Independent Order of Odd Fellows of Victoria v Commissioner of Taxation

[1991] HCATrans 313

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No MG of 1991

B e t w e e n -

INDEPENDENT ORDER OF ODD

,FELLOWS OF VICTORIA

Appellant

and

COMMISSIONER OF TAXATION

Respondent

MASON CJ
BRENNAN J
DAWSON J
TOOHEY J

McHUGH J

Odd Fellows(2) 1 6/11/91

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 6 NOVEMBER 1991, AT 12.30 PM

Copyright in the High Court of Australia

MR F.G.A. BEAUMONT, QC: If the Court pleases, I appear with

my learned friend, MR J.W. DE WIJN, on behalf of

the appellant in the matter. (instructed by

Higgins Teale)

MR J.I. FAJGENBAUM, QC: If the Court pleases, I appear,

together with my learned friend, MR G.T. PAGQNE, on
behalf of the Commissioner. (instructed by the

Australian Government Solicitor)

MASON CJ: Yes, Mr Beaumont.

MR BEAUMONT:  Your Honours, I have handed up the outline of

argument, and I understand all Your Honours have a

copy of the same.

MASON CJ: Yes.

MR BEAUMONT:  Your Honours, IOOF is a registered Society

under the Friendly Societies Act 1958. It is also

a Friendly Society as defined in section 6 of the Income Tax Assessment Act. It is not a corporate

entity and it is not an insurance company. The

income of IOOF is exempt by reason of section 23G

of the Income Tax Assessment Act unless

section 116G applies in respect of eligible

insurance business.

The issue in this case, Your Honours, is

whether the interest arrived on investments in No 2

fund is income derived from eligible insurance

business of the Society. The term "eligible

insurance business" is defined in section 116E of

the Act as being:

means business of, or in relation to, the

issuing of, or the undertaking of liability

under, eligible insurance policies.

There are then also, of course, definitions of

eligible insurance policies, meaning:

a life insurance policy; an accident policy;

or a disability policy, but does not
include ..... sickness policy, a funeral policy.

Now, Your Honours, the system under which

friendly societies operate is that they have

separate funds and, for example, they have what are

called Grand Lodge funds, which are distinct from

benefit funds. The more appropriate Grand Lodge

funds include things such as dispensing societies,

funeral benefits, and those type of funds.

As distinct from that, they also operate funds which issue insurance policies. IOOF, in fact, has

Odd Fellows(2) 2 6/11/91

37 separate funds - that is contained at 229 of the

appeal book - of which eight carry on eligible

insurance businesses. That evidence was given at

page 34. The No 2 fund - - -

TOOHEY J:  Mr Beaumont, what is meant by a fund carrying on

business or a fund issuing policies? Exactly how

does it work?

MR BEAUMONT: It works, Your Honour, by - under the Friendly

Societies Act, it is specifically divided up so as

you have what are called funds, as it were,

divisions. In respect of various policies, for

example, which are issued under the benefit funds,

which are all set out in page 73 of the appeal

book, and you will see, Your Honours, that there

are then, to take a couple of examples, the

Flexible Insurance Benefit Fund No 1, the Flexible

Insurance Benefit Fund No 3.

Each one of those funds has its own set of

rules under which it operates and under which it

issues insurance policies in the case of benefit

funds that are carrying on business.

TOOHEY J:  I do not want to sound pedantic, but when you say

it issues policies, presumably the policies are

issued in the name of - perhaps I should not

presume. Who issues the policies?

MR BEAUMONT:  The Society does, but the policies might be

issued depending upon different rules or depending

upon the policy issued. When moneys are paid into

\ one fund, they must be kept separate.

TOOHEY J:  So the fund is an internal arrangement, is that

the position?

MR BEAUMONT:  It is required by law, but it is internal, but

it is required by law to be that way.

TOOHEY J: But so far as anyone dealing with the Society, as I a policy holder or otherwise is concerned, they, I

take it, hold a policy issued by the IOOF.

MR BEAUMONT: Yes, but by the Flexible Insurance Fund No 1

or by the Flexible Insurance Fund No 3, as the case

may be.

TOOHEY J: Yes, thank you.

BRENNAN J:	Can a policy holder, whose policy matures, recover against the assets generally of IOOF?
MR BEAUMONT:	No, Your Honour. Only against each of the )

separate funds under which the policy was issued

and in each one of those funds that issues the

Odd Fellows(2) 6/11/91

policy, there are the rules and its separate bonus,

for example, is calculated for each of the funds,

depending upon where they have all made their

separate investments. It might best be illustrated

by saying that Your Honours will have seen a number

of different products in the financial market, such

as Supersaver No 1, Supersaver No 2, and they are

all separate, in that they are all distinct and

freestanding and are required by law, if you invest
in one of those funds, to keep the funds separate.

Section 14(3) of the Friendly Societies Act - I have full copies of the full Friendly Societies

Act, if Your Honours require them; the 1958

reprint, if that would be more convenient than - we

did give the section numbers, but - - -

DAWSON J:	You are offering to -
MR BEAUMONT:	Yes, Your Honour.

MASON CJ: Well, it may be convenient for us, I think.

MR BEAUMONT:  I thought it might have been, Your Honour.

There is one nicely bound and four stapled copies,

Friendly

Your Honour. Under section 14(3) of the provides:

In all societies and branches all moneys

received or paid on account of any particular

fund or benefit provided by the rules for any

of the purposes in sub-sections (1) and (3) of

section five shall be entered in a separate

account distinct from the moneys received and paid on account of any other fund or benefit, and the moneys belonging to any one such fund

or benefit shall not be used in any manner for

the advantage of any other fund or benefit:

Provided always that it shall be lawful to apply any savings out of moneys applicable for

Md-	management expenses in aid of any of the funds or benefits of the society:	Provided further that on a valuation being
made under this Act of the assets and
liabilities of a society the Government of any surplus of assets over liabilities thereby disclosed in respect of any one fund
or benefit to be used or applied in any manner
for the purposes of the same or any other fund
or benefit.

Odd Fellows(2) 4 6/11/91

Now, if one goes back, Your Honours, to - and

I do not intend to go through it in any detail -

section 5 of that Act, one will see that the

purposes that are set out therein are such things

as insurance, medical and chemical insurance, life

insurance, travel insurance, fire insurance,

geriatric hospitals, hospital benefits, medical

benefits and powers to conduct building societies,

et cetera.

The other section I should refer Your Honours

to at this stage is section 14(l)(da), which is

contained on page 15 of the Act, which requires an

annual return to be submitted to the government

statist each year before the first day of October -

which shall contain a revenue account in

respect of each of the several funds of the

society and including all branch funds made

out for the period of twelve months ending on

the thirtieth day of June then last occurring

and balance sheets as at the end of the same

period -

and they have to be audited. And if one looks,

Your Honours, at the documents which are contained

in the appeal book at page 229 following,

Your Honours will see thereafter set out each of

the various funds kept separately with their own

balance sheets and their own profit and loss

statements.

BRENNAN J:  One thing that puzzles me, Mr Beaumont, is how

is it that the authority was given for the transfer

to the management fund No 2 of moneys that were

required to meet the liability of the insurance

fund for tax?

MR BEAUMONT:  The tax liability Your Honour means, yes.

BRENNAN J: Yes, having regard to the proviso in

section 14(3).

MR BEAUMONT:  Your Honour, what happens of course is that

once you have worked out the tax liability, you

then work out the bonus rate to be issued to

members each year, and the bonus rate is allocated

to each policy each year and the bonus rate, as I

said, varies. Once it is in those circumstances

worked out, the money is no longer needed to meet

the liabilities of the members. That is what

section 14(3) is referring to in that proviso,

because the liabilities of the members consist of

their premiums plus the bonuses which have been

added to those amounts each year.

Odd Fellows(2)	6/11/91
DAWSON J:	Did the government statist authorize the removal

of funds into the fund we are talking about?

MR BEAUMONT: Yes, Your Honour. The government statist in

fact has given evidence saying that he authorized

it. It also has to have the approval of the registrar of the friendly societies as well.

BRENNAN J: But he can only authorize a surplus of assets

over liabilities. If there was a liability tax,

how did he authorize the transfer of the money

which was appropriated to the tax?

MR BEAUMONT:  Your Honour, we say that means the liabilities

to the members.

BRENNAN J: It is liabilities to members or anybody else, is

it not? Liabilities of a society to whomsoever it

may be liable. I do not know whether anything

turns on it, but I am puzzled to discover how the
fund ever came into existence, having regard to the

proviso of 14(3).

MR BEAUMONT:  Your Honour will, when I come to it, find that

Mr Truslove, who was the government statist at that

stage, said that in order to build up the funds of
the societies and to give them a proper basis for

which they could use for the purposes of all their

members, because tax was payable in the future, as

it were, he authorized the transfer of those moneys

relating to the provision for tax to that fund, to

the No 2 fund, which then, when the tax became

payable, paid that liability but in the meantime

had the benefit of the investments and, as he

called it, the surplus at that stage.

BRENNAN J:  He treated the contingent liability of the first

fund as not a liability at all?

MR BEAUMONT:  No, Your Honour. And, in fact, Your Honour,

if one goes to rule 6.12.4, which is contained on

page 73 of the appeal book, this same rule was, on

the evidence of Mr Truslove, passed for a large

number of funds. Rule 6.12.4 says:

Into this -

life insurance management fund No 2 -

shall be paid the provision for taxation as

calculated for each financial year -

so it made it arbitrary - not "may" but "shall be

paid" into that fund the provision for tax when it

was created. And, of course, the provision for tax when it was created was only a contingent liability

until the assessment was issued. And although it

Odd Fellows(2) 6 6/11/91

does not make a large difference, the societies pay

their tax on a cash receipts basis but calculate

the provision for tax on an accruals basis.

BRENNAN J: Is it right to say that this fund then received

subventions from other taxable funds, not one fund

but from all taxable funds?

MR BEAUMONT:  Yes, from any taxable fund that had a tax

liability.

DAWSON J:  You talk of the fund having a tax liability, is

that so?

MR BEAUMONT:  Yes, Your Honour. From any fund which carried

on an eligible insurance business.

DAWSON J: Which gave rise to a tax liability on the part of

the Soiety?

MR BEAUMONT: That is correct, Your Honour, I accept that.

And it operates by way of trustees, and although they are the same trustees they are the trustees

for each and every one of the funds, and that is

specifically provided.

We say that the No 2 fund, if I could call it

that rather than using the full expression "Life

Assurance Management Fund No 2", itself did not

carry on an eligible insurance business; it did not

issue policies of insurance; it did not receive

premium income. And that evidence is at page 36 of

the appeal book. Further, it is not a benefit

fund.

TOOHEY J: But when you put it that way, Mr Beaumont, back where we were a little while ago you are equating

the fnd with the taxpayer, are you? The fund, I

would not have thought, paid tax, in a strict

sense.

MR BEAUMONT:

No, it is IOOF, Your Honour, as trustees for

of the way the whole thing is set up, although
there are 37 separate funds there is only one

the fund, who pay the tax. Unfortunately, because

taxpayer.

TOOHEY J: Well, fortunate or unfortunate. I mean, that is

the fact of life.

