Howard – High Court of Australia finds that merely assigning a future damages award rather than the law suit entitlement is not effective to shift the resulting income

At the same time as the taxpayer launched an action against some co-venturers, he assigned any resulting award of damages to a corporation of which he was a director.  The corporation included the ultimate award in its income.  Before considering the effect of this assignment, the High Court found that the award was his income rather than corporate income on general principles, as in the circumstances he would not have breached his fiduciary obligations to the corporation if he had pocketed the damages himself.

As for the assignment, the reasons suggest that the taxpayer would have successfully avoided a personal income inclusion if he had assigned his entitlements under the law suit to the corporation rather than just assigning any future damages award.

The second point is generally consistent with Canadian cases finding that amounts received by a taxpayer subject to a pre-existing obligation to pay them to a third party should be excluded from its income (Premium Iron Ores, Wilson, Leonard Pipeline, Canadian Fruit, Minet, cf. Canpar), and might be viewed as partially codified by s. 56(4).

Were the facts reversed so that Howard as fiduciary had been obligated, but failed, to pay the award over to the corporation, the amount likely would have been income to him under Canadian principles notwithstanding his lack of legal entitlement to it (Angle, Penny).

Neal Armstrong.  Summaries of Howard v. Commissioner of Taxation, [2014] HCA 21 under s. 9 – compensation payments and s. 9 – nature of income.