ERIC Insurance Ltd v Chief Commissioner of State Revenue

Applicable legislation

1. The duty payable on life insurance policies is determined under part 2 of Chapter 8 of the Duties Act 1997. Section 243 of that Act relevantly provides: 243 What duty is payable? (1) Policies of life insurance, other than a temporary or term insurance policy or trauma or disability insuranceThe amount of duty chargeable on a policy of life insurance, other than a temporary or term insurance policy, a trauma policy, a TPD policy or a disability income policy is: (a) on the first $2,000, or part of $2,000, of the sum insured - $1, and (b) for every $200, or part of $200, in excess of the first $2,000 - 20 cents. (2) Temporary or term insurance policiesThe amount of duty chargeable on a temporary or term insurance policy, other than a group term insurance policy, is 5% of the first year's premium on the policy. (2A) Group term insurance policiesThe amount of duty chargeable on a group term insurance policy is: (a) 5% of the first year's premium on the policy, and (b) 5% of the amount of the premium (if any) payable in any succeeding year in respect of each additional life covered by the insurance policy (that is, each life that was not covered during the previous year). (3) Life insurance ridersThe amount of duty chargeable on a life insurance rider is 5% of the first year's premium on the life insurance rider. (4) Trauma or disability insuranceThe amount of duty chargeable on a trauma policy, a TPD policy or a disability income policy is 5% of the premium paid to effect the insurance. (5) In this section: disability income policy means a policy of insurance under which an amount is payable as a replacement of income in the event of the disablement of the insured by accident or sickness. group term insurance policy means a term insurance policy that applies in respect of the lives of a specified group of persons, being a group the membership of which may change during the term of the policy. TPD policy means a policy of insurance under which an amount is payable in the event of the total and permanent disablement of the insured by accident or sickness. trauma policy means a policy of insurance under which an amount is payable in the event of the insured being found to have a stated condition or disease
2. Section 243A provides that the term "premium" in relation to a policy of life insurance or a life insurance rider has the same meaning as it does in part 1 in relation to general insurance. Section 231(1) accordingly provides that the term "premium" relevantly means "the total consideration given to an insurer by or on behalf of the insured person to effect insurance without deductions for any amounts paid or payable, or allowed or allowable, by way of commission or discount to an insurance intermediary".
3. The issue in these proceedings is whether the words "the first year's premium" in s 243(2) of the Duties Act should be construed, where the premium for the entire term of a term insurance policy is paid upfront, as meaning the premium referable or attributable to the first year of the policy, or the total consideration received by the applicant during the first year of the policy to effect the term insurance.