MR BEAUMONT: Yes, I accept that, Your Honour. But it can

only be IOOF, the trustees of IOOF, who would have

to pay the tax. And if I might say, Your Honours,

of course the whole scheme of the Act normally was

that friendly societies were to be exempt, so it is

the exact opposite to the normal position where

income was meant to be taxable but were sometimes

Odd Fellows(2) 7 6/11/91

held to be exempt if certain circumstances existed.

This is the exact reverse, where the income is

meant to be exempt unless the fund carries on an

eligible insurance business.

TOOHEY J:  Or putting it another way, except to the extent

that the taxpayer carries on an eligible insurance

business.

MR BEAUMONT:  Yes, Your Honour, but it can only do so, not

in its own capacity, but through funds. There is

not other way, under the Friendly Society Act, that

it can work. And we say, Your Honours, that income

under the No 2 fund does not accrue for the benefit

of the policy holders of any insurance policies or

anything like that, but rather accrues for the

benefits of the Society as a whole. Under rule 4.1

of the rules of the Society, which are contained at

page 61 in section 17 of the Friendly Societies

Act, the assets of IOOF were to be invested in the

names of the trustees, and as I have already said

to Your Honours, each of the funds had to be kept

separate from each other fund, with separate

accounts, including bank accounts to be maintained

for each fund. I have referred Your Honours to

section 14(3) already. If I may further refer Your

Honours to rule 6.1 which is contained at page 69

of the appeal book, which says:

In addition to the various Benefit Funds

identified in Part 8 of these rules, the

Society may, for the purposes of administering

its affairs and of preserving and furthering

its objects, maintain Grand Lodge Funds to be

used for such purposes as the Grand Lodge sees

fit. Each Grand Lodge Fund shall be kept

clear and distinct from each other fund but

the assets of Grand Lodge Funds may, with the

consent of the Government Statist, be combined

for investment purposes.

It then goes through the various Grand Lodge funds and the No 2 fund is such a fund, at 6.12.

In Part 7 it is defined at to what are benefit

funds. They are contained at page 73 of the appeal

book and it says:

The Society may, for the purpose of providing for the welfare of its members and their

dependants, maintain benefit funds whose

nature and circumstances shall be decided by

the Grand Lodge in Session. Each Benefit Fund

shall be kept clear and distinct from each

other fund. The assets of any Benefit Fund

may be combined with the assets of another

fund, for investment purposes, only with the

Odd Fellows(2) 8 6/11/91

specific written consent of the Government

Statist.

As the funds are kept as separate trust funds, the members' interests in each of those Grand Lodge or benefit funds is that which is set out in the

rules, so if you are a member of one fund, that is

the rules which comply to you. As I have said,

7.l(b) lists the benefit funds, which include the

funds which carry on eligible insurance business.

We would point, Your Honours, to a summary in Mr

Justice Northrop's decision, which is contained at

page 337, where we say His Honour accurately

portrayed the position. I do not intend to read

that through, but it only confirms exactly what I

have already been putting to Your Honours, at

pages 337 and 338.

One of the big differences, of course,

Your Honours, is that the No 2 fund, by its nature of being a Grand Lodge fund, was permitted to

invest in a broader range of investments than the

eight insurance funds, which were restricted to

authorized trustee investments, and that is

contained in pages 38 and 39 of the appeal book,

the evidence upon which that is based. The moneys

and investments which were transferred to the No 2
fund consisted of funds to be used to pay the
income tax liabilities of the society and surplus

funds - that is at page 40 and 41 of the appeal

book - the evidence of Mr Truslove, where he, in

answer to a question, said at about line 7:

What I need to do is to just give you a

little more explanation in that the fund - the

life assurance management fund number 2 was

established for two management purposes. It

was established to provide readily available

assets to meet any tax payments that were due
from time to time, and it was established to

meet or to provide the working capital and

expansion requirements of the society.	Now,
to meet those two objectives, I -

that is, he as government statist -

set up a system which transferred from the

life assurance fund to the life assurance

management fund number 2, an amount in excess

of what was required to meet the taxation

liability.

And then continuing on at line 33:

There is a part which would meet the precisely calculated tax liability, that is, tax at

20 per cent less deductible expenses and there

Odd Fellows(2) 9 6/11/91

is the balance of that which is a pure

transfer of free surplus. And that is the

excess equal to tax or an amount calculated at

20 per cent of the investment income less the

actual amount of tax that would be payable on

an accrual basis allowing for the deduction of

expenses. So that life assurance management

fund number 2 contained two parts. Firstly, a

pure transfer of surplus which it was in my

power to authorise -

and a fortiori did so -

and secondly, an amount of transfer sufficient

to meet the tax liability calculated exactly

on an accruals basis.

BRENNAN J: Which he was not empowered to authorize perhaps?

MR BEAUMONT:	We say he was, Your Honour, under the rules.
BRENNAN J:	Yes -
MR BEAUMONT:	And we say - I can understand Your Honour's

point.

BRENNAN J:  The significance of it, however, is this, is it

not, that whether or not that money having been

transferred out being money to meet a contingent

liability for tax stamps the fund No 2 with the

character of a fund in relation to the first fund?

MR BEAUMONT: That is the question to be asked.

BRENNAN J: That is the question?

MR BEAUMONT:  Yes, I accept that, that that is the question

to be asked. I should say, Your Honours, that it

has never been suggested at any stage prior to

this:  (a) that he did not have the power to do so;

or (b) did not do so. In fact,

Mr Justice Northrop, at page 343, in his judgment,

at line 23, specifically said: 

For present purposes, it must be accepted that

the Society, by transferring moneys and

investments from the eight eligible insurance
funds, was acting within powers conferred upon

it by its rules. The transfer constitutes the

breaking of the nexus between each of the
eligible insurances on the one hand and the
other activities of the Society on the other.

The majority judges, Acting Chief Justice Sweeney

and Mr Justice Wilcox, we say, Your Honour, at

page 328, accepted that is the position because

they say, "We've had the advantage of reading in

Odd Fellows(2) 10 6/11/91

draft form the reasons for judgment of

Mr Justice Northrop.	We need not repeat the facts
and relevant provisions set out therein.	The only

thing we disagree with him on is his conclusion,

not as to the way he set out the facts." And, as I

said, it has never been suggested at any stage that

there was no power, that it was a sham or anything

like that, other than it all occurred properly

according to the powers.

MASON CJ:  Mr Beaumont, we will adjourn until a quarter past

two.

AT 1.00 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.16 PM:

MASON CJ: Yes, Mr Beaumont.

MR BEAUMONT:  Your Honours, I was on point 5 and I think

what I have already said covers {a), (b) and (c)

and I will not go over anything that is there.

I move on to point S(d). We say, Your Honour,

that the surplus moneys in the No 2 fund were not required for the payment of tax or liabilities of that fund but were used with the approval of the

IOOF Building Society, the assumption of

government statist, for the general purpose of the the

liabilities of the assurance management fund and

for new equipment and general refurbishment. And

we refer, Your Honours, to pages 223, 224 and 228

of the appeal book, and the first one, shares in the building society illustrates the sort

of problems that one can come up against unless, as	it were, the income is the income of the No 2 fund
in the hands of the trustees only, because if you take the Commissioner's contention, once those building society shares are purchased the dividends received from the building society would also have
to be, in those circumstances, income in relation
to the issuing of eligible insurance business
policies.

It is a matter of where you can draw the line

because, otherwise, where do you stop in relation
to the words "in relation to" and it is, we say,

important, Your Honour, to go back and have another

Odd Fellows(2) 11 6/11/91

look at this stage at that definition and in

section 116G it says:

The assessable income of the year of income of

a registered organization being a friendly

society shall include so much of the total
income (other than premiums) of the society of
the year of income as is derived from eligible

insurance business of the society.

Now, it is only the income that is derived from the

eligible insurance business that is therefore

taxable, and therefore the words "or in relation

to" cannot have any real meaning to extend, as the

Commissioner wants to do, the net to cover after it

has already been derived. The words "or in

relation to" can only mean, in the definition in

section 116, in relation to the issuing or

undertaking of liability under the policies. It
does not mean in relation to the income earned, or

the income derived rather, from that business.

BRENNAN J:  You are referring to 116G before the amendment?

MR BEAUMONT:  Yes, Your Honour. These sections were amended, I think in 1987. I am referring to the

law as it stood at that time.	I could get copies
if Your Honour - - -

McHUGH J:  It is in the CCH in the history. The section is

set out there on page 14,043.

MR BEAUMONT:  I was reading it as the section then stood.

What we say of course, Your Honour, is that the

words "in relation to" can only mean in relation to

the issuing of the policies or the undertaking of

liability under those policies, not as to income

earned, when you read it properly.

Your Honours, we say that it is further

clear - although this is not set out in the notes -
that from the format of the Income Tax Act as a

whole, that the legislation itself recognizes that	a friendly society is in a different position from
life insurance companies and that different
considerations are to apply in calculating what
part of the income is received by the taxpayer -
that is by IOOF - is to form part of its taxable
income. It is a lot simpler in the case of
friendly societies. Therefore, it often does not
help us to look at the type of insurance cases,
though we will be going to them in due course. In relation to the Full Federal Court,
Your Honours, we say that the two learned judges who held for the Comissioner held against IOOF
principally because the moneys of the No 2 fund

Odd Fellows(2) 12 6/11/91

might have been made available to any of the eight

insurance benefit funds. That is contained at

page 331 of the appeal book.

We say that they have made a basic mistake

there, Your Honours, because what they have seemed

to say is purely and simply because subrule 6.12.6,

which is contained at page 73 of the appeal book,

reads:

All or part of the surplus generated by this

fund -

that is, the No 2 fund -

may be transferred to any other fund subject

to approval of the Board of Management and the

Government Statist and Actuary.

TOOHEY J:  Mr Beaumont, do you say that the money

transferred to the fund changed its character when

it was transferred or is the argument put in a

different way?

MR BEAUMONT:  Yes, Your Honour, I would say that it changes

its character in that, although it was income when it was received, possibly - because it is not even

completely sure that it is income when received,

because part of it could have been, for example,

premium income, which does not form part of the

income - but it is in essence a capital sum which

is paid over to the No 2 fund.

DAWSON J: And then is not used in any eligible insurance

business.

MR BEAUMONT: That is correct, Your Honour.

DAWSON J: Well, that is what you say.

MR BEAUMONT: Yes.

McHUGH J:	I am not quite sure I understand the use that the majority in the Full Court seek to make of rule
6.12.6.  On one reading of it it would seem that
any income from any other fund to which 6.12
applied would be taxable, any fund set up by the
Grand Lodge.
MR BEAUMONT:	That is what the Full Court said, Your Honour,

with respect, and that cannot be correct.

McHUGH J: But does that mean that any other fund of the

appellant to which 6.12.6 applied would be caught

or not? I suppose they say, no, it is not derived

unless - it has got to be first derived, has it?

Odd Fellows(2) 13 6/11/91

MR BEAUMONT:  But if we could take the argument exactly as

Your Honour has put it to me and say there was a

transfer of $200,000 to the Funeral Benefits Fund,

and that $200,000 was transferred out of the No 2

fund into the Funeral Benefits Fund, and that

earned income, even though it has got nothing to do

with insurance, that would be taxable because its

original source, as it were, was the life insurance

money.

