Case W3

Members:
KL Beddoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 25 November 1988.

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K.L. Beddoe (Senior Member)

The question at issue in this application is whether certain compensation payments received by the applicant during the years ended 30 June 1985 and 30 June 1986 are assessable income within the terms of subsec. 25(1) or para. 26(j) of the Income Tax Assessment Act 1936.

2. The payments in question were made to the applicant by the West Australian Government Railways within the terms of the Workers' Compensation and Assistance Act 1981.

3. The factual circumstances surrounding these compensation payments are as follows. Between November 1948 and February 1950 the applicant was employed as a fitter in the railway workshops. He was again employed in the railway workshops as a turner between August 1950 and May 1951. It seems that on

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both of these occasions the applicant's employment exposed him to asbestos dust.

4. In 1951 the applicant took up employment with the Police Department and remained an employee of that department until he reached retirement age (60 years) on 1 September 1982. At the time of his retirement his weekly salary from the Police Department was $720 per week.

5. Following his retirement from the Police Department the applicant then took a temporary position in the Crown Law Department with a remuneration of $540 per week plus the use of a vehicle. Consequent upon his retirement from the Police Department the applicant also received a superannuation payment of $356 per week. The position with the Crown Law Department was terminated after a relatively short period of employment.

6. The applicant has adopted the practice over many years of having an annual chest X-ray. This was apparently a carry-over from the compulsory X-ray campaign instituted by the health authorities in earlier times in connection with eradication of tuberculosis. In conformity with his usual practice the applicant attended for a chest X-ray in 1982 at the chest clinic; the result of which was that he was advised by the chest clinic that he was suffering from asbestosis. That advice was given to him by the chest clinic prior to his retirement from the Police Force in September 1982 but was not in any way the cause of his retirement from that force. After his retirement from the Police Force the applicant applied for compensation under the Workers' Compensation and Assistance Act 1981 making his claim against the West Australian Government Railways in relation to his earlier employment.

7. As a result of the claim for compensation the applicant was reviewed by a medical panel which found that there was nothing wrong with him and in particular that he was not suffering from asbestosis. In his evidence the applicant said that he was pleased to be cleared by the medical panel and he thought no more of the matter until he attended for his annual chest X-ray the next year. The chest clinic again diagnosed asbestosis and the applicant again applied for compensation from the Railways.

8. The applicant was again reviewed by a medical panel under the Compensation Act and this time the medical panel found that he was suffering from asbestosis and chronic bronchitis, that he was disabled from earning full wages and that disablement was rated as being 40%. The medical panel found that he was fit to undertake work at a moderate level. That last finding made little sense in the context of the fact that the applicant had retired from employment and was living on his superannuation pension from the Police Force. In August 1984 the Railways Commission payment of compensation was backdated to 21 November 1983, such payments being made on a fortnightly basis. The quantum of the payment was fixed as being the difference between the basic wage in 1983 and the wage of a fitter and turner in 1983.

9. In the year of income ended 30 June 1985 the applicant received $18,585 from the Superannuation Board and $10,721 from the Railways in respect of compensation.

10. In May 1985 the applicant was reviewed by a medical panel which determined the same diagnosis but found that his impairment was not at 60% and that he was only fit to undertake light work. That finding resulted in the Railways paying compensation payments on a weekly rate based upon the difference between half of the basic wage and the wage for a fitter and turner. That resulted in an increase in the compensation paid to the applicant. In the year ended 30 June 1986 the applicant was paid $19,540 by the Superannuation Board and $12,213 by the Railways.

11. The applicant turned 65 on 1 September 1987 and elected to take a lump sum in full settlement of his rights under the Compensation Act. As a consequence of that election an amount of $25,834 was paid to the applicant on 29 October 1987.

12. Division 3 of Pt 3 of the Workers' Compensation and Assistance Act 1981 provides for payment of compensation for workers disabled from earning full wages by reason of suffering from pneumoconiosis and other diseases arising from their employment by their present or a former employer. In particular sec. 33 of the Act provides that where a worker is disabled from earning full wages by reason of suffering from pneumoconiosis and the disease was due to the nature of any employment at any time previous to the date of the disablement then the Act will apply subject to the provisions

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of Div. 3. Section 35 makes it clear that a workman disabled by contracting asbestosis is deemed to be disabled by pneumoconiosis provided he does not again engage in employment entailing substantial exposure to asbestos dust. Section 41 makes it clear that on the facts of the present case the State Government Insurance Commission was correct in determining that the Railways were liable for the applicant's disablement. Section 42 of the Act provides that the amount of the compensation shall be calculated with reference to the earnings of the worker with the employer from whom compensation is recoverable.

