Sydney Refractive Surgery Centre Pty Ltd v Commissioner of Taxation

Jury Findings 15 The imputations the jury found had been made out were conveniently recorded by Studdert J in a chart reproduced below (SRSC v Beaumont, at [3]): 'SRSC: Imputations Summary

Imputation Beaumont Beaumont Broadcasts: Broadcasts: Interview: Interview: SRSC Dr Lawless SRC Dr Lawless

(b) deceitful scheme to ● ● ● ● trick with video

(c) disgrace to profession ● ● in that recommends surgery

(d) irresponsible eye surgeon ● ● ● ●

(e) no patient gone blind ● ● ● ●

(f) throw away spectacles ● ● ● ●

(g) absurdly inflated costs ● ●

(h) false advertisements ● '

Judgment 16 Studdert J rejected the defences pleaded by the defendants. In particular, he rejected the defence of truth, finding that the defendants had not established the truth of any of the imputations found by the jury. His Honour also rejected the defence of comment, either because the imputations related to matters of fact rather than opinion, or because the opinion was not based on proper material or was not an opinion genuinely held by the person expressing it. 17 Studdert J first considered Dr Lawless' claim for damages. His Honour observed (at [259]) that: '[i]t is relevant to heed the circumstance that [SRSC] makes a claim which encompasses the alleged economic loss of [SRSC] by reason of the impact of these publications. [Dr Lawless] was at all relevant times pursuing his professional activities through [SRSC] and as a shareholder will directly benefit from any award of damages to [SRSC] and will thus be compensated in [SRSC's] claim for any loss of income occasioned by the television broadcasts'. 18 When turning to the assessment of damages to be awarded to SRSC, Studdert J said this (at [294]-[295]): '[SRSC], of course, has no claim for harm to feelings available to it, but it is entitled to maintain a claim for harm to its trading reputation. The way the case has been presented by [SRSC] has been to make a claim for loss of business, and it has sought to quantify that claim and also to quantify a claim for loss of good will. The issue in this case, subject to proof of [SRSC's] entitlement to damages at all, has been the quantification of loss.' 19 Studdert J recorded (at [297]) that the number of laser procedures performed by SRSC dropped from 2,390 for the year ended 30 June 1998 to 1,617 for the year ended 30 June 1999. He found that SRSC had ceased to trade beyond 30 June 1999 and thus performed no procedures at all beyond that date. His Honour also found (at [316]) that it was unlikely that a potential patient would have been deterred, after 1 July 2000, from undertaking surgery because of any continuing impact of the television broadcasts. 20 SRSC advanced at the trial three methods of assessing the loss it had suffered in consequence of the defamatory broadcasts. · The first was to determine the profits that SRSC had lost during the period from 6 May 1998 to 30 June 1999. SRSC put forward various calculations, based on different assumptions as to the number of procedures that would have been conducted had the defamatory broadcasts not taken place. · The second was to determine the profits that SRSC had lost during the period from 6 May 1998 to 30 June 2001. Once again, SRSC supported this hypothesis with various calculations based on different assumptions as to the number of procedures that would have been carried out had the defamatory broadcasts not taken place. · The third was to determine the reduction in the value of SRSC's business which had occurred by 30 June 1999 in consequence of the reduction in the number of laser procedures it had conducted during the preceding year. 21 The first and second methods were presented as alternatives to each other, with SRSC contending for the first. SRSC presented the third method as an alternative to the first two. 22 Studdert J first addressed SRSC's claim that its damages claim should extend to losses incurred by it after 30 June 1999. His Honour held (at [319]) that this claim was 'fundamentally flawed'. SRSC had simply ceased to carry on its business from 1 July 1999. It had made no attempt to mitigate its loss, for example by changing its name. In these circumstances, SRSC was not entitled to maintain a claim for economic loss beyond 30 June 1999. 23 Studdert J next considered SRSC's 'reduction in value' claim. His Honour noted SRSC's expert had acknowledged that in the absence of any sale of SRSC's business, it was inappropriate to include a loss of capital value in the assessment of damages. SRSC simply ceased to offer procedures to the public and the doctors through whom it earned its income thereupon provided their services to another corporate entity. There was no evidence that SRSC had any contractual entitlement to retain the services of those doctors. It followed that the claim had to be rejected. 24 Studdert J then considered the evidence bearing on the reduction in laser procedures during the period from 6 May 1998 to 30 June 1999 that could be attributed to the defamatory broadcasts. His Honour accepted neither the estimate of Dr Callaghan, called by the plaintiffs, nor that of Dr Beaton, called by the defendants, as to the number of procedures that would have taken place but for the broadcasts. His Honour decided that the best approach was simply to take the average number of laser procedures for the twelve months prior to the publications and to use that average figure as a guide for estimating the procedures that would have occurred during the post publication period up to 30 June 1999, in the absence of the defamatory publications. He reduced the figure so calculated by ten per cent to take account of the adverse effect of the broadcasts, independently of the defamatory imputations contained in them. 25 On this basis, Studdert J found that but for the adverse impact of the defamatory broadcasts, SRC would have performed 2,814 laser procedures during the period from 6 May 1998 to 30 June 1999. SRSC in fact performed 1,928 procedures during that period. After making the allowance of ten per cent already referred to, his Honour concluded that in the eight weeks immediately before 30 June 1998, SRSC had lost 82 laser procedures by reason of the defamatory broadcasts. The corresponding figure for the year ending 30 June 1999 was 715 procedures. 26 Studdert J calculated SRSC's loss of revenue as follows: · Year ended 30 June 1998 82 procedures, at an average loss of revenue of $2,113.70 per procedure = $173,323.40. · Year ended 30 June 1999 715 procedures, at an average loss of revenue of $1,991.18 per procedure = $1,423,693.70 Total Lost Revenue $173,323.40 plus $1,423,693.70 = $1,597,017.10 27 From the gross figure of $1,597,017.10 his Honour deducted: · laser cost savings of $204.49 per procedure (797 x $204.49 = $162,978.53) and · labour cost savings of $143.43 per procedure (797 x $143.43 = $114,313.71). This produced a total costs savings of $277,292.24. 28 Accordingly, SRSC's lost net profit before tax attributable to the defamatory imputations was $1,319,724.96 ($1,597,017.10 - $277,292.14 = $1,319,724.96). 