YCNM and Commissioner of Taxation (Taxation)
[2019] AATA 1592
•1 July 2019
YCNM and Commissioner of Taxation (Taxation) [2019] AATA 1592 (1 July 2019)
Division: TAXATION AND COMMERCIAL
File Number: 2017/7300
Re: YCNM
APPLICANT
COMMISSIONER OF TAXATIONAnd
RESPONDENT
DECISION
Tribunal:Senior Member L Hespe
Date:1 July 2019
Place:Melbourne
The Tribunal sets aside the decision under review and remits the matter back to the Respondent for reassessment in accordance with its reasons.
....................[sgd]...............................................
Senior Member L. Hespe
CATCHWORDS
TAXATION – characterisation of settlement payment made by insurer under deed of release – claim under group salary continuance insurance policy – complaints about conduct of insurer - whether the settlement sum is ordinary income – whether CGT exemptions in s 118-37 or s 118-300 apply – settlement sum apportionable - decision set aside and remitted for reconsideration
LEGISLATION
Australian Securities and Investment Act 2001 (Cth), ss 12GF, 12 CB, 12CC, 12DA
Corporations Act 2001 (Cth), s 912A
Income Tax Assessment Act 1936 (Cth), Pt IIIA, ss 27A(1)(n), 160ZB(1)
Income Tax Assessment Act 1997 (Cth), Pt 3-1, Div 115, ss 6-5, 15-30, 112-20, 118-15, 118-37, 118-300, 995-1
Insurance Contracts Act 1984 (Cth), s 48A
Life Insurance Act 1995 (Cth), ss 9, 9A
Tax and Superannuation Laws Amendment (2014 Measures No 7) Act 2015 (Cth), Sch 3, Item 8
CASES
Allied Mills Industries Pty Ltd v Federal Commissioner of Taxation [1989] FCA 135; 20 FCR 288
Allsop v Federal Commissioner of Taxation [1965] HCA 48; 113 CLR 341
Berryman v Zurich Australia Ltd [2016] WASC 196; 310 FLR 108
Bond v Federal Commissioner of Taxation [2015] FCA 245; ATC 20-499
Carapark Holdings Limited v Federal Commissioner of Taxation [1967] HCA 5; 115 CLR 653
Commissioner of Stamp Duties (NSW) v Jones [1971] HCA 67; 125 CLR 511
Commissioner of Taxation v CSR Ltd [2000] FCA 1513; 104 FCR 44
Commissioner of Taxation v Scully [2000] HCA 6; 201 CLR 148
Dibb v Commissioner of Taxation [2004] FCAFC 126; 136 FCR 388
Federal Coke Co Pty Ltd v Federal Commissioner of Taxation [1977] FCA 3; 34 FLR 375
Federal Commissioner of Taxation v Spedley Securities 88 ATC 4126; (1988) 19 ATR 938
Federal Commissioner of Taxation v Sydney Refractive Surgery Centre Pty Ltd [2008] FCAFC 190; 172 FCR 557
GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation [1990] HCA 25; 170 CLR 124
Henry Jones (IXL) Ltd v Commissioner of Taxation (1991) FCA 488; 31 FCR 64
McLaurin v Federal Commissioner of Taxation [1961] HCA 9; 104 CLR 381
Namol Pty Ltd v AW Boulderstone Pty Ltd (No 2) (1993) 47 FCR 388
Purvis and Commissioner of Taxation [2013] AATA 58; 90 ATR 739
Reuter v Federal Commissioner of Taxation 93 ATC 5030; (1993) 27 ATR 256
Scott v Federal Commissioner of Taxation [1966] HCA 48; 117 CLR 514
Senior and Commissioner of Taxation [2015] AATA 353; 101 ATR 415
Sommer v Federal Commissioner of Taxation 2002 ATC 4815; [2002] FCA 1205; 51 ATR 102
The National Insurance Co of New Zealand Ltd v Espagne [1961] HCA 15; 105 CLR 569
Trident General Insurance Company v McNiece Bros [1988] HCA 44; 165 CLR 107
SECONDARY MATERIALS
Explanatory Memorandum, Income Tax Assessment Amendment (Capital Gains Tax) Bill 1986 (Cth)
REASONS FOR DECISION
Senior Member L. Hespe
1 July 2019
The Applicant sought review of a decision of the Respondent disallowing his objection against an assessment for the year ended 30 June 2014 in which the applicant had included in his assessable income a settlement sum received by him from an insurer pursuant to a Deed of Release. On objection, the Applicant contended that the settlement received by him was not ordinary income and did not give rise to a taxable capital gain.
For the reasons set out below, the decision under review should be set aside and the matter remitted back to the Commissioner for reassessment in accordance with these reasons.
Evidence
The evidence led included:
a)The documents lodged under ss 37 and 38AA of the Administrative Appeals Tribunal Act 1975 (‘AAT Act’) (referred to as ‘T’ documents and ‘ST’ documents respectively);
b)Four witness statements signed by the Applicant, including annexures; and
c)A witness statement signed by the Applicant’s wife.
The Applicant gave oral evidence. Consistent with the descriptions of his illness in the medical reports before the Tribunal, he was tearful and presented as an individual in emotional pain. His suffering was not assisted by recalling the history of difficulties he had experienced with the insurer. His evidence was that he recalled those dealings as being “traumatic”. Nothing in these reasons should be taken as in any way dismissing the Applicant’s pain.
The evidence provided to the Tribunal, perhaps inevitably, reflected the Applicant’s perception and understanding of the events as they transpired and as he now recalls them. As such, some of the evidence reflected the Applicant’s distressed condition and confusion. Further, the evidence, stretching as it did across some 10 years, was less than complete, with documentary gaps apparent.
As will be seen, the standard of the Insurer’s conduct in respect of this matter has been the subject of observations by the Financial Ombudsman Service and the role of the Tribunal here is not to engage in the type of work undertaken by the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Its role is only to determine whether all, or part, of the Settlement Sum is taxable as a revenue receipt in the hands of the Applicant and if not, the extent to which all or part of it is taxable as a capital gain in accordance with the provisions of Part 3-1 of the Income Tax Assessment Act 1997 (‘the 1997 Act’).
Facts
From 28 April 1997 to 7 March 2003, the Applicant was employed by Multigroup Distribution Services Pty Ltd trading as Star Track Express. [1]
[1] Applicant witness statement dated 19 April 2018 (‘first witness statement’) [4]
From on or about 1 January 2003 (when the policy commenced) the Applicant became an “insured person” under the Star Track Express Executive Plan, being a salary continuance – group insurance policy issued by the Insurer.
The terms of the policy[2] provided, amongst other things:
[2] T 82
a)The policy owner was LifeTrack Management Limited (the trustee of a superannuation fund for employees of Star Track Express);
b)In consideration for premium payments, the Insurer provided Group Salary Continuance, under which it would provide the following Cover:
i. Group Salary Continuance under which the Insurer would pay the Policy Owner a Monthly Amount if an Insured Person became Totally Disabled.[3] The Monthly Amount was required to be determined in accordance with the “GSC Insurance Benefit formula”.[4] The benefit formula was 75% of Salary at the date of the claim, subject to a maximum amount payable;
ii. Rehabilitation Costs Insurances under which the Insurer would pay the Policy Owner certain rehabilitation costs of an Insured Person (Rehabilitation Costs Insurance); and
iii. Superannuation Contributions Insurance under which the Insurer would pay the Policy Owner an additional Monthly Amount if an Insured Person became Totally Disabled. If an Insured Person was Totally Disabled, the Insurer would pay to the Policy Owner an additional 10% of Salary (subject to the overall maximum amount payable). The additional amount was required to be paid to a complying superannuation fund for the benefit of the Insured Person.
c)The Cover was to apply to each of the Employers employees who satisfied certain criteria. If the Insurer “agreed to cover an employee, then that employee became an “Insured Person” under the Policy and was insured according to the benefit formula up to the “Automatic Acceptance Level.” The Policy referred throughout to “the Insured Person’s Cover”: and
d)For Total Disablement, there was a claims escalation clause[5] which provided:
After each 12 month period of continuous Monthly Amount payments in respect of the Total Disablement of an Insured Person, we will automatically increase the continuing Monthly Amounts payable … by the Change in CPI up to maximum increases of 10% …
“Change in CPI” was defined as:
the change in the CPI in the 12 months between the September quarter in the year before the year in which the new Policy Period began and the following September quarter (The CPI figure used is the figure that the Australian Statistician publishes for the weighted average of the 8 capital cities for the September quarter).[6]
(Aside from the first policy period, the Policy Period commenced on 1 July each year).
[3] T 91, clause 2(a)
[4] T 105, clause 9.1
[5] T 108, clause 10.4
[6] T 88.
As a result of suffering severe depression and anxiety, the Applicant became unable to work from 7 March 2003 and has not worked since.[7]
[7] T 81. First witness statement [5]
By claim form dated 10 June 2003, the Applicant made a claim under the policy.
Some time after 1 July 2003, the Insurer accepted the claim.[8] The Applicant received his first payment in response to his claim in August 2003.[9]
[8] The claim was allocated a claim number by the Insurer in the form C0XXXXX )
[9] First witness statement [6]
As will be seen below, the Applicant experienced on-going difficulties in respect of the administration of his claim. Over the course of the next 10 years, the Applicant made a series of complaints to the Insurer about their dealings with him. Broadly, the complaints related to payments being made late, incorrect payments being paid and in some instances, payments being made too early. Given his illness, the Applicant had difficulty coping with the continual errors and, from his perspective, the errors appeared demonstrative of a lack of concern and respect by the Insurer.
Late Payments
One of the early issues experienced by the Applicant was the late payment of his claim benefits. For example, by letter faxed on 1 October 2004[10] addressed to Claims Manager, the Applicant’s wife wrote to the Insurer in the following terms:
With the full knowledge of my husband …, I write this letter in shear [sic] fear and with great frustration.
As you are aware from discussions with [the Applicant] he is to be paid his salary continuance on the first of each month and an agreement was made to return his forms by the 15th of each month, as to allow time to have the payment made by the 1st of the next month. As with previous months, [the Applicant’s] pay has not arrived and discussions with … [the Trustee of the Superannuation Fund][11] indicates that they are yet to receive the cheque from the Insurer and can do nothing. Further attempts to contact [X] of your office resulted in a message on his line reporting he is on leave until 11 October and the caller … should contact [Y]. Amazingly that staff member is also on leave … until 5 October and she actually states in her message to contact [X] or email the group administration. The actions are beyond belief. [The Applicant] tried to contact the manager of the department but unfortunately it was past 5 o’clock.
I write to tell you this as [the Applicant’s condition] … is great and he suffers from major depression coupled with real fear/anxiety which actually makes him very sick/ill and he has trouble just coping on a daily basis. Clearly the situation is not helped when your organisation fails to meet it’s [sic] obligations as he gets calls from our mortgage lender and bank and we must pay a default fees [sic]. This along with what appears to be a lack of concern from relevant parties makes him even more depressed and I am concerned that given his suicidal state, he will try to harm himself or worse ….
Please understand my concern and that of [the Applicant] and try to help reduce some of the pain and suffering he feels …..
