The taxi driver, the car crash and the court case with a tax sting

A case heard before the NSW Court of Appeal in September 2011 involved an appeal concerning a damages claim that resulted from an injury suffered by a self-employed taxi driver. What has that got to do with tax, you say? Plenty.

On 1 May 2004, the taxi driver was injured in a collision between the taxi he was driving and another vehicle. In an April 2010 judgment, the taxi driver was awarded damages totalling $156,833. This amount did not include damages for non-economic loss.

The tax sting in this case was that, although it was a damages case and had nothing to do with tax, it was referred by the judge to the Commissioner of Taxation after it was revealed the taxi driver had not declared all his income for tax purposes.

In the course of the judgment, the Court examined the taxi driver’s pre-injury earnings.

Prior to the accident, the man earned income by driving a taxi that he owned, utilising a taxi plate that he also owned. He usually worked 12 hours a day, six days a week and had the taxi driven by another driver on the day that he did not work. The Court said his claim in the proceedings in respect of past loss of earnings and future lost earning capacity was based on the assumption that his average net weekly earnings in the three years prior to the accident had been about $430 and that, but for the accident, these earnings would have continued for 10 years after the date of his medical assessment, that is, until he was aged 70. The amount of $430 was based upon an approximation of the figures appearing in his tax returns for the years 2002, 2003 and 2004.

The man also owned a second taxi plate (although not a second taxi cab) that he leased to another driver at a rental of $330 per week. According to the Court:

“When the appellant first gave evidence he said that all of his income was disclosed in his tax returns, including the lease payments. Later, he was recalled to say that the income disclosed in the tax returns did not include the lease payments. He said that he first came to realise that when he spoke to his accountant that morning.”

The taxi driver’s accountant gave evidence that when preparing his tax returns for the relevant years, he was not aware that the driver owned a second taxi plate and was therefore not aware that he received lease payments in respect of it. The accountant said the taxi driver simply gave him figures for his “takings” to be included in the tax returns as his gross income from which expenses were deducted to obtain his net income.

The Court said the consequence of it accepting the taxi driver’s submission as to his pre-tax earnings was that the man did not make full disclosure of his income for income tax purposes. As a result, the judge directed the Registrar of the Court to refer the judgment to the Commissioner of Taxation for consideration. The Court of Appeal noted that a 1988 South Australian Full Court judgment in Giorginis v Kastrati [1988] 49 SASR 371 at 376 said it was the duty of a court to take this course in a case such as the present.

Tax issues can crop up in all sorts of places. The courts do have the power to refer matters in otherwise non-tax cases to the Tax Commissioner where they consider it appropriate. The courts do listen to what is said in front of them and what evidence is presented to them. So revelations in non-tax cases can have a real tax sting!

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.