Mc HUGH J: Yes.

MR BEAUMONT:	That is what we say is the vice, very much, of the Full Court, and that is why we say that
Mr Justice Northrop was correct when he says that
there was a breaking of the nexus, once you have
transferred it into a freestanding and independent
fund.  Because the income that was earned was
earned in the No 2 fund, and it had nothing to do
with whether there was an insurance policy, it had
nothing to do with whether there had been premium
income which had been invested anywhere else. It
was freestanding by itself.

MASON CJ: But they are talking about transfer to another

fund which constitutes part of the eligible

insurance business of the Society.

MR BEAUMONT: Yes, Your Honour, there is no doubt. What

they are saying is that because there was "a

possibility" that moneys might be transferred back,

you could not break the nexus, but they did not

decide it on the words "in relation to", they
decided it, with respect to the Full Court, on

their own point. It was not a point that was taken

by my learned friend.

But, as I say, it illustrates then,

Your Honours, the problems which can arise with

that sort of interpretation, because if one went to a hospital benefits fund or a sickness benefit fund

or a funeral benefit fund for old ladies - which

there are such funds here - the income, when they

got it, would equally be taxable, because there was

some sort of possibility that it could have been
transferred back originally, and that cannot be

correct, we would say with respect.

And we say, Your Honours, that the judgment of

Mr Justice Northrop makes that quite clear and I

cannot do any better than the words in which he

used at page 343 when he said:

For present purposes, it must be accepted -

and this is at the bottom, I am sorry, at line 23 -

Odd Fellows(2) 14 6/11/91

that the Society, by transferring moneys and

investments from the eight eligible insurance

funds, was acting within powers conferred upon

it by its rules. The transfer constitutes the

breaking of the nexus between each of the
eligible insurance businesses on the one hand

and the other activities of the Society on the

other. It is the Society which is liable to

pay tax and it is free to make its own

provisions to enable the tax to be paid. The

liability to pay tax is imposed on the Society

and not on an eligible insurance business

being conducted by the Society. In the
absence of paragraph 23(g)(i) of the

Assessment Act, the Society would be liable to pay tax on all its income. Liability for tax cannot be imposed on the general activities of the Society under the guise of treating the

income as coming within Division BA of

Part III.

MASON CJ: Well that is the point of departure, is it not?

MR BEAUMONT:  Yes, Your Honour.

MASON CJ: And His Honour takes the view that the nexus is

broken, but the majority take the view that the

nexus is not broken, because the funds are

available for use in other funds, which constitute

the eligible insurance business of the Society.

MR BEAUMONT: Possibly available for use.

MASON CJ: Yes.

MR BEAUMONT:	Never used, of course.
MASON CJ:	No, never used, but possibly available.
MR BEAUMONT:	But possibly available.

MASON CJ: If the appropriate steps be taken.

MR BEAUMONT: Yes. If I could, Your Honours, just at that

point say that once that money is transferred to

the No 2 fund the contractual liability of the policy holders, does not alter in any way by the

transfer of that because their contractual

liability is set by the amount of the premiums and

the amount of the bonuses which they receive.	So
the transfer in no way affects the contractual

liability between the Society itself in issuing the

policies and its members.

TOOHEY J: But if you have a sum of money, Mr Beaumont,

which itself is derived from eligible insurance

Odd Fellows(2) 15 6/11/91

business and which, if it remained where it was

would give rise to assessable income in respect of

interest earned on that amount, I am still not sure

that I follow the argument that somehow it ceases

to be income derived from eligible insurance

business because it is transferred to a fund of a

different character.

MR BEAUMONT: At the stage when it is received, assuming it

is income and not premiums, it is definitely income

and it is definitely taxable. But what then

happens is in essence the transfer of a capital

amount, the after tax amount.

TOOHEY J: Yes, I understand that, but it gets a bit clouded

with words in a way. You can give descriptions

which, as it were, dictate the conclusion.

MR BEAUMONT: Possibly. Your Honour, if, for example, I

earned money from selling gold that I mined and

therefore it was exempt in my hands, and I invested

the proceeds from the sale of that gold in interest

bearing securities, there would be no doubt that

although the original source of the money was

exempt, that the interest bearing security, the

interest on them, would be taxable in my hands.

TOOHEY J: Yes, I do not find that analogy very helpful,

because in the end are you not driven back to the

language of section 116E as it then stood, and do

you not have to ask whether what is described as
income represents income of the Society derived
from eligible insurance business? I mean, whatever

fund it happens to be in, it seems to me that can

hardly dictate the result.

MR BEAUMONT:  I am afraid, with respect, Your Honour, it

must because remember as a matter of law they all

must be kept separately, and it is the same as

someone who might carry on three or four different

businesses. You would not say, for example - and

the analogy we have given in our outline of

argument is, for example, if a barrister instructs

his clerk to invest one-third of his fees in a

separate bank account out of which he proposes to

meet his tax liability, you would not say that the

income derived by way of that interest in any way

was derived from or in relation to his practice as

a barrister.

DAWSON J: Or if he lent the money to his wife and she

invests it and receives income, she pays income

tax, not him.

MR BEAUMONT: That is right.

Odd Fellows(2) 16 6/11/91

McHUGH J: But is that the proper way to analyse what

happened here? Is the real question this: is the business?

MR BEAUMONT:  That may well be a way of analysing it,

Your Honour. We would say the answer is clearly no

and the reason we say the answer is clearly no is

because it has got a different mode of investment;
it does not issue insurance policies; it has

nothing to do with contractual liability to

insurance policies that have been issued by any

other fund.

McHUGH J: But it is a question of construing not the

Victorian Act but the federal Act and the fact that

you put it in a particular fund or you put the

money in the director's pocket, it is there to pay

the tax on the eligible insurance business, so why

is it to be regarded as an asset of the business?

MR BEAUMONT:  Can I answer that question this way,

Your Honour, by saying that the rules are all quite

clear as to what can be done with that money and

they were apparently complied with and we have seen

the use to which it has been put. And there is no

provision in any way for that to satisfy in any way

the liabilities which have arisen under the

insurance policies which were issued by the other

fund.

Your Honour has said to me, "You are looking

at the Victorian Act." But you have got to look at
the Victorian Act because the tax Act itself

incorporates the Victorian Act.

DAWSON J: Really, you are looking, are you not, at the

Assessment Act because for the purposes of the

Assessment Act the Friendly Society has two

capacities: one, a tax liable capacity; and the
other a tax free capacity. In that sense, the

Income Tax Assessment Act views the Friendly

Society as two different people for different

purposes.

MR BEAUMONT:  Yes, it does, Your Honour, and it specifically

says that the definition of a friendly society by definition goes back to under the State Acts. So

that is the only way you can be a friendly society

under section 116E in the interpretation section,
if you are registered under the State Acts.

Therefore, you must incorporate those laws.

McHUGH J: But, ultimately, the question is whether the

income was derived from the eligible insurance

business. The question is, "What is meant by

'business'?", and obviously the 'business' includes

Odd Fellows(2) 17 6/11/91

its assets and liabilities, including goodwill, I

suppose, but surely the amount in this No 2 fund

was an asset of the business?

MR BEAUMONT:  Not once it was transferred, Your Honour.

MCHUGH J: But why not?

MR BEAUMONT:  Because it was transferred it was placed into

a fund where it was only available for use with the

permission of the government actuary.

McHUGH J: Was it? I may have misunderstood the facts but I

thought the moneys that had been paid into the fund

were to be used to pay the income tax of the

eligible insurance business.

MR BEAUMONT:  They were, Your Honours, but the position was

that they were invested and the income was made
which was then used for the purposes of the whole

Society -

McHUGH J:  I appreciate the point about the income, but the

capital which earned that income was itself

transferred from the eligible insurance business.

MR BEAUMONT:	Yes.
McHUGH J:	And it was to pay a contingent liability of that

business.

MR BEAUMONT:  Yes, and there was to be an excess, say

between six and a half million and seven million,

or something like that, without the exact figures.

McHUGH J: 

So why was not the money paid in to discharge the

contingent liability part of the eligible insurance
business?

DAWSON J: 

The answer to that is that the eligible insurance

fund did not have any liability to pay tax.

MR BEAUMONT:  IOOF had the liability to pay the tax, not the

fund, and the fund had no liability to pay anything

to any of the members of any of the eligible

insurance funds.

McHUGH J: Well, I do not know about that. Does not one

start with section 25, and then one has to go to

23Q and then to 116G?

MR BEAUMONT:  I think not, Your Honour. I think you have to

start with the fact that you start with 23G(l),

which was a longstanding provision since probably

the 1930s in the Act.

MCHUGH J: Yes, I said 23Q.

Odd Fellows(2) 18 6/11/91

MR BEAUMONT:  Yes, 23G(l) was a longstanding provision and

in fact it is not the normal alteration of the

status quo, it is the exact reverse, and it is only

certain income that is deemed to be taxable.

BRENNAN J:  Mr Beaumont, is it possible to distinguish

between the assets of a business and the business

itself in such a way that one regards the payment

of the liabilities of the business, including the

meeting of contingent liabilities, as part of that

business?

MR BEAUMONT:  I think I can only answer that by saying,

Your Honour, that it is possible for one taxpayer to carry on more than one business and that the

assets of one business do not necessarily form part

of the assets of another business.

BRENNAN J:  I am not suggesting anything about assets, I am

looking at activities.

MR BEAUMONT:  But they can be carrying on different

activities. For example, BHP could have a division

making steel and another division just investing

funds, surplus funds, and it might happen that they

get a huge payment in, for example, for the sale of

steel. But once that steel has been sold, and the

proceeds obtained, we say that is the finish of

that transaction.

BRENNAN J:	I appreciate you say that.
MR BEAUMONT:	That is the only way we can put it,

Your Honour.

BRENNAN J:  But I do not know quite why you do not say that

having regard to an eligible insurance business

part of that business does not consist of the

making provision for meeting and discharging the

liabilities of the business.

MR BEAUMONT:  Your Honour, we say that the payment of income

tax is not a trading liability.

BRENNAN J: You say that the payment of income tax on income

derived from a business is no part of that

business?

MR BEAUMONT:  It is something that is separately imposed,

subsequently, and we say authority is with us in

that respect.

BRENNAN J: Perhaps you could refer us to it?