[10] T 164
[11] T 169
The Insurer made a series of apologies to the Applicant and represented that it had taken actions to prevent the issues from reoccurring. For example, a letter dated 4 February 2005[12], from a Claims Administrator from the Insurer to the Applicant states :
Thank you for informing us of the problems you have encountered over the last week relating to your January benefit payment and on behalf of [the Insurer, I extend my sincerest apologies for the inconvenience caused. It is always personally disappointing for me to hear about when your payment has not been sent to you promptly.
I was most concerned to learn about the difficulties which you have encountered in relation to this matter. I can assure you we strive to provide the highest standards of service …
We have plans in place to prevent its reoccurrence and will be faxing you ono the 9th of each month the Continuation Claim Form to ensure that you have enough time to complete the form and fax back to us to ensure that your payment is processed by the 15th of each month.
Enclosed please find a Continuation Claim Form and Progress Medical Report for 1 February 2005 to 28 February 2005. To ensure a timely review of your claim, please have this form completed by the 15th February 2005 and return to me. Please note that the cost of the report will be at your expense …..
[12] Annexure to the Applicant’s first witness statement (‘Annexure’) 4.
At some point in 2006, and notwithstanding the terms of the policy, the Insurer began making salary continuance payments directly to the Applicant but continued making superannuation continuance benefit payments to the trustee of the Applicant’s superannuation fund. At this point, the Insurer also appears to have assumed responsibility for making PAYG withholdings in respect of the salary benefit payments made to the Applicant and issuing PAYG statements to the Applicant. If by assuming this responsibility the Insurer was attempting to improve the administration of the policy, this outcome was not successfully achieved.
The Applicant’s medical condition did not significantly improve over time and he was diagnosed as unlikely to ever be able to return to work. A Report from his psychiatrist to the Insurer in January 2007 stated that “he is distressed to such an extent by any issue that involves trust let alone work situations, that would preclude him from being able to engage productively in an assessment and rehabilitation programme at present”.[13]
[13] Annexure 8
The Applicant also encountered difficulties with the trustee of his superannuation fund in respect of the administration of his claim.
Mistimed Payments
The difficulties in the administration of his claim by both the Insurer and the trustee of the superannuation fund resulted in him receiving additional insurance payments in some financial years, which seemed to cause him to incur higher levels of income tax than he otherwise would have (presumably by pushing him into a higher tax bracket). For example, as a result of a payment due for the month of June 2006 being processed and paid in July 2007 by the trustee of his superannuation fund, the Applicant incurred a higher tax bill than he otherwise would have. The Applicant made a request of the Insurer that “due to the continued errors, I again as I did last year ask that your organisation tax me an extra $100 per month so that any likely possible future error will be offset.”[14]
[14] Annexure 9
In his witness statement, the Applicant stated that although the letter was written as addressed to the trustee of his superannuation fund, the letter was in fact sent to the Insurer[15]. I accept this evidence as it was consistent with the fact that the Applicant received a response from the Insurer. By letter dated 27 August 2007, the Insurer confirmed that it would withhold an additional $100 in tax from the monthly payments[16].
Suggestion of Possible Commutation in 2007
[15] First witness statement [23]
[16] Annexure 9A
Notwithstanding the Insurer’s agreement to make salary continuance payments directly to the Applicant, the Applicant continued to experience difficulties with his payments which led to the Insurer’s representative to suggest raising a possibility of commutation of the policy, if the Applicant so requested. For example, notes made by the Applicant of a telephone call between the Applicant and a representative from the Insurer on 28 August 2007 record the Applicant as saying that “he had not been paid yet” and “ask[ed] for a solution to the problem.”[17] I infer that the Applicant was referring to a non-payment for the month of August 2007. The notes also record the Insurer representative raising the possibility of a “computation” [sic] and she would take it up with the assessor if the Applicant so requests. The notes record the Applicant saying that it was not up to him to offer anything. The notes record the Insurer representative asking the Applicant to re-fax the payment claim form and the Applicant responding that the he had sent the original claim form with his letter. The notes record the Applicant as crying. The Tribunal accepts the Applicant’s evidence that the notes were made contemporaneously. The Applicant’s evidence was that at the time he did not know or fully understand what a commutation was. The Tribunal accepts that evidence.
[17] Annexure 10
At some point, the Applicant came to understand that a commutation would involve a lump sum payment. On 16 September 2007, the Applicant wrote a letter addressed to the Claims Administrator [Trustee of his superannuation fund] (again this appears to be an error and should have referred to the Insurer) in which he said he now wished “to enquire in greater detail about the possible availability and the suitability for me to elect to take a lump sum payment”.[18] There was no evidence before the Tribunal of the Insurer replying to this letter.
[18] Annexure 12
The possibility of commuting the Claim became another source of confusion for the Applicant. On 23 October 2007, the Applicant spoke to an Insurer representative. The Applicant’s notes of the conversation[19] record the Insurer representative as saying, amongst other things, that she had seen a letter that was to be sent to the Applicant in relation to the commutation and that she was disappointed that the Applicant had not been contacted. The Insurer would also write to the Applicant about a “CPI increase”. The notes record a comment that the Insurer was in discussion with its reinsurer about the commutation.
[19] Annexure 13-14
The Tribunal was provided with notes of a telephone discussion between the Applicant and an insurance assessor from the Insurer. The notes are difficult to follow and are undated. The Applicant’s evidence was that on or around 26 October 2007, he received a call from the assessor, that the conversations were very confusing to him but that he had understood that the Insurer was denying that they had been trying to commute the claim. The notes record that the Applicant stopped the conversation because it was upsetting him[20].
[20] Annexure 15-16
On the same day, the Applicant spoke to another Insurer representative. The records of that conversation indicate that the Insurer representative was also confused by the Applicant’s discussions with the assessor and that she had informed the assessor that the Applicant had requested a payout of his policy. The notes record the Applicant cried “because of the issues” and the Insurer representative as expressing concern for the Applicant, telling him that the claim was with the reinsurer and that the assessor would be in contact. The evidence was that the Applicant was left in a confused and agitated state after the discussions.[21]
[21] Ibid
On 30 October 2007, the Insurer wrote to the Applicant informing him that the Insurer was reviewing the commutation process.[22]
Difficulties Experienced in respect of Claims Escalation
[22] T 178
The Applicant also experienced issues in relation to the application of the claims escalation benefit clause of the Policy. On about 30 November 2007, the Applicant had a telephone discussion with another Insurer representative who was now looking after his file. The notes record that the Applicant inquired about the size of the CPI increase he had been given and from when it had been applied. He also requested that a review be undertaken to see if all CPI increases had been paid and that the Insurer respond in writing because “he no longer trusted [Insurer] employees.”[23]
[23] Annexure 17-18
On about 23 April 2008, the Applicant telephoned the Insurer and expressed his concern in relation to his payments and the fact that he had not received a letter which he had been expecting since December of the prior year. The Applicant said he wished to make a formal complaint and wished to speak to the Claims Administrator. The notes record the Applicant being put on hold and being told that his file could not be found. The Claims Administrator came to the telephone. By this stage, the Applicant was crying. The notes record the Claims Administrator saying that “the payment had not gone through” and that this was now being done. The notes also record that the Applicant was also told that a letter had been prepared but the Claims Administrator was going to look at it to ensure that it was correct and that the amounts had been properly taxed. The notes record the Claims Administrator saying that “he would follow this up as it cannot be allowed to continue, its [sic] wrong”.[24]
[24] Annexure 19-20.
The Insurer Claims Administrator called the Applicant on or about 23 or 24 April 2008. The Applicant’s notes record that the Claims Administrator said he would review the tax and superannuation calculations and that he was “sorry as he knows [the Applicant] has been treated badly” and “it would be better if there was a commutation.” The notes record the Applicant as saying he has been taking up his complaint for 6 years and it never gets fixed. The Applicant told the Claims Administrator that he was struggling and that “this makes me feel sick”. The notes record the Claims Administrator saying he understood and was sorry.
Notwithstanding he had raised issues with the Insurer, the Applicant’s experience with the Insurer did not improve. The Applicant’s notes of a conversation he had with another representative from the Insurer on 5 May 2008 record the Applicant as having explained that there had been incorrect letters, payments were never made (on time) and the Applicant always had to call. The notes record the Applicant saying he was crying all the time; everyone says they will look into it but never do and he felt that the Insurer was “deliberately incompetent.” The notes record the Applicant was crying and that he hung up.[25]
[25] Annexure 21-22, 23.
By letter dated 9 May 2008, the Applicant wrote to the Claims Manager at the Insurer in the following terms:
I have discussed with my treating doctors the ongoing failure of your company and its clear disregard for my mental health, which now spans some 5 and ½ years and the doctors have no doubt that the actions of the Insurer have been and continue to be detrimental to my medical condition.
Although a history of recorded comments and correspondence acknowledge such failure, it is now abundantly clear that your organisation has no intention of resolving the outstanding matters and; as such I have no choice but take legal action.[26]
[26] T 179-180
On or about 14 May 2008, the Applicant had another telephone discussion with the Claims Manager at the Insurer about his CPI increases. It appears that the CPI calculations prepared by the Insurer did not provide for the Applicant to receive a CPI increase for the 2004 year because the CPI calculations had been based on a file that only went back to 2004 rather than recording the Applicant as having been in receipt of claim benefit payments since June 2003. No CPI increase was made for 2004 because that was the year payments commenced, according to the file. The notes record the Applicant saying that he only wanted “fair payment” and that he had been “underpaid, overpaid, tax[ed] incorrectly, [received] late payments.” and that Applicant cried saying that it was making him sick. The notes record that “[the Insurer Claims Manager] said 10 June deadline not a threat will not hold”. The meaning of the last sentence is not apparent.[27]
[27] Annexure 24-25
By letter dated that same day[28], the Insurer wrote to the Applicant, stating amongst other things that:
a)one of the concerns the Applicant had mentioned was the Insurer had delayed some payments of monthly benefits and that subsequently the Applicant had incurred an overdraft fee of $100. Investigation by the Insurer revealed that the payments were made by the Insurer to the trustee of the superannuation fund in a timely manner and should have been on-forwarded to the Applicant. Although the delay was not caused by the Insurer, the Insurer had decided to reimburse the overdraft fee;
b)the Applicant’s claim period commenced on 6 June 2003 and up to and including the July 2006 payment, the payments were made to the trustee of the superannuation fund. Because the trustee of the superannuation fund was responsible for deducting tax and providing the Applicant with a Group Certificate, the Insurer was unable to reconcile the amounts that had been paid to the Applicant and tax deducted on the Applicant’s behalf;
c)the Insurer began making payments directly to the Applicant from August 2006. A review of the calculations showed that an amount of $4491.43 was owed to the Applicant ($3525.43 after deducting tax) and an additional $456.39 to the Applicant’s superannuation fund;
d)the Insurer had used the published CPI figure for the September quarter and had applied a CPI increase of 3.9% from July 2006 and 1.9% from July 2007; and
e)the author apologised for any inconveniences and assured the Applicant that a process had been put in place to effect monthly payments in a more appropriate and timely manner.
[28] Annexure 26.
