Commissioner of Taxation of the Commonwealth of Australia v Australian National Hotels Limited

[1989] HCATrans 30

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney Nos Sl07, Sl08 and Sl09 of 1988

B e t w e e n -

COMMISSIONER OF TAXATION OF THE

COMMONWEALTH OF AUSTRALIA

Applicant

and

AUSTRALIAN NATIONAL HOTELS LIMITED

Respondent

Applications for special leave to

appeal

MASON CJ
DEANE J

TOOHEY J

Hotels

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 17 FEBRUARY 1989, AT 9.32 AM

Copyright in the High Court of Australia

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MR K.R. HANDLEY L QC :  If the Court pleases, I appear with

my learned	friend, MR B.J. SULLIVAN, for the
applicant.	(instructed by the Australian
Government	Solicitor)

MR D. BLOOM, QC:  I appear with my learned friend,

MR R.F. EDMUNDS, for the respondent, if Your Honours

please. (instructed by Allen Allen & :ffi;msley)

MASON CJ: Yes, Mr Handley.

MR HANDLEY:  The applicant does not seek to proceed with the

grounds of appeal which raise issues of fact or

section 260. The proposed grounds of appeal are

at pages 97 and 98 of the application book and the

only grounds sought to be pursued are grounds 3

and 4.

If the Court pleases, we would present two

alternative but related submissions in support of

the grant of special leave and in support of any

resulting appeal. Firstly, and more fundamentally,

we would submit that premiums paid for insurance

against capital losses of any kind are outgoings of

a capital or of a capital nature and are now allowable

under section 51. And we would therefore submit

that the assumption made by the majority in the

Federal Court that premiums such as fire insurance

premiums on capital assets are deductible is not a

correct view of the Australian law.

MASON CJ:  Was that point put in the Full Court of §)peal?

MR HANDLEY: It was not put. The submissions put for the

Commissioner in the Full Federal Court accepted

that fire insurance premiums were deductible but

argued against the principle being extended.

The second submission is that if insurance

premiums such as fire insurance premiums on capital

assets are allowable under Australian law, this is

anomalous and contrary to principle and there should

be no extension of this anomaly by analogy or

otherwise. On either view, we submit the present

application does raise important questions in

relation to section 51 which extend beyond the field

of insurance against exchange losses and outside the
field of insurance generally and we would instance

payments to insure against future long service

leave obligations as one possible extension of the

Full Federal Court decision in this case.

I should say something about division 3B of Part III of the Act which came into force in June

1987 which does allow, in some circumstances,

deductions for capital losses in exchange contract

situations where they are not allowable under

section 51. It is our submission, and I do not

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know whether the Court wishes to be taken to this

at this stage of this application but the

division does not apply to insurance payments of

any kind where the sum payable is in Australian

currency, it only applies to contracts where there

are amounts payable in a foreign currency in this

situation. I have got the legislation here which

we could hand up in a photocopied form. Section 82U(l):

MASON CJ:	Thank you.
MR HANDLEY:	This Division applies in relation to gains
and losses only to the extent to which
they are of a capital nature.

And it made clear that it is cumulative on

section 51. Going to the definition, and these

are the key provisions, on the first left-hand page:

"currency exchange loss" means a loss
to the extent to which it is attributable

to currency exchange rate fluctuations.

Insurance premiums paid in advance of the loss

accruing do not come within that definition, we would

submit.

"eligible contract" -

includes:

(b) a hedging contract -

and a -

"hedging contract" ..... means a contract

that is entered into by the taxpayer

for the sole purpose -

and that is an important limitation -

of eliminating or reducing the risk of

result for the taxpayer ..... from currency	adverse financial consequences that might
exchange rate fluctuations.

Going over the page again to 822:

currency exchange loss incurred by a

taxpayer in a year of income under an

eligible contract is an allowable

deduction -

and going back to 82X:

where -

(a) a taxpayer has an option to purchase currency under an eligible contract that

is a hedging contract -

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and there you find the limitation that the eligible
contract must be one under which the taxpayer has
an option to purchase currency, that is, of course,
foreign currency, so that insurance contracts where

any claims will be payable in Australian currency such as the ones involved here are not within the

new legislation. In any event, Your Honours, we

would submit, not only, of course, would these

points continue to be applicable under the new

legislation, the points raised by this proposed

appeal, but in view of the fact that important

questions arise under section 51, the Court would

be disposed to treat the case still of continuing
public importance just as it did in the NILSEN case

in relation to long service leave provisions.

