The Cassandra Complex
The History Behind the One of the Largest Agency Failings on Record in New Zealand
The genesis of what can be reasonably described as the greatest agency failure in New Zealand history started in 2004 when a ruling was provided in the outcome of the appeal Windle v ACC. The situation for Windle was an unfortunate one. Mr. Windle had an injury that prevented him from working not long after he left his permanent employment (salary and wage ) to become a self-employed person.
All these considerations factored into the same financial year that being the tax year in which the injury occurred. So Mr. Windle had paid levies on his salary and wages at the time of his PAYE payments. He left that employment, became a self-employed earner and was injured shortly afterwards. Mr. Windle held the view that as he had paid levies on that PAYE Income in the year incapacity commenced he should be entitled to access those earnings as eligible for weekly compensation.
Unfortunately for Mr. Windle, there was nothing in the legislation that allowed such a consideration and the judge had to rule against him. However in doing so the judge also noted the inherent unfairness of the situation. Mr. Windle was not able to claim under the permanent employee entitlement clause 34 because to claim under clause 34 the claimant must have been in that permanent employment immediately before the date of injury.
Mr. Windle was not in that employment and the legislation saw him as a self-employed person who was entitled to claim under clause 38. There was no legal mechanism in clause 38 to recognize the income from another category of earner so Mr. Windle's claim fell into a hole in the legislation. As a result the judge instructed the Corporation to go to the government of the day and seek to have the matter addressed under legislation.
The Corporation did so and the Labour led government of the day altered the payment formulas in clause 38 to factor in all "employee" earnings for that self-employed person as long as those earning were received in the same tax year of incapacity up to a maximum of 52 weeks. This came into force in 2005 and although I cannot say with confidence that the Corporation's process on this is lawful, the Corporation's process was updated to accommodate the law change.
This was in fact the beginning of the end for the Corporation. This is the point where the understanding between the Corporation and the legislators began to diverge with both parties blissfully unaware of that fact.
In the Corporation's view an issue had been raised, the government spoke, the process was updated and there we have a complete process.
The legislators on the other hand were not finished. The government was planning a large shake up of the income tax regime and this was occurring as the legislators had been given the ACC entitlement matter to consider. The Government was facing several taxation issues that it sought address by introducing a new category of earner into the new Income Tax Act it was planning on implementing in 2007.
It is fact that the government also had ongoing concerns about the levy and entitlement processes for self-employed earners and shareholder employees.
Injury Prevention, Rehabilitation, and Compensation Amendment Bill (No 3)
Fair compensation for self-employed and shareholder-employees The Government is concerned that the earnings calculations for the purposes of calculating weekly compensation for self-employed people and shareholder-employees do not provide a fair assessment for some people. This is because income from other work undertaken during the income year is not factored into the calculation, and because earnings may be divided by a number of weeks that is greater than the period over which the earnings were earned.
The Bill provides that to establish a weekly self-employed earnings rate for self-employed people and shareholder-employees, the earnings from other sources in the 52 weeks preceding the commencement of the incapacity can be taken into account, and the total earnings should be divided by the number of weeks which accurately represents the period over which the earnings were earned.
This document is dated 2004. The legislators future intentions are made clear. They sought to introduce a weekly self-employed earnings rate for self-employed earners. However to achieve that required a weekly payment system for said self-employed earners. The weekly payment system would levy for this new weekly earnings rating system weekly at the time of payment.
The document goes on to list all the changes that were made to the Accident Compensation Act 2001 and the Corporation acted on those amendments accordingly. However, the changes made to the legislation were not complete for to introduce this new weekly rating system the government would need to change the Income Tax Act 2004.
It just so happened that the government did not wish to just amend the IT Act 2004, the intention was to introduce the new IT Act 2007 to completely replace it. So the intention is in the documentation along with the listed changes but the changes we are focused on could not take place. The Corporation completes the listed required changes and as far as it was concerned the job is done.
In the meantime the legislators went on to implement further changes by introducing the IT Act 2007 and amending the AC AC Act 2001 on the 1st of April 2008. However the driver behind these more recent changes was not Windle v ACC but the outcome of a process that focused on the Income Tax Act. As a result the AC Act 2001 was seen as a secondary consideration yet it is under the AC Act 2001 that the duty under law to levy all earnings is placed on the Corporation.
