Mutual Life & Citizens' Assurance Co Ltd v Federal Commissioner of Taxation [1959] HCA 21; (1959) 100 CLR 537 (27 April 1959)

HIGH COURT OF AUSTRALIA

MUTUAL LIFE AND CITIZENS' ASSURANCE CO. LTD. v. COMMISSIONER OF TAXATION [1959] HCA 21; (1959) 100 CLR 537

Income Tax (Cth.)

High Court of Australia
Dixon C.J.(1), McTiernan(2), Fullagar(3), Taylor(4) and Menzies(5) JJ.

CATCHWORDS

Income Tax (Cth.) - Assessable income - Exempt income - Income from sources outside Australia - Not exempt from tax in country where derived - Exempt from tax under local legislation - Life assurance company - Branch in United Kingdom - Investments in securities - Income therefrom not chargeable to tax in United Kingdom - Company liable to pay tax in United Kingdom - Calculated on formula &which disregards exempt income for purpose of ascertaining statutory proportion - Whether income from securities exempt in United Kingdom - Income Tax Act 1918 (Imp.), s. 46 (1), schedule C. and 2 (d), schedule D, Case III, r. 3 - Income Tax Assessment Act 1936 (Cth.), s. 23 (q).

HEARING

Sydney, 1958, December 4, 5, 8; 1959, April 27. 27:4:1959
CASE STATED.

DECISION

April 27, 1959.
The following written judgments were delivered:-
DIXON C.J. I have had the advantage of reading the judgment prepared by

McTIERNAN J. I am of opinion that the decision of this case is governed by the decision in Inland Revenue Commissioners v. Australian Mutual Provident Society (1947) AC 605 . In my opinion, therefore, the question asked by the stated case should be answered "Yes". (at p547)

FULLAGAR J. This is a case stated by Menzies J. in an appeal by the Mutual Life and Citizens' Assurance Company Limited against an amended assessment of income tax on income derived by it in the accounting period ended 31st December 1935. The company is incorporated in New South Wales, and is a resident of Australia within the meaning of the Income Tax Assessment Act 1936 (Cth.). It carries on the business of life assurance in Australia, and also in the United Kingdom, where it maintains a branch. During the accounting period the investments of its life assurance fund included certain United Kingdom war loan stock, New South Wales Government inscribed stock, New Zealand Government inscribed stock, and Alberta and Great Waterways stock. The interest on these securities, which amounted to a total sum of 71,427 pounds 4s. 11d., was payable and paid in the United Kingdom. The question raised by the stated case is whether the whole or any part of this sum is exempt from Commonwealth income tax under s. 23(q) of the Assessment Act. Section 23 provides that "The following income shall be exempt from income tax:- . . . (q) income derived by a resident from sources out of Australia, where that income is not exempt from income tax in the country where it is derived . . .". (at p547)

2. The commissioner does not dispute that the company was a resident of Australia, and he does not dispute that the income in question was derived from sources out of Australia. But he maintains that the case does not fall within s. 23(q) because that income was exempt from income tax in the country where it was derived, viz. the United Kingdom. So far as the United Kingdom war loan stock is concerned, that stock was issued with a condition that the interest thereon should not be liable to tax or super-tax and the commissioner refers to s. 46(1) of the Income Tax Act 1918 (Imp.). That sub-section provides:- "Where the Treasury have before the commencement of this Act issued or may thereafter issue any securities which they have power to issue for the purpose of raising any money or any loan, with a condition that the interest thereon shall not be liable to tax or super-tax, so long as it is shown, in manner directed by the Treasury, that the securities are in the beneficial ownership of persons who are not ordinarily resident in the United Kingdom, the interest of securities issued with such a condition shall be exempt accordingly." Paragraph 9 of the case states:- " . . . this security was shown in manner directed by the United Kingdom Treasury to be in the beneficial ownership of a person who was not ordinarily resident in the United Kingdom, that is to say, the company . . . .". (at p548)

3. So far as the New South Wales, Canadian and New Zealand stocks are concerned, the commissioner refers to r. 2(d) of the Rules Applicable to Schedule C of the First Schedule in the Income Tax Act 1918. Schedule C provides:- "Tax under Schedule C shall be charged in respect of all profits arising from interest, annuities, dividends, and shares of annuities payable out of any public revenue, for every twenty shillings of the annual amount thereof." Rule 2 provides:- "No tax shall be chargeable in respect of - . . . (d) The interest or dividends on any securities of a foreign State or a British possession which are payable in the United Kingdom, where it is proved to the satisfaction of the Commissioners of Inland Revenue that the person owning the securities and entitled to the interest or dividends is not resident in the United Kingdom. . . .". Paragraph 10 of the case states that the New South Wales, Canadian and New Zealand stocks were securities of a British Possession and were payable in the United Kingdom, and it proceeds:- " . . . it was proved to the satisfaction of the Commissioners of Inland Revenue of the United Kingdom that in the relevant year the company owned the said securities and was entitled to the interest thereon, and that it was not at the relevant time resident in the United Kingdom . . .". (at p548)

