Case V16

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 15 January 1988.

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P.M. Roach (Senior Member)

The applicant in this reference is an unskilled worker and a migrant. He arrived in Australia in 1961 at the age of 17 years. English is not his first language. Despite that, he has appeared before this Tribunal on his own to request the Tribunal to justly determine an issue between the Commissioner of Taxation and himself.

2. Early in the calendar year 1981 the applicant suffered injury at a time when he was employed as a storeman by a company - Alpha. He claimed that he was entitled to compensation and for a short period he received weekly amounts as ``workers' compensation''. When that flow of payments ceased he applied to the Commonwealth Department of Social Services and was granted ``sickness benefits'' pursuant to the provisions of the Social Services Act 1947: payments commencing from 28 March 1981. By 30 June 1981 he had been paid $1,528.90. It is not known whether any dispute exists or existed between the applicant and the Commissioner in relation to the determination of the applicant's taxable income to 30 June 1981.

3. Payment of sickness benefits continued into the new fiscal year and extended up to 22 November 1981. In relation to that period the applicant was paid $2,632 by way of sickness benefits.

4. By an order of the Workers' Compensation Commission of New South Wales of 19 November 1981, the Commission ordered and awarded:

``1(a)(i) That the Respondent pay the Applicant weekly compensation at the rate of $15 [sic] from 28th March 1981 in respect of his incapacity for work which he alleges results from injury referred to in the application for determination, such weekly payment to continue until the same be ended, diminished, increased or redeemed in accordance with the provisions of this award.

• (ii) That the liability of the Respondent to make the said weekly compensation payments be redeemed in whole by payment to the Applicant of a lump sum of $40,000 in addition to any compensation heretofore paid to the applicant or on his behalf.
• (b) That the Respondent pay the Applicant's costs (including one qualifying fee) forthwith after they have been agreed or taxed.''

The Commission also noted certain undertakings as to payment of outstanding sec. 10 expenses; as to consent to judgment (including a verdict for payment of the applicant's costs); and that by agreement the lump sum redeemed liability under sec. 16 of the Workers' Compensation Act 1926. Some time was to pass before payment was effected with the result that, in the period from 14 December 1981 to 9 February 1982, the applicant was in receipt of unemployment benefits paid pursuant to the Social Services Act 1947.

5. Pursuant to Div. 3A of the Social Services Act 1947 the Director of Social Services claimed and, by payment effected 16 March 1982, received reimbursement from the solicitors to the applicant in the sum of $4,160.90 being the sum of payments by way of sickness benefits made in the years of income ended 30 June 1981 and 1982 respectively.

6. In or about February 1982 the applicant recommenced employment after securing a position with a new employer - Beta. His wage was of the order of $210-$220 per week in the new position.

7. On 24 August 1982 the applicant, with the assistance of a fellow countryman and registered tax agent, completed an ``S'' Form of income tax return acknowledging receipt from Alpha of a lump sum payment (with no income component); and income from Beta. He asserted correctly that tax instalments had been deducted by both employers. He acknowledged payments in respect of unused annual leave and of unused long service leave which accrued after 15 August 1978, but acknowledged no other income. At the hearing, he expressed the belief that he had made available to his tax agent full particulars of the payments received from the Department of Social Services and said that the tax agent had at least been aware that there had been such payments. The applicant expressed the belief that all the payments he had received had been sickness benefits. As to that he was in error.

8. In due course, the Commissioner issued an original assessment on 26 January 1983 in

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which he increased taxable income returned by an amount described in the adjustment sheet which accompanied the notice of assessment as ``unemployment benefits $3,858'': the sum which represents the total of sickness benefits $2,632 and unemployment benefits $1,226 paid during the year of income ended 30 June 1982. The increased tax payable by reason of the increased income assessed (after effecting a set-off for rebates) was determined as $891.40. No net tax would have been payable had the income been assessed as returned. In those circumstances additional tax for incorrect return was levied at $445.70: one-half of net tax payable.

9. At the hearing the applicant sought leave to amend his grounds of objection to put in issue the reasonableness or otherwise of the imposition of additional tax and, with the consent of the Commissioner's representative, the application was granted. With a view to effecting a just determination of the matter, I have also raised a further issue. That being so, there are four issues to be considered:

• (a) unemployment benefits as assessable income;
• (b) sickness benefits as assessable income;
• (c) the deductibility of refunded benefits; and
• (d) remission of additional tax.

