Producers and Citizens' Co-Operative Assurance Co Ltd v Federal Commissioner of Taxation

[1972] HCA 56

HIGH COURT OF AUSTRALIA

. Barwick C.J., McTiernan, Walsh and Stephen JJ.

PRODUCERS AND CITIZENS' CO-OPERATIVE ASSURANCE CO. LTD. v. FEDERAL COMMISSIONER OF TAXATION.

(1972) 128 CLR 63

7 November 1972

Income Tax (Cth)

Income Tax (Cth)—Assessable Income—Deduction—Life assurance company—General management of company—"Management" and "general management"—Income Tax Assessment Act 1936-1967 (Cth), s. 113.

Decisions

November 7.
The following written judgments were delivered: -
BARWICK C.J. I have had the advantage of reading the reasons for judgment prepared in this appeal by my brother Stephen. He there sets out the relevant facts and refers to such statements in the decisions of this Court as bear upon the construction of s. 113(2) of the Income Tax Assessment Act 1936-1967 (the Act). I have no need to supplement that recital of the facts or that reference to those decisions. (at p64)

2. I am in full agreement with my brother Stephen in thinking that the expression "expenditure incurred ... in the general management of the business of the company" does not refer only to expenditure incurred in policy making for the business as a whole. I can find no reason for so restricting the operation of the expression. The function of the word "general" in the context of s. 113 is, in my opinion, to gather in expenditure which is undifferentiated in its purpose in relation to the earning of income in a particular department of the company's business. It is not a very precise adjective in the circumstances but cannot in any event, in my opinion, be so transposed in the whole statutory expression as to exclude from the operation of the section all expenditure which cannot be related to some matter of policy affecting the entire business operation of the company. Thus I am unable to accept the conclusion to which my brother Menzies came. (at p65)

3. I agree with my brother Stephen that if the word "management" is to be treated as limiting the expenditure which may come within the operation of the sub-section, as he suggests, at least the salaries and wages of the divisional managers ought to be included in the expenditure incurred in the general management of the business of the company. (at p65)

4. However, after much consideration, I find myself unable to agree that the salaries and wages of the inspectors should be excluded from that expenditure. I have come to think that Starke J., though not then faced with the problem now before us, correctly interpreted the provisions of the forerunner of s. 113, see Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation (1933) 49 CLR 171, at p 174 . It is no doubt justly pointed out that his Honour's conclusion that the section in its three classes of expenditure exhaustively described all business outgoings of the company virtually treated the expression "in the general management of the business" as synonymous with the expression "in carrying on a business" which is found in s. 51 of the Act. But I have been unable to find any reason why the Parliament should have intended the evidently untidy result of excluding some business expenditure of the company from the operation of s. 113, leaving the singularly difficult problem of differentiating the expenditure to be excluded without any better criterion than the word "management" in one of its senses might provide. A narrow significance assigned to the word "management" enforces on the Commissioner and the taxpayer a dissection of the business expenditure of the company which it seems to me it was a purpose of s. 113(2) to avoid. The problem the draftsman faced was the need to provide a formula for the estimation of what part of that component of the expenditure of a company falling within the statutory description of ss. 110 and 113 which did not relate exclusively to one or other of the categories nominated in s. 113(3) should be deductible from the assessable income. Because the two categories of income mentioned in that sub-section would each be gained in a separate department of the company's business, it does seem to me to be an acceptable use of the word "management" to describe the overall activity of running the business of the company. On the other hand, it would have been quite inapt in the generally operating s. 51 to have referred to expenditure incurred in managing a business to produce income. A meaning of the word "manage" is "to conduct, for example, an undertaking". Using the word "management" in that sense, the statutory expression "in the general management of the business" means, in my opinion, "in conducting the business as a whole". Thus, although the views of Starke J. do not in any case form a binding authority, I am persuaded that, as expressed, they were correct. (at p66)

