Harper J

Supreme Court of Victoria

Judgment date: Judgment handed down 26 May 1993

Harper J

On 5 February 1993, I delivered judgment in this matter. For the reasons which I then endeavoured to articulate, I found that the defendant was liable to pay to the plaintiff damages as compensation for the defendant's negligence in inspecting and reporting upon the condition of a residential property at 30 Wilfred Road, Ivanhoe.

After delivering my reasons, counsel for the plaintiff sought leave to amend its statement of claim by adding a number of paragraphs to the particulars given under paragraph 22 of that pleading (which alleges loss and damage). Among the proposed additional particulars were the following:

``Interest To be assessed.

An award of damages to compensate the plaintiff in respect of its liability to capital gains tax under Part IIIA of the Income Tax Assessment Act or alternatively a declaration that if the plaintiff is held liable to pay to the Commissioner of Taxation capital gains tax on any judgment it is entitled to be indemnified for such amount as it is liable to pay by the defendant.''

The plaintiff also sought to make a consequential amendment to its prayer for relief by adding to it a new paragraph. The amendment sought reads as follows:

``1A. A declaration that if the plaintiff is held liable to pay to the Commissioner of Taxation capital gains on the judgment, it is entitled to be indemnified for such amount as it is liable to pay by the defendant.''

By application dated 11 March 1993, the plaintiff applied to a Deputy Commissioner of Taxation for a ``private ruling'' for the purposes of Part IVAA of the Taxation Administration Act 1953. This was furnished on 23 March 1993. It was signed by Barbara R. Benson, Deputy Commissioner of Taxation. Under the heading ``ruling'' she said:

``Based on the facts as presented, the damages awarded in favour of the [plaintiff] are not considered to be income assessable under s.s. 25(1) or other income provisions of the Income Tax Assessment Act. The damages awarded are considered to be a capital gain assessable to the [plaintiff] under Part IIIA of the Act.''

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This is a remarkable conclusion. If correct, it means that, in Part IIIA of the Act, the word ``compensation'' is synonymous with the word ``gain''. But compensation in the form of an award of damages may not (in any but an inappropriately restricted sense) result in a gain at all. This is so if, for example, the Court has been concerned to determine how much worse off the plaintiff is as the result of the commission of the wrong of which complaint is made. A judgment which does no more than award damages in a sum necessary to correct that position is not a judgment which results in any gain to the plaintiff.

My judgment in this case falls into the category just described. It did not result in any gain to the plaintiff. Its purpose was to correct a wrong suffered by the plaintiff as a result of the negligence of the defendant. For present purposes, it must I think be conclusively presumed that that is indeed its effect. Certainly, the plaintiff does not view itself as being better off as a result of the judgment than it was before the negligent report was furnished to it. The whole object of its present application for leave to amend its statement of claim is, as its counsel necessarily submitted, to avoid the loss which will follow if part of the compensation to which I referred on 5 February must be paid to the Commissioner. If part of the sum which I then had in mind is so payable, then the plaintiff will remain worse off than it would have been had the wrong not been done. The object which my judgment was designed to effect will be frustrated. An injustice will result - all because capital gains tax was levied on something which did not constitute a ``gain''.

The plaintiff seeks to avoid this situation by recovering from the defendant the amount of any capital gains tax which the plaintiff, as a result of my judgment, is now liable to pay. But this is, it seems to me, inappropriate. If a judgment does not result in a gain, then capital gains tax ought not to be payable. Essentially, a tax on capital gains is a tax imposed on the gain which results when an asset is disposed of for a consideration which exceeds the cost of its acquisition:
Kirby (Inspector of Taxes) v. Thorn E.M.I. Plc. [1988] 1 W.L.R. 445 at 450 per Nicholls, J. Thus, s. 160Z of the Income Tax Assessment Act (``the Act'') which is to be found in Division 3 of Part IIIA of the Act, provides (in part) that, subject to Part IIIA, a capital gain shall be deemed to have accrued to a taxpayer where a relevant asset has been disposed of during the year of income and ``the consideration in respect of the disposal exceeds the indexed cost base to the taxpayer in respect of the asset''.

To state the position in this way is, admittedly is, to indulge in an over- simplification. Part IIIA of the Act contains provisions which deem assets to have been acquired or disposed of in circumstances in which there is (given the ordinary meaning of the words) no acquisition and no disposal. Moreover, the Act provides that capital gains tax will, if the prescribed conditions obtain, be assessed on the basis that (whatever the actual cost) the cost of acquisition to the taxpayer has been nil: see, for example, s. 160M(7)(d).

