Maher and Commissioner of Taxation

[2005] AATA 272

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2005] AATA 272

ADMINISTRATIVE APPEALS TRIBUNAL      )

)   No QT2004/53-56, 128-133

TAXATION APPEALS DIVISION		)
Re		RICHARD MAHER

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Ms MJ Carstairs, Member

Date31 March 2005  

PlaceBrisbane

Decision  The Tribunal affirms the decisions under review. 

.................[Sgd]......................

M J Carstairs
  Member

CATCHWORDS

TAXATION – Income Tax – application for review of disallowed objections – applicant’s compensation payments assessed as income after he turned 65 – whether compensation payments are assessable income – payments are not a redemption – payments are assessable income – decisions under review affirmed.

Income Tax Assessment Act 1936 s25
Income Tax Assessment Act 1997
Safety, Rehabilitation and Compensation Act 1988 s137

Re Barnett and Federal Commissioner of Taxation [1999] AATA 950

FCT v Blake 84 ATC 4661

FCT v Dixon (1952) 86 CLR 540

FCT v Harris 80 ATC 4238

FCT v Inkster 89 ATC 5142

Coward v Commissioner of Taxation 99 ATC 2166

Brackenreg v FCT 2003 ATC 2196

X22 90 ATC 242

REASONS FOR DECISION

31 March 2005 Ms MJ Carstairs, Member

1.      This is an application by Richard (Terry) Maher (the applicant) for review of decisions made by the Commissioner of Taxation (the respondent) in relation to the assessment of tax in the tax years ending 1994 through to the present.   

2.      At the hearing the applicant represented himself.  The respondent was represented by Mr M Curran, from the Australian Taxation Office Legal Practice section.

3. The Tribunal had before it the documents lodged under s37 of the Administrative Appeals Tribunal Act 1975, being two volumes of documents. The first volume (QT2004/53-56) was numbered T1-T15; the second volume (QT2004/128-133) was numbered T1- T17. Additional documents were numbered A1-A4 for the applicant and R1 for the respondent.

BACKGROUND

4.      The applicant retired from the public service in 1982 on grounds of ill health and since then has been incapacitated for work.  The applicant received fortnightly compensation payments.  These payments are made under the Safety Rehabilitation and Compensation Act 1988 (the Compensation Act). 

5.       When the applicant turned 65 years on 9 March 1994 he was notified that from then, and for his lifetime, his compensation payments would be frozen at $101.88 per week.   This amount constituted a reduction of some 30% on his pre-65 weekly payments.     

6.      On 9 December 2003 the applicant queried the deduction of tax from compensation payments after he turned 65 years, and asked for re-assessment.   The respondent disallowed the applicant’s objection to the assessment of tax, in decisions dated 20 January 2004 (QT2004/53-56) and 17 March 2004 (QT2004/128-133).   The applicant required an extension of time to object to the decisions made in relation to the tax years ending 1994 to 1999.  The respondent agreed to the extension of time for the objection to be lodged for those tax years outside the four year time limit for objections.   

7.      The issue for the Tribunal in regard to each of the tax years since the applicant turned 65 is whether the applicant’s compensation is assessable income for taxation purposes.

EVIDENCE AND SUBMISSIONS

8.      The essential facts were not in dispute.  The applicant gave evidence that he has applied to Comcare for a redemption of compensation because the Compensation Act makes provision for this to occur.  He said that his request has been refused.  The applicant says that he experienced financial pressures with the 30% reduction in his compensation payments after age 65.  He points out that his increasingly poor health means that he must spend increasing amounts of money on medication and mobility aids.

9.      Despite his request to redeem his compensation, which had been refused by Comcare, it was part of the applicant’s case that the reduced rate of compensation payment after age 65, should be viewed as a redemption as it is a payment that takes into account that at 65 a person has passed retirement age, and the new rate of payment in fact redeems compensation that was previously payable to him.    

10.     The applicant says that his weekly compensation payments after age 65, frozen at the amount of $101.88 per week, is a lump sum redemption payment, though it is paid periodically.  He said that forward projections of what he will be paid in the future (T1 – Q2004/53-56) show that the payments represent a known sum that then is divided into weekly payments of equal amounts.   

11.     The applicant referred the Tribunal to the Comcare Publication All About Workers Compensation – A Guide for Employees Injured at Work Before December 1988 which states:

According to the Tax Office any part of the lump sum redemption that includes fortnightly payments that would have been made to you before you reached age 65 is subject to taxation.   The part of the lump sum redemption of fortnightly payments after you reach after 65 is not subject to taxation. 

12.     The applicant referred to Concise Oxford and Macquarie dictionary definitions of redemption as including the action of clearing off a recurring liability or charge by the payment of a single sum.  He submitted also that to redeem includes the meaning of to compensate.    

13.     The applicant submitted that the payment is in recognition of inability to work (loss of earning capacity).  As such he says that the payments are capital in nature.  He referred to the decision of the Tribunal in Re Barnett and Federal Commissioner of Taxation [1999] AATA 950 which noted the distinction between loss of earnings and loss of earning capacity, with the former being income, but the latter capital.   The applicant said that the case law shows that periodicity of payment is only one indicator, not necessarily decisive, of whether an amount was income or capital.    

CONSIDERATION OF THE ISSUES

14. The relevant legislation is s25 of the Income Tax Assessment Act 1936 for the tax years 1994/1995 to 1996/1997 which provides that a person’s assessable income incudes gross income that is not exempt income or an eligible termination payment; and the Income Tax Assessment Act 1997 for the subsequent tax years, which provides that assessable income includes income according to ordinary concepts. 

