Tinkler v. Federal Commissioner of Taxation.

Judges: Brennan J

Deane J
Fisher J

Court:
Federal Court of Australia

Judgment date: Judgment handed down 14 December 1979.

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Deane and Fisher JJ.: This is an appeal from a decision of the Supreme Court of Victoria ( Jenkinson J.) dismissing an appeal by the appellant taxpayer against a decision of the respondent Commissioner to disallow, in part, an objection by the appellant against an assessment of income tax in respect of the year of income ended 30 June 1975 (``the tax year''). The appeal involves the common problem of determining whether payments which the appellant received were receipts of income or of capital.

On 10 May 1974, the appellant was injured in a motor car accident in Victoria. At the time, she was 17 years of age and in clerical employment. She was in hospital for a considerable period of time and, in consequence of her hospitalization and her injuries, was unable to work during the tax year. An application was made on her behalf in accordance with sec. 22 of the Motor Accidents Act 1973 of the State of Victoria (``the Act'') and, during the tax year, she received 22 payments of varying amounts totalling $2,371.20 pursuant to the provisions of sec. 25(1) of the Act. The respondent Commissioner, in assessing the appellant to income tax in respect of the tax year, acted on the view that these receipts were receipts of income and, subject to the effect of a minor mathematical error, included them in the appellant's assessable income. The ultimate question involved in the appeal is whether the amounts in question should properly have been so included.

In the Supreme Court, Jenkinson J. held that the relevant receipts were income according to ordinary concepts and thus assessable income of the appellant by virtue of the provisions of sec. 25(1)(a) of the Income Tax Assessment Act 1936. His Honour's judgment has been reported (78 ATC 4565; (1978) 22 A.L.R. 654). The essence of his decision was that, upon analysis of the provisions of the Act under which they were made, the payments represented a statutory substitute, pro tanto and subject to some adjustments, for the wages lost by the appellant. It followed, in his Honour's view, that the payments were income pursuant to sec. 25 of the Income Tax Assessment Act . It can be said at once that, subject to the effect of the provisions of sec. 25(2) of the Act to which detailed reference is subsequently made, we are in agreement with his Honour's analysis of the nature of the relevant payments and the reasons which he gave for that analysis. Once it was held that, upon analysis, the 22 payments were, to adapt the words of Fullagar J. in
F.C. of T. v. Dixon ( (1952) 86 C.L.R. 540 at p. 568) , a substitute for - the equivalent pro tanto of - part of the wages which would have been earned if the accident had not taken place, it followed, as Jenkinson J. held, that they were assessable income under sec. 25(1)(a) of the Income Tax Assessment Act (see also
F.C. of T. v. Smith, Fed. C. of A. , 17 October 1979 [reported at 79 ATC 4553 ]).

The challenge made before this Court to Jenkinson J.'s reasoning placed much greater reliance on the provisions of sec. 25(2) of the Act than had, apparently, been placed in the argument before the Supreme Court. We proceed to consider the argument advanced before this Court in support of that challenge. To understand the argument before this Court, it is necessary to refer in some detail to the relevant provisions of the Act.

Section 25(1) of the Act is, in so far as is presently relevant, in the following terms:

``25(1) Where a person injured as a result of an accident suffers a loss of income in the capacity of employe by reason of the injury and makes an application under this Act for payments under this sub-section in respect of the loss of that income, the Board shall, subject to this Act, pay to that person an amount calculated in accordance with the formula....''

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ATC 4646

It is common ground that subsec. (1) of sec. 25 applies if the injured person is an employee in receipt of wages and that it was pursuant to that subsection that the payments were made to the appellant.

Subsection (2) of the section, upon which the appellant's argument before us was largely based, is the relevant provision if the injured person is self-employed. It is, in so far as is presently relevant, as follows:

``25(2) Where a person injured as the result of an accident suffers by reason of the injury a reduction in his capacity to earn income by personal exertion and makes an application under this Act for payments under this sub-section in respect of that reduction in capacity, the Board shall, subject to this Act pay to that person an amount payable in accordance with the formula....''

