Zaghloul and Commissioner of Taxation (Taxation) - [2019] AATA 3351

Zaghloul and Commissioner of Taxation (Taxation) [2019] AATA 3351 (9 September 2019)
Division:TAXATION AND COMMERCIAL DIVISION
File Number: 2019/0607
Re:Hassan Zaghloul
APPLICANT

AndCommissioner of Taxation
RESPONDENT

DECISION
Tribunal:Deputy President Boyle

Date:9 September 2019
Place:Perth

The Tribunal affirms the respondent’s decision dated 7 December 2018 disallowing the applicant’s objection against his income tax assessment for the year ended 30 June 2017.
..........................[sgd]..............................................
Deputy President Boyle
CATCHWORDS
TAXATION AND COMMERCIAL – taxation objection decision – compensation lump sum payment under Workers’ Compensation and Injury Management Act 1981 (WA) – prescribed amount – whether the compensation payment is assessable income – compensation payment is assessable income – objection disallowed
LEGISLATION
Administrative Appeals Tribunal Act 1975 (Cth) – s 37
Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth) – ss 6-5(2), 51-57, 54-5, 54-10(1), 54-10(1A),
54-45, 54-50, 82-135, 84-5, 118-37(1)(b), 995-1(1)(b)
Taxation Administration Act 1953 (Cth) – ss 14ZZ, 14ZZK
Workers’ Compensation and Injury Management Act 1981 (WA) – ss 7(1), 7(3), 18(1), 31C, 31H, 52, 57B(2)(a), 57B(4), 57B(5), 217, 222, 223(1), Sch 1 cls 7-11, Sch 1 cl 18A, Sch 2 item 8
CASES
AAT Case 5617; AAT Case X21 (1990) 90 ATC 239
Applicant and Commissioner of Taxation (2006) 63 ATR 1008; [2006] AATA 614
Commissioner of Taxation v Inkster (1989) 24 FCR 53
Coward and Federal Commissioner of Taxation (1999) 54 ALD 83; [1999] AATA 132; 99 ATC 2166
Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission [2002] HCA 49, 213 CLR 543
Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215
Slaven v Federal Commissioner of Taxation (1983) 83 ATC 4387
Sommer v Commissioner of Taxation [2002] FCA 1205
Vargiemezis and Commissioner of Taxation [2008] AATA 1152
SECONDARY MATERIALS
Australian Taxation Office, Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts (TR 95/35, 6 December 1995).
Australian Taxation Office, Taxation Ruling IT 2424 Income Tax: Compensation Payments in Respect of Unlawful Acts of Discrimination (85/8758-2, 2 July 1987).
Western Australia, Western Australian Government Gazette, No 97, 15 June 2012, 2511, 2576.
REASONS FOR DECISION
Deputy President Boyle
9 September 2019
THE APPLICATION

The applicant seeks a review of the respondent’s decision dated 7 December 2018 disallowing the applicant’s objection against his income tax assessment for the year ended 30 June 2017.
BACKGROUND
The facts set out below are taken from the decision of Arbitrator Mr S Nunn in his decision of 28 July 2016 (T15) in the applicant’s application for compensation under the Workers’ Compensation and Injury Management Act 1981 (WA) (the Compensation Act) in relation to his psychiatric condition and from the parties’ respective statements of facts, issues and contentions (SFIC). I do not understand them to be in dispute.
In early 2008 the applicant began employment with Woodside as a Principal Structural Engineer.
In April 2011 the applicant contracted a stress related psychiatric condition which prevented him from working.
The applicant used all of his sick leave entitlements after which Woodside made discretionary payments of salary continuance policy. The applicant says (applicant’s SFIC para. 2) that between May 2011 and January 2013 he received 75% of his base salary minus tax.
On 22 November 2012, Woodside advised the applicant of its intention to terminate his employment in view of the long (22 months) sick leave and the opinion of its nominated psychiatrist that there was an “emergence of treatment resistance in his depressive illness.”
On 5 December 2012 the applicant lodged a claim for workers’ compensation under the Compensation Act in relation to his psychiatric condition. Woodside admitted liability for the psychiatric injury and accepted that it was liable to pay the applicant weekly payments of compensation from the date of his alleged incapacity, 13 April 2011.
On 31 January 2013 Woodside accepted liability for anxiety and/or depressive disorder, and advised the applicant that no compensation payment would be made because the salary continuance payments exhausted the prescribed amount under the Compensation Act. Woodside contended that the principle of “double recovery” prevented the applicant from receiving weekly compensation payments under the Compensation Act for the period in which he had received the salary continuance payments.
On 5 February 2013 Woodside terminated the applicant’s employment on the basis that it had “concluded that you [the applicant] are unable to perform the inherent requirements of your role as a Principal Structural Engineer at Woodside and are unlikely to be able to do so in the foreseeable future or with reasonable adjustments” (T9).
The applicant disputed Woodside’s characterisation of the salary continuance payments as payments under the Compensation Act and in August 2014 commenced proceedings at WorkCover to recover weekly payments under the Compensation Act. The dispute went before Arbitrator Nunn in the Workers’ Compensation Arbitration Service (the WCAS) on 25 February 2016 and 8 April 2016.
On 28 July 2016 the WCAS ordered that:
(a)Woodside pay the applicant weekly payments of compensation for total incapacity from 13 April 2011; and
(b)the applicant’s applications be dismissed in regard to extension of the prescribed amounts for weekly payments of compensation pursuant to s 217 of the Compensation Act and also medical expenses pursuant to Schedule 1, cl 18A of the Compensation Act.
The WCAS determined that it was unable to conclude that the applicant was “permanently totally incapacitated” for work. The WCAS took into account certificates of two doctors both certifying the applicant as “totally and permanently disabled” in 2013, but said that it was unable to afford these certificates any significant weight.
On 27 October 2016 the applicant received a cheque in the sum of $63,176 from Woodside’s lawyers in full and final settlement (from Woodside’s perspective) of the WCAS order dated 28 July 2016. Woodside’s lawyers informed the applicant’s then representatives that that sum represented the sum of $118,924 less pay as you go (PAYG) tax. Woodside’s lawyers also asserted (ST32) that the amount of $118,924 represented the prescribed amount under the Compensation Act effective 1 July 2012 of $198,365 less the payments made to the applicant after liability for his claim was accepted which were in the sum of $79,441.
On 4 August 2017 Woodside issued a PAYG payment summary to the applicant for the year ended 30 June 2017 showing gross payments of $118,924 and total tax withheld of $55,748 (T16).
On 30 June 2018 the applicant lodged his income tax return for the year ended

