Hannover Life Re of Australasia Ltd v Commissioner of Taxation

Introduction 11 Under the GST Act, a supply may be a taxable supply, a GST-free supply or an input taxed supply: s 9-5. A supply will relevantly be a GST-free supply if it is GST-free under Div 38: s 9-30(1)(a). A supply will relevantly be an input taxed supply if it is input taxed under Div 40: s 9-30(2)(a). If a supply would otherwise be both GST-free and input taxed, it is relevantly only GST-free and is not input taxed: s 9-30(3)(a). 12 The issuing of a life insurance policy to individual insureds and the provision of reinsurance to other life insurers is an input taxed supply: s 40-5(2); item 6 of the table in reg 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (Cth) (GST Regulations) - being the version of the regulations applicable at the relevant times. 13 When the applicant ceded its risk to Hannover Rück it made an acquisition of rights under the relevant reinsurance or retrocession arrangement (and Hannover Rück made a supply). However, as curious as it may seem, that acquisition by the applicant was also the making by the applicant of a "financial supply", and hence it was also the making by it of an input taxed supply: ss 9-10(2)(f) and 40-5(2) of the GST Act; reg 40-5.09(1)(a) and item 6 of the table in reg 40-5.09(3) of the GST Regulations. Although not a term used in the legislation, the supply that results from the acquisition of, in this case, reinsurance or retrocession, is sometimes referred to as an "acquisition supply": AXA Asia Pacific Holdings Ltd v FCT [2008] FCA 1834; 173 FCR 500 at [44] per Lindgren J. That is presumably with reference to reg 40-5.09(1)(a) which provides that the provision, "acquisition" or disposal (for consideration, in the course or furtherance of an enterprise and connected with the indirect tax zone) of an interest mentioned in the table in sub-s (3) is a financial supply. 14 Supplies of things that are not goods or real property are GST-free when they are supplied to a non-resident who is not in the indirect tax zone when the thing supplied is done: item 2 of the table in s 38-190(1). Accordingly, supplies of reinsurance to the New Zealand insurer and the acquisition supplies to Hannover Rück are each GST-free because the New Zealand insurer and Hannover Rück were each non-residents. By reason of the tie-breaker in s 9-30(3)(a), these supplies are GST-free and are not input taxed. 15 The result is that the types of supply that are immediately relevant have the following status: (1) Issuing of life insurance policies to individual insureds resident in Australia - input taxed supply (2) Providing reinsurance to other Australian insurers - input taxed supply (3) Providing reinsurance to the New Zealand insurer - GST-free supply (4) Reinsuring or retroceding with Hannover Rück - GST-free supply.

Creditable acquisitions 16 A taxpayer is entitled to an input tax credit for any creditable acquisition that it makes: s 11-20. An acquisition is relevantly a creditable acquisition if it is acquired solely or partly for a creditable purpose: s 11-5(a). 17 Section 11-15 relevantly provides: (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) … 18 Section 11-15(1) has been described a positive test and s 11-15(2) as a negative, or blocking, provision: Rio Tinto Services Ltd v Federal Commissioner of Taxation [2015] FCAFC 117; 235 FCR 159 at [4] per Middleton, Logan and Pagone JJ; AXA at [124]. 19 It is common ground that the applicant has satisfied sub-s (1), ie, both types of acquisition in question were acquired in carrying out the applicant's enterprise. In issue is whether sub-s (2)(a) prevents the acquisitions from being regarded as having been made for a creditable purpose and, if not entirely, to what extent. 20 Although the defined term in s 11-15 is "creditable purpose", whether and to what extent an acquisition is for a creditable purpose is not an inquiry into the acquirer's, or anyone's, purpose. It is an objective inquiry into the relationship between the acquisition for which the input tax credit is claimed and the supply for which the credit is lost: Rio Tinto at [6] and [8]; see also AXA at [124], where Lindgren J described the inquiry as referring to "relatedness as a matter of objective fact between an acquisition and a supply." 21 The nature of the relationship required between the acquisition and the making of an input taxed supply is a "real and substantial relationship - not one that was trivial", although the relationship may be direct or indirect. An acquisition may relate to the making of supplies that are input taxed as well as supplies that are taxable (or GST-free), as would be the case with undifferentiated general overhead outgoings of an entity making both input taxed and taxable (or GST-free) supplies. See HP Mercantile Pty Ltd v Commissioner of Taxation [2005] FCAFC 126; 143 FCR 553 at [35]-[37] per Hill J, Stone and Allsop JJ agreeing. 22 As it was explained in Rio Tinto (at [6]), the inquiry called for by s 11-15(2)(a) is not into whether something was acquired in carrying on the enterprise (which would otherwise have acquired the thing for a creditable purpose within the meaning of s 11-15(1)) but, rather, irrespective of the extent to which the thing was acquired in carrying on the enterprise, to what extent, if any, did the acquisition relate to making supplies that would be input taxed - the relationship to focus on is the relationship between the antecedent acquisitions for which credit is claimed and the subsequent supply for which the credit is, in effect, lost. 23 It was further explained in Rio Tinto (at [7]) that the application of s 11-15(2)(a) requires "the precise identification of the relevant acquisition and a factual inquiry into the relationship between that acquisition and the making of supplies that would be input taxed."

