 2016 report showed that health costs inflation generally exceeded CPI by about 2%, and that a 4% bed day inflation rate was therefore conservative.
7. Fifth, Macquarie submitted that prosthesis revenue growth should be included in calculating bed day rate inflation. Relying on Mr Anderson's opinion, the argument was that Mr Palassis' exclusion of prostheses was inappropriate because it is inconsistent with the EBIT and bed day rate determined in the Principal Judgment, and because prosthesis costs have been a major contributor to rising health insurance premiums and hospital benefit payments. Macquarie also submitted that Mr Palassis' deduction from PHIAC/APRA rates for prosthesis revenue is inappropriate where the PHIAC/APRA rate already excluded prosthesis revenue, although in the witness box Mr Anderson agreed that this criticism was not relevant to Mr Palassis' revised opinion in the Joint Inflation Report.
8. The Health District submitted that the appropriate bed day inflation rate for 2004-2017 is 2.5%, being CPI, because CPI is "a widely used and widely known barometer of the inflation" whereas the alternative is a rate derived from adjustments made to less reliable data sets. It submitted that for the Court to depart from CPI, it would have to be satisfied on the evidence that another data set referred to in the Joint Inflation Report is more appropriate for determining the inflation rate. It also submitted that, if that data set provides a foundation for a 4% rate, the Court must be satisfied that the evidence explains the difference between that rate and CPI.
9. In respect of the selection of a data set, the Health District argued that the Court should prefer Mr Palassis' approach. The Health District submitted that the relevant experts' exercise is "a valuation or something closely analogous to a valuation". Reference was made to this statement by Branson J in Tyler v Thomas (2006) 150 FCR 357 at 370; [2006] FCAFC 6: "[56] A court is not obliged to accept the evidence of a particular valuer, even in a case where only one expert opinion as to value is adduced. However, in making adjustments to a valuation the court must find support for the adjustment in the evidence, apply proper principles and avoid casting itself in the role of an additional expert (Arcus Shopfitters Pty Ltd v Western Australian Planning Commission (2002) 125 LGERA 180 at [76])."
10. The Health District argued that Mr Palassis' approach to selecting a data set should be preferred because of the limitations of the HCP and PHDB data identified by Mr Palassis and because he "adopts a consistent position". The Health District contrasted this with Mr Anderson's use of PHIAC/APRA data in his November 2013 report before rejecting the same PHIAC/APRA data in the Joint Inflation Report.

Bed day rate inflation 2005-2017 - resolution

1. I have carefully considered the detailed arguments which the parties presented and which I have recorded above. Like so much in this case, it is neither desirable nor necessary in an exercise such as the present to attempt to resolve every twist and turn in the arguments. In my view, when one takes a step back, the scope of the dispute may be more clearly seen to reveal that the parties ultimately were not that far apart, as is demonstrated by the table set out in paragraph [36] above.
2. For reasons which I will now set out, the Court finds that the bed day inflation rate for 2005-2017 should be 3.8%.
3. By the end of the concurrent evidence the following points were clear and, I find, were the subject of agreement between the experts: 1. The basic CPI figure was 2.5%. 2. For the entirety of the historical period under examination the rate of inflation in relation to services such as those to be offered by the PAPH was above CPI. 3. None of the data sources was entirely satisfactory as a comparator whether in and of themselves or when specifically related to the PAPH. 4. A blended approach to the data was acceptable, although the precise adjustments were the subject of disagreement. 5. A result within the range of figures set out in paragraph [36] above would be reasonable, although the precise figure was a matter of judgment about which reasonable minds could differ.
4. Although on this issue they were not quite so far apart as they had been on other matters dealt with in the Principal Judgment, I do not see any reason to depart from the preference (and my reasons for that preference) that I expressed in the Principal Judgment (at paragraphs [435], [444] and [445]) for the evidence of Mr Anderson over that of Mr Palassis. I therefore adopt Mr Anderson's stated preference, in the first instance, for the PHDB data.
5. I propose to accept that PDHB data in its unadjusted form because, when the 0.4% element for prostheses is added back in, Mr Palassis' calculation of the PDHB figure is the same as Mr Anderson's. It is also within the range - albeit at the higher end - of the figure which Mr Palassis accepted as appropriate if prostheses were included (see paragraph [34] above).
6. On the question of prostheses, I accept Macquarie's arguments set out in paragraph [43] above. Perhaps even more fundamentally, it is clear that prostheses would have formed part of PAPH's revenue. To the extent prostheses are included in the data, there is nothing to support the conclusion that its circumstances would be materially different so as to make the data inclusive of prostheses inapplicable to the hypothetical PAPH.
7. In reaching this conclusion I have not overlooked Mr Palassis' argument recorded in paragraph [28] above that inclusion of prostheses together with the decided earnings before interest and tax margin ("EBIT") of 15% (as required by the Principal Judgment at [435]) would distort the bed day rate unreasonably over time. However, assuming that contention to be correct, I am satisfied that for three reasons it does not vitiate the conclusion I have reached. First, such is the interdependence of the various integers which the Court has been called upon to decide that perfect harmony between them is an impossibility. I am not satisfied that, in the overall scheme of the assessment exercise, the degree of distortion to 2017 (if it be such) is sufficient to compel a different result. Second, as noted in paragraph [29] above, Mr Palassis accepted that the 15% EBIT found in the Principal Judgment was made by reference to a case mix that included prosthesis procedures. Third, as will become apparent in the next section, I do not accept that the historical rate I have determined should apply for the entirety of the period of the Hospital Lease.

Bed day rate inflation 2018-2099 - evidence

1. Mr Palassis expressed the view in the Palassis Inflation Report and Joint Inflation Report that the bed day inflation rate to be applied from 1 December 2014 to 1 December 2099 should align with the inflation rate embedded in the discount rate of 8.94% post-tax or 12.77% pre-tax used to calculate the net present value of the Hospital Lease (being CPI or 2.5%) lest the difference between a lower rate of inflation in the discount rate and a higher bed day rate inflation increase the damages award simply by virtue of the inconsistency. Mr Gower gave evidence of a similar opinion in a joint experts' report by him and Mr Coleman dated 8 February 2017. Mr Palassis had calculated a compounded annual growth rate from the 2005-2016 CPIs as 2.5% and it is not disputed that CPI should be estimated at 2.5% from 2004-2099. Mr Palassis therefore considered the applicable rate from 1 December 2014 to 1 December 2099 to be 2.5%.
2. It was put to Mr Palassis, when giving concurrent evidence, that CPI is not a reliable indicator of actual growth in revenue for hospital services. Mr Palassis reiterated that he considered that the bed day inflation rate needed to correspond to the inflation rate used to calculate the discount rate. He said that he adopted CPI in the absence of evidence that growth in private hospital revenue will exceed the general long-term growth of the economy, and he considered that the historical 4% growth rate relied upon by Mr Coleman could not be used to predict future growth.
3. Mr Coleman expressed the opinion in the Joint Inflation Report that a rate of 4% was reasonable, and perhaps slightly conservative. He agreed with Mr Anderson, who also considered that 4% was the appropriate rate from 2004-2099. In the Joint Inflation Report, Mr Coleman referred to inflation in health and medical costs, average weekly earnings ("AWE"), and private health insurance premiums exceeding CPI from about 2000 to 2016. He said that this sustained difference, which he said may be more stable than CPI, should be reflected in an evaluation of Macquarie's loss and that this was the basis of his conclusion that a 4% rate is reasonable. Mr Palassis agreed that hospital revenue growth had exceeded CPI over the last 15 years. Mr Anderson also referred to a presentation given by a publicly listed health insurer predicting continued inflation of hospital claims at a rate of 4%-5%.
4. Mr Palassis, however, considered that the 15-year historical growth rate is not indicative of the long-term growth rate because of "the lag of one-off structural changes to the private hospital sector". Examples included the introduction of the Medicare Levy Surcharge, private health insurance rebate, lifetime health cover, legislated limits on private health insurance premium increases, and other structural changes, and that the growth rate would return to CPI in the long term.
5. Messrs Coleman and Anderson accepted, to some extent, that Commonwealth Government policy was a major factor in private hospital bed supply and demand in Sydney. Mr Anderson's opinion, however, was that recent private hospital revenue growth is mostly attributable to utilisation and case mix changes. The Health District submitted that the Court would not give weight to that evidence since it was not mentioned in the Joint Inflation Report. Mr Coleman considered that political interventions into the private health care system are attributable to an aging population, increased use of hospitals, and continued efforts by the Commonwealth Government to relieve burdens on public hospitals - trends which are not anticipated to change for many years into the future. The Health District submitted that Mr Coleman's actuarial expertise did not qualify him to express this opinion.
6. Mr Palassis referred to a confidential due diligence report predicting revenue growth of 2.6% and market analysis predicting revenue growth of about 3%, comprising price growth of 0%-2% per annum and case mix growth of 2%. He considered that, since case mix growth attributable to changes in proportions of day and overnight patients cannot be taken into account because of the Court's findings in the Principal Judgment at [435], the presently applicable case mix growth is 1%-2%.
7. Mr Coleman responded that the hospital owners' growth projections, and analysts' predictions based on those projections, are likely (so as to promote share prices) to be calculated to avoid overpromising; that they relate to current growth expectations rather than expectations about future growth in the year 2000, which expectations would differ in pricing of risk; and that Mr Palassis incorrectly excluded organic growth from greater utilisation by only adding price and case mix growth. The Health District also submitted that the market analysis should not be given significant weight because the company by which the report was written could be retained as an advisor or underwriter in a capital raising by a private hospital and the market analysis therefore expressly disclaimed objectivity and impartiality.
8. Mr Palassis' view was that volume growth should be excluded from calculating the bed day inflation rate because assumptions have already been made, which will not be revisited, as to bed numbers and occupancy rates, and that the proper inquiry is what the growth in revenue per bed day will be. Mr Coleman, however, considered that increasing utilisation provides volume growth without higher occupancy rates and that this should be accounted for in calculating bed day rate inflation. Whereas Mr Palassis pointed to assumptions as to capital expenditure and furniture, fixtures and equipment - costs which would be increased by greater throughput and that bed day rate inflation must accommodate - Mr Coleman considered that the critical assumption is the 15% EBIT which allowed for such cost increases.
9. Mr Coleman concluded that 2.5% bed day rate growth from 2017-2099 was unreasonable because, with an EBIT of 15%, it "mathematically requires" either AWE to increase at a rate lower than CPI plus 1%-1.4% per annum, or non-wage PAPH costs to increase at a rate materially lower than CPI. He thought both of these scenarios to be "extremely unlikely", given the implications for wages growth across the Australian economy, in respect of the first scenario, and, in respect of the second scenario, the improbability of inflation of non-wage costs - largely the price of consumer goods - departing from the very index that measures inflation of the price of consumer goods. On that basis, he considered that a minimum of 3.5% (CPI plus 1% for AWE) and up to 4.5% (CPI plus 2% for the higher health costs component of CPI) long term inflation of the bed day rate was required.
10. Mr Palassis responded that AWE growth, CPI and 15% EBIT could all be maintained if one considered the nature of revenue and costs, specifically, the difference between fixed costs and costs that increase in line with revenue growth; accounted for not only for increased AWE but also for corresponding increased employee productivity; and had regard to the fact that annual costs savings of up to 2% allow private hospital operators to achieve a constant margin even while inflation of wage costs exceeds revenue growth.
11. Mr Palassis was of the view that the same inflation rate should be used in calculating the discount rate and the future bed day rate growth. Mr Coleman, however, said that it is common for actuaries to be required to calculate net present value by reference to two rates of inflation. For example, in evaluating the financial position of a superannuation fund that pays CPI-indexed pensions, the net present pension liability of the fund will depend on both CPI and AWE growth of members' earnings, which generally exceeds CPI over the long term. Similarly, in Mr Coleman's opinion, projections of PAPH revenue must account for above-CPI private hospital revenue growth in the long term. In Mr Coleman's view, this is consistent with the use of CPI as an integer of the discount rate because the discount rate is calculated with reference to the views of buyers and sellers in a market for assets such as PAPH, which reflect expectations as to future private hospital revenue growth.
12. One possibility raised by Mr Richmond SC in the course of the expert witnesses' concurrent evidence was that it may be appropriate to apply different bed day rates in different years, or different portions, of the period from 2017-2099. Mr Palassis acknowledged that would be an acceptable approach, although the Health District again submitted that it would be inconsistent with the 2.5% rate used to calculate the bed day rate from 2001-2004.
13. Mr Coleman gave an extended explanation of why he considered that a single rate should be used from 2017 onwards. He considered that the goal of determining a rate was to "set an assumption which over the long term on average effectively, over the full period you're talking about, should produce a sensible result, a balanced result" and that it is sensible to set a long-term rate where one has evidence as to a stable rate of growth, which in this case was the stable difference between AWE and CPI.

