BARNETT v FC of T

Members:
J Block SM

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [1999] AATA 950

Decision date: 15 December 1999

J Block (Senior Member)

The objection decision under review is the decision of the Respondent to disallow an objection dated 28 May 1996 against a notice of private ruling issued on 6 May 1996 in respect of the years ending 30 June 1993 to 30 June 1996 (both years inclusive).

2. (a) The Applicant was represented by Mr D.M. McGovern and Mr P. Rodionoff of Counsel while the Respondent was represented by Mr Martin Dwyer, who is an officer of the Respondent.

(b) The Tribunal had before it the T Documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 together with Supplementary T Documents.

(c) The Applicant gave evidence briefly (and credibly) on his own behalf. The matter was argued in the main on the papers before the Tribunal.

3. (a) Mr McGovern tendered, on behalf of the Applicant, a chronology (``the chronology'') which, in my view, contains a useful summary of the relevant facts and the dates on which they occurred and which is therefore reproduced in full in these Reasons as follows:

``Barnett v Commissioner of Taxation

4 July 1940

Date of birth of applicant (T 11 p 38)

August 1978

While working for Commonwealth Department of Primary Industry and Energy applicant contracted humidifier lung disease later attributed to the effects of office airconditioning.

1984

Applicant made application for worker's compensation in respect of humidifier lung disease; Commonwealth Government eventually accepted liability for disease initially for periods of temporary incapacity for work with effect from 1978.

18 November 1987

Comcare made determination that from 11 May 1987 applicant permanently partially incapacitated for work as a result of the disease and awarded ongoing weekly compensation payments in respect of partial incapacity; payments exceeded $50 per week and were payable under section 46 of the Compensation (Commonwealth Government Employees) Act 1971.

Determination under 1971 Act that from 11 May 1987 applicant partially incapacitated for work as a result of personal injury sustained on 7 August 1978 and making determination of compensation payable in an amount equal to the lesser of the amounts prescribed in section 46(2)(a)(i) of the Act or the difference in the amount able to be earned since 11 May 1987 and amount of average weekly earnings as calculated in determination (T 9 pp 32-34).

17 February 1988

Applicant writes to Comcare requesting consideration of a redemption of compensation payable in respect of partial incapacity (T 10 pp 35-37).

19 October 1989

Applicant advised by Comcare that as his application for redemption under section 49 of Old Act had not been finalised prior to commencement date of new Act, new Act contained no provision for redemption of lump sum weekly payments and application was refused.

Comcare writes to applicant referring to his request for lump sum redemption and advising request should be refused (T 12 p 39).

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31 July 1990

Comcare advised applicant that as a result of litigation pending elsewhere, applicant might still be entitled to proceed with application for lump sum redemption under section 49.

Comcare writes to applicant advising he may still be entitled to claim for lump sum redemption of entitlement to compensation under section 49 of the 1981 Act; also enclosing a copy of instructions which will be used to apply in regard to the operation of section 49; also advising that provision of 1971 Act lump sum redemptions could only be considered when it could be demonstrated when the applicant would benefit by the payment of the lump sum by using the money to obtain some form of financial security or advantage; the most common form of approval was when someone who was partially incapacitated for former employment could use the money to obtain some form of alternative economic support (T 13, p 40).

1992

High Court of Australia hands down decision
Esber v Commonwealth (1992) 174 CLR 430; the effect of that case was that where an application was pending under section 49 of the Old Act but not finalised prior to the date of repeal of the Old Act it should be allowed to proceed as if the Old Act had not been repealed.

22 February 1994

Applicant advised Comcare that he wished to proceed with application for redemption to a lump sum under section 49 of the Old Act.

22 February 1994

The applicant writes to Comcare putting forward submission for lump sum payment and in particular indicating lump sum redemption would allow for self employment from home based business (T 15 pp 42-45).

25 January 1996

Applicant's tax agent seeks private ruling from respondent on issue whether lump sum amount to be received would be assessable income or capital in nature.

1 February 1996

Comcare internal minute calculating redemption figure on alternative basis (T 16 pp 46-49).

13 February 1996

Comcare writes to applicant attaching documents indicating how redemption figure calculated (T 18 p 50).

26 February 1996

Applicant writes to Comcare debating deduction from total redemption figure incorrect (T 19 pp 51-52).

13 March 1996

Comcare grants redemption into lump sum of $136,495 payable under section 40 of the Old Act.

13 March 1996

Comcare finds decision that section 49 entitlement calculated as at 30 November 1998 as payments under the 1988 Act (T 21 p 55).

6 May 1996

Respondent issues unfavourable ruling in respect of lump sum on basis of the amount assessable under section 25(1) of ITAA 36.

6 May 1996

Notice of private ruling (T 5 pp 22-24).

28 May 1996

Applicant objects against respondent's decision.

28 May 1996

Applicant's accountant's objection against ruling (T 6 pp 25-26).

23 June 1997

Respondent disallows objections.

23 June 1997

Respondent's decision on objection (T 8 pp 28-29).

4 August 1997

Taxpayer seeks review of determination (T 1 p 3).

9 September 1997

Respondent's statement of facts issues and contentions that applicant was [paid] lump sum in computation [sic] of weekly compensation payments that were

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assessable amounts; purpose of lump sum payment was to substitute for weekly amounts that were assessable income and lump sum amount paid was calculated with reference to applicant's weekly entitlements; conversion of regular payments of income into lump sum does not alter its character [from] income to capital (T 2 pp 4-5).

1 December 1998

Old Act repealed and replaced with Commonwealth Safety and Rehabilitation Act 1988; from that time applicant's weekly compensation payments made under section 19 of the new Act which contained no provision for redemption of lump sum of weekly payments exceeding weekly payments exceeding $50 per week.''

4. I use the term ``Old Act'' in these Reasons to refer to the Compensation (Commonwealth Government Employees) Act 1971. The term ``New Act'' refers by contrast to the Safety, Rehabilitation and Compensation Act 1988 which replaced the Old Act in 1988 (the New Act was originally entitled the Commonwealth Employees' Rehabilitation and Compensation Act 1988). However, and as set out in the chronology, the decision in
Esber v Commonwealth (1992) 174 CLR 430 had the effect that the Applicant was able to proceed with an application for a lump sum redemption under section 49 of the Old Act.

5. The relevant statute for the purposes of this matter is the Old Act. Sections 45 (which deals with total incapacity), 46 (which deals with partial incapacity) and 49 (which provides for lump sum redemption but only in the case of a partial disability under section 46 and not in respect of a total disability under section 45), which together constitute the legislative framework which is relevant for the purposes of these Reasons, are set out in this clause 5 as follows:

``45. (1) Where an injury to an employee results in the employee being totally incapacitated for work, the succeeding provisions of this section have effect.

