Gupta and Commissioner of Taxation (Taxation)

[2016] AATA 914

Gupta and Commissioner of Taxation (Taxation) [2016] AATA 914 (16 November 2016)

Division	TAXATION & COMMERCIAL DIVISION
File Number(s)	2016/1389
Re	Pravin GUPTA
APPLICANT
And	Commissioner of Taxation
RESPONDENT

Decision

Tribunal	Mr P W Taylor SC, Senior Member
Date	16 November 2016
Place	Sydney

The decision under review is affirmed.

........................[sgd]................................................

Mr P W Taylor SC, Senior Member

Catchwords

TAXATION – assessable income – negotiated settlement awarding lump sum payment for arrears of workers’ compensation –– whether lump sum payment was assessable income – private tax ruling that weekly compensation payments were primarily compensation for loss of income – Workers Compensation Act 1987 (NSW) – compensation payments had character of “income support” not compensation “for” injury or incapacity – lump sum nature of payment not significant in characterisation – lump sum payments amounted to ordinary income - decision under review affirmed

Legislation

Income Tax Assessment Act 1997 (Cth) ss 6-5, 118-37(1)(b)
Interpretation Act 1987 (NSW) s 34 and 35(5)
Taxation Administration Act 1953 (Cth) Schedule 1 Division 359
Workers Compensation Act 1987 (NSW) ss 9; 36, 40, later amended by the Workers Compensation Legislation Amendment Act 2012 (NSW), sch 1.1 [3]

Cases

Abuothman and Commissioner of Taxation [2004] AATA 881
Allman and Federal Commissioner of Taxation [1998] AATA 451; (1998) 98 ATC 2142; (1998) 39 ATR 1081
Barnett and Federal Commissioner of Taxation [1999] AATA 950; (1999) 99 ATC 2444; (1999) 43 ATR 1221
Barry v Repatriation Commission (1993) 41 FCR 529; (1993) 29 ALD 670; (1993) 113 ALR 461
Case 9/2006 [2006] AATA 614
Case X21 90 ATC 239 (9 January 1990)
Case Y47 (1991) 22 ATR 3422; 91 ATC 433
Commissioner of Taxation v Slaven (1984) 1 FCR 11; (1984) 52 ALR 81
Commissioner of Taxation v Smith (1981) 147 CLR 578; 34 ALR 16
Cooper and Federal Commissioner of Taxation (2003) 52 ATR 1199
Coward and Federal Commissioner of Taxation (1999) 54 ALD 83; [1999] AATA 132
Edwards and Commissioner of Taxation [2016] AATA 781
Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540; [1953] ALR 17
Federal Commissioner of Taxation v Inkster (1989) 24 FCR 53; (1989) 89 ALR 137
Graham v Baker (1961) 106 CLR 340; [1962] ALR 331; [1961] HCA 48
Maher and Commissioner of Taxation [2005] AATA 272
McLennan and Commissioner for Superannuation (1990) 22 ALD 607
Purdon and Commissioner of Taxation [2001] AATA 188; 2001 ATC 2064; (2001) 46 ATR 1161
Samuel Parkes v Cocker Brothers Ltd (1929) 46 RPC 241
Tinkler v Federal Commissioner of Taxation (1978) 45 FLR 205; 22 ALR 654
Tinkler v Federal Commissioner of Taxation (1979) 29 ALR 663

Vargiemezis and Commissioner of Taxation [2008] AATA 1152

Secondary Materials

Australian Taxation Office Private Ruling 64919
Taxation Determination TD 93/58
Taxation Ruling No. IT 2193

Taxation Ruling TR 95/35

REASONS FOR DECISION

Mr P W Taylor SC, Senior Member

16 November 2016

1. In July 2010 Mr Gupta injured his knee at work.  He had 5 weeks off, and then returned to work in about mid August 2010.  But he resigned shortly afterwards (on 10 September 2010) because of on-going difficulties with his knee.  In late 2011 (possibly from September to December) he worked for 3 months with another employer.  Apart from that short period of employment he has not worked since the 2010 injury.

2. Mr Gupta started workers compensation proceedings in May 2013.  They eventually resulted in a negotiated settlement, which was formally expressed in consent orders made by the Workers Compensation Commission of New South Wales on 19 May 2015.  Their material effect was (i) to award Mr Gupta weekly compensation for a period of about 16 months after September 2010, and (ii) to determine that he had no ongoing compensation entitlement after January 2012. 

3. The actual terms of the May 2015 orders (in which Mr Gupta is referred to as “the Applicant”), in so far as they are presently relevant, were as follows:

   1.     Respondent pay the Applicant weekly compensation as follows:

   (a)  At $1346 per week from 11 September 2010 to 12 March 2011 pursuant to the former s. 36 of the 1987 Act;

   (b)  At $108.78 per week from 13 March 2011 to 27 January 2012 pursuant to the former s. 40 of the 1987 Act;

   2.     Award in favour of the Respondent in respect of the claim for weekly compensation from 28 January 2012 to date and continuing.

4. The practical effect of the orders for “weekly compensation” was to entitle Mr Gupta to receive a total of about $40,000, in respect of the 16 month period of agreed incapacity.  The composition of that total, and the income years to which the compensation entitlement relates, is set out in the following Table:

5. Mr Gupta’s former employer (perhaps, more accurately, its workers’ compensation insurer) insisted on deducting from the total agreed compensation an amount reflecting Mr Gupta’s anticipated income tax liability.  This insistence gave rise to a dispute, which Mr Gupta resolved to his own satisfaction by contacting the ATO, and receiving an assurance that the total compensation amount was not assessable income.  Mr Gupta says he was further informed that, if the insurer did not accept that position, he could himself apply for a private tax ruling.

6. The insurer did not accept that the agreed compensation amounts were not taxable, and deducted about $5,304 from the total amount when it actually paid Mr Gupta - on 17 July 2015.  Four days later Mr Gupta applied for a private tax ruling.  The Commissioner’s 21 August 2015 ruling rejected his contention that the settlement amount was not assessable income.  The Commissioner considered that the weekly compensation payments provided for in the 19 May 2015 orders were primarily compensation for loss of income.  As such they were “ordinary income” for the purposes of the Income Tax Assessment Act 1997 (“ITAA 1997”) s 6-5.

7. The Commissioner adhered to that position in the 4 March 2016 objection decision that is the subject of Mr Gupta’s review application to this Tribunal.

   Mr Gupta’s contention

8. Mr Gupta’s primary contention was that his workers compensation settlement amount was compensation for a workplace injury, was not a substitute for “lost earnings” and consequently did not constitute “ordinary income” to which ITAA 1997 s 6-5 applied.  He further contended, and the Commissioner agreed, that it did not constitute “statutory income” - because of the exemption contained in ITAA 1997 s 118-37(1)(b).

