FC of T v CROWN INSURANCE SERVICES LTD

Judges: Lander J

Jessup J
Foster J

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

MEDIA NEUTRAL CITATION: [2012] FCAFC 153

Judgment date: 2 November 2012

Jessup J

51. This is an appeal by the Commissioner of Taxation from a decision of the Administrative Appeals Tribunal made on 30 November 2011, whereby, in an application for review under s 14ZZ of the Taxation Administration Act 1953 (Cth), the Tribunal set aside a decision by the Commissioner disallowing objections by the now respondent, Crown Insurance Services Ltd, to assessments of income tax with respect to the years ending on 30 June 2004, 2005, 2006 and 2007. Under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) ( " the AAT Act " ), the present appeal lies only if it is " on a question of law " . The respondent submits that the appeal is not on such a question, and is incompetent.

52. In the years to which I have referred, the respondent was an insurer incorporated in Vanuatu. Relevantly to the present proceeding, its only business was to provide insurance to certain Australian companies whose business was the provision of funeral and like benefits to members of the aboriginal community. There were five such companies referred to by the Tribunal in its reasons ( " the Australian companies " ), plus an administration company which handled some of the payments which were made to, and by, the respondent. All of these companies, and the respondent itself, were under common ownership. In the present proceeding, the parties did not find it necessary to draw a distinction between any of the Australian companies, arguments being advanced in the context one of them, Aboriginal Community Benefit Fund No 2 Pty Ltd ( " the No 2 Fund company " ), it being accepted that its circumstances were typical.

53. The No 2 Fund company was the trustee of the Aboriginal Community Benefit Fund No 2 ( " the No 2 Fund " ). The fund was constituted by a trust deed which provided for the No 2 Fund company (described as the " trustee " ) to " stand possessed of the Trust Fund and the income thereof upon trust for the Members upon the trusts and with and subject to the powers and provisions " expressed in the deed. Members of the aboriginal community could apply for membership of the No 2 Fund, and, as members, were obliged to pay periodical contributions calculated by reference to the terms of their particular applications. Those contributions were to be held in trust by the No 2 Fund company and applied by it in accordance with the provisions of the deed. Upon the death of a member, the No 2 Fund company was to pay to his or her next of kin a benefit calculated by reference to the application form signed by the member. It was, however, provided that no benefit would be payable in respect of the member " should the Insurer under the Group Life Policy referred to in Clause 13.5 hereof not pay the Trustee in respect of that Member ' s death " .

54. Clause 13.5.1, under which the No 2 Fund company had a duty to insure, was as follows:

[ T ] he Trustee shall at all times maintain a Group Life Policy in respect of the lives of the Members for the time being of the Fund for not less than the total benefits payable to the Members. For this insurance aspect, the Trustee is currently utilising National Mutual Life Association of Australasia Limited as underwriters for the full death benefits payable. The Trustee may in its discretion change the insurer at any time. The Trustee shall, if requested by a Member, advise the Member the name of the insurer from time to time.

The No 2 Fund company was obliged to observe the terms of any such group life policy, and to hold in trust for the next of kin any amount paid by the insurer pursuant to that policy in relation to the death of a particular member.

55. As is apparent from the passage quoted above, the insurer used for the group life policy was originally National Mutual Life Association of Australasia Ltd. However, by about 2000, the Australian companies were concerned that that insurer was taking too long to process their claims made in respect of the deaths of members. It was decided to establish a new insurer, the business of which would be confined to insuring the Australian companies for their liability to pay death benefits to members of the aboriginal community who were members of the various funds. However, under Australian law, it was necessary for an insurer to have net assets of at least $ 5m. That made the proposal unworkable, but it was discovered that an insurance company established in Vanuatu would be required to have a net capital of $ 200,000 only. This led to the establishment of the respondent as a Vanuatu company.

56. The respondent subsequently entered into contracts of insurance with the Australian companies. In each case, this was done in Vanuatu. The contract entered into between the respondent and the No 2 Fund company was a single-page document accompanied by a proposal executed on behalf of that company on 24 May 2002. It was treated as typical in the present proceeding. It was pursuant to that contract of insurance that the No 2 Fund company complied with its obligation, arising under the No 2 Fund trust deed, to maintain a group life policy with respect to the benefits that would have to be paid from time to time upon the death of members of that fund. Under that contract, in consideration of " the payment of premiums as provided for in the … proposal and the fulfilment of the obligations required of the policy owner in accordance with the … proposal " , the respondent agreed " to provide to the policy owner the respective benefits " .

57. Under the insurance contract, it was for the respondent to determine whether the circumstances of a particular member of the No 2 Fund would be covered by the insurance, in accordance with the following provisions:

As defined in the proposal, an " eligible person " was a member of the No 2 Fund, and an " insured person " was an eligible person who had become an insured person pursuant to the provisions of cl 6.1, set out above, and who had not ceased to be an insured person pursuant to the following provisions:

58. Premiums were dealt with in the contract by provisions which included the following:

The term " premium basis " was defined as:

" Premium Basis " means the basis for determining the amount of premiums, as specified in paragraph 1.1.

That is, each member of the No 2 Fund had a certain level of cover under the contract of insurance between the No 2 Fund company and the respondent, and the premiums payable by that company were referrable to that level of cover. There was also a provision with respect to default arising in the payment of premiums, as follows:

9.6

If any premium or instalment of premium remains unpaid at the expiration of 14 days from the date on which the premium or instalment became due and payable, three months notice may be given and the policy shall lapse and the cover shall cease. However this shall not affect the liability of Crown Insurance in relation to the death of an insured person where the date of death is prior to the date on which such premium or instalment became due and payable.