4. If no more appeared than has so far appeared, it would seem plain enough that the commissioner was right, that all the interest in question was exempt from income tax in the United Kingdom, and that the company could not therefore claim the benefit of s. 23(q) of the Assessment Act (Cth). It is necessary now, however, to refer to certain other provisions of the Income Tax Act 1918, and to certain further facts. Schedule D of that Act provides that tax under that schedule shall be charged in respect of a considerable variety of profits or gains, which it is unnecessary to set out, and that the tax shall be charged "under the following cases". Then follow six "cases". Case III is "Tax in respect of profits of an uncertain value and of other income described in the rules applicable to this Case". Rule 3 of the rules applicable to Case III (so far as material) provides: - "3. (1) Where an assurance company not having its head office in the United Kingdom carries on life assurance business through any branch or agency in the United Kingdom, any income of the company from the investments of its life assurance fund (excluding the annuity fund, if any), wherever received, shall, to the extent provided in this rule, be deemed to be profits comprised in this Schedule and shall be charged under this Case. (2) Such portion only of the income from the investments of the life assurance fund for the year preceding the year of assessment shall be so charged as bears the same proportion to the total income from those investments as the amount of premiums received in that year from policy holders resident in the United Kingdom and from policy holders resident abroad whose proposals were made to the company at or through its office or agency in the United Kingdom bears to the total amount of the premiums received by the company: Provided that in the case of an assurance company having its head office in any British possession, the Commissioners of Inland Revenue may, by regulation, substitute some basis other than that herein prescribed for the purpose of ascertaining the portion of the income from investments to be so charged as being income derived from business carried on in the United Kingdom . . . . (4) Where a company has already been charged to tax, by deduction or otherwise, in respect of its life assurance business, to an amount equal to or exceeding the charge under this rule, no further charge shall be made under this rule, and where a company has already been so charged, but to a less amount, the charge shall be proportionately reduced." (at p549)

5. The company was required by the revenue authorities in the United Kingdom to pay, and did in fact pay, income tax computed under r. 3 of the rules applicable to Case III of schedule D. The computation took the figure of 820,182 pounds as representing the total interest on the investments of the company's life assurance fund, and the proportion of what may be shortly called United Kingdom premiums to total premiums as 2.888 per cent. By applying that percentage to the total interest, a sum of 23,687 pounds was arrived at. From this sum a deduction was allowed of the due proportion of "expenses of management" under s. 33(4) which provides: - "Where an assurance company, not having its head office in the United Kingdom, is charged under Case III of schedule D, on a proportion of the income from the investments of its life assurance fund, or on a basis substituted therefor, the relief in respect of expenses of management shall be calculated by reference to a like proportion of its total expenses of management for the year, estimated according to the provisions of this Act." This left a sum of 14,212 pounds, and the tax was calculated on this sum at the rate of 4s. 9d. in the pound. After the making of certain immaterial adjustments, the amount of tax payable was shown as 3,361 pounds 3s. 2d. The important fact to be noted is, of course, that the commencing figure of 820,182 pounds included the interest received by the company on the United Kingdom war loan stock and on the New South Wales, Canadian and New Zealand stocks. (at p550)

6. If the matter had been free from English authority, one could have had little hesitation in saying that the assessment of the company on the above basis had the effect of imposing United Kingdom income tax on the interest on the four stocks in question. a
If you impose tax on a proportion --- of x, you are taxing x, and, if b
x includes y, you are taxing y. In other words, as my brother Menzies put it during argument, if you impose a tax on 10 per cent of an amount which includes several items, then you are imposing a tax on every item which is included in that amount. But one would also have had little hesitation in saying that the assessment of the company on the above basis could not, as a matter of law, be justified. Rule 3 of the rules applicable to Case III of schedule D is a general provision, which must, according to the accepted rule of statutory interpretation, be read subject to the special provisions of the Act which unequivocally exempt from all tax the interest on the four stocks in question. That interest should accordingly have been excluded from the computation of the tax payable by the company. It would appear that before 1937 the revenue authorities had not acted on this view. But that exempt income should be excluded from the computation in such a case was clearly decided by the Court of Appeal in Hughes v. Bank of New Zealand (1937) 1 KB 419 . In that case the assessment was made under Case I of schedule D. Lord Wright M.R. referring to s. 46, said: ". . . The section was put in in 1915, when it was undoubtedly desired to attract subscriptions to loans which were being put forward, as we well remember in those critical years of the War. It seems to me that it would be rather deplorable if, notwithstanding what I regard as the clear language of s. 46, the owner, not being ordinarily resident in the United Kingdom, was still taxed as part of his trading profits, and in my view that is not the true construction of the section. It is not introduced in respect of any particular schedule; it is quite general, . . . I see no ground at all consistent with ordinary principles of construction for cutting down its meaning and treating it as only applicable to Case III of schedule D, . . . If they are not taxable at all, then obviously they can neither be charged under Case III of schedule D nor under any Case of schedule D at all" (1937) 1 KB, at pp 430, 431 . (at p551)

7. When Hughes v. Bank of New Zealand (1937) 1 KB 419 reached the House of Lords (1938) AC 366 , the only question argued (apart from a point which has no relation to the present case) was whether the special provisions of the Act, on which the bank relied, did, as a matter of construction, confer on the receipts in question complete immunity from tax. The House of Lords held, as the Court of Appeal had held, that they did. So far as certain interest on war loan stock was concerned, the Crown abandoned in the House of Lords its contention that s. 46 did not confer such an immunity on that interest. (at p551)

