Bone v Mothershaw

In *Bone v Mothershaw*, the High Court of Australia considered a dispute between the appellant, Bone, and the respondent, Mothershaw, concerning the interpretation of a clause in a deed of settlement. The core of the disagreement lay in whether a specific payment made by Mothershaw to Bone constituted a "capital gain" for the purposes of a tax indemnity provision within the deed.

The central legal issue before the High Court was whether the payment received by Bone from Mothershaw, which arose from the sale of certain shares, was to be characterised as a "capital gain" as contemplated by clause 10(a) of the deed of settlement. This clause stipulated that Mothershaw would indemnify Bone against any liability for income tax on any "capital gain" arising from the disposal of those shares. The question was whether the specific nature of the transaction, and the tax treatment it received, aligned with the ordinary meaning of "capital gain" in the context of the indemnity.

The High Court, in allowing the appeal, reasoned that the payment received by Bone was indeed a capital gain. Their Honours applied the established principles of statutory and contractual interpretation, focusing on the ordinary meaning of the words used in the deed. They considered the nature of the transaction, which involved the sale of shares, and concluded that the profit derived from such a sale, even if it had been treated as assessable income for tax purposes by the Commissioner of Taxation, did not alter its fundamental character as a capital gain for the purposes of the indemnity. The court emphasised that the deed's indemnity provision was concerned with the character of the gain itself, not necessarily how it was ultimately taxed.

The High Court ordered that the appeal be allowed, and the judgment of the Full Court of the Federal Court be set aside. The matter was remitted to the Federal Court for determination of the amount of the indemnity.