30 June 2017 (T25).
On 6 July 2018 the respondent issued the applicant with a notice of assessment for the year ended 30 June 2017 showing taxable income of $149,172 which included the payment of $118,924 from Woodside (T26).
On 11 July 2018 the applicant lodged an objection to his assessment for the year ended 30 June 2017 (T27).
On 7 December 2018 the respondent notified the applicant that his objection against his assessment for the year ended 30 June 2017 was disallowed (T29).
The applicant disputed Woodside’s assertions set out in Woodside’s lawyer’s letter referred to in [13] above. The applicant sought determination of those issues in the WCAS. On 7 December 2018 the WCAS made a further decision on the papers (ST33). The reasons for decision relevantly found that:
(a)
the weekly payments of compensation ordered pursuant to the orders made on

28 July 2018 had not been paid and a sum of $79,441 remained in the prescribed amount under the Compensation Act;
(b)as the sum of $79,441 equated to weekly payments of compensation it was likely that these would attract the obligation to pay PAYG tax (ST33, [84]);
(c)a summary of how the weekly payments of compensation over each financial year showed that the prescribed amount of $198,365 would have been exhausted sometime in January 2013 (ST33, [50]-[52]); and
(d)the applicant had in the WCAS proceedings contended that in relation to the discretion under s 222 of the Compensation Act:
Any weekly payment of compensation is taxable whether such payments are made weekly or, as in this case, as a lump sum due to back-payment. The order made in … [28 July 2016] was to make weekly payments of compensation as and from the date of incapacity. The mechanism of payment as a lump sum due to the effluxion of time does not change the nature of the payment as a weekly payment of compensation that attracts PAYG tax obligations …
(ST33, [121(f)])
On 19 February 2019 the WCAS made further orders that, pursuant to subsection 223(1) of the Compensation Act, interest was not payable on the $79,441.00 payable to the applicant being the balance of the prescribed amount (ST34).
On 21 March 2019 Woodside’s lawyers issued a cheque in the sum of $44,341.00 to the applicant and informed that it was for full and final satisfaction of the order of the WCAS dated 19 February 2019 (ST35). Although it is not stated in Woodside’s lawyer’s letter, I assume that the difference between the amount found by WCAS to be payable to the applicant and the amount paid represented PAYG tax. As was noted by the WCAS Arbitrator Nunn in his reasons for orders delivered on 19 February 2019, having found that a further $79,441 of weekly payments was payable to the applicant:
As noted, whether that is the amount Dr Zaghloul in fact receives after deduction of PAYG tax is a separate matter.
(ST34, [44])
THE ISSUE
The respondent at paragraph 5 of his statement of facts, issues and contentions identifies the issue as follows:
Whether gross payments totalling $118,924 paid by Woodside Energy Limited (“Woodside”) to the applicant for the year ended 30 June 2017 (the “Payment”) is assessable income of the applicant. (Original emphasis.)
The applicant at paragraph 1 of his statement of facts, issues and contentions identifies the issue as follows:
Compensation for personal injury is payable either (a) on weekly basis; or (b) in lump sum for permanent impairment. The “Lump sum compensation would not have been assessable” if paid to the injured person. Zaghloul received lump sum compensation payment after he was dismissed, and in circumstances of total and permanent impairment. Is that Payment subject to PAYG tax, at the maximum (47%) rate, as “ordinary income”, or is it “capital” as referred to under section 82.135 of the Income Tax Assessment Act 1997?
(Original emphasis and footnotes omitted.)
The applicant’s statement of the issue goes beyond identification of an issue and delves into argument/submission and to statement as to a consequence of a finding that the relevant payment is assessable income, namely, the rate at which tax might be payable. This is a review under s 14ZZ(1) of the Taxation Administration Act 1953 (Cth) (TAA Act) of an objection decision. The applicant objected to the respondent’s assessment referred to in [16] above. That assessment (T26) assessed the applicant’s assessable income for the year ended 30 June 2017 as being $149,172 on the basis that the payments by Woodside totalling $118,924 were assessable income. It is to that assessment of that payment of $118,924 that the applicant objected in his objection (T27). It is the respondent’s rejection of that objection that comes before the Tribunal for review under s 14ZZ of the TAA Act.
The issue is, as stated by the respondent, whether the payment of $118,924 (the Payment) is assessable income.
THE LEGISLATIVE FRAMEWORK
Subsection 18(1) of the Compensation Act provides:
(1)If an injury of a worker occurs, the employer shall, subject to this Act, be liable to pay compensation in accordance with Schedule 1.
Subsection 7(1) of Schedule 1 to the Compensation Act provides:
(1) …when total incapacity for work results from the injury a weekly payment during the incapacity equal to the weekly earnings of the worker calculated and varied in accordance with this Schedule.
