RAC Insurance Pty Ltd v Commissioner of Taxation

[1990] HCATrans 266

~ , AUSTRALIA,,~	:
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IN THE HIGH COURT OF AUSTRALIA

Office ot -the Registry

Perth No P28 of 1990

B e t w e e n -

RAC INSURANCE PTY LTD

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Office of the Registry

Perth No P29 of 1990

B e t w e e n -

RAC INSURANCE PTY LTD

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Office of the Registry

Perth No P30 of 1990

B e t w e e n -

RAC INSURANCE PTY LTD

Applicant

TOOHEY J 26/10/90

and

COMMISSIONER OF TAXATION

Respondent

Applications for special

leave to appeal

MASON CJ
DEANE J

TRANSCRIPT OF PROCEEDINGS

AT PERTH ON FRIDAY, 26 OCTOBER 1990, AT 9.31 AM

(Continu~d -from 25/10/90)

Copyright in the High Court of Australia

MASON CJ: Yes, Mr Bloom?

MR BLOOM:  If Your Honours please. Yesterday Your Honour

Justice Deane took me to a passage in the judgment

of the learned trial judge which is at both

pages 45 and 12 of the application book. May I

first remind Your Honours that the years in

question are 1984, 1985 and 1986. The 1983 year

which was in question before His Honour the trial

judge was completely resolved on the section 23J

point and is no longer in issue.

But in those years in question what the trial

judge says at page 12 is quite correct, namely,
that:

In calculating a solvency margin all reserves of .the taxpayer represented by the various

investments were taken into account including

the value of loans to its subsidiary company.

That is because, under the Insurance Act 1973 it is

a requirement to file a form which is a prescribed

form, form 4, and list all one's assets for the

purpose of calculating the solvency margin.

The forms 4 for the relevant years were in

evidence and were part of exhibit 14 but it is

perhaps unnecessary for me to take Your Honours to

copies of those in view of what I can now tell

Your Honours. What Your Honour Justice Deane was

really, with respect, asking was whether the

inclusion of the relevant investments, that is, the

profits from the realization of which are in issue
in this matter, was necessary in order to enable
the solvency margin to be met and the answer to
that question is, "No, it was necessary", and that
proposition not only is not contestable but it is

our understanding that it is not contested.

26/10/90

I have had prepared and can hand to

Your Honours some figures extrapolated from

exhibit 14 which were the forms 4 which will

demonstrate to Your Honours the effect of the

-~exclusion of government bonds, semi-government

s~curities, shares and debentures, the profits from

the realization of which are in issue, and will

demonstrate that for the years 1984, 1985 and

1986 - Your Honours see the surplus on the final

line - even after excision of those particular

investments there is a surplus over the earlier

figure, the figure one earlier which is the amount

required to meet the solvency test.

Your Honours, I had yesterday submitted to the

Court that there was no submission below on behalf

of the respondent that there was any separate
business of investment and, indeed, that was
disclaimed; that the facts did not entitle the
court to find that the investments were part of the
insurance business, given the facts which are set
out in the affidavit and that the court reached the

conclusion it did at both levels by a wrongful,

with respect, extension of the principle applicable

to life insurance companies across the board to

general insurers and it is the correctness of this

extension that we seek in this application to put
in issue.

Your Honours, in the application book the matter is dealt with in the judgment of the

Full Court very briefly, firstly at page 50. There

has been a reference to all of the relevant cases

and then the second paragraph:

It follows that profits derived from the

sale of investments are ordinarily brought to

account in the assessment of the income of a

banking or an insurance company.

At page 52, the first full paragraph:

Counsel for RAC Insurance submitted that

the principle of the insurance cases applies
only to long-term insurance and not to the

type of short-term insurance which RAC

Insurance carried on. But this is not so, as

was held in Chamber of Manufactures Insurance

Ltd -

a case to which I will shortly take Your Honours.

At page 54, the second paragraph, in the

middle of the page:

Counsel for RAC Insurance further relied

upon the principles enunciated in Northern

10   26/10/90

Assurance Co v Russell by the Lord President of the Court of Exchequer, Scotland, for the guidance of the Commissioners of Inland

Revenue.

Tliey were actually called "instructions" by

His Lordship to the commissioners.

Counsel relied particularly upon the third

precept that, as fire insurance policies were
contracts for one year only, premiums received

for the year of assessment and ordinary

expenses could be fairly taken as profits and

gains of the company without taking into

account or making any allowance for the

balance of annual risks unexpired at the end

of the financial year. Counsel submitted that

this precept drew a clear distinction between

a general insurance company and a life

assurance company.

