CATCHWORDS COMMONWEALTH EMPLOYEES COMPENSATION - Redemption of entitlement to periodic payments - Computation of lump sum payment - Allowance to be made for likely future increases in wage rates - Effect of inflatzon —- Whether discount must be allowed as a matter of law - Relevance of Todorovic v Waller (1981) 150 CLR 402. Compensation (Commonwealth Government Employees) Act 1971 ss.25, 46, 49 Administrative Appeals Tribunal Act 1977 ss.43, 44 Todorovic v Waller (1981) 150 CLR 402, Dzekovski v Safcol yy cereg oo 6 ms - 7 ce <e Tet ee ne te eee eng en per seriy Seafoods Pty Limited [1968] VR 190, O'Brien v McKean (1968) 118 CLR 540, Lim Poh Choo v Camden and Islington Area Health Authority [1980] AC 174, Lindsley v Hawkins [1973] 2 NSWLR 581, Hawkins v Lindsley (1974) 49 ALJR 5, Beneke v Franklin [1975] 1 NSWLR 571, Jacobs v Varley (1976) 50 ALJR 519, Armstrong v_ Rudd (1978) 21 ALR 166, Pennant Hills Restaurants Pty Limited v Barrell Insurances Pty Limite 198 145 CLR 625, Australian National Rallways Commission v Koultras (1983) 5 ALD 415 referred to. ON APPEAL from the Administrative Appeals Tribunal General Administration Division VG.119 of 1985 CHRISTOPHER GEORGE BLACKWELL v COMMONWEALTH OF AUSTRALIA Northrop, Keely and Wilcox JJ Melbourne 18 July 1986 2 1 JUL 1986 FEDS. aeGicrey eye pry coat pees eee ee es > IN THE FEDERAL COURT OF AUSTRALIA VICTORIAN DISTRICT REGISTRY No. VG.119 of 1985 Ys ee ee ee GENERAL DIVISION ON APPEAL from the General a Administration Division of ! the Administrative Appeals . Tribunal constituted by Mr u I R Thompson (Deputy President), Mr L J Cohn (Member) and Mr HC Trinick (Member) meen ace: ~ Tree BETWEEN: CHRISTOPHER GEORGE BLACKWELL . Applicant we AND: COMMONWEALTH OF AUSTRALIA wep eee eet oe ey Fi may Respondent Wee Sw ora pn yee a ' ' CORAM: NORTHROP, KEELY and WILCOX Jd PLACE: MELBOURNE DATE: 18 JULY 1986 i, MINUTES OF ORDER THE COURT ORDERS THAT: eee ee cae ree 1. The appeal be allowed. The decision of the Administrative Appeals Tribunal made on 26 April 1985 be set aside and the case be remitted to the said Tribunal to be heard and decided again, with such further evidence as the Tribunal may admit, according to law. The respondent, the Commonwealth of Australia, pay to the applicant, Christopher George Blackwell, his costs of this appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. a aa ra eee —t IN THE FEDERAL COURT OF AUSTRALIA VICTORIAN DISTRICT REGISTRY No. VG.119 of 1985 GENERAL DIVISION ON APPEAL from the General Administration Division of the Administrative Appeals Tribunal constituted by Mr I R Thompson (Deputy President), Mr L J Cohn (Member) and Mr HC Trinick (Member) BETWEEN: CHRISTOPHER GEORGE BLACKWELL Applicant AND: COMMONWEALTH OF AUSTRALIA Respondent CORAM: NORTHROP, KEELY and WILCOX JJ PLACE: MELBOURNE DATE: 18 JULY 1986 REASONS FOR JUDGMENT THE COURT: This application, by way of appeal from a decision of the Administrative Appeals Tribunal, raises an important question under the Compensation (Commonwealth Government Employees) Act 1971: the extent of any discount factor which cy oe a fy should be allowed in the calculation of the lump sum payable to redeem the liability of the Commonwealth to pay compensation in respect of partial incapacity for work. The matter has been argued in terms of general principle, so that it is sufficient merely to outline the facts of the particular case. Christopher George Blackwell, the applicant, was employed by the Department of Defence as a security guard. On 29 June 1979 in the course of his work he injured his neck and shoulder muscles. He reported the injury and subsequently made a claim for compensation under the Act. The Commissioner for Employees' Compensation made determinations as to certain periods of total incapacity for work and that, from 22 October 1980, Mr Blackwell was partially incapacitated. Compensation on the basis of partial incapacity has since been paid pursuant to s.46 of the Act. In November 1982 the applicant requested the Commissioner to redeem the Commonwealth's liability to make weekly payments for partial incapacity by payment of a lump sum. Provision for redemption is made by s.49 of the Act which relevantly provides: "49. (1) Subject to this section, where payments of compensation in respect of an injury have been made to an employee under section 46 for a continuous period of not less than six months, the employee may request the Commissioner in writing that the liability of the Commonwealth to make further payments to the employee under that section be redeemed by the payment to the employee of a lump sum. ene ete eters (2) A request under the last preceding sub-section shall be in writing and shall specify the manner in which the employee intends to use the lump sum if the request is granted. (3) Where a request is made under sub-section (1), the Commissioner shall, unless the employee has, by notice in writing to the Commissioner, withdrawn the request, determine —- (a) whether the liability of the Commonwealth is to be redeemed by the payment to the employee of a lump sum; and (b) if he determines that the liability is to be so redeemed -- the amount of the lump sum. (4) The amount of the lump sum is the amount determined to be the value, as at the date of the determination by the Commissioner that the liability is to be redeemed, of the right of the employee to receive further payments of compensation under section 46 and, in the determination of the value of that right, regard shall be had to the nature of the injury to the employee, the age and occupation of the employee and any other relevant matters. (5) The Commissioner shall not make a determination that the liability of the Commonwealth to make further payments to an employee under section 46 is to be redeemed unless he is satisfied that-- (a) the injury is not likely to result in the employee becoming totally incapacitated for work; (b) the employee intends to use the lump sum in a manner that is particularly advantageous to the employee; and ({c) in all the circumstances it is desirable in the interests of the employee that the liability of the Commonwealth be redeemed. (6) ..." Various determinations were made and revoked before a determination of 25 July 1983 that the applicant suffered total incapacity and, consequently, that the liability was not able to be redeemed. There is no provision for redemption of liability in respect of total incapacity. The applicant applied to the Administrative Appeals Tribunal for review of that determination, contending that he was but partially incapacitated. At the hearing before the Tribunal counsel for the respondent conceded that