Vargiemezis and Commissioner of Taxation

[2008] AATA 1152

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 1152

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No    2008/2787 TAXATION        APPEALS         DIVISION  )          No    2008/2788

Re SOKRATIS VARGIEMEZIS

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr B H Pascoe, Senior Member

Date22 December 2008

PlaceMelbourne

Decision The Tribunal affirms the objection decisions under review in respect of the years ended 30 June 2006 and 30 June 2007.

(sgd) B.H. Pascoe

Senior Member

INCOME TAX -  lump sum arrears of weekly compensation – year of derivation – repayment of disability support pension – whether allowable deduction – claim for work related travel expenses – not incurred in deriving assessable income – private or domestic expenditure

Income Tax Assessment Act 1936

Income Tax Assessment Act 1997

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

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

Case 9, 2006 ATC 155

REASONS FOR DECISION

22 December 2008 Mr B H Pascoe, Senior Member  

1.      This is an application to review decisions of the respondent to disallow objections to assessments of income tax for the years ended 30 June 2006 and 2007.

2.      At the hearing the applicant, Mr S Vargiemezis, was unrepresented.  The respondent, Commissioner of Taxation was represented by Ms A Lemish, an officer of the respondent.  Mr Vargiemezis was assisted by an interpreter in the Greek language.

3.      The facts of this matter were not in dispute.  Mr Vargiemezis was an employee of Kraft Foods Limited.  His employer paid him to a date in July 2005 producing a gross salary of $2,416 and tax withheld of $340.  An income tax return was lodged for the year ended 30 June 2006 showing such salary as the only income and, on 28 July 2006, the respondent issued a refund notice for the $340.00 In the interim, Mr Vargiemezis commenced proceedings in the Magistrates’ Court of Victoria claiming compensation from his employer.  On 18 December 2006, the Court ordered Kraft Foods Limited to pay Mr Vargiemezis weekly compensation at the rate applicable for no work capacity from 24 July 2005 and continuing.  In February 2007, the entitlement to weekly compensation was calculated at $24,108 for the period 25 July 2005 to 26 June 2006 and $13,527 for the period from 3 July 2006 to 1 January 2007, a total of $37,635.  Subsequent payments of compensation to 30 June 2007 totalled $11,523.  The PAYG summary issued by the employer for the year ended 30 June 2007 showed gross salary of $49,158 with tax withheld of $11,114.

4. During the period from 25 July 2005 to 8 January 2007. Mr Vargiemezis received a disability support pension through Centrelink. On 10 January 2007 Centrelink issued a Compensation Recovery Notice to Kraft Foods Limited pursuant to s 1184 of the Social Security Act 1991.  Such notice required payment of $19,232 out of the compensation due to Mr Vargiemezis being the total disability support pension paid to him during that period from 25 July 2005 to 8 January 2007.

5.      On behalf of Mr Vargiemezis, his tax agent made a request to amend his assessment for the year ended 30 June 2006 by the inclusion of an additional $24,108 of salary and wages, allowance of a deduction of $19,232 and a credit for additional PAYG instalments of $7,618 referable to the additional salary and wages.  On 26 April 2007, the respondent issued an amended assessment of income tax which resulted in a refund of the $7,618 plus interest of $352.69.

6.      On 19 July 2007 Mr Vargiemezis’ tax agent lodged his income tax return for the year ended 30 June 2007 showing gross salary and wages of $11,523, claimed deductions of $2,400 for work related travel expenses and $400 for the cost of managing tax affairs and a credit for PAYG instalments of $11,114.  This return was selected by the respondent for audit.

7.      As a result of the audit an amended assessment for the year ended 30 June 2006 was issued to reverse the adjustments for additional income, deduction claimed and additional PAYG instalments.  The effect was to restore the position to that shown in the original return for that year.  An assessment was issued for the year ended 30 June 2007 to include additional income of $37,605 being the amount of compensation assessed in February 2007, disallow the deduction claimed of $2,400 for work related travel expenses and allow a credit for PAYG instalments of $11,114.

