BRACKENREG v FC of T

Members:
D Muller DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2003] AATA 824

Decision date: 22 August 2003

DW Muller (Deputy President)

This is an application by Deborah Odile Brackenreg for review of an objection decision dated 25 March 1999, in respect of the taxation year ended 30 June 1996, to include as assessable income an amount of $50,004.74 paid to Ms. Brackenreg by Comcare as a lump sum redemption payment of weekly payments of compensation, made pursuant to section 137 of the Commonwealth Employees Safety Rehabilitation and Compensation Act 1988 (the SRC Act).

Background

2. The following matters are not in dispute and the Tribunal finds as follows:

(a) On 16 June 1981, Ms. Brackenreg commenced employment with the Northern Territory Public Service.
(b) On 7 March 1984, Ms. Brackenreg was involved in a motor vehicle collision on her way to work. She suffered a whiplash injury to her neck.
(c) Ms. Brackenreg was paid workers compensation and received other benefits and services from the date of her neck injury.
(d) Ms. Brackenreg was retired from the Northern Territory Public Service on 29 January 1987, on the grounds of ``invalidity unable to discharge her duties as an employee'' due to the following disabilities:
- Depression 40%
- Hysterical Conversion State 25%
- Soft Tissue Injury Cervico-Brachial Region 25%
- Tendon Injury Index Finger Right Hand 10%
(e) Ms. Brackenreg then received an indexed superannuation benefit (which was worth $20,817.16 per annum as at 9 September 2002). She also received some weekly payments of compensation.
(f) On 6 November 1992, a delegate of the Commission of the Commonwealth Employees Rehabilitation and Compensation Act 1988 determined:
- ``(i) On the evidence before me, including special medical opinion, I find that-
  - (a) the said Deborah Brackenreg is not incapacitated for work as a result of the injury sustained on 7th March 1984;
  - (b) any symptoms suffered by the said Deborah Brackenreg are not the result of the incident on the 7th of March 1984;
  - (c) the said Deborah Brackenreg is capable of undertaking employment which is reasonably available to her and is able to earn not less than her normal weekly earnings at the date of the injury as varied.
- (ii) The said Deborah Brackenreg is not entitled to weekly compensation in accordance with Section 131 of the said Act from the date of this determination.
- (iii) I find that the amount of any expenditure incurred for travel from Groote Eylandt to Darwin by the said Deborah Brackenreg is not reasonably required as a result of the incident of 7th March 1984 and is therefore not payable under Section 16 of the said Act.
  
  ATC 2198
- (iv) Household cleaning services are not reasonably required by the said Deborah Brackenreg as a result of the incident of 7th March 1984 and the cost thereof is not payable under the said Act.''
(g) Ms. Brackenreg sought reconsideration of the determination by a letter dated 14 December 1992.
(h) By letter dated 17 February 1993 the reconsideration delegate and Manager, Legal Services of Comcare Australia, Mr. T. Fay, affirmed the determination.
(i) On 23 March 1993, Ms. Brackenreg made application to the Administrative Appeals Tribunal (AAT) for review of the reconsideration.
(j) On 23 November 1993 the AAT affirmed the decision that Ms. Brackenreg was not entitled to any compensation pursuant to the SRC Act from 5 November 1992.
(k) Ms. Brackenreg appealed to the Federal Court.
(l) On 15 March 1995, Sheppard J. of the Federal Court allowed the appeal, set aside the AAT decision and remitted the matter to the AAT to be heard and determined again.
(m) The matter came back before the AAT on 27 November 1995. On that date the parties lodged with the Tribunal a signed agreement as to the terms of a decision of the Tribunal that was acceptable to them. Those parts of the decision relevant to this review were:
- ``(a) the decision under review be set aside;
- (b) there be substituted therefor a decision that:
  - (i) the respondent is liable to pay to the applicant weekly compensation in respect of the applicant's partial incapacity on and from 27 November 1995;
  - (ii) the calculation of the correct amount of weekly compensation is remitted to the respondent.''
(n) The amount of weekly compensation was calculated pursuant to sections 131 and 132A of the SRC Act. It is not necessary to set out those provisions in full. The headings indicate the nature of the way in which the calculations were to be made.
``SECTION 131 FORMER EMPLOYEES UNDER 65 WHO ARE IN RECEIPT OF SUPERANNUATION BENEFITS AND UNABLE TO ENGAGE IN ANY WORK

