|NSW DISPUTE RESOLUTION SERVICE (NSWDRS)|
|Catchwords||PAWE – pre-accident weekly earnings – weekly payments of statutory benefits – tax return – personal exertion – principal architect – earner – director – shareholder – ASIC records – self-employed – superannuation contributions|
Motor Accident Injuries Act 2017 (NSW) ss 1.3(4), 3.6, 3.7, 7.13(4), 8.10, div 3.3, Schedule 1 clause 3, Schedule 1 clause 4(1), Schedule 2(1)(a)
|Cases cited||Husher v Husher (1999) 197 CLR 138;  HCA 47|
|Parties||AHE – Claimant |
NRMA – Insurer
|Disclaimer||This decision has been edited to remove all Unique Personal Identification including the name of the Claimant.|
Merit Review Certificate
Merit Reviewer's Reasons for Determination
1. There is a dispute between the claimant and insurer about the amount of statutory benefits that is payable to the claimant under Division 3.3 (Weekly payments of statutory benefits to injured persons) of the Motor Accident Injuries Act 2017 (“the Act”).
2. The dispute is about the insurer’s calculation of the claimant’s pre-accident weekly earnings (PAWE) under Schedule 1 of the Act.
3. The claimant is a 72-year-old man who was injured in a motor accident on 30 June 2018.
4. On 20 July 2018, the claimant made an Application for Personal Injury Benefits which included a claim for weekly payments of statutory benefits.
5. In the application, the claimant stated that, at the time of the accident, he was employed full- time as an architect with XXXX Architects Pty. Ltd. The application did not specify an amount for the claimant’s earnings at the time of the accident either on a weekly, fortnightly, monthly or annual basis.
6. XXYY Architects Pty. Ltd. trades as AHE Architects at YYY Road, Waverley NSW 2024. The sole director and shareholder of the company is the claimant’s wife, AHE’s wife
7. On 16 August 2018, the insurer issued a Liability notice- benefits up to 26 weeks, accepting liability for the claim for statutory benefits. At that stage, the claimant’s PAWE had not been calculated by the insurer. The insurer indicated in the notice that it would do so after the receipt of documents confirming the claimant’s weekly earnings, as requested in their email of 30 July 2018.
8. In that email, the insurer requested a copy of the claimant’s most recent tax return.
9. On 22 October 2018, the insurer issued a Liability notice- benefits up to 26 weeks, accepting continuing liability for the claim for statutory benefits. At that stage also, the claimant’s PAWE had not been determined because the claimant’s 2018 tax return was not yet available.
10. After the lodgement of his 2018 tax return, the claimant provided the insurer with a copy to enable the insurer to calculate his PAWE. It appears that this was sent to the insurer in February or March 2019 when the claimant also provided the insurer with other financial documents, including submissions from his accountant, ZZZ.
11. On 31 July 2019, the insurer issued a determination of the claimant’s PAWE in the amount of
$480.77. In arriving at this amount, the insurer relied on the report of Matthew Gwynne, Chartered Accountant of PKF(NS) Forensic Accountants Pty. Ltd. dated 16 July 2019 (“PKF”).
12. The claimant applied for an internal review. On 19 September 2019, the insurer issued a
Certificate of Determination – Internal Review affirming its original decision.
13. On 22 October 2019, the claimant applied to the Dispute Resolution Service for a merit review of the insurer’s decision.
Documents and Information
14. I have considered the documents provided in the application and the reply and further information provided by the parties.