MR BEAUMONT:  Yes, Your Honour. I can refer Your Honours to

the decision of Mr Justice Wilberforce in Tryka

v Newall, 41 TC 146 and, in particular,

Odd Fellows(2) 19 6/11/91

Your Honour, at page 158, and this was a case where

cessation of business and what constituted there

was directly in point, His Honour said, reading

from the paragraph:

There is one other point of some interest

which has been relied on by the taxpayer. I

have been referred to a number of cases in

bankruptcy which establish this: that for the

purposes of the law on bankruptcy a debtor may

be treated as carrying on trade although, to

use one of the expressions in the cases, he

has put up the shutters and he is not doing

anything but still has trading debts. That

line of decisions started with In re Dagnall
in 1896, which was a case concerned with a

married woman and one in which

Vaughan Williams, J., sitting in the

Divisional Court, accepted that a bankrupt who

still had debts outstanding could be treated

as carrying on trade. It has been followed in

a number of cases, including Theophile

v Solicitor-General. That was a case where it

was necessary to decide whether the debtor was

carrying on business in England although in

fact he had left England, and all that was in

England were the debts which he had left

behind him. Now it is ingeniously sought to apply that line of argument here, and to say

that, inasmuch as the Company here had trading

debts undischarged related to its former

business, therefore it must be treated, so

long as those debts remain undischarged, as

carrying on that business. I do not think I

can accept the application of the bankruptcy

cases here. It seems to me that the two

fields are quite different. When one is

considering the question whether for purposes
of bankruptcy laws a person was carrying on

business, it may be necessary to hold that he

does not cease to carry on business when

trading activity has ceased, and for that

reason the Courts have been ready to extend

the Section so as to cover a case where he has

left debts unpaid. But to apply the same line
of thought to Income Tax cases would lead to
very great difficulties and, indeed, would
mean that almost every case which one finds in
the books on such questions as cessation of
business would have been complicated by the
introduction of this question and might,

indeed, have been otherwise decided. One can

in fact see in cases such as cessation that,

if one has to consider Income Tax as a trading
debt, an absurd inextricable circle would be

reached, because one cannot assess the tax
until one decides whether cessation has

Odd Fellows(2) 20 6/11/91

occurred; and yet one could not, if this
proposition were correct, decide that

cessation had occurred until the Income Tax

had been discharged. Therefore, ingenious

though the argument is, I am clear I cannot

accept it here on this particular subject

matter.

That judgment of Lord Justice Wilberforce was

in fact approved by Mr Justice Gibbs, Your Honours,
in Avondale Motors (Parts) Pty Limited v Federal

Commissioner of Taxation, 124 CLR 97, and in

particular at page 102, where there was a question

of cessation of business. Your Honours will be

aware of the type of case with the carry forward

losses and whether or not business had ceased, for

example. His Honour, at the last paragraph on page

102, said:

During the period from 29th February 1968 to

15th March 1968 the company had no

liabilities, and with the exception of the

stationery, no assets. It had no employees

and no premises of its own. It earned no

income and incurred no liabilities. It had no

trade in stock and entered into no contracts.

In these circumstances the Commissioner

submits that immediately before 15th March

1968 the taxpayer was not carrying on any

business. In reply to this submission the

taxpayer relies on the rule, established in

bankruptcy cases, that a trader who has put up

his shutters and has, in fact, ceased to trade

is regarded as continuing to carry on business

until all trade debts have been paid and all

sums due have been collected.

He quotes Theophile v Solicitor-General and In re

Bird v Inland Revenue Commissioners; Ex parte The

Debtor. He then goes on:

It has been held that this rule does not

extend beyond the field of bankruptcy and into

that of taxation law ..... and although I am

doubtful whether the principle can be applied for the purpose of holding that a company was carrying on business within the meaning of s. BOE of the Act I need not decide that

question.

BRENNAN J: That seems to me to show that the existence of

outstanding debts may not be sufficient to hold

that a company which is no longer in fact carrying

on business is for a particular purpose to be

deemed to be carrying on business.

MR BEAUMONT:  I accept that, Your Honour.

Odd Fellows(2) 21 6/11/91

BRENNAN J: But it is another question whether or not a

company or an entity which is in fact carrying on a

business has, as part of its business, the
provision of funds to meet its contingent

liabilities and the meeting of those contingent

liabilities.

MR BEAUMONT:  I accept that, Your Honour, and I accept that

it is the drawing of the line. Your Honour may

well remember the case of Northern Engineering Pty

Limited v Federal Commissioner of Taxation,

29 ALR 563, in which Your Honour and

Mr Justice Toohey and Mr Justice Deane were all on

the appeal court in the Full Federal Court. There

was an attempt in that case - - -

BRENNAN J:	I am sure it is an excellent authority.
MR BEAUMONT:	I was looking for Mr Justice Deane,

Your Honour, because I was going to quote from him.

MASON CJ:  We are prepared to hear a quotation from this

judgment.

MR BEAUMONT: In particular, Your Honours, at page 567,

where Mr Justice Deane at line 21 said:

Mr Sweeney relied upon the decision of the

House of Lords in Theophile v Solicitor-

General to support a general proposition that

a taxpayer does not cease to carry on business for the purposes of s BOE in its relevant form

while any debts remain outstanding either to,

or by, him. Theophile's case was concerned

with the bankruptcy law and was based on cases

in that field. In my view, it cannot be taken

as authority for the proposition that a

taxpayer is, for the purposes of s BOE of the

Income Tax Assessment Act 1936 ..... carrying on

business while so ever any debt owing to him

remains uncollected or unpaid.

We say, Your Honour, that is exactly the same

sort of situation because once you reach the stage

that the money is transferred out from the flexible

insurance fund it has ceased to have any

association with that fund.

TOOHEY J: But why? That seems to me to be the $64

question. You accept that while it is in the

insurance fund it represents income derived from

eligible insurance business. That seems to be

common ground.

MR BEAUMONT:  I would have to under the definition, yes,

Your Honour.

Odd Fellows(2) 22 6/11/91

TOOHEY J:  So it is then incumbent upon the taxpayer to

demonstrate that in some way this sum of money
changes its character by being transferred from one

fund to another, so that it can be said, putting it
in the negative, that the income derived from that

sum of money is not derived from eligible insurance business, although income on that sum of money, had

it remained in the original fund, would clearly

have been assessable income.	What is it that
causes - - -

MR BEAUMONT:  It is not credited. I should make this clear,

Your Honour. The money is actually paid over. In

fact, there was both cash and securities actually

paid between the life insurance fund and the No 2

fund. So that money physically parted, and that is

shown in the evidence. It physically parted, and

it is the same as, for example, Mr Justice Dawson

giving that money to his wife. He has physically

parted with that money.

TOOHEY J:  I am not sure that that helps you. You might be

in a stronger position if that were not the case,

because the way you are putting it to the Court is,

you have an identifiable sum of money which can be

traced through to another fund, which might make it

more difficult to demonstrate that it has changed

its character.

MR BEAUMONT:  But the only money that I can trace through

has, in the hands of the second fund, the nature of

capital.

BRENNAN J: That has got nothing to do with the business

from which it comes.

TOOHEY J: Are you not driven back, are we not all driven

back, to the language of section 166E as it then

stood? Was this income derived from eligible

insurance business? That is the question. I do not pretend it is a simple question but once you get into analogies and so on, it is easy to lose

sight of what the statute is all about.

MR BEAUMONT:  You see, if Your Honour looks clearly, we say,

at the definition of eligible insurance business,

it does not say anything about the income earned by

that business. By its definition the words "in

relation to" only relate to the issuing of the
policies or the undertaking of the liability under

the policies, and once this money is transferred to

the No 2 fund, it has got absolutely nothing to do

with the issue of those policies or any liability

under those policies. The liability under those

policies is that that is actually contained in the

flexible insurance fund itself, not the moneys that

are in the No 2 fund.

Odd Fellows(2) 23 6/11/91

BRENNAN J:  What is the difference between the insurance

fund drawing a cheque and investing the money on

fixed deposit, if you like, with Westpac, and

putting it into this No 2 fund?

MR BEAUMONT: Well, if it put the money into Westpac, I

accept, Your Honour, it would be taxable in its own

hands as part of carrying on that eligible

insurance business.

BRENNAN J:  Why? On your argument, tax has got no part of

it?

MR BEAUMONT:	No, because, Your Honour, on the general policy of income tax and insurance businesses, that
is why.

MASON CJ: It is an asset of the insurance fund, is it not,

in those circumstances?

MR BEAUMONT: That is right. In those circumstances it is

clearly an asset of the insurance company.

MASON CJ:  And therefore income earned from that asset is

income earned by the insurance business.

MR BEAUMONT: Correct. I accept that, Your Honour, and it

is quite correct. But when it transfers it over to

the No 2 fund, it has got no right to that money

any more and, it has nothing to do with the

insurance business.

DAWSON J: Well, that is the point you see. The Society has

two capacities for income tax purposes; it is

merely a question of which capacity it holds this

money in. That is all.

MR BEAUMONT:  I accept that, Your Honour and we say that is

the simple point.

DAWSON J: But you say it is not holding this money in the

capacity of the insurance company; maybe it will

pay its insurance business's tax, but it is holding

the money in its capacity of the Friendly Society.

That is shown because it can spread the money where

it wants to.

MR BEAUMONT:  As a Grand Lodge fund for the benefit of all

of the members.

DAWSON J:  And whether you like it or not, the Income Tax

Assessment Act does view it as having two

capacities.

MR BEAUMONT:  Yes and that is the very way the Income Tax

Assessment Act has been set up.

Odd Fellows(2) 24 6/11/91

McHUGH J: Well, can I just ask your assistance on this:

you keep using the definite article, "a business",

"the business", but neither the definition of

"eligible insurance business" nor section 116G have

any article. They talk about "eligible insurance

business means business of or in relation to the

issuing of eligible insurance policies" and so on.

MR BEAUMONT:  With respect, Your Honour, "business of" can only mean "a business" or "the business".

McHUGH J: Well, not necessarily; perhaps it is talking

about transactions.	I am putting this in your
favour.	I mean - - -

MASON CJ: It would be well disguised.

McHUGH J: Well perhaps the section is talking about income

derived from the collective transactions of issuing

or in relation to eligible insurance policies, so

that you are looking at the transactions as opposed

to some sort of structure. You seem to have

conceded that you have some sort of structure,

which brings in the idea of assets and liabilities, whereas it may be looking really at the income from

transactions which answer a particular description.

I do not know if you have given any thought to

that.

MR BEAUMONT:  I guess, Your Honour, I have done that because

of the way in which the Friendly Societies Act is

structured, which talks about the funds having

their own assets and their own liabilities, putting
their own annual returns and everything in. So,

maybe I am loose with the word "business" as such.

But what I do say is quite clearly that the meaning

of the words "in relation to", in that definition,

can only be in relation to the issuing of the

policies and the ascertainment of the liability;

it in no way relates to the investment of the

moneys and the source of income.

McHUGH J: "Business" only means repetitive activity.
MR BEAUMONT:	Yes.

MASON CJ: But I have not quite understood the answer you

have just given to Justice McHugh. If the moneys

had remained in the relevant insurance fund and had

earned interest, you earlier conceded that the

income derived from the investment of those funds

would have been subject to tax; are you now

denying that in your - - -

MR BEAUMONT:  No, Your Honour,'because in that instance,

once it was derived from that investment, it would

have gone to the benefit of all the policy holders;

Odd Fellows(2) 25 6/11/91

whereas here, it does not go to the benefit of all

the policy holders, and that is the big difference.

What we really do say, in essence, Your Honours, is

that you have really got to look at the source of
the income that is sought to be taxed and that is

what this Act is doing. And the only income in the

hands of the Society that is being sought to be

taxed is income derived from the carrying on of an

eligible insurance business; not from any other

activity that it carries on.

TOOHEY J:  I understand that argument but it seemed to me

that what you were suggesting a moment ago was you

do not look to source, you look to destination.

MR BEAUMONT:  No, but you get the source - no, I am not

saying you look to destination because, for

example, if it comes into the No 2 fund as capital,

it does not matter whether it was, we say, taxable,

non-taxable or whatever because the source of the income of the investment, the interest earned, is

that capital sum of say 200,000 or $200 million as

the case may be.

