Federal Commissioner of Taxation v. Equitable Life and General Insurance Co. Ltd.
Judges:Davies J
Pincus J
Gummow J
Court:
Full Federal Court
Davies J.
The issue in this appeal is the assessability to tax of profits derived by the taxpayer, Equitable Life and General Insurance Co. Ltd., on the sale of shares in the years of income ended 30 June 1983 and 30 June 1984 [judgment at first instance reported at 89 ATC 4972].
The taxpayer is one of an international group of companies. Its parent company, QBE Insurance (International) Ltd., carries on business as an insurance company outside Australia. Other companies in the group also carry on the business of insurance. For several years until the 1983 and 1984 years, the taxpayer was assessed to tax as a share investor. At least one other company in the group, QBE Securities Pty. Ltd., also appears to have been so treated.
ATC 4440
The taxpayer contended to the Commissioner that:
``9. The taxpayer is a subsidiary whose activity falls outside the QBE group insurance business. The taxpayer is a wholly owned subsidiary of QBE Insurance (International) Limited. QBE Insurance (International) Limited writes insurance business in many countries not including Australia and has sufficient funds to satisfy the local solvency requirements and liabilities offshore and in Australia without including the taxpayer's investments as available assets.
10. The taxpayer's investments have never been viewed by its directors or shareholders as a potential reserve fund to meet the liquidity requirements of QBE's group insurance operations. Proceeds from the disposal of the taxpayer's investments have, in fact, never been used for this purpose. To cover any major catastrophe QBE Insurance (International) Limited has entered into reinsurance treaties. Further, proceeds from the disposal of the taxpayer's investments are never taken into account in QBE's group insurance operations' cashflow forecasts or budgets.''
The learned trial Judge considered that there was no such involvement of the taxpayer's share portfolio with the affairs of the parent company or other insurance companies as to bring this case within the principles of taxation generally applicable to insurance companies. I accept his Honour's view. Mr G.K. Downes Q.C., senior counsel for the Commissioner, challenged it, but principally by reference to the fact that the taxpayer and its assets formed a part of the parent company's reserve for insurance purposes rather than by reference to detailed facts which might have shown that the taxpayer's share portfolio was maintained and managed as a part of an insurance business or businesses. The connection so demonstrated was not sufficient, in the circumstances of this case, to characterise the taxpayer's activities as a part of or an incident of a business of insurance. Other facts which tended to establish such a character were not developed in detailed argument. I am not satisfied that there was any error in his Honour's conclusion on this point.
Until the year 1977, the taxpayer itself carried on business as an insurance company. In that year, it transferred its business to Friends' Provident Life Office. From the assets transferred, the taxpayer retained a share portfolio which formed the basis of the share portfolio held until 1984. Mr Downes submitted that the shares carried over continued to form a part of the taxpayer's prior insurance business and that the sales which subsequently occurred amounted to the realisation of profits of that insurance business. It is sufficient to say that the facts necessary to support this contention were not established at the trial. The source of the share portfolio - whether capital, trading stock, profits assessed to tax or profits not so assessed - was not investigated or established at the trial. I therefore approach the matter on the same basis as did the trial Judge, namely that the shares held in 1977 were capital assets of the taxpayer having no character or incident arising from the insurance business previously carried on.
From 1977 until 30 June 1984, the taxpayer's principal activity was that of managing its share portfolio and borrowing money from or lending money to other companies in the group, particularly its parent company. For the first two years, it borrowed from its parent company. Thereafter, it was a creditor, in varying amounts. No business was carried on, unless the management of the share portfolio constituted a business, a crucial issue which I shall later discuss. The needs of associated companies played a small part in the buying and the selling of shares which occurred but, in general, the funds invested in the taxpayer's share portfolio were surplus to the current needs of the group and were invested so as to enhance the capital value of the portfolio. A witness, Mr F.M. O'Halloran deposed that the shares:
``... were purchased or acquired because of their perceived potential as growth stocks, through bonus and rights issues, over a long term with a view to increasing the net worth of the company.''
As Mr O'Halloran deposed, the enhancement of the capital value of the portfolio appears to have been an important end in view, though in the context that the shares were secure dividend-yielding investments held for long-term investment. During the period, no or only minimal dividends were paid to the taxpayer's parent company.
