Commissioner of Taxation of the C of A v ANZ Banking Group

[1994] HCATrans 27

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
              Melbourne        No M41 of 1994

B e t w e e n -

THE COMMISSIONER OF TAXATION
  OF THE COMMONWEALTH OF
  AUSTRALIA

Applicant

and

AUSTRALIA AND NEW ZEALAND
  BANKING GROUP LTD

Respondent

Application for special leave
  to appeal
MASON CJ
BRENNAN J
DAWSON J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 16 SEPTEMBER 1994, AT 9.57 AM

Copyright in the High Court of Australia

MR F.H. CALLAWAY, QC:   May it please the Court, I appear with my learned friend, MR G.T. PAGONE, for the applicant.  (instructed by the Australian Government Solicitor)

MR B.J. SULLIVAN:   May it please the Court, I appear for the respondent.  (instructed by Freehill, Hollingdale and Page)

MR CALLAWAY:   If the Court pleases, in our submission the decision below represents a mistaken reading of the authorities that leads to an odd result and has ramifications extending well beyond accident compensation.  When I refer to the authorities I refer, on the one hand, to the insurance cases, RACV and Commercial Union and, on the other hand, to Flood and Nilsen.  The oddness of the result can perhaps be illustrated best by the weekly payments.  The weekly payments may extend for a very long time.  They may, quite realistically, go for 10, 20 or 30 years if the employee is totally incapacitated, never returns to work and is a relatively young person, and they will continue until he or she reaches normal retirement age or 65, whichever is earlier.

The decision below enables the taxpayer to make an estimate of the whole of that series of payments and claim is, as a deduction, in the first year.  In our submission, that is exactly the kind of odd result that the majority of the Court was concerned to avoid in Coles Myer Finance v The Commissioner of Taxation.  Now, I am thinking not just the spreading over the bills and notes, but the example that the members of the Court, other than Justices Deane and McHugh gave of the 10-year bill, and the Court said how inappropriate it would be if one could claim the whole outgoing in the first year.

MASON CJ:   But, what is the question of principle that that raises?

MR CALLAWAY:   The question of principle is this, Your Honour, that the Full Court has taken Flood and Nilsen to apply to a series of period payments extending for a very long period of time.  Flood and Nilsen were concerned with payments of weekly wages by way of leave in the future and said, “You have to wait until it comes home to the taxpayer, no matter how certain it is that they’ll arise in the future.”  It is anomalous if the weekly payments which are in lieu of income are income support under the Accident Compensation Act can all be brought to account now.  Not discounted to their present value, all brought to account now.  We submit that that is a misreading of Nilsen.

DAWSON J:   But that is something that can be done under the Act anywhere, is it not?  You can convert the weekly payments into a lump sum?

MR CALLAWAY:   Thirty per cent I think, Your Honour.  But, of course, that could not be brought to account now, that would awaits the election of the employee to seek commutation.  Once they are commuted, at some time in the future, if they are commuted, then it is difficult to resist the contention that then the 30 per cent could be brought to account, but that would be a very different sort of liability from a liability now to pay weekly amounts in the future if the incapacity continues.  We submit there is a strong analogy between the requirement for the employee to enter on the week during which he or she is on leave, and the employee to enter on the week of incapacity, being still incapacitated to enter into a week which may be in 20 years time where that payment has to be made.

BRENNAN J:   Mr Calloway, what is the principle by which the insurance companies cases are distinguished from Flood and Nilsen?

MR CALLAWAY:   Your Honour, as to the insurance cases we say two distinct things:  the first is that we say that our submission would be equally true of an insurance company.  We would say of the Accident Compensation Commission, which at the relevant time was the insurer, and of the private companies which are now the insurers under the Act, they too could not bring to account in the first year of income the present undiscounted value of the whole series of outgoings that they would not be incurred.

MASON CJ:   So, your primary submission draws no distinction between insurance companies and self‑insurance?