13. The rate of compensation is to be determined in accordance with Sch. 1 of the Compensation Act and on the facts of this case the relevant provision is cl. 7 of that schedule. Evidence was given before the Tribunal to the effect that the Insurance Commission had been advised that superannuation payments were not to be regarded as earnings when calculating entitlements under Sch. 1 and further where an applicant for compensation is not earning any wage and that applicant has entitlement to compensation based upon his being fit for moderate work or light work then the payments are calculated on the basis that he is capable of earning either half the basic wage in respect of light and the basic wage in respect of moderate fitness for work.

14. The evidence before the Tribunal shows that the applicant was paid compensation at the following rates:

      From 21 Nov. 1983       $116.40 per week
      From 8 April 1984       $128.70 per week
      From 7 April 1985       $221.80 per week
      From 10 Nov. 1985       $230.20 per week.
      

The above variations in the payments reflect firstly the change in the medical panel's decision as to his fitness for work and also reflect changes in wage movements in the relevant award.

15. Evidence was also given that the applicant had applied under sec. 67 of the Compensation Act to redeem his right to weekly payments. However, that redemption did not proceed because the applicant was dissatisfied with the lump sum amount offered by the Insurance Commission in full satisfaction of his rights under the Act. The amount offered to the applicant was $23,750. It is not difficult to see why the applicant refused the offer because he continued to receive the weekly payments until he turned 65, 18 months later, and he was then paid an amount of $25,834 calculated in accordance with Sch. 5 of the Act. According to the evidence the applicant has been paid a total amount of $64,452 by the Railways in respect of his disablement.

16. Evidence was also given by an officer of the Insurance Commission that the Commission was reluctant to pay redemptions prior to a disabled worker reaching age 65 because in the event of that worker dying before reaching age 65 the worker's spouse would also have the right to claim compensation in respect of the disablement. Although it is not clear on the evidence before the Tribunal it seems that the Insurance Commission was concerned to discourage disabled workers claiming redemptions of their right to weekly payments. The applicant claims that the payments he received from the Railways were not a payment for wages and should be construed as a payment for disablement caused by asbestosis. He further argues that there was no question of the payments being in any sense a substitute for loss of earnings caused by the asbestosis as he has not suffered any loss of earnings because of the disease. He also put some weight on the fact that there was a maximum payment under the Compensation Act in the vicinity of $75,000. However, it is not clear to the Tribunal why the fact that there is a prescribed maximum payment in any way alters the character of the amounts received by the applicant.

17. In a well-prepared address to the Tribunal the applicant relied in the main on the decision of the Federal Court in
F.C. of T. v. Slaven 84 ATC 4077.

18. The respondent contends that the character of the amounts derived by the applicant is that of payments in lieu of wages and therefore income according to ordinary concepts. Although she did not make a special point of it the representative's concern was clearly with the periodicity of the payments received.

19. Some reliance was placed upon the decision of Taxation Board of Review. No. 3 reported as Case M85
80 ATC 618. The case concerned weekly payments of workers compensation received by a totally disabled

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worker prior to the worker being paid a lump sum payment in redemption of the balance of his entitlement. With respect the Board correctly stated the law after reviewing the authorities at that time, as follows:

``When one looks at the nature of weekly payments paid and payable under the [Workers Compensation] Act, they have the classic characteristics of payments of assessable income not only in terms of the periodicity with which they are paid, but also in the manner in which they are quantified, namely, they bear a distinct ascertainable ratio to the actual income the taxpayer would have earned had he not been injured.''

20. In
F.C. of T. v. Dixon (1952) 86 C.L.R. 540 the High Court (McTiernan and Webb JJ. dissenting) held that a sum provided to an employee, by his employer, being the difference between military pay and the salary the employee would have received if he had not enlisted in the military forces, was assessable income.

21. In the course of their judgment Dixon C.J. and Williams J. stated at p. 557:

``Because the £104 was an expected periodical payment arising out of circumstances which attended the war service undertaken by the taxpayer and because it formed part of the receipts upon which he depended for the regular expenditure upon himself and his dependants and was paid to him for that purpose, it appears to us to have the character of income, and therefore to form part of the gross income within the meaning of sec. 25 of the Income Tax Assessment Act 1936-1943.''

