Case U223

Members:
Purvis J

Tribunal:
Administrative Appeals Tribunal

Decision date: 1 December 1987.

---

R.N. Purvis J. (Presidential Member)

This is an application for review of the disallowance of a claim for rebate by the respondent Commissioner in respect of payments made by the Government Insurance Office of New South Wales in relation to medical expenses and hospital attendances of the applicant consequential upon his involvement in a motor cycle accident. The applicant in his income tax return for the year ended 30 June 1982 claimed a rebate pursuant to the provisions of sec. 159P of the Income Tax Assessment Act in respect of

---

ATC 1232

such expenses and attendances and in the amount of $45,360.53. This claim was rejected by the respondent.

2. Section 159P of the Income Tax Assessment Act 1936 as amended and so far as it is relevant to this application provides:

"(1) An amount paid by the taxpayer in the year of income as medical expenses in respect of himself, or in respect of a dependant who is a resident, less any amount paid to the taxpayer or any other person, and any amount which the taxpayer or any other person is entitled to be paid, in respect of those medical expenses by a government or public authority or by a society, association or fund (whether incorporated or not) shall, for the purposes of section 159N, be treated as a rebatable amount in respect of that year of income."

Section 159N entitles a taxpayer to a rebate of tax in his assessment in respect of income of the particular year of income of a percentage of the amount by which the rebatable amount exceeds a particular sum.

3. It was on 22 November 1980 that the taxpayer, as a passenger on a motor cycle, was involved in an accident and very seriously injured. He was hospitalised for a long period of time, experienced operative treatment and convalesced. He is now a quadriplegic.

4. The taxpayer caused proceedings to be commenced in the Supreme Court of New South Wales against the driver of the motor cycle and on 29 September 1981 obtained a verdict against the defendant driver in the amount of $2.8m.

The taxpayer was not capable of giving instructions in relation to such proceedings, his solicitor and accountant acted in this regard on his behalf.

The defendant appealed the verdict and in due course, and on 15 June 1982, the New South Wales Court of Appeal, by consent, entered judgment in favour of the taxpayer in the amount of $1.65m. A verdict was entered accordingly. The short minutes of order reflecting the settlement read as follows:

"By consent and without admission by either party orders:

• 1. That the judgment of His Honour Larkins J. on 29 September 1981 be set aside.
• 2. That a verdict and judgment be entered for the respondent/plaintiff in the sum of $1,650,000 inclusive of costs, such judgment to take effect from 29 September 1981.
• 3. That the appellant/defendant have credit for $745,390.53 paid to or on behalf of the respondent/plaintiff details of which are shown in annexure `A' to these terms.
• ..."

The annexure to the short minutes of order detailed the following payments "made to or on behalf of the respondent/plaintiff".

• 1. Payment for stay of proceedings as ordered by his Honour Larkins J. on 29 September 1981 - $700,000.
• 2. Out-of-pocket expenses:

      (i)   Hospital:                               $
            Royal North Shore Hospital
              I/P 22/11/80 - 12/3/81            18,745.64
            Royal North Shore Hospital
              I/P 12/3/81 - 2/7/81              20,663.18
      (ii)  Medical:
            Dr C.J. Lowrey                          55.00
            Dr J. Yeo                              112.00
            Dr T. Taylor                           589.00
            Dr W. Hunter                            53.00
      (iii) Quadriplegic Equipment and
            Supplies:
            Paraplegic and Quadriplegic
              Association of N.S.W.              2,236.30
            George H. Murphy and
              Sons Pty. Limited                  1,752.40
            John Kent Carriers P/L                  30.00
            K.G. Vost Pty. Limited                 129.90
      (iv)  Nursing services:
            Newcastle and District
            Nursing Service                      1,024.11
      

5. The Government Insurance Office of New South Wales was the authorised insurer of the owner and hence the driver of the motor vehicle and as such insurer was the effective defendant in the Supreme Court proceedings. Liability was at all times in issue between the parties, not a substantial issue, but one to be overcome nevertheless. The appeal raised the question of liability as well as the quantum of damages.

