Newsletter December
2005
Apologise, but better late then
never.
Welcome to the fifth edition of
the Flint Forensics Pty Ltd semi-annual newsletter. This newsletter is to help
keep you informed of the latest developments relevant to Life Policies and
personal and commercial litigation support. It is a free service provided by
Flint Forensics Pty Ltd.
Index
Life Insurance
Motor Vehicle
Expenses
This issue is whether any motor
vehicle expenses should be added back to earnings in order to determine the
level of income under an income protection policy. I will give an
example to illustrate my opinion on the subject as an expert
witness.
The facts
-
The insured's income
protection contract is silent on any add back of motor vehicle
expenses,
-
Underwriting guidelines accept
income splitting arrangements and is silent on any add back,
-
The income definition states that
expenses should be incurred in deriving money generated by the
business as a result of the insured's own activity,
-
At underwriting, financials were
provided and the insured's car was claimed through the business and for
tax purposes 30 per cent private use was excluded from the expenses disclosed
in the insured's income tax return,
-
At underwriting, it was
established that the insured's spouse did not work in the business, but her
car was claimed through the business at 70 per cent business use.
The insured's spouse was paid a salary of $30,000 per
annum.
The Issue
The issue is what amount of private
use motor vehicle expense should be added back to earnings as income under the
policy definition of income.
An Insurance Company
View
I have seen several insurance company
approaches to adding back private use.
-
Simply take between 20 and 50 per
cent of total motor vehicle expenses and add this back onto
earnings.
-
Treat the total motor vehicle
expense as a legitimate business expense.
My Determination
-
My view on an insurance company
taking the view of simply taking 20 to 50 per cent of total motor vehicle
expenses and adding it back to earnings is incorrect and has no basis under
the contract or underwriting guidelines. This position would be hard to
argue in a court of law and a claims management nightmare.
-
The fact is that the
underwriters are actually adding back the private use component of motor
vehicle expenses twice. For tax purposes the private use component if
motor vehicle expenses is already taken out. There is no justification
for adding back the private use component twice.
-
The fact is that the actual
expense claimed by the insured should technically be 100 per cent business
use. There should be no personal use included in this amount because
it has already been deducted for tax purposes. If this is not the
case, then it is tax evasion.
-
The fact is that underwriting
guidelines accept income splitting arrangement, however, simply adding more
alleged personal use is not income splitting and does not conform to
any underwriting guidelines known to me.
-
The fact is that there may be
one, two or more cars included in the motor vehicle expenses and over time,
this may change and not consistent under pre commencement, pre
disability and post disability earnings assessments scenarios. By
adding a arbitrary percentage of private use has no justification
because in this instance we have one car legitimately utilised in the
business and one not. The percentage used has no
basis.
-
My view is that whatever the insured has
disclosed in the income tax returns as a business expense is the correct
amount for business purposes. The fact is that in this example we know that there are
two vehicles, the insured and his spouse. In this instance, I would be
adding back 100 per cent of the insured's spouses car as an expense which is
not a result of the money generated by the business from the insured's own
activity. I note that this is not an example of an income splitting
arrangement, however, it applies the definition of income an is an eligible
add back under the definition of income. I have note considered the tax
consequences for the insured in this instance, however, it is the insured's
problem. At underwriting and claims stage, the expenses can be split and
amounts justified in order to accept or add back expenses to
income.
The issue of what to do with motor
vehicle expenses is an important one as it has implications on a financial
assessment as claims stage and what is done at underwriting has to be the right
method, be justified and the whole facts known. It is sometimes difficult
at underwriting stage as a full understanding of the business structure is not
known at that time. However, it is important to ask the right questions
and get the correct answers.
It has been argued with me that it
is the industry that is driving the add back an arbitrary percentage
for motor vehicle expenses in order to increase the level of income
insured. My understanding of the industry is that some insurance companies
do and some don't, however, the issue is justifying what when one makes
such a decision. In my opinion, the good insurance companies are taking
the second view as it is easier to justify and their is less time administering
this simple concept in the claims process. It's all about servicing your
client in the most efficient and effective way. Simply, adding back an
assumed percentage is fraught with anomalies. The true facts of the business require to be fully understood
and it is only then that a decision to add back certain motor vehicle
expenses should be made on an eligible add back.
In my opinion, I would never add
back motor vehicle expenses on a percentage basis as their is no justification
as I could not argue this basis in court. An instance where I would
entertain the add back of motor vehicle expenses to earnings if there was a
second vehicle (i.e. usually the insured's spouses car) which is ran
through the business for tax purposes and not used for business purposes, as the
insured was the only income generator.
I believe that adding back the
total expenses of a second vehicle to income is the best method to use when
determining the income definition under income protection policies.
