Atkinson v Federal Commissioner of Taxation [1951] HCA 64; (1951) 84 CLR 298 (5 November 1951)

HIGH COURT OF AUSTRALIA

ATKINSON v. FEDERAL COMMISSIONER OF TAXATION [1951] HCA 64; (1951) 84 CLR 298

Income Tax (Cth.)

High Court of Australia
Dixon(1), Webb(1) and Fullagar(1) JJ.

CATCHWORDS

Income Tax (Cth.) - Assessable income - Annuity - Quarterly payments under heritage policy - Income Tax Assessment Act 1936-1946 (No. 27 of 1936 - No. 6 of 1946), s. 26 (c).

HEARING

Perth, 1951, September 4;
Melbourne, 1951, November 5. 5:11:1951
REFERENCE BY BOARD OF REVIEW.

DECISION

November 5.
THE COURT delivered the following written judgment:-
This is a reference by a Board of Review made pursuant to s. 196(2) of the The taxpayer is the widow of Sydney Atkinson, who died 10th August 1940. She is the executrix of his will and takes thereunder as sole beneficiary. Over six years before his death her late husband had obtained from the Prudential Assurance Company Ltd. a policy of insurance called a "heritage policy". He was then forty years of age. The insurance commenced as from 18th December 1933 and the policy stipulated for a half-yearly premium of 21 pounds 18s. 8d. payable until 18th June 1953, a period of twenty years, or until the previous death of the insured. If the premiums were paid, then the company covenanted to pay Atkinson's executors administrators or assigns "the benefit or benefits", as the policy expressed it, set out in the policy substantially thus: - (1) In the event of the death of Atkinson within such twenty years, 4,120 pounds diminished by the sum of 39 pounds for every completed period of three months that Atkinson had survived 18th December 1933, payable as follows (a) 100 pounds on death (b) 39 pounds in addition on death and a similar payment at the expiration of each period of three months commencing subsequent to death and completed on or before the last day of the twenty years (c) 900 pounds on the last day of the twenty years calculated from 18th December 1933. (2) In the event of the death of Atkinson after the expiration of the twenty years, 1,000 pounds payable on death. (at p303)

2. The company duly made to the widow as executrix the payment of 100 pounds on the death of her husband and has since made the quarterly payments to her of 39 pounds each. The Commissioner of Taxation insists that these quarterly payments, amounting annually to 156 pounds, form part of her assessable income. (at p303)

3. He appears to have made assessments of her taxable income on this footing for the four years of income ending 30th June 1943 to 1946. Against these assessments she objected and, on the objection being disallowed, she requested the commissioner to refer the decision to a Board of Review. One year was chosen by her advisers for obtaining the actual decision by the Board of Review, that for the year of income ending 30th June 1945. The board decided that the commissioner was wrong and that the payments amounting to 156 pounds per annum did not form part of her assessable income. The commissioner did not appeal from that decision. But he did not accept the board's decision and by amendment apply it to the assessment for the next year of income, that ending 30th June 1946. When the reference in that year came before the Board of Review he exercised his right under s. 196(2) of requiring a reference of the question to this Court. (at p303)

4. In including the sum of 156 pounds in the taxpayer's assessable income the commissioner acted upon s. 26(c). That provision says that the assessable income of a taxpayer shall include the amount of any annuity. The question for decision is whether the quarterly payments amounting to 156 pounds a year constitute an annuity within this provision. Section 26(c) does not end with the words quoted, and, although what follows is not relevant to the decision of this case it is better to set it out. The paragraph runs: "the amount of any annuity, excluding, in the case of an annuity which has been purchased, that part of the annuity which represents so much of the purchase price as has not been allowed or is not allowable as a deduction or in respect of which a rebate of income tax has not been allowed or is not allowable in assessments for income tax under this Act or any previous law of the Commonwealth". The words of exclusion cannot be relevant in this case because, even if the "annuity" were regarded as "purchased", the premiums paid by Atkinson in his life time must presumably be considered the purchase price and they were allowed as deductions in his assessments pursuant to s. 79(e)(i) of the Income Tax Assessment Act 1936-1941 and the corresponding previous enactment. (at p303)

5. In considering whether the quarterly payments of 39 pounds to the widow constitute an annuity, it is well to begin by noticing some of the features of the "benefit" the policy assures to her as executrix of the insured. First it will be seen that no sum certain is named as that payable in consequence of the death of the insured. There is a sum fixed as the base, the maximum, and that is to be diminished as time advances by 39 pounds a quarter. The diminishing amount is payable only in the event of death within twenty years. In the event of death after that period a fixed sum of 1,000 pounds is payable. But upon death within the twenty years what is actually payable is not one lump sum but the two lump sums of 100 pounds and (at the end of the period) 900 pounds and the quarterly payments to the end of the period. This will, however, add up to the diminished sum, that is to say, to the 4,120 pounds minus 39 pounds multiplied by the number of completed quarters between 18th December 1933 and the death of the insured. Thus in the events which happened in the present case, the widow as executrix will have received by 18th December 1953 2,106 pounds in quarterly payments of 39 pounds and 100 pounds and 900 pounds, making in all 3,106 pounds. The insured survived 18th December 1933 for twenty-six completed quarters and therefore 1,014 pounds is the amount by which the 4,120 pounds is to be reduced. That leaves the figure of 3,106 pounds. (at p304)

