Draft Taxation Ruling

TR 1999/D1

Income tax and fringe benefits tax: meaning of 'personal injury'

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FOI status:

draft only - for comment

What this Ruling is about

1. The purpose of this Ruling is to provide the meaning of the term 'personal injury', which appears in sections 27A, 102AE and 102AG of the Income Tax Assessment Act 1936 ('the Act'), and section 136 of the Fringe Benefits Tax Assessment Act 1986 ('the FBTAA') as follows:

•

paragraph (n) of the definition of 'eligible termination payment' in subsection 27A(1) of the Act;

•

sub-subparagraph 102AE(2)(b)(i)(B) of the Act;

•

sub-subparagraph 102AG(2)(c)(i)(B) of the Act; and

•

subparagraph (m)(ii) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA.

2. The Ruling also considers the terminology used in subsection 160ZB(1) of the Act (now paragraph (b) of section 118-15 of the Income Tax Assessment Act 1997) where the terms 'person' and 'injury' both appear, with the result that the subsection is often referred to as providing an exemption from tax on capital gains for personal injury.

Class of person/arrangement

3. This Ruling applies to:

(a)

an employer who provides consideration of a capital nature to an employee or his or her associate for, or in respect of, personal injury to a person;

(b)

an individual in receipt of a payment in consequence of the termination of employment which includes consideration of a capital nature for, or in respect of, personal injury to the individual;

(c)

an individual who is a minor within Division 6AA of the Act and who has derived income from the investment of property transferred to the minor as compensation for the minor in respect of personal injury to the minor;

(d)

a trustee who derives income from the investment of property transferred to the trustee for the benefit of a beneficiary who is a minor within Division 6AA of the Act, where such property was received as compensation for the beneficiary in respect of personal injury to the beneficiary; and

(e)

an individual in receipt of a capital amount being compensation or damages for any wrong or injury suffered to his or her person, or in his or her profession or vocation.

Ruling

4. In the Act and the FBTAA, the term 'personal injury' refers to an injury suffered to the person as opposed to the person's property, character or reputation. It covers physical injury (internal and/or external) and/or mental injury that is clearly discernible to a qualified medical practitioner.

5. The reference to the term 'injury' in subsection 160ZB(1) of the Act has the meaning ascribed to it in Taxation Determination TD 92/130 and Taxation Ruling TR 95/35. That meaning may be broader than the meaning of 'personal injury'.

6. The full amount received for wrongful dismissal is usually an 'eligible termination payment'. If any part of the amount can be shown to be an amount for a personal injury, that part is not an eligible termination payment.

7. An amount included for 'personal injury' in a court award in a wrongful dismissal action, or heads of claim that relate to personal injury (e.g., pain and suffering, medical expenses, etc.) are not, in the opinion of the Commissioner, eligible termination payments in accordance with paragraph (n) of the definition of 'eligible termination payment' in subsection 27A(1) of the Act. These amounts are also not assessable as a capital gain as they fall within the exemption provided by subsection 160ZB(1) of the Act.

8. An amount included in either an out of court settlement or an undissected court award for wrongful dismissal is treated as being an 'eligible termination payment' except to the extent that the taxpayer can demonstrate that all, or some part, of the amount is in respect of personal injury, and is able to support the value of the amount claimed as being in respect of that personal injury. As the Commissioner must form an opinion about the reasonableness of the amount that is not an 'eligible termination payment', the taxpayer is required to seek an opinion from the Commissioner where it is claimed that all, or some part, of the amount received in respect of wrongful dismissal is in respect of personal injury. That opinion may be sought by way of a Private Ruling or by including the amount in assessable income and objecting against the assessment that issues. In order to form an opinion, supporting documentation, such as medical reports to demonstrate that personal injury was suffered and legal opinions on the likely value of the damages for personal injury, are required to be provided. The taxpayer also needs to provide a copy of any statement of claim (if legal action was commenced), identify the relevant Statute under which the payment was made, and in some instances, provide a copy of the employment contract or industrial award (if it is claimed the employment contract or industrial award provides for payments for personal injury upon wrongful dismissal or termination).

