Abbott v QBE Insurance (Australia) Limited
[2023] NSWPICMR 49
•20 September 2023
| CERTIFICATE OF DETERMINATION OF MERIT REVIEWER | |
| CITATION: | Abbott v QBE Insurance (Australia) Limited [2023] NSWPICMR 49 |
| CLAIMANT: | Stewart Abbott |
| INSURER: | QBE |
| MERIT REVIEWER: | Katherine Ruschen |
| DATE OF DECISION: | 20 September 2023 |
| CATCHWORDS: | MOTOR ACCIDENTS - Motor Accident Injuries Act 2017; pre-accident weekly earnings, schedule 1(4)(1); sole trader; business income; whether sufficient evidence of business expenses; whether financial records unreliable; whether Australian Taxation Office small business benchmark should be adopted to calculate business expenses; onus of proof; Held – the reviewable decision is set aside. |
DETERMINATIONS MADE: | CERTIFICATE Issued under s 7.13(4) of the Motor Accident Injuries Act2017 DETERMINATION 1. The reviewable decision is set aside and: (a) the claimant’s pre-accident weekly earnings amount is $1,785.31. |
STATEMENT OF REASONS
INTRODUCTION
There is a dispute between Stewart Abbott (the claimant) and the insurer about the amount of weekly payments of statutory benefits payable under Division 3.3 of the Motor Accident Injuries Act 2017 (the MAI Act).
The claimant was involved in a motor accident on 31 January 2023.
On 1 May 2023 the insurer determined the claimant’s pre-accident weekly earnings (PAWE) in the sum of $1,069.71.
On 2 May 2023 the claimant applied for an internal review of the insurer’s decision dated 1 May 2023.
On 15 May 2023 the insurer issued their internal review decision in which the insurer affirmed their decision that the claimant’s PAWE amount is $1,069.71.
The claimant has requested a merit review of the insurer’s internal review decision dated 15 May 2023.
SUBMISSIONS
The claimant was a self-employed concreter at the time of the motor accident. The dispute is primarily about the amount incurred by the claimant’s business in expenses in the relevant pre-accident period. The insurer calculated business expenses based on the relevant Australian Taxation Office (ATO) benchmark (the benchmark).
The claimant submits sufficient information is provided to enable the insurer to calculate actual business expenses on balance, rather than rely on the ATO benchmark and submits his business expenses are lower than the benchmark. The claimant submits allowance is made for the cost of purchase of a tipper truck in his accountant’s calculation of business expenses.
The insurer relies on reports from Procare dated 26 April 2023 and 11 May 2023 and submits:
(a) using the benchmark to calculate business expenses is justified in circumstances where there is reason to doubt the accuracy and reliability of the claimant’s financial records;
(b) the annual turnover of the claimant’s business falls within the middle band of the ATO benchmark and the benchmark percentage for the middle band is consistent with a business expense average of just over 70% incurred by the claimant’s business, and
(c) purchase of a tipper truck is related to the business and accordingly, purchase and associated costs should be included in business expenses.
REASONS
Issues
There is no dispute the claimant is an earner under the MAI Act.
There is also no dispute the claimant’s PAWE falls under Schedule 1, cl 4(1) of the MAI Act. The claimant’s PAWE is therefore the weekly average over the 52 week pre-accident period from 31 January 2022 to 30 January 2023.
There also does not appear to be any dispute the gross earnings received by the claimant as an earner for the purpose of PAWE in circumstances where he is a sole trader are the net profit of the business after accounting for all business expenses.
The substantive issue is whether there is satisfactory evidence of business expenses or whether the benchmark average should be used.
Gross sales of the business
As noted, the pre-accident period under Schedule 1, cl 4(1) is 31 January 2022 to
30 January 2023.Procare calculated gross sales of the business in the sum of $223,111 net of GST. The claimant’s accountant calculated gross sales in the sum of $227,422 net of GST.
I have calculated income in the bank statements in the sum of $245,095 inclusive of GST received in the period 31 January 2022 to 30 January 2023 which equates to $222,813 net of GST.
There is a difference of $4,609 between my calculation of $222,813 and that of the claimant’s accountant of $227,422. This is readily accounted for by the fact the claimant’s accountant calculated income to 31 January 2023 that is, an additional day has been included after the end of the pre-accident period on 30 January 2023.
Bank statements show income totalling $5,070 inclusive of GST (which equates to $4,609 net of GST, being the precise difference between my calculation and that of the claimant’s accountant) received on 31 January 2023. Clause 4(1) is concerned only with earnings “received” in the pre-accident period. Accordingly, earnings received by the business on 31 January 2023, after the 12 month pre-accident period ended, must be excluded from PAWE.
