High Court of Australia|1961-03-07|Before: Kitto J

McLaurin v Federal Commissioner of Taxation [1961] HCA 9; (1961) 104 CLR 381 (7 March 1961)

McLAURIN v. FEDERAL COMMISSIONER OF TAXATION [1961] HCA 9; (1961) 104 CLR 381

Income Tax (Cth) - Damage to appellant's grazing property by fire - Appellant plaintiff in action for damages - Lump sum paid by defendant in full settlement - Calculated by defendant from his own list of items of damage - Method of calculation not revealed to appellant - Amount received as lump sum - Certain items in defendant's list in the nature of income - Claim that whole or part of amount paid assessable income - Income Tax and Social Services Contribution Assessment Act 1936-1955 (Cth), ss. 17, 26 (j), 59.

THE COURT delivered the following written judgment:-

This is a case stated in an appeal to this Court against an amended Income Tax and Social Services Contribution Assessment Act 1936-1955 (Cth) in respect of income derived by him in the year ended 30th June 1955. (at p389)

2. In that year, the appellant received from the Commissioner for Railways (N.S.W.) an amount of 12,350 pounds in full settlement of a claim for damages which was the subject of an action then pending in the Supreme Court of New South Wales in which the appellant was the plaintiff and the Commissioner for Railways was the defendant. The claim was in respect of damage done on a grazing property of the appellant, on 24th January 1952, by a fire which had commenced on land of the defendant Commissioner. The appellant's case, as appears from the declaration which he filed in the action, was that the defendant Commissioner was liable to him in damages, either for not having taken reasonable care in relation to the fire or on the principle of Rylands v. Fletcher (1868) LR 3 HL 330 . The amount claimed in the writ was 30,000 pounds. Before the issue of the writ the appellant had supplied particulars, under a number of heads, of the damage he had sustained and of the amounts which he intended to claim in respect of each head of damage. The total of these amounts was 30,240 pounds. The settlement of the action was reached after negotiations in which the Commissioner for Railways was represented by a Mr. Cameron. He was a valuer employed by the Commissioner for Railways, and had visited the appellant's property as early as November 1952 to make his own assessment of the damage caused by the fire. Discussions without prejudice took place first between Mr. Cameron and a brother and a nephew of the appellant, and ultimately between Mr. Cameron and the appellant himself. At their conclusion Mr. Cameron, having consulted the Assistant Solicitor for Railways, told the appellant that the Commissioner for Railways was prepared to offer a lump sum of 12,350 pounds, together with costs, to settle the case. He gave the appellant no information as to how this sum had been arrived at, and the appellant, without knowing how it had been arrived at, agreed to accept it. Payment was made to the appellant on 28th June 1955, after he had signed a document expressing his agreement to accept the sum "in full settlement of all claims for damage arising out of" the fire which has been referred to. (at p389)

3. The respondent in the first instance assessed the appellant to tax on the footing that 11,000 pounds of the amount so received formed part of the appellant's assessable income. By amended assessments, the amount was reduced to 10,640 pounds. Apparently the respondent had ascertained how the 12,350 pounds had been arrived at by Mr. Cameron, and he reached his own figure of 10,640 pounds by taking Mr. Cameron's list of items and accepting the amounts shown therein, subject to some omissions and some adjustments. The items omitted related to damage done to a garden, and to the destruction of standing timber and firewood, two hundred bags of oats, five tons of hay, and some building materials, all these being treated as items of capital. The items in relation to which adjustments were made related to the destruction of a saw bench and saw and of a crutching machine, the amount in each case being reduced from Mr. Cameron's figure to the excess of that figure over the depreciated value : see s. 59. This meant that, although the 12,350 pounds had been offered to and accepted by the appellant as a lump sum without his knowing how it had been made up by Mr. Cameron, the respondent acted on a view that for the purposes of the appellant's income tax the amount should be divided up into the amounts which had formed its components in Mr. Cameron's computation, and that the income or non-income nature of each component amount should be determined as if it had been separately received by the appellant in specific relation to the item of damage for which it had been allowed by Mr. Cameron. (at p390)

4. It may be said in favour of the respondent's view, that Mr. Cameron's list of items had evidently been based upon the particulars originally supplied by the appellant himself. The list adopted almost entirely the appellant's own descriptions of the items of property damaged or destroyed, and in a number of instances it conceded the actual amounts which he had claimed. No doubt it was discussed item by item during the negotiations which resulted in the settlement. But the settlement, nevertheless, was for a lump sum of damages, not composed of agreed constituents, offered and accepted in full satisfaction of the entirety of the appellant's causes of action against the Commissioner for Railways. It may be the fact, and it makes no difference if it is, that the appellant, because of the course the discussions had followed, was in a position to make a confident guess as to the amount Mr. Cameron had allowed for each item in making his recommendation to the Assistant Solicitor for Railways. But he was not concerned to make the guess. He had simply to weigh 12,350 pounds against the entirety of his claim, and accept it or reject it as a whole. Obviously, to accept the lump sum was not to assent to any figure in respect of any individual item of his claim. (at p390)

