CATCHWORDS
INCOME TAX - Assessable Income - award of damages for personal injury - judgment included an amount for pre-judgment interest under s94 of the Supreme Court Act 1970 (NSW) - post-judgment interest was awarded under s95 - whether either or both of the pre-judgment interest and the post-judgment interest was income in ordinary concepts or of a capital nature -
Deductibility - whether costs of litigation deductible - question to be determined by reference to the purpose of the litigation - apportionment between income and non-income purposes required.
Supreme Court Act 1970 (NSW); ss 94, 95.
Commissioner of Taxation v Northumberland Development Co Pty Ltd (1995) 59 FCR 103; distinguished.
Pheeney v Doolan [1977] 1 NSWLR 601; applied.
R v The County Court Judge of Essex and Clarke [1887] 18 QBD 704; referred to.
Riches v Westminster Bank Limited [1947] AC 390; discussed.
Re Cooper [1911] 2 KB 550; referred to.
Federal Wharf Co v Deputy Federal Commissioner of Taxation (1930) 44 CLR 24; discussed and applied.
Schulze v S W Bensted (Surveyor of Taxes) (1915) 7 TC 30; discussed.
Commissioners of Inland Revenue v Ballantine (1924) 8 TC 595; discussed.
Inland Revenue Commissioners v Barnato (1936) 20 TC 455; discussed.
McLaurin v Federal Commissioner of Taxation (1960) 104 CLR 381; discussed.
Allsop v Federal Commissioner of Taxation (1965) 113 CLR 341; discussed.
Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634; referred to.
Smithkline Beecham Laboratories (Australia) Ltd v Federal Commissioner of Taxation (1933) 93 ATC 4629; referred to.
Madigan v Commissioner of Taxation (unreported, Hill J, 17 July 1996); referred to.
Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47; referred to.
Adelaide Racing Club Inc v Federal Commissioner of Taxation (1964) 114 CLR 517; referred to.
MAREE LYNETTE WHITAKER v COMMISSIONER OF TAXATION
No NG 653 of 1995
HILL J
SYDNEY
19 AUGUST 1996
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No NG 653 of 1995
)
GENERAL DIVISION )
BETWEEN: MAREE LYNETTE WHITAKER
Applicant
AND: COMMISSIONER OF TAXATION
Respondent
CORAM: HILL J
PLACE: SYDNEY
DATED: 21 AUGUST 1996
MINUTES OF ORDER
THE COURT ORDERS THAT:
(1) The application be allowed in part.
(2) The objection decision be set aside.
(3) The matter be remitted to the Commissioner to allow as a deduction a proportion of the legal costs incurred by Ms Whitaker in accordance with these reasons.
(4) The Commissioner pay Ms Whitaker's costs of the application, as agreed between the parties.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No NG 653 of 1995
)
GENERAL DIVISION )
BETWEEN: MAREE LYNETTE WHITAKER
Applicant
AND: COMMISSIONER OF TAXATION
Respondent
CORAM: HILL J
PLACE: SYDNEY
DATED: 21 AUGUST 1996
REASONS FOR JUDGMENT
In Commissioner of Taxation v Northumberland Development Co Pty Ltd (1995) 59 FCR 103 at 106, Davies J expressed the view that a court in Australia would be unlikely to hold that an award of pre-judgment interest, included in an award of damages for personal injury, was income. His Honour said that no reported case had been referred to in Australia where pre-judgment interest had been assessed to tax as income. This could either be because it was always accepted that such pre-judgment interest was assessable or because it was always accepted that it was not. Be that as it may, the question whether tax is payable on such pre-judgment interest is one of the questions to be resolved in the present case.
In 1984 Ms Whitaker sought the services of Mr Rogers, a prominent eye surgeon, in connection with a proposed corneal graft. She was operated on by him and ultimately lost her sight in both eyes. Subsequently, she brought proceedings against Mr Rogers in the Supreme Court of New South Wales. In those proceedings she claimed damages against Mr Rogers, either for breach of contract or in negligence. In addition, she claimed in the statement of claim "Interest pursuant to s94 of the Supreme Court Act".
