HOLLIS V COMMISSIONER OF INLAND REVENUE HC NAP CIV 2009-441-000074

HOLLIS V COMMISSIONER OF INLAND REVENUE HC NAP CIV 2009-441-000074 30 October 2009IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY CIV 2009-441-000074IN THE MATTER OF the Tax Administration Act 1994 and the Income Tax Act 1994 BETWEEN CLAIRE AVON RAE HOLLIS Appellant AND THE COMMISSIONER OF INLAND REVENUE Respondent Hearing: 2 July 2009 Appearances: Appellant in person P Courtney and H Ryburn for Respondent Judgment: 30 October 2009RESERVED JUDGMENT OF RANDERSON JThis judgment was delivered by me on 30 October 2009 at 2.30 pm, pursuant to r 11.5 of the High Court Rules Registrar/Deputy Registrar Solicitors: Crown Law, PO Box 2858, Wellington 6140 Copy to: C Hollis, 920 Nelson Street North, Hastings 4120Introduction[1] The appellant was injured in an accident in 1992. Initially, she received from the Ministry of Social Development (MSD) a sickness benefit and supplementary benefits comprising disability and accommodation allowances. It is common ground that the sickness benefit was taxable and that the supplementary benefits were not taxable. In 2003 it was determined that she was entitled to weekly compensation from the Accident Compensation Corporation (ACC). In consequence, she received lump sum payments of back-dated compensation in the 2004 income year. [2] ACC deducted from the lump sums certain amounts which were refunded to MSD and the Inland Revenue Department (the IRD) in relation to the benefits she had earlier received during the years for which she was later found to be eligible for compensation. The propriety of these deductions and the tax treatment of the payments lie at the heart of this appeal from a decision of the Taxation Review Authority (the TRA). [3] Before the TRA, Ms Hollis disputed her assessment of income tax in the 2004 income year on a number of grounds. In a decision issued on 14 January 2009, Judge Barber dismissed the challenge by Ms Hollis to the income tax assessment but reserved leave for her to apply further in relation to the deduction of certain expenses from her assessable income. [4] The broad issue Ms Hollis raises on this appeal is whether she was overtaxed in the 2004 year at a rate of 40.2%. The whole of the lump sums she received were treated as taxable in that year. Had they been spread over the years in which she was found to be eligible for weekly compensation, her rate of taxation would have been at a much lower level, perhaps no more than 15%. [5] In the course of her wide-ranging submissions, which were at times difficult to follow, Ms Hollis challenged "the change in character" of the benefits she received to weekly compensation and the resulting tax treatment of those sums. She also challenged the administrative arrangements between the ACC, MSD and theIRD under which the various deductions and payments were made when she received the back-dated compensation payments in the 2004 income year. [6] The issues are somewhat inter-related but in broad terms can be stated as: a) Whether the TRA was correct to find that the amount of income- tested sickness benefit and the non-taxable supplementary benefits received from MSD are deemed to be weekly compensation; b) Whether the TRA was correct to find that Ms Hollis was not over- taxed in the 2004 income year; and c) Whether the TRA was correct to find that Ms Hollis was not entitled to deduct certain expenses from her assessable income in the 2004 year. [7] The case before the TRA proceeded on the basis of an agreed statement of facts, affidavit evidence and certain supplementary documents. Some of the witnesses were cross-examined. [8] So far as it is relevant for present purposes, the agreed statement of facts was: ...3. In 1992 [the Appellant] sustained an injury to her shoulder and neck area, which resulted in surgery on both shoulders in 1996 and 1997. 4. Because of injury, in October 1998 [the Appellant] left her employment after nine years. In the period June 1999 to February 2001 [the Appellant] was overseas. Except for that period she received payments from Work and Income New Zealand, now known as the Ministry of Social Development ("MSD"). 5. The payments from MSD consisted of: 5.1 taxable income tested benefits; and 5.2 non-taxable supplementary benefits comprising disability and accommodation allowances And were received by [the Appellant] in the 1999 to 2004 income tax years (excluding the period when [the Appellant] was overseas referred to in paragraph 4 above).6. In August 2001 [the Appellant] made written application to the Accident Compensation Corporation ("ACC") for weekly compensation, which she requested be backdated to 1998. 