SYDNEY REFRACTIVE SURGERY CENTRE PTY LTD v FC of T

Judges:
Sackville J

Court:
Federal Court, Sydney

MEDIA NEUTRAL CITATION: [2008] FCA 454

Judgment date: 9 April 2008

Sackville J

The issue

1. The issue in this case concerns the liability of the applicant ("SRSC") to income tax in respect of damages awarded in defamation proceedings instituted by it in the Supreme Court of New South Wales. SRSC was awarded damages against the defendants totalling $844,624.00 in the defamation proceedings and was paid that sum by the defendants during the taxation year ended 30 June 2004 ("2004 year"). SRSC's damages were assessed by Studdert J, the trial Judge, by reference to the profits SRSC lost in consequence of the defamatory publications.

2. The specific question is whether the damages of $812,726.00 actually received by SRSC ("the Sum"), after allowing for $31,898 in costs incurred by SRSC, was "income according to ordinary concepts", for the purposes of s 6-5 of the Income Tax Assessment Act 1997 (Cth) ("ITAA"). If so, the present respondent ("Commissioner") correctly disallowed an objection by SRCS to the inclusion of the Sum in its assessable income for the 2004 year. Section 6-5(1) provides as follows:

"Your assessable income includes income according to ordinary concepts, which is called ordinary income".

3. The Appeal Statements filed by the parties to these proceedings identified a second issue. The second issue arose out of an alternative contention once advanced by the Commissioner, that the Sum constituted a capital gain realised by SRSC in the relevant year, by reason that a "CGT event C2" occurred within the meaning of s 104-25(1) of the ITAA. The Commissioner no longer presses this contention. Nor does the Commissioner contend that the Sum constituted an "indemnity for the loss of an amount", where the lost amount would otherwise have been included in SRSC's assessable income: ITAA, s 15-30; cf H Luntz, Assessment of Damages for Personal Injury and Death (4th ed 2002), at [5.7.2].

Proceedings in this Court

4. In September 2004, SRSC applied to the Commissioner for a private binding ruling, seeking a ruling that it was entitled to disregard the Sum when returning its assessable income in its tax return for the 2004 year. The Commissioner declined to make such a ruling.

5. SRSC lodged its return for the 2004 year on 17 May 2005. The return included the Sum as part of SRSC's assessable income. Pursuant to s 166A of the Income Tax Assessment Act 1936 (Cth) ("ITAA 1936"), the Commissioner was taken to have made, on the day on which the return was finalised, an assessment of SRSC's taxable income for the 2004 year as specified in the return.

6. SRSC lodged a Notice of Objection dated 21 August 2006, contending that the deemed assessment should be amended to reduce SRSC's assessable income by the amount of the Sum. The Commissioner disallowed the objection in full on 19 October 2006. SRSC commenced proceedings in this Court on 18 December 2006, appealing against the Commissioner's disallowance of its objection.

7. Although SRSC is the applicant, the proceedings in this Court were initially conducted on its behalf by solicitors acting on instructions from two of the three defendants in the defamation proceedings, HSV Channel Seven Pty Ltd ("HSV") and Amalgamated Television Services Pty Ltd "ATS") (together "Seven"): see
Sydney Refractive Surgery Centre Pty Ltd v Commissioner of Taxation [2007] FCA 1544, at [10]. Seven took on this role, notwithstanding that neither HSV nor ATS is a party to the current proceedings, apparently because the orders made by Studdert J in the defamation proceedings contemplate that SRSC can apply for an increase in the damages award if it is found liable to pay capital gains tax in respect of the Sum.

8. Since the Commissioner no longer presses the contention that the Sum represents a taxable capital gain and since the orders made by Studdert J in the Supreme Court make no provision for an increase in the damages award if the Sum is determined to be income according to ordinary concepts, SRSC now appears to be the real party in interest as well as the nominal applicant in these proceedings. It is of course possible that some indemnity arrangement is in place between Seven and SRSC but, if so, I have not been informed of any such arrangement.

A procedural observation

9. Before considering the issue debated before me, one aspect of the present case should be noted. Studdert J specifically addressed the question of whether the Sum would be regarded as "income according to ordinary concepts", within the meaning of s 6-5 of the ITAA. His Honour decided that it should not be so regarded and that, in order to avoid over-compensating SRSC, its damages were to be reduced by 36 per cent to take account of the tax that it would have had to pay on the profits lost in consequence of the defamatory broadcasts. Apparently SRSC did not ask Studdert J to make an order allowing SRSC to apply for an increase in the damages award if the Commissioner subsequently regarded the damages received by SRSC as ordinary income and part of its assessable income for that reason.

10. If the Commissioner's contentions in the present proceedings are correct, SRSC may find itself in the position of having to pay income tax on a damages award already reduced to take account of its notional income tax liability. Perhaps more significantly, this Court would have reached a conclusion inconsistent with that reached by the Supreme Court in a judgment that has not been the subject of an appeal. Courts have adverted to this problem on other occasions and suggested that it should be open to join the Commissioner as a party in proceedings in which damages are to be assessed:
Gill v Australian Wheat Board [1980] 2 NSWLR 795, at 797, per Rogers J;
Provan v HCL Real Estate Ltd (1992) 24 ATR 238, at 247, per Rolfe J. This case may be a further illustration of the need to consider procedural changes designed to enable a court to determine the impact of taxation on a damages award once and for all and to encourage the parties to take steps in an appropriate case to ensure that this is done.