However, the important precept of the

Lord President for the present purposes if the fifth precept that "Where the gain is made by

the Company ... by realising an investment at

a larger price than was paid for it, the

difference is to be reckoned among the profits

and gains of the Company." The

Lord President's remarks in this respect and

other authorities were considered in the -

Colonial Mutual case. And if Your Honours would

then go over to page 56, the passage which is cited

as the real authority for the extension in the

Colonial Mutual case appears in the second extract

from the judgment of the High Court in that case

towards the end of it. Your Honours see a

reference to 754,000 pounds and that under that

"Case 1" and then:

the sounder view is that profits and losses on

the realization of investments of the funds of an insurance company should usually be taken	into account in the determination of the
profits and gains of the business".
It will be noted that their Honours made no distinction between an insurance company and a
life insurance company. Nor in his fifth
precept did the Lord President in Northern
Assurance Co v Russell.

Now, Your Honours, in the bundle of documents which we handed up yesterday, amongst other things,

appears the Chamber of Manufactures case at page 28

of the bundle. If I could take Your Honours

11   26/10/90

initially to the headnote which is, with respect,

accurate:

Where the portfolio of shares and securities held by a general insurance company

constituted the necessary reserve fund

available to meet claims and expenses in all

reasonably foreseeable contingencies, the

profits from sales of shares and securities in

the course of carrying on its insurance
business were income according to ordinary

concepts.

Now, with respect, that is explicable on the basis

that there was a finding of fact to that extent,

namely - - -

MASON CJ: There was what?

MR BLOOM:  A finding of fact to that extent, namely, that

the particular investment portfolio in that case

did constitute the necessary reserve to enable the

meeting of reasonably foreseeable contingencies,

contrary to the fact of this case.

However, the case has been spoken of by both

Professor Parsons and the Federal Court as extending the rule applicable to life insurance

companies across the board to - - -

MASON CJ: Just before you get to that, the sentence to

which you drew attention in the second passage

quoted from Colonial Mutual Life, in referring to

the realization of investments of the funds of an

insurance company was expressed in very general

terms.

MR BLOOM: It was.

MASON CJ: 

It was not limited to realizations made in the

course of reinvesting the assets of a necessary
r~serve fund.

MR BLOOM: That is quite so, Your Honour, and it is the

correctness of that as a proposition which is

really in issue. It is hard for me to put a

submissions to Your Honours that that court did not

consider the difference between a life insurance

company and insurance companies in saying what was

in fact said yet I do hope to show Your Honours

shortly that all that went before this passage was

really a reference to life insurance companies,

including the company which was involved in that

particular case and the conclusion that the passage

expresses is a conclusion which is to be drawn from
the peculiar nature of the business of a life

12   26/10/90

insurer or a bank rather than the nature of the

business of a general insurer.

DEANE J:  I do not know if it helps you here but in this

field does not a lot turn on the notion of the

funds of an insurance company? In other words,

even if it be a bank, if moneys or assets are set
right apart from the business, it is not the

ordinary situation.

MR BLOOM:  Yes.

DEANE J: But if assets are properly regarded as funds

within the insurance business, one normally would

assume that the banking and insurance approach

would apply. It seems to me that while there is

obviously force in your approach to the facts of

this case, at the end of the day the real question

might be the factual question, "Has there been a

sufficient setting aside or demarcation between

reserve funds which are to be seen as within the

insurance business and investments that have been

taken out of the insurance business and put to one

side?" That approach, of course, would not help

you on a leave application.

MR BLOOM:  No, it would not, Your Honour, with respect, but

that was what Chamber of Manufacturers largely

concerned and the question arises whether the only

way that an insurance company can show that its

investments are not a necessary reserve is by some

form of definite segregation. Chamber of

Manufacturers said, "Segregation by itself wouldn't

assist you unless you could also prove that the

particular fund was not a necessary reserve."

Segregation there did not, of course, carry the

day.

What we say is, whereas here, the whole of

those investments are quite clearly not a necessary
reserve. That is, with respect, the test. And no

further or other segregation is or ought to be

required in such a case, and segregation in a sense

of a separate accounting or separate books or as the
case may be, could only be a matter of evidence to
prove what, at the end of the day, is what we put,

namely, that it is not a necessary reserve for the

purpose of business.

