Wesfarmers General Insurance Ltd v CSR

[2009] VSC 599

IN THE SUPREME COURT OF VICTORIA

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT

LIST F
No. 7989 of 2009

WESFARMERS GENERAL INSURANCE LIMITED (ACN 000 036 279)	Appellant
v
COMMISSIONER OF STATE REVENUE	Respondent

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JUDGE:	Pagone J
WHERE HELD:	Melbourne
DATE OF HEARING:	8-9 December 2009
DATE OF JUDGMENT:	16 December 2009
CASE MAY BE CITED AS:	Wesfarmers General Insurance Limited v Commissioner of State Revenue
MEDIUM NEUTRAL CITATION:	[2009] VSC 599

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TAXATION & REVENUE – Refund of duty – Whether proof of receipt of refund by insured required – Inferences that can be drawn – s 183 Duties Act 2000 (Vic).

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APPEARANCES:	Counsel	Solicitors
For the Appellant	Mr A. Broadfoot	Mallesons Stephen Jaques
For the Respondent	Ms P. Neskovcin	State Revenue Office

HIS HONOUR:

1. The appellant (“Wesfarmers”) seeks a refund of duty under s 183 of the Duties Act 2000 (Vic) (“the Act”). Wesfarmers was registered as a general insurer pursuant to s 185 of the Act and was authorised to carry on an insurance business pursuant to the Insurance Act 1973 (Cth). It was, therefore, required to pay duty under s 179 of the Act upon premiums it received on policies it issued, and was entitled to a refund of duty under s 183(1) to the extent that it refunded the duty in respect of the contracts of insurance for which duty had been paid.

1. Wesfarmers received premiums and duty from insureds over the period 1 July 2001 to 31 May 2007 (“the assessment period”) and lodged returns with the State Revenue Office (“the SRO”) over the assessment period as it was required to do. During that period it became obliged to refund amounts of premiums and duty under approximately 22,500 policies in the ordinary course of its business because they were voided, cancelled or varied prior to the expiration of the terms of the policies. Wesfarmers has paid all such amounts to the brokers for payment to the policy holders, and claims that it is entitled to a refund of the duty under s 183 of the Act. The respondent (“the Commissioner”) contended that Wesfarmers is not entitled to a refund in respect of a small proportion of the total claims because it has not been able to demonstrate receipt by the insureds of the amounts paid by Wesfarmers to brokers.

1. The ambit of the present dispute arose from an audit of Wesfarmers by the Commissioner. The latter notified Wesfarmers in September 2004 that it had been selected for an investigation in respect of its compliance with the Act for the period commencing 1 July 2001. The process adopted in the audit involved the selection of 446 policies from eight sample months in the assessment period. Wesfarmers was requested to provide documents and other supporting materials in relation to return premiums for the 446 policies selected to determine whether there was sufficient evidence that return premium amounts and duty had been refunded. On 5 June 2007 Wesfarmers was informed that the Commissioner intended to assess it on the basis that in 22 of the 446 cases (that is, in 4.93% of the total sample) Wesfarmers had been unable to demonstrate that the policy holders had received a reimbursement or refund of the amounts which Wesfarmers paid to the brokers for payment to the policy holders. The Commissioner accepted that Wesfarmers had paid the amounts to the brokers but contended that it was required to establish receipt by the policy holders and not merely payment by Wesfarmers to the finance brokers. The Commissioner has assessed Wesfarmers on the basis that a failure to establish receipt by the policy holders of the payment by Wesfarmers in 22 of the 446 cases (4.93% of the sample) justified denying refunds to Wesfarmers in 4.93% of the total of approximately 22,500 refund premiums (an amount exceeding $740,000 with penalties).

1. Section 183 of the Act provides:

(1) A general insurer or a person to whom section 181 applies is entitled to a refund of duty if the general insurer refunds, or there is refunded to the person, the whole or a part of a dutiable premium in respect of the contract of insurance for which duty has been paid.

(2) The refund is the duty paid on the amount of the premium refunded.

(3) A general insurer to whom duty is refunded may apply the amount of the refund to offset any other payment required to be made under this Act by the general insurer.

(4) As an alternative to applying for a refund under Part 4 of the
Taxation Administration Act 1997, a general insurer may offset an amount equivalent to the amount of refund to which the insurer is entitled under subsection (1) against any other payment required to be made under this Act by the insurer.

(5) Subsection (4) only applies if the general insurer-

(a)   has not charged to, or recovered from, any other person any amount in  respect of the whole or any part of the duty to which the general insurer is entitled to a refund; or

(b)  has refunded or reimbursed each person for the amount charged to or recovered from that person in respect of the duty to which the general insurer is entitled to a refund.

