Re Commissioner of Taxation v Manchester Unity Ioof [1993] FCA 27; (1993) 25 Atr 48 (1993) 113 ALR 113 (11 February 1993)

FEDERAL COURT OF AUSTRALIA

Re: COMMISSIONER OF TAXATION
And: MANCHESTER UNITY IOOF
No. V G64 of 1992
FED No. 54
Number of pages - 28
Income Tax
[1993] FCA 27; (1993) 25 ATR 48
(1993) 113 ALR 113

COURT

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Northrop J.(1)

CATCHWORDS

Income Tax - Construction and application of ss116F, 116G and 116H of Income Tax Assessment Act 1936 - assessable income of a registered organization - characterisation of allowable deductions - apportionment of expenditure between assessable income and exempt income.

Income Tax Assessment Act 1936 - ss6, 18, 23, 25, 51, 116F, 116G, 116H

Income Tax Assessment Amendment Act (No 3) 1984 - ss36, 60(4)

HEARING

MELBOURNE, 10, 11 September 1992
11:2:1993

Counsel for the Applicant: Mr J.I. Fajgenbaum QC with

Ms H.M. Symon

Solicitors for the Applicant: Australian Government Solicitor

Counsel for the Respondent: Mr N.H.M. Forsyth QC with
Mr G.T. Pagone

Solicitors for the Respondent: Barker Gosling

ORDER

THE COURT ORDERS THAT:

1. The appeal be allowed with costs.
2. The decision appealed from be set aside and the matter remitted to
the Administrative Appeals Tribunal to be heard and decided
according to law.

Note: Settlement and entry of orders is dealt with in Order 36 of The Federal Court Rules

DECISION

NORTHROP J. This appeal raises for consideration the construction and application of s116H of the Income Tax Assessment Act 1936 ("the Assessment Act") in operation for the tax years ended 31 May 1984 to 1987 inclusive to the income of the Manchester Unity IOOF ("the taxpayer"). Section 116H is contained in Division 8A of Part III of the Assessment Act. Division 8A is headed "Annuity and insurance business of certain organizations" and comprises sections 116E to 116J inclusive. The taxpayer is a registered organization under Division 8A.

2. At all material times s116H provided:

"116H. Notwithstanding any other provision of this Act, the
deductions allowable to a registered organization in relation to
the year of income are -
(a) any deductions that, apart from this section, would be
allowable to the organization in relation to the year of
income, being deductions that relate exclusively to the
assessable income of the organization; and
(b) so much of any other deductions that, apart from this
section, would be allowable to the organization in relation
to the year of income (other than deductions that relate
exclusively to exempt income of the organization) as bears
to the amount of those other deductions the same proportion
as the assessable income of the organization of the year of
income bears to the total income of the organization of the
year of income."

3. In order to consider the construction of s116H, it is necessary to make some reference to the apparent policy of the Assessment Act, as evidenced by the provisions of Division 8A. Before Division 8A came into operation pursuant to the provisions of the Income Tax Assessment Amendment Act (No 3) 1984, ("the Amendment Act (No 3)"), it is true to say that the income of the taxpayer, being a friendly society, was exempt from tax by reason of paragraph 23(g)(i) of the Assessment Act. That paragraph provides as follows:

"23. The following income shall be exempt from income tax:
(a) ...
(g) the income of a society, association or club which is not
carried on for the purposes of profit or gain to its
individual members and is -
(i) a friendly society, not being a friendly society
dispensary; ..."

4. The Amendment Act (No 3), which was assented to on 25 June 1984 and came into operation on that day, by s36 inserted Division 8A into the Assessment Act, but that Division was given retrospective operation. Sub-sec 60(4) of the Amendment Act (No 3) provided that the amendments made by s36 "apply to assessments in respect of income of the year of income that commenced on 1 July 1983 and of all subsequent years of income", that is to the years of income commencing almost one year before the Amendment Act (No 3) came into operation. It is noted that the taxpayer has adopted as its tax year the year of income commencing on 1 June, but by reason of sections 18 and 6(2) of the Assessment Act, Division 8A applies to the year of income of the taxpayer commencing 1 June 1983, namely the year commencing more than 12 months before Division 8 came into operation.

