VT91/33 and Commissioner of Taxation [1991] AATA 718; (1991) 22 ATR 3422; 91 ATC 433 (16 September 1991)

Last Updated: 27 May 2009

INCOME TAX - Assessable income - Weekly payments of compensation after partial redemption - Whether payments assessable - Accident Compensation Act 1985 (Vic) sec 115 - Income Tax Assessment Act 1936-1987, sec 25(1).

Paff v Speed [1961] HCA 14; (1961) 105 CLR 549
Groves v United Transport Pty Ltd [1965] QdR 62
Tinkler v FC of T 79 ATC 4641
Cullen v Trappell [1980] HCA 10; (1980) 146 CLR 1
FC of T v Slaven 84 ATC 4077
FC of T v Inkster 89 ATC 5142
Gala v Preston [1991] HCA 18; (1991) 65 ALJR 366

ADMINISTRATIVE APPEALS TRIBUNAL )
) NO. VT91/33
TAXATION APPEALS DIVISION )

Re:

APPLICANT
And: COMMISSIONER OF TAXATION

RESPONDENT

DECISION

AAT Decision No 7328
Before: Dr P Gerber (Deputy President)
Date: 16 September 1991
Place: Melbourne

The Tribunal affirms the objection decision under review.

(Sgd P Gerber)
DEPUTY PRESIDENT

ADMINISTRATIVE APPEALS TRIBUNAL )
) NO. VT91/33
TAXATION APPEALS DIVISION )

Re:

APPLICANT

And: COMMISSIONER OF TAXATION

RESPONDENT

WRITTEN REASONS FOR DECISION GIVEN ORALLY AT THE HEARING

Before: Dr P Gerber (Deputy President)
Date: 16 September 1991
Place: Melbourne

The point in dispute in this case is said to be novel: Are weekly payments of compensation, paid pursuant to the Victorian Accident Compensation Act 1985 (the "Act") after a partial redemption for permanent incapacity "income" or "capital" for tax purposes. I find the answer is so clear that I can see no good reason to reserve my decision. I do, however, reserve the right to elaborate on my reasons should either party require a decision in writing.

2. The facts are not in dispute and can be briefly stated: The applicant suffered a myocardial infarction in circumstances which attract the benefits of the Act, and thereupon received weekly payments for total incapacity in accordance with the Act.

3. Put in historic context, the Act is said, according to its preamble, to have "amended" the Victorian Workers' Compensation Act 1958, albeit containing much of the earlier structure and machinery for the payment of compensation for workers suffering injury or disease arising out of or in the course of their employment. For present purposes, the Act is said to contain several features which it is claimed have unique tax consequences. Thus, it is said, the Act is all embracing, replacing the former alternative right to seek redress at common law in those cases where the injury brought the worker into "proximity" (the latest buzz word, see Gala v Preston [1991] HCA 18; (1991) 65 ALJR 366) with the employer. Again, the Act enables injured workmen to apply to the newly created Accident Compensation Commission for a redemption of up to 30 per cent of weekly payments for a period of up to five years, provided the claimant is (a) over the age of 55 years, and (b) has an incapacity that is assessed as being permanent. The applicant/taxpayer in this case, having qualified on both counts, successfully applied to have his weekly payments redeemed to the full 30% on 1 August 1986.

4. The taxpayer adopts the view that the effect of the redemption is to convert the weekly payments - now reduced by 30% - from "income" to "capital" for tax purposes. The amount in dispute ($15,484) is made up of the total of his weekly payments in 1987, the amount to which he is entitled after his partial redemption.

5. The argument runs something like this, in the words of Mr McCullagh of learned counsel for the applicant:

What the applicant says is that as at 1 August 1986, the character of his payments changed because it was found that his total incapacity was judicially considered and decided that his total incapacity had become permanent and as such, he suffered a permanent incapacity for employment.