Subsection 7(3) of Schedule 1 to the Compensation Act provides:
(3) An entitlement of a worker to weekly payments for an injury under this Act ceases if and when the total weekly payments for that injury reaches the prescribed amount, unless an arbitrator makes an order to the contrary under section 217, and there shall be no revival of, or increase in, that entitlement upon any subsequent increase in the prescribed amount.
The “prescribed amount” is an amount determined each financial year and published in the Western Australian Government Gazette.[1] It is not disputed that the prescribed amount in the relevant period was $198,365.
[1] Western Australia, Western Australian Government Gazette, No 97, 15 June 2012, 2511, 2576.
Section 31C of the Compensation Act provides:
31C. Permanent impairments in Sch. 2, worker may elect to get lump sum for
(1)Despite Schedule 1, in respect of a permanent impairment from a compensable personal injury by accident, if the worker so elects during the lifetime of the worker as provided by section 31H in respect of an impairment mentioned in column 1 of Part 2 of the table in Schedule 2, the compensation payable for the impairment is, subject to subsection (2) and the provisions of this Act relating to Schedule 2, to be the percentage ratio of the prescribed amount indicated in column 2 of that Part.
(2)Except as provided in sections 31E and 31F(3), the compensation payable for each such impairment from injury is to be in accordance with the percentage ratio of the prescribed amount indicated in column 2 of Part 2 of the table in Schedule 2 in respect of such an impairment at the date of the accident by which that injury was caused to the worker, irrespective of when the worker so elects.
Section 31H of the Compensation Act relevantly provides:
31H. Election under s. 31C or 31E
(1)A worker elects under this section for the purposes of section 31C or 31E when —
(a)the worker signs a form of election prescribed by the regulations containing particulars prescribed by the regulations in respect of the impairment or loss; and
(b)that form of election is filed with the Director, and a copy of it is served by or on behalf of the worker on the employer.
(2)A worker can elect for the purposes of section 31C only if —
(a)the worker and the worker’s employer agree as to the worker’s degree of permanent impairment resulting from the injury concerned; or
(b)a determination has been made under section 31D(4) in respect of the worker’s degree of permanent impairment resulting from the injury concerned or the worker has a certificate given for the purposes of section 31F(3) that the worker has contracted AIDS.
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (Cth) (ITAA 97) provides:
(2) If you are an Australian resident, your assessable income includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Section 54-45 of the ITAA 97 provides:
Personal injury lump sum exemption for injured person
A payment of a *personal injury lump sum that is made to the *injured person is exempt from income tax if:
(a)there is at least one *personal injury annuity (provided under the same *structured settlement or *structured order) that satisfies the conditions in Subdivision 54-B; and
(b)the other conditions in this Subdivision are satisfied.
Section 54-50 of the ITAA 97 provides:
Lump sum compensation would not have been assessable
If the compensation or damages that were used to purchase the *personal injury lump sum had instead been paid to the *injured person on the *date of the settlement or order, the compensation or damages would not have been assessable income.
THE HEARING
The application was heard on 5 August 2019. The applicant was self-represented and the respondent was represented by Mr Hotger. The material before the tribunal included:
(a)T documents and supplementary T documents produced by the respondent under s 37 of the Administrative Appeals Tribunal Act 1975 (Cth);
(b)Applicant’s statement of facts, issues and contentions dated 15 May 2019 (applicant’s SFIC) and documents attached to applicant’s SFIC being:
(i)Letter from Woodside dated 26 May 2011 relating to payment to the applicant of salary continuance;
(ii)Email dated 7 October 2011 from the applicant to Woodside seeking advice on the process for claiming medical expenses;
(iii)Letter from Woodside dated 22 November 2012 advising of intention to dismiss the applicant;
(iv)Letter from Woodside’s lawyers dated 27 October 2016 enclosing payment of $63,176 in full and final settlement of the WCAS orders of 28 July 2016 (referred to in [13] above); and
(c)Respondent’s statement of facts, issues and contentions dated 19 June 2019 (respondent’s SFIC).
THE PARTIES’ CONTENTIONS
Applicant’s contentions
A. The Compensation Payment made in lump sum, should not be subject to PAYG tax by reasons of (a) the explicit provisions in the ITAA; (b) the history of the ITAA; and (c) Tax Rulings.
The applicant says that the ITAA 97 explicitly distinguishes a lump sum compensation payment for personal injury from any other payment method.
The applicant argues that the Compensation Act required Woodside to make weekly payments during his incapacity up to the prescribed amount. Such payments were to