the applicant was partially incapacitated and that the injury was not likely to result in his becoming totally incapacitated for work. The applicant established the other matters necessary to entitle him to a redemption under s.49, leaving as the sole contentious matter the computation of the amount of the lump sum. In its decision of 26 April 1985 the Tribunal took as its starting point on that question an agreement between the parties that the financial loss sustained by the applicant, as a result of his partial incapacity, was at that time $94.52 per week; being the difference between the amount which the applicant would have earned if he had continued in his pre-accident employment and the amount which he was actually earning in work undertaken on behalf of another employer in a job within his physical capacity. The Tribunal held that the lump sum, subject to any appropriate discount, was to be computed by multiplying $94.52 by the value of an annuity payable by weekly instalments of $1.00 during the prospective A rae ge ee remainder of the applicant's life, such value being determined by using actuarial life tables and having regard to the age and sex of the applicant. The Tribunal rejected a submission made on behalf of the Commonwealth that the instalments should be limited to the period which would elapse until the applicant attained the age of 65 years, about 23 years; holding that the effect of the Act, subject to any later determination, was to confer benefits in respect of partial incapacity for the whole of the life of a relevant employee. No challenge is now made to this aspect of the Tribunal's decision. The Tribunal then turned to the question whether it was appropriate to discount the aggregate figure, computed in the manner described, in order to reflect the fact that a lump sum payment would be received by the applicant earlier than the dates upon which he would receive weekly payments under s.46. The Tribunal stated that this has been the practice of courts assessing damages in personal injury claims and that the various tribunals administering workers' compensation legislation within Australia have taken the same course in respect of lump sum payments which redeem liability to make future periodic payments. The rationale of such a discount is, of course, that money received immediately has a greater value to the recipient -- and a greater cost to the payer -- than the same amount of money paid at a later date. This is a ep ore serene wget et rs se pro { true irrespective of any reduction in the real value of a given nominal sum which may be caused by inflation, because of the ability of the person in possession of the money to earn interest upon it. The Tribunal's discussion of the question whether, as a matter of principle, a discount should be applied was dominated by 1ts consideration of the decisions of the High Court of Australia in two appeals heard together, Todorovic v Waller and Jetson v Hankin, both reported at (1981) 150 CLR 402. Both were motor accident cases in which damages had to be assessed for loss of future earning potential. The Court divided as to the appropriate course to adopt in relation to a discount. Gibbs CJ, Wilson and Aickin JJ would have chosen a discount rate of 4%. Mason J preferred 2%. Stephen and Murphy JJ thought that, at least upon the evidence available in those cases, there ought to be no discount at all. Brennan J found "no calculable figure which presents itself as the appropriate discount rate". In this situation, and in order to avoid the consequences attendant upon such a division of opinion, Gibbs CJ, Mason, Aickin, Wilson and Brennan JJ joined in a decision that the matters should be disposed of upon the basis of a 3% discount rate. On behalf of the Court the Chief Justice made a statement (p.409) that, in quantifying the present value of loss of future earning capacity in an action for damages for personal injuries, a rate of 3% should be adopted in all cases, subject to any relevant statutory we provisions and without the admission of evidence as to the likely future course of inflation or of wage rates. The rate of 3% was intended to make allowance for inflation, for future changes in wage rates and prices and for tax upon income from investment of the sum awarded. The Tribunal, noting that the majority of the High Court "was satisf1red that the injured person was advantaged by receiving the money as a lump sum in advance and that for that reason a discount rate should be used", held that "unless there are such differences between the payment of damages for future economic loss in common law personal injury cases and the payment of a lump sum in redemption of liability to pay weekly compensation that the reasoning of the majority of the High Court in Todorovic is inapplicable to such a lump sum payment, we are bound to decide that a discount rate should be used in its calculation". The Tribunal then proceeded to consider whether there was a relevant difference in principle saying: "Although section 49 of the Act is expressed in terms of redemption of the Commonwealth's liability rather than in terms of payment in advance of the applicant's entitlement to weekly compensation, the one 1s in fact the obverse of the other. The distinction, therefore, 1S not one of substance. In common law personal injury cases prospects which the injured person had of promotion and the fact that the injured person is likely to cease earning at the age of 65 are taken into account; in calculating the amount of compensation payable under the Act no allowance for promotion is made and the fact that the employee is entitled to receive weekly compensation until the end of his life is taken into account. Although those distinctions have significance for some purposes, they are not of any substance in relation to the applicability of the reasoning in Todorovic which led the High Court to decide that a discount rate should be used in the calculation. We find, therefore, that the multiplier to be used for multiplying the amount of the compensation payable weekly under section 46 should be ascertained by the use of a discount rate in association with the relevant actuarial life table." Having accepted that there must always be a discount, the Tribunal turned to the questions as to the appropriate rate to be allowed and whether that rate should vary according to the age of the employee. As to the latter question, without arguing that it was correct in logic so to do, the Tribunal referred to, and adopted, the approach taken by the majority of the High Court in Todorovic; specifying a percentage to be applied in all cases