8. If, then, one could stop at this point, one would say that the interest on the four stocks now in question was exempt from income tax in the United Kingdom, where it was derived, and that the commissioner should succeed on this appeal. If the company in fact paid tax which it was not liable to pay, that would be a misfortune which this Court cannot cure. It is now necessary, however, to consider a later decision of the House of Lords, which reversed a decision of the Court of Appeal and restored a decision of Macnaghten J. The case is Inland Revenue Commissioners v. Australian Mutual Provident Society (1946) 1 All ER 236; (1946) 1 All ER 528, ; (1947) AC 605 . (at p551)

9. This case (so far as here material) was concerned only with the method of giving effect, in an assessment under r. 3 of Case III of schedule D, to exemptions from tax to which it was assumed that effect must be given. There were two theoretically possible ways of doing this, which are made plain in the table which appears in the report of the case in the House of Lords (1947) AC, at p 608 . The first excludes the exempt income from the commencing figure of the total income of the investments of the life assurance fund, and then applies the prescribed ratio to the balance remaining. The second includes the exempt income in the commencing figure of total income, applies the prescribed ratio to that total, and then deducts the exempt income from the resultant figure. A similar choice of alternatives is, of course, presented when (as in Hughes v. Bank of New Zealand (1938) AC, 366 ) it is a matter of calculating a profit for the purposes of an assessment under Case I of schedule D. The first alternative would appear to provide the correct way of giving effect to the exemption, though the second is more favourable to the taxpayer. In the Australian Mutual Provident Society Case (1940) 1 All ER 236; (1946) 1 All ER 528; (1947) AC 605 , Macnaghten J. held that the first alternative should be adopted (1946) 1 All ER 236 , but his decision was reversed by the Court of Appeal (1946) 1 All ER 528 . (at p552)

10. On an appeal by the Crown to the House of Lords, Lord Porter (1947) AC, at p 627 intimated that, if the Act required a deduction of exempt income to be made at all in the course of the calculation, it should be made in the manner approved by Macnaghten J. (1946) 1 All ER 236 . But Lord Porter, like the rest of their Lordships, really decided the appeal in favour of the Crown on the ground that the proportion sum required by r. 3 of Case III of schedule D should be worked out and applied without taking into account in any way whatever the fact that some of the investments of the company assessed were exempted from income tax by other express provisions of the Act. One result of this view would seem to be that a company of the class mentioned in r. 3, which invests the whole of its assurance fund in securities which s. 46 purports to exempt from income tax, is in precisely the same position, as regards income tax, as a company which invests the whole of its assurance fund in securities to which the Act gives no exemption. (at p552)

11. In order to indicate the reason for their Lordships' adoption of this view, it will be sufficient to quote two short passages. Viscount Simon said: - "Once it is accepted that r. 3 of Case III is not one which taxes income from investments, whether exempted or not, but one which taxes a conventional sum calculated as the rule directs, it becomes reasonably clear that the sum to be taxed is not varied by inquiring whether one of the elements in the calculation contains income from exempted investments" (1947) AC, at p 620 . Lord Wright said: - "The charge was a tax on the investment income only as a machinery to tax the general profits of the British business, and as a manner of measuring the charge by an arbitrary figure derived from a percentage of the investment income. In this connection it was not material to distinguish between exempted and unexempted income. All that was needed was a yardstick" (1947) AC, at p 622 . The reasons so given were used as an aid in the interpretation of the Double Taxation Relief (Taxes on Income) (Australia) Order 1947 by Upjohn J. and the Court of Appeal in Ostime (Inspector of Taxes) v. Australian Mutual Provident Society (1958) Ch 774; (1958) 2 WLR 636; (1958) 3 WLR 354 , though Parker L.J. (as he then was) felt difficulty in "fully understanding" the decision. (at p553)

12. The question then arises - whether the decision of the House of Lords in 1947 compels a different view in this case from that which one would have taken in its absence. In my opinion, it does. In its absence one would have thought, as I have said, that the income of the four securities now in question was exempt from income tax in the United Kingdom, with the consequence that the taxpayer was not entitled to the benefit of s. 23 (q) of the Assessment Act (Cth). But that decision clearly means that a proportion of the company's income from investments, including income from investments of the character described in s. 46 and r. 2 (d) of the rules under schedule C, is charged with United Kingdom income tax. If you charge tax on 10 per cent of an identified fund, you cannot be said to leave that fund exempt from tax. (at p553)

13. It is important to remember that the ultimate question in this case turns on the meaning of a provision in the Australian Act. We have to determine whether the company's income from four specific classes of security is exempt from income tax in the United Kingdom. But the words "exempt from income tax" in this question import "exempt from income tax within the meaning of s. 23(q) of the Australian Assessment Act." It is true, of course, that, in order to answer the question, we have to inquire into the law of the United Kingdom relating to income tax, and to examine the statutes of the United Kingdom which impose income tax. But the use, in a statute of the United Kingdom, of the word "exempt" in relation to income of a particular description is not necessarily decisive of the question whether that income is exempt from income tax in the United Kingdom within the meaning of s. 23(q). So it is quite conceivable, if unlikely, that a tax, which was called an income tax in a United Kingdom statute, would not be rightly regarded as an income tax within the meaning of s. 23(q). Here, of course, there is no question but that the United Kingdom tax is such a tax. Everything turns on the word "exempt". (at p553)