29 Studdert J recorded that the question of whether SRSC's award of damages would attract a taxation liability had been a matter of strenuous debate. However, it appears that the debate before Studdert J focussed on whether SRSC would be liable to pay capital gains tax in respect of the Sum. I was informed that there had been no substantial dispute between the parties as to whether the Sum would constitute a receipt of income in SRSC's hands and, for that reason, would form part of its assessable income. Both SRSC and the defendants in the defamation proceedings apparently took the view that the Sum would not be income according to ordinary concepts in SRSC's hands. Accordingly, they considered that, subject to the capital gains argument, it was appropriate for Studdert J to reduce the damages award to take account of the income tax that SRSC would have had to pay on the net revenue lost in consequence of the defamatory broadcasts. 30 Nonetheless, Studdert J addressed at some length (at [374]), the question of whether the Sum ought to be treated as 'ordinary income' for the purpose of s 6-5 of the ITAA. He referred to Cullen v Trappell (1980) 146 CLR 1, in which a majority of the High Court, following British Transport Commission v Gourley [1956] AC 185, held (in his Honour's words) that: 'in an action for tort where a person is claiming damages in respect of impairment of earning capacity following injury, any allowance in respect of such a claim is made by reference to nett loss. The court does not include in the assessment the income tax that the person would have had to pay on lost earnings because he does not have to pay income tax on that assessment. … The damages are awarded for loss of earning capacity, even though they may be measured for the past by reference to comparable earnings of others and even though there may be agreement between the parties as to wage loss for the past'. 31 Studdert J referred to Rubber Improvement Ltd v Daily Telegraph Ltd [1964] AC 234, in support of the proposition that the Gourley principle applies where a company establishes that its profits has been diminished by defamatory publications. His Honour quoted a well-known passage from the speech of Lord Reid ([1964] AC, at 262): 'There can be no difference in principle between loss of income caused by negligence and loss of income caused by a libel. Let me take first the case of the plaintiff company. A company cannot be injured in its feelings, it can only be injured in its pocket. Its reputation can be injured by a libel but that injury must sound in money. The injury need not necessarily be confined to loss of income. Its goodwill may be injured. But in so far as the company establishes that the libel has, or has probably, diminished its profits, I think that Gourley's case is relevant'. (Emphasis added.) 32 Studdert J considered that, although counsel had not referred him to any Australian authority directly in point, he should follow Rubber Improvement v Daily Telegraph. Thus, the damages awarded to SRSC were not to be treated as its 'ordinary income' for the purposes of s 6-5 of the ITAA and the quantum of damages had to be reduced to take account of the notional tax SRSC would have had to pay on the net revenue it would have earned from its lost laser procedures. Otherwise SRSC would be over-compensated for its loss. 33 Studdert J then addressed a submission made on behalf of SRSC that the payment of damages would be treated as a 'capital gain', thereby attracting liability to income tax pursuant to s 102-5 of the ITAA. If accepted, the effect of this submission would have been to increase the damages award to take account of SRSC's liability to pay capital gains tax on the Sum. 34 His Honour adverted to the terms of s 118-37 of the ITAA, which requires a capital gain made from a CGT event to be disregarded if it relates to compensation or damages received for any wrong or injury suffered in the recipient's occupation. He pointed out that the Commissioner had issued a ruling excluding corporations from the exemption, but noted that the defendants (Seven and Dr Beaumont) had argued that the ruling related to the terms of the ITAA 1936 and did not apply to the different language used in the ITAA. The defendants had submitted that the damages award would not result in any capital gain to SRSC for the purposes of the ITAA. 35 Studdert J considered that there was merit in the defendants' submission and, accordingly, that SRSC would have a substantial argument to make to the Commissioner as to why it should not have to pay capital gains tax in relation to the award of damages. However, his Honour thought that, in the circumstances, justice could best be served by reserving leave to SRSC to apply for additional damages referable to capital gains tax, should it be found liable to pay such tax. Accordingly, he made no provision for capital gains tax in his assessment of the damages to be awarded to SRSC. 36 Although Studdert J made no provision for capital gains tax in the damages award, he reduced SRSC's 'lost nett profit' by 36 per cent to take account of the tax that SRSC would have had to pay on its lost profit, had that profit been derived by it. After rounding off, this produced an amount of $844,264.00. 37 Studdert J assessed the damages attributable to each defamatory publication as follows: · in respect of the 1998 interview (the publication of which was limited) - $4,000.00; · in respect of the program broadcast on 4 May 1998 in Victoria - $75,000.00; and · in respect of the program broadcast on 5 May 1998 in New South Wales - $765,624.00. 38 Studdert J then considered the responsibility of the defendants (Dr Beaumont, HSV and ATS) as joint tortfeasors. His Honour proceeded to make the following orders relevant to SRSC's claims (retaining the original numbering): '4. In the proceedings by [SRSC] arising from the publication in April 1998, verdict for [SRSC] against [Dr Beaumont] in the sum of $4000, together with interest in a sum to be determined. 5. In the proceedings by [SRSC] arising from the publication on 4 May 1998: (a) verdict for [SRSC] against [Dr Beaumont] and [HSV] concerning imputations (b), (d), (e), (f) and (g) in the sum of $62,500, together with interest in a sum to be determined; (b) verdict for [SRSC] against [HSV] concerning imputation (h) in the sum of $12,500, together with interest in a sum to be determined. 6. In the proceedings by [SRSC] arising from the publication on 5 May 1998: (a) verdict for [SRSC] against [Dr Beaumont] and [ATS] concerning imputations (b), (d), (e), (f) and (g) in the sum of $638,020, together with interest in a sum to be determined; (b) verdict for [SRSC] against [ATS] concerning imputation (h) in the sum of $127,604, together with interest in a sum to be determined. 7. In respect of the claim by [SRSC] against [Dr Beaumont] and [HSV] and in respect of the claim by [SRSC] against [Dr Beaumont] and [ATS] I reserve leave to [SRSC] to apply for additional damages referable to capital gains tax considerations should [SRSC] be found liable to pay such tax'.

