Todorovic v Waller

[1981] HCA 72

HIGH COURT OF AUSTRALIA

Gibbs C.J., Stephen, Mason, Murphy, Aickin, Wilson and Brennan JJ.

TODOROVIC v. WALLER - JETSON v. HANKIN

(1981) 150 CLR 402

16 December 1981

Damages

Damages—Calculation—Personal injuries—Loss of earning capacity—Assessment of present value of future loss—Allowance for inflation, tax and changes in wages—Discount rate.

Decisions

December 16.
The following written judgments were delivered: -
GIBBS C.J. AND WILSON J. These two appeals require the Court to consider the manner in which courts in Australia should approach the everyday task of assessing damages for personal injuries in cases in which the plaintiff, by reason of his injuries, has suffered a loss or impairment of his capacity to earn wages in the future, or will require in the future to be supplied with goods and services for which he will have to pay. (at p409)

2. The first appeal, Todorovic v. Waller is brought from the Court of Appeal of New South Wales. In that case the plaintiff (the present respondent), a man aged thirty-five at the date of the trial, had suffered brain damage which rendered him virtually unemployable. The learned trial judge, who decided the case after the decision in Atlas Tiles Ltd. v. Briers (1978) 145 CLR 625 but before Cullen v. Trappell (1980) 146 CLR 1 , took gross rather than net figures in assessing the damages attributable to the respondent's loss of earning capacity. Also, in the assessment of damages for the loss of certain superannuation benefits, the learned trial judge received and applied the evidence of an actuary who had worked on the basis that each year the respondent's salary would increase by annual increments of about 7 per cent - that assumption appears to have been made as the result of advice received from "a panel of economists". The Court of Appeal held that the learned trial judge fell into error in these two respects, and that it was accordingly necessary for them to make a reassessment of the award. In so doing, they held, after a consideration of Barrell Insurances Pty. Ltd. v. Pennant Hills Restaurants Pty. Ltd. (1981) 145 CLR 625 , that future inflation is to be disregarded in estimating the level at which future expenditure and future wage losses will be incurred, but that it is proper to take it into account in determining the rate at which a present lump sum assessed as compensation for such future expenditure and future losses should be discounted, and that the fairest and simplest practice for courts to follow in achieving this end is to award compensation for future losses and future outgoings on an undiscounted footing. They further held that the principle of full compensation requires that notice should be taken of the tax attracted by the investment income earned by the lump sum. They went on to say that if a zero discount rate were adopted, that would be inconsistent with making any allowance for tax on notional income, and since in the present case no attempt was made to introduce evidence showing how an allowance for actual tax on actual income should be made, tax liability should be disregarded. Indeed they said that until the High Court decides to the contrary the safest practice for courts adopting a zero rate of discount is to disregard entirely the liability of the plaintiff to be assessed to tax on the invested lump sum. The application by the Court of Appeal of these principles resulted in a reduction of the total damages from $476,118 to $461,343, and the respondent's appeal was accordingly allowed. (at p410)

3. The second appeal, Jetson v. Hankin, was brought from the Full Court of the Supreme Court of Victoria. The plaintiff in this action is the present appellant, who was aged thirty-four at the time of the trial. He also had suffered brain damage and was unlikely to obtain further gainful employment. The action was tried by a jury, which assessed damages at $1,100,000, reduced to $990,000 by reason of a finding that the appellant's responsibility for the accident was 10 per cent. The jury had before them evidence as to the effect of inflation on interest rates, the relevance of which will later be discussed. The learned trial judge left the matter to the jury on the basis that it was open to them to select a primary discount rate of between 4 to 5 per cent and 2 per cent, and on the further basis that it was open to them, after allowing for notional income tax, to find that there should be no discount for present payment. All of the learned judges of the Full Court (McInerney, Anderson and Jenkinson JJ.) held that they should follow the earlier decision of that Court in Barker and O'Sullivan v. Neilsen 31 March 1981; Unreported. where it was held (1) that unless there is some compelling reason in a particular case for following a different course, as a matter of practice, until the High Court or the Full Court otherwise decides, a discount rate of 4 per cent should be applied, and (2) that allowance may be made in appropriate cases for the incidence of taxation on notional income, but that in so doing "a broad brush approach" should be used. McInerney and Anderson JJ. held that the largest amount that could, in conformity with that decision, properly be awarded in respect of loss of earning capacity and future care for the appellant fell so short of the amount of $1,100,000 as to leave an unsupportably high allowance for pain and suffering and loss of amenities of life, and that the verdict was unreasonably large. Jenkinson J. said that he could reach the same conclusion even if the ruling in Barker and O'Sullivan v. Neilsen were disregarded. The Court ordered a new trial limited as to damages. (at p411)

4. The questions of principle that are raised by these appeals are whether, in the assessment of damages for loss of earning capacity, and for the cost of goods and services which the plaintiff will need in the future because of his injury, it is proper to make allowance for future inflation, and if so how this is to be done and whether evidence is admissible on the issue. Those questions were not settled by Barrell Insurances. In the first place, that was a very different case from an ordinary personal injuries claim. Moreover, it cannot be said with confidence that any particular principle commanded the assent of a majority of the Court. It must however be said that the Court of Appeal were wrong in thinking that on any view there was a majority in that case in favour of the general principle that there should be no discounting to take account of the present receipt of money due in the future or to defray expenses to be incurred in future. Clearly Barwick C.J. and Gibbs, Mason and Wilson JJ. considered that some discounting was necessary. However, it would be of little assistance for this Court now to consider what ought to be held to be the ratio decidendi of Barrell Insurances. It would be more profitable to decide, as a matter of principle, the questions mentioned, which arise in a very large number of actions for damages for personal injuries. (at p411)

5. At the outset it is necessary to refer to the general principles which govern the assessment of damages, and the accepted method by which those principles are applied in Australia. We are not concerned with damages for pain and suffering and loss of amenities of life, but with damages for financial loss likely to be sustained in the future. There are two principal elements - the loss or diminution of earning capacity in so far as it is likely to cause financial loss in the future, and the need, caused by the injuries, for services (such as medical treatment or nursing or domestic care) or goods (such as appliances designed to assist the disabled) in the future. In O'Brien v. McKean (1968) 118 CLR 540 Barwick C.J. drew a distinction between these two aspects of compensation, although in the end it did not affect the result which he reached (1968) 118 CLR, at pp 546, 548-551 . Windeyer J. (1968) 118 CLR, at p 558 also recognized that there was a distinction, although not one of practical importance. From the point of view of the matters now under consideration there is no material difference between these two elements, and much of the discussion that follows will relate to both. (at p412)

6. Certain fundamental principles are so well established that it is unnecessary to cite authorities in support of them. In the first place, a plaintiff who has been injured by the negligence of the defendant should be awarded such a sum of money as will, as nearly as possible, put him in the same position as if he had not sustained the injuries. Secondly, damages for one cause of action must be recovered once and forever, and (in the absence of any statutory exception) must be awarded as a lump sum; the court cannot order a defendant to make periodic payments to the plaintiff. Thirdly, the court has no concern with the manner in which the plaintiff uses the sum awarded to him; the plaintiff is free to do what he likes with it. Fourthly, the burden lies on the plaintiff to prove the injury or loss for which he seeks damages. (at p412)

7. Although the aim of the court in awarding damages is to make good to the plaintiff, so far as money can do, the loss which he has suffered, it is obvious that it is impossible to assess damages for pain and suffering and loss of amenities of life by any process of arithmetical calculation. It may be less obvious, but is no less certain, that the assessment of damages for future pecuniary loss resulting from personal injuries can never be a mere matter of mathematics. It is true that as the assessment of damages has become more sophisticated, calculations are made in an attempt to achieve greater precision. Such calculations may sometimes give a false appearance of accuracy. Some of the figures on which they are based are the result of estimate or speculation. In the case of loss of earning capacity it is necessary to compare what the plaintiff might have earned if he had not suffered the injury with what he is likely to earn in his injured condition. In many cases this means that the court has to engage in "a double exercise in the art of prophesying": Paul v. Rendell (1981) 55 ALJR, at p 372; 34 ALR, at p 571 . Of course in some cases of serious injury it will be possible to say that the plaintiff is probably capable of earning nothing in the future. However, in no case can there be any solid basis on which to determine what the plaintiff would have earned if he had not received the injuries in respect of which he sues. Actuarial tables will show the average number of years which will be lived after a certain age by those alive at that age, but will not show that it is probable that the plaintiff, even if in good health, would have conformed to the average. No evidence can possibly indicate whether the plaintiff, had he not been injured, would have remained in good health, and continued to be employed at any particular rate of earnings. For these reasons, damages for financial loss likely to result from personal injury "can only be an estimate, often a very rough estimate, of the present value of his prospective loss": British Transport Commission v. Gourley (1956) AC 185, at p 212 , per Lord Reid. Ultimately the process must always be one of judgment rather than calculation. (at p413)

8. The difficulty inherent in the assessment of damages provides no reason for the courts to shirk the task of arriving at the estimate most likely to provide fair and reasonable compensation. But it may provide a reason for approaching with some caution a proposal to overturn an established method of assessment, in an attempt to achieve an accuracy which it is not humanly possible to attain. (at p413)

9. Before one turns to consider the critical questions that arise in the case, it is convenient to discuss briefly the purpose and method of discounting in the assessment of damages, putting aside the effect of inflation. In Nance v. British Columbia Electric Railway Co. Ltd. (1951) AC 601 , a case under legislation corresponding to the Fatal Accidents Act, Viscount Simon (1951) AC, at p 615 pointed out that the sum to be awarded is not simply the annual loss multiplied by the number of years over which the loss will be suffered, "because that sum is a sum spread over a period of years and must be discounted so as to arrive at its equivalent in the form of a lump sum payable at his death as damages." The reason for discounting was explained by the Supreme Court of the United States in Chesapeake &Ohio Railway Co. v. Kelly (1916) 241 US 485, at p 489 (60 Law Ed 1117, at p 1122) , as follows:

"So far as a verdict is based upon the deprivation of future benefits, it will afford more than compensation if it be made up by aggregating the benefits without taking account of the earning power of the money that is presently to be awarded. It is self-evident that a given sum of money in hand is worth more than the like sum of money payable in the future."