MR CALLAWAY:   That is so, Your Honour.  In the alternative, we would say that insurance companies are special.  That was the view that the Commissioner, in fact, took in the ruling which is in the appeal book.  The basis for the distinction drawn in the ruling and the basis for the distinction that we would seek to maintain in that alternative argument is this:  there are several passages in each of RACV and Commercial Union where Mr Justice Menhennitt and Mr Justice Newton were concerned to say that the reason why the claims could be allowed in the first year was the nature of insurance business.  One such passage was, in fact, the foundation of the decision of the learned primary judge who, of course, decided in our favour on this point and is in the application book at page 58 in His Honour’s judgment.  At the top of page 58, Mr Justice Sweeney quoted this passage from Mr Justice Menhennitt’s judgment in RACV:

“The liability to indemnify in respect of events occurring in the year of income is, it seems to me, properly to be regarded as incurred in gaining or producing the assessable income of that year because it is out of that year’s premiums that the liability is to be met.”

DAWSON J:   That is why I thought it was strange you said you did not draw any distinction between self‑insured and insurance companies.

MR CALLAWAY:   Your Honour, we only have to do in the alternative because if we are right about our Flood‑Nilsen argument, if we are right that this case is in fact governed by Nilsen, then an insurance company, similarly, would not have incurred the liabilities now.

BRENNAN J:   But the real point of distinction, I take it, is this:  that in the insurance cases what one does is bring to account in the year of income that proportion of the premiums received which can be described as property.  Well now, is that the situation in relation to the self‑insurer?

MR CALLAWAY:   We would submit not, Your Honour, and it is true that in RACV - there were original two issues in RACV, one concerned the spreading of the premiums over two years and the other concerned the claiming of the deduction.

BRENNAN J:   And that is because in insurance business there is an actuarial calculation that has to be made, reserves established and the like, under the statute which leaves you only with the profit available.

MR CALLAWAY:   No, I am sorry, Your Honour and I are addressing different issues.  The point on which we rely in RACV is that the case started with the matter of whether the premiums should be spread over two years using the twenty‑fourth’s method.  That was eventually common ground.  His Honour said it was right and His Honour said, “I mention this because it is of significance when I come later to consider the deductions.”, which ties in, of course, with the passage I have just read, and with other passages.  For example, at page 103 of the application book there is another passage from RACV which is, if anything, even clearer.  I will not read it all because it is rather long, but at the bottom of 103:

“When there has to be considered the question whether an insurance company has incurred a loss or outgoing in a particular year that question comes to be considered in relation to the nature of the business being carried on.

And if one goes to Commercial Union, for example, at the top of page 105 is the passage which the Commissioner set out in the ruling, distinguishing self‑insurers from insurance companies. 

“Putting it broadly, the true profit of an insurance business in respect of any year can be no more than what remains after deducting from the premiums earned in that year, all the claims arising out of the insurances in respect of which those premiums were earned -

and so forth.  So, if we are driven back to relying on that distinction - and, we submit, that the Bank is not all like an insurance company.  There is nothing  ‑ ‑ ‑

DAWSON J:  What does it matter?  One can understand why anyone puts it that way in relation to the insurance company.   It is important for any business to ascertain what its profit is in any accounting period.  It does not really matter where the income comes from if you are going to put against that claims which are referrable to the income in that period.

MR CALLOWAY:   The problem, Your Honour, with respect, is that if one goes ‑ ‑ ‑

DAWSON J:   What is magical about premiums?  They are just income.

MR CALLAWAY:   At the end of the day, Your Honours, the insurance cases are an anomalous exception.  The problem, if one extends them too far ‑ ‑ ‑

DAWSON J:   What do you mean by that?  That they are wrong?

