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High Court of Australia |
H C of A
10 July 1946
Starke J.
Phillips K.C., Spicer and H. U. Best, for the appellant.
Hudson K.C. and Adam, for the respondent.
July 10
Starke J. delivered the following written judgment:—
This is an appeal on the part of the Colonial Mutual Life Assurance Society Ltd. pursuant to the provisions of the Income Tax Assessment Act 1936-1941 from a decision of the Commissioner of Taxation including a sum of £27,713 in its assessment to income tax for the financial year 1941-1942.
The same sum appears also to have been included in an assessment to further tax on undistributed income of the Society but that assessment is not the subject of this appeal.
The Society is incorporated as a company limited by guarantee under the law of the State of Victoria: See The Colonial Mutual Life Assurance Society Act 1912. It is a mutual society and its members are its policy holders.
The objects of the Society are the assurance of lives, the granting of annuities and endowments and all other cognate business and to do all such other things as are incidental or conducive to the attainment of the above objects. The operations of the Society include the issue of policies of assurance of various descriptions, the grant of annuities and endowments and the investment of its funds which it derives from premiums paid to it and returns from its investments.
Article 42 of the articles of association of the Society provides that a board of directors shall lay out and invest the funds of the Society in the mode authorized by the articles and that the board or local boards having authority in that behalf may from time to time vary or transpose any investments made for or into others of any nature authorized at their discretion.
In the year which ended on 31st December 1940 it appears that various stocks and debentures, investments of the society, matured, and that it also sold various stock and debentures, investments of the Society. But the gains or losses thus accruing are not entered in the accounts of the Society as capital gains or losses. The sums realized were reinvested in various securities of the same kind.
The difference between the average cost of the securities and the amount realized disclosed a surplus of £27,713. The documents, forwarded by the Commissioner to the Court "Profit on sale or realization of investments," contain a summary of the figures constituting this sum of £27,713 and the statement forwarded by the Commissioner to the Court showing the particulars of sales and maturities of stocks and debentures during the year ended 31st December 1940 contains the detailed items which make up this sum.
The general manager of the Society said, in his evidence, that the general policy of the Society was to hold its securities as investments and not to traffic in or to make a profit from realizing them and that the governing consideration in purchasing stocks or debentures or varying or "switching," as it is called, its investments in such securities was to increase its effective interest yield. I see no reason to doubt the accuracy of this statement. But the gains or losses already mentioned were taken into account in calculating the effective interest yield to the Society. The effective yield is not the rate of interest contracted to be paid but the yield that the Society requires from year to year until the prescribed maturity of the security. That yield may or may not be greater than the nominal or contracted yield. Incidental receipts and expenses such as brokerage and commission are taken into account in calculating the yield. The Society writes the securities from year to year up or down to par according as their cost is above or below par until at the prescribed maturity date the securities will appear at par in the accounts of the Society. Thus the security is entered in the books at its cost price. If this price exceeds face value the book value is written down gradually in each year so that at maturity the security appears at par in the accounts of the Society and the effective interest yield is maintained at the rate required by the Society when it purchased the same. If the cost price is below par then the security is written up gradually to par at maturity. These adjustments are effected through the Society's "Written off Securities" account but it is not necessary that I should enter upon any detailed explanation of the process for it has been fully stated and illustrated in a written statement by an actuary of the Society which is in evidence. By this process the true or effective yields of the securities to the Society during their currency are ascertained and ensured.
The question is whether the Society is assessable to income tax in respect of the sum of £27,713 for the financial year 1941-1942.
The Income Tax Assessment Act 1936-1941 in Part III., Division 8 makes some special provision touching the assessment of life-assurance companies to income tax but they do not affect this case and otherwise the assessable income of such a company is governed by the general provisions of the Act. By those provisions a taxpayer is assessable to income tax in respect of the proceeds of any business carried on by the taxpayer and in respect of any profit arising from the carrying on or carrying out of any profit-making undertaking or scheme: See Income Tax Assessment Act, ss. 6, 17, 25, and 26.