Similarly, in a case of damages for personal injuries, the relevant loss for which the plaintiff claims damages, whether arising from diminished earning capacity, or from the need to make expenditure in providing care and comfort in the future, is a loss which will be suffered in the future - part of it often in the distant future. The task of the court is to find "a present equivalent for all future pecuniary loss", to employ words as apt now as when they were used in McDade v. Hoskins (1892) 18 VLR 417, at p 421 . The fact that a lump sum is being given instead of various sums over the years "does, of course, in every case demand that the product of the initial multiplication must be discounted at some assumed rate of interest to ascertain the present value of the notional future earnings" : Bresatz v. Przibilla (1962) 108 CLR 541, at p 543 . If the award is not discounted, the plaintiff will necessarily be over-compensated. The process of discounting can only be dispensed with if some other consideration completely offsets the advantage that a plaintiff gains by receiving at the date of judgment a sum that if he had not been injured would have been paid to him at some time in the future, or a sum that he will be required to expend at some time in the future. (at p414)

10. Different methods of discounting are used in different parts of the world, but they are of course intended to achieve the same result. The method that has been adopted in countless cases in Australia is to use tables, prepared by actuaries, which show the present value of a given amount, (e.g. a dollar) of income receivable periodically over a given number of years. The tables reveal the sum which, if invested at the discount rate, would suffice to enable periodic drawings of the given amount to be made from income and capital over the given number of years, so that at the end of that period both capital and income would be exhausted. Obviously the assumption is that the drawings will at first be made mainly out of income, but that there will be increasing resort to capital as time goes on. (at p414)

11. There has been little judicial consideration of the rate at which the discount should be made, assuming that inflation is being ignored. Obviously the rate should be one obtainable from investments at the date on which the award is made. The question is what notional investments are contemplated - must they be gilt-edged, or is it enough that they should be reasonably safe? Professor Street, in Principles of the Law of Damages (1962), p. 116, submitted that "the test should be the yield obtainable from safe easily realisable investments at the time of receipt of the judgment damages". Lord Diplock, in Cookson v. Knowles (1979) AC 556, at p 570 , suggested that fixed interest bearing securities form the relevant type of investment to be assumed. In Canada, the starting point appears to be "the reasonable rate of return for high-grade investments of long-term duration": Lewis v. Todd (1980) 115 DLR (3d) 257, at p 270 . In the United States, in Chesapeake &Ohio Railway Co. v. Kelly (1916) 241 US, at pp 490-491 (60 Law Ed, at p 1122) , the Supreme Court held that the discount should not be at the legal rate of interest, i.e. the maximum rate fixed by law, since such rate might not be obtainable on investments on safe securities, at least without the exercise of financial experience and skill, and went on to say:

"This, however, is a matter that ordinarily may be adjusted by scaling the rate of interest to be adopted in computing the present value of the future benefits; it being a matter of common knowledge that, as a rule, the best and safest investments, and those which require the least care, yield only a moderate return."

An American writer has suggested that "the test is what a normal person of reasonable experience and competence might be expected to earn without undue risk of the principal": Jacob A. Stein, Damages and Recovery (1972), p. 336 (n. 11). Such authorities as there are seem opposed to the view that the discount rate is that which will be yielded by investments that are completely free of risk. It would seem to accord with the general approach of the common law that the rate should be that produced by reasonably safe investments - such investments as a prudent man in the position of the plaintiff, very much concerned to preserve his capital, but not over cautious, would make - such investments as loans issued by public authorities such as electricity commissions and water boards, or debentures issued by large well-established industrial companies. At the present time it would not seem unreasonable to suppose that an interest rate of at least 15 per cent would be obtainable on such securities. (at p415)

12. In order to do justice to the plaintiff, it has been thought necessary, when discounting, to take account of the notional tax that would be payable on the notional issue of the invested fund. This was established in Cullen v. Trappell where the earlier authorities are cited. In that case it was said that the question whether the notional tax should be taken into account "depends less on the general principles governing the assessment of damages, than on the logical requirements of a particular method adopted to assess them" (1980) 146 CLR, at p 11 . The view which the Court accepted was that "it is necessary, in order that the method followed should be consistently applied, that regard should be had to the notional tax on the assumed income of the amount awarded for the future economic loss" (1980) 146 CLR, at p 15 . The trial judge in that case had applied the 6 per cent tables, and it is clear from the judgment (1980) 146 CLR, at pp 12-16 that "the assumed income" was that produced by the investment of the fund at 6 per cent - no other rate was in contemplation, and the effect of inflation was not discussed. It will be necessary to return to this question, when considering to what extent inflation ought to be taken into account. (at p416)

13. Against this background, it is now possible to consider the question whether allowance should be made for inflation, and if so, in what manner. Before an attempt is made to consider the matter from the point of view of principle, it is convenient to see how it is dealt with by the authorities. In O'Brien v. McKean (1968) 118 CLR 540 it was held by this Court that the Full Court of the Supreme Court of Queensland was not in error in setting aside the decision of a trial judge who had admitted evidence as to the future decline in the value of money and had allowed for future inflation in making an award of damages in respect of loss of future earning capacity and in respect of the necessity to make expenditure in the future. The decision, which was reached unanimously by five Justices, is clear authority for the proposition that direct evidence of inflation is not admissible on this issue. In England, after the expression of some conflicting views in Taylor v. O'Connor (1971) AC 115, at pp 129-130, 138, 142-143 , it was held by the House of Lords in Cookson v. Knowles (1979) AC 556 (a case of fatal accident) and Lim Poh Choo v. Camden and Islington Area Health Authority (1980) AC 174 (a case of personal injury) that, except in exceptional cases, no allowance should be made for the risk of future inflation in the assessment of damages for future loss. However, in Cookson v. Knowles their Lordships expressly recognized what was not mentioned in O'Brien v. McKean, that in fact some allowance for inflation is made by the adoption of a discount rate lower than that which would be obtainable on the market from investment in appropriate securities. In Cookson v. Knowles Lord Diplock said (1979) AC, at pp 571-572 :

"In times of stable currency the multipliers that were used by judges were appropriate to interest rates of 4 per cent to 5 per cent whether the judges using them were conscious of this or not . . . Inflation is taken care of in a rough and ready way by the higher rates of interest obtainable as one of the consequences of it and no other practical basis of calculation has been suggested that is capable of dealing with so conjectural a factor with greater precision."

(See also per Lord Fraser (1979) AC, at p 577 .) (at p417)

14. In Australia also, at least since the 1950s, the courts have consistently made a modest allowance for inflation by adopting comparatively low discount rates. In Saul v. Menon (1980) 2 NSWLR 314, at p 327 , Moffitt A.C.J. said that between the years 1956 and 1964 the rates were 5 per cent or less, and, as he rightly pointed out, it was significant that when the Australian Law Journal first published any tables, in 1959, it published only the 5 per cent table (vol. 33, p. 28). The courts do not appear to have discussed the reason for taking any particular rate, and there is inadequate evidence to enable it to be said that they had deliberately chosen interest rates applicable to times of stable currency. On the contrary, the note published in the Australian Law Journal with the first tables suggests that the 5 per cent represented the yield obtainable from trustee investments at that time. Moreover, as Hutley J.A. pointed out in Saul v. Menon (1980) 2 NSWLR, at pp 339-340 , interest rates offered in Australia have historically been higher than those available in England, and the figures which he gives appear to lend support to his view that there would be just as much reason for choosing 6 per cent as 5 per cent as the rate in a period of stable currency. Subsequently, as interest rates showed a noticeable increase, the courts began to use higher discount rates. The 6 per cent tables were published in the Australian Law Journal in 1966 (vol. 40, p. 243) and the 7 per cent and 8 per cent tables in 1971 (vol. 45, p. 159). We have been informed by counsel in Todorovic v. Waller that by the time Barrell Insurances came to be decided the discount rates applied in the various States tended to be as follows: Victoria 6 to 9 per cent, Queensland 8 per cent, Western Australia 6 to 6 1/2 per cent, South Australia 5 to 6 per cent and Tasmania 7 to 8 per cent. Of course this is an indication only of the range; there were variations in individual cases. In New South Wales, however, it was perceived that it was erroneous to increase the discount rate in line with rising interest rates. In Lindsley v. Hawkins (1973) 2 NSWLR 581, at p 586 , Jacobs P. said:

"The consequence of the rule that one should not speculate on future inflationary trends is that, to avoid unfairness, one should not take account of present high interest rates which are a symptom of the instability which inflationary trends bring."

In that case the trial judge had taken a discount rate of 7 per cent, and the Court of Appeal, in allowing an appeal, held that the rate to be adopted was 6 per cent. An appeal to this Court was allowed: Hawkins v. Lindsley (1974) 49 ALJR 5 . The judgment of Gibbs, Stephen and Mason JJ. (in which Menzies J. agreed although his death prevented him from taking part in its delivery) contains the following passage (1974) 49 ALJR, at p 8

"In our opinion it would be an error for the Court of Appeal to adopt as a rule of its own that if a trial judge should adopt a rate of interest in excess of six per cent his judgment is automatically to be set aside as erroneous. This Court is concerned with the judgments of all the courts in Australia and we are not prepared to accept any arbitrary ruling regarding interest rates as one having general application. It is to be borne in mind, as the learned trial judge said, that the ultimate task as the law stands is to assess a lump sum, and if it be that the sum fixed in any particular case is one within the limits of a sound discretion then it matters not that in making his assessment a judge had regard to a rate of interest which other judges may for the time being consider is one per cent too high. It is not possible either by law or by mathematics to determine a formula according to which the rate of interest which may be used at a particular time is to be determined. Could that be done there would be some basis for judging whether or not there had been error in choosing a particular rate in any particular case. Without it, however, there is no standard for accurately fixing an interest rate although, of course, the rate actually chosen in a particular case could be palpably wrong."

After further discussion of the question in Beneke v. Franklin (1975) 1 NSWLR 571 , the Court of Appeal held in Saul v. Menon (1980) 2 NSWLR 314 that it was wrong to select a higher discount rate under the influence of high interest rates, if the latter were the product of inflation. In that case the court selected 5 per cent, which seems to have been generally used thereafter in New South Wales until Barrell Insurances was decided. (at p418)

15. At the time Barrell Insurances was decided the state of the law, having regard to authority and practice, might have been thought to be settled as follows: (1) in the assessment of damages for personal injuries, inflation could not directly be taken into account, and evidence of predictions of future inflation was inadmissible. (2) Some allowance for future inflation was made by taking a discount rate lower than that available from safe investments. The trial judge had a discretion as to the rate selected. The rate originally taken, 5 per cent or sometimes less, had crept up without adequate consideration being given to the justification for the increase. (at p419)

16. Three reasons were suggested by Lord Scarman in Lim Poh Choo v. Camden and Islington Area Health Authority (1980) AC, at p 193 , in favour of the view that inflation should be disregarded - first, that it is pure speculation whether inflation will continue at present, or higher rates or disappear; secondly, that inflation is best left to be dealt with by investment policy; and thirdly, that "it is inherent in a system of compensation by way of a lump sum immediately payable, and, I would think, just, that the sum be calculated at current money values, leaving the recipient in the same position as others, who have to rely on capital for their support to face the future." With respect to the third suggested reason, it may be said that the true comparison is not between the plaintiff and a person who has to rely on capital for his support to face the future, but with a person who was in the same position as the plaintiff but has not suffered his injuries. However, there is much force in the first of Lord Scarman's reasons. It is true that present indications suggest that inflation will continue into the foreseeable future, but for how long and at what rate it will continue is no more than conjecture, and the rate at which it will increase during any particular year a decade or so hence cannot even be conjectured. Evidence directed to these questions would be purely speculative, and would prolong and complicate trials for no advantage. Moreover, even if the rate of inflation could safely be predicted, it is not in itself relevant. No principle of compensation entitles a plaintiff to be protected generally from the effects of inflation. The only relevance of inflation is that it will be likely to increase the earnings that might have been made had the plaintiff not been injured, and the cost of the goods and services that his injuries have made necessary for his future care: cf. Cookson v. Knowles (1979) AC, at pp 574, 576 . Wages and costs will of course rise with inflation, but not necessarily at the same rate, and this introduces another element of speculation into the topic. Of course, it is rightly said that the courts take into account matters equally speculative when they have regard to the contingencies of life. However, evidence cannot be given to show how a plaintiff might have been affected by contingencies not presently foreseen - for example, to show whether a healthy plaintiff might have been disabled by some illness or accident in no way related to his present state of health. Such evidence as to future contingencies, like evidence as to what the inflation rate will be a decade or so in the future, is no more than unverifiable surmise and inadmissible. (at p420)

