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[2024] FCAFC 23
Federal Court of Australia (Full Court)
2024-03-04
Hespe JJ
Original judgment source is linked above.
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.
LEGISLATIVE SCHEME 13 The entitlement to input tax credits is provided for in s 11-20 of the GST Act. That section is in the following terms: 11-20 Who is entitled to input tax credits for creditable acquisitions? You are entitled to the input tax credit for any *creditable acquisition that you make. 14 Section 11-5 sets out the circumstances in which a creditable acquisition is made: 11-5 What is a creditable acquisition? You make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose; and (b) the supply of the thing to you is a *taxable supply; and (c) you provide, or are liable to provide, *consideration for the supply; and (d) you are *registered, or *required to be registered. 15 The meaning of "creditable purpose" is provided for in s 11-15 in the following relevant terms: 11-15 Meaning of creditable purpose (1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise. (2) However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be *input taxed; or (b) the acquisition is of a private or domestic nature. 16 Section 11-15(2)(a) provides that a thing is not acquired for a creditable purpose "to the extent that" the acquisition relates to input taxed supplies. Sections 11-25 and 11-30 have the effect of limiting the amount of input tax credits to which a person is entitled (s 11-20) in respect of acquisitions that are "partly creditable". 17 Section 11-25 provides: 11-25 How much are the input tax credits for creditable acquisitions? The amount of the input tax credit for a *creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of the input tax credit is reduced if the acquisition is only *partly creditable. 18 Section 11-30 relevantly provides: 11-30 Acquisitions that are partly creditable (1) An acquisition that you make is partly creditable if it is a *creditable acquisition to which one or both of the following apply: (a) you make the acquisition only partly for a *creditable purpose; (b) you provide, or are liable to provide, only part of the *consideration for the acquisition. (2) [Repealed] (3) The amount of the input tax credit on an acquisition that you make that is *partly creditable is as follows: where: extent of consideration is the extent to which you provide, or are liable to provide, the *consideration for the acquisition, expressed as a percentage of the total consideration for the acquisition. extent of creditable purpose is the extent to which the *creditable acquisition is for a *creditable purpose, expressed as a percentage of the total purpose of the acquisition. full input tax credit is what would have been the amount of the input tax credit for the acquisition if it had been made solely for a creditable purpose and you had provided, or had been liable to provide, all of the consideration for the acquisition. … (5) The Commissioner may determine, in writing, one or more ways in which to work out, for the purpose of subsection (3), the extent to which a *creditable acquisition is for a *creditable purpose. 19 We make the following observations in relation to the statutory scheme: (1) A person makes a creditable acquisition if each of the matters in paragraphs (a) to (d) in s 11-5 are satisfied. In what follows we assume that s 11-5(b) to (d) are each satisfied. (2) A taxpayer has an entitlement to an input tax credit for a creditable acquisition if the creditable acquisition is either "solely or partly for a creditable purpose": ss 11-5(a) and 11-20. A creditable acquisition is not made, and there is no entitlement to an input tax credit, in respect of an acquisition which is made solely for a purpose that is not a creditable purpose. (3) If a thing was acquired partly for a creditable purpose, there is an entitlement to an input tax credit, measured by the extent to which the acquisition is for a creditable purpose, expressed "as a percentage of the total purpose of the acquisition": s 11-30. (4) The extent to which something is acquired for a creditable purpose is limited by: (a) the extent to which the taxpayer acquires the thing in carrying on the taxpayer's enterprise: s 11-15(1); and (b) the extent to which the acquisition relates to the making of supplies that would be input taxed or the extent to which the acquisition is of a private or domestic nature: ss 11-15(2)(a) and (b). (There are some qualifications to s 11-15(2)(a), but none are presently relevant - see: s 11-15(3) to (5)). (5) The phrase "to the extent that" in s 11-15 allows for "dissection and … apportionment": Ronpibon Tin NL v Commissioner of Taxation [1949] HCA 15; 78 CLR 47 at 55. The apportionment required by s 11-15(2)(a) is of the extent to which the acquisition "relates to making" supplies which would be input taxed. In HP Mercantile Pty Ltd v Commissioner of Taxation [2005] FCAFC 126; 143 FCR 553 at [35], Hill J observed of the words "relates to": The connection or association signified by the words may be direct or indirect, substantial or real. It must be relevant and usually a remote connection would not suffice. The sufficiency of the connection or association will be a matter for judgment … (6) Where an acquisition relates solely to the making of supplies that would be input taxed, the acquisition is not to be apportioned merely because that supply also serves some broader commercial objective of the supplier: Rio Tinto Services Ltd v Commissioner of Taxation [2015] FCAFC 117; 235 FCR 159 at [7]. (7) Where an acquisition is made indifferently for the purpose of making supplies that are input taxed and making supplies that are not input taxed, an assessment must be made of the extent of the relationship between the acquisition and the making of the different classes of supplies: Rio Tinto at [7]. The question is one of fact. (8) Some acquisitions by their very nature do not relate to the making of any particular supply by a taxpayer. This can be the case, for example, with general management expenses or general overhead expenses. Where it is shown that the acquisitions underlying such expenses relate to the enterprise as a whole (and not solely to the making of an input taxed supply) and the enterprise involves making both input taxed and other supplies, an apportionment is generally required: HP Mercantile at [37]. 20 The Commissioner has issued Ruling GSTR 2006/4 which is said to provide "guidance on how to determine the extent of your creditable purpose in making acquisitions and importations to enable you to claim the correct amount of input tax credits". The Ruling includes: This Ruling makes clear that you are not limited to the particular methods it sets out. However, this Ruling explains the requirement that the method you choose is fair and reasonable in the circumstances of your enterprise. 21 The Ruling does not purport to be a determination under s 11-30(5). However, both at trial and on appeal, the Commissioner accepted that it was sufficient for Hannover to establish that the method it chose to calculate the amount of input tax credits on partly creditable acquisitions was fair and reasonable in the circumstances.