14. The general scheme of the Commonwealth legislation is not to impose tax by reference to specific categories of income. It contains, of course, many special provisions as to what does and does not constitute income, but its general plan is to treat as "assessable income" - gross income - whatever is income within the general conception of that term, and to require the "taxable income" to be ascertained by subtracting from assessable income what are called "allowable deductions". Consistently with this general plan no income can be regarded as exempt from income tax either if it is required to enter into the calculation directly as itself a part of the assessable income, or even if, though it is excluded from the actual calculation of assessable income, the rate of tax is increased by reference to its existence. See Reid v. Federal Commissioner of Taxation [1947] HCA 4; (1947) 73 CLR 282 ; The Commonwealth v. State of Queensland [1920] HCA 79; (1920) 29 CLR 1 ; cf. Douglass v. Federal Commissioner of Taxation (1931) 45 CLR 95 , and Commercial Banking Company of Sydney Ltd. v. Federal Commissioner of Taxation [1950] HCA 15; (1950) 81 CLR 263 . The United Kingdom income tax legislation adopts, as has often been observed, a different general scheme. It does impose tax by reference to specific categories of income, and these are not completely mutually exclusive. But the calculation required by r. 3 of Case III of schedule D and s. 33(4) is precisely parallel to the process of ascertaining assessable income and then subtracting allowable deductions in order to arrive at taxable income. The difficulties to which Dixon J. adverted in Australian Machinery and Investment Co. Ltd. v. Deputy Federal Commissioner of Taxation [1946] HCA 65; (1946) 8 ATD 81, at pp 100, 101 do not exist here. What the Commonwealth Act calls assessable income is obtained by taking a proportion of a total income which includes interest on the four classes of securities mentioned above. It is impossible to say that that process leaves that interest exempt from income tax within the meaning of s. 23(q). (at p554)

15. Their Lordships in the Australian Mutual Provident Society Case (1947) AC 605 did not expressly deal with the relation between s. 46 and r. 2(d) of schedule C on the one hand and r. 3 of Case III of schedule D on the other hand. In this connection two possible views seem to be open as to the effect of the decision. It may be that the former provisions are to be regarded as qualified or excluded, so far as life assurance companies are concerned, by the latter provision. Or it may be that the former provisions stand unaffected but are to be construed as meaning merely that the interest therein referred to is not to be charged specifically or eo nomine with tax. for the purposes of the present case, it does not matter which view be taken. On either view the interest in question is not exempt from income tax in the United Kingdom. (at p554)

16. It follows that the whole of the interest, amounting to 71,427 pounds 4s. 11d., which is referred to in the case stated is exempt from income tax in Australia, because the whole is not exempt in the United Kingdom. It is true, of course, that r. 3 of Case III of schedule D does not in terms charge with tax the whole of that interest, but only a specified proportion (2.888 per cent) of that whole. But it does not follow that only that percentage of that whole is to be regarded as "not exempt from income tax" for the purposes of s. 23(q). It is not possible to say that any identifiable part of the total sum is taxed, and that an identifiable remainder is "exempt". It is not possible to attribute or appropriate the United Kingdom tax paid by the company to any specific part or portion of the total interest from the four classes of security in question. The tax was calculated by reference to a percentage of the total sum, but it was not paid on any specific part of that total sum. If it had ever become necessary for any purpose to apportion the amount of tax paid among components of the interest received, the apportionment could only have been made by attributing the tax paid to each pound of that interest rateably. There are many purposes of the law for which it may be necessary to make an apportionment in respect of a payment, and, unless a special appropriation can be made and is made, the rule of the common law is that a payment is attributed rateably to each pound of a debt or fund. In Ellis v. Emmanuel (1876) 1 Ex D 157 Blackburn J. said:- "It was said that the dividends are by law applied to each part of the debt rateably, which is unquestionably true" (1876) 1 Ex D, at p 163 . And see Commissioner of Stamp Duties (N.S.W.) v. Perpetual Trustee Co. Ltd. [1929] HCA 27; (1929) 43 CLR 247, at p 266 ; W. & A. McArthur Ltd. v. Federal Commissioner of Taxation [1930] HCA 47; (1930) 45 CLR 1, at p 20 ; Resch v. Federal Commissioner of Taxation [1942] HCA 2; (1942) 66 CLR 198, at p 230 ; Re D (a Lunatic Patient) (No. 2) (1926) VLR 467, at pp 485, 486 and Blackston Bank v. Hill (1830) 10 Pick (Mass) 128, at p 133 . In the present case it may be said that essentially it is not a matter of distributing a payment but of distributing a burden. But the position is entirely analogous. The burden cannot be distributed in any way which will leave it resting not on the whole, but exclusively on some severable part, of the interest received. The whole, therefore, is "not exempt". (at p555)