It nevertheless remains true that, even given the extended meaning attributed by the legislation to the elements of the tax, capital gains tax is payable in circumstances in which an asset belonging to the taxpayer has been disposed of for a consideration which results in a gain to the taxpayer. The elements which give rise to liability to pay the tax are an asset (or assets), a disposal, consideration for that disposal, and a consequent gain.

In this case, there was, perhaps, an asset (the plaintiff's cause of action or, subsequently, the judgment debt). There will be a deemed disposal of that asset when (but not before) the judgment debt is paid. But the other two elements are entirely absent. There was no consideration. And there was no gain.

There is a danger, when seeking to construe legislation by which taxes are imposed, that one will miss the wood for the trees. This is especially true of Part IIIA of the Act. There are provisions contained in that Part which, in the words of Mason, C.J. in
Hepples v. FC of T 91 ATC 4808 at 4810; (1991-1992) 173 C.L.R. 492 at 497 are ``extraordinarily complex''. The Chief Justice continued:

``They must be obscure, if not bewildering, both to the taxpayer who seeks to determine his or her liability to capital gains tax by reference to them and to the lawyer who is called upon to interpret them.''

The seeds of confusion are often sown by provisions which deem something to be that which it is not - or at least is not usually. Part IIIA contains its fair share of such provisions. They are, however, intended to ensure that a

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transaction which results in a transfer of an asset or an interest in an asset, for a consideration which results in a gain, should not by reason of any artifice or disguise escape the legislative net. They were not, as I read Part IIIA, intended to operate so as to gather within its sphere transactions which do not involve the passing of consideration and which do not result in a gain. The Act did not intend to effect legislative transformation of black into white.

In this context, it is I think relevant to note that the plaintiff can only be said to have ``gained'' as a result of my judgment insofar as its position is better now than it was immediately before judgment. By focusing exclusively on the fact that the plaintiff now has judgment for $75,000, the Deputy Commissioner of Taxation was apparently able to conclude (that sum in the plaintiff's hands being a capital sum) that the plaintiff had to that extent received a capital gain. Nobody in the real world could reach such a conclusion. In particular, no accountant seeking accurately to assess the plaintiff's financial position would treat the judgment debt, even after payment, in the splendid isolation reserved for it by the Deputy Commissioner of Taxation. Any responsible accountant would link the money to the underlying asset, i.e. to the residential property at 30 Wilfred Road, Ivanhoe. Once that link is made, as it must be if artificiality is to be avoided, any question of gain disappears.

In my opinion, the Deputy Commissioner of Taxation's private ruling, because it defies common sense, could only be justified by reference to legislation expressed in the clearest terms. The one thing clear about Part IIIA of the Act is that it is not. In these circumstances, I adopt with respect the position taken by Deane, J. in Hepples' case at ATC pp. 4818-4819; C.L.R. pp. 510-511. His Honour there quoted from the joint judgment of Rich and Dixon, JJ. in
Anderson v. The Commissioner of Taxes (Victoria) (1937) 57 C.L.R. 233 at 243 as setting out the basic principles of statutory construction of taxing provisions, at least in cases (such as the present) where tax avoidance is not involved and where the substance of relevant transactions is not concealed by artificialities of form. Their Honours there said:

Brunton v. Commissioner of Stamp Duties [[1913] A.C. 747, at p. 760], Lord Parker of Waddington, speaking for the Privy Council, says: `The intention to impose a tax or duty, or to increase a tax or duty already imposed, must be shown by clear and unambiguous language and cannot be inferred from ambiguous words.' This rule he again emphasized in
Attorney- General v. Milne [[1914] A.C. 765, at p. 781], where he said, in the House of Lords: `The Finance Act is a taxing statute, and if the Crown claims a duty thereunder it must show that such duty is imposed by clear and unambiguous words.' In
Ormond Investment Co. v. Betts [[1928] A.C. 143, at p. 151], Lord Buckmaster, although differing from the majority of their Lordships and holding that in the particular case the Crown had satisfied the burden lying upon it, described the rule as a `cardinal principle... a principle well known to the common law that has not been and ought not to be weakened - namely, that the imposition of a tax must be in plain terms.' He added: `The subject ought not to be involved in these liabilities by an elaborate process of hair-splitting arguments.' Lord Atkinson, who agreed in the decision of the House, expressed the rule as follows [at p. 162]: `It is well established that one is bound, in construing revenue Acts, to give a fair and reasonable construction to their language without leaning to one side or the other, that no tax can be imposed on a subject by an Act of Parliament without words in it clearly showing an intention to lay the burden upon him, that the words of the statute must be adhered to, and that so-called equitable constructions of them are not permissible'.''

