FEDERAL COURT OF AUSTRALIA Commissioner of Taxation v CSR Ltd [2000] FCA 1513 INCOME TAX – Allowable deduction - $100,000,000 paid to taxpayer by insurer in settlement of claims for indemnity in respect of amounts paid and payable by taxpayer as damages to sufferers of asbestosis who had contracted the disease while working for the taxpayer, and also in settlement of claims by taxpayer against insurer on various causes of action, the proceeds of which would have been received by taxpayer on capital account – amount of $100,000,000 not apportioned between the two classes of claim by deed of settlement between taxpayer and insurer – whether whole amount income according to ordinary concepts for purpose of subs 25(1) of Income Tax Assessment Act 1936 (Cth) – whether amount received "by way of insurance or indemnity for or in respect of any loss … which [was] an allowable outgoing" within par 26(j) of that Act. Income Tax Assessment Act 1936 (Cth) ss 25(1), 26(j) Allsop v Commissioner of Taxation (1965) 113 CLR 341, applied McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381, applied Federal Commissioner of Taxation v Myer Emporium Ltd (1986) 163 CLR 199, distinguished Federal Coke Co Pty Ltd v Federal Commissioner for Taxation (1977) 34 FLR 375 (FC), referred to COMMISSIONER OF TAXATION v CSR LIMITED N 395 of 2000 LEE, COOPER, LINDGREN JJ 26 OCTOBER 2000 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 395 OF 2000 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION Appellant AND: CSR LIMITED (ACN 000 001 276) Respondent JUDGES: LEE, COOPER, LINDGREN JJ DATE: 26 OCTOBER 2000 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The appellant pay the respondent's costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 395 OF 2000 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION Appellant AND: CSR LIMITED (ACN 000 001 276) Respondent JUDGES: LEE, COOPER, LINDGREN JJ DATE: 26 OCTOBER 2000 PLACE: SYDNEY REASONS FOR JUDGMENT THE COURT: Introduction 1 The appellant ("the Commissioner") appeals from a decision of a judge of the Court allowing an appeal by the respondent ("CSR") against an objection decision of the Commissioner dated 9 November 1998. The dispute relates to $100,000,000 paid to CSR by the New Zealand Insurance Group ("NZI") on or about 5 March 1995 pursuant to a deed of settlement between CSR and NZI dated 3 March 1995. The Commissioner decided that the amount was assessable income of CSR. On 15 December 1995 CSR returned the amount as assessable income in its income tax return for the year of income ended 31 March 1995. 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 of the return. CSR lodged a notice of objection against the deemed assessment on 20 May 1998. By the objection decision, the Commissioner disallowed that objection. 2 On 24 December 1998, CSR filed its application which commenced the proceeding before the primary judge, seeking to have the Commissioner's assessment set aside pursuant to s 14ZZP of the Taxation Administration Act 1953 (Cth). Background facts 3 The following account of the background facts is taken from the reasons for judgment of the learned primary judge. 4 CSR is a publicly listed company which carried on business in Australia and overseas. At relevant times, Midalco Pty Limited ("Midalco") was a wholly owned subsidiary of CSR. Midalco was formerly known as Australian Blue Asbestos Pty Limited. From 1943 to 1966 it operated a blue asbestos mine and primary processing facility at Wittenoom, Western Australia. Asbestos produced from that facility was sold to an American company, Johns-Manville Corporation, in the period from 1948 to 1966. As well, asbestos from the facility was sold within Australia. CSR America Inc ("CSR America") is an indirect, wholly owned subsidiary of CSR. NZI claims 5 CSR contended that: (a) Between November 1955 and November 1976 the United Insurance Company Limited ("United") issued policies of public liability and products insurance to CSR; and (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 CSR. 6 Between 1981 and 1984 NZI assumed the obligations of United and South British under the respective policies as if NZI were named as the insurer in them. 7 Commencing in the late 1970s, CSR, Midalco and CSR America became subject to numerous claims and joined as defendants in numerous proceedings in which it was alleged that personal injuries were suffered due to exposure to asbestos fibre mined, milled, and/or sold by CSR and Midalco. Injury resulting from exposure to asbestos fibre occurs over a long period of time and may not become manifest until many years later. 