Ms Whitaker's case was ultimately heard by Campbell J of the Supreme Court of New South Wales and the decision at first instance is reported in (1990) Aust. Torts Reports 81-062. In the result judgment was entered in her favour in the sum of $808,564.38. The judgment so entered included an amount of $65,514.38 representing the "interest" entered in the award pursuant to s94 of the Supreme Court Act (NSW) 1970 ("the Act").
Mr Rogers
appealed to the New South Wales Court of Appeal and his appeal was
unsuccessful. He then appealed with
leave to the High Court of Australia and again the appeal was dismissed. The proceedings in the High Court are
reported as Rogers v Whitaker (1992)
175 CLR 479. Subsequently,
Ms Whitaker received interest on the verdict, pursuant to s95 of the Act
for the period 13 August 1990 to 19 November 1992, agreed upon as
being $287,671. The parties are at issue
as to whether the amounts paid to Ms Whitaker under s94 of the Act
($65,514.38) and the amount of post-judgment interest payable under s95 of the
Act are, as the Commissioner contends, income
in ordinary concepts, or as is contended for Ms Whitaker amounts of a
capital nature and thus not assessable income.
In total Ms Whitaker incurred in respect of the litigation $348,240.28, by way of legal costs. After she had recovered a contribution of costs from Mr Rogers, she was out of pocket $214,240.28. It is her case that if some part of the amount recovered by her (being particularly the s94 interest) was to form part of assessable income, then some part of the legal costs incurred by her in either the trial or in the appeal courts subsequently should be available to her as a deduction.
Before turning to consider the assessability of the pre and post-judgment interest amounts and the deductibility of the legal costs, it is necessary to say something about the provisions of ss94 and 95 of the Act pursuant to which such interest amounts become payable. Section 94 is, relevantly, in the following terms:
"(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."
The power to include in a judgment such "interest" originated from s3(1) of the English Law Reform (Miscellaneous Provisions) Act 1934. The view was taken before that time that the courts of common law (not other courts such as courts of admiralty or equity) had no power to award interest, either directly or by way of damages. The latter proposition has now been shown to be wrong in Hungerfords v Walker (1989) 171 CLR 125. Strangely, it appears that between 1934 and 1969 in England, the power to include in awards of damages such pre-judgment "interest" was scarcely ever invoked by the parties to litigation. The Third Report of the Law Reform Commission for Scotland (1957), Cmnd 141, p4, suggested that one reason for the lack of enthusiasm in England for invoking a claim for such "interest" was a view that income tax was deductible from the interest awarded.
Ultimately, in the United Kingdom, the discretion to award interest was removed and it became mandatory that all judgments include interest, unless there were special reasons why no interest should be given in respect of the damages actually sought.
When, in 1970, the Act introduced power to award interest in s94(1), the power was discretionary and not, as in the United Kingdom, mandatory.
The principles to be applied in calculating the pre-judgment "interest" have been worked out in a number of cases. It suffices here to refer to the decision of the New South Wales Court of Appeal in Pheeney v Doolan [1977] 1 NSWLR 601. It appears from that case that the power to include in a judgment an amount for interest under s94(1) is exercisable in the unfettered discretion of the judge. The claim for such interest is separate and distinct from the underlying claim for damages and is required to be separately claimed for in a statement of claim. Further, the interest is calculated by reference to the various heads of damage awarded and not by reference to the global damages ultimately found to be payable.
In Pheeney v Doolan, Moffitt P emphasised (at 604) that the s94 interest was:
"... not designed to compensate a plaintiff for loss arising out of the cause of action, but to provide compensation when a sum of money has been outstanding for a period of time. This follows because of the nature of the payment provided. It is `interest' which may be awarded on the whole or part of the money recovered by the judgment. It presupposes a determination at some time of the amount of money to which the plaintiff is entitled by reason of his cause of action against the defendant."
Later, at 605, his Honour said:
"While the essential nature of the award is to compensate a plaintiff by reason of delay in payment of moneys, there is no entitlement to interest. The Court must be persuaded that it is just, between the plaintiff and the defendant, to make an award of interest in relation to each of the elements referred to in the section, namely the rate, the sum to bear interest, and the period for which the interest is to accrue."
