• The impact of this case on ATO policy is discussed in Decision Impact Statement: Commissioner of Taxation v Crown Insurance Services Ltd (Published 6 January 2014).

FC of T v CROWN INSURANCE SERVICES LTD

Judges:
Lander J
Jessup J
Foster J

Court:
Full Federal Court, Melbourne (Heard in Brisbane)

MEDIA NEUTRAL CITATION: [2012] FCAFC 153

Judgment date: 2 November 2012

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Lander and Foster JJ

1. We have had the advantage of reading in draft the reasons of Jessup J.

2. His Honour has comprehensively addressed the facts underlying the decision of the Administrative Appeals Tribunal (AAT). He has also identified the two issues for determination by this Court: first, whether this Court has jurisdiction to entertain the " appeal " infected by error; and secondly, if this Court has jurisdiction, whether the decision arrived at by the AAT was infected by error.

3. The AAT is charged with reviewing decisions made in the exercise of powers by administrative decision makers under a Commonwealth enactment: s 25 of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act).

4. For the discharge of its powers, the AAT may exercise all the powers and discretions that are conferred by any relevant enactment on the person who made the decision which is sought to be reviewed: s 43(1) of the AAT Act.

5. The AAT has the power to affirm, vary or set aside the decision under review and, if it sets aside the decision under review, the AAT can make a decision in substitution for the decision set aside or, alternatively, remit the matter for reconsideration in accordance with directions or recommendations of the AAT: s 43(1).

6. The AAT must give reasons orally or in writing for its decision: s 43(2).

7. Notwithstanding that the role of the AAT is to review administrative decisions, an appeal lies from the AAT to the Federal Court from the AAT ' s decisions, but a party to a proceeding before the AAT may only appeal to the Federal Court " on a question of law " : s 44(1). If the appeal is brought from the AAT constituted by a presidential member, subject to a determination by the Chief Justice to the contrary, the appeal must be heard by a Full Court: s 44(3). Notwithstanding that the appeal is to be heard by a Full Court, the Full Court is not exercising the appellate jurisdiction of the Court but is acting in the original jurisdiction of the Court under s 19 of the Federal Court of Australia Act 1976 (Cth).

8. The power of the Federal Court to hear appeals from the AAT is a judicial function and a valid exercise of the judicial power of the Commonwealth:
Minister for Immigration & Ethnic Affairs v Gungor (1982) 42 ALR 209 .

9. The purpose of the appeal procedure in this Court is to correct an error of law.

10. The pre-conditions for the exercise of jurisdiction by the Court are that the applicant was a party to the proceeding before the AAT; the AAT has made a decision; the decision involved a question of law; and the way in which the AAT has dealt with that question of law has impacted adversely upon the applicant. Because it is a question of the Court ' s jurisdiction, the Court needs to be satisfied that there is a question of law raised, even in the absence of a challenge by the respondent to the appeal:
H P Mercantile Pty Ltd v Commissioner of Taxation (2005) 219 ALR 591 at 608.

11. If the applicant can satisfy each of those matters, the applicant will be entitled to ask the Federal Court to " make such order as it thinks appropriate by reason of its decision " : s 44(4) of the AAT Act.

12. The Court ' s powers to make orders are constrained by first, the subject matter of the appeal being the question of law; and secondly, its own reasons for decision in relation to that question of law.

13. The question of law should be stated with precision, because it is the question of law that enlivens the jurisdiction:
Birdseye v Australian Securities and Investment Commission (2003) 76 ALD 321 ;
Colby Corporation Pty Ltd v Federal Commissioner of Taxation (2008) 165 FCR 133 ;
TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation (1988) 82 ALR 175 .

14. In the present case, the question that the AAT had to determine was whether the premium income that was paid to Crown Insurance Services Ltd was assessable income within the meaning of s 6-5(2) or (3) of the Income Tax Assessment Act 1997 (Cth) (ITA Act 1997), which subsections provide:

• (2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
• (3) If you are a foreign resident, your assessable income includes:
  • (a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and
  • (b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source.

