EMPLOYERS' MUTUAL INDEMNITY ASSOCIATION LIMITED v FC of T

Members:
Sheppard J
Burchett J
Gummow J

Tribunal:
Full Federal Court

Decision date: Judgment handed down 2 October 1991

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Sheppard J

The case for the appellant in this matter is based upon a dictum of this Court in
The Chamber of Manufactures Insurance Limited v. F.C. of T. 84 ATC 4315 ; (1984) 2 FCR 455 . The Court said (ATC 4318-4319; FCR 459-460):

``It is important to remember also that the view, even as expressed, does not deny that in some cases profits and gains on the realisation of an investment of the funds of an insurance company should not be taken into account in the determination of the profits and gains of the business. Thus, for example, funds of an insurance company invested in the construction of a building to be used as a head office by that company will probably not attract income tax if the head office is subsequently sold for a profit.

Even in a case such as the present, the position might have been different had the taxpayer maintained two quite separate funds - the first acknowledged as a reserve fund and demonstrably sufficient to meet claims and expenses in all reasonably foreseeable contingencies - the second categorised and dealt with as an investment fund. Whether profits from the sale of investments in the second fund were taxable would depend upon factors unrelated to insurance such as those referred to in the
London Australia Investment Co. case [London Australia Investment Co. Limited v. F.C. of T. 77 ATC 4398 ; (1977) 138 CLR 106 ] .''

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ATC 4852

The usual position which prevails in relation to taxpayers which carry on the business either of banking or of insurance is well settled. In
Colonial Mutual Life Assurance Society Limited v. F.C. of T. (1946) 8 ATD 137 ; (1946) 73 CLR 604 the Court said (ATD 145; CLR 619-620) :

``... an insurance company, whether a mutual insurance company or not, is undoubtedly carrying on an insurance business and the investment of its funds is as much a part of that business as the collection of the premiums. The purpose of investing the funds of the appellant is to obtain the most effective yield of income. The diminution or increase in the capital value of the investment between the date of purchase and that of maturity, and the apportionment and deduction or addition over the intervening period of that diminution from or increase to the interest actually payable on the investment is a material ingredient in the ascertainment of this yield.''

That approach was followed in the High Court by Webb J. in
Producers' & Citizens' Co-operative Assurance Company Limited v. F.C. of T. (1956) 11 ATD 86, 89-90 ; (1956) 95 CLR 26, 32-34 and by Menzies J. in
Australasian Catholic Assurance Company Limited v. F.C. of T. (1959) 11 ATD 577, 578-581 ; (1959) 100 CLR 502, 505-509 . Those authorities were applied by the Full Court of this Court in The Chamber of Manufactures Insurance case . The words in the passage relied upon were said in the course of the general discussion of the applicable principles which appears in that case.

An important part of the background to the case consists of the relevant provisions of the Insurance Act 1973 under which the appellant is authorised to carry on insurance business. Section 29 of the Insurance Act provides that an authority granted to a body corporate under Part III of the Act, which is entitled ``Authority to Carry On Insurance Business'', is subject to a number of conditions. One of these conditions is that the value of the company's assets shall at all times exceed the amount of its liabilities by not less than the greater of $1 million or 20 per cent of the premium income of the company during its last financial year. There are other provisions of s. 29 which are relevant in this connection but it is unnecessary to refer to the detail of them.

The way in which the moneys and other assets of the appellant were accounted for is described in the judgment of Gummow J., which I have had the opportunity of reading, and in the judgment of the learned primary Judge. In my opinion the critical matter to be taken into account in resolving the question at issue is the relevant provisions of the Articles of Association of the company. The account I am about to give is largely taken from the judgment of the primary Judge. Originally, membership of the company comprised employers who were members of the Master Bakers' Association and employers who were members of the Plumbers' Association. The Articles originally provided for a division of membership into three sections referred to as the ``A'', ``B'' and ``C'' sections. Membership of the B and C sections was restricted to members of the Master Bakers' Association and the Master Carriers' Association respectively. Other members were admitted to the A section. In 1945 the Articles were amended to merge the B section into the A section. In the relevant years of income there were only two sections, namely, the A section and the C section.

The purpose of dividing the members into sections was to enable premium rates to be set at appropriate levels for the different sections having regard to the industry in which the members were engaged and to enable surpluses arising as a result of insurance against the risks associated with that industry to be related exclusively to participating members.

The Articles of Association provided for the business of the company to be managed in the two sections by committees elected by the members of each section. Each committee was empowered to determine the different classes of insurance to be undertaken by the particular section and to fix the basis and rate of premium which was to be applicable. The general affairs of each section were to be managed by that section's committee. There were to be three directors of the company, two being the chairmen for the time being of the A and C committees and the third elected at the annual general meeting each year.

Such proportion of the profits of each section as its committee determined was to be divided

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ATC 4853

amongst the persons who were members of that section. The committee of each section was to receive, control and deal with all income and receipts arising from the business of the section of which it was the committee. Each section was to maintain a separate bank account under the control of the relevant committee. Additionally, the company was authorised to operate a third bank account or accounts which accounts were under the control of the directors.

Article 98 provided that all claims and the expenses of management of each section should be paid in the first place out of the current year's income and receipts of such section. Any deficiency was to be made good out of a reserve account of the section in respect of which such deficiency occurred.

