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Accident Compensation Cases

Neame v Commissioner of Inland Revenue (HC, 17/11/88)

Judgment Text

JUDGMENT OF HARDIE BOYS J 
HARDIE BOYS J
The short point in this appeal by way of Case Stated under s 43 of the Inland Revenue Department Act 1974 is whether weekly payments under the Accident Compensation Act 1972 in respect of permanent incapacity were assessable income for the purposes of the Income Tax Act 1976. 
The appellant lost a hand in a work-related accident on 9 May 1974. He was unable to return to work until November 1974. During that period he was paid earnings related compensation under s 113 of the Accident Compensation Act 1972. In 1976 he received lump sum payments under ss 119 and 120. But it was not until June 1981 that he finally obtained an assessment of his permanent loss of earning capacity under s 114(1). Soon after, he received a lump sum payment pursuant to this assessment, representing the aggregate of the weekly amounts payable pursuant to it backdated to November 1974, less PAYE tax deductions. The Commissioner assessed the gross sum, together with subsequent weekly payments, as income derived in the 1982 year. The appellant objected, claiming first that payments under s 114 were not taxable, and secondly that if they were, they were assessable in respect of the years to which they related, not the year in which they were received. The Commissioner having disallowed the objection, a case was stated to the Taxation Review Authority. In a decision delivered on 17 March 1987 Judge Barber upheld the Commissioner. On appeal to this Court, the second of the grounds advanced before the Authority was not pursued, leaving only the question, apparently now raised for the first time, whether the payments in question were properly treated as assessable income. 
The appeal turns on s 65(2)(c) of the Income Tax Act, as it stood before the Accident Compensation Act 1972 was replaced by the consolidating and amending Act of 1982; and on the relationship of ss 113 and 114 of the 1972 Act to each other and to the general framework of that statute. The point at issue cannot arise under the 1982 Act, as I will explain. 
At the relevant time, s 65(2)(c) of the Income Tax Act declared that for the purposes of that Act the assessable income of any person included inter alia “all payments of earnings related compensation (as defined in section 2 of the Accident Compensation Act 1972).”Section 2 of the Accident Compensation Act relevantly defined “earnings related compensation” as compensation payable under any of sections 109(2), 112, 113, 116, 117, 118, and 123 of the Act. Section 114 was not included. 
Section 112 provided for the payment of compensation for the first week of incapacity. Section 113 provided for incapacity for a longer period. It stated in subs (1): 
“(1)
Where as a result of incapacity due to personal injury by accident a person who has cover in respect of the injury suffers any loss of earning capacity as determined under the provisions of this section [[or section 114 of this Act]] during any period after the expiration of the working week comprising the day of the accident and the 6 days thereafter, the Commission shall pay him earnings related compensation in accordance with this section in respect of that loss, — 
(a)
Until an assessment has been made under section 114 of this Act of the amount to be paid in respect of his permanent loss of earning capacity, at the rate of 80 percent of the amount of his loss of earning capacity due to the injury for the time being as determined by the Commission. 
(b)
After such an assessment has been made, at the rate specified in that assessment, or fixed by any determination made under subsection (3) of section 114 of this Act that is for the time being in force, as adjusted from time to time under subsections(8) and (9) of that section or either of those subsections. ”
(The words in double brackets were added in 1975.) 
Section 114, which it is unnecessary to set out in full, required the Commission in a case of permanent incapacity to make an assessment of it and of its effects and on the basis of that to assess the weekly amount to be paid initially under s 113(1)(b). Section 114 did not of itself provide for the payment of compensation. In this respect it differed from each of the sections listed in the definition in s 2. These were all provisions directing the payment of earnings related compensation: s 109(3) where the injured person lost time for medical treatment; ss 116 and 117 for an increased sum in certain cases; s 123 for dependants of deceased persons; or, in the case of s 118, payment for loss of potential earning capacity. 
The appellant's argument requires that s 114 be construed as creating an independent right and obligation in respect of the payment of an amount which was not earnings related compensation as provided for in s 113. However to construe it in this way would be to ignore the clear distinction the Legislature had drawn between s 114 and those sections listed in the definition of earnings related compensation in s 2. And it would also be unnecessary. For s 113(1)(b) already created the right and the obligation. Furthermore, to treat s 114 as providing for something other than earnings related compensation would be to make nonsense of other provisions of the Act. One example is subs (4) of s 114 which was in these terms: 
“The earnings related compensation for the time being payable to the person under this section shall not be reduced by reason of any increase in his earning capacity. ”
