REITER v FC of T

Members:
DJ Trowse M

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2000] AATA 1133

Decision date: 21 December 2000

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DJ Trowse (Member)

This is an application by Thomas Joseph Reiter (``the applicant'') for review of a decision of the Commissioner of Taxation (``the respondent'') dated 10 May 1999, disallowing the applicant's objection against the notice of assessment issued on 2 October 1997 for the 1997 year of income. At issue is the assessability of WorkCover income maintenance payments received by the applicant during the period 18 December 1996 to 30 June 1997. It was contended by the applicant that the payments in question were made in error and that, as such, he had no beneficial interest in the amounts received.

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Rather, he was holding those monies in trust for the rightful owners. Contrarily, the respondent viewed the receipts as assessable income pursuant to sub-section 25(1) or, alternatively, sub-section 26(j) of the Income Tax Assessment Act 1936 (ITA Act). Notably, the objection lodged on behalf of the applicant brought into question similar payments received in earlier years and that, ultimately, the applicant conceded, on the basis that he had a beneficial interest in those receipts, they represented assessable income in his hands.

2. The Tribunal had before it the documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (the ``T'' Documents) together with exhibits tendered by the parties. The Tribunal also had the benefit of the applicant's written ``further submission'' which was received after the conclusion of the hearing, and the respondent's reply to the applicant's further submission. In addition, the Tribunal heard oral evidence from the applicant, and from Mr Beckwith, a senior legal officer with WorkCover Corporation.

3. The applicant represented himself at the hearing, and the respondent was represented by one of his officers.

Background history

4. The applicant was employed by K & S Freighters Pty Ltd as a heavy vehicle driver. On 19 February 1993, the applicant was injured in Laverton, Victoria, during the course of his employment. As a result of the injury, the applicant received weekly income maintenance payments pursuant to section 35 of the Workers Rehabilitation and Compensation Act 1986 (SA) (WRC Act).

5. Following the accident, the applicant took legal action in the Victorian Supreme Court and on 17 December 1996 was awarded common law damages, less an amount to be deducted by agreement pursuant to provisions of the WRC Act (A2/126). The applicant's employer lodged an appeal against the verdict (A2/59) and WorkCover instituted separate recovery proceedings against the applicant in the Supreme Court of South Australia (A2/67).

6. While the two separate court actions were proceeding the applicant continued to receive income maintenance payments in terms of the WorkCover system. The judgment sum was invested in a term deposit account on trust for the applicant pending the outcome of the appeals.

7. On 17 December 1997 a settlement was reached between the parties. The invested judgment sum was released to the applicant on condition that he repaid to WorkCover the ``income maintenance'' payments that he had received from 18 December 1996 to 16 December 1997 totalling $32,304.48. After the WorkCover payments were deducted, the applicant received a total of $612,235.90.

8. The applicant's tax returns disclosed all of the income maintenance payments received as assessable income, including those received after 17 December 1996. On 14 December 1998 the applicant's accountants requested the respondent to amend the applicant's income tax returns for the years 1993 to 1997 inclusive to exclude the amounts previously shown as income maintenance payments received. The letter to the respondent included the statement that:

``The reasons for the request is that as a result of a compensation settlement an amount of $102,167.54 was repaid to WorkCover Corporation for income previously paid to me over the period 26th February 1993 to 9th December 1997, and it is requested that my assessment be amended to reduce my taxable income by the amounts repaid to WorkCover.''

It seems that the letter of request dated 14 December 1998 was regarded by the respondent as a formal objection.

9. On 10 May 1999, the respondent disallowed the applicant's objection. The applicant conceded or agreed with the respondent's decision in respect to the years of income 1993 to 1996 inclusive. However, the applicant did not accept the respondent's decision in relation to the 1997 year of income and on 1 November 1999 appealed to this Tribunal for review of the respondent's decision to include as assessable income an amount of $16,773 which represented income maintenance payments received from 18 December 1996 to 30 June 1997. Inherent in that rejection is the notion that the entitlement to receive those benefits ceased upon the judgment of damages and that the appeal therefrom was of no consequence.