6. Prior to the hearing at first instance, the Government Insurance Office had had presented to it, as such authorised insurer, various of the accounts for services and

---

ATC 1233

attendances rendered to and on the taxpayer. Some of such accounts might have been addressed to the Government Insurance Office. Individual accounts were not in evidence. The Government Insurance Office, in August and September 1981, that is, prior to the hearing at first instance, paid the accounts detailed above in annexure A to the short minutes of order and as set forth in para. 4 above. The said detailed expenditure did not contain all of the accounts for services and attendances to and on the taxpayer but only those that had been paid for by the Government Insurance Office prior to the hearing of the action.

7. The claim for a rebate is denied by the respondent Commissioner, he contending that the expenses were "paid" by the authorised insurer, and not by the taxpayer as required by sec. 159P of the Act. The taxpayer on the other hand says that if it is only for the "fortuitous circumstance" that the taxpayer received a lump sum net of medical expenses already paid, rather than a lump sum from which he was to meet the medical expenses that the claim for rebate is denied, then this is to lead to a result which would be "manifestly absurd or unfair". The taxpayer in fact, it is said, undertook the relevant expenditure and the lump sum to which he was otherwise entitled was in effect depleted by the expenditure. He did not receive any of the expenditure back. The payments by the Government Insurance Office were made, it was further said on behalf of the taxpayer, either directly or indirectly, they meeting medical expenses on the taxpayer's behalf. Alternately the payments represented an advance against the verdict, so that the taxpayer became liable to meet them as if they had been paid by him.

8. On the assumption that a finding favourable to the taxpayer is made on the issue of payment, it was submitted that the same should not be reduced on account of the payments made by the Government Insurance Office being deemed to be payment by way of an entitlement on the part of the taxpayer, or any other person, to be paid in respect of the medical expenses by a public authority.

9. The return of income as lodged in respect of the 1982 financial year contained in a schedule and as a notation the following:

"Medical Expenses -

During the year the taxpayer paid a total of $65,398 for medical expenses, details of which are set out in this return.

All of the expenses related to his accident and he did not received [sic] nor is he entitled to receive, any reimbursement of any medical funds of medical insurance for these expenses.

Of the $65,398 the sum of $45,360 was paid by him to the Government Insurance Office to reimburse them for amounts they had advanced on his behalf and which were repayable by him as soon as the verdict was finalised. The balance of $20,038 was paid direct by the taxpayer. It is therefore maintained that he is entitled to claim a rebate on the whole of the $65,398 as he was personally liable for it, and he received no reimbursement for any part of it, his only receipts being capital sums of $1,650,000.

..."

The evidence before the Tribunal was inconsistent with the statement that "the sum of $45,360 was paid by him to the Government Insurance Office to reimburse them for amounts they had advanced on his behalf and which were repayable by him as soon as the verdict was finalised".

10. Evidence before the Tribunal established that payment on account of medical expenses and hospital attendances and the like is made by the Government Insurance Office when the latter is of the opinion that the defendant, its insured, will more likely be found liable, but the amount is still not determined, be it that the same will exceed the disbursement. The means whereby the accounts come into the hands of the Government Insurance Office varies. Sometimes accounts are made out to the insurer, sometimes to the plaintiff. Sometimes accounts are paid in part, sometimes in full. It was said in evidence that "it comes down to how hard the doctor or hospital pushes for payment". That is, whether the claimant is prepared to wait until the litigation is complete. Where a defendant admits liability the Government Insurance Office, or other insurer, generally pays the medical and hospital expenses.

The attention of the Tribunal was directed to the provisions of the Motor Vehicle (Third Party Insurance) Act 1942 as amended, and particularly sec. 25 thereof. So far as it is relevant, sec. 25 provides:

---

ATC 1234

"(1) Where the death of or bodily injury to any person is caused by, or arises out of the use of a motor vehicle, not being a motor vehicle in respect of which persons are exempted by or under this Act from the provisions of section 7(1), and where any payment is made (whether or not with an admission of liability) by the Government Insurance Office in respect of such death or bodily injury, then -

• (a) if the person received, in respect of the bodily injury or the injury which caused the person's death, treatment at a public hospital as an in-patient, there shall also be paid by the Government Insurance Office to the proper officer for each day or part of a day of the treatment of the person, an amount estimated by the Minister for Health and last notified, as the daily average cost to that hospital of the hospital treatment of in-patients..."