TOOHEY J:	Once it is derived from eligible insurance business, it does not really matter much what
happens to it after that, does it?
MR BEAUMONT:	It does, Your Honour, because that would mean,

for example -

TOOHEY J:  I hope I am doing justice or not doing an

injustice to your argument because I appreciate

that what you are saying is that the income from

the money in the management fund is itself not

derived from eligible insurance business and that

is what we are talking about. But the capital sum

itself, initially, was derived from eligible

insurance business; there is no argument about

that, is there?

MR BEAUMONT:  No, but it would not matter, Your Honour, we

say, whether it was derived from eligible insurance

business or from one of the other funds because it

would be equally possible to transfer it, say,

from the sickness fund or something like that, if

it had that surplus. And why should there be a

difference if it is transferred from one of the

other funds which is clearly non-taxable? What we

say, Your Honours, is that the source of the income

of the No 2 fund was the interest bearing

investments held by that fund.

MASON CJ:  Mr Beaumont, I think you have made your point

clear, and I do ndt know that you are going to gain

very much by repetition of it except, perhaps, to

attract opposition.

Odd Fellows(2)	26	6/11/91
MR BEAUMONT:	I certainly do not want to do that.	If I

could - without going through all the cases,

Your Honour - just refer to the cases I have put in

my outline of argument, and in particular in

relation to the decision of the High Court in

O'Grady v Northern Queensland Company Ltd,

169 CLR 356 and, in particular, the decision of

Mr Justice Dawson therein in relation to the words

"in relation to", and say with respect,

Your Honour, that we agree that the proper test has

been applied by Mr Justice Dawson in this instance

in that you have to have a look at it in the

context of the whole matter. Mr Justice Dawson

says, and this is four lines into his judgment:

The words "in relation to", read out of context, are wide enough to cover every

conceivable connexion. But those words should

not be read out of context, which in this case

is provided by the Mining Act 1968. What is

required is a relevant relationship, having

regard to the scope of the Act. Where

jurisdiction is dependent upon a relation with

some matter or thing, something more than a

coincidental or mere connexion - something in

the nature of a relevant relationship - is

necessary.

He then went on to say:

The law of contract is an example. A contract may deal with mining or a mining tenement, but

proceedings arising out of the contract may
raise only questions of personal obligations
under a contract rather than questions related

to mining or a mining tenement. That is to

say, the proceedings may raise questions which

are quite outside the area within which the Act purports to operate and which, for that reason, exhibit no relevant relationship with
mining or a mining tenement.

And then on the facts he disagreed with

MASON CJ: But that really is irrelevant to your argument,

is it not?

MR BEAUMONT: It is irrelevant, yes. It is only an attempt

to answer probably an argument by my learned

friend, Your Honour, in advance in relation to the

words "in relation to" as to the meaning to be

given. But it is irrelevant, Your Honour.

MASON CJ:  It might be wise to wait and hear what your opponent has to say.

Odd Fellows(2) 27 6/11/91

MR BEAUMONT:  I think in those circumstances,

Your Honour - I have set out the outline of our

argument and it necessarily follows, and I do not

think there is anything to be gained by me reading

the various decisions in relation to one business

or no business.

MASON CJ: Yes, we understand the argument.

MR BEAUMONT: In those circumstances, unless there are any

further questions, Your Honour - - -

MASON CJ: Thank you, Mr Beaumont. Yes, Mr Fajgenbaum.

MR FAJGENBAUM:  If the Court pleases, might I hand up eight

copies of our outline and provide copies to my

friend.

Our proposition is that the No 2 fund in the

light of the rules, and particularly in the light

of the Friendly Societies Act, section 14(3) in

particular, and in the light of the facts

surrounding the investment of the moneys in the

No 2 fund, is to be seen as part of the eligible

insurance business of the appellant, and indeed,
the transactions within the No 2 fund which

generated the income in question are transactions

constituting eligible insurance business.

The critical facts to recall is that what was transferred into this No 2 fund which was designed

as the repository of the tax moneys of the

appellant to be invested pending the payment of tax

liabilities, was a sum in the year in question of

$7,051,724, which was transferred from the eight

eligible insurance business funds. The greater

part of that money was transferred on 1 July, and

most of that came out of the No 1 fund, and in the
accounts of all the eight funds in question the
amounts so transferred constituting the total of

$7 million-odd was entered in both the revenue

accounts and the capital accounts in the balance

sheet as an income tax expense in the revenue case,

or an income tax liability in the case of the

balance sheet. That is, each of the eight funds

had its own accounting system as required by the

Act, and in the accounts of each of the eight funds

the sums of money ultimately transferred were

entered as an income tax expense on revenue

account, and as a tax liability on capital account.

DAWSON J: So, in effect, they were shown as going out to

pay income tax?

MR FAJGENBAUM:  Yes, and that can be seen if the Court first

turns to page 305 of the appeal book.

Odd Fellows(2) 28 6/11/91

DAWSON J: That is what the funds did go to, is it not?

They did go to pay income tax?

MR FAJGENBAUM:  One presumed that because there is no

evidence, Your Honours, as to what happened to the

moneys - - -

DAWSON J: There is no reason to -

MR FAJGENBAUM:  There is no reason to believe they did not

go to pay income tax.

DAWSON J: -	they did not go to pay income tax.
MR FAJGENBAUM:	No.

BRENNAN J: But the amount that was brought to tax was the

income, or the interest, not only on the sums thus

transferred but on other moneys that stood to the

credit of the No 2 account?

MR FAJGENBAUM:  Yes. The sums of money transferred, the

$7 million-odd, was the tax provision on otherwise

assessable income of some $40 million-odd.

BRENNAN J: Yes, but the assessable income that is in

question here is interest derived on the No 2 fund,

is that not - - -

MR FAJGENBAUM: Yes, in the following year. If I can - - -

BRENNAN J:  The total of the amount derived by the

No 2 fund, not only, or not limited, to the

interest that might reasonably be attributable to

the $7 million.

MR FAJGENBAUM:  The only evidence of any moneys going into

the No 2 fund is the $7 million-odd.

BRENNAN J: Which included some surplus?

MR FAJGENBAUM: That characterization of the surplus, with

respect, is surplus over that which was needed,

perhaps, to pay tax but it was not surplus within the characterization of the $7 million by
the technical meaning of the Friendly Societies

Mr Truslove, I think it was, as surplus being

transferred as well as by reference to tax, was

simply him saying that because I calculated the tax

provision on an accruals basis rather than a cash

receipts basis, I permitted more to be transferred

as a tax provision.

BRENNAN J: It is not on that basis, is it, it is on the

basis that I did not take into account any

deductions?

Odd Fellows(2) 29 6/11/91

MR FAJGENBAUM:  I am not sure, with respect, that that is

so. His viva voca evidence on that point appears,

I think, at page 40, at around line 32:

The amount that was transferred, we can regard

as being comprised of two parts. There is a

part which would meet the precisely calculated

tax liability, that is, tax at 20 per cent

less deductible expenses and there is the

balance of that which is a pure transfer of

free surplus. And that is the excess equal to

tax or an amount calculated at 20 per cent of

the investment income less the actual amount
of tax that would be payable on an accrual

basis allowing for the deduction of expenses.

It is not, with respect, that the actuary or the

government statist has ignored all expenses in

determining that the sum of $7 million-odd could be

transferred. What the actuary or the statist is

determined is that for each of the funds in

question, the eight funds, for the year ended

30 June 1984, tax provisions totalling

$7 million-odd have to be raised. I will permit

that $7 million-odd to be transferred into the

No 2 fund and the transfer began on 1 July 1985

and, of course, the money remained in the No 2 fund

for a substantial part of 1985 because there was

some delay, obviously before the assessments were

raised, which obliged the appellant to pay the tax.

MR FAJGENBAUM: That that is so can be seen, if I may return

to page 305 of the Court book, where there is a

handwritten note setting out the moneys which were

transferred into the No 2 fund in the 1984-85 year,
and the Court will see that the bulk of the money
of the $7 million-odd was transferred on

1 July 1984, indeed out of the flexible insurance

fund No 1.	A total of six million was transferred
on that date.	Some three or so months later

another $289,864 was transferred, and so it goes on

through each of the funds.

Now concentrating on the flexible insurance

fund No 1, one can turn to page 259 of the appeal

book, where one sees the balance sheet of the No 1

fund as of 30 June 1985, as of that date, and over

the page we have the revenue account. In that

balance sheet and in that revenue account the

comparative previous year's figures appear.	You
will see at the bottom, at around line 33, in

respect of the previous year, 30 June 1984, a
provision for income tax of $6,289,864 which

corresponds, of course, with the amount that was

transferred.

MCHUGH J: What page is that?

Odd Fellows(2) 30 6/11/91

MR FAJGENBAUM: That is on page 258, line 33. That sum of

$6,289,864 corresponds with the amount that was

transferred on 1 July as to $6 million and as to

11 October as to the balance. Over the page, the

completion, one sees, as in the revenue account,

the provision for income tax raised as an expense

in the identical sum.

McHUGH J:	Does note 4 appear anywhere?
MR FAJGENBAUM:	Note 4 appears at page 300. There is a

reference to it in our outline and it refers to the

fact that as from 1 July 1983 the eligible

insurance business of the appellant became

assessable under Division 8A.

Now, similar accounting entries appear for

each of the other eight funds. I do not intend to

take the Court to them, but the references appear

at the top of page 3 of our outline.

Now, in the context also of evidence about

surplus it is important to go to what Mr Truslove,

whose oral evidence I have just taken the Court to,

said in a written statement which appears at

page 309 of the Court book - sorry, page 308,

rather, over to 309, in the paragraph numbered 6.

He is there talking about management funds

generally, including this No 2 fund, and the Court

will recall that my learned friend said that
similar rules were established for other similar
friendly societies.

These management funds including that established by IOOF, were designed to be funded by the transfer from the policies

insurance funds of an amount calculated to represent tax payable on an accruals basis

when in fact tax was payable on a cash basis.

So they pass through the accounts as tax.

Now, what happens to this money once it is in

the No 2 fund? An examination of the rules of the

No 2 fund itself - and they appear at page 73 of

the appeal book - will, in our respectful

submission, disclose that the only moneys that can

be paid into the No 2 fund are taxation provisions,

or provisions for taxations calculated for each

financial year. At page 73, at about line 8,

6.12.4 says:

Into this fund shall be paid the provision for

taxation as calculated for each financial

year, and also any interest earned on this

amount.

Odd Fellows(2) 31 6/11/91

So what my friend has called the capital that comes

in from outside the fund into this fund is only the

taxation provision and, of course, the interest

earned on that taxation provision has to remain

invested within the fund. 6.12.5 has the effect,

in our respectful submission, that moneys whilst in

the fund remain held upon trust for the discharge
of the appellant's income tax liabilities that

result from section 116G, because 6.12.5 says:

The fund shall be used for the purposes of

paying income tax assessments as advised by

the Australian Taxation Office from year to

year.

No other purpose. The capital of the fund, whether

it is invested in fixed interest, securities or
building society investments or whatever, whilst in
the fund, has to remain committed to the payment of
the income tax liabilities of the appellant.