DEANE J:  I mean, if one looks for a moment at the form you

have handed up this morning, to understand it one

really needs to know what are comprised in total

assets. I am not suggesting you should do it but if, for example, "total assets" were to include a

building in which the company carried on its head

office, the calculation done here would be

unhelpful in that one would have thought the

13   26/10/90

building would be the first thing to be put to one

side. On the other hand, if the assets, apart from

gQvernment bonds and shares, debentures, were

moneys held on the short-term money market, this

--document would be very helpful in saying, "Well,

6ne can see a line of demarcation".

MR BLOOM: 

By far the greatest assets, I think it is fair to

say, Your Honour, are moneys on the money market
and debts, in particular, the loan to the
subsidiary company.

DEANE J: 

I was not requiring or suggesting that you get

involved, I was simply point out to you that on one

approach, unless you can identify a very clear

error of law, we are essentially in an area of

fact.

MR BLOOM: Well, the error of law that we seek to identify,

of course, is that extension which we say the court

erroneously performed upon a principle; a principle

which really is a second principle that comes in

answer to the Californian Copper principle. The

Californian Copper principle, of course, gives us a

prima facie position that an accretion to capital

is capital, non-taxable, unless it is an act done

in the course of carrying on of the business.

Now, one gets with life insurance companies and banks a presumption, perhaps rebuttable but a

presumption to the effect that where that is the

nature of the business, having regard to the

actuarial need to take into account the results of

the investments, it is always going to be in the

course of carrying on the business.

One also then has London Australia Investment

which says that if one carries on a business of

trading in investments in the way in which it

occurred in that case, again, that is within the

exception to the Californian Copper principle.

But here we have neither of those, with

respect. It is able to be demonstrated, and the

facts are clear on that, that this was not a

necessary reserve and it is not even suggested that

London Australia Investment applies to the manner

in which the taxpayer held its investments and

invested in them. So, in those circumstances, we

say, with respect, it is a question of law, namely,

is this rebuttable presumption there to be

rebutted, in effect, by the taxpayer or, on the

contrary, given the facts as found by the learned

trial judge and the absence, if we are correct, of

such a rebuttable presumption, should not the

matter be concluded in favour of the applicant?

14   26/10/90

That is how we see the question of law, with

respect.

Your Honours, in Chamber of Manufacturers, at

· -page 32 in the bundle of documents there is a

reference at about point 8 of the page to the

passage from the judgment of Colonial Mutual Life

and then the Full Court of the Federal Court says:

It should be noted that this view was

expressed in terms which would cover all

insurance companies, although its emphasis may

have been affected by the fact that the

company there in question was a life insurance

company. The business of life insurance

obviously is a special case because of the

necessity to maintain an actuarial

relationship between accumulated funds and

liabilities, and to obtain a regular yield

from investments with surplus funds typically

being distributed to policy holders in the

form of bonuses.

Your Honours, the Colonial Mutual Life case is

also contained in that bundle of documents. The

passage in question is at page 24 and underneath

the passage there is what we think may explain the

use of the wider term "insurance company" rather

than just "life insurance company". There is a

reference, Your Honours will see, at the bottom of

page 24 or 618 of the Commonwealth Law Reports,

over to page 619, to "mutual life insurers" and

"mutual companies" and the different position that

pertains in Australia with mutual insurers than in

England in terms of their taxation. And if one goes to the argument in the case at page 16 of the

bundle of documents, page 610 of the law report,

one sees the argument of Mr Coppel, towards the

bottom of the page, last paragraph:

In the present case the realization of

investments is no part of the ordinary

activity of the appellant, which is a purely

mutual company. Even if the true view of the

English authorities is that a life-insurance

company conducts a business which consists in

part in the making of profits by the

realization of investments, that view cannot

be applied to a mutual life-insurance company.

And it was in answer, we would respectfully

suggest, to that submission that Their Honours may have taken the statement of principle broader than

the facts of the case.

15   26/10/90

If one goes back to page 21 or page 615 of the

Commonwealth Law Reports, at the very bottom of

that page:

Since the future interest to be earned by

the investment of the premiums is taken into

account in determining what portion of the

premium must be set aside to pay the policy at

its maturity, and the expenses and other
contingencies of the business must be met by

the investment of the balance, it is clear

that the investing of its funds is part of the

business of the Society.

It is talking very much about a life insurance business there.