It appears that there were some further exchanges between the Applicant and the Insurer over the course of the next month. By letter dated 18 June 2008, the Applicant wrote to the Insurer stating that he “accepted in good faith your advice that effective June 2008 my gross monthly benefit will be $7,598.42 less superannuation and taxes” and “confirmed” his request that the extra $100.00 cease being taken from his monthly payments. The letter goes on to state that:
having to deal with payment issues for some 6 years continues to have a significantly detrimental effect on my diagnosed condition and in the interests of my health and well being [sic] I beg your organisation to review all available options with a view to alleviating such affect [sic].[29]
[29] Annexure 27.
The Applicant’s progress medical report from his psychiatrist dated 28 August 2008 noted that the psychiatrist had observed the Applicant’s “distress at multiple errors in his payments/contributions towards superannuation. These have further contributed towards worsening of his condition.”[30]
[30] T 196-199.
The Applicant was particularly affected by the difficulties with the administration of his claim over December 2008. The difficulties were two-fold.
First, the Applicant’s payment for the month December 2008 was not received on time. By letter dated 24 December 2008, the Applicant wrote to the Insurer noting that the Applicant had been informed that his payment was processed on 17 December but he had not received payment. The letter stated:
“Due to my illness and inturn [sic] reliance on [the Insurer] my families [sic] Christmas has been destroyed and my mental state is beyond description. I no longer have any trust in your organisation or hope for the future.[31]
[31] T 200
By letter dated 30 December 2008 from the Insurer to the Applicant, the Applicant was informed that the payment for the month of December 2008 was processed in time but “due to a system error, the EFT could not [be] made earlier than 24/12/2008”. The error had affected not just the Applicant “but all other employees whose payment were to be made through Electronic Fund Transfer”. The Insurer apologised “to you and your family for any inconvenience caused during the Christmas ”.[32]
[32] Annexure 28
Secondly, the Applicant was informed that his benefit payments were to be reduced. Notes dated 6 January 2009 record the content of a telephone call from the Insurer (group administrator) to the Applicant.[33] Although apologising for the late Christmas payment the Insurer administrator informed the Applicant that the new system (which had caused the delayed payment) had “now calculated [the Applicant’s] benefit as further reduced as at 1 January 2009” and “tried to explain that the new system works backwards so the next payment would be further reduced by some amount.” The Applicant did not understand.
[33] Annexure 29-30
The Applicant’s evidence was that by this time he was left feeling “overwhelmed with complete dread”; that he “feared interacting with [the Insurer]”; and “feared not getting paid.”[34]
[34] First Witness Statement [48]
On the evening of 6 January 2009, the Applicant’s wife wrote to the Insurer seeking a further explanation in relation to the reduction in his “salary”. In particular, she sought a written explanation relating to “superannuation discrepancies for the month of December 2008” (which appeared to involve more than 10% super being deducted from the total benefit amount). She continued:
Please help me, so that I may help reduce the suffering my husband has and I ask you to remember that I am left to pick up the pieces and only had [the Applicant] at the doctors today due to the Christmas payment issue and his depression and now this. [The Applicant] suffers greatly and has lost all trust in people and that any anger he shows is born out of his depression and inability to believe in others and to rationalise each situation he faces.[35]
[35] T 202
Notes written by the Applicant dated 22 January 2009 of the content of a telephone call from the Insurer to the Applicant record that the Applicant expressed his “significant concern” over the Insurer “wanting to further reduce his benefit” and wanted to understand why the reduction was being made. The notes record the Applicant as saying that there was always something wrong with his benefit, it had caused years of suffering and “it was so bad he wanted to kill himself” and now the Insurer seemed to want more money from him. The notes record him saying that if he died he had told his wife to hold the Insurer responsible for his death. The notes record the Insurer representative as saying she understood the history of the Applicant’s claim and the errors and stress it had caused. The notes record the Applicant as saying he just wanted to be paid the right benefit. He had enough of the suffering caused and that he intended “to take [the Insurer] and his employer to Court something has to be done to stop this continual harm”. He accused the Insurer of negligence and that the Insurer was “killing him”. The notes record the Insurer representative as saying that they were looking at the issues of calculations and his complaints and she would write by the end of the week.[36]
[36] Annexure 31-32
At some point between 22 January 2009 and 2 February 2009, the Applicant received a further letter from the Insurer, informing him that his benefit had been further reduced. The Tribunal was not provided with a copy of that letter. Notes prepared by the Applicant dated 2 February 2009 record the content of a telephone call from the Applicant to an Insurer representative, saying “he had little choice but to have [the Insurer] taken to Court for the continued negligence and the harm caused to me”. The notes record the Insurer representative as apologising and saying “she was fully aware of [how] this is effecting [sic] me”. The Applicant requested his file be independently audited. The Insurer representative told the Applicant that, although the Applicant had not done anything wrong, there were “other issues” with the file that she needed “to review with senior management”. The notes record the Applicant saying it “had become a nightmare pushing his life to the edge” and that he had “done nothing to deserve this type of treatment”.[37]
[37] Annexure 33-34
An Insurer internal email to the Head of the Corporate Super Admin dated 9 February 2009 record that, based on the Insurer’s calculations, the Applicant had been overpaid over a 2.5 year period a total of over $5,000 and that the claims manager would prefer not to seek reimbursement. The email stated:
The member is suffering from severe depression and he advises that it is worsening as a result of [the Insurer]. I openly admit that this member on a few occasions has not received payment on time, 1 resulting in a dishonour fee (which we reimbursed), his payment amounts varied without explanation and the Insurer has tried to commute his benefit. This claim is extremely high maintenance … my team are not qualified to deal with his mental state/condition.
The Head of Corporate Super Admin responded in an email dated 10 February 2009 that he agreed that the Insurer “will not seek recovery” and that “if we have ballsed up the Admin that is our fault.”
By letter dated 16 February 2009 sent by facsimile, the Applicant’s wife asked for a further explanation relating to “salary discrepancies” for the months of December 2008 and January 2009. The letter noted that it has been two months since the initial reduction and that the Applicant:
has still not been given the basic curtsey [sic] of the reason why, instead to add insult to injury his January benefit has further been reduced, which is just cruel, damaging and unwarranted.[38]
[38] T 204
By letter dated 16 February 2009 [which the Applicant testified that he received and read some time after 25 February 2009], an Insurer representative wrote to the Applicant’s wife apologising for the delay in receiving the December payment but that the reasons for this delay “was out of our direct control”. The letter attempted to explain the way in which the new computer system calculated the monthly benefits. The insurer’s review of the benefit calculations had revealed that the new computer system had used the wrong salary figure, the superannuation component of the benefit had been incorrectly calculated since August 2006 (when the salary continuance benefit had commenced to be paid directly to the Applicant) and that incorrect CPI figures had been used in all but 1 year. The letter also stated:
I do agree and have agreed in the past that there have been calculation errors with regard to [the Applicant’s] monthly benefit …. …. We have undertaken a full reconciliation and audit of claim payments made. This has resulted in a figure of [over $5000] being overpaid to [the Applicant] since claim payments began. This finding has been referred to senior management with a recommendation not to seek recovery to which they have agreed. I know from past discussions with [the Applicant] that he has said he just wants the payments to be correct and I can assure you this is what we want also.…
… the January 2009 payment that was made has been calculated correctly. …. The above figures will remain constant to the next CPI increase (and providing there are not amount to offset). I will ensure that any changes made to these payment amounts are confirmed in writing and I have clearly marked [the Applicant’s] records to reflect this.
….. Again I sincerely apologise for any additional suffering this has caused to [the Applicant] and your family.[39]
[39] Annexure 36.
It appears that at some point the Applicant requested a firm of accountants, JP Hardwick and Associates, to conduct an audit of his insurance benefits. On or about 8 May 2009, the Applicant received a letter from JP Hardwick and Associates. A copy of that letter was not before the Tribunal.
By July 2009, a new claim administrator from the Insurer was administering the Applicant’s claim and the Applicant’s difficulties with the Insurer continued. By letter dated 19 July 2009, the Applicant’s wife wrote to the Insurer stating that the Applicant had recently received his PAYG summary “which is clearly incorrect”. The letter stated:
Please understand that such errors have been occurring for some seven years now and this incorrect document on top of recent issues has further aggravated [the Applicant’s] condition, largely because in the past he has to pay extra tax as he was incorrectly taxed by [the Insurer]. Also understand in the past while each staff member in turn (now some 9 employees) apologised to [the Applicant] for numerous mistakes and reported it never happen again! It continues and I am left to pick up the pieces …. Since his discussion with you I have had to closely watch [the Applicant’s] depressive and anxious state … such is the effect your company and its continual mistakes have had on him. The Applicant can no longer deal with such errors … He fears getting his payments each month, which is wrong but he has reason to because of the late payments and other mistakes. Whilst I understand you may be new to [the Applicant’s] file I beg you to please help me by getting it right, pay him correctly and on time and give him the right information at least this will show him that he means something to someone and that your company respects him, his position and his medical condition and his doctors.
In closing I again point out that [the Applicant’s] doctor and I have asked for a resolution to the continual documented errors and … I personally put your company on notice that its actions have and are causing harm to my husband and in turn my family and your company must do something to stop such harm.[40]
[40] T 205
A psychiatrist report to the Insurer dated 17 August 2009 described the Applicant as suffering severe chronic major depressive disorder which appears treatment resistant and that as a result of his illness, he was unable to do his job on a full- or part-time basis and was unlikely to regain a work capacity in the foreseeable future. The psychiatrist report noted that the Applicant “was constantly thinking of his employer and how he had been treated. He is aggrieved and angry.”[41]
[41] Annexure 39
By letter dated 17 September 2009, an Insurer representative (Business Unit Manager, Shared Services) wrote to the Applicant noting that they had conducted a review of the PAYG Payments Summaries issued for the year ended June 2009 and confirmed that the amounts shown in that summary were incorrect. The letter went on to state that if the Applicant’s tax return had already been lodged, he would need to arrange for an amended return. The Insurer apologised for the inconvenience.[42]
[42] Annexure 40
By letter dated 19 November 2009, the Applicant’s consultant psychiatrist wrote to the Insurer (Business Unit Manager, Shared Services) wanting to:
communicate to you my concerns regarding [the Applicant’s] mental state being adversely affected by dealings with your organisation. I have repeatedly observed how he gets extremely distressed when he receives communications from [the Insurer]. He informs me that there are perhaps avoidable mistakes that cause distress to him. Given his level of distress, I am compelled to write to you to keep you informed of this. If there is any possibility of avoiding him being subjected to further stress, I would be grateful for whatever action you may be able to take to achieve this …[43]
[43] T 206
By Dispute Form dated 1 December 2009, the Applicant lodged a dispute with the Financial Ombudsman Service (FOS) relating to his policy. The claim appears to be made in respect of both the trustee of his superannuation fund and the Insurer and initially related to the superannuation contributions insurance benefit. In that form, the Applicant identified the events in dispute as occurring since 2003 but that he was unaware he had a dispute until 8 May 2009. The attachments provided to FOS with that form were not in the materials before the Tribunal. From the Dispute Form, it appears that the FOS claim was triggered by the content of the audit letter the Applicant had received from JP Hardwick dated 8 May 2009. In the claim form, the Applicant raised three issues of concern relating to the superannuation component of his insurance claim:
a)“withdrawn contributions” totalling over $16,000 relating to years ended 20 June 2005, 2006 and 2007. (What was meant by “withdrawn contributions” is not clear from the materials before the Tribunal);
b)a “forfeited benefit dated 11 November 2003”, totalling over $11,000. (What was meant by “forfeited benefit” is not clear from the materials before the Tribunal); and
c)four missing superannuation payments recorded as sent by the Insurer but not received by the Trustee of the Applicant’s superannuation fund totalling about $3000 over the years ended 30 June 2005, 2006 and 2009.