7. In April 2003 ACC accepted [the Appellant's] claim for weekly compensation under the Accident Rehabilitation, Compensation Insurance Act 1992 (the ARCI Act). The date of incapacity used to calculate weekly compensation was accepted as 15 October 1996, when the ARCI Act was in force. [The Appellant's] entitlement to weekly compensation was backdated to 2 November 1998 (when she left work) to April 2003; and she was paid on-going weekly compensation from 28 April 2003 in the 2004 income year. 8. During the 2004 income year, two lump sum payments of backdated ACC weekly compensation in relation to the 1999 to 2003 income years were paid to [the Appellant] by ACC. 9. As [the Appellant] was no longer entitled to the income-tested and supplementary benefits she had previously received from MSD, MSD required reimbursement of the net amounts she had received in the 1999 to 2003 income years. 10. MSD requested that ACC reimburse it for the net amount of the taxable income-tested benefit ($20,178.83) [the Appellant] had received from MSD. 11. MSD also requested that ACC recover and pay to it the non-taxable supplementary benefits of $11,266.55; and [the Appellant] gave her authority for that amount to be deducted from her back-dated lump sum ACC payments. 12. ACC deducted the gross amount of the MSD income-tested benefit from [the Appellant's] back-dated lump sum payments. 13. [The Appellant] and the Commissioner of Inland Revenue's ministerial unit engaged in correspondence about the amount of her taxable income in the 1999 to 2004 income years. 14. [The Appellant's] returns of income for the 2000 to 2004 income years, which were submitted by her accountant, already included as income, amounts she had received by way of income-tested benefit. 15. Adjustments were made in the 2000 to 2004 income years to spread back into the relevant income year the ACC payments that replaced the non-taxable supplementary benefits. 16. It [was] only the 2004 income year that [was] before the Authority for decision. (citations omitted).[9] A summary of these transactions adapted from [18] of the Commissioner's submissions follows:18.1 MSD paid the appellant an income-tested benefit. 18.2 MSD paid PAYE due on the income-tested benefit to IRD on behalf of the appellant. 18.3 When the appellant's claim for backdated cover by ACC was accepted, MSD sought recovery from ACC of amounts equal to: 18.3.1 Net amount of income-tested benefit paid to the appellant; and 18.3.2 Supplementary benefits. 18.4 From the total backdated weekly compensation amount due to the appellant, ACC deducted an amount equal to the net income-tested benefit and PAYE, tax on the remainder, and the amount required to reimburse MSD in respect of the supplementary benefit. 18.5 ACC reimbursed MSD for the amount it had paid out to the appellant by way of net income-tested benefit and supplementary benefits. 18.6 IRD repaid MSD the amount of PAYE paid on the income-tested benefit. 18.7 IRD received from ACC tax due in respect of: 18.7.1 that part of the amount of weekly compensation that replaced the income-tested benefit, and 18.7.2 the remainder of the backdated weekly compensation, including that part that replaced supplementary benefits.[10] Before considering the relevant legislation, it is helpful to set out a worked example of the reimbursement process between MSD, ACC and IRD in cases where a beneficiary is subsequently found to be entitled to weekly compensation, which is often payable at a much higher level than the previously received MSD benefits. The administrative processes to make the necessary adjustments are undertaken in terms of a tri-partite agreement between the three institutions set against the background of the legislation. The worked example of the process (in simplified form) I now set out was produced by Mr J P Mulcahy who gave evidence on behalf of the Commissioner before the TRA:Worked Example1. MSD pays: 1.1 to X: income-tested benefit 1.2 to IRD: PAYE on income-tested benefit on behalf of X (assume 20% for each calculation) Gross income-tested benefit $ (80) (20) ____ 100 2. X's ACC claim accepted 3. MSD seeks recovery of: 3.1 from ACC: Net amount equivalent to income-tested benefit paid to X 3.2 from IRD: PAYE on income-tested benefit paid on behalf of X 80 20 4. ACC calculates backdated weekly compensation amount in respect of X (assume) 500 5. ACC deducts from: -total backdated weekly compensation amount: 5.1 amount equivalent to gross income-tested benefit comprising 5.1.1 net amount equivalent to income-tested benefit to be repaid to MSD 5.1.2 tax on the proportion of the backdated weekly compensation amount originally received as income-tested benefit, and now deemed to be weekly compensation, ie an amount equivalent to PAYE originally paid - residual backdated weekly compensation amount 5.2 tax at extra emolument rate including ACC earner levy (40.2%) in the income year the amount is received. 5.3 reimbursement of supplementary benefits to be paid to MSD (80) (20) (100) 400 (160) (30) 6. ACC pays excess of backdated weekly compensation to X 210 7. ACC repays to MSD: 7.1 net amount of income-tested benefit originally paid to X 7.2 supplementary benefits (80) (30) 8. ACC pays IRD tax on backdated weekly compensation comprising: 8.1 amount equivalent to original PAYE 8.2 tax on residual backdated weekly compensation ( 20) (160) (180)First Issue – Whether the TRA was correct to find that the income-tested benefit and supplementary benefits are deemed to be weekly compensation?