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.
ISSUE 2 33 The parties conducted the hearing before the primary judge on the basis that Hannover bore the onus of establishing that its apportionment methodology was fair and reasonable in the circumstances of Hannover's enterprise. With one modification (see J[98], [101]), the primary judge concluded that the basis of apportionment adopted by Hannover was fair and reasonable: J[101]. The Commissioner accepted on appeal that he was required to establish that the primary judge erred in that evaluative exercise. 34 It is not necessary to go to the detail of the methodology. It is sufficient to observe that Hannover's proposed methodology determines the extent of creditable purpose by reference to the quotient of the premium on-paid to Hannover Rück and the premiums received by Hannover. It is a revenue based methodology. 35 The Commissioner's case, both at trial and on appeal, relied upon a claimed disconnect between the fact that Hannover was making input taxed supplies for which input tax credits would not be allowed, but was (in substance) claiming input tax credits in relation to 75% of its premium revenue referable to those input taxed supplies. The Commissioner submitted at AS[52]: That methodology fails to recognise that, even though the Respondent cedes a portion of its risk to Hannover Rück, it still makes a supply of the entirety of the life insurance policy to the individual insured (or reinsurance to the other insurer), and so the acquisition is still related to the making of that input taxed supply to that extent. 36 The Commissioner sought to demonstrate error by relying upon an example of a notional 100% reinsurance arrangement. As the primary judge observed at J[96], the example does not reflect the terms of the arrangement in fact before the Court. Further, any such arrangement would be inconsistent with the Hannover Re Group's Global Underwriting Guidelines Life & Health (GUG Guidelines). The goal of the GUG Guidelines included providing a framework for companies in the Group to write insurance and reinsurance profitably without overexposing the capital base of the Group: J[35]. The GUG Guidelines required an appropriate "alignment of interest" between Hannover and Hannover Rück as members of the Group. The reinsurance arrangements between Hannover and Hannover Rück sought to achieve an appropriate "alignment of interest" between the two by splitting risk, premium income and expenses. A 100% reinsurance arrangement would not result in "an alignment of interest" because Hannover would not in substance be bearing any of the risks of the reinsured policies. 37 The claimed disconnect is a red herring. The ability to claim input tax credits to the extent those credits relate to GST-free supplies reflects the intended operation of the statute. 38 The primary judge concluded that it was not unfair or unreasonable to adopt an apportionment methodology which looked to the revenue value of the supplies to the enterprise: J[95]. This conclusion was not challenged as a general proposition, but only in relation to its application in this case as illustrated by the Commissioner's example of a 100% ceding of risk. The Commissioner submitted at AS[55]: The error in the Respondent's methodology is to assume that, to the extent that the Respondent cedes its risk to Hannover Rück, the overhead acquisitions cease to relate to the input taxed supply of insurance or reinsurance to that extent. However, that is not so. The overhead acquisitions continue to relate to the input taxed supply of insurance or reinsurance. 39 This submission cannot be accepted. Contrary to the Commissioner's submission, the question is not whether overhead acquisitions "cease to relate to the input taxed supply of insurance or reinsurance" in Australia. The overhead acquisitions related indifferently to all of the types of supplies made by Hannover. They did not relate solely to any particulars supply, whether input taxed or otherwise. It follows that an appropriate apportionment was necessary. In circumstances where: (a) the overhead acquisitions related indifferently to all of Hannover's supplies; and (b) Hannover ceded 75% of the risk, paid over 75% of the premiums, was entitled to an expense allowance referable to that 75%, and received a GST-free commission revenue stream; it was not unreasonable to adopt an apportionment methodology that was based on the quotient of the premium on-paid to Hannover Rück and the premiums received by Hannover. 40 The primary judge has not been shown to have erred in relation to his evaluation of the apportionment methodology.
CONCLUSION 41 The appeal should be dismissed with costs. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Derrington, Thawley and Hespe.
Commissioner of Taxation
Hannover Life Re of Australasia Ltd