Paragraphs (b), (c), (d) and (e) of sec. 25(1) contain a similar requirement to sec. 25(1)(a) referable to treatment at a public hospital as an out-patient, treatment at a hospital other than a public hospital, an amount appropriate for ambulance vehicle expenses and proper medical massage, dental and nursing expenses referable to treatment afforded to the person who suffered the injury.

The obligations imposed on the Government Insurance Office by sec. 25 only arise where any payment is made (whether or not with an admission of liability) by the Government Insurance Office in respect of such death or bodily injury. The payment there referred to is a payment other than that detailed in para. (a) to (e). In the subject case no payment was made prior to the verdict, other than the medical and hospital disbursements already detailed. The obligation resting on the Government Insurance Office pursuant to sec. 25 of the Motor Vehicles (Third Party Insurance) Act is not in aid of resolving the issue to be determined in this application.

11. In the absence of the circumstances referred to in sec. 25(1) of the Motor Vehicles (Third Party Insurance) Act being applicable, it is only in the event of a plaintiff obtaining a verdict that a liability will rest upon a defendant and thence the authorised insurer, to make a payment in respect of medical expenses. Such payment will more usually be made directly to the doctor or hospital by the insurer. The insurer in the event of the plaintiff having made payment will reimburse him the amount. What is generally described as the disbursements of the plaintiff will, in the event of a verdict being obtained, be funded by the insurer.

The procedure in a case where payments have been made by the insurer and in the event of a verdict for the plaintiff being obtained, is for the total of the payment so made to be deducted from the verdict and the remaining net amount paid to the plaintiff or the plaintiff's solicitors.

If the authorised insurer should make payment on account of medical expenses prior to the termination of litigation, then in the event of a verdict for the defendant being entered, as might have been the case in the present instance, the authorised insurer will seek repayment from the doctor or hospital, or payment from the plaintiff, this on the basis of no responsibility for payment or reimbursement then resting on its insured. In the event of repayment being made by a doctor or hospital, the same will then render another account to the plaintiff.

12. On account of the tribunal of fact, in arriving at its decision, necessarily taking into account not only injuries, disabilities, pain and suffering, but past and future economic loss and disbursements, the ultimate result will often be in an "odd amount" that is not rounded off to hundreds or thousands. In the case of a settlement this is usually not the case, it is often for a "round sum", but in considering the same, according to the evidence, a list of items is compiled covering the various ingredients of a damages claim, an upper and lower range is arrived at and consideration then given to whether a settlement offer should be favourably considered.

Consideration will, in arriving at such a range of figures, be given to the fact that the verdict will be a once and for all figure to cover lifetime needs, including anticipated future medical expenditure. In respect of the latter a rebate will be claimed as and when expenditure is incurred and payment made.

It is usual for the Government Insurance Office, it was said in evidence, not to indicate how it arrives at any settlement offer figure, but in the event of payment having been made by

---

ATC 1235

an insurer of medical and hospital expenses, the same would inevitably be taken into account by both the plaintiff and the insurer in arriving at any such figure: the plaintiff because he realises that he will not be required to make the payment to a doctor or hospital, the insurer because he has already made the payment and is not going to be repaid by the plaintiff on this account.

In the event of a plaintiff having paid any of such disbursements, then this fact would be taken into account in arriving at a settlement figure and the plaintiff would "be compensated". The negotiations, it was said in evidence, "relate to the general damages - the out-of-pockets are agreed and seen to be correct". In the subject case, the out-of-pockets were an agreed figure and contained in the settlement figure of $1.65m. The Government Insurance Office having paid the accounts specifically included the figure, and had this fact noted in the short minutes, the plaintiff or his legal advisers did so as they thence bore no liability in respect of the various accounts so paid and detailed the disbursements in the annexure to the short minutes of order.

13. Section 159P(1) of the Income Tax Assessment Act requires, in order that the amount be rebatable in respect of the particular year of income, inter alia, and so far as it is here relevant, that it be paid by the taxpayer in the year of income as medical expenses in respect of himself.

It was submitted on behalf of the taxpayer that sec. 159P does not require personal payment by the taxpayer. Even though the payment was, in the subject application, made by the Government Insurance Office, the same was, it is said on behalf of the taxpayer, so paid by the Government Insurance Office when acting as the taxpayer's agent. Alternatively, it was submitted, the payment should be deemed to have been an advance to the taxpayer against an obligation that he, in due course, would be required to meet. Payment by the Government Insurance Office would, it was put by counsel, reduce the amount that the taxpayer would ultimately receive. The payment was made at the taxpayer's request and direction and as evidenced by the wording of the short minutes of order. If the plaintiff had not obtained a verdict then it was submitted the Government Insurance Office would look for recovery, this being indicative of it having acted in the payment on behalf of, or as agent of, the taxpayer.

