Mutual Life and Citizens' Assurance Co Ltd v Commissioner of Taxation

100 CLR 537
1959 - 0427A - HCA

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(Judgment by: Fullagar J)

Between: Mutual Life and Citizens' Assurance Co Ltd
And: Commissioner of Taxation

Court:

Judges: Dixon CJ
McTiernan J

Fullagar JTaylor J
Menzies J

Subject References:
Taxation and revenue
Assessable income
Exempt income
Income from sources outside Australia

Legislative References:
Income Tax Assessment Act 1936 (Cth) - s 23

Hearing date: 4 December 1958; 5 December 1958; 8 December 1958; 19 December 1958
Judgment date: 27 April 1959

SYDNEY

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Judgment by:
Fullagar J

This is a case stated by Menzies J. in an appeal by the Mutual Life and Citizens' Assurance Company Limited against an amended assessment of income tax on income derived by it in the accounting period ended 31st December 1935.  The company is incorporated in New South Wales, and is a resident of Australia within the meaning of the Income Tax Assessment Act 1936 (Cth.).  It carries on the business of life assurance in Australia, and also in the United Kingdom, where it maintains a branch.  During the accounting period the investments of its life assurance fund included certain United Kingdom war loan stock, New South Wales Government inscribed stock, New Zealand Government inscribed stock, and Alberta and Great Waterways stock.  The interest on these securities, which amounted to a total sum of PD71,427 4s. 11d., was payable and paid in the United Kingdom.  The question raised by the stated case is whether the whole or any part of this sum is exempt from Commonwealth income tax under s. 23 (q) of the Assessment Act.  Section 23 provides that

"The following income shall be exempt from income tax:

...

(q)

income derived by a resident from sources out of Australia,

where that income is not exempt from income tax in the country where it is derived...".

 

The commissioner does not dispute that the company was a resident of Australia, and he does not dispute that the income in question was derived from sources out of Australia.  But he maintains that the case does not fall within s. 23 (q) because that income was exempt from income tax in the country where it was derived, viz. the United Kingdom.  So far as the United Kingdom war loan stock is concerned, that stock was issued with a condition that the interest thereon should not be liable to tax or super-tax and the commissioner refers to s. 46 (1) of the Income Tax Act 1918 (Imp.).  That sub-section provides:"Where the Treasury have before the commencement of this Act issued or may thereafter issue any securities which they have power to issue for the purpose of raising any money or any loan, with a condition that the interest thereon shall not be liable to tax or super-tax, so long as it is shown, in manner directed by the Treasury, that the securities are in the beneficial ownership of persons who are not ordinarily resident in the United Kingdom, the interest of securities issued with such a condition shall be exempt accordingly."  Paragraph 9 of the case states:"... this security was shown in manner directed by the United Kingdom Treasury to be in the beneficial ownership of a person who was not ordinarily resident in the United Kingdom, that is to say, the company. ...".  

So far as the New South Wales, Canadian and New Zealand stocks are concerned, the commissioner refers to r. 2 (d) of the Rules Applicable to Schedule C of the First Schedule in the Income Tax Act 1918.  Schedule C provides:

"Tax under Schedule C shall be charged in respect of all profits arising from interest, annuities, dividends, and shares of annuities payable out of any public revenue, for every twenty shillings of the annual amount thereof."

Rule 2 provides:"No tax shall be chargeable in respect of-... (d) The interest or dividends on any securities of a foreign State or a British possession which are payable in the United Kingdom, where it is proved to the satisfaction of the Commissioners of Inland Revenue that the person owning  the securities and entitled to the interest or dividends is not resident in the United Kingdom. ...".  Paragraph 10 of the case states that the New South Wales, Canadian and New Zealand stocks were securities of a British Possession and were payable in the United Kingdom, and it proceeds:"... it was proved to the satisfaction of the Commissioners of Inland Revenue of the United Kingdom that in the relevant year the company owned the said securities and was entitled to the interest thereon, and that it was not at the relevant time resident in the United Kingdom ...".  