8 CSR claimed indemnity from NZI in respect of the claims made upon it and its subsidiaries. It claimed that NZI's conduct until 1989 led it to believe that NZI would provide indemnity. Indeed, CSR included a statement in its annual reports between 1982 and 1988 to the effect that it had insurance to cover the claims. In the event, however, NZI refused to indemnify CSR and Midalco. CIGNA claims 9 From 2 November 1978 to 1985 CSR entered into policies ("the CIGNA policies") which provided primary and excess general products liability coverage for CSR 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"). Importantly, however, other insurers including NZI also underwrote portions of the risk. South British had a 20 per cent participation in the primary cover of the CIGNA policies for the period from 2 November 1978 until 1984 and after that period NZI had a 20 per cent participation in the primary cover of the CIGNA policies to 30 September 1985. CIGNA 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 CSR sent a letter to each of CIGNA and its co-insurers under the CIGNA policies, including NZI, claiming indemnity under those policies for asbestos related claims. At that time CSR was seeking to renew its product liability insurance cover commencing from March 1992. On 4 December 1991, CIGNA, purporting to act on behalf of all the CIGNA policy insurers (including NZI), wrote to CSR's insurance broker refusing to discuss renewal until CSR had withdrawn its claim for indemnity. 11 On 6 March 1992 CSR's broker informed CSR of this and as a result, on 17 March 1992, CSR withdrew those claims, after which the insurers agreed to renew cover. First New Jersey proceeding and New South Wales proceeding – June and October 1994 12 In June 1994 CSR and CSR America commenced a proceeding in the Superior Court of New Jersey against NZI seeking indemnity under the earlier policies and relief for breach of contract and breach of a duty of good faith and fair dealing. In October 1994 NZI commenced a proceeding in the Supreme Court of New South Wales as to its liability to indemnify, inter alia, CSR and sought and obtained an anti-suit injunction restraining the further prosecution by CSR and CSR America of the New Jersey proceeding. 13 NZI asserted, inter alia, that the policies relied on by CSR did not exist or, alternatively, that the maximum level of indemnity it was obliged to provide was A$47 million, and further that in any event the indemnity did not cover liability in the United States. 14 CSR alleges that when it became publicly known that NZI had declined indemnity, CSR suffered damage to its reputation (including its credit rating) and damage to its goodwill. There was a significant fall in its share market capitalisation. The Commissioner, on the other hand, submits that there is no tangible evidence of damage to CSR itself, pointing out that the shareholders in the company, rather than CSR itself, suffered from the fall in the share price, and says that the share price recovered in due course anyway. While conceding that each of the Commissioner's submissions was correct, the learned primary judge accepted the evidence that a public perception that large, but unquantified, liabilities were not covered by insurance or appropriate provisions, would and did damage the business reputation, including the credit, of CSR. His Honour stated: "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 [CSR] and its business." Settlement – March 1995 15 In February 1995 settlement discussions took place between CSR and NZI. By that time, CSR and CSR America had appealed to the New South Wales Court of Appeal against the anti-suit injunction. CSR and Midalco entered into a deed of settlement with NZI on 3 March 1995 ("the Settlement Deed"). At that time the appeal against the anti-suit injunction had been heard and judgment had been reserved but was not delivered. 16 Pursuant to the Settlement Deed, among other things: (a) The amount of $100 million ("the Settlement Sum") was paid to CSR in return for releases granted and other obligations undertaken by CSR and Midalco to NZI (Clause 3.7); (b) The releases included past, present and future liability of NZI to CSR and Midalco in Australia and the United States, inter alia, concerning "extra contractual obligations" (Clauses 4.2.1 and 4.2.2); (c) CSR and Midalco indemnified NZI in respect of claims against NZI for all "extra contractual obligations" by, inter alia, CSR America (Clauses 4.3 and 4.4); (d) Both the New South Wales proceeding and the first New Jersey proceeding were dismissed (Clause 4.5.1 and Attachment D). 17 CSR received the Settlement Sum on or about 5 March 1995. It is the character of that receipt which was the subject of the proceeding before his Honour and which is the subject of this appeal. CSR submits that its character is to be determined by the terms of the Settlement Deed and, in particular, by the character of the consideration identified in the Settlement Deed for which the Settlement Sum was paid, whereas the Commissioner submits that it is necessary and appropriate to go outside the terms of the Settlement Deed. Second New Jersey proceeding – June 1995 18 In June 1995 CSR 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. CSR submitted, and his Honour accepted, that but for the Settlement Deed, NZI would have been joined as a defendant in this second New Jersey proceeding. 19 The insurers who are CSR's targets in the second New Jersey proceeding have unsuccessfully attempted to have it summarily dismissed. 20 CSR contends that the claims available to it against NZI included claims based on bad faith, tortious interference and anti-trust violations, and that the damages awarded to CSR against NZI in the second New Jersey proceeding would have included an amount computed by reference to damage to CSR's goodwill and reputation and would also have included punitive damages, and, if anti-trust violations were established, treble damages. Indeed, CSR submits 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. 