17. Since this Court is now called on to consider the principles on which courts should in future proceed in the assessment of damages for personal injuries, it may be instructive to consider the choices that are open if a new method of assessment were to be approved. One convenient course is to look at the various ways in which the courts in the different jurisdictions of the United States have approached the problem. The American authorities are collected and clearly analysed in an article by Thomas E. Malone: "Considering Inflation in Calculating Lost Future Earnings", Washburn Law Journal, vol. 18 (1979), p. 499. At least four different rules are currently applied in different jurisdictions within the United States: (1) inflation is ignored completely as being too speculative for consideration; (2) evidence of future inflationary trends is rejected, but the court takes inflation into account in a general and undefined way; (3) evidence of future inflationary trends is admitted, and is used in one of two ways - (i) the lost earnings are compounded by the inflation rate, and then discounted to present value, or (ii) the inflation rate is subtracted from the discount rate and the discounting is effected at the adjusted rate (this is the method used also in Canada - see Andrews v. Grand &Toy Alberta Ltd. (1978) 83 DLR (3d) 452 and Lewis v. Todd (1980) 115 DLR (3d) 257 ); (4) it is presumed that the inflation rate will be equal to the discount rate, and the award will not be discounted. The last-mentioned rule, which is of course that which the Supreme Court of New South Wales has applied in the present case, has been approved by the Supreme Court of Alaska, but has been rejected by most other courts in the United States. (at p420)

18. We have already given reasons for adhering to the settled doctrine which requires the Court to reject evidence of inflation. Such evidence would be purely speculative, it would tend to prolong trials, and would introduce an additional element of uncertainty into awards. The only practicable alternative, if inflation is to be considered, is by taking it into account in fixing the discount rate. In the absence of evidence, that can only be done by an intuitive recognition that the chosen discount rate bears a just relation to the impact of inflation. Courts can of course take judicial notice of the way in which rates of interest, and the rate of inflation, have moved in the past, in so far as that is commonly and certainly known. In Holland v. Jones (1917) 23 CLR 149, at p 153 , Isaacs J. went so far as to say that a judge is justified in taking judicial notice of a fact, only if he is "fully satisfied of the fact" and that he "must be cautious to see that no reasonable doubt exists". We regard it as impossible to say that it is commonly and certainly known that rates of interest do no more than match the current inflation rate or that the real interest rate is zero. No published statistics showing the position in Australia, authentic enough to warrant judicial notice being taken of them, have been brought to the notice of the Court which would support the view that there is no real interest rate in Australia. In a number of cases in the United States and Canada, where evidence has been called on the issue, that conclusion has been rejected. Equally, it is impossible to take judicial notice of the extent to which interest rates include an inflationary element - in other words, as to what is the real interest rate. In truth the Court is forced to make a judicial guess (to use Lord Diplock's words in Paul v. Rendell (1981) 55 ALJR, at p 376; 34 ALR, at p 578 ) as to the difference between prevailing interest rates on safe investments and the rate of inflation. (at p421)

19. In deciding upon the ultimate rate of discount, it becomes important to decide on the manner in which notional tax is to be taken into account. The question is whether the notional tax is that which would be payable on the income from a fund invested at the discount rate, or that payable on income at the rate at which the plaintiff might in fact invest the damages when he got them, if he wished to do so. In Cullen v. Trappell, where this Court accepted that tax on the notional income from the assumed fund should be taken into account, it was said (1980) 146 CLR, at p 13 that there is "no justification for using a method of an actuarial or mathematical kind in assessing damages, without making the allowances that the method itself requires in order to give the correct result". In discounting, as Windeyer J. said in Bresatz v. Przibilla (1962) 108 CLR, at p 543 , nothing turns on the individual; the discounting is "a mere process of arithmetic applicable to all cases". The sum produced by the application of the tables is the sum which, invested at the discount rate, will provide the requisite weekly amounts for the requisite period. The notional income will be derived at 6 per cent, if, as in Cullen v. Trappell, the 6 per cent tables were taken. It is that notional income that is assumed to be subject to tax. It is perfectly true that it is highly likely, or even certain, that the plaintiff will not invest his damages in the manner which the calculation postulates, but the Court is not concerned with what the plaintiff would or might do with his damages. The need to take tax into account is a logical consequence of the method adopted, which assumes that the fund is invested at the discount rate. Lord Diplock recognized this in Paul v. Rendell when he said (1981) 55 ALJR, at p 375; 34 ALR, at p 576 :

"Rule of thumb' may be an apt description of the Australian practice of using actuarial tables in order to produce a figure to use as a starting point for determining what is a suitable capital sum to compensate a plaintiff for future economic loss: but in their Lordships' view, if this course is adopted one must follow the logic of the method of calculation to the end, or else as a guide post it will point the wrong way. That logic requires that if the pre-accident earnings used for the purpose of calculation are net earnings after deduction of tax, the notional income from the notional investment needed to produce the notional annuity should also be treated as subject to income tax on the interest element involved, and the notional income left after deduction of that tax should alone be treated as available to replace the pre-accident net earnings."

"The notional income from the notional investment needed to produce the notional annuity" of which Lord Diplock spoke, like "the assumed income" referred to in Cullen v. Trappell (1980) 146 CLR, at p 15 , can only mean the income taken as the basis of the calculation, namely the income produced by investment of the assumed fund at the discount rate. The method of discounting has nothing to do with inflation. Of course the discount rate may be adjusted to take account of inflation, but once a rate is selected the logic of the method requires it to be assumed that income at that rate will be received and that tax will be payable on it. Thus if no discount is made there will be no allowance for tax, for the reason that it is not assumed that the fund will produced income; the fund, unaugmented by income, will provide sufficient compensation. If it were not for the need to find the present value of a future loss, no assumption would be made that the lump sum would be invested, and although it is possible to say that if the plaintiff decided to invest he could, with prudent investments, obtain a particular rate, it is impossible to say that a particular plaintiff would or should invest the sum received by way of damages at that rate; he may quite reasonably decide not to invest in income producing securities, and in any case it is not for the court to say whether it is reasonable or unreasonable for him to apply his money in a particular way. (at p422)

20. If the notional tax were taken on the income which the plaintiff might derive by investing his damages at current rates, an anomalous result would follow. The higher the rate currently obtainable on reasonably safe investments, the more the plaintiff benefits when a conventionally low discount rate is taken. Yet the higher that rate, the more the ultimate discount rate would have to be reduced for tax, so that the plaintiff would receive a double benefit. This unlikely consequence shows one practical disadvantage of regarding the notional income as gained at current rates, but the true answer to the suggestion that it should be so regarded is that the only necessity to consider tax arises as a logical consequence of the method of discounting adopted, and that method does not at any step require consideration of current rates. (at p423)

21. The necessity to consider the effect of notional tax introduces a further element of speculation into calculations which, to cite again from Lord Diplock's judgment in Paul v. Rendell (1981) 55 ALJR, at p 377; 34 ALR, at p 580 , are already "far removed from all reality". It is quite impossible to know, or even to guess, what the tax scales, and the allowable rebates and deductions, will be even a few years hence. The actuary in Jetson v. Hankin, in calculating the effective net discount rate that should be used to take tax into account, assumed that the interest earned would be subject to tax at current tax scales - i.e., that the tax laws will remain unaltered. It needs little knowledge of fiscal history to know that it cannot be assumed that taxing statutes will be as the laws of the Medes and Persians. No assumption can safely be made as to what the tax scales will be in the near future, still less a decade hence. For these reasons, notional tax can be taken into account only in the broadest way, by making an adjustment to the discount rate, and it is impossible to make even a pretence of accuracy in doing so. Therefore, despite what was said in Cullen v. Trappell (1980) 146 CLR, at p 15 it seems necessary to ignore the existence of any other income to which the plaintiff may be entitled. (at p423)

22. In strictness perhaps this Court should not declare the rate at which discounts should be effected, but should leave that to the discretion of the courts of trial, as was done in Hawkins v. Lindsley (1974) 49 ALJR 5 . However, it is most desirable that awards of damages should be predictable, so that settlements may be facilitated, and the task of the courts eased. Moreover, while general economic circumstances remain as they are, there is no compelling reason why one judge should select a discount rate different from that selected by another. In the interest of securing uniformity throughout Australia this Court should therefore do what it has held that a Supreme Court of one State may not do, and that is to make an arbitrary ruling regarding interest rates of general application. (at p423)

23. We consider that in future the courts in Australia, in States where the question is not governed by statute, should, in assessing damages, arrive at the present value of a future loss by discounting at a fixed rate which will be applied in all cases and which will in itself reflect the effect of notional tax on notional income from the invested fund. To take this course may seem to involve some sacrifice of accuracy in the interests of predictability, but the whole process involves so much speculation that it is impossible to pretend to accuracy. In fixing the discount rate, the fact that for so long the rates applied by the courts in Australia have been at a level of 5 per cent and above should not be disregarded. Some downward adjustment is necessary to take account of notional tax. The actuaries' tables show that if the assumption is, as it must be, that the income is earned at the discount rate the necessary adjustment is quite small, particularly when the assumed income is within the range within which most employees' incomes fall in Australia. Now that the effect of inflation has become more apparent, it seems right to make a further moderate downward adjustment to the rate. Our own choice would be to adopt a discount rate of 4 per cent, but all that we have said indicates how arbitrary any choice must be and for that reason it is necessary for individual members of the Court to adjust their views in the interests of achieving a final and authoritative decision. We therefore concur in the view, to which we understand a majority of the Court is prepared to subscribe, that until this Court otherwise decides, a discount rate of 3 per cent should in future be applied and that no further allowance should be made for notional tax. (at p424)

24. Our discussion of the questions involved indicates that the law relating to the assessment of damages for personal injury is far from satisfactory. However, any decision as to the way in which the law should be reformed depends on views as to social policy which can be formed only by the legislatures. (at p424)