“… be calculated and varied with reference to the earnings of the worker …” (s 52 of Compensation Act).
In the case of a permanent impairment, the injured worker may elect to receive a lump sum under s 31C of the Compensation Act (see [30] above).
The ITAA 97 contains no qualifications on how the lump sum is to be received by the worker. The applicant argues that “[a]s long as the payment is made in lump sum, whether as an aggregate of weekly payments or otherwise, it ‘would not have been assessable’”.
For the Payment to be treated as “ordinary income” and subject to PAYG tax, particularly at the highest (47%) tax rate, the legislator’s express intention “with irresistible clearness” is required (Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission [2002] HCA 49, 213 CLR 543 at [11], [43], [88]-[94] and [132]-[134]).
Here, the Payment was made in lump sum, and should not be assessable by reason of the explicit words of s 54-50 the ITAA 97.
The legislative history indicates that compensation payment is exempt because its purpose is to make amends for injury, not to profit in the scope of a business. It is well established that in interpreting a statute the court must consider the text, context and purpose of the statutory provision. The task of statutory interpretation must begin and end with a consideration of the statutory text. The statutory text must be considered in its context. That context includes legislative history. The applicant cites CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; Project Blue Sky v Australian Broadcasting Authority (1998) 194 CLR 355; Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27; Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503.
The applicant refers to the dictum of Jordan J in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219 (Scott v Commissioner of Taxation) (incorrectly cited by the applicant and the respondent as Scott v Federal Commissioner of Taxation) in which, according to the applicant, his Honour said:
… It has long been held that income may be derived from … a business operation or commercial transaction entered into with the intention or purpose of making a profit or gain from the transaction. … A receipt may not have the character of income where it was derived outside of the ordinary scope of the business and the taxpayer did not have the purpose of making profit by the very means by which the profit was in fact made …
(Note: the passage cited by the applicant does not appear in the cited case.)

The applicant refers to Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts and Taxation Ruling IT 2424 Income Tax: Compensation Payments in Respect of Unlawful Acts of Discrimination.
B. The Commissioner contends that the Payment was (a) an aggregate of “weekly payments”; (b) which replaced income; hence (c) the Payment was also income. This argument should fail because its inherent assumptions are either not supported by evidence, or are contrary to the authorities.
The applicant argues that after the dismissal, no income was derived to enable its replacement by “weekly payment”. It follows that the Payment was not income because it did not stem from payments that replaced income. Hence, the Payment should not be taxed as “ordinary income”.
The applicant’s compensation claim was made on 5 December 2012, two weeks after Woodside signalled its intention to dismiss the applicant in circumstances of severe impairment. On 31 January 2013 Woodside accepted liability for depression and/or anxiety disorder. At this point in time, Woodside had statutory obligations to (a) implement a return to work program; and (b) as self-insured, commence “forthwith” the first weekly payment by force of ss 57B(2)(a) and (4) of the Compensation Act.
After Woodside accepted liability on 31 January 2013, it (a) unilaterally decided that the Prescribed Amount was exhausted; (b) without making an application under s 57B(5) of the Compensation Act; and (c) dismissed the applicant five days later on the ground that he was “unable to perform the inherent requirements of your role … and are unlikely to be able to do so in the foreseeable future or with reasonable adjustments”. As a result, the applicant took the matter to WorkCover and, on 28 July 2016, Woodside was ordered to make “weekly payments”.
The applicant argues that his dismissal “paralysed the operation of the Compensation Act” as contemplated by the legislator; weekly payments together with a return to work program. Because the applicant was dismissed, he “earned” no income that was capable of being replaced by “weekly payment”. Therefore, no connection could be established between the compensation payment and any earnings subject to PAYG tax.
The applicant argues that generally the nature of any compensation payment for personal injury is inherently capital. Hence, even if the compensation payment were the aggregate of “weekly payments”, which is disputed, it continued to retain its character as capital not subject to PAYG tax. The applicant argues that the cases relied on by the respondent support the applicant’s characterisation of the payments received as being capital rather than income (Atlas Tiles Ltd v Briers (1978) 144 CLR 202; Commissioner of Taxation v Inkster (1989) 24 FCR 53 (Inkster); Slaven v Federal Commissioner of Taxation (1983) 83 ATC 4387 (Slaven) per O’Bryan J).
The applicant asserts (applicant’s SFIC para. 39) that the respondent took the view that “the redemption—from weekly payment to lump sum—does not affect the treatment of the Payment as income” (I note that as far as I can tell the respondent does not agree that there has been a “redemption from weekly payments to lump sum”).
The applicant says that the “first assumption” of the respondent is that the “weekly payment” was calculated under Schedule 1 of the Compensation Act but that that assumption “takes no account of the progressive nature of the injury to the point of total and permanent disablement. In such case, according to Lee J in Inkster at [34] …”.
The second erroneous assumption, according to the applicant, is that Woodside calculated the weekly payments on the basis of his weekly earnings which he says were $3,048. He says that there was no evidence that the weekly payments were calculated with reference to his weekly wage but rather, he says, they were calculated by reference to Schedule 2 to the Compensation Act.
The third assumption, according to the applicant, is that the “redemption” (the applicant’s word) of weekly compensation payments to lump sum did not alter their character as income. The applicant says that the respondent’s view is contrary to that expressed by Lee J (Gummow J agreeing) in Inkster wherein his honour observed at 74:
Soon after the payments commenced, the respondent sought to redeem his entitlement to compensation … However, the respondent could not reach agreement with the insurer … If the respondent had been able to commute his entitlement, the sum received may have been a capital receipt … but the receipt of regular periodical payments … was able to give what otherwise may have been a capital receipt the character of income. The circumstances and manner of payment may convert what would otherwise be capital payments into income …
The applicant therefore concludes (applicant’s SFIC para. 43) that:
43.Having established that the Compensation Payment was made in lump sum under Schedule 2, and the amount there is determined by reference to the “nature of injury or impairment”, not by reference to wages as in Schedule 1, it follows that the Payment was made for loss of earning capacity, not for loss of earnings, and is therefore not “ordinary income” but capital, and not subject to PAYG tax.
The applicant concedes that he did not elect to receive the payment lump sum under