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Issues and legislation

10. The issue to be considered is whether the sum of $16,773 forms part of the applicant's assessable income for the 1997 year of income pursuant to sub-section 25(1) or alternatively sub-section 26(j) of the ITA Act.

11. Sub-section 25(1) provides that:

``The assessable income of a taxpayer shall include-

• (a) where the taxpayer is a resident-
  • the gross income derived directly or indirectly from all sources whether in or out of Australia;
• ...''

Section 26 is headed ``Certain Items of Assessable Income'', and commences with the statement that the assessable income of a taxpayer shall include and, thereafter, follows a description of the kinds of items which come within the section. One of the items nominated in sub-section 26(j) is:

``any amount received by way of insurance or indemnity for or in respect of any loss:

• ...
• (ii) of profit or income which would have been assessable income;

if the loss had not occurred, and any amount so received for or in respect of any loss or outgoing which is an allowable deduction;''

12. At issue is the applicant's claim that he was never legally or beneficially entitled to the income maintenance payments received during the relevant period and that he only received the payments as a constructive trustee for WorkCover. In the event of a finding that there existed such a legal and/or a beneficial entitlement and, based on the applicant's acceptance that payments received prior to December 1996 constituted assessable income, it is reasonable to conclude that, in those circumstances, there is agreement that the amount in question would correctly fall within the provisions of sub-section 25(1) or alternatively sub-section 26(j) of the ITA Act.

Applicant's evidence and submissions

13. The applicant gave evidence before the Tribunal as to the background of his compensation claim. This history, as is relevant to the issue currently before this Tribunal, has been set out above.

14. The applicant submitted that he was not entitled to receive income maintenance payments as of and from 18 December 1996, as sections 36 and 55 of the WRC Act work together to prevent ``double dipping''. Sub- section 36(1) deals with the discontinuance of weekly payments, and establishes that:

``Subject to this Act, weekly payments to a worker who has suffered a compensable disability must not be discontinued unless-

• (a) the worker consents to the discontinuance of weekly payments; or
• ...
• (f) the worker breaches the obligation of mutuality; or
• ...
• (h) the discontinuance of weekly payments is authorised or required by some other provision of this Act.''

Sub-section 36(1a)(b) provides that a worker breaches the obligation of mutuality if WorkCover has, by written notice to the worker, required the worker to submit a certificate from a recognised medical expert certifying that the compensable disability continues, and the worker fails to comply with the requirement within the time allowed in the notice.

15. The applicant then referred the Tribunal to the provisions of section 55 of the WRC Act which, in his opinion, represented the kind of requirement referred to in sub-section 36(1)(h) and which would cause the discontinuance of the weekly payments. The section is headed ``Prohibition of double recovery of compensation'' and states that:

``(1) Where a disability is compensable under this Act and under a corresponding law, compensation shall not be paid both under this Act and under the corresponding law.

(2) Where compensation is in fact paid both under this Act and under a corresponding law, the compensation paid under this Act may be recovered as a debt due to the person by whom it was paid from the person to whom it was paid.

(3) The fact that compensation or damages in respect of a disability have been recovered under a foreign law is a bar to the recovery of compensation in respect of the same disability under this Act.''

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16. It was the applicant's submission that the date of recovery for purposes of sub-section 55(3) was 17 December 1996, that is, the day upon which the Supreme Court of Victoria handed down its judgment for compensation and damages. According to the applicant, it was that action that brought into operation the combined effects of sub-sections 36(1) and 55(3) of the WRC Act. The applicant also said that the judgment of
WorkCover Corporation v Thomas Joseph Reiter (1997) SASC 6313 specifically noted that the applicant was debarred from receiving compensation payments of any kind under the WRC Act.

17. The applicant contended that, in light of the above, he never had any legal or beneficial entitlement to the receipt of income maintenance payments totalling $16,773, and that the money had always belonged and was repayable to WorkCover. The applicant further opined that the only way in which he would have been entitled to the income maintenance payments would have been if the appeal by K & S had been successful, and he had not received his judgment sum.