According to the claim form:[44]
a)the Insurer had replied but “show little action”;
b)the trustee of the superannuation fund responded in a letter dated 25 November 2009. A copy of the letter was not before the Tribunal. The Applicant’s claim form records the trustee’s response as stating that:
i. the withdrawn contributions’ totalling over $16,000 were re-credited; and
ii. the “forfeited benefit” had been deducted from the Applicant’s account “following his payment of relevant taxes and fees due to some unknown agreement with the employer and without authority from me”. The Applicant was reported by the trustee of the superannuation fund as having contacted the trustee in August 2008 and had requested contributions be recorded as “undeducted personal contributions and not employer superannuation payments.” The Applicant did not recall such a request ever being made by him.
c)the Applicant and JP Hardwick and Associates had been unable to identify whether the withdrawn moneys had in fact been re-credited, who had authorised the “forfeit” of his benefit, and was yet to be provided with any documentation relating to his supposed request to change his contributions from being recorded as employer superannuation contributions to personal contributions.
[44] Annexure 41
In that form, the Applicant requested:
a)the organisations involved to “clarify the issues/question raised and provide clear evidence to their stance”;
b)a full audit of all monthly salary continuance benefits be made “and those matched against superannuation benefits made to the trustee of the superannuation fund and against those received by the trustee commencing July 2003 to present; and
c)“the monetary return of funds noted as deducted, forfeited and missing” to the combined total of over $30,000, “plus any monies owed as a result of missing and incorrect payments noted in the trustee’s reply letter and monies not paid where the 10% superannuation value was not paid”.
The Applicant’s evidence was that at the time of completing the claims form, he had understood a senior case manager from FOS had “advised” him “not to refer in it to aggravation, suffering and distress” caused by the Insurer, as this did not fall under the FOS Terms of Reference.[45]
[45] First Witness Statement [68]
Under the FOS Terms of Reference as they existed at the time:
a)complaints to FOS were subject to a monetary limit (for an income stream product, the limit was $6000 per month);
b)the Panel could award compensation for “any financial or economic loss or damages which is a direct result of any act or omission in respect of which a complaint is upheld”;
c)the Panel (or Adjudicator (for claims less than $30,000)), could not award monetary compensation in the nature of punitive damages or compensation for financial or economic loss or damages that is not a direct result of any act or omission in respect of which a complaint is upheld or compensation for suffering or distress;
d)complainants are expected to abide by the decision of the Panel or Adjudicator although Complainants are not bound by those decisions and may wish to pursue whatever rights they have against the member in another forum;
e)where a Complainant accepts the decision of the Panel or the Adjudicator, the Complainant is bound by all aspect of that decision and before implementing the decision, the member is entitled to ask the complainant to sign a deed of release provided that:
i. the proposed deed of release is forwarded to the Complainant within 10 days of the member being informed that the Complainant accepts the decision; and
ii. the proposed deed of release is limited to the matter in dispute in the complaint dealt with by the Panel or the Adjudicator.
f)FOS was required to have in place procedures for dealing with systemic issues and serious misconduct.
By letter dated 2 February 2010, FOS advised the Insurer (Senior Complaints Analyst) of the dispute received by it from the Applicant.[46]
[46] Annexure 43
At some point, the Applicant also commenced proceedings in the Superannuation Complaints Tribunal.
The Applicant testified that around February 2010, he was advised by his treating psychiatrist that his diagnosis had changed from major depression to bipolar affective disorder. This diagnosis was confirmed in a letter to the Insurer from that psychiatrist dated 23 June 2010.[47]
[47] Annexure 44
While the FOS dispute remained on foot, the Applicant continued to experience difficulties with the administration of his claim. By letter dated 10 July 2010, the Applicant received a PAYG summary for the year ended 30 June 2010, which in the Applicant’s view was not correct.[48] A file note prepared by the Applicant records a conversation between the Applicant and an Insurer representative on 16 July 2010 about the incorrect PAYG statement and the Insurer Team Leader Claims later agreeing that the PAYG Statement was incorrect (gross payments and tax withheld had been understated).[49] The note also recorded the claims area was reviewing the CPI increase and superannuation calculations.
[48] Annexure 44A
[49] Annexure 45-46
By letter dated 18 July 2010, the Applicant’s wife wrote to the Insurer noting that issues with incorrect PAYG statements happen every year.[50] The letter also recorded the Applicant’s understanding that the Insurer was again reviewing the CPI increases and the rate at which superannuation had been paid. The letter records:
I point out that these types of payment errors, investigation and excuses have been happening for some 8 years and you know your organisation has been conducting a full investigation for some years now but again you said “look we need to do a full review of all payments and we have sent more information recently to [B] in dispute resolution who is conducting an investigation.” Clearly we are no closer to a resolution. Both [the Applicant’s] doctor and I have written to your organisation on numerous occasions (6 at least) expressing our strongest possible fear and concern over the effect such errors and investigation have on [the Applicant] and the harm it’s causing both [the Applicant] and our family yet we are no closer to fixing the issues and the apologies and further investigation mean nothing … Please I beg you to resolve these issues as I fear for my husband’s wellbeing and life.
[50] Annexure 47
A revised PAYG statement was resent to the Applicant.[51]
[51] Annexure 44B
At some point in the FOS resolution process, FOS began to investigate issues relating to the salary continuance component of the Applicant’s claim. By email sent on 9 September 2010, FOS asked the Insurer for a copy of the reconciliation/audit information that had led the Insurer to conclude that the Applicant had been overpaid by about $5,000 (as has been set out in the Insurer letter of 16 February 2009).[52] The Insurer sent a spreadsheet to FOS on 14 September 2009 showing the calculation. That spreadsheet was not before the Tribunal.
[52] Annexure 48
It appears that the spreadsheet did not allay the Applicant’s concerns.
a)By letter dated 5 October 2010[53] from the Applicant’s wife to an Insurer Claims Administrator (a copy sent to FOS and the Superannuation Complaints Tribunal), the Insurer was requested to explain how it had arrived at the CPI figure and why the Insurer considered the Applicant had been overpaid (recovery of which had been waived) when the summary table had shown that the Applicant had not been “paid the correct CPI or salary for years”. The letter continued:
Whilst we agree with the salary as at 2009, we remain unsure if superannuation payments have been correct and we are extremely concerned that the Insurer are unable to offer correct calculations or same set of data twice yet they still maintain [the Applicant] has been overpaid and continue to confirm this to the Superannuation Complaints Tribunal and the Financial Ombudsman Service...
b)By letter dated 7 October 2010,[54] the Applicant’s wife again wrote to the Insurer (copy to FOS and Superannuation Complaints Tribunal) questioning the superannuation payments made by the Insurer to the trustee of the Applicant’s superannuation fund. It appears she was unable to reconcile the superannuation contributions recorded as received by the trustee with the superannuation contributions reported by the Insurer to FOS and the Superannuation Complaints Tribunal as having been paid. The letter states: “I have not told [the Applicant] of this issue as I fear for his wellbeing. Issues like this must stop I beg all of you.”
c)By letter dated 20 October 2010,[55] the Applicant’s wife wrote to the trustee of the superannuation fund informing it that the Insurer had confirmed that they had sent all the amounts to the trustee and that the Applicant was now making a further formal complaint to the trustee.
[53] T 208
[54] T 209
[55] T 212
Whilst FOS was dealing with the issues relating to past periods, the Applicant continued to experience difficulties with the application of the escalation clause to his then current payments. Queries in relation to the CPI increase for September 2010 were made by the Applicant’s wife to the Insurer by letters dated 6 October 2010[56], 22 October 2010[57] and 27 October 2010.[58]
[56] T 210
[57] T 213
[58] T 216
By letter dated 23 November 2010, the dispute resolution consultant from the Insurer responded to the Applicant’s wife, setting out the Insurer’s interpretation of the escalation clauses in the policy and a reconciliation of the rates applicable to the applicant’s policy. The letter confirmed that the benefits should have been indexed from 7 June each year and indexation had been incorrectly applied in 2009 and 2010 from September rather than from June. The Insurer apologised for the error. The letter also confirmed the Base Salary that had been used for calculation for benefits. The Insurer’s review had revealed that:
a)the Insurer had issued cheques for superannuation continuance to the trustee of the Applicant’s superannuation fund for the period 1 July 2009 to 31 October 2010, five of which had been unpresented;
b)the Applicant had been paid one day’s extra benefit for the period June 2003 to 31 July 2003 (he had been paid for 6 June 2003 when his payments should have commenced on 7 June);
c)for 1 September 2003 to 30 September 2003 an offset was miscalculated, resulting in a cheque for $182 being paid to the trustee of the Applicant’s superannuation fund (It will be recalled that at that time payments had been made to the Trustee rather than the Applicant for both salary continuance and superannuation continuance);
d)from 1 October 2004 to 31 October 2004, an additional $70 was paid to the Applicant to reimburse him for a dishonour fee he had incurred;
e)there had been an overpayment of about $350.00 to the trustee of the Applicant’s superannuation fund for the period to 31 July 2006;
f)from 1 August 2006, a higher benefit was paid for the month of June 2008 to adjust for miscalculated benefits from 2003;
g)in October 2008, it had been identified that indexation in June 2008 had not occurred so a higher payment was made for the month of October;
h)indexation had not occurred in June 2009 but instead in September 2009 and for 2009 and 2010, indexation had been applied from September rather than June; and
i)it appeared to the Insurer that the Applicant had been underpaid superannuation benefits by over $7600 but overpaid salary continuance by just over $11,800. After tax, he was overpaid by about $5800.
The Insurer proposed to adjust the Applicant’s monthly benefit [downward] effective immediately, revert to indexing his benefit from June each year commencing in 2011 and not reissue the unpresented cheques because of the overpayment made to the Applicant.
The letter concluded “[the Insurer] acknowledges the numerous errors in the administration of [the Applicant’s] disability payments and sincerely apologises for the inconvenience this has caused.”
The Applicant spoke with the Insurer Dispute Resolution consultant by telephone on 26 November 2010. The Applicant had struggled to understand the letter of 23 November 2010 and considered the dispute resolution consultant to be aggressive. The Applicant’s notes[59] record the Applicant being told that he either accept the terms in the Insurer’s letter and if he did accept those terms, the FOS matter had to be withdrawn. The Applicant wanted the terms of the letter looked at by FOS. The Applicant records the Insurer Dispute Resolution consultant as telling him that if he did not accept the terms, the Insurer would not be making any further adjustments to his benefits and would seek to recover all past overpayments. The Applicant’s notes record him as responding by saying he would not be bullied. The notes state:
FOS will determine my financial complaint and I’m telling you straight I will then take [the Insurer] to Court on the detailed complaints of my suffering and the wrong and harm [the Insurer] has over 8 years and continue to cause me. Mate its [sic] time [the Insurer] should think about settling all my complaints, put up or shut up.
[Insurer representative] – FOS are dealing with your complaints…
[Applicant] – FOS are not, not all. No one in your company listens, reads or wants to understand my complaints. Look we will review this document and send our reply.