9. Mr Gupta said his contention about the characterisation of his compensation entitlement under the May 2015 order was supported by (i) Taxation Ruling No IT 2193, (ii) Taxation Ruling TR 95/35 (relating to ITAA 1997 s 118-37(1)(b)) and (iii) by numerous Private Rulings (under the Taxation Administration Act 1953, Schedule 1 Division 359). In particular he agreed that the substance of his contention was encapsulated by the following passage from Private Ruling 64919. (That ruling concerned a lump sum compensation payment made under a deed of release that specified the payment was for pain and suffering and loss of income earning capacity.)

   A compensation amount generally bears the character of that which it is designed to replace.  If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income.

   Taxation Ruling IT 2193 deals with the issue of compensation of the loss of earning capacity.  Although the discussion is in the context of compensation for motor vehicle accidents, the discussion is relevant to other types of compensation payments.

   IT 2193 makes it clear that compensation for loss of earning capacity will not lose its character as a capital receipt simply because the amount of compensation is calculated by reference to the amount of income you would have earned.

   Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts.  However, no component of the amount received by you was received to compensate for loss of income.

   In your case, you have received compensation for the loss of a capital asset, that is the capacity to earn income and for pain and suffering as a result of your service … The compensation is a capital receipt and is not ordinary income.

   Accordingly, the lump sum payment is not ordinary income and is therefore not assessable under section 6-5 of the ITAA 1997.

10. The phrase I have underlined in the preceding passage may, in the absence of specific information about any statutory compensation entitlement provisions, be the key to the conclusion reached in the particular ruling.  It suggests that the ruling may have depended on the terms of the particular deed of release and, in particular, accepted the deed’s agreed stipulation that the payment was for “loss of earning capacity” rather than lost earnings.  Although there was corresponding stipulation in the 19 May 2015 consent determination, Mr Gupta nevertheless emphasised that his entitlement payment was “for his injury”.  He pointed out that his entitlement was determined years after his employment had ended, and was not in relation to any work he had performed.  He claimed the agreed compensation was in “reality” for loss of capacity, and was not within the concept of “ordinary” income.  Mr Gupta added to that argument by pointing out that he had in fact received a “one-off lump sum”.  He said that in many of the “private rulings” he cited and relied upon, there was an apparent consistency in regarding “one-off lump sum” payments as a capital receipt, and not assessable income.

11. The various Private Rulings to which Mr Gupta referred can be read as lending some support to his arguments. But the reality is that those rulings provide no sound basis from which to make a determinative characterisation of his particular payment entitlement under the 19 May 2015 consent determination. There are two main reasons why that is the case. The first reason is that the Private Rulings typically do not reveal the full circumstances of the claims, agreements and payments involved. (A potentially critical lack of information, in many cases, is the absence of reference to the specific legislative compensation provisions that applied to the taxpayer.) The second is that the Private Rulings are in no sense authoritative (other than for the parties to which the rulings “apply” for the purposes of the Taxation Administration Act 1953). They are useful in illustrating the way in which the Commissioner has applied the relevant legislation and authoritative case law. But that illustration itself points to the need to pay primary regard to the legislation and case law, and to avoid findings being made in reliance on beguiling analogies and apparent (but typically not verifiable) similarities.

    The potential difficulty of the income / capital distinction

12. In a different context (that of distinguishing between “invention” and “workshop improvement” for the purpose patent law) Lord Tomlin long ago colourfully alluded to the difficulty of drawing distinctions at the limits of the connotations of otherwise ordinary and well understood, concepts.  In Samuel Parkes v Cocker Brothers Ltd (1929) 46 RPC 241 at 248 His Lordship said “Day is day, and night is night, but who shall tell where day ends or night begins”. His Lordship’s statement, though somewhat banal, was a preface to the useful observation that, when such a categorising distinction has to be drawn, it may rest on the most subtle of distinctions and the merest scintilla of difference. (In the most difficult of cases that possibility typically becomes a probability.)

13. At the outset of any of characterisation task its purpose, and the terms of any relevant statutory context, must be kept firmly in mind.  That is why, for example, under a particular statutory definition, workers compensation payments may constitute “income”, even if they are capital in nature:  see eg Barry v Repatriation Commission (1993) 41 FCR 529; (1993) 29 ALD 670; (1993) 113 ALR 461 (referring to the Veterans’ Entitlements Act 1986 (Cth) s 35). It is also explains why the fact that workers compensation payments are usually not “taxable wages” for the purposes of payroll tax legislation, is uninformative about their potential characterisation as “income” for the purposes of ITAA 1997.

14. Where there is no relevantly determinative statutory definition, different minds may reach opposite conclusions about the “income” character of contentious payments, because they disagree on the comparative significance of particular circumstances, rather than on the applicable basic principles.  That is illustrated by the majority (3 to 2) decision of the High Court in In Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540; [1953] ALR 17. In that case the High Court majority held that a former employer’s voluntary “make-up” payments, which partly bridged the “gap” between a serviceman’s military pay and his pre-enlistment civilian wage, formed part of the serviceman’s assessable income. Dixon CJ and Williams J characterised the payments as assessable income because they were periodical payments “incidental” to the serviceman’s AIF employment, intended to be paid to him, and relied on by him, for his regular expenditure: see 86 CLR at 556-7. For his part Fullagar J (who perhaps held similar views to those alluded to in paragraph 12 above) declared that he had not regarded the case as “by any means free from difficulty”: see 86 CLR at 563. But in coming to the same conclusion as the Chief Justice, His Honour attached significance to the regularity of the payments. He then regarded as decisive the fact that “the expressed object and the actual effect of the payments made was to make an addition to the earnings, the undoubted income, of the respondent.” His Honour then said of the payment total (at 86 CLR 568):

    it is intended to be, and is in fact, a substitute for - the equivalent pro tanto of - the salary or wages which would have been earned and paid if the enlistment had not taken place.  As such, it must be income, even though it is paid voluntarily and there is not even a moral obligation to continue making the payments.  It acquires the character of that for which it is substituted and that to which it is added.

15. Dixon’s case was, of course, rather unusual - because it did not involve any kind of injury or actual “loss of capacity”.  But even where the underlying reason for the contentious payments is a “loss of capacity”, they may still be properly characterised as ordinary income.  That generality is reflected in the decision in Commissioner of Taxation v Smith (1981) 147 CLR 578; 34 ALR 16. In that case the High Court held that disability insurance premiums were deductible expenses, and that the policy benefits were assessable as ordinary income. One argument that had been advanced by the taxpayer was that the policy benefits were properly to be characterised as compensation for the loss of income earning capacity, and thus a capital receipt that was not income. But the High Court did not regard the nature of the insurance contract as a determinative consideration in the characterisation of the payments made under the policy. This was so, even though the High Court accepted the basic proposition that the nature of the insurance contract was to provide an indemnity against the contingency of the insured’s loss (or impairment) of a capital asset (the capacity to earn income). The joint judgment of Gibbs CJ, Stephen, Mason and Wilson JJ said this, in response to the “basic proposition” argument:-

    … So much may be conceded, as also the proposition that capacity or ability to earn is a capital asset.  But, with respect, these conclusions do not carry the taxpayer far enough to establish the contrary of the Commissioner's assertion that the moneys paid under the policy were paid in substitution for income and therefore take the place of a revenue receipt.  If the ability to earn is the tree, and income the fruit thereof, a policy of insurance against impairment of the fruit-bearing capacity of the tree may well take the form of providing the fruit until such time as the tree recovers its proper role.  The degree of correspondence, if any, between the moneys payable under the policy and the actual pecuniary loss of revenue suffered by the insured is a relevant factor, but it is not necessary to look for an indemnity measured with any precision against the loss. 