18. In support of his submission that he was never legally entitled to the income maintenance payments as of and from 18 December 1996, the applicant gave evidence that he had informed WorkCover and his employer that he was not entitled to the payments he was receiving (Exhibit A2/92, 96). The applicant gave further evidence that he had requested his employer pay him from the accrued sick leave benefits to which he was entitled, as he had no entitlements to WorkCover benefits (Exhibit A2/80, 85, 92, 96).

19. The applicant also testified that he had notified his employer that the ``certificate of sickness'' which he periodically supplied was not a WorkCover certificate as required under section 36(1a)(b) of the WRC Act (Exhibit A2/80, 85, 92, 96). The applicant submitted that this constituted a breach of mutuality and that WorkCover should also have ceased the payments on that ground.

20. The applicant then advanced the argument that although he was not legally or beneficially entitled to the WorkCover payments, he had nevertheless received the payments and was holding the money on constructive trust for WorkCover. When the applicant was cross-examined on the concept of a constructive trust, he gave evidence that he had not opened a separate account for the payments received after the judgment date and that he had used the money for living expenses. The applicant conceded that he continued to spend the WorkCover payments even after he realised that the payments were not derived from his accrued sick leave, but were in fact WorkCover payments. However, the applicant testified that he was under the impression that eventually he would have to pay the money back to WorkCover.

21. Material prepared on the applicant's behalf and tendered at the hearing indicates that significant reliance was being placed on statements made by Senior Member D.W. Muller in
Rayner v FC of T 98 ATC 2310 on the issue of whether payments incorrectly received can constitute income. At p 2313 the Senior Member confirmed the content of Income Tax Ruling 2623 in the following terms:

``IT 2623 deals with the situation whereby, if a person receives an amount to which they were never entitled, but has paid tax on this amount before it is refunded, a determination is made, in retrospect, that the recipient should never have received the money. The money was not payable to them. The money was, in effect, never paid, and hence, it never became income.''

22. With regard to the existence of a constructive trust and the resultant income tax implications, the Tribunal was referred to
Zobory v FC of T 95 ATC 4251. The decision in that case clarifies that the general provisions of the ITA Act are directed to income to which a taxpayer is beneficially entitled and that a constructive trust will be fully effective in diverting the liability to income tax to the beneficiary.

Evidence of Mr Beckwith

23. Mr Beckwith was called to give evidence in his capacity as Senior Legal Officer with WorkCover, and, in particular, to expand upon statements made by his employer in a letter of reply dated 18 May 2000. A summary of the statements in question reads:

• • WorkCover did have a statutory obligation in terms of section 35 of the WRC Act to continue weekly payments of income maintenance during the period 18 December 1996 to 16 December 1997.

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• • During that same period payments could not be ceased in accordance with section 36 of the WRC Act.
• • Payments ceased in terms of section 36(1)(a) under the authority of section 55 because the applicant had been awarded compensation under a corresponding law.

24. Mr Beckwith testified that the obligation to pay remained in place until settlement was reached in December 1997. According to Mr Beckwith, the settlement agreed upon by the parties carried with it the applicant's consent to the discontinuance of weekly payments and, on the authority of sub-section 36(1)(a), the right to receive such payments ceased at that point in time. The witness had some misgivings as to the application of section 55 to a consideration of whether weekly payments of compensation should be discontinued. In any event, Mr Beckwith expressed the view that the word ``recovery'' used in sub-section 55(3) denotes actual receipt and rejected the suggestion that its meaning was wide enough to encompass the handing down of a judgment.

25. Mr Beckwith also testified that sub- section 36(1a)(b) does not refer to a medical certificate in ``prescribed'' form, and that the certificates supplied by the applicant to his employer were adequate to satisfy the requirements of the sub-section. He therefore concluded that there had been no breach of mutuality.