21 CSR relies on the second New Jersey proceeding as showing that an effect of the Settlement Deed was to prevent CSR from bringing a bona fide claim against NZI which may well have resulted in an award of very substantial damages to CSR which would have been received by it on capital account. Circumstances of settlement 22 The learned primary judge considered how the Settlement Sum was arrived at and how, if at all, it was or might be apportioned as between the elements of the consideration furnished for it. 23 When the settlement was negotiated in February and early March 1995, the first New Jersey proceeding and the New South Wales proceeding were on foot, although the first New Jersey proceeding was the subject of the anti-suit injunction. The New South Wales proceeding related only to establishing the right to indemnity. The first New Jersey proceeding also sought to establish the right to indemnity, but also included the following: "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 primary judge referred to this particular claim as, in the words of an expert witness, "a contractual bad faith claim". We will use the same expression. 24 The relief claimed consequential upon this allegation was "all damages proximately caused by the defendants' breach of their duties of good faith and fair dealing". His Honour noted that there was no evidence as to what the content of the contractual bad faith claim would have been or the relief which might have been expected in respect of it. 25 There was unchallenged expert evidence that, based on allegations that CSR would make, a bad faith claim sounding in tort might have been pursued, involving potential liability for consequential and punitive damages, but his Honour did not read that evidence as asserting that the contractual bad faith claim made in the first New Jersey proceeding was such a claim. 26 His Honour noted that the evidence touching the negotiation of the settlement and the drafting of the Settlement Deed was "sparse". Two papers were tendered setting out CSR's position in relation to settlement – an "initial position paper" of 3 February 1995 and a "settlement proposal" of 9 February 1995. Neither referred to any claim other than the claim that NZI was liable to provide indemnity. The initial position paper went to CSR's Board when it approved the settlement. Relevant portions of the minutes of the special meeting of the directors of CSR held to consider the issue referred to a release of all claims which CSR might then or in the future be entitled to make "under policies of insurance … in consideration of" the payment to CSR of $100 million. A press release issued by CSR announcing the settlement referred to CSR's proposed receipt of $100 million in settlement of its litigation with NZI over "liability insurance policies which were in operation between 1955 and 1978". It also stated that over the preceding decade, asbestos injury claims and legal costs to CSR had exceeded $120 million. 27 In affidavit testimony, Mr Ian Burgess, the Chairman of CSR at the time of the trial, who had been present at the Board meeting in question, stated as follows: "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." His Honour noted, however, that the cross-examination of Mr Burgess revealed that he had no knowledge as to the process of negotiation which led to the fixing of the sum of $100 million. 28 The definition of "The Insurance Coverage Litigation" in clause 2.12 of the Settlement Deed referred to the relief sought in the first New Jersey proceeding as being "with respect to Asbestos Related Claims", and the definition of "Asbestos Related Claims" in the Settlement Deed did not include the kind of tortious bad faith claim referred to in the expert evidence. 29 Before his Honour, the Commissioner relied on the manner in which the $100 million received by CSR was dealt with by it: the board of directors of CSR increased provision for asbestos-related claims by approximately $100 million. 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." 30 The minutes of a Board Meeting held on 15 May 1995 recorded as follows: "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." 31 His Honour stated: "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. 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 Commissioner of Taxation (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. 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". 32 The initial position paper of 3 February 1995 stated that CSR had already expended "more than $110 million in managing asbestos claims" and faced many claims yet in a climate where the range of verdicts was increasing and where many claims could be expected to be made into the future. The position paper asserted that it was CSR's strong preference that its insurers "stand in its shoes and fulfil their obligations to indemnify both in relation to costs already incurred and current and future claims". 