REPORTABLE

IN THE HIGH COURT OF SOUTH AFRICA (WESTERN CAPE HIGH COURT, CAPE TOWN)

CASE NO: 20738/2008
In the matter between:

and

[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.

[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.

"[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.'"

[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.

[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.

"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."

"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."

"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."

[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