Independent Order of Odd Fellows of Victoria v Commissioner of Taxation

[1991] HCATrans 65

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M46 of 1990

B e t w e e n -

INDEPENDENT ORDER OF ODD

FELLOWS OF VICTORIA

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Application for special

leave to appeal

BRENNAN J
DAWSON J

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 8 MARCH 1991, AT 10.21 AM

Copyright in the High Court of Australia

Odd Fellows 1 8/3/91

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

my learned friend, MR J.G. JUDD, on behalf of the

applicant in this matter. (instructed by Higgins

Teale)

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

together with my learned friend, DR S.C. KENNY, for

the respondent. (instructed by Australian

Government Solicitor)

BRENNAN J: Yes.

MR BEAUMONT: If the Court pleases, Your Honours, the scheme

of the Income Tax Act allows for certain defined

bodies to be exempt from income tax. Under

section 23(g), friendly societies are specifically

included as exempt, and be definition in section 6,
friendly societies are defined by reference to the
various State Acts under which they are registered.
The question to be considered here is whether

Division 8A is to have a limited or wide

application, and that is, whether it is to limit

the exemption which is otherwise granted.

We say that Division 8A is designed to

accommodate the fact that friendly societies carry

on business in separate funds, but it is necessary

to isolate the eligible insurance business, as it

is only in these defined circumstances that an

exemption can be taken away. The very nature of

the Friendly Societies Act is that it distinguishes

between a number of businesses operated by one

taxpayer and the way in which friendly societies

operate or carry on their affairs must be in
accordance with that State Act, and that State Act

requires that they maintain separate funds with

respect to each activity carried on.,

Your Honours, I do have the relevant

provisions of the Friendly Societies Act, if

Your Honours would be assisted by it, but most of

them are, in fact, summarized at page 21 of the

appeal book.

BRENNAN J: But the essential question is whether the

income that was assessed to tax in this case is

income derived from eligible insurance business.

MR BEAUMONT:	That is correct, Your Honour, yes. The No 2 fund, in this instance, did not carry on an
eligible insurance business directly.

BRENNAN J: Well, obviously no fund carries on a business.

MR BEAUMONT:  Yes they do, Your Honour. It has been

conceded that, in fact, eight separate funds do

carry on an eligible insurance business.

Odd Fellows 2 8/3/91

BRENNAN J:  A fund is not a person.

MR BEAUMONT: Well, although a fund is not a person,

Your Honour, the position is that under the

Friendly Societies Act you have to maintain for the

members of various funds, something. Now that is a

separate fund, and all the moneys of the members of

that particular fund must be kept separate from

other members' moneys.

BRENNAN J: Certainly.

MR BEAUMONT:  Now that means, therefore, Your Honour, that

where there is a group of people who have an

activity of a business which is constituted by

issuing insurance policies, et cetera, that is

limited to one fund, and it is only the members of

that fund that are entitled to benefit. Now,

whether you call it the fund having a separate

entity, or all the members of that fund, with

respectful submission, it does not make any

difference, because each of the funds is composed

only of the members of that fund.

BRENNAN J: There is only one taxpayer, is there not,

Mr Beaumont?

MR BEAUMONT: 

Yes, Your Honour, there is only one taxpayer,

but it is not all of the activities of the taxpayer
or businesses carried on by the taxpayer which are
taxable.

BRENNAN J: Well quite, but I mean, we need not talk about

the members of a fund, we are talking about the

income of a taxpayer which is either exempt or not

exempt.

MR BEAUMONT:  Yes, Your Honour, but what you have got to

look at is that there are separate businesses

carried on by each separate fund, and under the

provisions of the Friendly Societies Act, they have

to, in fact, keep separate accounts for each of
those separate businesses.	Now, so far as there

are eight separate funds that carry on eligible

insurance business, that is acknowledged, and it is

the income from that fund which gave rise to the
issue of the assessment of some $43 million worth

of taxable income.

BRENNAN J:	Does each of those business then pay tax?
MR BEAUMONT:	No, the Society pays the tax, Your Honour.
BRENNAN J:	Why does each business not pay its own tax?
MR BEAUMONT:	Because it does not receive an assessment from

the Commissioner, otherwise it would. However,

Odd Fellows 8/3/91

each one of those businesses has to only put in the

amount of tax in so far as it relates to that fund,

and you cannot use the moneys of another fund to

pay the liabilities of that fund. Now, it would be

a gross breach of duty and of trust if you used the
general funds of the Society to pay for the income
tax liability imposed by the Commissioner in

respect of a business of which the other members

had no connection. So you cannot used, because you

would be in breach of trust and in breach of the
State law, the funds of a grand lodge fund, which

is not even a benefit fund, but for all the members of the whole of it, who have got nothing to do with the insurance part of it, to pay the income tax

liability.

