Henry v Accident Rehabilitation and Compensation Insurance Corporation

IN THE DISTRICT COURT Decision No. 196 197 HELD AT TE AWAMUTU IN THE MATTER of The Accident Rehabilitation and Compensation Insurance Act 1992 AND IN THE MATTER of an Appeal pursuant to Section 91 of the Act BETWEEN CHARLES HENRY Appellant (Appeal No. DCA 78/97) AND ACCIDENT REHABILITATION AND COMPENSATION INSURANCE CORPORATION a body corporate duly constituted under the provisions of the said Act Respondent HEARD on the 4th day of September 1997 APPEARANCES Michael Jamieson for appellant Fleur Patterson for respondent DECISION OF JUDGE D A ONGLEY This appeal concerns the application of s 41(3) of the Accident Rehabilitation and Compensation Insurance Act 1992. Section 41 of the Act applies to calculation of weekly earnings which are earnings other than earnings as an employee during the twelve months before commencement of incapacity. Such earnings are to be fixed by reference to earnings as defined in s OB 1 of the Income Tax Act 1994 in the most recent income year last ended before the commencement of the period of incapacity as shown in an income tax return. Therefore, the calculation of weekly earnings is to be derived from an income tax return, not from an assessment by the Corporation in the manner which had formerly been the case under s 53 of the Accident Compensation Act 1982. - 2. Where an income tax return for the most recent income year has not been filed at the commencement of the period of incapacity, there is a possibility that, once filed, the return may show income calculated in the most favourable way for the claimant, thereby enhancing the basis for calculation of weekly compensation. That possibility is dealt with in s 41(3) as follows: (3) For the purposes of this section, an income tax return shall not be taken into account and shall have no effect unless the return has been filed with the Inland Revenue Department and the return, and any related accounts, have not been influenced by the fact of the incapacity or the effects or likely effects of the incapacity on the income or business activities of the person. Ms Patterson for the Corporation did not argue that the only return which may be taken into account is one that had already been filed at the time of commencement of the incapacity. Subsection (3) must contemplate that the Corporation may refer to a return filed after commencement of incapacity, because otherwise the return could not be influenced by the fact of incapacity, except in unusual circumstances. Section 41(2A) refers to the use of the return when it becomes available. Section 41(3) directs the Corporation to not take account of such a return unless it has not been influenced by the fact of the incapacity or the effects or likely effects of the incapacity on the income or business activities of the person. Both counsel accept that the evident purpose of subs (3) is to remedy the kind of problem highlighted in the decision of Mr P J Cartwright in Mccorkindale 101/96. The question of influence plainly includes the maximising by a claimant of income in the year in question with a view to obtaining greater weekly compensation. In this case the appellant's incapacity began in May 1994. The appellant was involved in a number of partnerships. His main source of income originated with a partnership called Combined Contractors. The appellant claims, and there is no need in this decision to make factual findings concerning these matters, that the partnership existed between himself and a Mr Greatbatch, and was involved in roading and maintenance contracts in the Gisborne area. Mr Greatbatch owned a digger and the appellant drove earthmoving machinery and did other manual work. The partners did not devote the whole of their energy to the partnership. In earlier years the income of the partnership was divided equally. The appellant maintains that in the year in question which is the income tax year ending 31 March 1994, the appropriate division was 82% in favour of the appellant, and 18% in favour of Mr Greatbatch. The Corporation, at least initially, was not prepared to accept that such an alteration in the division of profits could be regarded as not having been influenced by the appellant's incapacity. The appellant's income was channelled through a partnership between himself and his wife, the CH & KA Henry Partnership. Historically, the Henry partnership income was divided 50/50. It included other income from growing grapes. That other venture was conducted mainly by the appellant's wife. In the year in question the appellant claims that there was no income from the grape growing business, and the whole of the Henry partnership income was derived from his personal exertions, therefore it was appropriate to allocate the whole of the income to him. The - 3 - Corporation did not accept that any departure from the historic 50/50 division of income of the Henry partnership was not influenced by the fact of incapacity. The effect of the appellant's accounting was that his income returned for taxation purposes was $10,595 for the 1993 year, and $102,832 for the 1994 year. Naturally the Corporation regarded that as an extraordinary increase in allocation of income to the appellant which, on the face of it, must have been