Bed day rate inflation 2018-2099 - submissions

1. Macquarie submitted that the opinion of Messrs Anderson and Coleman on the applicable bed day inflation rate for the period from 2017 to 2099, being 4%, should be preferred. It submitted that Mr Palassis' 2.5% rate implied that there would be no long-term difference between hospital revenue growth rates and CPI and referred to the observations of Messrs Anderson and Coleman on AWE, wage costs, new models of care and technologies attracting higher relative revenues.
2. The Health District urged Mr Palassis' view that the bed day inflation rate must match the 2.5% rate applied in determining the discount rate for the purposes of calculating net present value, since Macquarie would otherwise be overcompensated. Macquarie, however, referred to Mr Coleman's opinion that two inflation rates are required to evaluate accurately the net present value of PAPH cash flows, since private hospital revenue consistently exceeded CPI by 1.9%-2.2% from 2000-2015 and that a 4% bed day inflation rate is consistent with the discount rate because the discount rate was calculated by reference to the expectations of buyers and sellers of assets such as PAPH as to future revenue growth.
3. Macquarie also submitted that the Court should accept Mr Coleman's view that a bed day inflation rate of 2.5% together with an EBIT of 15% "mathematically requires" either AWE to increase at a rate lower than CPI plus 1%-1.4% per annum or non-wage PAPH costs to increase at a rate materially lower than CPI. Macquarie also referred to Mr Coleman's opinion that bed day rate inflation will be balanced out by the discount rate. Mr Richmond SC submitted that Mr Coleman's evidence on the combination of CPI and AWE growth meant there was a minimum "floor" of 3.5% below which the Court would not go in determining the applicable future inflation rate.
4. The Health District submitted that Mr Coleman had no specialised knowledge in the field of bed day rates and, according to his several curricula vitae in evidence, had no experience in the health industry sector at all. It submitted that his expertise did not advance the inflation rate issue in any meaningful way, that his reliance on a 4% inflation rate is ultimately based on instruction or on Mr Anderson's opinion, and that nothing in his evidence in the various experts' reports would assist the Court, since it did not amount to an application of relevant expertise in determining the appropriate inflation rate nor did it assist in the discrete area of future growth in the private hospital sector.
5. Macquarie submitted that Mr Coleman, as an actuary, had significant experience in considering the use of different inflation rates to reflect different rates of growth in underlying cash flows and the consistency of those rates relative to the discount rate, and that the Health District had accepted his actuarial qualification. Macquarie submitted that Mr Palassis was not an actuary and was likely to have less experience in that respect, and noted that the Court preferred Mr Coleman's discount rate to Mr Palassis' in the Principal Judgment at [489]-[503].
6. The Health District attributed growth in the health component of the CPI, insofar as Macquarie relied on that to establish above-CPI growth before 2017, to structural changes in the private hospital sector, relying on evidence in the Joint Inflation Report. On the question of prostheses the Health District also relied on reports from Private Healthcare Australia, the Private Health Insurance Council, and the Industry Working Group on Private Health Insurance Prostheses Reform, and Mr Palassis' oral evidence, that price regulation of prostheses was under review by the Commonwealth government and that it was a major objective of the government to reduce the cost of prostheses. It submitted that the government is likely to "rethink the artificial market which it has created through the policy that's imposed on the private health sector" in respect of prosthesis procedures in private hospitals.
7. Macquarie, however, adopted Mr Coleman's view that recent high revenue growth in the private hospital sector is attributable to demographic causes rather than the temporary causes suggested by Mr Palassis. Macquarie disputed the relevance of market expectations referred to by Mr Palassis, reasoning that market expectations must be gauged as at 2000 in order to correctly apply the discount rate.
8. The Health District further submitted that, even if a 4% inflation rate were accepted, the Court would not accept that private hospital sector inflation exceeding that of the broader economy by 37.5% would continue from 2004 to 2099. It submitted that the evidence explaining the difference between CPI and 4% in Mr Anderson's report dated 8 November 2013 rises no higher than a general observation and there is no evidence as to why the difference would continue in respect of the private hospital sector in general, and PAPH in particular, until 2099. Mr Anderson's evidence therefore proceeded, the Health District submitted, on an unproved factual assumption.
9. Mr Jackman SC argued that the period over which the inflation rate is to be applied is sufficiently large that, beyond a particular point, the Court can only speculate as to whether the inflation rate applicable to the private hospital in question would exceed the general inflation rate in perpetuity. A rate of 2.5% therefore represented the safest course because historical inflation data is influenced by structural changes in the private hospital sector, for which no allowance is made by adopting a 4% rate.
10. Macquarie accepted that there are difficulties in predicting what will occur in the future, but pointed to evidence of above-CPI private hospital revenue growth for 18 years and the fact that CPI does not measure hospital revenue in support of its submission for above-CPI inflation from 2017. Macquarie also referred to Mr Anderson's opinion that past causes of above-CPI growth will continue into the future.

Bed day rate inflation 2018-2099 - resolution

1. For the reasons which follow, the Court finds that the bed day inflation rate for 2018 to 30 June 2024 should be calculated at 3.8%, and from 1 July 2024 to 1 December 2099 at 2.8%. In arriving at those figures I have not overlooked the possibility of some distortion arising between the use of those figures and the discount rate which the Court has found. If that is correct (a matter about which I do not think I need to express a concluded view), then I disregard it for two reasons. First, as I have said before, the complexity of the exercise and the way in which the case has had to be run (I make no criticism of the parties), means that a technically perfect harmonisation between the various integers is not really practicable and not something which the law requires in an assessment such as the present. Second, in a calculation running over 99 years, the impact of any distortion will diminish over the life of the calculation.
2. In a piece of cross-examination that was no less effective for the obvious point it was making, Mr Jackman SC put to Messrs Coleman and Anderson that supply and demand for private hospital beds is heavily dependent on federal government policy. They agreed. Unsurprisingly, they also agreed with his next proposition that it would be silly for any expert to claim they could predict government policy over the next 70 years. That evidence opened up Mr Jackman SC's submission - which in my view carries considerable force - that it would invite derision for the Court to suggest that it could find what the bed day inflation rate will be in, say, 2080. It is precisely to avoid such derision that in damages calculations running over a long period of time, courts will generally default to a basic inflation figure into the future. That result may appear pragmatic but it also reflects a legal reality: beyond a certain future date the Court will not be satisfied on the balance of probabilities of a particular figure above the inflation rate. Even acceptance of the CPI as the appropriate measure entails more of an appeal to general economic experience than strict proofs. From time to time the law has had to grapple with the assumptions underlying this approach when confronted with unusual economic times: see, for example, the discussion by the High Court in Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625; [1981] HCA 3 ("Pennant Hills Restaurants").
3. Having found the bed day inflation rate to date should be 3.8%, I am satisfied, given the evidence that a rate of that order has been the case for 15 or more years, that such a rate is likely to continue for a few more years. However, the evidence also suggests that, with each passing year, the possibility of things such as government review of the prostheses market, the vagaries of government policy and efficiencies in the running of private hospitals will make it harder for the Court to be satisfied of the reliability of that figure to the requisite standard.
4. In other aspects of the damages calculation in this case experts drew what I would respectfully describe as a commonsense line between the first 20 years of PAPH's hypothetical existence and thereafter. So, for example, in relation to ongoing capital expenditure and FFE replacement costs (see Principal Judgment at paragraph [533]), it was accepted that an inflation rate of 2.5% should apply uniformly after the first 20 years of PAPH's operation. In my view it is fair and just, and supported by the evidence, that in similar fashion, the higher interest rate of 3.8% should apply to the bed day rate for the first 20 years of PAPH's operation concluding on 30 June 2024. I am satisfied on the balance of probabilities that represents the applicable bed day inflation rate until that time. Thereafter I am not so satisfied because the outcome of the variables debated between the experts becomes too difficult to predict to satisfy the Court of any particular figure to the civil standard of proof.
5. At this point in the analysis the question becomes whether Macquarie has satisfied the Court that any ongoing figure after the first 20 years should be greater than the agreed CPI of 2.5%. Based on Mr Coleman's evidence (see paragraph [62] above), Macquarie contended that the figure should be not less than 3.5%.
6. The Health District submitted Mr Coleman lacked relevant expertise. In my view an important distinction must be made in assessing that submission. Insofar as Mr Coleman gave evidence about the technicalities underlying the CPI and other economic indices such as AWE, the Court accepts Mr Coleman was well qualified as a senior actuary to give such evidence. Such matters are fundamental knowledge in a field of learning dedicated, in part, to making calculations about the value of money over time.
7. However, Mr Coleman himself quite properly acknowledged that he was not an expert in bed day rates, which I take to include the value of those rates over time. Nor was he an expert in the health sector, so I accept the Health District's criticism referred to in paragraph [58] above. Mr Coleman's evidence provides a theoretical basis to conclude as a matter of generality that a "floor" of 3.5% in a long term inflation calculation may be appropriate. It does not assist in answering whether that general position applies in the case of private hospital bed day rates. That issue falls to the expertise of Messrs Anderson and Palassis.
8. Although I have generally preferred the evidence of Mr Anderson, it is neither inconsistent with that position nor a criticism of him, to conclude that I do not accept his evidence that 4% (or, as I have found, 3.8%) should apply over the life of the balance of the Hospital Lease. As I have noted in paragraph [78] above, Mr Anderson properly accepted no one could predict government policy years into the future. Nor does anything in Mr Anderson's evidence enable me to be satisfied that the "floor" rate of 3.5% represents the probable figure after 2024.
9. However, that conclusion does not exhaust the inquiry. By reason of the evidence of the history of the bed day inflation rate for the last 15 years or so, the Court is satisfied on the balance of probabilities that the bed day inflation rate is likely to exceed the CPI after 2024 for the life of the Hospital Lease and that the fair and just assessment of Macquarie's damages requires that to be taken into account. Putting it another way, the Court concludes that to make no allowance for this difference would undercompensate Macquarie.
10. In circumstances where, as here, the Court is not satisfied on the balance of probabilities as to the amount by which the bed day rate inflation rate will exceed 2.5% after 2024, in my opinion the correct outcome in the light of the conclusion expressed in the preceding paragraph is to make a nominal allowance. Doing the best I can, the Court finds that figure should be 0.3% over the agreed CPI of 2.5% after 2024.