(2) Subject to this section, compensation is payable to the employee, during the period of the incapacity, of an amount per week equal to-

(a) $90 or such higher amount as is prescribed plus any amount or amounts required to be added to that amount in accordance with the succeeding provisions of this section; or

(b) the average weekly earnings of the employee before the injury,

whichever is the less.

(2A) Notwithstanding subsection (2), but subject to the succeeding provisions of this section, if the prescribed amount applicable to the employee under sub-section (2B) in respect of a week, being one of the first 26 weeks of the period, or of the aggregate of the periods, of the incapacity, is the greater than the amount of compensation that would, but for this sub-section, be payable to him in respect of that week under sub- section (2) (including sub-sections (3) and (4) of this section, if applicable), the amount of compensation payable to him in respect of that week is that prescribed amount.

(2B) For the purposes of sub-section (2A), the prescribed amount applicable to an employee in respect of a week is-

(a) in the case of an employee who is, during that week, employed by the Commonwealth under conditions of employment providing for sick leave payments - an amount equal to the sum of-

(i) the sick leave payment that he would receive in respect of that week if, during that week, he were entitled to, and were granted, sick leave on full pay by reason of an illness that is not attributable to an injury in relation to which this Act applies; and

(ii) the amount, if any, that was payable to the employee under section 46 in respect of the week that ended immediately before the commencement of the period of the incapacity or, where there are 2 or more periods of incapacity, the last of those periods;

(b) in the case of an employee who is not employed by the Commonwealth during that week, but was, immediately before he ceased to be employed by the

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Commonwealth, employed under conditions of employment providing for sick leave payments - an amount equal to the amount that would be applicable to him under paragraph (a) if he had continued in that employment; or

(c) in any other case - an amount determined by the Commissioner, having regard to the following:

(i) if the employee is, during that week, employed by the Commonwealth - the amount of the earnings, if any, payable to him in respect of that week in respect of that employment;

(ii) if the employee is not, during that week, employed by the Commonwealth - the amount of the earnings, if any, that, if he had continued in the employment in which he was engaged immediately before he ceased to be employed by the Commonwealth, would have been payable to him in respect of that week in respect of that employment; and

(iii) any other matter that the Commissioner considers to be relevant.

(2C) For the purposes of sub-section (2B)-

(a) an employee who would be, or would have been, employed but for his incapacity shall be taken to be employed, or to have been employed, as the case may be;

(b) a reference to a sick leave payment is a reference to a payment by way of salary, wages or pay in respect of a period during which the employee concerned is absent from his employment by reason of illness; and

(c) a reference to earnings, in relation to an employee-

(i) includes a reference to the earnings that would be or would have been, payable to the employee but for his incapacity; and

(ii) does not include a reference to a payment in respect of overtime or a reference to an allowance that is intermittent or is payable in respect of special expenses incurred or likely to be incurred by the employee in respect of his employment.

(3) If there is a prescribed person who is, or there are prescribed persons who are, wholly or mainly dependent upon the employee, there shall be added to the amount specified in paragraph (2)(a) the amount of $23.60 or such higher amount as is prescribed.

(4) If there is a child in relation to whom this Act applies (whether born before, on or after the date of the injury) who is wholly or mainly dependent upon the employee or there are children in relation to whom this Act applies (whether born before, on or after the date of the injury) who are wholly or mainly dependent upon the employee, there shall be added to the amount specified in paragraph (2)(a) the amount of $11.25, or such higher amount as is prescribed for that child or each of those children, but an amount shall not be so added for a child in relation to any time before the date of the birth of that child.

(5) If a child in relation to whom this Act applies is-

(a) a prescribed person in relation to the employee; and

(b) is the only prescribed person who is wholly or mainly dependent upon the employee,

sub-section (4) does not apply in relation to that child.

(6) If there are two or more persons who are prescribed persons in relation to the employee and are wholly or mainly dependent upon the employee and each of those persons is a child in relation to whom this Act applies, sub-section (4) does not apply in relation to one of those persons.

(7) If the employee-

(a) is retired from his employment as a result of the incapacity for work; and

(b) as a result of the retirement is in receipt of a pension under a superannuation or provident scheme established or maintained by the Commonwealth or by a prescribed authority of the Commonwealth,

the compensation payable to the employee in respect of each week during the period of the incapacity shall not exceed the amount,

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if any, by which the average weekly earnings of the employee before the injury exceed-

(c) if a part of the pension is, under the scheme, attributable to contributions for the pension paid by the employee - the part of the pension paid or payable to the employee in respect of that week that is not attributable to those contributions;

(d) if the employee has paid contributions under the scheme, the scheme does not identify a part of the pension as being attributable to those contributions and the Commissioner has determined that it is reasonable that a part of the pension should be treated as if it were attributable to those contributions - the part of the pension paid or payable to the employee in respect of that week that is determined by the Commissioner to be the part that is to be treated as not attributable to contributions for the pension paid by the employee; or

(e) in any other case - the pension paid or payable to the employee in respect of that week.

(8) Where-

(a) as a result of the injury, the employee is being maintained as a patient in a hospital, nursing home or similar place and has been so maintained for a continuous period of not less than one year; and

(b) there are no prescribed persons, and no children in relation to whom this applies, who are dependent upon the employee,

the compensation payable to the employee is such amount per week as is determined by the Commissioner, having regard to the present and probable future needs and expenses of the employee and the duration of the period during which the employee is likely to be a patient in a hospital, nursing home or similar place, but the amount so determined shall not be less than one-half of, and shall not be greater than, the amount per week of the compensation that, but for this sub-section, would be payable to the employee.

(9) Subject to sections 47 and 50, where a determination is made that an amount of compensation is payable to the employee under section 39 in respect of an injury that resulted in a loss referred to in that section or a determination is made that the liability of the Commonwealth to make further payments to the employee under section 46 in respect of an injury is to be redeemed, compensation is not payable to the employee under this section in respect of a period of incapacity for work resulting from that injury, being a period occurring after the date of the making of the determination.

(10) For the purposes of this section, `prescribed person', in relation to an employee, means-

(a) the spouse of any employee;

(b) any of the following persons, being a person over the age of sixteen years-

(i) the father, mother, step-father, step-mother, father-in-law, mother-in- law, grandfather, grandmother, son, daughter, step-son, step-daughter, grandson, granddaughter, brother, sister, half-brother or half-sister of the employee;

(ii) a person who stands in loco parentis to the employee; or

(iii) a person, not being the spouse of the employee or a person referred to in sub-paragraph (i) or (ii), who is wholly or mainly maintained by the employee and has the care of a child in relation to whom this Act applies being a child who is wholly or mainly dependent on the employee; or

(c) a person of the opposite sex to the employee who lives with the employee as the spouse of that employee on a bona fide domestic basis although not legally married to that employee.