25. It is now necessary to return to the facts of the two appeals before the Court. Clearly the Full Court of Victoria in Jetson v. Hankin was right in ordering a new trial limited to damages. On a new trial, the judge will of course direct the jury in accordance with the judgment of this Court. We were asked by counsel for the appellant to reassess the damages for ourselves if we considered that the verdict of the jury was too large, and counsel for the respondent did not oppose that course. We appreciate counsels' proper wish to save further costs, but regret that it is impossible to accede to their request. The jury assessed the total damages of the plaintiff (the present appellant) and of course did not attribute any part of the total to pain and suffering and loss of amenities of life. Although we could calculate for ourselves the amount that should be awarded for economic loss, it would not be right for us, in a case of this kind, to attempt to fix the damages for non-economic loss, when we have not seen the witnesses and no sum in respect of those damages has been fixed in the court below. The order for a new trial on the issue of damages should be affirmed. (at p425)

26. In Todorovic v. Waller the Court of Appeal fixed the damages as follows:
Loss to date of trial $31,596
Loss of earning capacity $275,000 Loss of superannuation benefits $90,747 Pain and suffering, loss of amenities etc. $50,000 --------------

Total $447,343

To this was added interest which amounted to $14,000. (at p425)

27. We are concerned only with the damages awarded in respect of loss of earning capacity and loss of superannuation benefits. When special leave to appeal was granted, the appeal was limited to questions of principle only. It is therefore unnecessary for us to review the evidence in any detail. We may accept as correct, without further examination, the facts as stated in the judgment of the Court of Appeal and proceed to correct the error involved in adopting a zero rate of discount. The Court of Appeal found that the respondent, who was aged thirty-five at the date of the trial, and who had been rendered unemployable by his injuries, was at the time of the accident a Grade 2 Operations Controller with the Australian Broadcasting Commission and could have been expected to progress to various higher grades until he retired in the year 2009. They made findings as to the gross and net income respectively that the respondent would have earned in the various grades and concluded that his total earnings from the time of the trial until his retirement less tax would have been $351,255. From this there was deducted eight dollars per week travelling expenses and 5 per cent for superannuation payments. A reduction of 15 per cent was made for contingencies, giving a final figure of $275,000 in respect of loss of earning capacity. (at p425)

28. We have been supplied, by the appellants, with a calculation made by an actuary which sets out the present lump sums equivalent in value to the loss of (inter alia) income estimated as follows. The actuary has not adopted the figures for net income taken by the Court of Appeal but has started with the highest gross income which the Court of Appeal found would have been earned in each of the various grades and has calculated for himself the net income remaining after tax has been paid on those gross amounts. In one respect the figures taken are too favourable to the respondent, because the actuary has not deducted travelling expenses and the 5 per cent payments made for superannuation. If a discount rate of 3 per cent is taken, and no further increase is made for notional tax, the calculation shows that the lump sum equivalent of the loss of income is $233,470. When a discount of 15 per cent is made for contingencies the resulting figure is $198,450. This figure is admittedly somewhat too high, but in all the circumstances it is appropriate to adopt the basis put forward by the appellant. We would substitute that figure for the amount of $275,000 awarded by the Court of Appeal. (at p426)

29. In calculating the value of the respondent's lost superannuation benefits, the Court of Appeal proceeded on the basis that the pension payable to the respondent on his retirement would be 50 1/2 per cent of his gross salary at retirement which was $16,306. They assumed that out of a number of alternatives open to him the respondent would have exercised the further right of applying his accumulated contributions towards an additional pension amounting to 20 per cent of his salary. That would have brought his pension to $11,495. They said that the life expectancy of a male aged sixty-five years is twelve and one-third years. Reference to tables of expectation of life shows that what the Court of Appeal has done is to consider what the expectation of life of the respondent would have been if he had survived until 2009, rather than what it was at the date of the trial. The Court of Appeal then held that if the respondent had enjoyed his pension for twelve and one-third years from the date of his retirement he would have received $141,388 from which had to be deducted an amount of $5,726 which he in fact received on his retirement. The resulting amount was $135,662. The Court of Appeal then made a deduction of 33 1/3 per cent in respect of the vicissitudes of life and thus arrived at the loss of $90,747. The deduction of 33 1/3 per cent cannot be criticized, particularly since the Court of Appeal favoured the respondent in taking twelve and one-third years as his expectation of life at a future date. (at p426)

30. The calculation of the actuary shows that the present lump sum equivalent in value to the loss of a superannuation benefit of 70 1/2 per cent of $16,306 per annum for a period of twelve and one-third years, at a discount rate of 3 per cent, is $39,250. When a deduction of 33 1/3 per cent is made the resulting figure is $26,170. After deducting the $5,726 actually received the loss under this head of damage is seen to be $20,444. Again, since the appeal is limited to questions of principle, we are content to proceed on the basis of the calculations of the appellant's actuary without questioning the accuracy of their details, since we have no reason to believe that they operate unfairly to the respondent. If the figures of $198,450 and $20,444 are substituted for the amounts of $275,000 and $90,747 adopted by the Court of Appeal the resulting damages payable to the respondent total $300,490, plus $14,000 for interest to date of trial. (at p427)

31. We would order as follows:

Todorovic v. Waller. (at p427)

32. Appeal allowed. (at p427)

33. Cross appeal dismissed. (at p427)

34. Judgment of the Court of Appeal varied by substituting for the words and figures "in the sum of $461,343" the words and figures "in the sum of $314,490".

Jetson v. Hankin. (at p427)

35. Appeal dismissed. (at p427)

STEPHEN J. These two appeals follow close in the wake of Pennant Hills Restaurants Pty. Ltd. v. Barrell Insurances Pty. Ltd. (1981) 145 CLR 625 . Like it, they concern the assessment of damages for losses the impact of which will be felt for many years into the future: the plaintiffs' personal injuries, received as a result of the defendants' negligence, will for the rest of their lives prevent them from earning their own living and subject them to nursing and medical expenses. The important issue in these appeals arises from this futurity affecting the incidence of the plaintiffs' losses. Under our system of law compensation for those losses must take the form of damages awarded in a lump sum. The problem is, then, how best in current circumstances to translate future periodic loss into present lump sum payment. The medium of compensation being money, the incidence of tax and inflation-caused changes in money's purchasing power and income-earning capacity may have to play a part in the process of translation if there is to be a just result. (at p427)

2. The law entitles these plaintiffs to compensation for their losses and outgoings. In Barrell (1981) 145 CLR, at p 646 I cited those authorities which, more than a hundred years ago, established and have ever since affirmed the cardinal principle of such compensation: that a plaintiff is entitled to such compensation as will, as nearly as may be, make good the financial loss which he has suffered and will probably suffer in the future. Once liability has been established and the facts relevant to damages have been found it is then for the courts to give effect to that principle in their assessment of damages for economic loss. While there may be no one exclusive method of assessment appropriate to every circumstance, there is but one criterion by which the adequacy of any particular method may be judged; it is whether or not the result of the assessment fairly makes good the financial loss incurred. (at p428)

3. The law, by insisting upon this principle, has established the proper measure of compensation for pecuniary loss; the actual process of assessment can then only be matter for reasoned estimation and computation. Rules and practices develop in the process of assessment and no doubt tend, by their judicial adoption in a legal system governed by precedent, to become current orthodoxy. But since the medium of compensation is money, whose purchasing power and income-yielding qualities may change over time, a particular process of assessment, attuned to a particular state of the medium, may come to be no longer appropriate. It follows that, since the sole function of the process of assessment is to attain what the law has fixed as the proper measure of compensation, there can be no place in the process for fixed rules of law; instead the process must be capable of adjustment in the face of changes in the quality of the medium of compensation. The current acceptability at any time of a process of assessment will depend, and depend only, upon whether or not its outcome fairly corresponds to what the law has set as the proper measure of compensation. (at p428)

4. In the past, when the purchasing power of money was little affected by inflation, when interest rates were low and rates of income tax were such as seldom to affect the great majority of accident victims, it was well recognized that present payment of the full amount of a future pecuniary loss would give to a plaintiff an unwarranted advantage. Present payment allowed him to increase the real value of his award; he could do this by earning income from the investment of his damages until the time came when they were needed to meet the future loss. (at p428)

5. Hence it was long conventional judicial wisdom that to offset this unwarranted advantage the process of assessment should involve a discounting of the award of damages at the rate at which, if invested, it could earn income. Instances of this as long ago as the last century are provided by two decisions of the Victorian Full Court, McDade v. Hoskins (1892) 18 VLR 417, at p 423 and Ritchie v. Victorian Railways Commissioner (1899) 25 VLR 272, at p 276 . By discounting at that rate overcompensation of plaintiffs and the consequent injustice to defendants were sought to be avoided. (at p428)

6. Such discounting involved the assumption that the income from the investment of the award of damages would enhance pro tanto the value to the plaintiff of the award. Because an award of $1,000, the present cost of an operation to be undergone in a year's time would, if invested at, say, 5 per cent give to a plaintiff a year later $1,050, he would be receiving $50 more than he would in fact need to defray the cost of that operation. Similar assumptions were made when it was the loss of future earnings rather than the extent of future outgoings that was in question. (at p429)

7. Changed economic circumstances have invalidated that assumption. The purchasing power of money is being constantly eroded by inflation and high rates of interest prevail, as do high rates of income tax. Each of these factors combines to ensure that there will be no pro tanto enhancement of the award; the whole of the income from investment of an undiscounted award of damages will no longer represent an unwarranted windfall to the plaintiff. (at p429)

8. Inflation has in itself been enough to invalidate the assumption; $1,000 received today to meet the cost of an operation a year hence, the present cost of which is $1,000, will have to be invested and part or all of the income it earns added to it at the end of the year if it is to then pay for the operation's then cost. High rates of income tax further distort the position; in the case of all but the smallest of awards the income earned from investment will bear tax; so that, even without inflation, the plaintiff will profit only to the extent of the amount left to him after tax. While available high rates of interest, reflecting inflationary expectations, will, if the resultant income is added to the capital, assist in countering its eroded purchasing power, the greater the income, due to high rates of interest, the more tax it will attract. (at p429)

9. Since it is clear that not all the income from the investment of a presently paid sum represents an unwarranted windfall, it follows that the assumption underpinning the practice of discounting at market rates of interest to allow for the supposed advantage of present payment no longer holds good. The correctness of that assumption, which in effect denied the existence of inflation, seemed axiomatic in the past and needed no evidence to support it; the addition of $50 to the award of $1,000 seemed so obviously to lead to overcompensation that to apply a discount rate of 5 per cent to the amount awarded was regarded as unquestionably correct. Consciously or unconsciously, the courts took judicial notice of what seemed, in the conditions of the past, a truth as self-evident as the fact that in England rain falls from time to time - Fay v. Prentice (1845) 14 LJCP (NS) 298, at p 299 . Both were facts "so generally known that every ordinary person may be reasonably presumed to be aware" of them and hence were proper subject matter for judicial notice - per Isaacs J. in Holland v. Jones (1917) 23 CLR 149, at p 153 . (at p430)

