Alliance Assurance Co Ltd v Federal Commissioner of Taxation [1921] HCA 36; (1921) 29 CLR 424 (25 August 1921)

HIGH COURT OF AUSTRALIA

The Alliance Assurance Company Limited Appellant; and The Federal Commissioner of Taxation Respondent.

H C of A

25 August 1921

Knox C.J., Higgins, Gavan Duffy, Rich and Starke JJ.

Leverrier K.C. (with him H. E. Manning), for the appellant.

Brissenden K.C. (with him Pitt), for the respondent.

The following written judgments were delivered:—

Aug 25

Knox C.J.,

Gavan Duffy, Rich and Starke JJ.

The question submitted by the special case is whether the appeal against the amended assessment of the appellant to income tax for the year 1915-1916 can in law be sustained in whole or in part. The effect of the amended assessment was to increase the amount of tax by £1,025 18s. 6d. by the inclusion in the income of a sum of £24,356 in respect of premiums alleged to have been received by the a pellant subject to a deduction therefrom of £6,089 in respect of commission which had been taken into account in the original assessment and of £4,588 representing losses paid on the risks covered by the premiums in question. The net addition to the taxable income of the appellant was thus reduced to £13,679. The circumstances under which the sum of £24,356 was received by the appellant, and the manner in which that sum was dealt with, are stated in the special case, and need not be repeated. The case also states "In order to carry on successfully the said business in the Commonwealth, and in particular in order to avoid the accumulation of risks which the said Company might not otherwise have been able to pay, it was at all material times necessary to reinsure portions of the risks accepted." By sec. 10 (1) of the Income Tax Assessment Act 1915 it is enacted that "subject to the provisions of this Act, income tax shall be levied and paid in and for each financial year upon the taxable income derived directly or indirectly by every taxpayer from sources within Australia during the period of twelve months ending on the thirtieth day of June preceding the financial year in and for which the tax is payable." By sec. 3 "taxable income" is defined as meaning "the amount of income remaining after all deductions allowed by this Act have been made." By the same section "income from personal exertion" is defined as meaning "income derived in Australia consisting of earnings, salary, ... and the proceeds of any business carried on by the taxpayer either alone or as a partner with any other person." By sec. 18 (1) it is enacted that "in calculating the taxable income of a taxpayer the total income derived by the taxpayer from all sources in Australia shall be taken as a basis, and from it there shall be deducted (a) all losses and outgoings, not being in the nature of losses and outgoings of capital, including commission, discount, travelling expenses, interest, and expenses actually incurred in Australia in gaining or producing the gross income."

It was argued for the appellant that the phrase "proceeds of any business" in the definition of income from personal exertion contained in sec. 3 includes only such portion of the gross receipts in the business as the taxpayer gets for himself, having regard to the manner in which the business is usually carried on, and that in substance the appellant did not receive for itself any portion of the £13,679. It was further argued that, if this contention failed, the appellant was entitled, by virtue of sec. 18 (1) (a), to deduct all amounts paid by way of reinsurance premiums as "losses or outgoings, not being in the nature of losses or outgoings of capital," and that, if the section on its true construction confined the deduction to losses and outgoings incurred in Australia, these were so incurred.

For the Commissioner it was argued that the phrase "proceeds of any business" means the gross receipts in that business not being receipts of capital, and that the only deductions to be made from the amount of such total receipts in arriving at the taxable income of a taxpayer were (a) amounts representing income declared by the Act to be exempt from taxation and (b) deductions specifically authorized by the Act, and it was contended that the deductions authorized by sec. 18 (1) (a) were limited to outgoings incurred in Australia in the production of the income.