[59] Annexure 50-51
By letter dated 16 December 2010[60], the Applicant responded to the Insurer letter of 23 November 2010. The letter records:
It appears that with every new report comes a new set of data and advice from the Insurer reporting the previous data and policy to be wrong. Whilst this is the 9th such formal apology relating to errors over 8 years this has been far more than an inconvenience for [the Applicant] and his family. Further your proposed and immediate benefit reduction would have devastating effect on the family’s daily living and [the Applicant’s] affordability to travel for treatment, payment of actual treatment, medications etc.
While your interpretation of the policy differs with previous and more senior management [the Applicant] again accepts in good faith this new advice, however, based on clear instruction and in an attempt to avoid litigation relating to wrong suffered and harm caused to [the Applicant], he agrees to withdraw the complaint with the Financial Ombudsman Service on the proviso that the following points are agreed to:
1.That no outstanding and/or over paid money relating to this matter whatsoever will be sort [sic] from [the Applicant] now or in the future.
2.The current monthly benefit remains as is presently paid until 6 June 2011. In regard to the present benefit please note [the Insurer] benefit entitlement letter dated 26 October 2010 [A copy of which was not before the Tribunal].
3.The indexation of the monthly benefit will revert back to 07 June each year commencing 2011. Therefore as at 07 June 2011 the actual salary benefit will be that nominated by you … plus the September 2009/2010 CPI entitlement of 2.8%.
4.Un-presented superannuation cheques where required will be represented by [the Insurer] to [the trustee of the superannuation fund] for the relevant value.”
The letter concluded by stating “by way of solution to any future problems and given [the Applicant’s] total and permanent medical condition we suggest [the Insurer] again explore the option of commutation as this was the case in mid 2007”
[60] T 222
By letter dated 24 December 2010[61], the Insurer responded to the Applicant’s letter of 16 December 2010 in the following terms:
a)the Insurer agreed to waive the overpaid benefits to date if the Applicant agreed to withdraw the complaint [with the FOS] and to a downward adjustment in the total monthly benefit to effective January 2011;.
b)the Insurer did not wish to make further overpayment by maintaining the current monthly benefit. Should the Applicant proceed with the complaint with FOS, the Insurer would continue to pay the current monthly benefit until FOS makes a determination. However, the Insurer reserved the right to recover any overpayment if it was found that the true monthly benefit should be less than the current monthly benefit;
c)the Insurer concurred with the Applicant’s calculation of the total monthly benefit from June 2011 (however considered the monthly superannuation benefit was 7 cents lower than that determined by the Applicant);
d)five cheques issued to the Trustee of the superannuation fund but not presented would not be reissued because the Applicant had been overpaid salary benefit; and
e)the request for commutation would be referred to the Group Claims area for consideration.
[61] T 224
By letter dated 17 January 2011,[62] the Applicant responded that he was maintaining his claim with FOS but accepted the Insurer’s “new advice regarding [the Insurer’s] previous incorrect interpretation of its own policy (method of CPI calculation) and indexation timing”. The Applicant stated that the letter of 24 December 2010 was “confusing in that point 4 conflicts with point 1” and “that a previously written and agreed settlement (16 February 2009) from [the Insurer] had dealt with and concluded the matter of any overpayment”. The letter continued:
[62] T 225
In view of such settlement and based on further legal instruction dated 13 January 2011 [copy not provided to the Tribunal], [the Applicant] cannot not [sic] accept your offer dated 24 December 2010. However, in the interest of [the Applicant’s] health and a fair and reasonable outcome, [the Applicant] agrees to withdraw the complaint with the Financial Ombudsman Services … on the proviso that each of the following points are agreed to:
i.That no outstanding and/or over paid money whatsoever relating to this matter will be sort [sic] from [the Applicant] now or in the future.
ii.The present monthly benefit be reduced to the nominated amount … effective January 2011.
iii.The indexation of the present monthly benefit will revert back to 07 June each year commencing 2011.
iv.All un-presented superannuation cheques where required will be reissued by [the Insurer] to [the trustee of the superannuation fund] for the relevant value.
v.Where points I to IV are agreed, [the Applicant] further agrees not to seek compensation for loss due to the failure of [the Insurer] to make correct superannuation entitlement contributions.
By letter dated 25 January 2011[63], the Insurer accepted the Applicant’s “proposition subject to completion of a deed of release” which was being prepared. “As part of the agreement [the Insurer] wishes to make it clear that withdrawal of your complaint with the Financial Ombudsman Service is required.”
[63] T 226
A Deed of Release was sent to the Applicant under cover of letter dated 28 January 2011.[64]
[64] T227-230, Annexure 52
The Recitals to the Deed recorded:
A. The Releasor is an insured person under the Policy
B. On or about 18 June 2003 the Releasor made a claim for benefits under the Policy
C. On or about 24 July [the Insurer] admitted the claim with benefits accruing from 6 June 2003 …
D. On or about 6 January 2009, the Releasor disputed the monthly benefit amount being paid by [the Insurer] relating to his superannuation contribution benefit under the Policy.
E. The Releasor has brought a Complaint before the Financial Ombudsman Service (FOS) claiming a shortfall in superannuation contribution benefit payments from 2004 to 2009 in the amount of [about $4000].
F. The parties to this Deed have agreed to resolve the Complaint in the manner and on the terms set out in this Deed.”
The operative clauses included:
1.Consideration
The Releasor agrees to accept the following:
A. The Total Monthly Benefit under the Policy will be amended to [about $8150] effective January 2011. [This] comprises of [specified dollar amount] of Superannuation Contribution Insurance and [specified dollar amount] as the Group Salary Continuance benefit.
B. Superannuation Contribution Insurance benefit cheques for [specified months where cheques had not been presented] will be reissued …
C. Indexation of the Total Monthly Benefit will be calculated as at June each year.
[the Insurer] agrees to the terms set out above in exchange for the Releasor’s promises and indemnities set out in this Deed. The Releasor acknowledges that the said sum under 1B is the full amount of the monetary consideration payable in respect of the Complaint and that no further sums (by way of legal costs, disbursements or interest of any kind or for any other reason whatsoever) shall be payable by [the Insurer] to the Releasor in respect of the Complaint.
[The Insurer] will continue to assess the Releasor’s entitlements to benefits in accordance with the terms and conditions of the Policy.
[The Insurer] agreed not to seek recovery from the Releasor in respect of any overpayment of benefits made by Insurer to date.
……
3 Release from the Complaint
3.1 For the consideration set out in Clause 1, the Releasor for himself, his heirs, executors, administrators, transferees and assigns hereby releases and forever discharges [the Insurer] and its related entities and employees and agents and respective heirs, executors, administrators, transferees and assigns from:
(a) the Complaint
(b) all claims, proceedings, suits, demands, damages, charges, costs and expenses of every description whatsoever which the Releasor may have or may have had but for this Deed against it in respect of any damage, loss, cost or expense of any kind suffered or incurred by the Releasor or otherwise for, by reason of, arising out of or in any way connected directly or indirectly with the facts, circumstances giving rise to the Complaint or the negotiations relating to the settlement evidenced by this Deed
including but not limited to all claims or damages, costs, charges and expenses which may hereafter arise.
….
5 Dismissal of Complaint
The Releasor agrees that immediately following the execution of this deed and receipt of the [missing superannuation unpresented cheques] the Complaint will be dismissed forthwith…
6 Denial of Liability and Bar to Suit
The Releasor acknowledges that:
(a) The consideration set out in Clause 1 is given with an express denial of liability…
(b) This Deed may be pleaded by Insurer …. in bar to any proceedings … arising out of or in connection with the facts and circumstances giving rise to the Complaint.
Definitions
Policy means policy number XXXXX between Insurer Life Limited and LifeTrack Management Limited
Claim means [Insurer Claim Number]
Complaint means FOS Complaint [Number] that included the miscalculation of the Releasor’s GSC and SCI monthly benefits for the period 2004 to 2010, missing SCI payments and any other complaints brought forward by the Releasor subsequent to the initial lodgement of his Complaint to FOS in December 2009.The Applicant did not sign the Deed of Release.
On or about 15 February 2011 the Applicant took advice from his solicitor. No letter of advice or contemporaneous records of advice were produced. The Applicant’s evidence was that he understood the advice as confirming:
that the effect of the deed might be to prevent me from taking action in the future against [the Insurer] and Star Track Express and other entities for their mistreatment of me and the resulting damage to my health and well being.[65]
[65] First witness statement [85]
The reasons the Applicant gave to the Insurer for not signing the deed were set out in a letter dated 15 February 2011 from the Applicant to the Insurer.[66] The Applicant wrote that the terms of the Deed of Release “clearly differs in respect to that which we put on offer 17 January 2011 and to that which [the Insurer] appeared to accept in your letter dated 25 January 2011.” The letter went on to specify:
[66] T 231, Annexure 53
1.The figures in the consideration clause of the Deed of Release appeared to the Applicant to be incorrect and not match those previously agreed. The discrepancies identified were an overstatement in the deed of the monthly superannuation contribution of about $27.00 (though it is noted that the amount identified in the letter as the amount disclosed in the deed appears to be mis-transcribed) and an understatement in the deed of the monthly group salary continuance benefit of about the same amount.
2.The Applicant considered that the deed was asking him to “forego or compromise what is a statutory right under the Superannuation Industry (supervision) [sic] Act 1993 as amended and supported by Australian Prudential Regulation Authority (Superannuation Circular No 1.A.2), that being to have superannuation contributions remitted promptly and/or to have the required superannuation contribution entitlement made good following any failure to make such contribution entitlement.” The Applicant considered that it was the responsibility of the Insurer to ensure the correct monthly benefit payment is made.
3.The Applicant wanted clarification of “point C under the Heading Consideration” where the term ‘at June’ was used. The Applicant sought clarification as to the date the actual indexation calculation would occur as either being 01 June or 07 June each year.
4.The Applicant wanted part of the Consideration clause redrafted. His preferred wording was “[the Insurer] agrees that no outstanding and/or over paid benefit whatsoever relating to this matter will be sort [sic] from the Releasor now or in the future.“
5.The Applicant also sought:
(a) that the definition of Complaint be replaced with:
Complaint means Financial Ombudsman’s Service (Dispute number XXX) as it relates to:
a. Unpresented and/or shortfall superannuation payments and; [sic]
b. Incorrect policy interpretations as it relates to Group Salary Continuance Benefit commencement salary and the calculation of Group Salary Continuance Benefits and; [sic]
c. The poor standard of service provided by [the insurer] and; [sic]
d. Any other claims brought forward subsequent to the initial lodgement of the complaint.
(b) That the words “and its related entities and employees and agents and respective heirs, executors, administrators, transferees and assigns” and “including but not limited to all claims or damages, costs, charges and expenses which may hereafter arise” be deleted from the release clause . The Applicant wanted the words deleted in order “to confine the scope of the release to the matter at hand” and “to limit the scope of the release to [the insurer]”.
(c) Changes to the recitals to the deed, including the deletion of recital D.
The letter then went on to raise an issue about the manner in which the Applicant’s salary had been determined for the purposes of the policy:
we say [the Insurer] and the Policy Owner did make further error in not allowing for taxable profit share/commissions paid by the employer to [the Applicant] to form part of the Group Salary Continuance Benefit commencement salary.”
