Employers Mutual Indemnity Association Ltd v. Federal Commissioner of Taxation

68 CLR 165

(Judgment by: LATHAM CJ)

Employers' Mutual Indemnity Association Ltd
v. Federal Commissioner of Taxation

Court:
High Court of Australia

Judges:
Latham CJ
Rich J
Starke J
McTiernan J
Williams J

Subject References:
Taxation and revenue
War-time company tax
Mutual indemnity association
Co-operative insurance company

Legislative References:
War-time (Company) Tax Assessment Act 1940 No 90 - s 14(b); s 14(d)
Income Tax Assessment Act 1936 No 27 - s 117

Hearing date: 10 November 1943; 11 November 1943
Judgment date: 1 December 1943

SYDNEY


Judgment by:
LATHAM CJ

Appeal from a decision of a Board of Review upholding an assessment of the appellant company to war-time (company) tax in respect of taxable profit derived during the year ended 30th June 1940. The assessment was made under the War-time (Company) Tax Assessment Act 1940. The company claims that it is exempt under s. 14 of that Act. Section 14 provides, inter alia:


"This Act shall not apply to-...

(b)
a co-operative company as defined in section one hundred and seventeen of the Income Tax Assessment Act; ...
(d)
a company (not being a company carrying on the business of financing time payments, instalments or hire purchase sales, or of providing cash orders) in which little or no capital is required, to the extent to which the Commissioner is satisfied that its profit arises from commissions, fees or charges for services rendered".

The company claims that it falls within both of these provisions for exemption.

The Income Tax Assessment Act 1936-1940, s. 117, provides that in Div. 9 of Part III. of the Act:


" `co-operative company' means a company the rules of which limit the number of shares which may be held by, or by and on behalf of, any one shareholder, and prohibit the quotation of the shares for sale or purchase at any stock exchange or in any other public manner whatever, and includes a company which has no share capital, and which in either case is established for the purpose of carrying on any business having as its primary object or objects one or more of the following:

(a)
the acquisition of commodities or animals for disposal or distribution among its shareholders;
(b)
the acquisition of commodities or animals from its shareholders for disposal or distribution;
(c)
the storage, marketing, packing or processing of commodities of its shareholders;
(d)
the rendering of services to its shareholders; (e) the obtaining of funds from its shareholders for the purpose of making loans to its shareholders to enable them to acquire land or buildings to be used for the purpose of residence or of residence and business."

The company is a company limited by guarantee and it has no share capital, and no shareholders in the ordinary sense: but "shareholder" in the Act includes member (s. 6). It claims that it was established for the purpose of carrying on a business having as its primary object the rendering of services to its shareholders. The "services" which, it is claimed, the company renders to its shareholders consist in the issuing of insurance policies against workers' compensation and motor car risks and the investigation, adjustment and payment of claims made under those policies.

By its memorandum of association, the company is empowered to carry on all kinds of insurance business. The terms of the memorandum do not limit the company to doing such business with its members. Neither do the articles in express terms impose any such limitation, though certain of the articles are so expressed as to assume or suggest that all policies issued will be issued to members. In fact the company has issued policies only to members. It would be necessary to examine the articles more closely if it were necessary to determine whether the business of the company in issuing policies was limited by the articles to issuing such policies to shareholders, as distinct from the general public. Upon the view which I take of the nature of the business of the company it is not necessary to determine this question.

It is contended for the company that when the company investigates and adjusts a claim made against it and either resists payment, or ultimately pays under the policy, the company is rendering services to its shareholders. In my opinion this is not the case. The company is bound by the terms of the policies which it issues to indemnify policy holders according to the terms of the policies, and in the case of workers' compensation policies it is also by statute liable directly to insured workers (Workers' Compensation Act 1926-1938 (N.S.W.), s. 18 (3)). In making the investigations which are necessary before the company decides whether to pay or to resist a claim the company is not engaged in rendering a service to the particular shareholder who has taken out the policy, or to its shareholders generally. It is acting on its own account. It is either discharging a liability which it has undertaken, or is resisting a liability alleged by the shareholder or some other person to exist but disputed by the company. Accordingly, in my opinion, the business of the company in investigating, adjusting and paying claims under policies cannot be brought within the category of rendering services to any other persons.

But it is claimed that the business of issuing insurance policies is itself a business which has as its primary object the rendering of services to the persons to whom policies are issued. The issuing of an insurance policy is the making of a contract of indemnity. An insurance company carries on a business in the same way as any other company or person carries on a business. In a very general sense it might be said that a company formed for the purpose of manufacturing and selling goods renders services to the persons who buy its goods; that a company which lends money on mortgage renders services to the mortgagors with whom it deals; that a company which produces wool renders services to the persons to whom the wool is sold; and that in each of the cases mentioned the company renders services to its shareholders, first, when it deals with any of them, and, secondly, when it seeks to make profits for them. But the rendering of services, in the ordinary sense of that expression, does not cover any and every kind of dealing between persons. It would not be in accordance with the ordinary use of language to say that every company which deals with another person in some way or other upon terms acceptable to that person, and therefore regarded by him as being beneficial to him, was engaged in rendering services to him. The object of the companies in the cases mentioned is to carry on business profitably and it cannot be said, even if in a very general sense they are rendering services to, among others, their shareholders, that the primary object of the company is to render such services.