If, however, there is a surplus generated

within the fund, that is, if investment of moneys
in the fund generate more moneys than are needed to
discharge the income tax liabilities of the
appellant, then that surplus generated can then be
transferred out of the fund and used as the Society
or as the Friendly Society wishes, subject to the
approval of the government statist and actuary.

But it has to be a surplus generated, and in the

context of the rules it is a surplus generated so

as to produce more than is needed for the payment

of taxation. If I can read 6.12.6:

All or part of the surplus generated by this

fund may be transferred to any other fund

subject to approval of the Board of Management

and the Government Statist and Actuary.

Therefore, we say, it is clear on the face of these rules, whilst in the fund all moneys are held

upon trust to pay the tax generated by the eligible	insurance business. It is only when a surplus is
generated and the money is then taken out of the
fund, that we might be able to say, the nexus is
broken. The income in question, in this case, the
$954,439 worth of interest in question in this case, were all earned within the No 2 fund, not as a result of investment of a surplus generated in
some third fund.

So that is what the rules provide: the moneys

in the fund are held upon trust. But we also

contend that further examination of the

Friendly Societies Act and of the rules will disclose that the moneys are held upon trust for the eight funds making the contributions into the

Odd Fellows(2) 32 6/11/91

No 2 fund, in proportion to their contributions,

and that in -

BRENNAN J:	Why do you say "held upon trust"?
MR FAJGENBAUM:	Because all moneys in the funds are held by

trustees and, in a sense, all these rules are rules

governing a trust, because the Friendly Society is

an unincorporated association and, as I think my
friend pointed out this morning, all its properties
are held upon trustees, and that is required under

section 17 of the Act.

BRENNAN J:	So there are different trusts for each fund?
MR FAJGENBAUM:	Yes, section 17(3):

All property belonging to a society .....

shall vest in the trustees for the time being

of the society for the use and benefit of the

society and the members thereof and of all

persons claiming through the members according

to the rules of the society -

Upon trust for the members according to the rules,

so the rules of the Society define the trust, and

we contend that when section 14 and other rules of

the Society are examined, it will be seen that the

moneys in the No 2 fund are held upon trust, as it

were, or held for the purposes of the eight

contributing funds in proportion to their

contributions and are, in truth, to be regarded as

a combined investment fund, holding moneys pending

the discharge of liabilities that ought to be

discharged by the contributing funds.

If I can take the Court to section 14(3) of the Friendly - - -

BRENNAN J:  Mr Fajgenbaum, can I just - this probably has nothing to do with it, but who is the taxpayer,

the trustees?

MR FAJGENBAUM: Well, it is the trustees who are the

taxpayer, but the Income Tax Assessment Act, of
course, ignores the trust and makes the Friendly

Society as such, the taxpayer.

BRENNAN J:	Does it?
MR FAJGENBAUM:	Yes, but it is in the sense because it may

be that as a friendly society can be incorporated -

the Act of 1958 contemplated incorporation of

friendly societies. This Friendly Society was not

incorporated and Division BA deals with friendly

societies regardless of their incorporation.

Odd Fellows(2) 33 6/11/91

BRENNAN J: It makes them liable to tax, does it?

MR FAJGENBAUM: It makes them liable to tax. Section 116G:

The assessable income of the year of income of

a registered organization being a friendly

society shall include so much of the total

income (other than premiums) of the society of

the year of income as is derived from eligible

insurance business of the society.

Of course, "registered organization" means, amongst

other things, a friendly society that, but for this

division, would be exempt from tax under

section 23G. So ultimately it is the trustee's

obligation to pay the tax, because they are holding
the property under section 17 to discharge the

obligations of the Society.

If I can turn to section 14(3), if it is

convenient to do so now, it appears at page 18 of

the print. It says:

In all societies and branches all moneys

received or paid on account of any particular

fund-or benefit provided by the rules for any

of the purposes in sub-sections (1) and (3) of

section five -

and those subsections comprehend all the eight

eligible funds, so all moneys received on account

of the eight eligible insurance funds -

shall be entered in a separate account

distinct from the moneys received and paid on

account of any other fund or benefit -

we are agreed -

and the moneys belonging to any one such fund

or benefit shall not be used in any manner for

the advantage of any other fund or benefit.

Moneys paid into the No 1 fund cannot be used for

the benefit of the No 2 fund.

Provided always that it shall be lawful to

apply any savings out of moneys applicable for

management expenses in aid of any of the funds

or benefits of the society.

We are not here dealing with management expenses.

And the further proviso:

that on a valuation being made under this Act

of the assets and liabilities of a society the

Government Statist may authorize the whole or

Odd Fellows(2) 34 6/11/91

any portion of any surplus of assets over

liabilities thereby disclosed in respect of

any one fund or benefit to be used or applied

in any manner for the purposes of the same or

any other fund or benefit.

It is clear that the $7 million-odd transferred out of the eight eligible funds into the No 2 fund were

not transferred as a surplus of assets over

liabilities thereby disclosed upon the valuation of

assets. That was not the case. It was simply the

transfer of the provision for taxation. There is

no attempt, as appears from the appeal book, to

make a valuation of assets and liabilities to

determine any surplus, whether there is in fact any

surplus which may be transferred subject to this

proviso.

If I can interrupt myself for a moment, my

learned junior brings to my mind that under

section 23(4), friendly societies can convert

themselves into corporations. And if that is so,

with respect, we say that the moneys contributed by

each of the eight eligible insurance business funds

to the No 2 fund whilst remaining in that fund can

only be used for the benefit of the contributing

fund and not for the advantage of any other fund.

Therefore, the moneys paid in from the eight funds to the No 2 fund, held in the No 2 fund for the

benefit of the contributing funds to discharge the

tax liabilities that they have generated and only

if and when a surplus is generated under

rule 6.12.6 may that surplus be transferred out to

any other fund, that surplus having occurred upon a

valuation of the kind that section 14(3) in the

second-mentioned proviso refers to.

The $7 million-odd transferred from the eight

funds to the No 2 fund, whilst remaining in the

No 2 fund, at all time belonged to, within the

meaning of section 14(3), the eight contributing

funds, $6.6 million-odd to the flexible life

assurance fund No 1.

Our contention that the No 2 fund is to be

regarded as a combined investment fund is made good

by an examination of the rules of the fund. If we

can first turn to rule 7.1, which my friend has

taken the Court to already which appears at

page 73. Paragraph (a), which begins about

line 18, says:

The Society may, for the purpose of providing for the welfare of its members and their

dependants, maintain benefit funds whose

nature and circumstances shall be decided by

the Grand Lodge in Session. Each Benefit Fund

Odd Fellows(2) 35 6/11/91

shall be kept clear and distinct from each

other fund.

That reflects section 14(3).

The assets of any Benefit Fund may be combined

with the assets of another fund, for

investment purposes, only with the specific

written consent of the Government Statist.

And that is what we contend the No 2 fund is.

Indeed, some of the benefit funds have specific

rules permitting the combination of assets for

investment. They are referred to at about point 7

of page 5 of our outline, whereas some other funds did not seem to have a specific rule, for example, the flexible insurance fund No 1 does not appear to

have a specific rule within the rules governing it

at 7.4, which were the rules governing the flexible

insurance fund No 1. But, of course, it takes the

benefit of the rule in 7.l(a).

Some funds take advantage of the general rule in 7.l(a) governing all funds, other specific

funds, of which reference is made to in our

outline, have specific rules permitting combination

with moneys held in other funds for the purposes of

investment if the government statist so approves.

Rule 7.3.2, a rule of the Assurance Benefit

Fund is an example; it appears at page 79 of the

appeal book at about line 37:

The Fund shall be kept separate and distinct

from all other funds but the assets of the

Fund may, with the consent of the Government

Statist be combined with other benefit funds

for investment purposes.

To the extent that it is relevant, it is

appropriate to recall that Mr Jacobs, who was an

officer of the appellant, said in his evidence at

page 225 - and that which appears at page 225 is a

written statement of the evidence that was handed

up - at lines 11 and 12 which are the last two

typewritten lines on that page:

The only business carried on was the

investment of moneys and the use of proceeds

to discharge the tax liabilities of -

and I think that word is a misprint for "other"

funds. It says "either funds", but the only word

that there makes sense is "other".

None of the funds, as far as we can see, have

rules which permit the transfer or the payment of

Odd Fellows(2) 36 6/11/91

any moneys into the No 2 fund other than the rule

in 6.12.4 providing for payment of the tax

provisions in the No 2 fund. There is no authority

in the rules, in other words, to pay money into the

No 2 fund other than 6.12.4.

All funds have rules which enable moneys to be

transferred into other management funds, and I set

those rules out at pages 5 and 6 of our outline.

There is no need to take the Court to them in

particular. They are all there. There are two

funds called Grand Lodge Funds - the Life Assurance

Management Fund and the Management Fund. Both are

concerned with administration, and each of the

eight benefit funds so far as we can see has a rule

which permits the transfer or the payment of money

into one or other of those management funds, not

the No 2 fund, of course, for management purposes.

So we are faced with the proposition that none of the rules of the funds permit transfer of moneys

into the No 2 fund so as to sever the connection.

The only rule which permits the payment of moneys into the No 2 fund is 6.12.4, and that, with

respect, does not operate to sever the connection

because so transferred pursuant to the right given

by 6.12.4, the money so transferred still belongs

to the fund making the contribution and that flows
from the provisions of section 14(3) because all

moneys paid on account of any particular fund

belong to that fund. To repeat section 14(3),

there is an injunction in section 14(3) prohibiting

the use of moneys belonging to any fund for the

benefit of any other fund.

So accordingly, we contend that the moneys

paid into the No 2 fund still belong to a

contributing fund, and I repeat there is no

evidence, and it is not in any way suggested that

those funds are surplus that could be transferred
out of the eight contributing funds, having regard

to the second proviso in section 14 which enables a

to be transferred out of a fund for the benefit of	surplus upon a valuation of assets and liabilities
another fund, because there is no such evidence. All that the witnesses said, and at most was
Mr Jacobs, I think it was at page 40, all he
transferred was:

an amount in excess of what was required to

meet the taxation liability.

He says that in the first place at around line 16.

Now, to meet those two objectives, I set up a

system which transferred from the life

assurance fund to the life assurance

Odd Fellows(2) 37 6/11/91

management fund number 2, an amount in excess

of what was required to meet the taxation

liability.

That is again repeated, at around line 31, but

there is no evidence that it was so transferred

having regard to evaluation made within

section 14(3) which requires a valuation under this

Act, and which is a complicated process, the basis

of which is set out in section 14(l)(e) which

appears at page 16, a provision which requires the

government statist, at least once every five years

and perhaps at earlier intervals to value and

report on the assets and liabilities of the fund.

It is a complicated section but that is its

substance.

BRENNAN J:  Mr Fajgenbaum, why is it that, even if one says

that there is no breaking of a relationship between

the money that is invested out of the life
insurance fund into the No 2 fund, the business of
the No 2 fund of investing that money is to be

characterized as in relation to the business of

life insurance? Why is it not a separate business

and the transaction regarded more as being in the

nature of a loan than anything else?

MR FAJGENBAUM: Well, that is ignoring the problems created by unity of legal personality, for the time being.

