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[1998] FCA 262
Federal Court of Australia
1998-03-26
Black CJ, Burchett JJ, Lockhart J, Burchett J
Original judgment source is linked above.
REASONS FOR JUDGMENT BLACK CJ: The first issue for decision in this appeal is whether an amount included in an award of damages for personal injuries in accordance with an order for interest under s 94(1) of the Supreme Court Act 1970 (NSW) is income according to ordinary concepts and so included in the appellant's assessable income under s 25(1) of the Income Tax Assessment Act 1936 (Cth). I agree with Lockhart J and Burchett J, for the reasons they give, that the amount of the pre-judgment interest does not have the character of income but was a receipt of a capital nature. It is well established that in actions for damages for personal injuries, the payment of what is called "interest" in s 94(1) of the Supreme Court Act and equivalent provisions in other jurisdictions is to compensate a plaintiff for the loss and detriment which he or she has suffered by being kept out of his or her money during the relevant period: see M.B.P. (S.A.) Pty Ltd v Gogic (1991) 171 CLR 657 at 663 and Haines v Bendall (1991) 172 CLR 60 at 63. In other contexts the characterisation of an amount ordered to be paid as "interest" as compensation for the loss or detriment suffered by a person by being kept out of his or her money would point to an amount receivable as income rather than as capital. The present context is, however, of a special character since there is a broader and fundamental function involved, namely the compensation of an injured person by means of an award of damages for negligence and the amount of interest is an integral and essential element in the attainment of that object: see Haines v Bendall at 63. An amount ordered as interest in these circumstances takes its character from the award of damages for negligence and is of a capital nature. I would add that the position here differs greatly from the commercial situation in which interest is payable as the price of being kept out of a specific or calculable principal sum. The entitlement to damages at the time of injury is entirely theoretical in a case such as the present and, at least in respect of non-economic loss, there can be no fixed or objectively calculable "principal sum" until damages are assessed. The second issue in this appeal is whether $287,671, payable as post-judgment interest under s 95(1) of the Supreme Court Act, is income. I agree with Lockhart J and Burchett J that this amount does have the character of income. It is money payable pursuant to the terms of s 95(1) (there having been no order to the contrary) in circumstances where there was a delay in complying with the order of the Supreme Court that a specific amount of money be paid. Counsel for Mrs Whitaker argued that until the result of her appeal to the High Court of Australia was known, her entitlement was, in a practical sense, conditional and that until judgment was given by the High Court there was nothing that was really analogous to a "principal sum". I do not agree with this submission. The $287,671 (it was an agreed amount) became due because s 95(1) operated of its own force on the judgment for damages given in Mrs Whitaker's favour by the Supreme Court. That judgment was never displaced and existed at all times to define the principal sum upon which interest was payable pursuant to s 95(1) at the prescribed rate. In contrast to the "interest" that may be the subject of an order under s 94, interest under s 95 is concerned solely with the delay in payment of a previously ascertained liability of a specific principal amount. It is not connected with the assessment of the appropriate total sum by which a plaintiff ought to be compensated for her injuries. I agree that the judgment of the learned trial judge should be upheld on this point. The final issue in this appeal concerns the deductibility of Mrs Whitaker's solicitor and client costs. As Lockhart J and Burchett J point out, and as the learned trial judge recognised, the cause or the purpose of incurring expenditure determines whether an outgoing is of a capital nature or is on account of income. Looking from a practical viewpoint (see Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 648 per Dixon J and Federal Commissioner of Taxation v Foxwood (Tolga) Pty Ltd (1981) 147 CLR 278 at 293 per Mason J) at what Mrs Whitaker sought to achieve by retaining solicitors to bring her action for damages and by thus incurring legal costs, I would conclude that from the outset her purpose was not limited to the recovery of damages for the serious injury she had suffered, but extended to the recovery of whatever else the law might provide in such a case, including costs and interest on judgment. In a common law action for damages for negligence that proceeds to judgment an appeal is always a possibility and if there is an appeal, with consequent further delay, the payment of interest on the outstanding judgment debt can become an important element in the amount that an ultimately successful plaintiff has at her disposal at the end of the day. In the present case, involving as it did a challenge to a widely accepted principle of the law relating to medical negligence, at least one appeal was very likely. It was also likely, having regard to the high prescribed rates of interest at the time, that interest on any judgment would amount to a large sum by the time the appellate process had come to an end. In fact, the amount of post-judgment interest of $287,671 was more than a third as large as the total amount for which judgment was given in the Supreme Court. But whether or not post-judgment interest is likely to assume the importance it ultimately assumed in this case, it is an entitlement (in the absence of any order to the contrary) that is closely associated with the award of damages and the realities of common law personal injury litigation and, as such, its recovery will ordinarily be part of the purpose for which a plaintiff will incur the legal costs of an action for damages. This is so even though an individual plaintiff may very well hope that her case does not turn out to be one in which the occasion arises for the payment of post-judgment interest. Mrs Whitaker embarked upon what turned out to be a long litigious journey, at the end of which she had recovered $808,564.38 by way of damages and $287,671 by way of agreed post-judgment interest, the latter amount being part of her assessable income. As a practical matter, the legal costs she incurred should be seen to be directed toward that overall ultimate result and in my view she is entitled to a deduction of a proportion of those legal costs. The proportion she is entitled to deduct is the same proportion as the post-judgment interest bears to the total amount of the judgment and interest. It follows that I would allow the appeal in part. In the circumstances I would direct the appellant to bring in, on a date to be fixed, short minutes of orders appropriate to be made having regard to the reasons for judgment of the members of the Court. I certify that this and the preceding three (3) pages are a true and correct copy of the reasons for judgment of the Honourable Chief Justice Black
on appeal from a judge of the federal court of australia
REASONS FOR JUDGMENT LOCKHART J Introduction This case raises three questions. The first question is whether the amount of pre-judgment interest included in an award of damages for personal injuries is income according to ordinary concepts under s 25(1) of the Income Tax Assessment Act 1936 ("the Act"). The second question is whether interest on the amount of the judgment itself is income. The third question concerns the deductibility under s 51(1) of the Act of the legal expenses incurred in fighting the case which led to the award of damages and in resisting the subsequent appeals. The case is a sad one. Mrs Whitaker, the appellant, has for many years been almost totally blind in her right eye. She consulted an ophthalmic surgeon who advised her that an operation on that eye would not only improve its appearance but would probably restore significant sight to it. She agreed to undergo surgery. After the operation there was no improvement to the right eye. Unfortunately, she developed inflammation in her left eye which led to loss of all sight in that eye. She sued the doctor in the Supreme Court of New South Wales for damages, for breach of contract and for negligence. On both counts the learned trial Judge found the doctor liable in that he had failed to warn the appellant that, as a result of the surgery, she might develop a condition known as sympathetic ophthalmia in her left eye. She was awarded damages of $808,564.38. The doctor appealed to the Court of Appeal of New South Wales, which dismissed the appeal. He then appealed, by special leave, to the High Court, which affirmed the judgment of the Court of Appeal. (The proceeding in the High Court is reported as Rogers v Whitaker (1992) 175 CLR 479.) The judgment entered in favour of the appellant in the sum of $808,564.38 included an amount of $65,514.38 for pre-judgment interest pursuant to s 94 of the Supreme Court Act (NSW) 1970 ("the Supreme Court Act"). The appellant received post-judgment interest on the amount of judgment pursuant to s 95 of the Supreme Court Act for the period 13 August 1990 (the date of entry of judgment) to 19 November 1992 (the date of payment), which the parties agreed was $287,671. The questions in the case concerning interest are whether the amount paid to the appellant under s 94 of the Act in respect of pre-judgment interest ($65,514.38); and the amount of post-judgment interest ($287,671) payable under s 95 of the Act, are income according to ordinary concepts and thus assessable income under s 25(1) of the Act. The appellant incurred by way of legal costs $348,240.28 in respect of the Supreme Court litigation and subsequent appeals. She recovered party and party costs from the doctor; but was nevertheless out of pocket in the sum of $214,240.28. The question is whether the whole or any part of the legal costs incurred by her in connection with the trial or the appeals to the Court of Appeal and the High Court are deductible under s 51(1) of the Act. The learned primary Judge (Hill J) held that both