33 The analysis in the settlement proposal of 9 February 1995 was more extensive and concluded that the insurance indemnity was worth more than $750 million to CSR. Past payments, including interest, were assessed by CSR in the settlement proposal at $180 million. Effect of releases 34 CSR submitted to his Honour that the releases which it granted by the Settlement Deed prevented it from pursuing claims against NZI such as those pursued against the other insurers in the second New Jersey proceeding, together with tortious claims arising out of the declining of cover by NZI under the earlier policies, and also what CSR claimed was tortious conduct in relation to the settlement culminating in the Settlement Deed itself. CSR contended that the rights it released by 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 [CSR's] goodwill and business reputation; (f) The right to claim damages from NZI for damage to [CSR's] credit rating; (g) The right to claim damages from NZI for wrongful interference with [CSR'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 [CSR] and Midalco in respect of the asbestos related claims; (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." 35 His Honour found that the expert evidence established that under New York law these claims could be made and pursued on a real basis. Their viability was also supported, according to his Honour, by evidence that attempts to strike out the second New Jersey proceeding had failed. His Honour concluded: "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." Reasoning of the primary judge 36 His Honour held that the issue under s 25 of the Act was determined in favour of CSR by the High Court decision in Allsop v Commissioner of Taxation (1965) 113 CLR 341 ("Allsop"), to which we will refer in more detail below. He regarded the sum of $100 million as having been paid and received for releases by CSR of causes of action, some of which, if successful, would have yielded to CSR receipts not constituting income within s 25. Because the amount of $100 million was not dissected as between those causes of action which would, and those which would not, have yielded receipts in the nature of income according to ordinary concepts, Allsop required, his Honour held, the total sum to be treated as having been received otherwise than as income. His Honour rejected the Commissioner's submission that Allsop was to be distinguished. 37 Paragraph (j) of s 26 of the Act brings to tax: "…any amount received by way of insurance or indemnity for or in respect of any loss … or outgoing which is an allowable deduction". While his Honour observed that Allsop did not directly preclude the Commissioner's contentions in respect of the operation of this paragraph, he thought it provided "an insurmountable barrier" for the Commissioner. In Allsop the High Court rejected a submission that par 26(j) and subs 72(2) of the Act caught the receipt in question in that case. Subsection 72(2) was, relevantly, as follows: "Where a taxpayer receives … a refund of an amount paid for … taxes which have been allowed … as a deduction … his assessable income shall include that amount." The learned primary judge noted that in rejecting the Commissioner's argument in relation to subs 72(2), Barwick CJ and Taylor J said (omitting citation of authorities): "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." 38 The primary judge thought that the same reasoning applied to par 26(j) in the case before him. 39 After noting that CSR agreed for the purpose of the proceeding that the whole of the Settlement Sum constituted a capital gain to CSR within the meaning of Part IIIA of the Act, his Honour made orders allowing the appeal against the objection decision of 9 November 1998, allowed the objection, excluded the sum of $100 million from the assessable income of CSR under ss 25 and 26 of the Act, and included it as assessable capital gain pursuant to Part IIIA of the Act. Reasoning on the appeal 40 In our respectful opinion, his Honour was correct in thinking that the issue under s 25 of the Act was resolved for him, as it is for us, by the High Court judgment in Allsop and further in thinking that Allsop presented an insurmountable barrier to the Commissioner's success on the issue arising under par 26(j). 41 Allsop was a strong case, but first it is convenient to deal with the slightly earlier case of McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381 ("McLaurin") on which his Honour also relied. 42 In McLaurin, a fire originated on land owned by the respondent Commissioner of Railways ("Railways") and spread to land of McLaurin causing damage there. Following a coronial inquiry into the cause of the fire, McLaurin furnished to Railways particulars, under certain heads, of the damage. The amounts totalled Ł30,240. A qualified valuer employed by Railways visited McLaurin's property to assess the damage. McLaurin commenced an action against Railways. Negotiations for settlement took place. The valuer recommended that Railways offer Ł12,350. He had arrived at that amount by attributing figures to McLaurin's respective heads of loss. No-one told McLaurin how the sum had been arrived at. McLaurin agreed to accept the amount offered in settlement of his action with costs as of a verdict of that amount. A document was signed by which McLaurin agreed to accept Ł12,350 in full settlement of all claims arising out of the fire, exclusive of costs. 43 In his assessment of McLaurin's assessable income for the year ended June 1955, the Commissioner included Ł10,640 being "Proportion of the bush fire payment received from the New South Wales Government Railways". That amount represented the total of amounts that the valuer had attributed to particular items of damage. 