Deane, J. then continued:

``The above extract constituted the foundation of Rich and Dixon, JJ.'s decision in Anderson. It represents a general statement of the `principles of construction applicable to an Act which imposes a tax or duty'... It is supported by strong reasons in both law and common sense. For one thing, statutes imposing taxation derogate from the ordinary rights of the citizen in that they represent a compulsory exaction of money. For another, the framing of the provisions of such legislation is essentially within the control of government. Indeed, in so far as provisions of the Act are concerned, it would seem that, particularly in relation to technical matters, the content and drafting of such provisions may, on occasion, reflect the

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advice and views of officers of the Australian Taxation Office itself... In circumstances where the heavy burden of legal costs is likely to constitute an insurmountable obstacle to the challenge by the average taxpayer of an assessment in the courts and where successive administrations have allowed the Act to become a legislative jungle in which even the non-specialist lawyer and accountant are likely to lose their way in the search to identify the provisions relevant to a particular case, the least that such a taxpayer is entitled to demand of government is that, once the relevant provisions are finally identified, a legislative intent to impose a tax upon him or her in respect of a commonplace transaction will be expressed in clear words. So to say is not, of course, to deny that complicated and even obscure taxation provisions may be necessary either to deal with technical situations or to prevent the avoidance of tax by artificiality of form or other device. However, it could not realistically be suggested that there would be any difficulty at all in plainly expressing a legislative intent that an amount received by an employee as consideration for a promise to refrain from competing with his or her employer or divulging or using the employer's information after the termination of the employment should be included in the employee's assessable income for income tax purposes.''

The concluding sentences of this passage are, I think, of particular importance in this case. Taxpayers ought not to be afforded assistance in avoiding tax by resort to artifice. Neither should persons, who are no better off by reason of a judgment in their favour than they were before the doing of the wrong which gave rise to the judgment, be taxed on the wholly artificial basis that they have received a ``gain''. At least, such tax should not be imposed in such everyday circumstances except by clear words in the relevant legislation.

An examination of that legislation for present purposes should, I think, commence with s.s. 160Z(1). I have already set out the effect of that sub-section. There can be little doubt that Parliament was there concerned to tax what are real gains arrived at after deducting costs outlaid from benefits obtained. There is nothing to suggest that Parliament was concerned to tax what was no gain following the disposal of an asset for which no consideration was received. Doubtless the legislature sought to ensure that real gains were not disguised, that what was in fact a benefit received was not hidden, and that what were in fact assets were not treated for relevant purposes as something else. So much may be conceded - indeed, welcomed. If the Deputy Commissioner of Taxation's private ruling is correct, however, then the opposite is also true. For the private ruling cannot be correct unless Parliament also intended to treat as a benefit (called ``consideration'') something which was not, and as a gain something the effect of which was entirely neutral.

I see nothing in the other relevant provisions of Part IIIA which would lead to such a conclusion. The expression ``asset'' is dealt with in s. 160A. This section was most recently amended by Act No. 191 of 1992, with effect from 21 December 1992. The amended provision is applicable to the construction or creation of assets after 25 June 1992. The cause of action here arose in May 1989. The provision applicable to that asset defined that word as meaning any form of property, including (among other things) a debt and a chose in action.

When Hepples' case came before the Full Court of the Federal Court (
Hepples v FC of T 90 ATC 4497) Gummow, J. said that, in his opinion, the then definition in s. 160A covered only rights of a proprietary nature, and not those of a personal nature, or those which may be called ``rights'' in a popular or non-technical sense - such as the right of adults to vote: 90 ATC 4497 at 4512. His Honour's conclusion in this regard appears to have been accepted by Toohey, J. in the High Court: 91 ATC 4808 at 4825; 173 C.L.R. 492 at 522.

Perhaps the most important feature of a proprietary right is that it can be assigned, transmitted or turned to account with a third party. A right which is not proprietary is a right such as an equity to have a court rectify a contract of personal services, or a right to sue for unliquidated damages in tort for personal injury. It might have been argued, therefore, that this explained the presence in Part IIIA of s.s. 160ZB(1). This sub-section exempts from assessment as a capital gain any sum received by the taxpayer by way of compensation or damages for any wrong or injury suffered to his

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or her person or in his or her profession or vocation.

The presence of s.s. 160ZB(1) can no longer, if it ever could, be explained in this way. With effect from 21 December 1992, all assets created after 25 June 1992 are defined to include any form of property (including a debt or a chose in action) whether legal or equitable and whether or not a form of property. There seems little doubt that the plaintiff's chose in action in this case, and subsequently its judgment debt, would (if s. 160A had in May 1989 been in it present form) be an ``asset'' for the purposes of Part IIIA.