Article 102 provided that all moneys paid into or standing in the general bank accounts might be drawn out and invested in such manner and upon such securities as the directors might determine. The moneys received by such investments together with the amounts standing to the credit of such general bank accounts were to be called the ``General Fund of the Company''.

Article 104 provided that at the end of each year all moneys over and above such as were required to discharge the liabilities of the section at such time and which the committee of the section intended to distribute by way of rebates to members should be credited to the General Fund of the Company. In the event of additional moneys at any time being required in the General Fund in order that the company might have sufficient money to fulfill its legal obligations, the A and C committees were to pay into the General Fund such moneys as they should respectively be called on so to do by the directors in anticipation of what might be due to be paid over at the end of the then current year.

By Article 105 the Secretary of the company was to keep separate accounts, one for each section. Each account was to show the amount of money contributed and withdrawn to or from the General Fund by each section.

Articles 106, 107, 108 and 109 were as follows:

``106. Each section shall be entitled to a refund from time to time from the General Fund of such sum or sums of money as may be required to make up any deficiency as aforesaid but the total amount of such sum or sums so required as aforesaid from the General Fund shall not exceed the amount standing to the credit of such section's Reserve Account.

107. The Secretary shall debit against the Reserve Accounts of the respective sections the amount or amounts of such refunds as aforesaid.

108. The interest and income of the Company derived from its General Fund after debiting the general expenses of the Company not payable by the sections respectively shall immediately prior to the end of each year be paid to the credit of the Reserve Accounts of the respective sections in proportion to the respective credit balances in the Reserve Accounts of the sections at the commencement of such year.

109. The income taxes assessed against the Company shall be paid out of the General Fund and be debited to the Reserve Accounts of the A and C Sections Accounts respectively in proportion to the taxable income of each section.''

Article 106 makes it clear that the General Fund was intended to be available, and was indeed available, to make up any deficiency which might arise in either of the sections subject to the sum required not exceeding the amount standing to the credit of each section's reserve account.

The learned primary Judge analysed the evidence given on behalf of the company and the findings about it made by the Tribunal. I do not need to refer to the detail of this analysis. There is no issue about the general purport of it. It is sufficient to mention that the evidence established that it had been necessary to have recourse to the General Fund on only one occasion and then only for a comparatively small sum. Nevertheless the General Fund was part of the assets of the company which were taken into account for the purposes of compliance by the company with s. 29 of the Insurance Act.

In the submission of counsel for the company the General Fund ought not be treated as a fund utilised for the purpose of obtaining the most effective yield of income so that the diminution

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ATC 4854

or increase in the capital value of the investment between the date of purchase and that of maturity was not a material ingredient in the ascertainment of this yield; see the passage quoted above from the Colonial Mutual case. In counsel's submission the whole of the circumstances of the case and the evidence led on the company's behalf established that the General Fund was an investment fund and not a reserve fund. The section funds were reserve funds and were demonstrated to have been sufficient to meet claims and expenses in all reasonably foreseeable contingencies. The submission picks up the words used in part of the passage earlier quoted from the judgment in The Chamber of Manufactures Insurance case.

I have reached the conclusion that these submissions should be rejected. The General Fund is in fact available to meet claims. The fact that recourse to it is postponed by the Articles of Association is not to the point. That is a matter which is an aspect of the way in which the company is internally organised and managed. The fact is that assets in the General Fund are as available to meet the claims of outsiders as the assets of the reserve funds. Furthermore, the Articles do not contemplate that the General Fund will not be available. Rather the intention, as disclosed by Article 106, is that it be a fund of last resort albeit only up to the amount standing to the credit of the reserve account of each section. But if that reserve account were not sufficient to meet claims that were made on the company, the assets in the General Fund would need, nevertheless, to be made available. Any of the company's assets could be the subject of an execution by a judgment creditor if that ultimate course became necessary.

Reliance was placed by the company on the evidence that only very limited recourse on one occasion had been had to the General Fund. But it is not at all difficult to envisage circumstances in which there may arise, perhaps out of the one incident or one series of incidents, a mass of claims which would require the company to have some recourse, perhaps substantial recourse, to the General Fund. To my mind the evidence is not capable of establishing that the General Fund was not one which, foreseeably, would ever be reasonably likely to be required to meet claims.

These considerations establish that the facts and circumstances of this case do not take it out of the ordinary principles which the decisions of the High Court show usually apply in the case of insurance companies. I think one should be careful, when considering a dictum such as is relied upon in the present case, not to place such literal reliance upon it as to convert it into some kind of inflexible rule or principle which requires it itself to be construed as if it were the statute. I do not think that that was the purpose which the judges who propounded it had. I think there is something to be said for the view that it was rather said in order to emphasise the difficulties which insurance companies have in showing that investments held by them should be treated indistinguishably from investments held by companies engaged in different fields of activity.

In the result I would dismiss the appeal with costs. In the circumstances of the case I agree that it is appropriate to substitute an order dismissing the appeal to the Tribunal for that made by it rather than to remit the matter for further hearing. The appeal is on a question of law only and, in my opinion, the facts and circumstances of the case can lead to only one conclusion. I agree in the orders proposed by Gummow J.