Equitable Life and General Insurance Co. Ltd. v. Federal Commissioner of Taxation
Judges:Wilcox J
Court:
Federal Court
Wilcox J.
Pursuant to sec. 187 of the Income Tax Assessment Act 1936 the applicant, Equitable Life and General Insurance Co. Limited, has requested the respondent, the Commissioner of Taxation, to refer to the Court his decision on two objections made by the applicant to notices of assessment of income tax. The relevant objections relate to the taxation years ended 30 June 1983 and 30 June 1984. They raise a common question: whether moneys received by the applicant from the disposal of shares and debentures constitute assessable income. By consent the two matters have been heard together.
The facts
The applicant is a member of the QBE group of companies. For many years prior to 1977 it carried on a life insurance business in Australia. It was registered for that purpose under the Life Insurance Act 1945. In June 1976 the applicant agreed with Friends' Provident Life Office (``Friends''') to transfer its life insurance business to Friends'. Heads of agreement were signed in January 1977, pursuant to which Friends' assumed the liabilities and management of the applicant's entire portfolio of life insurance business, as at 31 December 1976. Friends' also took over the staff and organisation of the applicant. It became entitled to all income arising out of the life insurance portfolio.
Since the transfer of its life insurance business to Friends', the applicant has not carried on any insurance business. Until 1984 it did, however, retain an investment portfolio and it received income from that source. The investment portfolio predominantly consisted of shares. From time to time shares were bought and sold.
In 1981 and 1982 there was a reorganisation of companies in the QBE group, out of which came its present structure. At the head of the group is QBE Insurance Group Limited (``QBE Group''), a holding company which does not trade. QBE Group wholly owns a company which, in January 1982, changed its name from Equator Insurance Limited to QBE Insurance Limited (``QBE Insurance''). At that time, QBE Insurance took over the Australian insurance activities of another wholly-owned subsidiary of QBE Group, namely QBE Insurance (International) Limited (``QBE
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International''). This company had previously been known as QBE Insurance Limited, and had carried on a general insurance business; but it has not done so since the transfer of its business to the new QBE Insurance. However, QBE International still carries on general insurance business outside Australia. Moreover, it is the owner of some subsidiaries, including the present applicant and QBE United Kingdom Limited (``QBE UK'').In January 1982 a company known as QBE Malaysia Limited (``QBE Malaysia'') was a partly-owned member of the group. The evidence does not establish the precise position, but it appears that one or more of the members of the group held a total of 55% of the issued shares in QBE Malaysia.
During the taxation year which ended on 30 June 1983 the applicant sold a number of parcels of shares from its portfolio. The sales realised the total sum of $745,745 and, after deducting the cost of those shares, a profit of $219,179. Evidence was given by Mr F.M. O'Halloran, Director of Finance of the QBE Group, that the proceeds of sale were applied towards the acquisition by the applicant, on 30 June 1983, of the group's 55% interest in QBE Malaysia. This evidence was not challenged.
During the period April-June 1984 the applicant sold the whole of the remainder of its shares, realising $12,701,281 and a profit, after deducting the cost of those shares, of $2,798,950. The applicant also sold some debentures, yielding a profit of $15,868. According to the uncontested evidence of Mr O'Halloran, the proceeds of sale were lent to QBE International to assist it in providing capital to QBE UK.
In its taxation returns for each of the year 1983 and 1984 the applicant disclosed the amount it received, and the profit it earned, from sales during the relevant year. But the company took the position that these receipts did not constitute assessable income. The respondent disagreed. In each of the years he adjusted the amount of taxable income, as returned, so as to include the amount of the company's profit on the sale of its shares and debentures. The applicant objected on a number of grounds. Its primary contention was that the profits did not represent income, within the ordinary meaning of that term, and so was not assessable. The respondent disallowed the objections and the matters were referred to this Court.
The submissions of counsel.