This is not to say that the chose in action/ judgment debt is not an asset even as that word was defined by s. 160A before 21 December 1992. If one is entitled to divorce the judgment debt from the chose in action from which it springs, then the asset which the plaintiff now has, or will upon the entry of judgment have, does come within the definition. I am inclined to think that that is indeed the position. But I do not need to finally determine the point. I am prepared to assume that the plaintiff presently has an asset which is caught by Part IIIA.

The next element in what (to use an analogy from chemistry) may be described as the capital gains tax compound is that which the Act refers to as a ``disposal''. For present purposes, the leading, but not exhaustive, provisions relating to the ``disposal'' of an asset are s.s. (1) and (3)(b) of s. 160M. The opening words of s.s. (2) are also relevant. These provisions read as follows:

``(1) Subject to this Part, where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change.

(1A) [Not here relevant].

(2) A reference in subsection (1) to a change in the ownership of an asset is a reference to a change that has occurred in any way...

(3) Without limiting the generality of subsection (2), a change shall be taken to have occurred in the ownership of an asset by-

  • (a)...;
  • (b) in the case of an asset being a debt, a chose in action or any other right, or an interest or right in or over property - the cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment, at law or in equity, of the asset;...''

The plaintiff submits that s.s. 160M(3)(b) has the effect in this case of requiring me to proceed upon the basis that there was a ``disposal'' of the plaintiff's chose in action when my judgment was pronounced. Alternatively, it was submitted, there will be a ``disposal'' of the judgment debt when it is paid. The chose in action or (as the case requires) the judgment debt was then or will then be ``satisfied''.

It seems to me that this submission is correct. It is therefore strictly unnecessary for me to consider an alternative submission of the plaintiff. It is that, if the circumstances here did not amount to a ``disposal'' pursuant to s. 160M(3)(b), they did amount to a ``disposal'' pursuant to s. 160M(7). That sub-section, like s. 160A, was amended by Act No. 191 of 1992, with effect from 21 December 1992. It is, however, unnecessary for me to decide whether the sub-section in its original, or in its amended, form should apply to the facts of this case. In both forms, it is a condition precedent to the operation of the provision that ``money or other consideration'' has been received by the person who owned the asset at the time of the relevant act, transaction or event; or, at that time, the owner was entitled to receive ``money or other consideration''. For the reasons to which I am about to turn, this case is not one in which the plaintiff (the ``owner'' of the ``asset'' at the relevant time) has received or is entitled to receive any consideration. If this is correct, then s.s. (7) is here irrelevant.

The concept of consideration is closely linked in legal theory to the concept of agreement. It has also, at times, been linked to the notion of bargain - so that the authors of the fourth Australian edition of Cheshire and Fifoot, Law of Contract could say (at p. 64, in a statement which, so far as my brief research indicates, does not appear in later editions) that consideration is ``nothing more or less than the sign and symbol of bargain''.

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The bargain theory of contract has not always found favour. Nevertheless, the linkage between consideration and the enforceability of an agreement not made under seal has been more or less consistently maintained since the development of the modern law of contract. In 1881, Oliver Wendell Holmes wrote in The Common Law (U.K. edition 1968, p. 230):

``[T]he essence of a consideration [is] that, by the terms of the agreement, it is given and accepted as the motive or inducement of the promise. Conversely, the promise must be made and accepted as the conventional motive or inducement for furnishing the consideration. The root of the whole matter is the relation of reciprocal conventional inducement, each for the other, between consideration and promise.''

The point I seek to make is a trite one. It is that, generally speaking, consideration is something given, by agreement, in return for something else. It has no place where, as here, the plaintiff will obtain the amount of its judgment debt by compulsory exaction from someone who has not agreed to pay it and who will receive nothing as a quid pro quo. The ``reciprocal conventional inducement'' of which Holmes spoke is entirely absent from the situation which obtains here.

The section in Part IIIA of the Act which is most directly relevant in this context is s. 160ZD. That section's use of the concept of consideration may be illustrated by reference to the terms of its first four sub-sections. They are as follows:

``160ZD Consideration in respect of disposal

160ZD(1) [Consideration] Subject to this Part, for the purposes of this Part, the consideration in respect of a disposal of an asset is-

  • (a) if the taxpayer has received or is entitled to receive an amount or amounts of money as a result of or in respect of the disposal - that amount or the sum of those amounts;
  • (b) if the taxpayer has received or is entitled to receive property other than money as a result of or in respect of the disposal - the market value of that property at the time of the disposal; or
  • (c) if the taxpayer has received or is entitled to receive both an amount or amounts of money and property other than money as a result of or in respect of the disposal - the sum of that amount or those amounts and the market value of that property at the time of the disposal.