A taxpayer means a person deriving income and includes a company. It was said however that the case of the New York Life Insurance Co. v. Styles[1] suggests that mutual societies do not trade or carry on a business or carry on or carry out any profit-making undertaking or scheme. But that proposition was finally negatived in the case of the Commissioners of Inland Revenue v. Cornish Mutual Assurance Co. Ltd.[2] , where it was said that the real question in the New York Case[3] was whether there were any taxable profits within the Income Tax Act[4] ). It was held that no part of premium income received under participating policies was liable to be assessed to income tax as profits or gains under Schedule D of the English Act, 16 & 17 Vict. c. 34, an Act imposing duties on profits arising from property, professions, trades and offices. By the Income Tax Assessment Act 1936-1944 it is expressly enacted in s. 111 that "the assessable income of a life assurance company shall not include premiums received in respect of policies of life assurance, or considerations received in respect of annuities granted ..."
Next it was said, that the Income Tax Assessment Act charges income and not capital, which no doubt is true. And that where the owner of an investment chooses to realize it and obtain a greater price for it than that at which he originally acquired it, the enhanced price is not income for the purposes of the Income Tax Assessment Act. But that where what is done is not merely a realization or change of investment but an act done in what is truly the carrying on or carryout of a business then the enhanced value so obtained is assessable.
The test to be applied is whether the amount in dispute is a gain made in an operation of business in carrying out a scheme of profit making. This principle is well settled and has been frequently applied (Californian Copper Syndicate v. Harris[5] ; Ducker v. Rees Roturbo Development Syndicate[6] ; Ruhamah Property Co. Ltd. v. Federal Commissioner of Taxation[7] ; Commissioner of Taxes v. British Australian Wool Realization Association Ltd.[8] ; Punjab Co-operative Bank Ltd., Amritsar v. Commissioner of Income Tax, Lahore[9] , decided under the Indian Income Tax Act the terms of which are stated in Commissioner of Income-Tax, Bombay Presidency and Aden v. Sarangpur Cotton Manufacturing Co. Ltd. of Ahmedabad[10] ). In some cases the line may be difficult to draw but the question is one of fact (Wilcock v. Pinto & Co.[11] ; Blockey v. Federal Commissioner of Taxation[12] ).
The intention of a taxpayer cannot be considered as determining what it is that his acts amount to; and the real thing that has to be decided is what were the acts that were done in connection with the business and whether they amount to a trading which would cause the profits that accrued to be profits arising from a trade or business (J. & R. O'Kane & Co. v. Commissioners of Inland Revenue[13] ).
Now in the present case the business of the Society was the assurance of lives, the granting of annuities and other cognate business and the investment of its funds. Some of its investments were varied or switched from time to time in order to increase the effective interest yield to the Society. It was a normal operation or step in the carrying on of its business. It is true that these operations were small in comparison with the aggregate value of the securities which the society held as investments but that does not make its acts in varying or switching its investments in order to increase its interest yield any the less an operation of business or establish the variation or switching as a mere realization or change of investment (Punjab Co-operative Bank Ltd., Amritsar v. Commissioner of Income-Tax, Lahore[14] ; Westminster Bank Ltd. v. Osler[15] ; Inland Revenue Commissioners v. Westleigh Estates Co. Ltd.[16] ). And the manner in which the Society dealt with its gains or losses does not affect the assessable nature of the surplus resulting from its operations (cf. Mersey Docks and Harbour Board v. Lucas[17] ).
The Society did not contend that any part of the sum of £27,713 was not derived or realized during the year of income upon which its assessment was based (cf. Brown v. National Provident Institution[18] ), but confined itself to the question of principle whether the transactions in question here were taxable transactions at all.
In my judgment the Commissioner rightly assessed the Society to income tax in respect of the surplus realized by those transactions, namely £27,713, and this appeal must therefore be dismissed with costs.
Appeal dismissed with costs.
Solicitors for the appellant: Moule, Hamilton & Derham.
Solicitor for the respondent: G. A. Watson, Acting Crown Solicitor for the Commonwealth.
H C of A
25 November 1946
Latham C.J., Dixon and Williams JJ.
Phillips K.C., Spicer and H. U. Best, for the appellant.
Hudson K.C. and Adam, for the respondent.
July 10
Starke J
. delivered the following written judgment:—This is an appeal on the part of the Colonial Mutual Life Assurance Society Ltd. pursuant to the provisions of the Income Tax Assessment Act 1936-1941 from a decision of the Commissioner of Taxation including a sum of £27,713 in its assessment to income tax for the financial year 1941-1942.
The same sum appears also to have been included in an assessment to further tax on undistributed income of the Society but that assessment is not the subject of this appeal.
The Society is incorporated as a company limited by guarantee under the law of the State of Victoria: See The Colonial Mutual Life Assurance Society Act 1912. It is a mutual society and its members are its policy holders.