SRSC 39 SRSC supports Studdert J's reasoning and emphasises the distinction between the character of a payment and the manner of its calculation or quantification: Tinkler v Commissioner of Taxation (1979) 29 ALR 663, at 672, per Deane and Fisher JJ. Mr Smark SC, who appeared with Ms McBride for SRSC, argued that the purposes of an award of general damages for defamation, where the plaintiff is a corporation, are to compensate for harm to reputation and to vindicate that reputation by establishing the falsity of the defamatory publications. Where a corporation claims that the defamatory publications have injured its reputation so as to affect its trade or business adversely, the damages award encompasses that form of harm. 40 In this case, so Mr Smark argued, SRSC complained of injury to its credit and reputation and sought damages for defamation, loss of business and economic loss. Its case before Studdert J concentrated on the loss of business it had sustained. His Honour rejected SRSC's claim for loss of business, insofar as it extended beyond 30 June 1999, and also rejected its claim for reduction in the value of the business. However, he awarded a lump sum (comprising three separate amounts for each defamatory publication) calculated by reference to lost earnings up to 30 June 1999. This method of calculation, so Mr Smark argued, does not alter the fact that SRSC received damages for injury to its business reputation. It follows that the damages award in favour of SRSC represents a receipt by it on capital account and is not income according to ordinary concepts.

