Hayes v GIO

CERTIFICATE OF DETERMINATION OF MERIT REVIEWER
CITATION:	Hayes v GIO [2022] NSWPICMR 17
CLAIMANT:	Graeme Hayes
INSURER:	GIO
MERIT REVIEWER:	Katherine Ruschen
DATE OF DECISION:	25 March 2022
CATCHWORDS:	MOTOR ACCIDENTS- Merit review; dispute about payment of weekly benefits under Division 3.3 of the Motor Accident Injuries Act 2017 (MAI Act); meaning of pre-accident weekly earnings; pre-accident weekly earnings; schedule 1, clause 4 of the MAI Act; self-employment; partnership; operating expenses; whether earnings as an earner are the gross profit or net income of the business; Held- the reviewable decision is affirmed.
DETERMINATIONS MADE:	The reviewable decision is about the amount of weekly payments of statutory benefits that are payable under Division 3.3 of the Motor Accident Injuries Act 2017 (MAI Act), and is therefore a merit review matter under Schedule 2(1)(a) of the MAI Act. 1. The reviewable decision is: affirmed.

BACKGROUND

There is a dispute between Graeme Haynes (the claimant) and the insurer about the amount of weekly payments of statutory benefits that are payable under Division 3.3 of the MAI Act.
The claimant was involved in a motor accident on 5 November 2021. He made a claim for weekly payments of statutory benefits under the MAI Act.
Prior to the accident the claimant worked as a self-employed cabinet maker.
Pursuant to an internal review decision dated 20 December 2021 the insurer calculated the claimant’s pre-accident weekly earnings (PAWE) to be $2,504.78.
The claimant has applied for a merit review of the insurer’s internal review decision of 20 December 2021.

SUBMISSIONS

The claimant submits the insurer’s calculation of PAWE fails to consider that he continues to incur business expenses even though he is unable to work because of the motor accident. The claimant submits only costs of materials and wages should be deducted from gross earnings of the business to produce his individual earnings. The claimant submits that all other expenses, referred to as “operating costs”, should not be deducted as he will continue to incur all of these operating costs, even though he is totally incapacitated for work.
Specifically, the claimant submits:
(a)    Operating costs do not properly relate to real loss.
(b)    The deduction of operating costs to produce his gross individual earnings is not in accordance with proper accounting conventions.
(c)    The business will continue to incur operating costs even though he is totally incapacitated and receiving no income from the business.
(d)    He will still be required to outlay operating costs each year.
(e)    Operating costs are akin to tax deductable work-related expenses for a wage earner.
The insurer submits that in the circumstances of a sole trader such as the claimant, PAWE is to be calculated based on net business income after all expenses, including operating costs, have been deducted but before tax.

REASONS

Issue

There is no dispute that the claimant is an earner under Schedule 1, clause 2(a) of the MAI Act on the basis he was self-employed during the eight weeks preceding the date of the motor accident (clause 2(a)(i)).
The issue in dispute is whether, for the purpose of calculating PAWE, the claimant’s income from the proceeds of his business is the gross income of the business after deducting only certain expenses or the net income of the business, after deducting all business expenses but before tax.

Legislation

The claimant is an earner within the meaning in Schedule 1, clause 2 of the MAI Act on the basis he was self-employed during the eight weeks immediately preceding the motor accident. The claimant ran a business through a partnership which comprised himself and a company.
“Loss of earnings” is defined in Schedule 1, clause 2 of the MAI Act and means “a loss incurred or likely to be incurred in a person’s income from personal exertion”. "Income from personal exertion" includes “the proceeds of any business carried on by the person either alone or in partnership with any other person”.
Pursuant to Schedule 1, clause 4 of the MAI Act PAWE means:
“4 Meaning of "pre-accident weekly earnings"--general
(1)"Pre-accident weekly earnings", in relation to an earner who is injured as a result of a motor accident, means the weekly average of the gross earnings received by the earner as an earner during the 12 months immediately before the day on which the motor accident occurred, unless subclause (2) applies.
(2) In the following cases, "pre-accident weekly earnings”, in relation to an earner who is injured as a result of a motor accident, means--
(a)if, on the day of the motor accident, the earner was earning continuously, but had not been earning continuously for at least 12 months--the weekly average of the gross earnings received by the earner as an earner during the period from when the earner started to earn continuously to immediately before the day of the motor accident,
(a1) if the earner was employed or self-employed during a period or periods equal to at least 26 weeks during the first year of the pre-accident period, but was not obtaining earnings from any source at any other time during the pre-accident period--the average weekly gross earnings received by the earner as an earner during the first year of the pre-accident period,
(b) if subclause (3) applies--the weekly average of the gross earnings received by the earner as an earner during the period from when the change of circumstance referred to in that subclause occurred to immediately before the day of the motor accident,
(c) if the earner is an earner by reason of having entered into an arrangement with an employer or other person to undertake employment or to commence business as a self-employed person--the average weekly gross earnings that the earner could reasonably have been expected to earn, but for the injury, in employment under that arrangement.