the amounts of pre-judgment interest and post-judgment interest were assessable income of the appellant. His Honour also held that some of the legal costs incurred by the appellant were deductible: "being that proportion of the entire damages and pre-judgment interest as bears to the total damages recovered the ratio A/B, where A is the pre-judgment interest recovered and B is the total recovered including interest. Post-judgment interest should play no part in this calculation for the proceedings which an applicant commences conclude once judgment is given". The appellant appealed to the Full Court of this Court from the whole of his Honour's judgment. The respondent cross-appealed from the third order made by the primary Judge, namely, that the matter be remitted to the respondent to allow as a deduction a proportion of the legal costs incurred by the appellant. By consent his Honour ordered the respondent to pay the appellant's costs of the proceeding in this Court at first instance. No order for costs of this appeal to the Full Court is sought by either party because we were informed by counsel for both parties that the respondent has agreed to pay the appellant's costs of the appeal in any event. Pre-judgment interest I turn first to the question wether the amount of pre-judgment interest awarded to the appellant pursuant to s 94 of the Supreme Court Act is assessable income of the appellant. The award of pre-judgment interest in the Supreme Court of New South Wales is governed by s 94 of the Supreme Court Act 1970 which reads as follows: "94(1)In any proceedings for the recovery of any money (including any debt or damages or the value of any goods), the Court may order that there shall be included, in the sum for which judgment is given, interest at such rate as it thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date when the judgment takes effect. (1A) Where - (a) proceedings have been commenced for the recovery of a debt or liquidated damages; and (b) payment of the whole or a part of the debt or damages is made during the currency of the proceedings and prior to or without judgment being given in respect of the debt or damages, the Court may order that interest be paid at such rate as it thinks fit on the whole or any part of the money paid for the whole or any part of the period between the date when the cause of action arose and the date of the payment. (2) This section does not - (a) authorise the giving of interest upon interest; (b) apply in relation to any debt upon which interest is payable as of right whether by virtue of any agreement or otherwise; or (c) affect the damages recoverable for the dishonour of a bill of exchange. (3) In any proceedings for damages, the Court may not order the payment of interest under subsection (1) in respect of the period after the date on which an appropriate settlement sum (or the first appropriate settlement sum) has been offered unless the special circumstances of the case warrant the making of such an order. (4) For the purposes of subsection (3), appropriate settlement sum is a sum offered by a defendant on or after the commencement of subsection (3) (as inserted by the Courts Legislation Amendment Act 1995) in settlement of proceedings where the sum for which judgment is given (including interest accrued up to and including the date of the offer) does not exceed the sum offered by more than 10 per cent. This subsection extends to such a settlement offer whether the proceedings commenced before, on or after the commencement of this subsection. (5) Subsection (3) does not prevent an award of interest for the period before the settlement offer is made." The primary Judge reviewed the history of the power of courts in the United Kingdom and this country to award interest and analysed many of the relevant cases. His Honour found that interest added to a judgment under s 94 was income, whether the claim otherwise being made was of a capital nature or a revenue nature, primarily for the following reasons:- · interest under s 94 must be specifically claimed in Supreme Court proceedings; and the claim for interest is separate and distinct from the claim for damages; · pre-judgment interest is paid as compensation to a successful plaintiff for being deprived of monies to which the plaintiff was entitled, generally speaking from the time the cause of action arose; · interest under s 94 is "added to" the damages to obtain the final verdict. This was relied upon by his Honour to support the view that the interest is not part of the claim for damages, but separate from it. Since the amount of the pre-judgment interest in essence reimburses the appellant as a successful plaintiff in respect of the time in which she has been out of pocket; and since at the relevant times rates of interest were equivalent, more or less, to commercial rates, not to charge tax upon the interest in fact operates to over-reimburse the appellant. Counsel for the appellant argued that the pre-judgment interest received by the appellant was of a capital nature, being interest concerning a claim for damages for personal injuries where there is no ascertained sum upon which interest in the true sense can be calculated. The position was said to be different in the case of a judgment on a claim for recovery of a debt or a sum certain where the interest may take its character from the nature of the claim and be of a revenue nature. Counsel for the appellant argued that the true nature of pre-judgment interest is to compensate the appellant as a successful plaintiff because she has been deprived of the use of her money, not because she has foregone any investment opportunity. In other words, the compensation is for not having received her damages at the time she should have; she should not be treated as having invested the judgment monies in such a way as to earn assessable income. Counsel for the respondent in essence supported the reasoning of the primary Judge on this issue. Historically, the courts of common law in the United Kingdom allowed interest only where the payment of interest was contracted for or was required by custom. The disapproval of awarding interest probably reflected the view held until the late 19th century that interest was usurious. In 1807 Lord Ellenborough in De Havilland v Bowerbank [1807] 1 Camp 50, 170 ER 872 mentioned a small number of cases where interest might be awarded by courts of common law. It was established, however, in 1829 that common law interest could not be awarded unless payable by contract or by the usage of trade, as in the case of mercantile instruments: Page v Newman [1829] 9 B & C 378 per Lord Tenterden CJ. at 381 (109 ER 140 at 141). Lord Herschell LC said in London, Chatham and Dover Railway Co v South Eastern Railway Co [1893] AC 429 at 440 that the powers of the common law courts of England to award interest were "too narrow for the purposes of justice". The Court of Chancery was entitled when making a money decree to award interest where justice required such an award, and it prescribed detailed rules governing the award of interest. The Court of Admiralty also claimed and exercised the power to award interest: see The Berwickshire (1950) P 204 per Lord Merriman P at 217; Roscoe's Admiralty Practice, 4th ed., 396 and Roscoe, Measure of Damages in Maritime Collision, 2nd ed., 40. Bentham's Writings on Utilitarianism appear to have agitated the United Kingdom legislature sufficiently to enact the Civil Procedure Act 1833 to vest a discretionary power to award interest as damages in some further cases than the limited cases that existed before. In England the Supreme Court Act 1881 was passed, s 35A of which empowered the High Court of Justice to award interest as damages for any part of the period between the date when the cause of action arose and the date of judgment. Section 69 of the County Courts Act 1984 made similar provision for the English County Courts. Section 3 of the Law Reform (Miscellaneous Provisions) Act 1934 and s 22 of the Administration of Justice Act 1969 governed the powers in the United Kingdom of the High Court and County Courts to award interest for many years until they were superseded in 1982. In their place s 15 of the Administration of Justice Act 1982 inserted s 35A of the Supreme Court Act 1981 in relation to the High Court and s 97A of the County Courts Act 1959 in relation to County Courts. Curiously s 3 of the 1934 Act remains in force for courts of record other than the High Court and County Courts. See McGregor on Damages, 15th ed., 1988, par. 574 and 599. In Australia, each of the States and Territories (other than Tasmania) and the Commonwealth with respect to the High Court and the Federal Court have broadly similar statutory provisions which permit or require a court on entering judgment for the plaintiff in an action for a debt or damages to include an amount by way of interest: Supreme Court Act 1970 (NSW), s 94; Common Law Practice Act 1867 (Qld), s 72; Supreme Court Act 1935 (SA), s 30c; Supreme Court Act 1986 (Vic), s 60; Supreme Court Act 1935 (WA), s 32; Australian Capital Territory Supreme Court Act 1933 (Cth), s 53A; Supreme Court Act 1979 (NT), s 84; Judiciary Act 1903 (Cth), s 77MA; Federal Court of Australia Act 1976 (Cth), s 51A. The primary purpose of an award of pre-judgment interest is to compensate a successful plaintiff for the loss or detriment which he or she has suffered by being kept out of his or her money during the relevant period; that is to compensate the plaintiff for having been deprived of the use of the money: Ruby v Marsh (1975) 132 CLR 642; Batchelor v Bourke (1981) 148 CLR 448; and MBP (SA) Pty Limited v Gogic (1991) 171 CLR 657. See P D Finn (editor), Essays on Damages, 1992 and in particular the essay by J L R Davis on Interest as Compensation at 149-152. There is a secondary purpose for awarding pre-judgment interest, namely, to provide a discouragement to defendants from delaying the conclusion or settlement of the proceeding: Ruby v Marsh per Barwick CJ at 652; with whose reasons for judgment McTiernan J agreed at 655. However, it is not a purpose of the award of pre-judgment interest to punish a defendant for having been dilatory in conducting the case or settling the plaintiff's claim. As Gibbs CJ observed in Batchelor v Bourke at 455: "The interest is awarded to compensate the plaintiff for the detriment