WorkCover Corporation of South Australia v Gray No. Scgrg-97-1391 Judgment No. S6700

[1998] SASC 6700

WORKCOVER CORPORATION OF SOUTH AUSTRALIA v GRAY

Full Court
Coram:  Prior, Olsson and Perry JJ

Olsson J

This is an appeal, by leave, from a decision of the Workers Compensation Appeal Tribunal, constituted by Cawthorne DP. It focuses on a short, but important, point as to the proper construction of section 42A of the Workers Rehabilitation and Compensation Act, 1986 (“the Act”).

That section, so far as is material for present purposes, is expressed in these terms:-

“42A.  (1) Where a worker suffers a compensable disability that results in incapacity for work for a period exceeding two years, the Corporation may assess the worker's loss of future earning capacity as a capital loss. 

(2)     In making the assessment, the following principles will be applied:

(a)the worker's notional weekly earnings (less an estimation of income tax) will be projected forward over the remainder of the worker's notional working life;

(b).... in the case of partial incapacity, the amount the worker could earn in suitable employment that the worker has a reasonable prospect of obtaining by way of average weekly earnings (less an estimation of income tax) will be projected forward over the remainder of the worker's notional working life and subtracted from the amount projected under paragraph (a);

(c)the worker's capital loss will be taken to be 80 per cent of the present value of the loss indicated by the above projections (and in determining the present value of that loss a prescribed discount rate must be applied). 

(3)     For the purposes of subsection (2) -

(a).... the projections referred to in that subsection will be made on the basis of rates of earnings current at the date of the assessment and without regard to possible future changes in those rates; and

(b).... the worker's notional working life is the period over which the worker would have worked assuming that he or she had not been incapacitated and that period will be assessed having regard to the contingencies and vicissitudes of life that might in any event have prevented the worker from continuing in employment but the period will not, in any event, be taken to extend beyond the date on which weekly payments would (assuming no assessment of capital loss were made under this section) cease to be payable (see section 35(5)); and

(c)     ...

(d)     ...

and

(4)     The Corporation may make one or more interim assessments of loss as to nominated portions of the worker's notional working life before making a final assessment of loss under this section. 

(5).... ... ”

The historical facts giving rise to the appeal need not be traversed in fine detail.  It will suffice to recite the essential substance of them as under:-

.In or about September 1989 the respondent, a worker employed by K‑Mart Australia, suffered compensable respiratory disability in the course of her employment, from which she has, at all subsequent material times, been fully incapacitated for work.

.As at June 1994 she was entitled to and in receipt of ongoing income maintenance payments at the rate of $448.80 per week.

.On 27 June 1994, pursuant to section 42A(4) of the Act, the appellant Corporation (“the Corporation”) determined that the respondent had suffered a loss of future earning capacity, in respect of which it made an interim assessment, as a capital loss, for a 52 week period from 21 July 1994.

.That assessment was in the sum of $15,531.10, said to have been computed in accordance with the formula prescribed by section 42A. In making the assessment the Corporation took, as its commencement point, the then current notional weekly earnings of the respondent, from which it deducted $68.00 per week as an estimation of income tax.  I take that to be the normal PAYE deduction applicable to the relevant notional weekly earnings.

.On 10 July 1995 the Corporation made a similar type of assessment in respect of the 52 week period commencing on 20 July 1995 - on that occasion estimating income tax at $69.83 per week.

.The respondent disputed the tax estimates made by the Corporation and applied for a review of the two determinations.  She sought and obtained an extension of time in respect of the first of them.

.In essence the respondent contended that, on a correct interpretation of section 42A, the estimate of tax required had to take account of her actual estimated tax liability during the relevant periods, whereas the Corporation had merely adopted figures which represented “gross” PAYE level deductions appropriate to the notional weekly earnings figures - regardless of whether that level of tax would have actually been payable by the respondent or not.

.In point of fact, throughout the two year period in issue, the respondent had sustained trading losses by reason of her involvement in a partnership venture.  These would greatly have lessened her tax liability.  She did not initially disclose this situation in a questionnaire sent to her by the Corporation, but evidence concerning it was later placed before the Review Officer when her application for review came on for hearing.

.The Review Officer rejected the respondent’s argument and confirmed the determinations made by the Corporation.  The respondent thereupon appealed to the Tribunal.