10. In recent years courts throughout Australia, while not necessarily analysing the matter in quite these terms, have recognized that the assumption supporting discounting at market rates of interest is no longer valid. They have accordingly ceased to adopt ruling market rates of interest, now in the region of 15 per cent, as the appropriate discount rate when discounting for present payment. Instead they have been discounting at much lower rates, between 5 per cent and 9 per cent, thereby acknowledging that part at least of the income which a plaintiff can derive from investment of his damages no longer represents an unwarranted accretion to his award of damages but instead serves only to make good the erosion, by inflation, of the real value of his award. What was long regarded as axiomatic, that all the income from the investment of an award of damages enhanced the real value of that award, is now recognized as no longer true. (at p430)

11. But this abandonment of discounting at market rates of interest has also destroyed the principled basis for discounting, which was entirely dependent upon a continued use of market rates. So long as those rates could be accepted as reflecting the extent of the unwarranted advantage which a plaintiff gained from present payment, namely, the opportunity to invest his award of damages at available market rates, they proved themselves as the appropriate discounting factor. Now that they have ceased to do so no other particular rate exists which possesses any such self-evident appropriateness as to qualify for judicial notice; the axiomatic quality of the application of a discount derived from the market-place has proved irreplaceable. The facts which could previously be judicially noticed have disappeared. (at p430)

12. That these new discount rates are not some mere refinement or modification of the old, market-reflecting, rates is apparent on their face; a rate of 5 per cent is obviously very different from market rates of 15 per cent or more, the rates at which any notional investment would be made. But the truly radical nature of the abandonment of market rates as the appropriate discount factor is best appreciated by an example. Assume a loss of future earnings of, say, $250 per week over thirty years (the example which I shall use throughout this judgment, the results of various discount rates are, throughout, based on tables tendered by the parties and extrapolations from them); if discounted at 5 per cent, at monthly rests, the award would be $205,500, whereas if discounted at a current market rate of 15 per cent the award would be only $87,081. (at p431)

13. But such a revolution in the assessment of damages, affecting daily large numbers of litigants throughout Australia, must surely require a well-defined base in principle, neither uncertain in character nor arbitrary in operation. It seems scarcely enough to account for this change in discount rates by describing it as making some unspecified and impressionistic allowance for future inflation. Yet that this is all that lies behind the new rates may be suggested by the range of variation in those rates as they have recently been applied in Australia. That different courts, operating within the one economic system, can vary in their allowance for inflation by as much as four percentage points, between 5 per cent and 9 per cent, in itself shows the need for a more principled approach. If contrasted with a discount based on current market rates of, say 15 per cent, which on the figures of my earlier example would give an award of only $87,081, the "allowance for inflation" being made can be seen to vary from $49,099 (a 9 per cent discount giving an award of $136,170) to $118,499 (a 5 per cent discount giving an award of $205,500). The concern of courts should not be, as is often said, lest processes of assessment bear an illusory air of precise accuracy but rather lest their outcomes bear the all too real appearance of gross inaccuracy in attaining anything like a proper measure of compensation. Since these appeals are, in essence, about discounting, the translation of future loss to present payment, it is worth adding to the above results of discounting the following, again based upon my earlier example: an undiscounted award of $391,350 will be reduced, at a discount of only 1 per cent to $338,350, a reduction of $53,000, and that what might seem the quite modest discount rate of 3 per cent would reduce it by $131,850, more than a third, to $259,500. These gross differences in outcome serve to emphasize how momentous must be any definitive decision by the Court concerning discount rates. (at p431)

14. Deprived of the support of axiomatic truth which formerly gave legitimacy to discounting at market rates, these new rates of discount, unrelated to the market-place, can now only be justified if shown to have a rational basis in fact and to result in awards which conform to the cardinal principle of compensation by fairly making good the financial loss incurred. Evidence will be necessary if it is to be contended that the income-earning capacity of an award of damages does in fact represent some ascertainable real accretion to the value of an award of damages comparable to the reduction effected by the rate of discount which is applied. Without such evidence, discounting for present payment, which is no more than a measure of the advantage to a plaintiff of that present payment, will lack any basis either in principle or in logic. It will be no more than a quite arbitrary reduction in the quantum of awards, having no place in the process of assessment of damages. What is more to the point, should there be no evidence that present payment does in fact overcompensate a plaintiff, plaintiffs cannot properly be denied recovery in full of the loss of which they have given evidence: namely, the undiscounted total of their future net losses of income and of their future expenses, reckoned in each case at rates ruling at date of trial. (at p432)

15. Of the two present appeals, only in that of Jetson v. Hankin was any evidence tendered which bore upon the advantage to a plaintiff of present payment and hence upon the practice of discounting. In Barrell evidence had been tendered from which in my view it was possible fairly to conclude that the advantage afforded the plaintiff by present payment was likely, over time, to be roughly equal to the disadvantage the plaintiff would suffer from being compensated in money of the day in respect of the future liability to which the defendant's negligence had exposed it (1981) 145 CLR, at p 658 . Uncertain though the economic future was, the evidence showed it to be more likely than not that two things would happen: the periodical payments which the plaintiff would be obliged to make in the future, subject as they were to statutory indexation, would retain their existing real value while greatly increasing in nominal amount, due both to inflation and to gains in productivity; on the other hand, the capital sum of the award of damages would rapidly decline in real value and would only be sufficient to meet those future periodical payments if the whole of the income from its investment was applied for that purpose. Accordingly, present payment gave no unwarranted advantage and no discount was called for. (at p432)

16. It will be apparent from what I said in Barrell that, despite its special circumstances, I regarded the general principles there discussed, relating to discounting in the light of those expectations of future inflation which reflected the economic experience of the recent past, as equally applicable to ordinary cases of personal injury. The extensive economic evidence in Jetson v. Hankin and the argument on that appeal confirm me in the views which I expressed in Barrell, assuming as I do that a plaintiff's notional investment of his award is to be treated as made in risk-free interest-bearing investments. If follows that I regard such evidence as has come before the courts in those two cases as positively supporting the outcome that must, in my view, in any event prevail in the absence either of evidence, or of matter seeming so axiomatic as to justify judicial notice, to the contrary: namely, that a plaintiff is at least entitled to an award of his proven loss without discount, no unwarranted advantage being shown to arise from the fact of present payment. (at p433)

17. I have now had the considerable advantage of reading the reasons for judgment prepared in these appeals by Brennan J. I join, with respect, in his Honour's view that it should be from published statistical material from official sources, such as his Honour has examined and analysed, rather than from evidence in a particular case, that the Court should derive any definitive views as to whether there should be any and, if so, what rate of discount for present payment. (at p433)

18. In Barrell I made some examination of statistical material similar to that now more extensively analysed by Brennan J. From it I noted (1981) 145 CLR, at pp 654-656 that the Australian experience in the past had been that, while there existed nothing approaching a steady real interest rate, it had tended, over time, to be close to zero. I concluded (1981) 145 CLR, at pp 659-660 , in light of Australian statistical material, that the advantage to a plaintiff of present payment, with its opportunity of deriving income from investment, would, in times of anticipated continuing inflation at relatively high rates, be substantially balanced by the disadvantage of only being compensated at present rates of earnings and outgoings when lost future wages of future outgoings would prove much greater in nominal terms. Hence my conclusion that to make no discount for present payment would not result in any overcompensation; in so concluding I expressly excluded considerations of income tax. (at p433)

19. I did not then approach the matter by making any direct comparison of future gross lost earnings on the one hand and an undiscounted award plus future gross income from its investment on the other. This Brennan J. has now done. His Honour's detailed consideration of the economic experience of the last twenty years has led him to the following conclusion: that an undiscounted award of future lost gross earnings, calculated at the rate of earnings current at the date of trial, even if invested at a rate of 2 per cent in excess of ruling bond rates, would not provide a fund significantly greater than the sum represented by those future gross earnings had they been received, over time, by a plaintiff from the exercise of his earning capacity. Were the undiscounted award of future lost gross earnings to be instead invested at only the ruling bond rate (the notional investment which I posited in Barrell) it would then provide substantially less than the total of future lost gross earnings. This I regard as providing further confirmation that no basis at present exists for any discounting in the process of assessment of damages. If anything, economic history would rather point to a "negative" discount as necessary to ensure that the award of damages will provide the equivalent of the future lost earnings. (at p434)

20. The conclusion to be drawn from this gross, before tax, comparison will be of general application. Comparisons between lost future earnings and the stream of income from their undiscounted sum plus income from the investment of that sum, whether performed on a gross or a net basis, will equally reveal whether or not an undiscounted award does involve the conferring of any unwarranted advantage upon a plaintiff. The figures on both sides will be larger if a gross, rather than net, earnings basis of comparison is adopted but proportionality will exist and the conclusion will be unaffected. The difference between the two bases is simply that the net earnings basis uses net of tax earnings as its start-point, consistently with Cullen v. Trappell (1980) 146 CLR 1 . (at p434)

21. However two additional tax factors must be taken into account. The first is one now well recognized and which was referred to in Cullen v. Trappell, namely, the tax which an injured plaintiff will have to pay on the income from the investment of his award (see per Gibbs J. at pp. 299 and 303). The second, to which Brennan J. has now drawn attention, is the additional tax which the plaintiff, uninjured, would have had to pay on those future increases in future earnings attributable to inflation and to productivity gains. If a gross basis of comparison is employed each of these two factors will be larger, although not necessarily to the same extent, than would be the case were a net basis of comparison being used. (at p434)

22. In any process of assessment these two factors will operate in diametrically opposed directions; the liability to tax on increases in future earnings should result in some diminution of damages, the liability to tax on investment income will call for an increase in damages. Little more than that can be said in evaluating their incidence. Like Brennan J., I note but do not attempt to quantify either; so much must depend upon conjecture about future tax regimens. The two liabilities will not even be incurred over the same time span; tax on increases in earnings would be nil in the first year, gradually increasing as increases in future earnings manifested themselves and increased in amount; tax on investment income will on the contrary be very large in early years, when income will be substantial, but will diminish over time to nil in the last year of compensation. Thus any changes in the tax regimen at a given point in time would affect each quite differently. All that can, I think, be said is that, because the tax on investment income will be incurred, at its highest levels, in the years immediately following the award, its incidence possesses a higher order of probable occurrence, being more imminent than will the possible incidence, in the more distant future, of tax on substantial increases in earnings. It follows that the gross basis of comparison does in my view provide general confirmation of the views which I would otherwise have expressed concerning discounting for present payment. (at p435)

23. I should say, with all respect to those who take a different view, that, in considering this question of tax upon income from investment of the plaintiff's award of damages, I have taken that income to be the income which would be derived from investment of the award at market rates of interest, at present in the region of 15 per cent, not the income which would be yielded by investment at whatever rate is ultimately adopted for discounting for present payment, whether zero or 3 per cent or 5 per cent. Now that discount rates no longer mirror current market rates of interest they can no longer provide any guide to the extent of the income upon which a plaintiff would bear tax were he to invest his award. Whatever rate of discount be adopted, the assumption must always be that a plaintiff would take advantage of the opportunity to invest which present payment affords him; without that assumption there could be no question of any discount at all. His notional investment would, of course, be made at current market rates. It would accordingly attract tax appropriate to the level of income so derived. To ascertain the true measure of the advantage capable of being derived by a plaintiff from present payment, consistently with Cullen v. Trappell, it is after-tax income from the notional investment that is to be looked at. But just as this assumes an income return from investment appropriate to current market yields, so it must also assume a burden of tax appropriate to that level of income. (at p435)