that he has suffered by being kept out of his money, and not to punish the defendant for having been dilatory in settling the plaintiff's claim." Aickin, Wilson and Brennan JJ agreed with the reasons for judgment of Gibbs CJ. This second purpose of awarding interest is less frequently referred to today than it used to be, doubtless because of the increasing role played by trial judges in case management which is designed to ensure greater control by the Court over the conduct of cases by the parties and to discourage any propensity for dilatoriness by parties. The question of whether the receipt of an award of pre-judgment interest is on revenue or capital account has received much judicial attention and excited division of opinion both in the United Kingdom and Australia. It is useful to turn to the United Kingdom authorities first, because they provide a helpful background to the analysis of the question in this country. Two early leading cases are Glenboig Union Fireclay Co Limited v Commissioners of Inland Revenue (1930) 12 TC 427 and Commissioners of Inland Revenue v Ballantine (1924) 8 TC 595. In Glenboig compensation was awarded to the Glenboig company by a railway company for the sterilization of a bed of fireclay and the amount awarded was arrived at by reckoning two-and-one-half years' profits of working. The award was held not to be profits calculated on that basis. In Commissioners of Inland Revenue v Ballantine (1924) 8 TC 595 an award of damages had been made to a firm of contractors against a railway company plus "interest" which was at the rate of 5 per cent per annum from the date of lodgement of the claim until payment. The question was whether the amount calculated on the basis of interest was "interest of money". The claim arose in circumstances where a railway line was being constructed which turned out to be unexpectedly onerous on the contractors; and after it was completed they made large claims against the railway company for additional costs, loss and damages incurred. The arbitrator made an award for a total sum with interest thereon at the rate of 5 per centum per annum. It was held by the Court of Session in Scotland, affirming the findings of the Special Commissioners, that the sum in question was an integral part of the total of costs and damages awarded and was not interest of money. In Ballantine Lord Clyde said at 611-612: "In all such cases, however - whether the allowance is wrapped up in a slump award or is separately stated in the decree - the interest calculation is used in modum aestimationis only. The interest is such merely in name, for it truly constitutes that part of the compensation decerned for which is attributable to the fact that the claimant has been kept out of his due for a long period of time. It is not therefore "interest of money" chargeable under Case III of Schedule D". Lord Sands said at 612 that he was not satisfied: "that there was, during the period in respect of which the claim is made, any sum of money bearing interest within the meaning of the Income Tax legislation." These passages were referred to with approval by Rich J in Federal Wharf Co Limited v Deputy Federal Commissioner of Taxation (1930) 44 CLR 24 at 26. He added, at 26-27: "The point of the case, therefore, lies not in a discrimination between capital and income, but in the fact that damages by way of interest on a sum not ascertained before the date of the award do not answer the description "interest of money"." Riches v Westminster Bank Limited [1947] AC 390 is the leading English case on the question whether pre-judgment interest is of a revenue character. In that case Riches had entered into an agreement with Ridsdel, under which, in consideration of his introducing to Ridsdel a transaction which involved the purchase of a block of shares in a company, Ridsdel was to pay Riches one-half of any profits which might be made upon the sale of the shares. Ridsdel bought the shares and resold them at a profit; but he paid to Riches a small sum, fraudulently pretending that that sum represented the whole of Riches' share of the profit. Ridsdel died and Riches, having discovered shortly afterwards that the profit was far greater than was represented, commenced an action in the King's Bench Division against the Westminster Bank as judicial trustee of Ridsdel's last will. In that action Riches claimed, inter alia, an account of profits made upon a resale of the shares, and payment of the difference between the sum already received by him and one-half of the profits found to have been made on the taking of accounts. Judgment was entered for a sum in Riches' favour together with a sum awarded of £10,028 by the learned trial Judge (Oliver J) in the exercise of his discretion as interest under s 3 of the Law Reform (Miscellaneous Provisions) Act 1934. The Bank appealed to the Court of Appeal from Oliver J's judgment, but the appeal was dismissed. The Bank then paid Riches a sum which included, not the whole of the £10,028, but half of it, namely, £5,014, being the sum of £10,028 included in the judgment as interest after deducting income tax therefrom at the standard rate then prevailing of 10 shillings in the pound. Riches contended that the deduction was not permissible and threatened to levy execution under the judgment unless the balance of £5,014 was paid to him. To avert that event the Bank commenced an action in the Chancery Division against Riches claiming a declaration that the judgment had been satisfied by the payments already made. Evershed J gave judgment for the Bank ([1945] 1 All ER 466). The Court of Appeal unanimously affirmed his Lordship's decision and Riches then appealed to the House of Lords. Before turning to the speeches of their Lordships it is worth noting that Evershed J at first instance distinguished Glenboig and Ballantine on the ground (at 475) that both decisions turned upon the findings of fact that the sums in each case described as "interest" were in truth damages or compensation properly so called, "the element of "interest" being introduced merely as a convenient and appropriate method of fixing the sum awarded". In the Court of Appeal in Riches ([1945] 1 Ch 381) Cohen J said at 399 that the true contrast was between an award of interest by way of compensation for the detention of a sum of money, and an award of damages, the damages being ascertained as a matter of convenience by an interest calculation. In the House of Lords their Lordships held that the pre-judgment interest was taxable and that the Westminster Bank, when paying the judgment debt, was entitled to deduct income tax on the award of interest. Their Lordships distinguished Glenboig and Ballantine as being cases which, though certain sums were described as interest, in substance were capital sums of compensation the subject of the award, the element of interest being introduced in modum aestimationis. Viscount Simon LC said at 398: "But I see no reason why, when the judge orders payment of interest from a past date on the amount of the main sum awarded (or on a part of it) this supplemental payment, the size of which grows from day to day by taking a fraction of so much per cent. per annum of the amount on which interest is ordered, and by the payment of which further growth is stopped, should not be treated as interest attracting income tax. It is not capital. It is rather the accumulated fruit of a tree which the tree produces regularly until payment." Lord Wright said at 400: "... the essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had had the use of the money, or conversely the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation. From that point of view it would seem immaterial whether the money was due to him under a contract express or implied or a statute or whether the money was due for any other reason in law. In either case the money was due to him and was not paid, or in other words was withheld from him by the debtor after the time when payment should have been made, in breach of his legal rights, and interest was a compensation, whether the compensation was liquidated under an agreement or statute, as for instance under s 57 of the Bills of Exchange Act, 1882, or was unliquidated and claimable under the Act as in the present case." Lord Simonds said at 408: "Perhaps the position may become even clearer if for 'damages' the word 'compensation' is substituted. It would be difficult, I suppose, in a case where a man, being deprived of the use of his money, was awarded interest by way of compensation, to say that what he was awarded was not interest but something else. ..." See also Jefford v Gee [1970] 2 QB 130 (judgment of the English Court of Appeal). Thus, in the United Kingdom in earlier days it had been held in some cases that damages awarded by way of interest on a sum not ascertained before the date of the award were not assessable to income tax; but since Riches the approach has been to treat the element of interest in a damages award as taxable. Whiteman on Income Tax, par 18-07 states: "As a general rule, however, where interest figures as an element in damages, that element is taxable." Australian courts must approach the judgments of courts of the United Kingdom concerning income tax with caution because, as Davies J observed in Commissioner of Taxation v Northumberland Development Co Pty Limited (1995) 59 FCR 103 at 106: "It must be kept in mind that, although many principles of taxation which are applied in the United Kingdom are given a like effect in Australia, the general structure of the Income Tax Acts in the United Kingdom are different from those in this country." I agree with his Honour's observation. With this background I turn to the judgments of Australian courts bearing on this question. A useful starting point is the judgment of Rich J in Federal Wharf. Section 26 of the Harbours Act 1913 (SA) provided that when property is compulsorily acquired, interest computed from the time when the Minister entered into occupation thereof on behalf of the Crown to the time when the compensation was paid "shall be added to the amount of any compensation to be paid in respect thereof". It was held by Rich J that such interest is income for the purposes of the Income Tax Assessment Act 1915-1921 and the Income Tax Assessment Act 1922-1928. His Honour said at 27-28: "In truth sec. 26 does little more