16. In Smith the High Court concluded that the policy benefit was assessable as income because “the purpose of the policy is to diminish the adverse economic consequences of injury by accident [and] to provide a monthly indemnity against the income loss arising from the inability to earn” (147 CLR at 584).

    Taxation Ruling No IT 2193

17. Mr Gupta placed significant reliance on this ruling - “IT 2193”.  In particular, he went so far as to suggest that it rendered irrelevant any reliance on previous case law authorities - including the decision in Dixon.  IT 2193 was published in September 1985, following the decision of the Federal Court of Australia in Commissioner of Taxation v Slaven (1984) 1 FCR 11; (1984) 52 ALR 81. In that case Ms Slaven had been off work for about nine months as a result of injuries suffered in a motor vehicle accident. She had received five, not regularly timed, compensation payments under the relevant Victorian motor vehicle accident legislation - the Motor Accidents Act 1973 “VicMAA”). At the time relevant to Ms Slaven’s claim, the VicMAA provisions had the following features:-

    (a)various provisions typically described the statutory entitlements as “compensation for deprivation or impairment of earning capacity”;

    (b)the timing of payments was discretionary, rather than for any regular or specified periods; and

    (c)the compensation amount payable depended on (i) the discretionary assessment of a “Motor Accidents Board”, (ii) the nature, extent and significance of the injury, (iii) the injured person’s likely work or occupation, and (iv) the person’s actual and likely earnings.

18. The Federal Court held that the VicMAA compensation payments were not part of Ms Slaven’s “ordinary income”.  In so doing the Federal Court said that the categorisation of the payments depended on:-

    (a)the terms of the statutory provisions under which they were made - “a powerful, though not conclusive, aid to the determination”: (at 1 FCR 22)

    (b)the ordinary character of earning capacity as a capital asset: (at 1 FCR 21)

    (c)the task involved in determining the compensation amount and, in particular, whether it involved a mere assessment of lost earnings: (at 1 FCR 21).

19. There were four reasons why the Federal Court regarded the VicMAA provisions referring to compensation for “deprivation or impairment of earning capacity” as powerful considerations informing the proper characterisation of the payments.  First, the provisions had been specifically amended since the earlier (first instance) decision in Tinkler v Federal Commissioner of Taxation (1978) 22 ALR 654 - see paragraph 23 below). Secondly, the amendments adopted language that had intentionally preferred “loss of earning capacity” to “loss of income” as the relevant qualification criterion, and thereby recognised a well established conceptual distinction: see Graham v Baker (1961) 106 CLR 340 at 346; [1962] ALR 331. Thirdly, the language of the apparently critical provisions (VicMAA ss 25(1), 25(4), 25(5) & 29) very explicitly described the statutory entitlement as an amount that “will adequately compensate … for the deprivation or impairment of earning capacity”: see 1 FCR at 18 & 20. Fourthly, the relevant extrinsic material (ie the parliamentary second reading speeches) made it “plain beyond argument that the principal problem which the 1979 Act was intended to overcome was the attraction of income tax to benefits paid under the Act”: see 1 FCR at 20.

1. In addition to those aspects of its reasoning, the Full Court in Slaven recognised the significance of the amended statutory provision that conditionally limited the common law right of action for damages for loss of earning capacity: VicMAA s 79. The Full Court stated its view of the significance of that limitation in the following terms (at 1 FCR 22):-

   Under s. 79 of the Act as amended an injured person's right to recover damages at common law in respect of the deprivation or impairment of his earning capacity arising by reason of the relevant injury is taken away if he is entitled to make a claim under s. 25 in respect of that deprivation or impairment of earning capacity but does not make such claim. As damages for personal injuries at common law (including a component of compensation for loss of earning capacity) are not assessable income under the Assessment Act it would be odd if different revenue consequences were attracted to payments made under the Act as amended for loss of the same asset and, more particularly, as the injured person who recovers damages at common law is liable to repay to the Board the amount paid by it to him.

2. IT 2193 noted that some of the typical VicMAA statutory compensation provisions, specifically those providing for assessment by a statutory board, were reflected in similar motor accident legislation in both Tasmania and the Northern Territory. The Northern Territory legislation (ie the Motor Accidents (Compensation) Act 1979 (NT) expressed its compensation entitlement in similar terms to the VicMAA provisions: see eg. s 13. Recognising that similarity, IT 2193 noted that compensation payments made under the Northern Territory legislation would be covered by the Slaven decision, and would not be assessable as ordinary income.  On the other hand, payments made under the Tasmanian legislation (the Motor Accidents (Compensation and Liabilities) Act 1973 (Tas) (which obliged the “Board” to make payments (described merely as “benefits”) to a person who suffered an injury as a result of the use of a motor vehicle - see s 23) would be covered by the earlier decision in Tinkler v Commissioner of Taxation.  Those payments would be assessable as ordinary income.  Finally, IT 2193 noted that in most Australian States and Territories, motor vehicle accident compensation was subject to common law principles.  Compensation payments made in those jurisdictions would be assessable, depending on “the terms of the decision governing the payments”. 

   Tinkler and Inkster

3. The Commissioner’s substantive reasoning in the 4 March 2016 objection decision relied on statements in Taxation Determination TD 93/58.  That determination outlines the circumstances under which the receipt of a lump sum compensation or settlement amount is regarded as assessable as ordinary income.  However the outline is expressed with considerable generality.  The determination states that where the compensation payment is for loss of income, the amount is assessable as ordinary income.  Where a portion of a lump sum payment is identifiable (including as a result of an express or implied agreement between the parties) as income, that portion of the payment will be assessable.  Both of these statements rather beg the critical questions - (i) in what circumstances will ‘”agreement” be implied, (ii) in what circumstances will the parties agreement be determinative in the characterisation, and (iii) in the absence of relevant agreement, what considerations will determine that “the compensation payment is for loss of income”.  In anticipation of these kinds of questions, the Commissioner’s reasoning in the objection decision, and in the present proceedings, relied on the decisions of the Federal Court in Tinkler v Federal Commissioner of Taxation (1979) 29 ALR 663 and Federal Commissioner of Taxation v Inkster (1989) 24 FCR 53; (1989) 89 ALR 137. The Commissioner also relied on a later decision of this Tribunal: see Case Y47 (1991) 22 ATR 3422; 91 ATC 433.

