Eva Riley and Commissioner of Taxation
[2014] AATA 664
[2014] AATA 664
Division TAXATION APPEALS DIVISION File Number(s)
2014/0374
Re
Eva Riley
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Professor R Deutsch, Deputy President Date 12 September 2014 Place Sydney The decision under review is affirmed.
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Professor R Deutsch, Deputy President
CATCHWORDS
TAXATION AND REVENUE – income tax – private ruling – payment pursuant to Workers Compensation Act 1987 (NSW) – compensation for domestic assistance – gratuitous domestic assistance – income according to ordinary concepts – decision affirmed
LEGISLATION
Income Tax Assessment Act 1997 (Cth) s 6-5
Workers Compensation Act 1987 (NSW) s 60AA
CASES
Commissioner of Taxation v Cooling (1990) 22 FCR 42
Commissioner of Taxation v Inkster (1989) 24 FCR 53
Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199
Federal Commissioner of Taxation v Slaven (1984) 1 FCR 11
GP International Pipecoaters Pty Ltd v Commissioner of Taxation (1990) 170 CLR 124
Re Applicant and Federal Commissioner of Taxation (2006) 63 ATR 1008
Re Cooper and Federal Commissioner of Taxation (2003) 52 ATR 1199
Re Cooper Bros Holdings Pty Ltd trading as Triple R Waste Management and Commissioner of Taxation (2013) 59 AAR 165Re Purdon and Federal Commissioner of Taxation (2001) 46 ATR 1161
SECONDARY MATERIALS
WorkCover Guidelines for the Provision of Domestic Assistance
REASONS FOR DECISION
Professor R Deutsch, Deputy President
12 September 2014
BACKGROUND
On 19 February 1997, the Applicant’s husband, Mr Gary Riley, was seriously injured when he was white water rafting during a team building exercise organised by his employer. Mr Riley suffered significant physical impairment as a result of his injuries and was consequently unable to work.
The Applicant gave up full time work to become a carer to Mr Riley. She continued to work part time or on a temporary basis.
On 7 May 2012, the insurer of Mr Riley’s employer offered to provide funding for 4.5 hours per week of domestic assistance.
On 15 June 2012, Mr Riley lodged a claim for compensation for domestic assistance under s 60AA of the Workers Compensation Act 1987 (NSW) (the “WCA 1987”) in respect of domestic assistance that the Applicant had provided to Mr Riley during the period between 1 January 2002 and 12 April 2012.
On 8 November 2012, the Workers Compensation Commission (“the WCC”) issued a determination awarding the Applicant the sum of $179,116.17 (the “Compensation Payment”) pursuant to s 60AA of the WCA 1987. There was no order for any on-going payments.
The Applicant received the Compensation Payment as a lump sum in the 2013 income year.
The Applicant was not a party to the proceedings that gave rise to the payment.
On 10 July 2013, the Applicant lodged a Private Ruling Application with respect to the Compensation Payment.
On 18 July 2013, the Respondent issued a Notice of Private Ruling, which stated that the Compensation Payment was assessable income for the purposes of s 6-5 of the Income Tax Assessment Act 1997 (Cth) (the “ITAA 1997”).
On 22 August 2013, the Applicant lodged an objection to the private ruling.
On 5 December 2013, the Respondent disallowed the objection in full.
ISSUES
The sole issue for determination here is whether the payment made to the Applicant is assessable as ordinary income under s 6-5 ITAA 1997.
RELEVANT LEGISLATION
The Compensation Payment was awarded pursuant to s 60AA of the WCA 1987, which relevantly provides:
60AA Compensation for domestic assistance
(1) If, as a result of an injury received by a worker, it is reasonably necessary that any domestic assistance is provided for an injured worker, the worker’s employer is liable to pay, in addition to any other compensation under this Act, the cost of that assistance if:
(a) a medical practitioner has certified, on the basis of a functional assessment of the worker, that it is reasonably necessary that the assistance be provided and that the necessity for the assistance to be provided arises as a direct result of the injury, and
(b) the assistance would not be provided for the worker but for the injury (because the worker provided the domestic assistance before the injury), and
(c) the injury to the worker has resulted in a degree of permanent impairment of the worker of at least 15% or the assistance is to be provided on a temporary basis as provided by subsection (2), and
(d) the assistance is provided in accordance with a care plan established by the insurer in accordance with the WorkCover Guidelines.
…
(3) Compensation is not payable under this section for gratuitous domestic assistance unless the person who provides the assistance has lost income or forgone employment as a result of providing the assistance.
…
(5) The following requirements apply in respect of payments under this section:
(a) payments are to be made as the costs are incurred or, in the case of gratuitous domestic assistance, as the services are provided,
(b) payments are only to be made if those costs and the provision of the assistance is properly verified (and the WorkCover Guidelines may make provision for how the performance of those services is to be verified),
(c) payments for gratuitous domestic assistance are to be made to the provider of the assistance.