6. The question what constitutes an "annuity" for the purpose of income tax laws has been the subject of much judicial decision without any clear or satisfactory test emerging. In England "any annuity or other annual payment" is chargeable under r. 1(a) of the Rules applicable to Case III. of Schedule D of the Income Tax Act 1918 (Imp.)(8 & 9 Geo. 5c. 40). That provision goes back substantially in its present form to the Act of 1853 and in other forms almost to the beginning of income tax: cf. per Lord Macnaghten, London County Council v. Attorney-General (1901) AC 26, at pp 37-39 . In deciding whether annual payments form an annuity the difficulty has been to find a satisfactory test for distinguishing between periodical instalments by way of payment or repayment of a capital sum and a fixed sum by way of income terminating at a time certain or on an uncertain event, as on the death of the payee. Yet such an income annuity may be purchased by a capital payment. In Scoble v. Secretary of State for India (1903) 1 KB 494, at p 501 Vaughan Williams L.J., whose judgment was approved in the House of Lords (1903) AC, at p 303 , said:- "It could not be said that every annual sum payable on a contract was necessarily an annuity within the Income Tax Acts. It had to be admitted that, in any case in which it appeared on the face of the contract that there was a debt existing of such a nature that it could be said that the contract was not to purchase an annuity, but a contract under which a debt was made payable by instalments, in such a case the Income Tax Acts would not apply to the whole sum payable by such annual instalments". There the Secretary of State, having purchased the Indian Railway, had an option, instead of paying the value in a gross sum, to pay what was called an annuity for a term of years, the annuity being ascertained in a prescribed manner and being payable to annuity trustees. "The method of payment provided by the . . . clause was in substance and in fact the payment of the price . . . by means of half-yearly instalments, each of such instalments being composed in part of capital and, as to the residue, of interest on the amount of the price for the time being unpaid" (1903) 1 KB, at p 497 . Notwithstanding the use of the description "annuity", the payments, except in so far as they represented interest, were held to be but instalments of the capital price and therefore not within Case III. Lord Lindley said (1903) AC, at p 305 :-
"The annuity in this case is to my mind proved to demonstration to be nothing more than the payment by equal instalments of the purchase-money for the railway with interest." In Chadwick v. Pearl Life Insurance Company (1905) 2 KB 507, at p 514 Walton J. said:- "It is obvious that there will be cases in which it will be very difficult to distinguish between an agreement to pay a debt by instalments, and an agreement for good consideration to make certain annual payments for a fixed number of years. In the one case there is an agreement for good consideration to pay a fixed gross amount and to pay it by instalments; in the other there is an agreement for good consideration not to pay any fixed gross amount, but to make a certain, or it may be an uncertain, number of annual payments. The distinction is a fine one, and seems to depend on whether the agreement between the parties involves an obligation to pay a fixed gross sum." (at p305)

