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CSR LTD v FC of T

Judges:
Gyles J

Court:
Federal Court

MEDIA NEUTRAL CITATION: [2000] FCA 403

Judgment date: 31 March 2000

Gyles J

The proceedings are an appeal against the disallowance of an objection against the assessment of CSR Limited (``the Applicant'') to income tax for the year of income ended 31 March 1995 (``the year of income''). The relevant assessment was a deemed assessment pursuant to s 166A of the Income Tax Assessment Act 1936 (Cth) (``the Act'') which arose upon lodgement, on 15 December 1995, by the Applicant of its income tax return for the year of income.

2. Following the expression by the Commissioner of Taxation (``the Respondent'') of his view that an amount of $100 million received by the Applicant from the New Zealand Insurance Group (``NZI'') pursuant to a deed of settlement dated 3 March 1995 (``the deed of settlement'') constituted assessable income, the Applicant returned that amount as assessable income in its income tax return. The Applicant lodged a notice of objection against the deemed assessment on 20 May 1998. The Respondent advised the Applicant on or about 9 November 1998 that its objection against the assessment had been disallowed.

3. On 24 December 1998 an application was filed by the Applicant in this Court seeking to have the Respondent's objection decision set aside pursuant to s 14ZZP Taxation Administration Act 1953 (Cth).

4. The Applicant has been, for many years, a publicly listed company, carrying on business in Australia and overseas. At all relevant times Midalco Pty Limited (``Midalco'') was a wholly owned subsidiary of the Applicant. Midalco was formerly known as Australian Blue Asbestos Pty Limited, and from 1943 to 1966 operated a blue asbestos mine and primary processing facility at Wittenoom, Western Australia. Asbestos produced from Midalco's Wittenoom facility was sold to an American company, Johns-Manville Corporation, in the period from 1948 to 1966. Asbestos from the Wittenoom facility was also sold within Australia. CSR America is an indirect, wholly owned subsidiary of the Applicant.

NZI claims

5. The Applicant contends that:

  • (a) Between November 1955 and November 1976 the United Insurance Company Limited (``United'') issued policies of public liability and products insurance to the Applicant.
  • (b) From November 1976 to November 1978 the South British Insurance Company Limited (``South British'') issued a policy of public liability and products insurance to the Applicant.

6. Between 1981 and 1984 NZI assumed all of the obligations of United and South British under their respective policies of insurance issued to CSR between 1955 and 1978, as if NZI were named as the insurer in those policies.

ATC 4217

7. Commencing in the late 1970s, the Applicant, Midalco and CSR America have been subjected to numerous claims and joined as defendants to numerous proceedings in which it was alleged that personal injuries were suffered due to exposure to asbestos fibre mined, milled, and/or sold by the Applicant and Midalco (``the asbestos related claims''). Due to the peculiar nature of asbestos related injury, the injuries resulting from exposure to asbestos fibre occur over a long period of time and may not become manifest until many years after initial asbestos exposure.

8. The Applicant notified NZI of each of the asbestos related claims made upon it and its subsidiaries and claimed indemnity from NZI. The Applicant claims that NZI's conduct until 1989 led it to believe that NZI would provide indemnity under the 1955-1978 policies. The Applicant included a statement in its Annual Reports between 1982 and 1988 to the effect that it had insurance cover for the asbestos claims. In the event, NZI refused to indemnify the Applicant and Midalco for liability in respect of the asbestos related claims made in relation to the 1955-1978 policies.

The CIGNA claims

9. From 2 November 1978 to 1985 the Applicant entered into insurance policies (``the CIGNA policies'') which provided primary and excess general products liability coverage for the Applicant and additional insureds (including at least for a number of the policies, CSR America). The lead insurer on many of the policies was CIGNA Insurance Australia Limited (as it is now known) (``CIGNA''), however, numerous other insurers, including NZI, also underwrote portions of the risk. South British had a 20% participation in the primary cover of the CIGNA policies for the period from 2 November 1978 until 1984; thereafter NZI had a 20% participation in the primary cover of the CIGNA policies to 30 September 1985. CIGNA Australia was a subsidiary of CIGNA Corporation, a Delaware Corporation, which had a number of other subsidiaries (collectively, ``the CIGNA Group'').

10. On 29 November 1991 the Applicant sent a letter to each of CIGNA and its co-insurers, including NZI, under the CIGNA policies, claiming indemnity under the CIGNA policies for asbestos related claims upon it. At that time, the Applicant was seeking to renew its product liability insurance cover commencing March 1992. On 4 December 1991 CIGNA, purporting to act on behalf of all the CIGNA policy insurers (including NZI), wrote to the Applicant's insurance broker, refusing to discuss a renewal of the Applicant's insurance cover until the indemnity claim had been withdrawn.

11. On 6 March 1992 the Applicant's broker informed the Applicant that CIGNA (and the other underwriters) would not renew the Applicant's insurance unless the Applicant unconditionally withdrew its claim for indemnity against all of the 1978-1985 insurers. As a result of the insurers' actions, the Applicant, of 17 March 1992, withdrew its claims against the insurers under the CIGNA policies. The insurers thereafter agreed to renew the Applicant's insurance coverage.

First New Jersey and New South Wales actions

12. In June 1994 the Applicant and CSR America commenced proceedings in the Superior Court of New Jersey against NZI, seeking indemnity under the policies and relief for breach of contract, and breach of the duty of good faith and fair dealing. In October 1994 NZI commenced proceedings in the Supreme Court of New South Wales as to its liability to indemnify (inter alia) the Applicant and sought and obtained an injunction restraining the further prosecution of the New Jersey proceedings (``the anti-suit injunction'').