If no more appeared than has so far appeared, it would seem plain enough that the commissioner was right, that all the interest in question was exempt from income tax in the United Kingdom, and that the company could not therefore claim the benefit of s. 23 (q) of the Assessment Act (Cth).  It is necessary now, however, to refer to certain other provisions of the Income Tax Act 1918, and to certain further facts.  Schedule D of that Act provides that tax under that schedule shall be charged in respect of a considerable variety of profits or gains, which it is unnecessary to set out, and that the tax shall be charged "under the following cases".  Then follow six "cases".  Case III is "Tax in respect of profits of an uncertain value and of other income described in the rules applicable to this Case".  Rule 3 of the rules applicable to Case III (so far as material) provides:"3. (1) Where an assurance company not having its head office in the United Kingdom carries on life assurance business through any branch or agency in the United Kingdom, any income of the company from the investments of its life assurance fund (excluding the annuity fund, if any), wherever received, shall, to the extent provided in this rule, be deemed to be profits comprised in this Schedule and shall be charged under this Case.  (2) Such portion only of the income from the investments of the life assurance fund for the year preceding the year of assessment shall be so charged as bears the same proportion to the total income from those investments as the amount of premiums received in that year from policy holders resident in the United Kingdom and from policy holders resident abroad whose proposals were made to the company at or through its office or agency in the United Kingdom bears to the total amount of the premiums received by the company: Provided that in the case of an assurance company having its head office in any British possession, the Commissioners of Inland Revenue may, by regulation, substitute  some basis other than that herein prescribed for the purpose of ascertaining the portion of the income from investments to be so charged as being income derived from business carried on in the United Kingdom.  ... (4) Where a company has already been charged to tax, by deduction or otherwise, in respect of its life assurance business, to an amount equal to or exceeding the charge under this rule, no further charge shall be made under this rule, and where a company has already been so charged, but to a less amount, the charge shall be proportionately reduced."  

The company was required by the revenue authorities in the United Kingdom to pay, and did in fact pay, income tax computed under r. 3 of the rules applicable to Case III of schedule D.  The computation took the figure of PD820,182 as representing the total interest on the investments of the company's life assurance fund, and the proportion of what may be shortly called United Kingdom premiums to total premiums as 2.888 per cent.  By applying that percentage to the total interest, a sum of PD23,687 was arrived at. From this sum a deduction was allowed of the due proportion of "expenses of management" under s. 33 (4) which provides:"Where an assurance company, not having its head office in the United Kingdom, is charged under Case III of schedule D, on a proportion of the income from the investments of its life assurance fund, or on a basis substituted therefor, the relief in respect of expenses of management shall be calculated by reference to a like proportion of its total expenses of management for the year, estimated according to the provisions of this Act."  This left a sum of PD14,212, and the tax was calculated on this sum at the rate of 4s. 9d. in the PD.  After the making of certain immaterial adjustments, the amount of tax payable was shown as PD3,361 3s. 2d.  The important fact to be noted is, of course, that the commencing figure of PD820,182 included the interest received by the company on the United Kingdom war loan stock and on the New South Wales, Canadian and New Zealand stocks.  

If the matter had been free from English authority, one could have had little hesitation in saying that the assessment of the company on the above basis had the effect of imposing United Kingdom income tax on the interest on the four stocks in question.  If you impose tax on a proportion a/b of x, you are taxing x, and, if x includes y, you are taxing y.  In other words, as my brother Menzies put it during argument, if you impose a tax on 10 per cent of an amount which includes several items, then you are imposing a tax on every item which is included in that amount.  But one would also have had little hesitation in saying that the assessment of the company on the above basis could not, as a matter of law, be justified.  Rule 3 of the rules applicable to Case III of schedule D is a general provision, which must, according to the accepted rule of statutory interpretation, be read subject to the special provisions of the Act which unequivocally exempt from all tax the interest on the four stocks in question.  That interest should accordingly have been excluded from the computation of the tax payable by the company.  It would appear that before 1937 the revenue authorities had not acted on this view.  But that exempt income should be excluded from the computation in such a case was clearly decided by the Court of Appeal in Hughes v  Bank of New Zealand. ^[F2]   In that case the assessment was made under Case I of schedule D.  Lord Wright M.R. referring to s. 46, said: "... The section was put in in 1915, when it was undoubtedly desired to attract subscriptions to loans which were being put forward, as we well remember in those critical years of the War.  It seems to me that it would be rather deplorable if, notwithstanding what I regard as the clear language of s. 46, the owner, not being ordinarily resident in the United Kingdom, was still taxed as part of his trading profits, and in my view that is not the true construction of the section.  It is not introduced in respect of any particular schedule; it is quite general, ... I see no ground at all consistent with ordinary principles of construction for cutting down its meaning and treating it as only applicable to Case  III of schedule D, ... If they are not taxable at all, then obviously they can neither be charged under Case III of schedule D nor under any Case of schedule D at all". ^[F3]

When Hughes v  Bank of New Zealand ^[F4] reached the House of Lords, ^[F5] the only question argued (apart from a point which has no relation to the present case) was whether the special provisions of the Act, on which the bank relied, did, as a matter of construction, confer on the receipts in question complete immunity from tax.  The House of Lords held, as the Court of Appeal had held, that they did.  So far as certain interest on war loan stock was concerned, the Crown abandoned in the House of Lords its contention that s. 46 did not confer such an immunity on that interest.  

