Colonial Mutual Life Assurance Society Limited v Federal Commissioner of Taxation [1946] HCA 60

Colonial Mutual Life Assurance Society Limited v Federal Commissioner of Taxation [1946] HCA 60 - HCA 1946 case summary — Zoe

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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 was held in Northern Assurance Co. v. Russell (1) that the profits or gains of a company carrying on the business of life assurance can only be ascertained by actuarial calculation, and that the profits and gains are not, as in the case of contracts of insurance like fire insurance which are for one year only, the amount of the net premiums and other 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 com- pany on certain assumptions as to the rate of mortality, the rate of interest, and the amount of expenses likely to be experienced 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 larger price than was paid for it, the difference is to be reckoned among the profits and gains of the company" (2). In Clerical, Medical, and General Life Assurance Society v. Carter (3) it was held that a life assurance company could be made liable to income tax on the interest of invest- ments made by the company for the purposes of its business, although the income tax on interest from such investments which had been deducted at the source exceeded the amount of the profits of the company for the year of assessment. It appears from this and other cases that under the English Income Tax Acts the Commissioners have the choice of bringing interest from investments into account in determining the annual profits or gains of the company from a trade exercised in the United Kingdom under Case 1 of Schedule '"' D," or of separately assessing the interest as income from property under other cases. If it is brought into account in determining the annual profits or gains the amount of tax on the interest deducted at the source must be credited against the amount of tax on the annual profits or gains. In Last v. London Assurance Corporation (4) the company was assessed on the annual profits or gains. The form of

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final assessment made after the decision of the House of Lords appears in the footnote to the Clerical, Medical, and General Life Assurance Society v. Carter (1), in the court below, the final item being for the amount remaining to be assessed or the amount of which tax had been overpaid, as the case might be. But the result of assessing the tax on interest from investments separately was that interest on investments made and retained abroad escaped tax : Gresham Life Assurance Society Ltd. y. Bishop (2). This led to the case of the Liverpool and London and Globe Insurance Oo. v. Bennett (3), where a fire and life insurance company had interest-producing investments abroad and at home, the interest from the investments abroad being received abroad and not remitted to the United King- dom. It was held that the income of the foreign investments formed part of the profits and gains of the company's business and was properly taxed under Case 1. Lord Shaw said: " The series of pro- positions in Northern Assurance Co. v. Russell (4) and Scottish Union and National Insurance Co. v. Smiles (5), which were formulated as instructions to the Commissioners, cover the present case, and have never been judicially controverted as a convenient guide" (6). It also appears from the form of final assessment in Last's Case (7) and from Royal Insurance Co. Ltd. v. Stephen (8) that profits and losses made upon a realization of investments are, in accordance with the fifth proposition in Northern Insurance Co. v. Russell (4), usually taken into account in assessing the profits and gains taxed under Case 1. On the other hand, in Brice v. Northern Assurance Co. (9), (one of the three cases before Hamilton J. which led to the appeal to the House of Lords in Liverpool and London and Globe Insurance Co. y. Bennett (10)) it was proved to the satisfaction of the Commis- sioners that it was not part of the business or trade of the company to deal in investments or to vary its investments or to make profits by so doing ; that investments were not made or sold with the inten- tion of earning profits and were rarely realized and then only for special reasons, and that any sums realized in excess of the cost of such investments were treated as and were capital and carried to Capital Investment Reserve Fund or used in writing off depreciation on other securities and were not in any way used or dealt with as profits or gains or taken into account for dividend purposes. Accord- ingly, the Commissioners held that a sum of £6,690, the net proceeds

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subject to be assessed to income tax. There was an appeal to Hamilton J. on this point but in view of this finding it was abandoned. His Lordship, however, appears to have agreed with the finding and said: "I take it that throughout the object of these investments it is not to do what I venture to call a stock-jobbing business, it is not to invest money with the object of getting in and getting out of rapidly moving investments, but is, as is stated expressly in the Liverpool and London and Globe Case (1) in order to have a fund created out of accumulated profits in past years and not distributed, and which may be easily realizable if required " (2). The same view that a profit on the sale of investments was not on the facts of that case a profit made by trading by a company carrying on an insurance business other than life assurance but was a profit made on a change of investments for the purpose of securing a higher rate of interest was taken by the Commissioners and upheld on appeal by a majority of the Court of Session, Scotland, in Commissioners of Inland Revenue v. Scottish Automobile & General Insurance Co. Ltd. (3). But the insistence by Lord Shaw upon the correctness of the whole of the series of propositions enunciated in Northern Assurance Co. v. Russell (4) after he had presumably read the remarks of Hamilton J. in the court below, and the criticism by the Privy Council of some dicta in Commissioners of Inland Revenue v. Scottish Automobile & General Insurance Co. Ltd. (5) in Punjab Co-operative Bank Ltd., Amritsar v. Commissioner of Income-Tax, Lahore (6), coupled with the willingness of the Inspector of Taxes in Royal Insurance Co. Ltd. vy. Stephen (7) to allow a loss on realization amounting to £754,000 as a deduction in computing its profits assessable under Case 1, tends to show that the sounder view is that profits and losses on the realiza- tion 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.

At a glance

Court

Decision date

Before

Source

Judgment (42 paragraphs)