4. I referred earlier (in paragraph 19) to the first instance decision in Tinkler v Federal Commissioner of Taxation (1978) 45 FLR 205; 22 ALR 654. That was a case where the total amount of 22 payments made under (the pre Slaven version of) VicMAA s 25 was held to be assessable income.  At first instance the Supreme Court of Victoria held that each payment effected the discharge of a separate liability in respect of a loss of income for the particular period of injury incapacity.  The Court found that the VicMAA sub-s 25(1) payment entitlement was to an amount “in respect of the loss of that income”:

   … 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 ss 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.

5. Ms Tinkler’s subsequent appeal to the Full Court of the Federal Court of Australia was unsuccessful:  see Tinkler v Federal Commissioner of Taxation (1979) 29 ALR 663. Brennan J said (at 29 ALR 666-7) that the regularity and purpose of the payments “combine to establish the income character of the amounts paid”. Deane and Fisher JJ accepted the conceptual distinction between the character of a payment and the manner of its calculation. Their Honours postulated (at 29 ALR 672) that the method of calculation or quantification “may provide a quite misleading guide to the character of the payment”. But their Honours went on to dismiss the relevance of that possibility where:-

   … as in the present case, the method of calculation comprises an integral part of the provisions under which the entitlement arises, it can legitimately be regarded as a relevant factor in determining the character of the payment.  In so far as the method of calculation is so regarded in the present case, it supports the view that payments under both s 25(1) and s 25(2) are in substitution, pro tanto, for income which could otherwise have been earned.

6. The decision in Federal Commissioner of Taxation v Inkster (1989) 24 FCR 53 followed 10 years after the decision in Tinkler v Commissioner of Taxation (1979) 29 ALR 663, five years after the decision in Slaven, and four years after the publication of IT 2193. It concerned a taxpayer who, after retiring from the workforce, had been diagnosed with asbestosis. His causative dust exposure had occurred some 30 years earlier. Those circumstances entitled him to regular payments under the Workers’ Compensation and Assistance Act 1981 (WA). The payments were paid initially in a single composite “catch up” payment of past entitlements. Subsequently he received regular fortnightly payments: (see 24 FCR 53 at 59). All of the payments were held to form part of his assessable income. This was so despite (i) his retirement, (ii) his consequential absence of ordinary income from personal exertion, and (iii) the fact that the statutory compensation entitlement depended on the occurrence of a relevant “disability” and operated from “the date of incapacity resulting from the disability”: (24 FCR 53 at 61).

7. Pincus J referred to the “basic rule” (illustrated in Dixon and applied in Tinkler) that payments to compensate for lost income are themselves income. But His Honour noted that the reasoning in, and the analogy provided by, those cases were of limited force in Mr Inkster’s circumstances. This was because he had no relevant income loss during his retirement, and the statutory payments were not calculated by reference to any amount of his actual earnings: see 24 FCR 53 at 55. However, Pincus J regarded the decision in Commissioner of Taxation v Smith (1981) 147 CLR 578 (see paragraph 15 above) as supporting the idea that “a payment made to compensate for lost capacity or ability may be income, at least if there is some correspondence between the amount of the payment and income lost or likely to have been lost”: (24 FCR 53 at 55).

8. Pincus J then went on to note that the relevant Workers’ Compensation and Assistance Act 1981 (WA) provisions (ie., ss 5, 18, 21, 34 & Schedule 1 cl 2) made compensation entitlement dependent on the person being “disabled from earning full wages”. They also provided that the entitlement applied from “the date of incapacity”. (These provisions therefore tended to point to “loss of capacity” as the operative pre-condition.) But they also quantified the payment amount by reference to the disabled person’s pre-disability earnings, and the extent to which they exceeded any actual current earnings. His Honour thought that, against this statutory background, Mr Inkster’s personal circumstances as a retiree, and the reasoning in Smith, it was a false and unhelpful dichotomy to postulate a distinction between loss of income and loss of earning capacity as the determinant of the tax status of the statutory payments. Rather, after taking into account the specific statutory wording, His Honour said (24 FCR 53 at 57):

   Reading the relevant provisions together, it seems to me that one cannot accurately say that the Compensation Act describes the compensation to which the respondent was held to be entitled as being for loss of earning capacity.  It is true that, not only in this particular case, but generally, compensation may be payable under the statute in amounts not truly representative of lost earnings.  However, the provisions in Sch 1 (in particular cll 7 and 11 referred to above), seem on their face to be designed to compensate for lost earnings: the idea appears to be that the worker should be paid the difference between what he would have got from doing the work which brought about his disability, and the lesser sum he is in fact able to earn.  The fact that cl 7 of Sch 1 makes the entitlement to compensation dependent upon the existence of “incapacity for work” does not seem to me, in this respect, to take the case into the Slaven class.

9. Lee J (with whom Gummow J agreed) also noted the statutory provisions limiting the statutory entitlement to the circumstance of a person being “disabled from earning full wages”. His Honour considered that this criterion enquired exclusively about a lack of capacity, irrespective of the person’s actual wages: (24 FCR 53 at 61 & 63 to 68). Lee J similarly noted that the compensation amount was determined by reference to the person’s type of employment at the time of the causative exposure, irrespective of the person’s circumstances when the disability arose: (at 24 FCR 62). Lee J then proceeded to explain the precise basis on which he concluded that Mr Inkster’s payments were, nevertheless, part of his assessable income. The first step in the analysis was to recognise that “loss of capacity” was at the heart of Mr Inkster’s claim - because

   No loss of income was established or sought to be established nor inferred from the facts. The calculation proceeded as if the respondent had an entitlement to an assessment for compensation which represented the extent of the impairment of his ability to gain income by personal exertion.  As such it was an assessment of the loss of capacity to earn income and not a calculation of a payment to serve as a contribution to offset an actual loss of income.  In that regard it was directed more to the matters with which Sch 2 of the Compensation Act was concerned, namely calculation of lump sum payments for compensation for the impairment of a worker's ability to earning (sic) income by reason of bodily injuries.

   The fact that the amount of a compensation payment is a notional calculation will not prevent the payment being of a revenue nature if it is designed as a contribution to diminish the adverse economic consequences of a disability, that is to say the income loss caused by it.

10. His Honour then referred to Smith’s case, and its finding that the character of the insurance payment in that case was established by the fact that the policy entitlement arose “when a loss of income occurred and the purpose of the replacing that lost income was shown to be inherent in the payments”: (24 FCR 53 at 71). Lee J then observed that because Mr Inkster had not suffered any loss of income:

    For this reason any one payment may have had the character of capital rather than revenue: see FCT v Slaven at 23. This was the conclusion of the tribunal and in my opinion the tribunal did not err in so finding.

