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Accident Compensation Cases

Adams v Commissioner of Inland Revenue (HC, 06/10/89)

Judgment Text

Judgment of Fisher J 
Fisher J
This is an objection by way of case stated under s 33 of the Income Tax Act 1976. The objection turns upon the question whether a lump sum derived by way of commutation of earnings related compensation under the Accident Compensation Act represents taxable income. 
The objector was married with four dependent children. He owned his own home. On 26 February 1979 at the age of 43 years he suffered serious head injuries when felling trees. 
As a result of the accident the objector became entitled to earnings related compensation under the Accident Compensation Act 1972. Unfortunately there was a series of misunderstandings between the objector and the Accident Compensation Commission concerning the objector's right to payments and the level of those payments. Some mistakes were made by the Commission. There were several reviews and appeals under the Accident Compensation Act. Eventually on 21 June 1984 the Accident Compensation Corporation (as it had then become) issued a decision in the objector's favour. It decided that pursuant to s 114 the objector's permanent loss of earning capacity due to the accident was 100%. He was therefore awarded compensation at the rate of 80% of his relevant earnings. At that stage the relevant earnings were assessed at $209.62 per week. 
During the five year period between the accident in 1979 and the decision in mid-1984, the objector felt constrained to sell his house. That was partly due to the financial difficulties which the objector was having with the Corporation. In itself, that would probably not have required the sale of the house. But as a result of the accident the objector had also developed a severe obsessional illness with paranoid elements. That caused him to take a pessimistic view of his treatment by the Corporation and his financial future. That in turn persuaded him that the house should be sold. The proceeds of selling were subsequently spent on living expenses for himself and his family. 
The combination of mistakes by the Corporation and the objector's mental illness made further contact between the objector and the Corporation intolerable to the objector. He decided that he would rather commute his future earnings related payments to a lump sum. As he saw it, that would enable him to terminate all further dealings with the Corporation, purchase another home and make certain business investments. Section 133 of the Accident Compensation Act 1972 provided for commutation of period payments to a lump sum "in very exceptional circumstances" in the discretion of the Commission. The objector's application for commutation was declined by the Commission and an Accident Compensation review officer but ultimately allowed in part by a decision of the Accident Compensation Appeal Authority on 11 December 1986. By that decision the Authority decided (p 7): 
“I have come to the view that the compound effect of all the matters which I have previously set out do amount to 'very exceptional circumstances' in this particular case. I consider that the discretion contained in s133 should be exercised to the extent that there will be commutation of 30% of the appellant's entitlement which on my calculation should provide sufficient to enable him to re-establish himself in a home, free of mortgage. This, of course, will have the effect of reducing the weekly payments which he will receive but he will not be liable to pay rent or mortgage payments so that both he and his family should be able to live in greater security. While this will leave regular weekly payments which will necessarily come from the Corporation, these are made by automatic bank transfer so that in my view there should be no real problems between the appellant and the Corporation. ”
The Corporation obtained an actuary's report and by a supplementary decision of 26 January 1987 the Authority decided: 
“The Corporation should supply the appellant's solicitors as soon as convenient with its calculation of the quantum available to the appellant as a result of the commutation and when the purchase of a house property has been arranged this sum should be paid to the appellant's solicitors on receipt by the Corporation of the solicitor's certificate that the funds are then required for settlement of the purchase. ”
The Corporation and the objector agreed that $91,189 net of any tax was the appropriate commutation figure and that subject to the Authority's approval that sum would be paid in cash to the objector. If any tax was payable on the lump sum, the Corporation would assume responsibility for its payment. The matter came back before the Authority on 5 February 1987. The Authority referred to the memorandum recording that agreement and the actuarial report placed before him. The Authority approved the proposed settlement and continued: 
“Mr Smith has included in that memorandum an undertaking to hold the funds for application towards the purchase of a home and I accept that undertaking but I consider that it would be appropriate for him to supply a formal notification to the Corporation that the funds have been so applied. ”
The Corporation duly paid the $91,189 in terms of the approved settlement. It then reached the view that the lump sum payment was taxable and subject to a PAYE deduction. In accordance with the settlement agreement, it paid the additional $27,356.70 PAYE deduction direct to the Inland Revenue Department. Regrettably, the objector does not seem to have been told of that decision and action on the part of the Corporation at the time. 
