Fox v Workcover/Allianz Australia

3. At the date of injury the worker and her husband operated a business consisting of

(1) A consulting business Rodney Fox Consulting Services

(2) A manufacturing business of remedial sports items.

(3) A retailing business - "On And In The Water Surf" shop.

(4) At least in its preparatory phase a museum at Glenelg.

4. The enterprises were all operated by ARE Pty Ltd as trustee for the Fox Unit Trust and RW and KM Fox as trustee for the Glenelg Fire Station Trust.

5. The worker and her husband were directors and controlling shareholders of ARE.

6. The worker and her husband were trustees of the two Fox Trusts.

7. In the financial year 1 July 1992 to 30 June 1993 the worker's return to the Australian Taxation Office showed a gross income of $21250.

8. That gross income was declared to be sourced from

9. In the next financial year 1 July 1993 to 30 June 1994 the worker declared wages of $4500 received from ARE.

10. WorkCover Corporation conducted audits for levy purposes in 1997. The results of which are set out in a letter of 22 July 1997 at 66 of Trial Book. In 1993/1994 the levy was calculated on:-

There is no evidence in that letter of what was the quantum if any of superannuation and/or wages paid to the worker.

11. The wages used for the WorkCover levy are said to be "per Group Certificates".

12. Hence I assume that the worker's wage on which the levy was struck was $12500, as per her Group Certificate.

4 The worker and Mr Brenton Scott, Chartered Accountant, gave evidence. Also in evidence was the 1993 taxation return, the 1994 taxation return, and a copy of the monthly wages sheet of ARE for 1992/1993. In addition there were written opinions from Mr Scott and Mr Phillip Plummer a Chartered Accountant of HLB Judd Stevens.

(i) The enterprises were conducted as a family business. That is to say the worker and her husband owned and controlled the entire business. The family business also employed inter alia, three other family members.

(ii) The commercial books of account were prepared by Bird Cameron Chartered Accountant.

(iii) The worker gave evidence in relation to the financial affairs of ARE as at the date of injury. Her recollection - if not her understanding of facts as they existed in July 1993 is necessarily imperfect - certainly because of the passage of time. Hence I accept her evidence on financial matters where it is confirmed by Mr Scott.

(iv) The worker's statement of the work that she performed is set out at 36 of the Trial Book and also at 72 and following. In essence she deposed that almost the whole of her time was spent working in the enterprises. I accept her as a witness of truth when she tells the Tribunal what she did in the business. I accept that she would have spent at least an average of 50 hours per week in the work. The respondent does not challenge the worker's credibility on this point.

(v) I accept the evidence of Mr Scott that the wages paid to the worker in any given financial year were dependent upon

(a) The profit and losses of the various business enterprises.

(c) The extent of prior losses that could be brought forward.

It is not possible to determine which was the dominant motive at any time.

(vi) I accept therefore that the wages paid to the worker did not necessarily have a direct relation to the amount of work she did in a financial year (tr 48).

(vii) I find that the worker was effectively absent from work for about 18 months after the injury (tr 10).

The notional weekly earnings hence the average weekly earnings should be set at the figure declared as wages in the financial year ending 30 June 1993 which is a date only seven days before the date of injury. In the 1992/1993 year no earned income was declared. Income came from distributions from two Trusts hence the average weekly earnings figure should be set at Nil.

7 The rationale of this approach was that the wages declared to the Australian Taxation Office was a declaration to the whole world that that figure was not only correct but was in fact the quantum of wages.

8 The respondent's submission is that if workers who are involved as shareholders and directors of business enterprises seek to arrange their affairs so as to - in a legitimate way - minimise income tax - among other things - through devices such as Family Trusts, loan accounts and an approportionment of profit and losses at the end of the financial year, to determine if a wage is payable and if so, the quantification thereof, that represents a desirable result for them, because it provides flexibility to them to order their financial affairs to their advantage.

9 However some less desirable results can follow. On the one hand against the ability to have financial flexibility to adjust the rewards of the fruits of their labour to their own advantage - an ability denied to the average PAYE worker whose remuneration is governed by the PAYE system - there is also a down side. That is you should be taken at your word for the purposes of s 4 of the Workers Rehabilitation and Compensation Act (among other things) that the "wages" that you declare, are the wages that are the true measure of your earnings.

10 The alternative position taken by the respondent is the 1993/1994 wages return to the Taxation Office should be used. This shows a gross wage of $12500. The monthly pay sheets show that amount. That amount finds its way into the Tax Return. It is consistent with the fact that the "wage" paid to the worker had no direct relationship to the work she actually did. In fact in that year, her disabilities prevented her from doing anything useful.