13. NZI asserted that the policies relied upon by the Applicant in the New South Wales proceedings did not exist, or alternatively, that the maximum level of any indemnity it was obliged to provide to the plaintiffs was A$47 million, and further that such indemnity (if any) did not cover liability in the United States. NZI made a number of other allegations.

14. When knowledge of the declinature of liability by NZI became public, the Applicant claims that it suffered damage to its reputation (including its credit) and damage to its goodwill. There was a significant fall in its share market capitalisation. The Respondent submits that there is no tangible evidence of damage to the company itself, pointing out that the shareholders suffered the fall in share prices rather than the company, and says that the share price recovered in due course. Whilst each of the Respondent's submissions is correct, I accept the evidence that a public perception that large, but unquantified, liabilities were not covered by insurance or appropriate provisions

ATC 4218

would and did damage the business reputation, including the credit, of the Applicant. I do not doubt that it would be a factor taken into account by many having dealings with the company, including actual and potential financiers, and even some suppliers and customers. Furthermore, the share price of a company is by no means irrelevant to the business of the company, as it affects the ability to obtain capital. However, there is a lack of evidence as to any actual concrete quantifiable effect upon the Applicant and its business.

Settlement

15. Settlement discussions took place in February 1995 between the Applicant and NZI. By that time, the Applicant and CSR America had appealed to the New South Wales Court of Appeal against the anti-suit injunction. At the time the matter settled, the appeal to the Court of Appeal had been heard and judgment had been reserved. The Applicant and Midalco entered into a deed of settlement with the NZI Group on 3 March 1995 (``the Settlement Deed'').

16. Pursuant to the Settlement Deed, inter alia:

  • (a) The amount of $100 million (``the Settlement Sum'') was paid to the Applicant in return for releases granted and other obligations undertaken by Midalco and the Applicant to the NZI Group (Clause 3.7);
  • (b) The releases included past, present or future liability of NZI to the Applicant and Midalco in Australia and the United States, inter alia, concerning ``extra contractual obligations'' (Clauses 4.2.1 and 4.2.2);
  • (c) The Applicant and Midalco indemnified the NZI Group in respect of claims against it for all ``extra contractual obligations'' by, inter alia, CSR America (Clauses 4.3 and 4.4);
  • (d) Both the New South Wales proceedings and the first New Jersey action were dismissed (Clause 4.5.1 and Attachment D).

17. The Settlement Sum was received on or about 5 March 1995, and it is the character of that receipt which is the subject of these proceedings.

Second New Jersey action

18. In June 1995 the Applicant and CSR America filed a complaint in the United States District Court for the District of New Jersey against CIGNA as lead insurer and more than 60 other insurers, seeking damages, including punitive damages, for breaches of contract, bad faith, tortious interference with contract and prospective economic advantage and anti-trust violations. The Applicant says (and I accept) that but for the Settlement Deed NZI would have been joined as a defendant to those proceedings.

19. The insurers against whom the Applicant is proceeding have unsuccessfully attempted to have the second New Jersey action summarily dismissed.

20. The Applicant contends that the claims available to it against NZI included bad faith, tortious interference and anti-trust violations, and that damages awarded would have included an amount computed by reference to damage to goodwill and business reputation, and would have included punitive damages, and, if anti- trust violations were established, treble damages. It is put that an indication of the quantum of the claim in an analogous context is provided by the example of Johns Manville Corporation, which has claimed US$5 billion against its insurers for their denial of coverage against asbestos claims.

Circumstances of settlement

21. Before turning to examine the arguments of the parties, it is necessary to look rather more closely at the circumstances of the settlement to see how the Settlement Sum was arrived at, and to see how, if at all, it was or might be apportioned to the consideration received for it.

22. At the time that the settlement was negotiated, the New South Wales proceedings were the ``live'' proceedings as the anti-suit injunction was in force in relation to the first New Jersey proceedings. The New South Wales proceedings related only to establishing the right to indemnity against claims under the relevant policies.

23. The first New Jersey Complaint is summarised in the first section of it as follows:

``1. This action seeks damages, as well as declaratory relief, with respect to defendant insurers' failure to provide coverage to CSR in the more than 30,000 claims that have been asserted against it in the United States alleging bodily injuries as a result of exposure to asbestos fiber sold by CSR and/or one of its subsidiaries. To date, CSR has expended more than $20 million in

ATC 4219

settlement of approximately 2000 such claims, including approximately $18 million expended by CSR to settle approximately 1800 claims by New Jersey plaintiffs primarily arising from alleged exposure to CSR asbestos at the Johns Manville plant in Manville, New Jersey. Despite the fact that CSR had broad general liability insurance coverage with defendants' predecessors from at least 1955 until 1978, defendants have failed to indemnify CSR for any of its defense costs or settlements in connection with any of these asbestos-related claims.''

(emphasis added)

24. Count I is a conventional breach of contract claim to establish indemnity and count III is declaratory relief on the same topic. Count II is as follows:

``9. Plaintiff repeats and realleges the allegations of Count I as if set forth at length herein.

10. Defendants' decision to refuse to provide any coverage to CSR for any of its expenses in connection with the Asbestos Claims was made in bad faith and constitutes a breach of the covenant of good faith and fair dealing.''

The relief claimed in relation to that count is ``all damages proximately caused by the defendants' breach of their duties of good faith and fair dealing''.

25. There is no evidence to indicate that any claims covered by count II had been made by the Applicant. There is unchallenged expert evidence that, based on allegations which the Applicant would make, a bad faith claim sounding in tort might have been pursued, involving potential liability for consequential and punitive damages. I do not read that evidence as asserting that the claim which was actually pleaded in the complaint was such a claim. Indeed, I read the evidence as rather to the contrary, indicating that count II was, what the witness called, a contractual bad faith claim. There is no evidence as to what the content of the contractual bad faith claim would have been or the relief which might have been expected.