131(1) [Application] This section applies to a former employee who:
- (a) on the commencing day, was under 65 and in receipt of a pension under a superannuation scheme; and
- (b) is not capable of engaging in any work.
131(2) [Benefit 95% earnings] Subject to this Division, if the former employee's total benefit immediately before the commencing day was equal to or more than 95% of his or her normal weekly earnings as at that day, the amount of compensation payable per week to the former employee under this Act is the amount that, when added to the former employee's superannuation amount, results in a combined benefit equal to 95% of those normal weekly earnings.

131(2A) [Benefit less than 70% earnings]

131(3) [70 to 90%]

131(3A) [Compensation less than 70%]

131(4) [Less than 70%]

131(5) [Super increased]

131(6) [Combined benefit less than 70%]

SECTION 132A FORMER EMPLOYEES UNDER 65 WHO ARE CAPABLE OF ENGAGING IN ANY WORK

132A(1) [Application] This section applies to a former employee who:
- (a) on the commencing day, was under 65; and
- (b) is capable of engaging in any work.
132A(2) [Amount if in receipt of pension] Where a person to whom this section applies was in receipt of a pension under a superannuation scheme on the commencing day, then, subject to this Division, the amount of compensation payable per week to the former employee is:
- (a) the amount of compensation per week that would have been payable under section 131 if that section had applied to
  
  ATC 2199
  the former employee, less an amount that is the greater of the following amounts:
  - (i) the amount per week (if any) that the employee is able to earn in suitable employment;
  - (ii) the amount per week (if any) that the employee earns from any employment (including self- employment) that is undertaken by the employee during that week; or
- (b) the amount of compensation per week that would have been payable under section 20 if that section had applied to the former employee.''
(o) The amount of weekly compensation was calculated to be $51.30.
(p) Ms. Brackenreg requested that the liability of Comcare to make further payments be redeemed by the payment of a lump sum pursuant to s. 137 of the SRC Act, which provides:
``SECTION 137 REDEMPTION ON REQUEST BY FORMER EMPLOYEE

137(1) [Conditions] If:
- (a) a relevant authority is liable to make weekly payments of compensation to a former employee in respect of an injury resulting in an incapacity; and
- (b) the amount of those payments if $62.99 per week or less; and
- (c) the relevant authority is satisfied that the degree of the former employee's incapacity is unlikely to change;
the relevant authority must, on written request by the former employee, make a determination that its liability to make further payments to the former employee be redeemed by the payment to the former employee of a lump sum.

137(2) [Amount] The amount of the lump sum is the sum of:
- (a) the amount worked out using the formula in subsection (3); and
- (b) the amount worked out using the formula in subsection (4).
137(3) [Formula] The formula for the purposes of paragraph (2)(a) is:
```
    52 x Amount per week x [(Specified number + 1)n - 1]
    ----------------------------------------------------
        Specified number x [(Specified number + 1)n]
              
```
137(4) [Formula for reduced amount]

The formula for the purposes of paragraph (2)(b) is:
```
    52 x Reduced amount per week x [(Specified number + 1)l - 1]
    ------------------------------------------------------------
           Specified number x [(Specified number + 1)l]
              
```
137(5) [Definitions] For the purpose of this section:

`amount per week' means the amount of compensation per week payable to the former employee;

`specified number' means the number specified by the Minister for the purposes of subsection 30(2);

`n' means the number worked out using the formula:
```
    number of days
    --------------
         365
              
```
where:

`number of days' means the number of days in the period beginning on the day after the day on which the determination is made and ending on the day immediately before the day on which the employee reaches 65 years of age;

`reduced amount per week' means the amount per week less the amount calculated under the formula in section 134;

ATC 2200

`l' means the number worked out in using the formula:

Expectation of life − (65 − Age)

`expectation of life' means the number of years in the complete expectation of life of the former employee at the date of the determination, as ascertained by reference to the latest Australian Life Tables published by the Australian Statistician;

`age' means the number of completed years in the age of the former employee at the date of the determination.''