While their Honours do not say so in as many words they were clearly regarding the payments as periodical payments made to the taxpayer to replace or substitute for the income lost because he enlisted for military service. This is made very clear in the judgment of Fullagar J. where his Honour stated at pp. 567-569:

``It seems to me that the appellant's receipts from Macdonald, Hamilton & Co. must be regarded as having the character of income. They were regular periodical payments - a matter which has been regarded in the cases as having some importance in determining whether particular receipts possess the character of income or capital in the hands of the recipient, see e.g.
Seymour v. Reed (1927) A.C. 554, at p. 570 and
Atkinson v. Federal Commissioner of Taxation (1951) 84 C.L.R. 298. This consideration, while not unimportant, is not decisive. What is, to my mind, decisive is that the expressed object and the actual effect of the payments made was to make an addition to the earnings, the undoubted income, of the respondent. What the employing firm decided to do, and what it really did, in relation to the respondent and others in the same position, was `to make up the difference between their present rate of wages and the amount they will receive'. What is paid is not salary or remuneration, and it is not paid in respect of or in relation to any employment of the recipient. But it is intended to be, and is in fact, a substitute for - the equivalent pro tanto of - the salary or wages which would have been earned and paid if the enlistment had not taken place. As such, it must be income, even though it is paid voluntarily and there is not even a moral obligation to continue making the payments. It acquires the character of that for which it is substituted and that to which it is added. Perhaps the nearest parallel among the many cases cited to us is to be found in
Commissioner of Taxes (Vict.) v. Phillips (1936) 55 C.L.R. 144. Phillips was managing director of a company under a contract for a term of years. That company entered into an agreement with another company which necessitated the retirement of Phillips from his position. By way of `compensation' the company agreed to pay Phillips the same amounts at the same times as it would have been obliged to pay him if he had continued in his position until the expiration of his term of employment. The payments made by way of `compensation' were held to partake of nature as the payments which would have been made if the employment of Phillips had continued. The payments in that case were made in pursuance of a binding contract, whereas the payments in the present case were voluntary. But the nature of the payments was the same in both cases, and what was said in Phillips' case (supra) applies mutatis mutandis to this case. In a joint judgment Dixon and Evatt JJ. said: - `No prima facie

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reason exists for regarding as instalments of capital annual payments which are taken in place of the contractual rights' (1936) 55 C.L.R. at p. 156 given by the original contract. And again: - `In these circumstances they' (i.e. the payments under the substituted contract) `must... be regarded as of the same nature as the payments they replace'. (1936 55 C.L.R. at p. 157).''

22. The reasoning of Fullagar J. was relied upon by the respondent's representative to support a proposition that the weekly amounts of compensation paid to the applicant were in substitution for income lost due to the disablement arising from asbestosis. This submission has within it a number of difficulties. The evidence makes it clear that the applicant has not suffered the loss of any income due to his disablement. At all relevant times he has been retired from employment. There is therefore no reduction of any income to which the compensation payments can be related and characterised as an ``add on'' or ``substitute for''.

23. That the State Government Insurance Corporation which acted on behalf of the Government Railways refers to such compensation payments as ``wages'' may be entirely appropriate in the vast majority of compensation payments which, it may be assumed, are paid in substitution for wages lost by workers suffering disabilities within the terms of the Workers Compensation Act. Clearly the description ``wages'' is inappropriate to the payments made to the applicant because he was not an employee of anyone at the time the liability for payment in respect of the asbestosis arose from his disablement, nor was there any loss of wages caused by the disablement.

24. That submission on behalf of the respondent also sought to gain support from the decisions in
Tinkler v. F.C. of T. 78 ATC 4565, 79 ATC 4641. Miss Tinkler was prevented from engaging in her employment for a time because of injuries suffered by her in a motor vehicle accident. She was entitled to, and was paid, certain amounts within the terms of sec. 25 of the Motor Accidents Act 1973 (Vic.). The relevant provision provided for payment of an amount equivalent to 80% of average weekly income (after tax instalment deductions had been made).