As a result, [the Applicant] contends that his commencement salary ought to have been [over $10,000 higher].
…..
Given the above and based on clear legal advice [the Applicant] is not presently in a position [sic] accept your deed of release ….
The Tribunal notes that the Applicant did not in his response state that he was seeking to reserve some right to make a claim for damages for distress.
By letter dated 21 February 2011[67], the Insurer requested further details of the Applicant’s contractual arrangements with his employer, copies of pay slips and other “supporting evidence” explaining why the Applicant considered profit share to be commission. The Insurer maintained its offer to pay the reduced monthly benefit effective January 2011 and “waive any overpayment up to the end of December 2010.”
[67] T 234
A report from the Applicant’s treating psychiatrist dated 11 June 2011[68] (released to the Insurer at that time) records the Applicant as reporting in March 2010 “depressed mood, hopelessness, anxiety, agitation, irritability, preoccupation with insurance issues and poor sleep.” In subsequent reviews, the Applicant:
got visibly distressed, agitated and tearful every time that he talked about his problems with the insurance company and the avoidable mistakes that the company had made. His illness has caused significant impairment in his mental state and he continued to display preoccupation with insurance issues.
He was considered as unlikely to be fit to return to the workforce. He had difficulty finding words and recalling events.
[68] T 236, Annexure 54
The progress medical report from October 2011[69] was the same.
[69] T 239
By letter dated 23 September 2011, FOS advised that the dispute had been referred to the Adjudicator for determination.[70] The letter noted that the submissions made in the matter were lengthy and the complaint had appeared to have evolved over the course of the dispute.
[70] T 246
The main issues identified for consideration by the Adjudicator were:
1.Did the Insurer:
a. correctly assess the Applicant’s salary at the commencement of the claim? If not what is the correct assessment?
b. act fairly and reasonably and with the utmost good faith in the assessment of [the Applicant’s] salary at the commencement of the claim?
2.Has the Insurer made the salary continuance and superannuation contribution payment in accordance with the policy?
3.If it is found that the Insurer did not correctly assess the commencement salary and/or breached its obligation to act in utmost good faith and/or did not make benefit payments in accordance with the policy, what loss, if any, has the Applicant suffered?
4.Was there a prior agreement relating to the waiver of overpayments by the Insurer, the correct monthly benefit to be paid, the CPI rate or the appropriate date for benefit indexation?
By determination made on 8 March 2012[71], the FOS Panel upheld the Applicant’s complaints.
[71] T 275
The FOS determination of 8 March 2012 recorded:
8. This dispute is not about whether the complainant was entitled to Benefits under the Policy but rather what amount he was entitled to.
9. While in receipt of benefits under the Policy, the complainant experienced a number of difficulties with the services provided by the member. These difficulties largely related to missed or delayed payments or the incorrect calculation of CPI increases for benefits. The errors related to both the Salary Benefit and the Superannuation Benefit under the Policy.
…
11. The member acknowledged, both before and during the course of the dispute, the administrative difficulties encountered by the complainant and that it had not paid the correct amount of benefits owing to the complainant under the Policy. For instance, during the course of the dispute, the parties reached an agreement as to the rate of the yearly CPI increases that ought to have been applied to the complainant’s benefits. However the member has declined to alter the rate of payments pending the resolution of all elements of this dispute.
12.On 15 February 2011, the complainant alleged that the member incorrectly calculated his salary when first assessing his claim in 2003.
13. The Panel was required to do what is fair in all the circumstances, having regard to the evidence, the law, good industry practice and relevant codes of practice. Liability can arise for a client’s loss for breach of contract, duty of care or statutory duty.
In respect of salary issue, the Applicant alleged that the Insurer had failed to take into account amounts received under a profit sharing scheme and that the employer had provided him with a car for private use, both of which were part of his remuneration package and therefore part of his salary within the ordinary meaning of that term. The Panel concluded that the payments were part of the complainant’s salary. As a result, the applicant’s salary at commencement of benefits should have been higher.
At the same time, the Panel did not consider it fair to allow the Applicant to reopen the salary issue but continue to maintain that the Insurer had waived its right to recover overpaid benefits. The Panel accepted the complainant’s calculation of the overpayment. (As will be seen, that part of the FOS determination was made in error. If the Applicant’s salary had been under-calculated, all the benefits under the policy needed to be re-determined and there could not have been an overpayment).
The Applicant had alleged that as a result of administrative errors, he had paid tax on amounts recorded as income on his PAYG statements but not actually received by him. The Panel accepted that the complainant had overpaid tax in the years ended 30 June 2004 and 30 June 2007 and that he should be compensated by the Insurer for the overpaid tax.
The parties had agreed that there were numerous errors in the Insurer’s calculation of the change in CPI for both the salary and superannuation benefits. The Insurer also admitted to not paying the superannuation benefit for January 2011 and October 2009 and the complainant claimed no benefit was paid in respect of June 2003, August 2003 and June 2006. The parties also disagreed as to the amount to be offset for Centrelink payments.
FOS was unable to reconcile how the superannuation benefit had been calculated by the member.
In conclusion, the Panel said:
The Panel has serious concerns with the multitude of errors and delays (and many apologies) by the member in respect of payments to and in respect of the complainant under the Policy. One would expect that such a large organisation would have sufficient resources and procedures to minimise the scope for such continual mistakes. It is to be hoped that extra care is taken to ensure that future payments are accurate and prompt.
In addition to making payments to the Applicant for underpayment of his prior salary benefits and to the trustee of his superannuation fund to compensate for underpayment of superannuation benefits, the Insurer was also directed to calculate all the payments under the policy for the period commencing 28 February 2012 in accordance with the Determination.
By letter dated 11 April 2012,[72] the FOS Panel accepted that there were “clerical errors” in the Determination. There was no overpayment to the complainant. There could have only been an overpayment if the member’s commencement salary had been correctly determined by the member. This had not been the case. Accordingly, although the Applicant should be compensated for tax paid by him on income not received, there was no overpayment of benefits to be offset. The Panel also considered, it inappropriate to direct the Insurer to pay interest given that the complainant had not claimed that a vehicle had formed part of his salary until 17 February 2012, but that as the Applicant had been put to substantial trouble in providing information and calculations to resolve the dispute as a result of the Insurer’s errors, delays, and its lack of discernment of the proper salary benefit payable under the policy, the panel was satisfied that the Insurer should pay the Applicant $2,500 in costs.
[72] T 294
In a supplementary determination dated 14 May 2012, FOS determined that interest was payable by the Insurer given that the complainant and his superannuation fund were deprived of income on the underpayments over a claim period of about 9 years. The member was directed to pay an amount to the Applicant on account of interest on the salary benefit (excluding vehicle salary)) and another amount to the trustee of the superannuation fund (on account of interest on underpayment of the superannuation benefit).
On 14 May 2012 the Applicant accepted the FOS determination of 11 April 2012 (as amended) and the supplementary determination dated 14 May 2012.[73] In so doing the Applicant acknowledged that: “I understand that I may not pursue any aspect of my complaint against the member in another forum.”[74]
[73] T 301
[74] T 309
In his witness statement, the Applicant testified that, notwithstanding his acceptance, he still thought, based on his understanding of his previous conversations with FOS and the advice of his lawyer that he had
a full and clear right to sue both and/or individually [the Insurer] and Star Track Express for wrong and harm caused as a direct result of their mistreatment, acts and omissions and the effect such mistreatment, acts and omissions had had on my health and well being.[75]
[75] First witness statement [90]
By letter dated 15 May 2012 from FOS to the Applicant[76], the FOS case manager confirmed that any deed of release had to be restricted to the terms of the dispute.
[76] T 299
Notwithstanding the FOS determination, the Applicant continued to experience difficulties in the administration of his claim.
By letter dated 5 June 2012[77] (sent by email), the Applicant wrote to the case manager at FOS acknowledging he had received cheques from the Insurer in respect of prior year salary continuance benefits and that the Trustee of his superannuation fund had received an amount in respect of prior superannuation contributions, but that the Insurer had failed to comply with the FOS decision as the superannuation contribution for the May 2012 period had not been received by the trustee of the superannuation fund. Furthermore, the salary benefit for May 2012 was only paid after the Applicant’s wife had contacted the Insurer. The Insurer had advised that the payment was late because it had missed a process cut off time. The Applicant considered this confirmation of a “systemic fault within [the Insurer] and a repeat of earlier failures” and that it was “obvious that [the Insurer] have no understanding of [the Decision]” and that because of “this lack of discernment toward [the Applicant’s] claim, he has now an irreversible loss of trust and a faith that [the Insurer] can ever deal with his claim in the required professional, accurate and timely manner.”
[77] T 310, Annexure 55
FOS forwarded the Applicant’s letter to the Insurer, by email sent on 5 June 2012[78], requesting the Insurer investigate the Applicant’s concerns urgently, confirm that the Insurer has fully complied with the decision and if not, take urgent steps to rectify any shortfall.
[78] Annexure 56
Notes of a telephone call between the Applicant’s wife and an Insurer representative made on 13 June 2012[79] record that the Applicant’s wife inquired about money deposited in the applicant’s bank account, noting that there had been 2 separate payments and wanting to know what they were for. She was advised that they were early payments of the June benefit payment, including a CPI adjustment of 3.5%. The Applicant’s wife complained that the situation was very confusing and that the Applicant was very upset “because its now 44 days before his next payment” and they could not keep up with late payments, early payments and the Applicant needed consistency.
[79] Annexure 57
By facsimile sent 3 July 2012 to the Insurer (Claims Assessor), the Applicant requested that a commutation “option be again explored with the objective [of] arriving at an agreeable commutation figure.” This was because:
without question all medical practitioners who have observed [the Applicant] over the past 9½ years have in advices to [the Insurer] concluded that [the Applicant] does not have a capacity to do any work …and collectively do not expect [the Applicant] to gain the capacity to work now or in the foreseeable future …[and the Insurer] would be in a position to financially advantageously to conclude this matter in finality. In October 2012, the Applicant will have 14 years of payments remaining with an increase of 3% @ 85% of gross including superannuation not taxed. This is calculated at just below $2million. A reasonable payout of 9 years @ 85% would be approximately $1million less taxes if applicable and this would be a significant saving to [the Insurer].[80]
[80] T 314
The statements made by Davies J in respect of the operation of the capital gains tax provisions were made in the absence of any argument or evidence in respect of their application. The observations made by his Honour concerned the wording of the now repealed provisions of Part IIIA of the Income Tax Assessment Act1936 and in particular, the use in that part of the concepts of asset and acquisition, neither of which were apt to deal with compensation for damage suffered because of a personal wrong (in that case being an infringement of a copyright).
The circumstances here and the sections which the Tribunal needs to apply are different. Here, the payment is not made to the Applicant as assessed compensatory damages awarded by a Court.[124] It is a settlement sum paid pursuant to a deed of release relating to a claim under a life insurance policy. The structure and wording of the provisions to be applied is also different. Any legislative policy that such a sum is not intended to be caught by the capital gains tax provisions is subject to the terms of the specific exemption contained in Part 3-1.
[124] cf Federal Commissioner of Taxation v Sydney Refractive Surgery Centre Pty Ltd (2008) 172 FCR 557; [2008] FCAFC 1905 which concerned a payment of Court awarded damages
The Applicant also contended that the cost base of the applicant’s rights under the policy and by reason of his complaints, which rights were relinquished under the deed equaled their market value.