44 At the parties' request, Kitto J stated a case for the opinion of the Full Court. In their joint judgment, Dixon CJ, Fullagar and Kitto JJ observed that the Railways valuer's list adopted almost entirely McLaurin's own descriptions of the items of property damaged or destroyed and in a number of instances conceded the actual amounts claimed by McLaurin in respect of them. Their Honours further observed that no doubt the list was discussed item by item during the settlement negotiations. But they added (at 390-391): "But the settlement, nevertheless, was for a lump sum of damages, not composed of agreed constituents, offered and accepted in full satisfaction of the entirety of the appellant's causes of action against the Commissioner for Railways. It may be the fact, and it makes no difference if it is, that the appellant, because of the course the discussions had followed, was in a position to make a confident guess as to the amount Mr Cameron [the valuer] had allowed for each item in making his recommendation to the Assistant Solicitor for Railways. But he was not concerned to make the guess. He had simply to weigh Ł12,350 against the entirety of his claim, and accept it or reject as a whole. Obviously, to accept the lump sum was not to assent to any figure in respect of any individual item of his claim. It is difficult in these circumstances to see how the dissection which the respondent has made can possibly be justified." 45 Their Honours observed that in a proper case a single payment or receipt of a mixed nature may be apportioned amongst several heads to which it relates and an income or non-income nature attributed to the portions. However, they added (at 391): "But while it may be appropriate to follow such a course where the payment or receipt is in settlement of distinct claims of which some at least are liquidated … or are otherwise ascertainable by calculation…, it cannot be appropriate where the payment or receipt is in respect of a claim or claims for unliquidated damages only and is made or accepted under a compromise which treats it as a single, undissected amount of damages. In such a case the amount must be considered as a whole:…". 46 Their Honours observed that the amount of Ł12,350 compensated for losses of or damage to capital assets such as pastures, fencing and buildings, as well as for loss of profits caused by the interruption of McLaurin's grazing business, and that it was therefore impossible to say that the sum took the place in McLaurin's hands of assessable income. 47 Finally, their Honours thought that par (j) of s 26 did not catch the amount in question, stating (at 393): "…We need say no more about it than that there is no amount here to which the description ["an amount received by way of … indemnity … for or in respect of any loss or outgoing which is an allowable deduction"] applies." In our view, their Honours meant by the words "no amount", something like "no definite amount" or "no specific amount". Again the point is that the parties had not dissected the total amount of Ł12,350 so that it could be said that an identifiable part of it had been received "by way of … indemnity … for or in respect of any loss or outgoing which [was] an allowable deduction". 48 We turn next to Allsop. Allsop carried on business as a carrier of goods inter-state by road. From time to time he applied for and obtained under the State Transport (Co-ordination) Act 1931-1954 permits for the carriage of goods by his vehicles in the course of that business. In order to obtain them, he was required to pay and did pay permit fees. He claimed as deductions from his assessable income in his income tax returns the amounts of the permit fees that he had paid. The amounts claimed were allowed as deductions by the Commissioner. 49 Allsop sued the Commissioner for Motor Transport ("Motor Transport") claiming to recover Ł54,868.18s 10d for "money payable by the defendant to the plaintiff for money had and received by the defendant for the use of the plaintiff" representing "amounts levied by the defendant upon the plaintiff for permits to operate the plaintiff's public motor vehicle while carrying goods within the State of New South Wales in the course and for the purposes of inter-State trade which said amounts were improperly demanded by the defendant under colour of office." The particulars given were of individual cheques drawn by Allsop and paid to Motor Transport. The amounts of all the individual cheques were set out and totalled the amount claimed. 50 On two occasions, Motor Transport officers stopped vehicles of Allsop which were carrying goods inter-State without permits and detained the vehicles for some time, releasing them only on Allsop's undertaking to pay the balance of the permit fee payable in respect of the load carried. Consignees complained to Allsop as a result of the delay in delivery. 51 There were negotiations for settlement of Allsop's action against Motor Transport. In a case stated by McTiernan J for the Full Court of the High Court, the following passage appeared (at 345): "At all times up to and including the date of the receipt by the appellant's solicitors of the said sum of Ł37,500, 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." 