Case W78

Members:
GL McDonald DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 21 July 1989.

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G.L. McDonald (Deputy President)

On 10 September 1976 the applicant, who was then a bus driver, incurred injury in the course of his work. Between that date and 18 July 1983 he received workers compensation payments totalling $41,345. The workers compensation was paid on a weekly or fortnightly basis and he paid income tax on those payments. On 18 July 1983, in an action in negligence for damages for the injuries incurred, the applicant was awarded $218,003.38 in the District Court of Western Australia. Of that sum, $41,345 was paid by the defendant in the District Court action to the applicant's employer in repayment of the workers compensation payments made to the applicant. The applicant claims that sum as a deduction under sec. 51(1) of the Income Tax Assessment Act 1936 (``the Act'').

The issues

There were three issues arising with respect to sec. 51(1) of the Act which were canvassed by the parties in these proceedings namely:

• (a) Is the $41,345 an outgoing incurred by the applicant?
• (b) Is the $41,345 payment of a capital nature?
• (c) Is the payment of $41,345 ``incidental and relevant'' to the gaining or production of assessable income?

For the sake of completeness I have addressed each of those issues.

(a) Is the $41,345 an outgoing incurred by the applicant?

Workers compensation payments were initially made pursuant to the West Australian Workers Compensation Act 1913 (the 1913 Act) which provided that an employer was liable to pay workers compensation to an employee in circumstances in which the employee was injured in the course of his work. From 3 May 1982 the 1913 Act was replaced by the Workers' Compensation and Assistance Act 1981 (the current Act) but an employer's liability to continue workers compensation payments commenced under the 1913 Act was preserved. Both the 1913 Act and the current Act have similar provisions requiring any amount paid by way of workers compensation to be deducted from any subsequent judgment for damages. Section 92(c) of the current Act which was applicable in these proceedings reads:

``92 Where, in respect of a disability an action is brought by a worker for damages independently of this Act against his employer or against some other person (referred to in this section as `the defendant') or against both of them -

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• (c) if the action proceeds to judgment, including the acceptance of an offer to consent to judgment, against the defendant only or settled by the acceptance of money paid into court by the defendant... and the defendant shall be bound to pay the amount of the compensation, and medical and other expenses to the employer and the judgment shall be pro tanto discharged by such payment, or the amount due under the charge shall be paid out of court to the employer or his authorized agent, as the case may be:''

The section contemplates an action being brought by a worker (plaintiff) against a defendant (tortfeasor). In this case since the tortfeasor was unidentified, sec. 7(3) of the Motor Vehicle (Third Party Insurance) Act 1943 provided for the Motor Vehicle Insurance Trust to be the defendant.

It is evident from the words used that sec. 92 of the current Act contemplates if a plaintiff succeeds judgment will be entered for the full amount in his or her favour. After judgment has been entered a portion of the amount nominated

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ATC 703

in the judgment is to be paid in accordance with the provision made in sec. 92(c).

It is usual, after a favourable finding in negligence for a Court in assessing damages, to deduct any amount already paid by a tortfeasor to a plaintiff,
Fox v. Wood (1981) 148 C.L.R. 438 per Gibbs C.J. at p. 441, where his Honour said:

``If the legislation did not require a plaintiff who had been paid damages to repay the compensation which he had received, clearly the receipt of the compensation would reduce the damages otherwise payable. If, on the other hand, the plaintiff repaid to the employer the net amount of compensation which he had received, so that he neither gained nor lost anything by the receipt and repayment, the question of workers' compensation could for practical purposes be ignored in the assessment of damages.''

Whilst that represents generally the situation at common law, the legislature in sec. 92(c) of the current Act envisages a plaintiff having his or her damages assessed regardless of any earlier payments of compensation.

As his Honour Burt C.J. expressed it in
MVIT v. Brambles Holdings Ltd. & Ors (1984) 3 ANZ Insurance Cases ¶60-583 at p. 78,529; (1985) W.A.R. 50 at p. 53:

``If section 92(b) of the Workers' Compensation and Assistance Act 1981... is the section to be applied then I have no doubt that the amount of compensation paid is not to be deducted from damages assessed and judgment then entered for the balance.''

His Honour went on to point out in that case that any amount paid by way of compensation is to be deducted from the amount recoverable under a judgment for damages rather than be deducted from the assessment. If the latter was the case, the judgment would be entered only for the balance. Whilst his Honour was commenting in relation to the applicability of sec. 92(b) of the current Act the reasoning is equally applicable to sec. 92(c).