There are a number of difficulties with this contention.
First, the contention seemed to be based on the market value substitution rule provided for in s 112-20. That section relevantly provides:
(1) The first element of your * cost base and * reduced cost base of a * CGT asset you * acquire from another entity is its *market value (at the time of acquisition) if:
(a) you did not incur expenditure to acquire it, except where your acquisition of the asset resulted from:
(i) * CGT event D1 happening; or
(ii) another entity doing something that did not constitute a CGT event happening; or
(b) some or all of the expenditure you incurred to acquire it cannot be valued; or
…
The expenditure can include giving property: see section 103-5.
Accordingly, the section does not apply to assets which are acquired as a result of CGT event D1 happening. CGT event D1 happens if you create a contractual or other legal or equitable right in another entity. Here, the rights the Applicant acquired against the insurer were not subject to the market value substitution rule because either:
a)those rights were created by the insurance policy issued by the insurer and paid for by the policy owner They were rights acquired as result of CGT event D1 happening; or
b)the rights resulted from the insurer doing something that did not constitute a CGT event.
Secondly, section 110-25(2) provides that the first element of the cost base is the money you paid or are required to pay in respect of acquiring the asset and the market value of the any other property you gave or are required to give in respect of acquiring it. The Applicant neither paid the premiums under the policy (they were paid for by the policy owner being the trustee of the superannuation fund) nor provided any property in order to acquire his rights as an insured. In this respect, loss of earnings as a result of becoming Totally Disabled is not the provision of property by the insured.
Thirdly section 110-25(3) provides that the second element of the cost base consists of the incidental costs incurred. The Tribunal was not provided with invoices or other records of expenses incurred by the Applicant which related to incidental costs associated with his claims or complaints against the insurer.
Exemptions
The Applicant contended that any capital gain made by the Applicant should be disregarded by reason of the application of one or more of the following:
a)Section 118-37(1)(a) or (b); or
b)Section 118-300
It is noted that the application of the CGT exemptions may not be entirely consistent with the Applicant’s primary contention that the Settlement Sum was an undissected lump sum paid to him on account of a number of matters, which was incapable of apportionment. The CGT exemptions are potentially capable of applying only to claims of a particular, specified kind and their application is predicated on an ability to identify the Settlement Sum or some part of it as referable to the matters the subject of the particular exemption.[125]
[125] Dibbs v Federal Commissioner of Taxation (2004) 136 FCR 388 at [45], [46]
For the reasons set out below:
a)The Tribunal considers that any capital gain made from the release of the Applicant’s rights under the Policy is to be disregarded by reason of s 118-37; and
b)The Tribunal does not consider that any of the other exemptions raised by the Applicant apply in the present case.
Section 118-37
Prior to their amendment in 2015, section 118-37(1)(a) and (b) provided:
(1)A capital gain or capital loss you make from a CGT event relating directly to any of these is disregarded:
(a) Compensation or damages you receive for any wrong or injury you suffer in your occupation;
(b) Compensation or damages you receive for any wrong, injury or illness you or your relative suffers personally.
The history of the exemption in the capital gains tax rules can be traced back to s 160ZB(1) of Part IIIA of the 1936 Act. That section provided:
A capital gain shall not be taken to have accrued to a taxpayer by reason of the taxpayer having obtained a sum by way of compensation or damages for any wrong or injury suffered by the taxpayer to his or her person or in his or her profession or vocation and no such wrong or injury, or proceeding instituted or other act done or transaction entered into by the taxpayer in respect of such a wrong or injury, shall be taken to have resulted in the taxpayer having incurred a capital loss.
According to the explanatory accompanying the introduction of s 160ZB(1)[126]:
Section 160ZB confers statutory exemption from capital gains tax on specific forms of capital receipts which might otherwise be included in a taxpayer’s assessable income under proposed Part IIlA. Correspondingly, where the exemption extends to a capital receipt within the scope of the section a deduction for a capital loss of a corresponding kind will not be available to a taxpayer.
Sub-section 160ZB(1) refers to compensation or damages awarded for any wrong or injury suffered by a taxpayer to his or her person or in his or her vocation. Under the sub--section such a wrong or injury, or proceeding instituted or other act done or transaction entered into by the taxpayer in respect of such wrong or injury will not be taken to have resulted in the taxpayer having incurred a capital loss. Within this category are damages for personal injuries or for libel, slander or defamation, and insurance monies under personal accident policies.” (emphasis added)
[126] Explanatory Memorandum, Income Tax Assessment Amendment (Capital Gains Tax) Bill 1986
Following the rewrite of the CGT rules into the 1997 Act and prior to the insertion of s 118-37 in the 1997 Act, compensation or damages for personal injury or illness was addressed in s 118-15 of the 1997 Act. That section required that in working out the Applicant’s net capital gain or net capital loss for the income year, compensation or damages received for any wrong, injury or illness you or your relative suffers personally were to be disregarded. According to the Explanatory Memorandum to the Bill introducing s 118-37[127] the exemption was intended to increase the scope of the exemption from capital gains tax rules for “capital receipts such as compensation for damages.”
[127] Explanatory Memorandum accompanying Taxation Laws Amendment Bill (No 4) 1999
Section 118-37(1)(a) and (b) was amended in 2015 with retrospective effect. The amendments made are relevant to these proceedings because they apply in relation to CGT events happening in the 2005-06 years or later income years. Following its amendment s 118-37(1)(a) provided:
(1)A capital gain or capital loss you make from a CGT event relating directly to any of these is disregarded:
(a) Compensation or damages you receive for:
(i) any wrong or injury you suffer in your occupation;
(ii) any wrong, injury or illness you or your relative suffers personally
It is noted that its terms are the same as the former sections 118-37(1)(a) and (b).
The capital gain was made by the Applicant from a CGT event being the release or discharge of his rights against the Insurer upon execution of the deed of release. Having regard to the totality of the circumstances, the Settlement Sum was received by the Applicant for and on account of the discharge of his claim under a policy of insurance taken out by the trustee of his superannuation fund to provide a salary continuance benefit and superannuation contributions benefit in the event the Applicant was Totally Disabled. The issue is whether the release or discharge of this claim directly related to compensation the Applicant receives for illness he suffers.
For the following reasons, and based on the facts in this case, the capital gain made by the Applicant was from a CGT event relating directly to compensation or damages received by the Applicant for a wrong, injury or illness suffered by the Applicant personally.
The analysis that follows is premised on the Tribunal’s conclusion that the Settlement Sum was received by the Applicant in discharge of his entitlement under the Policy as a result of him being Totally Disabled. The same analysis would not apply to the Settlement Sum if, contrary to the findings of the Tribunal, it was received in part on account of allegations of wrong referable to the Insurer’s conduct. Whilst the Insurer had accepted the Applicant’s Claim under the Policy, there was no admission of liability on the part of the Insurer in respect of damages flowing from any of its conduct. The deed included an express disclaimer of liability. Section 118-37 does not provide an exemption for consideration for or in respect of an allegation of wrong or injury.[128] Nor, if contrary to the Tribunals’ conclusion that the Settlement Sum was paid in discharge of liabilities under the Policy, would it be possible to conclude that the Settlement Sum had been determined having regard to the nature of the Applicant’s illness and therefore was for the Applicant’s illness.
[128] Dibbs v Federal Commissioner of Taxation (2004) 136 FCR 388 at [46].
The Tribunal notes the following:
a)benefits were to be paid to the Applicant pursuant to a contractual promise by an insurer to pay a calculable sum in the event of illness or injury resulting in a total inability to work, rather than a general law obligation to pay damages or compensation;
b)the Applicant’s claim under the Policy was contingent upon him suffering an illness or injury which resulted in him being Totally Disabled;
c)the Policy provided for the Salary Continuance and Superannuation Contributions Benefits to be paid only if the Applicant suffered an illness or injury which resulted in him being Totally Disabled; and
d)there was a correlation between the length of time for which the Applicant was Totally Disabled, the Applicant’s Salary at the time of his Claim and the amount to be paid to the Applicant under the Policy.
The Tribunal was referred to the decision in Purvis and Commissioner of Taxation (2013) 90 ATR 739 which concerned an insurance payment received by the taxpayer for the loss of their pilot’s licence. As explained by Mansfield J in Bond v Federal Commissioner of Taxation 2015 ATC 20-499, the decision in Purvis was an application of the principles in Federal Commissioner of Taxation v Scully (2000) 201 CLR 148. Scully concerned the definition of “eligible termination payment” and in particular the phrase “consideration of a capital nature for, or in respect of, personal injury to the taxpayer“, as it was then found in s 27A(1)(n) of the Income Tax Assessment Act 1936. The plurality of the High Court held (at [29]) that the phrase was to be interpreted as referring to “payments which must be compensation for the particular injury” or illness. Based on Scully for a payment to be regarded as compensation for injury or illness it is not sufficient for the cause of a payment to be the suffering of illness or injury. Rather the character or purpose of the payment must be to compensate the recipient for injury or illness.[129]
[129] at [38]
This notion of recompense is the same as that found in s 118-37(1)(a). The Tribunal notes that the language of s 118-37(1)(a) is, in some respects, narrower than that considered by the High Court in Scully. Unlike former s 27A(1)(n), s 118-37(1)(a) does not contain the phrase “in respect of” and refers to CGT events “relating directly” to compensation or damages received.
On one reading of Scully, a payment of insurance will not generally be regarded as compensation for injury or illness. Parts of the reasons given in Scully may indicate that a payment will have the character of compensation if it is of a kind that, at common law, would reduce the compensation or damages that would be payable by a defendant causing injury or illness.[130] At common law, payments of insurance in the event of sickness or accident are not payments of that kind. Ordinarily, it is not the purpose of either superannuation schemes or insurance to compensate for personal injury or illness, although that may be the effect of certain payments.[131] In assessing damages for personal injuries, benefits that a plaintiff has received or is to receive from any source other than the defendant, are not regarded as mitigating that plaintiff’s loss, if they were received or are to be received as a result of a contract made by the plaintiff before the loss occurred (such as a contract of insurance) and by the express or implied terms of that contract they were to be provided notwithstanding any rights of action he might have.[132] Such benefits are conferred on a plaintiff independently of the plaintiff’s right of redress against others and are not provided in relief of any liability in others fully to compensate that plaintiff.[133]
[130] at [38]
[131] at [31]
[132] The National Insurance Co of New Zealand Ltd v Espagne [1961] HCA 15; (1961) 105 CLR 569 at 588, 598 per Windeyer J
[133] The National Insurance Co of New Zealand Ltd v Espagne [1961] HCA 15; (1961) 105 CLR 569 at 573 per Dixon CJ.