(6) In this section:
gratuitous domestic assistance means domestic assistance provided to an injured worker for which the injured worker has not paid and is not liable to pay.
The amount of compensation payable under s 60AA is to be determined in accordance with cl 7.4 of the WorkCover Guidelines for the Provision of Domestic Assistance (the Guidelines), which relevantly provides:
The maximum hourly fee amount for which an employer is liable under the Act for gratuitous domestic assistance services is the hourly rate calculated by dividing by 35 the amount estimated by the Australian Bureau of Statistics as the average weekly total earnings (full time adult ordinary time) of all employees in New South Wales from time to time. Compensation is not payable for more than 35 hours per week.
The relevant tax legislation is s 6-5(1) ITAA 1997 which provides that “Your assessable income includes income according to ordinary concepts, which is called ordinary income.”
APPLICANT’S CONTENTIONS
The Applicant’s contentions, as stated in her Statement of Facts, Issues and Contentions, were:
[6] The lump sum was in the nature of capital and was not income according to ordinary concepts.
[7] The lump sum should be characterised as a receipt of capital by the Applicant as the lump sum:
(a) was not earned by the Applicant;
(b) was not expected by the Applicant;
(c) was not relied upon by the Applicant;
(d) did not have any element of periodicity, recurrence or regularity;
(e) was not payment for services rendered;
(f) was not in substitution for income; and
(g) was not for financial support.
[8] The Respondent has erred in characterising the receipt by:
(a) finding that the Applicant rendered personal services to Mr Riley;
(b) misconstruing the lump sum as not being a statutory payment not falling within ordinary concepts of income;
(c) misapplying, or failing to apply, the legal distinction between loss of income and loss of earning capacity; and
(d) applying a “but for” test to the receipt of the lump sum.
[9] The Respondent erroneously applied the Tax Acts to the facts under consideration in the private ruling decision and the objection decision and the Respondent should have characterised the lump sum as a receipt of a capital nature.
(10] Alternatively if the Respondent’s characterisation of the lump sum is found to be correct despite the contentions of the Applicant, the Applicant does not seek to disturb the application of s.159ZR of the [Income Tax Assessment Act 1936 (Cth)].
RESPONDENT’S CONTENTIONS
The Respondent’s contentions, as set out in his Statement of Facts, Issues and Contentions, were:
[14] The amount of the Compensation Payment was calculated by reference to the number of hours of gratuitous domestic assistance that the Applicant provided to Mr Riley during the period 1 January 2002 to 12 April 2012 as determined by the Workers Compensation Commission.
[15] The Compensation Payment was accordingly made for personal services rendered by the Applicant.
[16] The Compensation Payment was neither calculated nor intended to reflect any loss of earning capacity on the part of the Applicant. There is no basis for the Applicant’s contention that the Compensation Payment was a receipt of a capital nature.
[17] The Compensation Payment has the character or is in the nature of ordinary income and is therefore assessable as ordinary income under s 6-5 of the ITAA 1997.
[18] The Applicant has not discharged her burden of proof in demonstrating that the private ruling should have been made differently.
THE TRIBUNAL’S REASONING AND CONCLUSIONS
There are a number of aspects to the Compensation Payment and the structure of the terms under which that payment was made that are relevant to consider in this decision.
First, it is clear that what is being given here is compensation. This is apparent from the heading to s 60AA as well as the reference in subs (1) to the fact that this payment is “in addition to any other compensation under this Act”. Further, subs (3) also makes it clear that the section is dealing with compensation as it refers to compensation not being payable under this section in a certain situation.
Secondly, the compensation appears to be for the cost of domestic assistance. Thus, although not precisely expressed in this fashion, if the injured worker was required to pay for the assistance that amount would be the cost of that assistance and that amount would be the amount of the compensation.
Thirdly, under the relevant legislation, in a case where the injured worker is not required to pay for the services in question (that is, gratuitous domestic assistance is provided), three consequences follow:
·the compensation is only payable if the care giver has “lost income or forgone employment” as a result of providing the assistance (s 60AA(3));
·the payment is made directly to the care giver (s 60AA(5)); and
·the compensation is calculated by reference to an hourly rate (up to a maximum of 35 hours per week) based on the amount estimated by the Australian Bureau of Statistics as the average weekly total earnings of all employees in NSW from time to time divided by 35 (cl 7.4 of the Guidelines).
The conclusion that one is inextricably drawn to as a result of these provisions is that the purpose of the compensation, in the case of gratuitous domestic help, is to ensure that the care giver is directly provided with a sufficient payment to cover her lost income. This is achieved through the mechanism of making a payment directly to the care giver only in circumstances where she has lost income or foregone employment as a result of providing that assistance. The calculation is made by reference to the number of hours of domestic assistance that the care giver is estimated to have provided.