[11] The hearing before the TRA proceeded on the basis that s 78(2) Accident Rehabilitation and Compensation Insurance Act 1992 (the 1992 Act) applied. The 1992 Act was in force from 1 July 1992 until 1 July 1999 which covered the period for which Ms Hollis' claim for weekly compensation was accepted. Section 78(2) of the 1992 Act provided:Where any payment is made under Part 1 of the Social Security Act 1964 to a person who establishes a claim to any treatment, service, rehabilitation, related transport, compensation, grant, or allowance under this Act, if the amount paid in respect of the benefit is in excess of the amount properly payable having regard to the compensation, the Corporation (with the concurrence of the Department of Social Welfare) may treat the amount so paid or so much thereof as it thinks fit as having been paid in respect of that treatment, service, rehabilitation, related transport, compensation, grant or allowance and may refund to the Department of Social Welfare, so much of the payment as is treated under this subsection as having been paid in respect of that treatment, service rehabilitation, related transport, compensation, grant, or allowance. Any amount that is treated under this subsection as having been paid in respect of that treatment, service, rehabilitation, related transport, compensation, grant, or allowance shall for all purposes be deemed to have been so paid.[12] This provision applied in cases where payment of benefits had been made under Part 1 of the Social Security Act 1964 to a person who later established a claim to compensation under the 1992 Act. If as a result of the grant of compensation the benefit previously paid exceeded the amount properly payable by MSD, ACC was entitled to treat all or part of the benefit payments as having been paid as compensation. That process had to be undertaken with the concurrence of MSD. ACC was entitled to refund to MSD the amount of the benefit payments which were treated as having been paid as compensation. The last sentence of s 78(2) emphasised that any amount treated under the subsection as having been paid as compensation was deemed for all purposes to have been so paid. [13] The TRA found at [50] that the payments originally made by MSD to Ms Hollis as income-tested and supplementary benefits were treated by ACC as payments of weekly compensation and were therefore deemed to be of that nature by s 78(2) of the 1992 Act.[14] In a decision delivered by Rodney Hansen J on 6 March 2009 (shortly after the decision of the TRA in this case) it was determined in a case similar to the present that the issue of any refunds due to MSD was to be considered under the legislation in force at the date when the refund of any excess benefit is made: Buis v Accident Compensation Corporation HC AK CIV 2007-404-004703 6 March 2009 at [10]. In that case, s 373 of the Accident Insurance Act 1998 (the 1998 Act) was in force from 1 July 1999 until 1 April 2002. In Buis, Rodney Hansen J also decided (both for the purposes of s 78 of the 1992 Act and s 373 of the 1998 Act) that the obligation to refund the claimant's benefit referred to the gross amount paid and was not limited to the net benefit (after tax) paid to the claimant (at [19]). I respectfully agree with the findings in Buis for the reasons the Judge gave. [15] In the present case, Ms Hollis' entitlement to compensation was established in April 2003 by which time the 1998 Act had been repealed and the Injury Prevention, Rehabilitation and Compensation Act 2001 (the 2001 Act) was in force with effect from 1 April 2002. On that basis, I do not accept Ms Hollis' submission that the 1992 Act is applicable. Section 252 of the 2001 Act replaced s 373 of the 1998 Act and provided:252 Relationship with social security benefits: reimbursement by Corporation(1) This section applies if a person— (a) receives a payment of an income-tested benefit under the Social Security Act 1964 in respect of a period; and (b) establishes a claim to an entitlement from the Corporation in respect of all or part of the same period. (2) An excess benefit payment is regarded as having been paid in respect of that entitlement. (3) An excess benefit payment is the part of the benefit payment (up to the amount of the entitlement) that is in excess of the amount of benefit properly payable, having regard to the entitlement under this Act. (4) The Corporation must refund the excess benefit payment to the department responsible for the administration of the Social Security Act 1964— (a) if the Corporation knows that this section applies; or (b) if requested to do so by that department.(5) For the purposes of this section, an excess benefit payment includes a payment of any part of a married rate of benefit that is paid to the spouse [or partner] of the person who established the claim to the benefit. (6) Any amount that is treated under this section as having been paid in respect of any treatment, service, rehabilitation, related transport, compensation, grant, or allowance is deemed for all purposes to have been so paid.