Editors --- "Family tax benefit: effect of arrears of compensation on taxable income" [2009] SocSecRpr 41; (2009) 11(4) Social Security Reporter, Article 4

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Family tax benefit: effect of arrears of compensation on taxable income

SPARK and SECRETARY TO THE DFHCSIA

(2009/636)

Decided: 27th August 2009 by B. H. Pascoe

Background

In December 2006 the Magistrate’s Court awarded Spark worker’s compensation payments from 1 June 2005 which resulted in her receiving arrears in a lump sum and ongoing weekly amounts. As a result her taxable income for the year totalled $63,416 being $32,446 compensation for the period from 1 June 2005 to 30 June 2006 and $30,970 compensation for the period from 1 July 2006 to 30 June 2007.

In January 2007 Spark provided an estimate of her taxable income of $35,000 for the financial year 2006/2007 and payments of family tax benefit (FTB) were made on the basis of that estimate. In February 2008 Centrelink reassessed her entitlement based on her actual income of $63,416 which resulted in overpayment of $3427.31 for the 2006/2007 financial year.

Spark’s accountants argued that $32,446 should not be taken into account when calculating her taxable income for the 2006/2007 financial year, however this amount was properly included in her income tax return for that year being the year of receipt and assessed in her income tax return for that year by the Australian Taxation Office (ATO). There is no provision within the income tax legislation to allow income of a taxpayer to be included in any year other than the year of receipt.

The law and discussion

Entitlement to FTB is governed by the A New Tax System (Family Assistance) Act 1999 and A New Tax System (Family Assistance) (Administration) Act 1999 (the Administration Act). Under the legislation a person’s rate of FTB is based on adjusted taxable income. In Spark’s case it was based on her actual taxable income for that year.

Spark argued that she had at all times sought to comply with all of the requirements for receipt of benefits. Her estimate of income in January 2007 was made on the basis of the then resumed compensation payments and was a conservative estimate. She was unable to understand how the compensation arrears relating to prior years could be regarded as income in the 2007 year. She argued that, if not for the work related injury, she would not be seeking any welfare payments and would prefer to be self-reliant. She argued that most of the lump sum of arrears received was used in legal fees of $6484 and repayment of $21,193 to Centrelink for pension payments from June 2005 to January 2007. As a consequence she was in debt and reliant on assistance from her family.

The Tribunal noted that the payment of FTB is specifically linked to taxable income and the lump sum representing arrears of compensation was clearly taxable income in the year of receipt.

The Tribunal gave consideration to Spark’s expenditure of $6484 in legal fees relating to the reinstatement of the weekly compensation entitlement and noted that in the case of Romanin v Commissioner of Taxation (2008) FCA 1532 legal expenses incurred in successfully pursuing the payment of remuneration in lieu of notice were held to be deductible under s.8-1(1) of the Income Tax Assessment Act 1997. The Tribunal stated that on the same basis it would appear that Spark was entitled to deduct her legal costs against the compensation income received in consequence of the legal action.

Centrelink argued that FTB is required to be based on taxable income as assessed by the ATO and there was no basis for adopting any figure other than that which appears on a notice of assessment. Centrelink submitted that the appropriate course would be for Spark to seek to amend her 2007 income tax return to claim the deduction. When and if such amendment was accepted by the ATO, an amended assessment would be issued and Spark could then claim any resulting entitlement to FTB. The Tribunal noted that the problem with doing so was the potential time limits on amending income tax assessments and the delay in Spark receiving her additional FTB. The Tribunal considered that it was appropriate to find that Spark’s taxable income for the year ended 30 June 2007 was $56,932 not $63,416.

The Tribunal noted that even if it were wrong in making such a finding, the circumstances were such that the part of the debt attributable to the inclusion of $6484 in taxable income of the year ended 30 June 2007 should be waived pursuant to s.101 of the Administration Act. The Tribunal considered the debt did not result from Spark knowingly making a false statement or omitting to comply with a provision of the law and there were special circumstances relating to this amount. In general Spark’s circumstances were not unusual, out of the ordinary or different from normal compared with other recipients of FTB. However, the Tribunal found that the failure to claim an allowable deduction in her income tax return constituted a special circumstance.

Formal decision

The decision under review was varied and the matter remitted to Centrelink with the direction to recalculate the debt based on a taxable income for the year ended 30 June 2007 of $56,932.

[S.P.]