Carapark Holdings Ltd v Commissioner of Taxation

The appeal relates to an amount of £10,000 which in the year of income the appellant received from an insurance company in consequence of the death of one Williams. The grounds of objection were broadly two, namely that no part of the amount was assessable income of the appellant according to ordinary concepts and that no part of it was included therein by the operation of s. 26 (j) of the Act. It seems that before the Board the respondent continued to place reliance upon s. 26 (j), and the appellant for its part put to the Board an argument to the effect that insurance receipts, being dealt with to an extent in s. 26 (j), could not form part of assessable income unless caught by that provision. The Board did not accept either of these contentions, and neither has been renewed on this appeal. The only purpose in mentioning them now is to show that for this reason if for no other the decision of the Board involved a question of law and the appeal is therefore competent.

In this Court the parties narrowed the contest between them to the one question whether the appellant's receipt of the £10,000 should be characterized as a receipt of income in the ordinary sense of the word. The relevant facts appear to be these. The appellant is a company which was formed in 1959, primarily, as the parties agree, for the purpose of acquiring the issued capital of certain other companies which were carrying on business in manufacturing, selling and hiring caravans and erecting and conducting motels. By the relevant year of income the appellant had acquired the whole of the issued shares in some of the companies and part of the issued shares in others. It had also made substantial loans to some of the companies. Its income accordingly consisted largely of dividends and interest from wholly-owned subsidiary and other associated companies all of which the parties have joined in describing as carrying on their businesses "as a group". The appellant was not in a general sense a managing company for the group, but in addition to being a holding and financing company it performed what have been called in one place "specific management functions for the group as a whole", and in another place "certain services on behalf of its subsidiary companies throughout Australia, primarily in secretarial, budgeting and financial matters".

Soon after its incorporation the appellant set about effecting certain insurances against death by air accident in respect of its own employees and the employees of its subsidiary and associated companies. As regards nine senior executives either of the appellant or of one or other of its subsidiaries the course adopted was to take out a separate policy in respect of each. All the remaining employees between the ages of fourteen and sixty-five were covered by a single contract of insurance. How many they numbered does not appear, but among them was one Clifford Ross Williams who was not employed by the appellant itself but was an employee of Carapark Productions Limited, one of the appellant's wholly-owned subsidiaries. The course of events in regard to the employees who were thus lumped together was as follows. On 30th October 1959 the appellant obtained from the insurance company, Australian Equitable Insurance Company Limited, a cover note in consideration of a payment of £5. Apparently no form of proposal was submitted by the appellant at that stage, and no information is available as to anything that passed between the appellant and the insurance company in the course of the negotiations for the cover. The parties to this appeal agree, however, that the cover note was in respect of a policy which ultimately was issued on 13th July 1960 pursuant to a formal proposal dated 21st June 1960 and in respect of the period from 15th October 1959 to 30th June 1960. The terms of the policy must therefore be looked at to ascertain the terms of the insurance contract which came into existence with the issue of the cover note. The policy provided for specified payments to be made by the insurance company to the appellant in the event of any employee of the appellant or of any of its subsidiary or associated companies (not being less than fourteen years of age and being under sixty-five years of age) sustaining bodily injury, caused by violent and accidental, external and visible means, which should be the sole and direct cause of death or disablement, "whilst in the course of his employment by the Insured" (the word was defined to mean the appellant) "as a passenger travelling in a fully licensed standard type aircraft operated by a recognized airline over an established air route" within Australia or New Zealand or between the two countries. In the event of death within ninety days from the date of the accident the payment to be made was of £10,000. Specified amounts were to be paid if injuries of various descriptions should be sustained, and weekly amounts where total or partial disablement should ensue. The policy required the appellant to furnish the insurance company with monthly returns showing the number of flights undertaken within the terms of the policy, and to pay a premium of £1 for each such flight.

It was during the interval between the issue of the cover note and the making of the formal proposal that the event occurred in respect of which the appellant received the £10,000 now in question. The event was the death on 10th June 1960 of Clifford Ross Williams in an air accident while he was travelling, within Australia and in the course of his employment by Carapark Productions Limited, as a passenger in such an aircraft and on such a route as the cover note described. Williams left a widow aged thirty-five and two children aged respectively ten and seven. The insurance company did not deny liability under the cover note, either on the ground that the appellant had no insurable interest in the life of an employee of its subsidiary or on the ground that the fatal accident befell Williams in the course of his employment by the subsidiary and not of any employment by the appellant. Accordingly, on 30th April 1961 it paid the £10,000 to the appellant.

