Tinkler v. Federal Commissioner of Taxation.

Judges:
Brennan J
Deane J
Fisher J

Court:
Federal Court of Australia

Judgment date: Judgment handed down 14 December 1979.

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Brennan J.: Miss Tinkler, the appellant, suffered personal injury in a motor car accident on 10 May 1974. She was a resident of Victoria and was a person in relation to whom Part III of the Motor Accidents Act 1973 (Vic.) (the Act) applied (sec. 13). Her injuries prevented her from working for a time in her employment as a clerk. Accordingly, she suffered ``a loss of income in the capacity of employe by reason of the injury'' as referred to in sec. 25(1) of the Act and, having made an appropriate application, she was entitled to receive payment pursuant to that subsection. It provides:

``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

             4AW

             ---

              5
        

where -

• A is the amount of the average weekly income of that person as an employe in accordance with section 20;
• and
• W is the number of weeks during the period of incapacity of that person.''

During the year ended 30 June 1975, the Motor Accidents Board (the Board referred to in sec. 25(1)) paid the appellant $2,371.20, in 22 payments which were made, for the most part, at fortnightly intervals. Each payment was made in respect of a certain number of working days, and was calculated at the rate of $9.12 per working day. Five working days were taken to be a working week, so that $45.60 was, in the appellant's case, four-fifths of her ``average weekly income'' as defined for the purposes of sec. 25(1). Average weekly income, as defined by sec. 20, is the weekly average of the employee's pre-accident salary or wages ``less the amount required to be deducted from that amount of salary or wages by employers under Division 2 of Part VI of the Income Tax Assesment Act ''.

In her return of income for the year ended 30 June 1975, the appellant disclosed the receipt of the payments, contending that they were not income. The Commissioner assessed her to tax in respect of the amounts that she had received, and disallowed her objection against the assessment. She appealed to the Supreme Court of Victoria where Jenkinson J. dismissed the appeal. She appeals to this Court.

It is submitted that the payments were not income, and that the subvention for which the Act provides is compensation for the loss of earning capacity which is said to be a capital asset.

In sec. 25(2) of the Act, which provides an additional category of eligibility for payment, reference is made to a ``reduction in... capacity to earn income by personal exertion'' as a condition of entitlement to payment and an element in the quantification of payment under that subsection. It provides:

``(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

            4BW

            ---       x       C where -

             5
          

• B is the amount of the average weekly personal exertion income of that person in accordance with section 21;
• C is the average proportion by which the capacity of that person to earn income by personal exertion was by reason of the injury reduced during the period of incapacity of that person; and
• W is the number of weeks during the period of incapacity of that person.''

It is submitted that it would be incongruous if payments made to employees under sec. 25(1) were taxable, and payments under sec. 25(2) were not. Neither class of payment is taxable, it is said, because each class of payment is intended to provide compensation of the same nature as

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ATC 4643

compensation at common law for personal injuries tortiously caused, the receipt of which has not been thought to be taxable under the Income Tax Assessment Act 1936 (
Groves v. United Pacific Transport Pty. Ltd and Thompson (1965) Qd. R. 62 ;
Atlas Tiles Ltd. v. Briers 78 ATC 4536 ; 21 A.L.R. 129 ).

The submission did not find favour with Jenkinson J., who held the amount to which a person becomes entitled under the statute to be a substitute for lost salary or wages. His Honour said:

``And it is clear, I think, that the entitlement thus derived is to an amount `in respect of the loss of that income' (to use the phrase which in sec. 25(1) qualifies the word `payments') - not only in the sense that the amount has been measured by reference to the diminution of income caused by the injury, but in the sense also that the amount is, substantially, a statutory substitute, pro tanto, for the salary or wages lost. And in my opinion an amount to payment of which entitlement arises by force of sec. 13(1) and 25(1) acquires the character of income which the salary or wages had, whether that amount be in respect of a loss of a week's income or of many weeks' income, and whether or not it was received in the course of regular periodic payments.''

[78 ATC at p. 4571.]

Where a taxpayer gives up his income in exchange for other payments, the other payments take on the character of the income for which they are exchanged (
C. of T. (Vic.) v. Phillips (1936) 55 C.L.R. 144 at p. 157 ). And where payments are made pursuant to a statute as compensation for an asset acquired by the State or sterilized in the hands of the taxpayer in order to serve the public interest, those payments take their character from the character, in the taxpayer's hands, of the asset acquired or sterilized (see, for example,
Newcastle Breweries Ltd. v. I.R. Commrs. (1927) 43 T.L.R. 476 ; 12 T.C. 927 ;
F.C. of T. v. Wade (1951) 84 C.L.R. 105 at p. 114 ).

Payments made pursuant to sec. 25 of the Act, however, are not made in exchange for income, nor in compensation for an asset acquired or sterilized. Nor are the payments made in fulfilment of any obligation or in discharge of any liability save the liability which Parliament chose to impose upon the Board to make payments under Part III of the Act (sec. 13). In this sense, the payments are gratuitous. The Act is the sole source of the liability to make, and of the correlative right to receive, the payments in question. The gratuitous nature of the payment does not, however, determine whether it is of an income or capital character (see per Kitto J. in
The Squatting Investment Co. Ltd. v. F.C. of T. (1953) 86 C.L.R. 570 at pp. 627, 628 ;
Brisbane Amateur Turf Club v. F.C. of T. (1968) 42 A.L.J.R. 79 at p. 80 ).