160ZD(2) [Consideration deemed market value] Where a taxpayer has disposed of an asset, the disposal is not by way of the expiry of the asset and-

  • (a) there is no consideration in respect of the disposal;
  • (b) the whole or a part of the consideration received by the taxpayer in respect of the disposal cannot be valued; or
  • (c) the amount that would, but for this paragraph, be taken to be the consideration received by the taxpayer in respect of the disposal is greater or less than the market value of the asset at the time of the disposal and, in the case where the asset was disposed of to another person, the taxpayer and that other person were not dealing with each other at arm's length in connection with the disposal;

the taxpayer shall be deemed to have received as consideration in respect of the disposal an amount equal to the market value of the asset at the time of the disposal.

160ZD(2A) [Market value where asset disposed of other than to another person] For the purposes of the application of subsection (2) to the disposal of an asset otherwise than to another person, the market value of the asset at the time of the disposal is the amount that would have been the market value at that time if that disposal did not occur and was never proposed to occur.

160ZD(2B) [Disposal by loss or destruction] Subsection (2) does not apply in relation to a disposal constituted by the loss or destruction of an asset.''

It seems to me that these provisions support two propositions. First, that the legislature's notion of that which constitutes consideration is consistent with the definition of the term which I have endeavoured to articulate; and secondly, that the legislature is concerned to ensure that the transactions in which consideration is in fact passed should not escape capital gains tax because the consideration was concealed. On

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the other hand, Parliament is not minded (or so in my opinion s. 160ZD indicates) to impose capital gains tax on transactions in which there was no consideration and no gain. In this case, the amount of money which the defendant must pay in order to eliminate the judgment debt will not be received by the plaintiff ``as a result of or in respect of the disposal'' of that debt. When received, that amount will effect the disposal of the judgment debt - and will do so without there being anything received by the defendant (or given by the plaintiff) in return.

If no consideration has been received in return for (or, in the words of s. 160ZD(1) ``as a result of or in respect of'') the disposal of an asset, then (ex hypothesi) no gain can accrue to the taxpayer as a result of or in respect of that disposal. It is important to remember, however, that we are here speaking not of any underlying asset that may be relevant - in the case of a chose in action or judgment debt - to that chose in action or judgment debt. We are speaking of an asset which itself is a chose in action or judgment debt. Some choses in action may, of course, result in a judgment which, when satisfied, will in turn result in a gain to the litigant/taxpayer - not ``as a result of or in respect of'' the ``disposal'' of the chose in action or judgment debt, but as a result of or in respect of a disposal of the underlying asset.

In such cases, it may well be (as a matter of principle if not of legislative effect) that the litigant/taxpayer ought not to escape such liability to pay capital gains tax as would have been incurred by the taxpayer had the chose in action not intervened. Take the case of a litigant/taxpayer who suffers loss by reason of a breach of an enforceable covenant in restraint of trade. He successfully sues the wrongdoer. He recovers, after judgment, a sum which represents the difference between the actual value of his business and that which it would have realised had the wrong not been done. There is also, let us suppose, a difference between the latter value and the indexed cost base (see ss. 160Z and 160ZH) of the business. That difference represents a capital gain. There is, it seems to me, no reason in principle why that gain ought not be brought into account for capital gains tax purposes.

This reasoning applies to two cases which were cited in argument before me. They are
Provan v. HCL Real Estate Limited & Ors 92 ATC 4644 and
.Tuite & Anor v. Exelby & Ors 93 ATC 4293.

The facts of Provan's case are set out in the headnote. For the purposes of consideration of the problems presently before me, it is particularly relevant that the litigation there concerned real estate which had been acquired before 20 September 1985, and that Part IIIA of the Act only applied to assets acquired on or after that date - see s. 160L. The property had been acquired for the purpose of realising a capital gain on its resale. In September 1988, the plaintiff decided to sell. He engaged agents to submit the property to a public auction. In October 1988 he was informed by the fourth and fifth defendants, who were principals of companies which held a franchise from the agents, that the only offer to purchase was from a syndicate that was not prepared to attend the auction. Faced with this information, the plaintiff decided to sell before auction. A purchaser was found. Contracts were exchanged. The purchase price was $1.95 million. Before completion, the plaintiff discovered that other parties were interested, and that the property's true market value exceeded the purchase price to which he had agreed. His initial decision, on receiving this information, was to refuse to complete the contract; but the purchaser's claim for specific performance was settled in October 1989. The headnote continues (at 4644):

``The plaintiff then instituted proceedings against the defendants alleging a breach of their contractual, common law and fiduciary duties and claiming damages, interest and costs. The plaintiff also sought a determination from the Court as to whether capital gains tax would be payable on any judgment he might recover from the proceedings. He submitted that in the event that he was liable to pay capital gains tax on the judgment, he was entitled to be indemnified for that amount by the defendants.''

