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Accident Compensation Cases

Commissioner of Inland Revenue v Buis (HC, 14/06/05)

Judgment Text

Judgment of Simon France J 
Simon France J
The issue 
Section 72 of the Accident Rehabilitation and Compensation Insurance Act 1992 (“ARCIA”) provided: 
“Where any payment of compensation based on weekly earnings to which a claimant is entitled is not paid by the Corporation or exempt employer within one month after the Corporation or exempt employer has received all information necessary to enable calculation of the payment, interest shall be paid on the amount payable by the Corporation or exempt employer at the rate for the time being prescribed by or for the purposes of s 87 of the Judicature Act 1908 from the date on which payment should have been made to the date on which it is made. ”
The issue in this case is whether a payment made under this section is taxable in the hands of the recipient. 
Background facts 
The case involves two claimants who received such payments. Their individual circumstances can be briefly described: 
Mr Buis had been in receipt of weekly compensation for many years. However, the quantum was the subject of on-going dispute. The dispute related to the level of his qualifying earnings prior to the accident. Ultimately, Mr Buis succeeded in establishing the correctness of his position. The Corporation accepted a back-payment was required, and also that interest pursuant to s 72 should be payable. The total interest payment was $126,528. 
Mr Burston made an initial claim that was rejected by the Corporation on the basis of insufficient causal connection between his disability and his employment. The Appeal Authority found in Mr Burston’s favour. There was a back-payment, and an interest payment of $40,116. 
The Commissioner assessed both interest payments as assessable income. This was disputed. The Taxation Review Authority (“TRA”) found in favour of the taxpayers. The Commissioner appeals. 
It will assist comprehension of what follows to state at the outset that the Commissioner accepts that no specific provision taxes the payment. Rather the Commissioner relies on s CD 5 of the Income tax Act 1994 which states: The gross income of a person includes any amount that is included in gross income under ordinary concepts. 
Decisions under appeal 
The two cases were argued sequentially. The judgment in relation to Mr Burston was given first, and then that pertaining to Mr Buis. The latter judgment confirmed the reasoning in the former but added a further reason in support of the outcome. This extra reason related to Parliamentary intention. 
In the Burston decision the TRA first addressed the proposition that s 76 ARCIA determined the matter in favour of Mr Burston. Section 76 of the Act provided: 
The only compensation paid under this Act that shall constitute gross income of the recipient for the purposes of the Income Tax Act 1994 is - 
Payment of compensation for loss of earnings: 
Payment of compensation for loss of potential earning capacity: 
Any payment under ss 25, 58, 59 and 60 of this Act. 
For the avoidance of doubt, it is hereby declared that the following payments are not to be treated as gross income or earnings of any person for the purposes of this Act or the Income Tax Act 1994: 
Any independence allowance payable under s 54 of this Act: 
Any survivor’s grant payable under s 56 of this Act: 
Any funeral grant payable under s 55 of this Act: 
Any payment under this Act or regulations made under this Act to an injured person in respect of rehabilitation, other than any amount paid under s 25 of this Act. ”
The submission for the taxpayer was that s 76(1) was determinative because: 
the payment was compensation; 
it was not caught by (1)(a), (b) or (c) of s 76(1). 
The Commissioner submitted the payment was not compensation within the meaning of s 76. Rather compensation was intended to be a reference to specific payments such as those listed. This was reinforced by the exclusions in s 76(2). 
The TRA agreed that the payment was not a payment that compensates the disputant for any loss of earnings or potential earning capacity. It was in the TRA’s view a payment made as a penalty for administrative delay and inefficiency and therefore not caught by s 76(1). 
In accepting the Commissioner’s position on s 76, the TRA noted what it perceived to be as a logical inconsistency in the Commissioner’s stance. If it was not compensation, what was the basis on which it was to be regarded as income? The Commissioner’s argument, which was said to reflect this inconsistency, was recorded as being that: 
“... although the payment is a penalty imposed on the Corporation, in the hands of the disputant it is some type of compensation. ”
Having rejected the applicability of s 76, the TRA next considered the Commissioner’s primary proposition that the payments were income under ordinary concepts: 
“The question is whether a statutory penalty imposed to discourage administrative delays is in the hands of the recipient gross income under ordinary concepts. ”
The TRA saw the nature of the payment as determinative. It was a penalty which had no compensation component. It did not involve any reassessment of the disputant’s compensation entitlement, but was in the nature of a fine on the Corporation. It was not “true” interest because it was not compound interest. 