What a taxpayer has done with an amount that he has received is in general of no materiality in determining whether his receipt of the amount was a receipt of income or of capital; but where the characterization of the receipt requires consideration of the purpose for which the taxpayer entered into a contract which produced the amount, as is the case here as we shall point out, the application that he has made of it may be material as throwing light upon that purpose: cf. In re Grove; Vaucher v. Solicitor to the Treasury [1] . Accordingly these further facts should be noticed. On 3rd May 1961 the appellant, pursuant to resolutions passed by its board of directors on 5th July 1960 and 2nd August 1960, settled £8,000 upon certain trusts contained in a deed which began by reciting that Williams had died in the service of a subsidiary of the appellant, that the appellant was desirous of establishing an annuity for a period of ten years to be paid to his widow and/or his two children, and that the appellant had paid £8,000 to the trustees "in order that same may be invested for the purpose of providing the said annuity". The trusts declared by the deed with respect both to the capital and to the income of the trust fund were, in brief, to pay an annuity of £15 a week for ten years to Williams's widow, and in the event of her death within that period to apply it for the maintenance, education, support and benefit of Williams's children then living, and at the expiration of the period or on the death within the period of the last survivor of the widow and the children to pay the trust fund and any accumulation of income to the appellant absolutely. The trustees' powers of investment were specifically extended to include loans to or deposits with the appellant or any of its subsidiaries with or without security and on such terms and at such rate as the trustees should think desirable. In fact the trustees lent the whole of the £8,000 to the appellant at 10 per cent interest. Presumably the interest was duly paid, for in fact the trustees paid the £15 a week to the widow throughout the relevant period.

The settlement was made pursuant to resolutions of the appellant's board of directors. According to the admissions of the parties the chairman was empowered by the resolution of 5th July 1960 "to purchase an annuity or create a trust fund with any portion of the amount to be received from the accident cover held with the Australian Equitable Insurance Company Limited to provide a weekly sum of £15 to be paid to the widow of the said Clifford Ross Williams for a period of ten years". The later resolution decided upon the creation of a trust fund and not the purchase of an annuity.

Both in the appellant's return of income and in the assessment the premium paid for the cover note was treated as an allowable deduction, but the £10,000 received under the insurance was not returned by the appellant as income. It did not appear in the profit and loss account by which the net profit of the business was ascertained. It was disclosed, however, as a separate item entered to the credit of the profit and loss appropriation account, and in the assessment of tax the Commissioner treated it as assessable income. The appellant objected, and the objection, upon being disallowed, was referred to the Board of Review from whose decision the present appeal is brought.

It will be observed that the effect of the settlement together with the mode of investment chosen by the trustees was to give the widow and children the equivalent of an annuity charged upon the capital and income of the £8,000. The decision was taken, according to the evidence, for the reason that Williams had been an excellent employee: he was a man of high integrity and great ability; he was the Queensland manager of the Carapark Productions Company; and he had done "quite a lot" in the business of that company. He had left his widow and two growing children in some financial difficulty, and, although there was a superannuation fund from which they received more than £3,000, the view was taken that the appellant ought to help them while the children were too young to earn their own living. Hence the period of ten years. It is to be observed that the decision to apply the £8,000 in the manner that has been described was taken as a fresh departure, determined upon not by way of carrying out any general plan, akin to a superannuation scheme, which the insurance of the main body of the employees had been intended from the beginning to serve, but as a response to the special circumstances of the particular case as they were found to exist when the insurance money had been got in.

It is of course conceivable that the insurance was a mere gamble, having no purpose but the gaining of a windfall. This would have been the case if the employees to whom the insurance related had been employees of a concern with which the appellant had no business connexion at all; but in the circumstances of the case the fact that the appellant stood in no legal relation to most of the employees is not enough to make a conclusion to this effect in the least plausible. There seem to be only two possibilities worth considering. One is that when the insurance was being negotiated the motivating consideration on the part of the appellant was that in any of the events insured against the receipt of the policy moneys would place the appellant in a position to do exactly the kind of thing it did in this instance, namely to extend an appropriate degree of generous treatment to the employee or his dependants. If any such notion existed, it was left to be further considered when the time should arrive. The only other possibility seems to be that as regards employees of subsidiaries the insurance was effected in order that in any of the events insured against the appellant should receive money to take the place of that which it would otherwise have derived from a continuance of the services of the employee to the subsidiary.

