RAYNER v FC of T

Members:
DW Muller SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 24 September 1998

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DW Muller (Senior Member)

This is an application to review an objection decision to refuse to amend the taxpayer's assessment for the 1994/95 tax year following a refund in 1996 by the taxpayer, of workers' compensation payments, which he had received in 1994/95.

2. The facts are not in dispute and I find as follows:

• (i) On 19 July 1994, the taxpayer was injured at his place of work.

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• (ii) The taxpayer was incapacitated for work from 19 July 1994 to 6 January 1995, and from 18 February 1995 to 22 May 1995.
• (iii) During the period of the taxpayer's incapacity for work he was paid weekly workers' compensation payments totalling $18,327.
• (iv) The weekly workers' compensation payments were included in the taxpayer's assessable income for the 1994/95 tax year.
• (v) The inclusion of the workers' compensation payments in the taxpayer's assessable income for the tax year 1994/95, increased the tax payable by the taxpayer, by an amount of $5,171.45.
• (vi) During the 1994/95 tax year, the Workers' Compensation Board of Queensland, withheld PAYE tax deductions totalling $2,781.05 out of the $18,327 workers' compensation payments.
• (vii) The taxpayer subsequently sued his employer for damages relating to his injuries and incapacity for work arising out of the workplace incident.
• (viii) In October 1996, the matter between the taxpayer and his employer was settled for $25,000 (nett of the refund of $18,327 to the Board plus other expenses incurred by the Board) plus costs. The lump sum payment, contained no specific allowance for the $2,781.05 tax paid, but in fact it was included.
• (ix) The taxpayer was advised by his legal advisers that he would be able to get an amended 1994/95 assessment on the basis of the refund of $18,327 to the Board and that, at least, he would receive a refund of $2,781.05.

3. The $18,327 received by the taxpayer as fortnightly workers' compensation payments during the 1994/95 tax year, stood in the place of wages earned, had the characteristics of income, were taxable when received and were correctly assessed at the time.

4. Subsequent repayment of the workers' compensation payments, has no tax consequences for the following reasons:

• (i) The original income character of the payments is not changed by the subsequent repayment.
• (ii) Tax is calculated on a year to year basis. The payments were income during the 1994/95 tax year.
• (iii) The repayment results from a legislative obligation.
• (iv) The repayment itself is of a capital nature and not incidental to, nor incurred in relation to the gaining of income.

5. The taxpayer submitted that in repaying the workers' compensation payments to the Board in October 1996, he, in effect, did not receive the payments in 1994/95. Therefore, his 1994/95 assessment should be amended, by subtracting $18,327 from his income. This submission, by the taxpayer overlooks the fact that he really received $18,327 twice for his period of incapacity for work. The first time occurred in 1994/95, when he received workers' compensation payments. The second time occurred in October 1996, when he received the equivalent of his lost wages as part of the settlement for his damages from the defendant in the civil suit. The Workers' Compensation legislation does not allow him to keep two payments for incapacity for work for the same period in these circumstances. He had to repay to the Board the amount of $18,327, out of the damages he received in October 1996. Had he not received workers' compensation in 1994/95, he could have kept whatever he was awarded by way of damages, in October 1996 for loss of wages incurred in 1994/95. In any event, it is not true to say, that in the end the taxpayer has not had the benefit of the $18,327 which he received in 1994/95. He had the benefit in 1994/95. He paid tax on the benefit when it was received. No amendment of the 1994/95 assessment is warranted, legally or morally.

6. The taxpayer raised the case of V16 [ reported at Case V16,
88 ATC 185] decided by the Administrative Appeals Tribunal on 15 January 1988. In that case the taxpayer received sickness benefits and unemployment benefits from the Department of Social Security (DSS) after his initial workers' compensation ran out. In the same year he subsequently received further workers' compensation payments to be redeemed by payment to the taxpayer of a lump sum. The taxpayer had to reimburse the DSS, allowances and pensions paid by DSS from the lump sum. The main complaint by the taxpayer in Case V16 was that he had been made liable to pay income tax on his DSS allowances and

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benefits, for the period July to November 1981. These moneys were fully recouped by the Commonwealth, in February 1982. The Tribunal held, that, although the payments of DSS benefits constituted assessable income, the repayments to DSS were allowable deductions because the obligation of repayment, was founded in the very circumstances of generating assessable income [ATC at 189-190]:

``... 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.''

7. That part of Case V16 in which repayments to DSS were held to be allowable deductions, has not been followed by subsequent decisions of the AAT, nor by the Australian Taxation Office (ATO). Nevertheless, the ATO has recognised that anomalies may arise in this area. Consequently, the ATO has issued two Rulings in an attempt to ameliorate the perceived unfairness, of a strict reading of the Income Tax Assessment Act 1936 in situations like those which arose in Case V16. The Rulings are IT 2107 and IT 2623.