5. The policy of the legislation enacted by Division 8A is clear. It is designed to make the income of a friendly society liable to tax on part of its income but to permit other parts of its income to remain exempt from tax. It did this by s116G which provides:

"116G.(1) The assessable income of the year of income of a
registered organization being a friendly society shall include so
much of the total income (other than premiums) of the society of
the year of income as is derived from eligible insurance business
of the society.
116G.(2) The assessable income of the year of income of a
registered organization not being a friendly society shall include
so much of the total income (other than premiums) of the
organization of the year of income as is derived from annuity
business of the organization other than annuity business in
respect of eligible annuities."

6. To understand this provision it is necessary to refer to the meanings to be given to some words and phrases when used in Division 8A. "Registered organization" means, for present purposes, a friendly association being a society the income of which would, but for Division 8A, be exempt from tax by virtue of paragraph 23(g)(i). It is accepted that the taxpayer is a friendly society and a registered organization. "Total income", in relation to a registered organization, "... means income, profits or other amounts that would, but for any exempting provision, be assessable income of the registered organization".

7. The definition of "total income" is of particular importance for the resolution of this appeal. For the purposes of Division 8A, the total income of a registered organization is to be determined as if none of that income was exempt income. The total income of an organization, for this purpose, is treated as being the same as the assessable income of a taxpayer determined in conformity with sub-sec 25(1) of the Assessment Act. For this purpose, the provisions of Division 2 of Part II of the Assessment Act are to be applied as if none of the income of the organization was exempt income. This concept will be referred to further later in these reasons.

8. The phrase "eligible insurance business" means "business of, or in relation to, the issuing of, or the undertaking of liability under, eligible insurance policies." "Eligible insurance policy" means

"(a) a life assurance policy;
(b) an accident policy; or
(c) a disability policy,
but does not include so much of a policy referred to in paragraph
(a), (b) or (c) as is a sickness policy, a funeral policy or an
eligible policy".

9. The phrase "eligible policy" means

"(a) a superannuation policy;
(b) a policy in relation to an immediate annuity; or
(c) a policy in relation to a roll-over annuity."

10. At this stage the difference between the meaning of the words "assessable income" used in the definition of "total income" and in s116G is to be noted. For the purposes of this appeal, sub-section 116G(1) is to be considered and it is to be observed that in each provision the reference is to the assessable income of a registered organization being a friendly society, but of necessity the meaning to be given to the words cannot be the same. Thus, in the definition of "total income" the words "assessable income" have a very wide meaning. The words encompass all the income of the organization and include its exempt income. In sub-sec116G(1) the words have a limited meaning, namely a part only of the total income of the organization. Unless great care is taken, the difference in meaning to be given to the words "assessable income" can lead to confusion.

11. It appears that in sub-sec116G(1), the word "eligible" is used to indicate that part of the total income of a registered organization which constitutes assessable income and thus be eligible to tax. It seems a strange use of words to suggest that eligible is to be understood as liable to assessment for tax, but that is the effect of the definitions. What is clear is that sub-sec116G(1) ensures that part only of the total income of a registered organization will be assessable income, while the balance remains exempt income. In this context, the words "assessable income" and "exempt income" are to be given the meaning ascribed to them by sub-sec 6(1) of the Assessment Act, namely "all the amounts which under the provisions of this Act are included in the assessable income" and "income which is exempt from income tax and includes income which is not assessable income" respectively. The position is made clear by s116F which provides:

"116F. Notwithstanding any other provision of this Act (other
than the provisions of Part IVA), the assessable income of a
registered organization shall be ascertained in accordance with,
and only in accordance with, this Division."

12. In this section, the reference to "the assessable income of a registered organization" is a reference to the assessable income referred to in s116G. That assessable income is not to be ascertained directly in accordance with the provisions of Division 2 of Part II of the Assessment Act, but indirectly in accordance with Division 8A. In s116G and in s116F the "assessable income of a registered organization" is a part only of the total income of the registered organization. The total income of the organization is to be ascertained in accordance with the provisions of Division 2 as if none of that income was exempt income. Thus s116F makes it clear that notwithstanding the other provisions of the Assessment Act, the assessable income of a registered organization referred to in sub-sec116G(1) is that part of its total income which is derived from its eligible insurance business as defined for the purposes of Division 8A. There might be difficulties in calculating that amount, but the concept is relatively clear.