We do not propose to express any opinion on the first question raised by the appellant, a decision on that point being rendered unnecessary by the conclusion at which we have arrived as to the true construction of sec. 18 (1) (a). In our opinion the words "all losses and outgoings," which occur at the beginning of sub-clause (a), extend to all losses and outgoings of the business not being in the nature of losses and outgoings of capital and are not qualified by the words "incurred in Australia in gaining or producing the gross income." We think these latter words refer either to the word "expenses" only, or at most to the words "commission, discount, travelling expenses, interest, and expenses." In our opinion this is the natural grammatical construction of the words used. Moreover, the construction contended for by the Commissioner would lead to the result that the cost of goods purchased and paid for in England and afterwards sold in the carrying on of a business in Australia could not be allowed as a deduction from the proceeds of sale in arriving at the taxable income of the taxpayer. We can find nothing in the Act which would justify us in imputing to Parliament an intention to legislate to this effect.

Having regard to the statement in the special case that these reinsurances were necessary in order to carry on successfully the business of the appellant in the Commonwealth, we are of opinion that the appellant was entitled to deduct from its total income the amount of the reinsurance premiums in question.

The question submitted by the special case should be answered: Yes, in whole.

Higgins J.

This is a case stated on an appeal from an amended assessment for 1915-1916, based on income derived by the Company during the year 1914-1915.

The question has to be decided on the Income Tax Assessment Act 1915 as amended by the Act No. 47 of 1915. There have been certain subsequent amendments (Acts No. 31 of 1916, No. 39 of 1916 and No. 18 of 1918); and some of these amendments apply to the Principal Act as from its date (see Act No. 39 of 1916, sec. 19; Act No. 18 of 1918, sec. 48), but it is not contended that any of the amendments which so apply affect the assessment now in question.

The Alliance Company is an English company; but it carries on the business of fire and marine insurance in Australia, and is registered in each of the States. Under "treaty contracts" with certain other British insurance companies the Alliance Company undertakes to cede to a company (which I shall call B company), and company B agrees to accept, one-fifth share of certain risks arising out of insurances effected. The liability of B company commences on the day on which the entry of the cession is made in the records of the Alliance Company or of any of its branches. The rates of premiums to be paid to B company are the same as those received by the Alliance Company after deduction of brokerage or other commission. The Alliance Company in England furnishes particulars of all such cessions to B company, and advises B company of any estimates of losses. B company's share of any losses is either remitted to the Alliance Company or is paid on adjustment of accounts. Quarterly accounts are rendered. B company pays to the Alliance Company a commission of 25 per cent. on the net premiums received.

Substantially, the Alliance Company by this arrangement protects itself from any huge loss on any one adventure. As Antonio says, in the "Merchant of Venice":—

My ventures are not in one bottom trusted,

Nor to one place; nor is my whole estate

Upon the fortune of this present year.

By paying over to the treaty companies four-fifths of the net premiums, the Alliance Company relieves itself of four-fifths of any loss within the cession. This is a good business; and, as admitted in the case, the practice was necessary in order to successfully carry on the business. Without the payment of the aliquot part of the net premium, the Alliance Company could not get the advantage of what is called in the case "reinsurance"—could not be indemnified against the corresponding aliquot part of the risk.

During the year 1914 it would appear that the share of the premiums payable by the Alliance Company to the treaty companies was £24,356; but from this sum the treaty companies had to be debited with commission and losses to the amount of £10,677. This left £13,679 as the actual payments of the Alliance Company to the treaty companies in respect of these risks, and the Company treated this sum as expenditure incurred in producing its income. The Commissioner, by his amended assessment, refuses to treat this sum as an outgoing that is to be allowed in ascertaining the taxable income; and, adding the amount to £747 admitted net income of the Alliance Company derived in Australia, he claims £1,081 19s. as being the income tax due by the Company instead of £56 0s. 6d., the tax actually paid on the £747. The question really is: Is the Alliance Company to be treated as deriving from Australia a net income of £14,426, although of this sum no less than £13,679 was paid to the treaty companies, and for value received? Does the Income Tax Assessment Act justify the Commissioner?