The claimant's submissions
15. The claimant makes the following submissions:
b) Clause 3(3) excludes income from other sources not related to personal exertion which in the usual course would continue to be paid notwithstanding an injury suffered by a claimant. The excluded items include interest, rents and dividends. Those items are passive income which would continue to be paid irrespective of the injuries suffered by a claimant.
c) The claimant is the principal architect carrying on business as AHE Architects at YYY Road Waverley NSW 2024. The dividend of $145,000 received by the claimant in the 2018 financial year from AHE Pty. Ltd. represents income received from his personal exertion as the principal architect in the business. The business does not have any other interest, income or investment income and the claimant’s dividend is the direct result of his personal exertion.
d) The Act provides a scheme to provide for compensation for losses suffered by claimants as a result of motor accidents where injuries are sustained as a result of the negligent actions of the driver of the insurer's vehicle. Section 1.3(4) requires that the Act be construed in a way that would promote and achieve the objects of the Act over a construction that would not promote those objects. The Act is clearly designed to provide for fair compensation.
e) The DRS ought to interpret the provisions of the Act to the extent necessary to find that the claimant's PAWE based on his income from personal exertion was $2,935 per week and not $480.77 per week.
The insurer's submissions
16. The insurer makes the following submissions:
a) The insurer concedes that the claimant is an earner.
b) The claimant's PAWE is $480. 77 per week before tax (gross).
c) The insurer concedes that the claimant’s PAWE should be calculated under clause 4(1) of Schedule 1 of the Act which provides that the claimant’s PAWE is the weekly average of his gross earnings received as an earner during the 12 months immediately before the day on which the motor accident occurred. The insurer submits that the relevant period is therefore, the 12 months from 30 June 2017 to 30 June 2018.
d) During the relevant period, the claimant derived the following income:
ii.Reportable Superannuation Contributions/Benefits, being salary sacrificed wages paid into the claimant’s superannuation fund by XXXX Architects Pty. Ltd. in the amount of $25,000.00.
e) ZZZ was of the view that PKF adopted an incorrect approach in assessing the claimant’s PAWE by not considering his dividend income was directly related to, connected with, and arising from his personal exertion as principal architect at AHE Pty. Ltd.
f) ZZZ’s view is incorrect. ASIC and ABN searches of AHE Pty. Ltd. and its 2018 Company Tax Return reveal that this company does not operate and/or trade as a business and receives only interest income. The claimant and his spouse, AHE’s wife, are the directors and shareholders of AHE Pty. Ltd. As such, the income from AHE Pty. Ltd. is not considered 'income from personal exertion'.
g) The Reportable Superannuation Contributions/Benefits of $25,000.00 paid to the claimant by XXXX Architects Pty. Ltd., represents salary sacrificed wages rather than employer superannuation contributions. This should be the only 'income from personal exertion' considered to represent the claimant's earnings for the purposes of assessing his PAWE. This equates to actual average earnings of $480.77 per week.
h) The dividends were substantially paid to the claimant from retained earnings of AHE Pty. Ltd. together with some interest income it derived. The interest income of AHE Pty. Ltd. was substantially derived from 'Division 7A Loans', which is a taxation requirement and does not reflect an external investment. The 2018 Financial Statements of AHE Pty. Ltd. indicate that the Division 7A Loans on which interest was paid were in existence prior to the 2018 financial year and therefore did not represent an advance of profits from the 2018 financial year.
i) ZZZ asserted that the dividend income amounts do not include any passive income from interest or rental income. According to PKF, the 2018 Financial Statements of AHE Pty. Ltd. demonstrate that the only income derived by the company was interest income and that the dividends paid were substantially paid from the retained profits.
j) ZZZ calculated that the portion of the dividend income paid to the claimant was 61.62% in the 2018 financial year and was attributable to the fee income generated by the claimant through the business AHE Architects in the 2018 financial year. PKF point to the fact that the dividend income was paid to AHE on 1 July 2017. The Insurer therefore submits that there is no relationship between the dividend payments and the claimant's personal exertion in the 2018 financial year.
k) ASIC records of XXXX Architects Pty. Ltd. and the 2018 Financial Statements of XXXX Architects Pty. Ltd., reveal that the sole director and shareholder of the company is the claimant’s wife, AHE’s wife. The dividends paid by XXXX Architects Pty. Ltd. are not paid to the claimant as he is not a shareholder of that company. The claimant’s 2018 Income Tax Return and Shareholder Dividend Statement show dividends derived from AHE Pty. Ltd., and not from XXXX Architects Pty. Ltd.