It was held in Northern Assurance Co v Russell

that the profits or gains of a company

carrying on the business of life assurance -

contrary to what the Full Court of the Federal

Court has said here, namely, that the principle in

Russell's case was not so limited -

can only be ascertained by actuarial

calculation, and that the profits and gains

are not, as in the case of contracts of

insurance life fire insurance -

expressly distinguished -

which are for one year only, the amount of the

net premiums and other income income received

during the year less the amounts required to

meet claims and the expenses and other

outgoings of the business, but the net surplus

after provision has been made for the

liabilities of the company on certain

assumptions as to the rate of mortality, the rate of interest, and the amount of expenses

likely to be experience in the future.	The
Lord President of the Court of Exchequer,

Scotland, laid down in that case five

propositions as useful guides to the Income

Tax Commissioners dealing with cases of this

description.	Of these propositions we need
quote only 2 and 5:	"(2) that the interest of

investments which has not suffered deduction

of Income Tax at its source must be taken into

account in ascertaining the assessable amount

of profits and gains of the company ... (5)

Where the gain is made by the company (within

the year of assessment ... ) ... by

realizing an investment at a large price than

was paid for it, the difference is to be

16   26/10/90

reckoned among the profits and gains of the

company.

Then there is a reference to Clerical, Medical, and

· General Life Assurance Society, a life assurance

company, and a number of other decisions in

England, some which, as a matter of fact, had conclusions of the kind that we would ask the Court

to conclude in this case but they were factual

conclusions; some which, like Stephen's case, which

is mentioned about point 6 of page 617, concerned a

concession by the taxpayer that his profits - being

a fire insurance company, concession that his

profits were assessable, and that is what leads to

the statement then which appears at page 618 and

whence brings the proposition as a proposition that
ordinarily all insurance companies are to be taken
as carrying on as part of their insurance business

the business of investing so that profits from

their investments will usually be income failing

some specific act of segregation or the like.

Lastly, Your Honours, Professor Parsons, as I

earlier indicated, has criticized such an extension

but passages from his text appear at page 36 and

following of the bundle of documents. Towards the

left-hand side at the bottom of the page, "Business

and investing", paragraph 2.456:

It may be accepted that there is no

business, within the ordinary usage business

gains principle, where an investment or any

number of investments have been made with the

purpose simply of obtaining income derived

from property - interest, rent, dividends -

which attends the investment. To treat this

income as supplying a profit purpose, so as to

make the investing a business, would be to

bring about a radical extension of the concept of income into the field of capital gains. A purpose simply to obtain income derived from

property, it was submitted above, is not a

profit purpose. In any case on the hypothesis

that the purpose is simply to obtain that

income, there will not be any system in the

taxpayer's activity such that a change in his

investments can be seen as part of or as

incidental to it. Sometimes the taxpayer will

cease to hold the investment because he has
been repaid money he has lent, or the company

in which he invested has been liquidated.

Sometimes he will have realised his investment

because he has need, for some private purpose,

of the money he had invested. None of these

events is part of or incidental to whatever

system there may be in obtaining the income

derived from the investments.

17   26/10/90

At 2.457 he looks at four variations which have

been considered by the authorities, the fourth of

which is the banking and life insurance cases and

in subparagraph (4) says:

the taxpayer's purpose includes a purpose to

use funds he is obliged to return to others to

meet calls for return which are a regular

experience of his business, and to seek a

profit by obtaining a greater amount, in the

form of income from investments, than the cost

of servicing the funds he is obliged to

return. Realisation will be necessary from

time to time to meet claims for the return of

the funds.

Then over at the next page, paragraph 2.467, in the bottom right-hand column:

Variation (4) is an attempt to specify the

circumstances which have been thought, at

least by Barwick C.J. and Jacobs J., to

explain the banking and life insurance cases.

A bank, collateral activities aside, depends

for its profit on a greater income flow from

its investments than the cost of servicing

borrowed money it has invested. It is

implicit in its operations that it must be

ready to effect some change in its investments

to meet a call for a return of their money by

those who have lent to it.

And if one then drops about six lines to a

reference again to Chief Justice Barwick and

Mr Justice Jacobs:

The Barwick CJ and Jacobs J explanation of the

banking cases is that the obtaining repayment

of a loan made by a bank, or the realisation
of an investment it has made, is incidental to

the making of a profit by a margin of income

flows over the costs of servicing. A similar

analysis may be made in relation to a life

insurance business.

And then he cites the principal banking and life insurance cases. And then in the next paragraph,

2.468:

So explained, the investments, changes in

which will be acts in carrying on the

business, will be those made in contemplation

of the need to change in order to meet calls

by customers for the return of their deposits, or by policy holders for the proceeds of their
policies.