(6) Subsections (4) and (5) apply despite anything to the contrary in
section 18(2) of the Taxation Administration Act 1997.

The first three subsections were operative for the whole of the assessment period whilst the last three were inserted in 2003. The effect of ss 183(4) – (6) is to permit a general insurer to obtain the benefit of refunds of duty under self assessment. Thus, s183(1) permits a general insurer to apply for a refund of duty whilst ss 183(4) permits the general insurer to offset an amount rather than apply for a refund (but only if the conditions in ss 183(5) are satisfied).

1. The entitlement of Wesfarmers to obtain a refund under s183(1) depends upon whether it refunds the whole or part of a dutiable premium in respect of the contract of insurance for which duty has been paid. It is common ground between the parties that the primary words of the section which need to be engaged are “if the general insurer refunds” in s 183(1) rather than the words appearing between the commas in that sub-section, although those words and the rest of the provision, as well as the Act as a whole, are relevant to the proper construction of the critical provisions upon which this dispute depends. The sole relevant precondition for Wesfarmers to be entitled to a refund of duty is whether, as a fact, it refunded part or all of a dutiable premium. The Commissioner’s contention is that the proper construction of this requirement necessitates proof of receipt of payment to the policy holders.

1. There was considerable debate between the parties about the relevant principles of statutory construction to determine the meaning and effect of the provisions. Much of the competing arguments had merit and arguably pointed in different directions. The applicant contended that I should see the provisions as remedial and, therefore, to construe them beneficially to afford the most complete remedy of the situation with which they were intended to deal,[1] and to construe them by reference to the commercial reality in which the provisions were intended to operate.[2]  The Commissioner urged that I should focus upon the language of the provision which, it was said, necessarily focused upon the receipt by the insured rather than the payment by the insurer.  In this context I was urged by the Commissioner to see the primary objective of the provisions as securing a refund for the insured rather than to relieve any burden upon the insurer who may no longer have the economic benefit of the premium upon which the liability to pay the duty depended.

   [1]Commissioner of State Revenue (Victoria) v Royal Insurance Australia Limited (1994) 182 CLR 51, 99 (Dawson J); Khoury v Government Insurance Office of New South Wales (1984) 165 CLR 622, 638 (Mason, Brennan, Deane and Dawson JJ); Common Equity Housing Ltd v Commissioner of State Revenue (Vic) [1996] 96 ATC 4598, 4601 (Ashley J).

   [2]Abbott Point Bulk Coal Pty Ltd v Collector of Customs (1992) 35 FCR 371, 378 (Ryan and Cooper JJ).

1. The main purpose of the Act is stated to be, unsurprisingly, “to create and charge a number of duties”.[3] This purpose necessarily contemplates the imposition of a liability upon the person who must pay the duty. For present purposes the liability and duty is that determined under s 179 and is made payable by the person who is made liable under s 180. The combined effect of those provisions is that a general insurer, like Wesfarmers, is liable to pay duty “on the premium paid” in relation to a contract of insurance at the rate of 10% of the amount of the premium. The legal burden to pay duty is thus imposed upon the general insurer who enjoys the economic benefit of the premium. A consequence of the operation of s 183(1) is to relieve the general insurer from the burden of the duty where the general insurer has refunded the premium. By those provisions there is thus sought to be matched the burden of the duty with the economic benefit of the premiums: duty is suffered where premiums are enjoyed but not suffered to the extent that premiums are refunded. There is much to be said for a construction of s 183(1) that reflects an objective of removing the burden from a general insurer of any duty paid in respect of any policy to the extent that it no longer enjoys the economic benefit of a premium. The statutory purpose of creating and charging a duty upon a general insurer in respect of premiums paid to a general insurer is not served by requiring that it continue to bear the burden of the duty where it has ceased to enjoy the benefit of the premium. A construction of s 183(1) preventing a general insurer from receiving a refund of duty where it no longer has the economic benefit of the premium and duty would secure as a tax for the consolidated revenue something which was no longer intended to be taxed. This is not a case in which Wesfarmers is seeking to make a windfall gain by a refund; a circumstance which is, in any event, expressly catered for by another provision.[4]

   [3]Duties Act 2000 (Vic) s 1.

   [4]Taxation Administration Act 1997 (Vic) s 22.

