JUDGMENT No. 12.) af of. CATCHWORDS INCOME TAX - Assessable income - Interest on compensation payable consequent upon resumption of property under statute - Compensation determined by judicial process - Compensation and interest paid - Determination of compensation set aside on appeal with a direction that amount be reassessed - No reassessment made before appeal against objection to inclusion of interest in assessable income heard by Administrative Appeals Tribunal - Taxpayer retaining full amount of compensation and interest paid - Whether amount of interest properly included in assessable income Administrative Appeals Tribunal Act 1975 (Cth), subs 44(1) Income Tax Assessment Act 1936 (Cth), subs 51(1) National Parks and Wildlife Act 1974 (NSW), ss 145, 147 Public Works Act 1912 (NSW), ss 42, 43, 45, 101, 126A Federal Wharf Co. Ltd v Deputy Commissioner of Taxation (1930) 44 CLR 24 applied M.B.P. (S.A.) Pty Ltd v Gogic (1991) 171 CLR 657 referred to Haines v Bendall (1991) 172 CLR 60 referred to BRYAN DOUGLAS HAIG v MMISSTONER OF TAXATION No. ACT G 3 of 1994 Neaves J. 14 December 1994 Canberra 15 DEC 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL IN THE FEDERAL RT _OF AUSTRALIS AUSTRALIAN CAPITAL TERRITORY DISTRICT REGISTRY ) ) No. ACT G 3 of 1994 GENERAL DIVISION ) ON_APPEAL FROM THE TAXATION APPEALS DIVISION OF THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: BRYAN DOUGLAS HAI Applicant AND: COMMISSIONER OF TAXATION Respondent MINUTE OF ORDER Neaves J. JUDGE MAKING ORDER DATE OF ORDER 3 14 December 1994 WHERE MADE : Canberra THE COURT ORDERS THAT: 1, The application be dismissed. 2. The decision of the Administrative Appeals Tribunal given on 23 July 1993 be affirmed. 3. The applicant pay the respondent's costs of and incidental to the application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN E_FEDERAL RT AUSTRALIA I APITAL TERRITORY No. ACT G 3 of 1994 DISTRICT RE TRY ee ee ee EN DIVISION APP. FROM THE TAXATION APPE. DIVISION F THE MINT T P TR NAL BETWEEN: BRYAN I Applicant AND: COMMISSIONER OF TAXATION Respondent CORAM: Neaves J. DATE: 14 December 1994 REASONS FOR DGMENT This application, which is made under subs.44(1) of the Administrative Appeals Tribunal Act 1975 (Cth), raises the question whether the Administrative Appeals Tribunal ("the Tribunal") erred in law in affirming decisions made by the respondent, the Commissioner of Taxation, to disallow objections lodged by the applicant, Bryan Douglas Haig, against his assessments to income tax in respect of the years of income ended 30 June 1989 and 30 June 1990. The decision of the Tribunal is reported: see Case 30/93 (1993) 93 ATC 354. The objections related to the inclusion in the applicant's assessable income for the year of income ended 30 June 1989 of amounts of $20,162.99 and $22,949.26 (totalling $43,112.25) received by him on 31 January 1989, and the 2. inclusion in his assessable income for the year ended 30 June 1990 of an amount of $102,548.14 received by him on 7 August 1989, the receipt of those amounts occurring in circumstances to which it will be necessary to refer. The objections also Claimed that, if the amounts referred to formed part of the applicant's assessable income for the years in question, the applicant was entitled to deductions from the assessable income of one or other of those years of amounts totalling $8,018.00, being amounts of interest paid under a mortgage, and amounts totalling $52,947.39 said to be legal expenses. The applicant did not persist before the Court in the contention, foreshadowed in the application, that the Tribunal erred in law in deciding that the amounts of $8,018.00 and $52,947.39 were not allowable as deductions. The relevant facts are in a short compass. By a notice dated 19 December 1984 and published in the New South Wales Government Gazette on 11 January 1985, certain property of which the applicant was then the registered proprietor under the Real Property Act 1900 (NSW) was resumed under the Public Works Act 1912 (N.S.W.), as amended. The land was described as: "Land District - Cooma: Shire - Snowy River County Wallace, Parish Gungarlin, about 387.7 hectares being portion 36 and being also the whole of the land contained in Certificate of Title, volume 14581, folio 27. NPWS.P 8336." 3. The notice stated that the resumption was for the purpose of the National Parks and Wildlife Act 1974 (NSW) and that the land was vested in the Minister administering that Act, as amended, as Constructing Authority. Sections 145 and 147 of the National Parks and Wildlife Act provided: "145. The Minister may, for the purpose of obtaining land for reservation or dedication under Part IV or of preserving, protecting and preventing damage to relics or Aboriginal places - (a) on behalf of Her Majesty, enter into and give effect to an agreement for the vesting in, or surrender to, Her Majesty of any land; or (b) acquire any land (including land previously appropriated or resumed for any purpose) by purchase or exchange or by resumption or appropriation in accordance with this Part. 147. (1) A resumption or appropriation for the purposes of this Act shall be effected by the Governor under the Public Works Act, 1912, and, without limiting the generality of the foregoing, appropriation under that Act may be effected in respect of any land vested in Her Majesty or any person in trust for Her Majesty. (2) A resumption or appropriation for the purposes of this Act shall be deemed to be for an authorised work and the Minister shall be deemed to be the Constructing Authority. Section 147 also had the effect, for the purposes referred to in that section, of deeming the Public Works Act to be amended in certain respects. It is, however, unnecessary for present purposes to refer to the deemed amendments. 