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Slaven v. Federal Commissioner of Taxation.

Judges:
O'Bryan J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 6 June 1983.

O'Bryan J.

This is an appeal by a taxpayer who is dissatisfied with the decision of the Deputy Commissioner of Taxation to include in her assessment of income for the financial year ended 30th June 1981 $4,360 received by her from the Motor Accidents Board pursuant to sec. 25 of the Motor Accidents Act 1973.

Before the Motor Accidents Act 1973 came into operation, a person injured as a result of a motor accident caused by or arising out of

ATC 4388

the negligent use in Victoria of a motor car who suffered deprivation or impairment of earning capacity by reason of injury would claim and recover his loss by way of general damages in a common law claim. The damages so assessed, whether as part of a global sum of damages which included damages for pain and loss of amenities or, solely referable to loss of earning capacity for a period between the date of the accident and verdict or for the future after verdict, would not be taxable for the reason that the component of the award representing deprivation or impairment of earning capacity would be for a capital loss. The principle was enunciated most clearly by the Chief Justice of the High Court, Sir Garfield Barwick, as he then was, in
Atlas Tiles Ltd. v. Briers 78 ATC 4536; (1976-1978) 144 C.L.R. 202; (1978) 52 A.L.J.R. 707 at p. 709. There the learned Chief Justice expressly stated that ```earning capacity' is a capital asset, capable by its use or employment of producing income''. The proposition that capacity or ability to earn is a capital asset was expressly approved in the majority judgment of the High Court in
F.C. of T. v. D.P. Smith 81 ATC 4114; (1981) 55 A.L.J.R. 229 at p. 230. In the end I do not believe that Mr. Batt, one of Her Majesty's counsel, who appeared with Mr. Hayne for the respondent, seriously contested the proposition. He was content to rely upon an observation of Murphy J. in Smith's case to the effect that the distinction between loss of future earnings and loss of future earning capacity which has emerged in personal injury cases should not be carried over into tax cases.

In Atlas Tiles the learned Chief Justice proceeded to draw a distinction between ``loss of earnings'' and ``loss of the capacity to earn perhaps the equivalent of his current earnings or perhaps more or less according to the reasonable expectations of the employment of his earning capacity''. His Honour added:

``If the award of damages for such an injury destroying or diminishing his earning capacity were merely a matter of replacing those earnings the amount of the award would be taxable, but it is not for the reason that the award is for a capital loss, however much the amount of the award is quantified by a consideration of what the use or employment of that capacity might be expected to produce. In other words, the assessment of damages for loss of earning capacity is in truth an exercise in valuation. It is quite true to say that what that capacity may reasonably be expected to produce is a factor, indeed a major factor, in the exercise of valuation. Indeed in some uncomplicated situations it may provide a sure guide to the amount of the valuation.''

Later his Honour said:

``Some have thought the distinction I have drawn between loss of earnings and loss of earning capacity is illusory or unsubstantial. But, in my opinion, it is real and radical... The distinction I make is not a matter of semantics but basically conceptual... The question is one of valuation of a capital asset...''

Subsequently, in
Cullen v. Trappell 80 ATC 4185; (1980) 54 A.L.J.R. 295, the same learned Chief Justice reaffirmed the reasons he gave in Atlas Tiles. He added supplementary remarks at ATC p. 4187; A.L.J.R. pp. 296-297:

``... the replacement of the capacity to earn money by damages was, by the very statement of the problem, not an exercise in replacing the wages which were currently being earned or which might be expected to be earned by the injured person so that the assessment was of the value of an annuity for the balance of the working life in the amount of those wages, some discount being made to reflect the vicissitudes of life. The problem is to value the capital asset of the injured person, namely, his capacity to earn money. Whilst it is true that what that capital asset by its exercise may produce in the form of money will quite properly be an element and perhaps in some cases a dominant element in that valuation, the exercise is not, in my opinion, one in which it is sought merely to replace the wages themselves.''

In a different context altogether, namely in a tax case, their Honours, Gibbs, Stephen, Mason and Wilson JJ. observed in Smith's case at p. 231: ``The loss of `ability to earn' in one's own calling is most likely to be reflected in an actual loss of earnings.'' Nowhere in the judgment is there to be found

ATC 4389

support for the proposition that it would not be possible to perceive conditions under which a person might receive compensation for impairment of the capacity to earn in circumstances where it would not be income. The distinction drawn by the learned Chief Justice is important and may carry over into tax cases, in my opinion, in appropriate circumstances.