BRENNAN J:  How then does the income tax liability ever come

to be paid?

MR BEAUMONT:  It is paid from the provision put aside in

each of the eight eligible insurance funds; in each

of the funds that carry on business which is
defined as eligible insurance businesses, and they

each pay their own proportion according to the

amount of income which is earned by each of those

funds that is carrying on an eligible insurance

business. So that is how it is paid.

Now the No 2 fund with which we are dealing

here does not directly carry on, and it is not

alleged that it directly carried on, any eligible

insurance business. What has occurred here,

Your Honours, is that it has received the

provisions for income tax and invested them in its

own right for the benefit of the members of the

whole of the Society~ as a whole, in accordance
with the law of the Society and in accordance with

the law of the State, and the income arising

therefrom can be used for the whole of the

purposes. When it came time to pay the income tax

the money was then transferred back to those funds,

and the treasurer of the Society drew a cheque on

the funds and paid the income tax.

BRENNAN J: If they had not put the funds into the

No 2 fund, but had kept them in the insurance funds and had allowed them to accumulate interest there, prior to the payment of income tax, would you have had the same argument?

MR BEAUMONT:  There would not have been an argument,

Your Honour, because there would not have been any income earned by the No 2 fund.

BRENNAN J:	It would have been earned by one of these other insurance funds.
Odd Fellows	8/3/91
MR BEAUMONT:	Yes.
BRENNAN J:	Would that then have been assessable to tax?
MR BEAUMONT:	Yes.
BRENNAN J:	Then your argument comes to this, that by

transferring the provision for income tax out of

one fund into another and then back again to the

original fund, the income that is derived avoids

the liability to tax which otherwise would be

imposed upon it?

MR BEAUMONT: That is correct, Your Honour.

BRENNAN J: Yes.

MR BEAUMONT: 

And each member of the Full Court agreed that

that was possible - to do it, and in fact, even the
majority said that basically it might have been -

and this is reading at page 15, Your Honour, at

line 8 -

McHUGH J: 

I was going to draw your attention to that,

Mr Beaumont, but does it not mean that this case

simply turns on the provision of subrule 6.12.6,

and therefore there is nothing special in the case.

MR BEAUMONT: Well, no, Your Honour, it does not. What we

say is that it really means that the effect of it -

if you take the interpretation that was placed

on 6.12.6 - is that if any other part being a

funeral benefit fund, or sickness benefit fund, has
a provision similar which would allow moneys to go
to the eligible insurance businesses, the whole lot

of the income of every friendly society in

Australia would be taxable on that basis, because

that is the way 6.12.6 has been applied, and the

point of importance is that it basically applies to

every friendly society in Australia, and it is

really a question - the most fundamental question

of all - as to whether income has been derived and

from what source it has been derived.

There is no real dispute about facts. The

matter took less than a day, Your Honours, to

argue. There is no real problem with the facts,

but there are fundamental problems with the

approach in which the way the Full Federal Court

took it, because what we say, Your Honour, is that

what they do is to attribute a character to the

income of the No 2 fund by reference to the fact

that it may distribute its moneys to a taxable

fund, and that is what they have done, that is the very essence of what they have done, and that goes

against the whole of tax law - the whole of tax law

that we have ever known before, because what they

Odd Fellows 8/3/91

have done is taken the result and said, "Well,

because it could go back there, and if it was back

there it would be taxable, therefore we will change

the genus of it and make it taxable".

BRENNAN J: Is it not rather saying that if it be argued

that to transfer the fund from the insurance
business fund to the other is thought to break the

nexus, I mean the fact that it could be transferred

back again indicates that the nexus is not broken.

They are all book entries.

MR BEAUMONT:  Oh no they are not, Your Honour.

BRENNAN J: Are they not?

MR BEAUMONT:  Very much not. They were real transfers of

real money.

BRENNAN J:	Of course they are.
MR BEAUMONT:	And real money in the terms of

$20 million-odd. They were not just book entries.

BRENNAN J: Yes. Well, no doubt - - -

MR BEAUMONT:  And there were separate investments made by

the No 2 fund by a separate investment officer, not

by the people that were running the eligible

insurance business, and the important part about

that is that the people running the funds that

conducted the eligible insurance business have only

got a certain range of investments that they can

put the moneys in, whereas the general funds are

completely unfettered. They may put it in

something which only realizes 2 per cent, or

something which realizes 28 per cent, but there is
a different lot of investments available, and it

is, with respect, different money, and actual

money, not just merely book entries.

