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[2011] ZAWCHC 490
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Barclay v Road Accident Fund (20738/2008) [2011] ZAWCHC 490; 2012 (3) SA 94 (WCC); 74 SATC 253 (1 December 2011)
REPORTABLE
IN THE HIGH COURT OF SOUTH
AFRICA (WESTERN CAPE HIGH COURT, CAPE TOWN)
CASE NO: 20738/2008
In the matter between:
CANDICE
BARCLAY
….......................................................................................
Plaintiff
and
THE ROAD
ACCIDENT FUND
…..................................................................
Defendant
SUPPLEMENTARY
JUDGMENT
DELIVERED ON 1
DECEMBER 2011
BLIGNAULT
J
:
[1] On 21
July 2011 I delivered a judgment in this matter in which I dealt with
the
quantum
of
the damages to be awarded to plaintiff for the loss of earnings
suffered by her. I did not quantify plaintiff's loss as I had
been
requested by the parties to make certain findings after which the
quantum
of
the loss would be determined by the parties' actuaries.
[2] In para [24] of my judgment
I listed the assumptions and findings to be taken into account by the
actuaries. They read as follows:
"(1) Plaintiff is to be
awarded a capital sum calculated on the basis of one hour's work per
weekday, ie excluding Saturdays
and Sundays, at the rate of R200,00
per day. This means that plaintiff's actual and expected monthly
income is irrelevant.
(2) Plaintiff is expected to
retire at the age of 60.
(3) Plaintiff is assumed to
take a three week holiday per year during which she will not earn any
income.
(4) The date of calculation
is the date of this judgment, ie 20 July 2011.
(5) A globular contingency
deduction of 30% should be applied.
(6) The mortality table,
discount, interest and inflation rates used in Mr Munro's report
dated 29 March 2011 are to be applied."
[3] In para [25] of the judgment
I said the following:
"[25] If the parties are
agreed on the result of the actuarial calculation it may be submitted
to me to be made an order of
court. If they are not agreed, the
difference(s) between the parties could be explained and motivated in
written argument for purposes
of the judgment to be granted."
[4] The parties' respective
actuaries thereafter prepared separate reports on the basis of my
findings.
[5] There is a substantial
difference between the calculation by plaintiff's actuary of the
capital value of her loss of earnings
and the calculation thereof by
defendant's actuary. The difference is due to the fact that they
departed from different premises.
Plaintiff's actuary's approach is
that the amount of the income tax that plaintiff would have paid on
her lost earnings, should
not be deducted in arriving at the amount
to be awarded. Defendant's actuary, on the other hand, deducted
income tax from plaintiff's
loss of earnings in performing his
calculation.
[6] The difference between the
results of the two calculations is material and I accordingly invited
counsel to submit written argument
on this issue.
[7] Mr H G
McLachlan, counsel for plaintiff, submitted that the issue is
res
iudicata.
According
to his argument the findings and assumptions listed by me in para
[24] of my judgment are final and exclusive. The list
does not
mention the question of the deductibility of plaintiff's income tax
and the court has no power to supplement or correct
its own judgment
at this stage.
[8] Mr K F
Allen, counsel for defendant, contended that the issue of the
deductibility of income tax, is not
res
iudicata
and
that this court can and should determine the issue. He submitted that
a deduction for plaintiff's income tax savings should
be made in
calculating the capital value of her loss of earnings.
[9] I propose
to deal with the question of
res
iudicata
first.
In my view there are two reasons why Mr McLachlan's submission cannot
succeed. The first reason is that I did not give any
final order in
respect of this issue. The question of the final quantification of
plaintiff's claim was left open. The actuaries
subsequently disagreed
on the basis for this quantification. There is no reason why this
issue should not be determined before
a final order is given.
[10] It seems to me in any event
that if my order on the question of the deductibility of plaintiff's
income tax savings were to
be regarded as a final decision, it would
be subject to variation in terms of High Court Rule 42(1 )(c) which
reads as follows:
"42 Variation and
Rescission of Orders
(1) The court may, in
addition to any other powers it may have, mero motu or upon the
application of any party affected, rescind
or vary:
…
......................
(c) an order or judgment
granted as the result of a mistake common to the parties."
[11] In the present case there
was a common mistake. Counsel on both sides were under the impression
that the question of the deductibility
of plaintiff's income tax
savings was not a significant issue in the case. For that reason no
argument was addressed to me on this
issue at the hearing of the
matter. Counsel erred in this regard. The issue has proved to be of
considerable significance.