Counsel for the respondent concede that the applicant was not at any material time a share trader. They do not contend that any of the subject shares were acquired for the purpose of profit-making by sale. None the less, they submit that the assessments were properly made: that the profit made by the applicant from selling the shares was income according to ordinary principles, or alternatively, a profit arising from the carrying on or carrying out of a profit-making scheme. Sections 25 and 26(a) of the Income Tax Assessment Act are relied upon. Counsel put three separate arguments. Firstly, they refer to the fact that many of the shares which were sold in 1983 and 1984 were acquired by the applicant prior to the year 1977 and at a time when the applicant was carrying on the business of life insurance. If the subject shares had been sold before 1977, counsel say, the proceeds would have been assessable income by virtue of either or both of sec. 25 and 26(a) of the Act. It ought to make no difference, they say, that the disposal occurred after that date.
Secondly, counsel argue that the nature and number of the transactions which occurred after the year 1977 show that, during the period which elapsed between the cessation of the life insurance business and the respective sales, the applicant was carrying on the business of investment, so that sale profits constituted assessable income. They refer to
London Australia Investment Company Limited v. F.C. of T. 77 ATC 4398; (1977) 138 C.L.R. 106. Finally, they refer to
Chamber of Manufactures Insurance Limited v. F.C. of T. 84 ATC 4315; (1984) 2 F.C.R. 455 contending that - whatever might be the position if no member of the group was continuing to conduct an insurance business - the special situation discussed in that case applies, the assets and affairs of the applicant being inextricably entwined with those of other companies within the group.
At the material time sec. 25 and 26(a) relevantly read:
``25(1) The assessable income of a taxpayer shall include -
- (a) where the taxpayer is a resident - the gross income derived directly or
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indirectly from all sources whether in or out of Australia; and- (b) where the taxpayer is a non-resident - the gross income derived directly or indirectly from all sources in Australia,
which is not exempt income...''
and
``26 The assessable income of a taxpayer shall include -
- (a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme;...''
The questions for determination
As counsel recognise, their concession as to share trading makes it unnecessary to dwell on the first limb of sec. 26(a). Although the Commissioner's submissions were put as separate propositions, in statutory terms there are two critical questions, which are themselves entwined: whether the profits derived from the sale of the shares constituted income, according to ordinary concepts and usages, so as to constitute assessable income under sec. 25 of the Act; and whether the profits arose from the carrying on or carrying out of any profit-making undertaking or scheme, within the second limb of sec. 26(a) of the Act.
I describe the two questions as entwined because, although sec. 25 and 26(a) postulate different tests of assessability, there is a close relationship between those tests. This relationship was discussed by the High Court of Australia in
F.C. of T. v. Myer Emporium Limited 87 ATC 4363 at pp. 4366-4367; (1987) 163 C.L.R. 199 at pp. 209-210:
``Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a `one-off' transaction preclude it from being properly characterized as income:... The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.''
After referring to
California Copper Syndicate v. Harris (1904) 5 T.C. 159 and
Ducker v. Rees Roturbo Development Syndicate (1928) A.C. 132, the Court went on at ATC p. 4367; C.L.R. p. 211:
``The important proposition to be derived from Californian Copper and Ducker is that a receipt may constitute income, if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction.''
I think that it follows from these passages that, in practical terms, the question in the present cases - and it is a separate question in relation to each of the two financial years - is whether the profits realised by the applicant from the sales made by it in 1983 and 1984 were made either in the ordinary course of business or in a business operation for the purpose of profit-making by the means giving rise to the profit.
A critical question in the present case is the identification of the relevant business. But,
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before turning to the second and third submissions of the respondent - which offer alternative approaches to that question - it is desirable to deal with one aspect of the first submission. That aspect is counsel's reference to the fact that many of the relevant shares were acquired prior to 1977, during the period when the applicant was carrying on the business of life insurance. It seems to me that this fact is immaterial. The relevant profits were taken on disposal of the shares in 1983 and 1984. Whatever other business it might then have been carrying on, the applicant was not then carrying on the business of life insurance. Consequently, the profit cannot be said to have arisen out of the carrying on of a life insurance business. Whilst the purpose of the original acquisition is relevant in some contexts, for example under the first limb of sec. 26(a), it does not matter in relation to the question whether the profit arose out of the conduct of a business. In that situation the critical questions are the nature of the business and the way the particular assets have been treated. The first submission, treated in isolation from one or other of the two following submissions, cannot succeed.The insurance connection
Counsel's third submission accepts that the applicant ceased to carry on the business of life insurance at the end of 1976 but insists, nevertheless, that, as a member of the QBE Group, the applicant remained involved in the business of insurance. Although the identity of the particular company changed in 1982, at all material times one member of the QBE Group was involved in general insurance within Australia. Counsel submit that, as a member of that group, the applicant participated in the business, or perhaps in the profit-making scheme, of general insurance.