Your Honours, I think the best way to

illustrate it is, what we would say is, reading
from a decision of Mr Justice Rich in The Federal

Commissioner of Taxation v United Aircraft

Corporation case, 68 CLR 525, at 539 he says, when he is talking about where money is derived:

If a person purchased a car from another in

New York on credit, with the intention of taking it to Australia and there using it as a taxi, the fact that he discharged his

indebtedness out of the proceeds of his taxi

business remitted by him from Australia would

not make the moneys received in America by the
seller moneys derived by him from property in

Australia in any relevant sense ..

Odd Fellows 6 8/3/91

And that is what we say is the very essence of what

occurs here. Merely because the No 2 fund got its

money from eligible insurance funds does not mean

that the income that is derived from the operation
of the No 2 fund make it in any way related to or

connected with the eligible insurance businesses.

BRENNAN J: But the true analogy would be if the vendor of

the car in New York carried on the taxi business in

Sydney with a manager to whom they allocated a

certain amount of discretion.

MR BEAUMONT:  With respect, I do not agree with that,

Your Honour, because - - -

BRENNAN J:  I can understand that, but is not the problem

that you have to face - - -

MR BEAUMONT:  - - - you would not have the actual transfer

of property in that instance - that is why.

BRENNAN J: Well, quite so. Is that not the problem that

you have to face - that you have here one taxpayer,

certainly governed by State law with respect to the

management of its funds, but one taxpayer deriving

income which bears one of two characters; exempt
and non-exempt, depending on where it was derived

from, and it is known that it was derived from the

allocation of money which was set aside, or

appropriated or earmarked for the payment of the

tax on the insurance business, and the question is

whether, when it was transferred out of one fund,

an insurance fund, into the No 2 fund, with the

intention that it should ultimately go back to the

fund from which it came in order to discharge the

tax, either directly or indirectly, whether you can

say that that robbed it of the character of income

derived from the insurance business.

MR BEAUMONT:  Your Honour, I should add that it was not just

the income tax provision that was transferred;

there were other funds as well.

BRENNAN J: Is that so?

MR BEAUMONT:	Yes.
BRENNAN J:	I was not sure from the appeal book that that

appeared very clearly.

MR BEAUMONT:  Yes, Your Honour, there was a surplus - there

was more than just the provision for income tax -

the proper provision for income tax.

Unfortunately, Your Honour, one has to go back to

the evidence as to that, but that was the evidence of Mr Truslove, that it was designated that there

were those - and in fact, if no further

Odd Fellows 7 8/3/91

illustration were necessary, it can be shown that

it was more than the actual income tax paid

because, if nothing else, it was the bare provision

at 20 cents in the dollar without taking into

account any deductions et cetera, which were

ultimately, and are, in fact, taken into account by

the Commissioner, because when one looks at the

assessment, the Commissioner does apportion certain

expenses and take it off. It is a very complicated

calculation, but there were moneys remaining.	Not
a substantial amount. It was not a matter of

$100 million remaining, or anything like that; it

is probably less than 10 per cent, but it was over

and above the actual tax payable.

BRENNAN J:	Where were those moneys taken from?
MR BEAUMONT:	From the eligible insurance businesses funds.
BRENNAN J:	Was the No 2 fund fed by anything but the

eligible insurance businesses fund plus interest?

MR BEAUMONT:  No, Your Honour. However, no moneys every

went back, of course, as the fact is - - -

BRENNAN J:  They went straight to the Commissioner, did

they?

MR BEAUMONT: Sorry. When I said, "No moneys went back",

yes, they went back; they went straight to the

Commissioner, and therefore they were entitled to a - because the book entries that were used were

sufficient to erase the liability in the insurance

funds and the moneys did go direct to the

Commissioner, but what I was going to say, had built up a substantial amount of funds in its

own right because it had interest of over $900,000,

for example, and none of that moneys, the evidence

was, went back to any of the eligible insurance

businesses. It was used for other purposes such as

by the government actuary, and what the court has	purchase of computers, which were actually approved	said is that because there is a mere possibility
that moneys might go back, the nexus is not broken.
Your Honours, it has been accepted that the Society did not do anything improper and the judge
has found all of those type of matters, but what we
say, Your Honour, is there is very much a question
and even the whole of the public, as to what nexus does have to be broken, because although
which is central to the whole of friendly societies what if a person was to give, in the days when
gold, for example - prospecting gold - it was
exempt - and you use those proceeds from that to

Odd Fellows 8/3/91

invest; obviously the investments are still

taxable.