24. There are two other things which call for mention, not only in relation to this "gross" basis of comparison but which are also of general relevance to any process of assessment involving future economic loss. Each is concerned with the fact that a compensated plaintiff will be in possession of a substantial lump sum. The contrast between the plaintiff uninjured and in his injured but compensated state is that he has exchanged personal earning capacity for a large sum in damages and, has perforce, become a potential investor of capital. His damages have been assessed upon the assumption that he will take advantage of the investment opportunity which his receipt of damages in a lump sum affords him. Now, the possession of such a sum might be thought to confer an advantage quite apart from its income-earning capability: instead of borrowing, at a cost in interest payments, to buy a car, a home or some other asset, use can be made of part of the available capital sum. Two things may be said of this. The first is that to begin to speculate about the nature of a plaintiff's actual expenditures, his particular departures in fact from the assumed notional investment model which has been the very basis of the assessment of his damages, is to enter upon a process inherently inconsistent with that basis. To do so with a view to affecting the amount to be otherwise derived from that model seems inconsistent with the whole approach to assessment. The second is that if, nevertheless, the suggested advantage were to be taken into account its value could only be the difference between the interest payments saved on the borrowing of funds and the interest foregone on the capital resorted to. To attempt to quantify that value is at once to depart still further from the speculation-free assessment model. Its quantum will depend upon the difference in interest rates, applied to the assumed expenditure by the plaintiff. If what was to be expended was a relatively small sum, say on the purchase of a car, even a marked difference in interest rates would be relatively insignificant in outcome; if what was to be expended was much greater it would be likely to represent the purchase of a house, for which the interest rate on borrowed funds might be even less than the interest forgone and would in any event not be likely to be very much higher. In my view a better course is not to attempt any such quantification, with the speculation which it involves, but instead to adhere to the assessment model. The capital sum awarded should thus be regarded as used for the purpose which the basis of its computation assumes, that is, to replace, by recourse to it and to the interest it can earn, the plaintiff's lost regular stream of earnings. On this basis a plaintiff's award is to be treated as wholly dedicated to the production of adequate compensation. Thus a plaintiff is not to be assumed to reap any advantage from his possession of his capital sum over and above the income which its investment can earn. (at p436)

25. The second thing to be mentioned concerns any tax advantages, quite distinct from the tax factors earlier referred to, flowing from the plaintiff's transformation from wage-earner to investor. It may be thought that an investor has greater scope for reducing his burden of tax, for instance by receipt of what are at present tax free capital gains, than has a wage-earner. However an incapacitated plaintiff is a very special sort of investor. The sum which he has for investment must, by recourse to both capital and income, replace year by year over a given term his continuing loss of earnings; it will have been computed on the assumption that, particularly in the early years of its investment, that investment will provide an assured and substantial flow of income. Unless it can do so the plaintiff will not be adequately compensated for his loss. Its notional investment must therefore reflect that assumption and must be such as will yield a regular and certain income; and it must also be a risk-free investment, because what it compensates for is the loss of a risk-free future stream of earnings, rendered risk-free by having been reduced so as to allow for vicissitudes. These characteristics of the plaintiff-investor so confine his range of choice of investments as to make his notional portfolio surely the despair of enterprising investment or tax advisers. Little else but investment in government or semi-government bonds appears to be open to him. (at p437)

26. If awards were to be computed upon some more venturesome notional investment plan, perhaps with a portfolio having a mix of equities, debenture stock, first mortgages and even some real estate, great new areas for evidence and for speculation would open up. There would be a very much diminished income flow because of the low income yield from sound equities and, perhaps, from net rental income of real estate. This would have to be made good by high capital gains on realization of equities and real estate. Yet those capital gains would attract substantial tax, even under our present tax structure, and what special tax burdens they might attract in the future would indeed be difficult to predict. Moreover the extent of such capital gains would be speculative and the risk of some capital losses would have to be allowed for since such a portfolio would be far from risk-free. That risk would be enhanced by the fact that realization of assets could not be timed so as to take advantage of favourable market conditions but would be dictated by the plaintiff's need of a continuous stream of income. Even without allowing for the cost of continous expert management of such a portfolio, I regard it as by no means clear that with such a portfolio the net-of-tax income stream necessary to make good a plaintiff's recurring future after-tax loss of income would justify a smaller award than would be called for were the notional investment to be made at current bond rates of interest. (at p437)

27. It follows that in my view the process of assessment should be uninfluenced by prospects of tax free capital gains. A notional investment portfolio relying upon such gains for the provision to a plaintiff of an income stream to make good his lost earnings provides, I think, no guide to the nature of the notional investment which the law should construct in assessing what should be the quantum of damages. Even were I wrong not to attribute some weight to some unquantified tax or capital gains advantage assumed to flow from the translation of a plaintiff from wage earner to investor, it would seem over-generous to a defendant to evaluate that advantage so highly as to justify even a 1 per cent rate of discount when to do so, would, in the example I have adopted, represent a valuation of that advantage as $53,000. (at p438)

28. My conclusion is, therefore, that any process of assessment that involves a discount for present payment denies to a plaintiff that measure of compensation for future economic loss to which the law entitles him. The range of discounts which, in response to an awareness of the effects of inflation, Australian courts have recently adopted cannot be supported, as could the former market-based rates of discount, by reliance upon judicial notice. Nor is there any evidence which will serve to take the place of judicial notice and now support the view that discounts anywhere within that range truly reflect any advantage to a plaintiff, gained from present payment. Indeed such evidence as exists suggests the contrary: that, quite apart from tax considerations, a plaintiff, on being translated from wage-earner to investor, does not, in the present economic circumstances, derive any unwarranted advantage from present payment of his award. If the award be computed as the sum of lost future earnings, calculated at the rate of after-tax earnings ruling at date of trial, no overcompensation will result. The same can be said of the case of future outgoings, if also calculated at rates ruling at date of trial. I have drawn no distinction between lost future earnings and future outgoings; that the effect of future productivity gains and inflation upon each of them may not be uniform is a complexity the introduction of which seems unwarranted. (at p438)

29. Disregarding tax, the indications are rather in favour of actually increasing awards by some amount, instead of reducing them by discounting, at least so long as the economic prospects for the future, so far as they can be at all foreseen, are of continuing inflation, and so long as the phenomenon, over the long term, of very low or negative average rates of real interest, persists. But on balance I remain of the view which I expressed in Barrell: that as things now stand substantial justice will be done to plaintiffs and defendants alike by simply making no discount for present payment. (at p438)

30. As to tax, it adds not one but a number of further speculative considerations. The judgment of Brennan J. has drawn attention to what was not taken into consideration in Barrell, that, apart from tax upon investment income, consideration also requires to be given to the tax which a plaintiff would have had to pay upon future increases in his earnings had he continued to exercise his earning capacity. As I have earlier said, while these two tax aspects will operate in opposing directions I have not attempted to determine their net result. On the material available I am unable to do so. Were the exercise to be undertaken, with the aid of appropriate expert evidence, I would expect it to result in the need somewhat to increase the amount of damages over and above the figure represented by a simple undiscounted award. (at p439)

31. That my conclusions do not result in any precise formula is because, to adapt the unsatisfactory tool of a presently paid lump sum award of damages to the case of the future loss of inflation-affected earnings, more assistance in the way of expert evidence about the effect of the tax factors referred to above, additional to any before the Court in these appeals, is necessary. With their aid an appropriate formula or tabulation could no doubt be devised which would be generally applicable, obviating any need for such evidence or computations in future cases so long as economic prospects did not substantially alter. (at p439)

18. In Barrell the plaintiff was the employer of an injured worker, the defendant an insurance broker which negligently failed to secure for the plaintiff an indemnity against liability for workers' compensation. The plaintiff was entitled to damages to indemnify it against its liability to pay to a statutory fund periodic amounts in respect of compensation payments to be made to the injured worker. Those payments were statutorily indexed, variable according to future wage movements. The Court, adhering to what was said in this respect in O'Brien, forbore from endeavouring to estimate what the effect of inflation on future wage movements would be; and equally, the majority of the Court sought to eliminate the effect of inflation (or, it may be, the effect of expected inflation) on interest rates. The resulting views of the Court were divided. Barwick C.J. would have adopted a discount rate of 5 per cent, Gibbs, Mason and Wilson JJ. a rate of 2 per cent, Stephen and Aickin JJ. would have adopted an undiscounted approach and Murphy J. came to the same conclusion though his approach may be more accurately described as a zero discount rate. (at p469)

19. It is clear from the judgments in Barrell that the discount rate or the undiscounted approach is the means by which the court takes into account the effect of inflation. Thus Stephen J. explained his reasons for adopting an "undiscounted" approach (1981) 145 CLR, at p 658 :

"The only reason for discounting for present payment is to offset the unintended advantage which a plaintiff gets from present payment, namely, the chance to earn income from its investment. But against that should be weighed the disadvantage he suffers by only being compensated at present rates of wages (or at present rates of outgoings) when his lost future wages (or future outgoings) would have proved much greater in money terms. If the advantage and disadvantage can be seen approximately to offset each other, neither need figure in the process of assessment and the occasion for discounting disappears. During periods of sustained inflation such as we have known in recent years and such as the expert evidence in this case predicts for the future, there does appear to occur something very like such a cancelling out of advantage and disadvantage. . . . But, continuing as I do, to ignore for the moment the impact of income tax upon investment income, it does appear that so long as the future holds promise of continued and relatively high rates of inflation substantial justice would be done both to plaintiffs and to defendants by simply awarding as damages the total estimated loss of future earnings (or future outgoings) calculated at current rates and without making any discount for present payment."

Aickin J. agreed in those reasons, and Murphy J. agreed in the result for reasons thus expressed (1981) 145 CLR, at p 685 :

"The proper way to assess the present value of the amounts to be paid under the indexing machinery of the Workers' Compensation Act, is to ignore the effects of monetary inflation on increasing the payments and if any discount is applied, to adopt a rate, if there is one, which prevails as the difference between the rate of inflation and the return upon safe investment, which may be described as a 'constant' or 'real' interest. Otherwise, one is making an assessment in which monetary inflation, instead of being cancelled out, affects both the payments and the offsetting discount rate. But as Stephen J. shows, there is no 'constant' or 'real' interest. The variations above and below zero justify the adoption of a rough zero rate, in other words, no discount."