The plaintiff succeeded. It was held that the fourth and fifth defendants had breached fiduciary duties owed by them to the plaintiff. Damages were fixed in the sum of $955,450. This represented the difference between the true market value of the property at the time the auction was to have taken place, and its value as at October 1989, when settlement was effected.

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The trial Judge (Rolfe, J.) was also asked by the parties at the trial (as he put it at p. 4645) ``to determine whether [in those circumstances] capital gains tax will be payable and, if I am of the opinion that it will, to make a declaration that the defendants should indemnify the plaintiff for any such amount''. It was agreed that his Honour could not quantify the tax involved. Moreover, counsel for the defendants did not dispute that, as a matter of principle, the plaintiff was entitled to recover from the defendants any capital gains tax payable, provided that it was ```causally related to the breach' or `if the breach is in contract it falls within the principles in
Hadley v Baxendale'. [(1854) 9 Exch. 341 [156 E.R. 145]]'': supra, at p. 4646.

In the result, Rolfe, J. held (at p. 4649) ``that the plaintiff has shown a causal relationship... between the breach of contract by the defendants and the loss, if any, resulting from any requirement to pay capital gains tax''; and (at p. 4652) that, if capital gains tax was payable, it was so payable ``because the negligence of the defendants has changed the essential character of the asset''. These words appear in a paragraph which should, I think, be quoted in full:

``Therefore, in my opinion, once financial loss was reasonably foreseeable the fact that the precise nature of that financial loss, i.e. the requirement to pay capital gains tax, and the fact that the defendants were not aware of the obligation to pay capital gains tax are not matters which preclude the defendants being liable. The capital gains tax is payable because the negligence of the defendants has changed the essential character of the asset. Had the property been sold for its proper value in October 1988, the moneys received would have represented the realization of an asset, which for all presently relevant purposes, was obtained before 20 September 1985 and on which capital gains tax was not payable. But the judgment represents the fruits of the legal action, in respect of a cause of action which did not arise until October 1988.''

His Honour therefore granted a declaration in the following form (at p. 4656):

``I declare that if the plaintiff is held liable to pay to the Commissioner of Taxation capital gains tax on the judgment, in circumstances the defendants acknowledge as constituting a proper defence by the plaintiff of any such claim made against him by the Commissioner of Taxation, the plaintiff is entitled to be indemnified for such amount together with such costs, on a solicitor and client basis, [as] the plaintiff is required to pay in pursuing or defending any such proceedings in consequence of the defendants not making the acknowledgment to which I have referred.''

Provan's case must, however, be distinguished from that before me. First, counsel for the defendant there accepted that declaratory relief was in the circumstances appropriate. Counsel for the defendant here argued strenuously to the contrary. Secondly, the market value of the underlying asset at the date on which the auction was to have been held may well have exceeded the cost to Mr. Provan of its acquisition - in which case, on receipt of the moneys representing the judgment debt, the plaintiff realised a capital gain, or (depending on the circumstances) an increased capital gain. Here, receipt of the moneys representing the judgment debt will not (at least in relation to the underlying asset) result in a capital gain or in an increased capital gain. Thirdly, the underlying asset in Provan's case was purchased before 20 September 1985. It was not, therefore, an asset in respect of which capital gains tax could be levied. The plaintiff's property at 30 Wilfred Road, Ivanhoe was purchased in mid 1989.

The relevance of the third point of distinction, which was also a point of distinction between Provan's case and Tuite's case, was not explored in the latter. Its significance is, in my opinion, that Mr. Provan would not have been liable to capital gains tax on the transaction which would have been effected had the fourth and fifth defendants done their duty. His liability to pay that tax only arose, if it arose at all, because of the defendants' breach. In Tuite's case, by contrast, the plaintiff's liability (if any) to capital gains tax did not arise only on breach: in that case the underlying assets were shares in a company (Wenmar Stockfeeds Pty. Ltd.) incorporated after 20 September 1985 (in fact, in November 1985). Accordingly, if the consideration in respect of the disposal of those shares exceeded their indexed cost base, the difference would be assessable for capital gains tax purposes. Any tax properly so assessed would be payable by

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the owner who effected the disposal and so realised the gain.