MR CALLAWAY:   No, they have been accepted for too long as a practical matter.  They are anomalous as a matter of logic, they are not anomalous as a matter of practical law for the reasons that both the judges explained.  With an insurance business, it is just unrealistic not to bring the liabilities to account in the year of the premiums receipt, but with other taxpayers those practical reasons do not exist and practicality points in the opposite direction because one produces the odd result to which I referred and it leads to other things.  A self‑insurer is just a person who is not insured.  All the taxpayer here has done is make a capital provision for expected future payments, to use a neutral expression. 

If this decision stands, other taxpayers may well want to make the same kind of provision and claim it in the first year in respect, for example, of warranty claims.    A manufacturer of motor vehicles or refrigerators that gives a warranty as part of the contract of sale knows as a statistical certainty that a percentage of warranties will have to be honoured over a foreseeable period, arising out of the contract entered into in the first year of income.  Such a taxpayer may well want to argue, in the light of this case, that it could all be brought to account with no present value, no discounting, and claimed in the first year.

BRENNAN J:   Could such a taxpayer establish a captive insurer of that liability?

MR CALLAWAY:   Well, they will not need to if this case stands, Your Honour ‑ ‑ ‑

BRENNAN J:   No, of course not.

MR CALLAWAY:   Another reason why this case has ‑ ‑ ‑

BRENNAN J:   But if they have not, as a matter of practice, done so one wonders whether there is any distinction between the two classes of liability?

MR CALLAWAY:   Yes.  Your Honour, one of the reasons why, in our respectful submission, this is an important case, is that if the decision below stands it will be an incentive to companies to self‑insure.  We do not put it in as evidence, but we adopt the words of the Financial Review that, “The decision is a blow to insurance companies” because the conventional wisdom has been that in order to get the deduction one needs to insure with a company and pay a premium and claim the premium.  If one can produce the same results by an internal provision, for many companies that will make a lot of commercial sense to self‑insure, not just in respect of workers compensation but other things where there is a sufficient analogy with the liability.  It is not everything: not fire, flood and disaster, but my product’s liability example is in point.  Now, that is normal bona fide insurance.  That is one of the reasons this case matters, in our submission.

Captive insurers raise another issue.  What has happened, especially overseas, is that because self‑insurance is usually not deductible - for example, it is not deductible in the United States - a company is set up, in effect, a subsidiary or other associated company, as an insurer or as a re‑insurer because you can do the same thing through re‑insurance, and has then said, “We’re not a self‑insurer, we are paying premiums, we claim the premiums in the usual way,” and that has sometimes been successful and sometimes not in the United States’ courts, there have been a lot of American cases.  It has frequently been unsuccessful because captive insurance does not involve shifting the risk and is of the essence of insurance that the risk should be shifted.

So that the Commissioner would ultimately say that self‑insurers and captive insurers are in much the same boat for the same reason.  That the captive insurance arrangement does not shift the risk and, therefore, is much the same as self‑insurance, and the premium paid to the captive insurer cannot be claimed.  The importance of this case lies in the incentive to move away from perfectly ordinary insurances and into self‑insurance.

MASON CJ:   Mr Calloway, am I wrong in thinking that the Full Court of the Federal Court rather proceeded on the view that applying ordinary principles applicable to section 51, particularly in the light of Nilsen, the result dictated or that dictated a result in favour of the taxpayer rather than a distinction between insurance companies and non‑insurance companies?

MR CALLAWAY:   Your Honour, Mr Justice Hill devoted a section of his judgment to whether there was a difference between insurers and self‑insurers.

MASON CJ:   Yes, but in the end, when you look at the end discussion in that section, it seems to turn rather on the application of general principles relating to section 51.

MR CALLAWAY:   His Honour did say that the were distinct hurdles to be jumped.  So that if His Honour had taken a different view about insurer/self‑insurer, the case would have been decided differently.  It was having rather brushed aside the distinction between insurers and self‑insurers that His Honour then correctly, as a matter of logic, turned to Nilsen and proceeded to distinguish Nilsen. 

