Hamilton v Accident Compensation Corporation (Leave to Appeal)

IN THE DISTRICT COURT AT WELLINGTON I TE KOTI-A-ROHE KI TE WHANGANUI-A-TARA [2018] NZACC 167 ACR 262/16 UNDER THE ACCIDENT COMPENSATION ACT 2001 IN THE MATTER OF AN APPLICATION FOR LEAVE TO APPEAL TO THE HIGH COURT PURSUANT TO SECTION 162 OF THE ACT BETWEEN SANDY HAMILTON Applicant AND ACCIDENT COMPENSATION CORPORATION Respondent Hearing: 11 May 2017 Appearances: J Farmer, QC and B Cunningham for the applicant D Tuigeregere for the respondent Judgment; 25 October 2018 JUDGMENT OF JUDGE A P CHRISTIANSEN [Application for Leave to Appeal] [1] Leave is sought to appeal the judgment of Judge J H Walker delivered on 8 February 2018. [2] Before Judge Walker an issue arose by the decision of the respondent ("the Corporation") suspending entitlements of weekly compensation that had been paid from May 1999, the Corporation's Accounting Advisory Service having recommended that the applicant's earning details lodged with Inland Revenue should not be accepted as those were unreasonably influenced with a view to maximising weekly compensation. [3] The applicant's leave application challenges the judge's decision endoring the Corporation's decision to suspend weekly entitlements and to seek to recover "overpayments". Background [4] The applicant gave birth to a son on 6 May 1999. In 2001 the applicant lodged a claim for cover with the Corporation for medical misadventure relating to the 1999 delivery and cover was granted. The applicant then applied for weekly compensation from the date of her son's birth. [5] In 2001 the applicant and her husband formed a company, Olette Limited ("Olette") which runs a hairdressing salon. The applicant continues to be a shareholder-employer since then. Her husband is a shareholder and a director of Olette. The main shareholder is the Hamilton Family Trust ("the Trust"), of which the applicant, her husband and their children are beneficiaries. The applicant, her husband and Trustee Management Limited are the trustees of the trust. [6] The business has been a successful one and reportedly continues to be so. Only a limited PAYE income was paid by the company to the applicant, with profits of the company's business having been distributed to the trust. [7] Not until 2015 did the Corporation reject the applicant's tax returns and in particular because of the level of income allocated to the applicant. In 2015 the Corporation calculated the applicant's shareholder employee earnings pursuant to s 15(3) of the Accident Compensation Act 2001 ("the Act") based on 75 percent of the net profits of Olette. The Corporation's issues concerned the years from 2004 to 2013 in respect of the weekly compensation paid having been abated by her PAYE earnings, when the Corporation says the company's records showed significant profits despite which the applicant received modest PAYE earnings. [8] The Corporation recalculated those earnings (applying s 15(3) of the Act) on the basis that the applicant's role with Olette, and her duties, were equivalent to a general manager's role with the company. In the outcome of their reassessment the Corporation calculated an overpayment in a total sum of $655,286.03. The Corporation subsequently determined that it would only recover the amount of $288,444.16. [9] The Corporation's position, supported by a chartered accountant Ms Greenwood, was that the applicant and her husband had received the benefit of the net profit of Olette despite that net profit not having been returned as earnings for the applicant and therefore she received the benefit of the net profit without the monies affecting the quantum of her weekly compensation. District Court Appeal [10] Judge Walker's judgment comprised 355 paragraphs. Her Honour conducted an extensive review of the evidence and the submissions of counsel. [11] There were two broad issues before Her Honour. The first concerned whether the Corporation was entitled under s 15(3) to recalculate the applicant's earnings as a shareholder-employee for the tax years 2004 to 2014, and if it was, then whether the Corporation's recalculations under s 15(3) were reasonable. [12] Her Honour preferred the accountancy evidence provided by Ms Greenwood on behalf of the Corporation. The effect of that evidence is that the net profits of Olette were paid to the trust which then, through various mechanisms, redistributed them back to the applicant and her husband through drawings, dividends and loan repayment. The applicant had therefore derived the benefit of the net proceeds although no shareholder - employee salary allocation was made to her that would have been subject to abatement under ACC legislation; the less she was paid by Olette, the greater the level of compensation she would receive from the Corporation. 13] Issues arose concerning whether the Corporation had correctly applied s 15(3) when recalculating the applicant's earnings, Her Honour noting that in the context of the wider company and trust structure a change occurred in 2004 when the applicant began receiving a Corporation weekly entitlement; Her Honour noting the changes in the income payment structure having then occurred in a manner considered to be consistent with the intention to divert income by way of the shareholder-employee payment to benefit the trust. [14] It is the position for the applicant that the Corporation, by taking that approach, it was in effect, lifting the corporate veil which the applicant argued was contrary to company law principles. When addressing that issue Her Honour commented that irrespective of such principles the Corporation was required to apply those particular provisions in the Act including cl 31 of Schedule 1 which expressly permits the Corporation to reject a tax return; and that s 15(3) expressly empowered the Corporation to recalculate a claimant's earnings as a shareholder-employee, even where earnings had already been