[12] I am accordingly of the
view that the question whether income tax should be deducted from
plaintiff's notional lost earnings
has not yet been decided in this
matter. I proceed to consider it.
[13] The
question whether income tax on a claimant's notional earnings should
be deducted in the quantification of his loss of earnings
or earning
capacity, has on various occasions received judicial attention, both
here and in comparable foreign jurisdictions. A
landmark decision is
that of the House of Lords in
British
Transport Commission v Gourley
[1955] UKHL 4
;
[1955]
3 All ER 796
(HL) where such income tax was deducted. This judgment
has been applied in South Africa on a number of occasions. Mr Allen
referred
in his argument to some of these cases, namely
Pitt
v Economic Insurance Co Ltd
1957
(3) SA 284
(D);
Gillbanks
v Sigournay
1959
(2) SA 11
(N) and
Snyders
v Groenewald
1966
(3) SA 785
(C). In
R
v Jennings et al
[1966]
SCR 532
, on the other hand, the Canadian Supreme Court declined to
follow the
Gourley
judgment
and held that the income tax which the plaintiff would have had to
pay on future earnings should not be taken into account.
In
Cullen
v Trappel
[1980]
HCA 10
;
(1980) 146 CLR 1
(1 May 1980), however, the High Court of Australia
followed the
Gourley
judgment
and deducted the income tax that the plaintiff would have had to pay
on her future earnings.
[14] In my
view the starting point of the enquiry is a set of principles which
are not controversial. The first is the trite statement
that receipts
of a capital nature are not subject to income tax whilst income is.
In terms of section 1 of the Income Tax Act 58
of 1962 receipts and
accruals
of
a capital nature
are
excluded from the definition of
gross
income.
There
may of course be exceptional cases where extraordinary tax
legislation is applicable but that is not the position in the present
case.
[15] The
second principle is that the claim which is sometimes loosely
described as one for the loss of earnings (as in my judgment
in the
present case), is in truth a claim for the loss of the claimant's
earning capacity which is an asset in his estate. See
Rudman
v Road Accident Fund
2003
(2) SA 234
(SCA) para [10]:
"[10] ... on the facts
of this case the nature of the loss ... is his diminished earning
capacity. In Santam Versekerings-maatskappy
Bpk v Byleveldt
1973 (2)
SA 146
(A ) Rumpff JA states the principle in the following terms, at
150B - D:
'In 'n saak soos die
onderhawige word daar namens die benadeelde skadevergoeding geeis en
skade beteken die verskil tussen die vermoensposisie
van die
benadeelde voor die onregmatige daad en daarna.'
The same learned Judge of
Appeal again dealt with the principle in Dippenaar v Shield Insurance
Co Ltd
1979 (2) SA 904
(A). He says at917B-D:
'The capacity to earn money
is considered to be part of a person's estate and the loss or
impairment of that capacity constitutes
a loss, if such loss
diminishes the estate.'"
[16] The
third principle is that an amount paid by way of damages takes on, in
the hands of the recipient, the character of the
loss in respect of
which it is being paid. If the payment is made in respect of a loss
of a capital nature, the receipt is also
of a capital nature. If the
payment is made in respect of a loss of income, the receipt is of a
revenue nature. This principle
is sometimes expressed by asking
whether the damages fill a hole in the taxpayer's capital or a hole
in his income. See
Bourke's
Estate v Commissioner for Inland Revenue
1991
(1) SA 661
(A) at 671J-672A;
Taeuber
& Corssen (Pty) Ltd v Secretary for Inland Revenue
1975
(3) SA 649
(A).
[17] The
fourth principle is that an award of damages for the loss of a
claimant's earning capacity is intended to place him in
the financial
position he would have been in had not been for the delict. It is not
necessary, but in general preferable, to quantify
the award by way of
an actuarial calculation. See
Southern
Insurance Association Ltd v Bailey NO
1984
(1) SA 98
(A) at 113H - 114F. The object of such a calculation is to
arrive at a lump sum that would allow the claimant to enjoy the
financial
benefits equal to the
quantum
of
the earnings lost by him.
[18] The typical actuarial
method (used in this case by both actuaries) takes place in two
stages. In the first stage the notional
income that the claimant
would have earned over the relevant period, is computed. In the
second stage this amount is capitalised
at a net discount rate which
takes into account the rate at which the claimant is assumed to
invest the lump sum to be awarded
to him and the likely future
inflation rate.