l) There is no evidence of any agreement for AHE Pty. Ltd. to remunerate the claimant on behalf of XXXX Architects Pty. Ltd.
m) The 2018 Company Tax Return of XXXX Architects Pty. Ltd. records dividend payments to associated persons of $50,000.00 and does not record payments totalling $152,641.00.
n) The insurer concludes that the claimant's dividend income is not directly related to, connected with, and arising from his personal exertion as principal architect at XXXX Architects Pty. Ltd. As such, the dividend income derived from AHE Pty. Ltd. by the claimant is excluded as 'income from personal exertion' pursuant to clause 3(3) of Schedule 1 of the Act and therefore, is not considered to be earnings.
The claimant's submissions in reply
17. The relationship between XXXX Architects Pty. Ltd. and AHE Pty. Ltd. can be best explained as follows.
18. Prior to 1 January 2016, AHE Pty. Ltd. carried on business as AHE Architects. The company was and is still owned equally between the claimant and his wife, AHE’s wife.
19. A new company, XXXX Architects Pty. Ltd. was established for asset protection purposes, with the claimant’s wife as the sole director and shareholder. From 1 January 2016, all of the assets of the business, AHE Architects was transferred to the new company.
20. In conducting my review, I have considered the following legislation and guidelines:
a) Motor Accident Injuries Act 2017 (NSW) (“the Act”)
b) Motor Accident Guidelines effective 15 January 2019 (“the Guidelines”)
c) Motor Accident Injuries Regulation 2017 (NSW) (“the Regulations”)
and cited the following case:
d) Husher v Husher (1999) 197 CLR 138;  HCA 47
What are the requirements of the Act for the payment of weekly payments of statutory benefits?
21. There is no dispute that the claimant is an earner.
22. Sections 3.6 and 3.7 of the Act provide that an earner who is injured as a result of a motor accident and suffers a total or partial loss of earnings as a result of the injury is entitled to weekly payments of statutory benefits for a period of up to 78 weeks.
23. Clause 3 of Schedule 1 of the Act provides the definition of loss of earnings:
(2) A person’s income from personal exertion is:
(b) the proceeds of any business carried on by the person either alone or in partnership with any other person, and
(c) any amount received as bounty or subsidy in carrying on a business.
(3) A person’s income from personal exertion does not include:
(b) rents or dividends, or
(c) any employer superannuation contributions, or
(d) the monetary amount of any annual, sick or other leave entitlement.
24. If the claimant has suffered a total or partial loss of earnings, the amount of weekly payments to which he may be entitled, is, for the purposes of sections 3.6(2)and 3.7(2) of the Act, the difference between his PAWE and by his post-accident earning capacity (if any).
25. The only issue for me to determine in the review is the amount of the claimant’s PAWE.
26. The insurer determined the claimant’s PAWE in the amount of $480.77. The claimant submits that it should be $2,935. The franking credit amount of $62,104 was factored in the claimant’s calculation.
27. The insurer’s calculation was based on the application of clause 4(1) of Schedule 1 of the Act
and thus, the earnings declared in the claimant’s 2018 tax return.
28. Clause 4(1) provides that pre-accident weekly earnings, in relation to an earner who is injured as a result of a motor accident, means the weekly average of the gross earnings received by the earner as an earner during the 12 months immediately before the day on which the motor accident occurred.
25. The claimant’s calculation of his PAWE is also based on the declared earnings in his 2018 tax return.
26. The crux of the dispute is therefore about what income declared in the 2018 tax return is considered to be income derived from personal exertion.
27. The insurer has taken the view that the dividend income of $145,000.00 paid by AHE Pty. Ltd. and declared in the claimant’s 2018 tax return, is a “dividend” within the meaning of clause (3)(3)(b) Schedule 1 of the Act and therefore cannot be included as the claimant’s income from personal exertion to calculate his PAWE.
