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THE COMMISSIONER OF INLAND REVENUE V BUIS And Anor HC AK CIV 2004-404-6696 [14 June
... Mr Buis had been in receipt of weekly compensation for many years. ...
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THE COMMISSIONER OF INLAND REVENUE V BUIS And Anor HC AK CIV 2004-404-6696 [14 June 2005]
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV 2004-404-6696
CIV 2004-404-5635
BETWEEN
THE COMMISSIONER OF INLAND
REVENUE
Appellant
AND
M O BUIS
First Respondent
AND
D BURSTON
Second Respondent
Hearing:
12 May 2005
Appearances: J Coleman for appellant
R Bedford for first and second respondents
Judgment:
14 June 2005
JUDGMENT OF SIMON FRANCE J
This judgment was delivered by Justice Simon France on 14 June 2005 at 4:30 p.m. pursuant to r 540(4) of the High Court Rules 1985.
Solicitors for Appellant:
Crown Law Office, PO Box 2858, DX SP 20208, Wellington Central (Fax: 64-4-473 3482)
Solicitors for Respondents:
Sandi Anderson, 9 Redmond Street, Ponsonby, Auckland (Fax: 64-9-378 1495)
Page 2
The issue
- Section 72 of the Accident Rehabilitation and Compensation Insurance Act
1992 (“ARCIA”) provided:
Where any payment of compensation based on weekly earnings to which a
claimant is entitled is not paid by the Corporation or exempt employer
within one month after the Corporation or exempt employer has received all
information necessary to enable calculation of the payment, interest shall be
paid on the amount payable by the Corporation or exempt employer at the
rate for the time being prescribed by or for the purposes of section 87 of the
Judicature Act 1908 from the date on which payment should have been made
to the date on which it is made. - The issue in this case is whether a payment made under this section is taxable
in the hands of the recipient.
Background facts - The case involves two claimants who received such payments. Their
individual circumstances can be briefly described:- Mr Buis had been in receipt of weekly compensation for many years.
However, the quantum was the subject of on-going dispute. The
dispute related to the level of his qualifying earnings prior to the
accident. Ultimately, Mr Buis succeeded in establishing the
correctness of his position. The Corporation accepted a back-payment
was required, and also that interest pursuant to s 72 should be payable.
The total interest payment was $126,528.
- Mr Buis had been in receipt of weekly compensation for many years.
- Mr Burston made an initial claim that was rejected by the Corporation
on the basis of insufficient causal connection between his disability
and his employment. The Appeal Authority found in Mr Burston’s
favour. There was a back-payment, and an interest payment of
$40,116.
Page 3 - The Commissioner assessed both interest payments as assessable income.
This was disputed. The Taxation Review Authority (“TRA”) found in favour of the
taxpayers. The Commissioner appeals. - It will assist comprehension of what follows to state at the outset that the
Commissioner accepts that no specific provision taxes the payment. Rather the
Commissioner relies on s CD5 of the Income tax Act 1994 which states:
The gross income of a person includes any amount that is included in gross
income under ordinary concepts.
Decisions under appeal - The two cases were argued sequentially. The judgment in relation to Mr
Burston was given first, and then that pertaining to Mr Buis. The latter judgment
confirmed the reasoning in the former but added a further reason in support of the
outcome. This extra reason related to Parliamentary intention.
- In the Burston decision the TRA first addressed the proposition that s 76
ARCIA determined the matter in favour of Mr Burston. Section 76 of the Act
provided:- The only compensation paid under this Act that shall constitute gross
income of the recipient for the purposes of the Income Tax Act 1994 is –[list=a] - Payment of compensation for loss of earnings:
- Payment of compensation for loss of potential earning
capacity: - Any payment under sections 25, 58, 59 and 60 of this Act.
- The only compensation paid under this Act that shall constitute gross
- For the avoidance of doubt, it is hereby declared that the following
payments are not to be treated as gross income or earnings of any person for
the purposes of this Act or the Income Tax Act 1994:- Any independence allowance payable under section 54 of
this Act: - Any survivor’s grant payable under section 56 of this Act:
- Any funeral grant payable under section 55 of this Act:
- Any payment under this Act or regulations made under this
Act to an injured person in respect of rehabilitation, other than any
amount paid under section 25 of this Act.
- Any independence allowance payable under section 54 of
- The submission for the taxpayer was that s 76(1) was determinative because:
- the payment was compensation;
- it was not caught by (1)(a), (B) or © of s 76(1).