You cannot just take the starting source, we

say, as controlling the investment of those funds,

to give it its nature, and that is what the

Commissioner has to do in order to succeed, because

once it is in the No 2 fund it is used to the

benefit of all of the members - the total members -

because it is not a benefit fund any more which is

liable to be distributed; but rather a grand lodge

fund, and the grand lodge funds are used for the

benefits of the whole of the members of the

societies, whereas each of the funds that carries

on an eligible insurance business can only use

those funds for the benefit of the members of those

funds, and to pay moneys to them or their spouses

or beneficiaries, for example, if it is an

insurance and there is a death.

BRENNAN J:  Mr Beaumont, I take it that the relevant

material before the courts below included all

relevant regulations governing the conduct of the

funds, did they not?

MR BEAUMONT:  Yes, Your Honour.

BRENNAN J: That is both insurance and the No 2 fund?

MR BEAUMONT: 

Yes, Your Honour, in total.

BRENNAN J: 

And the disposition which the directors of the

applicant were entitled to make of the No 2 fund as
amongst the members of the Society?

MR BEAUMONT: 

Yes, Your Honour.

BRENNAN J: Yes, right.

MR BEAUMONT:  And, in fact, Your Honour,

Mr Justice Northrop, in his judgment, quite clearly

sets out that this is a grand lodge fund as

distinct from a benefit fund.

BRENNAN J: Yes. The significance though, of that, needs to

be understood in the background of the material.

MR BEAUMONT:  Yes, Your Honour, but the - I did have a copy

of the appeal book, Your Honour, and -

BRENNAN J:  One other question: was this the first year in

which the No 2 fund was operated?

MR BEAUMONT:  Not quite, Your Honour, except it was set up

near the end of the previous year, but there was no
income the previous year, but for all practical

purposes the answer is, "Yes" to that question.

Odd Fellows 9 8/3/91

BRENNAN J:  And has the fund been maintained from year to

year?

MR BEAUMONT:  Yes, Your Honour.

BRENNAN J: Operated in the same way?

MR BEAUMONT:  At least for three years, Your Honour, and

there has been some subsequent changes.

BRENNAN J: Yes.

MR BEAUMONT:  But at least for three years, and I do not

think I - - -

BRENNAN J: Accumulating?

MR BEAUMONT: There are three year's worth of assessments,

Your Honour, that are - - -

BRENNAN J: Accumulating the interest from year to year?

MR BEAUMONT:	Yes, Your Honour.
BRENNAN J:	Or distributing it?

MR BEAUMONT: Accumulating it, but making, from time to

time, investments on behalf of the Society as a

whole, but no money has ever gone back to any of

the eligible insurance funds. So, it has been

accumulating, but it has been spending money for

the benefit of the members in that, I think, there

was a building purchased; some computers purchased

and things like that.

BRENNAN J:	And that material appears in the - - -
MR BEAUMONT:	Yes, Your Honour, there was evidence before the court - if Your Honour will just excuse me for
a moment - there was certainly evidence before the
court, Your Honour, as to three separate
investments that had been made on behalf of the
Society as a whole.
DAWSON J:	How were the amounts calculated, which were paid out of the eligible funds into the No 2 fund?

MR BEAUMONT: Their income tax liability, Your Honour, was

calculated - the rate of income tax at that stage

was 20 per cent - - -

DAWSON J: Yes.

MR BEAUMONT:  - - - and it was calculated as a flat 20 per

cent of income, so therefore, once you then took

into account the complicated calculation whereby

the Commissioner has allowed as a deduction - - -

Odd Fellows 10 8/3/91

DAWSON J: Yes, you need not go into that - but the aim was

to pay the amount of the prospective tax just - - -

MR BEAUMONT: Plus more.

DAWSON J: Plus more?

MR BEAUMONT: Plus more.

DAWSON J: Well now, how was calculated?

MR BEAUMONT: Well, if you took, for example, a gross amount

at 20 per cent, Your Honour, and then you had to
take off deductions, obviously there must be more

paid in because if you take 20 per cent of your

gross income as distinct from 20 per cent of your

taxable income - - -

DAWSON J:  I realize there was more paid, but the aim, if

you had been able to calculate it accurately, was

to pay no more and no less than the amount of the

tax liability.

MR BEAUMONT:  No, the aim was was to pay more. In fact,

that was the evidence of Mr Truslove.

McHUGH J: Well there was a transfer of free surplus, was

there not - pure transfer?

MR BEAUMONT: Pure transfer of surpluses, yes, and that was

the evidence as to what was intended by the

Government actuary who set it up, Mr Truslove.