5. I might add that it seems to me, in any case, that to exclude the expenditure on salaries for inspectors from the operation of s. 113 is in substance to treat the section as limiting the relevant expenditure to the salaries and expenses of persons performing managerial functions. But expenditure in the management of a business, even if a narrow view of the word "management" be accepted, cannot, in my opinion, be so limited. To manage a business must, in my opinion, involve the employment of persons to do work which is not in its nature managerial. (at p66)

6. Thus I have come to the conclusion that the salaries and expenses of the inspectors constituted for the purpose of s. 113 expenditure in the general management of the business of the company. (at p66)

7. In my opinion, therefore, the appeal should be allowed and the assessment remitted to the Commissioner to be amended by the allowance of the deduction claimed by the taxpayer. (at p66)

McTIERNAN J. I think that the expression "the general management of the business of the company" has the same application in sub-ss. (1) and (2) of s. 113 of the Income Tax Assessment Act 1936-1967 (Cth). The real difference between the two sub-sections is in the manner of computing the deduction allowable by virtue of the section. The word "expenditure", in itself, has the same meaning in each of the sub-sections. The provisions of sub-s. (3) apply to both sub-ss. (1) and (2) . No doubt, it would matter in the case of a given company that in a particular year of income it had not made an election pursuant to s. 113(1). The problem presented by s. 113 is what is the meaning of "general management", in relation to the business of the company concerned. The meaning of "general" in the Shorter Oxford English Dictionary (1933) includes: "2. concerned with the whole"; "5. not specifically limited in application"; "6. not restricted to one department". In the same dictionary the meaning of "management" includes: "1. the action or manner of managing"; and the meaning of "managing" includes "3. having executive control". The words "general" and "management" and the expression "general management" are not terms of art in the law. In the present Act it is to be presumed that the word "management", as well as the expression "general management", derive their respective denotations from business usage. I would think that according to business usage the expression "general management" of the business of a company may denote a special or particular field of management not denoted by the word management per se. I think that the effect of adding the word "general" to management is to confine the operation of the section to expenditure incurred in management of the nature of executive control of the business of the company. (at p67)

2. I think that the decision of the learned judge was right. I would dismiss the appeal. (at p67)

WALSH J. The decision in this appeal depends upon the meaning of the words "expenditure incurred in the year of income in the general management of the business of the company" which occur both in sub-s. (1) and sub-s. (2) of s. 113 of the Income Tax Assessment Act 1936 (Cth), as amended (the Act), and upon the application to the facts of the case of the provisions of s. 113(2), in accordance with the construction placed upon those provisions. (at p67)

2. Upon the question of construction, I agree with the conclusions reached by Stephen J. and with his reasons for those conclusions. (at p67)

3. It was submitted for the appellant that the whole of the "mixed expenditure" incurred by the company, that is to say, the whole of its expenditure which was not exclusively incurred, either in gaining or producing assessable income, or in gaining or producing non-assessable income, is included in the expression "expenditure incurred ... in the general management of the business of the company". According to that submission, the provision has the same meaning as it would have if it contained, instead of the words "the general management of the business", some such words as "the carrying on of the business" or "the conduct of the business". I am unable to accept that submission. In my opinion, it does not accord with the ordinary meaning of the words used in s. 113. I am in agreement with the opinion of Stephen J. that the management of a company's business is not to be equated with the carrying on of its business. (at p68)

4. We were referred to Sun Life Assurance Society v. Davidson (Inspector of Taxes) (1958) AC 184 in which the House of Lords affirmed the decision of the Court of Appeal (1956) 1 Ch 524 . The actual decision in that case is not, in my opinion, of any real assistance in resolving the questions with which we are now concerned. But, in my opinion, the interpretation which Viscount Simonds put upon the expression "expenses of management" was correct and a similar meaning should be given to the words used in s. 113 of the Act. His Lordship regarded the words that he had to consider as words of qualification or limitation. He said (1958) AC, at p 198 : "It is not all the expenses incurred by the society; it is not their trading or general expenses which are deductible." In like manner s. 113 does not refer, in my opinion, to all the expenditure incurred by the company in its business, but to a class of expenditure limited by the use of the words "in the general management". (at p68)

