In April this year the Queensland Court of Appeal handed down its decision in Westpac Banking Corporation v Jamieson & Ors  QCA 50.
In so doing the court considered a novel argument, raised by the plaintiff, to the effect that they were entitled to a further “gross up" of their damages award, even though the award had already been grossed by the trial judge to compensate for tax payable on that award.
In May and June 2007, Mark and Lorrell Jamieson (the Jamiesons) and the trustee of their self-managed superannuation fund (the trustee) made investments based on a written statement of advice (SOA) provided by a financial planner employed by Westpac Banking Corporation (Westpac). The SOA recommended that Mr Jamieson borrow $5 million to be invested in a registered managed investment scheme described as the MQ Gateway Trust; and that the Jamiesons borrow $600,000 from Westpac to make undeducted contributions to their self-managed superannuation fund.
Both strategies were unsuccessful, and the Jamiesons and the trustee claimed damages against Westpac for alleged breaches of contract, negligence and contraventions of the Australian Securities and Investment Commission Act 2001 (Cth) in preparing and giving the SOA. The claims for damages were calculated so as to restore the Jamiesons to the position they would have been in had no borrowing or investment been made.
The Decision at Trial
The trial judge held that Westpac was negligent and in breach of contract, and engaged in misleading and deceptive conduct, in preparing and providing the SOA, and that the Jamiesons would not have borrowed the money and made the investments had the breaches not occurred.
The trial judge ultimately found that:
- Mr Jamieson’s loss on the MQ Gateway Trust, after tax, was $623,236;
- Had he not taken up the Westpac recommendations he would have invested $200,000 in agribusiness, resulting in a loss unrelated to Westpac’s advice, of $134,107;
- The damages of $623,236 should be reduced by $134,107 to reflect this, so that Mr Jamieson’s net damages after tax were $489,129;
- As Mr Jamieson would have to pay tax on his damages of $489,129 pursuant to s 20-20 of the Income Tax Assessment Act 1997 (Cth) (ITAA), that figure had to be “grossed up” by an amount of $200,992 to ensure that he was left with $489,129 after tax;
- Mr Jamieson’s total damages arising from the MQ Gateway Trust investment as $690,121;
- After adding interest of $228,535, judgment was given in the sum of $918,656;
- The assessable amount of the judgment for taxation purposes under s 20-20 was $489,129; and
- In the claim arising out of the superannuation fund investment, judgment was given in the sum of $161,799 inclusive of interest.
Westpac appealed the trial judge’s decision.
The Jamiesons cross-appealed as to the amount of the damages award.
The Decision of the Queensland Court of Appeal
The Court of Appeal unanimously dismissed Westpac’s appeal, leaving undisturbed the finding of the trial judge in favour of the plaintiffs.
The Court of Appeal also dismissed the plaintiffs’ cross-appeal.
- There was a risk that the ATO may treat the whole of the damages award as a recoupment for purposes of s 20-20 of the ITAA; and
- The plaintiffs should therefore be compensated for that risk by a further grossing up of the damages awarded by the trial judge.
Having considered relevant case authorities the Court ultimately rejected the “further gross up” argument. Applegarth J, who wrote the leading judgment, expressed the Court’s reasoning as follows:
“In practice and in light of the primary judge’s reasons it may be supposed that Mr Jamieson will declare only the compensatory amount as an assessable recoupment, with the amount awarded by way of grossing-up remaining to meet the expected tax on the assessable recoupment. One would not expect in the face of the primary judge’s ruling that the ATO would treat the entire amount, including the grossed-up component, as subject to tax.”
Implications of the Decision
The judgments usefully confirm that where a loss is subject to taxation, damages to compensate that loss must account for the tax payable. But nothing more is required.