In the same case, Reynolds JA said (at 613):
"In my view, the provision in s94 is properly to be regarded as adjectival in character; see per Gibbs J., Ruby v Marsh (1975) 132 CLR 642, at p.656. It provides an ancillary power akin to an order for costs, and its purpose is to aid the court to do more complete justice between the parties than is otherwise possible. It does not confer a substantive right to interest upon creditors and persons who have suffered injury to person or property and its application is dependent upon proceedings being instituted in the Supreme Court and continuing to judgment. It is not designed to compensate a plaintiff for loss arising out of the cause of action, but to provide compensation where it is otherwise appropriate to do so for the circumstance that a sum of money has been outstanding to him for a period of time.
One, but not necessarily the only, factor is the inevitable delay between cause of action, or institution of proceedings, and judgment. While the delay is inevitable, nevertheless the defendant has the use of the money during the period. A rate of interest for the period of delay affords the fair legal measure of compensation"
The interest payable under s95 of the Act is of a different character. Section 95 provides as follows:
"(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."
It was not until the Judgments Act 1838 (UK) that interest was payable in the United Kingdom on judgments at common law. Prior to that time, the judgment was only for that which was claimed in the writ. The history is dealt with in the judgment of Lord Esher MR in R v The County Court Judge of Essex and Clarke [1887] 18 QBD 704, in which it was decided that, County Courts, not being in existence in 1838 when the Judgments Act was passed, had no power to impose interest on judgments obtained in such courts.
The predecessor to s95 of the Act in New South Wales was the Common Law Procedure Act 1899, pursuant to which judgments carried interest from the date of the verdict upon which they were based.
The policy behind s95 and like sections is evident. Once a judgment has been given in favour of a party for the payment of a sum of money, it is clear that that party is entitled to be paid the sum ordered to be paid and if there be delay in making that payment, post-judgment interest compensates the successful party during the time that person is out of pocket.
No case in Australia has directly dealt with the assessability of amounts ordered to be paid under s94 or required to be paid under s95 of the Act, or equivalent sections in other States or Territories. There have, however, been cases in the United Kingdom covering both pre-judgment interest and post-judgment interest: see, as to pre-judgment interest, Riches v Westminster Bank Limited [1947] AC 390; and, as to post-judgment interest, Re Cooper [1911] 2 KB 550. In this area, care must be taken with United Kingdom authorities as there are significant differences between the United Kingdom and Australian legislation. However, some of the comments in Riches' case are not without interest.
First, Lord Wright (at 403) made it clear that, in determining whether an amount was or was not "interest", the label which the statute used was not material. The same can be said in connection with the Australian position. The fact that s94 uses the label "interest" and that interest, properly so called, will almost invariably be on revenue account, does not mean that the label "interest" is determinative of the taxation position. Second, Viscount Simon made it clear that, for the purposes of the English legislation, the relevant question for determination was whether the interest component added to the damages otherwise to be awarded was capital or income. That, of course, is precisely the question to be decided in Australia. None of their Lordships who found that the amount in question was interest, seemed to have any difficulty with the issue of income versus capital. All were of the view that it was income. Finally, it should be said that Lord Wright sought assistance from cases such as Glenboig Union Fireclay Co Ltd v Inland Revenue Commissioners (1992) 12 TC 427 and Inland Revenue Commissioners v Barnato (1936) 20 TC 455, in resolving the distinction between amounts of capital compensation, albeit estimated in terms of interest on the one hand and real interest on the other, being on revenue account.
While the English decisions found the pre-judgment interest assessable, it had earlier been held in Re Cooper that no deduction for tax needed to be made from post-judgment interest. The decision turned not so much on the question of whether the amount might be said to be interest, but whether it had the character of being "yearly interest". The decision has no relevance at all to the Australian situation.
Senior counsel for Mrs Whitaker, while expressing his argument to be equally relevant to the interest under s94 as well as to that under s95, rather concentrated upon s94. And indeed it must be conceded that the argument in favour of pre-judgment interest being not assessable is stronger than in respect of the post-judgment interest.