- the payment was compensation;
- The Commissioner submitted the payment was not compensation within the
meaning of s 76. Rather compensation was intended to be a reference to specific
payments such as those listed. This was reinforced by the exclusions in s 76(2).
- The TRA agreed that the payment was not a payment that compensates the
disputant for any loss of earnings or potential earning capacity. It was in the TRA’s
view a payment made as a penalty for administrative delay and inefficiency and
therefore not caught by s 76(1).
- In accepting the Commissioner’s position on s 76, the TRA noted what it
perceived to be as a logical inconsistency in the Commissioner’s stance. If it was not
compensation, what was the basis on which it was to be regarded as income? The
Commissioner’s argument, which was said to reflect this inconsistency, was
recorded as being that:
… although the payment is a penalty imposed on the Corporation, in the
hands of the disputant it is some type of compensation.
- Having rejected the applicability of s 76, the TRA next considered the
Commissioner’s primary proposition that the payments were income under ordinary
concepts:
The question is whether a statutory penalty imposed to discourage
administrative delays is in the hands of the recipient gross income under
ordinary concepts.
- The TRA saw the nature of the payment as determinative. It was a penalty
which had no compensation component. It did not involve any reassessment of the
Page 5
disputant’s compensation entitlement, but was in the nature of a fine on the
Corporation. It was not “true” interest because it was not compound interest.
- In essence the TRA held that the conflict in the Commissioner’s position was
not sustainable for it would be:
To treat the transaction as of a revenue nature for some purposes [the
recipient’s] but as capital for others [the Corporation].
- The TRA also noted that the interest payment was not money that arose from
any “effort” at any point on the part of the recipient. It is “in every acceptable sense
a windfall”.
- The TRA further noted that the Corporation had no statutory obligation to
report the payments to the Inland Revenue, nor did it have to take withholding tax.
These were, in its view, further indicia that Parliament did not regard the payment as
taxable. It accordingly found in favour of Mr Burston.
- In the decision concerning Mr Buis the TRA referred to, and accepted, a
further argument advanced by the taxpayer that had not featured in the Burston case.
It concerned the background to the enactment of s CD5, and generally, the enactment of the Taxation (Core Provisions) Act 1996.
- The thrust of this line of reasoning is that s CD5 was enacted as part of the
Core Provisions legislation. The clear intent at the time was that the 1996 Act would
be tax neutral; it was designed to make the legislation more comprehensible but not
to impose or remove existing tax liability. At the time of the 1996 Act the
Commissioner had not, for the four years it had been in existence, regarded the
“interest” payment as taxable. Nothing in the 1996 Act was to change things.
Further, there had been opportunities when the ACC legislation was reviewed
(twice), and when the 1994 Income Tax Act was enacted, to make the payment
taxable. It was accordingly submitted that against this plethora of opportunity, it is
difficult to imagine that the failure to expressly tax the payment was an oversight,
especially when the tax status of other ACC payments is expressly dealt with in the
legislation.
Page 6
Arguments on appeal - The structure of the Commissioner’s argument was first to establish the
proposition that the payment is to be regarded as interest under the common law
definition of that concept. It is accepted by the Commissioner that the payment is
not interest within the definition of “interest” in the Income Tax Act 1994.
However, if the payment is interest under common law principles, then it is income
under ordinary concepts because in effect interest is always revenue and not capital
in the hands of the recipient. Hence s CD5 applies. - In support of this proposition, Mr Coleman submitted that the payment came
within the accepted indicia of income which he submitted were that:
• it came in;
• it had an element of recurrence and regularity;
• it depended on the relationship between payer and payee; and
• it depended upon its quality in the hands of the recipient.
- Mr Coleman submitted that the payment in question clearly came in, and it
did so in the form of money. Further, it stemmed from the relationship between
payer and payee, which he submitted was one of debtor/creditor.
- Mr Coleman then moved on to identify the type of income it was, namely
interest. He relied on Riches v Westminster Bank Ltd [1947] AC 390, and Euro
Hotel (Belgravia) Ltd [1975] 3 All ER 1075 to submit that a payment was interest
when it was fixed by reference to a sum of money it was said to be “interest on”, and
when that sum of money was due to the person entitled to the alleged interest. Both
criteria were submitted to be fulfilled here. (I note that the Megarry J passage from
which this is taken also states that the criteria are not exhaustive or inescapable.)