Mason J., with whose reasons Gibbs and Wilson J. were in general agreement asked and answered what his Honour called the "fundamental question" (1981) 145 CLR, at pp 679-680 :

"Should the damages in this case be assessed by estimating future increases in wages or should the likelihood of such increases be ignored and a low discount rate applied? The reasons which underlie the decisions in O'Brien (1968) 118 CLR 540 and Lim (1980) AC 174 , are opposed to the first approach. The only distinction which this case presents is that here we have a statute which increases the amount of the liability at regular six-monthly intervals by reference to a statistical index. But the inevitable problems of determining whether inflation will continue, and at what rate, over a long future period remain with us. It was the presence of those problems and the difficulties in answering them that led to the decisions in O'Brien and Lim. Some of the assumptions on which O'Brien was based were, as we have seen, unsound. None the less it is still correct to say that prediction of the inflation rate over the next thirty to forty years is a hazardous and uncertain enterprise and that the nature of the topic is such that it is incapable of being rendered certain by expert evidence or existing statistical materials. . . . Moreover, it is undesirable that the assessment of damages for personal injury, already a complex undertaking, should be further complicated by an inquiry into future rates of inflation. Essentially it is for these reasons that I regard the attempt to calculate future wage increases as being too speculative and difficult to justify. Instead, I favour the calculation of damages, without attempting any such projection, by applying a low discount rate, if the application of such a rate be appropriate to the case."

This was substantially the view of Gibbs J. who accepted the 2 per cent discount rate favoured by Mason J. and who was in general agreement with his reasons. Gibbs J. said (1981) 145 CLR, at p 639 : "The only practicable course is, I think, that suggested by Lord Diplock in Mallett v. McMonagle (1970) AC 166, at p 176 ' . . . to leave out of account the risk of further inflation, on the one hand, and the high interest rates which reflect the fear of it and capital appreciation of property and equities which are the consequence of it, on the other hand.'" (at p471)

20. It is stated or assumed by Gibbs, Mason, Murphy and Wilson JJ. that in assessing the damages in Barrell it was fair to omit from consideration the effect of inflation upon wage levels if the discount rate does not reflect the effect of inflation (or the effect of expected inflation). Barwick C.J. declined to adopt this approach. He said (1981) 145 CLR, at p 637 :
"There remains the question of the rate of discount to be applied to the sum of the future liability in order to determine the amount of damages presently assessed. I agree that the percentage figure currently to be obtained for investment of money ought not to be used for this purpose. Nor do I think that an endeavour should be made to work out what might be called a 'real' rate of interest, that is an endeavour to determine the extent of the inflationary element in the current rates of interest obtainable. I favour adhering to an artifical rate of discount which, when compared with the current or 'going' rate of interest leaves some room for the successful plaintiff to some extent to offset the effect of declining value in money. After all, the discount rate traditionally used has in truth always, or at least for a considerable time, been to a degree artifical. On balance, I would continue the use of 5 per cent as the appropriate rate of discount." (at p472)

21. With the exception of Barwick C.J. the Court did not approve of discounting a stream of workers' compensation payments calculated on present earnings, if the result would reduce the assessment below a sum which the plaintiff could invest and draw upon from time to time to put himself in the same financial position that he would have been in but for the defendant's tort. Applying that approach to the assessment of financial loss occasioned by a tortious diminution of earning capacity, the discount rate may be defined. When a stream of future lost net earnings is calculated on the net earnings current at the time of the assessment (Cullen v. Trappell (1980) 146 CLR 1 ) adjusted, if need be, to reflect savings in expenditure which would have been incurred in earning that income (Sharman v. Evans (1977) 138 CLR, at p 577 ), the appropriate discount rate (if any) is the rate which, applied to that undiscounted stream, results in a sum which the plaintiff could invest and draw upon from time to time to put himself in the same financial position as he would have been in if his earning capacity had not been tortiously impaired or destroyed. (at p472)

22. It is permissible to have regard to past experience to guide a judgment as to what is a fair discount rate to select, though the past does not furnish a prediction of what the future is likely to hold. Past experience is relevant to the range of discount rates which might properly be considered by this Court, though there is no assurance that past experience will be repeated. In considering past experience, inflation and its effects may be taken into account - its effect on levels of earnings and on investment yields - but it is not necessary to assume that inflation has made or will make an equal contribution to the levels of earnings and to investment yields. Perhaps an assumption of that kind was made by Lord Diplock in Mallett v. McMonagle (1970) AC 166 or flows from what his Lordship said in that case, but it is an assumption of fact, and unless its accuracy be demonstrated, it is better to make a direct comparison between levels of earnings and investment yields. In my opinion, a comparison between rates of interest and rates of inflation is not the appropriate comparison: the appropriate comparison is between what earning capacity has produced on the one hand and what capital has yielded on the other, for capital is the vehicle of compensation for diminution in earning capacity. (at p473)

23. If it be possible to ascertain how a plaintiff in receipt of average earnings would have fared in previous years if his earning capacity had not been diminished, in comparison with how he would have fared if he had received an undiscounted award calculated on his then current earnings, we have some information upon which an opinion may be formed as to whether a plaintiff whose earning capacity is tortiously diminished is financially either better off or worse off by receiving an undiscounted award than if he gainfully employed his undiminished earning capacity. And the study should show incidentally whether a plaintiff is financially better able to cope with inflation by employing his earning capacity or by investing an amount equal to the undiscounted current earnings. (at p473)

24. In Jetson v. Hankin, some evidence of past experience was tendered and admitted, but there are difficulties in the way of using that evidence exclusively as the historical material to guide the selection of a discount rate. First, it would not be right to reach a result in Todorovic v. Waller upon evidence given in another trial, much less to select a discount rate for general application by reference only to evidence given in a particular case. Secondly, the evidence in Jetson v. Hankin is incomplete in some relevant respects, does not fully describe the methods used for calculating inflation and real rates of return and, except for one series of bonds, does not specify fully the statistical and other sources upon which conclusions are founded. (at p473)

25. Rather than rely upon evidence in a particular case, resort should be had to notorious economic data published by the Australian Bureau of Statistics and the Reserve Bank of Australia. The Bureau publishes quarterly and annual estimates of average weekly earnings per employed male unit and quarterly and annual percentage increases in the Consumer Price Index for a "basket" of goods and services, deriving a weighted average of the indices for the six State capitals. The Reserve Bank publishes a list of Commonwealth bond rates or theoretical yields available from time to time. All series cover the last twenty years, though a change from rebatable to non-rebatable bonds in November 1968 (Income Tax Assessment Act 1936 (Cth), s. 160AB) affects the accuracy of comparisons prior to that year. Since 1974, the Bureau has published estimates of median weekly earnings (male), but those figures, which have not fallen short of the average figure by more than $5.80, are not available for earlier years. The average weekly earnings series is defined to be total weekly earnings divided by total male employees plus a proportion of female employees, the proportion being derived from the estimated ratio of female to male average earnings. Earnings comprise award and over-award wages and salaries, the earnings of employees not covered by awards, overtime earnings, bonuses and allowances, commissions, directors' fees and payments made retrospectively or in advance during the quarter. It is an adequate series to use for comparison with yields on investment. (at p474)

26. It is impossible for a broad comparison to make allowances for the peculiar features of each case, and in particular to allow for the incidence of tax upon income earned either by the employment of earning capacity or by the investment of a capital sum. It is necessary to start with average gross figures, for want of any method which is more sensitive, appreciating that information so crudely derived furnishes no more than a preliminary guide to the selection of a rate. Moreover, a broad comparison cannot take account of the variety of yields upon the investment or mix of investments available from time to time. It is better to take the longest term bond rate for comparative purposes, assuming that the rates on those securities bear a sufficient relationship to other sound securities to indicate the movement in yields from year to year, although some upward adjustment of the bond rate is needed to give reality to the comparison. (at p474)

27. By reference to the series mentioned, it can be seen that average weekly earnings have increased each year for the last twenty years, the rate of increase exceeding the increase in the Consumer Price Index for each of those years (i.e., years ended 30 June) with the exception of 1977, 1979 and 1980. Except for the years 1973 to 1977 and 1980 the twenty year bond rate available from June in the previous year (rebatable until 1968, non-rebatable thereafter) also has exceeded the increase in the Consumer Price Index for the following year. However, the real rate of return on bonds differs, year by year, from the percentage of real earnings increase, and the arithmetic mean of the available bond rates is approximately 2 per cent less than the arithmetic means of the annual increases in weekly earnings. It is not right to assume, therefore, that inflation (as quantified by the Consumer Price Index) is reflected equivalently in average earnings and the bond rate; nor is it right to assume that increases in average earnings are matched by the bond rate. It seems that a yield of the order of the bond rate plus 2 per cent has been required to match what the employment of average earning capacity would have produced during the last twenty years. (at p474)

28. However, the appropriate comparison is not between annual figures; rather it is desirable to ascertain how a plaintiff whose earning capacity would have produced the average wage during a span of years would have fared, year in and year out, as an investor of a fund calculated on his gross earnings current at the time of the award extended over those years. (at p475)

29. An undiscounted award allocates to each year during the period of compensable loss the amount of earnings current at the time when the award is made. If gross earnings current in each of the last twenty years are compounded by the percentage increase in average weekly earnings in the years following and if the same gross earnings are compounded by a percentage equal to the available bond rate plus 2 per cent in the years following, a year by year comparison can be made. The year by year comparison leads me to the view that the bond rate plus 2 per cent is a fair approximation of the gross yield on investment required to match increases in gross average weekly earnings. Such a calculation does not carry forward the surplus or deficit of each year; it treats each year's allocation as a separate fund. It is clear that if a carry forward calculation were done - and it could be useful only if it were done on a net basis - the early years after an award are of the greatest significance to its long term sufficiency or inadequacy. (at p475)

30. Leaving income tax out of account for the moment, is it fair to assume that an amount of damages assessed in compensation for diminished earning capacity can be invested to yield 2 per cent above the bond rate, and be available when required to make good the lost earnings which the plaintiff would have received from time to time? (at p475)

31. In selecting a discount rate, it is necessary to evaluate comparatively the risk which a person runs of losing his earning capacity because of death, ill health, or loss of his source of earnings and the risk which an investor runs of losing his capital or the expected yield on his investment. The risk of a plaintiff's losing his earning capacity for reasons other than the injury for which the tortfeasor is responsible requires some allowance to be made on the earnings side, unless that risk is allowed for in some other way. Where that risk is allowed for in estimating the period during which the plaintiff's diminution in earning capacity will be productive of financial loss, as frequently occurs, it would be wrong to select a discount rate which assumes a return obtainable on an investment which is not secure. To provide the equivalent of an assured stream of earnings, a reasonably secure investment must be posited. The level of security required by a notional investor of a sum to compensate for future economic loss would preclude the seeking of a yield significantly in excess of 2 per cent above the bond rate. On that hypothesis, the experience of the last twenty years suggests that an undiscounted award of gross earnings current at the date of an award does not provide a fund from which to draw significantly more than the gross earnings which might be earned if the plaintiff's earning capacity were undiminished. The crude comparison between the level of gross earnings and a yield of 2 per cent above the bond rates suggests that a plaintiff who receives an undiscounted award calculated on gross average earnings does not receive a financial advantage above what he would have received by way of gross earnings if he were gainfully employing his undiminished earning capacity. But the comparison cannot be relied upon to warrant the selection of a zero discount rate, because the relevant comparison is not between gross earnings and gross yields. The comparison leaves two factors - important but not amenable to quantification - out of account. (at p476)