The problem with that analysis, with respect, is that the rules require the moneys to be invested,

if I am correct, for the No 1 fund. That No 1

fund, for example, the Flexible Life Assurance Fund

No 1, is clearly a fund through which the eligible

insurance business is being conducted. They are
conveniently known as the eligible insurance funds
or the eligible insurance business funds.

Therefore, the moneys in the No 2 fund are an

integral part of the moneys in the contributing

fund until transferred out of the No 2 fund when an

appropriate surplus is determined.

BRENNAN J: They belong rateably, do they?

MR FAJGENBAUM: Rateably, yes. we say that, rateably. And

whether one looks at the business or the

transactions of a business, having regard to what

His Honour Justice McHugh said earlier in the

proposition in support of my friend, as it was put in argument ..•.. friend, whether it is the business

or a transaction in a business of life insurance,

involves not only the receipt of premiums and the

payment of benefits when a policy matures or the

peril insured against is suffered, but it also

includes investment. It also includes the receipt of income for the benefit of those policy holders. It also includes the discharge of all the

Odd Fellows(2) 38 6/11/91

liabilities incurred in connection with the receipt
of the premium, the investment of the premium
income, the receipt of the interest or the

dividends or the profits on the investments, and it also, we contend, involves the discharge of the tax

liabilities incurred in connection with that.

We are concerned with an ongoing business.

Any transaction, we contend, which is a step in the discharge of a liability - sorry, let me withdraw

that. Any step taken or anything done to assist in

the discharge of a liability incurred in the course of an ongoing business is a transaction within that business.

MASON CJ: But is the investment of the funds with which to

pay tax a step in that business?

MR FAJGENBAUM:  Yes.

MASON CJ: Why, because the purpose of the investment is not

to derive funds for the insurance business?

MR FAJGENBAUM:  Is Your Honour assuming that the moneys

remain in the benefit fund?

MASON CJ:  No, I am assuming that the moneys are now in the

No 2 fund.

MR FAJGENBAUM:  I am sorry, yes. We would say, in those

circumstances, that it is a step in the business because if it is not a step in the business then

section 14(3) is being broken. We are not

suggesting that the Friendly Societies Act has in

any way been breached. Section 14(3) prohibits a

friendly society using moneys belonging to any fund

to be applied for the benefit of any other fund.

Section 14(3), for example, prohibits the

6.6 million-odd belonging to the No 1 fund, as it
appears in the balance sheet as of 30 June 1984,

being applied at any later time, say, as to six

million on the following day, on 1 July.

MASON CJ: Would you have any answer to it but for the

presence of 14(3) and the prohibition that it

imposes?

MR FAJGENBAUM:  I may, but there is no need, with respect,

to look for it, because section 14(3), we say,

compels the conclusion. But the answer may be that

it can be characterized as, having regard to the

rules, simply as a convenient repository for the

investment of moneys belonging to the No 1 fund to

enable the discharge of - sorry, of the eligible

insurance business funds, a convenient repository

for the investment of their moneys, the product of

which is to be used to discharge liabilities

Odd Fellows(2) 39 6/11/91

incurred in respect of the business conducted by

them. We would say that.

MASON CJ: Yes.

DAWSON J: What do you say the effect of being in breach of

section 14(3) would be?

MR FAJGENBAUM:	We have not suggested that.
DAWSON J:	I know, but if that were the conclusion, what would the effect be?
MR FAJGENBAUM:	If there was a breach of section 14(3) then

in all probability the breach would mean that the

money still remained on perhaps a constructive

trust for the benefit of the policy holders in the

eligible funds, and once that trust is found then

the product of the investment of moneys in breach
of section 14(3) belongs to those eligible
insurance fund funds from which the moneys, on the

hypothesis, have been unlawfully taken.

With respect, it is an irrelevant proposition,

as my friend has stressed, that the government

statist has permitted the No 2 fund to invest more

dangerously or more liberally than he would permit

moneys in the eligible insurance funds to be

invested. The Court will recall that my friend

said - and we do not gainsay this - that moneys in

the eligible funds could only be invested in

trustee securities. The range of investments

available to the No 2 fund were larger.

With respect, that is simply a matter in which

the government statist, in the discharge of his
function to ensure that these funds are

prudentially managed, permits, but it is of no

legal consequence to the question at hand and, with

respect, is irrelevant.

McHUGH ~=	Where does the government statist get his authority to allow them to invest the money other
than in trustee type investments?
MR FAJGENBAUM:	I do not think, as I recall, that there was

a specific power, as it were, within the - there is

nothing in the Act which limits particular ranges

of investments.

McHUGH J: Except section 17.

MR FAJGENBAUM:  Yes, that, for example, life funds can only

invest in certain trustee securities and other

funds in other securities, but under section 17 I

think it clear, and having regard to his general

Odd Fellows(2) 40 6/11/91

powers, the trustee controls the investments. I

think also there are specific rules in property

investments as well. For example, turning to 7.4.2

at page 89, which is the rules of the Flexible

Insurance Fund No 1 which was by far the largest

contributor to the No 2 fund - it contributed

something in excess of $6.6 million - it says:

The assets of the Fund shall be invested in

such securities as are approved by the

Government Statist.

That appears at about lines 7 or 8. All the funds

have similar rules, and of course the rules are

rules which can only apply if the government

statist approves them. So ultimately, through the

Act or the rules, it is the government statist who

has a discretion as to the objects of investment.

If it be thought that the No 2 fund was not an

integral part of the business of managing, as it

were, the funds of an insurance fund, then we would

contend that the words "in relation to" take us

that far, and without going to any authorities that

the investment of moneys for the purposes of
discharge of a tax liabilities incurred in respect
of the business conducted through the eligible

insurance funds is real and substantial, the

connection - it is not remote, it is direct and

most intimate, and I can do nothing else but repeat

the formulae and ask the Court to accept them as

being applicable here.

I think, with respect, that that is about all

that I have to say except for, perhaps, two

things - - -

BRENNAN J:  Can I just take you back to your last submission

however. The words "in relation to" are not a

business in relation to another business, it is a
business in relation to the issuing or undertaking

of liability under eligible insurance policies.

MR FAJGENBAUM: There are two businesses that the section

contemplates.

BRENNAN J: Yes.

MR FAJGENBAUM:  There is the business or a business. not want to buy into any construction problem of I do

the kind raised by Justice McHugh, but it is
business of issuing or undertaking of liabilities

under eligible insurance policies or business in

relation to that business.

BRENNAN J: Well no, not business in relation to that

business; business in relation to the issuing.

Odd Fellows 41 6/11/91

MR FAJGENBAUM: Business in - no, with respect; if one

ignores the words "or in relation to" the

definition in section 116E is that:

"eligible insurance business" means business of ..... the issuing of, or the undertaking of

liability under, eligible insurance policies;

And it also means, business:

in relation to, the -

business of -

the issuing of, or the undertaking of

liability under, eligible insurance policies.

BRENNAN J:  I do not read it that way at first instance; it

is not the first impression. In other words, why

is the insurance business not the sort of business

that you expect to find being conducted inside the

doors of a place which is issuing and undertaking

liability under policies?

MR FAJGENBAUM:  Yes. Perhaps the contrast I am seeking to

set up is a purely linguistic one of no

consequence, because business in relation to the

issuing, or the undertaking of liability under

policies, must include the business of investing

the moneys, the premium income that comes in; the

discharge of liabilities under the policy; the

management of the investment income and the
discharge of all other expenses incurred in, not
only the issuing of the policies, but the
management or the investment of the funds from

which the benefits are ultimately going to be paid.

BRENNAN J: Yes.

MR FAJGENBAUM:  What my junior wishes me to stress and I

shall, is that what is being defined is "business",

means the business of issuing the policies or the the eligible insurance business, and the "business" business in relation to the issuing of policies.

BRENNAN J: The question really is, once you have made your

provision for tax, is that the end of your

business?

MR FAJGENBAUM:  The answer is no.

BRENNAN J: Well, I understand that.

MR FAJGENBAUM:  It may be that simply having a tax liability

discharged does not involve you in the carrying on

of a business other than for bankruptcy purposes,

but if you still carry on that business as an

Odd Fellows 42 6/11/91

ongoing business, the discharge of the tax

liabilities and that otherwise ongoing business is

an integral part of the business.

The other matter that I wish to raise is in

response to my learned friend's submission, for

what it is worth, is in paragraph S(d) on page 2 of
his outline. My friend says if the moneys that were invested in the IOOF building society were

moneys that were so invested, because they were not

required for the payment of tax, or the liabilities

of the No 2 fund.	We contend that that is not
clearly so.

What the government statist has done in

connection with the building society was that on
the day in question the - that appears at page 228

of the court book - the day in question being

3 June 1985, just before the close of the relevant

financial year, the government statist has

authorized the No 2 fund to invest $300,000 of its

dollars - we would say belonging to the
contributing funds - in the building society, pursuant to section 17(1)(k) of the Friendly

Societies Act which prohibited friendly societies

from investing any of their funds in building

societies without the consent of the government

statist.

It is clear that at that stage there has been

no valuation of any moneys within the meaning of

section 14(3) or the second proviso to

section 14(3). There has been no attempt to have

such a valuation nor could it have occurred on
3 June at that time and the letter appears to be
confused, in any event, because it assumes that the

balance of $7,051,724 was in the No 2 fund as at

30 June 1984. We know, from other evidence, it was

not transferred into that fund until on or after

1 July 1984.	So it has it in the fund far too
early.

So, it is not, with respect, to be

characterized as an investment of surplus within

the meaning of rule 6.12.6 or surplus generated but

simply as a permission required under the Act for

any moneys belonging to any particular fund before

it can be invested in building societies.

Unless there are other matters that it is

thought I can be of assistance to the Court, they

are the submissions for the Commissioner.

MASON CJ:  One question I would like to ask you is this:

you now rely quite strongly on section 14(3).

MR FAJGENBAUM:  Yes.

Odd Fellows(2) 43 6/11/91

MASON CJ:  Did you rely on section 14(3) in the courts

below?

MR FAJGENBAUM:  Not as strongly as we are now.

MASON CJ: But at all?

MR FAJGENBAUM:	Yes.
MASON CJ:	In the same way that you have relied on it here?

MR FAJGENBAUM:  I am not sure. I cannot remember. Perhaps

my learned friends can recall.

MR BEAUMONT:  We know you did not. We have got your

submissions to prove it.

MASON CJ: Well, that seems to me to give rise to a problem

because it creates some issues which were not

raised and were not determined by the courts below.

MR FAJGENBAUM:  But they are matters, with respect, that can

be raised here, if that be so for the first time,

because - - -

MASON CJ:  One thing, for example, is on your argument the

rules of the Society would be invalid to the extent

to which they conflict with section 14(3).

MR FAJGENBAUM:  Yes, but I have not raised any suggestion

that the rules are in conflict.

MASON CJ: But you cannot really avoid it that way, can you,

because your reliance on section 14(3) would seem

necessarily to undermine the reliance which the

appellant places on a transfer pursuant to the

rules.	And you say it creates a constructive
trust.