DAWSON J:  So that if I am a policy holder in one of the

funds; I am paid my dividend, or whatever it is you

get paid every year, but that is all I am entitled

to and the surplus is available to the Society?

MR BEAUMONT:  The Society as a whole - yes, correct,

Your Honour - to be used for the -

DAWSON J:  And that is generally, whether it was for tax

purposes or otherwise?

MR BEAUMONT:  Yes, that is right.

DAWSON J: In other words, the Society makes a profit out of

the - - -

MR BEAUMONT:  Yes, Your Honour, it is a way, of course, in

which the Friendly Society is able to finance the

running of the Society as a whole, because it is a

huge concern with literally millions of members.

DAWSON J: Yes, I see.

Odd Fellows 11 8/3/91

MR BEAUMONT:  Hundreds of thousands, I am corrected,

Your Honour, rather than millions.

McHUGH J: Well, under the enactment of 116G, the income was

exempt, was it not?

MR BEAUMONT:  Yes, that is so, other than - yes,

Your Honour.

BRENNAN J: Yes, Mr Fajgenbaum.

MR FAJGENBAUM: If the Court pleases. It is our primary

submission that the case involves no point of

general legal significance, that it all turns upon
the construction of the rules of the Society and
the application of Division 8A to those rules, and

the question that arises under the Act is whether

the income derived in the No 2 fund was income

derived from business in relation to the issuing or
underwriting of policies. Definition of "eligible

insurance business" is to be found in

section 116E(l) of the Act.

BRENNAN J: "In relation to", is that where - - -

MR FAJGENBAUM:  Yes, it is business - "eligible insurance

business" is defined to mean:

business of, or in relation to, the issuing

of, or the undertaking of liability under,

eligible insurance policies.

BRENNAN J:  Oh yes, but the taxing provision is:

income ..... derived from eligible insurance

business.

MR FAJGENBAUM:  So that is business in relation to the

underwriting of policies.

BRENNAN J: Yes.
MR FAJGENBAUM:	Now, my friend, with respect, has

conveniently ignored the rules and conveniently
ignored the facts which are important in this case,
which are a consequence of the application of the

rules. If we can turn to page 25 of the appeal book where rule 6.12 of the Society - the rules

governing the No 2 fund, are set out, one can see,

upon their examination that whilst the moneys

remain in the No 2 fund they remain committed to
the discharge of the Society's liabilities for
income tax under Division A, because it is the only

source of income tax liability at the present time,

and cannot be used for any other purpose, and that
flows particularly from rule 6.12.4 and 6.12.5.

Rule 6.12.4 provides:

Odd Fellows 12 8/3/91

Into this fund shall be paid the provision for taxation as calculated for each financial

year, and also any interest earned on this

amount.

Now, what was paid into the fund was a $7-odd

million, out of the eight benefit funds through

which the eligible insurance business was carried

on. That was paid in and that was the provision

for income tax. Rule 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.

Whilst the money remains in the fund it

remains committed to the discharge of the income

tax liabilities of the society. It is only after

a surplus is found, from year to year, that is
there is a sum of money in the fund which is no

longer needed to discharge income tax liabilities,

that remains available pursuant to rule 6.12.6 for

transfer to other funds, be they the relevant

eligible insurance business funds, if I can

describe them as such, the Society generally, the
members generally or what have you, but whilst the

money remains in the fund, under the rules, the

trustees are bound to hold that money because it is

so committed under the rules for the discharge of

the Society's income tax liabilities.

Now, on the face of those rules, we contend,

Your Honours, that it is abundantly correct to say

that the interest earned on the fund in the 1985
income tax year was income in relation to the

issuing of or the undertaking of liability under

eligible insurance policies.

BRENNAN J: But if the provision for tax be correctly

calculated, which one must assume is the underlying

purpose of the rules, one sees in 6.12.4 that that

amount is to be paid into the fund.

MR FAJGENBAUM:	Yes.
BRENNAN J:	The fund is to be used for the purpose of paying

the tax under point 5, and that should acquit the

amount that is paid in, but the fund also is to

earn interest under point 4, and if that is surplus
then that surplus being the interest falls under

point 6.

MR FAJGENBAUM:  Yes, but as surplus, the only character of

the extra moneys as surplus is not that they cease
to become committed to income tax liabilities

whilst in the fund, but they are available for

Odd Fellows 13 8/3/91

transfer out of the fund. For example, in the

succeeding - if the money is not transferred out of

the fund - if, for example, in 1985 the interest in

question in this case - I have forgotten how much

money it was now - $950,000-odd, remained in the

fund until the following year; it was not
transferred out - it remains in the fund

appropriate for income tax purposes, and the

society in the succeeding year need not transfer

out of the eligible insurance funds as much as they
had in the previous year - assuming the tax

liability is the same, because $900,000-odd of tax

money has already been provided for.