[16] Section 252 of the 2001 Act is in virtually identical terms to s 373 of the 1998 Act apart from the addition of subsection (6). The essential features of s 252 of the 2001 Act are: a) The section applies where a person receives an income-tested benefit under the Social Security Act 1964 and establishes a claim to an entitlement under the 2001 Act for all or part of the same period. b) Unlike s 78(2) of the 1992 Act, ACC does not have a discretion to treat benefits as having been paid as weekly compensation. Instead, where the section applies, the benefit payment is treated as an "excess benefit payment" to the extent that it is in excess of the amount of benefit properly payable having regard to the entitlement to compensation under the 2001 Act. That is the result of the application of subsections (2) and (3). c) Under subsection (4), ACC is obliged to refund the excess benefit payment to MSD if ACC knows s 252 applies or is requested to do so by MSD. d) By subsection (6), the amount of the excess benefit payment which is treated (by subsection (2)) as having been paid as compensation or other entitlement under the 2001 Act is "deemed for all purposes to have been so paid". [17] The practical consequences of the application of s 252 of the 2001 Act in the case of Ms Hollis are: a) The whole of the net income-tested benefit she received from MSD over the period for which she established an entitlement to weeklycompensation must be treated by operation of law under the section as having been paid as compensation under the 2001 Act. b) ACC is obliged to refund the amount of the excess benefit payment to MSD. c) Section 252 does not cover the supplementary benefits since they are non-taxable. However, Ms Hollis accepted (paragraph 9 of the agreed statement of facts) that she was no longer entitled to the income-tested and supplementary benefits received from MSD. In respect of the non-taxable supplementary benefits, she gave a written authority to ACC to deduct those amounts from her lump sum ACC payments and authorised ACC to pay the relevant amount to MSD. Ms Hollis has also agreed with the Commissioner that income adjustments may be made in the tax years 2000 to 2004 to spread the non-taxable supplementary benefit refunds into the relevant income year. [18] It will be recalled that, as part of the payments and deductions made after Ms Hollis established her claim to compensation, ACC paid IRD an amount equivalent to the original PAYE on the income-tested benefit she had received. Originally, MSD had paid this tax to IRD on the income-tested benefit Ms Hollis had received. As Rodney Hansen J found in Buis, s 83A(4) Social Security Act 1964 provides that an income-tested benefit paid under the Act includes the tax paid by MSD on the benefit described in his judgment as a "grossed up" amount. It follows that reference in s 252 of the 2001 Act to receipt by a person of a payment of an income-tested benefit is a reference to the gross amount of that benefit. [19] If Ms Hollis were correct that she did not have to pay tax on the lump sum entitlement from ACC because of the tax paid on the benefit received from MSD, she would effectively gain an advantage (i.e. a grossed-up payment) meant only for beneficiaries of MSD, despite not being entitled to a benefit. Additionally, she would obtain an advantage over and above that of other ACC recipients who did not first (erroneously) obtain a benefit from MSD. [20] I am satisfied that ACC was obliged to repay to MSD the gross amount of the income-tested benefit received by Ms Hollis during the relevant years. In practice,under the terms of the tri-partite agreement, ACC paid the tax portion of the benefit directly to IRD which, in turn, credited MSD under monthly payment schedules through the Crown account. [21] I am satisfied that the payments made by ACC were correctly made in terms of the statutory obligations imposed by s 252 of the 2001 Act. Ms Hollis expressed concern about the "changed character" of the income-tested benefit payments. However, as already indicated, ACC had no discretion in that respect. In cases such as the present, the treatment of the amount of the excess benefit payment as having been paid as weekly compensation arises by operation of law. I also accept Mrs Courtney's submission for the Commissioner that a Tax Information Bulletin relied upon by Ms Hollis in relation to income received "fraudulently or in error" has no application in the present circumstances. [22] My conclusions in respect of this issue are supported by the judgment of Stevens J in Reddell v Accident Compensation Corporation HC AK CIV 2008-485-002736 24 June 2009.Second Issue: Was the TRA correct to find that Ms Hollis was not over-taxed in the 2004 year?