Howard v Commissioner of Taxation of the Commonwealth of Australia [2014] HCA 21

The High Court has unanimously dismissed an appeal from the Full Court of the Federal Court of Australia in the case of Howard v Commissioner of Taxation of the Commonwealth of Australia [2014] HCA 21. The court found that the appellant, Stephen Howard, was liable to income tax on equitable compensation received.

Facts

Mr Howard was a director of Disctronics Ltd. In early 2005, he participated in a proceeding concerning a joint venture involving a purchase, lease and on-sale of a golf course. Whilst the joint venture was on foot, Mr Howard and two other directors of Disctronics, who were also members of the joint venture, endeavoured to have Disctronics become the purchaser of the golf course, although two other members of the joint venture did not agree.

Subsequently, two other members diverted to their own use the business opportunity pursued by the joint venture. These two were later found in breach of their fiduciary duties owed to Mr Howard. Mr Howard was awarded equitable compensation following this.

Upon the assessment of Mr Howard’s income for the year 2005, the Commissioner of Taxation found that his share of the equitable compensation was part of his assessable income. Mr Howard argued that he received the compensation as constructive trustee of Disctronics and therefore the sum should not be included as part of his assessable income.

High Court Appeal

The High Court found that the amount of equitable compensation received by Mr Howard was not received by him as constructive trustee of Disctronics. The Court found that at the time Mr Howard obtained or became entitled to that amount, there was no actual conflict, and no real possibility of conflict, between his personal interests and his duties as a director of Disctronics. The Court ultimately found that the proceeds of the action were income in his hands and thus correctly assessed as assessable income. 

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