There is no doubt that, insignificant respects, the various companies within the group acted as units of a single commercial enterprise. Each member of the group had its own board of directors, but there was a substantial overlap in the membership of the various boards. All the companies were subject to ultimate control by the board of QBE Group. There was a single investment manager, responsible to the Chief Executive of QBE Group. The investment manager had responsibility for all investment decisions on behalf of all companies within the group. His activities were supervised by an investment committee, which operated within guidelines laid down by the board of QBE Group. And returns to the Insurance Commissioner, pursuant to the Insurance Act 1973, were made on a group basis.
This last fact is the foundation of the respondent's third submission. The Insurance Act requires authorised insurers each year to make a return to the Insurance Commissioner. Amongst other information, that return must disclose the assets and liabilities of the insurer, the purpose being to enable the Insurance Commissioner to check that the insurer meets the required solvency margin: net assets of not less than 15% of net premium income.
In each of the years 1977 to 1984 the general insurer within QBE Group made a return containing information as to assets and liabilities. In each of those years assets were included on a ``group'' basis, thus including the investments held by the present applicant. In each year the total net assets disclosed - that is, assets less liabilities - comfortably exceeded the required margin. But, of the assets disclosed, some were intra-group investments which could be counted only with the approval of the Insurance Commissioner under sec. 30 of the Act. That leave was in fact given in each year. Had it not been for the inclusion of sec. 30 assets, the net assets figure would have been negative for all years between 1980 to 1984 inclusive, except 1983; that is, the assets other than sec. 30 assets did not exceed liabilities. It follows, of course, that the inclusion of at least some sec. 30 assets was critical to the achievement of the solvency margin. In each year the insurer's investment in the applicant company was shown as one of the sec. 30 assets. Indirectly, therefore, the subject shares were part of the assets considered in determining that the insurer met the solvency margin. In fact, as a table prepared by Mr O'Halloran demonstrates, the solvency margin could have been achieved even if the insurer's investment in the applicant had been disregarded.
Having in mind the evidence that the shares were in fact treated as assets for the purposes of the calculation of the solvency margin, counsel for the respondent argue that this case is governed by the decision in Chamber of Manufactures Insurance Limited. In that case the appellant carried on business as an insurance company. It held some funds on call
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or on short-term deposit. These funds were described as ``hard core'' funds available to meet normal expenses. The remainder of the company's assets were shares in companies, fixed interest securities and ``property'', presumably real estate. The trial Judge found that the shares and fixed interest securities were available to meet the claims of policyholders and that they constituted, and were intended to constitute, a reserve fund for that purpose. The Full Court upheld a decision by the trial Judge that profits earned in the disposal of shares constituted taxable income. In the course of their judgment the members of the Court referred to a decision of the High Court inColonial Mutual Life Assurance Society Limited v. F.C. of T. (1946) 73 C.L.R. 604 wherein that Court held certain profits made on the realisation of investments were taxable. In the course of their reasons for judgment the High Court said, at p. 618, ``the sounder view is that profits and losses on the realisation of investments of the funds of an insurance company should usually be taken into account in the determination of the profits and gains of the business''. Commenting, the Full Court, at ATC pp. 4318-4319; F.C.R. pp. 459-460 said:
``It is important to remember also that the view, even as expressed, does not deny that in some cases profits and gains on the realisation of an investment of the funds of an insurance company should not be taken into account in the determination of the profits and gains of the business. Thus, for example, funds of an insurance company invested in the construction of a building to be used as a head office by that company will probably not attract income tax if the head office is subsequently sold for a profit.