Taxation issues - generally

1. It was common ground between the parties at the hearing of the damages inquiry that argument about the impact of taxation (if any) on any damages that might be awarded to Macquarie should be deferred until after the Principal Judgment was delievered. By the conclusion of the further hearing before me which is the subject of these reasons, the parties had agreed draft orders to take account of taxation on the award, subject to two matters: 1. The Health District raised a point of legal principle in the nature of a demurrer. Insofar as Macquarie submitted that any award of damages should be "grossed up" to allow for any taxation that may be payable on that award, the Health District submitted that grossing up for tax is only available when the damages are being awarded for the purpose of what Mr Jackman SC described as the "true sense or strict sense" of compensation by putting Macquarie in the position it would have been in if the wrongful conduct had not occurred. I shall refer to this as the "compensatory principle". Because it was abundantly clear from the Principal Judgment that the damages which the Court has assessed were in accordance with the user principle, such damages were not compensatory in that true or strict sense and, as a matter of legal principle, the question of grossing up could never arise. 2. If the Court did not accept the Health District's fundamental legal objection to grossing up any award, then the parties were in dispute as to whether the orders which they had agreed in relation to taxation issues should provide for tax losses within the Macquarie group of companies to be taken into account to reduce the damages award. The Health District said that question should be answered "yes". Macquarie disagreed.
2. I will consider each of these questions separately.

