Atlas Tiles Ltd v Briers

[1978] HCA 37

HIGH COURT OF AUSTRALIA

Barwick C.J., Gibbs, Stephen, Jacobs and Murphy JJ. Barwick C.J., Gibbs, Stephen, Mason, Jacobs, Murphy and Aickin JJ.

ATLAS TILES LTD. v. BRIERS

(1978) 144 CLR 202

5 October 1978

Damages—Practice (Vict.)—Privy Council

Damages—Contract—Wrongful dismissal from employment—Effect of liability for taxation on quantum of damages—Whether damages should be reduced by tax plaintiff would have paid in respect of earnings if he had not been dismissed—Compensation paid by compulsion of law in consequence of termination of employment taxable as to 5 per cent—Whether 95 per cent of damages subject to reduction for tax—Gourley principle—Income Tax Assessment Act 1936 (Cth), s. 26 (d), * (j). Practice (Vict.)—Supreme Court—Judgment—Interest on judgment for damages from commencement of action until entry of judgment—Damages for wrongful dismissal—Damages calculated at date of judgment in respect of future period—Supreme Court Act 1958 (Vict.), s. 79A. Privy Council—Appeals from High Court—Decision involving application or interpretation of a law made by the Parliament—Privy Council (Limitation of Appeals) Act 1968 (Cth), s. 3 (b). *Section 26 of the Income Tax Assessment Act 1936 (Cth) provides: "The assessable income of a taxpayer shall include—. . . (d) five per centum of the capital amount of any allowance, gratuity or compensation where that amount is paid in a lump sum in consequence of retirement from, or termination of, any office or employment, of whether so paid voluntarily, by agreement or by compulsion of law . . . . "

Decisions

1978, October 5.
The following written judgments were delivered: -
BARWICK C.J. The appellant, who was the defendant in an action in the Supreme Court of Victoria for wrongful dismissal, appeals to this Court against the amount of damages awarded by the learned trial judge (McInerney J.). The ground of complaint is that the judge, in assessing damages, did not deduct any sum in respect of income tax which would have been payable by the plaintiff because of his receipt of the sum payable as remuneration under the contract of employment had he not been dismissed from that employment by the defendant. (at p205)

2. The trial judge, in a careful judgment, reviewed a number of authorities, both English and Australian, before reaching his conclusion that ". . . I consider that in the assessment of damages in this case I should make no deduction for taxation". His Honour had earlier concluded that "the damages which I will hereafter award are subject to taxation under s. 26 (d)" of the Income Tax Assessment Act 1936, as amended ("the Income Tax Act") "to the extent of five per cent only and no more. My view further is that to apply the Gourley principle", i.e. the decision in British Transport Commission v. Gourley (1956) AC 185 , "in such a way as to make deductions for tax in assessing the five per cent of the lump sum paid as damages - a process which can be carried out only in respect of the full amount (the hundred per cent) of the lump sum in question - would be to set at nought the legislative policy which I consider is discernible from the combined effects of pars (a) and (e) of s. 26." (at p205)

3. It is said that the award of damages in this case would not have been taxable and that Gourley's Case should have been followed and applied. (at p205)

4. The appellant's argument on this appeal therefore has squarely raised for the decision of this Court the correctness of the reasoning and decision in Gourley's Case as well as the applicability of that reasoning to the assessment of damages for wrongful dismissal. A subsidiary question of the meaning and operation of s. 26 of the Income Tax Act may also be involved. (at p205)

5. This is the first time this Court has been presented with a challenge to the validity of the reasoning in Gourley's Case and with the question whether, if acceptable, that reasoning is applicable to a case of wrongful dismissal. I shall discuss the first of these questions, i.e. whether in assessing damages for personal injuries tortiously caused, either the amount by which the income tax which the injured person would have had to pay would be increased because of his earnings had he not been injured or the rateable proportion of the tax he would pay upon his taxable income should be deducted from any sum awarded either for loss of wages or for loss of earning capacity if the damages awarded in that respect are not wholly or partly liable to income tax in the hands of the successful plaintiff, and later I will discuss the second, as itself a separate question. (at p206)

6. I have so stated the first of these questions because it seems to me that Gourley's Case does not clearly distinguish two possible positions, namely, that which I have first stated in which the earnings themselves are regarded as subject to tax, with the result that the deductible sum is the amount by which the income tax of the plaintiff would be increased by the inclusion in the taxable income of the amount which would have been earned. The other position, which may be radically different in result, is that the amount of tax ultimately assessed is ratably spread over all the elements of the taxable income. No doubt the tendency to identify the amount deducted at the source under a P.A.Y.E. system with the amount of tax payable obscured this difference upon which no observations were made in Gourley's Case. It may be, of course, that if Gourley's Case is not supported this difference cannot matter: but, in considering the validity of that decision, the difference has significance, if for no other reason than that it is indicative of the limited consideration which was given to the impact what was decided would have in the administration of the law. (at p206)

7. The House of Lords in 1956 in Gourley's Case (17) decided that an amount of income tax was deductible from the earnings of the plaintiff upon which a calculation of the damages for personal injury was made. Because of the findings of the primary judge, and perhaps also of the respondent's uncomplicated income tax situation, no detailed attention was called to what was represented by the amount deducted. However that may be, the question now is whether, assuming the award of damages not to be taxable in the hands of the successful plaintiff, liability to income tax should be taken into account in the assessment of damages for personal injury when the capacity to earn has been destroyed or impaired. (at p206)

8. This Court is not bound by the decision in Gourley's Case though, due to the eminence of the body which so decided, and particularly as six Lords of Appeal and the Lord Chief Justice participated in the decision, the Court will pay great respect to it. The Court, however, will examine the question for itself as the final court of appeal in this case. As this Court has observed elsewhere (see Viro v. The Queen (1978) 141 CLR 88 ), all State courts will be bound by our decisions, even though an appeal may yet be brought to the Privy Council from some State court involving the same question. The responsibility to examine the matter of principle involved in the case is therefore unusually heavy. (at p207)

9. The decision of the House of Lords, however, has been binding on all the courts of the United Kingdom. Consequently, it has been applied by those courts for the past twenty years: and, unless the House should reverse its decision as it is now, though formerly was not, in a position to do (see the statement of Lord Gardiner L.C. (1966) 1 WLR 1234 ), those courts will continue to be so bound and to wrestle with the difficult problems to which the decision has already and will yet give rise. (at p207)

10. The courts in Australia, quite properly regarding themselves at least as at liberty to follow the decision of the House of Lords, have been regularly applying Gourley's Case in the assessment of damages for personal injuries, chiefly in cases of injuries to persons employed on weekly wages, estimated tax being deductible by the employer under a P.A.Y.E. system of tax collection. It has also been applied in the assessment of damages for wrongful dismissal. (at p207)

11. Thus, there is a course of decision in the United Kingdom and of practice and decision in Australia by which the liability to taxation upon earned income is included as a depreciating integer in the assessment of damages for loss of earning capacity or of wages due to personal injury tortiously caused or due to breach of a contract of employment. (at p207)

12. The House of Lords in considering Gourley's Case faced a somewhat similar but perhaps more difficult situation than does this Court in this case. Lord Reid, in his speech in that case, dealt with this aspect of the matter when he said (1956) AC, at pp 211-212 :
"It is true that there are several authorities and a long course of practice against taking tax liability into account in assessing damages, but this is not the type of case in which vested interests may have accrued or in which people may have ordered their affairs relying on the validity of existing practice. In my opinion, this is a case in which it is proper for your Lordships to consider the question on its merits as one of principle." (at p207)

13. This Court, in my opinion, should now do likewise. Like the House of Lords in Gourley's Case it is asked to consider the question, not having done so before. But, if anything, there is more reason for this Court to examine the question as a matter of principle than there was for their Lordships. Before Gourley's Case the authorities and practice in the United Kingdom against making any deduction in respect of income tax from damages for wrongs committed had been developed upon expressly stated and long accepted reasoning as to the principle involved whilst the authorities and practice in Australia have developed merely upon the authority of Gourley's Case and decisions of courts bound by it, without any independent examination of principle. (at p208)

14. This Court, not being bound by any relevant decision, is in a position to determine what is the relevant law. There being no authority which binds or course of acceptable decision which compels, the common law is what the Court, informed as to the past course of decision, decides what in truth it is and, of course, always has been. That, as I see the matter, is this Court's proper function and duty in the present case. (at p208)

15. The Court can begin its consideration of what is the common law in Australia with acceptance of the view that there is now no compelling reason why the view as to what is the common law should necessarily be identical with that which is currently accepted in the United Kingdom: see Australian Consolidated Press Ltd. v. Uren (1967) 117 CLR 221; (1969) AC 590 . No doubt there should be no divergence of view in this respect without sound reason: but if this Court were convinced that Gourley's Case was wrongly decided, sound reason for departure from it would be made out. (at p208)

16. Gourley's Case and cases such as West Suffolk County Council v. W. Rought Ltd. (1957) AC 403 , Lewis v. Daily Telegraph Ltd. (1964) AC 234 and Parsons v. B.N.M. Laboratories Ltd. (1964) 1 QB 95 , which have followed and applied Gourley's Case, are said to be founded upon the proposition that damages are only compensatory, a principle which may at once be accepted as fundamental. The real question, however, is the identification of that for which compensation is to be assessed. In the cases to which I have referred, the statement that the plaintiff may not make a "profit" out of his cause of action through the award of damages or the statement that that which he has lost is the measure of his compensation are treated as synonymous statements of the accepted principle, which in my opinion they are not. It is for that of which the plaintiff has been deprived by the defendant's act that the award of damages must compensate. To refer the ultimate consequence to the plaintiff of a verdict in terms of profit or loss is, in my opinion, to introduce an irrelevancy. (at p208)

17. The plaintiff in Gourley's Case had been deprived of some part of his earning capacity. It was for this deprivation that compensation was to be awarded. Undoubtedly that capacity is a capital asset, though like other capital assets capable by its use or employment of producing income. Logical adherence to this concept would, in my opinion, avoid much of the confusion which to my mind has crept into the assessment of damages for loss of earning capacity tortiously caused. Although statements can be found in decided cases to the effect that it is for loss of earning capacity that compensation by way of damages is to be assessed, in other cases the method of determining, or the factors employed in determining, the value of such an asset as earning capacity have been confused with the identity of the asset itself. It can be seen in the reasons in Gourley's Case itself, where loss of earnings or non-receipt of remuneration is treated as synonymous with loss of earning capacity: compensation for the non-receipt of earnings is what is there sought rather than compensation for the deprivation of a capital asset, albeit one capable of producing earnings. The confusion is exacerbated, in my opinion, by the practice of determining the compensation for non-receipt of earnings by estimating the value of an annuity to produce the actual earnings which the earning capacity might have been expected to produce during the remaining working life, some endeavour being made by arbitrary discounting to take account of the "vicissitudes" of life. A multiplier is applied to the estimated periodic earnings. (at p209)