What I have said so far is introductory to the legal reform introduced into Victoria by the Motor Accidents Act. By 1973 great hardship was being experienced in Victoria by many motor accident victims through long delays in the courts and in the legal system generally, all too often experienced before damages were assessed at common law. One of the purposes of the Act was to alleviate hardship to persons injured by accelerating the payment of portion of their damages. Section 25 of the Act, which came into operation in February 1974, enabled a person injured as a result of an accident who suffered ``a loss of income in the capacity of employee by reason of the injury'' to make an application under the Act ``for payments in respect of the loss of that income''. Section 25 went on to provide that the Motor Accidents Board should pay to the applicant an amount calculated in accordance with a prescribed formula and taking into account certain relevant matters. In substance the Board was required to calculate eighty per centum of the average weekly income of the applicant as an employee and the number of weeks during the period of incapacity of that person and make payments in respect of the loss of that income. Section 79 of the Act provided:

``(1) A person injured as a result of an accident may not, in proceedings to recover damages in respect of that accident, seek to recover damages from an insured person or a nominal defendant in respect of a loss of income during a period arising by reason of that injury if before the date of commencement of the hearing of the proceedings he was entitled to make a claim under section 25 in respect of the loss of income during that period and did not make such a claim before that date.''

Accordingly, after February 1974 claimants for common law damages rarely sought to recover as part of their damages either ``loss of earnings'' or ``loss of capacity to earn'' between the date of the accident and judgment, the reason being that payments made under sec. 25 in respect of loss of income usually fully compensated the claimant.

Then came the decision in
Tinkler v. F.C. of T. 79 ATC 4641 (Brennan, Deane and Fisher JJ.) and (1979) 40 F.L.R. 116 (Federal Court of Australia). The facts in the case were not unlike the facts in the present case. A person injured in a motor accident was precluded from working throughout a year of income. She claimed payments under sec. 25 of the Act and was paid the sum of $2,371 in twenty-two individual payments. The Commissioner included the amount in her assessable income. Jenkinson J. upheld the assessment, holding that the compensation paid to the taxpayer had been calculated and quantified by reference to loss of income and the formula provided in sec. 25 of the Act. He rejected a submission that a person's entitlement to compensation under sec. 25 is for loss or impairment of a capacity. Apart from the verbiage of the Act, his Honour had regard to the regularity of the payments made to the taxpayer by the Board which suggested a characterisation of the payments as income. The Federal Court held that an analysis of the Motor Accidents Act indicated that the payments were for the purpose of providing partial recoupment of lost income and, from the taxpayer's point of view, the periodic receipt of the payments suggested that they were of an income nature.

One may be pardoned for mentioning the anomaly and injustice of the situation produced by the Act. Had the taxpayer in Tinkler's case been able to claim and recover in a common law action the sum of $2,371 as and for loss or impairment of her capacity to earn, albeit after some delay, the damages so recovered would not have attracted tax. The Act, which was intended to relieve hardship, unintentionally had caused another hardship to injured persons inasmuch as portion of their statutory compensation received with expedition now attracted taxation as income.

Late in 1979 the Victorian Parliament enacted Act No. 9332. The Act was given the title: ``An Act to amend the Motor Accidents

ATC 4390

Act 1973 with respect to Compensation for Deprivation or Impairment of Earning Capacity, and for other purposes.'' It substituted for sec. 25 in the 1973 Act a new section. The relevant portions of sec. 25 are as follows:

``(1) Where a person injured as a result of an accident suffers deprivation or impairment of his earning capacity by reason of the injury and makes an application under this Act for a payment under this section in respect of that deprivation or impairment, the Board shall, subject to this Act, pay to that person -

  • (a) such amount as, in the opinion of the Board, will adequately compensate that person for the deprivation or impairment of earning capacity which he has suffered; or
  • (b) $20,800 -

whichever is the lesser.

(2) The Board shall, for the purposes of determining under paragraph (a) of sub-section (1) an adequate amount of compensation in relation to any person, have regard to the loss of earnings which that person has incurred and the likely loss of future earnings which that person will incur by reason of the injury.

(3) In sub-section (2) `earnings' means such amount as, in the opinion of the Board, the person concerned would have received by way of income from personal exertion but for the injury less such amount as the Board reasonably considers to be the amount of income tax that would have been payable on those earnings under the Income Tax Assessment Act.