7. It may be doubted whether the test of a fixed gross sum may not mislead, because after all the fixed gross sum may be applied or appropriated as the consideration for the grant of an annuity; and "an annuity means where an income is purchased with a sum of money and the capital has gone and has ceased to exist, the principal having been converted into an annuity" - per Watson B., Foley v. Fletcher [1858] EngR 1107; (1858) 3 H & N 769, at pp 784-785 [1858] EngR 1107; (157 ER 678, at p 684) . The decision of this Court in Egerton-Warburton v. Deputy Federal Commissioner of Taxation [1934] HCA 40; (1934) 51 CLR 568 affords an example, and the observations of Rowlatt J. in Jones v. Commissioner of Inland Revenue (1920) 1 KB 711, at pp 714, 715 give others. In Perrin v. Dickson (1929) 2 KB 85; (1931) 1 KB 107 the taxpayer, a clergyman, had effected an insurance with the Clergy Mutual Assurance Society for the purpose of making a provision for his infant son's education when he grew older. For six premiums of 90 pounds paid from 1912 to 1917 he obtained an annuity of 100 pounds for seven years from 1920. If his son died in the meantime the premiums were to be returned less any payment on account of the annuity but without interest. It was decided that this annuity was not taxable. Rowlatt J. so decided on the ground that "the position was not so much that the principal was repaid by means of the annuities as that it was never parted with". His Lordship said:- "In the case of a life annuity the principal sum is of necessity parted with and disappears. But here the principal is never lost sight of. It is always there and is repaid, in certain events without interest, in other events with interest" (1929) 2 KB, at pp 89, 90 . In the Court of Appeal this decision was affirmed. But, of the reasons given in the Court of Appeal, it was said by Greene M.R. that he must confess that he found the reasoning of the judgments difficult to follow: Sothern-Smith v. Clancy (1941) 1 KB 276, at p 284 , and Clauson L.J. (1941) 1 KB, at pp 291, 292 , after referring to the fact that if the premiums had not been kept up the insured would not have been entitled to any payment, said this circumstance might in a court having power to overrule the decision be a matter for serious consideration. Goddard L.J. (1941) 1 KB 276, at p 294 distinguished the decision on the facts. Sothern-Smith v. Clancy (1941) 1 KB 276 related to payments under a contract by the taxpayer with the Equitable Life Assurance Society of the United States. He paid a lump sum in consideration of which the Society agreed to pay him an annuity during his life and, if at his death the aggregate payments did not equal the amount he had paid, then to pay the annuity to his wife or sister until they did so. The Court of Appeal held that what the taxpayer was paid was subject to tax as an annuity. Greene M.R. expressed the essential ground of his decision in this sentence (1941) 1 KB, at p 286 :- "It seems to me that the capital sum did cease to exist when once it was paid: and that the so-called guarantee was an undertaking not to refund a capital sum or any part of a capital sum, but to continue annual payments for an ascertainable period". Clauson L.J. said (1941) 1 KB, at pp 291 :-"The only continuing relation between the annuity and the vanished capital sum is that the amount of the vanished capital sum is arbitrarily taken to measure the minimum period for which the annuity is to run". Goddard L.J. said (1941) 1 KB, at p 293 :-"The only principle that I can deduce from the cases is that the court must have regard to the true nature of the transaction from which the annual payment arises and ascertain whether or not it is the purchase of an annual income in return for the surrender of capital. If it is the purchase of an income the annual payment is taxable; if it is a capital payment it is not, though in the latter case if the annual sum represents a payment or a return of capital coupled with interest, the sum may be dissected and tax charged on so much as represents interest." It is impossible to read the judgments through without concluding that Perrin's Case (1929) 2 KB 85; (1931) 1 KB 107 did not in the least commend itself to their Lordships. The important features of Perrin's Case (1929) 2 KB 85; (1931) 1 KB 107 and of Sothern-Smith's Case (1941) 1 KB 276 upon which the decisions turned are not found in the present case. So far as the reasoning provides guidance it is the second case which should be used: the earlier decision may safely be neglected. (at p307)

8. An obvious circumstance of the case now to be decided is that the number of premiums paid in no way determines the amount of the policy moneys. There is therefore no question of the investment of a capital sum which may be considered returned by annual instalments. The feature of the policy upon which the taxpayer's case appears to us to depend is that the policy money is described first as a lump sum and that sum is made payable by means of the 100 pounds, the quarterly payments of 39 pounds and the 900 pounds. (at p307)

9. The lump sum is uncertain because it is ascertainable only by reference to the date of the insured's death. But when ascertained it is described in terms as the amount payable by means of the quarterly payments and the two other sums. Arithmetically the lump sum depends as much upon the quarterly payments and the two other sums as they do upon it. They are equivalents depending upon the fact that at whatever date within the twenty years the insured died, 39 pounds must be deducted for every quarter since 18th December 1933 that he had survived and 39 pounds must be paid for every quarter of the remaining years of the twenty. The 4,120 pounds is calculated by taking eighty (possible) payments of 39 pounds, with the addition of the 100 pounds on death and the 900 pounds at the end of twenty years. The statement in the policy that the sum of 4,120 pounds diminished &c. is "payable as follows", is therefore without any but a formal significance. As the question whether the 39 pounds a quarter is an annuity is to be governed, not by the intention of the parties that it should or should not be so classified, but on substantial considerations disclosing "its true nature", it would seem that little importance should be attached to the formal manner in which the policy states "the benefit" it assures. But an examination of that "benefit" makes it clear that the purposes of the policy were first to provide a sum, although not a very large sum immediately on death, then to provide a quarterly payment equivalent to 3 pounds a week in case of premature death for an interval of time thereafter fixed by reference to the date of insurance, and finally to provide at the end a substantial lump sum. It seems obvious that the purpose was to provide "an income" during the period between the death of the insured and the expiration of twenty years from the date of the insurance, the use of which the insured could direct by his will. The diminishing liability of the company as time advanced shows, of course, the basis in actuarial probability upon which the profitable character of the company's "heritage policies" must rest. But the distinction drawn between on the one hand the initial and final lump sums and on the other hand the quarterly payments indicates the different objects of these provisions. The limitation of twenty years from the date of insurance, the periodicity of the payments of 39 pounds, the amount itself of 39 pounds, and the contrast with the two lump sums of 100 pounds and 900 pounds, all show that the quarterly payments were provided as an income. The premiums were the consideration for which the "income" of 39 pounds a quarter was obtained. The quarterly payment in no sense represents the premiums and its intrinsic character is an income for the maintenance of those on whom the insured by his will should bestow it, in case of his premature death, until the end of a time regarded by him as either adequate having regard to their circumstances or else as being as much as he was prepared to provide for. (at p308)

10. For these reasons the first question in the reference should be answered - Yes. Having regard to that answer the second question does not arise. There should be no order as to the costs of the reference. (at p309)

ORDER

First question in the reference from the Board of Review answered - Yes.

No order as to costs of the reference.