17. The question asked by the case stated should be answered - Yes. (at p555)

TAYLOR J. The question raised by the case stated involves an inquiry whether the sum of 71,427 pounds 4s. 11d., being part of the investment income received by the appellant in the United Kingdom, was, within the meaning of s. 23(q) of the Income Tax Assessment Act 1936 of the Commonwealth of Australia, "not exempt" from United Kingdom income tax. At first sight the problem may seem simple for some of the components of that amount were declared by s. 46(1) of the Income Tax Act 1918 (Imp.) to be "exempt" from income tax and the remaining components, by virtue of r. 2 of the general rules applicable to schedule C of that Act, were not "chargeable" with tax. But the income tax payable by the appellant pursuant to the latter Act was assessed without reference to these provisions and, in the result, the amount of the assessment was precisely the same as it would have been if the component parts of the income receipts in question had not been declared to be "exempt" from or not "chargeable" with tax. (at p556)

2. This anomaly resulted from the fact that in the making of the assessment the formula prescribed by r. 2 of Case III in schedule D to the Act was employed. Pursuant to this rule the tax payable was calculated upon the appropriate proportion (2.888 per cent) of the aggregate income of the company from the investment of its life assurance fund. That proportion was less than the appellant's United Kingdom investment income though a perusal of r. 3 readily reveals that this is an accidental feature and would not be a necessary result in every case. (at p556)

3. In disregarding the provisions of s. 46(1) and r. 2 of the general rules applicable to schedule C the income tax authorities acted in accordance with the principle now established by the decision of the House of Lords in Inland Revenue Commissioners v. Australian Mutual Provident Society (1947) AC 605 . That case decided, in effect, that tax assessed pursuant to r. 3 of Case III to schedule D was not a tax upon the investment income of the assurance company concerned; it was, it was said, a tax upon a "conventional or notional sum . . . 'deemed to be profits' to be charged as such" (per Viscount Simon (1947) AC, at p 619 ) or "a charge under the case on a notional figure deemed to be a figure of profit" (per Lord Wright (1947) AC, at p 621 ) and the process employed was said to be "a conventional calculation adopted for the purpose of estimating an otherwise almost incalculable sum" (per Lord Porter (1947) AC, at p 627 ). (at p556)

4. The peculiar difficulties in the way of assessing life assurance companies to income tax was adverted to by several of their Lordships and it is not out of place to repeat the observations of Viscount Simon on this point: "The present r. 3 had its origin in s. 15 of the Finance Act 1915 (5 & 6 Geo., c. 62). As Mr. Hills pointed out to us, before the Act of 1915 there was much difficulty in getting income tax from a life assurance company resident abroad with a branch here. Such a company could avoid United Kingdom income tax on its income from investments, even though it had a branch in the United Kingdom, by so arranging its affairs that its investments were foreign investments, the proceeds of which were not caught by United Kingdom income tax. It is true that the company might be regarded as carrying on in this country a trade through its branch, but there was much practical difficulty in arriving at the figure under case I of sch. D of annual profits of such a branch for, in the case of life assurance business, the true profits attributable to the branch could not be ascertained in the normal manner, as is shown by provisions in the Assurance Companies Act 1909 for a quinquennial valuation. Section 15 of the Finance Act 1915, was, it would seem, aimed at meeting this difficulty, and it did so by providing for a conventional figure, which should be 'deemed to be profits', comprised in schedule D, on which a non-resident life assurance company, with a branch in the United Kingdom, would make a contribution to United Kingdom income tax, however it arranged its investments. The provisions now contained in r. 3 of case III call for the use of certain factors in order to arrive at this conventional figure, upon which such an assurance company as the respondent society is required to pay tax in respect of the annual profit of its life assurance business carried on in this country" (1947) AC, at p 617 . (at p557)

5. The case is, of course, clear authority for the proposition that in arriving at the "conventional figure" in this case no account could be taken of the fact that part of the appellant's investment income in the United Kingdom was declared by other provisions of the Act to be "exempt" or not "chargeable" to tax. In the result the application of r. 3 produces the anomaly already mentioned for if, as Lord Porter said, "a non-resident company should have invested all its life assurance fund in tax-exempt securities, it would pay tax on the conventionally apportioned sum without any reduction and would be no better off than if the statutory proportion were wholly liable to tax" (1947) AC, at p 626 . His Lordship agreed that this was a "hardship" but it did not, in his view, entitle their Lordships to disregard the plain meaning of the rule. "So long as the words are in their present form", he said, "the result must be looked on as the price which non-resident assurance companies have to pay for engaging in business in this country" (1947) AC, at p 626 . The sense of this final observation was expressed by Viscount Simon in the concluding words of the passage quoted earlier and by Lord Wright when he said that the process employed "was merely a convenient mode of imposing some charge on the assurance company in consideration of the privilege it enjoyed in trading in this country" (1). He added that "The charge was a tax on the investment income only as a machinery to tax the general profits of the British business, and as a manner of measuring the charge by an arbitrary figure derived from a percentage of the investment income" (1) and that "In this connexion it was not material to distinguish between exempted and unexempted income" (1). (at p558)

