Case W86

Members:
RK Todd DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 1 September 1989.

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R.K. Todd (Deputy President)

This matter is an application for review of a decision of the Deputy Commissioner of Taxation disallowing an objection lodged by the applicant dated 30

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June 1987 to assessment in respect of income derived during the year ended 30 June 1986.

2. The applicant was, at the time of his injury on 9 November 1981, a member of the Australian Federal Police. He was retired on 15 November 1982, and received weekly compensation payments from 9 November 1981 until 19 February 1986. The compensation payments were made pursuant to the Compensation (Commonwealth Government Employees) Act 1971 (``the 1971 Act'') as amended. They amounted to $59,131.81 in total, and were included as assessable income in the years ended 30 June 1982 to 30 June 1986 inclusive.

3. On 14 February 1986 the applicant received an award of damages, judgment being entered in the sum of $170,000. An amount of $59,131.81 was deducted from this sum pursuant to the 1971 Act and paid to the Commonwealth by way of refund of the compensation payments. The amount allowed for the refund in settlement negotiations was $60,483.09. An adjustment was made of $1,352.

4. The applicant lodged a return for the year ended 30 June 1986 wherein he claimed as a deduction under sec. 51(1) of the Income Tax Assessment Act (``ITAA'') an amount of $59,131 which he had repaid to the Commonwealth, and excluded from assessable income the $170,000 received by way of damages. In his disclosure statement in the 1986 return the applicant stated that the whole amount repaid had been claimed as a deduction in accordance with Taxation Rulings IT 1302 and IT 937 and advice from an officer of the Australian Taxation Office (``ATO'').

5. The applicant did this in the belief that, having received compensation payments out of which tax had been deducted over the four to five years and then at settlement required to pay the gross amount received over that period, he had, in fact, ``overpaid'' by an amount equal to the tax instalments deducted. On the advice, he said, of the officer from the ATO however it was regarded as appropriate to claim the full amount reimbursed.

6. The deduction was in fact disallowed, and the applicant lodged an objection on 30 June 1987. The objection itself was disallowed on 26 October 1987, and it is this objection decision that is now before the Tribunal.

7. The respondent originally sought to defend the objection decision on two bases. The first, which was later abandoned, was that the award of $170,000 was not received as an undissected lump sum. At the hearing both parties agreed that this was no longer in dispute. The second basis was that no part of the $59,131 paid back to the Commonwealth represented an outgoing incurred in gaining or producing assessable income pursuant to sec. 51(1) of the ITAA.

8. The respondent submitted that a clear distinction existed in the 1971 Act between the liability imposed by sec. 27 on the Commonwealth to make compensation payments, and the liability imposed by sec. 99 upon persons who have recovered damages. Instead, it was submitted, there are separately defined statutory functions that operate between the receipt of the assessable income and the liability imposed to effect repayment. This latter proposition was based on a comment made by Northrop J. in
Commonwealth v. Goodfellow 31 A.L.R. 533 at p. 550 when determining whether the Commissioner under the 1971 Act had power to refer to the Compensation Tribunal for reconsideration any matters or questions to which a particular determination related. He said at p. 550 that:

``The fact that the amount of the liability concerned is recoverable by the Commonwealth as a debt due to the Commonwealth by action in a court of competent jurisdiction highlights the difference between the liabilities arising under Part VI and the liability of the Commonwealth to pay compensation under other Parts of the Act.''

9. The respondent submitted that nowhere in the Act is the liability of the Commonwealth expressed to be conditioned on an otherwise entitled person being required to pay back the compensation in the event of that person recovering damages. The liability of the Commonwealth to pay compensation thus remained unquestioned. The repayment was not a loss incurred in the production of income, but was quite separate from the income-producing event, namely the liability of the Commonwealth to pay compensation. The repayment arose not from that liability but from the award of damages to the taxpayer.

10. The applicant submitted that the Act, as a matter of statutory interpretation, must be

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read as a whole and that there is a nexus between payments made to the taxpayer and the repayment required upon receipt of damages in respect of the injury. The applicant relied mainly on the decision in Case V16,
88 ATC 185.

11. In Case V16 the taxpayer suffered a work-related injury in early 1981 and received $1,529 in sickness benefits for that income year and, during the 1982 income year, an amount of $2,632 in sickness benefits and $1,226 in unemployment benefits. In March 1982 the taxpayer refunded to the Department of Social Security an amount of $4,160 out of the lump sum payment for the sickness benefits received by him. In his 1982 return, the taxpayer did not include as assessable income the social security payments received. The Commissioner's assessment increased the assessable income, and the applicant sought review of the decision to disallow the objection. The taxpayer argued that it was unreasonable to pay income tax on moneys paid conditionally which were later refunded.