In essence the TRA held that the conflict in the Commissioner’s position was not sustainable for it would be: 
“To treat the transaction as of a revenue nature for some purposes [the recipient’s] but as capital for others [the Corporation]. ”
The TRA also noted that the interest payment was not money that arose from any “effort” at any point on the part of the recipient. It is “in every acceptable sense a windfall”. 
The TRA further noted that the Corporation had no statutory obligation to report the payments to the Inland Revenue, nor did it have to take withholding tax. These were, in its view, further indicia that Parliament did not regard the payment as taxable. It accordingly found in favour of Mr Burston. 
In the decision concerning Mr Buis the TRA referred to, and accepted, a further argument advanced by the taxpayer that had not featured in the Burston case. It concerned the background to the enactment of s CD 5, and generally, the enactment of the Taxation (Core Provisions) Act 1996. 
The thrust of this line of reasoning is that s CD 5 was enacted as part of the Core Provisions legislation. The clear intent at the time was that the 1996 Act would be tax neutral; it was designed to make the legislation more comprehensible but not to impose or remove existing tax liability. At the time of the 1996 Act the Commissioner had not, for the four years it had been in existence, regarded the “interest” payment as taxable. Nothing in the 1996 Act was to change things. Further, there had been opportunities when the ACC legislation was reviewed (twice), and when the 1994 Income Tax Act was enacted, to make the payment taxable. It was accordingly submitted that against this plethora of opportunity, it is difficult to imagine that the failure to expressly tax the payment was an oversight, especially when the tax status of other ACC payments is expressly dealt with in the legislation. 
Arguments on appeal 
The structure of the Commissioner’s argument was first to establish the proposition that the payment is to be regarded as interest under the common law definition of that concept. It is accepted by the Commissioner that the payment is not interest within the definition of “interest” in the Income Tax Act 1994. However, if the payment is interest under common law principles, then it is income under ordinary concepts because in effect interest is always revenue and not capital in the hands of the recipient. Hence s CD 5 applies. 
In support of this proposition, Mr Coleman submitted that the payment came within the accepted indicia of income which he submitted were that: 
it came in; 
it had an element of recurrence and regularity; 
it depended on the relationship between payer and payee; and 
it depended upon its quality in the hands of the recipient. 
Mr Coleman submitted that the payment in question clearly came in, and it did so in the form of money. Further, it stemmed from the relationship between payer and payee, which he submitted was one of debtor/creditor. 
Mr Coleman then moved on to identify the type of income it was, namely interest. He relied on Riches v Westminster Bank Ltd [1947] AC 390Has Cases Citing which are not known to be negative[Green] , and Euro Hotel (Belgravia) Ltd [1975] 3 All ER 1075Has Cases Citing which are not known to be negative[Green]  to submit that a payment was interest when it was fixed by reference to a sum of money it was said to be “interest on”, and when that sum of money was due to the person entitled to the alleged interest. Both criteria were submitted to be fulfilled here. (I note that the Megarry J passage from which this is taken also states that the criteria are not exhaustive or inescapable.) 
Finally in support of the proposition it is income, Mr Coleman referred to two New Zealand cases, Marshall v C of T [1953] NZLR 335Has Cases Citing which are not known to be negative[Green]  and Public Trustee v CIR [1960] NZLR 365Has Cases Citing which are not known to be negative[Green] . Marshall concerned a Compensation Court award for land taken under the Public Works Act 1928. The award described the payment as being £47,000 together with interest thereon at a rate of 4%. The issue before the court was whether the interest was a separate payment, or was really to be seen as part of the capital sum estimated in terms of interest. The wording of the award was held to be decisive in determining its nature as separate and as interest on the capital compensation award. The judgment does emphasise the importance of the purpose and nature of the payment. The Public Trustee case essentially involved the same issue - was the “interest” payment truly that or was it just a means of estimating the capital sum. 
I do not see either case as particularly instructive for the present facts, other than to observe there was no suggestion the present payment was being made as part of the weekly earnings sum otherwise due. 