Date of effect

9. This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

10. Paragraph 24 of Taxation Ruling IT 2424, which does not recognise that a compensation payment for an unlawful or wrongful dismissal can include an amount for personal injury, is modified by paragraphs 7 and 8 above. Taxpayers who have included an amount in respect of a 'personal injury' in an eligible termination payment may seek amendments, subject to the limitations imposed by subsection 170(3) of the Act. Taxpayers who fall into paragraph 7 can self amend. Taxpayers who fall into paragraph 8 should lodge the amendment request as an objection and provide the information required by paragraph 8. Very few, if any, taxpayers are expected to be affected by this modification.

Explanations

Types of injury that a person may encounter

11. A person can encounter three forms of injury:

(a)

'behavioural' injury - one that involves physical injury (internal and/or external) and/or mental injury that is clearly discernible to a qualified medical practitioner;

(b)

'non-behavioural' injury - hurt, distress, anxiety, etc., that flows from the death of, or serious injury to, a relative or close friend; wrongful dismissal; defamation; etc. This type of injury may have legal remedies under the law of torts (e.g., defamation, slander), statute (e.g., sexual harassment, discrimination), or contract (e.g., employment, professional negligence); and

(c)

property injury - damage to a person's property.

12. Notwithstanding it may be said all three types of injury may be personal, it is considered that, for tax purposes, it is only the first type that falls within the meaning of the term 'personal injury' as used in the Act and in the FBTAA ('the relevant tax legislation').

Meaning of 'personal injury'

13. The first consideration in determining the meaning of words is the legislative context in which they are used. The relevant tax legislation seeks to provide a special tax treatment for amounts received in respect of personal injury to the person. However, the term 'personal injury' is not defined in the relevant tax legislation. Therefore, extrinsic material that accompanied the legislation, such as the explanatory memorandum, may be used to determine if the Parliament intended to ascribe a particular meaning to the words. Where the extrinsic material provides no assistance, the common usage of the words prevails.

14. The term 'personal injury' was inserted by Income Tax Laws Amendment Act 1980 (sections 102AE and 102AG of the Act), Income Tax Assessment Amendment Act (No 3) 1984 (section 27A of the Act), and Fringe Benefits Tax Assessment Act 1986 (section 136 of the FBTAA). The explanatory memoranda that accompanied these Acts do not provide any narration that may assist in defining 'personal injury'.

15. The CCH Macquarie Dictionary of Law (2nd edition) provides two definitions for injury:

1.

the infringement of another's legal right.

2.

(in personal accident and workers compensation insurance) any damage, whether external or internal, poisoning, disease or disability, sustained to the body of a person as a result of any sort of trauma. It includes both physical and mental injury, and aggravation, acceleration, exacerbation and recurrence of such injury.'

16. An injury to a person can, therefore, be an injury to a person's right (e.g., reputation) or to the person's physical being. The courts refer to only the latter as being a personal injury.

17. In personal injury cases, the term 'personal' merely excludes claims for damages to property (Adelaide Stevedoring Co Pty Ltd v. Humphreys (1972) 3 SASR 396). The term 'property' can refer to an object of ownership (referred to as 'realty') or a right of ownership (referred to as 'personal property'). Personal property is further subdivided into 'choses in possession' (tangible forms of personal property) or 'choses in action' ('all personal rights of property which can only be claimed or enforced by action, and not by taking physical possession': Channel J in Torkington v. Magee [1902] 2 KB 427, at 430). Non-behavioural injuries are associated with 'choses in action'.

18. The term 'personal injury' has not been defined by the courts as noted in Graham v. Robinson [1992] 1 VR 279 (Graham v. Robinson), a case which had to consider if 'emotional hurt' (i.e., 'hurt', 'distress' and 'public scandal, hatred, odium, ridicule and contempt') was a personal injury. At 281, Smith J stated:

Counsel have not been able to refer me to any authority on the expression personal injury which shed any light on its meaning. I have been unable to find any authority that assists.