6. The decision in the case disposes, of course, of the notion that the question raised by the case stated can be answered simply by saying that the provisions of s. 46(1) and r. 2 of the rules applicable to schedule C exempted the income in question from income tax for in the making of the assessment no effect was given to these provisions. But, according to the respondent, the case goes further and decides that no part of those receipts are subjected to tax. That is to say, the tax was charged upon what was merely an "arbitrary" or "conventional" figure which, though arrived at by employing the prescribed formula, did not in reality represent any part of that income. Therefore, it is said, that the income was not chargeable with tax and should therefore be regarded as exempt. (at p558)

7. To my mind this contention is fallacious. It may at once be conceded that the tax was calculated by applying the appropriate rate to an amount which was equal to the appropriate proportion of the appellant's aggregate income from the investment of its life assurance fund. It may also be conceded that the proportion when ascertained was a "conventional" or "arbitrary" figure and that, in reality, it did not represent and was not part of the appellant's United Kingdom investment income. But it is another thing to say that, therefore, the company was not subjected to tax in respect of that investment income. Indeed, to assert that it was not would, by parity of reasoning, be to assert that the company was not subjected to tax in the United Kingdom in respect of any part of its income wherever derived. This, to my mind, would be in the face of their Lordships' decision for as already appears the formula contained in r. 3 was prescribed merely as a means of assessing the tax payable "in respect of the annual profit of its life assurance business carried on" in the United Kingdom and the tax, itself, constituted "a charge . . . on a notional figure deemed to be a figure of profit" or upon "notional profits . . . ascertained in a conventional way and then subjected to tax". The views implicit in these observations, it seems to me, receive the literal support of s. 1 of the Income Tax Act and of the classification, contained in r. 2 of schedule D, of the profits and income with which Case III was designed to deal. In the result the tax payable in the United Kingdom should, in my opinion, be regarded as the tax properly payable in respect of the whole of the appellant's income in the United Kingdom during the relevant period and accordingly no part of the amount in question was exempt from tax. (at p559)

8. For these reasons the question in the case stated should be answered by saying that the amount of 71,427 pounds 4s. 11d. was wholly exempt from Commonwealth income tax. (at p559)

MENZIES J. The answer to the question whether 71,427 pounds 4s. 11d., the interest received by the taxpayer in the United Kingdom from securities situated in the United Kingdom, or any part thereof, is exempt from income tax under the provisions of s. 23(q) of the Income Tax Assessment Act 1936, which exempts income not exempt from income tax in the country where it is derived, requires in the first place an examination of the United Kingdom legislation to find out whether the interest or any part of it was exempt from income tax in the United Kingdom. If it was, what was exempt cannot fall within s. 23(q). (at p559)

2. The interest in question is expressly declared to be exempt from income tax as to part by s. 46(1) of the Income Tax Act 1918, and as to the rest by r. 2(d) of schedule C of the Income Tax Act 1918 so that at first sight these provisions would seem to be conclusive that the income in question is exempt in the United Kingdom; but the income tax laws of the United Kingdom are not something to be understood at first sight; indeed, they seem to call for a measure of second sight. In this particular case the provision that creates the difficulty is r. 3 of the rules applicable to Case III of schedule D of the Income Tax Act 1918 which I will refer to more shortly as Case III, r. 3. This is a provision that was designed to facilitate the taxation of foreign assurance companies. Prior to its enactment such companies were taxable upon their United Kingdom gains under schedule D, Case I, and under other provisions as well. These provisions were, however, difficult to apply and to facilitate the collection of tax s. 15 of the Finance Act 1915 was introduced. Part of that section is now Case III, r. 3. It provides a formula for ascertaining the taxable income of such companies which may be expressed as follows:
United Kingdom Premium Income Total Investment Income
----------------------------- X

Total Premium Income of Life Assurance Fund

The figure thus arrived at is deemed to be "profits comprised in this Schedule" and then, apparently because the provisions of s. 1 of schedule D to the effect that tax under the schedule shall be charged in respect of the annual profits accruing to a person from any trade exercised within the United Kingdom were thought not to apply, it is provided expressly that the calculated amount "shall be charged under this Case". (at p560)

3. In seeking to find out the character of what it is that is charged in the manner described it is necessary to keep in mind that annual profits which may be taxed under Case I of schedule D are ascertained by deducting expenditure from receipts. Such a calculation is not, of course, open in a case where it is provided in terms that a sum calculated without any regard to expenditure shall be deemed to be chargeable profits, and to meet this situation there was a further provision in s. 15 of the Finance Act 1915, which is now to be found in s. 33(4) of the Income Tax Act 1918, to the effect that when a company is charged under Case III, r. 3, "the relief in respect of expenses of management shall be calculated by reference to a like proportion of its total expenses of management for the year estimated according to the provisions of this Act". The relief there referred to is that now provided for by s. 33(1) which says, inter alia, that where an assurance company "has not been charged in respect of its profits in accordance with the rules applicable to Case I of Schedule D the company . . . shall be entitled to repayment of so much of the tax paid by it as is equal to the amount of the tax on any sums disbursed as expenses of management (including commissions) for that year". This provision is of general application when an assurance company is charged on a basis other than annual profits; cf. Sun Life Assurance Society v. Davidson; Phoenix Assurance Co. Ltd. v. Logan (1958) AC 184 . (at p560)