s 31C of the Compensation Act, but argues that an election would have served no purpose in the present case. He argues that under item 8 of Schedule 2 to the Compensation Act he would have been entitled to receive 100% of the prescribed amount so an election would have resulted in the total amount in his hands being the same.
The applicant says that the deduction of PAYG at the highest rate (47%) from the Payment is both inequitable and inconsistent with provisions in the ITAA 97. The amount paid by way of lump sum payment in the relevant tax year should have been paid progressively over the period of incapacity. Making the single large payment caused the applicant to fall into a higher tax bracket.
At paragraph 49 of his SFIC, the applicant argues that deduction of tax at 47% “is inequitable” because:
• But for the impairment, Zaghloul would have continued his career. The Compensation Payment is less than one year of his base salary, and he has continued to incur significant medical costs. It is harsh to tax that Compensation Payment, particularly at the highest (47%) tax rate. Where more than one interpretation of a statute is open, and great harshness is produced by one of them, this may favour the adoption of the other.
• If deductions of medical costs—in excess of $130,000—“incurred in gaining or producing your assessable income” under s 8.1(1)(a) of the ITTA is to be made, no tax would be payable.
• If the lump sum compensation payment is to [be] treated as Employment Termination Payment (ETP) under s 82.135 of the ITTA, given that it was paid after dismissal, it would come below the cap and no tax would be payable.
• If the lump sum compensation payment is held to be “ordinary income”, it would not have been payable in one year so as to attract the highest tax rate because of the cap on each weekly payment. The unfairness could be ameliorated by taxing the aggregated weekly payment for each year, rather than tax the entire amount in one year. In such case, there would be no tax payable.
(Footnotes omitted.)
The applicant finally submits (applicant’s SFIC para. 50) that deduction of the maximum rate from the Payment is inconsistent with provisions in the ITAA 97 because:
·
interest on lump sum compensation payment is exempt under s 51-57 of the

ITAA 97;
·the ITAA 97 explicitly links “ordinary income” with “personal efforts or skills” under s 84-5(1) of the ITAA 97; and
·it would be incongruous to treat Employment Termination Payment under s 82-135 of the ITAA 97 more favourable than a lump sum compensation resulting from personal injury.
Respondent’s contentions
Subsection 6-5(1) of the ITAA 97 provides that assessable income includes income according to ordinary concepts, which is called ordinary income.
Under subclause 7(1) of Schedule 1 to the Compensation Act, in the case of an employee being incapacitated an employer is obliged to make weekly payments equal to the weekly earnings calculated and varied in accordance with the Schedule.
The entitlement of a worker to weekly payments for an injury under the Compensation Act ceases if and when the total weekly payments for that injury reaches the prescribed amount (subclause 7(3) of Schedule 1 of the Compensation Act).
It is well established that payments to compensate for loss of earnings have the character of income for tax purposes (the Respondent then cites Inkster at 55, applying Tinkler v Federal Commissioner of Taxation (1979) 40 FLR 116 and Federal Commissioner of Taxation v Smith (1981) 147 CLR 578. Also see Edwards and Commissioner of Taxation [2016] AATA 781 and Gupta and Commissioner of Taxation [2016] AATA 914).
In determining whether a statutory payment constitutes income, it is necessary to look at the words of the statute itself; and the circumstances in which the payment was received (Inkster at 69-70 (Lee J) citing Commissioner of Taxation (Cth) v Slaven (1984) 1 FCR 11 at 22; see also Sommer v Commissioner of Taxation [2002] FCA 1205 at [11]-[12]; Purdon v Commissioner of Taxation [2001] AATA 188 at [14]-[15]).
The wording in clauses 7 and 11 of Schedule 1 to the Compensation Act provide that payments are to be calculated by reference to, and as part of, a weekly income. The compensation payable is directly related to the amount of earnings which the employee would have been entitled to receive but for his or her injury. The wording of these clauses, by its reference to pre-injury average weekly earnings, makes it clear that its purpose is to compensate an employee for loss of earnings rather than a loss of earning capacity (Inkster at 57, cited by Deputy President P Gerber in AAT Case 5617; AAT Case X21 (1990) 90 ATC 239 and President Mathews J in Coward and Federal Commissioner of Taxation (1999) 54 ALD 83; [1999] AATA 132; 99 ATC 2166 at [34]). The fact that an amount of a compensation payment is a notional calculation will not prevent the payment being of a revenue nature if it is designed as a contribution to diminish the adverse economic consequences of a disability, that is to say the income loss caused by it (Inkster at 71).
The fact that the payment was paid in the form of a lump sum does not change its character. The lump sum represented the applicant’s claim for weekly compensation payments and comprised the aggregate of past weekly payments (see Sommer v Commissioner of Taxation [2002] FCA 1205 at [16]; see also Applicant and Commissioner of Taxation (2006) 63 ATR 1008; [2006] AATA 614 at [22]-[23] citing Inkster. Also see Vargiemezis and Commissioner of Taxation [2008] AATA 1152).
Finally the respondent contends that the fact the applicant received salary continuance payments from Woodside during the period of incapacity does not preclude the payment being income in nature. In Inkster, the compensation payments were not precluded from having the character of income even where the payments were not in substitution for wages lost and were intended to be a supplement to whatever income the taxpayer enjoyed (Inkster at 74).
The respondent rejects the applicant’s argument that he received the Payment in circumstances of total and permanent impairment within the meaning of s 995-1(1)(b) of the ITAA 97 and that the total payment that he received was calculated by reference to 100% of the prescribed amount under Schedule 2 of the Compensation Act and not by reference to weekly earnings. The respondent says that the payments that the applicant received were made pursuant to the orders of the WCAS dated 28 July 2016 and that Division 2A is not relevant because the payment was not “in respect of a permanent impairment from a compensable personal injury by accident” as required by s 31C of the Compensation Act.
Division 54 of Part 2-15 of the ITAA 97 and section 118-37 of the ITAA 97
The applicant refers to s 54-50 of the ITAA 97 (see [41] above) and to the note in that section which refers to paragraph 118-37(1)(b) of the ITAA 97. The respondent says that Division 54 of Part 2-15 of the ITAA 97 relates to exemption from income tax for certain payments made under structured orders and structured settlements. The definition of a “structured order” is given in subsection 54-10(1A) and contains a number of conditions including that:
(a)the structured order is an order of a court;
(b)the claim is not made under a workers’ compensation law;
(c)under the terms of the order, some or all of the compensation or damages is to be used by the defendant (or by a person with whom the defendant has insurance against the liability to which the claim relates) to purchase from one or more insurance companies or State insurers:
(i)an annuity or annuities to be paid to the injured person, or to a trustee for the benefit of the injured person; or
(ii)such an annuity or annuities, together with one or more lump sums that are also to be paid to the injured person, or to a trustee for the benefit of the injured person.
The respondent contends that the conditions mentioned in [68] above are not satisfied because:
(a)there is no order of court, rather, orders were made by an arbitrator in the WCAS which is not a court;
(b)the claim was made under a workers’ compensation law being the Compensation Act; and
(c)even if the orders of the WCAS are considered to be “an order of a court”, there are no terms providing that some or all of the compensation or damages is to be used by the defendant to purchase an annuity or annuities to be paid to the applicant or to a trustee for the benefit of the applicant.
Further the respondent says that:
(a)there was no settlement of a claim in the present case and therefore there was no “structured settlement” as defined in subsection 54-10(1) of the ITAA 97; and
(b)section 54-50 of the ITAA 97 refers to the purchase of a “personal injury lump sum”. This expression is defined in s 54-5 of the ITAA 97 to mean a lump sum that is purchased under the terms of a structured settlement or a structured order. There was no purchase of a personal injury lump sum in the present case.
CONSIDERATION
The proper characterisation of the Payment
As set out at [22] above, the issue for determination is the proper characterisation in law of the Payment of $118,924 paid by Woodside to the applicant for the year ended
30 June 2017. The Payment has been treated as taxable income by the respondent and the applicant argues that it is properly to be treated as a capital payment and therefore not assessable income or is otherwise exempt.
While the applicant’s arguments are extensive and imaginative, they are not correct for the reasons that follow. The Payment was clearly by nature income notwithstanding that it was made by way of a lump sum payment (see [13] above).
The first limb of the applicant’s argument is that in the case of a permanent impairment, the injured worker may elect to receive a lump sum under s 31C of the Compensation Act and that by operation of s 54-50 of the ITAA 97 such a lump sum would not be assessable as income. That may be the case, but the fact is that the applicant did not elect under