13. In Independent Order of Odd Fellows of Victoria v The Commissioner of Taxation of the Commonwealth of Australia [1991] HCA 55; (1991) 173 CLR 417, the High Court considered the meaning and application of s116G as contained in Division 8A and the problem arising in determining what was assessable income and what remained exempt income. The Court stressed the fact that all the income received by a registered organization was the income of the registered organization but part of it was to be treated as assessable income depending upon the character properly attributed to the activity of the investment by which that income was derived. The position is stated in the joint judgment of the Court at pp 423-4:

"The criterion of assessability of the income of a friendly
society is its derivation from eligible insurance business
(s116G(1)). Eligible insurance business is neither a Fund nor a
sum of money; it is business consisting in the issuing of or the
undertaking of liability under eligible insurance policies or
business in relation to the issuing of or the undertaking of
liability under eligible insurance policies (s116E). Income
derived from any other business of a friendly society is outside
s116G(1). In applying the criterion, it is erroneous to treat a
business or a fund as if it had a legal personality. If that
error be made, it facilitates the making of the further error that
moneys transferred to the No 2 Fund belong beneficially to the
Benefit Funds from which they were transferred. Then it is but a
short step to treat the income derived from investment of those
moneys as the income of the respective Benefit Funds and hence
derived from the respective businesses in respect of which the
Funds were constituted. The basic fallacy in this chain of
reasoning is that it overlooks the fact that at all material times
the money belongs to I.O.O.F. alone. It is true that while the
money stands to the credit of a Fund it must not be used "for the
advantage of any other fund". It is also true that the policy
holders concerned with that Fund have the right to have the Fund
administered in accordance with the rules. But they have no
beneficial interest in the moneys in the Fund. I.O.O.F. is the
beneficial owner of those moneys. Consequently, a transfer of
money from one Fund to another merely alters the powers of
I.O.O.F. (or its trustees) with respect to the control, investment
and application of the money transferred and the application of
income or capital gains derived from its investment. Although
transfers between Funds might affect the administration of the
moneys transferred, income derived from the investment of moneys
in any Fund is the income of I.O.O.F. and the administration of
the income so derived is governed by the rules applicable to that
income. The liability of IOOF as taxpayer in respect of income
derived from investment of moneys does not depend upon the Fund
from which or to which money destined for investment is
transferred but upon the character properly attributed to the
activity of investment by which that income is derived: is the
investment of the money an activity which is part of the
taxpayer's eligible insurance business?"

14. In an attempt to reduce confusion, in the remainder of these reasons, the phrase "total income" will be used in its defined meaning when referring to the income of the taxpayer while the phrase "assessable income", when referring to the income of the taxpayer, will be used as having the meaning given to that phrase by s116G.

15. It is to be observed that the words "taxable income" are not used in Division 8A. When used in the Assessment Act, those words are defined in sub-sec 6(1) to mean:

"(a) in a case to which paragraph (b) does not apply - the amount
remaining after deducting from the assessable income all
allowable deductions; and
(b) ... (not relevant for present purposes)."

16. By this stage, it is apparent that in any tax year a registered organization normally receives income part of which is assessable income and part of which is exempt income. It is completely inappropriate to consider what are allowable deductions with respect to exempt income since the concept of taxable income is incompatible with the concept of exempt income. It is important, however, that allowable deductions be deducted from the assessable income of a registered organization in order to determine the taxable income of that organization. Of necessity difficulties arise in ascertaining what are allowable deductions for that purpose where an expenditure relates to both assessable income and exempt income.

17. Section 116H is directed to resolve these difficulties. The section postulates two extremes. Where an expenditure relates "exclusively to the assessable income of the organization" that expenditure is an allowable deduction from that assessable income in order to determine the taxable income of the organization. Where an expenditure "relates exclusively to exempt income of the organization" that expenditure is not an allowable deduction from the assessable income in order to determine the taxable income of the organization. An expenditure of that kind can have no practical application to the exempt income of the organization. The section then provides a formula to determine the amount of an allowable deduction from the assessable income of the organization where the deduction relates partly to the assessable income and partly to the exempt income of the organization. The terms of s116H have been set out earlier in these reasons, but it is helpful to repeat them here:

"116H. Notwithstanding any other provision of this Act, the
deductions allowable to a registered organisation in relation to
the year of income are -
(a) any deductions that, apart from this section, would be
allowable to the organization in relation to the year of
income, being deductions that relate exclusively to the
assessable income of the organization; and
(b) so much of any other deductions that, apart from this
section, would be allowable to the organization in relation
to the year of income (other than deductions that relate
exclusively to exempt income of the organization) as bears
to the amount of those other deductions the same proportion
as the assessable income of the organization of the year of
income bears to the total income of the organization of the
year of income."