59. The proposal dealt with benefits under the contract as follows:

60. I would also note the following provision of the proposal with respect to the making of claims:

The proposer shall arrange for Crown Insurance to be notified as soon as practicable of particulars of any event or other occurrence which may entitle the proposer to claim a benefit under the policy. Upon receipt of such notification, Crown Insurance shall promptly make known it ' s [ sic ] requirements for effecting payment of the claim.

61. From the commencement of the contract of insurance between the respondent and the No 2 Fund company on 1 June 2002, premiums were received, claims were made and benefits were paid uncontroversially during the years with which the assessments were concerned. According to the Tribunal:

It is evident from the material that very few claims were refused and that Crown authorised the payment of claims promptly. Given the profitability of the business, the modest amount of the payout and the size of the communities from which the claims (and thus potential new members) were coming it made sense to do so and to do so even where there might be some doubt about the strict legal entitlement to a payout.

The first claim made under the insurance contract was paid on 14 June 2002. From then until May 2011, the respondent paid in excess of 600 claims (whether for the No 2 Fund company only or for all the Australian companies is not clear), and it did so promptly.

62. For an initial (brief) period, the respondent remitted funds in payment of claims back to the Australian companies by international bank transfer, but in July 2002, the respondent set up an imprest account (which the Tribunal assumed, in the absence of clear evidence on the subject, was held by the administration company) into which premiums were paid to, and from which claims were paid by, the Australian companies. This system operated from July 2002 to 30 June 2006. During this period, operating via the imprest account, the administration company remitted to the respondent the premiums received from the Australian companies less the amount of claims paid out. From 1 July 2006, that system was altered such that the administration company remitted to the respondent all premium income, and the respondent remitted funds to the administration company sufficient to reimburse the imprest account for claims paid.

63. The question which arose before the Tribunal was whether the premium income of the respondent was assessable income within the meaning of s 6-5 of the Income Tax Assessment Act 1997 (Cth) ( " the 1997 Act " ), subss (2) and (3) of which provide as follows:

Before the Tribunal, it was argued by the Commissioner that the respondent was an Australian resident. The Tribunal rejected that argument, and no question presently arises in that regard. It was also argued by the Commissioner that the respondent ' s premium income had been derived from an Australian source for the purposes of para (a) of subs (3). The Tribunal rejected that argument also, and it is that rejection which lies at the centre of the present proceeding.

64. In reaching its decision that the respondent was not resident in Australia, the Tribunal expressed some conclusions that were, on one view, relevant also to the source question with which it was concerned. It held that both the Australian companies and the respondent were insurers, in the sense that they -

… entered into contracts whereby, in consideration of the payment of sums of money during the currency of the contract (premium) [ they ] would make a payment upon the happening of a specified event involving an element of uncertainty.

The Tribunal found it unnecessary, however, " to determine whether a contract that lays off all of the risks of one insurer to another [ was ] a contract of reinsurance. "

65. In response to the Commissioner ' s argument that the Australian companies were merely agencies through which the respondent carried on its insurance business, the Tribunal said:

In my opinion the business of [ the respondent ] was confined to the entry into the various contracts with the member companies whereby in consideration of the payment of the premiums, [ the respondent ] agreed to pay the defined benefit to the member company. [ The respondent ] was not concerned, in a contractual sense, with the payment of the defined benefit for the benefit of the fund member.

Thus the Tribunal rejected that argument.

66. The Tribunal found that premiums were paid to the respondent in Vanuatu by the Australian companies. It did not regard the practice of the payment of premiums net of claims (by way of the imprest account) " as having any particular significance " ; it was no more than a sensible set-off. It held that the approval of claims by the respondent was perfunctory, but was satisfied that the respondent " was required to, and did, approve the payment of claims " . It saw " nothing untoward " in a staff member of the Australian companies " satisfying himself that the claim was in order and making a recommendation to [ the respondent ] about the payment of the claim " . It accepted that the decision to pay on a claim was made by a representative of the respondent in Vanuatu. It rejected the Commissioner ' s submission that the respondent ' s work was merely by way of rubber stamping what had been decided in Australia.

67. The Commissioner submitted to the Tribunal that the respondent had its central management and control in Australia. The Tribunal rejected that submission. It said:

I am satisfied that [ the respondent ] did not have its central management and control in Australia during the years in question. Were it necessary to reach a conclusion on where central management and control was, I would have no hesitation in concluding that its operations were controlled and directed in (cf
Koitaki Para Rubber Estates Ltd v Federal Commissioner of Taxation (1941) 64 CLR 241 ) Vanuatu. It was incorporated in that country, it held its directors ' meetings in that country, its accounts were prepared, kept and audited in that country, its employees or agents resided in that country, the insurance contracts that were the basis of its business were made in that country and decisions or claims under those policies were made in that country. But it is sufficient to say that none of those activities are undertaken in Australia.

The Tribunal ' s conclusion was that the respondent neither carried on business in Australia nor had its central management and control in Australia.

68. The Tribunal then turned to the question which is directly relevant to the present appeal, namely, whether the income the subject of the assessments was " derived directly or indirectly from … Australian sources " within the meaning of s 6-5(3)(a) of the 1997 Act. Here the Tribunal accepted the submission of the Commissioner " that the original source of the amounts remitted to [ the respondent ] was the payments by members in Australia " , but considered that the case was covered by the judgment of the High Court in
Tariff Reinsurances Ltd v Commissioner of Taxes (Vic) (1938) 59 CLR 194 . That case involved s 42 of the Income Tax Act 1928 (Vic), which provided as follows:

So far as regards any company liable to pay tax the income thereof chargeable with the tax shall … be the profits earned in or derived in or from Victoria by such company during the year immediately preceding the year of assessment.