Unemployment benefits

10. In my view there can be no doubt but that unemployment benefits constitute assessable income. There is no provision in the Income Tax Assessment Act 1936 (``the Act'') which would constitute such receipts as exempt income. Although the applicant does not profess to understand the provisions of the Social Services Act 1947 any more than he claims to understand the provisions of the Income Tax Assessment Act 1936, the inclusion of unemployment benefits in the computation of taxable income is not really disputed.

Sickness benefits

11. The principal complaint of the applicant relates to the fact that in this regard he considers that the Commonwealth by its officer, the Commissioner of Taxation, is seeking to tax him on moneys of the Commonwealth of which he had only temporary use. He cannot understand why he should be made liable to pay income tax to the Commonwealth on moneys advanced to him by the Commonwealth in the period July to November 1981 which were fully recouped by the Commonwealth in February 1982.

12. The Commissioner's representative pointed to the circumstance that fortnight- by-fortnight as the Commonwealth paid sickness benefits to the applicant, those moneys were received by him in the way of income and that the payments so made constituted in all respects income according to the standards which have been accepted consistently since the decision in
F.C. of T. v. Dixon (1952) 86 C.L.R. 540. He supported that contention by pointing to decisions of Boards of Review as to allowances paid to trainee teachers (Case A59,
69 ATC 334; Case D19,
72 ATC 113; and Case G80,
75 ATC 564); weekly payment of workers' compensation (Case M85,
80 ATC 618); and an aged person's pension (
Keily v. F.C. of T. 83 ATC 4248). However, the Commissioner's representative was not able to point to any decision relating to the character of sickness benefits in circumstances such as those affecting the applicant.

13. The applicant's case differs from those of the trainee teacher whose obligation to repay would only arise in the event of a breach of the obligations undertaken by the bond. His circumstances differ from those of the aged pensioner because, considerations of fraud apart, the problem of repaying the pension to the Commonwealth could not arise. In so far as he recognises his case as similar to that of the injured worker, he makes no complaint. He accepts that the weekly payments of workers' compensation which he received constituted assessable income. But he cannot understand why he should have an obligation to pay tax on moneys which he only received conditionally and which, in the circumstances, were temporarily advanced by the Commonwealth and later recouped.

14. At the hearing no evidence was adduced to explain what tax considerations (if any) were taken into account by the Workers' Compensation Commission in determining the orders it was to make. I also recognise that if, in the event, his claim to compensation had failed, the applicant would have had no obligation to reimburse the Commonwealth and would have been as surely and effectively in receipt of ``income'' by way of sickness

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benefits as if there had never been any prospect for the Commonwealth of recovering compensation. The applicant can probably recognise too that, if payments of compensation had continued regularly until the final award, he would have been taxable on those regular payments; and the final lump sum payment would have been less than it was.

15. As the authorities stand at this time, I am not persuaded that the contingent liability to effect repayment in the event of the compensation claim being successful so alters the character of the periodic advances as to cause them not to constitute assessable income for the purposes of the Act. I am satisfied that, as with unemployment benefits, so too with sickness benefits: the amounts received constituted assessable income. Should I be incorrect as to that, then it follows that for that reason the assessment is excessive.

Deductibility

16. I now proceed to address an issue which was not canvassed during the hearing. Having regard to the status of the applicant, it is hardly surprising that he failed to raise it. Nor is it surprising that the issue should not have been raised by the officer responsible for the presentation of the Commissioner's case because his attention was concentrated on the issues as to assessability and the imposition of additional tax.

17. I address the question because it seems contrary to common sense to hold that a person is liable to pay income tax on moneys received from Commonwealth funds despite the reimbursement of those moneys to the Commonwealth. It has been said that ``tax and equity are strangers to each other'' but in my view that is not proposing that tax laws are expected to be unreasonable or that an interpretation of income tax legislation which produces an unjust result is to be preferred to that which produces a more just result.

18. Section 51(1) provides:

``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''

19. For the businessman that means that when he has to give a refund of moneys to a customer then, although the moneys received on the sale will retain the character of assessable income, the amount refunded will be considered to constitute a loss or outgoing incurred in carrying on business. So much would seem to be clear even if it is unclear whether moneys recouped in respect of losses and outgoings previously allowed will constitute assessable income. But references to the situation of persons carrying on business cannot automatically resolve similar problems for persons such as the taxpayer, who cannot say that the expenditure was ``necessarily incurred in carrying on business''.