than express in precise legislative form the rule established by In Re Pigott and Great Western Railway Co [1881] 18 ChD 146 that an authority compulsorily acquiring land is in the position of a purchaser in the absence of statutory provision to the contrary, and must pay interest upon the compensation as if it were purchase-money, from the date of possession until payment. It is quite clear that interest upon the balance of purchase-money payable upon a sale of real property is income (Hudsons Bay Co v Thew (1919) 7 Tax Cas 206). The observation made by Rowlatt J in that case at 217 that if the vendors "had collected the money and had been paid it, they would have invested it and got interest", and that "the purchaser has not paid it, and he therefore pays interest instead until he does pay it," is a simple proposition which seems equally applicable to the payment of compensation. In my opinion, the character of the interest payable under sec. 26 is that of recompense for loss of the use of capital during a period of time in which it would earn income. It represents the annual value of capital. It is paid because the owner has been deprived of a capital asset which he had and has not received the fund which is to be substituted for the capital asset. The interest is the flow of that fund. In my opinion it is income." There is in my opinion a fundamental difference between a case where a sum is received as compensation for the compulsory acquisition of property and interest is payable to the former owner of the acquired property pursuant to a statutory obligation from the time when the Minister enters into occupation to the time when the compensation is paid; and a case where a sum is received as damages for personal injury. The passage cited from Rich J's judgment illustrates the point. I shall return to this point more fully later. The word "interest" has a variety of meanings, the aptness of which depends on the context in which it is used. It can mean compensation for some injury or wrongdoing, or money paid for the use of money lent or for forbearance of a debt. Interest awarded under s 94 and equivalent sections in other jurisdictions in Australia and elsewhere is calculated on a base figure which is not known until judgment is given. Since a claim for damages for personal injuries is unliquidated, the amount of interest is not ascertainable until the reasons for judgment have been given by the trial Judge or until the jury gives its verdict, as the case may be. There is no certain or ascertainable sum until that time, unlike interest on a debt or other obligation. This point was made by Moffitt P in Bennett v Jones [1977] 2 NSWLR 355 at 368. Receiving compensation for the compulsory acquisition of a capital asset which would have been put to a revenue use is quite different from compensation for damages for personal injury. The latter is compensation for not having received damages when they should have been paid, where the plaintiff should not be treated as having invested the judgment monies in such a way as to earn taxable income. Interest is awarded in cases of this kind because the plaintiff has been deprived of the use of his money, not because he has foregone investment opportunity. Also, as the terms of s 94 make clear, the interest is to be included in the sum for which judgment is given. It is one of the components which together make up the global sum constituting the amount of the award. C.f. Pheeney v Doolan [No 2] [1977] 1 NSWLR 601 (NSW Court of Appeal). In Gogic the High Court considered s 30(c)(i) of the Supreme Court Act 1935 (SA), which empowered that Court to award interest on the amount of the judgment. The question before the High Court concerned the basis of awarding interest on damages in South Australia. In the course of their reasons the Full Bench of the High Court said at 663: "The function of an award of interest is to compensate a plaintiff for the loss or detriment which he or she has suffered by being kept out of his or her money during the relevant period: Batchelor v Burke (1981) 148 CLR 448 at 455, per Gibbs CJ." And at 665: "A plaintiff who is awarded interest at 4 per cent on damages for pre-trial non-economic loss has not had to risk his or her capital and arguably does not have to pay income tax on that interest." Alsoat 666: "A plaintiff is awarded interest because he or she has been deprived of the use of his or her money, not because he or she has foregone investment opportunities." Davies J expressed substantially the same point, by way of obiter dicta, in Northumberland Development at 106 in these terms: "A court in this country would be unlikely to hold that an award of pre-judgment interest, included in an award of damages for personal injury, constituted a receipt in the nature of income. It is therefore unlikely that Riches would be applied in this country in terms of the ratio which it propounds. The Court has indeed not been referred to any reported instance in Australia where pre-judgment interest has been assessed to tax as income." It should not be assumed that a successful plaintiff would have invested the monies awarded in the judgment in such a way as to earn assessable income. The plaintiff may have done all manner of things with the amount of the award: purchased a home for himself or herself and family, or a car, or travelled overseas, or spent the money in any of the multifarious ways which are possible. In Tipper v Williams (NSW Court of Appeal, 12 May 1993, unreported) Priestley JA said at 2 (though in dissent): "I do not see why the plaintiff should be treated as having invested the judgment moneys in such a way as to earn taxable interest; he might have bought a home to live in; he might have bought shares with fully franked dividends; he might have bought vacant land with a view to holding it as a gift for his children in twenty years time; the possibilities are endless, and not all have the same tax consequences." In Golec v Scott (1995) 38 NSWLR 168 Meagher JA, (though in Tipper v Williams he was one of the two judges in the majority) said at 171 that he agreed with what was said by Priestley JA in Tipper v Williams on this point. The views which I have expressed concern interest included in awards of damages in personal injury cases. The position would be different in some cases, especially where, for example, the claim is for loss of profits arising from a business in circumstances where it may be reasonably assumed that the award of damages, if available at the time of the accrual of the cause of action, would have been spent by the plaintiff for the derivation of further profits and this would be of an income nature, so would the interest. It is useful to compare s 94 of the Supreme Court Act 1970 (NSW) with s 51A of the Federal Court of Australia Act 1976. They are in substance the same but with certain differences, one of which is of some importance in this case. Section 51A empowers the Federal Court or a Judge to order that there be included in the sum for which judgment is given, interest in terms similar to s 94; but provides in s 51A(1)(b) as follows: "without proceeding to calculate interest in accordance with paragraph (a) [that is akin to s 94], order that there be included in the sum for which judgment is given a lump sum in lieu of any such interest." Hence, the Federal Court need not engage in the exercise of calculating the interest in essence as provided for in s 94 of the Supreme Court Act 1970 (NSW); but may include in the sum for which judgment is given a lump sum in lieu of any such interest. This reinforces the view that in a case of damages for personal injuries the element of pre-judgment interest included in the amount of the judgment is itself a head of compensation, of a capital nature. The inclusion of s 51A(1)(b) in the Federal Court of Australia Act 1976 does not mean that different revenue consequences flow to a successful plaintiff depending on the particular court in Australia in which he sued and recovered judgment. That would indeed be unfortunate. Rather the point highlights the capital nature of a sum awarded as interest as part of the global amount for which judgment is entered in personal injury cases. I therefore respectfully differ from the conclusion reached by the primary Judge that the pre-judgment interest received by the appellant was of an income nature. In my opinion, it was a receipt of a capital nature and is not liable to be included in the appellant's assessable income. Post-judgment interest I turn to the interest awarded pursuant to s 95 of the Supreme Court Act. Entitlement to post-judgment interest is determined by s 95 of the Supreme Court Act which is in the following terms:. "95(1)Where judgment is given or an order is made for the payment of money, interest shall, unless the Court otherwise orders, be payable at the prescribed rate from the date when the judgment or order takes effect on so much of the money as is from time to time unpaid. (2) Notwithstanding subsection (1), where, in proceedings on a common law claim the Court gives judgment for damages, and the damages are paid within 21 days after the date when the judgment takes effect, interest on the judgment debt is not to be payable under subsection (1) unless the Court otherwise orders. (3) Notwithstanding subsection (1), where, in proceedings for damages on a common law claim, the Court makes an order for the payment of costs and the costs are paid within twenty-one days after ascertainment of the amount of the costs by assessment under Division 6 of Part 11 of the Legal Profession Act 1987 or otherwise, interest on the costs shall not be payable under subsection (1) unless the Court otherwise orders. (4) If an order is made for the payment of costs, the Court may order that interest is to be paid on the amount so ordered, at the prescribed rate referred to in subsection (1), from the date or dates when the amount in respect of costs was duly paid." The primary Judge found that interest on the amount of the judgment paid pursuant to s 95 was plainly of a revenue nature and therefore must be included in the appellant's assessable income. With respect to the s 95 post-judgment interest, counsel for the appellant argued that until the High Court had delivered its judgment in favour of the appellant in the proceedings commenced in the Supreme Court for damages, it