The basic facts of the case, as stated by Dixon J (59 CLR at 212) were as follows:

The appellant is a company incorporated in Great Britain. Its business is that of reinsuring risks undertaken by other insurers. In the year 1928 it entered into a reinsurance treaty with a Victorian company carrying on in Victoria the business of motor car insurance. The treaty was made in London, whither the Victorian company had sent its manager to obtain reinsurance cover.

His Honour identified the question arising in the case as " whether any part of the moneys received by the appellant under the treaty is taxable in Victoria as profits earned in or derived in or from that State … "

69. Additionally to the fact that the appellant reinsured the risk carried by a Victorian insurer, there were circumstances which provided a connection between Victoria and the source of the profits in question. As stated by Latham CJ (59 CLR at 203):

The consideration for the English company undertaking this liability is constituted by monthly payments made by the Victorian company. These payments are calculated by taking two-thirds of the gross premiums in respect of the relevant risks and deducting therefrom an amount varying with the loss ratio from thirty-five per cent (when the loss ratio is relatively low) to twenty-seven and a half per cent (when the loss ratio is relatively high). Thus, the better the selection of risks by the Victorian company, the smaller the payment made by it to the English company. A further deduction is made of ten per cent on the profits of the Victorian company calculated in the manner set forth in the contract.

And (59 CLR at 203-204):

The contract provides that moneys payable to the English company shall be paid into its account at the Bank of New South Wales in Melbourne. If the English company had to make any payment on account of losses to the Victorian company which could not be satisfied by deductions from the moneys payable to the credit of the English company, it would be necessary under the terms of the contract for these payments to be made by the English company to the Victorian company in Victoria.

70. Notwithstanding those indications, in five separate concurring judgments, the High Court held that the profits of the reinsurer were not to any extent " derived in or from Victoria " . The essence of their Honours ' reasoning was that, given that the Victorian company was not the partner or agent of the reinsurer, and that the contract was made in England, the profits were derived wholly from the business of reinsurance carried on outside Victoria. The Chief Justice said (59 CLR at 205) that it was " necessary to ascertain what the taxpayer does in order to obtain the profits in question " and (59 CLR at 206) that the profits in question were the profits derived from the contract of reinsurance, " not … from the insurance operations of the Victorian company " . In determining the source of the profits of a reinsurer, Rich J expressed the opinion (59 CLR at 209) that " the place where the event or events may or do happen upon which the company ' s liability depends [ cannot ] matter at all. " Starke J said (59 CLR at 211-212):

In my opinion in this case the real connection of the business operations is with England. It is where the substance and essence of the operations were transacted. They had no connection with Victoria except that the risks reinsured existed in Victoria. But the making of reinsurance in England in respect of risks arising in Victoria is not a business operation carried on in Victoria … .

The reasons of McTiernan J were to like effect (see 59 CLR at 218).

71. So were the reasons of Dixon J. Those reasons, however, also looked at the question from a slightly different perspective from that used by the other members of the court. His Honour highlighted the circumstances that the " profits " of a reinsurance company would arise from the whole of its transactions, and that the Victorian treaty was but one element of the business of the English company. His Honour said (59 CLR at 214):

[ T ] he real nature of the profit or income arising from reinsurance business … does not consist in the net receipts from a particular treaty, but in a favourable balance arising from the business as an interconnected whole; and this may, perhaps, be said to depend as much upon the retention as upon the acceptance of risks.

And (59 CLR at 217):

That the reinsurer takes no share in the net profits or income of the reassured admits, I think, of no doubt. The amount of the profits of the reassured is dependent upon a multitude of elements of which the reinsurance treaty is only one. Too high an expenditure on efforts to obtain new business might, for instance, conceivably leave it with a loss although the reinsurer ' s net receipts under the treaty were left undiminished, or were actually increased.

72. Before the Tribunal in the present case, both sides sought to derive comfort from Tariff Reinsurances . The respondent relied upon it as being analogous. The Commissioner submitted, in effect, that the circumstances of the English company stood as a contrast to those of the respondent which, he submitted, were more analogous to those of the Victorian motor insurer. Rejecting the Commissioner ' s submission, the Tribunal took as its guiding principle what Latham CJ had said (59 CLR at 205):

In order to determine whether the profits are derived in or from Victoria it is necessary to ascertain what the taxpayer does in order to obtain the profits in question -
Premier Automatic Ticket Issuers Ltd v Federal Commissioner of Taxation, 50 CLR 268 , per Dixon, J, at p 294 … .

The Tribunal said that Tariff Reinsurances emphasised that regard had to be had to " the substance of the transaction, ie what did [ the respondent ] do to receive the income " ? It was this approach which informed the conclusion which the Tribunal reached, as follows:

The source of [ the respondent ' s ] income was the insurance contracts with the various member companies. I am satisfied that the contracts were made in Vanuatu. And I have already concluded that those contracts were performed in Vanuatu, not Australia. I am then satisfied that [ the respondent ' s ] income in the years in issue was not derived from sources in Australia.

It is this conclusion which, according to the Commissioner, was infected by an error which gives rise to a question of law within the meaning of s 44 of the AAT Act.

73. That brings me to the Commissioner ' s appeal under s 44 of the AAT Act. As filed, the Commissioner ' s Notice of Appeal set out the following questions of law:

However, the written outline filed on behalf of the Commissioner proposed that there was " at the heart of this appeal " but one question of law, namely:

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

On the opening of oral submissions for the Commissioner, counsel made it clear that they relied on that question only. Although the Notice of Appeal was not formally amended, the appeal thereafter proceeded by reference to that question. Whether any of the questions set out in the Notice of Appeal as filed was one of law, therefore, is not presently relevant.