A chronology

11. There is no dispute as to the primary facts. A chronology of the relevant events is set out below.

The defamation proceedings

Introduction

12. Section 5 of the Defamation Act 1958 (NSW) defined an actionable defamation for which proceeding could be brought in New South Wales, including a defamation comprising imputations by which a person was likely to be injured in his or her trade or profession. The Defamation Act 1958 (NSW) was, however, repealed by s 4(1) of the Defamation Act 1974 (NSW). Thereafter, the law relating to defamation was as if the earlier Act:

"had not been passed and the common law and the enacted law … shall have effect accordingly" (s 4(2)).

See
Sungravure Pty Ltd v Middle East Airlines Airliban SAL (1975) 134 CLR 1;
John Fairfax Publications Pty Ltd v Gacic (2007) 235 ALR 402, at 422-423 [77]-[78], per Kirby J (dissenting). SRSC's defamation claim was brought pursuant to the provisions of the Defamation Act 1974 (NSW).

Pleadings

13. After pleading the three separate publications, the plaintiffs in the defamation proceedings alleged that the following imputations defamatory of SRSC were made in each of the three publications:

  • "(a) Through its surgical staff, [SRSC], which is an eye-surgery clinic, behaves unethically in that for its financial gain they mislead their patients about the risks of eye surgery.
  • (b) [SRSC] is an eye-surgery clinic which, through its surgical staff, is a party to a deceitful scheme to trick patients into signing a form purporting to give consent to surgery on their eyes by showing them a video tape which is misleading as to risks inherent in the surgery.
  • (c) [SRSC], which is an eye-surgery clinic, employs on its staff a surgeon who is a disgrace to the medical profession in that he recommends eye surgery when it is not in his patients" best interest.
  • (d) Surgical staff of [SRSC], which is an eye surgery clinic, are irresponsible eye surgeons in that they perform eye surgery without adequately warning their patients of the serious risks of permanent eye damage inherent in laser eye surgery.
  • (e) [SRSC] is an eye surgery clinic which engages in deliberately misleading marketing practices in supplying potential patients with a video which falsely states that no patient has gone blind from laser eye surgery.
  • (f) [SRSC] is an eye surgery clinic which engages in deliberately misleading marketing practices in supplying potential patients with a video which falsely states that if patients have laser surgery on their eyes they will be able to throw away their spectacles.
  • (g) [SRSC] is an eye surgery clinic which participates in an arrangement to cause its patients to pay absurdly inflated costs for post-operative care.
  • (h) [SRSC] is an eye surgery clinic which publishes advertisements which are false in that they deliberately mislead prospective patients about the risks inherent in laser eye surgery".

14. The plaintiffs pleaded that by reason of the three publications, SRSC:

"was and will be greatly injured in its … reputation in the way of its … trade and business and has suffered and will continue to suffer loss and damage, including economic loss".

The plaintiff claimed damages for defamation, loss of business and economic loss.

Jury findings

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


"SRSC: Imputations Summary
"SRSC: Imputations Summary
Imputation Beaumont Interview: SRC Beaumont Interview: Dr Lawless Broadcasts: SRSC Broadcasts: Dr Lawless
(a) unethical misleading •      
(b) deceitful scheme to trick with video • • • •
(c) disgrace to profession in that recommends surgery • •    
(d) irresponsible eye surgeon • • • •
(e) no patient gone blind • • • •
(f) throw away spectacles • • • •
(g) absurdly inflated costs •   •  
(h) false advertisements     •"  

Judgment

16. Studdert J rejected the defences pleaded by the defendants. In particular, he rejected the defence of truth, finding that the defendants had not established the truth of any of the imputations found by the jury. His Honour also rejected the defence of comment, either because the imputations related to matters of fact rather than opinion, or because the opinion was not based on proper material or was not an opinion genuinely held by the person expressing it.

17. Studdert J first considered Dr Lawless" claim for damages. His Honour observed (at [259]) that:

"[i]t is relevant to heed the circumstance that [SRSC] makes a claim which encompasses the alleged economic loss of [SRSC] by reason of the impact of these publications. [Dr Lawless] was at all relevant times pursuing his professional activities through [SRSC] and as a shareholder will directly benefit from any award of damages to [SRSC] and will thus be compensated in [SRSC's] claim for any loss of income occasioned by the television broadcasts".

18. When turning to the assessment of damages to be awarded to SRSC, Studdert J said this (at [294]-[295]):

"[SRSC], of course, has no claim for harm to feelings available to it, but it is entitled to maintain a claim for harm to its trading reputation. The way the case has been presented by [SRSC] has been to make a claim for loss of business, and it has sought to quantify that claim and also to quantify a claim for loss of good will.

The issue in this case, subject to proof of [SRSC's] entitlement to damages at all, has been the quantification of loss."

