Hamilton v Accident Compensation Corporation
[2019] NZHC 3109
•27 November 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-002521
[2019] NZHC 3109
UNDER the Accident Compensation Act 2001 BETWEEN
SANDY JUNE HAMILTON
Appellant
AND
THE ACCIDENT COMPENSATION CORPORATION
Respondent
Hearing: 24 September 2019 Counsel:
J A Farmer QC and B M Cunningham for the Appellant S M Bisley and O C Gascoigne for the Respondent
Judgment:
27 November 2019
JUDGMENT OF EDWARDS J
This judgment was delivered by me on 27 November 2019 at 11.30 am pursuant to r 11.5 of the High Court Rules.
Deputy Registrar
Counsel: J A Farmer QC, Auckland
B M Cunningham, Auckland
Solicitors: Dyer Whitechurch, Auckland
Buddle Findlay, Wellington
HAMILTON v ACCIDENT COMPENSATION CORPORATION [2019] NZHC 3109 [27 November 2019]
[1] Mrs Hamilton appeals a District Court decision1 upholding a review of an Accident Compensation Corporation (Corporation) decision regarding the calculation of Mrs Hamilton’s weekly compensation payments.
[2] At issue in the appeal is the way in which reasonable remuneration for a shareholder-employee is to be calculated. The appeal proceeds on a question of law.2 Leave to appeal was granted by Jagose J on the following question:3
Did Judge Walker err in law by allocating 75 per cent of the employer’s net profits as the claimant’s ‘reasonable remuneration’ for the purposes of s 15 of, and/or clause 50 of Schedule 1 to, the Accident Compensation Act 2001?
[3]That question has two aspects:
(a)First, how is reasonable remuneration for shareholder-employees to be assessed under s 15 and/or cl 50 of Schedule 1 of the Act?
(b)Second, did the District Court err in law by assessing reasonable remuneration at 75 per cent of the employer’s net profits?
[4]Both aspects are addressed below.
What happened?
[5] In 1999, Mrs Hamilton suffered a medical misadventure during the delivery of her child. She lodged a claim for cover with the Corporation in 2001 and became eligible for weekly compensation payments. Mrs Hamilton was employed as a full- time hairdresser when she suffered her medical misadventure. After the misadventure she was only able to work part-time due to her incapacity.
[6] In January 2001, Mrs Hamilton set up her own hairdressing business and incorporated Olette Ltd (Olette). Mrs Hamilton and her husband are Olette’s directors. The shareholders in Olette are Mr and Mrs Hamilton who each own one share, and their family trust (Trust) which owns the remaining 998 shares. The trustees of the
1 Hamilton v Accident Compensation Corporation [2018] NZACC 30.
2 Accident Compensation Act 2001, s 162.
3 Hamilton v Accident Compensation Corporation [2019] NZHC 1337 at [20].
Trust are Mr and Mrs Hamilton and Trustee Management Ltd. Mr and Mrs Hamilton are beneficiaries of the Trust and their son is a residuary beneficiary.
[7] From 2001 to 2004, Mrs Hamilton received PAYE earnings and a shareholder- employee salary. In February 2004, Mrs Hamilton and the Corporation agreed that her weekly compensation payments were to be made on the basis of PAYE earnings calculated according to the number of hours Mrs Hamilton worked in any particular week. The hours fluctuated week to week depending on how much pain Mrs Hamilton was in at any one time.
[8] After the agreement was reached in February 2004, Olette ceased paying Mrs Hamilton a shareholder salary. Mrs Hamilton only received PAYE earnings for her work as a hairdresser at the agreed hourly rate. This change in the way her remuneration was structured appears to have informed the approach taken by the Corporation when it came to review the weekly compensation payments, as I explain later in this judgment.
[9] Mr Farmer QC informs me from the bar that Olette employs two full time managers and 22 hairdressers. I note that the District Court judgment refers to Olette employing at least 25 staff at some point in time.4
[10]Olette is a profitable company. For most years, its net surpluses have exceeded
$100,000 and, in some years, exceeded $200,000. Olette paid cash dividends of
$1,407,365 to the Trust, and $1,410 to each of Mr and Mrs Hamilton in the 2004 to 2015 income years. In addition:
(a)Mr and Mrs Hamilton took drawings between 2002 to 2015 totalling
$160,742.70. These were recorded as loans in their respective shareholders’ accounts.