74. To the extent that this question identifies what the contentious question of law actually is - ie as distinct from merely paraphrasing the matter which the Tribunal had to determine, as introduced by the word " whether " - one gets the impression that the error said to have been made by the Tribunal was rooted in the construction of s 6-5(3) of the 1997 Act. But it was clear both from the grounds set out in the Notice of Appeal and from the submissions as presented in court that no such error was alleged by the Commissioner. Rather, as senior counsel for the Commissioner made clear, the error said to have been made by the Tribunal related to the " application " of s 6-5(3).

75. The grounds set out in the Commissioner ' s Notice of Appeal were as follows:

76. Was the Commissioner ' s appeal, constituted as indicated above, on a question of law within the meaning of s 44 of the AAT Act? In
Thorpe Nominees Pty Ltd v Commissioner of Taxation (1988) 88 ATC 4886 , the Full Court (Lockhart and Burchett JJ, Sheppard J dissenting on this point) (sitting on appeal from the Supreme Court of New South Wales) held that the determination of the source of the income of a trust estate to which no beneficiary was presently entitled " involve [ d ] a question of law " within the meaning of s 196(1) of the Income Tax Assessment Act 1936 (Cth) ( " the 1936 Act " ). Justice Lockhart said (88 ATC at 4887-4888):

Whether the facts as found by the Board of Review led to the conclusion that there was income which formed part of the assessable income of Thorpe Nominees as trustee of the Duncan trust for the purposes of sec. 99 can be determined only by applying the relevant legal tests as to the determination of the source of income for this purpose. Hence, whether the moneys in the hands of Thorpe Nominees as trustee fell within those sections is a question of law:
Lombardo v F.C. of T 79 ATC 4542 per Bowen C.J. at pp 4543-4546, per Franki J. at p. 4547 and per Toohey J. at pp 4549-4550. Moreover, questions were raised in the notice of appeal from the Board of Review ' s decision to the Supreme Court as to whether the Board of Review had applied correct principles of law in reaching its ultimate conclusions of fact. The issues raised in the appeal to the Supreme Court in turn involved the questions whether the Board took into account extraneous considerations or failed to take into account relevant considerations. In my opinion those grounds of appeal raised questions of law. I am therefore satisfied that the appeal from the decision of the Board of Review to the Supreme Court involved questions of law.

Justice Burchett agreed with Lockhart J. In the present case, counsel for the Commissioner submitted that Thorpe Nominees was authority for the proposition that the application of " the relevant legal tests " to the facts of a case in order to determine the source of income involved a question of law, a proposition that had never been brought into question.

77. Thorpe Nominees has been mentioned twice in subsequent judgments of the court.
Grealy v Commissioner of Taxation (1989) 24 FCR 405 was not a source case, but Thorpe Nominees was one of three judgments mentioned by the Full Court as exemplifying " the obscurity of the distinction " presented by the issue whether a question as to the effect of a statute was one of law (24 FCR at 407). In
Kumagai Gumi Co Ltd v Commissioner of Taxation (1999) 90 FCR 274 , although Hill J did not need to determine the point, his Honour relied upon Thorpe Nominees to reject the submission then put by the Commissioner that " residence and source were ultimately matters of fact " . His Honour continued (90 FCR at 284):

The submission ignores the decision of a Full Court of this Court dealing with source:
Thorpe Nominees Pty Ltd v Federal Commissioner of Taxation (1988) 88 ATC 4,886 . In that case, Lockhart J, with whose reasoning on this point Burchett J agreed (Sheppard J dissented, although not in the result), pointed out that questions of source can only be determined by applying the relevant legal tests, so that the issue whether, when the primary facts are found or, as here, are not in dispute, a particular section applies, involves a question of law:
Lombardo v Commissioner of Taxation (Cth) (1979) 79 ATC 4,542 at 4,543-6 per Bowen CJ, at 4,547 per Franki J and at 4,549-4,550 per Toohey J; and see, generally, the discussion on the dichotomy between fact and law to be found in
Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 at 287-288, particularly the fifth proposition.

78. The issue in
Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 , referred to by Hill J, was whether the diesel fuel rebate was allowable in relation to fuel used by cartage contractors involved in the transportation and unloading of stock feed, on the basis that the fuel was being used " in primary production " . The case came to the court, and then to the Full Court, as an appeal on a question of law under s 44 of the AAT Act. The Full Court said (43 FCR at 287):

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

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

Their Honours added that, when a statute used words according to their ordinary meaning and it was reasonably open to hold that the facts as found fell within those words, the question whether they did so or not was one of fact.

79. The case which came ultimately to the Full Court in
Sharp Corporation of Australia Pty Ltd v Collector of Customs (1995) 59 FCR 6 involved the classification of goods under the Customs Tariff Act 1987 (Cth) by reference to their " essential character " . The court held that the identification of the essential character of goods was a matter of fact, not law. Notwithstanding that, their Honours dealt with the appeal on the merits (the original appeal from the Tribunal having been upheld by the primary Judge). The case is presently of interest because of what Hill J (in a separate concurring judgment) said about the fifth proposition in Pozzolanic (59 FCR at 16):

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

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

When in
Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 Neaves, French and Cooper JJ enunciate their fifth proposition in terms that the question whether facts fully found fall within the provisions of a statutory enactment properly construed is " generally " a question of law, the reason for the qualification lies in the fact that the fifth proposition is in truth the two separate and related propositions to which I have already referred.

The significance of his Honour ' s clarification of the fifth proposition, which neither side in the present case criticised, will become clear presently.