The Commissioner 41 The Commissioner submits that the Sum received by SRSC is to be regarded as income according to ordinary concepts for the purposes of s 6-5 of the ITAA. According to the Commissioner, the test of whether an amount received by a taxpayer is ordinary income is whether the receipt in the hands of the taxpayer bears the character of income. The Commissioner relies on the proposition that the moneys recovered from any source representing items on revenue account must be regarded as income according to ordinary concepts. 42 In this case, SRSC made a claim for loss of profits as well as loss of business. Had the profits been realised, they would have been assessable as ordinary income. Thus the damages awarded by Studdert J represented items on revenue account and formed part of SRSC's assessable income. The case is analogous to a damages award for loss of profits, which is treated as income in the hands of the successful plaintiff, rather than a damages award for loss of earning capacity, which is characterised as a receipt on capital account. 43 Mr Hmelnitsky, who appeared for the Commissioner, acknowledged that the authorities seem to establish that an undifferentiated lump sum award, covering both economic and non-economic loss, cannot be dissected for the purposes of determining whether the whole or any part of the award should be treated as income in the plaintiff's hands. But SRSC had been careful in the Supreme Court proceedings to differentiate between its claim for loss of goodwill and its claim for loss of profits.

Section 6-5 of the ITAA 44 As the joint judgment observed in Federal Commissioner of Taxation v Stone (2005) 222 CLR 289, at 294 [8], the reference to 'income according to ordinary concepts' in s 6-5(1) of the ITAA is evidently to Sir Frederick Jordan's statement in Scott v Federal Commissioner of Taxation (1935) 35 SR (NSW) 215, at 219, as follows: 'The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts.' 45 Whether a particular receipt is income on ordinary principles depends upon the character of the receipt in the hands of the taxpayer: GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124, at 136, per curiam; The Federal Coke Co Ltd v Federal Commissioner of Taxation (1977) 34 FLR 375, at 388, per Bowen CJ, FCT v Stone, at 296 [16]. The question in the present case therefore turns on the character of the Sum received by SRSC in the 2004 year.

Defamation Claims by Trading Corporations 46 In South Hetton Coal Co v North-Eastern News Association [1894] 1 QB 133, Lord Esher MR held (at 139) that a corporation can be defamed by statements: 'with regard to their mode of carrying on business, such as to lead people of ordinary sense to the opinion that they conduct their business badly and inefficiently.' See also at 141, per Lopes LJ (a corporation may not maintain an action for anything reflecting on it personally, but can maintain an action for a libel 'reflecting on the management of [its] trade or business'); at 145, per Kay LJ. 47 It was also held in South Hetton that an action will lie without proof of special damage and that the quantum of damages is at large: at 139, per Lord Esher MR; at 143, per Lopes LJ; at 148, per Kay LJ. In Australia, South Hetton has been accepted as accurately stating the law: Barnes & Co Ltd v Sharpe (1910) 11 CLR 462, at 473-474, per Griffith CJ; at 478-479, per O'Connor J; at 485, per Higgins J. 48 In a recent case, the New South Wales Court of Appeal approved the explanation of the distinction between defamation in its generally understood meaning and business defamation, given by Gatley on Libel and Slander (10th ed, 2004) (P Milmo and WVH Rogers, eds), at [2.7], as follows: 'An imputation may be defamatory without falling within any of the specific heads so far set out. Any imputation is defamatory if it would tend to lower the claimant in the estimation of right-thinking members of society generally or would be likely to affect a person adversely in the estimation of reasonable people generally. For instance, to say of someone that he is ungrateful would scarcely expose him to hatred, ridicule or contempt, or cause him to be avoided, yet it has been held defamatory. To say of a person carrying on any trade or profession, or holding any office, that he is incompetent at it, may not even lower him in the estimation of others, but the words will be defamatory because of the injury to his reputation in his trade, profession or office.' (Citations omitted; emphasis added.) Gacic v John Fairfax Publications Pty Ltd (2006) 66 NSWLR 675, at 678 [32], per Beazley JA, with whom Handley and Ipp JJA agreed. 49 An appeal to the High Court in from the judgment of the Court of Appealwas, in substance, dismissed and there was no challenge to this statement of principle: John Fairfax v Gacic. However, Gleeson CJ and Crennan J observed (at 404[2]) that the case concerned 'that form of defamation which involves injury to business reputation'. Their Honours also observed that statements may injure a person's professional reputation even though they may not evoke feelings of hatred, ridicule or contempt. 50 The statements of principle in Gacic, both in the Court of Appeal and the High Court, are consistent with the holding of a Full Court of this Court that a necessary element of an action in defamation by a trading corporation is that it has sustained injury to its reputation 'in the way of its trade or business': Australian Broadcasting Corporation v Comalco Ltd (1986) 12 FCR 510, at 586-587, per Neaves J; at 599-603, per Pincus J; at 560, per Smithers J (agreeing). The Court rejected the opinion expressed by Mahoney JA (dissenting) in Andrews v John Fairfax & Sons Ltd [1980] 2 NSWLR 225, at 255, that a trading corporation may recover damages for 'injury to reputation as such'.