The applicant's submissions commenced with the proposition, as to which there can be no argument, that the question whether a receipt has the character of income is a question to be ascertained by consideration of the true nature or character of the receipt and the circumstances in which it was received: see GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 136. Next, it was said, and this is likewise not in dispute, that the method of calculation will not be determinative of the true character of the receipt. Support for this proposition can be found in the Glenboig Union Fireclay case; Californian Oil Products Ltd v Federal Commissioner of Taxation (1934) 52 CLR 28 at 46-47; Van Den Berghs v Clark (Inspector of Taxes) [1935] AC 431 at 442; and Northumberland Development at 104-5.
At the heart of the submission for the applicant is the proposition that the true character of the interest, whether determined under ss94 or 95, is to be found in the nature of the claim brought, initially, by the plaintiff. In the present case that claim was one for damages for personal injury. The damages themselves are clearly on capital and not revenue account. So, it is submitted, the true character of the additional amounts payable under ss94 and 95 is to be found by reference to the capital character of the personal injury claim, not by reference to the essential character of the interest amount itself.
Senior counsel for the applicant then undertook an analysis of the leading cases in support of a proposition that they demonstrated that the income character of the interest amount was attributable to the underlying transaction, so that if the underlying transaction involved the derivation of income, so, too, would the interest payment. It was submitted (although as will be seen the submission is not necessarily consistent with the major premise of the argument for the applicant) that in all cases where pre-judgment or post-judgment interest had been held assessable, the sums by reference to which those amounts were calculated were sums which were recovered in the course of a business or amounts invested to earn income or sums due as rewards for services rendered. I say that there is some inconsistency because it might be expected that if a company carrying on business made a capital claim then on the major proposition any interest payable under ss94 or 95 would likewise be on capital account. Yet as will be seen, that is not the result of the cases. The fact that it is not casts doubt on the basic submission.
The
first case to which reference was made in the course of argument was Riches' case. In that case the claim brought was for an
accounting of profits in circumstances where there was an agreement that the
defendant would pay to the plaintiff a share of profits and the profits were
misrepresented. It is true, therefore,
that the claim in question was for an income amount and it was held that the
s94 interest was likewise income and not capital. But there is nothing in the judgments of the
House of Lords which suggests
that the decision depended upon the character of the claim brought.
The second case to which reference is made is the decision of the High Court in Federal Wharf Co v Deputy Federal Commissioner of Taxation (1930) 44 CLR 24. The appellant in that case was entitled to compensation for property compulsorily acquired. Section 26 of the Harbours Act 1913, under which the compulsory acquisition occurred, provided for interest to be paid computed from the time when the Minister entered into occupation on behalf of the Crown, to the time when the compensation was to be paid, to be added to the amount of the compensation. The question for decision was whether the interest component was income in ordinary concepts assessable to the recipient. If the applicant's basic submission were correct, the result would be expected to be that the interest factor was capital, taking the same character as the compensation payment. That seems never to have been suggested in argument and certainly there is nothing in the judgment of Rich J to support it. At 27 the following appears:
"The true question is whether sums received pursuant
to sec.26 of the Harbours Act 1913
are of a capital nature or of an income nature.
In considering this question it is important to observe, first, that the
sum is calculated and payable in respect of time; second, that the time in
respect of which it is so calculated commences when the owner is deprived of
the actual profitable
enjoyment of his property by the entry of the Minister; third, that the period
ends with the payment of the compensation which represents the capital of that
property; and fourth, that the interest is calculated upon the sum ascertained
to represent the capital value of the property of which the owner has been
deprived. It is true that sec.26 says
that the interest is to be added to the amount of any compensation to be paid,
but this statement manifests no intention that it shall be considered capital
whether as against the revenue or between life-tenant and remainderman, or for
the purposes of the internal management of a company."
Rich J drew by way of analogy upon the position of a purchaser obliged to pay interest upon the balance of purchase money payable on the sale of real property. Drawing upon the comments of Rollette J in Hudson's Bay Co v Thew (1919) 7 TC 206, his Honour said (at 28):
"The observation made by Rowlatt J in that case ... 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."