(11) For the purposes of sub-paragraph (10)(b)(i), relationships referred to in that sub-paragraph shall be taken to include illegitimate relationships and relationships by adoption and relationships that are traced through illegitimate relationships or relationships by adoption.

(12) For the purposes of sub-paragraph (10)(b)(iii), a person who has the care of a child referred to in that sub-paragraph shall not be taken not to be wholly or mainly maintained by an employee by reason only

ATC 2450
that the employee pays any remuneration to the person for caring for that child.

46. (1) Where an injury to an employee results in the employee being partially incapacitated for work, the succeeding provisions of this section have effect.

(2) Subject to this section, compensation is payable to the employee, during the period of the incapacity, of an amount per week equal to-

(a) the lesser of the following amounts, namely-

(i) $90 or such higher amount as is prescribed; or

(ii) the amount (if any) by which the average weekly earnings of the employee before the injury exceeds from time to time the amount per week that he is able to earn in some suitable employment or business; or

(b) the amount (if any) by which the amount per week that would be payable to him under section 45, disregarding sub-sections (2A) and (7) of that section, if he were totally incapacitated for work exceeds from time to time the amount per week that he is able to earn in some suitable employment or business,

whichever is the greater.

(3) If, as a result of the partial incapacity for work-

(a) the employee is retired from his employment, or the minimum amount per week payable to the employee in respect of his employment by the Commonwealth is reduced; and

(b) as a result of the retirement or reduction, as the case may be, the employee is in receipt of a pension under a superannuation or provident scheme established or maintained by the Commonwealth or by a prescribed authority of the Commonwealth,

the compensation payable to the employee in respect of each week during the period of the incapacity shall not exceed the amount, if any, by which the average weekly earnings of the employee before the injury exceed from time to time the sum of-

(c) the amount per week that he is able to earn in some suitable employment or business; and

(c) the amount of-

(i) if a part of the pension is, under the scheme, attributable to contributions for the pension paid by the employee - the part of the pension paid or payable to the employee in respect of that week that is not attributable to those contributions;

(ii) if the employee has paid contributions under the scheme, the scheme does not identify a part of the pension as being attributable to those contributions and the Commissioner has determined that it is reasonable that a part of the pension should be treated as if it were attributable to those contributions - the part of the pension paid or payable to the employee in respect of that week that is determined by the Commissioner to be the part that is to be treated as not attributable to contributions for pension paid by the employee; or

(iii) in any other case - the pension paid or payable to the employee in respect of that week.

(4) In ascertaining for the purposes of sub- sections (2) and (3) the amount per week that an employee is able to earn, any amount that he is able to earn in respect of overtime shall be taken into account.

(4A) In determining for the purposes of sub- sections (2) and (3), the amount per week that an employee is able to earn in some suitable employment or business, the Commissioner shall have regard to-

(a) in a case where the employee is in employment - the amount per week that the employee is earning in that employment;

(b) in a case where, after becoming partially incapacitated for work, the employee received an offer of suitable employment and failed to accept that offer - the amount per week that the employee would be earning in that

ATC 2451
employment if the employee had accepted that offer and were engaged in that employment;

(c) in a case where, after becoming partially incapacitated for work, the employee received an offer of suitable employment and, having accepted that offer, failed to engage, or to continue to engage, in that employment - the amount per week that the employee would be earning in that employment if the employee were engaged in that employment;

(d) in a case where, after becoming partially incapacitated for work, the employee has failed to seek suitable employment - the amount per week that, having regard to the state of the labour-market at the relevant time, the employee could reasonably be expected to earn in such employment if the employee had sought, obtained and were engaged in such employment;

(e) in a case where paragraph (b), (c) or (d) applies to the employee - whether the employee's failure to accept an offer of employment, to engage, or to continue to engage, in employment or to seek employment, as the case may be, was, in the Commissioner's opinion, reasonable in all the circumstances; and

(f) any other matter that the Commissioner considers relevant.

(5) Subject to section 47, where a determination is made that an amount of compensation is payable to the employee under section 39 in respect of an injury that caused a loss referred to in that section or a determination is made that the liability of the Commonwealth to make further payments to the employee under this section in respect of an injury is to be redeemed, compensation is not payable to the employee under this section in respect of a period of incapacity for work resulting from that injury, being a period occurring after the date of the making of the determination.

...

49. (1) Subject to this section, where payments of compensation in respect of an injury have been made to an employee under section 46 for a continuous period of not less than six months, the employee may request the Commissioner in writing that the liability of the Commonwealth to make further payments to the employee under that section be redeemed by the payment to the employee of a lump sum.

(2) A request under sub-section (1) shall be in writing and shall specify the manner in which the employee intends to use the lump sum if the request is granted.

(3) Where a request is made under sub- section (1), the Commissioner shall, unless the employee has, by notice in writing to the Commissioner, withdrawn the request, determine-

(a) whether the liability of the Commonwealth is to be redeemed by the payment to the employee of a lump sum; and

(b) if he determines that the liability is to be so redeemed - the amount of the lump sum.

(4) The amount of the lump sum is the amount determined to be the value, as at the date of the determination by the Commissioner that the liability is to be redeemed, of the right of the employee to receive further payments of compensation under section 46 and, in the determination of the value of that right, regard shall be had to the nature of the injury to the employee, the age and occupation of the employee and any other relevant matters.

(5) The Commissioner shall not make a determination that the liability of the Commonwealth to make further payments to an employee under section 46 is to be redeemed unless he is satisfied that-

(a) the injury is not likely to result in the employee becoming totally incapacitated for work;

(b) the employee intends to use the lump sum in a manner that is particularly advantageous to the employee; and

(c) in all the circumstances it is desirable in the interests of the employee that the liability of the Commonwealth be redeemed.

(6) Where-

(a) the Commissioner has made, in pursuance of a request under sub-section (1), a determination that the liability of

ATC 2452
the Commonwealth to make further payments to an employee under section 46 is to be redeemed by the payment to the employee of a lump sum;

(b) the employee has not instituted a proceeding under Part V in respect of the determination or, if he has instituted such a proceeding, has discontinued the proceeding; and

(c) the lump sum has not been paid to the employee in pursuance of the determination,

the employee may notify the Commissioner in writing that he no longer wishes the liability to be redeemed and, in that case, the determination shall be deemed not to have been made and a further determination shall not be made in respect of that request.''

6. (a) The decision of Mathews J sitting as President of this Tribunal in
Coward v FC of T 99 ATC 2166 was canvassed at some length during the hearing.