19. Studdert J recorded (at [297]) that the number of laser procedures performed by SRSC dropped from 2,390 for the year ended 30 June 1998 to 1,617 for the year ended 30 June 1999. He found that SRSC had ceased to trade beyond 30 June 1999 and thus performed no procedures at all beyond that date. His Honour also found (at [316]) that it was unlikely that a potential patient would have been deterred, after 1 July 2000, from undertaking surgery because of any continuing impact of the television broadcasts.

20. SRSC advanced at the trial three methods of assessing the loss it had suffered in consequence of the defamatory broadcasts.

21. The first and second methods were presented as alternatives to each other, with SRSC contending for the first. SRSC presented the third method as an alternative to the first two.

22. Studdert J first addressed SRSC's claim that its damages claim should extend to losses incurred by it after 30 June 1999. His Honour held (at [319]) that this claim was "fundamentally flawed". SRSC had simply ceased to carry on its business from 1 July 1999. It had made no attempt to mitigate its loss, for example by changing its name. In these circumstances, SRSC was not entitled to maintain a claim for economic loss beyond 30 June 1999.

23. Studdert J next considered SRSC's "reduction in value" claim. His Honour noted SRSC's expert had acknowledged that in the absence of any sale of SRSC's business, it was inappropriate to include a loss of capital value in the assessment of damages. SRSC simply ceased to offer procedures to the public and the doctors through whom it earned its income thereupon provided their services to another corporate entity. There was no evidence that SRSC had any contractual entitlement to retain the services of those doctors. It followed that the claim had to be rejected.

24. Studdert J then considered the evidence bearing on the reduction in laser procedures during the period from 6 May 1998 to 30 June 1999 that could be attributed to the defamatory broadcasts. His Honour accepted neither the estimate of Dr Callaghan, called by the plaintiffs, nor that of Dr Beaton, called by the defendants, as to the number of procedures that would have taken place but for the broadcasts. His Honour decided that the best approach was simply to take the average number of laser procedures for the twelve months prior to the publications and to use that average figure as a guide for estimating the procedures that would have occurred during the post publication period up to 30 June 1999, in the absence of the defamatory publications. He reduced the figure so calculated by ten per cent to take account of the adverse effect of the broadcasts, independently of the defamatory imputations contained in them.

25. On this basis, Studdert J found that but for the adverse impact of the defamatory broadcasts, SRC would have performed 2,814 laser procedures during the period from 6 May 1998 to 30 June 1999. SRSC in fact performed 1,928 procedures during that period. After making the allowance of ten per cent already referred to, his Honour concluded that in the eight weeks immediately before 30 June 1998, SRSC had lost 82 laser procedures by reason of the defamatory broadcasts. The corresponding figure for the year ending 30 June 1999 was 715 procedures.

26. Studdert J calculated SRSC's loss of revenue as follows:

• Year ended 30 June 1998 82 procedures, at an average loss of revenue of $2,113.70 per procedure = $173,323.40 .
• Year ended 30 June 1999 715 procedures, at an average loss of revenue of $1,991.18 per procedure = $1,423,693.70
Total Lost Revenue $173,323.40 plus $1,423,693.70 = $1,597,017.10

27. From the gross figure of $1,597,017.10 his Honour deducted:

This produced a total costs savings of $277,292.24 .

28. Accordingly, SRSC's lost net profit before tax attributable to the defamatory imputations was $1,319,724.96 ($1,597,017.10 − $277,292.14 = $1,319,724.96).

29. Studdert J recorded that the question of whether SRSC's award of damages would attract a taxation liability had been a matter of strenuous debate. However, it appears that the debate before Studdert J focussed on whether SRSC would be liable to pay capital gains tax in respect of the Sum. I was informed that there had been no substantial dispute between the parties as to whether the Sum would constitute a receipt of income in SRSC's hands and, for that reason, would form part of its assessable income. Both SRSC and the defendants in the defamation proceedings apparently took the view that the Sum would not be income according to ordinary concepts in SRSC's hands. Accordingly, they considered that, subject to the capital gains argument, it was appropriate for Studdert J to reduce the damages award to take account of the income tax that SRSC would have had to pay on the net revenue lost in consequence of the defamatory broadcasts.

30. Nonetheless, Studdert J addressed at some length (at [374]), the question of whether the Sum ought to be treated as "ordinary income" for the purpose of s 6-5 of the ITAA. He referred to
Cullen v Trappell (1980) 146 CLR 1, in which a majority of the High Court, following
British Transport Commission v Gourley [1956] AC 185, held (in his Honour's words) that:

"in an action for tort where a person is claiming damages in respect of impairment of earning capacity following injury, any allowance in respect of such a claim is made by reference to nett loss. The court does not include in the assessment the income tax that the person would have had to pay on lost earnings because he does not have to pay income tax on that assessment. … The damages are awarded for loss of earning capacity, even though they may be measured for the past by reference to comparable earnings of others and even though there may be agreement between the parties as to wage loss for the past".

31. Studdert J referred to
Rubber Improvement Ltd v Daily Telegraph Ltd [1964] AC 234, in support of the proposition that the Gourley principle applies where a company establishes that its profits has been diminished by defamatory publications. His Honour quoted a well-known passage from the speech of Lord Reid ([1964] AC, at 262):

"There can be no difference in principle between loss of income caused by negligence and loss of income caused by a libel. Let me take first the case of the plaintiff company. A company cannot be injured in its feelings, it can only be injured in its pocket. Its reputation can be injured by a libel but that injury must sound in money. The injury need not necessarily be confined to loss of income. Its goodwill may be injured. But in so far as the company establishes that the libel has, or has probably, diminished its profits, I think that Gourley's case is relevant". (Emphasis added.)