...

In the absence of express authority, I have come to the conclusion that the expression personal injury does not extend beyond physical injury and mental illness to include emotional hurt. I am encouraged to this view by the fact that the law has rejected grief or sorrow as a form of injury which can be relied on to mount a claim in negligence: Mount Isa Mines Ltd. v. Pusey (1970) 125 CLR 383, at p. 394 and Jaensch v. Coffey (1984) 155 CLR 549, at p. 587. It is true that damages are awarded for pain and suffering in the typical personal injury case. They are awarded, however, where pain and suffering flow from and are connected with physical or mental injury and may therefore be said to be damages in respect of personal injury.

...

I do not have to decide whether the provision would apply to a claim for damages which included a claim for physical injury or mental illness resulting from a defamatory publication.'

19. The conclusion is that the term 'personal injury' is limited to physical and/or mental injury.

'In respect of' a personal injury

20. The use of the words 'in respect of' before 'personal injury' in the relevant tax legislation has the effect of broadening the application of the relevant provisions beyond amounts 'directly' for personal injury. Stephen J, in State Government Insurance Office v. Rees (1979) 144 CLR 549 at 553-554, noted that the term 'in respect of' has a wide range of proximity but if a context exists, the range is confined to that context.

21. In Graham v. Robinson, Smith J made the following comment in relation to the expression 'in respect of', which preceded the term 'personal injury' in the Magistrates Court Act 1971 (Vic), at 281-282:

In the light of my ruling it is not necessary to consider the meaning of the expression in respect of. ... [Cases in respect of personal injury are those] cases where physical or mental injury is alleged as an element in the cause of action and damages are claimed for it and its consequences - pain and suffering, loss of enjoyment of life and loss of earning capacity. Such a claim for damages would be connected to and flow from the original injury and be in respect of it. In a defamation action, the injury is to reputation, not physical or mental health, and the emotional hurt flows from that. A claim for damages in such a case may be said to be in respect of injury to reputation, not injury to the person. The matter has not been argued, however, and I express no final view on it.'

22. It is, therefore, necessary for there to be a personal injury (i.e., a behavioural injury) and for the amount received to be 'in respect of' that personal injury. In cases where a non-behavioural injury is suffered as a result of something other than a behavioural injury, the damages are not in respect of a personal injury. This is particularly relevant in wrongful dismissal cases where the damages are in respect of the wrongful dismissal.

Personal injury 'to a person'

23. The relevant tax legislation mentioned in paragraph 2 of this Ruling refers to 'injury to the taxpayer' (section 27A of the Act), 'injury to the minor' (section 102AE of the Act), 'injury to the beneficiary' (section 102AG of the Act) and 'injury to a person' (section 136 of the FBTAA). In short, the relevant tax legislation refers to personal injury in the context of 'injury to the person', which is considered to mean an injury to the physical body.

Behavioural injury

24. Physical injury is usually obvious. Where it is not obvious (e.g., bad back, repetitive strain injury, etc.), a compensation payment for the physical injury would only be made where expert witnesses have demonstrated, on a balance of probabilities, there is a physical injury. It is commonplace for several expert witnesses, at least one for the plaintiff and one for the defendant, to provide reports upon which the probability of there being a physical injury is determined.

25. Mental injury is not usually as obvious as physical injury. Where a person has lost part of his or her speech, the injury is obvious. On the other hand, where the person is prone to fits of depression or sudden mood changes, the injury may be difficult to prove and, as with hard to prove physical injuries, expert witnesses provide reports upon which the probability of the injury existing is determined.