The position would be no different in principle were realisation of the gain to be initially thwarted by the action of a wrongdoer, but later recovered after judgment against that wrongdoer. Let it be supposed that the judgment restores the owner to the position in which he would have been had the wrong not been done - i.e. (which is not the present case) with an assessable capital gain realised following the disposal of the relevant asset. There would be no question of the wrongdoer being liable to contribute to any capital gains tax thus payable. The gain is realised by the owner. The owner would have paid capital gains tax had no wrong been done. Equally, the owner (fully restored to the position in which he would have been had no wrong been done) should also bear the burden of the tax payable after the wrong has been the subject of compensation. In these circumstances, there should in principle be no question of the damages payable by the wrongdoer being increased to allow for any amount payable as capital gains tax. The owner realises, and obtains the benefit of, the gain; the owner should therefore pay any resultant tax.

If one looks only to principle, the position may be summarised in simple terms. On the one hand, the situation may be one, as here, in which judgment results in an award of damages which does no more than restore to his previous position a plaintiff who had been rendered worse off by a wrong than would have been the case had the wrong not been committed. No capital gains tax should be payable, because there has been no gain. Accordingly, the judgment debt should not reflect any capital gains tax component. Alternatively, the situation may be one in which judgment enables the plaintiff to realise a gain of which he would otherwise have been deprived by the wrong in question. Again, the judgment debt should not reflect any capital gains tax component. Capital gains tax would have been payable by the plaintiff had the wrong not been done. Such tax should continue to be payable by the plaintiff, and not the wrongdoer. Otherwise, the plaintiff would obtain not merely proper compensation, but also a windfall benefit.

It seems to me, with respect, that Tuite's case, at least on the face of the judgment, may offend against this principle. There, the defendants were in breach of a lawful provision in restraint of trade. As a result of that breach, certain shares in Wenmar Stockfeeds Pty. Ltd. were reduced in value by $808,940. His Honour accepted that an award of that sum ``would more than likely involve an assessable capital gain''; see pp. 59 and 62 of the judgment of Shepherdson, J. The quantum of tax had been calculated by an accountant at $517,191. His Honour increased the amount of the judgment by that sum, i.e. ($808,940 + $517,191) to $1,326,131.

Tuite's case is, however, distinguishable from that before me. There, compensation for the loss of a capital gain was sought by the plaintiff and (properly, given his Honour's findings) reflected in the judgment.

For these reasons, neither Provan's case nor Tuite's case nor Part IIIA of the Act is in conflict with the conclusion in which in my opinion is dictated by common sense: that capital gains tax is not payable on the basis of a judgment which does no more than restore to his previous position a plaintiff made worse off by the commission of a wrong and he seeks not to recover a gain but simply his restoration to a position which may for present purposes be described as one of ``neutrality'' - neither loss nor gain.

Unfortunately for the parties in the present case, the Commissioner of Taxation is not bound by the opinion which I have here expressed. Unfortunately for the plaintiff, it is for the time being bound by the private ruling to which I have already referred - and will remain so bound until (and if) that ruling is overturned. In these circumstances, it is entirely appropriate for the plaintiff to point out that I may be wrong in the opinion which I have expressed above. In any event, the plaintiff may be the subject of a conclusive ruling that, by reason of my earlier judgment, it must pay capital gains tax assessed on the basis of the value of the chose in action or judgment debt. If that were to happen (so the plaintiff submits) then it is entitled to be indemnified by the defendant.

I have considerable sympathy for the plaintiff's position in this regard. It is caught between Scylla and Charybdis. But I also have difficulty with the propositions upon which it relies. First, I am mindful of the massive internal contradiction of its position. It can only succeed on this part of its case if it

ATC 4428

demonstrates that a loss is a gain. Its primary loss is reflected in the difference between the price it paid for the property and the true value of that property. My judgment has simply cancelled out that loss. As a result, and although no gain has been realised, the plaintiff is (on this hypothesis) subject to capital gains tax. If it pays that tax without being indemnified by the defendant, its loss will reappear, albeit in part only. Accordingly, it argues, it should to that extent be indemnified by the defendant.