declared, by tax return, to the IRD. [15] It was Her Honour's expressed view that those said company law principles had "no relevance to these proceedings", it being noted this determination was consistent with a previous decision of the District Court.! [16] Regarding the submission on behalf of the applicant that s 15 was only available to the Corporation to exercise where it was calculating a claimant's payment of weekly compensation under cl 39 of Schedule 1 but was not available where the Corporation was abating a claimant's weekly compensation under cls 49- 51 of Schedule 1, Her Honour did not accept this interpretation noting no such restriction was contained within s 15. [17] Her Honour, adopted the dicta in Irwin v Accident Compensation Corporation and determined that the Corporation was not required to reject a tax return under cl 31(b) in order to resort to s 15(3) but could go directly to s 15(3) in the first instance. Her Honour found that on the facts and evidence in the case the Corporation was entitled to reject the applicant's tax returns on the basis that they were unreasonably influenced by the fact of her entitlement and payment of weekly compensation. Of particular influence was Her Honour's assessment of the changes that occurred in 2003 when the applicant commenced receiving the payment of weekly compensation, following which only modest earnings were allocated to her and because the reality was that she and her husband continued to receive the benefit of the net profits of Olette through those transactions and mechanisms earlier referred to. Accident Compensation Corporation v Drage [2010] NZACC 9. 2 [2014] NZACC 58, MacLean DCJ. Application for Leave to Appeal [18] The application for leave to appeal identifies rulings/findings contained in eight paragraphs of Her Honour's decision. It is asserted those constitute errors of law and/or are not supportable by probative evidence or factual assessment. In essence, they concern the Court's ruling that the earnings of the applicant as a shareholder/employee of Olette were not restricted to those returned by her in her tax return as an employee. [19] It is submitted Her Honour erred: [i] In finding that company law was not relevant to the interpretation of s 15(3); [ii] In concluding that the Corporation was entitled to determine what was reasonable remuneration that the applicant had earned from Olette in the context of "the wider company and trust structure" without adhering to that structure and the way in which it in fact operated. [ifi] In concluding the applicant had structured her financial affairs for the purpose of diverting income of Olette to the family Trust in order to minimise the percentage abatement of her weekly ACC compensation. [iv] In finding that the weekly payment structure and hourly rate of $41.88 that was applied from 2004 onwards constituted a change of payment structure that had been entered into with the intention of diverting income by way of shareholder-employee to benefit the trust. [v] That the Corporation was entitled to resort to s 15(3) without first finding under cl 31 of Schedule 1 of the Act that the returned income had been unreasonably influenced by the fact of the applicant's incapacity or the effects or likely effects of the incapacity on the claimant's income or business activities. [vi] In ruling that the evidence provided at the Review hearing justified a finding that the applicant's earnings from 2004 to 2014 did not reflect her reasonable remuneration (or true services) to Olette and that the 75 percent of the company's profits represented reasonable remuneration for the applicant's services to the company. [vii] In stating that the applicant has received through drawings, dividends advanced and loan repayments from the trust, direct access to the use of the profits of Olette, while circumventing the abatement provisions. [vili] In finding that the evidence established that the profits from Olette were transferred in the most part directly to the trust and redistributed to the applicant and her husband. [ix] In finding that 75 percent of Olette's profits were attributable to the services provided by the applicant. [x] In concluding that where monies are derived from a business activity of a company in which the applicant was involved those monies were required to be returned to IRD as earnings to be abated under the ACC legislation. Intended Grounds of Appeal [20] These include: [a] The company law cannot be ignored when applying s 15(3); [b] The applicant and Olette are distinct legal personalities; [c] The applicant's earnings represent her true and reasonable income as a shareholder-employer whereas 75 percent of the company's profits do not; [d] The learned Judge appears to have indicated that the s 14 definition of earnings for a self employed person ought to have some factor or influence in the interpretation or understanding of the earnings earned as a shareholder-employee; [e] That the Corporation is inflating income gained by the company with income earned by the applicant; and therefore "personal exertions" have no relevance to the derivation of income by a shareholder-employee. [f] The applicant's tax returns were not unreasonably influenced by incapacity and there is no evidence that the applicant's tax returns were in some way "loaded" so as to trigger their rejection under cl 31; [g] Not all monies derived from Olette were subject to abatement as the abatement provisions applied only to gross weekly taxable earnings and certain extra earnings; [h] Drawings are not taxable earnings and dividends are not earnings for the purpose of s 15; [i] The figure of 75 percent of company profits held to be the applicant's earnings was not justified based on her overall input to the company for it could not have been said that the company profits would not have been made but for the inputs of the applicant and her husband to the company which