Independent Order of Odd Fellows v. Commissioner of Stamps (S.A.).

Judges:
King CJ
Cox J
Olsson J

Court:
Supreme Court of South Australia (Full Court)

Judgment date: Judgment handed down 1 May 1985.

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King C.J.

The appellant made application dated 2 March 1983 to the Commissioner of Stamps for a licence pursuant to sec. 33 of the Stamp Duties Act, 1983 as amended. The Commissioner assessed the duty payable in respect of the annual licence, which was issuable on 1 January 1983, at the sum of $35,085. The appellant appealed to this Court pursuant to sec. 24 of the Act. A case was stated and signed by the Commissioner pursuant to sec. 24(4). The questions for the determination of this Court are:

• 1. whether the amount of duty payable on the licence is the amount determined by the Commissioner; and
• 2. if not, what amount of duty is payable on the licence?

The appellant is a friendly society and a body corporate. The business with respect to which the licence was required was the conduct by the appellant of what was known as the ``Flexible Assurance Fund''. The fund was established pursuant to r. 365 of the Constitution and Rules

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and Regulations of the appellant and was based upon the concept of single contribution assurance. A certificate of membership was issued to each contributor in consequence of a signed application for membership made on a standard form. The legal effect of these documents, in my opinion, is to constitute a contract between the appellant and the member, the terms of which are to be found in the certificate of membership including the folder in which it is issued and the relevant rules of the appellant. The essence of the contract is that in consideration of the contribution paid by the member, the appellant agrees to pay the benefits stipulated in the certificate and the rules.

The contribution to be made by the member was to be in the form of a single, specified lump sum. There was an initial administration charge not to exceed 5% of the contribution. In fact it was 4% during the relevant year. The members' contributions and the income derived from the investment of these contributions constitute the fund. The Board of the appellant is empowered to apply up to 4% of the annual investment income to ``the management fund''. The Board is to declare bonuses annually to the extent that they can be supported by the fund and the bonuses are to be allotted to members on ``a pro rata basis on the daily balance since bonuses were last allotted''.

The benefits payable by the appellant under the contract are as follows:

• 1. At the end of the 10 year period of membership, payment of the total contributions and bonuses allotted with an alternative to invest for a further period.
• 2. Upon death prior to the expiration of the period, refund of contributions and payment of bonuses allotted to the date of death ``provided that the benefit shall not be less than the contribution paid by the member and remaining in the Fund plus the initial administration charges '' (emphasis mine).
• 3. Provisions for withdrawal with pro rata benefits prior to the expiration of the 10 year term.

The contract between the appellant and the member is a contract of assurance within the accepted concept. A licence pursuant to sec. 33 was therefore required. The Commissioner assessed stamp duty in accordance with the Second Schedule to the Act on the basis of $1.50 for each $100 of the amount shown on the application of the appellant for the annual licence as being received by it as gross premiums for life assurance. The appellant claims to be entitled to an exemption from duty in respect of the whole of those premiums pursuant to the third exemption in the Second Schedule which exempts from duty ``Any portion of a premium received or charged under any life insurance policy, being an amount that is specified in, or directly ascertainable from, the policy and declared therein to be for investment purposes and is not for, or in respect of, any insurance risk''.

The Commissioner does not dispute that the contract is one of life insurance within the meaning of the exemption and I think that proposition may be accepted. See Halsbury's Laws of England 4th ed. vol. 25 from p. 586; Law of Life Insurance in Australia (4th ed.) P.C. Wickens pp. 12-13;
The National Mutual Life Association of Australasia Ltd. v. F.C. of T. (1959) 102 C.L.R. 29 at pp. 42-46 . That being so, the contributions of members of the fund are undoubtedly premiums received under a life insurance policy. The policy is the document or documents which contain the terms of the contract of assurance. Section 32 provides that ```policy' means and includes as well any policy or any investment in the nature of a policy, an open policy, an insurance cover, or any instrument in any manner concerning any assurance or insurance''. The policy includes, in my opinion, the certificate of membership together with the folder in which it is issued and the relevant rules of the appellant.

