Frost v Accident Rehabilitation and Compensation Insurance Corporation

IN THE DISTRICT COURT HELD AT WELLINGTON Decision No. 2/2000 UNDER The Accident Rehabilitation and Compensation Insurance Act 1992 AND IN THE MATTER of an appeal pursuant to section 91 of the Act BETWEEN IVAN LEWIS FROST of Stratford Appellant (Appeal No. Al 38/99) AND ACCIDENT REHABILITATION AND COMPENSATION INSURANCE CORPORATION a body corporate duly constituted under the provisions of the said Act Respondent HEARING at NEW PLYMOUTH on the 22nd day of November 1999 APPEARANCES/COUNSEL S R Ebert for appellant D A Laurenson for respondent RESERVED JUDGMENT OF JUDGE A W MIDDLETON The issue in this appeal is whether the appellant received "earnings" dependant on his "personal exertions" during the tax period from 1 April 1996 to 31 March 1997 which warrant the application of the provisions of section 47. The facts which give rise to the appeal are that the appellant suffered severe injuries to his left arm in an angle grinder accident in his factor on 9 January 1996. An assessment for an independence allowance completed on 25 April1 996 was 54% for which the appropriate independence allowance was paid. A medical report from Mr S Hadlow, an Orthopaedic Surgeon, on 17 December 1997 stated: "1 . The current medical needs are for revision of his left median nerve cable graft. 2 2. I have no results from investigations or copies of any reports from the Plastic Surgeons treating this patient. 3. The details of further treatment plan would be best obtained from the Plastic Surgical Department at Waikato Hospital. 4. There has been no change in medical diagnosis to my knowledge. 5 . The patient sustained a myocardial infarction earlier this year which delays his scheduled nerve graft revision surgery. Since this time he has been made ineligible for public hospital treatment through the change in ACC funding 6. The disabilities resulting from his left median nerve injury remain major, and he is in effect unable to use the left hand without directly visualising it, and fine activities are almost impossible as with loss of sensation he has a permanent feeling as though there is a thick lump on his left hand. 7. Expected prognosis following graft revision would be guarded but this would best be obtained from the Plastic Surgeon at Waikato Hospital. 8. No obvious barriers to rehabilitation once a successful cable graft has taken place although the patients usually have some degree of impairment of the median nerve function despite successful grafting. 9. In my opinion this patient is unlikely to return to full work independence until he has protective sensation in the left hand.' A subsequent report from Mr S B Nicholl of Plastic Surgical Outpatient Clinic at Waikato Hospital, on 16 April 1998, noted that his expected progress was "uncertain". Mr Nicholl then stated: "There has been some improvement since his neurolysis, but nothing dramatic. There are some encouraging signs that nerve regeneration is recurring. He has already largely returned to work and is fully independent at home. Because his hand is insensate it is unsafe for him to weld or to expose his hand to potentially injurious situations where sensation is important. He will also have continued difficulty with any fine manipulative work such as welding and fine engineering work." The respondent paid earnings related compensation based on the appellant's earnings for the income year immediately preceding the accident. At that time the appellant and his wife were involved in the family engineering business and shared the profits on a 50/50 basis. When the return of income for the year ending 31 March 1997 was lodged, the appellant's income was recorded as $21,548.50 which amounted to 50% of the income he had received in the previous tax year. As a result of that return the respondent assessed that the appellant had been overpaid weekly compensation during the year. In a letter dated 27 April 1998 the appellant was advised that further payments of weekly compensation would cease as from 1 April 1998 and that he was required to repay the overpayment assessed at $8,801.54. The reason given was that the overpayment had occurred because "post-incapacity actual earnings as verified by Inland Revenue Department exceeding the income the appellant received prior to his incapacity." The appellant applied for a review of that decision. On 18 September 1998 the appellant's Tax Advisor requested an adjournment of the hearing of the review application to enable him to correct an error in the appellant's 3 accounts for the 1997 financial year and to file an amended tax return. As a result the Tax Advisor completed new accounts and filed amended tax returns, allocating 100% of the business income to the appellant's wife and none to the appellant. At that time the respondent had in its file the FLC16 certificate from the Inland Revenue Department dated 16 April 1998 which confirmed the appellant's assessed earnings at $21,548.50 for the 1997 year. The appellant gave evidence before the Review Officer in which he stated that since his accident he had been unable to do any of the work in the workshop apart from occasional sweeping of the floor. The Review