regardless of personal circumstances, including age. In so doing, the Tribunal quoted and emphasized the passage in the joint judgment of Gibbs CJ and Wilson J at pp.423-424 in which their Honours concede the arbitrariness of such an approach, but justify it upon the basis that the gain in predictability justifies "some sacrifice of accuracy" in an exercise which, in any event, "involves so much speculation that it is impossible to pretend to accuracy". In relation to the appropriate rate, the Tribunal drew attention to one significant difference between the assessment of common law damages for loss of future earning a capacity and the calculation of an appropriate lump sum under the Act. Damages for loss of future earnings are assessed upon the basis of net wages -- that is the earning capacity of the plaintiff, absent the injuries, calculated after allowing for the deduction of income tax, is compared with his or her earning capacity, having regard to the injuries, calculated net of tax. By contrast, s.46 of the Compensation (Commonwealth Government Employees) Act requires a computation of compensation upon the basis of comparative gross earnings. The Tribunal commented: "If our approach is to be consistent with that apparently taken by the majority of the Justices in Todorovic who decided that there should be a standard discount rate of 3 per cent per annum in common law personal injury cases, we must, we consider, in using that rate as our yardstick to decide what was the notional discount rate which would have been appropriate in Todorovic if the multiplicand had been the amount of notional future earnings without reduction for notional income tax. The fact that the lump sum payment is paid as compensation and not as damages affords no grounds for any variation of the discount rate in relation to lump sums calculated on the basis of multiplicands which are gross amounts without reduction for notional 1ncome tax. So we must, in our view, fix for the purposes of section 49 the same rate of discount as would be appropriate for common law personal injury cases if the lump sum in those cases were calculated without notional taxation being taken into account. ».. The rate of discount to be applied must be that which, when the 3 percent rate held to be appropriate in common law personal injury cases where the multiplicand is an amount nett of notional income tax is used as a yardstick, would be appropriate in the calculation of lump sums resulting from multiplicands which are gross amounts without reduction for notional income tax." Om v prea, Sree ete tae 5 oan ee et wr ee ee peer sy eypnen cere ee Ree re race oe ate 10. The Tribunal referred to the comment by Gibbs CJ and Wilson J in Todorovic at p.423 about notional tax being able to be taken into account "only in the broadest way". It then concluded: "For this Tribunal, or the Commissioner, to attempt to ascertain and apply specific rates of notional tax would be to fly.in the face of the reasoning of the High Court; it would be an attempt to measure the unmeasurable. In Todorovic the High Court adopted a broad-brush approach. We can only make an informed guess what was the quantum of the allowance which they made for notional income tax. That allowance must have resulted in a decrease in the rate of discount which would have been appropriate if the multiplicand had been a gross amount without reduction for notional income tax. We have come to the conclusion that that rate was probably about 4.5 per cent per annum. We, therefore, decide that that should be the fixed rate of discount to be applied in the calculation of a lump sum payable under section 49." The applicant challenges this approach, putting two fundamental propositions: that the Tribunal erred in law in concluding that it was obliged to discount the lump sum derived by the calculation earlier described and that, if a discount was required, there was no evidentiary basis for the adoption of a rate as high as 4.5%. In relation to the first matter counsel for the applicant submit that the fact of present payment is but one aspect to be considered in determining the appropriate amount for redemption of liability under s.46. They point out that the section provides for the adjustment of unredeemed weekly eee woe Le cee pe ee eee: e x —_ We ae ll. compensation by reference to "the average weekly earnings of the employee before the injury": see s.46(2) in relation to employees remaining in the workforce and s.46(3) in respect of retired employees. The term "average weekly earnings of the employee before the injury" does not necessarily refer to the actual pre-injury earnings of a claimant. By s.25 that amount is to be adjusted, for the purposes of calculating "average weekly earnings of the employee before the injury", by reference to changing wage rates, whether from inflation or from changes in specified personal circumstances: the attainment by the employee of a particular age or the completion by the employee of a particular period of service ° (s.25(9)). The employee, in redeeming, is thus giving up the value of future wage adjustments not taken into account in the selection of the multiplicand. Importantly, under present economic conditions, they include future increases in wages caused by inflation. We shall return to these matters but it is convenient first to deal with a submission made on behalf of the respondent that, as a matter of law, any computation of an appropriate redemption figure must include a discount factor. This submission requires consideration of a considerable volume of case law, concluding with the matter which much concerned the Tribunal: the significance of Todorovic. rer ere ee ne ee enn er eee a era oe rh ~ eo oe eer roe ge en ee | rn hh ee ee acne 12. In support of their submission counsel for the respondent refer to Dzekovski v Safcol Seafoods Pty Limited [1968] VR 190, a case in which the Full Court of the Supreme Court of Victoria set aside a lump sum award in favour of dependants of a deceased worker. In making the award the Workers Compensation Board had stated that "it was not making any discount in the amount awarded because of present cash payment". Wuinneke CJ and Adam J regarded the necessity for discounting as self evident. At p.192 they said: ",.. we would feel no hesitation in concluding that an assessment in terms of money payable presently of an amount of money which would become payable in the future would require some discounting of the latter sum for present payment. This would be so because the value of a presently payable sum of money capable of earning interest is necessarily greater than an equivalent