The language of the exemption makes a distinction in relation to a premium between the purpose of investment and the purpose of payment for cover against an insurance risk. In order to qualify for the exemption the premium or some portion of it must be for the former purpose and not for the latter and that portion must be directly ascertainable from the policy itself. Moreover the policy must declare that the premium or the relevant part of it is for the former purpose only. The benefits under the policy which is the subject of this appeal are partly in the nature of the product of investment and partly in the nature of cover against an insurance risk. In so far as the benefits represent the member's contribution and his prorata share of the income generated by investment of the contributions of the members,

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they are the product of investment. In so far, however, as the benefits consist of payment in case of death before the pro rata bonus equals the initial management charge, of an amount in excess of the contribution plus pro rata bonus, they are of the nature of indemnity against an insurance risk namely the risk of death occurring before the investment income is sufficient to equal, on a pro rata basis, the amount of the initial management charge. The latter benefit, no doubt, is but a small portion of the former benefit but it exists and cannot be ignored. It follows that the premium is the consideration for benefits which are partly of an investment nature and partly in the nature of indemnity against an insurance risk.

The policy does not declare that the premium or any portion of it is for investment purposes only. The folder in which the certificate of membership is issued states:

``A measure of Life Insurance cover is included to assure that in the event of death in the first year the benefit will not be less than the contribution paid and remaining in the Fund (including the initial Management Fee).''

It does not, however, specify what part of the premium is attributable to the cover against the insurance risk or what part remains for investment purposes.

It appears from the case stated that in practice the whole of the members' net contributions were invested and that the appellant's Board limited the bonus rate to an extent which permitted a small part of the investment income, calculated on an actuarial basis, to be set aside for the purpose of making up the difference, in case of early death, between the contribution plus pro rata bonus and the gross contribution which had to be repaid. It was argued that this practice demonstrated that the whole of the premium was for investment purposes. Counsel pointed out that r. 365 provides that the benefit is to include the whole of the amount contributed together with bonuses and the Certificate Folder states:

``The amount of contribution will be credited in the Society's books for the benefit of the member. The amount so credited, plus any bonus distributions declared in accordance with Clause 2, will constitute the Member's Investment Account in respect of this Benefit.''

This, counsel argued, amounted to a declaration that the whole of the premium was for investment purposes and, by a process of exclusion, not for or in respect of an insurance risk.

I think however that the argument from the practice of providing for the shortfall on early death out of the investment income, involves a fallacy. It seems to me that the statement that a premium is for investment purposes only predicates of that premium that it will be invested and that the capital so invested and the income generated by it will accrue, subject to proper charges and expenses, for the benefit of the policyholder. This predicate may be satisfied, no doubt, by the pooling of premiums in a fund and the pooling of the income generated by the fund for the purpose of a pro rata allocation. It is not satisfied, however, if some part of the investment income does not accrue to the policyholders on a pro rata basis but is used to cover the risk of some of them becoming entitled by early death to payments in excess of the pro rata investment yield. To speak, in those circumstances, of the cover being provided for out of investment income, is to obscure the truth that the investment yield of some part of the premiums has been used for the purpose of providing against an insurance risk. When that is understood, it becomes clear, in my opinion, that some part of the premium is used, in reality though not in form, not for investment purposes in the relevant sense of that expression, but in order to cover the insurance risk.

The only consideration for the benefits under the policy is the premium. If the benefits include, as they do, cover against an insurance risk, there is simply no escape from the conclusion that some part of the premium is for or in respect of that risk. It may seem harsh that duty is to be calculated upon the full amount of premiums received because there is a small degree of cover against an insurance risk. But if the exemption is to be availed of, its conditions must be complied with. The proportion of the premium attributable to investment purposes must be specified in or be directly ascertainable from the policy and the policy must disclose that the investment portion is for investment purposes only. Such premium or portion thereof can not be for, or in respect of, any

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insurance risk. In my opinion the Commissioner's assessment was correct. I would answer the first question ``YES''. The second question does not require an answer.