employed 26 people, including two managers, and whose inputs were instrumental in generating profits for the company; j] Monies derived from the business activity were not required to be returned as the applicant's earnings and under cl 31 of Schedule 1 of the 2001 Act if the Corporation is determining earnings in relation to a shareholder-employee, and it must take an income tax return into account if the claimant has given the return to the IRD and the Corporation considers that the return and any related accounts have not been unreasonably influenced by the fact that the claimant's incapacity or the effects and likely effects of the incapacity on the claimant's income or business activities. [21] The applicant's position is summarised by the following: She was paid wages for the hours she worked. The trust income was obtained from company dividends (and interest on investments) and was not diverted from the applicant's income and distributions of income to a trust beneficiary are not earnings. Dividends are not earnings for the purpose of determining earnings as a shareholder-employee. Clause 50 of Schedule 1 which permits the Corporation to estimate an amount of reasonable remuneration may only be used when actual earnings cannot readily be ascertained and therefore the Corporation was not entitled to make an estimate when it could readily have ascertained her actual earnings due to her regularly providing details of those for abatement purposes. Considerations [22] Leave to appeal to the High Court is only available regarding the questions of law that are capable of bona fide and serious argument. The Court should avoid allowing issues of fact to be dressed up as questions of law and while a Judge's treatment of facts can amount to an error of law there will be no such error unless there is no evidence to support the decision or the evidence is inconsistent with and contradictory of the decision.3 Application Grounds: Assessment [23] This judgment has already detailed the applicant's issues with Her Honour's judgment. It seems clear that the primary focus of those concerns the construction and application of s 15(3). Of the ten grounds referred to it seems all but one 3 Edwards v Bairstow [1995] 3 ALLER 48, 57. involved, as the Corporation's counsel submits, questions of fact turning on the Court's analysis of the facts and evidence and do not constitute a question of law, that relates to the relevance of company law to the accident compensation provision and that relates to the applicant's argument that Olette is a separate legal entity and distinct from the applicant and therefore it is asserted the Corporation should have accepted the tax return lodged by Olette for the applicant because the Corporation cannot lift the corporative veil. Ground I - the Court erred in not applying company law when applying s 15(3) [24] As Her Honour noted legislation outside of the ACC statute does not prevail over the clear and express wording of the ACC provisions which expressly allows the Corporation to reject a tax return lodged with IRD where it has been unreasonably influenced by a claimant's entitlement to weekly compensation. Section 15(1)(b) enables the Corporation to disregard earnings allocated by a company if it decides the amount is not a reasonable representation of the person's earnings. Ground II - the Court erred in concluding that ACC was entitled to determine reasonable remuneration under s 15(3) in the context of 'wider company and trust structure' [25] Her Honour noted in 2004 a change in the payment structure was consistent with the intention to divert income by way of the shareholder-employment payment to benefitting the Trust. There is little detail provided by the reference to a wider company and trust structure that appears to support this challenge. Ground III - the Court erred in concluding that the applicant had structured her financial affairs for the purpose of minimising the abatement of her weekly compensation [26] Again it appears there is little by way of submissions or reference offered in support. Her Honour did not find that the applicant had structured her financial affairs to minimise the abatement of her weekly compensation; but rather found the applicant had changed her income payments with Olette following the commencement of her weekly compensation. Those are factual findings. Submissions do not indicate how Her Honour erred or what available evidence there was indicating the contrary. Ground IV - the Court erred in finding that the hourly rate paid to the applicant of $41.88 by Olette constituted a change of payment structure designed to avoid the abatement provisions [27] Again issues raised on behalf of the applicant are brief and provide no detail regarding the applicant's role and duties for Olette or the control she had over its affairs and decisions. Also it overlooks the fact that before receiving payments of weekly compensation in 2003 the applicant had not received earnings from Olette at an hourly rate and it was not until she received weekly compensation that an hourly rate was used. [28] Also, the learned Judge indicated she preferred the evidence from Ms Greenwood to support the Corporation's recalculations of earnings as a shareholder-employee were reasonable. Ground V - the Court erred in ruling that the Corporation was entitled to resort to s 15(3) without first rejecting a tax return under cl 31 [29] Again, and as counsel for the Corporation comments, there does not appear to be any discussion on the Court's determination that the Corporation was entitled to exercise its power under s 15(3) without first demonstrating that cl 31 was satisfied. As counsel notes this submission focuses on the Court's subsequent finding that the Corporation had correctly determined that the applicant's tax returns had been unreasonably influenced as per cl 31. [30] Her Honour's decision that the Corporation was entitled