The extent of creditable purpose / apportionment 24 If an acquisition is, to some extent, not related to the making of input taxed supplies for the purposes of s 11-15(2)(a), then a taxpayer is entitled to a partial input tax credit for the acquisition. It is necessary to determine the quantum of that partial input tax credit. That is addressed by ss 11-25 and 11-30. 25 Section 11-25 provides: 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. Note: … 26 Section 11-30 relevantly provides: (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. (3) The amount of the input tax credit on an acquisition that you make that is *partly creditable is as follows: Full input x Extent of creditable x Extent of tax credit purpose consideration

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. 27 Thus, if a taxpayer makes an acquisition that, to some extent, is not related to the making of input taxed supplies for the purposes of s 11-15(2)(a), the acquisition is, to that extent, for a creditable purpose under s 11-15. As that acquisition is only partly for a creditable purpose, the acquisition is "partly creditable" under s 11-30(1)(a) and so, under s 11-25, the taxpayer is entitled to an input tax credit worked out under s 11-30(3). 28 The formula in s 11-30(3) requires the calculation of the product of three factors. The first and third factors, the "extent of consideration" and the "full input tax credit", are not in dispute in this proceeding. Rather, it is the "extent of creditable purpose", if any, that is in dispute. 29 Pursuant to s 11-15(2)(a), where an acquisition is partly for a creditable purpose, it is an acquisition that relates to some extent to the making of one or more input taxed supplies and that, to some extent, does not relate to the making of input taxed supplies. The extent to which it is for a creditable purpose is the extent to which it does not relate to the making of input taxed supplies. 30 The use in revenue legislation of the words "to the extent that" calls for an apportionment. Such an apportionment will depend on the facts and circumstances of the case but will require a "fair and reasonable assessment of the extent of the relation": Ronpibon Tin NL v Federal Commissioner of Taxation [1949] HCA 15; 78 CLR 47 at 55 and 59; Rio Tinto at [7]. 31 Thus, in working out the "extent of creditable purpose", it is necessary to make a fair and reasonable assessment of the extent to which an acquisition is not related to making input taxed supplies. The GST Act does not mandate a particular method of apportionment. In that regard, s 11-30(5) provides that the Commissioner may determine, in writing, one or more ways in which to work out, for the purpose of sub-s (3), the extent to which a creditable acquisition is not for a creditable purpose. In the Goods and Services Tax Ruling 2006/4 (at [32]), the Commissioner has accepted that a taxpayer may choose their own apportionment method, but it needs to be fair and reasonable in the circumstances of the enterprise - it needs to appropriately reflect the intended or actual use of the acquisitions or importations. 32 In AXA (at [75]) it was said that the evidence should ideally specify the nature and use made of the things acquired in some detail, the attempts made to relate them directly to supplies, and the reason why the particular methodology and proxies proposed are most likely to approximate the relatedness between acquisition of the things and the use made of them.

The applicant's business and prudential requirements 33 As a registered life insurance company with APRA, the applicant is subject to Prudential and Reporting Standards which cover capital, financial statements, governance, risk management and other requirements. This includes maintaining a sufficient level of capital to meet its obligations, including the payment of claims to policy holders. 34 The applicant has a target capital surplus level, being a level such that, in the opinion of the applicant's board of directors, there is at least a 95% probability of meeting minimum regulatory capital requirements each year. Capital in excess of the target surplus figure can be used to fund the underwriting of new business. The Hannover Re Group's preferred means of providing capital support to sustain the applicant above the target surplus is via reinsurance from Hannover Rück. This results in the applicant operating with a relatively tight level of capitalisation, with limited excess capital to support the issue of new insurance policies. As a result, the applicant relies heavily on reinsurance from Hannover Rück to provide capital relief via reinsurance. Indeed, the vast majority of the applicant's business (upwards of 95%) is subject to reinsurance by Hannover Rück. 35 The applicant is also required to comply with the Global Underwriting Guidelines Life & Health (GUG Guidelines) of the Hannover Re Group, which set out the requirements and parameters, including financial and pricing, under which the entities in the Group, including the applicant, are required to operate. The goal of the GUG Guidelines is stated to include providing a framework to those writing insurance and reinsurance business for companies in the Group to do so profitably without overexposing the capital base of the Group and in compliance with all applicable external and internal requirements. 36 During the relevant tax periods, the applicant did not have an Australian Financial Services Licence (AFSL) and could not issue life insurance policies directly to the public. The applicant subsequently obtained an AFSL, but only for the purposes of claims handling and continues to be unable to issue life insurance policies directly to the public. The applicant therefore underwrites life insurance policies using the services of licensed distributors. Under these distribution arrangements, the distributors arrange for the issue of life insurance policies by the applicant and undertake the marketing, distribution and administration of those policies. In return for those services, the distributors receive an agreed commission calculated by reference to the premiums received under the policies. 37 In determining the terms and pricing of the policies, and the commission payable to the distributor, the applicant is required to take into account the GUG Guidelines and ensure that the policies will be expected to generate, at a minimum, a return to the applicant in excess of costs, including the cost of capital. The applicant is also required to ensure that, by entering into the policies, it complies with the legislative requirements and prudential standards and maintains its target capital levels.