Respondent's submissions

1. The respondent filed and served written submissions which began by pointing out that the applicant's case was that the words "the first year's premium on the policy" in s 243(2) of the Duties Act should be construed as meaning the premium referable or attributable to the first year of the policy. The respondent's position is that those words mean the total consideration given to the applicant during the first year of the policy to effect the term insurance.
2. The respondent's grounds for that position were, first, that s 239 provides that duty is charged on a policy of life insurance, which includes term insurance policies. Duty is therefore referable to a "policy". Thus, it is necessary to consider each policy according to its terms, such as its duration and the premium or premiums payable during its currency. In this case the policies were issued for terms exceeding one year, typically for five years, for a single premium paid upfront and were not renewed annually. They were therefore single premium policies that covered a term of years. In circumstances where a term insurance policy is renewed annually and a premium is payable each year on that renewal, the respondent accepted that under s 243(2) duty is imposed only on the amount of the premium that is paid or payable in the first year, and not on any premiums payable in succeeding years to renew the policy.
3. Secondly, the respondent argued that s 243(2) imposes duty on term policies at the rate of 5 percent of the first year's premium. Section 243A provides that "premium" in relation to a life policy has the same meaning as it does in relation to general insurance. Under s 231, "premium" in relation to general insurance is defined to mean "the total consideration given to an insurer by or on behalf of the insured person to effect insurance". Here, the total consideration payable to ERIC to effect the insurance was payable upfront in the first year for the total term of the policy. That is, the single policy was issued and effected after payment of the single premium and there was no requirement to pay further premiums during the term of the policy.
4. Thirdly, it was clear from s 243(2A), which deals with group term insurance policies, that the Act contemplates that the premium for term insurance may be paid in the first year and may or may not be payable in succeeding years. That is, the "first year's premium" is the premium that is paid on the first year of the policy (i.e. to effect insurance), as opposed to any premium or premiums payable in succeeding years (i.e. to reflect any change in the policy, such as lives not covered in the previous year). Thus, in context, the concept of "year" draws attention to the facts and circumstances of the policy in the relevant chronological period, such as the lives covered and the premium or premiums paid. Therefore, the meaning of "first year's premium" is simply the premium paid on the first year of the policy, not the premium paid for the first year of the policy. The existence of s 243(2A) suggests that there is a difference between the words "the first year's premium" (as used in s 243(2A)(a) and "the amount of the premium (if any) payable in any succeeding year" (as used in s 243(2A)(b), with emphasis added). The emphasized words indicate that the difference turns on when the premium is payable.
5. On the basis of the above, because the term insurance policies in the present case covered a number of years for which the premium (or total consideration) was paid upfront in the first year to effect the policy for its entire term, the respondent had correctly assessed duty on the "first year's premium on the policy". Further, National Mutual Life Association of Australia v FCT (1959) 102 CLR 29 and AMP Life Ltd v Commissioner of State Revenue [2003] VSC 198, (2003) ATR 54 did not assist the applicant as they did not concern the duty payable on term insurance policies. The respondent was not aware of any decisions that considered that issue. Consequently the assessment should be confirmed.
6. At the hearing the respondent reiterated those points and added that the applicant's contractual provision for the refund of premiums in the event of early cancellation was a choice made for commercial reasons and did not alter the fact that the total consideration was payable upfront. The applicant's submission that s 243(4), which does not refer to the first year's premium, shows that s 243(2) must be referring to the premium attributable to the first year did not assist the applicant. The position remained that the entire premium was paid upfront to effect the insurance.
7. In National Mutual, which was not a duties case, the Commissioner had conceded that apportionment was appropriate. That was not the case here. AMP Life was a duties case, but it involved apportionment as between different types of insurance, not between different years.

Applicant's submissions

1. The applicant filed written submissions advancing the argument that "the first year's premium on the policy" should be construed as meaning the premium referable or attributable to the first year. Two elements of the textual context supported that construction. First, the term "premium" was defined as the "total consideration given to an insurer" to effect the policy. Second, the words "the first year" qualified the subsequent words "premium on the policy". It followed that duty was not payable on the total consideration, only on so much as was attributable to the first year.
2. Further, a distinction was drawn between the entire premium and the first year's premium in the context of the provision as a whole. Pursuant to s 243(4), duty was payable on "the premium paid to effect the insurance" in respect of trauma or disability insurance. The contradistinction between the entire premium and the first year's premium was therefore manifested from both the text and context of s 243.
3. There were several instances where the courts had readily apportioned single insurance premium covering different types of insurance where only one type of insurance was subject to a particular taxing statute. In National Mutual the High Court considered whether a single premium payable in respect of both life insurance and other types of insurance could be apportioned so that only the amount "in respect of policies of life insurance" would have the benefit of s 111 of the Income Tax Assessment Act 1936, which excluded life insurance premiums from an insurer's assessable income. The majority held that where the premium was capable of division and apportionment, only so much as was attributable to life insurance fell within the exemption.
4. Similarly, in AMP Life, the court concluded that where the statute provided for different rates of duty for life insurance and general insurance, and a single premium was referable to both life and general insurance, the Act required the amount of the premium attributable to life insurance to be apportioned in order to facilitate the imposition of duty.
5. While National Mutual and AMP Life concerned the apportionment of the premium according to the character of the insurance covered by it, by parity of reasoning an apportionment applied equally to the period of insurance covered by the premium.
6. The construction advanced by ERIC was therefore not only supported by the text and policy of the statute, it was consistent with the line of authorities that had apportioned divisible premiums where the criterion of operation of a taxing statute related to a particular portion of the premium. But the construction advanced by the Chief Commissioner would result in duty being payable on the entire consideration and was therefore contrary to the purpose of the provision.
7. In the present case the total consideration to effect the policy was given by the insured in the first year. Pursuant to the cancellation provision in the policies, however, the premium attributable to subsequent years (the "unexpired portion" of the period of insurance) was refundable if the insured exercised his or her right to cancel the policy after the first year. The premium was therefore inherently divisible and apportionable between the first and subsequent years' premium.
8. At the hearing Mr Jones revisited those points, stressing that "first year's premium" was not the same as the premium paid in the first year. The cancellation provisions showed that the total premium was not earned at the outset and was inherently apportionable. On the respondent's proposed construction, if a term policy defined an annual premium but required that it be paid in full in the first year, the whole premium would be dutiable. That showed the Chief Commissioner's position to be untenable. Section 243(2) did not say "the premium paid in the first year". The construction advanced by the applicant was supported by the text, the cases and the policy of the legislation in any case where the premium was divisible.