Your Honours, there is no direct authority in this Court or in Australia prior to the decision

of the Federal Court in this case which supports
the deductibility under section 51 of premiums paid
to insure against capital losses. And the United

Kingdom authority, when one looks at it, is scanty and unsatisfactory and reveals a great diversity of

opinion. The applicants wish to submit that the

decisions of this Court in CARA.PARK V THE FEDERAL

COMMISSION OF TAXATION, 115 CLR, dealing with

the assessability of the proceeds of an insurance

taken out by a company to protect it against the

death of a key employee; FEDERAL COMMISSIONER OF

TAXATION V SMITH, dealing with the assessability

of receipts by a doctor under a sickness and accident

policy and the allowability of deductions to secure

such a policy; and FAIRFAX V THE FEDERAL COMMISSIONER

in relation to legal costs paid or incurred in

defending title to capital assets all support the proposed appeal of the Commissioner in this case.

In CARA.PARK - and we do have copies here if

necessary - this Court unanimously held that

proceeds of a life policy taken out by a company

on a key employee who died in an accident were

assessable income and the Court looked at the nature

of the loss insured against to characterize the

receipt. The same analysis, we submit, should be

implied to characterize the insurance premiums

claimed as a deduction.

In THE FEDERAL COMMISSIONER OF TAXATION V SMITH,

the IX)C'I'QR's case, 147 CLR 578, the Court held that

since the insurance was to protect the doctor against

loss of income and the benefits payable were periodic,

the benefits were assessable and therefore the premiums

were deductible. And, again, that would support, in

our submission, the Commissioner's proposed appeal in

this case. Unless payments received under insurance

policies for the loss or destruction of capital assets

are assessable income, the analysis in SMITH, in our

submission, on the deductibility question would support

the conclusion that the premiums in this case werenot

allowable.

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Finally, in JOHN FAIRFAX this Court, in

holding that costs incurred by the taxpayer in

defending its title to capital assets weremt
deductible, refused to follow an English decision

of Mr Justice Lawrence, later, Lord Oaksey, in

SOUTHERN V BORAX, who had held that such legal

expenses were deductible in England. Significantly,

Lord Oaksey had relied upon the FIRE INSURANCE case

in support of his conclusion, arguing by analogy,

from fire insurance premiums being deductible

under the English system to legal costs incurred

in defending and maintaining a title to

capital assets also being deductible and we have

here the relevant extract from Mr Justice Lawrence's

judgment if that is required. Not only did this

Court refuse to extend that English principle
about the deductibility of fire insurance premiums

on capital assets to legal costs in FAIRFAX's

case but, impliedly, in our submission, and

adopting a consistent view of section 51 principles,

it disapproved of the anomalous rule about fire

insurance premiums in the first place.

MASON CJ:	Mr Handley, there would be no decision of this
Court that would preclude the Full Court of the
Federal Court from considering, and if it accepted the submission, giving effect to your
first submission, the submission you make as a
matter of general principle.
MR HANDLEY:	Your Honour, in my submission, the majority

judgment in this case would stand in the way

because - - -

MASON CJ:	The majority judgment in this case might
unless the Federal Court were prepared to reconsider it and it might well be prepared to reconsider it seeing it did not have the advantage
of the submission that you wish  to make to this
Court.

MR HANDLEY:  I have to acknowledge Your Honour's point on

that matter but - - -

MASON CJ: It seems. to me inappropriate that we should be

called upon to consider a matter of fundamental

general principle when we do not have the
advantage of a consideration of that question by

the Full Court of the Federal Court.

MR HANDLEY:  Your Honour, what this Court does have is the

view of the majority that the allowability
of fire insurance premiums under the English system
represents an adequate basis to extend - adequate,
or sufficient or an appropriate foundation for an

extension into this area of insurance premiums

payable to insure against capital exchange losses,

and the dissenting judgment, as the Court would

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appreciate, takes the stand that the existing

accepted position is anomalous and is not to be

extended. Now, it would be even less satisfactory

for this Court to look at the question that was

actually litigated before the Federal Court without

looking at the fundamental question and, in my

submission, in the section 51 area where the Court

does have the benefit of its earlier decisions in

CARAPARK, SMITH and FAIRFAX, the usual considerations

which would apply where the point was arising, as

it were, de novo, do not apply with the usual

cogency in this case because when one tries to

fit this decision into, what I might call, the

seamless but consistent web of section 51 cases

in this Court, its anomalous nature stands out

and so that it is appropriate for the Court to
grant special leave to review the question of
insurance premiums paid to guard against capital

losses in the context of the extension favoured

by the majority below and, indeed, the whole

question of whether there is any exception at all

to the general principle about capital losses.