to proceed directly to s 15(3) does involve a question of law but nothing arises from that because Her Honour found nevertheless that cl 31 was satisfied - and that involved a question of fact [31] Also there was no discussion of the reasons Her Honour gave for the finding that the tax returns were unreasonably influenced or why such a finding was wrong. The Court agrees that all that remains is an issue of fact. Ground VI and IX - the Court erred in ruling that 75 percent of the company's net profits represent a reasonable remuneration for the applicant's services under s 15(3) [32] It appears clear that involves a question of fact. The Court agrees there was sufficient evidence available to support the finding made by Her Honour. Ground VII - the Court erred in stating that monies received from drawings and dividends, loan repayments etc could be treated as earnings as a shareholder- employee [33] It is contended for the applicant that the Court erred because drawings and dividends are not earnings. [34] Usually payments that are properly drawings or dividends are not generally treated as earnings. In this case the Court found that 75 percent of the net profits (i.e. before they were treated as dividends or drawings) should more properly have been treated as earnings for the applicant under s 15(3). "35] The Court agrees with the submission that the authorities and reasoning relied upon on behalf of the applicant have no application or relevance to Her Honour's judgment. Ground VIII - the Court erred in finding that the evidence established that the net profits distributed by Olette to the family trust were redistributed to the applicant and her husband [36] This does not concern a matter of law but is about an issue of fact. It is clear that the evidence supported Her Honour's conclusions in this regard. Ground X- the Court erred in concluding that where monies are derived from business activity of a company in which the applicant is involved those monies are required to be returned to IRD as earnings to be abated under the ACC legislation [37] It is difficult to understand the nature of the submissions made in support of this claim. It appears to argue that cl 20 does not apply because the applicant's earnings were readily ascertainable; and perhaps that the Corporation should have relied on the ACC 38 Earnings Certificate supplied by the applicant in order to determine her earnings as a shareholder. [38] It does not appear the success of Olette in the years in question was in large measure due to the services of the applicant in her managerial capacity. The facts appear clear that regardless of how the net profits were originally treated by her, she directly received the benefit of those monies. [39] The Court agrees this ground does raise a question of law that appears readily available. The Corporation is required by cl 51(2) to abate a claimant's weekly compensation by 'earnings' received after his or her incapacity commences, and therefore must determine a claimant's 'earnings' in order to abate the claimant's weekly compensation. [40] Clause 31 applies where 'the Corporation was determining earnings under this part' in relation to a shareholder employee, as was the applicant. Earnings are defined under s 6 of the Act as including 'earnings as a shareholder-employee'. Section 15 contains the definition of 'earnings as a shareholder-employee'. [41] As counsel for the Corporation submits, the pathway from cl 1 to cl 31 and s 15 is straightforward and as Her Honour stated: It is self-evident in respect to clauses 49 t 51 of the Schedule of the Act that provisions relating to abatement relate to earnings deprived (sic) during incapacity ... Reply Submissions [42] By the submissions filed in reply, counsel warns that if a statutory provision is wrongly applied to the facts that that will constitute an error of law.4 Counsel submits the factual findings of Her Honour fall within the Edwards v Bairstows category that constitute an error of law i.e. if there is no evidence to support a finding of fact, or if the Court's view of the facts is inconsistent with the evidence, that will constitute an error of law. (43] Counsel submits there was no mandate to treat company profits as employee wages. The facts included she was a minimal shareholder and did not receive remuneration as a director. Also that it was clear that the drawings received from [1963] NZLR 339 (CA) per Gresson P. Olette, were payable to Olette and were not income received by the applicant and therefore not taxable. [44] In this Court's view, that assessment does not affect the ability of the Corporation to assess the value of the applicant's contribution to company services. Also Her Honour had all of the information available to provide an endorsement of the Corporation's process. It is not accepted that the process used involves an issue of law. The issue as identified is only about challenging the factors used in this assessment. [45] It is not a process that engages a consideration much less a commitment to be bound by a person's income tax return, if it appears to have been 'influenced' [46] Her Honour was clear in her view that the corporate structure shielded the applicant from full accountability. Nothing is provided by the reply submissions to indicate Her Honour did not have all available facts to assist her with that conclusion. Conclusions 47] Almost all of the issues raised by this application concern questions of fact, from which claims of questions of law are submitted to arise. The Court agrees with counsel for the Corporation that where any question of law has been identified by the applicant, there is little if any substance to the points raised. [48] Any issues as to costs should be addressed by an exchange of submissions to be filed in due course. Judgment [49] Leave to appeal is refused. Judge A P Christiansen District Court Judge [1956] AC14 29 per Viscount Simonds.