18. But the plaintiff has not in a relevant sense lost the earnings either in the period before verdict or the future thereafter: he has lost the capacity to earn perhaps the equivalent of his current earnings or perhaps more or less according to the reasonable expectations of the employment of his earning capacity. If the award of damages for such an injury destroying or diminishing his earning capacity were merely a matter of replacing those earnings, the amount of the award would be taxable: but it is not, for the reason that the award is for a capital loss, however much the amount of the award is quantified by a consideration of what the use or employment of that capacity might be expected to produce. In other words, the assessment of damages for loss of earning capacity is in truth an exercise in valuation. It is quite true to say that what that capacity may reasonably be expected to produce is a factor, indeed a major factor, in the process of valuation. Indeed, in some uncomplicated situations it may provide a sure guide to the amount of the valuation. So many cases before the courts concern personal injury to industrial workers which destroys or reduces their capacity to earn. The uncomplicated nature of the financial affairs of such a person and the prevalence of a P.A.Y.E. system of tax collection have, in my opinion, worked to obscure the matters of principle which fall to be considered in this case. I cannot think that in the future the problems of assessment of damages will be limited to such simple situations. The areas in which the principle of negligence is relevant are extending: and the courts are ever finding new and more refined examples of the duty of care. Such a duty is finding its place in an ever widening segment of relationships within the community. Further, the endeavour to extend the decision of Gourley's Case to the award of damages in fields other than that of personal injury tortiously caused has by no means ended. Such considerations give added reason for this Court closely to examine the Gourley decision before endorsing it for Australia for the future. (at p210)

19. Some have thought the distinction I have drawn between loss of earnings and loss of earning capacity is illusory or insubstantial. But, in my opinion, it is real and radical. A capacity to earn which is not being exercised nor presently intended to be exercised has a value which can be estimated, though no current earnings are available to demonstrate its worth even with approximation. Again, the plaintiff may have been currently employed in an industry which, for some reason or other, was doomed to extinction or in a capacity which technology was likely to render redundant. Yet retrained, other and more remunerative employment may be available. Earning capacity may produce, not merely earnings, but a satisfactory way of life which, being denied or destroyed, may need to be reflected in the value of the capacity. In my opinion, the distinction I make is not a matter of semantics but basically conceptual: and being observed and applied goes far to solving the matter of principle here under discussion. (at p210)

20. As I think the question is one of valuation of a capital asset, it is appropriate to remark that if a rental property has to be valued, the rent it might be expected to produce might well be a factor, indeed a prime factor, in assessing its value. But the value assigned would not in any sense be a replacement of those rents, though the only utility of the property may be the production of rent. That the property was currently vacant would not deny its value, nor would its current rental income necessarily reflect its maximum productivity. It is to my mind unthinkable that in valuing the rental property, the assessment should be made upon the "taxed" rentals which the property would produce: see the decision of the House of Lords in Lim Foo Yong Ltd. v. Collector of Land Revenue (1963) 1 WLR 295; (1963) 1 All ER 186 . (at p211)

21. The confusion of the asset with the factors by the use of which it may be valued can be further seen, in my opinion, in connexion with the award of interest upon a verdict for personal injury under statutory provisions such as s. 79A of the Supreme Court Act 1958 (Vict.), as amended; s. 94 of the Supreme Court Act, 1970 (N.S.W.). Both in England and in Australia, interest may only be awarded on so much of the damages as represents a loss or losses which have already occurred at the date of verdict. In so far as the award of damages is referable to loss of earning capacity, the wages which it is thought would have been earned in the period subsequent to verdict and which are taken into account for the purposes of assessment are regarded as compensation for a future, i.e. post verdict, loss: therefore interest upon their amount is not allowable. I have found such an analysis unacceptable for the simple reason that the loss of earning capacity is complete at the time of the receipt of the injury, even though it may later become manifest and its extent depend upon subsequent examination: see Ruby v. Marsh (1975) 132 CLR 642, at p 648 . (at p211)

22. A further matter which, in my opinion, has tended to obscure the subject matter of the compensation is the deeply entrenched practice of treating the actual amount of wages which, but for the injury, would have been received between the date of its receipt and the date of the verdict as special damages. I have earlier remarked on this practice which may be convenient and not produce much distortion of result in the case of an industrial worker where no unnecessary delay takes place between receipt of injury and verdict: see Ruby v. Marsh (1975) 132 CLR, at pp 649-650 . But I remain of the opinion that even in such a case the law would be administered more in accordance with principle if the earning capacity were valued as at the date of the receipt of the injury and interest at a market rate allowed, at least from the date of the commencement of the action, if not indeed from the date of the injury - a course which I would prefer. The damage for loss of earning capacity is, as to its whole amount, in my opinion, general damage; none of it is truly special. (at p211)

23. I might add at this point a general observation. Tribunals of fact, whether composed of a lay jury or of a judge sitting alone, are clearly not equipped not merely to assess but even to estimate liability for tax. Lord Jowitt and Lord Goddard in Gourley's Case realized the inappropriateness of committing such a task to a jury. But judges who customarily sit to try cases at common law are themselves as a rule unfamiliar with the intricacies of the law of taxation and, in any case, whatever their experience in professional practice, cannot be expected to keep themselves abreast of the frequently changing provisions of the law. Further, the trial of an action for damages is scarcely a suitable vehicle for the examination of a party's affaris in relation to liability to taxation. It can scarce be regarded as satisfactory to say, as Lord Jowitt did, that an estimate of the party's potential liability "will be none the worse if it is formed on broad lines, even though it may be described as rough and ready". There is in truth no similarity or comparison, in my opinion, between the estimation of such an imponderable as compensation for pain and suffering and the estimation of potential tax liability which is capable in a practical sense of near mathematical accuracy. But his Lordship found it satisfactory to think that such comparability existed (1956) AC, at pp 203-204 . (at p212)

24. Nor can it be enough in order to answer the criticism of the assignment to a tribunal of fact of the task of estimating liability to taxation to say, as Lord Goddard did, "The task of determining it" (liability to taxation) "may not always be an easy one, but in complicated cases it is to be hoped that the parties, with the help of accountants, will be able to agree figures. If not, the court" (i.e. the tribunal of fact) "must do its best to arrive at a reasonable figure, even though it cannot be said to be an exact one" (1956) AC, at p 208 . (at p212)

25. I cannot help thinking that in the choice between holding that liability to taxation on taxable income is an irrelevant and remote circumstance in the assessment of damages and imposing on judges at first instance and juries a task which neither is fitted to perform, it would have been so much better - legal principle apart for the moment - to have chosen the former, leaving it to the legislature to determine whether, and, if so, to what extent damages awarded for personal injuries should be included in assessable income. This is not to say that the legislators are likely to appreciate all the consequences of their interference, if they do decide to interfere. But at least whatever rule they make is more likely, in my opinion, to secure uniform and certain results than the course of leaving the estimation of tax liability to judges of first instance or to lay juries in the course of common law actions. Also, if tax is to be imposed the community and not defendants will get the benefit of it. If one had to consider the practical difficulties of a tribunal of fact, be it primary judge or jury, in attempting adequately to apply Gourley's Case, particularly in a case where the affairs of a party in relation to taxation are of a complicated nature, I would consider these difficulties to be quite overbearing. (at p213)

26. I turn now to an examination of the reasons of their Lordships in Gourley's Case. There were in truth four speeches to which reference need be made, those of Earl Jowitt, Lord Goddard and Lord Reid forming part of the majority and the speech of Lord Keith of Avonholm in dissent, the reasons of the other participating Lords adding little beyond concurrence. (at p213)

27. Earl Jowitt referred to the earlier cases, both those in England and those in Scotland, most of them being reviewed in the judgment of the Court of Appeal in Billingham v. Hughes (1949) 1 KB 643 . His Lordship then denies that it follows that to take into account liability to taxation in assessing damages is to confer a benefit upon the wrongdoer, though undoubtedly if the decision in Gourley's Case is correct, the wrongdoer gets the advantage and the community does not of the amount by which the award of damages is diminished because of the plaintiff's liability to pay tax on his taxable income. Undoubtedly, according to Gourley's Case, it is cheaper to injure a taxpayer than to injure a nontaxpayer, though no benefit to the revenue accrues from the distinction. However, that consideration may be irrelevant if Gourley's Case is otherwise supportable. (at p213)

28. His Lordship then discusses cases enunciating the principle that damages are compensatory and not in general punitive, a matter about which there can be no question. But no examination is made by his Lordship of the question: for what is compensation to be assessed? True, Comyn v. Attorney-General (1950) IR 142 and W. Rought Ltd. v. West Suffolk County Council (1955) 2 QB 338 are noted, but no discussion in depth of the relevance of either decision is undertaken. Clearly the doubt expressed by his Lordship as to the relevance of liability to taxation in an exercise of valuation indicates that the capital nature of the earning capacity of which the plaintiff had been deprived did not bulk large in his Lordship's mind. It might be noted that the decision of the Court of Appeal in the case of W. Rought Ltd. v. West Suffolk County Council was later reversed by the House of Lords because of its decision in Gourley's Case: see West Suffolk County Council v. W. Rought Ltd. (1957) AC 403 . (at p213)

29. Lord Sorn's appeal to "reality" in M'Daid v. Clyde Navigation Trustees (1946) SC 462 found favour with his Lordship because, the payment of income tax being of universal obligation, liability to taxation must be present in everyone's mind in estimating what part of his income he can safely treat as available for expenditure by him. As so often it happens, it seems to me that, in Gourley's Case, an appeal to so-called "reality" heralded a departure from principle and logic. Such an appeal prima facie, in my opinion, savours of resort to expediency rather than of acknowledgement of the principles of law. His Lordship thought that the common reaction of mankind to the incidence of taxation denied that liability to tax on taxable income could be regarded as remote when estimating the financial compensation for loss of earning capacity. If I may say so with the utmost respect, I fail to see any connexion between the common reaction of mankind and the problem of remoteness in its legal sense. (at p214)

30. So far from considering compensation for the injury received, i.e. the earning capacity of which he had been deprived, his Lordship seems to have thought the problem to be: "How much had the plaintiff, bearing in mind liability to tax, lost by reason of the injury?" As I have said, the two questions are not the same, viz. compensation for destroyed or diminished earning capacity and the financial position of the income-earner after payment of tax. (at p214)

31. His Lordship then reiterated the somewhat facile illustration cleverly put as a matter of advocacy by Sir Andrew Clark in reply, i.e. the case of an injured taxpayer and an injured servant of the United Nations (1956) AC, at p 195 : his Lordship, as I think, too readily accepted it (1956) AC, at p 203 . But the illustration was in truth superficial. (at p214)

32. I would give a couple of instances which themselves, to my mind, show how superficial and legally irrelevant was this illustration. One could multiply instances of like injuries befalling people in unequal taxation situations. In connexion with these instances it is important to bear in mind that the wages, salary or earnings are not themselves taxed: they simply form part of the assessable income from which the taxable income is derived, i.e. after allowable deductions are made. Whilst it may be possible after due assessment of income tax has been made to calculate how much each pound or dollar of the assessable income has "borne" tax, income tax cannot, in my opinion, be said to be levied at any particular rate on each pound or dollar as the case may be which forms part of the assessable income. Earlier I pointed out the different ways of looking at the effect of Gourley's Case. The difference in the two situations is even more notable where graduated rates of income tax apply. It might possibly then be said that some particular ingredient of the assessable income has taken the taxable income into a higher rate of tax. I remarked earlier also on the obscuring apparent simplicity of the case of an industrial worker with no income except his wages. But even in such a case, there may be complications. Though a stipulated amount is deducted periodically at the source from wages, salary or earnings, the total of the sums deducted does not necessarily represent the amount of income tax payable. Some earners allow such deductions to be made by the employer as if they had no allowable deductions to be taken into account in determining their taxable income with the result that after the close of the tax year refunds are payable because the total deductions by the employer significantly exceed the tax payable. Further, the circumstances of the earner may generate allowable deductions after the date as at which the assessment of damages may have to be made. Lastly, in this connexion it is increasingly likely that so far from taxation remaining at or above its current level, it may indeed fall and even do so dramatically. Therefore any prognostication of the amount of tax payable because of estimated earnings over a lengthy period of time must indeed be susceptible of grievous error. (at p215)