8.      Objections were lodged against both of the above assessments and disallowed by the respondent.  The resulting three issues arising from these objections are:

1.whether the entitlement to arrears of weekly compensation constitutes assessable income and, if so, the year of income in which it is assessable.;

2.whether the repayment of $19,232 to Centrelink reduces the assessable amount of compensation entitlement or is, otherwise, an allowable deduction;

3.whether the amount of $2,400 described as work related travel expenses in an allowable deduction.

9.      Mr Vargiemezis maintained that his returns had been prepared by a tax agent who had advised him that the amounts shown in the tax returns were correct according to tax law.  He maintained, further, that he had obtained legal advice that he was entitled to deduct the $19,232 refunded to Centrelink.  He noted that a similar position had arisen in the year ended 30 June 2001 and such a deduction had been allowed by the respondent.  He said that he had been advised, also, that he could claim $2,400 for travel expenses involved in visiting his doctor, visiting the chemist to obtain medication and for shopping.  This advice was said to include that such an amount could be claimed irrespective of the reason for travel and without the need for receipts.

10.     Whether Mr Vargiemezis actually received such advice or whether he misunderstood whatever advice he received is not clear.  It is noted that the amended 2006 year return sought to include as income the $24,108 of compensation and $7,618 of PAYG instalments referable to that period but, also, sought to claim the whole amount of $19,232 repaid to Centrelink notwithstanding that a substantial part of that amount related to disability support pension paid in the period from 1 July 2006 to 8 January 2007.  It is noted, also, that the return for the 2007 year included income of $11,523 being the weekly payments from 1 January 2007 but omitted $13,527 being the arrears from July 2006 to January 2007.  These obvious errors in the returns lodged do not indicate a reasoned professional approach by his tax agent.

11. At the hearing, Ms Lemish advised that it was correct that, in the year ended 30 June 2001, Mr Vargiemezis had claimed a refund to Centrelink from arrears of compensation which had been allowed. However, she noted that in an era of self assessment such claims can be allowed without consideration by the respondent. While it was detected subsequently, the respondent accepted that the time allowed under s 170 of the Income Tax Assessment Act 1936 (the 1936 Act) for amendment had passed and no further action was taken.

12.     The answer to the first issue before the Tribunal is clear.  From many decisions of the Courts and this Tribunal including Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540, Tinkler v Federal Commissioner of Taxation (1979) 29 ALR 663 and Tribunal decision reported as Case 9 [2006] ATC 155 that a payment of a lump sum representing arrears of weekly compensation entitlements is a replacement for a loss of income and, itself, of an income nature and assessable. It is clear also that such income is assessable in the year of income in which it is received notwithstanding that part of the amount is referable to a prior year. It follows that the correct assessable income for the year ended 30 June 2006 was $2,416 and was $49,158 for the year ended 30 June 2007 from the employment and compensation income. It is noted that the respondent has correctly applied the rebate provisions of subdivision AB of Division 17 of Part 111 of the 1936 Act to ensure that the tax payable in the 2007 year did not exceed the tax payable if the $24,108 had been included in the 2006 year.

13.     The payment to Centrelink cannot be applied to reduce the assessable income from the compensation payment.  Under the Social Security Act 1991 a person who has received disability support pension and, subsequently, becomes entitled to compensation payments for the same period is liable to repay that amount of pension. Section 1184 allows for the payer of the compensation to be given notice requiring the repayments to be made out of the compensation entitlement. As in this case, the employer was required to satisfy a debt of Mr Vargiemezis out of the arrears of compensation and, as such, applied that amount of $19,232 on his behalf so that, pursuant to s 6-5(4) of the Income Tax Assessment Act 1997 (the 1997 Act) he is deemed to have derived that amount at the time it was so applied.  Further, it is clear that no deduction is available under s 8-1 of the 1997 Act as the repayment cannot be said to have been incurred in gaining or producing the assessable income from the compensation entitlement.  In many ways the $19,232 was equivalent to repayment of amounts advanced to Mr Vargiemezis by the Commonwealth to meet his living expenses pending the recovery of amounts due by way of compensation.