32. Studdert J considered that, although counsel had not referred him to any Australian authority directly in point, he should follow
Rubber Improvement v Daily Telegraph. Thus, the damages awarded to SRSC were not to be treated as its "ordinary income" for the purposes of s 6-5 of the ITAA and the quantum of damages had to be reduced to take account of the notional tax SRSC would have had to pay on the net revenue it would have earned from its lost laser procedures. Otherwise SRSC would be over-compensated for its loss.

33. Studdert J then addressed a submission made on behalf of SRSC that the payment of damages would be treated as a "capital gain", thereby attracting liability to income tax pursuant to s 102-5 of the ITAA. If accepted, the effect of this submission would have been to increase the damages award to take account of SRSC's liability to pay capital gains tax on the Sum.

34. His Honour adverted to the terms of s 118-37 of the ITAA, which requires a capital gain made from a CGT event to be disregarded if it relates to compensation or damages received for any wrong or injury suffered in the recipient's occupation. He pointed out that the Commissioner had issued a ruling excluding corporations from the exemption, but noted that the defendants (Seven and Dr Beaumont) had argued that the ruling related to the terms of the ITAA 1936 and did not apply to the different language used in the ITAA. The defendants had submitted that the damages award would not result in any capital gain to SRSC for the purposes of the ITAA.

35. Studdert J considered that there was merit in the defendants" submission and, accordingly, that SRSC would have a substantial argument to make to the Commissioner as to why it should not have to pay capital gains tax in relation to the award of damages. However, his Honour thought that, in the circumstances, justice could best be served by reserving leave to SRSC to apply for additional damages referable to capital gains tax, should it be found liable to pay such tax. Accordingly, he made no provision for capital gains tax in his assessment of the damages to be awarded to SRSC.

36. Although Studdert J made no provision for capital gains tax in the damages award, he reduced SRSC's "lost nett profit" by 36 per cent to take account of the tax that SRSC would have had to pay on its lost profit, had that profit been derived by it. After rounding off, this produced an amount of $844,264.00.

37. Studdert J assessed the damages attributable to each defamatory publication as follows:

38. Studdert J then considered the responsibility of the defendants (Dr Beaumont, HSV and ATS) as joint tortfeasors. His Honour proceeded to make the following orders relevant to SRSC's claims (retaining the original numbering):

  • "4. In the proceedings by [SRSC] arising from the publication in April 1998, verdict for [SRSC] against [Dr Beaumont] in the sum of $4000, together with interest in a sum to be determined.
  • 5. In the proceedings by [SRSC] arising from the publication on 4 May 1998:
    • (a) verdict for [SRSC] against [Dr Beaumont] and [HSV] concerning imputations (b), (d), (e), (f) and (g) in the sum of $62,500, together with interest in a sum to be determined;
    • (b) verdict for [SRSC] against [HSV] concerning imputation (h) in the sum of $12,500, together with interest in a sum to be determined.
  • 6. In the proceedings by [SRSC] arising from the publication on 5 May 1998:
    • (a) verdict for [SRSC] against [Dr Beaumont] and [ATS] concerning imputations (b), (d), (e), (f) and (g) in the sum of $638,020, together with interest in a sum to be determined;
    • (b) verdict for [SRSC] against [ATS] concerning imputation (h) in the sum of $127,604, together with interest in a sum to be determined.
  • 7. In respect of the claim by [SRSC] against [Dr Beaumont] and [HSV] and in respect of the claim by [SRSC] against [Dr Beaumont] and [ATS] I reserve leave to [SRSC] to apply for additional damages referable to capital gains tax considerations should [SRSC] be found liable to pay such tax".

Submissions

SRSC

39. SRSC supports Studdert J's reasoning and emphasises the distinction between the character of a payment and the manner of its calculation or quantification:
Tinkler v Commissioner of Taxation 79 ATC 4641; (1979) 29 ALR 663, at 672, per Deane and Fisher JJ. Mr Smark SC, who appeared with Ms McBride for SRSC, argued that the purposes of an award of general damages for defamation, where the plaintiff is a corporation, are to compensate for harm to reputation and to vindicate that reputation by establishing the falsity of the defamatory publications. Where a corporation claims that the defamatory publications have injured its reputation so as to affect its trade or business adversely, the damages award encompasses that form of harm.

40. In this case, so Mr Smark argued, SRSC complained of injury to its credit and reputation and sought damages for defamation, loss of business and economic loss. Its case before Studdert J concentrated on the loss of business it had sustained. His Honour rejected SRSC's claim for loss of business, insofar as it extended beyond 30 June 1999, and also rejected its claim for reduction in the value of the business. However, he awarded a lump sum (comprising three separate amounts for each defamatory publication) calculated by reference to lost earnings up to 30 June 1999. This method of calculation, so Mr Smark argued, does not alter the fact that SRSC received damages for injury to its business reputation. It follows that the damages award in favour of SRSC represents a receipt by it on capital account and is not income according to ordinary concepts.