[19] The
effect of income tax plays a role in both stages. In the first stage
the question is whether income tax should be deducted
in the
calculation of the claimant's gross notional earnings over the
relevant period. The question in the second stage is whether
income
tax should be taken into account in the quantification of the net
discount rate. The deduction of income tax in the calculation
of the
claimant's gross notional earnings would,
ceteris
paribus,
diminish
the lump sum to be awarded to the claimant. The deduction of income
tax from the income that the claimant is assumed to
receive from his
investment of the lump sum, would result in the employment of a lower
net discount rate. A lower discount rate
would,
ceteris
paribus,
increase
the lump sum to be awarded to the claimant.
[20] It follows that it would in
principle be unfair to the claimant if income tax is deducted from
his gross notional earnings
and a pre-tax investment rate is used in
calculating the net discount rate. That would in effect amount to the
double taxation
of the claimant to the benefit of the defendant. By
the same logic it would in principle unduly favour the claimant if
income tax
is not deducted from his notional earnings in the first
stage of the calculation but then deducted in the second stage to
arrive
at an after-tax net discount rate.
[21] The question of principle
that arises for determination is which calculation is to be applied.
Should one deduct income tax
in calculating the claimant's gross
notional earnings and deduct it again in calculating the net discount
rate or should one ignore
income tax in both stages of the
calculation? Before dealing with this question it would be useful to
consider first the various
judgments referred to above.
[22] In the
Gourley
case
the plaintiff claimed damages from the defendant for what was
described as a loss of earnings. The court deducted the plaintiff's
income tax savings in calculating the
quantum
of
the damages awarded to him. It is important, however, to note that
the court treated the plaintiff's loss as a loss of income.
One must
further have regard to the legislative context in the
Gourley
judgment.
The plaintiff found himself in a situation where, due to the
particular provisions of the English tax legislation, his
lost income
would have been subject to income tax but the damages themselves were
not taxable.
[23] The
import of the
Gourley
judgment
in its particular context is described in McGregor on Damages 17th
edition para 14-002 as follows:
"The presence of two
factors was necessary to set the stage for the problem which was
posed for their Lordships' decision in
Gourley's case: (1) the sums
for the loss of which the damages awarded constitute compensation
would have been subject to tax;
and (2) the damages awarded to the
claimant would not themselves be subject to tax. For there cannot be
any reason for taking tax
into account in calculating damages given
in compensation for a loss which would never itself have been taxed:
this would let in
a taxation where no taxation would have been, which
would be unfair to the claimant. Equally there cannot be any reason
for taking
tax into account in calculating the damages if the damages
themselves will then be taxed in the same manner as the loss
compensated
would have been taxed: this would result in a double
taxation, equally unfair to the claimant."
[24] In
Pitt
v Economic Insurance Co Ltd
1957
(3) SA 284
(D), at 287A-C, the
Gourly
judgment
was followed, without any apparent consideration of its particular
legislative context. The court (Holmes J) did however
point out that
the incidence of taxation in relation to interest obtainable on the
court's award, should also borne in mind.
[25] In
Gillbanks
v Sigournay
1959
(2) SA 11
(N) the reasoning of the learned judge (Henochsberg J) is
not very clear. He pointed out, at 18F, that the award in the
Gourley
judgment
was not subject to income tax and he referred, at 18H, to a statement
in Silke South African Income Tax 33 that damages
received for
personal injury are an accrual of a capital nature and are not
taxable. The learned judge nevertheless took the plaintiff's
notional
tax savings into account, albeit as part of an all encompassing
contingency and not quantified as a separate item.
[26] The
matter went on appeal. It is reported as
Sigournay
v Gillbanks
1960
(2) SA 552
(A). Schreiner JA, delivering the majority judgment. He
confirmed, at 568FG, that if income tax were to be deducted from the
plaintiff's
gross earnings, then the tax that would have been payable
on the interest that would have accrued from the investment of the
amount
of the award, must also be taken into account.
[27] In
Snyders
v Groenewald
1966
(3) SA 785
(C) van Winsen J followed the judgments in
Pitt
v Economic Insurance Co Ltd supra
and
Sigournay
v Gillbanks supra
in
coming to the conclusion that it would be correct to deduct the
plaintiff's income tax savings. One must assume that he also
recognized that income tax payable on the award must also be taken
into account.