I am unable to comment on the difference between my calculation and that of Procare as Procare have not provided sufficient information in their report to enable me to ascertain why there is a difference. However, given my calculation is lower than Procare’s and there is an obvious explanation for the difference between my calculation and that of the claimant’s accountant, I assume the insurer will not have an issue with this.
I agree with Procare that there are discrepancies between the bank statements, invoices, the accountant’s working documents and business activity statements (BAS). For example, there is a cash deposit of $1,170 received on 14 August 2022 in the bank statements circled by the claimant as business income. However, this amount is not included in income by the claimant’s accountant. I understand the claimant relies on memory in retrospectively circling transactions in the bank statements in response to directions made in this merit review. Given this and the absence of source documents verifying the deposit as income I consider documents prepared by the claimant’s accountant are more reliable. Given the lack of any documents to support the cash deposit as income and the exclusion of the case deposit as income by the claimant’s accountant I am not comfortably satisfied on balance that this or any other transactions not included by the claimant’s accountant are income.
For these reasons I am satisfied on balance that gross income of the business net of GST in the 12 month pre-accident period to 30 January 2023 is $222,813.
Business expenses
Procare adopted the benchmark on the basis of their opinion that:
(a) expenses do not include the cost of purchasing the tipper truck;
(b) there are unusual fluctuations in cost of sales (subcontractor expenses and materials);
(c) there are abnormally high printing and stationery costs in the quarter ending 30 June 2022;
(d) a portion of subcontractor costs are unreported by the claimant and there are substantial cash withdrawals that may represent further unreported subcontractor costs, and
(e) the discrepancies in the claimant’s documents render the claimant’s financial records unreliable for the purpose of calculating business expenses.
However, in my view Procare failed to adequately consider the following:
(a) the benchmark used is the 2020 to 2021 benchmark and uses information reported on tax returns for the 2020–21 financial year. This is a period in which the concreting industry was likely impacted by COVID-19. As a result, there is a probability that business expenses for many in the industry were higher in that year;
(b) whilst 75% (used by Procare) is the benchmark average, the relevant benchmark range is 68% to 81% which is a broad range. Procare provide insufficient reasons for adopting the average of this range rather than a percentage at the lower end of this range (particularly having regard to the claimant’s business expense percentages over previous tax years, which were lower), and
(c) the purpose of the benchmark is to assist small businesses to compare their business performance against the concreting industry average. The benchmark acknowledges that whilst the benchmark is considered to be the “norm”, not every business will fall within this norm.
Procare’s complaint that the claimant’s business expense figure does not include the costs of purchasing a tipper truck appears unfounded. The claimant’s accountant prepared a statement of income and expenses of the business for the relevant period in which the cost of purchasing the motor vehicle is depreciated on a prime cost basis. In fact, the claimant’s accountant deducts a higher amount of $2,142 for depreciation expenses for the tipper truck than the figure of $1,791 proposed by Procare at paragraph 20 of their supplementary report. The tipper truck depreciation expense appears in the first line under “Overhead Expenses” in the document prepared by the claimant’s accountant titled “Summary of Income and Expenses For the Period 31 Jan 2022 to 31 Jan 2023”. Accordingly, I am satisfied the cost of purchase of a tipper truck is adequately accounted for by the claimant’s accountant as a business expense in the relevant period.
Procare also suggest interest on finance for the purchase of the tipper truck is not accounted for in business expenses. However, interest is included by the claimant’s accountant and appears in the second line under “Overhead Expenses” in the Summary of Income and Expenses for the Period 31 January 2022 to
31 January 2023. I am therefore also satisfied this expense has been accounted for by the claimant’s accountant.As to Procare’s opinion there are unusual fluctuations in the cost of sales Procare does not provide any or any adequate reasoning for this opinion other than to suggest it is based on the author’s experience. However, the author’s experience dealing with small businesses operating in the construction industry and specifically, the concreting industry is not known.
One probability for a fluctuation in expenses is that there is also a fluctuation in earnings from month to month. For example, gross earnings in February 2022 were only $2,250 net of GST whereas in December 2022 they were $46,264. Another probability is the cost of purchase of materials fluctuates because the size of jobs varies from small $600 jobs to larger jobs in excess of $10,000. It might be for example that no subcontracted labour is required for smaller jobs thereby reducing the percentage cost of sales compared to larger jobs requiring subcontracted labour in addition to materials.
A further probability may also be because the claimant has trade accounts for materials which are paid intermittently (for example when the account recaches a threshold amount and becomes due) or less frequently than say monthly for example, on a quarterly basis. This appears probable in relation to payments to Western Suburbs Concrete and Metromix Pty Limited. The claimant’s accountant also informed Procare that due to the nature of the business the claimant may purchase excess materials when the business is financially able to and carry those materials over to future jobs.