[23] There are essentially three sub-issues under this heading: a) Whether the TRA was correct to find that the residual portion of the back-dated weekly compensation Ms Hollis received from ACC in the 2004 income year was properly assessed as gross income under s CC1(1) Income Tax Act 1994 (the ITA). b) Whether the TRA was correct to find that the full residual amount was taxable in the 2004 year. c) Whether the residual amount was correctly taxed at the "extra emolument" rate of 39 per cent.Whether the TRA was correct to find that the residual portion of the back-dated weekly compensation Ms Hollis received from ACC in the 2004 income year was properly assessed as gross income under s CC1(1) Income Tax Act 1994[24] Addressing the first of these issues, Mrs Courtney relied on s CC1(1) ITA which provides that certain compensation payments and other benefits are gross income for the purpose of the ITA. So far as it is relevant, the section provides:The gross income of any person includes— (a) All payments of earnings related compensation (as defined in section 2 of the Accident Compensation Act 1982) and of compensation under section 80(4) of that Act, not being payments— (i) Which are recovered or recoverable by the Accident Compensation Corporation under section 86(3)(a) or section 88(4) of that Act; or (ii) In respect of which an amount equal to those payments is refunded to the [chief executive of the department for the time being responsible for the administration of the Social Security Act 1964] by the Accident Compensation Corporation under section 88(3) of that Act: (b) All payments of any compensation for loss of earnings payable under sections 38, 39, and 43 of the Accident Rehabilitation and Compensation Insurance Act 1992, or any vocational rehabilitation allowance payable under section 25 of that Act, or any compensation for loss of potential earning capacity payable under section 45 or section 46 of that Act, or any weekly compensation payable under section 58, section 59, or section 60 of that Act, or any continued compensation payable under section 138 of that Act, not being payments which are recovered or recoverable by the Accident Rehabilitation and Compensation Insurance Corporation under section 77(1) of that Act: (ba) All payments made, under the Accident Insurance Act 1998, by an insurer (within the meaning of that Act) of weekly compensation (within the meaning of that Act) that are not recovered or recoverable under section 320 of that Act: (bb) Any other payments made by an insurer, pursuant to any policy of personal accident or sickness insurance to which [[section 188(1)(a) of the Accident Insurance Act 1998 (as it read immediately before its repeal by section 7 of the Accident Insurance Amendment Act 2000)]]applies, of compensation for loss of earnings or loss of potential earning capacity in so far as it relates to a work-related personal injury within the meaning of that Act: (bc) All payments made, under the Injury Prevention, Rehabilitation, and Compensation Act 2001, by the Corporation of weekly compensation(within the meaning of that Act) that are not recovered or recoverable under section 248 of that Act: ...[25] Since the payments in question were made to Ms Hollis under the 2001 Act, I am satisfied that s CC 1(1)(bc) applies and that the amount equivalent to the income- tested benefit and the residual weekly compensation are both part of the gross income of Ms Hollis for the purpose of the ITA. The income-tested benefit is deemed by s 252 of the 2001 Act to be weekly compensation and the residual sum is weekly compensation from the outset. Section 248 of the 2001 Act is the only exception to the treatment of compensation as gross income. Ms Hollis submitted s 248 applied but I am satisfied it does not. It relates to overpayments made by ACC which have no bearing on the obligations of ACC under s 252 to refund the amount of income-tested benefits to MSD.Whether the TRA was correct to find that the full residual amount was taxable in the 2004 year[26] Ms Hollis submitted that the TRA was wrong to find that the residual sum she received in the 2004 income year was all taxable in that year. In that respect, the TRA accepted that the tax payable by Ms Hollis would have been less if it had been treated as taxable in the prior years in which she was later found to be entitled to compensation. The TRA did not accept the submission that the residual payment should be spread over previous years, finding that it was "settled law" that in cases involving back-dated ACC payments, the taxpayer derives the income when it is received and it cannot be spread back to earlier years to which the computation of the income relates. Judge Barber stated:61. This Authority has held in numerous cases (e.g. Case H24 (1986) 8 NZTC 246; Case H46 (1986) 8 NZTC 377; Case H70 (1986) 8 NZTC 496; Case J46 (1987) 9 NZTC 1,262; Case N9 (1991) 13 NZTC 3,075) involving backdated accident compensation payments on facts materially similar to those that apply in this case, that it is settled law that the taxpayer derives the income when it is received (which in this case is the 2004 income year i.e. April 2003) and it cannot be spread back to earlier years to which the computation of the income relates. 62. For present purposes, it is sufficient to refer to three cases where the main principles which apply are discussed: F157 (1984) 6 NZTC 60,350; K23 (1988) 10 NZTC 233; and S9 (1995) 17 NZTC 7,084. The reasoning of the TRA from such cases can be summarised as follows: 62.1 Income is assessable when it is "derived". 