It can be seen that sec. 25(1) provides, in terms, that the occasion for an application under the subsection is loss of income in the capacity of an employee and the object of the application is for ``payments... in respect of the loss of that income''. On the other hand, the occasion of an application under sec. 25(2) is stated to be reduction in capacity to earn income by personal exertion and the object of the application is for ``payments... in respect of that reduction in capacity''. Subsections (4) and (5) of sec. 25 likewise refer to reduction in the capacity to earn income in relation to payments under sec. 25(2).

It was argued on behalf of the appellant taxpayer that compensation payable pursuant to sec. 25(2) to a self-employed person is clearly for reduction or impairment of earning capacity as distinct from being in substitution for loss of earnings and that the receipt of sec. 25(2) payments is therefore a capital receipt. It would, it was argued, be anomalous if receipts under sec. 25(1) were of a different and of a revenue character. In this context, so the argument proceeded, the express reference to payments ``in respect of loss of income'' in sec. 25(1) loses much of its significance and payments under that subsection should be seen as corresponding to payments under sec. 25(2) and characterized as being for impairment of earning capacity and not as a pro tanto substitute for wages which would otherwise have been earned.

At the heart of the appellant's argument based on the provisions of sec. 25(2) are both the assumption of a dichotomy between compensation for loss or impairment of earning capacity and compensation for lost earnings and the proposition that, if the relevant payments can properly be characterized as compensation for loss or impairment of earning capacity, it will automatically follow that the payments were received by the taxpayer as capital. Some support for that assumption and that proposition is to be found in statements in the authorities: indeed, some of those statements tend to treat a man's body, mind and capacity as a capital asset for revenue purposes (but cf. per Menzies J.,
F.C. of T. v. Hatchet 71 ATC 4184 at p. 4186; (1971) 125 C.L.R. 494 at p. 497 ). It is not necessary, for the purposes of the present appeal, that we form or express any considered view on the validity of either the assumption or the proposition. In our view, the appellant's argument before this Court clearly breaks down at another point.

We can see force in the contention that it would be anomalous if payments under sec. 25 of the Act to a self-employed person were capital receipts and not subject to income tax whilst payments to a wage earner were on revenue account and constituted assessable income. Such an anomaly, if it existed, would, perhaps, be less surprising in circumstances such as the present where the contrasting tax situations would arise not by reason of the provisions and operation of a single statute but as the result of the inter-action of independent Commonwealth and State legislative provisions. Be that as it may, the appellant's argument based on the perceived anomaly is without foundation unless one is reasonably satisfied that sec. 25(2) payments should, in truth, be characterized as compensation for loss or impairment of earning capacity and not compensation for loss of earnings. For our part we are far from being so satisfied. Indeed, there are to be found in the Act a number of specific indications to the contrary.

It is apparent that, in contradistinction to sec. 25(1), sec. 25(2) is required to encompass

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ATC 4647

payments of compensation to persons whose income arises from a host of diverse situations. The definition, in sec. 21(3)(b), of ``personal exertion income'' indicates the variety of such situations. The self-employed person who carries on business as a sole trader and on his own account provides, no doubt, the simplest situation. A person may however also earn income in consequence of the fact that he is a member of a partnership or in some like association with others, and the earning of his income may not be the consequence of any ``personal exertion'' on his part. The situation of a partner who is a sleeping partner with the other partners contributing the personal exertion may be likened to the ownership of goodwill or some other property interest. In these and other like circumstances, the fact that the self-employed person has suffered an accident does not necessarily mean that he will suffer a loss of earnings even though his earning capacity may have been impaired: his earnings may well continue undiminished notwithstanding his absence. Thus it can be said that the expression ``a reduction in his capacity to earn income'' is used to point to the diverse circumstances in which a person other than a wage earner can earn income. The expression is not necessarily referable either to the type of incapacity which is compensable if the injured person is self-employed or to the precise character of compensation received.