5. In s. 51(1) of the Act there is a reference to losses and outgoings incurred "in carrying on a business". In the history of the Commonwealth Income Tax legislation, the use of that expression, in providing for deductions allowable to a taxpayer, came later than the inclusion, in the forerunner of s. 113 of the Act, of the expression with which we are now concerned. But when the Act was passed in 1936 the reference to expenditure incurred "in the general management of the business of the company" was retained in an enactment which, in s. 51(1), used different language to describe what is, according to the argument for the appellant, the same thing, namely, all the expenses of conducting the business. That difference of language was still retained when s. 113 was re-enacted in a new form in 1961. This provides, in my opinion, some support for the conclusion that the words used in s. 113 have a limited meaning, not extending to all the expenses of conducting the business of the company. (at p68)

6. But independently of the question whether or not any assistance in the construction of the relevant words in s. 113 can be obtained by comparing them with the language used in s. 51(1) of the Act, I am of opinion that in their ordinary meaning the words in s. 113 do not describe all the expenditure incurred in carrying on the business of the company. I am of opinion that no sufficient reason appears, from an examination of other provisions of the Act or from a consideration of what might be expected to have been the probable intention of the legislature, for giving the words a meaning different from their ordinary meaning. If it be thought inconvenient or odd that a special provision relating to the mixed expenditure of life assurance societies should have been so framed as to apply to a part and not to the whole of that expenditure, that does not warrant, in my opinion, an interpretation of the section as applying to all such expenditure. The words used are not apt, in my opinion, to refer to the whole of the expenditure and they ought not to be given the extended meaning for which the appellant has contended. (at p69)

7. Having decided that the provision is limited to part only of the expenditure incurred in the conduct of the business of the company it is necessary to consider what is the extent of that limitation. In my opinion, the answer given to that question by Stephen J. is correct and I do not wish to add to the reasons which he has given for his conclusions as to the limiting effect of the words "the general management". (at p69)

8. The acceptance of the view that the operation of s. 113 is limited to expenditure incurred in the management of the business leads, in my opinion, to the conclusion that the wages of employees who have no part in management are excluded from its operation. Those who manage the business may be required, no doubt, to employ persons to do work, which is necessary for the carrying on of the business, but which is not of a managerial nature. But the salaries or wages paid by the company to those workers cannot be regarded, in my opinion, as being expenses incurred in the management of the business, merely because those who do manage it have been responsible, on behalf of the company, for selecting and engaging those workers. (at p69)

9. Upon applying s. 113(2), understood in the sense in which I think it should be interpreted, to the facts of this case and to the findings of Menzies J. concerning those facts, my conclusion is the same as that reached by Stephen J. I am of opinion that the salaries and expenses of the divisional managers are included but the salaries and expenses of the inspectors are not included in the expenditure incurred by the appellant in the general management of its business. (at p69)

10. I am of opinion that the appeal should be allowed and that the assessment should be remitted to be amended in the manner which has been indicated. (at p69)

STEPHEN J. This is an appeal from a decision of Menzies J. dismissing the taxpayer company's appeal against an assessment in respect of income of the year ended 31st August 1967. (at p69)

2. The taxpayer is a life assurance company. Life assurance companies are not assessed to income tax upon their income from life assurance premiums nor is expenditure exclusively incurred in gaining that income allowable as a deduction. It follows that when a particular item of expenditure is incurred partly in gaining that income and partly in gaining other, assessable income there may be difficulty in attributing to the gaining of each type of income its due proportion of that total mixed expenditure, so as to determine how much of that expenditure will be allowable as a deduction. No doubt much expenditure by life assurance companies will be of this mixed character; office overhead expenses will, I imagine, often provide an example. (at p70)