(4) In determining for the purposes of sub-section (1) the extent to which the earning capacity of any person has been impaired by reason of an injury, the Board shall have regard to all relevant matters and in particular to -

  • (a) the nature of the injury
  • (b) the nature of the trade, business, profession or vocation in which that person is engaged or is likely to be engaged; and
  • (c) medical evidence relating to the injury.''

For present purposes the remaining subsections in sec. 25 are not relevant.

A new sec. 79 was introduced. It reads:

``(1) A person injured as a result of an accident may not, in proceedings to recover damages in respect of that accident, seek to recover damages from an insured person or a nominal defendant in respect of a deprivation or impairment of earning capacity arising by reason of that injury if before the date of commencement of the hearing of the proceedings he was entitled to make a claim under section 25 in respect of that deprivation or impairment of earning capacity and did not make such a claim before that date.''

There were a number of other changes made to the 1973 Act, many of them consistent with a clear legislative intention or purpose that a payment made to an applicant under sec. 25 would henceforth be by way of compensation for deprivation or impairment of earning capacity and not, as previously, in respect of a loss of income. Section 32 now provided that:

``Where the Board is liable to make any payment under this Part to any person, the payment may be made at such times and by such instalments as the Board determines.''

The appellant was injured in a motor accident caused by or arising out of the use of a motor car in Plenty Road, Reservoir in the State of Victoria on 18th July, 1980. Being eligible for compensation under the Motor Accidents Act she made an application under sec. 25 of the Act for a payment in respect of deprivation or impairment of her earning capacity. It is not suggested that she claimed for loss of income during a period of unemployment. The Board obtained information from the appellant's employer which revealed that over a six week period immediately before the accident the appellant had earned $163.40 gross per week from which tax of $29.40 had been deducted, leaving net income of $134. The Board determined, on or about 8th September, 1980, to make a payment to the appellant under sec. 25 to

ATC 4391

adequately compensate her for the deprivation or impairment of earning capacity she had suffered. The Board further determined that being liable to make a payment under sec. 25 the payment ought to be made by instalments at times to be determined, pursuant to sec. 32. And so it happened that the appellant received a payment of $4,360 for deprivation of earning capacity between 24th July 1980 and 6th March, 1981.

The following information is revealed in the evidence of one Berryman, Claims Manager of the Motor Accidents Board. His evidence shows that the payment of $4,360 was made by instalments as follows:

  • 1. On or about 18th September 1981, for the period 24/7/80 to 17/10/80 (12.4 weeks) $1,670.
  • 2. On or about 12th November 1980, for the period 18/10/80 to 7/11/80 (3 weeks) $410.
  • 3. On or about 27th November 1980, for the period 8/11/80 to 30/1/81 (12 weeks) $1,610.
  • 4. On or about 29th January 1981, for the period 31/1/81 to 27/2/81 (4 weeks) $540.
  • 5. On or about 26th February 1981, for the period 28/2/81 to 6/3/81 (1 week) $130.

The total period covered by the payment of $4,360 is 32.4 weeks - a simple arithmetical calculation will show that the Board determined to value the appellant's loss of earning capacity throughout the period at $134.57, which is marginally higher than her actual earning experience immediately before the accident. The Board had regard to the fact that in the first week after the accident the appellant received a sick leave payment from her employer of $134. The payment, made by the Board approximated very closely to the appellant's pre-accident earnings but was not identical with those earnings. However, it is significant, in my opinion, that the payment did not replace income in as much as increases in income, which might reasonably have been expected in the relevant period, are not reflected in the payment. And unlike the position of Tinkler or Smith, the periodic instalments were irregular and not referable to working weeks or days. Whilst the valuation placed by the Board upon the appellant's deprivation or impairment of earning capacity was equated closely to her net earnings immediately before the accident, it is difficult to see how the Board could have performed it statutory duty otherwise than as it did. The major factor in the exercise of valuing deprivation of earning capacity in the appellant's case was to have regard to her immediate pre-accident earning experience. That was something most relevant to quantifying her loss. Here, the Board faced an uncomplicated situation where past earnings ``may provide a sure guide to the amount of the valuation''. (Atlas Tiles at p. 709.)

The appellant disclosed the payment of $4,360 from the Motor Accidents Board when she made her Taxation Return for the year of income ending 30th June 1981. The Deputy Commissioner determined the payment was assessable as income and after the appellant gave notice of objection he disallowed her objection. Hence the appeal to this Court.