MASON CJ: Is it correct to say, as you have suggested, that

Mr Justice Pincus in his dissenting judgment

regarded the deductibility of fire insurance

premiums as an anomaly?

MR HANDLEY:  Your Honour, he said it was not to be extended

and I - - -

MASON CJ:	But that does not imply that it is an anomaly.
MR HANDLEY:	Perhaps the beauty was in the eye of the beholder but I did think that that was what His Honour was
saying. For example, at page 75, line 9,
His Honour says:

In the ordinary use of the term

"capital", a payment made to fix in

advance -

well, perhaps that is not - I would put it in terms
of what Mr Justice Pincus said at page 72.	Then he

did comment about analogy. Perhaps at the bottom of

page 75, the last paragraph:

The tax laws require one, however, to

endeavour to preserve the distinction.

It is at the top of page 75, line 2:

At first sight, the analogy between, say, fire insurance as securing the value of a physical entity and this insurance as

preserving the value of another sort of

capital is attractive; but moving by

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analogy fraa ~ i.fllflX'ginal case to another

can, in the end, produce an erroneous

result.

So, that indicates, in my submission, a dissatisfaction

with the terms of principle with the - - -

MASON CJ:	Has there ever been any suggestion before this
statement by Mr Justice Pincus that the deductibility
of fire insurance premiums is marginal?
MR HANDLEY:	Your Honour, on capital assets?

MASON CJ: Yes.

MR HANDLEY:  I mean, it has just been - no one has ever looked

at it.

DEANE J: And no exceptions on your primary argument.

A lessor - - -

MR HANDLEY:	On capital losses?
DEANE J: Yes.
MR HANDLEY:	No, Your Honour.
DEANE J:	A lessor cannot deduct the fire insurance premiums
in calculating his taxable income.

MR HANDLEY "A lessor"?

DEANE J: Yes.

MR HANDLEY:  He can deduct so much of it as relates to the loss of rent.

DEANE J: No, in relation -

MR HANDLEY: In relation to the capital loss?

DEANE J: Yes.
MR HANDLEY:	Your Honours, what happened in Britain is that

in a case - I have got Hannon here which explains
what happened historically - where there were

compulsory payments added to licence fees of publicans

to sustain a fund out of which licensees would be

compensated for the lose of their liquor licence or

the publican's licence. there was an equal division

in all courts including the House of Lords on whether

those payments were deductible. That is SMITH V LION

BREWERY, (1911) AC. We would say at this point of

time that they were deductible because they were

annual payments in the nature of licence fees

so that the publican could carry on business but

the judgments in all courts stray into the area of

insurance and there was an equal division of opinion

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as to whether, if you looked on these payments

which were, in fact,compulsory and which, in fact,

the government used to sustain this compensation

fund - if you looked on them as insurance payments,
they would or would not be deductible. There was

an equal division of opinion.

And then in USHER's case, the Court of Appeal,

three nil, affirming the trial judge, said:

Fire insurance premiums paid by lessors

on licensed premises were clearly not

deductible.

And we have got the passages here.

In the House of Lords the matter was treated

as covered by SMITH V LION BREWERY:  (a) where

there was an equal division in the House of Lords, an equal division in all courts and, (b) where the

payments were compulsory annual payments and the

insurance component just related to the way in

which the government used the money. So that is

the very unsatisfactory basis, and USHER's case

has just been accepted here as, indeed, Hannon

indicates in his book ever since, understandably

enough in the early days of the Commonwealth, as

establishing that fire insurance premiums were

deductible. But if you test it against principle

and against what this Court said in CARAPARK, supported and the extension by analogy which

the Federal Court has adopted in this case and
which Mr Justice Pincus refused to adopt, as

it were, sends one back to first principles and

one asks, "Well, how on earth can you deduct

payments made to insure against capital losses?"