4. The Public Works Act relevantly provided: "42. For the purpose of carrying out any authorised work, if the Governor directs that any land required for such work shall be taken under this Division of this Act, he may by notification to be published in the Gazette and in one or more newspapers published or circulated in the police district wherein is situated the land the subject of such notification declare that the land described in such notification has been appropriated (if Crown land) or resumed (if private property) for the public purpose therein expressed.... 43. (1) Upon the publication of such notification in the Gazette, the lands described or referred to in such notification shall forthwith be vested in the Constructing Authority on behalf of His Majesty for the purpose of this Act for an estate in fee-simple in possession, freed and discharged from all trusts, obligations, estates, interests, contracts, charges, rates, rights-of-way, or other easements (except such rights-of-way or other easements as may be specified or described in the notification as being excepted from the vesting) whatsoever, and to the intent that the legal estate therein, together with all powers incident thereto, or conferred by this Act, shall be vested in the Construction Authority as a trustee. (2) sees 45. (1) The estate and interest of every person entitled to lands resumed under this division of this Act or any portion thereof and whether to the legal or equitable estate therein shall by virtue of this Act be deemed to have been as fully and effectually conveyed to the Constructing Authority as if the same had been conveyed by the persons legally or equitably entitled thereto by means of the most perfect assurances in the law. (2) Every such estate and interest shall, upon the publication of such notification as aforesaid be taken to have been converted into a claim for compensation in pursuance of the provisions hereinafter contained. (3) Every person shall upon asserting his claim as hereinafter provided and making out his title in respect of any portion of the said resumed lands be entitled to compensation on account of such resumption in manner hereinafter provided. 5. 101. (1) Where the land described in any such notification as in section forty-two hereof mentioned consists wholly or partly of land alienated by or not the property of the Crown, or is not Crown land, the owners thereof, or the persons who, but for the provisions hereinbefore contained, would have been such owners, shall be entitled to receive such sums of money by way of compensation for the land of which they have been deprived under this Act as shall be agreed upon or otherwise ascertained under the provisions of this Division of this Act. (2) In this section the expression 'Crown land' means all lands vested in His Majesty, whether dedicated to any public purpose or not, and which have not been lawfully contracted to be sold. 126A. (1) Subject to this section and section 126B, where land is taken or acquired under this Act by notification in the Gazette, the Constructing Authority shall - (a) where the compensation is paid by more than one payment - pay interest on each payment from the date of the notification until that payment is made; or (b) in any other case - pay interest from the date of the notification until the payment is made. (4A) Subject to subsection (9), where a taking or acquisition referred to in subsection (1) took effect on or after the commencement of the Public Works (Amendment) Act, 1975, interest is payable under that subsection - (a) in respect of the period expiring twelve months after the taking or acquisition - at the rate of four per centum per annum; and (b) in respect of any period later than twelve months after the taking or acquisition - at the rate specified in respect of that period in a notification under subsection (5). (5) The Treasurer may, by notification published in the Gazette, specify the rate of interest payable under subsection (1) in respect of a period that commences not earlier than the publication of the notification. 6. (8) In publishing a notification under subsection (5) in respect of an amount or period, or both, the Treasurer shall have regard to the rates of interest paid by banks. (9) Until provision is otherwise made in a notification under subsection (5), the rate of interest payable under subsections (3)(b), (4)(b) and (4A)(b) is - (a) where the total amount of compensation does not exceed $50,000 - 8.3 per centum per annum; or {b) where the total amount of compensation is $50,000 or more - 9.25 per centum per annum." It is unnecessary for present purposes to refer to the other provisions of s.126A or to the provisions of s.126B. By the Public Works (Interest) Amendment Act 1986 (NSW), assented to on 4 December 1986, s.126A of the Public Works Act was amended so that, inter alia, subs.