ATC 4441
At the end of the 1984 year of income, when funds were required elsewhere in the group, the share portfolio was liquidated. Reasons given for the liquidation of the share portfolio were:
``(a) to enable funds to be remitted to QBE Insurance (U.K.) Ltd. to satisfy the shareholders funding requirements on domestication of QBE operations in the United Kingdom and the statutory requirements of the United Kingdom's Department of Trade;
(b) to enable a loan from QBE Insurance Limited to be repaid by QBE Insurance (International) Limited;
(c) the QBE Group has no particular need for the company as an investment subsidiary; and
(d) the company is a wholly owned Australian subsidiary of QBE Insurance (International) Ltd. which only conducts operations outside of Australia and as such it is not appropriately placed in the QBE Group to act as an Australian investment subsidiary.''
The taxpayer thus commenced its quiescent role as investor in 1977 holding the shares which it retained on the disposal of the assets of the insurance business previously carried on. The facts which occurred thereafter have been carefully examined by my colleague, Pincus J., and I am content and grateful to accept his Honour's exposition thereof. In 1978, it was decided that the taxpayer should invest in public companies in which it did not then hold shares and should increase its investments in some other companies. That the taxpayer did, in part with funds borrowed from the parent company. Thereafter for some years, most but not all share transactions reflected the taking up or disposal of rights to new issues, the acceptance of bonus shares and the taking up or disposition of shares as the result of take-over offers. Overall, the portfolio appears to have been a widespread, secure portfolio which was managed in a conservative manner, though managed so as to enhance its overall capital value.
In the years of income ended 30 June 1979, 1980, 1981 and 1982, only three acquisitions were made which were not associated with new issues and take-over offers relating to an existing investment. In 1981, very substantial sales were made at a time when it was anticipated that share values were likely to fall. The QBE group as a whole took steps to reduce its exposure to the share market. Such a course was not inconsistent with long-term investing, though it tends towards profit-making and profit-taking.
Pincus J. has set out the memorandum of a Mr Moody dealing with the policy for the last six months of 1983. This shows that, as there were excellent long-term investment opportunities in both the resources and industrial sectors ``$10 million should be made available for long-term share investment'' and that as ``excellent short-term situation opportunities are expected to become available in both the resource and industrial sectors... an additional $1 million be allocated for trading investment in mining, oil and industrial shares''. Again, the first part of that policy was consistent with long-term investment whilst the latter part tended towards trading. In the result, in 1983 and 1984, a number of mining and other shares were acquired. Of the mining shares acquired in 1983, some or most may have been purchased from QBE Securities Pty. Ltd. which did not wish to prejudice its status as a share investor.
It was not contended by Mr Downes that the transactions occurring in the 1983 and 1984 years of income changed the character of the taxpayer's shareholding activities and it was not submitted to the trial Judge or in the appeal that, on the acquisition of the mining and other shares in 1983, the taxpayer became a share trader rather than a share investor or that any of the shares acquired in 1983 or 1984 were individually the subject of transactions caught by sec. 26(a) (by which I refer also to sec. 25A after it came into operation).
The entire portfolio was liquidated at the end of the 1984 year of income for the reasons I have mentioned resulting in the derivation of a substantial profit. Overall, the mining and other shares which had been acquired in 1983 and 1984 were sold at a loss.
The trial Judge adopted the following table as setting out the effect of the activities of the taxpayer over the years:
ATC 4442
``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 trial Judge summarised the taxpayer's activities in these terms (at p. 4981):
``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.''
This was not a finding that the taxpayer carried on a business of dealing or trading in shares.
His Honour's conclusion as to assessability, omitting the particular issue relating to the final liquidation of the portfolio in 1984, was as follows (at p. 4981):
``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.''
Because it demonstrates the concept lying behind the assessments and the case put to the trial Judge, it is useful to look at the taxpayer's holding in the ANZ Banking Group, a holding to which Mr Downes drew particular attention as demonstrating in his view how the taxpayer made profits from dealing in shares. On 1 July 1977, the taxpayer held 75,000 shares in the Bank of Adelaide. In the 1978 year of income, presumably during the 1978 acquisitions, the taxpayer acquired 125,000 shares in the ANZ Banking Group. In the year ended 30 June 1979, the taxpayer acquired a further 15,625
ATC 4443
shares therein, presumably from a new issue in the ratio of one to eight. In the year ended 30 June 1980, the Bank of Adelaide was taken over by the ANZ Banking Group and, in place of the Bank of Adelaide's shares, the taxpayer acquired a further 60,724 shares in the ANZ Banking Group. In the year ended 30 June 1981, the taxpayer received a bonus issue of 50,337 shares in the ANZ Banking Group. In the following year it received a further bonus issue of 50,337. In the year ended 30 June 1984, the taxpayer received a further bonus issue of 30,202 shares. The total shareholding, then 332,225 shares, was sold before 30 June 1984 at a profit of $1,319,972. This profit was, in Mr Downes' submission, assessable income. It is relevant to note, however, that there is nothing in these facts which suggests trafficking in shares.The issue as put to the trial Judge and as put in the appeal by Mr Downes was that the profits derived were assessable income either because of their connection with an insurance business or because the facts of the matter fell within the principles enunciated by the High Court of Australia in
London Australia Investment Co. Ltd.
v.