18   26/10/90

And one might add there was life insurance

companies, the payment of bonuses.

An investment in shares so as to control a

company will not ordinarily be such an

investment.

Assuming that the banking and life insurance

cases are to be explained in this way, there

is a question of how far the principle that

they express extends.

And if one goes to the right-hand side of the page

to 2.474:

The Federal Court decision in The Chamber of

Manufacturers Insurance Ltd has extended the

principle of the banking and life insurance

cases to other insurances. The court quoted

from Colonial Mutual Life Assurance Society

Ltd in support of this extension, though the support given by the quotation is little more than what might be drawn from the absence of the word "life" before "insurance" in

referring to the principle. There are,

however, United Kingdom decisions, including General Reinsurance Co Ltd v Tomlinson which would support the extension.

Pausing there, Your Honours, there was a

specific finding of fact in Tomlinson that the

investments in question, again, constituted the

necessary reserve for meeting claims by policy

holders upon the taxpayer there which was a

reinsurer.

The case concentrates on a concept of a

"reserve fund" of investments which will be

treated as revenue assets. Banking and life

companies must hold assets to meet inevitable

calls by depositors and policy-holders. In

both instances they are calls, in effect, for

return of moneys vested in the company by the

depositors or policy-holders, more obviously
so, perhaps, in the case of a bank than in the

case of a life company. The extension of the

principle to other insurance companies

modifies the principle, so that it now extends

to assets held to meet contingencies whose

occurrence may be statistically predictable but which are not inevitable in the way the claim of a depositor in a bank or policy-

holder in a life company is inevitable. The

extension paves the way for yet another
modification which would treat assets as

revenue assets whenever a business need to

realise them may be fairly anticipated. As so

19   26/10/90

modified the principle would extend to assets
that represent a temporary investment during a

period of excess liquidity of a business, due,

for example, to seasonal factors. And it

might extend to any assets of a taxpayer

carrying on a business: they stand available

to meet claims made against the company,

whether by creditors or others. The reasoning

in Chamber of Manufacturers suggests that in

the illustration of excess liquidity, the

assets are a reserve fund. The court

considered that for various reasons, including
the possibility of legislative exclusion from
the industry, the company might have to

realise some of its investments, presumably so

as to diversify into some other business

activity to replace the lost insurance

activity. In this there is an assumption that

investments of money which may need to be

redeployed in the business activities of a

taxpayer are revenue assets. The assumption

challenges the very existence of a distinction

between revenue assets and capital assets.

The illustration of assets treated as revenue

assets because they stand available to meet

claims made against the company by any

creditor will abandon the distinction.

The next paragraph:

The notion of "reserve fund", as it is used in

Chamber of Manufacturers, is ill-defined. It

must refer to assets representing a reserve to

meet claims. Not all assets of an insurance

company will be treated as a "reserve fund."

And then at the bottom of the page, 2.477:

The words quoted from Chamber of Manufacturers

suggests that a designation of assets as pure investments, and thus not part of the reserve

fund, will not be accepted where the assets_

designated as reserve fund are not

"demonstrably sufficient to meet claims and

expenses in all reasonably foreseeable

contingencies".

Just pausing there again in answer to what

Your Honour Justice Deane put to me, we say that if

you can demonstrate that these particular assets

are able to be set aside and are not needed, on any

view, to meet reasonably foreseeable claims and,

indeed, there are specific findings of fact to that

effect, that is enough without the added need of

some additional evidentiary form of segregation.

20   26/10/90

DEANE J:	was there any designation even in this case?
MR BLOOM:	.No .

DEANE J: - · There was not any at all?

MR BLOOM:  No, it was simply not considered necessary,

Your Honour, because the investments were

considered to be true investments and it was not
considered necessary to do anything more than speak

of them, with respect, in those terms.

And then Professor Parsons, towards the end of

that paragraph, again, makes a criticism and says:

At this pint, if not earlier in this

discussion, there appears reason to doubt the

extension of the banking and life insurance

cases attempted in Chamber of Manufacturers.

But, Your Honours, what we say is it ought not to

be the case that merely by an act of segregation or

separate book of accounts in this case, the
taxpayer evidence, what was already evident,
namely, that these were not - these investments - a

necessary reserve for any part of its business and

that being the case the applicant should have

succeeded and it did not succeed because of an

extension, as a matter of law, by the court of this

rebuttable presumption applicable to life insurance

companies and banks, to all insurance companies in

reliance upon that broad proposition appearing in

the Colonial Mutual Life case. If Your Honours

please, they are out submissions.

