Smith v. Federal Commissioner of Taxation.

Members:
Wickham J

Tribunal:
Supreme Court of Western Australia

Decision date: Judgment handed down 21 December 1978.

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Wickham J.: During the year of income ending the 30th June 1978, the appellant taxpayer was a medical practitioner employed by the Sir Charles Gairdner Hospital upon an annual salary with certain other emoluments including ``sick leave'' with pay, overtime and other allowances. The appellant was insured under a policy of insurance with the Australian Casualty Co. Ltd. against disability sustained by him resulting from injury.

On the 19th October 1977 he was injured in a traffic accident. He was at that time the senior resident medical officer. He was disabled until 15th February 1978, during which period he was promoted to medical registrar. He took annual leave from his employment on full pay from the 20th October 1977 to the 9th November 1977 and sick leave on full pay from the 10th November 1977 to the 23rd November 1977. From the 24th November 1977 to 15th February 1978 he was on special leave without pay. On the 9th January 1978 he received from the insurance company the sum of $1,440 in respect of the period of disability from the 19th November 1977 to the 18th January 1978. On the 24th February 1978 he received the further sum of $672 disability insurance from the period 19th January 1978 to 15th February 1978. These payments included some type of bonus of 20%. On 24th May 1978 he paid an insurance premium of $91.36 which was for the renewal of his insurance for the insurance year commencing 1st June 1978.

In his return of income for the relevant year the appellant included the receipt of the disability insurance benefits as income and claimed the sum of $91.00 described as ``loss of income insurances'' in a schedule applicable to the deduction description of ``other expenditure necessarily incurred in earning your income''.

The Commissioner when making the assessment disallowed the claimed deduction of $91.00. The appellant gave notice of objection to this disallowance and claimed that the assessment should be reduced accordingly or alternatively by the excision of the sum returned as income and representing the disability insurance benefit. It is accepted by the respondent that this alternative objection may properly be considered upon this appeal if the objection in respect to the disallowance of the deduction of $91 is unsuccessful.

That primary objection may be unsuccessful for one or other of two reasons, namely that it was not incurred in gaining or producing assessable income for the reason that it was paid for insurance against a future risk or, alternatively, that it was not incurred in gaining or producing the assessable income for the reason that the proceeds of the policy are not assessable income whenever received.

In respect to the first point and for the reasons which I attempted to give in
Chapkhana v. F.C. of T. 77 ATC 4412, I am of the opinion that the objection is

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unsuccessful. I am also, however, of the opinion that it is unsuccessful for the second reason and which reason was not debated in the case mentioned. In my view the receipts of the disability insurance benefits by the appellant were receipts of capital and are not assessable income either under the provision of sec. 25 of the Act or under the provisions of sec. 26(j). It follows that the appeal should be allowed on that ground and the assessment should be amended accordingly to delete from the assessable income of the appellant the sum of $2,112 but that the disallowance of the deduction of $91 should be confirmed.

In general, insurance moneys are to be considered as received on revenue account where the purpose of the insurance is to fill the place of a revenue receipt. On the other hand, this I think is not a case where the characterisation of the receipt requires consideration of the purpose for which the taxpayer entered into the contract of insurance which produced the amount, as was the case in
Carapark Holdings Ltd. v. F.C. of T. (1966) 115 C.L.R. 653. Even if it is such a case then I am of the opinion on the short evidence which was given by the appellant that the purpose of the insurance was to compensate him for the loss of a professional ability and with the motive of lessening the economic hardship which could be caused to him and his family as a result of any such loss of ability or capacity. It is apparent that in this case the moneys were neither paid nor received for the purpose of filling the place of a revenue receipt. The character of the receipt in this case is largely, if not entirely, determined from the construction of the insurance policy.

The contract of insurance, although the word indemnity is used, is not a contract of indemnity. It is a contract to pay specific sums upon the happening of specified events and subject to certain limitations and exclusions, which liability is not related to the actual pecuniary loss of revenue by the insured but related only to his disability or incapacity. Earning capacity or ability is undoubtedly a capital asset:
Atlas Tiles Ltd. v. Briers 78 ATC 4536, 52 A.L.J.R. 707.

The obligation of the insurer under the policy is ``to pay indemnity for disability sustained by the insured resulting from injury''. The obligation is to pay in the manner and to the extent provided in the policy. The extent of the obligation is to pay at a monthly rate of $600 for life while the insured is under total disability. The obligation is not incurred until after the expiration of 30 days from the start of total disability and that is so whatever may be the insured's economic position in the meantime. The disability covered is the inability of the insured to carry out his usual occupation, except that during the first two years of such disability he must also be not engaged in any occupation or employment for wage or profit. After the first two years, the fact that the insured earns income is irrelevant, so long as it remains the case that he is disabled from performing ``each and every gainful occupation for which he is reasonably suited by education, training or experience''.

This is clearly an insurance against loss of an ability and it is not the less so because the payments terminate upon the insured's 65th birthday or when he retires or ceases to be engaged in any gainful employment. The view that the insurance is for an occupational disability is fortified by the provision that if the event should occur after the insured's 63rd birthday, then liability should not exceed 24 months. This makes it clear that the ground of liability is for occupational disability caused by injury by accident and not by advancing years. The only apparent connection between other income and the receipts from disability insurance is the provision that benefits under the policy are to be reduced by any amounts paid under workers compensation or similar legislation, but this does nothing to change the character of the insurance receipt.

The receipts are not assessable as income under sec. 25 of the Act.

In respect to sec. 26(j) the amounts received were received by way of insurance. Whether or not it is possible to give some extended meaning to the word indemnity, the matter in this instance, I think, turns upon the meaning of the term ``in respect of''. The payments were not received in place of, or instead of, or as the equivalent of, or as commutation of, or in proportion to, or as dependent upon, any loss of income. The loss here was not a loss of income but a loss

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of an ability. The word ``respect'' must I think be used in the primary meaning given in the Shorter Oxford Dictionary as a relative property or quality or a relationship. I do not think there is any sufficient relationship between the receipts and any loss of income to lead to the conclusion that the money was received by the appellant in respect of any loss of income.

I would allow the appeal and declare that the assessment should be varied as indicated.