33. Now for my instances: suppose the same earning-disabling injury befell two men, both engaged in professional life. One, by engaging in farming at an operating loss, though with good prospects of capital gain, and perhaps having the benefit of averaging provisions, has no liability to tax either in the current year or for the foreseeable future, though in receipt of a substantial professional income. The other, perhaps having more interest in the efficient pursuit of his profession, has not done anything to lessen his taxation, with the result that his professional income figures undiminished in his assessable income. What "reality" is there in an award of damages for the same injury which gives a large sum to the plaintiff who has the least tax to pay? But even more significantly, how does the tribunal of fact examine the circumstances so as to form an opinion as to the income tax position? And, if and when it does so, is the Commissioner of Taxation to be bound by what the tribunal decides? (at p215)

34. Or, again, take the case of a workman who has a large family of infant children, some of whom are students and some of whom are sick and ailing. He thus has a large amount of allowable deductions before his taxable income is determined, though of course his children will ultimately become adult and may become more healthy. Suppose that workman and a bachelor earning exactly the same money as the family man each received by the fault of another the same incapacitating injury. Could it be said with legal propriety that the one should obtain a higher award than the other merely because the one paid less tax in relation to his assessable income than the other? I do not think it could properly be so said. We are, of course, dealing with a legal problem and not with a problem of political philosophy. (at p216)

35. A further illustration might be of assistance. Suppose two men, identically employed and identically incapacitated: one lives within walking distance of the employer's premises, the other travels a long distance by his own car. If you ask what each has lost when not in receipt of a wage, I suppose it would be legitimate in answering that question, though not in the assessment of tax, to take into consideration the cost of transport, the one having none and the other a considerable amount. Their "losses" in the ultimate are in a "real" sense different. But there could be no difficulty, in my opinion, in concluding that as a matter of law the cost of getting to work was irrelevant or remote when assessing damages for lost earning capacity. (at p216)

36. Many other and more complicated circumstances may come to mind in which the inability to make in the course of a common law trial even the "roughest" estimation of tax liability would illustrate what I consider to be a legal fallacy of allowing the liability to tax upon taxable income to be used as a depreciating factor in the valuation of lost or diminished earning capacity. But what I have offered by way of illustration suffices to make my point that the illustration suggested by Sir Andrew Clark was at the best not worthy of the significance attached to it. (at p216)

37. In Lord Goddard's speech, the identification of loss of earnings with loss of earning capacity is clearly evident. He speaks of the practice of treating earnings lost up to date of trial as special damage and loss of earnings after trial as "loss of earning power in the future" and part of general damages. I have already adverted to the illogicality of this dichotomy. The longer the delay in bringing an action to trial, the greater is the "special damage": and thus the greater the damages in total for the loss of earning capacity inflicted by and at the date of the injury. Throughout the speech, it is lost wages which are spoken of as the subject matter of compensation, though at p. 208 "lost earning capacity" is spoken of. Along with this, there is the notion that future earnings as of the date of verdict for the loss of which compensation is awarded constitute a future or prospective loss, a matter to which I have already referred. (at p216)

38. Perhaps, as in the case of Earl Jowitt, the notion that damages involved a restitutio in integrum coloured his Lordship's speech. Concern was expressed that the plaintiff should not be better off or, on the other hand, be no worse off by reason of the verdict. Lord Reid did not accept that a restitutio in integrum is involved in the assessment of damages. His Lordship insisted that compensation was that which was to be awarded. I respectfully agree. But, again, that for which compensation was to be awarded is identified, in my opinion, in his Lordship's speech as the loss of wages. Again, the wages unpaid down to the date of verdict are treated as certain and recoverable: but the wages which might thereafter have been earned are treated as a prospective loss. His Lordship expresses the question to be decided as being "whether the plaintiff's liability to pay taxes is something which the law must regard as too remote when determining or estimating what he has lost as a result of the accident" (1956) AC, at p 212 . I would respectfully agree that the question is one of relevance or remoteness though his Lordship's expression "what he has lost" I find ambiguous and likely to turn the mind away from rather than towards the identification of the subject matter of the compensation. His Lordship, it seems to me, answers the question he posed by treating the liability to tax as a cost of earning the income. He realizes that tax is not directly levied on the earnings but only on the taxable income to the total of which the earnings contribute. Yet the impression, and I must concede it is only that, because the reasons expressed in the speech are, if I may respectfully say so, anything but express on the point, is that his Lordship treated the payment of tax as a cost of earning the wages for the loss of which his Lordship thought the plaintiff was to be compensated. Thus, in the long run, his Lordship, faced with the difficulties of introducing tax estimation into common law trials, said (1956) AC, at p 215 : "In considering the importance of practical difficulties I would weigh them against the importance of the element of tax liability, with tax at modern levels, in determining the real loss which the plaintiff has suffered. I cannot find any sufficient reason theoretical or practical, for excluding the element of tax liability . . ." With unfeigned respect for his Lordship's views, it seems to me that by treating the problem as one of replacing the wages which will not be received and treating tax as a cost of earning wages, his Lordship has been led to deciding that the plaintiff's loss in this respect must be ascertained after setting against those wages the liability to pay tax on the taxable income to which those wages, if received, would have contributed. (at p218)

39. Lord Keith dissented. I respectfully agree with the reasons he gives. His Lordship ranges perhaps more widely than I have done and has considered the equity or justice of the result attained by the majority. But there is, in my opinion, no antipathy between my own reasoning and that of his Lordship. (at p218)

40. This review of the speeches of their Lordships leads me to the conclusion that none of the reasons advanced by the majority are convincing to my mind as expositions of legal principle. If, as I think, the correct statement is that compensation is to be given for destroyed or reduced earning capacity and not for the nonreceipt of earnings, the liability to pay tax on taxable income to which the product of the earning capacity would contribute is not relevant to the valuation of the earning capacity destroyed or diminished: or it may equally be said that that liability is remote in the legal sense. (at p218)

41. So far, I have considered the case of damages for lost earning capacity as a result of injury tortiously caused. But my reasons for my conclusion would be equally valid if Gourley's Case were sought to be applied to a case of wrongful dismissal. In the case of wrongful dismissal, the salary or wages to be paid are rendered certain by the agreement between the parties whether oral or in writing. Further, the time during which they are payable is both fixed or capable of being fixed. There is thus at first sight some attraction in the proposition that the only "real loss" occasioned by the wrongful dismissal is the non-receipt of the agreed wages. But, so to regard the matter is, in my opinion, to make a false analysis. The liability to pay tax on taxable income cannot properly be classified as a cost of earning the emoluments of the employment. So to say is not to deny that in economic terms the level of income tax in a community does not result in an increase in the price of goods and services. But that economic fact is, in my opinion, quite irrelevant when determining the damages for breach of a contract to pay salary or wages. Suppose, for example, an employer is to pay salary or wages which, according to the terms of the employment, were an underpayment. Could the employer in an action to recover the shortage successfully say that the employee had in truth not lost the salary or wages but that he had lost only the net amount he would have beneficially retained after payment of income tax referable directly or indirectly to the receipt of wages? Of course not - and why not? True, the action would be for debt and not damages. But, in any case, the liability to tax would be irrelevant. If instead of short payment of salary or wages the employer wrongfully dismissed the employee, or by persistent refusal to pay the agreed wages repudiated the employment, in an action for damages could the employer say that the employee had only lost so much of the agreed salary or wages as would remain in his hands after payment of income tax? I cannot bring myself to believe that, in point of law, he could. The dismissed employee had lost the benefit of the employment: that means, in my opinion, the amount the employer had agreed to pay him. Again, the fate of the wages received, whether already pledged to be paid away under some obligation or bound to be applied to or towards the payment of income tax, would, in my opinion, be quite irrelevant. The employer would, in my opinion, be bound to pay what he had agreed to pay undiminished by any consideration of the obligation to pay income tax. It is, in my opinion, quite fallacious in relation to damages for wrongful dismissal to ask the question what has the employee really lost, meaning thereby how much of what he would have been paid could he have kept for himself. As I have indicated, it was by asking a comparable question in Gourley's Case: what really in that sense had the plaintiff lost by the deprivation of his earning capacity?, that the House of Lords reached its conclusion in that case. (at p219)

42. Consequently, in my opinion, Gourley's Case should not be followed in Australia, whether in relation to damages for loss of earning capacity or for wrongful dismissal, as indeed it has not been followed in Canada since the decision in Reg. v. Jennings (1966) 57 DLR (2d) 644 , a decision and the reasons of Judson J. with which I fully agree. (at p219)

43. Having formed this view, I have no need to consider the question whether or not the amount of the verdict would be taxable in whole or in part under s. 26 (d) of the Income Tax Act. Further, I would not disturb the trial judge's award of interest. To do so is to allow an illogical, if convenient, practice to override principle. (at p219)

44. However, having regard to the views expressed by other Justices, and to the decision of a majority of Justices in Ruby v. Marsh (1975) 132 CLR 642 , and my brother Jacobs' adherence to it in this case, I should agree in the circumstances to the order proposed by my brother Jacobs. (at p219)

GIBBS J. The respondent was the managing director of the appellant company, which had agreed to employ him until 30th June 1976. He was dismissed from his employment on 20th December 1973. He brought an action in the Supreme Court of Victoria against the appellant for wrongful dismissal, and on 28th August 1975 obtained judgment for $45,144.22 together with $4,815.32 interest thereon. On the present appeal, which is brought from that judgment, two questions only were argued. The learned trial judge held that in the assessment of damages the incidence of income tax upon the emoluments which the respondent would have received had he continued in employment should not be taken into account. He said that he should calculate the damages on the footing of the gross amounts which would have been payable to the respondent had his employment not been wrongfully terminated. The first question is whether this approach was erroneous in principle. The second question is whether it was right to allow interest on the full amount of the award. (at p220)

2. The first of these questions may be restated by asking whether the principle in British Transport Commission v. Gourley (1956) AC 185 should have been applied in the assessment of damages. In that case it was held by the House of Lords that in assessing damages for personal injuries which have diminished the plaintiff's earning capacity it is necessary to take into account the income tax which the plaintiff would have had to pay on his lost earnings if he had received them. However, the principle is not limited to cases of damages for personal injuries. It has since been applied by the House of Lords to the assessment of compensation for loss of profit when factory premises were compulsorily acquired (West Suffolk County Council v. W. Rought Ltd. (1957) AC 403 ) and to the assessment of damages for loss of profit arising from libel (Lewis v. Daily Telegraph Ltd. (1964) AC 234 ). In Gourley's Case itself three of the members of the House of Lords expressed the opinion that the principle would apply to cases of wrongful dismissal, and two others were probably also of that opinion, although a sixth member left the question open. The Court of Appeal in England has held that the principle does apply to such cases (Parsons v. B.N.M. Laboratories Ltd. (1964) 1 QB 95 ; Lyndale Fashion Manufacturers v. Rich (1973) 1 WLR 73; (1973) 1 All ER 33 ). Speaking generally, the principle will apply only where the earnings or profits lost would have been taxable if the plaintiff had received them but the damages awarded to compensate the plaintiff are not taxable: see Parsons v. B.N.M. Laboratories Ltd. (1964) 1 QB, at pp 124-126, 133-135 and Groves v. United Pacific Transport Pty. Ltd. and Thompson (1965) Qd R 62, at p 63 . (at p220)