sum of money payable in the future." The test applied by their Honours was "whether acting as a body of reasonable men the Board could have formed the opinion that the fact of present payment was a matter which need not be taken into account". Answering that question in the negative, their Honours held that the award was erroneous in point of law. The passage from the reasons of Winneke CJ and Adam J quoted above may be read as suggesting that, at least under the conditions then prevailing, a fair and reasonable computation of a lump sum award always must, as a matter of law, include a discount for the benefit of present receipt of rm 'analaneerell 13. future payments. However, the actual decision of their Honours was more limited, involving as 1t did merely the proposition that -- as a matter of law -- the fact of present payment must be taken into account. It does not, as a matter of logic, follow that the taking into account will result ina discount being allowed. factors. may have been dictated by the view that it was not legitimate to consider at all the likelihood of any future devaluation of money. the High Court who considered a personal injuries damages claim only a few months later: CLR 540. should take account of likely increases in real wages, for example by the plaintiff's advancement in his employment, Barwick CJ held that future inflation should be disregarded. The approach taken in the cited passage in Dzekovski Certainly this was the opinion of all the members of Whilst holding the opinion that the award of damages At p.547 he said: "For the loss of a present capacity, with all its inherent probabilities, the injured person is to be presently compensated by an immediate payment of money. Upon the award being made, the successful plaintiff becomes entitled to that money free to do with it what he will. He can protect himself against the possibilities of continuing or increasing inflation to the same extent as any other citizen with an investible fund. The successful plaintiff has, as it were, exchanged an earning capacity for such a capital fund. In my opinion, neither possible nor probable changes in the purchasing power can be relevant to the assessment of the capital sum so to be paid." It may be counter-balanced by other O'Brien v McKean (1968) 118 ae nner Ve 14. Other members of the Court emphasized the difficulty involved in any estimate of future changes in the value of money: see McTiernan J at p.552 and Taylor and Menzies JJ at p.553. Windeyer J reasoned that, as a matter of principle and having regard to the fundamental premise that damages are assessed once and for all to compensate an injured plaintiff for loss of future earning capacity, likely future changes in the value of money ought to be ignored. The approach taken in O'Brien remains favoured in the United Kingdom, at least in relation to the inclusion of some specific allowance for inflation: see Lim Poh Choo v Camden and Islington Area Health Authority [1980] AC 174 at p.193 where Lord Scarman, speaking with the agreement of the other members of the House of Lords, held that the law is "now settled that only in exceptional cases, where justice can be shown to require it, will the risk of future inflation be brought into account in the assessment of damages for future loss". It is significant, however, that, despite the sweeping nature of his proposition, Lord Scarman did not put it forth as a Statement of law. On the contrary, he described it "as a sensible rule of practice, a matter of common sense". Echoing views expressed in O'Brien, he thought that any attempt to protect against future inflation "is seeking after a perfection which is beyond the inherent limitations of the system", ae ee 15. Notwithstanding the inflation experienced in Australia during the preceding twenty years, Windeyer J felt able, 1n 1968, to express optimism about its future course. He said in O'Brien at p.558: "In books on economics and economic history, tables may be found listing periods of rising prices and periods of falling prices. A perusal of these must create scepticism about the proposition that there will be a continuous and uniform decline in the value of money for an indefinite period in the future." In the years since 1968 the decline in the value of money has not been uniform; but it has been continuous and, during most years, at rates well exceeding those usually encountered in earlier times. By way of example, and appreciating that variations in the Consumer Price Index do not necessarily correspond with variations in wage levels, the purchasing power of the Australian dollar -- as measured by that index ~- more than halved in the nine years immediately following O'Brien; it almost halved again 1n the eight years from 1977 to 1985. One consequence of the increased rates of inflation since 1968 has been a general increase in interest rates. From time to time defendants have relied upon these rates to argue for a relatively high discount rate. The fallacy in the argument was pointed out by Jacobs P, sitting in the New South Wales Court of Appeal, in Lindsley v Hawkins [1973] 2 NSWLR 581 at p.586 when he said: —-- - —_—ee pega 2 ge aetaianedaend Se A ER Le ees 16. "The consequence of the rule that one should not speculate on future inflationary trends is that, to avoid unfairness, one should not take account of present high interest rates which are a symptom of the instability which inflationary trends bring." In that case Jacobs P, with the agreement of Hutley JA, held that an assessment based upon a discount rate of 6% should be substituted for that of the trial judge based upon 7%. That variation was over-ruled by the High Court; the majority (Gibbs, Stephen and Mason JJ) holding it to be inappropriate for an appellate court to interfere in relation to a variation of only 1% in the adopted discount rate -- see Hawkins v Lindsley (1974) 49 ALJR 5 at p.8 -- but no criticism was made of the rejection of current interest rates as a yardstick for the appropriate discount rate. (It 1s interesting to note, as a measure of the increasing frustration felt by the courts in grappling with the problem of inflation, that at that stage the majority in the High Court was prepared to condemn that which the Court was later driven to accept, in Todorovic: the acceptance of an "arbitrary ruling regarding interest rates as one having general application".) In Beneke v Franklin [1975] 1 NSWLR 571 Glass JA, in the New South Wales Court of Appeal, distinguished between two aspects of the effect of future inflation: first, its impact on future levels of income and expenditure to be allowed for in the verdict