(b) Coward's case is useful in particular for the review by Mathews J of a line of cases commencing with
Tinkler v FC of T 79 ATC 4641; see in this regard clauses 16 to 35 inclusive of Coward's case reading as follows (at 2169 and following):

``16. In this regard Mr Murphy relies on a line of cases which commenced with Tinkler v FC of T 79 ATC 4641. The taxpayer in that case was injured in a motor vehicle accident in 1974. She was incapacitated for a period from her employment during which time she received regular payments under s 25(1) of the Motor Accidents Act 1973 (Vic) (the Victorian Act). Section 25(1) provided as follows:

`25(1) Where a person injured as a result of an accident suffers a loss of income 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...'

17. The formula which followed provided for payment to be calculated having regard to the person's `average weekly income' during the period of incapacity.

18. The Commissioner assessed taxation in respect of the compensation received by Ms Tinkler, who appealed to the Supreme Court of Victoria and then to the Full Federal Court (Brennan, Deane and Fisher JJ). It was submitted that the payments were not income, being compensation for loss of earning capacity which was said to be a capital asset. The taxpayer placed reliance on s 25(2) which, it was said, clearly showed this to be the case. Section 25(2) was in the following terms:

`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 calculated in accordance with the formula...'

19. The formula which followed provided for the person to receive weekly payments based upon the extent to which the capacity of the person to earn income had been reduced by reason of the injury.

20. It was submitted on behalf of the taxpayer that it would be incongruous if payments made to employees under s 25(1) were taxable but payments under s 25(2) were not. Neither class of payment was taxable, it was urged, because each class of payment was intended to provide compensation for loss of earning capacity, this being a capital asset.

21. This submission did not find favour with Jenkinson J, of the Victorian Supreme Court [ reported at 78 ATC 4565], nor with the Full Federal Court. Brennan J noted that the character of a statutory payment made otherwise than as compensation for an asset or right which is acquired or sterilised, depends upon the purpose of the payment as revealed by the statute, and the circumstances of its receipt by the taxpayer. In relation to payments under s 25(1), his Honour observed that the statutory indicia uniformly pointed to a purpose of providing the taxpayer with a partial recoupment of lost income. From the taxpayer's viewpoint, the payments were received at intervals during the period when she was not earning

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income. Thus the purpose of the payments and the circumstances of their receipt combined in that case to establish the income character of the amounts paid. As to s 25(2), Brennan J made the following observation:

`... And it may be necessary to consider whether the description of a capacity to earn income as a capital asset - however useful that description may be thought to be in working out the principles of compensation for personal injury at common law - is accurate for the purposes of the Income Tax Assessment Act...'

(p 4644)

22. Deane and Fisher JJ, in a joint judgment, noted that the taxpayer's argument was based on the assumption that compensation for loss of earning capacity is capital in the hands of a taxpayer, whereas compensation for loss of earnings is income. Their Honours declined to express a considered view as to the validity of this assumption, thus implicitly putting it into question. They proceeded to analyse the purpose of payments made under s 25(2), noting that the reference in that subsection to `reduction in economic capacity' was not necessarily determinative of the character of payments made under it. They concluded:

`... 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... 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.'

(p 4649)

23. Following the decision in Tinkler the Victorian Act was amended. A new s 25(1) was substituted for the old section in the following terms:

`25(1) Where a person injured as a result of an accident suffers deprivation or impairment of his earning capacity by reason of the injury and makes an application under this Act for a payment under this section in respect of that deprivation or impairment, the Board shall, subject to this Act, pay to that person-

(a) such amount as, in the opinion of the Board, will adequately compensate that person for the deprivation or impairment of earning capacity which he has suffered; or

(b) $20,800-

whichever is the lesser.'

24. In assessing `adequate compensation' under s 25(1)(a) the Board was required to have regard to the person's loss of past earnings and likely loss of future earnings (s 25(2)). By subs (4), the Board was to measure the impairment of earning capacity having regard to `all relevant matters' and in particular to (a) the nature of the injury, (b) the nature of the person's trade, business or profession and (c) the medical evidence relating to the injury. A new s 32 was inserted which enabled the Board to make payments under s 25(1) by way of instalments.

25. These new provisions were considered in FC of T v Slaven 84 ATC 4077; (1984) 1 FCR 11. The taxpayer in that case had been injured in a motor car accident in 1980. The Commissioner treated payments she received under s 25(1) as assessable income and assessed her accordingly. Her objection was disallowed and she appealed to the Victorian Supreme Court which allowed her appeal. A further appeal to the Full Federal Court was dismissed. The Court (Bowen CJ, Lockhart and Sheppard JJ) noted that it was plain from the second reading speeches that the 1979 amendments were intended to overcome the position that benefits paid under the Act attracted income tax. As to s 25, and the Board's function in assessing compensation, the Court made the following observation:

`The exercise in which the Board is required to engage by the Act is not

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merely one of assessing lost earnings. It is in fact an exercise in valuation. It is true to say that the amount of compensation payable to an injured person is quantified by a consideration of what the use of the lost or diminished earning capacity might be expected to produce. In some simple situations the amount of lost earnings may be a certain and ready guide to the amount of entitlement. But the Board's task is essentially to determine the compensation payable to a person having regard to the deprivation or impairment of his earning capacity by reason of the injury. The distinction between loss of earnings and loss of earning capacity is well established; it is by no means fictional. See for example
Paff v Speed (1961) 106 CLR 549 per Windeyer J at pp 566-567;
Graham v Baker (1961) 106 CLR 340 per Dixon CJ and Kitto and Taylor JJ at 346-347;
Skelton v Collins (1966) 115 CLR 94 per Windeyer J at p 129; and Atlas Tiles Limited v Briers 78 ATC 4536; (1978) 144 CLR 202 per Barwick CJ at ATC p 4540; CLR p 210. Nothing in the judgment of the majority in
Cullen v Trappell 80 ATC 4185; (1980) 146 CLR 1 detracts from what Barwick CJ said on this topic in the Atlas Tiles case.'

(ATC pp 4084-4085; FCR p 21)

26. Their Honours concluded that the payments under s25(1) were capital by nature. They did so in the following terms:

`Whether a receipt constitutes income or capital must, of course, depend upon a consideration of all the circumstances. It is the character of the receipt in the hands of the taxpayer as recipient that must be determined:
Hayes v FC of T (1956) 11 ATD 68 at p 72; (1956) 96 CLR 47 at p 55;
Scott v FC of T (1966) 14 ATD 286 at p 293; (1966) 117 CLR 514 at p 526; Federal Coke Company Pty Ltd v FC of T 77 ATC 4255 at p 4264; (1977) 34 FLR 375 at p 388.

The Parliament of Victoria cannot determine by its own legislation whether the receipt of a statutory payment answers the description of income or capital in the hands of the recipient within the meaning of sec 25 of the Assessment Act, a Commonwealth Act. But the purpose of a statutory payment, as disclosed by the terms of the statute itself, must be a powerful, though not conclusive, aid to the determination of the character of the payment and in particular as to whether its receipt constitutes income in the hands of the taxpayer.