3. Gourley's Case rested on two foundations. In the first place their Lordships re-affirmed the fundamental principle that damages awarded for personal injuries are compensatory. It would be unreal to measure the loss of a plaintiff, who has been deprived of the ability to earn moneys which, when earned, would have been subject to tax, by having regard to his gross earnings, without taking tax into consideration. Secondly, they rejected the argument that taxation is something too remote to be taken into account in the assessment of damages - something merely collateral, res inter alios acta. (at p221)

4. The decision in Gourley's Case has been widely criticized. The Supreme Court of Canada has declined to follow it (The Queen (in right of Ontario) v. Jennings (1966) 57 DLR (2d) 644 ). Learned writers have exposed what they regard as its weaknesses. The main criticisms are stated in the dissent of Lord Keith, in the judgment of Judson J. in the Canadian case and in Street on Damages (1962), pp. 98-104, although the topic has been discussed in many articles, some of which are mentioned in Luntz: Assessment of Damages for Personal Injury and Death (1974), p. 162. I shall refer briefly to the most cogent of these criticisms, and in doing so would return to consider what I have described as the foundations of the decision in Gourley's Case. In most cases of personal injuries a plaintiff would be compensated too generously if his damages were assessed on the basis of his gross earnings. He would be better off financially by reason of the wrong done to him. Judson J. in The Queen (in right of Ontario) v. Jennings did not agree that this would be so. He said (1966) 57 DLR (2d), at p 656 : "There must be very few plaintiffs who are compelled to take a lump sum who would not be better off with their earning capacity unimpaired or a periodic reassessment of the effect of its impairment. There is, as things are at present, no possibility of such a reassessment. But mathematical precision is impossible in assessing the lump sum, and where large amounts and serious permanent disability are involved, I think that the award is usually a guess to the detriment of the plaintiff." With great respect I remain unconvinced by these assertions. Take first the case - probably, in Australia, the most common case - of the plaintiff who receives earnings after tax has been deducted from them. A person cannot be said to have lost something that he would never have received and a plaintiff in that situation would never have received more than what remained after tax had been deducted, with perhaps a small taxation refund as well - in all, no more than his net earnings. To assess the damages of such a plaintiff on the basis that he has lost his gross earnings seems manifestly unreal, and unduly advantageous to the plaintiff. However, the critics say, the principle in Gourley's Case will work unfairly where the plaintiff would have earned a large income, particularly if tax was not deducted at the source. Such a plaintiff may have lost the ability to deal freely with his gross earnings and to take steps to reduce the burden of the tax. However, there is nothing in Gourley's Case that requires the court to proceed so mechanically as to fail to take these possibilities into account. Further it is said that it is impossible to foresee future changes in the level of tax, or in the tax laws, or in the situation of the plaintiff himself which may affect the extent to which the lost earnings would have borne tax. There is an element of truth in this criticism, but in the assessment of damages the court is constantly required to endeavour to predict the course of events in the future, and it does not abdicate a necessary function for fear that its predictions may be falsified. To ignore tax altogether would be to assess damages on a basis that would be unreal and theoretical. It is asked what will be done with foreign taxes; the answer is that there, too, an estimation may be made, but in any case that question does not cause practical difficulties in many cases in Australia. I consider that on the whole the tendency of the principle in Gourley's Case is to ensure that damages do not exceed the amount required to compensate the plaintiff for his loss, rather than to reduce awards below a proper level of compensation. (at p222)

5. Some critics attack also the second foundation on which Gourley's Case rests, saying that the courts are not concerned with what the plaintiff might have done with his earnings, that tax is not a charge on the income, but is paid out of it after it has been received and should no more be taken into account than any other liability, such as rates or interest payable under a mortgage. I cannot agree It is sufficient to cite the words of Earl Jowitt in Gourley's Case (1956) AC, at p 203 :
"The obligation to pay tax - save for those in possession of exiguous incomes - is almost universal in its application. That obligation is ever present in the minds of those who are called upon to pay taxes, and no sensible person any longer regards the net earnings from his trade or profession as the equivalent of his available income." (at p222)

6. The argument is also advanced that the principle in Gourley's Case wrongly transfers to the defendant a benefit which the taxation laws have given to the plaintiff. With all respect, this is fallacious. The question is what damages will compensate the plaintiff for his loss. It is not to the point that by reason of the circumstances of the case the damages are lower than they would have been if those circumstances did not exist. (at p223)

7. Dire predictions have been made as to the difficulties and complexities involved in the application of the rule. It has been said that the courts in assessing damages may decide that the award will not be taxable in the hands of the plaintiff, but that the decision will not bind the taxation authorities, who may in fact require the plaintiff to pay tax. If that occurred, of course, the plaintiff's damages would have been wrongly reduced. However this objection has proved quite theoretical in the case of awards of damages for personal injuries in Australia. I have already expressed the opinion that in Australia an award of damages for personal injuries is not taxable: Groves v. United Pacific Transport Pty. Ltd. and Thompson (1965) Qd R 62 . I adhere to that view. Indeed so far as I am aware it has never been seriously challenged. The Commissioner does not attempt to assess tax on awards of damages for personal injuries. He is never likely to do so while the law remains as it is. (at p223)

8. There is no doubt that the courts face difficulties in some cases in estimating the amount of tax that would have been payable if the plaintiff had not been deprived of his earnings, but that problem is no more difficult than many others that arise in the assessment of damages. The fears that if the Gourley principle were applied trials would be lengthened, and examination and discovery would be "oppressive and endless" (as Judson J. said in The Queen (in right of Ontario) v. Jennings (1966) 57 DLR (2d), at p 657 , have been falsified by the course of events. (at p223)

9. For the reasons I have given I consider that the decision in Gourley's Case rested on sound principles and is not inconvenient in practice. It should be followed in Australia. Indeed it would have required the strongest reasons to justify this Court in refusing to follow a decision of the House of Lords that has provided the basis upon which damages have been assessed in Australia for the last twenty years. (at p223)

10. I have already said that it has been held in England that the principle in Gourley's Case extends to damages for wrongful dismissal. The measure of damages for wrongful dismissal is the estimated pecuniary loss resulting from the premature determination of the plaintiff's service: Lucy v. The Commonwealth (1923) 33 CLR 229, at pp 238, 253 ; Automatic Fire Sprinklers Pty. Ltd. v. Watson (1946) 72 CLR 435, at p 476 . Prima facie, it is "the amount that the plaintiff would have earned had the employment continued according to contract subject to a deduction in respect of any amount accruing from any other employment which the plaintiff, in minimizing damages, either had obtained or should reasonably have obtained": McGregor on Damages, 13th ed. (1972), par. 884. The principle that damages are to compensate the plaintiff for what he has lost, and not to provide him with any additional benefit, is applicable to the assessment of damages for lost earnings in actions for wrongful dismissal as well as in actions for damages for personal injuries. It has been said that it would be contrary to public policy to apply the principle of Gourley's Case to actions for wrongful dismissal, because an employer would have to pay less for breaking the contract with his employee than for carrying it out. There is a fallacy here: if the employer does not dismiss the employee, and pays him the gross wage, he has the benefit of the services for which he pays. In any case the damages are to compensate the dismissed employee for his actual loss, and not to punish the employer. I agree with the English cases already cited that the principle of Gourley's Case applies to the assessment of damages for wrongful dismissal, provided, at least, that the lost earnings would have been taxable in the hands of the plaintiff if he had received them, and that the damages when received are not subject to tax. (at p224)

11. There is no doubt that the respondent's lost emoluments would have been taxable if he had received them. The question then is whether, and to what extent, the damages will be taxable in his hands. The learned trial judge held that the award of damages is subject to tax to the extent of five per cent and no more, and in my opinion he correctly so decided. It is provided by s. 26 (d) of the Income Tax Assessment Act 1936 (Cth), as amended, that the assessable income of a taxpayer shall include "five per centum of the capital amount of any . . . compensation where that amount is paid in a lump sum in consequence of retirement from, or the termination of, any office or employment, and whether so paid voluntarily, by agreement or by compulsion of law". An award of damages for wrongful dismissal is compensation paid in a lump sum in consequence of the termination of employment. In Reseck v. Federal Commissioner of Taxation (1975) 133 CLR 45 it was decided that s. 26 (d) "has both a charging and a liberating effect; it brings into charge a percentage of the amount paid though it would otherwise not be taxable at all, and it includes only a factional amount of a sum which would otherwise be assessable in full" (1975) 133 CLR, at p 50 . It follows from the decision in that case that the effect of s. 26 (d) is that only five per cent of the award will be included in the respondent's assessable income; the remaining ninety-five per cent will not be so included, even if the damages would otherwise have been regarded as assessable income within either s. 25 or s. 26 (j) of the Income Tax Assessment Act. (at p225)

12. However the learned trial judge went on to hold that the whole of the amount paid as damages would be "taxable subjectmatter", to use the phrase of Pearson L.J. in Parsons v. B.N.M. Laboratories Ltd. (1964) 1 QB, at p 140 . He held that by s. 26 (d) the Parliament had fixed a rate of taxation of the total lump sum payment. He explained this view as follows:

"The whole one hundred per centum of the lump sum payment is made taxable subject matter in the sense that, whether it be of a capital or an income character, it is brought into the ambit of the Income Tax Assessment Act as being the source from which part of the assessable income of the taxpayer is derived, namely, that part which consists of five per centum of the capital (or capitalised) amount of that lump sum payment, and by furnishing the basis for the calculation of the extent by which the assessable income is increased, namely, by that amount which represents five per centum of the capital (or capitalised) amount of the lump sum payment."

He accordingly held that the Gourley principle could not be applied. With great respect, I am unable to agree with this view of the effect of s. 26 (d). It is true that in one sense the whole of an award of damages for wrongful dismissal is within the ambit of the section, but the whole of the award is not made subject to tax. Only five per cent of the award is taxable - the rest is not. The Act does not charge tax on the whole award at five per cent of the rates otherwise chargeable; it charges tax on only five per cent of the amount of the award. (at p225)

13. The question then is whether the principle in Gourley's Case applies when a proportion - but only a small proportion - of the damages will be taxable. A similar question has been considered in the United Kingdom, where ss. 37 and 38 of the Finance Act, 1960, and later ss. 187 and 188 of the Finance Act 1970, charged income tax on payments made under an award of damages for wrongful dismissal, but provided that the tax should not be charged in respect of an amount not exceeding 5,000 pounds, or, in the case of a payment which exceeded that amount, should be charged only in respect of the excess. (In certain cases the figure was larger than 5,000 pounds, but that is not material for present purposes.) In Parsons v. B.N.M. Laboratories Ltd. the majority of the Court of Appeal held that as the damages in that case were under 5,000 pounds they were free of tax and that the Gourley principle applied. However both of the Lords Justices who constituted the majority appeared to be of the opinion that if the award had exceeded 5,000 pounds, so that part of the award would have been taxable, the Gourley principle would not have applied at all, and the damages would then have been assessed on the basis of the gross loss of earnings (1964) 1 QB, at pp 130, 139 . (at p226)

14. In a Scottish case decided shortly before Parsons v. B.N.M. Laboratories Ltd. - Stewart v. Glentaggart Ltd. 1963 S.L.T. 119. - Lord Hunter had held that the proper approach in a case where the total damages exceeded 5,000 pounds was first to assess damages on the basis of the net income, in accordance with Gourley's Case, and then to ascertain what sum would leave the plaintiff with that net amount after taking into account his liability to tax under the Finance Act. In Parsons v. B.N.M. Laboratories Ltd. Harman L.J. regarded this approach as a counsel of perfection - logical but impracticable (1964) 1 QB, at pp 129-130 . Pearson L.J. also thought it open to serious objection (1964) 1 QB, at pp 137-138 . (at p226)