Reinsurance arrangements with Hannover Rück 38 As mentioned, where the applicant cedes risk it has taken on from its issuing of insurance policies, the ceding of that risk is reinsurance. Where the applicant cedes risk it has taken on from its providing reinsurance to other insurers, the ceding of that risk is referred to as "retrocession". 39 The legal mechanism by which the applicant cedes its risk to another insurer, such as Hannover Rück, involves the applicant having a contractual right to receive in certain circumstances a payment in respect of the extent of the ceded risk. There is no assignment or novation or any similar legal device involved; there is no transfer of the risk. The arrangement is as described by Dixon J in Tariff Reinsurances Ltd v Commissioner of Taxation [1938] HCA 21; 59 CLR 194 at 215-216, including that: [t]he original insured is a stranger to the reinsurer. He is unaffected by the reinsurance and obtains no legal advantage from it. It establishes no relations except with the reassured … 40 Thus, the applicant remains the only person legally liable to the insured to which it has provided insurance or to the other insurer to which it has provided reinsurance. That person has no contractual rights against the reinsurer to which the applicant has ceded some of its risk. 41 Thus, regardless of whether and the extent to which the applicant cedes its risk that it incurs under a policy under which it provides insurance or reinsurance, the rights that the insured person or reinsured insurer obtains are provided to them solely by, and are solely against, the applicant. Similarly, the reinsurer to which the applicant cedes some of its risk, such as Hannover Rück, has obligations owing only to the applicant.

The Greenstone arrangement 42 On 9 March 2009, the applicant entered into a DAA with The Hollard Insurance Company Pty Ltd, which in 2010 was novated to Greenstone. This is referred to as the Greenstone DAA. Broadly, the Greenstone DAA provided for Greenstone to perform certain services for the applicant to assist the applicant with issuing and managing certain life insurance policies to Australian individual insureds. 43 Under the Greenstone DAA, Greenstone performed for the applicant a range of services that are broadly related to developing life insurance products, marketing those life insurance products and managing those life insurance products, including dealing with policyholders and paying claims. Those services included development of insurance products for Australian individual insureds, including drafting product disclosure statements; marketing insurance products to potential policyholders; operating a call centre for dealing with policyholders and potential policyholders; issuing reports to the applicant identifying which businesses and policies were being distributed, which commissions were being raised and the premiums generated; providing information to policyholders; collecting premiums from policyholders; transferring funds out of the applicant's bank account in limited circumstances, such as to refund premiums, to pay bank charges, to pay stamp duty and to pay claims that the applicant had admitted. 44 Notably, to which I will return, none of the services required to be performed under the DAA by Greenstone, and none of the applicant's obligations to Greenstone under the DAA, related to the applicant's reinsurance of the risks under the policies written for the applicant by Greenstone with Hannover Rück (or any other reinsurer). That is to say, ex facie the DAA, it had nothing to do with the applicant's reinsurance arrangements. 45 As at the commencement of the relevant tax periods, Greenstone was entitled to be paid a Total Commission comprising the following: (1) Trail Commission, calculated as a specified percentage of the gross premium, and paid over the premium payment term of the policy; plus (2) New Business Commission, an "up-front" commission based on the annualised first year premiums to the policy; and less (3) Renewal Commission [REDACTED]. 46 [REDACTED] 47 Trail Commissions were paid monthly and were included in recipient created tax invoices (RCTI) prepared by Greenstone on behalf of the applicant. New Business Commissions were paid quarterly and were included in tax invoices prepared by Greenstone. GST was charged on the invoices. 48 In December 2017, the commission structure changed. The payment of the New Business Commission was removed. [REDACTED]

The relationship between the Greenstone arrangement and the Hannover Rück arrangement 49 In June 2009, the applicant entered into the Hollard Reinsurance Agreement with Hannover Rück under which the applicant ceded to Hannover Rück 75% of its risk in the insurance policies the applicant issued pursuant to its arrangements with Greenstone. 50 Several addenda were made to each of the Greenstone DAA and the reinsurance arrangements with Hannover Rück over the years. 51 Under the terms of the Hollard Reinsurance Agreement as it applied during the relevant tax periods: (1) The applicant ceded and Hannover Rück accepted all life insurance business falling under the agreement subject to its provisions (Art 2). (2) The acceptance of reinsurance did not create any legal right or relationship whatsoever between Hannover Rück and any insured party under any of the policies (Art 3). (3) For all policies issued by the applicant under the Greenstone DAA (defined as the "Reinsured Business") (Art 2), Hannover Rück accepted by way of automatic reinsurance 75% of 100% on a quota share basis (Art 5) and the applicant retained 25% of the Reinsured Business net and unreinsured (Art 6). (4) The applicant was required to pay a premium to Hannover Rück equal to 75% of the "Net Premium" (Art 7). The Net Premium was the gross premiums received for the policies less stamp duty, GST, bank charges, trail commissions paid to Greenstone and the increase in the applicant's unearned premium reserves. (5) The claims payable by Hannover Rück were 75% of the sum of the actual claim payments by the applicant, profit commissions paid by the applicant in respect of income protection benefits and certain increases in the applicant's reserves (Art 10). (6) Hannover Rück was required to pay a commission to the applicant equal to 75% of the difference between the New Business Commission paid to Greenstone and the Renewal Commission received from Greenstone (Art 11). (7) Hannover Rück was required to pay an Expense Allowance to the applicant being a percentage of the premium payable under Art 7 (Art 8). 