LIFTRONIC PTY LIMITED v FC of T

Members:
Foster J

Tribunal:
Federal Court

Decision date: 15 May 1996

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Foster J

The applicant, Liftronic Pty Limited (``Liftronic''), appeals to this Court pursuant to s 14ZZ of the Taxation Administration Act 1953 (Cth) ("the Administration Act") against the disallowance by the respondent Commissioner of Taxation (``the Commissioner'') of an objection lodged by it against a Private Ruling by the Commissioner given under s 14AR of the Administration Act.

I do not find if necessary to set out these sections or the other sections of Pt IVAA of the Administration Act dealing with the obtaining from the Commissioner of Private Rulings. It has not been suggested in argument that it was in any way inappropriate for Liftronic, on the facts of the case, to seek the relevant Private Ruling from the Commissioner. The operation of this Part has been the subject of extensive consideration and discussion in
CTC Resources NL v FC of T 94 ATC 4072. There was no suggestion that the Commissioner was not empowered under the Part to make the Ruling sought. Since the conclusion of argument in the matter and my reserving of this decision, I have experienced slight concern as to whether the Ruling sought by Liftronic was in respect of an ``arrangement'' within the meaning of s 14ZAAA for the purposes of Part IVAA. However, the definition is couched in extremely wide terms and, in the absence of any submission to the contrary, I am prepared to accept that Liftronic's application fell within it. I turn then to the background of this appeal.

Background

Liftronic began business in February 1985 selling, installing and maintaining lift systems, mainly in high rise buildings. In April 1988 it began purchasing and using lift equipment from Hyundai Elevator Co Limited (and associated companies) (``Hyundai'') for use in the fulfilling of its own contracts. This equipment proved to be defective and Liftronic suffered

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consequent losses from its use. It brought proceedings in the Supreme Court of New South Wales for breach of contract. The relevant portion of those proceedings was heard by Giles J, who found that Hyundai was liable to pay a sum of damages to Liftronic.

The damages awarded to Liftronic had three components, only one of which is relevant to these proceedings. It was an amount of $3,670,000, referred to by his Honour in his judgment as being for ``loss of profits'' for the period of six years from 1990 to 1996. There was an appeal against his Honour's decision, and this amount was reduced by the Court of Appeal to $2,238,336. Two Private Rulings were sought from the Commissioner, one in respect of each award of damages. The second was occasioned by the fact that the award at first instance was reduced on appeal. The Commissioner's Ruling in respect of this award was the subject of objection by Liftronic. The objection was disallowed and it is against that objection decision that this appeal is brought.

Neither the first nor the second Ruling of the Commissioner dealt with all matters raised by Liftronic in its applications. The Commissioner's Ruling was that the sum awarded for ``loss of profits'' was assessable under s 25(1) of the Income Tax Assessment Act 1936 (Cth) (``the Assessment Act''). This was, of course, contrary to the contention of Liftronic in its application. Another part of the application, namely that the same amount was not assessable under s 26(j), was not dealt with in the Ruling and, accordingly, does not arise for consideration in this appeal.

It must be noted that the only material available for consideration in this appeal is the material that was placed before the Commissioner for the purpose of obtaining the second Ruling. This material consists of the material placed before the Commissioner in relation to the first application, together with certain additional material. It is convenient, now, to set out the relevant portions of the material.

The relevant material

The relevant material was described in the Commissioner's second Notice of Private Ruling, dated 3 February 1995, as consisting of ``the letters of 4 July 1994, 16 December 1994, 24 and 25 January 1995 and accompanying documentation''. It was said in this Notice that this material ``described'' ``the arrangement'' which was ``the subject of the Ruling''.

The letter of 4 July 1994 was a communication from Liftronic's then solicitors to the Deputy Commissioner of Taxation. It requested a ``Private Ruling on the impact of the Income Tax Assessment Act 1936 on damages received by Liftronic in respect of an action taken by Liftronic against... Hyundai for breach of contract which resulted in Liftronic suffering considerable loss of goodwill''. It provided the ``relevant facts'' in the following way:-

``(a) Liftronic sells, installs and maintains lift systems. It began this business in February 1985.

(b) Liftronic initially used equipment from a British supplier. From July 1986 to March 1988 it investigated the use of Hyundai equipment and, in April 1988 it placed orders for Hyundai equipment to fulfill [sic] contracts for the sale and installation of multi-storey lifts.

(c) The first Hyundai lift was installed in early 1989, and a number of other lifts were installed during 1989. Tenders for contracts for lifts using Hyundai equipment were lodged up to December 1989.

(d) Deficiencies in the quality of Hyundai equipment became rapidly evident. Complaints were received from virtually every installation made by Liftronic and the bad news spread very quickly within the lift industry as well as to lift consultants (a great source of contract work to Liftronic) and generally to building/owners and tenants who use those lifts.

Liftronic's reputation was so badly affected that the news reached the Express Lift Company of the United Kingdom who were considering a take-over offer for Liftronic. Negotiations which were around a purchase price of $8,000,000 were called off and Express Lift dropped out.

(e) In early 1990 Liftronic decided to stop using Hyundai equipment. The last contract for a lift using Hyundai equipment was entered into in April 1990.''

The letter then referred to the relevant claims made against Hyundai in the following terms:-

``As a result of the faulty nature of Hyundai equipment, Liftronic claimed damages for

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the enormous loss of reputation caused to it by the supply of defective Hyundai equipment... A copy of the statement of claim is attached.

In order to quantify the effect of Hyundai's breach on the value of Liftronic goodwill, the claim for loss of reputation was re- expressed, during the hearing, by reference to lost profitability.''

The attached statement of claim sought damages for ``loss of goodwill''. There was no reference to ``loss of profits''.

The letter of 4 July, under the heading ``Judgment and Orders'', advised the Commissioner that ``Liftronic was successful in... the claim for loss of goodwill (which was classified in the judgment as loss of profits flowing from damage to goodwill)''. It went on to say that ``Justice Giles stated in his judgment that `effect on reputation is the major reason' for falling profitability''.

A copy of the judgment was attached. It will be necessary to refer to sections of it later in these reasons.

The letter then recounted that Hyundai was ordered to pay various amounts to Liftronic including:-

``(a)...

(b) Damages of $3,670,000 called `loss of profits' (for the period of six years from 1990-1996) being in substance for loss of Liftronic's goodwill.

(c)...''

There followed the ``Ruling Request'', of which the relevant portions read as follows:-

``Based on the facts set out above, and in the copy judgment attached, your ruling is sought on the following matters:

• (a) Loss of Goodwill
  • (i) Is this award an amount in the nature of income (under ordinary concepts... of the Tax Act) and taxable as income?
  • (ii) Alternatively, is the amount a capital sum?
  • ...''

The letter then continued by setting out the contentions put on behalf of Liftronic as to why the award of damages was not income under ordinary concepts. Although these contentions and supporting arguments have been repeated before me in submissions made on behalf of the appellant, I consider it necessary to set them out in full as they were material before the Commissioner. So far as relevant, they read as follows:-

``3. OUR CONCLUSIONS

3.1 In summary, we believe that:

• (a) Loss of Goodwill
  • (i) This award is not income under ordinary concepts... as in substance it relates to damage caused to Liftronics goodwill - see Spedley's case and Board Case No. D69 1954 TBRD 356 .
• ...