The issue raised by decision can be precisely stated and does not depend upon a finding of disputed facts. It is whether a payment made under sec. 25 of the Motor Accidents Act is income or is of a capital nature. The Commissioner contends that the payment made by the Motor Accidents Board is income because the payment was for the purpose of providing recoupment of lost income. Mr. Batt relies heavily upon the decision of the Federal Court in Tinkler v. F.C. of T. 79 ATC 4641; (1979) 40 F.L.R. 116. The appellant contends that the payment is of a capital nature because it is compensation for deprivation or impairment of earning capacity and as such is not assessable as income. Mr. Liddell, one of Her Majesty's counsel, who appeared with Dr. Sundberg for the appellant, distinguishes Tinkler's case upon the ground that the amendments made to the Motor Accidents Act in 1979 by Act No. 9332 fundamentally altered the character of a payment made pursuant to sec. 25. Whereas, before 1979, payments were made and calculated by reference to the average weekly income of an injured person and were for the loss of that income, since 1979 a payment is made in

ATC 4392

respect of deprivation or impairment of earning capacity. The Board is required to place a value upon the injured person's asset, earning capacity, and award compensation for deprivation or impairment of that asset.

The decision in Tinkler was perfectly consistent with the proposition of the learned Chief Justice in Atlas Tiles that ``if the award of damages for such an injury destroying or diminishing his earning capacity were merely a matter of replacing those earnings the amount of the award would be taxable''.

Mr. Batt relies most strongly upon the reasoning in Tinkler's case and argues that the amendments made to the Motor Accidents Act in 1979 did not change the substance of a sec. 25 payment. Alternatively, he argues that if a change of substance did occur then, in the case of the appellant, the fact that five instalments were paid to her, approximating to her pre-accident income, will characterise the instalments as a replacement of income, notwithstanding the change of substance produced in the Act. I might observe at this point that the alternative argument ought to be rejected. If the appellant applied for a payment under the changed Act, not payments or instalments, and her application contemplated ``compensation for deprivation or impairment of earning capacity'' and not a ``replacement of lost earnings'', the fact that the Board chose in its discretion to make five payments or instalments and quantified her claim by reference to her pre-accident earnings, should not alter the true character of the receipt of the compensation in her hands and turn it into income. She instituted a claim for compensation for damage to a capital asset and did not seek to replace her lost earnings. The actions of the Board, made independently of the appellant, surely cannot change the true character of the receipts in the hands of the appellant. Mr. Batt correctly observed:

``The question here is whether what the appellant received was in the true sense of the word income... The question in each particular case is as to the character of the receipt in the hands of the recipient. The test to be applied is an objective not a subjective one.''

(
Hayes v. F.C. of T. 11 A.T.D. 68; (1956) 96 C.L.R. 47at p. 55.)

``Whether or not a particular receipt is income depends upon its quality in the hands of the recipient. It does not depend upon whether it was a payment or provision that the payer or provider was lawfully obliged to make... The question whether a receipt comes in as income must always depend for its answer upon a consideration of the whole of the circumstances.''

(
Scott v. F.C. of T. (1966) 14 A.T.D 286; (1966) 117 C.L.R. 514at p. 526.)

Inasmuch as regard must be had to all of the circumstances to determine if the nature of the receipt is income or capital for the purposes of the Income Tax Assessment Act, the following matters are relevant:

1. That the Motor Accidents Act since 1979 empowers the Board to pay to an applicant compensation for deprivation or impairment of earning capacity.

2. That the Board is not empowered to make a payment to replace lost earnings.

3. That the appellant applied for a payment of compensation for deprivation or impairment of earning capacity.

4. That after the Board had regard to all relevant matters it determined to make a payment to the appellant pursuant to sec. 25 of the Act. It further determined that between 18/7/80 and 6/3/81 the appellant's earning capacity had been totally destroyed by reason of injuries she received in a motor accident on 18/7/80.

5. That in order to properly evaluate and quantify the appellant's compensation the Board had regard to her earning experience immediately before her accident, the nature and extent of her injuries and the receipt of sick leave entitlement.

6. That the Board determined in its discretion to make a payment pursuant to sec. 25 by instalments.

7. That the appellant received a total payment of $4,360 for a period of 32.4 weeks deprivation of earning capacity.

8. That the instalments were paid irregularly and in irregular amounts.

The circumstances I have outlined may be contrasted with the circumstances which existed in Tinkler's case and Smith's case.