15.     The applicant acknowledged that Comcare has refused to redeem his compensation under s137 of the Compensation Act.  The Tribunal notes that s137 of the Compensation Act allows redemption only if the former employee is receiving a lesser amount per week than a specified statutory sum by way of compensation (indexed at 1 July 2003 at $81.81 per week).  The applicant receives more than that amount in weekly payments of compensation, so this is the likely basis for Comcare’s refusal.   

16.     Mr Curran submitted that the periodic compensation payments are income on ordinary principles.  He submitted that several criteria assist in determining the character of the payments as income rather than capital:

§The object and effect of the payments in the hands of the applicant is that of amounts to meet daily subsistence needs.  Mr Curran referred to FCT v Blake 84 ATC 4661 (at 4644) which cited the expressed object of the payment and its effect in the hands of the recipient as one criterion among others which may be relevant in determining whether an amount is income; and  FCT v Dixon [1952] 86 CLR 540 where reference was made to the object and the actual effects of the payments.

§The amounts are received periodically: FCT v Dixon [1952] 86 CLR 540; FCT v Harris 80 ATC 4238; FCT v Inkster 89 ATC 5142.

§The receipts are on a regular basis to meet regular expenditure: FCT v Dixon (1952) 86 CLR 540

§The amounts are received as a regular income supplement: FCT v Inkster 89 ATC 5142; Coward v Commissioner of Taxation 99 ATC 2166.

17.     Mr Curran submitted that the amounts received by the applicant after he turned 65 were paid under s134 of the Compensation Act which deals with the payment of compensation to certain former employees.  He submitted that the payments received by the applicant replace payments of compensation which themselves were calculated by reference to the applicant’s former salary and so took on the character of the substituted amount.  He said that the payments were not a redemption payment, and noted that the Comcare booklet upon which the applicant relied for his part of his submission clearly referred to the redemption possible under s137 of the Compensation Act.  Mr Curran submitted that the applicant’s fortnightly payments under s134 of the Compensation Act were not a redemption payment.

18.     The Tribunal was not persuaded by the applicant’s submission that part of the ordinary meaning of the word redemption incudes compensation.  Dictionary definitions of these terms are not determinative of the matter, even if the applicant had persuaded me to his view of the ordinary meaning of redemption.    

19.     The Tribunal agrees with Mr Curran that the issues raised by the applicant have been dealt with in previous Tribunal cases which apply to the facts as raised by the applicant’s case.  In Coward v Commissioner of Taxation 99 ATC 2166, then President of the Tribunal Matthews J looked at three sets of payments received by the taxpayer under the Compensation Act: periodic payments made to age 65; periodic payments after age 65; and a lump sum redemption which the taxpayer accessed after the age of 65. Matthews J concluded that the weekly payments after age 65 under the Compensation Act were income because of their periodic nature and because they served as an income supplement. She said that neither the reduction in the payments after age 65 or the fact of turning age 65 had the effect of converting the payments to capital.

20.     In Coward’s case, Mathews J said:

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.

21.     At issue in Inkster was the assessability of amounts of compensation paid during a period before the respondent turned 65 but long after the cessation of the employment during which the injury arose which gave rise to his incapacity.   Compensation payments were calculated by reference to his earnings during that employment, however on the facts of that case the payments could not be said to be for lost income, because no income had been lost.  Lee J considered that the payments were not capital in nature and said:

The payments were intended to serve the purpose of providing a regular income supplement to the respondent notwithstanding that the payments were generated by calculations which related to capital considerations”.  (at p5158)

22.     The Tribunal has addressed similar issues to those in Coward in Re Brackenreg v FCT 2003 ATC 2196. In that case Deputy President Muller referred to Case X22 90 ATC 242 where Deputy President Gerber had analysed the relevant case law and concluded that the basic rule is that payments made to compensate for lost income are themselves income. Where the relevant compensation legislation makes provision for calculating compensation payable by reference to amounts of earnings which an employee would have been entitled to receive if earning wages, then compensation is a substitute for earnings, is paid for loss of earnings, and is assessable as income.

23.     The Tribunal finds that the applicant has not redeemed compensation under the Compensation Act.  The Tribunal finds that the weekly payments are not a lump sum which simply is paid periodically.  The applicant has not received, and is not receiving, a lump sum of compensation.  Indeed there is not a fixed sum, as there is no fixed amount, as what is ultimately paid depends on the applicant’s life span.   Rather than a fixed amount divided equally, there is a formula applied which indirectly relies for its computation on amounts of previous earnings in former employment.    

24.     Coward’s case dealt specifically with periodic payments post age 65 which are the same as the payments made to the applicant here.  The applicant, unlike Mr Coward, has not received any lump sum in redemption under s137 of the Compensation Act.  It follows, applying Coward and Brackenreg , that the applicant’s payments of compensation are not capital in nature.  The Tribunal finds that the payments of compensation are income, and the assessments should be confirmed.

25.     For these reasons the Tribunal affirms the decisions of the respondent dated 20 January 2004 and 17 March 2004.

I certify that the 25 preceding paragraphs are a true copy of the reasons for the decision herein of Ms M J Carstairs, Member

Signed:         Camille Banks
  Associate

Date/s of Hearing  23 November 2004 [at Robina]
Date of Decision  31 March 2005 [at Brisbane]   
The Applicant appeared in person
For the Respondent                  Mr M Curran, ATO Legal Practice