Consideration

1. This is a case of first impression. It turns on the construction of three words, the "first year's premium", in s 243(2) of the Duties Act. The controversy arises from the fact that the Chief Commissioner's position is that those words mean the total amount of premium that is in fact paid in the first year of the policy, while the taxpayer maintains that they mean the amount of premium that is attributable to, or referable to, the first year.
2. Under s 100(3) of the Taxation Administration Act 1996, the applicant has the onus of proving its case on a review. That is to be done through evidence or submissions or both, but as in this case the facts are not in dispute, it is a matter for submissions only.
3. The starting-point for understanding any enactment is that it must be read in its entirety. Looking at the section that seems immediately applicable to the problem at hand is likely to lead to a misconception of the total effect of the provision: Williamson v New South Wales [2010] NSWSC 229 at [57] - [58]. In an often-cited passage, the High Court declared that, "The primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute": Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355, [69].
4. A refinement to that principle may be introduced where an Act is divided into parts. In an older case it was said that "When an Act is divided and cut into parts or heads, prima facie it is, we think, to be presumed that those heads were intended to indicate certain groups of clauses as relating to a particular object": Re Commercial Bank of Australia Ltd (1893) 19 VLR 333, 375. More modern authorities, however, take the view that it is improbable that it is intended to give a word different meanings in different parts of an Act: United Airlines Inc v Sercel Australia Ltd [2012] NSWCA 24, [64]. Nevertheless, it would seem that the Re Commercial Bank proposition may survive to the extent that it means that the other provisions of a particular part or chapter may be of somewhat elevated assistance in interpreting the immediately applicable section.
5. Section 243 is part of Chapter 8 of the Duties Act, which establishes different rates of duty for different types of insurance. The chapter evinces a legislative intention to encourage particular types of insurance in varying degrees by establishing concessional rates of duty for them. Thus, under ss 233 and 234, the rate of duty in respect of general insurance other than the types given concessional treatment is 9 percent, while, for example, crop insurance is dutiable at the rate of only 2.5 percent.
6. A similar approach is taken in relation to life insurance. Section 243 sets out five different rates or scales of duty for various forms of life insurance. Three of the five relevant provisions use the words "first year's premium".
7. The evidence in this case and the cases cited show that, as a matter of commercial practice, insurers may charge a single premium for different policies and types of insurance, and for various time periods. The courts have recognized that usage and have been prepared to apportion income tax and stamp duty liability in such a way as to ensure it falls only on the appropriate part of the premium. Thus, in National Mutual, the High Court held that the taxpayer could not exclude from its assessable income the whole amount of the premiums received for a combined life, sickness and accident policy, but only that part that was referable to life insurance and therefore entitled to concessional treatment. Even though the insurer had charged a single premium for the three forms of coverage, the part referable to life insurance was ascertainable from the company's records. The court was therefore prepared to apportion the premium income in such a way as to exclude from the insurer's assessable income only that part that was attributable to life insurance premiums.
8. The respondent submitted that the case was of no assistance because the Commissioner had conceded that apportionment was appropriate, which was not the case here. It is apparent, however, that the court was prepared to accept that concession only because the true actuarially established premium for the life insurance element could readily be calculated. That is clear from the contrast that the court drew between the facts before it and an earlier case in which the life insurance element was a dependent part of an accident and sickness policy: That is a very different case from the present one. The premium there was not divisible. The stipulation in question could never have an independent operation; and, without re-writing the contract, there was no way in which it could be disentangled from the other provisions.
9. National Mutual was an income tax case. The AMP Life case extended the concept of apportioning undivided premiums to the field of stamp duty. At issue was coverage consisting of a life insurance policy combined with additional benefits available at the policy owner's selection. The court held that the premium could be apportioned as between different types of insurance. "[I]t accords with common sense and the legislative purpose", Hansen J said, " that what is truly general insurance should be dutiable as general insurance, and that what is truly life insurance should be dutiable as life insurance". Apportionment would be available even in the absence of actuarial material, provided that it could be done on some other reasonable basis. The Commissioner would then be able to assess the appropriateness of the basis for apportionment, such as by examining witnesses (at [99]).