80. The issue in
Ergon Energy Corp Ltd v Commissioner of Taxation (2006) 153 FCR 551 also related to the diesel fuel rebate, this time the claim being that the fuel was purchased " for use … at residential premises to generate electricity for domestic purposes and at hospitals, nursing homes and aged persons homes " . The Full Court held (Sundberg and Kenny JJ, Gyles J dissenting) that the appeal from the Tribunal on that issue was on a question of law. The majority held (153 FCR at 564) that there was " strong authority for the proposition that, where the facts have been found and the only question is whether they fall within a statutory provision, the question is one of law " . Having considered the authorities, their Honours said (153 FCR at 564):

The authorities on these rebate provisions amply demonstrate that, as the primary judge held, the application of the words " purchases … for use by [ the purchaser ] " , " at residential premises " , " at a hospital … " and " at a home for aged persons " necessarily involves a selection process about a range of relationships. In the present case, even if the material before the AAT did reasonably admit of more than one conclusion as to whether or not the statutory criteria were satisfied, the question of whether the material did so admit was necessarily a question of law.

81. The issue in
Price Street Professional Centre Pty Ltd v Commissioner of Taxation (2007) 243 ALR 728 was whether certain losses made by the taxpayer were made in the conduct of a business for the purposes of the deductibility provisions of s 51 of the 1936 Act. The Tribunal had held not, and this conclusion had been upheld by a single Judge of the court. The Full Court itself raised, seemingly for the first time, whether the appeal from the Tribunal had been competent under s 44 of the AAT Act. It was held that it had not been (although Edmonds and Greenwood JJ proceeded to decide the case, adversely to the taxpayer, on the merits). Based on submissions made on behalf of the taxpayer on the appeal, Edmonds J identified what was said to be the error of law involved (243 ALR at 738): " … the tribunal should have found that the facts before it constituted business activities under the revenue provisions of the 1936 Act " . His Honour said (243 ALR at 738) that the alleged error was " identified as being the tribunal ' s failure to characterise the facts found as constituting a business " . In holding that the appeal from the Tribunal in respect of this alleged error was not on a question of law, his Honour referred (243 ALR at 739) to what was said in
Commissioner of Taxation v Brixius (1987) 16 FCR 359 at 365:

In setting out the grounds in his notice of appeal the Commissioner did not point to any error of law, with one possible exception hereinafter referred to, but contended rather that the Tribunal came as a matter of law to the wrong conclusion or incorrectly applied the law to the facts.

The difficulty which confronts the Commissioner is that, once having identified the correct principles of law (a matter which was not challenged) the question for determination by the Tribunal is, in a matter of this nature, essentially a question of fact, or of fact and degree.

As a matter of law the question for determination on the first limb of s 51(1) is whether the outgoing has the necessary relation to the gaining of assessable income, that is, has it the essential character of an outgoing incurred in gaining such income? The Tribunal correctly identified this principle and the Commissioner did not contend to the contrary. Its task was then to apply the law to the facts as found. The application of s 51(1) in this manner is in the varied circumstances of each case very much a matter of fact and degree.

82. The third member of the court in Price Street , Kenny J, would have dismissed the appeal without consideration of the merits for the reason that the earlier appeal from the Tribunal was not on a question of law. Her Honour allowed for the fact that, depending on the nature of the case, some appeals involving s 51 issues may give rise to questions of law, but the instant appeal did not. Her Honour gave some attention to the reasons of Hill J in Sharp . To the two propositions which his Honour had perceived as embedded within the fifth proposition in Pozzolanic , Kenny J proposed the addition of a third (243 ALR at 735): " whether the facts reasonably admit of more than one conclusion as to whether or not they fall within the language of the statute is a question of law " . As to the outcome of Price Street itself, her Honour said (243 ALR at 736-737):

The argument for Price Street on the applicability of s 51(1) made it very clear that Price Street was effectively challenging the factual findings of the tribunal. Counsel for Price Street asked us, in effect, to remake the tribunal ' s findings in light of the evidence before the tribunal (all of which was documentary). I would eschew this task as one not open to the court, because of the limited jurisdiction conferred by s 44(1) of the AAT Act. For the reasons already given, it is not open to the court to second-guess the tribunal ' s factual findings. Much of the argument for Price Street also underlined the fact that the field in which it invited us to tread was " very much a matter of fact and degree " in the sense used in Brixius : see Brixius at FCR 365. This part of the argument invited us to take a different view from the tribunal as to which " side of the line " the purposive facts fell. As Hill J said [ in Sharp ] this is a matter of fact.

83. The present case is potentially covered by the fifth proposition in Pozzolanic , in that the primary facts were uncontroversial and the task of the Tribunal was to determine whether those facts fell within the terms of s 6-5(3)(a) of the 1997 Act. Guided by the elaborations of Hill J in Sharp and Kenny J in Price Street , I would set out the following as correctly stating the position arising under that proposition:

I recognise that the difference between (i) and (ii) in point (b) above may be terminological only, but (ii) reflects what was added by Kenny J in Price Street and is, in my respectful view, a useful guide, even if it does amount to little more than expressing (i) in a different way.

84. Returning to the present case, it will be seen that the question of law as formulated on behalf of the Commissioner does not conform closely to point (b) (in either of its aspects) as set out in the previous paragraph. However, it does appear to be intended to invoke the fifth proposition in Pozzolanic and, albeit not without some hesitation, I would be prepared to treat the question as being, in substance, whether the facts found by the Tribunal in the present case necessarily fell within the terms of s 6-5(3)(a) of the 1997 Act.