In the course of his carefully reasoned judgment Cawthorne DP traversed a number of issues raised by the parties, many of which are not relevant to this appeal.  However, he rejected the reasoning of the Review Officer as to the above aspect, set aside her determination and, for reasons expressed by him, remitted the matter to another Review Officer for re-determination in accordance with his decision.

Counsel for the Corporation argued before the Tribunal that the scheme of the legislation was not to put the worker in the same position as would be the case with a claim for common law damages.  He argued that the relevant provision was meant to be what he described as a “safety net” and not an indemnity.

He pointed to what he described as the difficulty of factoring what might only be a temporary earnings loss into the estimate of tax payable over a lifetime.  It was, he said, unrealistic to look to temporary substantial tax losses which could not continue indefinitely;  and that enormous difficulties would arise if each worker’s individual situation had to be considered separately.  It was his argument that the scheme of the legislation was to look globally at the situation of workers generally.  The statutory formula was simply intended to produce what was considered to be a realistic figure in the circumstances of the average worker.  So it was that he contended that the Corporation and the Review Officer were correct in ignoring taxation factors peculiar to the individual worker and simply applying taxation scales to the notional weekly earnings base, without consideration of factors which might operate so as to reduce the worker’s tax liability.

Distilled to the essence the reasoning of Cawthorne DP may be summarised thus:-

1. Contrary to the above contention, the proper approach under the section is to take into account the individual circumstances of the person in respect of whom the assessment is made - that is implicit from the statutory notion of “an estimation of income tax”, a concept which is necessarily individual in focus.

1. It must be borne in mind that the assessment of compensation to be made is in respect of each individual worker concerned;  and, in making the assessment, the Corporation is obliged to take into account such personal circumstances as the worker’s notional weekly earnings, in the case of partial incapacity, the amount the worker could earn in suitable employment that the worker has a reasonable prospect of obtaining by way of weekly average earnings, and the worker’s notional working life.

1. There is, accordingly, no logical reason why the worker’s personal circumstances, which may be relevant to an assessment of tax liability, should not also be taken into account.  In this regard the practical difficulties associated with doing so are no greater than would arise in the context of an assessment of common law damages.

In viewing the notion of “an estimation of income tax” in that way Cawthorne DP held that the personal circumstances of the worker logically had to be taken into account in making the relevant estimation.  He further held that if an assessment is an interim one (as in this case) it was entirely appropriate to take into account the actual tax position of the worker for the period of the assessment being made where there is information to enable that to be done.  He went on to make the point that, if the assessment is for the whole of a working life and there is a situation similar to that asserted by the worker in the present case (where there may be tax losses in the short term which  must be factored into the taxation payable), the possibility of future profits must also be considered when making the estimation.

He pointed out that that had been the approach adopted by members of the Tribunal in other cases.

In the event, Cawthorne DP reviewed the factual evidence bearing on this issue and concluded that, for reasons expressed by him, the matter would need to be referred back to another Review Officer for re-determination on the basis of proper evidence bearing on the question of the respondent’s taxation circumstances.

As the only issue currently before this Court is the question of the legal principle involved, it is unnecessary to reflect upon the last mentioned aspect of the reasons published by the learned Deputy President.

The arguments presented to this court readily reveal that, regardless of what approach is employed, some difficulties of practical implementation are likely to arise.  However, it must be said that, on any view, the global, arbitrary mathematical approach contended for by Mr Peek, of counsel for the Corporation, necessarily drove him to espouse potential results which underscore serious anomalies inherent in its application.  Furthermore, it was an approach which had an obvious potential for gratuitous windfalls for the Corporation whenever actual tax liability of the worker was, in fact, appreciably less than the PAYE levels.

It must not be forgotten that the phrase “less an estimation of income tax” is employed in both subparagraphs (a) and (b) of section 42A(1), obviously with the same meaning. Mr Peek was driven to argue that, in both the cases of total and partial incapacity, the mathematical formula was, rigidly, to be applied, i.e. the appropriate marginal rates of tax were simply to be calculated in relation to the actual quantum of relevant notional weekly earnings and then deducted. Thus in the case of partial incapacity, the assessment to be made would be arrived at, inter alia, by applying marginal rates of tax to the amount the worker could earn in suitable employment that the worker has a reasonable prospect of obtaining - as if that amount was the sole and only income which the worker had - and then deducting the result from a similar type of computation made in respect of full notional weekly earnings. This would be so, he said, regardless of whether or not the worker was in receipt of income from other sources.

