Tag Archive | loss of earning capacity

Tax evasion extinguishes loss of earning capacity claim – IAC Newsletter 38/2013, (November 2013)

Dear Reader,

Welcome to the 38th edition of Independent Actuaries & Consultant’s (IAC’s) monthly newsletter.

Tax evasion extinguishes loss of earning capacity claim – Heese N.O. v RAF, Western Cape High Court, case no: A586/2012

Hans Ulrich Peters (‘Peters’), a German businessman, was seriously injured in a motor car accident in Cape Town on 10 June 2000. The appellant, an advocate, was appointed as his curator ad litem (‘the plaintiff’) for purposes of pursuing a claim against the respondent (‘the RAF’). The curator issued summons against the RAF in October 2004. The merits were referred to arbitration. In June 2007 the arbitrator determined that the RAF was fully liable for any damages suffered by Peters.

The determination of damages went to trial in the high court and the only aspect that remained in issue was Peters’ alleged diminution of earning capacity. The parties agreed at the beginning of the trial that the determination of damages in respect of Peters’ earning capacity would be divided into two phases.

In the first phase the trial judge would be asked to determine the gross pre-tax income that Peters would have earned but for the accident. The second phase would address questions of tax.
The curator contended, on behalf of Peters, that his historic profits as a businessman over the period 1991 to 2001, as reflected in his financial statements and tax returns, was not a safe guide to his likely post-accident profits because he had dishonestly evaded tax in Germany by understating his income and overstating his expenditure.

Blignault J dismissed the plaintiff’s claim, finding that Peters had no post-accident earning capacity to which a value could be ascribed. The trial judge based his conclusion on two lines of reasoning.

The first line was the following. The judge accepted that Peters’ business (the selling of magazine subscriptions) was not unlawful. The capacity to earn money from such a business could legitimately be the subject of compensation. However, Peters could not lawfully have continued to conduct the business without disclosing to the German tax authorities that he had evaded tax. If Peters could only earn future income by dishonestly refraining from making such a disclosure, it would be contrary to policy to award him compensation for the loss of the future earnings. And if he did make the necessary disclosure, this would have caused the sterilisation of his earning capacity by virtue of harsh criminal sanctions.

The trial judge’s second line of reasoning was that the German tax authorities were in any event closing in on Peters and that he would probably have been arrested if he had not made voluntary disclosure.

The claimant appealed against the judgement.

The appeal court did not accept that the court a quo’s reasoning was wrong. If it appears from evidence that a claimant’s supposed earning capacity would as likely as not have been sterilised and rendered worthless by some or other event over the future period covered by the claim, the court could properly conclude that a claim of diminution in earning capacity has not been established.

In short the appeal court found that the tax evasion in itself did not cause the claimant to fail in its claim, however in casu the tax evasion led to imminent criminal prosecution which precluded the claimant to return to his homeland to continue his business. Thus, it was as a results of the tax evasion that the claimants earning capacity was extinguished and not as a result of the sequlae of the motor vehicle accident.

As observed in Rudman v Road Accident Fund 2003 (2) SA 234 (SCA) paras 11 and 16) para 11, the fact that a physical disability which impacts upon earning capacity also reduces the patrimony of the injured person may follow readily in some cases but it did not follow in all cases, including this one.

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