The appellant's case renders this meaningless, for if it is correct there could be no earnings related compensation payable “under this section”. Similarly with subs (7), which refers to the effect of a general wage order on “any earnings related compensation that is payable in accordance with an assessment or determination that has been made under this section”; and subs (9), which enables increases to be made in the weekly amount of any such earnings related compensation. Other sections to which Mr Pearson drew my attention, and which if the appellant is right would be severely and unreasonably restricted in their operation, if not rendered nugatory, include sections 115(1)(b), 116, 117 and 118. 
Two other features of the scheme as a whole militate against the appellant's argument. First, under s 114(1)(e) compensation was 80% of the reduction in earnings due to the incapacity. It is clear from s 103 that the earnings upon which compensation payments were based were earnings before tax. If the compensation payments were not taxable, the recipient, being paid 80% of his loss, may well have received more than he would have earned had there been no accident. Secondly, the Act differentiated between lump sum payments and weekly payments. The former, made under ss 119 and 120, were for loss or impairment of bodily function and non-economic loss, such as loss of amenities and pain and suffering. The latter were directly related to loss of earnings or earning capacity and were plainly intended, so far as they went, to make good income lost as a result of the accident. The former were not taxable and it is obvious why that was so. It is not at all obvious however why the latter should have been divided into two classes for tax purposes, depending on whether the incapacity was temporary or permanent. 
These are all rather secondary points. The most substantial argument against the appellant's case is the wording of the two sections and their relationship to each other. In my opinion it is quite clear that s 113 created the right and the obligation with regard to weekly payments. It also fixed the amount payable until it was known that there would be a permanent incapacity and its extent could be assessed. Section 114 provided for the fixing of the amount payable once that time came. In short, s 114 dealt only with assessment. This I think is abundantly clear from s 113(1), which stated that the Commission shall pay at the rate assessed under s 114, and by s 114(1)(e) which provided for the assessment of the amount “to be paid … under”s 113(1)(b). As Mr Pearson submitted, the two sections go in tandem. Neither is complete in itself. But their functions are different. It was only by virtue of s 113 that weekly compensation was payable. Section 114 was concerned with the amount that was payable. There is nothing in the two cases to which Mr Black referred me, Re Wilde (1983) 3 NZAR 321 (per Judge Blair at p 322), and Dean v A.C.C. [1982] 1 NZLR 750 (per Woodhouse P at p 754), that affects this view. All they do is recognise the respective roles of the two sections in the legislative scheme. 
Mr Black also relied on the word “payable” in s 2, arguing that compensation for permanent incapacity became payable only by virtue of an assessment under s 114. This of course is true. An assessment under s 114 was an essential prerequisite to payment. But this begs the question. The question is whether, once an assessment had been made under s 114, compensation became payable under s 113 or s 114. For the reasons I have given, I consider that it became payable under s 113. This is the conclusion Judge Barber reached in his succinct decision, with which I entirely agree. 
The 1982 Act now makes the position clear beyond dispute. Section 114 is replaced by s 60, which in subs (1), after repeating the earlier assessment formula, now has the words “and shall pay him earnings related compensation in accordance with the assessment”. And in s 2“earnings related compensation” is defined so as to include compensation payable under s 60. This however does not mean that the 1972 Act should be given a forced construction so as to provide an apparent explanation for the new provisions. It may have been thought there was some doubt as to the meaning of the 1972 Act — although I would not share it — or it may have been desired to remove any possibility of argument. But the new Act cannot be taken as a legislative admission that the earlier Act meant something different. 
My conclusion that the compensation payments are taxable under s 65(2)(c) means that it is not necessary to consider the further point canvassed by counsel, which was whether the payments, if not taxable under s 65(2)(c), were nonetheless caught by s 65(2)(1) as “income derived from any other source whatsoever”. I simply repeat the view that compensation assessed under s 114 is not of a capital nature, but is a substitute for earnings. Received as regular weekly payments, the compensation becomes “part of the receipts upon which the recipient may depend for his living expenses, just as in the case of a salary or wage earner, annuitant or welfare beneficiary” and so is to be regarded as income “according to ordinary concepts and usages of mankind”, and so is taxable: Reid v C.I.R. (1983) 7 NZTC 5,176, 5,183. 
The answer to the question in the case stated is therefore that the Taxation Review Authority was correct in confirming that the respondent acted correctly in disallowing the appellant's objection to the income tax assessment for the year ended 31 March 1982. 
The appeal is dismissed with costs to the Commissioner of $500. 

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