Zaghloul v Commissioner of Taxation

Dr Zaghloul's objection to the assessment 6 In his objection to the Assessment, Dr Zaghloul said (AB 93): The core issue is whether workers compensation payment resulting from incapacity to earn income should be treated as taxable income, which attracts PAYG, rather than capital, which does not. … my former employer, wrongly treated workers compensation payment, which it was ordered to pay, as taxable income and deducted PAYG in circumstances where the payment was for incapacity to earn income. As a result, the assessment raised tax liabilities in the form of PAYG, Compulsory Higher Education Loan repayment and Medicare Levies. Because [my employer] incorrectly reported the nature of the workers compensation payment as income, the taxable income was artificially increased such that it attracted those liabilities. 7 In reasons for not allowing the objection, the Commissioner said (AB 99): An amount paid to compensate for loss generally acquires the character of that for which it is substituted. Compensation payments that substitute for income have been held by the courts to be income under ordinary concepts. The order for weekly payments of compensation retains the characteristics of ordinary income even though it was paid as a lump sum. … In accordance with subsection 6-5(2) ITAA 1997 your lump sum compensation payment is fully assessable in the financial year the payment was received. (footnotes omitted) 8 Section 6-5(2) of the Income Tax Assessment Act 1997 (Cth) (ITAA) provides: If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. 9 As to when income is derived, s 6-5(4) provides: In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct. (emphasis omitted) 10 Therefore, the decision by the Commissioner on Dr Zaghloul's objection treated the lump sum payment as being properly accounted for on a receipts basis. Otherwise, the decision did not deal in any detail with the alternate claim by Dr Zaghloul that if the lump sum payment was income then it had been earned, in part, in previous financial years when part of the weekly payments should have been made by his employer and tax should have been assessed on that basis.

Taxation Ruling concerning when income is derived 11 The Commissioner has issued Taxation Ruling TR 98/1 (consolidated as at 29 March 2017) concerning whether income earned in one year and received in another should be included in the assessable income of a taxpayer for the year in which it was received (Ruling). Amongst other things, the Ruling states: (1) The two commonly used methods of determining when income is derived in a relevant year if income are the receipts method (cash received) and the earnings method (accruals). (2) The method of accounting adopted by a taxpayer when accounting for income must be appropriate. (3) To be appropriate it must give a substantially correct reflex of that income. (4) A taxpayer who accounts for income on a receipts basis should continue to adopt that method until it is no longer appropriate. (5) Income from employment would normally be assessable on a receipts basis. (6) Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period.

The Tribunal's findings concerning the lump sum payment 12 The Tribunal considered the materials concerning the circumstances in which the lump sum payment came to be made to Dr Zaghloul in 2016. It made a number of findings of fact (and mixed fact and law) concerning those circumstances. They included the following: (1) The lump sum payment to Dr Zaghloul was made under the Compensation Act in satisfaction of orders (Orders) made by an arbitrator with the Workers' Compensation Arbitration Service (WCAS) (paras 11, 21, 74, 78). (2) The Orders were made as a result of a claim by Dr Zaghloul that his employer had failed to make weekly payments during a period when he was totally incapacitated from work (paras 75-76). (3) The lump sum amount of $118,924 was paid in the 2016-2017 financial year. (4) The lump sum amount was payment of weekly compensation entitlements under Schedule 1 of the Compensation Act (para 78). (5) The lump sum amount was a 'back-payment' for a period when weekly payments should have been made by Dr Zaghloul's employer and was made as a lump sum only because the weekly payments to which Dr Zaghloul was entitled had not been paid when they should have been (para 92). (6) The WCAS arbitrator found that weekly compensation amounts were payments for total incapacity for a period commencing on 13 April 2011 (para 11). (7) The WCAS arbitrator found that the weekly payments up to the statutory maximum would have exhausted sometime in January 2013 (para 19). (8) The WCAS arbitrator had been unable to conclude whether Dr Zaghloul was 'permanently totally incapacitated' for work (para 12). (9) Dr Zaghloul had made no election to receive a lump sum payment under the Compensation Act (para 73). 13 On the basis of those findings, Deputy President Boyle found that the lump sum payment was received by Dr Zaghloul as income not capital (para 88). The Deputy President also found that submissions raised by Dr Zaghloul about being taxed at a higher rate because all of the payments were assessed in a single taxation year was 'understandable, but not relevant to the matters to be determined … in these proceedings' (para 93). Arguments to the effect that the lump sum had been received under 'structured orders' for the purposes of Division 54 of Part 2-15 of the ITAA were also rejected (paras 95-97).