and, secondly, its impact on the investment potential of the verdict sum. His Honour thought that O'Brien operated to exclude consideration only of the former effect, i7. leaving it open to the court assessing damages to take the latter effect into account in the selection of an appropriate discount rate. Samuels JA was unable to discern in O'Brien the limitation referred to by Glass JA. His Honour thought that O'Brien compelled the court totally to ignore future inflation. However, he reached a similar result to that of Glass JA because he held that it followed that the court should also disregard the high interest rates which were a product of inflationary expectations. In the result the court rejected an attack by the defendant upon an assessment of damages derived from the use of a 6% discount rate. The question whether O'Brien should continue to be followed was referred to in two of the judgments in the High Court in Jacobs v Varley (1976) 50 ALJR 519. Gibbs J at p.523 said that, until the matter was reconsidered by the Court, courts -- including the High Court itself -- should follow O'Brien "and should not make any allowance for inflation in the calculation of damages for personal injuries or in fatal accident cases". Murphy J at pp.527-528 expressed the opposite view, describing O'Brien as having been made "at a time when inflation was comparatively slight". He thought that "an award which is arrived at by ignoring the prospect of continuing inflation in its tendency to increase wages, yet applying a discounting rate which reflects a prospect of continuing high inflation, does not comply with the statutory direction" ~- in the South Australian Wrongs Act 1936 -- "that damages be proportioned to the injury". 18. In Armstrong v Rudd (1978) 21 ALR 166 Brennan J, sitting as a member of this Court on an appeal in a motor accident case from the Supreme Court of the Australian Capital Territory, discussed the principles to be borne in mind in selecting an appropriate discount rate. At p.171 his Honour identified, as being "of major importance", "the principle relating to the relevance of inflation to the award of damages for personal injury". Brennan J referred to the comment -— quoted above -- of Barwick CJ in O'Brien about the opportunity of a judgment creditor to protect himself, by his choice of investment, against the possibilities of continuing or increasing inflation and continued: "A discounting rate cannot therefore be appropriate if it den1zes to the judgment creditor the opportunity to protect his capital from inflation, and to secure for himself an undiminishing effective return for his lost earning capacity. To the extent to which commercial rates of interest contain a percentage reflecting and covering inflation, they are too high for use in discounting future net earnings, for it is only to the extent that investment of the undiscounted sum may earn an increment more than inflation that the sum 1s required to be discounted. Otherwise the assessment would deny fair compensation. The use of the higher rate would diminish the undiscounted sum not only by the amount of the real increments which that sum might earn, but also by an equivalent of the nominal amounts which, when earned, will provide the plaintiff with the effective return appropriate to his lost earning capacity." Sone apres --—- 19. There is 1n this approach no disregard of O'Brien, by which Brennan J acknowledged himself to be bound, but rather a limitation upon its application. Like Glass JA in Beneke, Brennan J accepted that any future increase in the nominal level of the plaintiff's income or expenses must be disregarded but he held that, in assessing the true value to the plaintiff of present receipt of future income, the influence of inflationary expectations on available interest rates could not be disregarded. This limitation was accepted by a majority of the High Court in Pennant Hills Restaurants Pty Limited v Barrell Insurances Pty Limited (1981) 145 CLR 625, a case involving the computation of damages awarded to an employer, liable to pay compensation to an injured worker, for the failure of its insurance broker to effect workers compensation insurance. Section 9A of the Workers Compensation Act 1926 (NSW), under which statute the compensation was payable, provided for the periodic adjustment of the weekly rate of compensation payable to an injured worker in proportion to changes in average weekly wage rates. Three members of the Court (Gibbs, Mason and Wilson JJ) adopted a discount rate of 2%, three members (Stephen, Murphy and Aickin JJ) thought that there ought to be no discount. Barwick CJ -- who adhered to the views he expressed in O'Brien -- favoured 5%; a rate which he described as "an artificial rate of discount which, when compared with the current or an ' freee ee eee te en ee ee ™~" 20. 'going' rate of interest leaves some room for the successful plaintiff to some extent to offset the effect of declining value in money". Because of the Chief Justice's position the order of the Court was based upon a 2% discount. Several members of the High Court, in Barrell, emphasized the distinctions between the case then before them and an assessment of damages for loss of future earning capacity. Nonetheless the various judgments deal in detail with the problem ~-- by 1981 abundantly obvious -- of reconciling adherence to O'Brien with the realities of a highly inflationary environment. Most members of the Court -- Barwick CJ (pp.634-635) apparently as a matter of principle, Gibbs J (p.639), Stephen J (pp.656-658), Mason J (p.680), Aickin J (p.685) and Wilson J (p.687) as a matter of practicality -- expressly rejected the predictive approach, that is the attempt to determine by evidence the course of future wage rates. But all members of the Court shared the view that the effect of the provisions of s.9A, having regard to likely future inflation, should be reflected in the decision as to what (if any) discount rate should be adopted. With the exception of Barwick CJ, all the Justices accepted the principle of an approach based upon ascertaining the "real" rate of interest; but none expressly followed that approach. 