The balance of the Commissioner’s argument was by way of countering the propositions advanced for a contrary conclusion. 
The Commissioner’s primary challenge was to the relevance of symmetry in tax treatment. It was submitted that the payment was not a penalty in the hands of the Corporation, but that even if it was, that did not dictate its nature in the hands of the recipient. Tasman Forestry Ltd v CIR [1999] 3 NZLR 129Has Litigation History which is not known to be negative[Blue] , at 137 was cited for the express rejection of a principle of symmetry in tax treatment. 
I accept, as of course I must, that this submission concerning symmetry is correct. However, the nature of the payment remains relevant to assessing whether it is income in the hands of the recipient. It is not that one looks for symmetry; rather in this case it is a question of looking to why the payment was made and what the recipient has done in order to receive it. 
Concerning the prior point of whether it is a penalty, Mr Coleman submitted the ACC cases relied upon either did not say it was a penalty or were wrong to say it was. Rather, he submitted: 
“The payments are compensating the taxpayers for the fact that weekly compensation was not paid for many years because of honestly held views concerning the taxpayer entitlement. ”
This analysis is very much to see the payment as being compensation for deprivation of money. I pause here to note no authority or policy document was referred to as support for this analysis and, as will be seen, it is contrary to the Corporation’s consistently stated rationale for the payment. It also does not take account of the fact that interest is not paid on the full entitlement but on that part of it that fell due after the Corporation became at fault in not paying. 
The Commissioner also submitted the payments were not windfalls, or alternatively if they were, they were taxable windfalls. This was essentially because they were income, so turned on the correctness of earlier arguments. 
Finally, the Commissioner challenged the respondents’ reliance on the tax history. Mr Coleman first contested the proposition that the Commissioner was changing its position. However, he was not able to say that the payment had ever been taxed in the 9 years before these cases, and certainly ACC had always throughout that period told recipients it was not taxable. Since there was no reporting mechanism from ACC to the Department, and since the taxpayer was told at the time of receipt it was not taxable, it is difficult to envisage how any such payments would have come to be taxed. Also, it is not express but a reasonable inference from the agreed facts before the TRA, and the tone of the rulings, that this was the basis on which the hearings proceeded. 
As an alternative Mr Coleman submitted, and I accept, that it is open to the Commissioner to change his position if satisfied that the former position is contrary to the statute. 
Concerning the history of the legislation, the appellant took the position that the various Acts neither said the payment was taxable nor that it was not. It was also submitted that there was no need to amend the Acts to make it express because s CD 5, or its ancestors, had always caught it. I find this latter argument unconvincing since the Commissioner had not previously taken the view that the payments were taxable. It would have been logical, but not necessary, to specifically clarify the position of this payment if a change were contemplated, rather than relying on the capacity of s CD 5 to capture it. There were specific sections that otherwise addressed the taxability of ACC payments. 
For the taxpayer, Ms Bedford advances all of the arguments identified and adopted by the TRA. The overview of her argument can be captured in two propositions: 
the penalty nature of the payment means that it is not to be treated in any sense as income or revenue. It is not money earned. It is a capital windfall; and 
the history of the “tax treatment” of the payments since they were introduced in 1992 supports the proposition that Parliament has never regarded the payment as taxable. The tax treatment involves an analysis of the legislative provisions, the failure of the Commissioner to seek to tax the payment between 1992 and 2001, and the fact that ACC expressly advised recipients as late as July 2001 that the payments were not taxable. 
Much of Ms Bedford’s submissions are reflected in the decision under appeal. It is accordingly not necessary to traverse them in as much detail. 
Concerning the nature of the payment, Ms Bedford emphasises that the Commissioner had not previously seen it as taxable, and that the Corporation itself took the view it was enacted in 1992 as a penalty provision to encourage prompt correct disposal of claims. In the agreed bundle there is a letter written in July 2001 to Mr Burston by the Corporation which states: 
“Further to your query in relation to your payment of interest under s 72, this is to confirm the payment is in fact non-taxable. ACC’s payment of interest is made as a result of ACC not making necessary payments earlier and as a result the interest payment is seen as a penalty payment and is therefore not liable for tax. ”
Ms Bedford submits that because of its penalty nature it is not income under ordinary concepts, and emphasises the total lack of “effort” by the recipient. There is nothing done by the recipient, nor is money lent. There is no debtor/creditor relationship in the normal sense because none of the trappings of that relationship, nor the traditional remedies, are available. 