MASON CJ: Yes, Mr Williams.

MR WILLIAMS:	Your Honours, it is our submission that the applicant has not raised any question of law at
all.  What is at issue is, really, the application
of the Californian Copper principle to a set of
facts and nothing more.

My learned friend has taken Your Honours to

salient points in the Full Court judgment. Can I

just repeat two or three of those? Page SO, having

reviewed a number of authorities, the court said:

It follows that profits derived from the

sale of investments are ordinarily brought to

account in the assessment of the income of a

banking or an insurance company.

Now, the word "ordinarily" there discloses that we

are not talking about a principle of law at all.

It is really a usual consequence from the

application of the Californian Copper principle to

21   26/10/90

a set of facts, those facts involving banking and

insurance companies.

.. " Page 52, the submission by my learned friend

·fo the court below in the first full paragraph was

that the principle of the insurance cases applies
only to long-term insurance and not to the type of

short-term insurance which the RAC Insurance

carried on. The principle that is being talked

about there is the principle I just read which

includes that word "ordinarily".

When the court reached its conclusion, having reviewed the CML case in particular, at page 56 it

cited - almost the last thing it did - that

passage:

the sounder view is that profits and losses on

the realization of investments of the funds

of an insurance company should usually be

taken into account in the determination of the

profits and gains of the business.

Again, we have a principle which is not a principle

of law, it is a conclusion as to the consequences
of a number of different cases.

And then at page 57 in the final sentence in

the reasoning:

The facts of the present case are not sufficient to distinguish the circumstances

from the general principle; indeed they are

illustrative of it.

Now, in order to demonstrate that that is all

the court is talking about it is necessary for us
to comment on the facts upon which my learned

friends rely in order to set up a question of law,

the question being -

DEANE J: l1r Williams, it may well be that those statement

of principles in the case of a company such as

this, at least, should be confined to assets not

separately designated and set to one side but, as I

follow it, there is no separate designation here,

is that so?

MR WILLIAMS: No, there is not. In fact, the findings of

the trial judge which were summarized, really, only

by the Full Court were that the investments were

intrinsically involved in all aspects of the

business.

DEANE J: If you so confine the statements, what they mean

or their effect would be, in the absence of

separate specific designation, there is a

22   26/10/90

presumption which can be resolved by an inquiry of

fact.

MR WILLIAMS:	Yes, a presumption of fact.
DEANE J:	I suppose it is a fact, yes.
MR WILLIAMS:	The principle - the usually or the ordinarily principle really is only, in our submission, a
presumption of fact.

DEANE J: Yes, except underlying the presumption of fact are

a number of legal principles in that what is

involved is a presumption of fact that the case

falls within a particular category or a particular

set of principled rules.

MR WILLIAMS:  With respect, I think there is really only the

one principle, at bottom. We are talking about the

Californian Copper Syndicate principle which is

cited ad nausearn in all of the authorities on which

reliance is placed and it is only - each of those

cases is really only a demonstration that the

increments to assets on realization realized in the

course of business constitute income of that
business and to say there is a banking and

insurance principle in that light is really only to

say that, "Well, in most cases of banking and in

most cases of insurance, that principle will apply"

and there is no factual reason for distinguishing

it.

DEANE J: Yes, except what it really amounts to is that if

the investments properly come within the insurance

or banking business, then a profit on realization

will be a profit of the business but if they have

been taken outside the insurance and banking

business by an appropriate form of segregation, you

are in a different territory.

MR WILLIAMS:  Yes. At the trial, initially, the applicant

pq-t up a proposition that there was a segregation

but it was abandoned in the course of the trial.

My learned friends have relied upon the summary of the facts that are set out in the

affidavit. Page 65, in paragraph 13, it is said

that:

the Respondent -

that is the Commissioner -

based his case upon the existence of a general
principle (or presumption) to the effect that

where a taxpayer carried on an insurance

business, all profits arising from the

23   26/10/90

realisation of investments are assessable

income save in the limited case where the

insurance company can demonstrate that it has

positively segregated an asset from the assets

of the insurance business.

In fact, that is not, with respect, an accurate

summary of the submission. The submission put

simply was whether - the question for the court was

whether the profit represented the profit on

realization of investments carried out in the

course of carrying on of the insurance business.