4. DISCUSSION - LOSS OF GOODWILL

4.1 Liftronic originally claimed damages for loss of goodwill, although, the judgment refers to this claim being in part damage to goodwill, and in part loss of profits (even though no dissection is made in the judgment between these two components). In substance, we believe that this award of damages to Liftronic was, as originally claimed, an award for damage to goodwill. That is, the claim was made by reference to future profitability, and future profitability is simply the most common method of valuing goodwill.

4.2 Income or Capital

There is no doubt that compensation received solely for damage to goodwill will be a capital gain. For example, in the Spedley case a $200,000 receipt received by the merchant bank Spedley in satisfaction of claims by Spedley against another party was held to be a non-taxable capital sum. This conclusion was reached primarily because Spedley claimed that the other party's breach of contract had damaged Spedley's goodwill and reputation in the international finance market.

4.3 Accordingly if the award of $3,670,000 in favour of Liftronic is in substance solely for diminution in the value of its goodwill, the Spedley case establishes that the damages received in satisfaction of that claim would be capital. In the present case, there is not [sic] doubt that Liftronic's reputation was damaged by the supply of the

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faulty equipment (this fact being acknowledged by Giles J) and Liftronic lodged a claim for damage to goodwill.

As in our view, the award of damages was in substance for damage to goodwill, with future profitability merely being a means of calculating the damage, we believe that the receipt was capital on the authority of the Spedley case.

4.4 However, it is also clear that an undissected lump sum received by a taxpayer as compensation for both income and capital claims made by a taxpayer is wholly capital - Allsop's case and McLaurin's case. This principle also applies where a composite claim is for both damage to goodwill and for loss of profits. This was established in a 1954 Board case, Case No. D69 1954 TBRD 356 , where a composite and undissected sum received by a taxpayer as compensation for claims made by the taxpayer for loss of profits and damage to goodwill was held to be a non- assessable capital receipt.

4.5 In the present case, if the damages award is not in substance solely for damages to goodwill (a conclusion that we do not accept), it is at least an undissected sum for damage to goodwill and loss of future profits. Accordingly, based on the taxation principles established in the Allsop and McLaurin cases , (and adopted in Case D69 ) the sum of $3,670,000 awarded to Liftronic was a capital receipt.''

The letter is not otherwise relevant.

The letter of 16 December 1994 merely enclosed a completed ``Application for Private Ruling''. It also indicated that the letter of 4 July 1994 contained ``considerable information concerning this request''. It would appear that this letter was written because the previous letter had not sufficed as a formal application for a Private Ruling, in respect of which there was a prescribed Taxation Office document.

The letter of 24 January 1995 was a communication from the applicant's present solicitors to the Deputy Commissioner of Taxation. It was written consequent upon the decision of the Court of Appeal which reduced the relevant amount of damages. It enclosed the Court of Appeal decision, and referred to the order of the Court that damages for ``loss of profits'' should be $2,238,336. It sought the same Ruling as contained in the First Application, and stated that ``[t]he relevant facts are those as set out in the First Application, together with the enclosed judgment of the Court of Appeal and copy of letter dated 22 December 1994 from the taxpayer's barrister Mr David Casspersonn''. A fresh ``Application for Private Ruling Form'' was also forwarded.

Mr Casspersonn's letter, which was, of course, material before the Commissioner, reads as follows:-

``As requested, I wish to note the following points in relation to the damages awarded by His Honour Mr Justice Giles on 1 September, 1993. I note the damages... were reduced in part by the Court of Appeal in a judgment dated 9 December, 1994 and orders made on 15 December, 1994.

In relation to that matter it was pleaded in the further amended summons of 12 May, 1993 as a claim for loss of goodwill. Particulars were submitted by the legal advisers for Liftronic Pty Limited on 11 November, 1992 and about May 1993, and referred to such particulars as particulars for loss of profit and goodwill.

On the following dates when His Honour Mr Justice Cole was case managing these proceedings he referred to the claim as a claim for loss of goodwill:

• - 26 February, 1993
• - 31 March, 1993
• - 21 April, 1993.

In the proceedings before His Honour Mr Justice Giles it was Liftronic's constant submission that the company had been substantially damaged in its earning ability and its general reputation by the supply of grossly defective goods by the Hyundai defendants. The experts' reports tendered by Liftronic in the proceedings before His Honour Mr Justice Giles, in effect, calculated how the value of Liftronic had diminished because of the damage done to it by Hyundai. The Court was assessing Liftronic's diminished ability to attract and earn business. That is, it was an assessment of the damage done to Liftronic's goodwill. The method taken by the experts and by the Court was to look at the company's reduced earning ability. Therefore, in effect, the

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Judgment by His Honour Mr Justice Giles was to award damages calculated to measure the appropriate value of the company, Liftronic Pty Limited, as if damage had not been done to that company's earning ability (that is to say goodwill) by Hyundai.''

The letter of 25 January merely enclosed a signed application form, the form previously forwarded having been unsigned.

It is necessary that I refer to and set out certain parts of the Supreme Court judgments which were before the Commissioner.

The Supreme Court judgment

The judgment of Giles J was given on 1 September 1993. His Honour found that Liftronic had begun business in February 1985 in a market where there were six major competitors. It was not, however, ``an unknown'', as its proprietors had had extensive experience in the lift industry and were known in the industry. His Honour made the following factual findings which were before the Commissioner:-

``In the beginning Liftronic used equipment from a British supplier. From July 1986 to March 1988 it investigated the use of equipment of Hyundai Elevator Co Ltd, a Korean company part of the world-wide Hyundai group, and negotiated the terms for supply of that equipment. Commencing in April 1988 it placed orders for Hyundai equipment to fulfil contracts for the sale and installation of multi-storey lifts. It ordered equipment for forty-one lifts to fulfil fifteen contracts. The first lift was installed in early 1989, a number of other lifts were installed during 1989, and tenders for contracts for lifts using Hyundai equipment were lodged up to December 1989. In early 1990 Liftronic decided not to use Hyundai equipment any more. The last contract for a lift using Hyundai equipment was entered into in April 1990, consequent upon the December 1989 tender, and the last order for Hyundai equipment to fulfil that contract was placed in July 1990.''

His Honour then referred to the defective nature of the Hyundai equipment and to the order made in the case that Hyundai pay Liftronic amounts representing the cost of remedial work. This claim had, as a result of procedures adopted in the Court's list, been heard separately and previously. After referring to this matter Giles J said ``there was left for determination Liftronic's claim for loss of profits. These reasons are concerned with that claim''. After noting that the claim had five elements, his Honour continued as follows:-

``First, it was said that after Liftronic decided not to use Hyundai equipment any more there was a period of two years during which its sales suffered because it could not sell and install lifts for which that equipment was appropriate (it being necessary to investigate alternative sources of like equipment, negotiate terms with suppliers, and obtain approval to the replacement equipment from the WorkCover Authority), and because its sales of other lifts were affected by damage to its reputation as a result of widespread knowledge of problems with the lifts using Hyundai equipment. The profits lost on sales for the period April 1990 to April 1992 were quantified at $1,734,000.

Secondly, it was said that during the same period Liftronic's maintenance contracts suffered because it did not secure the maintenance contracts normally flowing from sales and installation of lifts. The profits lost on maintenance contracts not secured in the period April 1990 to April 1992 were quantified at $716,330 or alternatively $615,684.

Thirdly, it was said that even after replacement equipment was available there was and would be a further period during which Liftronic's sales were affected by the damage to its reputation. On the basis of return to normality over four years from April 1992 to April 1996, the discounted profits lost on sales for that period were quantified at $1,309,000.