These considerations do not support the notion that payments made pursuant to determinations of the Board are in partial substitution for earnings which would have been earned but for the relevant accident. The essential character of those payments is in our opinion, as compensation for loss or impairment of earning capacity. The receipt of those payments is a capital receipt.'

(ATC p 4085; FCR p 22)

27. The third case in the series is FC of T v Inkster 89 ATC 5142. The circumstances of that case were a little unusual. Between 1948 and 1951 the taxpayer worked as a fitter and turner in the Western Australian Government Railways Workshop (WESTRAIL). He then worked with the Western Australian Police Department from which he retired in September 1982 at the age of 60. In 1983 he was diagnosed as suffering from asbestosis as a result of his exposure to asbestos dust whilst working with WESTRAIL. At that time he was living on his superannuation pension from the Police Force and had no intention of ever working again for a living. Between 1984 and 1987 the applicant received compensation under the Workers' Compensation and Assistance Act 1981 (WA) (the Western Australian Act). This was treated by the Commissioner as assessable income, and the matter was eventually appealed to the Full Federal Court (Pincus, Gummow and Lee JJ). The Court unanimously found that the payments were income by nature.

28. The following is a brief distillation of the relevant provisions of the Western Australian Act. Under s18 of the Act, an employer was liable to pay compensation to a worker who was `disabled from earning full wages'. Compensation was to be assessed in accordance with Schedule 1 of

ATC 2455
the Act. If the disability resulted in either a total incapacity or a partial incapacity for work a weekly payment was to be made to the worker during the period of incapacity. The amount of weekly payment was calculated by reference to the weekly earnings of the worker, being the remuneration which was payable in the employment in which the disability occurred. In the case of Mr Inkster, the disability was taken to have occurred when he contracted the disease, namely during his employment with WESTRAIL over 30 years before his condition was diagnosed.

29. Mr Inkster continued to receive weekly payments of compensation under the Western Australian Act until he reached the age of 65 in September 1987. At that time he elected to take a redemption payment under a provision of the Western Australian Act similar to s 37 of the SRC Act. Unfortunately, for present purposes, the dispute between the taxpayer and the Commissioner related to the weekly payments received during the earlier years of income and not to the redemption amount received subsequently.

30. Lee J (with whom Gummow J agreed) noted that the weekly payments made to the taxpayer were assessed according to a notional calculation. No loss of income had been established or sought to be established. The calculation proceeded as if the taxpayer had an entitlement to compensation which represented the extent of the impairment of his ability to gain income by personal exertion. As such, Lee J concluded that it was the loss of his capacity to earn income rather than a calculation designed to offset any actual loss of income. His Honour continued with the following observation:

`The fact that the amount of a compensation payment is a notional calculation will not prevent the payment being of a revenue nature if it is designed as a contribution to diminish the adverse economic consequences of a disability, that is to say the income loss caused by it.'

(p 5157)

31. His Honour then referred to FC of T v DP Smith 81 ATC 4114; (1980-1981) 147 CLR 578 (referred to later in these Reasons) and continued:

`In the respondent's case, there was no loss of income to which the payments were directed as a substitution for such earnings and the payments had their genesis in an assessment of a loss of earning capacity.

For this reason any one payment may have had the character of capital rather than revenue. (See FC of T v Slaven at ATC pp. 4085-4086; ALR p. 93). This was the conclusion of the Tribunal and in my opinion the Tribunal did not err in so finding.'

(p 5157)

32. His Honour then proceeded to consider whether compensation payments, calculated as weekly payments and paid regularly, took on the character of income by virtue of their periodicity. On this question the AAT had found that periodicity of payments alone was not sufficient to convert capital payments to income. His Honour, after quoting the Tribunal's reasons, made the following observations

`With respect to the Tribunal, there were surrounding circumstances more than capable of characterising the periodical payments as income. Although the payments had their origins in capital, they were not in the nature of payments by instalments of a fixed sum due and owing. 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. Although it is the character of the receipt in the hands of the taxpayer as recipient that must be determined (FC of T v Slaven at ATC pp. 4085-4086; ALR p. 93), part of the consideration of that matter must involve consideration of the motive of the payer (
Hayes v FC of T (1956) 96 CLR 47 per Fullagar J at p 55) and the part the receipt played in the payee's affairs.

Although the respondent may not have relied upon the payments to meet his regular expenditures... the payments were calculated as weekly payments by reference to notional weekly earnings and were received fortnightly by the respondent over a significant period of time. The Compensation Act provided for

ATC 2456
the payments to be calculated as weekly payments and paid regularly. The calculation of such payments by reference to, and as part of, a weekly income and regular receipt thereof may be sufficient to attract the character of income to the payments. (See FC of T v Slaven at ATC pp 4084-4085; ALR p 92)...' (p 5158).''

7. In respect of the decisions referred to by Mathews J in Coward's case:

(a) There is a clear distinction between loss of earnings and loss of earning capacity; see in particular the passage from, and the cases cited in the judgment in
FC of T v Slaven 84 ATC 4077; (1984) 1 FCR 11 and set out in clause 25 of the decision in Coward's case.

(b) The Court in Slaven's case was influenced by the fact that the Motor Accidents Act 1973 (Vic) (the ``Victorian Act''), which was considered in Tinkler's case (and referred to in clause 16 of the decision in Coward), was amended in 1979 (and having regard to the second reading speeches referable to the amending legislation) so as to ensure a different tax treatment of certain benefits paid under it.

The Court in Slaven's case also had regard to the fact that section 25(1) of Victorian Act was amended so as to make it clear that the amount in question was designed to compensate an injured person for ``the deprivation or impairment of earning capacity'' and moreover ``earnings'' was defined by section 25(3) of the Victorian Act so as to mean the amount after deduction of taxation.

It is thus apparent that the Victorian Act statutory amendments, which were considered in Slaven's case, were such that the Court was able to conclude that the compensation was an affair of capital rather than of income.

It is to be noted also that although the relevant statute was a Victorian Act, which could not directly affect a Commonwealth taxing statute, it was, so the Court held, a powerfully persuasive influence. In the present case the Old Act is, of course, a statute of the Commonwealth.

``... If the respondent had been able to commute his entitlement, the sum received may have been a capital receipt as far as the respondent was concerned having regard to the particular circumstances of his case, but the receipt of regular periodical payments pursuant to the scheme for such payments provided by the Compensation Act was able to give what otherwise may have been a capital receipt the character of income. The circumstances and manner of payment may convert what would otherwise be capital payments into income. (See
Egerton Warburton v FC of T (1934) 51 CLR 568, per Rich, Dixon and McTiernan JJ at pp 572-573.)''