One only has to state that proposition to reveal the incongruity of it.  The result would necessarily be totally divorced from any actual tax liability of the worker and would operate on a totally capricious basis from case to case.

It seems to me that the proper interpretation of section 42A falls to be arrived at bearing in mind two fundamental concepts.

First, it is critical to bear in mind that the legislature did not, as it readily could have, specify some arbitrary approach to computation of income tax, in the same manner as it has done in crafting a formula for the overall assessment of both weekly payments of compensation and also the very method of capitalisation of loss of future earning capacity itself.   It is significant that what was required by the legislature was an “estimation” of income tax.  According to the normal dictionary definition of that work it essentially connotes the making of a judgment as to the approximate amount of whatever is in issue.

On Mr Peek’s approach no element of judgment whatsoever would be involved.  That approach is no more than the mechanical application of a mathematical formula, i.e. applying a fixed set of tax rate scales to an already determined figure.

By way of contrast, the inherent concept of making an estimation is the taking of a specific factual situation and making an individual judgment specific to it.

Second, as Mr Kourakis QC, of senior counsel for the appellant, so compellingly pointed ut, the whole concept of our taxation system is such that it is, literally, quite impossible to make any calculation or estimate of taxation unless one first arrives at a conclusion as to the actual or probable quantum of the taxable income of the taxpayer.  Such a process demands taking into account of a raft of considerations, comprehending not only all sources of gross income, but also all heads of deduction - such as number and type of dependents, deductible expenses, concessionary deductions (eg gifts), work related expenses, business losses, rebates and the like.  All of these elements, pro and con, bear on the correct marginal rates to apply and the ultimate total quantum of tax liability.

The identification of net taxable income and the application of marginal rates to them to determine tax payable constitute a single indivisible concept;  and it is a contradiction in terms to say that applying the arbitrary, mathematical approach contended for by Mr Peek is - in any sense - tantamount to making an “estimation” of income tax within the normal connotation of that word.  On the contrary, it is an express negation of such a process.  It is stating the obvious to say that his approach is, in result, capriciously discriminatory as between workers in a manner that the legislature could not have intended.  Moreover, it is not to be forgotten that the prescribed levels of PAYE deductions are by no means synonymous with the quantum of income tax which may properly be levied on an individual taxpayer at the end of a financial year.  At best they are no more than a provisional retention.

Finally, it must firmly be borne in mind that the overall compensation scheme erected by the statute plainly (and of necessity) has the individual worker as its focus.  It is pre-occupied with the concept of notional weekly earnings of the disabled worker, whom it specifically and subjectively targets.  Prima facie it would be in discord with the whole thrust of the legislation if the abatement of compensation to allow for income tax liability had a completely different focus.

An element of judgment will always be involved - hence the deliberate use of the word “estimation”.  That judgment will, of course, need to e made, and can only be made, in light of information made available, at the relevant time to the Corporation, or the Review Officer, as the case may be.

So far as the Corporation is concerned it will clearly need, as a precursor to a determination to capitalise, to take some reasonable steps to procure information upon which it can proceed.  Use of a worker questionnaire such as that exhibited in the appeal book commencing at page 16 is an obviously reasonable strategy.  If the worker chooses not to supply adequate information, then the Corporation will be entitled to do the best it can with the information known to it.  That is, of course, not to say that, if a review is initiated, as it was in the instant case, a worker cannot provide additional information.

In the present case the task is rendered much simpler than would otherwise be the case because the closed periods have expired.  It is ceased to be a mere prognostication as to the likely future.  The “estimation” can positively be made as an actuality on the basis of proven historic fact, albeit retrospectively.

For the foregoing reasons I consider that the order made by Cawthorne DP was correct in the circumstances.

I would dismiss the appeal.

Prior J

The Tribunal was correct in the approach it adopted in this case.  The “estimation of income tax” is with respect to a particular worker by reference to that worker’s taxable income.  The personal circumstances of the worker are taken into account.

The appeal should be dismissed for the reasons given by Olsson J.  I also agree with the comments added by Perry J.

Perry J

I agree that the appeal should be dismissed for the reasons given by Olsson J.