could not be said that the appellant was entitled to any sum at all. Her entitlement in the meantime was conditional. It was argued that the appellant's position is thus distinguishable from, for example, the position of a person whose land has been resumed and about whom there can be no doubt as to entitlement to compensation. There was therefore nothing analogous to a 'principal sum' until the High Court gave judgment. Hence, it was argued the post-judgment interest awarded under s 95 was also in the nature of capital. Counsel for the respondent supported the reasoning of the primary Judge on this question. In one sense counsel for the appellant is correct in saying that the appellant's entitlement to payment of interest upon the amount of the judgment was conditional, because, until the High Court delivered its judgment, it was not known whether the appellant would be finally entitled to any sum at all. But the judgment entered by the Supreme Court gave rise to an immediate entitlement in the appellant to the benefit of the judgment. The fact that appeals intervened or that there may have been a stay of execution of the judgment granted or that it would have been very difficult for the appellant to have resisted such a stay because there was a real dispute on liability, does not determine the character of the judgment itself. That the appellant's cause of action was for damages for personal injury is highly relevant in determining the true nature of the pre-judgment interest. But, once the plaintiff has succeeded and judgment has been entered for a sum which includes the pre-judgment interest, the cause of action which led to the judgment has merged in the judgment. Interest is payable under s 95(1) upon the amount of the judgment as a judgment debt. Post-judgment interest is payable to a successful plaintiff. Interest awarded pursuant to s 95(1) has no connection at all with the cause of action which underlay, but merged in, the judgment. Interest under s 95 is payable solely because there has been delay between the date of entry of judgment and the date of receipt by the appellant of the payment of the amount of the judgment debt. In my opinion post-judgment interest is plainly income of the appellant according to ordinary concepts. It therefore forms part of the appellant's assessable income pursuant to s 25(1) of the Act. Deductibility of legal expenses So far as the deductibility of legal expenses was concerned, his Honour said that it had been long accepted that the deductibility of costs of litigation is determined by reference to the purpose of the taxpayer in undertaking the litigation. In the present case, the appellant claimed two separate amounts in the proceedings which she commenced. The first was an affair of capital being a claim for damages for personal injury. The second was an affair of income being pre-judgment interest. Hence, her legal costs fell to be apportioned because they were incurred indifferently for an income and a non-income purpose. His Honour said that the apportionment must be made on such basis as is fair and reasonable, which in the present case meant the apportionment must be done as indicated earlier. It was argued on behalf of the appellant that the proper apportionment is to simply take into account the total of the amount the appellant received (that is the amount for which judgment was entered, which included the pre-judgment interest, to which must be added the post-judgment interest); and, compare the assessable proportion, if any, with the non-assessable proportion. It was argued that the entirety of the legal costs incurred by the appellant were incurred in order to get monies into her hands; and that, if any part of the monies ultimately received by her constitutes assessable income, it must follow that the proportion which the assessable income bears to the total receipt is a proportion which should be applied to the entirety of the costs in determining deductibility. The respondent did not seek to disturb the primary Judge's conclusion on the question of deductibility of the legal expenses unless the Court concludes that the pre-judgment interest in the hands of the appellant is not income. It was argued that, in such an event, the reasons which led the primary Judge to conclude that a proportion of the legal expenses was an allowable deduction to the appellant would no longer be applicable. Counsel for the respondent submitted that whether legal expenses are of an income or capital nature must be determined by examining the cause or the purpose of incurring the expenditure. The cause of the expenditure being incurred here was the personal injuries suffered by the appellant as a result of the doctor's negligence. So, a claim for interest pursuant to s 94 of the Supreme Court Act was totally incidental to this cause in the sense that it played no part in the incurring of the expenditure. The fact that interest was ultimately awarded was solely a function of the success of the action. Success or failure of what the outlay was intended to achieve can make no difference to the character of the outlay. Counsel for the respondent submitted that post-judgment interest paid to the appellant can have no bearing on the character of the legal expenses incurred by the appellant because such interest had no connection with the cause of incurring the expenditure; it was solely a function of the delay in the appellant receiving payment of her judgment debt. It has been long accepted that the deductibility of the costs of litigation is determined by reference to the purpose of the taxpayer in undertaking that litigation: Hallstroms Pty Limited v Federal Commissioner of Taxation (1946) 72 CLR 634 per Dixon J at 647-8; also Creer v Federal Commissioner of Taxation (1994) 28 ATR 442 per Burchett J at 446, Smithkline Beecham Laboratories (Australia) Limited v Federal Commissioner of Taxation (1993) 93 ATC 4629. The legal expenses incurred by the appellant in suing the defendant in the Supreme Court proceeding and in resisting the appeals to the Court of Appeal of New South Wales and the High Court were incurred in order to obtain damages, including the pre-judgment interest component. It was not suggested in argument that any part of the award of damages constituted income except the pre-judgment interest. In my view the pre-judgment interest was received on capital account and the whole of the award in favour of the appellant including pre-judgment interest was of a capital nature. Hence the expenditure incurred by the appellant in legal costs was incurred in pursuit of a receipt of a capital nature. Interest payable under s 95 is due solely because of the delay that was occasioned to the appellant between the date of the judgment and the date of the receipt of the amount of the award including pre-judgment interest. Such interest throws no light on the question of the deductibility of the legal expenses. Accordingly, in my opinion no part of the legal expenses incurred by the appellant in pursuit of the Supreme Court litigation and subsequent appeals are deductible under s 51(1) of the Act. Conclusion I would therefore allow the appeal in part and make the following orders:
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
REASONS FOR JUDGMENT BURCHETT J This tax appeal turns not so much on any point of tax law as on a correct understanding of the law governing aspects of the assessment of damages in litigation in respect of personal injuries. The principal question debated upon the appeal was the character of an amount included, pursuant to s 94 of the Supreme Court Act 1970(NSW), in a judgment for damages for a personal injury. The character of the amount so included in the judgment must determine whether it was received by the successful plaintiff as capital or as income liable to tax. Section 94(1) of the Supreme Court Act provides: "In any proceedings for the recovery of any money (including any debt or damages or the value of any goods), the Court may order that there shall be included, in the sum for which judgment is given, interest at such rate as it thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date when the judgment takes effect." Pursuant to this section, a sum of $65,514.38 was included in a total award of damages in favour of the appellant of $808,564.38, given by Campbell J in the Supreme Court of New South Wales in an action for damages for medical negligence. The appellant (it is convenient to call her the plaintiff), who had been virtually without sight in one eye as a result of an injury suffered as a child, in middle age became quite blind in the other eye also, by reason of the onset of a condition known as sympathetic ophthalmia following surgery performed on the injured eye. The plaintiff, now almost totally blind, sued the surgeon on the basis that he had negligently failed to advise her there was a very small risk of this happening, a risk which she asserted she would not have run had she known of it. The evidence showed that, while some reputable medical experts would have warned the plaintiff, other reputable medical experts would not. In those circumstances, difficult questions of the law of medical negligence were raised by the case, and it ultimately reached the High Court of Australia, which affirmed the plaintiff's success in the Courts below: Rogers v Whitaker (1992) 175 CLR 479; and see Rogers v Whitaker (1991) 23 NSWLR 600, and Whitaker v Rogers (1990) Aust Torts Reports 68,288, the decision at first instance. In accordance with the normal practice, Campbell J apportioned the general damages of $120,000 so as to specify that $50,000 related to the period prior to judgment, and likewise divided loss of earning capacity between the past and the future, apportioning the sum of $78,074 to the past. These figures appear in the judgment at 68,337. Utilising them together with a relatively small amount of $2,025 apportioned to past transport costs, the parties were able to agree on the inclusion in the judgment of the sum of $65,514.38, previously mentioned. That amount was made up of the following components: a sum of $39,190.26, being 8.61 per cent per annum calculated on $78,074 over a period of 5.83 years to 30 June 1990, the date of the plaintiff's operation having been 1 August 1984; a sum of $25,307.64, being 8.56 per cent per annum calculated on $50,000 over a period of 