BRENNAN J:  Would they not be required so to do under

point 4?

MR FAJGENBAUM:  Sorry. They would be -

BRENNAN J: If they were to provide the next year, pursuant

to point 4, the amount which was thought to be
appropriate for that year, leaving the surplus not
to bear the burden of that year's tax, then the

surplus would be accumulated from year to year.

MR FAJGENBAUM:  Yes.

BRENNAN J: Is it the Commissioner's contention that the

amount which might be attributable to the

reinvested surplus would equally be liable to tax?

MR FAJGENBAUM:  Yes, Your Honour, because whilst it remains

in the fund, it is bound by the trust, as it were,

or the rule of the trust created by 6.12.5 of the

fund:

shall be used for the purposes of paying

income tax assessments as advised

that is the only purpose for which money in the

fund can be used. The nexus is only broken if sums

of money in the fund are declared to be surplus to

income tax liabilities and are then transferred

under 6.12.6 to other funds, or for the benefit of

the Society generally, for example for the purchase

of a head office head office computers and so

forth.

BRENNAN J: Then if the money was invested from the fund

with a banker on terms that the interest be paid to

another fund, would the interest be assessable to

tax?

MR FAJGENBAUM:  No, if that other fund was not a fund

through which the eligible insurance business was

being carried on and if there was no nexus

Odd Fellows 14 8/3/91

otherwise created between these hypothetical funds

and the eligible insurance business funds, no.

BRENNAN J:  So the proposition comes down to this: that by

putting the money into the No 2 fund and perceiving

that that fund is devoted as point 4 and point 5

indicate, you have established that the interest on

the fund is derived in the relevant sense.

MR FAJGENBAUM:	Indeed, yes.
BRENNAN J: Yes.
MR FAJGENBAUM:	And, indeed, there is a proposition derived

in bankruptcy law that a person does not cease to

carry on business until he has discharged all the

liabilities that he incurs in respect of that

business, including taxation liabilities. There

are two cases - - -

DAWSON J: If, Mr Fajgenbaum, you assume, which is not the

case, that the fund was a separate entity - a
separate corporate entity - and the society was a

separate corporate entity and the fund paid to the

society moneys which were to be used to defray tax

liability, would it be any different? I think you have to ask another question before you can answer

that one.

MR FAJGENBAUM:  I suspect not. It depends on how the

arrangement is established.

DAWSON J:  You have to ask the question, "Whose tax

liability?" do you not?

MR FAJGENBAUM:  It is a question of whose tax liability, but

if it was paid over to another entity and the other

entity is under an obligation to hold the capital

and the interest it earns on that capital for the

Society for the discharge of the Society's tax liabilities, then the answer would be the same.

DAWSON J: 

I am thinking if I pay to my wife, every month,

an amount of money which she will eventually use to
discharge my tax liability on my behalf and she
invests that money and earns interest, that is her

income, is it not?

MR FAJGENBAUM: That is clearly so, but

DAWSON J:	Why is this any different?
MR FAJGENBAUM:	Because in that case there are two different legal personalities, and one has to examine the
trust upon which - - -

Odd Fellows	15	8/3/91
DAWSON J:	But you see, that is the point.	The point is

that, whether one likes it or not, the legislation

does treat the fund as being a separate entity,

does it not?

MR FAJGENBAUM:  No, it does not, with respect. The

tax -

DAWSON J: It must; it treats it as a separate business,

anyway.

MR FAJGENBAUM:  Business - I mean - and there is nothing

novel about the proposition that a taxpayer can

carry on a number of businesses and discharge tax
obligations of a different kind and at different

rates in respect of those businesses.

DAWSON J:  But you see, they are separate, because one part

of the taxpayer, the fund, is liable to tax, and

the other is not.

MR FAJGENBAUM:	Yes.
DAWSON J:	So you have got to, as it were, separate them.
MR FAJGENBAUM:	Yes, but we say that this separation is not

sufficient because what went into this fund was a

tax provision; the interest on that tax provision

and all that money remain committed upon trust for

the - - -

DAWSON J:  So was the money that I paid to my wife. She

holds it on trust to pay my income tax when the

assessment issues in due course.

