Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 2 - Amendments to exempt certain post judgment interest
Overview
2.1 Schedule 2 to this Bill will amend the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997) to exempt from income tax post-judgment interest received in personal injury compensation cases.
Summary of the amendments
2.2 The purpose of the amendments is to exempt from income tax post-judgment interest received in personal injury compensation cases. This will ensure that individuals who have suffered personal injuries, and who face a delay in receiving the compensation that they are awarded as a result of those injuries, will not bear the burden of income tax on interest payable to them for any delay that occurs until all avenues of appeal have been exhausted.
2.3 The proposed amendments will provide a fair and equitable taxation treatment for post-judgment interest awarded in personal injury compensation cases. The amendments provide an equivalent or more generous taxation treatment than currently exists in other comparable jurisdictions.
2.4 The amendments to the ITAA 1936 will apply to the 1992-93 and later years of income up to, and including, the 1996-97 year of income [subitem 4(1), Schedule 2] . The amendments to the ITAA 1997 will apply to the 1997-98 and later years of income [subitem 4(2), Schedule 2] .
Background to the legislation
2.5 The amendments represent the Governments response to the Full Federal Court decision in
Whitaker v Federal Commissioner of Taxation
(1998)
98 ATC 4285
;
38 ATR 219
.
2.6 In that case, the Full Federal Court decided that post-judgment interest is income according to ordinary concepts and is assessable in the year in which it is received.
2.7 As a general rule, unless the court orders otherwise, post-judgment interest is payable on the amount of a judgment debt at a prescribed rate from the date that the judgment or order of the court comes into effect until the amount of the judgment debt is paid. For example, see section 95 of the Supreme Court Act (NSW) 1970 .
2.8 When a plaintiff is unsuccessful at first instance, but obtains judgment from the relevant appeal court, post-judgment interest generally applies only from the date of the order of the appeal court, unless the court orders otherwise. Similarly, where a plaintiff is successful only on an appeal to the High Court, post-judgment interest will generally only be payable from the date of the judgment of the High Court, unless the court orders otherwise.
2.9 However, when the effect of a judgment of the High Court is to restore a judgment of the court of first instance (eg. a single judge of the Supreme Court of a State or Territory) which was reversed by a judgment of an appeal court, the judgment of the court of first instance remains standing from the date when it was originally made. In that situation, post-judgment interest generally will be payable from the date of the judgment at first instance.
2.10 Where the judgment given at first instance is not set aside on appeal, but the amount of the judgment is varied, either by increasing or decreasing it, post-judgment interest on the varied amount generally is payable from the date of the judgment at first instance.
Explanation of the amendments
2.11 This Bill will amend the ITAA 1936 and the ITAA 1997 to make post-judgment interest in personal injury compensation cases exempt from income tax. [Items 1 and 3, Schedule 2]
Period to which exemption applies
2.12 The exemption will apply to post-judgment interest payable to an individual who is awarded damages for personal injury. The interest that accrues from the time a judgment debt arises from the judgment of a court (the original judgment) until the time that judgment is finalised will be exempt. [New subsection 23GA(1) of the ITAA 1936 and new subsection 51-55(1) of the ITAA 1997]
2.13 In some situations, the original judgment that gives rise to a judgment debt will be the judgment given by an appeal court, where the taxpayer who is seeking compensation is unsuccessful at first instance.
2.14 If a judgment debt is taken to have arisen earlier than the time of the original judgment, the exemption will apply to the post-judgment interest that accrues from the earlier time [new subparagraphs 23GA(1)(b)(i) and 51-55(1)(b)(i)] . An example of this is where the plaintiff is not successful at first instance, but obtains judgment from an appeal court which orders that post-judgment interest is payable from the date of the judgment at first instance.
2.15 For the purposes of calculating the amount of post-judgment interest that is exempt from income tax, the original judgment is regarded as finalised at whichever of the following times is applicable:
- •
- if the period for lodging an appeal against either the original judgment or a subsequent related judgment expires without an appeal being lodged, the original judgment is finalised when the period for lodging an appeal expires [new paragraphs 23GA(2)(a) and 51-55(2)(a)] ;
- •
- if an appeal has been lodged against either the original judgment or a subsequent related judgment and a final judgment is given by a court, the original judgment is finalised when the final judgment (see paragraphs 2.17 to 2.20) takes effect [new paragraphs 23GA(2)(b) and 51-55(2)(b)] ;
- •
- if an appeal has been lodged against either the original judgment or a subsequent related judgment but is settled or discontinued, the original judgment is finalised at the time the settlement between the parties or the discontinuance takes effect [new paragraphs 23GA(2)(c) and 51-55(2)(c)] .
2.16 When a judgment is given by the Supreme Court of a State or a Territory, the parties have a limited period to lodge an appeal or seek leave to appeal to a higher court. If that appeal period expires without an appeal or application for leave to appeal having been lodged, post-judgment interest that accrues until the date on which the appeal period expires will be exempt from income tax. [New paragraphs 23GA(2)(a) and 51-55(2)(a)]
A court awards David an amount of compensation for personal injuries that he suffers as a result of an accident. No appeal is lodged against that judgment. The amount of post-judgment interest that is exempt from income tax is the amount that accrues on the judgment debt until the time at which the right to appeal against the judgment expires.