influenced by the advantage in maximising income in the year which was to be used for calculation of future weekly compensation. The view taken by the Corporation is not at all surprising. The appellant's argument in this appeal relates to the process which the Corporation adopted in rejecting the income returned and compiling its own assessment of the appellant's income. It relates also to the reasons given by the Review Officer for arriving at an assessment of income different from that returned by the appellant. The appellant seeks to have the appeal allowed and the question of weekly earnings referred back to the Corporation for proper calculation. There is no need for the Court to examine details of the calculation of income made by the Review Officer, or the calculation made in the appellant's return of income. It is sufficient to deal generally with the aspects which have caused difficulty. The Corporation engaged Mccullochs, chartered accountants, to provide advice and information. Mccullochs reported on 22 August 1995 recommending that the Corporation accept the 82% allocation of profit to the appellant. Representatives of the Corporation met with the appellant and his representatives. The Corporation did not immediately accept the recommendation for 82%/18% division, but it eventually did so in December 1995. The appellant's explanation for receiving an increased share of the partnership income from Combined Contractors was that the partnership obtained a number of profitable contracts which were worked by the appellant himself, so that the greater part of the 1994 profit represented his own exertions. With respect to the Henry partnership, Mccullochs did not make any recommendation for change, and the Corporation adhered to the view that a 50/50 allocation should be used for its calculations. In the review decision which was issued on 26 February 1997, the Review Officer said that the accounts showed that the grape growing venture was undergoing a phase of replanting so that it was still a viable business but produced no income in the 1994 tax year. Although, in that year, the Henry Partnership income flowed from the appellant's contracting work, the Review Officer decided that it is not unusual when a partnership operates a number of separate activities for profits to be split evenly despite the individual parts of the business contributing varying amounts to that profit. He said that it may simply be a matter of swings and roundabouts so that over a number of years the contributions would be expected to even out, or looked at in another way it recognises the efforts of a partner whose responsibility was establishing a new activity which would take some years to become profitable. Another departure from the historic pattern concerned a change to the method of including debtors. Previously Combined Contractors had not fully included debtors and work in progress in its annual accounts. A change in policy was incorporated in - 4 - the 1994 accounts, resulting in an increase in profit connected with the manner of accounting for debtors and work in progress. The appellant does not dispute that the Corporation was entitled to consider whether it should decline to take the 1994 return of income into account, but he submitted that the Corporation had not addressed the question whether the return of income and related accounts had been influenced by the fact of the incapacity. Instead, the Corporation had placed undue emphasis on the pattern of earlier accounts and it had then proceeded to make its own assessment of earnings that should fairly be included in the calculation of weekly earnings. The appellant submitted that the Review Officer had also failed to address the correct question. In formulating the question to be decided, the Review Officer stated that the appellant had submitted that the Corporation could only depart from the income returned if it was satisfied that the accounts were wrongly drawn on purpose, so as to increase entitlement to weekly compensation, in other words that there must be fraud before the Corporation could reject the return. The Review Officer stated that he put the proposition to the Corporation's legal adviser for an opinion, and he received advice that the Act gives the Corporation the power to scrutinise variations in the normal pattern of accounting, and to make a decision on whether to take into consideration accounts which depart from that normal pattern when calculating a person's entitlement to weekly compensation. After hearing helpful argument from both counsel on this appeal, I think that the Review Officer approached the question on an incorrect basis. It is not correct that the Corporation may reject any return that departs from the normal or historic pattern of accounting. Although the Review Officer correctly said that the Corporation had to make a decision on whether to take into consideration such accounts, he did not articulate the fact that the decision had to be made in relation to the question in 's 41(3) of the 1992 Act. It may be that such a question was implicit in the Review Officer's decision, but a reading of the decision indicates that undue weight may have been given to a requirement to adhere to the historical pattern of accounting, without proper regard