11. Having thus concluded that any of the individual payments, when taken in isolation, might “for this reason” be characterised as a capital payment, Lee J then continued on to explain why that characterisation could not be made.  This was because

    … there were surrounding circumstances more than capable of characterising the periodical payments as income.  Although the payments had their origins in capital, they were not in the nature of payments by instalments of a fixed sum due and owing.  The payments were intended to serve the purpose of providing a regular income supplement to the respondent notwithstanding that the payments were generated by calculations which related to capital considerations.  Although it is the character of the receipt in the hands of the taxpayer as recipient that must be determined (FCT v Slaven at 93), part of the consideration of that matter must involve consideration of the motive of the payer (Hayes v FCT (1956) 96 CLR 47 per Fullagar J at 55) and the part the receipt played in the payee's affairs.

    Although the respondent may not have relied upon the payments to meet his regular expenditures (FCT v Harris (1980) 30 ALR 10 per Bowen CJ at 15), the payments were calculated as weekly payments by reference to notional weekly earnings and were received fortnightly by the respondent over a significant period of time. The Compensation Act provided for the payments to be calculated as weekly payments and paid regularly. The calculation of such payments by reference to, and as part of, a weekly income and regular receipt thereof may be sufficient to attract the character of income to the payments: see FCT v Slaven at 92.

12. Then, after referring to Dixon’s case (see paragraph 14 above), Lee J expressed his final conclusion on characterisation in the following passage:-

    Periodicity of payment alone may not be determinative of the question of whether the payments are in the nature of income, but such a circumstance is important and additional circumstances may make it clear that the periodical payments do have such a character.  Although the payments made to the respondent were not in substitution for wages lost, the payments were intended to be a supplement to whatever income the respondent enjoyed and, furthermore, each payment as it was made was intended to operate as a weekly amelioration of any realisation of his impaired capacity to earn a weekly income: see Tinkler v FCT (1979) 29 ALR 663; 10 ATR 411 per Brennan J at 414.

    Post Inkster decisions

13. Since the 1989 decision in Inkster the characterisation of compensation payments under various statutory workers compensation regimes has been considered in a number of decided cases.  In McLennan and Commissioner for Superannuation (1990) 22 ALD 607 this Tribunal considered section 78 of the Superannuation Act 1976 (Cth). That section provided for payment of a partial invalidity pension to a contributor whose annual salary decreased as a result of physical or mental incapacity. The applicant was partially incapacitated, had been transferred to duties at a lower classification, and was in receipt of compensation payments. The Tribunal held that the compensation payments could not be regarded as “salary or wages” (see [26]). That specific finding is not directly relevant to the dispute in the present proceedings. But part of the underlying reasoning is relevant. The Tribunal held (at [65]) that the compensation provisions in the Commonwealth Employees’ Rehabilitation and Compensation Act 1988 (see s 14, in particular) were relevantly indistinguishable from the statutory provisions considered in Inkster. On that basis, the Tribunal considered that the compensation payments were “income”, but not “salary or wages” for the purposes of the Superannuation Act.

14. In Case Y47 (1991) 22 ATR 3422; 91 ATC 433 the Tribunal reached a conclusion similar to the decision in Inkster in relation to the Victorian Accident Compensation Act 1985 (“VACA”).  That decision dealt with a taxpayer’s partial redemption of weekly workers’ compensation entitlements.  The taxpayer claimed that the reduced weekly compensation payments he received after the partial redemption were properly characterised as payments for lost earning capacity and that, consequently, his weekly payments were no longer assessable as ordinary income. 

15. The Tribunal noted that the VACA amended a number of previous legislative provisions, including the Workers Compensation Act 1958 (Vic). In particular it had removed the common law right to damages in relation to employment injuries. Nevertheless the Tribunal held that the continuing weekly compensation entitlement payments continued to from part of the taxpayer’s ordinary income. The Tribunal however noted, for the purpose of dismissing, the argument on which the taxpayer had relied. The relevant passage of the Tribunal’s reasons was in the following terms:-

    5. The argument runs something like this… the applicant says … that as at 1 August 1986, the character of his payments changed because it was found that his total incapacity was judicially considered and decided that his total incapacity had become permanent and as such, he suffered a permanent incapacity for employment.'

    6. It seems that the term ``permanent'' is thought to be the philosopher's stone which turns income into capital. Thus, it is submitted that until the applicant's incapacity had been judicially determined to be ``permanent'', his sole entitlement under the Act is to weekly payments of compensation, and hence ``income''. The metamorphosis to ``capital'' is said to be the consequence of a judicial determination under the Act that the incapacity — whether partial or total — is permanent. Henceforth, so it is submitted, the continuing weekly payments have become an affair of capital because they are no longer paid in substitution for lost earnings, but for lost earning capacity; see Paff v Speed (1960-1961) 105 CLR 549, Groves v United Pacific Transport Pty Ltd [1965] QdR 62 at 65, Tinkler v FC of T 79 ATC 4641, Cullen v Trappell 80 ATC 4185; (1979-1980) 146 CLR 1 and FC of T v Slaven 84 ATC 4077.

    7. It is an ingenious argument, but it must fail. When both the structure of the Act and the character of the payments made pursuant to it are examined, the conclusion is inescapable — the weekly payments remain ``income'' as classically understood.

    8. Looking at the Act as a whole, it reeks of the structure of the earlier Victorian Workers' Compensation Act, legislation deemed to be remedial and designed to provide periodic payments in substitution of income lost, wholly or partially, as the result of a compensable injury or disease. The quantum of the weekly payments (and hence the lump sum in redemption) are/is calculated upon ``the worker's pre-injury average weekly earnings''. The amount of weekly payments under the Act is exclusively fixed to wages, and thus readily distinguishable from ``economic loss'' awarded at common law, where pre-accident earnings are merely one of the co-ordinates applied in arriving at general damages.

16. The impression (noted at the end of paragraph 0 above) about the effect of the compensation provisions in the Commonwealth Employees’ Rehabilitation and Compensation Act 1988 was confirmed in two later decisions of this Tribunal. The first of those was the decision in Coward and Federal Commissioner of Taxation (1999) 54 ALD 83; [1999] AATA 132. That decision involved compensation entitlements under the Compensation (Commonwealth Employees) Act 1971. The Act provided (in s 45) for “compensation” to be payable to an employee who was “totally incapacitated for work” (s 45(1)) “during the period of the incapacity” at a rate equivalent to at least the injured worker’s pre-injury average weekly earnings. The taxpayer had received regular compensation payments over a 13 year period preceding his 65^th birthday.   Matthews J (at AATA 132, [34]-[36]) considered that the compensation entitlement provisions in the 1971 Act were indistinguishable from the those considered in Inkster, and materially different from the VicMAA provisions considered in Slaven.  Her Honour also held that the question of periodicity that had been determinative in the reasoning of Lee & Gummow JJ in Slaven, referred to the essential character of the individual compensation entitlements, rather than to the circumstance of the actual payment.  In reaching this conclusion Matthews J relied on Case X21 90 ATC 239 (9 January 1990). That was another AAT decision, where Deputy President Gerber (prior to his similar decision in Case Y47 - see paragraph 33 above) had come to the same conclusion, and had also determined that, because the compensation entitlement was “directly related to the amount of earnings which the employee would have been entitled to receive if he had been earning it in the form of wages'’, the statutory compensation was assessable as ordinary income.  The fact that the compensation had been paid as a lump sum was irrelevant, because it was simply an aggregation of weekly payment entitlements, and the aggregated payment did not alter the inherent character of the periodic entitlements.  (I note that the decision in Case X21 90 ATC 239 was applied in the Tribunal’s later decision in Purdon - see paragraph 39 below.)