4. Case III, r. 3, and s. 33(4) therefore provide an additional means for taxing an assurance company not having its head office in the United Kingdom which carries on life assurance business there through any branch or agency. The provisions I have referred to, however, do clearly contemplate that the taxation of such a company may still be differently based, e.g. on the basis of annual profits; cf. s. 33(1) and Case III, r. 3(4). See too Equitable Life Insurance Society of U.S.A. v. Hills (1924) 8 Tax Cas 657 . (at p560)

5. It is not a matter for surprise that tax collectors and taxpayers alike have from time to time become lost in this elaborate labyrinth and it is hardly less surprising that the decisions of the Courts have not perfectly illuminated its darkest places. This is perhaps best illustrated by Inland Revenue Commissioners v. Australian Mutual Provident Society (1947) AC 605 . In that case there had been a difference between the commissioners and the society about the way in which the exemption provided by s. 46 and r. 2(d) of schedule C should be applied in determining the tax charged under Case III, r. 3. A number of hypothetical examples of the ways in which the provision might be applied were prepared for examination by the courts and of these the Court of Appeal chose an example which adopted the society's method of computation as illustrating the proper operation of the various relevant provisions. Upon appeal by the commissioners the House of Lords, following an observation made by Viscount Simon in the course of the argument, decided that the sum to be taxed was not affected at all by the fact that one of the factors in the calculation contained as an element income from exempted investments. The basis of the decision was that the tax charged under Case III, r. 3, was not directly or indirectly a tax upon income from investments but, to use the language of Viscount Simon, "the thing to be taxed" is "a conventional or notional sum" (1947) AC, at p 619 deemed to be profits and to be charged as such. Lord Wright said: "In truth, as already observed, the charge under r. 3 was not a charge on the specified investments except in form: it was an artificial mode of charging the general profit of the British business. Rule 3 not being qualified except for sub-r. 4, and being a charging section must receive its appropriate effect from the court, notwithstanding an apparent but not real conflict between it and s. 46 of the Income Tax Act 1918" (1947) AC, at p 623 . Lord Porter stated that exempt investments should not be taxed even indirectly and added that to include tax-free investments in assets the profits from which were to be taxed would be to tax what ought not to be taxed. Following this he said: "But it has no application to a case where the profits or income, the subject of charge, is a notional sum calculated in a conventional way nor do I think it matters whether it is or is not established that the tax-exempt investments are assets of the branch carried on in this country" (1947) AC, at p 625 . This case, then, for the reasons indicated by the citations that I have made, decided that interest from tax-exempt investments must be included in the total income from investments of the life assurance fund for the purpose of the calculation of that portion of the income from investments of the fund that is deemed to be profits and is charged with tax. The decision means that for the purpose of the exempting provisions already referred to the tax that is imposed by Case III, r. 3, is not to be regarded as a tax on investment income as such; it is rather a tax upon a calculated sum given the character of profits imposed by a provision which contains no exemption. To use Lord Porter's words: "The result must be looked on as the price which non-resident assurance companies have to pay for engaging in business in this country" (1947) AC, at p 626 . This seems to me to be the view of the decision that was taken by Upjohn J. and by the Court of Appeal in Ostime (Inspector of Taxes) v. Australian Mutual Provident Society (1958) Ch 774; (1958) 2 WLR 636; (1959) Ch 427; (1958) 3 WLR 354 where a claim made by the Inland Revenue Commissioners that what was taxed under Case III, r. 3, was not profits was rejected. It was not decided in either case, however, that Case III, r. 3, charges all that goes to make up what are in strictness United Kingdom profits. Nor does the language of the rule require this conclusion; indeed it points the other way in providing that what is to be charged as profits comprised in the schedule is a portion of the total income from the assurance fund. When Case III, r. 3, provides an additional method for taxing the companies to which it relates there seems to me to be no justification for identifying what is taxed thereunder with what would be taxed if the other methods of taxing were to be adopted. The reason for disregarding the exemption provisions was that Case III, r. 3, makes chargeable a "notional" or "conventional" sum. When Lord Wright spoke of Case III, r. 3, as "an artificial mode of charging the general profits of the British business" (1947) AC, at p 623 he was not, I think, identifying what Viscount Simon and Lord Porter described as a "notional" or "conventional" sum with the net profits of the British business. The existence of s. 33 as I have pointed out indicates that something different from annual profits is taxed under Case III, r. 3. (at p562)

6. In the present case the taxpayer was taxed under Case III, r. 3, and in conformity with Inland Revenue Commissioners v. Australian Mutual Provident Society (1947) AC 605 the 71,427 pounds 4s. 11d. in question was included as part of the total investment income for the purpose of United Kingdom Premiums
the calculation of tax. The fraction- ----------------------- -