There is no indication Procare considered any of these probabilities, or made any enquiry into such matters, before reaching their conclusion that the fluctuation in cost of materials is “unusual”. Having regard to the nature of the industry and a range of probabilities that could explain the fluctuation, I do not consider the fluctuation to be unusual.
As to “abnormally high printing and stationary costs” I do not understand this complaint by Procare. In any event, it is explained by the claimant’s accountant as a stand-alone error. I agree with the claimant’s accountant that it is immaterial.
As to alleged unreported subcontractor costs and cash withdrawals Procare has not provided any evidence to support their contention that expenses calculated by the claimant’s accountant do not include all subcontractor costs. Whilst the claimant has omitted to circle some contractor payments in the bank records, this exercise is understood to have been undertaken by the claimant in response to directions made in this merit review and does not reflect the accountant’s work.
The claimant’s accountant maintains all subcontractor expenses are included in business expenses and are typically included as costs of goods sold rather than classified in a separate “subbies” category. This would seem appropriate given subcontractor costs are the costs to carry out a particular job and therefore represent costs of goods sold. As set out further below, the claimant’s accountant has an amount for expenses that is substantially higher than expenses in the bank statements, inclusive of subcontractor payments not circled by the claimant. There is also no reason on the evidence before me to doubt the statements of the claimant’s accountant. There is no evidence to refute the accountant’s statement in correspondence to Procare that all subcontractor costs are accounted for as costs of goods sold. I am satisfied on balance that the claimant’s accountant has included all subcontractor payments.
Procare’s suggestion that cash withdrawals shown in the bank statements may represent additional subcontractor payments is speculation, as it is not supported by any evidence. It is clear the claimant uses one bank account for business and personal purposes and that the claimant has a number of not inexpensive recreational and entertainment pursuits. I am not satisfied on balance that any of the cash withdrawals represent business expenses.
Finally, I do not agree with Procare’s view the discrepancies in the claimant’s documents are such that his financial records cannot be relied upon for the purpose of calculating business expenses. I have scrutinised the documents and consider the discrepancies minor in the context of a small business operating on a sole trader basis where the bank account is for both business and personal purposes. The claimant has provided various financial records, including records from previous tax years against which the likelihood of income and expenses in the subject period can be compared.
This matter is distinguishable from the decision of Conde v Insurance Australia Limited t/as NRMA Insurance [2022] NSWPICMR 28 (Conde) relied on by the insurer. As pointed out by the claimant’s solicitor, in Conde the claimant had a recently established business and therefore no past records against which performance could be compared. There were also no tax returns, no business activity statements and no records of expenses of the business at all. In that case, where there was a complete absence of evidence of expenses the benchmark was appropriate. However, in this case I am of the view sufficient records are available upon which to calculate the claimant’s likely business expenses in a manner that is in all probability more reliable than the benchmark (noting my comments at paragraph 23 above).
Whilst the claimant prima facie has the onus of proof, he is not required to establish beyond reasonable doubt the amount of his pre-accident earnings. Nor is he required to disprove speculation, or a case theory put forward by Procare not supported by any evidence. In a civil matter such as this the standard of proof depends on the balance (or preponderance) of probabilities. This simply means a party must prove their case is more likely than not to be true. If the scales tip in favour of the party, however slight, they have proved their case.
I have scrutinised the documents. I have been able to reconcile gross income received by the business in the 12 month pre-accident period with the figure provided by the claimant’s accountant with the variation obviously accounted for by the inclusion by the claimant’s accountant of income received on 31 January 2023, after the end of the pre-accident period.
I have also been able to reconcile the bank statements with expenses calculated by the claimant’s accountant, with only a minor variation which I do not consider significant or unusual for a small business operating on a sole trader basis. Further, the claimant’s accountant’s figure is higher than the amount I calculated even after adding in subcontractor costs not circled by the claimant in the bank statements. Expenses from 31 January 2022 to 30 January 2023, as circled by the claimant in the bank statements (after accounting for refunds and adding in $12,510 for subcontractor payments not circled[1]) total $123,160.49 inclusive of GST. Assuming an input tax credit for these expenses the figure net of GST is $111,964.
[1] Whilst not circled they bear the description “job” or “work” or “payment for work”, for example 6 April 2022 “Transfer to Lionel… Schofields job” $660.
On the other hand, the claimant’s accountant has $129,977 net of GST for expenses in the same period ($140,867 inclusive of GST). The difference is partially accounted for by the inclusion of the tipper truck depreciation and interest costs by the claimant’s accountant totalling $4,593. Adding this in, my total becomes $116,557 ($111,964 plus $4,593). There is also an amount for “wages and super” included by the claimant’s accountant for the month of June 2022 in the sum of $11,286. On balance this appears to fall outside the bank statements and separate from subcontractor payments included in cost of goods sold by the claimant’s accountant. By adding in wages and super my calculation for expenses becomes $127,843 ($116,557 plus $11,286) leaving a variation of $2,134 between my calculation and the higher calculation by the claimant’s accountant in the sum of $129,977.
