FEDERAL COURT OF AUSTRALIA Reiter v Commissioner of Taxation [2001] FCA 1068 INCOME TAX – ascertainment of assessable income – whether payments made in error to applicant by WorkCover Corporation of South Australia were assessable income – whether applicant "recovered" damages under a foreign law within meaning of subs 55(3) of Workers Rehabilitation and Compensation Act 1986 (SA) – whether income "derived" by applicant within meaning of subs 25(1) of Income Tax Assessment Act 1936 (Cth) – whether income "received" by applicant within meaning of s 26(j) of Income Tax Assessment Act 1936 (Cth) Income Tax Assessment Act 1936 (Cth) ss 25(1), 26(j) WorkCover Corporation Act 1994 (SA) ss 4, 13 Workers Rehabilitation and Compensation Act 1986 (SA) ss 35, 36, 55 Wigens v Cook (1859) 28 LJCP 312 considered Fergusson v Davison (1882) 8 QBD 470 considered Ings v London and South Western Railway Company (1868) 4 LR CP 17 followed Federal Commissioner of Taxation v Clarke (1927) 40 CLR 246 considered Zobory v Commissioner of Taxation (1995) 64 FCR 86 followed THOMAS JOSEPH REITER v COMMISSIONER OF TAXATION S 16 of 2001 BRANSON J SYDNEY (Heard in ADELAIDE) 8 AUGUST 2001 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY S 16 of 2001 BETWEEN: THOMAS JOSEPH REITER APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: BRANSON J DATE OF ORDER: 8 AUGUST 2001 WHERE MADE: SYDNEY (Heard in ADELAIDE) THE COURT ORDERS THAT: 1. The decision of the Administrative Appeals Tribunal be set aside. 2. The case be remitted to the Administrative Appeals Tribunal to be heard and decided again in the light of the reason for judgment of the Court. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY S 16 of 2001 BETWEEN: THOMAS JOSEPH REITER APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: BRANSON J DATE: 8 AUGUST 2001 PLACE: SYDNEY (Heard in ADELAIDE) REASONS FOR JUDGMENT INTRODUCTION 1 This is an "appeal" from a decision of the Administrative Appeals Tribunal ("the Tribunal") whereby the Tribunal affirmed a decision of the respondent disallowing the applicant's objection to the notice of assessment for the year ending 30 June 1997 dated 2 October 1997 issued to him by the Deputy Commissioner of Taxation ("the DCT"). The question of law raised by the appeal is whether the amount of $16,773 paid by WorkCover Corporation of South Australia ("the Corporation") to the applicant between 17 December 1996 and 30 June 1997 is assessable income of the applicant under subs 25(1) or s 26(j) of the Income Tax Assessment Act 1936 (Cth) ("the ITAA"). 2 For the reasons given below I have concluded the appeal should be allowed and the case formally remitted to the Tribunal to be heard and decided again in the light of these reasons for judgment. BACKGROUND FACTS 3 The Corporation is a body corporate which owes its existence under its present name to s 4 of the WorkCover Corporation Act 1994 (SA). Section 13 of that Act provides that one of the functions of the Corporation is to administer the Workers Rehabilitation and Compensation Act 1986 (SA) ("the WRC Act"). 4 The Tribunal summarised the background history of this applicant's dispute with the DCT as follows: "The applicant was employed by K & S Freighters Pty Ltd as a heavy vehicle driver. On 19 February 1993, the applicant was injured in Laverton, Victoria, during the course of his employment. As a result of the injury, the applicant received weekly income maintenance payments pursuant to section 35 of the Workers Rehabilitation and Compensation Act 1986 (SA) (WRC Act). Following the accident, the applicant took legal action in the Victorian Supreme Court and on 17 December 1996 was awarded common law damages, less an amount to be deducted by agreement pursuant to provisions of the WRC Act. The applicant's employer lodged an appeal against the verdict and WorkCover instituted separate recovery proceedings against the applicant in the Supreme Court of South Australia. While the two separate court actions were proceeding the applicant continued to receive income maintenance payments in terms of the WorkCover system. The judgment sum was invested in a term deposit account on trust for the applicant pending the outcome of the appeals. On 17 December 1997 a settlement was reached between the parties. The invested judgment sum was released to the applicant on condition that he repaid to WorkCover the 'income maintenance' payments that he had received from 18 December 1996 to 16 December 1997 totalling $32,304.48. After the WorkCover payments were deducted, the applicant received a total of $612,235.90. The applicant's tax returns disclosed all of the income maintenance payments received as assessable income, including those received after 17 December 1996. On 14 December 1998 the applicant's accountants requested the respondent to amend the applicant's income tax returns for the years 1993 to 1997 inclusive to exclude the amounts previously shown as income maintenance payments received. The letter to the respondent included the statement that: 'The reasons for the request is that as a result of a compensation settlement an amount of $102,167.54 was repaid to WorkCover Corporation for income previously paid to me over the period 26th February 1993 to 9th December 1997, and it is requested that my assessment be amended to reduce my taxable income by the amounts repaid to WorkCover.' It seems that the letter of request dated 14 December 1998 was regarded by the respondent as a formal objection. On 10 May 1999, the respondent