Colonial Mutual Life Assurance Society Ltd v. Federal Commissioner of Taxation (17 July 1933)

49 CLR 171
1933 - 0717A - HCA

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(Judgment by: Starke J)

Between: Colonial Mutual Life Assurance Society Ltd
And: Federal Commissioner of Taxation

Court:

Judge:
Starke J

Subject References:
Taxation and revenue
Income tax
Deduction
Life insurance society
Expenditure in gaining premiums

Legislative References:
Income Tax Assessment Act 1922 (Cth) No 37 - s 20(5)

Hearing date: 26 June 1933; 17 July 1933
Judgment date: 17 July 1933

MELBOURNE

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Judgment by:
Starke J

These are appeals by the Colonial Mutual Life Assurance Society Ltd from a Board of Review confirming assessments for the financial years 1928-1929, 1929-1930, 1930-1931, based on the Society's accounting periods ending on the 31st days of December of 1927, 1928 and 1929 respectively.  

The principal business of the Society is life insurance. It has a large income derived from premiums in respect of life insurance, from considerations received in respect of annuities granted, from investments, and also from other sources. The liability of the Society to income tax is not in dispute, and the only question in issue on these appeals is whether the expenditure by the Society in respect of certain "welfare services" instituted by it in connection with its business, and in respect of "consulting officers" appointed by it, is, as the Commissioner contends, an expenditure exclusively incurred in gaining premium income, or is, as the Society contends, part of the expenditure incurred in the general management of the business of the company.  

Income tax is levied for each financial year upon the taxable income derived directly or indirectly by every resident from all sources, whether in Australia, or, since 1930, elsewhere (Act No. 50 of 1930, s. 4), but a taxpayer is entitled to deduct all losses and outgoings actually incurred in gaining or producing the assessable income, and in no case is a deduction allowed in respect of money not wholly and exclusively laid out or expended for the production of the assessable income (Income Tax Assessment Act 1922-1930, ss. 13, 23 and 25). But a special provision is made for ascertaining the taxable income of a company the principal business of which is life insurance. It is s. 20 (5) of the Income Tax Assessment Act 1922-1930, and it is upon this section that the question before me arises. (See Act No. 46 of 1928, s. 22 (2).) Section 20 (5) provides:

"For the purpose of ascertaining the taxable income of a company the principal business of which is life insurance there shall be excluded from the assessment the following amounts-

(a)

all premiums received in respect of policies of life insurance and all considerations received in respect of annuities granted and all income derived from any source whether in or outside Australia which, apart from the provisions of this sub-section, would not be included in the assessment, and all expenditure exclusively incurred in gaining those premiums or considerations or that income; and

(b)

the part of the expenditure incurred in the general management of the business of the company (but not including any expenditure exclusively incurred in gaining or producing the income included in the assessment) which bears to that expenditure the proportion which the sum of the premiums, considerations and income mentioned in paragraph (a) of this sub-section bears to the total income of the company derived from any source whether in or outside Australia."

 

As part of its "welfare service" the Society voluntarily provides a nursing service, which enables skilled nurses to visit assured persons in their own homes and render them assistance both in treatment and in advice; in addition, it issues a series of pamphlets upon matters relating to health and measures to be taken for the prevention and treatment of various complaints. The benefit of this service to the Society is twofold: it attracts clients to the Society; it certainly maintains premium income for the Society, and interest-earning power thereon, over longer periods than would otherwise be the case. The Society expended on this service, during 1927, PD4,048, during 1928, PD3,918, and during 1929, PD6,852. The expenditure in connection with consultant medical officers arises in this way: the Society retains medical men, who advise it generally upon matters relating to life insurance and in particular upon reports and statements made with respect to life risks offered, and whether such risks should be accepted, rejected or loaded, upon claims made against the Society under life policies, and upon information given in the pamphlets issued by the Society. The Society expended on consultant medical officers, during 1927, PD456, during 1928, PD482, and in 1929, PD922.  