15. The matter fell for consideration again in Bold v. Brough, Nicholson and Hall Ltd. (1964) 1 WLR 201; (1963) 3 All ER 849 , another case where the damages exceeded 5,000 pounds. In that case Phillimore J. said (1964) 1 WLR, at p 208; (1963) 3 All ER, at p 854 that it seemed to him that the majority judgments in Parsons v. B.N.M. Laboratories Ltd. (1964) 1 QB 95 must apply equally to the 5,000 pounds of the award, inasmuch as tax is only chargeable on the excess. He did not specifically refer to the dicta in that case that would have appeared to have expressed a different view. He first assessed the damages on the basis of the gross income, and then calculated the amount of tax payable on the lost income represented by the first 5,000 pounds of the award and deducted that from the amount first assessed. (at p226)

16. The provisions of the Finance Act (U.K.) present difficulties in the assessment of damages for wrongful dismissal, particularly when the total award is just below or just above 5,000 pounds. The same difficulty does not arise under s. 26 (d) of the Income Tax Assessment Act. Whatever may be the correct position in the United Kingdom, it seems to me that the principle in Gourley's Case should be applied in assessing damages for wrongful dismissal in Australia, notwithstanding that five per cent of the award will be taxable. As I have already said, I consider that, in general, the principle applies only where the damages are not taxable, and this would be so even if the tax payable on the award were considerably less than the notional tax on the lost earnings. But where only a small fixed proportion of the award is subject to tax, it would be manifest that a plaintiff would receive more than was necessary to compensate him for the loss caused by his wrongful dismissal if his damages were assessed on the footing of his gross earnings, when all of those earnings would have been subject to tax. The reasons underlying Gourley's Case in my opinion require that in such a case the court should assess damages on the basis of the net earnings which represented the plaintiff's real loss, but should adjust the result by taking account of the fact that a proportion of the award will bear tax. The proper approach is, I consider, along the lines suggested in Stewart v. Glentaggart Ltd. (1963) SLT 119 , but it is not necessary, as a matter of law, to say more than that in making the assessment the court must take into account both the fact that if the contract had not been broken the respondent would have had to pay tax on his earnings, and that he will now have to pay tax on five per cent only of the damages awarded. A theoretical difficulty will be occasioned by the fact that once the amount provisionally assessed on the basis of net earnings is increased to take account of the fact that five per cent of the damages will bear tax, the increase in the amount to be awarded will increase the tax payable. However an elaborate assessment, aiming to produce mathematical accuracy, is not required - "an estimate will be none the worse if it is formed on broad lines, even though it may be described as rough and ready": Gourley's Case (1956) AC, at p 203 . I am not convinced that an assessment made in the manner suggested will cause undue difficulty or inconvenience. And I consider that it is necessary to take tax into account in order to determine, in the fairest way possible, the compensation that the respondent should receive for the wrong done to him. (at p227)

17. For these reasons in my opinion the learned trial judge was in error in not taking into account the tax that would have been payable on the lost earnings, and the damages should be reassessed. (at p227)

18. The second point taken on the appeal is that so much of the damage as represented loss suffered in respect of the period from 28th August 1975 (the date of the award) to 30th June 1976 was "compensation for loss or damage to be incurred or suffered after the date of the award" within s. 79A (3) (b) of the Supreme Court Act 1958 (Vict.), as amended, and that the judge should not have allowed interest in respect of that amount. In argument before us it was virtually conceded on behalf of the respondent that so much of the award as represented loss suffered after 28th August 1975 did answer that description, and that it was wrong to allow interest in respect of the whole award. I need not repeat what I said in Ruby v. Marsh (1975) 132 CLR at p 656 as to the effect of the introductory words of s. 79A (3). In the present case the learned trial judge made a global award, and did not go on to determine that any part of it included any compensation for loss or damage to be incurred or suffered after the date of the award. He was not forbidden by the statute to allow interest on the whole amount awarded in those circumstances, for the reasons I gave in Ruby v. Marsh (1975) 132 CLR 642 . However when damages are reassessed, the judge will doubtless reconsider this question. (at p228)

19. I would allow the appeal and remit the matter to the Supreme Court of Victoria so that the damages may be reassessed in accordance with the judgment of this Court. (at p228)

STEPHEN J. This appeal, although directly concerned with the proper mode of assessment of damages for wrongful dismissal, involves more far-reaching issues. It raises the question of the application in this country of the principle in British Transport Commission v. Gourley (1956) AC 185 . It does so because what is here in question is a suggested extension of the underlying principle in Gourley's Case beyond its primary field, that of the assessment of damages for personal injuries, into the area of assessment of damages for wrongful dismissal. A feature of such damages is that, unlike damages for personal injuries, they attract income tax under our tax laws, although only to a quite limited extent and with a quite special incidence. This feature in itself presents novel problems in any application of Gourley's Case. (at p228)

2. In this appeal the appellant wrongfully terminated the respondent's employment as its managing director. The latter sued for damages and established his entitlement to very substantial damages. The learned trial judge concluded, correctly in my view, that only five per cent of the amount awarded would be assessable to income tax in his hands, the remainder attracting no liability to tax. Had the respondent's employment not been so terminated, the whole of his remuneration as managing director would have been subject to tax. The question accordingly arose whether the damages to be awarded to the respondent were to be assessed having regard to the gross remuneration, before tax, which he would have received but for his dismissal, or upon some other basis which would take into account the fact that ninety-five per cent of the damages awarded would be free of any tax impost. (at p229)

3. Although what was decided in Gourley's Case is not directly in issue, it is, I would suppose, clear that if it were to be said for Australia as has been said for Canada by the Supreme Court in Reg. v. Jennings (1966) 57 DLR (2d) 644 that Gourley's Case is not to be applied in the assessment of damages for lost earning capacity in personal injuries cases, where it is directly applicable, there would be all the less reason to seek to apply any variant or extension of it to the case of damages for wrongful dismissal. It is for that reason that I would regard a satisfactory disposition of this appeal as requiring at the outset a consideration of Gourley's Case as it applies in the assessment of damages for personal injuries. (at p229)

4. Until the mid 1950s it was well established in Australia that in claims for damages for personal injuries "where loss of earnings is to be allowed for, the incidence of income tax is not to be considered" - Lincoln v. Gravil (1954) 94 CLR 430, at p 442 , per Fullagar and Kitto JJ. Accordingly it was to the likely future level of gross earnings, rather than of net earnings after tax, that courts would look in seeking to evaluate a plaintiff's claim to damages for lost earning capacity. (at p229)

5. By the end of the decade all this had changed; British Transport Commission v. Gourley had been decided and was being regularly applied in the sense that in assessing damages for lost earning capacity it was to a plaintiff's after-tax earnings rather than to his pre-tax earnings that courts looked. The fact of the change was but little referred to in Australian law reports, although it was the subject of a considered judgment by Gibbs J. in Groves v. United Pacific Transport Pty. Ltd. and Thompson (1965) Qd R 62 . His Honour there concluded that he should take the plaintiff's tax position into account both "in determining what financial loss the plaintiff has probably suffered up to the date of trial by reason of the impairment of his earning capacity, as well as in considering what financial loss he is likely to suffer in future" (1965) Qd R, at p 65 . This has now been the rule in the assessment of such damages in this country for upwards of twenty years. (at p230)

6. The working of the principle in Gourley's Case has been the subject of prolonged debate, much of it critical, in the law journals of the common law world. In part that criticism has been directed to the practical difficulties to which it is said to give rise; in part it is concerned with other more fundamental objections. The nature of the debate is exemplified in the articles by Mr. Bale in the Canadian Bar Review, vol. 44 (1966), p. 66 and by Professor Dworkin in (1967) British Tax Review, pp. 315, 373. (at p230)

7. Australian experience would suggest, as Professor Luntz notes in his book Assessment of Damages for Personal Injury and Death (1974), p. 163, that the practical difficulties so much referred to have not been very evident in practice in this country. This avoidance of difficulties may sometimes have been at the expense of the ideal of compensation when resort has been had to the "simple and blunt process" of doing no more than taking net-of-tax earnings, continuing them into the future and ascertaining their present value from appropriate tables - Taylor, "The Element of Income Tax in Damages Awards for Personal Injuries", Victoria University of Wellington Law Review, vol. 5 (1968-1970) 208, at p 224 There are, however, some better reasons why the application of the principle has not occasioned practical difficulty in this country. These include the fact that the one tax system prevails throughout the continent, unlike the Canadian position where tax rates may vary from province to province: that Australian litigants tend to be relatively isolated from foreign tax systems: that it has long been assumed in Australia, correctly I think, that awards of damages in personal injuries cases, although containing a component representing damages for lost earning capacity, do not attract tax and are never treated by the Commissioner as doing so - see per Walsh J. in Williamson v. Commissioner for Railways (1960) SR (NSW) 252, at p 281 . Recent legislative changes should also assist in disposing of what have been thought of overseas as additional practical difficulties. Australian State Supreme Courts now exercise a substantial jurisdiction in tax appeals, unlike their Canadian counterparts, and the recently introduced system of substantial minimum, and uniform, tax rebates lends itself to a more ready and more reliable estimation of after-tax incomes, changes in the number of dependants over the years producing relatively little change in taxable income. (at p230)

8. What has, perhaps, been most material in the avoidance of practical difficulties has been the courts' understanding that in considering economic loss, particularly future economic loss, they are entering an uncertain realm where the critical matter, what the future would have held for the plaintiff in terms of his earnings, depends upon a number of imponderables, some personal to the plaintiff, others affecting the community at large. If the basic factor in assessing economic loss, namely, what would have been the plaintiff's earnings but for his injury, can be no more than an informed estimate, inherently subject to errors of various kinds, some of which may be cumulative the one upon the other, it is obviously illusory to seek for precise accuracy in an ancillary factor such as tax, itself dependent for its quantum upon an uncertain estimate of earnings. As Barwick C.J. said in Lind v. Macleod (1972) 46 ALJR 378, at 379 , estimation of the amount of tax a plaintiff would have paid on his continuing pre-accident income is to be made "not, of course, precisely but broadly in a manner which is sufficient for such purposes as the present". This conforms with the views of their Lordships in Gourley's Case; as Earl Jowitt said (1956) AC, at p 203 , the tax must be estimated and that estimate "will be none the worse if it is formed on broad lines, even though it may be described as rough and ready". (at p231)

9. Practical difficulties of application apart, the objection taken to the principle in Gourley's Case seems to rest principally upon two grounds: that the incidence of income tax is too remote or is res inter alios acta, as it is sometimes put, and that if either party is to "benefit" from the transmutation of taxable earnings into taxfree damages it should be the innocent plaintiff rather than the unworthy wrongdoer. The use of the concept of remoteness seems undesirable in the present context. It properly may operate to confine recoverable losses within certain limits but is inappropriate as a reason for inflating damages by excluding from consideration factors tending to reduce the measure of the plaintiff's loss. The use of the Latin maxim, in its contracted form of res inter alios acta, is little more apposite. It is often employed, albeit inaccurately, to justify benefits which a plaintiff may derive from third parties being excluded from consideration, however Dixon C.J. regarded it as telling him nothing when so employed - National Insurance Co. of New Zealand Ltd. v. Espagne (1961) 105 CLR 569, at pp 571-572 . It tells one no more in the present context and this because the decision whether or not the incidence of income tax is to be taken into account is essentially concerned with the aim of compensating the plaintiff and with matters of policy in achieving that aim. In Gourley's Case their Lordships were guided by the view that it was unrealistic in modern conditions to exclude from consideration the incidence of income tax. I would, with respect, take a like view; the present all-pervading influence of income tax and, in particular, the natural tendency, when tax is deducted before wages are paid, for actual take-home pay, rather than nominal wages, to be regarded as the true measure of the wage-earner's reward, both suggest that there is no error in the policy decision so made. (at p232)