For the reason that the legislation makes it so, judgment in the full sum was entered in the plaintiff's favour. Section 92(c) requires a defendant to pay any sum previously paid by workers compensation to the employer direct, or for the court to make a payment out of any sum paid into court direct. To that extent the damages do not come into the plaintiff's hands. However, it still remains the plaintiff's judgment. Mr O'Connor, for the applicant, likened such payments to ``payments by direction''. In this case the direction is exercised by statute. In my view, the payment to the employer out of such a judgment is an outgoing incurred by the plaintiff/applicant even although it is not an outgoing over which he has any control.

(b) Is the $41,345 of a capital nature?

Damages in negligence cases are awarded for economic loss, i.e. for loss of earning capacity rather than loss of earnings (
Graham v. Baker (1961) 106 C.L.R. 340 at p. 347 per Dixon C.J., Kitto and Taylor JJ.,
Redding v. Lee, Evans v. Muller (1983) 57 A.L.J.R. 393 at p. 398 per Mason and Dawson JJ.). The fact that damages may be, at least in part, quantified by reference to amounts paid under the workers compensation legislation does not change the character of the payment (
Tinkler v. F.C. of T. 79 ATC 4641 per Deane and Fisher JJ. at p. 4648). As was said by the Full Court of the Federal Court in
F.C. of T. v. Slavin 84 ATC 4077 at p. 4085:

``Whether a receipt constitutes income or capital must, of course, depend upon a consideration of all the circumstances. It is the character of the receipt in the hands of the taxpayer as recipient that must be determined...''

Here, it is clear that the character of the money received is of a capital nature because it is paid by way of damages for loss of earning capacity. For that reason the outgoing of $41,345.34 was an outgoing of a capital nature and hence not claimable as a deduction under sec. 51(1) of the Act.

(c) Is the payment of $41,345 ``incidental and relevant'' to the gaining or production of assessable income?

If I am wrong in (b) can the $41,345.34 be described as an outgoing incidental and relevant to the gaining or production of assessable income? Mr O'Connor, on behalf of the applicant, submitted a connection is to be found in the provisions of the current Act which both establishes entitlement to the income and provides for repayment in a claim for damages. He relied on the reasoning expressed in Case V16,
88 ATC 185. In that case the taxpayer

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ATC 704

received, inter alia, sickness benefits under the provisions of the Social Security Act 1947, those benefits constituting income for which he was liable to pay income tax. There the applicant subsequently succeeded in a workers compensation claim covering the period in which the sickness benefits had been paid. Following the claim succeeding, the Director-General of the Department of Social Security claimed reimbursement of the sickness benefits paid pursuant to the provisions of the Social Security Act 1947. The Tribunal addressed the issue of deductibility of the amount recovered and decided that there was a connection sufficient to enable that amount to be claimed as a deduction. In that case the Tribunal said (at pp. 189-190):

``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.

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

Whilst the Social Security Act makes provision for reimbursement it is not mandatory that that reimbursement occur. The Director-General exercises a discretion, reviewable on appeal, in those cases where he seeks reimbursement under sec. 156 of the Social Security Act 1947. The applicant submits his situation, in the instant case, is in fact stronger than that of the applicant in Case V16 because sec. 92(c) of the current Act makes it obligatory, rather than discretionary, for repayment to occur.

Mr O'Sullivan, for the respondent, submits that Case V16 is distinguishable because in that case there was a requirement that the taxpayer repay the benefits he had received and in relation to which he had been liable to pay tax. In the instant case the taxpayer is not required to repay the workers compensation payments made. The respondent submits the applicant is able to keep the workers compensation payments but that a notional assessment is made at the time damages are awarded and that sum paid to his employer.

Unlike the social security legislation, where, upon the happening of certain events, a liability to repay benefits received may arise, the workers compensation legislation creates no such liability. Workers compensation payments stand in the place of salary earned and are not subject to recoupment. The amount refunded pursuant to the workers compensation legislation is refunded because the statute requires the defendant in the action to make the payment. If the workers compensation legislation did not require the repayment to be made, the damages awarded to the plaintiff/applicant would be adjusted to take account of the weekly or fortnightly workers compensation payments made to the date of judgment. That being the case, no obligation would arise requiring the applicant/plaintiff to repay any workers compensation payments which he had earlier received. Further, the statutory repayment is, as I have found earlier in this decision, not an outgoing over which the plaintiff/applicant exercises any control. Having regard to those circumstances, I find there is no connection incidental or relevant in the repayment of the $41,345 to the gaining or production of assessable income and for that reason the requirements of sec. 51(1) of the Act are unable to be satisfied.

Conclusion

For the reasons stated in (b) and (c) the application must be dismissed. The decision under review is affirmed.