Case X21

Members:
P Gerber DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 9 January 1990.

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Dr P. Gerber (Deputy President)

The facts in this case can, for present purposes, be briefly stated. The applicant, a worker for purposes of the Compensation (Commonwealth Government Employees) Act 1971 (the ``Compensation Act'') asserts that an amount of $49,061, paid in a lump sum for weekly payments of workers' compensation, does not constitute assessable income. The said sum was received by the taxpayer on 3 April 1985 as part of a greater amount of $54,786, being the amount of compensation the delegate had calculated as being due to the taxpayer as weekly payments of compensation for total incapacity from 30 April 1977 to the date of payment; i.e. 3 April 1985. The amount of $49,061 now in dispute is that proportion of the sum of $54,786 which covers weekly payments for the period 30 April 1977 to 3 April 1985. It should be added that the taxpayer's (then) accountant remitted an amount of $14,463.70 to the respondent as tax instalments.

2. At the hearing of this matter, I gave my provisional reasons why I believed the claim could not succeed, based on the authorities as they then stood. However, I added that my reasons were ``provisional'' because a matter touching on the issue before me - Case W3,
89 ATC 126 - was on appeal to the Federal Court. I added that I myself would have reached a different conclusion on the facts of Case W3, but in case I was wrong, it would be unfortunate if the applicant were compelled to appeal my decision in order to preserve his rights. It was therefore agreed that I would reserve my decision until Case W3 had been finally determined. That case has now been heard and determined and is reported as
F.C. of T. v. Inkster 89 ATC 5142.

3. At the hearing, Mr Schoch, who ably represented the applicant, relied on two alternative submissions. Firstly, he argued that compensation payable under the Compensation Act were payments for loss of earning capacity, as distinct from loss of earnings, thus constituting an affair of capital not subject to tax; cf.
Groves v. United Pacific Transport Pty. Ltd. (1965) Qd.R. 62 at p. 65; alternatively, he submitted that even if weekly payments of compensation were prima facie assessable as income, a lump sum constituted a capital payment, even if exclusively made up of the arrears of weekly payments.

4. Neither argument is new. Thus, as far back as 1959 a Taxation Board of Review held, in Case K34
(1959) 10 T.B.R.D. 187, on facts difficult to distinguish from those before me, that weekly payments of compensation had ``elements of a substitute for earnings, of regular periodicity, and of indefinite duration... and... clearly have the quality of income in ordinary parlance''. The Board concluded in that case the determination of the employer's liability to pay weekly payments, ``being retrospective in its operation, raised certain arrears of compensation which were paid to the taxpayer in one sum. The sum so received consisted of an aggregation of weekly payments paid in one amount, and the fact that they were so paid does not alter their nature from that of income to that of capital'' (at p. 189).

5. In the instant case, it was common ground that the taxpayer suffered from a work-related condition which rendered him totally incapacitated for work. In due course, the delegate determined that the applicant was entitled to weekly payments of compensation pursuant to sec. 45 of the Compensation Act. Can it be possibly maintained in the circumstances that the payments thus received constitute compensation for lost earning capacity? Once the question is posed in this way, the answer appears disarmingly simple.

6. Since seemingly simple questions frequently produce highly complex answers, it is necessary to examine recent judicial decisions dealing with the treatment of compensation for tax purposes, involving the ``earnings'' versus ``earning capacity''

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ATC 241

controversy, which in fiscal terms, comes to ``revenue'' versus ``capital''.

7. In
Tinkler v. F.C. of T. 78 ATC 4565, 79 ATC 4641;
F.C. of T. v. Smith 81 ATC 4114; (1981) 147 C.L.R. 578 and
F.C. of T. v. Slaven 83 ATC 4387, 84 ATC 4077, all the judges accepted that the distinction was not a mere artificiality. In all three cases it was accepted that the test in determining whether a payment of compensation has the character of assessable income must turn on the characterisation of the payment, a process which looks at the purpose for the payment as (hopefully) revealed by the statute pursuant to which the compensation becomes payable.

8. I have had the additional advantage of reading the most recent pronouncements on the subject by the Full Federal Court in Inkster (supra). In that case, the taxpayer had worked as a fitter and turner in railway workshops in Western Australia (the ``railways''). Upon cessation of his employment with the railways, he worked with the Police Department until his retirement in 1982. In 1983, he was diagnosed for the first time as suffering from asbestosis. It was common ground that he had been exposed to asbestos dust whilst working for the railways. The taxpayer, who was in receipt of a superannuation pension from the Police Department, applied for compensation under the Workers' Compensation and Assistance Act 1981 (W.A.) (the ``Act'').