18. In this section the words "assessable income" have the same meaning as in s116G.

19. The taxpayer is a friendly society conducting a number of benefit funds. In addition it conducts an eligible insurance business which, essentially, relates to what is known as a 10 year savings plan or flexible insurance. The insured, or investor, pays a single "up front" premium. The taxpayer invests the premium and at the end of the specified period repays the premium together with bonuses that have attached to the premium and the investor does not pay tax on the bonuses. If the investor dies before the expiration of the specified period, the premium is returned to the estate of the deceased investor together with a reduced "bonus". Income derived by the taxpayer from its eligible insurance business in the four tax years ended 31 May 1984, 31 May 1985, 31 May 1986 and 31 May 1987 respectively, has constituted assessable income of the taxpayer under s116G of the Assessment Act.

20. The financial accounts of the taxpayer for each of those four tax years showed, in substance, three categories of allowable deductions which can be described as category A deductions, being those deductions claimed by the taxpayer to relate exclusively to the assessable income of the taxpayer; category B deductions, being those deductions claimed by the taxpayer to relate exclusively to the exempt income of the taxpayer; and category C deductions, being the remaining allowable deductions which did not come within either category A or category B.

21. In its return of income lodged for each of the four tax years, the taxpayer claimed as allowable deductions against its assessable income amounts calculated in conformity with s116H. One amount was claimed to come within category A and claimed in full as an allowable deduction. Another amount was said to come within category B and thus was not claimed as an allowable deduction. The third amount which, constituted the largest amount by far, was claimed to come within category C being the amounts of allowable deductions which did not come within category A or category B deductions. Sometimes the category C deductions are described as apportionable deductions. The amount claimed by the taxpayer as an allowable deduction from its assessable income was the proportion of the apportionable deductions calculated in conformity with the formula contained in para 116H(b), namely:

Assessable Income x Apportionable Deductions
Total Income

22. The taxpayer claimed as allowable deductions the category A deductions and the proportion of the category C deductions and deducted those amounts from its assessable income to determine its taxable income. The taxpayer was assessed for tax accordingly.

23. By amended assessments issued on 1 February 1988, the Commissioner disallowed a number of deductions which the taxpayer had included as apportionable deductions within category C deductions in relation to each of the four tax years. The disallowed deductions related to "advertising and public relations" expenditure. The Commissioner claimed this expenditure was not deductible, presumably because it was not allowable as a deduction under sub-sec 51(1) of the Assessment Act. It is noted that a large number of other deductions normally deducted, and if necessary, apportioned, under s51(1) were included as apportionable deductions within category C deductions and thus became apportionable in conformity with the statutory formula. The Commissioner did not seek to vary those deductions.

24. The taxpayer objected to each of the four amended assessments and eventually the matters came before the Administrative Appeals Tribunal. At the hearing before the Tribunal, the parties agreed that the year ended 31 May 1987 was typical of each of the proceeding three years and that the "fiscal consequences in 1987 would, for tax purposes, apply to the other years" and the hearing before the Tribunal proceeded on that basis.

25. The return of the taxpayer for the year ended 31 May 1987 showed assessable income as $31,502,614, its category C deductions as $5,882,819 and its total income as $143,505,485. Applying the formula contained in sub-sec 116H(2), an amount of $1,291,408 was claimed as an allowable deduction. In making its amended assessment, the Commissioner disallowed the sum of $878,982 from the category C deductions saying it was not a deduction allowable under s51(1) or s116H of Division 8A of the Assessment Act. As a result the apportionable deductions or category C deductions were reduced from $5,882,819 to $5,003,837 and the allowable deductions were reduced, by applying the formula, from $1,291,408 to $1,098,452.

26. The amount of $878,982 was identified by the taxpayer as "advertising and public relations" expenditure. The taxpayer did not claim that amount as being an allowable deduction relating exclusively to the assessable income of the taxpayer under para 116H(a). The Commissioner, in reality, claimed that the amount constituted "deductions that relate exclusively to exempt income of the" taxpayer and thus could not be included in the apportionable expenses or category C deductions under para 116H(b). They could not be included, so the Commissioner contended, because they were not allowable deductions under s51(1). The taxpayer joined issue with the Commissioner on this conclusion.