It is true of course that s26 of the Harbours Act differs in a number of respects from s94 of the Act. First, the award of interest under s26 is mandatory; that under s94 is discretionary. Secondly, in the context of compulsory acquisition it can be said that there is a fund of money being the compensation payable which is immediately payable at the time of resumption, although not yet calculated, so that the interest payable is truly interest in respect of the fund to compensate the person whose property has been acquired during the time in which that person is kept out of the fund. The analogy is not complete in the case of a judgment. The award of damages in a personal negligence suit is not in any way analogous to the calculation of compensation. This having been said, however, much of what is said by Rich J is applicable here. The interest under s94 is calculated and payable in respect of time, generally, in respect of the time elapsing between the accrual of the cause of action and the date of judgment. Secondly, that time commences, generally speaking, when the cause of action arises, that being analogous at least to the time the owner of compulsorily acquired property has been deprived of enjoyment of it. Thirdly, the period ends with judgment.
Ultimately, as has already been pointed out, the interest under s94 is payable to compensate a plaintiff for being out of the damages ultimately awarded between the time the cause of action arose and the time of judgment. A fortiori, the interest under s95 is of an income character. It compensates the successful litigant for being kept out of the moneys which the Court has ordered to be paid between the date of judgment and the date payment is made. So seen, it has the character of income.
The next case to which reference is made is the case of Schulze v S.W. Bensted (Surveyor of Taxes) (1915) 7 TC 30. In that case the trustees of a trust estate sued a former trustee to recover an asset of the trust estate which had not been got in. The suit was successful and the representatives of the former trustee were ordered to repay a sum of money, together with interest at the rate of 3½% per annum from the date at which the money in question should have belonged to the trust estate. It was held that the trustees were rightly assessed to tax under Schedule D of the English legislation in respect of the interest.
The case was decided before Riches' case, that is to say at a time when it was thought that there was a distinction between interest on the one hand and amounts by way of damages on the other, a distinction rejected in Riches' case. However, it was held that the amounts in question were interest, not because of the nature of the claim which the trustee had against the former trustee (presumably a claim of capital), but because the trustee receiving payment of the interest had been deprived of the use of the sum of money which the former trustee was directed to pay. It is said (at 33):
"... if they had it, presumably they would have invested it, and if they had invested it, presumably it would have yielded them 3½ per cent., and, therefore, as recompense as for being deprived of the use of this trust money, they had awarded to them the sum which it would have earned in their hands, if placed in a proper trust investment."
Much the same can be said of the damages payable to any person injured. If instead of litigation a defendant in a personal accident case had immediately paid the amount claimed, then presumably the plaintiff could have invested that money and if it had been invested would have received interest upon it which would have been taxable. The amount of interest payable under s94 recompenses the plaintiff for being deprived of the use of the money.
The next judgment raised was Commissioners of Inland Revenue v Ballantine (1924) 8 TC 595. The claim made in that case was for loss and damage incurred by a firm of contractors against a railway company. Presumably the amount ordered by way of damages would have been on revenue account, but whether it was does not appear from the report of the case. The amount of pre-judgment interest paid was held to be interest of money within Case III of Schedule D of the 1918 Income Tax Act. Reference is made to Schulze v Bensted (the judgment of Lord Johnston) in which it is suggested that the assessability of interest may depend upon the character of the obligation in respect of which the decree was pronounced. But that reference is not a reference to the question whether the damages sought in the proceedings are of a capital or revenue nature, but rather to the question whether the interest itself may be seen as damages or as something else. That is a distinction, of course, which has ceased to be material in the English context as a result of Riches' case and, in my view, never was material in Australia.
Finally, reference may be made to Barnato's case which was a case where the beneficiary, under the wills of two testators who had been partners in a business firm, sought against the trustees of the wills, who were also partners, an accounting of transactions of the partnership so as to have the beneficiary's share in the firm's assets ascertained. In that case, presumably, some of the amounts ultimately found to be liable could be of a capital nature and other amounts could be of an income nature. At issue was the question whether pre-judgment interest is taxable. It was held that it was. Again, the case is affected by the now discredited distinction between damages and interest.