Even in a case such as the present, the position might have been different had the taxpayer maintained two quite separate funds - the first acknowledged as a reserve fund and demonstrably sufficient to meet claims and expenses in all reasonably foreseeable contingencies - the second categorised and dealt with as an investment fund. Whether profits from the sale of investments in the second fund were taxable would depend upon factors unrelated to insurance such as those referred to in London Australia Investment Co.'s case.''
I do not think that Chamber of Manufactures governs the present case. In Chamber of Manufactures the relevant assets were owned directly by a company which was both the relevant taxpayer and an operating insurance company. They were included in a reserve fund intended to meet the claims of policyholders. The maintenance and enlargement of that fund was an activity essential to the success of the business which the taxpayer conducted. In the present case the relevant assets were not owned by a company which was both the relevant taxpayer and an operating insurance company. They were owned by a taxpayer which, during relevant years, did not carry on the business of insurance and whose only connection with insurance was being the subsidiary of an operating insurance company. There is no evidence to suggest that the insurance company ever treated its interest in the applicant as a reserve to meet policyholders' claims. Even if there were such evidence, this would be relevant to the insurance company's tax position, rather than to that of the applicant. All that can be said is that, in tendering its statement of assets and liabilities to the Insurance Commissioner, the insurance company disclosed the value of its interest in the applicant and asked for that interest to be taken into account in assessing the solvency margin. As it happens, it was not necessary for the insurance company to include its interest in the applicant to achieve the necessary margin. But I do not think that this matters. On no view of the case can it be said that the applicant was conducting the business of insurance. Whatever profits it made did not arise out of the carrying on of that business.
The conclusion which I have expressed is consistent with that reached by Woodward J. in a decision announced since argument in the present case:
CMI Services Pty. Ltd. v. Commissioner of Taxation 89 ATC 4847. That case was similar to the present case. The taxpayer was the subsidiary of an insurance company, which included its investment in the taxpayer amongst its schedule of assets disclosed to the Insurance Commissioner. Woodward J. regarded this circumstance as relevant, but he commented that it did not affect the reality of the situation ``that the assets in question were not required for insurance purposes''.
The London Australia argument
The most substantial argument available to the respondent, in my opinion, is the second
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submission put by his counsel. That argument depends upon the proposition that, at material times, the taxpayer carried on the business of investment in shares. It asserts that the profits realised on the shares sold in 1983 and 1984 arose from the carrying out of a share investment business.The evidence shows that, in the financial years ended 30 June 1979 to 30 June 1984, the percentage, by value, of securities sold compared with securities held, at the commencement of the financial year, was never less than 16.48%. The actual figures were: 1979, 17.2%; 1980, 19.08%; 1981, 56.05%; 1982, 27.73%; 1983, 16.48% and 1984, 100%. A comparison between the cost of the shares sold in each of those years and the cost of all securities held at the commencement of the relevant year reveals a series of figures of a comparable order of magnitude. In most years sales exceeded purchases, but in each year purchases were significant. In two of the relevant years they far exceeded sales. The actual figures were as follows:
``Yearly figures of purchases and sales
$ 1978 Purchases 4,195,071.54 Sales 703,417.00 1979 Purchases 570,306.17 Sales 1,813,170.00 1980 Purchases 332,041.81 Sales 1,945,825.00 1981 Purchases 341,452.34 Sales 7,251,367.00 1982 Purchases 244,362.44 Sales 2,313,869.00 1983 Purchases 3,741,517.78 Sales 745,745.24 1984 Purchases 3,447,211.20 Sales 12,701,281.00''
The submission of counsel for the respondent is that this evidence shows a pattern of active management of the applicant's share portfolio, shares being bought and sold as was thought appropriate. The applicant's investment manager was not called. No evidence was given as to the reasons for the various decisions to buy and sell shares, except that Mr O'Halloran said that the major reason for the sales made in 1984 was to provide funds for lending to QBE UK. There was some evidence as to the investment policies pursued by the group, including in relation to the applicant's share portfolio, but it was in very general terms. On 25 August 1976 the board of directors of QBE Group approved a document entitled ``investment authorities'' which included an item ``investment policies'', as follows:
``In relation to (a)(i), the Committee will advise the Board in respect of each half year on the proportions to be invested in various classes of investment and in doing so will indicate to the Board the assumptions that have been made in respect of:
- (i) Anticipated interest rate changes.