5.913 years; and a sum of $1,016.47 calculated at 8.61 per cent per annum on $2,025 over a period of 5.83 years. The total seems to involve an error of 1 cent. Although these calculations reveal slight differences in the periods and interest rates, it is apparent that, in broad terms, the conventional practice was adopted of taking an interest rate (in this case about 17 per cent per annum) and then halving it for the purposes of a calculation over the approximate period between the injury and the date of the assessment, so that the amount of interest allowed would reflect the accrual of the damages over that period. The rationale of this practice is explained in Bennett v Jones [1977] 2 NSWLR 355 at 371-372, 374, and 380-381. So far as concerns the choice of a rate of about 17 per cent in respect of all the calculations, including that relating to general damages for the past, this was no doubt due to the date of the assessment, which was made at a time when the view of the majority of the High Court in Cullen v Trappell (1980) 146 CLR 1 at 21 required the adoption of interest "at ordinary commercial rates", in the application of s 94, whether past economic loss or past pain and suffering and loss of amenity was in question. Since the decision in M.B.P. (S.A.) Proprietary Limited v Gogic (1991) 171 CLR 657, a conventional rate of 4 per cent has generally been utilised in the calculation of interest in respect of sums apportioned to general damages for the past, although a commercial rate has been retained in respect of loss or impairment of earning capacity during the past. Precision has never been required: Fire and All Risks Insurance Co. Limited v Callinan (1978) 140 CLR 427 at 432-433. "Whether or not a particular receipt is income depends upon its quality in the hands of the recipient": Scott v The Commissioner of Taxation of the Commonwealth of Australia (1966) 117 CLR 514 at 526; G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 at 136; The Commissioner of Taxation of the Commonwealth of Australia v Rowe (1997) 187 CLR 266 at 279. Therefore, the question whether the appellant must bring the amount awarded under s 94 to account for income tax purposes requires an examination of the nature of such an award. That, as I have already suggested, does not depend upon the law of income tax; it depends upon the law applicable to the assessment of damages in a case of this kind. In Haines v Bendall (1991) 172 CLR 60 at 66-67, Mason CJ, Dawson, Toohey, and Gaudron JJ stated the principles governing the exercise of the power to award interest under s 94. Their Honours said: "The power to award interest on damages for the period between the date when the cause of action arose and the date on which a judgment takes effect is conferred by s. 94 of the Supreme Court Act. The section confers power on the Supreme Court to order that there shall be included, in the sum for which judgment is given, interest at such rate as it thinks fit on the whole or any part of the money between the date when the cause of action arose and the date when the judgment takes effect. An award of interest up to the date of judgment is an award of interest in the nature of damages: Fire and All Risks Insurance Co. Ltd. (1978) 140 C.L.R., at p. 431. This statement acknowledges that the award of interest is an integral element in the attainment of the object of damages, namely, to compensate a plaintiff for injury sustained. Hence the award of interest is compensatory in character. While '[i]nterest should not be awarded as [I have added the emphasis which is missing from the C.L.R. report - see corrigenda p. xi] compensation for the damage done' (emphasis added) (Jefford v. Gee [1970] 2 Q.B. 130, at p.146), the award of interest is nevertheless an essential element in the achievement of true compensation for that damage. In Thompson v. Faraonio (1979) 54 A.L.J.R. 231, at p. 233; 24 A.L.R 1, at p.7, the Privy Council stated that '[t]he reason for awarding interest is to compensate the plaintiff for having been kept out of money which theoretically was due to him at the date of his accident' (emphasis added): see also Batchelor v. Burke (1981) 148 C.L.R., at p.455, per Gibbs C.J.; M.B.P. (S.A.) Pty. Ltd. v. Gogic (1991) 171 C.L.R., at pp. 663-665; cf. Ruby v. Marsh (1975) 132 C.L.R. 642, at pp. 652-653, per Barwick C.J. The award of interest for the period of delay in payment between the date of accrual of the cause of action and judgment affords the fair legal measure of compensation: Pheeney v. Doolan [1977] 1 N.S.W.L.R. 601, at p.613, per Reynolds J.A. Thus, it is the award of damages and, where appropriate, interest awarded on damages for the period up until the judgment takes effect which allows the plaintiff to be placed in or restored to the situation, as far as money can do, in which he or she would have been but for the defendant's negligence. Section 94(1) of the Supreme Court Act confers a wide discretion on a court awarding interest. That discretion must, however, be exercised in accordance with legal principle: Cullen v. Trappell (1980) 146 C.L.R., at p. 17, per Gibbs J. That means that the discretion must be exercised in conformity with the general principles governing the award of damages so that an award of interest on damages for personal injury should do no more than assist in the restoration of a plaintiff to the position in which he or she would have been but for the defendant's negligence." It is worthy of note that when, in this passage, their Honours make the statement "the award of interest is an integral element in the attainment of the object of damages, namely, to compensate a plaintiff for injury sustained", they are echoing the words which Evershed J (as he then was) used in the decision at first instance in Westminster Bank, Ltd v Riches [1945] 1 All ER 466 at 479 to distinguish the case of an assessment of "damages for fraud or negligence", including an amount for pre-judgment interest, from the case of a judgment allowing recovery of a debt with interest. His Lordship said that "in the case, for example, of a claim for damages for fraud or negligence it is plainly easier to conceive of an award calculated in terms of interest being in reality an integral part of a single award of damages as such." Riches involved an award of interest upon the taking of an account of profits. When the case reached the House of Lords as Riches v Westminster Bank Limited [1947] AC 390, the amount allowed as interest was held, in the words of Lord Wright at 402, to fall "within the scope of the charging words of sch. D to the Income Tax Act 1918... which charges 'all interest of money.'" Lord Wright made it clear (at 402-403) that cases of this kind depended on the distinction "whether the payments were payments of profits, that is, were income, or were payments on capital account estimated in terms of interest. ... This distinction depends on substance not on the mere name." In Gogic, the joint judgment of all members of the High Court stated (at 663) that "[t]he function of an award of interest is to compensate a plaintiff for the loss or detriment which he or she has suffered by being kept out of his or her money during the relevant period: Batchelor v Burke (1981) 148 CLR 448, at p. 455, per Gibbs CJ." Their Honours went on (at 666) to state specifically that it would be erroneous "to assume... that the purpose of the award of interest is to compensate a plaintiff for being deprived of the opportunity to invest his or her money". The true position, they made clear, is that "[a] plaintiff is awarded interest because he or she has been deprived of the use of his or her money, not because he or she has forgone investment opportunities". In the later decision Andjelic v Marsland (1996) 186 CLR 20 at 25, Brennan CJ, Dawson, Toohey and Gaudron JJ referred to Gogic, and said (at 25): "In that case, the reason for allowing interest was identified as the 'depriv[ation] of the use [by a plaintiff] of his or her money', not the fact that 'he or she has forgone investment opportunities'." That a plaintiff in a personal injuries case receives interest as compensation for being kept out of his money has also been held in England: Pickett v British Rail Engineering Ltd [1980] AC 136 at 151, 158, 164, 173. In Metropolitan Meat Industry Board v Williams (1991) 24 NSWLR 54, the New South Wales Court of Appeal (Samuels AP, Mahoney JA and Hunt AJA) commented on Gogic. Their Honours said (at 56-57): "The notion that the recovery of a verdict turns the plaintiff into an investor... has been... effectively demolished in [Gogic]... An award of damages for non-economic loss is designed to provide solace to a plaintiff for the pain and other disabilities which the defendant's tort has inflicted. In Thatcher v Charles (1961) 104 CLR 57 at 75-76, Windeyer J said that 'in very many cases damages are given, not to meet particular needs, but so that the injured person may use the money as he wishes: so that by it he may get things, tangible or intangible, that he otherwise could not have had to make up for the loss of the things that he now can never have again.' And in Teubner v Humble (1963) 108 CLR 491 at 507, he observed: 'But in so far as the possession of money can in a particular case give pleasure or provide comfort, money can properly be said to compensate for pain and suffering.' It is by no means easy, to our minds, to work out a means of assessing a rate of interest capable of satisfactorily valuing the delay in receiving a sum destined for use for such a purpose. ... We would, for our own part, respectfully adopt the reasoning of Lord Diplock in Wright v British Railways Board [1983] 2 AC 773 at 781 and 784. In the first of those passages, his Lordship said: 'My Lords, just as the lump sum of money assessed as being the appropriate compensation for past and future pain and suffering and loss of amenities cannot be other than a conventional figure, since such non-economic loss is not susceptible of measurement in money, so too an award of simple "interest" at a particular rate on that lump sum as the method of assessing compensation for the temporary loss of the use of it between the date of service of writ and the date of judgment is wholly conventional; but it is the method that the court is commanded by the statute to adopt. To what use the particular plaintiff would have actually put