Questions of law as stated in Dr Zaghloul's notice of appeal 14 Dr Zaghloul's notice of appeal under s 14ZZ of the Taxation Administration Act identifies the following three questions of law: 1. Whether the requirement to elect under s. 31C of the Compensation Act was non-jurisdictional, rather than substantive, such that the election may be waived or excused on a retrospective or nunc pro tunc basis to avoid harshness on the Applicant. 2. In the alternative, whether the Payment should be treated as [an] Employment Termination Payment under s. 82.135 of the Income Tax Assessment Act ('ITTA') 1997 (Cth), which would result in no tax payable on the Payment being below the threshold; 3. In the alternative, if the Payment was correctly characterised as 'ordinary income' under Schedule 1 of the Compensation Act, whether: (a) it should be spread over a number of years (as weekly payments would have been); and (b) medical expenses should be deducted under ss. 4.15(1), 8.1 of the Income Tax Assessment Act ('ITTA') 1997, given that the Payment would not have been made but for the injury which necessitated medical expenses. (original emphasis) 15 As to question 1, s 31C of the Compensation Act provides that a claimant may elect for a lump sum payment 'in respect of a permanent impairment from a compensable personal injury by accident'. If the election is made then the amount of the lump sum is to be determined in accordance with Schedule 2 of the Compensation Act. The Tribunal records Dr Zaghloul as saying that he did not make an election and also that an election would have served no purpose because the amount of his entitlement would have been the statutory maximum in either case (para 55). It appears that, in the Tribunal, Dr Zaghloul claimed that he had received his lump sum in circumstances of total and permanent impairment and for that reason it was a capital payment (just as it would have been if an election had been made) (para 23). In those circumstances, the terms in which question 1 is expressed seem to contend for a proposition that was not advanced before the Tribunal, namely Dr Zaghloul should be treated, as a matter of law, as if he had made an election (or that some relief could have been granted by the Tribunal by which he could have been allowed to make an election after the event). 16 As to question 2, one claim advanced before the Tribunal was that the lump sum payment by Dr Zaghloul's employer should be treated as a settlement of a personal injury claim (paras 95-97). As to termination of employment, Dr Zaghloul's argument before the Tribunal was by analogy to Employment Termination Payments (para 58). Importantly, he did not contend that the payment he received was such a payment. 17 As to question 3, it concerns whether the lump sum payment, if properly treated as income, should have been treated as income that had been earned in earlier years. 18 Both parties filed written submissions and accepted that it was appropriate for the appeal to be determined on the papers.