27. Before turning to the detail of the submissions of the parties, it is important to note that Division 8A of the Assessment Act, and in particular the provisions of s116H, does not deal with what constitutes allowable deductions for the purposes of the Assessment Act. Division 3 of Part II of the Assessment Act is headed "Deductions". A very large number of sections are contained within Division 3. They involve lengthy, detailed and difficult to apply provisions which enable a taxpayer to calculate the amounts of allowable deductions that are to be deducted from its assessable income to determine the amount of its taxable income.

28. Before Division 8A came into operation, the income of the taxpayer was exempt income. The provisions of Division 3 had no application with respect to its income. Division 8A introduced special concepts of total income and assessable income with respect to the income of the taxpayer. It also introduced special provisions with respect to deductions that would be allowable with respect to the assessable income of the taxpayer but Division 8A does not specify what constitutes deductions. The provisions of Division 3 continue to apply, but the question is apply to what; the total income of the taxpayer or the assessable income of the taxpayer? The answer depends upon the proper construction of s116H.

29. The efficacy of sections 116F and 116G depends upon the definition of "total income" contained in s116E. There is no comparable definition of "deductions" contained in Division 8A, but, on its proper construction, s116H contains its own definitions. Division 8A must be understood in the sense that the total income of the taxpayer includes both assessable income and exempt income. The word "deductions" contained in s116H means allowable deductions and includes deductions "that relate exclusively to exempt income of the" taxpayer. This is consistent with the concept that total income is in truth the income of the taxpayer, see Independent Order of Odd Fellows of Victoria. Consistently with this concept, in ascertaining the allowable deductions of the taxpayer, the deductions allowed pursuant to Division 3 must be treated as applying to the total income of the taxpayer as if none of that income were exempt income.

30. Once those deductions have been ascertained, the amount that can be deducted from the assessable income of the taxpayer to ascertain its taxable income is to be calculated in conformity with s116H. This is made clear by the opening words of s116H. The most startling result is that the apportionment provisions of sub-sec51(1) have no application. In this context, s116H is designed to simplify the apportionment of expenditure and outgoings of a registered organization between deductions that relate to both its assessable income and its exempt income. The only deductions which are not apportioned are those that relate exclusively to the assessable income of the organization and those that relate exclusively to exempt income of the organization. The emphasis is added. The test to be applied, exclusively, is a strict test and must be the same test with respect to assessable income and exempt income. Of necessity, it follows, that the great bulk of the deductions must come within the group of deductions which are to be apportioned.

31. The amount of $878,982 disallowed by the Commissioner in his amended assessment of the taxpayer for the year ended 31 May 1987 related to advertising and public relations expenditure by the taxpayer. There seems little doubt that this expenditure normally would be an allowable deduction of the taxpayer if the whole of its total income was assessable income under s116G of Division 8A of the Assessment Act. The Commissioner was not heard to argue against that proposition. The method of apportioning the expenditure between assessable income and exempt income was in issue. The taxpayer argued that because of the existence of s116H, it was not permissible to look at each separate item of expenditure for advertising and to determine according to the principles enunciated by the High Court in relation to s51(1) of the Assessment Act whether the whole or part of that amount was an allowable deduction with the result that the balance was not allowable, but rather that the appropriate course was to take the total expenditure of the advertising and since the totality of the benefit derived from it applied to the taxpayer generally, the totality of the expenditure became an allowable deduction from the total income of the taxpayer. What amount was to be deducted from its assessable income was to be ascertained by applying s116H. In short, counsel for the taxpayer said, unless this was done, why was s116H enacted?

32. Counsel for the Commissioner argued that the taxpayer was not entitled to any of the outgoings expended on advertisements as an allowable deduction under sub-sec 51(1) of the Assessment Act because the deductions referred to in para 116H(a) must be deductions "that apart from this section would be allowable to the organization ... being deductions that relate exclusively to the assessable income of the organization" and since the advertisements were not claimed and could not be claimed to relate exclusively to the assessable income of the taxpayer, sub-sec 51(1) had no application.