The statement by Lee J as to the fact that commutation might have resulted in a capital receipt was clearly obiter, as noted by Mathews J in Coward, but it must nevertheless be persuasive authority as to its correctness.

8. (a) Mathews J went on in Coward's case to note that the Act with which she was concerned (being the New Act and referred to in Coward's case as the ``SRC Act'') provided for a statutory reduction in weekly compensation payments when the recipient of those payments turned 65. That led her Honour to infer that in those circumstances the payment must be construed as compensation for loss of earning capacity. See in this context clauses 72 and 73 of the decision in Coward's case as follows (at 2180):

``72. 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.

73. Lee J's observation in Inkster as to the likelihood of a redemption payment being capital in the hands of the taxpayer was clearly obiter, and the circumstances of that

ATC 2457
case were by no means identical to those of the applicant here. In particular, the weekly payments made to Mr Inskter were calculated on a `notional' basis which had no relevance to his present circumstances. The weekly payments made to the present application, at least before he turned 65, had their basis in his `normal weekly earnings' at the time he received his injury. However, when he turned 65, and the payments were reduced under the formula contained in s 134, any relevance that the resultant amount had to his present circumstances was so remote as to be indistinguishable from the circumstances in Inkster. Accordingly I consider that the analysis undertaken by Lee J is both relevant and applicable in this case. Under this analysis, the weekly payments which the applicant was entitled to receive after he turned 65 constituted income in his hand notwithstanding that they were designed to compensate him for a capital loss. The periodicity of the payment was the principal feature which converted them from capital to income. The lump sum redemption payment, which clearly lacked this feature, therefore reverted to capital.''

(b) With respect to Matthews J, I am inclined to the view that clause 72 of the decision in Coward's case is open to some degree of doubt. The reduction in weekly compensation on the attainment of the age of 65 years is capable of other explanations and not necessarily founded on the assumption that by the age of 65 ``most members of the community are no longer in the workforce''. Parliament may have considered that at the age of 65 one's needs diminish if only because one's responsibilities to one's offspring have usually been discharged. Earnings can indeed diminish with age, but it does not follow that at the age of 65 such earnings cease.

(c) Mr McGovern submitted that the decision in Coward's case was correct but for different reasons. The calculation under the New Act relates to the whole of a person's life expectancy and thus going beyond the date on which work would cease even though that cessation date is, at the date of any relevant computation, uncertain. There are, in other words (so he contended), in the normal course two periods, one related to work and one related to retirement after work (and necessarily estimated by reference to life expectancy tables). The latter period cannot on any basis refer to earnings and is thus necessarily of a capital nature. And a lump sum payment which is mixed as to capital and income and which is not dissected is, having regard to the decisions in
Allsop v FC of T (1965) 14 ATD 62; (1965) 113 CLR 341 and
McLaurin v FC of T (1961) 12 ATD 273; (1961) 104 CLR 381, to be treated as capital.

(d) Mr McGovern submitted that in any event compensation for an injury, albeit measured by reference to lost earnings, will usually be referable to lost earning capacity. He referred me in this context to:

(1) Clause 2.1320 of Taxation Law in Australia (4th Edition) by Lehmann and Coleman reading as follows (at page 164):
- `` [2.1320] In contrast to cases involving compensation for loss of trading profits, compensation paid to natural persons for wage loss caused by physical injuries is usually capital. Wage loss accruing to the date of the compensation and subsequent to it receive the same treatment. Both are capital. This may seem to be a strange result particularly where compensation is merely for wage loss over a short period, perhaps a matter of days. Personal injuries cases are an apparent exception to the replacement principle. Courts have justified this by claiming that personal injuries compensation (so far as it contains a wage loss component) is not merely to replace wages. It is to compensate for loss of earning capacity, which is an affair of capital. Note that earning capacity of an individual is probably not an asset for the purposes of Pt IIIA: s 160A. Furthermore compensation for a wrong or injury `suffered by the taxpayer to his or her person or in his or her profession or vocation' is excluded from the capital gains tax provisions: s 160ZB(1).
- Compensation for loss of future wages is easily viewed as compensation for a capital right, but compensation for wages lost prior to the award was held in two unreported Tasmanian cases to be income under s 25(1) of the Act. However Gibbs J, who was then a justice of the Supreme Court of Queensland held in
  Groves v United Pacific Transportation Pty Ltd [1965] Qd R 62
  
  ATC 2458
  that s 26(j) of the Act did not apply to personal injuries compensation as the amount awarded, although described for convenience as a payment for loss of wages or other earnings is `really awarded for the impairment of the plaintiff's earning capacity that has resulted from his injuries'. Gibbs J relied on the view of Dixon CJ, Kitto and Taylor JJ expressed in
  Graham v Baker (1961) 106 CLR 340 that wage loss up to the time of the award and estimated future economic loss are not really two separate matters. The right of action is complete at the time injuries are sustained.
- Subsequently in Atlas Tiles Ltd v Briers (1978) 9 ATR 143 Barwick CJ held that ```earning capacity'' is a capital asset, capable by its use or employment of producing income'. The fact that this loss was quantified by a consideration of the earnings lost, was `an exercise in valuation' and did not change the capital nature of the loss. In Cullen v Trappell (1980) 10 ATR 772 Barwick CJ reaffirmed his view in Atlas Tiles and held that `the exercise is not, in my opinion, one in which it is sought merely to replace the wages themselves'.
- Barwick CJ rejected criticism that his distinction between loss of earnings and loss of earning capacity was `illusory or insubstantial' and `a matter of semantics'. Arguably the view of Barwick CJ and Gibbs J (as he then was) is correct. Where an employer wrongfully terminates an employment contract an employee may suffer earnings loss, but his earning capacity is unimpaired. By contrast personal injuries impair the earning capacity. The decisions in Atlas Tiles and Cullen v Trappell firmly establish the principle that compensation for wage loss resulting from injury is not assessable. Nor is this principle an exception to the replacement principle, if the wage loss is viewed as impairment of earning capacity, being a capital asset (but not a capital asset for the purposes of Pt IIIA).''
(2)
Williams v Metropolitan Coal Company Limited (1947-1948) 76 CLR 431 per Latham CJ as follows (at 440 and 441):
- ``In order to establish a claim for compensation, the worker must show incapacity resulting from an `injury'; that is, in this case, resulting from the disease. `Incapacity' means incapacity to earn wages (Wicks v Union Steamship Co. of New Zealand Ltd). It means `loss or diminution of the capacity to earn wages in the employment in which the injured workman was employed' (Ball v William Hunt & Sons Ltd). Partial incapacity resulting from injury may continue to be grounds for compensation though a subsequent infirmity not resulting from an employment `injury' may have produced further or total incapacity (Harwood v Wyken Colliery Co; Ward v Corrimal-Balgownie Collieries Ltd).
- An award of compensation in respect of incapacity is based upon comparison of a worker's diminished earning capacity as a result of the injury on the one hand, with, on the other hand, what the worker could have earned in a relevant employment if he had not been affected by the injury which has brought about his incapacity. I agree with the opinion of the majority in the Full Court that the facts stated show that the incapacity of the worker to earn wages in the coal industry... existed, as a consequence of the attainment of the age of sixty years by the worker and of the provisions of the Pensions Act, from February 1942, ie., before 19th November 1946.''
(3)
Arthur Robinson (Grafton) Pty Limited & Anor v Carter (1967-1968) 122 CLR 649, per Barwick CJ as follows (at 658-660):
- ``... But to take the present value of a regular weekly wage paid continuously for the estimated working life and then attempt to discount that figure to allow for the many factors of which it takes no account is not to my mind a satisfactory course to take, particularly as an initial step in an attempt to calculate what is a fair compensation for the loss of an earning capacity which has or could have produced that rate of weekly wage. That reported cases appear to condone such a course may be conceded: but I question whether any case in that sense by which this Court is bound, has been arrived at after contest of the specific point and
  