[28] In
R
v Jennings et al supra
the
Supreme Court of Canada dealt pertinently with the question whether a
reduction should be made in the calculation of the damages
for the
future loss of earnings claimed by the plaintiff. Judson J delivered
the unanimous judgment of the court on this aspect
of the case. He
emphasised that the plaintiff is compensated for the loss of his
earning capacity which is a capital asset and
not for a loss of
earnings as such. The thrust of his reasoning is contained in the
following passage, at 545-546, which I quote
in full:
"The plaintiff has been
deprived of his capacity to earn income. It is the value of that
capital asset which has to be assessed.
In making that determination
it is proper and necessary to estimate the future income earning
capacity of the plaintiff, that is,
his ability to produce dollar
income, if he had not been injured. This estimate must be made in
relation to his net income, account
being taken of expenditures
necessary to earn the income. But income tax is not an element of
cost in earning income. It is a disposition
of a portion of the
earned income required by law. Consequently, the fact that the
plaintiff would have been subject to tax on
future income, had he
been able to earn it, and that he is not required to pay tax upon the
award of damages for his loss of capacity
to earn income does not
mean that he is over-compensated if the award is not reduced by an
amount equivalent to the tax. It merely
reflects the fact that the
state has not elected to demand payment of tax upon that kind of a
receipt of money. It is not open
to the defendant to complain about
this consequence of tax policy and the courts should not transfer
this benefit to the defendant
or his insurance company."
[29] In
Cullen
v Trappel supra
Gibbs
J delivered the principal majority judgment. He repeated the reasons
which he had given in
Atlas
Tiles Ltd v Briers
[1978]
HCA 37
;
(1978) 144 CLR 202
(14 December 1978) where he delivered a
minority judgment. The latter was also a decision of the High Court
of Australia but it
was overruled by a differently constituted court
in
Cullen
v Trappel supra.
Gibbs
J followed the
Gourley
judgment
and held that the plaintiff's income tax should be deducted from his
gross notional earnings. He approached the
Gourley
judgment
on the basis that it would have required the strongest reasons to
justify the court in refusing to follow a decision of
the House of
Lords that has provided the basis upon which damages had been
assessed in Australia for the previous twenty years.
[30] In
Atlas
Tiles Ltd v Briers supra
Barwick
CJ delivered the majority judgment. He emphasised that a claimant's
earning capacity is a capital asset which, like other
capital assets,
is capable by its use or employment of producing income. In para 18
of the judgment he said the following:
"18. But the plaintiff
has not in a relevant sense lost the earnings either in the period
before verdict or the future thereafter:
he has lost the capacity to
earn perhaps the equivalent of his current earnings or perhaps more
or less according to the reasonable
expectations of the employment of
his earning capacity. If the award of damages for such an injury
destroying or diminishing his
earning capacity were merely a matter
of replacing those earnings, the amount of the award would be
taxable: but it is not, for
the reason that the award is for a
capital loss, however much the amount of the award is quantified by a
consideration of what
the use or employment of that capacity might be
expected to produce. In other words, the assessment of damages for
loss of earning
capacity is in truth an exercise in valuation. It is
quite true to say that what that capacity may reasonably be expected
to produce
is a factor, indeed a major factor, in the process of
valuation."
It may be
noted that Barwick CJ reiterated these reasons for his approach in
Cullen
v Trappel supra
but
in that case he was in the minority.
[31] For the
sake of completeness I may mention that there are two other judgments
of the South African Supreme Court of Appeal
(as it is now called) in
which the question of the effect of taxation on the calculation of
damages was considered. In
Whitfield
v Phillips
1978
(3) SA 465
(A) the plaintiff claimed damages for loss of income by
reason of a breach of contract and in
Omega
Africa Plastics (Pty) Ltd v Swisstool Manufacturing Co (Pty) Ltd
1978
(3) SA 465
(A) the plaintiff was awarded damages for the infringement
by the defendant of its registered design. The courts in both
instances
rejected the defendants' contention that the plaintiff
would be overcompensated as the damages in its hands would be a
capital
accrual and therefore not taxable. The basis of both
decisions is that the damages would have been taxable in the hands of
the
plaintiff as income. These two decisions are accordingly
distinguishable from the typical claim for damages for a loss of
earning
capacity.