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 under the Greenstone DAA. The percentages were adjusted from time to time based on an annual assessment of the contribution required to cover those overheads. I will return to the Expense Allowance in the discussion of the statutory apportionment of overhead costs below. (8) Hannover Rück would, subject to the terms and conditions of the agreement, follow the actuarial, contractual and underwriting fortunes of the applicant in respect of the risks that the applicant had accepted under policies covered by the agreement (Art 9). 52 With effect from 1 January 2016, the reinsurance arrangement with Hannover Rück was replaced by the applicant's arrangements with that company under the Australian Statutory Fund Master Reinsurance Agreement and the special conditions to that agreement pertaining to the insurance policies the applicant issued pursuant to its arrangements with Greenstone. For that reason it is conveniently referred to as the Greenstone Reinsurance Agreement although Greenstone was not a party to it. 53 The Greenstone Reinsurance Agreement operated in a similar manner to the Hollard Reinsurance Agreement: (1) Article 6 provided for the applicant to retain all of the Reinsured Business net of the Reinsurer's Share of 75% of the Reinsured Business. (2) Article 7 provided for the payment of Reinsurance Premiums by the applicant to Hannover Rück. These were calculated in a similar manner to the premiums under Art 7 of the Hollard Reinsurance Agreement. (3) Article 8 provided for the payment of Reinsurance Premium Rebates by Hannover Rück to the applicant. This payment was calculated in a similar manner to the commission under Art 11 of the Hollard Reinsurance Agreement, being calculated by reference to 75% of the difference between New Business Commission and Renewal Commission. (4) Article 9 provided for the payment of a Reinsurance Expense Allowance based on a percentage of the premium, similar to Art 8 of the Hollard Reinsurance Agreement. (5) Article 11 provided for Hannover Rück to pay 75% of claims in a similar manner to Art 10 of the Hollard Reinsurance Agreement. 54 Through the operation of the reinsurance arrangements with Hannover Rück, the applicant underwrote life insurance policies through the Greenstone DAA 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.

The overheads 55 The applicant has identified the "overheads" in respect of which it claims input tax credits with reference to labels in its general ledger for management expenses, with each transaction generally captured as a cash payments record. The expense categories were intended to record expenses that are not directly attributable to a specific product line. These expenses included: (1) rent; (2) office-related expenses; (3) audit fees; (4) consumable office supplies; (5) telephone and fax expenses; (6) expenses for archiving; (7) consulting fees - Information Technology (IT); (8) consulting fees - personnel; (9) consulting fees - tax & legal; (10) consulting fees - business management; (11) consulting fees - actuarial; (12) advertising; (13) IT services; (14) IT equipment rental; and (15) IT equipment maintenance. 56 The "management expenses" are all expenses incurred by the applicant and described by the applicant's General Manager (Finance) & Company Secretary, David Tallack, as being not directly attributable to a product or reinsurance treaty. It was on that basis that he describes them as being "in the nature of overheads." He says that these management costs cannot be directly attributed to particular activities or product lines and, consequently, are allocated to individual statutory funds and lines of business within those statutory funds as part of the annual statutory expense allocation, to which I now turn.

Expense apportionment under the Life Insurance Act 57 The applicant carries out an annual expense apportionment for the purposes of the Life Insurance Act 1995 (Cth). Sections 78 and 79 of that Act require an apportionment of, relevantly, outgoings among a life company's businesses and among its statutory funds. Under s 80, this must be done on an equitable basis and in accordance with generally accepted accounting principles. 58 Relevantly, the applicant apportions various of its outgoings, including the "overheads" for which it claims input tax credits, among three funds: (1) the Australian Statutory Fund (ASF), which relates to the applicant's issuing of insurance to Australian individual insureds; (2) the Australian Reinsurance Statutory Fund (ARSF), which relates to the applicant's reinsurance of other Australian insurers; and (3) the Overseas Statutory Fund (OSF), which relates to the applicant's reinsurance of New Zealand insurers. 59 In summary, the effect of the statutory expense apportionment is to apportion expenses among "business lines" or products based on the time that employees record they spend working in relation to each of those "business lines" or products. To the extent that an employee has unallocated time, that unallocated time is then allocated based on weightings from claims and premiums to recognise that the employee is doing work in that unallocated time, and then the relevant part of an expense is apportioned based on that allocation of the employee's time. That is, the expenses are apportioned based on the time the employees are doing work for particular business lines or products or for which they are assumed or inferred to be doing such work. 60 As mentioned, part of the reimbursement by Hannover Rück to the applicant in respect of the reinsured risks is captured in the Expense Allowance (see [51(7)] and [53(4)] above). It was explained in the evidence that given the requirement in the GUG Guidelines that there be an "alignment of interests" between the applicant and Hannover Rück, the percentage of risk of each policy reinsured or retroceded to Hannover Rück will be reflected in the extent to which the applicant and Hannover Rück share in the premiums received and the costs incurred, including commissions and overhead expenses incurred in the ongoing management of the policies. As I understand it, the overhead expenses are allocated according to the same approach as that used for the purpose of the statutory expense allocation under the Life Insurance Act.

