In an action for damages against a financial adviser for misleading and deceptive conduct in relation to advice concerning investments in a managed agricultural investment scheme, the NSW Court of Appeal has held that any damages awarded to the appellants should be “grossed-up” for tax on the basis that the damages would be taxable income in the circumstances. (Note that the matter has been remitted to the primary judge for reconsideration on the issue of “causation”). On the other hand, the respondents argued that any award of damages would not be taxable, except for the interest component of the damages.
In finding for the appellants on this issue, the Court of Appeal found that the non-interest portion of any damages awarded would be assessable either as “ordinary income under s 6-5 of the ITAA 1997 or as recoupment of losses or outgoings that were, or could have been, deducted for income tax purposes under s 20-20 of the ITAA 1997. In doing so, the Court found that the principal amounts of any damages awarded would compensate the appellants for their deductible losses and outgoings that were expected to be, but were not, recouped by income earned from the investment projects and that, in these circumstances, the primary judge had correctly concluded that they should be “grossed-up” for tax.
(Tomasetti v Brailey [2012] NSWCA 399, NSW Court of Appeal, McColl JA, Campbell JA and Macfarlan JA, 11 December 2012.)
[FJM Note: This still sounds dubious to me, as the money lost was no doubt largely deductible, and to the extent it was, the recouped amount was assessable under s20-20 of the ITAA97. If this is right, then where’s the mis-match warranting a ‘gross-up’.]
[LTN 243, 14/12]