Officer concluded that the respondent was correct to rely on the FLC16 certificate from the Inland Revenue Department and that the respondent's assessment of the overpayment was correct. In addition, the Review Officer held that the respondent should issue a decision to the appellant, including rights of review in respect of the outstanding debt which would enable the appellant to provide further information in regard to the overpayment. The appellant has appealed against the decision. At the hearing of the appeal, the appellant gave evidence in which he stated that he had established a specialist light engineering business which catered to the dairy industry. He and his wife both worked in the business with the appellant doing the specialist welding work while his wife managed the office and accounts. It was on that basis that the income was shared 50/50. The appellant stated that he had become well known for the specialist nature of the welding work which he undertook, particularly tig welding, and that he was not aware of other persons within New Zealand who were capable of doing the work. It was for that reason that the business had flourished which meant that he received a large amount of precision work from all over the country. He said that since the accident and in spite of specialist surgical treatment, he has lost the feeling in his hand and fingers which precludes him from doing any of the work which he had previously undertaken. He said that he is not able to do any welding work and while he may occasionally have gone into the building, the welding work is now all done by his son who has been employed in the business. He said that his son does not have his particular skill in the fine welding and few people do. He considered it is something which appears to be more of a "gift" than something that can be learned. However, he said that his son is continuing with the welding work required in the dairy industry but without the benefit of the tig welding which the appellant had been able to do. He said that as a result of not being able to work he has turned his attention to training Greyhounds which had been a venture in which he had previously been involved and which is now his only interest. The appellant said that from the time of his accident he had passed over the day to day engineering work to his son who had learned some skills first in repairing his own motorcycle and subsequently by observing the appellant. However, he said that while he had acquired a specialty in "tig welding" this was a very special art which his son had not acquired. He said that from the time of his accident the son on occasions asked him how certain jobs should be done but apart from that he had taken absolutely no interest in the business. he said that the business was really a one-man workshop providing a service to dairy farmers and, as such, management was not an issue. It was a business which now relied on his son's physical effort while the appellant's wife managed the office and bookwork. The appellant did concede that his wife continued to draw a monthly sum of $800 from the business account and transferred it to their joint bank account as this had been a standard practice over the years. However, the appellant did not consider that this in any way counted as income to him. Mr Ebert submitted that when the appellant's Tax Advisor became aware of the appellant's physical problems and the implications created by the first tax return filed for the year ending 31 March 1997, he filed the amended tax return allotting all income to the appellant's wife and that has now been accepted by the Inland Revenue Department. He submitted that it was clear that the appellant provided no assistance either physically or managerially in the business and that therefore he did not receive any "earnings" from the business for the year in question Mr Laurenson submitted that the Review Officer was correct in holding that the appellant had received "earnings from employment" during the income tax year ending 31 March 1997. He submitted that the evidence demonstrated that the appellant and his wife had intended to split the business income equally regardless of how much input either made to the business and that the reason for filing the amended return was because the appellant's entitlement to compensation had been revised. The issue raised in this appeal is whether, pursuant to section 47(1A) of the Act, the appellant received earnings from "employment" in the year in question which exceeded his "weekly earnings". Section 3 of the Act defines "earnings" and "employment" as: "Earnings', 'earnings as an employee', and 'earnings other than as an employee' each has the meaning assigned to it in regulations made this Act." "Employment' means work engaged in or carried out for the purposes of pecuniary gain or profit; and, in the case of an employee, includes any period of paid leave other than paid leave on termination of employment." There is no definition of "earnings from employment" in the Act. However, the Accident Rehabilitation and Compensation Insurance (Earnings Definitions) Regulations 1992 define "earnings other than as an employee" in relation to any person in any income year as: "(a) Means the amount of gross income (if any) derived by the person in the income year for the purposes of the Income Tax Act 1994- That is dependent on the personal exertions of the person; and (ii) That, if the person were to suffer any incapacity, he or she would cease to derive as a consequence of the incapacity, - minus all amounts allowed as deductions to the person under the Income Tax Act 1994 that relate to the deriving of the gross income; but (b) does not include any earnings as an employee." 