15. Before the AAT, the Commissioner contended that the respondent was an Australian resident for the purpose of s 6-5(2) of the ITA Act 1997, but that contention was rejected and that decision has not been challenged by the Commissioner on this appeal.

16. The Deputy President found, as a matter of fact, that the premium income was not sourced either directly or indirectly from Australia. Instead, he found that the source of the respondent ' s income was the insurance contracts with the member companies, which were made in Vanuatu and were wholly performed in Vanuatu. The sole question on appeal, therefore, is whether the respondent, being a foreign resident, received premium income directly or indirectly from an Australian source during the relevant year, which, because of the provisions of s 6-5(3)(a), is assessable income.

17. It is that finding of fact that is the basis of the Commissioner ' s appeal. The questions of law identified by the Commissioner in the notice of appeal are set out in [ 73 ] of Jessup J ' s reasons, but on the appeal the sole question of law, which was identified, at least by the Commissioner, was:

Whether, on the facts found by the Tribunal, the income of [ the respondent ] in the years in question was derived (directly or indirectly) from Australian sources, on the proper construction of the words of s. 6-5(3) " … derived directly or indirectly from all Australian sources … " ?

18. The grounds of appeal are identified in [ 75 ] of Jessup J ' s reasons.

19. The first question to be determined is whether the finding made by the AAT that the respondent ' s premium income was not sourced from Australia raises a question of law.

20. It is often not easy to discern whether an issue raised is a question of law, a mixed question of law and fact, or a question of fact. The difference can be subtle and the distinction obscure:
Grealy v Commissioner of Taxation (1989) 24 FCR 405 at 407.

21. Notwithstanding the difficulty in determining whether the question raised on appeal is a question of law, the Court must address the issue because its very jurisdiction depends upon the appeal being on a question of law.

22. Paragraph 1 of the grounds of appeal does not raise a construction issue, but is merely a claim that the AAT erred in the conclusion it reached. There was no suggestion in the AAT or on the appeal that the words in s 6-5(3)(a) of the ITA Act 1997 bore any meaning apart from their ordinary meaning. There was never any question as to whether or not the words in the paragraph had some technical or other meaning.

23. In
Hope v The Council of the City of Bathurst (1980) 144 CLR 1 , Mason J said that there are many authorities for the proposition that whether facts as found come within a statutory provision is a question of law. He added at 7-8:

However, special considerations apply when we are confronted with a statute which on examination is found to use words according to their common understanding and the question is whether the facts as found fall within these words.
Brutus v. Cozens was just such a case. The only question raised was whether the appellant ' s behaviour was " insulting " . As it was not unreasonable to hold that his behaviour was insulting, the question was one of fact.

The judgment of Kitto J. in
N.S.W. Associated Blue-Metal Quarries Ltd. v. Federal Commissioner of Taxation is illuminating. Kitto J. observed that the question whether certain operations answered the description " mining operations upon a mining property " within the meaning of s. 122 of the Income Tax Assessment Act 1936, as amended, was a mixed question of law and fact. He went on to explain why this was so: " First it is necessary to decide as a matter of law whether the Act uses the expressions ' mining operations ' and ' mining property ' in any other sense than that which they have in ordinary speech. " Having answered this question in the negative, he noted that the " common understanding of the words has … to be determined " as " a question of fact " . He continued:

" The next question must be whether the material before the Court reasonably admits of different conclusions as to whether the appellant ' s operations fall within the ordinary meaning of the words as so determined; and that is a question of law: see also per Isaacs and Rich JJ. in
Australian Slate Quarries Ltd. v. Federal Commissioner of Taxation . If different conclusions are reasonably possible, it is necessary to decide which is the correct conclusion; and that is a question of fact: see per Williams J. in the Broken Hill South Case. "

(Footnotes omitted.)

24. In
Thorpe Nominees Pty Limited v Federal Commissioner of Taxation (1988) 88 ATC 4,886 , the Full Court was considering an appeal from a single judge of the Supreme Court of New South Wales who had heard an appeal from the Income Tax Board of Review. The Full Court had to consider whether the appeal to the Supreme Court of New South Wales invoked a question of law thereby giving that Court jurisdiction. The question that was before the Board of Review was whether certain income was assessable income of a trust of which the appellant was trustee, when there was no beneficiary entitled at any time to the income of the trust.