Here, however, the legislative history indicates that the Legislature intended that the exemption be capable of application to a policy of insurance against accident.Furthermore, here there was a relation between the amount of compensation and the nature of the injury. In determining the amount of the Benefit, it was necessary to refer to the nature of the injury or illness and consequence of the injury or illness to the Applicant.[134] Unlike Scully, the Policy in this case did not provide for the same benefit to be paid in respect of a number of events, only one of which was illness or injury. Here the Salary Continuance Benefit and Superannuation Contributions Benefit were payable only if the illness or injury was such that it rendered the Applicant Totally Disabled. The monthly benefit to be paid here was dependent on the Applicant’s Salary at the time of claim and was payable for the period whilst the Applicant was unable to work (up to the age of 65). It was not a sum that was unrelated to the Applicant’s injury, such as a fixed multiple of earnings (like Scully), nor was the sum to be paid a fixed amount, nor a sum dependent on factors other than actual earnings (as in Purvis). Furthermore, under the Policy, an insured’s monthly benefit was to be reduced by amounts the insured received as compensation for injury or sickness from a government authority (such as accident or worker’s compensation), suggesting that the benefits under the Policy had a similar character. For these reasons, the benefits to which the Applicant was entitled under the Policy as a result of his Claim do have the character or purpose of compensating the Applicant for injury or illness.
[134] See Berryman v Zurich Australia Ltd (2016) 310 FLR 108 at [77]
This conclusion makes it unnecessary to address the balance of the Applicant’s contentions in respect of other CGT exemptions. However, I have addressed those contentions below.
Section 118-300
The Tribunal notes that the contention put at the hearing in respect of s 118-300 was broader than the ground set out in the Applicant’s notice of objection. In the statement of grounds accompanying the notice of objection, the Applicant sought to rely upon s 118-300 in the following way:
If the release of the death insurance was a separate CGT event for the purposes of s 116-40 of the Act, the taxpayer contends that so much of the receipt by him as was paid for the release of the death insurance was made from the release of his interest in a policy of insurance on the life of an individual and he was the original owner of the policy for the purposes of s 118-300 of the Act.
The relevance of these grounds is not readily apparent given that the terms of the policy did not provide for a death benefit. No part of the receipt could be said to be paid to the Applicant for the release of death insurance.
In his Statement of Facts Issues and Contentions and closing submissions provided to the Tribunal at the hearing, the Applicant sought to rely upon item 1 of the table in s 118-300 in a manner that was quite different from that articulated in the grounds accompanying the notice of objection. The Applicant’s submission was that if he made any capital gain, the gain (or part thereof) was made from a release in relation to a CGT asset that was his interest in rights under a life insurance policy on his life and he was the original beneficial owner of the policy for the purposes of s 118-300 of the 1997 Act.
As the Respondent responded to that contention and did not take issue with Applicant’s ability to rely upon it, I have addressed that contention in these reasons, notwithstanding s 14ZZK(a) of the Taxation Administration Act 1953.
Section 118-300 was amended in 2015 by the Tax and Superannuation Laws Amendment (2014 Measures No 7) Act 2015. Although enacted in 2015, the amendments made to s 118-300 applied to CGT events happening in the 2005-6 or later income years.[135] In its amended form, s 118-300 relevantly provides that:
[135] Schedule 3 item 8 Tax and Superannuation Laws Amendment (2014 Measures No 7) Act 2015.
A *capital gain or *capital loss you make from a * CGT event happening in relation to a *CGT asset that is your interest in rights under a *general insurance policy, a *life insurance policy or an *annuity instrument is disregarded in the situations set out in this table.
| Insurance policies | ||
| Item | The * CGT event happens to this type of policy: |
|
| 3 | A policy of insurance on the life of an individual or an * annuity instrument | the original owner of the policy or instrument (other than the trustee of a * complying superannuation entity) |
| 5 | A policy of insurance on the life of an individual or an * annuity instrument | the trustee of a * complying superannuation entity for the income year in which the * CGT event happened |
The Tribunal makes the following observations in respect of item 3 of the table in s 118-300:
a)The opening words of s 118-300 refer to a CGT asset that is your right or interest in a life insurance policy. A life insurance policy is defined in s 995-1 as:
life insurance policy has the meaning given to the expression life policy in the Life Insurance Act 1995 but includes:
(a) a contract made in the course of carrying on business that is *life insurance business because of a declaration in force under section 12A or 12B of that Act; and
(b) a sinking fund policy within the meaning of that Act.
b)Life policy in the Life Insurance Act 1995 (‘Life Insurance Act’) is defined in s 9 of that Act as follows:
Life policy
(1)Subject to subsection (2), each of the following constitutes a life policy for the purposes of this Act:
(a)a contract of insurance that provides for the payment of money on the death of a person or on the happening of a contingency dependent on the termination or continuance of human life;
(b)a contract of insurance that is subject to payment of premiums for a term dependent on the termination or continuance of human life;
(c)a contract of insurance that provides for the payment of an annuity for a term dependent on the continuance of human life;
(d)a contract that provides for the payment of an annuity for a term not dependent on the continuance of human life but exceeding the term prescribed by the regulations for the purposes of this paragraph;
(e)a continuous disability policy;
(f)a contract (whether or not it is a contract of insurance) that constitutes an investment account contract;
(g)a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract.
(2)A contract that provides for the payment of money on the death of a person is not a life policy if:
(a)by the terms of the contract, the duration of the contract is to be not more than one year; and
(b)payment is only to be made in the event of:
(i) death by accident; or
(ii) death resulting from a specified sickness.
c)The Commissioner conceded that the Salary Group Continuance Policy was a life insurance policy because it was a continuous disability policy, as that term is defined in s 9A the Life Insurance Act.
d)However the exemption in item 3 is not expressed to apply to a life insurance policy. It is expressed to apply to a policy of insurance on the life of an individual. The exemption is therefore applicable to a narrower subset of policies than that encompassed by the definition of “life policy” in the Life Insurance Act. It appears to refer to a policy,under which the benefit is payable contingent on a human life, most commonly a whole of life policy.[136] Here, the policy in issue did not provide for a death benefit at all. It is therefore not a policy of insurance on the life of an individual. I did not understand either party to contend that the policy was an annuity instrument (as defined in s995-100)
e)The language of item 3 is different from the language in the opening words of the section. The opening words of the section refer to an “interest in rights under a life policy.” The words of the exemption refer to the “owner of the policy.” The policy owner here was the trustee of the superannuation fund. Although he had rights under the policy, and the holder of an interest in rights under the policy (consistent with the High Court’s observations in Trident at [13]), the Applicant was not the original owner of the policy.
[136] see Commissioner of Stamp Duties (NSW) v Jones [1971] HCA 67; (1971) 125 CLR 511 (9 December 1971) where the majority cast doubt on whether a policy taken out by the trustee of a superannuation fund that provided for the payment of benefits on a happening of events, only one of which was the death of an insured employee was a “a policy of assurance on the life of the deceased”. See too Windeyer J “any money payable to any person under a policy of assurance on the life of the deceased" means money that is the proceeds of a whole of life policy payable on the death of the life assured.
In reliance upon the former wording of item 3 of the table in s 118-300 (which referred to the “original beneficial owner of the policy or instrument”), the Applicant submitted that he was the original beneficial owner of the policy because the owner of the policy held the benefits under the policy on trust for him. I accept that the Applicant was an insured under the policy and was entitled to cover under that policy. As such, he may be described as entitled to benefit under the policy and in that loose sense, a beneficiary of the policy. However, he was not the beneficial owner of the policy. The policy was a group policy covering eligible employees of the employer. It was not a policy covering the Applicant alone.
The Applicant sought to invoke clause 9.3(c)(ii) of the Policy in support of his contention that he was the beneficial owner of the policy. That clause relevantly provided:
c) If we are still considering whether to agree to that increase when the Insured Person becomes Totally Disabled we will pay the increased amount in accordance with the benefit formula if:
(i) the Insured Person was already covered by this Policy when they applied to increase the sum insured; and
(ii) we have told the Trustee that for us to decide whether to agree to the increase or not, we need more medical evidence about the Insured Person;
…
The term “Trustee” is not defined in the policy and does not otherwise appear in it. It seems to the Tribunal that the term “Trustee” should be taken as a reference to the Trustee of the superannuation fund, otherwise referred to in the policy as the “Policy Owner”. The Tribunal does not consider the existence of that clause to support a conclusion that the Applicant was the “beneficial owner of the Policy.”
In any case, since the amendments made in 2015 (with retrospective effect), the section refers now to the owner of the policy; beneficiaries of a trust are dealt with by the terms of s 118-300(1A).
In summary, the exemption in s 118-300(1) does not apply because the Policy was not a policy of the type referred to in item 3 of the table nor was the Applicant the original owner of the policy.
Other exemptions
The Applicant raised other grounds in his Statement of Facts, Issues and Contentions. One of those contentions concerned the application of section 118-305(1). That section provides:
Superannuation
(1) A * capital gain or * capital loss is disregarded if you make it from a * CGT event happening in relation to any of the following:
(a) a right to an allowance, annuity or capital amount payable out of a * superannuation fund or * approved deposit fund; (b) a right to an asset of such a fund;
(c) a right to any part of such an allowance, annuity, capital amount or asset.
Example: Angela retires from her employment and receives a lump sum payment from her superannuation fund. This is an example of CGT event C2 (her rights to receive the payment ending). There are no CGT consequences for Angela.
The release and discharge effected by the Deed of Release was not a CGT event which happened in relation to the Applicant’s right to any part of an allowance, annuity or capital amount payable out of a superannuation fund or a right to an asset of a superannuation fund. The Deed of Release did not affect the Applicant’s rights to a payment or asset from his superannuation fund. Indeed, the Trustee of the Superannuation Fund was not a party to the Deed of Release. The Deed of Release may have affected the value of the Applicant’s rights in the future by reducing the amount which may otherwise have accumulated in the Applicant’s superannuation fund in the future, but it did not effect a discharge or release of any of the applicant’s existing rights to any part of an asset, allowance or capital amount that was payable to him out of the superannuation fund.
One other contention related to the content of two private rulings issued to other taxpayers. The rulings are not relevant because they are not binding in respect of the Applicant.
Application of CGT Discount
Any taxable capital gain will be reduced by the amount included in the Applicant’s assessable income as ordinary income under s 6-5; s 118-20 of the 1997 Act.
The parties agreed that if the Applicant were taxable on any capital gain, a 50% discount would apply to the amount of the capital gain in accordance with Division 115 of the 1997 Act.
Conclusion
The Tribunal concludes that:
a)the Settlement Sum should be apportioned between the settlement of the Applicant’s claim for future Salary Continuance Insurance and the Applicant’s claim for future Superannuation Contributions Insurance in the same proportions as provided for in the Policy. On this basis, the Tribunal estimates that about 88.2% of the Settlement Sum should be attributed to the settlement of the Applicant’s claim for future Salary Continuance Insurance with the balance to be attributed to the Applicant’s claim for future Superannuation Contributions Insurance.
b)That part of the Settlement Sum so calculated as being referable to the Salary Continuance Claim is assessable under s 6-5 as ordinary income.
c)The Settlement Sum does not result in the Applicant deriving a taxable capital gain.
Decision
The decision under review is set aside and the matter remitted to the Commissioner for reassessment in accordance with these reasons.
| 1. I certify that the preceding 219 (two hundred and nineteen) paragraphs are a true copy of the reasons for the decision herein of Senior Member L. Hespe. |
......................[sgd].....................................
Associate
Dated: 1 July 2019
| Date of hearing: | 22 November 2018 |
| Counsel for the Applicant: | Mr Michael Hines |
| Solicitors for the Respondent: Counsel for the Respondent: | Privitelli Legal Dr Philip Bender |
| Solicitors for the Respondent: | Australian Taxation Office |
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