Contentions in support of the appeal to this Court on questions of law

Alleged election under s 31C 19 Dr Zaghloul's written submissions begin by contending that the Tribunal upheld the tax assessment on the ground that for compensation payments to be treated as a lump sum under the Compensation Act an election had to be made. He then submits that the issue is whether the nature of an election under s 31C was substantive or procedural. He claims that it was procedural and could be waived or relief could be granted allowing it to be exercised retrospectively. 20 The first difficulty for Dr Zaghloul is that the contention misstates the Tribunal's finding. The Tribunal did not find in terms that there needed to be an election for the payment to be treated as a lump sum compensation payment. Rather, it found that the lump sum payment was made as a back payment of a liability to make weekly payments. It is that affirmative finding of mixed fact and law as to the characteristics of the lump sum payment that provided the basis for the Tribunal's conclusion that the lump sum amount was income. As to the election, the Tribunal simply found that there had been no election made by Dr Zaghloul. 21 The contention now advanced accepts (as it must) that the Tribunal found that there had been no election. It appears that the question of law is whether the Tribunal should have made a decision (with retrospective effect) that allowed Dr Zaghloul to elect to receive the lump sum amount as a lump sum payment for permanent incapacity (and that lump sum payments for permanent incapacity are not income). The submission goes so far as to contend that Dr Zaghloul has recently (since the Tribunal made its decision) made such an election. 22 Reliance is placed upon the decision in Dossett v TKJ Nominees Pty Ltd [2003] HCA 69; (2003) 218 CLR 1 at [61] for the proposition that constraints under the Compensation Act are procedural in nature and leave may be granted with retrospective effect for Dr Zaghloul to make the required election. Dossett concerned a very different question. When the Compensation Act was introduced, it included transitional provisions to the effect that it did not affect the awarding of damages in proceedings under previous legislation that was commenced before the date of assent or where leave had been given before the date of assent to commence the proceedings. Mr Dossett had applied for leave to commence proceedings before the date of assent, but his application had not been determined by the date of assent. Gummow, Hayne and Heydon JJ found that the Interpretation Act 1984 (WA) operated to allow Mr Dossett to proceed with his pending application for leave: at [43]-[45]. McHugh J delivered a separate judgment reaching a similar conclusion by different reasoning: at [17]. Kirby J agreed as to the result. In doing so, his Honour reasoned on the basis that the requirement under the previous legislation that proceedings were not to be commenced without the leave of the District Court was a procedural condition: at [61]. However, his Honour also found that an abolition of an entitlement to seek compensation under the provisions of the previous legislation was not procedural only: at [80]. Applying authorities as to the proper approach to construction of statutes where accrued substantive rights may be affected, his Honour agreed with the conclusion reached by the other members of the Court. Therefore, the decision in Dossett provides no foundation for a submission that the statutory requirement to make an election under s 31C has a character that enables it to be ignored or for a party who had not elected to be treated as having done so. 23 Then, it is submitted that leave to commence proceedings can be granted with retrospective effect and therefore the same applies to an election under s 31C. This claim fails because there is no analogy between the election and a requirement for leave before commencing proceedings. 24 An election to take a lump sum payment is not procedural. It is substantive. It results in a different entitlement under the Compensation Act. The election can only be made in particular circumstances and results in the payment to be made being assessed in a different way. The fact that in this case Dr Zaghloul says that he would have been entitled to the statutory maximum in either case is not a basis upon which to ignore the difference in the way the payment is determined. There is also the fact that an election can only be made in particular circumstances which were not the subject of any consideration by the Tribunal because it was not claimed that Dr Zaghloul could be treated as having made an election. 25 Further, on the factual findings by the Tribunal the lump sum payment was claimed by Dr Zaghloul on the basis that there had been a failure to make weekly payments, was upheld by the arbitrator on that basis and was paid by the employer on that basis. Its character cannot be changed by conduct of Dr Zaghloul many years after the event. 26 Even if there had been some claim before the Tribunal that despite what had occurred it should treat the lump sum as if there had been an election by Dr Zaghloul, the Tribunal had no jurisdiction by which it could change the character of the payment retrospectively. 27 For those reasons the contentions about an election should not be accepted.

Submissions concerning disability payment income 28 Dr Zaghloul then submits that the Commissioner's assessment also treated disability payments received in the 2016-2017 financial year as income. This was not a basis for the objection to the assessment and was not raised in the Tribunal (assuming it could have been). It is not a question of law. In any event, in reply submissions Dr Zaghloul states that the Commissioner has amended the assessment to disallow the disability payments as income so any point about the payments falls away.