(b)The Trust repaid a loan to Mr and Mrs Hamilton in the 2005 to 2010 income years. That loan arose out of the transfer of Mr and Mrs Hamilton’s family home to the Trust. Repayment of the loan was
4 Hamilton v Accident Compensation Corporation [2018] NZACC 30 at [324].
used by Mr and Mrs Hamilton to repay the mortgage secured over the property.
(c)The Trust made advances by way of loans to Mr and Mrs Hamilton in the 2009 to 2015 income years. The balance of these loans as at 31 March 2015 was $133,076.
[11] In 2013, the Corporation began an investigation into Mrs Hamilton’s financial circumstances. This started out as a covert investigation into whether Mrs Hamilton was in fact only working the number of hours she said she was working. The investigation revealed nothing out of the ordinary.
[12] Subsequently, the Corporation undertook a re-calculation of Mrs Hamilton’s earnings as shareholder-employee for the 2004 to 2014 income years. The Corporation concluded that based on the indirect benefits Mrs Hamilton received through the Trust from Olette’s profits, there had been no loss of earnings in any real sense.
[13] On 15 October 2015, the Corporation assessed Mrs Hamilton’s earnings at 75 per cent of Olette’s net profits for each of the relevant tax years. As a result, the Corporation abated Mrs Hamilton’s weekly compensation payments resulting in her receiving no further payments. The Corporation also determined that Mrs Hamilton had been overpaid by $655,286.03 between 2004 and 2015 and it signalled an intention to instigate recovery proceedings. It is the 2015 re-assessment decision that forms the genesis of this appeal.
[14] The 2015 re-assessment was affirmed on review and was subsequently upheld on appeal to the District Court as explained further below.
District Court judgment
[15] The appeal came before Judge Walker.5 The Judge canvassed the background to the dispute, the approach taken in recalculating the compensation payments, and the parties’ respective submissions in some detail.
[16] The Judge accepted that the assessment of reasonable remuneration should take into account the profitability of the company, and the payments received indirectly by Mrs Hamilton as beneficiary of the Trust. The Judge rejected a submission that company law principles (and in particular, those relevant to piercing the corporate veil) prevented the Corporation from considering Olette’s profits in calculating Mrs Hamilton’s reasonable remuneration.
[17] In addition, the Judge upheld the conclusion that Mrs Hamilton’s earnings from 2004 to 2014 did not reflect her reasonable remuneration or true services to Olette. Reference was made to the fact that Mrs Hamilton had complete control over the assets of Olette and, during the 10 years that she had been in receipt of weekly compensation, she had “… received through drawings, dividends advanced and loan payments from the trust, direct access and the use of the profits of Olette while circumventing the abatement provisions.”6
[18] The Corporation’s assessment of Mrs Hamilton’s contribution to the management of Olette at around 75 per cent of Olette’s profits was confirmed.
The legislative framework
[19] A key objective of the accident compensation scheme is to provide fair compensation for those who have suffered personal injury. That goal is reflected in the purpose of the Act, and in particular s 3(d):
Purpose
The purpose of this Act is to enhance the public good and reinforce the social contract represented by the first accident compensation scheme by providing for a fair and sustainable scheme for managing personal injury that has, as its overriding goals, minimising both the overall incidence of injury in the
5 Hamilton v Accident Compensation Corporation [2018] NZACC 30.
6 At [326].
community, and the impact of injury on the community (including economic, social, and personal costs), through—
….
(d)ensuring that, during their rehabilitation, claimants receive fair compensation for loss from injury, including fair determination of weekly compensation and, where appropriate, lump sums for permanent impairment:
[20] The form of compensation at issue in this case is weekly compensation. Section 100(1)(a) of the Act applies. Under that section, a claimant is entitled to weekly compensation if they are incapacitated within the meaning of s 103(2), and are eligible for weekly compensation under cl 32, 44, or 44A of Schedule 1 of the Act.
[21] Under s 103(2), the Corporation must determine whether the claimant is unable, because of his or her personal injury, to engage in the employment in which they were employed when they suffered the injury. Under cl 32(1) of Schedule 1 of the Act, the Corporation is liable to pay weekly compensation for loss of earnings to a claimant who has an incapacity and was an earner immediately before his or her incapacity commenced.