25. Justice Lockhart (with whom Burchett J agreed) said at 4,887:

Only trust estates with income from Australian sources are within the scope of Div. 6 of Pt III of the Assessment Act:
Union Fidelity Trustee Co. of Australia Ltd. & Anor v. F.C. of T. 69 ATC 4084 ; (1969) 119 C.L.R. 177 per Barwick C.J. at ATC p. 4087; C.L.R. p. 183, per Kitto J. at ATC p. 4090; C.L.R. p. 187, per Menzies J. at ATC p. 4091; C.L.R. p. 189. Whether the facts as found by the Board of Review led to the conclusion that there was income which formed part of the assessable income of Thorpe Nominees as trustee of the Duncan trust for the purposes of sec. 99 can be determined only by applying the relevant legal tests as to the determination of the source of income for this purpose. Hence, whether the moneys in the hands of Thorpe Nominees as trustee fell within those sections is a question of law:
Lombardo v. F.C. of T. 79 ATC 4542 per Bowen C.J. at pp. 4543-4546, per Franki J. at p. 4547 and per Toohey J. at pp. 4549-4550.

26. It was the need to apply the legal tests to determine whether the income was assessable that made the question before that Court a question of law.

27. Justice Sheppard disagreed, holding that the authorities provided a necessary guide, there was no question of the legal principles to be applied, and the Board of Review was solely concerned with a question of fact.

28. Those different conclusions reached by Lockhart J and Sheppard J led the Court in
Grealy v Commissioner of Taxation 24 FCR 405 to say that the reasons " exemplify the obscurity of the distinction sought to be made " : at 407.

29. In
Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 , the Court (which comprised Neaves, French and Cooper JJ) said at 287-288:

The principles according to which the jurisdiction conferred by s 44 is limited are not always easy of application. Distinctions between a question of fact and a question of law can be elusive. The proper interpretation, construction and application of a statute to a given case raises issues which may be or involve questions of fact or law or mixed fact and law. Nevertheless there are five general propositions which emerge from the cases:

• 1. The question whether a word or phrase in a statute is to be given its ordinary meaning or some technical or other meaning is a question of law:
  Jedko Game Co Pty Ltd v Collector of Customs (NSW) (1987) 12 ALD 491 ;
  Brutus v Cozens [ 1973 ] AC 854 .
• 2. The ordinary meaning of a word or its non-legal technical meaning is a question of fact:
  Jedko Game Co Pty Ltd v Collector of Customs (NSW) (supra);
  New South Wales Associated Blue-Metal Ouarries (sic) Ltd v Commissioner of Taxation (Cth) (1956) 94 CLR 509 at 512;
  Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 at 78;
  Neal v Department of Transport (1980) 3 ALD 97 at 107-108.
• 3. The meaning of a technical legal term is a question of law:
  Australian Gas Light Co v Valuer-General (1940) 40 SR (NSW) 126 at 137-138;
  Lombardo v Commissioner of Taxation (Cth) (1979) 40 FLR 208 at 215.
• 4. The effect or construction of a term whose meaning or interpretation is established is a question of law:
  Life Insurance Co of Australia v Phillips (supra) at 79.
• 5. The question whether facts fully found fall within the provision of a statutory enactment properly construed is generally a question of law:
  Hope v Bathurst City Council (1980) 144 CLR 1 at 7 per Mason J with whom Gibbs, Stephen, Murphy and Aickin JJ agreed;
  Australian National Railways Commission v Collector of Customs (SA) at 379 (Sheppard and Burchett JJ).