8. Taxation Ruling IT 2107 provides (among other things):

``3a. This Ruling deals with those situations where a person has an injury which may entitle them to workers' compensation, but until that entitlement is resolved, the person receives social security benefits which are assessable under section 6-5 of the Income Tax Assessment Act 1997 (`the Act'). When the entitlement is confirmed, a lump sum payment in respect of the arrears of workers' compensation due is made. That lump sum payment is also assessable under section 6-5 of the Act. It may be eligible for the lump sum payments in arrears rebate. Taxation Ruling IT 2623 deals with repayments other than those addressed in this Ruling.

Ruling

4. In these circumstances it is considered that the amount of the lump sum arrears of compensation reduced by the amount of sickness benefits repaid to the Director General of Social Security is the amount to be included in the assessable income of the compensated party in the year of receipt. It is this net amount only that should be subject to PAYE deductions and included on group certificates.''

9. Taxation Ruling IT 2623 provides (among other things):

``This Ruling considers a decision of the Administrative Appeals Tribunal which allowed a taxpayer a deduction under subsec 51(1) of the Income Tax Assessment Act 1936 (`the Act') for an amount of sickness benefits repaid to the Commonwealth Department of Social Security. The decision is reported as Case V16 88 ATC 185; AAT Case 4077 19 ATR 3165.

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Ruling

7. Sickness benefits received as compensation for loss of earnings have the characteristics of income. They are fully assessable in the year of receipt under sec 25(1) of the Act. Similarly, workers' compensation received on a regular basis to replace earnings lost during a period of disability has the characteristics of income and is assessable income.

8. Situations such as that in Case V16, AAT Case 4077, will arise, however, where an amount equivalent to the amount of sickness benefits received is repaid to the Department of Social Security following the award of workers' compensation.

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10. Under Part XVII of the Social Security Act, the Secretary to the Department of Social Security may require a person to repay the whole or some part of the sickness benefits that the person received when compensation for disability is awarded following payment of sickness benefits. The Secretary of the Department of Social Security has advised that, under sec 153 of the Social Security Act (sec 115 of the former Social Services Act), liability for repayment of benefits arises only when the Secretary makes a determination of the amount of benefits that is required to be repaid and sets out the determination in a notice in writing to the person liable to make the repayment. No liability for repayment arises purely from the act of receiving sickness benefits or from the award of compensation for disability. Contrary to the findings of the Tribunal, it is not, therefore,

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a condition of payment of sickness benefits (expressed or implied) that the benefits are to be repaid if compensation for disability is subsequently awarded.

11. Repayment of sickness benefits is made to satisfy the determination made by the Secretary, Department of Social Security, rather than in satisfaction of any repayment condition attaching to the original payment of the sickness benefits.

12. No appeal was lodged against the particular Tribunal decision. However, the decision is not to be followed in other cases because the required nexus does not exist between the receipt of assessable income (either the sickness benefits received from the Department of Social Security or any assessable portion of a lump sum compensation subsequently received) and the repayment of the benefits by a taxpayer. The repayment of the benefits is not incurred in gaining or producing assessable income. The taxpayer in such a case is therefore not entitled to an income tax deduction under subsec 51(1) of the Act.

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14. The question arises, however, whether original assessments in which the periodic sickness benefits have been included in assessable income may be amended when the benefits are repaid to exclude the benefits from assessable income.

15. This Office has for many years recognised the need to adopt an administrative approach which would ameliorate the strict application of tax law and avoid unfair or illogical treatment of a taxpayer where, for example, overpaid salary or, in this instance, overpaid sickness benefits are required to be repaid subsequent to the income year in which the salary or benefits were received and assessed to tax. The general approach in these circumstances has been to use the amendment provisions in the law, subject to the statutory time limits in those provisions, to exclude the overpayment from the assessable income of the year in which the overpayment was made.

16. The suggestion has been made that this corrective action should be confined to cases where the overpayment was not occasioned by any act or inaction of the taxpayer. The decisive consideration in those cases, however, is whether the taxpayer has repaid the amount of the overpayment.

17. Where the overpayment has been paid back the taxpayer's assessments, subject to one qualification, may be amended to exclude from income tax the amount repaid. The one qualification is that amended assessments can only be made:

• • under subsection 170(3) of the Act within 4 years from the date upon which the tax became due and payable under the assessment being amended; or
• • under subsection 170(6) where an application for amendment of an assessment is made by a taxpayer within 4 year from the date upon which the tax became due and payable under that assessment.''

10. IT 2107 deals with the situation whereby the compensation award from which the repayment is made, is itself taxable. There is a double taxation element.

11. 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.

12. Neither IT 2107, nor IT 2623 apply to Mr. Rayner. He was entitled to receive the money when he did in 1994/95 and he has had the benefit of the money.

13. The Tribunal was referred to various judgments which arose out of damages claims for personal injuries, arising out of alleged negligence or unsafe work systems. The judgments reflect the desire of courts, in such proceedings to take into account the tax implications, on such matters as damages awards, workers' compensation repayments and tax paid on workers' compensation before the damages award is made. These civil cases were not tax cases and have had no effect on tax law. The judgments accepted the established tax law and attempted to adjust the quantum of damages accordingly, to allow the plaintiffs to be put in an equivalent position to what they would have been, had they not had their injuries.

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14. The Tribunal affirms the objection decision under review to refuse an amendment to the taxpayer's assessment for the 1994/95 tax year.