ATC 4393

At the outset in Tinkler's case, as much as in Smith's case, the taxpayer had sought to replace lost income by periodic payments referable to her income. In each case the taxpayer had received payments which replaced lost income. In the present case the appellant sought the payment of a lump sum to replace the loss or impairment of a capital asset and she received a payment which represented the value of the deprivation or impairment of her earning capacity.

Mr. Batt also relies upon Smith's case to support an argument that the payment made by the Board is assessable income pursuant to subsec. 26(j) of the Income Tax Assessment Act. There a medical practitioner had taken out a policy of insurance under which the insurer promised ``to pay indemnity for disability covered by this policy and sustained by the insured resulting from injury or sickness''. The payments under the terms of the policy were made monthly and were intended to and did replace a proportion of earnings lost by the insured following an illness or accident. The payments were held to be income as they constituted amounts received by way of insurance or indemnity for or in respect of a loss of income which would have been assessable income if the loss had not occurred. (Subsection 26(j) of the Income Tax Assessment Act.) It was held that the terms of the policy, the circumstances in which it was taken out and the entitlement to periodic monthly payments were circumstances which pointed to the payments being income as a substitution for earnings.

I should have thought that the nature and terms of the policy pointed most strongly to the conclusion arrived at by the Court. It was a case quite unlike the present. The policy did not speak of loss of earning capacity, but provided for payments in substitution for income.

Mr. Batt submits that the word ``indemnity'' in subsec. 26(j) applies to compensation awarded under the Motor Accidents Act. He relies upon the reasoning of Kitto J. in
F.C. of T. v. Wade 9 A.T.D. 337; (1951) 84 C.L.R. 105 at p. 115, that, ``the words `by way of... indemnity' describe the character of the receipt, and in my opinion they may be satisfied as well by receipt pursuant to a statutory right as by a receipt under a contract''. Be that as it may Wade's case was concerned with a loss of trading stock and statutory compensation for the loss sustained. The moneys recovered under the Milk Act (W.A.) represented items of a revenue account and were regarded as received by way of revenue.

The position in the present appeal may be contrasted with the cases referred to inasmuch as the Act under which the payment was made to the appellant neither insures the appellant against a loss of income nor does it indemnify her against such a loss. In order to receive compensation certain qualifications or conditions must be met by an applicant, and an application must be made in a formal way by the claimant. If the qualifying conditions exist, the statutory compensation must be paid by the Board, not by reference to loss of income but by reference to an evaluation of the earning capacity of the claimant and the loss sustained, whether total or partial.

Subsection 26(j) is primarily concerned with receipt under a policy of insurance or a contract of indemnity of moneys to replace income. I am satisfied that the purpose of the Victorian Act, as amended in 1979, is to ensure that a payment made under sec. 25 is not paid as income but as capital to compensate an injured person for loss of a capital asset. I believe the purpose has been achieved, when one has regard not only to the character of the payment described by the Act but also to the circumstances of its receipt by the appellant. Those circumstances I have already mentioned.

I should add, for emphasis, that neither the calculation of the appellant's compensation nor the timing of the payment lay in the hands of the appellant. The instalment paid to her, for example, on 27th November, was mainly prospective in terms of her loss, whereas the instalment paid to her on 12th November was mainly retrospective. The facts placed before me did not reveal that the Board calculated a payment which would represent the replacement of lost earnings nor did they reveal that the appellant made such a request. In my opinion, the appellant's argument should be upheld. The sum of $4,360 paid to the appellant was to compensate her for the deprivation or impairment of earning capacity which she

ATC 4394

suffered as a result of an accident which occurred on 18th July 1980 at Plenty Road, Reservoir, the said amount being determined by the Motor Accidents Board having regard to, firstly, the loss of earnings which the appellant incurred, and any likely loss of future earnings she might incur by reason of that injury and, secondly, all relevant matters, and in particular (a) the nature of her injury, (b) the nature of her vocation of clerk and (c) medical reports.

The receipt had the character of capital, as there had been a genuine attempt to value an asset, earning capacity, and to award to the appellant an amount which represented the value of the deprivation of earning capacity for a period of time. Accordingly, the appeal will be allowed and the assessment varied by deleting the amount of $4,360 as assessable income. The assessment will be remitted to the Deputy Commissioner of Taxation to be re-assessed in accordance with law. The costs of the appellant will be ordered to be taxed by the Taxing Master, and when taxed such costs are to be paid by the Deputy Commissioner of Taxation.


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