62.2 Derivation usually requires actual receipt of the amount. 62.3 Individuals are taxed on a cash basis, i.e. income is returned in the year it is received, CIR v The National Bank of New Zealand(1976) 2 NZTC 61,150. 62.4 In Case N9 at p.3,080 Barber DJ stated:"In these situations of the checks and balances of the accident compensation system often leading to earnings-related compensation being paid in a later financial year than that to which it relates, one can understand the references of Mr Allan to a lack of commonsense and justice where the delay increases the tax rate on the compensation. However, this area of tax law was settled by Judge Bathgate in Cases H24 (1986) 8 NZTC and H46, as I explained in Case J46. Maybe, it needs to be addressed by legislation ... It seems to me that the objector operated on a cash basis each year for the purposes of assessment of his income. It follows from that method of dealing with revenue or earnings, that the objector derives income when he receives it. Accordingly, it cannot be open to the objector to spread income back over earlier years to which the computation of the income relates, because the objector did not in fact get the income in any of those earlier years, but only in the year of receipt."63. In Case K23 there was evidence before the TRA that, as a result of receiving the compensation in one lump sum payment, the tax liability was twice as much as it would have been, had the compensation been paid in instalments over the period from 1980 as the right to it accrued. The objector argued that the legislature could not have intended that he should pay twice as much tax as he would otherwise have been liable for, when the increase could be attributed to a failure by ACC to make a correct assessment of his medical condition and also to bring the appeal promptly to a hearing. The TRA considered that there was no principle of law which would entitle the objector to relief from the liability to tax on the ground of alleged maladministration by ACC. Despite the hardship faced by the objector, the lump sum payment was taxable in the year it was received. 64. It is settled law that the amount of the backdated weekly compensation received from ACC in the 2004 income year is properly assessed as gross income under CC 1(1)(b) in that year.[27] The decisions cited by the TRA revolved around s 38(2) Income Tax Act 1976, which provided:Subject to this Act, income tax shall be payable by every person on all income derived by him during the year for which the tax is payable.[28] Section BB 1 of the ITA 1994 contains a provision not materially different from s 38(2) of the 1976 Act. No sustainable basis has been put forward by Ms Hollis to depart from the statute and the long line of authorities referred to by the TRA to the effect that the payment of back-dated compensation is to be taxed as a payment received in the year of its receipt.Whether the residual amount was correctly taxed at the "extra emolument" rate of 39 per cent[29] I sought further submissions as to the statutory authority for the residual back-dated weekly compensation being taxed at the extra emolument rate (39%) plus the ACC earner levy, resulting in a total deduction of 40.2%. Mrs Courtney submitted by reference to the ITA that "salary or wages" is not confined to the employment context but includes weekly compensation paid by ACC and any back- dated payments of such compensation. [30] Section OB 1 ITA defines "employee" as meaning a person who receives or is entitled to receive a "source deduction payment" and "employer" as a person who pays or is liable to pay a source deduction payment. (I am satisfied that the exceptions to the definition of "employer" referred to by Ms Hollis do not apply in this case.) A "source deduction payment" is defined by s OB 2(1) ITA 2004 as meaning "...a payment by way of salary or wages, an extra emolument, or ...". This definition is subject to other subsections of s OB 2 which I am satisfied do not apply. [31] Section OB 1 ITA relevantly defines "extra emolument":extra emolument, in relation to a person, excluding a payment of exempt income, means— (a) a payment in a lump sum, whether paid in one lump sum or in 2 or more instalments, made to the person in respect of or in relation to the person's employment, whether for a period of time or not, being a payment that is not regularly included in salary or wages payable to the person for a pay period, but not being overtime pay, and includes a payment made—(i) by way of bonus, gratuity or share of profits: (ii) by way of a retrospective increase in salary or wages, to the extent that the payment accrues from the start of the increase until the beginning of the first pay period for which the increase is included in salary or wages, and to the extent that a week ends with a Saturday, the total of the increase for the week, the salary or wages for the week exclusive of the increase and any other salary or wages earned by the person for the week is more than $4: (iii) by way of a redundancy payment: (iv) on occasion of that person's retirement from employment: ...