The Commissioner

41. The Commissioner submits that the Sum received by SRSC is to be regarded as income according to ordinary concepts for the purposes of s 6-5 of the ITAA. According to the Commissioner, the test of whether an amount received by a taxpayer is ordinary income is whether the receipt in the hands of the taxpayer bears the character of income. The Commissioner relies on the proposition that the moneys recovered from any source representing items on revenue account must be regarded as income according to ordinary concepts.

42. In this case, SRSC made a claim for loss of profits as well as loss of business. Had the profits been realised, they would have been assessable as ordinary income. Thus the damages awarded by Studdert J represented items on revenue account and formed part of SRSC's assessable income. The case is analogous to a damages award for loss of profits, which is treated as income in the hands of the successful plaintiff, rather than a damages award for loss of earning capacity, which is characterised as a receipt on capital account.

43. Mr Hmelnitsky, who appeared for the Commissioner, acknowledged that the authorities seem to establish that an undifferentiated lump sum award, covering both economic and non-economic loss, cannot be dissected for the purposes of determining whether the whole or any part of the award should be treated as income in the plaintiff's hands. But SRSC had been careful in the Supreme Court proceedings to differentiate between its claim for loss of goodwill and its claim for loss of profits.

REASONING

Section 6-5 of the ITAA

44. As the joint judgment observed in
Federal Commissioner of Taxation v Stone 2005 ATC 4234; (2005) 222 CLR 289, at 294 [8], the reference to "income according to ordinary concepts" in s 6-5(1) of the ITAA is evidently to Sir Frederick Jordan's statement in
Scott v Federal Commissioner of Taxation (1935) 35 SR (NSW) 215, at 219, as follows:

"The word 'income' is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts."

45. Whether a particular receipt is income on ordinary principles depends upon the character of the receipt in the hands of the taxpayer:
GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation 90 ATC 4413; (1990) 170 CLR 124, at 136, per curiam;
The Federal Coke Co Ltd v Federal Commissioner of Taxation 77 ATC 4255; (1977) 34 FLR 375, at 388, per Bowen CJ,
FCT v Stone, at 296 [16]. The question in the present case therefore turns on the character of the Sum received by SRSC in the 2004 year.

Defamation claims by trading corporations

46. In
South Hetton Coal Co v North-Eastern News Association [1894] 1 QB 133, Lord Esher MR held (at 139) that a corporation can be defamed by statements:

"with regard to their mode of carrying on business, such as to lead people of ordinary sense to the opinion that they conduct their business badly and inefficiently."

See also at 141, per Lopes LJ (a corporation may not maintain an action for anything reflecting on it personally, but can maintain an action for a libel "reflecting on the management of [its] trade or business"); at 145, per Kay LJ.

47. It was also held in South Hetton that an action will lie without proof of special damage and that the quantum of damages is at large: at 139, per Lord Esher MR; at 143, per Lopes LJ; at 148, per Kay LJ. In Australia, South Hetton has been accepted as accurately stating the law:
Barnes & Co Ltd v Sharpe (1910) 11 CLR 462, at 473-474, per Griffith CJ; at 478-479, per O'Connor J; at 485, per Higgins J.

48. In a recent case, the New South Wales Court of Appeal approved the explanation of the distinction between defamation in its generally understood meaning and business defamation, given by Gatley on Libel and Slander (10th ed, 2004) (P Milmo and WVH Rogers, eds), at [2.7], as follows:

"An imputation may be defamatory without falling within any of the specific heads so far set out. Any imputation is defamatory if it would tend to lower the claimant in the estimation of right-thinking members of society generally or would be likely to affect a person adversely in the estimation of reasonable people generally. For instance, to say of someone that he is ungrateful would scarcely expose him to hatred, ridicule or contempt, or cause him to be avoided, yet it has been held defamatory. To say of a person carrying on any trade or profession, or holding any office, that he is incompetent at it, may not even lower him in the estimation of others, but the words will be defamatory because of the injury to his reputation in his trade, profession or office ." (Citations omitted; emphasis added.)


Gacic v John Fairfax Publications Pty Ltd (2006) 66 NSWLR 675, at 678 [32], per Beazley JA, with whom Handley and Ipp JJA agreed.

49. An appeal to the High Court in from the judgment of the Court of Appeal was, in substance, dismissed and there was no challenge to this statement of principle:
John Fairfax v Gacic. However, Gleeson CJ and Crennan J observed (at 404 [2]) that the case concerned "that form of defamation which involves injury to business reputation". Their Honours also observed that statements may injure a person's professional reputation even though they may not evoke feelings of hatred, ridicule or contempt.

50. The statements of principle in Gacic, both in the Court of Appeal and the High Court, are consistent with the holding of a Full Court of this Court that a necessary element of an action in defamation by a trading corporation is that it has sustained injury to its reputation "in the way of its trade or business':
Australian Broadcasting Corporation v Comalco Ltd (1986) 12 FCR 510, at 586-587, per Neaves J; at 599-603, per Pincus J; at 560, per Smithers J (agreeing). The Court rejected the opinion expressed by Mahoney JA (dissenting) in
Andrews v John Fairfax & Sons Ltd [1980] 2 NSWLR 225, at 255, that a trading corporation may recover damages for "injury to reputation as such".