(4A) and subs.(9) were omitted. A new subs.(3) was inserted in s.126A reading as follows: "(3) On and from the commencement of the Public Works (Interest) Amendment Act 1986, interest is payable under subsection (1) in respect of any period at the rate specified in respect of that period in a notification under subsection (5)." The applicant took proceedings in the Land and Environment Court of New South Wales for the determination of the amount of compensation payable in consequence of the resumption of the land. On 31 October 1988, the Land and Environment Court assessed the value of the land at $195,000.00, the value of improvements at $147,000.00, the loss of goodwill/special value at $7,500.00 and disturbance at 7. $10,000.00, totalling $359,500.00. A deed of release dated 7 August 1989 was executed on behalf of the applicant, that deed reading as follows: "BRYAN DOUGLAS HAIG of 66 Wybalena Grove, Cook in the Australian Capital Territory (as Owner) hereby acknowledges to have received from THE MINISTER FOR NIN D ENVIRONMENT (hereinafter called 'the Authority') the sum of Five Hundred & Five Thousand One Hundred & Sixty dollars Thirty Nine Cents ($505,160.39) (hereinafter called 'the said sum') whereof Three hundred and fifty nine thousand five hundred dollars ($359,500.00) is compensation and One Hundred & Forty Five Thousand Six Hundred & Sixty Dollars Thirty Nine Cents ($145,660.39) is interest thereon at the rate provided for by the Public Works Act, 1912, on account of compensation claimed by the Releasor for [or} in respect of the Resumption by Notification published in the Government Gazette dated the 11th January, 1985 of - ALL THAT piece of land in the district of Cooma, Shire of Snowy River, County of Wallace, Parish of Gungarlin, about 387.7 hectares being Portion 36 and being also the whole of the land contained in Certificate of Title Volume 14581 Folio 27. AND of which said sum:- (i) one hundred thousand and eight hundred dollars ($100,800.00) Compensation was paid on 13th July, 1987; (ii) Twenty two thousand nine hundred and forty nine dollars twenty six cents ($22,949.26) on account of interest on the said sum of one hundred thousand and eight hundred dollars for the period from lith January, 1985 to 13th July, 1987 was paid 3ist January, 1989; (iii) forty seven thousand seven hundred and ninety six dollars and sixty six cents ($47,796.66) compensation was paid on 3lst January, 1989; (iv) Twenty thousand one hundred and sixty two dollars ninety nine cents ($20,162.99) on account of interest on the said sum of forty seven thousand seven hundred and ninety six dollars sixty six cents ($47,796.66) for the period 11th January, 1985 to the 31st January, 1989, was paid on 3l1st January, 1989; 8. (v) Two hundred and ten thousand nine hundred and three dollars thirty four cents ($210,903.34) is the balance of compensation now paid. (vi) One Hundred & Two Thousand Five Hundred & Forty Eight Dollars, Fourteen Cents ($102,548.14) is the interest on the sum of two hundred and ten thousand nine hundred and three dollars thirty four cents ($210,903.34) from 11th January, 1985 to the date of this deed. AND in consideration of the amount so paid the Releasor in confirmation of the resumption but not so as to limit or abridge its effect hereby conveys and confirms to the Authority in fee simple the land above described. AND in further consideration of the amount so paid the Releasor by this Deed hereby releases and discharges Her Majesty the Queen Her Heirs and Successors and the Authority and the Authority's successors from all claims demands actions suits cause and causes of action or suit sum or sums of money compensation interest damages costs charges and expenses now or hereafter of the Releasor for or on account of the said resumption or the matters before mentioned or for or on account of any other matter or thing arising out of or in respect of the premises." It appears that on 14 February 1991 the Supreme Court of New South Wales (Court of Appeal) allowed an appeal from the decision of the Land and Environment Court, set aside the decision under appeal and remitted the proceedings to the Land and Environment Court to determine the amount of compensation payable under s.125 of the Public Works Act. It is clear that, at the time the matter was heard and determined by the Tribunal, the amount of compensation payable under that section had not been determined. The Court was informed by counsel for the applicant that, since the matter was determined by the Tribunal, the amount of compensation has been determined by the Land and Environment Court, that the applicant lodged an appeal to the Supreme Court (Court of Appeal) against that determination but that that appeal is not 9. to proceed. It is common ground that the applicant has not refunded any part of the amount of $505,160.39 referred to in the deed of release to which I have referred. In deciding that, by virtue of the provisions of subs.25(1) of the Income Tax Assessment Act 1936 (Cth) the amounts of $43,112.25 and $102,548.14 properly formed part of the applicant's assessable income in respect of the relevant years of income, the Tribunal said (see (1993) 93 ATC 354 at p.358): "19. In Federal Wharf Company Limited v The Deputy Federal Commissioner of Taxation (1930) 44 CLR 24 Rich