6. It seems that the term "permanent" is thought to be the philosopher's stone which turns income into capital. Thus, it is submitted that until the applicant's incapacity had been judicially determined to be "permanent", his sole entitlement under the Act is to weekly payments of compensation, and hence "income". The metamorphosis to "capital" is said to be the consequence of a judicial determination under the Act that the incapacity - whether partial or total - is permanent. Henceforth, so it is submitted, the continuing weekly payments have become an affair of capital because they are no longer paid in substitution for lost earnings, but for lost earning capacity; see Paff v Speed [1961] HCA 14; (1961) 105 CLR 549, Groves v United Pacific Transport Pty Ltd [1965] QdR 62 at 65, Tinkler v FC of T 79 ATC 4641, Cullen v Trappell [1980] HCA 10; (1980) 146 CLR 1 and FC of T v Slaven 84 ATC 4077.

7. It is an ingenious argument, but it must fail. When both the structure of the Act and the character of the payments made pursuant to it are examined, the conclusion is inescapable - the weekly payments remain "income" as classically understood.

8. Looking at the Act as a whole, it reeks of the structure of the earlier Victorian Workers' Compensation Act, legislation deemed to be remedial and designed to provide periodic payments in substitution of income lost, wholly or partially, as the result of a compensable injury or disease. The quantum of the weekly payments (and hence the lump sum in redemption) are/is calculated upon "the worker's pre-injury average weekly earnings". The amount of weekly payments under the Act is exclusively fixed to wages, and thus readily distinguishable from "economic loss" awarded at common law, where pre-accident earnings are merely one of the co-ordinates applied in arriving at general damages.

9. Thus, it may well be that, whilst a redemption may constitute the receipt of a capital sum in substitution of a series of recurrent and periodic payments of income (the Commissioner did not tax the 30% lump sum in this case but insisted that this should not be construed as an admission that the sum constituted "capital"), the factum of a redemption cannot, in my view, alter the character of the weekly payments thus reduced. As Lee J noted in FC of T v Inkster 89 ATC 5142, albeit in a different context:
   

The calculation of such payments by reference to, and as part of, a weekly income and regular receipt thereof may be sufficient to attract the character of income to the payments. (at p 5158).

10. Having regard to the nature of the payments in this case, their indefinite duration, the manner of their calculation, and their periodicity, I am satisfied that they are classically an income substitute, and assessable under sec 25(1) of the Tax Act.

11. In parenthesis, it was put to me by Mr McCullagh in his opening - I don't know why - "that the State of Victoria is not able to legislate to determine the character of payments by way of income of capital". I told counsel that I did not wish to engage in a constitutional debate, but could not refrain from noting that if Victoria lacked the constitutional power to turn "income" into "capital", this constraint had not prevented its Parliament from amending the Motor Accidents Act of 1973 (post-Tinkler (supra)) in a way which led the headnote writer of Slaven in the Australian Law Reports to observe that "the intention of the relevant 1979 amendment to the Motor Accidents Act 1973 was to overcome the attraction of income tax to benefits paid under the Act". (52 ALR 81; cf the different fiscal consequences in Tinkler (supra) and Slaven (supra). I have no doubt that if the result my decision is viewed as fiscally undesirable, it will not be beyond the wit of the parliamentary draftsman to amend the Act along the lines of the 1979 amendment to The Motor Accidents Act, which (successfully) transmuted periodic payments payable under the Motor Accidents Act, based on pre-accident earnings, into a capital asset; cf Slaven (supra).

12. Regrettably, this applicant can do no better than hope that his case will pioneer an amendment to the Accident Compensation Act if the result is deemed to be fiscally undesirable. In the present state of the law, the decision on the objection must be affirmed. I am grateful to Mr McCullagh and Mr Davies, both of counsel, for their valuable and instructive addresses on the law.

This is to certify that this and the preceding 3 pages are a true and correct copy of the reasons for decision herein.

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Associate