Fourthly, and no doubt most controversially, the payments are made in respect of services provided by the care giver to the injured worker. This is, at the very least, implied from the provisions which specifically refer to the services provided and ensure that if no payment is received by the care giver from the injured worker for the services provided, the payment will be made directly to the care giver. Further, in making the determination, the WCC referred to and made its calculations based on the number of hours of assistance per week that was reasonably necessary as a result of Mr Riley’s injuries.
In other words, contrary to the views expressed by the Applicant, the Compensation Payment is a reasonable substitute for a payment which the care giver might have received from the injured worker if the care giver had not chosen to provide those services gratuitously.
Fifthly, it is difficult to accept the proposition that the Compensation Payment was made to compensate the Applicant for a loss of earning capacity. The facts quite clearly indicate that the Applicant did not suffer a loss of earning capacity. She did not suffer an injury that prevented her from being able to work. Rather, she elected to voluntarily resign from her full-time employment so as to enable her to provide domestic assistance to Mr Riley. On no basis can this be described as a loss of income earning capacity. It is clearly a loss of income but that is a very different thing and can lead to different tax consequences.
In this context the Tribunal also notes that there was no finding by the WCC that the Applicant had suffered a loss of earning capacity. Indeed the compensation payment, such as it was, was made specifically in respect of the time period which was the subject of the Applicant’s claim namely 1 January 2002 up to 12 April 2012. The WCC did not consider the actual or potential earning capacity for any future period and it is correct that it did not do so, as no such consideration is required to be given by section 60AA.
In this respect the Applicant, through her representatives, invited the Tribunal to make certain assumptions regarding whether the WCC could have determined future claims. There are two responses to such an invitation. First, the matter at hand is not about what might have happened – it is about what did happen and what did happen is that the WCC made certain findings in respect of the domestic assistance that the Applicant provided during a specific defined period and did not consider any claims into the future. Secondly, this is an objection in respect of a private ruling application and the Tribunal is confined by the scheme as set out in that private ruling. The Tribunal is not at liberty to create its own description of the scheme or make assumptions about the scheme or otherwise change the scheme: see Re Cooper Bros Holdings Pty Ltd trading as Triple R Waste Management and Commissioner of Taxation (2013) 59 AAR 165 esp. at [8].
Thus, based on the scheme presented the only conclusion that can reasonably be reached is that the compensation in question was not given in respect of a loss of earning capacity but rather in respect of a loss of income.
Sixthly, while the fact that the Compensation Payment was made and received as a lump sum can be suggestive of a capital payment, that fact alone does not mandate a conclusion that the payment is of a capital nature (see GP International Pipecoaters Pty Ltd v Commissioner of Taxation (1990) 170 CLR 124 at 138, Commissioner of Taxation v Cooling (1990) 22 FCR 42 at 51, Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 at 209-210.) It will very much depend on all the relevant circumstances and in this case the other relevant circumstances (for example, the purpose of the payment and the legislation pursuant to which it is made) are critical.
Finally, it is true that the payment was neither expected nor relied upon by the Applicant. However, that does not in any way appear to be the critical issue. Rather, the key question is what was the purpose of the payment? That purpose can be determined by reference to:
·the relevant scheme pursuant to which it is made (Federal Commissioner of Taxation v Slaven (1984) 1 FCR 11; Commissioner of Taxation v Inkster (1989) 24 FCR 53), and
·from all the circumstances surrounding the payment.
It is also clear from the decided case law that a lump sum payment representing lost earnings is assessable income (Inkster, Re Purdon and Federal Commissioner of Taxation (2001) 46 ATR 1161; Re Cooper and Federal Commissioner of Taxation (2003) 52 ATR 1199 and Re Applicant and Federal Commissioner of Taxation (2006) 63 ATR 1008).
Having regard to the case law, the facts referred to in the ruling application and specifically the manner in which the WCC determined the amount to be paid in compensation, the Tribunal is of the view that the Compensation Payment received is assessable as ordinary income under s 6-5 ITAA 1997.
DECISION
The decision under review is affirmed.
I certify that the preceding 33 (thirty-three) paragraphs are a true copy of the reasons for the decision herein of Professor R Deutsch, Deputy President ...................[sgd].....................................................
Associate
Dated 12 September 2014
Date of hearing 4 June 2014 Date final submissions received 23 June 2014 Counsel for the Applicant Mr L D Robison Representatives for the Applicant Leslie Nagy & Associates and Brown Wright Stein Lawyers
Counsel for the Respondent Mr R Jedrzejczyk Solicitor for the Respondent ATO Review and Dispute Resolution Group
Key Legal Topics
Areas of Law
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Taxation Law
Legal Concepts
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Compensation Payment
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Ordinary Income
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Assessment
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