One of the submissions we would make, and we make the submission with respect, is that the Full Court of the Federal Court should not be too ready to distinguish a leading case in this Court.  Obviously, if it does not apply it must not be applied.  But, we would say that this is a pretty fine distinction and that Nilsen should have been applied and if Nilsen is to be explained it should be explained by this Court.

MASON CJ:   Yes, but I think we have said in the past that that is not so, that, by and large, this Court now exists as an ultimate Court of Appeal to review decisions made in relation to the Income Tax Assessment Act, in exceptional cases, where a question of fundamental principle is involved and that, surely, is inconsistent with the notion that there is some kind of onus on the Federal Court to be reluctant to distinguish decisions of this Court.

MR CALLAWAY:   Yes, with respect, Your Honour, I accept that and, of course, I have to accept it but, nevertheless, we can still make this submission and we do, that when there is a leading case - and on any test Nilsen is a leading case, not only Sir Garfield Barwick’s judgment but Your Honour’s judgment which dealt with the insurance cases and treated them as being authoritative on a very narrow basis.  Mr Justice Aiken and Mr Justice Wilson agreed with the Chief Justice and with Your Honour the present Chief Justice.  Nilsen’s case is a very important case, both on the flood principle and on the insurance cases and the Federal Court has - no doubt it saw it as its duty to do so - limited Nilsen and extended the insurance cases in very significant ways.  Now, we must accept that it is Federal Court’s duty to do that if that is how it reads the law, but from the point of view of the development of the law, with respect, it may better if those things are done in this Court.    I should say something quickly about two other points.

MASON CJ:   I think the point probably is this:  you would say that they demonstrate - the decisions demonstrate and what has happened demonstrates that this is a very important area of taxation law and a significant development has taken place, on your view, a result of this judgment.

MR CALLAWAY:   In our submission, yes, Your Honour.  The two other matters I should deal with in the remaining two minutes are the medical expenses.  In our submission, they are a clear example of a contingent liability.  They are not incurred until the employee incurs the medical expense, until the medical expenses are provided, and they are not the sort of contingent liability that Justice Deane referred to in Coles Myer which are inevitable.  One can illustrate it this way: the insurance companies would have paid on the claim even if notice was not given.  That is one of the points dealt with mainly in Commercial Union.   This

taxpayer would not pay the medical expenses unless they were incurred and, I add, nor would it pay the weekly payments unless, in the relevant week, the worker was still incapacitated. 

Finally, Your Honours, while it would not be sufficient in itself, it is submitted that it is relevant as part of the application for special leave that this presses the concept of reasonable estimation to breaking point.   The five main cases accounted for about 60 per cent of the provision and the man who made the provision said, in oral evidence, that the five main cases were pretty much a lottery.  That, in our submission, does not comply with the test in Commonwealth Aluminium, which we adopt, that a reasonable estimate requires that it be capable of approximately calculation based on probabilities.

Now, Your Honours, unless there is some other aspect that it would assist the Court for me to address, those are, in a substance, our respectful submissions.

MASON CJ:   Yes, thank you, Mr Calloway.

MR CALLAWAY:   May it please the Court.

MASON CJ:   Mr Sullivan.

MR SULLIVAN:  Your Honour, in our submission, the case raises no question of fundamental principle.  There was no issue between us before the Federal Court as to the correct test to be applied and that was noted by His Honour Mr Justice Hill at page 110 of the application book.  The real issue in the case came down to the question as to whether, when an employee suffers an injury, there is a present liability on the part of the Bank to indemnify that employee. 

BRENNAN J:   To indemnify?

MR SULLIVAN:   Or to compensate.

BRENNAN J:   To make the statutory payments, surely?

MR SULLIVAN:   Yes, Your Honour.  Now, the Full Federal Court came to the conclusion that on the provisions of the Accident Compensation Act liability arose at the time of injury.  In our submission, from that point, there was no other conclusion open to the Court, on existing authority, other than in favour of the Bank, subject only to the question of reasonable estimation.  The conclusion, ultimately, should be seen as turning not on any important question of tax law but on the provisions of just the Accident Compensation Act.