21. Gibbs J thought that the desirable course was to calculate damages upon the basis of the present level of weekly compensation but to "take into account the effect of the provisions of s.9A by adopting an exceptionally low discount rate": p.641. His selection of a rate of 2% reflected not only this factor but also the likelihood that tax would be payable on the income produced by the fund, if invested. But no reason was given for the selection of the particular percentage. Stephen J, with whom Aickin J agreed, discussed in some detail the "real interest rate approach", discarding it only because recent Australian economic history falsified the assumption upon which it was based: that there exists a relatively constant rate of "real" interest. At p.654 he referred to various official statistics for the previous twelve calendar years which showed that the "difference figure year by year, which should represent the 'real interest' rate, averages out at a negative average rate of interest of -1.46, the widest flunctuations found in particular years being a positive rate of 2.58 per cent and a negative rate of -6.61 per cent. Nothing resembling a relatively constant positive rate of 2 percent-3 percent emerges". His Honour went on, at p-655, to note that over a thirty year period (1950-1979) the average implicit real interest rate was a negative rate of ~0.7%, with annual variations from a positive rate of 4% to a negative rate of -20.2%. REE pS 8 ne oe ee — a re o 22. Mason J, with whom Wilson J agreed, accepted the absence of evidence of a steady real rate of interest in Australia but said that "in this unsatisfactory situation" a discount rate of 2% should be adopted "as a fair approach to the problem raised by this case -- one which does more justice to the plaintiff than the adoption of a 4 percent or 5 percent rate appropriate to a stable economy reflecting a moderate level of inflation". Murphy J agreed, on this question, with the substance of what was said by Stephen J. Two comments may be made about Barrell; first, that only Barwick CJ was prepared to affirm a belief that a plaintiff was likely to be able to provide out of his damages his own hedge against inflation -- and he much less confidently than in O'Brien 13 years before; secondly, that the rate of 2%, which ultimately prevailed, was not justified by reference to any statistical or other evidence. The rate was an arbitrary selection, a concession to inflationary times from the 4-5% interest rate traditionally obtainable in times of stable currency. The majority view did not address the statistical material cited by Stephen J which suggested that the concession was insufficient to cope with actual experience in Australia during recent decades. a Meee greene te ee meee wrt oa ns ne — ee 23. Todorovic was argued only a few months after the decision in Barrell. It raised directly the applicability to a personal injuries claim of the approach taken in that case. As we have mentioned, the members of the High Court gave diverse answers, confusion being averted only by the willingness of five Justices to adopt a rate of 3%, which none of them favoured, for general application; subject to any relevant statutory provision, until otherwise decided. It is not our purpose to criticize the course taken in Todorovic. However unusual the course may be, there were obviously practical advantages in declaring a discount rate applicable to all cases. If that course was to be adopted, the question necessarily arose as to the rate to be specified. Although, no doubt, there are those who prefer the minority view, the fact appears to be that the majority were not Satisfied -- having regard to the material before them -- that there had been in Australia in relevant times a zero rate of real interest: see Gibbs CJ and Wilson J at p.421, Mason J at pp.445-449, Aickin J at pp.459-460 and Brennan J at pp.473-477. The figure of 3% appears to have been selected, upon a compromise basis, as that which, in the eyes of the majority, most accurately reflected that material. For present purposes, the relevance of Todorovic is whether it lays down any rule of law governing the computation of a lump sum amount to be paid in redemption of compensation bs omaha Lined eee ee me 77 To Tae 27 ee mr ne en en a pcre 24. under the Compensation (Commonwealth Government Employees) Act. We do not think that it does. It was no doubt true to say, as did the Tribunal in this case, that the majority of the High Court was satisfied that an injured person was, on balance and notwithstanding inflation, advantaged by receiving the money as a lump sum in advance and that, for that reason, a discount rate should be used. But any decision as to the manner in which inflationary expectations should be taken into account remains a decision as to a matter of fact. See, in Barrell, Gibbs CJ and Wilson J at p.423 and Stephen J at p.431-432; notwithstanding that it is one in respect of which an exercise in judgment 1s required: see Brennan J at p.464. However helpful the various decisions of the High Court, including Todorovic, may be in considering the principles involved in the calculation of the amount of lump sum compensation, that Court has not purported to propound any statement of law governing the present situation. The decisions in Barrell and Todorovic nonetheless dispose of the first proposition put on behalf of the respondent, namely that, as a matter of law, a discount must be allowed. Those decisions show that there is nothing sacrosanct or mandatory about a discount rate. Each member of the Court who participated in either of those cases, with the possible exception of Barwick CJ, would have joined in a conclusion that there ought to be no discount if he had been oe yp ee ee ee ape 25. satisfied that there was a zero or negative rate of real interest, that is that, having regard to inflation, there was in truth no advantage to a claimant in present receipt of the money. It appears to us that, as suggested on behalf of the applicant, the Tribunal did approach the matter on the basis that the High Court had decided in Todorovic that, as a matter of law, a discount rate must be adopted. The Tribunal referred to the High Court's having said that a discount rate "should" be used, and then added that, unless there are relevant differences between the payment of damages for future economic loss in personal injury cases and the payment of a lump sum in redemption of liability to pay compensation, "we are bound to decide that a discount rate should be used in its calculation". The reasons of the Tribunal do not indicate an appreciation that the conclusion of the High Court in Todorovic was essentially a conclusion of fact, based upon the material then before the Court. It is true that, in the statement made on behalf of the Court by Gibbs CJ, the High Court took the unusual course of indicating, in relation only to personal injury damages claims, its opinion that the appropriate method of dealing with inflation, future changes in wage rates and prices and tax upon income from investment of the sum awarded was to adopt