26. The evidence which was led as to the negotiations for settlement and the drafting of the deed is sparse. The negotiations were conducted by Mr Alec Brennan, the Executive General Manager, Finance & Investments, of the Applicant, in conjunction with Mr Keith Steele, a partner of Freehill Hollingdale & Page. Neither was called, and no evidence was called from NZI. No evidence was led as to the course of drafting of the deed. There is no evidence, for example, as to which party proposed the form of releases, when they were proposed or why they were proposed. Mr Pagone QC, for the Respondent, submits that the absence of Mr Brennan is particularly telling, as he had been managing the asbestos issue for the Applicant from a commercial and financial standpoint for some considerable time.

27. Two papers were tendered which set out the Applicant's position in relation to settlement - the first was an initial position paper of 3 February 1995 and the second was a settlement proposal of 9 February 1995. I can find no reference in either of them to any claim of liability of NZI going beyond an obligation to indemnify pursuant to the policies which the Applicant was asserting, notwithstanding the fact that all available artillery seems to have been called up for the purposes of settlement. The first of these papers went to the Applicant's Board when it approved the settlement. Relevant portions of the minutes of the special meeting of directors of the Applicant held for the purpose of considering the issue were as follows:

``The board noted that the proposed settlement would require the Company to release all of the NZI companies and their respective successors and assigns from all claims which the Company may now or in the future be otherwise entitled to make under policies of insurance entered into by the Company with the NZI companies between 1955 and 1985 (the `policies') in consideration of the payment to the Company of the sum of $100,000,000.00.

The board further noted that the proposed settlement would require the Company to indemnify each of the NZI companies from all claims that may be made against the NZI companies under the policies, including claims that may be made by any subsidiary or related company of the Company.

The board further noted that under the terms of the proposed settlement, the parties would be required to discontinue all current legal proceedings and to bear their own costs of such proceedings.''

(emphasis added)

ATC 4220

28. The press release which was issued by the Applicant was in the following terms:

``CSR AND NZI SETTLE INSURANCE LITIGATION

CSR will receive $100 million in full and final settlement of its long standing litigation with NZI over liability insurance policies which were in operation between 1955 and 1978. Over the past decade asbestos injury claims and legal costs to CSR have been more than $120 million.

The settlement covers all past, present and future claims. Other terms of settlement are confidential.

The insurance policies in question provided product and public liability cover for CSR and its subsidiary which operated the Wittenoom asbestos mine. The mine was closed in 1966.

CSR Executive General Manager, Finance and Investments, Alec Brennan, said `We are pleased that this litigation has now ended. Any negotiated settlement is necessarily a compromise and we believe it a better outcome than continuing the litigation to its ultimate conclusion'.

INQUIRIES:

Alec Brennan Executive General Manager, Finance and Investments 02 235 8099

3 March 1995 C&IR 17/95''

(emphasis added)

29. In his affidavit, Mr Ian Burgess, the present Chairman of the Applicant, who was present at the Board meeting in question, said:

``16. The CSR Board did not give any consideration to apportionment of the amount of $100 million paid by NZI to CSR pursuant to the Deed of Settlement in any way. To the best of my knowledge, no valuation was obtained by CSR prior to 3 March 1995 of the various rights released or obligations created by the Deed of Settlement. As far as I was aware the settlement sum of $100 million was reached by way of a `horse trade' between the respective senior executives of CSR and NZI who were responsible for the matter. It was considered to be the best deal that we could get from NZI and a commercially acceptable settlement.''

It became clear, however, when cross- examined, that he had no knowledge as to the process of negotiation which led to the fixing of the sum of $100 million.

30. The definition of ``The Insurance Coverage Litigation'' in clause 2.12 of the Settlement Deed describes each of the proceedings consistently with my analysis of them. In particular, the relief in the United States proceedings is described to be ``with respect to Asbestos Related Claims''. The definition of an ``Asbestos Related Claim'' does not include the kind of tortious bad faith claim referred to in the expert evidence. Furthermore, the recitals in clauses 3.1 to 3.4 (inclusive) do not refer to any such claim.

31. Mr Pagone QC on behalf of the Respondent also sought to rely upon the manner in which the receipt was dealt with by the Applicant. He submitted that it was effectively utilised to increase the provision for asbestos claims in the accounts of the Applicant.

32. One draft agenda for the special board meeting contained the following items:

``9. Alec Brennan - discussion of accounting treatment of NZI payment, including tax issues.

10. Alec Brennan - consideration of adequacy of provisioning. ANB to support proposal to increase asbestos related provisions by approximately $100 million.

11. Board resolutions on this proposal.''

Another draft agenda included the following: 

``SPECIAL ITEMS

1. Proposed settlement of insurance litigation.         )
                                                        )
2. Increase in provisions for asbestos related claims.  )
                                                        )
3. Issue of news release.                               )''

ATC 4221

33. A draft news release included the following paragraph which was omitted from the final release:

``Concurrently with its settlement negotiations, CSR is undertaking a review of its asbestos provision and anticipates that the provision will increase by approximately $100 million. In doing so, CSR will be adopting a more conservative position based in part on actuarial advice and will be charging future litigation costs against the provision.''

34. The evidence indicates that the question of extra provision was not the subject of any resolution at the Special Meeting.

35. At a Board Meeting on 15 May 1995 the minutes record the following:

``The board considered the memorandum dated 11 May, 1995 from Mr Brennan detailing the current status of asbestos related litigation against the Company and reviewing provisions and disclosures. The board resolved to increase the asbestos provisions by $117.1m to $155.8m.''