- Finally in support of the proposition it is income, Mr Coleman referred to two
New Zealand cases, Marshall v Commissioner of Taxes [1953] NZLR 335 and
Page 7
Public Trustee v Commissioner of Inland Revenue [1960] NZLR 365. Marshall
concerned a Compensation Court award for land taken under the Public Works Act
1928. The award described the payment as being &47,000 with interest thereon at a rate of 4%. The issue before the court was whether the interest was a
separate payment, or was really to be seen as part of the capital sum estimated in
terms of interest. The wording of the award was held to be decisive in determining
its nature as separate and as interest on the capital compensation award. The
judgment does emphasise the importance of the purpose and nature of the payment.
The Public Trustee case essentially involved the same issue – was the “interest”
payment truly that or was it just a means of estimating the capital sum.
- I do not see either case as particularly instructive for the present facts, other
than to observe there was no suggestion the present payment was being made as part of the weekly earnings sum otherwise due.
- The balance of the Commissioner’s argument was by way of countering the
propositions advanced for a contrary conclusion.
- The Commissioner’s primary challenge was to the relevance of symmetry in
tax treatment. It was submitted that the payment was not a penalty in the hands of
the Corporation, but that even if it was, that did not dictate its nature in the hands of
the recipient. Tasman Forestry Ltd v Commissioner of Inland Revenue [1999] 3
NZLR 129 at 137 was cited for the express rejection of a principle of symmetry in
tax treatment.
- I accept, as of course I must, that this submission concerning symmetry is
correct. However, the nature of the payment remains relevant to assessing whether it is income in the hands of the recipient. It is not that one looks for symmetry; rather in this case it is a question of looking to why the payment was made and what the recipient has done in order to receive it.
- Concerning the prior point of whether it is a penalty, Mr Coleman submitted
the ACC cases relied upon either did not say it was a penalty or were wrong to say it
was. Rather, he submitted:
The payments are compensating the taxpayers for the fact that weekly
compensation was not paid for many years because of honestly held views
concerning the taxpayer entitlement.
- This analysis is very much to see the payment as being compensation for
deprivation of money. I pause here to note no authority or policy document was
referred to as support for this analysis and, as will be seen, it is contrary to the
Corporation’s consistently stated rationale for the payment. It also does not take
account of the fact that interest is not paid on the full entitlement but on that part of it
that fell due after the Corporation became at fault in not paying.
- The Commissioner also submitted the payments were not windfalls, or
alternatively if they were, they were taxable windfalls. This was essentially because
they were income, so turned on the correctness of earlier arguments.
- Finally, the Commissioner challenged the respondents’ reliance on the tax
history. Mr Coleman first contested the proposition that the Commissioner was
changing its position. However, he was not able to say that the payment had ever
been taxed in the 9 years before these cases, and certainly ACC had always
throughout that period told recipients it was not taxable. Since there was no
reporting mechanism from ACC to the Department, and since the taxpayer was told
at the time of receipt it was not taxable, it is difficult to envisage how any such
payments would have come to be taxed. Also, it is not express but a reasonable
inference from the agreed facts before the TRA, and the tone of the rulings, that this
was the basis on which the hearings proceeded.
- As an alternative Mr Coleman submitted, and I accept, that it is open to the
Commissioner to change his position if satisfied that the former position is contrary
to the statute.
- Concerning the history of the legislation, the appellant took the position that
the various Acts neither said the payment was taxable nor that it was not. It was also
submitted that there was no need to amend the Acts to make it express because
s CD5, or its ancestors, had always caught it.
I find this latter argument unconvincing since the Commissioner had not previously taken the view that the payments were taxable. It would have been logical, but not necessary, to specifically clarify the position of this payment if a change were contemplated, rather than relying on the capacity of s CD5 to capture it. There were specific sections that otherwise addressed the taxability of ACC payments.
- For the taxpayer, Ms Bedford advances all of the arguments identified and
adopted by the TRA. The overview of her argument can be captured in two
propositions:- the penalty nature of the payment means that it is not to be treated in
any sense as income or revenue. It is not money earned. It is a capital
windfall; and - the history of the “tax treatment” of the payments since they were
introduced in 1992 supports the proposition that Parliament has never
regarded the payment as taxable. The tax treatment involves an
analysis of the legislative provisions, the failure of the Commissioner
to seek to tax the payment between 1992 and 2001, and the fact that
ACC expressly advised recipients as late as July 2001 that the
payments were not taxable.
- the penalty nature of the payment means that it is not to be treated in
- Much of Ms Bedford’s submissions are reflected in the decision under
appeal. It is accordingly not necessary to traverse them in as much detail.
