Tax Judgment Alarms Lawyers
The Age
Wednesday August 21, 1996
Personal injury lawyers are alarmed by a landmark court ruling which will allow the Commissioner of Taxation to tax interest payments on compensation awards.
They fear the commissioner could plunder compensation payouts made in recent years apart from raising millions of dollars from future judgments.
They say the judgment will affect thousands of people each year, including some of the most disadvantaged people in the community.
Justice Hill of the Federal Court ruled yesterday that interest added to an award of damages for personal injury was income and therefore assessable for taxation.
He made the finding in reviewing the case of a blind woman who argued that she should not have to pay about $168,000 in tax after being awarded $1,095,000 including $352,000 interest in a successful 1990 claim against her eye surgeon in the Supreme Court.
But doubt remained last night over whether or not the Commissioner of Taxation would apply the ruling retrospectively and seek to recoup tax on interest payments made in cases in recent years.
The president of the National Tax and Accountants' Association Ltd, Mr Ray Regan, estimated yesterday that up to 300,000 people awarded a total of $10 billion in damages and interest over the past four years could be affected.
A tax office spokesman last night said the issue of retrospectivity was not a priority but the judgment would be carefully examined.
A statement issued moments earlier, however, said: ``If people who have not paid tax on interest income received in relation to compensation payments come forward, the ATO will take a sympathetic view to their situation."
The blind woman, Mrs Maree Whitaker, from Sydney, yesterday described as ``barbaric" the tax grab.
The president of the Australian Plaintiff Lawyers' Association, Mr Peter Semmler, QC, said the ruling was a major blow to plaintiffs in personal injury cases.
It would increase their costs and further complicate the assessment of their damages.
``It is a further impost on members of the community, accident victims who can least afford to shoulder another taxation burden," he said.
Any plan to make the ruling retrospective would be wrong and create havoc, he said, stressing that many plaintiffs had settled their claims on the basis that no part of their award would be taxable.
``Throughout Australia there would be thousands of people who have received interest on damages . . . who have not been taxed," he said. ``There is an enormous amount of money .
. . at stake if the Tax Commissioner proposes to apply this ruling to past verdicts and settlements."
The principal of the Sydney law firm Cashman and Partners, Dr Peter Cashman, described the ruling as a regrettable decision that would further erode the already pathetically low amounts of compensation awarded to injured plaintiffs.
``Personally, I don't understand the logic of it. I think if the decision is not overturned on appeal then there is a need for legislative reform . . . I would have thought there were some serious arguments to the contrary to those adopted by Justice Hill."
Mrs Whitaker said the ruling would affect vulnerable people like her including people on life-support machines ``who can't fight back" who planned to use the money to meet daily needs not to invest.
Dr Cashman added taxpayers were already subsidising claims defended by corporations and insurance companies and should not be slugged again.
© 1996 The Age