In
summary, therefore, I am of the view that the applicant's suggested principle
can not be accepted. Interest added to a
judgment under s94, in my view, is income whether
the claim otherwise being made is of a capital nature or a revenue nature. I reach my conclusion on the following bases.
1. Interest under s94 must be claimed for. It is true that it can not be claimed without there being a liability for damages arising in the proceedings, but the claim to interest is a claim separate and distinct from the damage claim.
2. Pre-judgment interest is paid as compensation for the successful plaintiff being deprived of moneys to which the plaintiff was entitled, generally speaking from the time the cause of action arose. To the extent that damage arise after that date, of course, there is the necessity for separate computation of interest in the manner discussed by the New South Wales Court of Appeal in Pheeney v Doolan (ante).
3. The interest under s94 is "added to" the damages to obtain the final verdict. This again supports the view that the interest is not part of the damages claim but separate from it.
What I have said above as to interest payable under s94 applies with even greater force to interest payable under s95.
An alternative submission was advanced by senior counsel on behalf of Mrs Whitaker based upon the decisions of the High Court in McLaurin v Federal Commissioner of Taxation (1960) 104 CLR 381 and Allsop v Federal Commissioner of Taxation (1965) 113 CLR 341. So it is said that the amount of interest under s94 was no more than a component in the calculation of a lump sum compensation for injury designed, so far as money can do so, to put the plaintiff in the same position as he would have been if the tort had not been committed. It is then said that the amount in question is an indissoluble part of a capital sum and not taxable.
In my view, the present circumstances are wildly different from those discussed in McLaurin and Allsop, and the principle enshrined in those cases has no application to the present facts. In McLaurin an action for damages, in respect of a fire alleged to have been caused by the Commissioner of Railways, was settled for a lump sum amount. The claim in question was for various heads of damages, some of which would have been capital and others income. The sum in question was calculated by the Commissioner for Railways based on certain amounts for damages of a capital and other amounts for damages of an income nature, but this is not the way the offer for settlement was put forward. The fact that one party to the litigation had calculated an amount offered in a particular way could not be determinative of the character of the receipt in the hands of the recipient. The principle is discussed in the joint judgment of Dixon CJ, Fullagar and Kitto JJ as follows (at 391):
"... it would plainly be unsound to allow a determination of the character of a receipt in the hands of the recipient to be affected by a consideration of the uncommunicated reasoning which led the payer to agree to pay it.
It is true that in a proper case a single payment or receipt of a mixed nature may be apportioned amongst the several heads to which it relates and an income or non-income nature attributed to portions of it accordingly: Texas Co (Australasia) Ltd v Federal Commissioner of Taxation (1940) 63 CLR 382 at p.466; Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at p55; The National Mutual Life Association of Australasia Ltd v Federal Commissioner of Taxation (1959) 102 CLR 29 at p50. But while it may be appropriate to follow such a course where the payment or receipt is in settlement of distinct claims of which some at least are liquidated, cf Carter v Wadman (1946) 28 Tax Cas 41, or are otherwise ascertainable by calculation: cf Tilley v Wales [1943] AC 386, it cannot be appropriate where the payment or receipt is in respect of a claim or claims for unliquidated damages only and is made or accepted under a compromise which treats it as a single, undissected amount of damages. In such a case the amount must be considered as a whole: Du Cros v Ryall (1935) 19 Tax Cas 444 at p453."
The present is not a case where the basis of apportionment was uncommunicated. It is a case where the basis of calculation of the ultimate award for damage is known. It comprised, relevantly, two amounts. The first was damages for the personal injury suffered by the plaintiff; the second was the interest component under s94. Rather, the present is a case where the single payment can be apportioned amongst the heads to which it relates and the income or non-income nature attributed accordingly. Further, it is not a case where the payment is in respect of one claim and one claim only. The payment is in respect of two claims, one for damages and the other for interest; one for capital; and one for income.