32. The first factor is income tax. The relevant comparison from period to period is between what net amount could be drawn out from a notionally invested fund and what net earnings would have been if earning capacity had not been diminished. The method of calculation adopted since Cullen v. Trappell (1980) 146 CLR 1 uses current net earnings, not current gross earnings, as the factor to be multiplied. And thus the question in whether present experience suggests that an undiscounted assessment would be likely to result in over-compensation of a plaintiff who is entitled to draw out from the fund the net earnings which he would have received if his earning capacity had not been diminished. As we have seen, the percentage increase in net earnings since O'Brien is less than the percentage increase in gross earnings, and unless the graduated tax scale is indexed to earnings that trend will continue. On the other hand, the yield on investments which must be relied on to cover increases in net earnings may be eroded by the incidence of tax. It is not possible to quantify the difference between the incidence of tax upon future increases in earnings and the incidence of tax upon the yield on investments. The scale of tax applicable to an increase in earnings may not be the same as the scale applicable upon the yield on the sum invested. Whatever differential could be shown at the commencement of a period would alter at the end of the period as increases in earnings are added one upon another, and the yield decreases as capital is consumed. But one circumstance is clear: earnings derived from the employment of earning capacity are assessable income; and yields upon sums invested may not be. At least a proportion of the yield on investments in a given year may fall outside the ambit of assessable income in a particular year, and perhaps escape the incidence of tax entirely, dependent upon the investment which is made. (at p476)

33. And thus the comparison of gross earnings and gross yields requires considerable adjustment when considering the ability of a fund calculated on current net earnings to provide for net drawings equal to net earnings in the future. An inability to quantify the adjustment precludes the use of comparison of the gross figures of earnings and yields to suggest a discount rate applicable to a calculation based on current net earnings. All that can be said is that the incidence of tax is likely to bear more heavily on increases in earnings than on the yield of an invested sum upon which a plaintiff may draw, and as the object of the discount rate is to equalize the net amount which can be drawn out of the fund year by year with the net amount which the plaintiff would have earned, the tax advantage enjoyed by yield in comparison with earnings must be taken into account by reducing the capital sum which is available for investment. In other words, a positive discount rate must be adopted. (at p477)

34. There was argument in the present appeals as to whether income tax should be taken into account as though it were exigible only upon the notional income assumed to be derived from investment of a capital sum at a low notional rate of interest equal to the discount rate selected (a view which commended itself to Gibbs J. in Barrell (1981) 145 CLR, at p 641 ) or whether it should be taken into account as exigible upon an income derived from the investment of a capital sum at a commercial rate of interest. The question arises in that form if one searches for a discount rate in the field of real interest rates. In that search, one deducts an inflation rate (whether derived from the Consumer Price Index or some other index) from the rate of interest available on government bonds or some suitable investment and then makes an allowance for tax liability upon interest. The argument is between making an allowance for tax upon the whole of the assumed interest or upon so much interest as would be earned at an interest rate found by deducting the inflation rate. As I would search for the discount rate in a different field, assuming that the yield on an invested sum is likely to enjoy a tax advantage over increases in earning, I do not find it necessary to answer the question in the precise form in which it was raised. In selecting a discount rate to be used as a practical operational tool, I do not find it possible to attribute a particular tax rate to either earnings or yields, and I do not find it necessary to attribute an hypothetical rate of tax to the yield. The material circumstance to be borne in mind is the difference in the incidence of tax upon earnings and investment yields. (at p477)

35. The second factor is the real but unquantifiable advantages which present possession of a discounted stream of net future earnings confers upon a person whose earnings would otherwise have been received over a period. The advantages may be manifold. A particular advantage is the saving in interest and borrowing charges which might have been paid out of future earnings to acquire a home, car or some other asset. A plaintiff who might have appropriated amounts out of his future net earnings to repay the amount borrowed and to pay interest and borrowing charges can buy the asset without incurring a liability for interest and borrowing charges. There is an advantage in being able to do so, and some allowance should be made for it and for other advantages which flow from possession of a capital sum. (at p478)

36. In the result, there is no calculable figure which presents itself as the appropriate discount rate. It is essentially a matter for judgment, and different minds would attribute a different weight to the immeasurable factors in selecting a discount rate. In practice the discount rate adopted by this Court will be its guide in determining appeals challenging the assessment of damages, and it will thus be a rate effective to guide the courts from which those appeals may come. As the discount rate is neither a principle of law nor a fact deducible from evidence or other material, the selection of a discount rate is a function peculiarly suited to the collective opinion of the Court. It follows that the coalescing of judicial opinions on a particular figure gives the best assurance of a proper selection. For my part, the rates adopted before Barrell appear to be too high to result in fair and full compensation in the great majority of cases. I would join in the selection of a discount rate of 3 per cent, finding that rate to be not outside the range which gives appropriate weight to the factors which, in my view, are material to the selection. (at p478)

37. Perhaps it is desirable to recapitulate those factors: the continuance of the practice of making a calculation of future net earnings losses based on current net earnings adjusted for savings in expenditure during a span of years discounted for the possibility of losses caused otherwise than by the defendant's tort, the economic history of the past twenty years showing the relationship between average earnings and the long term bond rate earlier mentioned, the comparative incidence of income tax upon gross earnings and yields on investments, and the advantages to be derived from present possession of a capital sum in comparison with an entitlement to payment of moneys over a period where the capital sum represents the present value of the aggregate of those payments. I would anticipate that the generality of awards assessed on the footing of a 3 per cent discount rate are likely to be within the appropriate limits of a sound judicial discretion. (at p478)

38. In the ordinary course of personal injury litigation, no evidence should be given or economic material received with a view to establishing a discount rate other than 3 per cent. None of the factors material to the selection of a discount rate is an issue for consideration by the tribunal of fact in a personal injuries action. It would unduly encumber the hearing of such an action to investigate Australian economic history, and if some future period throws up a substantially different comparison between average earnings and yields on secure investments, the relevant facts can be brought to the attention of this Court and the Court might then be asked to consider whether 3 per cent ought to be retained as the appropriate rate. (at p479)

39. Nor should evidence be admitted in an endeavour to show that a discount rate other than 3 per cent can be supported in a particular case by measuring the immeasurable factors (tax and advantages from possession of a capital sum). These factors are taken into account in selecting a discount rate not because they have been shown to represent accurately the circumstances of each case, but because it is necessary to bear them in mind in selecting a basis by reference to which Australian courts may assess damages which will give comparable compensation in comparable cases being as fair to plaintiff and defendant as the uncertainties of the future and the limited ability of courts to receive evidence about them permit. The method of assessing damages for future economic loss without encumbering trials with inquiries incompatible with the efficient discharge of the courts' functions necessitates the adoption of a discount rate which is likely in the generality of cases to result in an award which accords with the legal principle of compensation. If it be shown that a calculation made on the footing of a 3 per cent discount rate does not accord with that principle, the principle would require that the discount method be rejected or an adjustment made. But proof of the effect of the immeasurable factors in the case of a particular plaintiff does not warrant discarding the 3 per cent discount rate or establish that the result thereby calculated does not accord with the principle. The parties are at liberty, of course, to lead evidence on an issue relevant to the other factors in the calculation: the likelihood of promotion carrying a higher salary, the expected period of loss, or any of the other matter peculiar to the plaintiff which courts are accustomed to evaluate in assessing damages. (at p479)

40. The selection of a discount rate for application in assessing the amount needed to defray the future costs of goods and services presents at first sight a different problem. It may be thought that the Consumer Price Index furnishes a sufficient guide (at least in the absence of contrary evidence) to movement in costs of goods and services which a plaintiff is likely to require because of the injury tortiously inflicted on him. If that were so, the Consumer Price Index rather than the movement in wage levels would require comparison with the yield on investments. But the Consumer Price Index is manifestly not a sufficient guide to the movement in the cost of those goods and services for which an injured plaintiff is ordinarily entitled to compensation from a tortfeasor. A high proportion of the cost of those goods and services usually consists in the payment, directly or indirectly, of wages and the wage comparison is as good a guide as a comparison with the Consumer Price Index. The incidence of tax upon the yield on investment will often be offset to some extent by the deductibility of the outgoing, and the possession of a capital fund to defray future costs and expenses confers a benefit similar to that mentioned in respect of the assessment of damages for diminished earning capacity. I would accept 3 per cent as an appropriate discount rate for the future cost of goods and services, in part because a different rate has not been demonstrated to be likely to be more appropriate and in part because, as Stephen J. observed in Barrell (1981) 145 CLR, at p 261 , "The complexity which any such a distinction would introduce outweighs, I think, any loss of accuracy which is entailed in ignoring it." (at p480)

41. It remains to apply these conclusions to the present appeals. In Todorovic v. Waller, the Court of Appeal has exposed its reasoning in arriving at the several components in its assessment of the plaintiff's damages, and it is possible to dissect the calculations made by the Court and rectify them by applying a discount rate of 3 per cent. The Court of Appeal, before taking adverse contingencies into account but after deducting superannuation payments and travelling expenses, assessed the respondent's net future lost earnings at the date of judgment at the undiscounted figure of $321,467. An actuarial calculation making the same deductions but applying a 3 per cent discount rate, would alter that assessment to $233,470. Although adverse contingencies are usually and desirably to be taken into account in estimating the years of loss before applying the discount rate, the Court of Appeal made an allowance for adverse contingencies in the present case by reducing the undiscounted figure by 15 per cent and rounding the assessment to $275,000. A reduction by 15 per cent of an amount arrived at by applying a discount rate of 3 per cent is arguably too high, but the relationship between the discount rate and the allowance for contingencies in this case was not argued, and the same approach in this respect should govern this Court's assessment of the respondent's damages. The resulting figure is $198,450. Discounting the value of the respondent's superannuation benefits at 3 per cent and making the same percentage allowance for contingencies as that allowed by the Court of Appeal, the assessment for this loss should be reduced from $90,747 to $20,444. The judgment of the Court of Appeal should be correspondingly altered. (at p481)

42. In Jetson v. Hankin, the Full Court of the Supreme Court of Victoria order a new trial, and the adoption by this Court of a 3 per cent discount rate precludes any departure from that order. We were invited to assess the damages in order to save the costs of a new trial, but as the award was not dissected it is impossible to ascertain the assessment in respect of lost earnings much less to examine the other elements in the award. The order for a new trial should stand. (at p481)

43. I agree in the orders proposed by the Chief Justice and Wilson J. (at p481)

Orders

TODOROVIC v. WALLER.

Appeal allowed.

Cross appeal dismissed.

No order as to the costs of the appeal or cross appeal.

Judgment of the Court of Appeal varied by substituting for the words and figures "in the sum of $461,343" the words and figures "in the sum of $314,490".

JETSON v. HANKIN.

Appeal dismissed.

No orders as to costs.