Rubber Improvements v Daily Telegraph 51 None of these cases considered the significance of taxation in assessing the damages to be awarded to a trading corporation for defamation. That issue was addressed in Rubber Improvements. In that case,two juries had awarded substantial damages for defamation in favour of a trading corporation. The plaintiff corporation did not plead that it had sustained special damage and adduced little or no evidence of financial loss. In determining that the awards were excessive, Lord Reid, in a frequently cited judgment, held that a damages award for libel, insofar as it compensates for loss of income, should allow for the corporation's notional obligation to pay income tax, had the lost income been earned. 52 Lord Reid first referred to Gourley, which held that damages for loss of income caused by a tort must be assessed after allowing for the income tax that would have been payable by the plaintiff had he or she actually earned the income. His Lordship explained (at 261-262) the rationale for the decision in Gourley as follows: 'As damages are not subject to tax, [the plaintiff] would have recovered far more than his real loss, if he had recovered the gross amount [of his loss of income] and accordingly it was held that he was only entitled to receive [the after-tax amount] in respect of his loss of income as this was sufficient to compensate him fully for the income which he had lost by the fault of the defendants.' Lord Reid continued as follows (at 262): 'There can be no difference in principle between loss of income caused by negligence and loss of income caused by a libel. Let me take first the case of the plaintiff company. A company cannot be injured in its feelings, it can only be injured in its pocket. Its reputation can be injured by a libel but that injury must sound in money. The injury need not necessarily be confined to loss of income. Its goodwill may be injured. But in so far as the company establishes that the libel has, or has probably, diminished its profits, I think that Gourley's case is relevant. But damages for libel have to be assessed by a jury, and juries are not expected to make mathematical calculations, so they can only deal with this matter on broad lines. I think that a jury ought to be directed to the effect that if they think that the plaintiff company has proved that it has suffered or will suffer loss of profit as a result of the libel they must bear in mind that the company would have had to pay income tax at the standard rate out of that profit if it had been earned and would only have been entitled to keep the balance. So in assessing damages they ought not to take into account the whole of that profit, but should make allowance for the obligation to pay income tax out of it.' (Emphasis added.) 53 On its face, this reasoning suggests that an award of damages for business defamation, insofar as it incorporates compensation for loss of income by reason of injury to a trading corporation's business reputation, is not taxable. However, the analysis by Lord Reid is not necessarily determinative of the issue before me, for three reasons. 54 First, the issue presented by Rubber Improvements was not specifically whether the damages award was taxable in the hands of the successful plaintiff. Lord Reid plainly assumed that it would not be taxable, but their Lordships did not strictly have to decide that question. (I leave to one side any conceivable differences between the definition of income for tax purposes in the United Kingdom in 1964 and the criterion embodied in s 6-5 of the ITAA.) 55 Secondly, it is at least theoretically possible that courts could formulate principles for the assessment of damages, whether in defamation or otherwise, quite independently of the taxability of the award in the hands of the successful plaintiff or applicant. Barwick CJ in Atlas Tiles Ltd v Briers (1978) 144 CLR 202, for example, considered (at 212) that liability to income tax was irrelevant to assessing damages for loss of earning capacity and that it was a matter for the legislature to determine whether and, if so, to what extent damages awarded for personal injuries should be included in assessable income. 56 Thirdly, the House of Lords in Rubber Improvements was concerned with undifferentiated lump sum jury awards that, as Lord Reid noted, were not necessarily confined to compensation for loss of income by the plaintiff corporation. Their Lordships were not concerned with a case like the present, where the damages award was made by a Judge sitting alone expressly by reference to the corporation's loss of income attributable to the defamatory publications. It appears to have been common ground before me that receipt of an undifferentiated award of damages of the kind considered in Rubber Improvements would not be regarded as assessable income in Australia. This is because a lump sum award of damages is ordinarily treated as a single, undissected amount which must be considered as a whole: McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381, at 391 per curiam. 57 Nonetheless, the reasoning in Rubber Improvements is important for present purposes. In part, this is because of the reliance placed by Lord Reid on the decision in Gourley and the subsequent acceptance of that decision in Australia. In part, it is because the statement of principle in Rubber Improvements suggests that an award of damages for business defamation is not to be characterised as income for tax purposes, even if assessed by reference to lost profits.