33. In my opinion, the submission on behalf of the Commissioner is based on a misunderstanding of s116H. In order to determine whether a deduction is an allowable deduction for the purpose of s116H, the taxpayer, being a registered organization, must be able to show that the amount claimed as a deduction is allowable under a provision contained in Division 3 of Part II of the Assessment Act. If it is, it becomes an allowable deduction under para 116H(a) if the deduction relates "exclusively to the assessable income of the organization." On the other hand, if the expenditure relates "exclusively to exempt income of the organization" under no circumstances can the expenditure be an allowable deduction under s116H. If the expenditure would normally be an expenditure under any of the provisions of Division 3 of Part II but does not relate exclusively to either the assessable or the exempt income of the organization, the amount which becomes an allowable deduction under s116H is to be determined in conformity with the formula prescribed in para 116H(b).

34. The nature of the submission made by counsel for the Commissioner is illustrated further by their contention that expenditure made by a registered organization, although an allowable deduction under a section other than s51 in Division 3 of Part II, could never come within para 116H(a) because it could never relate "exclusively to the assessable income of the organization." This contention begs the question. An expenditure must be an allowable deduction under a provision contained in Division 3 of Part II before consideration is given to Division 8A. Without a detailed examination of all the provisions contained in Division 3, it would be a bold submission to contend the only deductions allowable under s51 could be allowable deductions under para 116H(a). It is easy to visualize cases where such a deduction would be allowable. For example a registered organization owns a building from which it conducts exclusively that part of its business for which it receives, exclusively, assessable income within the meaning of Division 8A. In those circumstances, it is difficult to see how the sums paid by the registered organization for rates and taxes for that building would not be allowable deductions under s72 of the Assessment Act and allowable deductions under para 116H(a).

35. In the result, the Tribunal accepted neither of these submissions. From the figures available, which admittedly were not complete, and to that extent are suspect, the Tribunal estimated how the expenditure was incurred and then made an estimation of what was a fair and reasonable apportionment of the expenditure in relation to that expenditure between expenditure which related exclusively to assessable income of the taxpayer under para 116H(a) and what part was apportionable under para 116H(b). As a result of estimations based upon the incomplete figures, a decision was made based upon apportionment similar to apportionment under s51(1) of the Assessment Act. The Tribunal relied on the well known statement of principle applicable to apportionment appearing in Ronpibon Tix No Liability v Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47 at 59 and held that on this basis, under s51(1) of the Act, the part of the expenditure on advertising which related exclusively to the assessable income of the taxpayer was deductible in full under paragraph 116H(a) by reason of sub-sec 51(1). Another group of expenditure was held to relate exclusively to exempt income of the taxpayer and thus was not apportionable while the third group was apportionable under para 116H(b). Nowhere, however, did the Tribunal give consideration to the meaning of the word "exclusively" appearing in s116H. The Tribunal used the word "exclusively" but, apparently, gave no consideration to its meaning and application under s116H. On apportionment, the Tribunal applied the principles developed in considering apportionment under sub-sec51(1) of the Assessment Act.

36. In my opinion, this approach is wrong. It purports to use the principles developed with respect to apportionment under sub-sec 51(1) of the Assessment Act to the application of apportionment under Division 8A. The authorities illustrate how the Courts have developed the principles of apportionment between allowable deductions under sub-sec 51(1) and deductions which are not allowable. The provisions of s116H are designed to overcome the need to adopt similar principles to be applied to registered organizations.

37. During the hearing, a large number of cases were cited referring to the problems involved in apportioning outgoings under s51 and other sections of the Assessment Act which did not contain an express formula. The position is clearly stated by Hill J in Kidston Goldmines Ltd v Commissioner of Taxation (1991) 30 FCR 77 when his Honour considered a number of the authorities relating to apportionment. In that case, the apportionment was in relation to interest paid by the taxpayer. This involved a consideration of the allowability of a portion of the interest deduction; see pages 83 and the following. Reference was made to Ronpibon and to Adelaide Racing Club Inc v Commissioner of Taxation [1964] HCA 57; (1964) 114 CLR 517. At p 85 his Honour said:

"However, there is danger in substituting for the words of the
subsection language which does not appear in it. The statutory
issue is whether the interest outgoing was incurred in (ie in the
course of) the income-producing activity or, in the case of the
second limb of the subsection, whether the interest outgoing was
incurred in (ie in the course of) the business activity which is
directed towards the gaining or producing of assessable income.
Where, as here, the taxpayer carries on a business, which business
is directed both at the gaining or production of assessable income
and to the gaining or production of exempt income, and the
interest expense is "necessarily incurred", in the sense of
"clearly appropriate" to or "adapted for" that activity (see
Commissioner of Taxation (Cth) v Snowden and Willson Pty Ltd [1958] HCA 23; (1958)
99 CLR 431, per Dixon C.J. (at 436-437) and per Fullagar J (at
444)), then, provided there is a relevant connection between the
outgoing and the business, the outgoing will be apportionable."