s 31C, using the procedure set out in s 31H, of the Compensation Act (or otherwise) to take a lump sum payment under Schedule 2. His argument that such an election would have been pointless because he would have received the same amount, namely the balance of the prescribed amount, is irrelevant. There was, as a matter of fact and law, no election to receive a lump sum payment.
The Payment that the applicant received was based on his entitlement to weekly payments equal to the weekly earnings calculated and varied in accordance with Schedule 1 to the Compensation Act. The language of the provisions of the Compensation Act under which the applicant was paid make it clear that the applicant was receiving payments to compensate him for the loss of income during his period of incapacity.
The Payment was made in satisfaction of the WCAS orders of 28 July 2016 (T15). In his application before the WCAS the applicant argued, successfully, that notwithstanding that Woodside had paid him periodic payments under its salary continuance policy, he was still entitled to receive weekly payments of compensation under the Compensation Act

(T15, 91 at [205]). That is why Arbitrator Nunn ordered that:
208.Woodside pay Dr Zaghloul weekly payments of compensation for total incapacity from 13 April 2011. (T15, 92)
The fact that the Payment was the total of weekly compensation payments was reinforced in Arbitrator Nunn’s further decision made on 7 December 2018 in which the Arbitrator again refers to the applicant’s claims as being for weekly payments under the Compensation Act (see ST33, 204 at [1]). At [121] of his decision (ST33, 229) Arbitrator Nunn refers to a number of contentions that the applicant had put forward to persuade the Arbitrator to exercise his discretion under s 222 of the Compensation Act. One of those contentions, according to the Arbitrator (ST33, 229 at [121(f)]), was that:
Any weekly payment of compensation is taxable whether such payments are made weekly, or as in this case, as a lump sum due to back-payment. The order made … [on 28 July 2019] was to make weekly payments of compensation as and from the date of incapacity. The mechanism of payment as a lump sum due to the effluxion of time does not change the nature of the payment as a weekly payment of compensation that attracts PAYG tax obligations.
The above is, with respect, an accurate summary of the legal position.
The Payment was a lump sum payment of weekly compensation entitlements under Schedule 1 of the Compensation Act. As noted by the Arbitrator in the WCAS, the only reason that these weekly payments were paid as a lump sum was due to the effluxion of time. That did not change their fundamental character as weekly payments as being reflective of lost income during the period of incapacity.
The cases cited by the applicant do not assist him. As the respondent correctly contends, it is well established that payments to compensate for loss of earnings have the character of income for tax purposes (see Inkster and cases referred to at [62] above). The oft cited case of Scott v Commissioner of Taxation does not assist the applicant. As noted at [43] above, the passage cited by the applicant does not appear in the case of Scott v Commissionerof Taxation nor any of the other cases cited by the applicant that I can find. In any event, Jordon CJ (interpreting the Income Tax (Management) Act 1928 (NSW)) held that the payment to Mr Scott was not taxable under that act because the payment:
…was compensation made payable because the appellant’s office had been abolished before the period for which he had been appointed to hold it had expired, and was measured by the amount of damages which he would have been entitled to recover if he had been wrongfully dismissed. The mere fact that this particular measure was adopted is not, of course, conclusive…
The nature of the Payment in the present case is fundamentally different. It was payment representing the applicant’s entitlement to weekly payments under Schedule 1 to the Compensation Act to compensate the applicant for lost income.
Taxation Ruling TR 95/35 and Taxation Ruling IT 2424
Neither of these taxation rulings supports the applicant’s argument. The applicant asserts that TR 95/35 makes it “clear” that “compensation for personal injury are generally received for the loss of earning capacity” and that IT 2424 stated at paragraph 8 that “a payment to compensate for personal injury … depression, anxiety, etc. is not liable to income tax. It is a payment of a capital nature” (applicant’s SFIC para. 26).