52 In a joint judgment, Barwick CJ and Taylor J observed that as a result of the Privy Council decision in Hughes and Vale Pty Ltd v State of New South Wales [1955] AC 241;(1954) 93 CLR 1, the fees collected from Allsop had not, in law, become payable. 53 Their Honours noted that the deed of settlement between Allsop and Motor Transport stated that Allsop accepted the sum of Ł37,500 in full satisfaction and discharge of his action "and in full satisfaction and discharge of all actions suits claims and demands which [Allsop] might then have or at any time thereafter have against the Government of the State of New South Wales or the Commissioner [of Motor Transport] or otherwise for or connected with or in any way arising out of anything done or omitted or purporting to have been done or omitted by any person under the [State Transport (Co-ordination) Act] or under any other Act of the State of New South Wales relating to motor vehicles or the use or operation of motor vehicles whether or not such Act is valid and effectual to authorize the act or omission." 54 Their Honours noted that the Commissioner sought to support his assessment on one general ground and two particular grounds. The general ground was, in effect, that where a refund is made to a trader in one income year of an amount or part of an amount which the trader had expended on revenue account in an earlier year and which had been allowed as a deduction in the assessment of his taxable income, the amount of the refund constituted assessable income of the later year. 55 Their Honours thought that it could not be said that the sum of Ł37,500 constituted a refund of part of the fees paid by Allsop. They stated (at 351): "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 [Motor Transport] . His claim for a refund of the fees paid by him was not admitted by [Motor Transport] and the amount payable upon the execution of the release was the consideration not only for a release of his claim against [Motor Transport] 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…. 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." 56 The two particular grounds on which the Commissioner relied were to be found in par 26(j) and subs 72(3) of the Act. In relation to par 26(j), their Honours stated (at 351): "…it is sufficient to observe that no part of the amount paid to [Allsop] was, as that section requires, received by him by way of insurance or indemnity." 57 Subsection 72(3) brought to tax amounts received by way of refund of amounts paid for rates and taxes that had been previously allowed as deductions to the taxpayer. Their Honours stated (at 351-2): "…the conclusion that no part of the sum paid to [Allsop] under the deed of release constituted a refund to [Allsop] of such fees paid by him renders s 72 on any view inapplicable to the present case." 58 Windeyer J agreed that Allsop was not liable to income tax in respect of his receipt of the settlement amount. His Honour stated (at 352): "He had commenced an action to recover from the Government of New South Wales the sum of Ł54,868 as money had and received to his use. He took Ł37,000 not simply in satisfaction of his claim in that action but in consideration of his release by deed of a variety of claims that he had, or might be thought possibly to have, against the Government. It does not appear from the material before us that the sum of Ł37,000 or any definite part of it, was computed, paid and received as a refund of particular amounts that had been paid by [Allsop] for road charges and which had been allowed as deductions in the assessment of his taxable income." 59 It remains to consider the basis on which the Commissioner seeks to distinguish McLaurin and Allsop. Section 26(j) (1) The Commissioner submits that a distinction between the present case on the one hand and Allsop and McLaurin on the other is that payment of the whole of the Settlement Sum flowed from the relationship of insurer and insured in the present case, whereas in Allsop and McLaurin there was no pre-existing obligation to insure or indemnify. It does not affect the characterisation of the Settlement Sum for the purposes of par 26(j), according to the submission, that CSR released claims against NZI for damage to CSR's reputation. Finally, according to the submission, the primary judge's conclusion leaves open the possibility that par 26(j) could be circumvented in any settlement of an insurance claim by the insured entering into a general release of rights in relation to the insured event. 60 While it is true that in Allsop and McLaurin there was no pre-existing relationship of insurer and insured (or indemnifier and indemnified), it does not follow from the existence of such a pre-existing relationship in the present case that the whole of the Settlement Sum was "received by way of insurance … for or in respect of any loss … or outgoing which [was] an allowable deduction". Paragraph (j) of s 26 requires that attention be given to the particular amount received. Consistently with a pre-existing relationship of insurer and insured, one amount received by the insured from the insurer may fall within the paragraph while another may not. The fact that a taxpayer receives a payment from an entity that is its insurer does not necessarily signify that the payment is received by way of insurance. Nor, probably, is it relevant that the amount is "earmarked" (to use the words of the primary judge) for insurance purposes. It is not permissible to substitute, for characterisation of the particular amount received, a characterisation of the general relationship between the parties. 