I add one or two further comments.

The estimation postulated by s42A by its very nature must be prospective. Subject to a proper opportunity being given to the worker to offer relevant information, the statutory provisions will be complied with if the Corporation makes a genuine and reasonable estimation based upon such material as may be at hand.

The process must be fair to the worker. The requirement of fairness would ordinarily be met if the worker is put on notice that the Corporation intends to make an assessment under s42A, and if he or she is, at the same time, given an opportunity to furnish to the Corporation such information as the worker may wish to have taken into account, including a specific reference to factors which may have a bearing on the estimation of income tax.

If the worker is given such an opportunity, in ordinary circumstances he or she will be bound by the information furnished to the Corporation.  This is because the statutory requirements are satisfied if an estimation is made by the Corporation.

The outcome of the assessment will not ordinarily be open to challenge simply on the ground that the actual tax liability of the worker over the period with respect to which the assessment relates turns out to be different, that is, either greater or less than the amount of the estimation.  In such circumstances, the assessment would stand, provided that the process by which it is made, including the estimation of income tax, was reasonable, and the worker had been given a fair opportunity to furnish information relevant to the exercise.

In any event, the statutory right on the part of the worker to seek a review of the assessment ordinarily falls to be exercised within an interval of time which would mean that the review would likewise involve a consideration of the assessment viewed prospectively.

As to that aspect of the matter, the right of review is given by s42A(9)(a) which states, inter alia:

“(9).. The following decisions of the Corporation are not reviewable-

(a).... a decision of the Corporation to make or not to make an assessment under this section (but an assessment is reviewable).”  (emphasis added)

Before the 1993 amendments,[1] there was a right of review as to certain other decisions (but not a decision of this kind) under s95.  That provided[2] that an application for review was to be made within one month of the receipt of notice of the decision with respect to which the review related, or within such further time as the Corporation in its discretion might allow. Presumably, that provision applied to define the time within which a review under s42A(9)(a) might be challenged.

[1]    See Act No 52 of 1993 the relevant sections in which came into operation on 20 May 1993.

[2]    See subs(4).

The procedure under s95 for review has been replaced by a procedure under Part 6A “Dispute Resolution”. Within that part, s89A defines reviewable decisions in terms which do not include a review under s42A(9)(a). However, I assume that a review under the latter section proceeds under the dispute resolution process contemplated by Part 6A, Division 2, under which a notice of dispute must be lodged within one month after notice is received of a reviewable decision.[3]

[3]    See s90A(1).

The drafting is, to say the least, untidy. The disconformity between s42A(9)(a) and s89A, and the lack of any provisions linking s42A(9)(a) with the review procedure under Part 6A, Division 2 are matters to which I draw the attention of the legislature.

This case is unusual in that a belated application to review the assessments was brought after the expiration of both of the periods the subject of the assessments.  Without questioning the propriety of the order giving an extension of time for the review to be brought, but not without considerable hesitation, I have finally reached the view that it was proper in the circumstances of this case to have regard to the actuality of the worker’s tax position in the intervening period.  I think it proper to follow that course in view of the fact that the review officer was satisfied that the worker had made a genuine mistake in the information which she furnished in the first place, and was labouring under a misapprehension as to the nature of her obligation as to the furnishing of the information sought in the two questionnaires.

But I would stress that in the ordinary case, I doubt that it would be proper outside of the ordinary review period of one month following notice being given of the assessment, to extend the time for the making of a request for a review, simply on the ground that the actual tax position of the worker during the intervening period differs from the prognostication made when the estimation was arrived at during the process of assessment.  To approach the matter in any other way would be to introduce into the scheme envisaged by the legislature in enacting the relevant provisions of the Act an unacceptable element of uncertainty.

On any review, the question arises as to the material which may then properly be taken into account.  In this case, I accept that it was proper to have regard to material indicating the actual tax position over the intervening period.

But I would reserve the question as to what it might be proper to have regard to upon an initial reconsideration (s91), conciliation (s91A), arbitration (s93) and judicial determination (ss94-94C inclusive), in the context of the available procedures under the Act as it now stands.  I draw attention to s94C(b), which is a section which might need to be considered when that question arises.

I treat the present case as involving different considerations, and in particular, the making of a “fresh determination” under the since repealed s96(2).