to the question of whether the departure from that pattern of accounting was influenced by the fact of capacity or was influenced by other factors. I reach the conclusion that the real decision required by s 43(3) has not been properly addressed by the Corporation or the Review Officer. Therefore the appeal must be allowed. An additional reason for allowing the appeal is that it is questionable that the calculation has not been derived from the appellant's earnings "as shown in an income tax return" but was based instead on only part of the earnings shown in the return. There may be cases where selective earnings in a return can be used but it is doubtful whether the Corporation can take part only of an amount representing the claimant's earnings because the Corporation considers that the return has been influenced by incapacity. If the return is so influenced then the Corporation is required by s 41(3) to wholly disregard it. The appellant wishes to obtain some directions to enable the matter to be quickly resolved according to the Act. This Court does not have authority to give directions - 5- to the Corporation. But there are a number of matters which the Corporation may take into account: 1. Calculation of weekly earnings under s 41(2)(b) after the first four weeks appears to depend entirely on there being a return of income as described in the section. If the return is not to be taken into account because of the provisions of s 41(3), there does not appear to be any authority for the Corporation to calculate weekly earnings in any other fashion. The appellant submitted that it would be necessary for the claimant to lodge a further return which is not influenced by the fact of the incapacity and have weekly earnings assessed accordingly. That appears correct. 2. In deciding whether a return has been influenced by the fact of the incapacity, the Corporation should be bound to accept the manner in which the Inland Revenue Department requires the income to be returned once the Department has received full disclosure of the circumstances of derivation of income. Therefore if, for example, the Department does not accept a 50/50 division of partnership income between husband and wife in the year in question, but approves some other division, then in most circumstances that should be regarded as a correct division and not one influenced by the fact of incapacity. 3. If it appears that the Commissioner would accept a division of partnership income within a certain range, for example within the range of 50/50 to 60/40, then the Corporation would not be bound to accept a division which gives the claimant the maximum entitlement to weekly compensation. The Corporation would need to examine the degree of departure from the historical basis of accounting and ascertain whether to any extent that degree was in fact influenced by the fact of incapacity. 4. In relation to a change of accounting policy, for example in relation to debtors and work in progress, the Corporation may not simply reject any departure from the former pattern of accounting, but must address the real question of whether the change has been influenced by the fact of the incapacity. The Corporation should weigh not only the obvious adverse inference of a sudden beneficial change made at the choice of the appellant, but should take into account any other relevant evidence bearing on the question whether the change was influenced by the fact of the incapacity. 5. The word "influence" is probably used in the section to indicate an effective or material influence, and not just an incidental factor that makes it more desirable for the claimant to adopt a certain manner of accounting for income. Ms Patterson has referred to a number of decisions and judgments dealing with s 53 of the 1982 Act, in particular Dragicevich (1981) 2 NZAR 549, McPhail & Mcfarlane 223/92, Beuth v ACC [1993] NZAR 461, Walsh 296/94, Blundell v ACC [1994] NZAR 1 and Mccorkindale 101/96. There are principles to be extracted from those decisions which may be applied to s 41(3) of the 1992 Act. In particular, it is appropriate to exercise caution in accepting a change in the pattern of accounting. However, the Corporation is not involved in the process of assessment under s 53 of the former Act, but in a different process of deciding whether a return has been influenced by the fact of incapacity. - 6- 6. A convenient procedure suggested by Mr Jamieson is for consultation in order to work out a basis of accounting which is not influenced by the fact of incapacity, and for the appellant to lodge a further income tax return with the benefit of that consultation. Such a return might effectively have the prior approval of the Corporation and be adopted as the basis for calculation immediately it is lodged with the Inland Revenue Department. Otherwise, the appellant may have to lodge a series of amended returns until it reaches a position that is not defeated by s 41(3). IN that event, the review and appeal process would unreasonably prolong the final determination of weekly earnings. For the reasons I have given the appeal is allowed and the Corporation's own assessment is revoked. The appellant will have costs of $800. DATED at WELLINGTON this 23 day of September 1997 D A Ongley District Court Judge