Resolution: the Greenstone services 61 The applicant's case for its acquisition of the Greenstone services being partly for a creditable purpose is that there is "a real and substantial relationship" between the Greenstone services and both the making of input taxed supplies by the issue of the Greenstone policies and GST-free supplies of reinsurance of those same policies with Hannover Rück. It submits that the relationship between the Greenstone services and the GST-free supplies of reinsurance of the Greenstone policies with Hannover Rück is not too remote. 62 The applicant emphasises that under the "contractual framework" established by the Greenstone DAA and the relevant reinsurance agreements, the provision of the Greenstone services (and the payment of commission to Greenstone) led to the issue of life insurance policies under which "75% of the risk lay with Hannover Rück and 25% of the risk lay with the applicant". Also, 75% of the premiums were received by Hannover Rück and 25% of the premiums were received by the applicant, and 75% of the costs (including commissions paid to Greenstone) were borne by Hannover Rück and 25% of those costs were borne by the applicant. 63 The applicant submits that without the reinsurance support from Hannover Rück under the reinsurance agreements, the applicant would have had insufficient capital to support the policies issued under the Greenstone DAA or the commissions payable to Greenstone and would not have been able to comply with its prudential requirements. 64 I have referred to the statutory framework and some of the established principles above, including with reference to Rio Tinto. That case bears closer scrutiny because of the way in which it provides the answer to the present case. The issue in the case was whether Rio Tinto, the business of which was principally conducting mining operations in the remote Pilbara region of Western Australia which produced taxable or GST-free supplies, was entitled to input tax credits for the GST paid on acquisitions in relation to the supply of residential accommodation for employees, contractors and ancillary service providers. The acquisitions in relation to that accommodation included maintenance and repairs, housekeeping and grounds maintenance, remediation and hygiene cleaning, and the construction and purchase of new housing. 65 The supply of residential accommodation is input taxed with the result that no input tax credits were claimable other than to the extent that the acquisitions did not relate to the supply of residential accommodation. Rio Tinto's case was that it was entitled to a credit to the full extent that its acquisitions related to the carrying on of its enterprise without denial of credit under s 11-15(2)(a) of the GST Act. The judgment at first instance records that the Commissioner accepted that the provision of accommodation in the region was a "necessary and essential part" of the business: Rio Tinto Services Ltd v Federal Commissioner of Taxation [2015] FCA 94; 98 ATR 390 at [12]. 66 The Full Court held (at [8]) that an examination of the acquisitions in question revealed unquestionably that they all related wholly to the making of supplies that would be input taxed, "albeit that they [did] so for the wider purpose of the enterprise." 67 As mentioned, the Full Court observed (at [7]) that it was necessary to precisely identify the relevant acquisition and make a factual inquiry into the relationship between that acquisition and the making of supplies that would be input taxed. In dismissing the appeal, the Court stated (at [8]): 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. (Emphasis added.) 68 Returning to the present case, the Commissioner emphasises that sentence, and in particular that the residential-related acquisitions by Rio Tinto were related to the taxable and/or GST-free supplies (or purpose) of the enterprise "only … wholly by and through" the input taxed supply. The Commissioner submits, and I accept, that Rio Tinto establishes the following propositions: (1) the incidentality, or even necessity, of an acquisition to the making of a taxable (or GST-free) supply does not answer the statutory inquiry under s 11-15(2)(a); and (2) section 11-15(2)(a) excludes any entitlement to input tax credit on an acquisition to the extent that the acquisition relates to the making of an input taxed supply, and the real and substantial connection between the acquisition and the making of the input taxed supply is not reduced by a relationship between the acquisition and the making of a taxable or GST-free supply that is "by and through" the making of the input taxed supply. 69 The basic point is that the inquiry is not whether something was acquired in carrying on the enterprise but, rather, to what extent, if any, the acquisition relates to making supplies that would be input taxed. As mentioned, the relationship to focus on is the relationship between the antecedent acquisitions for which credit is claimed and the subsequent supply for which the credit is, in effect, lost. See Rio Tinto at [6]. 70 The Greenstone services, being the relevant acquisitions made by the applicant and paid for by way of commission payments to Greenstone, related - at the relevant level of inquiry - directly and in a real and substantial way to the applicant's supply of life insurance policies procured by the services of Greenstone. Greenstone rendered services specifically referrable to the issue of those policies. There was no connection between the Greenstone agreement under which the services were rendered and the reinsurance arrangement with Hannover Rück; the cession of risk in the policies written and administered by Greenstone arose entirely and automatically under the Hannover Rück reinsurance agreements and not under the Greenstone agreement and effected no change in the relationship between the applicant and the policyholders. As in Rio Tinto, the relationship of the services acquired from Greenstone to the GST-free acquisition supply of the Hannover Rück reinsurance was wholly by and through the otherwise input taxed supply of the domestic insurance policies. 71 The result, with reference to s 11-15(2)(a), is that the acquisition relates wholly (that being the relevant "extent") to making supplies that would be input taxed. Therefore, notwithstanding that the Greenstone services were acquired in the carrying on of the applicant's enterprise within the meaning of s 11-15(1), they are "blocked" from having a creditable purpose by s 11-15(2)(a). That conclusion is not affected by the fact that but for the GST-free acquisition supply of reinsurance with Hannover Rück, the relevant input taxed supplies could not have been made. 72 From that it follows that no issue of apportionment in relation to the Greenstone services arises and that the appeal in relation to these acquisitions fails.