- (ii) The impact of prevailing income tax legislation.
- (iii) Changes in the outlook for ordinary share investment.
- (iv) Changes in the outlook for property investment.
- (v) The requirements of the Insurance Commissioner or other authority.''
The terms of that authority were varied from time to time, but without changing the substance of the investment policy.
Two more specific resolutions were passed in 1980, on each occasion by the board of the company then known as QBE Insurance Limited, but which is now QBE International, the owner of the applicant. On 26 March 1980 the board resolved that:
``the following recommendations of the Investment Committee be adopted noting that the intent of the recommendations is that new money will be substantially applied as set out in items (i) and (ii) below:
- (i) that we capitalise on higher short term interest rates likely in April/May 1980,
- (ii) that we seek good quality fixed interest securities at the higher rates likely to prevail. It is unlikely that funds will be committed until at least June 1980,
- (iii) that we continue efforts to rationalise the property portfolio and improve its performance,
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- (iv) that we continue to rationalise the share portfolios and improve their performance.''
The minutes of the meeting of the board of 24 September 1980 contain the following item:
``Investment policy:
After considerable discussion at the present high level of stock exchange value of equities and the current level of uncertainty as to future movements in these values, it was agreed that steps should be taken to protect the company's portfolio against these uncertainties and in particular that the company's portfolio should be reviewed to determine those shares which are most exposed with a view to disposing of such shares. In the circumstances, IT WAS RESOLVED that authority be given to the Investment Committee to dispose of shares held by subsidiary companies up to an amount of $5,000,000.00.''
Apart from the above, there is no evidence as to the criteria used in determining which shares should be sold and which retained, and which shares ought to be acquired. In the absence of evidence to the contrary, say counsel for the respondent, the Court ought to infer that shares were bought and sold by reference to their yield.
London Australia was a case in which a taxpayer invested in securities for the purpose of producing dividend income. It did not purchase securities with the intention of realising profits on their resale but, during the relevant financial years, it engaged in continuous activity in the buying and selling of shares. As a result of these transactions profits were generated and the question arose as to whether those profits constituted assessable income. The trial Judge found that, in determining what shares should be bought, sold or retained, the taxpayer was guided by a number of principles, but one important consideration in buying shares was the actual or expected yield. He held that the profits constituted assessable income within sec. 25 of the Act.
By majority, the High Court upheld the trial Judge. Gibbs J. at ATC p. 4403; C.L.R. p. 116 referred to the decision of the High Court in Colonial Mutual Life at p. 614:
``Prima facie the depreciation in or accretion to the capital value of a security between the date of purchase and that of realization is a loss of or accretion to capital and is therefore a capital loss or gain and does not form part of the assessable income... But in the words of the Lord Justice Clerk in Californian Copper Syndicate v. Harris... at p. 166, which have been so often quoted,
- `it is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business'.''
Gibbs J. went on:
``Their Honours went on to point out that not all of the proceeds of a business carried on by a taxpayer are income for the purposes of the act; they will be so only if they are income `in accordance with the ordinary usages and concepts of mankind, except in so far as the Act states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income'... However it is my opinion established by this and the many other cases in which Californian Copper Syndicate v. Harris has been applied that if the sale in question is a business operation, carried out in the course of the business of profit-making, the profit arising on the sale will be of an income character. To apply this criterion it is necessary `to make both a wide survey and an exact scrutiny of the taxpayer's activities':... Different considerations may apply depending on whether the taxpayer is an individual or a company. In the latter case it is necessary to have regard to the nature of the company, the character of the assets realized, the nature of the business carried on by the company and the particular realization which produced the profit:...''