3. Section 113(2) of the Income Tax Assessment Act offers a partial solution to the practical difficulties of attribution by providing an arbitrary formula, applicable in the absence of election by the taxpayer to the contrary, by which the extent of a life assurance company's entitlement to a deduction in the case of one particular class of mixed items of expenditure may be determined. The question in the present appeal is the width of that class, which the section describes as expenditure incurred in "the general management of the business of the company". (at p70)

4. That that class must consist exclusively of what I have called mixed expenditure is clear; sub-s. (3) of s. 113 expressly excludes from the operation of the section all expenditure which is exclusively incurred in gaining either assessable income or income which is not assessable. (at p70)

5. If an election is made sub-s. (1) will apply; it calls for an investigation into such mixed expenditure so that the extent to which it was incurred in gaining assessable income can be determined; it will then be allowed as a deduction to that extent. If no election is made the formula in sub-s. (2) will apply, dispensing with the need for any investigation of such mixed expenditure and prescribing instead a fraction which, when applied to such mixed expenditure, determines how much of it will be an allowable deduction; the fraction has, for its numerator, assessable income and, for its denominator, total income. (at p70)

6. In the present case, the taxpayer made no election, accordingly the formula provided for in sub-s. (2) became applicable but in applying it the Commissioner reduced from $924,445 to $513,839 the amount claimed by the taxpayer as mixed expenditure incurred by it "in the general management of the business of the company" and to which the formula was to be applied. This reduction the Commissioner made because he took the view that, although the total expenditure claimed was incurred by the taxpayer in the relevant year of income in payment of the salaries and expenses of two classes of employees, divisional managers and inspectors, and was expenditure of mixed character, it was not incurred in "the general management of the business of the company" and thus was not to be included in the expenditure to which the formula should be applied. Instead the Commissioner regarded s. 51(1) as applicable and ascertained how much of the total of these salaries and expenses was allowable as a deduction under that section by applying to that total a quite different formula, in which assessable premiums formed the numerator and total premiums the denominator. By that means he arrived at a lesser allowable deduction than s. 113(2) would have produced; hence the appeal by the taxpayer. (at p71)

7. The taxpayer has not sought to challenge the correctness of this method of applying s. 51(1) but has confined itself to the contention that the salaries and expenses in question should properly have been treated as forming part of its expenditure incurred "in the general management of the business of the company" to which, in the absence of election, s. 113(2) was applicable. (at p71)

8. In assigning a meaning to this phrase in s. 113 a choice appears to me to lie between giving to the adjective "general" a meaning which restricts the phrase to what Menzies J. aptly described in the judgment under appeal as "management of the business as a whole", and, on the other hand, treating "general" as operating in a neutral, or even an expansive, fashion so that the phrase means "management generally of the business". (at p71)

9. The difficulty of interpretation arises from the use, in a context which supplies little guidance, of the adjective "general", a word having a variety of different shades of meaning. The numerous dictionary meanings of "general" range from a concept of universality as opposed to particularity, through meanings of "widespread", "usual", and "unrestricted to one department" to "applicable to a wide variety of cases or instances". (at p71)

10. An interpretation which might seem to provide a pleasing legislative symmetry, by providing that all mixed expenditure is to be dealt with under s. 113, is, I think, foreclosed by the use of the word "management", a word unlikely to be apt to include every type of expenditure of a life assurance company which is of mixed character and therefore does not fall within the exclusions in sub-s. (3) . But it is the word "management" rather than the word "general" which I regard as imposing a limitation of this sort. Expenditure which is not incurred in the management of the business will not be within s. 113; I see no justification for equating management of a company's business with the carrying on of its business. It must, I think, be possible to say of an expenditure that it is incurred in managing the business, as distinct from carrying it on, before the section can apply. (at p72)

11. It is not, I think, irrelevant that it will no doubt be in the field of management that most mixed expenditure difficult of exact attribution will be encountered. If this be so it becomes apparent why it is those expenses which have been singled out by the legislature as appropriate for the application of s. 113 which, as was said by this Court in Federal Commissioner of Taxation v. Australian Mutual Provident Society (1953) 88 CLR 450, at p 462 provides:

"a convenient method of calculating the amount of a deduction which would have to be calculated in some way in the absence of any express provision."