5. It is difficult in these circumstances to see how the dissection which the respondent has made can possibly be justified. All that has been urged in support of it is that the Commissioner for Railways should be considered to have paid the 12,350 pounds as the total of the separate amounts which were allowed in Mr. Cameron's list, and that each of those amounts must be separately included in or excluded from the appellant's assessable income upon consideration of the nature of the item to which it related in the list. The submission neither accords with fact nor squares with legal principle. It does not accord with fact, for an account of the manner in which Mr. Cameron reached his total is only an account of his reasons for the recommendation he made to the Assistant Solicitor for Railways ; and even though those reasons may have been adopted by that officer, or even by the Commissioner for Railways himself, the offer that was made was not of a total of itemized amounts, but was of a single undissected amount. And in point of law it would plainly be unsound to allow a determination of the character of a receipt in the hands of the recipient to be affected by a consideration of the uncommunicated reasoning which led the payer to agree to pay it. (at p391)

6. It is true that in a proper case a single payment or receipt of a mixed nature may be apportioned amongst the several heads to which it relates and an income or non-income nature attributed to portions of it accordingly : Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation [1940] HCA 9; (1940) 63 CLR 382, at p 466 ; Ronpibon Tin N. L. and Tongkah Compound N. L. v. Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47, at p 55 ; The National Mutual Life Association of Australasia Ltd. v. Federal Commissioner of Taxation [1959] HCA 6; (1959) 102 CLR 29, at p 50 . But while it may be appropriate to follow such a course where the payment or receipt is in settlement of distinct claims of which some at least are liquidated, cf. Carter v. Wadman (1946) 28 Tax Cas 41 , or are otherwise ascertainable by calculation: cf. Tilley v. Wales [1943] UKHL 1; (1943) AC 386 , it cannot be appropriate where the payment or receipt is in respect of a claim or claims for unliquidated damages only and is made or accepted under a compromise which treats it as a single, undissected amount of damages. In such a case the amount must be considered as a whole: Du Cros v. Ryall (1935) 19 Tax Cas 444, at p 453 . (at p391)

7. On the hearing of the case stated, however, a different submission was placed in the forefront of the respondent's case. Notwithstanding that the amended assessment had excluded some of the items of which the 12,350 pounds was treated as composed, and had reduced others, the submission was made that the whole sum should be regarded as of an income nature according to ordinary concepts. Considered as a whole, the submission ran, the amount was in the nature of compensation to the appellant for loss of opportunity to use his grazing property to its full capacity, and therefore it should be considered as possessing in his hands the same character as the profits would have had which the fire prevented him from making. (at p392)

8. It is the fact that at the time of the fire the appellant was using his property for the purpose of carrying on a grazing business, and that one item of damage was the burning out of the pastures on the property so that for three or four months there was no grass for sheep or cattle to graze upon. The respondent says it may be inferred that as a result the appellant's business, though not completely stopped, was rendered for a time much less remunerative than but for the fire it would have been. This the appellant does not dispute. Indeed, in his declaration in the action against the Commissioner for Railways he alleged as part of his damage that he had been prevented from earning the profits which he could and would otherwise have earned. But it is impossible to see a basis in fact for the contention that the 12,350 pounds which the appellant accepted in settlement of his claims for every kind of damage which the fire had caused him was in truth of the nature of compensation for loss of profits. The fire caused him losses of sheep and cattle, and damage to wool on surviving sheep ; it put him to expense for the eradication of rabbits to the incursion of which the destruction of fences had exposed the property ; it also caused losses of or damage to capital assets such as pastures, fencing and buildings. But the whole of the damage which it did, whether covered by the appellant's list of particulars or not, was compensated for by the one entire sum ; and it is simply not true that that sum took the place in the appellant's hands of assessable income. Cases such as Ensign Shipping Co. Ltd. v. Inland Revenue Commissioners (1928) 12 Tax Cas 1169 ; Burmah Steam Ship Co. Ltd. v. Inland Revenue Commissioners (1930) 16 Tax Cas 67 ; and Federal Commissioner of Taxation v. Wade [1951] HCA 66; (1951) 84 CLR 105 , lay down nothing that can be applied to the facts of the present case. (at p392)

9. We have been referred to the cases of Roberts v. Collier's Bulk Liquid Transport Pty. Ltd. [1959] VicRp 48; (1959) VR 280 and Williamson v. Commissioner for Railways (1960) SR (NSW) 252 ; 76 WN 648 , but in the former the whole of the damages, and in the latter what was considered a severable part of the damages, was for loss of trading stock or profits, and was held to be brought within assessable income by the application of par. (j) of s. 26 as being "an amount received by way of . . . indemnity . . . for or in respect of any loss or outgoing which is an allowable deduction". In the argument for the respondent in the present case an endeavour was made to derive assistance from the same provision, but we need say no more about it than that there is no amount here to which the description applies. (at p393)

10. The answer to the question in the case stated must be that no part of the sum of 10,640 pounds should be treated as included in the appellant's assessable income. (at p393)

Order that the question in the case stated be answered that no part of the said sum of 10,640 pounds should be so included. Costs of the case stated to be paid by the respondent the Commissioner of Taxation of the Commonwealth of Australia.

Income Tax and Social Services Contribution Assessment Act 1936

McLaurin v Federal Commissioner of Taxation [1961] HCA 9;

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Judgment (15 paragraphs)

McLaurin v Federal Commissioner of Taxation [1961] HCA 9; (1961) 104 CLR 381 (7 March 1961)

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Legislation Cited (1)

Cases Cited (5)