Under sec. 10 of the Act income tax is to be levied for each financial year upon the "taxable income" derived by the taxpayer from sources within Australia during the previous year. "Taxable income" means the amount of income remaining after all deductions allowed by the Act have been made (sec. 3). In calculating the taxable income the total income is to be taken as a basis, and from it certain deductions are allowed (sec. 18; also secs. 16, 27, &c.). By the "total income" I take it that the "gross income" is meant—that which "comes in" to the taxpayer irrespective of the taxpayer's necessary expenditure for stock, materials, wages, &c. Now, under sec. 18, the first deductions allowed are "all losses and outgoings, not being in the nature of losses and outgoings of capital, including commission, discount, travelling expenses, interest, and expenses actually incurred in Australia in gaining or producing the gross income." It is urged for the Commissioner that these expenses incurred under the treaty contracts were not "actually incurred in Australia," as the treaty contracts were made in England, and the payments were made in England by the head office of the Alliance Company to the treaty companies. In my opinion, the words "actually incurred in Australia" do not qualify or limit the words "all losses and outgoings," but only the words "commission, discount, travelling expenses, interest, and expenses," or it may be (it is not necessary to decide this point) the final word "expenses" only. All losses and outgoings (of the business) are to be deducted; but the following words make it clear that these include outgoings in the nature of commission, &c. This is the plain grammatical construction; and if we depart from the grammatical construction, if no outgoings not "incurred in Australia" are to be allowed as deductions, the absurdity would follow that a tailor or a draper would not be allowed a deduction for the cost of the tweeds which he buys in England and imports for his Australian customers. There is nothing in the Act to justify such a deduction unless sec. 18 (1) (a) justifies it. The draughtsman of the Act probably treated such an outgoing as an obvious "outgoing" to be allowed; but to show that the deductions are not to be confined to such outgoings, he expressly includes "commission, discount, travelling expenses, interest, and expenses actually incurred in Australia in gaining or producing the gross income." If a tailor can charge the price of the tweeds which he imports as an outgoing, the insurance company can, in my opinion, charge the price of laying off or reinsuring its risks; and, e converso, the income derived by the treaty company from the same Australian risk is made, by sec. 17A of the Act, income of the treaty company for the purposes of the tax.

I am, therefore, of opinion that, on the facts stated in the case, the full sum of £13,679 should be treated as "outgoings" of the Alliánce Company, and be deducted from the gross receipts or gross "income" of the Company. Several cases have been referred to by Dr. Brissenden for the Commissioner; but they were not decided on this Commonwealth Act. In Moffatt v. Webb[1] a question arose under a Victorian Act as to the allowance of a deduction for Federal land tax paid by a grazier in respect of his land used for his business; and it was held that the tax was "actually incurred in Victoria in production of income," and should be allowed as a deduction. The words in the Victorian Act were "all losses and outgoings actually incurred in Victoria by any taxpayer in production of income." But, in my view, the words italicized do not apply in sec. 18 of the Commonwealth Act to the words "losses and outgoings" at all. I base my decision on the distinctive language of sec. 18 (1) (a). If, however, in this section the Alliance Company had to rely on the words "actually incurred in Australia," if it had to show that the payments made in England by the head office of the Alliance Company to the treaty companies in pursuance of the treaty contracts made in England were "actually incurred in Australia," I am not prepared to say that the Alliance Company would succeed. The relevant meaning of the word "incur," according to the Oxford Dictionary, is "to become through one's own action liable or subject to." It is true that the portion of the risks to be accepted was not determined until each specific risk was ceded to the treaty company in the Australian books of the Alliance Company (par. 6 of case); but the ceding of the risk in a defined proportion was made obligatory by the treaty contract on the Alliance Company and on the treaty company. The risk was, of course, incurred in Australia; but the expense of the payments made to the treaty companies may have to be treated as incurred in England.

Question answered: Yes, in whole.

Solicitors for the appellant, Norton Smith & Co.

Solicitor for the respondent, Gordon H. Castle, Crown Solicitor for the Commonwealth.