a discount rate of 3%. But that indication did not extend beyond its own terms. The conclusion of the Court was not one of law, so that it could sore ay 26. bind other courts as a matter of precedent. The statement was, of course, intended to influence courts assessing damages for personal injuries. No doubt it has had that effect, but, if so, this is because of the obvious desirability of uniformity in approach and the likelihood that the High Court will interfere with assessments which do not comply with its advice. It would be erroneous to treat the statement, or the conclusion in the case, as a proposition of law even in its own context; and still less in relation to a different juristic exercise. Todorovic should be used in the computation of lump sum compensation for such assistance as it may offer on matters of principle. It should not be used to provide a particular discount figure by which a computation of lump sum compensation is to be adjusted. The Tribunal took the figure of 3% adopted in Todorovic and increased it by half to reach the figure of 4.5% finally adopted by it. It did this because of the consideration that the multiplicand used for calculating lump sum compensation -- unlike that used in the assessment of damages -- was a gross figure, before deduction of tax. The Tribunal made what it called "an informed guess" as to the extent of the allowance which the High Court made for tax in selecting a figure of 3%. No doubt it is correct that, if the High Court had been faced with a multiplicand gross of tax or with a situation under which the income of the investment fund was free of tax, the compromise rate would have been somewhat " Dar lees Lea) 27. higher than 3%; but how much higher is only a guess, and the speculation is not improved by calling it "informed". [In our view the Tribunal fell into legal error, firstly, in regarding itself as bound by Todorovic to discount; and secondly, in the selection of a discount figure, by preferring to the evidence before it a divination of the likely position, upon a matter of fact, of the members of the High Court. It follows that the appeal must be allowed and the matter returned to the Tribunal for further consideration of the amount of the lump sum to be offered in redemption of the applicant's entitlement to compensation. Under normal circumstances, where that course is proposed, it may be undesirable for the Court to make any further comment. Computation of the appropriate sum being a matter of fact, it is a task committed to the, Tribunal and to the Tribunal alone, subject to any appeal upon a question of law; see s.43(6) of the Administrative Appeals Tribunal Act 1975. However, given the nature and difficulty of the problem confronting the Tribunal, it may be appropriate to make some observations as to the legal principles which ought to underlie the re-assessment. There was an issue before us as to whether the multiplicand, for calculation of the value of the right of the employee to receive further payments of compensation, should be the gross amount received or the net amount after tax. aye 28. Upon this matter we entertain no doubt: the gross figure must be taken. Section 49(4) provides that the amount of the lump sum is "the value ... of the right of the employee to receive further payments of compensation" under s.46. The amount which the employee is entitled to receive under that section is the gross amount. It is not material that, depending upon the total amount of his income and other financial and personal circumstances, the employee may become liable under other legislation to pay tax on some or all of the moneys received by him pursuant to that entitlement. In the translation of a gross weekly figure into a lump sum it is, perhaps, desirable to recall the precise nature of the question raised by an argument as to discounting. This was explained by Brennan J in Todorovic at p.466 where his Honour pointed out that the court is concerned with two "streams": "the stream of future net amounts which the plaintiff would have received by employing his undiminished earning capacity if he had not been tortiously injured, and the yield which might be obtained by prudently investing a sum with a view to drawing out of it from time to time the net amounts which the plaintiff£ will not receive because of the tortious diminution of his earning capacity". "Inflation", he said, "may contribute to both streams, but the discount rate has to do with a comparison of streams, not directly with the rate of inflation". Test To" 29. Applied to the task confronting the Tribunal, this passage requires some adjustment. Compensation under s.46 of the Compensation (Commonwealth Government Employees) Act is calculated without regard to income tax so that the first stream requiring consideration cannot be described as "future net amounts". Section 49(4) provides that the amount of the lump sum is to be "the value ... of the right of the employee to receive further payments of compensation" under s.46. The gross amount currently payable -~ in this case $94.52 -- is known. Irrespective of inflation, in some cases, that figure may require adjustment, pursuant to s.25(9), because of factors personal to the particular employee. That adjustment should ordinarily present little difficulty. If the situation were such that it could safely be predicted that there would be no adjustment of salary or wages by reason of the matters encompassed by s.25(11) -- including the effect of inflation upon minimum wage levels and award rates ~- within the likely compensation period, the valuation would be effected by multiplying the weekly compensation figure or figures by the appropriate number of weeks and by discounting the resultant sum at a rate equal to the interest likely to be earned by the investment of that sum. But such a prediction cannot be made, under present conditions and in relation to the present case; hence the "two streams" approach. This approach requires a comparison between the stream of compensation payments which the applicant might be expected to receive if he did not redeem his entitlement and the yield which he might be wee ter: as Lk AO rr tery r Re ee pe ea An ee aoe ya he ee re en cen crete ee t ' are oe eee ares be 30. expected to obtain by prudently investing the lump sum with a view to drawing upon it the foregone compensation receipts. The foregone compensation and the income earned by the lump sum are each taxable, so that income tax may largely be ignored. However the differential between the two streams is also a gross figure, the benefit of which is liable to be reduced by the imposition of income