Non-behavioural injury

26. A 'non-behavioural' injury has yet to be pronounced by a court as being a personal injury.

27. In a case involving determining whether a bankrupt retained any personal rights, the House of Lords, in Wilson and Anor v. United Counties Bank Ltd and Anor (1918-19) All ER 1035, after noting that property rights were not personal rights, made a distinction between a behavioural injury and a non-behavioural injury by referring to injury to the 'person or reputation' (Viscount Finlay, at 1038) and injury to the 'person, character or feelings' (Lord Atkinson, at 1039). This decision was followed by the High Court in Cox v. Journeaux (No 2) (1935) 52 CLR 713 at 721.

28. The High Court, in Carson v. John Fairfax & Sons Ltd; Carson v. Slee (1993) 67 ALJR 634, confirmed that an injury to reputation is not a personal injury. The majority, Mason CJ, Deane, Dawson and Gaudron JJ (at 639) said defamation results in 'harm', 'hurt to ... feelings' and 'damage to reputation'. They went on to confirm (at 642) that in determining the quantum of damages for defamation, reference can be made to 'the scale of awards for general damages in cases of serious personal injuries which, in their severity and disabling consequences, transcend injury to reputation'. McHugh J (at 672) said the result of the majority was that the 'pain and suffering component of a personal injury award' was to be compared with the 'compensatory damages in a defamation action'. In must be concluded that, while an injury to reputation involves pain and suffering, it is not a personal injury.

29. In Pritchard v. Racecage Pty Ltd and Ors (1997) 142 ALR 527, Branson J of the Federal Court, with whom the other two Justices agreed, said (at 539) that injury 'plainly includes bodily or personal injury and extends to other forms of harm'. This statement indicates Branson J equates behavioural (i.e., bodily) injury with personal injury.

Personal injury and wrongful dismissal

30. The particular wording of paragraph (n) of the definition of 'eligible termination payment' in subsection 27A(1) requires the amount to be 'of a capital nature' for a 'personal injury to the taxpayer' which 'in the opinion of the Commissioner' is 'reasonable having regard to the nature of the personal injury and its likely effect on the capacity of the taxpayer to derive income from personal exertion'.

31. Case 20/97 97 ATC 258; AAT Case 11,722 (1997) 35 ATR 1114 is the only case to consider the term 'personal injury' as used in paragraph (n) of the definition of 'eligible termination payment'. This case involved an action for wrongful dismissal that was settled out of court. Wheeler v. Philip Morris Ltd (1989) 97 ALR 282 was cited with approval as indicating an amount for wrongful dismissal is an eligible termination payment. Graham v. Robinson was cited with approval as indicating personal injury is a reference to physical or mental injury. Due to a technicality, it was not necessary to provide a definitive meaning for 'personal injury' but the opportunity was taken to consider the relationship between the eligible termination provisions and the capital gains provisions. Senior Member Dwyer said (ATC at 265; ATR at 1122):

... if the payment is caught, as I am satisfied it is, by s 27A(1), there is no advantage to the applicant in the fact that it would be exempt by virtue of s 160ZB(1), if it were so caught. Further, I agree that because of the difference in terminology s 160ZB(1) provides a wider exemption from capital gains tax than the exclusion from taxable income of that part of an eligible termination payment which is consideration of a capital nature for, or in respect of, personal injury to the taxpayer (s 27A(1)(n)).'

32. Case law has identified several matters that need to be considered in determining whether an amount relating to personal injury has been included in damages for wrongful dismissal, viz.:

•

the industrial relations statute law;

•

the nature of the damages received;

•

the nature of the damages sought; and

•

the employment contract.

Industrial relations statutes

33. The technicality in Case 20/97; AAT Case 11,722 was that clause 6 of the settlement document showed none of the payment could be for 'personal injury'. Clause 6 had to be inserted because the Queensland statute did not allow a payment in respect of 'personal injury'.

