Double Taxation of ACC Payments? – April 2010
A feature of the system of injury compensation administered by the Accident Compensation Corporation (“ACC”) is the way in which claimants’ entitlements can be reviewed, sometimes many years after the event. And in some of these reviews the result is that the claimant is found to have been entitled to a greater amount of earnings-related compensation than was previously believed to be the case, so a lump sum of arrears is payable. In such circumstances it will often be the case that the claimant has been in receipt of a sickness or invalid’s benefit, and the result of the lump sum of arrears is that the sickness or invalid benefit has been overpaid and requires refunding. ACC is authorised and required to make such a refund direct to the relevant agency which paid the benefit (now Work and Income New Zealand – “WINZ” – a division of the Ministry of Social Development).
When such a review takes place, the issue arises as to the correct tax treatment of that entitlement, and especially the tax treatment of the amount refunded by ACC from the lump sum compensation to WINZ. In practice ACC repays WINZ the net benefit paid, and IRD the tax on that net benefit. IRD then refunds an equivalent amount to WINZ.
This article considers a series of recent cases where the recipients of such ACC lump sum compensation have challenged the correctness of ACC paying the equivalent tax on that benefit to IRD. The nub of the claims seems to be that, tax having already been paid on the benefit by WINZ, no further tax is payable and ACC’s practice amounts to double taxation.
The Cases
In the first of these cases, Buis v Accident Compensation Corporation (unrep High Court, Auckland, CIV 2007-404-004703, 6 March 2009, Rodney Hansen J) the taxpayer had been injured in an accident in 1976, and applied for compensation. ACC accepted liability, but settlement was not reached on the level of compensation to be paid until 1999. In the interim period between 1986 and April 1999, the taxpayer had been paid an income-tested benefit by WINZ. The compensation arrears due to the taxpayer were paid in a lump sum in October 1999. From that lump sum ACC deducted the aggregate sum of $101,879.75 paid as a benefit between October 1986 and April 1999. Of that amount, $15,770.79 was PAYE tax which had been deducted and paid to Inland Revenue. The ACC refunded the net benefit of $86,108.96 to WINZ, and the tax component was paid to Inland Revenue in July 2000, then transferred by Inland Revenue to WINZ, in accordance with administrative procedures.
It appears that a process for refunding benefits to WINZ was agreed by the ACC, WINZ and the IRD in March 1999. WINZ stipulated that, for administrative reasons, payment of the tax component of the gross benefit refund should be paid to the IRD, which would then refund to WINZ.
The taxpayer applied for judicial review of ACC’s decision, contending that the decisions in October 1999 and July 2000 to deduct the PAYE from the sum paid to him, and to make the payment of tax to WINZ, were ultra vires ACC’s statutory powers. The taxpayer submitted that WINZ was only permitted to recover the net benefit from the ACC, not the tax component, and that WINZ had to obtain a refund of that tax component from the IRD.
Rodney Hansen J held that WINZ was entitled to recover the gross benefit from the ACC, including the tax paid, on the basis that s 83A Social Security Act 1964 clearly states that references to “benefit” in s 373 AIA 1998 are to the gross benefit paid, including any sum paid to IRD, and the excess benefit payment under the relevant ACC legislation is to be calculated accordingly.
The facts in Reddell v Accident Compensation Corporation (unrep High Court, Auckland, CIV 2008-485-002736, 24 June 2009, Stevens J) were that Mr Reddell suffered injury in an accident in 1998. He was paid weekly compensation by the ACC until December 1999, at which stage he was assessed as having capacity for work, and then received a benefit from Work and Income NZ (WINZ). In February 2001 the taxpayer persuaded ACC that he had been unable to work, and was entitled to backdated weekly compensation. ACC then paid the taxpayer backdated weekly compensation totalling $32,868.31, consisting of the gross entitlement to backdated compensation, less the amount of benefits paid for the relevant period by WINZ (the excess benefit payment) which was reimbursed to WINZ, and less PAYE tax at the rate of 30.2%. That PAYE amount was paid to the IRD, which then reimbursed that tax portion to WINZ.
The taxpayer unsuccessfully challenged the deductions made by the ACC from the lump sum in the District Court, and appealed to the High Court. On appeal, he contended that the deductions made by the ACC from the lump sum were incorrect, and that only the net amount of the excess benefit should have been deducted from his backdated compensation. He said that ACC had breached s 252 Injury Prevention, Rehabilitation and Compensation Act 2001 by deducting the gross amount and by paying $23,392.94 to WINZ and $4,318.67 to the IRD. That section provides:
252 Relationship with social security benefits: reimbursement by Corporation
(1) This section applies if a person—
(a) receives a payment of an income-tested benefit under the Social Security Act 1964 in respect of a period; and
(b) establishes a claim to an entitlement from the Corporation in respect of all or part of the same period.
(2) An excess benefit payment is regarded as having been paid in respect of that entitlement.
(3) An excess benefit payment is the part of the benefit payment (up to the amount of the entitlement) that is in excess of the amount of benefit properly payable, having regard to the entitlement under this Act.