Taxation issues - grossing up

1. In approaching this question, some preliminary points may be dealt with immediately: 1. Each party advanced expert taxation and accounting evidence on the question of whether grossing up was required. While degrees of agreement were achieved in the course of expert conclaves, the fundamental dispute remained: Macquarie's accounting and tax experts said grossing up was required; the Health District's expert evidence was to the contrary. With no disrespect intended to the qualifications and diligence of the several experts, I do not think that this issue is to be resolved by expert evidence. As it was ultimately presented by Mr Jackman SC, the Health District's argument was a purely legal one. Accordingly, I do not propose to take account of the experts' views, particularly in circumstances where the parties were able to propose a mechanism for how issues of taxation would be dealt with if the Health District's legal argument was not accepted. 2. Subject to resolution of the Health District's legal argument and the question concerning the treatment of tax losses, the parties have agreed an approach for how taxation questions are to be dealt with (see paragraph [130] below). 3. The Health District's submission is correct that Macquarie's damages in these proceedings calculated by reference to the user principle are not damages which reflect the compensatory principle when that latter principle is understood to mean putting Macquarie back in the position, as far as money can, that Macquarie would have been in but for the wrong. So much is apparent from paragraphs [160] to [181] of the Principal Judgment, especially paragraph [177]. 4. As is discussed further in paragraphs [134] to [141] below, Macquarie is a subsidiary member of a tax consolidated group of which Traknew Holdings Pty Ltd ("Traknew") is the head company (the "Tax Group"). This has the consequence that it is Traknew which is the taxable entity. This is recognised in the approach the parties have agreed if the Court finds the damages are to be grossed up which expressly refers to Traknew. While the discussion in what follows refers to Macquarie, I have taken into account the taxation role of Traknew and the Tax Group. The conclusions I have reached are on the basis that for the purposes of the legal principles in relation to grossing up, Macquarie and Traknew are synonymous.
2. For the reasons set out below, I do not accept the Health District's submission that, as a matter of law, Macquarie's damages in this case calculated in accordance with the user principle cannot be adjusted to take account of the impact of taxation on the award by being grossed up. In my respectful opinion, the authorities require a court to take the following approach to the impact of taxation on the damages award in this case. Damages are compensatory. Where damages are or are arguably going to be taxed, the fundamental question is whether justice requires that taxation be taken into account in the amount of the award? The answer to that question requires a judicious blend of principle and expediency which will depend on the facts of the particular case. Regarding the application of principle, it will always involve keeping in mind the compensatory purpose of damages but may also involve other issues such as remoteness or causation. Considerations of expediency will include the method or logic of the way in which damages have been calculated and the ease or difficulty with which an amount can be determined to allow for the effect of taxation on the damages award.
3. In the absence of a binding authority directly on point, the conclusion which I have expressed in the preceding paragraph is derived from an examination of the authorities which have considered this question in other damages contexts. I will first consider the five cases which each party addressed during the course of argument. I will then make reference to some other authorities which I think are relevant.
4. Both parties agreed that the starting point was the decision of the House of Lords in British Transport Commission v Gourley [1956] AC 185 ("Gourley"). The damages under consideration in that case were loss of earnings due to personal injury. The seminal passage is in the judgment of Earl Jowitt (at 197-198) (emphasis added; citations omitted): "The question for determination in this appeal is whether the judge ought to have taken the tax position into account in assessing that part of the damages attributable to loss of earnings actual or prospective. The broad general principle which should govern the assessment of damages in cases such as this is that the tribunal should award the injured party such a sum of money as will put him in the same position as he would have been in if he had not sustained the injuries: see per Lord Blackburn in Livingstone v Rawyards Coal Co (1880) 5 App.Cas. 25, 39. The principle is sometimes referred to as the principle of restitutio in integrum; but it is manifest that no award of money can possibly compensate a man for such grievous injuries as the respondent in this case has suffered. The principle, therefore, affords little guidance in the assessment of damages for the pain and suffering undergone and for the impairment which results from the injuries, and in fixing such damages the judge can do no more than endeavour to arrive at a fair estimate, taking into account all the relevant considerations. The principle can, however, afford some guidance to the tribunal in assessing compensation for the financial loss resulting from an accident, and in such cases it has been referred to as "the dominant rule of law": see per Lord Wright in Liesbosch (Owners) v Edison (Owners) [1933] A.C. 449, 463. There are, no doubt, instances to be found in the books of exceptional cases in which this dominant rule does not apply, as, for instance, in cases of insurance, or cases calling for exemplary or punitive damages, or in certain cases dealing with the loss of use of a chattel; but, as Lord Sumner said in Admiralty Commissioners v Chekiang (Owners) [1926] A.C. 637, 643: "The measure of damages ought never to be governed by mere rules of practice, nor can such rules override the principles of the law on this subject." "
5. Attention was also drawn to the speeches of Lord Goddard (at 206 and 208), Lord Reid (at 212), and the agreement of Lord Radcliffe with Lord Goddard (at 215) in support of the proposition that the plaintiff was receiving compensation and not restitution, such compensation being intended to put the plaintiff in the same position he or she would have been in, so far as money can do it, as if the wrong had not occurred.
6. The first point to note is that nowhere in the decision are the words "grossing up" or anything like them to be found. Nor will one find, in terms, a statement of what came to be referred to as the conditions precedent for the application of Gourley.
7. This point was not lost on Stephen J in Atlas Tiles Ltd v Briers (1978) 144 CLR 202; [1978] HCA 37 ("Atlas Tiles") at 234-236 (emphasis added): "It has been customary to say of the principle in Gourley's Case that its application is dependent upon the satisfaction of two conditions precedent; the award of damages must represent compensation for loss of income (or for loss of earning capacity manifested by a loss of income) which income would have been subject to tax had it been received by the plaintiff, and the award of damages must itself not be subject to tax. … The so-called conditions precedent with which Gourley's Case has come to be associated find no place in their Lordships' speeches in that case itself, they are no more than working rules judicially deduced from that decision as it operated in the then-existing pattern of United Kingdom revenue laws. They were, no doubt, well suited to that pattern of taxation, at least as it existed before the introduction of ss. 37 and 38 of the Finance Act 1960, but are quite unsuited to the wholly different problem posed by a provision such as s. 26 (d). To regard them in any different light is to erect into rules of law working guides to the proper application of an important principle in the assessment of damages and to do so in disregard of the very principle itself."
8. As I will shortly develop, although he was in the minority in Atlas Tiles, the views of Stephen J and his fellow dissentient, Gibbs J, ultimately prevailed in Cullen v Trappell (1980) 146 CLR 1; [1980] HCA 10 ("Cullen").
9. Although the notion of "grossing up" does not appear anywhere in the judgment in Gourley, it has come to be understood as the legal foundation for that practice by reference to the two "conditions precedent" identified in the judgment of Stephen J in Atlas Tiles set out in paragraph [95] above. It was the passage in the judgment of Earl Jowitt (see paragraph [92] above) that the Health District relied on for the argument that the principle in Gourley was to be confined to those cases of compensation in its "strict sense" - namely, putting Macquarie back into the position Macquarie would have been in but for the wrong.
10. I do not agree that Gourley has the effect for which the Health District contends. Gourley stands for, or is at least consistent with, the basal proposition that damages in tort are compensatory. However, as is apparent from the passage quoted from Earl Jowitt's speech, Gourley is a case concerning whether or not tax should be taken into account in awarding damages "attributable to loss of earnings actual or prospective" and the statement of the "broad general principle which should govern the assessment of damages" is directed to "cases such as this". In my view, his Lordship's express acknowledgment "of exceptional cases in which this dominant rule does not apply, as, for instance … certain cases dealing with the loss of use of a chattel" means the Health District may not rely on Gourley in the way it seeks to do.
11. Gourley has nothing to say about whether tax should or should not be taken into account when damages are calculated in accordance with the user principle. The fact that it supports the conclusion that tax should be taken into account when the compensatory principle is applied does not mean that it is authority for the proposition that tax should not be taken into account when the user principle is applied. I do not think that in referring to the "exceptional cases" his Lordship was suggesting that they are any less examples of compensation, but only that they do not engage "the broad general principle". In my respectful view, rather than foreclosing tax being taken into account when the user principle is used, Gourley and its successors must be analysed to identify a more fundamental principle at work of which Gourley is an example.
12. In order to understand the course of Gourley through Australian jurisprudence, the parties accepted that the next case which needed to be considered was the decision of the High Court in Atlas Tiles, in which the majority rejected the application of Gourley in Australia. Both parties, however, drew attention to the reasoning of Gibbs and Stephen JJ in dissent, which, as I have already observed, was ultimately accepted by the High Court in Cullen. In Atlas Tiles, Mr Briers had successfully sued the company for wrongful dismissal. The question was whether his damages should be reduced by the tax that he would have paid in respect of income which he would have earned if he had not been dismissed.
13. Gibbs J (as his Honour then was) explained Gourley as follows (at 221): "Gourley's Case rested on two foundations. In the first place their Lordships re-affirmed the fundamental principle that damages awarded for personal injuries are compensatory. It would be unreal to measure the loss of a plaintiff, who has been deprived of the ability to earn moneys which, when earned, would have been subject to tax, by having regard to his gross earnings, without taking tax into consideration. Secondly, they rejected the argument that taxation is something too remote to be taken into account in the assessment of damages - something merely collateral, res inter alios acta."
14. His Honour then went on to consider various criticisms that had been made of Gourley. For present purposes it is important to note that his Honour's approach emphasised both realism and the need to avoid a mechanistic approach. So much appears in this passage (at 222): "To assess the damages of such a plaintiff on the basis that he has lost his gross earnings seems manifestly unreal, and unduly advantageous to the plaintiff. However, the critics say, the principle in Gourley's Case will work unfairly where the plaintiff would have earned a large income, particularly if tax was not deducted at the source. Such a plaintiff may have lost the ability to deal freely with his gross earnings and to take steps to reduce the burden of the tax. However, there is nothing in Gourley's Case that requires the court to proceed so mechanically as to fail to take these possibilities into account. Further it is said that it is impossible to foresee future changes in the level of tax, or in the tax laws, or in the situation of the plaintiff himself which may affect the extent to which the lost earnings would have borne tax. There is an element of truth in this criticism, but in the assessment of damages the court is constantly required to endeavour to predict the course of events in the future, and it does not abdicate a necessary function for fear that its predictions may be falsified. To ignore tax altogether would be to assess damages on a basis that would be unreal and theoretical."
15. One issue in Atlas Tiles was whether the principle in Gourley should extend to where some of the damage would be taxable. Gibbs J answered that question in the affirmative, giving expression to the concept which is now referred to as "grossing up" (at 227): "Whatever may be the correct position in the United Kingdom, it seems to me that the principle in Gourley's Case should be applied in assessing damages for wrongful dismissal in Australia, notwithstanding that five per cent of the award will be taxable. As I have already said, I consider that, in general, the principle applies only where the damages are not taxable, and this would be so even if the tax payable on the award were considerably less than the notional tax on the lost earnings. But where only a small fixed proportion of the award is subject to tax, it would be manifest that a plaintiff would receive more than was necessary to compensate him for the loss caused by his wrongful dismissal if his damages were assessed on the footing of his gross earnings, when all of those earnings would have been subject to tax. The reasons underlying Gourley's Case in my opinion require that in such a case the court should assess damages on the basis of the net earnings which represented the plaintiff's real loss, but should adjust the result by taking account of the fact that a proportion of the award will bear tax."
16. In so developing the principle in Gourley by reference to the "reasons underlying it", Gibbs J identified the fundamental purpose of the task (at 227) as being "that it is necessary to take tax into account in order to determine, in the fairest way possible, the compensation that the respondent should receive for the wrong done to him".
17. Stephen J reached the same conclusion as Gibbs J. I have already referred in paragraph [95] above to the passage from his Honour's judgment where in reference to the so called "conditions precedent" associated with Gourley, his Honour counselled (at 236) against erecting "into rules of law working guides to the proper application of an important principle in the assessment of damages and to do so in disregard of the very principle itself".
18. In my opinion, the key passage in his Honour's reasoning - which is equally applicable to resolving the issue in this case - is (at 235-236) (emphasis added; citations omitted): "In my view it is not these so-called conditions precedent but, rather, a judicious blend of principle and expediency that must determine when, in the assessment of damages, the incidence of taxation is to be taken into account by the application of the principle in Gourley's Case. In that blend the principle in question is that damages should be no more than compensatory, the expediency is concerned with the degree of added complexity which attainment of that principle may involve. It is easy to imagine a particular taxing provision the effect of which, if not taken into account in the process of assessment, will nevertheless have but little effect upon attainment of the desired goal of just compensation. In such a case the added complexity involved in taking tax into account may outweigh the relatively slight gain in fairness of compensation. Section 26 (d), however, is not such a taxing provision; the contrast between tax on earnings and tax upon only five per cent of damages is likely to be marked and should be taken into account in the process of assessment if the compensatory character of damages is to be retained."
19. The parties next took the Court to the decision of the High Court in Cullen.
20. In Cullen, Gibbs J said (at 11) (emphasis added; citations omitted): "Having considered with care the arguments which the parties in the present case have put before us, I adhere to the view which I expressed in Atlas Tiles Ltd v Briers that Gourley's Case should continue to be followed in Australia. My opinions were fully expressed in my judgment in that case; they remain unchanged and no useful purpose would be served by recapitulating or expanding them. … The decision in British Transport Commission v Gourley rested on the broad principle "that the tribunal should award the injured party such a sum of money as will put him in the same position as he would have been in if he had not sustained the injuries", from which it followed that a plaintiff should have his damages assessed "upon the basis of what he has really lost": per Earl Jowitt [46]. The question now raised, whether the court, in assessing damages, should take into account the income tax notionally payable on the income which the plaintiff is assumed to earn from that part of the judgment which is awarded to compensate him for economic loss, depends less on the general principles governing the assessment of damages, than on the logical requirements of a particular method adopted to assess them."
21. His Honour concluded (at 13): "I can see no justification for using a method of an actuarial or mathematical kind in assessing damages, without making the allowances that the method itself requires in order to give the correct result. As a general rule, therefore, the application of this method seems to make it necessary to take into account the tax that would be notionally payable on the income from the invested sum."
22. The "method" referred to by his Honour, which had earlier been identified by him (at 12), "is first to estimate what the loss will be, and over what period it is likely to occur, and then to estimate what sum, if paid at the date of judgment, would compensate the plaintiff for that future loss. This is usually done by applying the actuarial tables which show the present value of a future loss, once an appropriate rate of interest has been selected". Stephen and Mason JJ agreed with Gibbs J. Wilson J, in agreeing with Gibbs J, also said (at 39) that he agreed "entirely with the dissenting views expressed by Gibbs and Stephen JJ in the Atlas Tiles case".
23. Pausing at this point of the review of the authorities, it will be obvious to the reader that none of the cases which I have considered deals with the impact of taxation on damages calculated in accordance with the user principle for trespass. Despite their industry and resources, the parties accepted that they have been unable to find a case precisely on point. What I draw from the passages which have been cited in the preceding paragraphs is that the essential principles underlying the Court's approach to the impact of taxation on damages awards is that one must bear in mind the fundamentally compensatory nature of damages and approach the impact of taxation by reference to the logic of the method by which damages have been calculated so as to determine a just outcome in the facts of any particular case.