If, then, one could stop at this point, one would say that the interest on the four stocks now in question was exempt from income tax in the United Kingdom, where it was derived, and that the commissioner should succeed on this appeal.  If the company in fact paid tax which it was not liable to pay, that would be a misfortune which this Court cannot cure.  It is now necessary, however, to consider a later decision of the House of Lords, which reversed a decision of the Court of Appeal and restored a decision of Macnaghten J.  The case is Inland Revenue Commissioners v  Australian Mutual Provident Society. ^[F6]  

This case (so far as here material) was concerned only with the method of giving effect, in an assessment under r. 3 of Case III of schedule D, to exemptions from tax to which it was assumed that effect must be given.  There were two theoretically possible ways of doing this, which are made plain in the table which appears in the report of the case in the House of Lords. ^[F7]   The first excludes the exempt income from the commencing figure of the total income of the investments of the life assurance fund, and then applies the prescribed ratio to the balance remaining.  The second includes the exempt income in the commencing figure of total income, applies the prescribed ratio to that total, and then deducts the exempt income from the resultant figure.  A similar choice of alternatives is, of course, presented when (as in Hughes v  Bank of New Zealand) ^[F8] it is a matter of calculating a profit for the purposes of an assessment under Case I of schedule D.  The first alternative would appear to provide the correct way of giving effect to the exemption, though the second is more favourable to the taxpayer.  In the Australian Mutual Provident Society Case, ^[F9] Macnaghten J. held that the first alternative should be adopted, ^[F10] but his decision was reversed by the Court of Appeal. ^[F11]  

On an appeal by the Crown to the House of Lords, Lord Porter ^[F12] intimated that, if the Act required a deduction of exempt income to be made at all in the course of the calculation, it should be made in the manner approved by Macnaghten J. ^[F13]   But Lord Porter, like the rest of their Lordships, really decided the appeal in favour of the Crown on the ground that the proportion sum required by r. 3 of Case III of schedule D should be worked out and applied without taking into account in any way whatever the fact that some of the investments of the company assessed were exempted from income tax by other express provisions of the Act.  One result of this view would seem to be that a company of the class mentioned in r. 3, which invests the whole of its assurance fund in securities which s. 46 purports to exempt from income tax, is in precisely the same position, as regards income tax, as a company which invests the whole of its assurance fund in securities to which the Act gives no exemption.

In order to indicate the reason for their Lordships' adoption of this view, it will be sufficient to quote two short passages.  Viscount Simon said:"Once it is accepted that r. 3 of Case III is not one which taxes income from investments, whether exempted or not, but one which taxes a conventional sum calculated as the rule directs, it becomes reasonably clear that the sum to be taxed is not varied by inquiring whether one of the elements in the calculation contains income from exempted investments". ^[F14]   Lord Wright said:"The charge was a tax on the investment income only as a machinery to tax the general profits of the British business, and as a manner of measuring the charge by an arbitrary figure derived from a percentage of the investment income.  In this connection it was not material to distinguish between exempted and unexempted income.  All that was needed was a yardstick". ^[F15]   The reasons so given were used as an aid in the interpretation of the Double Taxation Relief (Taxes on Income) (Australia) Order 1947by Upjohn J. and the Court of Appeal in Ostime (Inspector of Taxes) v  Australian Mutual Provident Society, ^[F16] though Parker L.J. (as he then was) felt difficulty in "fully understanding" the decision.  

The question then arises-whether the decision of the House of Lords in 1947 compels a different view in this case from that which one would have taken in its absence.  In my opinion, it does.  In its absence one would have thought, as I have said, that the income of the four securities now in question was exempt from income tax in the United Kingdom, with the consequence that the taxpayer was not entitled to the benefit of s. 23 (q) of the Assessment Act (Cth).  But that decision clearly means that a proportion of the company's income from investments, including income from investments of the character described in s. 46 and r. 2 (d) of the rules under schedule C, is charged with United Kingdom income tax.  If you charge tax on 10 per cent of an identified fund, you cannot be said to leave that fund exempt from tax.  

It is important to remember that the ultimate question in this case turns on the meaning of a provision in the Australian Act.  We have to determine whether the company's income from four specific classes of security is exempt from income tax in the United Kingdom.  But the words "exempt from income tax" in this question import "exempt from income tax within the meaning of s. 23 (q) of the Australian Assessment Act." It is true, of course, that, in order to answer the question, we have to inquire into the law of the United Kingdom relating to income tax, and to examine the statutes of the United Kingdom which impose income tax.  But the use, in a statute of the United Kingdom, of the word "exempt" in relation to income of a particular description is not necessarily decisive of the question whether that income is exempt from income tax in the United Kingdom within the meaning of s. 23 (q).  So it is quite conceivable, if unlikely, that a tax, which was called an income tax in a United Kingdom statute, would not be rightly regarded as an income tax within the meaning of s. 23 (q).  Here, of course, there is no question but that the United Kingdom tax is such a tax.  Everything turns on the word "exempt".  