14.     If the disability support pension had been assessable income in the years of receipt.  Mr Vargiemezis could have taken advantage of s 59-30 of the 1997 Act.  This provides that an amount received is not assessable income if the taxpayer is liable to repay it, does so repay it and cannot deduct the repayment.  The section was enacted to allow a taxpayer to amend an earlier year return of income to exclude previously assessable income which is repaid in a subsequent year.  In relation to disability support pension, such income is not assessable income under the Act being specifically defined as exempt under Item 6.2 of s 52-10(3) of the 1997 Act.  To clear any doubt, s 59.30 provides, also, that an amount received is not exempt income in the year of receipt if it is repaid in a later year.  Clearly, Mr Vargiemezis had hoped to preserve the exempt nature of the disability support pension out of the amounts of compensation entitlement to the extent that they did not exceed such pension.  However, s 59.30 clearly prevents this and ensures that any weekly compensation payments which subsequently replace the previously exempt pension are assessable income.

15.     It may be understandable that Mr Vargiemezis considered that he would be afforded the same treatment of the Centrelink repayment as received in relation to the 2001 year and was upset that this did not happen.  However, it is more appropriate that he congratulates himself in escaping income tax properly payable on the total arrears of compensation received in that year.

16.     The remaining issue is the claim of $2,400 as work related travel expense deductions.  The basis of this claim and the alleged advice of his entitlement to seek a deduction remains a mystery to this Tribunal.  At best, it would appear that the $2,400 is alleged to be the cost of public transport and taxis incurred by Mr Vargiemezis in attending his medical practitioner, his chemist and other shopping needs.  Maybe it is alleged that his compensable disability required the expenditure to be incurred. Mr Vargiemezis was very vague as to the basis of the claim, saying simply that he probably spent more but limited his claim to the figure he was advised could be claimed without receipts.  In any event, apart from the complete lack of any substantiation or detail of the expense claimed, it is necessary for it to be shown as an outgoing incurred in the course of gaining or producing assessable income not being of a private or domestic nature.  There has to be a causal connection or nexus between the expenditure and the derivation of income, namely the compensation payments.  I am unable to see any direct or causal connection between the cost of visiting doctors or shopping with the derivation of the compensation entitlements which, presumably, arose from some work related injury in the past.  In any event, I am satisfied that the apparent cause of the expenditure falls into the clear category of private or domestic expenditure.  It follows that the amount claimed was not an allowable deduction in the year ended 30 June 2007.

17.     For completeness and for the benefit of Mr Vargiemezis it is appropriate to comment on much of the written material provided by him prior to the hearing and his evidence and submissions at the hearing.  Predominantly they sought some assistance or remedy to his allegations of mistakes, discrimination, prejudice and racism by officers of the respondent.  Some of these were said to have occurred since 1997 and he, apparently, is still not satisfied with the result of assessment for the 2001 year of income.  It is likely that he is under the not unusual assumption that an assessment means that the Australian taxation Office has explicitly accepted claims in a return. This, of course, does not happen in an era of self assessment.  It was explained to Mr Vargiemezis that the only jurisdiction which the Tribunal has is to review decisions of the respondent which are reviewable under the Taxation Administration Act 1953.  Here the only reviewable decisions were the decisions on objections to the assessments for the years ended 30 June 2006 and 2007.  Any alleged problems with comments or actions by an individual officer of the respondent such as a refusal to provide an interpreter are not matters over which this Tribunal has any power or jurisdiction unless they are directly relevant to the issue of arriving at the correct or preferable decision on the objections lodged.  Other avenues of complaint such as the Ombudsman may be available.

18.     The result of the foregoing is that the objection decisions under review should be affirmed.

I certify that the eighteen [18] preceding paragraphs are a true copy of the reasons for the decision herein of
Mr B H Pascoe, Senior Member

Signed:         ........Dianne Eva
  Clerk

Date of Hearing  15 December 2008
Date of Decision  22 December 2008
Self Represented Applicant     Mr Sokratis Vargiemezis
Counsel for the Respondent     Anna Lemish
Solicitor for the Respondent     Priscilla Lecordier, ATO Legal Service