Author: Peter Hunt
Judgment date: 16 April 2020
Citation: Allianz Australia Insurance Ltd v Jenkins  NSWSC 412
- Weekly Benefits in the Third Entitlement Period, under s 3.8 of the Motor Accident Injuries Act 2017 (MAIA), are calculated on a net amount per week.
- Unlike the First and Second Entitlement Periods (ss 3.6 and 3.7 of MAIA), no PAYG Tax is remitted to the ATO in the Third Entitlement Period.
The Injured Person suffered serious injuries in a motor accident. She was, at the time of her accident, employed as a full-time clearer earning $893 gross per week. This amount increased, through indexation, to $918 gross per week or $764 net per week.
The parties agreed that the Claimant's pre-accident weekly earnings (PAWE) (for the purpose of the First and Second Entitlement Periods) was equivalent to her pre-accident earning capacity (for the purpose of the Third Entitlement Period).
In the First and Second Entitlement Periods, the Insurer paid the Injured Person Weekly Benefits equivalent to her net PAWE and withheld amounts of PAYG Tax, which the Insurer remitted to the ATO; in the same way an employer would deal with an employee's wages.
In the Third Entitlement Period, however, the Insurer paid the Injured Person Weekly Benefits equivalent to her net weekly loss of capacity and remitted no PAYG Tax to the ATO.
The Insurer took this approach based on ATO advice to the Insurance Council of Australia dated 30 November 2017 that:
- Weekly Benefits in the First and Second Entitlement Periods (ss 3.6 and 3.7 of MAIA) were in the nature of income and were taxable; whereas
- Weekly Benefits in the Third Entitlement Period (s 3.8 of MAIA) were in the nature of capital because they related to a `loss of earning capacity' and were not taxable.
The dispute proceeded to assessment by the Merit Review Panel which decided that Weekly Benefits in the Third Entitlement Period should be made on a gross basis and were, therefore, the subject of income tax.
The Insurer sought relief pursuant to s 69 of the Supreme Court Act 1970 from a decision of the Merit Review Panel.
In the Supreme Court, Adamson J held that the Merit Review Panel erred in its construction of s 3.8 and that Weekly Benefits in the Third Entitlement Period were not taxable and should be paid on a net basis.
Relying significantly on the ATO advice to the ICA, her Honour held that Weekly Benefits in the First and Second Entitlement Periods are based upon loss of earnings, which are treated as income and are, therefore, taxable, and that Weekly Benefits in the Third Entitlement Period are based on loss of earning capacity, which is treated as capital, and are not taxable.
Why this case is important
This decision is critical to the payment of Weekly Benefits under s 3.8, in the Third Entitlement Period, because the Supreme Court has confirmed that those payments are to be made on a net basis and that no tax is to be withheld.
That is because Weekly Benefits in the Third Entitlement Period are based on the Injured Person's loss of capacity – as distinct from their loss of earnings in the first two Entitlement Periods – which is capital loss and not taxable.
Given this decision, Insurers should adopt the following processes:
- First and Second Entitlement Periods – calculate a Weekly Benefit on a gross amount per week, pay the Injured Person the net component and remit the PAYG tax component to the ATO; and
- Third Entitlement Period – calculate Weekly Benefits on a net amount per week and pay that amount to the Claimant (with no sum remitted to the ATO).
For the sake of completeness, damages for past and future economic loss claims continue to be assessed, in Common Law claims, on a net basis and no tax is payable upon those damages.