36. The memorandum from Mr Brennan is not in evidence, but there is a memorandum of that date to Mr Brennan (and Mr Mutton, a company lawyer) which gives some justification for the abnormal item increasing the provision by $117.1 million as at 31 March 1995.

37. I do not think that it is correct to say that from an accounting point of view the Settlement Sum was credited to the Provision but I have little doubt that, whatever the formalities, it was ``earmarked'' as the business and commercial source of the extra provision, to borrow a phrase from Gibbs J (as he then was) in
Stephens v R (1978) 139 CLR 315 at 333.

38. The Applicant has not established that the parties had in contemplation any other cause for payment than a compromise of the claims for indemnity for damages and costs under the insurance policies. The mere fact that the deed releases claims which go beyond that is not sufficient, unexplained by evidence, to establish that any such claim was then in contemplation. For all I know, the relevant releases may have been proffered by the Applicant at a late stage of the drafting of the deed at the suggestion of someone familiar with the case of
Allsop v FC of T (1965) 14 ATD 62; (1965) 113 CLR 341. The legal and accounting advice which the Applicant no doubt received concerning the taxation implications of the arrangement has not been tendered. Indeed, it seems to me that, even leaving aside any question of onus, the proper finding is that there was no such additional claim in contemplation at the time of entering into the deed. It follows that no amount could have been attributed to it by releasee or releasor.

39. This is hardly surprising. There is no evidence of any such claim having been advanced, and the reality is that the settlement which was arrived at was at a significant discount to the amount at which it would have been assessed if there were no problem in relation to the grant of indemnity pursuant to the policies. The Applicant summarised the position in its First Position Paper in the following terms:

``The insurers accordingly should be under no misapprehension about CSR's resolve to commit whatever resources may be necessary to prosecute through litigation its rights against the insurers for indemnity. CSR has of course already expended considerable resources in the current litigation, but those resources are not significant when compared to the magnitude of the asbestos problem faced by CSR and the upside which the insurance litigation can deliver. CSR is an experienced and capable litigant. The circumstances in which CSR finds itself wholly justify the continuation of the litigation until CSR's claim to insurance indemnity is exhausted.

Any resolution of the current litigation must accommodate and recognise CSR's position that it has already expended more than $110 million in managing asbestos claims, faces a large number of claims in a climate where the range of verdicts (as evidenced by the Mississippi and Olson verdicts) is increasing, and where a large number of claims can be expected to be made into the future. Accordingly, in addition to the value of the claims themselves there is also the very substantial ongoing burden of the costs of defending and managing these claims in different jurisdictions.

CSR's strong preference in relation to any resolution is that it accordingly be protected by having its insurers stand in its shoes and

ATC 4222

fulfil their obligations to indemnify both in relation to costs already incurred and current and future claims. If, however, the insurers wish to have for themselves the certainty about the future which CSR had sought to achieve through the purchase of insurance, then any settlement would need to reflect that trade. Certainly the offer made in mid 1994 and the attempt in the Phillips Fox letter of 16 December 1994 to set $47 million as the outer limit within which to negotiate would not interest CSR.

The challenge for the parties is whether a negotiated agreement to resolve this litigation can satisfactorily accommodate CSR's interest and legitimate expectation, recognising the inherent risks of litigation to all parties but also the value of the Cohen judgment obtained in CSR's favour to date, or whether CSR's interests are better served by prosecuting the litigation to its end and having the Courts determine the full extent of the parties' rights and obligations. The situation faced by CSR renders the litigation course attractive with little downside from the situation CSR is already in but with potentially very significant upside.

If the insurers wish to obtain certainty and to extricate themselves from the substantial exposure to continuing high risk litigation then any settlement will need to reflect an appreciation and accommodation of CSR's position.

CSR is prepared to be commercial and flexible in exploring the various options which might be available in achieving a resolution outside litigation. Such flexibility might include a preparedness to consider payment or indemnification to defined limits over a future time frame. However whatever the structure of the solution, it must be sufficient to satisfy CSR's directors that it is in the interests of shareholders to accept it. Otherwise CSR will continue to see its best course to be full scale prosecution of the litigation to meet the exposure situation which it has and continues to face.''

40. The analysis in the settlement proposal of 9 February was much more extensive, and I need not reproduce it in this judgment. The conclusion was that the insurance indemnity was worth in excess of $750 million to the Applicant. Even if that estimate was not discounted back to present value, it was significantly greater than the amount of the settlement. Indeed, past payments, including interest, were assessed by the Applicant at $180 million.

Effect of releases

41. Nonetheless, the Applicant puts that the releases which it granted by the Settlement Deed now prevent it from pursuing claims against NZI such as those pursued against the other insurers in the second New Jersey action, together with tortious claims arising out of the declinature of cover by NZI in relation to the earlier policies and what it now claims was tortious conduct in relation to the settlement culminating in the deed.

42. The Applicant contends that the rights released by the Applicant pursuant to the Settlement Deed included:

  • (a) The residual rights to indemnity which it alleged it had under the ``Policies'' (as defined in clause 2.11 of the Settlement Deed);
  • (b) The right to claim damages (including punitive damages) from NZI in the 1994 New Jersey proceedings against NZI;
  • (c) The right to claim damages (including punitive damages) from NZI in the 1995 New Jersey proceedings or otherwise, to which NZI would have been joined as a defendant but for the provisions of the deed of settlement;
  • (d) The right to claim treble damages under the Sherman Act from NZI in the 1995 New Jersey proceedings or otherwise, to which NZI would have been a party but for the provisions of the deed of settlement;
  • (e) The right to claim damages from NZI for damage to the Applicant's goodwill and business reputation;
  • (f) The right to claim damages from NZI for damage to the Applicant's credit rating;
  • (g) The right to claim damages from NZI for wrongful interference with the Applicant's business;
  • (h) The right to be indemnified by NZI pursuant to the November 1955 to November 1978 public liability insurance policies, in respect of the liabilities of the Applicant and Midalco in respect of the asbestos related claims;

    ATC 4223

  • (i) The right to be indemnified by NZI as one of the syndicate of insurers pursuant to the policies of insurance covering the period 2 November 1978 to 30 September 1985.