F.C. of T.
77 ATC 4398
;
(1976-1977) 138 C.L.R. 106
. I have already dealt with the connection which the profits had with an insurance business and I agree with the trial Judge that any such connection did not render these profits assessable. Before turning to the submissions based on
London Australia
, it is convenient to mention what was not relied upon by counsel for the Commissioner.
Counsel for the Commissioner did not rely upon the first limb of sec. 26(a) of the Act. For the purpose of the trial, it was conceded, as the trial Judge noted, that none of the shares from which profits had been derived had been acquired for the purpose of profit making by sale.
The second limb of sec. 26(a), that is to say, a profit-making undertaking or scheme, was relied upon both at the trial and in the appeal but not in the context that any one particular transaction ought to be isolated out as a profit-making scheme. The section may therefore be put on one side. In the context of regular ongoing activities, this provision adds little or nothing to the concepts applicable under sec. 25(1) of the Act. Section 26(a) concerns itself in general with transactions which are entire in themselves. See
Australasian Catholic Assurance Co. Ltd.
v.
F.C. of T.
(1959) 100 C.L.R. 502
at p. 509
and
Investment
&
Merchant Finance Corporation Ltd.
v.
F.C. of T.
71 ATC 4140
at pp. 4142-4147;
(1971) 125 C.L.R. 249
at pp. 255-264
. It is sufficient to refer to the examination of the second limb of sec. 26(a) undertaken in
F.C. of T.
v.
Bidencope
78 ATC 4222
;
(1978) 140 C.L.R. 533
, by
Barwick
C.J. at ATC pp. 4226-4227; C.L.R. pp. 540-542 and by
Gibbs
J. at ATC pp. 4231-4234; C.L.R. pp. 550-554 and in
F.C. of T.
v.
Whitfords Beach Pty. Ltd.
82 ATC 4031
;
(1982) 150 C.L.R. 355
by
Gibbs
C.J. at ATC pp. 4034-4037; C.L.R. pp. 362-367 and by
Mason
J. at ATC pp. 4042-4047; C.L.R. pp. 376-384. As
Mason
J. said at ATC p. 4046; C.L.R. p. 383:
``... the second limb does not affect the principle enunciated in Californian Copper except to emphasize that an undertaking or scheme may be a profit-making one even if it lacks the characteristics of repetition or recurrence supposedly essential to the carrying on of a business.''
Moreover, it was not contended that the taxpayer carried on a business which in the ordinary sense would be described as a business of share trading. Mr Downes only submitted that there was a business of investment in ``the London Australia sense''. Not only was the concession expressly made that the taxpayer was not a share trader, but in the appeal, Mr Downes accepted that this concession carried with it a concession that the shares held by the taxpayer were not its trading stock.
That concession having been made, I need not discuss the many cases, to be found principally in decisions of Boards of Review, which have discussed the issue as to what number, repetition and regularity of trading is required to turn what would otherwise be an activity of share investment into an activity which amounts to the carrying on of a business of trading or dealing in shares. See, e.g., 73 ATC at pp. 24, 328, 344 and 410. In
N.F. Williams
v.
F.C. of T.
72 ATC 4069
;
(1972) 127 C.L.R. 226
,
Stephen
J. considered that certain speculative and profit-making acquisitions undertaken by a person who was otherwise a mere share investor were better considered as isolated transactions to which
ATC 4444
sec. 26(a) applied rather than as transactions made in the course of carrying on a business. Even that situation does not arise in the present appeal for it is not contended that the transactions, if looked at individually, were assessable to tax under sec. 26(a). See alsoTrent Investments Pty. Ltd. v. F.C. of T. 76 ATC 4105 .
The trial Judge did not hold that the taxpayer had, in the ordinary sense, carried on a business of trading or dealing in shares, and did not discuss cases such as
Ferguson
v.
F.C. of T.
79 ATC 4261
;
(1979) 26 A.L.R. 307
and
F.C. of T.
v.