[22] Mrs Hamilton was deemed to be incapacitated on these grounds. Accordingly, under cl 32(3) she was entitled to 80 per cent of her weekly earnings as calculated under cls 33 to 45 and cl 48 (and subject to cls 46, 51, 52 and 53) of Schedule 1.7
[23] Clauses 33 to 45 and 48 set out different calculations for weekly compensation depending on whether a claimant is in permanent employment, self-employed or is a shareholder-employee. As Mrs Hamilton was an earner in permanent employment immediately before her incapacity, her weekly earnings were calculated in accordance with cl 34.
[24] The calculation of Mrs Hamilton’s weekly earnings was subject to the abatement provisions in cl 51. That clause provides for the reduction of compensation where the claimant is earning during the period of incapacity.
7 Schedule 1, cl 32 (3) and (4).
[25] There are two key provisions relevant to the calculation of shareholder- employee remuneration. Section 15 of the Act governs the assessment of “earnings” as a shareholder-employee. Clause 50 of Schedule 1 to the Act applies when the Corporation cannot readily ascertain, for abatement purposes, a shareholder- employee’s actual earnings during a particular period during incapacity. Both these sections are considered in more detail below.
How is reasonable remuneration for shareholder-employees to be assessed under s 15 and/or cl 50 of Schedule 1 of the Act?
[26] Section 15 and cl 50 of Schedule 1 of the Act governs the assessment of earnings as a shareholder-employee. I start with s 15 of the Act, which provides:
Earnings as a shareholder-employee
(1)Earnings as a shareholder-employee, in relation to a person who is a shareholder-employee and any tax year, means—
(a)the amount described in subsection (2) (the subsection (2) amount); or
(b)the amount described in subsection (3) (the subsection (3) amount), if the Corporation decides that the subsection (2) amount is not a reasonable representation of the person's earnings as a shareholder-employee in the tax year.
The subsection (2) amount is—
(a)all PAYE income payments of the person for the income year derived from a company of which the person is a shareholder-employee; and
(b)all income of the person that is deemed to be income derived otherwise than from PAYE income payments under section RD 3B or RD 3C of the Income Tax Act 2007.
(3)The subsection (3) amount is an amount determined by the Corporation in the following way:
(a)first, determine each of the following amounts:
(i)an amount that represents reasonable remuneration for the services that the person provides to the company as an employee of the company in the tax year; and
(ii)an amount that represents reasonable remuneration for the services that the person provides as a director of the company in the tax year; and
(b)second, add the amounts described in paragraph (a)(i) and (ii), and the result is the subsection (3) amount.
(4)The earnings as an employee of the person as an employee of the company are the amount described in subsection (3)(a)(i).
(5)The director's fees of the person as a director of the company are the amount described in subsection (3)(a)(ii).
(6)The dividend of the person as a shareholder of the company is determined by the Corporation in the following way:
(a)first, determine the total amount the company pays or provides to the person in any capacity in the tax year; and
(b)second, deduct the subsection (3) amount from that total amount, and the result is the dividend of the person as a shareholder of the company and is not earnings of the person.
(7)For the purposes of this section, earnings as a shareholder- employee do not include a benefit arising under section CE 2(2) or (4) of the Income Tax Act 2007 in relation to which an employer has made an election under section RD 7B to withhold an amount of tax.
[27] The meaning of this section is to be ascertained from its text and in light of its purpose. In determining purpose, the court must have regard to both the immediate and general context. The social, commercial or other objective of the enactment might also be relevant.8 As Cooke J said in McKeefry v Accident Compensation Corporation, the objective must be to make the Act work as Parliament must have intended.9
[28] Section 15 applies at the pre-incapacity and post-incapacity stages. The interpretation of this section is therefore relevant to claimants trying to establish their pre-incapacity earnings, and in calculating the abatement of weekly compensation paid post-incapacity.
8 Interpretation Act 1999, s 5; Commerce Commission v Fonterra Co-operative Group Ltd [2007] NZSC 36, [2007] 3 NZLR 767 at [22].