Rubber Improvements v Daily Telegraph

51. None of these cases considered the significance of taxation in assessing the damages to be awarded to a trading corporation for defamation. That issue was addressed in Rubber Improvements. In that case, two juries had awarded substantial damages for defamation in favour of a trading corporation. The plaintiff corporation did not plead that it had sustained special damage and adduced little or no evidence of financial loss. In determining that the awards were excessive, Lord Reid, in a frequently cited judgment, held that a damages award for libel, insofar as it compensates for loss of income, should allow for the corporation's notional obligation to pay income tax, had the lost income been earned.

52. Lord Reid first referred to Gourley, which held that damages for loss of income caused by a tort must be assessed after allowing for the income tax that would have been payable by the plaintiff had he or she actually earned the income. His Lordship explained (at 261-262) the rationale for the decision in Gourley as follows:

"As damages are not subject to tax, [the plaintiff] would have recovered far more than his real loss, if he had recovered the gross amount [of his loss of income] and accordingly it was held that he was only entitled to receive [the after-tax amount] in respect of his loss of income as this was sufficient to compensate him fully for the income which he had lost by the fault of the defendants."

Lord Reid continued as follows (at 262):

"There can be no difference in principle between loss of income caused by negligence and loss of income caused by a libel. Let me take first the case of the plaintiff company. A company cannot be injured in its feelings, it can only be injured in its pocket. Its reputation can be injured by a libel but that injury must sound in money . The injury need not necessarily be confined to loss of income. Its goodwill may be injured. But in so far as the company establishes that the libel has, or has probably, diminished its profits, I think that Gourley's case is relevant.

But damages for libel have to be assessed by a jury, and juries are not expected to make mathematical calculations, so they can only deal with this matter on broad lines. I think that a jury ought to be directed to the effect that if they think that the plaintiff company has proved that it has suffered or will suffer loss of profit as a result of the libel they must bear in mind that the company would have had to pay income tax at the standard rate out of that profit if it had been earned and would only have been entitled to keep the balance. So in assessing damages they ought not to take into account the whole of that profit, but should make allowance for the obligation to pay income tax out of it."

(Emphasis added.)

53. On its face, this reasoning suggests that an award of damages for business defamation, insofar as it incorporates compensation for loss of income by reason of injury to a trading corporation's business reputation, is not taxable. However, the analysis by Lord Reid is not necessarily determinative of the issue before me, for three reasons.

54. First, the issue presented by Rubber Improvements was not specifically whether the damages award was taxable in the hands of the successful plaintiff. Lord Reid plainly assumed that it would not be taxable, but their Lordships did not strictly have to decide that question. (I leave to one side any conceivable differences between the definition of income for tax purposes in the United Kingdom in 1964 and the criterion embodied in s 6-5 of the ITAA.)

55. Secondly, it is at least theoretically possible that courts could formulate principles for the assessment of damages, whether in defamation or otherwise, quite independently of the taxability of the award in the hands of the successful plaintiff or applicant. Barwick CJ in
Atlas Tiles Ltd v Briers (1978) 144 CLR 202, for example, considered (at 212) that liability to income tax was irrelevant to assessing damages for loss of earning capacity and that it was a matter for the legislature to determine whether and, if so, to what extent damages awarded for personal injuries should be included in assessable income.

56. Thirdly, the House of Lords in Rubber Improvements was concerned with undifferentiated lump sum jury awards that, as Lord Reid noted, were not necessarily confined to compensation for loss of income by the plaintiff corporation. Their Lordships were not concerned with a case like the present, where the damages award was made by a Judge sitting alone expressly by reference to the corporation's loss of income attributable to the defamatory publications. It appears to have been common ground before me that receipt of an undifferentiated award of damages of the kind considered in Rubber Improvements would not be regarded as assessable income in Australia. This is because a lump sum award of damages is ordinarily treated as a single, undissected amount which must be considered as a whole:
McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381, at 391 per curiam.

57. Nonetheless, the reasoning in Rubber Improvements is important for present purposes. In part, this is because of the reliance placed by Lord Reid on the decision in Gourley and the subsequent acceptance of that decision in Australia. In part, it is because the statement of principle in Rubber Improvements suggests that an award of damages for business defamation is not to be characterised as income for tax purposes, even if assessed by reference to lost profits.

Gourley

58. The principle for which Gourley stands has been controversial in Australia: see, generally, H Luntz, Assessment of Damages for Personal Injury and Death (4th ed, 2002), at [5.7.3]-[5.7.4]. In Atlas Tiles, decided in December 1978, a bare majority of a five member High Court refused to follow Gourley (Barwick CJ, Jacobs and Murphy JJ; Gibbs and Stephen JJ dissenting). Seventeen months later, a bare majority of a seven member High Court overruled Atlas Tiles and followed Gourley: Cullen v Trappell (Gibbs, Stephen, Mason and Wilson JJ; Barwick CJ, Murphy and Aickin JJ dissenting).