(4) The Corporation must refund the excess benefit payment to the department responsible for the administration of the Social Security Act 1964—
(a) if the Corporation knows that this section applies; or
(b) if requested to do so by that department.
(5) For the purposes of this section, an excess benefit payment includes a payment of any part of a married rate of benefit that is paid to the spouse [or partner] of the person who established the claim to the benefit.
(6) Any amount that is treated under this section as having been paid in respect of any treatment, service, rehabilitation, related transport, compensation, grant, or allowance is deemed for all purposes to have been so paid.
The High Court dismissed the taxpayer’s appeal, holding that in the circumstances, the ACC was required under s 252(4) to refund to WINZ the gross excess benefit payment, where the taxpayer had received benefits for the period for which he was entitled to weekly compensation. The Court held that the ACC or WINZ does not determine the tax component, as this is done by reference to the applicable income tax legislation. Further, the payment of the appropriate amounts to WINZ and the IRD was correctly made pursuant to the administrative protocol agreed to by the ACC, WINZ and the IRD, to ensure the refund of excess benefit payments to WINZ in a tax neutral way.
An application for leave to appeal to the Court of Appeal was subsequently dismissed: Reddell v Accident Compensation Corporation (unrep High Court, Auckland, CIV-2008-485-002736, 17 August 2009, Stevens J) as the question of law raised by the taxpayer was not capable of bona fide and serious argument on appeal, and nor did the case involve some interest of sufficient or public importance to justify the cost and delay of a further appeal.
Hollis v CIR (2010) 24 NZTC 23,967 involved similar facts, in that the taxpayer’s ACC claim for weekly compensation was accepted in 2003 and backdated to 1998, with a proportion of the lump sum payment going to refund WINZ for net benefit payments and a corresponding portion going to IRD as the tax paid. In that case Ms Hollis challenged the payment through the Part IVA and Part VIIIA process in the TAA 1994. The TRA held, and the High Court agreed, that the ACC payments, although lump sums, were revenue in nature (the “hole in the profits” principle – Burmah Steamship Co Ltd v IRC [1931] SC 156) and, following Buis, there was no double taxation.
The background facts in Goh v CIR (unrep High Court, Auckland, CIV 2009-404-3258, 11 November 2009, Woodhouse J) are similar, in that the taxpayer had been in receipt of a benefit, was found to be entitled to a retrospective ACC payment, and ACC repaid WINZ the net amount of benefit paid and IRD the tax on that benefit; IRD repaying the equivalent amount to WINZ. However the procedural route taken by Ms Goh was different again, in that she claimed a tax credit from IRD for the equivalent amount of the tax payment by ACC, and upon this being declined, sought judicial review.
Although the procedural route adopted by Ms Goh was different, the result was the same. In fact, she seems simply to have added to the number of reasons why her case could not succeed, and her case was struck out on the basis that it was clearly untenable. This was for two reasons:
- Firstly, the law is clear that in most cases, the only means of challenging a decision of the CIR is pursuant to the disputes procedures in Parts 4A and 8A of the TAA 1994, rather than judicial review (see “Judicial Review? – No Thanks” – Taxation Today XX 2009).
- Secondly, as the claim could be treated as one to recover an amount unlawfully deducted from the compensation payment, the amount paid to IRD had not been unlawfully deducted because of the decision in Buis, followed in Reddell and Hollis.
The Maths
Taking the figures from the Buis case as an example, his situation pre October 1999 appears from paragraph 5 of the judgment to be as follows:
| WINZ – total benefit paid | Mr Buis – net benefit | IRD – tax |
| -$101,879 | $86,109 | $15,770 |
The effect of the ACC reimbursement to WINZ can be set out as two steps – ACC reimburses the net to WINZ and pays tax to IRD, and IRD repays the (now owverpaid) tax to WINZ. The effect of these transactions, again using Mr Buis’ case, the steps and results are:
| WINZ – total benefit paid | Mr Buis – net benefit | IRD – tax | ACC – payments made | |
| Starting position | -$101,879 | $86,109 | $15,770 | $- |
| ACC refunds WINZ & IRD | $ 86,109 | $15,770 | -$101,879 | |
| IRD refunds WINZ | $ 15,770 | -$ 15,770 | ||
| End position | $- | $86,109 | $15,770 | -$101,879 |
Viewed this way, the pragmatic sense of the transactions seems obvious. As regards the payment which was formerly benefit and is now ACC compensation, the beneficiary’s position is unchanged as is IRD’s, but WINZ has been fully reimbursed by ACC.
Summary
To a tax practitioner, the answer posed by these cases seems quite clear: the ACC payment to IRD creates an overpayment in the relevant account, and that overpayment is refunded to WINZ as the original payer. The process by which this is effected, while no doubt administratively convenient and sanctioned by the legislation, clearly causes confusion among at least some of those claimants in respect of whom the payments are made. However, confusion aside, the cases convincingly demonstrate that whatever procedure (administrative review of ACC, tax challenge of IRD, or administrative review of IRD) is adopted to challenge the practice of ACC repaying net benefit to WINZ and corresponding tax to IRD which then refunds WINZ, the challenge cannot succeed.