The objects of the Society are the assurance of lives, the granting of annuities and endowments and all other cognate business and to do all such other things as are incidental or conducive to the attainment of the above objects. The operations of the Society include the issue of policies of assurance of various descriptions, the grant of annuities and endowments and the investment of its funds which it derives from premiums paid to it and returns from its investments.
Article 42 of the articles of association of the Society provides that a board of directors shall lay out and invest the funds of the Society in the mode authorized by the articles and that the board or local boards having authority in that behalf may from time to time vary or transpose any investments made for or into others of any nature authorized at their discretion.
In the year which ended on 31st December 1940 it appears that various stocks and debentures, investments of the society, matured, and that it also sold various stock and debentures, investments of the Society. But the gains or losses thus accruing are not entered in the accounts of the Society as capital gains or losses. The sums realized were reinvested in various securities of the same kind.
The difference between the average cost of the securities and the amount realized disclosed a surplus of £27,713. The documents, forwarded by the Commissioner to the Court "Profit on sale or realization of investments," contain a summary of the figures constituting this sum of £27,713 and the statement forwarded by the Commissioner to the Court showing the particulars of sales and maturities of stocks and debentures during the year ended 31st December 1940 contains the detailed items which make up this sum.
The general manager of the Society said, in his evidence, that the general policy of the Society was to hold its securities as investments and not to traffic in or to make a profit from realizing them and that the governing consideration in purchasing stocks or debentures or varying or "switching," as it is called, its investments in such securities was to increase its effective interest yield. I see no reason to doubt the accuracy of this statement. But the gains or losses already mentioned were taken into account in calculating the effective interest yield to the Society. The effective yield is not the rate of interest contracted to be paid but the yield that the Society requires from year to year until the prescribed maturity of the security. That yield may or may not be greater than the nominal or contracted yield. Incidental receipts and expenses such as brokerage and commission are taken into account in calculating the yield. The Society writes the securities from year to year up or down to par according as their cost is above or below par until at the prescribed maturity date the securities will appear at par in the accounts of the Society. Thus the security is entered in the books at its cost price. If this price exceeds face value the book value is written down gradually in each year so that at maturity the security appears at par in the accounts of the Society and the effective interest yield is maintained at the rate required by the Society when it purchased the same. If the cost price is below par then the security is written up gradually to par at maturity. These adjustments are effected through the Society's "Written off Securities" account but it is not necessary that I should enter upon any detailed explanation of the process for it has been fully stated and illustrated in a written statement by an actuary of the Society which is in evidence. By this process the true or effective yields of the securities to the Society during their currency are ascertained and ensured.
The question is whether the Society is assessable to income tax in respect of the sum of £27,713 for the financial year 1941-1942.
The Income Tax Assessment Act 1936-1941 in Part III., Division 8 makes some special provision touching the assessment of life-assurance companies to income tax but they do not affect this case and otherwise the assessable income of such a company is governed by the general provisions of the Act. By those provisions a taxpayer is assessable to income tax in respect of the proceeds of any business carried on by the taxpayer and in respect of any profit arising from the carrying on or carrying out of any profit-making undertaking or scheme: See Income Tax Assessment Act, ss. 6, 17, 25, and 26.
A taxpayer means a person deriving income and includes a company. It was said however that the case of the New York Life Insurance Co. v. Styles[19] suggests that mutual societies do not trade or carry on a business or carry on or carry out any profit-making undertaking or scheme. But that proposition was finally negatived in the case of the Commissioners of Inland Revenue v. Cornish Mutual Assurance Co. Ltd.[20] , where it was said that the real question in the New York Case[21] was whether there were any taxable profits within the Income Tax Act[22] ). It was held that no part of premium income received under participating policies was liable to be assessed to income tax as profits or gains under Schedule D of the English Act, 16 & 17 Vict. c. 34, an Act imposing duties on profits arising from property, professions, trades and offices. By the Income Tax Assessment Act 1936-1944 it is expressly enacted in s. 111 that "the assessable income of a life assurance company shall not include premiums received in respect of policies of life assurance, or considerations received in respect of annuities granted ..."
Next it was said, that the Income Tax Assessment Act charges income and not capital, which no doubt is true. And that where the owner of an investment chooses to realize it and obtain a greater price for it than that at which he originally acquired it, the enhanced price is not income for the purposes of the Income Tax Assessment Act. But that where what is done is not merely a realization or change of investment but an act done in what is truly the carrying on or carryout of a business then the enhanced value so obtained is assessable.
