What is Loss of Income?

What exactly is loss of income? In the case of injury or sickness, the loss of income is calculated as the difference between your present income and the income generated before the disability or illness. In the case of fatal accident litigation, the loss of income will generally be the income at the time of the deceased death or leading up to the deceased death.

How to calculate loss of income in personal injury litigation?  image by Rushmore Group
Loss of income calculations in personal injury and other litigation

When conducting a loss of income calculation, it’s important to assess what evidence exists in relation to both income leading up to the relevant date. In some cases, the level of reported income does not reflect the true level of earnings. The subject individual may have derived income from another part time business, or generated income in some other manner. In some cases, it may be appropriate to analyse the level of expenditure leading up to the relevant date. If the level of expenditure is used to estimate the lost income, consideration should be given as to whether the individual was spending money that had been earnt in their activities or whether the money spent was the result of a loan, a gift or from another source.

Review of Tax Returns for a Loss of Income Calculation

In many instances, the review of income tax returns for an individual will reveal their level of income to an accurate degree. This will occur where the individual was a Pay-As-You-Go (PAYG) employee and they did not engage in any other part time, casual or ad-hoc work. It may be relevant to consider any other income such as share trading activities.

Income from Share Trading Activities

It is common for many individuals to earn income from trading shares on a listed stock exchange. For some individuals income will be generated from this type of activity due to their own particular skill, knowledge or other characteristic. This may not be able to be replicated by someone in the place of the individual.

Loss of Income Calculation for Self Employed Individuals

Loss of Income Calculations for self employed individuals can be quite involved. In many cases, a number of adjustments will be required to adjust a self employed person’s income in order to calculate a ‘true income’ level.

People can also earn income from activities that they themselves may not even equate to running a business. They may restore cars in their spare time for additional funds or sell DVD’s or other products on E-Bay. These activities may have many of the characteristics of a business such as:

  • A trading name and logo
  • Conduct advertising
  • Investment in capital equipment such as machines or other relevant equipment
  • Budgets and planning
  • Separate bank accounts and record keeping

If we are performing a loss of income calculation, consideration would be given to these activities and whether they are considered income for the purposes of the calculation.

Importance of Record Keeping in a Loss of Earnings Calculation

It is very important to obtain and retain as much documentation as possible for the purposes of conducting this type of calculation. Typically we would obtain as many bank statements, home loan statements, and credit card statements as possible. Also we would obtain share trading statements, buy and sell confirmations, and transfer statements.

Income from Rental Properties

In many cases, income from rental properties will continue past the relevant date and in most cases there will be no “lost income”. However there may be situations where rental income was being obtained and was due to the individuals unique skills and talents, in these cases, an adjustment may be made to the calculation to reflect that this will no longer be earnt in the future.

In some situations, an individual may have earnt cash income from a particular activity. Quantifying this document and reconciling this information to source documentation may be very difficult or impossible to conduct.

Use of Expenditure Transactions to Estimate Income

In some situations, the income that is alleged to have been earned during a period of time will bear little or no resemblance to the income reported on a tax return or other official document. In these situations, the only option available in conducting this type of calculation would be to analyse the expenses that have been incurred by the individual leading up to the relevant date. This would involve obtaining all bank statements, home loan statements, mobile phone statements, utility bills and any other statement that reflects the level of expenditure that has been previously incurred by the individual.

Managing Information in a Personal Injury or Other Type of Litigation

Typically when we consolidate all these documents, we often have more than a 1,000 documents. Each statement will contain relevant data but the data will be in a variety of formats. At this stage, we will typically have all the documents scanned and OCR’d by a legal scanning house.

OCR is described by Wikipedia as:

“Optical character recognition, usually abbreviated to OCR, is the mechanical or electronic conversion of scanned images of handwritten, typewritten or printed text into machine-encoded text. It is widely used as a form of data entry from some sort of original paper data source, whether documents, sales receipts, mail, or any number of printed records. It is crucial to the computerization of printed texts so that they can be electronically searched, and stored more compactly.”

The OCR process is important as we can copy and paste the data from the scanned PDF image and then past this data into a spreadsheet. We normalise the information in a spreadsheet and then import the data into a custom database. Once the data has been imported into the database we can very quickly tag each transaction as relevant or not. We can also categorise this information for the purposes of summarising the data and including the relevant information in a report.

The information obtained from the OCR document is then incorporated into our proprietary case database. Our case database is then used to formulate a report according to the instructions we have obtained.

Further Information

If you would like further information about using our forensic accounting services for a personal injury, litigation, or  other forensic accounting matter, then please contact us for an obligation free discussion. We provide services to corporations, law firms and individuals in Sydney, Brisbane, Melbourne, Adelaide, Perth and across Australia. To arrange an appointment with one of our personal injury compensation experts, please call (02) 9954 6200.

 

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