Davy and Commissioner of Taxation

[2003] AATA 544

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2003] AATA 544

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No QT2002/102

TAXATION APPEALS  DIVISION		)
Re		MARTIN RAYMOND DAVY

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Deputy President Don Muller

Date12 June 2003

PlaceBrisbane

Decision The Tribunal affirms the decision under review.

..............Signed.................................

D.W. MULLER

DEPUTY PRESIDENT

CATCHWORDS

TAXATION – lump sum compensation payment – whether exempt income – whether similar to income support supplement under the Veterans’ Entitlements Act 1986

Income Tax Assessment Act 1997: s 52-5, 52-65, 52-70, 53-20, 52-75

Safety, Rehabilitation & Compensation Act 1988: s 19, 30

Veterans’ Entitlements Act 1986: Part IIIA

Social Security Act 1991

REASONS FOR DECISION

12 June 2003 Deputy President Don Muller       

1.This is an application to review an objection decision of the Commissioner of Taxation (“the Respondent”) dated 3 May 2002, that a lump sum compensation payment of $75,147.34, paid to Martin Raymond Davy, the Applicant, pursuant to sections 19 and 30 of the Safety, Rehabilitation and Compensation Act 1988 (“the SRC Act”) is not exempt income for the purposes of Divisions 52 and 53 of the Income Tax Assessment Act 1997 (“the ITAA”).

2.At the hearing the Applicant was represented by Mr. McCreanor of Counsel and the Respondent was represented by Mr. Aftanas. The Tribunal had before it the documents provided by the Respondent pursuant to section 37 of the Administrative Appeals Tribunal Act 1975.

3.The provisions of Divisions 52 and 53 of the ITAA make certain pensions, benefits and allowances exempt from income tax.  For example, sub-division 52-A contains a list of payments made under the Social Security Act 1991 (the SS Act) which are exempt from income tax. Section 52-5 sets out the payments from the various sections of the SS Act which are exempt.

“Subdivision 52-A - Exempt payments under the Social Security Act 1991

Guide to Subdivision 52-A

52-5     What this Subdivision is about

This Subdivision tells you:

(a)  the payments under the Social Security Act 1991 that are wholly or     partly exempt from income tax;  and

(b)  any special circumstances, conditions or exceptions that apply to a payment in order for it to be exempt;  and

(c)  how to work out how much of a payment is exempt.

Table of sections

Operative provisions

52-10   How much of a social security payment is exempt?

52-15   Supplementary amounts of payments

52-20   Tax-free amount of an ordinary payment after the death of your partner

52-25   Tax-free amount of certain bereavement lump sum payments

52-35Tax-free amount of a lump sum payment made because of the death of a person you are caring for

52-40   Provisions of the Social Security Act 1991 under which payments are made”

4.Sub-division 52-B contains a table of pensions and benefits, payable under the Veterans’ Entitlements Act 1986, that are wholly or partly exempt from income tax.  The benefit which has been focussed on for the purpose of this review is contained in Item 6.2 of section 52-65 and the relevant part is set out in the ITAA as follows:

“B52-65  How much of a veterans’ affairs payment is exempt?

(1)  The table in this section tells you about the income tax treatment of veterans’ affairs payments (other than payments of pension bonus).

Note: Section 52-75 sets out the provisions of the Veterans’ Entitlements Act 1986 under which the payments are made.

(1A)  Payments of pension bonus under Part IIIAB of the Veterans’ Entitlements Act 1986 are exempt from income tax.

(2)  Expressions (except ‘pension age’) used in this Subdivision that are also used in the Veterans’ Entitlements Act 1986 have the same meaning as in that Act.

(3)  Pension age has the meaning given by subsection 23(1) of the Social Security Act 1991.

(4)  Ordinary payment means a payment other than a payment made because of a person’s death.

‘Income tax treatment of veterans’ affairs payment’

Item          Category of veterans’ affairs payment        Ordinary     Payment made

  Payment     because of a

  Person’s death

6.2            Income support supplement:  you are            Exempt        Exempt

                 under Exempt pension age and

                 receiving the supplement on the

                 grounds of permanent incapacity.           

5.Section 52-70 of the ITAA defines what is meant by the “supplementary amount of a veterans’ affairs payment”.

“52-70  Supplementary amounts of payments

The supplementary amount of a veterans’ affairs payment is the total of:

(a)       so much of the payment as is included by way of rental assistance;  and

(b)so much of the payment as is included by way of an additional amount for each of your dependent children;  and

(c)       so much of the payment as is included by way of remote area allowance.”