The fifth proposition as stated by the High Court in
Hope v Bathurst City Council (supra) was elaborated by reference to the remarks of Fullagar J in
Hayes v Commissioner of Taxation (Cth) (1956) 96 CLR 47 at 51:

" Where the factum probandum involves a term used in a statute, the question whether the accepted facta probantia establish that factum probandum will generally - so far as I can see, always - be a question of law. "

This principle is qualified when a statute uses words according to their ordinary meaning and the question is whether the facts as found fall within those words. Where it is reasonably open to hold that they do, then the question whether they do or not is one of fact:
Hope v Bathurst City Council at 8. Mason J there cited the observation of Kitto J in
New South Wales Associated Blue-Metal Quarries Ltd v Commissioner of Taxation (Cth) (supra) at 512:

" The next question must be whether the material before the Court reasonably admits of different conclusions as to whether the … operations fall within the ordinary meaning of the words as so determined; and that is a question of law … If different conclusions are reasonably possible, it is necessary to decide which is the correct conclusion; and that is a question of fact … "

30. Those two cases were considered in
Sharp Corporation of Australia Pty Ltd v Collector of Customs (1995) 59 FCR 6 . Justices Davies and Beazley said, after referring to
Collector of Customs v Pozzolanic Enterprises Pty Ltd , at 12:

Thus, it is primarily a question of fact, not of law, as to what is the meaning of an ordinary English word or phrase as used in a statute in its ordinary sense and so also is the question whether, there being different conclusions reasonably open, a particular set of facts comes within the description of such a word or phrase. This principle was enunciated in detail and explained by Jordan CJ in
Australian Gas Light Co v Valuer-General (1940) 40 SR (NSW) 126 at 137-138 and by Mason J in
Hope v Bathurst City Council (1980) 144 CLR 1 at 7-8. The principle was followed by Beaumont and Burchett JJ in
Jedko Game Co Pty Ltd v Collector of Customs (NSW) (unreported, Federal Court, 10 March 1987); noted
12 ALD 491 .

31. Justice Hill, in dealing with a submission by the respondent that the finding made by the Tribunal was merely a finding of fact, said at 15-16:

At the heart of the submission lies the well-established rule that the ascertainment of the ordinary meaning of a word is but a question of fact:
Australian Gas Light Co v Valuer-General (1940) 40 SR (NSW) 126 at 137-138 per Jordan CJ;
Hope v Bathurst City Council (1980) 144 CLR 1 at 7-8 per Mason J. So it is said that the meaning of the phrase " essential character " , that phrase being made up of ordinary English words, is likewise a question of fact.

The next step in the argument is to say that the question whether a particular set of facts comes within the description of such a word or phrase is likewise one of fact, a proposition for which Australian Gas Light Co is also authority. A finding by the Tribunal that a particular material component gave to particular goods their essential character would be a finding of fact:
Times Consultants Pty Ltd v Collector of Customs (Qld) (1987) 16 FCR 449 .

He continued at 16:

The rule that a question of fact is involved in determining whether facts fall within the meaning of a word once that meaning is ascertained, may cause confusion. The confusion comes about because there are actually two related rules, the distinction between which is not always readily apparent. The first of these rules is generally expressed as being that where the facts have been fully found or there is no dispute as to the facts and the question is whether those facts necessarily fall within the description of a word or phrase in a statute, that will be a question of law. This is the sixth proposition enunciated by Jordan CJ in the Australian Gas Light Co case. The rationale for this principle is clear enough. If only one meaning is open but a tribunal arrives at a different meaning, underlying the Tribunal ' s conclusion must be an error of principle, that is to say, an error of law.

The second related principle is that where the facts found are capable of falling within or without the description used in the statute, the decision which side of the line they fall on will be a decision of fact and not law. Such a decision will generally involve weight being given to one or other element of the facts and so involve matters of degree.

32. In
Kumagai Gumi Co Ltd v Commissioner of Taxation (1999) 90 FCR 274 , Hill J said at [ 46 ] :

First, it was submitted on behalf of the Commissioner that, because residence and source were ultimately matters of fact this Court had no jurisdiction to consider them. The submission ignores the decision of a Full Court of this Court dealing with source:
Thorpe Nominees Pty Ltd v Commissioner of Taxation (Cth) (1988) 88 ATC 4,886 . In that case, Lockhart J, with whose reasoning on this point Burchett J agreed (Sheppard J dissented, although not in the result), pointed out that questions of source can only be determined by applying the relevant legal tests, so that the issue whether, when the primary facts are found or, as here, are not in dispute, a particular section applies, involves a question of law:
Lombardo v Commissioner of Taxation (Cth) (1979) 40 FLR 208 at 208-213;
79 ATC 4,542 at 4,543-4,546 per Bowen CJ, at 213-215; 4,547 per Franki J and at 217-220; 4,549-4,550 per Toohey J; and see, generally, the discussion on the dichotomy between fact and law to be found in
Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 at 287-288;
115 ALR 1 at 9-10, particularly the fifth proposition.