5 It is therefore necessary to consider what earnings from employment were derived by this appellant. That question involves a determination what gross income he derived and how much of that gross income was attributable to his personal exertions. While the Review Officer concluded that the original intention of the appellant and his wife had always been to share the income from the business equally and have so returned it in the initial return for the year in question, he then concluded that the second return was filed only because the appellant had found that he would lose his entitlement to weekly compensation. I do not consider that having made that latter finding the Review Officer took into account the full facts of the situation. I consider that the nature of the business conducted by the appellant and his wife was very much a day to day business which, up to the time of his accident, depended on the engineering skills of the appellant. It was basically a country workshop in which the appellant provided the manual skills and his wife managed the office. The evidence clearly demonstrates that the business supplied engineering skills to dairy farmers in the vicinity and also the specialist skills which the appellant had acquired in the art of "tig welding". I do not consider that there was any great management requirement necessary but rather a business that ran from day to day when jobs came to the appellant. When the appellant suffered his injury his son was then employed to do the manual work while the appellant's wife continued to manage the office. As I understood the evidence from the appellant, the son was paid a wage but he did all the physical engineering work. At no time was the appellant in any way involved except on odd occasions when his son might have asked his advice as to how to do a particular job. The issue of "earnings" and "earnings other than as an employee" was considered by Justice Potter in Caverhill v ARCIC (an unreported High Court decision issued from the Rotorua Registry as AP 93/97 on 2 October 1998). Justice Potter stated: "Personal exertion has been interpreted particularly in relation to income tax legislation (Hadlee v Commissioner of Inland Revenue ...). It does not necessarily involve manual or physical labour; exertion by the "sweat of the brow". Input or contribution to a business enterprise may be to management, administration, planning, strategy, structuring etc. The appellant was well experienced and able to make such a contribution and on the evidence it would be a fair inference that he made such a contribution, and that it was an essential contribution to the maintenance of income sourced from the sharemilking arrangement and the contracting partnership. The income derived from those businesses would depend essentially but certainly not exclusively, on the contribution of the person or persons who actually did the work (the farm labour/contracting), but there is much more in operating a business to produce a profit than "doing the work"." I consider the facts of this appeal are quite different from those in Hadlee in that the evidence in this appeal demonstrates that this was a simple day to day business which did not require any managerial contribution from the appellant as referred to by Justice Potter. 6 I consider that the evidence given by the appellant and the manner in which he gave it demonstrated a patent honesty and a complete lack of sophistication so far as business management is concerned. The appellant looked upon himself as a supplier of engineering facilities to dairy farmers through the business which he had built over some 35 years and which remained a small one-man business in which his wife managed the office. I find that his injury precluded him from providing any assistance in the business from the time of his accident and this has been confirmed by the medical evidence. I do not consider that the fact that his wife continues to draw $800 from the business account and put it in their joint account in any way amounted to a payment for services rendered by the appellant. Both the definitions in the relation to this legislation and the income tax legislation refer to "personal exertions". I am satisfied that in the year in question this appellant did not receive any income derived from his personal exertions and that the amended return was not a device to ensure his entitlement to weekly compensation was not compromised. The appeal is therefore allowed and the file will be returned to the respondent to make the necessary assessment. There will be costs to the appellant of $1,000. DATED at WELLINGTON this (7th day of January 2000 A W Middleton District Court Judge ai38-99.doc (nr)