Total Premiums

produced a figure of 2.888 per cent and this was applied to 820,182 pounds being the total income of the company from the investments of its life assurance fund and which included the 71,427 pounds 4s. 11d. in question, to arrive at a figure of 23,687 pounds. At this point in the calculation of tax it would seem correct to say that 2.888 per cent of every 1 pound of the 71,427 pounds 4s. 11d. was deemed to be profit and charged with tax. Section 33 had, however, to be applied which, as I have pointed out, did no more than entitle the company to repayment of so much tax paid by it as is equal to the amount of tax on any sum disbursed as expenses of management. This sum in the computation of the taxpayer's United Kingdom tax was calculated to be 9,534 pounds. The company therefore had to pay tax on 23,687 pounds at 4s. 9d. in the 1 pound and was entitled to repayment of 4s. 9d. in the 1 pound upon 9,534 pounds. This relief was given by deduction in the calculation of the tax payable, that is, 9,534 pounds was deducted from 23,687 pounds to produce a figure of 14,153 pounds which was taxed at 4s. 9d. in the 1 pound. In the result the 71,427 pounds 4s. 11d. was included in the 820,182 pounds that formed an element in the calculation of United Kingdom tax; and of the 71,427 pounds 4s. 11d. so much as was comprised in the sum of 14,153 pounds was charged with tax. This can be ascertained by calculation. (at p563)

7. It is now necessary to turn to s. 23(q) of the Income Tax Assessment Act 1936 to decide whether upon the basis I have just stated all or any part of the sum of 71,427 pounds 4s. 11d. should for the purposes of s. 23(q) be regarded as exempt from United Kingdom tax. (at p563)

8. The whole sum was not exempt because, as I see it, an ascertainable portion thereof was charged with tax under Case III, r. 3. What is taxed under any description is not exempt from tax. I think the argument for the commissioner that no part of the 71,427 pounds 4s. 11d. was taxed pushes the House of Lords decision too far. That decision, as is perhaps seen most clearly from the speech of Lord Porter, really depended upon the view that Case III, r. 3, imposed tax upon an amount without embodying the exemptions provided by s. 46(1) and r. 2(d) of schedule C, not that it charged what was brought to tax by Case I, without the appropriate exemptions nor that the amount taxed thereunder must be regarded as entirely separate from the items going to make up the investment income. (at p563)

9. It was argued for the taxpayer, however, that not only was the whole sum not exempt but no part of it was exempt because the 71,427 pounds 4s. 11d. was brought into the calculation of the tax that became payable and the words "income not exempt from income tax" amount to the same thing as "assessable income". The argument that "income not exempt from income tax" is equivalent to "assessable income" is, I think, substantially correct if what is meant is income brought to tax. The phrase "income . . . exempt from income tax" in the beginning of s. 23 has been regarded as meaning "not assessable income": cf. Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation [1940] HCA 9; (1940) 63 CLR 382 , per Dixon J. (1940) 63 CLR, at p 472 but I cannot think this is conclusive as to like words in s. 23(q) because the phrase in the opening words of s. 23 refers to Australian law which makes "assessable income" the basis of the imposition of tax by imposing tax upon assessable income less allowable deductions, i.e. taxable income, whereas the phrase in s. 23(q) refers to non-Australian systems of taxation which operate differently and may not require any ascertainment of "assessable income". I have, however, reached the conclusion that s. 23(q) is dealing with income of the character there described upon which the taxpayer in some way or another is liable to be taxed in the country where it is derived: see Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation (1940) 63 CLR, at pp 432, 452, 472 . How it is brought to tax is not important for the purposes of s. 23(q). (at p564)

10. The final matter for determination is then whether the whole of the 71,427 pounds 4s. 11d. is brought to tax in the United Kingdom. If United Kingdom tax was levied upon the 820,182 pounds with or without deduction I think that the whole 71,427 pounds 4s. 11d. which forms part of the larger sum would have been charged but that is not the case. What is charged, however, is a fraction of the 820,182 pounds and therefore, as it seems to me, a fraction of each and every pound going to make up that sum, and accordingly, a fraction of the 71,427 pounds 4s. 11d. To take a comparable case from the Income Tax Assessment Act 1936 itself I turn to s. 26(d) which provides that the assessable income of a taxpayer shall include five per cent. of the capital amount of any gratuity paid in a lump sum in consequence of retirement from any employment. I regard that provision as saying in effect that five per cent of the gratuity is brought to tax and ninety-five per cent is not and that is the case notwithstanding that the whole gratuity must be used for the purpose of calculating what is assessable income. I think s. 26(d) denies that the whole gratuity is assessable income by providing expressly that five per cent of the whole is assessable income. In the same way I think that Case III, r. 3, denies that the whole of the income from the investment of the life assurance fund is brought to tax by providing expressly that a specified calculable portion is to be charged with tax. Furthermore for the reasons given earlier I am not prepared to regard Case III, rule 3, as taxing actual British profits (which would include the 71,427 pounds 4s. 11d.) without exemption. (at p564)

11. My conclusion is that the portion of the 71,427 pounds 4s. 11d. that is included in the portion of the income from the investment of the life assurance fund of the taxpayer that is charged under Case III, r. 3, but only that portion of the 71,427 pounds 4s. 11d., is brought to tax and accordingly that is the only portion which is exempt from tax under s. 23(q). That portion is so much of the 71,427 pounds 4s. 11d. as is included in the sum of 14,153 pounds which was charged with tax in the United Kingdom. That is exempt from tax under s. 23(q) but the balance of the 71,427 pounds 4s. 11d. is not exempt. (at p565)

ORDER

Question in the case stated answered: Yes, wholly. Order that the costs of the case stated be reserved for the judge disposing of the appeal.