43. This issue involves New York law. I must put aside my own views as to the realities of the claims which are made and have regard to the expert evidence tendered on behalf of the Applicant. The expert was not cross-examined and no evidence in rebuttal was called on behalf of the Respondent. Counsel for the Respondent, however, submits that this evidence was based upon assumed facts, a number of which have not been proved and are mere assertions. This is not a sufficient answer in this context. The question is not whether the claim would ultimately succeed - to decide that would be to try that case - but to assess whether such a claim could be made and pursued upon a real basis. In my view, the expert evidence does establish such a basis. It is also supported by the evidence that attempts to strike out the second New Jersey proceedings have not succeeded.

44. Thus, immediately prior to entry into the Settlement Deed, a basis existed for the Applicant pursuing claims against NZI, although I have found that those claims had not been advanced at that time. There is no suggestion that the release is a sham.

Applicant's contentions

45. The Applicant submits that the Settlement Sum was paid and received as consideration for the release of a number of rights, some of which, viewed individually, would have given rise to damages on capital account. It was submitted that the authorities establish that, in such a case, if the payment is an undissected lump sum the entire sum will constitute a capital receipt in the hands of the Applicant -
McLaurin v FC of T (1961) 12 ATD 273; (1961) 104 CLR 381; Allsop v FC of T (supra);
FC of T v Spedley Securities Limited 88 ATC 4126;
FC of T v Northumberland Development Co Pty Ltd 95 ATC 4483 at 4485; (1995) 59 FCR 103 at 106-107 per Davies J.

46. It was submitted that before an apportionment of the Settlement Sum could be made there would have to be a basis for apportionment (Spedley (supra) at 4131.2). What is required in order that there be a basis for apportionment is that some part of the amount was agreed as being ``computed, paid and received'' as payment of, for example, a particular and distinct claim, eg, for indemnity in respect of amounts which had been paid out by the Applicant to injured claimants. There must be a communicated and agreed apportionment which operates between the parties; failing that, no part of the $100 million can be attributed solely to the claim for indemnity: Allsop (supra) at ATD 64, 65; CLR 351.5, 352.3; Spedley (supra) at 4131.

47. It was further submitted that the evidence establishes that:

  • (a) There was in fact no dissection or apportionment of the amount of $100 million;
  • (b) The $100 million was paid and received as an entire and undissected lump sum in settlement of all claims, actual and potential, and no part of it was in settlement of any distinct claim;
  • (c) The claims released were not illusory.

48. It was submitted that those causes of action available to the Applicant which it released by the deed and which, on an individual basis, would have given rise to receipts/compensation of a capital character were:

  • (a) The right to claim damages (including punitive damages) from NZI in the 1994 New Jersey proceedings against NZI;
  • (b) The right to claim damages (including punitive damages) from NZI in the 1995 New Jersey proceedings or otherwise to which NZI would have been joined as a defendant but for the provisions of the deed of settlement;
  • (c) The right to claim treble damages under the Sherman Act from NZI in the 1995 New Jersey proceedings or otherwise to which NZI would have been a party but for the provisions of the deed of settlement;
  • (d) The right to claim damages from NZI for damage to the Applicant's goodwill and business reputation;
  • (e) The right to claim damages from NZI for damage to the Applicant's credit rating;
  • (f) The right to claim damages from NZI for wrongful interference with the Applicant's business;
  • (g) The residual rights to indemnity which the applicant alleged it had under the ``Policies'' (as defined in clause 2.11 of the deed of settlement).

    ATC 4224

49. The conduct of NZI gave rise to a claim for damage to the goodwill and reputation of the Applicant. That goodwill constituted a capital asset of the Applicant (
FC of T v Murry 98 ATC 4585 at 4590-4591; (1998) 193 CLR 605 at 615) and damages for injury to goodwill will give rise to a receipt on capital account (FC of T v Spedley Securities Limited (supra) at 4131).

50. The principle said to flow from Allsop and McLaurin is not affected by a consideration of the fact that NZI stood in the position of an alleged insurer to the Applicant. In the first place, amongst NZI's many defences the existence of the policies was denied, as was the obligation to indemnify - for that and other reasons. Secondly, no part of the $100 million was in distinct settlement of the claim for indemnity. For the same reason that s 26(j) does not apply, the passage in the decision in
Carapark Holdings Ltd v FC of T (1967) 14 ATD 402 at 405-406; (1966-1967) 115 CLR 653 at 663 does not assist the Respondent.

51. Further, the Applicant's New Jersey claims included claims in tort. There was potential in relation to all claims (including the Sherman Act) to claim for punitive damages. Punitive damages are not awarded as compensation but ``to deter the defendant and others from repeating the egregious conduct''. They are essentially of a capital nature for this reason. In particular, they cannot be described as having their genesis in any normal incident of carrying on the business - cf
FC of T v Montgomery 99 ATC 4749 at 4762; (1999) 164 ALR 435 at 452 (par 70).