Concerning the legislative history and previous tax treatment, Ms Bedford repeats the points made, and accepted, in the Buis decision. She also places weight on the fact that the payment is not caught by the Income Tax Act 1994 definition of “interest”. I return to this more fully later in the judgment. 
Preliminary point - scope of appeal 
The respondents took issue with the capacity of the appellant to challenge many of the TRA’s findings. It was said that the findings had not been put in issue by the Notice of Appeal or Points on Appeal and so could not be challenged, at least without the leave of the Court. 
The difficulty this submission presents is illustrated by the fact that two of the unchallengeable points were said to be the TRA’s finding that the payment was a “windfall” and the finding that “Parliament did not intend to make the payment taxable”. Both these findings are important steps in the TRA’s reasoning; it is untenable that this Court should decide a question of law - “is it taxable” - whilst having to accept key aspects of the TRA’s reasoning. 
For myself I doubt that specific notice needed to be given, since the whole basis of the appeal is that the TRA erred in finding the payment to be not taxable. What Ms Bedford relies on are not findings of fact - there have never been any in dispute. They are parts of the decision-maker’s reasoning process in reaching a single finding - the payment is not taxable. That single finding is the subject of appeal. 
The width of the appeal did not embarrass Ms Bedford, who ably addressed all points both in written submissions and orally. In any event I am satisfied the Points on Appeal adequately gave notice of the thrust of the Commissioner’s argument. 
I have decided that the resolution of this case lies in a matter not specifically focussed upon by the parties, but raised by Ms Bedford in her written submissions. It concerns the relationship between ss CD 5, CE 1 and OB 1 of the Act. 
It will be of assistance to set the three provisions, plus the interpretation provision, out in sequence. 
AA 3(1): 
The meaning of a provision of this Act is found by reading the words in context and, particularly in light of the purpose provisions, the core provisions and the way the Act is organised. 
CD 5: 
The gross income of a person includes any amount that is included in gross income under ordinary concepts. 
CE 1: 
‘The gross income of any person includes 
all interest, investment society dividends and annuities ... 
OB 1: 
“‘Interest’ - 
In relation to the deriving of gross income, resident withholding income, or non-resident withholding income by any person (in this definition referred to as the ‘first person’), means every payment (not being a repayment of money lent and not being a redemption payment), whether periodical or not and however described or computed, made to the first person by any other person (in this definition referred to as the ‘second person’) in respect of or in relation to money lent to the second person making the payment or to any other person: 
In relation to land, has the same meaning as ‘estate’: ”
The Commissioner’s proposition is that the payment is interest at common law and therefore caught by s CD 5. In my view this gives s CD 5 too broad a scope in that it gives it an application that is in conflict with other parts of the Act. 
One can hardly imagine a more encompassing provision than s CE 1. It is not a case of the Act, despite its comprehensibility, not addressing a particular situation. Section CE 1 starkly captures all interest payments as gross income. On its face the Commissioner should not need s CD 5, but the “problem” lies with the definition of “interest”. It fixes interest by reference to the concept of money lent, and it is common ground that makes it inapplicable to the s 72 payment. 
The important aspects of the s OB 1 definition, however, are the opening words: 
“Interest, in relation to the deriving of gross income, means ... ”
In my view s CD 5 must be read subject to this since it deals with gross income. The Act defines what interest is for gross income purposes, and that must apply to both ss CD 5 and CE 1. The contrary argument is that there are two definitions of interest - the statutory one, and the common law one, and both continue by virtue of s CD 5. I prefer the view that the s OB 1 definition, expressed as it is as capturing the concept of interest for gross income purposes, applies to both ss CD 5 and CE 1. Such an approach accords with ordinary statutory interpretation principles concerning general and specific provisions. It also accords with s AA 3(1) which places weight on the reading of the statute in context. 
I accordingly conclude that, since the Commissioner relies on s CD 5 applying on the basis that the payment is interest, the argument fails because s OB 1 defines interest exhaustively for the purpose of determining if a payment is gross income. It is appropriate, however, to address the underlying proposition of the Commissioner that s CD 5 applies. 
