Commissioner of Taxation v Hannover Life Re of Australasia Ltd

INTRODUCTION 1 Hannover Life Re of Australasia Ltd carried on an enterprise in the life insurance industry. It is a wholly owned subsidiary of Hannover Rück SE, a company incorporated in Germany that operates a global reinsurance business. 2 Hannover brought an "appeal" under Part IVC of the Taxation Administration Act 1953 (Cth) in this Court's original jurisdiction. Hannover contended that various notices of assessment issued to it by the Commissioner of Taxation were excessive in that the assessments reflected a denial of input tax credits to which Hannover claimed it was entitled under the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act). The input tax credits related to two types of acquisitions: (a) commissions paid by Hannover to Australian licensed distributors of its insurance policies; and (b) overhead acquisitions such as rental expenses, office supplies, telephone expenses and the like: Hannover Life Re of Australasia Ltd v Commissioner of Taxation [2023] FCA 680 at [5] (hereafter "J"). 3 There was no issue that the relevant things were acquired by Hannover in carrying on its enterprise such that s 11-15(1) of the GST Act was satisfied. The issue was whether the acquisitions related solely to supplies that would be input taxed with the consequence that Hannover was not entitled to them by reason of s 11-15(2)(a) of the GST Act. 4 The activities of Hannover's enterprise included the making of both: (1) input taxed supplies (in respect of which there is no entitlement to input tax credits): (a) supplies of life insurance policies in Australia; (b) supplies of reinsurance of life insurance policies in Australia; and (2) GST-free supplies (in respect of which there is an entitlement to input tax credits): (a) supplies of reinsurance of life insurance policies issued by other insurers in New Zealand; and (b) acquisition supplies of reinsurance and retrocession of life insurance policies with Hannover Rück. 5 The supplies of insurance policies in Australia were made using the services of commission agents (including Greenstone) who were responsible, amongst other things, for developing and marketing life insurance products and dealing with policyholders and paying claims: J[43]. 6 The acquisition supplies of reinsurance in relation to Australian insurance were made pursuant to contractual arrangements between Hannover and Hannover Rück. In simple terms, under the arrangements, Hannover Rück: accepted by way of automatic reinsurance 75% of the risk in the policies issued by the applicant through Greenstone; received 75% of the premium paid for those policies; was liable to Hannover for 75% of any claim; was required to pay Hannover a commission; and, was required to pay an "expense allowance" to Hannover. The expense allowance provided for the reimbursement to the applicant of 75% of its overhead expenses incurred in the ongoing management of the insurance policies issued through Greenstone: J[51]. 7 The reinsurance arrangements permitted Hannover to issue more insurance policies in Australia. At J[54], the primary judge observed: Through the operation of the reinsurance arrangements with Hannover Rück, the applicant underwrote life insurance policies through the Greenstone DAA [Distribution and Administration Agreement] with the surety that 75% of the risk in those policies would be automatically reinsured, and that an equivalent proportion of the commissions paid to Greenstone and the overhead costs of operating that part of the business would be recovered from Hannover Rück. This allowed the applicant to ensure that it had sufficient capital to support those policies, to achieve its target surplus and to comply with its prudential requirements. Without the reinsurance support from Hannover Rück, the applicant would have had to access or acquire other capital to support those policies. 8 Hannover was unsuccessful in relation to the commissions. The primary judge concluded that the commissions related solely to the making of supplies that would be input taxed with the result that Hannover was not entitled to input tax credits: J[71]. The commissions related in a real and substantial way to the applicant's supply of life insurance policies and in no real way with Hannover's reinsurance activities: J[70]. These conclusions are not contentious. 9 Hannover was successful in relation to the overhead acquisitions. The primary judge concluded that the overhead acquisitions related to all of Hannover's supplies, both the input taxed supplies and the GST-free supplies: J[79]. None of the individual overheads had a more real and substantial relationship with any particular supply than with any other: J[90]. 10 It was therefore necessary to apportion because the acquisition of the overheads was partly creditable: J[82], [91]. With one adjustment, the primary judge accepted Hannover's method of apportionment: J[98], [101] 11 The Commissioner has appealed from the orders made by the primary judge, contending that Hannover was not entitled to any input tax credits in respect of the overhead acquisitions. Hannover did not cross-appeal in relation to the commissions. Although there are six grounds of appeal, there are only two confined issues: (1) whether the overhead acquisitions related solely to making supplies that would be input taxed with the result that Hannover was not entitled to input tax credits for the relevant acquisitions (Grounds 1-5); and (2) if the overhead acquisitions did not relate only to making supplies that would be input taxed, the extent to which the overhead acquisitions are for a creditable purpose (Ground 6). 12 It is convenient at this point to refer briefly to the legislative scheme.