It is likely the claimant’s accountant included $420 (rounded) net of GST ($461.60 inclusive of GST shown in the bank statements) as expenses incurred after the pre-accident period on 31 January 2023. If I remove this amount from the claimant’s accountant’s figure it gives a figure of $129,557. This reduces the discrepancy between my calculation and that of the claimant’s accountant to only $1,714 which is a difference of only 1.3% with the accountant’s figure remaining the higher amount. This remaining discrepancy may be because I have assumed an input tax credit for GST on all expenses in the bank statements whereas the claimant’s accountant has noted expenses such as storage that do not attract GST. By assuming all expenses in the bank statements include GST I may have deducted a larger amount for GST in calculating the net of GST equivalent. There is also a possibility that the claimant may have overlooked some minor expenses when asked to retrospectively circle expenses in the bank statements, given he overlooked some subcontractor payments.
In any event I consider the remaining discrepancy of $1,714 or 1.3% to be minor in the context of a small business operated on a sole trader basis with one bank account for business and personal use. As noted, I have no reason to doubt the veracity of the statements of the claimant’s accountant in emails to Procare in circumstances where gross sales calculated by the claimant’s accountant align with the bank statements and business expenses calculated by the claimant’s accountant closely align with the bank statements save for a difference of only $1,714.
Business expenses calculated by the claimant’s accountant in the sum of $129,977 represent 58.33% of gross income of $222,813. In the 2020 to 2021 tax year the claimant’s business expenses represented 57% and in the 2021 to 2022 tax year the claimant’s business expenses represented 63% of gross income based on the figures in the tax returns. The average over the two years was 60% which out-performed the benchmark norm. The 58.33% in the 12 month pre-accident period falls within the claimant’s range of 57% to 63% for his business expenses in the period 1 July 2020 to 30 June 2022.
In my view, Procare failed to give adequate consideration to the percentages for business expenses in previous tax years in addition to failing to adequately consider the probabilities relating to matters such as a fluctuation in business expenses.
For the reasons outlined above I am satisfied on the balance of probabilities that business expenses for the pre-accident period total $129,977, as calculated by the claimant’s accountant given:
(a) there are sufficient financial records upon which I have been able to calculate business income and expenses over the 12 month pre-accident period;
(b) my calculation of income aligns with that of the claimant’s accountant after reconciling the income received on 31 January 2023 and excluding that amount;
(c) there is a difference of only $1,714 between my calculation of expenses and that of the claimant’s accountant;
(d) I have assumed GST on all expenses in the bank statements, which may be incorrect and may account for the $1,714 difference;
(e) the calculation by the claimant’s accountant is higher;
(f) given the claimant’s accountant is an accounting professional their calculation is likely to be more reliable than my own which is based solely on bank statements and no detailed knowledge of the GST component, and
(g) there is a consistency in the percentage of sales that business expenses represent in the 2021 and 2022 tax years (57% to 63%) and the 12 month pre-accident period (58%) which provides a level of comfort that the calculations for the 12 month pre-accident period are likely correct.
Whilst the claimant’s accountant may have included expenses incurred on
31 January 2023, I am unable to readily reconcile this in the same way the inclusion of income received on 31 January 2023 is directly reconcilable with the bank statements. The claimant has not provided sufficient information for me to be comfortably satisfied on balance as to the expenses of 31 January 2023 that may have been included by the claimant’s accountant. I therefore consider on balance that the accountant’s total expenses figure should be adopted regardless.On this basis, the claimant’s gross earnings as an individual earner after accounting for all business expenses in the 12 month pre-accident period are $92,836 ($222,813 less $129,977) which equates to PAWE in the sum of $1,785.31.
CONCLUSION
For the reasons set out above I am satisfied on the balance of probabilities that:
(a) the financial records provided by the claimant are sufficient for the purpose of calculating the likely gross business income;
(b) the claimant’s gross business income in the 12 month pre-accident period from 31 January 2022 to 30 January 2023 is $222,813;
(c) the claimant’s business expenses in the same period are $129,977;
(d) the claimant’s gross earnings as an earner for the purpose of cl 4(1) are therefore $92,836, and
(e) the claimant’s PAWE is therefore $1,785.31.
Accordingly, the reviewable decision is set aside and the claimant’s PAWE is determined in the sum of $1,785.31.
LEGISLATION AND GUIDELINES
In making this decision, I have considered the following:
· The Application, Reply and supporting documentation;
· MAI Act;
· Motor Accident Guidelines, and
· Motor Accident Injuries Regulation 2017.
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