It will be observed that s. 20 (5) refers to three classes of expenditure: the first, that exclusively incurred in gaining what I may shortly call premium income, the second, that exclusively incurred in gaining or producing the income included in the assessment, and the third, that part incurred in the general management of the business of the company but not including any expenditure incurred in gaining or producing the income included in the assessment. It recognizes that the expenditure of a company is not always exclusively incurred for the production of premium or assessable or non-assessable income, but may be undertaken for the general business purposes of the company, as, for instance, the class of expenditure often referred to as overhead expenses. But the classification of expenditure in s. 20 (5) is, I think, exhaustive: that which is not exclusively incurred in gaining premium income or assessable income is incurred in the general management of the business of the company. Again, the phrase "any expenditure exclusively incurred in gaining or producing the income included in the assessment" refers us to the provisions of s. 23 (1) (a) and s. 25 (e), which were dealt with by this Court in Herald and Weekly Times Ltd v Federal Commissioner of Taxation. ^[F1] Ward & Co v Commissioner of Taxes, ^[F2] makes it clear, I think, that it is not enough that the disbursement is made in the course of, or arises out of, or is connected with, or is made out of the profits of, the business. It must be exclusively laid out or expended for the production of the assessable income. But the Herald and Weekly Times Case ^[F3] establishes that expenditure repeatedly or recurrently involved in an enterprise or undertaken in order to gain assessable income cannot be excluded as a deduction simply because the obligation to make it is an unintended consequence which the taxpayer desired to avoid. A like construction must, I think, be given to the expression in s. 20 (5) (a) "all expenditure exclusively incurred in gaining those premiums or considerations or that income."  

Under the Income Tax Assessment Act 1922-1930, s. 51 (6), the Commissioner or a taxpayer may appeal to the High Court from any decision of the Board which, in the opinion of the High Court, involves a question of law. If some question of law be involved in the decision of the Board, the whole decision of the Board, and not merely the question of law, is open to review ( Ruhamah Property Co v Federal Commissioner of Taxation, ^[F4] at p. 151). The question whether the expenditure has been exclusively incurred in gaining premium income or has been incurred in the general management of the business of the company is undoubtedly a question of fact ( Smith v Incorporated Council of Law Reporting for England and Wales, ^[F5] at p. 684). But if in reaching that conclusion of fact the Board acted upon some principle of law, or acted without any evidence to support it, then a question of law is involved in the decision of the Board ( Smith v Incorporated Council of Law Reporting for England and Wales; ^[F6] Currie v Inland Revenue Commissioners, ^[F7] at pp. 339-343; Rees Roturbo Development Syndicate Ltd v Inland Revenue Commissioners, ^[F8] at pp. 517, 518; Ducker v Rees Roturbo Development Syndicate; ^[F9] American Thread Co v Joyce; ^[F10] Usher's Wiltshire Brewery Ltd v Bruce, ^[F11] at p. 465). The Board has not discussed or disclosed its view of the construction of the Act, but decided the question before it as a mere matter of fact. In my opinion, it is quite impossible to say whether the Board acted upon a right or a wrong construction of the Act, and the question of its construction is involved in these appeals. Again, the taxpayer insists that there is no evidence supporting the conclusion of the Board, and that the expenditure in question on these appeals was in truth and on the admitted facts incurred in the general management of the business of the company. Therefore, in my opinion, questions of law are involved in these appeals, and it is competent for this Court to deal with them.  

I have sufficiently dealt with the construction of the Act, and now proceed to consider the facts of the case in relation to that construction.

It is conceded on both sides, and rightly, I think, that the expenditure was not exclusively incurred in gaining or producing the income included in the assessment. The question is whether it was incurred in the general management of the business of the company, or exclusively incurred in gaining the premium income. In my opinion, the welfare service expenditure was exclusively incurred in gaining the premium income. It is an expenditure connected wholly with the life insurance side of the company's business, its object is to attract life insurance business to the company and consequent premium income, and to retain that income over longer periods of time. It is an expenditure undertaken to gain premium income, and the mere fact that it enures to some extent for other purposes does not alter its real character (Usher's Wiltshire Brewery Ltd v Bruce). ^[F12] In my opinion, too, the expenditure in connection with the consulting medical officers was exclusively incurred in gaining the premium income. It is also an expenditure wholly connected with the life insurance side of the company's business. The advice these officers give is an aid to the company in fixing its premium rates, generally and in particular cases, and the expenditure is incurred for that among other purposes. It is also an aid to the company in ascertaining its liability upon risks in respect of which it has received premiums. The expenditure has little, if anything, to do with the investment side of the company's business; such influence as it has upon the earning power of the company in the way of investments is an indirect consequence of the expenditure; it is not an expenditure undertaken for the general business purposes of the company.  

The appeals fail, in my opinion, and must be dismissed with costs.