ISSUE 1 22 The Commissioner submitted that: (a) there was no issue that the overhead acquisitions were related to the input taxed supplies of Hannover in issuing life insurance in Australia and reinsuring other Australian life insurers; (b) the question then becomes whether the extent of the relationship between the overhead acquisitions and the reinsurance arrangements between Hannover and Hannover Rück "reduces" the extent of the relationship between the overhead acquisitions and the input taxed supplies in Australia for the purposed of s 11-15(2)(a). 23 This submission follows a line of reasoning which is not mandated or authorised by the statutory language. The first relevant question which arose on the facts was: to which supplies did the overhead acquisitions relate? The relationship can be direct or indirect, but it must be a real and substantial connection. The second relevant question which arose was: if the overhead acquisitions relate in a real and substantial way to both input taxed and GST-free supplies, such that the acquisitions are only partly creditable, is Hannover's apportionment in accordance with the statutory scheme? 24 At trial, the parties agreed that there was a real and substantial relationship between the overhead acquisitions and Hannover's input taxed supplies. The statute did not require the primary judge to analyse whether that relationship was then somehow reduced. The question initially was simply whether the overhead acquisitions were also related, directly or indirectly, and in a real and substantial way, to GST-free supplies. Hannover was entitled to claim an input tax credit under s 11-20 for a creditable acquisition it made. A creditable acquisition includes one that is "partly for a creditable purpose": s 11-5(a). The extent of the creditable purpose affects the quantum of input tax credits which may be claimed: ss 11-25 and 11-30. A person cannot claim an input tax credit "to the extent" that the acquisition relates to a supply which would be input taxed: s 11-15(2)(a). 25 For the Commissioner to succeed on the first issue, he would need to show that the primary judge erred in his factual and evaluative conclusion that the overhead acquisitions did not relate solely to the making of input taxed supplies. The Commissioner sought to do this by contending that an acquisition will relate solely to the making of input tax supplies if a supply that is not input taxed is made "by and through" an input taxed supply. The Commissioner relied upon the structure of the contractual arrangements for reinsurance to show why the GST-free acquisition supplies by Hannover to Hannover Rück were made "by and through" the input taxed supplies Hannover made in Australia. This argument focusses on the contractual relationship between Hannover and Hannover Rück rather than directly engaging the question of the relationship between the overhead acquisitions and the various supplies made by Hannover, being the question raised by s 11-15(2)(a). 26 The phrase "by and through" was taken from the Full Court decision in Rio Tinto at [8]: The terms of s 11-15(2)(a) do not depend upon the reason or purpose of the enterprise making the supply or making the anterior acquisition. The provision does not turn upon a characterisation of the purpose, or the occasion of the purpose, of the supplier but upon a characterisation of the extent to which the acquisition relates to the subsequent supply. The acquisitions in this case were not like undifferentiated general overhead outgoings (HP Mercantile at [37]), which, although undifferentiated, related to different supplies, but were acquisitions of things which related wholly to the otherwise input taxed supply of residential premises, and could not relate to the broader purposes of the enterprise other than by the acquisitions relating to the otherwise input taxed supplies. The extent of the relationship between the acquisitions and the supply of the residential premises is not to be reduced by the fact that the acquisitions may also have related to another purpose where that other purpose is only related to the acquisition wholly by and through the otherwise input taxed supply. 27 That case concerned acquisitions that were found, as a fact, to be directly and only related to the making of input taxed supplies of residential accommodation. The acquisitions fell within the principle set out at [19(6)] above. The acquisitions were not sufficiently related to non-input taxed supplies merely by reason of the fact that the acquisitions occurred in the course of the taxpayer's operations and in pursuit of the broader business objectives of the taxpayer. Here, the primary judge did not find that the overhead acquisitions related directly or solely to the making of input taxed supplies. His Honour concluded that the acquisitions were in the nature of overheads which related to the making of all Hannover's supplies and not solely to one or other of them. Such expenses fall within the principle set out at [19(7)] above. 28 The phrase "by and through" is not a part of the statute, as Senior Counsel for the Commissioner acknowledged. However, the Commissioner's reliance on the phrase "by and through" as a 'tool of analysis' is liable to distract from an application of the statute according to the terms of the statute properly construed. It is a phrase which was used in Rio Tinto as part of the Full Court's explanation for its evaluation of the facts. The statute does not require tracing of supplies. So far as concerns s 11-15(2)(a), the statute requires a judgment about the relationship between an acquisition and the making of supplies. 29 The overhead acquisitions in the present case related to all of Hannover's activities and accordingly to the making of all of its supplies. The Commissioner criticised the primary judge for concluding at J[79] that the overhead acquisitions had no "immediacy" of connection to input taxed supplies. It was submitted that "immediacy" was immaterial and irrelevant: AS[40]. All the primary judge was doing was expressing one of his reasons for concluding that the overhead acquisitions could not be said to be directly or immediately related only to input taxed supplies. 30 His Honour was required to examine the relationship between the overhead acquisitions and Hannover's supplies in order to undertake the evaluative exercise required. The directness or "immediacy" of the connection between the two is plainly relevant. His Honour concluded that the overhead acquisitions had no direct or immediate relationship to any particular supply. 31 The primary judge's conclusion that the overhead acquisitions were related to the making of all of Hannover's supplies - all of which it might be observed are one way or the other revenue generating and most of which are complementary - was not shown to be attended by error or otherwise incorrect. Contrary to the Commissioner's submission, the overhead acquisitions did not relate only to those of Hannover's revenue generating supplies which were input taxed supplies. There was evidence which indicated that various administrative, legal and financial resources were applied to the various reinsurance arrangements during Hannover's operations. There was evidence from Mr Tallack that "management costs cannot be directly attributed to particular activities or product lines". The Commissioner submitted that, at best, Mr Tallack's evidence meant that those costs were not directly attributable to a particular supply and that this does not mean that those costs related indifferently to all supplies: ARS[5]-[6]. Referring to J[79], the Commissioner submitted that it is an error to assume that, because an acquisition does not relate specifically to one supply, it must therefore relate indifferently to all supplies: AS[41] (Commissioner's emphasis). That may be so, but the evidence as a whole was not shown to be insufficient to support the primary judge's conclusion that the overhead acquisitions related to all of Hannover's supplies. The conclusion is also unsurprising when one has regard to the general nature of overheads and the nature of the overheads in this case. 32 The Commissioner has not identified any error in the primary judge's finding that the acquisitions related to both input taxed supplies and GST-free supplies. Grounds 1 to 5 are not made out. It is therefore necessary to consider the issue of apportionment and Ground 6.

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