- Concerning the nature of the payment, Ms Bedford emphasises that the
Commissioner had not previously seen it as taxable, and that the Corporation itself
took the view it was enacted in 1992 as a penalty provision to encourage prompt
correct disposal of claims. In the agreed bundle there is a letter written in July 2001
to Mr Burston by the Corporation which states:
Further to your query in relation to your payment of interest under s 72, this
is to confirm the payment is in fact non-taxable. ACC’s payment of interest
is made as a result of ACC not making necessary payments earlier and as a
result the interest payment is seen as a penalty payment and is therefore not
liable for tax.
- Ms Bedford submits that because of its penalty nature it is not income under
ordinary concepts, and emphasises the total lack of “effort” by the recipient. There
is nothing done by the recipient, nor is money lent. There is no debtor/creditor
relationship in the normal sense because none of the trappings of that relationship,
nor the traditional remedies, are available.
- Concerning the legislative history and previous tax treatment, Ms Bedford
repeats the points made, and accepted, in the Buis decision. She also places weight
on the fact that the payment is not caught by the Income Tax Act 1994 definition of
“interest”. I return to this more fully later in the judgment.
Preliminary point – scope of appeal - The respondents took issue with the capacity of the appellant to challenge
many of the TRA’s findings. It was said that the findings had not been put in issue
by the Notice of Appeal or Points on Appeal and so could not be challenged, at least
without the leave of the Court.
- The difficulty this submission presents is illustrated by the fact that two of the
unchallengeable points were said to be the TRA’s finding that the payment was a
“windfall” and the finding that “Parliament did not intend to make the payment
taxable”. Both these findings are important steps in the TRA’s reasoning; it is
untenable that this Court should decide a question of law – “is it taxable” – whilst
having to accept key aspects of the TRA’s reasoning.
- For myself I doubt that specific notice needed to be given, since the whole
basis of the appeal is that the TRA erred in finding the payment to be not taxable.
What Ms Bedford relies on are not findings of fact – there have never been any in
dispute. They are parts of the decision-maker’s reasoning process in reaching a
single finding – the payment is not taxable. That single finding is the subject of
appeal.
- The width of the appeal did not embarrass Ms Bedford, who ably addressed
all points both in written submissions and orally. In any event I am satisfied the
Points on Appeal adequately gave notice of the thrust of the Commissioner’s
argument.
Discussion - I have decided that the resolution of this case lies in a matter not specifically
focussed upon by the parties, but raised by Ms Bedford in her written submissions.
It concerns the relationship between ss CD5, CE1 and OB1 of the Act.
- It will be of assistance to set the three provisions, plus the interpretation
provision, out in sequence.- AA3(1):
The meaning of a provision of this Act is found by reading the words in
context and, particularly in light of the purpose provisions, the core
provisions and the way the Act is organised. - CD5:
The gross income of a person includes any amount that is included in gross
income under ordinary concepts. - CE1:
The gross income of any person includes
(a) all interest, investment society dividends and annuities … - OB1:
“Interest” –
(a) In relation to the deriving of gross income, resident withholding
income, or non-resident withholding income by any person (in this
definition referred to as the “first person”), means every payment
(not being a repayment of money lent and not being a redemption
payment), whether periodical or not and however described or
computed, made to the first person by any other person (in this
definition referred to as the “second person”) in respect of or in
relation to money lent to the second person making the payment or
to any other person:
(B)In relation to land, has the same meaning as “estate”:
- AA3(1):
- The Commissioner’s proposition is that the payment is interest at common
law and therefore caught by s CD5. In my view this gives s CD5 too broad a scope
in that it gives it an application that is in conflict with other parts of the Act.
- One can hardly imagine a more encompassing provision than s CE1. It is not
a case of the Act, despite its comprehensibility, not addressing a particular situation.
Section CE1 starkly captures all interest payments as gross income. On its face the
Commissioner should not need s CD5, but the “problem” lies with the definition of
“interest”. It fixes interest by reference to the concept of money lent, and it is
common ground that makes it inapplicable to the s 72 payment.
- The important aspects of the s OB1 definition, however, are the opening
words:
Interest, in relation to the deriving of gross income, means …
- In my view s CD5 must be read subject to this since it deals with gross
income. The Act defines what interest is for gross income purposes, and that must
apply to both ss CD5 and CE1. The contrary argument is that there are two
definitions of interest – the statutory one, and the common law one, and both
continue by virtue of s CD5. I prefer the view that the s OB1 definition, expressed
as it is as capturing the concept of interest for gross income purposes, applies to both ss CD5 and CE1. Such an approach accords with ordinary statutory interpretation principles concerning general and specific provisions. It also accords with s AA3(1) which places weight on the reading of the statute in context.