The government of the day was facing new challenges under New Zealand's increasingly antiquated taxation system. There had been a rise in the number of sole trader / contractor self-employed and many of these earners came from overseas. These earners were taxed under the system that taxed businesses generally and they also filed a tax return at the end of the year and submitted deductions for expenses.
There were several issues that needed addressing. Overseas contractors were legging it with their tax and ACC levies tucked firmly in their back pockets to the places from whence they came.
On the ACC side of the process these earners were levied by invoice based on the amount of "relevant" earnings that resulted from the calculation income minus expenses under the section 222 levy process. Self-employed earners were known for minimizing their earnings for taxation purposes and then trying to inflate said earnings when it came to entitlement considerations under the AC Act 2001.
It was clear that the Income Tax regime needed an upgrade and part of that upgrade was to include the introduction of a new category of earner, that would specifically apply to self-employed earners, who worked as contractors in certain industries. These earners would be required by law under the IT Act 2007, if their type of industry was listed in Schedule 4 of that Act, to receive their earnings in the form of what would be called PAYE Schedular Payments.
For example. A company that hires laborers must under law treat those hires "earnings" as PAYE Income just as they would if that person was a permanent employee. The status of self-employed earner remains unchanged it is the earnings that have the legal status of PAYE under the IT Act 2007. The result is a category of earner that is a self-employed person who receives PAYE Income Payments for the purposes of the PAYE rules.
The purpose of the PAYE rules is to ensure that people are taxed and levied as they earn. This allows both ACC and IRD to achieve higher intakes and it leaves little room for argument in taxation and ACC entitlement matters. The formulas provided in entitlement clause 38 are complex and they cover off a startling range of employment circumstances that results in nearly all claimants getting fair compensation. Unfortunately no one thought to consider what might happen once ACC got its hands on it.
A perfect storm was brewing and no one could see the threat of it on the horizon. The legislators completed their work and the Income Tax Act 2007 came into force in late 2006. Their work was complete. IRD completed its own processes to accommodate the requirements of the new legislation and their work was complete. However there was work to be completed on the ACC side of the process as well and amendments were inserted into the Accident Compensation Act 2001 on the 1st of April 2008.
It is here the monster grew a second head. Things were about to go badly sideways at both a political and a process level and the flaws in each would aggravate the other.
There were three amendments and they all had the effect of adding the definition PAYE Income Payment into the levy / entitlement processes. There were no other corresponding amendments required because these 2008 amendments were being added to legislation that was already written to accommodate them.
Those changes had occurred when the legislation was amended in 2005 and three years had passed with what appeared to be a fully functioning levy and entitlement system.
The problem was that the Corporation had no understanding of this new category of earner for all that pertained to this earner was in the IT Act 2007 and put together under a separate process from the original process triggered by Windle.
IRD could not see the error because the duty to actually instruct IRD to levy such payments belongs to the Corporation under the AC Act 2001. IRD has no understanding of the AC Act 2001.
Another factor was in play. ACC was having significant issues with its new and expensive IT management system EOS that went fully live on June 12th 2007. Staff were struggling with this new system, everything looked and behaved differently on the new system and the system was designed to assert as much automated managerial oversight as possible.
The new Income Tax Act 2007 came into force on the 1st of November 2007 a mere 3.5 months after EOS went fully live. As the Corporation continued to try and bed in EOS the clock ticked onwards and the 1st of April 2008 arrived. On that date three amendments that were added to AC Act 2001 in 2007 came into force. They all have the same effect. They add the definition of PAYE Income Payment to the levy entitlement consideration.
Section 6 (1) PAYE income payment: inserted, on 1 April 2008 (effective for 2008–09 income year and later income years, except when the context requires otherwise), by section ZA 2(1) of the Income Tax Act 2007 (2007 No 97).
We can see here this amendment was added to Section 6 (1) in 2007. The same year that EOS went live in June. It was in 2007 that the levy entitlement system was supposed to be updated on the Corporation's IT system. The problem of course was that the entire focus was on getting EOS under control at a staff level and EVERY process in the system was being tweaked all over the place. It seems evident that with all this going on the alterations to the levy / entitlement process was simply overlooked.
In November 2008 the Labour led government fell to National in the general election. The legislators who put the new system together were now either retired from parliament or opposition MP's. The legislators had left the building as had the IRD who had no understanding of legislation outside of their inherent jurisdiction.