(q) The Redemption Calculation was conducted using the following data.

Date of Birth (DD/MM/YY)     5/11/58
Date of Redemption          27/11/95
Amount per week ($)           $51.30
Specified number                0.03
Life expectancy                39.58
Claimant's Age                    37
Age as at 1/12/88                 30
Number of days                 10204
``n''                          27.96
Reduced amount per week        $0.00
``I''                          11.58
----------------------------------------------------------
The answers                    S137 Former
                               $50,004.74    S137 3
                               $     0.00    S137 4
                               $50,004.74    Total (3 + 4)

(r) For the financial year ending 30 June 1996 Ms. Brackenreg's gross lump sum redemption payment of $50,007.74 was assessed as assessable income pursuant to section 25(1), or alternatively section 26(j) of the Income Tax Assessment Act 1936, the relevant parts of which provide:
``SECTION 25 GROSS INCOME FROM CERTAIN SOURCES

25(1) [Assessable income to include gross income] 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; and
- (b) where the taxpayer is a non- resident-
  - the gross income derived directly or indirectly from all sources in Australia,
which is not exempt income, an amount to which section 26AC or 26AD applies or an eligible termination payment within the meaning of Subdivision AA.

...

SECTION 26 CERTAIN ITEMS OF ASSESSABLE INCOME

The assessable income of a taxpayer shall include-
- ...
- (j) [Insurance or indemnity for trading loss] any amount received by way of insurance or indemnity for or in respect of any loss:
  - (i) of trading stock which would have been taken into account in computing taxable income; or
  - (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;
...

ATC 2201

Subdivision AA - Superannuation, termination of employment and kindred payments

SECTION 27A INTERPRETATION

`eligible termination payment' , in relation to a taxpayer, means:
- (a) any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer, other than a payment:
  - (i) made from a superannuation fund in respect of the taxpayer by reason that the taxpayer is or was a member of the fund;
  - (ii) of an annuity, or supplement, to which section 27H applies;
  - (iii) from a fund in relation to which section 121DA, as in force at any time before the commencement of section 1 of the Taxation Laws Amendment Act (No. 2) 1989, has applied in relation to the year of income commencing on 1 July 1984 or any subsequent year of income;
  - (iiiia) from a fund that is or has been a non-complying superannuation fund in relation to any year of income;
  - (iv) of an amount to which section 26AC or 26AD applies; or
  - (v) of an amount that, under any provision of this Act, is deemed to be a dividend paid to the taxpayer;
  - ...
but does not include:
- ...
- (n) consideration of a capital nature for, or in respect of, personal injury to the taxpayer, to the extent to which the amount or value of the consideration is, in the opinion of the Commissioner, reasonable having regard to the nature of the personal injury and its likely effect on the capacity of the taxpayer to derive income from personal exertion; or''

3. Ms. Brackenreg's initial workers' compensation payments in 1984, were paid pursuant to the provisions of the Compensation (Commonwealth Employees) Act 1971 (the 1971 Act). The 1971 Act was repealed and replaced by the SRC Act. Parts of the SRC Act commenced on 1 July 1988 and the remainder on 1 December 1988.

4. Ms. Brackenreg's weekly compensation payments continued to be paid pursuant to the 1971 Act until the SRC Act commenced. Thereafter she was paid weekly compensation payments pursuant to the SRC Act. She was being paid pursuant to the SRC Act when the decision was made in November 1992 to cancel her payments.