20. The applicant was an employee prior to suffering his disability. He was unemployed from that date until he resumed employment. In the interim period he received moneys from the Commonwealth and received them as having the character of income (ante). He received that income in accordance with the provisions of the Social Services Act 1947 and that Act by sec. 115 expressly cast on him an obligation if called on to repay an amount equal to the moneys received from the Commonwealth if he later received compensation in consequence of suffering the disability which qualified him to receive Commonwealth assistance. That obligation was not conditional on whether the compensation moneys would be received as income in the common law or sec. 25 sense or on any notion as to whether he would be taxable on the compensation either in whole or in part; whether at full rates of tax or not, and whether in one year or over several years of income.

21. The Parliament has provided that income tax is to be levied on an annual basis based upon an assessment of taxable income derived year by year. That assessment is made by bringing to account assessable income ``derived'' during the year and by offsetting against that figure deductions in respect of losses and outgoings ``incurred'' during the same year. In determining whether an item is to be brought to account in one year rather than another, the courts have taken the view that the objective directed by the Act is to secure a result which most nearly provides ``a

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substantially correct reflex'' of the income of the period. In business at least that is achieved by treating businesses as ongoing concerns, with a result that it is not necessary for a taxpayer to establish that a claimed deduction directly relates to income of the year in which the deduction is claimed. With individuals who derive income from personal exertion, it also follows that it is ordinarily appropriate to only treat what is received as having been ``derived'' and then to treat it only as income of the year in which the moneys were derived (
C. of T. (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. - Carden's case (1938) 63 C.L.R. 108;
Brent v. F.C. of T. 71 ATC 4195; (1971) 125 C.L.R. 418). In the vast majority of cases application of those principles presents no difficulty. The result accords with common sense. Sometimes a taxpayer perceives a difficulty when a sum earned by his efforts over several years is only paid in a later year. But even then the accepted principles do not ordinarily operate unfairly because usually during the period of alleged accrual, there was no certainty that the income in question would ever be received. Certainty commonly comes with the payment and only with the payment. In such circumstances it is unlikely that many such recipients would have wished to present their returns for assessment in earlier years on an ``accruals'' basis.

22. However, the present reference raises a somewhat different issue. Considered narrowly, it is whether the refund of money by this applicant constituted a ``loss or outgoing'' incurred in the course of deriving assessable income within the meaning of sec. 51(1) of the Act. Put more broadly, it is whether a person, who is obliged to refund moneys previously derived as income, may be entitled to a deduction pursuant to the same provision. It sometimes happens that persons not in business are rewarded for past or future personal services and subsequently become liable to refund some or all of those moneys. That might be because they fail to perform the duties for which they had been paid (cf.
Lister v. Romford Ice & Cold Storage Co. Ltd. (1957) 1 All E.R. 125) or because, whether by an inadvertence or otherwise, they become liable to effect a refund because of an overpayment.

23. In the latter case, so long as the employment continues, there is unlikely to be any difficulty in the application of taxation principles because, in most cases, future receipts of income will be reduced until the necessary adjustments have been made. However, the situation would be more closely analogous to the present problem if, for example, as a condition of providing continuing employment, the employer insisted upon an immediate refund of the moneys overpaid and, only then, continued the employment paying in full the salary to which the employee was entitled.

24. The present circumstances raise a similar problem. In this instance, there is no question of non-performance or of sub-standard performance of obligations arising from employment because the assessable income in question was derived in the way of recurrent grants of social services. Nor does any question of overpayment arise because the amounts paid were what the Parliament intended they should be. What is significant is that the amounts were not advanced unconditionally. The entitlement to receive the moneys flowed from the statute, once the statute made express provision for the moneys advanced to be refunded in the events which happened. The moneys were advanced initially to the applicant from moneys provided for the purpose by the Parliament. Those moneys were provided (inter alia) to enable persons faced with similar circumstances to the applicant to provide for the support of themselves and their families pending determination of claims to compensation. The moneys so advanced were theirs to use as they pleased for that personal support. But a condition was built in - the moneys had to be refunded if the compensation claim succeeded. Further, that obligation to refund was not conditioned upon a breach of an obligation which had been assumed by the applicant. For that reason the circumstance of the applicant is to be distinguished from the circumstances of a formerly bonded student who, having repudiated his obligations, became obliged to make satisfaction for his breach and to do so by way of refunding moneys which had been paid to him as income (Case A59, 69 ATC 334).