That was the simple proposition and it was then

said in the way we now say that the - as a

presumption, in effect of fact, that the nature and

common characteristics of an insurance business is

such that profits on the realization of investments

of an insurance company are usually gains made in

the course of carrying on the insurance business

and recording the income for taxation purposes, and

that proposition is not limited to life insurance

companies. I am reading there from the written

submissions that we offered to the Full Court.

My learned friends have set out in

paragraph 18 a number of facts which they rely upon

to raise a question of law. In 18.3, it is said:

That the Applicant carried on business so as

to achieve an underwriting profit i.e. so that

premiums received should exceed claims and

expenses.

Now, with that should be 18.8:

That it was not the policy of the Applicant's

Board to augment the Applicant's underwriting activities by the use of income from

investments.

What that is referring to is a finding of the trial

judge repeated by the Full Court at page 43:

In conducting its insurance business, it was

the longstanding policy of the taxpayer, as

adopted by its Board of Directors, to

endeavour to provide for the underwriting

activity of the business to be run at a

break-even level or at a small profit.

In other words, they are not budgeting to make a

significant profit on underwriting. They are using

their reserves to enable them to budget for a

break-even or a small profit.

24   26/10/90

It was not the policy of the Board to augment

the taxpayer's underwriting activities by the
use of income from investments.

But then the impact of that policy is seen in the next paragraph:

On several occasions when the taxpayer sought

to meet or intensify competition in the

marketplace for motor vehicle insurance, it

budgeted for small underwriting losses. That

was an option available to the taxpayer but it

was not a reflection of regular policy.

And it was an option because it had reserves.

MASON CJ:  Mr Williams, could I ask you this question, and

it is designed, in effect, to summarize what I

understand to be the effect of the exchange that

has taken place between Mr Bloom and Justice Deane

and it is this, that in its accounts the taxpayer

did not maintain a clear and express distinction

between assets held in an insurance reserve fund

and its other investments. Now, is that correct?

MR WILLIAMS:  Yes. It went further than that. The

investment income including profit on realization

of investments was included in annual profit and

loss budgets. All income from investments whether

redemption of securities or dividends or interest

or the like, or profit on sale, was included in

cash flow budgets. It was all taken into account.

There was just one big tank with money coming at

the bottom, money going out of it.

Now, there has been some small focus on the

calculation of the solvency margin. Can I just

hand up a copy of my learned friend's sheet which includes another column which is that of the year before? In the calculation Your Honours will see the figures for 1983 which are taken from the same

sources as the other figures. Taking 1983, I

concede that without the relevant investments those

against the word "Less: Government bonds and

semi-government securities, Shares and

Debentures" - in 1983 there was not only not a

proper solvency margin, there was an excess of

liabilities over assets.

What this table indicates is that the company was in a transition stage. It was in the process

of endeavouring to set up a segregated investment

fund through a subsidiary and as investments

matured they were transferred to the subsidiary and that subsidiary was included in the solvency margin

calculation simply as an unsecured liability. But

in 1983 it was not possible for the solvency margin

26/10/90

to be met without the relevant investments. In

started to be a little more open. 1984 it was only just met; in 1985 and 1986 it

Mr Le Miere points out Your Honour

Justice Deane has asked my learned friend about the

buildings. If one took the solvency margin for

1984 and extracted from it fixed assets - they are

not shown in here - which were some land but mainly

motor vehicles, the solvency margin would not have

been met in that situation.

On page 67, at paragraph 18.4, it is said:

That the investments, the profits from the

realisation of which were in issue,

represented funds of the company which were not required to meet the estimated level of

claims from year to year.

That comes from page 44. It is the second complete

paragraph after the words "On the other hand" -

funds of the company which were not required

to meet the estimated level of claims from

year to year were invested in shares,

debentures, government bonds and in loans on

first mortgage security.

If one goes back to the previous paragraph, it is

said:

The premium income of the taxpayer provided a

substantial cash flow which required, or

permitted, a mix of investments to be

undertaken. On the one hand there were

investments in the short-term money market and

short-term investments maturing in the course
of the financial year which were
re-incorporated in the cash flow of the

taxpayer to meet claims as they arose.

were not required to meet the estimated level	On the other hand, funds of the company which
of claims from year to year were invested in shares, debentures, government bonds and in loans on first mortgage security.
Now, can I take Your Honours over the page to

page 45, in the third paragraph:

In the relevant years of income the mix of investments of the taxpayer and utilization of the funds generated by the premium inflow

reflected an intention that such investments

as were not in short-term deposits would be in

negotiable securities and where the

26   26/10/90

investments were in bonds, debentures or

mortgages, the term for maturity or repayment

would be usually not more than three years and

certainly no more than five.