Mark is awarded damages by a court to compensate him for personal injuries he receives as a result of an accident. He is dissatisfied with the amount that he is awarded and appeals against the judgment. The appeal court gives judgment in his favour and increases the amount of the damages awarded. No appeal is lodged against that judgment. In Marks case, post-judgment interest is payable on the increased amount of damages from the date of the judgment at first instance. The amount of post-judgment interest that is exempt from income tax is the amount that accrues until the time at which any right to appeal or to seek special leave to appeal against the judgment of the appeal court expires.
2.17 A judgment will be regarded as a final judgment for the purposes of new paragraph 23GA(2)(b) of the ITAA 1936 or new paragraph 51-55(2)(b) of the ITAA 1997 if:
- •
- no appeal can be lodged against the judgment [new paragraphs 23GA(3)(a) and 51-55(3)(a)] ; or
- •
- leave to appeal against the judgment has been refused [new paragraphs 23GA(3)(b) and 51-55(3)(b)] .
2.18 For example, if a personal injury compensation claim has been the subject of an application for leave to appeal to the High Court of Australia and that application is refused, then the original judgment is finalised on the date that special leave is refused.
2.19 Alternatively, if the High Court grants leave to appeal, the original judgment is finalised when the judgment of the High Court takes effect.
2.20 In either situation, all avenues of appeal have been exhausted. Consequently, the exemption will apply to any post-judgment interest that accrues up to the date on which the High Court either refuses to grant leave to appeal or gives judgment in a matter for which it has granted leave to appeal.
Betty suffers personal injuries as a result of an accident. She sues for damages and is unsuccessful at first instance. She appeals against that decision and is awarded damages by the appeal court. The High Court grants leave to appeal and subsequently confirms the decision of the appeal court.
In Betty's case, post-judgment interest is payable on the judgment debt that arises from the judgment of the appeal court. That is the original judgment for the purposes of new subsection 23GA(1) of the ITAA 1936 and new subsection 51-55(1) of the ITAA 1997. Consequently, any post-judgment interest that accrues on that judgment debt until the time that the judgment of the High Court takes effect will be exempt from income tax.
2.21 If the original judgment which gave rise to a judgment debt is the subject of an appeal, and the appeal proceedings are subsequently settled or discontinued, the amount of post-judgment interest that has accrued on the judgment debt from the time of the original judgment until the time the settlement or discontinuance takes effect will be exempt from income tax. [New paragraphs 23GA(2)(c) and 51-55(2)(c)]
2.22 The expression by way of interest in new subsections 23GA(1) and 51-55(1) extends the exemption to situations where payment of post-judgment interest does not arise directly from a judgment debt. For example, the exemption will apply to an amount, payable under the terms of a settlement, that represents post-judgment interest, to the extent that it does not exceed the amount that a personal injury compensation recipient would have received if the amount of the settlement had been the amount of the judgment debt.
Mike is injured in a car accident. A court awards him damages of $100,000. He is entitled to post-judgment interest at the relevant prescribed rate from the date the judgment debt comes into existence. The defendant appeals against the judgment but subsequently discontinues the appeal proceedings before the appeal court hearing. Post-judgment interest that accrues up to the date the appeal proceedings are formally discontinued will be exempt from income tax.
A court awards Peter $250,000 damages in a personal injury compensation case. The defendant is dissatisfied with the amount of damages awarded to Peter and lodges an appeal against the judgment. The matter is settled before the appeal court hearing. The terms of the settlement are that Peter is to receive a lump sum of $200,000 by way of compensation, together with interest payable on that amount from the date of the original judgment at the rate prescribed for post-judgment interest. The amount of interest payable on the $200,000 from the date of the original judgment until the date the settlement takes effect will be exempt from income tax.
Assessable post-judgment interest
2.23 Post-judgment interest that accrues between the time at which all avenues of appeal have been exhausted and the time of the actual payment of the damages awarded to a taxpayer will continue to be assessable in the year in which it is received. As a general rule, in a personal injury case, payment will be made immediately after the litigation between the parties has been finally determined.
2.24 An entitlement to exemption for post-judgment interest does not extend to non-personal injury cases. The exemption applies only to post-judgment interest in personal injury cases. [New paragraphs 23GA(1)(a) and 51-55(1)(a)]
2.25 The term personal injury is not defined by the amendments but rather takes its ordinary meaning. The ordinary meaning of the term is an injury suffered to a person as opposed to the persons property, character or reputation. It covers physical injury (internal and/or external) and mental injury that is clearly discernible to a qualified medical practitioner (see
Graham v Robinson
[1992] 1 VR 279
).
2.26 Division 11 of the ITAA 1997 lists the classes of exempt income and then links each class to the relevant section in the ITAA 1936 and the ITAA 1997. Section 11-10 is amended by inserting interest on a judgment debt for personal injury in the table of exempt income, with a reference to new section 51-55 of the ITAA 1997 and new section 23GA of the ITAA 1936 . [Item 2, Schedule 2]
2.27 The amendment in item 1 of Schedule 2 applies to the 1992-93 year of income and later years of income until and including the 1996-97 year of income [subitem 4(1), Schedule 2] . The amendments in items 2 and 3 of Schedule 2 apply to the 1997-98 year of income and later years of income [subitem 4(2), Schedule 2] .
2.28 As a general rule, the Commissioner of Taxation (the Commissioner) cannot amend an assessment to reduce the liability of a taxpayer after the end of four years from the date on which the tax became due and payable under the assessment.
2.29 Clause 4 of this Bill will allow the Commissioner to amend an assessment at any time to give effect to these amendments. This is necessary because the amendments apply to the 1992-93 year of income and later years. Without this provision the Commissioner could only give effect to amendments that were requested by taxpayers within 4 years of the date that tax became due and payable under their assessments.