9 McKeefry v Accident Compensation Corporation [2019] NZHC 612 at [7]–[9].
[29] The section provides two ways of ascertaining the earnings of a working shareholder-employee. The starting point is the “subsection (2) amount”. That amount comprises: (a) the PAYE income payments received by the claimant, and (b) other income deemed to be income derived otherwise than from PAYE income payments under s RD 3B or s RD 3C of the Income Tax Act 2007. Those sections of the Income Tax Act broadly relate to amounts paid as income that were later allocated to a person as an employee for the income year. Neither party placed any reliance on them in interpreting s 15.
[30] If the Corporation decides that the subs (2) amount is “not a reasonable representation of the person's earnings as a shareholder-employee in the tax year”, then earnings will be determined in accordance with subs (3). The “subsection (3) amount” comprises the total of the remuneration received as (a) an employee of the company; and (b) a director of the company. It is subs (3), and in particular, the calculation of “reasonable remuneration” received as a director of the company, that is at issue in this case.
[31] It is plain from the text of the section that the “subsection (3) amount” requires a two-step enquiry. First, the Corporation must consider the services provided by a person as an employee and as a director of the company. That is necessarily a fact- specific enquiry. It involves consideration of the nature of the tasks undertaken by a person as employee and as director, and the time spent on those tasks.
[32] It is only once the services provided by the claimant have been identified that consideration may be given to what constitutes reasonable remuneration for those services. This is the second stage of the enquiry. The fact that the subs (3) assessment operates as an alternative to the subs (2) measure means that the Corporation is not limited in its assessment to the actual payments made to a claimant. Indeed, the use of the word “reasonable” suggests that the assessment is an objective one.
[33] The parties differ on the relevance of profitability to the determination of reasonable remuneration. At a general level, it is difficult to see how profitability could ever be relevant to the determination of an employee’s reasonable remuneration. There is nothing before the Court to suggest otherwise. However, I accept that
profitability may conceivably be relevant to the assessment of reasonable remuneration for a director. A director is the controlling mind of the company, responsible for its strategic direction and overall governance. In some cases, profitability may be an indicator of a director’s performance, which could then be reflected in the remuneration paid for those director’s services.
[34] It is important to emphasise the narrow compass in which profitability might be relevant. To simply assume a level of remuneration based on the profitability of a company overlooks the focus of subs (3) which is on the services provided by a claimant. I consider there would need to be a factual basis for concluding that the services provided by a director contributed to the profitability of the company and that this should be reflected in the reasonable remuneration for those services.
[35] Ensuring the focus remains on remuneration for services also preserves the distinction between earnings and dividends drawn in subs (6). That subsection requires the Corporation to determine the total amount the company pays or provides to a shareholder in any capacity in the tax year, and then deduct the subs (3) amount from that total amount. The end result is deemed to be the “dividend” received by the claimant as a shareholder of the company. That dividend is then excluded from the assessment of a claimant’s earnings.
[36] The distinction between earnings and dividends reflects the different income streams received by a claimant falling within the s 15 category. The exclusion of “dividends” from the claimant’s earnings also recognises that dividends result from many factors other than the services provided by a claimant as either employee and director.
[37] The payments to be totalled under subs (6)(a) are those made by the company to a claimant “in any capacity”. As Mr Bisley submits, this is a very broad phrase. I consider it relates to any capacity in which a claimant receives payments directly from a company. For example, it would cover payments made by way of shareholder salary, and loans made by the company to the claimant. But I do not consider it relates to payments received indirectly. It would not, therefore, capture payments received by a claimant as beneficiary of a trust shareholder in the company. Those payments sit well
outside the Accident Compensation scheme which is focused on compensating a person for lost earnings as a result of personal injury. Taking those payments into account would also cut across what Jagose J referred to as “important aspects of company and trust law enabling aggregation of capital, spreading of risk, and prudential (and fiduciary) management.”10
[38] Ultimately, however, what is meant by “in any capacity” in subs (6), and the nature of the payments totalled under subs (6)(a), may not matter very much. That is because subs (6) only works if the subs (3) amount has already been assessed. That follows from subs (6)(b) which requires the subs (3) amount to be deducted from the total payments made. Once the subs (3) amount is determined, the balance (whatever it may comprise in terms of payments made by the company) is deemed to be “dividends”. Those dividends are then excluded from the assessment of earnings.