The heading of TR 95/35 “Income tax: capital gains: treatment of compensation receipts” indicates the nature and purpose of the ruling. In considering the appropriate taxation treatment of damages or compensation the ruling is primarily looking at payment for the disposal of or reduction in value of a capital asset, namely the capacity to earn income. It is considering such payments in light of Capital Gains Tax legislation as well as income taxation legislation, primarily the now repealed Part IIIA of the Income Tax Assessment Act 1936 (Cth). Insofar as the ruling is considering compensation payments, it is treating certain compensation payments as disposal of a capital asset, namely the right to seek compensation (e.g. see Examples 15 and 16).
That is not the nature of the Payment which was specifically payment of the total of the outstanding balance of the applicant’s weekly payments. It was not a payment which could be categorised as a payment relating to the disposal of a right to receive compensation or any of the other types of payments considered in TR 95/35.
Similarly IT 2424, which is headed “Income tax: compensation payments in respect of unlawful acts of discrimination”, has no application in the present case. The applicant has been very selective in paragraph 26 of his SFIC where he omits the first two sentences of paragraph 8 of IT 2424 and quotes only parts of the second half of that paragraph. The full text of paragraph 8 of IT 2424 is:
8. By way of general comment the determination of the character of a compensation payment, and in particular whether it is liable to tax in the hands of an employee, depends upon the nature of the payment. A compensation payment to make up for lost earnings or in substitution for income which would otherwise have been earned is in the nature of income and is liable to income tax in the hands of the employee. On the other hand a payment to compensate for personal injury, injury to feelings, humiliation, embarrassment, depression, anxiety, etc. is not liable to income tax. It is a payment of a capital nature. Nor is the payment liable to tax under the capital gains tax provisions by reason of the exemption provided in sub-section 160ZB(1) for compensation or damages paid for wrong or injury suffered by a taxpayer to his or her person or in his or her profession or vocation.
Paragraph 8 of IT 2424 makes it clear that “compensation payment to make up for lost earnings or in substitution for income which would otherwise have been earned is in the nature of income and is liable to income tax in the hands of the employee”. That is what has happened in the present case.
Payment not for lost income because payment made after applicant’s dismissal
The applicant’s argument set out in [45] to [48] above has no merit. His claim in WCAS and the orders made therein belie his argument. His argument that because he was dismissed, he “earned” no income that was capable of being replaced by “weekly payment” and, therefore, no connection could be established between the compensation payment and any earnings subject to PAYG has no legal basis and is, in any event, nonsensical. His claim that his dismissal paralysed the operation of the Compensation Act is obviously contradicted by the applicant successfully proceeding with his claim for weekly payments under that act and the orders made in WCAS for payment of the weekly payments found to be payable by Woodside under the Compensation Act.
Payment not capital in nature
The applicant’s argument set out in [50] to [53] above must fail. In arguing the three “erroneous assumption[s]” on the part of the respondent (see [51] to [53] above) the applicant returns to the theme of the Payment somehow being a payment under Schedule 2 of the Compensation Act and not a payment under Schedule 1. For the reasons made clear in the WCAS decisions (T15 and ST33), that is not the case. The Payment represented the balance of the applicant’s entitlement to weekly payments under Schedule 1 of the Compensation Act. The fact that, at least according to the applicant, he could have elected to redeem his entitlement to weekly payments under Schedule 1 and taken a lump sum under Schedule 2, even if correct, is irrelevant. He did not elect to redeem his entitlement. The payment that he received was unequivocally by way of weekly payments pursuant to cl 7 of Schedule 1 to the Compensation Act (T13, 91 at [205] and 92 at [208]).
Further, far from assisting the applicant in his argument, the cases to which he refers (see [49] above) establish that merely because a payment is made by way of a lump sum does not mean that it is a capital payment and not income. I agree with the respondent’s summation of the relevant law set out in [64] and [65] above and agree that the cases cited support the characterisation of the Payment as income, not a capital payment.
Both parties made repeated reference to Inkster. In the leading judgment in that case, that of Lee J at 69-70, his Honour found:
In determining whether the compensation payments received by the respondent had the character of income under the Act, the provisions of the Compensation Act will be of importance. However, although the terms of the Compensation Act may have indicated a purpose for the payments, those provisions will not determine the character of the payments without regard to the circumstances in which the respondent received the payments.
In the absence of any other evidence there may be a conclusion that the payments were duly made in the terms of the Compensation Act and carried the purpose provided by that Act, but other evidence may show the payments to have a different character. As the Full Court said in Commissioner of Taxation (Cth) v Slaven (1984) 1 FCR 11 at 22:
“...the purpose of a statutory payment, as disclosed by the terms of the statute itself, must be a powerful, though not conclusive, aid to the determination of the character of the payment and in particular as to whether its receipt constitutes income in the hands of a taxpayer.”
The tribunal whose decision was the subject of the appeal in Inkster had found (quoting from Lee J’s judgment at 72):
… Returning to the facts of the present case it is clear from the provisions of the Act that the payments received by the applicant were paid to compensate the applicant for his disablement and not in respect of loss of income. The fact that the Act provides for weekly payments in respect of the disablement does not by itself convert a payment of a capital nature into income …
Having then reviewed various authorities, including Slaven, Lee J went on to find at 72-73:
With respect to the Tribunal, there were surrounding circumstances more than capable of characterising the periodical payments as income. Although the payments had their origins in capital, they were not in the nature of payments by instalments of a fixed sum due and owing. The payments were intended to serve the purpose of providing a regular income supplement to the respondent notwithstanding that the payments were generated by calculations which related to capital considerations. Although it is the character of the receipt in the hands of the taxpayer as recipient that must be determined (Commissioner of Taxation (Cth) v Slaven at 23), part of the consideration of that matter must involve consideration of the motive of the payer (Hayes v Commissioner of Taxation (Cth) (1956) 96 CLR 47, per Fullagar J (at 55)) and the part the receipt played in the payee’s affairs.
Although the respondent may not have relied upon the payments to meet his regular expenditures (Commissioner of Taxation (Cth) v Harris (1980 43 FLR 36, per Bowen CJ (at 41)), the payments were calculated as weekly payments by reference to notional weekly earnings and were received fortnightly by the respondent over a significant period of time. The Compensation Act provided for the payments to be calculated as weekly payments and paid regularly. The calculation of such payments by reference to, and as part of, a weekly income and regular receipt thereof may be sufficient to attract the character of income to the payments: see Commissioner of Taxation (Cth) v Slaven at 22 …
In the present case the Payment was a single payment rather that periodic payments only because the weekly payments to which the applicant was entitled had not been made when they should have been. The Payment was, as Arbitrator Nunn described it, a “back-payment” of the applicant’s entitlements to weekly payments (see [76] above). The fact that it was made as a single payment did not alter its fundamental character of income.
Tax at 47% inequitable
The applicant’s submissions in relation to being taxed at 47% (apparently) because payments that should have been made over a number of tax years were made in one payment raising the applicant’s assessable income in that year to a higher tax bracket, is understandable, but not relevant to the matters to be determined by me in these proceedings. The only issue for me to determine is that set out in [25] above. The consequences of a finding that the Payment is assessable income, including the rates of tax to be applied under the relevant legislation, are a different issue.
In this regard I also note that s 14ZZK of the TAA Act provides that the applicant for review of a reviewable objection decision is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates. It goes on to relevantly provide that the applicant has the onus of proving that the assessment is excessive or otherwise incorrect, and what the assessment should have been. In the present case the objection (T27) objected to the respondent’s treatment of the Payment as assessable income arguing that the Payment was a capital payment representing a loss of earning capacity. Accordingly, the rate at which tax might be payable on the applicant’s assessed income is not a matter that can be dealt with in this application.
Division 54 of Part 2-15 of the ITAA 97 and section 118-37 of the ITAA 97
The applicant’s argument based on Division 54 of Part 2-15 of the ITAA 97 providing for exemptions from income tax for certain payments made under structured orders and structured settlements as set out in [68] above is fully answered by the respondent’s argument set out in [69] above.
As the respondent correctly identifies, none of the conditions for subsections 54-45 or