33. These observations are difficult to reconcile with his Honour ' s remarks in the second paragraph quoted above in
Sharp Corporation of Australia Pty Ltd v Collector of Customs.

34. There are two further authorities to which reference should be made.

35. In
Ergon Energy Corp Ltd v Commissioner of Taxation (2006) 153 FCR 551 , the majority (Sundberg and Kenny JJ), after discussing
Hope v The Council of the City of Bathurst and
Vetter v Lake Macquarie City Council (2001) 202 CLR 439 , said at [ 47 ] :

There is, therefore, strong authority for the proposition that, where the facts have been found and the only question is whether they fall within a statutory provision, the question is one of law: see Vetter at 450; Hope at 7; and Pozzolanic at 287; also Roberts at 252 per Hill J and the authorities there cited;
Lombardo v Commissioner of Taxation (1979) 40 FLR 208 at 212 per Bowen CJ; Cooper at 194 per Hill J; and
Australian National Railways Commission v Collector of Customs (1985) 8 FCR 264 at 277 per Sheppard and Burchett JJ.

36. Justice Gyles said at [ 86 ] :

It is well established that where a statute uses words according to their common understanding and the question is whether the facts fall within those words, then the question is a question of fact not a question of law, at least where it is possible to reasonably arrive at different conclusions, the question thus being one of degree upon which different minds may take different views (
Hope v The Council of the City of Bathurst (1980) 144 CLR 1 per Mason J (with whom Gibbs, Stephen, Murphy and Aickin JJ agreed) at 7-9;
Vetter v Lake Macquarie City Council (2001) 202 CLR 439 per Gleeson CJ, Gummow and Callinan JJ at 450-451;
Re Minister for Immigration and Multicultural Affairs; Ex parte Cohen (2001) 75 ALJR 542 at [ 35 ] ; and
Cakmak v Minister for Immigration and Multicultural and Indigenous Affairs (2003) 135 FCR 183 at [ 51 ] - [ 55 ] ).

37. The Full Court considered the question in an appeal under s 44(1) of the AAT Act in
Price Street Professional Centre Pty Ltd v Commissioner of Taxation (2007) 243 ALR 728 . Justice Kenny said at [ 23 ] :

In this Court, discussion of s 44(1) commonly commences with the Full Court ' s statement of the five general propositions in
Collector of Customs v Pozzolanic (1993) 43 FCR 280 ( ' Pozzolanic ' ) at 287 per Neaves, French and Cooper JJ that can ground the characterization of a question as one of fact or one of law. The fifth proposition, which was apparently the assumption on which the case had proceeded in this Court, states that " [ t ] he question whether facts fully found fall within the provision of a statutory enactment properly construed is generally a question of law " : see Pozzolanic at 287 (emphasis added), citing
Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47 at 51-52 per Fullagar J. See also
Ergon Energy Corp Ltd v Commissioner of Taxation (2006) 153 FCR 551 ( ' Ergon ' ) at 564 per Sundberg and Kenny JJ and the cases cited. Hill J later commented that the reason for the qualification in Pozzolanic was that " the fifth proposition is in truth … two separate and related propositions " : Sharp at 16. The first was that " where the facts have been fully found or there is no dispute as to the facts and the question is whether those facts necessarily fall within the description of a word or phrase in a statute, that will be a question of law " : Sharp at 16. As his Honour said, at 16, the rationale for this proposition is comparatively clear since, if only one meaning is open and the tribunal arrives at a different one, there must be an error of law in the tribunal ' s approach. The second related proposition is that " where the facts found are capable of falling within or without the description used in the statute, the decision which side of the line they fall on will be a decision of fact and not law " : Sharp at 16. Again, as his Honour said, " [ s ] uch a decision will generally involve weight being given to one or other element of the facts and so involve matters of degree " : Sharp at 16. I would add a third related proposition, namely: whether the facts reasonably admit of more than one conclusion as to whether or not they fall within the language of the statute is a question of law: see Ergon at 564.