1. The second relevant Tribunal decision was that in Barnett and Federal Commissioner of Taxation [1999] AATA 950; (1999) 99 ATC 2444; (1999) 43 ATR 1221. Mr Barnett was a Commonwealth public servant who had received partial incapacity payments under the Compensation (Commonwealth Government Employees) Act 1971. About 19 years later he obtained a lump sum payment under the statutory provision that permitted the Commonwealth to redeem its liability to make “further” payments “of compensation in respect of an injury”. Under s 46 of that Act, the compensation liability was to make weekly payments “during the period of the incapacity”. The Tribunal reviewed the decision of President Matthews in Coward’s case, and in a reference to Slaven’s case, noted the “clear distinction between loss of earnings and loss of earning capacity”.  However, having noted that “clear distinction” Senior Member Block then went on to review various commentaries and decisions which expressed differing views as to whether compensation for injuries resulting in economic loss was properly characterised as compensation for loss of earnings, or compensation for loss of earning capacity.  In particular, Senior Member Block adverted to the suggestion that compensation for past economic loss could be characterised as compensation for “loss of earnings” but compensation for future economic loss was to be characterised as compensation for “loss of earning capacity”.  Senior Member Block noted the apparently contrary, but partly qualified, view expressed by the High Court in Graham v Baker [1961] HCA 48; (1961) 106 CLR 340 at 346 to 347:

   So far the matter has been discussed as if the right of a plaintiff whose earning capacity has been diminished by the defendant's negligence is concerned with two separate matters, i.e. loss of wages up to the time of trial and an estimated future loss because of his diminished earning capacity.  It is, we think, necessary to point out that this is not so. A plaintiff's right of action is complete at the time when his injuries are sustained and if it were possible in the ordinary course of things to obtain an assessment of his damages immediately it would be necessary to make an assessment of the probable economic loss which would result from his injuries.  But for at least two obvious reasons it has been found convenient to assess an injured plaintiff's loss by reference to the actual loss of wages which occurs up to the time of trial and which can be more or less precisely ascertained and then, having regard to the plaintiff's proved condition at the time of trial, to attempt some assessment of his future loss.  We mention this matter because it has been suggested that since an injured plaintiff is entitled to recover damages for the impairment of his earning capacity, the fact that a totally incapacitated plaintiff has, during the period of his incapacity, received his ordinary wages is not a matter to be taken into consideration.  To be more precise, however, an injured plaintiff recovers not merely because his earning capacity has been diminished but because the diminution of his earning capacity is or may be productive of financial loss.

2. Then after noting the discussion in Graham v Baker, and a commentator’s view that it dictated the result that all economic loss from injury should be characterised as a loss of capacity, Senior Member Block went on to doubt the validity of that proposition.  He cited the decision, and analysis, in both Smith and Inkster as providing good reason to doubt that the correct characterisation of compensation receipts could be arrived at by simply regarding all injury-related economic loss as a loss of earning capacity.

3. In the end result Senior Member Block came to the view, consistent with the reasoning in Coward’s case, that a lump sum payment that was purely the formulaic combination of a weekly compensation entitlement would likely be characterised as income for income tax purposes.  The Senior Member then went on to distinguish that possibility from a redemption payment which was not payable as a matter of right, and depended both as to amount and entitlement, on the exercise of a specific, and subjective, statutory discretion.  In those particular circumstances Senior Member Block considered that the particular legislative provisions pointed strongly to an inference that the redemption payment was properly to be characterised as a receipt of capital, rather than income.

4. The Tribunal’s decision in Purdon and Commissioner of Taxation [2001] AATA 188; 2001 ATC 2064; (2001) 46 ATR 1161 involved compensation payments made under the Safety, Rehabilitation and Compensation Act 1988 (Cth) ss 19 and 20. The latter provision authorised compensation payments to a worker whose injuries had caused their retirement. The compensation amount was determined by the combined effect of sections 19 and 20. The former section provided that compensation was payable “during each week … during which the employee is incapacitated”: The latter section required that the compensation amount payable to an eligible retiree was the net balance of their normal weekly earnings after deducting both (i) actual / available earnings, and (ii) any superannuation pension (including foregone superannuation contribution amounts). After contested proceedings Mr Purdon was awarded compensation, and subsequently received a consequential lump sum back payment covering the total of his weekly compensation entitlements in the four year period after his retirement. The Tribunal held that the lump sum payment relating to those weekly entitlements was assessable as income. The essential basis of the decision, which relied on the decision in Inkster, was that that the compensation payment amounts were determined by reference to normal weekly earnings.  After citing various passages from the judgments in Inkster, the Tribunal said:

   15.      To my mind the passages quoted above direct attention back to the precise wording of section 20 of the SRC Act and that particular Act, by its reference to section 19 and normal weekly earnings, makes it clear that the character of the payments are income based.

   16.      Although, to my mind, that is the effect of Inkster's case supra in this particular matter, a previous matter, namely Case X21 90 ATC 239 decided by Deputy President Gerber, is directly on point. After a review of the judgments in Inkster's case supra, the learned Deputy President said at p242:

   "I am therefore satisfied that the mechanics provided by the Act (the Compensation (Commonwealth Government Employees) Act 1971) for calculating compensation indicate that the compensation payable is directly related to the amount of earnings which the employee would have been entitled to receive if he had been earning it in the form of wages. Compensation is thus in substitution for earnings and is paid for loss of earnings and assessable under sec. 25(1)(a) of the Tax Act."[1]

   [1]I note that s 25(1)(a) of the Income Tax Assessment Act 1936 was to substantially the same effect as ITAA 1997 s 6-5.

5. In Abuothman and Commissioner of Taxation [2004] AATA 881, the taxpayer had received workers’ compensation payments (apparently under the relevant Western Australian legislation) totalling about $75,000 over an 18 month period, and then a further lump sum settlement amount of $38,000. The Tribunal, without a detailed discussion of the various legislative provisions, applied the decision in Inkster to conclude that the periodic workers’ compensation payments formed part of the taxpayer’s assessable income.  There were similar decisions of the Tribunal, although usually without a detailed consideration of the underlying statutory provisions in:

   (a)Maher and Commissioner of Taxation [2005] AATA 272 (This decision involved payments made under s 134 of the Safety, Rehabilitation and Compensation Act 1988 (Cth). The taxpayer unsuccessfully contended that payments made after he turned 65 were properly to be characterised as compensation for loss of earning capacity.)