tax. The amount of that imposition will depend both upon factors personal to a particular applicant and upon future tax rates. In practical terms it will usually be difficult, if not impossible, to assess the value of the net differential between the two streams. It may be possible to do no more than to bear in mind the fact of taxation when considering whether to discount at the full rate of the differential. For the reasons spelt out by Stephen J in Barrell, at pp.656-658, it is, in practice, impossible to predict what adjustments in wage rates, and therefore of compensation under s.46, might take place over a period as extensive as 25 years. Similarly, it is impossible to predict the likely level of interest rates over such a period. All that can be said is that a high rate of increase in wages is likely to be accompanied by high interest rates. If the rates correspond, the one will cancel out the other. It can only be said that there is a value in receiving payment in a present lump sum rather than in wage-rate adjusted weekly amounts where it can be said that the level of interest rates is likely, over the para were eo ae -4 Or w " 31. period during which those amounts would have been received, to exceed the level of wage increases; that is, comparing interest rates to 1ncreases in wage rates -- not prices -—- expressed in percentage terms, that there is a positive rate of real interest. Actual rates being impossible to predict, this conclusion can only be reached if, in a particular case, there is material to show that there has in the past existed a relationship between interest rates and increases in wage rates sufficiently constant to justify the assumption that a given relationship will apply in the future. If such material is not available, there is no basis for applying any discount at all. It appears that the only evidence tendered to the Tribunal in this case as to real interest rates was that contained in a report by an actuary, Mr N D Whitehead. Mr Whitehead said that, over the period 1950-1981, "the average real rate of interest was between J] percent and 3.4 percent depending upon whether Government Bonds or Stock market returns were considered. However, the position has fluctuated widely with negative real rates applying for long periods". Bearing in mind the underlying assumption of the exercise that the capital sum will be invested safely, it is a question for the Tribunal whether 1t is proper to have regard to returns upon stock market investments. But the major deficiency in this evidence -- as a guide to the Tribunal's calculation -- is that it makes an inappropriate comparison. As Mr ieetediicdeentagtauered Tr. . 32. Whitehead's oral evidence made clear, his figures relate investment returns to increases in the Consumer Price Index; and not to increases in wage levels, the matter made relevant by s.25(9) and (11) of the Act. One further matter should be mentioned. Section 49(4) requires that, in the determination of the lump sum, "regard shall be had to the nature of the injury to the employee, the age and occupation of the employee and any other relevant matters". The computation of a lump sum is not an exercise to be performed in the abstract, regardless of the circumstances of the particular case. In some cases the period during which compensation would have been payable may be comparatively short, so that a prediction as to future wage and interest rates may safely be made; cf Australian National Railways Commission v Koultras (1983) 5 ALD 415. In some cases the nature of the injury to the employee may be such as to justify the conclusion that the extent of his partial incapacity is likely to diminish or increase; if so, that likelihood must be taken into account by a reduction or increase in the amount which would be payable if the extent of incapacity were likely to be static. One difficult question, in relation to s.49(4), is the extent to which the Commissioner -- or the Tribunal upon application for review -- is entitled to take into account the use of the lump sum proposed by the particular employee. ee ave 33. Unlike the situation in a personal injuries damages claim, the employee is required by s.49(5)(b) to have formulated, and to disclose, an intended use of the lump sum. As the making of a determination is dependent upon the Commissioner being satisfied that the employee has a particular intention, it is arguable that s.49(4) should be read as permitting the fact of that intention to be taken into account as a relevant matter. If this were correct, it is difficult to see that the nature of the intention could be given much weight; intentions sometimes miscarry or, for good reason, are varied. It would be unsafe to assume that the employee will in fact carry through the intended use. However, it seems to us that the nature of the intention 1s not a relevant matter. That which has to be valued is the right of the employee to receive compensation. That value is related to such personal characteristics of the employee as are relevant to the duration or quantum of the weekly compensation payments. It is logically independent of the use to which the employee eventually puts the lump sum. The lump sum may not be applied to an income producing investment. For example, the employee may extend his or her home. Nonetheless, the value of the "right" has to take account of the opportunity to invest. It would be just as erroneous to increase the amount of the lump sum because the declared intention of the employee was to use the money in a manner non-productive of income as it would be to decrease the + r oo —o asad oe eo toe 34. amount because the intention was to invest the money in a Manner offering prospect of high profits, perhaps with commensurate risks. Other matters being equal, the value of the "right" is in each case identical. The formal orders of the Court will be that the appeal be allowed with costs, that the decision of the Tribunal be set aside and that the case be remitted to the Tribunal to be heard and decided again, with such further evidence as the Tribunal may admit, according to law. I certify that this and the thirty-three (33) preceding pages to be a true copy of the Reasons for Judgment of their Honours Mr Justice Northrop, Mr Justice Keely and Mr Justice Wilcox Associate: Up pene. Px: Hetthorw Date: 18 July 1986 Counsel for the Applicant: Mr J E Barnard QC with Mr C Wheeler Solicitors for the Applicant; Messrs Macpherson, Robinson, Tunnock & Co Counsel for the Respondent: Mr R Stanley oc with Mr M Kellam Solicitors for the Respondent: Australian Government Solicitor Date(s) of hearing: 11 March 1986 ~ wan oe