In our opinion, if either of these two possibilities explains the insurance, the conclusion follows that the insurance moneys reached the hands of the appellant as income, for reasons analogous to those which Lord Greene M.R. elaborated and the House of Lords approved in Williams's Executors v. Inland Revenue Commissioners [1] in relation to an insurance taken out by a company on the lives of its own employees. The reasons may be summarized by saying that, in general, insurance moneys are to be considered as received on revenue account where the purpose of the insurance was to fill the place of a revenue receipt which the event insured against has prevented from arising, or of any outgoing which has been incurred on revenue account in consequence of the event insured against, whether as a legal liability or as a gratuitous payment actuated only by considerations of morality or expediency. See also Murphy v. Thomas E. Gray & Co. [2] ; Keir & Cawder Ltd. v. Commissioners of Inland Revenue [3] . True, in a case like the present the insurance money was not received by the appellant to take the place of what Lord Greene described as "those benefits on revenue account which it would have received if it had continued to enjoy (the employee's) services", for the appellant was not itself in enjoyment of those services. But it was in enjoyment, through the medium of dividends from the employing companies, of some or all of the profits of those companies which, on the one view of the purpose of the insurance, the services of the employees were helping to produce and which, on the other view of that purpose, the payments to injured employees or to dependants of deceased employees would necessarily reduce. So whichever of the purposes was the true purpose, the situation simply is that the appellant, rather than leave the employing companies to take out separate insurances designed to bring in money in place of profits which would be lost to them if any of the events insured against should occur, itself took out a single policy in its own name to provide directly against such loss of dividend income as it might itself suffer, really, though indirectly, in consequence of the death or disablement of any of the employees. Accordingly the insurance moneys which the appellant received in respect of the death of Williams must be considered as having been gained in the course of its business, using "business" in the broad sense which makes it relevant to the tax problem, that is to say as meaning the continuous course of conduct which the appellant was following for the derivation of income. For this reason, conformably with the cases above cited and with the general conception which is illustrated by J. Gliksten & Son v. Green [1] and R. v. B.C. Fir and Cedar Lumber Co. Ltd. [2] they must be held to form part of the appellant's assessable income.

1. (1944) 26 Tax Cas. 23. 2. [1940] 2 K.B. 175. 3. (1958) 38 Tax Cas. 23. 4. [1929] A.C. 381. 5. [1932] A.C. 441.

The dissenting member of the Board of Review, in a carefully worked-out opinion, rejected this view upon the ground that decided cases holding that the proceeds of an employer's insurance of his employee are income should be distinguished from a case where a company has insured a person who is not its employee but is an employee of a subsidiary company. He considered that in the latter case the holding company has no insurable interest in the employee, and that therefore it could not be held that the insurance was an insurance against loss resulting from the employee's death. The purpose which has to be considered in determining the nature of the receipt, however, is the purpose which in actual fact the insurance serves. In a case where it is clear that the insured had an insurable interest, the inference normally is that the purpose was to provide against the loss the likelihood of which, as a result of the nominated event, provides the foundation of the insurable interest. But where it is considered that he had no insurable interest non constat that if the nominated event should happen he could not suffer any financial ill-effect and that therefore in taking out the de facto insurance he could not have had any purpose of providing against any loss; for it is not every possibility of loss that is proximate enough to give an insurable interest. The possibility of loss to a holding company as a result of the death or incapacity of an employee of its subsidiary is one step more remote than the possibility of loss to the subsidiary itself; but it is real enough, for if the subsidiary's profits fall the dividends it pays to the holding company are likely to fall also. Whether this gives the latter an insurable interest in the life and health of the employee is a question which, if it had to be decided, would require a careful consideration of Macaura v. Northern Assurance Co. [3] on the one hand and Wilson v. Jones [4] on the other. But we have not to decide it here, for where a policy has been honoured by the insurance company questions consequential upon the receipt of the policy moneys by the insured are generally to be determined as if the statutory requirement of an insurable interest had not been in force: cf. Worthington v. Curtis [1] . Even if the appellant is right in saying that it had no insurable interest, the fact that the death or incapacity of an employee of one of its subsidiaries might have an adverse effect upon its own dividend income provided a sensible business reason for its wanting to protect itself by insurance; and in the absence of any other apparent explanation of the insurance, the proper conclusion seems to be that it was an insurance against that adverse effect.

1. [1925] A.C. 619. 2. (1866) L.R. 1 Ex. 193; (1867) L.R. 2 Ex. 139. 3. (1875) 1 Ch. D. 419, at p. 424.

The appellant submits that even if this be so it is nevertheless a mistake to regard the risk as a risk "on revenue account", for although the effect of the death or incapacity of an employee of a subsidiary in relation to the appellant would be upon dividend income in the first instance, in the end its effect would be upon capital, because a fall in its dividends may be expected to result in a fall in the capital value of its shares in the subsidiary company. Therefore, the argument concludes, the insurance moneys were received on capital account. But the appellant was a holding company. If it had been a dealer in shares, the value of the shares it held in the subsidiaries might have assumed prime importance in inferring the purpose with which steps were taken in the conduct of its affairs. As things were, however, dividend income mattered primarily for its own sake, and an insurance against events likely to affect income adversely was necessarily a purpose of income rather than of capital concern.

For these reasons, which in substance are those which guided the majority of the Board of Review, the decision of the Board should be affirmed and the appeal dismissed.