It must be noted in this context that the relationship of insurer and insured was in effect between the Government Insurance Office and the defendant and it was the defendant and the Government Insurance Office who, on a verdict being entered, and on the evidence, then assumed a legal obligation to pay the accounts of the doctors and the hospitals either directly, by way of reimbursing the plaintiff, or by way of placing the plaintiff in funds with which he could make the payments.

14. The words "an amount paid by the taxpayer" as they appear in sec. 159P may be compared, it was submitted, with the wording used in sec. 44 and 51(1) and as it appeared in sec. 105A(1) of the Income Tax Assessment Act. Section 51(1) refers to losses and outgoings, "to the extent to which they are incurred". The connotation thence sought to be attached to the word "incurred", it might be noted, is closer to that sought by the taxpayer to be attached to the word "payment" in sec. 159P.

Section 105A(1) as it appeared in the Act at the relevant time referred to a private company having "paid in dividends" an amount by way of a sufficient distribution during a prescribed period. There is no question, however, of such a dividend having had to be paid by any other than the "private company".

By sec. 44 of the Income Tax Assessment Act, dividends "paid to a shareholder in a company by the company [in which he is a shareholder] out of profits derived from a source" is to form a part of his assessable income. Where a dividend is not in fact paid "out of profits" but is debited to a share premium account, or is in repayment of paid-up capital, then the latter are expressly by the statute, sec. 44(1B), deemed to have been "paid out of profits". It would have been open to the legislature to have deemed payments the like of those presently being considered to be "paid by the taxpayer" and to a like effect. It did not do so.

I do not find the phraseology used in the above section and subsections to be of assistance in giving the relevant words in sec. 159P a meaning consistent with that sought by the applicant. The word "incurred" in sec. 51(1) is one with a clearly defined meaning, viz. "to render oneself liable to" (Shorter

---

ATC 1236

Oxford English Dictionary). This, as I have said, is the meaning sought to be ascribed to the words "paid by the taxpayer". I do not consider that the English language or the context warrants such a construction. Section 44 expressly makes provision for a situation which on a proper construction of the wording of the section, as it would have appeared without the deeming, would not have encompassed the debiting of a share premium account or repayment out of capital.

15. In
P. Iori & Sons Pty. Limited v. F.C. of T. 87 ATC 4058, the provisions of the Income Tax Assessment Act referable to deductions for contributions to a superannuation fund for employees and the meaning to be ascribed to the words "sets apart or pays in the year of income" were considered. The Court there held that the section did not in express words require a payment to be made in actual cash, or by cheque, and that there were not any reasons of policy why such a requirement should be implied. Journal entries in the particular circumstances of that case constituted "a payment made... for the purpose of making provision for superannuation benefits within the meaning of sec. 82AAC".

Whilst of assistance in showing that payment need not be physically made, P. Iori & Sons Pty. Limited is not illustrative of a situation where payment is or has been made by a person other than the company, but only as to the means by which such payment is or was effected by the person making the payment.

16. The issue of payment being made by another again arose for consideration in
Cam v. F.C. of T. 78 ATC 4061, where the taxpayer was at the relevant time subject to a maintenance order referable to his four dependent children. The children were in the custody of the wife. Orthodontal expenses were incurred on behalf of the children and in the relevant period paid by the wife. The taxpayer sought to claim the orthodontal fees, they, he submitted, being contained within and funded out of the maintenance money that he provided. The claim was rejected, the expenses not having been paid by the taxpayer or his agent within the meaning of the legislation as it then stood. At pp. 4065-4066 of the reasons for decision it was said:

"This claim for a concessional deduction depends on sec. 82F of the Act. Section 82F(1) provides that: `an amount paid by the taxpayer as medical expenses in respect of a dependant shall be an allowable deduction'

...

I consider that in this case Mr Cam does not launch an arguable claim unless he satisfies me that money which he paid as maintenance was used by his former wife to pay the orthodontist, or that part of his payments of maintenance was in respect of the orthodontal expenses, or that the amounts of his payments of maintenance were sufficient to cover all other aspects of the children's maintenance and to leave a surplus sufficient to pay the orthodontist's fees...