That such a "convenient method" of resolving the problem of attribution of part of a mixed item of expenditure to the gaining of assessable income should be restricted to management of a business as a whole and should not include local management is an interpretation which I would resist unless the plain meaning of the words of the section required it. In my view they do not and such aid as is to be gained from the authorities also appears to me to support the wider view of the scope of "general management". (at p72)

12. The only effect of excluding particular expenditure from the operation of s. 113 because it is not within the scope of "general management" is to subject it to the operation of s. 51(1). The relevant terms of s. 51(1) are calculated to produce the same effect as does s. 113(1) and accordingly where a taxpayer has elected to have its allowable deductions ascertained under s. 113(1), there is no discernible legislative purpose to be served in applying s. 51(1) rather than s. 113(1). When no election is made and s. 113(2) accordingly applies, it is not, I think, readily to be assumed that what the legislature has apparently thought an appropriate formula for the calculation of allowable deductions of life assurance companies should be restricted to a limited class of the expenses of management if the particular problem of attribution, which sub-s. (2) is designed to solve, is common, as it clearly is, to all expenses of management. (at p72)

13. In Federal Commissioner of Taxation v. Australian Mutual Provident Society (1953) 88 CLR 450 , this Court dealt with the Act in the form it took before s. 113 was amended, in 1961, by inserting before sub-ss. (2) and (3) the present sub-s. (1), conferring an election upon the taxpayer. The amendments which were, at the same time, made to what are now sub-ss. (2) and (3) were not such as to affect the meaning to be attributed to the two phrases which appeared both before and after amendment, namely "expenditure incurred in the year of income in the general management of the business" in sub-s. (2) and "incurred in such general management" in sub-s. (3). The Court said (1953) 88 CLR, at pp 467-468 , that in applying s. 113 (2) (now sub-s. (3)) it was necessary to inquire whether any particular expenditure in fact "incurred by way of general management expenses" could be exclusively referred either to assessable or non-assessable income; if so, those expenses were to be excluded and "you then take the balance of the expenditure actually incurred in general management" and work out the proportion sum which the sub-section called for. (at p73)

14. The Court, it seems, thus treated the expression "expenditure incurred in the general management of the business" as synonymous with the expression "general management expenses"; I do not understand the latter to be employing the adjective "general" in any limiting sense; indeed the contrary is rather the case, the adjective serving to emphasize the generality of expenses of a managerial nature which are spoken of. (at p73)

15. In the Income Tax Assessment Act 1922-1935 (Cth) s. 20 (5) served the same purpose as did s. 113 of the 1936 Act before it was amended in 1961 by the insertion of the present sub-s. (1) and in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation (1933) 49 CLR 171, at p 174 , Starke J. said of s. 20 (5) that:

"It will be observed that s. 20 (5) refers to three classes of expenditure: the first, that exclusively incurred in gaining what I may shortly call premium income, the second, that exclusively incurred in gaining or producing the income included in the assessment, and the third, that part incurred in the general management of the business of the company but not including any expenditure incurred in gaining or producing the income included in the assessment. It recognizes that the expenditure of a company is not always exclusively incurred for the production of premium or assessable or non-assessable income, but may be undertaken for the general business purposes of the company, as, for instance, the class of expenditure often referred to as overhead expenses. But the classification of expenditure in s. 20 (5) is, I think, exhaustive: that which is not exclusively incurred in gaining premium income or assessable income is incurred in the general management of the business of the company."