38. This extract highlights the difference between apportionment under sub-sec 51(1) of the Assessment Act and apportionment under Division 8A. In the latter case, the first step is to determine the total income of the registered organization; see sub-sec 116G(1). The assessable income is determined by calculating that part of the total income as is derived from eligible insurance business. The deductions allowable under s51 in relation to the total income of the registered organization including any deductions under other provisions of Division 3 of Part II, are then to be dealt with in conformity with s116H. Some of those are wholly deductible under para 116H(a), some cannot be deductible by reason of para 116H(b) while the remainder are apportioned under para 116H(b). What is required is to determine what deductions relate exclusively to the assessable income of the organization and what deductions relate exclusively to exempt income. Deductions which come within neither of those categories are to be apportioned in conformity with the formula contained in s116H.

39. It is interesting to note that in Adelaide Racing Club the High Court constituted by Owen J, upheld a formula adopted by the Commissioner to determine an apportionment of a deduction under sub-sec 88(2) of the Assessment Act. In order to apportion the expenditure, which was partly for the purpose of producing assessable income and partly for the purpose of producing non-assessable income, the Commissioner used the following formula:

"Gross income other than
members' subscriptions and
purchase of race costs
Total receipts from X Apportionable
all sources income"

40. The Commissioner allowed the resulting figure as a deduction.

41. In considering this formula, Owen J said at pp 525-6:

"In a case such as this, the Commissioner is faced with a
difficult problem. Section 51 requires him to determine and allow
as a deduction outgoings to the extent to which they are incurred
in gaining or producing the assessable income. Where a taxpayer
receives income part of which is assessable and part is not, he
must dissect the expenditure and, to the best of his ability,
estimate how much of it relates to the production of assessable
income and how much to the production of non-assessable income.
This the Commissioner did in the manner which I have sought to
explain. Before me the method adopted by him was subjected to
considerable criticism and several alternative bases were
suggested by counsel for the Club. But they were, I think, at
least equally open to criticism and produced varying results. It
is unnecessary to detail the alternatives put forward on behalf of
the Club or the various criticisms made of them. The Commissioner
made what he regarded as a just apportionment of the Club's
expenditure, allocating against assessable and non-assessable
income respectively the proportions of that expenditure that
seemed right and I am not satisfied that the course he followed
was wrong or that the resulting assessment, except in so far as it
related to the deductions claimed under s88(2), was excessive."

42. The similarity of the formula used in that case and the formula specified in para 116H(b) of the Assessment Act is obvious. One was used in apportioning deductions under sub-sec 51(1). The other is used in apportioning deductions under para 116H(b). The express provisions of para 116H(b) must apply to registered organizations. There is no room for the general application of principles of apportionment under sub-sec 51(1). This is made clear by s116F.

43. Reference was made also to The Colonial Mutual Life Assurance Society Ltd v The Federal Commissioner of Taxation [1933] HCA 29; (1933) 49 CLR 171, Starke J. That case involved the application of sub-sec20(5) of the Income Tax Assessment Act 1922-1930 which had a number of similarities to s116H of the Assessment Act and in particular contained provisions relating to "expenditure exclusively incurred" in gaining specified types of income and for apportionment in conformity with a prescribed formula. His Honour was concerned to determine whether certain expenditure was incurred exclusively in gaining "premium income". At p174, his Honour said:

"It will be observed that s20(5) refers to three classes of
expenditure: the first, that exclusively incurred in gaining what
I may shortly call premium income, the second, that exclusively
incurred in gaining or producing the income included in the
assessment, and the third, that part incurred in the general
management of the business of the company but not including any
expenditure incurred in gaining or producing the income included
in the assessment. It recognizes that the expenditure of a
company is not always exclusively incurred for the production of
premium or assessable or on-assessable income, but may be
undertaken for the general business purposes of the company, as,
for instance, the class of expenditure often referred to as
overhead expenses. But the classification of expenditure in
s20(5) is, I think, exhaustive: that which is not exclusively
incurred in gaining premium income or assessable income is
incurred in the general management of the business of the
company."