24. The parties were able to point to two cases concerning the impact of tax for damages in an action for trespass and conversion. However, neither of them answers the present problem because they do not involve the user principle. Nor does that mean that they stand for the proposition that tax cannot be taken into account where the user principle is applied.
25. In Hall & Co Ltd v Pearlberg [1956] 1 WLR 244 ("Pearlberg"), his Honour W K Carter QC was sitting as an Official Referee. The defendant had unlawfully trespassed upon two farms, which she occupied for some ten months without paying any rent. The plaintiff's damages included the sum equivalent to one year's rent which the plaintiff would have received but for the defendant's trespass. During the course of the hearing before his Honour, the decision of the House of Lords in Gourley became available and his Honour had to consider its impact on the case before him. His Honour said (at 247) that "It appears to me that the principles of Gourley's case apply to claims for damages for trespass and conversion in the same way as they do to claim [sic] for damages for personal injuries".
26. Pearlberg is of no assistance in the present case, because the damages for trespass were calculated by reference to the compensatory principle rather than user principle. In Pearlberg, his Honour had contrasted the position in which the plaintiff would have been had there been no trespass with the actual events as they occurred. By doing so, his Honour arrived at an amount of rent which he was satisfied the plaintiff would have received but for the defendant's trespass. His Honour concluded that because the damages awarded for trespass would not be taxable in the hands of the plaintiff, but the rent would have been taxable if it had been received, then Gourley required the damages award to be reduced to a figure net of tax. Not to have done so would have left the plaintiff overcompensated.
27. The second trespass case identified by the parties was the decision of the Privy Council on appeal from the Singapore Court of Appeal in Raja's Commercial College v Gian Singh & Co Ltd [1977] AC 312. In that case tenants were found to have remained in occupation of certain premises wrongfully for a period of years after receiving a notice to quit. The landlord's damages were calculated as the difference between the rent which the tenants purported to pay during the period of their wrongful occupation and the higher rent which it was admitted that the landlords could have obtained if the tenants had moved out and the landlords had been able to relet the premises. It was accepted that, if it had been received as such, the additional rent would have been income in the hands of the landlords and taxable accordingly. However, damages were awarded on the gross sum because the damages were themselves held to be taxable.
28. This case also casts no light on the present circumstances for at least two reasons. First, damages had been calculated on the compensatory principle - calculating the damage by reference to the higher rent which the landlord would have earned had the tenants vacated the premises. Second, there was no dispute about the application of Gourley. The issue before the Privy Council was whether the damages would themselves be taxable. The Privy Council upheld the Court of Appeal's decision that the damages were taxable, in which event the damages had been correctly calculated as a gross sum rather than being awarded on an after-tax basis.
29. In addition to those cases to which the parties referred the Court, in my view the pragmatism which has informed the law's approach to questions of grossing up may be demonstrated by considering the following, additional cases.
30. In Pennant Hills Restaurants, an employer was entitled to damages from its insurance broker by reason of the broker's failure to arrange cover in respect of the employer's liability for worker's compensation. The broker had been found liable in both negligence and for breach of contract. The employer was liable to make periodic payments for compensation during the lifetime of the injured employee. The main question before the High Court was the extent to which the employer's future liability should be discounted and the impact of high inflation rates on that assessment. Nevertheless, the Court made some observations pertinent to the present problem.
31. Barwick CJ maintained his resistance to Gourley and drew attention to the need to be able to ascertain the tax that would be payable on any damages (at 636-637): "I turn then to the question whether the amount of tax which may become payable on the income of the investment of the sum awarded to represent future liability for workers' compensation ought to be taken into account in assessing the present sum to be awarded. The Court has decided not to depart from British Transport Commission v Gourley [1955] UKHL 4; (1956) AC 185 (Gourley's Case). But I do not regard that decision as carrying the conclusion that liability to taxation must always and in every case be taken into account when assessments of damages are being made. In that case, the receipt of emoluments by reference to which assessment was to be measured was assumed to be reduced in the hands of the recipient by an amount of tax which it was assumed would be established, if not otherwise, then by agreement. Here, clearly, we have no comparable situation. In this case, I do not think that the amount to be paid in tax on the investment of the whole or part of the assessed damages can be established to that degree of certainty which would warrant its recognition in the assessment of the damages themselves. To take a "base" rate and assume it to be payable on the amount of the investment income is not, in my opinion, acceptable. For one thing, the successful party may not invest in income producing assets. He may opt for capital gain. If investment does take place the amount of tax payable on the investment income may be affected by so many circumstances as to involve a view as to its amount no better than highly speculative and of a kind not satisfying the requirements of proof. I would therefore not attempt to reflect in the assessment of damages the amount of tax which might possibly become payable by reason of the investment of the whole or part of the amount to be assessed."
32. Stephen J, under the heading "Taxation aspects, more generally considered" said (at 663): "In Cullen v Trappell (1980) 146 CLR, at p 15 Gibbs J. said, that because the process of assessment of damages for future economic loss assumes the investment of damages and the consequent receipt of income, a failure to take account of the liability to tax on that income "will produce a somewhat misleading result". In the undiscounted approach the assumption is retained that what is awarded will be invested and will produce income. It is the very capacity of the invested capital to produce income roughly equivalent to and offsetting the effects of inflation and increased productivity that is the justification for the undiscounted approach. Accordingly, notional tax liability on that income cannot be ignored. But whatever allowance is to be made for it should not be the occasion for the introduction of refined calculations such as have so troubled the assessment process in the past, while at the same time giving a spurious air of precision to a process founded upon a variety of imprecise assumptions or estimates."
33. Mason J (at 681-682) declined to adjust the relevant interest rate for taxation because the relevant tax outcome was too difficult to predict, notwithstanding the decision in Cullen: "Pennant does not argue that the verdict itself attracts income tax. But it does contend that we should take account of the circumstance that the income produced by the verdict, when invested, will be subject to tax and this in itself justifies the application of no discount rate or of a lower discount rate than might otherwise be chosen. The recent majority decision of this Court in Cullen v Trappell [1980] HCA 10; (1980) 146 CLR 1 establishes authoritatively that it is right to take into account the tax which will be payable on the income produced by the verdict, if it is invested. Quite plainly the award of damages will be inadequate in this case if, after tax on the investment income, the capital sum provided does not fully indemnify Pennant against the payments which it is bound to make. After all, the amount has been calculated on the footing that Pennant will be able to have recourse to the income as well as the corpus of the verdict. However, there are difficulties in estimating the tax which Pennant will bear on the investment income. Although the ordinary rate of company tax is 47 1/2 per cent, Pennant might so conduct its affairs or arrange its investments that its investment income attracts no tax. On the other hand, Pennant, by deciding not to distribute profits by way of dividend, may expose itself to a liability to pay undistributed profits tax. It is impossible to evaluate accurately all these contingencies. Moreover, there is the added complication that Pennant may be entitled to treat the payments which it makes under s. 18c as allowable deductions from its assessable income. In these circumstances I would make no adjustment to the discount rate of 2 per cent on account of taxation. On the existing materials I would fix the amount of damages to cover future loss for 34.2 years at $118,000."
34. In Gill v Australian Wheat Board [1980] 2 NSWLR 795 ("Gill"), Rogers J (as his Honour then was) was assessing the damages for which the Australian Wheat Board was liable for excessive amounts of pesticide in wheat dust which the Board had sold to the plaintiff. The plaintiff had included that wheat dust in what he fed his poultry, with the result that the plaintiff's poultry farm was greatly damaged.
35. His Honour assessed the amounts lost in each taxation year on a net basis, making reference to the decision in Gourley. However, he also went on to decide that the damages would be taxable in the hands of the plaintiff. This conclusion took the matter outside of the traditional application of the principle in Gourley.
36. Rogers J considered a number of the cases to which I have referred above. He also noted that after Gourley, the Court of Appeal in England in Parsons v BNM Laboratories Ltd [1964] 1 QB 95 had decided that taxation was not to be taken into account in assessing damages where both the lost earnings or profits and the damages were taxable.
37. Ultimately, his Honour referred to the observations of Stephen J in Atlas Tiles which are quoted in paragraphs [95] and [106] above. Rogers J then concluded that he would follow Stephen J's approach (at 806-807) (emphasis added; citations omitted): "(27) Encouraged by his Honour's words, I propose to follow the course E delineated by Lord Hunter and Stephen J. Indeed, as I read what fell from Harman and Pearson LJJ in Parson's case, where justice so requires the general rule perceived by their Lordships may be departed from and the otherwise impugned approach of Lord Hunter followed. Merely to follow the course suggested by Reynolds JA in Pennant Hills Restaurant, of catering for the impact of taxation by taking into account gross figures rather than nett figures in the years of income could produce a grossly unjust result in the present case. … (28) The whole essence of the decision in Cullen's case is that the reality of the impact of taxation must be recognized and allowed for."
38. In New South Wales Cancer Council v Sarfaty (1992) 28 NSWLR 68, a wrongful dismissal case, the New South Wales Court of Appeal applied Cullen, Atlas Tiles and Gill. This was to the effect that insofar as the damages were not taxable, they should be assessed on the basis of the after-tax salary which the employee would have received had the employment continued. But to the extent to which damages were taxable at a concessional rate, damages should be grossed up to compensate the plaintiff for the tax payable on the damages.
39. Rogers J adopted the same approach as he had in Gill in the case which on appeal was Daniels v Anderson (1995) 37 NSWLR 438 ("Daniels"). The Court of Appeal (Clarke and Sheller JJA; Powell JA agreeing on this point) did not accept that his Honour's approach was applicable on the facts of the case before them because of the uncertainty surrounding the possible tax consequences to be taken into account. The Court said (at 585-586): "From the cases to which we have referred the following propositions can be derived. 1. If an award is made for loss of earning capacity and the verdict is not taxable it is appropriate to assess the amount of verdict by reference to nett earnings after tax. 2. In making such an assessment and using tables to determine the present value of future economic loss regard should be had to the notional tax on the income assumed to be derived from the amount awarded for the future economic loss. 3. If a comparison between taxable receipts for which damages are recoverable and the taxability of the compensatory verdict are so uncertain and depend upon such imponderables as the degree to which the Plaintiff can for example carry forward losses from previous years the appropriate course is to ignore taxation considerations. 4. If on the other hand it is unjust not to take account of identifiable and quantifiable taxation impacts both on the lost receipts and the compensatory damages then these may be taken into account in assessing damages. The fourth of these propositions was the justification for Rogers J's conclusion in Gill. But in the present case AWA argues that the directions and orders were made on the assumption that it would be better off by receiving the verdict after judgment rather than the amount of income lost in the tax year in which the loss was suffered. AWA advanced a number of hypotheses which tended against the validity of the assumption, such as the availability of tax losses to set off against the increased income. As Walsh J said in Williamson the principle of remoteness means that not all the consequences of the loss complained of are to be taken into account in assessing damages. The need after judgment for inquiry about the consequences of the changed rate of company tax is a telling indicator that they are too remote to be taken into account. Even if a judicious blend of principle and expediency should determine the account to be taken of the impact of tax, in our opinion such an adjustment cannot be supported in the present case. AWA has adverted to circumstances which would make it difficult if not impossible to arrive at an amount which would allow appropriately for the tax consequences of the reduction in the company rate. In most cases if damages to be awarded to a plaintiff are taxable, taxation should not be taken into account in their assessment. There may be exceptions, but this case is not one."
40. Finally, by way of example after the Court of Appeal's decision in Daniels, in Patterson v Middle Harbour Yacht Club (1996) 64 FCR 405, Whitlam J, in assessing damages for wrongful dismissal, said (at 408): "Recently in Daniels v Anderson (1995) 37 NSWLR 438 the Court of Appeal in New South Wales considered the vexed question of tax adjustment to damages. Clarke and Sheller JJA sounded a warning note about such adjustment and said (at 586): "In most cases if damages to be awarded to a plaintiff are taxable taxation should not be taken into account in their assessment." However, their Honours earlier set out certain propositions that they derived from the cases. They expressed the third and fourth of these propositions this way (at 585): "(3) If a comparison between taxable receipts for which damages are recoverable and the taxability of the compensatory verdict are so uncertain and depend upon such imponderables as the degree to which the plaintiff can for example carry forward losses from previous years the appropriate course is to ignore taxation considerations. (4) If on the other hand it is unjust not to take account of identifiable and quantifiable taxation impacts both on the lost receipts and the compensatory damages then these may be taken into account in assessing damages." In the present case I propose to apply the method used in Sarfaty. It would, in my opinion, be unjust not to do so. The damages award will be taxable as an eligible termination payment. It is agreed that the tax rate (including Medicare levy) on such a judgment will be 31.4 per cent. If I "gross up" the relevant part of the damages by that percentage, that should provide just compensation to Mr Patterson for his loss of earnings and the value of his lost benefits. (I realise that, as noted in Sarfaty by Mahoney JA at 96, the method is not perfect.)"
41. In the light of the authorities which I have considered above, I have set out in paragraph [90] above the principles which, in my opinion, are to govern a case such as the present. Applying those principles, the Court finds as follows. The damages in this case, calculated in accordance with the user principle, are nonetheless "compensatory in character in the broad sense": Bunnings Group Ltd v CHEP Australia Ltd (2011) 82 NSWLR 420; [2011] NSWCA 342 at 177 per Allsop P (as his Honour then was). The parties accept that it is arguable that the damages will be subject to taxation, more probably under the capital gains tax ("CGT") regime rather than as income. In my opinion, justice in this case requires that taxation be taken into account in the amount of the award. There are four reasons for this conclusion: 1. Throughout the entire course of argument before me, it was never suggested that the purpose of the exercise was anything other than to determine the compensation to which the Health District might be entitled. Although accepting that the process was governed by the user principle, the methodology adopted was the same as that which would have applied for the compensatory principle: what (on the balance of probabilities) would have happened had the PAPH been built? - see paragraph [353] of the Principal Judgment quoted in paragraph [13] above. Whether treated as a "value" (as some of the experts suggested) or as an actual dollar calculation, I consider that the outcome which is ultimately produced by the application of all the integers determined in the Principal Judgment and these reasons represents the value of the damage done to Macquarie in money's worth. If that amount is reduced by taxation then Macquarie will be undercompensated. 2. Where an integer could be determined on either a pre-tax or post-tax basis, it was done on a post-tax basis: see paragraphs [482] to [503] of the Principal Judgment. Applying, by analogy, the principles in a case such as Cullen, to the extent that any part of the award is taxable, then the figure should be grossed up. This result is a reflection of the method or logic of the way in which the damages have been calculated, that is on a post-tax basis. 3. The fundamental economic paradigm or analogy which underlies the damages in this case is one of rent: see paragraphs [173] to [178] and [351] of the Principal Judgment. The purpose of the damages exercise is to determine a market rent (I do not think the adjective "notional" changes the analysis) by way of compensation for the Health District's wrongful occupation of the Hospital Site: see paragraphs [543], [544] and [558] of the Principal Judgment. Maintaining that analogy, any rent received by Macquarie would have been taxable. Where, as here, the calculation has been performed on a post-tax basis, the damages are being awarded net of tax. In those circumstances, to the extent the damages are taxable, then they should be grossed up to ensure that Macquarie receives the post-tax figure which the Court has determined represents its damages. 4. The agreement of the parties (see paragraph [130] below) demonstrates that there is no particular difficulty in determining a mechanism for how the question of any taxation on the award can be resolved.