The infamous board and executive, put together by National Minister of ACC of the day Nick Smith, swept in to take over and management was given an overhaul. So we can see that at every level the entire ACC system was under massive turmoil and right in the middle of all this upheaval three amendments came into force and the Corporation essentially missed them.
The levy / entitlement system the legislators had worked so hard to implement was now sitting as a ghost process sitting between two of the most powerful agencies in New Zealand. However all was not lost. When the earnings in question started to show up on IRD documentation then the error should be spotted and the system fixed accordingly.
Sadly this was not to be. As I am writing this I cannot help but marvel at just how brutally unlucky the Corporation has been in all of this. Another perfect storm awaited in the entitlement process. The IRD had the taxation side of this earner sorted out and it was only a matter of time before these earnings started to show up on IRD documentation for ACC claims.
The first claims with said earnings arrived in ACC's system and the Corporation's staff were faced with an issue. The system had not been upgraded in 2007 as required for the reasons outlined above. What were these earnings that seemed to have no place in the system? It is at this point where the second perfect storm and the Corporations inherent incompetence combined to result in a truly absurd outcome at the entitlement level.
Corporation staff had two facts presented to them. One was that these errant earnings were showing up on the system and the second was that these payments had no record of being levied. The actual issue of course is that those levies were supposed to be levied and no one had responded to the amendments that went into the Act in 2007. Important facts come into play here.
The legislation that applies to PAYE levies was not a part of the legislation that Corporation staff had to deal with much. That part of the process is supposed to be set and forget.
The legislation had been working with no issues and there was no evident change in the legislation in question. The problem there is that the legislation had indeed been changed but in the form of small but critical amendments that altered the function of the legislation without materially changing the wording of the sections. The only way these amendments would be noticeable is if someone reverse engineered the entire levy process.
Having failed to see any changes it is most likely that the staff reached the conclusion that no new levy process was in place and decided to see if they could determine why not. This is where the Corporation was to officially make the one of the biggest mistakes in NZ agency history. Corporation staff had never had to deal with this kind of consideration. ACC staff see the legislation from the entitlement side of the process and not the levy side of the process.
Evidently, instead of applying section 221 in the way it is written from the levy process side of the consideration, the staff in question, having likely already incorrectly concluded that the levy legislation was unchanged, approached the matter from the entitlement consideration and evidently started their consideration from the entitlement clause 38 instead of the levy consideration provided by section 221.
Clause 38 has been amended in 2005 and the "employee earnings" consideration became part of the formula. Normally this would have given the Corporation some kind of clue but not so fast. When the 2005 amendments were introduced they allowed self-employed earners to claim on PAYE salary and wages they had earned in the current financial year even if that claimant was no longer working in permanent employment.
So for three years clause 38 had been operating correctly and there was no detected change in section 221. Earnings as a self-employed person was subject to the relevant year consideration but these earnings were presenting in the current tax year. ACC then must have decided that these were not earnings as a self-employed person so therefore could only be "employee earnings".
It is important to note that Corporation staff have a very distant relationship with the actual legislation. ACC staff are taught ACC policy but not the legislation. It is fair to say that the ability of Corporation staff members to read legislation sits in the incompetent to average range. The evidence shows that ACC "decided" to determine if the errant payments counted as PAYE earnings to be compensated and in doing so went so far off the rails they ended up in some form of alternative reality.
Lets take a look at the most basic entitlement clause in clause 38.
The amounts that apply under this subclause are,—
(a) for claimants who first commenced receiving earnings as self-employed persons in the tax year in which the incapacity commenced, the amount calculated using the following formula:
a ÷ b
a is the total of the claimant’s earnings as an employee in the 52 weeks immediately before the incapacity commenced
b is the number of full or part weeks during which the claimant earned those earnings as an employee:
On the surface it would have been better to have had PAYE Income Payments instead of earnings as an employee but there are good reasons for not doing so. Earnings as an employee is a legal term that has applied to the entitlements for permanent employees since 1972.
Due to various requirements there is an entire legislated process built into section 6 that applies to salary and wage PAYE and if they changed the legislation at the entitlement end they would have to change a significant part of the legislation in various other parts of the Act.
Much easier then to fit the new category of self-employed earner into the existing PAYE system at the IT Act 2007 level and the 2008 amendments were supposed to complete the system at issue. So they thought but we know about the plans of mice and men.
So, to recap. The Corporation is dealing with the outcome of a major change in legislation three years after that process started. ACC was separated from the process after the 2005 amendments. The process was completed through the IT Tax Act 2007 select committee process and the Corporation was likely not part of that process.