  ATC 2459
  upon full consideration. The recent decision of the Court of Appeal in England in Watson v Powles, would indicate the trend in that country. Ill health, unemployment, road or rail accidents, wars, changes in industrial emphasis, so that industries move their location, or are superseded by new and different techniques, the onset and effect of automation and the mere daily vicissitudes of life are not adequately reflected by merely - and blindly - taking some percentage reduction of a sum which ignores them. The calculation of that sum has a disarming appearance of introducing some mathematic accuracy into the assessment of the compensation. But, in truth, it must eventually tend to inflate the ultimate sum awarded: and unjustifiably to do so. To begin with, it represents a calculation as to the value of the loss of wages upon an assumption which the attempt to make a discount therefrom denies. Therefore, the assessment based upon it begins with a figure which in at least a great many cases must be too high in relation to fair compensation for loss of earning capacity: and secondly, not only does it not provide for any of the contingencies of which I have spoken but, in truth, it is so unrelated to them that it offers no firm basis on which a meaningful discount of the sum may be made. Also, and perhaps even more significantly, its use is based upon an assumption that the injured person will use the compensation to buy an annuity or at least invest the verdict at no higher rate of return than that rate which has been used for the capitalisation to reach the sum of the present value of the future receipts or payments. That, it seems to me, is a fundamental error which must weaken immensely any utility the calculation of that sum might otherwise have. In the present case, can it be thought for one moment that a person in the situation of the respondent would purchase an annuity or annuities as a means of securing himself or confine himself to investment at the rate of capitalisation. Such a person is free to do what he will with the damages he is paid. And in arriving at a verdict in such a case as this, consideration, in my opinion, ought specifically to be given to the question of the avenues open for investment or employment of the verdict and of how the plaintiff if successful is likely to employ his money so as to secure himself so far as the award will extend against the consequences of the disabilities for which he is being compensated.''

9. (a) As to whether a compensation payment made in respect of an injury relates to a loss of earning capacity is doubtful.

(b) In
FC of T v DP Smith 81 ATC 4114; (1980-1981) 147 CLR 578 a medical practitioner was employed by a hospital; he was injured in a traffic accident in October 1977 and unable to work until February 1978. For that period he received a sum of money under the terms of a personal disability insurance policy he had taken out some time earlier. He had also received full sick leave pay from his employer during two of the weeks of his disablement. The Court noted (per Gibbs CJ, Stephen, Mason and Wilson JJ) as follows (at ATC 4116; CLR 584):

``... the conclusion is inescapable that the purpose of the policy is to diminish the adverse economic consequences of injury by accident. It was to provide a monthly indemnity against the income loss arising from the inability to earn. The revenue character of the benefits is so clearly stamped upon them during the period of two years during which the insured is totally disabled...

... that the Commissioner is... entitled to include the benefits... as assessable income...''

(c) In Inkster's case the Court found (per Lee and Gummow JJ at ATC 5158; FCR 72) that the Tribunal had erred when it found that periodicity of payment alone was not decisive and that there were no other factors present to make the payments income according to ordinary concepts. The Court said:

``With respect to the Tribunal, there were surrounding circumstances more than capable of characterising the periodical payments as income. Although the payments had their origins in capital, they were not in the nature of payments by instalments of a fixed sum due and owing. The payments were intended to serve the purpose of

ATC 2460
providing a regular income supplement to the respondent notwithstanding that the payments were generated by calculations which related to capital considerations. Although it is the character of the receipt in the hands of the taxpayer as recipient that must be determined (FC of T v Slaven at ATC pp 4085-4086; ALR p 93, part of the consideration of that matter must involve consideration of the motive of the payer (Hayes v FC of T (1956) 96 CLR 47, per Fullagar J at p 55) and the part the receipt played in the payee's affairs.''

(d) There is, of course, other authority for the ``substitution'' principle. In
FC of T v Dixon (1952) 10 ATD 82; (1952) 86 CLR 540 payments made to supplement a soldier's military pay were held to be stamped with the character of income. The majority found that the amounts were income under ordinary concepts, because they were paid to the taxpayer in substitution for a part of the income which he would ordinarily have earned from his civilian employment.

10. I cite Case X21,
90 ATC 239, not because it involved any new matter of principle, but because it relates to section 45 of the Old Act. It involved the payment of a lump sum made up exclusively of arrears of weekly payments. Deputy President Gerber (as he then was) found, understandably enough, that that lump sum payment was stamped with the character of income.

11. (a) Comcare, which administered the Old Act, plainly thought (at least ex facie its own internal directives) that a lump sum would be treated as capital. Comcare's internal directives, which are set out in pages 11 to 16 (inclusive) of the T Documents, make it clear that this is so. See in particular its commentary in respect of section 49(5) of the Old Act as regards the concept of ``Particularly Advantageous Manner''; paragraphs (b)(i) and (b)(ii) read as follows (at page 12):

``(b) `Particularly Advantageous Manner'

(i) The employee must indicate what is intended to be done with the lump sum (sub-section 49(2)) and the plan that the employee has in mind must be evaluated. The extent and degree of the evaluation should be wide ranging. Where appropriate, the employee should be specifically requested to provide evidence that the scheme is practical and an assessment made of the capability of the claimant to undertake the project after considering physical, educational, social and intellectual characteristics. In some instances this may involve seeking confirmation from the employee's accountant, real estate agent, etc., but in all cases, some attempt should be made to establish the bona fide and viability of the proposal. If the proposal involves the paying out of a mortgage, full details of the savings by way of interest, etc should be supplied.