5. The subsequent litigation, settlement, calculation of weekly payments and calculation of the quantum of the redemption was all done pursuant to the SRC Act.

6. Ms. Brackenreg was put into the category of ``former employee'' by s. 123 of the SRC Act because she was a person who was receiving weekly payments of compensation under the 1971 Act immediately before the commencing day of the SRC Act in respect of an injury resulting in an incapacity and had ceased to be an employee before that day. (She ceased to be an employee in January 1987.) Consequently, some of the ``special transitional provisions relating to certain former employees'' applied to her.

7. The SRC Act provides for the redemption of weekly payments which fall below a certain low level, by payment to the recipient of a lump sum. The redemption is available to current employees (s. 30), a person who has ceased to be an employee, (s. 30 would also apply) or a ``former employee'' (special transitional provisions sections 131 to 137). There is no pre-condition to the receipt of a lump sum redemption payment, that the recipient have their employment terminated. It is merely a convenient option which has been thought to be an efficient and probably economic way for Comcare to deal with small ongoing weekly payments, and also to give a more significant benefit to the employee in the form of a useful lump sum instead of relatively insignificant weekly amounts. There is no connection at all between the lump sum redemption payment to Ms. Brackenreg in the 1996 financial year and the termination of her employment in 1987. Ms. Brackenreg's payment was not an ``eligible termination payment''.

8. Ms. Brackenreg has submitted that she was paid the $50,000 ``to go away''. That is, she claims that a commercial decision was made by Comcare to pay her a lump sum to settle the matter, and that the lump sum was not referable

ATC 2202

to any specific weekly payment. The Tribunal does not accept that proposition. The documents show that Comcare conceded liability to settle the matter, but thereafter the quantum of the weekly payments and subsequently the redemption lump sum were calculated in accordance with the provisions of the SRC Act.

9. Whilst it is true that some lump sum payments of compensation or damages may be of a capital nature when they involve compensation for pain and suffering, loss of amenities, permanent physical or mental impairment and other non-economic loss. However, there is no such component in the payment to Ms. Brackenreg. Her payment was confined to compensation for loss of earnings.

10. There is no component of Ms. Brackenreg's payment which relates to any entitlement beyond 65 years of age. One of the changes brought about by the SRC Act was the provision (s. 23(1)) that compensation is not payable on a weekly basis (pursuant to s. 19) to an employee who has reached 65. There is a ``transitional provision'' (s. 134) which allows for a ``reduced payment'' to be made to certain ``former employees'' beyond the age of 65. The formula contained in s. 134 takes into account the age of the employee at the date of the commencement of the SRC Act. The older the employee, the less the reduction. Ms. Brackenreg's relative youth would have meant that if she had continued to receive her weekly compensation payment until 65, she would have received zero beyond 65. Similarly, the amount calculated pursuant to s. 137(4) for the purposes of the lump sum redemption (the 65 + factor) was zero in her case (see the calculation in paragraph 2 (q) above).

11. These issues have been the subject of many court and tribunal appeals. In Case X21,
90 ATC 239, Deputy President Gerber embarked on a useful analysis of the main line of authority in the area. He said [at 240-242]:

``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 (Common- wealth 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....

...

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).

...

6...., it is necessary to examine recent judicial decisions dealing with the treatment of compensation for tax purposes, involving the `earnings' versus `earning capacity' controversy, which in fiscal terms, comes to `revenue' versus `capital'.

ATC 2203

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....

...

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.

...

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.''

12. In 1999, Matthews J. re-visited some of these issues in
Coward v FC of T 99 ATC 2166. Mr. Coward had been injured in a workplace accident whilst employed by the Commonwealth in 1983. He was formally retired due to incapacity in 1985, and from that date received compensation payments. From 1988, those weekly payments were pursuant to the SRC Act. In 1996, Mr. Coward turned 65 and thereafter his weekly payments were dramatically reduced to $62.46 pursuant to s. 134 (mentioned in paragraph 10 above). Mr. Coward decided to apply for a lump sum redemption of the weekly payments of $62.46 which he was to get after turning 65 (s. 137). His redemption payment was calculated to be $39,590.24, and income tax of $11,206.70 was deducted from this amount. Matthews J. held at 2180.