12. The Tribunal (Mr P.M. Roach, Senior Member) found that unemployment and sickness benefits constituted assessable income. Although the question of deductibility had not been raised during the hearing, Mr Roach proceeded to address that question, concluding that (at p. 189) -

``The moneys so advanced were theirs [the applicant's and his family] to use as they pleased... 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...''

The applicant's representative sought to distinguish the present case from the so-called ``teacher bond type'' cases where the obligation to refund was conditional upon breach of obligations under the bond: see Case A59,
69 ATC 334. The respondent, however, submits that the situation here is analogous to the bond cases where the outgoing flowed directly from the breach, not from what was productive of assessable income.

13. Further, the applicant submitted, sec. 101 of the 1971 Act indicated an expectation by the Commonwealth that it be reimbursed for benefits paid by it, and goes even as far as subrogating the right to prosecute in certain circumstances. Here, the question is one of dealing with obligations and liabilities, and of repayment of compensation under the same Act, whereas in Case V16 the liability and obligation arose under the Social Services Act 1947 and the compensation payout under the Workers' Compensation Act 1926 (N.S.W.). Yet the Tribunal there found that the obligation of repayment was found in what was productive of assessable income. The respondent however submitted that ``what produced the income in Case V16 was an entitlement to sickness benefits pursuant to the Social Services Act 1947. The obligation to repay only arose because the taxpayer was entitled to receive weekly compensation under the Workers' Compensation Act 1926 which was redeemed and a lump sum awarded in its stead''. The occasion for the outgoing, it was said, could not be said to be found in what was productive of the assessable income.

14. A further argument for the respondent was that even if the repayment was an outgoing incurred in gaining or producing assessable income, the outgoing was of a capital nature and expressly excluded from deductibility. This was because the applicant was required to make a once and for all payment for the purpose of acquiring a capital asset. The applicant submitted that Mr Roach in Case V16 did not treat the outgoing as being of a captial nature.

15. An equity argument was also raised by the applicant in that although he had paid tax on the moneys received through the years in question, he has refunded the gross amount. The respondent in return submitted that the applicant would in effect have not paid any tax at all if his submission succeeded, and also that interest rates applied to amounts similar to those received by the applicant drawn down progressively over five years would see interest accrue approximating the amount said to have been overpaid. I need express no opinion about this.

16. The conclusion to which I have come will no doubt be seen as a hard one by the applicant, and is one which I have no doubt he will find it difficult to accept. I consider however that I have no option in the matter.

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The applicant's representative laid great stress on the decision in Case V16. I shall refer to that decision below, but briefly here say first that I have difficulty with that decision, and secondly that a significant point raised in the present case was not there dealt with.

17. Approaching the matter from the point of view of principle, it is clear, in the first place that the compensation payments represented income in the hands of the applicant and were assessable as such. No subsequent development can affect that.

18. Secondly, the operative factor giving rise to the requirement that the compensation payments be refunded was the provisions of sec. 99 of the 1971 Act. Those provisions were invoked by the award of damages for which judgment was entered. Nothing in the receipt as such of the compensation payments in the previous years invoked those provisions.

19. Thirdly, it follows that the required repayment bore no relevant relationship to the receipt of the compensation in the first place, but was rather related to the award of damages. It thus cannot be said to have been ``incurred in gaining or producing assessable income'', which is what is required for the purpose of sec. 51(1). It was incurred as a statutory obligation.

20. Fourthly, the repayment represented an outgoing of capital or of a capital nature. This is not so because, as it was argued, it was paid for the acquisition of a capital asset. It is because of the once and for all nature of the lump sum payment, a payment which has all the marks of capital, and no less so because it is ultimately traceable to a series of past income receipts. Those individual receipts of income were no doubt a matter without which the liability to repay would not have arisen, but the single payment made in discharge of the liability was demanded not by their making but by the need to discharge the statutory obligation.

21. As to Case V16, it is necessary to understand how that case developed. The unrepresented applicant had contended that the social security benefits were not assessable, a forlorn hope. It was perhaps more tempting to raise such an argument in that case since such benefits, though not all of the benefits that he had received, were paid to him in the same year, namely fiscal 1982, as that in which he had made the repayment of such benefits upon the award of lump sum compensation. What the Tribunal proceeded to do was, having rejected the argument in relation to assessability, to find of its own motion in favour of deductibility. Maybe such a conclusion appears even more attractive in a case wherein receipt and repayment have occurred in the one year. But the question of capital was not raised or debated, and because of this and because of the general difficulties that, with the greatest respect, I have to say that I have with the decision in Case V16, I am unable to derive from it the comfort that the applicant's representative understandably pressed upon me in argument.

22. Since preparing these Reasons I have had the advantage of reading the Reasons for Decision of Deputy President G.L. McDonald in Case W78,
89 ATC 701. The legislative provisions there in question were not identical to those before me, nor is the reasoning expressed entirely the same as mine. The Decision is however clearly consistent with the conclusion to which I have come.

23. The objection decision under review must be affirmed.