59. The decision in Cullen v Trappell effectively ended the continuing controversy so far as Australian courts are concerned. However, in determining the significance of the Gourley principle for present purposes the key judgment is that of Gibbs J in Atlas Tiles. In Cullen v Trappell, Gibbs J said that his views had been fully expressed in his dissenting judgment in Atlas Tiles and that there was no point in restating them. The other three members of the majority in Cullen v Trappell simply expressed their agreement with the reasoning of Gibbs J.

60. The issue in Atlas Tiles was whether the trial Judge had been correct, when assessing damages for wrongful dismissal, to disregard the incidence of income tax on the remuneration the plaintiff would have received had he continued in employment. Gibbs J said (at 220) that the issue could be restated by asking whether the principle in Gourley should have been applied to the assessment of damages.

61. Gibbs J pointed out that the principle in Gourley is not confined to damages for personal injury. He specifically noted that in Rubber Improvements the House of Lords had applied the principle to "the assessment of damages for loss of profit arising from libel". His Honour added (at 223-224) that:

"Speaking generally, the principle will apply only where the earnings or profits lost would have been taxable if the plaintiff had received them but the damages awarded to compensate the plaintiff are not taxable: see
Parsons v B.N.M. Laboratories Ltd [[1964] 1 QB 95, at 124-126, 133-135] and
Groves v United Pacific Transport Pty Ltd and Thompson [[1965] Qd R 62, at 63]."

62. Gibbs J stated (at 223-224) that the measure of damages for wrongful dismissal is the estimated pecuniary loss resulting from the premature determination of the plaintiff's service. Citing McGregor on Damages (13th ed, 1972), at par 884, he described this measure, prima facie, as:

"the amount that the plaintiff would have earned had the employment continued according to contract subject to a deduction in respect of any amount accruing from any other employment which the plaintiff, in minimizing damages, either had obtained or should reasonably have obtained".

63. His Honour considered (at 223-224) that Gourley rested on "sound principles" and that the English Courts had been correct to apply Gourley to the assessment of damages in wrongful dismissal cases. The latter proposition was, however, subject to the proviso that:

"the lost earnings would have been taxable in the hands of the plaintiff if he had received them, and that the damages when received are not subject to tax ". (Emphasis added.)

64. Gibbs J thought it plain that portion of the plaintiff's lost remuneration would have been taxable had he received it. Section 26(d) of the ITTA 1936 had the effect that five per cent only of a lump sum award in consequence of termination of employment, whether made by a court or otherwise, was taxable, while the remaining 95 per cent was not (at 225). His Honour held (at 227) that Gourley should apply to the assessment of damages where only a small proportion of the damages award was taxable, since to do otherwise would over-compensate the plaintiff. Under-compensation could be avoided by adjusting the result to take account of the taxation regime applicable to the lump sum award.

Groves v United Pacific Transport

65. In the passage in his judgment in Atlas Tiles quoted at [61] above, Gibbs J referred with approval to his own judgment in Groves v United Pacific Transport, in the Supreme Court of Queensland. Later in his judgment in Atlas Tiles, Gibbs J expressly stated (at 223) that he adhered to the opinion he had expressed in Groves v United Pacific Transport that in Australia an award of damages for personal injuries is not taxable.

66. The issue in Groves v United Pacific Transport, which predated both Atlas Tiles and Cullen v Trappell, was whether Gourley required income tax to be taken into account in the assessment of damages in respect of earnings during the period up to the date of trial . Gibbs J quoted the remark of Pearson LJ in
Parsons v BNM Laboratories, a case also cited by Gibbs J in Atlas Tiles, that (at 134):

"the principle of the Gourley Case is applicable only if the lost earnings or profits are taxable and the damages are not ". (Emphasis added.)

67. In Groves v United Pacific Transport, the plaintiff apparently argued that the damages would be taxable under the predecessor to s 26(d) of the ITAA 1936 ([64] above). Gibbs J rejected the argument (at 64-65):

"The answer is in my opinion to be found by considering the true nature of the damages awarded in such a case. In
Graham v Baker (1961) 106 CLR 340, at pp 346-7, Dixon CJ, and Kitto and Taylor JJ said:

'So far the matter has been discussed as if the right of a plaintiff whose earning capacity has been diminished by the defendant's negligence is concerned with two separate matters, i.e., loss of wages up to the time of trial and an estimated future loss because of his diminished earning capacity. It is, we think, necessary to point out that this is not so. A plaintiff's right of action is complete at the time when his injuries are sustained and if it were possible in the ordinary course of things to obtain an assessment of his damages immediately it would be necessary to make an assessment of the probable economic loss which would result from his injuries. But for at least two obvious reasons it has been found convenient to assess an injured plaintiff's loss by reference to the actual loss of wages which occurs up to the time of trial and which can be more or less precisely ascertained and then, having regard to the plaintiff's proved condition at the time of trial, to attempt some assessment of his future loss.'

Their Honours went on to say that

'an injured plaintiff recovers not merely because his earning capacity has been diminished but because the diminution of his earning capacity is or may be productive of financial loss.'