25. Brennan J. had this to say at 79 ATC pp. 4643-4644:

``Where a taxpayer gives up his income in exchange for other payments, the other payments take on the character of the income for which they are exchanged (C. of T. (Vic.) v. Phillips (1936) 55 C.L.R. 144 at p. 157). And where payments are made pursuant to a statute as compensation for an asset acquired by the State or sterilized in the hands of the taxpayer in order to serve the public interest, those payments take their character from the character, in the taxpayer's hands, of the asset acquired or sterilized (see, for example,
Newcastle Breweries Ltd. v. I. R. Commrs. (1927) 43 T.L.R. 476; 12 T.C. 927;
F.C. of T. v. Wade (1951) 84 C.L.R. 105 at p. 114).''

and further on:

``The character of a statutory payment made otherwise than as compensation for an asset or right which is acquired or sterilized depends upon the purpose of the payment as revealed by the statute, and the circumstances of its receipt by the taxpayer. The conditions of eligibility created by the statute and the statutory formula for its quantification provide the clearest definition of the purpose of a payment, though a purpose otherwise expressed in the statute is a useful, if subsidiary, aid to ascertaining the character of a payment made pursuant to its terms.

In the present case, an applicant for a benefit payment must have suffered `a loss of income in the capacity of employee' (sec. 25(1) and the amount of the payment depends upon the period during which he suffers `a loss of income in the capacity of employee' (sec. 25(7)). A factor in the calculation of the amount to be paid is the average pre-accident weekly income of the applicant nett of tax (sec. 20). These statutory indicia uniformly point to a purpose of providing a partial recoupment of lost income. Although the Board has a discretion as to the times when and instalments in which payments are to be made (sec. 32), the discretion is not inconsistent with the purpose of partially recouping lost income. Indeed, the exercise of the discretion may well be affected by the purpose to be served in making the

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payments, as it was in the present case where payments were made at fairly regular intervals.

From the taxpayer's viewpoint, the payments were received at intervals during the period when she was not earning income, consequent upon her application for the payment of benefit under sec. 25(1). The periodic receipt of subventions in amounts which varied only in accordance with working days in each period is powerful to suggest that the receipts were of an income nature. The purpose of the payments and the circumstances of their `receipt combine to establish the income character of the amounts paid.

The contrary arguments is founded upon the supposed similarity between payments, made pursuant to sec. 25(1) and an award to an accident victim of common law damages against a tortfeasor. Income which is lost by reason of injury is partially recouped pursuant to sec. 25(1) and is a factor in assessing an award of common law damages against a tortfeasor. But it does not follow that a payment under sec. 25(1) and an award of common law damages are similar for tax purposes. Section 25(1) is not concerned with any of the effects of an injury save loss of income, but an award of common law damages comprehends several heads of compensation, only one of which is the destruction or impairment of earning capacity. Moreover, an award of damages is assessed to compensate not for loss of earnings but for loss or impairment of earning capacity (see
Paff v. Speed (1961) 105 C.L.R. 549 at pp. 559, 566;
Bresatz v. Przibilla (1962) 108 C.L.R. 541 at p. 545;
Arthur Robinson (Grafton) Pty. Ltd. v. Carter (1969-1970) 122 C.L.R. 649 at p. 658). Although an injured plaintiff recovers `not merely because his earning capacity has been diminished but because the diminution in his earning capacity is or may be productive of financial loss (
Graham v. Baker (1961) 106 C.L.R. 340 at p. 347), the award is assessed as a lump sum to include fair compensation for the affection of earning capacity over the entire post-accident period. Section 25(1), on the other hand, does not attempt to evaluate the destruction or impairment of earning capacity, but provides merely for a partial recoupment of income lost during a maximum period of 104 weeks (sec. 25(7)). An award of common law damages against a tortfeasor is different from a payment under sec. 25(1) not only because of the different sources of liability but also because the heads of compensation are different from the lost income which is the subject of partial recoupment under sec. 25(1). In considering the heads of compensation, earning capacity has been described as a capital asset (see
Atlas Tiles Ltd. v. Briers 78 ATC 4536 at p. 4539; (1978) 21 A.L.R. 129 at pp. 134, 135) but that description does not throw light upon the character of a payment made pursuant to sec. 25(1).''

26. At p. 4648 Deane and Fisher JJ. also came to the conclusion that the amounts received were income in the following dicta:

``The actual amount of both sec. 25(1) and sec. 25(2) payments is calculated by reference to a formula. The formula provides, during the period of incapacity of a wage-earner, a sum quantified at ⅘ths of his average pre-injury after-tax weekly income. In the case of the self-employed person, the sum payable during the period of incapacity is quantified at ⅘ths of the average pre-injury after-tax personal exertion income. There is a clear distinction between the character of a payment and the manner of its calculation or quantification (see
Glenboig Union Fireclay Co. Ltd. v. I.R. Commrs. (1921) 12 T.C. 427 at p. 464; C. of T. (Vic.) v. Phillips (1936) 55 C.L.R. 144 at p. 156. The method of calculation or quantification may provide a quite misleading guide to the character of the payment. Where however, as in the present case, the method of calculation comprises an integral part of the provisions under which the entitlement arises, it can legitimately be regarded as a relevant factor in determining the character of the payment. In so far as the method of calculation is so regarded in the present case, it supports the view that payments under both sec. 25(1) and sec. 25(2) are in substitution, pro tanto, for income which could otherwise have been earned.

