Nelson and Repatriation Commission

[2007] AATA 1597

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2007] AATA 1597

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No Q 200600083

VETERANS’ APPEALS  DIVISION		)
Re		Kerrod Arthur Nelson

Applicant

And Repatriation Commission

Respondent

DECISION

Tribunal Senior Member Bernard J McCabe

Date27 July 2007

PlaceBrisbane (heard in Mackay)

Decision The decision under review is set aside and the matter is remitted to the respondent for reconsideration in accordance with these reasons. The date of effect is 15 September 2003.

................[Sgd].........................

SENIOR MEMBER

CATCHWORDS

VETERANS’ AFFAIRS – Veterans’ Entitlements – disability pension – earnings not defined – whether earnings should include payments under an income protection policy

VETERANS’ AFFAIRS – Veterans’ Entitlements – disability pension – loss of earnings – business partnership – compare income protection payments to gross or net income – gross income of the partnership is the correct measure of earnings – decision under review set aside

Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540

Tinkler v Federal Commissioner of Taxation (1979) 29 ALR 663

Counsel v Repatriation Commission (2002) 72 ALD 204

Veterans’ Entitlements Act 1986

REASONS FOR DECISION

27 July 2007 Senior Member Bernard J McCabe         

1.      Mr Nelson is unable to work because of his service-related conditions. He has asked for a disability pension under the Veterans Entitlements Act 1986 (the Act). Sections 23 (governing the award of pensions at the intermediate rate) and 24 (governing the award of pensions at the special rate) require that the veteran experience a loss of earnings after his defence-related condition(s) cause him to cease his former work. The outcome of the application turns on the answer to two questions – both of which arise because Mr Nelson is in receipt of payments under the terms of an income protection policy. Those questions are:

(a)Should the payments made by the insurer under the terms of the policy be taken into account when assessing whether or not the veteran’s earnings have declined; and

(b)If the payments made under the policy are to be taken into account, should they be compared to the gross or net amounts earned by the applicant in the course of his former business activities?

I will deal with each of these questions in turn.

are payments made pursuant to an income protection policy proeprly characterised as earnings for the purposes of ss 23 and 24?

2.      Sections 23 and 24 set out the criteria for granting disability pensions at the intermediate rate (s 23) and the special rate (s 24). In each case, the veteran must establish that he or she suffered a loss of salary or wages, or of earnings on his or her own account as a result of being forced to give up the remunerative work he or she had previously been doing.

3.      The expression earnings is not defined in the Act. The parties were unable to identify any authorities that addressed whether payments made under an income replacement policy should be treated as earnings. Mr Douglas, for the respondent, referred me to a number of taxation cases including the decision of the High Court in Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540 and Tinkler v Federal Commissioner of Taxation (1979) 29 ALR 663. Mr Douglas said those cases stood for the proposition that payments made to an individual by way of compensation for lost income assumed the same character as the payments they replaced: Dixon at 568 per Fullagar J; see also Tinkler at 665 per Brennan J and 670 per Deane and Fisher JJ. In the context of the income tax legislation, the answer is clear: payments made under an income protection policy would ordinarily be characterised as assessable income. Mr Douglas says the same reasoning should apply here.

4.      Mr Cullinane, for the applicant, says there are two reasons why I should not follow the reasoning in Dixon and Tinkler when considering the scope of the word earnings in the Act:

·     the two decisions relate to the use of a different expression – ie, income - under taxation law. The veterans’ legislation, unlike the income tax legislation, is beneficial in nature. Ambiguities should be resolved in favour of the veteran: Counsel v Repatriation Commission (2002) 72 ALD 204 at 215-216 per Carr J. Mr Cullinane says the use in the Act of a different word – earnings – gives rise to an ambiguity that should be resolved in favour of Mr Nelson; and

·     the parliament surely did not intend an outcome in which veterans were discouraged from taking out income protection policies. Mr Cullinane says a veteran might think twice about taking on the expense of paying premiums under an income protection policy if he knew doing so would effectively disentitle him from receiving a disability pension under the Act.

5.      While I accept the veterans’ legislation is beneficial legislation and ambiguities should be resolved in favour of the veteran, the meaning of the word earnings is clear enough. The legislation is intended to provide a safety net to veterans who are worse-off after being forced to leave work because of their service-related condition(s). If a veteran receives payments under an insurance policy explicitly intended to replace payments he would otherwise receive, the replacement payments must be treated in like the original payments.

6.      Even if I accepted there is an ambiguity in the language of the Act, the public policy argument that veterans may be discouraged from taking out income protection policies does not assist me in the interpretation process. A veteran only qualifies for a disability pension under the Act in carefully-defined circumstances. No sensible person would refrain from seeking insurance on the basis that he or she may be eligible for cover in respect of one or a few of the multitude of conditions that might cause him to cease work unexpectedly.

7.      The reasoning in Dixon and Tinkler is applicable. The payments to Mr Nelson under the terms of the income protection policy should be regarded as income and taken into account for the purposes of the legislation.

should the applicant’s earnings (including payments under the income protection policy) be compared to his gross or net earnings from the former partnership?

8.      The applicant’s former business was conducted in partnership with his wife and, following her death, the applicant’s son. The business ceased in 2004 after the applicant became unable to continue working.

9.      Mr Douglas took me to the taxation records for both the applicant and the partnership from 1999 until the year ending 30 June 2004. The business generated significant gross income in each of those years but was not very profitable. The partnership made a net loss in 1999, 2000 and 2004 after accounting for expenses (although Mr Nelson had other income in 2000 which left him with a small surplus). The partnership made a small profit after accounting for expenses in 2001, 2002 and 2003.

10.     I was told the insurer made payments after 2003 of between $2000 - 2500 per month under the income protection policy. Those payments continue until the applicant reaches the age of 65. I do not need to set out the payments in detail. Suffice to say the applicant is worse-off if his current earnings are compared to his share of the gross income of the partnership, but better off if compared to his share of the net income during the same period.

11.     The decision of the Full Federal Court in Counsel resolves the point in the applicant’s favour. Goldberg J acknowledged there was some difficulty in reconciling the concept of a veteran losing earnings on his or her own account with the framework of a partnership: at 218. Even so, his Honour went on (at 219) to explain that a partner received earnings, money or cashflow as a result of activities which the appellant and his wife were undertaking as part of their partnership business. A partner had access to the funds as they came in. He was able to take advantage of the cash flow, at least in the short term. Once the applicant became unable to carry on with the business, he lost access to the income stream flowing into the partnership as a result of his efforts – which amounted to a loss of earnings within the meaning of the Act.

12.     It follows the applicant’s earnings under the income protection policy should be compared with his share of the gross income of the partnership (together with earnings derived from any other source).

conclusion

13.     The payments made to the applicant under the terms of an income protection policy may be taken into account when determining whether the applicant’s earnings have declined for the purposes of s 24 of the Veterans’ Entitlements Act1986. The respondent should have regard to the gross amounts earned by the applicant from his former business activities for the purposes of the comparison. The decision under review is therefore set aside and the matter is remitted to the respondent for reconsideration in accordance with these reasons. The date of effect is 15 September 2003.

I certify that the 13 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe.

Signed:         .....................................................................................
  Associate:     Stephen O’Grady

Date of Hearing  9 July 2007
Date of Decision  27 July 2007
The applicant was represented by Mr Cullinane, of counsel.

The respondent was represented by Mr Douglas, a departmental advocate.