11 The worker provided a list of personal drawings 80 - 86 of the Trial Book. Using this as the quantum of earnings, was an approach adopted by Mr Scott.

12 The respondent said it is useless. Firstly, for the most part the drawings are for the joint benefit of the applicant and her husband for their joint needs.

13 Secondly there is nothing that allows one to dissect what drawings were paid qua employee and what drawings were paid qua proprietor (director/shareholder).

14 The worker's first submission is largely based on Mr Scott's analysis of payments.

(i) In the year ending 30 June 1993 the funds drawn by the worker and her husband for living expenses were approximately $50500.

(ii) In addition expenses such as telephone, motor vehicle expenses etc in the sum of $15000 were paid to the worker and her husband.

(iii) Superannuation was also paid to the worker and her husband in the sum of $10000.

Fifty per cent of that is very close to $38000 per annum - That is the true average weekly earnings.

16 An alternative approach, is to estimate what the cost to the business would have been if it had employed a person other than the applicant. Mr Scott estimates this to be in the order of $52000 per annum - calculated on the basis of 50 hours per week at $20.00 per hour.

17 Both submissions have as their foundation, the proposition that the tax returns represent the wages position from the point of view of the Income Tax Assessment Act and that Act alone. It is but one aspect (and a minor one at that) of the figure to be arrived at pursuant to s 4 of the 1996 Act.

"S 4.(1) ... the average weekly earnings of a disabled worker are the average amount that the worker could reasonably be expected to have earned for a week's work if the worker had not been disabled.

(2) For the purpose of determining the average weekly earnings of a worker -

(i) the actual weekly earnings of the worker over a period of up to 12 months before the relevant date may be taken into account; and

(ii) if by reasons of the shortness of time during which the worker has been in employment, the terms of the worker's employment or for any other reason, it is not possible to arrive at a fair average, the worker's average weekly earnings may be determined by reference to the average weekly amount being earned by other persons in the same employment who perform similar work at the same grade as the worker or, if there is no person so employed, by other persons in the same class of employment who perform similar work at the same grade as the worker."

19 S 4(1) has been described as the "dominant principle". Francese v Corporation for the City of Adelaide (1989) 51 SASR 522 at 526 but to quote Cawthorne J in Rajcevic v WorkCover/NZI (Valley Crest Fruits) [2000] SAWCT 5 "However simple that concept may seem in some instances it is extremely difficult to fix upon what rate of notional weekly earnings should be set and given the material before me this is such a case".

20 S 4(2)(b) sets out two subsidiary propositions to be used to the extent that they are helpful.

21 (i) It is clear on the authorities that the word "earnings" is wider than wages - hence the line of authorities on non-wage emoluments eg car, telephone, housing etc.

(ii) The principle in s 4(1) is not based upon the "value" of the work that would be performed.

(iii) The principle in s 4(1) is different to the enquiry at common law when assessing the loss of earning capacity.

(iv) The principle in s 4(1) is different from the content of the common law claim for quantum meruit.

22 It has not been suggested from the bar table that s 4(2)(b)(i) and s 4(2)(b)(ii) apply only the case where a worker was immediately before the relevant date employed by one employer ie that the correct punctuation should have a full stop rather than a semi-colon after the word "account" as if s 4(2)(b) was to be read as being attached to the opening words of s 4(2). That argument awaits its solution on another day.

23 Because the "average amount that the worker could reasonably be expected to have earned" is not immediately obvious, S 4(2)(b)(i) is central to the respondent's first submission: There were no wages declared - only Trust distributions. But "earnings" has a wider meaning than "wage" and s 4(2)(b)(i) is not determinative in this case. I turn to s 4(2)(b)(ii) for assistance.

(i) The shortness of time during which the worker has been in employment.

25 Where it is not possible to arrive at a fair average, the worker's average weekly earnings may be determined by:-

A Reference to the average weekly amount being earned by other persons in the same employment who perform similar work at the same grade as the worker.

B Or if there is no such person so employed by other persons in the same class of employment who perform similar work at the same grade as the worker.

26 It can be said that it is not possible to arrive at a fair average amount the worker could reasonably be expected to have earned for a week's work. The reason for this conclusion ie the "any other reason" is that the work performed and the earnings generated were idiosyncratic and peculiar to the Fox Enterprises. The fortunes of the family business fluctuated from year to year and the return to proprietors was partly intangible ie good will, building a clientele for the future and accretions of a capital nature.