Walker
84 ATC 4553
which considered the type of activity which constitutes the carrying on of a business. Presumably, there was no need to do so having regard to the concession made to the trial Judge. In my view, the concession that the taxpayer was not a share trader was correctly made. I would not describe the taxpayer as a company which carried on a business of dealing or trading in shares. It seems to me that there was no such repetition of buying and selling, no such regularity of dealing as was sufficient to transform the management of the investment portfolio into a business of dealing or trading in shares, even in the light of the taxpayer's character as a corporation.
That leads me to the point that the argument put for the Commissioner in the present case was an argument which was rejected by Mahoney J. in Trent Investments Pty. Ltd. v. F.C. of T., supra . In that case, the concession had also been made that the taxpayer was not a share trader but it was submitted that, notwithstanding that the taxpayer did not carry on a business of dealing or trading in shares, and notwithstanding that the taxpayer's profits were not assessable under sec. 26(a) of the Act, nevertheless, the taxpayer's profits constituted the proceeds of a business of investment and were assessable as such. Mahoney J., said at pp. 4106-4107:
``The Commissioner did not, in the argument before me, contend that the taxpayer was, in respect of any of these shares, a share trader, i.e., a company carrying on a business for the purpose of deriving profit from the buying and selling of shares.
...
As I have said, the Commissioner accepted that the taxpayer was not engaged in the business of share trading at any relevant time, and that this part of the case is to be dealt with upon the basis that the taxpayer's activities were dictated by `the portfolio management principles' to which I have referred.
The Commissioner's argument was, however, first, that a taxpayer who acquires and disposes of assets according to such principles, is liable to tax upon the surpluses generated by such business, whether by way of receipt of dividends or surplus on disposal; and, second, that (whether this be so or not) the way in which the portfolio management principles were applied by the taxpayer had such a result.''
At pp. 4108-4109, his Honour said:
``In my opinion, this general principle should not be accepted. The term `portfolio management' covers a number of different kinds of business activities and I do not think that the activities, systematic and concerted though they may be, have the income tax results which the Commissioner claims. The term, as perhaps it would more usually be understood, denotes merely the systematic investment of assets. I do not think that, notwithstanding Mr Priestley's careful argument, such investment activities have the tax consequences he suggests because they are systematic or are directed to matters other than the derivation of income.
Those who have large sums of money have normally not held such money in globo but have turned it to account. Where this has been done not by way of trading or in the making of profits by ventures in the nature of trade, but by the purchase of assets to be held, it has generally been accepted that an increase in the value of the assets, whether realised or unrealised, is not of the nature of income. The distinction between investment, in this sense, on the one hand, and the use of capital in trade is well established.
...
It is, in my opinion, consistent with investment principles, e.g., that an asset will be sold and the proceeds invested in another asset because, inter alia, it is seen
ATC 4445
that the asset purchased is likely to be more valuable than that sold. I do not think that the principles which have been established require that the investor, in considering whether to hold or dispose of an investment, should not have regard to the fact that a prospective investment will become of a greater capital value than the one presently held. The difficulty of drawing the line between a sale and purchase for that purpose and one for the purpose of realisation at a profit does not, in my opinion, mean that the investor must ignore the opportunity to improve as well as maintain the value of his capital.''
At p. 4108, his Honour commented:
``Investment, in the sense to which I have referred, does not cease to be such merely because it is done systematically and skilfully. It may do so if, as a matter of fact, the activities of a taxpayer are such that he is carrying on a trade: see
I.R. Commr v. Sangster (1920) 1 K.B. 587 ; 12 T.C. 208 ;
Salisbury House Estate Ltd. v. Fry (1930) 1 K.B. 304 ; 15 T.C. 266 ; and see the Noddy Subsidiary Rights case (supra) at p. 15; 475. But, upon the present facts, I do not think that it was so. Except in the sense to which I have referred, the Commissioner did not contend that what the taxpayer was doing was a trade.''
I agree with his Honour's approach.
The starting point is the principle stated by the Lord Justice Clerk, the Right Honourable J.H.A.
McDonald
, in
Californian Copper Syndicate
v.
Harris
(1904) 5 T.C. 159
at pp. 165-166
, where his Lordship said:
``It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.
...
Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?''
The importance of his Lordship's remarks for present purposes lies in his Lordship's references to ``a business'' and ``an operation of business''. If what occurred in the present case was an activity of business, then the profits would be assessable. The relevant business, if there was one, would for present purposes be a business of dealing or trading in shares for, as I have said, the share transactions were not an incident of an insurance or any other business.
