Decision impact statement

Howard v Commissioner of Taxation

• Note: A separate aspect of the Howard litigation concerned whether distributions of trust corpus received by an Australian resident individual in the 2006 year from a Jersey Trust were assessable income of the taxpayer in that year. This aspect of the litigation is dealt within a separate Decision Impact Statement

Venue: High Court
Venue Reference No: M140/2013
Judge Name: French CJ, Crennan, Gageler, Hayne, Keane JJ
Judgment date: 11 June 2014
Appeals on foot: No
Decision Outcome: Favourable to the Commissioner

Impacted Advice

Relevant Rulings/Determinations:

• N/A

Subject References:
Accountability of company officers & directors (Directors duties)
Assignment of rights and entitlements
Constructive trusts
Derivation of income
Equitable interests
Fiduciary duties
Whether expense incurred

Précis

This case concerns whether an award of equitable damages was received by the taxpayer in his personal capacity or as a constructive trustee, or was assigned such that it was otherwise not derived beneficially by the taxpayer.

Brief summary of facts

In 1999 the taxpayer and five other individuals formed a joint venture to pursue a property investment opportunity ("the investment opportunity") involving the purchase of a property in Rowville, Victoria, on which was conducted the public golf course known as "Kingston Links Golf Course" ("the property").

The investment opportunity involved the purchase, letting, and thereafter, the sale, of the property to a third party investor for a day one profit.

The taxpayer was a director of Disctronics Ltd ("Disctronics").

The taxpayer and two other directors of Disctronics who were also joint venture members asserted Disctronics' intention and right to become the equity participant for the investment opportunity and purchaser of the property as the third party investor. Two other joint venture members disputed this right, entered into a new arrangement with a third party, acquired the property and carried out the investment opportunity to the exclusion of the other joint venture members (including the taxpayer).

The taxpayer, other excluded joint venture members and Disctronics instituted proceedings in the Supreme Court of Victoria for breach of fiduciary duty. The court of appeal of the Supreme Court of Victoria upheld the decision of the primary judge in favour of the excluded joint venture members (including the taxpayer, but not Distronics) and awarded them each an amount of equitable damages.

The Commissioner included the taxpayer's share of the award of damages in the taxpayer's assessable income for the year ended 30 June 2005.

At first instance in the Federal Court, the primary judge held that the award was not assessable income in the taxpayer's hands as he had received it in a fiduciary capacity as a director of Disctronics. This was overturned by the Full Federal Court.

Issues Decided by the Court

The issues in the High Court appeal were:

1.

Whether the taxpayer received the sum of equitable compensation awarded by the Supreme Court as constructive trustee for Disctronics? (No).

2.

If not, whether the taxpayer had assigned the right to receive that amount such that the income was not derived by him beneficially? (No).

3.

Whether the taxpayer incurred liability in respect of the costs of the proceedings in the Supreme Court which should properly have been taken into account in ascertaining the amount of any gain made by the taxpayer and, alternatively, whether those costs were an outgoing of a revenue nature incurred in gaining the income comprised in the award made by the Supreme Court? (No).

ATO view of decision

The views expressed by the High Court are consistent with the Commissioner's view and current practices.

Administrative Treatment

Implications for impacted ATO precedential documents (Public Rulings & Determinations etc)

N/A

Implications for impacted Law Administration Practice Statements

N/A

Court citation:
[2014] HCA 21
2014 ATC 20-457
(2014) 309 ALR 1

Legislative References:
Taxation Administration Act 1953
14ZZ

Income Tax Assessment Act 1936
6(1)
69
97

Corporations Act 2001
197(1)
Pt 2D.1

Case References:
Barnes v Addy


Birtchnell v Equity Trustees, Executors and Agency Co Ltd
(1929) 42 CLR 384
35 ALR 273

Booth v Commissioner of Taxation
[1987] HCA 61
164 CLR 159
19 ATR 514
87 ATC 5100

Bray v Ford
[1896] AC 44
[1895] All ER Rep 1009

Breen v Williams
(1996) 138 ALR 259
(1996) 186 CLR 71

Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd
[2006] HCA 41
229 CLR 386
229 ALR 58

Canadian Aero Service Ltd v O'Malley
[1974] SCR 592

Chan v Zacharia
(1984) 154 CLR 178
(1984) 53 ALR 417

Clay v Clay
(2001) 202 CLR 410
(2001) 178 ALR 193
[2001] HCA 9

Disctronics Ltd v Edmonds (No. 2)
[2002] VSC 534

Disctronics Ltd v Edmonds
[2002] VSC 454

Edmonds v Donovan
[2005] VSCA 27
(2005) 12 VR 513

Federal Commissioner of Taxation v Everett
(1980) 143 CLR 440
(1980) 80 ATC 4076
(1980) 10 ATR 608

Furs Ltd v Tomkies
(1936) 54 CLR 583
[1936] HCA 3

Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL
(1968) 121 CLR 483
[1968] HCA 37

Hirsche v Sims
[1894] AC 654

Hospital Products Ltd v United States Surgical Corporation
(1984) 156 CLR 41
[1984] HCA 64

Howard v Federal Commissioner of Taxation
(2012) 206 FCR 329
[2012] FCAFC 149
(2012) 2012 ATC 20-355

Howard v Federal Commissioner of Taxation (No 2)
(2011) 86 ATR 753
[2011] FCA 1421
(2011) 2011 ATC 20-298

Industrial Development Consultants Ltd v Cooley
[1972] 1 WLR 443

Keech v Sandford
(1726) Sel Cas T King 61

Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd
(1958) 100 CLR 342

Maguire v Makaronis
(1997) 188 CLR 449

Mills v Mills
(1938) 60 CLR 150

Ngurli Ltd v McCann
(1953) 90 CLR 425
[1953] HCA 39

Norman v Federal Commissioner of Taxation
(1963) 109 CLR 9

Pacifica Shipping Co Ltd v Andersen
[1986] 2 NZLR 328

Phelan v Middle States Oil Corporation
220 F 2d 593 at 602 (1955)

Pilmer v Duke Group Ltd (in liq)
(2001) 207 CLR 165
49 ATR 324

R v Byrnes
(1995) 183 CLR 501
[1995] HCA 1

Regal (Hastings) Ltd v Gulliver
[1967] 2 AC 134

Richard Brady Franks Ltd v Price
(1937) 58 CLR 112
[1937] HCA 42

United Dominions Corporation Ltd v Brian Pty Ltd
(1985) 157 CLR 1

Warman International Ltd v Dwyer
(1995) 182 CLR 544