Respondent's submissions

26. On behalf of the respondent, it was submitted that the applicant was both beneficially and legally entitled to weekly compensation payments received after 18 December 1996 and until the settlement agreement on 17 December 1997. In particular, the Tribunal's attention was directed to the judgment of the Full Court of the Supreme Court of South Australia in
WorkCover Corporation v Reiter (1997) 70 SASR 347 where Lander J said at p 351:

``By reason of the provisions of the Act the respondent had an entitlement to compensation for medical expenses and income maintenance by way of weekly payments and other compensation under the Act and the appellant had a corresponding liability to make those payments. As at the date of issue of these proceedings the respondent still had a right to expect payments of compensation upon establishing a disability at any time and consequent incapacity arising out of this incident and the Corporation had an ongoing liability to make payments.''

27. Also, it was submitted that there was clear authority that weekly compensation payments received in respect of the loss of income are assessable income in terms of sub- section 25(1) or alternatively sub-section 26(j) of the ITA Act and, in this regard, the well known cases of
Tinkler v FC of T 79 ATC 4641,
FC of T v Slaven 84 ATC 4077 and
FC of T v Inkster 89 ATC 5142 were cited.

28. It was further submitted that there was no constructive trust in existence as, on the applicant's own evidence, no constructive trust had ever been created. The Commissioner's representative highlighted the fact that the applicant had not created a separate bank account, and had used the money as his own.

The Tribunal's findings and reasons for decision

29. The Tribunal has given consideration to the whole of the material before it, together with the submissions of the parties.

30. Having regard to the evidence before it, the Tribunal finds that the applicant was legally and beneficially entitled to the income maintenance payments received from WorkCover after 17 December 1996 and until 17 December 1997. It follows that the Tribunal finds that the income maintenance payments received during the period December 1996 and 30 June 1997 and totalling $16,773 constituted assessable income under sub-section 25(1) or alternatively sub-section 26(j) of the ITA Act.

31. In particular, the Tribunal accepts Mr Beckwith's evidence that WorkCover did not have the power to cease payments under sub- section 36(1) of the WRC Act until the settlement agreement was reached between the parties on 17 December 1997. It was then that consent to the discontinuance was forthcoming which, in turn, brought into operation the provisions of sub-section 36(1)(a). As to the possible application of section 55 of the WRC Act, the Tribunal agrees that ``recovery'' crystallised in December 1997, that is, when the monies first became available to the applicant.

32. The Tribunal accepts, that the applicant requested payment from his accrued sick leave, that he notified his employer he was not entitled

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to WorkCover payments, and that he believed his sick certificates were not in the prescribed form thus breaching the mutuality requirement. However, none of those actions impact upon WorkCover's responsibility to continue the applicant's income maintenance payments.

33. It is appropriate that the Tribunal comment on two submissions put to it in the course of the hearing, one by the applicant and the other by the respondent. The first relates to the notation in WorkCover Corporation v T.J. Reiter (1997) SASC 6313 that the applicant was debarred from receiving compensation payments of any kind under the WRC Act. That statement forms what appears to be a minor part of a submission made on behalf of the applicant regarding the possible operation of sub-section 54(7b) of the WRC Act and which found favour with the Court. It is not possible to ascertain what significance the Court gave to the quoted part of the submission and, in any event, it is observed that, on appeal, the Full Court disagreed with the construction of the sub- section as determined at first instant. The other submission pertains to the statement made by the Full Court of the Supreme Court of South Australia in WorkCover Corporation v Reiter (1997) 70 SASR 347 that ``as at the date of issue of these proceedings the respondent still had a right to expect payments of compensation upon establishing a disability at any time and consequent incapacity arising out of this incident and the Corporation had an ongoing liability to make payments''. Unfortunately, the date of the issue of those proceedings was prior to the period now under review and, thus, the pronouncement is of no assistance in the resolution of this matter.

34. In light of the above findings, the issue of whether the income maintenance payments were held by the applicant in constructive trust becomes irrelevant, and accordingly the Tribunal need not consider this issue.

35. For the reasons given above, the decision under review is affirmed.