38. Justice Edmonds said at [ 40 ] :

But whether or not the ultimate question as framed in para 2(a) of the notice of appeal before the primary judge will be a question raised by the appeal can only be determined by reference to the grounds of appeal. The only relevant error, said to be " error in law " , identified as having been made by the Tribunal in the notice of appeal before the primary judge is that " the Tribunal should have found that the facts before it constituted business activities under the revenue provisions of the 1936 Act … " (para 4(a)). In other words, the alleged error is identified as being the Tribunal ' s failure to characterise the facts found as constituting a business. That does not raise a question of law; at best it might be a question of mixed fact and law; more likely a question of fact. Moreover, that ground of appeal will not raise the question framed in para 2(a) of the notice of appeal before the primary judge in the sense referred to by Gummow J in
TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation (1988) 82 ALR 175 at 178:

" The existence of a question of law is now not merely a qualifying condition to ground the appeal, but also the subject matter of the appeal itself:
FCT v Brixius (1987) 87 ATC 4963 at 4967 "

even if the weight of authority supports the characterisation of that question as a question of law.

39. When the statute under consideration has no technical meaning, but is understood in its plain ordinary meaning, a question of law will arise if the facts found must necessarily have come within the statutory description, but only a question of fact will arise if the facts found are capable of coming within the statutory description. In that second case, no question of law arises because, as Hill J said at 16 in
Sharp Corporation of Australia Pty Ltd v Collector of Customs , the decision " will generally involve weight being given to one or other element of the facts and so involve matters of degree " . To put it another way, a choice between two conclusions open on a consideration of the facts is a question of fact.

40. The Commissioner sought to bring the question on appeal within the question of law identified in the fifth general proposition as stated in
Collector of Customs v Pozzolanic Enterprises Pty Ltd 43 FCR 280 , but the respondent argued that the fifth proposition was qualified as identified in those reasons.

41. On this appeal there was no question of legal principle nor, as we have said, was there any question on the construction of the legislation. The sole question was whether, as a matter of fact, the respondent received its premium income directly or indirectly from Australia. It was not said that, as a matter of law, it could not be said that the respondent received its premium income directly or indirectly from Australia. It was merely argued that the better view of the facts, which had not appealed to the AAT, was that the respondent ' s income was sourced indirectly from Australia.

42. That, in our opinion, is a question of fact and this Court has no jurisdiction to hear the appeal. The respondent ' s claim that the appeal is incompetent should be upheld.

43. Because that conclusion means this Court has no jurisdiction to hear the appeal, it would not be appropriate to pass an opinion on the second question, which cannot arise for determination.

44. We would dismiss the appeal as incompetent.

45. The respondent contended in its written submissions that the Commissioner should have to pay the respondent ' s costs on an indemnity basis. The Commissioner did not address that claim in its reply submissions.

46. There can be no doubt that the respondent should be entitled to its costs but that does not mean necessarily indemnity costs. In the ordinary course, a successful party to an appeal would be entitled to costs on a party and party basis, and there must be some justification to depart from that rule.

47. Indemnity costs are sometimes awarded where the party has obstinately prosecuted a proceeding or an appeal in circumstances where that party should have known there was little or no prospect of the proceeding or appeal succeeding.

48. This is not such a case. The members of the Court are not agreed that the appeal is incompetent, which indicates that the appeal was not wilfully prosecuted. The member of the Court who is of the opinion that a question of law has arisen is of the opinion that the AAT has erred in its conclusion.

49. In those circumstances, it cannot be said that there was any misconduct on the part of the Commissioner which would justify any departure from the usual rule.

50. The order should be that the respondent has its costs on a party and party basis.