This method is the best because, evidence can be obtained to justify your
position, as opposed to a arbitrary allocation on an amount which can vary
depending upon the nature of the business activities. Look at this
example, a plumber starting off takes out a policy, has two vehicles, one for
his spouse and one for himself. If you take say 30 per cent off the total
motor vehicle expenses of $10,000, then the add back would be $3,000.
However, at partial disablement, the insured now has 10 employees with their own
vehicles. The expenses are now $55,000 and the add
back worth $16,500. Is
it acceptable to add back $16,500 to earnings. In my opinion, it is
not and another question is whether the insured would accept $16,500 as an add
back to earnings. In my experience they would not and their
accountant would argue that the $16,500 is unacceptable as an add back as the
private portion has already been deducted for tax purposes, which I am inclined
to agree.
There are other implications and it
requires the underwriter/claims assessor to get it right from the start.
For instance, what do you do when a business expense claim comes in, pay the
total motor vehicle expenses less an arbitrary add back on top of the amount
already deducted for personal use for tax purposes. Well in practice this
never happens. The only way to be correctly and justifiably apply an
add back in accordance with the income definition is to, for instance
add back a second vehicle for a spouse who does not work in the business
and her car expenses are run through for tax purposes.
To think, the add back of motor
vehicle expenses should be simple, the real trick is to understand the
insured's business and add back expenses which can be justified and evidence
obtained in the event that the matter proceeds to court. At the end of the
day, if the facts can be justified, the financial assessment can be better
accepted by the insured himself, save time for the claims assessor and make for
a happier client.
I note that I have not considered
an insurance companies obligations under the Financial Transactions Reports
Act 1988.
Each policy is a contract and a
decision should be made after consideration of the terms and conditions of the
contract and legal advice obtained.
Service Trusts - ATO
Guidelines
I expect a final ruling on TR 2005/D5 “Deductibility of Service Fees paid to Associate Service Entities” and the accompanying explanatory booklet will be released shortly.
I will talk more about the ATO Guidelines next edition and identify what impact these new guidelines have on financial assessments that you should be aware of, if any.
FICS
Hot Items for an Issued
Focus
No items of note.
High Court Judgements
No matters of note.
Federal Court Judgements
No matters of note.
Litigation Matters
In-house counsel
privilege
Whether communications are
privileged or not depends on the nature of employment of those giving legal
advice, and on whether the common law or the Evidence Act applies.
This issue is pertinent when
insurance companies go through the Procedural Fairness process and exchange of
evidence. Your own legal advice should be obtained.
"The position of in-house counsel
and privilege appears to be as follows:
* At
common law, to attract privilege, a communication must be from or to a lawyer,
being a person holding a current practicing certificate and who is entitled to
and does exercise a degree of independence when providing advice, and the
communication must be for a privileged purpose. The common law will
continue to apply in all extra-curial processes (for example, orders for
production issued by various regulatory bodies such as ASIC, ACCC, ATO and so
on) and in jurisdictions where the Evidence Act does not
apply.
* In jurisdictions where the Evidence Act applies and there are
provisions in the rules of court which have the effect of incorporating the
privilege provisions of Evidence Act in respect of pre-trial processes,
then communications may be privileged regardless of whether the lawyer has a
practicing certificate so long as the lawyer acts in his or her capacity as a
lawyer and for a privileged purpose (except in the Federal Court(1))
* In
jurisdictions where the Evidence Act applies then, adopting the
rationale in Commonwealth v Vance, privilege will apply to
communications sought to be adduced in evidence if those communications are to
or from a lawyer regardless of whether that lawyer holds a current practicing
certificate so long as the person is acting in their capacity as a lawyer and
for a privileged purpose.
While this this decision will no
doubt be welcomed in some circles, it has added to the confusion surrounding the
duopoly of tests that exist depending upon whether and to what extent the
Evidence Act applies in any given circumstances"
by Anthony Lo Surdo, Law
Society Journal, November 2005, Page 63
(1) Seven Network Limited v
News Limited (2005) FCFCA 40 and 41.
New Additions to Web Site
Instruction Forms
The instruction form can be
downloaded from the web site. You can either print them out or simply
unprotect the document by using the password "FLINTFORENSICS" and save the
document to your desktop.
Administration
Looking forward to continuing to work
with you resolving your problems on a professional, equal and friendly
manner. The next edition will talk about the concept of investment value
or proprietorship value in considering the level of income under an income
protection policy.
Talk to you soon,
Bruce Flint
Managing Director
FLINT FORENSICS PTY LIMITED - Assessment of Economic Loss, Expert Witness, Financial
and Other Investigations, Income Protection Risk Management, Regulatory Investigation
and Assessment, Training and Valuations
PH: 02 9584 1474 FAX: 02 9584 1475 MOBILE: 0409 18 4598
WE AIM TO PROVIDE PROFITABLE SOLUTIONS
We hope you find the Flint Forensics Pty Ltd Free E-mail Update service useful. |