In my opinion the words "rendering of services to" persons mean doing work of some kind for those persons. When it is the primary object of a company to do work for other persons, then it may be said that the primary object of the company is the rendering of services to such persons. But the issuing of an insurance policy to a person cannot be described as doing work for that person. It is making a contract with him. Work may be done for a person in pursuance of a contract with him, but the making of a contract with him does not amount to doing work for him.

I am therefore of opinion that the company is not a co-operative company within the meaning of s. 117 of the Income Tax Assessment Act 1936-1940 and is therefore not entitled to the benefit of the exemption provided by s. 14 (b) of the War-time (Company) Tax Assessment Act 1940.

The next question is whether the company falls within the provisions of s. 14 (d) of the War-time (Company) Tax Assessment Act 1940, as being a company in which little or no capital is required. If this question should be answered in favour of the company, it will then be necessary for the Commissioner to determine the extent to which he is satisfied that its profit arises from charges for services rendered, as the company is exempt from tax only to the extent to which the Commissioner is so satisfied. Both questions must be answered in favour of the company before exemption can be established. Thus if none of the profits of the company can be said to arise from charges for services rendered it would be immaterial that the company was one in which little or no capital is required. I have already stated my opinion that the company is not a company established for the purpose of carrying on a business one of the primary objects of which is the rendering of services to its shareholders. In giving my reasons for this opinion I have already given reasons to support the proposition that the company does not render services at all-the issuing of insurance policies cannot be described as rendering a service at all and the adjustment, etc, of claims is not a service to any person other than the company, and is therefore not a "service rendered" (see s. 14 (d)), which I understand as meaning a service rendered to some other person.

Apart, however, from this answer to the claim for exemption under s. 14 (d), I am of opinion that it is shown that the company is not one in which little or no capital is required.

The company started without any capital at all. It was fortunate in its early years in that the claims made were less than the premiums received and the company accordingly saved money out of premiums paid on policies. The articles provide for the division of policy holders into three sections, and for a degree of control by committees representing the sections over the moneys received by way of premiums from members of those sections. Article 113 provides for investigation of the profits of each section of the company from time to time as the committees shall determine, and also provides that such proportion of such profits as the respective committees may determine "shall be divided between the persons who were members of the section to which such profits belong during any portion of the period covered by the investigation in question pro rata in accordance with the moneys paid by such persons respectively to the company." After the company had paid all claims and dividends had been paid in pursuance of article 113, surpluses remained in the hands of the company from time to time. These surpluses were placed in a reserve fund and the amount of the reserve fund at the beginning of the income year in question was (after an adjustment which is not in question) PD27,145. Of this amount PD10,000 represented by government securities is deposited with the Colonial Treasurer under the provisions of the Workers' Compensation Act 1926-1938, s. 19, as a condition of the company carrying on the business of insurance against workers' compensation risks. Other part of the reserve fund is represented by other income-producing investments. The reserve fund was from time to time drawn upon when the amount of the claims made it necessary to do so.

Accordingly, first, the sum of PD10,000 was a sum which it was necessary for the company to provide in order to carry on the business which it in fact conducted, and which any company conducting such a business must provide. That sum was a sum which had to be held to provide against possible future contingencies. It was not available for ordinary use by the company. It could be withdrawn only if the company ceased business and provided for all its insurance liabilities (Workers' Compensation Act, s. 25). It was, in my opinion, plainly part of the commercial capital of the company. Secondly, the reserve fund was necessary to enable the company to carry on business from year to year. It consisted of moneys saved for the purpose of meeting obligations for which the current income of the company in a particular year might not be sufficient. This sum also is capital in the ordinary commercial sense of that term. It has been held in the case of Incorporated Interests Pty Ltd v Federal Commissioner of Taxation [F1] that the word "capital" in s. 14 (d) of the War-time (Company) Tax Assessment Act means, not share capital, but the assets actually used by the company for capital purposes. Accordingly, in my opinion, it cannot be said that this company is one in which little or no capital is required, and for this reason also the company does not fall within the provisions of s. 14 (d) of the Act.

It was contended that, because under art. 26 a member of the company upon resignation or death had certain rights of withdrawal of what was regarded as his interest in the reserve fund, therefore the reserve fund could not be regarded as capital of, i.e., owned by, the company. In my opinion this proposition is quite untenable. The rights of the members of the company under the articles do not affect the ownership by the company of the reserve fund.

In my opinion the appeal should be dismissed.