27 Guideline A does not apply. There is no evidence of "the average weekly amount being earned by other persons in the same employment who perform similar work at the same grade as the worker". One reason is that the worker's employment was peculiar to her situation in life.

1. Firstly: there is no "class of employment" demonstrated. Much less is there any evidence of what the persons who are actually employed in that class earn.

2. The same "grade" imports a concept taken from Industrial law and awards. Ie a junior, senior - a senior of some years experience predicated on the defined award position. "Grade of employment" is usually predicated on competency and sometimes linked to years of service. There is no evidence of any award that may exist - and I doubt whether any award exists that could assist - because the worker's role was that of Manager /Proprietor.

30 Hence I have come to the conclusion that s 4(2)(b)(ii) is of no assistance.

31 The case must be decided on the words of s 4(1) "The amount that the worker could reasonably be expected to have earned for a week's work."

33 Both the first and alternative submissions have as their foundation the invitation to treat the material in the income tax returns at definitive.

34 The weight to be given to income tax returns varies in accordance with the use to which it is put.

1. Loss of earning capacity at common law. Giorginis v Kastrati and Another (1988) 49 SASR 371 was a loss of earning capacity case and Von Doussa J dealt with the results of a plaintiff claiming damages where the plaintiff produced income tax returns that were incomplete and obviously not reliable.

His Honour at 374 and following commented that the burden of proof rests on the plaintiff and the plaintiff must prove the extent of his pre-accident earning capacity. The accountant was not called. His Honour pointed out that if there is a deficiency of evidence caused by the conduct of the plaintiff's case then the plaintiff could not be heard to complain if there was a low award - that was a case on sufficiency of evidence.

That case was fell for consideration in a later Full Court in Butler v Stamoulis BC 9200359 Legoe J again dealt with the necessity of a plaintiff producing such evidence as was necessary to make a finding of loss of earning capacity. This occurred in Russell v J Hargreaves and Sons Pty Ltd (1956) 30 ALJ 533.

2. In cases dealing with the category of worker/independent contractor - the use to be made of tax returns has been examined. A useful summary appears in WorkCover Corporation (Fairmont Homes Pty Ltd) v Greg (1998) SAWCAT 10. The matter was dealt with at 9 and there is a review of the authorities at 10. In the judgment it mentions WorkCover Corporation (Renfrey Excavations Pty Ltd) v McPartland (1997) SAWCATR at 12 that the courts have stopped short of saying in the case of inconsistency between the tax returns and the assertion of an employer/employee relationship, other than in cases of fraud - that the tax returns will be taken to reflect the true relationship.

3. Tax returns as evidence of an obligation under a statute. See Vabu Pty Ltd v The Commissioner of Taxation (NSWCA 40206/95) per Meagher JA:-

"What is significant is that the couriers tell the Commissioner that they are independent contractors not employees, but the Commissioner presumably after making what investigations he deems proper, acquiesces in their description of themselves and taxes them accordingly."

The issue in Vabu was the liability of an "employer" to pay the superannuation guarantee levy.

35 In my view, the application of a legal principle said to be determinative of a set of facts, is of little utility when applied to a completely different set of facts posing a quite different legal problem. Thus the weight given to taxation returns in the Vabu Case was discounted in Jackson and Another v Monadelphaus Engineering Associates Pty Ltd Australia Industrial Relations Court 281/97 per Moore J when examining an industrial situation of wrongful dismissal.

36 I do not think that the information disclosed in tax returns in a case involving s 4 can be put any higher than that the returns are relevant. However they are to be given such weight in the context of the whole of the evidence that they deserve. They are not decisive of the answer to a s 4 problem.

37 As to the 1993/1994 return, the evidence was that the source of the funds paid as wages was work performed in the USA in the previous financial year. The payment for that work found its way into the Fox Trusts. I find that the "income" was in fact a Trust distribution. I find that the wages sheets enclosed in the Trial Book for each month of 1993/1994 are an accountancy construct. That is not to say that such constructs are unlawful much less does it say that they are fraudulent.

38 As to the worker's submissions I do not accept that Mr Scott was qualified to express an opinion as to the cost of employing a comparable worker.

(ii) The ARE cash flow could not possibly have supported the salary of $52000 pa plus employment on costs.

(iii) Mr Scott is not qualified within the rule in Clark v Ryan [1960] HCA 42; (1960) 103 CLR 486 and its derivatives to express such an expert opinion. His experience is limited to recruiting for a practice of Chartered Accountants. His knowledge of what the practice of some (unspecified) clients of Bird Cameron did is not the point. The basis of his opinion as required by the rule expounded by Ramsay v Watson [1961] HCA 65; (1961) 108 CLR 642 (albeit on the issue of medical evidence) makes the opinion of Mr Scott inadmissible.