The general scheme of the Commonwealth legislation is not to impose tax by reference to specific categories of income.  It contains, of course, many special provisions as to what does and does not constitute income, but its general plan is to treat as "assessable income"-gross income-whatever is income within the general conception of that term, and to require the "taxable income" to be ascertained by subtracting from assessable income what are called "allowable deductions".  Consistently with this general plan no income can be regarded as exempt from income tax either if it is required to enter into the calculation directly as itself a part of the assessable income, or even if, though it is excluded from the actual calculation of assessable income, the rate of tax is increased by reference to its existence.  See Reid v  Federal Commissioner of Taxation; ^[F17] The Commonwealth v  State of Queensland; ^[F18] cf. Douglass v  Federal Commissioner of Taxation, ^[F19] and Commercial Banking Company of Sydney Ltd  v  Federal Commissioner of Taxation. ^[F20]   The United Kingdom income tax legislation adopts, as has often been observed, a different general scheme.  It does impose tax by reference to specific categories of income, and these are not completely mutually exclusive.  But the calculation required by r. 3 of Case  III of schedule D and s. 33 (4) is precisely parallel to the process of ascertaining assessable income and then subtracting allowable deductions in order to arrive at taxable income.  The difficulties to which Dixon J. adverted in Australian Machinery and Investment Co  Ltd  v  Deputy Federal Commissioner of Taxation ^[F21] do not exist here.  What the Commonwealth Act calls assessable income is obtained by taking a proportion of a total income which includes interest on the four classes of securities mentioned above.  It is impossible to say that that process leaves that interest exempt from income tax within the meaning of s. 23 (q).  

Their Lordships in the Australian Mutual Provident Society Case ^[F22] did not expressly deal with the relation between s. 46 and r. 2 (d) of schedule C on the one hand and r. 3 of Case III of schedule D on the other hand.  In this connection two possible views seem to be open as to the effect of the decision.  It may be that the former provisions are to be regarded as qualified or excluded, so far as life assurance companies are concerned, by the latter provision.  Or it may be that the former provisions stand unaffected but are to be construed as meaning merely that the interest therein referred to is not to be charged specifically or eo nomine with tax.  For the purposes of the present case, it does not matter which view be taken.  On either view the interest in question is not exempt from income tax in the United Kingdom.  

It follows that the whole of the interest, amounting to PD71,427 4s. 11d., which is referred to in the case stated is exempt from income tax in Australia, because the whole is not exempt in the United Kingdom.  It is true, of course, that r. 3 of Case III of schedule D does not in terms charge with tax the whole of that interest, but only a specified proportion (2.888 per cent) of that whole.  But it does not follow that only that percentage of that whole is to be regarded as "not exempt from income tax" for the purposes of s. 23 (q).  It is not possible to say that any identifiable part of the total sum is taxed, and that an identifiable remainder is "exempt".  It is not possible to attribute or appropriate the United Kingdom tax paid by the company to any specific part or portion of the total interest from the four classes of security in question.  The tax was calculated by reference to a percentage of the total sum, but it was not paid on any specific part of that total sum.  If it had ever become necessary for any purpose to apportion the amount of tax paid among components of the interest received, the apportionment could only have been made by attributing the tax paid to each pound of that interest rateably.  There are many purposes of the law for which it may be necessary to make an apportionment in respect of a payment, and, unless a special appropriation can be made and is made, the rule of the common law is that a payment is attributed rateably to each pound of a debt or fund.  In Ellis v  Emmanuel ^[F23] Blackburn J. said:"It was said that the dividends are by law applied to each part of the debt rateably, which is unquestionably true". ^[F24]   And see Commissioner of Stamp Duties (N.S.W.) v  Perpetual Trustee Co  Ltd; ^[F25] W. & A. McArthur Ltd  v  Federal Commissioner of Taxation; ^[F26] Resch v  Federal Commissioner of Taxation; ^[F27] Re D (a Lunatic Patient)[No. 2] ^[F28] and Blackston Bank v Hill ^[F29] .  In the present case it may be said that essentially it is not a matter of distributing a payment but of distributing a burden.  But the position is entirely analogous.  The burden cannot be distributed in any way which will leave it resting not on the whole, but exclusively on some severable part, of the interest received.  The whole, therefore, is "not exempt".  

The question asked by the case stated should be answered-Yes.