Resolution: the overheads 73 With regard to the overheads, the applicant contends that they relate indifferently to all the applicant's activities in the course of carrying on its enterprise. It says that the activities of its enterprise relevantly included the making of the following supplies: (1) input taxed supplies of life insurance policies in Australia; (2) input taxed supplies of reinsurance of life insurance policies in Australia; (3) GST-free supplies of reinsurance of life insurance policies issued in New Zealand; (ie, the three revenue earning activities identified in [3] above), and (4) GST-free acquisition supplies of reinsurance and retrocession of life insurance policies with Hannover Rück. 74 The applicant notes that the Commissioner accepts that the overheads are creditable acquisitions with a partly creditable purpose to the extent that they relate to the GST-free supply of reinsurance of life insurance policies issued in New Zealand, and that the appropriate method of calculating the applicant's entitlement to apportionment of the overheads in respect of those supplies is to follow its statutory expense allocation. 75 The Commissioner submits that the overheads do not relate indifferently to all the applicant's activities in the course of carrying on its enterprise. However, the Commissioner accepts that the overheads can be apportioned with respect to the New Zealand reinsurance supplies. That means that the Commissioner accepts, with reference to s 11-15(2)(a), that although there is a real and substantial relationship between the overhead acquisitions and the making of the input taxed supplies of Australian insurance and reinsurance policies, the relationship is not to a complete extent. That is to say, the Commissioner accepts that there is an apportionable extent to which the overheads do not relate, in a real and substantial way, to the making of the input taxed supplies of Australian insurance and reinsurance policies - or, to put it the other way, they relate sufficiently, to an apportionable extent, to the GST-free New Zealand reinsurance supplies. 76 That acceptance by the Commissioner undercuts the Commissioner's submission that the overheads do not relate indifferently to the various activities, or supplies, of the applicant's enterprise. Putting to one side how an appropriate apportionment might best be done, that is because there is no apparently relevant distinction between the relationship that the overhead acquisitions have to the GST-free New Zealand reinsurance supplies and the relationship that they have to the GST-free Hannover Rück reinsurance acquisition supplies. If the overheads are partly creditable in respect of the New Zealand supplies then why not also the Hannover Rück supplies? 77 The Commissioner distinguishes the New Zealand supplies and the Hannover Rück acquisition supplies by categorising the overheads into two types of acquisition: (1) The first category consists of acquisitions that allow the applicant's employees to do their work or assist them in doing that work. For the 2014 and 2015 years, this category includes rent to acquire office premises and IT, and for later years it includes office supplies, telephone and fax expenses, office expenses and expenses for copying and archiving. (2) The second category consists of other acquisitions. For the 2014 and 2015 years, these include audit expenses, and for later years they include consulting fees and expenses for advertising. The Commissioner identifies these acquisitions as relevant to the operation of the applicant's business, but they do not assist the applicant's employees in doing their work. 78 The Commissioner submits that in respect of the first category, the relationship between the work done by an employee to issue a New Zealand reinsurance policy and the supply of the reinsurance policy is "by and through" that GST-free supply. In contrast, the relationship between the work done by an employee and the applicant's GST-free reinsurance supply with Hannover Rück is "by and through" the applicant's input taxed supply of the Australian insurance policy issued through Greenstone. That is because, the Commissioner submits, the applicant's making of the GST-free supply with Hannover Rück is wholly reactive and responsive to it making an input taxed supply of insurance or reinsurance to an Australian insured or reinsured, both as a matter of legal analysis and practical reality. 79 I do not accept that submission. The overhead acquisitions do not arise "by and through" the input taxed supplies in the same way that the Greenstone acquisitions do, or in the same way Rio Tinto's did. The input tax credits sought to be claimed on the Greenstone acquisitions, as explained, amount to the GST paid by the applicant to Greenstone on the latter's RCTIs for work done exclusively in relation to input taxed supplies. The very nature of the input tax credits sought to be claimed on the overheads expenditure is that they do not have that character; they are acquisitions that do not have any immediacy of connection to input taxed supplies. If one takes as an example the payment of an invoice for rent for premises on which GST is paid - that being the precise identification of the relevant acquisition, it has no greater relationship or connection to one type of the applicant's supplies as any other. That is the very basis for its categorisation as an undifferentiated overhead. 80 The Commissioner submits that subject to one exception, the making of the GST-free supply with Hannover Rück does not involve any work being done by the applicant's employees other than the work that they do to make the input taxed supply of Australian insurance or reinsurance. The exception is any identifiable work done by employees to negotiate the contractual terms of the arrangements with Hannover Rück, and work done to carry out those contractual terms, such as to prepare reports and notices required under the contractual terms to be given by the applicant to Hannover Rück. The Commissioner submits that to that extent some portion of the applicant's acquisition of "overheads" such as office premises allow those employees to do that work, and so those acquisitions might to that extent not relate to the making of input taxed supplies. 81 The problem, the Commissioner submits, is that there is insufficient evidence to enable the Court to identify in any meaningful way the extent to which the applicant's employees did work of that nature. Moreover, what evidence there is suggests that relatively minimal employee time and effort was spent doing such work. 82 The difficulty with that approach is that it accepts that some overheads can be appropriately attributed to the relevant GST-free supplies, but then on the basis that the (only) way to do that is with reference to an allocation of employees' time, concludes that there can be no allocation because the evidence of that time is insufficient or the time spent was insignificant. The correct approach, once it is accepted that there is a sufficient relationship between the relevant acquisition and a GST-free supply to make the acquisition for a creditable purpose, is to look for the proper method of apportionment. In that regard, the time spent by employees might be regarded as only one of a number of possible proxies to form the basis for such an apportionment. 