52. The defendants in the 1995 New Jersey action (who were the plaintiffs in the case reported at 189 CLR 345) were those insurers who, together with CIGNA, had insured the Applicant at various periods between 1978 and 1993. NZI had a 20% participation in the primary layer of the CIGNA cover between 1978 and 1985. NZI continued to participate in the Applicant's insurance cover in 1992 upon the Applicant withdrawing its claim against CIGNA policy insurers. The boycott alleged had as its purpose the inducing of the Applicant to waive its claim to indemnity under the 1978-1985 policies. It is quite correct to say that NZI would, but for the deed of settlement, have been a party to the 1995 New Jersey proceedings.

Respondent's contentions

53. The Respondent's first contention is that the Settlement Sum is assessable as income under ordinary concepts within the meaning of s 25(1) of the Act.

54. It is an elementary principle of tax law in Australia that ``[w]hether or not a particular receipt is income depends upon its quality in the hands of the recipient'':
Scott v FC of T (1966) 14 ATD 286 at 293; (1966) 117 CLR 514 at 526. Thus, for example, ``it is a commonplace that a gift may or may not possess an income character in the hands of the recipient'':
Squatting Investment Co Ltd v FC of T (1953) 10 ATD 126 at 146; (1952-1953) 86 CLR 570 at 627;
FC of T v Rowe 97 ATC 4317 at 4321, 4322; (1996-1997) 187 CLR 266 at 277, 279; see also Principle 3 in Parsons Income Taxation in Australia at p 34.

55. The fiscal character of a business receipt is to be judged by reference to the nature and scope of the business:
GP International Pipecoaters Pty Ltd v FC of T 90 ATC 4413 at 4420 and especially 4419; (1989-1990) 170 CLR 124 at 138 and especially 137; see also Lehmann and Coleman, Taxation in Australia, 4th Ed, at pp 52-57.

56. The nature and scope of the business of the Applicant may be seen in the facts and analysis in Exhibit E and the evidence of Mr Burgess:

  • (a) The activities of the Applicant and Midalco are integrated and interdependent;
  • (b) It is a regular and recurrent feature of the business of the Applicant that it is exposed to product liability and public liability risks;
  • (c) It is a regular and recurrent feature of the business of the Applicant that it insures against its risks and liabilities;
  • (d) It is a regular and recurrent feature of the business of the Applicant that it receives payment from its insurers and that it settles claims against insurers; and
  • (e) It is a regular and recurrent feature of the business activities of the Applicant that it manages its exposure to risks by research, better products, provisions for meeting claims, captive insurers, staff responsible for managing claims and the like.

57. The Settlement Sum received by the Applicant from NZI was by an insured claiming against its insurer. The whole of the claims brought against NZI and CIGNA related to and

ATC 4225

flowed from the relationship of insurer and insured.

58. The purpose of the insurance taken out by the Applicant was to protect itself from the liabilities which it may incur and for which it claims tax deductions.

59 In general, ``insurance moneys are to be considered as received on revenue account where the purpose of the insurance was to fill the place of... any outgoing which has been incurred on revenue account in consequence of the event insured against'': Carapark Holdings Ltd v FC of T (supra) at ATD 405; CLR 663; FC of T v Rowe (supra) at ATC 4321; CLR 276.

60. Even in the case of a taxpayer not being a business ``it is necessary to look'' at ``the total situation of the taxpayer'' to determine the true character of the receipt: FC of T v Rowe (supra) at ATC 4329; CLR 292;
FC of T v Dixon (1952) 10 ATD 82 at 85; (1952) 86 CLR 540 at 555;
Allied Mills Industries Pty Ltd v FC of T 89 ATC 4365; (1989) 20 FCR 288.

61. The proper inquiry to determine whether a receipt comes in as income ``must always depend for its answer upon a consideration of the whole of the circumstances'' to determine ``the how and why'' of the receipt: Squatting Investments Co Ltd (supra) at ATD 146; CLR 627-628.

62. The inquiry into the ``how and why'' of a receipt includes ``any common understanding between the payer and the payee'': Rowe (supra) at ATC 4322 and 4329; CLR 279 and 292;
The Federal Coke Company Pty Limited v FC of T 77 ATC 4255 at 4273; (1977) 34 FLR 375 at 402.

63. It is thus manifestly insufficient to look only at the legal rights affecting the transaction. The inquiry here shows a relationship between insurer and insured and claims upon and incidental to insurance policies and insurance relationships.

64. Even if some of the claims released would, in isolation, be regarded as on capital account, this would not detract from the Respondent's submission that, in this case, they all flowed from the business relationship of insurer and insured in relation to risks which were of a revenue nature.

65. It was also submitted on behalf of the Respondent that the Applicant's reliance upon McLaurin, Allsop and Spedley was misplaced, when the cases are properly analysed in context and having in mind cases such as
Carter v Wadman (1946) 28 TC 41 and
Tilley v Wales (Inspector of Taxes) (1943) AC 386. I shall return to this submission. It was also put as a formal submission that these cases were wrongly decided and ought not to be followed.

66. The Respondent's second contention is that s 26(j) of the Act brings to tax:

``... any amount received [by way of insurance and indemnity] for or in respect of any loss or loss or outgoing which is an allowable deduction.''

67. The Settlement Sum has been received by the Applicant upon claims against its insurer. The claims against its insurer were for, ``or in respect of'', liabilities which the Applicant had for which it has claimed and been allowed deductions. The losses or outgoings for which it has claimed tax deductions have been incurred in its business in the gaining or producing of assessable income.

Decision

Section 25

68. In my opinion, it is clear that at least some of the causes of action which are released should be classed as capital in nature - the most obvious being the claims in relation to damage to reputation. It is also obvious that the Settlement Deed does not attribute the Settlement Sum to any particular promise, nor does it dissect the amount in any way between promises. At first blush, therefore, this would appear a straightforward case for the application of Allsop, as submitted by the Applicant.