1. The Commissioner contended in his written submissions, however, that the language used in s 183(1) and the definition and meaning of “premium”, suggests that the entitlement to a refund under s 183(1) arises only where dutiable premiums are refunded “to the person who paid or is liable to pay the premium, the insured”. Although the written submissions for the Commissioner were expressed in the terms I have just quoted, in fact the Commissioner’s submission was that the entitlement to a refund depended upon proof of receipt by the policy holder rather than the person “who paid or is liable to pay” as described in his written submissions. The significance of the difference may lie in the circumstance that most of the premiums paid to Wesfarmers were not paid by the policy holder but by the brokers to whom the disputed refunds were subsequently paid. The amount of duty chargeable on the premiums “paid” (within the meaning of s 179) relevant to this dispute were typically paid to Wesfarmers on behalf of policy holders by brokers. A narrow linguistic analysis of sections 179 and 183 together would suggest (contrary to the view urged by the Commissioner) that Wesfarmers should pay any refund to the person from whom it received the premiums rather than the person on whose behalf they were paid to Wesfarmers. In any event, the dispute engaged in this case was the correctness of the Commissioner’s contention that the general insurer needed to show receipt by the policy holder to invoke the entitlement under s 183(1) rather than payment to the brokers on behalf of the policy holder.

1. The textual analysis urged by the Commissioner of the words “if the general insurer refunds” in s 183(1) is that they focus upon the recipient of the refund rather than the giver of the refund. The more natural reading of the words, however, is that what is called for is a focus upon what the general insurer does. The words do not raise the question “to whom must the insurer refund the dutiable premium?” (as was contended by the Commissioner), but rather, “has the general insurer refunded premiums?” Whether the policy holder has received payment may be relevant, and at times may be decisive, in answer to the question of what the general insurer has done, but the focus is upon what the general insurer does rather than upon what the individual policy holder has received. That accords with the policy of the legislation of imposing duty upon receipt by the general insurer of premiums to the extent that the general insurer enjoys the economic benefit of the premiums. It is also consistent with the basis of the duty as a tax upon receipt of premiums by the general insurer rather than upon payment by the policy holder: the obligation to pay duty does not depend upon proof that the policy holder has paid the premium. The non receipt of a refund, if established, may well also establish that the general insurer has not refunded the premium and duty for the purposes of s 183(1), but the focus, as a matter to textual analysis and policy, is not upon the individual policy holder but upon the action of the general insurer. It is not surprising that this should be so, in part because nothing in the policy of the Act requires proof of receipt by a policy holder if the general insurer no longer enjoys the dutiable benefit of a premium, but in part also because there is no sound reason in principle or policy to require a general insurer to be satisfied (or obtain proof) of receipt of a refund which its records unquestionably establish that it has paid.

1. In my opinion the precondition to the operation of s 183(1), on the evidence in this case, was satisfied when Wesfarmers paid refunds of premium and duty to brokers on behalf of the policy holders on whose behalf the brokers had effected the insurance. There is no doubt, and the evidence was, that Wesfarmers sought to refund premiums and duty in the 22 cases in question (as well as in most of the other 22,500 cases in the assessment period) to the brokers on behalf of the policy holders. There was no suggestion that any payment was ever made by Wesfarmers to a broker for any person other than the policy holder. The brokers were at all times the agent of the policy holder[5] and were under a legal duty to pay the amounts received to the policy holders.[6]  A failure by a finance broker to pay monies received from insurance companies to policy holders would expose the finance broker to criminal sanction, potential revocation of licences and sanction for professional misconduct.  Finance brokers have for some years been the subject of close government regulation to ensure that their obligations are fully met and in large part to protect consumers such as policy holders. 

   [5]Manufacturers’ Mutual Insurance Limited v John H Boardman Insurance Brokers Pty Ltd (1994) 179 CLR 650, 656 (Mason CJ, Toohey and McHugh JJ); Insurance (Agents and Brokers) Act 1984 (Cth) s 12; HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2001] 1 All ER (Comm) 719.

   [6]Insurance (Agents and Brokers) Act 1984 (Cth) s 27(10); Corporations Act 2001 (Cth) ss 1430 – 1432; Corporations Regulations 2001 (Cth) reg 7.8.08(16).