Although it is usual and convenient in an action for damages for personal injuries to say that an amount is awarded for loss of wages or other earnings, the damages are really awarded for the impairment of the plaintiff's earning capacity that has resulted from his injuries. This is so even if an amount is separately quantified and described as special damages for loss of earnings up to the time of trial. Damages for personal injuries are not rightly described as damages for loss of income. It follows that in my opinion an award of damages for personal injuries does not come within the description of 'an indemnity for or in respect of any loss of income' within s 26(j) of the Income Tax and Social Services Contribution Assessment Act and that such an award is not income in accordance with ordinary concepts so as to be taxable apart from the special provisions of that section. In determining what financial loss the plaintiff has probably suffered up to the date of trial by reason of the impairment of his earning capacity, as well as in considering what financial loss he is likely to suffer in future, I must therefore take his tax position into account."

See also
Federal Commissioner of Taxation v Slaven 84 ATC 4077; (1984) 1 FCR 1, at 22-23, per curiam;
CSR Ltd v Eddy (2005) 80 ALJR 59, at 69 [30], per Gleeson CJ, Gummow and Heydon JJ;
Husher v Husher (1999) 197 CLR 138, at 143 [7], per Gleeson CJ, Gummow, Kirby and Hayne JJ.

68. The decision in Groves v United Pacific Transport, given that it was approved in
Atlas v Tiles and
Cullen v Trappell, establishes that an award of damages for loss of earning capacity is not taxable even if calculated precisely by reference to earnings lost prior to the date of the trial. The principle applies to an award of pre-judgment interest, which has been held to have the character of a receipt of a capital nature:
Whitaker v Commissioner of Taxation 98 ATC 4285; (1998) 82 FCR 261. The reason is that the award of an interest is an integral and essential element in the compensation for the plaintiff's list or diminished earning capacity: at 264, per Black CJ.

Principles

69. The following propositions seem to me to emerge from the authorities I have discussed.

Application of principles

70. SRSC's pleaded case in the Supreme Court of New South Wales was that the defamatory publications had injured it in its reputation in the way of its trade or business. It succeeded in making out that case.

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

Other authorities

72. Mr Hmelnitsky submitted that this case should be regarded as governed by the principle that damages representing trading profit which would have been earned but for the defendants" tortious conduct are to be regarded as a trading receipt. He relied particularly on two cases:
London and Thames Haven Oil Wharfs Ltd v Attwool [1967] 2 All ER 124, and
Liftronic Pty Ltd v Commissioner of Taxation 96 ATC 4425; (1996) 66 FCR 175.

73. In Thames Haven, a company owned jetties which were damaged by the negligence of the operators of a tanker. The company sustained loss in the form of physical damage to the jetty and consequential loss in the form of lost profits during the period of 380 days the jetty was unusable. The Court of Appeal held that the damages for physical injury were quite separate from the damages recovered in respect of the loss of profitable use of the jetty. The latter were held to be taxable as a trading receipt. Diplock LJ stated the relevant rule as follows (at 134):

"Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received instead of the compensation."

No reference was made to Gourley.

74. Thames Haven was followed by Foster J in Liftronic. In that case, Liftronic purchased lift equipment from Hyundai which proved to be defective. It succeeded in an action for breach of contract. The damages included $2.238 million for "loss of profits" for a period of six years. No deduction was made for the incidence of income tax on the lost profits (see at 194). Foster J held (at 197) that the breaches of contract did not destroy the goodwill or earning capacity of Liftronic. There was a mere restriction of trading opportunities, creating a "hole in profits" that the award of damages was intended to fill. Hence the amounts awarded as loss of profits was properly to be characterised as income in accordance with ordinary concepts.

75. There are differences between the payments in these two cases and the damages award at issue in the present case. The award made by Studdert J, although calculated by reference to lost profits, was in respect of injury to SRSC's trading reputation brought about by the defamatory publications. His Honour was presented with alternative means of assessing the damages for SRSC's loss of reputation and he selected the one that measured the loss by reference to SRSC's lost profits. The use of this measure for the assessment of damages does not alter the character of the award in the hands of SRSC.

76. The award made by Studdert J was not merely intended to fill a "hole in [SRSC's] profits", as in Liftronic. Rather it was intended to compensate SRSC for the injury to its reputation; it was not an award of damages for loss of profits as such. Thames Haven was also a different case to the present. Not only was there no question of any injury to the plaintiff's reputation, but the award was specifically made to compensate for loss of profits by reason of the unusability of the jetties.

77. I acknowledge that the dividing line between payments that bear the character of income and those that do not can be fine: cf
Federal Commissioner of Taxation v Spedley Securities Ltd 88 ATC 4126; (1988) 19 ATR 938 (where the Full Federal Court held that a lump sum payment of $200,000 to a merchant bank for the termination of a contract included compensation for injury to goodwill and was therefore not assessable income). I recognise, too, that the law in Australia could perhaps have taken a different turn: cf McGregor on Damages (17th ed, 2003), at [14-029] (arguing that it is not clear that "damages specifically awarded for loss of business profits", particularly to a company, would not be taxable in the defamed plaintiff's hands, unless the business was brought down by the defamation). But the course of authority in this country governing the nature of SRSC's claim and of the damages awarded to it strongly suggests that the Sum should not be characterised as income according to ordinary concepts.

Conclusion

78. SRSC's appeal against the objection decision made by the Commissioner should be allowed. The Commissioner should be directed to excise the Sum from SRSC's taxable income for the 2004 year. The Commissioner must pay SRSC's costs of the appeal.

 

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