Amies v Accident Rehabilitation and Compensation Insurance Corporation

IN THE DISTRICT COURT Decision No. 119 195 HELD AT WELLINGTON 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 87 94 0921 BETWEEN RACHEL GEORGINA AMIES Appellant (Appeal No. DCA 216/94) AND ACCIDENT REHABILITATION AND COMPENSATION INSURANCE CORPORATION a body corporate duly constituted under the provisions of the said Act Respondent HEARD on the 7th day of June 1995 APPEARANCES Mr D A Rennie advocate for appellant Mr A D Barnett for respondent DECISION OF JUDGE D A ONGLEY The question in this appeal concerns the calculation of weekly earnings of a self employed person under s 41 of the Accident Rehabilitation and Compensation Insurance Act 1992. The case involved a partnership where the earnings of a deceased partner were divided equally between himself and his wife in the income year last ended before his death. Richard John Amies was killed in a forklift truck accident on 8 March 1994. At the time of his death he was operating two businesses named Buller Supplies and Buller Freighting. He employed staff and the appellant assisted with record keeping and returns but her contribution was very limited. The appellant says that the income of the businesses depended on the personal exertions of her deceased husband. After - 2- his death his brother carried on the business for a short time and then sold it as a going concern. For income tax purposes the profit of the business was shared equally although the profit sharing arrangement had not been approved by the Commissioner of Inland Revenue. The half share of the deceased for the year ended 31 March 1993 was $33,066 and he filed an individual return of income based on that share. The Corporation calculated the appellant's entitlement to weekly compensation under s 58 of the Act as 60% of the earnings related compensation to which the deceased would have been entitled if he had been totally incapacitated. The compensation to which each of three dependent children were entitled was also calculated on the basis of the same weekly compensation figure. Section 41(2) of the Act provided: "(2) The weekly earnings of any person to whom this section applies shall be: . . .. b) In respect of any period of incapacity after the period referred to in paragraph (a) of this subsection, the earnings of that person other than earnings as an employee in the most recent income year (as defined in section 2 of the Income Tax Act 1976) last ended before the commencement of the period of incapacity as shown in an income tax return, divided by the number of weeks in that income year." By s 41 the earnings of the deceased as shown in an income tax return determined the calculation of weekly earnings. Mr Rennie for the appellant submitted that all of the earnings of the deceased as shown in the books of account of the partnership were derived from the personal exertions of the deceased and were shown in the partnership return as the profit of the partnership. He said that while s 41(2)(b) refers to earnings shown in an income tax return the appropriate return is not necessarily that filed by the deceased. He submitted that both the deceased's and the appellant's income tax returns, which purported to show a taxable income from the partnership of $33,066 are null and void because they were based on an artifical division of partnership profits which had not been approved or consented to by the Commissioner and therefore did not comply with the requirement of the Income Tax Act 1976. He submitted that the intention of the legislation was achieved by regarding the partnership return of income as an income tax return showing the earnings of the deceased, that is to say the whole profit of the partnership. He said that the definition of "earnings other than as an employee" would be rendered meaningless and of no effect if the determining factor for entitlement to compensation was merely the earnings figure shown in the claimant's income tax return He referred to the Accident Rehabilitation and Compensation Insurance (Earnings Definitions) Regulations 1992. Reg 11 provides, in part: - 3 - "11. Employee spouses - (1) if a person is an employee of his or her spouse or is otherwise rendering services no account shall be taken of any services performed or of any amounts paid for the purposes of determining:- (a) the amount of the person's earnings under the regulations; or (b) the liability of the person or his or her spouse for any premium under the Act or the regulations. (2) If a person provides services to his or her spouse and that spouse makes, or has made, an application in writing to the Commissioner for the Commissioner's consent to a deduction being made for any amounts paid by the spouse to the person in respect of the services provided by the person in calculating the assessable income of the spouse for the purposes of the Income Tax Act 1976, and consent is or has been given by the Commissioner to any such deduction being made, then, for the purposes mentioned in paragraphs (a) and (b) of subclause (1) of this regulation, account shall be taken of - (a) The services provided by the person after the date on which such application by the spouse is or was received by the Commissioner; and (b) Any amounts paid after the date on which such application is or was received by the Commissioner in respect of the services - to the extent that the consent of the Commissioner relates and continues to relate to the services and to the amounts so paid, notwithstanding that the consent may not be given until after the date on which such application is or was received by the Commissioner. (3) If a person provides services to his or her spouse and that spouse submits or has submitted a return of income to the Commissioner and the amounts paid by the spouse to the person in respect of such services are shown as an expense incurred in the production of assessable income for the purposes of the Income Tax Act 1976, and the person includes the amounts paid to the person in a return of income submitted to the Commissioner and pays or has paid tax (is appropriate) on such amounts, the Corporation may accept that there has been sufficient compliance with subclause (2) of this regulation, and premiums shall be payable accordingly." Mr Rennie submitted that any profit allocated to the appellant (the spouse of the deceased) would have to be disregarded if she suffered incapacity under the Act and an assessment of her own earnings was then to be made. He dealt with the possibility that, in the absence of a contract of partnership, the appellant should be regarded as an employee. He said that by operation of r 11 her income would have been excluded in assessing her earnings because there was no consent by the Commissioner. He submitted that it would be an unfair result if her income could not be assessed as her earnings in the event of her suffering personal injury by accident and at the same time could not be assessed as the earnings of the deceased. Leaving aside the question of whether r 1 1 could apply where the husband and wife regarded their business relationship as a partnership, if she was injured and made a claim for earnings related compensation the reason she would probably not succeed is that there would be no loss of earnings as a result of incapacity in terms of s 38 of the Act. That would follow because, if the appellant is consistent in her claim that all the profit was from her husband's exertions, her income from the partnership was not derived from her personal effort and would not be affected by disability. It is - 4- interesting to note that these regulations cover persons employed by spouses and also shareholder employees, but they do not appear to affect partnerships between spouses. It may also be instructive to note that under r 11(3) the Corporation may assess spousal wages for relevant earnings if the returns of the employer and employee have been filed and tax is paid accordingly, otherwise r 11(2) applies and no account of the wages can be taken until an application is made to the Commissioner for consent. Both the Act and the Regulations rely on returns of income as the measure of relevant earnings Mr Barnett submitted that s 41(2)(b) can not be construed so widely as to include the financial statements or the partnership returns of income within the meaning of the expression "the earnings of that person ... as shown in an income tax return". He referred to s 10(1)(b)(i) of the Income Tax Act which requires partners to "make a joint return of the income of the firm, setting forth the amount of that income, and the shares of the several partners therein". He submitted that the "personal exertions" argument does not in any case assist in answering the question because the partnership return or the financial statements do not show on their face that the profit is derived from the personal exertions of the deceased. In other words on the face of the partnership return the income of the deceased was only $33,066 and there is nothing to show that his earnings were in fact greater than his income as returned. Finally the respondent submitted that where there is a personal return of income the Corporation must rely on it. He referred to s 97 and s 106 of the Income Tax Act 1976 affecting transactions between spouses and related persons. He submitted that the relationship was a partnership within the definition of's 4 of the Partnership Act 1908 and he submitted there is no basis to depart from the return of income filed by the deceased. Both sets of submissions were extensive and helpful. I have endeavoured to encapsulate, in a much abbreviated form, the points that bear on my eventual decision. In relation to partnership returns s 97(1)(c) of the Income Tax Act provides: 97. Payment of excessive salary or share of profits to relative employed by or in partnership with taxpayer - (1) Where .... (c) Any taxpayer carries on business in partnership with any relative or with any company a director or shareholder of which is a relative of the taxpayer or, being a company, carries on business in partnership with any relative of a director or shareholders of the company, whether or not any other person is a member of the partnership, - and the Commissioner is of the opinion that the remuneration, salary or wages, share of profits, or other income payable to or for the benefit of that relative or that company, or the share of losses to be borne by that relative or that company, under the contract of service, employment or engagement or the terms of the partnership exceeds such an amount as is reasonable having regard to the nature and extent of the services rendered, the value of the contributions made by the respective partners by way of services or capital or otherwise, and any other relevant matters, the Commissioner may for the purposes of this Act allocate the total profits, income, or losses of the business or undertaking, before the deduction of any amount payable to that relative or . 5 - company, between the parties to the contract or the partners or any of them in such shares and proportions as he consider reasonable and the amounts so allocated shall be deemed to be income derived or, as the case may be, losses incurred by the person to whom those amounts are so allocated and by no other person. That section applies whether the partnership was entered into before or after the income year, but it does not apply to a bona fide contract of partnership which complies with statutory conditions. The Commissioner has power under s 97 to re- allocate profit, in which case the income is deemed to have been derived in a manner different from that shown in the return filed. If there is a question of the correctness of the return then it may well be open to the claimant to take up the matter with the Commissioner and have the return amended or corrected. At the hearing of this appeal, the suggestion was raised that the appellant and the executors of the deceased should submit an amended income tax return, which, if accepted as correct by the Commissioner, could form the basis of an amended assessment of earnings related compensation. Counsel for the appellant