Mutual Life and Citizens' Assurance Co Ltd v Commissioner of Taxation
100 CLR 5371959 - 0427A - HCA
(Judgment by: Taylor J)
Between: Mutual Life and Citizens' Assurance Co Ltd
And: Commissioner of Taxation
Judges:
Dixon CJ
McTiernan J
Fullagar J
Taylor JMenzies J
Subject References:
Taxation and revenue
Assessable income
Exempt income
Income from sources outside Australia
Legislative References:
Income Tax Assessment Act 1936 (Cth) - s 23
Judgment date: 27 April 1959
SYDNEY
Judgment by:
Taylor J
The question raised by the case stated involves an inquiry whether the sum of PD71,427 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.
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.
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. [F30] 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) [F31] or "a charge under the case on a notional figure deemed to be a figure of profit" (per Lord Wright) [F32] 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). [F33]
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". [F34]
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" [F35] 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". [F36] 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". [F37] 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" [F38] and that "In this connection it was not material to distinguish between exempted and unexempted income" [F39]
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.
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.
For these reasons the question in the case stated should be answered by saying that the amount of PD71,427 4s. 11d. was wholly exempt from Commonwealth income tax.