83 There is no apparent reason why time spent by employees in relation to one or other type of supply should be regarded as the only appropriate proxy, or indeed why it is an appropriate proxy at all when it comes to acquisition supplies. For example, time spent as a proxy does not differentiate between work done by senior and junior employees. It may be that the work done on the reinsurance relationship with Hannover Rück is done with great time efficiency by very senior employees who, on a time-costed basis, come at a significant cost to the applicant although taking an insignificant amount of time, and the work done directly in relation to other supplies such as the relevant input taxed supplies is done by junior employees at less significant cost although taking a significant amount of time. Why should such undifferentiated time spent be the appropriate basis for a method of apportionment that is "fair and reasonable in the circumstances of [the] enterprise" (referring to GSTR 2006/4)? 84 I accept, of course, that the statutory expense allocation is done using employee hours as the relevant proxy, but that does not make it the necessary proxy for the creditable acquisition allocation when the supplies with Hannover Rück are concerned. The key difference between the statutory expense allocation exercise and the exercise of apportioning partly creditable acquisitions is that the former takes into account only the revenue earning output of the enterprise as expressed in its statutory funds, ie, the policies of insurance and reinsurance that it sells and on which it earns premium income. See s 30 of the Life Insurance Act. The latter exercise - apportioning partly creditable acquisitions - must take into account all supplies, which include the acquisition supplies from/to Hannover Rück which do not find expression in a statutory fund and which are undertaken at a net expense to the enterprise. 85 I therefore do not accept that because very little employee time is spent on the Hannover Rück GST-free supplies, or because the evidence of time spent on those supplies is scant, the first category of acquisitions is not partly creditable as having a partly creditable purpose in relation to the GST-free supplies. 86 The Commissioner submits that the second category of overhead acquisitions, as with the first, does not have any relationship with the Hannover Rück GST-free supplies other than "by and through" the input taxed supplies of insurance and reinsurance made by the applicant. The first example the Commissioner takes is that of audit expenses and consulting fees, and submits that there is no evidence to suggest that these "overheads" have anything to do with the reinsurance and retrocession arrangements with Hannover Rück, other than by reason of those arrangements applying automatically when the applicant makes an input taxed supply of insurance and reinsurance. 87 However, it is far from clear that that is so. First, there is nothing in the nature of audit expenses or consulting fees that suggests that they were incurred specifically in relation to input taxed supplies. Indeed, by their nature, they would appear to be acquisitions which could have been incurred in respect of all the different supplies done by the applicant and might not have been incurred exclusively in relation to input taxed supplies; presumably the Hannover Rück relationship was also subject to audit and to the work of consultants. Secondly, as mentioned, Mr Tallack's evidence was that the "overhead" expenses - including the audit and consulting fees - could not be directly attributed to any particular activities or product lines. Not only was Mr Tallack not challenged on that - he was not required for cross-examination - but there is no reason to doubt that evidence. 88 The second example taken by the Commissioner is the acquisition of advertising, which is included in the "overheads". The Commissioner submits that it is inherently more likely that the applicant was advertising its insurance products and, perhaps, its reinsurance products, rather than advertising anything to do with its relationship with Hannover Rück. 89 I accept that it does seem unlikely that the applicant incurred advertising expenses in respect of its reinsurance and retrocession arrangements with Hannover Rück. However, as mentioned, Mr Tallack's evidence was that these expenses cannot be attributed to any particular product, reinsurance treaty or product line. That unchallenged evidence must be accepted. Therefore, for the same reasons as given in relation to the first category at [79] above, the advertising, audit and consulting expenses cannot be said to have only related to the reinsurance or retrocession arrangements with Hannover Rück "by and through" the applicant's making of input taxed supplies of insurance and reinsurance. On the evidence, they were incurred independently of, or indifferently in respect of, all the four types of supply identified at [73] above. 90 In the circumstances, I am satisfied that the acquisitions described by Mr Tallack as "overheads" are indeed not attributable to any particular supply made by the applicant. I accept that in that sense none of the individual overheads has a more real and substantial relationship with any particular supply than with another. That is to say, the acquisition of the overheads relates in a real and substantial way to making supplies that would be input taxed, but no more than to the applicant's GST-free supplies and therefore only partially. 91 The acquisition of the overheads is therefore partly creditable, and the amount of the input tax credit on the acquisition must be calculated under the formula in s 11-30(3). That requires that the "extent of creditable purpose", being the extent to which the creditable acquisition is for a creditable purpose expressed as a percentage of the total purpose of the acquisition, must be calculated. That must be done in a way that is fair and reasonable in the circumstances of the applicant's enterprise. 92 The applicant proposes a formula for calculating the "extent of creditable purpose" (ECP), which uses a combination of the statutory expense allocation and premium revenue as a "proxy", as follows: ECP = NZ% + (ARSF% * A/B) + (ASF% * C/D) Where: ECP = the extent of creditable purpose NZ% = the percentage of expenses allocated to the OSF statutory fund under the Statutory Expense Allocation ARSF% = the percentage of expenses allocated to the ARSF statutory fund under the Statutory Expense Allocation A = total retrocession premiums paid by the Applicant to Hannover Rück in respect of the risk ceded from the ARSF statutory fund B = total life insurance premiums received by the Applicant in respect of life insurance policies within the ARSF statutory fund ASF% = the percentage of expenses allocated to the ASF statutory fund under the Statutory Expense Allocation C = total reinsurance premiums paid by the Applicant to Hannover Rück in respect of the risk ceded from the ASF statutory fund D = total life insurance premiums received by the Applicant in respect of life insurance policies within the ASF statutory fund. 93 The Commissioner offers three reasons why the applicant's proposed apportionment methodology should not be adopted or approved. 