6.Section 52-75 of the ITAA provides a table which lists the provisions of the Veterans’ Entitlements Act 1986 (the VEA) under which veterans’ affairs payments are made that are wholly or partly exempt from income tax under sub-division 52-B. The table lists Item 6, category “income support supplement”, as being a payment under Part IIIA of the VEA.

7.Section 53-20 of the ITAA provides for the exemption from income tax of similar Australian and United Kingdom veterans’ payments.

“53-20  Exemption of similar Australian and United Kingdom veterans’ payments.  The following payments made by the Government of Australia, or the Government of the United Kingdom, are exempt from income tax:

(a)       payments similar to payments under the Veterans’ Entitlements Act 1986 that are exempt under Subdivision 52-B.”

8.It is the Applicant’s case that the lump sum payment he received was for income support, that it is similar to item 6.2 set out in paragraph 4 above, and that therefore it is exempt from income tax.

9.There is no dispute between the parties about the facts which gave rise to this review.  The Tribunal finds as follows:

(a)In 1998 while employed by the Department of Defence as a soldier, the Applicant suffered a serious deep penetration injury to his right eye.

(b)The Applicant was granted compensation and rehabilitation pursuant to the provisions of section 19 of the SRC Act.

(c)He was initially paid gross compensation of $648.55 per week while he was unfit for work.  This amount was later varied from time to time.

(d)On 15 May 2000, the Military Compensation and Rehabilitation Service of the Department of Veterans’ Affairs wrote to the Applicant to advise him that his entitlement had been re-assessed because he had completed a retail skills course and work trial in a retail/stores position.  The Applicant was deemed to have the ability to earn $445.45 per week in suitable employment.  Consequently, he was entitled to compensation of $55.54 per week from 8 June 2000.

(e)On 26 July 2000 the Department of Veterans’ Affairs wrote to the Applicant and informed him:

“Under Section 30 of the Act, if the amount of your payment is $72.82 gross per week or less, and the degree of your incapacity is unlikely to change, the Department is obligated to redeem these payments by paying a lump sum.  This will cut out the need to make any more fortnightly payments.

As your weekly entitlement is $67.63 you meet all the conditions specified in Section 30.  If you decide to receive redemption, this Department will stop paying fortnightly amounts after 3 August 2000, and will instead pay you a gross lump sum of $75,147.34.  Taxation of $23,996.67 needs to be deducted so the net amount payable to you will be $51,150.67.”

(f)The Applicant elected to receive the lump sum payment and as a result he received a lump sum payment in the amount of $75,147.34 less tax of $23,996.67.

10.The lump sum payment was made pursuant to s.19 and s.30 of the SRC Act which provided:

“SECTION 19  COMPENSATION FOR INJURIES RESULTING IN INCAPACITY

19(1)  [Application]  This section applies to an employee who is incapacitated for work as a result of an injury.

19(2)  [Formula]  Subject to this Part, Comcare is liable to pay to the employee in respect of the injury, for each week that is a maximum rate compensation week during which the employee is incapacitated, an amount of compensation worked out using the formula:

NWE  -  AE

Where:

AE is the greater of the following amounts:

(a)  the amount per week (if any) that the employee is able to earn in suitable employment;

(b)  the amount per week (if any) that the employee earns from any employment (including self-employment) that is undertaken by the employee during that week.

NWE is the amount of the employee’s normal weekly earnings.

SECTION 30  REDEMPTION OF COMPENSATION

30(1)  [Circumstances]  Where:

(a) Comcare is liable to make weekly payments under section 19,20, 21 or 21A to an employee in respect of an injury resulting in an incapacity;

(b)  the amount of those payments is $72.82 per week or less;  and

(c) Comcare is satisfied that the degree of the employee’s incapacity is unlikely to change;

Comcare shall make a determination that its liability to make further payments to the employee under that section be redeemed by the payment to the employee of a lump sum.