[39] This distinction between remuneration and dividends, and the ability of a shareholder-director to structure their corporate affairs, appears to have caused some concern that a claimant may minimise their earnings to maximise their weekly compensation. That concern is evident in the Corporation’s approach in this case. In my view it has diverted the Corporation from the proper enquiry under the Act and it overlooks the purpose and effect of subs (3). The Corporation is not limited to considering the actual payments made by the company to the claimant under subs (3). Indeed, that subsection applies when the Corporation is not satisfied that the subs (2) amount (which effectively covers ‘actual payments’) is a reasonable representation of a claimant’s earnings. In that sense, it does not matter whether the Corporation suspects that a structure has been set up to divert income, because the Corporation is not constrained by the structures put in place.
[40] To recap, I consider s 15(3) requires the Corporation to first determine the services provided as employee and as director, and then to assess the reasonable remuneration for those services. That sum must then be deducted from the total payments received by a claimant with the “dividends” balance excluded from the assessment of reasonable remuneration.
10 Hamilton v Accident Compensation Corporation [2019] NZHC 1337 at [15].
[41] This interpretation of s 15 must sit alongside cl 50 of Schedule 1 of the Act. That clause provides:
50 Estimation for abatement purposes of earnings that cannot be ascertained
(1)This clause applies to a claimant who has—
(a)earnings as a self-employed person; or
(b)earnings as a shareholder-employee.
(2)This clause applies when the Corporation cannot readily ascertain, for abatement purposes, the claimant’s actual earnings during a particular period, during incapacity.
(3)In order to calculate the claimant’s earnings under this Part, the Corporation may estimate an amount that represents reasonable remuneration for the claimant during the period.
(4)The Corporation must have regard to—
(a)the evidence available of the claimant’s earnings; and
(b)the nature of the claimant’s employment immediately before his or her incapacity commenced; and
(c)the nature of the claimant’s employment that the claimant has during the period of incapacity.
[42] The clause applies to a claimant who has earnings as a shareholder-employee and in circumstances where the Corporation cannot readily ascertain, for abatement purposes, a claimant’s actual earnings during a particular period of incapacity.
[43] There appears to be considerable overlap between s 15 and cl 50 as both relate to the calculation of earnings for abatement purposes during a period of incapacity. The differing approaches in both provisions makes the relationship between the two somewhat awkward, but I consider the only way of reconciling them is to read cl 50 in light of s 15 of the Act. That means the estimate of reasonable remuneration under cl 50(3) must relate to services performed as employee, and as director, as provided for in s 15(3).
[44] Further, the distinction between “dividends” and reasonable remuneration drawn in s 15(6) must also be preserved in any cl 50 assessment made by the Corporation. And, although the Corporation must have regard to the evidence in
cl 50(4), it is not limited to considering only that evidence. The objective criteria relevant to the assessment of reasonable remuneration under s 15(3) will also be relevant to assessments under cl 50.
[45] Finally, I record that both counsel referred me to District Court decisions which they said supported their respective interpretations of the statutory provisions.11 Those decisions are fact-specific, and in some respects, support the positions taken by both parties in this case. None embark on the statutory interpretation exercise set out here and, ultimately, I have found them to be of little assistance in deciding on the plain meaning of s 15 and cl 50.
[46] Returning to the question therefore, I consider reasonable remuneration under s 15(3) must be assessed by reference to the services provided by the claimant. The profits of a company may be relevant to that assessment, but only if there is a factual link between the services provided and those profits. The assessment of earnings must also preserve the distinction between remuneration and dividends drawn in subs (6), with the latter excluded in the overall assessment.
[47] The next question is to consider whether the assessment in Mrs Hamilton’s case was in accordance with that interpretation of s 15 and cl 50. That now follows.
Did the District Court err in law by assessing reasonable remuneration at 75 per cent of the employer’s net profits?
[48] Mr Farmer QC, for Mrs Hamilton, approached this question on Edwards v Bairstow grounds.12 That is, he submitted that the adoption of 75 per cent of profits figure was so unreasonable as to amount to an error of law.