69. It is submitted for the Respondent that both McLaurin and Allsop were stated cases, whereas this is a case in which it is for the Applicant to establish that the amount for which tax is levied exceeds the actual substantive liability (
FC of T v Dalco 90 ATC 4088; (1990) 168 CLR 614). It was submitted that this burden necessarily involves the Applicant in showing, for example, that the sum was not dissectible. It was submitted that neither McLaurin nor Allsop justify the proposition that a release of claims which could have been raised but were not is sufficient to give an amount recovered as a consequence of the release the character of such a claim. It was submitted that, bearing in mind the principles in
Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589, this would have the consequence that the character of a judgment

ATC 4226

recovered would have to be judged for revenue purposes by claims which existed but were not made in the proceedings, but which, by reason of the judgment, are discharged.

70. These submissions require a close analysis of the cases relied upon by the Applicant, principal among which was Allsop. In that case, at the time of the deed of release in question, the appellant had issued proceedings against the Commissioner for Motor Transport, making a claim related wholly to amounts paid for or in respect of permits sought and obtained by the appellant under the provisions of the relevant State Act for the carriage of goods by his vehicles in the course of his business. Each amount which had been paid, and which was identified in the particulars, had been claimed as a deduction for income tax purposes. Findings of fact by the trial judge included the following:

``(a) In or about the middle of 1952 two vehicles owned by the appellant which were carrying goods inter-State without the proper permits having been obtained pursuant to s 22 of the State Transport (Co- ordination) Act were stopped and detained by officers of the Department of Motor Transport for approximately twelve to fourteen hours. The said officers uncovered the loads carried by the vehicles, inspected them and partially unloaded the vehicles without the consent of the appellant or his drivers. Upon the appellant undertaking to pay the balance of the permit fee payable in respect of the load carried on the vehicles the vehicles were released to their drivers but neither the load nor the tarpaulin was replaced. The appellant received complaints from the consignee, a customer of the appellant, arising out of the delay in delivery consequent upon the said detention of the vehicles. Due to the delay, loads from Melbourne to Sydney which were awaiting transport by the appellant's said vehicles were necessarily diverted to a sub- contractor.

(b) In or about July 1953 a vehicle owned by the appellant which was carrying goods inter-State without a sufficient permit having been obtained pursuant to s 22 of the State Transport (Co-ordination) Act was stopped and detained for approximately twelve hours by officers of the Department of Motor Transport. The key of the said vehicle was taken from the appellant's driver and the vehicle was locked up in the premises owned by the Department of Railways. The vehicle was partially unloaded by the said officers. Upon the appellant undertaking to pay the balance of the permit fee payable in respect of the load carried the vehicle was released. The appellant again received complaints from the consignee who was also a regular customer of the appellant, arising out of the delay in delivery consequent upon the said detention by officers of the Department of Motor Transport.

...

(f) Prior to the date on which the aforesaid sum of £37,500 was received by the appellant's solicitors the appellant made no claim or demand of any kind nor did he threaten or institute any legal proceeding of any kind against anyone for the recovery of damages or any other relief in respect of the aforesaid interference with his vehicles: nor did the appellant prior to the said date ever entertain the idea of making any such claim or demand or instituting any such proceedings.

(g) Prior to the execution of the deed of release hereinbefore referred to negotiations took place between the appellant's solicitors and the solicitors for the Commissioner for Motor Transport for the settlement of the said action No. 5808 of 1955. These negotiations took place to the knowledge of the appellant. At all times up to and including the date of the receipt by the appellant's solicitors of the said sum of £ 37,500, the appellant and his solicitors regarded the negotiations for settlement of the said action as relating solely to the recovery of permit fees which had been paid by the appellant under the provisions of the said State Transport (Co-ordination) Act and in the minds of the appellant and his solicitors the said sum when received represented to them a repayment of part of the total amount which had been paid by the appellant for permit fees and nothing else.''

The majority (Barwick CJ and Taylor J) held as follows at ATD 64-65; CLR 351:

``The primary question in the case is whether the payment to the appellant of the sum of £37,500 constituted, in the

ATC 4227

circumstances, a refund of part of the fees which had been paid by him. In our opinion it did not. There is sufficient in the case to enable it to be said that during the period in question there had been unlawful interferences with the appellant's vehicles and his business operations and in respect of these matters he had valid claims against the Commissioner. His claim for a refund of the fees paid by him was not admitted by the Commissioner and the amount payable upon the execution of the release was the consideration not only for a release of his claim against the Commissioner in respect of the fees paid by him for permits but also for his release of all claims for anything done in purported pursuance of the State Transport (Co-ordination) Act. There is no suggestion that the release was illusory or that it was not designed to operate, or, that it did not operate according to its tenor and, that being so, we do not regard the allegations contained in para. 10(g) of the case stated as relevant matters for our consideration. But even if they are taken into consideration they would not affect the conclusion that the amount payable was an entire sum paid by way of compromise of all these claims and no part of it can be attributed solely to a refund of the fees paid by the appellant for permits. In these circumstances there is no warrant for regarding the amount paid by him or any part of it as a refund or recoupment to him of any revenue disbursement made in carrying on his business or for regarding it on any other ground as an income receipt.''