MR FAJGENBAUM:  Your Honour, if your wife is also to hold

the interest on trust together with the capital,

then the interest would be your interest, because

your wife would then be a perhaps a bare trustee;

perhaps a trustee with some discretion.

DAWSON J: Not if the arrangement is that the interest is to

be hers, to use - - -

MR FAJGENBAUM:  If the interest is to be hers, so be it,

that -

DAWSON J:  And that is what the situation is here, is it

not?

MR FAJGENBAUM:  No, with respect, not, because rule 6.12.4

says that the moneys in the fund, the provision for

tax and the interest shall be used for the purposes

of paying income tax assessment.

DAWSON J: Yes, but then the surplus is to be used

otherwise.

Odd Fellows 16 8/3/91

MR FAJGENBAUM:  The surplus may be transferred to any other

fund.

DAWSON J:  In other words the Society is to do what it wants

to.

MR FAJGENBAUM: Subject to approval, yes, but unless and

until it takes the money out of the fund, whilst it
remains in the No 2 fund in a state of investment,
or in a bank account if the interest has not been

reinvested, it is still in the fund and is

committed to income tax purposes. That commitment

can only be defeated or removed and the relevant

nexus between the fund and the eligible insurance

business can only be broken by transfer out of the

No 2 fund. Now, in this case, such a transfer had

not occurred in the 1985 income tax year. It is a

question, with respect, that does not depend on any

general principle; it raises no novel questions of

law; it does not raise any difficult problems of

interpretation under Division BA; it is merely a

question of the construction and operation of the

rules of the Society and rule 6.12 and their

application to the particular facts of the case,

and if I may - - -

BRENNAN J:  Mr Fajgenbaum, does it not involve this

proposition, that liability to tax depends upon

whether or not the income was derived from funds of

a particular kind?

MR FAJGENBAUM: Well, business in relation to, with respect.

I hesitate to interrupt you there. I do so

because it is the business in relation - - -

BRENNAN J: Yes, of course, quite, quite. Well, not derived

from business in relation to - derived from a

business, and the business is in relation to the

issuing of policies.

MR FAJGENBAUM:  Yes.

BRENNAN J: Well now, the question of whether this interest

is derived from the business requires
consideration, does it not, of whether the business
includes the conduct of the No 2 fund, and in the

case of societies of this kind, is the question of

whether the business extends to funds which are of

this kind not a question of general public

importance, in other words, whether derivation

extends thus far?

MR FAJGENBAUM: Well, Your Honour, it may be said to be of

public importance because there are a lot of policy

holders and lots of members of friendly societies

who may have similar rules to this Society, but

with respect, no, because it ultimately comes back

Odd Fellows 17 8/3/91

to a construction of rule 6.12, and that is all

that the case turns upon, with respect, and the

notion that the business of the Society which

attracts income tax liability can only be operated

through funds, the whole of whose business is

taxable or assessable, is a fallacy, with respect,

because if one goes back to the definition, section

116E - - -

BRENNAN J: That is not quite the question, is it?

MR FAJGENBAUM:	I am sorry, Your Honour.
BRENNAN J:	The question must be whether or not the conduct

of the fund is part of the conduct of the eligible

insurance business.

MR FAJGENBAUM:  We say the conduct of this fund clearly is;

only because of the rule.

BRENNAN J: Yes.

MR FAJGENBAUM:  Not because of any question of general

principle, but only because of the clear duties

imposed upon the trustees of the Society by

rule 6.12, and particularly, point 4 and point 5.

BRENNAN J: Yes, but is that not a point of general

importance, having regard to the use of the word

"derived" and the way in which friendly societies

carry on their businesses? In other words is a

business being carried on by a society of a
particular kind if it carries it on, or if it

devotes the fund to an aspect of the business which, in part, redounds to the credit of the Society at large?

MR FAJGENBAUM: Yes. That is an abstract question. Yes, Your Honour, that might be a question of general

importance, but this case does not raise, with

respect, that abstract question. It raises it in

the context of this Society with the clear language
of rule 6.12, and ultimately it only becomes a

question of the application of clear law to the

clear fact, including, if I can describe the rules

as a fact - the fact of the rules. The general

question does not arise. There was no argument in

this case, for example, at either of the levels

below as to the meaning of the word "derivation".

Everybody agreed that the principles about

derivation are to be found in this or that judgment

of the High Court, but there was no

difficulty -

BRENNAN J:  What does it mean?

Odd Fellows 18 8/3/91

MR FAJGENBAUM: Well, I can only repeat the proposition - it

all depends on the circumstances, Dr Kenny reminds

me. But with respect, if there are difficulties of language, there are no such difficulties of

language here, because the No 2 fund in this case,
if I can repeat it again, with the Court's

indulgence - whilst the moneys are in the No 2 fund

have only one purpose, they are held on trust for

the taxation liabilities incurred by the Society

through the eligible insurance funds.