J was concerned with the issue of interest on compensation payments for property compulsorily acquired. His Honour said at 27: 'The true question is whether sums received pursuant to sec. 26 of the Harbours Act 1913 are of a capital Nature or of an income nature. In considering this question it is important to observe, first, that the sum is calculated and payable in respect of time; second, that the time in respect of which it is so calculated commences when the owner is deprived of the actual profitable enjoyment of his property by the entry of the Minister; third, that the period ends with the payment of the compensation which represents the capital of that property; and fourth, that the interest is calculated upon the sum ascertained to represent the capital value of the property of which the owner has been deprived. It is true that sec. 26 says that the interest 1s to be added to the amount of any compensation to be paid, but this statement manifests no intention that it shall be considered capital whether as against the revenue or between life-tenant and remainderman, or for the purposes of the internal management of a company. Indeed for the purposes of the Federal tax it would matter little if it did, for such an intention could not alter its true character. In truth, sec. 26 does little more than express in precise legislative form the rule established by In re Pigott and Great Western Railway Co. (1881) 18 Ch. D 146 that an authority compulsorily acquiring land is in the position of a purchaser in the 10. absence of statutory provision to the contrary, and must pay interest upon the compensation as if it were purchase money, from the date of possession until payment. It is quite clear that interest upon the balance of purchase-money payable upon a sale of real property is income (Hudson's Bay Co. v Thew (1919) 7 Tax Cas. 206). The observation made by Rowlett J at p.217 in that case that if the vendors 'had collected the money and had been paid it, they would have invested it and got interest', and that 'the purchaser has not paid it, and he therefore pays interest instead until he does pay it' is a simple proposition which seems equally applicable to the payment of compensation. In my opinion, the character of the interest payable under sec. 26 is that of recompense for the loss of the use of capital during a period of time in which it would earn income. It represents the annual value of capital. It is paid because the owner has been deprived of a capital asset which he had and has not received the fund which is to be substituted for the capital asset. The interest is the flow of that fund. In my opinion it is income.' 20. This decision of the High Court is unchallenged authoritative precedent on treatment of interest paid on compensation for property compulsorily acquired. It is on all fours with the matter presently before the Tribunal. The test for the analysis of what the interest represents is not a subjective one derived from the state of mind of the taxpayer. Rather the tests applied in Federal Wharf Company Limited as well as the analogous vendor and purchaser situation set out therein by Rich J in his judgement [supra] provide the correct interpretation of the interest component as _ income. There was evidence before the Tribunal that clearly differentiated between the compensation as a capital sum and statutory interest accrued on that amount [Exhibit Cj. The Tribunal is bound by this decision and, with respect, agrees with his Honour. Thus the Tribunal finds that the statutory interest paid on the capital amount of compensation is income for the purposes of sub-section 25(1) of the Act." Counsel for the applicant conceded that if Federal Wharf Co. Ltd v Deputy Federal Commissioner of Taxation is to be regarded as correctly stating the law, the amounts in question were properly included in the applicant's assessable income for the years in question. The researches of counsel 11. have not discovered any case in which the correctness of the decision in that case has been judicially questioned. On the contrary, it was accepted as correct by the Supreme Court of New South Wales in Easy v Commissioner of Taxation (NSW) (1941) ATD 101 at p.105 (Herron J.) and in Gill v Australian Wheat Board [1980] 2 NSWLR 795 at p.799 (Rogers J.); and it has been followed and applied by Taxation Board of Review No.1 in Case N° F8 reported (1955) 6 TBRD 46 and by the Tribunal in Case T104 reported (1986) 86 ATC 1,184 at p.1,186 and Case W40 reported (1989) 89 ATC 399 at p.403. It was referred to, without any suggestion of disapproval, by members of the High Court in Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 at p.218. For the applicant, it was submitted that' the decision in Federal Wharf Co. Ltd v Deputy Federal Commissioner of Taxation requires reconsideration in the light of the reasoning of the High Court in M.B.P. (S.A.) Pty Ltd v Gogic (1991) 171 CLR 657 and Haines v Bendall (1991) 172 CLR 60. The first of those cases concerned the rate to be used in calculating the amount to be included in a judgment for damages for personal injuries as representing interest on the amount awarded for pre-trial pain and suffering. In the second of those cases, the question at issue was whether, for the purpose of computing interest to be included in a judgment