Gross income under ordinary concepts? 
The history of this payment is that from its inception in 1992 until 2001, the Commissioner did not seek to tax the payments. The reason for the change in position is not clear. It is clear, however, that the Corporation has until 2001 advised recipients that the payment is not taxable. This is illustrated by the ACC letter cited earlier. 
It is not surprising to me that the Commissioner might at different times take contrary views on the nature of the payment. It is not susceptible to easy analysis. 
In favour of the Commissioner’s position is that the payment is described in s 72 as interest, it is fixed by reference to the Judicature Act 1908 rate, and it is fixed by reference to a sum of money payable to the recipient. There is money “owing” to the claimant and the payment in issue pays “interest” on that. 
However, there are contrary indicia. It is accepted by the Corporation to be a penalty. It is a system adopted by Parliament to encourage the Corporation to efficient disposal of claims. It is not referenced to the claimant’s actual entitlement, but to a point in time one month after the point when the Corporation should have accepted entitlement. 
The penalty characterisation was influential on the TRA. The payment is not made because the claimant has loaned the money, or because the claimant has been deprived of its earning potential. It is made in a sense because the claimant is a “victim” of an inadequate processing of his or her claim. It is payment made because of default on the part of the payer, not because of anything at all done by the payee. 
In a public ruling on the taxability of payments made under the Employment Relations Act 2000 for humiliation, loss of dignity and injury to feelings, the Commissioner said this of s CD 5 (BR Pub 01/04, p 8): 
“Although the legislation does not define “gross income under ordinary concepts”, a great number of decided cases has variously identified the concept by reference to such characteristics as periodicity, recurrence, and regularity, or by its resulting from business activities, the deliberate seeking of profit, or the performance of services. Nor do capital receipts form part of “gross income” unless there is a specific legislative provision to the contrary. It is clear that payments under s 123(c)(i) will not generally be made periodically or regularly, or generally recur. Nor as we have seen above, are they compensation for services. And by analogy with common law damages, they are of a capital nature. ”
When that statement is considered there is much about the payment that does not fit within it: 
periodicity, regularity and recurrence are absent; 
it does not result from business activities, the deliberate seeking of profit or the performance of services. 
It was the absence of these features that was relied on by Ms Bedford, and given weight by the TRA. 
The other interest in the Commissioner’s public ruling relates back to the third of Mr Coleman’s income indicia (para 20 above). The Commissioner’s ruling illustrates that a payment can emerge out of a relationship but not be sufficiently a product of it to fall within income. In those cases, the payments for humiliation in the workplace were not payments for anything done by the employee although arising out of and connected to the employment relationship. There are parallels to the present situation. The payments are for actions done or not done by the Corporation. 
I admit to some unease about a conclusion that Parliament has legislated for a non-taxable windfall to be paid to members of the public because of administrative inefficiency or error. It is not instinctively to be expected. However, on balance I consider, along with the TRA, that the payment is not to be seen as income under ordinary concepts. The reference to the Judicature Act rate is a means by which the quantum of the penalty is assessed. 
I have not discussed in further detail Ms Bedford’s submissions on the legislative history. Given my findings, I do not need to. I accept that there have been many occasions when Parliament could have addressed the taxability of the payment. In one sense that is true of anything that has not actually been covered, but the occasions in question are those when the taxability of other payments under the ACC regime have been expressly considered. I also accept there is relevance in the fact that the Corporation does not have to report the payments to the Department or take withholding tax. One would expect a statutory mechanism to be in place to ensure the Department is aware of payments. The withholding tax situation arises, of course, because the payments are not interest as defined in the Act and so the withholding tax provisions do not apply. I have already discussed the significance I see in that. 
Accordingly, I agree that there are contextual indicia that support the conclusion the payment is not taxable. However, not too much weight should be placed on the failure to specifically address taxability of the payment; logically that is neutral in that the Act neither says it is or is not taxable. I see more significance in the consequent absence of procedural mechanisms such as reporting obligations, and withholding tax obligations. 
For these reasons the appeal is dismissed. 
The respondents are entitled to 2B costs, together with reasonable disbursements to be fixed by the Registrar, if necessary. 

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