30(2)  [Lump sum formula]  The amount of the lump sum is the amount worked out using the formula:

52 x amount per week x [(specified number +1)ⁿ - 1]

specified number x [(specified number +1)ⁿ]

30(3)  [Formula definitions]  For the purposes of subsection (2):

“amount per week” means the amount per week payable to the employee under section 19, 20, 21 or 21A, as the case may be, at the date of the determination;

“specified number” means the number specified by the Minister;

n means the number worked out using the formula:

Number of days

365

where:

number of days means the number of days in the period beginning on the day after the day on which the determination is made and ending:

(a)if the employee is injured before reaching 63 years of age – on the day immediately before the day on which the employee reaches 65 years of age;  and

30(4)  [Specified number]  The Minister may, from time to time, by notice in writing, specify a number (being a specification of the number in decimal notation) for the purposes of subsection (2).”

11.The question for determination is whether the payment to the Applicant of a lump sum pursuant to the SRC Act as compensation for income lost due to a work related injury, is “similar” to a “supplementary amount” paid to a person pursuant to Part IIIA of the VEA, limited to rental assistance, additional amounts for dependant children and remote area allowance.

12.The criteria for eligibility for “income support supplement” are contained in s.45A of the VEA.  The only persons who are eligible are war widows or widowers  who are not eligible for a service pension but who would qualify for a social security pension.  They can elect to have the “income support supplement” paid to them through the Department of Veterans’ Affairs in lieu of the social security payment.  If the applicant is under pension age the widow or widower would not qualify for a social security payment unless they were permanently incapacitated or qualified as a carer.  The criteria for qualification for income support pension under the VEA due to being permanently incapacitated for work, are the same as for qualification for disability support pension under the Social Security Act 1991 (the SS Act). Income support supplement may also be extended to younger war widows who have dependent children and who do not willingly apply for sole parent pension under the SS Act.

13.The income support supplement paid pursuant to the VEA is subject to an assets and income test.

14.The meaning of the word “similar” in section 53-20 of the ITAA is not defined by the ITAA.  The Applicant submits the meaning of the word is its ordinary and plain meaning as defined by the Oxford English Dictionary, “having a marked resemblance or likeness, of nature or kind”.  The Respondent referred the Tribunal to the Macquarie Dictionary definition, “having likeness or resemblance, especially in a general way..”.

15.Specifically, the Applicant submits that the similarities between the Applicant’s lump sum payment and the pension identified under section 52-65 Item 6.2 of the ITAA are as follows:

(a)The Applicant is receiving an income support supplement;

(b)The Applicant is under the pension age;  and

(c)The Applicant is receiving that supplement on the basis of a permanent incapacity for work.

16.The lump sum redemption payment of $75,147.34 paid to the Applicant under s.30 of the SRC Act represented the present value of future income. It was paid in a lump sum to avoid the inconvenience of making small fortnightly payments over a period of many years. It was compensation for a specific quantum of lost income due to a work related injury. It was not subject to an assets test nor subject to any other income which the Applicant may have received, such as from investments.

17.The lump sum was a payment made pursuant to the provisions of workers’ compensation legislation. It was similar in nature to any other workers’ compensation payment which may have been made to an injured worker in any other field such as banking, railway work, surveying or bus driving. The fact that the payment was made by the Military Compensation arm of the Department of Veterans’ Affairs does not change its essential character from that of workers’ compensation. It was not a payment pursuant to the VEA or the SS Act.

18.The income support supplement paid pursuant to the VEA is paid specifically to a restricted class of widows and widowers who have suffered loss of support from their spouse due to the death of their spouse from war-service.  The payment is not related to any loss of income from employment.  It is in the nature of a social security benefit, paid to provide sustenance at a fairly basic level to persons who are unable to support themselves.

19.The benefit of exemption from income tax under the ITAA is directed towards the recipients of certain supplements to their social security pensions, certain supplements to benefits under the VEA which are in effect social security benefits, and to those receiving “similar” veterans’ payments.

20.The payments under the SRC Act and the VEA are made respectively to two entirely different categories of people. The qualifications for entitlement are completely different. The methods by which the compensation or benefits are calculated are different.

21.It is the Tribunal’s view that the lump sum payment under the SRC Act is not similar to the income support supplement under Part IIIA of the VEA.

22.Consequently, the lump sum payment is not exempt income for the purposes of the Income Tax Assessment Act 1997.

23.The decision under review is affirmed.

I certify that the 23 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President Don Muller

Signed:         .......................................................................................
           C. O’Donovan, Associate

Date/s of Hearing   28 November 2002
Date of Decision  12 June 2003
Counsel for the Applicant          Mr. K. McCreanor
Solicitor for the Applicant           Horwath Cairns
Respondent   Mr. S. Aftanas, departmental advocate