His Honour thus equates the "expenditure incurred in the general management of the business of the company" with expenditure "undertaken for the general business purposes of the company" of which overhead expenses provide an instance. In that case, his Honour was not concerned to distinguish between expenditure of a mixed character which did, and expenditure of that character which did not, fall within the description "general management"; the issue was whether the expenditure in question was exclusively incurred in gaining non-assessable income and his Honour held that it was so incurred. It follows that the present problem was not that to which his Honour was directing his consideration and his judgment is not authority for the precise scope of the phrase "general management" nor do I, as already stated, accept the view that that phrase is synonymous with the carrying on of a company's business. Nevertheless, it is apparent that his Honour perceived no very narrow limitations which were to be placed upon the phrase; to that extent the judgment in that case is at least in no way opposed to the view which I have formed. (at p74)

16. I gain no assistance from those English cases to which the Court was referred and which relate to the expression "expenses of management (including commissions)" as used in the United Kingdom Income Tax Act 1918. The relevant section of that legislation is markedly different in its language from the wording of s. 113 and decisions on it appear to me to throw little light upon the different wording of the Australian Act. (at p74)

17. In the present case, considerable evidence was given before Menzies J. concerning the functions, within the organization of the taxpayer company, of the two classes of employees whose salaries and expenses were the subject of exclusion by the Commissioner from the category of expenses incurred in the general management of the business of the company. (at p74)

18. Without attempting to summarize that evidence it suffices to refer to the descriptions, as expressed in his Honour's judgment, of the functions of these two classes of employees. Divisional managers his Honour found to occupy a place in the management of the business of the company, it being part of their duties to see that the inspectors subject to their control observed company policy and complied with its rules. They exercised a supervisory function in relation to the work of inspectors and, as his Honour said "had offices with staff to run and records to maintain". (at p74)

19. His Honour concluded that the work of divisional managers was part of the management of the business of the company but he held that, although managers, they were only local or sectional managers.

"with no responsibility for policy and with very limited responsibility for making decisions within their own divisions and within the limits of the policy laid down by higher authority."

He accordingly concluded that their salaries and expenses did not fall within the concept of expenses incurred in the general management of the business of the company, because he gave to the word "general" a limiting operation which I do not find it to have. But for this I think it is clear that he would have included amounts expended in salaries and expenses of divisional managers within the general category of expenditure incurred in the general management of the business of the company. In my view, for the reasons already stated, it should be so included. (at p75)

20. The position is, I think, otherwise, in the case of inspectors. In their case it suffices to say that, as his Honour found (1971) 124 CLR, at p 148 :

"An inspector managed no person and no activity. He did the work allotted to him subject to the control and supervision of his divisional manager. His main work was to write new business and to look after policy holders - to be, as it were, the link between the company and the policy holders within his area. An inspector did not make decisions on behalf of the company, although, no doubt, in the course of his work he could decide not to submit particular proposals for policies or loans to the company. No doubt an inspector made recommendations both to policy holders - prospective and actual - and to the company relating to matters such as the alteration of policies and the granting of loans, but decisions were made elsewhere. Apart from the recruitment of sub-agents and the giving of assistance to divisional managers and the training of new inspectors, the duty of an inspector was no more than to write new policies and service old ones and to help policy holders to make the best of their positions as policy holders."

It follows that expenditure on the salaries and expenses of inspectors is in no sense an expenditure incurred in management of the taxpayer's business any more than the expenses of shop assistants working behind the counter of a department store would be incurred in the management of that store. (at p75)

21. I therefore conclude that the assessment by the Commissioner was erroneous to the extent to which it excluded from the sum which was subject to the operation of s. 113 (2) amounts expended by way of salaries and expenses of divisional managers but not otherwise. To this extent, therefore, in my opinion this appeal succeeds and the assessment should be remitted to the Commissioner so that the assessment may be amended accordingly. (at p75)

Orders

Appeal allowed. Order of Menzies J. set aside and in lieu thereof order that the appeal be allowed so far as the assessment excluded the sum of $89,658, being the salaries and expenses of divisional managers, from the amount claimed by the appellant to be the amount of the expenditure incurred by it in the general management of its business, and that the assessment be remitted to the Commissioner to be amended accordingly. The respondent to pay one-half of the appellant's costs of the appeal before Menzies J. and of this appeal.