1. The payment by Wesfarmers of amounts to brokers does not discharge its legal obligation to the policy holder if the broker does not pay the amounts received to the policy holder.[7]  However, the obligation on Wesfarmers to the policy holders would plainly cease if payment was made to them by the brokers.[8]  It may thus be accepted that the mere payment by Wesfarmers to a broker would not remove its legal liability to policy holders if the brokers failed to pass on the money in accordance with their legal obligation.  However, there was no evidence in any one of the 22 cases in the sample of 446, or in any of the other 22,500 cases, that the premiums and duty refunded by Wesfarmers to brokers had not been paid by the brokers to the policy holders.  There was, rather, clear acceptance by the Commissioner that all amounts in question had been refunded by Wesfarmers to the brokers on behalf of the policy holders.  To this may be added the legal obligation of the brokers to forward what they received to the persons on whose behalf they were received.  To this may be added the absence of any evidence of a policy holder not receiving his, her or its entitlement.  Various possibilities were suggested on behalf of the Commissioner to explain why a policy holder might not have received payment or might not have complained about non payment, including that the amount might be insignificant to a particular insured (a circumstance which might in some instances amount to an abandonment of a right rather than its continued existence).  As against this speculation by the Commissioner, however, there is strict Commonwealth regulation of an industry whose members should, in the absence of any evidence to the contrary, be assumed on the balance of probabilities to be complying with their legal obligations, coupled with the complete absence of any evidence of a failure to have discharged those obligations.  The circumstance that in 424 of 446 cases (95.07%) the repayments to brokers were forwarded to the policy holders is to my mind a compelling fact alone to infer that the brokers forwarded the money in the remaining 4.93% cases. 

   [7]Corporations Act 2001 (Cth) s 985B.

   [8]Mooney v Williams (1906) 3 CLR 1, 8 (Griffith CJ).

1. The 22 cases in which the Commissioner had not been satisfied that receipt by the policy holder had been proven were all cases in which attempts had been made to prove receipt by the policy holder.  In one instance it was not possible to prove receipt because the person who might otherwise have been capable of providing the evidence had sold the business and no longer had access to the relevant records.  It is unsurprising in this kind of business that access to records to provide proof of the particular kind required by the Commissioner may, to say the least, be difficult if sought after the period of insurance to which the policy related.  It is not surprising that the attempts to satisfy the Commissioner’s requirement for proof of past events might produce some material which on its face did not meet the requirement: some material which was obtained showed such internal inconsistencies that plainly it could not prove receipt by a policy holder.  However, in not one case was there proof that the policy holder had not received the amount to which he, she or it was entitled.  The highest that the evidence went from the Commissioner’s point of view was that the material in 22 of 446 cases did not prove receipt by the policy holder, not that it proved that any policy holder had not received the money.  In some instances the material provided raised questions which could further be investigated.  In one case the material showed that a return had been incorrectly processed.  In another case it showed amounts of refunds which did not correspond with the amounts in Wesfarmers’ accounts.  In each case there may have been an explanation for the inconsistency; thus, for instance, amounts which Wesfarmers refunded to brokers may have been added to, or set off against, other amounts to the account of a policy holder.  In none of the 22 disputed sample cases however could it be said affirmatively that the amounts refunded by Wesfarmers to the brokers were not paid by the brokers to the policy holders.  As against the absence of conclusive proof of payment to the policy holders, as I have said, there was payment by Wesfarmers to the brokers (thereby no longer enjoying the economic benefit of the premium upon which the duty was levied), receipt by the brokers on behalf of the policy holders, a duty on the brokers to refund payments to the policy holders, a regulatory regime to ensure that brokers complied with their obligations (including exposure to serious sanctions), an absence of any evidence that any policy holder had not received the amounts Wesfarmers had paid to the brokers on their behalf, the detailed evidence of a careful business system adopted by Wesfarmers, and that in the overwhelming number of cases in the sample (424 of the 446 cases) proof of receipt by the policy holders had been established.

1. In these circumstances the probable fact is, and I infer to be the fact, that Wesfarmers refunded the premiums in all of the cases in question by payment to the brokers. There is nothing in s 183(1) that compels a general insurer to refund premiums in any particular way or which qualifies the entitlement to a refund of duty by making it depend upon proof of refund in any particular way or by reference to any particular standard. The relevant precondition to the entitlement under s 183(1) is that Wesfarmers “refunds” part or all of the dutiable premium. It is the existence of the objective fact of refund which constitutes the sole condition for the entitlement. The Commissioner is given no independent power to impose upon a general insurer any particular standard or method of proving a refund nor is the entitlement made to depend upon the Commissioner being of the opinion that there was receipt by the policy holder. That is not surprising given the nature of a general insurance business and what may be taken to be the general reliability of the financial details kept by an insurance company operating diligently and efficiently. Whether or not there has been payment is a matter of fact capable of determination upon the balance of probabilities taking into account all of the facts and circumstances which reasonably and logically bear upon the fact probatively.[9]

   [9]Bercove v Hermes (No. 3) (1983) 74 FLR 315, 323 (Bowen CJ, Lockhart and Beaumont JJ); Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321, 367-8 (Deane J); Holloway v McFeeters (1956) 94 CLR 470, 477 (Dixon CJ).