Further on:

with the exception of monies advanced on

mortgage security, the investments were

readily realizable in markets trading in those

securities.

And further down, about six lines from the bottom:

The shareholdings were not purchased with the intent of providing income from the trading of

them. They were purchased to represent a safe

holding for part of the reserves of the

taxpayer's business.

Paragraph 18.5 at page 67, it is said:

That the reserves arising from the profits

from investments gave the Applicant security

against events which were unlikely

catastrophic events.

Could I take Your Honours to page 19, His Honour

the trial judge found that:

As may be expected of a prudently

conducted insurance company, the taxpayer was

diligently engaged in building reserves to

better secure its operation. The reserves

gave the taxpayer security against possible,

albeit unlikely catastrophic events and -

he adds -

permitted the taxpayer to withstand

competition if it became necessary to do so.

The next two paragraphs can be taken together,

18.6 and 18.7:

the Applicant protected its exposure as an

insurer by obtaining cover under reinsurance

contracts.

And then:

That experience gained from the Applicant's

operations had indicated that the amount of

re-insurance obtained by the Applicant was

likely to be adequate to meet any foreseeable

catastrophe.

27   26/10/90

That comes from the Full Court judgment at page 43 which is, in turn, citing from page 17, in the

middle paragraph:

It may also be accepted that the

experience gained from the company's
operations had indicated that the amount of

re-insurance obtained by the taxpayer was

likely to be adequate to meet any foreseeable

catastrophe.	However, the taxpayer's business
was conducted on conservative lines.	The

taxpayer had been content to accumulate

reserves and apparently such reserves were

regarded as necessary for the purposes of the

business, perhaps to cover an event, however remote, such as the failure of a re-insurer.

I have previously mentioned paragraph 18.8.

In relation to the cash flow and profit and

loss, there is a reference on page 19 which may be

of relevance. At about point 7:

In addition, maturing investments were
regularly introduced to the cash flow of the
business and necessarily became available for
the day-to-day conduct of the business
including re-investment. Part of the
operation of the taxpayer's business involved

the flow of funds from cash to investments and

from investments to cash from which funds the

outgoings of the business were met. The final

accounts reflecting the year's operation of

the business may have shown that the amount of

premiums received were sufficient to meet or
exceed the costs of operating the insurance

business but, in fact, the proceeds of

realized investments and investment income

were participating elements in the operating

activities of the business.

MASON CJ: ,Mr Williams, I think we have got a sufficient

picture now of the facts of the case.

MR WILLIAMS:  They are our submissions.

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

MR BLOOM:  Your Honours, essentially, in Chamber of

Manufacturers what the Full Court said was that it

was not enough for the taxpayer to segregate, what

had to be shown was that the investments in

question were not a necessary reserve. The
findings of the learned trial judge here were that
the particular investments were not a necessary
reserve and, in particular that finding, 18.4,

28   26/10/90

which is at page 67 and which is borne out by the

passages my learned friend took Your Honours to.

.· So, the real question is whether the act of

•· segregation, some act to prove additionally that

tnis was not a necessary reserve, is a necessary

evidentiary act. That is really the sole question,

with respect.

Your Honours, as to the 1983 figures,

unfortunately we disagree with them. We say they

are not relevant anyway because obviously the years

in issue are the years in issue and the investments

in issue are those realized in the years in issue

but the figures of my learned friend leave out of

account the loan to the subsidiary in the 1983 year

which would at least produce a deficit but a very

small one. If Your Honours please.

MASON CJ:  Thank you, Mr Bloom.

As we understand the facts of this case, the taxpayer did not in its accounts maintain a

distinction between assets held in an insurance

fund and other investments. On this understanding

the decision of the Full Court of the Federal Court

turned on what was essentially an issue of fact and

there were concurrent findings of fact in the

courts below.

The case is therefore not appropriate for the

grant of special leave and the application is
refused.

MR WILLIAMS: Your Honour, we seek an order for costs.

MASON CJ: Yes. You do not oppose that, Mr Bloom?

MR BLOOM:  No, Your Honour.

MASON CJ: The application is refused with costs.

AT 10.23 AM THE MATTER WAS ADJOURNED SINE DIE 29 26/10/90