10. As to the second objection, to speak of who is to receive the "benefit" of tax consequences is to lose sight of the fact that the prime purpose of damages is that of compensating the injured party, no more and no less. It introduces instead a notion suitable only to some punitive theory of damages and seeks to convert awards of damages into vehicles for the distribution of tax savings. It also ignores reality in supposing that the financial interests of defendants in the great bulk of personal injuries cases are other than those of the premium-paying community at large. (at p232)

11. A majority of the English Law Reform Committee, in its Seventh Report (1958) Cmnd. 501), concluded that to apply Gourley's Case was the most satisfactory solution since it best gave effect to the principle that an award of damages should compensate for actual loss. This is the view to which Mr. Treitel comes in his work Law of Contract, 4th ed. (1975), pp. 637-638, following his review of authority and text. It is one which, with respect, I share. (at p232)

12. With the current average weekly earnings in Australia amounting to somewhat in excess of $200, involving the single worker in a liability to tax of well over twenty per cent of his earnings, any abandonment of the now conventional postGourley basis for the assessment of financial loss due to impaired earning capacity would dramatically increase the general level of awards of damages, calling for a far-reaching and temporarily disruptive re-evaluation of the present basis whereby loss has come to be distributed, by means of insurance, throughout the community. It would also, in times of high rates of tax, involve the substantial abandonment of "the dominant rule of law" that such damages should be compensatory of the plaintiff - per Earl Jowitt in Gourley's Case (1956) AC, at p 198 , and per Lord Goddard (1956) AC, at p 208 and Lord Reid (1956) AC, at p 212 - what Windeyer J. described, in Skelton v. Collins (1966) 115 CLR 94, at p 128 as "the one principle that is absolutely firm . . . that damages for . . . mere negligence are compensatory". Instead of attempting to place the plaintiff, so far as an award of damages can do so, in the same financial position as that in which he would be likely to have found himself but for the accident of which he complains, accident victims would, for a time at least until the revenue laws were appropriately amended, find themselves in a tax haven of the Court's own making. (at p233)

13. In Parry v. Cleaver (1970) AC 1, at p 13 Lord Reid had occasion to look back on Gourley's Case with the benefit of the experience of almost fifteen years of the working of it. He described it as making clear, if it had not been clear before, "that it is a universal rule that the plaintiff cannot recover more than he has lost" and, more importantly, that "in this chapter of the law we must have regard to realities rather than technicalities". Despite, then, the disapproval of "a good many lawyers" their Lordships, he said, had "preferred realities to 'res inter alios' and 'remoteness'". For my part, and despite the great weight of academic writing to the contrary and the views of the Canadian Supreme Court in Reg. v. Jennings (1966) 57 DLR (2d) 644 , I would adhere to the now well established application of Gourley's Case in personal injuries cases. (at p233)

14. This is not to say that the "simple and blunt" process earlier referred to is necessarily a satisfactory solution; there are special factors which, in individual cases, may have to enter into the estimation of what tax would have been paid by a plaintiff on his earnings but for the accident. Perhaps among the most obvious are the higher rates that would accompany increased remuneration in the future, the possession of sources of income other than the income the loss of which reflects lost earning capacity and any likelihood that, whether by dramatic changes in marital status or otherwise, the plaintiff's allowable deductions and taxable income would have been subject to marked changes in the future. Occasion may also arise in the future for consideration of the effects of inflation and of income tax upon the income which capital sums of damages may produce; but these are matters for another day and for a case which squarely raises the issue. For present purposes it is enough to conclude that Gourley's Case should be regarded as generally applicable to the process of assessment of damages for personal injuries when lost earning capacity is in question. (at p233)

15. If this be so, how should it affect the assessment of damages in the present case? The plaintiff here sued in contract for damages for wrongful dismissal. In the United Kingdom it is clear that damages for wrongful dismissal, like damages for lost earning capacity in the case of personal injuries claims in tort, to the extent to which they do not exceed 5,000 pounds and are therefore, under the Finance Act 1960, free of tax, are subject to the principle in Gourley's Case. In Gourley itself, at a time when all such damages were free of tax, Lord Goddard expressly said as much (1956) AC, at p 210 ; with his opinion Lord Radcliffe and Lord Somervell agreed, and the speech of Lord Tucker seems to be expressive of the same view (1956) AC, at p 215 . Only Earl Jowitt expressly reserved the point. Subsequent cases in England and Scotland after the enactment of the "golden handshake" provisions of the Finance Act 1960 have, despite some notable dissents such as that of Sellers L.J. in Parsons v. B.N.M. Laboratories Ltd. (1964) 1 QB 95, at p 106 , applied the principle to such damages: Stewart v. Glentaggart Ltd. 1963 S.L.T. 119. ; Parsons v. B.N.M. Laboratories (1964) 1 QB 95 (and the additional cases there cited by Pearson L.J. (1964) 1 QB, at pp 134-135 , Bold v. Brough, Nicholson and Hall Ltd. (1964) 1 WLR 201; (1963) 3 All ER 849 and Lyndale Fashion Manufacturers v. Rich (1973) 1 WLR 73; (1973) 1 All ER 33 ). Any impression that, because liability depends upon the defendant's breach of his contract to employ the plaintiff for reward rather than upon a tortious breach of his duty of care, the burden of tax thereby becomes a merely collateral matter, properly to be disregarded, is dispelled by recalling that in both cases the dominant rule of law is compensation of the plaintiff; or, as Earl Jowitt said in Gourley's Case (1956) AC, at p 197 the awarding to the injured party of "such a sum of money as will put him in the same position as he would have been in" but for the wrongful act. (at p234)

16. So long, then, as an examination of Australian tax laws does not disclose good reason to the contrary, I would apply Gourley's Case to the assessment of damages for wrongful dismissal. (at p234)

17. It has been customary to say of the principle in Gourley's Case that its application is dependent upon the satisfaction of two conditions precedent; the award of damages must represent compensation for loss of income (or for loss of earning capacity manifested by a loss of income) which income would have been subject to tax had it been received by the plaintiff, and the award of damages must itself not be subject to tax. (at p234)

18. The first condition is satisfied readily enough in the present case, the plaintiff's earnings denied to him by his wrongful dismissal would have been assessable income in his hands. The second condition, if indeed it be a necessary condition precedent to the application of Gourley's Case, will not have been fully satisfied because s. 26 (d) of the Income Tax Assessment Act will in my view operate to include in the plaintiff's assessable income five per cent of the damages awarded to him. That this is the effect of s. 26 (d) is, I think, clear; damages awarded to the plaintiff for wrongful dismissal answer quite precisely to the statutory description of compensation paid in a lump sum, by compulsion of law, in consequence of the termination of any employment and the learned trial judge, McInerney J., so held, As a result of the decision of the majority in Reseck v. Federal Commissioner of Taxation (1975) 133 CLR 45 , it would seem that, even were the remaining ninety-five per cent thought for any reason to be assessable income, it will in fact be freed of any liability to tax by the operation of s. 26 (d). In argument reference was made to the effect of s. 26 (j). In my view that paragraph has nothing to say of an award of damages for wrongful dismissal; I would not regard its reference to indemnity for loss of income, in the context in which it appears, as applicable to such damages nor do I regard anything that was said by Kitto J. in Federal Commissioner of Taxation v. Wade (1951) 84 CLR 105 as requiring a contrary conclusion. (at p235)

19. McInerney J. concluded that the operation of s. 26 (d) upon five per cent of the award of damages was sufficient wholly to exclude the principle of Gourley's Case; he regarded the second alleged condition precedent as not having been satisfied. The respondent, in supporting this view, contended that it is enough that the damages awarded are taxable subject-matter. It does not matter that a great part of them will not, in fact, be included in assessable income. Thus, so long as the damages fall within the purview of the taxing legislation, as it is said that they do by reason of s. 26 (d), the principle in Gourley's Case is inapplicable. (at p235)

20. In my view it is not these so-called conditions precedent but, rather, a judicious blend of principle and expediency that must determine when, in the assessment of damages, the incidence of taxation is to be taken into account by the application of the principle in Gourley's Case. In that blend the principle in question is that damages should be no more than compensatory, the expediency is concerned with the degree of added complexity which attainment of that principle may involve. It is easy to imagine a particular taxing provision the effect of which, if not taken into account in the process of assessment, will nevertheless have but little effect upon attainment of the desired goal of just compensation. In such a case the added complexity involved in taking tax into account may outweigh the relatively slight gain in fairness of compensation. Section 26 (d), however, is not such a taxing provision; the contrast between tax on earnings and tax upon only five per cent of damages is likely to be marked and should be taken into account in the process of assessment if the compensatory character of damages is to be retained. (at p236)

21. The so-called conditions precedent with which Gourley's Case has come to be associated find no place in their Lordships' speeches in that case itself, they are no more than working rules judicially deduced from that decision as it operated in the then-existing pattern of United Kingdom revenue laws. They were, no doubt, well suited to that pattern of taxation, at least as it existed before the introduction of ss. 37 and 38 of the Finance Act 1960, but are quite unsuited to the wholly different problem posed by a provision such as s. 26 (d). To regard them in any different light is to erect into rules of law working guides to the proper application of an important principle in the assessment of damages and to do so in disregard of the very principle itself. In saying this I am, in effect, adopting the reasoning of Lord Hunter in Stewart v. Glentaggart 1963 S.L.T., at p. 122. with which, with respect, I fully agree. (at p236)

22. If effect is, then, to be given to the principle in Gourley's Case against the background of s. 26 (d) and if the aim is to award damages which will as nearly as possible fairly compensate for economic loss measured in net, after tax, terms, the first step will be to estimate in net terms the plaintiff's loss due to his wrongful dismissal, applying the rate of tax appropriate to what would have been his taxable income, including income from other sources, but for his dismissal. This done, the damages to be awarded, after taking into account any adjustment for contingencies or discount for present payment if applicable, will be such a sum as will leave that amount of net loss in the plaintiff's hands after five per cent has borne tax at the rate of tax applicable to the plaintiff, again taking account of income from other sources. Thus the award will seek to represent net loss plus tax on five per cent of that loss. (at p236)

23. Throughout the process of assessment it is to be kept clearly in mind that substantial fairness rather than precise accuracy must be the aim. For example, the effect of adding into the award the tax which will be payable upon the taxable five per cent of the award will, by increasing the damages awarded, necessarily slightly increase the amount of tax payable; to seek to engage in further adjustments so as to take account of this effect will be to add undesirable complexity without worthwhile result. Accordingly it may be disregarded. (at p237)

24. The appellant asked that, if successful, the case should be remitted to the learned trial judge for the re-assessment of damages in the light of the judgments in this Court. This would appear to be the appropriate course to now adopt. (at p237)

25. There is a subsidiary matter which arises for consideration; a short point relating to s. 79A of the Supreme Court Act 1958 (Vict.). The learned trial judge awarded to the plaintiff interest pursuant to that section upon the whole of the damages. The appellant submits that this was by way of oversight and that it should only have been awarded upon so much of the damages as represented the plaintiff's economic loss incurred up to the date of judgment and not upon so much as represented economic loss in the future, in the period from August 1975, when the order was made, until June 1976 when the contract of employment would have terminated by effluxion of time. This submission is clearly correct, the respondent did not contend to the contrary. It may be corrected when the matter goes back for re-assessment of the award of damages. (at p237)