[49] Mr Bisley, for the Corporation, submits that the 75 per cent figure cannot be challenged on appeal. He says this aspect of the question was not pressed in the lower Court and did not form part of the submissions on appeal. In any respect, he says that
11 See for example: Heasley v Accident Compensation Corporation DC Dunedin 345/2002, 17 October 2002; Truscott v Accident Rehabilitation and Compensation Insurance Corporation [1998] NZACC 134.
12 Edwards v Bairstow [1956] AC 14 (HL).
it is a question of fact as opposed to a question of law, and it does not come anywhere near the Edwards v Bairstow threshold.
[50] I do not consider it necessary to frame the issue in Edwards v Bairstow terms. The question is whether the Corporation’s approach was in accordance with s 15 and cl 50. If it was not, there will be an error of law, and the District Court Judge will have endorsed that error by upholding the decision. That does not involve a challenge to the Corporation’s factual assessment. Nor is it an issue that needed to be raised in the lower courts. I approach the appeal on that basis.
[51] The District Court Judge essentially relied on the evidence called on behalf of the Corporation, including the Corporation’s accountant, and the evidence of Ms Greenwood, a forensic accountant. Based on that evidence, the District Court Judge concluded that the change in payment structure in 2004 was consistent with the intention to divert income to benefit the Trust. Further, the Judge agreed with the Corporation that Mrs Hamilton had received direct access and use of Olette’s profits through drawings, dividends advanced, and loan repayments from the Trust, while circumventing the abatement provisions.13
[52] As noted earlier, I consider this finding resulted in the Corporation, and the Judge, starting from the wrong premise in assessing reasonable remuneration. It resulted in a telescopic focus on the actual payment structure in place, rather than on the services provided by Mrs Hamilton and an objective assessment of remuneration for those services.
[53] That erroneous starting premise was then compounded by the adoption of the 75 per cent of net profits formula as reasonable remuneration. The 75 per cent figure was derived by comparing the services carried out by Mrs Hamilton with those carried out by Mr Hamilton. Ms Greenwood estimated that Mr Hamilton spent three hours per week on Olette-related activities, and Mrs Hamilton’s activities took up 79 per cent of the total time spent by her and Mr Hamilton together. That percentage figure was then adjusted downwards to reach the 75 per cent figure.
13 Hamilton v Accident Compensation Corporation [2018] NZACC 30 at [295] and [324]–[329].
[54] That approach is at odds with the requirements of s 15. The underlying assumption behind Ms Greenwood’s calculation is that both Mr and Mrs Hamilton’s services were wholly responsible for the generation of Olette’s profits. There is nothing in Ms Greenwood’s report to support such an assumption as a matter of fact. In other words, there is no link between the services Mrs Hamilton provided as director and profitability, and therefore no basis to reflect the latter in the assessment of reasonable remuneration.
[55] Further, and even more significantly, such an assumption overlooks the other generators of Olette’s profits. They will be wide and many, but will include the size of the business, the number of employees, and the duties performed by those employees, including the managers. It is notable that none of these factors were mentioned in Ms Greenwood’s report. And, although the number of employees was mentioned in the District Court judgment, it did not feature in the Judge’s analysis at all.
[56] In addition, there is no evidence that the assessment of reasonable remuneration was undertaken in accordance with subs (6). That is, a calculation of reasonable remuneration under subs (3), which is then deducted from the total of all company payments made, resulting in a “dividend” sum to be excluded from earnings. There is a real risk, therefore, that the resulting formula adopted by the Corporation and the Judge does not respect the delineation between “dividends” and “reasonable remuneration” mandated by subs (6).
[57] It follows that the answer to the question of law is “yes”. I consider the Corporation’s assessment of reasonable remuneration was not in accordance with s 15 or cl 50, and the 75 per cent of profits formula was the result of an error of law. The Judge’s decision upholding the Corporation’s assessment should be quashed accordingly. That will have the effect of reinstating the previous weekly compensation regime subject to any fresh review by the Corporation that may be instigated in the future.
Result
[58]The District Court decision is quashed.
[59] Mrs Hamilton is the successful party and is entitled to an award of costs on at least a schedule 2B basis. If costs in this Court cannot be agreed, then Mrs Hamilton may file submissions in support within 15 working days of this decision, and the Corporation shall file submissions in response within 10 working days thereafter. Costs shall be determined on the papers unless the Court orders otherwise.
Edwards J
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