[32] An "extra emolument" tax rate is intended to apply where a person receives a lump sum in relation to that person's employment which is not regularly included in that person's salary or wages. For this purpose, the reference to salary or wages includes an extra payment that is included in "gross income" under s CC 1: see the definitions of "salary or wages" in s OB 1 and the definition of "gross income" under s CC 1(1) above. I note that Ms Hollis has sought to introduce definitions of employer and employee from the ACC legislation but those definitions are irrelevant for present purposes. It is the ITA which governs the taxation of the payments received. [33] Mrs Courtney submitted that the lump sums fell within sub-clause (a)(ii) of the definition of extra emolument as a "retrospective increase in salary or wages". [34] I am not satisfied that the back-dated compensation paid by way of lump sum to Ms Hollis is properly characterised as an "extra emolument" for tax purposes. The lump sum did not amount to an increase in compensation ("wages") she was then receiving for the current period (i.e. from the date her entitlement to ACC cover was established). Rather, it was a payment of the amount to which she was entitled by way of compensation for the prior years i.e. from the date of her accident until the date ACC cover was established. It could not therefore be characterised as an extra payment over and above her ordinary entitlement for the "pay period" in question. I am satisfied that a lump sum payment of back-dated compensation does not fall within the definition of "extra emolument" unless it is a payment additional to the"employee's" ordinary entitlement for the relevant "pay period". An extra emolument is usually a discretionary payment rather than one to which the "employee" has a statutory or contractual entitlement. [35] The rate of taxation payable in terms of s NC 2 ITA may still be higher than the rate payable if the lump sums had been received in the appropriate years but is likely to be less than the extra emolument rates. The rate payable will have to be assessed by the Commissioner and adjusted accordingly.Third Issue: Whether the TRA was correct to find that Ms Hollis was not entitled to deduct certain expenses from her assessable income in the 2004 year.[36] In a supplementary decision issued on 20 April 2009 (pursuant to leave reserved in the TRA's earlier decision) Judge Barber considered whether Ms Hollis was entitled to a deduction under s DJ 5(1)(a) ITA in respect of expenses said to have been incurred by her in the course of pursuing her challenge to the IRD tax assessments over several years prior to the initial hearing before the TRA on 17 October 2008. I am prepared to allow Ms Hollis to amend her notice of appeal to deal with this issue. [37] The amounts in issue totalled a little over $3000. The TRA determined that these expenses could not be deducted because the dispute was concerned solely with the 2004 income year and the Judge was satisfied the expenses had not been incurred in that year. [38] I am satisfied the TRA was correct in this respect. Section DJ 5(1)(a) ITA states:(1) Subject to this section, a taxpayer is allowed a deduction in any income year in respect of any expenditure incurred by the taxpayer during that income year in connection with – (a) The determination of the income tax liability of the taxpayer for any income year.[39] The section is explicit in limiting the deductible expenditure to that incurred in the income year in question. It follows that, if the relevant expenditure was not incurred during the 2004 income year, it could not be deducted in that year.Conclusions[40] For the reasons stated, the appeal is allowed but only to the extent that the extra emolument rate of taxation has been found not to apply. [41] It is not clear whether any issue remains about the tax treatment of the non- taxable supplementary benefits (see [17](c) above). If there is an issue, it could only relate to the 2004 income year. If Ms Hollis wishes to raise any issue about this, she is to file and serve a memorandum within 14 days of today. In any event, the Commissioner will have 14 days thereafter to file and serve a memorandum in response. [42] As each party has been partially successful, I am inclined to let costs in this Court lie where they fall i.e. each party is to bear their own costs. If either party wishes to claim costs, a memorandum should be filed and served within 14 days of today with the opposite party having 14 days thereafter to file and serve a responding memorandum. [43] During the course of the hearing before me, Ms Hollis expressed some frustration about her inability to obtain a clear picture from IRD about her tax affairs. Without expressing any view about the validity of her complaint in this respect, it would be helpful if the IRD provided a full accounting to Ms Hollis in relation to her taxation over the period from the date of her accident in 1992 until the present time. ______________________________ A P Randerson J Chief High Court Judge