34. The Commonwealth statute law was considered by three Federal Court judges sitting in the Industrial Relations Court of Australia in Burazin v. Blacktown City Guardian Pty Ltd (1996) 142 ALR 144 (Burazin). The Judges stated (at 156) that '[t]here is an element of distress in every termination' and awarded Ms Burazin $2,000 in respect of the 'distress' she suffered based on her argument the statute allowed 'compensation' to be paid. Subsection 170EE(2) of the Workplace Relations Act 1996 provides the '[C]ourt may ... make an order requiring the employer to pay to the employee compensation of such amount as the Court thinks appropriate'. Subsection 170EE(3) requires the Court 'to have regard to the remuneration that the employee would have received' and sets a maximum amount of six months remuneration as compensation. The Industrial Relations Court applied the decision in Aitken v. Construction, Mining, Energy, Timberyards, Sawmills and Woodworkers Union of Australia - Western Australian Branch (1995) 63 IR 1 rather than the decision in Brackenridge v. Toyota Motor Corporation (1996) 67 IR 162 in holding the Court could award an amount for an injury under the statute.

35. Ms Burazin had already been awarded $3,000 as damages for the 'economic loss' flowing from 'her diminished employability and the difficulty of finding alternative employment, caused by the circumstances of her unlawful termination' (at 146). The Court found she had entitlements under two heads of compensation, one being the economic injury, the other being the non-economic injury. The non-economic injury is the distress suffered because she was not treated properly when she was being dismissed (the employer had her escorted from the premises by the police). The full $5,000 is an eligible termination payment.

Nature of the damages received

36. In Grout v. Gunnedah Shire Council (1995) 1 IRCR 499, at 510, the Industrial Relations Court of Australia awarded $15,000 as 'damages for the distress associated with the physical injury, namely the aggravation of the psychiatric illness, flowing from the repudiation ... of the contract of employment'. It is accepted the $15,000 is in respect of personal injury of the taxpayer and, therefore, is not an eligible termination payment. The balance of the award (excluding the sick leave already paid), which amounted to $51,171 (see Grout v. Gunnedah Shire Council (1995) 129 ALR 372, at 377), is an eligible termination payment.

Nature of the damages sought

37. In Graham v. Robinson the damages sought by the plaintiff were in respect of defamation. The plaintiff claimed she was 'injured in her reputation and character, has suffered hurt and distress, has been brought into public scandal, hatred, odium, ridicule and contempt and has suffered damage'. The defendant sought to have the award struck down on the basis that the award was in respect of 'personal injury'. The defendant argued for a personal injury finding because the Court that awarded the amount was not authorised under its statute to hear a case in respect of 'personal injury' where more than $5,000 was being sought as damages.

38. Smith J concluded what was suffered in the case before him was an 'injury to reputation, not injury to the person' and the specific damages sought were in respect of the injury to reputation. Therefor, the court had jurisdiction to hear the case.

39. However, the nature of the damages sought must relate to the nature of the damages received. In Liftronic Pty Ltd v. FC of T 96 ATC 4425; (1996) 32 ATR 557, it was Liftronic's 'contention ... that the award, or a significant part of it, was given in respect of damage to Liftronic's goodwill or its earning capacity' (ATC at 4435; ATR at 567) and this was supported by its statement of claim for damages. The damages received were for 'loss of profits' even though this had not been sought. Foster J said (ATC at 4435; ATR at 567) '[i]t is the characterisation of this award which is at the heart of this application' and he held it was the nature of the damages received that he had to consider.

The employment contract

40. Will a claim for damages for breach of an employment contract allow damages to be paid for personal injury? This issue was discussed at length in Burazin. This case involved a person who was wrongfully dismissed from her employment. She suffered '... the humiliating experience of being escorted from Blacktown's premises by the police'. The Judges concluded, after considering several cases, and especially the decision of the Full High Court in Baltic Shipping Company v. Dillon (1993) 176 CLR 344, at 9:

[The High Court] approved the awarding of damages for distress only in a limited range of cases. Although there was some difference in the precise formulations put forward by their Honours, none was broad enough to cover distress resulting from wrongful dismissal.'

41. Accordingly, in cases involving wrongful dismissal, regard must be had to the provisions of the statute law under which the litigation has been taken, the nature of the damages actually received, the nature of the damages sought and the employment contract. Where it is claimed a payment has been received in respect of personal injury, the evidence supporting both the fact that personal injury was suffered and the likely value of the damages awarded in respect of such personal injury must be presented to the Commissioner.