It follows from what has been written above that we are not persuaded that the payments made pursuant to sec. 25(2) of the Act should be characterized as capital payments

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for loss or impairment of earning capacity as distinct from payments in partial substitution for earnings which would have been earned but for the relevant accident. In these circumstances, sec. 25(1) falls to be considered uninhibited by preconceived notions as to the character for income tax purposes of a payment under sec. 25(2). As we have said, we agree, when sec. 25(2) is so considered, with the conclusion of the learned judge at first instance that the payments received by the appellant under sec. 25(1) were in substitution, pro tanto, for income which she would have earned were it not for the accident and constituted income pursuant to the provisions of sec. 25(1)(a) of the Income Tax Assessment Act.''

27. It is clear from the authorities cited [that] the issues in these cases were whether there is a substitution for lost income; the character of a statutory payment depends upon the purpose of the payment as revealed by the statute under which it is paid, that purpose may be reflected in the periodicity of the payments, and the method of calculation of these payments is also a relevant factor.

28. In
Slaven v. F.C. of T. 83 ATC 4387 O'Bryan J. of the Supreme Court of Victoria held that payments made to the taxpayer under the Motor Accidents Act 1973 (Vic.) were made to compensate her for loss of earning capacity for a period of time. His Honour found that the amounts in question were not income according to ordinary concepts, nor did the payments received fall within the terms of para. 26(j). His Honour analysed developments in the law up to the decision in Tinkler's case at pp. 4388-4389. In particular his Honour noted that the Motor Accidents Act had been amended so that 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, with the change in the Act the payment was made in respect of deprivation or impairment of earning capacity. That change in the Motor Accidents Act led O'Bryan J. to hold that the payments in question were not income. The decision was confirmed by the Federal Court (84 ATC 4077).

29. The Federal Court held that the starting point for determination of the character of the payments there in question must be the terms of the Act under which the payments were made (84 ATC 4084). Other considerations such as the regularity and periodicity of payment will generally not be decisive (p. 4085). Their Honours referred with approval to the dicta of Barwick C.J. in Atlas Tiles Ltd. v. Briers 78 ATC 4536 at pp. 4539-4540; (1978) 144 C.L.R. 202 at p. 210 where the Chief Justice stated:

``Some have thought the distinction I have drawn between loss of earnings and loss of earning capacity is illusory or insubstantial. But, in my opinion, it is real and radical. A capacity to earn which is not being exercised nor presently intended to be exercised has a value which can be estimated, though no current earnings are available to demonstrate its worth even with approximation. Again, the plaintiff may have been currently employed in an industry which, for some reason or other, was doomed to extinction or in a capacity which technology was likely to render redundant. Yet retrained, other and more remunerative employment may be available. Earning capacity may produce, not merely earnings, but a satisfactory way of life which, being denied or destroyed, may need to be reflected in the value of the capacity. In my opinion, the distinction I make is not a matter of semantics but basically conceptual: and being observed and applied goes far to solving the matter of principle here under discussion.''

30. Returning to the facts of the present case it is clear from the provisions of the Act that the payments received by the applicant were paid to compensate the applicant for his disablement and not in respect of loss of income. The fact that the Act provides for weekly payments in respect of the disablement does not by itself convert a payment of a capital nature into income. Where there are other circumstances which also suggest the payment to be of an income nature then the periodicity of the payments would need to be taken into account. However, periodicity without more is not decisive on the authorities already referred to. In this case there is no payment for lost income which would otherwise have been derived except for the disablement. The applicant was in receipt of a superannuation pension as a retired police officer and he continued to be paid such pension.

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31. The payments made were wholly and exclusively for the permanent disablement, no loss of income being involved. A payment for such disablement is clearly a payment of a capital nature except where other factors intrude. No factors intrude here except periodicity of payment which alone is not decisive. The payments were not income according to ordinary concepts nor did they come within the terms of para. 26(j).

32. The applicant has established that each assessment is excessive. Each objection decision under review will be set aside and the objection allowed.