71. I do not believe that it is open to me to accept the Respondent's submissions that Allsop can be distinguished. Just because insurance against product liability by a substantial manufacturing and distribution organisation, and risk management generally, might be seen as a normal incident of carrying on the business, and so as essentially of revenue character, does not mean that where the organisation enters into such insurance all that arises thereafter between it and its insurer is on revenue account. In the present circumstances, if the second New Jersey proceeding had included NZI, and if there were a severable portion of the verdict entered in relation to an item which would properly be regarded as on capital account, the circumstance that it arose in a general way because the parties were insurer and insured would not convert that amount from capital to income account. None of the authorities to which I was referred by the Respondent establish the proposition contended for. In my view, it is contrary to the distinction between income and capital which is at the heart of the system of taxation represented by the Act.

72. The appellant in Allsop carried on business as a carrier of goods interstate by road. He was just as much in business as was the Applicant here, although, of course, on a vastly different scale. Furthermore, the actions by State officers, which were described as unlawful interferences with the appellant's vehicles and his business operations, were all directly connected with the business of Allsop, and directly connected with the dispute which existed as to the payment of permit fees, the recovery of which was the subject of the action. Those permit fees were just as much a matter of revenue as payment of compensation and costs in the present case. Deductions were claimed and allowed in relation to payment of those amounts. I cannot see that Allsop can be distinguished on the basis of what counsel for the Respondent described as the nature and scope of business test or the common understanding test.

73. It is true that Allsop was a stated case. However, the stated case included both admitted facts and facts found by the judge on the evidence before him. I have found the facts here. The question is whether there is any material difference between the facts. I do not think that there is. They are very close. In each case circumstances existed at the time of the release which might have led to liability in the releasee, but in neither case had any claim been made in relation to that liability by the time of the deed and it was not taken into account by the releasor in the negotiations for settlement. In each case it is plain that the whole of the amount which was arrived at for the settlement was attributed by the parties to the claim or demand which had actually been made - in the one case for permit fees paid, and in the present case for indemnity under the insurance policies. In each case the claim or demand made at the time was liquidated.

74. The decision in Allsop has been criticised by commentators (eg Taxation Law in Australia, Lehmann and Coleman, 4th Ed, paras

ATC 4228

2.1410-2.1430; Income Taxation in Australia, Parsons, paras 2.558-2.570), but it is a unanimous decision of the High Court which has stood since 1965 without either curial or legislative intervention. In my opinion, the decision compels the conclusion that the Settlement Sum was not received as income according to ordinary concepts within s 25. Without any disrespect to the careful arguments advanced by counsel on both sides dealing with cases such as McLaurin, and the English authorities which preceded Allsop, and other cases since Allsop, it is pointless for me to embark upon an analysis of the authorities in order to distinguish Allsop on some tenuous ground. If Allsop is to be reviewed, it will have to be reviewed by the High Court. The result here is no more surprising or anomalous than that in Allsop, notwithstanding the amount involved.

Section 26(j)

75. Allsop does not directly preclude the Commissioner's contentions in relation to the operation of s 26(j). In that decision, Barwick CJ and Taylor J said [at 65]:

``... As far as s 26(j) of the Act is concerned it is sufficient to observe that no part of the amount paid to the appellant was, as that section requires, received by him by way of insurance or indemnity.''

76. The Applicant submits that the ratio of Allsop would deny the application of s 26(j), as the proper conclusion is that no part of the sum paid to the Applicant under the deed of release constituted a refund to the Applicant of amounts paid (or to be provided or paid) in settlement of claims.

77. It is relevant, in relation to this head of argument, to note that in 1991 there was a debate between the Applicant and Respondent as to the deductibility pursuant to s 51(1) of settlement payments and legal expenses in the course of which the Manager, Group Taxation, of the Applicant prepared a comprehensive statement of the company's position on fact and law in favour of deductibility. At that stage, the claim was for the deduction of $60,130,377. The Respondent accepted the Applicant's contentions.

78. It seems to me that, again, the decision in Allsop provides an insurmountable barrier in the path of the Respondent. It was argued in that case that the payment was caught by s 72(2) which was in the following form (so far as is relevant):

``Where a taxpayer receives... a refund of an amount paid for... taxes which has been allowed... as a deduction... his assessable income shall include that amount.''

79. In disposing of that argument, Barwick CJ and Taylor J said (omitting citation of authorities) [at 65]:

``Though there may be much to be said for the view that s 72(2) applies to any refund of an amount paid for rates and taxes without restriction to those mentioned in the earlier sub-sections and for the view that the fees paid for permits under the State Transport (Co-ordination) Act 1931-1951 were taxes, the conclusion that no part of the sum paid to the appellant under the deed of release constituted a refund to the appellant of such fees paid by him renders s 72 on any view inapplicable to the present case.''

80. That reasoning must also apply to the application of s 26(j) here. In my opinion, s 26(j) has no application in the present case. That relieves me from considering quantum and any issue as to future claims.

Capital gains

81. It is now agreed by the Applicant (for the purpose of these proceedings) that the whole of the Settlement Sum constituted a capital gain to the Applicant within the meaning of Part IIIA of the Act.

Orders

82. Subject to any submissions to the contrary, I propose to make the following orders:

  • 1. Allow the appeal against the Notice of Objection Decision dated 9 November 1998.
  • 2. Allow the objection and:
    • (1) exclude from the assessable income of the Applicant pursuant to s 25 and s 26 of the Income Tax Assessment Act 1936 (Cth) (``the Act'') the amount of $100 million.
    • (2) include the amount of $100 million as assessable capital gain pursuant to Part IIIA of the Act.
  • 3. The Respondent is to pay the Applicant's costs of the proceedings less any costs referable to the issue of capital gains.

    ATC 4229

  • 4. The Applicant is to pay the Respondent's costs referable to the capital gains issue.

THE COURT ORDERS THAT:

The proceedings stand over to 9.30am on Friday, 7 April 2000.


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