Defamation Damages Not Taxable

FCT v Sydney Refractory Surgery Centre Pty Ltd [2008] FCAFC 190; (2008) 73 ATR 28

The Full Federal Court of Australia dismissed the Commissioner's appeal over the tax treatment of defamation damages awarded to a corporate taxpayer. The company in question received $812,000 in compensatory damages for defamation. The Commissioner sought to treat this as income on the basis that the damages had been calculated on a "lost profits" basis and were to repair a hole in the income of the company.

The Court held that the tax treatment of the payment had to be determined having regard to the cause of action in respect of which the damages were paid, rather than the way the damages had been calculated.

A company's business reputation was akin to goodwill and was in the nature of a capital asset. Injury to that reputation diminished the company's ability to induce customers to do business with it. Regardless of how they were measured, a claim for defamation damages based on injury to business reputation was a capital claim and not taxable as income according to ordinary concepts.