44. Further, it is noted that the Tribunal based its decision on estimates of amounts. Normally, this is not permissible, see for example, Palvestments Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia (1964) 112 CLR per Menzies J at pp664-5.

45. Earlier in these reasons there is a discussion of what constitutes deductions allowable to a registered organization with respect to its total income as defined in Division 8A. In the present case, it appears that for the 1987 tax year the total income of the taxpayer was $143,505,485 and that its assessable income was $31,502,614. The reasons of the Tribunal do not contain a finding of the amount of deductions "that relate exclusively to the assessable income" of the taxpayer under para 116H(a). The reasons of the Tribunal do not contain a finding of the amount of deductions "that relate exclusively to exempt income" of the taxpayer under para 116H(b). The reasons of the Tribunal make a finding that the deductions that did not come within either of those two categories of deductions amounted to $5,882,819 being what is described as the apportionable expenses or, in these reasons, category C deductions. There is no discussion as to the basis of this finding. Included in this amount was the sum of $878,982 being the amount disallowed by the Commissioner in his amended assessment. The sum of $878,982 related to "advertising or public relations".

46. The reasons of the Tribunal do not contain a finding that any expenditure relating to "advertising or public relations" was included in the amount of deductions "that relate exclusively to the assessable income" of the taxpayer nor whether any such expenditure related "exclusively to exempt income" of the taxpayer.

47. Findings of this nature are the essential first steps in determining what deductions are to be included in the apportionable expenses. This methodology is of the utmost importance. Section 116H introduces a new concept in relation to deductions namely that a deduction must relate "exclusively" to the assessable income or to exempt income, respectively, of the taxpayer. The word "exclusively" is to be contrasted with the provisions of sub-sec51(1) of the Assessment Act allowing specified deductions "except to the extent to which they ... are incurred in relation to the gaining or production of exempt income." Those words form the basis for the development of the principles of apportionment. Those words are very different from the word "exclusively" used in s116H.

48. The reasons of the Tribunal do not contain a consideration of the meaning of the word "exclusively" when used in s116H nor a discussion of the application of that word to the general deductions claimed by the taxpayer with respect to its total income. At the hearing of the appeal, the meaning to be given to the word "exclusively" did not form a major part of the submissions. The word "exclusively" connotes a degree of absoluteness. It is an adverb meaning "in an exclusive sense or manner; solely". Exclusive means "excluding all but what is specified", generally see the Shorter Oxford English Dictionary. The Macquarie Dictionary is even more emphatic; thus "not admitting of something else"; "incompatible"; "limited to the object or objects designated"; "shutting out all other activities".

49. It is apparent, therefore, that the principles to be applied in determining whether a deduction relates "exclusively to the assessable income" of the taxpayer or whether it relates "exclusively to exempt income" of the taxpayer are different to those enunciated by the High Court in apportioning deductions under sub-sec51(1) of the Assessment Act. The test is much more strict. A deduction must relate "exclusively" to the designated object. The same test of "exclusively" must be applied with respect to both assessable income and exempt income. In the result, from the very activities of the taxpayer, it would be expected that a large proportion of deductions would not satisfy the "exclusively" test with respect to assessable income or to exempt income. This does not matter, since the remaining deductions are apportioned although the amount allowed could vary. The policy of the Act appears to be directed to avoiding a detailed examination of each item of expenditure and to rely on a general approach. Further, there appears to be much force in the argument that the use of the name of the taxpayer in advertisements would suggest that the cost of the advertisement came within neither of the exclusive categories of deductions. The position can be illustrated by reference to deductions under s72 of the Assessment Act. If a building is used exclusively for an eligible insurance business, deductions for rates and taxes would be deductions relating exclusively to the assessable income of the organization. If a building was used exclusively for non-eligible insurance business, deductions for rates and taxes would be deductions relating exclusively to exempt income of the organization. If a building was used for both types of business, prima facie rates and taxes would be apportioned pursuant to the formula contained in s116H. This would be dependent upon the relevant facts established at the time.

50. From what has been said, it is obvious that the matter must be remitted to the Tribunal. Accordingly the appeal should be allowed with costs, the decision appealed from should be set aside and the matter be remitted to the Tribunal to be heard and decided according to law, either with or without the hearing of further evidence as the Tribunal determines.