- I accordingly conclude that, since the Commissioner relies on s CD5
applying on the basis that the payment is interest, the argument fails because s OB1
defines interest exhaustively for the purpose of determining if a payment is gross
income. It is appropriate, however, to address the underlying proposition of the
Commissioner that s CD5 applies.
Gross income under ordinary concepts? - The history of this payment is that from its inception in 1992 until 2001, the
Commissioner did not seek to tax the payments. The reason for the change in
position is not clear. It is clear, however, that the Corporation has until 2001 advised
recipients that the payment is not taxable. This is illustrated by the ACC letter cited
earlier.
- It is not surprising to me that the Commissioner might at different times take
contrary views on the nature of the payment. It is not susceptible to easy analysis.
- In favour of the Commissioner’s position is that the payment is described in
s 72 as interest, it is fixed by reference to the Judicature Act 1908 rate, and it is fixed
by reference to a sum of money payable to the recipient. There is money “owing” to
the claimant and the payment in issue pays “interest” on that.
- However, there are contrary indicia. It is accepted by the Corporation to be a
penalty. It is a system adopted by Parliament to encourage the Corporation to
efficient disposal of claims. It is not referenced to the claimant’s actual entitlement,
but to a point in time one month after the point when the Corporation should have
accepted entitlement.
- The penalty characterisation was influential on the TRA. The payment is not
made because the claimant has loaned the money, or because the claimant has been
deprived of its earning potential. It is made in a sense because the claimant is a
“victim” of an inadequate processing of his or her claim. It is payment made
because of default on the part of the payer, not because of anything at all done by the payee.
- In a public ruling on the taxability of payments made under the Employment
Relations Act 2000 for humiliation, loss of dignity and injury to feelings, the
Commissioner said this of s CD5 (BR Pub 01/04, page 8):
Although the legislation does not define “gross income under ordinary
concepts”, a great number of decided cases has variously identified the
concept by reference to such characteristics as periodicity, recurrence, and
regularity, or by its resulting from business activities, the deliberate seeking
of profit, or the performance of services. Nor do capital receipts form part of
“gross income” unless there is a specific legislative provision to the contrary.
It is clear that payments under section 123©(i) will not generally be made
periodically or regularly, or generally recur. Nor as we have seen above, are
they compensation for services.
And by analogy with common law damages, they are of a capital nature.
- When that statement is considered there is much about the payment that does
not fit within it:
• periodicity, regularity and recurrence are absent;
• it does not result from business activities, the deliberate seeking of profit
or the performance of services.
- It was the absence of these features that was relied on by Ms Bedford, and
given weight by the TRA.
- The other interest in the Commissioner’s public ruling relates back to the
third of Mr Coleman’s income indicia (para [20] above). The Commissioner’s ruling
illustrates that a payment can emerge out of a relationship but not be sufficiently a
product of it to fall within income. In those cases, the payments for humiliation in
the workplace were not payments for anything done by the employee although
arising out of and connected to the employment relationship. There are parallels to
the present situation. The payments are for actions done or not done by the
Corporation.
- I admit to some unease about a conclusion that Parliament has legislated for a
non-taxable windfall to be paid to members of the public because of administrative
inefficiency or error. It is not instinctively to be expected. However, on balance I
consider, along with the TRA, that the payment is not to be seen as income under
ordinary concepts. The reference to the Judicature Act rate is a means by which the
quantum of the penalty is assessed.
- I have not discussed in further detail Ms Bedford’s submissions on the
legislative history. Given my findings, I do not need to. I accept that there have
been many occasions when Parliament could have addressed the taxability of the
payment. In one sense that is true of anything that has not actually been covered, but the occasions in question are those when the taxability of other payments under the ACC regime have been expressly considered. I also accept there is relevance in the fact that the Corporation does not have to report the payments to the Department or take withholding tax. One would expect a statutory mechanism to be in place to ensure the Department is aware of payments. The withholding tax situation arises,of course, because the payments are not interest as defined in the Act and so the withholding tax provisions do not apply. I have already discussed the significance I see in that.
- Accordingly, I agree that there are contextual indicia that support the
conclusion the payment is not taxable. However, not too much weight should be
placed on the failure to specifically address taxability of the payment; logically that
is neutral in that the Act neither says it is or is not taxable. I see more significance in
the consequent absence of procedural mechanisms such as reporting obligations, and
withholding tax obligations.
- For these reasons the appeal is dismissed.
Costs - The respondents are entitled to 2B costs, together with reasonable
disbursements to be fixed by the Registrar, if necessary.
Simon France J
or © of s 76(1).