In so far as my learned friend’s various points are concerned, we would not treat or see the insurance cases as some anomalous exception.  In our submission, the insurance cases are but an application of existing principles in relation to that particular area of industry.  There has not been suggested in any of the cases that they somehow form a special category, that they somehow recognise some principle which is different from the principles in relation to incurred recognised in cases such as Nilsen Development.  The cases have been referred to, with approval, in this Court.  I believe Your Honour the Chief Justice referred to the RACV case and the Commercial Union case in your judgment in Nilsen Development without questioning them, apparently recognising their correctness.  The cases, I think, were also referred to, or RACV was cited from, in the Coles Myer decision.  None of those decisions have suggested that somehow they form a special category.

DAWSON J:   But there is a difference in fact, is there not?  It lies in the certainty with which you can estimate in relation to insurance companies the claims which are incurred but not reported and so on.   Statistically, it is something which can be established without any difficulty.

MR SULLIVAN:   In our submission, Your Honour, there are two things to say about that.  First, it is a question of fact as to estimation which hardly raises a question of importance.  The second point to make is perhaps that when you have an organisation the size of the respondent in this case then you have a very large number of employees and you could probably predict with the same sort of certainty that there will be liabilities arising in respect of compensation of employees who are injured and, if one is talking about self‑insurers, the requirements of the legislative regime are such that only very large employers are able to register as self‑insurers.

BRENNAN J:   But is there any requirement that there should be, for example, a statutory margin of solvency?

MR SULLIVAN:   There are financial requirements in the legislation in respect of companies which wish to register as  self‑insurers.  I cannot recall off hand, Your Honour, whether margins of solvency are a matter that those requirements go to.

BRENNAN J:   I mean, in your submission - well, the principle on which the case has been decided in your favour though would not turn upon considerations of that kind, would it?

MR SULLIVAN:   No.

BRENNAN J:   In other words, this principle could be applied to a self‑insurer, if that is the relevant word, and it is quite small in size?

MR SULLIVAN:   Well, if it was quite small, Your Honour ‑ ‑ ‑

BRENNAN J:   Suffice only that the liability was incurred or run upon in the relevant year.

MR SULLIVAN:   Yes.  The fundamental prerequisite, applying the test in Nilsen, is that there be a presently existing liability.  That is the key to this whole case, in our submission.

BRENNAN J:   Liability to what?

MR SULLIVAN:   Liability on the part of the Bank to the employee.

BRENNAN J:   Presently enforceable?

MR SULLIVAN:   Presently enforceable by action, yes.  Perhaps payable in the future, debitum in praesenti solvendum in futuro.

BRENNAN J:   But is there a debitum in praesenti?

MR SULLIVAN:   Well, that was the whole basis, in our submission, of the Full Federal Court’s decision.  His Honour Mr Justice Hill, in his judgment with which the other judges agreed, said at page 110 of the application book:

The loss or outgoing must represent a present liability -

when he was referring to the principles that are to be applied, and then at page 113 where he distinguished Nilsen, he said, commencing at line 14:

Unlike the case in Nilsen there exists from the moment that an employee has suffered an injury in the course of his or her employment, a presently existing liability to make payments in the future.

Now, Nilsen was distinguished but not on any matter of principle.  Nilsen was distinguished on the basis that in that case the legal liability to make annual holiday payments only arose when the employee took his leave. 

BRENNAN J:   Well, that is the same here, is it not?

MR SULLIVAN:   No, Your Honour, with respect.

BRENNAN J:   There is no present debt which is to be paid in the future.  There is a present liability which consists of a liability to make payments in the future.

MR SULLIVAN:   That is so, Your Honour.  There is a present legal liability, the precise quantum of which has not been ascertained.

BRENNAN J:   Let us assume that the so-called debtor became insolvent, for how much could a creditor prove?