``71. The applicant received compensation under s 132 (or possibly s 131) between 1 December 1988 and 16 February 1996 when he turned 65. On the latter date, by virtue of s 134 of the SRC Act, the amount payable to him was reduced by a formula which had, amongst its ingredients, the amount of weekly compensation then currently payable to the applicant, and his age as at 1 December 1988.

ATC 2204

72. The fact that there is a statutory reduction in the rate of weekly compensation payments when the recipient turns 65 plainly recognises that most members of the community are no longer in the workforce at that age. The object of compensation which then becomes payable can no longer be to compensate the individual for lost earnings, for it is assumed at that stage that there would not in any event be any earnings. What, then, was the nature of the payments to which the applicant was entitled after he turned 65? The answer provided by the majority in Inkster, in not dissimilar circumstances, is that the payments represented compensation for loss of earning capacity. As such, the payments had their genesis in capital, but nevertheless were income in the hands of the applicant so long as they were paid on a weekly basis.

73. Lee J's observation in Inkster as to the likelihood of a redemption payment being capital in the hands of the taxpayer was clearly obiter, and the circumstances of that case were by no means identical to those of the applicant here. In particular, the weekly payments made to Mr Inkster were calculated on a `notional' basis which had no relevance to his present circumstances. The weekly payments made to the present applicant, at least before he turned 65, had their basis in his `normal weekly earnings' at the time he received his injury. However when he turned 65, and the payments were reduced under the formula contained in s 134, any relevance that the resultant amount had to his present circumstances was so remote as to be indistinguishable from the circumstances in Inkster. Accordingly I consider that the analysis undertaken by Lee J is both relevant and applicable in this case. Under this analysis, the weekly payments which the applicant was entitled to receive after he turned 65 constituted income in his hand notwithstanding that they were designed to compensate him for a capital loss. The periodicity of the payment was the principal feature which converted them from capital to income. The lump sum redemption payment, which clearly lacked this feature, therefore reverted to capital.

74. It follows that Mr Murphy's second submission must prevail. The amount paid to the applicant by way of lump sum redemption of his compensation entitlements was a payment of capital and was therefore not assessable income under s 25(1) of the ITA Act.''

13. The Tribunal adopts the reasoning of Deputy President Gerber in Case X22, and the reasoning of Matthews J in Coward's case. The weekly compensation payments made to Ms. Brackenreg had their basis in a formula which took account of her ``normal weekly earnings'' which was referable to what she was earning when she was employed by the Commonwealth. Her compensation was in substitution for earnings and was paid for loss of earnings and was assessable under section 25(1)(a) of the Tax Act. In her case (unlike Mr.Coward) the weekly payments did not change their character upon being redeemed by the payment of a lump sum.

14. The objection decision under review is affirmed.

Disclaimer and notice of copyright applicable to materials provided by CCH Australia Limited

CCH Australia Limited ("CCH") believes that all information which it has provided in this site is accurate and reliable, but gives no warranty of accuracy or reliability of such information to the reader or any third party. The information provided by CCH is not legal or professional advice. To the extent permitted by law, no responsibility for damages or loss arising in any way out of or in connection with or incidental to any errors or omissions in any information provided is accepted by CCH or by persons involved in the preparation and provision of the information, whether arising from negligence or otherwise, from the use of or results obtained from information supplied by CCH.

The information provided by CCH includes history notes and other value-added features which are subject to CCH copyright. No CCH material may be copied, reproduced, republished, uploaded, posted, transmitted, or distributed in any way, except that you may download one copy for your personal use only, provided you keep intact all copyright and other proprietary notices. In particular, the reproduction of any part of the information for sale or incorporation in any product intended for sale is prohibited without CCH's prior consent.