In F.C. of T. v. Whitfords Beach Pty. Ltd., supra, Gibbs C.J. at ATC p. 4034; C.L.R. p. 362, after referring to Jones v. Leeming (1930) A.C. 415, said:
``... the conclusion that a profit made on the realization of a capital asset does not become income by reason only of the fact that the asset was acquired for the purpose of profit-making by sale accords with ordinary concepts. Such a profit is ordinarily regarded as a capital gain, even though the asset was bought for the purpose of making the gain.''
At ATC p. 4035; C.L.R. p. 363, after referring to remarks in
Ruhamah Property Co. Ltd.
v.
F.C. of T.
(1928) 41 C.L.R. 148
, his Honour said:
``The judgment goes on (at p. 152) to refer to `the question whether the sale was an operation of business in carrying out a scheme of profit-making' - words of course taken from the judgment in Californian Copper Syndicate v. Harris - and it is apparent that their Honours did not intend to depart from the law as declared in that and other authorities, under which profits from carrying on or carrying out a scheme of profit-making were treated as income only if the scheme could be described as a business, a trading adventure, or a commercial venture.''
At ATC p. 4040; C.L.R. p. 372, Mason J. said:
``It has been a long-settled principle of revenue law that, unless a sale of property is
ATC 4446
made in an operation of business, the resulting profit will not be income according to the ordinary concepts and usages of mankind.''
This was also the way in which the matter was regarded in
F.C. of T.
v.
Myer Emporium Ltd.
87 ATC 4363
at pp. 4366-4367;
(1987) 163 C.L.R. 199
at pp. 209-210
, in which
Mason
A.C.J.,
Wilson, Brennan, Deane
and
Dawson
JJ. commented:
``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.... 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.''
At ATC pp. 4368-4369; C.L.R. p. 213, their Honours said:
``... over the years this Court, as well as the Privy Council, has accepted that profits derived in a business operation or commercial transaction carrying out any profit-making scheme are income, whereas the proceeds of a mere realization or change of investment or from an enhancement of capital are not income: Ruhamah Property Co. Ltd. v. F.C. of T. (1928) 41 C.L.R. 148 at pp. 151-152, 154;
McClelland v. F.C. of T. 70 ATC 4115 at pp. 4120-4121; (1970) 120 C.L.R. 487 at pp. 495-496 ; London Australia Investment Co. Ltd. v. F.C. of T. 77 ATC 4398 at pp. 4402-4403; (1977) 138 C.L.R. 106 at pp. 115-116; and see Whitfords Beach .The proposition that a mere realization or change of investment is not income requires some elaboration. First, the emphasis is on the adjective `mere' ( Whitfords Beach , at ATC pp. 4046-4047; C.L.R. p. 383). Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value - see the discussion by Gibbs J. in London Australia , at ATC pp. 4403-4404; C.L.R. pp. 116-118. It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.''
Thus it has been held that a bank's investments, wherein reside its circulating capital, are investments in which the bank deals and the profits and losses of such dealing form part of its annual profits and losses and its assessable income. See
ATC 4447
Punjab Co-operative Bank Ltd., Amritsar
v.
Commr of Income Tax, Lahore
(1940) A.C. 1,055
,
National Bank of Australasia Ltd.
v.
F.C. of T.
69 ATC 4042
;
(1969) 118 C.L.R. 529
,
Commr of Taxation
v.
Commercial Banking Co. of Sydney
(1927) 27 S.R. (N.S.W.) 231
. A bank deals in money and makes profits from the money which it handles. Its profits and income therefore take account of share investments acquired for that purpose and the profits or losses from dealing in those investments. Similarly, an insurance company makes profits or losses from dealing with its circulating funds. See
Australasian Catholic Assurance Co. Ltd. v. F.C. of T.
(1959) 100 C.L.R. 502,
Producers'
&
Citizens' Co-operative Assurance Co. Ltd.
v.
F.C. of T.
(1956) 95 C.L.R. 26
,
Colonial Mutual Life
Chamber of Manufactures Insurance Ltd.
v.
F.C. of T.
84 ATC 4315
;
(1984) 2 F.C.R. 455
. It is an incident of an insurance business which receives premiums in advance, sometimes years in advance of the insured event occurring, that profits and income are made from the investment of the premiums. Insurance companies therefore deal or trade in shares and the like.
The same principle applies to such investment companies as carry on a business of dealing or trading in investments. See, e.g.,
Scottish Investment Trust Co.
v.