The process had to be implemented when the Corporation was undergoing a massive IT upgrade and was dealing with a new board and management. The legislators who made the legislation were now fenced off from the process due to Labour losing the election in 2008. The levy legislation had no obvious changes. IRD did not see the fault as the legislation that applied was the AC Act 2001 and not the IT Act 2007. The entitlement process had been running correctly for years.
If they took note of the amendments at all then they decided they only existed to match terminology found in the new IT Act 2007 and some of the arguments provided by the Corporation in recent appeals reflect that determination.
It is fair to say that the Corporation was really up against it but there were many glaring anomalies in the process that should have warned them and the incorrect was now about to become the downright absurd.
The Corporation was clearly out of its depth but now they had something that they "knew" or so they thought. As the formula provided shows "a" is the total of the claimants "earnings as an employee" and naturally they seized on what they thought they knew.
According to the evidence, it seems clear that ACC took the term "earnings as employee" and applied in the way they were familiar with, the same way they apply it to salary and wage earners. Note that last part for it is very important.
The entire dispute revolves around this legal term "earnings as an employee" and there is a massive red herring in the legislation that would lure the Corporation to its own doom.
Having most likely incorrectly decided that there was no levy process for these earnings in the Act, the question for ACC then would be "are these earnings eligible for entitlement"? The natural thing to do then would be to start the consideration from the clause 38 entitlement clause and NOT the section 221 levy section.
As clause 38 is completely silent on the levy process side of things, there was no legislation that presented another context that was required. This mistake bypassed a vital section consideration.
(1) In this Act, unless the context otherwise requires,
As stated, clause 38 had no context to offer so ACC applied section 6 unlawfully. There is absolutely another context in the legislation that requires its own strictly interpreted legislative outcome under section 221 but again, ACC started the consideration from the wrong part of the Act and as a result unlawfully applied the strictly interpreted legislation that applies to permanent employees who are eligible for entitlement under clause 34 to this new category of self-employed earner.
This allowed the Corporation in its own mind to apply the incorrect legislation as follows:
earnings as an employee has the meaning set out in sections 9 to 13
9 Earnings as an employee: what it means
(1) Earnings as an employee, in relation to any person and any tax year, means all PAYE income payments of the person for the tax year.
(2) This section is subject to sections 10 to 13.
11 Earnings as an employee: what it does not include
(1) Earnings as an employee, in relation to any person and any tax year, does not include—
(a) any income-tested benefit, veteran’s pension, New Zealand superannuation, or schedular payment; or
This would have seemed very conclusive to ACC and so the determination was made that PAYE Schedular Payments are not levied and not eligible for entitlement because schedular payments are specifically excluded under the section 11 of the legislation. The specific details of how section 11 in no way applied to the self-employed consideration can be found here.
The correct application of section 11
ACC was no doubt very pleased with themselves but they were blissfully unaware that what they had done was usurp the role of the Governor General. ACC had altered the outcome of a regulation and ACC does not make regulations. That right is reserved for parliament. ACC had been viewing their course of action as a determination on an entitlement when in fact what they had done was make a decision that applied to an entire category of earner. The full details on how ACC has subverted the role of the Governor General can be found here.
Corporation exceeds its power under legislation
The decision in question is printed on ACC invoices for the earners in question when they are unlawfully invoicing, for levies they have refused to pay entitlement on, in the following financial year under section 222.
"Your invoice has been calculated based on schedular payments that were declared to Inland Revenue by your employer. Schedular payments are treated as self-employed earnings because no ACC levy is deducted.
A detailed description of the glaring flaws in the resulting entitlement process can be found here.
Resulting flaws in application of entitlement
Having succeeded in their own minds the Corporation went to advance this fatally flawed reasoning as legitimate legislation when appeals by self-employed earners went to court. It is clearly evident that the reviewers and judges do not take the time to read the legislation either and the appeal bodies would not have been part of the amendment process at any level.
Another highly relevant issues is that the entitlements that applied had been completely nullified. As the entitlements were never provided to any person, claimants, the courts and ACC advocates were completely oblivious that there were entitlements available in the first place. It is very hard to appeal on an entitlement that is essentially a ghost in the machine.
All this was to change in 2017 when I picked up my very first self-employed compensation claim in my role as ACC Advocate. The details of that part of this story can be found here.
How the flaw came to be discovered