MR SULLIVAN:   Whatever the value of the claim was as determined under the provisions of the compensation legislation, the Accident Compensation Act.

DAWSON J:   But surely that is the difference because with an insurance company the liability incurred but not.....may not be ascertained, but it is ascertainable, and in relation to future payments of weekly payments the amount of the liability is not even ascertainable.

MR SULLIVAN:   Well, if that is so in respect of the Bank it is also the case in respect of other insurers in respect of workers compensation where there is an obligation to make weekly payments rather than a lump sum payment.  Again, Your Honour, in our submission, that is a matter that turns on the question of estimation of the liability which is ‑ ‑ ‑

DAWSON J:   No, that is the distinction, it is not so much the definition - well, it is the definition of the liability, but it is something that can be ascertained if you know if the claims manifest themselves.

MR SULLIVAN:   Yes.  Well, the comment that was made in the Full Federal Court here was that the manner in which the liabilities were estimated, the technique used was similar to that in RACV.  What was done, on the evidence, was that experienced claims officers addressed the individual claims and, on the basis of those, made estimates and, it was said that that was similar to the approach adopted in RACV, and that, I think, appears at page 118 of the application book, at about point 2 of the page:

The means of calculation was not dissimilar from that adopted in the RACV Insurance - - -

DAWSON J:   The distinction is:  there is an accident; someone is injured; you may not know about it but if you did you could estimate the amount of the worth of the injury, the amount of the claim, with a degree of certainty.  But here there is an accident; there is an injury, but there are weekly payments which are to be made in the future and you do not know how long they are going to go on.

MR SULLIVAN:   That may be so, Your Honour, but, in our submission, the difficulties in relation to estimation would not by themselves produce any principle or fundamental importance here.  That is just a factual  matter essentially that must be approached in any case where the issue of estimation arises.  In our submission, therefore, the insurance cases would not be seen as any anomalous exception to 51(1) general principles. 

My learned friend referred to the prospect of warranties and vendors of goods making claims in respect of warranty liabilities in the future.  In our submission, this case would not in any way support such

deduction claims.  It is clear that there can be no present liability to future warranty claims at the time at which goods are sold. 

Unless I can be of further assistance to Your Honours, those are my submissions.

MASON CJ:   Yes, Mr Callaway.

MR CALLAWAY:   Your Honour, I only wish to add on two points arising out of what my learned friend said.  The first is that if the decision of the Full Court gives rise to the submission that this was debitum in praesenti solvendum in futuro it demonstrates how astonishing, with respect, the decision is.  It is not just an application of Nilsen to funny facts, it is a misreading of Nilsen. 

Secondly, one of Your Honours, I think Your Honour Justice Brennan, asked a question about insolvency.  I suppose that the employer could claim an insolvency because in incorporate insolvency you can claim not just contingent but prospective claims but, of course, you would value them, so the amount claimed would be quite small, it would be the present value of the future outgoings.  Whereas one of the worrisome features of this case is it is not discounted.

DAWSON J:   Mr Calloway, what was the position of workers compensation insurers?  Did they apply the RACV principle even though they were insuring against weekly payments and so?

MR CALLAWAY:   Well, yes, I think workers compensation liabilities in fact were included though not discussed in RACV and Commercial Union, Your Honour.

DAWSON J:   Yes.

MR CALLAWAY:   Your Honour, unless there is some other point that I can address, those are our submissions.

MASON CJ:  The Court will take a short adjournment to consider the course it will take in this matter.

AT 10.20 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.35 AM:

MASON CJ:   The Court is not persuaded that the proposed appeal will raise a question of fundamental principle in the law of taxation.  For that reason, the application for special leve to appeal is refused.

MR SULLIVAN:   I ask for costs, Your Honour.

MR CALLAWAY:   We do not resist that, Your Honour.

MASON CJ:   Yes.

AT 10.36 AM THE MATTER WAS ADJOURNED SINE DIE