If this argument were correct, absurd results would follow. For example, a plaintiff who successfully sued for the cost of reconstructing a wholly new building which had been carelessly destroyed by the defendant would be assessed for capital gains tax on the amount of a judgment by which the plaintiff recovered no more than the cost of reconstruction. Indeed, if the Act were construed as Ms. Barbara Benson would apparently have it, the defendant himself might be liable to pay capital gains tax not merely by way of an indemnity to the plaintiff, but directly, on the basis of his ``disposal'' of the building.

Another problem for the plaintiff is that there is no clear basis upon which the indemnity should be ordered. I accept that (to adopt the words of Rolfe, J. in Provan's case at p. 4646) ``if capital gains tax is payable as a consequence of the necessity to bring these proceedings and of recovering a judgment in them, that payment is causally related to the breach of... duty''. On the other hand, I do not accept that liability for capital gains tax ``may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, on [the defendant's] breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it'': Hadley v. Baxendale, supra, at 354 [156 E.R. at 151]. I am I think entitled to proceed on the basis that, at the time the relevant contract was made, neither party turned its mind to capital gains tax, whether in relation to a breach of the contract or otherwise. Nor can results which offend both logic and common sense be said to arise naturally, i.e. according to the usual course of things, from a breach of contract. This being so, the damage which the plaintiff will suffer if it is assessed for capital gains tax on the proceeds of my judgment is too remote for such damage to be recovered from the defendant in an action for breach of contract.

A similar result would follow a claim in tort for negligence. In my opinion, it is not reasonably foreseeable that the damage caused by the defendant's negligence in this case would include liability for capital gains tax. Certainly, the plaintiff did not foresee such damage: it was not until after judgment that the plaintiff became aware of a potential problem.

Foreseeability is not the exclusive test of remoteness:
March v. E. & M.H. Stramare Pty. Ltd. (1990-1991) 171 C.L.R. 506 at 535 per McHugh, J. To the extent that other policy factors should in appropriate circumstances intervene, no argument has been put to me by the plaintiff that such factors exist here.

There are other difficulties in the way of my making orders which would protect the plaintiff. Neither liability to pay capital gains tax, nor its amount if payable, have been established. It follows that neither the fact nor the extent of the defendant's liability can be established either. If in these circumstances I am not minded to reject the plaintiff's claim altogether, then I could assess the likelihood of the plaintiff being found liable under Part IIIA in respect of my earlier judgment. If that likelihood is greater than zero, I could then attempt to assess the amount of capital gains tax which would be followed once liability is established.

The problem here is that I have no factual basis upon which I could make the latter assessment. Given that difficulties of assessment are no bar to the recovery of damages, the thing could, however, be done.

In Tuite's case, Shepherdson, J. stated (at p. 63) that he would ``seek and obtain from the first plaintiffs their undertaking to be given in open court that, in the event that [capital gains] tax is not assessed at all or that such tax is assessed at less than $517,191, they will refund to the first and second defendants the whole of the $517,191 or the amount by which $517,191 exceeds the tax assessed as the case may be''.

It is not clear what the position would be were the undertaking refused. For this reason, this course does not commend itself to me. It also suffers from the difficulty that the liability of the defendant depends upon the outcome of litigation to which he is not a party.

ATC 4429

This difficulty, of course, necessarily also attends the approach adopted by Rolfe, J. in Provan's case. Moreover, although his Honour there (at p. 4647) was of the opinion that his approach ``does not affront the principle that damages must be determined once and for all'', I am not sure that this is so. It seems to me that the only means of avoiding the problem is to join the Commissioner to the principal proceeding.

This was not done in Provan's case, or Tuite's case, or the case before me. At least in the former two, however, the question of capital gains tax was raised before judgment. The issues involved were presumably there canvassed rather more effectively than they could be in the present case, given that argument here took place over a number of short sittings outside normal Court hours, and that portion of that time was occupied with the question whether, at that very late (post judgment) stage of the proceeding, the plaintiff ought to be allowed to raise the issue at all.

In the end result, I have concluded that I ought not allow the plaintiff's application to amend. This conclusion rests in part on the proposition that, if made, the amendment would have no point. I do not think that the plaintiff should be assessed for capital gains tax on the proceedings of the judgment given by me on 5 February. If it is not, there can be no question of any further liability in the defendant. Even if the plaintiff is so assessed, its loss would in my opinion be too remote to be recoverable in the present proceeding.

Another, entirely separate, reason for my decision that leave to amend not be allowed, is based upon the lateness of the application. The defendant would, I think, be unfairly prejudiced were it required, post judgment, to meet for the first time a claim giving rise to difficult issues of law, some of the most difficult of which (given the fact that the Commissioner was not joined as a party) are hypothetical. The plaintiff's application to amend its statement of claim is therefore refused.

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