(2A) The "pre-accident period”, in relation to a motor accident, is the period of 2 years immediately preceding the motor accident.
(3) This subclause applies if, during the 12 months immediately before the day of the motor accident, there was, as a result of any action taken by the earner, a significant change in his or her earnings circumstances that resulted in the earner regularly earning, or becoming entitled to earn, more on a weekly basis than he or she was earning before the change occurred.
...
(4) For the purposes of this clause, an earner earns continuously if he or she obtains earnings from permanent employment or from a source that, on the day of the motor accident, was likely to continue for a period of at least 6 months to provide earnings to the earner on the same, or a similar, basis to the basis on which the earnings were being provided as at that day.” (emphasis added)

None of the sub-clauses in clause 4(2) apply to the claimant’s circumstances. Accordingly, the claimant’s PAWE falls for assessment under clause 4(1).
Under clause 4(1) PAWE is calculated based on “the weekly average of the gross earnings received by the [claimant] as an earner during the 12 months immediately before the day on which the motor accident occurred” (emphasis added).
This makes clear that what is relevant is:
(a) the earnings received by the claimant as an individual earner, and
(b) only those earnings actually received during the 12 months before the date of the motor accident.
In this case, the 12-month pre-accident period is 5 November 2020 to 4 November 2021 (the motor accident having occurred the following day, 5 November 2021).