MR FAJGENBAUM:  No. Well, I do say that, but that is not a

matter which, on the evidence, has occurred in this

case. The evidence was all led before the

Administrative Appeals Tribunal. The argument in

the court below was an argument on appeal direct

from the AAT in to the Full Federal Court, and that

was on the basis of the evidence as led below. So

nothing that was said in the Federal Court below or

not said could have affected the course of the

evidence in that case or the way that case ran. I

am not sure - I was not present, I was not retained

at the hearing originally in the AAT. I do not

know whether the argument in the AAT ran

differently from the argument in the Full Federal

Court. I believe it did, however, having regard to

discussions I had with my then junior in the

hearing on the appeal. She had been retained to

appear alone for the Commissioner at the AAT.

Odd Fellows(2) 44 6/11/91

BRENNAN J: But are we to conclude this case on the footing

that the income which is in question here belongs

beneficially to the policy holders or belongs

beneficially to the Society at large?

MR FAJGENBAUM:	To the policy holders.
BRENNAN J:	Why?
MR FAJGENBAUM:	Because whilst it remains in the No 2 fund and unless and until it is generated as surplus, we
would say it remains committed as a combined
investment fund for the benefit of the contributing
funds in their rateable shares, in order to
discharge tax liabilities generated by those funds.
BRENNAN J:	Does 14(3) figure in that argument?

MR FAJGENBAUM:  No. I think that was how it was put below,

in substance. 14(3) was referred to but 14(3) is

not a necessary step in that argument. I think I

answered a question raised by the Chief Justice

earlier in relation to these matters on an

assumption that 14(3) did not apply. What we were

contending for primarily below was that the moneys

were to be regarded in truth as held by the No 2

fund for the purposes of discharging tax

liabilities incurred as a result of the conduct of

the business of the eight eligible funds, and so

held the investment of them and the interest

generated by them being held because of rule 6.12 -

the emphasis below was on rule 6.12 - the moneys

still remain held on trust, as it were, for tax.

Whose tax? The tax generated from the eligible

insurance fund. And that, if I may say so, appears

in our written submission in paragraph 6, at the

bottom of page 3 of our outline. Our argument

below concentrated on the effect of rule 6.12.

I must concede, also, that we did not argue

the case on a basis that was ultimately decided our

way by the court being appealed from.

MASON CJ:  Interesting to speculate on what basis you did

argue the case.

MR FAJGENBAUM:  On the effect of rule 6.12.5. My friend has

got multiple copies of the outline below. Perhaps

it might be of assistance to the Court if I hand

those up.

MASON CJ:	Thank you.
MR FAJGENBAUM:	If I ask the Court to turn to paragraph 5 on page 3 of the earlier outline of argument. What is
not stressed in this outline - no, it is. On the
first page is the significance of rule 6.12. The

Odd Fellows(2) 45 6/11/91

significance of rule 6.12 appears on the first page

in relation to the findings of the tribunal being

appealed from. The reference to section 14(3) -

no, that is irrelevant.

MASON CJ: That is on page 5?

MR FAJGENBAUM:	Yes, but it is irrelevant, Your Honour.
MASON CJ: Yes.

MR FAJGENBAUM: That was the outline of the argument below.

My recollection is that there was far greater

stress on rule 6.12 in the course of argument than

would appear from this outline.

DAWSON J: In effect, the argument here was that the

activities of fund No 2 were part of the business

activities of the eligible insurance funds.

MR FAJGENBAUM:  Yes.

DAWSON J: Nothing more, nothing less than that.

MR FAJGENBAUM: Nothing less, yes, as is developed.

McHUGH J:  Can I just ask you some questions about where you

say the limitation of this section is.	If you go
to section 16G.	Now, the $7 million which was

transferred was part of the income of the Society

derived from eligible insurance business during the

year 1983/1984, was it not?

MR FAJGENBAUM:  The assessable income was, yes.

MCHUGH J: The $7 million?

MR FAJGENBAUM:	Yes.
McHUGH J:	So during the year 1983/1984 any interest earned

on that $7 million would clearly be caught by the

section?

MR FAJGENBAUM:	Yes.
McHUGH J:	When could it come about that money ceases to be

caught by 116G when it is income that has been

derived from eligible insurance business?

MR FAJGENBAUM:  We would say - and this is consistent both

here and below - that the money in the No 2 fund

could only be severed, as it were, from the

eligible insurance business - if I can use that

non-technical expression - when a surplus generated

was then transferred out under rule 6.12.6.

Odd Fellows(2) 46 6/11/91

McHUGH J: So let us forget the $7 million. Let us take

other money that was earned in that year 1983/84,
and there is a surplus transferred out. You

accept, do you, that once there is a surplus

transferred, any income earned on that surplus is

no longer derived from eligible insurance business?

MR FAJGENBAUM:  The only reason I hesitate - it may be

transferred to something else which, as it were,

re-establishes the relevant connection. But on the

assumption that it is transferred out to something

completely alien, the answer is clearly yes.

McHUGH J: Well, what stops it being derived from eligible

insurance business?

MR FAJGENBAUM:  When it can no longer be said that this

money which I have earned - - -

McHUGH J:  The hypothesis is you have received the money

from eligible insurance business - - -

MR FAJGENBAUM:  And you have to identify a source from

whence it came.

McHUGH J: And it came from eligible insurance business. Now, true it may have been transferred out as a

surplus, but it is still money that did come from

eligible insurance business. Yet you say it - - -

MR FAJGENBAUM:  No, but the nexus would then be broken. It

would be, we would contend, in the same situation

as Justice Dawson's concern about the money I think

he gives to his wife, and she invests it and

derives the income.

DAWSON J: Yes, but you have to ask the question why, in

this situation Justice McHugh poses, there is a

breaking of the nexus, whereas in the present situation, apart from any question of wrongly

treating something as a surplus, there is not a

breaking of the nexus.

MR FAJGENBAUM: Because the fund that has generated this income, this hypothetical third fund, which has

generated this income, is not part of the business

because it has no business in relation to the

issuing of policies.

McHUGH J: That does not seem to be the question that the

section asks.

MR FAJGENBAUM:  It may be in some of the source cases - I

cannot recall which case it was - but there is an

example given by Mr Justice Rich or Mr

Justice Starke about the trader in New York doing

Odd Fellows(2) 47 6/11/91

good business with an Australian tourist who comes

along with his hard-earned Australian money,

perhaps converted, and spends up big. The New York

shopkeeper does not derive his income from

Australia. Why that is so is you look at the

relevant transactions - - -

McHUGH J: But supposing the Australian had taken his money

over there and invested it on the New York Stock

Exchange. Is it derived from Australia? It is not

on the cases, I know.

MR FAJGENBAUM:  No. And this would no longer be derived

from the eligible insurance business because, in

our case, the moneys would not be subject to any

rules controlling the eligible insurance business.

And we say 6.12 is a rule relating to eligible

insurance business in this context, and say that

6.12.6 permits of a surplus generated being

transferred out and breaking the nexus, as it were,

and committing it. But one has to take a practical

view about these things ultimately, and as is often

said, the practical view one takes has to be done

by reference to legal relationships and the

relevant legal relationships in this case are the

legal relationship constituted by the rules.	I do
not know whether I can take the matter further.

McHUGH J: Yes.

MR FAJGENBAUM:  Yes, as my junior says, the nexus is

provided by rule 6.12 subject to 6.12.6 which

provides the only way of breaking the nexus.

BRENNAN J: But 6.12.6 is -

MR FAJGENBAUM:  The surplus generated.

BRENNAN J: But that is the rule which is relevant to the

income derived by this fund, is it not, because ex

hypothesi the capital amount that is invested by

this fund is sufficient to discharge the tax

liabilities?

MR FAJGENBAUM:  No, it may not be because they may decide to

leave it in the fund as a provision for the tax

that is likely to be accrued next year, because

these are contingent liabilities we are concerned

with. The moment the money, the tax provision, was

transferred into the No 2 fund, on 1 July, there

was a contingent liability in respect of the

following year already for tax because the company

was, ex hypothesi, trading from one day in the

1984-85 year. That will generate a tax liability

and therefore perhaps a contingent provision ought

to be set aside for tax to be paid to the

Commissioner in the year 1985-86. It is a

Odd Fellows(2) 48 6/11/91

neverending circle until the shutters are put up,

to use that expression.

BRENNAN J: There is the advantage of paying it in on an

accruals basis and paying it out on a cash basis,

so that the time element is not a very substantial

one.

MR FAJGENBAUM:  Yes, but nevertheless the moneys do not have

to be wholly dispersed in the one year; they can

be kept in the No 2 fund as a provision for future

tax liabilities. Now, unless again there are any

further matters - - -

McHUGH J:	You do not seem to rely on the reasoning of the majority in the Full Court.
MR FAJGENBAUM:	No and, as I said earlier, it was not an

argument that we had put.

MCHUGH J: Yes.

MR FAJGENBAUM: With respect, our argument is best reflected

in the judgment of Justice Northrop, although he

decided adversely to it. If the Court pleases.

MASON CJ: Yes, thank you, Mr Fajgenbaum. Yes, Mr Beaumont.

MR BEAUMONT:  Your Honours, in respect of my learned

friend's outline, having regard to what we have put

in by his submissions and the summary of argument

in front of the Full Court, you can see we are
somewhat taken back by this suggestion, for the
first time, of some sort of trust and/or breach of

duty. There was no notice, which we say should

have been given to us under Order 70 rule 6(5),

because we would point out, Your Honour, as I have

already in my opening address pointed out to you, that the Full Court have accepted that everything did in fact proceed properly and, therefore, if you

want to upset that as a finding, there should have

been a notice of contention.

Secondly, this case has always proceeded, from

the very start, on the basis that the transfers

were valid and that the only question was, whether

or not the interest that was received by the No 2
fund became part of the eligible insurance business

or not.

MASON CJ: But as I understand it, it is not now submitted

against you that the transfers were invalid; it is

suggested that the transfers were valid, but none

the less it results in the moneys being held in

trust for the beneficiaries of the No 1 fund.

Odd Fellows(2) 49 6/11/91

MR BEAUMONT:  As I say, this is the first time we have heard

of that argument that they are held in trust. In

fact, Your Honour, it was never put to Mr Truslove

or Mr Jacob that they had no power to authorize the

transfers, which is what you have got to rely on in

order to establish that argument. Secondly, we

would point out, Your Honour, that rule 6.12 was

enacted after all the other rules and therefore,

although there is no specific rule in each of the

benefit fund rules such as the Flexi Insurance Fund

No 1, Flexi Insurance Fund No 3, et cetera, that

they are all subject to that rule and that the

power comes from 6.12.4 in the circumstances. Lastly, Your Honour, there are two things:

firstly, that quotation from Mr Justice Rich,

Your Honour, is contained in the United Aircraft

Corporation case, 68 CLR 525, and the page number

is 539. I do not need to read it; merely to draw

Your Honours' attention to it.

Lastly, Your Honours, we would say that it is

quite clear that the interest in the fund must

always be surplus, no matter what my learned friend
says. It must always be surplus by its very

nature, and that therefore there must have been a

transfer and that income was not required to pay

tax - that is, the interest income - on the $7

million that was invested, nor any liability under

the policies. So it must always be surplus.

Unless there are any other matters?

MASON CJ:  Thank you, Mr Beaumont. The Court will consider

its decision in this matter.

AT 4.15 PM THE MATTER WAS ADJOURNED SINE DIE

Odd Fellows(2) so 6/11/91