Allsop was a case of a similar kind to McLaurin. A single payment was made, less than the amount sued for, in full satisfaction of all causes of action. It was held that there had been an entire sum paid by way of compromise of claims, partly income and partly capital, and there was no warrant for treating the entire amount as having the character of income. Particularly, there was no way in which it could be determined how the amount received was computed.
The decisions in McLaurin and Allsop received endorsement in the judgment of Davies J in Northumberland Development, and see per Beaumont J at 116. It is of course binding upon me. But the principle can have no application in a case where apportionment is possible. The ambit of the principle in McLaurin and Allsop, in my view, should not be extended.
Finally, it should be said that Northumberland Development is a case clearly distinguishable from the present. In that case coal owners, whose interests had been confiscated, became entitled to compensation calculated in such a way that it could be argued that the resultant figure had an interest component. Nevertheless, what was paid to the coal owners was held to be compensation for the confiscation of a capital asset and thus capital. The principle for which the case stands is summarised by Davies J in the following passage (at 108):
"... although the compensation was calculated by multiplying the discounted rent component and saleable coal component, which were precise sums, by the appropriate incremental factor, which itself was a factor fixed by reference to returns on investment, the sum so calculated was not interest or in the nature of interest. It was merely a figure which brought the calculation of compensation up to the date of the determination of the Compensation Board.
An award of interest presupposes an entitlement to a sum and an award of interest or in the nature of interest made by reason of the late payment thereof. Northumberland had no such entitlement going back to 1 January 1982 ...
In the present case, the amount added by multiplying the total of the rent and saleable coal components by the appropriate incremental factor was a step taken in the calculation of the compensation awarded. It was not a sum added on by way of interest to an award of compensation."
However, the present is not a case where the interest under s94, a fortiori s95, is but a step taken in the calculation of damages awarded. Those damages are first determined and then there is an amount added by way of interest to the award of damages. The fact that the interest is mathematically but a component of a lump sum which is the amount of the original verdict, does not change the character of the interest into a lump sum compensation amount.
Thus, with respect, I differ from Davies J in concluding that pre-judgment interest is assessable income in respect of a personal injury damages claim. I do not find this conclusion as remarkable as he did. Since the amount in essence reimburses a successful plaintiff in respect of the time in which that plaintiff has been out of pocket and at rates of interest equivalent, more or less, to commercial rates, not to charge tax upon the interest in fact operates to over-reimburse the successful plaintiff. The problems that arise in cases such as Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625 and British Transport Commission v Gourley [1956] AC 185, do not arise in the present case.
The second aspect of the case may be dealt with but briefly. 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 the litigation: Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 647-8 per Dixon J (as his Honour then was); and see the discussion in Smithkline Beecham Laboratories (Australia) Ltd v Federal Commissioner of Taxation (1993) 93 ATC 4629.
In the present case Ms Whitaker claimed two separate amounts in the proceedings she commenced. The first, which was an affair of capital was damages for a personal injury she had suffered at the hands of Mr Rogers. The second was pre-judgment interest, an affair of income. Here legal costs thus require to be apportioned incurred as they are indifferently for an income and a non-income purpose: cf Madigan v Commissioner of Taxation (unreported, Hill J, 17 July 1996); and Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 58-9. That apportionment must be made on such bases as is fair and reasonable: cf Adelaide Racing Club Inc v Federal Commissioner of Taxation (1964) 114 CLR 517 at 526. In the present case that means a proportion of the legal costs are 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.
I make the following orders:
1. The application is allowed in part.
2. The objection decision be set aside.
3. The matter to be remitted to the Commissioner to allow as a deduction a proportion of the legal costs incurred by Ms Whitaker in accordance with these reasons.
4. By agreement I order the Commissioner to pay Ms Whitaker's costs of the application.
I certify that this and the
preceding twenty-four (24) pages
are a true copy of the Reasons
for Judgment herein of his Honour
Justice Hill.
Associate:
Date: 21 August 1996
Counsel and Solicitors A H Slater QC with S J McMillan
for Applicant: instructed by Warren McKeon Dickson
Counsel and Solicitors R F Edmonds SC instructed by the
for Respondent: Australian Government Solicitor
Date of Hearing: 17 July 1996
Date Judgment Delivered: 21 August 1996