wished to have the opportunity of considering that course of action. The appeal was adjourned for that purpose, but as argument on the appeal was complete I indicated that I would deliver a decision on the appeal if no further submissions were received. Some months have now passed, and I have now embarked on this decision after being requested to do so by counsel for the respondent and being satisfied that the appellant has had an opportunity to take up the question of amendment of the returns. Whether the filing of amended income tax returns would achieve the result desired by the appellant is not the subject of this decision. I also express no opinion on whether that can still be achieved even after this decision is delivered. No doubt the appellant would be concerned by s 41(3) which states that the return will have no effect if it has been influenced likely effects of the incapacity on the income of the person. Decision. The principle of finality of assessment with reference to income returned for income tax purposes was considered by Mahon J in Dragicevich v ACC (1980) 2 NZAR 549. That case also involved a different factual situation, where a solicitor set off farming losses against his professional income to produce a nil result. As to the intention of the Act Mahon J observed at p 553: "The question therefore arises whether in both types of case there may have been a legislative oversight. I do not think that such a conclusion is inevitable. When a person in the position of the appellant claims a business loss deduction under s 104 of the Income Tax Acrt 1976, and when an exporter claims the export incentive deduction under s 154, the purpose oin each case is to reduce or extinguish assessable income. The Commissioner will not make the deduction unless it is claimed by the taxpayer. When the Legislature enacted the Accident Compensation Act, it adopted the administrative and logical expedient of equating earnings with assessable income, and it is not readily to be inferred that business loss deductions and export incentive deductions were overlooked." - 6- The 1992 Act, which is expressed in a different form and provides for more delegated legislation in the form of regulations, placed the same reliance on returns of income in assessing earnings for the purpose of earnings related compensation. Section 41 refers repeatedly to "income year" and "income tax return" and section 167(d) authorises regulations: "(d) Defining, so as to ensure that the meanings are consistent for the purposes of income tax, premiums, and compensation, the terms "earnings", "earnings as an employee", and "earnings other than as an employee", and the time of their payment or derivation for premium purposes and for the purposes of determining the weekly earnings of any person and prescribing the maximum amounts and deemed minimum amounts of earnings for premium purposes:" The expressions "earnings" "income" and "profit" or "share of profit" have different meanings. "Earnings" is an expression defined in s 2 of the Accident Rehabilitation and Compensation Insurance Act 1992 as having the meaning assigned to it in regulations made under the Act. "Assessable income" is defined in the Income Tax Act 1976 and means "income of any kind which is not exempted from income tax otherwise than by way of special exemption expressly authorised as such by this Act". The partnership return is a joint return of the income of the firm. The income of a single partner is not to be found in the joint return of the firm, but in the "shares of the several partners therein" - s 10(1)(b) Income Tax Act. Section 41 is directed to "earnings" as shown in an income tax return, which would be ascertained initially by reference to the sources of income shown in an individual return. In this case, any such earnings must be within the definition contained in reg 2 of the Earnings Definitions Regulations, which is: "Earnings other than as an employee', in relation to any person in any income year, means the amount of assessable income (if any) derived by the person in the income year for the purposes of the Income Tax Act 1976 which - (a) Is dependent on the personal exertions of the person; and (b) If the person were to suffer any incapacity, the person would cease to derive as a consequence of such incapacity, - after deducting all amounts allowable as deductions to the person for the purposes of the Income Tax Act 1976 which are allowable by virtue of the person deriving the income referred to in this clause; but does not include and earnings as an employee: 'Income year', in relation to any person, means the year or other period ending with the date of the annual balance of the person's accounts for the purpose of furnishing a return of income under the Income Tax Act 1976:" Although this case is different from Dragevitch because here all the income was declared in three separate returns for assessment of income tax, it can still be said that the effect of excluding the part of the deceased's income that was not included in his return is not the result of a legislative oversight. It was excluded by the deceased himself. The natural meaning of s 41 expressed the plain intention of the Act to base earnings assessments on income as it has been returned under the Income Tax Act. So far as the justice and fairness of the case is concerned, there is a converse consideration that if a claimant was permitted both to divide income for - 7- income tax purposes and to aggregate it for assessment of earnings related compensation the results might unfairly favour the claimant. I accept the respondent's submission that the assessment of relevant earnings is determined by reference to those definitions. It follows that earnings other than as an employee cannot be more than that income from personal exertions of the individual taxpayer which is shown in an individual return of income. It cannot include profit from personal exertion that is not shown in such a return. For the above reasons the appeal is dismissed. DATED at WELLINGTON this 6 th day of October 1995 D A Ongley District Court Judge