1. The method adopted by the parties to determine Wesfarmers’ entitlement to refund of duty under s 183(1) was by sample. The assumption in that approach was that the sample was representative of all cases in which Wesfarmers had claimed a refund of duty. A further assumption in that approach was that it was not necessary for Wesfarmers to prove receipt by policy holders in all other cases as long as it was able to prove receipt in the cases in the sample. It was, therefore, curious that the Commissioner contended that Wesfarmers should change its procedures for refunds to policy holders in all cases when any doubt which existed was in so small a proportion of the cases in the sample chosen. It was also curious, in my view, that the Commissioner (who chose to lead evidence on some matters) led no affirmative evidence to establish that the 22 policy holders in question had not received payment. I do not mean by that observation that the onus of proof fell upon the Commissioner to prove the correctness of the assessment; plainly he does not – the onus falls upon the taxpayer to establish the correct amount of the assessment.[10]  But the Commissioner urged me to infer (that is, to find as a fact by inference from other facts) that payment had not been received by the policy holders when the fact could have been established simply by contacting the 22 policy holders concerned and determining whether or not the refund had been received.

   [10]Taxation Administration Act 1997 (Vic) s 110; see also Federal Commissioner of Taxation v Dalco (1989) 168 CLR 614.

1. The absence of evidence of receipt of refunds by policy holders is one relevant circumstance to take into account when considering whether it may reliably be inferred that the policy holders did not receive the refunds.  It is, however, not determinative: indeed, it is the reason why it becomes necessary to make an inference since, analytically, it is only because there is no evidence of receipt that one need look at surrounding facts and circumstances to see what may reliably be inferred about the matter.  Thus, the absence of evidence of receipt of a payment does not prove that the payment was not received but, rather, creates the need to consider the other matters that help determine reliably whether receipt occurred in fact.  The need for that consideration to be undertaken upon reliable evidence is highlighted in cases such as the present where the evidence in a sample will govern the position of a much greater number of cases and, presumably, will be the basis upon which other taxpayers in similar circumstances will be assessed.[11]  The need is further highlighted where, as here, the consequences of adopting the processes advanced in argument by the Commissioner to deal with a mere 4.93% of cases would potentially have profound effects upon the orderly conduct of efficient business and upon the relations between policy holders, the broker and general insurer.

   [11]Federal Commissioner of Taxation v Indooroopilly Children Services (QLD)Pty Ltd (2007) 158 FCR 325.

1. One of the Commissioner’s arguments was that Wesfarmers should have adopted a system of paying the policy holder directly rather than purporting to rely upon its payment to policy holders through payment to the brokers.  In other words, that to satisfy the Commissioner’s requirement of proof in 4.93% of cases, Wesfarmers should alter a system of payment which appeared satisfactory in the remaining 95.07% of its business.  That was submitted even though it would potentially interfere with orderly business dealings between policy holder, broker and Wesfarmers.  The evidence was that in all but “a very small proportion of policies” Wesfarmers dealt with brokers both in relation to entry into policies and their cancellation or variation during their term.  The brokers, as was evident from the evidence of some of the 22 cases in this dispute and the evidence of the witnesses, conducted independent businesses.  They might have many policies for a policy holder and have significant dealings on their behalf.  Payment of refunds directly to policy holders (rather than to their broker) could interfere with settled arrangements to the potential inconvenience of policy holder and broker.

1. The result in this case might have been different if there had been proof, or if it could reliably have been inferred, that the money paid by Wesfarmers to the brokers had not been received by the policy holders.  However, as I have said, the evidence is not to that effect either directly or by inference.  

1. It is not necessary for me to consider whether penalties should be imposed upon Wesfarmers. Section 29 of the Taxation Administration Act 1997 (Vic) provides that a taxpayer is liable to pay a penalty tax in addition to any amount of tax unpaid. In this case the Commissioner determined that 20% (reduced from 25%) of the amount of duty assessed should be paid as penalty on the basis that Wesfarmers had not taken reasonable care to comply with its obligations. If this issue had been something which I needed to consider, or had a jurisdiction to consider, I would have thought that in the circumstances of this case there was no basis upon which to conclude that Wesfarmers had failed in its obligation to take reasonable care to comply with its obligations under the Act.

1. I will hear from the parties concerning any question of costs but will otherwise order that the assessment be set aside and be remitted to the Commissioner for determination in accordance with these reasons.

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