Fourthly, it was said that during the same further period Liftronic's maintenance contracts suffered and would suffer together with its loss of sales. Again on the basis of the return to normality over four years, the discounted profits lost on maintenance contracts not secured were quantified at $718,000.''

The fifth claim was for interest which is not relevant in this appeal.

His Honour then dealt with the points raised in opposition to these claims on behalf of Hyundai. The first of these was that the claim

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for ``lost profits'' was not recoverable as a matter of law in that, in reality, it was no more than a claim to damages for effect on reputation. The contract contained no promise that Hyundai would enhance the reputation of Liftronic or that it would not injure it. Cases such as
Marbe v George Edwardes (Daly's Theatre) Limited [1928] 1 KB 269 and
Herbert Clayton & Jack Waller Limited v Oliver [1930] AC 209 were relied upon. These cases related to general damages given for loss of publicity attendant upon breaches of an actor's contract, the breach being the refusal to allow the relevant actor to perform in advertised theatrical performances. They were clearly nothing to the point, as Giles J held. In this regard he said:-

``... Liftronic's claim was more than a claim to damages for effect on reputation. Effect on Liftronic's reputation was only part of the first and second elements in the claim, which were founded more upon Liftronic's inability to sell and install lifts because it did not have a supply of the necessary equipment. It was part of the third and fourth elements, but in those respects the claim was not for general damages to assuage an injured reputation. It was for the profits lost because Hyundai's breaches had, by damaging Liftronic's reputation, caused it to lose profits: the effect on reputation was part of the causal chain to a pecuniary loss.''

He held that such damage was not too remote for recovery in accordance with the rule in
Hadley v Baxendale [1854] 9 Ex 341; 156 ER 145.

His Honour also referred to
GKN Centrax Gears Limited v Matpro Limited [1976] 2 LlR 555, a case in which a manufacturer of forklift trucks sued the supplier of defective axle assemblies which occasioned frequent breakdowns in the trucks. The manufacturer received an award of damages for loss of orders for forklift trucks, being not only trucks using the defective assemblies but also other trucks. This award was upheld. His Honour referred to and relied upon the following passage from the judgment of Lord Denning MR in that case (at 573-4):-

``To my mind the governing principle is to be found in Hadley v Baxendale. The damages recoverable are those which would ordinarily and naturally be in the contemplation of the parties as a consequence of the breach. I should have thought that loss of repeat orders was well within that principle. But Mr Wilson submitted that a defendant ought not to be liable for such loss unless he had expressly or impliedly undertaken to pay damages on that account. He relied on
British Columbia Sawmill Co v Nettleship (1868) LR 3 CP 499. But the observations in that case cannot survive the decision of the House of Lords in
Czarnikow v Koufos (1967) 2 Ll R 457; (1969) 1 AC 350. The principle was stated by Lord Upjohn at pp 484 and 421 and 422:

`... If parties enter into the contract with knowledge of some special circumstances, and it is reasonable to infer a particular loss as a result of those circumstances that is something which both must contemplate as a result of a breach...'

That principle applies to loss of repeat orders as well as to other losses. Applying the principle here Centrax knew as well as anybody the purpose for which these axles were required. It must have been within the contemplation of the parties that if these axles failed, it would cause much damage to the goodwill of Matpro. Customers would be disappointed and would not order any more. It seems to me that the arbitrator was entirely correct. Loss of repeat orders from existing customers can be recovered where that is naturally within the contemplation of the parties as a consequence of the breach.''

His Honour also relied upon a lengthy passage from the judgment of Stephenson LJ in the same case in which, after referring to the rule in Hadley v Baxendale, his Lordship said:-

``Applying that principle to the present case I have no doubt at all that the supplier of an important component part to a vehicle manufacturer, namely an axle, such as Centrax here, if he had stopped to think at the outset of the contractual relationship what would be the result of what happened in fact, namely of a continuous supply of defective axles, he would have seen it not only as probable but as almost inevitable that that would seriously affect the saleability of the vehicle manufacturer's products in the market and would be likely to cause him loss of trade.''

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Giles J also referred to passages in the judgments in
The Commonwealth of Australia v Amann Aviation Pty Limited (1991) 174 CLR 64 which were to the like effect. He said:-

``It was known to Hyundai that Liftronic was a fairly recent but successful entrant into the lift industry, intent on promoting Hyundai equipment. One of the early letters from Liftronic to Hyundai described how it was proposed to circulate information on the Hyundai equipment and launch an advertising campaign, and said-

`The sales plan will begin with a hard hitting, extremely competitive surge into the market so that the equipment is proven and can be shown to clientelle [sic].'

In due course a Hyundai brochure listed Liftronic as the Australian `authorised Hyundai Elevator Distributor'. It must have been known to Hyundai that its equipment would be used in lifts sold and installed by Liftronic, and that if the equipment was defective the lifts would encounter problems and Liftronic's customers would be dissatisfied.''

Also, after some further discussion of the evidence he made the following observations:-

``... Hyundai must have known sufficient of the Australian lift industry that it would readily have appreciated that having to switch to an alternative source of equipment would take some time and would impact upon Liftronic's sales, and that dissatisfaction through defective Hyundai equipment would cause Liftronic's customers to look with less favour upon Liftronic for the sale and installation of lifts and even their maintenance.''

He also said:-

``In my opinion at the time of the contracts for the supply of the Hyundai equipment loss of profits of the kinds claimed by Liftronic were within the reasonable contemplation of the parties as a probable consequence of the supply of defective equipment, and Hyundai's second submission can not be accepted.''

Giles J then rejected a submission by Hyundai that Liftronic's proof of ``loss of profits'' was fundamentally deficient in that it had not called evidence of loss of particular contracts for sale, installation or maintenance of lifts because of the holding by relevant people of ``an adverse opinion of Liftronic, its lifts or services, flowing from the defects in the Hyundai equipment''. He considered that it was not ``incumbent on Liftronic to prove its loss of profits'' in that way. He then dealt with the means of proof which Liftronic in fact adopted. He described this as follows:-

``In general terms, it pointed to a marked fall in sales from early 1990, sought to identify, quantify and exclude reasons other than lack of equipment to replace the Hyundai equipment and the effect of damage to reputation (with evidence that the defective equipment and the problems with lifts using that equipment were widely known and caused Liftronic to be looked upon with less favour for the sale and installation and maintenance of lifts), and invited the conclusion that the remainder of the fall in sales was caused by the lack of equipment and the effect of damage to reputation. Maintenance contracts secured were treated as falling proportionately, with some adjustment, and an estimation was made of the ongoing effect of damage to reputation.''

His Honour commented that, although this approach could not lead to precision he saw no reason to reject it as a way of arriving at ``the loss of profits claimed''. After citing relevant authority he stated that, in the present situation, ``the Court must estimate the damages as best it can and sometimes with an element of guesswork'', and that Liftronic's approach provided a reasonable basis for so doing.

His Honour then dealt with what he described as ``the particular issues''. He did this by considering the situation in relation to lift sales and installation and maintenance contracts for lifts in two periods, viz. April 1990 to April 1992, and April 1992 to April 1996. It is to be observed that his Honour's judgment was given on 1 September 1993, so that at least from that date to the end of April 1996, he was dealing with a future period.