Subsequently after the objector had learned of the additional PAYE payment he filed a tax return for the year ended 31 March 1987. In the annual statement of accounts annexed to the tax return, the gross commutation payment of $118,546.00 (including both the cash payment to the objector and the PAYE payment to the Inland Revenue Department) was recorded as a "capital receipt". In consequence, that sum was not included as part of the objector's taxable income for that year. 
The issues 
The objector says that the commutation payment represented a capital receipt in his hands. He says such a payment fell outside any of the income provisions of the Income Tax Act 1976. He further says that the sum received was effectively compensation for the loss of his home due to the Corporation's unreasonable refusal to make payments. When the payment was authorised by the Authority, it was tagged with the requirement that it be used for the purchase of a home. He says that since it was to replace the loss of a capital asset the payment was in the nature of capital and did not attract income tax. It was common ground that periodic earnings related compensation constituted taxable income but the commutation was said to change the fundamental nature of the payment to that of capital. 
The Commissioner argued that the commutation represented a mere change in the form of the payment without affecting the fundamental nature of the payment as income. The Commissioner said that the commutation payment fell within the express statutory provisions concerned with taxation of earnings related compensation. Alternatively he argued that the payment constituted "income" in the more general sense. 
The issue is therefore whether the payment of $118,546 represented taxable income in the hands of the objector. 
Statutory basis for the ACC payment 
The accident giving rise to the right to ACC compensation occurred on 26 February 1979. At that time the Accident Compensation Act 1972 was in force. The Accident Compensation Act 1982, which replaced the 1972 Act, came into force on 1 April 1983. However, s 122(4) of the 1982 Act provides that "... Part VI of the Accident Compensation Act 1972 shall continue in force and apply in respect of personal injury by accident occurring on or after the lst day of April 1974 and before the 1st day of April 1983 as if those provisions had not been repealed by subsection (1) of this section." As the accident in the present case fell within the time span referred to in s 122(4), s 4 and 5 and Pt VI of the 1972 Act continue to apply with respect to the objector's injuries. 
Included in Pt VI of the 1972 Act, and therefore preserved for the purposes of the objector's accident, are s 113, 114 and 133 of that Act. Section 113 was the basic provision for payment of earnings related compensation. It provided: 
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,— 
Subject to subsection (13) of this section 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: 
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. ”
In case of permanent incapacity s 114 required the Commission to make an assessment as to the nature and extent of the permanent incapacity and the amount to be paid thereafter by way of earnings related compensation. In the present case, a finding under s 114 on 21 June 1984 resulted in the objector's receipt thereafter of 80 percent of his relevant earnings. 
Subsequently, the objector applied for commutation of periodic payments under s 133. Section 133 provides: 
The Commission may, in its discretion in very exceptional circumstances, on such terms as to medical examination as the Commission may impose, commute periodic payments of earnings related compensation being made to any person under section 113 or section 123 of this Act wholly or partly into a lump sum payment to that person. 
Such a commutation shall not normally be made if the effect thereof will be that the person concerned will need support thereafter out of money appropriated by Parliament in excess of the support (if any) that he is so receiving immediately before the date of the commutation. ”
It was under the authority of s 133 that the Authority had directed commutation of part of the objector's earnings related compensation. It is common ground that the periodic compensation until then paid to the objector under s 113 represented taxable income. The question is whether that portion commuted to a lump sum under s 133 no longer represented taxable income. 
Determination of taxable income under Income Tax Act 1976 
Pursuant to s 2, 9, 19, 20, 38 and 39 of the Income Tax Act 1976 and the First Schedule thereto, income tax is exacted with respect to "assessable income". "Assessable income" is defined in s 2 to mean "income of any kind which is not exempted from income tax otherwise than by way of a special exemption expressly authorised as such by this Act". The principal question in the case is therefore whether the commuted lump sum in the present case constituted "income" within the meaning of that definition. 
Extended meanings are given to the term "assessable income" in s 65(2) of the Income Tax Act, the relevant portions of which provide: 
Without in any way limiting the meaning of the term, the assessable income of any person shall for the purposes of this Act be deemed to include, save so far as express provision is made in this Act to the contrary, -... 