that capital sum during the period for which "interest" is to be given is utterly irrelevant. It is most unlikely that if he had received it he would have invested and kept it in income-earning securities throughout that period'. He went on to add that investment by the plaintiff of his damages is 'the assumption that judges are called upon to make'; but now, in Australia, that assumption has been excluded." In NSW Department of Technical & Further Education v Pitt (1993) 9 NSWCCR 309, the question whether compensation, if received in due time, would have been invested so as to earn income was raised in a somewhat different context. The appeal came from the Compensation Court, which had ordered the payment of a lump sum in respect of permanent impairment, and had ordered that interest be paid on that sum from a date nearly three years past. It was argued that the interest should be scaled down "to take account of the taxation on the notional investment and the elimination of the risk of loss of capital during the relevant period". Cripps JA (with whom on this point Priestley and Meagher JJA agreed) declined to do that. His Honour said (at 319): "It would seem to me, with respect, that upon the assumption that interest is being awarded to compensate Mr Pitt for being kept out of his money, it is irrelevant to consider what he might have done with that money had he had it." Meagher JA referred to this case in his judgment (with which relevantly Priestley JA agreed and with which Cole JA also agreed) in Golec v Scott (1995) 38 NSWLR 168 at 171. He there quoted with approval the statement of Priestley JA in an earlier unreported case: "I do not see why the plaintiff should be treated as having invested the judgment moneys in such a way as to earn taxable interest; he might have bought a home to live in; he might have bought shares with fully franked dividends; he might have bought vacant land with a view to holding it as a gift for his children in 20 years time; the possibilities are endless, and not all have the same tax consequences. Further, I take the award of interest as a form of compensation for the plaintiff's not having received his damages when he should have done in the ordinary course of events; the interest rate calculation is a convenient way of estimating this compensation, but does not require that the plaintiff be held to the hypothesis upon which its reasonableness is based." Similarly, in Alvorac General Engineering Pty Ltd v Arlotta (1993) 29 NSWLR 734, like Pitt an appeal from the Compensation Court, Cripps JA said (at 747): "It would seem to me, with respect to people who have other views, that upon the assumption that interest is awarded to compensate a person for being kept out of money due, it is not relevant to consider what that person might have done with the money." Priestley JA agreed (at 743). Mahoney JA, who dissented from the decision of the majority, nevertheless, commenting on Gogic, said (at 741): "It is, of course, correct that, in the ordinary case, a plaintiff who receives damages for non-economic loss does not use it, or use it merely, to invest at interest: common knowledge or conjecture would suggest that some or all of it is used to achieve more personal satisfactions. It is therefore, in a sense, incongruous to award compensation for a loss of interest which the plaintiff would in fact not have suffered." What Mahoney JA said of damages for non-economic loss would be equally true of weekly or fortnightly wages, in a case where interest under section 94 is awarded because they have not been received between the date of injury and the date of assessment. These various statements of the position under s 94 of the Supreme Court Act and similar provisions in Australia are consistent with the statement of White J, delivering the opinion of the Supreme Court of the United States in Monessen Southwestern Railway Co. v Morgan (1988) 486 US 330 at 335: "Prejudgment interest is normally designed to make the plaintiff whole and is part of the actual damages sought to be recovered." In my opinion, it follows from the principle upon which pre-judgment interest is awarded in respect of past pain and suffering and loss of the amenities of life that it is not in any sense of an income character. It does not replace any actual income lost, and the statements of principle in the High Court and in the Court of Appeal of New South Wales make it clear that it does not replace notional income lost either. Whether by the adoption of a commercial interest rate or, as has been the practice since Gogic, by the adoption of a conventional interest rate, the use of an interest rate is no more than a guide to the determination of an appropriate figure. When determined, the figure is part of the total amount awarded by the judgment in order to achieve the law's object - to put the plaintiff back, so far as money can do so, in the position he would have been in but for the injury. That cannot be done without making up in some way for the fact that some parts of the award compensate the plaintiff for losses suffered, perhaps, years previously. But to do that it is not necessary to assume, contrary to human experience, that if moneys had been received earlier they would necessarily, or even probably, have been invested at interest. It is more likely that a solace for pain and suffering would have gone into immediate expenditure to relieve a pressing need, or to provide some comfort. The law is not so foolish as to suppose otherwise. It compensates the plaintiff for not having been able to do what he would have done, not what he would not have done. While the award of interest upon so much of the general damages as is apportioned to past pain and suffering and loss of the amenities of life provides the most obvious illustration of this point, I think the position is the same with reference to interest calculated upon past economic loss. It is not ordinary experience that the wage earner invests the whole, or even any substantial part, of his wages to earn interest. Wages are normally spent as they are earned. The amount added to the award is to compensate the plaintiff for being kept out of his money. It is a matter of common observation that, in many cases, needy plaintiffs, unable to work, have had to borrow from friends or relatives or from less generous lenders. They may have to make repayments with interest. They may have had to buy household requirements pursuant to deferred payment arrangements involving significant expense, or they may have had a motor car or appliance repossessed because no wages were coming in. Even if a particular plaintiff suffered no special difficulty, the loss of the opportunity to do what he wished with his own wages when they should have been received, and the loss in the value of the money over the period until receipt, require compensation. That compensation has nothing to do with a notional investment at interest. It is, in Lord Wright's phrase, "estimated in terms of interest", but interest it is not. Indeed, the apportioned award itself of damages for loss of earning capacity for the past does not necessarily imply an imputed receipt by the plaintiff of a particular sum of wages which could be notionally invested. That may be the normal case, but in principle the award is for the loss of an earning capacity, not for particular wages. The point is made succinctly, and the position in England is contrasted, in the joint judgment of Mason and Dawson JJ in Redding v Lee (1983) 151 CLR 117 at 133-134. McLaughlin v Chicago, Milwaukee, St. Paul & Pacific Ry. Co. (1966) 143 NWR 2d 32 is, I think, good law in Australia as well as in the United States. There it was held that a plaintiff, who was a teacher, was entitled to damages for the loss of his earning capacity notwithstanding that he had taken a vow of poverty as a priest of a religious order, for which he taught at no salary. That the same decision would be reached in Australia is confirmed by the judgment of Gallop J in McMillan v Territory Insurance Office (1988) 57 NTR 24 at 32-33. The legal theory which justifies such a result has been repeatedly stated by members of the High Court, and a number of the cases will be found collected in a footnote to para. 5.1.3 of Luntz, Assessment of Damages for Personal Injury and Death (3rd ed., 1990). One of those cases is cited in Fleming, The Law Of Torts (8th ed., 1992) at 231 for the proposition that damages for the loss of earnings relate to the impairment of a plaintiff's capacity to earn. The case is O'Brien v McKean (1968) 118 CLR 540, where Windeyer J said (at 557) that "the true ground of damages for what is called economic loss is the destruction or impairment of earning capacity". Barwick CJ had asserted the same view at 546. The position was restated by Brennan J, when he was a member of this Court, in Tinkler v Federal Commissioner of Taxation (1979) 29 ALR 663 at 667: "[A]n award of damages is assessed to compensate not for loss of earnings but for loss or impairment of earning capacity: see Paff v Speed (1961) 105 CLR 549 at pp 559, 566; Bresatz v Przibilla (1962) 108 CLR 541 at 545; Arthur Robinson (Grafton) Pty Ltd v Carter (1968) 122 CLR 649 at 658. Although an injured plaintiff recovers 'not merely because his earning capacity has been diminished but because the diminution in his earning capacity is or may be productive of financial loss' (Graham v Baker (1961) 106 CLR 340 at 347), the award is assessed as a lump sum to include fair compensation for the affection of earning capacity over the entire post-accident period." The conclusion has been drawn that an award of damages in respect of economic loss is not assessable to income tax. In Groves v United Pacific Transport Pty Ltd [1965] Qd.R. 62 at 65, Gibbs J said: "Although it is usual and convenient in an action for damages for personal injuries to say that an amount is awarded for loss of wages or other earnings, the damages are really awarded for the impairment of the plaintiff's earning capacity that has resulted from his injuries. This is so even if an amount is separately quantified and described as special damages for loss of earnings up to the time of trial. Damages for personal injuries are not rightly described as damages for loss of income. It follows that in my opinion an award of damages for personal injuries does not come within the description