85. Section 44(2A)(b) of the AAT Act requires that an appeal from the Tribunal on a question of law be instituted " in such manner as is prescribed by rules of court made under the Federal Court of Australia Act 1976 " . The relevant provision of the Federal Court Rules 2011 is r 33.12(2)(b), which requires the Notice of Appeal to state " the precise question or questions of law to be raised on the appeal " , and " briefly but specifically, the grounds relied on in support of the relief or variation sought " . At the time which was relevant to the facts which came before the Full Court in
Birdseye v Australian Securities and Investments Commission (2003) 76 ALD 321 , the relevant provision of the rules of court then in force required the notice of appeal to state " the question or questions of law to be raised on the appeal " , and " briefly, but specifically, the grounds relied upon in support of the order sought " . In that case, Branson and Stone JJ expressed their agreement (76 ALD at 324) with what had been said by Ryan J in
Australian Telecommunications Corporation v Lambroglou (1990) 12 AAR 515 at 524:

I do not regard it as legitimate to call in aid the grounds supplied in purported compliance with O 53, r 3(2)(d) to read down the questions stated as required by paragraph (b) to what are truly questions of law. Because the appeal under s 44 of the AAT Act is confined to a question of law it would be inappropriate for the Rules to specify as part of the contents of a notice of appeal " grounds " which would be appropriate if the appeal could be brought against findings of fact as well as against what are said to be errors of law; cp O 52, r 13(2)(b) which requires a notice of appeal of that wider kind to state " briefly, but specifically, the grounds relied upon in support of the appeal " . The distinction is recognized by O 53, r 3(2)(d) which requires the notice of appeal under the AAT Act to state only " the grounds relied upon in support of the order sought " . In the present case the order sought is that " the Decision of the Tribunal be set aside " . Grounds in support of that order would properly assume the resolution of the question of law in favour of the applicant and indicate in a summary way the reasons why that resolution requires the decision of the AAT to be set aside. Of necessity, properly drawn grounds of that kind could not elucidate the question of law. '

Relevantly to the present issue, there has never been any question as to the correctness of the approach taken in Birdseye .

86. I mention only two of the more recent Full Court authorities which make it clear that that approach is central to the jurisprudence which has arisen under s 44 of the AAT Act. In
Kowalski v Repatriation Commission [ 2011 ] FCAFC 43 at [ 16 ] , Logan (with whom Dowsett and Cowdroy JJ concurred in separate judgments) said:

Though termed an " appeal " by the AAT Act, an appeal to this court under s 44 of that Act invokes, in point of law, this Court ' s original jurisdiction. That jurisdiction is only invoked if the appeal is, indeed, on a question of law. That is because the question of law is the very subject matter of such an appeal:
TNT Skypak International (Aust) Pty Ltd v FCT (1988) 82 ALR 175 at 178. The importance therefore of formulating what is truly a question of law in a notice by which it is sought to institute an appeal under s 44 was rightly highlighted some two decades ago by Ryan J in
Australian Telecommunications Corporation v Lambroglou (1990) 12 AAR 515 at 524. The requirement for that formulation is jurisdictional, not pedantry in relation to pleading. This requirement has been emphasised in a number of more recent judgments of the Full Court, notably
Birdseye v Australian Securities and Investments Commission (2003) 76 ALD 321 at 324-325;
Australian Securities and Investments Commission v Saxby Bridge Financial Planning Pty Ltd (2003) 133 FCR 290 at 300-302 and
Comcare v Etheridge (2006) 149 FCR 522 at 526-527.

In
Rana v Repatriation Commission (2011) 126 ALD 1 at 5 [ 11 ] , the Full Court said:

The right of appeal conferred by s 44 of the AAT Act is a right to appeal to this court " on a question of law " . The question of law is, as was emphasised by Gummow J when a judge of this court, the very subject matter of the appeal:
TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation (1988) 82 ALR 175 at 178. Recognising this, Ryan J in
Australian Telecommunications Corporation v Lambroglou (1990) 12 AAR 515 at 524 highlighted the importance of stating a question of law in the notice of appeal. This importance has been repeatedly emphasised in recent years by the Full Court in cases such as
Birdseye v Australian Securities and Investments Commission (2003) 76 ALD 321 … at [ 11 ] - [ 21 ] … ;
Australian Securities and Investments Commission v Saxby Bridge Financial Planning Pty Ltd (2003) 133 FCR 290 … at [ 124 ] - [ 125 ] and
Comcare v Etheridge (2006) 149 FCR 522 … at [ 11 ] - [ 16 ] . The need for a notice of appeal to specify a question of law is not just a matter of pleading. In the absence of a question of law there is no subject matter for the appeal and the court has no jurisdiction to entertain the proceeding.

87. This line of jurisprudence makes clear what is required in a notice of appeal by way of the identification of a question of law. But it also makes it clear, in my view, that, a question of law having been identified, it forms the subject matter of the proceeding which is before the court. An appellant cannot identify a question and then rely on grounds or advance arguments which do not fall within the area marked out by that question. What this means in the context of the present case is that the only question with which we can be concerned is whether facts found by the Tribunal necessarily fall within the terms of s 6-5(3)(a) of the 1997 Act. If they do, the case will be resolved in favour of the Commissioner. If they do not, we are not at liberty to proceed to decide the matter of source for ourselves, as though the present appeal were on fact as well as law.

88. Turning to that question, the starting point should be the judgment of the High Court in
Nathan v Federal Commissioner of Taxation (1918) 25 CLR 183 where, speaking of corresponding earlier legislation, the Court said (25 CLR at 189-190):

The Legislature in using the word ' source ' meant, not a legal concept, but something which a practical man would regard as a real source of income. Legal concepts must, of course, enter into the question when we have to consider to whom a given source belongs. But the ascertainment of the actual source of a given income is a practical, hard matter of fact.