His Honour noted the finding that the shares were not bought for the purpose of selling them at a profit, commenting that this was ``indeed an important circumstance''. He further noted that the shares were acquired on the capital account of the company, for the purpose of adding to its profit-making structure, as the means of producing dividend income, rather than as part of the profit-earning activities
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within that structure. He observed that the fact that the shares were realised in a methodical and enterprising way, so as to secure the best results for the taxpayer, would not convert the proceeds of realisation into income. He then said at ATC pp. 4403-4404; C.L.R. p. 117:``But the question whether the shares were acquired on the capital account of the taxpayer can only be answered by applying the tests indicated by Californian Copper Syndicate v. Harris... Helsham J. found that during the three years in question it was an integral part of the taxpayer's business to deal in shares, in the sense that switching of investments was desirable to produce the best dividend returns and was indeed necessary if the taxpayer's policy of investing in shares with growth potential was to be adhered to. In my opinion it is impossible to controvert that finding; it was clearly right. Although the company's business was to invest in shares with the primary purpose of obtaining income by way of dividends, the conduct of the investment business required that the share portfolio should be given regular consideration, and that shares should frequently be sold when the dividend yield dropped, which for practical purposes usually meant when the shares went up in the value. The taxpayer systematically sold its shares at a profit for the purpose of increasing the dividend yield of its investments. The sale of the shares was a normal operation in the course of carrying on the business of investing for profit. It was not a mere realization or change of investment.''
In the present case there is no evidence as to the development of the portfolio of shares which was held by the applicant before it ceased to carry on the business of life insurance. However, the matter was argued upon the footing that the shares in that portfolio had been acquired over a lengthy period as an adjunct to the applicant's underwriting activities. Presumably the intention was to provide asset backing for the applicant's life policies, although income may also have been important.
As I have already indicated, most of the shares were retained after the applicant ceased to carry on the business of life insurance. There is no evidence as to the applicant's reason for retaining the shares. Friends' had taken over the applicant's insurance liabilities, so there was no longer a need to retain the shares as backing for life insurance policies. In the absence of any other explanation, I think that I should draw the inference that the shares were retained for their income-earning potential. Consequently, the case may be likened to London Australia, where the taxpayer invested in shares with the primary purpose of obtaining income by way of dividends.
Notwithstanding the points of similarity which I have mentioned, counsel for the applicant contend that London Australia is distinguishable from the present case. They point to the finding in London Australia that the taxpayer systematically sold its shares at a profit for the purpose of increasing the dividend yield of its investments. They rightly say that, in the present case, there is no evidence of any systematic review of the applicant's share portfolio or any regular culling of poor performers. Moreover, they point out that there is evidence that the 1984 sales were made for the particular purpose of raising the necessary funds for the United Kingdom investment. In relation to that year, this is a case, say counsel, of sales being made, not in the course of carrying on a business, but in the course of going out of business. Reference is made to the decision in
Modern Permanent Building and Investment Society v. F.C. of T. (1958) 98 C.L.R. 187. In that case the taxpayer claimed as a deduction a loss which it sustained on the sale to another building society of its outstanding loans. The sale was made immediately prior to the society going into voluntary liquidation. Williams J. disallowed the claim, on the basis that it was a capital loss. At p. 191 his Honour said:
``Any loss upon a loan that such a trader might incur in the course of carrying on its business would be a loss incurred in gaining or producing the assessable income and be an allowable deduction under s. 63 of the Act. But a loss incurred upon the realisation of such loans in order to put an end to the business or part of it would, in the absence of legislation to the contrary, be a capital loss.''
