Howard v. Commissioner of Taxation, [2014] HCA 21

The taxpayer and four others formed a joint venture to acquire, lease and sell a golf course. The taxpayer attempted to have a corporation of which he and two other of the participants were directors ("Disctronics") acquire the property. The other two joint venture participants (the "non-directors"), rather than agreeing, secretly acquired the gold course for their own account and sold it at a profit.

The taxpayer and the other two directors obtained a damages award against the non-directors for breach of their fiduciary duties to the three directors qua joint venture participants.

The taxpayer was assessed to include his share of the award in his income notwithstanding that Distronics had received that amount and included it in its income. The High Court first held that the taxpayer had not received the award by reason of his position of director (as Disctronics never was admitted to the joint venture) and that no conflict had arisen between his personal interests and those of Disctronics. Accordingly, he had not become entitled to the amount as constructive trustee for Disctronics, and it was income to him.

The taxpayer and four others formed a joint venture to acquire, lease and sell a golf course. The taxpayer attempted to have a corporation of which he and two other of the participants were directors ("Disctronics") acquire the property. The other two joint venture participants (the "non-directors"), rather than agreeing, secretly acquired the gold course for their own account and sold it at a profit.

The taxpayer and the other two directors obtained a damages award against the non-directors for breach of their fiduciary duties to the three directors qua joint venture participants. Around the time of launching the action, he and the two other directors entered into a "litigation agreement" with Disctronics which provided (para. 101):

In consideration of [Disctronics'] promises [to pay all costs and disbursements] the directors…assign absolutely unto… [Disctronics], any award of damages (whether on revenue or capital account)… made in their favour as a consequence of their participation in the joint venture or arising out of the proceedings… .

The taxpayer was assessed to include his share of the award in his income notwithstanding that Distronics had received that amount and included it in its income. After finding that the taxpayer had not become entitled to his share of the award as constructive trustee for Disctronics, Hayne and Crennan JJ. then turned to the effect of the litigation agreement, stating that "the better construction of the litigation agreement is that it provided for the assignment of any proceeds of the action, not for the assignment of the appellant's rights under any judgment obtained in the proceedings" (para. 104). As thus "the litigation agreement provided for the assignment of future income, dissociated from the proprietary interest which produced the income, the proceeds of the action, when received….were income in the hands of the appellant [Booth [1987] HCA 61; (1987) 164 CLR 159 at 167 per Mason CJ.]" (para. 102).

The taxpayer and four others formed a joint venture to acquire, lease and sell a golf course. The taxpayer attempted to have a corporation of which he and two other of the participants were directors ("Disctronics") acquire the property. The other two joint venture participants (the "non-directors"), rather than agreeing, secretly acquired the gold course for their own account and sold it at a profit.

The taxpayer and the other two directors obtained a damages award against the non-directors for breach of their fiduciary duties to the three directors qua joint venture participants.

The taxpayer was assessed to include his share of the award in his income notwithstanding that Disctronics had received that amount and included it in its income. The High Court first held that the taxpayer had not received the award by reason of his position of director (as Disctronics never was admitted to the joint venture) and that no conflict had arisen between his personal interests and those of Disctronics. Accordingly, he had not become entitled to the amount as constructive trustee for Disctronics, and it was income to him.

The taxpayer and four others formed a joint venture to acquire, lease and sell a golf course. The taxpayer attempted to have a corporation of which he and two other of the participants were directors ("Disctronics") acquire the property. The other two joint venture participants (the "non-directors"), rather than agreeing, secretly acquired the gold course for their own account and sold it at a profit.

The taxpayer and the other two directors obtained a damages award against the non-directors for breach of their fiduciary duties to the three directors qua joint venture participants. Around the time of launching the action, he and the two other directors entered into a "litigation agreement" with Disctronics which provided (para. 101):

In consideration of [Disctronics'] promises [to pay all costs and disbursements] the directors…assign absolutely unto… [Disctronics], any award of damages (whether on revenue or capital account)… made in their favour as a consequence of their participation in the joint venture or arising out of the proceedings… .

The taxpayer was assessed to include his share of the award in his income notwithstanding that Distronics had received that amount and included it in its income. After finding that the taxpayer had not become entitled to his share of the award as constructive trustee for Disctronics, Hayne and Crennan JJ. then turned to the effect of the litigation agreement, stating that "the better construction of the litigation agreement is that it provided for the assignment of any proceeds of the action, not for the assignment of the appellant's rights under any judgment obtained in the proceedings" (para. 104). As thus "the litigation agreement provided for the assignment of future income, dissociated from the proprietary interest which produced the income, the proceeds of the action, when received….were income in the hands of the appellant [Booth [1987] HCA 61; (1987) 164 CLR 159 at 167 per Mason CJ.]" (para. 102).