(ii) A detailed comparison is to be made between the current income of the employee (including section 46 payments, superannuation, Social Security benefits, salary or wages etc) and the expected income from the employee's proposal in support of the request for redemption. Consideration is also to be given to the fact that, if a redemption is granted, the employee will acquire a capital asset .''

(Emphasis added)

(b) However, in making the lump sum payment, Comcare clearly thought that tax might be a relevant consideration. See for example T18 at page 50 and in particular paragraph (3) reading (in part) as follows:

``The tax on this amount is $67,037.29 which leaves a net amount of $90,190.29.''

(c) I might here note that the objection decision relates to an application for a private ruling expressed in its terms to relate not only to the tax years referred to in clause 1, but also prior years and indeed a number of years before the private ruling system came into force; the objection decision was expressed to relate only to the years referred to in clause 1. The lump sum payment was made in the year ended 30 June 1996. The private ruling application was erroneous insofar as it was expressed to relate to a number of years; however, there was no prejudice to the Respondent.

(d) There are also references in the T Documents to the fact that the Applicant was aware that tax would be a consideration; see for example T19 at page 52 of the T Documents. But Mr Dwyer conceded (properly in my view) that the Applicant had made an application for a private ruling, and there was no suggestion that he had waived his rights in respect of tax.

ATC 2461

(e) It is also relevant to note that the lump sum payment was made pursuant to a formula which appears at page 54 of the T Documents as follows:

``Calculation under s 137 (using original formula) for purposes of s 49 of the 1971 Act.

Deemed date of determination: 30.11.88.

52 × [(192.50 × 29.35) − 3% × (192.80 × 29.35)]

= 52 × (5658.68 − 169.76)

= $285,424

Deduct payments under s 19 since 1.12.88.
 285,424
-163,170 (to 30.6.96)
 -------
 122,254
 -------
              
Amount payment (gross) = $122,254.''

($192.80 was the relevant weekly payment and 29.35 was the Applicant's life expectancy on the date of determination, and being 30 November 1988.)

Moreover, the computation was made pursuant to section 137 of the New Act, which was considered to be an equitable method, because the Old Act did not contain a relevant formula.

12. Ultimately it was unnecessary for me to decide whether a payment measured purely by reference to lost earnings is referable to just that, ie ``lost earnings'', or to a loss of earning capacity. It is likely in my view that where an Applicant is entitled to a weekly compensation payment, and he then, as a matter of right, redeems that amount in accordance with a formula calculation which is related to the weekly payment and the period during which it is likely to be paid, the lump sum payment is likely to be a substitute for income and thus stamped with the character of income. I think that it is implicit in her Honour's judgment in Coward that she would have found that the relevant lump sum would have been correctly characterised as income were it not for the statutory provision (as to an Applicant receiving diminished payments on attaining the age of 65) which in her view gave rise to a capital characterisation. But in this case, section 49 of the Old Act is the section pursuant to which payment was made and it is the Old Act which must be considered in order to determine the character of the lump sum payment. In this connection:

(a) In the first instance the section 49 lump sum procedure is available only in relation to section 46 (partial disability) and not section 45 (total disability). This tends, in my view, to support a conclusion that it is designed to foster a ``self-help'' or ``self- funding'' program, but only for a partially disabled Applicant, and not for a totally disabled Applicant (who presumably, and being totally disabled, cannot administer it), and which explains why the same procedure is not available by reference to a totally disabled Applicant under section 45.
(b) Section 49(2) requires a plan by the Applicant as to how the lump sum will be used. (The internal directives of Comcare indicate that a detailed plan is required.)
(c) Section 49(3) then proceeds to specify the factors to be taken into account and which include the nature of the injury, the age and occupation of the employee and ``any other relevant matters''.
(d) It is to be noted in particular that ex facie the Statute, the procedure is not a simple matter of arithmetic involving a calculation of the weekly compensation, life expectancy (per the relevant tables) and a discount rate. There are, as the section specifies, other considerations to be taken into account for the purpose of the valuation. It may be that in practical terms the process is dealt with as if it were merely arithmetical, but such a process would not accord with the statutory requirements of the Old Act. The statutory provision requires a consideration of, amongst other things, the nature of the injury, and the age and occupation of the Applicant; these factors are clearly designed to determine whether the Applicant in question is capable of administering a ``self- help'' program, and so that arithmetic is by no means the only relevant factor.
(e) Even more to the point is the fact that the relevant authority must be satisfied that the lump sum will be utilised in a particularly advantageous manner (and see (b)(ii) of Comcare's internal directive quoted earlier in these Reasons). The plain intent is that the lump sum will be used by the partially disabled person in question as a fund in order to provide either substitute income or a reduction in relevant obligations (or both).

ATC 2462

Viewed from this perspective, it seems clear that the legislative intent was that the payment would not be treated as income; were it to be treated as income, and taking into account marginal rates in Australia, a substantial amount (of not much less than one-half) would immediately be lost to income tax. Such an impost would, in my view, defeat the object of the statute which is designed in its terms to remove Comcare as a provider of support and to enable the partially disabled person in question to support himself through his own plan. And this explains why the plan is of such importance. The relevant plan and Comcare's approval thereof lies at the heart of section 49. The plan is to be formulated by reference to the whole of the lump sum, and not by reference to a part of it and which is not much greater than one half of it. This is, in my view, further indication of a clear legislative intent that it be treated as capital.

(f) Nor is the ``right'' to a lump sum properly characterised as a right. It is more aptly characterised as a right to apply, but the provisions of section 49 make it clear that the application will be granted (on a discretionary basis) only if, amongst other things, the nature of the plan is satisfactory (and see for example
Australian Telecommunications Commission v Newson (1985) 61 ALR 521 as to the nature of the relevant enquiry).
(g) It is true, as Mr Dwyer submitted, that the Old Act does not specify in categorical terms whether a lump sum payment under section 49 is to be categorised as capital or income. But the provisions of the Old Act point strongly to the fact that an inference of capital was intended. An inference of income would, in my view, defeat the object of section 49. (I note, for what it is worth, that if the decision in Coward was correct in respect of the statutory provisions there considered, the statutory provisions considered in the present case are far clearer as to a capital intent.)

13. Although generally a payment must be characterised in accordance with its nature in the hands of the recipient (and see
The Federal Coke Co Pty Ltd v FC of T 77 ATC 4255; (1977) 15 ALR 449), the decision in Inkster indicates that the motivation of the payer is not irrelevant. And the payer (Comcare) per its own internal directive considered that such a payment would be capital.

14. In the circumstances, the question asked of me as to whether the lump sum payment was capital or income must be answered on the basis that it was capital and the objection decision under review is set aside accordingly.

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