In relation to the first period, his Honour gave consideration to the following matters. Problems in relation to the lifts occurred soon after their installation began in early 1989, those problems increasing with the passage of time. The last contract awarded to Liftronic involving the use of Hyundai lift equipment

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was in April 1990. Shortly after that Liftronic decided to stop using Hyundai equipment. From July to December 1990 extensive inquiries were made to obtain substitute equipment resulting in, at the end of the period, the choice of a number of alternative suppliers. Necessary approval for use of some of the equipment was obtained from the WorkCover Authority, relevant approvals being received over the period May to October 1991. A number of adjustments to Liftronic's method of work, training of staff, etc were required as a result of its use of the different equipment. Although it obtained one contract in July 1991 for the installation of a lift using the new equipment, ``it could not fully compete in the market'' until about February 1992. Such was Liftronic's claim and Giles J, after consideration and rejection of countervailing arguments, accepted it.

His Honour accepted that Liftronic's sales from April 1988 to April 1990 had totalled $13,067,000, whereas from April 1990 to April 1992 they totalled only $4,453,000, a fall of $8,614,000. Liftronic sought to attribute $3,123,000 of the gross fall in sales to recessionary economic conditions commencing in 1990, thus reducing the figure for sales fall- off to $5,491,000. To this figure it applied its historical gross profit percentage of 31.59, producing a figure of claimed loss of $1,734,000.

His Honour did not reject this general approach although, as will be seen, he arrived at a different final figure. He said:-

``... I am satisfied that for over eighteen months from the beginning of 1990 Liftronic was unable to properly tender or offer itself for contracts for the supply and installation of lifts for multi-storey buildings of the kind using the Hyundai equipment. That does not make regard to the period April 1990 to April 1992 inappropriate, as it is still a guide to the effect of that inability. Over the period there would also be the effect of damage to Liftronic's reputation, something to which I refer later in these reasons and which I consider would have contributed to the fall in sales (in relation to lifts not using Hyundai equipment) over this period. There would not have been a magical date at which Liftronic had replacement equipment enabling it to compete as before, and its ability was regained over the second half of 1991 and into 1992. I consider that a period of twenty-one months is a reasonable period for the first element in the claim.''

His Honour rejected a submission by Hyundai that there had been a failure on Liftronic's part to mitigate its loss. He then considered a further submission that a greater allowance should be made for the effect of the recession on multi-storey building work. He acceded, in part, to these submissions and determined that a reduction of 25% in sales should be attributed to this factor.

His Honour finally expressed his findings in respect of this period of Liftronic's claim as follows:-

``It is obvious that a purported calculation of lost profits after Liftronic decided not to use Hyundai equipment any more and while it obtained alternative supplies of the equipment would give a false impression of accuracy. Of importance, in my view, is that there was a marked fall in sales for which a reason or reasons must be found apart from the recession. I am satisfied that there was no reason of significance other than the impact of Hyundai's breaches of contract, via the decision not to use Hyundai equipment any more and the effect on Liftronic's reputation. I consider that there was a loss caused by Hyundai's breaches of contract, and that this element of the claim should be quantified at $1,627,500. I arrive at that figure as no less than the relevant loss, while stressing that it is an estimate guided by calculation rather than a calculation, by taking a gross fall in sales of $8,000,000 for the period April 1990-April 1992, attributing 25 per cent of that to causes other than the unavailability of equipment and effect on reputation, applying a profit percentage of 31 per cent, and reducing the result by 12.5 per cent to accord with the period of twenty-one months rather than two years.''

Liftronic's claim for losses in relation to maintenance contracts for the period April 1990 to April 1992 was then considered by his Honour. Liftronic's approach to quantification was, as before, founded upon the nett fall in sales of lifts. His Honour said that, in his view, it was ``likely almost to the point of certainty that Liftronic would have been awarded maintenance contracts for lifts which it would have sold and installed but for the unavailability

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of equipment and the effect on its reputation during the period in question''. Other factors taken into account by his Honour are not relevant for present purposes, although it may be noted that he appears to have accepted a discount rate of 17% as being appropriate having regard to the fact that a maintenance contract would ordinarily continue for a considerable period of years. He found that ``there was and will be a loss of profits in relation to maintenance contracts flowing from sales lost in the period''. He awarded, in relation to ``this element of the claim'', the amount of $577,870.

His Honour then considered the period April 1992 to April 1996 in relation to losses relating to fall off in sales and acquisition of maintenance contracts. He stated Liftronic's claim as follows:-

``Liftronic's quantification was again founded upon the net fall in sales earlier mentioned. The fall was reduced to an average monthly figure over the period April 1990-April 1992, and then extended, on the basis that there was a continued effect on Liftronic's reputation which reduced its sales over a four year period with recovery to normal spread evenly over that period, to a fall for two years. To that figure there was applied the gross profit percentage of 31.59 per cent to arrive at $1,668,000, and after discounting for the future profits at 17 per cent there was reached the figure of $1,304,000 earlier mentioned.''

His Honour then considered and dealt with submissions by Hyundai similar to those made in respect of the first period. The detail of these is not relevant for present purposes, except to note that it was argued on behalf of Hyundai that ``it should not be accepted that Liftronic's sales were or would be reduced by an adverse effect on its reputation, at all or at least for anything like four years''. In relation to this argument his Honour said:-

``A fairly significant indicator that sales have been reduced by an effect on Liftronic's reputation is that its sales recovered in a leisurely manner in the year to 30 June 1993 and in a manner which, if projected, would suggest return to the 1989-90 position over something like four years. Again a reason or reasons must be found apart from the recession for the current reduced sales, and effect on reputation is the major reason.''

His Honour referred to the fact that, in respect of this aspect of the claim, it was necessary ``to divine the future''. He accepted that there was an effect on sales after Liftronic obtained its alternative sources of supply but was of the view that ``an effect beyond three years would be speculative''. He made consequent adjustments to the figures claimed and also stated that, as the exercise was very inexact, a calculated discount for ``income over the next year or so'' was not appropriate. He held that ``a reasonable estimate of the lost profits for this element of the claim is $1,000,000''.

In relation to maintenance contracts between April 1992 to April 1996 his Honour adopted the same approach as in the previous period and dealt with the same arguments. Again, a discount of 17% was used having regard to the anticipated longevity of these contracts. He held that ``a reasonable estimate of this element of the claim is $466,000''.

In the result, his Honour held that Liftronic was entitled to ``damages for loss of profits of $3,671,370'', which he rounded off to $3,670,000.

The Court of Appeal judgment

As already noted, this figure was reduced on appeal. However, a reading of the reasons for judgment of the members of the Court of Appeal, which material, as I have already indicated, was before the Commissioner, indicates that there was an acceptance of the general approach taken by Giles J. The major factor in the reduction was the adoption by the Court of Appeal of a figure of 35% rather than 25% to take account of the effect of economic recession in the relevant years. It was also held that this percentage reduction should have been applied to the sales figure for the 1988 to 1990 period, rather than to the figure for fall of sales in the 1990 to 1992 period. This approach when applied consistently throughout the calculations in relation to fall in sales and maintenance contracts produced another variation in the figures. The result was the reduction of ``damages for loss of profits'' to the figure of $2,238,336, which was the subject of the Commissioner's Ruling appealed against in these proceedings.

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It must be noted that neither in the proceedings before Giles J nor in the Court of Appeal was any allowance sought or made for the effect of taxation upon any of the components entering in to the assessment of ``loss of profits''. This appears, clearly enough, from the judgments themselves and was, in any event, conceded by both sides, in argument before me, to be the case.