I might just remind the Court that in

the SUN case Mr Justice Dixon said, of course,

recurrence is not a test of deductibility. It is

a factor but it is not a test, and we have that

reminded of it.	passage here also if the Court would wish to be	Accepting that these fire insurance premiums are paid generally year after year, recurrence is
the only factor which points to revenue.
The other factors all point to capital and, in my
submission, it is an appropriate case for the
Court to examine, (a) the propriety of the extension
to - - -

DEANE J:  Why do the other cases or other factors all point to

capital when the insurance is against damage of a type caused by carrying on the relevant business?

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MR HANDLEY: It is not, with respect, Your Honour. Fire is not

caused by carrying on the business.

DEANE J:	But what if it is a manufacturer of fire crackers?
MR HANDLEY:	Yes. Well, it is still a capital loss,

Your Honour; it is an insurance against a capital

loss.

DEANE J:  I was just querying your statement that all the

other factors point to non-deductibility. I

would have thought the obvious factor when you

are insuring against damage caused by carrying

on your business was the one that pointed to revenue.

MR HANDLEY:  Your Honour, the insurance is an undifferentiating

insurance against capital losses to a building or

plant however caused. If it, of course, was stock

in trade, it would be a different matter. If it was

a loss of profits policy,it would be a different

matter, more a business interruption policy. But

the losses or damage to the structure of the

building would cover such losses or damage from

any cause: aircraft falling out of the sky;

faulty wiring; fire spreading from next door or

whatever. So, in the ordinary case, in my submission,

a loss directly due to the hazardous nature of the
business would only be one of the possible causes
of the loss but even then one sees that it is

insurance against capital loss and that, in my

submission, in the light of the other decisions

of this Court, would be the critical factor.

They are our submissions, if the Court pleases.

MASON CJ: Thank you, Mr Handley. Yes, Mr Bloom?

MR BLOOM: If Your Honours please. Your Honours, it was

conceded below by counsel for the Connnissioner that

insurance against fire of the casino which was
bought with the moneys that were the subject of the

loan, the replacement loan, would be deductible.

Your Honours, the principle which the majority of

the Full Court applied in this case is the principle

in the TEXAS case and that is the principle which

is set out at page 49 of the appeal book from the

judgment of Mr Justice Dixon as he then was in that

case. It is a simple principle. It is:

Some kinds of recurrent expenditure made

to secure capital or working capital are

clearly deductible.

And he instances rent and interest as examples

that fall within what he says. To the same extent

was Sir John Latham in that case and at pages 49 to

50 of the application book what he said is there

set out.

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Your Honours, this case, in our submission,

is an application or an example of an application

of that principle to the peculiar facts of this
case and no more than that. It involves no new

principle and, in particular, does not involve a

departure in any existing principle.

We also rely upon the enactment of division 3B,

Your Honours. That, in effect, abolishes, for the
purposes of either deductibility or assessability
the distinction between capital and revenue in

the case of foreign exchange losses and foreign

exchange gains. It is our submission, Your Honours,

that Your Honours should not grant special leave in

this case.

MASON CJ:  Mr Handley?

MR HANDLEY: Nothing in reply, if Your Honours please.

MASON CJ:	The Court will announce its decision in this
matter after the adjournment at midday.

AT 9.58 AM THE MATTER WAS ADJOURNED UNTIL

LATER THE SAME DAY

T8	UPON RESUMING AT 2.22 PM:
MASON CJ:  The applicant seeks to argue two points in the proposed appeal: first,that t.he premiums for insurance against capital loss of any kind including fire insurance premiums are of a capital nature and not deductible under section 51 of

the INCOME TAX ASSESSMENT ACT; secondly, that

if some such premiums are deductible they

constitute an anomaly which should not be

extended to cover the payments made in the

present case.

The first point is both novel and fundamental. However, it was not raised in the Federal Court and

this Court should not embark upon an examination

of it without having the advantage of a comprehensive

consideration of it by an intermediate Court of

Appeal.

We are left then with the second point. It

would be inappropriate for us to grant special leave

to appeal to deal with this question in isolation

now that the Commissioner has signalled his intention

to challenge the traditional view according to

which premiums for insurance against capital loss

in a variety of circumstances have been treated as

deductible under section 51. It would be an

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artificial exercise to consider and determine the

second point so long as the first point remains

in abeyance.

For these reasons the application for special

leave to appeal is refused.

MR BLOOM:	With costs, Your Honour?
MASON CJ:	You do not dispute that?
MR SULLIVAN:	No, Your Honour.
MASON CJ:	The application is refused with costs.

AT 2.24 PM THE MATTER WAS ADJOURNED SINE DIE

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