61 We do not think that the primary judge's conclusion leaves open the possibility of avoidance of the incidence of par 26(j) as suggested in the Commissioner's submission. Attention must be paid to determining what is truly represented by the amount received. Ordinarily this is most easily gleaned from the terms agreed between the parties. However, these terms will also always have to have some basis in the facts surrounding the payment. This was recognised in Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 34 FLR 375 (FC) ("Federal Coke"), where Brennan J said: "The evidence [of the agreement between the taxpayer and the donor] tends to identify the matter in respect of which the payments were received, but the conclusion to which it tends must be tested by reference to other relevant evidence" (at 404). As noted earlier, in the present case, the primary judge accepted that there was evidence of a significant fall in CSR's share market capitalisation, and that claims for "contractual bad faith" could well have been pursued against NZI in the second New Jersey proceeding but for the settlement. However, on appropriate facts, it may be open to a court to find that a purported general release of rights in relation to an insured event is a sham, or to find that irrespective of how the parties described the sum received, no part of it represented a receipt in the nature of capital; cf Reuter v Federal Commissioner of Taxation (1993) 93 ATC 5030 at 5035-5036. (2) The Commissioner submits that his Honour erred in thinking that Allsop provided an insurmountable barrier in his path because of what was stated in the joint judgment about s 72 of the Act. The Commissioner emphasises that subs 72(2) includes in assessable income "a refund of an amount paid for … taxes which has been allowed … as a deduction" (our emphasis), whereas par 26(j) includes amounts received by a taxpayer "by way of" something other than such a refund. 62 We do not think the distinction a pertinent one. Their Honours stated in relation to both par 26(j) and subs 72(3) that it was a sufficient answer to the Commissioner's argument that "no part" of the sum paid to Allsop satisfied the statutory description. Again, what is meant is that no "definite part", to use the words of Windeyer J in Allsop, satisfied that description. Allsop and McLaurin turned on the High Court's reading of the word "amount" which was considered to refer to the final amount only of a unified sum. It was the totality of the amount which needed to be characterised as "received by way of insurance…" or "an amount paid for … taxes which has been allowed … as a deduction", and the differences in wording after the word "amount" in the respective subsections do not detract from this construction. (3) The Commissioner submits that Allsop and McLaurin are distinguishable because both were stated cases and that therefore there was removed from the taxpayer the burden of establishing that the Commissioner's assessment was excessive. 63 We do not think the distinction material. On his Honour's findings of fact in the present case, the principle recognised in those cases is applicable here. Section 25 64 The Commissioner submits that the trial judge appears to have regarded Allsop as establishing "the principle that: (a) where a 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 a claim for damages on capital account; and (b) if the payment was an undissected lump sum; the entire sum was a capital receipt on the payee's hands and not assessable income under section 25…". The Commissioner observes in his submissions that the primary judge was referred by CSR not only to Allsop and McLaurin as establishing this principle, but also to statements by the Full Court of this Court in Federal Commissioner of Taxation v Spedley Securities Ltd (1988) 19 ATR 938 and by Davies J as a member of the Full Court in Federal Commissioner of Taxation v Northumberland Development Co (1995) 59 FCR 103 at 106-107. The Commissioner submits: "(a) that Allsop does not contain the principle for which the respondent contends; (b) that McLaurin is authority for a different principle; (c) that the Full Court's statement in Spedley Securities in relation to McLaurin and Allsop was properly explained in the later Full Court decision in Allied Mills Industries Pty Ltd v Commissioner of Taxation (1989) 20 FCR 288; (d) that his Honour Davies J's statement in Northumberland Development refers only to the proposition that the character of an 'undissectable' settlement sum must be considered as a whole in the payee's hands and cannot be dissected by reference to the causes of action released; and (e) the principle that emerges from McLaurin is correctly stated in Allied Mills." 