Carried forward losses - background

1. At the conclusion of the latest hearing before me, the parties presented draft orders setting out a procedure which they had agreed between themselves to approach the Australian Taxation Office for a private ruling in relation to taxation on the damages award. They informed the Court that they would follow that procedure if the Court did not accept the Health District's submission that damages of the kind awarded in this case were not, as a matter of law, susceptible to grossing up. For reasons set out above, the Court has not accepted that submission.
2. The other area of dispute between the parties in relation to the procedure depended on whether the damages should take account of capital losses available to Traknew as the head company of the Tax Group. This was because while the parties do not concede that any tax is payable, they accept that if it is, then it is more likely to be CGT than income tax.
3. The dispute between the parties was crystallised in terms of the declaration that they otherwise invited the Court to make if the Court was of the view that, as a matter of law, the damages could be grossed up: "The Court: 1. DECLARES THAT the defendant is obliged to indemnify the plaintiff in respect of income tax referable to such part of the judgment sum for mesne profits damages awarded to the plaintiff for the defendant's trespass on the Hospital Site in proceedings number 2000/34949 (Damages) and which constitute either ordinary income, or gives rise to a capital gain of the plaintiff or Traknew Holdings Pty Ltd (as head company of the tax consolidated group of which the plaintiff is a member) (relevant taxpayer) in respect of any year of income; [MACQUARIE'S ALTERNATIVE: And FURTHER DECLARES THAT such indemnity shall be given effect by increasing the amount of such part of the Damages as constitute either ordinary income, or statutory income, or gives rise to a capital gain of the relevant taxpayer by the amount of 42.85714%.] [HEALTH DISTRICT'S ALTERNATIVE: And FURTHER DECLARES THAT such indemnity shall be given effect by reducing the amount of such part of the Damages as constitute either ordinary income, or statutory income, or gives rise to a capital gain of the relevant taxpayer by any tax losses or capital losses available to the relevant taxpayer and then increasing this reduced amount by 42.84714%.]"
4. Because this was a matter on which the parties reached substantial agreement only at the end of the latest hearing before me, the Court ordered further written submissions in relation to the dispute concerning Traknew's capital losses. In the course of providing its submissions, Macquarie was given leave to rely upon an affidavit of Mr Dennis Lear, a director of the company which provides tax agency and tax advice services to the Tax Group.

Carried forward losses - the facts

1. The Tax Group of which Macquarie is a member is a group of companies that was consolidated for income tax purposes in 2003 with Traknew as the head company. The Health District submitted that if an award of damages is grossed up for CGT, allowance should be made for tax and capital losses incurred by the Tax Group that are available to reduce any CGT liability of Traknew in respect of the damages. Macquarie disputed that proposition.
2. The Income Tax Assessment Act 1997 (Cth) (the "Tax Act") provides for a tax consolidation regime pursuant to which wholly-owned corporate groups may elect to be treated for tax purposes as a single entity, and subsidiaries such as Macquarie are treated as part of the head company of the group. Section 701-1 of the Tax Act provides: "701-1 Single entity rule (1) If an entity is a *subsidiary member of a *consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the *head company of the group, rather than separate entities, during that period. Head company core purposes (2) The purposes covered by this subsection (the head company core purposes) are: (a) working out the amount of the *head company's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and (b) working out the amount of the head company's loss (if any) of a particular *sort for any such income year. Note: The single entity rule would affect the head company's income tax liability calculated by reference to income years after the entity ceased to be a member of the group if, for example, assets that the entity held when it became a subsidiary member remained with the head company after the entity ceased to be a subsidiary member. Entity core purposes (3) The purposes covered by this subsection (the entity core purposes) are: (a) working out the amount of the entity's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and (b) working out the amount of the entity's loss (if any) of a particular *sort for any such income year. Note: An assessment of the entity's liability calculated by reference to income tax for a period when it was not a subsidiary member of the group may be made, and that tax recovered from it, even while it is a subsidiary member."
3. In an expert report filed for the Health District, Mr David Wood, a partner of King & Wood Mallesons with more than 34 years' experience in advising upon Australian taxation law, confirmed that if Macquarie is part of a tax consolidated group (which it is) then prior year capital losses of the Tax Group would be available to the head company in working out net capital gain or net capital loss for CGT purposes - provided that the head company satisfies the "continuity of ownership" or "continuity of business" tests in Div 165 of the Tax Act. There was no dispute between the parties that the capital losses available to Traknew could be used to offset any assessable capital gain created by receipt of the damages award.
4. Mr Lear's affidavit disclosed that the Tax Group has capital losses carried forward of approximately $16 million. All but a negligible amount of $46,471 of these capital losses were incurred by entities other than Macquarie. Given that the authorities make it clear that the Court is not striving for perfect mathematical accuracy in an exercise such as the present, and given the likely large amount of any damages award, I will put that small amount of Macquarie's own capital losses out of consideration as de minimis.
5. Of the Tax Group's losses, $15,053,197 were incurred by subsidiaries - other than Macquarie - before the formation of the Tax Group on 1 July 2003 and were transferred to Traknew as the head of the Tax Group pursuant to sub-div 707-A of the Tax Act. The balance of the capital losses were incurred after 1 July 2003. Mr Lear gives deposed that the capital losses are available in calculating the net capital gain of the Tax Group, but the availability of $10,752,009 of losses incurred between 21 September 1999 and 1 July 2003 and transferred to Traknew is limited by fractional rules in sub-div 707-C of the Tax Act.
6. The Tax Act provides that - while the head company in a tax consolidated group is principally liable for the group's tax - other members become jointly and severally liable to pay the group's tax liability pursuant to ss 721-15 and 721-30 of the Tax Act where they leave the tax consolidated group or the head company defaults. That joint and several liability can be limited by entry into a valid tax sharing agreement, in which case each member is only liable to make a contribution to the group's liability as is reasonably allocated by the tax sharing agreement pursuant to sub-s 721-30(2) of the Tax Act.
7. The Tax Group entered into a tax sharing agreement (the "Agreement"). Clause 3 of the Agreement requires each subsidiary member of the Tax Group, including Macquarie, to contribute to the Group Liability (as defined in s 721-10 of the Tax Act) of the Tax Group the amount of tax that would be payable by that subsidiary member for the relevant financial year if the subsidiary member were a separate entity and not a member of the Tax Group, which is defined in respect of income tax as the subsidiary member's "Notional Taxable Income".
8. Section 721-10 of the Tax Act defines "Group Liability" by reference to a table of tax-related liabilities payable by a consolidated group's head company, and operates when the head company of a consolidated group has not paid or otherwise discharged its Group Liability. Clause 5 of the Agreement requires that subsidiary members of the Tax Group pay their respective contributions before the head company must pay the Group Liability to the Australian Tax Office. Clause 7 of the Agreement also requires a subsidiary member of the Tax Group to pay the head company a corresponding amount, or a reasonable estimate of the corresponding amount, if the subsidiary member leaves the Tax Group.

Carried forward losses - the parties' submissions

1. Macquarie submitted that if an award of damages is grossed up for CGT, Macquarie's tax liability should be calculated without regard for any entitlement to offset that liability against tax or capital losses incurred by other entities in the Tax Group. It submitted that the Tax Group's losses are not, for the most part, losses incurred by or related to Macquarie or PAPH; that the Health District's approach would cause detriment to Traknew and the other members of the Tax Group, none of which are parties to the proceedings; and that Macquarie is liable to contribute its Notional Taxable Income to the Tax Group's Group Liability pursuant to the Agreement and should be compensated for that liability. Macquarie also drew attention to Mr Lear's evidence that the Tax Group's carried forward capital losses would not be available in calculating the Tax Group's net capital gain at face value by operation of the fractional rules in sub-div 707-C of the Tax Act. Finally, Macquarie submitted that it would be contrary to the compensatory principle to require Traknew's carried forward capital losses to be applied to reduce the damages payable by the Health District.
2. In response, the Health District submitted that accounting for losses carried forward by the Tax Group would not cause detriment to other subsidiary members of the Tax Group, since only Traknew is liable to pay tax and can have recourse to the losses; that such losses would be available to calculate only the Tax Group's net capital gain and not its assessable income, and it appears Traknew has not been able to apply much of the losses against capital gains in at least the last 18 years; and that, in those circumstances, and in the absence of evidence to the contrary, Traknew would likely use the entire carry forward capital loss balance against any CGT liability arising from the damages award. This was an inference which the Health District invited the Court to draw because there was no evidence to the contrary, and it was to be "expected that Traknew will utilise its carry forward capital losses to the maximum extent possible against any award of damages to reduce its capital gains tax liability, as would any reasonable taxpayer acting rationally in its own interest".
3. The Health District submitted that it was therefore unreasonable for Macquarie to argue that the Health District's approach to grossing up would deprive Traknew of the ability to deduct those losses from future capital gains. Nor, it submitted, could Macquarie say that no regard should be had to the capital losses of Traknew only because it is not a party to the proceedings, since that would be inconsistent with Macquarie's claim for grossing up for tax owed by Traknew rather than by Macquarie.
4. The Health District also submitted that clause 3 of the Agreement only obliges Macquarie to contribute to the Tax Group's Group Liability if Traknew defaults or Macquarie leaves the Tax Group; that there is no suggestion of a prospect of Traknew defaulting or Macquarie leaving the Tax Group; and that there is therefore no liability under clause 3 of the Agreement for which Macquarie should be compensated. Clause 5 of the Agreement, the Health District submitted, is an internal Tax Group tax funding arrangement not required by law that contractually obliges Macquarie to contribute to Traknew's tax liability.
5. The Health District also maintained its submission that the damages in this case did not involve the compensatory principle. However, if they did, then the Health District relied on Gill, to which reference had first been made by Macquarie. In Gill, Rogers J awarded grossed up damages, and brought to account the plaintiff's carried forward losses. The Health District fastened upon Rogers J's conclusion (at 808-809) that the plaintiff could not "juggle his tax position … to increase the amount of tax borne by the defendant". By parity of reasoning, Mr Jackman SC submitted that Macquarie should therefore not be entitled to "keep these capital losses for a rainy day". Without abandoning its primary position that the damages were not compensatory, the Health District submitted that if they were, then it was hardly "just" or "fair" (adopting Rogers J's test in Gill) to overcompensate Macquarie by failing to take into account Traknew's capacity to reduce its capital losses to reduce the tax burden which Macquarie wanted to have visited on the Health District.
6. Macquarie sought to distinguish Gill on the basis that it concerned carried forward losses of the plaintiff himself. The present case concerned Macquarie as a member of the Tax Group and none of the carried forward capital losses (save the de minimis amount) were attributable to the activity of Macquarie. The Health District submitted that, despite that difference, Gill is not distinguishable at the level of principle and is authority for the proposition that carried forward losses must be accounted for in a grossing up for tax and for the proposition that Macquarie is not entitled to manipulate its tax position in order to avoid applying carried forward losses at the expense of the Health District.
7. Macquarie's final response was that Gill is distinguishable at the level of principle since the carried forward losses in the instant case were not connected with the wrong that gives rise to the damages award, referring to the decision of the Federal Court in Simpson v Hubbards Pty Ltd (1982) 44 ALR 695 ("Simpson").