of 'an indemnity for or in respect of any loss of income' within s.26(j) of the Income Tax and Social Services Contribution Assessment Act and that such an award is not income in accordance with ordinary concepts so as to be taxable apart from the special provisions of that section." Gibbs J referred to this decision in his judgment in Atlas Tiles Limited v Briers (1978) 144 CLR 202 at 223, and added: "I adhere to that view. Indeed so far as I am aware it has never been seriously challenged. The Commissioner does not attempt to assess tax on awards of damages for personal injuries. He is never likely to do so while the law remains as it is." In the same case, Barwick CJ said (at 209): "If the award of damages for such an injury destroying or diminishing his earning capacity were merely a matter of replacing those earnings, the amount of the award would be taxable: but it is not, for the reason that the award is for a capital loss, however much the amount of the award is quantified by a consideration of what the use or employment of that capacity might be expected to produce." This proposition is accepted in Fleming op. cit. at 233. See also Daniels v Anderson (1995) 13 ACLC 614 at 726, per Clarke and Sheller JJA. Since, as the authorities cited earlier make clear, the allowance of interest in respect of past economic loss is wholly ancillary to the assessment of the proper measure of damages in respect of that loss, the application of an interest rate being merely by way of estimation, the inclusion of the resulting sum in the total award cannot alter its nature. The total award is received in the character of damages for a personal injury, including the destruction or impairment of the injured person's earning capacity at a date preceding the date of the assessment. Accordingly, I think the dictum of Davies J in Commissioner of Taxation v Northumberland Development Co Pty Ltd (1995) 59 FCR 103 at 106 is correct: "A court in this country would be unlikely to hold that an award of pre-judgment interest, included in an award of damages for personal injury, constituted a receipt in the nature of income." His Honour added: "The Court has indeed not been referred to any reported instance in Australia where pre-judgment interest has been assessed to tax as income." What I have said so far would justify upholding the appellant's claim that the "interest" allowed under s 94 in respect of past economic loss, as well as that allowed in respect of past personal damages, does not have the character of income, even if included in an amount of damages assessed in respect of a claim based on inability to continue to earn in an employment held at the time of the injury. However, in fact the plaintiff was not working at the time of her injury. She had left paid employment three years before, in order to nurse her son who was ill. The claim for loss of earning capacity made in her case was supported by evidence that she intended to return to some employment, her son having recovered. But it could not be related to precise wages suspended by her injury. On the contrary, it was a pure example of a claim for destruction of an earning capacity which could have been, but was not being, converted into actual wages. That makes the principles I have been discussing even more clearly applicable. I would accordingly allow the appeal, so far as it relates to s 94. The learned trial judge also held that the appellant was liable to pay income tax in respect of the amount of interest received by her under s 95 of the Supreme Court Act. That section entitles a judgment creditor to receive interest on the judgment sum in respect of a period following the entry of judgment. Subsection (1) of s 95 provides that "[w]here judgment is given or an order is made for the payment of money, interest shall, unless the Court otherwise orders, be payable at the prescribed rate from the date when the judgment or order takes effect on so much of the money as is from time to time unpaid." The subsection is qualified by subsection (2) in a manner which is not relevant to the present case. In my opinion, s 95 is plainly distinguishable from s 94, understood as I have understood it. Section 95 is not concerned with the assessment of an amount fully compensating the plaintiff, but with the consequences of a delay in compliance with the order of the Court. Its remedy is to make the judgment bear interest. That interest is in no sense a means of calculating an appropriate lump sum, but is payable in its own character as interest. Accordingly, it is income, and assessable to tax. This part of the judgment under appeal must be upheld. The final question relates to the claimed deductibility of solicitor and client costs. It will be remembered that the plaintiff's case was an unusually difficult one, which was not finally resolved without an appeal to the Court of Appeal of New South Wales, an application for special leave to appeal to the High Court of Australia and the hearing of an appeal in that ultimate Court. The solicitor and client costs incurred by the plaintiff, over and above the amounts of party and party costs allowed to her, amounted to the sum of $215,578.87. The learned trial judge, holding that both amounts of interest the assessability of which was in dispute were assessable to tax, held also that a proportion of the solicitor and client costs was deductible in relation to the s 94 interest. He considered that the s 95 interest was not at all related to the legal costs because "the proceedings which an applicant commences conclude once judgment is given". It seems to me that the solicitor and client costs were incurred in order to obtain the whole benefit of the judgment of the Supreme Court of New South Wales. I do not understand how some part of that benefit can be split off and held to be outside the purpose for which the plaintiff entered upon the expenditure. As the learned trial judge recognised, it is the purpose for which legal costs are incurred which determines the character of the expenditure for income tax purposes: Hallstroms Pty Ltd v Commissioner of Taxation (1946) 72 CLR 634 at 647; Commissioner of Taxation v Rowe (1995) 60 FCR 99 at 113-114. When the plaintiff incurred costs invoking the jurisdiction of the Supreme Court, those costs were expended in order to secure all the rights to which her claim might entitle her. One of those rights was the right to receive interest on any judgment until payment. That right may not generally be reflected in a large amount. But where a defendant appeals on issues including those of liability, and obtains a stay, whether by order or by the plaintiff's acquiescence in his right to it, interest under s 95 becomes a matter of importance. Even if the costs at first instance should be regarded as unrelated to that interest (which I do not think would be correct), the costs in relation to the appellate hearings were certainly incurred to establish or maintain the plaintiff's challenged entitlement to the whole amount due, that is, the verdict and the interest. The respondent to the appeals was not fighting to retain part only of the full amount due to her. If, for example, a year into the appeal process, which in this case in fact extended for over two years and three months (hence the large amount of interest involved), the plaintiff had received an offer of settlement and had considered the question whether the costs being expended in defence of the appeals were excessive in comparison with what she stood to gain, in the homely phrase whether the game was worth the candle, it would be absurd to suggest she would not have taken into account the large sum of s 95 interest as part of what those costs might achieve for her. And this amount of interest would have been a bargaining chip in any negotiation. Not only are the litigation and the interest inseparable in terms of the plaintiff's conduct; they also run together in time. What delayed the payment, and so led to the interest being incurred, was the succession of appeals; and, upon the High Court handing down its decision, payment was effected immediately. Interest calculations under s 95 were actually made to the very day of decision. In that situation, it is wrong to regard the costs as incurred to gain part only (the original verdict sum) of the daily accumulating amount, which in practical reality was the subject matter under dispute over the period occupied by the appeals, and to which the plaintiff became indisputably entitled when the High Court brought down the curtain on the litigation. At the very least, so much of the solicitor and client sum as related to the appeals was incurred to defend the right to the full sum due under the judgment, including the interest. But, in my opinion, the better view is to regard the litigation, from the beginning, as aimed at securing the plaintiff's full rights, including her rights under s 95 in the always likely event that an appeal or appeals should delay the receipt of any verdict. Accordingly, I think the appellant is entitled to a deduction of a proportion of the solicitor and client costs, being the same proportion as the s 95 interest bears to the total amount of the judgment and interest. The appeal should be allowed to the extent I have indicated. In view of the Commissioner's agreement to pay the costs in any event, it is unnecessary to make an order as to the costs of the appeal.
I certify that this and the preceding thirteen (13) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Burchett
Counsel for the Appellant: Mr D H Bloom QC with Mr J W Durack SC and Mr K J Burges
Solicitor for the Appellant: Warren McKeon Dickson
Counsel for the Respondent: Mr D F Jackson QC with Mr R F Edmonds SC
Solicitor for the Respondent: Australian Government Solicitor
Rogers
Whitaker
(1992) 175 CLR 479
(1991) 171 CLR 657
(1966) 117 CLR 514
(1990) 170 CLR 124
(1997) 187 CLR 266
(1995) 60 FCR 99
(1991) 172 CLR 60
(1996) 186 CLR 20
(1991) 24 NSWLR 54
(1993) 9 NSWCCR 309
(1995) 38 NSWLR 168
(1993) 29 NSWLR 734
(1979) 29 ALR 663
(1995) 59 FCR 103
(1946) 72 CLR 634
(1981) 147 CLR 278
(1975) 132 CLR 642
(1981) 148 CLR 448
(1930) 44 CLR 24
(1991) 23 NSWLR 600
(1980) 146 CLR 1
(1978) 140 CLR 427
(1961) 104 CLR 57
(1963) 108 CLR 491
(1983) 151 CLR 117
(1968) 118 CLR 540
(1961) 105 CLR 549
(1962) 108 CLR 541
(1968) 122 CLR 649
(1961) 106 CLR 340
(1978) 144 CLR 202