94 First, the Commissioner submits that the applicant's methodology fails to account for the fact that, regardless of the extent to which the applicant cedes risk to Hannover Rück, the applicant still makes the whole input taxed supply of insurance or reinsurance. To illustrate the point, the Commissioner takes as an example a case where the applicant cedes 100% of the risk to Hannover Rück and so pays 100% of the premiums to Hannover Rück, in which case the fraction A/B and C/D in its methodology is 1. The otherwise partly creditable acquisition would then be entirely attributed to the GST-free supply and none would be attributable to the input taxed supply of insurance or reinsurance. That would be so even though the applicant is still making two supplies and the acquisition is said to relate to both. This is said to illustrate that the methodology does not give a fair and reasonable result. 95 I do not accept this criticism because the proposed apportionment methodology reflects the extent to which, by reference to the reinsurer's share of 75%, the applicant and Hannover Rück share in the risk, premiums and costs with respect to the issue of the life insurance policies. If the share was greater than 75%, even 100%, the outcome of the application of the methodology would then still reflect the net revenue to the applicant from that part of its business. That is to say, there is nothing that strikes me as unfair or unreasonable in a methodology that apportions an otherwise partly creditable acquisition with reference to the revenue value to the enterprise of the respective supplies. In the 100% example, the whole business would in effect be that of Hannover Rück and the applicant would be a mere conduit. It is not obvious why in that situation it should be regarded as unfair or unreasonable that the overheads be wholly creditable. 96 In any event, it is not necessary to look to an extreme example, such as the ceding or retrocession of 100% of the risk. The proposed methodology is to apply only to the known case where 75% of the risk was ceded and 75% of the premium revenue was passed on. That revenue can be an appropriate proxy to calculate the extent of creditable purpose is illustrated by Federal Commissioner of Taxation v American Express Wholesale Currency Services Pty Ltd [2010] FCAFC 122; 187 FCR 398. Kenny and Middleton JJ, the majority, observed (at [79]) that the agreed formula in that case did not directly depend on the nature of the acquisitions themselves, but used revenue as a proxy to calculate the extent of creditable purpose. Rather than undertake the analysis individually for each of the acquisitions in question, the taxpayers used the formula based on revenue figures as a proxy for the relationship between their acquisitions (in the aggregate) and the making of particular supplies (at [79]). 97 Secondly, the Commissioner submits that the methodology overlooks the fact that the applicant makes investments of the capital that it retains, which investments are input taxed supplies. The Commissioner submits that the acquisition of the overheads relates to some extent to the making of such investments but this is not accounted for in the applicant's methodology. 98 The applicant accepts this criticism of the methodology, but says that the formula can be adjusted to have the effect of stripping out the investments. It has suggested a way of achieving this which is reflected in the document MFI-1, but the Commissioner has not responded specifically to that proposal because it was raised late in the piece. In the circumstances, I propose giving the parties the opportunity to discuss the methodology and to agree an amendment to it so as to take account of the investment-related input taxed supplies. To the extent that any disagreement still remains, I will then decide the best way of dealing with it. 99 Thirdly, the Commissioner submits that the applicant's methodology utilises "current year data" which only becomes available at the end of the tax year and is not available for each of the tax periods during the year. The Commissioner submits that that is inappropriate because it is contrary to the scheme of the GST Act and that the apportionment should be calculated using the previous year's data. 100 Whilst I appreciate the underlying relevance of this criticism to a methodology to be applied into the future on an ongoing basis, the fact of the matter is that the question before the Court is whether the assessments for the relevant tax periods, which are all well in the past, are excessive. There is no compelling reason why current year data should not be used for that purpose. I note, also, that the Commissioner does not take issue with current year data being used for the New Zealand reinsurance component. 101 I am accordingly satisfied that the applicant's proposed methodology to calculate the extent of creditable purpose in respect of its overheads in the relevant tax periods is fair and reasonable, subject to an adjustment to exclude an amount attributable to the applicant's input taxed investment supplies. I will give the parties the opportunity to seek agreement on that adjustment, failing which I will hear from them further in order to decide the point myself. The appeal in relation to the overheads otherwise succeeds.

Conclusion 102 For the above reasons, I am satisfied that: (1) The Greenstone acquisitions relate exclusively to input taxed supplies with the result that they are not, to any extent, creditable acquisitions. The appeal therefore fails in relation to the Greenstone acquisitions. (2) The overhead acquisitions are creditable acquisitions to the extent that they relate to the applicant's GST-free supplies, including to/from Hannover Rück, and that, subject to one adjustment, the applicant's proposed methodology of apportionment is fair and reasonable in the circumstances of the applicant's enterprise. The required adjustment is to account for the applicant's input taxed investment supplies. The appeal therefore succeeds in relation to the overheads. 103 The parties should bring in orders giving effect to these reasons. To the extent that they cannot agree the adjustment required to be made to the applicant's proposed methodology, and on the costs of the proceeding, I will hear them further. I certify that the preceding one hundred and three (103) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.