The Private Ruling

The Notice of Private Ruling was forwarded to Liftronic on 3 February 1995 by the Deputy Commissioner. It indicated that the Ruling applied to the years of income ended 30 June 1995 and 1996 inclusive. The Ruling itself was as follows:-

``On the basis of the information submitted for consideration and to the extent that the original Judgement has been varied by the Court of Appeal, the amount of damages for loss of profits of $2,238,336 is in the nature of income under ordinary concepts and is not referable to capital account.''

Contentions in this appeal

I have set out at some length what I consider to be the relevant material in the judicial reasoning which led to the award of damages for ``loss of profits'', which the Commissioner claimed, in the Ruling under appeal, to be taxable under s 25(1) of the Assessment Act. It is the characterisation of this award which is at the heart of this application. As appears from the letters which also formed part of the material before the Commissioner, the applicant's contention is that the award, or a significant part of it, was given in respect of damage to Liftronic's goodwill or its earning capacity. It was further put that, insofar as the award related to a future period of time, that portion depended upon lost earning capacity or the loss of a chance to earn additional income. All these findings, it was said, were, in fact, findings of damage to a capital asset or assets and were therefore on capital account. Furthermore, if portions of the award related to loss of income, those portions were inextricably combined in the final award with elements relating to impairment of capital assets, with the result that, in accordance with authority, the whole award must be treated as one given on capital account. I shall, of course, refer to the detail of these arguments later.

The Commissioner's contention was a simpler one. It was submitted that the award was given for ``loss of profits'', and should be regarded as an amount provided to compensate for the ``hole in profits'' occasioned by Hyundai's breaches. As such it was income according to ordinary concepts and assessable in conformity with the Commissioner's Ruling. The Commissioner asserted that in identifying ``the arrangement'' in respect of which the Ruling was sought he was entitled to have regard to the content of the judgments of Giles J and the Court of Appeal, copies of which accompanied the application. This was not contested by Liftronic, and both sides made reference to those judgments in argument. It is convenient, in the first place, to consider the Commissioner's submissions.

The Commissioner's submissions

In the first place the Commissioner, in oral and written submissions, stressed the numerous occasions in which reference is made to ``loss of profits'' in the judgments. This fact is amply demonstrated in the passages which I have set out above. His submission, based upon these passages and upon the form of the final awards, was that the amount in question was received by the applicant as ``damages for loss of profits'', in circumstances where whatever the entitlement of the applicant, the Court had made no award for damages for loss of reputation. The damages were in substitution for income which would have been earned and were thus of an income character. Reliance was placed on the well known authorities relating to the filling of ``a hole in profits'' (see e.g.
Californian Oil Products Ltd v FC of T (1934) 3 ATD 10 at 20; (1934) 52 CLR 28 at 46;
London & Thames Haven Oil Wharves Ltd v Atwooll (Inspector of Taxes) (1966) 43 TC 491 at 515;
Burmah Steamship Co Ltd v Commissioner of Inland Revenue (1930) 16 TC 67 at 71-73;
Allied Mills Industries Pty Ltd v FC of T 89 ATC 4365 at 4369; (1990) 93 ALR 157 at 162;
FC of T v Wade (1951) 9 ATD 337 at 341; (1951) 84 CLR 105 at 112).

In this regard particular reference was made to the passage in the judgment of Lord Clyde in Burmah Steamship (at 71-2), in which the difference between capital and income losses was discussed as follows:-

``Suppose some one who chartered one of the Appellant's vessels breached the charter and exposed himself to a claim of damages

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ATC 4436

at the Appellant's instance, there could, I imagine, be no doubt that the damages recovered would properly enter the Appellant's profit and loss account for the year. The reason would be that the breach of the charter was an injury inflicted on the Appellant's trading, making (so to speak) a hole in the Appellant's profits, and the damages recovered could not therefore be reasonably or appropriately put by the Appellant - in accordance with the principles of sound commercial accounting - to any other purpose than to fill that hole. Suppose, on the other hand, that one of the Appellant's vessels was negligently run down and sunk by a vessel belonging to some other shipowner, and the Appellant recovered as damages the value of the sunken vessel, I imagine that there could be no doubt that the damages so recovered could not enter the Appellant's profit and loss account because the destruction of the vessel would be an injury inflicted, not on the Appellant's trading, but on the capital assets of the Appellant's trade, making (so to speak) a hole in them, and the damages could therefore - on the same principles as before - only be used to fill that hole.''

It was the Commissioner's contention in the present case that, despite references to injury to goodwill and commercial reputation made in the judgments, the Supreme Court was fundamentally engaged in estimating the value of an injury ``inflicted on the appellant's trading'' and filling ``that hole'', rather than compensating it for an injury inflicted on a capital asset.

Liftronic's submissioins

On the other hand, it was the contention of Liftronic that the many references made in the Supreme Court judgments to damage to goodwill and reputation were clearly indicative of the fact that, although described as damages for loss of profits, the award in question was made to repair damage to a capital asset and was thus received on capital not revenue account. Reliance for this submission was placed upon a number of decided cases. I shall make reference to the more significant of these.

In the first place counsel referred to cases which clearly establish that in an action for breach of contract, compensation for damage to the goodwill of the plaintiff's business may be recovered where it is the natural and probable or reasonably contemplated result of the breach (see e.g.
Bristow v Moffat-Virtue (Qld) Pty Ltd [1962] QdR 377, 396;
Flamingo Park Pty Ltd v Dolly Dolly Creation Pty Ltd (1986) 65 ALR 500, 524;
FAI General Insurance Co Ltd v RAIA Insurance Brokers Ltd (1992) 108 ALR 479, 508-9; affirmed (1993) 112 ALR 511, 527).

In this regard, I am satisfied that the material before the Commissioner clearly established that, at the time of Hyundai's breaches of contract, Liftronic had established a capital asset in the nature of existing goodwill. It had, in fact, received a substantial offer for the sale of its business, which offer was withdrawn after the problems had arisen in relation to the supply to it of defective equipment by Hyundai and its consequent loss of business reputation. It must be noted, however, that Liftronic did not, in consequence of the breaches, sell its business at a lesser figure. It did not sell the business at all. It continued to trade and took steps which, as Giles J found, led or would lead to the restoration of its goodwill. It promptly proceeded to rectify the problems in the lifts which it had sold to its customers. It was compensated in the award of damages for expenditure incurred in so doing. It also obtained, by dint of investigative effort and expense, alternative sources of supply for lift equipment which, as its trade recovered, it was able to use in the supply and installation of lifts to customers. During this period of recovery it clearly lost money which it otherwise could and would have earned had it not been for Hyundai's breaches of contract. These losses, as found by Giles J, occurred in the period required for the re-establishment of its commercial reputation and goodwill, part of which period extended beyond the date of judgment. The whole question in the case is whether the amount so awarded is to be characterised as a replacement for lost goodwill or earning capacity, or as truly a substitute for lost income earnings.

In seeking the former characterisation, counsel for Liftronic relied heavily upon the well known case of
The Glenboig Union Fireclay Co v IRC [1922] 12 Tax Cas 427, and authorities stemming from it.