The test to be applied is whether the amount in dispute is a gain made in an operation of business in carrying out a scheme of profit making. This principle is well settled and has been frequently applied (Californian Copper Syndicate v. Harris[23] ; Ducker v. Rees Roturbo Development Syndicate[24] ; Ruhamah Property Co. Ltd. v. Federal Commissioner of Taxation[25] ; Commissioner of Taxes v. British Australian Wool Realization Association Ltd.[26] ; Punjab Co-operative Bank Ltd., Amritsar v. Commissioner of Income Tax, Lahore[27] , decided under the Indian Income Tax Act the terms of which are stated in Commissioner of Income-Tax, Bombay Presidency and Aden v. Sarangpur Cotton Manufacturing Co. Ltd. of Ahmedabad[28] ). In some cases the line may be difficult to draw but the question is one of fact (Wilcock v. Pinto & Co.[29] ; Blockey v. Federal Commissioner of Taxation[30] ).
The intention of a taxpayer cannot be considered as determining what it is that his acts amount to; and the real thing that has to be decided is what were the acts that were done in connection with the business and whether they amount to a trading which would cause the profits that accrued to be profits arising from a trade or business (J. & R. O'Kane & Co. v. Commissioners of Inland Revenue[31] ).
Now in the present case the business of the Society was the assurance of lives, the granting of annuities and other cognate business and the investment of its funds. Some of its investments were varied or switched from time to time in order to increase the effective interest yield to the Society. It was a normal operation or step in the carrying on of its business. It is true that these operations were small in comparison with the aggregate value of the securities which the society held as investments but that does not make its acts in varying or switching its investments in order to increase its interest yield any the less an operation of business or establish the variation or switching as a mere realization or change of investment (Punjab Co-operative Bank Ltd., Amritsar v. Commissioner of Income-Tax, Lahore[32] ; Westminster Bank Ltd. v. Osler[33] ; Inland Revenue Commissioners v. Westleigh Estates Co. Ltd.[34] ). And the manner in which the Society dealt with its gains or losses does not affect the assessable nature of the surplus resulting from its operations (cf. Mersey Docks and Harbour Board v. Lucas[35] ).
The Society did not contend that any part of the sum of £27,713 was not derived or realized during the year of income upon which its assessment was based (cf. Brown v. National Provident Institution[36] ), but confined itself to the question of principle whether the transactions in question here were taxable transactions at all.
In my judgment the Commissioner rightly assessed the Society to income tax in respect of the surplus realized by those transactions, namely £27,713, and this appeal must therefore be dismissed with costs.
Appeal dismissed with costs.
Solicitors for the appellant: Moule, Hamilton & Derham.
Solicitor for the respondent: G. A. Watson, Acting Crown Solicitor for the Commonwealth.
4. (1926) 12 Tax Cas., at pp. 853, 854, 867.
6. (1928) A.C. 132, at p. 140.
7. [1928] HCA 22; (1928) 41 C.L.R. 148.
8. (1931) A.C. 224, at p. 231.
9. (1940) A.C. 1055, at p. 1072.
10. (1937) 65 Ind. App. 1, at p. 2.
11. (1925) 1 K.B. 30, at pp. 44, 45.
12. [1923] HCA 2; (1923) 31 C.L.R. 503, at p. 511.
13. (1922) 12 Tax Cas. 303, at p. 347.
15. (1933) A.C. 139, at pp. 140, 146.
16. (1924) 1 K.B. 390, at p. 490.
18. (1921) 2 A.C. 222, at pp. 253-256.
22. (1926) 12 Tax Cas., at pp. 853, 854, 867.
24. (1928) A.C. 132, at p. 140.
25. [1928] HCA 22; (1928) 41 C.L.R. 148.
26. (1931) A.C. 224, at p. 231.
27. (1940) A.C. 1055, at p. 1072.
28. (1937) 65 Ind. App. 1, at p. 2.
29. (1925) 1 K.B. 30, at pp. 44, 45.
30. [1923] HCA 2; (1923) 31 C.L.R. 503, at p. 511.
31. (1922) 12 Tax Cas. 303, at p. 347.
33. (1933) A.C. 139, at pp. 140, 146.
34. (1924) 1 K.B. 390, at p. 490.
36. (1921) 2 A.C. 222, at pp. 253-256.
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URL: http://www.austlii.edu.au/au/cases/cth/HCA/1946/60.html