Forbes
(1893) 3 T.C. 231
in which at p. 234, the Lord President said:
``But from the structure of the Memorandum it appears that the varying [of] the investments and turning them to account are not contemplated merely as proceedings incidentally necessary, for they take their place among what are the essential features of the business. In my view such speculations are among the appointed means of this Company's gains.''
In London Australia Investment Co. Ltd. v. F.C. of T. (supra) , an investment company, listed on the London Stock Exchange, was held to be assessable on its profits from its share trading activities. Barwick C.J., dissenting, accepted that the company carried on investment in Australian shares as a business or business activity but felt that it was no part of that business that the company traffic in shares. Gibbs and Jacobs JJ., however, came to the contrary conclusion. Their Honours each made reference to the extensive dealings which took place and to the derivation of both dividend income and substantial gains through share dealings. Reference was made to the fact that the activities of the company, which carried on an extensive investment business for the purpose of creating returns for its shareholders, necessarily involved it in switching or dealing with its investments. Gibbs J. held that the investment company was carrying on a business of dealing in shares. At ATC p. 4403; C.L.R. p. 116, his Honour referred to the remarks of the Lord Justice Clerk, cited previously, and at ATC p. 4404; C.L.R. p. 118, rejected the contention that the principles I have discussed above related only to banking or insurance companies. His Honour said, having referred again to the remarks of the Lord Justice Clerk in Californian Copper Syndicate v. Harris :
``That test is applicable to any business, and if the sale of the shares is an act done in what is truly the carrying on of an investment business the profits will be taxable just as they would have been if the business had been that of banking or insurance.''
Jacobs J. took a similar approach. At ATC p. 4410; C.L.R. p. 128, his Honour said:
``Therefore, once profits on sale are found not to fall within the first limb of sec. 26(a), the determinant is the carrying on of a business, not any associated business in a general sense, but the specific business of acquisition with a purpose or intention or expectation of resale and subsequent resale with consequent profit. Though frequent activity of acquisition and resale does not necessarily signify a business, it is evidence from which it may be inferred that there is a business.''
As the taxpayer in the present case, Equitable Life Insurance Co. Ltd., was not a trader in shares and did not carry on a business of or involving dealing or trading in shares, it follows from the principles I have outlined that the profits made from its investment activities did not form part of its assessable income. Its profits were capital profits derived from an activity of investment that was not a business.
I should add that, in the appeal, Mr Downes did not embark upon a detailed examination of the facts such as ordinarily occurs when an allegation is that the taxpayer has carried on a business of dealing in shares. Mr Downes contented himself with submitting in substance that the taxpayer carried on a business of investing in the London Australia sense. But London Australia was a different type of case for London Australia was listed on the London Exchange and made regular returns to its shareholders. Its activities, including its share dealings, constituted a business and the issue was whether, as its share dealings were designed to maintain dividend income, the profits arising from the dealings were assessable. In the present case, as my colleague Pincus J. has pointed out, the taxpayer had no portfolio management plan directed to maintaining dividends but was rather more
ATC 4448
concerned to enhance the capital value of its portfolio.It would follow that, if as Mr Downes contended, the taxpayer had carried on a business of dealing in shares, the conclusion would have had to be drawn that it was doing so for profit and was a trader or trafficker in shares for the purpose of profit. Mr R.J. Ellicott Q.C., senior counsel for the taxpayer, therefore understandably found it difficult to ascertain to what point he should direct his argument, for the concession that the taxpayer was not a share trader, a concession from which Mr Downes did not resile, seemed to foreclose the Commissioner's case. Mr Ellicott nevertheless addressed the contention that the taxpayer carried on a business of investment in the London Australia sense. I agree with Mr Ellicott that the factors which led to the conclusion that London Australia was dealing in shares are absent from the present case. I accept Mr Ellicott's submission that the taxpayer was not a share trader and that the taxpayer did not carry on a business of dealing in shares or any business which involved dealing in shares. The activities of the taxpayer were consistent with long-term investment. The profits which it derived were profits from ordinary investments.
For these reasons, I would allow the cross-appeal in respect of the 1983 year of income and would substitute for the order made by the trial Judge an order that the Commissioner's decision on the taxpayer's objection for that year be set aside and that the matter be remitted to the Commissioner to be dealt with according to law. I would dismiss the appeal from his Honour's order in respect of the 1984 year of income but my reasoning proceeds from a basis different from that adopted by his Honour. The Commissioner should pay the costs of these proceedings and the costs of the proceedings below.
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