Submissions concerning Higher Education Loan Repayment 29 There is then a submission that 'the justice of the case would be met if the Higher Education Loan Repayment could be deferred'. An assertion by Dr Zaghloul as to what might be just without any foundation in the law does not raise a question of law. In reply submissions he seeks a refund on the basis that the payment should have been deferred. However there is no articulation of any legal basis for that submission that might found a question of law.

Effect of legal advice on rights of Dr Zaghloul 30 Dr Zaghloul then submits that he should not carry the consequences of the failure of his lawyer to advise as to the election. This submission does not raise a question of law as to the Tribunal's decision. The Tribunal has considered the facts and legal context in which the lump sum payment was made. Dr Zaghloul does not dispute those aspects of the Tribunal's decision. Issues about legal advice that Dr Zaghloul may or may not have received concerning the election do not raise a question of law on the appeal.

Alleged Employment Termination Payment 31 As noted above, question 2 claims that the payment should have been treated as an Employment Termination Payment and no tax should have been assessed on that basis. No submissions were advanced to support that contention or how it is a matter that could now be raised. The payment made to Dr Zaghloul was not of that character. The payment was made to satisfy the determination by the arbitrator. It was not a termination payment.

The assessment of the quantum of the tax payable 32 Finally, there is a submission to the effect that Dr Zaghloul's tax liability should have been assessed on the basis that it was income for the year in which the weekly payments should have been made by the employer. It may be accepted that this is a matter that was raised in the Tribunal, but was dismissed as irrelevant. To the extent that it is a complaint that the point should have been considered by the Tribunal but was not addressed, it raises a question of law, namely whether it was relevant to consider the point. 33 It may be accepted that the point was relevant on the review. The complaint about the manner in which the income should be calculated and whether it should have been treated as income earned in previous years was a matter that formed part of the objection and the matters raised by Dr Zaghloul in the Tribunal. However, the difficulty faced by Dr Zaghloul is that, as I have explained, the terms of the Ruling make clear that the lump sum payment was to be treated as having been derived in the year in which it was paid to him. It was remuneration for his employment received in the relevant year. According to the Ruling the lump sum payment is therefore to be treated as income in the year of receipt. Therefore, to the extent that the question of law should be decided in favour of Dr Zaghloul it does not establish a basis upon which the decision of the Tribunal should be set aside. Had the issue been considered by the Tribunal then it would have been required to accept the approach in the decision on the objection.

Reply submissions 34 In his reply submissions, Dr Zaghloul adopts a different tack. He challenges the correctness of the finding by the Tribunal that the lump sum payment was income. He submits that the question whether the 'one-off, lump sum payment "for" personal injury' is a matter to be determined by reference to the ITAA not the Compensation Act. 35 There are two fundamental problems with the submissions in reply. 36 First, the characterisation of the payment is contrary to the findings of mixed fact and law by the Tribunal. The Tribunal found that the lump sum amount was for weekly payments that the employer was required to make but did not. The authorities that Dr Zaghloul relies upon are no more than instances in which courts were called upon to make determinations as to whether a lump sum payment to an employee was income or capital in nature. Each case turns upon the findings as to the facts including the legal context in which the payment was received. Findings of that kind are factual or findings of mixed fact and law. No question of law arises where the challenge is to the correctness of findings of that kind by the Tribunal. 37 Second, many of the authorities to which Dr Zaghloul refers concern instances in which a person received a lump sum payment for personal injury. Dr Zaghloul seeks to characterise the lump sum amount that he received as being of that character. However, on the findings made by the Tribunal, the lump sum amount was for weekly payments, not lump sum compensation for personal injury.

Conclusion 38 It follows that the claim by Dr Zaghloul that the appeal gives rise to questions of law that should be decided in his favour is a claim that should not be accepted. The appeal should be dismissed. The Commissioner seeks costs in the event that the appeal is unsuccessful. The Commissioner having succeeded, and there being no suggestion of any other consideration that should affect the exercise of the Court's discretion as to costs, the appeal should be dismissed with costs. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Colvin.