A consideration of other provisions of the Act tends to support this tentative view that the references to reduction in earning capacity in sec. 25 are not necessarily determinative of the character of sec. 25(2) payments. These provisions suggest that compensation is not, in the case of the self-employed person, for loss of earning capacity simpliciter, but rather for the loss of earnings which is usually but not invariably the consequence of loss of earning capacity. Not only is there an absence of express reference (other than in sec. 25) to the concept of reduction in capacity to earn income either as a condition precedent to the receipt of compensation or as the compensable loss itself. In provisions where the compensable loss might readily have been referred to in these terms, the general expression ``loss of income'' appears. Moreover, we attach significance to the provisions of sec. 25(5) which is in the following terms:

``(5) Where it appears to the Board that a person injured as a result of an accident who makes an application under this Act for payments under sub-section (2) has, by reason of the injury, suffered a reduction in his capacity to earn income by personal exertion but has not, in the opinion of the Board, suffered a material loss of income by reason of the injury, the Board may, by notice in writing given to that person, refuse the application or, for such period as it states in the notice, defer determination of the application.''

This subsection indicates that the reduction in capacity to earn income of a self-employed person is not, standing alone, the subject of compensation. It only qualified as such when the consequence of the reduction in capacity is ``a material loss of income''. In these circumstances considerable doubt is cast on the proposition that sec. 25(2) payments are, in fact, for a capital loss or impairment of earning capacity and not for the loss of income which is sometimes but not always the result of that impairment.

Section 79(1) of the Act, by its use only of the words ``loss of income'' in referring to claims under sec. 25, supports the view that compensation awarded under sec. 25 is for loss of income itself rather than for loss of earning capacity. Section 79(1), which is not set out in the reasons of the trial judge, is in the following terms:

``79(1) A person injured as a result of an accident may not, in proceedings to recover damages in respect of that accident, seek to recover damages from an injured person or a nominal defendant in respect of a loss of income during a period arising by reason of that injury if before the date of commencement of the hearing of the proceedings he was entitled to make a claim under sec. 25 in respect of the loss of income during that period and did not make such a claim before that date.''

It may be that this subsection is equivocal but it was not suggested that its restriction on the commencement of proceedings had application only to a wage earner.

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ATC 4648

The actual amount of both sec. 25(1) and sec. 25(2) payments is calculated by reference to a formula. The formula provides, during the period of incapacity of a wage-earner, a sum quantified at ⅘ ths of his average pre-injury after-tax weekly income. In the case of the self-employed person, the sum payable during the period of incapacity is quantified at \m?\ths of the average pre-injury after-tax personal exertion income. There is a clear distinction between the character of a payment and the manner of its calculation or quantification (see
Glenboig Union Fireclay Co. Ltd. v. I.R. Commrs. (1921) 12 T.C. 427 at p. 464 ;
C. of T. (Vic.) v. Phillips (1936) 55 C.L.R. 144 at p. 156 ). The method of calculation or quantification may provide a quite misleading guide to the character of the payment. Where however, as in the present case, the method of calculation comprises an integral part of the provisions under which the entitlement arises, it can legitimately be regarded as a relevant factor in determining the character of the payment. In so far as the method of calculation is so regarded in the present case, it supports the view that payments under both sec. 25(1) and sec. 25(2) are in substitution, pro tanto, for income which could otherwise have been earned.

It follows from what has been written above that we are not persuaded that the payments made pursuant to sec. 25(2) of the Act should be characterized as capital payments for loss or impairment of earning capacity as distinct from payments in partial substitution for earnings which would have been earned but for the relevant accident. In these circumstances, sec. 25(1) falls to be considered uninhibited by preconceived notions as to the character for income tax purposes of a payment under sec. 25(2). As we have said, we agree, when sec. 25(2) is so considered, with the conclusion of the learned judge at first instance that the payments received by the appellant under sec. 25(1) were in substitution, pro tanto, for income which she would have earned were it not for the accident and constituted income pursuant to the provisions of sec. 25(1)(a) of the Income Tax Assessment Act .

We would dismiss the appeal with costs.

ORDER:

1. The appeal be dismissed.

2. The appellant pay to the respondent his costs of the appeal.