disallowed the applicant's objection. The applicant conceded or agreed with the respondent's decision in respect to the years of income 1993 to 1996 inclusive. However, the applicant did not accept the respondent's decision in relation to the 1997 year of income and on 1 November 1999 appealed to this Tribunal for review of the respondent's decision to include as assessable income an amount of $16,773 which represented income maintenance payments received from 18 December 1996 to 30 June 1997. Inherent in that rejection is the notion that the entitlement to receive those benefits ceased upon the judgment of damages and that the appeal therefrom was of no consequence." (reference to exhibits deleted) 5 The applicant by his Statement of Issues, Facts and Contentions criticised certain aspects of the above summary. However, the criticisms did not prove material to the appeal as argued. 6 A significant factual matter not included in the above summary, and which is agreed between the parties, is that on 17 December 1996 it was ordered by the Supreme Court of Victoria that execution of the judgment in favour of the applicant be stayed for a period of fourteen days. STATUTORY PROVISIONS Income Tax Assessment Act 1936 (Cth) 7 Subsection 25(1) and s 26(j) of the ITAA respectively provide: "25(1)The assessable income of a taxpayer shall include: (a) where the taxpayer is a resident: the gross income derived directly or indirectly from all sources whether in or out of Australia; and (b) where the taxpayer is a non-resident: the gross income derived directly or indirectly from all sources in Australia; which is not exempt income, an amount to which section 26AC or 26AD applies or an eligible termination payment within the meaning of Subdivision AA." "26 Subject to section 25B, the assessable income of a taxpayer shall include: … (j) any amount received by way of insurance or indemnity for or in respect of any loss: (i) of trading stock which would have been taken into account in computing taxable income; or (ii) of profit or income which would have been assessable income; if the loss had not occurred, and any amount so received for or in respect of any loss or outgoing which is an allowable deduction; …." Workers Rehabilitation and Compensation Act 1986 (SA) 8 Section 35 of the WRC Act provides that, subject to the Act, where a worker suffers a compensable disability that results in incapacity for work, the worker is entitled to weekly payments in respect of that disability in accordance with certain principles set out in the section. 9 Section 36(1) of the WRC Act is concerned with the discontinuance of weekly payments. Relevantly it provides: "36(1)Subject to this Act, weekly payments to a worker who has suffered a compensable disability must not be discontinued unless – (a) the worker consents to the discontinuance of weekly payments; or … (h) the discontinuance of weekly payments is authorised or required by some other provision of this Act." 10 Section 55 of the WRC Act, which is concerned to prohibit double recovery of compensation, provides: "55(1)Where a disability is compensable under this Act and under a corresponding law, compensation shall not be paid both under this Act and under the corresponding law. (2) Where compensation is in fact paid both under this Act and under a corresponding law, the compensation paid under this Act may be recovered as a debt due to the person by whom it was paid from the person to whom it was paid. (3) The fact that compensation or damages in respect of a disability have been recovered under a foreign law is a bar to the recovery of compensation in respect of the same disability under this Act." CONTENTION OF THE PARTIES 11 Before the Tribunal the applicant contended that the amount of $16,773 paid to him by the Corporation had been paid to him in error and that, for this reason, he had no beneficial interest in the monies which he received. He argued that he held the monies in trust for the rightful owner. 12 Before this Court the applicant contended that the amount of $16,773 paid to him by the Corporation ought not to have been paid to him by reason of s 36 of the WRC Act. The written submissions of the applicant argued as follows: "As sec 55 of the WRC Act applies, amounts paid after the date of judgment on 17 December 1996 were not 'derived' by the applicant in the sense meant in sec 51(1) of the ITAA. Nor was it his 'income' in the sense meant in sec 51(1) of the ITAA." (citation omitted) The references in the above passage from the applicant's written submissions to "sec 51(1) of the ITAA" must, I think, be understood as references to s 25(1) of the ITAA. 13 The respondent has at all times contended that the amount of $16,773 paid by the Corporation to the applicant was assessable income in the applicant's hands by reason of the operation of either subs 25(1) or s 26(j) of the ITAA. The respondent argued that the monies were properly paid to the applicant in accordance with an obligation imposed on the Corporation by the WRC Act, and that no constructive trust arises where a person is legally entitled to receive, and does in fact receive and apply to his or her own use, payments made to that person. CONSIDERATION 14 As the applicant through his counsel, Ms Macdonald, acknowledged, the issue on this appeal is narrow. It is, in effect, whether the amount of $16,773 paid to the applicant by the Corporation was income "derived" by him within the meaning of subs 25(1) of the ITAA. The applicant accepted