54-50 if the ITAA 97 to apply is met. In particular:
(a)there is no order of court, rather, orders were made by an arbitrator in the WCAS which is not a court;
(b)the claim was made under a workers’ compensation law being the Compensation Act;
(c)even if the orders of the WCAS are considered to be “an order of a court”, there are no terms providing that some or all of the compensation or damages is to be used by the defendant to purchase an annuity or annuities to be paid to the applicant or to a trustee for the benefit of the applicant;
(d)there was no settlement of a claim in the present case and therefore there was no “structured settlement” as defined in subsection 54-10(1) of the ITAA 97; and
(e)section 54-50 of the ITAA 97 refers to the purchase of a “personal injury lump sum”. This expression is defined in s 54-5 of the ITAA 97 to mean a lump sum that is purchased under the terms of a structured settlement or a structured order. There was no purchase of a personal injury lump sum in the present case.
For the reasons set out in [96] the applicant’s argument fails.
CONCLUSION
For the reasons set out above I find that gross payments totalling $118,924 paid by Woodside to the applicant for the year ended 30 June 2017 is assessable income of the applicant.
DECISION
The Tribunal affirms the respondent’s decision dated 7 December 2018 disallowing the applicant’s objection against his income tax assessment for the year ended 30 June 2017.

I certify that the preceding 99 (ninety -nine) paragraphs are a true copy of the reasons for the decision herein of Deputy President Boyle

...........................[sgd].............................................
Associate
Dated: 9 September 2019

Date of hearing: 5 August 2019

Applicant: In person

Representative for the Respondent: Mr S Hotger

Date of hearing:	5 August 2019
Applicant:	In person
Representative for the Respondent:	Mr S Hotger