In
Commissioner of Taxation of the Commonwealth of Australia v Mitchum (1965) 113 CLR 401 , Barwick CJ said (113 CLR at 407):

The conclusion as to the source of income for the purposes of the Act is a conclusion of fact. There is no statutory definition of ' source ' to be applied, the matter being judged as one of practical reality. In each case, the relative weight to be given to the various factors which can be taken into consideration is to be determined by the tribunal entitled to draw the ultimate conclusion as to source. In my opinion, there are no presumptions and no rules of law which require that that question be resolved in any particular sense.

In Thorpe Nominees , these and a number of other statements to like effect were discussed by Lockhart J and treated as representing the law. That was so notwithstanding his Honour ' s comment as to the opacity of the term " practical, hard matter of fact " , a term which, his Honour held (88 ATC at 4,893): " embodie [ d ] the notion that the question must be decided ' in accordance with the practical realities of the situation without giving undue weight to matters of form, and not by the application of absolute rules of law ' " , a formula which his Honour derived from the judgment of Gibbs J in
Esquire Nominees Limited v Federal Commissioner of Taxation (1973) 129 CLR 177 at 192.

89. These authorities make it difficult for the Commissioner to succeed in his submission that, as a matter of law, the only conclusion which the Tribunal could have reached in the present case was that the premium income of the respondent had an Australian source. However, in the present case the hard matters of fact have been found by the Tribunal. The circumstances which persuaded the Tribunal to find in favour of the respondent were that the contracts under which its entitlement to premiums arose were made in Vanuatu, and were performed there. That is to say, what the respondent did to earn its premiums, it did in Vanuatu. Save for one circumstance, that would make Tariff Reinsurances relevant and, as the Tribunal considered, dispositive of the question which arose before it.

90. That circumstance is the inclusion in s 6-5(3)(a) of indirect derivation. I do not think the Commissioner could succeed in the present case if the provision were concerned with direct derivation only. The actual payments which constituted the respondent ' s income were made in Vanuatu under a Vanuatu contract. It was that contract which provided the direct source of the payments. However - and this, as the Commissioner pointed out, was not a matter considered by the Tribunal - it must then be asked whether there was an indirect source of those payments, and if there was, whether that was an Australian source.

91. There appears to be little direct authority on the contribution which the adverb " indirectly " makes to the formula in s 6-5(3)(a) of the 1997 Act, notwithstanding that the provision has antecedents, in relevantly indistinguishable terms, which go back many years. The matter was touched on in Nathan (25 CLR at 188-189), in
Federal Commissioner of Taxation v W Angliss & Company Pty Ltd (1931) 46 CLR 417 at 441, and again by Gibbs J in Esquire Nominees (129 CLR at 193-194), but in no instance in any sense that threw light on the connotation of the extension implied by the adverb. Although not dealing with the matter specifically, Starke J determined
Federal Commissioner of Taxation v United Aircraft Corporation (1943) 68 CLR 525 in terms which suggested that even indirect derivation still had to be " from any business operations carried on by the appellant in Australia " (68 CLR at 529). The facts of that case did not, however, throw up the question of indirect derivation for consideration as such, and I would not regard his Honour ' s general observation as an authority binding us to give a particular construction to s 6-5(3)(a).

92. The Commissioner relied upon a number of judicial expositions of the connotation of the term " directly or indirectly " , none of which was given, however, in relation to legislation corresponding to the provision of present concern. They included the use of the term in the Police Ordinance 1927 (ACT) - " a member of the police force who … takes any bribe, either directly or indirectly " - (
Day v Rugala (1978) 20 ACTR 3 ), in the Trade Practices Act 1974 (Cth) - " a corporation shall not acquire, directly or indirectly, any shares in the capital, or any assets, of a body corporate " - (
Trade Practices Commission v Australian Iron & Steel Pty Ltd (1990) 22 FCR 305 ), and in the Duties Act 2000 (Vic) - " if … the transfer executed by the vendor transfers the whole or any part of the property … to another person … who has acquired, whether directly or indirectly, the whole or any part of the rights and interest under the agreement of the first purchaser in the property … . " - (
Commissioner of State Revenue v Politis [ 2004 ] ATC 4453 ). Because of the very different statutory settings involved, I do not find these expositions of much assistance in the present context.

93. Closer to the mark were the Commissioner ' s references to the jurisprudence which arose under s 26(e) of the 1936 Act, which included in the assessable income of a taxpayer " the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him … . " In
Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540 at 553-554, Dixon CJ and Williams J said of this provision:

It is hardly necessary to say that the words " directly or indirectly " extend the operation of the words " in relation … to " . In spite of their adverbial form they mean that a direct relation or an indirect relation to the employment or services shall suffice. A direct relation may be regarded as one where the employment is the proximate cause of the payment, an indirect relation as one where the employment is a cause less proximate, or, indeed, only one contributory cause.

In
Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47 at 54, Fullagar J said of s 26(e):

The words " directly or indirectly " are doubtless intended to cast the net very wide, but it is clear that there must be a real relation between the receipt and an " employment " or " services " .

Section 26(e) was before the High Court again in
Smith v Federal Commissioner of Taxation (1987) 164 CLR 513 . Toohey J, with whom Wilson J agreed, said (164 CLR at 530):

There can be no doubt that, in formulating s. 26(e), the legislature chose words of wide import - " in respect of " , " for or in relation to " , " directly or indirectly " . It remains true however that, notwithstanding the breadth of the language used, there must be a connexion between the benefit received and the employment of the taxpayer or services rendered by him.