that if the amount of $16,773 was properly payable to him under the WRC Act it was income "derived" by him and became assessable for income tax purposes under the ITAA. The applicant initially relied on pars (a) and (h) of subs 36(1) and subs 55(3) of the WRC Act to support his contention that the relevant amount was not properly payable to him under the WRC Act. However, ultimately the applicant did not dispute that, although par 36(1)(a) of the WRC authorises the Corporation to discontinue weekly payments to a worker where the worker consents to the discontinuance, the subsection does not compel the Corporation to discontinue weekly payments in every case in which the worker consents to the discontinuance. That is, in the circumstances of this case, the crucial provisions of the WRC Act are par 36(1)(h) and subs 55(3). 15 Having regard to the terms of subs 55(3) of the WRC Act (see [10] above), the contention of the applicant that the amount of $16,773 was not properly payable to him involves identification of time when the applicant "recovered" damages under the law of Victoria within the meaning of the subsection. 16 The word "recover" has a technical legal meaning whereby it signifies recovery by action resulting in an enforceable court judgment (see, for example, Wigens v Cook (1859) 28 LJCP 312; Fergusson v Davison (1882) 8 QBD 470). The applicant contends that the word "recovered" in subs 55(3) of the WRC Act should be understood in this technical sense, or at least in a way which includes this technical sense. The respondent contends that the word should be understood in a non-technical way so as to mean obtain actual possession of, or control of, the monies which constitute the relevant compensation or damages. On the meaning of the word for which the respondent contends, a worker who obtained a judgment under a foreign law, but was not able to enforce the judgment debt, say because of the insolvency of the judgment debtor, would not have "recovered" damages under the foreign law. 17 In my view, the terms "recovered" and "recovery" in subs 55(3) of the WRC Act are not intended to encompass only recovery by action resulting in an enforceable court judgment. If they were, the subsection would have a surprisingly narrow and artificial impact, particularly so far as the bar on recovery under the WRC Act is concerned. In my view, if a worker instituted a proceeding under a foreign law claiming compensation or damages and subsequently settled the proceeding on the basis that the proceeding would be discontinued upon the worker receiving payment on an agreed amount of money, the worker would be likely, depending on the circumstances leading to the settlement, to have recovered compensation or damages in respect of a disability under a foreign law within the meaning of subs 55(3). He or she would, it seems to me, almost certainly have done so if the settlement was consequent upon an admission of liability made by the other party to the proceeding. Similarly, in my view, if a worker asserted an entitlement under a foreign law to compensation or damages in respect of a disability, and that assertion led to an acknowledgment of liability and payment of compensation or damages, the worker would have recovered compensation or damages in respect of that disability under the foreign law within the meaning of subs 55(3) of the WRC Act. The bar to recovery of compensation in respect of the same disability under the WRC Act is, in my view, plainly intended to be a bar to recovery whether by legal action or otherwise. 18 However, do the terms "recovered" and "recovery" in subs 55(3) of the WRC Act include recovery by action resulting in an enforceable court judgment, even in circumstances in which the resulting judgment debt is not satisfied? The WRC Act is beneficial legislation and must be construed in a way which is consistent with its beneficial intent. For this reason, the submission that subs 55(3) should only be construed so as to bar a worker from recovering compensation under the Act where the worker has actually obtained possession of, or control of, the relevant compensation or damages has a superficial attraction. Difficulties would, however, attend this construction. It would give rise to scope for a worker to determine the time of the "recovery" by either pressing or not pressing for payment of a judgment debt or, should enforcement procedures prove necessary, by taking such procedures in respect of the judgment debt promptly or only after delay. It might also allow a worker the freedom not to "recover" a judgment debt that he or she deemed to be less valuable than the right to recover compensation under the WRC Act, either because the judgment itself was in a lesser amount than he or she had expected when the proceeding was instituted or because the later insolvency of the judgment debtor meant that full recovery of the judgment debt had become impossible. 19 The above considerations, in my view, indicate an intention in the legislature that, in a case in which a legal proceeding claiming compensation or damages in respect of a disability has been instituted under a foreign law, the coming into existence of an enforceable judgment in that proceeding is the event which results in the recovery of such compensation or damages within the meaning of subs 55(3) of the WRC Act. That is, at least to that extent, the term "recovered" takes on its technical legal meaning. 