In that case Glenboig carried on the business of manufacturing fireclay goods and selling fireclay. It owned mining rights over certain fireclay beds. One fireclay bed was adjacent to

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ATC 4437

the line of the Caledonian Railway Co, such that its continued working would be an interference with the operation of the railway. As a result of arbitration proceedings the railway company paid a sum of money to Glenboig for the giving up of its rights to the working of the fireclay. The question for determination was whether this sum should properly have been included as a profit in Glenboig's balance sheet for the tax year in question. Lord Buckmaster held that it should not be so included. His reasons for so doing are set out in the following passage (at 463-464) to which reference is frequently made in the cases:-

``The argument in support of its inclusion can only be well founded if the sum be regarded as profits, or a sum in the nature of profits, earned in the course of their trade or business. I am quite unable to see that the sum represents anything of the kind. It is said, and it is not disputed, that the amount in fact was assessed by considering that the fireclay to which it related could only be worked for some two and a half years before it would be exhausted, and it is consequently urged that the amount therefore represents nothing but the actual profit for two and a half years received in one lump sum. I regard that argument as fallacious. In truth the sum of money is the sum paid to prevent the Fireclay Company obtaining the full benefit of the capital value of that part of the mines which they are prevented from working by the Railway Company. It appears to me to make no difference whether it be regarded as a sale of the asset out and out, or whether it be treated merely as a means of preventing the acquisition of profit that would otherwise be gained. In either case the capital asset of the Company to that extent has been sterilised and destroyed, and it is in respect of that action that the sum... was paid. It is unsound to consider the fact that the measure, adopted for the purpose of seeing what the total amount should be, was based on considering what are the profits that would have been earned. That, no doubt, is a perfectly exact and accurate way of determining the compensation, for it is now well settled that the compensation payable in such circumstances is the full value of the minerals that are to be left unworked, less the cost of working, and that is, of course, the profit that would be obtained were they in fact worked. But there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test. I am unable to regard this sum of money as anything but capital money, and I think therefore it was erroneously entered in the balance sheet..., as a profit on the part of the Fireclay Company.''

It was Liftronic's contention that this reasoning should be applied to the effect upon its goodwill of Hyundai's breaches. In this regard, Liftronic relied upon cases which established that damage to goodwill and to earning capacity relevantly constituted damage to a capital asset.

The concept of goodwill has been the subject of much discussion in the cases, having been described as ``a thing very easy to describe, very difficult to define'' (per Lord Macnaghten
Inland Revenue Commissioners v Muller & Co's Margarine Limited [1901] AC 217 at 223-4; see also
Box v FC of T (1952) 10 ATD 71; (1952) 86 CLR 387 and cases referred to therein). In my view, it is not synonymous with the term ``earning capacity''. However, for present purposes it is sufficient, in my opinion, to recognise that Liftronic's established commercial reputation bore a direct association with its earning capacity, in that its earnings clearly depended upon its maintenance of its established custom and, indeed, upon its acquisition of new customers. An impairment of its goodwill or commercial reputation would necessarily have an influence upon its capacity to earn income.

It was no doubt because of this connection that reliance was placed by Liftronic upon decisions of high authority in the area of the computation of damages for personal injuries. In those cases the distinction between earning losses and impairment or destruction of earning capacity has been the subject of considerable analysis. I do not propose to undertake a review of the well known cases in this area, although I shall have occasion to refer to one aspect of their reasoning later in this judgment. The case of
FC of T v Slaven 84 ATC 4077; (1984) 1 FCR 11 relied upon by Liftronic provides a useful example of the treatment of earning

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ATC 4438

capacity as a capital asset, and makes reference to these cases.

In that case the taxpayer Slaven had been injured in a motor vehicle accident and claimed compensation under the Motor Accidents Act 1973 (Vic). That Act was amended in 1975 by requiring the relevant Board to assess and pay compensation for ``deprivation or impairment of earning capacity'' and not as, prior thereto, for ``loss of income in the capacity of employee''. The Court held that there was a well established distinction between the two concepts, with the result that the amount awarded by the Board was capital and not income in the hands of the taxpayer. The Court (at ATC 4084-4085; FCR 21) said in this regard:-

``The exercise in which the Board is required to engage by the Act is not merely one of assessing lost earnings. It is in fact an exercise in valuation. It is true to say that the amount of compensation payable to an injured person is quantified by a consideration of what the use of the lost or diminished earning capacity might be expected to produce. In some simple situations the amount of lost earnings may be a certain and ready guide to the amount of entitlement. But the Board's task is essentially to determine the compensation payable to a person having regard to the deprivation or impairment of his earning capacity by reason of the injury. The distinction between loss of earnings and loss of earning capacity is well established; it is by no means fictional. See for example:
Paff v. Speed (1961) 105 C.L.R. 549 per Windeyer J. at pp 566-567;
Graham v. Baker (1961) 106 C.L.R. 340 per Dixon C.J., and Kitto and Taylor JJ. at pp 346-347;
Skelton v. Collins (1966) 115 C.L.R. 94 per Windeyer J. at p 129; and
Atlas Tiles Limited v. Briers 78 ATC 4536; (1978) 144 C.L.R. 202 per Barwick C.J. ATC p 4540; CLR at p 210. Nothing in the judgment of the majority in
Cullen v. Trappell 80 ATC 4185; (1980) 146 C.L.R. 1 detracts from what Barwick C.J. said on this topic in the Atlas Tiles case.''

The Court went on to hold that the payments ``should be characterised as capital payments for deprivation or impairment of earning capacity as distinct from payments in partial substitute of earnings which would have been earned but for the accident'' (at ATC 4086; FCR 23).

It was Liftronic's contention that, in the same way, the amount of the award to it in the Supreme Court should be characterised as compensation for lost earning capacity.

A similar argument was mounted in respect of impairment of goodwill. Reference was made, in particular, to the case of
FC of T v Spedley Securities Limited 88 ATC 4126.

In that case the taxpayer (Spedley) was assessed to tax in respect of a lump sum of $200,000, which had been paid to it by another company pursuant to the terms of a deed of discharge entered into after the termination of an earlier agreement between Spedley and that company. Spedley carried on the business of a merchant bank, and the terminated agreement had provided for the taxpayer's securing of a substantial loan for the other company. It was argued on behalf of the Commissioner that the lump sum received represented a payment for loss of commission for the obtaining of the loan and, accordingly, bore the character of income. Spedley, however, relied upon the fact that under the deed, in consideration for the payment to it of the lump sum, it released the other company from all possible claims arising out of the termination of the agreement. The deed did not cover in specific terms damage to goodwill or loss of reputation. However, evidence was given that it was considered by Spedley and its advisers that an action for damages for loss of reputation and damage to goodwill would lie. It was accepted, in this context, that Spedley was concerned for its reputation in the international money market and that the arranging of this loan ``was its largest endeavour''. It appeared that in any proceedings which might have been brought, had it not been for the bar constituted by the deed, the claim for loss of commercial reputation would have loomed very large. Indeed, it appears that evidence was accepted that, had proceedings been taken rather than settled in the terms of the deed, Spedley's ``most substantial claim'' would have been ``for damage to its reputation and goodwill and that this would [have been] the primary ground of relief in any proceedings taken''. This enabled a finding that ``the payment was, at least in a substantial part, recompense for damage to... reputation''.

The Court concluded (at 4131) that:-

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ATC 4439

``In the present case the amount received comprised or included recompense for damage to goodwill, which, it is agreed, is an item of capital. The point of the present case is that what was received was a lump sum, the ingredients of which were not identified (there may in fact have been no dissection made on either side) but which, it was held, included compensation for injury to a capital asset. There is no basis for dissection or apportionment. In these circumstances, in accordance with authority (
McLaurin v. F.C. of T. [(1961) 12 ATD 273;] (1961) 104 C.L.R. 381;
Allsop v. F.C. of T. [(1965) 14 ATD 62;] (1965) 113 C.L.R. 341; and see Parsons, Income Taxation in Australia (1985) para 1.78) the whole receipt is to be treated as one of capital.''