10. Chapter 8, part 1, expressly adopts the principle of apportionment in relation to general insurance. Section 234 sets out three rates of duty and in each case declares them to be applicable "to the extent to which the premium is paid to effect" that particular type of insurance (my emphasis). As similar language does not appear in part 2, which deals with life insurance, the question whether a single life insurance premium can be apportioned between different years still remains.
11. The respondent submits that it is clear from s 243(2A) that the Act contemplates that the premium for term insurance may be paid in the first year of the policy and may or may not be payable in succeeding years. Consequently the "first year's premium" is the premium actually paid on the first year, as opposed to any premiums paid in succeeding years, for example to reflect any increase in the number of lives covered. The difference in wording between paragraphs (a) and (b) of that subsection showed that the "first year's premium" was being distinguished from "the amount of the premium (if any) payable in any succeeding year" on the basis of when the premium was payable.
12. In my view the ordinary and natural meaning of the language used favours a different construction. Para (2A) has two components: (a) 5 percent of the first year's premium, and (b) 5 percent of the amount of the premium (if any) payable in any succeeding year in respect of additional lives covered. According to the respondent's argument, that shows that the section contemplates the possibility that in later years no premium will be payable and that the "first year's premium" is simply the premium paid in the first year, not the premium paid for the first year. But s 243(2A) deals with additional premium payable only by reason of further lives being added to the coverage provided by a group term insurance policy. The reference to "premium (if any) payable in any succeeding year" is simply providing for the case where no new lives are being added and consequently there is no premium to be paid over and above the amount originally attributed to each year. Contrarily to the respondent's submission, it has no bearing on whether "the first year's premium" means the amount attributable to the first year or the amount paid in that year.
13. "Premium" is defined to mean the total consideration given to an insurer to effect the policy. The words "the first year" relate to the immediately following words "premium on the policy", which tends to favour the interpretation that duty is payable, not on the total consideration, but only so much of it as is attributable to the first year.
14. Further, s 243(4) makes duty for trauma or disability insurance payable on "the premium paid to effect the insurance". It thereby establishes a distinction between the entire premium and the first year's premium under s 243(2). It also expressly refers to the "premium paid", whereas s 243(2) makes no reference to premium that has been "paid", though it would have been a simple and logical matter for it to do so if it had been intended to mean a sum that had been paid. The reference in one paragraph to premium having been paid and its absence in the other is presumably deliberate and favours the conclusion that para (2) is referring to premium attributable to the first year.
15. As Mr Jones pointed out, on the respondent's construction, even if a term policy explicitly defined an annual premium but required the total of all the annual premiums to be paid in the first year, the whole amount would be dutiable in the first year, which would make the words "first year's" otiose.
16. The applicant also relied on the cancellation provisions in the specimen policies, which provide for a refund of premium paid "that is attributable to the unexpired Period of Insurance remaining under the Policy" (exhibit R1, p 219) as showing that the entire premium was not earned at the outset and there was a legal obligation to repay it pursuant to the National Consumer Credit Protection Act 2009. That proposition was not fully developed in argument, but the policy's cancellation provisions make it clear that the amount of premium attributable to the first year and subsequent years is readily ascertainable by the application of a formula. The provision states that "We will calculate the amount of Your refund using the formula as set out under the National Consumer Credit Protection Act 2009 (NCCP). The refund calculation takes into account the total Premium paid, term of the Policy and unexpired portion of the Period of Insurance". This is therefore not a case such as the one referred to by the High Court in National Mutual, where the various elements of the insurance coverage could not be disentangled one from the other.
17. I therefore conclude that on a proper construction of the Duties Act, and especially Chapter 8, as a whole, the words the "first year's premium on the policy" in s 243(2) mean the amount of premium attributable to the first year, not the sum actually paid. The decision under review must therefore be set aside.

Order

1. The decision under review is set aside. I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 05 October 2016