Carried forward losses - consideration

1. Again, the starting point is to examine whether the authorities establish a principled approach to the issue at hand.
2. Simpson is a decision of the Full Court of the Federal Court concerning the measure of damages for a contravention of the Trade Practices Act 1974 (Cth) (the "TPA") in relation to resale price maintenance. The parties were agreed that the trial judge had been entitled to approach the assessment as if the action were in tort. In calculating the damages, the trial judge took into account certain tax losses available to the successful party because he was of the view that any amount of loss or damage awarded would be income assessable in the hands of that party. He discounted the damages for tax that would be payable. In challenging the award, the appellant claimed that the amount the trial judge had calculated was excessive, including because while his Honour had correctly made some allowance for income tax in respect of the damages awarded, he should have made full allowance for the 46% tax rate rather than taking into account tax losses. There was also cross-appeal by the successful respondent in relation to damages.
3. The Full Court disposed of the matter as follows (at 702-703) (emphasis added): "On the evidence before the trial judge, he was justified, in our view, in treating the damages to be awarded for loss of profit in the calendar year 1979 as probably assessable income within the meaning of s 25 of the Income Tax Assessment Act 1936. Counsel for the appellant conceded this. The Commissioner of Taxation is not a party and, in view of the concession made by the appellant we are not required to finally determine the question of liability of tax. In Stoke-on-Trent City Council v Wood Mitchell and Co Ltd [1979] 2 All ER 65 the Court of Appeal (at 69) expressed the view in relation to a claim where the plaintiff might become liable to taxation on a sum awarded in respect of loss of profits that no deduction should be made in respect of taxation. The basic principle which is applicable is that damages are compensatory. If the damages are taxable in this case it follows that, if forty-six per cent be deducted from the calculation and the balance only awarded as damages, this balance will be taxable in the hands of the respondent at forty-six per cent. In other words, the respondent will, in effect, if the damages are taxable, be taxed twice at the rate of forty-six per cent and the Commissioner of Taxation will be deprived of part of the tax he might have received, the benefit of this being passed to the appellant. In addition, it would mean that the respondent would not have been properly compensated for its loss. Those cases where the damages will not be taxable in the hands of the recipient though he would have been liable to be taxed if a loss had not occurred raise a different question (see McGregor on Damages (14th ed), p 299 et seq and, in particular, pp 303-4; British Transport Commission v Gourley [1956] AC 185; Barrell Insurances Pty Ltd v Pennant Hills Restaurants Pty Ltd (1981) 34 ALR 162). Since damages are compensatory the question of deducting probable taxation does not really arise. It is quite clear, in our opinion, that the respondent would not be properly compensated if a deduction was made from the damages awarded to it arrived at by requiring it to set off past tax losses against an award for damages. These losses may be regarded in one sense as an asset of the respondent and we see no reason why the respondent should be required to dissipate this asset to benefit the appellant. In summary, our opinion is that the damages related to lost sales might be assessable to tax. If this is so the amount when received will be, subject to the financial state of the respondent at the date of receipt, assessable to tax. We consider the trial judge was in error in reducing the proposed award by reference to tax."
4. In Milner v Delita Pty Ltd (1985) 9 FCR 299, Lockhart J was concerned with a case where the respondents had engaged in conduct in contravention of s 52 of the TPA by making misrepresentations concerning their proposed guava farming venture. His Honour was assessing damages payable to investors who had suffered loss and damage by investing in the venture. It was common ground that damages were to be assessed as on an action for deceit.
5. One of the issues for determination was whether tax savings resulting from claims to deduct losses should be brought to account in calculating the damages. His Honour held (at 303-304) (emphasis added): "The issues between the parties on the question of damages are in respect of the following matters: (a) Whether tax savings of partners resulting from claims to deduct losses should be taken into account in mitigation of their loss. Some applicants made claims to the Commissioner for Taxation for contributions made by them to the partnership trusts to be treated as allowable deductions. Some of the claims were allowed, others were disallowed but objected to. In some cases the objections have not been determined by the Commissioner, while in others they have been determined adversely to the taxpayers but are awaiting determinations before Boards of Review. It is not disputed that the partnerships carried on the business of primary production for the purposes of the Income Tax and Social Services Contribution Assessment Act 1936. In my opinion the tax savings, if any, by the applicants should not be taken into account in reduction of their claims under s 82 against the respondents. The moneys contributed by the applicants to the partnerships were applied for the purposes of those partnerships. Although it was envisaged by the brochures that tax losses could be claimed by the taxpayers it seems to me to be an irrelevant consideration in deciding the question presently before me. I do not see that there is any relevant nexus between the contraventions of the Act by Delita and any benefit gained by applicants by reason of the allowability of the claimed losses: see Simpson Ltd v Hubbards Pty Ltd (1982) 44 ALR 695."
6. The authorities just referred to were followed by Heerey J in Henderson v Amadio Pty Ltd (No 1) (1995) 62 FCR 1 at 200 ("Henderson") (emphasis added): "3. Allowance for tax benefits In my opinion an award of damages should not be reduced by the amount of tax benefits obtained by applicants as a result of payments under the scheme. I repeat what I said in Jaldiver Pty Ltd v Nelumbo Pty Ltd (unreported, Federal Court, Heerey J, 2 December 1992) at p 109: "The respondent argued that an allowance must be made for the benefit of tax losses which the applicants have already received or will have the benefit of claiming. Reference was made to Neilsen v Hempston Holdings Pty Ltd (1986) 65 ALR 302 at 314. However the Full Court appears to have decided to the contrary in Simpson Ltd v Hubbards Pty Ltd (1982) 69 FLR 392 at 400, which was not cited to the learned trial judge in Neilsen. I would respectfully adopt the view of Lockhart J in Milner v Delita Pty Ltd (1985) 9 FCR 299 at 303-304 that there is no relevant nexus between the contraventions of the Act by the respondent and any benefit gained by applicants by reason of the allowability of the claimed losses. As counsel for the applicants demonstrated in cross-examination of Mr Stewart, the respondent's contention would mean that a contravener could cause $1,000 worth of loss or damage by misleading or deceptive conduct at a net cost to it of $370. In the result, the general taxpaying community would be subsidising misleading and deceptive conduct. I do not think the law compels such a consequence." I have no reason to doubt that the applicants as law-abiding citizens will, in respect of any recovery of losses by way of damages, make such disclosure to the tax authorities and pay such tax as the law requires."
7. Pausing there, these authorities, which despite their TPA context were applying tort law principles, in my view establish the principle that tax benefits available to a successful plaintiff should only be brought to account in any damages award if there is some nexus (most obviously causal, but not necessarily limited to that) between the existence of the benefit and the wrong which was being sought to be compensated. This is borne out by considering three cases where courts have said tax benefits would or should have been brought to account in reduction of damages payable.
8. In Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353 ("Akron Securities"), the Court of Appeal was considering the scope of the remedies available under s 87 of the TPA, in particular the extent to which relief in the nature of restitution as the price of rescission was available. The case concerned the failure of a horse breeding venture which had given the investor participants substantial tax deductions. The trial judge, in setting aside the investment contracts, had found that there was no evidence that the plaintiffs' tax returns would be reassessed so as to deprive them of the tax deductions they had received. Mason P, with whom Priestley JA agreed, said (at 370) that he did "not consider that the court is required to shut its eyes to the reality of the [plaintiffs'] position [in relation to the tax benefits received] when considering what remedy is "appropriate"". One of the reasons why his Honour overturned the relief granted at first instance was that equitable rescission would not have required the plaintiffs to give credit to the defendant for the tax deductions the plaintiffs had received.
9. In Osric Investments Pty Ltd v Clout (As liquidator of Woburn Downs Pastoral Pty Ltd) [2001] FCA 1402 ("Osric"), the applicant entered into a number of contracts to require stud cattle to be bred by embryo transfer technology. Each of the contracts had been marketed to the applicant as an investment that would confer substantial tax benefits as well as the opportunity to acquire a small herd of valuable stud cattle. The arrangement was clearly tax driven.
10. Drummond J assessed damages under the TPA. He was satisfied, by reason of the respondent's contraventions of s 52 of the TPA, that the applicant was entitled to compensation in the amount of all the payments he had made to enter into the relevant contracts. However, his Honour had to resolve a dispute between the parties as to whether the tax benefits received by the applicant from its investments in the scheme should be ignored in the assessment of damages and whether an allowance should be made in those damages for the possibility that they might attract capital gains tax and goods and services tax.
11. His Honour referred to Akron Securities, a case which, at least on that point, he said was on all fours with Osric. His Honour concluded: "192 In the absence of argument that the Commissioner can properly invoke the power in s 170 ITAA 1936 to reassess the applicant now in respect of its 1993 to 1996 returns and in the absence of evidence as to the likelihood, in the events which have happened, that the Commissioner will seek to invoke that power and will be able to maintain a re-assessment of each of these years' income to exclude the Woburn Downs deductions and evidence of what the applicant's overall tax position for the period 1993 to 1996 would be likely to be in comparison to the now existing position, I think the submission of the sixth and seventh respondents is correct that the applicant's loss caused by the conduct in question is $131,857, i.e., the difference between the total amount paid by the applicant and the amount of the tax savings it has enjoyed. The risk of giving the applicant a windfall is too great to justify ignoring that it has enjoyed those tax savings."
12. In Spangaro v Corporate Investment Australia Funds Management Ltd (2003) 47 ACSR 285; [2003] FCA 1025 ("Spangaro"), the applicant succeeded against the respondent in trust and restitution for monies which the applicant had paid to the responsible entity of a managed investment scheme in relation to growing and harvesting cotton. In finding for the applicant, Finklestein J clearly regarded it to be axiomatic that (at [61]) "as a condition of relief Mr Spangaro must apply to have his income tax assessments amended to remove any deduction relating to his interests in the project". In drawing this case to attention, I have not overlooked that the source of Mr Spangaro's obligation, strictly understood, rested in equitable principles rather than common law damages.
13. Notwithstanding the different juridical basis of Spangaro, both Osric and Spangaro are examples of the just or fair outcome as those terms were used by Rogers J in Gill because the applicant's tax losses were integrally connected with the subject matter of the dispute. In the absence of the Court being able to conclude that there was an appreciable risk that the applicants would lose their tax deductions because of a reassessment by the Commissioner of Taxation, it is obvious that they would have been overcompensated if the value of those deductions was not brought to account to the respective respondent's benefit in calculating the amount of damages the respondent had to pay. The same analysis supports Mason P's conclusion in Akron Securities.
14. Gill is not binding upon me. However, as a judgment of one of the most eminent commercial judges of recent times, it is entitled to the highest respect and I do not disagree with either its reasoning or outcome. However, I do consider it to be distinguishable from the present case. In order to understand that conclusion, it is necessary to set out the relevant part of Rogers J's reasons in their entirety: "(32) The parties have agreed that the nett figures of loss for the various years were as follows: 1972 $4,815 1973 $11,350 1974 $23,054 1975 $16,154 1976 $12,000 Total $67,373 Total interest to 3rd December, 1980 $41,605 Total compensation prior to any amount on account of income tax payable $108,978 (33) The parties are further in agreement that for the purpose of determining what, if any, amount should be added to the amount of compensation to allow for the imposition of taxation in the financial year ended 30th June, 1981, there should be a number of matters taken into account. The agreed matters are: Carried forward loss of 30th June, 1980 $75,146 Less profit year ended 30th June, 1980 $9,210 Estimate profit year ending 30th June, 1981 $25,000 Balance of carried forward losses to be set off against verdict $40,936 Compensatory verdict without provision for tax $108,978 Taxable amount in year ended 30th June, 1981 after deduction of carried forward losses $68,042 (34) Conformably with the reasoning in my judgment, I should then allow the plaintiff a sufficient amount as will cover his tax liability on the $68,042, so that after allowing for the benefit of carried forward losses, he gets the same advantage as though he had received free of tax $108,978. It is at this point that there is a further difference of view between the parties. It is an undoubted fact that the plaintiff owes large sums of money which, if paid, would be deductible in his hands. The defendant urges upon me that I should approach the question of the plaintiff's tax liability for year ended 30th June, 1981, on the basis that these debts will be paid and will be deducted. The plaintiff, on the contrary, contends that he will seek to postpone payment of his liabilities beyond the tax year, in order to apply the verdict money, so far as possible, towards building up his hen quota. In order to evaluate these competing contentions, it is necessary to advert to the nature of the debts. (35) The plaintiff owes the Commonwealth $36,994 on account of hen levy, of which $25,000 approximately is the subject of a judgment. He owes the Egg Marketing Board the sum of $2,884 pursuant to the obligations in his Producers Agent Licence and the Board has also signed judgment in the sum of $6,359.83 for similar charges not included in the earlier amount. These debts total $46,237. In addition, the plaintiff owes the sum of $8,288 to a Mr Gatenby, who had supplied him with feed stock. The total indebtedness thus arising is $54,525. Together with certain minor items, the grand total of deductible debts is $58,166. Accordingly, there will be only approximately $10,000 which will be left as taxable income. (36) The defendant invited me to hold that I should then take into account the fact that the plaintiff is a primary producer and will have the benefit of the averaging provisions. (37) The plaintiff, as I have already said, argued that having regard to the evidence as to the plaintiff's wish to postpone payments of his debts, I should not make deductions in respect of those amounts. I do not think I am entitled to follow that course. It is not open to the plaintiff to seek to so juggle his tax position at the expense of the defendant as will avoid the obligation to pay his indebtedness for some time and thereby increase the amount of tax to be borne by the defendant. I think that I have to allow the deductions as submitted by the defendant. There may be some residual tax liability on the part of the plaintiff and it is recognized by all the authorities that it is not appropriate to seek to determine amounts with complete nicety. I think that justice will be done to all concerned if I round off the verdict for the plaintiff to $115,000."
15. In my opinion, four salient matters emerge from the passage just quoted: 1. It is a working out of the just and fair approach identified by his Honour which I have accepted (see paragraph [90] above) as part of the guiding principles in this universe of discourse. 2. As appears from paragraph [33] of his Honour's reasons, allowing for the plaintiff's carried forward losses was a matter of agreement between the parties. 3. As is apparent from paragraph [35] of his Honour's reasons, the various liabilities - payment of which the plaintiff sought to postpone - were all due and owing (including pursuant to judgments). In other words, the plaintiff had a legal liability to make those payments. 4. When the matter noted in the preceding sub-paragraph is taken into account, the proper meaning of his Honour's comment becomes clear (emphasis added): "It is not open to the plaintiff to seek to so juggle his tax position at the expense of the defendant as will avoid the obligation to pay his indebtedness for some time and thereby increase the amount of tax to be borne by the defendant". The object of his Honour's disapprobation and, I infer, what informed his Honour's conclusion as to what would be unjust and unfair to the defendant, was that the plaintiff proposed to defer (and "so juggle his tax position at the expense of the defendant") payment of debts which the plaintiff legally had to pay. Gill is authority directed, in a way with which I completely agree, to preventing a party acting contrary to its legal obligations in order to gain a collateral advantage. In my respectful opinion, it is this which makes Gill relevantly distinguishable from the case at bar. Traknew has no legal obligation to anyone to deploy its capital losses in any particular way.
16. Taking the matters set out in paragraphs [149] to [163] above into consideration, for the following reasons the Court concludes that fairness or justice in the present case do not require Traknew's carried forward capital losses to be applied in reduction of any damages payable by the Health District to Macquarie. That justice or fairness must operate equally in relation to both parties. One manifestation of this is the Court's determination, as far as possible, to avoid both overcompensation (which is unfair to the defendant) and undercompensation (which is unfair to the plaintiff): 1. The Court accepts the Health District's submission that Gill cannot be distinguished on the basis of the different legal personalities in this case between Macquarie and Traknew. If, as the Court has concluded, Macquarie (in effect, through Traknew) can be the beneficiary of grossing up of the damages for taxation, Macquarie must, if otherwise applicable, accept that the carried forward capital losses available to Traknew could be taken into account. 2. Gill does not assist in the resolution of the present case for two reasons. First, insofar as carried forward losses are concerned, it was a matter of agreement between the parties they should be taken into account. Second, I repeat the observations made in paragraph [163] above. Unlike the plaintiff's existing obligation to pay the relevant debts in Gill, Traknew has no legal obligation to deploy its carried forward capital losses in any particular way. 3. The touchstone of justice or fairness in a case such as this is some causal or other nexus between the tax benefits sought to be taken into account and the circumstances which have given rise to the liability in damages. None exists in the present case. It is clear from the facts that none of the capital losses relate to Macquarie or the circumstances of this case. 4. By reason of the matters referred to in the preceding sub-paragraph, in effect to require Traknew to bring the capital losses to account so as to reduce the amount of damages payable by the Health District would be unfair and unjust to Macquarie. To borrow the example of counsel referred to by Heerey J in Henderson (see paragraph [154] above), the Health District would obtain an unjust windfall. The result would be that the Health District could have caused $[A] damage to Macquarie at a net cost of $[A - B], where the deduction of B is for an amount peculiar to Macquarie's (or Traknew's) own circumstances, but where those circumstances have no legal, factual or other connection to whatever has given rise to the Health District's liability.