It may be said, at once, that Spedley contained many features distinguishing it from the present case. An undifferentiated lump sum was accepted in settlement of all conceivable claims that might be brought by Spedley as a result of the termination of its agreement to negotiate the relevant loan. The main factual issue of the case was whether, despite the broad wording of the deed, the payment was not, in reality, simply made as compensation for lost commission in relation to the obtaining of the relevant loan. This issue was decided against the Commissioner on the basis of the acceptance of evidence that it represented, for the most part, compensation for damaged goodwill. In the present case the amount in question is the subject of a Court award which, although reference is made in the reasons for judgment to effect of the breaches by Hyundai upon goodwill and reputation of Liftronic, is nevertheless clearly expressed to be compensation for ``lost profits''.

As I have previously indicated, counsel for Liftronic also took me in some detail to the cases in which damages for lost earning capacity have been considered in the context of personal injury. Reference has been made to these cases in the passage cited above from the judgment in Slaven. Whilst it is true that an injured plaintiff's earning capacity has been, in some instances, viewed as being in the nature of a capital asset, I do not consider that these cases are, in the ultimate, of assistance to the case put forward here by Liftronic. In my view, the characterisation of earning capacity in those cases was of secondary significance to the question whether the calculation of damages for lost or permanently impaired earning capacity should include an allowance for the taxation that the injured plaintiff would have incurred on the wages or other emoluments he was prevented from earning. This involved the question of whether the House of Lords decision in
British Transport Commission v Gourley [1956] AC 185 should be applied in Australia. The effect of that decision was referred to by Gibbs J (as he was then) in
Groves v United Pacific Transport Pty Limited and Thompson (1962) QdR 62 at 63 where his Honour said:-

``It was submitted on behalf of the plaintiff that the decision in British Transport Commission v. Gourley (1956) A.C. 185 does not require the tax position to be taken into account in the assessment of damages in respect of loss of earnings during the period up to the date of trial. In
Robert v. Collier's Bulk Liquid Transport Pty. Ltd. (1959) V.R. 280, at p. 281, Gavan Duffy J. said of that decision: `The underlying principle is that where the sum representing income or profits alleged to have been lost owing to the defendant's negligence would have been taxable if it had, in fact, been received by him, and the sum received as damages to compensate him for the loss of such income or profits is not taxable, to fail to take into account the tax that would have been payable in calculating the plaintiff's damages would be to give him not only all that he had lost but more than all'.

In other words, as Pearson L.J. put it in
Parsons v. B.N.M. Laboratories Ltd. (1963) 2 W.L.R. 1273, at p. 1300, `the principle of the Gourley case is applicable only if the lost earnings or profits are taxable and the damages are not'.

It of course follows that if the sum that will be received by the plaintiff as damages in the present case is taxable, the decision in the Gourley case will not apply, and the better view appears to be that in that event taxation should not be taken into account in the assessment of damages - see Parsons v. B.N.M. Laboratories Ltd. (supra at pp. 1296, 1304), Robert v. Collier's Bulk Liquid Transport Pty. Ltd. (supra) and
Williamson v. Commissioner for Railways (1959) 76 W.N. (N.S.W.) 648.''

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ATC 4440

His Honour went on to say (at 65):-

``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.''

This view finally prevailed in the High Court in Cullen v Trappell 80 ATC 4185; (1979-1980) 146 CLR 1. Reference may also be made to
Williamson & Anor v Commissioner for Railways (1960) 60 SR (NSW) 252, a case where the plaintiff's grazing property, fencing and stock had been damaged by fire occasioned by the negligence of the defendant. In that case, Herron and Sugerman JJ held that a jury verdict, insofar as it included compensation for loss of profits or income, was assessable to income tax under s 26(j) of the Income Tax and Social Services Contribution Act 1936. The result then was that no deduction should have been made for income tax in accordance with the principle of Gourley.

It would appear, therefore, that if damages are awarded for loss of or impairment to earning capacity, then, in the calculation of such damages, express consideration must be given to the incidence of taxation. If the award is not itself taxable as being income according to ordinary concepts, or under some express provision of the taxing statute, then proper allowance must be made for tax that the successful plaintiff would have incurred in respect of earnings, had his earning capacity not been impaired. Although this does not necessarily mean that, where no deduction has been made in calculation for the incidence of taxation, the final figure is, therefore, a substitution for income rather than for capital loss, it is, nevertheless, a consideration which may be adverted to. In the present case no deduction has been made for income tax.

Although no reason was given for this in any of the Supreme Court judgments, it points, in my opinion, to the fact that their Honours were proceeding on the basis that they were making an award for lost income which would be subject to taxation in the hands of the plaintiff.

Nothing is to be served, in my view, by a consideration of all the decided cases referred to me in the careful argument of counsel. The question for decision is always the characterisation of the particular money sought to be brought to tax: in the hands of the taxpayer, is it a receipt on capital or on revenue account? Its description in the course of the transaction in which it is received is not determinative of this question. As was said in Glenboig in the passage cited above, ``there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test''. In my view, the whole of the argument presented on behalf of Liftronic centres on this proposition. Notwithstanding the use throughout the judgments of the term ``loss of profits'', and the fact that the amount of the final award has been calculated on that basis, the award itself must be characterised as a receipt of capital in the hands of Liftronic. The use of the term in other portions of the judgment and in the pleadings, ``loss of goodwill'' and references to injury to or reflection on ``reputation'' also point to the fact that the damages awarded are for restoration of a relevant capital loss.

I have come to the conclusion that this submission should not be accepted. I have derived some assistance in this regard from a consideration of the reasoning at first instance and on appeal in the English case of London & Thames Haven Oil Wharves Ltd v Atwooll. In that case the appellant company owned and operated an oil storage installation which consisted (inter alia) of certain deep-water jetties. One of these jetties was damaged by the

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ATC 4441

negligent handling of a tanker, the owners of which admitted liability. The jetty was put out of use for a period of 380 days. After adjustments, not relevant for present purposes, the company received the amount of 21,404 for loss of use of the jetty during the period of its repairs. The company contended that this amount was received on capital account. The Crown asserted that it represented payment for loss of profits and was a trading receipt. At first instance the company's argument was successful. It is useful, in my view, to set out the relevant portion of the trial Judge's reasoning (at 504) as follows:-

``If, in the present case, the jetty, instead of being damaged, had been entirely destroyed by an explosion, the amount recoverable as damages would have included an element related to the profitability of the jetty, but no part of such damages would, in my opinion, have fallen to be treated as a matter of sound accountancy or for fiscal purposes as profit of the Appellants' business. Can it make any difference in this respect that, instead of being wholly destroyed, the jetty was only partially damaged, and that, instead of losing all future profit from the jetty, the Appellant lost the profitable use of the jetty for only 380 days? In my judgment, none. The damage which the Appellants suffered all flowed directly from physical injury to a capital asset of their business, the jetty, inflicted by the negligent handling of a ship. The amount of damages which the Appellants might have recovered constitutes the relief, whole and indivisible, to which the Appellants became entitled in consequence of that injury... Although some part of that amount related to the loss of use of the jetty for 380 days, this fact does not, in my judgment, make that part of the damages proper to be brought into account as a revenue receipt of the business.''