Gourley 58 The principle for which Gourley stands has been controversial in Australia: see, generally, H Luntz, Assessment of Damages for Personal Injury and Death (4th ed, 2002), at [5.7.3]-[5.7.4]. In Atlas Tiles, decided in December 1978, a bare majority of a five member High Court refused to follow Gourley (Barwick CJ, Jacobs and Murphy JJ; Gibbs and Stephen JJ dissenting). Seventeen months later, a bare majority of a seven member High Court overruled Atlas Tiles and followed Gourley: Cullen v Trappell (Gibbs, Stephen, Mason and Wilson JJ; Barwick CJ, Murphy and Aickin JJ dissenting). 59 The decision in Cullen v Trappell effectively ended the continuing controversy so far as Australian courts are concerned. However, in determining the significance of the Gourley principle for present purposes the key judgment is that of Gibbs J in Atlas Tiles. In Cullen v Trappell, Gibbs J said that his views had been fully expressed in his dissenting judgment in Atlas Tiles and that there was no point in restating them. The other three members of the majority in Cullen v Trappell simply expressed their agreement with the reasoning of Gibbs J. 60 The issue in Atlas Tiles was whether the trial Judge had been correct, when assessing damages for wrongful dismissal, to disregard the incidence of income tax on the remuneration the plaintiff would have received had he continued in employment. Gibbs J said (at 220) that the issue could be restated by asking whether the principle in Gourley should have been applied to the assessment of damages. 61 Gibbs J pointed out that the principle in Gourley is not confined to damages for personal injury. He specifically noted that in Rubber Improvements the House of Lords had applied the principle to 'the assessment of damages for loss of profit arising from libel'. His Honour added (at 223-224) that: 'Speaking generally, the principle will apply only where the earnings or profits lost would have been taxable if the plaintiff had received them but the damages awarded to compensate the plaintiff are not taxable: see Parsons v B.N.M. Laboratories Ltd [[1964] 1 QB 95, at 124-126, 133-135] and Groves v United Pacific Transport Pty Ltd and Thompson [[1965] Qd R 62, at 63].' 62 Gibbs J stated (at 223-224) that the measure of damages for wrongful dismissal is the estimated pecuniary loss resulting from the premature determination of the plaintiff's service. Citing McGregor on Damages (13th ed, 1972), at par 884, he described this measure, prima facie, as: 'the amount that the plaintiff would have earned had the employment continued according to contract subject to a deduction in respect of any amount accruing from any other employment which the plaintiff, in minimizing damages, either had obtained or should reasonably have obtained'. 63 His Honour considered (at 223-224) that Gourley rested on 'sound principles' and that the English Courts had been correct to apply Gourley to the assessment of damages in wrongful dismissal cases. The latter proposition was, however, subject to the proviso that: 'the lost earnings would have been taxable in the hands of the plaintiff if he had received them, and that the damages when received are not subject to tax'. (Emphasis added.) 64 Gibbs J thought it plain that portion of the plaintiff's lost remuneration would have been taxable had he received it. Section 26(d) of the ITTA 1936 had the effect that five per cent only of a lump sum award in consequence of termination of employment, whether made by a court or otherwise, was taxable, while the remaining 95 per cent was not (at 225). His Honour held (at 227) that Gourley should apply to the assessment of damages where only a small proportion of the damages award was taxable, since to do otherwise would over-compensate the plaintiff. Under-compensation could be avoided by adjusting the result to take account of the taxation regime applicable to the lump sum award.

Groves v United Pacific Transport 65 In the passage in his judgment in Atlas Tiles quoted at [61] above, Gibbs J referred with approval to his own judgment in Groves v United Pacific Transport, in the Supreme Court of Queensland. Later in his judgment in Atlas Tiles, Gibbs J expressly stated (at 223) that he adhered to the opinion he had expressed in Groves v United Pacific Transport that in Australia an award of damages for personal injuries is not taxable. 66 The issue in Groves v United Pacific Transport, which predated both Atlas Tiles and Cullen v Trappell, was whether Gourley required income tax to be taken into account in the assessment of damages in respect of earnings during the period up to the date of trial. Gibbs J quoted the remark of Pearson LJ in Parsons v BNM Laboratories, a case also cited by Gibbs J in Atlas Tiles, that (at 134): 'the principle of the Gourley Case is applicable only if the lost earnings or profits are taxable and the damages are not'. (Emphasis added.) 67 In Groves v United Pacific Transport, the plaintiff apparently argued that the damages would be taxable under the predecessor to s 26(d) of the ITAA 1936 ([64] above). Gibbs J rejected the argument (at 64-65): 'The answer is in my opinion to be found by considering the true nature of the damages awarded in such a case. In Graham v Baker (1961) 106 CLR 340, at pp 346-7, Dixon CJ, and Kitto and Taylor JJ said: "So farthe matter has been discussed as if the right of a plaintiff whose earning capacity has been diminished by the defendant's negligence is concerned with two separate matters, i.e., loss of wages up to the time of trial and an estimated future loss because of his diminished earning capacity. It is, we think, necessary to point out that this is not so. A plaintiff's right of action is complete at the time when his injuries are sustained and if it were possible in the ordinary course of things to obtain an assessment of his damages immediately it would be necessary to make an assessment of the probable economic loss which would result from his injuries. But for at least two obvious reasons it has been found convenient to assess an injured plaintiff's loss by reference to the actual loss of wages which occurs up to the time of trial and which can be more or less precisely ascertained and then, having regard to the plaintiff's proved condition at the time of trial, to attempt some assessment of his future loss." Their Honours went on to say that "an injured plaintiff recovers not merely because his earning capacity has been diminished but because the diminution of his earning capacity is or may be productive of financial loss. 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. In determining what financial loss the plaintiff has probably suffered up to the date of trial by reason of the impairment of his earning capacity, as well as in considering what financial loss he is likely to suffer in future, I must therefore take his tax position into account.' See also Federal Commissioner of Taxation v Slaven (1984) 1 FCR 1, at 22-23, per curiam; CSR Ltd v Eddy (2005) 80 ALJR 59, at 69 [30], per Gleeson CJ, Gummow and Heydon JJ; Husher v Husher (1999) 197 CLR 138, at 143 [7], per Gleeson CJ, Gummow, Kirby and Hayne JJ. 68 The decision in Groves v United Pacific Transport, given that it was approved in Atlas v Tiles and Cullen v Trappell,establishes that an award of damages for loss of earning capacity is not taxable even if calculated precisely by reference to earnings lost prior to the date of the trial. The principle applies to an award of pre-judgment interest, which has been held to have the character of a receipt of a capital nature: Whitaker v Commissioner of Taxation (1998) 82 FCR 261. The reason is that the award of an interest is an integral and essential element in the compensation for the plaintiff's list or diminished earning capacity: at 264, per Black CJ.