   (b)Case 9/2006 [2006] AATA 614 (This was a case where, about two years after the injury-related termination of his employment, the taxpayer had been awarded “lump sum” compensation under the NSW Workers Compensation Act 1987, for two periods of partial incapacity. The Tribunal, substantially relying on the decision in Inkster, concluded that the compensation payments were assessable as part of the taxpayer’s ordinary income.)

   (c)Vargiemezis and Commissioner of Taxation [2008] AATA 1152 (This was a case where the taxpayer received payments as compensation for work-related incapacity - (i) in about January 2007 - a total of about $37,000 for past periods of incapacity, and (ii) after June 2007 - additional regular payments totalling $11,523. Again the Tribunal held (although without specific consideration of the relevant Victorian statutory provisions) that the payment of arrears of the statutory entitlements relating to periods of incapacity formed part of the taxpayer’s assessable income.)

6. The decision in Edwards and Commissioner of Taxation [2016] AATA 781 was another decision involving compensation payments under the Safety, Rehabilitation and Compensation Act 1988 (Cth). Mr Edwards had received partial incapacity payments over a six year period, from 2000 to 2006. In apparent accordance with the adjustment mechanism provided for in s 19(2) of the Act, Comcare’s payments during that period were a net weekly amount calculated by deducting from Mr Edwards “normal weekly earnings” an amount reflecting his potential post injury weekly earnings. Following a contested hearing, Mr Edwards succeeded in his contention that he had no such potential earnings and consequently no deduction should have been made. As a result of that success, in the 2015 tax year, he received a lump sum payment that made up for the previous deductions. That amount was held by this Tribunal to form part of Mr Edwards’ ordinary income. The Tribunal relied on the decision in Purdon to describe the compensation amounts as “directly referable to the amount of earnings” he would have received but for the injury.  The Tribunal opined that it was therefore “clear that the character of the payments is income based”.  Citing the later decision of the Tribunal in Cooper and Federal Commissioner of Taxation (2003) 52 ATR 1199, the Tribunal went on to observe that the fact the payment was a cumulated lump sum of the prior sequential deductions “does not alter its character”: see [2016] AATA 781 at [19]-[20].

7. That particular finding, that a single payment is not to be characterised as a “capital” receipt merely because it was a “one-off” payment, was consistent with the reasoning of Lee J in Inkster - see paragraphs 29 to 31 above.  It was also the view that had been taken in the earlier decisions in Case X21 (see paragraph 35 above), Allman and Federal Commissioner of Taxation [1998] AATA 451; (1998) 98 ATC 2142; (1998) 39 ATR 1081 (a case involving damages for wrongful dismissal); and Abuothan (see paragraph 40 above).  That view directly contradicts the reliance Mr Gupta sought to place on the contents of the Private Rulings to which he referred - see paragraph 10 above.

8. The various decisions in Slaven, Tinkler and Inkster, and the other decisions I have discussed above, suggest the relevance of the following propositions, in addition to the proposition expressed in the immediately preceding paragraph, in assessing the character of compensation payments for the purposes of ITAA 1997 s 6-5:-

   (a)the dichotomy between “loss of income” and “loss of earning capacity” is inherently uninformative in the characterisation of compensation payments relating to past periods of incapacity - see Graham v Baker (paragraph 36 above), Smith (paragraph 15 above) and Pincus J in Inkster (paragraph 27 above);

   (b)in cases involving compensation for injury, there is an unhelpful ambiguity in an enquiry about the “loss” for which the contentious payments “compensate” - because the “loss” is (i) conceptually a “loss of earning capacity” but, (ii) in relation to past periods, it is compensable only to the extent that it has resulted in a “loss of earnings” - (paragraph 36 above);

   (c)although general statements caution against the proposition that the quantification basis for any particular compensation payment “may” provide a misleading basis for its proper “characterisation”, the underlying nature of the entitlement, where it involves periodicity, and perhaps also periodicity of payment, may be taken into account in the characterisation, and may be determinative: see Inkster (at paragraphs 27 to 31 above) and Smith (at paragraph 15 above); and

   (d)where there is a statutory basis for the compensation entitlement, the statutory description of the entitlement’s nature, purpose and conditions are relevant to the characterisation of the payment, and potentially determinative of it:- see Slaven and IT 2193 (paragraphs 17 to 21 above).

   Workers Compensation Act provisions

9. I noted earlier (in paragraph 17 above) Mr Gupta’s submission that pre IT 2193 case law was irrelevant in the characterisation of his claim.  He also contended that later decisions (particularly Case 9/2006 [2006] AATA 614 - see paragraph 40(b) above) were of limited assistance, because they had not specifically addressed IT 2193. Neither of these submissions was well founded - for the reason indicated in paragraph 43(d) above.

10. The reference in the 19 May 2015 orders to “the 1987 Act” was to the Workers Compensation Act 1987 (New South Wales). The principally relevant provisions of that legislation (as in force at the time of Mr Gupta’s July 2010 injury) were sections 9, 36 and 40. Section 9 provided that an injured worker “shall receive compensation from the worker’s employer in accordance with this Act”. The operative provisions quantifying the compensation amount were set out in “Part 3 Compensation—benefits” and, more particularly in “Part 3 Division 2” which was entitled “Weekly compensation by way of income support”. Those headings formed part of “the 1987 Act”: see Interpretation Act 1987 (NSW) s 35. In addition, the headings of the individual sections, although not forming part of the Act, may be considered for the purpose of confirming the ordinary meaning of the particular provision, having regard to its context and underlying purpose: see Interpretation Act 1987 (NSW) s 34 and 35(5).

11. The principal provisions, which dealt respectively with total and partial incapacity, were in the following terms:-

    33   Weekly compensation during total or partial incapacity for work

    If total or partial incapacity for work results from an injury, the compensation payable by the employer under this Act to the injured worker shall include a weekly payment during the incapacity.

    34   Definition of first 26 weeks of incapacity

    (1) For the purposes of this Division, the first 26 weeks of incapacity, in relation to a worker, is the period of incapacity for work (whether total or partial, or both) not exceeding 26 weeks after the worker becomes entitled to weekly payments of compensation in respect of the incapacity.

    (2)  A reference in subsection (1) to a period of incapacity for work includes, in the case of separate periods of incapacity resulting from the same injury, a reference to the aggregate of those periods.

    (3) For the avoidance of doubt, the first 26 weeks of incapacity does not include any period during which there is no weekly compensation payable in accordance with this Division, whether because of the operation of section 40 or otherwise.

    …

    36   Weekly payment during total incapacity—first 26 weeks

    (1)  The weekly payment of compensation to an injured worker in respect of any period of total incapacity for work during the first 26 weeks of incapacity shall be the amount of the worker’s current weekly wage rate.

    (2) In this section: 

    current weekly wage rate, in relation to a worker, means the worker’s current weekly wage rate determined from time to time in accordance with section 42.

    …

    40   Weekly payments during partial incapacity—general

    (1)Entitlement

    The weekly payment of compensation to an injured worker in respect of any period of partial incapacity for work is to be an amount not exceeding the reduction in the worker’s weekly earnings, but is to bear such relation to the amount of that reduction as may appear proper in the circumstances of the case.