[32] I revert
to the question posed in para [21] above. Should one deduct income
tax in calculating the claimant's gross notional
earnings and deduct
it again in determining the net discount rate to be applied or should
one ignore income tax at both stages
of the computation? It seems to
me that recognition of the implications of the fact that the
claimant's earning capacity is a capital
asset, leads one to the
conclusion that income tax should not be deducted in the first stage
of calculating the claimant's gross
notional earnings. A claimant is
not bound to employ his earning capacity in any particular manner.
The fact that the
quantum
thereof
is normally calculated with reference to the earnings which he would
have earned over the period in question, does not change
its nature
as a capital asset. The claimant might, for example, have decided to
utilise his earning capacity by starting and developing
his own
business. I respectfully agree in this regard with the views of
Judson J in
R
v Jennings supra
and
Barwick CJ in
Atlas
Tiles Ltd v Briers supra.
Support
for it is also to be found in an article written as long ago as 1979
by H J O van Heerden (later Deputy Chief Justice) entitled
"Skadevergoeding
en Belastingpligtigheid"
in
J
C Noster: 'n Feesbundel
(essays
in honour Prof J C de Wet, edited by J J Gauntlett) at p1. He
approved of the approach of Judson J in
R
v Jennings supra.
[33] That brings me to the
question of the proper approach to be adopted in the second stage of
the determination, namely the manner
of treating income tax in
calculating the appropriate net discount rate. It follows from my
earlier discussion that it would in
principle be unfair to the
defendant if an after-tax investment rate is used. There is no reason
in principle, however, why the
net discount rate should be calculated
on the assumption that the claimant would invest the award in such a
manner that the proceeds
would be fully taxable His earning capacity,
as an asset in his estate before the delict, was not limited to any
particular form
of utilisation. The utilisation of the compensation
for his loss should similarly not be limited in any particular
respect. The
claimant may elect to utilise his award by investing it
or to purchase capital assets with it. If he decides to invest it, he
would
be able to choose between various investments possibilities,
some of which may be tax-free.
[34] It remains to apply this
approach to the facts of the present case. Plaintiff's actuary did
not deduct income tax from plaintiff's
gross notional earnings. He
applied a net discount rate of 2,5% per year, based on an interest
rate of 8% per year after all taxes
and a future inflation rate of
5,4% per year. He calculated that the net present value of
plaintiff's loss, after the deduction
of 30% for contingencies (which
had already been decided), amounted to R595 420,00.
[35] Defendant's actuary
deducted income tax from plaintiff's gross notional earnings at a
marginal tax rate of 35%. He applied
a net discount rate of 2,5% per
year, based on a net of tax rate of return of 8% per year and a
future inflation rate of 5,4% per
year. His valuation of the net
present value of plaintiff's loss, after the deduction of 30% for
contingencies, amounted to R383
173,00.
[36] It is apparent that the two
actuaries did not differ in their calculation of the net discount
rate. The difference between
their results is mainly due to the fact
that defendant's actuary deducted income tax from plaintiff's
notional earnings whilst
plaintiff's actuary did not.
[37] It follows from my earlier
discussion that I do not agree in principle with the method used by
either actuary. Plaintiff's
actuary did not deduct income tax from
plaintiff's gross notional earnings but he apparently applied it in
arriving at an after-tax
investment rate. That method would favour
plaintiff. Defendant's actuary deducted income tax from plaintiff's
gross notional earnings
which is in conflict with the method
suggested by me. The use of an after-tax investment rate might
compensate plaintiff to some
extent but only if it is assumed that
plaintiff would have invested her entire award in such a manner that
all her income would
be taxable.
[38] I am not in a position at
present to determine what allowance should be made for the taxation
of the income to be derived by
plaintiff from her utilisation of the
award. I do not have the requisite evidence before me. Evidence of
actuarial practices would
also be useful as it may, from a wider
perspective, be cost effective to use standardised rates in this kind
of cases.
[39] In this case, however, it
would be unfair to the parties to subject them to another round of
evidence and argument. I accordingly
propose to award a sum which, on
the evidence before me, I view as fair and reasonable compensation
for plaintiff's partial loss
of her earning capacity. I assume in
this regard that plaintiff is likely to invest a substantial portion
of the sum awarded to
her in tax-free investments. On this basis I
propose to award a sum of R500 000,00 to plaintiff.
[40] In the result, judgment is
granted in favour of plaintiff for payment of the amount of R500
000,00.
A P BLIGNAULT