9. In August 1984, the railways were ordered to pay the taxpayer fortnightly compensation payments under the Act, backdated to November 1983 (subsequently increased in amount due to further physical impairment). In September 1987, the taxpayer reached 65 years and was thereupon paid a lump sum of $25,834 in full settlement of his rights under the Act. The Commissioner assessed the taxpayer to tax on the compensation payments received in each of the 1985 and 1986 income years.

10. The Federal Court upheld the Commissioner's assessments and unanimously overturned the decision of this Tribunal which had earlier concluded the payments were of a capital nature and not assessable under sec. 25(1)(a) or 26(j) of the Tax Act.

11. On a careful perusal of Inkster, I am satisfied that the case has not changed the law. The case itself involved some unique features, if only because workers' compensation was found to be payable notwithstanding that there was no loss of income. It was therefore not possible to hold that the payments were in substitution for lost earnings, if only because the worker would have earned nothing during the relevant period even without any disability. In the result, the relevant compensation had to be calculated without reference to recent earnings.

12. Lee J. (Gummow J. concurring) and Pincus J. each reached the same result; viz. that weekly payments of compensation under the Western Australian Compensation Act constitute assessable income.

13. After reviewing the facts, Lee J. observed (at p. 5157):

``The payments had their genesis in an assessment of a loss of earning capacity.

For this reason any one payment may have had the character of capital rather than revenue.''

Nevertheless, his Honour at p. 5158 held the instant compensation payments to be income which:

``Although the payments had their origins in capital, they were not in the nature of payments by instalments of a fixed sum due and owing. The payments were intended to serve the purpose of providing a regular income supplement to the respondent notwithstanding that the payments were generated by calculations which related to capital considerations. Although... the Compensation Act provided for the payments to be calculated as weekly payments and paid regularly. 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.''

14. Pincus J., at p. 5146, after an exhaustive analysis of the relevant legislation, concluded that the better view was that although:

``compensation may be payable under the statute in amounts not truly representative of lost earnings... the provisions in Sch. 1 (in particular cl. 7 and 11...) seem on their face to be designed to compensate for lost earnings.''

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ATC 242

His Honour found some difficulty in reconciling Slaven with Tinkler. In the result, he preferred to follow, what he referred to as the ``basic rule'' in Tinkler; viz. that payments made to compensate for lost income are themselves income.

15. For present purposes, I am satisfied that the Commonwealth Compensation Act is indistinguishable from its Western Australian counterpart, and that the jurisprudence applied by the Federal Court in Inkster applies mutatis mutandis to the federal provisions relevant to this case. This inference is supported by sec. 45 of the federal Act, which provides the statutory formulae for ascertaining the quantum of compensation. By sec. 45(2), compensation is payable to the employee, during the period of the incapacity, of an amount per week equal to the lesser of the amounts calculated under sec. 45(2)(a) and 45(2)(b). By sec. 45(2)(a), the amount of compensation is equal to $90, or such higher amount as is prescribed, plus any amount or amounts required to be added to that amount in accordance with the succeeding provisions of this section. Section 45(2)(b) stipulates the compensation to be an amount per week equal to the average weekly earnings of the employee before the injury. This is read subject to sec. 45(7) where the employee has retired as a result of the incapacity for work and as a result of the retirement is in receipt of a pension under a superannuation scheme established or maintained by the Commonwealth. Under sec. 45(7), the amount of compensation payable to the employee in respect of each week during the period of the incapacity shall not exceed the amount, if any, by which the average weekly earnings of the employee before the injury exceed by sec. 45(7)(e) the pension paid or payable to the employee in respect of that week. Although sec. 45(2)(a) places a ceiling on the remuneration recoverable, the reference in sec. 45(2)(b) to the average weekly earnings of the employee, and the role of sec. 45(7), discloses a statutory intent to compensate the injured employee for the income truly lost.

16. I am therefore satisfied that the mechanics provided by the Act for calculating compensation indicate that the compensation payable is directly related to the amount of earnings which the employee would have been entitled to receive if he had been earning it in the form of wages. Compensation is thus in substitution for earnings and is paid for loss of earnings and assessable under sec. 25(1)(a) of the Tax Act.

17. It will be of small comfort to the taxpayer to know that the Tribunal considers the result to be inequitable and, were it possible to dissect the lump sum on a year-by-year basis - and thus reduce the amount of tax payable - it would gladly have done so. Alas, lump sum payments of an income nature have, since time immemorial, been taxed in the year of receipt, an inequitable process which was only recently remedied by legislation. It will be of no comfort to the applicant that this legislative change does not apply to him.

18. The Tribunal has no alternative but to affirm the decision under review.