26. I would for these reasons allow this appeal and would accordingly remit the matter to the Supreme Court. (at p237)

JACOBS J. Until the decision of the House of Lords in British Transport Commission v. Gourley (1956) AC 185 it was the practice in New South Wales and, I believe, in other parts of the Commonwealth to take no account, in assessment of damages for loss of earning capacity, of income tax which would have been payable on earnings as a result of the injury for which damages were claimed. After that decision the practice changed and damages for loss of earning capacity came to be calculated by taking account of the net earnings of a plaintiff, with income tax deducted. (at p237)

2. That the decision in Gourley represented a departure from previous practice in England is clear from the decision itself. Since then the decision has been much debated, and the debate has taken place on two levels - the level of conceptual accuracy and the "realist" level, that is to say, the social usefulness or desirability of the decision, its justice and fairness. It is necessary to keep both these aspects in mind, but I think that it may fairly be said that the problems sought to be resolved in Gourley have come to be recognized in the House of Lords itself as problems requiring consideration rather on the latter than the former level. See Parry v. Cleaver (1970) AC 1 , to which I shall later return. (at p238)

3. The question of the applicability of the Gourley rule has never before arisen for decision in this Court, though many appeals concerning the adequacy or inadequacy of damages have been decided on the assumption made in the courts from which the appeals were brought that Gourley should be applied. However, this Court has had occasion to treat in some detail an associated question, namely, the question whether a pension payable by the State to a person who has lost his earning capacity, an invalid pension, should be set off against the damages payable for that loss of earning capacity, and it was decided that there could be no set off: National Insurance Co. of New Zealand Ltd. v. Espagne (1961) 105 CLR 569 . See also Paff v. Speed (1961) 105 CLR 549 . Gourley was referred to in both cases. McTiernan J. in the latter case expressed the view that the question decided in Gourley was entirely different, but Menzies J. in Espagne (1961) 105 CLR, at p 582 noted the similarity of the approach made to both classes of case. (at p238)

4. By 1970, it can I think fairly be said that it had come to be recognized by the House of Lords in Parry v. Cleaver that conceptually it was hardly possible to distinguish the two classes of case and that the distinction lay in the "realities" as Lord Reid said of Gourley (1970) AC, at p 13 and "public policy" as he said of his approach to the problem of pensions (1970) AC, at p 19 . See also per Lord Pearce (1970) AC, at pp 37-38 where he refers to "fairness and justice and public policy". Lord Wilberforce did not regard Gourley as decisive of the "pension question" or that it had any bearing on that question (1970) AC, at p 40 , but he did not have occasion to consider whether the difference was conceptual or based on the broader grounds to which Lord Reid and Lord Pearce had referred. Lord Morris of Borth-y-Gest and Lord Pearson both regarded the "pension" question as decided by the principle enunciated in Gourley. (at p238)

5. I find myself unable to distinguish the Gourley question and the pension question in conceptual principle, at least where the pension is a state non-contributory pension provided by Act of Parliament. The question to be determined is what the plaintiff lost by his injury. One aspect of that loss is financial or economic loss and one approach to the quantification of that financial loss is to examine what the plaintiff would probably have earned if he had not been injured. The question of what the plaintiff would probably have earned can only be his earnings before tax is deducted therefrom. If tax is deducted in arriving at the amount of damages it must be because it is deductible in computing, not loss of earnings, but financial or economic loss. Once that is recognized, it becomes impossible to distinguish financial or economic loss reduced because something earned would have been taken away by the State and such a loss reduced because something - a pension - is given by the State as compensation for his inability to earn. A different result in the two classes of case would need to be reached not on a conceptual level but on a level related to the realities, or the justice, fairness and public policy referred to by their Lordships in Parry v. Cleaver (1970) AC 1 . (at p239)

6. However, since Espagne (1961) 105 CLR 569 has been decided by this Court and since in conceptual principle it is not distinguishable from Gourley, it is necessary first to examine the matter on this conceptual level. It has now been sufficiently demonstrated (by Dixon C.J. and Windeyer J. in Espagne and by most of their Lordships in Gourley and in Parry v. Cleaver that very broad statements, referring to "collateral matters", "remoteness", "causa sine qua non", "causa causans", "res inter alios acta" and more, do not provide sound ground for the elucidation of a principle but tend rather to express a conclusion. Prior to Gourley it was generally accepted that in the assessment of damages for financial or economic loss arising from an incapacity to earn the measure of damages was the loss of earnings less the cost of earning and that apart from this latter cost no account was to be taken of what the injured man would have expended out of his earnings, by statutory compulsion as tax or by statutory or other compulsion for maintenance of dependants or by contractual obligation or otherwise; nor was account to be taken of a benefit which the injured man received or became entitled to receive after his injury which he would not have received or been entitled to receive if he had not been injured, whether the benefit came from benevolence or statutory right or contractual right or otherwise. This rule could be accommodated with the primary notion that damages in such cases are compensatory by treating this notion as an elaboration of the principle that there is no punitive element in such damages. What Gourley did was to frame the notion that such damages are compensatory only as a principle whereunder it is generally necessary to regard the whole financial or economic situation of a plaintiff before and after his injury, and to balance all credits and debits one against the other. In order to escape the application of this general rule a plaintiff would need to establish an exception to a dominant rule that damages should be assessed on the basis of what a plaintiff had really lost overall. See in Gourley, per Earl Jowitt (1956) AC, at pp 198, 203 ; per Lord Goddard (1956) AC, at p 206 and Lord Reid (1956) AC, at pp 212, 214 who both apply a test of remoteness to determine whether an exception does or does not exist; per Lord Tucker (1956) AC, at p 215 who applied the test whether the expenditure out of earnings was imposed by law as a necessary consequence of receipt. (at p240)

7. If either the test of remoteness or the test of an expenditure imposed by law as a necessary consequence of receipt of earnings provided a sure test for determining exceptions to a dominant rule then it would not matter whether the dominant rule with its certain exceptions were expressed as in Gourley or whether the rule was more narrowly expressed in the way in which it commonly was before Gourley. But, as has been observed, remoteness expresses a conclusion, not a reason for reaching a conclusion, while to the test of expenditure imposed as a necessary consequence of receipt of earnings there must be so many exceptions that the test would be obscured in them. Obligations under contract and family obligations are all legal obligations. They are, it is true, individual to each person, but fiscal obligations also depend upon the individual financial position of each person. (at p240)

8. There does not appear to be any conceptual basis upon which the exceptions can be placed, and that led Lord Reid in Parry v. Cleaver (1970) AC, at p 13 to conclude that Gourley was based on the "realities" and to regard the common law approach to the question of pensions as one depending on "justice, reasonableness and public policy". (at p240)

9. If the problems raised by Gourley, Espagne, and Parry v. Cleaver can be approached at a conceptual level it seems to me that the only approach which permits anything like consistency in concept is that which was understood before Gourley. The "dominant rule" of Gourley requires so many exceptions governed not by any other identifiable concept but by "justice, reasonableness and public policy" that it becomes, in my view, necessary to consider whether the particular result which was reached in Gourley itself satisfies that test. My conclusion to this point is that on a conceptual level the old test before Gourley was a more satisfactory test, but that if the exceptions to Gourley have to be determined on the level of justice, reasonableness and public policy then it is inevitable, particularly in the light of this Court's decision in Espagne, that this Court should consider at that level of "justice, reasonableness and public policy" whether Gourley ought to be followed. To that aspect I now turn. (at p241)

10. The object of the rule enunciated in Gourley was to prevent a plaintiff being better off as a result of his verdict than he would in fact have been if he had received earnings as such. Therefore the tax on those earnings was to be deducted in the computation of the loss resulting from the affection of earning capacity. It has remained an open question whether tax on the income from an investment of the damages awarded for loss of earning capacity should be taken into account. The question was argued in Petroleum and Chemical Corporation (Australia) Ltd. v. Morris (1973) 47 ALJR 484 . Stephen J., with whom Walsh, Gibbs and Mason JJ. agreed, found it unnecessary to consider the question. Menzies J. expressed the view that only in an exceptional case should such tax be taken into account. He said (1973) 47 ALJR, at p 485 :

"It is true that the sum awarded will, if and when invested, produce an income which will suffer diminution by taxation. How much cannot be predicted or even guessed. It depends inter alia upon the length of the life of the respondent, the nature of the investment, the extent of other income, the size of the deductions to which he may be entitled and the varying rates of income tax. The problem now is whether and how to apply Taylor v. O'Connor (14) in such circumstances. Of course it cannot be applied by fixing a lump sum that would produce something like $54 a week tax free, nor do I think it can be applied by endeavouring to fix what capital sum would, with interest, produce $54 a week tax free for thirty-five years. To do so would be impossible without making a number of unjustifiable assumptions including those relating to the matters that I have already mentioned, and some assumption as to any and what capital appreciation or depreciation there would be in the assets in which a lump sum would be invested. To essay such a task would make the assessment of damages a computer programme rather than an exercise of judgment for a judge or jury which must, of necessity, be both more and less than a mathematical exercise. That exercise of judgment must be directed towards the assessment of a lump sum fair to both parties, leaving to the respondent himself the task of making the best use of the amount awarded."

I would agree that where damages have been fixed in a lump sum fair to both parties without any particular regard to the present sum necessary to produce a predicated periodical sum for loss of earning capacity, then it would be inappropriate to take account of tax on the income of that sum. However, that is not the way in which damages for loss of earning capacity are most commonly arrived at. Moreover, the assumption underlying the Gourley rule is that a first step in calculation is to decide upon an average periodical loss over the estimated length of time of the incapacity; for it is that loss which Gourley decided to be the net loss after payment of tax. It appears to me that it should in fairness follow from Gourley that the tax payable on the income produced by the lump sum in damages attributable to loss of earning capacity must be taken into account so that the plaintiff will not be worse off. The longer the period in respect of which the present value of the loss must be computed the more important this income factor will be; for there will be a greater income component in the earlier years. It is hardly practicable to draw a line between what is a short term loss of future earning capacity where the computation of both factors is less important and what is a long term loss of such earning capacity where the computation of tax on the income of the lump sum would go a long way to offset the computation of what the tax would have been on lost earnings. I have come to the conclusion that in relation to loss of future earnings the complexities introduced by the Gourley rule outweigh any real advantage achieved by its application. Most of the uncertainties which Menzies J. described in the passage which I have quoted apply as much to an estimate of the tax for which the plaintiff would have been liable on his earnings if they had not been lost to him as to the prediction of the tax which income from investment of the damages would incur; and therefore to essay both tasks - the calculation of probable tax on what would have been earned and the calculation of probable tax on the income from compensation - would, in the words of Menzies J. which I have quoted, make the assessment of such damages a computer programme rather than an exercise of judgment. And in very many cases it would achieve little. Having concluded that Gourley is not strongly based on a conceptual approach I see no advantage in its adoption as a realistic approach to the assessment of damages for loss of future earning capacity. (at p242)

11. Nevertheless, in respect of past loss of earnings, the objections which I have advanced provide no reason why the Gourley rule should not be applied. I bear in mind that in theory all the damages for loss of earning capacity are part of the general damages but the long-standing practice has been to calculate these damages separately and it is with such realities that I find it necessary to deal. The factors which led to the enunciation of the Gourley rule appear to me to be applicable to damages for past loss of earnings, and there are none of the complexities and uncertainties which the rule introduces when it is necessary to set off assumed savings of tax which would have been payable on earnings against the tax which would be payable on the income of the sum awarded as the present value of the loss of earning capacity. Likewise, in a claim for dependency loss, no attempted set-off is necessary. The degree of dependency is determined by the value of the actual benefit to the dependant and this is a value unaffected by tax. In order to compensate a dependant for the value of that which has been lost, it is therefore necessary to ensure that the dependant will have a sum which together with the income therefrom will provide an amount equal to any actual periodical benefit which was previously received. Of necessity this requires that income which goes to provide that benefit be sufficient that after payment of tax the amount of the benefit previously enjoyed will be actually available to the dependant: Taylor v. O'Connor (1971) AC 115 . (at p243)

12. The present case is one of damages for wrongful dismissal and in England the Gourley rule has been applied to such a case. See Parsons v. B.N.M. Laboratories Ltd. (1964) 1 QB 95 . Sellers L.J. dissented, taking the view that the Gourley rule was restricted to the assessment of damages in tort and had no application to the assessment of damages for wrongful dismissal. He said (1964) 1 QB, p 109 :

"Close as the analogy may be between the loss of earnings, either from a contract of service or otherwise, by reason of the negligence of a third party, and the loss of earnings due to breach by a party to the contract which brought about the loss, I am not satisfied that the same considerations apply."