The evidence in the present case shows that a significant volume of purchases and sales occurred in each of the financial years from 1978 to 1984. Many of the purchases were of
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shares issued by companies in which the applicant already had holdings. In the period of six months which elapsed between the cessation of life insurance business and 30 June 1977 no purchases were made. During the year ended 30 June 1978 the applicant bought shares in 17 companies, of which it was not already a shareholder. In the following four years it bought into three additional companies. During the whole of this period it acquired additional shares in many of the companies in which it already had an interest; sometimes by way of bonus issues or from the exercise of rights issued in respect of the company's existing holdings. Some shares were acquired as a result of the applicant accepting a formal take-over offer for an existing holding of shares.During the year ended 1983 the applicant purchased shares in six new companies; all of them companies with interests in the mining industry. There is no evidence as to the reason for these purchases. One can only speculate that someone was optimistic as to mining prospects.
As for sales, the pattern is more even. In the year ended 30 June 1977 shares in three companies were sold. In 1978 shares in eight companies were sold; in 1979, 15; in 1980, 12; in 1981, 20; in 1982, 11; in 1983, 7; and in 1984, 23. Some were sales of rights. Some sales resulted from the acceptance of take-over offers. Although the total amounts of money involved, in each of these years, was substantial, the stock of only a small number of companies was sold, compared with the overall number of companies in which the applicant held an interest. The only exception was 1984.
The impression I get from the evidence regarding purchases and sales is that the applicant reviewed and supplemented its portfolio immediately after it ceased to carry on life insurance business. Between that date and 1983 it was content more or less to retain that portfolio. But it did have guidelines in place which directed attention, amongst other things, to the returns available in different types of investment. After March 1980 there was an instruction requiring the investment committee ``to continue to rationalise the share portfolios and improve their performance''. The September 1980 resolution was not directed to advantageous disposal of shares. Although the evidence does not establish the constant ``fine tuning'' found in London Australia, it must be assumed that the investment manager had regard to these directions in making decisions as to the acquisition and disposal of shares.
In 1983 a decision must have been made to invest in mining stock. Otherwise the pattern remained as before until the ``closing down'' sale in early 1984.
Any submission based on London Australia necessarily involves matters of degree upon which people might reasonably differ. I have found this aspect of the case not easy to resolve, but I have reached the conclusion that I ought to accept the submission made on behalf of the respondent in so far as it relates to 1983, but not in relation to 1984. In reaching my conclusion about the 1983 tax year, I have been influenced by the approach taken in CMI Services. In that case Woodward J. upheld a submission, made for the Commissioner, which was based on London Australia. The question there was the assessability of certain profits realised by the taxpayer upon the sale of two parcels of real estate, those properties having been purchased for the purpose of deriving rental income. In analysing the evidence, Woodward J. found that ``(t)here was a willingness to sell whenever it was sensible to do so having regard to the property's performance and the price available''. He described the case as ``not as clear'' as London Australia, the taxpayer's history being ``the quite frequent sale of properties, mostly at a substantial profit, for the purpose of protecting the rental yield of its portfolio''. As such, he considered it to be ``a normal operation in the course of carrying on the business of investing for profit. It was an operation which was carried on in a professional, orderly and business-like way''.
I think that similar observations may be made about the investment portfolio of the present applicant. As the record shows, the applicant was willing to sell particular shares from time to time, no doubt whenever it was thought sensible to do so having regard to the performance of the shares and the price available. Such periodic sales must be regarded as a normal operation in the course of carrying on the business of investing for profit. The sales made during the year ended 30 June 1983 were within this category. Consequently, the profits realised by those sales constitute assessable income.
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The situation in relation to the 1984 sales is, however, different. The applicant made a decision in early 1984 to sell the whole of its share portfolio in order to raise the funds required by QBE UK. It carried out that decision, even to the point of selling at a substantial loss the mining shares which it had acquired during the previous year. The 1984 sales represented a closing down of the business previously carried on. Such profits as were realised were capital profits obtained upon the disposal of the business, not profits realised in the course of carrying it on. The situation is the converse of that in Modern Permanent Building and Investment Society.
It follows from the above that the applicant is entitled to succeed only in relation to 1984. The reference relating to 1983 should be dismissed. The 1984 assessment should be amended so as to delete from the income assessed for that year the amount in contest. Having regard to the fact that each of the parties has succeeded in relation to one of the two taxation years, there ought to be no order as to costs.
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