Principles 69 The following propositions seem to me to emerge from the authorities I have discussed. 1. The Gourley principle applies in Australia to damages awards in personal injury cases. That is, a damages award, insofar as it compensates the plaintiff in respect of loss of income, must be assessed after taking into account the plaintiff's liability to pay tax on the income he or she would have derived but for the compensable injury: Cullen v Trapell. 2. Subject to limited exceptions, the Gourley principle applies where the lost income would have been taxable if received by the plaintiff and the damages award is not assessable income in the hands of the plaintiff: Groves v United Pacific Transport, per Gibbs J; Atlas Tiles, per Gibbs J. An example of an exceptional case (in the context of a wrongful dismissal claim) is Atlas Tiles, where a small portion of the damages award was taxable. 3. Subject to any relevant statute, an award of damages in a personal injuries claim, even if calculated by reference to lost income, is not income according to ordinary concepts for the purposes of s 6-5 of the ITAA: Cullen v Trapell (endorsing the judgment of Gibbs J in Atlas Tiles); Groves v United Pacific Transport. The reason is that the award of damages is, in point of principle, for impairment of the plaintiff's earning capacity and not for loss of income as such: Graham v Baker. 4. This proposition applies even if the award is limited to damages in respect of lost income (in the sense explained in the previous paragraph) during a period prior to trial: Graham v Baker; Groves v United Public Transport. 5. It follows that there is a clear distinction between the character of a payment for the purposes of s 6-5 of the ITAA and the manner of its calculation or quantification: Tinkler v FCT. Indeed, the latter might provide a quite misleading guide to the former: Tinkler v FCT. 6. The Gourley principle applies in Australia to an award of damages for wrongful dismissal, notwithstanding that the calculation of damages is based on the precise amount of income lost by the plaintiff in consequence of the wrongful termination of his or her employment: Atlas Tiles, per Gibbs J, approved in Cullen v Trapell. A damages award in such a case is not income according to ordinary concepts. 7. A damages award for defamation of a trading corporation is intended to compensate for the injury sustained by the corporation to its reputation in the way of business: Gacic v John Fairfax; ABC v Comalco. The assessment of damages is 'at large', but may be undertaken in a particular case by reference to the loss of income attributable to the defamatory publication: Barnes & Co v Sharpe. 8. Where damages for defamation are awarded to a trading corporation and are assessed by reference to the plaintiff's loss of income, the Gourley principle applies to the assessment: Rubber Improvement; Atlas Tiles, per Gibbs J, approved in Cullen v Trappell. 9. As has been noted, subject to limited exceptions, Gourley applies only where the income that would have been derived by the plaintiff would have been taxable and the damages award is not subject to tax. It follows that a damages award in favour of a trading corporation for injury to its reputation in the way of business, assessed in the manner described, is not income according to ordinary concepts when received by the plaintiff corporation. The reason why this is so is that damages for defamation of a trading corporation are awarded for loss of business reputation, however they may be calculated: see authorities cited in para 7 above. Thus even if the award is assessed exclusively by reference to loss of income, the award does not constitute income in the hands of the plaintiff corporation. In this respect the award is conceptually similar to damages awarded for loss of earning capacity.

