The AAT has confirmed that a lump sum payment made by Comcare to a former Australian Federal Police officer for arrears of workers’ compensation was assessable in its year of receipt, and not over the income years to which it related. In doing so the AAT confirmed that the “appropriate” accounting method for the taxpayer, as a salary and wage earner, was on a receipts or cash basis (and not on an accruals or earnings basis), even though the payment may relate to a past income year – and that there was no reason to change the basis of accounting in the circumstances.
Likewise, the AAT stated that no amounts “came home” to the taxpayer in any realisable form, and there was no amount that could be applied or dealt with on his behalf or as he directed, until the lump sum was actually received – notwithstanding the taxpayer’s argument that lump sum was a “recoverable debt” due to him from his successful claim against Comcare. In this regard, the AAT also had major reservations whether the lump sum could be considered a “judgment debt” in the strict sense of the term.
However, the AAT found (and the parties accepted) that a lump sum payment in arrears (LSPIA) tax offset that had been recalculated by the Tax Office under ss 159ZR to 159ZRD of the ITAA 1936 (Div 17, SubdivAB) to account for omitted tax losses was correct. However, the AAT refused to rule on whether the taxpayer was entitled to interest on the lump sum payment or whether he is was entitled to relief for damages against the ATO, as such matters were beyond its jurisdiction.
(Re Edwards and FCT  AATA 781, AAT, File No: 2016/2057, Cotter SM, 5 October 2016.)
[LTN 194, 7/10/16]
Extract from the reported decision
- As I mentioned earlier, Mr Edwards’ first substantive argument was that the Tribunal’s decision in his favour in Edwards and Comcare allowed the lump sum to be “generated” as a judgement debt, which then became a “recoverable debt”. The significance of that submission is to be found in paragraphs 9 to 11 of Taxation Ruling TR 98/1:
- The ‘earnings’ method is often referred to as the ‘accruals’ method or the ‘cash and credit’ method. Under the earnings method, income is derived when it is earned. The point of derivation occurs when a ‘recoverable debt‘ is created.
10. The term ‘recoverable debt’ is used to describe the point of time at which a taxpayer is legally entitled to an ascertainable amount as the result of having performed an agreed task. A taxpayer may have a recoverable debt even though, at the time, they cannot legally enforce recovery of the debt.
11. Whether there is, in law, a recoverable debt is a question to be determined by reference to the contractual agreements that give rise to the legal entitlement to payment, the general law and any relevant statutory provisions.
- There are a couple of observations I have concerning Mr Edwards’ argument.
- First, I have some reservations as to whether the lump sum could be considered a “judgment debt” [‘recoverable debt’??] in the strict sense of the term. The Tribunal in Edwards and Comcare determined that the decision under review be set aside and that another decision be substituted in its place. Neither of those decisions concerned the award of an ascertainable amount of money that could be readily described as a “debt”. Rather, the decision had to be considered by Comcare, which in turn undertook a calculation of the amount payable, after which payment was made to Mr Edwards [sounds wrong to me – sounds like it was ascertainable by a formula applied by Comcare].
- Second, it seems to me that there is an inherent weakness in Mr Edwards’ argument, in that any “debt” which ultimately arose (or was “generated”, to use Mr Edwards’ term) actually crystallised in the 2015 income year, not some earlier year or years. That crystallisation was dependent on a number of things occurring. All of them were in the 2015 income year – the Tribunal hearing, the favourable decision, and the reconsideration of the matter by Comcare in light of that decision, followed by its calculation of the applicable back payments in respect of each of the years in question. Until all of those matters happened, there was no “debt”. Nor, until then, was Mr Edwards “legally entitled to an ascertainable amount”.
- That has many features in common with the situation described in Cooper’s case:
Until the Authority approved of the payment and, importantly, determined his classification, Mr Cooper had no right to any payment, no amount could be ascertained as due to him, and there had been no segregation of any amount due to… him from the fund…There was no amount that could be applied or dealt with in any way on his behalf or as he directed for the purposes of s 6-5(4) of the ITAA 1997 or that could be reinvested, accumulated, capitalised, carried to any reserve etc or otherwise dealt with on his behalf or as he directed for the purposes of s 19 of the ITAA 1936 in relation to years prior to 1997/98. In my opinion no amount “came home” to Mr Cooper in any realisable form until the 2000 year.
- So, too, is it the position in Mr Edwards’ case. Until the 2015 income year, there was no amount that could be applied or dealt with on his behalf or as he directed. Nor was there any amount that “came home” to him in a realisable form until that year. As was observed in Cooper’s case:
Any other conclusion would, in my opinion, be strange to say the least. It would require a conclusion that in the years before 2000 the “entitlement” of Mr Cooper was such that he should have brought to account for taxation purposes the income that he had not received and which at the time he had no right to receive.
- For those reasons, I do not accept Mr Edwards’ first argument, that he was legally entitled to a “recoverable debt” in the 2001 to 2006 income years, and that it was assessable income in the relevant years.