28. From the evidence before me, I am satisfied of the following:
a) The claimant was carrying on business as the principal architect of his own firm at YYY Road, Waverley trading as AHE Architects.
b) The business was conducted through a company, AHE Pty. Ltd. until 1 January 2016 and thereafter and to date, through a new company, XXXX Architects Pty. Ltd.
c) The claimant is considered to be an employee within the company structure of the business. However, he is in effect self-employed as he has ultimate control over the business.
d) The claimant worked full time during the 2018 financial year in the business and generated fees of $871,960.
e) Both companies have retained earnings or profits of the business.
29. The claimant’s declared income in his 2018 tax return comprises of franked dividend income of $145,000.00 paid by AHE Pty. Ltd. and a franking credit of $62,104. His gross taxable income was $207,142 and there were Reportable Employer Superannuation Contributions of $25,000 paid by XXXX Architects Pty. Ltd.
30. I accept the claimant’s explanation that the ownership of the business was transferred from AHE Pty. Ltd. to XXXX Architects Pty. Ltd. in January 2016 for asset protection purposes. There is therefore no reason to conclude that AHE Pty. Ltd. has no connection to the claimant’s business.
31. If the claimant chooses to declare his income from the 2018 financial year from earnings still retained by the previous company, AHE Pty. Ltd., there is no reason to suggest that he is not entitled to do so or that such earnings are not the product of his personal exertion as an architect in the business.
32. The claimant has also chosen to carry on his business through a company structure. His wife is now the sole director of the new company. These types of arrangements are very common among self-employed professionals because of the taxation benefits. So much was acknowledged by the High Court in Husher v Husher (1999) 197 CLR 138;  HCA 47 at .
33. In the context of calculating the PAWE for weekly payments of statutory benefits under the Act, this may well work to the disadvantage of such claimants because not all of their income by way of personal exertion in the preceding 12 months to the motor accident might have been declared for taxation purposes. For example, if the fees of $871,960 generated by the claimant in the 2018 financial year was declared as income from personal exertion through a different tax structure the claimant’s PAWE may have resulted in a larger sum.
34. I consider that the calculation of the claimant’s PAWE should be based on clause 3(2)(b) of Schedule 1 of the Act, being the proceeds of the business carried on by the claimant through a company structure.
35. The proceeds of the business declared in the claimant’s 2018 tax return is a gross income of $207,142. On that basis, I calculate that the claimant’s PAWE is $3,983.50. The maximum weekly amount of statutory benefits allowed by section 3.9(1) of the Act as at 1 July 2018 is $3,853. The claimant’s PAWE must therefore be reduced to that amount.
36. I do not accept that the amount $25,000 paid by XXXX Architects Pty. Ltd. and declared in the claimant’s 2018 tax return as Reportable Employer Superannuation Contributions should be considered as “salary sacrificed wages”. It follows that the amount should not be included in the PAWE calculation because clause (3)(3)(c) of Schedule 1 of the Act excludes any employer superannuation contributions as a person’s income from personal exertion.
37. For the above reasons, the reviewable decision is set aside.
38. I make a finding that the claimant’s PAWE is $3,853.
39. Having regard to section 8.10 of the Act and Schedule 1, Part 1 of the Regulations, legal costs are not recoverable for this merit review type.
- The reviewable decision is set aside and the following decision is made in substitution for the reviewable decision:
o The claimant’s pre-accident weekly earnings (PAWE) is $3,853
o The insurer is to make eligible weekly payments to the claimant in accordance with sections 3.6 and 3.7 of the Act and having regard to Clause 7.230 of Motor Accident Guidelines (effective 15 January 2019).
- Effective Date: This determination has effect from 1 July 2018.
- Legal Costs: Not recoverable.
Merit Reviewer, Dispute Resolution Service