Application of Principles 70 SRSC's pleaded case in the Supreme Court of New South Wales was that the defamatory publications had injured it in its reputation in the way of its trade or business. It succeeded in making out that case. 71 SRSC put its claim for damages essentially on two alternative bases. One was for the loss it sustained by the reduction in the value of its business attributable to the defamatory publications. The second was for the loss of profits sustained during a closed period by reason of the reduction in the number of laser procedures attributable to the defamatory publications. The former claim was rejected; the latter was accepted. Nonetheless, the award of damages in favour of SRSC was to compensate it for the injury to its reputation in the way of business. The fact that the award was calculated by reference to loss of profits does not alter the character of the payment received by SRSC. It was compensation for injury to a capital asset and thus the payment received by SRSC was not income on ordinary concepts. For this reason, it was appropriate for Studdert J to reduce the damages award to take account of SRSC's notional liability to income tax had it received the lost profits.

Other Authorities 72 Mr Hmelnitsky submitted that this case should be regarded as governed by the principle that damages representing trading profit which would have been earned but for the defendants' tortious conduct are to be regarded as a trading receipt. He relied particularly on two cases: London and Thames Haven Oil Wharfs Ltd v Attwool [1967] 2 All ER 124, and Liftronic Pty Ltd v Commissioner of Taxation (1996) 66 FCR 175. 73 In Thames Haven, a company owned jetties which were damaged by the negligence of the operators of a tanker. The company sustained loss in the form of physical damage to the jetty and consequential loss in the form of lost profits during the period of 380 days the jetty was unusable. The Court of Appeal held that the damages for physical injury were quite separate from the damages recovered in respect of the loss of profitable use of the jetty. The latter were held to be taxable as a trading receipt. Diplock LJ stated the relevant rule as follows (at 134): 'Where,pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received instead of the compensation.' No reference was made to Gourley. 74 Thames Haven was followed by Foster J in Liftronic. In that case, Liftronic purchased lift equipment from Hyundai which proved to be defective. It succeeded in an action for breach of contract. The damages included $2.238 million for 'loss of profits' for a period of six years. No deduction was made for the incidence of income tax on the lost profits (see at 194). Foster J held (at 197) that the breaches of contract did not destroy the goodwill or earning capacity of Liftronic. There was a mere restriction of trading opportunities, creating a 'hole in profits' that the award of damages was intended to fill. Hence the amounts awarded as loss of profits was properly to be characterised as income in accordance with ordinary concepts. 75 There are differences between the payments in these two cases and the damages award at issue in the present case. The award made by Studdert J, although calculated by reference to lost profits, was in respect of injury to SRSC's trading reputation brought about by the defamatory publications. His Honour was presented with alternative means of assessing the damages for SRSC's loss of reputation and he selected the one that measured the loss by reference to SRSC's lost profits. The use of this measure for the assessment of damages does not alter the character of the award in the hands of SRSC. 76 The award made by Studdert J was not merely intended to fill a 'hole in [SRSC's] profits', as in Liftronic. Rather it was intended to compensate SRSC for the injury to its reputation; it was not an award of damages for loss of profits as such. Thames Haven was also a different case to the present. Not only was there no question of any injury to the plaintiff's reputation, but the award was specifically made to compensate for loss of profits by reason of the unusability of the jetties. 77 I acknowledge that the dividing line between payments that bear the character of income and those that do not can be fine: cf Federal Commissioner of Taxation v Spedley Securities Ltd (1988) 19 ATR 938 (where the Full Federal Court held that a lump sum payment of $200,000 to a merchant bank for the termination of a contract included compensation for injury to goodwill and was therefore not assessable income). I recognise, too, that the law in Australia could perhaps have taken a different turn: cf McGregor on Damages (17th ed, 2003), at [14-029] (arguing that it is not clear that 'damages specifically awarded for loss of business profits', particularly to a company, would not be taxable in the defamed plaintiff's hands, unless the business was brought down by the defamation). But the course of authority in this country governing the nature of SRSC's claim and of the damages awarded to it strongly suggests that the Sum should not be characterised as income according to ordinary concepts.

CONCLUSION 78 SRSC's appeal against the objection decision made by the Commissioner should be allowed. The Commissioner should be directed to excise the Sum from SRSC's taxable income for the 2004 year. The Commissioner must pay SRSC's costs of the appeal. I certify that the preceding seventy-eight (78) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville.

Counsel for the Applicant: Mr K Smark SC with Ms D McBride

Solicitor for the Applicant: Mallesons Stephen Jacques

Solicitor for the Respondent: Australian Government Solicitor