20 While execution on a judgment is stayed, the judgment creditor has no right to recover the amount of the judgment (Ings v London and South Western Railway Company (1868) 4 LR CP 17 at 20). For this reason, in my view, in the circumstances of this case, the applicant is to be taken to have recovered under the law of Victoria compensation or damages in respect of his disability when the fourteen day stay of execution of the judgment of the Supreme Court of Victoria expired. From that time on, in my view, subs 55(3) of the WRC Act operated as a legal bar to the recovery by him of compensation under the WRC Act. 21 For this reason, on the view which I take of subs 55(3) of the WRC Act, the institution of the appeal against the judgment of the Supreme Court of Victoria had no significance so far as the operation of the subsection was concerned. Of course, had the appeal challenged the determination of liability, and not merely the quantum of the compensation or damages found to be payable, and had the appeal been successful, the appeal judgment would have resulted in the earlier judgment being set aside with the result that compensation or damages in respect of the disability would not have been "recovered" under the law of Victoria. However, the appeal was not prosecuted to hearing and determination. 22 The applicant has repaid to the Corporation all amounts received by him as weekly payments under the WRC Act. Did he nonetheless "derive" as income all or any of the amount of $16,773 paid to him by the Corporation between 17 December 1996 and 30 June 1997 (par 25(1)(a) of the ITAA)? Alternatively, did he receive all or any of the amount by way of insurance or indemnity for or in respect of any loss of income which would have been assessable income (subs 26(j)(ii) of the ITAA)? 23 The applicant placed reliance on observations made by Isaacs ACJ in Federal Commissioner of Taxation v Clarke (1927) 40 CLR 246 at 260-261. In that case the Acting Chief Justice said: "I ought not to pass by the doubt expressed by the learned primary judge as to the application of the word 'derived' to the profits here in question. Learned counsel for the respondent stressed this view. It is that no one can 'derive' profits that belong to another or are intended for another as owner. No doubt a manager does not 'derive' his employer's profits. But it is dependent on circumstances whether anyone, other than the person beneficially entitled, 'derives' income within the meaning of the Act. A person in fact carrying on and controlling a business and appearing to the outer world as the owner 'derives' the income produced by the business for the purposes of the income tax. His accountability to another is beside the point. 'Derived' only means 'obtained' or 'got' or 'acquired'. All income is derived from something and by someone." 24 In Zobory v Commissioner of Taxation (1995) 64 FCR 86 at 89 Burchett J referred to the "fundamental principle … that the general provisions of the Income Tax Assessment Act 1936 (Cth) are directed to income to which a taxpayer is beneficially entitled". 25 In my view, the applicant was not beneficially entitled to such of the amount of $16,773 as was paid to him by the Corporation after the expiration of the stay of execution of the judgment of the Supreme Court of Victoria ("the post-bar amount"). The Corporation had no legal entitlement to pay him the post-bar amount by reason of the operation of subs 55(3) of the WRC Act. Conversely, the applicant had no legal entitlement to receive the post-bar amount. The respondent acknowledged that the Corporation had a statutory right of recovery in respect of the post-bar amount. The post-bar amount was not, in my view, in these circumstances income derived by the applicant within the meaning of subs 25(1) of the ITAA. Nor was the post-bar amount, in my view, in the circumstances, received by the applicant by way of insurance or indemnity in respect of any loss of profit or income within the meaning of s 26(j) of the ITAA. 26 However, such of the amount of $16,773 as was paid to the applicant by the Corporation as weekly payments before the expiration of the stay of execution of the judgment of the Supreme Court of Victoria ("the pre-bar amount"), if any, has not, in my view, been shown to be paid other than in accordance with the Act. The applicant did not advance submissions in support of the contention that the applicant held the pre-bar amount, if any, in trust for the Corporation. In my view it is plain that he did not. I conclude that the pre-bar amount, if any, was part of the gross income derived by the applicant within the meaning of subs 25(1) of the ITAA. CONCLUSION 27 For the above reasons the decision of the Tribunal must be set aside. It is appropriate to stress, however, that the ground upon which this appeal has succeeded is a ground that was not relied upon before the Tribunal. 28 As the Court did not hear from the parties on the issue of the proportion, if any, of the amount of $16,773 that was received by the applicant before the expiration of the stay of execution of the judgment of the Supreme Court of Victoria, the case must formally be remitted to the Tribunal to be heard and decided again in the light of these reasons for judgment. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Branson. Associate: Dated: 6 August 2001 Counsel for the Applicant: Ms Macdonald Solicitor for the Applicant: Rankine Tucker Counsel for the Respondent: Mr Sallis Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 11 July 2001 Date of Judgment: 8 August 2001