    (2)Calculation of reduction in earnings of worker—general

    The reduction in the worker’s weekly earnings is (except as provided by this section) the difference between:

    (a)  the weekly amount which the worker would probably have been earning as a worker but for the injury and had the worker continued to be employed in the same or some comparable employment (but not exceeding $1,000), and

    (b)  the average weekly amount that the worker is earning, or would be able to earn in some suitable employment, from time to time after the injury (but not exceeding $1,000).

    (2A) Calculation of reduction in earnings of worker—workers rejecting suitable employment

    If the worker has unreasonably rejected suitable employment, the reduction in the worker’s weekly earnings is the difference between:

    (a)  the current weekly wage rate for the worker’s pre-injury employment (but not exceeding $1,000), and

    (b)  the current weekly wage rate for some suitable employment for the worker from time to time after the injury (but not exceeding $1,000).

    (2B)  For the purposes of subsection (2A), a worker unreasonably rejects suitable employment if:

    (a)  a period of 28 days has elapsed since the worker was offered suitable employment by any person and the worker has unreasonably refused or not accepted the offer (whether or not the offer was available during the whole of that period), or

    (b)  the worker obtains suitable employment with any person but subsequently unreasonably discontinues that employment.

    (3) Ability to earn in suitable employment

    The determination of the amount that an injured worker would be able to earn in some suitable employment is subject to the following:

    (a)  the determination is to be based on the worker’s ability to earn in the general labour market reasonably accessible to the worker,

    (b)  the determination is to be made having regard to suitable employment for the worker within the meaning of section 43A.

    (4) Rehabilitation—unemployed (or not fully employed) workers

    An injured worker who duly undertakes rehabilitation training under section 38 is not to be disadvantaged under this section by any increase in the amount that the worker would be able to earn merely because of that training, unless the worker unreasonably refuses an offer of suitable employment for which the worker has been trained. The Commission may determine any dispute about the operation of this subsection.

    (5) Maximum rate of compensation

    The weekly payment of compensation to an injured worker in respect of any period of partial incapacity for work is not to exceed the weekly payment that would be payable to the worker if it were a period of total incapacity for work.

    (6) Adjustment of compensation—indexation

    If it appears proper in the circumstances of the case, the weekly payment of compensation to an injured worker in respect of any period of partial incapacity for work may (subject to subsection (5)) be adjusted to take account of any adjustment because of the operation of Division 6 in the weekly payment that would be payable to the worker if it were a period of total incapacity for work.

    (7) Adjustment of maximum amounts—application

    If an amount mentioned in subsection (2):

    (a)  is adjusted by the operation of Division 6, or

    (b)  is adjusted by an amendment of this section,

    the weekly payment of compensation applicable to a worker injured before the date on which the adjustment takes effect is, for any period of partial incapacity for work occurring on and after that date, to be determined by reference to that amount as so adjusted. Such an adjustment does not apply to the extent that the liability to make weekly payments of compensation in respect of any such period of incapacity has been commuted.

    (8) Exemption

    This section does not apply to any period of partial incapacity for work during which the worker is compensated under this Act as if the worker’s incapacity for work were total.

1. Other relevant provisions of “the 1987 Act”:

   (a)provided criteria for determining the injured person’s pre-incapacity “current weekly wage”:  (Part 3 Division 2 ss 42 - 43);

   (b)provided for separate compensation for;

   (i)injury related expenses:  (Part 3 Division 3 ss 59 - 64A);

   (ii)permanent impairment:  (Part 3 Division 4 ss 65 - 73);

   (iii)property damage:  (Part 3 Division 5 ss 74 - 78);

   (c)required payment of compensation at either the person’s usual wage payment times, at least fortnightly, or at agreed intervals:  (Part 3 Division 7 ss 83 - 87);

   (d)required a reduction of the compensation amount where the person was in receipt of certain categories of additional or alternative compensation:  (Part 3 Division 8 ss 87A-C);

   (e)permitted the conditional “commutation” of entitlement to future compensation benefits:  (Part 3 Division 9 ss 87D-K);

   (f)specifically preserved an injured person’s right to claim common law damages (although it also limited the scope of the damages that could be recovered) and required repayment of compensation where such damages were recovered:  (Part 5 Division 2 ss 151, 151A; Part 5 Division 3 ss151E-T); and

   (g)drew a distinction between damages for (i) “past economic loss due to loss of earnings”, and (ii) “damages for future economic loss”, and apparently limited common law compensation to damages for “past and future loss of earnings”:  (Part 5 Division 3 s 151Gs 87A-C).

   Conclusion

2. The relevant provisions of “the 1987 Act” (referred to in the 19 May 2015 consent orders) unarguably establish that the compensation entitlements for which the Act provided were “in respect of a period of incapacity” rather than “for” the loss of capacity itself.  This difference in statutory language is a critical point of distinction between the present matter and the decision in Slaven.  Numerous “post Slaven” decisions have consistently applied similar legislative wording (ie wording which makes the entitlement merely contingent on the fact of incapacity) as leading to the proper characterisation of such payments as “ordinary income”.

3. Furthermore “the 1987 Act”, in dealing with the compensation entitlements in sections 36 and 40 describes them, in the relevant sub-heading (which forms part of the Act), as “weekly compensation by way of income support”. Under that description, the payments are not so much compensation “for” any injury or incapacity, as “income support” during the period of that incapacity. Payments so characterised are qualitatively analogous to the payments made to Mr Dixon (see paragraph 14 above) and properly characterised as ordinary income.

4. The actual compensation entitlement under “the 1987 Act” was to weekly payments, and the payments were limited in their amount (at least initially) by the amount of the recipient’s weekly income (ie., their “normal” pre-incapacity income, and their actual, or apparently achievable, income during incapacity).  Both the periodicity of the entitlement, and the basis of quantification of the payment, pointed to the proper characterisation of the payment as income.

5. The terms of the 19 May 2015 consent orders reflect an explicit agreement, by Mr Gupta, that his compensation entitlement was to weekly payments, and under the relevant specific provisions of “the 1987 Act”.  Those circumstances require the conclusion that the parties to the consent orders were, as a matter of contractual interpretation, at least implicitly agreeing that the payment had the character of “income”.

6. The fact that the payment was made in 2015, and was a “one-off” payment, is of no material significance in the proper characterisation of the payment for the purposes of ITAA 1997 - see paragraph 35 above.

   Decision

7. Having regard to the considerations and reasons I have set out above, the decision under review is affirmed.

I certify that the preceding 53 (fifty-three) paragraphs are a true copy of the reasons for the decision herein of Mr P W Taylor SC, Senior Member

..................................[sgd]......................................

Associate

Dated 16 November 2016

Date(s) of hearing	26 October & 3 November 2016
Applicant	In person
Solicitors for the Respondent	Australian Taxation Office, Review and Dispute Resolution