With all respect to the different view of the majority in that case, I consider that there is a significant difference in this respect between damages in tort for personal injury and damages for breach of contract. Conceptually, a loss of earning capacity is a reflection of the injury suffered. A breach of a contract of employment is an anticipatory breach which prevents the employee earning the remuneration payable to him under the contract. The measure of damages is the lost remuneration. It may be reduced by a failure on the part of the dismissed employee to mitigate those damages and thereby a similarity arises between the amount of damages for personal injury and the damages found in the particular case to flow from the breach of contract. But, unless an employer proves a failure to mitigate the damages, the amount of damages will be the loss under the contract and that should be ascertained from the terms of the contract and from the loss naturally and probably arising as a consequence of its breach. (at p244)

13. However, I would place less emphasis upon this conceptual difference than upon the difference in reality between the two classes of case. I can appreciate the approach in Gourley that rather a defendant than a plaintiff should have the benefit of a tax saving which reduces the effective loss. But in the case of breach of contract I cannot see that the same considerations of justice and fairness apply. If there is a benefit it should not go to a defendant who deliberately breaks his contract and who must be taken to be aware of the consequences of that breach. And, if such a defendant should be taken to have regard to a consequence of the breach being that he will be relieved of paying the whole remuneration or other contract price to the extent of the tax saving, all the more reason for the law not offering such a financial inducement to breach of contract. In my opinion the Gourley rule should not be applied in respect of damages for wrongful dismissal even where the loss has become wholly measurable before the date of assessment of the damages. (at p244)

14. A subsidiary matter argued was the entitlement to interest under s. 79A of the Supreme Court Act 1958 (Vict.), as amended. The trial judge awarded interest on the whole of the damages, namely, $45,144.22, from the date of the writ, 4th April 1974, to the date of his judgment, 28th August 1975. The respondent was wrongfully dismissed on 20th December 1973. He was found to be entitled to damages calculated on the basis of loss of emoluments to 30th June 1976, less an amount in respect of the contingency of him otherwise having ceased to earn those emoluments and less a further amount to allow for the fact that part of the damages represented the present value at the date of judgment of moneys which he would have earned after that date if he had not been wrongfully dismissed. Thus part of the damages represented compensation for loss to be incurred after the date of the judgment. No interest should have been awarded in respect of that part of the damages. See Ruby v. Marsh (1975) 132 CLR 642 , per Gibbs, Stephen and Jacobs JJ. See also Cookson v. Knowles (1979) AC 556 . (at p244)

15. The position is further complicated by the fact that the respondent received $19,541 in respect of lost salary shortly before the issue of the writ. The trial judge concluded that the salary in 1974 would have been $24,000 per annum. Therefore the sum paid would substantially cover damages awarded by way of loss of salary up to October 1974. Further, the trial judge assessed loss of benefit by way of use of a car from June 1974 (when the respondent returned the company car) to 30th June 1976 in the sum of $9,094. Therefore the period in respect of which s. 79A interest could be ordered was about one year before the date of judgment. Further, it must be borne in mind that the whole of the loss before judgment had not been incurred at the date of the writ but that it accrued over the period between that date and the date of judgment. This factor should be reflected in the rate of interest allowed, as well as the fact that any amount awarded in lieu of long service leave was in respect of an entitlement which would not have been payable until the end of the period of service. When account is taken of the payment made in early 1974 and the other factors, the damages actually awarded represented losses which can be broadly stated to have been incurred as to half before the date of judgment and as to half thereafter. A broad estimate is all that is required. (at p245)

16. I would therefore reduce the amount of s. 79A interest by one-half to $2,407.66. I would confirm the judgment in favour of the respondent in the sum of $45,144.22. I would vary the order for interest thereon by substituting the sum of $2,407.66 in lieu of the sum of $4,815.32. Subject to that variation, I would dismiss the appeal with costs. (at p245)

MURPHY J. The question is whether an award for damages for wrongful dismissal should be reduced by the amount of income taxation which would have been payable on the plaintiff's lost earnings if he had not been dismissed. (at p245)

2. Before the English case of Gourley v. British Transport Commission (1956) AC 185 , taxation was ignored in assessing the value of lost earnings (or lost earning capacity) and in considering the value of the sum awarded as restitution in personal injury and wrongful dismissal cases. The absence of any reference to the incidence of taxation simplified the assessments. Gourley was an atypical personal injury case. The plaintiff was near the end of his working life and had very high earnings subject to a very high income tax rate. The decision to take taxation into account was justified as avoiding a windfall to the plaintiff. Gourley was uncritically applied in Australia to typical personal injury claims. In Canada, however, the Supreme Court declined to follow Gourley (see Reg. v. Jennings (1966) 57 DLR (2d) 644 ). (at p245)

3. The necessity, if taxation is taken into account, to consider not only what the plaintiff's tax position would have been but what it will be was recognized by Lord Reid in Gourley (1956) AC, at p 215 , but it is not clear whether the plaintiff's post-injury tax position was taken into account; the result of taking taxation into account was agreed between the parties and the calculations were not disclosed. (at p246)

4. To take taxation into account in assessing the value of the losses, but not the value of the sum awarded as restitution, is illogical and unjust. I referred to this in Kaufmann v. Van Rymenant (1975) 49 ALJR 227, at p 229 , and Sharman v. Evans (1977) 138 CLR 563, at p 598 . This is one of the ways in which damages in serious personal injury cases have been underestimated. Another is taking into account the effect of inflation on interest used to compute capital value of lost future earnings but ignoring the effect of inflation in increasing those earnings. (at p246)

5. If the incidence of taxation is considered in the typical case, not only in valuing the lost earnings or earning capacity but also in assessing the value of the sum awarded as restitution for that loss, the windfall argument is exposed as fallacious. The effect would be sometimes to decrease and sometimes to increase the amount which would otherwise have been awarded. When taxation on investment on the capital sum awarded as restitution for lost earnings or capacity is taken into consideration, the present capital value of future earnings cannot be properly assessed on the basis of restoring the gross equivalent of the plaintiff's net loss. Also, in a graduated tax system such as ours, if extra income will be gained from investment of sums awarded for non-economic damage (such as pain and suffering), this would increase the rate of taxation on income from the sum awarded for future lost earnings (or earning capacity) which would require a compensatory increase of the verdict. As well, the effect of income from investment of, for example, the sum provided for future medical and hospital costs would need to be taken into account as it would push taxable income (including that on the sum for future earnings or earning capacity) into a higher tax bracket offset by the extent to which deductions are allowable from taxable income for medical and hospital expenditure. (at p246)

6. It is often fairly easy to assess the effect of taxation on past or current lost earnings. It is not so easy to assess its effect on the earnings of a notionally depleting capital sum intended (with the income on it) to replace future loss of earnings (or earning capacity) and to be exhausted at the end of the plaintiff's estimated pre-injury working life. The difficulty in calculation is compounded in a system of graduated taxation rates if attention is paid to inflation (but not if taxation scales are indexed to inflation) and if earnings from other components of an award (for example, earnings on the amount for non-economic loss) are taken into account. The difficulties are so great that in general the calculation is not attempted. As the windfall argument is unsound and the difficulties in taking post-trial as well as pre-trial taxation into account are so great, the effects of taxation should be left out of consideration in personal injury cases. In my opinion, Gourley's Case should not be followed. (at p247)

7. In wrongful dismissal cases, the loss of earnings is generally over a fairly short period. Because of this, the facts resemble those in Gourley more than those in a typical personal injury case. Wrongful dismissal is by its nature deliberate. In general, the relationship of employment has ended in antagonism. From a social point of view, the financial relations between the parties should be finalized without delay. The introduction of taxation into the calculation of the correct amount to be paid requires investigation of the former employee's tax position. The former employer could justifiably refuse to pay until the former employee's tax position had been investigated. To reach an accurate assessment the inquiry often would have to embrace other income, allowable deductions and other personal details. This would encourage delay and add indignity to the injury of wrongful dismissal. It would introduce the anomaly that while an employer is not entitled to know an employee's tax position, one who wrongfully dismisses an employee would reasonably be entitled to know it. (at p247)

8. My conclusion is that taxation should not be taken into account in assessing damages for wrongful dismissal. In this respect, the Supreme Court's decision was correct. The respondent conceded that McInerney J.'s award on interest should be varied; apart from giving effect to that, the appeal should be dismissed. (at p247)

1978, December 14.
The following judgments were delivered.
BARWICK C.J. It is desirable in my opinion that the Court give judgment in these matters forthwith. Accordingly, it must, of necessity, express its reasons with brevity and without elaboration. (at p251)

2. In my opinion the applicant, Briers, ought not to succeed upon his motion or as plaintiff in a suit against the respondent to the motion for a declaration and an injunction to restrain the presentation of a petition to Her Majesty in Council for special leave to appeal. (at p251)

3. I am prepared to accept that, upon the reasoning of their Lordships in The Commonwealth v. Bank of New South Wales (32), special leave if sought by the respondent would be a matter in which there was a decision of this Court that involves the application or interpretation of a law made by the Parliament and that consequently it ought not to be asked. (at p251)

4. The draftsman in s. 3 of the Privy Council (Limitation of Appeals) Act, 1968-1973, evidently accepted that reasoning and phrased s. 3 accordingly. Rather than follow the language of s. 74 of the Constitution the draftsman took the words used in that reasoning, namely "involves" in s. 3 (1) (b). All policy reasons which operated to persuade the adoption of that reasoning are in my opinion equally cogent and compelling in the construction of s. 3, a section passed as part of the law made under the authority of the third paragraph of s. 74. (at p251)

5. But to accept that view does not mean that either motion or suit should succeed. (at p251)

6. In my opinion there are considerable procedural difficulties in the way of the grant of the motion and of the success of the suit. But, in any case, in my opinion the Court should neither make a declaration nor grant an injunction as asked in these matters. (at p251)

7. Accordingly, in my opinion both motion and the suit ought to be dismissed with costs. (at p251)

GIBBS J. I agree. (at p251)

STEPHEN J. I agree. (at p251)

MASON J. I agree. (at p251)

JACOBS J. I agree but I would not make the proposed order for costs; I would make no order for costs of the motion. (at p251)

MURPHY J. I agree with Jacobs J. (at p251)

AICKIN J. I agree with the reasons given by the Chief Justice and with the order as proposed by him. (at p251)

Orders

Motion and suit dismissed with costs.