65 The Commissioner submits that the character of the receipt of the Settlement Sum considered as a whole is that of income according to ordinary concepts and not capital. In support of the contention that the character of a receipt is identified by reference to its character in the hands of the taxpayer, not the character of the expenditure which produced the payment, the Commissioner cites Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 at 526 and Federal Coke at 402 per Brennan J. The Commissioner also refers to Carapark Holdings Ltd v Federal Commissioner of Taxation (1967) 115 CLR 653, in which, at 660, the High Court held that what a taxpayer has done with an amount received "is in general of no materiality in determining whether his receipt of the amount was a receipt of income or of capital". In that case, the High Court found a general nexus between insurance receipts and income "where the purpose of the insurance was to fill the place of a revenue receipt which the event insured against has prevented from arising, or of any outgoing which has been incurred on revenue account in consequence of the event insured against, whether as a legal liability or as a gratuitous payment actuated only by considerations of morality or expediency". 66 In sum, and at the risk of oversimplifying the Commissioner's submission, it is put that one must take a broad view of a taxpayer's situation in determining whether an amount received was in the nature of income according to ordinary concepts. In support of the proposition that it is necessary to consider the "total situation of the taxpayer", the Commissioner relies on Federal Commissioner of Taxation v Rowe (1997) 187 CLR 266 at 292, Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540 at 555, and The Squatting Investment Co Ltd v Federal Commissioner of Taxation (1953) 86 CLR 570 at 627-628. In particular, it was submitted that it is "manifestly insufficient to look only at the legal rights effecting the transaction". Instead, it was contended that the amount should be viewed in the context of the activities engaged in by the taxpayer. The Commissioner submits that: "inquiry here shows a relationship between insurer and insured and claims upon and incidental to insurance policies and insurance relationships." 67 The Commissioner emphasises that according to the evidence: "(a) The activities of CSR and Midalco are integrated and interdependent (b) It is a regular and recurrent feature of the business of CSR that it is exposed to product liability and public liability risks (c) It is a regular and recurrent feature of the business of CSR that it insures against its risks and liabilities (d) It is a regular and recurrent feature of the business of CSR that it receives payment from its insurers and that it settles claims against insurers (e) It is a regular and recurrent feature of the business activities of CSR 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." 68 It is true that in Federal Commissioner of Taxation v Myer Emporium Ltd (1986) 163 CLR 199 the High Court had regard to the nature of Myer's business at all relevant times as a financier in determining that the consideration received by it for the assignment of future interest due or to become due under a separate loan agreement was income within subs 25(1). However, their Honours stated as follows (at 213): "It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction. If Myer's decision to assign to Citicorp the moneys due or to become due under the loan agreement had been unrelated to and independent of its decision to enter into the loan agreement, the argument that the assignment amounted to no more than the realization of a capital asset would perhaps have had more force, though, as will appear later, we do not consider that the respondent's argument would have prevailed even in such a situation. However, in the actual circumstances, as we have stated them, the consideration received for the assignment is necessarily income." In the present case, the arising of the right to indemnity was not planned by CSR at all and was certainly not part of a plan of which the payment of the Settlement Sum was part. 69 In our respectful opinion, the Commissioner's submission involves a fallacy. It may readily be accepted as a general proposition that it will be appropriate and indeed necessary to take into account the totality of a taxpayer's business operations when characterising a particular receipt for income tax purposes, but where, as here, there is an agreement between payer and payee that is not a sham, the "how and why" of the receipt (Squatting Investments at 627-628) are determined by that agreement, and, in particular, by the nature of the consideration for which, according to the agreement, the money was paid. 70 In the present case, the conclusion cannot be avoided that the consideration was a release of causes of action some of which would have generated receipts of a non-income nature. 71 In our opinion, Allsop governs the issue under s 25 of the Act. Conclusion 72 For the above reasons, in our view the appeal should be dismissed with costs. I certify that the preceding seventy-two (72) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court. Associate: Dated: 26 October 2000 Counsel for the Appellant: Mr GT Pagone QC, Mr KM Connor Solicitors for the Appellant: The Australian Government Solicitor Counsel for the Respondent: Mr DH Bloom QC, Mr BJ Sullivan SC, Mr AJ Payne Solicitors for the Respondent: Gilbert & Tobin Date of Hearing: 28, 29 August 2000 Date last submission received: 31 August 2000 Date of Judgment: 26 October 2000