25. Considered in that way, the obligation of repayment which was assumed by the applicant was founded in the very circumstances generating the assessable income. In my view, it arose out of and in the course of derivation of the assessable income and, accordingly, the

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obligation satisfies the requirements of sec. 51(1) of the Act.

26. For those reasons I am satisfied that the applicant was entitled in the year of income ended 30 June 1982 to a deduction in the sum of $4,161 - an amount equal to the sickness benefits of $1,529 and $2,632 derived as assessable income during the years of income ended 30 June 1981-1982 respectively. To allow that deduction would reduce taxable income below the returned and undisputed figure for taxable income of $5,957. I have to consider whether I should direct the reduction of taxable income below that figure. I have decided that I should not because to do so would involve the granting of relief never claimed. Accordingly, I proceed to address the question of additional tax.

Additional tax

27. Section 226 of the Act provided that what gave rise to liability to additional tax was (inter alia) the omission of assessable income from a return of income. By its terms it did not require that the omission should lead to an avoidance of tax. However, as I have held that the applicant was entitled to an even larger deduction than the amount of omitted income, in the exercise of discretion I have decided that in this instance additional tax should be wholly remitted. However, in case I am in error on the question of understatement of taxable income, I now address other aspects of the additional tax issue.

28. The assessment in issue before me issued on 26 January 1983: the day after the Commissioner's Taxation Ruling IT 2012 issued with effect from 14 February 1983. In consequence, the amount of additional tax was not determined by the norms proclaimed by that Ruling but rather by reference to older norms which have been generally thought to be less severe than the norms set by IT 2012. Whatever may generally be the case, it was not so in this instance. Following questions raised at the hearing, the Commissioner's representative had the calculations underlying the imposition of additional tax checked with the result that it was acknowledged that, had the norms of IT 2012 been applied, a basic penalty of 40% of tax avoided would have been applied, but with no provision for interest to be charged at the rate of 20% per annum because it was said the understatement of income did not delay the assessment of tax correctly payable. Accordingly, the Commissioner's representative indicated that, by the norms of IT 2012, additional tax would have been set at the lesser figure of $356.56.

29. There remains a separate question as to whether, independently of that consideration, the imposition of additional tax is unduly harsh. I have considered at some length the exercise of discretion in relation to penalties for additional tax in Case U36,
87 ATC 266 and I propose to apply those considerations. In doing so, I would observe that it would not be proper to reduce penalties because of any thought that the state of the law is unreasonable. However, a proper consideration to take into account is to allow for the circumstance that a person such as the applicant might be confused as to the law or not unreasonably ignorant as to the requirements of the law (cf.
Trautwein v. F.C. of T. (1935-1936) 56 C.L.R. 196 at p. 210; and my decision this day in Case V14,
88 ATC 170). In this instance I particularly take account of the circumstance that, by the time the applicant came to lodge his return in August 1982, some 6 months had passed from the last date upon which he had received any supporting allowances from the Commonwealth; and that, by that date, he had repaid to the Commonwealth all moneys which had been advanced to him out of the public purse by way of sickness benefits (although not by way of unemployment benefits). I also accept that, while he was disabled and awaiting payment of moneys due from Alpha and awaiting new employment which was later to be found with Beta, the subtleties of distinction between sickness benefits and unemployment benefits would largely have been lost on him. On the other hand, I am not persuaded that he did not receive from the Department of Social Services, prior to the preparation and lodgment of his income tax return, something in the way of a ``Statement of Earnings'' which would not only have brought to his attention the total amounts received from the Department but also drawn to his attention, in the interests of both himself and the Commonwealth, the need to declare the amounts so received as assessable income.

30. All in all, I think that if there should have been any imposition of additional tax, the amount levied was excessive and unreasonable. Accordingly, I conclude by finding that if,

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contrary to the views I have expressed, the assessment of taxable income should be upheld, additional tax should be reduced to $200.