McHUGH J: So, on that basis, you say the No 2 fund

constitutes a business in relation to the

undertaking of liability under eligible insurance

policies.

MR FAJGENBAUM:  Yes, and the income derived from it is such

income.

MCHUGH J: Yes.

BRENNAN J: Is there anything further?

MR FAJGENBAUM:  Your Honour, perhaps I can correct something

that my learned friend might have said, that moneys
came into this fund which were other than taxation
liabilities. It becomes clear, with respect, from

the judgments of the Full Court, the view that they took of it, that the only moneys that went into the fund upon which interest was earned - the

$7,051,724 which went into the fund, represented a

provision for income tax liability in respect of

the year ended 30 June 1984, the bulk of it went in

on 1 July 1984. At page 13:

It is common ground that the money paid

into the No.2 Fund, whose investment generated

the subject income, was money which had been

earned by the society in the conduct of the

various eligible insurance businesses.	A
total of $7,051,724 was transferred during the

course of the 1984-1985 financial year from

eight other Funds; which were used by the

society to carry on an activity on its behalf

which fell within the s.116E definition of

"eligible insurance business". The greater

part of this money ($6,600,000) was

transferred on 1 July 1984.

McHUGH J:  Your argument here is a different argument from

the way the majority in the Full Court approached

this, is it not? They seem to throw the weight of
their reasoning on 6.12.6; you seem to throw the

weight of your argument on 6.12.4.

MR FAJGENBAUM:  Yes, but I think, Your Honour, that that is

how we put it to the Full Court below. Our primary

Odd Fellows 19 8/3/91

argument was based on 6.12.4 and the Full Court

dealt with that argument briefly - or not to its

full extent - the majority, at page 17, from about

lines 8 down. Their Honours refer to:

an alternative submission made by counsel for

the respondent.

BRENNAN J:  What you say, essentially, is that point 4

establishes that the business of the fund was the
business in relation to the issuing of and
undertaking of liability under an eligible

insurance -

MR FAJGENBAUM:  Yes, the business being the discharge of the

tax liabilities that are generated by the conduct of the eligible insurance business. The nexus is

not broken until the money is taken out of that

fund as surplus and put into some other fund which

has no connection back to the - - -

BRENNAN J: Because that is the No 2 fund's business?

MR FAJGENBAUM:  Yes.

BRENNAN J: Yes, I see.

MR FAJGENBAUM:  I do not think I can usefully add anything

more. Unless I can be of further assistance, they

are the submissions for the respondent, if the

Court pleases.

MR BEAUMONT:  Your Honour, just if I could - - -

BRENNAN J: Yes, Mr Beaumont.

MR BEAUMONT:	If my learned friend had bothered to read the next paragraph that he was reading at page 13, it
would make quite clear, Your Honour, it said:

the unchallenged evidence of Dr Allen

Truslove, who was then an officer of the
Government Statist and Actuary and who was

responsible for setting up the No.2 Fund, the

amount which was transferred ..... comprised two

elements: "a part which would meet the

precisely calculated tax liability" and "a

pure transfer of free surplus".

We just leave it at that, Your Honour, and

secondly, Your Honour, in view of the way it was

raised, my learned friend did not rely on 6.12.6

before the Court, it was a position that was put -

it was not in his submissions originally to the

Court, it was something that put for.ward by the

Court. My learned friend argued it quite

Odd Fellows 20 8/3/91

differently, more along the lines he has argued it

today, but there was definitely -

McHUGH J:  I did not understand him to say to the contrary.

What I put to him was that his argument here and apparently his argument in the Full Court is different to the way the Full Court -

MR BEAUMONT: Is different - yes, Your Honour.

BRENNAN J:  Mr Beaumont, what do you say to the proposition

that the business carried on through the No 2 fund

was a business in relation to the issuing of the

undertaking of liability of - - -

MR BEAUMONT:  We say it has got no connection to it,

Your Honour, and we rely upon what

Mr Justice Northrop said in relation thereto, in

his dissenting judgment.	We say it sets it out
beautifully.

BRENNAN J:  The Court will adjourn briefly to consider this

matter.

AT 11.13 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.18 AM:

BRENNAN J:  The Court is of the opinion that special leave

should be granted in this application. Special

leave will be granted accordingly.

AT 11.19 AM THE MATTER WAS ADJOURNED SINE DIE

Odd Fellows 21 8/3/91