Business expenses

In the circumstances of a partnership trading as a business, the earnings of the claimant as an individual as distinct from the business, are the profits of the business after expenses of the business are paid. In other words, the “proceeds” of the business the claimant receives as an earner is the net profit of the business after accounting for all business expenses incurred to run the business, but before tax. Business expenses are not “proceeds” of the business that make it into the claimant’s hands as his individual gross earnings.
The claimant’s PAWE must be based on his individual gross earnings and not the gross earnings of the business because it is his personal, individual status as an “earner” that provides him with benefits under the MAI Act. The claimant’s gross earnings as an “earner” cannot be anything other than the net income of the business, after deducting business expenses. Business expenses are clearly outgoings, which are incurred in this case by the partnership that runs the business. They do not form part of the gross earnings of the claimant as an individual “earner”, as distinct from the partnership running the business. As an individual earner, the claimant ultimately receives the net income of the business, after the partnership has accounted for all expenses, including operating costs.
Adopting the net business income as the claimant’s gross earnings for the purpose of the MAI Act is consistent with the presentation by the claimant of his individual earnings to the Australian Taxation Office (ATO). In his individual tax return, the claimant declares to the ATO that his gross earnings as an individual are the net profits of the business, after accounting for all, not just some, business expenses. It is also consistent with the treatment and assessment of such income by the ATO and is consistent with the method of calculation in previous merit review decisions including ABQ v NRMA Insurance [2018] NSWDRS MR 043; ACK v QBE Insurance Australia Limited [2018] NSWDRS MR 063 and AGZ v NRMA Insurance Pty Ltd [2019] NSWDRS MR 184.
Operating costs are not akin to tax-deductible employment expenses, as submitted by the claimant. Self-employment is an entirely different structure of employment where a business is created to generate income and the business typically incurs expenses, including operating costs, in order to generate revenue. Under such arrangement the expenses become the expenses of the business. In this case, the business is run by a partnership.
The claimant submits the deduction of operating costs of the business to produce his gross individual earnings is not in accordance with “proper accounting conventions”. However, accounting conventions are a set of industry best practices which serve as guidelines for the accounting industry. They do not dictate the operation of the MAI Act or other legislation.
In any event, the methodology is consistent with proper accounting conventions when one looks at the whole picture of running a business. It is correct that accountants work with two critical profitability metrics for a business, being gross profit and net income. However, gross profit is a profit margin or metric that sits in between the top line, which is revenue, and the bottom line, which is net income. Revenue is the income a business generates before any expenses are subtracted. Gross profit is revenue minus the cost of goods sold that is, the direct costs attributable to the production of the goods sold such as materials and labour. Net income is the profit that remains after all expenses and costs (including operating costs) have been subtracted from revenue.
Net income is synonymous with profit, as it represents the final measure of profitability of a business. Net income represents the net amount of profit remaining after all expenses and costs are subtracted from revenue and it is the net income that then becomes available to the owners of the business, as their individual gross earnings from the business.
Although the claimant derives income from a business operated through a partnership, the MAI Act is concerned with the earnings the claimant ultimately receives into his own hands as an individual. Ultimately, the earnings the claimant receives as a partner in the business is what is left over after accounting for all expenses of the business, including operating costs. Again, this is consistent with how the claimant ultimately presents his individual gross earnings to the ATO that is, his earnings are the net income of the business and is therefore consistent with accounting conventions.
Some business expenses may be one-off or occasional expenses. Others may be incurred weekly, monthly or on some other regular basis. This is part and parcel of running a business. Some people choose not to run their own business because they do not want to carry the risk of ongoing operating costs in case of, for example, a downturn in business or a non-operating period. It is a matter for the business owner whether they take steps to reduce, avoid or otherwise mitigate ongoing expenses in circumstances where the business is not active for example due to injury or a period of absence for any other reason such as an extended holiday or to care for a relative. Such steps may include winding up the business or arranging a locum or other employed staff to keep the business running.
The claimant presented the expenses of the business to the ATO in a particular way. He cannot then cherry pick expenses to be deducted for the purpose of calculation of his PAWE. A number of expenses the claimant wishes to exclude from calculation of his PAWE do not have the character of ongoing expenses in any event, if the business were not active. These include advertising, electricity, fuel, repair and maintenance, telephone and internet. If the business were not operating, there should be no fuel or electricity consumption by the business, for example. Advertising would be unnecessary and the need to repair tools or equipment not in use because the business is not active ought not arise.
It is noted the business has a number of employees. If the business continues to operate through employees the income generated will be relevant to the extent to which the claimant suffers a loss of earnings for the purpose of sections 3.6, 3.7 and 3.8 of the MAI Act. The claimant ought to be required to provide ongoing financial records of the business for this purpose. If the business continues to earn income, the claimant will no doubt expect his loss of earnings to be calculated by reference to net income of the business (that is, after operating costs) rather than gross profit (that is, before subtracting operating costs). This also highlights why the claimant’s individual earnings are the net profit of the business.
If the claimant is totally incapacitated and expects to remain so for some time, he may need to make decisions about what to do with the business. Whilst his submissions state he is “required” to continue to pay operating costs, he can choose to take other steps given current circumstances. As noted, it is difficult to understand why the business would continue to incur operating costs such as fuel, repairs and electricity if the business is inactive. These examples demonstrate the claimant is likely to be enriched, if operating costs were not deducted for the purpose of calculating PAWE.
Section 1.3 sets out the objects of the MAI Act, which relevantly include:
(a) benefiting all members of the motoring public by keeping the overall costs of the scheme within reasonable bounds so as to keep premiums affordable, and
(b) promoting the recovery and return to work or other activities of those injured in motor accidents.
Section 1.3(4) requires a construction of the MAI Act that would promote the objects of the MAI Act to be preferred to a construction that would not promote those objects. The second reading speech for the Motor Accident Injury Bill noted the reasons for insurers being able to regularly assess a person’s earning capacity under the MAI Act as being “to ensure that injured people who have the capacity to return to employment stay off work only as long as is necessary to support their recovery”. The quarantining of operating costs from other business expenses for the purpose of calculating PAWE in relation to self-employment is likely to give rise to enrichment and is therefore inconsistent with the objects of the MAI Act.
The profit and loss statement for the claimant’s business for the pre-accident period shows a net business income of $130,599.43. Accordingly, the claimant’s PAWE is $2,504.78.

CONCLUSION

The claimant is an earner within the meaning in schedule 1, clause 2(a).
The claimant’s PAWE falls under Schedule 1, clause 4(1).
For the reasons set out above, under Schedule 1, clause 4(1) the claimant’s earnings are to be calculated on the basis of the individual earnings he received from the business, after deducting all business expenses (including operating costs) in the period 5 November 2020 to 4 November 2021, being the 12 months immediately before the date of the accident.
For the reasons set out above, clause 4(1) does not permit adjustment to this calculation to account for ongoing business expenses the claimant may incur should he choose to continue the business after the accident, or during any period of incapacity.
Accordingly, I am of the view the claimant’s PAWE is to be calculated based on net income of the business in the period 5 November 2020 to 4 November 2021 in the sum of $130,599.43.
Accordingly, the reviewable decision is:
(a) affirmed.

LEGISLATION AND GUIDELINES

In making this decision, I have considered the following:
·        the Application, Reply and supporting documentation;
·        the MAI Act;
·        Motor Accident Guidelines, and
·        Motor Accident Injuries Regulation 2017.

Katherine Ruschen

Merit Reviewer

Personal Injury Commission

[2022] NSWPICMR 17

25 March 2022