If the payment were gratuitously made to an employee as an incident of his employment, the payment would bear the character of income, though the payment were made by a person other than the employer (
F.C. of T. v. Dixon (1952) 86 C.L.R. 540 at p. 556 ), but payment pursuant to sec. 25(1) is not, or is not necessarily, incidental to any employment. A payment may be made because income has been lost consequent upon the termination of employment after injuries have been sustained in an accident, so there is no necessary relationship between a payment and any contemporaneous activity on the part of the taxpayer (cf.
Reckitt & Colman Pty. Ltd. v. F.C. of T. 74 ATC 4185 at pp. 4186-4187; (1974) 23 F.L.R. 58 at p. 60 ).

The character of a statutory payment made otherwise than as compensation for an asset or right which is acquired or sterilized depends upon the purpose of the payment as revealed by the statute, and the circumstances of its receipt by the taxpayer. The conditions of eligibility created by the statute and the statutory formula for its quantification provide the clearest definition of the purpose of a payment, though a purpose otherwise expressed in the statute is a useful, if subsidiary, aid to ascertaining the character of a payment made pursuant to its terms.

In the present case, an applicant for a benefit payment must have suffered ``a loss of income in the capacity of employe'' (sec. 25(1)) and the amount of the payment depends upon the period during which he suffers ``a loss of income in the capacity of employe'' (sec. 25(7)). A factor in the calculation of the amount to be paid is the average pre-accident weekly income of the applicant nett of tax (sec. 20). These statutory indicia uniformly point to a

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ATC 4644

purpose of providing a partial recoupment of lost income. Although the Board has a discretion as to the times when and instalments in which payments are to be made (sec. 32), the discretion is not inconsistent with the purpose of partially recouping lost income. Indeed, the exercise of the discretion may well be affected by the purpose to be served in making the payments, as it was in the present case where payments were made at fairly regular intervals.

From the taxpayer's viewpoint, the payments were received at intervals during the period when she was not earning income, consequent upon her application for the payment of benefit under sec. 25(1). The periodic receipt of subventions in amounts which varied only in accordance with the working days in each period is powerful to suggest that the receipts were of an income nature. The purpose of the payments and the circumstances of their receipt combine to establish the income character of the amounts paid.

The contrary argument is founded upon the supposed similarity between payments made pursuant to sec. 25(1) and an award to an accident victim of common law damages against a tortfeasor. Income which is lost by reason of injury is partially recouped pursuant to sec. 25(1) and is a factor in assessing an award of common law damages against a tortfeasor. But it does not follow that a payment under sec. 25(1) and an award of common law damages are similar for tax purposes. Section 25(1) is not concerned with any of the effects of an injury save loss of income, but an award of common law damages comprehends several heads of compensation, only one of which is the destruction or impairment of earning capacity. Moreover, an award of damages is assessed to compensate not for loss of earnings but for loss or impairment of earning capacity (see
Paff v. Speed (1961) 105 C.L.R. 549 at pp. 559, 566 ;
Bresatz v. Przibilla (1962) 108 C.L.R. 541 at p. 545 ;
Arthur Robinson (Grafton) Pty. Ltd. v. Carter (1969-1970) 122 C.L.R. 649 at p. 658 ). Although an injured plaintiff recovers ``not merely because his earning capacity has been diminished but because the diminution in his earning capacity is or may be productive of financial loss'' (
Graham v. Baker (1961) 106 C.L.R. 340 at p. 347 ), the award is assessed as a lump sum to include fair compensation for the affection of earning capacity over the entire post-accident period. Section 25(1), on the other hand, does not attempt to evaluate the destruction or impairment of earning capacity, but provides merely for a partial recoupment of income lost during a maximum period of 104 weeks (sec. 25(7)). An award of common law damages against a tortfeasor is different from a payment under sec. 25(1) not only because of the different sources of liability but also because the heads of compensation are different from the lost income which is the subject of partial recoupment under sec. 25(1). In considering the heads of compensation, earning capacity has been described as a capital asset (see Atlas Tiles Ltd. v. Briers 78 ATC 4536 at p. 4539; (1978) 21 A.L.R. 129 at pp. 134, 135) but that description does not throw light upon the character of a payment made pursuant to sec. 25(1).

Nor is the tax nature of a benefit payment under sec. 25(1) altered by reference to the provisions of sec. 25(2). It might be a curious and undesirable result if payments under sec. 25(2) were held not to be payments of an income nature, but if the terms of sec. 25(2) require that result because the phrase ``reduction in his capacity to earn income'' gives a capital character to payments made pursuant to that subsection, the difference between payments made under the respective subsections would be traceable to the different purposes which Parliament, on that hypothesis, must have intended. I would not wish, however, to conclude that there is any difference in the nature of payments under the respective subsections. If the question of the character of payments under subsec. (2) arises in the future, it will be relevant to note that subsec. (5) makes the suffering of ``a material loss of income'' a qualification upon an absolute entitlement to benefit under subsec. (2). 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 . In
F.C. of T. v. Hatchett 71 ATC 4184 ; (1971) 125 C.L.R. 494 , Menzies J. observed (at p. 4186; 497)

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that in ``the field of taxation, as in the field of business, `capital' is used in contrast with `revenue'; it has no reference to a man's body, mind or capacity''. A personal capacity is not property, and inaccuracy is the least of the risks inherent in describing a personal capacity as if it were a capital asset for taxation purposes.

In my judgment, the payments made to the appellant pursuant to sec. 25(1) were payments of an income nature and they formed part of her assessable income. The appeal should be dismissed with costs.