The Car park - weekend staff utilisation

1. The Health District drew to attention that by the time of their joint report of 27 June 2014, Mr O'Sullivan and Mr Milou had accepted for the purposes of their calculations that only 22.5% of staff were present at the hospital on weekends. This led the Health District to submit that in concluding that Macquarie's damages in respect of the Car Park Site should be calculated by reference to a starting market rate of $3.00 per day multiplied by a turnover of 1.45 for each of the 1,026 spaces, the Court had overlooked this agreement between the experts and the fact that fewer staff members were present on weekends. Mr Jackman SC submitted that applying $3.00 per day led to too high a figure because the staff actually only utilised the car park to the extent of 22.5% on weekends and not the 100% occupancy 1.45 times per day that occurred Monday to Friday.
2. Macquarie submitted that it was not open to the Health District to re-agitate this question. Macquarie referred to these paragraphs of the Principal Judgment (citations omitted): "185 The view that I have adopted as to the application of the user principle means that I have accepted Macquarie's submission that, in relation to the Car Park Site, mesne profits are to be calculated without reference to the numerous hypothetical counterfactuals raised by the Health District. The Health District had the benefit of all 1,026 car spaces for the entire period of the trespass. Applying cases such as Bunnings and Inverugie, I am therefore satisfied that the calculation is to be made by reference to 100% occupancy of the 1,026 car spaces that were available in the car park during the period of the trespass. I also agree that there must be a deduction in favour of the Health District in relation to expenses incurred and the rent Macquarie was contracted to pay. … 283. Second, to do so would not be consistent with the view I have taken of the user principle and its application to the question of the mix of users (see paragraphs [228] to [233] above). What is to be compensated is use only by staff and hence the market rate for staff must apply. The user principle "cuts both ways" in its application to what in fact happened where the use was confined to staff parking. Neither side can posit alternative hypotheticals to improve their own position. The Hospital District must compensate Macquarie for what occurred: that is, in effect, its 100% occupation of the 1,026 places by its staff 24 hours a day. It cannot say it should pay less because staff were not there 100% of the time in all the spaces and would never have been. But Macquarie must also only be compensated for what occurred: it cannot say that had it done a deal which in fact it would never have done (in this case giving the Health District complete use of the car park for hospital staff for 15 years) it would only have done so for a rate better than the market rate for staff parking. This is precisely the kind of difference in outcome between the user principle and the hypothetical negotiation approach referred to by Warren J in Field Common."
3. In addition to those paragraphs referred to by Macquarie, I also draw attention to this paragraph of the Principal Judgment: "342 In their joint report of 27 June 2014 Messrs Milou and O'Sullivan agreed that "given the available evidence, 1.45x is a reasonable estimate of daily staff turnover". The Court accepts that figure. One-hundred per cent occupancy of the car park for the purposes of the user principle must take into account that it could and would never be full at night because fewer staff were on duty. A multiplier of 1.45 reflects that phenomenon. No allowance needs to be made for weekend rates or lower occupation at weekends because damages for the Health District's use are calculated by the weekly staff rate applied for the period of the trespass. This rate applies whether the staff member's five days include any part of a weekend."
4. By reference to the paragraphs of the Principal Judgment which I have set out above, I reject the Health District's application to revisit this aspect of the car park damages calculation. The application ignores what the Principal Judgment concluded was the proper operation of the user principle in this case. For the reasons set out in the Principal Judgment, in my opinion it is not open to the Health District to rely upon the lower occupation, in fact, of the car park by staff on weekends. To make that allowance would be to ignore that the Health District's trespass for which the Court has found Macquarie is entitled to be compensated related to all of the 1,026 car spaces for all day every day of the trespass, irrespective of whether it was a week day or a weekend.

Conclusion

1. The Court will give the parties an opportunity to prepare short minutes to give effect to the Principal Judgment and these reasons, including final damages calculations, and to determine how any argument as to the costs of the entire inquiry can be most efficiently heard and decided.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 18 September 2017