He then referred to the passage in Glenboig cited above and continued:-

``The questions are: What was the nature of the Appellants' claim against the shipowners, and what was the quality of any sum recovered by them in respect of that claim? The Appellants' claim did not arise out of any involuntary disposition of stock- in-trade of their business or of any involuntary rendering of any services or provision of any facilities in the course of their business. It did not arise out of any contract entered into in the course of their business or out of any abrogation, breach or modification of any such contract. Nor is it the result merely of the loss of trading opportunities. I can see no ground for treating any part of the damages received by the Appellants as a receipt in the course of their trade or so connected with their trade as to make it proper to be treated as a revenue receipt of the trade. On the contrary, it seems to me that the £21,404 received by the Appellants in respect of the consequential damage is compensation for a capital asset, the jetty, having been sterilised - that is made incapable of producing profit - for 380 days. The effect of that sterilisation in monetary terms can be appropriately measured by estimating the profit that might have been earned during that period, but the effect of the accident was to depreciate the value of the Appellants' undertaking as a whole and as a going concern by an amount equal to the aggregate of the cost of repair and the loss of profit. Regarded in this way, the loss is seen as a capital loss, and in my judgment that is the proper way to regard it in the circumstances of this case.''

This reasoning was rejected on appeal, Willmer LJ saying (at 506-7) that it was ``a very plain case''; the question for decision was ``eminently a question of fact, which depends on the answer to the question: what did the sum of £21,404 represent?''. His Lordship, after some discussion of authority, went on to consider the passage from the judgment appealed from, which I have set out above. Whilst not taking issue with the first part of that passage he said, in respect of the second part (at 509):-

``... it appears to me, with all respect to the view of the learned Judge, that there is all the difference in the world between a total loss and a partial injury. In the case of a total loss what can be recovered from the assumed wrongdoer is the value of that which has been lost. If the thing lost is a ship or a jetty which is ordinarily used for the purpose of earning profits, the fact of its profitability is an element to be considered in assessing its capital value. In such a case the owner's right is a right to recover the value of the thing which has been lost, and

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ATC 4442

this can, no doubt, be properly described as `whole and indivisible', even though it includes some element of profitability of the thing lost; in such circumstances what is recovered is properly treated as a capital receipt. But where there is only a partial injury, as there was in the present case, there are necessarily two elements to be considered if the owner is to be put back, so far as money can do it, in the same position in which he would have been but for the tortfeasor's wrongdoing. First, he can recover the whole cost of repair, which is without doubt a capital receipt. Secondly, he can also recover something in respect of the loss of use during the period of repair... why should not damages recovered under this head be regarded as a trading receipt, in that they represent the trading profit which the owner would have earned if he had had the use of his ship or of his jetty.''

His Lordship went on to point out that the company's case had, in effect, been founded on an erroneous view of the decision in Glenboig. He said of that case (at 510):-

``The fireclay in which the company was interested was a capital asset, but it was a capital asset which could be turned into profit only by consuming it. When the railway company exercised its statutory powers, the fireclay company lost its capital asset; it could no longer consume the fireclay. In those circumstances it appears to me to be a natural result that the compensation recovered should be regarded as a capital receipt.''

His Lordship also cited in respect of the Glenboig case a comment made by Lord Clyde in Burmah Steamship (16 TC at 72):-

``But, as the case just referred to shows, it is very relevant to enquire whether the thing in respect of which the taxpayer has recovered damages or compensation is deprivation of one of the capital assets of his trading enterprise, or - short of that - a mere restriction of his trading opportunities.''

His Lordship then remarking that the sentence stated ``in very succinct form the problem which has to be solved in a case of this sort''.

His Lordship went on to say (at 512) in respect of the question: what did the sum recovered represent?, that ``the answer to that question must be that it represents profit which would otherwise have been earned by the use of the thing concerned''.

The other judgments were to like effect, Harmen LJ remarking in respect of the fireclay in the Glenboig case, ``that was a capital asset which has been destroyed and therefore compensation for it was a capital receipt''.

This case and the conflict of reasoning between the decision at first instance and on appeal is, in my view, most instructive in relation to the present case. Here the breaches of Hyundai did not destroy the goodwill or earning capacity of Liftronic. They did not take away ``the whole structure, [its] profit making apparatus'' (per Lord McMillan
Van Den Berghs Limited v Clark [1935] AC 431 at 442). Those income earning assets of Liftronic were not ``sterilised and destroyed'' (see passages cited from Glenboig) by Hyundai's breaches. They were temporarily impaired during the period in which, through efforts made on the company's behalf, they were restored. There was no destruction of these assets but ``a mere restriction of... trading opportunities''. This restriction created a ``hole in profits'' which the award of damages was intended to fill.

It follows that, in my view, the amounts awarded as ``loss of profits'' are properly to be characterised as income in accordance with ordinary concepts.

There remains for consideration the question whether this result should be affected by the fact that, as at the time of the judgment, some part of the amount awarded related to a future period, being the balance of time which, in the opinion of the Court, was reasonably required for the total restoration of the company's goodwill and earning capacity. It is submitted that the portion of the sum awarded referable to this period cannot reasonably be dissected from the total. It is contended that this amount, whatever it might be, must be characterised as the valuation of a ``chance'' and have thereby a capital character. In those circumstances, the inability to dissect it requires, in accordance with the reasoning in McLaurin v FC of T (1961) 12 ATD 273; (1961) 104 CLR 381, that the whole of the receipt must be treated as capital (see also Allsop v FC of T (1965) 14 ATD 62; (1965) 113 CLR 341;
FC of T v Northumberland Development Co Pty Ltd 95 ATC 4483).

These arguments depend upon the finding that such portion of the award for loss of profits

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ATC 4443

as relates to the future could not be dissected out of the whole. I am by no means persuaded that this is so. However, I am not, in any event, prepared to find that that element in the award must properly be characterised as ``capital'' in the hands of Liftronic. The overwhelming thrust of the judgments of the Supreme Court, in my view, is that the Court was performing the task of filling in the ``hole in profits'' occasioned by Hyundai's negligent breaches of contract. It was not seeking to value a loss of goodwill or earning capacity nor was it being asked to do so. Liftronic was not contemplated as having suffered anything in the nature of permanent or ongoing impairment in this regard. It was viewed as having suffered a temporary setback, for the effect of which it could be compensated by an appropriate award to restore past loss of income and provide for such future loss as would occur before it was able to achieve a level of trading commensurate with its restored position in the market place.

I was referred to remarks of Aickin J in
Air Express Limited v Ansett Transport Industries (Operations) Pty Limited (1979) 146 CLR 249 at 303 and also to statements in
Lonie v Perugini & Perugini 77 ATC 4318; (1977) 18 SASR 201. These cases appear to me to be involved primarily with the question of the application of the decision in Gourley in claims for loss of income. As I have already mentioned, Gourley was neither applied nor adverted to in the judgments of the Supreme Court on the basis, it would appear, that the amounts awarded were regarded as being of an income nature and subject to tax in the ordinary way, according to ordinary concepts.

In conclusion, I am quite satisfied that the whole amount the subject of the Ruling was properly characterised by the Commissioner as income according to ordinary concepts.

Accordingly, I dismiss this application with costs.

THE COURT ORDERS THAT:

1. The application be dismissed.

2. The applicant pay the respondent's costs.