39 As to Mr Scott's estimate of $38000 based on 50 per cent of the drawings plus superannuation payments, plus the costs of a vehicle, telephone expenses etc I accept Miss Kelley's criticism to a certain extent. Her crisicism is:-

1. The $38000 includes an acknowledged superannuation payout. That is precluded by s 4(8)(ab).

For the purposes of determining the average weekly earnings of a worker - s 4(8)(ab) any contribution paid or payable by an employer to a superannuation scheme for the benefit of the worker will be disregarded.

Notwithstanding the complaint of Mr Saies that the WorkCover letter to ARE on 27 July 1997 63, in 1993/94 included superannuation payments of $33713 as part of the levy basis - and it would be grossly unfair that having used superannuation to extract the levy pursuant to Div 4 ie s 66, the Corporation is morally obliged to include the superannuation payment in the calculation of average weekly earnings in s 4 - that is not the law.

Apparently s 65 gives the Corporation carte blanche to determine whatever remuneration it chooses as the levy basis. The definition of remuneration includes:-

"Payments to or for the benefit of a worker which by the determination of the Corporation constitute remuneration but does not include payments determined by the Corporation not to constitute remuneration".

In the exercise of that discretion superannuation is included for the levy. That decision is not, I apprehend justiciable before the Tribunal. It is another question altogether that is before me. It is not relevant to my deliberation. The fact is that s 4(8)(ab) is mandatory.

2. Miss Kelly's second submission included a criticism of Mr Scott's analysis in that the drawings do not distinguish between those that come to the worker qua employee and those that come to her qua proprietor. That criticism does not destroy - but rather limits the use I can make of Mr Scott's analysis. Quite obviously there must be earnings before there are drawings (unless the beneficiary is living on third party loans - and there is no evidence of that).

3. Likewise I take note of Miss Kelly's criticism of Mr Scott including $15000 for the car/phone payments. Miss Kelly submits that because these are business expenses they are deductable at the behest of the payor/employer. That criticism partly misses the point. Such payments (if made) would doubtless be deductable by the employer in GA Michell v Bockman (1993) 1 WCATR 148. The deductibility is not the point. The point is that being deductable they reduce the tax liability of the paying entity - the entity is partly owned and controlled by the worker. Hence the worker would obtain a double benefit. That benefit has not been quantified.

40 There is some force in Ms Kelly's arguments: however I do not propose to make the taxation position as being determinative of the s 4 figure.

41 In determining the answer posed by this case I have little assistance from the evidence. That is no criticism of the parties. It is because there is little evidence that is available. Although the Trust and Company Taxation returns were not in evidence - I doubt they would have been of much use. The difficulties are greater than faced by Judge Cawthorne in Rajecevic v WorkCover (Valley Crest Fruits) [2000] SAWCT 5 where his Honour said:-

"It is necessary to strike a rate based on the evidence tendered on the hearing which is not particularly satisfactory."

42 Doing the best I can I intend to approach this problem by

(i) starting with the drawings of $50500. That should be divided by 2 leaving $25250.

(ii) I then propose to deduct 25 per cent of the drawings which I assign to those drawings generated by the worker's status as a proprietor. Therefore $6312.50 should be deducted from $25250 leaving $18937.50.

(iii) The value of the non-financial emoluments car, telephone etc is approximately $7500. I propose to allow 50 per cent of that as earnings. That is $3750.

44 That translates into average weekly earnings of $436.00.

45 This is a very difficult conclusion at which to arrive. However it is enjoined by the Act. The fact is, that the difficulty of the task should not inhibit the performance thereof.

46 I appreciate that different minds would come to different results looking at this case - perhaps widely differing results. However this is one of those rare cases where it is clear that justice would abhor setting the average weekly earnings figures at $Nil per week.

47 What happens after that should be informed by such evidence as is available, guided by such assistance as can be gleaned from the authorities, - but in the final analysis the result must be infused by the terms of s 85 which enjoins that "the Tribunal must act according equity, good conscience and the substantial merits of the case without regard to technicalities and legal forms". I therefore set the average weekly earnings at $436.00 per week.

48 I will hear counsel on the future progress of the matter.

Parties are advised that if a party wishes to appeal against any part of this decision which is appealable pursuant to s 86(1) of the Act such appeal must be filed with the Registrar in accordance with Form 11 within 14 days of the delivery of this decision and must be served on all parties.