All payments of earnings related compensation (as defined in section 2 of the Accident Compensation Act 1982) and of compensation under section 80(4) of that Act, not being payments— 
Which are recovered or recoverable by the Accident Compensation Corporation under section 86(3)(a) or section 88(4) of that Act; or 
In respect of which an amount equal thereto is refunded to the Social Security Commission by the Accident Compensation Corporation under section 88(3) of the Accident Compensation Act 1982: 
Income derived from any other source whatsoever. ”
In the present case, the Commissioner says that the commuted lump sum constituted income both by virtue of the express reference to the Accident Compensation Act in s 65(2) and also by virtue of the more general word "income" as it appears in the definition of "assessable income" and in s 65(2)(l). 
Two preliminary points affect that approach. The first concerns the objector's argument that s 65(2)(c) represents an exhaustive definition of tax liability so far as Accident Compensation payments are concerned. For the objector, Mr Smith argued that the express and highly specific matters dealt with in s 65(2)(c) indicated an intention on the part of the legislature that that should be the sole source of tax liability for payments made under the Accident Compensation Act. However, I do not see any warrant for cutting down in that way the more general references to "income" as they appear elsewhere in the Act. Section 65(2) is no more than an inclusive definition. It expressly begins with the admonition "Without in any way limiting the meaning of the term, the assessable income of any person shall for the purposes of this Act be deemed to include ...". That I take to be a clear indication that if a receipt would otherwise satisfy the ingredients necessary to constitute "income" for tax purposes, the mere fact that the receipt might fall outside one of the particular paragraphs in s 65(2) should not be taken to disqualify the receipt from classification as income. 
The second preliminary argument advanced by the objector was that s 65(2)(c) could no longer apply to earnings related compensation under the Accident Compensation Act 1972. In fact, however, although s 65(2)(c) of the Income Tax Act appears in vol 12 of the Reprinted Statutes of New Zealand in the way that I have quoted it above, the Income Tax Act 1976 was actually passed with references to the Accident Compensation Act 1972 (see (1988) 10 NZTC 5,288; (1988) 12 TRNZ 672. There, Hardie Boys J held that it was s 113 that "created the right and the obligation with regard to weekly payments". He held that "it was only by virtue of s 113 that weekly compensation was payable. Section 114 was concerned with the amount that was payable." He concluded that, notwithstanding assessment under s 114, the compensation thereafter payable continued to be "payable under s 113" for the purposes of the definition of "earnings related compensation" in s 2, and in consequence was taxable in terms of the Income Tax Act s 65(2)(c). Although there are substantial differences between s 114 and 133, broadly the same reasoning seems to me to be applicable. It is true that Hardie Boys J placed considerable reliance upon the express statutory cross-referencing between s 113 and 114 which does not have any exact parallel in the present case. However, the essential point is that in both cases s 113 represents the origin and rationale for the compensation paid. Section 114 and 133 are essentially parasitic upon s 113. They do not confer any independent right to compensation. 
It would be curious if a mere change in the form in which earnings related compensation is paid resulted in an exemption from the tax liability which would otherwise apply. It is common ground that periodic payments made on a weekly basis under s 113 would in the normal course attract income tax liability. Pursuant to s 133 the lump sum payable is based upon the exercise of "commute(ing) periodic payments of earnings related compensation". There is no warrant in that provision for commuting periodic payments for the net amount of earnings related compensation after income tax had been deducted. In consequence it would seem that the commuted lump sum is intended to represent the gross amount without reference to the subject of tax. If the lump sum so received did not then attract tax liability there would be an obvious windfall to the recipient. Through a mere change in the form of the payment he would receive a significant advantage compared with all other recipients of earnings related compensation. That is no more than a background consideration since the interpretation of revenue matters should turn upon the strict wording of the statutory provisions concerned. Nevertheless, I am reassured by what I regard as the commonsense consequences of the interpretation which I favour. 
For these reasons I consider that lump sums commuted under s 133 of the Accident Compensation Act 1972 representing a commutation of periodic payments due to a person under s 113 of that Act continue to represent "compensation payable under section 113" for the purpose of the definition of "earnings related compensation" in s 2 of that Act. Consequently, such sums are included in the assessable income of the recipient for the purposes of s 65(2)(c) of the Income Tax Act 1976. 
Was the commutation income in the more general sense? 
In view of my conclusion as to the tax liability flowing from s 65(2)(c) of the Income Tax Act, I can deal more briefly with the alternative limb upon which the Commissioner relied, namely that the commuted lump sum payment constituted income in the more general sense that that expression is used in s 65(2)(1) and other parts of the Income Tax Act. 