The notion of " source " in s 6-5(3)(a) is a relational one, and these indications of the sense of the word " indirectly " in s 26(e) are of some assistance in resolving the issue which arises in the present case.

94. Turning to the facts as established before, or found by, the Tribunal, the present was not the conventional case in which an Australian company takes out an insurance policy with a foreign company. At one level, it was a case of that kind, but it was not a conventional, arms-length, contract into which the No 2 Fund company entered with the respondent. Because of the nature of the question arising under s 6-5(3)(a), we are especially concerned with what the contract said about premiums. Of relevance were the provisions that -

From these provisions the conclusion is irresistible that the respondent ' s entitlement to premium income, and the amount of that income, were tied to the circumstances of the members of the No 2 Fund themselves. To this might be added the Tribunal ' s finding - accepting in this respect the submission of the Commissioner - that the " original source " of the premiums received by the respondent was the payments made by members of the various funds in Australia.

95. There is also the nature of the relationship between the No 2 Fund company and the members of the No 2 Fund to be considered. There was, it seems, an issue before the Tribunal as to whether that relationship was one of insurer and insureds. In my opinion, this issue did not, and does not, need to be resolved, because, on any view, whatever else it was, the relationship was one of trust. The instrument under which the No 2 Fund was constituted was a " Trust Deed " , the fund was established by a settlement, and the No 2 Fund company, described as the trustee, was obliged by the deed to " stand possessed of the Trust Fund and the income thereof upon trust for the Members upon the trusts and with and subject to the powers and provisions " set out in the deed. In the circumstances, it would have amounted to a breach of trust for the No 2 Fund company to have used the contributions made by the members other than in accordance with the provisions of the deed. Although the company had the usual powers of investment etc, an important requirement was that a group life policy of insurance should be taken out. The funds used to pay premiums to the respondent, which constituted its income, were, therefore, trust funds in the hands of the No 2 Fund company. The relevant beneficiaries, before their respective deaths, were the members of the fund.

96. Upon the death of a member of the No 2 Fund, any payment received by the No 2 Fund company from the respondent under the group life policy had to be held in trust for the late member ' s next of kin. Thus, to the extent that it is necessary to consider what the respondent did to obtain its income (as the Tribunal thought in the present case) it must be held that it paid a sum to a trustee to be held in trust under an Australian trust deed. It is true that there was no requirement for the deceased member to have been an Australian resident at any relevant time, but the Australian connection with the performance of the respondent ' s obligations under the insurance contract was, at the general level, a conspicuous one.

97. Before the Full Court, it was a significant part of the Commissioner ' s case that the members of the funds (or more realistically, given the nature of the benefits contemplated under the contract, their next of kin) would have standing to enforce the respondent ' s obligations to the No 2 Fund company in accordance with the principle in
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 , as subsequently applied - one might say developed - in
Cigna Insurance Asia Pacific Ltd v Packer (2000) 23 WAR 159 at 166 [ 23 ] and
Hannover Life Re of Australasia Limited v Sayseng [ 2005 ] NSWCA 214 at [ 66 ] . While I can appreciate the sense of this submission on the part of the Commissioner, I would be reluctant to rule on the question whether a stranger to the present case would or would not have a cause of action in circumstances which have not arisen, particularly since the contract in question was made in Vanuatu, and the court has no evidence as to whether the law of that place, if it were the law to be applied to an action by a member of the No 2 Fund against the respondent, would recognise the Trident principle. As it happens, I take the view that the Trident principle makes no contribution to the resolution of the question whether the facts found by the Tribunal in the present case necessarily fell within the terms of s 6-5(3)(a) of the 1997 Act. That question is concerned with the source of the respondent ' s income rather than with the means by which, or with the identity of the person at whose suit, the respondent ' s obligation to pay benefits might be enforced.

98. An associated, and alternative, argument advanced on behalf of the Commissioner was that the No 2 Fund company held the respondent ' s promise to make payments under the insurance contract on trust for the members of the No 2 Fund. This was said to align with the basis upon which Deane J would have determined the appeal in Trident , and with some observations made in the case by other members of the court. However, I would be reluctant to make a finding along those lines in the absence of the putative trustee. Additionally, I could foresee that the trust contemplated might not be as simple as that which presumptively arose in Trident , because a particular member, alive at the time when the respondent received the premiums by reference to which it was assessed, would not be so at the time when the condition fell in giving rise to the respondent ' s obligation to make good on its promise. But, however these complications may be, I do not think that this alternative argument has the potential to advance the Commissioner ' s case on source any further than the point reached with respect to the application of the Trident principle as such. To the extent that the existence of a trust is relevant, I consider that there is neither reason nor justification for going beyond the relevant terms of the trust deed itself, to which I have adverted above.

99. The present is not an easy question, but, it being a question of law, there is only one correct answer. On any view, the reference in s 6-5(3)(a) of the 1997 Act to an indirect derivation is one of extension. The direct source of the respondent ' s income was the premiums to which it was entitled under the insurance contract. But it would be quite artificial to hold, as the Tribunal seemingly did, that the inquiry ended there. There was an undeniable, though indirect, relationship between the respondent ' s entitlement to, and the amount of, those premiums, on the one hand, and the circumstances of, and the contributions made by, the members of the No 2 Fund, on the other hand. Particularly in the light of the factors to which I have referred in para [ 44 ] above, I take the view that the income constituted by those premiums was indirectly derived from an Australian source. Further, I think that that is the only view of the matter reasonably open on the evidence. I have come to the conclusion that the facts of the present case necessarily fitted the terms of s 6-5(3)(a).

100. For the above reasons, I would allow the appeal with costs, and order that the respondent ' s application for review to the Tribunal be dismissed.

 

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