for damages for personal injuries, the amount of the pre-judgment non-economic loss was to be reduced by the amount of worker's compensation that had been received. Reliance was placed by 12. counsel for the applicant on the statement in the judgment in M.B.P. (S.A.) Pty Ltd v Gogic at p.666 that, in an action for damages for personal injuries suffered as a result of the defendant's negligence, a plaintiff is awarded interest on pre-judgment non-economic loss, not to compensate him or her for being deprived of the opportunity to invest his or her money - not because he or she has foregone investment opportunities - but because he or she has been deprived of the use of his or her money. Reliance was also placed on the following passage in Haines v Bendall at p.66: "An award of interest up to the date of judgment is an award of interest in the nature of damages: Fire and All Risks Insurance Co. Ltd (1978) 140 CLR at p.431. This statement acknowledges that the award of interest is an integral element in the attainment of the object of damages, namely to compensate a plaintiff for injury sustained. Hence the award of interest is compensatory in character. While '[ijnterest should not be awarded as compensation for the damage done' (emphasis added) (Jefford v Gee (1970) 2 Q.B. 130, at p.146), the award of interest is nevertheless an essential element in the achievement of true compensation for that damage. In Thompson v Faraonio (1979) 54 A.L.J.R. 231 at p.233; 24 A.L.R. 1, at p.7, the Privy Council stated that '[t]he reason for awarding interest is to compensate the plaintiff for having been kept out of money which theoretically was due to him at the date of his accident' (emphasis added): see also Batchelor v Burke (1981) 148 C.L.R., at p.455, per Gibbs C.J.; M.B.P. (S.A.) Pty Ltd v Gogic (1991) 171 C.L.R., at pp.663-665; cf. Ruby v Marsh (1975) 132 C.L.R. 642, at pp.652-653, per Barwick C.J. The award of interest for the period of delay in payment between the date of accrual of the cause of action and judgment affords the fair legal measure of compensation: Pheeney v Doolan [1977] 1 N.S.W.L.R. 601, at p.613, per Reynolds J.A. Thus, it is the award of damages and, where appropriate, interest awarded on damages for the period up until the judgment takes effect which allows the plaintiff to be placed in or restored to the situation, as far as money can do, in which he or she would have been but for the defendant's negligence." 13. The statements relied upon must, of course, be read in the context of the issues then under consideration, namely, in actions for damages for personal injuries, the rate of interest to be adopted and the amount to which the relevant rate of interest is to be applied. In my opinion, there is nothing in those statements which casts doubt on the correctness of the decision in Federal Wharf Co. Ltd v Deputy Federal Commissioner of Taxation that interest payable under statutory provision upon the amount of compensation payable in respect of the resumption of real property forms part of the recipient's assessable income. I am, therefore, unable to accept the submission advanced on behalf of the applicant. In my opinion, the decision that the amounts in question form part of the applicant's assessable income has not been shown to be tainted with any error of law. An alternative argument advanced on behalf of the applicant turned on the circumstance that, after the relevant years of income but before the matter was determined by the Tribunal, the decision of the Land and Valuation Court that the amount of compensation payable was $359,900.00 was set aside and the matter remitted to that court to re-determine the amount of compensation payable. It was submitted that that circumstance required the Tribunal to conclude that the amounts of $43,112.25 and $102,548.14 were not properly included in the applicant's assessable income for the years 14. ended 30 June 1989 and 30 June 1990 respectively. This argument was advanced notwithstanding the admitted situation that no part of the amounts totalling $505,160.39 paid to the applicant have been repaid by him. In my opinion, the alternative argument is misconceived. The fact that the determination of the amount of compensation was required to be reconsidered cannot alter the character of the amounts received by the applicant in the relevant years of income. In the event that, as a result of the redetermination of the amount of compensation properly payable, the applicant is required to repay, and does in fact repay, any part of the amounts of $43,112.25 and $102,548.14 paid to him by way of interest, the question of amendment of the relevant assessments will arise. It is not a matter that arises on the present application. For the reasons set out above, the application is dismissed and the decision of the Tribunal is affirmed. The applicant must pay the respondent's costs of and incidental to the application. I certify that this and the preceding 13 pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Neaves. AssocVate Dated: 14 December 1994 Counsel for the applicant Solicitors for the applicant Counsel for the respondent Solicitor for the respondent Date of hearing Date of judgment 15. Mr C.M. Erskine Blake Dawson Waldron Mr T. Howe Australian Government Solicitor 29 November 1994 14 December 1994