I am not to be taken as indicating an opinion that if I were satisfied of one or more of the things which I have mentioned the appellant would succeed in this part of his appeal. I am deciding no more than that in this case there is no factual basis which gives rise to a credible argument that the amounts paid to the orthodontist were paid by the appellant or his agent within the usual meaning of the word `paid', or were paid by the appellant within any extended meaning which could reasonably be given to the word `paid'..."

The facts in Cam's case are clearly distinguishable from those in the present application. The taxpayer did not make money available to the Government Insurance Office and particularly did not make money available out of which the relevant payments were made. Nor can it be said, so far as it is relevant, that the Government Insurance Office was reimbursed for any payments made. Certainly if it had not made the payments then the amount of the final judgment would have been higher and the taxpayer would then have paid the medical and other attendances himself. Whether the payments that would then have been made by the taxpayer could be successfully claimed would depend upon a consideration of the second leg of the relevant section. In the subject case, the Government Insurance Office was not an agent for the taxpayer, the plaintiff in the litigation. They were, in fact, opponents to one another.

It should be noted in passing, however, that I do not, with respect, consider the absolute statement in Case B12,
70 ATC 49 at p. 51, "Allowances for medical expenses are covered

---

ATC 1237

by sec. 82F, whilst allowances for educational expenses are covered by sec. 82J. Each of these sections require that the taxpayer must personally pay the amounts claimed", is in accord with authority, nor a proper construction of the sections. It is not in aid of a resolution of the issue in this application.

17. The attention of the Tribunal was drawn by counsel appearing for the taxpayer to Case Q3,
(1964) 15 T.B.R.D. 7 where Mr J.D. Davies (as he then was), when dealing with a matter referable to concessional deductions for medical expenses of an infant beneficiary paid by a trustee out of income to which the infant was deemed to be presently entitled, said that he had "some reservations" as to a finding that the amount was not paid by the beneficiary as medical expenses so as to entitle her to a deduction as the words "paid by the taxpayer... as medical expenses...", "do not carry a technical meaning...". This reasoning is generally in accord with that in P. Iori & Sons Pty. Limited (supra). The beneficiary was there presently entitled and the payment made by the trustee reduced the amount otherwise payable to her. The item in respect of which payment was made by the trustee did not bear any connection to the right of the beneficiary to receive her "present entitlement".

In the subject application the plaintiff/taxpayer was not, at the time of payment by the Government Insurance Office, "presently entitled". The payment did not reduce the amount otherwise payable to the taxpayer for his own use and benefit for, in the event of the payment not having been so paid, the Government Insurance Office and the plaintiff would, on the evidence, in the course of negotiations have taken the same into account in arriving at the verdict figure and increased the same accordingly to provide the plaintiff with the funds to pay the accounts.

18. The taxpayer is not out of pocket by reason of the subject expenditure. He did not himself disburse the moneys. The verdict was, whilst inclusive of the detailed expenses, on the evidence, one that was arrived at with the fact of such expenditure having been made clearly in mind and taken into account in arriving at the final figure.

This is not a case where the taxpayer has, from his own funds, or funds to which he would otherwise have been entitled, disbursed moneys and after payment by a government or public authority, or by a society, association or fund, still been "out-of-pocket"; the latter then being treated as rebatable, that is, subject to notional or actual reimbursement as to part, and at the expense of the public revenue.

Indeed, if in a case such as the present, where medical disbursements were paid by an insurer, a taxpayer was able to claim them as a rebatable amount, he would then derive a monetary benefit consequent on expenditure made by another and in respect of which he was at no time out of pocket. Where expenditure is incurred and payment funded by a taxpayer then, except as to any part in respect of which there is an entitlement in the taxpayer to repayment, a claim for rebate is maintainable.

The present application does not fall into the latter category.

The Tribunal is of the opinion that the subject expenditure does not constitute an amount paid by the taxpayer in the year of income as medical expenses in respect of himself. Accordingly it is not necessary for me to consider the alternative submissions in relation to payment or entitlement to payment by, inter alia, a public authority.

For the reasons hereinbefore given, the Tribunal affirms the objection decision in relation to the assessment for the year ended 30 June 1982.