In that regard, Mr Smith relied upon the importance of periodicity, recurrence and regularity as indicia of income: see, for example, Reid v C of IR (1985) 7 NZTC 5,176 CA, 5,183; (1985) 8 TRNZ 769Has partially negative history or cases citing, but has not been reversed or overruled[Yellow] , 776, FC of T v Dickson (1952) 86 CLR 540Has partially negative history or cases citing, but has not been reversed or overruled[Yellow]  and Asher v London Film Productions [1944] 1 All ER 77. Clearly, the lump sum payment in the present case did not itself involve any element of periodicity, recurrence or regularity. However, in the present context, I think it important to have regard to the origins of the payment rather than its final form. It is trite to say that capital can be paid regularly over a period by instalments (repayment of mortgage principal) while income could be received on one occasion only in the form of a single sum of money (eg the wages of a short term employee). Thus a lump sum received in consideration for an undertaking by a cemetery company to maintain graves in perpetuity may constitute taxable income: London Cemetery Co v Barnes [1917] 2 KB 496; 7 TC 92
As a general principle, the commutation of an entitlement to revenue receipts into a lump sum in lieu does not affect the revenue nature of the entitlement. That principle was recognised in C of IR v McKenzies NZ Limited (1988) 12 TRNZ 157Has partially negative history or cases citing, but has not been reversed or overruled[Yellow] . In that case a lump sum payment was held to be capital in nature precisely because, on analysis, it did not represent a commutation of revenue. The converse came before the English Court of Appeal in Wales (Inspector of Taxes) v Tilley [1942] 2 All ER 22. The Court was considering the revenue implications of a lump sum paid to the managing director of a company in consideration for a release of the company from an obligation to pay him a pension and to serve as a managing director at a specified salary for a given period. In that context Lord Greene MR said at p 24: 
“Indeed, the only real argument that was presented on behalf of the appellant on this aspect of the case consisted of an endeavour to draw a distinction between a lump sum paid at the beginning of the service and a sum paid, as in the present case, in consideration of an agreement to continue to serve for a reduced salary. There is no substance in this distinction. If a man who is serving at a salary of £1000 a year agrees to serve for a reduced salary in consideration of a lump sum, he is merely commuting his salary and a sum so accepted in commutation of salary can in its nature be nothing but salary. The commutation merely substitutes one form of remuneration for another. IT IS IN EFFECT REMUNERATION PAYABLE IN ADVANCE, AND IT IS QUITE FALLACIOUS TO SPEAK OF IT AS A CAPITAL PAYMENT. ”
(emphasis added)
Mr Smith referred to the interesting metaphor of Pitney J of the Supreme Court of the United States in Eisner v Macomber (1919) 252 US 189Has Cases Citing which are not known to be negative[Green]  when he said: 
“The fundamental relation of capital to income has been discussed by economists, the former being likened to the tree on the land, the latter to the fruit or the crop. ”
It is common ground that in the present case the more usual form of earnings related compensation as weekly payments under s 113 represents taxable income or, in terms of the Pitney analogy, the fruit from the tree. In the normal course one apple is picked from the tree each week. But the mere fact that the objector has elected to pick all the fruit at once in the form of a commutation payment under s 133 does not change the fact that he is still receiving the same fruit from the same tree. 
In my view the commutation payment constituted "income" in the general sense for revenue purposes. 
Capital object of the compensation payment 
Finally, Mr Smith placed considerable reliance upon the fact that the payment, once received by the objector, was earmarked for the purchase of a house. That object played a strong (although by no means the sole) part in the reasoning of the Appeal Authority in allowing a commutation and it was an express condition imposed upon the payment. 
I cannot see, however, that the purpose to which a payment is to be put provides any assistance in the classification of the payment itself as capital or income for revenue purposes. An inherited lump sum can be drawn upon for living expenses and wages can be used to purchase a house. The object of the subsequent purchase tells us nothing as to the capital or income nature of the antecedent receipt of the funds in question. It is the transaction by which those funds came into the hands of the taxpayer which must be examined, not the subsequent transaction by which those funds may be expended. Nor could this be affected by the mandatory nature of the subsequent expenditure. 
I therefore answer the question posed for my determination "whether the commissioner acted incorrectly in treating the said payment of $118,546 referred to in para 5 [of the case stated] as assessable income of the objector" in the negative. 
Leave is reserved to the parties to file memoranda concerning costs should they consider that necessary. 

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