Self assessment

42. Under self-assessment, the taxpayer is not required to have the Commissioner determine if an amount received in respect of a personal injury is to be included in assessable income (e.g., as an 'eligible termination payment') or is subject to special tax treatment (e.g., Division 6AA of the Act). Further, the Commissioner is not an authority on whether a 'personal injury' has been suffered. The Commissioner accepts that a 'personal injury' has been suffered where a court has ruled that way based on the use of the term in the particular case.

43. However, most 'personal injury' claims are settled out of court on a 'without prejudice' basis, i.e., a compromise position (as opposed to unanimous concluded agreement) is reached by way of mere negotiation between the parties to the action on such matters as the settlement sum and heads of claim. An opinion must be requested for non-court awarded 'personal injury' amounts associated with a termination of employment if it is claimed the amount received is, partly or wholly, not an eligible termination payment, as the Act requires the Commissioner to form an opinion about the reasonableness of the amount that is not an eligible termination payment. Paragraph 8 advises the options for seeking an opinion.

44. Where an out of court settlement is relied upon, and the taxpayer is seeking an exception provided by sections 102AE or 102AG of the Act, or section 136 of the FBTAA, the taxpayer should retain evidence, such as medical reports and the settlement reached between the parties, in case the Commissioner queries whether the concessions allowed by these provisions apply.

Detailed contents list

45. Below is a detailed contents list for this Ruling:

Your comments

46. If you wish to comment on this Draft Ruling, please send your comments by: 20 March 1999

Commissioner of Taxation
20 January 1999

References

ATO references:
NO NO 99/539-8
BO BO 97/5831-3

Related Rulings/Determinations:

TR 1999/D1W
IT 2424
TR 95/35
TD 92/130

Subject References:
compensation income
damages income
personal injury awards

Legislative References:
ITAA36 27A
ITAA36 27(1)(n)
ITAA36 102AE
ITAA36 102AE(2)(b)(i)(B)
ITAA36 102AE(2)(c)(i)(B)
ITAA36 102AG
ITAA36 160ZB(1)
ITAA36 170(3)
FBTAA 136
FBTAA 136(1)(m)(ii)

Case References:
Adelaide Stevedoring Co Pty Ltd v. Humphreys
[1972] 3 SASR 396

Aitken v. Construction, Mining, Energy, Timberyards, Sawmills and Woodworkers Union of Australia - Western Australian Branch
(1995) 63 IR 1
Baltic Shipping Company v. Dillon
(1993) 176 CLR 344
Brackenridge v. Toyota Motor Corporation
(1996) 67 IR 162
Burazin v. Blacktown City Guardian Pty Ltd
(1996) 142 ALR 144
Carson v. John Fairfax & Sons Ltd; Carson v. Slee
(1993) 67 ALJR 634
Case 20/97
97 ATC 258
AAT Case 11,722
(1997) 35 ATR 1114
Cox v. Journeaux (No 2)
(1935) 52 CLR 713
Graham v Robinson
[1992] 1 VR 279
Grout v. Gunnedah Shire Council
(1995) 1 IRCR 499
Grout v. Gunnedah Shire Council
(1995) 129 ALR 372
Jaensch v. Coffey
(1984) 155 CLR 549
Liftronic Pty Ltd v. FC of T
96 ATC 4425
(1996) 32 ATR 557
Mount Isa Mines Limited v. Pusey
(1970) 125 CLR 383
Pritchard v. Racecage Pty Ltd and Ors
(1997) 142 ALR 527
State Government Insurance Office v. Rees
(1979) 144 CLR 549
Torkington v. Magee
[1902] 2 KB 427
Wheeler v. Philip Morris Ltd
(1989) 97 ALR 282
Wilson and Anor v. United Counties Bank Ltd and Anor
(1918-19) All ER 1035